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Ideas on Postwar Economic Policy

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Tags Protectionism and Free TradeHistory of the Austrian School of Economics

Mises Institute-Peru is proud to present this English-language version of an article written by Ludwig von Mises that, until now, was only available in Spanish. The text was translated by Lucas Ghersi.

This article was first published in the Mexican journal Cuadernos Americanos, Mexico, Year 1, vol. 4, July-August 1942.  According to Bettina Bien Greaves’ bibliography, an English or German version of this text is not known (Mises: An Annotated Bibliography, p. 46).  It is likely that the Spanish version was translated from English, but an original draft in German cannot be ruled out.

I

We hope that one day this awful war will end and men may, once again, occupy themselves with the works of peace. Then, the production of arms and other instruments of crime will be substituted by the production of consumer goods for men, women and children. No longer will people think in annihilation and destruction but in establishing and increasing human wellbeing.

This return to peace, of course, presupposes the absolute annihilation of the totalitarian powers since, if the dictators were to prevail, the consequence of their victory would not be peace but unending warfare. In these totalitarian powers, a philosophy that proclaims war, instead of peace, is defended as the natural most desirable state for men that will provide them with joy. Their longing is not permanent peace but permanent war; thus, if they achieve triumph, the world will become a great slaughterhouse.

However, the dictators will succumb; therefore, the question is:

What must we do to close, as soon and as thoroughly as possible, the wounds opened in society during these years of fighting? This is the great problem that should worry us and that will never concern us prematurely. Even now, when the roar of battle is still being heard, statesmen and economists must think about the last day of the war. Even now they should prepare, in their spirits, what will be necessary to put in practice later.

II

Above all, it is necessary to make this idea clear: if postwar economic policy is to be successful, it must be based on measures radically different from those pursued before the outbreak of this war.

The main characteristic of policies implemented in the decade that preceded the current war, was economic nationalism; that is, an economic policy based on the belief that it is possible to promote the wellbeing of all nationals of a country, or at least of a specific group of them, through measures harmful to foreigners. It was understood that deterring or prohibiting, in an absolute way, the importation of foreign goods; restricting the immigration of aliens; or expropriating, partially or totally, the capital owned by foreigners could provide an important service to a country. This is not the appropriate place to analyze if those measures are suitable to achieve their desired end. The classical economic theory of free exchange has already proven, beyond refutation, that the final result of restrictions placed on foreign trade is the general decline of the productivity of labor and, therefore, of standards of living. In this way, production ceases to occur in places where a high return may be achieved and moves to others where, with the same investment of capital and labor, much lower returns can be obtained. The classic doctrine of free exchange of Hume, Smith and Ricardo has never been refuted. All objections to it turned out to be unfounded.

However, protectionism not only creates economic disadvantages. It also precludes peaceful cooperation between states leading to a sure war. The Society of Nations’ efforts to stop the new global conflagration, through a system of collective security, were in vain because of this environment since all states, big or small, tended to harm one another by implementing certain economic measures.

If we are unable to overcome economic nationalism, all hopes of achieving the reconstruction of our culture will prove illusory. Economic nationalism prevents industrialized States ¾ that is, all those that are compelled to import foodstuff and raw materials ¾ from gathering the necessary means to pay for their imports. How would they be able to pay if not through the exportation of their industrial products? If not permitted to export their industrial articles, these states would be fatally forced into autarchy; on the other hand, countries that possess raw materials would loose markets for the produce of their land. In industrialized states, this situation provokes the desire to dominate nations that possess raw materials through military means. We must not fool ourselves: ambitions of conquest lie behind apparently innocent claims for the equal distribution of natural sources of wealth and free access to raw materials.

In a peaceful world ruled by free trade, there would be no problems regarding raw materials. Each country would be able to buy all the raw materials it could pay for in international markets. In a world subject to protectionism things happen in a very different way: in this world the problem of raw materials cannot disappear; and for small countries, that is those that are weaker militarily, having mines or a fertile soil within their borders represents a danger.

All arguments regarding the advantages of peace, international cooperation, the creation of a society of nations and the reconstruction of the world economy are hollow words if there is the intention of preserving protectionism. If one is not willing to renounce economic nationalism, small states will lose their autonomy and become the vassals of strong militaristic states. Coalitions of Great Powers, armed to the teeth, will confront one another and take advantage of any momentary weakness of their adversaries to undertake new campaigns of conquest.

It is necessary to understand that this new World War (as well as the First World War) is not the consequence of a natural catastrophe unleashed upon innocent men; rather, it is the inevitable result of the nationalist economic policy pursued in the preceding decades. In a world were free trade prevails, despite the dynamism of Hitler or Mussolini, reaching a state of war would not have been possible. Evil men will always exist; however, it is important to create an economic order in which their power to do harm is reduced to a minimum.

In summary, without the eradication of economic nationalism, it will not be possible to return to peace and wellbeing.

III

The main problem of the postwar era will be general poverty; that is, the shortage of capital.

In the last decade, politics seemed uninterested in the problem of formation and maintenance of capital. Governments acted as if the availability of greater or lesser amounts of capital for production had no importance for the wellbeing of the people. Through their policy of taxes and public spending, these governments not only slowed down the formation of capital but also ¾ at least in recent years and in many countries ¾ caused the consumption of available capital. Thus, they did not practice a policy aimed at increasing general prosperity and raising standards of living but one aimed towards the impoverishment of the people. After the end of the current war, it will not be possible to maintain this policy unless we deliberately seek the destruction of what we nowadays call Western Civilization.

What made possible the development of this civilization, the greatest that has ever existed, was precisely, at least regarding economics, the continued accumulation of capital goods. In the days before this time of world wars and dictatorships, a greater number of people lived, including in this Western Civilization, than in the days before the Industrial Revolution; and each of these men lived much better than their ancestors a century or two before. Each year brought rising living standards for the masses; each year, new products became available for the average man, which made his life healthier, more agreeable, and more stimulating. Contemporary men would find the life of the nobility in pre-capitalist times indignant, not to mention the living conditions of the commoners.

All of these increases in living standards are due to the fact that, year after year, production exceeded consumption. The surplus was gathered and invested; that is used to develop the production apparatus. In this way, means of transportation were developed and new installations were created to achieve a better and cheaper production of all sorts of goods for consumption. The individual labor of each man yields more today because, for a given quantity of labor, there is a much greater quantity of capital goods than before. Thus, the marginal productivity of labor has been growing and, consequently, real wages have increased. If the standard of living of the masses has increased, it was because the supply of capital in the economy surpassed population growth.

But the masses did not only benefit from the increase of real wages: the modern organization of financial techniques, of systems of credit and of joint stock companies enabled these very masses to become owners of capital. Most holders of deposits in saving banks, bonds and insurance policies are even members of the working class. In a capitalist state, thrift and the formation of new capitals are not the privilege of a minority, but are generalized; and their fruits, in one way or another, benefit everyone.

Governments and politicians have refused to recognize that the increase of capital is the lifeline of economic progress; on the contrary, they made everything they could to take away people`s desire for thrift. They confiscated part of that capital through taxes and impaired small savings by means of inflation. They carried out expropriations thus eroding the stocks of capital that had been achieved.

As an example, we can mention the way Hitler acted in relation to German railroads in the Reich. A long time before the First World War, diverse German states ¾ Prussia, Bavaria, etc. ¾ bought railroads built with private capitals, paying for them with bonds. Since these bonds lost their value due to inflation, in a way, the Government acquired these railroads for free. Hitler managed this vast supply of capital, equivalent to more than 60,000 kilometers of rail, in the most irresponsible way. He did not substitute vehicles (locomotives and railcars) that had been worn out by use, nor did he maintain rails and signal equipment as it would have been convenient; he also completely unattended fixed equipment. The situation is similar in the railroads of southern and eastern Europe. When the current war is over, the greater part of the railroads of Europe will be a heap of stones and scrap metal. In this way, capital worth thousands of millions has been consumed in the strictest sense of the word.

The destruction of capital caused by the war far surpasses that which happened before the war. When the struggle is over, we will see everywhere huge installations dedicated to the production of arms and other materials for war, however these installations cannot be utilized for the production of the goods that are required in peacetime. The capital immobilized in them will be lost and, instead, there will be lack of capital where it is most necessary. Old installations meant to produce goods necessary in peacetime will be useless, either because they have been converted to serve the needs of rearmament, or because they have been ruined after several years of disuse.

IV

What could we do to alleviate this shortage of capital as quickly as possible?

There is only one solution: to produce more than what is consumed; that is, practice thrift and, in this way, form new capital. The more one produces, and the higher the proportion of that production that is invested rather than consumed, the sooner the hard times of capital shortage will be over. All those that propose solutions different from the one explained above are either fooling themselves or trying to fool others.

There are no magical financial procedures to remedy the shortage of capital. The expansion of credit cannot alleviate it and much less, suppress it. On the contrary, the boom artificially produced by the expansion of credit creates distortion and, therefore, a waste of capital by immediately promoting overconsumption; that is, the reduction of capital. Inflationist experiments will only make the ailment worse. What is necessary in this case is, precisely, a monetary and credit policy that guarantees the stability of monetary value.

Governments will have to renounce to all confiscatory measures: they will have to radically change their tax policy.

In many countries, taxes on rent and inheritance have been transformed into ill-disguised measures of confiscation. The continuity of this system is not compatible with the existence of private property and is pointless unless we wished to transit to a communist regime and make standards of living fall to the permanent state of misery that prevails among the Russian masses. Within the limits of a non-communist system, these measures only produce an effect of immobility and destruction. They stimulate the consumption of capital since; what logic is there in thrift for a man who knows that only a small part of his inheritance will go to the hands of his children?

If we wished to preserve an income tax, it would be necessary to transform it into a tax on consumed rent. Incomes that are not consumed, but saved and invested, should be exempt from all taxation since it is of public interest to form as much new capital as possible.

All large corporations are developed through the consumption of only a small part of their profits and the investment of the rest. Due to the simultaneous existence of national and local duties, the current system increased the taxation of larger incomes to rates of 100% or more. This system makes it impossible to create new industries or develop those that already exist. For the benefit of the North American people, the development of corporations that supply markets with a variety of cheap goods did not stop some years ago; however, current efforts to prevent new competitors from emerging cause harm to consumers while granting unjustified protection to the incapable heirs of existing corporations. Tax legislation, considered by its supporters to be in favor of the people, only produces the antisocial effect of hindering the supply of consumer goods.

The decrease of government revenue, as an inevitable consequence of these reforms in the tax system, must be compensated with the restriction of public spending. It is necessary to break free, once and for all, from the illusion that the State has money for everything and everyone. The State cannot give to somebody what it has previously not taken away from others. In order to plan the State’s expenses, it is necessary to carefully assess whether the profits to be obtained from the desired expense are more beneficial than the required increase in taxation and its economic consequences are harmful. It will no longer be possible to give away subsidies or issue bonds to finance the reelection of members of parliament. It will be necessary to return to the economic management of old parliaments, which understood that an ordered budget is preferable to the supposed happiness of leveled budgets.

Capital shortage will probably be less severe in the United States of America than in the British Empire and less oppressive there then in the European continent. In central, eastern and southern Europe, the situation will be completely catastrophic. The industrialized nations of Europe, the most densely populated places on earth, cannot feed their people without exporting the products of their industry, which are largely manufactured from imported raw materials. Those countries will be forced to compete in global markets with their industrialized products and this will not be done successfully unless they rebuild their apparatus of production, which was destroyed by hostile policies towards capital in the previous era and by the war itself, to the levels of capital that existed before the outbreak of the war. They will have to completely renovate their transport infrastructure and the machinery of their factories; in other words, completely address all the problems of industrial production again. But before achieving it, they will have to endure years or decades of hunger and misery.

It is clear that, in these circumstances in Europe, particularly in central and southern Europe, the activities of labor unions will not be possible for a long time. The tendency of labor unions to forcefully obtain higher wages and shorter working hours for their members, through unionist means, must be forgotten wherever capital is completely lacking. Workers will have to satisfy themselves with a job that can protect them from misery. To whom will they address their complaints in a country where there is no capital to set industry in motion? Low salaries, low standards of living, and a general decline of culture: these are the sad but inevitable consequences of the shortage of capital.

When they notice the pitiful luck of their European peers, North American workers must realize that they have effective means to remedy the situation: opening up American borders to European immigration would create a tendency to equate the level of European wages to those of the United States. However, if restrictions to immigration persist, wages in Europe, where natural conditions of production will be worst and capital shortage most acute, will be much lower than those in North America.

Thus, it is clear that, after the war, the shortage of capital will produce radical changes in domestic policy. Now we shall examine what the consequences will be regarding foreign policy.

V

The development of international markets for capital and currency during the 19th century was a great achievement of far reaching worldwide political consequence. The peoples of Western Europe, which where the first to create political and economic institutions favorable to the formation and conservation of capital, made part of their wealth available to less favored nations through a system of credit. The excess savings of Europe where invested around the world and helped the peoples of Eastern Europe and Asia overcome their state of economic backwardness; it also provided Americans and Australians with the means necessary to exploit the riches of their land. European culture provided all humanity, not only the fruits of modern technique, but also the material means to transform the economy according to the demands of modern technique. Billions poured from Europe (and later also from the United States) to all the countries of the earth and, as payment, European capitalists, men of business and thrift, received property rights and industrial values.

This international organization of credit is now in ruins; the same countries that, once, prospered because of it have destroyed it. Neither the debts’ interest nor their principals were paid either because debtors openly defaulted on their obligations or because governments cancelled the rights of creditors through inflation or currency controls. Businesses belonging to foreigners were expropriated or taxed in such a way that their owners where left with nothing but hollow legal titles. Creditors and foreign capitalists have been completely dispossessed of their rights.

In these circumstances we cannot expect that, after the war, the least ruined countries will make their capital available to the most ruined. The experience of capitalists and businessmen, regarding the concession of credit and participation in foreign ventures, is sufficiently explicit for them to feel inclined to expose themselves to the dangers of such adventures. Maybe the United States, motivated by old friendships, will invest some capital in Anglo-Saxon countries or in Mexico, as help to a neighbor. However, even this is doubtful since American trade unions tend to regard exports of capital as contrary to their interests and, therefore, demand measures aimed at preventing them. In any case, it is certain that other peoples will not expect foreign capital, to help rebuild their economies, unless the dire condition of foreign capitalists changes radically.

Energetic reforms in international law are necessary to set the international mechanisms of capital and credit in motion again. Only states willing to accept great restriction on their sovereignty can hope to obtain credit or direct investment from abroad. In all matters related to foreign capital, these states will have to renounce their autonomy in favor of the Society of Nations; that is, in all that affects monetary and credit policy as well as mercantile and fiscal powers over foreign capital, they will have to submit unconditionally to the jurisdiction of international courts and tolerate the decisions of those courts to be executed through an international coercive power.

Undoubtedly, all this may seem very strange and the leaders of most states will simply consider it unacceptable. But, above all, it is necessary to consider two things: firstly, every state will be free to submit or not to these conditions and to accept or decline the assistance of foreign capital; secondly, it is inevitable to liquidate a conception of state sovereignty that is no longer in harmony with current circumstances. In no way is it possible to accept that cases such as those of Austria, Albania or Ethiopia can repeat themselves. Great Powers must award effective protection to small states from violations such as these. The ambitions of states that secretly practice a policy of rearmament must be contained through an international police force. It will be necessary to treat governments that disturb the peace in the same way as bandits and murderers are treated within states. By establishing such a system, restrictions of sovereignty regarding financial and fiscal policy will not seem intolerable and much will have been gained.

However, we must point out that all these measures will not be able to completely remedy the shortage of capital. What may be achieved is a more equitable distribution of existing capital and with this much will have been gained.

VI

After the current war, the world will not be a paradise. Men will be poor and have to endure the spiritual and moral consequences of poverty.

Not all peoples will suffer in the same way the consequences of war. Latin American countries will probably be among the least affected ones. Thus, their backwardness in relation to Anglo-Saxon countries will be compensated in part. A new era will begin in which the handicap of Latin America will be smaller.

The supposed backwardness of Central and Southern America, that always made ordinary Cook tourists smile compassionately, was only due to the shortage of capital in those countries. Since capitalism reached Latin America two centuries late in relation to other countries, certain institutions familiar elsewhere were lacking in the region. The low level was not moral or intellectual: it was nothing else than a relatively higher shortage of capital.

But now, more or less, all countries will begin again; and, therefore, with the passing of the years, these differences may gradually fade. Through a wise economic policy, it may be possible that Latin American countries can conquer the place in the World Economy to which they are predestined by the genius and industry of their citizens and the wealth of their land. 

Ludwig von Mises was the acknowledged leader of the Austrian School of economic thought, a prodigious originator in economic theory, and a prolific author. Mises's writings and lectures encompassed economic theory, history, epistemology, government, and political philosophy. His contributions to economic theory include important clarifications on the quantity theory of money, the theory of the trade cycle, the integration of monetary theory with economic theory in general, and a demonstration that socialism must fail because it cannot solve the problem of economic calculation. Mises was the first scholar to recognize that economics is part of a larger science in human action, a science that he called "praxeology."

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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