Why Capitalism, Lecture 1

David Gordon
Mises Academy
April 23, 2013
 Mises on Capitalism
• “Capitalism” is a name invented by the
opponents of the free market, but Mises is
willing to embrace it.
• We can see what Mises’s view of capitalism is
by contrasting it with that of Marx.
• Marx thought that the ancient world and the
Middle Ages were based on exploitation.
 Marx and Mises Continued
• Marx said that the ancient world was based
on slavery and the Middle Ages was based on
serfdom.
• Both are systems of exploitation. One class
does the work, and others live off this work.
• Mises agrees with this. Of course, this doesn’t
commit him to accepting Marx’s analysis of
these systems.
 Capitalism
• Mises says capitalism breaks with past systems.
Unlike them, it is not based on exploitation of the
producing class.
• Marx disagreed. It is true that under capitalism,
people are legally equal---everybody has the
same rights.
• This conceals the true situation. In fact, capitalists
exploit workers. Workers have no realistic
alternative to working for a capitalist employer.
 Who Runs Capitalism?
• Mises says that capitalism is not really run by
a small group of capitalists.
• Businesses exist to make profits. How do you
make profits? By producing what consumers
want. It is the consumers who are really in
charge, because businesses that satisfy them
will grow and those that don’t will fail.
 Mass Production
• Consumers determine what goods are
produced; but which consumers?
• Even though a rich person has more money
than a poor person, the large number of the
masses means that capitalism is geared to
mass production.
• Capitalism is “mass production for the
masses.”
 The Masses
• Of course, luxuries are produced too, but in
developed capitalism, mass production tends
to be more important.
• This raises the question, where do consumers
get money to buy things?
• In most cases, this will be from their job.
Under capitalism, it is ultimately workers who
run things. They are the consumers whose
wants direct production.
 Capitalist Exploitation?
• If workers direct production, why do people
think that workers are exploited?
• Marx thought that wages couldn’t rise very
much above subsistence.
• This view, found in the British classical
economists, was that if wages go above
subsistence, larger families will result. This will
drive wages back down.
 Subsistence Wages
• This view assumes that workers react
mechanically to an increase in wages by
having more children.
• They can limit the number of children they
have and then wages won’t fall to subsistence.
 The Industrial Revolution
• The system of mass production for the masses
is much more productive than earlier systems,
in which people’s positions were determined
at birth.
• If you were born a peasant, you would almost
always remain a peasant throughout your life.
• The British economy reached a crisis in the
mid-18th century. The economy couldn’t
support all of the people.
 Industrial Revolution Continued
• Because of a population increase, there were
people who had nothing to do and had no
means of support. (About 1 million out of 6 or
7 million ) Mises calls them proletarians in the
full sense.
• The proletarii were a social class in the Roman
republic who owned little or no property. They
were good only for bearing children (proles).
 More Industrial Revolution
• The new economy, based on new factories,
made it possible to employ these people.
• Working conditions in the new factories were
often bad, but these people would have died
under the old conditions.
• Opposition to the Industrial Revolution often
came from aristocrats, who didn’t like the fact
that workers were leaving the aristocrats’
estates to work in the cities.
 How Do Workers Prosper?
• Workers increase their prosperity through
increases in capital goods, such as machines
they use in production.
• Wages depend on how much the workers
produce, and an increase in capital goods
makes them more productive.
• What is important is the capital/worker ratio.
 Increase in Capital
• Workers’ prosperity depends on growth in
capital goods.
• Capital goods require savings. If people
consume all their wealth, nothing will be left
to invest.
• Savings is thus essential to prosperity.
• A great deal of the wealth of the rich is saved
rather than spent. This money goes into
investments.
 Criticisms of Savings
• Keynes and his followers criticized savings.
• They objected to the argument in favor of
savings. Their objection was that the
argument assumes that money that is saved,
i.e., not spent, will go into investment.
• But what if it doesn’t? What if people just
hold money. expecting prices to fall? This will
depress the economy.
 Kinds of Saving
• Hazlitt says that sudden changes in the rate at
which people save can cause disruptions. In
general, savings does not cause trouble.
• Rent saving doesn’t cause trouble.
• Rainy day saving doesn’t cause problems
either. This simply changes the pattern of
spending over time.
• Capitalist saving, i.e., saving that goes into
investment, is beneficial.