Saturday, July 20, 2019

Those Spurning Entrepreneurial Profit as “Unearned” Mean that It Is Lucre Unfairly Withheld from the Workers and/or Consumers

Those who spurn entrepreneurial profit as “unearned” mean that it is lucre unfairly withheld either from the workers or from the consumers or from both. Such is the idea underlying the alleged “right to the whole produce of labor” and the Marxian doctrine of exploitation. It can be said that most governments—if not all—and the immense majority of our contemporaries by and large endorse this opinion although some of them are generous enough to acquiesce in the suggestion that a fraction of profits should be left to the “exploiters.” . . .

Those who want to abolish profit are guided by the idea that this confiscation would improve the material well-being of all non-entrepreneurs. In their eyes the abolition of profit is not an ultimate end but a means for the attainment of a definite end, viz., the enrichment of the non-entrepreneurs. Whether this end can really be attained by the employment of this means and whether the employment of this means does not perhaps bring about some other effects which may to some or to all people appear more undesirable than conditions before the employment of this means, these are questions which economics is called upon to examine.

The idea to abolish profit for the advantage of the consumers involves that the entrepreneur should be forced to sell the products at prices not exceeding the costs of production expended. As such prices are, for all articles the sale of which would have brought profit, below the potential market price, the available supply is not sufficient to make it possible for all those who want to buy at these prices to acquire the articles. The market is paralyzed by the maximum price decree. It can no longer allocate the products to the consumers. A system of rationing must be adopted.

The suggestion to abolish the entrepreneur’s profit for the benefit of the employees aims not at the abolition of profit. It aims at wresting it from the hands of the entrepreneur and handing it over to his employees. . . .

If, for the sake of argument, we were prepared to neglect any reference to the problem of capital accumulation, we would still have to realize that giving profit to the employees must result in rigidity of the once attained state of production and preclude any adjustment, improvement and progress.

In fact, the scheme would transfer ownership of the capital invested into the hands of the employees. It would be tantamount to the establishment of syndicalism and would generate all the effects of syndicalism, a system which no author or reformer ever had the courage to advocate openly.

A third solution of the problem would be to confiscate all the profits earned by the entrepreneurs for the benefit of the state. A one hundred per cent tax on profi ts would accomplish this task. It would transform the entrepreneurs into irresponsible administrators of all plants and workshops. They would no longer be subject to the supremacy of the buying public. They would just be people who have the power to deal with production as it pleases them.

The policies of all contemporary governments which have not adopted outright socialism apply all these three schemes jointly. They confiscate by various measures of price control a part of the potential profits for the alleged benefit of the consumers. They support the labor unions in their endeavors to wrest, under the ability-to-pay principle of wage determination, a part of the profits from the entrepreneurs. And, last but not least, they are intent upon confiscating, by progressive income taxes, special taxes on corporation income, and “excess profits” taxes, an ever-increasing part of profits for public revenue. It can easily be seen that these policies if continued will very soon succeed in abolishing entrepreneurial profit altogether.

--Ludwig von Mises, “Profit and Loss,” in Planning for Freedom: Let the Market System Work; A Collection of Essays and Addresses, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2008), 158-161.


Following the Doctrines of Silvio Gesell Who Wanted to Create “Free Money,” Lord Keynes Wanted Credit Expansion to Perform the “Miracle” of Turning a Stone into Bread

The stock-in-trade of all Socialist authors is the idea that there is potential plenty and that the substitution of socialism for capitalism would make it possible to give to everybody “according to his needs.” Other authors want to bring about this paradise by a reform of the monetary and credit system. As they see it, all that is lacking is more money and credit. They consider that the rate of interest is a phenomenon artificially created by the man-made scarcity of the “means of payment.” In hundreds, even thousands, of books and pamphlets they passionately blame the “orthodox” economists for their reluctance to admit that inflationist and expansionist doctrines are sound. All evils, they repeat again and again, are caused by the erroneous teachings of the “dismal science” of economics and the “credit monopoly” of the bankers and usurers. To unchain money from the fetters of “restrictionism,” to create free money (Freigeld, in the terminology of Silvio Gesell) and to grant cheap or even gratuitous credit, is the main plank in their political platform.

Such ideas appeal to the uninformed masses. And they are very popular with governments committed to a policy of increasing the quantity both of money in circulation and of deposits subject to check. However, the inflationist governments and parties have not been ready to admit openly their endorsement of the tenets of the inflationists. While most countries embarked upon inflation and on a policy of easy money, the literary champions of inflationism were still spurned as “monetary cranks.” Their doctrines were not taught at the universities.

John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The “Keynesian Revolution” consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.” The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume's and Mill's views on miracles.

--Ludwig von Mises, “Stones into Bread: The Keynesian Miracle,” in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 305-306.


Keynes's Difficulties with the Classical Savings Theory of Growth and His Misidentification of Saving with the Hoarding of Cash Are Illustrated by a Thrift Campaign in His Banana Economy

It is easy to understand Keynes’s difficulties with the classical savings theory of growth when one recognizes his misidentification of saving with the hoarding of cash. In the Treatise Keynes illustrates this misunderstanding with a banana economy model in which a thrift campaign leads to a fall in the demand for bananas, a fall in the price level, and a loss to the plantation owners who then lay off some of their employees (1930). Had Keynes conceived of saving as the transfer of purchasing power from income earners to borrowers or issuers of financial assets, he might have realized that saving does not reduce the total demand for bananas. Some borrowers of the savings would use the funds to purchase bananas for consumption, while others would purchase bananas for processing into banana products, such as banana cream pies.

--James C. W. Ahiakpor, “The Classical Theory of Growth and Keynes's Paradox of Thrift,” in Classical Macroeconomics: Some Modern Variations and Distortions (London: Routledge Taylor and Francis e-Library, 2005), 154.


Friday, July 19, 2019

The Actual Originator of Say's Law Was James Mill Who Was Responding to an 1807 Pamphlet by William Spence; Spence Argued Demand Was at the Heart of the Wealth Creation Process

To understand the actual meaning of Say's Law, and why its disappearance has made the most profound difference to economic theory, the best place to start is with the controversy out of which Say's Law grew. Although the law of markets is now generally referred to as Say's Law, Say was not in fact the originator of the essential proposition denying the possibility of demand deficiency. The actual originator of Say's Law was James Mill who was responding to an 1807 pamphlet written by William Spence. Spence had argued that it was demand which was at the heart of the wealth creation process:
It is clear, then, that expenditure, not parsimony, is the province of the class of land proprietors, and, that it is on the due performance of this duty, by the class in question, that the production of national wealth depends. And not only does the production of national wealth depend upon the expenditure of the class of land proprietors, but, for the due increase of this wealth, and for the constantly progressive maintenance of the prosperity of the community, it is absolutely requisite, that this class should go on progressively increasing its expenditure. 
It is spending which causes wealth to grow, not saving. And Spence makes no bones about it as this example shows:
The prosperity of the country would be as much promoted, if an owner of an estate of 10,000 l. a year, were to expend this sum in employing 500 men to blow glass bubbles, to be broken as soon as made, as if he employed the same number in building a splendid palace. . . . The 500 glass blowers would require as much wealth to be brought into existence from the soil, would consume as much food, and would consequently be as prosperous, as the 500 palace builders. 
 Spence owns that it would be better to build palaces since this would add to the capital stock of the nation. But even so, the creation of no value at all would have the same economic effect on the level of prosperity as the building of a palace. There is no substantive difference between this and Keynes in the General Theory.
Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better. . . . 
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again. . . there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a great deal greater than it actually is. 
 Keynes too stated that it would be better to build something useful, but argued that even completely unproductive spending would add to wealth. And for both Keynes and Spence, it was the restrictions in demand caused by saving which was at the heart of the problem.

It was to this kind of argument in Spence that James Mill replied. And this is why the argument moves in the way it does from demand deficiency to the causes of recession. Mill finds it beyond comprehension that someone should recommend wasteful expenditure as a means of generating wealth. Spending is a depletion of wealth while saving adds to it. The idea of spending one's way to prosperity was the worst sort of nonsense to Mill as it was to the entire classical school.

--Steven Kates, “On the True Meaning of Say's Law,” Eastern Economic Journal 23, no. 2 (Spring 1997): 196-197.


John Stuart Mill's 4th Proposition (“Demand for Commodities Is Not Demand for Labor”) Has the Same Mystery about It that Fermat's Last Theorem Had in Mathematics

John Stuart Mill's fourth proposition respecting capital, that “demand for commodities is not demand for labor,” has in many respects the same mystery about it that Fermat's Last Theorem had in mathematics. The proposition is found in  a text of the highest reputation, Mill’s Principles of Political Economy—arguably the nineteenth century's most influential text. Yet, it can no longer be explained in a way that makes clear why Mill considered it so fundamentally important. . . .

Several questions therefore arise. What did Mill mean? Was Mill’s proposition sensible and coherent? Did it require some special assumption that we have since discarded, such as the wages fund? Why could Leslie Stephen in 1876 describe Mill’s fourth proposition as “the doctrine—so rarely understood, that its complete apprehension is, perhaps, the best test of a sound economist,” emphasizing both how infrequently economists even in his own time were capable of making complete sense of Mill’s proposition, while also specifically stating how crucial he believed understanding Mill’s proposition is if one is actually to understand how an economy works?

--Steven Kates, “Mill's Fourth Fundamental Proposition on Capital: A Paradox Explained,” Journal of the History of Economic Thought 37, no. 1 (March 2015): 39-40.


Thursday, July 18, 2019

The Notion of Aggregate Demand Separate from Aggregate Supply Was Foreign to Pre-Keynesian Economic Thought

Moving forward a century [from when James Mill wrote], the same concept is found in the following passage from one of the most widely used economic texts ever published, in which this principle is stated in very clear terms:
It is only because our exchanges are made through money that we have any difficulty in perceiving that an increase in supply is (not 'causes') an increase in demand . . . An increase in the supply of cloth is an increase in the demand for other things; and vice versa, an increase in the supply of anything else may constitute a demand for cloth. What is divided among the members of society is the goods and services produced to satisfy its wants; and the same goods and services are both Supply and Demand. (Clay, [1916] 1924: 242)
The notion of aggregate demand separate from aggregate supply was foreign to pre-Keynesian economic thought. Aggregate demand grows at the same rate and by the same amount as aggregate supply, and will not grow unless supply has grown. It is not, however, just any production that will lead to an increase in aggregate demand. What creates demand is the production of forms of output for which enough buyers can be found whose payments cover in aggregate the entire costs of production. Only if  the goods and services produced can be sold for more than was paid for the inputs that went into their production can it be said with certainty that value has been added during the production process. Conversely, if the goods and services produced do not create more value than is used up in the production process, there can be no increase in aggregate demand because there has been no increase in aggregate supply in any relevant sense.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.


Monday, July 15, 2019

The Absence of Competition and Profit-and-Loss Incentives in Supplying the Consumers Makes the Plain Citizens Economically Impotent under Socialism

What positively generates the system of aristocratic privilege under socialism is the fact that the only values that actually count in a socialist society are the values of its rulers. It should be recalled from the previous chapter that the absence of competition and profit-and-loss incentives in supplying the consumers makes the plain citizens economically impotent under socialism. Production thus takes place exclusively in accordance with the values of the rulers. What the rulers value is what contributes to their military strength, their prestige, and their amusement. The goods required by the masses for survival enter into the rulers' valuations only to the extent that the rulers need subjects and do not wish to lose too many of them.

The nature of the rulers' values determines the nature of the incentives and inequalities of a socialist society. It is not true that a socialist society exists entirely without incentives. That would be true only if it tried to practice consistently the absurd ideal “from each according to his ability, to each according to his need.” In actual fact, a socialist society does have some incentives. But the incentives are geared entirely to the achievement of the values of the rulers. There are no incentives to the achievement of the values of the plain citizens.

The kind of incentives and inequalities that prevail under socialism are similar to those which prevail in an army. In an army there are incentives for privates to make corporal and for everyone to advance to a higher grade. But all the incentives in an army are geared to achieving the objectives of the supreme commander. The objectives of the supreme commander are the ultimate ends, definitely not the improvement of the life of the privates. Indeed, neither in an army nor under socialism is the improvement of anyone's actual life the goal. The goal is always some impersonal achievement, whether victory in the battle with the neighboring country or victory in the battle of the new dam or truck factory, which is just how the socialists describe their construction projects. The closest socialism ever comes to making the improvement of life its goal is its alleged concern with the improvement of the life of unborn future generations. But no sooner does the generation of the grandchildren arrive, than socialism's concern switches to the grandchildren of the grandchildren.

--George Reisman, The Government Against the Economy: The Story of the U.S. Government's On-going Destruction of the American Economic System through Price Controls (Ottawa, IL: Jameson Books, 1979), 184-185.


Sunday, July 14, 2019

Under the Threat of Excommunication, a Keynesian Is Never Allowed to Look at the Matter the Way an Entrepreneur Looks at It

Keynes does not advance in the slightest beyond Cournot is setting up his own “functions” and his own formulas. In fact, as we shall see, he goes backward. His equations are not merely unverified and unverifiable; they are invalid or inadmissible in other ways.

Let us begin, as an example, with the Aggregate Demand Function. “Let D,” writes Keynes, “be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being written D = f(N), which can be called the Aggregate Demand Function.”

The first thing that troubles one about this (as I have pointed out previously) is that entrepreneurs practically never think or act in the way Keynes implies. The entrepreneur usually begins by trying to determine what his net income will be from producing a certain quantity of a certain product and selling it at a certain price. Only when he has made this estimate does he decide how many men will be needed to turn out this product. How many men he hires or keeps, moreover, will also be determined heavily by the wage-rates he is obliged to pay. Instead of thinking what his gross proceeds will be from hiring so-and-so-many men, he decides how many men he will have to hire (or how many he can afford to hire at a given wage-rate) to acquire a certain net income. (His decision will also be governed, of course, by how much capital he has or can borrow.)

But a Keynesian is never allowed to look at the matter the way an entrepreneur looks at it. Under threat of excommunication, he is not even permitted to hint that the amount of employment will have anything to do with wage-rates. That unemployment might be primarily the result of excessive wage-rates in relation to prices or the demand for products is the very doctrine that Keynes started out to disprove and to ridicule.

--Henry Hazlitt, The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies (1959; repr., Auburn, AL: Ludwig von Mises Institute, 2007), 104-105.


“Consumptionism” Is the Doctrine that the Fundamental Problem of Economic Life Is How to Increase the Need and Desire to Consume in the Face of an Ability to Produce that Exceeds Them

In the twentieth century, there has been a growing influence of irrationalist philosophy, which denies the reliability and efficacy of human reason and which disregards the profound influence that the possession of reason exerts on every aspect of human life. According to such philosophy, there is little to distinguish man from the lower animals. Indeed, as we have seen, man is depicted as “the trousered ape”; porpoises, it is asserted, may possess intelligence comparable to man’s; snail darters, we are told, have equal rights with man. Thus, at bottom, man, it is held, is just another animal. On such a view of man, it follows that man’s needs and desires must be as limited as those of an animal and thus fundamentally incapable of extending beyond the range of minimum necessities. The fact that man’s desires obviously do extend beyond the range of an animal’s is held to be the result of “social and cultural conditioning” and the work of advertisers; at the same time, the desires are denounced as “unnatural,” “artificial,” and “created.” Thus, the basic economic premise is advanced that the need and desire to consume are essentially fixed and given, and that the ability to produce threatens constantly to outrun them.

This premise, together with its leading implications, I call consumptionism. It is the doctrine that the fundamental problem of economic life is how to increase the need and desire to consume in the face of an ability to produce that exceeds them. Consumptionism proceeds as though the problem of economic life were not the production of wealth, but the production of consumption.

The consumptionist premise must be characterized as nothing less than the premise of anti-economics. This is because, as we shall see, point by point, it leads to a total inversion of the conclusions of sound, rational economic science.

--George Reisman, Capitalism: A Treatise on Economics (Laguna Hills, CA: TJS Books, 1998), 543.