Friday, April 6, 2012

Book Review: Economic Planning: Thoughts for Today and Tomorrow

Economic Planning: Thoughts for Today and Tomorrow is a series of lectures given by Ludwig von Mises at the University of Buenos Aires in 1958. The lectures were published by Margit von Mises in 1979, after her husband's death. Margit correctly notes in her forward that these lectures are easier to understand than many of Mises' works. It was her "earnest hope" that the book would be "made available to younger audiences, especially high school and college students throughout the world."
In his first lecture, Von Mises explains that the "kings"--modern captains of industry--don't rule, they serve. If they do not please their subjects, the customers, they lose their kingdom. I consider it striking how this principle of free market capitalism resembles Christ's advice to His disciples on how to be great in God's kingdom: "Whoever wants to become great among you must be your servant, and whoever wants to be first must be your slave..." (Matthew 20:26-27 NIV)
Von Mises carefully shows that capitalism improves conditions for the masses. Often, he observes, people look back at the Industrial Revolution, the factory working conditions, and the long hours for women and children and mourn how industrialization took these women and children from their homes into the factories. This thinking is all wrong, he says. "The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen, they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying." The advent of capitalism improved living conditions so much that England's population doubled with the Industrial Revolution. The Industrial Revolution was not evil; children who otherwise would have starved to death obtained jobs and lived. Since then, we have continued to see conditions improve.
What about wage rates? Since every individual is both consumer and producer, Mises says, "Wage rates under capitalism are not set by a class of people different from the class of people who earn the wages...If buyers do not pay the employer enough to enable him to pay his workers, it becomes impossible for the employer to remain in business."
Savings are good for the economy because they are invested, Mises notes. Let me give an example: take your latest tax refund or stimulus check. If you are a good, patriotic American and want to help the economy with your check, what should you do? Hide it under your mattress? No, that won't do you, or anyone else, any good. Spend it immediately (like you are advised to do) on luxury items? No! You might have fun with a new motor boat or big screen TV, but they really will do you no permanent good. Do you really help the economy? Not very much, you encourage frivolous industry. Should you save and invest your money? Yes! Your savings will be lent to some entrepreneur who may start a useful business, boost the economy, hopefully make a net income for himself, and pay you back with interest so you can lend even more money to the next entrepreneur. Theoretically, you will enrich yourself and society indefinitely.
Von Mises says the meaning of economic freedom is "that the individual is in a position to choose the way in which he wants to integrate himself into the totality of society. The individual is able to choose his career, he is free to do what he wants to do." Many people do not realize, he notes, that "in a system where there is no [free] market, where the government directs everything, all those other freedoms are illusory, even if they are made into laws and written up in Constitutions." Where there is no economic freedom it is very easy for the government to suppress these other liberties. Take, if I may give an example, Pastor Richard Wurmbrand in Communist Romania: his ration cards were suspended when he was too vocal about his religious beliefs. Consider in Revelations where St. John speaks of the mark of the beast without which no one could buy or sell: in that case economic sanctions seriously inhibit religious liberty. Or consider the consequences of perhaps saying something "wrong" in the future if the government controls healthcare; it would be very easy for some hitch in bureaucracy to come up so you would not get your healthcare. Von Mises observes that while in a capitalist society the consumer is the boss, "In socialist countries it is not the seller who has to be grateful, it is the buyer. The citizen is not the boss; the boss is the Central Committee, the Central Office. Those socialist committees and leaders and dictators are supreme, and the people simply have to obey them."
Mises was a firm believer in limited government. He says, "Under socialism, of course, the government is totalitarian, and there is nothing outside its sphere and its jurisdiction. But in the market economy, the main task of the government is to protect the smooth functioning of the market against fraud or violence from within and from outside the country. People who do not agree with this definition of the functions of government may say: 'This man hates the government.' Nothing could be farther from the truth. If I should say that gasoline is a very useful liquid, useful for many purposes, but that I would nevertheless not drink gasoline because I think that would not be the right use for it, I am not the enemy of gasoline, and I do not hate gasoline...The government's only legitimate function is, precisely, to produce security." "Interventionism means that the government not only fails to protect the smooth functioning of the market economy, but that it interferes with the various market phenomena; it interferes with prices, with wage rates, interest rates, and profits. Von Mises goes on to explain the futility of price controls and protectionism, concluding that all government interference is wrong and leads to socialism.
Ludwig von Mises' 4th lecture is on inflation: "With the stroke of a pen, the government creates fiat money," he says. Mises, an Austrian, recalled when German hyperinflation took its toll. On August 1, 1914, $1 equaled 4 marks and 20 pfennings. By November 1923, $1 was worth 4.2 billion marks. Inflation is based on a live-for-the-day mentality, as Madame de Pompadour said, 'Aprés nous le déluge." (Keynes said, "In the long run, we are all dead.") Sometimes, though, Mises observes, we outlive the short run and find ourselves in "le déluge." Mises recommended the gold standard: "The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments." Inflation increases the quantity of money while lowering its purchasing power, effectively lowering real wages and decreasing unemployment. But unions noticed the lowering of real wages and started using indexing in their bargaining. If full employment is to be achieved, Mises explains, the unhampered market must determine wage rates. He also says that capital is the only way to increase the standard of living; unions, protectionism, inflation, and minimum wage rates only hamper the process.
Foreign investment, he remarked, is good for the country.
Like many authors and speakers, Von Mises ends with an optimistic note:

"We must fight all that we dislike in public life. We must substitute better ideas for wrong ideas...Our civilization will and must survive. And it will survive through better ideas than those which now govern most of the world today, and these better ideas will be developed by the rising generation."
Now, Let's take a look into Argentine history...
(Historical information thanks to A Brief History of Argentina)
If the Argentines had followed Mises' advice, given soon after Perón's resignation and exile, history would be written differently. But, no, bureaucracy, inefficiency, inflation, and corruption reigned. No president dared cut back the public sector because there would be outcries of (temporarily) jobless bureaucrats. In Argentina, economic downturns and regime changes became synonymous. Individuals tolerate difficulties if they have no one to blame but themselves. But when the government was in charge of (and consequently responsible for) everything, and nothing worked, the people had no one to blame but the government. There were riots and guerrilla fighters. Less than a decade after Von Mises gave his lectures there, 200 students were jailed and 30 hospitalized during the "Night of Long Pencils" at the University of Buenos Aires. The guerrillas claimed to fight the "enslavement of foreign capital. " The labor unions and guerrillas made Argentina ungovernable. Perón returned to power in '73. In '75, he died and his wife Isabel became president. A civil war between the Monteneros and Triple A ensued, and a military junta took the reins in '76. A temporary economic boom occurred, but the military soon succumbed to corruption. As Lord Acton said, "Power tends to corrupt, and absolute power corrupts absolutely." The national debt rose astronomically. The junta "mortgaged future economic health, but the prosperity of the moment enabled the junta to defeat the guerrillas." To wipe out the approx. 2000 remaining guerrillas, the military killed 19,000 Argentines. The government tortured and killed in secret. They raided homes at night, and their victims just disappeared.
After a war with Britian over the Malvinas Islands, strikes, various elections, revolts, and with the onset of hyperinflation and 1/5 of total employees in the country working for the government, President Carlos Menem took office. Menem and his finance minister Cayallo privatised companies, lowered tarrifs, encouraged foreign investment, sought closer trade relations with neighboring countries, streamlined beauracracy, created a new peso note fixed on par with the U.S. dollar, and anounced that "subsidies no longer exist." Inflation dropped from 3000% to less than 20% in 3 years. Argentina's GDP increased by 35% from 1990 to 1994, and foreign investment increased by 150%. Of course, the situation in Argentina has changed since then, but imagine all the bloodshed, revolutions, and poverty that could have been avoided if Von Mises' advice had been followed in 1958.
The lectures found in Economic Planning: Thoughts for Today and Tomorrow are very easy to understand, and I would recommend them to anyone looking for a short, easy introduction to Von Mises' work in Austrian economics.

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