Ludwig von Mises’s Liberalism: The Classical Tradition is sold as a book primarily about the vital role that private ownership in the means of production plays in organizing society. In fact, when I was reading book descriptions posted on the Ludwig von Mises Institute’s website in order to decide which books to buy, the selling point was that private property in the means of production is the cornerstone of a modern civilization. To rid the world of private property is to condemn it to penury and want. Instead of producing an earthly bliss, the world will retrogress into a barbaric state where the wants and needs of most people will remain unfulfilled. Man faces a fork in the road on the highway of social philosophy; he has to choose which societal plan he wants to follow. The two paths before him are to follow either his own plan or that of the state. “Either a man is free to live according to his own plan or he is forced to submit unconditionally to the plan of the great god state” (Mises, “The Market” 44). Private property in the means of production causes a society to organize around the fulfillment of the wants and needs of the masses as opposed to around the wants and needs of the state. Private property is instrumental in creating a society in which the masses plan their own lives freely because the state is now in a subordinate position to that of the masses. Unlike Marxist and socialist writers, Mises might argue sarcastically that the real “exploited class” is the owners of the factors of production, or the capitalists, not the workers (I say sarcastically because, in fact, Mises argues that there are neither losers nor exploiters under capitalism—everybody wins). Capitalists cannot use their private property in the means of production to do whatever they want; they must produce whatever the masses, the consumers want them to produce. As Mises writes, the capitalists are forced, if they want to keep their private property, to do one and only one thing, that is, satisfy the masses.
The owner of producers’ goods, the capitalist, can derive advantage from his ownership only by employing them for the best possible satisfaction of the wants of the consumers. In the market economy property in the means of production is acquired and preserved by serving the public and is lost if the public becomes dissatisfied with the way in which it is served. Private property of the material factors of production is a public mandate, as it were, which is withdrawn as soon as the consumers think that other people would employ the capital goods more efficiently for their, viz., the consumers’, benefit. (Mises, “The Elite” 23)
Other systems of organizing society, such as communism, socialism, syndicalism (the factory is now owned and operated by the factory workers), and bureaucratization or interventionism in private businesses, all inherently attack private property in the means of production. Private property in the means of production is outright confiscated under communism and socialism by the state. Under syndicalism, private property in the means of production is also confiscated expect that under this system, the workers, not the state, seize ownership. Bureaucratization and interventionism are the stealthy ways for a state to take over the means of production. When private businesses are forced to comply with legions of regulators telling them what to do and what not to do, the private businesses are put into a position where they no longer are using their private property to satisfy the wants and needs of the masses. Instead, the private businesses are now simply satisfying the wants and needs of the regulators from the great god state.
In summary, to ensure that the means of production are used to benefit the masses, private property and the shifting mechanism of private property from one owner to another (i.e., the profit and loss system) must be preserved. Without private ownership in the means of production, society will be under a state of planning or socialism where “the goals of production are determined by the supreme planning authority; the individual gets what the authority thinks he ought to get” (Mises, “The Elite” 26) and so, under this scenario, individuals are no longer free to choose anything in life. All they can do is obey.
This line of reasoning is not surprising, given the fact that Ludwig von Mises was an Austrian economist who taught graduate seminars at New York University and wrote prolifically on economic themes including a doctoral dissertation at the University of Vienna, a treatise on economics called Human Action, and his business cycle theory. Yet, Liberalism: The Classical Tradition is much more than a book on economic systems and the history of economic thought. The book does much more than to provide a refutation of socialism and numerous warnings against the dangers of both the bureaucratization of private businesses and the interventionism of governments in business decision-making. This book is much more than a review of the philosophy underlying capitalism. The most profound theme is, however, that the harmony of interests of all men is the only way to achieve a lasting world peace. Throughout all of Mises’s economic arguments, whether on labor market theory or on parliamentary democracy, one can detect this unifying humanitarian theme.
The world that Mises lived in when he wrote this book originally in 1927 was already soaked in blood and tears. Earlier in his life, Dr. Mises experienced, as an artillery officer on the Russian front, the horrors of World War I. Recalling Mises’s views on inflation (he called supporters of inflationary policies ‘monetary cranks’), he must have watched with horror the destruction brought about by the Weimar hyperinflation that was initially provoked by the invasion of Germany over its reparations default on January 9, 1923 (Engdahl 71). In Liberalism, he also describes in rather graphic detail the evils of both communism and fascism in Europe. He writes:
Only under the fresh impression of the murders and atrocities perpetrated by the supporters of the Soviets were Germans and Italians able to block out the remembrance of the traditional restraints of justice and morality and find the impulse to bloody counteraction. The deeds of the Fascists and of other parties corresponding to them were emotional reflex actions evoked by indignation at the deeds of the Bolsheviks and Communists. (Mises, Liberalism 28)
He also witnessed a Europe sharply divided into political party factions. Mises stresses in Liberalism that, in fact, political parties started so that special interests could stop the classical liberal philosophy from taking root. “All modern political parties and all modern party ideologies originated as a reaction on the part of special group interests fighting for a privileged status against liberalism” (Mises, Liberalism 123). The goal of all political parties is “to obtain, at the cost of the rest of the population, the greatest possible advantages and privileges for the groups they represent” (Mises, Liberalism 136). Classical liberal though abhors special interests and special privileges because it does not see groups, classes, or factions, just humans living on Earth who want to improve their lives.
This climate of bloodshed, war, hyperinflation, party divisions, special interests, and all around general suffering of the masses explains why Mises, in 1927, writes about the need for humanity to adopt the classical liberal principle of the harmony of interests of all men. Mises pursues the idea of world peace not in order to win some philosophical debate regarding social organization but rather to achieve a desperately needed improvement to his current world conditions. The passion with which Mises writes about world peace is a testament to his desire to improve his own situation and that of everyone else. The lessons learned from Mises’s lived experience in the early half of the twentieth century are as relevant today as they were in 1927.
The unifying theme is what Mises calls the Montaigne fallacy, that is to say, “The profit of one man is the damage of another; no man profits but by the loss of others” (Mises, “Economics as a Bridge” 260). Notice how every argument above, with the exception of Mises’s, that human interaction involves winners and losers—one party wins at the expense of all the other parties. The communist and socialist argument assumes that the capitalists, or owners of the means of production, are “exploiters” who are profiting off their workers by paying the workers subsistence wages. In other words, the capitalists win by making the workers lose. Moreover, consider the argument regarding the political parties in Europe in the 1920s. The party representing farmers, for example, wanted to enrich farmers at the expense of the rest of society. In addition, consider the discussion regarding bureaucratization and interventionism. The government can justify regulations by using an argument based on protecting the consumers from the unsafe products coming from manufacturers who are cutting corners. In other words, the manufacturers are winning with higher profits at the expense of the consumers. Trade union interventions, tariffs and other international trade barriers, central banking and the monopolization of credit, are additional examples of the Montaigne fallacy way of viewing the world. All these examples assume that human interaction boils down to irreconcilable differences—one party is winning at the expense of all other parties.
The classical liberal school of though differentiated itself from all these other schools by arguing that this way of thinking about human interaction is destructive. The Montaigne fallacy is, after all, “not a philosophy of social cooperation, but of dissociation and social disintegration” (Mises, “Economics as a Bridge 260). Domestically, it produces infighting among groups such as farmers versus grocery store customers, unionized versus non-unionized workers, and workers versus capitalists. Internationally, it produces infighting among nations over access to resources, to markets, and to labor. Initially one group wins at the expense of all others. The victimized groups, obviously, do not like this state of affairs and so they try to create a new situation where they win at the expense of all others. This downward spiral is what Mises means by social disintegration.
The solution to all of this social disintegration is to adopt the classical liberal view that human intercourse can be fashioned in such a manner that everyone wins. The win-lose outcome of the Montaigne fallacy can be replaced by a win-win outcome if only the classical liberal philosophy were to be implemented. To the classical liberals:
It seemed certain that mankind would advance to ever higher stages of perfection and that nothing would be able to arrest this progress. They were firmly convinced that rational cognition of the fundamental laws of social cooperation and interdependence, which they had discovered, would soon become common and that thereafter the social bonds peacefully uniting mankind would become ever closer, there would be a progressive improvement in general well-being, and civilization would rise to ever higher levels of culture. (Mises, Liberalism 120)
One of the best examples illustrating the feasibility of arranging human intercourse so that everyone wins is the example of how slavery ended in America. In his critique of the presidency of Abraham Lincoln, Loyola College professor Thomas J. DiLorenzo, argues that it was not Lincoln but rather economics that liberated the slaves. He succinctly argues that slave labor became less and less viable as it became less and less profitable. The reason for why slave labor became less and less profitable is that slave labor is much less productive than capital or free labor.
The advent of the industrial revolution added economic pressures as well, for slave labor is inherently inefficient compared to free labor. Slaves have very few, if any, incentives to work productively, to acquire new skills, and to improve their productivity levels, since they do not stand to benefit from doing so. Furthermore, capital-intensive agriculture and industry began to render labor-intensive production, including slave labor, uncompetitive. As the economist Ludwig von Mises wrote, “Servile labor disappeared because it could not stand the competition of free labor; its profitability sealed its doom in the market economy. (DiLorenzo 47-8)
In this example regarding slavery, everyone—the slave owner and the slave—benefits from emancipating the slave. The slave, naturally, is now a free man who can choose where he would like to work. Moreover, the introduction of capital goods that DiLorenzo mentions suggests that the productivity of the worker will now be higher and so the real wage of the former slave should be higher than it was before. The former slave owner also benefits because the use of free labor combined with capital guarantees much higher productivity and so much higher profits for him as well.
Another compelling example is the private property in the means of production example used at the start of this essay. The profit and loss system is the great shifter of private property in the means of production. If the capitalist fails to use his property in the best interest of the masses or consumers, then he will lose his property and will be forced to sell it to other capitalists who will then use it for the best interests of the masses. The capitalist wins by earning profits but the capitalist can only earn these profits if he satisfies the wants and needs of the consumers or the masses. The capitalist, therefore will win only when the masses win. Therefore, if the profit and loss system is allowed to work freely without government bailouts and other forms of intervention, then the capitalists and the masses both simultaneously win. No party is forced to lose under this scenario. Foreigner nations are not burdened with losses from the government intervention of the tariff and so international strive is avoided. Domestic strife is also avoided because rising profits allow the capitalist to invest in additional capital, which increases the productivity of labor and consequently increases the real wage paid to labor.
In conclusion, the advantage of classical liberal thought over that of other schools of thought is that classical liberalism seeks to replace the Montaigne fallacy view of win-lose with its win-win view of human intercourse. The implications of such a philosophy are staggering because it renders obsolete most of our current domestic and foreign policies. So, why then has the world not adopted this philosophy yet? After all, classical liberalism is today called classical because it is an old system of thought! What is stopping the implementation of this system of thought? Just as the world of 1927 did not listen to the voice of Mises and his contemporary liberals, so the world of 2010 is not listening to the voices of today’s classical liberals. The news today is full of wars, calls for new wars, riots, austerity measures, protests, and airplane bombings so obviously something is not working—we are certainly not living in the world of economic prosperity and peace that was envisioned by the classical liberals. In future blog posts I plan to address why classical liberalism has not been adopted by the masses and what can be done to help assist in its adoption.
DiLorenzo, Thomas J. The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War. 2002. New York: Three Rivers-Random, 2003. Print.
Engdahl, William. A Century of War: Anglo-American Oil Politics and the New World Order. Rev. ed. London: Pluto, 2004. Print.
Mises, Ludwig von. “Economics as a Bridge for Interhuman Understanding.” 1945. Economic Freedom and Interventionism: An Anthology of Articles and Essays. Ed. Bettina Bien Greaves. Indianapolis: Liberty Fund, 2006. 253-267. Print.
---. “The Elite under Capitalism.” 1962. Economic Freedom and Interventionism: An Anthology of Articles and Essays. Ed. Bettina Bien Greaves. Indianapolis: Liberty Fund, 2006. 20-28. Print.
---. Liberalism: The Classical Tradition. 1996. Ed. Bettina Bien Greaves. 5th ed. Indianapolis: Liberty Fund, 2005. Print.
---. “The Market and the State.” 1968. Economic Freedom and Interventionism: An Anthology of Articles and Essays. Ed. Bettina Bien Greaves. Indianapolis: Liberty Fund, 2006. 41-45. Print.