CAPITALISM CAPITALISM A Treatise on Economics George Reisman Prepublication, Interim Edition Jameson Books, Ottawa, Illinois Copyright © 1998, 1996, 1990 by George Reisman. All rights reserved. No part of this book may be reproduced in any manner without written permission, except in the case of brief quotations embodied in reviews. Mail order copies of this book may be purchased from the publisher by call- ing 800-426-1357. All inquiries should be addressed to Jameson Books, 722 Columbus St., Ottawa, IL 61350. (815)-434-7905. Fax: (815)-434-7907. Distributed to the book trade by MidPoint Trade Books. All returns to the MidPoint warehouse. Bookstores, please call 800-243-0138 to order. Photocopying of excerpts from Jameson Books editions are licensed through the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923. Call 508-750-8400 for information. ISBN: 0-915463-73-3 Library of Congress Catalogue Card Number: 96-78105 Manufactured in the United States of America 09 08 07 06 05 04 / 8 7 6 5 4 To Ludwig von Mises, my teacher, and Edith Packer, my wife. CONTENTS IN BRIEF PREFACE xxxix INTRODUCTION 1 PART ONE THE FOUNDATIONS OF ECONOMICS CHAPTER 1. ECONOMICS AND CAPITALISM 15 CHAPTER 2. WEALTH AND ITS ROLE IN HUMAN LIFE 39 CHAPTER 3. NATURAL RESOURCES AND THE ENVIRONMENT 63 PART TWO THE DIVISION OF LABOR AND CAPITALISM CHAPTER 4. THE DIVISION OF LABOR AND PRODUCTION 123 CHAPTER 5. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM I 135 CHAPTER 6. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM II: THE PRICE SYSTEM AND ECONOMIC COORDINATION 172 CHAPTER 7. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM III: PRICE CONTROLS AND ECONOMIC CHAOS 219 CHAPTER 8. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM IV: SOCIALISM, ECONOMIC CHAOS, AND TOTALITARIAN DICTATORSHIP 267 CHAPTER 9. THE INFLUENCE OF THE DIVISION OF LABOR ON THE INSTITUTIONS OF CAPITALISM 296 CHAPTER 10. MONOPOLY VERSUS FREEDOM OF COMPETITION 375 CHAPTER 11. THE DIVISION OF LABOR AND THE CONCEPT OF PRODUCTIVE ACTIVITY 441 PART THREE THE PROCESS OF ECONOMIC PROGRESS CHAPTER 12. MONEY AND SPENDING 503 CHAPTER 13. PRODUCTIONISM, SAY’S LAW, AND UNEMPLOYMENT 542 CHAPTER 14. THE PRODUCTIVITY THEORY OF WAGES 603 CHAPTER 15. AGGREGATE PRODUCTION, AGGREGATE SPENDING, AND THE ROLE OF SAVING IN SPENDING 673 CHAPTER 16. THE NET-CONSUMPTION/NET-INVESTMENT THEORY OF PROFIT AND INTEREST 719 CHAPTER 17. APPLICATIONS OF THE INVARIABLE-MONEY/NET-CONSUMPTION ANALYSIS 809 CHAPTER 18. KEYNESIANISM: A CRITIQUE 863 CHAPTER 19. GOLD VERSUS INFLATION 895 EPILOGUE CHAPTER 20. TOWARD THE ESTABLISHMENT OF LAISSEZ-FAIRE CAPITALISM 969 A BIBLIOGRAPHY OF WRITINGS IN DEFENSE OF CAPITALISM 993 INDEX 1001 viii CAPITALISM CONTENTS LIST OF FIGURES xxxv LIST OF TABLES xxxvii PREFACE xxxix Notes l INTRODUCTION 1. Procapitalist Economic Thought, Past and Present 1 2. Pseudoeconomic Thought 6 Marshallian Neoclassical Economics: The Monopoly Doctrine and Keynesianism 7 Mathematical Economics 8 3. Overview of This Book 9 Notes 11 PART ONE THE FOUNDATIONS OF ECONOMICS CHAPTER 1. ECONOMICS AND CAPITALISM PART A. THE NATURE AND IMPORTANCE OF ECONOMICS 1. Economics, the Division of Labor, and the Survival of Material Civilization 15 2. Further Major Applications of Economics 16 Solving Politico-Economic Problems 16 Understanding History 17 Implications for Ethics and Personal Understanding 17 Economics and Business 18 Economics and the Defense of Individual Rights 18 PART B. CAPITALISM 1. The Philosophical Foundations of Capitalism and Economic Activity 19 2. Capitalism and Freedom 21 Freedom and Government 21 Freedom as the Foundation of Security 22 The Indivisibility of Economic and Political Freedom 23 The Rational Versus the Anarchic Concept of Freedom 23 The Decline of Freedom in the United States 26 The Growth of Corruption as the Result of the Decline of Freedom 26 3. Capitalism and the Origin of Economic Institutions 27 4. Capitalism and the Economic History of the United States 28 5. Why Economics and Capitalism Are Controversial 31 The Assault on Economic Activity and Capitalism 31 The Prevailing Prescientific Worldview in the Realm of Economics 32 Economics Versus Unscientific Personal Observations 32 Economics Versus Altruism 33 Economics Versus Irrational Self-Interest 34 Economics Versus Irrationalism 35 6. Economics and Capitalism: Science and Value 36 Notes 37 CHAPTER 2. WEALTH AND ITS ROLE IN HUMAN LIFE 1. Wealth and Goods 39 2. Economics and Wealth 41 3. The Limitless Need and Desire for Wealth 42 Human Reason and the Scope and Perfectibility of Need Satisfactions 43 Progress and Happiness 45 The Objectivity of Economic Progress: A Critique of the Doctrines of Cultural Relativism and Conspicuous Consumption 46 The Objective Value of a Division-of-Labor, Capitalist Society 48 4. The Law of Diminishing Marginal Utility and the Limitless Need for Wealth 49 5. Applications of the Law of Diminishing Marginal Utility 51 Resolution of the Value Paradox 51 Determination of Value by Cost of Production 52 Determination of Consumer Spending Patterns 52 Say’s Law 53 x CAPITALISM [...]... Government and Science 986 Separation of State and Church 987 9 A General Campaign at the Local Level 988 10 The Outlook for the Future 989 Notes 990 xxxiv CAPITALISM A BIBLIOGRAPHY OF WRITINGS IN DEFENSE OF CAPITALISM INDEX 993 1001 FIGURES Figure 5–1 Hypothetical Demand and Supply Curves Based on the Data of Table 5–1 153 Figure 5–2 The Austrian View of Demand and Supply 154 Figure 5–3 The Aggregate Unit... Supply Under an Invariable Money 900 Figure 19–2 The Initial Balance Sheet of a Hypothetical Average Firm Before a Rise in Prices Resulting from Any Cause 904 Figure 19–3 The Balance Sheet of a Hypothetical Average Firm Following a Rise in Prices Caused by a Halving of Supply 905 Figure 19–4 The Balance Sheet of a Hypothetical Average Firm Following a Rise in Prices Caused by a Doubling of Money and... Toward Universal Price Controls 256 xvi CAPITALISM 2 Universal Price Controls and Universal Shortages Excess Demand and Controlled Incomes 3 The Destruction of Production Through Shortages The Prosperity Delusion of Price Controls: The World War II “Boom” 257 257 258 262 4 Socialism on the Nazi Pattern 263 Notes 264 CHAPTER 8 THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM IV: SOCIALISM, ECONOMIC... System of Aristocratic Privilege and a Court Society 288 6 From Forced Labor to Mass Murder Under Socialism 290 7 From Socialism to Capitalism: How to Privatize Communist Countries 290 Notes 294 CONTENTS xvii CHAPTER 9 THE INFLUENCE OF THE DIVISION OF LABOR ON THE INSTITUTIONS OF CAPITALISM PART A PRIVATE OWNERSHIP OF THE MEANS OF PRODUCTION 1 The General Benefit from Private Ownership of the Means of Production... Natural Resources 322 323 PART B ECONOMIC INEQUALITY 1 Economic Inequality Under Capitalism 326 2 Critique of the Marxian Doctrine on Economic Inequality 330 Economic Inequality and the Law of Diminishing Marginal Utility 332 Economic Inequality and the Normal Curve 336 3 The “Equality of Opportunity” Doctrine: A Critique 337 xviii CAPITALISM Education and the Freedom of Opportunity 342 Everyone’s Interest... Inversion of Economic History 406 The Myth of Predation With Respect to Suppliers 406 The Myth of Standard Oil and the South Improvement Company 407 xx CAPITALISM 8 Marginal Revenue and the Alleged “Monopolistic Restriction” of Supply 408 Competitors’ and Potential Competitors’ Costs—Ultimately, Legal Freedom of Entry—as Setting the Upper Limit to Prices in a Free Market 411 Ricardo and Böhm-Bawerk on... Technological Progress 631 The Economic Degree of Capitalism, the Wage “Share,” and Real Wages 632 Other Factors, Above All Economic Freedom and Respect for Property Rights, as Sources of Capital Accumulation 634 The Undermining of Capital Accumulation and Real Wages by Government Intervention 636 The Nonsacrificial Character of Capital Accumulation Under Capitalism 639 Appendix to Section 3: An Analytical... CONTENTS The 100-Percent-Reserve Gold Standard, Liquidity, and the Dismantling of the Welfare State Notes xxxiii 962 963 EPILOGUE CHAPTER 20 TOWARD THE ESTABLISHMENT OF LAISSEZ-FAIRE CAPITALISM 1 Introduction 969 The Importance of Capitalism as a Conscious Goal 969 The Capitalist Society and a Political Program for Achieving It 971 2 Privatization of Property: Importance of Fighting on Basis of Principles... Under Capitalism 54 7 Time Preference and the Scarcity of Capital 55 The Foundations of Time Preference 55 The Scarcity of Capital 56 A Word on Capital Accumulation and the Rate of Return 58 Time Preference, Rationality, and Freedom 58 8 Wealth and Labor The Scarcity of Labor and Its Ineradicability Notes 58 59 61 CHAPTER 3 NATURAL RESOURCES AND THE ENVIRONMENT PART A NATURAL RESOURCES 1 The Limitless Potential... the Case for Unilateral Free Trade 190 xiv CAPITALISM 3 The Tendency Toward Uniform Prices Over Time: The Function of Commodity Speculation 191 Rebuttal of the Charge That the Oil Shortages of the 1970s Were “Manufactured” by the Oil Companies 192 4 The Tendency Toward Uniform Wage Rates for Workers of the Same Degree of Ability 194 Equal Pay for Equal Work: Capitalism Versus Racism 5 Prices and Costs . ON CAPITALISM I 135 CHAPTER 6. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM II: THE PRICE SYSTEM AND ECONOMIC COORDINATION 172 CHAPTER 7. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM. 895 EPILOGUE CHAPTER 20. TOWARD THE ESTABLISHMENT OF LAISSEZ-FAIRE CAPITALISM 969 A BIBLIOGRAPHY OF WRITINGS IN DEFENSE OF CAPITALISM 993 INDEX 1001 viii CAPITALISM CONTENTS LIST OF FIGURES xxxv LIST OF TABLES. 18 Economics and the Defense of Individual Rights 18 PART B. CAPITALISM 1. The Philosophical Foundations of Capitalism and Economic Activity 19 2. Capitalism and Freedom 21 Freedom and Government 21 Freedom