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Why Capitalism, Lecture 4

David Gordon
Mises Academy
May 14, 2013
Mises and Hazlitt on History
Before the Industrial Revolution, life for most
people in the world was very bad.
Hazlitt gives a long list of famines throughout
People lacked features of life that we take for
granted today, such as heating, light, and
indoor plumbing.
Things were so bad that it looked like Malthus
was right. He said in An Essay on Population
(1798) that the standard of living of the
masses couldnt rise above subsistence for
very long.
Dismal Science
Mises says that Malthus view ( + the iron law
of wages) was the reason Thomas Carlyle
called economics the dismal science. Later
research by David Levy makes it likely Carlyle
meant the opposition of economics to racism
and imperialism
Conditions in England
Conditions n England in the 18th century were
particularly bad.
Population was increasing, but there were no
jobs available for the new people.
Unless the economic system could be
changed, people would starve.
After the Industrial Revolution
Despite the bad conditions in the 18th century,
conditions in Britain improved rapidly in the
19th century.
Population increased, and the standard of
living also increased.
There is a big controversy about when the
standard of living increased. Hobsbawm
versus Ashton and Max Hartwell. But it did
increase sometime in the 19th century.
How Did This Happen?
What is the source of economic progress?
Ideas arent enough. Mises compares India
and America in 1952.
India was then under the Nehru government.
Nehru and others in the Indian government
had been strongly influenced by Harold Laski
and British Fabian socialists.
How Did This Happen Continued
Nevertheless, the scientists and businessmen
in India had access to the same technological
information as people in the West.
A key point when Mises talks about the
entrepreneur is that ideas must be backed by
The entrepreneur does not have to rely on
technological innovation.
What Is the Answer?
The reason for the takeoff into prosperity that
began near the end of the 18th century was an
increase in investment.
Because of increases in capital goods, workers
are more productive.
Pay depends on how productive workers are.
Answer Continued
There is a complication that needs to be
added to what we have already said.
It isnt always true that the greater the capital
investment, the higher wages rise.
Why not? We have left out the number of
workers. If workers kept increasing as capital
investment rose, wages wouldnt go up.
Malthusian Element
The key to prosperity is the ratio between
capital investment and the number of
Misess stress on this reflects a Malthusian
element in his thought.
There is an optimal population.
Population and Law of Returns
A similar point is true for any factor of
production. You cant increase what is
produced indefinitely by just increasing one
factor, while leaving everything else the same.
Population Optimists
Population optimists, like Julian Simon, think
we would require tremendous increases in
population to reach the optimal point. Maybe
we dont need to worry about this at all,
because the more people the more ideas.
Mises didnt agree.
Conditions for Investment
If prosperity requires investment, nations that
want to improve need to assure investors that
they wont confiscate their businesses or
Many governments dont do this. On the
contrary, they do seize investments. The
climate of opinion (Whitehead) is against
Regime Uncertainty
Misess idea is similar to Robert Higgss notion
of regime uncertainty.
Higgs argues the 1930s Depression was made
worse because business people didnt know
what Roosevelt was planning.
During the 1930s, the economist Benjamin
Anderson also emphasized this point.
Mises thus argues that taking away income and
wealth from the rich wont help the poor.
Doing this will hurt the poor because it
discourages investment.
The short-term gains from confiscating wealth
dont amount to very much, over the long run.
Bill Gates is worth about $67 billion. If this were
confiscated and divided equally among the
311,000,000 US population, this would give each
person about $215.