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Broken Capitalism, Lecture 6 with David Gordon - Mises Academy

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For lecture videos, readings, and other class materials, you can sign up for this independent study course at academy.mises.org.

For lecture videos, readings, and other class materials, you can sign up for this independent study course at academy.mises.org.


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  • 1. Broken Capitalism, Lecture 6 David Gordon Mises Academy July 29, 2013
  • 2. Effects of Taxation • Many people favor very heavy taxes on the rich. • These taxes make it more difficult for the rich to save and build up accumulations of capital. • If capital grows, this raises the productivity of workers. This makes wages rise. • Taxes on the rich thus hurt the poor.
  • 3. Value Judgment • Note what Mises is doing in this argument. He is not saying, “I don’t like high taxes on the rich” or claiming that these taxes are morally bad. • He is not making a value judgment. • He is saying, “Here is the consequence of high taxation.” This is a strictly scientific, value-free statement.
  • 4. Value Judgment Continued • Even though Mises’s statement is value-free, it sounds like there’s a trick involved. • Wouldn’t almost everybody think that something that hurts the poor is, to that extent, bad? If so, is the judgment really value free? • Yes it is. It is like a doctor’s claim “smoking causes lung cancer”, where (almost) no one wants lung cancer.
  • 5. Borrowing • Some people think that the government can escape the harmful effects of taxes by borrowing. • If the government borrows, it is claimed, people don’t have to pay for government expenses through taxes now. • The taxes will be delayed to the future, when they will be needed to pay off the government’s creditors.
  • 6. Borrowing and Inflation • Government borrowing is not the same as inflation. • Inflation means that the government issues new money. • In government borrowing, people give the government money in return for a promise to pay later.
  • 7. A Problem with Borrowing • Borrowing isn’t a way in which people today can “get something for nothing” by passing on the cost to a future generation. • When the government borrows, it takes resources away. These resources would have been used for other projects. • Resources are finite. Borrowing, or creating new money, doesn’t change this.
  • 8. Armaments and War • Defenders of the state claim that only the government can run a modern war. • Mises wrote during WWII. At the time, people stressed the great achievements of the of the German and Russian military machines.
  • 9. Armaments Continued • Mises does not agree that only powerful states can finance war. • During the 19th century, private arms makers outperformed the state in producing arms. • Armaments are like other products. If there is a demand for the product, the market will supply it.
  • 10. Merchants of Death • The fact that arms merchants respond to the demands of governments for arms does not imply that the arms merchants cause or encourage wars. • The “merchants of death” view was popular in the 1930s, but Mises doesn’t accept it. • Engelbrecht and Hanighen, The Merchants of Death, (1934) was a famous attack on the arms merchants. http://library.mises.org/books/HC%20Engelbrech t/The%20Merchants%20of%20Death.pdf
  • 11. World War II • Mises suggests that if France had relied on private arms makers, the German invasion of 1940 could have been stopped. • One reason France failed in 1940 was that socialist measures in the 1930s crippled private enterprise.
  • 12. Germany versus France • Another reason that Germany did well was that Germany had been building up arms in the 1930s. • Doing this required that civilian consumption been reduced. • The Nazi leader Hermann Goering was correct that there is a choice: guns or butter.
  • 13. Profit • The driving force of capitalism is the efforts of business people to make a profit. • Efforts to curb profits inhibit the ability of entrepreneurs to respond to changing preferences of consumers.
  • 14. A “Fair” Margin of Profit • One proposal is that a business should get a “fair” profit, added to its costs. • An obvious problem is that there is no criterion for what a “fair” profit is. • This system will give an incentive to business to be wasteful on costs, rather than to cut them. • People will have a different attitude to risk if they have to bear losses from what will happen if their profit margin is guaranteed.
  • 15. Another Problem • On the “cost + fair rate of profit” view, every business subject to the rule gets the same rate of profit. • But it is differences in profit, including losses, that guide entrepreneurs in their efforts to satisfy consumers.
  • 16. Subsidies • Subsidies to help one industry come at the expense of others. • This is an application of the broken window fallacy. • Hazlitt mentions that argument that subsidies should be given to an industry if overcrowding leaves profits low. Here the market remedy is for firms to move elsewhere.
  • 17. Subsidies • The basic point on all subsidies is again an application of the broken window fallacy. • You can’t help one product except at the expense of something else.