Broken Capitalism, Lecture 6 with David Gordon - Mises Academy


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Broken Capitalism, Lecture 6 with David Gordon - Mises Academy

  1. 1. Broken Capitalism, Lecture 6 David Gordon Mises Academy July 29, 2013
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. t/The%20Merchants%20of%20Death.pdf
  11. 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. 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. 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. 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. 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. 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. 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.