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1. Why Capitalism, Lecture 2
David Gordon
Mises Academy
April 30, 2013

2. Long Run Consequences
• A key principle of economics is that all of the
consequences of a policy should be
considered.
• People sometimes just look at things in
isolation or consider only the short run
consequences of a policy.
• It’s necessary to consider alternatives---what
would happen if you did something else.

3. Production for Use
• Socialists and others used to criticize
capitalism for not producing enough.
• If production were planned or directed by
engineers, we would be able to produce much
more.
• Instead, production is limited because
businessmen stop producing when it is no
longer profitable.

4. Production for Use Continued
• This argument isn’t as popular as it used to be.
The Technocracy movement in the 1930s used
it.
• The collapse of the Soviet Union hurt this
claim. Today, most socialists defend the
system using arguments about equality, etc.
They don’t say, at least not as much, that
socialism is more efficient than capitalism.

5. Problems with the Use Argument
• The production for use argument ignores the
fact that resources are limited. If more of one
good is produced, then less is available to
produce other goods.
• Choice between alternatives is fundamental to
economics. Choice is a basic feature of action.

6. The Price System
• In the free market, supply and demand
determine prices.
• If consumers want more of a certain product
than is available, they will bid up the price.
• The higher price will encourage suppliers to
increase the supply of the good. The increased
demand will attract new firms into producing
the product.

7. Price System Continued
• As production of the good increases, the price
will go down. This is because of the increased
supply.
• When the price goes down, the higher profits
that attracted new entrants will lessen. The
rate of return on invested capital will return to
normal.
• The rate of return on investment tends to be
equal in the economy.

8. More Price System
• When resources move into the product with
an increase in demand, it is at the expense of
other products.
• The price system is the mechanism by which
goods are shifted to meet changes in demand.

9. Costs
• Past costs don’t determine price. Once a cost
has been incurred, there is nothing that can
be done about it.
• Bygones are bygones.
• Estimates of future cost will influence how
much of the good a producer will produce.

10. Consumers in Command
• Mises emphasizes that under
capitalism, consumers are really in charge.
• This is true because in order to make a
profit, businesses must satisfy consumer
demand.
• He uses the expression “a daily repeated
plebiscite” to describe the market.
• This is a slightly modified phrase taken from a
famous 19th century essay on nationalism by
Ernest Renan.

11. Property Owners
• Mises takes the idea of consumer control
extremely seriously.
• He goes so far as to say that consumers are
the real owners of productive property.
• If you own a business but don’t do what
consumers want, you will tend to go out of
business and be replaced by someone who
meets consumer demand better.

12. Natural Rights
• Mises uses this point to defend private
property. If consumers are the “real”
owners, who the ostensible owners are
doesn’t matter.
• Under capitalism, the socialists who call for
common ownership of property are getting
what they want.
• He is suspicious of appeals to a natural right to
property. What if someone counters this by
asserting a natural right to equality?

13. An Objection
• Last week, we mentioned the objection that
consumers can’t order a businessman to do
something. They aren’t legal owners and can’t
force producers to do what they want.
• A businessman can say, “I’m going to do it my
way,” even if this isn’t popular.
• Mises is aware of this objection. He says that
businessmen are responding to incentives.

14. Power versus Market
• Mises contrasts power and market.
• The free market is the means by which people
can cooperate. In doing so, they benefit from the
division of labor.
• Free market capitalism is based on mutual
advantage.
• This is be contrasted with the state, which rests
on force. Mises would agree with Joseph de
Maistre, “The state rests on the executioner.”

15. Capitalism and Freedom
• If you don’t rely on the free market, then the
alternative is central direction of the economy.
• You can’t separate an economic sphere from a
political sphere and say people can still be
politically free even though the economy is
centrally directed.
• In order to act, you need access to material
goods. E.g., how is free speech possible if the
government controls all access to print and other
media?

16. Inequality and Power
• Mises believes that people differ greatly in
ability.
• Throughout most of history, the elite groups
have exploited the masses.
• Capitalism allows the masses to benefit from
the creativity of elites.

17. More Equality?
• Socialists argue that there is too much
inequality. Some people under capitalism are
much richer than others.
• Rich people’s luxuries become mass products
later. Mises cites the 19th century sociologist
Gabriel Tarde.
• There is no natural stopping point in claims
that there is too much inequality.

18. Exploitation
• Some people claim that workers are exploited
because they don’t receive the full monetary
value of what they produce.
• This objection ignores the role of capital as a
factor of production.
• Gains in labor productivity are generally due
to the fact that labor has access to capital
goods.

19. Taxes on Capital
• Taxes on capital and other measures to reduce
inequality don’t help the poor.
• Investment in capital goods is the main way
that workers’ productivity rises.
• This is the main way wages go up.