01/19/15 – Dan Sanchez – The Scott Horton Show

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All right, you guys, welcome back.
I'm Scott Horton.
It's my show, The Scott Horton Show.
Next up is Dan Sanchez.
He is the director of the Mises Academy at the Ludwig von Mises Institute at mises.org.
Hey, welcome back.
Very happy to talk to you again.
It's always great to talk to you, Scott.
All right, so Capitalism Encapsulated is the article Mises in Four Easy Pieces.
You know, no one ever makes that Mises pieces pun very often, so I'm glad that you did.
It's also a play on a Richard Feynman book called Six Easy Pieces.
Oh, there you go.
Well, yeah, I don't know about that.
Anyway, so cool story that you tell here.
One day in 1959 something something.
Go ahead.
Okay, yeah, I'm talking about a day in 1959 when Ludwig von Mises, the great Austrian economist, was invited to give a speech at the University of Buenos Aires.
And luckily it was transcribed, and Mises' wife, Margit, edited it, and it is now a book called Economic Policy, Thoughts for Today and Tomorrow, which is available at mises.org.
And we also used the first lecture of that as the first reading for our online course Why Capitalism, taught by David Gordon.
It's part of our Mises curriculum program.
And basically what happens is that this is four years after Juan Perón, the populist Presidente, had been ousted from office, and in my essay I wonder, are people so disappointed that they're ready for a completely different message?
And Mises certainly gave them one.
And Mises' wife recollected, she wrote, the audience reacted as if a window had been opened and fresh air allowed to breeze through the rooms.
And what was so refreshing about it is that Mises really showed how capitalism actually follows through on the broken promises of people like Perón, the broken promises of leftists and socialists and Marxists, that it actually provides people power and prosperity.
All right, and so now tell us a little bit more about Perón and the situation in the country as Mises arrived.
Well, I don't know a whole lot about Perón, but I do know that he was sort of an economic populist, and that the American government wasn't too happy with him at first, but then they sort of came to an understanding.
And so what Mises tried to show is that capitalism really was the opposite of feudalism in the way that it provided people power, because feudalism was very oppressive to the people.
So first he sets the scene by characterizing feudalism as a contrast against capitalism, which emerged later.
He characterizes feudalism as a system of productive rigidity.
So the peasant serfs were irrevocably tied to the land they tilled, they couldn't leave, which in turn was inalienably tied to their noble lords.
So generation after generation, everything was static, the lords kept the land no matter what they did, and the peasant serfs could never go anywhere in their lives.
And then also the urban guilds, people couldn't really create a new industry in the towns either, everything, every productive role in society was a cast.
And as a result, as Mises pointed out, the rich stayed rich and the poor stayed poor, generation after generation, and very poor.
Over 90% of the population had to stick entirely, almost, to food production just to survive.
And it was a very meager survival at that, and very precarious, and in order to feed the parasitic nobles that ruled over them.
And it was very autarkic, meaning that there wasn't trade or division of labor to much extent.
Most of the manufacturing that happened in the towns were for the elites, for the wealthy people, it wasn't for the masses.
And so Mises talks about how, especially in the 18th century, there were millions of poor people on the brink because the system, the economic system as it was, just didn't have a role for them.
The land was all used up, basically.
And what happened next is that capitalism basically saved the day.
It basically saved the lives of those millions.
And by the way there, what happened with that?
Is it just because certain kings happened to get sick and die and be replaced by weak sons at just the right time?
Or how was it that they didn't all just die off and the system remained the same?
Well, what happened is that there was capital that was allowed to employ them.
Because as I point out, if there isn't enough land for everybody, then the labor can't produce by itself.
It has to have some sort of material resource to be applied to.
And so if there isn't enough land, there has to be capital goods.
And before, there weren't enough capital goods available because there wasn't an incentive to save.
Because capital accumulation is impossible without savings.
You have to delay consumption in order to have resources, unconsumed resources, that embody capital goods.
But people are not going to be willing to save and to invest if what they save and the products and proceeds of what they save gets confiscated.
So really it depends on a degree of security of private property.
And so that's what really changed, is that there was relatively more security in private property and that freed up capital accumulation.
But that's no good if the whole system remains static.
And so another major change that happened is that the productive rigidity that Mises talked about was replaced by what I call dynamic production.
And so that means that, for one, there was free entry, that there was less exclusion.
And for example, there was progressively less guild restrictions and people were more free.
Anyone with savings and gumption could start his own factory, could start his own business to a large extent.
And free exit is also really important, that peasants were allowed to leave their lords and the land that they tilled for greater opportunities in the towns.
And that is actually a big source of anti-capitalism, as Mises pointed out.
A lot of people think that anti-capitalism mostly arises from the proletariat, but actually in the beginning it arose from the aristocracy, because they didn't like that competition.
They didn't like having the peasants leave their land for other employers.
There was even a word for it in Germany called Landflucht, which means flight from the countryside.
And especially the Prussian Junkers, the nobles in Prussia and Germany, really hated it and were grumbling about it.
Mises talks about this story about Otto von Bismarck, who complained about someone who left his estate for the beer gardens and the higher wages that were offered in Berlin.
And he really hated that.
He was the paradigmatic aristocratic conservative and he was also the originator of the welfare state and a big critic of capitalism.
So really anti-capitalism started out as a right-wing thing.
All right, hold it right there.
It's Dan Sanchez from Mises.org.
We'll be right back.
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All right, you guys, welcome back.
I'm Scott Horton.
I'm talking with Dan Sanchez, the director of the Mises Academy at the Mises Institute, Mises.org.
And that's who we're talking about, Mises.a series of speeches he gave down in Buenos Aires back in the 1950s, I mean to say, and he was explaining to them about how capitalism saved humanity.
And the thing that is, I think any of us can imagine, whoever the roomful of people is he was speaking to, unless they were a bunch of businessmen, they must have been shocked and incredulous, no matter how well he explained it, because everybody knows that capitalism is the engine of unfairness, Dan.
Capitalism is why some people can blow what our entire family could never make in all their lifetimes combined on a yacht that they never even drive, kind of thing.
And inequality is at an all-time high, and it just ain't fair.
And so how can you be an apologist for a system like that?
That's all Mises is doing, and that's all you're doing.
What about that?
Yeah, one of the fallacies involved in that is that people sort of have the impression, it seems, that capitalists consume, almost as if they literally eat their factories.
And what they don't realize is that however large the consumption of a capitalist is, that is an infinitesimally small portion of his overall savings, that most of the wealth of a wealthy capitalist, an actual capitalist, not like a crony capitalist, is embedded in capital goods, the products of which benefit the masses of consumers.
And another point to the inequality that I don't mention in the essay but that is really important is that Mises says that before, the difference was basically that some people had to walk on foot and other people had a horse-drawn carriage.
So it was like a qualitative difference.
Now the difference between a wealthy person and a poor person is that a wealthy person has a nicer car, and the poor person has a not-so-nice car.
Or like with an iPhone, then the difference almost disappears, because a lot of wealthy people love their iPhones too, that a lot of not-wealthy people have.
So the inequality argument is really off-base.
So in other words, in terms of just pure quality of life, real wages compared to the cost of consumer goods and this kind of thing overall, as opposed to the size of the complete bank account.
It's like me, I don't own a house, I barely get by, but I got an iPhone, hell, I got more computers than I can do anything with.
Right.
And inequality is growing in some ways, in some sectors, but it's because of state intervention and state involvement, that especially the activity of the Fed really hurts the average person and helps the connected investor.
And so that's one of the big reasons why there's inequality.
Well, and that's no diversion either, I mean, that's a really important point that people have to understand.
And you know, I think, I still remember, I'm almost positive, Dan, it was in sixth grade when I first learned about the so-called business cycle and the history of the New Deal and all that.
And that sixth grade understanding that capitalism is wild and excessive and leads to these catastrophes.
And so the people decided that the government had to step in to smooth out that boom and bust.
Nevermind that the Federal Reserve was created 20 years before the market crashed in 29.
But anyway, that's the story, as everybody learns it, if they learn it at all, that's the story why the government regulates the economy, because capitalism is crazy and capitalism makes even rich people bankrupt and hurdle themselves out of windows.
Right.
And nevermind the fact that it was before the Great Depression where there was tremendous intervention and unprecedented intervention.
And it was following this unprecedented intervention that you had a crisis, an economic crisis, that lasted an unprecedented long time and was bad in an unprecedented way.
And so it just, the fact that people can look at that and interpret it that way on its face is absurd.
Well, it's the government school teachers, especially, but yeah, we're making some headway on that argument.
But of course, to a libertarian who knows better and knows about the business cycle or to anybody who understands about the cause of the, you know, the Misesian-Hayekian theory of the business cycle, it's always kind of at the root of most important lessons to be taught.
It's one of the main excuses they sell us for why we need them.
And it turns out that it's exactly false, you know, so very important one there.
I'm sorry to interrupt, but...
No, that's fine.
That's one of the ways in which sort of the old regime kind of gets reasserted.
Because with the Federal Reserve, we have these money czars, you know, dictating the lives of everybody, whereas, as Mises points out, what was so different about the capitalism is that the quote-unquote kings of capitalism, to the extent that they were actually capitalists and not cronies, were actually servants of the people.
Because there's this great quote, Mises says, in talking about modern captains of industry and leaders of big business, they call a man, quote, a chocolate king, or a cotton king, or an automobile king.
Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes, and lords of earlier days.
But the difference is, in fact, very great.
For a chocolate king does not rule at all, he serves.
And the reason for that is, what I was talking about before, is the dynamic production and the competition that evolves out of that.
Because basically, just the way that before, a sovereign could move his favor from one courtier to another, well, what Mises called the sovereign consumers can take their business from one capitalist to another.
And like I said, whereas before, the nobles, no matter what they did, they always kept their land from generation to generation.
But if you're a capitalist, the way that you keep your empire, the only way, outside of a state, that you can hold on to all of your factories and resources, is if you continue to use them to produce goods and services that people buy, to an extent where it more than covers your costs.
And so they're constantly having to scramble to do that, and the only way that they can do that is by really trying to be solicitous, to think about the ends, the consumer wishes, so that they know how to best serve those wishes.
And so it really turns everything on its head, because really, the way to become rich in a capitalist economy is to serve the consumers.
And David Gordon, our instructor of this course, Why Capitalism, he brings up this great anecdote of this communist economist named Maurice Daub from Britain.
He tried to answer Mises by saying, well, it's the wealthiest consumers who are most important, so that doesn't change anything, the fact that there's consumer sovereignty, because then it's just the wealthy consumers who are running things.
But that ignores the fact that we're not talking about individual consumers.
We're talking about the combined purchasing power, that if you have a small profit margin, that profit margin multiplied by millions and billions of times, that's how you make serious money.
Economic-type businesses serving the elite, like how most manufacturers did in the feudal times, that just can't compare.
And so really, it is the masses who steer production in a capitalist economy.
Yeah, that's a very important point.
Whoever's making yachts for the super-rich is plenty rich, but may not be super-rich himself, just because he's got a great boat company, he's still only making a few of these things a year or a decade, even.
Right, and there can only be so many of those, whereas that can't compare with retail giants of the wealth that you can get from retail giants, and that can't compare with the opportunities to become very wealthy that abound there, that there can only be so many boats.
How about providing fresh fruits and vegetables to people all seasons, that kind of thing?
That's where the real money's at, is getting heads of lettuce where people can get at them and stay alive with them.
All right, I wish we had more time, because we're not done going over this essay yet, but the show's over.
But thank you so much, everybody.
That's the great Dan Sanchez from Mises.org.
Appreciate it.
Thank you.
Oh, and dansanchez.me for this essay, guys.
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