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Ludwig Von Mises


Once the socialists and communists have thoroughly ignored these critical points, they continue marching on raising the spectre of unemployment. They question what happens when more efficient machines replace workers. According to them, these workers will be out of a job and their standards of living will fall into oblivion like rocks near a black hole's gravity.

In order to study this scenario let's assume that "The Approximator" has been so successful that Elias has hired a total of 10 workers. Eventually Elias decides to purchase high end automated machines that replace 5 workers, thus 5 workers are fired.

In this scenario the 5 workers still working for Elias are better off because the new machines are more efficient, thus there are more gadgets produced which means that their price falls further. This is true because all other entrepreneurs are doing the same.

For the 5 fired workers, their standards of living continue to increase in the long run because their savings are worth more and more as time goes by because prices are constantly falling. Although it is true that in the short run these 5 workers will be out of work, we must remember that work is simply one of the factors of production. So far we have no entrepreneurial activity that is devoid of workers. What this means is that these 5 workers will be able to find a job if a job is what they want. However, they may need to lower their expectations in terms of wages. Yet, even in those conditions, general standards of living will continue to improve because productivity improvements increase supply which lowers prices. Workers losing their jobs will still benefit immensely from the extra wealth created by successful companies.

This is true even in the event where successful companies drive unsuccessful ones out of business. This is so because there is yet another mechanism through which laid out employees benefit from closures; by stopping the destruction of capital. When a company goes out of business this means that some other company is making more efficient use of limited capital to benefit customers. Which means that the first company was making an inefficient use of capital. In other words, the bankrupted company was wasting capital. As capital is the enabler of higher standards of living, the sooner we reduce capital waste (i.e. destruction) the sooner this capital will be put to better use, thus helping laid out employees by raising their standards of living.

The issue of unemployment is a lengthy and complicated one and will be developed in a separate lesson.

The capital barrier

So far we have seen how capital accumulation is the enabler of higher standards of living. This means that if we wish to have a progressing economy, we must increase the amount of capital available for productive use.

Yet, there is a well-known argument that appears quite often. This is the technological argument. It states that as higher standards of living are dependent upon technological advancement, technology is the ultimate limit to our progress. According to this argument we cannot progress faster than our technological progress and in a sense this is correct. In a scenario where all things are equal, this is indeed the case. Unfortunately, when was the last time you saw that all things are equal anywhere in the world? Allow us to clarify.

Let's say that you invent a new gasoline engine that is 90% more efficient than regular car engines. Thus, we must conclude that all cars will automatically and instantaneously had their machines replaced by this new wonder, right? OK…OK… this is too farfetched. Let's say that all new cars from this point on will have their engines updated, right? No? OK then… some cars in some companies in some countries? Perhaps.

It so happens that, as Austrians pointed out, there is something called a market structure. This "structure" is all the stuff that makes manufacturing possible, including capital, labour, capital goods, time, planning, execution, marketing and so on. Things are not manufactured magically from one instant to the next. However, in ultimate analysis, this structure is fully dependent from the amount of available capital. A company may wish to use the new engine design and they are fully committed to do so, but if they lack the capital to re-tool their production line, this is not going to happen.

The ultimate limit to our prosperity is capital. We may have the most brilliant ideas and technological advancement but if we lack the capital to convert these ideas in consumer goods and services, they are worthless.

A classic example of this phenomenon was the USSR. Arguably, their scientists were equally intelligent than their counterparts in the West. The technological know-how and innovation was more-or-less similar in both blocks. Yet, the standards of living in the USSR were dismal when compared to the west. Why? Because the USSR was unable to produce consumer goods and services even though that they had all the technological advancement they could possibly use. They simply lacked capital.

Think of it this way. We can fund science and technology until we are all broke but this is not going to improve our standards of living until we put all this knowledge to use. And we cannot do so without factories, factories that require capital to be built.

In ultimate analysis, technology is simply a recipe how to produce a consumer good. As such a recipe can exist without ever being put to use (how many food recipes have you read that you never prepared?). The use of capital to produce goods and services is limited by technology, but before we even get to this point, we must remember that capital is limited in and by itself! The amount of existing capital is a much higher barrier to higher standards of living than the availability of technological know-how.

If capital would be plentiful this would mean that every possible technological advancement would be implemented in consumer goods almost immediately upon discovery. Yet, this is not the case at all, which proves our point.

We can see this barrier in action if we classify countries in terms of their developmental level. In the most developed countries most people can afford to buy a car. In less developed countries this is not the case. Considering that obtaining the blueprints for manufacturing cars is not that difficult, what is preventing people in less developed countries from having a car? It is certainly not lack of knowledge; it is a lack of car manufacturers which cannot build factories because of lack of money (i.e. capital) to invest in such factories.

Government-manufactured escape hatches

So far we have seen how the accumulation of capital is the only way in which we can achieve a progressive economy and thus increase our standards of living. However, what happens if entrepreneurs have a second option to increase profits. An option that does not involve producing goods or services? An option that is safer and easier? Obviously they will use it because their only motivation are profits.

This second option exists only because it was artificially created by governments. It is called government debt or its equivalence, government contracts. Government debt does not increase standards of living (at least not permanently) because it takes capital and spends it on consumer goods. It converts capital into disposable income. The capital that should be used to produce goods and services thus further increasing the amount of capital is no more.

Government debt pays interests that are nearly 100% safe and require no economic calculation. This is so because governments can always print more money. So-called "investing" in government debt is a no-brainer for any entrepreneur with the required skills. However, through this artificial escape hatch entrepreneurial activity enabled by capital has been destroyed. Thus, our standards of living do not improve.

Government contracts operate in the same manner because they divert capital use from producing goods and services required by markets into the production of goods and services demanded by a handful of government bureaucrats. Capital that should be used to increase our standards of living is (mostly) used to buy votes through the manufacturing of politically-expedient goods and services.

Correlation and causation

If you go onto the internet and search for list of countries classified based on the capital accumulation per capita, you will notice something strange. The higher this number the higher their standards of living tend to be. Of course these numbers are not perfect, but they are quite close to what we experience in reality. Based on this we can categorically state that there is a very powerful correlation between the amount of capital invested per capita and our standards of living. But as scientists say, correlation is not causation and they are correct.

These numbers do not prove anything, at least not to an Austrian. This is so because as we have stated previously, Austrian Economics is a logical construct, one that depends upon logic because the nature of economic human action is subjective. These numbers only show the subjective past that occurred in different countries. Yet, these numbers are compelling evidence that the Austrian position that capital enables wellbeing is indeed correct.

The accumulation and increase of capital does indeed raise our standards of living.

Communist and socialist arguments

We have explained in our article why the idea that workers are "exploited" by capitalists is nonsense. We have further explained how all people benefit enormously from entrepreneurial activity enabled by capital and how only the accumulation and growth of capital assures higher standards of living.

Communism and socialism are based on the idea that wealth (i.e. capital) must be removed from people's hands and redistributed among the "poor" workers in a perennial search for equality. The problem is that this process destroys capital thus preventing the creation of higher standards of living. It is this process that destroys the standards of living in communists and socialist countries more than anything else, including plain old stupidity.

As such, capitalism is the only system that enables the saving process (i.e. capital accumulation) to reach its fullest potential. This is not to say an "optimum" potential. This is so because it is impossible to define "optimum" since economic activity is personal and subjective at all time.

Are there scenarios where capital accumulation may be higher? Yes. Are those scenarios realistic? No. This is so because such scenarios imply, by definition, the forceful increase of capital which then produces lower standards of current living in the artificial hope of having higher standards of living in the future. We must remember that capital accumulation is always counterbalanced by consumer spending. If we increase capital accumulation then we must decrease consumer spending thus decreasing our standards of living.

Governments pretend to go around this truth by pseudo creating capital out of thin air. Governments believe that printing money is creating capital, when in reality it is only diluting and destroying capital. In the medium to long run, all that governments achieve is the decrease of standards of living in the midst of cycles of boom and bust.

Note: please see the Glossary if you are unfamiliar with certain words.

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