Foreign Investments and the Spirit of Capitalism

THREE HUNDRED YEARS AGO, economic conditions in the world were more uniform than at present. There were some savage tribes, of course, but except for them the greater part of the world by and large had reached the same level of technological development and civilization. Then there came a radical change in some countries. Capitalism developed in the West; there was an accumulation and investment of capital; tools were perfected; Western civilization developed. Today there is an immense difference between Western civilization in the “advanced” countries of the world and conditions in the “backward” countries.
This distinction was even somewhat sharper in the early and middle part of the nineteenth century. A man who visited England and Romania in 1700 would not have seen any remarkable differences in the methods of production. By the year 1850, these differences were enormous. These differences were then so considerable that one could say, and some people believed, that the disparities would never disappear, that they would remain forever.
These differences consisted in the fact that there was greater capital investment, very much greater capital investment, in the West. But this capital investment, these capital goods are nothing but intermediate products. The head start these countries had attained over the “backward” countries consisted only in the matter of time. The Western nations had started earlier on the road toward improving economic conditions. The “backward” countries had still to begin. But there was time. It would have been a slow process. However, these backward nations would have found enterprise much easier, for there was no need for them to make experiments with unsuccessful methods of production. They didn’t have to make the inventions anew; they could simply take them over from the Western countries. In time, this would have reduced the discrepancy in economic levels, but some difference would have remained.
There was no secrecy about the technological inventions of Western civilization. The most intelligent young men in the “backward” countries went to schools in the West to learn all they could about methods of production. Then they could bring Western technology to their own countries. But technology was not the only thing. What was lacking in the “backward” countries was the mentality that had produced capitalism in the West and the institutions brought about by that mentality.
Capitalism couldn’t develop in the “backward” nations because the people didn’t like capitalism, and because businessmen there were exposed to dangers which didn’t exist in the West where there was the Rule of Law. The important thing for these “backward” nations, which were mostly in the East, was to change radically their mentality, their idea of economics. They had to recognize that the greater the number of rich there are, the better it is for the poor, that the presence of rich people is necessary for the abolition of the poverty of the masses. But this idea didn’t enter into the minds of these people. The farther they were from Europe, the less they realized that the essence of capitalistic development was not the technological knowledge and capital goods but the mentality which had made it possible to accumulate large-scale capital and capital goods.
The people in the “backward” nations, especially those in Asia, saw only their technological backwardness. If these countries had powerful governments, powerful in dominating their own country, what they wanted first of all, what they envied most of all, was the better weaponry produced by the West. These kings of the East were interested first of all in getting better guns; they were little interested in other things. But the patriots who did not consider war as the most important manifestation of the human mind were interested in technology. So they sent their sons to technological universities in the West and invited professors and industrialists from the West to come to their countries. But they didn’t grasp the real difference between the East and the West, the difference in ideas.
If the people in the “backward” nations had been left alone, they would probably never have improved conditions in their own countries; they probably wouldn’t have adopted the ideologies necessary to transform their countries into “modern” countries. Even if they had done this, it would have been a very slow process. It would have been necessary for them to start from the grass roots. First, they would have had to accumulate capital to construct, let us say, equipment for the mines, in order to produce ore and from this ore to produce metals, and then the railroads. It would have been a very long, slow process.
But what really happened was a phenomenon that nobody in the eighteenth century had considered. What developed was foreign investment. Considered from the point of view of world history, foreign investment was a most important phenomenon. Foreign investment meant that the capitalists in the West provided the capital required for the transformation of a part of the economic system of the “backward” countries into a modern society. This was something entirely new, something unknown in earlier ages. In 1817, when Ricardo wrote his book On the Principles of Political Economy and Taxation, he simply assumed as a fact that there was no capital investment abroad.
The capital investment that developed in the nineteenth century was very different from what had taken place under the old colonial system as it developed from the fifteenth century on. Then it had been a search for agricultural materials, natural resources, and products that could not be obtained in Europe. A silly explanation of their desire to trade was that the colonial powers were interested in getting foreign markets for their production. Actually the colonial powers exploited the colonies in order to get materials; they were very happy when they didn’t have to give anything for the resources they wanted, when they could get the foreign products for nothing. These early colonists were more often pirates and robbers than tradesmen. They considered selling abroad only as a sort of emergency measure if they couldn’t get what they wanted without paying for it. They really had very little interest in investing—they only wanted the raw materials.
Of course, they couldn’t prevent some citizens from their own countries from settling in these colonies and starting agricultural production. As a by-product of these colonial ventures of the fifteenth–eighteenth centuries, some important colonies developed overseas. The most important, of course, was the United States, and secondly the Latin American countries. But from the point of view of the European merchants and tradesmen, there was little interest in the fact that some members of the lower classes migrated and settled in the United States. For a long time they probably considered the islands in the Caribbean more important because there they could produce something they wanted— sugar. The settlements in America were not a part of the old colonial policy; they developed in spite of the ideas of the government, at least not because of them.
In the eighteenth century there was already some investment in the North American colonies, but it was not yet a phenomenon of great historical importance. The real foreign investment started in the nineteenth century. This foreign investment was different from the earlier colonial investment insofar as it took place in territories owned and ruled by foreign governments.
This foreign investment was developed in two different ways. One development was the investment in colonies owned by the several colonial powers, i.e., in countries dependent on European nations, for instance, the British investments in India. But still more important were the investments in countries that were politically independent and some of which were highly developed, such as the United States. The American railroads, for instance, were built to a great extent with the aid of European capital. Investments in the United States, Canada, and Australia were different from investments in other foreign countries because those three countries were not “backward” in the sense that they lacked the business mentality. These investments had a very different history because they were really used in the best possible way, and also because they were later completely paid back. In the 1860s and 1870s one of the most important investment opportunities for Europeans was to invest in the United States.
Capital investment in a country means, of course, what is called an “unfavorable balance of trade.” The United States imported capital in the nineteenth century. Therefore, in the nineteenth century there was an excess, by and large, of imports to the United States over exports from the United States. But then from the last decade of the nineteenth century on, the United States began to pay back the investments the Europeans had made. Then there was an excess of exports over imports; the balance of trade became, therefore, “active.” The difference was paid for by the purchases by U.S. citizens of American shares and bonds that before had been sold to Europeans. This went on until after World War I. The United States then became the greatest money lender and investor in the world.
The capital from Europe, and later from North America, that came to these countries made it possible for European and North American countries to expand their economic systems. One result of these foreign investments was that certain branches of production were developed in countries where they wouldn’t have been developed at all, or where they would have been developed only much later and certainly not in the way in which they were actually developed. The consequences undoubtedly benefited both the countries that invested and the countries in which the investments had been made.
Very soon an attitude hostile to foreign investors and foreign creditors developed in many of the countries which had benefited from this foreign investment. Such things even happened to some extent in the United States. One reason why the Confederate States didn’t get more than one small loan from Europe during the Civil War was that in their files Jefferson Davis [1808–1889] had a black mark against him. Before he became president of the Confederacy, Davis had worked to repudiate a state loan in Mississippi, and the European bankers at that time had a good memory. However, such things happened more often in other countries than they did in the United States.
On the one hand some countries had a specific idea about how foreign investors and foreign creditors should be treated. On the other hand there were European governments waiting to intervene when such conflicts became acute, to protect the “rights” as they said, of their citizens. As a matter of fact, these European governments were not very much interested in the “rights” of their citizens. What they wanted was a pretext for colonial conquest. After the Congress of Vienna [1814–1815], it was a very disagreeable situation to be an army officer in Europe which was, by and large, at peace. The governments, and especially their armies and navies, were anxious to gain success abroad. They wanted victories, and some governments believed that public opinion expected such victories. If they went to war, they might be defeated and their prestige would suffer. This led some of them to seek colonial exploitation. For instance, the government of Napoleon III, which suffered from really bad treatment of French investors in the Republic of Mexico, embarked in the 1860s on a great adventure in Mexico. In the beginning, it brought some success to the French army, but it did not end as the French had hoped.
The countries which had been benefited from foreign investment misunderstood the meaning and advantages of foreign investment. There was a popular movement against foreign investors. Throughout the world, the principle of national sovereignty became accepted; it was maintained that an outside nation does not have the right to interfere if the rights of its citizens in another country are being violated. This was called the sovereignty doctrine. We are not interested in the legal excuses for placing obstacles in the path of foreign investors. But the result of the whole movement was that foreign investments and foreign loans granted to a country were completely at the mercy of every sovereign nation. These countries declared the foreigners to be exploiters and they tried to demonstrate the presence of exploitation by various theories which are not worth mentioning.
The Marxians provided several doctrines which related foreign investment to imperialism. They maintained imperialism is bad and must be abolished at any cost. These Marxian doctrines, especially those of Rosa Luxemburg [1871–1919], cannot be explained without entering into the whole value theory of Karl Marx. These Marxian doctrines of imperialism declared that foreign investment is both detrimental to the country from which capital is exported and detrimental to the country to which it is imported. Foreign investment is imperialism—imperialism means war—and therefore foreign countries are conquerors. The naïve reader of a newspaper is very astonished to learn that the United States, which is today practically the only country that can make foreign investments, is an imperialistic power and that a loan granted by the United States to another country means aggression against that country. This is a consequence of these ideas. But are they true? Did the capitalists of one country go into foreign countries, as this doctrine declares, in order to withhold capital and the advantages of additional capital investment from their own citizens?
Let us look at the motives of an individual capitalist entrepreneur. Why did he not invest at home? Because he believed that investing abroad was more profitable than investing at home. Why was this the case? Because the consumers on the domestic market were asking more urgently for products which could be produced only with the aid of foreign resources than they were asking for products which could have been produced by an expansion of domestic industries. For example, until a short time ago Europe had practically no oil production. Except for a very small quantity of inferior quality oil in Romania and in a part of the Austro-Hungarian Empire that later became a part of Poland one could produce practically no oil in Europe. Therefore, instead of expanding European industries when consumers began to ask for more oil products, it became profitable to go to foreign countries and invest there in order to produce oil. The same was true of many other articles. For instance, the greater part of the cooking fats and soaps produced in Europe were made from plants that couldn’t be grown in Europe. A great part of European consumption was consumption of things produced from raw materials that couldn’t be produced in Europe at all, or that could be produced there only at a much higher cost.
At the beginning of the nineteenth century, when the question was protectionism against free trade, the slogan of the free traders in Britain was the simple Englishman’s breakfast table for which all the products were either directly or indirectly imported from abroad. Even if some of them were produced at home, it was with the aid of fertilizer or fodder from abroad. In order to develop the products for the Englishman’s breakfast, European investors went abroad and in the process they developed a demand for the products of English manufacturers. They also had to establish transport systems, harbors, and so on. Therefore, it is simply not true that European consumers and then later American consumers were hurt by capital exports; the capital was exported to invest in the production of things that European and American consumers wanted. The domestic resources of the European nations were lamentably insufficient; it would have been impossible for them to feed and clothe their populations out of domestic resources. In spite of the fact that there are now seven times more people in England than at the start of the Industrial Revolution,1 the standard of living is incomparably higher. This was possible only because capital had been invested and large-scale production had been started in England and abroad—railroads, mines, and so on.
On the eve of the Second World War, the economic structure of British life was characterized by the fact that Great Britain imported about £400,000,000 more than it exported. 50 percent of this surplus was paid for by the dividends and profits of British-owned enterprises abroad and by the interest on bonds of foreign countries owned by the British. The standard of living of Great Britain was determined by this fact. During World War II, a part of these British investments abroad were sold, mostly to the United States, in order to pay for the war and for the surplus of imports the British needed before Lend-Lease started.2 Then after the war, when Lend-Lease came to an end, the British government declared that it was no longer possible to feed their people without the aid of an American loan which was, in fact, an American gift. But even this was not enough. The Argentine government expropriated the shares of the British-owned railroad and paid for these expropriations in British currency. The British government then taxed the money away from the people who got this indemnity from Argentina, and used this money to pay for wheat, meat, and other foodstuffs bought from Argentina. This is a typical case of capital consumption. Savings of the past which had been accumulated in the form of railroads were sold in order to get food (current consumption). This is very characteristic; it shows how these foreign investments were consumed.
But the greater part of European foreign investments, including British investments abroad, were simply expropriated. For the United States these expropriations and repudiations didn’t mean so much, because the United States is comparatively very rich and these investments didn’t play such a great role in the economy. Also, in my opinion, the United States is still accumulating additional capital. But for Great Britain, Germany, Switzerland, France, and other countries, this meant a considerable reduction in their wealth; they had invested abroad, not because they wanted to give away their wealth, but because they wanted income from the investments.
There are many different methods of expropriation.
1. The communistic method: If the country goes communistic, the government simply declares that there is no longer any private property; it takes and it doesn’t pay for what it takes. Sometimes they say they will pay, but in fact they find some excuse not to make this indemnification.
2. Confiscatory taxation: Of course, there are in some trade agreements provisions prohibiting any discrimination against foreigners and this includes discrimination by taxation. But laws can be written so as not to appear to be against foreigners.
3. Foreign-exchange control: This is the most popular method. The foreign corporation makes a profit in its dealings in a country but the foreign-exchange control laws prevent it from transferring these profits into another country. As an example, let us consider Hungary. There were foreigners who owned small or greater amounts of bonds and common stocks in Hungary. The Hungarian government said, “Of course, you are perfectly free. You have the right to receive your interest and dividends. But we have a law, not only for foreigners, also for Hungarians. The law says that the transfer of funds out of the country is forbidden. Come to Hungary and live here, and you can get your money.” Often a country with foreign-exchange controls does not even let a man spend all his money earned in a short period of time—it is portioned out in monthly payments. In effect, this means expropriation. What they really want is for the producer, if he should actually come to the country, to spend not only the money earned in the country but also his own money which he brings to the country. This practically means an end to foreign investment. In the past if people were willing to invest capital in foreign countries they expected an improvement in conditions. But now this is no longer the case.
In the Middle Ages, the wealthy kings and rulers traveled around their empires. They said they were judges and had to keep an eye on the country. But the real economic reason for their travels was that the prince, the German Kaiser, for instance, owned big estates in various parts of the country. They traveled with their retinue to consume what was produced there. It was easier to move the men to the commodities than to move the commodities to the prince’s palace. This is the same right that exchange controls give—to consume goods in the region of their origin.
The Chinese governments were very clever. They did not expropriate the British. First, they prohibited them from exporting profits. Then they forced them to operate in such a way that there was no profit. Then they asked for taxes also, so that the British had to send additional money to China. Finally they made the British realize that you cannot do business with the communists, you especially cannot invest with them.
The expropriation of the Mexican oil fields was accomplished by repudiation, by the nonpayment of bonds.
The story of foreign investment can be told in a few words. Investments went out but only the glory, or the fame of this glory, remains. The result is that today there is very little readiness of people to invest abroad.
It was amazing that during the interval between the first and second World Wars there were still investments in countries that had repudiated foreign investors openly or indirectly. American investors lost a lot of money when the German mark collapsed because the German bonds were Mark bonds, not gold bonds. Nevertheless, during this period there were many German municipalities that succeeded in getting loans from American investors. Sometimes these America investors were simply “babes in the woods”; they didn’t know what they were doing.
The Swedish government issued a gold dollar bond. They were paid for these bonds in gold dollars and promised to repay the loan in American gold dollars, defined as the American McKinley gold dollar. Then in 1933, the United States went off the gold standard. The provision in the Swedish loan had been formulated precisely for the unlikely event of a change in the American currency. But then the Swedish government declared, “We will repay the loan in new American dollars, Roosevelt dollars, not in McKinley dollars as specified in the bond.” Given such a situation it is very difficult to get foreign investment.
In some Latin American countries there is no market for government bonds. These countries got private loans in the United States. But they will no longer get such loans. What has been substituted for this system of private investment was, first, Lend-Lease and, now, foreign aid. That means the American taxpayer is making gifts, not loans, to these countries.
Institutions have been established, especially the International World Bank, for the purpose of giving loans, but under a guarantee. In the long run such a system is self-defeating. If the United States issues bonds at a definite rate, let us say 3 percent, then the United States is standing behind the bond. If a foreign government issues such a bond under the guarantee of the United States, then again the United States is behind this bond. If the United States will not pay, then this foreign government will certainly not pay either. Now if this foreign loan is at a higher rate, let us say 4 percent, then the American government competes with its own bonds. The American government will not be in a position to sell its own bonds at 3 percent if the foreign bond has an advantage over the American bonds—not only a higher interest rate but the guarantee of the American government besides. Therefore, such a system cannot prevail in the long run. The result of the whole thing is that there is no longer any private investment.
Public investment abroad means something quite different from private investment. When the Argentine railroads were owned by private individuals of Great Britain, there was no infringement on the sovereignty of the government of Argentina. But if the railroads or harbors, for instance, are owned by a foreign government, this means something entirely different. And it means political problems become more important than economic problems.
Point Four is a very lame attempt to do away with the disastrous consequences of the absence of foreign investment.3 Behind it is the idea of teaching these backward nations “know-how.” But in the United States, there are many gifted engineers with “know-how” who could be offered positions abroad where they could use the knowledge and experience they have acquired in this country. Therefore, Point Four is not necessary for that reason. Also, there are hundreds and even thousands of foreign citizens in the United States and in Western universities who learn all these things. The art of printing was invented 500 years ago, and there are now printed textbooks. For those who cannot read English there are translations of these books. There are many clever Chinese. If a factory in China is backward, it is not due to the inability to acquire “know-how,” but because it doesn’t have the capital required.
In 1948, there was a meeting of the World Council of Churches in Amsterdam. They issued a statement saying that it was unfair and unjust that only the countries of the West enjoyed the advantages of machines, while in Asia and Africa the methods of production were backward. If, on the eighth day of Creation, the Lord had made a limited amount of machines and hospitals to be distributed equally and the West had appropriated more than its share, then one could have said that the situation was unfair. But the capitalist countries actually gave very valuable equipment and machines as gifts to these “backward” countries and the “backward” countries simply expropriated them. These countries didn’t understand what capitalism means. They thought the machines and the hospitals were capitalism. But capitalism is the mentality from which the institutions could emerge making it possible for capital to develop in the West and then to construct all these things. It could be said that the West developed its method of production from capital it made at home. Capitalism is not things; it is a mentality.
Nehru [Jawaharlal Nehru, 1889–1964] has been quoted as saying: “We want to give every encouragement to private industry. We won’t expropriate private businesses for at least ten years—perhaps not even that soon.” You cannot expect people to invest if you tell them that you will expropriate them at some time in the future. Therefore, conditions in India are much worse now than when the British were there. Then you could still hope that the British would remain and that they would not expropriate your business. The conditions are again similar to those that prevailed before the British came to India. If an Indian has some savings, he invests in the precious metals or still better in jewels. First of all these cannot be confiscated so easily and you can try to hide them. If necessary, you can even swallow a diamond to keep it safe for some time. You can’t hide a railroad or a mine. And this is the catastrophe of the “backward” nations; people invest their savings in such things rather than in capital goods.
This situation has been made much worse because the Europeans brought to these countries modern medicines and modern methods of treating contagious diseases. In spite of the conditions that still prevail in China, and India especially, infant mortality figures have dropped considerably. As a result, these countries have an increasing population and a decreasing capital investment. The per capita capital is dropping instead of increasing. The Russian system also does not produce capital accumulation, i.e., it has insufficient capital accumulation. Thus, we have a situation in which the greater part of mankind in the world is living under conditions which mean a lowering of the standard of living. It is terrible to say this, but it is true; it would have been better for these people if the methods of fighting contagious diseases had not been imported for them.
I want to stress again that capitalism, modern machine production, and so on, is not something material! The tools and machines are the material results attained by a certain spiritual mentality, by a certain ideology. Capitalism or modern conditions, modern standards of living, are not simply the outcome of technology. They are the outcomes of certain ideas about social organization and about the cooperation of men under the division of labor and private ownership of the means of production. These ideas must be adopted in these “backward” countries if they want to change conditions.
I do not want to deal with happiness and other connected problems. I don’t want to say that the Africans are happy without machines, without clothes, and with very different methods of feeding. But certainly they are not enthusiastic about the various diseases that plague them and which they can fight only with the methods of modern capitalism. It is wonderful that Dr. Albert Schweitzer [1875–1965] went to the center of Africa to work for the improvement of conditions. But Dr. Schweitzer has had only a very limited effect compared to the effects of capitalism which made possible the modern means of production that provided all the things necessary to maintain a hospital in the middle of Africa. If you want to help the millions in Asia and Africa, then what is needed is capitalistic methods of production and capitalistic ideas. And they cannot be developed by the means which are today being applied in those countries.
It was the introduction of foreign investment in the nineteenth century that helped to make war and conquest superfluous. The situation which people had to face at that time, and are facing again today, was that there are countries in the world which nature has endowed with natural resources that are not available in other countries. From the point of view of natural resources, Europe is very poorly endowed by nature; Asia is much better endowed. If, on the one hand, the countries which have rich natural resources are so backward and so poor in capital that they cannot produce from these resources, and if, on the other hand, they do not permit foreigners to invest capital there and take advantage of the existence of these resources, both for their own and for the natives’ advantage, can anyone expect that the people of the civilized countries will forever tolerate this state of affairs? Do the inhabitants of a country, just because their ancestors, conquered the country 500 or 600 years ago, have a right to prevent the improvement of conditions and peace in the world?
We are going back to the situation when you couldn’t get these products without conquest, the situation which made the colonial system necessary. The nineteenth century developed a method which made it unnecessary. But now we have a state of affairs again in which these countries are preventing access by trade to raw materials. We can’t know but some day a new technological method may be discovered that depends on raw materials which are available only in very backward countries. The people will say, “We could improve our standard of living and that of all other countries if we had access to these raw materials; they are completely useless to the Dalai Lama of Tibet.” It was precisely foreign investment— the possibility of making use of all natural resources without political interference—that made war unnecessary. That doesn’t hurt the countries involved. The foreign investments really cooperated in the country’s development without hurting the country in any way. The peace of the world depends on this.
The disappearance of foreign investment is a very serious problem. What is most visible today is only the bad consequences, the bad standards of living, in India and China and some other countries. But this is not all; the whole system of world policies and international policies will be affected. And then if such real conflicts really arise, even the Boy Scouts of the United Nations will not prove any better than did the statutes of the League of Nations, the UN’s predecessor.

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Profit and Loss, Private Property, and the Achievements of Capitalism

IN DEALING WITH ALL MATTERS CONCERNING CAPITALISM, it is fundamental never to forget the difference between “capital goods” and “capital.” “Capital goods” are physical things. The concept of “capital” is purely a theoretical concept within the framework of a definite method of calculation and computation. The evolution of this concept of capital finally resulted in including in the accountant’s concept of capital, the auditor’s concept, and also those things that are not capital goods.
The system of accountancy started, of course, with businessmen. Anxious to know what the results of their transactions were they developed this method of accounting—double-entry bookkeeping and so on. The concept of capital that they applied referred to, and included, only those funds that they had diverted to the development of business. It did not include real estate or the private property of the head of the enterprise, of his family, and so on. You can still read in legal treatises and papers essays debating whether or not the private capital of the owner should be included in the balance sheet of a firm. According to the methods in practice in accountancy, the concept of capital as used today includes the real estate and all rights owned by the enterprise.
Agriculturists also began to pay attention to these problems, but only much later. In the beginning they developed methods of accounting which were limited to the operation of the farm only, without including the whole property of the owner. I mention these facts because if you look into the balance sheet of an enterprise there is room for the building, the real estate, owned by the enterprise. The concept of capital as used today includes more than capital goods; it includes all the things owned by the enterprise.
From this point of view we must raise the question also of whether or not there are other distinctions which may have greater importance for the practical problems of capital. If we speak of capital we discover that we have in mind all the total material factors of production as far as they may be used for production purposes.
If we talk about the decisions to be made concerning the employment of capital, we must take into account the fact that the greater part of the capital available is embodied in nonconvertible or not perfectly convertible goods. Capital goods are intermediary factors between the natural goods and the final consumer’s goods. In a changing world, in which the productive processes and other things are constantly changing, the question is whether we can use these intermediary products, which were originally designed for a specific end use, for any other end. Is it possible, even after a change in plans and intentions, to use for other purposes capital accumulated or produced in the past with different plans and different intentions in mind? This is the problem of the convertibility of capital goods.
For more than one hundred years, a movement popular in the whole world, today especially in California, is represented by a group of reformers who call themselves “technocrats.” Technocrats criticize the fact that we have still going on side by side with the most modern methods of production, processes of production of an outdated character. And they are not the only ones to criticize this fact. They point out how wonderful it would be if all that they call “economic backwardness” were eliminated, if we had all the factories located in the best places, and if all the factories were equipped with the most modern equipment. Then there wouldn’t be any backwardness, nor any machines and methods of production being used which are no longer up to date. There was a German, or a Russian—I had better say a Baltic—socialist who pointed out, for instance, how backward German agriculture was. He would abandon or diminish all existing farms and machines, substitute the most modern achievements of agriculture, and then it would be possible to produce everything cheaper.
The weak point of these plans is that the capital accumulated in the past was in the form of capital goods that represented the technical wisdom of the ages in which it was accumulated. Although the factories are out of date it does not necessarily mean that the old machines have to be sold as scrap iron and new machines substituted. It depends upon the superiority of the new machines. Unless it is impossible for the old factory to make any surplus over current expenses, it would be a waste, not only both from the point of view of the individual factory owner but also from the point of view of a socialistic system that had to deal with the same thing. The problem is similar to that of a man who must choose between buying a new typewriter or a new television set because better ones have now been invented, or buying something else that he doesn’t have at all. Just as not everybody will throw away his old typewriter or his car when a new model appears, so will a businessman have to make similar decisions in business. While in the household precise calculations are not needed, in business these decisions are made on the basis of more careful calculations.
The capital equipment that makes up the wealth of our age and that also makes one country richer as against poorer countries is embodied in capital goods created in the past by our ancestors, or created by ourselves under different technical conditions and for different purposes. If we want to use this old capital equipment in the future, too, in spite of the fact that it does not render as much service as new equipment, we do so because we consider the service it renders worth more than what we can gain by throwing away the old machines and replacing them with new machines.
The settlement of the world was done in other ages under other assumptions and other conditions with other technical knowledge. If we were to come to earth from another planet with perfect knowledge of today’s geographical conditions, we would settle the world with the use of that other knowledge, knowledge very different from that which was responsible for our present capital equipment. In the past our wealth consisted to a great extent of capital goods adjusted to conditions which are different from our conditions. Decisions of the past were based on conditions at that time. The fact that our ancestors made the decisions they did helps to influence us to keep things as they are; it wouldn’t be worthwhile to abandon the investments of the past. In every individual case we have to make a decision between continuing in the old ways, in spite of the fact that we now know better, or renouncing the old ways for some other employment of additional capital goods which we now consider more important.
In answer to the technocrats, we say we are not rich enough to scrap everything that was built in the past. Perhaps it would be better to have the industrial centers somewhere else than where they were built in the past. But this transfer, this shifting, is a very slow process. It depends on the superiority of the new sites. This is a refutation of the famous infant-industry argument, which says that the new industries must be protected against the old industries. In this case too—in the case of shifting industries from physically less favorable to more favorable sites—the decision must depend on the degree of superiority of the new sites. If the superiority of the new sites is sufficient the industries will move without any outside assistance at all. If it is not sufficient, it is a waste to assist industries to make such a move. (For instance, the textile industries developed in New England even though the cotton was grown in the south. More lately the textile mills have been shifting to the south, again without any outside assistance.) If the advantage to be derived from the abandonment of capital goods is great enough, the change will be made.
Technical backwardness is not the same as economic backwardness. If capital needed for eliminating this technical backwardness, from our point of view or from the point of view of the buying public, has a more urgent employment somewhere else, then it would be economically a very serious mistake to employ it in making changes to new equipment simply because there are already better machines.
Capital goods are scarce. The economic problem consists precisely in the fact that consumers seek to employ them for the satisfaction of their most urgent not-yet-satisfied demands. The economic problem is not to employ capital goods for producing something which is less important than another product, which cannot be started precisely on account of the fact that these capital goods are being employed in the production of the less important product. This is what unprofitability means. A businessman says, “This is unprofitable. The project could be undertaken but it would be unprofitable. Therefore, we do not want to start it.” What the socialists say is, “But businessmen are greedy; they want to produce only those things which are profitable, not those which are unprofitable.” However, what makes an enterprise unprofitable is that, given the prices of the factors of production and the rate of interest, the anticipated proceeds would lag behind the expenditures.
What does it mean if the price of copper is higher than it used to be? It means that consumers are ready to pay a higher price for the copper that goes into the making of other products; they are not ready to pay the higher price for copper in its present uses. They make some prices high enough to make the production of other products profitable. On the other hand, if there is an increase in the supply of copper, or if some branches of business which used to employ copper until now use something else instead of copper in production, then copper becomes more readily available, the price of copper drops, and it now becomes profitable to use copper to produce some things that yesterday were unprofitable. Ultimately it is the consumers, in their buying, who determine what should be produced and what should not be produced.
When aluminum was first introduced, many things could not be produced from aluminum because its price was very high. Napoleon III [1808–1873] immediately had the idea to give to his cavalry armor of aluminum, but it was so expensive then that it would have been cheaper to give them armor made of silver. When I was a child, aluminum was used for children’s toys, but the really serious industrial use of aluminum was then more or less out of the question. Slowly the production of aluminum improved and the use of aluminum for many articles became possible. Years ago, it was as unprofitable to use aluminum as it is today to use some high-grade metals for certain commercial purposes.
The slogan “Production for use and not for profit” is meaningless. A businessman produces for profit. But he can make profits only because consumers want to use the things he produces, because they want to use them more urgently than other things.
In the absence of profits and losses there wouldn’t be any guides for production. It is profits or losses that show the businessmen what the consumers are asking for most urgently, in what qualities and in what quantities. In a system in which there were no profits or losses, the businessman would not know what the wishes of the consumers were, and he wouldn’t be able to arrange his production processes according to the wishes of the consumers.
Besides this function of profit or loss there is the role they play in shifting ownership of the means of production into the hands of those who knew—in the past, of course, i.e., until yesterday—how best to employ them for the needs of the consumers. This is no guarantee that the means of production will be used in the best way tomorrow. But if they aren’t, the owners will suffer losses. And if they do not change their methods of production, they will lose their property and will be thrown out of their eminent position as the owners of factors of production. But this is something given, and it cannot be changed. Every judgment about people refers to the past. A candidate in an election can only be judged by what he has done in the past. The same applies also to the choice of a doctor, a shop, and so on, and also to producers. It is always good will referring to the past.
Past profits shift the ownership of the means of production from the hands of those who were less efficient in using them in the eyes of the public into the hands of those who are expected to be more efficient. Therefore, the meaning of ownership of the means of production is very different in a system based on the division of labor from its meaning in a feudal system. In a feudal system, private ownership was acquired by conquest or by the arbitrary appropriation of pieces of land. The proprietor was the conqueror; the supreme conqueror was the head of the army, the king, the “Führer.” Other people acquired private property as gifts from the supreme lord. There was a whole hierarchy—kings, dukes, knights, and so on, and at the bottom were the people with no property. The dukes and knights could lose their property by being deprived of their “gift” by the higher authority—the king—revoking his gift; or they might be defeated by a successful conqueror. This system prevailed until capitalism replaced it to varying degrees in many countries.
If you study the history of private ownership in land you can, of course, go back either to conquest or to appropriation of ownerless property by somebody. From this point of view, the older critics of private ownership said property does not have a legal origin; it was acquired by might, by conquest, without any legal basis. Hence, they say they want to take it away from the current private owners and give it to everybody. Whether the origin described here is right or wrong is one question. Another question is what to do now that property is privately owned.

The socialists took over this critique of the origin of property without realizing the enormous difference that existed between then and now. If you say that in the old days the owners of land did not depend on the market, that is true; there was no market; there was only an insignificant amount of trade. The feudal lord had only one real way to spend his great income in the products of the earth—to retain a great retinue of armed men in order to fight his battles. The court of a feudal lord consisted of an enormous household in which many people lived (boarders I would say), supported by the great estate. In Brandenburg in Berlin, for instance, there was one case of a councilor in the sixteenth century who was living in the king’s household. This is very different from the conditions in the market economy.
In the market economy, private ownership is, as it were, a social function because it can be retained and enlarged only by serving customers in the cheapest and best possible way. Those who do not know how to serve consumers in the cheapest and best possible way suffer losses. If they do not change their methods of production in time they are thrown out of their positions as owners, entrepreneurs, capitalists, and shifted to positions in which they no longer have entrepreneurial and capitalistic functions. Therefore, the meaning of private ownership in the capitalistic system is entirely different from the meaning of private ownership in the feudal system.
Critics of private ownership are still living mentally in the Middle Ages (like critics of interest and creditors). They don’t realize that the market determines every day who should own what and how much he should own. The market gives ownership to those people who are best fitted to use the means of production for the best possible satisfaction of the needs of the consumers. Therefore it is not correct to criticize the institutions of private property by citing conditions as they existed in the early days under feudal conditions, under absolute kings.
As President Franklin Roosevelt [1882–1945] said, capitalism has never been really tried.1 There always remains something from the old days. But it is absolutely useless to tell us today, “Look how the wealth of many aristocratic families originated in the seventeenth century.” Some modern wealthy people may be descendants of wealthy aristocratic families, but what has that to do with the situation today? The Prussian Junkers were still privileged in the nineteenth century and early twentieth century; they could retain their property only because the whole apparatus of the imperial government was glad to preserve them, to protect them, and to prevent consumers from putting persons in their places who were better equipped to serve consumers.
We must realize that every governmental measure that lowers the amount of profit successful enterprises can make or which taxes away their profits is a measure that weakens the influence of the consumers over producers. For example, the great industrial fortunes of the nineteenth century were acquired by successful innovators in their business. Henry Ford [1863–1947] started with almost nothing; he made enormous profits which were plowed back in his enterprise; in this way over a comparatively short time he developed one of the biggest fortunes of the United States. The result was that something quite new happened, mass production of automobiles for the masses. At the beginning of the twentieth century there were some successful motor cars. The French Renault cost about $10,000 in gold; it was a luxury car for a few very rich men. The activities of Ford and of some other people made the motor car something for everybody. In this way great fortunes were developed. The great department stores and the great factories developed in this way. But now this cannot happen. If a man starts a small enterprise and makes huge profits, the greater part of this profit is absorbed by taxes. However, there are still some loopholes. If you have a good accountant you may avoid being expropriated 90 percent and may be expropriated only 70 percent. But the greater part of the profits which would have been reinvested are taken by the government and spent for current expenses.
In the case of department stores, formerly an old store had to compete for potential new consumers with new competitors. Today this is no longer the case. The small man will never develop into a big store because his profits are taken away by the government. It is true that the old and new stores operate under the same laws; the large old store also has to pay high income taxes. But the old store has already accumulated the capital needed for a big business, while the new man is prevented from accumulating the capital needed to expand into a big-scale enterprise. The consequence, therefore, is that the competitive spirit could easily disappear from the management of the big store. Without any danger to the old store in the conduct of its affairs, the old store may sometimes become “lazy.”
There are people who say capitalism is dying because the spirit of competition no longer exists as it used to and because great enterprises become bureaucratic. But capitalism is not dying; people are murdering it. There is a difference between dying by a disease that finally results in death and dying as a result of assault and assassination. It is fantastic to use as an argument against capitalism the fact that the competitive spirit in business is weakening and that businesses sometimes become bureaucratic. This is precisely due to the fact that people are fighting against the capitalistic system and don’t want to tolerate the institutions that are essential for its existence. Therefore, I must say something about the difference between profit and loss under business management on the one hand, and bureaucratic management on the other hand.
Profit-and-loss management is the sign of an enterprise, of an outfit, that is subject to the supremacy of the market, i.e., the supremacy of consumers. In such an outfit the determining factor is “Is it profitable or not?” This yardstick is applied not only to the whole enterprise but to every portion of the enterprise. This is the method of double-entry accounting which Goethe characterized in such a wonderful way by saying that it makes it possible for the man at the head of an organization to control every aspect of a business without becoming enmeshed in too much detail work.
Under such an accounting system you can establish whether or not any special department or branch pays. For instance, an enterprise in New York has a branch store in San Francisco. There is only one standard the head of the company in New York need apply: is it profitable? He has a special balance sheet for the store in San Francisco. He assigns to this branch on his books the necessary capital, compares the costs and the prices of this branch, and on this basis judges whether or not it is useful, whether or not it is profitable, for the total enterprise to continue this branch office in San Francisco. He can leave all the details to the head of the branch office in San Francisco because this man always knows that he is responsible. It is not necessary that the branch manager get a share of the profits. He knows very well that if the branch does not pay it will be discontinued and he will lose his job; his future depends on this branch. Therefore, the man in New York does not have to say to this branch manager in San Francisco anything more than, “Make profits!” The head in New York doesn’t interfere because if he does and the branch office has losses, the branch manager will be able to say it was because “You ordered me to do so and so.”
The consumers are supreme. The consumers are not always intelligent—not at all—but the consumers are sovereign. They can be stupid and they may change their minds, but we must accept the fact that they are sovereign. Businessmen are subject to the supremacy of the consumers. The same is, of course, true for the whole business establishment; the decisive voice is the voice of the consumers. It is not the problem of the producers or manufacturers to criticize consumers, to say, “These people have bad tastes—I recommend they buy something else.” This is the task of philosophers and artists. A great painter, a great leader, a man who wants to play a role in history must not yield to the bad taste of consumers. However, businessmen are subject to profit-and-loss management and are directed in every detail by the wishes of the consumers. The consumers are supreme; they are buying the product and this is justification for the producer. If it is not weakened by government interference, this is profit-and-loss management, production for consumers.
Now what is bureaucratic management? People often confuse bigness with bureaucracy. Even such an eminent man as Max Weber [1864–1920] thought that the essential factor of a bureaucracy was that people sat at desks and had a lot of paperwork to do. But this is not the essential feature of a bureaucracy. The characteristic of a bureaucracy is that it deals with things which are necessary but which cannot be sold and that do not have a price on the market. Such a thing, for instance, is the protection of individuals against gangsters and other criminals. This is the job of the police department. It is very important, indispensable. But the services of the police department cannot be sold on the market. Therefore, you cannot judge the results of these police operations in the same way as you can judge the operations of a shoe factory. The shoe factory can say, “The public approves of our operations because we make profits.” The police department can only say the public approves through the actions of its town council, congress, parliament, and so on. Therefore, the system of management which must be used for a police system is the bureaucratic system.
The nation, or the citizenry, elects parliamentary bodies and these parliamentary bodies determine how much should be spent for the various functions of the government, including the police department. You cannot evaluate in dollars and pennies the results of a police department. And, therefore, you cannot have bookkeeping and auditing of a police department in the same way you do in private businesses. In private businesses, the expenses are measured in terms of dollars against the proceeds. In the police department you cannot measure the expenses against the proceeds. The police department has only expenses. The “proceeds” of a police department are, for instance, the fact that you can walk safely through the town, even after midnight. Such proceeds cannot be evaluated in terms of money.
The parliaments set the budget for the police department; they determine the amount of money to be spent. They must also tell the police department what services they should perform. The FBI could no doubt be improved by increasing its appropriations, but it is the will of the people that it not go any further; the head of the Department of Justice tells the FBI what to do and what not to do; the Department of Justice head cannot leave these decisions to the “branch managers.” Therefore, the manager of a bureaucratic operation issues instructions on many things which appear unnecessary to the businessman—how often to clean the offices, how many telephones to have, how many men to watch a certain building, and so forth. These detailed instructions are necessary because in a bureaucracy what has to be done and what has not to be done must be determined by such rules. Otherwise the man on the spot would spend money without giving heed to the total budget. If there is a limited budget you must tell the employees what they can and what they cannot do. This refers to all branches of government administration.
This is bureaucracy, and in these areas it is indispensable. You cannot leave it to the individual employee; you cannot tell a man, “Here is a big hospital. Do what you want with it.” A limit is drawn by the parliament, the state, or the union and, therefore, it is necessary to limit the money spent in each department. This bureaucratic method of management does not apply under profit management. But, of course, if you weaken the profit motive of private businesses, bureaucratic ideas and bureaucratic management creeps in.
Given the present-day excess-profits tax, corporation taxes, and individual taxes on corporation shareholders, many enterprises say when calculating a new expenditure, “It means an expenditure of $100 more, of course. But considering the 82 percent tax I must pay on the firm’s earnings, it will cost much less. If I don’t spend this $100 on business, I will still have to pay a tax of $82. Therefore, spending this $100 will cost the firm only $18.” People calculating this way no longer compare the total expenditure with the advantages to be derived from it on the market; they compare only that part of the expenditures which affects their own income. In other words, in spending $100 on its business, the company could afford to be lavish, wasteful, or extravagant; it would no longer consider consumer wishes primarily.
If this tax system is continued, it could lead finally to complete government control. For instance, if government takes 100 percent of a company’s income, its business expenses would all be deductible and chargeable to the government. The company wouldn’t need to worry then about consumer sovereignty, about whether consumers would be willing to pay enough for their product to cover costs; it wouldn’t need to worry about keeping expenses down. But then the government couldn’t allow the business to do as it wished; the government would have to control all aspects of the business’s operations. Therefore, if you hear that business is becoming bureaucratic and wasteful, it is not the consequence of big business, of capitalism, of an unhampered market system; it is the consequence of government taxation and government interference with these things.

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Marxism and the Manipulation of Man by Ludwig von Mises

IT IS AN ASTONISHING FACT that a philosophy like Marxism, which attacks the whole social system, remained for many decades more or less unattacked and uncontested. Karl Marx was not very well known in his lifetime and his writings remained practically unknown to the greater part of his contemporaries. The great socialists of his age were other men—for instance, Ferdinand Lassalle. Lassalle’s agitations lasted only a year because he was killed in duel as a result of a private affair, but he was considered a great man in his age. Marx, on the other hand, was more or less unknown. People neither approved, nor criticized, his teachings. He died in 1883. After his death, there appeared the first part of Böhm-Bawerk’s critique of the economic doctrines of Karl Marx.1 And later in the 1890s, when the last volume of Das Kapital was published, there appeared the second part of this critique, which completely killed Marx’s economic doctrines.2 The most orthodox Marxians tried to revive and restate his doctrines. But there was practically no sensible critique of the philosophical doctrines of Karl Marx.
Marx’s philosophical doctrines became popular in that people became familiar with some of his terms, slogans, and so forth, although they used them differently from the way they were used in the system of Karl Marx. Such simplification happens to many doctrines. For instance, Darwinism became known as the theory based on the idea that man is the grandson of an ape. What remains of Nietzsche is not much more than his term “superman,” which later acquired popularity in the United States without any connection to Nietzsche. Regarding Marx, people know his terms but they use them very loosely. But by and large, Marxian ideas have little or no opposition.
One of the reasons why the doctrine of Marx was so diluted in the public mind was the way Engels tried to explain Marxian theory. See his statement at the graveside of Marx: “Marx discovered the law of mankind’s historical evolution, i.e., the simple fact, hitherto hidden beneath ideological overgrowths, that men must first of all eat, drink, have shelter and clothing before they can pursue politics, science, art, religion, and the like.”3 Yet no one ever denied this. But now if someone says something against Marxian doctrine then they can be asked: “How can you be so stupid as to deny that one must first eat before one becomes a philosopher?”
Again there is the theory of the material productive forces. But no explanation is offered for their formation. Dialectical materialism states that the material productive forces come to the world—one doesn’t know how they come, nor where they come from—and it is these material productive forces that create everything else, i.e., the superstructure.
People sometimes believe that there has been a very sharp conflict between the various churches and Marxism. They consider Marxism and socialism as incompatible with the teachings of all Christian churches and sects. The early communist sects and early monastic communities were based on a peculiar interpretation of the Bible in general, and of the book of Acts especially. We don’t know much about these early communist sects but they existed in the Middle Ages and also in the early years of the Reformation. All these sects were in conflict with the established doctrines of their churches or denominations. So it would be absolutely wrong to make the Christian church responsible for them. I mention this to show that, at least in the minds of some groups, most of which the church considered heretical, there is no absolute conflict between socialism and the teachings of the church. The anti-Christian tendencies of the socialist forerunners of Karl Marx, of Karl Marx himself; and later of his followers, the Marxians, must first of all be understood within the whole framework which later gave rise to modern socialism.
The states, the governments, the conservative parties, were not always opposed to socialism. On the contrary; the personnel of a government has a tendency or a bias in favor of the expansion of government power; one could even say that there is an “occupational disease” on the part of government personnel to be in favor of more and more governmental activities. It was precisely this fact, this propensity of governments to adopt socialism—and many governments really did adopt socialism—that brought Marxism into conflict with the various governments.
I have pointed out that the worst thing that can happen to a socialist is to have his country ruled by socialists who are not his friends. This was the case with respect to Karl Marx and the Prussian government. The Prussian government was not against socialism. Ferdinand Lassalle attacked the liberal parties of Prussia, which were at that time fighting a great constitutional battle against the Hohenzollern kings, headed by Bismarck. The majority in Prussia at that time was against the government; the government couldn’t get a majority in the Prussian Parliament. The Prussian government was not very strong at that time. The King and the Prime Minister ruled the country without consent, without the cooperation of the Parliament. This was the case in the early 1860s. As an illustration of the weakness of the Prussian government, Bismarck, in his Memoirs, reported a conversation he had with the King. Bismarck said he would defeat the Parliament and the liberals. The King answered, “Yes, I know how that will end. Here in the square in front of the palace. First they will execute you and then they will execute me.”
Queen Victoria [1819–1901], whose oldest daughter [Victoria, 1840–1901] had married the royal prince of Prussia, was not very pleased by these developments; she was convinced that the Hohenzollerns would be defeated. At this critical moment Ferdinand Lassalle, who was at the head of a labor movement which was then still very modest, very small, came to the aid of the Hohenzollern government. Lassalle had meetings with Bismarck and they “planned” socialism. They introduced state aid, production cooperatives, nationalization, and general manhood suffrage. Later Bismarck really embarked on a program of social legislation. The greatest rival of the Marxians was the Prussian government, and they fought with every possible movement.
Now you must realize that in Prussia, the Prussian Church, the Protestant Church, was simply a department of the government, administered by a member of the Cabinet—the Minister of Education and Affairs of Culture. One of the councilors in the lower levels of the administration dealt with the problems of the church. The church in this regard was a state church; it was even a state church in its origin. Until 1817, there were Lutherans and Calvinists in Prussia. The Hohenzollerns didn’t like this state of affairs. The Lutherans were in the majority in the old Prussian territories, but in the newly acquired territories there were both groups. In spite of the fact that the majority of the whole Prussian people were Lutherans, the electorate of the Brandenburgs had changed from Lutherans to Calvinists. The Hohenzollerns were Calvinists, but they were the head of the Lutheran Church in their country. Then in 1817, under Frederick Wilhelm III of Prussia, the two churches were merged to form the Prussian Union Church. The Church was a branch of the country’s government.
From the seventeenth century on in Russia, the church was simply a department of the government. The church was not independent. Dependence of the church on the secular power was one of the characteristics of the Eastern Church at Constantinople. The head of the Eastern Empire was in fact the Superior of the Patriarch. This same system was to some extent carried over into Russia, but there the church was only a part of the government. Therefore, if you attacked the church, you also attacked the government.
The third country in which the problem was very critical was Italy, where the nationalist unification implied the abolition of the secular rule of the Pope. Until the second part of the nineteenth century the central part of Italy was ruled independently by the Pope. In 1860, the king of Sardinia conquered these states. The Pope retained only Rome, under the protection of a detachment of the French Army until 1860, when the French had to withdraw to fight Prussia. Therefore, there was a very violent feud between the Catholic Church and the Italian secular state. The struggle of the Church against the ideas of the Marxians concerning religion is something different from their struggle against the socialist program. Today it is complicated even more by the fact that the Russian Church, the Oriental Orthodox Church, came as it seems, to some agreement with the Bolsheviks. The struggle in the East is to a great extent a struggle between the Eastern Church and the Western Church—a continuation of the struggle that originated more than a thousand years ago between the two churches. Therefore, the conflicts in these countries, between Russia and the western boundaries of the Iron Curtain, are very complicated. It is not only a struggle against totalitarian economic methods for economic freedom; it is also a struggle of various nationalities, of different linguistic groups. Consider, for instance, the attempts of the present Russian government to make the various Baltic nationalities over into Russians—a continuation of something that had been started by the Tsars—and the struggle in Poland, Czechoslovakia, Hungary, and so on, against the attempts of the Russian Church to bring them back, as they say, to the Oriental Creed. To understand all these struggles one needs a special familiarity with these nationalities and with the religious histories of these parts of the world.
In the sixteenth and seventeenth centuries there were changes that expanded the size of the territory in which the Pope’s supremacy was acknowledged. Therefore, there existed a Russian Church, the Orthodox Church, and a Ukrainian or Russian Catholic Church which acknowledged the supremacy of the Pope. All these things together constituted the great religious struggles of the East. However, one must not confuse the events happening in these nationalistic and religious struggles with the fight against communism. For instance, the politicians fighting against the Russians today are not always, or at least not in most cases, fighters in favor of a free economic system. They are Marxians, socialists. They would probably like to have a totalitarian police state, but they don’t want it to be governed by the Russians.
From this point of view, one cannot say that there is any real opposition to the social teachings and social programs of Marxism. On the other hand, it is important to realize that there isn’t necessarily always a connection between anti-Marxism, an ideological philosophy, and economic freedom.
One of the outstanding contemporaries of Karl Marx in Germany was a philosopher, Friedrich Albert Lange [1828–1875]. He wrote a famous book, The History of Marxism, considered for many years, not only in Germany but also in English-speaking countries, one of the best introductions to philosophy. Lange was a socialist; he wrote another book about socialism. In his book he didn’t criticize Marx, but rather materialism. Marxian materialism is a very imperfect materialism because it traces all changes back only to something which is itself already the product of the human mind.
It is important to stress the fact that the critiques of Marxism were sometimes very wrong. I want to point to only one typical example. This is the popular propensity of anti-Marxians to consider dialectical materialism and Marxism as something belonging to the same group of ideas as Freudian psychoanalysis. I am not a psychologist, but I only have to point out how mixed up these people are who believe that materialism in general and Marxian materialism in particular have some connection with Freudian psychoanalysis.
Before Sigmund Freud [1856–1939] and Josef Breuer [1842–1925], who opened up this whole method of thinking, began to develop their doctrines, it was the generally uncontested assumption among all doctors that mental disabilities were caused by pathological changes in the human body. If a man had something that was called a nervous or mental disease they looked for some bodily factor that brought about this state of affairs. From the point of view of the doctor who deals with the human body this is the only possible interpretation. However, sometimes they were absolutely correct when they said, “We don’t know the cause.” Their only method was to look for a physical cause. One could give many examples. I want to cite only one. It happened in 1889, just a few years before the first book of Freud and Breuer was published. An eminent man in France committed suicide. For political reasons and because of his religion, the question was raised whether or not he was sane. His family wanted to prove that it was a mental disease. In order to prove his mental disease to the Church, they had to discover some physical cause. There was an autopsy by eminent doctors, and their report was published. “We discover certain things in the brain,” they said; “there is something that is not regular.” At that time, people thought that if a man doesn’t behave like other people has no physical sign of abnormality in his body, he is a malingerer. Sometimes this is unfortunate, because one can only discover whether or not a person is a malingerer after he is dead. In this regard, psychoanalysis brought about a great change. The case of Crown Prince Rudolf of Austria [1858–1889], who committed suicide at Mayerling, raised similar issues.4
The famous first case was that of a woman who was paralyzed. Yet nothing could be discovered in her body to explain her situation. The case was written up by a man who followed the advice of a Latin poet: wait nine years with your manuscript before you publish. Breuer got the idea that the origin of this bodily deficiency was not physical but that it was in the mind. This was a radical change in the field of the natural sciences; such a thing had never happened before—a discovery that mental factors, ideas, superstitions, fables, wrong ideas, what a man thinks, what he believes, can bring about changes in the body. This was something that all the natural sciences had denied and contested before.
Freud was a very conscientious and cautious man. He didn’t say, “I have completely discredited the old doctrines.” He said, “Perhaps one day, after a very long time, the pathological doctors will discover that ideas are already the product of some physical external bodily factor. Then psychoanalysis will no longer be needed or useful. But for the time being you must at least admit that there is a temporary value in Breuer’s and my discovery and that, from the point of view of present-day science, there is nothing that confirms the materialist thesis that every idea or every thought is the product of some external factor, just as urine is a product of the body. Psychoanalysis is the opposite of materialism; it is the only contribution to the problem of materialism vs. idealism that has come from empirical research in the human body.
We have to deal with the ways some people abuse psychoanalysis. I do not defend those psychoanalysts who try to explain everything from the point of view of certain urges, among which the sex urge is considered the most important. There was a book by a Frenchman dealing with Baudelaire [Charles Baudelaire, 1821–1867]. Baudelaire liked to spend money, but he didn’t earn money because publishers didn’t buy his poems during his lifetime. But his mother had money; she had married money and her husband died and left it to her. Baudelaire wrote his mother a lot of letters. This writer found all sorts of subconscious explanations for his letters. I don’t defend this attempt. But his letter writing doesn’t need any further explanation than that Baudelaire wanted money.
Freud said he didn’t know anything about socialism. In this regard he was very different from Einstein [1879–1955] who said, “I don’t know anything about economics, but socialism is very good.”
If we follow how Marxism became the leading philosophy of our age, we must mention Positivism and the school of Auguste Comte. Comte was a socialist similar to Karl Marx. In his youth, Auguste Comte had been the secretary of Saint-Simon. Saint-Simon was a totalitarian who wanted to rule the whole world by world council and, of course, he believed he would be the president of this world council. According to Comte’s idea of world history, it was necessary to search for the truth in the past. “But now, I, August Comte, have discovered the truth. Therefore, there is no longer any need for freedom of thought or freedom of the press. I want to rule and to organize the whole country.”
It is very interesting to follow the origin of certain terms which are today so familiar that we assume they must have been in the language from time immemorial. In French, the words “organize” and “organizer” were unknown before the end of the eighteenth century or the beginning of the nineteenth century. With regard to this term, “organize,” Balzac5 observed “This is a new-fangled Napoleonic term. This means you alone are the dictator and you deal with the individual as the builder works with stones.”
Another new term, “social engineering,” deals with the social structure. The social engineer deals with the social structure or with his fellowmen as the master builder deals with his bricks. Reasoning in this way, the Bolsheviks eliminate those individuals who are useless. In the term “social engineering” you have the idea of planning, the idea of socialism. Today we have many names for socialism. If a thing is popular, then the language has many expressions for it. These planners say in defense of their ideas, you must plan things; you cannot let things act “automatically.”
Sometimes “automatically” is used in a metaphorical sense to apply to things that happen on the market. If the supply of a product drops, then they say prices go up “automatically.” But this doesn’t mean that this is done without human consciousness, without some persons bidding and offering. Prices go up precisely because people are anxious to acquire these things. Nothing in the economic system happens “automatically.” Everything happens because certain people behave in a definite way.
Also the planners say, “How can you be so stupid as to advocate the absence of planning?” But no one advocates the absence of plan. The question is not “Plan, or no plan.” The question is “Whose plan? The plan of one dictator only? Or the plan of many individuals?” Everyone plans. He plans to go to work; he plans to go home; he plans to read a book; he plans a thousand other things. A “great” plan eliminates the plans of everybody else; then only one plan can be supreme. If the “great” plan and the plans of individuals come into conflict, whose plan is to be supreme? Who decides? The police decide! And they decide in favor of the “great” plan.
In the early days of socialism, some critics of socialism used to blame socialists for their ignorance of human nature. A man who must execute the plan of somebody else only would no longer be a man of the kind we call human. This objection was answered by those socialists who said, “If human nature is against socialism, then human nature will have to be changed.” Karl Kautsky said this many years before, but he didn’t give any details.
The details were provided by Behaviorism and by [Ivan] Pavlov [1849–1936], the psychologist mentioned in every book by a Marxist. The explanation was offered by Pavlov’s conditioned reflex. Pavlov was a Tsarist; he made his experiments in the days of the Tsar. Instead of human rights, Pavlov’s dog had canine rights. This is the future of education.
The Behaviorist philosophy wants to deal with human individuals as if there were no ideas or no faults in men. Behaviorism considers every human action as a reaction to a stimulus. Everything in the physical and physiological nature responds to certain reflexes. They say, “Man belongs to the same realm as animals. Why should he be different? There are certain reflexes and certain instincts that guide men to certain ends. Certain stimuli bring about certain reactions.” What the Behaviorists and the Marxists did not see was that you cannot even discredit such a theory of stimuli without entering into the meaning that the individual attaches to such stimuli. The housewife, when quoted the price of an object which she is considering buying, reacts differently to $5 than she does to $6. You cannot determine the stimulus without entering into the meaning. And the meaning itself is an idea.
The Behaviorists’ approach says, “We will condition the other people.” But who are the “we”? And who are the “other people?” “Today,” they say, “people are conditioned for capitalism by many things, by history, by good people, by bad people, by the church, etc., etc.”
This philosophy doesn’t give us any answer other than the answer we have already seen. The whole idea of this philosophy is that we must accept what Karl Marx told us because he had the great gift—he was entrusted by Providence, by the material productive forces, with discovering the law of historical evolution. He knows the end toward which history leads mankind. This leads eventually to the point where we must accept the idea that the party, the group, the clique, that has defeated the others by force of arms, is the right ruler, that he is called by the material productive forces to “condition” all other people. The fantastic thing is that the school which develops this philosophy calls itself “liberal” and calls its system a “people’s democracy,” “real democracy,” and so on. It is also fantastic that the Vice President of the United States [Henry Wallace, 1888–1965] one day declared, “We in the United States have only a civil rights democracy—but in Russia there is economic democracy.”
There was a socialist author, valued highly by the Bolsheviks in the beginning, who said the most powerful man in the world is the man in whose favor the greatest lies are told and believed. (Something similar was said by Adolf Hitler.) Here is the power of this philosophy. The Russians have the power to say, “We are a democracy and our people are happy and enjoy a full life under our system. “And other nations seem to be unable to find the right answer to this idea. If they had found the right answer, this philosophy wouldn’t be so popular.
There are people living here in the United States, at an American standard of living, who think they are unhappy because they do not live in Soviet Russia where, they say, there is a classless society and everything is better than it is here. But it seems that it is not very much fun to live in Russia, not only from the material point of view, but from the point of view of individual freedom. If you ask, “How is it possible that people say everything is wonderful in a country, Russia, in which everything is probably not very wonderful,” then we must answer, “Because our last three generations were unable to explode the contradictions and the failures of this philosophy of dialectic materialism.”
The greatest philosophy in the world today is that of dialectical materialism--the idea that it is inevitable that we are being carried toward socialism. The books that have been written up to now have not succeeded in countering this thesis. You must write new books. You must think of these problems. It is ideas that distinguish men from animals. This is the human quality of man. But according to the ideas of the socialists the opportunity to have ideas should be reserved to the Politburo only; all the other people should only carry out what the Politburo tells them to do.
It is impossible to defeat a philosophy if you do not fight in the philosophical field. One of the great deficiencies of American thinking—and America is the most important country in the world because it is here, not in Moscow, that this problem will be decided—the greatest shortcoming, is that people think all these philosophies and everything that is written in books is of minor importance, that it doesn’t count. Therefore they underrate the importance and the power of ideas. Yet there is nothing more important in the world than ideas. Ideas and nothing else will determine the outcome of this great struggle. It is a great mistake to believe that the outcome of the battle will be determined by things other than ideas.
Russian Marxists, like all other Marxists, had the idea that they wanted to nationalize agriculture. That is, the theorists wanted to—the individual worker did not want to nationalize the farms; they wanted to take the big farms, break them up, and distribute the land among the small farmers. This has been called “agrarian reform.” The social revolutionaries wanted to distribute the farms to the poor peasants. In 1917, Lenin coined a new slogan, “You make revolution with the slogan of the day.” Therefore, they accepted something that was against Marxism. Later they started the nationalization of farm lands. Then they adopted this idea in the new countries they took over; they told every man that he would get his own farm.
They started this program in China. In China they took the big farms and abolished the rights of mortgage banks and landlords and freed the tenants from making any payments to the landlords. Therefore, it was not philosophy that made the Chinese peasants communistic, but the promise of a better life; people thought they would improve their conditions if they could get some farm land owned up to then by wealthier people. But this is not the solution for the Chinese problem. The advocates of this program were called agricultural reformers; they were not Marxians. The idea of land distribution is entirely un-Marxian.

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Nationalism, Socialism, and Violent Revolution by Ludwig von Mises

MARXIAN DOCTRINE DOESN’T DENY THE POSSIBILITY OF ABSOLUTE TRUTH, but it maintains that absolute truth can be attained only in the classless society. Or in the proletarian class society.
Lenin’s main book1, or at least his most voluminous book (now available in the Collected Works of Lenin), led some people to call him a philosopher. Most of Lenin’s critique of the ideas of his adversaries consists of calling them “bourgeois.” Lenin’s philosophy is merely a restatement of the philosophical ideas of Marx; to some extent it is not even up to the level of other Russian writers on Marxism.
Marxist theory or philosophy had no development in countries where there were Communist parties. Persons whom we call Marxians consider themselves merely interpreters of Marx; they never tried to change anything in Marx. However, there are contradictions in Marx. So it is possible to quote passages from his writings from all points of view. The influence of Marx on all authors and writers who have lived since Marx died has been considerable, even though it is not usually admitted that these authors were influenced by Marx.
Although Marxians considered themselves solely interpreters of Marx, one Marxian, one writer, added something and had a strong influence, not only on the small group of his followers, but also on other authors. Georges Sorel [1847–1922]—not to be confused with Albert Sorel [1842–1906]—an important historian, developed a philosophy in many respects different from the Marxian philosophy. And it influenced political action and philosophic thinking. Sorel was a timid bourgeois intellectual, an engineer. He retired to discuss these things with his friends at a bookshop owned by Charles Péguy [1873–1914], a revolutionary socialist. In the course of the years, Péguy changed his opinions and at the end of his life he was a very ardent Catholic author. Péguy had serious conflicts with his family. Péguy was remarkable for his intercourse with Sorel. Péguy was a man of action; he died in action in 1914 in the first weeks of the war.
Sorel belonged psychologically to the group of people who dream of action but never act; he didn’t fight. As a writer, however, Sorel was very aggressive. He praised cruelty and deplored the fact that cruelty is more and more disappearing from our life. In one of his books, Reflections on Violence, he considered it a manifestation of decay that Marxian parties, calling themselves revolutionary, had degenerated into parliamentary parties. Where is the revolution if you are in Parliament? He also didn’t like labor unions. He thought the labor unions should abandon the hopeless venture of seeking higher wage rates and should adopt, instead of this conservative pattern, the revolutionary process.
Sorel saw clearly the contradiction in the system of Marx who spoke of revolution on the one hand and then said, “The coming of socialism is inevitable, and you cannot accelerate its coming because socialism cannot come before the material productive forces have achieved all that is possible within the frame of the old society.” Sorel saw that this idea of inevitability was contradictory to the idea of revolution. This is the contradiction all socialists ask themselves about—Kautsky, for one. Sorel completely adopted the idea of revolution.
Sorel asked of the labor unions a new tactic, action directe—attack, destroy, sabotage. He considered these aggressive policies only preliminary to the great day when the unions would declare a “general strike.” That is the day when the unions will declare “Now we don’t work at all. We want to destroy the life of the nation completely.” General strike is only a synonym for the live revolution. The idea of action directe is called “syndicalism.”
Syndicalism can mean ownership of the industry by the workers. Socialists mean by this term ownership by the state and operation for the account of the people. Sorel wanted to attain this by revolution. He didn’t question the idea that history leads toward socialism. There is a kind of instinct that pushes men toward socialism, but Sorel accepted this as superstition, an inner urge that cannot be analyzed. For this reason his philosophy has been compared with that of Henri Bergson’s élan vital (myths, fairy stories, fables, legends). However, in the doctrine of Sorel, “myth” means something else—a statement which cannot be criticized by reason.
1. Socialism is an end.
2. The general strike is the great means.
Most of Sorel’s writings date from 1890 to 1910. They had an enormous influence on the world, not only on the revolutionary socialists, but also on the royalists, supporters of the restoration of the House of Orange, the “Action française,” and in other countries the “Action nationale.” But all these parties gradually became a little bit more “civilized” than Sorel thought they should be.
It was the idea of French Syndicalism that influenced the most important movement of the twentieth century. Lenin, Mussolini, and Hitler were all influenced by Sorel, by the idea of action, by the idea not to talk but to kill. Sorel’s influence on Mussolini and Lenin has not been questioned. For his influence on Nazism, see the book by Alfred Rosenberg2 titled The Myth of the 20th Century. The fundamental idea of racism was borrowed from Frenchmen. The only man who really contributed something to the Marxian idea was Sorel, along with a group of syndicalists—a comparatively small group composed exclusively of intellectuals and even of idle rich and intellectuals, like the “penthouse Bolshevists” of New York. They repeated again and again that only the workers have enough vigor and enough class consciousness in order to search out and to destroy the bourgeois system.
The center of Marxian activity shifted from Germany to France. The greatest portion of Marxian writings are in French. Sorel’s work was done in France. Outside of Russia, there are more Marxians in France than in any other country; there is, however, more discussion of communism in France than in Russia. The École Normale Supérieure in Paris was an important center of Marxian teachings. Lucien Herr [1864–1926], the librarian, had a great deal of influence. He was the father of French Marxism. As former students of École Normale Supérieure became more and more important, the school spread Marxism all over France.
By and large, the same condition prevailed in most European countries. When the universities seemed slow to accept Marxism, special schools were endowed to educate the rising generations in orthodox socialism. This was the goal of the London School of Economics, a Fabian institution founded by the Webbs. But it couldn’t avoid being invaded by persons of other ideas. For instance, [Friedrich A.] Hayek [1899–1992] taught for some years at the London School of Economics. This was the case in all countries—European countries had state universities. People generally ignored the fact that Marxians, not free traders, were appointed by the Tsar at the imperial universities in Russia. These professors were called legal, or better “loyal,” Marxians. When the Bolshevists came to power in Russia, it was not necessary to fire the professors.
Marx didn’t see any differences between the various parts of the world. One of his doctrines was that capitalism is one stage in the development of socialism. In this regard, there are some nations that are more backward than others. But capitalism was destroying the trade barriers and migration barriers that once prevented the unification of the world. Therefore, the differences in the evolution of the various countries with regard to their maturity toward socialism will disappear.
In the Communist Manifesto in 1848, Marx declared that capitalism was destroying all national peculiarities and unifying into one economic system all the countries of the world. The cheap prices of products were the means capitalism used to destroy nationalism. But in 1848, the average person didn’t know anything about Asia or Africa. Marx was even less informed than the average English businessman who knew something about business relations with China and India. The only attention Marx gave to this problem was his remark, later published by Vera Zasulich, to the effect that it might be possible for a country to skip the capitalist stage and proceed directly to socialism. Marx saw no distinction between various nations. Capitalism, feudalism, brings about progressive impoverishment everywhere. Everywhere there will be mature economies. And when the age of mature capitalism comes, the whole world will have reached socialism.
Marx lacked the ability to learn by observing political events and the political literature being published around him. For him practically nothing existed but the books of the classical economists, which he found in the library of the British Museum, and the hearings of the British Parliamentary Commissions. He didn’t even see what was going on in his own neighborhood. He didn’t see that many people were fighting, not for the interests of the proletariat, but for the principles of nationality.
Marx completely ignored this principle of nationality. The principle of nationality asked that every linguistic group form an independent state and that all the members of such a group should be recognized and unified. This was the principle which brought about the European conflicts, led to the complete destruction of the European system, and created the present-day chaos in Europe. The principle of nationality doesn’t take into account that there are large territories in which linguistic populations are mixed. Consequently there were struggles between the various linguistic groups which finally resulted in the situation we have today in Europe. I mention this because it is a principle of government which was unknown up to now.
According to this principle there is no such nation as India. It is possible that this principle of nationality will break India up into many independent states fighting one another. The Indian Parliament uses the English language. The members of the various states cannot communicate with one another, other than by employing the language of the government, a language which they have practically expelled from their country. But this situation will not last forever.
In 1848, when the Slavs of Europe met for a Panslavist Congress in Moscow, they had to speak with one another in German. But this didn’t prevent later developments in a different way.
Karl Marx and Engels didn’t like the nationalistic movement and never took notice of it. It didn’t fit into their plans or schemes. If, on account of the unfriendly remarks Marx and Engels made about various linguistic groups of Austria-Hungary and the Balkans, some authors, especially French authors, think Marx was a forerunner of National Socialism—Nazism—they are wrong. Marx said that what he wanted was to create a one-world state. And that was Lenin’s idea too.
By 1848 Marx had already assumed that socialism was just around the corner. Given such a theory, there was no reason to form a separate linguistic state. Such a state could only be very temporary. Marx simply assumed that the age of nationalities would come to an end, and that we were on the eve of an age in which there would no longer be differences between various types, classes, nations, linguistic groups, etc. Marx absolutely denied any differences among men. Men would all be of the same type. There was never any answer in Marx as to what language the people in his one-world state would use, or what the nationality of the dictator would be.
Marx was furious when someone said there were differences between men in the same nation, the same city, the same branch of business, just as all Marxists became furious when someone told them there were differences between Englishmen and Eskimos. According to Marx, the only difference was due to education. If an idiot and Dante had been educated in the same way, there would have been no difference between them. This idea influenced Marx’s followers, and it is still one of the guiding principles of American education. Why is not everybody equally intelligent? Many Marxians assume that in the future socialist commonwealth the average person will be equal in talents, gifts, intelligence, artistic attainments, to the greatest men of the past, such as Trotsky, Aristotle, Marx, and Goethe, although there will still be some more gifted people.
It never occurred to Marx that, in the best case, education can only transfer to the pupil what the teacher already knows. In the case of Marx, it wouldn’t have been enough for him to have been educated in a school by perfect Hegelian teachers because then everything he would have produced would have only been Hegelianism again. By educating people in the knowledge of the generation preceding motor cars, it wouldn’t have been possible to produce motor cars. Education can never bring about progress as such. That some people, thanks to their positions, inheritance, education, and so on, have the gift to go one step farther than preceding generations cannot be explained simply by education.
Similarly, it is impossible to explain great things and the great acts of some men simply by referring to their national affiliation. The problem is, why were these people different from their brothers and sisters? Marx simply assumed, without any reason, that we are now living in the age of internationalism and that all national traits will disappear. In the same way that he assumed that specialization would disappear, because machines can be operated by unskilled workers, he assumed there would no longer be any differences between various parts of the world and various nations. Every kind of conflict between nations was interpreted as the consequence of the machinations of the bourgeoisie. Why do Frenchmen and Germans fight? Why did they fight in 1870? Because the ruling classes of Prussia and the ruling classes of France wanted to fight. But this had nothing to do with the interests of nations.
In regard to his attitude toward war, Marx was, of course, influenced by the idea of the Manchester laissez-faire liberals. In using the term “Manchester liberalism” always as an insult, we tend to forget the essential statement in that famous declaration of the Manchester Congress where the term originated. It was said there that in the world of free trade there is no longer any reason for nations to fight one another. If there is free trade and every nation can enjoy the products of every other nation, the most important cause of war disappears. The princes are interested in increasing the territorial size of their princely province to get greater income and power, but nations as such are not interested, because it doesn’t make any difference under free trade. And in the absence of immigration barriers it doesn’t matter to the individual citizen whether his country is large or small. Therefore, according to the Manchester Liberals, war will disappear under popular democratic rule. The people will not then be in favor of war because they have nothing to win—they have only to pay and to die in the war.
It was this idea that was in the mind of President [Woodrow] Wilson [1856–1924] when he went to war against Germany. What President Wilson didn’t see was that all this about the uselessness of war is true only in a world when there is free trade between the nations. It is not true in a world of interventionism.
Sir Norman Angell [1872–1967] still argues in the same way. What did the individual Germans gain in 1870? This was almost true then, because there was comparatively free trade. But today the situation is different. Italy’s own policies made it impossible for Italians, in the world of interventionism, to get the raw materials they needed. It is not true in today’s interventionist world that the individual person does not gain something from war.
The League of Nations is one of the great failures in world history—and there have been many failures in world history. During the League’s 20 years the trade barriers had been more and more intensified. Tariffs became unimportant as trade barriers because embargoes were established.
Because the liberals said war was no longer economically advantageous because the people will not gain anything from it, therefore, a democratic nation will no longer be eager to fight wars. Marx assumed that this was true even in the interventionist world which was developing under his very eyes. This was one of the fundamental errors of Marxism. Marx was not a pacifist. He didn’t say war was bad. He only said—because the liberals said so—that war between nations had no importance or meaning at all. He said war—i.e., revolution, by which he meant civil war—was necessary. Nor was Friedrich Engels a pacifist; he studied military science day in and day out in order to prepare himself for the position he had assigned himself as commander-in-chief of all nations, as commander-in-chief for the proletarians of all countries united. Remember that he participated in fox hunting in a red coat, which he told Marx this was the best exercise for a future general.
Because of this idea of revolution—civil war, not international war—the Marxian International began to discuss peace. In 1864 Marx founded in London the First International. A group of persons who had very little to do with the people and the masses met together. There was a secretary for every country. The secretary for Italy was Friedrich Engels and many of the other countries were represented by persons who only knew the countries they represented as tourists. Arguments between the members disrupted the whole International. Finally it was moved to the United States and then fell apart in 1876.
The Second International was formed in Paris in 1869. But this Second International didn’t know what to deal with. The unions had arisen and the unions were opposed to free trade and free migration. Under such conditions, how could you find subjects to be discussed at an international congress? Then they decided to discuss peace and war, but only on a national level. They said they were all proletarians and they agreed they would never fight the wars of the bourgeoisie. The Germans included Engels and Karl Kautsky. There were some “bad” Frenchmen in the group who asked, “What do you mean when you say we can’t defend our own country? We don’t like the Hohenzollerns.” The French at this time made an agreement with the Russians and the Germans didn’t like that. Every few years there was such an international congress and each time the newspapers said it heralded the end of war. But these “nice fellows” didn’t discuss the real causes of friction, migration barriers, etc. The outbreak of World War I disrupted the International Congresses.
What Marx planned was a revolution. But what really happened was that he created a bureaucratic organization in the European countries which was, by and large, innocent because it lacked the power to execute its theories. Then there developed in the East a Communist organization that unfortunately has the power to execute people and to threaten the whole world. And all this was started in the Reading Room of the British Museum in London by a man, who was not in this regard a man of action, but who was able to bring about violent action. It was the timid bourgeois characters, Karl Marx and Georges Sorel, who created all this mischief. Most of the violent ideas of our times have come from men who themselves wouldn’t have been able to resist any aggression.
Wilson accepted the doctrine of the Manchester Liberals, namely that so far as war was concerned, democracies don’t like to fight wars; democracies fight only wars of defense because the individual citizen cannot expect any improvement of his conditions from war, not even if his country is victorious. But Wilson didn’t see that this was true only in a world of free trade. He didn’t see that this was quite different already in the age in which he lived, which was an age of interventionism. He didn’t realize that an enormous change in economic policies had deprived this theory of the Manchester Liberals of its practicability. Trade barriers were comparatively innocent in 1914. But they were very much worsened during the years of the League of Nations. While free traders were meeting with the League in Geneva and talking about reducing trade barriers, people at home were increasing them. In 1933, there was a meeting in London to bring about cooperation among the nations. And precisely at this time the richest country, the United States, nullified the whole thing with monetary and financial regulations. After this the whole apparatus was absolutely useless.
Ricardo’s theory of comparative advantage is that it is to the advantage to a nation to have free trade even if all other nations cling to their trade barriers. If the United States alone today adopted free trade there would be certain changes. But if all other countries clung to protectionism with import barriers, it would not be possible for the United States to buy more goods from other countries.
There are isolationists not only in this country; there are also isolationists in other countries. Imports must be paid for by exports and exports have no other purpose than to pay for imports. Thus the establishment of free trade by the richest and most powerful nation only would not change the situation for the Italians, for instance, if they retained their trade barriers. It would not make any difference for other countries either. It is advantageous for any country to have free trade even if all other countries do not, but the problem is to remove the barriers of the other countries.
The term “socialism,” when it was new in the second part of the 1830s, meant exactly the same as “communism”—i.e., the nationalization of the means of production. “Communism” was the more popular term in the beginning. Slowly the term “communism” fell into oblivion and the term “socialism” came into use almost exclusively.
Socialist parties, social democratic parties, were formed and their fundamental dogma was the Communist Manifesto. In 1918, Lenin needed a new term to distinguish his group of socialists from those groups which he called “social traitors.” So he gave to the term “communism” a new meaning; he used it to refer, not to the final goal of socialism and communism, but only to the tactical means for attaining them. Until Stalin, communist meant simply a better method—the revolutionary method—as against the peaceful, socialist, method of the “socialist traitors.” At the end of the 1920s, without great success, Stalin in the Third International tried to give a different meaning to the term “communism.” However, Russia is still called the Union of the Soviet Socialist Republics (USSR).
In a letter, Karl Marx distinguished between two stages of socialism—the lower preliminary stage and the higher stage. But Marx didn’t give different names to these two stages. At the higher stage, he said, there will be such an abundance of everything that it will be possible to establish the principle “to everybody according to his needs.” Because foreign critics noticed differences in the standards of living of various members of the Russian Soviets, Stalin made a distinction. At the end of the 1920s he declared that the lower stage was “socialism” and the higher stage was “communism.” The difference was that at the lower socialist stage there was inequality in the rations of the various members of the Russian Soviets; equality will be attained only in the later, communist, stage.

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