 What I'd like to do in the lecture today will be somewhat different, fortunately, from the Praxeology lecture that I gave on Monday. I say, fortunately, it doesn't follow, but you'll like this lecture. That could be equally bad, but even worse. What I want to do in this lecture is first discuss a feature of capitalism, of the free market, that Mises stressed especially, and he thought this feature was important not only in explaining how the free market operated, but also as a justification for the market. Then I want to go on to consider various types of interference with the free market measures, such as price and wage control, and the way in which Mises criticized those. Since I find it difficult to stay away from philosophy for long, I'll say a few things about the role of value judgments in economics and how particularly Mises approach here. Now, one of the main criticisms of the free market that has been advanced by socialists, I'm sure you've heard this, is that in the capitalist system, a few wealthy business people, few capitalist bankers and others, control what's being produced. And the claim of so-called democratic socialist is in a system of democratic socialism, it would be the people as a whole who decided what would be produced. Just as in a democracy, it's the people who elect the political leaders in an economic democracy, it would be the people who decide what's being produced. So Mises had a very ingenious way of responding to this argument that was also, but not only a response to the argument, it was very important as an explanatory feature of how the free market works. What he said was in capitalism, the consumers, the people who buy the consumer goods, control what is produced. Now, why is that? Why is it that consumers are controlling what's produced? Well, business owners are trying to make money, otherwise they wouldn't be in business. That's their purpose. If you own an operated business, you want to make a profit. So the way you do that is to provide consumers with what they want. And Mises speaks in this respect of what he calls the dollar votes of consumery. He says that when you spend money on a product, you're in effect voting for that product, you're voting that that product be produced, and he calls this system one of consumer sovereignty. So you see how in using these phrases of consumer sovereignty and dollar votes, he's really responding to this criticism that I mentioned that the socialists raise against capitalism. They said that under capitalism, it's the rich businessmen who decide what's being produced. And Mises said, no, it isn't that at all. It's the consumers who decide what's being produced. Because the business people are trying to make a profit, so they want to produce what the consumers favor what they want. Now, there's an object. There's objections that could be raised to Mises's argument. One of them was raised by the communist economist, Maurice Daub, DOBB, who was taught at Cambridge University for many years. He was a, there were some suggestions, some hints he may have been involved in the famous Cambridge spy rings, but I don't think that's been proved. But DOBB in one book said, well, Mises is talking about dollar votes, but don't rich people have a lot more dollars than other people? So can't they really still control what's being produced? It reminds me of the story once about Abraham Lincoln. There was a meeting of his cabinet in which Lincoln made a certain proposal and then he put it to a vote of the cabinet. Everybody in the cabinet was against the proposal itself, but he was in favor. So he, Lincoln said, well, the vote is one in favor, seven against the guys have it. So he was the one who decided because his vote counted for more. So you see this criticism is, well, don't rich people have more votes? So they can, if Mises is talking about the consumer sovereignty in dollar votes, isn't it the rich people are still controlling what's being produced? But Mises answered this, that although individual rich people have more votes than individual poor person, the masses as a whole still have the most votes. And he calls capitalists and mass production for the masses. And even more important, I think, is another feature that of the consumer sovereignty that Mises stressed in a political democracy, especially one where you have a majority vote principle. One candidate wins and other people lose. Sometimes in proportional voting, you can have more than one winner. People are getting votes in proportion to the number of votes their political party receives, but still there are losers. Some people are outvoted. But under capitalism, as long as a small number of people want a certain product, the products will be produced even if most people don't want it. There are products that appeal to only very specialized markets. And as long as it's profitable to produce those, they will be produced even if the most people wouldn't want the product. So Mises is then saying, not only do we have an effect to democracy of the market that guides production, but this is better than political democracy. Because in political democracy, you have just some people win, others lose. But in the democracy of the market and the consumer sovereignty, practically everyone will get what he wants produced because it's in the interest of producers to give them what they want. Now Murray Rothbard certainly accepted the basic idea that I've been explaining that Mises gave. In fact, if you read Manny Kahn's state, he explains in detail how the choice of the consumer's guide production. But he didn't like the phrase consumer sovereignty. And his objection to the phrase was this is a sovereignty is a political concept. It's usually applied to government. So the sovereign has the power to tell people what to do the sovereign. But this isn't the case in the market. In supposing the owner of a business doesn't want doesn't care about the consumers. He said, I'm going to produce this my way. I don't I have a restaurant. I don't care if people don't like the way I cook food. You're going to get the people here going to eat it my way or not at all. He won't be put in jail for doing that. But so whereas under if it were a political matter, he could be ordered by the government to do that. So it isn't the consumers could say to this person, we order you to produce what we want. It's just rather that if he doesn't, he'll lose money. So Rothbard didn't like the phrase consumer sovereignty. Incidentally, this phrase consumer sovereignty comes from the another free market economist, W.H. Hutt William H. Hutt, who was a British economist but taught in South Africa for most of his life. And he used the phrase consumer sovereignty in his book. Economists and the public, I think, came out in around 1936. And also in some articles in South Africa, Journal of Economics. Now, I should say Hutt, if somebody would be much more vulnerable to Rothbard's criticism that means it is because what Hutt said was really people who don't produce what consumers want are really doing something bad. They should be forced to do so. For example, he thought that supposing, let's say you were very talented people, obviously you all are because you're attending the Mises University, but supposing you could earn some very high salary, let's say you could produce, say you work in as lawyers and you make a whole lot of money. This is what consumers want. So suppose you said, though, I don't want to do that. I'd rather just not make much money and be a beach bum. That's not a politically incorrect term. I don't keep up with these things. But supposing somebody said, well, I just don't want to bother doing what the consumers want. Hutt thought you could really be forced to do that. He actually gave an example of an artist who didn't want to produce very many pictures, didn't want to paint many pictures. He thought this would rain because he thought that, say, the artist thought that if he didn't paint very many pictures, he could get higher prices for the ones he did paint. Hutt said that's withholding supply, so he shouldn't be allowed to do that, but Mises doesn't say anything like that. Mises is just emphasizing that in the interest of the producers to satisfy consumers because that's how they make money. If they don't, then the consumers will purchase products from other people and they'll tend to lose money, the ones who don't produce what consumers want. So money will flow from the ones who don't give the consumers what they want to the ones who do. Mises goes so far as to say, and this is one point that Rothbard differed with it, is that Mises goes so far as to say that in effect, the consumers are the real owners of the means of production. And in general, Mises was not sympathetic to Lockean or natural rights views of property ownership. Where Rothbard was, where Rothbard said people acquire property by mixing their labor with previously unowned land or other natural resources. Mises didn't like that. He didn't think natural law arguments had any basis. So that was one difference of Mises and Rothbard. So as I've explained so far, we can understand how those who produce consumer goods will respond to consumer demand. They'll be trying to produce what the consumers want. But as you know, not all goods on the market are consumer goods. What about producers goods? What about the other, say, some goods are not bought by consumers at all? You don't go down to the store and say, buy a ton of steel, unless it's a very unusual store. So what about these other goods? And this you will already understand in lectures that have been previously given on imputation, we can understand how the price, how the demand by consumers really will determine all of production. This operates in this fashion. Those who produce consumer goods will demand first level production goods. Let's say they'll want goods that will enable them to produce the consumer's goods and they'll try to get these the least cost that they can. So the producers of these first level production goods will be trying to meet the demands of those who produce consumers good just in the same way we have at the initial level, the ones who sell consumers goods, they're trying to satisfy the consumers, the ones who have the first level production goods are trying to satisfy those who produce consumer goods. And we can keep going on this till however many stages of production, there are the producers of the second level production goods will try to meet the demands of those who produce the first level production goods. So you see it's really consumer demand that determines all production because the consumers are deciding which consumer goods they want. And then the consumer goods will produce the ones who sell the consumer goods will then demand production goods in accord with the demands of the consumer goods and this will keep going on to higher and higher stages. Now, one mistake to avoid here in this notion of imputation where you have the you get once you get the demand for the consumer goods that will enable you to get the demand and prices for all the other goods. One mistake to avoid is to think that this process is automatic. Joseph Schumpeter was a great economist from Austria, although not a member of the Austrian school, used this point about imputation to criticize Mises' socialist calculation argument. What he said was, look, once you get prices of consumer goods and we could imagine a socialist economy doing that and Mises accepted that, then you could get by imputation all the price of all the production goods. So there wouldn't be any problem of calculation. But what we have to realize to see the fallacy here is that this process isn't automatic. The adjustment of the supply to demand at each level is something that undertaken by entrepreneurs and they display their entrepreneurial judgment in anticipating what the demand is. It isn't it isn't something that just happens automatically. Now, so far so we have then this notion that Mises has defended. It's really in the capitalist system. It's really the consumers who determine what's being produced. It's really a system of democracy that's much better than political democracy. But some people, whether or not they accept that or they would say, even if that argument is right, there's still a problem that in the system, as I've explained it, the key factor that enables the system to work, the motivating factor, is that the business people are trying to make as much money as they can. Because of that, that's why they they adjust production to the demand that the consumers want. But there are some people who say people shouldn't be motivated exclusively by trying to make money. This is not a good thing. Instead, people should act by moral standards. For example, they should always pay workers a living wage, avoid charging high prices for necessity. The people should follow certain moral standards in their economic decisions, rather than be motivated by the desire to attain money. Remember, Karl Marx in Das Kapital makes fun of the capitalists who are motivated by trying to get as much money as possible. And he says, accumulate, accumulate. That is Moses and the prophets. So by Moses and prophets, he's referring to the Bible. So he's saying, well, the capitalists just believe in accumulating money as religion and suggestion is this isn't very good. Of course, I ran would probably say it is very good. And people who deny it are bad, but that isn't what the Mises responded. If let's suppose people did operate according to the moral standards, then such as always paying a living wage and avoiding charging high prices for necessity, if they did that, production wouldn't be responding to consumer demands because the producers would be following certain they would be producing according to these moral requirements. So one way to challenge that would be just to say, try to come up with, say, are they really moral requirements and try to argue on the basis of ethics, moral philosophy. But Mises had a very different type of criticism of this objection. The objection is, look, according to you, this is a capitalism in capitalism. The producers are trying to satisfy consumers. So we have a system of economic democracy. But the motivation is businessmen are trying to make as much money as they can. That isn't a good idea. People shouldn't do that. So Mises, and we'll see this also later in the lecture, tries to avoid appeals to moral judgments and we'll see why does that later. But so what he says is not that these critics have the wrong view of morality. But he says people who say that businesses shouldn't be seek profit don't have an alternative criterion on what businesses should do. They just have certain vague ethical requirements as they can see them. They don't really say, this is what the businesses should do. So if they don't, if businesses don't charge market prices, supposing, say, there is some necessity, say, they think bread is a very important thing for people to have, so they charge very low prices for that. Then there'll be a shortage of bread. People will demand more bread than is produced at that price. And the system, the economic system won't work. So Mises, unless you can come up with some way of determining what the prices are, you won't have economic calculation. You won't be able to know what good should be priced at what price. When he says this, he's not making a value judgment. He's not saying what's good or bad, although pretty obviously he thought going against the market was bad from his point of view. But he's just pointing out what's required for economic calculation. We have to have some way of setting prices and under capitalism we do. And we have the motivation that people are trying to make as much money as possible and under this alternative where we say or people say the people shouldn't be motivated by making as much money as possible. We don't have an alternative criteria. You can see this pretty directly because if you say people shouldn't be motivated by making, trying to make as much money as they can, that's just saying what they shouldn't be motivated by doesn't say how they should act. It isn't giving any specifications on how they should act. So he wouldn't be able to determine prices just by saying they shouldn't be motivated by making money. Now, this leads to the more general topic of interventionism. And one way the government can act is trying to supplant the free market completely. Say under socialism, we have the government trying to just take over production of goods and services. But there's another way the government can interfere with the free market other than just getting rid of it all together. It can pass laws that restrict market transactions in certain ways such as price control, which would include minimum wage laws and rent control and tariffs. These if you have these measures, they don't get rid of the free market. We still have private businesses that are making their pricing decisions in response to consumer demands. But the process is being interfered with by government regulations. So Mises as criticizes various types of interventionism, but he follows a characteristic pattern of argument in all of these. The pattern is that we first take whatever the goal is the interventionist wants, at least the ostensible goal, what he says he wants, then we show that the intervention won't achieve this, that you won't get what you want. If you do this in what's important to see in this pattern is this is a value free method of arguing. It isn't that Mises is saying, I don't like intervention or this is bad. It's that he says you won't get what you want. That isn't a value judgment, whereby value judgment would mean the expression of certain preferences about what should or shouldn't be the case. It's just a factual claim saying this is what's going to happen. If you do such and such. Now, let's take price control as an example. Supposing the government thinks that the price of milk is too high. At the high price, the poor find it hard to buy milk. They don't have enough. They don't have enough money for the milk, so the government isn't going to be cowed by that. That was supposed to laugh at that point. The government then says, we're going to impose a maximum price on milk. So then it'll be easier for the poor to buy milk. So one way you could criticize that is if somebody said, well, I don't think that's appropriate or it's wrong of the government to do that. That's interfering with the private property rights of the milk producers. And that's ethically wrong to do that. That would if you criticize price control in that way, that would be an appeal to a value judgment. But that isn't what Mises does. He just wants to say, well, suppose they do the government does that, what's going to happen is making asking a strictly factual question. He said, at the lower price, more milk will be demanded by consumers. But suppliers won't supply more because at the lower price at the amount they supply and there will be at a certain price will depend on the particular supply curve. And we wouldn't expect that if the price gets lower, they're going to supply more, quite the contrary. And marginal sellers, those who are making the least return will leave the business of selling milk. They'll say, with these new low prices, it's not going to be profitable for us to produce milk anymore, so we're getting out of the milk supply business. Now, you notice here that Mises is assuming that when he says the marginal sellers are going to leave the business, he's assuming that people in the business aren't all earning the same return. If that were the case, then the low price would make everybody leave. But he said, no, just the marginal sellers will leave. So it's only in equilibrium, which we never really attain that every all the businesses are in the same return. So there's some businesses that are not do it. They're just barely making a profit at existing prices. So then the new governmentally imposed lower prices will make them leave. So what has happened here? Well, the suppliers aren't supplying more. And in fact, some milk suppliers have left the business altogether. So there's less milk available. And this wasn't what the price control was supposed to do. Because remember the purpose of the price control was to make milk available to poor people at a lower price. But the result is you have less milk available than before. So here what Mises is saying is that the measure, the price control has failed to achieve its purpose. It's failed from the point of view of those who favor it. And when he says that he's not making a value judgment, this is a strictly factual claim. This is what's going to happen if price controls are imposed. And we can see exactly the same process with rent control. Just go through the same stuff. Under rent control, the purpose is to make more housing available to the poor. But at the rent control price, more housing is demanded that is available. It's exactly, you see exactly parallel arguments, the one I gave on the price control for milk. So people at lower rents, more people will want to rent apartments or houses than before. But the landlords won't be willing to supply more. On the contrary, those who aren't going won't be making money under the new rent control will withdraw housing from the market and they'll avoid making repairs. So the result will be that the housing situation for the poor is worse. So again, the result is the aims of rent control aren't achieved. It's amazing how many sometimes you see people falling for this fallacy. There was a law professor, Margaret Raiden, who was quite influential, who had had a suggestion that she thought that people who've lived in an apartment for a long time, number of years should get property rights in the apartment so that the landlord would be unable to kick them out. And she didn't realize that if that if such a law were passed, then it would be in the interest of the landlords to make sure they got out before they set number of years by which the tenants could acquire ownership. So you have the same pattern where somebody proposes a law. It's supposed to have certainly goals, but the measure doesn't attain what the goal suggested as it has just the reverse. So this again is the characteristic pattern that Mises uses. Now, I'll just go through another case, which is very important. I'm from Los Angeles and we just had in Los Angeles, there's new minimum wage laws. These are very popular and these are supposed to raise wages for workers. They're not intended to harm workers, but a minimum wage is a price floor saying wages can't go below a certain point. So if the minimum wage is above the market wage, then more workers will want to work at the minimum wage and employers are willing to hire. So workers who aren't worth the minimum wage employer will either be fired or not hired. So again, the intervention fails to achieve the goal. And we can see this also with tariffs, where tariff is a tax on goods that are coming into the country, supposed to help domestic producers. But a result of having a tariff is to make a product more costly for consumers. And by decreasing competition, they enable cartels to be produced. So one of the the people who favor tariffs say, well, this will help, say, American prosperity if we have tariffs, but the result will be we'll have higher prices for consumers more cartels, less competition. So again, the results of the interventions measure is counter to what the advocates support. Now, what happens when the intervention fails? Well, one thing that could happen is, say, the government, people in government have read their Mises or Henry has it says they say, oh, we made a terrible mistake. We're not going to we're going to repeal the measure. But that rarely happens. They instead very likely say, we have to have more intervention to cure the problems caused by the first intervention. For example, to take the case I started with, we have the milk suppliers have compulsory lower prices for milk. So suppose the milk sellers say, well, we can't make a profit under these new low prices, then the government might respond by imposing price controls on the suppliers of the milk sellers to lower their costs. We can see if they do that, these interventions will also fail. And supposing the government keeps doing this, they just say, well, this intervention didn't work, so we'll try another one. If they do that, then it'll lead to total government control of the economy because you'll have price controls for everything and you won't have any free market prices. This actually took place in Germany during World War One. You had a so-called Hindenburg plan, which was named for the general Paul von Hindenburg. Remember, he was the general who was very long lasting. He had fought in the Franco-Prussian War of 1870, but he was still around in. He was the one who appointed Hitler Chancellor of Germany in January 1933. So he lasted a very long time. He did a lot of damage over a long period. But under this Hindenburg plan, it was really one of total control of the German economy by the government by having price and wage regulations of everything. And this was a method of having government take over the economy just by price and wage control. It was also used in Britain during World War One and World War Two. And in this connection, Mises makes one of his lectures, makes it somewhat rather startling claim that socialism didn't come to England after 1945. Remember 1945, the Labour Party, the British Socialist Party under Clement Antley replaced Winston Churchill as Prime Minister. Churchill was the Conservative Prime Minister. But Mises said it was Churchill who brought socialism to government, not the post-war Labour government, because it was under Churchill that price control was imposed. And this is rather surprising because Churchill had praised Hayek's road to serfdom. He was a reader of Garrett Garrett, who was a great American supporter of free enterprise. But Mises said, well, whatever he thought, whatever his professor believed, he was the one who brought socialism to England. And this type of control by the government where the government sets all prices and wages is a type of socialism. You have private property that people, the businesses are still owned in some sense by private people or their private corporations, but the government is telling them what to do at each stage. And this was characteristic of the Nazi system that Mises considers this a type of socialism. Socialism is not just a system where the government directly owns the means of production, but can be one where the government controls production, even though the forms of private property are kept in place. This, when Mises points this out, he's making an important counter to the Marxist, because under the Marxist interpretation of Nazism, for example, you find in a book by Frantz Neumann Behemoth, it was published by Oxford University Press, the claim is that under the Nazi system, because the big businesses were in control, Hitler was in some sense a puppet of the big business people. But actually, as Mises points out, it was the government that ran things. The Marxists were wrong. It wasn't the businessmen in control because they weren't the ones who were setting the prices and wages. The government was telling them what to do. Now, there's another, and this will be, I think, the last type of intervention I want to consider is taxation. Many people favor very high taxes on the rich. You'll find, for example, this book that came out by Thomas Piketty, the French economist, he thinks it's really terrible that some people earn much more than others. Very wealthy people have hundreds of times more in salary than poor people. The government should really do something about that by having very heavy taxes on the rich. So Mises, again, doesn't make a value judgment say, well, I don't think there's anything wrong with inequality. Instead, he says, what happens if the government does this? Well, if you have such taxes, it'll make it very difficult for the rich to save and build up accumulations of capital. But if you have large accumulations of capital, this raises workers' productivity. So this will make wages rise. So if you have taxes on the rich, this hurts the poor. It's supposed to say, well, you're supposed to say, well, you're having these taxes because they supposed to make incomes more equal. But if you have them, they'll worsen the position of the poor because it's through capital accumulation that the poor get more money because wages on the free market are determined by the marginal productivity of labor. And if you have an increase in capital, this will enable the marginal productivity of labor to rise. Again, this is, I think, perhaps the big point I'd like you to take away from this lecture if you just remember one thing that's more than I would remember, oops, so much. Well, that's water under the floor now. OK, so remember, Mises here is not saying, I don't like taxes on the rich. You're claiming these taxes are more than a ban. He's not making a value judgment. He's saying, here's the consequence of high taxation. So this is a strictly scientific value free claim. Now, you might think, well, it's value free, but it sounds like there's a trick involved here because wouldn't almost everybody think that something that hurts the poor is to that extent ban. So is the judgment really value free? Something that's supposed to say, well, socialist calculation is impossible. So if you have a socialist economy that's going to lead to chaos, is that really a value free judgment? I mean, who likes chaos? But it is a value free judgment, something like a doctor's claim smoking causes lung cancer, which is value free, even though probably nobody wants lung cancer. Now, just end then by reminding you of a story of the man who read so much about how bad smoking is for your health that he gave up reading. OK, thanks very much.