Credit Expansion, Economic Inequality, and Stagnant Wages

Capital in the form of credit is normally and, certainly, properly, extended out of previously accumulated savings. In sharpest contrast, credit expansion is the creation of new and additional money out of thin air, which money is then lent to business firms and individuals as though it were a supply of new and additional saved up capital funds. Its existence serves to reduce interest rates and to enable loans to be made and debts to be incurred which otherwise would not have been made or incurred. Always and everywhere, to the extent that private banks participate in the process of credit expansion, they do so with the sanction and generally with the active encouragement of the government.

Economists, above all Ludwig von Mises, have shown how credit expansion is responsible for the boom-bust business cycle and how its existence depends on deliberate government policy. Nevertheless, public opinion believes that the business cycle is an inherent feature of capitalism and that the role of government is not that of causing the phenomenon but of combating it. Indeed, as Mises observed, “Nothing harmed the cause of liberalism [capitalism] more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy.”

The truth is that credit expansion is responsible not only for the boom-bust cycle but also for another major negative phenomenon for which public opinion mistakenly blames capitalism. Namely, sharply increased economic inequality, in which the wealthier strata of the population appear to increase their wealth dramatically relative to the rest of the population and for no good reason.

It is not accidental that the two leading periods of credit expansion in history—the 1920s and the period since the mid 1990s—have been characterized by a major increase in economic inequality. Both in the 1920s and in the more recent period, a major cause of the increased economic inequality is that the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.

Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices. Since the stocks are owned mainly by wealthy people, they are the main beneficiaries of the process. The more substantial and the more prolonged the credit expansion is, the larger are the gains enjoyed by wealthy people more than anyone else.

The new and additional funds injected into the economic system also soon show up in an additional demand for capital goods, such as business inventories and plant and equipment, and in an additional demand for consumers’ durable goods, such as houses and automobiles. The purchase of these latter goods, like the capital goods purchased by business firms, depends largely on credit and is encouraged by lower interest rates. It is also fed by the capital gains being reaped by wealthy individuals, which results in an especially pronounced increase in the demand for luxury housing and for luxury goods in general.

The additional demand for capital goods and consumers’ durable goods serves to increase business sales revenues and thus business profits across a wide spectrum of the economic system. Credit expansion increases profits in the economic system because the expenditure of the new and additional money in buying capital goods and labor increases the sales revenues of business firms immediately, while it increases the costs they must deduct from those sales revenues only with a time lag. This is also true to an extent of inflation that enters the economic system by means of its creators simply spending the new and additional money rather than lending it out—“simple inflation,” as Mises calls it. What is present in both kinds of inflation—credit expansion and simple inflation—is the fact that sales revenues rise as soon as new and additional money is spent, but the costs deducted from the sales revenues of any given year largely reflect outlays of money made in previous years. In those previous years the quantity of money and volume of spending of virtually all types was smaller, including the spending that shows up in the present year as costs in business income statements.

Credit expansion boosts profits more than does simple inflation because the reduction in interest rates it brings about serves to increase the time lag between the making of expenditures for capital goods and labor and their subsequent appearance as costs in business income statements. The low interest rates encourage the purchase of such things as durable machinery and the undertaking of construction projects. The kind of increase that this must bring about in economy-wide profits can be seen in the following examples.

Thus in one case, imagine that a business firm uses newly created money that has come into its hands to increase its newspaper advertising, say. Its additional expenditure will be equivalent additional sales revenue to the newspaper. It will also most likely be an equivalent immediate additional cost to it—a cost that it must deduct from its sales revenues in its very next income statement. Thus, in the same accounting period that the newspaper records additional sales revenues equal to the firm’s additional expenditure, the firm itself must record an equal additional cost of production to deduct from its own sales revenues. Obviously, in this case there is no increase in the economy-wide aggregate amount of profit. This is because economy-wide, aggregate sales revenues and economy-wide aggregate costs have both increased to the same extent.

But now imagine that the firm spends the same amount of money in buying durable machinery that will be depreciated over a ten-year period. Once again, a seller, this time the seller of the machinery, will immediately have additional sales revenues equal to our firm’s additional expenditure. But in this case, our firm will certainly not have an equally large additional cost of production to report in its next income statement. If its expenditure for the machinery was $1 million, say, then while the seller has $1 million of additional sales revenues in his next annual income statement, our firm will probably have merely $100 thousand of additional costs to report in its next annual income statement. This is because the purchase price of the machine is not charged off all at once, but only gradually, over its depreciable life. The implication of this example is that in the current year there will be an addition of $900,000 to economy-wide, aggregate profits. If our firm’s $1 million were part of an investment in the construction of a building with a forty-year depreciable life, the implied addition to economy-wide, aggregate profits would be even greater.

Such boosts to profits go hand in glove with the rise in common-stock prices and greatly reinforce them. Of course, once credit expansion comes to an end, the stimulus it gave to profits and to the stock market both disappear and at that point profits plunge and capital gains turn into capital losses. And at that point, the enemies of capitalism turn to attacking capitalism for causing depressions.

Now as the new and additional money created in credit expansion works its way through the economic system, one would expect the demand for labor and thus wage rates also to rise. This certainly does tend to happen and in the 1920s wages increased substantially in terms both of money and real buying power. They simply did not increase to nearly the same extent as the incomes of the wealthier strata of the population, nor, of course, to the extent that business profits increased.

In addition to the special stimulus given to profits, a second reason for the failure of wages to keep pace with the rise in profits, is that the encouragement given by credit expansion to the purchase of durable capital goods, particularly plant and equipment, tends to take place at the expense of funds that otherwise would be devoted to the purchase of labor services. As a result, the rise in wages is retarded at the same time that profits sharply advance. For this reason too it does not keep pace with the rise in profits.

Despite any appearances to the contrary, the rise in real wages in the 1920s was not the result of credit expansion but of rising production. Credit expansion actually operated to retard the rise in production insofar as it caused the wasteful investment of capital, i.e., what Mises calls malinvestment.

The rise in production is what prevented the prices of goods and services from rising as rapidly as credit expansion raised wage rates in terms of money. The rise in production, in turn, was based on a high degree of availability of capital funds provided by actual savings, as opposed to credit expansion, together with rapid scientific and technological progress. It was this that increased real wages, i.e., the goods and services that wage earners could actually buy with their wages.

In contrast to the experience of the 1920s, in the two great recent credit expansions, i.e., the dot.com bubble of 1995-2001 and its successor the presently collapsing housing bubble that began not long thereafter, there has been very little, if any, rise in real wages. Most commentators appear to attribute this to nothing more than the unrestrained greed of businessmen and capitalists. They apparently go on the theory that if there is anything in the economic system that breathes or moves other than at the command of the government, or other than with the active supervision and control of the government, it is proof that we live in an era of “laissez-faire.” For example, in The New York Times of December 30, 2007, in an article titled “The Free Market: A False Idol After All?,” Times columnist Peter Goodman writes:

For more than a quarter-century, the dominant idea guiding economic policy in the United States and much of the globe has been that the market is unfailingly wise. So wise that the proper role for government is to steer clear and not mess with the gusher of wealth that will flow, trickling down to the [sic] every level of society, if only the market is left to do its magic.

That notion has carried the day as industries have been unshackled from regulation, and as taxes have been rolled back, along with the oversight powers of government.

This alleged laissez-faire environment, such writers pretend, has enabled businessmen and capitalists shamelessly to enrich themselves at the expense of increasingly impoverished wage earners, to whom nothing any longer even “trickles down.” Increased free trade and “globalization,” of course, are attacked as part of the process and as greatly contributing to the stagnation or outright decline in real wages.

In sharpest contrast to such blather, in the real world there are innumerable rules and regulations enacted by the Federal Government to control virtually every aspect of economic activity. They are contained in the more than 70,000 pages of The Federal Register. The overwhelming mass of government interference described therein, and in its counterparts at the state and local level, is a glaring refutation of claims about the existence of any kind of laissez faire in the present-day world. The very description of such interference, in tens of thousands of pages of official text, is a refutation of such size and literal weight as to render any claims about laissez faire or insufficient government controls or regulations utterly nonsensical.

This truly massive body of material also suggests that the actual explanation of the stagnation in real wages is precisely an ever growing burden of government intervention in the economic system. The intervention is in the form of policies that undermine genuine saving and in numerous other ways undermine capital accumulation and the rise in the productivity of labor. Personal and corporate income taxes, the inheritance tax, the capital gains tax, and government budget deficits—all entail the taking away of funds that if left in the hands of their owners would have been heavily spent, indeed, overwhelmingly spent, in the purchase of capital goods and labor services. Instead, those funds are diverted into financing the consumption of the government and those to whom the government gives money.

Inflation and credit expansion greatly exacerbate this diversion of funds, because their effect is artificially to increase the incomes subject to these taxes and to thus to deprive business firms of the funds required to replace assets at prices made higher by the same process that increases their taxable incomes. The progressive aspect of income and inheritance taxes also worsens their effects, because incomes tend to be saved and invested the more heavily the larger they are; at the same time, substantial inheritances are more likely to be retained in the form of accumulated savings and capital than are modest inheritances.

Because of the reduced demand for labor that results from the taxation of funds that would otherwise have been used in employing labor and in buying capital goods, wages are substantially less than they otherwise would have been. At the same time, the buying power of those reduced wages is also sharply reduced in comparison with what it would otherwise have been.

It is worth pointing out that totally apart from the effect of social security in undermining the incentive to save, the sheer rise in tax rates since 1965 to pay for the system has taken away fully eight additional percentage points of the income of every wage earner whose earnings are equal to or less than the amount subject to such taxation. In 1965 the combined social security tax on wage earners and their employers was 7.25 percent, which applied to a maximum annual income of $4800. Today, the combined rate is 15.3 percent, which includes 2.9 percent for Medicare. The 15.3 percent rate currently, i.e., in 2008, applies to all wages and salaries up to a maximum of $102,000 per year. The effect of these major increases both in social security tax rates and in the amount of income
subject to them has been to reduce the take-home wages of many workers by considerably more than 8 percent.

The social security contribution of employers is a loss to wage earners, because it is a cost of employment no different than the payment of take-home wages. Financially, it is a matter of indifference to employers whether they pay this sum to the government or to their employees. The cost to them is the same. It is money that the employees could and would have had, if the government had not taken it from the employers.

The same is true of all other costs borne by employers on behalf of their workers, whether it is health insurance, day care, family leave, or whatever. The costs in question are all costs of employment, which, in the absence of such government interference, the wage earners could and would have had in their own pockets. Compelling employers to pay the costs of such things is at the expense of the workers’ take-home wages. The more such costs are imposed, the lower are take-home wages in comparison with what they otherwise would have been. The increase in such costs over time has correspondingly held down any rise in take-home wages.

Government intervention, as I’ve said, not only holds down the demand for labor and thus wages, particularly take-home wages, but it also reduces the buying power of wages. This is because the supply of capital goods is less, thanks to the diversion of funds from their purchase. The absence of these capital goods prevents the productivity of labor from being increased as much as it otherwise would have been. This in turn holds down the production both of consumers’ goods and of further capital goods. The consequence of a lesser supply of consumers’ goods is prices of consumers’ goods that are higher than they otherwise would have been and thus a buying power of wages that is correspondingly lower than it otherwise would have been.

The consequent absence of further capital goods compounds the negative effect on production, in a process that can be repeated over and over again, with each passing year. What this means is that because fewer capital goods in the form of factories and machines are available this year, the ability to produce capital goods in the form of factories and machines for the following year is reduced, because capital goods in the form of factories and machines are the means of producing further capital goods in the form of factories and machines no less than they are of producing consumers’ goods.

The buying power of wages is also reduced by all of the other laws and regulations that hold down the production and supply of goods in general and thus keep up prices. And again, there is a compounding effect. Environmental legislation deserves an especially prominent place in any list of such laws and regulations. Already, because of the restrictions it has imposed on the production of oil, coal, natural gas, and atomic power, it has served to raise the price of energy to unprecedented levels and to deprive many wage earners of the ability to buy gasoline for their cars or trucks and heating oil for their homes. To the extent that wage earners are able to pay energy prices reflecting a $100- per-barrel price of oil, their ability to buy other goods is correspondingly reduced. If the environmental movement’s agenda of radical reductions (up to 90 percent) in carbon dioxide emissions is imposed, meeting it will require absolutely crippling cutbacks in the production and use of oil, coal, and natural gas which must result in corresponding reductions in production, increases in prices, and absolute devastation for real wages.

The negative effect on production here is again a cumulative one, inasmuch as lack of energy supplies hampers the ability to find and exploit further supplies of energy. The more abundant and cheaper energy is, the greater is man’s ability to move masses of earth and to process them, thereby developing further energy supplies. Thus, government intervention that reduces energy supplies reduces the ability to find and exploit further energy supplies.

Other examples of laws and regulations holding down production are minimum-wage, prounion, and licensing legislation. These cause higher costs, higher prices, the diversion of labor from more productive pursuits to less productive pursuits, and, finally, unemployment. Subsidies of all kinds, tariffs, and consumer-product safety legislation also serve to hold down the production and supply of things and to keep up or add to their costs and prices. Again, to whatever extent production in general is curtailed, so too is the production of capital goods, with a consequent cumulative negative effect on subsequent production.

It should be clear that the resumption of an era of high and progressively rising real wages requires a radical reduction of government intervention into the economic system and the reestablishment of economic freedom.

What we have seen is that credit expansion is responsible not only for the boom-bust business cycle, as Mises showed, but also that it is a major source of artificial economic inequality and sharply increases profits relative to wages. These are processes that come to an end and are actually thrown into reverse as soon as credit expansion stops and the recession/depression that is its ultimate consequence begins. In wasting capital through malinvestment, it undermines the rise in production and accompanying rise in real wages. Despite credit expansion, real wages could still rise through most of American history, because of the substantial economic freedom enjoyed in the United States and did so even in the midst of credit expansion, as in the 1920s. In the last two episodes of major credit expansion, however, and over the last several decades as a whole, real wages have largely stagnated. This stagnation is the result of massive government intervention into the economic system that undermines capital accumulation and both the demand for labor and the productivity of labor. It is not the result of economic inequality, the profit motive, or any other aspect of the capitalist system.

I have explained all of the essential matters discussed in this article in full detail, with all of their presuppositions and implications, in my book Capitalism: A Treatise on Economics.


Copyright © 2007, by George Reisman. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is www.capitalism.net.

The Housing Bubble and the Credit Crunch

The turmoil in the credit markets now emanating from the collapse of the housing bubble can be understood in the light of the theory of the business cycle developed by Ludwig von Mises and F.A. Hayek. These authors showed that credit expansion distorts the pattern of spending and capital investment in the economic system. This in turn leads to the large scale loss of capital and thereby sets the stage for a subsequent credit contraction, which is precisely what is beginning to happen now. (For the benefit of readers unfamiliar with the expression, credit expansion is the creation of new and additional money by the banking system and its lending out at artificially low interest rates and/or to borrowers of low credit worthiness.)

The genesis of the present problem goes back to the bursting of the stock-market bubble in the early years of this decade. In an effort to avoid its deflationary consequences, the bursting of the stock market bubble was followed by successive Federal Reserve cuts in interest rates, all the way down to little more than 1 percent by the end of 2003.

These cuts in interest rates were accomplished by means of repeated injections of new and additional bank reserves. The essential interest rate in question was the so-called Federal Funds rate. This is the interest rate that the banks that are members of the Federal Reserve System charge or pay in the lending and borrowing of the monetary reserves that they are obliged to hold against their outstanding checking deposits.

The continuing inflow of new and additional reserves allowed the banking system to create new and additional checking deposits for the benefit of borrowers. The new and additional deposits were created to a multiple of ten or more times the new and additional reserves and made possible the granting of new and additional loans on a correspondingly large scale. The sharp decline in interest rates that took place encouraged the making of mortgage loans in particular. The reason for this was the steep decline in monthly mortgage payments that results from a substantial decline in interest rates. The new and additional checking deposits were money that was created out of thin air and which was lent against mortgages to borrowers of poorer and poorer credit.

So long as the new and additional money kept pouring into the housing market at an accelerating rate, home prices rose and most people seemed to prosper.

But starting in 2004, and continuing all through 2005 and the first half of 2006, in fear of the inflationary consequences of its policy, the Federal Reserve began gradually to raise interest rates. It did so in order to be able to reduce its creation of new and additional reserves for the banking system.

Once this policy succeeded to the point that the expansion of deposit credit entering the housing market finally stopped accelerating, the basis for a continuing rise in home prices was removed. For it meant a leveling off in the demand for housing. To the extent that the credit expansion actually fell, the demand for houses had to drop. This was because a major component of the demand for houses had come to be precisely the funds provided by credit expansion. A decline in that component constituted an equivalent decline in the overall demand for houses. The decline in the demand for houses, of course, was in turn followed by a decline in the price of houses Housing prices also had to fall simply because of the unloading of homes purchased in anticipation of continually rising prices, once it became clear that that anticipation was mistaken.

This drop in the demand for and price of houses has now revealed a mass of mortgage debt that is unpayable. It has also revealed a corresponding mass of malinvested, wasted, capital: the capital used to make the unpayable mortgage loans.

The loss of this vast amount of capital serves to undermine the rest of the economic system.

The banks and other lenders who have made these loans are now unable to continue their lending operations on the previous scale, and in some cases, on any scale whatever. To the extent that they are not repaid by their borrowers, they lack funds with which to make or renew loans themselves. To continue in operation, not only can they no longer lend to the same extent as before, but in many cases they themselves need to borrow, in order to meet financial commitments made previously and now coming due.

Thus, what is present is both a reduction in the supply of loanable funds and an increase in the demand for loanable funds, a situation that is aptly described by the expression “credit crunch.”

The phenomenon of the credit crunch is reinforced by the fact that credit expansion, just like any other increase in the quantity of money, serves to raise wage rates and the prices of raw materials. It thereby reduces the buying power of any given amount of capital funds. This too leads to the outcome of a credit crunch as soon as the spigot of new and additional credit expansion is turned off. This is because firms now need more funds than anticipated to complete their projects and thus must borrow more and/or lend less in order to secure those funds. (This, incidentally, is the present situation in the construction of power plants and other infrastructure, where costs have risen dramatically in the last few years, with the result that correspondingly larger sums of capital are now required to carry out the same projects.) In addition, the decline in the stock and bond markets that results after the prop of credit expansion is withdrawn signifies a reduction in the assets available to fund business activities and thus serves to intensify the credit crunch.

The situation today is essentially similar to all previous episodes of the boom-bust business cycle launched by credit expansion. The only difference is that in this case, the credit expansion fed an expanded demand for housing and, at the same time, most of the additional capital funds created by the credit expansion were invested in housing. Now that the demand for housing has fallen, as the result of the slowdown of the credit expansion, much of the additional capital funds invested in housing has turned out to be malinvestments. In most previous instances, credit expansion fed an additional demand for capital goods, notably plant and equipment, and most of the additional capital funds created by credit expansion were invested in the production of capital goods. When the credit expansion slowed, the demand for capital goods fell and much of the additional capital funds invested in their production turned out to be malinvestments.

In all instances of credit expansion what is present is the introduction into the economic system of a mass of capital funds that so long as it is present has the appearance of real wealth and capital and provides the basis for sharply increased buying and selling and a corresponding rise in asset prices. Unfortunately, once the credit expansion that creates these capital funds slows, the basis of the profitability of the funds previously created by the credit expansion is withdrawn. This is because those funds are invested in lines dependent for their profitability on a demand that only the continuation of the credit expansion can provide.

In the aftermath of credit expansion, today no less than in the past, the economic system is primed for a veritable implosion of credit, money, and spending. The mass of capital funds put into the economic system by credit expansion quickly begins evaporating (the hedge funds of Bear Stearns are an excellent recent example), with the potential to wipe out further vast amounts of capital funds.

As the consequence of a credit crunch, there are firms with liabilities coming due that are simply unable to meet them. They cannot renew the loans they have taken out nor replace them. These firms become insolvent and go bankrupt. Attempts to avoid the plight of such firms can easily precipitate a process of financial contraction and deflation.

This is because the specter of being unable to repay debt brings about a rise in the demand for money for holding. Firms need to raise cash in order to have the funds available to repay debts coming due. They can no longer count on easily and profitably obtaining these funds through borrowing, as they could under credit expansion, or, indeed, obtaining them at all through borrowing. Nor can they readily and profitably obtain funds by liquidating the securities or other assets that they hold. Thus, in addition to whatever funds they may still be able to raise in such ways, they must attempt to accumulate funds by reducing their expenditures out of their receipts. This reduction in expenditures, however, serves to reduce sales revenues and profits in the economic system and thus further reduces the ability to repay debt.

To the extent that anywhere along the line, the process of bankruptcies results in bank failures, the quantity of money in the economic system is actually reduced, for the checking deposits of failed banks lose the character of money and assume that of junk bonds, which no one will accept in payment for goods or services.

Declines in the quantity of money, and in the spending that depends on the part of the money supply that has been lost, results in more bankruptcies and bank failures, and still more declines in the quantity of money, as well as in further increases in the demand for money for holding. Such was the record of The Great Depression of 1929-1933.

Given the unlimited powers of money creation that the Federal Reserve has today, it is doubtful that any significant actual deflation of the money supply will take place. The same is true of financial contraction caused by an increase in the demand for money for holding. In confirmation of this, The New York Times reports, in an online article dated August 11, 2007, that “The Federal Reserve, trying to calm turmoil on Wall Street, announced today that it will pump as much money as needed into the financial system to help overcome the ill effects of a spreading credit crunch.… The Fed pushed $38 billion in temporary reserves into the system this morning, on top of a similar move [$24 billion] the day before.” In addition, the print edition of The Times, dated a day earlier, reported in its lead front-page story that “the European Central Bank in Frankfurt lent more than $130 billion overnight at a rate of 4 percent to tamp down a surge in the rates banks charge each other for very short-term loans.”

Thus the likely outcome will be a future surge in spending and in prices of all kinds based on an expansion of the money supply of sufficient magnitude to overcome even the very powerful impetus to contraction and deflation that has come about as the result of the bursting of the housing bubble.

Another outcome will almost certainly be the enactment of still more laws and regulations concerning financial activity. Oblivious to the essential role of credit expansion and of the government’s role in the existence of credit expansion, the politicians and the media are already attempting to blame the present debacle on whatever aspects of economic and financial activity still remain free of the government’s control.

It probably is the case that at this point the only thing that can prevent the emergence of a full-blown major depression is the creation of yet still more money. But that new and additional money does not necessarily have to be in the form of paper and checkbook money. An alternative would be to declare gold and silver coin and bullion legal tender for the payment of debts denominated in paper dollars. There is no limit to the amount of debt-paying power in terms of paper dollars that gold and silver can have. It depends only on the number of dollars per ounce.

To be sure, this is an extremely radical suggestion, but something along these lines will someday be necessary if the world is ever to get off the paper-money merry-go-round of the unending ups and downs of boom and bust, accompanied since 1933 by the continuing loss of the buying power of money.


Copyright © 2007, by George Reisman. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is www.capitalism.net.

Environmentalism in the Light of Menger and Mises

I

Environmentalism is the product of the collapse of socialism in a world that is ignorant of the contributions of von Mises—a world that does not know what he has said that would logically explain the collapse of socialism and, even more importantly, the success of capitalism.

Because of ignorance of the contributions of von Mises, the great majority of the intellectuals, and of the general public too, which has been subjected to the educational system fashioned and run by them, continues to believe such things as that the profit motive is the cause of starvation wages, exhausting hours, sweatshops, and child labor; and of monopolies, inflation, depressions, wars, imperialism, and racism. At the same time, they believe that saving is hoarding and a cause of unemployment and depressions, as is, allegedly, economic progress in the form of improvements in efficiency. And by the same logic, they regard war and destruction as necessary to prevent unemployment under capitalism. In addition, they believe that money is the root of all evil and that competition, is “the law of the jungle” and “the survival of the fittest.” Economic inequality, they believe, proves that successful businessmen and capitalists play the same social role in capitalism as did slave owners and feudal aristocrats in earlier times and is thus the logical and just basis for “class warfare.”

Real, positive knowledge of the profit motive and the price system, of saving and capital accumulation, of money, economic competition, and economic inequality, and of the harmony of interests among men that results from the joint operation of these leading features of capitalism—all of this knowledge is almost entirely lacking on the part of the great majority of today’s intellectuals. To obtain such knowledge, it would be necessary for them to read and study von Mises, who is far and away the most important source of such knowledge. But they have not done this.

Ignorance of the ideas of von Mises—the willful evasion of his ideas—has enabled the last three generations of intellectuals to go on with the delusion that capitalism is an “anarchy of production,” a system of rampant evil, utter madness, and continuous strife and conflict, while socialism is a system of rational planning and order, of morality and justice, and the ultimate universal harmony of all mankind. For perhaps a century and a half, the intellectuals have seen socialism as the system of reason and science and as the ultimate goal of all social progress. On the basis of all that they believe, and think that they know, the great majority of intellectuals even now cannot help but believe that socialism should succeed and capitalism fail.

Ignorant of the contributions of von Mises, the intellectuals were totally unprepared for the world-wide collapse of socialism that became increasingly evident in the last decades of the twentieth century and that culminated in the overthrow of the communist regimes in Eastern Europe and the former Soviet Union. Carrying their ignorance to the depths of depravity, they have apparently chosen to interpret the undeniable failure of socialism not as evidence of their own ignorance but as the failure of reason and science. Socialism, they believe, is the system of social organization implied by reason and science. Its failure, they conclude, can only be the failure of reason and science. Such is the state of ignorance that results from ignorance of the contributions of von Mises.

This much at least must be said here about the actual relationship between socialism and reason. Reason is an attribute of the individual, not the collective. As von Mises repeatedly said, “Only the individual thinks. Only the individual acts.” So far from being any kind of system demanded or even remotely supported by reason, socialism constitutes the forcible suppression of the reason of everyone except that of the Supreme Dictator. He alone is to think and plan, while all others are merely to obey and carry out his orders. A system in which one man, or a few men, presume to establish a monopoly on the use of reason must, of course, fail. Its failure can certainly not be called a failure of reason. It can no more be called a failure of reason than it could be called a failure of human legs if one man or a handful of men were somehow to deprive the rest of the human race of the power to use its legs and then, of course, found its own legs inadequate to support the weight of the human race. So far is the failure of socialism from being a failure of reason that it would be much more appropriate to describe it as a failure of lunacy: the lunacy of believing that the thinking and planning of one man or a handful of men could be substituted for the thinking and planning of tens and hundreds of millions of men cooperating under capitalism and its division of labor and price system. (Of course, because they never bothered to read von Mises, the intellectuals do not even know that ordinary people do in fact engage in economic planning, planning that is integrated and harmonized by the price system. From the abysmally ignorant perspective of the intellectuals, ordinary people are chickens without heads. Thinking and planning are allegedly actions that only government officials can perform.)

Because of ignorance of the contributions of von Mises, one cannot expect very many people to know that Nazism was actually a major form of socialism and thus that the fifteen million or more murders for which it was responsible should be laid at the door of socialism. Nazism and all of its murders aside, Marxian “scientific” socialism was responsible for more than eighty million murders in the twentieth century: thirty million in the former Soviet Union, fifty million in Communist China, and untold millions more in the satellite countries.
The great majority of the intellectual establishment never took these latter mass murders very seriously and certainly did not regard them as being caused by the nature of socialism. (They did take seriously the murders committed by the Nazis, which, in their ignorance, they blamed on capitalism.) Even when, late in the twentieth century, well after the great majority of the murders had been committed and were known to the world, President Reagan characterized the Soviet Union as “the evil empire,” the intellectual establishment was capable of no other response than to criticize him for being impolite, undiplomatic, and boorish.

Now the reality is that the great majority of intellectuals of the last several generations have blood on their hands. Morally speaking at least, in urging the establishment of socialism and/or in denying or ignoring its resulting bloody consequences, they have been accessories to mass murder, either before the fact or after the fact.

And, indeed, the intellectuals have some form of awareness of their guilt. For not only do they blame reason and science for the failure of socialism but they now also regard reason and science, and its offshoot technology, as profoundly dangerous phenomena, as though they, and not socialism and the intellectuals who made socialism possible, had been responsible for the mass murders. Indeed, the same intellectual quarter that a generation or more ago urged “social engineering” has taken the failure of social engineering so far as to now oppose engineering of virtually any kind. The same intellectual quarter that a generation or more ago urged the totalitarian control of all aspects of human life for the purpose of bringing order to what would otherwise allegedly be chaos, now urges a policy of laissez-faire—out of respect for natural harmonies. Of course, it is not a policy of laissez-faire toward human beings, who are to be as tightly controlled as ever. Nor, of course, is it a policy that recognizes any form of economic harmonies among human beings. No, it is a policy of laissez-faire toward nature in the raw; the alleged harmonies that are to be respected are those of so-called eco-systems.

But while the intellectuals have turned against reason, science, and technology, they continue to support socialism and, of course, to oppose capitalism. They now do so in the form of environmentalism. It should be realized that environmentalism’s goal of global limits on carbon dioxide and other chemical emissions, as called for in the Kyoto treaty, easily lends itself to the establishment of world-wide central planning with respect to a wide variety of essential means of production. Indeed, an explicit bridge between socialism and environmentalism is supplied by one of the most prominent theorists of the environmental movement, Barry Commoner, who was also the Green Party’s first candidate for President of the United States.

The bridge is in the form of an attempted ecological validation of one of the very first notions of Karl Marx to be discredited—namely, Marx’s prediction of the progressive impoverishment of the wage earners under capitalism. Commoner attempts to salvage this notion by arguing that what has prevented Marx’s prediction from coming true, until now, is only that capitalism has temporarily been able to exploit the environment. But this process, he claims, must now come to an end, and, as a result, the allegedly inherent conflict between the capitalists and the workers will emerge in full force. (For anyone interested, I quote Commoner at length in Capitalism.)

Concerning the essential similarity between environmentalism and socialism, I wrote:

The only difference I can see between the green movement of the environmentalists and the old red movement of the Communists and socialists is the superficial one of the specific reasons for which they want to violate individual liberty and the pursuit of happiness. The Reds claimed that the individual could not be left free because the result would be such things as “exploitation,” “monopoly,” and depressions. The Greens claim that the individual cannot be left free because the result will be such things as destruction of the ozone layer, acid rain, and global warming. Both claim that centralized government control over economic activity is essential. The Reds wanted it for the alleged sake of achieving human prosperity. The Greens want it for the alleged sake of avoiding environmental damage . . . [And in the end,] [b]oth the Reds and the Greens want someone to suffer and die; the one, the capitalists and the rich, for the alleged sake of the wage earners and the poor; the other, a major portion of all mankind, for the alleged sake of the lower animals and inanimate nature. (p. 102)

If the world’s intellectuals had been open to the possibility that they had been wrong about the nature of capitalism and socialism—profoundly, devastatingly wrong—and taken the trouble to read and understand the works of von Mises in order to learn how and why they had been wrong, socialism would have died once and for all with the Soviet Union, and the whole world would now be moving toward laissez-faire capitalism and unprecedented economic progress and prosperity. Instead, the intellectuals have chosen to foist the doctrine of environmentalism on the world, as a last-ditch effort to destroy capitalism and save socialism.

II

All that I have said up to now should be understood as in the nature of an introduction. I consider the substance of my talk to be the refutation of the two essential claims of the environmentalists and then a critique of their essential policy prescription. The two essential claims of the environmentalists, which I take for granted are already well known to everyone, are (1) that continued economic progress is impossible, because of the impending exhaustion of natural resources (it is from this notion that the slogan “reduce, reuse, recycle” comes), and (2) that continued economic progress, indeed, much of the economic progress that we have had up to now, is destructive of the environment and is therefore dangerous. The essential policy prescription of the environmentalists is the prohibition of self-interested individual action insofar as the byproduct of such action when performed on a mass basis is alleged damage to the environment. The leading concrete example of this policy prescription is the attempt now underway to force individuals to give up such things as their automobiles and air conditioners on the grounds that the byproduct of hundreds of millions or billions of people operating such devices is to cause global warming. And this same example, of course, is presently the leading example of the alleged dangers of economic progress.

The basis of my critique of the essential claims of the environmentalists is Carl Menger’s theory of goods. The basis of my critique of their essential policy prescription is the spirit of individualism that runs throughout the writings of Ludwig von Mises.

In his Principles of Economics, Menger develops two aspects of his theory of goods that are highly relevant to the critique of the environmentalists’ two essential claims. The first aspect is his recognition that what makes what would otherwise be mere things into goods is not the intrinsic properties of the things but a man-made relationship between the physical properties of the things and the satisfaction of human needs or wants. Menger describes four prerequisites, all of which must be simultaneously present, in order for a thing to become a good, or, as he often puts it, have “goods-character.”

He writes:

If a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present:

1. A human need.

2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this
need.

3. Human knowledge of this causal connection.

4. Command of the thing sufficient to direct it to the satisfaction of the need. (p. 52)

The last two of these prerequisites, it must be stressed, are man made. Human knowledge of the causal connection between external material things and the satisfaction of human needs must be discovered by man. And command over external material things sufficient to direct them to the satisfaction of human needs must be established by man. For the most part, it is established by means of a process of capital accumulation and a rising productivity of labor.

All this has immediate bearing on the subject of natural resources. It implies that the resources provided by nature, such as iron, aluminum, coal, petroleum and so on, are by no means automatically goods. Their goods-character must be created by man, by discovering knowledge of their respective properties that enable them to satisfy human needs and then by establishing command over them sufficient to direct them to the satisfaction of human needs.

For example, iron, which has been present in the earth since the formation of the planet and throughout the entire presence of man on earth, did not become a good until well after the Stone Age had ended. Petroleum, which has been present in the ground for millions of years, did not become a good until the middle of the nineteenth century, when uses for it were discovered. Aluminum, radium, and uranium also became goods only within the last century or century and a half.

An example concerning goods-character being created only after the establishment of command sufficient to direct the resource provided by nature to the satisfaction of a human need would be the case of petroleum deposits lying deeper than existing drilling equipment could go. As drilling equipment improved, command was established over deposits lying at greater and greater depths. Those deposits, to the extent that they were known, then became goods, which they had not been before. Similarly, for some years after the creation of the goods-character of petroleum, those petroleum deposits containing a significant sulfur content were unuseable for the production of petroleum products and were therefore not goods. Their goods-character was created only when Rockefeller and Standard Oil developed the process of cracking petroleum molecules, which then made sulfurous deposits useable.

The second aspect of Menger’s theory of goods that is highly relevant to the critique of the environmentalists’ essential claims is his principle that the starting point both of goods-character and of the value of goods is within us—within human beings—and radiates outward from us to external things, establishing the goods-character and value first of things that directly satisfy our needs, such as food and clothing, which category of goods Menger describes as “goods of the first order,” and, second, the means of producing goods of the first order, such as the flour to bake bread and the cloth to make clothing, which category of goods Menger describes as “goods of the second order.” Goods-character and the value of goods then proceed from goods of the second order to goods of the third order, such as wheat, which is used to make the flour, and cotton yarn, which is used to make the cloth to make the clothing. From there they proceed to goods of the fourth order, such as the equipment and land used to produce the wheat, and the raw cotton from which the cotton yarn is made. Thus, goods-character and the value of goods, in Menger’s view, radiate outward from human beings and their needs to external things more and more remote from the direct satisfaction of human needs.

In Menger’s own words: “The goods-character of goods of higher order is derived from that of the corresponding goods of lower order” (p. 63). And: “. . . the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve” (p. 150). And as to the value of goods of the first order: “The value an economizing individual attributes to a good is equal to the importance of the particular satisfaction that depends on his command of the good” (p. 146). “The determining factor . . . is . . . the magnitude of importance of those satisfactions with respect to which we are conscious of being dependent on command of the good” (p. 147).

In Menger’s view, it is clear that the process of production represents a progression from goods of higher order to goods of lower order, that is, from goods more remote from the satisfaction of human needs and the source of the value of all goods, to goods less remote from the satisfaction of human needs and the source of the value of all goods. The process of production unmistakably appears as one of continuous enhancement of utility, as it moves closer and closer to its ultimate end and purpose: the satisfaction of human needs.

To apply Menger’s views to the critique of the essential claims of environmentalism, it is first necessary to stress the fact that in his account of things, nature’s contribution to natural resources is implicitly much less than is generally supposed. According to the prevailing view, what nature has provided is the natural resources that man exploits, that is, for example, all of the iron mines and coal mines, all of the oil fields and natural-gas wells, and so on. At the same time, according to the prevailing view, man’s only connection to these allegedly all-nature-given natural resources is merely that he uses them up, with no means of replacing them. It is generally thought, for example, that while man produces such things as automobiles and refrigerators, his sole connection to the natural resources used in their production, such as iron ore, is merely to use them up, with no possibility of replacing them.

As I say, in Menger’s view, nature’s contribution to natural resources is much less than what is usually assumed. What nature has provided, according to Menger, is the material stuff and the physical properties of the deposits in these mines and wells, but it has not provided the goods-character of any of them. Indeed, there was a time when none of them were goods.

The goods-character of natural resources, according to Menger, is created by man, when he discovers the properties they possess that render them capable of satisfying human needs and when he gains command over them sufficient to direct them to the satisfaction of human needs.

All that needs to be added to Menger’s view of the man-made creation of the goods-character of natural resources is a precise, explicit recognition of the extent of the things Menger refers to that nature has provided and which are not yet goods, but which, under the appropriate circumstances, might become goods, or, at least, from the domain of which things might be drawn to a greater extent to receive goods-character by virtue of man’s contribution to the process. In other words, what precisely has nature provided with respect to which man might discover causal connections to the satisfaction of his needs and over greater portions of which he might gain command sufficient to direct such things to the satisfaction of his needs?

My answer to this question is that what nature has provided is matter and energy—matter in the form of all the chemical elements both known and as yet unknown, and energy, in all of its various forms. I call this contribution of nature “the natural resources provided by nature.” Natural resources in the much narrower sense of “goods,” as Menger uses the term, are drawn from this virtually infinite domain provided by nature. Natural resources that are goods in Menger’s sense are natural resources provided by nature that man has made useable and accessible by virtue of discovering properties they possess that enable them to satisfy human needs and by virtue of gaining command over them sufficient to direct them to the satisfaction of human needs.

What is essential here is to grasp the distinction between the two senses of the expression “natural resources.” First, there are natural resources as provided by nature. Such natural resources, as I say, are matter, in all of its elemental forms, and energy, in all of its forms. And then, second, drawn from this domain, are natural resources to which man has given goods-character.

We are already familiar with the fact that an outstanding characteristic of natural resources in the first sense, that is, of natural resources as provided by nature, is that none of them are intrinsically goods—that their achievement of goods-character awaits action by man. A further, equally important characteristic of natural resources as provided by nature, and which now needs to be stressed as strongly as possible, is the enormity of their quantity. Indeed, for all practical purposes, they are infinite. Strictly speaking, they are one and the same with all the matter and energy in the universe. That is the full extent of the natural resources supplied by nature.

Thus, in one sense, the sense of useable, accessible natural resources—that is, of goods as Menger defines the term—the contribution of nature is zero. Practically nothing comes to us from nature that is ready-made as a useable, accessible natural resource—as a good in Menger’s sense. In another sense, however, the natural resources that come from nature—the matter, in the form of all the chemical elements, known and as yet unknown, and energy in all of its forms—are virtually infinite in their extent. In this sense, nature’s contribution is boundless.

Even if we limit our horizon exclusively to the planet earth, which certainly need not be our ultimate limit, the magnitude of natural resources supplied by nature is mind-bogglingly huge. It is nothing less than the entire mass of the earth and all of the energy that goes with it, from thunder storms in the atmosphere, a single one of which discharges more energy than all of mankind produces in an entire year, to the tremendous heat found at the earth’s core in millions of cubic miles of molten iron and nickel. Yes, the natural resources provided by nature in the earth alone extend from the upper limits of the earth’s atmosphere, four-thousand miles straight down, to its center. This enormity consists of solidly packed chemical elements. There is not one cubic centimeter of the earth, either on its surface or anywhere below its surface, that is not some chemical element or other, or some combination of chemical elements. This is nature’s contribution to the natural resources contained in this planet. It indicates the incredibly enormous extent of what is out there awaiting transformation by man into natural resources possessing goods-character.

And this brings me to what I consider to be the revolutionary view of natural resources that is implied in Menger’s theory of goods. Namely, not only does man create the goods- character of natural resources—by obtaining knowledge of their useful properties and then creating their useability and accessibility by virtue of establishing the necessary command over them—but he also has the ability to go on indefinitely increasing the supply of natural resources possessing goods-character. He enlarges the supply of useable, accessible natural resources—that is, natural resources possessing goods-character—as he expands his knowledge of and physical power over nature.

The prevailing view, that dominates the thinking of the environmentalists and the conservationists, that there is a scarce, precious stock of natural resources that man’s productive activity serves merely to deplete is wrong. Seen in its full context, man’s productive activity serves to enlarge the supply of useable, accessible natural resources by converting a larger, though still tiny, fraction of nature into natural resources possessing goods-character. The essential question concerning natural resources is what fraction of the virtual infinity that is nature does man possess sufficient knowledge concerning and sufficient physical command over to be able to direct it to the satisfaction of his needs. This fraction will always be very small indeed and will always be capable of vastly greater further enlargement.

As I stated a moment ago, the supply of useable, accessible natural resources expands as man expands his knowledge of and physical power over the world and universe. Up to now, although considerably expanded in comparison with what it was in previous centuries, man’s physical power over the world has been essentially confined to the roughly thirty percent of the earth’s surface that is not covered by sea water, and there it has been further confined to depths that are still measured in feet, not miles. Man is literally still just scratching the surface of the earth, and the far lesser part of its surface at that. And nowhere is he dealing with nature nearly as effectively or efficiently as he someday might.

In addition to the examples previously given with respect to iron, petroleum, aluminum, radium, and uranium, consider the implications for the supply of useable, accessible natural resources of man becoming able to mine at greater depths with less effort, to move greater masses of earth with less effort, to break down compounds previously beyond his power, or to do so with less effort, to gain access to regions of the earth previously inaccessible or to improve his access to regions already accessible. All of these increase the supply of useable, accessible natural resources. They do so, of course, by virtue of creating what Menger describes as command over things sufficient to direct them to the satisfaction of human needs. All of them bestow the character of goods on what had before been mere things.

As I wrote in Capitalism:

Today, as the result of such advances, the supply of economically useable natural resources is enormously greater than it was at the beginning of the Industrial Revolution, or even just one or two generations ago. Today, man can more easily mine at a depth of a thousand feet than he could in the past at a depth of ten feet, thanks to such advances as mechanical-powered drilling equipment, high explosives, steel structural supports for mine shafts, and modern pumps and engines. Today, a single worker operating a bulldozer or steam shovel can move far more earth than hundreds of workers in the past using hand shovels. Advances in reduction methods have made it possible to obtain pure ores from compounds previously either altogether impossible to work with or at least too costly to work with. Improvements in shipping, railroad building, and highway construction have made possible low-cost access to high-grade mineral eposits in regions previously inaccessible or too costly to exploit.

And, I added:

There is no limit to the further advances that are possible. Reductions in the cost of extracting petroleum from shale and tar sands have the potential for expanding the supply of economically useable petroleum by a vast multiple of what it is today. Hydrogen, the most abundant element in the universe, may turn out to be an economical source of fuel in the future. Atomic and hydrogen explosives, lasers, satellite detection systems, and, indeed, even space travel itself, open up limitless new possibilities for increasing the supply of economically useable mineral supplies. Advances in mining technology that would make it possible to mine economically at a depth of, say, ten thousand feet, instead of the present much more limited depths, or to mine beneath the oceans, would so increase the portion of the earth’s mass accessible to man that all previous supplies of accessible minerals would appear insignificant in comparison. (p. 64)

The key point here is that, following Menger’s insights into the nature of goods, the supply of economically useable, accessible natural resources is expandable. It is enlarged as part of the same process by which man increases the production and supply of all other goods, namely, scientific and technological progress and saving and capital accumulation.

The fundamental situation is this. Nature presents the earth as an immense solidly packed ball of chemical elements. It has also provided comparably incredible amounts of energy in connection with this mass of chemical elements. If, over and against this massive contribution from nature stands motivated human intelligence—the kind of motivated human intelligence that a free, capitalist society so greatly encourages, with its prospect of earning a substantial personal fortune as the result of almost every significant advance, there can be little doubt as to the outcome: Man will succeed in progressively enlarging the fraction of nature’s contribution that constitutes goods; that is, he will succeed in progressively enlarging the supply of useable, accessible natural resources.

The likelihood of his success is greatly reinforced by two closely related facts: the progressive nature of human knowledge and the progressive nature of capital accumulation in a capitalist society, which, of course, is also a rational as well as a free society. In such a society, the stock of scientific and technological knowledge grows from generation to generation, as each new generation begins with all of the accumulated knowledge acquired by previous generations and then makes its own, fresh contribution to knowledge. This fresh contribution enlarges the stock of knowledge transmitted to the next generation, which in turn then makes its own fresh contribution to knowledge, and so on, with no fixed limit to the accumulation of knowledge short of the attainment of omniscience.

Similarly, in such a society the stock of capital goods grows from generation to generation. The larger stock of capital goods accumulated in any generation on the foundation of a sufficiently low degree of time preference and thus correspondingly high degree of saving and provision for the future, together with a continuing high productivity of capital goods based on the foundation of advancing scientific and technological knowledge, serves to produce not only a larger and better supply of consumers’ goods but also a comparably enlarged and better supply of capital goods. That larger and better supply of capital goods, continuing on the same foundation of low time preference and advancing scientific and technological knowledge, then serves to further enlarge and improve the supply not only of consumers’ goods but also of capital goods. The result is continuing capital accumulation, on the basis of which, from generation to generation, man is able to confront nature in possession of growing powers of physical command over it.

On the basis of both progressively growing knowledge of nature and progressively growing physical power over nature, man progressively enlarges the fraction of nature that constitutes goods, i.e., the supply of useable, accessible natural resources.

III

I turn now to the second aspect of Menger’s theory of goods that relates to the critique of the essential tenets of environmentalism, namely, his view of the process of production as one of continuous enhancement of utility as it moves from goods of higher order to goods of lower order.

All that it is necessary to add to Menger’s view is recognition once again of the fact that the earth is an immense ball of solidly packed chemical elements. Now these chemical elements constitute man’s external material surroundings, i.e., his environment. They are the external material conditions of human life.

When these facts are kept in mind, it becomes clear that the process of production, and the whole of economic activity, so far from constituting a danger to man’s environment, as the environmentalists claim, have the inherent tendency to improve his environment, indeed, that that is their essential purpose.

This becomes obvious as soon as one realizes that not only does the entire world physically consist of nothing but chemical elements, but also that these elements are never destroyed. They simply reappear in different combinations, in different proportions, in different places. As I wrote in Capitalism:

Apart from what has been lost in a few rockets, the quantity of every chemical element in the world today is the same as it was before the Industrial Revolution. The only difference is that, because of the Industrial Revolution, instead of lying dormant, out of man’s control, the chemical elements have been moved about, as never before, in such a way as to improve human life and well-being. For instance, some part of the world’s iron and copper has been moved from the interior of the earth, where it was useless, to now constitute buildings, bridges, automobiles, and a million and one other things of benefit to human life. Some part of the world’s carbon, oxygen, and hydrogen has been separated from certain compounds and recombined in others, in the process releasing energy to heat and light homes, power industrial machinery, automobiles, airplanes, ships, and railroad trains, and in countless other ways serve human life. It follows that insofar as man’s environment consists of the chemical elements iron, copper, carbon, oxygen, and hydrogen, and his productive activity makes them useful to himself in these ways, his environment is correspondingly improved.

Consider further examples. To live, man needs to be able to move his person and his goods from place to place. If an untamed forest stands in his way, such movement is difficult or impossible. It represents an improvement in his ennvironment, therefore, when man moves the chemical elements that constitute some of the trees of the forest somewhere else and lays down the chemical elements brought from somewhere else to constitute a road. It is an improvement in his environment when man builds bridges, digs canals, opens mines, clears land, constructs factories and houses, or does anything else that represents an improvement in the external, material conditions of his life. All of these things represent an improvement in man’s material surroundings—his environment. All of them represent the rearrangement of nature’s elements in a way that makes them stand in a more useful relationship to human life and well-being.

Thus, all of economic activity has as its sole purpose the improvement of the environment—it aims exclusively at the improvement of the external, material conditions of human life. Production and economic activity are precisely the means by which man adapts his environment to himself and thereby improves it. (p. 90)

If anyone should ask how the environmentalists could miss the fact that precisely production and economic activity constitute the means whereby man improves his environment, the answer is that the environmentalists do not share Menger’s (or Western Civilization’s) starting point of value, namely, the value of human life and well-being. In their view, the starting point of value is the alleged “intrinsic value” of nature—that is, the alleged value of nature in and of itself, totally apart from any connection to human life and well-being. Such alleged intrinsic value is destroyed every time man changes anything whatever in the preexisting state of nature.

When the environmentalists speak of “harm to the environment” in connection with such things as clearing jungles, blasting rock formations, or the loss of this or that plant or animal species of no known or foreseeable value to man, what they actually mean in the last analysis is the loss of the alleged intrinsic values constituted by such things, and not any actual loss whatever to man. On the contrary, they are eager to sacrifice human life and well-being for the preservation of such alleged intrinsic values. To them, the “environment” is not the surroundings of man, deriving its value from its relationship to man, but nature in and of itself, deriving its value from itself—i.e., allegedly possessing “intrinsic” value.

Of course, the environmentalists also frequently pose as supporters of human life and well-being, and at such times they direct their fire at various comparatively minor negative byproducts of production and economic activity, such as local degradation of the quality of air or water, while totally neglecting the enormous positives, which, of course, are of overwhelmingly greater significance.

What guarantees that the positive benefits of production and economic activity incalculably outweigh any negatives associated with their byproducts is the principle of respect for individual rights. Although by no means always observed, this principle requires that one’s production and economic activity not only benefit oneself but also that insofar as any other people are involved in the process, the use of their labor and property must be obtained only by their voluntary consent. And, of course, to secure their voluntary consent, their cooperation must be made worth their while.

Thus, for example, if I wish to construct a building, not only will I benefit from it, but also all those who work for me in its construction and all those who supply me with materials and equipment for constructing it. So too will the building’s purchaser or tenants—if I construct it for the purpose of sale or rent. In addition, no third party’s property or person may be harmed by my action. For example, I risk serious legal penalty if I construct my building in a way that undermines a neighboring building’s foundation or which makes my building unsafe for passersby.

The major complaints the environmentalists currently make concern the fact that I heat and air-condition my building—to be sure, not I as one isolated individual, but as one of many tens or hundreds of millions of individuals using fossil fuels or CFCs. In so doing, mankind is allegedly guilty of the crime of increasing the level of carbon dioxide and other greenhouse gases, thereby causing “global warming,” or increasing the level of ozone-destroying molecules in the upper atmosphere, thereby causing higher rates of skin cancer. And because mankind is allegedly guilty in these ways, the environmentalists assume that I as one individual man must be restricted, if not prohibited altogether, in my use of fossil fuels and CFCs, even though I, as one individual, am utterly incapable of causing any of the harmful effects alleged; and the same, of course, is true, mutatis mutandis, for each and every other individual.

IV

Here I want to turn to the enormous spirit of individualism that is found in von Mises. Only individuals think and only individuals act, says von Mises. It follows, of course, that it is only for his own actions that an individual should be held responsible. The son should not be punished for the sins of the father; one member of a race or nation or economic class should not be held responsible for the deeds of any other members of that race, nation, or economic class.

And so too should it be in the case of any alleged environmental damage. If an individual, or an individual business enterprise, is incapable by himself of causing global warming or ozone depletion, or whatever, on a scale sufficient to cause harm to any other specific individual or individuals, then there is absolutely no proper basis on the individualistic philosophy of von Mises for prohibiting his action. As I say in Capitalism, “To prohibit the action of an individual in such a case is to hold him responsible for something for which he is simply not in fact responsible. It is exactly the same in principle as punishing him for something he did not do" (p. 91).

The individual should not be punished for consequences that can occur only as the result of the actions of the broader category or group of which he is a member, but do not occur as the result of his own actions. Thus, even if it is true that the combined effect of the actions of several billion people really is to cause global warming or ozone depletion (neither of these claims has actually been proven—the claims of global warming have all the certainty of a weather forecast, extended out to the next 100 years!), but even if, as I say, the claims were true, it still would not follow that any proper basis existed for prohibiting any specific individual or individuals from acting in ways that only when aggregated across billions of individuals resulted in global warming or ozone depletion or whatever.

If global warming or ozone depletion or whatever, really are consequences of the actions of the human race considered collectively, but not of the actions of any given individual, including any given individual private business firm, then the proper way to regard them is as the equivalent of acts of nature. Not being caused by the actions of individual human beings, they are equivalent to actions not morally caused by human beings at all, that is to say, to acts of nature.

Once we see matters in this light, it becomes clear what the appropriate response is to such environmental change, whether global warming and ozone depletion, or global cooling and ozone enrichment, or anything else nature may bring. It is the same as the appropriate response of man to nature in general. Namely, individual human beings must be free to deal with nature to their own maximum individual advantage, subject only to the limitation of not initiating the use of physical force against the person or property of other individual human beings. By following this principle, man will deal with the any negative forces of nature resulting as byproducts of his own activity taken in the aggregate in precisely the same successful way that he regularly deals with the primary forces of nature.

Allow me to elaborate on this. Here we are. We enjoy an incredibly marvelous industrial civilization, whose nature is indicated by the fact that because of it vast numbers of human beings can travel at breathtaking speeds for hundreds of miles at a stretch in their own personal automobiles, listening to symphony orchestras as they go—indeed, can fly over whole continents in a matter of hours in jet planes, while watching movies and drinking martinis; can walk into darkened rooms and flood them with light by the flick of a switch; can open a refrigerator door and enjoy delicious, healthful food brought from all over the world; can do all this and so much more. This is what we have. This, and much, much more, is what people everywhere could have if they were intelligent enough to establish economic freedom and capitalism.

But all this counts for virtually nothing as far as the environmentalists are concerned. They are ready to throw it all away because, they allege, it causes global warming and ozone depletion, i.e., bad weather. And the best way, they say, for us to avoid such bad weather, and thus to control nature more to our advantage, is to abandon modern, industrial civilization and capitalism.

The appropriate answer to the environmentalists is that we will not sacrifice a hair of industrial civilization, and that if global warming and ozone depletion really are among its consequences, we will accept them and deal with them—by such reasonable means as employing more and better air conditioners and sun block, not by giving up our air conditioners, refrigerators, and automobiles.

More fundamentally, the answer to the environmentalists is that the appropriate response to environmental change, whether global warming or a new ice age, is the economic freedom of a capitalist society. Sooner or later, such environmental change will occur—if not in this new century or even in this new millennium—then certainly at some time in the more remote future. At that time, it will require vast changes in human economic activity. Some areas presently used for certain purposes will become unuseable for those purposes. Conceivably, they might even become uninhabitable. Other areas presently uninhabitable or barely habitable, will become much more desirable. Major changes in the comparative advantages of vast areas will take place, to which people must be free to respond.

As I wrote in Capitalism,

Even if global warming turned out to be a fact, the free citizens of an industrial civilization would have no great difficulty in coping with it—that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired. The seeming difficulties of coping with global warming, or any other large-scale change, arise only when the problem is viewed from the perspective of government central planners.

It would be too great a problem for government bureaucrats to handle . . . . But it would certainly not be too great a problem for tens and hundreds of millions of free, thinking individuals living under capitalism to solve. It would be solved by means of each individual being free to decide how best to cope with the particular aspects of global warming that affected him.

Individuals would decide, on the basis of profit-and-loss calculations, what changes they needed to make in their businesses and in their personal lives, in order best to adjust to the situation. They would decide where it was now relatively more desirable to own land, locate farms and businesses, and live and work, and where it was relatively less desirable, and what new comparative advantages each location had for the production of which goods. Factories, stores, and houses all need replacement sooner or later. In the face of a change in the relative desirability of different locations, the pattern of replacement would be different. Perhaps some replacements would have to be made sooner than otherwise. To be sure, some land values would fall and others would rise. Whatever happened individuals would respond in a way that minimized their losses and maximized their possible gains. The essential thing they would require is the freedom to serve their self-interests by buying land and moving their businesses to the areas rendered relatively more attractive, and the freedom to seek employment and buy or rent housing in those areas.

Given this freedom, the totality of the problem would be overcome. This is because, under capitalism, the actions of the individuals, and the thinking and planning behind those actions, are coordinated and harmonized by the price system . . . . As a result, the problem would be solved in exactly the same way that tens and hundreds of millions of free individuals have solved much greater problems, such as redesigning the economic system to deal with the replacement of the horse by the automobile, the settlement of the American West, and the release of the far greater part of the labor of the economic system from agriculture to industry. (pp. 88-89)

A rational response to the possibility of large-scale environmental change is to establish the economic freedom of individuals to deal with it, if and when it comes. Capitalism and the free market are the essential means of doing this, not paralyzing government controls and “environmentalism.” And both in the establishment of economic freedom and in every other major aspect of the response to environmentalism, the philosophy of Ludwig von Mises and Carl Menger must lead the way.


George Reisman is Pepperdine University Professor Emeritus of Economics, and is the author of Capitalism: A Treatise on Economics. His website is www.capitalism.net.

Copyright © 2001 by George Reisman. Permission is hereby granted to reproduce and distribute this article electronically and in print, other than as part of a book. (Email notification is requested). All other rights reserved.

This article, which draws on the author’s Capitalism, is an abridged version of his Mises Memorial Lecture, delivered at the Ludwig von Mises Institute’s Austrian Scholars’ Conference in 2001. A more abridged version appeared in The Quarterly Journal of Austrian Economics, vol. 5, no. 2. The present version was published as a Daily Article on www.mises.org, April 20, 2001, under the title “Environmentalism Refuted.”