Op-Ed by Stefan Kløvning
Can you list up all the ways that the world has improved since the Industrial Revolution? I think one hardly can, though one could get very far trying. We’re enjoying living standards that were unimaginable to the people of the 19th century: twice as high life expectancy; an abundance of new goods and services that have transformed our lives radically through innovation; luxury goods have become commonplace; the poverty rate has plummeted, and so on. I cannot see any way that one can look at the data and honestly conclude that things on a net basis have gotten worse since then, though it didn’t come about completely without a sacrifice (see: creative destruction).
There has been no single person – or a few people – that coordinated economies towards such progress. Such attempts made during the 20th century by Vladimir Lenin, Joseph Stalin, Mao Zedong, Pol Pot and others failed miserably and collectively left a legacy of over a hundred million deaths, systematized famines, and placing a halt on their peoples’ freedoms, happiness and potential for innovation. These failures were the result of total state intervention in the private and economic activities of its citizens. Their desires, wishes and hopes – all stomped by rulers with visions of the perfect world, damned be whoever got in their way.
Leonard Read made a brilliant illustration of this in his essay I, Pencil [1, 2]. A pencil looks rather small and simple, but, Read emphasizes, “if you can understand me [the pencil]—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For what is needed to make a pencil? You certainly need wood, so somebody will have to cut down a tree, for which saws, trucks, ropes, etc. are needed, each of which are the result of further activities, such as mining ores, making steel, and so on. And the workers cutting down the trees naturally need some food and drinks to nurture themselves at work, which has its own history and thus become part of the process of creating a pencil. Talking for the pencil, Read therefore says, “it impossible for me to name and explain all my antecedents” and that “millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others.”
I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.
Adam Smith referred to this phenomenon by saying that people were “led by an invisible hand to promote an end which was no part of his intention.” Others have called it “spontaneous order”. “By pursuing his own interest”, Smith then says, “he frequently promotes that of the society more effectually than when he really intends to promote it.”
This can explain a great deal of how the economy works and produces the great abundance of goods and services that we have access to, but we’re still missing a major piece of the puzzle – that which I call the “engine of progress”. For there are prerequisites that must not be impaired if one wishes spontaneous order to create prosperity through economic freedom. Dictators are unable to efficiently coordinate the economic activity through force, but the market actually still require coordinators.
The real coordinators in the economy are the entrepreneurs and business owners. It is they who have to coordinate the factors of production – land, labor and capital – in order to produce goods and services which the public desires. It is they who innovate and thereby contribute to great progress for their contemporary society, either through self-interest by trying to out-compete their competitors or through an altruistic vision of human progress – or both. Most workers, that is, those who are not self-employed, have to rely upon them in order to get a job and earn a living, and thus be guided by the invisible hand to the benefit of society.
Despite entrepreneurs and business owners playing such an essential role in the progress we have seen since the Industrial Revolution, they are subjected to constant critique and condemnation. This is especially seen from Socialists, who label employer-employee relationships for “wage slavery” and accuse employers for “exploiting” their workers. The choice of the worker is either to work or to die, they say, and insist that the power imbalance therefore means that the exchange between labor and wages can hardly be called voluntary and consensual. It is therefore necessary, they say (even self-proclaimed “Anarcho-Communists”), that the government interferes and places restrictions and conditions which the employer must follow in order to be able to hire them. This, they say, will ensure that the worker will enjoy a “livable wage” and a “tolerable environment.”
Unfortunately, a lot of people seem to have a conviction in a variety of the argument mentioned above, or at least find it more or less plausible. But as Henry Hazlitt asserts in Economics In One Lesson (p. 118), “you cannot make a man worth a given amount by making it illegal for anyone to offer him anything less.” I think that most of the sentiment for the argument is actually more rooted in entitlement and ingratitude than any legitimate philosophical meditation. Thomas E. Woods particularly emphasizes this in his talk with the telling title “Socialists and Other Grotesque Ingrates”. The opportunity of a job and the source of revenue that the worker derives from it is simply taken for granted. A job, they say, is a “human right”, and not just any kind of job – it must also pass the criteria that the activists acclaim in order to be legitimate. Any employer who offers anything less gets vilified, despite what contributions they may have made to their community. The concept of human rights from natural rights were from Franklin Roosevelt and onward thereby turned on its head. Rather than being understood as “a moral principle defining and sanctioning a man’s freedom of action in a social context,” as Ayn Rand defined it, it is now used to justify that the government interferes with and impairs others’ freedom to exchange and being able to keep the product of one’s labor for the gain of oneself or one’s interest group. The results? The exact people that the activists claimed to fight for are the ones harmed the most by the policies they advocated.
“But,” the Socialists will object, “the employer does not allow his employees to keep the full product of his labor, which is seen by the fact that the former exploits some of it in the form of profits.” I addressed this in my book review of Ludwig von Mises’ book “Profit and Loss”, but I’ll repeat some important points again here.
First of all, it’s important to understand what “profits” and “losses” mean. “Profit,” according to Investopedia, is “a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.” Simply said, profits can mathematically be understood as Revenue minus Expenses when the result is positive, and losses when it is negative. The revenue here is the source of income that the business earns by selling the goods and services it produces to its customers. Those goods and services are the result of, as mentioned earlier, the business owner mixing the factors of production (land, labor and capital), which constitute the expenses of the business. He needs a facility or several facilities for the production to take place in, machines and other capital meant for producing certain goods, and naturally also workers to operate them. The employer is the one who must organize all of this, but the effort required to do that is by itself actually not the real reason why profits exist. Mises explains,
What makes profit emerge is the fact that the entrepreneur who judges the future prices of the products more correctly than other people do buys some or all of the factors of production at prices which, seen from the point of view of the future state of the market, are too low.
In other words, for the entrepreneur to achieve profits (without state intervention), he has to structure the factors of production in a way that produces, in the aggregate, higher value for its customers than it had cost for the entrepreneur to buy in and coordinate to produce it. In light of this, I think it should be clear that Marx’ claim that “capital begets profits” automatically is unbelievably absurd and fallacious.
Even with all this understood, however, the Socialist (and even Social Democrats) could respond by pointing to the fact that the employer likely will seek to pay his workers as little as possible. This may indeed be the case, in the same way that you as a consumer would like to buy goods and services as cheaply as possible. But the (potential) employee most likely wouldn’t have taken the job if it wasn’t the best alternative that he was aware of. In a competitive market, very few people would actually want to work for wages far lower than what the worker would contribute to the business. To attract workers towards one’s own business and away from one’s competitors, therefore, employers are incentivized to set wages closer and closer to the value that they contribute to the business, lest they leave for some other employer who would value their competence more. Even if it was the case that all or most employers were purely self-interested and didn’t really care about their workers, which in itself is an unreasonable assumption, then they would still have to pay workers by their merit in order to make their business remain competitive.
The most reliable way that real wages rise from there, which is not the result of coercion, is that of increased worker productivity by investing in more capital and innovating so that the workers are able to work faster and more efficiently with the tasks they’re ascribed to. With the competence one gains over time in the job, one can also potentially climb up the hierarchy and achieve higher positions. From lower to middle class, and maybe even the upper class!
The solution to alternatives that are perceived as bad, I say, is to open up for more alternatives, by making the markets more free and competitive by lowering tax rates, decreasing regulations, and by rolling back systematic barriers to entry which make it more difficult for small new businesses to compete. Sweatshop jobs don’t become middle class jobs by a swing of legislation, but through innovation and economic progress (see: Causes to the Reduction of Child Labor During the Industrial Revolution). Do you really want to take away the best alternatives from the people you proclaim to champion? Or do you just not see them as reasonable enough to make the right decisions for themselves, and that they are in need of an enlightened overlord like yourself or others of your persuasion to coordinate their activities? If people want to refer to people with such a sentiment as having “good intentions”, then I perceive it at best as either just naïve or short-sighted and at its worst as delusional.
You know best for yourself what you want. Though you (and I!) may not always make the best decisions for your own well-being, I certainly trust you more with making the right decisions for yourself than some power-hungry politicians and bureaucrats. In my view, no one is truly competent or moral enough to hold such positions over other peoples’ lives.
- If you don’t have time to read it, check out Milton Friedman’s 2.5-minute video about it: https://www.youtube.com/watch?v=67tHtpac5ws
- For more commentary on this essay and Read’s point, check out FEE’s series of articles on it: https://fee.org/resources/10-essays-celebrating-60-years-of-i-pencil/
Stefan M. Kløvning is a Norwegian high school student studying economics in his spare time, with aspirations of eventually taking a PhD in economics and afterward contributing to growth in the private sector. He’s a follower of the Austrian School of Economics, drawing inspiration mainly from Ludwig von Mises and Murray Rothbard, and blogs regularly about thoughts on a variety of topics, mainly economics and politics, but also philosophy, psychology and history.
This article was republished with permission from MisesRevived.
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