Confiscation and Subsidies

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The complete confiscation of all private property is tantamount to the introduction of socialism. Therefore we do not have to deal with it in an analysis of the problems of interventionism. We are concerned here only with the partial confiscation of property. Such confiscation is today attempted primarily by taxation.

The ideological motivations of such action is immaterial. The only question of interest to us is merely: What is sought by these measures and what is actually accomplished?

Let us first consider taxes which directly or indirectly affect incomes only. In all countries there is today a tendency to tax larger incomes at higher rates than smaller incomes. In the case of incomes which exceed a certain amount most countries tax away, even nominally, up to 90 percent. Methods prescribed by law for the determination of the amount of income, and the interpretation of these laws by the administering agencies, fix incomes considerably higher than could be established on the basis of sound accounting principles. If taxpayers could not avoid some taxes by using loopholes in the laws, their actual taxes would thus not infrequently exceed by far the amount of their actual incomes. But legislators try to plug these loopholes.

Popular opinion is inclined to believe that the taxing away of huge incomes does not concern the less wealthy classes. This is a fallacy. The recipients of higher incomes usually consume a smaller proportion of their incomes and save and invest a larger part than the less wealthy. And it is only through saving that capital is created. Only that part of income that is not consumed can be accumulated as capital. By making the higher incomes pay a larger share of the public expenditures than lower incomes, one impedes the operation of capital and eliminates the tendency, which prevails in a society with increasing capital, to increase the marginal productivity of labor and therefore to raise wages.

The same is, of course, true even to a greater extent of all methods of taxing away part of the principal. By drawing on capital to pay for public expenditures through inheritance taxes or a capital levy, for instance, capital is directly consumed.

The demagogue tells the voters: “The state has to make large expenditures. But the procurement of funds for these expenditures is not your concern. The rich should be made to pay.” The honest politician should say: “Unfortunately the state will need more money to cover its expenditures. In any case, you will have to carry most of the burden because you are receiving and consuming the largest share of the total national income. You have to choose between two methods. Either you restrict your consumption immediately or you consume the capital of the wealthy first and then a bit later you will suffer from falling wages.”

The worst type of demagogue goes even further by saying: “We have to arm and possibly even go to war. But this not only will not lower your standard of living; it will even increase it. Right now we shall undertake a large-​scale housing program and increase real wages.” To this we have to say that with a limited quantity of materials and labor we cannot simultaneously make both armaments and dwellings. Herr Göring was more honest in this respect. He told his people “guns or butter,” but not “guns and (therefore) still more butter.” This honesty is the only thing Herr Göring will be able to claim to his credit before the tribunal of history.

A tax system which would serve the real interests of the wage earners would tax only that part of income which is being consumed, and not saved and invested. High taxes on the spending of the rich do not injure the interests of the masses; however, every measure which impedes the formation of capital or which consumes capital does injure them.

Of course, there are circumstances which make the consumption of capital unavoidable. A costly war cannot be financed without such a damaging measure. But those who are aware of the effects of capital consumption will try to keep this consumption within the limits of necessity, because that is in the interest of labor, not because it is in the interest of capital. There may arise situations in which it may be unavoidable to burn down the house to keep from freezing, but those who do that should realize what it costs and what they will have to do without later on. We must emphasize this, particularly at the present moment, in order to refute the current errors about the nature of the armament and war booms.

The costs of extraordinary armaments may be paid for by inflation, by borrowing, or by taxes which hamper the formation of, or which even consume, capital. How inflation leads to boom conditions does not require further explanation. When funds are made available by borrowing, this can only shift investment and production from one field to another; the increase in production and consumption in one sector of the economy is compensated for by the decline of production and consumption in another part. The funds which are withheld from capital formation and withdrawn from already accumulated capital may have the effect of an increase in current consumption. Thus consumption for military purposes may be increased without a proportionate decrease in other consumption. This may be called a “stimulus” to business. But we should not overlook the fact that all the effects of this boom, which are favorably looked upon now, will be paid for by depression and reduced consumption in the future.

Hunger can only be satisfied with bread which is already available; future bread does not satisfy anyone today. It would seem superfluous to reiterate such self-​evident statements were it not necessary to refute fallacies with regard to the procurement of funds for public expenditure.

War, it is frequently said, is fought not only in our interest, but also in the interest of our children and grandchildren. It is only just that they should bear part of the war costs. Therefore, only part of the war expenditures should be paid out of taxes; the rest should be paid out of borrowing; the interest payments and the amortization of the loans should be the problem of future generations.

This is plain nonsense. A war can be fought only with weapons which are today already available. Material and labor which are placed in the service of armaments, therefore, are withdrawn from our presently available means and diminish the supply of other goods for people living in the present. They are taken out of present income and present property. The grandchildren are concerned only insofar as they will inherit less. This fact cannot be altered by any method of financing.

Even if part of the war expenditures is covered by borrowing, that means resources which otherwise would be devoted to the production of other goods are now used for war purposes. It is only for the man who happens to be Secretary of the Treasury today that borrowing means a postponement of the payment. For the citizens, borrowing means they pay the bill immediately by forgoing consumption in the present. What one man borrows is, for the duration of the loan, not available to the lender.

An individual may buy a refrigerator on the installment plan if someone grants him the necessary credit. The totality of the citizens of the world or of a closed economy cannot buy anything on credit. Neither can those who are not yet born make loans to us. In this connection, we may disregard foreign loans; they are out of the question for the United States today [1940].

Equally erroneous is the opinion that government borrowing is a measure in favor of the rich. Were we to tax the rich even more than we do now we would have to take away their businesses, that is, we would have to adopt socialism. Because we do not want to go that far and because we do not want to impose higher taxes on the masses, we choose the seemingly painless way of borrowing.

“This,” says the socialist, “is precisely the point. You do not want to adopt socialism. Germany, however, proves that socialism is superior in the production of armaments. The German army is the best equipped in the world. The crux of the world problem today is that the Nazis have superior equipment.”

This argument, too, misses the point. Germany is well equipped because for at least eight years it has restricted the consumption of the whole population and has placed her entire productive system in the service of armaments. With unbelievable shortsightedness, England, France, and the small democracies failed to arm themselves for defense. Even after the war started they did not take it seriously. The fight against war profiteering seemed to them more important than the fight against the Nazis.

For the armaments industry the same principle holds true as for all other production: Private enterprise is more efficient than public enterprise. A hundred years ago guns and rifles were mostly produced in government arsenals and by small craftsmen. Private entrepreneurs found the production of arms unattractive. It was not until they realized that the nations were only interested in exterminating each other that they took up armament production. Their success was overwhelming. The arms produced by large-​scale private industry stood up far better in actual combat [in wars] than the products of state-​owned arsenals. All the improvement and perfection of the implements of war have originated in private enterprise. The state-​owned arsenals were always backward in accepting new techniques, and the military experts have always been reluctant in accepting the improvements which the entrepreneurs furnished.

Contrary to popular belief, nations do not fight wars in order to make it possible for the arms factories to make money. Arms factories exist because nations fight wars. The entrepreneurs and capitalists who produce arms would manufacture other goods if the demand for arms was not stronger than it is for other goods. Germany’s war industry, too, developed as a private enterprise. As a nationalized industry it may be able to maintain for a certain time the advantage it has gained as a private industry.

In England today it is frequently said: If England’s workers make the heavy sacrifices which the war imposes on them they have a right to demand that their noble attitude should be rewarded by the abolition of capitalism and the adoption of socialism after the war. There is hardly anything more confused than this argument.

If the workers of England defend their country, their freedom, and their culture against the onslaught of the Nazis and Fascists, and against the Communists, who for all practical purposes are the allies of the Nazis, they are doing it for themselves and for their children, not for the interests of some other people from whom later on they may demand rewards. The only reward which the great sacrifices may bring them is victory and with it the safeguard that they will not get into the same position in which the German and Russian masses find themselves. If the English workers were of the opinion that this prospective success did not warrant taking the burden upon themselves which the war imposes, they would not fight; they would capitulate.

If we believe that socialism is a better system and secures a better existence for the great majority of the population than does capitalism, then we should adopt socialism regardless of war or peace, and irrespective of whether the workers have been brave in the war or not. If we believe, however, that the economic system, which Messrs. Hitler, Stalin, and Mussolini call “plutocracy,” guarantees a better life for the masses than socialism, it will not occur to us to “reward” the workers by lowering their standard of living to the level of the Germans, Italians, and Russians.

The entrepreneurs try to undertake only such projects as appear to promise profits. This means that they endeavor to use the scarce means of production in such a way that the most urgent needs will be satisfied first, and that no part of capital and labor will be devoted to the satisfaction of less urgent needs as long as a more urgent need, for whose satisfaction they could be used, goes unsatisfied.

When the government intervenes to make possible a project which promises, not profits, but losses, then there is only talk in public of the need which finds satisfaction through this intervention; we do not hear anything of the needs which fail to be satisfied because the government has diverted to other purposes the means of satisfying them. Only what is gained by the government action is considered, not also what it costs.

The economist is not called upon to tell the people what they should do and how they should use their resources. But it is his duty to call public attention to the costs. This differentiates him from the quack who always speaks only of what the intervention gives, never of what it takes.

Let us, for instance, consider a case which we may judge with objectivity today because it is a matter of the past, though not of a very distant past. It is proposed that a railroad, the construction and operation of which does not promise profitability, is to be made possible by a government subsidy. It may be, it is said, that the railroad is not profitable in the usual sense of the word and that, therefore, it is not attractive to entrepreneurs and capitalists, but it would contribute to the development of the whole region. It would promote trade, commerce, and agriculture and thus it would make an important contribution to the progress of the economy. All this would have to be taken into consideration if the value of this construction and operation is to be judged from a higher standpoint than that of profitability alone. From the standpoint of private interests the construction of the railroad may appear inadvisable. But from the standpoint of the national welfare it seems beneficial.

This reasoning is thoroughly mistaken. Of course, it cannot be denied that the inhabitants of the region through which the railroad is to run would be benefited. Or, more accurately, it gives advantages to the landowners of this region and to those who have made investments there which cannot be transferred elsewhere without a diminution of their value. It is said that it develops the productive forces of the regions through which it runs. The economist has to express this differently: The state pays the subsidies out of the taxpayers’ money for the construction, maintenance, and operation of the line which, without this assistance, could not be built and operated. These subsidies shift a part of the production from locations which offer more favorable natural conditions of production to locations which are less suited for this purpose. Land will be cultivated which, in view of its distance from the centers of consumption and in view of its low fertility, could not permit profitable cultivation unless it is subsidized indirectly by financial grants to the transport system, to the cost of which it cannot contribute proportionately. Certainly, these subsidies contribute to the economic development of a region where otherwise less would be produced. But the production increase in the part of the country thus favored by the government’s railroad policy is to be contrasted with the burden placed on production and consumption in those parts of the country which have to pay the costs of the government policy. The poorer, less fertile, and more remote land is being subsidized out of the proceeds of taxes, which either burden the production of better land or have to be borne by the consumers directly. The enterprises which are located in the less advantageous region will be able to expand production, but the enterprises in more advantageous locations will have to restrict their production. One may consider this as “just” or politically expedient, but one should not be deluded into believing that it increases the total satisfaction; it reduces it.

One should not consider the increase of production in the region served by the subsidized railroad an “advantage from the standpoint of national welfare.” These advantages amount only to this, that a number of enterprises are operating in locations which under different conditions would have been regarded as unfavorable. The privileges which the state grants to these enterprises indirectly by subsidizing the railroads are in no way different from those privileges which the state grants to other less efficient enterprises under different conditions. In the final analysis, the effect is the same whether the state subsidizes or grants privileges to a cobbler’s business, for instance, in order to enable him to compete with the shoe manufacturers, or whether it favors land, which due to its location is not competitive, by paying out of public funds part of the costs of transporting its products.

It does not matter whether the state undertakes the unprofitable enterprise itself, or whether it subsidizes a private business so that it may undertake the unprofitable enterprise. The effect on the community is identical in both instances. The method used in granting the subsidy is not important either. It does not matter whether the less efficient producer is subsidized so that he may produce or increase his production, or whether the more efficient producer is subsidized so that he will not produce, or will restrict his production. It is immaterial whether bounties are paid for producing or for not producing, or whether the government buys up the products to withhold them from the market. In each case the citizens pay twice—once as taxpayers who indirectly pay the subsidy, and then again as consumers in higher prices for the goods they buy and in reduced consumption.

When the self-​styled “progressives” use the word profit they rant and rave. They would like completely to eliminate profits. In their view, the entrepreneur should serve the people altruistically, not seek profits. He is either not to receive anything, or to be content, if his business is successful, with a small margin over his actual costs. That the entrepreneur has to bear the possible loss is never objected to.

But the profit orientation of the activities of entrepreneurs is precisely what gives sense and meaning, guidance and direction, to the market economy based on private ownership of the means of production. To eliminate the profit motive is to transform the market economy into chaos.

We have already dealt with the confiscation of profits and the effects of such action. Now, we shall discuss the limitation of profits to a definite percentage of costs. If the entrepreneur is to receive more, the higher his costs rise, his incentive to produce as cheaply as possible is changed to the opposite. Every reduction in production costs reduces his receipts; every increase in production costs means more income for him. We do not have to presuppose here a sinister intention on the part of the entrepreneur. We merely have to understand what a cut in production costs involves for the entrepreneur.

For the most part, the entrepreneur can achieve cost reductions in two different ways: By careful purchases of raw materials and semi-​finished products, and by adopting more efficient methods of production. Both involve a high degree of risk and the exercise of intelligence and foresight. Like every other action of the entrepreneur, whether the most opportune moment to purchase has come, or whether it is better to wait longer, is speculation on an uncertain future. The entrepreneur who bears the entire loss but participates in only a part of the gain, his share increasing with rising expenditures, is in a different position from the entrepreneur who is credited or debited with the entire profit or loss. His attitude toward the risks of the market will be fundamentally altered. He will be inclined, therefore, to buy at higher market prices than the entrepreneur in the free economy. The same is true of improvements in production methods. They too are always risky; additional investments are necessary of which it cannot be said with certainty in advance whether they will pay. Why should an entrepreneur take chances if, in case of success, he is to be punished by a reduction in his receipts?