L. von Mises, We need to understand what raised our well-being in an unprecedented way

Spurious legends, popularized by demagogic propaganda, have entirely misrepresented the capitalist system. Capitalism has succeeded in raising the material well-being of the masses in an unprecedented way. In the capitalist countries population figures are now several times higher than they were at the eve of the “industrial revolution,” and every citizen of these nations enjoys a standard of living much higher than that of the well-to-do of earlier ages. Nevertheless a great part of public opinion disparages free enterprise and private ownership of the means of production as dismal institutions that are detrimental to the immense majority of the nation and further only the selfish class interests of a small group of exploiters.

Politicians whose main achievement consisted in restricting agricultural output and in attempts to put obstacles in the way of technical improvement of methods of manufacturing discredit capitalism as an “economy of scarcity” and talk about the abundance that socialism will bring about. The heads of labor unions, whose members drive their own motor cars, are enthusiastic in exalting the conditions of the ragged and barefooted Russian proletarians and in praising the freedom that the workers enjoy in Russia where labor unions have.been suppressed and strikes are a criminal offense. There is no need to enter into a detailed scrutiny of these fables. Our intention is neither to praise nor to condemn. We want to know what the two systems in question are, how they work, and how they serve the needs of the people… Bureaucracy, its merits and its demerits, its working and its operation, can be understood only by contrasting it with the operation of the profit motive as it functions in the capitalistic market society.

CAPITALISM or market economy is that system of social cooperation and division of labor that is based on private ownership of the means of production. The material factors of production are owned by individual citizens, the capitalists and the landowners. The plants and the farms are operated by the entrepreneurs and the farmers, that is, by individuals or associations of individuals who either themselves own the capital and the soil or have borrowed or rented them from the owners.

Free enterprise is the characteristic feature of capitalism. The objective of every enterpriser-whether businessman or farmer-is to make profit. The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.

Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The producers do not produce for their own consumption but for the market. They are intent on selling their products. If the consumers do not buy the goods offered to them, the businessman cannot recover the outlays made. He loses his money. If he fails to adjust his procedure to the wishes of the consumers he will very soon be removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.

The real bosses in the capitalist system of market economy are the consumers: They, by their buying and by their abstention from buying decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy…

The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.

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