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1. Broken Capitalism, Lecture 6
David Gordon
Mises Academy
July 29, 2013

2. Effects of Taxation
• Many people favor very heavy taxes on the
rich.
• These taxes make it more difficult for the rich
to save and build up accumulations of capital.
• If capital grows, this raises the productivity of
workers. This makes wages rise.
• Taxes on the rich thus hurt the poor.

3. Value Judgment
• Note what Mises is doing in this argument. He
is not saying, “I don’t like high taxes on the
rich” or claiming that these taxes are morally
bad.
• He is not making a value judgment.
• He is saying, “Here is the consequence of high
taxation.” This is a strictly scientific, value-free
statement.

4. Value Judgment Continued
• Even though Mises’s statement is value-free, it
sounds like there’s a trick involved.
• Wouldn’t almost everybody think that
something that hurts the poor is, to that
extent, bad? If so, is the judgment really value
free?
• Yes it is. It is like a doctor’s claim “smoking
causes lung cancer”, where (almost) no one
wants lung cancer.

5. Borrowing
• Some people think that the government can
escape the harmful effects of taxes by
borrowing.
• If the government borrows, it is
claimed, people don’t have to pay for
government expenses through taxes now.
• The taxes will be delayed to the future, when
they will be needed to pay off the
government’s creditors.

6. Borrowing and Inflation
• Government borrowing is not the same as
inflation.
• Inflation means that the government issues
new money.
• In government borrowing, people give the
government money in return for a promise to
pay later.

7. A Problem with Borrowing
• Borrowing isn’t a way in which people today
can “get something for nothing” by passing on
the cost to a future generation.
• When the government borrows, it takes
resources away. These resources would have
been used for other projects.
• Resources are finite. Borrowing, or creating
new money, doesn’t change this.

8. Armaments and War
• Defenders of the state claim that only the
government can run a modern war.
• Mises wrote during WWII. At the time, people
stressed the great achievements of the of the
German and Russian military machines.

9. Armaments Continued
• Mises does not agree that only powerful
states can finance war.
• During the 19th century, private arms makers
outperformed the state in producing arms.
• Armaments are like other products. If there is
a demand for the product, the market will
supply it.

10. Merchants of Death
• The fact that arms merchants respond to the
demands of governments for arms does not
imply that the arms merchants cause or
encourage wars.
• The “merchants of death” view was popular in
the 1930s, but Mises doesn’t accept it.
• Engelbrecht and Hanighen, The Merchants of
Death, (1934) was a famous attack on the arms
merchants.
http://library.mises.org/books/HC%20Engelbrech
t/The%20Merchants%20of%20Death.pdf

11. World War II
• Mises suggests that if France had relied on
private arms makers, the German invasion of
1940 could have been stopped.
• One reason France failed in 1940 was that
socialist measures in the 1930s crippled
private enterprise.

12. Germany versus France
• Another reason that Germany did well was
that Germany had been building up arms in
the 1930s.
• Doing this required that civilian consumption
been reduced.
• The Nazi leader Hermann Goering was correct
that there is a choice: guns or butter.

13. Profit
• The driving force of capitalism is the efforts of
business people to make a profit.
• Efforts to curb profits inhibit the ability of
entrepreneurs to respond to changing
preferences of consumers.

14. A “Fair” Margin of Profit
• One proposal is that a business should get a “fair”
profit, added to its costs.
• An obvious problem is that there is no criterion
for what a “fair” profit is.
• This system will give an incentive to business to
be wasteful on costs, rather than to cut them.
• People will have a different attitude to risk if they
have to bear losses from what will happen if their
profit margin is guaranteed.

15. Another Problem
• On the “cost + fair rate of profit” view, every
business subject to the rule gets the same rate
of profit.
• But it is differences in profit, including
losses, that guide entrepreneurs in their
efforts to satisfy consumers.

16. Subsidies
• Subsidies to help one industry come at the
expense of others.
• This is an application of the broken window
fallacy.
• Hazlitt mentions that argument that subsidies
should be given to an industry if overcrowding
leaves profits low. Here the market remedy is
for firms to move elsewhere.

17. Subsidies
• The basic point on all subsidies is again an
application of the broken window fallacy.
• You can’t help one product except at the
expense of something else.