Mises in Mexico (2): Capital and Poverty
“Governments have not practiced a policy aimed at increasing general prosperity and raising standards of living but one aimed towards the impoverishment of the people.”
Ludwig von Mises
In June I published the first article in this series. Recall that Mises arrived in México in 1942 at the invitation of Luis Montes de Oca director of the Bank of México, in order to offer a series of lectures at the National Autonomous University of Mexico on the serious economic problems facing our country.
In my June article, I shared Mises' vision of the crucial role of trade among nations in maintaining peace. In this second part, I will share my notes on what the economist wrote in Cuadernos Americanos regarding the importance of capital accumulation.
Capital and Well-being
The political class typically assumes that the availability of capital has no relation to the welfare of the population— or absurdly states that the relationship is harmful. This is a serious error. From Mises' point of view, it is often forgotten that the accumulation of capital is synonymous with the creation of wealth, since it is this investment that increases the productive capacities of an economy.
The political class typically assumes that the availability of capital has no relation to the welfare of the population.
Governments in Latin American have acted as if the formation of capital was not the least bit important, in the best of cases. Unfortunately, they often openly combat the principle, which amounts to economic suicide.
Through predatory oversight, increasing regulation, restrictions on trade, and excessive public spending, governments have created increasing barriers to capital formation. Fortunately, the President-elect of México has emphasized the importance of breaking down these obstacles. Consider that, for Mises, this historical neglect puts Western civilization at risk because the absence of capital is synonymous with poverty.
What has advanced our society to the progress we enjoy today is precisely the continuous accumulation of capital that makes possible the greater production of goods and services, which increases the standards of living for all members of society— independent of how much wealth they have at their disposal individually— because the greater the accumulation of capital in an economy, the higher the average income of families.
What has advanced our society to the progress we enjoy today is the continuous accumulation of capital that makes possible the greater production of goods and services.
Mises rightly states that contemporary man would look with contempt on the living conditions of royalty only two hundred years ago— and he wrote this almost eight decades ago.
The standard of living of the average modern family is possible thanks to the fact that, over the centuries, economies have accumulated capital— some more than others. This development occurs thanks to production that exceeds the consumption of a society over many years.
The Capital Accummulation is a Fragile Process
For individuals— future investors and entrepreneurs— to be willing to sacrifice present consumption for a future benefit certain conditions must prevail. Among the most important we find are: (1) certainty about the future; (2) a reasonable tax burden that offers clear benefits and a better environment for business; (3) minimal, simple, and transparent regulation; (4) government intervention in the economy only in exceptional situations such as in the case of monopolies, resolution of externalities, affects to third parties, and to provide public services and infrastructure; and, (5) in exchange for our taxes the government must guarantee the safety of people, private property, the provision of justice, and the fulfillment of contracts between individuals.
The accumulation of capital is a fragile process that cannot occur in an environment where trust does not prevail - the same naturally applies to attracting resources from abroad.
Unfortunately, an infinite number of public policies that have been applied in Mexico, far from generating wealth, have fostered poverty and very low wage levels. Hence the great need to create awareness among the governors and legislators of the need to design and implement public policies that promote capital formation. Only then can our country eradicate poverty, an unacceptable situation that affects millions of families.
Unfortunately, an infinite number of public policies that have been applied in Mexico, far from generating wealth, have fostered poverty and very low wage levels.
The Austrian thinker reminds us that it is not through the pressure of unions, but thanks to the accumulation of capital, that people will be able to access higher wages and a better standard of living.
I have written before that the salary could not be fixed by decree. Many times unions seek to obtain by force what does not correspond in the market. This is counterproductive because an artificially high wage only creates unemployment and inhibits the formation of capital, which impoverishes us all. Around the world, the most successful countries in capital accumulation - Switzerland, Germany, Denmark, United Kingdom, Norway, etc. – are those that have achieved higher standards of living for their respective populations. The best part is that capital, when conditions are favorable, multiplies.
A Bright Future?
In 1942 Mises predicted a bright future for Latin America. Unfortunately, his forecast is not yet fulfilled. In the opinion he expressed almost eight decades ago, the destruction of capital caused by the Second World War in Europe would level the playing field so that Latin America, which emerged virtually intact from that conflict, could close the development gap. In his words, "since capitalism arrived in Latin America two centuries later than Europe, certain institutions did not exist in the region. Their level of poverty is due more to a lack of capital than to a moral or intellectual shortcoming." Almost eighty years later, Europe has surpassed the standards of living it had prior to the world wars and Latin America continues to suffer from a low level of relative development.
In my opinion, the failure to close the development gap has to do with certain cultural features that condemn us to failure.
In my opinion, the failure to close the development gap has to do with certain cultural features that condemn us to failure. Generating an environment conducive to the accumulation of wealth begins with a Cultural Change. For example, for some strange reason, in our country, "capitalism" is a bad word and this perception pulls us down. In a new dictionary, the word capitalism should represent, first, the formation of capital and therefore greater wealth for all.
These times of government change are also promising times to take seriously our aspirations of development, to change our mentalities, and to promote public policies that encourage the accumulation of capital and discard all those that have had the opposite result, as this will undoubtedly condemn us to failure.