The Firm as the Engine of Social Change

0:00Great pleasure to be here in New York. I was born just across the river in Brooklyn, not too far from where Murray Rothbard spent most of his professional career at the Brooklyn Polytechnic Institute. I also lived not only in New York City, but in upstate New York in the Buffalo area, the town of Fredonia, and also spent a year across this river in Joyzee. So, it's always a great pleasure to be back. New York City, as you know, is a lot like other cities. That was a joke. Whenever I'm in New York, I'm reminded of the time I was watching television, and a CNN reporter was interviewing three individuals, a Russian, a Texan, and a New Yorker.

0:51And the reporter said, excuse me, what do you think of the meat shortage? And the Russian said, what's meat? And the Texan said, what's shortage? And the New Yorker said, what's excuse me? But I'm not here to talk about New York. I'm here to talk about the firm, the business firm, and the role of the firm and capitalism more generally in fostering social change. Now by social change, I don't mean what is often called social responsibility. In other words, the encouragement or requirement that firms be sensitive to the environment, that they pay living wages, so-called living wages or family wages, that they encourage diversity in the workplace and so on.

1:51No, I'm talking about changes that in a fundamental sense make society better. Changes that improve the quality of life for the average working man and woman in a society. Of course, we're talking about capitalism. The concept of the quality of life is defined by scholars, by economic historians in various ways. Usually we have in mind some combination of one's material standard of living, the availability of goods and services, health and nutrition, access to a variety, the variety of goods and services that are available, mobility, the condition of women and children, the amount of leisure time, and most important, what Judge Napolitino referred to last night as the right to be left alone, namely the amount of human liberty or freedom in a society.

2:53One of the most important themes in Mises' writings is his repeated insistence that the The radical improvements in the quality of life that have been experienced over the last two, two and a half centuries are the product not of the state, not of the labor unions, which you might call the junior partners of the state, but of capitalism, the product of the entrepreneurs, the capitalists, the laborers, financiers, others who contribute to their intellect, their time, their toil, to the worldwide division of labor. Now, it shouldn't surprise us, of course, that capitalism and capitalist institutions are fundamentally at odds with the state in a very important sense.

3:39The German sociologist Franz Oppenheimer famously distinguished two means of creating wealth. The first, through voluntary exchange, what he called the economic means, and the second, through theft or violent takeover, what he called, appropriately, the political means. The state, in Oppenheimer's definition, is, quote, the organization of the political means. In other words, as Murray Rothbard famously put it, and as Robert Higgs explained to us in great detail last night, the state is best understood as organized theft, organized robbery, organized exploitation. The state encourages conflict among people. Capitalism, by contrast, encourages harmony and peaceful interaction. Private property and the market system encourage cooperation among strangers, peaceful relationships among people of different races, colors, creeds, national backgrounds, people who speak different languages, people who otherwise might wish to have nothing to do with these people.

4:50So, capitalism and the firm, the business firm, are the creators of social harmony, one of the most important aspects of the quality of life. Now what are some visible manifestations of the improvements in quality of life that we've seen in the capitalist era? Well, let's start with the Industrial Revolution, at the birth of the capitalist era, the first great explosion of capitalist or commercial activity. The modern firm really begins a little bit later, the mid-19th century, but the great flourishing of capitalist institutions, to study that, we want to go back to the Industrial Revolution.

5:40Now the standard view of the Industrial Revolution, as summarized in a nice passage by Mises in Human Action, Mises describes the standard view, characterizes it as follows, quote, the peasants were happy, so also were the industrial workers under the domestic system, so called cottage production. They worked in their own cottages. They enjoyed a certain economic independence since they owned a garden plot and their tools. But then the Industrial Revolution fell like a war or a plague on these people. The factory system reduced the free worker to virtual slavery. It lowered his standard of living to the level of bare subsistence. In cramming women and children into the mills, it destroyed family life This view is still in many of the textbooks that our high school and college students use.

6:40However, this account is widely recognized by competent historians as pure fiction, as a purely fictional account. It doesn't square with any of the historical documents and data that we have from the early industrial period Let's start with the material standard of living. For most of human history, the material standard of living was fairly constant. Per capita incomes would rise on occasion and subsequently fall. There were no sustained changes over long periods of time. Then, beginning in the late 18th century and really taking off after about 1820, per capita incomes in the United Kingdom, the birthplace of the Industrial Revolution, and in the United States, began to rise year after year, a previously unknown phenomenon.

7:40Just to give you some numbers, according to the best estimates in the United Kingdom, At the start of the 18th century, the year 1700, per capita income was about $1,500 in today's currency, in today's U.S. dollars. It had risen to $1,800 by about 1760, and at the turn of the 19th century was up to about $2,000. It was $2,300 by 1830 and $3,800 by 1860, a two and a half times increase over what it had been just a century and a half before. And again, I emphasize that this kind of sustained increase, more than doubling over a century and a half, was unprecedented in human history.

8:31If we turn to the U.S., real GDP per capita was about $1,200 in 1820. That had gone up to about $2,500 by 1870, $5,300 by 1913, $9,561 by 1950, about $17,000 by 1973, about $27,000 today or at the end of the 1990s. That's a 25-fold increase from 1820 until the present, so real per capita incomes have increased by about 25 times since the dawn of the industrial era. What about health and nutrition?

9:18Their data on life expectancy, for example, would show that in 1850 in the U.S., the life Life expectancy for men and women averaged was about 38 years, 38.3. By the year 1900 that had risen to 47.8. In 1950 it was 68.2 and today is around 76, 77 years averaged across men and women. So we live approximately twice as long as our forebears lived in 1850. Interesting, researchers have looked at data on average height as a proxy for nutrition since nutrition is difficult to observe directly and we have seen a secular increase in average height in the past 200 years.

10:09Average men's height in 1750 was about 67 inches, 67.8 inches. It was about the same in 1850. By 1950 it was up to 69.8. So men in 1950 were about two inches taller on average than men in 1750. And this is explained by specialists in health as primarily due to improvements in nutrition, in the nutritional intake of the average diet. Okay, so people are much wealthier since the capitalist era than they were before it. They're much healthier. What about things, intangibles like leisure time? Well, in thinking about leisure, something that is often forgotten is that the very concept of leisure or leisure time was largely unknown prior to the industrial era.

11:02Era. Indeed, think of the average laborer, average farm worker, or laborer in an early industrial setting. People went to bed when the sun went down because there was no efficient, no inexpensive, reliable means of providing light after dark. And it was only through the relentless efforts of men like John D. Rockefeller, who by continually cutting the the price of fuel, and making kerosene, as opposed to whale oil, available to the mass of people, gave working folks, for the first time, private time at night, time to read, or time to engage in conversation, or to pursue whatever they might be interested in.

11:49Even today you think about, you know, a great capitalist entrepreneur like Sam Walton and Walmart of course is the subject of great denunciation particularly in places like New York, elite establishment cities, but if you go into the heartland the average person is tremendously loyal to and grateful to Walmart because by making it easier to shop, providing one-stop shopping, making the shopping experience faster, It gives people free time to engage in other pursuits. There's a good passage in W.H. Hutt's article on the Industrial Revolution that's reprinted in the Hayek edited volume, Capitalism and the Historians, on this point.

12:35Hutt notes in the context of discussing labor legislation, the British Factory Act, which placed maximums Maximums on the amount of hours people could work in the factories, limited how children could be employed in the factories. Hut says, he says, there would have been some fall in hours and some elimination of child labor following increasing real wages, legislation or no legislation. In other words, even in the absence of government intervention, the working day would have become shorter and children would have been used less as incomes rose. He says both of these things, shorter hours and reduction in child labor, are expressions of a demand for leisure, and leisure is only demanded after the more primary of human wants are amply satisfied.

13:29Moreover, Hut continues, until man has something to do in leisure, or until the commodities for use in leisure are sufficiently cheap and plentiful, what is the use of it to him? What is the use of leisure when there isn't sufficient food, or clothing, or shelter? In other words, the point is, leisure time, the whole concept of leisure is a uniquely modern invention, is a product of the capitalist era. What about women and children? It's true that women and children were employed in the factories, and that their lives were very difficult, the conditions were hard. Pages upon pages have been written about the long hours, the dirty and unsafe factories, the crowded and unhealthy tenement houses.

14:20But very little is known among non-specialists and the general population about the conditions of their lives before they went to the factories, about life in the villages. You often hear the expression, well, women went to work for the first time under capitalism. So back home in the village, on the farm, women didn't work. I guess they went to the beauty parlor and they did their nails all day and read magazines. There's a famous passage from Human Action in which Mises says the following. The factory owners, he writes, did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work at wages offered to them.

15:08Low as these wage rates were, they were nonetheless much more than these paupers could earn in any other field open to them. It is a distortion of facts to say that the factories carried off the housewives from the nurseries and the kitchens and the children from their play. These women had nothing to cook with and to feed their children. These children were destitute and starving. Their only refuge was the factory. It saved them in the strict sense of the term from starvation. Mises also points out in some interesting passages in his book Socialism that the capitalist institutions of private property and contract have been responsible for the greatest improvements in the status of women Mises says, the evolution of marriage has taken place by way of the law relating to the property of married persons.

16:04Woman's position in marriage was improved as the principle of violence was thrust back, and as the idea of contract advanced in other fields of the law of property, it necessarily transformed the property relations between the married couple. The wife was freed from the power of her husband for the first time when she gained legal rights over the wealth that she brought into the marriage and which she acquired during marriage. Thus, marriage as we know it, this is Mises writing in 1922, has come into existence entirely as a result of the contractual idea penetrating into this sphere of life. All of our cherished ideals of marriage have grown out of this idea that marriage unites one man and one woman, except in Massachusetts, That it can be entered into only with the pre-will of both parties, that it imposes a duty of mutual fidelity, that a man's violations of the marriage vows are to be judged no differently from a woman's, that the rights of husband and wife are necessarily the same.

17:04These principles develop from the contractual attitude to the problem of marital life. This contractual attitude that Mises refers to is of course a capitalist one because capitalism is fundamentally a society of contract. We could look at other indicators, improvements in mobility with the demise of the feudal system. We often describe the great industrialists of the 19th century as the robber barons, sort of the term that you see in the popular textbooks. As has been widely pointed out, you could hardly think of a less appropriate term for these men. They weren't robbers because they became wealthy by offering goods and services to consumers, and consumers willingly and voluntarily paid for those goods and services.

17:57and they certainly weren't barons. They all came from humble beginnings. I remember as a child visiting relatives in Scotland and seeing the little cottage that was the birthplace of Andrew Carnegie. It was about the size of Lew and Marty's office that Mark described in his speech. It's a tiny little primitive cottage. We could discuss ways in which capitalism has improved people's informal relations, improvements in what people now call social capital. and Capital. We could talk about the contributions of capitalism to culture and the arts, but Mark's giving me the signal so we won't talk about those things. The main point is that the key to these improvements in the quality of life is mass production, the factory system and so on, and in modern terms the corporate form of organization.

18:52Mises repeatedly emphasized that the hallmark of capitalism was mass production, or as he put it, mass production to satisfy the needs of the masses. So of course there had been sophisticated craft production before, but it largely served the interests of the elites, politically connected elites. What capitalism ushered in was a new era in which the consumer, the average man and woman, was truly sovereign. To conclude, man is inherently, as Mises emphasized, a social being, a social animal. In economic theory, we sometimes use the construct of the isolated individual, Robinson Crusoe on his island.

19:40But as Mises emphasized, this idea of man as an isolated individual is purely an analytical device. It's an aid to our reasoning in thinking through certain problems of resource allocation and so on. In reality, men are linked by a dense network of social ties. Mises emphasized that society, the society of voluntary interaction among individuals, was the product of rational, calculated action on the part of these individuals who choose to participate in the division of labor. As Joseph Salerno has summarized Mises' thought in Joe's article, Mises as a Social Rationalist, society is therefore a product of human reason. The firm is one of the most important manifestations of this.

20:29What is the firm? It's a voluntary nexus of individuals who choose to pool their resources, to share rights and responsibilities, and so on, governed by contract, to produce goods and services, to achieve other outcomes that make the consumer better off. In short, it's the entrepreneur, the capitalist and the business firm that have always been the drivers of social change in the positive sense. Social change in the sense of making people in society better off. And we can be sure that it is these private institutions and not the state or its agents who will continue to drive improvements in society in the future. Thank you very much.