WEBVTT NOTE The Firm as the Engine of Social Change 1 00:00:00.000 --> 00:00:03.220 Great pleasure to be here in New York. 2 00:00:03.220 --> 00:00:06.640 I was born just across the river in Brooklyn, 3 00:00:06.640 --> 00:00:11.480 not too far from where Murray Rothbard spent most of his professional career 4 00:00:11.480 --> 00:00:14.360 at the Brooklyn Polytechnic Institute. 5 00:00:14.360 --> 00:00:19.080 I also lived not only in New York City, but in upstate New York in the Buffalo 6 00:00:19.080 --> 00:00:21.160 area, the town of Fredonia, 7 00:00:21.160 --> 00:00:25.720 and also spent a year across this river in Joyzee. 8 00:00:25.720 --> 00:00:33.720 So, it's always a great pleasure to be back. New York City, as you know, is a lot like other cities. 9 00:00:36.720 --> 00:00:39.720 That was a joke. 10 00:00:39.720 --> 00:00:51.720 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. 11 00:00:51.720 --> 00:00:56.720 And the reporter said, excuse me, what do you think of the meat shortage? 12 00:00:56.720 --> 00:01:00.720 And the Russian said, what's meat? 13 00:01:00.720 --> 00:01:03.720 And the Texan said, what's shortage? 14 00:01:03.720 --> 00:01:14.720 And the New Yorker said, what's excuse me? 15 00:01:14.720 --> 00:01:16.720 But I'm not here to talk about New York. 16 00:01:16.720 --> 00:01:20.720 I'm here to talk about the firm, the business firm, 17 00:01:20.720 --> 00:01:27.720 and the role of the firm and capitalism more generally in fostering social change. 18 00:01:27.720 --> 00:01:34.720 Now by social change, I don't mean what is often called social responsibility. 19 00:01:34.720 --> 00:01:41.720 In other words, the encouragement or requirement that firms be sensitive to the environment, 20 00:01:41.720 --> 00:01:46.720 that they pay living wages, so-called living wages or family wages, 21 00:01:46.720 --> 00:01:51.720 that they encourage diversity in the workplace and so on. 22 00:01:51.720 --> 00:01:58.120 No, I'm talking about changes that in a fundamental sense make society better. 23 00:01:58.120 --> 00:02:04.720 Changes that improve the quality of life for the average working man and woman in a society. 24 00:02:04.720 --> 00:02:09.520 Of course, we're talking about capitalism. 25 00:02:09.520 --> 00:02:17.520 The concept of the quality of life is defined by scholars, by economic historians in various ways. 26 00:02:17.520 --> 00:02:25.520 Usually we have in mind some combination of one's material standard of living, the availability of goods and services, 27 00:02:25.520 --> 00:02:33.520 health and nutrition, access to a variety, the variety of goods and services that are available, 28 00:02:33.520 --> 00:02:42.960 mobility, the condition of women and children, the amount of leisure time, and most important, 29 00:02:42.960 --> 00:02:49.060 what Judge Napolitino referred to last night as the right to be left alone, namely the 30 00:02:49.060 --> 00:02:53.320 amount of human liberty or freedom in a society. 31 00:02:53.320 --> 00:02:58.960 One of the most important themes in Mises' writings is his repeated insistence that the 32 00:02:58.960 --> 00:03:03.980 The radical improvements in the quality of life that have been experienced over the last 33 00:03:03.980 --> 00:03:11.460 two, two and a half centuries are the product not of the state, not of the labor unions, 34 00:03:11.460 --> 00:03:16.780 which you might call the junior partners of the state, but of capitalism, the product 35 00:03:16.780 --> 00:03:22.360 of the entrepreneurs, the capitalists, the laborers, financiers, others who contribute 36 00:03:22.360 --> 00:03:28.360 to their intellect, their time, their toil, to the worldwide division of labor. 37 00:03:28.360 --> 00:03:39.360 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. 38 00:03:39.360 --> 00:03:46.360 The German sociologist Franz Oppenheimer famously distinguished two means of creating wealth. 39 00:03:46.360 --> 00:03:58.360 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. 40 00:03:58.360 --> 00:04:05.360 The state, in Oppenheimer's definition, is, quote, the organization of the political means. 41 00:04:05.360 --> 00:04:20.360 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. 42 00:04:20.360 --> 00:04:50.360 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. 43 00:04:50.360 --> 00:05:03.360 So, capitalism and the firm, the business firm, are the creators of social harmony, one of the most important aspects of the quality of life. 44 00:05:03.360 --> 00:05:12.360 Now what are some visible manifestations of the improvements in quality of life that we've seen in the capitalist era? 45 00:05:12.360 --> 00:05:24.360 Well, let's start with the Industrial Revolution, at the birth of the capitalist era, the first great explosion of capitalist or commercial activity. 46 00:05:24.360 --> 00:05:40.360 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. 47 00:05:40.360 --> 00:05:54.360 Now 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, 48 00:05:54.360 --> 00:06:03.360 quote, the peasants were happy, so also were the industrial workers under the domestic system, so called cottage production. 49 00:06:03.360 --> 00:06:10.360 They worked in their own cottages. They enjoyed a certain economic independence since they owned a garden plot and their tools. 50 00:06:10.360 --> 00:06:16.360 But then the Industrial Revolution fell like a war or a plague on these people. 51 00:06:16.360 --> 00:06:20.360 The factory system reduced the free worker to virtual slavery. 52 00:06:20.360 --> 00:06:24.360 It lowered his standard of living to the level of bare subsistence. 53 00:06:24.360 --> 00:06:28.360 In cramming women and children into the mills, it destroyed family life 54 00:06:28.360 --> 00:06:40.360 This view is still in many of the textbooks that our high school and college students use. 55 00:06:40.360 --> 00:06:50.360 However, this account is widely recognized by competent historians as pure fiction, as a purely fictional account. 56 00:06:50.360 --> 00:06:56.360 It doesn't square with any of the historical documents and data that we have from the early industrial period 57 00:06:56.360 --> 00:07:20.360 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. 58 00:07:20.360 --> 00:07:27.760 Then, beginning in the late 18th century and really taking off after about 1820, per capita 59 00:07:27.760 --> 00:07:32.320 incomes in the United Kingdom, the birthplace of the Industrial Revolution, and in the United 60 00:07:32.320 --> 00:07:40.480 States, began to rise year after year, a previously unknown phenomenon. 61 00:07:40.480 --> 00:07:46.160 Just to give you some numbers, according to the best estimates in the United Kingdom, 62 00:07:46.160 --> 00:07:53.420 At the start of the 18th century, the year 1700, per capita income was about $1,500 in 63 00:07:53.420 --> 00:07:58.160 today's currency, in today's U.S. dollars. 64 00:07:58.160 --> 00:08:06.440 It had risen to $1,800 by about 1760, and at the turn of the 19th century was up to 65 00:08:06.440 --> 00:08:08.660 about $2,000. 66 00:08:08.660 --> 00:08:17.900 It was $2,300 by 1830 and $3,800 by 1860, a two and a half times increase over what 67 00:08:17.900 --> 00:08:20.760 it had been just a century and a half before. 68 00:08:20.760 --> 00:08:27.220 And again, I emphasize that this kind of sustained increase, more than doubling over a century 69 00:08:27.220 --> 00:08:31.140 and a half, was unprecedented in human history. 70 00:08:31.140 --> 00:08:59.140 If 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. 71 00:08:59.140 --> 00:09:07.300 That's a 25-fold increase from 1820 until the present, so real per capita incomes have 72 00:09:07.300 --> 00:09:14.780 increased by about 25 times since the dawn of the industrial era. 73 00:09:14.780 --> 00:09:18.900 What about health and nutrition? 74 00:09:18.900 --> 00:09:25.820 Their data on life expectancy, for example, would show that in 1850 in the U.S., the life 75 00:09:25.820 --> 00:09:51.820 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. 76 00:09:51.820 --> 00:10:09.820 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. 77 00:10:09.820 --> 00:10:17.820 Average men's height in 1750 was about 67 inches, 67.8 inches. 78 00:10:17.820 --> 00:10:30.820 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. 79 00:10:30.820 --> 00:10:40.820 And this is explained by specialists in health as primarily due to improvements in nutrition, in the nutritional intake of the average diet. 80 00:10:40.820 --> 00:10:46.820 Okay, so people are much wealthier since the capitalist era than they were before it. 81 00:10:46.820 --> 00:10:51.820 They're much healthier. What about things, intangibles like leisure time? 82 00:10:51.820 --> 00:11:02.820 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. 83 00:11:02.820 --> 00:11:11.700 Era. Indeed, think of the average laborer, average farm worker, or laborer in an early 84 00:11:11.700 --> 00:11:20.020 industrial setting. People went to bed when the sun went down because there was no efficient, 85 00:11:20.020 --> 00:11:25.900 no inexpensive, reliable means of providing light after dark. And it was only through 86 00:11:25.900 --> 00:11:31.560 the relentless efforts of men like John D. Rockefeller, who by continually cutting the 87 00:11:31.560 --> 00:11:49.560 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. 88 00:11:49.560 --> 00:12:19.560 Even 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, 89 00:12:19.560 --> 00:12:23.560 It gives people free time to engage in other pursuits. 90 00:12:23.560 --> 00:12:27.560 There's a good passage in W.H. Hutt's 91 00:12:27.560 --> 00:12:31.560 article on the Industrial Revolution that's reprinted in the Hayek 92 00:12:31.560 --> 00:12:35.560 edited volume, Capitalism and the Historians, on this point. 93 00:12:35.560 --> 00:12:39.560 Hutt notes in the context of discussing 94 00:12:39.560 --> 00:12:43.560 labor legislation, the British Factory Act, which 95 00:12:43.560 --> 00:12:47.560 placed maximums 96 00:12:47.560 --> 00:12:56.560 Maximums on the amount of hours people could work in the factories, limited how children could be employed in the factories. 97 00:12:56.560 --> 00:13:07.560 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. 98 00:13:07.560 --> 00:13:16.560 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. 99 00:13:16.560 --> 00:13:29.560 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. 100 00:13:29.560 --> 00:13:42.560 Moreover, 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? 101 00:13:42.560 --> 00:13:48.560 What is the use of leisure when there isn't sufficient food, or clothing, or shelter? 102 00:13:48.560 --> 00:13:55.560 In other words, the point is, leisure time, the whole concept of leisure is a uniquely modern invention, 103 00:13:55.560 --> 00:13:59.560 is a product of the capitalist era. 104 00:13:59.560 --> 00:14:02.560 What about women and children? 105 00:14:02.560 --> 00:14:06.560 It's true that women and children were employed in the factories, 106 00:14:06.560 --> 00:14:10.560 and that their lives were very difficult, the conditions were hard. 107 00:14:10.560 --> 00:14:20.560 Pages upon pages have been written about the long hours, the dirty and unsafe factories, the crowded and unhealthy tenement houses. 108 00:14:20.560 --> 00:14:33.560 But 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. 109 00:14:33.560 --> 00:14:41.560 You often hear the expression, well, women went to work for the first time under capitalism. 110 00:14:41.560 --> 00:14:47.560 So back home in the village, on the farm, women didn't work. 111 00:14:47.560 --> 00:14:53.560 I guess they went to the beauty parlor and they did their nails all day and read magazines. 112 00:14:53.560 --> 00:14:58.560 There's a famous passage from Human Action in which Mises says the following. 113 00:14:58.560 --> 00:15:04.560 The factory owners, he writes, did not have the power to compel anybody to take a factory job. 114 00:15:04.560 --> 00:15:08.560 They could only hire people who were ready to work at wages offered to them. 115 00:15:08.560 --> 00:15:17.560 Low as these wage rates were, they were nonetheless much more than these paupers could earn in any other field open to them. 116 00:15:17.560 --> 00:15:26.560 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. 117 00:15:26.560 --> 00:15:31.060 These women had nothing to cook with and to feed their children. 118 00:15:31.060 --> 00:15:34.060 These children were destitute and starving. 119 00:15:34.060 --> 00:15:36.060 Their only refuge was the factory. 120 00:15:36.060 --> 00:15:42.060 It saved them in the strict sense of the term from starvation. 121 00:15:42.060 --> 00:15:47.060 Mises also points out in some interesting passages in his book Socialism 122 00:15:47.060 --> 00:15:51.060 that the capitalist institutions of private property and contract 123 00:15:51.060 --> 00:15:56.060 have been responsible for the greatest improvements in the status of women 124 00:15:56.060 --> 00:16:04.060 Mises says, the evolution of marriage has taken place by way of the law relating to the property of married persons. 125 00:16:04.060 --> 00:16:09.060 Woman's position in marriage was improved as the principle of violence was thrust back, 126 00:16:09.060 --> 00:16:13.060 and as the idea of contract advanced in other fields of the law of property, 127 00:16:13.060 --> 00:16:18.060 it necessarily transformed the property relations between the married couple. 128 00:16:18.060 --> 00:16:22.060 The wife was freed from the power of her husband for the first time 129 00:16:22.060 --> 00:16:28.060 when she gained legal rights over the wealth that she brought into the marriage and which she acquired during marriage. 130 00:16:28.060 --> 00:16:40.060 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. 131 00:16:40.060 --> 00:16:49.060 All of our cherished ideals of marriage have grown out of this idea that marriage unites one man and one woman, except in Massachusetts, 132 00:16:49.060 --> 00:17:04.060 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. 133 00:17:04.060 --> 00:17:10.060 These principles develop from the contractual attitude to the problem of marital life. 134 00:17:10.060 --> 00:17:20.060 This contractual attitude that Mises refers to is of course a capitalist one because capitalism is fundamentally a society of contract. 135 00:17:20.060 --> 00:17:28.060 We could look at other indicators, improvements in mobility with the demise of the feudal system. 136 00:17:28.060 --> 00:17:36.060 We often describe the great industrialists of the 19th century as the robber barons, 137 00:17:36.060 --> 00:17:40.060 sort of the term that you see in the popular textbooks. 138 00:17:40.060 --> 00:17:47.060 As has been widely pointed out, you could hardly think of a less appropriate term for these men. 139 00:17:47.060 --> 00:17:53.060 They weren't robbers because they became wealthy by offering goods and services to consumers, 140 00:17:53.060 --> 00:17:57.060 and consumers willingly and voluntarily paid for those goods and services. 141 00:17:57.060 --> 00:18:08.060 and 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. 142 00:18:08.060 --> 00:18:15.060 It was about the size of Lew and Marty's office that Mark described in his speech. It's a tiny little primitive cottage. 143 00:18:15.060 --> 00:18:25.060 We could discuss ways in which capitalism has improved people's informal relations, improvements in what people now call social capital. 144 00:18:25.060 --> 00:18:34.060 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. 145 00:18:34.060 --> 00:18:52.060 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. 146 00:18:52.060 --> 00:19:04.060 Mises repeatedly emphasized that the hallmark of capitalism was mass production, or as he put it, mass production to satisfy the needs of the masses. 147 00:19:04.060 --> 00:19:14.060 So of course there had been sophisticated craft production before, but it largely served the interests of the elites, politically connected elites. 148 00:19:14.060 --> 00:19:23.060 What capitalism ushered in was a new era in which the consumer, the average man and woman, was truly sovereign. 149 00:19:23.060 --> 00:19:32.060 To conclude, man is inherently, as Mises emphasized, a social being, a social animal. 150 00:19:32.060 --> 00:19:40.060 In economic theory, we sometimes use the construct of the isolated individual, Robinson Crusoe on his island. 151 00:19:40.060 --> 00:19:48.560 But as Mises emphasized, this idea of man as an isolated individual is purely an analytical device. 152 00:19:48.560 --> 00:19:54.560 It's an aid to our reasoning in thinking through certain problems of resource allocation and so on. 153 00:19:54.560 --> 00:20:00.560 In reality, men are linked by a dense network of social ties. 154 00:20:00.560 --> 00:20:07.060 Mises emphasized that society, the society of voluntary interaction among individuals, 155 00:20:07.060 --> 00:20:14.560 was the product of rational, calculated action on the part of these individuals who choose to participate in the division of labor. 156 00:20:14.560 --> 00:20:20.760 As Joseph Salerno has summarized Mises' thought in Joe's article, Mises as a Social Rationalist, 157 00:20:20.760 --> 00:20:23.760 society is therefore a product of human reason. 158 00:20:23.760 --> 00:20:29.560 The firm is one of the most important manifestations of this. 159 00:20:29.560 --> 00:20:31.360 What is the firm? 160 00:20:31.360 --> 00:20:50.360 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. 161 00:20:50.360 --> 00:20:58.360 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. 162 00:20:58.360 --> 00:21:03.360 Social change in the sense of making people in society better off. 163 00:21:03.360 --> 00:21:14.360 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. 164 00:21:15.360 --> 00:21:17.360 Thank you very much.