By Richard M. Ebeling
The coronavirus and the government responses with shutdowns and lockdowns, along with restrictions on international travel and disruptions of the global supply chains that crisscross countries and continents, have made a fuller and more rapid recovery difficult in the Western industrialized countries, but even more so in many places in what used to be called during the Cold War, the underdeveloped nations of the “Third World.” The question is what may be the best domestic and trade policies for these countries to follow in such trying times?
To where and to whom might we turn for some advice for these developing countries in the aftermath of the economic disaster caused by governments due to their responses to the coronavirus? I would like to suggest that one place to start might be with the policy recommendations offered by the Austrian economist, Ludwig von Mises (1881-1973), about 80 years ago, when he was asked to present an agenda for economic reform and growth for Mexico after he completed an extensive stay in and study of that country’s situation and possibilities.
In December 1941, Mises was invited to spend most of January and February of 1942 in Mexico, lecturing at the School of Economics of the National University of Mexico. There he delivered a series of lectures on “The Organization of Social Economy,” and two seminar series – “The Role of Economic Doctrines in Present-day Political Antagonisms” and “Fundamental Problems of Money and Credit.” He also delivered two lectures at the Independent Law School in Mexico City. In total, Mises gave twenty-three lectures over that six-week period.
The following year, in June 1943, Mises finished a monograph on “Mexico’s Economic Problems,” which he had prepared for a market-oriented business association in Mexico City. His purpose was to develop a series of detailed economic policy proposals that a country like Mexico could follow with two underlying goals in mind: to foster that nation’s industrial development and to integrate that nation’s economy into the global system of division of labor.
Mises started out by emphasizing that regardless of the policies of other countries and the general international conditions, sound economic policy always begins at home and never loses sight of the long run.
He explained the counterproductive consequences for Mexico resulting from the country’s intellectual and political leadership having accepted many of the premises of socialist and interventionist ideology. Wrong ideas had prevented Mexico’s economic development. What Mexicans had to realize was that, “The only way toward an improvement of Mexico’s economic situation is economic liberalism, that is, the policy of laissez-faire; what Mexico needs is economic freedom.”
Mises contrasted two methods for Mexico’s path toward industrialization, what he called the “closed door” and the “open door” methods. The closed-door method is what became widely known in the post-World War II period as the import-substitution method of industrialization. Under this approach, industrialization was to be forced through trade restrictions and high tariff barriers behind which domestic industries would be stimulated into existence at artificially high prices, far above those in the general global market. Mises pointed out that countries implementing such policies inevitably made their own people poorer and less productive.
Mises argued, Mexico needed to follow the “open door” approach to industrialization, initially selling mostly raw materials and resources on the world market, and thereby earning the means to import capital and so raise the standard of living of its workforce, from which domestic saving and investment would be generated over time. Many sectors of the Mexican economy could make a fairly easy and smooth adjustment to an immediate shift to a free trade policy, he estimated. But there were, admittedly, other sectors that had become significantly dependent upon the tariff walls behind which they had developed over the years. Of course, he went on, “A sound industrialization program for Mexico has to repeal all import duties.”
What the Mexican government and political parties needed to do immediately was to publicly declare that henceforth economic policy would be based on: (a) no expropriation of private property; (b) no confiscatory taxation of profit; (c) no controls or restrictions on the foreign exchange market; and (d) no direct or indirect interference with the management and decision-making of private businesses. It was important to attempt to recreate confidence in the Mexican business climate to attract foreign investors as well as creating a sense of security for Mexican entrepreneurs.
If Mexico was to succeed in its market-driven industrial development it was essential that neither government legislation nor trade union power be used to artificially raise wage rates above those set on the market, and most certainly there should be no attempt to raise them to comparable United States levels. Mexico was a capital-poor country, Mises emphasized, with a relatively large supply of unskilled labor. That necessarily meant that labor productivity was far lower than that of American workers. To be competitive Mexican workers had to specialize in those lines of production in which they had a cost-advantage in international markets.
Mises argued that the private sector should be neither taxed nor expected to directly provide workers with social insurance of any kind. If the employer is burdened with financing social insurance schemes, the cost of employing workers rises, since the full cost of hiring is both the money wage agreed to as well as the taxes for or the direct costs of providing social security, public housing, medical care, and so on. These additional labor expenses result in some workers again being priced out of the market or some jobs never being created.
Equally important, Mises said, is that mandatory social insurance limits the freedom of the employee. “It only restricts his freedom to spend his earnings ad libitum. It forces him to provide for illness, disability, and to spend a minimum for housing and so on,” whether or not this reflects the worker’s personal preferences about how best to allocate his income as he understands his own circumstances.
Finally, on monetary and fiscal matters Mises argued that Mexico should establish a functioning gold standard that would secure a stable currency not open to direct or easy manipulation and abuse by the government. A stable, gold-based currency would also help to create a market climate more likely to attract foreign investment, without which Mexico’s climb to industrial development would be that much more difficult. With this goal in mind, the government had to maintain a balanced budget by keeping expenditures within the bounds of taxes collected, and with those taxes being kept generally low.
Almost 80 years since Ludwig von Mises penned these words and advice, it may be said that they remain as true and important now as in the 1940s, for any country wishing to improve the economic circumstances of its people. Indeed, his warnings about misguided government policies remain just as relevant if not more so today, as we see in our own time a new push for increased interventionism, expanded welfare statism, and renewed calls for socialist-style centralized planning. As Mises said, if we want, peace, freedom and prosperity, there is no alternative to the free market economy respectful of competitive entrepreneurship and consumer choice.
Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.The above is an abridged version of an essay, Post-Covid Policy Advice from Ludwig von Mises for Developing Countries, that first appeared at aier.org.
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