Human Action: A Treatise on Economics

by Ludwig VonMises

  Superficial observers sometimes fail to see these facts because they are deluded by the practice of many big enterprises of acquiring the rights granted by a patent in their field regardless of its usefulness. This practice stems from various considerations:

  The economic significance of the innovation is not yet recognizable.

  The innovation is obviously useless. But the firm believes that it could develop it in such a way as to make it useful.

  The immediate application of the innovation does not pay. But the firm intends to apply it later when replacing its worn-out equipment.

  The firm wants to encourage the inventor to continue his research in spite of the fact that up to now his endeavors have not resulted in a practically utilizable innovation.

  The firm wants to placate litigious inventors in order to spare the money, time, and nervous strain which frivolous infringement suits bring about.

  The firm resorts to hardly disguised bribery or yields to veiled blackmail when paying for quite useless patents to officers, engineers, or other influential personnel of firms or institutions which are its customers or potential customers.

  If an invention is so superior to the old processes that it makes the old equipment obsolete and peremptorily demands its immediate replacement by new machines, the transformation will be effected no matter whether the privilege conferred by the patent is in the hands of the owners of the old equipment or of an independent firm. The assertions to the contrary are based on the assumption that not only the inventor and his attorneys but also all people already active in the field of production concerned or prepared to enter into it if an opportunity is offered to them fail entirely to grasp the importance of the invention. The inventor sells his rights to the old firm for a trifle because no one else wants to acquire them. And this old firm is also too dull to see the advantages that it could derive from the application of the invention.

  Now, it is true that a technological improvement cannot be adopted if people are blind to its usefulness. Under a socialist management the incompetence or stubborness of the officers in charge of the department concerned would be enough to prevent the adoption of a more economical method of production. The same is the case with regard to inventions in fields dominated by the government. The most conspicuous examples are provided by the failure of eminent military experts to comprehend the significance of new devices. The great Napoleon did not recognize the help which steamboats could give to his plans to invade Great Britain; both Foch and the German general staff underestimated on the eve of the first World War the importance of aviation, and later the eminent pioneer of air power, General Billy Mitchell, had very unpleasant experiences. But things are entirely different in the orbit in which the market economy is not hampered by bureaucratic narrow-mindedness. There a tendency to overrate rather than to underestimate the potentialities of an innovation prevails. The history of modern capitalism shows innumerable instances of abortive attempts to push innovations which proved futile. Many promoters have paid heavily for unfounded optimism. It would be more realistic to blame capitalism for its propensity to overvalue useless innovations than for its alleged suppression of useful innovations. It is a fact that large sums have been wasted for the purchase of quite useless patent rights and for fruitless ventures to apply them in practice.

  It is absurd to speak of an alleged bias of modern big business against technological improvement. The great corporations spend huge sums in the search for new processes and new devices.

  Those lamenting an alleged suppression of inventions on the part of free enterprise must not think that they have proved their case by referring to the fact that many patents are either never utilized at all or only used after a long delay. It is manifest that numerous patents, perhaps the far greater number of them, are quite useless. Those alleging suppression of useful innovations do not cite a single instance of such an innovation’s being unused in the countries protecting it by a patent while it is used by the Soviets—no respecters of patent privileges.

  The limited convertibility of capital goods plays an important role in human geography. The present distribution of human abodes and industrial centers over the earth’s surface is to a certain degree determined by historical factors. The fact that definite sites were chosen in a distant past is still operative. There prevails, it is true, a universal tendency for people to move to those areas which offer the most propitious potentialities for production. However, this tendency is restrained not only by institutional factors, such as migration barriers. A historical factor also plays a momentous role. Capital goods of limited convertibility have been invested in areas which, from the point of view of our present knowledge, offer less favorable opportunities. Their immobilization counteracts the tendency to locate plants, farms, and dwelling places according to the state of our contemporary information about geography, geology, plant and animal physiology, climatology, and other branches of science. Against the advantages of moving toward sites offering better physical opportunities one must weigh the disadvantages of leaving unused capital goods of limited convertibility and transferability.

  Thus the degree of convertibility of the supply of capital goods available affects all decisions concerning production and consumption. The smaller the degree of convertibility, the more realization of technological improvement is delayed. Yet it would be absurd to refer to this retarding effect as irrational and antiprogressive. To consider, in planning action, all the advantages and disadvantages expected and to weigh them against one another is a manifestation of rationality. Not the soberly calculating businessman, but the romantic technocrat is to blame for a delusive incomprehension of reality. What slows down technological improvement is not the imperfect convertibility of capital goods, but their scarcity. We are not rich enough to renounce the services which still utilizable capital goods could provide. The fact that a supply of capital goods is available does not check progress; it is, on the contrary, the indispensable condition of any improvement and progress. The heritage of the past embodied in our supply of capital goods is our wealth and the foremost means of further advancement in wellbeing. It is true, we would be still better off if our ancestors and we ourselves in our past actions had succeeded in better anticipating the conditions under which we must act today. The cognizance of this fact explains many phenomena of our time. But it does not cast any blame upon the past nor does it show any imperfection inherent in the market economy.

  7. Accumulation, Maintenance and Consumption of Capital

  Capital goods are intermediary products which in the further course of production activities are transformed into consumers’ goods. All capital goods, including those not called perishable, perish either in wearing out their serviceableness in the performance of production processes or in losing their serviceableness, even before this happens, through a change in the market data. There is no question of keeping a stock of capital goods intact. They are transient.

  The notion of wealth constancy is an outgrowth of deliberate planning and acting. It refers to the concept of capital as applied in capital accounting, not to the capital goods as such. The idea of capital has no counterpart in the physical universe of tangible things. It is nowhere but in the minds of planning men. It is an element in economic calculation. Capital accounting serves one purpose only. It is designed to make us know how our arrangement of production and consumption acts upon our power to satisfy future wants. The question it answers is whether a certain course of conduct increases or decreases the productivity of our future exertion.

  The intention of preserving the available supply of capital goods in full power or of increasing it could also direct the actions of men who did not have the mental tool of economic calculation. Primitive fishermen and hunters were certainly aware of the difference between maintaining their tools and devices in good shape and serviceableness and wearing them out without providing for adequate replacements. An old-fashioned peasant, committed to traditional routine and ignorant of
accountancy, knows very well the significance of maintaining intact his live and dead stock. Under the simple conditions of a stationary or slowly progressing economy it is feasible to operate successfully even in the absence of capital accounting. There the maintenance of a by and large unchanged supply of capital goods can be effected either by current production of pieces destined to replace those worn out or by the accumulation of a fund of consumers’ goods which makes it possible to devote effort at a later time toward the replacement of such capital goods without being forced to restrict consumption temporarily. But a changing industrial economy cannot do without economic calculation and its fundamental concepts of capital and income.

  Conceptual realism has muddled the comprehension of the concept of capital. It has brought about a mythology of capital.15 An existence has been attributed to “capital,” independent of the capital goods in which it is embodied. Capital, it is said, reproduces itself and thus provides for its own maintenance. Capital, says the Marxian, hatches out profit. All this is nonsense.

  Capital is a praxeological concept. If we were to resort to the terminology of traditional philosophy, which is characterized by neglect of all praxeological issues, we could call it a voluntaristic concept. It is a product of reasoning, and its place is in the human mind. It is a mode of looking at the problems of acting, a method of appraising them from the point of view of a definite plan. It determines the course of human action and is, in this sense only, a real factor. It is inescapably linked with capitalism, the market economy. It is a mere shadow in economic systems in which there is no market exchange and no money prices of goods of all orders.

  The capital concept is operative as far as men in their actions let themselves be guided by capital accounting. If the entrepreneur has employed factors of production in such a way that the money equivalent of the products at least equals the money equivalent of the factors expended, he is in a position to replace the capital goods expended by new capital goods the money equivalent of which equals the money equivalent of those expended. But the employment of the gross proceeds, their allotment to the maintenance of capital, consumption, and the accumulation of new capital is always the outcome of purposive action on the part of the entrepreneurs and capitalists. It is not “automatic”; it is by necessity the result of deliberate action. And it can be frustrated if the computation on which it is based was vitiated by negligence, error, or misjudgment of future conditions.

  Additional capital can be accumulated only by saving, i.e., a surplus of production over consumption. Saving may consist in a restriction of consumption. But it can also be brought about, without a further restriction in consumption and without a change in the input of capital goods, by an increase in net production. Such an increase can appear in different ways:

  1. Natural conditions have become more propitious. Harvests are more plentiful. People have access to more fertile soil and have discovered mines yielding higher returns per unit of input. Cataclysms and catastrophes which in repeated occurrence frustrated human effort have become less frequent. Epidemics and cattle plagues have subsided.

  2. People have succeeded in rendering some production processes more fruitful without investing more capital goods and without a further lengthening of the period of production.

  3. Institutional disturbances of production activities have become less frequent. The losses caused by war, revolutions, strikes, sabotage, and other crimes have been reduced.

  If the surpluses thus brought about are employed as additional investment, they further increase future net proceeds. Then it becomes possible to expand consumption without prejudice to the supply of capital goods available and the productivity of labor.

  Capital is always accumulated by individuals or groups of individuals acting in concert, never by the Volkswirtschaft or the society.16 It may happen that while some actors are accumulating additional capita), others are at the same time consuming capital previously accumulated. If these two processes are equal in amount, the sum of the capital funds available in the market system remains unaltered and it is as if no change in the total amount of capital goods available had occurred. The accumulation of additional capital on the part of some people merely removes the necessity of shortening the period of production of some processes. But no further adoption of processes with a longer period of production becomes feasible. If we look at affairs from this angle we may say that a transfer of capital took place. But one must guard oneself against confusing this notion of capital transfer with the conveyance of property from one individual or group of individuals to others.

  The sale and purchase of capital goods and the loans granted to business are not as such capital transfer. They are transactions which are instrumental in conveying the concrete capital goods into the hands of those entrepreneurs who want to employ them for the performance of definite projects. They are only ancillary steps in the course of a long-range sequence of acts. Their composite effect decides the success or failure of the whole project. But neither profit nor loss directly brings about either capital accumulation or capital consumption. It is the way in which those in whose fortune profit or loss occurs arrange their consumption that alters the amount of capital available.

  Capital transfer can be effected both without and with a conveyance in the ownership of capital goods. The former is the case when one man consumes capital while another man independently accumulates capital in the same amount. The latter is the case if the seller of capital goods consumes the proceeds while the buyer pays the price out of a nonconsumed—saved—surplus of net proceeds over consumption.

  Capital consumption and the physical extinction of capital goods are two different things. All capital goods sooner or later enter into final products and cease to exist through use, consumption, wear and tear. What can be preserved by an appropriate arrangement of consumption is only the value of a capital fund, never the concrete capital goods. It may sometimes happen that acts of God or manmade destruction result in so great an extinction of capital goods that no possible restriction of consumption can bring about in a short time a replenishment of the capital funds to its previous level. But what brings about such a depletion is always the fact that the net proceeds of current production devoted to the maintenance of capital are not sufficiently large.

  8. The Mobility of the Investor

  The limited convertibility of the capital goods does not immovably bind their owner. The investor is free to alter the investment of his funds. If he is able to anticipate the future state of the market more correctly than other people, he can succeed in choosing only investments whose price will rise and in avoiding investments whose price will drop.

  Entrepreneurial profit and loss emanate from the dedication of factors of production to definite projects. Stock exchange speculation and analogous transactions outside the securities market determine on whom the incidence of these profits and losses shall fall. A tendency prevails to make a sharp distinction between such purely speculative ventures and genuinely sound investment. The distinction is one of degree only. There is no such thing as a nonspeculative investment. In a changing economy action always involves speculation. Investments may be good or bad, but they are always speculative. A radical change in conditions may render bad even investments commonly considered perfectly safe.

  Stock speculation cannot undo past action and cannot change anything with regard to the limited convertibility of capital goods already in existence. What it can do is prevent additional investment in branches and enterprises in which, according to the opinion of the speculators, it would be misplaced. It points the specific way for a tendency, prevailing in the market economy, to expand profitable production ventures and to restrict the unprofitable. In this sense the stock exchange becomes simply “the market,” the focal point of the market economy, the ultimate device to make the anticipate demand of the consumers supreme in the conduct of business.

  The mobility of the investor manifests itself in the phenomenon called capi
tal flight. Individual investors can go away from investments which they consider unsafe provided that they are ready to take the loss already discounted by the market. Thus they can protect themselves against anticipated further losses and shift them to people who are less realistic in their appraisal of the future prices of the goods concerned. Capital flight does not withdraw inconvertible capital goods from the lines of their investment. It consists merely in a change of ownership.

  It makes no difference in this regard whether the capitalist “flees” into another domestic investment or into a foreign investment. One of the main objectives of foreign exchange control is to prevent capital flight into foreign countries. However, foreign exchange control only succeeds in preventing the owners of domestic investments from restricting their losses by exchanging in time a domestic investment they consider unsafe for a foreign investment they consider safer.

  If all or certain classes of domestic investment are threatened by partial or total expropriation, the market discounts the unfavorable consequences of this policy by an adequate change in their prices. When this happens, it is too late to resort to flight in order to avoid being victimized. Only those investors can come off with a small loss who are keen enough to forecast the disaster at a time when the majority is still unaware of its approach and its significance. Whatever the various capitalists and entrepreneurs may do, they can never make mobile and transferable inconvertible capital goods. While this, at least, is admitted by and large with regard to fixed capital, it is denied with regard to circulating capital. It is asserted that a businessman can export products and fail to reimport the proceeds. People do not see that an enterprise cannot continue its operations when deprived of its circulating capital. If a businessman exports his own funds employed for the current purchase of raw materials, labor, and other essential requirements, he must replace them by funds borrowed. The grain of truth in the fable of the mobility of circulating capital is the fact that it is possible for an investor to avoid losses menacing his circulating capital independently of the avoidance of such losses menacing his fixed capital. However, the process of capital flight is in both instances the same. It is a change in the person of the investor. The investment itself is not affected; the capital concerned does not emigrate.