Eduardo Turrent. Mises on Mexico

An Opportunity to Reflect on Mexico's Economic Development

Eduardo Turrent is the historian of the Bank of Mexico. This article is excerpted from a paper delivered at a conference of the Ludwig von Mises Cultural Institute of Mexico City, September 23–24, 1998, celebrating the publication in Spanish of Ludwig von Mises’s Mexico’s Economic Problems: Yesterday and Today, which was written in 1943 but unpublished until last year. Translated by Bettina Bien Greaves. 

Today should be a day of celebration for students, book lovers, and all who are interested in reflecting on the economic development of Mexico. Mexico’s Economic Problems by Ludwig von Mises, which Bettina Greaves found in 1997 among Mises’s papers, is truly a treasure.^[1] Although there are obvious differences, it calls to mind musicologist Alberto Gentili’s rediscovery in the 1920s of the complete works of Antonio Vivaldi, more than 200 years after the composer’s death. We economic historians are more fortunate than musicians and music lovers were, since Mises’s text has reappeared only 25 years after his death.

The monograph by Mises on the Mexican economy is outstanding in many respects. One particularly important aspect is that it is relevant to more than just the economic situation he found when he visited in 1942. Mises was concerned with the long-run historical context; or as one says nowadays, he focused on fundamental structural change. He was interested in uncovering the fallacies on which the principal positions and policies of Mexico’s former socialist regime, as well as all socialist regimes, were based.

One of the principal points in Mises’s essay was his vote of confidence for Mexico because of the capabilities of its people and the progress of the country. As he put it: “It is beyond doubt that the Mexicans are endowed with the spirit of workmanship. The achievements of the autochthonous [indigenous] craftsmen and artisans meet with the admiration of all experts. The workers in the already existing industrial plants and in the mines are not less efficient than those of other countries.” And the same may be said with respect to their entrepreneurial and other skills.

Thus the problem of Mexico’s development was not capital scarcity, geography (which Mises judged favorably), climate, or geology, even though the soil “in the greater part of the country is dry and barren.” Development depends on the application of “an appropriate economic policy”; that is, a “wise” economic policy aimed at the “establishment of a durable system resulting in a continuous improvement of the nation’s well-being.”

Unfortunately, this was not the case in Mexico when Mises wrote this paper. Nor has it been the case since, especially not from 1970 to 1982, even if one considers the several forms such a “wise” policy may take.

Attack on Easy Money

Only five or six years after the publication of Keynes’s General Theory, Mises took a well-aimed shot at the economic policies that stemmed from the noted English author’s ideas. According to Mises, the “easy money” policies of the interwar years, policies that tended to generate inflation, had been based on the doctrines of Lord Keynes, doctrines that Mises called “fallacious.” To Mises, the Keynesian dictum that “in the long run we are all dead” was no more than a new version of the cruel-hearted motto attributed to Madame de Pompadour, “After us, the deluge.” Thus, every strategy that “is indifferent about the tomorrow strives after ephemeral success and carelessly sacrifices the future.” Such strategies must not be considered “progressive, but parasitic.” Growth may be sustained only by having fundamental policies favorable to the stability of money and exchange.

Mises said in this study, not without cause, that the monetary history of Mexico, like that of many other countries, has been “a record of failures and disasters.” He hit the bull’s-eye when he said that “Monetary troubles are never the inextricable outcome of conditions beyond the control of a country’s government. They are always the result of a deliberate policy,” which, only too often, has been “the result of erroneous monetary doctrines.” Thus, with a nod to the then-current financial authorities in Mexico, Mises pointed to the need to return to a firm path toward stability.

But stability is not a goal in and of itself. “Monetary stability” must be recognized as a means, “an indispensable requirement for the formation of capital.” Moreover, the consequences of applying an “easy money” inflationary policy are, and have been, economic depressions with millions unemployed and social unrest. “Easy money” policies “result for a short time in the creation of an artificial boom, but must later end in a slump and in depression.”

Few of the wise observations, prescriptions, clairvoyant remarks, and even prophetic visions in Mises’s text appear obsolete, not even his proposals concerning exchange. Nevertheless, one must remember that this manuscript was written years before Bretton Woods and more than a decade before the celebrated article by Milton Friedman, “Fixed vs. Flexible Exchange Rates” (1953). It should not be surprising that Mises showed himself in 1942 to be an advocate of the gold standard. However, one should look at the matter from the perspective of history. Basically, what Mises wanted was not something radically different from what Domingo Cavallo introduced in Argentina, fixed exchange with a monetary policy subject to discipline.^[2]

At a time when public deficits have come to be considered virtuous, Mises insisted on the advantages of fiscal health. He explained clearly that excessive public spending contributes neither to disposable income for the masses nor to the supply of social capital. If the public budget is in disequilibrium, this must be financed either by issuing central bank credit or by using internal debt. If central bank credit is used to finance the public debt, it is doubly pernicious because, in addition to leading to inflation with all its harmful consequences, it affects the balance of payments and hinders the maintenance of exchange stability. If internal debt is used to finance the public debt, wealth is simply withdrawn from the private sector and transferred to the public sector. Public spending proposals assume, also, that the government will spend resources better than individuals will. But is this by any means certain? Withdrawing purchasing power from the private sector not only reduces the total resources entrepreneurs will have available to invest, but it may also reduce the income and consumption of the needy.

It is possible, even likely, that in his Mexican travels under the guidance of Montes de Oca, Mises became acquainted with the Mexican historian Daniel Cosio Villegas. Mises’s opinions concerning the apparent and abundant “natural wealth of Mexico and the chances of its future prosperity” were contrary to the views then commonly held. But they were remarkably similar, particularly in emphasis and approach, to those expressed by Cosio Villegas in his essay “The Legendary Wealth of Mexico.” Mises’s sharp observations were, and still are, particularly applicable to the agricultural capabilities of Mexico. To Mises the natural supply and quality of the land were not insuperable obstacles. Rather, he looked on agricultural policy, which was rooted in the heart of the revolutionary ideology, as the obstacle to the country’s progress.

Mises cited figures to illustrate what he called the harmful effects “of the agrarian reform of the revolution.” The crops of corn and wheat had been much less in 1937 than in 1907 and those of beans less than in 1897. Mises saw clearly, as did Manuel Gómez Morín and a few other illustrious intellects, that in Mexico, as in any other country, the agricultural sector could not make progress without a clear definition and absolute respect for the rights of property. The plain fact was that those rights were not well defined in the arrangement made for common land. Therefore, land was not only not cultivated with the devotion required, but investments necessary for the development of the land were not made either.

The right to property is the necessary condition for all modern productive activity. Therefore, Mises argued strenuously in 1942 against the desire of many to look to the Soviet system of agricultural collectives as the example for Mexico to follow. Granting that, however, Mises did not object to, and he even looked with favor on, other forms of collective activity even with the active participation of the state. For instance, he mentioned cooperatives that could be formed to acquire farm equipment, seed, and fertilizers, and to cover other expenses. Such cooperatives could also arrange for leasing machinery, selling farm produce, and obtaining credits for members. The government could also help with institutions to promote technological education and agricultural research. Nevertheless, every individual farmer should be “the master on his own farm.”^[3]

The Demographic Problem

Surely Mises was one of the first visionaries to recognize the demographic problem from which Mexico has long suffered. Mexico, he noted, is “a comparatively overpopulated country,” with the surplus population living in rural areas. The potential productivity of the country was insufficient to assure a decent standard of living for these excess people. Therefore, the only viable solution was for industries to be developed to absorb that excess population. But truly productive industries could develop only in response to definite commercial opportunities.

In 1942, Mises called for something that was then strictly taboo, something that could not be undertaken in Mexico until more than four decades later: an “open door” trade policy. If the dismantling of our ancient protectionist structure in recent times provoked no few laments and rending of garments, imagine the reaction to the Austrian economist’s proposal in the 1940s, in the midst of the great World War. Contrary to archaic mercantilist doctrines, Mises looked on imports as something desirable; he considered the opening of trade as the indispensable means for obtaining the best possible allocation of resources. “The advantage derived from foreign trade lies entirely in importing, not in exporting,” he said. According to Mises, only by competitive industry emerging in an open environment can manufactured products be produced at prices that permit living standards in the country to rise while at the same time generating exports to pay for the nation’s indispensable imports. The problem, he lamented, is that many Mexican patriots were “entangled in the neo-mercantilist fallacies” then in vogue—and I would say still in vogue among many groups.

The whole process of industrialization based on protectionism is damaging in three ways. First, protection inhibits the agricultural sector from exporting. Second, it raises the prices of manufactured consumers goods, which could otherwise be acquired by the rural inhabitants. And third, because of its high costs, industrialization based on protectionism prevents the manufactured products from penetrating international markets. It is true that, given such industrialization, many people would find employment in the protected industries. But what they would gain as employees others in other sectors of the economy would lose through the high cost of the manufactured articles. In this way any possibility of raising “the standard of living of the average Mexican” would be lost. Therefore, Mises concluded, industrialization by means of protection would lead the nation down a “blind alley” since it would perpetuate the low living standards of the people.

Although Mises argued for opening up trade gradually, he predicted that there was no need to fear that, by removing tariff barriers, “any plant will be forced to discontinue production. Some plants, it is true, will have to rearrange their lines of production in order to obtain a higher degree of specialization.” But, to the great surprise of many, the visiting Austrian recommended opening up trade unilaterally—removing commercial barriers even though other countries maintained protective policies without offering commercial reciprocity.

Mises’s expectations about opening the country up to trade were absolutely correct, as they were in other instances. Although the Mexican opening was not gradual and the policy adopted was unilateral in the beginning, practically no failures that could be attributed to that fact were reported.

Mises explained how the opening up of trade, with all its benefits, cannot yield its full benefits without a coherent and a compatible wage policy. Today those who think real wages can be determined by decree or by employer-employee negotiations still organize in battalions. But those who are serious know the painful consequences of such a wage policy; it directly diminishes the competitiveness of enterprises and employment, and indirectly affects inflation and economic growth. As Mises expressed it:

There is but one means to raise Mexican wage rates: industrial expansion. Every new plant improves the standard of living of the Mexican masses by creating an additional demand for labor. But industry cannot allow higher wages than such as safeguard the conduct of business. If trade unions are anxious to enforce higher wages, they prevent the establishment of new plants and the expansion of existing plants. They succeed, it is true, in raising wage rates for a comparatively small group of workers; but they force, on the other hand, hundreds of thousands to remain in agricultural occupations, in which their income is extremely low, i.e., much lower than it would be if they could find industrial jobs.

Mises was absolutely clairvoyant in suggesting in 1942 that private initiative should participate in the production of petroleum, the management of the railroads, and the generation of electricity. He was also right in insisting that unless investment and production have confidence, they cannot thrive and thus cannot contribute to economic progress.

Railroads, Electricity, and Petroleum

More than half a century after Mises’s visit, his recommendation with respect to the railroads is becoming a reality. In the case of investment in the field of electricity, there are now indications that private capital will be permitted greater participation in the future. As for the production of petroleum, we are still far from a decision; some isolated voices suggest only occasionally, rather timidly, that the matter be reconsidered.

Further, Mises was several decades ahead in predicting what would happen in Mexico between 1970 and 1976 with respect to cooperativism. In that six-year period the management of cooperatives in some sectors, like that of fishing, was entirely given up. The results had been very disappointing; they fulfilled to the letter what Mises had written years before. “No serious economist believes that a cooperative society could successfully compete with private enterprises. The experiments have resulted in complete failure.” This, he said, applied especially in the field of industrial production.

One of the themes emphasized in Mises’s essay is the importance of maintaining the confidence of investors in order to improve the country’s material welfare. In Mexico’s Economic Problems there are more than ten references to this. On this point Mises was absolutely positive: “What Mexico needs most is capital, either foreign or domestic. The repudiation of the national debt and the expropriation of foreign investments deter the foreign capitalist. The methods of taxation prevent the accumulation of domestic capital.”

The investor, domestic or foreign, fears every attack on property rights, lack of public safety, and arbitrariness. Strictly speaking, when we consider the situation, confiscatory taxation is aggression against the right of property. According to Mises, very high taxes “paralyze the spirit of entrepreneurship.” Therefore, he recommended that Mexico distance itself from a “suicidal” tax policy of this kind. Taxes should never discourage saving or the accumulation of capital. In this same vein, personal and entrepreneurial income that is invested should be taxed at a lower rate.

Mises’s essay is enlightening and clear; it refutes fallacies, destroys myths, is analytical, and advisory. When it was first written and made available in Mexico, it had practically no effect; in fact it was forgotten. Why? I venture a few theories.

First, his views were in opposition in many regards to the most widely accepted ideas of the time and the years to follow. Moreover, there was resistance from the powerful groups that were surely disturbed, or would have been disturbed, by this text. International experience reveals that one of the great obstacles to undertaking reforms is special-interest groups. And Mises’s paper touched directly on many of them, especially syndicalism, the agrarian reform bureaucracy, the administrators of public enterprises that would be dismantled, the industrial beneficiaries of protectionist measures, the clientele of subsidized organizations, and even the teachers who were preaching in the schools and universities “the religion of étatism.” In this connection, Chapter XI of Mises’s essay, “Education,” is recommended.

However, as Keynes said, the ideas of economists and social philosophers are more powerful than generally believed. There is a tendency to exaggerate the power of special interests as compared with the gradual penetration of ideas. And something that Keynes did not say, but which I firmly believe, is that in the long run, correct ideas will succeed in asserting themselves over the fallacies and the economic deceits.