Book Review
by Richard M. Ebeling, January 1999
Problemas Economicos de Mexico by Ludwig von Mises (Mexico City: Instituto Cultural Ludwig von Mises); 125 pages; $20.
In December 1941, Austrian economist Ludwig von Mises was invited by
Luis Montes de Oca, a former director of the Mexican central bank, to
deliver a series of lectures in Mexico during January and February 1942.
The Mexico visited by Mises was dominated by a socialist ideology
that had resulted in the nationalization of industry and land, with
heavy-handed regulation of private enterprise and high protectionist
trade barriers. In response, Mises attempted to present an understanding
of sound free-market economics in the lectures he gave during his
two-month stay in Mexico.
At the request of a Mexican association of market-oriented
businessmen, he prepared, in English, a monograph on "Mexico's Economic
Problems" in June 1943. For some unknown reason, this monograph remained
unpublished in either English or Spanish until now.
The original English version will appear in a volume of previously
unpublished essays by Mises from the early 1940s under the title Selected Essays of Ludwig von Mises: International Economic Reform and Reconstruction,
which I have edited and which will be published by the Liberty Fund of
Indianapolis in cooperation with Hillsdale College before the end of
1999.
A Spanish translation of this monograph has just recently been
published by the Instituto Cultural Ludwig von Mises under the title Problemas Economicos de Mexico.
It also includes an introduction by the Institute's director, Carolina
R. de Bolivar, and an afterward by the Institute's academic director,
Josefina Vazquez Mota, in which the monograph's historical context and
continuing relevance are explained.
Mises argued that the trading opportunities Mexico was enjoying with
the United States due to the Second World War were likely to end with
the cessation of the conflict. Mexico, therefore, needed an agenda of
postwar market-oriented reforms for further economic improvement. A
policy of free trade was essential to the country's future. He
emphasized that the benefit from trade came from the imports obtainable
at prices less costly than alternative domestic production. Exports were
only the means for acquiring those imports and not an end or a good in
itself.
Anticipating one of the major schemes proposed by postwar development
planners, he strongly criticized what he labeled the "closed door
method of industrialization," but which became more widely known and
popular in third-world countries after 1945 as the "import-substitution"
method for development. Under the import-substitution approach,
industrialization was to be forced through trade restrictions and high
tariff barriers behind which domestic industries would be stimulated at
artificially high prices far above those in the general global market.
Mises pointed out that countries implementing such policies inevitably
make their own people poorer and less productive.
Reducing imports would also reduce exports, since potential foreign
buyers of Mexican goods would lose the ability to earn the Mexican
revenue that would have provided them with the financial wherewithal to
purchase Mexican exports. Mexico would be locked out from maximizing the
income it could earn from exporting those goods for which it had the
greatest comparative advantage in the international market. And
consumers would have to pay the cost of such a method of "hothouse"
industrialization through a lower standard of living due to the higher
prices and lower quality of the domestic substitutes they would be
forced to purchase on the Mexican market. Import substitution methods of
economic development merely represented a modern version of the
18th-century mercantilist fallacies.
Equally disastrous for Mexican development was any attempt to raise
Mexican wages to comparable U.S. levels through either government
legislation or trade union pressure. Mexico was a capital-poor country
with a relatively large supply of labor. That necessarily meant that
labor productivity was far lower than that of American workers. The only
way that Mexican labor could compete on the global market was to take
advantage of those opportunities in which it could be a lower-cost
producer in labor-intensive lines of production. The standard of living
in Mexico could permanently rise only through the normal processes of
market-directed capital formation over time and through emigration of a
part of the labor force to other countries where wages and the marginal
productivity of labor was higher. Since the latter method was generally
closed off owing to immigration barriers in the United States and other
countries, only the former method was available to Mexico under
prevailing international conditions. Raising wages above
market-determined levels could only condemn a part of the Mexican labor
force to permanent unemployment or more primitive lines of employment.
Since Mexico had long practiced protectionist, interventionist, and
socialist policies, the country had to make a transition to a regime of
free markets and free trade. Those familiar with Mises's uncompromising
defense of laissez faire, will be very surprised that he proposed a
series of "gradualist" policies for Mexico. For example, because a
number of industries had grown up and been long protected behind high
tariff walls, he suggested a transition to free trade over a period of
years during which tariff levels would be reduced by 10 percent per
year.
While generally critical of government-sponsored and
government-supported cooperative movements, Mises argued that full land
privatization in Mexico should be supported for the poor peasantry
through government assistance in forming farm-producer cooperatives and
even limited, but temporary, state subsidies to help them get started.
In the area of privatization, Mises argued that the most desirable
course of action would be full denationalization. But given the
ideological climate in Mexico, he proposed that the national railway
system, for instance, be transformed into a government-owned but
independent corporation whose management of the rail system would
operate on a for-profit basis.
Crucial and central to any economic reform project in a country such
as Mexico, Mises again emphasized, was the establishment and strict
enforcement of property rights and contract, for both Mexicans and
foreign investors alike. And, finally, inflationary monetary policies
had to be renounced, with a gold or silver standard put in its place.
At a time of international financial crisis, like the one during the
last two years, when a growing number of governments are once more
publicly advocating new controls on global capital movements, increased
restrictions on private enterprise, and inflationary policies to
artificially create employment, Mises's insightful analysis remains as
timely as when he penned it more than half a century ago.
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