Book Review

by

, 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 For some unknown reason, this monograph remained unpublished in either English or Spanish until now.The original English version will appear in a volume of previously unpublished essays by Mises from the early 1940s under the titlewhich I have edited and which will be published by the Liberty Fund of Indianapolis in cooperation with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 titleIt 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.