It is enough to mention the commercial crises that by their periodic return put the existence of the entire bourgeois society on trial, each time more threateningly. In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity -- the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed. And why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce.¹¹

Marx is absolutely not arguing that the problem would be an insufficiency of aggregate demand, which could be solved by having the state tax capitalists and hand out unemployment checks and food stamps. He posited a distribution crisis, with capitalists unable to find ways to distribute the productivity gains capitalism was producing. As America put up its tariff wall, our production and that of the world outside piled up on each side of it, unable to exchange in trade. In this sense, there was too much industry, too much commerce. What has saved the United States thus far has been the resilience of our democracy, which Marx had no possible means of anticipating. The corporate forces of reaction that had overtaken the Republican Party in the late 1920s -- the "malefactors of great wealth" -- were pushed aside. Franklin Roosevelt, a member of the privileged class who had been stricken by polio, launched the Democratic Party's New Deal, preserving capitalism within the beginnings of a welfare state.

The Keynesian "underconsumption" theory appeared to explain the Depression. The Crash of '29 was widely explained as a breakdown in the efficiency of the market itself, a "bubble theory" that enabled a new intellectual aristocracy to emerge at the center of policymaking in Washington. If the market is perfectly efficient, there is little need for a "brain trust" of experts to manage competition and allocate resources via taxes, spending, and monetary manipulation. In connecting the Crash with the protectionism of the commercial aristocracy, as I did in 1977, the case for market efficiency was restored. This is the chief reason, I think, why the intellectual aristocracy of both left and right refuses to discuss the Smoot-Hawley/Crash hypothesis.¹²

In the USSR of 1929, the Wall Street Crash appeared as conclusive proof of capitalism's demise, vindicating Marx. Josef Stalin abandoned Lenin's market-oriented New Economic Policy and liquidated what remained of the bourgeoisie. In the name of Marx, private property was expropriated, market pricing of goods and wages jettisoned, and the allocation of capital was assigned to Communist Party functionaries instead of to the market. It took another six decades before this brave new world experiment finally collapsed, unable to maintain itself in its race with a revived U.S. capitalism.

Why? Chiefly, I think, because of Moscow's reliance on that part of Marx's theory that defined profit. In this regard, Marx's economics does have the same gaping hole as that of Keynes: Throughout his writings, Marx systematically fails to take risk and innovation into account. His theory of profit, which is the economic foundation for "class struggle," is a total and unqualified rejection of profit as reward-for-risk. Profit for Marx is exclusively "surplus value" appropriated by the capitalist. In this analysis, "capital" is a legal property title which entitles its owner to appropriate whatever the wage-worker produced over and above the factor-costs of production. Marx can hardly be faulted, as it was not until 1907 that F.B. Hawley put forward the first satisfying and complete risk theory of profit in Enterprise and the Productive Process.¹³ The classical economists that preceded Marx gave little thought to the dynamics of production, concentrating on problems of distribution, such as those involving price. Monetarists and Keynesians simply assume the productive process, focusing entirely on demand.

It is more than a convenience for modern economists to ignore the role of risk-taking and innovation. The profession's determination to convert Keynesian demand theory into an exact science ran afoul of Princeton mathematician John von Neumann, who in 1936 demonstrated that risk and innovation could not be converted into mathematical equations. To this day, the computers that drive economic policymaking in most of the West cannot handle questions relating to this basic ingredient of entrepreneurial capitalism. Taxation of either business profit or an increase in the value of capital assets (a capital gain) are dealt with in static, linear fashion, as if the risk-taker is largely unaffected by variations in reward.¹⁴

In Human Action, Ludwig von Mises's 1949 magnum opus, we find the first connection between confiscatory taxation of risk-taking as an instrument of the bourgeois oligarchs, much as the oligarchs employed the Smoot-Hawley tariff to thwart external competition. We quote at length this fascinating passage:

Confiscatory taxation results in checking economic progress and improvement not only by its effect on capital accumulation. It brings about a general trend toward stagnation and the preservation of business practices which could not last under the competitive conditions of the unhampered market economy...

Every ingenious man is free to start new business projects. He may be poor, his funds may be modest and most of them may be borrowed. But if he fills the wants of consumers in the best and cheapest way, he will succeed by way of "excessive" profits. He ploughs back the greater part of his profits into business, thus making it grow rapidly. It is the activity of such enterprising parvenus that provides the market economy with its "dynamism." These nouveaux riches are the harbingers of economic improvement. Their threatening competition forces the old firms and big corporations either to adjust their conduct to the best possible service of the public or to go out of business.

But today taxes often absorb the greater part of the newcomer's "excessive" profits. He cannot accumulate capital; he cannot expand his own business; he will never become big business and a match for the vested interests. The old firms do not need to fear his competition; they are sheltered by the tax collector. It is true, the income tax prevents them, too, from accumulating any capital. But what is more important for them is that it prevents the dangerous newcomer from accumulating any capital. They are virtually privileged by the tax system...

The interventionists complain that big business is getting too rigid and bureaucratic and that it is no longer possible for competent newcomers to challenge the vested interests of the old rich families. However, as far as their complaints are justified, they complain about things which are merely the result of their own policies. Profits are the driving force of the economy...He who serves the public best, makes the highest profits. In fighting profits governments deliberately sabotage the operation of the market economy.¹⁵

While Von Mises is viewed by America's intellectual aristocracy as an extreme conservative in his economic views, there is a definite flavor of Marx in this passage. In fact, even though the two are at polar extremes, they merge in their hostility to the politically entrenched vested interests of the Big Business bourgeoisie. If they were alive today, they no doubt would have similar perspectives on the state of the world economy, which is, after all, what this essay is all about.

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