Interventionism by Ludwig von Mises

Those who call themselves ‘liberals’ today are asking for policies which are precisely the opposite of those policies which the liberals of the nineteenth century advocated in their liberal programs.  The so-called liberals of today have the very popular idea that freedom of speech, of thought, of the press, freedom of religion, freedom from imprisonment without trial — that all these freedoms can be preserved in the absence of what is called economic freedom.  They do not realize that, in a system where there is no market, where the government directs everything, all those other freedoms are illusory, even if they are made into laws and written up in constitutions. ¹ Ludwig Von Mises

It might seem contradictory to say that a book written to address the issues of 1940 is timely in 2011.  Nonetheless, Mises’ topic, “Interventionism,” is even more relevant today than when America was mobilizing for war.  Today’s threat to freedom is not a European dictator, but an ambitious, interventionist government whose grasp far exceeds Constitutional limits.

With the clarity and logic Mises always brings to his writing, he begins by stating what interventionism is not. It is not a third economic system, a compromise between capitalism and socialism that has all the advantages but none of the disadvantages of the other two.  Rather, as he demonstrates in the rest of the book, interventionism is only a way station on the track to socialism.

The author’s purpose is to determine whether interventionism attains the ends that governments promise.  He explains, “All political arguments of our time center around capitalism, socialism and interventionism.”  All political parties justify their programs by telling their supporters they will become richer, and all pressure groups promise economic improvement.

He defines the three centers of political debate. In capitalism, (or Market Economy), “The means of production are owned by individuals or associations of individuals, such as corporations.”  The producers, whether they use their own or borrowed funds, are called entrepreneurs.  But, because entrepreneurs produce goods for others to consume, it is consumers who determine the success or failure of their enterprises.  To succeed (make a profit) entrepreneurs must produce in the most cost effective way, a quality product that consumers will buy.  Consumers, by deciding what to buy, and what prices they are willing to pay, also determine the wages entrepreneurs will be able to pay to continue producing. Mises elaborates for several pages, but the concept is not complicated.  The 10- year-old who sets up lemonade stand in hot weather has figured it out.

In a socialist system, the means of production are owned by the nation and the government decides what will be produced and how, and what share of the production each individual is allotted.  There are variations on this theme but the problem is the same; without the market to determine the cost of goods and services, the need or lack thereof for a project or product, the ruling authority is unable to make rational economic calculations.

Interventionism, Mises explains, is a hampered market economy.  The government interferes with isolated interventions in the market; “it orders and it forbids.”  His examples resonate in our time.  He suggests that certain foods might be forbidden –  “perhaps for health reasons.  The ruling authority assumes the role of guardian.  It deems the individual incapable of looking out for his own best interests; he is to be protected by his paternal overseer from suffering harm.”

The recent ban on new fast food restaurants in East LA comes to mind.  As with other interventions, the ban has ramifications far beyond the city council’s intention.  The already-high unemployment in low-income East LA will get higher because the ban eliminates a source of part-time work for students and other unskilled labor.  No new construction of fast food establishments means fewer jobs for unemployed construction workers.

But there is also a larger issue, which Mises touches upon.

Once the principle is acknowledged that the consumption choices of the individual are to be supervised and restricted by the authority, how far this control will expand depends only on the authority and the public opinion that motivates it…

Mises examines the various kinds of interventions that governments undertake.  He defines restrictive measures as measures undertaken by the authority, which directly and primarily are intended to divert production from the ways it would take in the unhampered economy.

Mises cites the case of the construction and operation of a railroad that does not promise profitability, but which is to be made possible by government subsidy. He lists the various justifications for the venture, some of which may even be true.  However, Mises points out that the economic benefits enjoyed by a politically favored group of landowners and enterprises will be paid by non-benefiting taxpayers with dollars that could have been better put to other uses.

In our time the president wants to spend $8 billion tax dollars on light rail systems, despite their long history of unprofitability.  Florida governor Rick Scott has refused his state’s share of the federal largess, citing projections that if built, the line would cost Florida taxpayers upwards of $2 billion and would only serve about 14,500 riders a day in 2030 – that is in 20 years.  That’s only 14,500 people in a metropolitan area predicted to have a population of 3.5 million. “Cost per rider: $180,000.”

Or as Mises explains,

The effect of the intervention is that men find themselves in a position where they may only use their knowledge and ability, their material resources in a less efficient way.  Such measures make people poorer.

Mises examines the result of various other kinds of market interventions, including price controls, minimum wage laws and credit expansion.  The latter is of particular interest today.

He writes, “Credit expansion gives the false impression that enterprises which previously had been regarded as unprofitable have become profitable.  It causes additional demand and a rise in prices and wages.”  If the credit continues to expand, the boom continues but the boom cannot continue indefinitely.  “Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a ‘’crack-up boom’ and in a collapse of the money and credit system.”  Sound familiar?

Following the current housing debacle, (largely a result of government directives to promote home ownership by extending credit to the uncredit-worthy) the federal government declared it had to subsidize selected financial institutions and businesses that might otherwise have been bankrupt.  Those now partially federally owned entities have been instructed how much they may pay their executives, which (politically favored) groups within their organizations would benefit from the subsidies, and which would not.  It is a textbook example of Mises’ point:

Any intervention in the economy leads to other interventions, until the full economy is engulfed in a sea of regulation, which we cannot call anything but socialism.

In Chapter VII:  “It (interventionism) does not take all freedom from its citizens, but everyone of its measures rakes a way a part of the freedom and narrows the field of activity.“  (In a footnote Mises points out that “Orthodox Marxists recommended interventionism in full recognition of the fact that it paralyzes and destroys the capitalistic market economy and, thus, in their opinion leads to socialism.  This was an argument advanced as long as a century ago by Friedrich Engels.”).

Mises discusses the mentality that prevails when electorates voluntarily surrender their power to the executive.  The content of ideas alleged to be new and better is not considered.

They merely understand that it is new and believe to see in this fact its justification… People hasten to exchange their  “old “ideas for “new” ones, because they fear to appear old-fashioned and reactionary.  They join the chorus decrying the shortcomings of the capitalistic civilization and speak in elated enthusiasm of the achievements of the autocrats.  Nothing today is more fashionable than slandering Western Civilization.

He decries the lack of sound reasoning that imperils the survival of Western Civilization.

Ever since the European governments of the last decades of the 19th century embarked on this policy, which today frequently is called “progressive” but which actually represents a return to the mercantilist policy of the 17th and 18th centuries, economists have persistently pointed out the inconsistency and futility of these measures and have predicted their political and social consequences.  Governments, political parties, and public opinion have just as persistently ignored these warnings…  The inevitable sequences of events, which followed upon the application of interventionist measures fully proved the correctness of the economists’ predictions.  The predicted political effects, social unrest, dictatorship, and war also did not fail to appear.

Readers can determine whether Mises’ findings and conclusions are pertinent today.

It is not an accident that everywhere, with the progress of interventionism, that democratic institutions have disappeared one after the other and that, in the socialist countries’ oriental despotism has been able to stage a successful comeback….

Should our civilization perish, it will not be because it is doomed, but because people refused to learn from theory and from history. It is not fate that determines the future of human society, but man himself. The decay of Western Civilization is not an act of God, something which cannot be averted. If it comes, it will be the result of a policy which can still be abandoned and replaced by a better policy.

George Washington understood that many choices lay ahead for the young nation and that, human nature being as it is, wisdom might not always prevail.

Such is our situation, and such are our prospects: but notwithstanding the cup of blessing is thus reached out to us, notwithstanding happiness is ours, if we have a disposition to seize the occasion and make it our own; yet, it appears to me there is an option still left to the United States of America, that it is in their choice, and depends upon their conduct, whether they will be respectable and prosperous, or contemptable and miserable as a Nation…

The warning issued by Mises eerily echoes Washington’s cautionary words:

For, according to the system of Policy the States shall adopt at this moment, they will stand or fall, and by their confirmation or lapse, it is yet to be decided, whether the Revolution must ultimately be considered as a blessing or a curse: a blessing or a curse, not to the present age alone, for with our fate will the destiny of unborn Millions be involved.

¹ Economic Policy: Thoughts for Today and Tomorrow