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Revisiting Ludwig von Mises's Interventionism

Mises Daily: Monday, July 13, 2009 by

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Interventionism: An Economic Analysis

Economists, political scientists, students, and laymen unfamiliar with the Austrian tradition sometimes restrict their discussion of Ludwig von Mises's contributions to economic science to his magnum opus, Human Action, and usually only then sometimes to deride it as a massive, irrelevant tome that nobody actually reads. Those who are familiar with the Austrian tradition are usually treated to a wider selection.

Specifically, lectures on and discussions of Mises's contributions to economics add his Theory of Money and Credit, Socialism (a book-length treatment of the criticisms he first raised in his classic essay "Economic Calculation in the Socialist Commonwealth"), and Theory and History to the mix.

These are necessary reading for the serious student of economics; however, this isn't to say that we should let Mises's minor works get lost in the shuffle. For the reader who is interested in the intellectual underpinnings of liberty yet hasn't the time to read several 500+ page treatises on economic theory (or the money to shell out for the 968 page scholar's edition of Human Action), I suggest several of Mises's shorter works. The Anti-Capitalistic Mentality, Bureaucracy, Liberalism, Planning for Freedom, and Interventionism: An Economic Analysis, among others, are all affordable ($10 and less), easy to read, and short (Liberalism, the longest of the listed works, is only 206 pages).

With that, I turn your attention to one of the shortest of Mises's works: Interventionism: An Economic Analysis. At 93 pages, it can be read in an evening. It was reviewed in the summer 1998 issue of The Mises Review and again by Robert Murphy for the Ludwig von Mises Institute in June 2001, but times have changed considerably in eight years. As David Gordon writes in his 1998 review,

Since so many refuse to learn its lesson, Mises's argument against interventionism merits continual repetition. But the details of Mises's case have been often presented in his other works; and Sanford Ikeda … has gone over the whole argument at length [in Dynamics of the Mixed Economy: Toward a Theory of Interventionism (Routledge, 1997)]. An unkind reader of The Mises Review might inquire: must we have this argument repeated once more?

I answer in the affirmative. We would do well to consider it again in light of aggressive foreign and domestic policies, a possible recession, the subprime-mortgage crisis, and an ever-increasing clamor for state intervention to fix the economy, fix the schools, fix the healthcare industry, and provide Herbert Hoover's promised "chicken in every pot."

According to the introduction by Bettina Bien Greaves, who received the Ludwig von Mises Institute's 2002 Schlarbaum Prize, Mises wrote this short book while on appointment at the National Bureau of Economic Research shortly after he migrated to the United States. It was finally published by the Foundation for Economic Education in 1998, and its contents are especially gripping when one considers the historical context in which it was written. Hitler and Mussolini were conquering Europe, Stalin was "liquidating" Russia's bourgeoisie in the gulags, and our very own Franklin Delano Roosevelt was in the process of "state-izing"[1] the American Economy.

The content isn't anything revolutionary for the seasoned reader of Mises's work, but as Robert Murphy points out in his June 2001 review, Mises "demands much from his reader." Mises's discussion of the argument that the state should intervene to bring "idle capacity" back into the stream of production is reminiscent of the criticisms of this doctrine made by Frederic Bastiat and the French liberals of the early 19th century, and he takes the time to defend his capital-theoretic business-cycle theory against criticisms from other economists.

In his introduction, Mises writes that "[a]ll political arguments of our time center around capitalism, socialism, and interventionism" (p. xiii). He defines and discusses these terms in a sixteen-page introduction, and he proceeds to analyze different types of state interference with the market in seven short chapters.

This book doesn't seek explicitly to refute the socialist doctrines of the day,[2] but it shows that interventionist measures and socialist doctrines stem from the same fundamental misunderstandings about the private-ownership economy. Specifically, interventionism seeks to address the supposed "inhumanity" of the unfettered market, but it suffers from the same problem as a socialist economy. There is no way for the state to rationally determine whether or not it is creating value.

Mises offers solid evaluations and critiques of different types of interventionism, offering lessons that are very valuable today. For example, chapter 1 deals with "Interference by Restriction," or "measures undertaken by the authority which directly and primarily are intended to divert production, in the widest meaning of the word, including commerce and transportation, from the ways which it would take in the unhampered economy" (p. 17). Restriction, essentially, consists of what we would today think of as regulation and outright prohibition of certain products or methods of production. As Mises writes,

By restrictive measures the authority forbids the manufacture of certain goods, or it forbids the application of certain methods of production, or it makes manufacture by such methods more difficult and more expensive. The authority thereby eliminates some of the means available for the satisfaction of human wants. The effect of the intervention is that men find themselves in a position where they may only use their knowledge and ability, their efforts and their material resources, in a less efficient way. Such measures make people poorer. (p. 17)

The most readily apparent examples of restrictive measures are barriers to international trade. For centuries, economists have extolled the virtues of international trade. Ricardo's law of comparative advantage suffices to show that specialization and division of labor, when advanced through free international markets, serve to make everyone wealthier. And yet western countries are still consumed with the mercantilist fantasy that relative autarky is the path to riches. In a concise and lucid manner, Mises dispatches with restrictionist mythology in short order.

Mises's second chapter deals with "interference by control," which Mises defines as measures "directed at fixing prices, wages, and interest rates at amounts different from those prevailing in the unhampered market" (p. 23). It is the very debate over whether or not the state should fix prices that led to the science of classical political economy. Time and again, economists have argued that price restrictions must, by necessity, distort the structure of production and lead to involuntary unemployment. Mises argues that the "[t]he discovery of the inevitable laws of the market and exchange was one of the great achievements of the human mind"[3] and that "[t]he science of political economy began with the realization that there is another limit [specifically, the laws of the market and exchange] for the sovereignty of those in power" (p. 24). Much to the consternation of socialists, the constraints of economic law reveal that the state most definitely is not God — no matter their intentions, economic law tells us definite things about the outcomes of certain interventions. Mises might advise us to borrow from UC Berkeley economists Carl Shapiro and Hal R. Varian and take to heart the following: "Rulers change. Economic laws do not."[4]

And so Mises continues through chapters on "inflation and credit expansion," "confiscation and subsidies," "Corporativism and Syndicalism," "War Economy," and "The Economic, Social, and Political Consequences of Interventionism." Each chapter delivers sound economic lessons that are every bit as relevant today as they were when they were originally written in 1940. Good ideas are never dated, and there remains much to learn about how economies and societies actually work. This tiny book offers a very solid defense of the classical-liberal program built on the fundamental axioms of the Misesian system. As the late 20th century's disastrous experiments with totalitarianism and interventionism showed, Mises's criticisms have most certainly stood the test of time.

Notes

[1] I borrow the term from Jose Luis Cordeiro's The Great Taboo: A True Nationalization of the Venezuelan Petroleum.

[2] Mises accomplishes this task in his monumental volume Socialism.

[3] And yet, there is no entry for "the market" in the syntopicon to The Great Books of the Western World.

[4] The actual phrase is "technology changes. Economic laws do not." Taken from Shapiro, Carl and Hal R. Varian. 1999. Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press).