Critique of Interventionism by Ludwig von Mises
A Critique
of Interventionism
by
Ludwig von Mises
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INTERVENTIONISM
1. Interventionism
as an Economic System
Ever
since the Bolshevists abandoned their attempt to realize the
socialist ideal of a social order all at once in Russia and,
instead, adopted the New Economic Policy, or NEP, the whole world has
had only one real system of economic policy: interventionism. Some of
its followers and advocates are thinking of it as a temporary system
that is to be replaced sooner or later with another order of
the
socialist variety. All Marxian socialists, including the
Bolshevists, together with the democratic socialists of
various
persuasions, belong to this group. Others are holding to the belief
that we are dealing with interventionism as a permanent
economic
order. But at the present this difference in opinion on the duration
of interventionist policy has only academic significance. All its
followers and advocates fully agree that it is the correct policy for
the coming decades, yea, even the coming generations. And all agree
that interventionism constitutes an economic policy that will
prevail in the forseeable future.
Interventionism
seeks to retain private property in the means of production, but
authoritative commands, especially prohibitions, are to
restrict
the actions of private owners. If this restriction reaches the
point that all important decisions are made along lines of
authoritative command, if it is no longer the profit motive of
landowners, capitalists, and entrepreneurs, but reasons of state,
that decide what is to be produced and how it is produced, then we
have socialism even if we retain the private property label. Othmar
Spann is completely correct when he calls such a system “a
private
property order in a formal sense, but socialism in
substance.”
Public ownership in the means of production is nothing but socialism
or communism.
However,
interventionism does not want to go that far. It does not seek to
abolish private property in production; it merely wants to limit it.
On the one hand, it considers unlimited private property
harmful
to society, and on the other hand, it deems the public property order
unrealizable completely, at least for the present. Therefore,
it
seeks to create a third order: a social system that occupies the
center between the private property order and the public
property order. Thus, it seeks to avoid the
“excesses” and
evils
of capitalism, but to retain the advantages of individual
initiative
and industry which socialism cannot bring forth.
The
champions of this private property order, which is guided, regulated,
and controlled by the state and other social organizations,
are
making demands that have always been made by political leaders and
masses of people. When economics was yet unknown, and man was unaware
that goods prices cannot be “set” arbitrarily but
are
narrowly
determined by the market situation, government commands sought
to regulate economic life. Only classical economics revealed that all
such interventions in the functioning of the market can never achieve
the objectives which the authorities aim to achieve. The old
liberalism which built its economic policies on the teachings
of
classical economics therefore categorically rejected all such
interventions. Laissez faire
et laissez passer! Even Marxian
socialists have not judged interventionism any differently from the
classical liberals. They sought to demonstrate the absurdity of all
interventionist proposals and labeled them contemptuously as
“bourgeois.” The ideology that is swaying the world
today
is
recommending the very system of economic policy that is rejected
equally by classical liberalism and older Marxism.
2. The
Nature of Intervention
The
problem of interventionism must not be confused with that of
socialism. We are not dealing here with the question of whether or
not socialism in any form is conceivable or realizable. We are
not here seeking an answer to the question of whether human society
can be built on public property in the means of production. The
problem at hand is, What are the consequences of government and other
interventions in the private property order? Can they achieve
the result they are supposed to achieve?
A
precise definition of the concept “intervention” is
now in
order.
1.
Measures that are taken for the purpose of preserving and securing
the private property order are not interventions in this sense. This
is so self-evident that it should need no special emphasis. And yet
it is not completely redundant, as our problem is often confused with
the problem of anarchism. It is argued that if the state must protect
the private property order, it follows that further government
interventions should also be permissible. The anarchist who rejects
any kind of state activity is said to be consistent. But he who
correctly perceives the impracticability of anarchism and seeks a
state organization with its apparatus of coercion in order to secure
social cooperation is said to be inconsistent when he limits
government to a narrow function.
Obviously,
this reasoning completely misses the point. We are not here
discussing the question of whether or not social cooperation can do
without the organization of coercion, which is the state, or
government. The sole point under discussion is whether there are only
two conceivable possibilities of social organization with
division of labor, that is, the public property order and the private
property order—disregarding syndicalism—or whether
there is
yet a
third system as assumed by interventionists, namely, a private
property order that is regulated through government
intervention.
Incidentally, we must carefully distinguish between the
question
of whether or not government is necessary and the question of
where and how government authority is in order. The fact that social
life cannot do without the government apparatus of coercion
cannot be used to conclude also that restraint of conscience, book
censorship, and similar measures are desirable, or that
certain
economic measures are necessary, useful, or merely feasible.
Regulations
for the preservation of competition do not at all belong to those
measures preserving the private property order. It is a popular
mistake to view competition between several producers of the same
product as the substance of the ideal liberal economic order. In
reality, the central notion of classical liberalism is private
property, and not a certain misunderstood concept of free
competition. It does not matter that there are many recording
studios, but it does matter that the means of record production are
owned privately rather than by government. This
misunderstanding, together with an interpretation of freedom that is
influenced by the natural rights philosophy, has led to attempts at
preventing the development of large enterprises through laws against
cartels and trusts. We need not here discuss the desirability of such
a policy. But we should observe that nothing is less important for an
understanding of the economic effects of a certain measure than its
justification or rejection by some juristic theory.
Jurisprudence,
political science, and the scientific branch of politics cannot offer
any information that could be used for a decision on the pros and
cons of a certain policy. It is rather unimportant that this pro or
that con corresponds to some law or constitutional document, even if
it should be as venerable and famous as the Constitution of the
United States of America. If human legislation proves to be
ill-suited to the end in view, it must be changed. A discussion of
the suitability of policy can never accept the argument that it runs
counter to statute, law, or constitution. This is so obvious that it
would need no mention were it not for the fact that it is forgotten
time and again. German writers sought to deduce social policy from
the character of the Prussian state and “social
royalty.”
In the
United States, economic discussion now uses arguments that are
derived from the Constitution or an interpretation of the concepts of
freedom and democracy. A noteworthy theory of interventionism
set forth by Professor J.R. Commons is largely built on this
rationale and has great practical significance because it represents
the philosophy of the La Follette party and the policy of the state
of Wisconsin. The authority of the American Constitution is
limited to the Union. But locally the ideals of democracy, liberty,
and equality reign supreme and give rise, as we can observe
everywhere, to the demand for abolition of private property or its
“limitation.” All this is insignificant for our
discussion
and,
therefore, does not concern us here.
2.
Partial socialization of the means of production is no intervention
in our sense. The concept of intervention assumes that private
property is not abolished, but that it still exists in substance
rather than merely in name. Nationalization of a railroad
constitutes no intervention; but a decree that orders an enterprise
to charge lower freight rates than it otherwise would is
intervention.
3.
Government measures that use market means, that is, seek to influence
demand and supply through changes of market factors, are not included
in this concept of intervention. If government buys milk in
the
market in order to sell it inexpensively to destitute mothers or even
to distribute it without charge, or if government subsidizes
educational institutions, there is no intervention. (We shall
return to the question of whether the method by which government
acquires the means for such actions constitutes
“intervention.”)
However, the imposition of price ceilings for milk signifies
intervention.
Intervention
is a limited order by a social authority forcing the owners of the
means of production and entrepreneurs to employ their means in a
different manner than they otherwise would.
A “limited
order”
is an order that is no part of a socialist scheme of orders, i.e., a
scheme of orders regulating all of production and distribution, thus
replacing private property in the means of production with
public property. Particular orders may be quite numerous, but
as
long as they do not aim at directing the whole economy and replacing
the profit motive of individuals with obedience as the driving
force of human action they must be regarded as limited orders. By
“means of production” we mean all goods of higher
order,
including the merchants’ inventories of ready goods which
have
not
yet reached the consumers.
We
must distinguish between two groups of such orders. One group
directly reduces or impedes economic production (in the
broadest
sense of the word including the location of economic goods).
The
other group seeks to fix prices that differ from those of the market.
The former may be called “restrictions of
production”; the
latter, generally known as price controls, we are calling
“interference with the structure of prices.”
3.
Restrictions
of Production
Economics
need not say much about the immediate effect of production
restrictions. Government or any organization of coercion can at first
achieve what it sets out to achieve through intervention. But whether
it can achieve the remoter objectives sought indirectly by the
intervention is a different question. And it must further be
determined whether the result is worth the cost, that is, whether the
intervening authority would embark upon the intervention if it
were fully aware of the costs. An import duty, for instance,
is
surely practical, and its immediate effect may correspond to the
government’s objective. But it does not follow at all that
the
import duty can realize the government’s ultimate
objective.
At this point the economist’s work commences. The purpose of
the
theorists of free trade was not to demonstrate that tariffs are
impractical or harmful, but that they have unforeseen
consequences and do not, nor can they, achieve what their advocates
expect of them. What is even more significant, as they observed,
protective tariffs as well as all other production restrictions
reduce the productivity of human labor. The result is always the
same: a given expenditure of capital and labor yields less with the
restriction than without it, or from the beginning less
capital
and labor is invested in production. This is true with protective
tariffs that cause grain to be grown in less fertile soil while more
fertile land is lying fallow, with class restrictions of trade
and occupation (such as the certificates of qualification for certain
occupations in Austria, or the favored tax treatment of small
enterprises) which promote less productive businesses at the expense
of more productive activity, and, finally, with the limitation
of labor time and of the employment of certain labor (women and
children), which diminishes the quantity of available labor.
It
may very well be that government would have intervened even
with
full knowledge of the consequences. It may intervene in the belief
that it will achieve other, not purely economic, objectives, which
are thought to be more important than the expected reduction
in
output. But we doubt very much that this would ever be the case. The
fact is that all production restrictions are supported wholly or
partially by arguments that are to prove that they raise
productivity, not lower it. Even the legislation that reduces the
labor of women and children was enacted because it was believed that
only entrepreneurs and capitalists would be handicapped while
the protected labor groups would have to work less.
The
writings of the “Socialists of the Chair” have been
rightly
criticized in that, in the final analysis, there can be no objective
concept of productivity and that all judgments on economic goals are
subjective. But when we assert that production restrictions
reduce labor productivity, we do not yet enter the field where
differences in subjective judgments prohibit observations on the
goals and means of action. When the formation of nearly autarkic
economic blocs hampers the international division of labor,
preventing the advantages of specialized large-scale production and
the employment of labor at the most advantageous locations, we face
undesirable consequences on which the opinions of most inhabitants of
the earth should not differ. To be sure, some may believe that the
advantages of autarky outweigh its disadvantages. In the discussion
of the pros and cons its advocates brazenly assert that autarky does
not diminish the quantity and quality of economic goods, or else they
do not speak about it openly and clearly. Obviously, they are fully
aware that their propaganda would be less effective if they were to
admit the whole truth of the consequences.
All
production restrictions directly hamper some production
inasmuch
as they prevent certain employment opportunities that are open
to the goods of higher order (land, capital, labor). By its very
nature, a government decree that “it be” cannot
create
anything
that has not been created before. Only the naive inflationists could
believe that government could enrich mankind through fiat
money.
Government cannot create anything; its orders cannot even
evict
anything from the world of reality, but they can evict from the world
of the permissible. Government cannot make man richer, but it can
make him poorer.
With
most production restrictions this is so clear that their sponsors
rarely dare openly claim credit for the restrictions. Many
generations of writers, therefore, sought in vain to demonstrate that
production restrictions do not reduce the quantity and quality of
output. There is no need to deal again with the protective tariff
arguments that are raised from a purely economic point of view. The
only case that can be made on behalf of protective tariffs is this:
the sacrifices they impose could be offset by other, noneconomic
advantages—for instance, from a national and
military point
of
view it could be desirable to more or less isolate a country from the
world.
Indeed,
it is difficult to ignore the fact that production
restrictions
always reduce the productivity of human labor and thus the social
dividend. Therefore, no one dares defend the restrictions as a
separate system of economic policy. Their
advocates—at least
the majority of them—are now promoting them as mere
supplements
to
government interference with the structure of prices. The
emphasis of the system of interventionism is on price intervention.
4.
Interference
with Prices
Price
intervention aims at setting goods prices that differ from those the
unhampered market would set.
When
the unhampered market determines prices, or would determine prices if
government had not interfered, the proceeds cover the cost of
production. If government sets a lower price, proceeds fall below
cost. Merchants and producers will now desist from
selling—excepting
perishable goods that quickly lose value—in order to
save
the
goods for more favorable times when, hopefully, the control will be
lifted. If government now endeavors to prevent a good’s
disappearance from the market, a consequence of its own intervention,
it cannot limit itself to setting its price, but must simultaneously
order that all available supplies be sold at the regulated price.
Even
this is inadequate. At the ideal market price supply and demand would
coincide. Since government has decreed a lower price the demand has
risen while the supply has remained unchanged. The available
supply now does not suffice to satisfy the demand at the fixed
price. Part of the demand will remain unsatisfied. The market
mechanism, which normally brings demand and supply together through
changes in price, ceases to function. Customers who were willing to
pay the official price turn away in disappointment because the
early purchasers or those who personally knew the sellers had
bought the whole supply. If government wishes to avoid the
consequences of its own intervention, which after all are
contrary to its own intention, it must resort to rationing as a
supplement to price controls and selling orders. In this way
government determines the quantity that may be sold to each buyer at
the regulated price.
A
much more difficult problem arises when the supplies that were
available at the moment of price intervention are used up. Since
production is no longer profitable at the regulated price, it
is
curtailed or even halted. If government would like production to
continue, it must force the producers to continue, and it must
also control the prices of raw materials, semifinished products, and
wages. But such controls must not be limited to a few
industries
which government meant to control because their products are
believed to be especially important. The controls must encompass all
branches of production, the prices of all goods and all wages, and
the economic actions of all entrepreneurs, capitalists,
landowners, and workers. If any industry should remain free,
capital and labor will move to it and thus frustrate the purpose of
government’s earlier intervention. Surely, government would
like
an
ample supply of those products it deemed so important and therefore
sought to regulate. It never intended that they should now be
neglected on account of the intervention.
Our
analysis thus reveals that in a private property order isolated
intervention fails to achieve what its sponsors hoped to achieve.
From their point of view, intervention is not only useless, but
wholly unsuitable because it aggravates the
“evil” it
meant
to alleviate. Before the price was regulated, the economic good was
too expensive in the opinion of the authority; now it disappears from
the market. But this was not the intention of the authority seeking
to lower the price for consumers. On the contrary, from its own point
of view, the scarcity and inability to find a supply must appear as
the far greater evil. In this sense it may be said that limited
intervention is illogical and unsuitable, that the economic system
that works through such interventions is unworkable and
unsuitable, and that it contradicts economic logic.
If
government is not inclined to alleviate the situation through
removing its limited intervention and lifting its price control, its
first step must be followed by others. Its decree that set price
ceilings must be followed not only by decrees on the sale of all
available supplies and the introduction of rationing, but also
price controls on the goods of higher order and wage controls and,
finally, mandatory labor for businessmen and workers. And such
decrees must not be limited to a single or a few industries, but must
cover all branches of production. There is no other choice:
government either abstains from limited interference with the
market forces, or it assumes total control over production and
distribution. Either capitalism or socialism; there is no
middle
of the road.
Let
us take yet another example: the minimum wage, wage control. It is
unimportant whether government imposes the control directly,
or
labor unions through physical coercion or threats prevent employers
from hiring workers who are willing to work for lower wages.
As wages rise, so must the costs of production and also prices. If
the wage earners were the only consumers as buyers of the final
products, an increase in real wages by this method would be
inconceivable. The workers would lose as consumers what they gained
as wage earners. But there are also consumers whose income is derived
from property and entrepreneurial activity. The wage boost does not
raise their incomes; they cannot pay the higher prices and,
therefore, must curtail their consumption. The decline in demand
leads to dismissal of workers. If the labor union coercion
were
ineffective, the unemployed would exert a labor market
pressure
that would reduce the artificially raised wages to the natural
market rate. But this escape has been closed. Unemployment, a
friction phenomenon that soon disappears in an unhampered market
order, becomes a permanent institution in interventionism.
As
government did not mean to create such a condition, it must intervene
again. It forces employers either to reinstate the unemployed
workers and pay the fixed rate, or to pay taxes that compensate the
unemployed. Such a burden consumes the owners’ income, or at
least
reduces it greatly. It is even conceivable that the
entrepreneurs’
and owners’ income no longer can carry this burden, but that
it
must be paid out of capital. But if nonlabor income is consumed by
such burdens we realize that it must lead to capital
consumption.
Capitalists and entrepreneurs, too, want to consume and live
even when they are earning no incomes. They will consume capital.
Therefore, it is unsuitable and illogical to deprive entrepreneurs,
capitalists, and land owners of their incomes and leave control over
the means of production in their hands. Obviously, the
consumption of capital in the end reduces wage rates. If the market
wage structure is unacceptable the whole private property order must
be abolished. Wage controls can raise rates only temporarily, and
only at the price of future wage reductions.
The
problem of wage controls is of such great importance today that we
must analyze it in yet another way, taking into consideration the
international exchange of goods. Let us suppose that economic goods
are exchanged between two countries, Atlantis and Thule. Atlantis
supplies industrial products, Thule agricultural products. Under the
influence of Friedrich List,
Thule now deems it necessary to build its own industry by way of
protective tariffs. The final outcome of Thule’s
industrialization
program can be no other than that fewer industrial products are
imported from Atlantis, and fewer agricultural products exported to
Atlantis. Both countries now satisfy their wants to a greater degree
from domestic production, which leaves the social product smaller
than it used to be because production conditions are now less
favorable.
This
may be explained as follows: in reaction to the import duties
in
Thule the Atlantean industry lowers its wages. But it is impossible
to offset the whole tariff burden through lower wages. When wages
begin to fall it becomes profitable to expand the production of raw
materials. On the other hand, the reduction in Thulean sales of
agricultural products to Atlantis tends to lower wages in the Thulean
raw material production, which will afford the Thulean
industry
the opportunity to compete with the Atlantean industry through
lower labor costs. It is obvious that in addition to the declining
capital return of industry in Atlantis, and the declining land rent
in Thule, wage rates in both countries must fall. The decline
in
income corresponds to the declining social product.
But
Atlantis is a “social” country. Labor unions
prevent a
reduction
in wage rates. Production costs of Atlantean industry remain
at
the old pre-import-duty levels. As sales in Thule decline Atlantean
industry must discharge some workers. Unemployment compensation
prevents the flow of unemployed labor to agriculture. Unemployment
thus becomes a permanent institution.
The
exportation of coal from Great Britain has declined. Inasmuch as the
unneeded miners cannot emigrate—because other
countries do
not
want them—they must move to those British industries that are
expanding in order to compensate for the smaller imports that
follow the decline in exports. A reduction in wage rates in
coal
mining may bring about this movement. But labor unions may hamper
this unavoidable adjustment for years, albeit temporarily. In the
end, the decline in the international division of labor must bring
about a reduction in standards of living. And this reduction
must be all the greater, the more capital has been consumed through
“social” intervention.
Austrian
industry suffers from the fact that other countries are
raising
their import duties continually on Austrian products and are imposing
ever new import restrictions, such as foreign exchange control. Its
answer to higher duties, if its own tax burden is not reduced,
can only be the reduction in wages. All other production factors are
inflexible. Raw materials and semifinished products must be
bought in the world market. Entrepreneurial profits and interest
rates must correspond to world market conditions as more foreign
capital is invested in Austria than Austrian capital is invested
abroad. Only wage rates are determined nationally because emigration
by Austrian workers is largely prevented by
“social”
policies
abroad. Only wage rates can fall. Policies that support wages at
artificially high rates and grant unemployment compensation only
create unemployment.
It
is absurd to demand that European wages must be raised because wages
are higher in the U.S. than in Europe. If the immigration barriers to
the U.S., Australia, et cetera, would be removed, European workers
could emigrate, which would gradually lead to an international
equalization of wage rates.
The
permanent unemployment of hundreds of thousands and millions of
people on the one hand, and the consumption of capital on the
other hand, are each consequences of interventionism’s
artificial
raising of wage rates by labor unions and unemployment compensation.
5.
Destruction
Resulting from Intervention
The
history of the last decades can be understood only with a
comprehension of the consequences of such intervention in the
economic operations of the private property order. Since the demise
of classical liberalism, interventionism has been the gist of
politics in all countries in Europe and America.
The
economic layman only observes that “interested
parties”
succeed again and again in escaping the strictures of law. The fact
that the system functions poorly is blamed exclusively on the
law that does not go far enough, and on corruption that
prevents
its application. The very failure of interventionism reinforces the
layman’s conviction that private property must be
controlled
severely. The corruption of the regulatory bodies does not shake his
blind confidence in the infallibility and perfection of the state; it
merely fills him with moral aversion to entrepreneurs and
capitalists.
But
the violation of law is not an evil that merely needs to be
eradicated in order to create paradise on earth, an evil that flows
from human weakness so difficult to uproot, as etatists so naively
proclaim. If all interventionist laws were really to be observed they
would soon lead to absurdity. All wheels would come to a halt because
the strong arm of government comes too close.
Our
contemporaries view the matter like this: farmers and milk dealers
conspire to raise the price of milk. Then comes the state, the
welfare state, to bring relief, pitting common interest against
special interest, public economic view against private point of view.
The state dissolves the “milk cartel,” sets ceiling
prices,
and
embarks upon criminal prosecution of the violators of its
regulations. The fact that milk does not become as cheap as the
consumers had wished is now blamed on the laws that are not strict
enough, and on their enforcement that is not severe enough. It is not
so easy to oppose the profit motive of pressure groups that are
injurious to the public. The laws must therefore be
strengthened
and enforced without consideration or mercy.
In
reality, the situation is quite different. If the price
ceilings
were really enforced, the delivery of milk and. dairy products to the
cities would soon come to a halt. Not more, but less milk, or none at
all, would come to the market. The consumer still gets his milk only
because the regulations are circumvented. If we accept the rather
impermissible and fallacious etatist antithesis of public and
private interests, we would have to draw this conclusion: the milk
dealer who violates the law is serving the public interest; the
government official who seeks to enforce the ceiling price is
jeopardizing it.
Of
course, the businessman who violates the laws and regulations in
order to produce regardless of government obstacles is not guided by
considerations of public interest, which the champions of the public
interest belabor continually, but by the desire to earn a
profit, or at least to avoid the loss which he would suffer complying
with the regulation. Public opinion, which is indignant at the
baseness of such motivation and the wickedness of such action,
cannot comprehend that the impracticability of the decrees and
prohibitions would soon lead to a catastrophe were it not for this
systematic disregard of government orders and prohibitions.
Public opinion expects salvation from strict compliance with
government regulations passed “for the protection of
the
weak.” It censures government only because it is not strong
enough
to pass all necessary regulations and does not entrust their
enforcement to more capable and incorruptible individuals. The
basic problems of interventionism are not discussed at all. He
who timidly dares to doubt the justification of the restrictions on
capitalists and entrepreneurs is scorned as a hireling of
injurious special interests or, at best, is treated with
silent
contempt. Even in a discussion of the methods of interventionism, he
who does not want to jeopardize his reputation and, above all, his
career must be very careful. One can easily fall under the
suspicion of serving “capital.” Anyone
using economic
arguments cannot escape this suspicion.
To
be sure, public opinion is not mistaken if it scents
corruption
everywhere in the interventionist state. The corruptibility of
the politicians, representatives, and officials is the very
foundation that carries the system. Without it the system
would
disintegrate or be replaced with socialism or capitalism.
Classical liberalism regarded those laws best that afforded least
discretionary power to executive authorities, thus avoiding
arbitrariness and abuse. The modern state seeks to expand its
discretionary power—everything is to be left to the
discretion of
officials.
We
cannot here set forth the impact of corruption on public
morals.
Naturally, neither the bribers nor the bribed realize that
their
behavior tends to preserve the system which public opinion and they
themselves believe to be the right one. In violating the law they are
conscious of impairing the public weal. But by constantly violating
criminal laws and moral decrees they finally lose the ability to
distinguish between right and wrong, good and bad. If finally
few economic goods can be produced or sold without violating
some regulation, it becomes an unfortunate accompaniment of
“life”
to sin against law and morality. And those individuals who
wish
it were different are derided as “theorists.” The
merchant
who
began by violating foreign exchange controls, import and export
restrictions, price ceilings, et cetera, easily proceeds to defraud
his partner. The decay of business morals, which is called
“inflation effect,” is the inevitable
concomitant of
the
regulations that were imposed on trade and production during the
inflation.
It
may be said that the system of interventionism has become
bearable through the laxity of enforcement. Even the interferences
with prices are said to lose their disruptive power if the
entrepreneurs can “correct” the situation with
money and
persuasion. Surely, it cannot be denied that it would be better
without the intervention. But, after all, public opinion must be
accommodated. Interventionism is seen as a tribute that must be paid
to democracy in order to preserve the capitalistic system.
This
line of reasoning can be understood from the viewpoint of
entrepreneurs and capitalists who have adopted Marxian-socialistic or
state-socialistic thought. To them, private property in the means of
production is an institution that favors the interests of landowners,
capitalists, and entrepreneurs at the expense of the public.
Its
preservation solely serves the interests of the propertied classes.
So, if by making a few painless concessions these classes can
salvage the institution that is so beneficial to them, and yet so
harmful to all other classes, why jeopardize its preservation by
adamantly refusing the concessions?
Of
course, those who do not share this view regarding
“bourgeois”
interests cannot accept this line of thought. We do not see why the
productivity of economic labor should be reduced through erroneous
measures. If private property in the means of production actually is
an institution that favors one part of society to the detriment of
another, then it should be abolished. But if it is found that private
property is useful to all, and that human society with its
division of labor could not be organized in any other way, then it
must be safeguarded so that it can serve its function in the best
possible way. We need not here discuss the confusion that must arise
about all moral conceits if law and moral precepts disallow, or at
least revile, something that must be preserved as the foundation of
social life. And why should anything be prohibited in the expectation
that the prohibition will be largely circumvented?
Anyone
defending interventionism with such arguments is undoubtedly
seriously deluded regarding the extent of the productivity loss
caused by government interventions. Surely, the adaptability of the
capitalist economy has negated many obstacles placed in the
way
of entrepreneurial activity. We constantly observe that entrepreneurs
are succeeding in supplying the markets with more and better
products and services despite all difficu1ties put in their
way
by law and administration. But we cannot calculate how much better
those products and services would be today, without expenditure of
additional labor, if the hustle and bustle of government were not
aiming (inadvertently, to be sure) at making things worse. We are
thinking of the consequences of all trade restrictions on which there
can be no differences of opinion. We are thinking of the obstructions
to production improvements through the fight against cartels
and
trusts. We are thinking of the consequences of price controls.
We are thinking of the artificial raising of wage rates through
collective coercion, the denial of protection to all those willing to
work, unemployment compensation, and, finally, the denial of the
freedom to move from country to country, all of which have made the
unemployment of millions of workers a permanent phenomenon.
Etatists
and socialists are calling the great crisis from which the world
economy has been suffering since the end of the World War the crisis
of capitalism. In reality, it is the crisis of interventionism.
In
a static economy there may be idle land, but no unemployed
capital or labor. At the unhampered, market, rate of wages all
workers find employment. If, other conditions being equal,
somewhere workers are released, for instance, on account of an
introduction of new labor-saving processes, wage rates must fall. At
the new, lower rates then all workers find employment again.
In
the capitalist social order unemployment is merely a
transition
and friction phenomenon. Various conditions that impede the free flow
of labor from place to place, from country to country, may render the
equalization of wage rates more difficult. They may also lead to
differences in compensation of the various types of labor. But with
freedom for entrepreneurs and capitalists they could never lead to
large-scale and permanent unemployment. Workers seeking
employment could always find work by adjusting their wage demands to
market conditions.
If
the market determination of wage rates had not been disrupted, the
effects of the World War and the destructive economic policies of the
last decades would have led to a decline in wage rates, but
not
to unemployment. The scope and duration of unemployment, interpreted
today as proof of the failure of capitalism, results from the fact
that labor unions and unemployment compensation are keeping wage
rates higher than the unhampered market would set them. Without
unemployment compensation and the power of labor unions to
prevent the competition of nonmembers willing to work, the
pressure of supply would soon bring about a wage adjustment that
would assure employment to all hands. We may regret the consequences
of the antimarket and anticapitalistic policy in recent decades, but
we cannot change them. Only reduction in consumption and hard
labor
can replace the capital that was lost, and only the formation
of
new capital can raise the marginal productivity of labor and
thus wage rates.
Unemployment
compensation cannot eradicate the evil. It merely delays the
ultimately unavoidable adjustment of wages to the fallen marginal
productivity. And since the compensation is usually not paid from
income, but out of capital, ever more capital is consumed and future
marginal productivity of labor further reduced.
However,
we must not assume that an immediate abolition of all the
obstacles to the smooth functioning of the capitalist economic
order would instantly eradicate the consequences of many
decades
of intervention. Vast amounts of producers’ goods have been
destroyed. Trade restrictions and other mercantilistic measures have
caused malinvestments of even greater amounts that yield
little
or nothing. The withdrawal of large fertile areas of the world (e.g.,
Russia and Siberia) from the international exchange system has led to
unproductive readjustments in primary production and processing. Even
under the most favorable conditions, many years will pass before the
traces of the fallacious policies of the last decades can be
erased. But there is no other way to the greater well-being for all.
6.
The
Doctrine of Interventionism
To
prescientific thinkers, a human society built on private property in
the means of production seemed to be naturally chaotic. It received
its order, so they thought, only from imposed precepts of
morality and law. Society can exist only if buyer and seller observe
justice and fairness. Government must intervene in order to avoid the
evil that flows from an arbitrary deviation from the “just
price.”
This opinion prevailed in all remarks on social life until the
eighteenth century. It appeared for the last time in all its
naiveté
in the writings of the mercantilists.
The
anticapitalist writers are emphasizing that classical economics
served the “interests” of the
“bourgeoisie,”
which allegedly
explains its own success, and led the bourgeois class to its
successes. Surely, no one can doubt that the freedom achieved by
classical liberalism paved the way for the incredible development of
productive forces during the last century. But it is a sad mistake to
believe that by opposing intervention classical liberalism
gained acceptance more easily. It faced the opposition of all those
whom the feverish activity of government granted protection, favors,
and privileges. The fact that classical liberalism
nevertheless
could prevail was due to its intellectual victory, which
checkmated
the defenders of privilege. It was not new that the victims of
privilege favored their abolition. But it was new that the attack on
the system of privilege was so successful, which must be credited
exclusively to the intellectual victory of classical liberalism.
Classical
liberalism was victorious with economics and through it. No other
economic ideology can be reconciled with the science of catallactics.
During the 1820s and 1830s, an attempt was made in England to use
economics for demonstrating that the capitalist order does not
function satisfactorily, and that it is unjust. From this Karl
Marx then created his “scientific” socialism. But
even if
these
writers had succeeded in proving their case against capitalism, they
would have had to prove further that another social order, like
socialism, is better than capitalism. This they were not able to do;
they could not even prove that a social order could actually be built
on public property in the means of production. By merely rejecting
and ostracizing any discussion of the problems of socialism as
“utopian” they obviously did not solve
anything.
Eighteenth
century writers then discovered what had already been
published
by earlier writers on money and prices. They discovered the science
of economics which replaced the collection of moral maxims,
the
manuals of police regulations, and the aphoristic remarks on their
successes and failures. They learned that prices are not set
arbitrarily, but are determined within narrow limits by the market
situation, and that all practical problems can be accurately
analyzed. They recognized that the laws of the market draw
entrepreneurs and owners of the means of production into the service
of consumers, and that their economic actions do not result from
arbitrariness, but from the necessary adjustment to given
conditions. These facts alone gave life to a science of economics and
a system of catallactics. Where the earlier writers saw only
arbitrariness and coincidence, the classical economists saw necessity
and regularity. In fact, they substituted science and system for
debates on police regulations.
The
classical economists were not yet fully aware that the private
property order alone offers the foundation for a society based
on division of labor, and that the public property system is
unworkable. Influenced by mercantilist thought, they contrasted
productivity with profitability, which gave rise to the question of
whether or not the socialist order is preferable to the
capitalist order. But they clearly understood that, except for
syndicalism which they did not see, the only alternatives are
capitalism and socialism, and that
“intervention” in
the
functioning of the private property order, which is so popular
with both people and government, is unsuitable.
The
tools of science do not enable us to sit in judgment of the
“justice”
of a social institution or order. Surely, we may decry this or that
as “unjust” or “improper”; but
if we cannot
substitute
anything better for what we condemn, it behooves us to save our
words.
But
all this does not concern us here. Only this matters for us: no one
ever succeeded in demonstrating that, disregarding
syndicalism,
a third social order is conceivable and possible other than that
based on private property in the means or production or that built on
public property. The middle system of property that is hampered,
guided, and regulated by government is in itself contradictory and
illogical. Any attempt to introduce it in earnest must lead to
a
crisis from which either socialism or capitalism alone can emerge.
This
is the irrefutable conclusion of economics. He who undertakes to
recommend a third social order of regulated private property must
flatly deny the possibility of scientific knowledge in the field of
economics. The Historical School in Germany did just that, and the
Institutionalists in the U.S. are doing it today. Economics is
formally abolished, prohibited, and replaced by state and police
science, which registers what government has decreed, and recommends
what still is to be decreed. They fully realize that they are harking
back to mercantilism, even to the canon doctrine of just price, and
are discarding all the work of economics.
The
German Historical School and its many followers abroad never thought
it necessary to cope with the problems of catallactics. They were
completely satisfied with the arguments which Gustav Schmoller
presented in the famous Methodenstreit
and his disciples,
e.g., Hasbach, repeated after him. In the decades between the
Prussian constitutional conflict (1862) and the Weimar constitution
(1919), only three men sensed the problems of social reform:
Philippovich, Stolzmann, and Max Weber. Among these three,
only
Philippovich had any knowledge of the nature and content of
theoretical economics. In his system, catallactics and
interventionism stand side by side, but no bridge leads from
the
former to the latter, and there is no attempted solution to the great
problem. Stolzmann basically seeks to realize what Schmoller and
Brentano had merely suggested. It is a sad commentary, however, that
the School’s only representative who really attacked
the
problem was utterly ignorant of what his opposition was saying. And
Max Weber, preoccupied with quite different matters, stopped
half way, because theoretical economics was alien to him.
Perhaps he would have gone further had he not been cut off by early
death.
For
several decades there has been talk at German universities of
a
reawakening of an interest in theoretical economics. We may
mention a number of authors such as Liefmann, Oppenheimer,
Gottl, et cetera, who ardently denounce the system of modern
subjective economics, of which they know only the
“Austrians.” We
need not here raise the question of whether or not such attacks are
justified. But we would like to point out the interesting
effect
such attacks have had on the discussion of the feasibility of the
system of interventionism. Each one of these writers summarily
rejects what has been created by theoretical economics—by the
Physiocrats, classical writers, and modern authors. In
particular, they depict the work of modern economics, especially of
the Austrians, as incredible aberrations of the human mind,
whereupon they present their own supposedly original systems of
theoretical economics, claiming to remove all doubts and solve all
problems. The public, unfortunately, is led to believe that in
economics everything is uncertain and problematic, and that economic
theory merely consists of the personal opinions of various scholars.
The excitement created by these authors in German-speaking
countries succeeded in obscuring the fact that there is a science of
theoretical economics which, despite differences in detail and
especially in terminology, is enjoying a good reputation with all
friends of science. And in spite of all the critique and
reservations, even these writers basically concurred with the
theoretical system in its essential questions. But because
this
was not understood, they did not see the need for examining
interventionism from the point of view of economic knowledge.
In
addition there was the effect of the argument on the permissibility
of value judgments in science. In the hands of the Historical School,
political science had become a doctrine of art for statesmen
and
politicians. At the universities and in textbooks economic demands
were presented and proclaimed as “scientific.”
“Science”
condemned capitalism as immoral and unjust, rejected as
“radical”
the solutions offered by Marxian socialism, and recommended either
state socialism or at times the system of private property with
government intervention. Economics was no longer a matter of
knowledge and ability, but of good intentions. Especially since the
beginning of the second decade of this century, this mix of
university teaching and politics became objectionable. The public
began to hold the official representatives of science in
contempt, because they made it their task to confer the blessings of
“science” on the party programs of their
friends. And
the
public would no longer tolerate the nuisance that each
political
party appealed to its favorite judgment of
“science,” that
is, to
a university professor marching in its footsteps. When Max
Weber
and some of his friends demanded that “science”
should
renounce
value judgments and the universities should not be misused for
political and economic propaganda, they met with almost universal
agreement.
Among
those writers who agreed with Max Weber, or at least did not dare
contradict him, were several whose whole record stood in open
contradiction to the principle of objectivity, and whose
literary efforts were nothing but paraphrases of certain
political programs. They interpreted “absence of value
judgment”
in a peculiar way. Ludwig Pohle and Adolf Weber had touched upon the
basic problems of interventionism in their discussions of the wage
policies of labor associations. The followers of the labor-union
doctrines of Brentano and Webb were unable to raise any
pertinent objections. But the new postulate of
“value-free
science” seemed to rescue them from the embarrassment in
which
they
found themselves. Now they could haughtily reject anything
that
did not suit them, on grounds that it did not square with the dignity
of science to interfere with the squabbling of political parties. In
good faith, Max Weber had presented the principle of Wertfreiheit
for a resumption of scientific inquiries into the problems of social
life. Instead, it was used by the Historical-Realistic-Social
School as protection from the critique of theoretical economics.
Again
and again, perhaps intentionally, some writers refuse to
recognize the difference between the analysis of economic problems
and the formulation of political postulates. We make no value
judgments when, for instance, we investigate the consequences of
price controls and conclude that a price ceiling set below that of
the unhampered market reduces the quantity offered, other conditions
being equal. We make no value judgments when we then conclude that
price controls do not achieve what the authorities hoped to achieve,
and that they are illogical instruments of policy. A physiologist
does not indulge in value judgments when he observes that the
consumption of hydrocyanic acid destroys human life and, therefore,
is illogical as a “nutritional system.”
Physiology
does not
answer the question of whether or not a man wants to nourish or kill,
or should do so; it merely determines what builds and what destroys,
what the nourisher should do and the killer should do in order to act
according to his intentions. When I say that price controls are
illogical, I mean to assert that they do not achieve the objective
they are usually meant to achieve. Now, a Communist could
reply:
“I favor price controls just because they prevent the smooth
functioning of the market mechanism, because they turn human society
into a ‘senseless chaos’ and all the sooner lead to
my
ideal of
communism.” Then, the theory of price controls cannot answer
him,
as physiology cannot answer the man who wants to kill with
hydrocyanic acid. We do not resort to value judgments when we
demonstrate, in similar fashion, the illogicality of
syndicalism
and the unrealizability of socialism.
We
destroy economics if all its investigations are rejected as
inadmissible. We can observe today how many young minds, who under
other circumstances would have turned to economic problems, spend
themselves on research that does not suit their talents and,
therefore, adds little to science. Enmeshed in the errors described
above, they shun significant scientific tasks.
7.
The
Historical and Practical Arguments for Interventionism
Put
on the spot by economic criticism, the representatives of the
Historical-Realistic School finally appeal to the
“facts.”
It
cannot be denied, they assert, that all the theoretically
unsuitable interventions were actually made, and continue to
be
made. We cannot believe, they contend, that economic practice did not
notice this alleged unsuitability. But interventionist norms
survived for hundreds of years, and since the decline of liberalism,
the world is ruled again by interventionism. All this is said to be
sufficient proof that the system is realizable and successful, and
not at all illogical. The rich literature of the Historical-Realistic
School on the history of economic policies is said to confirm the
doctrines of interventionism.
The
fact that measures have been taken, and continue to be taken, does
not prove that they are suitable. It only proves that their sponsors
did not recognize their unsuitability. In fact, contrary to
the
beliefs of the “empirics,” it is not so easy to
comprehend
the
significance of an economic measure. We cannot understand its
significance without an insight into the workings of the whole
economy, that is, without a comprehensive theory. The authors of
works on economic history, economic descriptions, economic
policies,
and economic statistics usually proceed much too thoughtlessly.
Without the necessary theoretical knowledge they engage in tasks for
which they are completely unprepared. Whatever the authors of
the source material did not discover usually escapes the
historians’
attention also. In a discussion of an economic regulation they are
rarely inclined to examine properly and carefully whether the
intended result was actually achieved, and if it was achieved,
whether it was brought about by the regulation or some other factors.
They surely lack the ability to perceive all concomitant
effects
that, from the point of view of the regulators, were desirable
or undesirable. Only in monetary history did the better
quality
of some works stand out. Their authors were equipped with some
knowledge of monetary theory (Gresham’s law, quantity
theory),
and
therefore better understood the work they were to do.
The
most important qualification of a researcher into
“facts”
is
complete mastery of economic theory. He must interpret the
available material in the light of theory. If he does not succeed in
this, or it leaves him unsatisfied, he must precisely elaborate the
critical point, and formulate the problem that needs to be solved
theoretically. Others then may try to solve the task. The failure is
his, not that of theory. A theory explains everything. Theories do
not fail in individual problems; they fail because of their own
shortcomings. He who seeks to replace one theory with another
must either fit it into the given system, or create a new
system
into which it fits. It is wholly unscientific to start with observed
“facts” and then announce the failure of
“theory” and system.
The genius who advances science with new knowledge can gain valuable
information from the observation of a minute process, either
overlooked or deemed insignificant by those before him. His
mind
is excited over every object. But the inventor replaces the old with
the new, not through negation, but with a view toward the whole and
the system.
We
need not here deal with the deeper epistemological question of
conflicting systems. Nor need we discuss a multiplicity of
opposing systems. To investigate the problems of interventionism
there are, on the one hand, modern economics together with classical
theory and, on the other hand, the deniers of system and theory, no
matter how carefully they word their denial of the possibility
of theoretical knowledge. Our answer to them is simple: try to create
a system of theoretical knowledge that pleases you more than ours.
Then we can talk again.
Of
course, all the objections raised against theoretical economics are
economic “theories.” In fact, the objectors
themselves are
now
writing “economic theories” and giving lectures on
“theoretical
economics.” But their work is inadequate because
they
neglect
to weave the individual tenets of their “theory”
into a
system, a
comprehensive theory of catallactics. A theoretical tenet
becomes a theory only through a system and in a system. It is very
easy to discourse on wage, rent, and interest. But we may speak of a
theory only where individual statements are linked to a comprehensive
explanation of all market phenomena.
In
their experiments the natural sciences can eliminate all disturbing
influences and observe the consequences of the change of one factor,
other conditions being equal. If the result of the experiment
cannot be fitted satisfactorily into the given system of theory, it
may invite an expansion of the system, or even its replacement by a
new one. But he who would conclude from the result of one experiment
that there can be no theoretical perception would invite ridicule.
The social sciences lack the experiment. They can never observe the
consequences of one factor, other conditions being unchanged.
And yet, the deniers of system and theory dare to conclude from some
“fact” that a theory, or even all theory, has been
refuted.
What
is there to be said about general statements such as these:
“Britain’s industrial supremacy during the
eighteenth
and
nineteenth centuries was the result of mercantile policies in
previous centuries,” or “The rise in real wages
during the
last
decades of the nineteenth century and the early decades of the
twentieth century must be credited to labor unions,” or
“Land
speculation raises rents.” Such statements are believed to be
drawn
directly from experience. This is not gray theory, they tell
us,
but fruit from the green tree of life. But they adamantly refuse to
listen to a theorist who proposes to examine the various tenets of
“practical experience” by thinking them through,
and
wanting
to unite them into a systematic structure.
All
the arguments the Empirical-Realistic School could advance do
not replace the lack of a comprehensive theoretical system.
8.
Recent
Writings on the Problems of Interventionism
In
Germany, the classical country of interventionism, the need to deal
seriously with an economic critique of interventionism was
scarcely felt. Interventionism came to power without a fight. It
could ignore the science of economics created by Englishmen
and
Frenchmen. Friedrich List denounced it as being injurious to the
interests of the German people. Among the few German economists,
Thünen was scarcely known, Gossen completely unknown, and
Hermann and Mangold without much influence. Menger was
“eliminated” in the Methodenstreit.
Formal science
in
Germany did not concern itself with economic achievements
after
the 1870s. All objections were brushed aside by branding them special
interest statements of entrepreneurs and capitalists.
In
the United States, which now seems to assume leadership in
interventionism, the situation is quite different. In the country of
J. B. Clark, Taussig, Fetter, Davenport, Young, and Seligman, it is
impossible to ignore all the achievements of economics. It was to be
expected, therefore, that an attempt would here be made to prove the
realizability and suitability of interventionism. John Maurice
Clark, formerly a University of Chicago professor and now, as was his
great father John Bates Clark, professor at Columbia
University
in New York City, has undertaken this very task.
We
regret, however, that only a single chapter with a few pages deals
with the fundamental problems of interventionism. Professor
Clark distinguishes between two types of social regulation of
economic actions: regulation of incidental matters, “those in
which
the state is dealing with matters which are incidental to the main
transaction,” and regulation of essential matters,
“those in
which the ‘heart of the contract’ is at stake and
the state
presumes to fix the terms of the exchange and dictate the
consideration in money or in goods, or to say that the exchange shall
not take place at all.”
This distinction roughly coincides with our distinction
between
production and price intervention. It is clear that an economic
consideration of the system of interventionism cannot proceed
any differently.
In
his analysis of “control of matters incidental to the
contract”
J. M. Clark does not arrive at any conclusion other than ours in an
analysis of production intervention. He too must conclude that
“such
regulations impose some burdens on industry.”
This is all that interests us in his discussion. His examination of
the political pros and cons of such intervention is irrelevant
for our problem.
In
his discussion of control of the “heart of the
contract,”
which
roughly corresponds to price intervention, Clark first mentions the
American control of interest rates. It is circumvented, he
asserts, through additional incidental charges that raise the nominal
rate to the borrower. An illegal commerce has developed in
small
loans to consumers. Inasmuch as decent people do not engage in such
transactions, they are the sphere for unscrupulous operators. As such
transactions must shun the light of publicity, exorbitant
interest rates are demanded and granted, which exceed by far the
rates that would prevail if no rates were fixed. “Charges
equivalent to several hundred per cent per year are the common
thing. The law multiplies the evil of extortion
tenfold.”
Nevertheless,
Professor Clark does not believe that rate fixing is illogical. In
general, the loan market even for this category of consumer loans is
to be left free, with a law to prohibit an interest rate higher than
the market rate. “The law . . . may render a great service in
preventing the exaction of charges which are materially above
the true market rate.” Therefore, the simplest method,
according
to
Clark, is “to fix a legal rate for this class of loans which
liberally covers all costs and necessary inducements, and to forbid
all charges in excess of this rate.”
Surely,
when the interest regulation sanctions the market rates or even
exceeds them, it can do no harm. It is useless and superfluous. But
if it fixes a rate that is lower than that which would develop in an
unhampered market, then all the consequences described so well by
Clark must emerge. Why, then, the rate fixing? Clark’s
answer: it
is necessary to avoid unfair discrimination.
The
concept of “unfair” or “undue
discriminations”
originates
in the field of monopoly.
If the monopolist as seller is in the position to classify the
potential buyers according to purchasing power and desire intensity,
to whom he offers his commodity or service at different prices, then
he does better without a uniform price. Such conditions are given in
most cases of means of transportation, electric power plants, and
similar enterprises. The freight rates of railroads represent a
nearly classical case of such a differentiation. But without further
explanation one cannot call this practice “unjust,”
an
interventionist charge so naively and resentfully made against
monopolists. However, we need not be concerned with the ethical
justification of intervention. From a scientific point of view, we
merely must observe that there is room for government intervention in
the case of monopoly.
But
there is also a differential treatment of the various classes of
buyers that runs counter to the interests of monopolies. This
may be the case where the monopoly is managed as a part of a
larger enterprise in which the monopoly serves objectives other than
greatest profitability. Let us disregard all cases in which the
monopolist either is a compulsory association or acts under
its
influence, seeking to achieve certain national, military, or social
objectives. Freight rates, for instance, may be set to accommodate
foreign trade, or municipal services may be priced according
to
customers’ income. In all such cases the interventionists
approve
of the differentiation. To us, only those cases are significant in
which the monopolist resorts to differentiation that runs
counter to his profit interests. It may be that he takes into
consideration the interests of his other enterprises that are
more important to him. Or he wants to disadvantage a buyer for
personal reasons, or force him to do or not to do something. In the
United States, railroads have favored individual shippers through
concessions of lower freight rates, which often forced their
competitors to close their businesses or sell them at depressed
prices. The public generally censured such practices because they
promoted industrial concentration and formation of monopolies.
Public opinion viewed the disappearance of competition in
individual industries with great alarm. It failed to recognize
that competition takes place among producers and sellers not only
within each individual branch of production, but also between all
related goods, and in the final analysis, between all economic goods.
And it did not recognize that the monopolistic price charged by the
few genuine monopolies—mining and similar primary
production—is
not so detrimental to all, as the naive foes of monopolies are
willing to assume.
But
there is no talk of monopoly in Clark’s case of the loan
market
for
consumers, small farmers, merchants and tradesmen. How is it
possible to practice unfair discrimination? When one lender does not
lend at the market rate the borrower may simply go to another.
Of course, it cannot be denied that everyone is
inclined—especially
among the borrowers of this lowest category—to
overestimate
his own credit rating, and call the rates demanded by creditors too
high.
J.
M. Clark proceeds from a discussion of interest regulation to
that of minimum wages. “Artificial” wage boosts, he
believes,
lead to unemployment. The rise in wages raises production costs, and
thus the product price. The quantity that was sold at the lower price
can no longer be marketed at this higher price. On the one hand, this
leaves unsatisfied buyers who would like to buy at the no longer
quoted lower price, and on the other hand, it causes unemployment of
workers who are willing to work at lower wage rates. Finally,
entrepreneurs will be willing to bring this potential demand and
supply together.
So
far we can again agree with Clark. But then comes an assertion that
completely misses the mark—that is, that “the
regulations
affecting the incidental conditions of employment”
must have
the same consequences since they too raise production costs.
But this is not correct. If wages are freely determined in the labor
market, no raise in wages above the market rate can occur as a result
of interventions, such as the shortening of labor time, mandatory
insurance of workers at the expense of employers, regulations of
workshop conditions, vacations of workers with full pay, et
cetera. All these costs are shifted to wages and are borne by the
workers. This fact could be overlooked because such social
interventions were introduced mainly at a time when real wages were
rising and the purchasing power of money was falling. Thus, net wages
paid to workers continued to rise in terms of both money and
purchasing power despite the ever-rising social costs placed on the
employer. His calculations include not only the workers’
wages,
but
also all costs resulting from their employment.
Clark’s
further remarks have no bearing on our problem. He believes that wage
increases, like other interventions on behalf of workers,
“may
prove self-sustaining through raising the level of personal
efficiency, through furnishing an added stimulus to the
employer’s
search for improved methods, and through hastening the elimination of
the least efficient employers and transfering their business to those
who will conduct it more efficiently.”
All this can also be said about an earthquake or any other natural
catastrophe.
Professor
Clark is trained too well in theory and is too perceptive not
to
notice how untenable his reasoning actually is. He concludes,
therefore, that the question of whether or not a given intervention
is a “violation of economic law” is
basically “a
question
of degree.” In the final analysis, Clark assures us,
we must
consider how severely the intervention affects production costs or
market prices. The law of supply and demand is “no thing of
precision and inexorable rigidity.” Many times
“a
small
change in costs of production” has no effect at all on final
prices—when, for instance, the price is usually quoted in
round
numbers and the merchants absorb small changes in costs or wholesale
prices. Clark’s final word: “A large
increase in wage
rates
may be a ‘violation of economic law,’ in the sense
in which
we
are using the term, where a small increase would not be.”
Upon
careful reflection, Professor Clark yields to all the objections by
those writers who call interventionism unsuitable and
illogical.
It is obvious and undeniable that the quantitative consequences of an
intervention depend on the severity of the intervention. A small
earthquake destroys less than a big one, and a very small earthquake
may leave no visible traces at all.
It
is utterly irrelevant that Clark nevertheless clings to the statement
that such interventions can be made and advocated. He must
admit
that this leads to further measures in order to alleviate the
consequences. For instance, when price controls are imposed, there
must be a rationing in order to remove the discrepancy between supply
and demand. And it will be necessary to stimulate production
directly because the normal impetus will be lost.
At this point Clark unfortunately discontinues his discussion. Had he
proceeded he would necessarily have come to the conclusion
that
there are only two alternatives: either to abstain from all
intervention, or, if this is not the intention, to add ever new
interventions in order to eliminate “the discrepancy
between
supply and demand which the public policy has created,” until
all
production and distribution are controlled by the social apparatus of
coercion, that is, until the means of production are nationalized.
In
the case of minimum wage legislation it is a very
unsatisfactory
solution for Professor Clark to recommend that the workers who lost
their jobs be employed in public works.
And when he points at “energy, intelligence and
loyalty”
calling
for government intervention, he merely reveals his embarrassment.
In
his second to last sentence of this chapter dealing with
fundamentals, Clark concludes that “government can do a great
deal
of good by merely seeing to it that everyone gets the benefit of the
market rate, whatever that is, and thus prevent the ignorant from
being exploited on account of their ignorance.”
This concurs completely with the position of classical
liberalism: government shall be limited to the protection of private
property and the elimination of all obstacles to free market access
for individuals or groups of individuals. This is nothing but another
wording of the principle: laissez
faire, laissez
passer.
It is insignificant that Professor Clark apparently believes that a
special information program is necessary for the attainment of
this objective. Ignorance of the market situation alone cannot
prevent potential buyers or workers from exploring the situation. If
the sellers and entrepreneurs are not hampered in searching for
customers and workers, their competition will reduce goods prices and
raise wages until the market rate is attained. But whatever it
be, classical liberal principles are not violated if government
undertakes to publish relevant data on the formation of market
prices.
The
result of Clark’s inquiry into our problem thus does not
contradict
our own analysis earlier in this essay. Despite Clark’s
eagerness
to prove that the popular interventions are not unsuitable and
illogical, he did not succeed in adding anything but the observation
that the consequences are insignificant if the intervention is
quantitatively unimportant, and that important interventions have
undesirable consequences that need to be alleviated through
more
intervention. At this point Clark unfortunately halted his
discussion. If he had proceeded to its conclusion, which he
should have done, it too would have clearly revealed the only
alternative: either private property in the means of
production
is permitted to function freely, or control over the means of
production is transferred to organized society, to its
apparatus
of coercion, the state. It would have revealed that there can be no
other alternative but socialism or capitalism.
Thus,
Clark’s work also, which is the most complete
expression of
American interventionism, can come to no other conclusion in its
discussion of the basic questions of interventionism.
Interventionism is a system that is contradictory and
unsuitable
even from the point of view of its sponsors, that cannot be carried
out logically, and whose introduction in every case can effect
nothing but disturbances in the smooth functioning of the social
order based on private property.
We
owe the most recent German discussion of our problem to
Richard
Strigl, a member of the Austrian School. Although not so outspoken as
J. M. Clark, he too sympathizes with interventionism. Every line of
his work, which seeks to analyze theoretically the wage problems of
interventionism,
clearly reflects his desire to acclaim as much as possible
social policy in general and labor union policies in
particular.
All Strigl’s statements are carefully worded in the same
manner
that authors of previous centuries worded theirs in order to escape
inquisition or censure.
But all the concessions which his heart grants to interventionistic
thinking concern only secondary matters and the formulation of
doctrine. Regarding the problem itself, Strigl’s
perceptive
analysis comes to no conclusion other than that drawn in scientific
economic analysis. The gist of his doctrine is visible in the
sentence: “The greater the service a worker can render, the
more
he
will earn, provided his service is useful in the economy; it
does not matter whether his wage is determined in the free market or
agreed upon by collective contract.”
It obviously grieves him that this is so, but he cannot and will not
deny it.
Strigl
emphasizes that artificial wage increases create unemployment.
This is undoubtedly the case where wages are raised in individual
industries only, or in individual countries only, or where they are
raised unevenly in different industries and countries, or
where
monetary policies are used to stem a general rise in prices.
Undoubtedly Strigl’s case is important for an understanding
of
present-day conditions. For a thorough understanding of the
problem, however, we must rely upon another basic assumption.
To
have universal validity our analysis must assume that the rise in
wages occurs evenly and simultaneously in different industries
and countries, and that monetary factors do not intervene.
Only
then can we completely understand interventionism.
Of
all the interventionist measures none is probably under stronger
attack in Germany and Austria than the eight-hour workday. Many
believe that the economic emergency can be met only be
repealing
the eight-hour law: more work and more intensive work are needed. It
is taken for granted that the lengthening of labor time and the
improvement in labor efficiency would not be accompanied by
higher wages, or at least that the increases would trail the rising
labor efficiency, so that labor would become less expensive.
Simultaneously, a reduction in all kinds of “social
costs”
is
demanded, such as the elimination of the “welfare
tax”
payable
by the businessman in Austria. It is tacitly assumed that he would
retain the savings from such cost reductions, and that his labor
costs would thus be reduced indirectly. Efforts to reduce wages
directly are insignificant at the present time.
In
social journals and economic literature, the discussion of the
problems of the eight-hour day, and the intensity of labor reveals a
slow but steady progress in economic understanding. Even
writers
who do not hide their bias for interventionism, admit the
cogency of the most important arguments against
interventionism.
Seldom do we still meet the blindness in a fundamental understanding
of such matters that characterized our literature before the war.
Surely,
the supremacy of the interventionist school has not yet been
overthrown. Of Schmoller’s state socialism and etatism and of
Marx’s egalitarian socialism and communism only the names
have
survived in political life; the socialist ideal itself has ceased to
exert a direct political effect. Its followers, even those who
were willing to shed blood to bring it about a few years ago, have
now postponed it or given up entirely. But interventionism as
Schmoller and Marx advocated it—Schmoller, as a foe
of all
“theory,” quite unhesitatingly; Marx with
bad
conscience
about its insoluble contradiction to all his
theories—now
dominates the climate of opinion.
We
need not examine here whether the political conditions are
ripe
for the German people and other leading nations to turn away from
interventionistic policies. An impartial analysis of the state
of affairs may show that interventionism continues to advance.
This can hardly be denied for Great Britain and the United States.
But surely it is as futile today as it was in the past to defend
interventionism as meaningful and purposeful from the point of
view of economic theory. In fact, it is neither meaningful nor
purposeful from any point of view. There is no road from
economics to interventionism. All interventionistic successes
in
practical politics were “victories over economics.”