by Ludwig von Mises
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Table of Contents
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.”2 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
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.4
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.5
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.6 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.7
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.8
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.9
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.10
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.”11 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.”12 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.”13
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.”14
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.15
The concept of “unfair” or “undue discriminations” originates in the field of monopoly.16 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.17
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.18 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.”19 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.”20
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.21 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.22 And when he points at “energy, intelligence and loyalty” calling for government intervention, he merely reveals his embarrassment.23
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.”24 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,25 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.26 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.”27 It obviously grieves him that this is so, but he cannot and will not deny it.
Strigl emphasizes that artificial wage increases create unemployment.28 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.”
1Archiv für Sozialwissenschaft und Sozialpolitik [Archives for social science and social policy], vol. 36, 1926.
2Othmar Spann, Der wahre Staat [The true state], Leipzig, 1921, p. 249.
3There may be some doubt about the suitability of a third group: interference by taxation which consists of expropriation of some wealth or income. We did not allow for such a group because the effects of such intervention may in part be identical with those of production restrictions, and in part consist of influencing the distribution of production income without redirecting production itself.
4For a critique of these notions see my Nation, Staat und Wirtschaft [Nation, state and economy], Vienna, 1919, p. 56 et seq., especially with regard to German policies since the 1870s.
5On the effectiveness of price controls versus monopolistic prices see my “Theorie der Preistaxen” [Theory of price controls] in Handwörterbuch der Staatswissenschaften [Handbook of social sciences], 4th ed., vol. VI, p. 1061 et seq. The essay appears below in this collection. To understand price controls as they are directed at monopolistic prices, we must not be influenced by popular terminology that detects “monopolies” everywhere, but work rather with the strictly economic concepts of monopoly.
6It should be noted that we are not dealing here with the question of whether or not wage rates can be raised permanently and universally through collective bargaining, but with the consequences of a general wage boost achieved artificially through physical coercion. To avoid a theoretical difficulty pertaining to money, namely that a general rise in prices is impossible without a change in the ratio between the quantity of money and its demand, we may assume that together with the boost in wages a corresponding reduction in the demand for money takes place through a reduction in cash holdings (e.g., as a result of additional paydays).
Editor’s note: A nineteenth century (1789–1846) German advocate of the use of protective tariffs to stimulate national industrial development.
7On the question of how collective bargaining can temporarily raise wage rates see my essay “Die allgemeine Teuerung im Lichte der theoretischen Nationalökonomie” [The high costs of living in the light of economic theory] in vol. 37 of Archiv, p. 570 et seq. On the causes of unemployment see C. A. Yerrijn Stuart, Die heutige Arbeitslosigkeit im Lichte der Weltwirtschaftslage [Contemporary unemployment in the light of the world economy], Jena, 1922, p. 1 et seq; L. Robbins, Wages, London, 1926, p. 58 et seq.
8Zwiedineck-Südenhorst, “Macht oder ökonomisches Gesetz” [Control or economic law], Schmoller’s Yearbook, 49th year, p. 278 et seq.
9See the relevant description of this method by Pohle, Die gegenwärtige Krisis in der deutschen Volkswirtschaftslehre [The present crisis in German economics], 2nd ed., Leipzig, 1921, p. 115 et seq.
10J.M. Clark, Social Control of Business (Chicago: University of Chicago Press, 1926).
11Ibid., p. 450. To avoid any misunderstanding I would like to emphasize that this distinction has nothing to do with the public-law distinction between essentialia, naturalia, and accidentalia negotii (the indispensably necessary, natural resources, and contract matters).
12Ibid., p. 451.
13Ibid., p. 453 et seq.
14Ibid., p. 454.
16See the voluminous American literature: Nash, The Economics of Public Utilities, New York, 1925, p. 97, 371; Wherry, Public Utilities and the Law, New York, 1925, pp. 3 et seq., 82 et seq., 174. See also Clark, op. cit., p. 398 et seq.
17See my Gemeinwirtschaft, Jena, 1922, p. 382 et seq. [English-language edition: Socialism (London: Jonathan Cape, 1936), p. 391 et seq.], also my Liberalismus, Jena, 1927, p. 80 et seq. [English-language edition: The Free and Prosperous Commonwealth (New York: D. Van Nostrand Co., Inc., 1962), p. 92 et seq.].
18Clark, op. cit., p. 455.
21Ibid., p. 456.
23Ibid., p. 457.
24Ibid., p. 459.
25See Strigl, Angewandte Lohntheorie. Untersuchungen über die wirtschaftlichen Grundlagen der Socialpolitik [Applied wage theory. Inquiries into the economic foundations of social policy], Leipzig and Vienna, 1926.
26Ibid., especially p. 71 et seq.
27Ibid., p. 106.