Critique of Interventionism by Ludwig von Mises
A Critique
of Interventionism
by
Ludwig von Mises
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SOCIAL LIBERALISM
1.
Introduction
Heinrich
Herkner, president of the Association for Social Policy, recently
published his autobiography under the subtitle “The
Life of
a
Socialist of the Chair.” In it he made it his task
“to
facilitate
an understanding of the closing era of German academic
socialism.”
In fact, it cannot be denied
that the Socialists of the Chair
have said everything they meant to say, and it seems their supremacy
is now declining. Therefore, it is time for an examination of
their achievements.
On
the occasion of Gustav Schmoller’s seventieth
birthday, the
most eminent members of the Historical-Realistic School cooperated in
a work that was to present the results of the efforts of German
economics during the nineteenth century.
A summary of the forty
monographs of this book was never
written. The preface expressly states that it must be left to a
future analysis to take stock of the nature and extent of the
progress of German economic science as a whole.
If
anyone had tried to write this analysis, it undoubtedly would have
been disappointing. The summary more than the individual monographs
would have revealed how few of its goals the School did achieve. It
would have shown how the School, whenever it touched upon fundamental
questions, could not escape borrowing from the discoveries of
a
theoretical school that is quite low in its esteem. In each
contribution that merely half-way meets its requirements, the work of
economic theorists is clearly visible despite the fact that they
stood apart from the School and were attacked by it.
Bernhard’s
contribution on wages, for instance, arrives at the conclusion
that “the Historical-Statistical School barely touched the
main
problem of wages.” It merely launched detailed
investigations,
but
on the great questions it “finally could stutter only the
confession: the processes are more complicated than the sum of our
detailed investigations. There would be no new German research
if it were not for the so-called abstract Austrian School.”
If this is true of wages, a
topic on which the Socialists of
the Chair loved to expound, how much more must it apply to all other
problems!
We
are gaining the same impression from all other collections of
essays this School has published. In Outlines
of Social
Economics Austrian economists
dealt with the history of thought
and with economic theory. And the classical contributions by
Menger, Böhm-Bawerk, Wieser, and a few other
“theorists” are
the only essays of lasting interest in the ten-thousand-page
collection of the third edition of the Handbook
of Social
Sciences.
There
is yet another comprehensive Festschrift
that seeks to present
the entire science in monographs. But there are signs that such
collections covering motley problems, torturing readers and
embarrassing librarians, are gradually being replaced with
collections dealing with one set of problems only. On the
occasion of the eightieth birthday of Lujo Brentano, the veteran dean
of academic socialism in and outside Germany, his students published
Economics After the War.
Naturally,
the quality of the individual contributions varies greatly.
And
it need not be emphasized that the twenty-nine contributors worked
independently and took no notice of each other’s theories and
ideologies. But a common thread appears throughout the
works—especially those the editors thought most important and
which
Brentano probably read with greatest delight—namely,
the
intention to defend and elaborate the “Brentano
system.”
The
external conditions for such a task are less favorable today than
seventeen years ago. When the Schmoller Festschrift
appeared,
academic socialism and Historical-Realistic economics stood at the
zenith of their reputation and political influence. A great deal has
changed since then. The Schmoller Festschrift
had the sound of
a fanfare. The Brentano Festschrift
is calling for
discussion.
2. Socialism of the Chair
Academic
socialism is no homogeneous ideology. In the way syndicalism stands
alongside socialism, although they often are not differentiated
distinctly, there are two schools of thought in Socialism of the
Chair: the Socialist School (state socialism or etatism), and the
Syndicalist School (at times called “social
liberalism”).
Socialism
and syndicalism are implacable antagonists, and the two ideologies
stand in irreconcilable contrast to liberalism. No specious argument
can ignore the fact that direct control over the means of production
can only rest either with individuals, with society as a whole, or
with associations of workers in each industry. Politics can
never succeed in dividing direct control over certain means of
production between society (the state), labor unions, or
individuals. Property as direct control over means of
production
is indivisible. True, there can be a social order in which some means
are owned by the state or other administrative bodies, some by labor
unions, and some by individuals. In this sense, there can be partial
socialism, partial syndicalism, and partial capitalism. But
there can never be a compromise between socialism, liberalism,
and syndicalism with regard to the same means of production. This
fundamental and logical implacability of the three conceivable
social orders has again and again been obscured in theory and
politics. But no one has ever succeeded in creating a social order
that could be called a synthesis, or even reconciliation, of the
conflicting principles.
Liberalism
is the ideology that views private property in the means of
production as the only possible, or at least best conceivable
foundation of human society based on division of labor. Socialism
seeks to transfer the property in the means of production to the
hands of organized society, the state. Syndicalism wants to transfer
control over the means of production to the association of workers in
the individual branches of production.
State
socialism (etatism, also conservative socialism) and its related
systems of military socialism and Christian socialism aim at
bringing about a society in which “the management of
property
is left to individuals,” but its employment is supervised and
guided by the collective whole so that “formally property is
private, but in substance it is public.”
The farmer, for instance,
becomes a “civil servant and must
grow what the country needs according to his best knowledge and
conscience or by government order. If he receives his interest
and a living salary, he has everything he can demand.”
Some large enterprises are
transferred directly to the
state or community, all others formally remain in the hands of their
owners, but must be managed in accordance with the plan of the
authorities. Thus, every business becomes a public office, and every
occupation an “appointment.”
At
the time serious consideration was still given to the
Social-Democratic program to transfer formally all means of
production to society, there seemed to exist a considerable, although
not fundamental, difference between the program of the etatists and
that of the Social Democrats. Today the Social-Democratic program
simply calls for an immediate nationalization of large enterprises,
while trade shops and farms are to be under the control of the state.
In this respect, etatists and socialists are much closer today than
they were a dozen years ago.
However,
the fundamental difference between the social ideals of etatism and
the Social Democrats existed in the problem of income distribution,
not in the nationalization program. It was self-evident to the Social
Democrats that all income differences were to disappear. But etatism
meant to distribute income according to “dignity.”
Everyone
was
to receive according to his rank. On this point as well, the gap
dividing Social Democrats and etatists has narrowed
considerably.
Etatism,
too, is genuine socialism, although it may differ in a few points
from the socialism of the Communist
Manifesto and the
Erfurt Program. What is essential alone is its position on the
problem of private property in the means of production. Inasmuch as
the Socialists of the Chair represented etatism, and inasmuch
as
they demanded the nationalization of large enterprises and
government supervision and control of all other enterprises, they
engaged in socialistic politics.
But
not all Socialists of the Chair were etatists. Lujo Brentano
and
his School promoted a syndicalistic program, although in many
questions of daily politics they joined ranks with the other
Socialists of the Chair and, together with the Social Democrats,
fought against liberalism. As set forth, their syndicalism is no more
definite and straightforward than any other program. As a matter of
fact, it is so contradictory and leads to such absurd
consequences that it could never be unswervingly advocated. Brentano
carefully veiled his position, but nevertheless it was syndicalism.
It became visible in his position on the problems of labor union
coercion and strike, and the protection of workers willing to
work.
If
employees receive the right to shut down an enterprise as long as its
owner rejects their demands, the control over production, in final
analysis, has been placed in the hands of labor unions. The problem
must not be obscured by the confusion between free collective
bargaining—the workers’ freedom to
organize—and the
impunity of
workers guilty of breach of contract. The protection of workers
willing to work is an entirely different matter. As long as the work
stoppage of the workers of one enterprise or in an entire
industry
can be rendered ineffective through employment of workers from other
industries or from a given reservoir of unemployed workers, the labor
unions are unable to raise wage rates above those paid without them.
But as soon as the physical force of labor, with tacit consent or
open promotion by the state, makes it impossible to replace
the
strikers, the labor unions can do as they like. The workers of
“essential” enterprises then can freely
determine
their wage
rates. They could raise them as high as they please were it not
necessary to be mindful of public opinion and the sentiment of
workers in other industries. At any rate, all labor unions have the
power temporarily to raise wage rates above those the economic
situation would determine without union intervention.
Anyone
who would deny protection to workers willing to work must raise the
question of how excessive labor demands can be dealt with. It is no
answer to refer to a sensible conduct of workers or to entrust
committees of employers and employees with the power of
decision. Committees with equal representation of both sides
can
come to an agreement only if one side makes the concessions. But if
the decision is to be made by the state, either as judge with the
power of binding arbitration or by the committee member representing
the state, the solution again is that of etatism, the very thing that
was to be avoided.
A
social order that refuses to protect those willing to work lacks
vitality and must disintegrate in short order. This is why all
political systems, no matter how they collaborate with the unions,
must finally oppose union coercion. To be sure, prewar Germany never
managed to legislate government protection to those willing to
work; an attempt failed on account of the resistance by Brentano and
his School. But it should be noted that prewar Germany could easily
have quashed a strike in essential enterprises by calling the
strikers to active military duty. Postwar republican Germany
no
longer has this power at its disposal. And yet, despite the
Social-Democratic Party’s supremacy, it has successfully
taken a
stand against strikes in essential enterprises and thus has expressly
granted protection to workers willing to work. In the Russia of the
Soviets, a strike is utterly impossible. Kautsky and Lenin
completely agree that willing workers must be permitted to render a
strike against vital facilities ineffective.
Etatism
trusts in the wisdom and attitude of government officials.
“Our
officials are learning soon enough,” writes Knapp,
how things look in the
clash of economic interests. They will not let the reins slip out of
their hands, not even to parliamentary majorities, which we know how
to handle so well. No rule is born so easily, in fact,
perceived
so gratefully as that of high-minded, very learned officials. The
German state is officialdom, let us hope that it will always remain
that. It should then be rather easy to overcome the confusion and
error of economic struggles.
Brentano
and his School lacked this faith in the infallibility of government
officials, on which they based their very claim to being
“liberal.”
But over the years, the two schools have come very close: the
Brentano School advocated nationalization or municipalization
of
a number of enterprises, and the Schmoller School emphasized
the
activity of labor unions. For a long time, their positions on foreign
trade policies separated the two schools. Brentano rejected
protectionism, while the majority of etatists pursued it. On this
point the etatists have made some concessions; an ambiguous
free-trade resolution, devised in 1923 by university professors
meeting at Stuttgart, revealed this change.
Brentano
himself sought to describe their differences in the fundamental
questions of social policy as follows:
We both favored the
activity of free organizations as well as government intervention
wherever the individual left to his own was too weak to
preserve
his personality and to develop his ability. But from the beginning
our positions on both were reversed. My studies of British conditions
had led me to build my hopes for lifting the working classes
primarily on the activities of their organizations, while it mattered
much more to Schmoller that the state assume the role of protector of
the weak.
Brentano
wrote this in the spring of 1918, shortly after the collapse of the
Schmoller system, and shortly before the collapse of the
Brentano system became evident. While the fundamental differences
between the two schools are not clearly delineated, they are at least
discernible.
3.
Liberalism and Social Liberalism
Names
are unimportant; what matters is substance. The term “social
liberalism” sounds strange indeed as socialism and liberalism
are
mutually exclusive. But we are accustomed to such terminology.
Also, socialism and democracy are irreconcilable in the final
analysis, and yet there is the old concept of “Social
Democracy,”
which is a contradictio in
adjecto. If today the Brentano
School, which adopted syndicalism, and some
“moderate”
etatists designate their movement as “social
liberalism,” no
terminological objection need be raised. But we must
object—not
for
political reasons, but in the interest of scientific clarity
and
logical thought—that this designation erases the differences
between liberalism and socialism. It permits calling
“liberal”
that which is the very opposite of what history and social science
define as liberal. The fact that in Great Britain, the home of
liberalism, this semantic confusion prevails is no excuse for us to
accede to the practice.
Herkner
is correct when he observes that the sanctity of private property is
not a dogmatically anchored objective for liberalism, but a means for
the attainment of ultimate goals. He is mistaken, however, when he
states that this is so “only temporarily.”
In their highest and ultimate
goal liberalism and socialism are
in agreement. They differ precisely in that liberalism views
private property in the means of production as the most suitable
means to attain the goal, while socialism looks upon public property
as the most suitable means. This difference in the two
programs,
and this alone, corresponds to the history of thought during the
nineteenth century. Their different positions on the problem
of
property in production separates liberalism from socialism. It
is confusing to present this in any other way.
Socialism,
according to Herkner, “is an economic system in which society
organized in a state directly assumes responsibility for the
existence of all its members. As an economic system based on
satisfying the national needs rather than gleaning profits, the whole
production and distribution process becomes the task of public
authority, replacing private property in the means of production and
their use for profit.”
This is not very precise, but
is stated clearly enough. Herkner
then continues, “If this system could be realized with
liberal
means, that is, without force and violation of law, and if it
could not only improve the material conditions of the people, but
also assure a greater measure of individual freedom, then no
objection could be raised against it from the liberal point of
view.”
Thus, when Parliament
discusses the question of
nationalization, the liberals, according to Herkner, could
vote
for the common weal if it is introduced “without force and
violation of law” and if it were not for their doubts about
the
material well-being of the people.
Herkner
seems to believe that the older liberalism advocated private
property for its own sake and not for its social consequences. Like
Wiese and Zwiedineck, he construes a difference between the older and
the contemporary liberalism. According to Herkner,
“While
the
older liberalism viewed private property as an institution of natural
law whose protection besides that of individual freedom was the first
duty of the state, contemporary liberalism is emphasizing ever
more strongly the social factor in property. . . . Private
property is no longer defended with individualistic reasons,
but
with considerations of social and economic suitability.”
In a similar vein, Zwiedineck
observes that there is
reason for optimism “that a private property order
for its
own
sake and in the interest of owners only, would be of brief
duration.”
Modern liberalism, too, is advocating private property on grounds of
“social suitability.”
It
cannot be our task here to examine how nonliberal theories of natural
law meant to defend private property as a natural phenomenon. But it
should be common knowledge that the older liberals were utilitarians
(they are frequently criticized for it), and that it was self-evident
to them that no social institution and no ethical rule can be
advocated for its own sake or for reasons of special interest, but
can be defended only on grounds of social suitability. It is
no
indication that liberalism is moving toward socialism if
modern
liberalism demands private property in the means of production
because of its social utility, and not for its own sake or for the
interests of owners.
“Private
property and inheritance,” Herkner continues, “give
rise to
unearned income. Liberalism sympathizes with the efforts of
socialists to oppose this unearned income in the interest of justice
and equal opportunity for all members of society.”
The fact that unearned income
flows from property is as obvious
as that poverty comes from pauvreté.
In fact, unearned
income flows from control over the means of production. He who
opposes unearned income must oppose private property in the
means of production. Therefore, a liberal cannot sympathize
with
such efforts. If he does so nevertheless, he is no longer a liberal.
What
in Herkner’s view, then, is liberalism? His answer is this:
Liberalism is a world
view, a kind of religion, a faith. It is a faith in the natural
dignity and goodness of man, in his great destiny, in his ability to
grow through his powers of natural reason and freedom, in the victory
of justice and truth. Without freedom there is no truth. Without
truth there can be no triumph of justice, no progress, thus no
development, later stages of which are always more desirable
than the preceding stages. What sunlight and oxygen mean to organic
life, reason and freedom mean to intellectual development.
Neither individuals, classes, nations, nor races must be viewed as
mere means for the purposes of other individuals, classes, nations or
races.
This
is all very fine and noble, but unfortunately so general and vague
that it equally applies to socialism, syndicalism, and anarchism. His
definition of liberalism lacks the decisive ingredient,
namely,
a social order that is built on private property in the means
of
production.
It
cannot surprise us that with such ignorance about liberalism Herkner
also subscribes to practically all misconceptions that are in
vogue today. Among others: “In contrast to the older
liberalism
which aimed mainly at the elimination of hampering
restrictions,
modern liberalism [that is, social liberalism] has a positive,
constructive program.”
If Herkner had discovered
private property in the means of
production as the basic ingredient of liberalism, he would have known
that the liberal program is no less positive and constructive than
any other. It is the mentality of officialdom—which,
according to
Brentano, was “the only sounding-board of the Association for
Social Policy”—that
considers as constructive and positive only that ideology which calls
for the greatest number of offices and officials. And he who
seeks to reduce the number of state agents is decried as a
“negative
thinker” or an “enemy of the state.”
Both
Herkner and Wiese
expressly emphasize that
liberalism has nothing to do with
capitalism. Passow tried to show that the ambiguous terms
“capitalism,” “capitalistic economic
order,” et
cetera, are
political slogans that, with but few exceptions, are not used
objectively to classify and comprehend the facts of economic life.
Instead, they are used to criticize, accuse, and condemn phenomena
that are more or less misunderstood.
If this position is taken, it
is clear that he who appreciates
liberalism, no matter how he defines it, seeks to protect it from
labels that are felt to be derogatory, defamatory, and abusive.
However, if we agree with Passow’s observation that for most
writers who have given the term “capitalism” a
definite
meaning,
its essence is the development and expansion of larger enterprises,
we must admit that liberalism and capitalism are closely
related.
It was liberalism that created the ideological conditions that
gave rise to modern large-scale industrial production. If we
should use the term capitalism to identify an economic method that
arranges economic activity according to capital calculation,
we must come to the same conclusion. But no matter how we
define
capitalism, the development of capitalistic methods of
production was and is possible only within the framework of a
social order built on private property in the means of production.
Therefore, we cannot agree with Wiese’s contention that the
essence
of liberalism was obscured by “its historical coincidence
with
large-scale capitalism.”
That
which makes capitalism appear “unliberal,”
according
to
Wiese, is “its insensitivity toward suffering, the
brutal
use
of elbows, and the struggle to overpower and enslave fellow
men.”
These expressions come from
the old register of socialistic
complaints about the corruption and wickedness of capitalism.
They reveal the socialistic misinterpretation of the nature
and
substance of a social order that is based on private property. If, in
a capitalistic society, the buyer seeks to buy an economic good
wherever it is least expensive, without regard for other
considerations, he does not act with “insensitivity toward
suffering.” If the superior enterprise successfully competes
with
one working less economically, there is no “brutal use of
elbows,”
or “struggle to overpower and enslave fellow
men.” The
process in this case is no undesirable concomitant effect, or
“outgrowth” of capitalism, and unwanted by
liberalism.
On
the contrary! The sharper the competition, the better it serves its
social function to improve economic production. That the stagecoach
driver was replaced by the railroad, the hand weaver by mechanical
weaving, the shoemaker by the shoe factory, did not happen contrary
to the intentions of liberalism. And when small shipowners
with
sailing vessels were replaced by a large steamship company, when a
few dozen butchers were replaced by a slaughterhouse, a few hundred
merchants by a department store, it signifies no
“overpowering
and enslaving of fellow men.”
Wiese
remarks correctly that “in reality, liberalism has never
existed
on
a large scale, and that the community of liberals still needs to be
created and brought along.”
Thus, the picture of what
fully developed capitalism can
achieve is incomplete at best, even if we reflect upon British
society at the zenith of capitalism when liberalism was leading the
way. It is popular today to blame capitalism for anything that
displeases. Indeed, who is still aware of what he would have to
forego if there were no “capitalism”? When great
dreams do
not
come true, capitalism is charged immediately. This may be a
proper procedure for party politics, but in scientific discussion it
should be avoided.
4.
Control or Economic Law?
Among
the many mistakes to which the Socialists of the Chair of all
varieties tenaciously cling is their faith in limited
government
interventions in economic life. They are convinced that, except for
syndicalism, there are three conceivable possibilities of
control over the means of production in a society based on the
division of labor. Besides public property and private property,
there is the third possibility of private property that is subject to
government regulation. The possibility and conceivability of this
third system will be discussed in this section on the antithesis of
“control or economic law.”
For
the Socialists of the Chair this question had special political
significance. They could maintain their claim of an impartial middle
position between the Manchester School and communism only if they
favored a social ideal that apparently was “equally
distant”
from the ideals of the two competing movements. They rejected as
irrelevant for their ideals all criticism leveled at the socialistic
ideal. They could do so as long as they ignored the fact that limited
interventions in the private property order fail to achieve
their objectives, and that the desired etatist objectives can
be
achieved only when private property exists in name only and a central
authority regulates all production. Moeller observes correctly
that the younger Historical School opposed classical economics for
practical reasons: “Schmoller did not care to see his road to
scientific justification of social policy blocked by the concept of
an external economic regularity independent of man.”
But
Moeller is mistaken when he comments on Rist’s remark that
the
classical school did not uphold the general validity of economic
laws. He is mistaken when he asserts that “it was not the
‘laws’
of classical economics properly understood that were blocking the
way.”
Indeed, they stood in the way
because they revealed that
government intervention in the operations of a capitalistic
social order is incapable of achieving the desired results, which
leaves the alternative either to renounce such intervention or go the
whole way and assume control over the means of production. On this
fact all the critique by the Historical-Realistic School missed its
mark. It was irrelevant that these economic laws were not
“natural
laws” and that private property was not eternal, but
“only” a
historical-legal category. The new economics should have
replaced the theory of catallactics developed by Physiocrats and
classical economists with another system that did not
demonstrate the futility of government intervention. Because
it
could not do so, it had to reject categorically all
“theoretical”
investigations of economic problems.
At
times it has been said that there are several kinds of economics.
This is no more correct than that there are several biologies
and several physics. Surely in every science various hypotheses,
interpretations, and arguments seek to solve concrete problems. But
logic is consistent in every science. It is true also of economics.
The Historical-Realistic School itself, which for political reasons
disagreed with the traditional and modern theories, proves this point
by not substituting its own explanations for the rejected doctrines,
but by merely denying the possibility of theoretical knowledge.
Economic
knowledge necessarily leads to liberalism. On the one hand, it
demonstrates that there are only two possibilities for the
property problem of a society based on the division of labor: private
property or public property in the means of production. The so-called
middle of the road of “regulated” property is
either
illogical,
because it does not lead to the intended goal and accomplishes
nothing but a disruption of the capitalistic production process, or
it must lead to complete socialization of the means of production. On
the other hand, it demonstrates what has been perceived clearly only
recently, that a society based on public property is not viable
because it does not permit monetary calculation and thus rational
economic action. Therefore, economic knowledge is blocking the way to
socialistic and syndicalistic ideologies that prevail all over
the world. And this explains the war that is waged everywhere
against economics and economists.
Zwiedineck-Südenhorst
seeks to give the untenable doctrine of the third possible
social order a new garb. “We are dealing not only with the
institution of property,” he informs us,
but probably more
importantly also with the totality of legal standards that form a
superstructure over any property order and thereby any economic
order. We must realize that these legal standards are decisive for
the manner of cooperation of the various factors of production (that
is, not only capital, land, and labor, but also the different
categories of human labor). In short, we are dealing with that
which comprises the organization of production. This
organization can only serve the objective of placing the
momentary control conditions over the various production
factors
in the service of the whole economy. Only then does it have social
character. Of course, these momentary control conditions, that is,
the property order, constitute a part of the organization of
production. But this does not lead to the conclusion that the
organization would have to differ for the individualistic and the
collectivistic economy. In fact, whether and how it can differ is the
crucial question.
Here
again, as with all representatives of etatism, is the notion that a
legal structure placing private property “in the service of
the
whole economy” can achieve the objectives the authority meant
to
achieve. After all, Zwiedineck only recently took his position on the
problem of “control or economic law,” which is so
characteristic
of all Socialists of the Chair.
It
is remarkable that all these literary efforts produced nothing new.
Old errors that had been refuted a hundred times were dished up
again. The question is not whether the power of the state
“can”
intervene in economic life. No economist would deny today that, for
instance, the bombing of a city or a prohibition of exports is
possible. Even the freetrader does not deny that import duties are
possible; he only maintains that protective tariffs do not have the
effects the protectionists ascribe to them. And he who rejects price
controls for being unsuitable does not deny that government
can
impose and supervise them. He merely denies that the controls will
lead to the goal which government meant to attain.
5.
The
Methodenstreit
As
early as the 1870s Walter Bagehot irrefutably exploded the arguments
with which the followers of the Historical School rejected the
dependability of “theoretical” inquiries in the
field of
economics. He called the two methods—the Historical School
considered them the only permissible methods—the
“all-case
method” and the “single-case method.” The
former
works with
induction only, and makes the erroneous assumption that this is the
road that usually leads the natural sciences to their findings.
Bagehot demonstrated that this road is completely impassable,
and that on it no science ever has achieved satisfactory results. The
“single-case method,” which accepts
descriptions of
concrete
historical data only, fails to realize, according to Bagehot, that
there can be no economic history and no economic description
“unless there was a considerable accumulation of applicable
doctrine before existing.”
The
Methodenstreit has
long been decided. Never before has a
scientific exchange led to such a crushing defeat of one side.
Fortunately, this is freely admitted in Economics
After the War.
In his contribution on business
cycle research, which is based on
a thorough knowledge of the material, Lowe briefly touches upon the
question of method and skillfully proves the untenableness of
the objections empiricists raise against theory. Unfortunately, we
must also agree with Lowe where he observes that “the heresy
of
‘impartial’ data research, which deprived a whole
generation of
German scholars of its results,” has recently also intruded
itself
into American research.
But it is even more
regrettable that despite the thorough
methodological debates in recent years, we again and again encounter
the old, long-refuted errors in German science. Bonn, for instance,
praises Brentano because in his book on Agricultural
Policy
he was not content with
“describing the skeleton of a
system, separated from the flesh of life. He abhored bloodless
abstractions, deductions of barren concepts, as he encountered
them in his youth. He sought the fullness of life.”
I
must admit that I find the term “flesh of life”
empty.
Bonn’s
use of the adjective “bloodless” in connection with
the
noun
“abstraction” appears illogical to me. What is the
contrast
to
“bloodless” abstraction—perhaps
“bloody”
abstraction?
No science can avoid abstract concepts, and he who abhors them should
stay away from science and see whether and how he can go through life
without them. When we look at Brentano’s Agricultural
Policy we
find a number of discussions of rent, land price, cost, et cetera,
purely theoretical investigations that obviously work with
abstractions and abstract concepts.
Every investigation that in
any way touches upon economic
questions must “theorize.” True, the empiricist
does not
know
that he is theorizing, as Monsieur Jourdain never knew that he was
always speaking prose. And as empiricists are unaware of this,
they carelessly adopt theories that are incomplete or even incorrect
and avoid thinking them through logically. An explanatory theory can
easily be constructed for each “fact,” but only
when the
individual theories are united into a whole can we determine the
value and futility of the “explanation.” But the
Historical
School rejected it all; it did not want to admit that theories must
be thought through and that they must be united into a consistent
whole. In eclectic fashion it used pieces of all possible theories
and followed indiscriminately and uncritically now this
opinion,
now that opinion.
But
the Socialists of the Chair not only did not build a system of
their own, they also failed utterly in their critique of modern
theoretical economics. The subjective-value theory did not receive
the outside critique that is so indispensible for scientific
progress. It owes its progress during the last decades to its own
initiative, to critiques from its own ranks. This the followers of
the Historical School did not even notice. Whenever they speak of
modern economics their eyes are glued on 1890, when the achievements
of Menger and Böhm-Bawerk were generally completed.
The
theoretical accomplishments in Europe and America since then remain
rather foreign to them.
The
critique which the champions of academic socialism leveled at
theoretical economics proved to be largely irrelevant and,
without apparent reason, not free of personal hatred. As in the
writings of Marx and his disciples, a more or less tasteful joke
often takes the place of critique. Brentano thought it proper
to
introduce a critique of Böhm-Bawerk’s Capital
and
Interest—a
critique which, by the way, no
one
appreciated in the seventeen years since its publication—with
the
following: “As one of my first-semester students correctly
remarked. . . .”
The Russian professor
Totomianz, an Armenian, writes in his
History of Economics and
Socialism:
A German critic of the
psychological school ironically observes, not without a kernel
of truth, that the soil in which the Austrian School grew was the
city of Vienna with its numerous students and officers. For a young
student seeking the pleasures of life present goods naturally
are more valuable than future goods. Similarly, a dashing officer
chronically suffering from lack of cash will pay any interest
rate on borrowed money.
This
book with such a profound critique of Böhm-Bawerk’s
theory
first appeared in the Russian language. Rist wrote an introduction to
the French edition, Loria to the Italian edition, and Masaryk
to
the Czech edition. In his introduction to the German edition, Herkner
acclaims the work for being “popular and
perceptual.” All
significant and fruitful thoughts in Great Britain, France, Germany,
Austria, Belgium, Italy, Russia, and America find
“loving
and
understanding consideration” with Totomianz. He shows
“remarkable
ability to do justice to such different minds as Fourier, Ruskin,
Marx, Rodbertus, Schmoller, Menger, and Gide.”
This Herkner judgment is all
the stranger as he is very
familiar with the history of economic thought.
In
the Methodenstreit the
Brentano wing of the
Empirical-Realistic School acted more prudently than the followers of
Schmoller. We must give personal credit to Brentano who, a generation
earlier, leveled sharp criticism at the School’s research in
economic history.
Many a writer of no
more than excerpts from economic documents believes he has
written an economic treatise. But when the excerpt is
completed
the economic analysis is just beginning. Its content must then be
analyzed and transformed to a picture full of life, and the lesson
must be drawn from this researched passage of life. It is not enough
to be diligent in the preparation of excerpts from documents.
It
takes the power of intuition, combination, sagacity, and the
most
important scientific gift: the ability to recognize the common
element in the multiplicity of phenomena. When
this is lacking we
gain nothing but uninteresting details. . . . This kind of economic
historical analysis is utterly worthless for economics.
And
bearing in mind the etatist bias in the works of the Schmoller
School, Brentano calls it an aberration “to confuse
enthusiastic
excerpts from archives with economic investigations and research.
6.
The Economic Doctrines of Social Liberalism
Faithful
to their principle, the Socialists of the Chair did not create a
system of economics, which was the endeavor of the Physiocrats and
classical economists, and now the modern subjectivist economists. The
socialists were not concerned with creating a system of catallactics.
Marx
simply adopted the system of the classics and drew the conclusion
that, in a society based on the division of labor, there is no
third organizational possibility besides the private property and the
public property orders. He mocked all attempts at a third order as
“bourgeois.” The position of etatism is different.
From the
start
it did not seek to understand, but to judge. It brought along
preconceived ethical opinions: “It shall be!” and
“It
shall not
be!” All things were chaotic as long as the state did not
intervene. Only government intervention could put an end to
the
arbitrariness of self-seeking individuals. The idea that a social
order could be based on a constitution under which the state would do
nothing but protect private property in the means of
production
seemed utterly absurd to it. It only had ridicule for the
“enemies
of the state” who believed in such a
“pre-established
harmony.” The etatists thought it utterly illogical to reject
every
government “intervention” in economic life, as this
would
lead to
anarchism. If government intervention for the protection of private
property is permissible, it is illogical to reject all further
intervention. The only reasonable economic order is a social order in
which private property exists in name, but actually is abolished, the
state holding the final reins over production and distribution. The
state of affairs at the zenith of liberalism could come into
existence only because the state neglected its duties and granted too
much freedom to individuals. With such a point of view, the
development of a catallactic system is unnecessary, indeed
illogical.
The
best example for the ideology of the welfare state is the balance of
payments theory. A country may lose all its monetary metal if the
state does not intervene, so runs the older, mercantilist version.
The classical economists demonstrated, however, that the
danger
so dreaded by the mercantilists does not exist, because forces
are at work that, in the long run, prevent the loss of money. This is
why the quantity theory was always so objectionable to
etatists.
They favored the Banking School. The victory of the Historical
School practically brought excommunication of the Currency
School. Karl Marx,
Adolf Wagner, Helfferich,
Hilferding, Havenstein, and
Bendixen held to the doctrines of the Banking School.
After
two generations of eclecticism and avoidance of clear concepts, many
contemporary writers have difficulty recognizing the differences
between those two famous British schools. Thus Palyi shows
surprise that “a resolute follower of the Banking
Principle,
M. Ausiaux, occasionally advocates the comptabilism of
Solvay.”
Let us not overlook the fact
that “comptabilism” and
all
other related systems are logical applications of the Banking
Principle. If the banks are in no position to issue more notes than
are necessary (the “elasticity of circulation”),
there can
be no
objection to the adoption of Solvay’s monetary reform.
Palyi’s
etatist position explains why he could not add a single word to the
old mercantilist observations, and why his whole theory is limited to
pointing at the selfish disposition of the state’s
subjects,
who should not be left to themselves.
Social liberalism could not
share this etatist position.
For better or worse it had to show how, according to its social
ideal, the members of an exchange society cooperate without
government assistance. But social liberalism never developed a
comprehensive theory either. Some of its followers probably believed
that the time was not yet ripe on account of insufficient preparation
through collection of material; the majority probably never saw the
need for a comprehensive theory at all. Wherever the need for theory
arose, the social liberals usually borrowed from the classical
system, mostly in the garb of Marxism. In this regard the
social
liberals differed from the etatists, who preferred to fall back on
the mercantilists.
Nevertheless,
social liberalism did seek to make an independent contribution
to theory—a doctrine of wage rates. It could use neither
classical
theory nor modern theory. Marx very logically had denied that
collective bargaining of labor unions could raise wages. Only
Brentano and Webb sought to prove that collective bargaining can
permanently raise the income of all workers; this theory is the
principal doctrine of social liberalism. However, it could not
withstand a scientific critique, such as that by Pohle
and Adolf Weber.
In his last essay,
Böhm-Bawerk, too, arrived at the same
conclusion,
and no one today dares seriously represent the Brentano-Webb
doctrine. It is significant that the comprehensive Festschrift
honoring Brentano does not
contain a single contribution on
wage theory and the wage policies of labor unions. Cassau
merely
observes that before the war the labor union movement worked
“without
any wage theory.”
In
his review of the first edition of Adolf Weber’s book,
Schmoller
responded to the point that it is regularly impossible,
without
a rise in productivity, to raise wage rates through the withholding
of labor. According to Schmoller, “such theoretical abstract
price
discussions” could lead to no useful results. We can render a
“safe
judgment” only “if we can numerically measure these
fine
complicated processes.” Adolf Weber sees in such an
answer a
declaration of bankruptcy of our science.
But the etatist need not be
concerned with the bankruptcy of
catallactics. In fact, the consistent etatist denies the existence of
any regularity in the process of market phenomena. At any rate, as
politician the etatist knows an escape from the dilemma: the state
determines the level of wages. But the refutation of the
Brentano-Webb doctrine alone is not fatal. Even if we were to
accept it—which, as we pointed out, no one would
dare do
since
the writings of Adolf Weber, Pohle, and
Böhm-Bawerk—the
decisive question would still need an answer. If labor unions
actually had the power to raise the average wage of all workers above
the rate that would prevail without their intervention, the question
remains, How high can wages go? Can average wages go so high that
they absorb all “unearned” income and must
be paid out
of
capital? Or is there a lower limit at which this rise must stop? This
is the problem the “power theory” must
answer with
regard to
every price. But until today no one has ever tried to solve the
problem.
We
must not deal with the power problem by calling authoritative
intervention “impossible,” as did older
liberalism.
There
cannot be any doubt that labor unions are in the position to raise
wage rates as high as they wish if the state assists them by denying
protection to all workers willing to work, and either pays
unemployment compensation or forces employers to hire workers. But
then the following occurs:
The
workers in essential enterprises are in the position to extract any
arbitrary wage from the rest of the population. But ignoring even
that, the shifting of the wage boost to consumer prices can be borne
by the workers themselves, but not by capitalists and entrepreneurs
whose incomes did not rise on account of the wage boost. They now
must curtail capital accumulation, or consume less, or even
eat
into their capital. What they will do, and to what extent they will
do it, depends on the size of their income reduction. Surely everyone
will agree that it is inconceivable thus to eliminate or merely
greatly to curtail property income without at least reducing or
halting capital formation and very likely consuming capital
(after all, there is nothing in the way of unions that could keep
them from raising their demands to levels that absorb all
“unearned”
income). But it is obvious that the consumption of capital does not
permanently raise the workers’ wages.
The
etatist and social-liberal roads to higher wages of workers diverge.
But neither leads to the goal. As social liberalism cannot
possibly wish to halt or reduce capital formation, much less
cause capital consumption, it finally faces the alternative: either
capitalism or socialism. Tertium
non datur (“There is
no
third road”).
7.
The Concept and Crisis of Social Policy
All
the economic policies of the last two generations are designed step
by step to abolish private property in the means of
production—
if
not in name, then in substance— and to replace the capitalist
social order with a socialistic order. Decades ago Sidney Webb
announced it in his Fabian
Essays.
As
the pictures of the desired future social order varied
with the individual branches of socialism, so did their opinions on
the road by which the goal was to be reached. There are questions on
which all branches could agree. In other questions great differences
separated the camps, as, for instance, factory labor by married
women, or protection of handcrafts from the competition of big
business. But they all agreed on the rejection of the social
ideal of liberalism. No matter how they differed from each other,
they joined ranks in the fight against
“Manchesterism.” In
this
point, at least, the champion Socialists of the Chair saw eye to eye
with the champions of social liberalism.
For
the movement toward a gradual replacement of capitalism by a
socialistic or syndicalistic social order, the term “social
policy”
slowly gained acceptance. A precise definition of the term was
never offered, as sharp conceptual definitions were never the
concern of the Historical School. The use of the term “social
policy” remained ambiguous. Only in recent years when pressed
by
economic critique did the social politicians attempt to define the
term.
Sombart
probably recognized the nature of social policy most clearly.
“By
social policy,” he wrote in 1897, “we
understand those
measures of economic policy that effect the preservation, promotion,
or repression of certain economic systems.”
Amonn rightly found many faults with this definition, but
especially pointed out that measures should be characterized by their
objectives, not by their effects within the framework of policy, and
that social policy goes beyond the realm that usually is called
“economic policy.”
But it is decisive that
Sombart saw a change in the economic
order as the objective of social policy. Let us bear in mind that
when he wrote this, Sombart was standing firmly on Marxian ground,
which made him think of the introduction of socialism as the
only conceivable social policy. We must admit that he correctly
perceived the essential point. The only deficiency of his
definition is his inclusion of all efforts toward a realization of
the liberal program, efforts that were made at a time when, in the
language of Marx, the bourgeoisie was still a revolutionary class.
Similarly, Sombart expressly included the liberation of peasants from
feudal servitude as an example of social policy. Many writers
followed him in this respect. Again and again they sought to define
the term “social policy” in such a way that it
would
include
political measures other than those aiming at the realization of
socialism.
It
makes little sense to deal further with the empty argument on
the concept of social policy, an argument that just recently caught
fire. It was touched off by the crisis that seized socialism and
syndicalism of all varieties upon the victory of the Marxian Social
Democrats in Germany.
Prussian
etatism and its intellectual followers in other countries, had gone
as far on the road to socialism as possible without too much
visible damage to the economy and too great a reduction in the
productivity of labor. No one whose vision is unclouded by party
politics can deny that Prussia-Germany of the prewar era was more
suited than any other country before or since to conduct socialistic
experiments. The tradition of Prussian officialdom, the faith
of
all educated people in the calling of the state, the
military-hierarchic classification of the population, its inclination
to blindly obey the authorities, all provided the prerequisites for
socialism given nowhere else. Never can there be men more suited for
the management of a socialistic communal operation than the mayors of
German cities or the directors of the Prussian railroad. They did
everything possible to make communal enterprises work. If, in spite
of these advantages the system failed, it proved conclusively that
the system just cannot be realized.
Suddenly
the Social Democrats came to power in Germany and Austria. For
many decades they had announced time and again that their genuine
socialism had nothing in common with the false socialism of the
etatists, and that they would proceed completely differently from the
bureaucrats and professors. Now was the time to demonstrate
what
they could do. But they could not come up with anything new except
the term “socialization.” In 1918 and 1919, all
political
parties
in Germany and Austria added the socialization of suitable
industries to their programs. At that time no step on the way to pure
socialism of the Marxian variety met serious resistance. Even so,
what was realized did not exceed in direction or scope that which the
Socialists of the Chair had recommended earlier, or in many cases had
already tried. Only a few day-dreamers in Munich believed that
the example of Lenin and Trotsky in agrarian Russia could be emulated
in industrial Germany without causing an unprecedented crisis.
Socialism
did not fail because of ideological resistance— the
prevailing
ideology is socialistic even today. It failed because of its
unrealizability. As the general awareness grew that every step taking
us away from the private property order always reduced
labor’s
productivity, and so brought want and misery, it became necessary not
only to halt the advance to socialism, but even to repeal some of the
socialistic measures already taken. Even the Soviets had to
yield. They did not proceed with the socialization of land, but
merely distributed the land to the rural population. In trade and
commerce they replaced pure socialism with the “New Economic
Policy.” However, the ideology did not participate
in this
retreat. It stubbornly clung to its pronouncements of decades
ago, and sought to explain the failures of socialism in all possible
ways except the right one—its basic unrealizability.
Only
a few champions of socialism have realized that the failure of
socialism was not coincidental, but inevitable. Some went even
further and admitted that all social measures reduce
productivity, consume capital and wealth, and are destructive. The
renunciation of the ideals these men used to embrace is called in
economic literature the crisis of social policy.
In reality, it is much more:
it is the great world crisis of
destructionism—the policy that seeks to destroy the
social
order based on private property in the means of production.
The
world can support teeming humanity in the manner in which it has been
supported in recent decades only if men work capitalistically. Only
capitalism can be expected to further raise the productivity of human
labor. The fact that the vast majority of people adheres to an
ideology that refuses to admit this, and therefore conducts
policies that lead to a reduction of labor productivity and
consumption of capital, is the essence of the great cultural
crisis.
8.
Max Weber and the Socialists of the Chair
The
opposition that arose in Germany against the Socialists of the
Chair generally started with an awareness that theoretical
investigations of economic problems are essential. As
economists, Dietzel, Julius Wolf, Ehrenberg, Pohle, Adolf Weber,
Passow, and others rose against the Socialists of the Chair. On the
other hand, historians raised objections against the manner in which
Schmoller, Knapp, and his pupils sought to solve historical
tasks. Equipped with the tools of their sciences, these critics
approached the doctrines of the Socialists of the Chair from the
outside. Of course the Socialists of the Chair, with their great
prestige and important positions, made it difficult for the
critics; but the encounter presented no problem of conscience
to
them. They either had never been under the spell of socialism, or had
freed themselves from it without difficulty.
It
was quite different with Max Weber. To the younger Max Weber, the
ideas of Prussian etatism, the Socialism of the Chair, and
evangelical social reform had meant everything. He had
absorbed
them before he had begun to deal scientifically with the problems of
socialism. Religious, political, and ethical considerations had
determined his position.
Max
Weber’s university training was in law; his early scientific
works
dealt with legal history. He began as an unsalaried lecturer
and
became professor of law. His inclination was for history, not
the historical research of particulars that is lost in details and
overlooks the whole, but universal history, historical synthesis, and
the philosophy of history.
To
him, history was no goal in itself, but a means toward gaining more
profound political insights. Economics was alien to him. He was
appointed professor of economics without having dealt with this
science before, which was a customary procedure at that time.
It reflected the
Empirical-Realistic School’s opinion
on
the nature of “social sciences” and on the
scientific
expertise
of legal historians. Just before his untimely death Weber regretted
that his knowledge of modern theoretical economics and the
classical
system was too limited. He mentioned his fear that time would not
permit him to fill these regrettable gaps.
When
he accepted the position, he was obliged to give lectures on those
problems which the Socialists of the Chair considered the proper
subject matter for university teaching. But Weber found no
satisfaction in the prevailing doctrine. The jurist and
historian in him rebelled against the manner in which the School
treated legal and historical problems. This is why he began his
pioneering methodological and epistemological investigations.
It
led him to the problems of materialistic philosophy of history, from
which he then approached the religious-sociological tasks. He
proceeded finally to a grandiose attempt at a system of social
sciences.
But
all these studies, step by step, led Max Weber away from the
political and social ideals of his youth. He moved, for the first
time, toward liberalism, rationalism, utilitarianism. It was a
painful personal experience, not different from that of many other
scholars breaking away from Christianity. Indeed, his faith
and
religion were Prussian etatism; breaking away from it was like
desertion from hope, his own people, indeed, from European
civilization.
As
it became clear to him that the prevailing social ideology was
untenable, and as he saw where it was bound to lead he began to see
the future of the German nation and the other nations that carry
European civilization. In a way, as the cauchemar
des coalitions
(“nightmare of
coalitions”) deprived Bismarck of
his
sleep, so the recognition to which his studies led him gave Weber no
rest. No matter how he clung to the hope that everything would work
out in the end, a dark premonition told him again and again that a
catastrophe was approaching. This awareness gnawed at his
health, filled him with growing uneasiness after the outbreak
of
the World War, urged him on to activity that for a man unwanted by
any of the political parties had to remain fruitless, and finally
hastened his death.
From
its beginning in Heidelberg, the life of Max Weber was an
uninterrupted inner struggle against the doctrines of the Socialism
of the Chair. But he did not fight this struggle to the end; he died
before he succeeded in completely freeing himself from the
spell
of these doctrines. He died lonely, without intellectual heirs who
could continue the fight he had to give up in death. To be sure, his
name is praised, but the true substance of his work is not
recognized, and that which was most important to him has found no
disciples. Only opponents have recognized the dangers to their own
ideology from the thoughts of Max Weber.
9.
The Failure of the Prevailing Ideology
In
all variations and colors the ideas of socialism and
syndicalism
have lost their scientific moorings. Their champions have been
unable to set forth another system more compatible with their
teachings and thereby refute the charge of emptiness by the
theoretical economists. Therefore, they had to deny
fundamentally the posibility of theoretical knowledge in the field of
social science and, especially, in economics. In their denial they
were content with a few critical objections to the foundation of
theoretical economics. But their methodological critique as well as
their objections to various theories have proven to be utterly
untenable. Nothing, absolutely nothing has remained of what
half
a century ago Schmoller, Brentano, and their friends used to proclaim
as the new science. The fact that studies in economic history can be
very instructive, and that they should be undertaken, had been known
before, and had never been denied.
Even
during the zenith of the Historical School theoretical economics did
not remain idle. The birthday of modern subjectivist theory coincided
with the foundation of the Association for Social Policy.
Since
then, economics and social policy have confronted each other. The
social scientists do not even know the foundation of the theoretical
system, and have taken no notice of the significant development of
theoretical knowledge in recent decades. Wherever they sought to deal
with it critically, they could not get beyond the old errors already
fully dealt with by Menger and Böhm-Bawerk.
But
all this has not weakened the socialistic and syndicalistic
ideology. Today, it is swaying the minds of people more than ever
before. The great political and economic events in recent years are
seen almost exclusively from its viewpoint, though of course it has
failed here also. What Cassau said about the ideology of proletarian
socialism applies also to that of Socialism of the Chair: All
experiences of the last decade “passed by the ideology
without
influencing it. Never did it have more opportunities for
expansion, and scarcely ever has it been as sterile as during the
debates on socialization.”
The ideology is sterile, and yet it is reigning. Even in Great
Britain and the United States, classical liberalism is losing
ground every day. To be sure, there are characteristic differences
between the teachings of German etatism and Marxism on the one
hand, and the new doctrine of salvation in the United States on the
other. The phraseology of the Americans is more carefully worded than
that of Schmoller, Held, or Brentano. But the Americans’
aspirations basically concur with the doctrines of the
Socialists of the Chair. They also share the mistaken belief that
they are upholding the private property order.
When,
by and large, socialism and syndicalism are in a stagnate state, when
we notice some retreating steps on the road to socialism are taken,
when thought is given to a limitation of labor union power,
the
credit can be given neither to the scientific perception of economics
nor the prevailing sociology. For but a few dozen individuals all
over the globe are cognizant of economics, and no statesman or
politician cares about it. The social ideology even of those
political parties that call themselves “middle
class,” is
totally
socialistic, etatistic, syndicalistic. If, nevertheless,
socialism and syndicalism are languishing, although the prevailing
ideology is demanding further progress, it is solely due to
the
all-too-visible decline in labor productivity as a result of every
restrictive measure. Swayed by the socialistic ideologies, everyone
is searching for excuses for the failure, and not for the cause.
Nevertheless, the net result has been greater caution in economic
policy.
Politics
does not dare introduce what the prevailing ideology is
demanding. Taught by bitter experience, it subconsciously has
lost confidence in the prevailing ideology. In this situation, no
one, however, is giving thought to replacing the obviously
useless ideology with a useful one. No help is expected from reason.
Some are taking refuge in mysticism, others are setting their hopes
on the coming of the “strong man”—the
tyrant who will
think for
them and care for them.