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Tragedy in the Language of Political Economy

November 7, 2007

Tags History of the Austrian School of EconomicsInterventionismPhilosophy and Methodology

[This review ran in American Affairs, 1945, Volume 7, number 1, pp. 47–49, available in PDF.]

Ludwig von Mises writes tragedy in the language of political economy. There is in man the very principle of frustration. Once, and perhaps for the first time, he did find the right way.

Beginning with the optimistic social philosophy of 18th-century liberalism he discovered the solutions of the free market, free competition, free private enterprise — that is to say, capitalism — and how at the same time to put government in its place.

After that he had only to go in a straight line toward a world of peace and unlimited plenty. For a while he did go in a straight line and there was the 19th century, in which political freedom and material well-being advanced together, inseparably and wonderfully.

But the government, which he had put in its place, began to overtake him, offering to do him good and to help him on his way. Little by little he accepted its friendly offices, thinking as he did so that government was something he imposed upon himself and therefore controlled, whereas he was to learn all over again that government is a natural and living thing, like an organism, with powers of self-extension. Offering only to help him on his way to a new free world of unlimited well-being it was really all the time hostile to anything he was doing for himself, because the more successfully he managed his own affairs, especially his economic affairs, the worse it was for the prestige of government. Mises says,

Governments have always looked askance at private property. Governments are never liberal from inclination. It is in the nature of the men handling the apparatus of compulsion and coercion to overrate its power to work, and to strive at subduing all spheres of human life to its immediate influence. Etatism is the occupational disease of rulers, warriors, and civil servants. Governments become liberal only when forced to by the citizens. From time immemorial governments have been eager to interfere with the working of the market mechanism. Their endeavors have never attained the ends sought.

The beginning of modern evil was when governments began again to intervene in the economic sphere. Every act of intervention turned man from his true purpose, and Mises explains why:

Prices, wages, and interest rates are the result of the interplay of demand and supply. There are forces operating in the market which tend to restore this — natural — state if it is disturbed. Government decrees, instead of achieving the particular ends they seek, tend only to derange the working of the market and imperil the satisfaction of the needs of the consumers.

In defiance of economic science the very popular doctrine of modern interventionism asserts that there is a system of economic cooperation, feasible as a permanent form of economic organization, which is neither capitalism nor socialism. This third system is conceived as an order based on private ownership of the means of production in which, however, the government intervenes, by orders and prohibitions, in the exercise of ownership rights. It is claimed that this system of interventionism is as far from socialism as it is from capitalism; that it offers a third solution of the problem of social organization; that it stands midway between socialism and capitalism; and that while retaining the advantages of both it escapes the disadvantages inherent in each of them. Such are the pretensions of interventionism as advocated by the older German school of etatism, by the American Institutionalists, and by many groups in other countries. Interventionism is practiced — except for socialist countries like Russia and Nazi Germany — by every contemporary government. The outstanding examples of interventionist policies are the Sozialpolitik of imperial Germany and the New Deal policy of present-day America.

But the tragedy was that when the government's intervention in the modern case had gone rather far, man embraced it, and there arose in the world the great cult of what Mises calls etatism, a word he prefers over statism, both meaning simply the all-powerful and worshipful state. He says,

A new type of superstition has got hold of people's minds, the worship of the state. People demand the exercise of the methods of coercion and compulsion, of violence and threat. Woe to anybody who does not bend his knee to the fashionable idols!

The case is obvious with present-day Russia and Germany. One cannot dispose of this fact by calling the Russians and the Germans barbarians and saying that such things cannot and will not happen with the more civilized nations of the West. There are only a few friends of tolerance left in the West. The parties of the Left and of the Right are everywhere highly suspicious of freedom of thought. It is very characteristic that in these years of the desperate struggle against the Nazi aggression a distinguished British pro-Soviet author has the boldness to champion the cause of inquisition. "Inquisition," says T.G. Crowther, "is beneficial to science when it protects a rising class." For "the danger or value of an inquisition depends on whether it is used on behalf of a reactionary or a progressive governing class." But who is "progressive," and who is "reactionary"? There is a remarkable difference with regard to this issue between Harold Laski and Alfred Rosenberg.

It is true that outside of Russia and Germany dissenters do not yet risk the firing squad or slow death in a concentration camp. But few are any longer ready to pay serious attention to dissenting views. If a man tries to question the doctrines of etatism or nationalism, hardly anyone ventures to weigh his arguments. The heretic is ridiculed, called names, ignored. It has come to be regarded as insolent or outrageous to criticize the views of powerful pressure groups or political parties, or to doubt the beneficial effects of state omnipotence. Public opinion has espoused a set of dogmas which there is less and less freedom to attack. In the name of progress and freedom both progress and freedom are being outlawed.

He agrees with Hayek when he says, "While fighting the German aggressors, Great Britain and the United States are, step by step, adopting the German pattern of socialism."

Such is the theme of Omnipotent Government. Since the eclipse of the classical economists, no writer has more powerfully or with fewer misgivings defended free private capitalism, not only as the system that works and contains within itself the mechanisms of self-correction, but as a social philosophy.

He says,

The essential teaching of liberalism is that social cooperation and the division of labor can be achieved only in a system of private ownership of the means of production, i.e., within a market society, or capitalism. All the other principles of liberalism — democracy, personal freedom of the individual, freedom of speech and of the press, religious tolerance, peace among the nations — are consequences of this basic postulate. They can be realized only within a society based on private property.

And this involves also the fate of peace, for, as he says,

The fateful error that frustrated all the endeavors to safeguard peace was precisely that people did not grasp the fact that only within a world of pure, perfect, and unhampered capitalism are there no incentives for aggression and conquest.

Some of the notable passages in the book are analytical, touching the technics and consequences of the government's intervention in the economic affair, as, for example, when it fixes a price ceiling for milk with the laudable purpose of making it possible for the poor to buy more milk for their children. What happens? First, the marginal or high-cost producers of milk stop producing it, so there is less for everybody.

To cure this situation the government must fix the price of all the factors necessary to produce milk. But at those prices other people stop producing the factors that are necessary to the production of milk. They begin to go out of business because there is no profit in it. Whereupon, the government, to cure that further situation, must go on "to fix prices for the factors of production necessary for the production of those factors of production which are needed for the production of milk," and so on and on back, from the cost of everything the milk farmer uses to the cost of everything it takes to make what he uses and the cost of everything it takes to make everything it takes to make what the milk farmer uses, even to his suspenders.

In his analysis of unemployment he regards unions as a vital part of the state apparatus of compulsion and coercion:

The labor unions succeed in forcing the entrepreneurs to grant higher wages. But the result of their endeavors is not what people usually ascribe to them. The artificially elevated wage rates cause permanent unemployment of a considerable part of the potential labor force. At these higher rates the marginal employments for labor are no longer profitable. The entrepreneurs are forced to restrict output, and the demand on the labor market drops. The unions seldom bother about this inevitable result of their activities; they are not concerned with the fate of those who are not members of their brotherhood.

These dismal effects of minimum wages have become more and more apparent the more trade unionism has prevailed. As long as only one part of labor, mostly skilled workers, was unionized, the wage rise achieved by the unions did not lead to unemployment but to an increased supply of labor in those branches of business where there were no efficient unions or no unions at all. The workers who lost their jobs as a consequence of union policy entered the market of the free branches and caused wages to drop in those branches. The corollary of the rise in wages for organized workers was a drop in wages for unorganized workers. But with the spread of unionism conditions have changed. Workers now losing their jobs in one branch of industry find it harder to get employment in other lines. They are victimized.

So one may come to the end of the book, or to almost the end, with a sense of nostalgia for the optimism of the 18th-century liberals and a certain hopefulness. If it was once there it must be there still — the right way to a free world of relative peace and yet greater well-being.

But, alas! his conclusion is that the old liberals were after all wrong. Their economic theories were right, almost too right, but they believed in the perfectibility of man; they believed mankind "was on the eve of lasting prosperity and eternal peace" and that reason would henceforth be supreme. Therein they were tragically wrong. They left out of consideration the principle of frustration. He says,

The realization of the liberal plan is impossible because — at least for our time — people lack the mental ability to absorb the principles of sound economics. Most men are too dull to follow complicated chains of reasoning. Liberalism failed because the intellectual capacities of the immense majority were insufficient for the task of comprehension. It is hopeless to expect a change in the near future.

The last words are,

The prosperity of the last centuries was conditioned by the steady and rapid progress of capital accumulation. Many countries of Europe are already on the way back to capital consumption and capital erosion. Other countries will follow. Disintegration and pauperization will result. Since the decline of the Roman Empire the West has not experienced the consequences of a regression in the division of labor or of a reduction of capital available. All our imagination is unequal to the task of picturing things to come.

Such a book could not have had a happy ending.

After Omnipotent Government, Mises brought out Bureaucracy, a smaller book with a kind of missile power. Bureaucracy is not in itself the evil. You cannot have government at all without it. Only the intent matters. It is puerile, therefore, for people as individuals to complain of it because it happens to touch them in a disagreeable way while at the same time, by groups and classes, they support the doctrine of intervention by government when they happen to be the beneficiaries. Who after all is to blame? He answers that question ironically:

It is a fact that the policy of the New Deal has been supported by the voters. Nor is there any doubt that this policy will be entirely abandoned if the voters withdraw their favor from it. The United States is still a democracy. The Constitution is still intact. Elections are still free. The voters do not cast their ballot under duress. It is therefore not correct to say that the bureaucratic system carried its victory by unconstitutional and undemocratic methods. The lawyers may be right in questioning legality of some minor points. But as a whole the New Deal was backed by Congress. Congress made the laws and appropriated the money.

Once intervention by government in the economic sphere begins, the parliamentary principle must decline, for the obvious reason that

Parliamentary procedures are an adequate method for dealing with the framing of laws needed by a community based on private ownership of the means of production, free enterprise, and consumers' sovereignty. They are essentially inappropriate for the conduct of affairs under government omnipotence. The makers of the Constitution never dreamed of a system of government under which the authorities would have to determine the prices of pepper and of oranges, of photographic cameras and of razor blades, of neckties and of paper napkins. But if such a contingency had occurred to them, they surely would have considered as insignificant the question whether such regulations should be issued by Congress or by a bureaucratic agency. They would have easily understood that government control of business is ultimately incompatible with any form of constitutional and democratic government.

It is true that bureaucrats are free to decide questions of vital importance in the individual's life; it is true that the unelected bureaucrats are no longer "the servants of the citizenry but irresponsible and arbitrary masters"; it is true, furthermore, that "bureaucracy is imbued with an implacable hatred of business and free enterprise." But none of this is the fault of bureaucracy primarily. It is the outcome of "that system of government which restricts the individual's freedom to manage his own affairs and assigns more and more tasks to the government."

Bureaucracy, therefore, is not itself the disease. It is a cancerous phenomenon and betokens the fact that one kind of tissue has got out of control and is growing wild at the expense of other tissue. Mises says,

The main issue in present-day political struggles is whether society should be organized on the basis of private ownership of the means of production (capitalism, the market system) or on the basis of public control of the means of production (socialism, communism, planned economy). Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individual's life and the unrestricted supremacy of the government in its capacity as central board of production management. There is no compromise possible between these two systems. Contrary to a popular fallacy there is no middle way, no third system possible as a pattern of a permanent social order. The citizens must choose between capitalism and socialism or, as many Americans say, between the American and the Russian way of life.

When he comes to the remedy his pessimism reappears. Against those who now call themselves liberals and are resolved nevertheless to abolish liberty, against those who call themselves democrats and yearn for dictatorship, against those who call themselves revolutionaries and want to make government omnipotent — against all of these there is but one weapon, and the name of it is reason. But how can it be supposed that by reason alone man can cure in himself this political disease when by reason alone he was unable to prevent it?

 


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