Between Freedom and Socialism

DYNAMICS OF THE MIXED ECONOMY: TOWARD A THEORY OF INTERVENTIONISM
Sanford Ikeda
Routledge, 1997, xiv + 296 pgs.

Ludwig von Mises's defense of the free market against its rivals extended far beyond the proof of the impossibility of socialist calculation for which he is best known. As Sanford Ikeda reminds us in this important and erudite book, Mises advanced an argument designed to undermine a supposed third economic system interventionism alleged by its supporters to combine features of capitalism and socialism. Ikeda does us all a service with his careful analysis of Mises's argument, although some of his modifications and extensions of it seem to me questionable.

Mises exposes interventionism for the pipedream it is, as the example of price control best illustrates. The direct result of a price ceiling, as everyone except bureaucrats knows from elementary economics, is a shortage. Sellers of a good offer less quantities for sale at the imposed lower price than consumers wish to purchase.

What is to be done? As Mises saw matters, the interventionists have two alternatives. They may repeal the ceiling and return to the free market. But then what of the poor unable to buy at the higher price?

If the temptation to intervene proves irresistible, the planners may decide to assist retailers to sell enough to meet the quantity demanded at the lower price. How may they do so? By imposing further price ceilings on the products retailers must purchase in order to carry on their business. Given lower costs, retailers will lower their prices.

The results of the new initiative will come as no surprise. The new price ceilings will cause shortages in the goods on which they are imposed, for the same reason as before. Once more the planners confront a choice: return to the free market or press on with yet more controls. Should they continue along the path of regulation, they will soon arrive at a system in which the government sets all prices. And this is socialism, not capitalism.

Mises endeavored to show that any attempt to interfere with the working of the free market would fail of its intended purpose. That being so, there is no third, interventionist system on the agenda: the choice confronting society is restricted to socialism or capitalism.

Ikeda explains Mises's argument in painstaking detail. I found especially valuable his distinction between several different senses in which an interventionist measure may fail, from the viewpoint of its supporters, to achieve its aims (pp. 110 12). Further, our author carefully delineates areas to which Mises's argument does not directly apply, such as nationalization of industry. As he notes, Mises directed his principal attention to measures that aimed to regulate the market, rather than redistribute wealth and income.

Though Mises's critique of interventionism was centered elsewhere, he does adduce a vital point that bears on redistributionist policies, as Ikeda ably brings out. Redistribution depends on a "reserve fund" of assets which the planners can plunder. Should interventionists radically upset production, there will be no funds to redistribute. To cite Mises himself: "An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this function is drained off: The Santa Claus principle liquidates itself" (pp. 125 26, quoting Mises, Human Action).

Our author's aims extend far beyond the task of expounding Mises's case against intervention. He notes a problem in Mises's argument, which he terms the "Misesian paradox." Intervention, according to Mises, is an unstable system. But are not all the economies of the world interventionist to some degree? Even the Soviet system, of blessed memory, was more accurately viewed as a mixed system rather than a full-scale socialist one. How could it have been the latter, given the soundness of Mises's calculation argument?

We may press the point further. Not only does price control lead to shortages, it does so quite obviously. Why then do interventionists persist in butting their heads against the wall? One would think that even a leftist would eventually see the error of his ways.

Ikeda's principal aim is to explain this persistence in error. In his quest to do so, he imposes on himself a severe methodological constraint. He wishes to explain the growth and contraction of intervention "in terms of endogenous economic forces," i.e., using forces internal to the economic system (p. 14).

This constraint leads him to put to one side the most popular way among public choice economists to explain support for seemingly irrational intervention. Richard Wagner and other "public choicers" point to self-interest: tariffs and minimum wage laws, for example, are very much to the advantage of certain groups, who manipulate the political process to their benefit and everyone else's loss.

Ikeda does not reject this view as false far from it. But it fails to explain what, within the system itself, induces actors to institute greater or less intervention. Once more, it is the endogenous explanation that he seeks.

He finds the answer to his quest in Hayek and Kirzner and accordingly embeds Mises's argument in the framework of the "knowledge problem." As Hayek and Kirzner see matters, actors in the economy continually face consequences of their actions which they did not anticipate. In Kirzner's phrase, they constantly confront "radical ignorance."

Here precisely, according to our author, lies the key to the Misesian paradox. Because of the large numbers of events taking place in the economy, and their complicated connections, planners cannot adequately assess the results of their interventions. Hence, in a way that Ikeda describes in elaborate detail, they may continue with their policies in spite of what strikes the informed Austrian observer as manifest absurdity.

But has not Ikeda proved too much? If the economy is that complex, why should we expect capitalism to work either? Ikeda has a ready response. Though the price system never reaches perfect equilibrium, its signals alert entrepreneurs that misallocation of resources is present, enabling continual improvement in satisfaction of consumer wants.

In the course of his account of interventionism's progress, Ikeda makes an especially insightful point. As the economy approaches more closely to socialism, Mises's socialist calculation argument becomes ever more relevant. That is to say, the calculation argument applies not just to full socialism. Rather, if an economy becomes significantly socialist, to that extent chaos takes the place of the market. This argument strikes me as excellent, but here for once our author's remarkable erudition fails him. Murray Rothbard made an analogous point in Man, Economy, and State. He there noted that "islands of calculational chaos" restrict the size of firms. Ikeda fails to note this adumbration of his own argument.

What is one to make of Ikeda's modification of Mises? Ikeda's ingenuity commands our admiration, but he argues with a Rube Goldberg abundance of qualifications, making evaluation of his claims difficult. Planners would do thus and so, unless of course such and such circumstances arise, in which case perhaps. No doubt the fault is my own, and I do not presume to assess him badly owing to my own lack of acuity.

On a few points I venture to think our author mistaken. He uses H.A. Simon's notion of "bounded" satisficing rationality to explain in part the mistakes that interventionists make (see, e.g., pp. 100, 160). But Simon thinks that the process he describes is a rational method of choice. If Ikeda disagrees, he should explain why the use of bounded rationality is liable to eventuate in error.

Further, in his argument for the instability of the minimal state, he claims that "since the minimal state is currently providing only those services essential to the operation of the catallaxy, a reduction in the supply of governmental services would not be feasible" (p. 205). This seems to me to ignore the possibility of downward revisions in the quantity of these essential services. Incidentally, Anthony de Jasay advances an argument about the minimal state quite similar to Ikeda's in Social Contract, Free Ride (Oxford 1989).

More fundamentally, I wonder whether the entire search for endogenous explanation is on the right lines. Why must we seek an account of this type, if an appeal to "outside" causes is simpler? I suspect that Ikeda has, through his rigid adherence to an ideal of explanation, made complicated what is after all in Mises a very simple argument. But even if this criticism is right, Ikeda has given us a great deal of importance to think about.