Books / Digital Text
1. The Prevailing Doctrine of the Hampered Market Economy
With a few exceptions contemporary commentators on economic problems are advocating economic intervention. This unanimity does not necessarily mean that they approve of interventionistic measures by government or other coercive powers. Authors of economics books, essays, articles, and political platforms demand interventionistic measures before they are taken, but once they have been imposed no one likes them. Then everyone—usually even the authorities responsible for them—call them insufficient and unsatisfactory. Generally the demand then arises for the replacement of unsatisfactory interventions by other, more suitable measures. And once the new demands have been met, the same scenario begins all over again. The universal desire for the interventionist system is matched by the rejection of all concrete measures of the interventionist policy.
Sometimes, during discussion of a partial or complete repeal of a regulation, there are voices against changing it, but they rarely approve the given measure; they wish to prevent even worse measures. For instance, scarcely ever have livestock farmers been pleased with the tariffs and veterinary regulations that were adopted in order to restrict the importation of livestock, meats, and fats from abroad. But as soon as consumers demand the repeal or relaxation of these restrictions, the farmers rise in their defense. The champions of legislative labor protection have labeled every regulation adopted so far as unsatisfactory—at best to be accepted as an installment on what needs to be done. But if one such regulation faces repeal—for instance, the legal limitation of the workday to eight hours—they rise in its defense.
This attitude toward specific interventions is readily understood by anyone who recognizes that intervention necessarily is illogical and unsuitable, as it can never attain what its champions and authors hope to attain. It is remarkable, however, that it is obstinately defended in spite of its shortcomings, and in spite of the failure of all attempts at demonstrating its theoretical logic. To most observers, the thought of returning to classical liberal policies appears so absurd that they rarely bother to give it thought.
The defenders of interventionism often appeal to the notion that classical liberalism belongs to a past era. Today, they tell us, we are living in the age of “constructive economic policy,” namely, interventionism. The wheel of history cannot be turned back, and that which has vanished cannot be restored. He who calls for classical liberalism and thus proclaims the solution as “back to Adam Smith” is demanding the impossible.
It is not at all true that contemporary liberalism is identical with the British liberalism of the eighteenth and nineteenth centuries. Certainly modern liberalism is built on the great ideas developed by Hume, Adam Smith, Ricardo, Bentham, and Wilhelm Humboldt. But liberalism is no closed doctrine and rigid dogma. It is an application of the principles of science to man’s social life, to politics. Economics and social science have made great strides since the beginning of liberal doctrine, and thus liberalism also had to change, although the basic thought remained unaltered. He who makes the effort to study modern liberalism will soon discover the differences between the two. He will learn that knowledge of liberalism cannot be derived from Adam Smith alone, and that the demand for repeal of interventionistic measures is not identical with the call, Return to Adam Smith.
Modern liberalism differs from the liberalism of the eighteenth and nineteenth centuries at least as much as modern interventionism differs from the mercantilism of the seventeenth and eighteenth centuries. It is illogical to call the return to free trade an anachronism if the return to the system of protection and prohibition is not also seen as an anachronism.
Writers who credit the change in economic policy simply to the spirit of the age surely expect very little from a scientific explanation of interventionism. The capitalist spirit is said to have been replaced by the spirit of the hampered economy. Capitalism has grown old and, therefore, must yield to the new. And this new is said to be the economy that is hampered by government and other intervention. Anyone who seriously believes that such statements can refute the conclusions of economics regarding the effects of import duties and price controls truly cannot be helped.
Another popular doctrine works with the mistaken concept of “free competition.” At first, some writers create an ideal of competition that is free and equal in conditions—like the postulates of natural science—and then they find that the private property order does not at all correspond to this ideal. But because realization of this postulate of “competition that is really free and equal in conditions” is believed to be the highest objective of economic policy, they suggest various reforms. In the name of the ideal, some are demanding a kind of socialism they call “liberal” because they apparently perceive the essence of liberalism in this ideal. And others are demanding various other interventionistic measures. But the economy is no prize contest in which the participants compete under the conditions of the rules of the game. If it is to be determined which horse can run a certain distance in the shortest period of time, the conditions should be equal for all horses. However, are we to treat the economy like an efficiency test to determine which applicant under equal conditions can produce at lowest costs?
Competition as a social phenomenon has nothing in common with competition in play. It is a terminological confusion to transfer the postulate of “equal conditions” from the rules of sport or from the arrangement of scientific and technological experiments to economic policy. In society, not only in the capitalist order, but in every conceivable social order, there is competition among individuals. The sociologists and economists of the eighteenth and nineteenth centuries demonstrated how competition works in the social order that rests on private property in the means of production. This was an essential part of their critique of the interventionistic policies of the mercantilistic police and welfare state. Their investigations revealed how illogical and unsuitable interventionistic measures were. Pressing further they also learned that the economic order that corresponds best to man’s economic goals is that built on private property. Surely the mercantilists wondered how the people would be provided for if government left them alone. The classical liberals answered that the competition of businessmen will supply the markets with the economic goods needed by consumers. In general they couched their demand for elimination of intervention in these words: the freedom of competition must not be limited. With the slogan of “free competition” they demanded that the social function of private property not be hampered by government intervention. Thus the misunderstanding could arise that the essence of liberal programs was not private property, but “free competition.” Social critics began to chase a nebulous phantom, “genuinely free competition,” which was nothing more than a creature of an insufficient study of the problem and occupation with catchwords.1
The apology for interventionism and the refutation of the critique of interventions by economic theory are taken much too lightly with the assertion, e.g., by Lampe, that this critique
is justified only when it is shown simultaneously that the existing economic order corresponds to the ideal of free competition. Only under this condition must every government intervention be tantamount to a reduction in economic productivity. But no serious social scientist would venture today to speak of such a pre-established economic harmony, as the classical economists and their optimistic-liberal epigones envisage it. There are tendencies in the market mechanism that bring about an adjustment of disrupted economic relations. But these forces prevail only “in the long run,” while the readjustment process is interrupted by more or less sharp frictions. This gives rise to situations in which intervention by “social power” not only can be necessary politically, but also suitable economically ... provided expert advice on the basis of strictly scientific analysis is available to the public power and that it is followed.2
It is most remarkable that this thesis was not written during the 1870s or 1880s when the Socialists of the Chair untiringly offered to the high authorities their infallible remedies for the social problem and their promises for the dawn of glorious times. But it was written in 1927. Lampe still does not see that the scientific critique of interventionism has nothing to do with an “ideal of free competition” and “preestablished harmony.”3He who scientifically analyzes interventionism does not maintain that the unhampered economy is in any sense ideal, good, or free from frictions. He does not contend that every intervention is tantamount to a “reduction in economic productivity.” His critique merely demonstrates that interventions cannot achieve the objectives which their authors and promoters want to achieve, and that they must have consequences which even their authors and sponsors did not want and which run counter to their own intentions. This is what the apologists of interventionism must answer. But they are without an answer.
Lampe presents a program of “productive interventionism” consisting of three points.4The first point is that the public authority “must possibly stand for a slow reduction of the wage level.” At least Lampe does not deny that any “public authority” attempt at holding wage rates above those an unhampered market would establish must create unemployment. But he overlooked the fact that his own proposal would bring about, to a lesser degree and for a limited time, the intervention which he himself knew to be unsuitable. When compared with such vague and incomplete proposals, the advocates of all-round controls have the advantage of seeming logical. Lampe reproaches me for not caring how long the transitional frictional unemployment will last and how severe it may be.5Now, without intervention it neither will last long nor affect many. But undoubtedly the enactment of Lampe’s proposal can only bring about its prolonged duration and its aggravated severity. Even Lampe cannot deny this in the light of his other discussion.
Anyway, we must bear in mind that a critique of interventionism does not ignore the fact that when some production interventions are eliminated special frictions are generated. If, for instance, all import restrictions were lifted today, the greatest difficulties would be evident for a short time, but there would soon be an unprecedented rise in the productivity of human labor. These inevitable frictions cannot be mitigated through an orderly lengthening of the time taken for such a reduction of the protection, nor are they always aggravated by such a lengthening. However, in the case of government interferences with prices, a slow and gradual reduction, when compared with their immediate abolition, only prolongs the time during which the undesirable consequences of the intervention continue to be felt.
The two other points of Lampe’s “productive interventionism” require no special critique. In fact, one of them is not interventionistic, and the other actually aims at its abolition. In the second point of his program, Lampe demands that public authority eliminate the numerous institutional obstacles that stifle the occupational and regional mobility of labor. But this means elimination of all those government and labor union measures that impede mobility. This is basically the old demand of laissez passer, the very opposite of interventionism. And in his third point, Lampe demands that the central political authority gain “an early and dependable overview of the whole economic situation,” which surely is no intervention. An overview of the economic situation can be useful to everybody, even to government, if the conclusion is reached that there should be no interference at all.
When we compare Lampe’s interventionistic program with others of a few years ago, we recognize how much more modest the claims of this school have become. This is progress of which the critics of interventionism can be proud.
- 1. See the critique of such errors, Halm, Die Konkurrenz [Competition], Munich and Leipzig, 1929, especially p. 131, et seq.
- 2. Lampe, Notstandarbeiten oder Lohnabbau? [Public works or wage reductions?], Jena, 1927, p. 104 et seq.
- 3. On "pre-established harmony" see further my essay below, "Anti-Marxism."
- 4. Lampe, op. cit. p. 127 et seq.
- 5. Ibid., p. 105.