[Chapter 4 of Away From Freedom]
It is a fallacy that government, which is an agency for coercion, can manage the economic affairs of its citizens. This is what the Keynesian economists propose it do in carrying out a "compensatory fiscal and monetary policy." In determining the amount and use of currency, government dictates changes in the opportunities and rewards for the individuals using the currency. This dictation ranges all the way from determining what persons shall get new houses or cars to deciding what persons shall get a chance to play golf or go to school.
Such use of coercion causes moral and intellectual decay of both government and citizenry. Those who apply the coercion become more arrogant and more indifferent to individual rights. The subjects lose incentive and a sense of personal responsibility. Understanding gives way to antagonism, and mutual hostility destroys both the will and the ability to cooperate.
Most persons admit that these are the results in the case of chattel slavery or foreign dictatorships. Why should they not expect the same results to follow every other attempt to get cooperation by use of compulsion?
The one way in which coercion can help to release or increase human energy is in defense against coercion. A defensive use of force neutralizes coercion, leaving peaceful individuals at liberty. In liberty, individuals learn to get what they want by producing it themselves or by getting it from their fellows through voluntary exchange or gift. The result is human progress.
On the other hand, when men use force to take what they want from their fellows or to manage them, they arouse antagonism and destroy cooperation. The results are conflict and insecurity, leading at last to apathy and indolence, stagnation and backwardness.
How Bureaucracy May Create "Planned Chaos"
Professor Ludwig von Mises, in his scholarly but readable little books, Bureaucracy and Planned Chaos, shows perhaps better than any other modern author why government interference with the free market leads to crisis, totalitarianism, and war. Every interventionist measure results in conditions which are even less satisfactory than those which preceded it, as shortages follow price control and black markets follow rationing. Yet, those who favor such intervention usually blame the evil results of their measures on the selfishness, stupidity, or perverseness of individuals. Then they urge more coercion to deal with the new problems.
Thus, for example, Samuelson fears that producers may "react perversely" to government spending and subsidies, so that prices and wage rates may rise before full employment has been achieved. In that case, he intimates, the government may have to apply price and wage controls to stop inflation.
The "mixed economy" advocated by the Keynesian economists, therefore, is highly unstable. It moves from crisis to crisis, from one emergency to another, while the currency depreciates, producers are demoralized, demagogy increases, government becomes more despotic, and international friction mounts. This spiral towards totalitarianism and war persists as long as faith in coercion and government planning prevails over a preference for voluntarism and free enterprise. Says Mises:
Our age has to face great economic troubles. But this is not a crisis of capitalism. It is the crisis of interventionism, of policies designed to improve capitalism…
Government Management Must Be Bureaucratic
Why is it that government intervention fails to achieve the results the "planners" hope for?
Mises believes that the answer is to be found in the very nature of government. In Bureaucracy, he tries to show that government cannot operate on economic principles because its operations cannot be subjected to the evaluations or checks of economic calculation. By its very nature as a coercive agency, its operations must be circumscribed by rules which restrict the enterprise and discretion of its officials. In other words, it must be bureaucratic; it cannot be businesslike.
In private enterprise, Mises point out, a business owner or the manager of a department may have wide discretion in use of the funds entrusted to him and in the spending of the revenues of his business or department. However, he must show a profit or lose his position, and he earns this profit in voluntary cooperation, competing with every producer in every line. He competes in offering greater economy ("more for less") to customers, investors, and wage earners. A business organization, says Mises, cannot become bureaucratic as long as its operations are guided by the profit motive and are not interfered with by government or private violence.
The profit motive in government, however, results in intolerable tyranny and conflict. This is because government is coercive. Its basic function is using coercion to protect citizens against violence from their fellow citizens or foreign enemies. The restraint of constitution, law, and "red tape" must apply to use of coercion by government, as well as to use of coercion by private citizens. Otherwise government is as dangerous as the criminal or foreign foe.
Even in dealing with the suspected or convicted criminal, government officials must observe rules designed to protect suspects and criminals (as well as innocent persons) against unnecessary violence. Laws must say what is a crime and must prescribe the manner of dealing with suspects and criminals.
Totalitarian governments also must operate bureaucratically, because, without rules to guide them, ambitious officials might build the means to declare their independence of the central authority or make war upon it. What authority a totalitarian regime has depends on subjecting subordinates to a rigid control by laws and rules, even though the laws and rules may be quickly changed by orders from the top.
In other words, all governmental departments, whether in a liberal or a totalitarian government, must operate bureaucratically, not according to business principles.
Every Government Agency Uses Compulsion
But what of an economic venture like a government owned power plant? May not that operate according to business principles rather than bureaucratically?
If it is to operate entirely according to business principles, however, why should anyone wish to make it a government project? No one advocates that government step into power production or the railway business or any other business unless he wants to get the operations away from control of business principles in some regard or other.
It is because he wishes at some point to substitute coercion for voluntarism, a bureaucratic rule for profit making in free markets, that anyone advocates government ownership of anything. He may wish to change the method of getting capital, hoping to get it at lower cost by taxes or by government manipulation of the currency. He may wish to change the method of hiring executives, hoping to get them cheaper and better by political or civil service appointments than by permitting profit-seeking owners to bid for them in open market. In addition, government ownership usually involves use of force to suppress competitors.
Whatever the reason for government ownership, therefore, it has to do with substituting force for the guidance of the free market in directing the operations.
It is this use of force which makes it necessary to substitute bureaucratic rules (red tape) for profit-making enterprise in the management of government undertakings. The central political authority (e.g., the Congress) must specify the field of work, set the limits of expansion, and lay down principles which are to govern the executive in its administrative rule-making. All of this restriction of the profit motive in government is necessary to prevent a government enterprise from undermining the position of the central government and ruling party, or from going beyond a certain point in interfering with the liberty of the citizens.
Government Markets Cannot Be Free
Samuelson describes the way in which he thinks a price system might work in a Socialist society. But how could government officials arrive at prices for land and machinery which only "society" may own? If no one owns them, it would be futile and foolish for anyone to offer anything for them. What money one government official may offer another for anything is not determined by business principles, because he is not supposed to be working for profits and he is not judged or rewarded according to the profits he makes.
Of course, in a "mixed economy," the central authorities could not permit an official to set prices that were entirely arbitrary or meaningless. Therefore, they must lay down rules for fixing prices. Without the profit motive to direct them they can only use political criteria for the rules governing price policies. That is, they must lay down price policies that are most pleasing to those who hold political power or to those who can bestow political power. Any other method of pricing would necessarily cost them their jobs.
Precisely the same holds true of government control of interest rates, government control of the value of money, government control of credit policies, or government control of wages and salaries. Once we depart from business criteria set up in free markets, there is left only political criteria established by the methods of winning political control.
Government Statistics Are Political Instruments
But what of the statistics of income and employment, savings and investment, price levels and wage rates, that the Keynesian economist proposes to use as criteria for "compensatory fiscal and monetary policy"? What of those mathematical formulas that are supposed to tell us just how much private spending will result from a given increase in government spending? Are not these economic criteria which experts might use to supply some overall government management along sound economic lines?
[Part of the answer to these questions will be found in a later section dealing with the supposed usefulness of the Keynesian approach in business forecasting.] At this point, I shall only call attention to the following facts which anyone may verify for himself by a little study of the "parity price" agricultural program of the United States government:
First, the compilation of statistics and the construction of government indexes are themselves political operations, controlled by political considerations and bureaucratic rules. There is no one "right" index of prices, interest rates, rates of profits, or wage rates. There are only various estimates arrived at by bureaucrats subject to political pressure and bureaucratic red tape.
What index to use is a matter of opinion in every case, and the only way to decide which opinion should determine a government policy is by political and bureaucratic methods and standards. The loyal government official asks, What does the law or executive order tell me to do? Insofar as it is not quite clear or specific, he next asks, What interpretation of this order will be most "politic"? This means, What interpretation will help keep my superiors and me in office?
Second, government policies do not affect people in general, or prices in general, or incomes in general. They affect particular persons at particular moments of time. The choice among which acts of which persons at what times the "planners" are to control must be bureaucratically and politically determined. That is, the "planners" must follow certain rules in deciding what taxes are to be raised or lowered, whose incomes are to be cut or raised, what interest rates are to rise or fall. And these rules must be laid down by other officials who must act politically in order to hold their jobs.
Third, even the arguments and reports of the "experts" in government must have a political slant. They must deal with subjects in which the politician is interested, and they must deal with them in such a way as to help the politician retain and consolidate his authority.
Government Planning Cannot Be Economic
If government "planners" hold office for short terms, then their decisions must follow the short-term political changes. If they are appointed for long terms, then they must follow the long-term political trends. But always they must obey the rules which political authorities lay down, and these rules are designed to help keep the ruling party in office.
As I pointed out above, government's construction and use of indexes in connection with the "parity price" program for agriculture in the United States illustrate nicely how politics and bureaucracy decide the issues. From an economic standpoint, the result can be only what Mises calls it — "planned chaos." Government spends millions of dollars to reclaim land for agricultural purposes, and it spends billions more to restrict agricultural output or to buy up the crop "surpluses" for waste and destruction. It gives farmers millions of dollars' worth of advice and aid to increase output, and then it pays them millions more to keep the crops from coming to market.
All Government Acts Are Political
Such policies make sense only from a political and bureaucratic standpoint. Bureaucrats are following rules which politicians believe will help them win and hold political office.
Again, therefore, we get back to the question: What is the proper scope of government? Should it determine how much individuals earn, how much they save or invest?
In order to answer these questions, we must realize that government is an agency for coercion, and we should understand how man reacts to coercion or in the absence of coercion.
To say that we can determine the scope of government only by experience, as the Keynesian economists argue, is not enough. Man has already had thousands of years of experience with a great variety of governments and government policies. If a political economist warrants the title "scholar," he should know a good deal about such experience, and he should have derived a set of principles for the use of political force in human affairs. If we have not learned from past experience, why should we expect to learn from future experience?
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This article is excerpted from Away From Freedom.
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