Thursday, August 30, 2018

Ricardo is now irrelevant



The celebrated theory of international trade proposed by the English economist David Ricardo (1772-1823) is logically impeccable.

It has several weaknesses, however. One of them is that it uses the classical comparative static approach and consequently ignores the dynamic aspects, which are decisive and constitute the subject matter of development economics.

The weakness I now address is, on the other hand, not inherent to Ricardo’s methodology, but instead a unique and unforeseeable outcome of the financialization process that has beset world capitalism during the last four decades.

Ricardo’s theory of international trade is based on prices of manufactured goods. Quite naturally, Ricardo based market prices on manufacturing costs. And there's the rub.

Because the self-evident maxim that market prices are based on manufacturing costs is no longer  valid in general terms.

Deregulation of commodities markets has enabled purchase of commodities – petroleum, for example -- by parties that are unrelated to the  industry in which such commodities are used as inputs in manufacturing processes.  The ensuing and  by now commonplace practice of stockpiling raw materials and other goods for the sole purpose of speculation, i.e. without any intention of ever actually using the wares as inputs in an industrial production process, means that demand is no longer related to the use value of the wares, but is instead largely determined by trends on the financial markets. 

Source: How commodities became financial assets, from The Great American Bubble Machine, by Matt Taibbi

http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=5


To the  extent that market prices are no longer determined by production costs but by financial market trends or other factors extraneous to the  production process, Ricardo’s theory of international trade has become irrelevant.

To what extent have production costs been trumped by expectations of speculative profits as determinants of market prices?

Deviation of market price from manufacturing cost cannot  exceed certain bounds in the long term.

That is all I can say at this stage without doing serious empirical research, which is a somewhat unlikely prospect.


Wednesday, August 29, 2018

Why Hayek Sucks


A critique of The Road to Serfdom
April 2006


Contents:



Meaning of “planning” in Hayek                ……..
p. 1

Hayek’s import-export theory of socialism       ……  
p. 6

Meaning of “Planning” in Hayek.

Hayek considers only two cases: complete free market and central planning. No intermediate cases. But he then proceeds to posit certain types of situation which are common both to central planning and to mixed economies like present-day European ones.

P.86: “When we have to choose between (A) higher wage for nurses or doctors and (B) more extensive services for the sick, (C) more milk for children and (D) better wages for agricultural workers, or between (E) employment for the unemployed or (F) better wages for those already employed, nothing short of a complete system of values in which every want of every person or group hasa definite place is necessary to provide an answer.” [letters (A) through (F) inserted by CS]

Four of those six magnitudes are today regularly decided by governments, namely A, B, E & F, without having to apply any exhaustive catalogue of values. I don’t know exactly how the Belgian or Austrian governments do it, but it doesn’t seem to give them much trouble. Perhaps an exact catalogue would be necessary if we had to choose between B and D, for example. But not between A & B.

Hayek´s phrase "a complete system of values in which every want of every person or group hasa definite place” is evidently an element which – in Hayek’s view -- would play in a socialist system the same vital role that money and the price system play in a market economy. In effect, the market system of prices assigns to each good and service a monetary value, which determines whether it will be produced or not, and if so in what amounts.

Thus Hayek measures any planned economy against a very demanding standard -- price and amount of every single merchandise and service must be determined down to the last penny, no less. What warrants such an exacting criterion? Not much, it turns out. It is true that in a market economy all prices are determined to the last penny. But Hayek’s assumption that it is the overall equilibrium of the market which imposes the exact price is gratuitous. Otherwise how could we explain so many prices ending in 99 cents? Obviously it is a mere psychological trick played on the consumer by sly shopkeepers, not the iron laws of supply and demand, that dictate the inevitable 99s at the end of every price. So all this precision is mere theater. Supply and demand impose a certain maximum and minimum between which the seller is free to maneuver, that is all.

In practice a government is free to manipulate supply and demand within certain limits. The specter of totally planned economies has receded. 

So Hayek is a very poor tool for analysis of mixed economies. For him a mixed economy is not an object of analysis in itself, but just a way-station on the road to central planning, a mere transitional phase.

In his amateurish attempt to prove that planning is inimical to the rule of law, Hayek writes, “…planning necessarily involves deliberate discrimination between particular needs of different people…” [change the cite to something more apposite] So what about the extensive state planning of economic development in South Korea? Here is a summary of a paper on Korean development planning:

This paper presents Korea's experience through planning, policymaking and budgeting over the past two decades.  First, the characteristics of the planning organizations, including the Economic Planning Board, the Office of Planning and Management under each ministry, and Ad Hoc Committees, and their evolution over time are first dealt with. Second, the process of plan formulation was discussed by specifying the respective roles of each planning organization, and of foreign and domestic exports. Third, the Korean system of annual planning, which serves as a device for effective implementation of a medium-term plan, and its evolution over time are examined. Fourth, the government budgetary process and the role of budgeting in plan implementation are discussed. Fifth, the formulation and implementation of the short-term economic management policy, which may or may not be tied in with the implementation of a medium-term plan, is discussed.[1]

For Hayek, all this frantic activity wasn’t planning at all, because it didn’t involve telling specific people what to do. But it certainly wasn’t just a general guide on how to act in certain formally specified future situations, which is Hayek’s prescription for seemly governmental behavior.

In any case Hayek’s argument doesn’t hold water, even referring to Soviet central planning, because the objects were not individuals, but sectors, regions, combines & firms. Not a single individual to be seen.

We soon see why. Hayek regularly uses the term “individual” to designate the economic actor. The trouble is that for him, Exxon and General Motors are “individuals". Nowhere in his book does he mention the obvious fact that the private sector is largely composed, not of individuals, but of organizations ranging in size from the middling to the huge. In a scandalous conceptual hat trick he blandly identifies these organizations with, and confers on them, all the attributes of individual human beings.

Friedman aids and abets him, repeating ad nauseam the terms “individual” and “individualism” while evidently referring to such ”individuals” as Dow Chemical, Toshiba and Daimler Chrysler.

This attitude stands in sharp contrast to that of A.V. Dicey, who wrote in 1905:

 “… One trade after another has passed from the management of private persons into the hands of corporate bodies created by the State. This revolution may be traced in every volume of the [English] statute-book which has appeared during the last seventy years [1835-1905] or more … This legislation was favoured and promoted by Liberals, but the revolution of which it is the sign has nevertheless tended to diminish, in appearance at least, the importance of individual action, and has given room, and supplied arguments for State intervention in matters of business with which in England the State used to have little or no concern... The modern development then of corporate trade has in more ways than one fostered the growth of collectivist ideas. It has lessened the importance of the individual trader. .. [it promotes the] principle that all property, and especially property in land, belongs in a sense to the nation... It constantly suggests … that every large business may become a monopoly, … [that] may wisely be brought under the management of the State. The characteristics of modern commerce … make for socialism.”[2]

At the beginning of this passage the modern reader is prompted to anticipate yet another denunciation of government displacing private business, but then in a flash it become clear that Dicey’s target is completely different: for Dicey, business corporations are not “individuals” and champions of private property at all, but absolutely the opposite, bureaucratic creatures of the state that undermine the ideals and attitudes of private property. The “individual” is for Dicey an actual single human being, against whom are ranged both the state and the corporation!

The contrast between Dicey in 1905 and Hayek 40 years later is dramatic. By Hayek’s time the commonly held concept of a business firm had ceased to be based on the idea of[CS1]  a single human owner-manager and had been replaced by the concept of the firm as an impersonal organization. However, presumably for ideological reasons, Hayek chose to conceal this dramatic change. He wished to anchor the idea of private property in the traditional and intuitively appealing concept of personal possession by individual humans. I conjecture that this was intended to prevent a continuation of the phenomenon that Dicey had decried: a drift toward an abstract notion of collective property that would be liable to dissolve into nothingness and oppose but a weak ideological and legal defense against expropriation by the state.

I presume that it was likewise to preserve the illusion of a traditional, seamless personal property that Hayek studiously ignored the seminal work by James Burnham The Managerial Revolution (1938), [insert Gardiner & Means] which announced the conquest of power by employee managers that by then had taken place in the large corporations and in many of the small ones.  Since Burnham we know that managers have wills and interests of their own that are seldom fully congruent with those of the firms’ owners. For their part, organizations themselves have an internal logic that partly escapes both owners’ and managers’ control.

Even if we ignore the matter of the manager’s and the organization’s specific contribution to decision-making and execution, the owner “him”self seldom exists as such any more. “He” is replaced by boards of directors, shareholders’ meetings, etc. A shareholders’ meeting is not the same thing as a sole proprietor. All kinds of factors enter into the decisions of groups which are absent from those of a single person. (elaborate – group dynamics, etc.)

Consequently to call a megacorporation an “individual” is sheer fantasy on several different levels at once. Nonetheless to do so is methodologically acceptable, insofar as a business corporation is vested with the same legal rights and obligations as a private citizen. The socio-economic difference is great, but only at a positive, not a normative level.

In any case, we are now enabled to reinterpret Hayek’s statements about individuals, replacing the term “individual” with the term “firm”. But even under this proviso, South Korea was innocent of planning between 1963 and 1983. Import quotas and export objectives are not orders to specific firms. They are filled by the firms that find it most convenient and profitable to perform the activities required for the attainment of those goals. In fulfillment of the five-year energy plan, the Ministry of Public Works asks for bids to build a hydroelectric plant. The firms that best qualify are then chosen to do the work. The plan doesn’t specify which firms will get the job. On the contrary, every modern government has elaborate rules on how to contract out work to private firms, which are every bit as abstract and impersonal as the rules Hayek espouses. Therefore[CS2]  the condition on which the alleged arbitrariness of planning is predicated, namely discrimination among specific firms, is not fulfilled. Consequently one of Hayek’s principal objections to planning is shown to be fatuous.[3]

Hayek’s words “… the main condition on which the usefulness of the system of private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers for all the damages caused to others by its use.” (p.44) assume that the “owner” is the decision-maker. But when the decision-maker is not an owner but a manager, who does not “benefit from all the useful services rendered by his property and suffer for all the damages caused to others by its use”... agent problem.

Equally fatuous is Hayek’s argument that planning leads to arbitrary behavior of government: “… as planning becomes more and more extensive [notice the “creeping socialism” assumption] it becomes regularly necessary to qualify legal provisions increasingly by reference to what is “fair” or “reasonable”; this means that it becomes necessary to leave the decision of the concrete case more and more to the discretion of the judge or authority in questions.” From this he concludes a “…decline of the Rule of Law … in terms of progressive introduction of these vague formulas into legislation and jurisdiction .... arbitrariness ... uncertainty ... consequent disrespect for, the law". For proof he resorts to the decline of the Weimar Republic. But the authoritarian decay of the Weimar Republic was hardly impelled by a process of ever greater discretion on the part of the authorities. Rather, the political crisis of Germany [bla bla bla]

Furthermore, to denounce judicial discretion while defending the Anglo-Saxon legal and economic system is a self-contradiction, since traditionally English law is not based on fixed codified rules, but on shifting interpretations that judges make of the decisions  entered by other judges. The dodgy nature of such a system is amply clarified in the following passage, which denounces the legal revolution instigated by judges whereby product liability law in the US became ever stricter after 1960:

The courts proceeded in the usual way, fashioning one exception and then another, then yet another. Evidence of subsequent remedial measures was first admitted to impeach witnesses, then to prove that the defendant con­trolled the premises in question, then to show that conditions had changed since the time of the accident or that changes in design were feasible. The exceptions nibbled away at the rule until some courts were emboldened to sweep the tattered remains aside entirely. An lllinois appellatecourt simply declared  that the rule should not apply in strict liability cases be­cause the focus was on the product itself, not on the defendant's conduct. The Califomia Supreme Court then picked up the idea in a landmark ruling in 1974. New York and other states followed quickly.

IncredibIy, the logic offered in these rulings was exactIy what had been used earlier to exc/ude evidence of the plaintiff's contributory negligence before the accident. The product was on trial, the courts argued, not the people. So the pIaintiff's personal conduct before the accident was irrele­vant. But somehow the defendant's conduct aflerward was perfectly rele­vant …[4]

Curiously, this process described by Huber parallels precisely the evolution of the English legal system in the 19th century which Dicey so criticized, and which was impelled by the Liberals through parliamentary legislation. The area allotted to free contracting became smaller and smaller, while the state (in the American case the courts, independently and without any legislative warrant) dictated more and more mandatory conditions that were binding on the parties although the contract failed to specify them. There appears to be a blind automaticity in the progress of government intervention, which chooses as its agent now one branch of government, now another, to strive toward the same goal of restricting individual freedom to contract.[5]


Hayek’s import-export theory of socialism

“For over two hundred years English ideas had been spreading eastward. The rule of freedom which had been achieved in England seemed destined to spread throughout the world. By about 1870 the reign of these ideas had probably reached its easternmost expansion. From then onward it began to retreat, and a different set of ideas … began to advance from the East. England … became an importer of ideas. For the next sixty years Germany became the centre from which the ideas destined to govern the world in the twentieth century spread east and west.” (p. 25) The upshot of all this is that Hayek presents socialism as a German import to Britain and elsewhere. Now there is no doubt that, as Hayek explains, German ideas exerted great influence in the 19th and 20th centuries -- sometimes for good and sometimes to the great detriment of humanity -- and that those ideas often entered into conflict with traditional British liberal ideas. Nonetheless it goes too far to claim that the idea of socialism was merely a German import into Britain and that it had no domestic roots.

A.V. Dicey goes into this matter in considerable detail in his Law and Public Opinion. He presents and illustrates five factors that in his opinion led to the spread of socialist/collectivist ideas in Britain starting about 1865. At no point does he mention German influence or any foreign influence at all, thus flatly contradicting Hayek. There follow some excerpts from his lecture on the subject.

My purpose in this lecture is to explain a revolution of social or political belief which forms a remarkable phenomenon in the annals of opinion. This explanation in reality is nothing else than an attempted analysis of the conditions or causes which have favoured the growth of collectivism [defined much more broadly than by Hayek] …

A current explanation lies ready to hand. Under the Parliamentary Reform Acts 1867-1884 the constitution of England has been transformed into a democracy, and this revolution, it is argued, completely explains the increasing influence of socialism. The many must always be the poor, and the poor are by nature socialists. Where you have democracy there you will find socialism.

This reasoning, as already pointed out is essentially fallacious. Democracy cannot be identified with any one kind of legislative opinion. The government of England is far less democratic than is the government of the United States, but the legislation of Congress is less socialistic than the legislation of the Imperial Parliament. Nor in England are laws tending towards socialism due to the political downfall of the wealthy classes. Under a democratic constitution they retain much substantial power-they determine in many ways the policy of the country. The rich have but feebly resisted, even if they have not furthered, collectivist legislation. The advance of democracy cannot afford the main explanation of the predominance of legislative collectivism.

The true explanation is to be found, not in the changed form of the constitution, but in conditions of which the advance of democracy is indeed one, but whereof the most important had been in operation before the Reform Act of 1867 came into force.

These conditions, which constantly cooperated, may be conveniently brought under the following heads:

·       Tory Philanthropy and the Factory Movement
·       the Changed Attitude after 1848 of the Working Classes
·       the Modification of Economic Beliefs
·       the Characteristics of Modern Commerce
·       the Introduction of Household Suffrage.[6]

Now I shall comment these factors:

1.                Tory philanthropy denotes a humanitarian movement in favor of protecting children from overwork and brutal conditions in the factories that were spreading throughout the land. It was similar in spirit and social compositing to the contemporary anti-slavery movement. (more detail)
2.               The changed attitude of the working classes was a trend away from revolutionary politics and into reformist trade-unionism that marked the 1848-1870 period. The trade-unionist ideology favored social legislation, etc. leading to  greater state involvement with and regulation of business.
3.               The modification of economic beliefs is rather sketchy. Dicey cites a few novels that display sympathy toward trade unionists.
4.               Characteristics of modern commerce. Cited above in connection with the definition of “individual”.  Dicey mentions no technological factor impelling the larger and more bureaucratic organization of capitalist firms with the exception of the railroads, which explain only one sector of the economy, although a crucial one. See Marx.
5.               Introduction of household suffrage is the factor previously rejected as sole explanation but now accepted as a partial one.

          Especially noteworthy in point 4 is Dicey’s identification of the prime movers of these changes: “This legislation was favoured and promoted by Liberals, … [who] … supplied arguments for State intervention in matters of business with which in England the State used to have little or no concern...” The “Liberals” to whom Dicey referred were the champions of private enterprise, industrialization, free trade, etc. In other words, the very class with which Hayek identifies himself, the business class, was primarily responsible for the growth of collectivism. The socialistic inclinations of the working class played second fiddle to those of the business class in the trend toward state intervention in the economy. Indeed, the trend toward big government started long before the first Labour M.P.s trod the halls of Parliament.

Now whom should we believe: Hayek, an Austrian economist ignorant of English political history – although he had lived in Britain since 1931 – who presents his theory in conclusory fashion, failing to mention a single historical fact that would tend to back his version, or Dicey, a celebrated legal scholar intimately familiar with the doings of Parliament in the 19th century, who explains his grounds in considerable detail? It is obvious that Dicey is right and Hayek wrong.

In other words Hayek committed the very mistake that Dicey had cleared up four decades earlier – attributing the spread of socialist ideas exclusively or principally to the working class. Furthermore Hayek compounded the error by also claiming that socialism was lock, stock and barrel a foreign import to Britain.

Thus we see that Hayek plays a vital role in the care and feeding of capitalist ideology in the late 20th and the 21st centuries by providing two of the stock items of present-day free-market propaganda -- firstly his humbug about “individual” property and secondly in obscuring the historical truth regarding the origin of “big government”, the great bugaboo of the free-market crowd. It is more convenient to dismiss big government (“BG”) as the insidious work of left-wing zealots than to acknowledge that it is a response to internal needs of the capitalist system in the course of its development.

Unlike Hayek, his great contemporary Karl Polanyi read Dicey’s work and cited it in his book on the Industrial Revolution The Great Transformation, written and published about the same time as TRTS. It is, indeed, thanks to this work of Polanyi’s that the author became aware of Dicey in the first place.


[1] Kwang Suk Kim: Korea's Experience in Managing Development through Planning, Policymaking, and Budgeting, WORLD BANK STAFF WORKING PAPERS Number 574, 1983
[2] A.V. Dicey: Lectures on the Relation between Law and Public Opinion in England during the Nineteenth Century, MacMillan & Company, London 1948, pp 245-248 (1st ed. 1905). Dicey was the most eminent constitutional theorist of hi time in Britain. He was the originator of the concept “rule of law” and the term that denotes it.
[3] It is widely rumored that Korea is the cradle of “crony capitalism”, in other words, that contracts really are assigned on the basis of the personal preferences of bureaucrats, just what Hayek denounces. Knowledge of this fact probably prompted Friedman to omit Korea from his list of “thriving” East Asian capitalist states (p. xiv). However, there is no causal link between the “planning” aspect and the “crony” aspect, as Hayek claims. Other East Asian states (e.g. Taiwan) have advanced to the status of industrial powers thanks to extensive government planning but with a far smaller component of corruption (see Governing the Market, …)
[4] "Liability", The legal revolution and its consequences" by Peter W. Huber - Basic Books, Inc.,Publishers, 1990, pp 159-160.
[5] Of course such freedom was and is often a pious fiction, since the specific conditions of each market (labour, housing, various merchandises, etc.) frequently give one or the other contracting party a monopoly or quasi-monopoly position that it can exploit to dictate often onerous terms which the other party can only accept or reject, but not negotiate.
[6] Dicey, ibid. pp. 217-219.

 [CS1]Verify.
 [CS2]Cite Austrian Code of Adm. Procedure

Wednesday, August 22, 2018

Milton Friedman’s Theory of the Depression



In his Monetary History of the US, Friedman says Depression was government’s fault – specifically the Federal Reserve’s. The Fed supposedly failed to pursue the proper monetary policy. This links up with another claim I have heard from the Right: that the New Deal did not end the Depression but prolonged it.

Even if both above statements are true, the New Deal has its historical justification:

1.      Its purpose was not only to reactivate the economy, but also to improve income distribution, which nobody denies was undesirably skewed. Even if it failed to reactivate the economy, it certainly did improve income distribution. Thanks to the New Deal, the subsequent reactivation of the economy – regardless of its cause – was characterized by equitable income distribution; this undoubtedly not only promoted the goals of social justice but also made the recovery (1946-1968) broad-based and consequently more lasting than it would otherwise have been. Thus the New Deal eventually did further the cause of economic growth.

2.     The rightist statements above can be construed as an argument that goes like this: the New Deal was a mistake; it would have been sufficient to adopt suitable monetary measures as outlined by M Friedman. In reply I would say: 1. the aforesaid distribution situation; and 2. Eschewing the New Deal or something similar was not an option. The candidates against whom FDR won election as president advocated far more radical measures. To a great extent Roosevelt can be seen as a factor moderating demands for radical change, rather than as an initiator of change.

3.     The characterization of the Fed as “the government” is only partially correct. The Fed was and is an independent agency that does not take orders from the Executive. No critique of the Fed's shortcomings can be generalized to encompass, nor attributed to, economic policies pursued by the executive or legislative branches.


C Stoll, May 2008

Addition. Sept 2009.
Currently the Phed is the creature of American finance oligarchy (see Ellen Brown's book). How can it have been otherwise in the 1930s? Same goes for Treasury. How come the misdeeds committed by the tools of the banks are proof of too much government? I think it much more reasonable to say that they are proof that the banks are too powerful. Verify. 




Milton Friedman's theory of monopolies disproved

By Carl Stoll

In Capitalism and Freedom, p. 130, M Friedman claims that government causes monopolies. His reasoning: Capital income is taxed twice: first when earned by corporation and later when corporation pays it out as dividends to stockholder. Consequently the corporation has an incentive to retain some earnings to avoid additional taxation. What does it do with these additional earnings? It invests them. So corporations get bigger and bigger, thus turning into monopolies.

Friedman likewise claims that retaining profits in a corporation is a less productive investment than would be reinvesting the profits in other, perhaps more productive firms. Thus the double taxation system renders capital less productive overall. In other words, the double taxation is inefficient.


 In this note I propose to subject Friedman's claims to two empirical tests. From each of his claims I will derive a prediction and then compare the prediction with empirical observation.


Hypothesis 1: If capital earnings tax rises (falls), the corporation will retain a greater (smaller) proportion of its earnings.

Data for USA:

From 1953 to 2003 tax on capital earnings fell from 47% to 28% (see Table 1).
Did the proportion of retained earnings fall? No, it did not (see Figure 14.3).

Consequently there is no prima facie reason to believe Friedman’s first hypothesis.




Source: Jane Gravelle: Historical Effective Marginal Tax Rates on Capital Income, Congressional Research Service. Report for Congress, January 12, (presumably 2006), cited in V.V. Chari and Patrick Kehoe: Modern Macroeconomics in Practice: How Theory Is Shaping Policy, Journal of Economic Perspectives, Volume 20, no. 4, Fall 2006, pages 3-28, p. 20




Composition of financing sources for gross investment (as % of total):
United States, non-financial companies
Legend: Gross retained profit (dashes),  stock issue net of stock repurchase (hyphens), and change in net indebtedness (solid line)
Source: Gérard Duménil, Dominique Lévy: Crise et sortie de crise : Ordre et désordres néolibéraux, Presses Universitaires de France, 2000, p. 160. (published in English as Capital Resurgent)






Hypothesis 2: If for whatever reason additional profits are paid out as dividends, they will be reinvested in more profitable firms belonging to the non-financial sector.

According to Gérard Duménil and Dominique Lévy, referring to France, op.cit., p. 99 [my translation] “…the growth rate of fixed capital [of the aggregate of French non-financial firms] developed exactly like the profit rate after taxes, interest and dividends. These results suggest that profits collected by finance do not return to non-financial firms.”

On p 101 is a graph illustrating this phenomenon:

 Figure 9.6  Rate of retained profit (solid line) and accumulation rate (hyphens) %: France, non-financial firms
Source: Gérard Duménil, Dominique Lévy: Crise et sortie de crise : Ordre et désordres néolibéraux, Presses Universitaires de France, 2000, p. 101. (published in English as Capital Resurgent)







France too has a system of double taxation of corporate profits.
In other words, what was paid out as dividends was not reinvested in non-financial firms, either in more productive ones or in less productive ones. 

I think it reasonable to assume that the results for France are directly transferable to the USA.  

Consequently the second hypothesis derived from M. Friedman’s claims is likewise falsified.

Mises and the Art of Methodological Hanky-Panky


By Carl Stoll [1]

In his book Critique of Interventionism[2]von Mises writes:

“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 interven­tionist measures. But the economy is no prize contest in which the participants compete under the conditions of the rules of the game. Tequila Kid’s commentary:  WHY THE HELL NOT? 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?  Tequila Kid’s commentary:  WHY THE HELL NOT?

...
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.”

Tequila Kid’s commentary: So “free competition”  is only a valid argument when used by businessmen against government controls, but not when used by consumers, say, against private monopolies![3] Very convenient indeed! Heads I win, tails you lose. We must infer that when it is used as an argument to further the interests of an undeserving party (i.e. non-businessmen), “free competition”  becomes a “mistaken con­cept”, no less!

Mises disparages the concept “(genuinely) free competition” as a “nebulous phantom“. In other words, he claims it’s pointless to try to define the term. Von Mises fails to give any grounds for this assertion. The only quasi-argument he offers is to insinuate that the term “free competition” can only be defined by reference to its historical origins, or its “original intent”, to employ the term used in jurisprudence.   

This etymological purism, so to speak, displayed by von Mises, is an exceedingly feeble argument. “Misunderstanding” indeed! We’re not talking about construing the language of an ancient legal document.[4] We’re talking about a concept whose content can and does vary through time, and quite legitimately, as a function of current social institutions and whatnot. For example it would be absurd to demand that the term “freedom” mean the same thing to a mediaeval serf as to the modern-day Michael Jackson of blessed memory, say.   

Despite von Mises’ denial, in my opinion there is a perfectly legitimate way of defining “genuinely free competition”, namely as the absence of market failures. Although the term “market failure” was not coined until 1958, the  concept has been lurking in neo-classical economics since the 19th century, having been conceived by no less a luminary than John Stuart Mill.[5]  Moreover, in von Mises’ salad days, the 1930s, a very lively discussion took place concerning a certain type of market failure, to wit, monopoly power, instigated by the noted economists Joan Robinson and Abba Lerner. Not to mention the early welfare economics postulated by Pareto and Pigou. Consequently von Mises can scarcely plead ignorance of the issues involved.[6] Indeed, to refuse, as von Mises does, even to discuss the possibility of defining the term “genuinely free competition” seems disingenuous in the extreme. This attitude raises the suspicion – one that often haunts me when reading von Mises’ works, by the way – that many of his arguments are mere propaganda tools that he himself did not believe. 

Moreover when von Mises states: "With the slo­gan of “free competition” they [ancient businessmen] demanded that the social function of private property not be hampered by govern­ment intervention,” what can he conceivably mean by “the social function of private property” unless it be that of providing goods and services as efficiently as possible (in other words untrammeled by market failures)?

The impression of doubletalk is only strengthened by the circumstance that von Mises’ position here regarding the meaning of “free competition” seems grossly inconsistent with the position he defends concerning a related issue in a different work, Social Liberalism[7] In Social Liberalism von Mises states:
“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.” [my stress]
Von Mises’ implied espousal of utilitarianism here is difficult to reconcile with his barely disguised contempt for Lampe and other (unnamed, as usual) critics of laissez-faire capitalism who based their critique on what would today be called “market failure”

In his book Critique of Interventionism von Mises denies legitimacy to the term “free competition” (but only when invoked by the wrong sort of people!). By so doing, von Mises appears to be breaching his own maxim – expounded in his article Social Liberalism according to which a social institution can be legitimately justified only on grounds of social utility, and that it is improper to “advocate a social institution for its own sake” (for example on grounds of historical precedent, as von Mises does in Critique of Interventionism) “or for reasons of special interest” (for example that of businessmen, as von Mises does in Critique of Interventionism).    
 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 [what today would be called “Pareto-suboptimum”]. … 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.
Lampe, Notstandarbeiten oder Lohnabbau? [Public works or wage reductions?], Jena, 1927, p. 104 et seq.
Tequila Kid’s commentary:  Apart from uttering the vague charge that Lampe’s approach takes [__?__] “much too lightly”, von Mises appears to have no substantive critique of Lampe’s position.
Lampe’s argument against laissez-faire is based on the existence of lags, or delays, that elapse before the market adjusts to whatever shock or stimulus we’re talking about. In other words the market may adjust perfectly in the long run, but to use a hackneyed phrase, “in the  long run we’ll all be dead” (Keynes). So although future generations may profit from today’s laissez-faire, our generation has to endure the unpleasant waiting period before market magic kicks in, and consequently reaps no direct benefit.[8] So why should our generation pay any attention to the alleged virtues of the free market? According to Lampe, it is politically opportune for the government to intervene to shorten the lags,  presumably to defuse social conflicts between haves and have-nots. Furthermore, according to  Lampe, government intervention is not only politically opportune, but also economically justified, provided  the  intervention serves, not to counteract market forces, but rather to hasten them, by subduing the “frictions” that prevent market forces from operating effectively.  
Von Mises sets out to disparage those who, by alleging market failure, wish to justify government intervention . (The term von Mises uses to describe these people is “free-competition ideologues” or something of the sort.) The example he cites, however, is not an argument based on market failure, but rather the argument of Lampe, which is based on lags.
Lags do not constitute market failures in the strict sense[9], but they are analogous to market failure, among other things in that they are market imperfections that may serve as a justification for government intervention.
Thus we see that von Mises is only pretending to argue theoretically. He attacks so-called free-competition ideology, but only because it might provide a justification for government intervention in the  market. The actual example he gives is a different kind of critique altogether. But he lumps them all together because they contradict his main ideological thrust: defending private property.
An alternative critique of Mises on this point is that he’s too stupid to understand the difference between a market failure and a lag.
But there is more: Ludwig von Mises fully recognized that lags in the market’s adjustment to events are capable of causing hardship. That is proven by his claim that length (and perhaps occurrence) of lags are directly proportional to the magnitude of government intervention in the  economy. He makes this claim precisely in the context of a polemic against some kind of government intervention [check] [cite] proposed by a left-wing author, who proposes this measure in order to alleviate hardship resulting from unemployment.  This supposed law (which could be formulated thus: “Government intervention in the  economy delays economic adjustment to shocks.”)  appears to imply that government intervention of whatever kind is incapable of abridging economic lags. We can safely assume that for von Mises no government intervention is conceivable that would support market forces. So presumably von Mises subscribed to the  following claim: “Government intervention must always be directed against market forces.”
I believe that this statement constitutes a core element of neoliberal ideology, as prefigured by von Mises in the  1920s. Furthermore I think this claim is clearly open to question. Anyone who relies on it must be prepared to justify this belief both theoretically and empirically. As far as I know von Mises did neither.
Conclusions

Consequently the picture of von Mises that emerges from the perusal of his early works is that of an ideological spokesman for private property, who resorted to whatever arguments seemed opportune at any given moment for purposes of furthering the interests of private property owners, regardless of principle or theoretical consistency.

Nonetheless I must qualify this fairly derogatory judgment with the following restriction:  von Mises has the undoubted merit of being free of any Fascist taint, which is a remarkable accomplishment for a right-wing German-speaking economist of his period, especially one that tirelessly advocated for the interests of the bourgeoisie, a class that was rife with Fascist beliefs of various stripes, be they Stahlhelm, Austro-Fascist, Nazi, or whatever. Although apparently none too scrupulous when choosing his arguments, he never went so far as to stray into the Fascist-authoritarian wasteland. To that extent, the purity of his neo-classical doctrine is a monument of consistency. 

Mises cannot be charged with the naive ahistoricism that characterizes his pupil Friedrich von Hayek.[10] Indeed, von Mises’ doctoral dissertation was a historical analysis of late feudal serfdom in what is now southern Poland. As a matter of fact he started out his career as a disciple of the German Historical School, with which von Mises and the rest of the Austrians later fought bitterly. He is skilled at dissecting the theoretical weaknesses of the German Historical School and shows great sensitivity to historical perspective.[11] He knew the works of Karl Marx, and often cited Marx approvingly when attacking reformist economic policies.  On the other hand he did not hesitate to lambaste Marx mercilessly whenever it was called for by their respective theoretical positions. 

However I have received the distinct impression (which I must clear up soon) that von Mises’ portrait of the German Historical School is a caricature, despite a number of at least  prima facie valid critiques that I admit von Mises makes. The reason I  say this is that von Mises depicts the German Historical School as a bunch of rabid, bellicose German nationalists. And there is no connection between what von Mises charges and the handful of writings I have read by authors of the German Historical School, especially Sombart and Friedrich List. Since von Mises as usual mentions no names, we don’t know which member of the German Historical School he’s attacking in his article [cite]. 

Von Mises’ theoretical ability was limited. His arguments are often vague in the  extreme. The fuzziness of his statements and the lack of logical rigor in their formulation make it difficult to pin him down and so criticize him in a conclusive manner. Consequently most of my criticisms of von Mises are hedged by terms like “presumably” and “implied”, or else formulated in contingent form, depending on which of various possible interpretations I attribute to his words. Moreover the consistency with which he avoided providing cites of his sources in the works of other economists[12], and the enigmatic vagueness of his allusions to ill-defined historical and political events, are prominent stumbling blocks to any critical perusal of his works.[13] 

Finally, I must caution the reader that, although I have tried to be as objective as possible and have prudently avoided any temptation to jump to conclusions, let alone  pursue any particular ideologically defined goal in my enquiries, the findings presented in this paper are of a merely preliminary nature, since my acquaintance with von Mises’ work and milieu is (as yet) relatively superficial.  


[1] Independent researcher -- carlstoll@gmail.com
[2] First published in German as Kritik des Interventionismus: Untersuchungen zur Wirtschaftspolitik und Wirtschaftsideologie der Gegenwart. Jena: Gustav Fischer Verlag, 1929.  http://mises.org/etexts/mises/critique/contents.asp
[3] Indeed, in a different work [cite] von Mises claims that the only bad monopolies are those created or encouraged by government action. He claims he has never known a purely private monopoly that caused any ill effects.  It is indeed peculiar that von Mises at this juncture chooses to use as a standard of verification, not any existing theory of market failure, nor any empirical study, but rather the general impression he has received over his years practicing as an economist.  This is a lax standard indeed, that even on its face deserves no credit whatso.
[4]  E.g. the originally intended meaning of a “well-regulated” militia in the US constitution. It turns out that “well-regulated” meant something UTTERLY different from what you'd expect, by the way.
[5] Steven G. Medema: Mill, Sidgwick, and the Evolution of the Theory of Market Failure, revised draft, July 2004, online.
[6] Although he could indeed plausibly plead ignorance thereof, since his works appear to be entirely lacking in references to other authors! Not a single footnote far and wide!
[7] First published in German in Zeitschrift für die gesamte Staatswissenschaft [Journal for all the social sciences], vol. 81, 1926.
[8] Analogously “our generation” can stand for whatever time span the lag may last, whether it be weeks or decades,
[9][9] I reason as follows: von Mises denounces  “free-competition ideologues”. All obstacles to free competition are types of market failure (although the converse, namely that all market failures are also obstacles to free competition, is not necessarily true).  Consequently “free-competition ideologues” are by definition people who denounce alleged deficiencies in competition on the market place. Lags characterize all events of whatever type, including political, meteorological, psychological, physical, chemical, etc. phenomena.  Lags are hence a much more primordial and elemental phenomenon than market failures and long predate any exchange of commodities. Indeed they long predate the appearance of life on this planet! Accordingly lags can under no circumstances be classified as market failures, since they are not specific to markets, but instead reflect characteristics of matter as such. In other words lags displayed by economic phenomena are not necessarily related to any deficiency of competition, although they can be. However Lampe does not specify what sort of lag he means.  Consequently von Mises has no justification in assuming that Lampe meant only the sorts of lags that are caused by deficiencies in competition. If von Mises assumes that that is the sort of lag Lampe meant, it would appear to be because von Mises is over-sensitive to allegations of deficiencies in competition, and as a result sees attacks on the quality of competition where none are intended. Attack-dog syndrome.    
[10] Notably in Hayek’s deeply flawed work The Road to Serfdom, which I comment elsewhere.
[11] I was impressed by the acumen (regardless of its historical accuracy, which I cannot judge) revealed by his statement that huge landed estates had never developed under market conditions, since their excessive size tends to make them economically   inefficient. On the contrary, he writes, large landed estates arise solely as a result of coercion, thanks to the concentration of military might in the hands of a powerful minority. [cite] I think Che Guevara would have found this statement exceedingly interesting subject matter. 
[12] Perhaps he didn't read other economists’ writings.   
[13] I must confess that I lack the expertise to determine to what extent these faults are personally attributable to von Mises, or instead are typical of the economic writings of his period and/or his geographical and cultural sphere. They are  certainty much vaguer than Karl Marx or Friedrich List.    
One instance where von Mises’ vagueness assumes clinical proportions is the following: “[Socialist] dogma was contested only by a few economists who were very soon silenced and barred from access to the universities, the press, the leadership of political parties and, most importantly, public office.” No names, no dates, no places, nothing! ( L. von Mises: Middle of the Road Policy Leads to Socialism [cite]. [The underscored language marks a minor correction I made to the translation.])  Baffled by this claim, I appealed for guidance to the doughty regulars of the Ludwig von Mises Institute web site, but in vain, alas. Nobody was able to provide any details of these alleged historical events. 
So is history: for lack of a footnote a battle was lost. I’m neither confirming nor disputing that such events occurred. I know nothing of the subject. But without any sort of documentation these claims cannot be accepted by a critical reader and must be completely disregarded.