Von Mises gives a very restrictive definition of interventionism, i.e. government
measures affecting the economy, and then
proceeds to attack it. But as a result of the restrictive original definition, his
assault is along a narrow front and his criticisms are consequently directed
against a rather minor set of government measures. There are many instruments
of economic policy that he fails to criticise or even mention when attacking
interventionism so narrowly defined!
The reason for this seems to be that many more mechanisms of state
influence exists nowadays than in von Mises’ time. Accordingly von Mises’
critique appears at first blush to be dated and inadequate to provide an
effective critique of most contemporary economic policy instruments.
Interventionism, says von Mises, “does not seek to abolish private
property in production; it merely wants to limit it.”
Mises writes:
We must distinguish between two groups of [interventionist
policies]. One group directly reduces or impedes economic production (in the
broadest sense of the word including the location of economic goods). The other
group seeks to fix prices that differ from those of the market. The former may
be called “restrictions of production”; the latter, generally known as price
controls, we are calling “interference with the structure of prices.
In a footnote he gives his reasons for omitting a third group:
There may be some doubt about the suitability of a
third group: interference by taxation which consists of expropriation of some
wealth or income. We did not allow for such a group because the effects of such
intervention may in part be identical with those of production restrictions, and
in part consist of influencing the distribution of production income without
redirecting production itself.
Henceforth in this essay I will refer to the first type mentioned as “type
1 interventionism” and to price fixing as “type 2 interventionism”.
He fails to include in interventionism any government measures that
instead of hampering private business, stimulate it. Nonetheless common sense
seems to require that these too be included in interventionism. However we know
from other writings of von Mises that he denies that government measures can
ever have any stimulating effect on business. Hence he is not inconsistent on
this point. His inconsistency is with the facts.
He excludes from his definition of interventionism the following:
1
“Partial socialization of the means
of production”
2
“Government measures that use market
means”
Von Mises’ theory of how interventionism leads to socialism restricts
itself to discussion of price controls. Other forms of interventionism are
ignored. This is his account:
When the unhampered market determines prices, or would
determine prices if government had not interfered, the proceeds cover the cost
of production. If government sets a lower price, proceeds fall below cost. Merchants
and producers will now desist from selling—excepting perish¬able goods that
quickly lose value—in order to save the goods for more favorable times when, hopefully,
the control will be lifted. If government now endeavors to prevent a good’s
disappearance from the market, a consequence of its own intervention, it cannot
limit itself to setting its price, but must simultaneously order that all
available supplies be sold at the regulated price.
Even this is inadequate. At the ideal market price
supply and demand would coincide. Since government has decreed a lower price
the demand has risen while the supply has re¬mained unchanged. The available
supply now does not suf¬fice to satisfy the demand at the fixed price. Part of
the de¬mand will remain unsatisfied. The market mechanism, which normally
brings demand and supply together through changes in price, ceases to function.
Customers who were willing to pay the official price turn away in
dis¬appointment because the early purchasers or those who per¬sonally knew the
sellers had bought the whole supply. If government wishes to avoid the
consequences of its own in¬tervention, which after all are contrary to its own
intention, it must resort to rationing as a supplement to price controls and
selling orders. In this way government determines the quantity that may be sold
to each buyer at the regulated price.
A much more difficult problem arises when the supplies
that were available at the moment of price intervention are used up. Since
production is no longer profitable at the reg¬ulated price, it is curtailed or
even halted. If government would like production to continue, it must force the
produc¬ers to continue, and it must also control the prices of raw materials, semifinished
products, and wages. But such controls must not be limited to a few industries
which govern¬ment meant to control because their products are believed to be
especially important. The controls must encompass all branches of production, the
prices of all goods and all wages, and the economic actions of all
entrepreneurs, capi¬talists, landowners, and workers. If any industry should
re¬main free, capital and labor will move to it and thus frustrate the purpose
of government’s earlier intervention. Surely, government would like an ample
supply of those products it deemed so important and therefore sought to
regulate. It never intended that they should now be neglected on ac¬count of
the intervention.
In Interventionism, von Mises
devotes twice as many words to price-setting as to type 1 restrictions. I
think this reflects his opinion of their relative importance.
From von Mises’ broad definition of interventionism, we must conclude that
such measures as hygiene standards for food vendors, medical degrees for
doctors, indeed any measure to standardise production and trade and to make
them more predictable, make tradesmen more honest, etc. are interventionism and
consequently undesirable. In several
places he admits that many people favor certain restrictions even when they hamper efficiency,
and that they do so on the grounds that a non-economic goal is being thereby
served, whose importance warrants disregard of economic efficiency. He does not
dispute this argument, but neither does he espouse it, but rather shrouds
himself in Sibylline ambivalence.
I think this ambivalence betrays an unresolved dilemma in von Mises’
theory: how are we to draw a dividing line between type 1 interventionism and
the measures the government must make in order to establish and assure
continued operation of a market? Does building a Stock Exchange and requiring
brokers to do business inside the building, to facilitate comparison and
control, likewise constitute an abominable type 1 restriction?
Von Mises prudently refrained from going into detail about how type 1
interventionism could lead to socialism. Indeed it is difficult to see how type
1 interventionism would be able to obtain the requisite dynamic spreading
effect. The inexorable spreading out of government control of type 2 is a
direct consequence of the fact that the price charged by a seller of a raw
material is the cost paid by the buyer of such raw material who will transform
it into something an intermediate good, sell it to a consumer goods
manufacturer, etc. There is a clear causal chain connecting all successive
transactions. But in type 1 interventionism we search in vain for any mechanism
that could make the original government measure spread, unless it be evasion. [Check].
Although von Mises has not provided any evidence that type 1
interventionism tends to snowball, he calmly concludes that the conclusion from
type 2 is also valid for type 1: “Our analysis thus reveals that in a private
property order isolated intervention [unspecified, and hence encompassing
both types 1 & 2] fails to achieve what its sponsors hoped to achieve.”
Where he does criticize type 1 interventionism specifically, it is only
because it allegedly reduces productivity or otherwise renders the economy
inefficient. No mention here of any snowball effect.
Mises claims in defense of his thesis that “The old liberalism which built
its economic policies on the teachings of classical economics therefore
categorically rejected all such interventions.” This is nonsense. In several
places in The Wealth of Nations Smith espouses government action [check].
Von Mises is no doubt right in rejecting price controls. I suspect that it
is largely due to von Mises’ writings that price controls have fallen into such
disrepute. Their rejection has become conventional wisdom.
State Planning
Von Mises’ critique of state planning is restricted to his 1919 article
denying the possibility of rational price calculations in socialism. Other than
that his efforts were directed against interventionism.
What role do open-market operations
play in von Mises’ scheme of things?
(Namely, when the government purchases or sells good in order to give
them away or sell them at a different price). Presumably he deems them
inefficient.
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