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 19^th 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.