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 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.

Detour on the Road to Serfdom

Does government intervention in the  economy lead inexorably to tyranny? So it would have us believe, the doughty  Austrian school.

This essay is not a frontal assault against the Austrian School. It attacks a theory that is popular among Austrians, but is by no means central to Austrian methodology. On the contrary. what I have called the Hayek Effect  plays a minor role in Austrian thinking, and its abandonment would do little damage to the structure of its ideas.

Although I direct my criticism against two of the Austrians’ main thinkers, I do not reject wholesale the theoretical contributions of either Ludwig von Mises or Friedrich Hayek. On the contrary, I find that von Mises’ critique of socialism was prescient and has been confirmed, among others, by the a posteriori observations of the foremost homegrown critic of East European communist rule, Janos Kornai.. Although I criticize Hayek’s noted wok The Road to Serfdom, I sympathize with the  aversion he expresses to excessive state domiation of society.

Von Mises theories of socialism and of interventionism

Von Mises distinguishes between socialism = economic planning, where the state takes over running firms, from interventionism, where property reains in private hands, but the state places restrictions of various types on the private capitalist’s decision-making. The difference between socialism and interventionism, according to  von Mises, is that interventionism leads inevitably to socialism. So once a country has embarked on the road of interventionism, the last astop is always socialism, which implies complete lack of civil liberties, democracy, etc. thus restrictions of economic freedom lead to restrictions on political freedom. 

See Ludwig von Mises and Interventionism

Von Mises lists a number of arguments against socialism which have stood the test of time and were prominently noticeable in the planned economies of eastern Europe between 1948 and 1988.  His objections are principally that in socialism no one would have an incentive to work because they would all get paid anyway, etc. I won't go into detail of his arguments, since I agree with them on the whole.

Von Mises then goes about proving that interventionism leads to socialism. His exhibit A is price controls. Cite von Mises, Wilensky on price controls in health insurance. Harold Wilensky: Rich Democracies: Political Economy, Public Policy and Performance, University of Californis Press, 2002, pages 600 et seq.

I accept von Mises’ theory of how price controls lead to comprehensive regulation. However von Mises provides no evidence that other sorts of interventionism likewise have the dreaded snowball effect. In any case he provides no examples, but instead concludes triumphantly that his conclusions for price controls are also valid for other controls.

It is by no means obvious why that should be so. I have cudgeled my brains to contrive some kind of model where this necessity takes place, but in vain, alas.

Consequently we must conclude that von Mises not only fails to prove his point, but actually seems to be arguing himself into a trap, which he then adroitly avoids by simply ceasing to discuss the issue at all.

Hayek took over von Mises’ thesis in The Road to Serfdom and provided a number of extremely feeble arguments to back up the price control argument presented by von Mises.  I go into detail on this subject in my essay Why Hayek Sucks.

But suffice it to say that no persuasive argument is presented to back up the Hayek effect. Indeed, Hayek proves that he has no viable theory of the relative between politics and economics.

I now proceed to empirical verification of the Hayek Effect.

I shall argue firstly synchronically, comparing political liberties in two small eurn countries that have dramatic difference in economic structure, but not very big ones in political freedom.

Then I proceed to a diachronic analysis of Sweden. My argument is simple:

See Close Call on the Road to Serfdom

Von Mises simply declares dogmatically that all government intervention is bad. He nowhere attempts to prove it, except with respect to a single sector of interventionism, namely price controls.

 

Ludwig von Mises and Interventionism

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.