Thursday, June 27, 2013

Interventionism

Mises' first lecture in Argentina in 1959 is about capitalism. In it, he exposed not a few erroneous ideas people had about capitalism. I skipped the second lecture, which is about socialism and went straight to the third lecture where Mises explained what interventionism is all about. 

Mises understands interventionism as the inclination of government to go beyond its appropriate function into the affairs of the free market. In short, interventionism is all "about government interference with the market" (p.40). Specifically, this means government interference "with prices, with wage rates, interest rates, and profits" (ibid.). Both the immediate and the long-term results of such interference will be the transfer of economic power from the consumers to the state and the bureaucrats.

Consumer sovereignty is the distinguishing mark in capitalism. So interventionism despite of its claim to preserve the fruits of capitalism, is actually working to destroy it. This is because interventionism is the other face of socialism (That's why when I was asked to define socialism, I simply replied that it is an economic system that gradually and persistently eroding the purchasing power of the consumers. I am simply following Mises in this conception. By socialism, I am not referring to the Marxian-Russian type, but to German type, which is prevalent these days.).

In this third lecture, we will see the real nature of this other form of socialism. And in order to do that, I would like to divide this article into five sections:

  • Proper role of the government

  • Mixed Economy

  • Price Control

  • Rent Control

  • Cartels

Proper Role of the Government

Interventionism is connected to the discussion about the proper role of the government. There are at least three views about the role of the government in relation to the free market. One is the idea that it is justified for the government to go beyond its proper function to protect its people. Another idea known as anarchism advocates the total abolition of government. And the third is the idea that the government has limited function.

In Mises' lecture, there's no hint related to the present debate within the libertarian camp between anarchism and minarchism. As I know Murray Rothbard is an advocate of anarchism or total absence of state government while Ludwig von Mises supports minarchism or limited government. 

In "How and How Not to Desocialize" posted last June 24 in mises.org, Rothbard speaks about an "act of self-immolation" on the part of the state for it to completely vanished from the scene. In Mises case, his idea of limited government is contrary to the popular saying, "That government is best, which governs least." For him, limited government means that a government ought to perform the very purpose for its establishment. And this includes protection of citizens both from domestic and foreign threats. 

Mixed Economy

Even though Mises does not believe in the existence of third economic system, for him the problem of interventionism should not be confused with the existence of the so-called "mixed economy". He understands mixed economy as an economic system where both private and public ownerships of corporations are allowed. 

Price Control

In order to clarify the distinction between mixed economy and interventionism, Mises gave three examples - price control, rent control and cartels. Under this section, we will see two historical examples of the failure of price control, an analysis of reasons for such failure, its extension to other products, and its end result.

1. Historical Examples

Examples of price control in the past tell us about the response of the government once prices started to increase as a result of inflating the money supply. Mises gave two examples: the Roman Emperor Diocletian and French Revolution.

The Roman emperor debased the silver coins in the second hald of the 3rd century. The government mixed increasing amount of copper into the silver coins. This is currency debasement that resulted into price increase followed by price control. Those who violated this law were severely punished. The final outcome "was the disintegration of the Roman Empire and the system of the division of labor" (p.41).

Similar mistake was repeated during the French Revolution. Since printing press had already been invented, the French used a different mode of currency debasement. They increased the money supply by printing huge quanitity of paper currency. The immediate result was price increase and again followed by price control. Even the method in punishing the violators was also changed. This time, it was through guillotine. 

2. The Reasons for Failure

In analyzing the failure of price control, Mises takes milk as an example. It all starts with people's dissatisfaction with the increasing price of milk. As a response, the government decides to fix the maximum price for milk, which is lower than the market price. Two immediate results will follow: the demand for milk will increase and the producers of milk will suffer loss as a result of lower price.

In order to continue and protect the business from the impact of government imposed price, it is natural that producers will do the following action: restrict milk production, reduce the number of cows by selling them and focus instead on other products made out of milk. The long-term results then of price control will be less supply of milk, greater demand, price increase, smaller number of people can avail the product, and rationing. 

3. Extension to Other Products

Then the government will inquire the reason for less supply of milk. The producers will respond that the cost of production is higher than the government imposed price. And as the government traces other items necessary for production, these items will be subjected also to price control. The same result that happened in the milk supply will also occur to related items. And if the government does the same thing with other basic necessities, similar result will take place. 

4. End Result

The final result of government interference in the market is socialism. This happened both in Germany and Great Britain in World War 1. Both countries inflated their money supply, which resulted to price increase and imposition of price controls. The government of Germany controlled the entire national economy through the "Hindenburg Plan" that resulted to the collapse of bureaucratic apparatus and bloody end. England would also about to suffer the same fate, if not for the entrance of the US into war that provided the necessary supply. 

During the 2nd World War, the same process was repeated. Price control was already present before Hitler came to power. During Hitler's time, the free enterprise was still allowed to operate but no longer under the control of entrepreneurs. Instead, they were called shop keepers. The entire operation of the free market is but a show. Everything is regulated from the kind and quantity of products, source and price of raw materials, buyers and price of goods to the designated works for people and amount of salary. This is the free market under German socialism. 

Great Britain followed the same pattern. It became socialist during the time of Sir Winston Churchill. Nationalization was the game of the day. For Mises, the difference between the two countries is unimportant for in both cases, it was the government's order, which had to be obeyed in all areas. 

Rent Control

The same process in controlling the price of milk is applicable in housing. Housing shortage is an outcome of similar mechanism, but this time, it is rent control. 

Mises identifies a series of results from rent control: people will not choose to transfer to smaller apartments when their conditions changed, many cities in the US suffered financial difficulty, shortage in housing, and then the government spent billions for building of new houses. 

Cartels

Another economic consequence of interventionism in the form of "protectionism" is the formation of cartels. Mises describes the formation of cartels as a result of the government's attempt "to isolate the domestic market from the world market" (pp. 51-52). Then the government "introduces tariffs which raise the domestic price of a commodity above the world market price, making it possible for domestic producers to form cartels" (p.52). Once cartels are formed, the government will call for anti-cartel legislation. Observing the process, you will see the absurdity of the government's call for legislation while in fact, cartels are formed due to its intervention. So if the government really wants to stop cartels, it must stop intervening in the affairs of the market. 

Conclusion

Interventionism is not a new development. It is a revival of an old idea that a king was the "messenger of God" with supernatural powers. It came back to the modern times through the influence of a German professor, Werner Sombart. This professor believes that Hitler's orders directly came from God Himself, "the Fuhrer of the Universe". For Mises, the return of this belief is inexcusable in modern times and in a country recognized "as the nation of philosophers and poets" (p.54). The only remedy to interventionism is the power of the citizens.

A personal remark before I end. I agree that the key to limit the power of the government is through the citizen's power. However, students of liberty have a big role to fulfill in educating the people to know that power. 

Concerning Mises' statement related to the revival of an old idea, I find it contradictory. I have reservation when it comes to kings' possession of supernatural powers. And I do not understand what Mises exactly meant by that. But concerning his denial of a king as God's messenger, this is understandable for as far as I know, in his system of economic thought, metaphysical existence is denied. So the plain teaching in Romans 13 that "the one in authority" as God's servant has no place in his mind. 



Source: Mises, Ludwig von. (1979). Economic Policy: Thoughts for Today and Tomorrow. Chicago: Regnery/Gateway, Inc.