Critique of the New Liberals

After dealing with Sombart and others who had remained unrepentant champions of powerful central government, Mises turned to a critique of the more moderate branch of the kathedersocialist movement.²⁹ In the wake of the “crisis of social policy” these intellectuals had lost their faith in the blessings of an omnipotent government. They thought of themselves as “social liberals”—meaning that they recognized certain fundamental defects of free markets, and advocated government interventions to fix them. The leaders of this group were Heinrich Herkner, Lujo Brentano, and Leopold von Wiese. Their most important prewar predecessors were Eugen von Philippovich and Friedrich Naumann.³⁰

The German social-liberal movement's endeavor to appropriate the term “liberal” paralleled the strategy of Leonard Hobhouse in England and John Dewey in the United States.³¹ Both groups championed a much broader scope for government action than the classical liberals, whom they derided for their laissez-faire position. So why did they call themselves “liberals”? Their only claim to the word was that they did not believe in the ideal of all-out central planning. The omnipotent state threatened the core of individual freedom: the “civil liberties” of individual citizens. But in contrast to classical liberals, these new social liberals had no principled objection to far-reaching limitations of citizens' “economic liberties.” Such intrusions into private property rights could, they contended, be justified on various grounds, for example, the “principle” that there should be no income without work, or the contention that government intervention was needed to make the economy better resemble the model of perfect competition. They also argued that economic liberty was not truly liberal because it entailed a certain cold-heartedness to one's fellow citizens.

The rest was marketing. Anticipating an important maneuver of twentieth century party politics in western democracies, they presented themselves as liberals because of the positive connotations of the still-popular notion of individual liberty. The strategy worked so well that today the words “liberal” and “liberalism” are often taken to be the exact opposite of their original meaning.

Mises objected to this intellectual and practical confusion. He emphasized that what was at stake was not the use of words, but the substantial differences between an economy unhampered by government intervention, and an economic system characterized by such interventions. To use the word “liberal” in the new sense was to obscure these differences.

The new liberals gave the impression that politics concerned only the ends to be attained. The choice, they implied, was between cold-hearted and parasite-friendly economic liberties on the one hand, and warm-hearted, equitable civil liberties on the other.³² But Mises explained that this view was entirely unfounded. Politics is not about ends but about means. Classical liberals often cherished the same ideals as their socialist rivals. What set them apart was their practical program to attain those ideals: where classical liberalism championed the inviolability of private property, the defining mark of all other political orientations was that they sought to attain their ends through violations of private property rights.

In an ideal classical-liberal society, every man is sovereign within the boundaries of his property. All relations between human beings are based on mutual consent. Each person cooperates with others to promote common interests; if one side is unwilling, cooperation stops. This withdrawal from cooperation might appear brutal in the eyes of the other party, but the only way to prevent it would be to force the first party to continue against his will, which would no longer promote the common interests of both. What might seem to be the unsocial excesses of the capitalist order are therefore, in truth, desirable consequences of the fact that cooperation is based on mutual consent:

If, in a capitalistic society, the buyer seeks to buy an economic good wherever it is least expensive, without regard for other considerations, he does not act with “insensitivity toward suffering.” If the superior enterprise successfully competes with one working less economically, there is no “brutal use of elbows,” or “struggle to overpower and enslave fellow men.” The process in this case is no undesirable concomitant effect or “outgrowth” of capitalism, and unwanted by liberalism. On the contrary! The sharper the competition, the better it serves its social function to improve economic production. That the stagecoach driver was replaced by the railroad, the hand weaver by mechanical weaving, the shoemaker by the shoe factory, did not happen contrary to the intentions of liberalism. And when small ship-owners with sailing vessels were replaced by a large steamship company, when a few dozen butchers were replaced by a slaughterhouse, a few hundred merchants by a department store, it signifies no “overpowering and enslaving of fellow men.”³³

It is true that an ideal classical-liberal society has never existed: “the picture of what fully developed capitalism can achieve is incomplete at best, even if we reflect upon British society at the zenith of capitalism when liberalism was leading the way.”³⁴ Capitalism was thus an “unknown ideal,” as Ayn Rand would later say.³⁵ It is neither impossible nor undesirable to bring such a society about. Economic science shows both that it is a practical political option, and that all the alternatives to it are inferior. Socialism is necessarily less efficient than capitalism because it cannot rely on economic calculation; and interventionism does not work at all. Mises asserted: “Economic knowledge necessarily leads to liberalism.”³⁶ The best proof was that the social liberals had been unable to develop an alternative economic theory that would substantiate their agenda.

The outstanding example of the social liberals' intellectual impotence was the theory of wages. As the Webbs had done before him, Brentano attempted to prove that labor unions could raise the wage rates of all workers above the level they would have attained on the free market. Their writings had already received devastating criticism from Böhm-Bawerk, Pohle, and Adolf Weber.³⁷ In his article on “Social Liberalism” Mises finished the job. He added that even if it were possible for labor unions to raise wage rates to some degree for all workers, there was another fundamental question to be asked:

If labor unions actually had the power to raise the average wage of all workers above the rate that would prevail without their intervention, the question remains, How high can wages go? Can average wages go so high that they absorb all “unearned” income and must be paid out of capital? Or is there a lower limit at which this rise must stop? This is the problem the “power theory” must answer with regard to every price. But until today no one has ever tried to solve the problem.³⁸

In other words, if the labor unions (or whoever else) really can increase wages rates for all by a mere display of power, that is, if prices really depend on power rather than on economic law, then why ask for wage increases of, say, 10 percent? Why not ask increases of 100 percent or 1,000 percent or 1,000,000 percent? To ask this question is to answer it. The wages-are-a-matter-of-bargaining-power theory is an absurdity.

Because the social liberals were aware of these problems, they denied the validity of economic science altogether. But, as Mises showed, this self-serving attitude amounted to an intellectual abdication and served to create a dangerous political vacuum. The social liberals even denied that present problems would ever be solved. For decades they had accustomed the German people to the notion that willpower and strength are the driving forces of all social processes. Now, at a time when they themselves had lost their faith in the omnipotent state, they left the people with old prejudices and no outlet. In his conclusion, Mises spelled out the grave political dangers of a situation in which the masses demand the establishment of socialism and their political leaders are unwilling to comply:

Politics does not dare introduce what the prevailing ideology is demanding. Taught by bitter experience, it subconsciously has lost confidence in the prevailing ideology. In this situation, no one, however, is giving thought to replacing the obviously useless ideology with a useful one. No help is expected from reason. Some are taking refuge in mysticism, others are setting their hopes on the coming of the “strong man”— the tyrant who will think for them and care for them.³⁹

Mises submitted the manuscript of “Social Liberalism” at the end of February 1926.⁴⁰ At this point he had already made up his mind about his next two books. The first would be a collection of his papers criticizing the different manifestations of the interventionist creed. It would feature his “Anti-Marxism” and “Social Liberalism” as well as one or two new pieces to generalize his thesis from the “Theory of Price Controls.” The second book would spell out the political implications of these findings from a classical-liberal point of view. As it turned out, the second book appeared first, in 1927, under the title Liberalismus (Liberalism); the other book was published only two years later under the title Kritik des Interventionismus (Critique of Interventionism).