Mises and the Neo-Liberals

The disagreement on the question of socialist calculation was but a symptom of a larger dissent between Mises and his erstwhile comrades-in-arms.

Not only did Mises unabashedly defend the central tenets of the Manchester School, which had by then fallen into general disrepute, he went beyond them. He showed that any third-way system was inherently unstable because it could not solve the problems it purported to solve, and thus motivated ever more government intervention until the interventionist system had been transformed into outright socialism. But socialism was not viable. There remained only one meaningful option: 100 percent capitalism. Again and again, Mises insisted that there was no choice in this matter. It was ludicrous to speculate about some particular third-way policy that would fit the sensibilities of a given group. Society was viable only to the extent that private property rights were respected, and that was that.

This message resonated well with the old liberals, who marveled at such a splendid restatement of the ideals of their youth. But Mises's views were received less wholeheartedly by the rising generation, which had been raised in an intellectual environment soaked in statism. Their school teachers and university professors had come to endorse all the main ideas behind the case for socialism: the doctrine of class conflict and class struggle, the notion of the immiseration of the working classes under capitalism, and the belief that an unfettered capitalist system tended toward monopoly.

On the positive side, Mises had definitely dethroned fullblown socialism as a policy ideal. The energies of Hayek, Machlup, Haberler, Robbins, Perroux, and Röpke—men who would play a significant role in shaping post-World War II policies in the western world—no longer served the idol of omnipotent government. This proved to be of decisive importance for the course of history. But Mises's influence proved too weak to inspire in them the courage necessary for a wholehearted return to the kind of vibrant liberalism that had characterized the Manchester School and the worldwide laissez-faire movement of the nineteenth century.

Mises had not yet published the systematic treatise on economic science that would have clarified the scientific case for unfettered capitalism. He had presented some important elements of his general economic theory of social systems, but before 1940 it was not yet clear how these elements interrelated and on which general analytical framework they relied. In 1940, Mises finally published such a general treatise under the title of Nationalökonomie—Theorie des Handelns und Wirtschaftens. But by 1940, Hayek was fifty-one years old and an established scholar; the book came too late for him, and it also came too late for the rest of his generation—for the Röpkes and Machlups and Robbinses and all the others Mises had steered away from socialism in the 1920s. In the minds of these men, Mises's early work on the impossibility of socialism and the ineffectiveness of interventionism had created a paradox. Mises had convinced them that fullblown socialism was neither feasible nor desirable; they were also persuaded that third-way systems were overrated. But many of them did not yet question the claim that nineteenth-century liberalism had failed because its economic program, laissez-faire capitalism, had not delivered the goods. They believed it to be a simple matter of fact that the unfettered free market tends toward monopoly, and that the nineteenth-century working classes had lived in misery because of laissez-faire capitalism.⁵⁰

For these men, theory had disproved the viability of socialism, and history had proven the defects of capitalism. What was needed was a third way—a third way that could somehow get around Mises's demonstration that interventionism was necessarily counter-productive. The solution that emerged in the 1930s was based on an intellectual construct that split the social economy into two elements: (1) an institutional framework, and (2) the processes that played themselves out within that framework—most notably the pricing process. According to this new creed, government should not meddle with the processes but it did have to establish and maintain the institutional framework. This set of assumptions is characteristic of what has come to be called neo-liberalism.

We find a clear expression of the neo-liberal worldview in a paper Hayek wrote in 1935. Commenting on Mises's theory of interventionism, Hayek observes that it did not follow from Mises's argument that “the only form of capitalism which can be rationally advocated is that of complete laissez faire in the old sense.” He continued:

The recognition of the principle of private property does not by any means necessarily imply that the particular delimitation of the contents of this right as determined by the existing laws are the most appropriate. The question as to which is the most appropriate permanent framework which will secure the smoothest and most efficient working of competition is of the greatest importance and one which must be admitted has been sadly neglected by economists.⁵¹

The roots of the neo-liberal ideology went back at least to the 1880s and 1890s, when German economists of the Historical School and their American disciples became convinced that industrial concentration has harmful effects and required moderation through government intervention. One of the visible consequences of this mindset was the Sherman Act, which to the present day has replaced the power of consumers with that of bureaucrats. In Germany, the philosophy of the third way became pervasive in the Sozialpolitik instigated under Kaiser Wilhelm. France followed, invoking the necessity of a tierce solution, as did the United States under the New Deal.

Still the first programmatic statements of neo-liberalism were published only in the 1930s—again, unsurprisingly, in Germany and the United States. The most influential statement came from Chicago economist Henry Simons, who in 1934 circulated a working paper with the title “A Positive Program for Laissez Faire”—in which the word “positive” indicated that this program justified ample government intervention, whereas classical laissez faire was a “negative” program in that it did not provide such a justification. Simons called on government to regulate money and banking, prevent the formation of monopolies, and provide minimum income for the destitute—a departure indeed from laissez-faire liberalism.⁵²

These ideas perfectly expressed the feelings of a generation of economists who had been raised in a thoroughly statist intellectual environment, but who still knew the teachings of the classical liberals. F.A. Hayek, Wilhelm Röpke, Fritz Machlup, Milton Friedman, Michael Polanyi, Walter Eucken, and many others received their university training and their decisive intellectual impulses during the 1920s and early 1930s. During the later 1930s they began to acquire more senior positions and would, after the World War II, assume intellectual leadership on the Right.⁵³ Their neo-liberalism animated the work of the postwar institutions that would stem the tide of growing statism, in particular, the Mont Pèlerin Society and the Institute for Economic Affairs in London. In more recent years, the neo-liberal agenda is carried forward by a new wave of educational institutions, such as the Institute for Humane Studies, the Cato Institute, and the Atlas Research Foundation.