Interventionism; L. von Mises

These are the functions of govern ment within a free system, within the system of the market economy. Under socialism, of course, the government is totalitarian, and there is nothing outside its sphere and its jurisdiction. But in the mar ket economy the main task of the government is to protect the smooth 84 functioning of the market economy against fraud or violence from within and from outside the country. People who do not agree with this definition of the functions of gov ernment may say: ((This man hates the government." Nothing could be farther from the truth. If I should say that gasoline is a very useful liquid, useful for many purposes, but that I would nevertheless not drink gasoline because I think that would not be the right use for it, I am not an enemy of gasoline, and I do not hate gasoline. I only say that gasoline is very useful for certain purposes, but not fit for other pur poses. If I say it is the government's duty to arrest murderers and other criminals, but not its duty to run the railroads or to spend money for use less things, then I do not hate the INTERVENTIONISM 85 government by declaring that it is fit to do certain things but not fit to do other things.

It has been said that under present-day conditions we no longer have a free market economy. Under present-day conditions we have something called the ~~mixed econ omy." And for evidence of our ~~mixed economy," people point to the many enterprises which are op erated and owned by the govern ment. The economy is mixed, peo ple say, because there are, in many countries, certain institutions-like the telephone, telegraph, and rail roads-which are owned and oper ated by the government. That some of these institutions and enterprises are operated by the government is certainly true. But this fact alone does not change the character of our economic system. It does not even mean there is a ~~litt1e socialism" within the otherwise nonsocialist, free market economy. For the government, in operating these enterprises, is subject to the supremacy of the market, which means it is subject to the supremacy of the consumers. The government -if it operates, let us say, post of fices or railroads-has to hire peo ple, who have to work in these en terprises. It also has to buy the raw materials and other things that are needed for the conduct of these en terprises. And on the other hand, it ~~sells" these services or commodities to the public. Yet, even though it operates these institutions using the methods of the free economic system, the result, as a rule, is a deficit. The government, however, is in a position to finance such a def icit-at least the members of the government and of the ruling party believe so.

It is certainly different for an in dividual. The individual's power to operate something with a deficit is very limited. If the deficit is not very soon eliminated, and if the enter prise does not become profitable (or at least show that no further deficit and losses are being incurred) the individual goes bankrupt and the enterprise must come to an end. But for the government, condi tions are different. The government can run at a deficit, because it has the power to tax people. And if the taxpayers are prepared to pay higher taxes in order to make it possible for the government to operate an enter prise at a loss-that is, in a less efficient way than it would be done by a private institution-and if the public will accept this loss, then of course the enterprise will continue. Intervention Breeds Inflation In recent years, governments have increased the number of na tionalized institutions and enter prises in most countries to such an extent that the deficits have grown far beyond the amount that could be 86 THE FREEMAN February collected in taxes from the citizens.

What happens then is not the sub ject oftoday's lecture. It is inflation, and I shall deal with that tomorrow. I mentioned this only because the mixed economy must not be con fused with the problem of interven tionism, about which I want to talk tonight. What is interventionism? Inter ventionism means that the govern ment does not restrict its activity to the preservation of order, or-as people used to say a hundred years ago-to ~~the production of security." Interventionism means that the government wants to do more. It wants to interfere with market phenomena. If one objects and says the gov ernment should not interfere with Ludwig von Mises, 1881-1973, was one of the great defenders of a rational eco nomic science, and perhaps the single most creative mind at work in this field in our century. Found among the papers of Dr. Mises were transcripts of lectures he delivered in Argentina in 1959. These have now been edited by his widow and are avail able as a Regnery/Gateway paper backed book. This article, one of the lectures, is here reprinted by permission of the publishers. All rights reserved.

The book, Economic Policy: Thoughts for Today and Tomorrow, also may be purchased at $4.95 from The Founda tion for Economic Education, Inc., Irvington-on-Hudson, N.Y. 10533. business, people very often answer: ~~But the government necessarily always interferes. If there are policemen on the street, the gov ernment interferes. It interferes with a robber looting a shop or it prevents a man from stealing a car." But when dealing with interven tionism, and defining what is meant by interventionism, we are speaking about government interference with the market. (That the government and the police are expected to pro tect the citizens, which includes businessmen, and of course their employees, against attacks on the part of domestic or foreign gang sters, is in fact a normal, necessary expectation of any government. Such protection is not an interven tion, for the government's only legi1980 INTERVENTIONISM 87 timate function is, precisely, to pro duce security.) What we have in mind when we talk about interventionism is the government's desire to do more than prevent assaults and fraud. Inter ventionism means that the govern ment not only fails to protect the smooth functioning of the market economy, but that it interferes with the various market phenomena; it interferes with prices, with wage rates, interest rates, and profits.

The government wants to inter fere in order to force businessmen to conduct their affairs in a different way than they would have chosen if they had obeyed only the consumers. Thus, all the measures of interven tionism by the government are di rected toward restricting the supremacy of consumers. The gov ernment wants to arrogate to itself the power, or at least apart of the power, which, in the free market economy, is in the hands of the con sumers. Let us consider one example of interventionism, very popular in many countries and tried again and again by many governments, espe cially in times of inflation. I refer to price control. Governments usually resort to price control when they have in flated the money supply and people have begun to complain about the resulting rise in prices. There are many famous historical examples of price control methods that failed, but I shall refer to only two of them because, in both these cases, the governments were really very energetic in enforcing or trying to enforce their price controls.

Price Controls in Ancient Rome and during the French Revolution The. first famous example is the case of the Roman Emperor Diocle tian, very well-known as the last of those Roman emperors who perse cuted the Christians. The Roman emperor in the second part of the third century had only one financial method, and this was currency debasement. In those primitive ages, before the invention of the printing press, even inflation was, let us say, primitive. It involved debasement of the coinage, espe cially the silver. The government mixed more and more copper into the silver until the color of the silver coins was changed and the weight was reduced considerably. The re sult of this coinage debasement and the associated increase in the quan tity of money was an increase in prices, followed by an edict to con trol prices. And Roman emperors were not very mild when they en forced a law; they did not consider death too mild a punishment for a man who had asked for a higher price. They enforced price control, but they failed to maintain the soci ety. The result was the disintegra88 THE FREEMAN February tion of the Roman Empire and the system of the division of labor.

Then, 1500 years later, the same currency debasement took place during the French Revolution. But this time a different method was used. The technology for producing money was considerably improved. It was no longer necessary for the French to resort to debasement of the coinage: they had the printing press. And the printing press was very efficient. Again, the result was an unprecedented rise in prices. But in the French Revolution maximum prices were not enforced by the same method of capital punishment which the Emperor Diocletian had used. There had also been an improve ment in the technique of killing citi zens. You all remember the famous Doctor J. I. Guillotin (1738-1814), who invented the guillotine. Despite the guillotine the French also failed with their laws of maximum price. When Robespierre himself was carted off to the guillotine the people shouted, ~~There goes the dirty Maximum."

I wanted to mention this, because people often say: ~~What is needed in order to make price control effective and efficient is merely more brutal ity and more energy." Now cer tainly, Diocletian was very brutal, and so was the French Revolution. Nevertheless, price control mea sures in both ages failed entirely. Now let us analyze the reasons for this failure. The government hears people complain that the price of milk has gone up. And milk is cer tainly very important, especially for the rising generation, for children. Consequently, the government de clares a maximum price for milk, a maximum price that is lower than the potential market price would be. Now the government says: ~~Cer tainly we have done everything needed in order to make it possible for poor parents to buy as much milk as they need to feed their children." But what happens? On the one .hand, the lower price. of milk in creases the demand for milk; people who could not afford to buy milk at a higher price are now able to buy it at the lower price which the govern ment has decreed. And on the other hand some of the producers, those producers of milk who are producing at the highest cost-that is, the marginal producers-are now suf fering losses, because the price which the government has decreed is lower than their costs. This is the important point in the market econ omy.

Milk Production Curbed The private entrepreneur, the private producer, cannot take losses in the long run. And as he cannot take losses in milk, he restricts the production of milk for the market. He may sell some of his cows for the slaughter house, or instead of milk 1980 INTERVENTIONISM 89 he may sell some products made out of milk, for instance sour cream, butter or cheese. Thus the government's interfer ence with the price of milk will re sult in less milk than there was before, and at the same time there will be a greater demand. Some peo ple who are prepared to pay the government-decreed price cannot buy it. Another result will be that anxious people will hurry to be first at the shops. They have to wait outside. The long lines of people waiting at shops always appear as a familiar phenomenon in a city in which the government has decreed maximum prices for commodities that the government considers as im portan t. This has happened everywhere when the price of milk was controlled. This was always prognosticated by economists. Of course, only by sound economists, and their number is not very great.

But what is the result of the gov ernment's price control? The gov ernment is disappointed. It wanted to increase the satisfaction of the milk drinkers. But actually it has dissatisfied them. Before the gov ernment interfered, milk was ex pensive, but people could buy it. Now there is only an insufficient quantity of milk available. There fore, the total consumption of milk drops. The children are getting less milk, not more. The next measure to which the government now resorts, is rationing. But rationing only means that certain people are privileged and are getting milk while other people are not getting any at all. Who gets milk and who does not, of course, is always very arbitrarily determined. One order may determine, for example, that children under four years old should get milk, and that children over four years, or between the age of four and six should get only half the ration which children under four years re ceive.

Feed Prices Controlled Whatever the government does, the fact remains, there is only a smaller amount of milk available. Thus people are still more dissatis fied than they were before. Now the government asks the milk producers (because the government does not have enough imagination to find out for itself): ttWhy do you not produce the same amount of milk you pro duced before?" The government gets the answer: ((We cannot do it, since the costs of production are higher than the maximum price which the government has established." Now the government studies the costs of the various items of production, and it discovers one of the items is fod der. ttOh," says the government, ((the same control we applied to milk we will now apply to fodder. We will determine a maximum price for fod90 THE FREEMAN February der, and then you will be able to feed your cows at a lower price, at a lower expenditure. Then everything will be all right; you will be able to produce more milk and you will sell more milk."

But what happens now? The same story repeats itself with fodder, and as you can understand, for the same reasons. The production of fodder drops and the government is again faced with a dilemma. So the gov ernment arranges new hearings, to find out what is wrong with fodder production. And it gets an explana tion from the producers of fodder precisely like the one it got from the milk producers. So the government must go a step farther, since it does not want to abandon the principle of price control. It determines max imum prices for producers' goods which are necessary for the produc tion of fodder. And the same story happens again. Other Products Affected The government at the same time starts controlling not only milk, but also eggs, meat, and other neces sities. And every time the govern ment gets the same result, everywhere the consequence is the same. Once the government fixes a maxim urn price for consumer goods, it has to go farther back to produc ers' goods, and limit the prices of the producers' goods required for the production of the price-controlled consumer goods. And so the gov ernment, having started with only a few price controls, goes farther and farther back in the process of pro duction, fixing maximum prices for all kinds of producers' goods, includ ing of course the price of labor, be cause without wage control, the government's ((cost control" would be meaningless.

Moreover, the government cannot limit its interference into the mar ket to only those things which it views as vital necessities, like milk, butter, eggs, and meat. It must necessarily include luxury goods, because if it did not limit their prices, capital and labor would abandon the production of vital necessities and would turn to pro ducing those things which the gov ernment considers unnecessary lux ury goods. Thus, the isolated inter ference with one or a few prices of consumer goods always brings about effects-and this is important to realize-which are even less satis factory than the conditions that pre vailed before: before the government interfered, milk and eggs were ex pensive; after the government in terference they began to disappear from the market. The government considered those items to be so important that it interfered; it wanted to increase the quantity and improve the supply.

The result was the opposite: the iso lated interference brought about a 1980 INTERVENTIONISM 91 condition which-from the point of view of the government-is even more undesirable than the previous state of affairs which the govern ment wanted to alter. And as the government goes farther and farther, it will finally arrive at a point where all prices, all wage rates, all interest rates, in short, everything in the whole economic system, is determined by the gov ernment. And this, clearly, is socialism. Controls After World War I What I have told you here, this schematic and theoretical explana tion, is precisely what happened in those countries which tried to en force a maximum price control, where governments were stubborn enough to go step by step until they came to the end. This happened in the First World War, in Germany and England. Let us analyze the situation in both countries. Both countries ex perienced inflation. Prices went up, and the two governments imposed price controls. Starting with a few prices, starting with only milk and eggs, they had to go farther and farther. The longer the war went on, the more inflation was generated.

And after three years of war, the Germans-systematically as always -elaborated a great plan. They called it the Hindenburg Plan: everything in Germany considered to be good by the government at that time was named after Hindenburg. The Hindenburg Plan meant that the whole German economic system should be controlled by the govern ment: prices, wages, profits . . . everything. And the bureaucracy im mediately began to put this into effect. But before they had finished, the debacle came: the German em pire broke down, the entire bureau cratic apparatus disappeared, the revolution brought its bloody results-things came to an end. In England they started in the same way, but after a time, in the spring of 1917, the United States entered the war and supplied the British with sufficient quantities of everything. Therefore the road to socialism, the road to serfdom, was interrupted. Hitler's Germany Before Hitler came to power, Chancellor Bruning again intro duced price control in Germany for the usual reasons. Hitler enforced it, even before the war started. For, in Hitler's Germany, there was no pri vate enterprise or private initiative.

In Hitler's Germany there was a system of socialism which differed from the Russian system only to the extent that the terminology and labeIs of the free economic system were still retained. There still existed ~(private enterprises," as they were called. But the owner was 92 THE FREEMAN February no longer an entrepreneur, the owner was called a ((shop manager" (Betrie bsfiihrer ). The .whole of Germany was or ganized in a hierarchy of fUhrers; there was the Highest Fiihrer, Hit ler of course, and then there were fiihrers down to the many hierar chies of smaller fiihrers. And the head of an enterprise was the Be triebsfuhrer. And the workers of the enterprise were named by a word that, in the Middle Ages, had sig nified the retinue of a feudal lord: the Gefolgschaft. And all of these people had to obey the orders issued by an institution which had a terri bly long name: Reichsfuhrer wirtschaftsministerium, at the head of which was the well-known fat man, named Goering, adorned with jewelry and medals.

And from this body of ministers with the long name came all the orders to every enterprise: what to produce, in what quantity, where to get raw materials and what to pay for them, to whom to sell the prod ucts and at what prices to sell them. The workers got the order to work in a definite factory, and they received wages which the government de creed. The whole economic system was now regulated in every detail by the government. The Betriebsfuhrer did not have the right to take the profits for him self; he received what amounted to a salary, and if he wanted to get more he would, for example, say: ((I am very sick, I need an operation im mediately, and the operation will cost 500 Marks," then he had to ask the fiihrer of the district (the Gaufuhrer or Gauleiter) whether he had the right to take out more than the salary which was given to him. The prices were no longer prices, the wages were no longer wages, they were all quantitative terms in a sys tem of socialism.

Now let me tell you how that system broke down. One day, after years of fighting, the foreign armies arrived in Germany. They tried to preserve this government-directed economic system, but the brutality of Hitler would have been necessary to preserve it and, without this, it did not work. Britain in World War II And while this was going on in Germany, Great Britain-during the Second World War-did pre cisely what Germany did: starting with the price control of some com modities only, the British govern ment began step by step (in the same way Hitler had done in peace time, even before the start of the war) to control more and more of the economy until, by the time the war ended, they had reached something that was almost pure socialism. Great Britain was not brought to socialism by the Labour government which was established in 1945.

1980 INTERVENTIONISM 93 Great Britain became socialist dur ing the war, through the govern ment of which Sir Winston Churchill was the prime minister. The Labour government simply re tained the system of socialism which the government of Sir Winston Churchill had already introduced. And this in spite of great resistance by the people. The nationalizations in Great Bri tain did not mean very much; the nationalization of the Bank of Eng land was merely nominal, because the Bank of England was already under the complete control of the government. And it was the same with the nationalization of the rail roads and the steel industry. The ((war socialism," as it was called meaning the system of interven tionism proceeding step by step had already virtually nationalized the system. The difference between the Ger man and British systems was not important since the people who op erated them had been appointed by the government and in both cases they had to obey the government's orders in every respect. As I said before, the system of the German Nazis retained the labels and terms of the capitalistic free market econ 0my. But they meant something very different: there were now only governmental decrees.

This was also true for the British system. When the Conservative party in Britain was returned to power, some of those controls were removed. In Great Britain we now have attempts from one side to re tain controls and from the other side to abolish them. (But one must not forget that, in England, conditions are very different from conditions in Russia.) The same is true for other countries which depend on the im portation of food and raw materials and therefore have to export man ufactured goods. For countries de pending heavily on export trade, a system of government control sim ply does not work. Thus, as far as there is economic freedom left (and there is still sub stantial freedom in some countries, such as Norway, England, Sweden), it exists because of the necessity to retain export trade. Earlier, I chose the example of milk, not because I have a special preference for milk, but because practically all govern ments-or most of them-in recent decades, have regulated milk, egg or butter prices.

Rent Control I want to refer, in a few words, to another example, and that is rent control. If the government controls rents, one result is that people who would otherwise have moved from bigger apartments to smaller ones when their family conditions changed, will no longer do so. For example, consider parents whose 94 THE FREEMAN February children left home when they came into their twentie&, married or went into other cities to work. Such parents used to change their apart ments and take smaller and cheaper ones. This necessity disappeared when rent controls were imposed. In Vienna, Austria, in the early twenties, where rent control was well-established, the amount. of money that the landlord received for an average apartment under rent control was not more than twice the price of a ticket for a ride on the city-owned street cars. You can imagine that people did not have any incentive to change their apart ments. And, on the other hand, there was no construction of new houses. Similar conditions prevailed in the United States after the Sec ond World War and are continuing in many cities to this day.

One of the main reasons why many cities in the United States are in such great financial difficulty is that they have rent control and a resulting shortage of housing. So the government has spent billions for the building of new houses. But why was there such a housing shortage? The housing shortage developed for the same reasons that brought milk shortages when there was milk price control. That means: when the gov ernment interferes with the market, it is more and more driven towards socialism. And this is the answer to those people who say: ((We are not socialists, we do not want the gov ernment to control everything. We realize this is bad. But why should not the government interfere a little bit with the market? Why shouldn't the government do away with'some things which we do not like?" These people talk of a ttmiddle-of the-road" policy. What they do not see is that the isolated interference, which means the interference with only one small part of the economic system, brings about a situation which the government itself-and the people who are asking for gov ernment interference-find worse than the conditions they wanted to abolish: the people who are asking for rent control are very angry when they discover there is a shortage of apartments and a shortage of hous ing.

But this shortage of housing was created precisely by government in terference, by the establishment of rents below the level people would have had to pay in a free market. There Is No Third System The idea that there is a third system-between socialism and cap italism, as its supporters say-a sys tem as far away from socialism as it is from capitalism but retains the advantages and avoids the disad vantages of each-is pure nonsense. People who believe there is such a mythical system can become really 1980 INTERVENTIONISM 95 poetic when they praise the glories of interventionism. One can only say they are mistaken. The government interference which they praise brings about conditions which they themselves do not like. One of the problems I will deal with later is protectionism. The gov ernment tries to isolate the domestic market from the world market. It introduces tariffs which raise the domestic price of a commodity above the world market price, making it possible for domestic producers to form cartels. The government then attacks the cartels, declaring: ~~Under these conditions, anti-cartel legislation is necessary."

This is precisely the situation with most of the European govern ments. In the United States, there are yet other reasons for antitrust legislation and the government's campaign against the specter of monopoly. It is absurd to see the government -which creates by its own interven tion the conditions making possible the emergence of domestic cartels point its finger at business, saying: ~~There are cartels, therefore gov ernment interference with business is necessary." It would be much simpler to avoid cartels by ending the government's interference with the market-an interference which makes these cartels possible. The idea of government interfer ence as a «solution" to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism. Nevertheless, government inter ference with business is still very popular. As soon as someone does not like something that happens in the world, he says: (~The government ought to do something about it.

What do we have a government for? The government should do it." And this is a characteristic remnant of thought from past ages, of ages pre ceding modern freedom, modern constitutional government, before representative government or mod ern republicanism. Omnipotent Government For centuries there was the doctrine-maintained and accepted by everyone-that a king, an anointed king, was the messenger of God; he had more wisdom than his subjects, and he had supernatural powers. As recently as the begin ning of the nineteenth century, Peo ple suffering from certain diseases expected to be cured by the royal touch, by the hand of the king. Doc tors were usually better; neverthe less, they had their patients try the king. This doctrine of the superiority of a paternal government, of the supernatural and superhuman pow96 THE FREEMAN ers of the hereditary kings gradu ally disappeared-or at least we thought so. But it came back again.

There was a German professor named Werner Sombart (I knew him very well), who was known the world over, who was an honorary doctor of many universities and an honorary member of the American Economic Association. That profes sor wrote a book, which is available in an English translation, published by the Princeton University Press. It is available also in a French translation, and probably also in Spanish-at least I hope it is avail able, because then you can check what I am saying. In this book pub lished in our century, not in the Dark Ages, ~~Sir" Werner Sombart, a professor of economics, simply says: ~~The Fuhrer, our Fuhrer" - he means, of course, Hitler-~~gets his orders directly from God, the Fuhrer of the Universe." I spoke of this hierarchy of the fuhrers earlier, and in this hier archy, I mentioned Hitler as the ~~Supreme Fuhrer" . . . But there is, according to Werner Somhart, a still higher Fuhrer, God, the Fuhrer of the universe. And God, he wrote, gives His orders directly to Hitler.