I suspect that Mises may have felt somewhat restless after writing Socialism. He had taken a very good stab at describing the socialist economy and its inadequacy for the promotion of human flourishing. By 1940 fascism had arisen in both Italy and in Germany, who Mises considered the clear antagonists of World War II. Further, the communist Soviets were allied with Germany at the time of writing Interventionism.
A communist-fascist alliance may seem strange to idealogues, but it appeared quite natural to Mises that the two distasteful versions of socialism should find cooperation convenient to achieve their own ends. In America, the revelations of German atrocities had yet to arrive and there were many sympathizers with both Russia and Germany. In Britain, union leaders were promoting the idea of socialism as a reward to the public who would be bearing the costs of the war.
Mises thought that the disfunction of socialism was adequate to describe its ultimate failure as an economic system. However, socialist tendencies were pervasive in the liberal market economies among both idealogues and demagogues enough to make the transition to socialism a very real threat. After all, while socialism may not be a stable regime in a dynamic world, certain features within specific market economies may nonetheless tend toward it. What is the cause of such tendencies?
Mises rejected genetic proclivities a priori. Similarly, culture is too endogenous and contextually specific to be convincingly analyzed. Rather, Mises rest the blame at the feet of interventionism: the tendency of governments to involve themselves by a variety of means inti the affairs of production, investment, and consumption. He regarded each intervention as the cause of a distortion in the market which subsequently motivated additional interventions. At either a rapid or sluggish pace, the result would be a largely socialist economy of one flavor or another.
The book is a brave endeavor. Mises painstakingly analyses several general types of government intervention in addition to some specific cases that he felt were relevant enough to address. The general categories of intervention are:
- Price Controls
- Inflation and Credit Manipulation
- Confiscation and Subsidies
- The War Economy
I can’t spend too much time on all of these, but I can say that some chapters were more exciting than others. Price controls was a largely predictable chapter. But I was pleased to see Mises’s level-handedness. Unlike many market-oriented economists Mises fairly asks “In what circumstance does the intervention achieve its goal?”. In the case of price controls, having illiquid capital that is difficult to repurpose is just such a case. For example, if a building is zoned as residential only and is difficult to sell, then imposing price controls would achieve the goal of transferring resources from the building owner to the renters. However, Mises is also quick to note that the capital stock in rental properties will consequently expand more slowly or even contract. That is, price controls provide relief in a static economy and not in a dynamic one. Personally, I find that it always improves a writer’s persuasiveness when he is willing to entertain the opposing position and provide the grounds on which it is right. The subsequent refutation is made all the more credible.
The chapter on restriction is simple enough for most readers. Similar ideas appear in Henry Hazlitt’s Economics in One Lesson and in Landsburg’s The Armchair Economist. And, having already read Mises’s Theory of Money and Credit, I found the chapter on Inflation and Credit to be banal. The casual reader may find that chapter somewhat opaque (monetary theory is hard).
More interesting were the chapters on Confiscation and the War Economy. Mises runs down a beautiful and concise litany of economist favorites. Confiscation reduces investment and production. Setting maximum profit margins increases costs. Government support in one geographic area or sector occurs at the cost of other areas and sectors. Socialist production is less efficient, even if the purpose is to produce armaments.
There are two items on which one can quibble.
First, government confiscation for large projects, such as by what we in the USA call ‘Eminent Domain’, can resolve the free-rider, the hold-out, the commons, and the public good problems. However, ‘can’ is very different from ‘does’. As I tell my Principles of Macroeconomics students, fiscal policy can close an output gap. Which is very different from asserting that a narrowed output gap is a desirable outcome or intentionally achievable by policy makers. Still further, Mises might correctly be quick to point out that many of the transaction costs that the government would be overcoming are of its own making.
Second, Mises states in no uncertain words that, during times of war, no amount of borrowing can increase the economic resources available at any given time. Afterall, no borrowing may occur apart from planet Earth and the available resources are endowed in any given moment. My issue with this is that labor supply curves slope upward. Of course, the supply of land may be fixed, and the factory buildings at present are also fixed in the short-run. But, labor supply and the time and attention of human ingenuity is flexible in the short run. We can gain access to additional labor now by promising greater consumption in the future. The overlapping generations model makes it clear that each generation can consume more today by paying producers with output from tomorrow (increasing their willingness and ability to produce today). One may say that the total population which could contribute labor is fixed. But that is not what is typically meant by the valuable resource that we call labor.
Mises also spends several pages chastising the unclear theory of corporativism, which he considered to be more political verbiage than an actual economic system. He has more to say about syndicalism, in which each industry self-regulates, inter-industry disputes are contractually resolved apart from the government, and in which each sector acts as a guild or oligopoly. It may sound nice for everyone to earn monopolistic rents. However, practiced economy-wide, the result is less output and fewer resources available to achieve human ends.
Finally, Mises ends with a popular trope amongst economic writers of the time that has unfortunately fell to the wayside. Modern writers recommend potentially fertile ground for future research. Historical authors, such as Keynes or Schumpeter, instead included sections on political economy and culture and how they do or would interact with the subject at hand. Indeed, this is where Mises is most strident in his support for the market economy. He states that, unfortunately, avoiding interventionism and the slow slide toward socialism can only be achieved by popular and categorical rejections of government attempts to intrude. Otherwise, each person has their own list of what they consider to be prudential interferences that they would tolerate such that we’d be harnessed into oppression by the yolk of an innumerable profusion of small interferences, none of which is worthy of radical upset on its own.
Unlike Schumpeter, who considered the ark of human history to be somewhat more determinate, Mises believed that interventionism is avoidable given suitable values and norms of the citizenry. Unfortunately, he provides no outline for the moral instruction that would provide inoculation from the interventionist creep toward socialism.
Nice point: “But, labor supply and the time and attention of human ingenuity is flexible in the short run. We can gain access to additional labor now by promising greater consumption in the future.”