Thursday, October 7, 2010

Was Mises a Socialist?: Why Mises Refutes Himself on Government Intervention

First, let me say that the title of this post is tongue-in-cheek (yes, Mises can hardly be considered a real socialist).

Many years ago, George J. Schuller reviewed the first edition of Mises’ Human Action (1949). Murray Rothbard (1951) wrote a reply to this review and in turn Schuller (1951) answered Rothbard’s criticisms. A re-reading of that exchange repays the effort involved.

As is well known, Ludwig von Mises argued that government intervention will always be inefficient and contrary to economic law. According to Mises, such intervention is unstable and will lead to chaos from which either socialism or capitalism will emerge (Rothbard 1951: 184; Ikeda 1998: 346; Mises 1997: 37–38).

Here is Mises’ definition of government intervention:
“The intervention is a decree issued directly or indirectly, by the authority in charge of society’s administrative apparatus of coercion and compulsion which forces the entrepreneurs and capitalists to employ some of the factors of production in a way different from what they would have resorted to if they were only obeying the dictates of the market. Such a decree can be either an order to do something or an order not to do something. It is not required that the decree be issued directly by the established and generally recognized authority itself. It may happen that some other agencies arrogate to themselves the power to issue such orders or prohibitions and to enforce them by an apparatus of violent coercion and oppression of their own. If the recognized government tolerates such procedures or even supports them by the employment of its governmental police apparatus, matters stand as if the government itself had acted. If the government is opposed to other agencies’ violent action, but does not succeed in suppressing it by means of its own armed forces, although it would like to suppress it, anarchy results” (Mises 1998 [1949]: 714–715).
Next we have Mises quite clearly giving his views on interventionism:
“the supporters of the most recent variety of interventionism, the German “soziale Marktwirtschaft [i.e., post-WWII social market economy in Germany],” stress that they consider the market economy to be the best possible and most desirable system of society’s economic organization, and that they are opposed to the government omnipotence of socialism. But, of course, all these advocates of a middle-of-the-road policy emphasize with the same vigor that they reject Manchesterism and laissez-faire liberalism. …. All these champions of interventionism fail to realize that their program thus implies the establishment of full government supremacy in all economic matters and ultimately brings about a state of affairs that does not differ from what is called the German or the Hindenburg pattern of socialism. If it is in the jurisdiction of the government to decide whether or not definite conditions of the economy justify its intervention, no sphere of operation is left to the market. Then it is no longer the consumers who ultimately determine what should be produced, in what quantity, of what quality, by whom, where, and how—but it is the government. For as soon as the outcome brought about by the operation of the unhampered market differs from what the authorities consider “socially” desirable, the government interferes. That means the market is free as long as it does precisely what the government wants it to do. It is “free” to do what the authorities consider to be the “right” things, but not to do what they consider the “wrong” things; the decision concerning what is right and what is wrong rests with the government. Thus the doctrine and the practice of interventionism ultimately tend to abandon what originally distinguished them from outright socialism and to adopt entirely the principles of totalitarian all-round planning” (Mises 1996: 723–724).
In this passage, Mises condemned the post-WWII mixed Keynesian economies that existed when Human Action was published. According to him, they would tend to “totalitarian all-round planning.” Thus interventionism of any type is ruled out. Presumably this was supposed to be a theory of Mises’ praxeology, which according to him would have “apodictic certainty.” If not, then this passage is clearly Mises’ own opinion that would need justification independently of his praxeology.

Rothbard characterised Mises’ position in his reply to Schuller as follows:
“When Mises presents us with the choice between the free market and socialism, he is saying that in-between systems of a hampered market are not coherent, consistent systems. He demonstrates that any measure of government intervention in the market creates problems and consequences which present the people with a further choice: repeal this measure, or effect another measure of governmental intervention …. interventionist measures logically lead to one or the other [sc. free market or socialism]. Since a socialist system cannot exist, the only intelligent choice is the purely free market. Since Mises demonstrates that every form of government intervention in the market creates consequences that lead to an economy worse than that of the free market, Schuller cannot distinguish between rational and irrational forms of government intervention … For Mises, all government intervention in the market is irrational and therefore contrary to economic law” (Rothbard 1951: 184).
In his reply to Rothbard on Mises’ view of interventionism, G. J. Schuller pointed out a fatal flaw and contradiction in Mises’ reasoning:
“What does ‘interventionist measures logically lead to’ mean? Either Mises believes that interventionism is cumulative and necessarily leads toward socialism and into ‘chaos’ (another undefined term), or he does not. If he does, can he explain how western nations reversed mercantilist intervention and established partially free markets in the 18th and 19th centuries, or how they accomplished partial decontrol after World Wars I and II? Can he explain how the purely free market is ever to be attained? On the other hand, if interventionism need not be cumulative (and Rothbard says it logically leads to the free market as well as to socialism) then is it necessarily incoherent, unstable, and transitory? If interventionism logically points in two opposite directions (toward zero and infinity), does it have to continue in either until it reaches respectively Elysium or chaos?” (Schuller 1951: 190).
Schuller makes a brilliant point here: there was massive mercantilist intervention in the early modern period in Europe. But this period did not end in “chaos” or “socialism”. There was mostly orderly reform of economic systems, as free trade or at least much less restrictive trade was adopted in the 19th century. Mises’ idea, if it is supposed to apply to conditions in the real world, is confronted with clear countervailing empirical evidence (of course, the pure Misesians will say that economic history is separate from praxeological theory and that empirical evidence can never verify or falsify praxeology, etc).

But, in addition, Mises has blatantly contradicted himself, because in Human Action (1949: 741) he argues that government intervention in the form of fire regulations can actually be justified:
“Economics neither approves nor disapproves of government measures restricting production and output. It merely considers it its duty to clarify the consequences of such measures. The choice of policies to be adopted devolves upon the people. But in choosing they must not disregard the teachings of economics if they want to attain the ends sought. There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule” (Mises 1998 [1949]: 741; see Murphy and Gabriel 2008: 286 for a discussion of this passage).
Mises in the last remarks here is actually conceding that there is room for a system of intervention “on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained.” Some might argue that Mises only thought that individual interventions should be considered on the basis of “meticulous weighing.” But that will not do. Once Mises has conceded that interventions are possible and that there is a rule for allowing them, he has given us a system.

Mises’ remark that “no reasonable man could possibly question this rule” suggests that he himself agreed with it, and presumably with the idea of government fire regulations. And, even if he did not, he clearly allowed that the “choice of policies to be adopted devolves upon the people” in such cases. G. J. Schuller points out the devastating, fundamental contradiction here in Mises’ thought:
“If ‘all intervention is irrational,’ then how can Mises sanction it for ‘defense of the citizen against violent invasion of his person and property?’ Mises says: ‘The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained.’ In fire regulations the prize outweighs the costs … Thus he admits that government interference in the private markets for armaments, mercenary soldiers, non-fireproofed buildings, or burglar’s equipment can attain the ends sought and need not lead to socialism. Once [Mises] … grants the distinction between intelligent and unintelligent intervention, and even the need for the former to preserve a partly free market economy, Mises leaves his sectarian Utopia and joins the rest of us in choosing among imperfect but possible alternatives in the real world” (Schuller 1951: 190).
Schuller is entirely correct. Government fire regulations are an obvious intervention even by Mises’ standards: such fire regulations require coercive government violation of private property rights and free markets, and the threat of force to maintain them.

Mises’ position is self-contradictory. In Human Action, Mises contends that intervention is unacceptable and will lead to socialism or chaos, but then makes it perfectly clear that there is room for what he thinks is intelligent and rational government intervention, which can be justified by “meticulous weighing of the costs to be incurred and the prize to be obtained.” This decision-making process is certainly also in the domain of democratic politics in a community. On this basis, one could easily construct a rational case for all manner of government interventions, from drug regulation and consumer protection all the way to Keynesian deficit spending.

Despite Mises’ argument that a system of intervention is inefficient and contrary to economic law and that such systems will lead to socialism or chaos, he actually allows for (and appears to advocate) his own particular system of government interventions!

Mises has left the back door of his praxeological system open to all types of intervention, a logical contradiction that is a massive hole in the anti-government ideology argued elsewhere in Human Action.

One might even say (tongue in cheek) that Mises’ logical inconsistency leaves him looking like a socialist in disguise.

Perhaps Austrian economists should start writing articles attacking their beloved hero with titles such as “Mises was a Red”! (after all, Rothbard did something like that for Ayn Rand - and rather well too).


BIBLIOGRAPHY

Ikeda, S. 1998. “Interventionism,” in P. J. Boettke (ed.), The Elgar Companion to Austrian Economics, Elgar, Cheltenham, UK. 345–351.

Mises, L. 1977. A Critique of Interventionism (trans. H. F. Sennholz), Arlington House, New Rochelle, N.Y.

Mises, L. 1996. Human Action: A Treatise on Economics (4th rev. edn), Fox and Wilkes, San Francisco.

Mises, L. 1998 [1949]. Human Action: A Treatise on Economics, Ludwig von Mises Institute, Auburn, Ala.

Murphy, R. P. and A. Gabriel, 2008. Study Guide to Human Action: A Guide Tutorial of Ludwig von Mises’s Classic Work, Ludwig von Mises Institute, Auburn, Ala.

Rothbard. M. N. 1951. “Mises’ ‘Human Action’: Comment,” American Economic Review 41.1: 181–185.

Schuller, G. J. 1950. Review of Human Action: A Treatise on Economics by Ludwig von Mises, American Economic Review 40.3: 418–422.

Schuller, G. J. 1951. “Mises’ ‘Human Action’: Rejoinder,” American Economic Review 41.1: 185–190.

3 comments:

  1. http://critiquesofcollectivism.blogspot.com/2011/02/was-mises-anarcho-capitalist.html

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  2. No offence but you have missed a rather big point here. An action can only be defined as irrational when there is not only an understanding of both the end trying to be reached and the means to be used to produce that end but understanding of the nature of the end and the quality of the means. Applying this to your example, if the end is to produce an optimal condition it would be irrational for the government to intervene in the creation of this condition because as mises states; that intervention will lead to a less than optimal condition. For an individual to demand the increase of their own safety through the government is necessarily rational based on mises definition of rational. This is not support for intervention, this just shows that individuals are eager to improve their own conditions, which is necessarily rational.

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  3. Excellent essay. It's pretty hard to swallow that an intervention like fire regulations would lead to socialism. What problem could this cause that would lead to a further intervention?

    Now our government-created banking cartel and bankrupt welfare state do look pretty shaky, and I could see a collapse creating calls for socialism or liberalism.

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