The theory of interventionism in light of economic experience

Economics Economics Questions
1

In a couple of places (notably Middle of the road policy leads to socialism) Mises argues that interventions by government will fail, leading to further interventions, culminating in a fully centrally planned economy.

An acquaintance (Economics PhD, very knowledgeable on Austrian theory, and at a minimum a “fellow traveller”) told me he thought it was the issue on which Mises was clearly wrong.

Several years ago, before I would have considered myself an Austrian, I asked David Gordon. He said that perhaps Mises underestimated how long the process would take.

A third response invoked a paper by Ulrich Witt (“The Endogenous Public Choice Theorist” Public Choice 73: 117-129, 1992 - I haven’t read it). In short I think the claim is that we have been saved from going down the road to serfdom because endogenous public choice theorists know about it (sounds implausible though, so perhaps I have misremembered).

Ikeda’s book (Dynamics of the mixed economy: toward a theory of interventionism) tries to explain the persistence of interventionism. I have looked at it for a year or so. But whilst it struck me as a good book, I don’t remember again particularly noteworthy arguments.

What do you think?

2

I think Mises was 100% correct. The middle of the road leads to Socialism. I don’t understand from your post what objections have been raised to claim that it is not necessarily so.

3

My objection is that we have experienced interventionism (middle of the road policy) for many decades, but an interventionist economy has never led to socialism economy. All socialism has come about through revolutions or public opinion, never as a result of failed interventions. Are there any counter-examples?

Could you elaborate on your claim that Mises was 100% correct? If there is not yet a case of middle of the road leading to socialism, then you might mean you believe it will happen in the future. Do you have any idea when it will happen? Why do you believe it will happen? Are you content to remain completely silent about why it has not happened yet? How far in the pocess have come already? Please give examples of failed interventions which called forth further interventions. I agree that there are some, but they often lead to crises, or are just repealed. It seems in light of this that the process is more complicated than a process leading to socialism. It’s provoked comment amongst Austrians. In particular Sandford Ikeda’s book, where he tries to account for the stability of the mixed economy.

To reiterate my friend from LSE told me he thought it was the weak spot in Mises. Compare this to other elements in his thought. The twentieth century clearly vindicated or illustrated the impossibility of socialism. The ABCT is a little more controversial, but it appears to have explained many actual business cycles. Do you see my point? What do you think?

I am not raising issues to claim that it is not necessarily so. Rather I am just interested if there are raising why it is necessarily so. And as you do, I am curious about your position.

4

So what’s healthcare reform every 10 years if not a failure of interventionsm?

How about banking and finanical reforms every time there is a bust ?

You misunderstand the curx of the argumnet. It is the failure of the public to recognize the failure of the previous interventions so they support further and futher interventions. Socialism may not be reached only because the system will finanically collapse beforehand. But that would still be a failue of interventionism.

Mises’ argument is that all interventions are bound to fail. The public then has a choice: To remove the previous intervention or to go further and further. Mises does not claim that it is impossible (in theory) for the public to realize that the interventions are the problem, but simply that if they fail to do so, they must go further and further until Socialism of the german pattern is achieved. (unless the system collapses beforehand and reforms in the right direction take place)

It is already happening. The healthcare industry is disintegrating right infront of our eyes as a result of prveious failed interventions. The public now is ready to support further interventions. So we are just 1 or 2 steps away from a total national healhtcare system.

If something is repealed, then that does not disporve Mises. Mises claimed that if the interventions are not repealed and you go further with more regulations, then you will eventually reach socialism.

But hardly anything is repealed! For every one or two regulations that are ever repealed, there were 10 new regulations that must have missed your radar.

The stability is an illusion. You wouldn’t have to keep cutting benefits, reforming the system, and constantly regulating if there was stability. Sure, with 50 trillion dollars in debt, you can keep the illusion longer.

When Iceland goes bankrupt, what is this if not a failure of interventionism? As long as the US and EU are still hanging on, such a small country can get bailed out. What’s going to happend when the US defaults on its debt and most government programs will default on their commitment? Will you then consider this a failure of Interventionsm?

Saying that we can reverse course does not refute Mises theory on interventionsim. To reverse course is to simply recognize Mises’ warning and to act upon it. This is what he wanted.

5

You don’t think the consequences of failed interventions influence public opinion?

6

Marko: “You don’t think the consequences of failed interventions influence public opinion?”

The middle of road policy leads to socialism was written by Mises, not me! I think public opinion could be a factor, but it plays no part in Mises’ discussion. I started this thread because numerous economists, including Austrians, have observed that middle of the road policy has not led to socialism. I listed a few factors which I thought might be relevant. I’m interested if you have others

I do think consequences influence public opinion. Of course, it’s difficult to say what impact this has on policy as public opinion isn’t some kind of data we can observe. I’m not sure that this would support your position though. Read a book like Myth of the rational voter (Caplan) and you’ll see that overwhelmingly people are anti-market, pro-regulation, and just a bit more observation about attitudes, economic news and debates in the media, and prevailing terminology, and you’ll see that when interventionism fails, it is blamed on the matter. Therefore public opinion could be considered to speed up the process. And yet we haven’t got anywhere near it.

7

You have set up a strawman argument here. That’s probably what the critique you have read has done also.

The middle of the road policy states that this policy cannot be a permanent solution but only a temporary transitional phase. Either the failed interventions in the past lead the public to pressure for more and more interventions, or the public realizes the failures of the interventions and this policy and pressures to abandon it.

That is Mises theory on Interventionism. And I suggest you learn about it from Mises and not his critics.

I wasn’t aware that there was a time limit on how long the process has to take before somebody comes and says Mises was wrong.

The facts remain. Interventions always fail and the public pressures to reform. Either they can regulate further and fruther or they can abandon this middle of the road policy. The system itself is a transitional phase; Either to Socialism or to Laissez-fair if the policy is abandoned. Thus far, public opinion has overwhelmingly chosen to stick to this policy.

8

I hope this isn’t too disorganised and difficult to follow. We agree on about 90% and I think the 10% disagreement is interesting.

DD5: “So what’s healthcare reform every 10 years if not a failure of interventionsm?”

I stated that I think interventions fail. You and I agree that interventions fail. So please do not try to misrepresent me as claiming that interventions do not fail. We are simply discussing the implications of failed interventions - my position being that perhaps this process can continue without culminating in socialism.

You rightly point out that Mises noted that failed interventions can be repealed. However, I think there is an important distinction but what he implies in his writing and what happens from time to time. He says interventionism is a contradictory and illogical system and it cannot persist, it must lead always to capitalism or socialism (I’m paraphrasing, but I believe this is a faithful representation). As I understand it, he is saying that interventionism (i.e. interventions en masse) must be repealed. But what we occasionally see is a politician realises a single intervention has failed, rather than the system of interventionism. So the post office could be privatised tomorrow because everyone knows it failed, but alongside a growing need for minimum wages, or a national health care system, because everyone knows it is “different.” This is the sense in which interventionism has proved to be relatively stable. There have been some regulations and deregulations but the system of interventionism has progressed or regressed much to capitalism (market economy) or socialism (central planning). Accordingly it seems that within our present system of interventionism there is quite unlikely to be such a move. Consider the ABCT and the boom-bust. There have been several business cycles, but during the bust do we just get more and more interventions? If we did, would we be likely to experience booms again in the future? Wouldn’t stagnation a la USSR or North Korea be more likely? The cyclical nature of business cycles seems to cohere somewhat with a more cyclical understanding of interventionism - interventions keep failing and government keeps intervening, not necessarily socialising.

You write: “When Iceland goes bankrupt, what is this if not a failure of interventionism?” Exactly, and what is Iceland today if not a interventionist economy? If Iceland is socialist soon, then we will have our first road trip from middle road to socialism. But I think it is just interventionism as usual.

You note “it is already happening.” I think this is right. But it is not entirely clear. The UK introduced the NHS immediately after WWII. For one thing, it was not introduced in response to any failed intervention. I think this may be true of many interventions (this is a very important point - we have to watch out for changes in ideology more than failed interventions).

Almost every country has had nationalised army, police, and some other services for as long as capitalism has existed. I don’t think the police has necessarily failed in ways which require further interventions in the economy. The same goes for health. I don’t think that has occurred in the UK. Yes healthcare gets worse, it fails in some sense, but that doesn’t necessarily mean anything has to be done about it. It fails and we carry on as usual with interventionism.

What do I think?

I think you could be right DD5. But it doesn’t seem to me the most likely scenario. I’m not going to attempt to assing a probability. That would make about as much sense as asking you how many years we have left. But I do think some indication of timescale is important.

Also I struggle a bit with how the interventions would occur. Like what is the next step. I understand if it just nationalising one industry after another, but what suggests this will happen? Now what is your basis for thinking this?

PS Do you think the Reagan and Thatcher years were an increase or decrease in regulation? This is a serious and sincere question. I honestly do not know what answer I’d give. Perhaps it all comes down to context and perspective, so that either answer is acceptable. But if, like many libertarians, you consider Reagan to have increased regulation, that could present some further difficulties for the middle road road trip: there were lots of subsidies for big business and privatisation, which I think is a different kind of interventionist dynamics, as it strengthens the wealthiest most politicised section of the private sector, so not readily obvious how this leads to central planning. Maybe taking the long scenic route though?!

9

I’m not sure if you fully grasp Mises’s argument, which is that failed interventions will beget yet more interventions until people either realise they fail or that interventionism is the wrong way to go. Some politicians might in individual cases reverse or even strip away regulations, but we’re talking about a net effect here, and reversals of their policies probably because a) they were insufficiently laissez-faire and interventionist in their own right, thus causing the problem Mises suggested or b) other interventions were still operative, not allowing deregulation to fully run its course, leaving it to shoulder the blame for their failure. Nor does Mises believe the only reason for interventions in the economy (which, by the way, WWII was most definitely) is prior interventions. His point is that you won’t for long have a ‘middle of the road’ economy as the failure of its interventions will have a domino effect. What are bailouts or bank nationalisations if not interventionism? Modern Western economies have a huge capital base. How long will it take to deplete these? Their existence as social democracies is relatively short, not even 100 years in most cases (and interventionism mostly went on the rise after WWII), not really a very long time frame. Of course the magnitude of the interventions especially in the US may hasten their demise into full socialism. We’ll see.

A classic example of his theorem btw is universal education. Why do you think nearly everyone ‘needs’ a degree nowadays?

10

“The middle of the road policy states that this policy cannot be a permanent solution but only a temporary transitional phase.” What do you mean by “permanent” and “temporary transitional phase?” When you use this terms but object “I wasn’t aware that there was a time limit on how long the process has to take before somebody comes and says Mises was wrong” it becomes clear that these are not meaningful terms.

The human race may die in 1million years and interventionism is only a temporary phase lasting 1.x million years. So yes I realise that neither you nor I can prove one way or the other. The time issue is really important, because there are people who think they can aid some groups through some welfare policies, and this is probably true in some cases. They will say, look if interventionism will fail in 500 years, lets only have interventionism for 400 years and then repeal it. In the meantime we can help some people who otherwise wouldn’t be helped (this isn’t my argument of course!). I was under the impression that Mises viewed the situation as dangerous - i.e. people couldn’t tell if things were failing, or they couldn’t influence government. But you seem to believe they can repeal. In this case it seems that your position is more one of a scare tactic to prevent social democrats from pursuing these kinds of policies. And if your position is just that as long as the human race has an infinite lifespan, at some point interventionism will lead to socialism, then this shouldn’t be persuasive to social democrats.

In any case I think we can make significant progress in our analysis of the nature of interventionism over the past century, for instance. To reiterate my point about the circularity of the business cycle and interventionism, the government expands the money supply and depresses interest rates, leading to depression. In response it may alter its policy. It certainly does not repeal the monetary interventionism. A deflationary monetary policy is just as interventionist as an inflationary monetary policy, as I’m sure you’ll agree. So interventions replace interventions, the system remains largely the same, and the same problem recur. Business cycles are not getting worse, more severe. Subsequent business cycles do not bring us closer to central planning. And neither do they lead to the repeal of central banking.

“You have set up a strawman argument here. That’s probably what the critique you have read has done also.” … “And I suggest you learn about it from Mises and not his critics.” Look I have set up a strawman. Also I haven’t read any critiques. Ikeda isn’t a critique of Mises. My friend from LSE talked to me (didn’t write anything) and I haven’t read Ulrich Witt. I’ve read Mises. I think I raise a legitimate point. David Gordon certainly told me so. He acknowledged that perhaps the process was taking longer than Mises thought. This is relevant. I think it is instructive to consider the comparison with the socialist impossibility debate. I think it was Karl Polanyi who said, look socialism is working, it is not actually impossible, with reference to the Soviet Union after several decades. But Polanyi was wrong. That wasn’t central planning. They tried that briefly for a year or two, but by about 1922 they had to abandon it. So central planning literally failed, and they tried a slightly more liberal central prohibition economy (see Rothbard, Thornton) which failed more slowly. Then the Soviet Union was a heavily interventionist system and yet no matter all of its failures, and all the political pressures to maintain centralised control, it continued to move toward the market economy. Isn’t that exactly the opposite of what you’d expect?

11

fiddlesticks, of course I meant to say that I haven’t set up a strawman

Hopefully no Freudians lurk here

12

No. It can go two ways after all. But the USSR had a very incomplete liberalisation which is why it is still such a mess today.

Erm, what world are you in? There is increasing pressure to regulate the financial sector now, beyond the onerous regulations already burdening it. BTW, look at how fast Zimbabwe draw near to collapse. What is the salient difference between it, and say, the USA? How much existing wealth it has. So yes, the USA will take longer before it either moves to full central planning (or repudiates it, as it were), merely because it has a more substantial pool of wealth to bleed dry, to blunt the perceived effects of interventionism.

13

The Myths of Reaganomics

14

Thanks Jon. You are right that Mises believes there are other reasons for interventions in the economy. I wanted to make the discussion a little more focused, at least initially. I think other reasons for intervention, perhaps given their best description in the Road to Serfdom, are probably more of a threat. I think the US and UK are more likely to abolish liberty under the guise of protecting us from terrorism than the slide towards socialism. I suppose my point is that you need to watch out for these ideological politicians, the ones who implement new policies before anything failed. Like Bush/Blair foreign adventures - wasn’t in response to failure, just fit in with their ideology and ambitions.

Social democracies have only existed for a short time, but social democracies are only one kind of interventionism. Adam Smith (1776) was written in response to interventionism. I don’t really know how long it had been going on for at that point (I’m not really sure how feudalism should be classified, so that presents difficulties if we go back to 14th century UK) but certainly a little while. So say UK has been interventionist for 3 or 4 centuries. Really for as long as the modern (i.e. not primitive, subsistence) economy has existed, it has been interventionist. Politically I’m prepared to side with Von Kuehnelt-leddihn and say this is not a long time (monarchy has existed much longer than liberal democracy). But economically this is a different matter. Interventionist economies have been on an upward trend. I agree that laissez-faire may be more efficient of course. But in short I think this is quite a long time frame.

“Failed interventions will beget yet more interventions” - I absolutely do agree with this. But let us assume the economy grows at 2% per year, and government, by some measure (I hesitated to make this kind of argument until now because there are no such measures in reality) grows at 1% per year (not necessarily in terms of goverment expenditure, by perhaps just a measure of its intervention). In this way, government can continue to grow, to fail, and to respond to failure by growing more, and yet not grow as fact as the economy. This gives an idea about what might be happening to our economies. Fifty or a hundred years ago there was no regulation for cellphones, computers, etc. I agree that interventions may continue, but I think the ingenuity of the private sector may outgrow it.

Your example of education is interesting. Firstly, do you mean to imply that little education would be undertaken if not for government provision? I think it really just crowds out a lot of private education. But I suspect really you are getting at the fact that a degree today is worth a high school diploma from 1960 or so. Yes, but that is perhaps better explained by Social Limits to Growth (Fred Hirsch, 1976). Insofar as it is a signal (Michael Spence etc.) it is a positional good, so education becomes an arms race. I agree government may have fuelled this, but it probably didn’t create it. Regardless the worst elements in education can again be put down to ideology and not to any particular failures. Note the point Sowell makes in his new book on Intellectuals. Intellectuals make ideas which are not tested. They also do not respond to failures. Out of the blue intellectuals and some bureaucrats decide that children need to focus on tolerance rather than knowledge. Then is it any wonder that they “graduate” without any knowledge or skills?

PS (Apologies again for rambling): I’m surprised nobody has referred to the ratchet effect (Higgs - Crisis and Leviathan) yet. OK the government may ratchet up the intervention, and perhaps this is not ideological, but opportunistic. But it is just one choice which politicians may or may not have the foresight to force through.

15

I said “Business cycles are not getting worse, more severe. Subsequent business cycles do not bring us closer to central planning” and Jon responded: “Erm, what world are you in?” Well I don’t think our crisis is worse than the 1930s. Is it? I think really it is remarkably similar to the great depression. That is one reason why Woods, Murphy et al keep drawing this comparison in their lectures.

“There is increasing pressure to regulate the financial sector now” Yes there are all sorts of demands for regulations. In the end the regulations will likely centralise power in the hands a relatively small group of bankers. I see that reference was made to the Myth of Reaganomics above. This seems to me to be further evidence for the position that interventionism may lead to an intensification of corporatism, rather than towards socialism.

Is Zimbabwe centrally planned? I think most countries which have this sort of experience end in chaos, maybe civil war. In any case I think ideology and political institutions were crucial in allowing Mugabe to behave this way. I can’t see a US president confiscated land from rich people! He’d have to establish a police state first. I agree with your point about Zimbabwe being a lot poorer than the US. But this is precisely my point too - the economy is outrunning intervention, and getting richer, so it is harder and harder for intervention to destroy the economy. So people who resent that are working overtime to construct new ideologies which can do just that (Al Gore, John Zerzan etc.)

16

That is not true. Every time socialism has been established it was established in a country which previously followed middle of the road policies. Never has there been a case of a laissez-faire country becoming socialist (without going through a middle of the road phase).

Allende in Chile, Chavez in Venezuela, Nasser in Egypt, etc, in all such cases you had a situation where middle of the road policy was clearly not working as intended which triggered ever more demands for the government to fix it leading to quasi-socialism (not necessarily socialist in name but de facto no less socialistic than Communist Yugoslavia).

17

It wasn’t. Especially not during the 19th century. Regarding feudalism and absolute monarchies I suggest you give Hoppe’s Democracy - the god that failed a read. They were substantially less interventionist than any modern democracy.

The impact may be enough to eventually stifle growth, or misdirect it into wrong areas (e.g. the housing boom), so not only are such metrics impossible, they would be misleading even if they weren’t. 2% growth isn’t unqualifiedly good.

This.

With universal public education, how didn’t it? Even if the ‘arms race’ would continue regardless, by aiming for everyone to at least be university educated (50% is the goal in the UK of Labour), it hugely aggravates the need to have a degree to even get an entry level job that may in fact better be suited for someone with more limited education but greater work experience. Of course, many firms now think degree = educated = skilled. Now a degree is seen as a “right”.

18

It is worse than any business cycle we’ve had in years. Is it worse than the GD? Dunno. There’s no imperative that it is. Interventions are not going to necessarily be worse in magnitude. Though this one may well be… This one definitely involves far more wealth destruction though. It will definitely bring in more interventions as I said.

Or fascism. But Mises would class it as a type of socialism anyway, and definitely heavy-handed interventionism.

Heavily. Especially its banking system.

19

The first socialist country (USSR) was not really an interventionist economy prior to the revolution. And note that though Bolshevik means majority, they were just a small group of demented misanthropes, so public opinion or demands for government to do this or that had nothing to do with it. I think until 1863 Russia was feudal. I suspect the same is true of China, Korea, Vietnam.

I’ll accept that you are more knowledgeable about the events leading up to Allende, Chavez and Nasser. But going back to Mises, doesn’t he give the example of fixing the price of milk at below equilibrium price, which leads to shortages or low quality (maybe watered down). So you give orders, or subsidise or nationalise industries or whatever. In this way, “pragmatic” politicians may establish socialism without trying. But Allende and Chavez (don’t know about Nasser) were certainly always trying for socialism. And I don’t think they responded to any failures, but they just KNEW that markets inherently fail, so they did all they could as soon as they could to implement socialism.

As I say, I do not know the extent of the middle of the road policies in Chile, Venezuela or Egypt before Allende, Chavez or Nasser. But you note they “triggered ever more demands for the government to fix it.” I think this is less plausible in the US. Despite a lot of hypocrisy surrounding it, socialism is a swearword. The constitution is something people think they like, and all the old sayings: “Get the government off our backs” and “rugged individualism.” The underlying ideology in the US is diametrically opposed to that of South Americans, and that means the transition to socialism would have to be gradual, as each intervention failed, rather than sudden as I suspect is the case in the countries you mention. And this is what I have a hard time envisaging!

20

It’s reliant on a far broader misconception: that of the state and capitalism as opposing machines bred by the one-dimensional economic spectrum, with “pure” capitalism being on one end and the “pure” command economy on the other, and all existing economies falling in “the middle” and therefore being “mixed” between state and market forces. In reality, however, considering the entirely theoretical nature of any form of “purity,” capitalist economic structure has always relied on the state as an integral stabilizing agent. For example, consider trade policy. As noted in Ha-Joon Chang’s Kicking Away the Ladder:

The infant industries example is my personal favorite because of the illustration of the fact that state forces ultimately act as a boon to market forces in the context of the capitalist economy, as the strategic protection of infant industries results in the long-run maximization of dynamic comparative advantage. And we see that rather than being “closer” to socialism, liberal and social democratic capitalism are in fact greater foes of socialism than more rightist forms of capitalism, as their greater incorporation of state intervention boosts efficiency, thereby sustaining the private ownership of the means of production. It’s therefore ironically the rightists that are the greater allies of socialism, as introduction of their proposed measures will cause economic instability and might possibly inspire violent revolution against capitalism. [:)]