6. The Economic Doctrines of Social Liberalism

Faithful to their principle, the Socialists of the Chair did not create a system of economics, which was the endeavor of the Physiocrats and classical economists, and now the modern subjectivist economists. The socialists were not concerned with creating a system of catallactics.

Marx simply adopted the system of the classics and drew the conclusion that, in a society based on the division of labor, there is no third organizational possibility besides the private property and the public property orders. He mocked all attempts at a third order as “bourgeois.” The position of etatism is different. From the start it did not seek to understand, but to judge. It brought along preconceived ethical opinions: “It shall be!” and “It shall not be!” All things were chaotic as long as the state did not intervene. Only government intervention could put an end to the arbitrariness of self-seeking individuals. The idea that a social order could be based on a constitution under which the state would do nothing but protect private property in the means of production seemed utterly absurd to it. It only had ridicule for the “enemies of the state” who believed in such a “pre-established harmony.” The etatists thought it utterly illogical to reject every government “intervention” in economic life, as this would lead to anarchism. If government intervention for the protection of private property is permissible, it is illogical to reject all further intervention. The only reasonable economic order is a social order in which private property exists in name, but actually is abolished, the state holding the final reins over production and distribution. The state of affairs at the zenith of liberalism could come into existence only because the state neglected its duties and granted too much freedom to individuals. With such a point of view, the development of a catallactic system is unnecessary, indeed illogical.

The best example for the ideology of the welfare state is the balance of payments theory. A country may lose all its monetary metal if the state does not intervene, so runs the older, mercantilist version. The classical economists demonstrated, however, that the danger so dreaded by the mercantilists does not exist, because forces are at work that, in the long run, prevent the loss of money. This is why the quantity theory was always so objectionable to etatists. They favored the Banking School. The victory of the Historical School practically brought excommunication of the Currency School. Karl Marx,41 Adolf Wagner, Helfferich, Hilferding, Havenstein, and Bendixen held to the doctrines of the Banking School.

After two generations of eclecticism and avoidance of clear concepts, many contemporary writers have difficulty recognizing the differences between those two famous British schools. Thus Palyi shows surprise that “a resolute follower of the Banking Principle, M. Ausiaux, occasionally advocates the comptabilism of Solvay.”42 Let us not overlook the fact that “comptabilism” and all other related systems are logical applications of the Banking Principle. If the banks are in no position to issue more notes than are necessary (the “elasticity of circulation”), there can be no objection to the adoption of Solvay’s monetary reform.

Palyi’s etatist position explains why he could not add a single word to the old mercantilist observations, and why his whole theory is limited to pointing at the selfish disposition of the state’s subjects, who should not be left to themselves.43 Social liberalism could not share this etatist position. For better or worse it had to show how, according to its social ideal, the members of an exchange society cooperate without government assistance. But social liberalism never developed a comprehensive theory either. Some of its followers probably believed that the time was not yet ripe on account of insufficient preparation through collection of material; the majority probably never saw the need for a comprehensive theory at all. Wherever the need for theory arose, the social liberals usually borrowed from the classical system, mostly in the garb of Marxism. In this regard the social liberals differed from the etatists, who preferred to fall back on the mercantilists.

Nevertheless, social liberalism did seek to make an independent contribution to theory—a doctrine of wage rates. It could use neither classical theory nor modern theory. Marx very logically had denied that collective bargaining of labor unions could raise wages. Only Brentano and Webb sought to prove that collective bargaining can permanently raise the income of all workers; this theory is the principal doctrine of social liberalism. However, it could not withstand a scientific critique, such as that by Pohle44 and Adolf Weber.45 In his last essay, Böhm-Bawerk, too, arrived at the same conclusion,46 and no one today dares seriously represent the Brentano-Webb doctrine. It is significant that the comprehensive Festschrift honoring Brentano does not contain a single contribution on wage theory and the wage policies of labor unions. Cassau merely observes that before the war the labor union movement worked “without any wage theory.”47

In his review of the first edition of Adolf Weber’s book, Schmoller responded to the point that it is regularly impossible, without a rise in productivity, to raise wage rates through the withholding of labor. According to Schmoller, “such theoretical abstract price discussions” could lead to no useful results. We can render a “safe judgment” only “if we can numerically measure these fine complicated processes.” Adolf Weber sees in such an answer a declaration of bankruptcy of our science.48 But the etatist need not be concerned with the bankruptcy of catallactics. In fact, the consistent etatist denies the existence of any regularity in the process of market phenomena. At any rate, as politician the etatist knows an escape from the dilemma: the state determines the level of wages. But the refutation of the Brentano-Webb doctrine alone is not fatal. Even if we were to accept it—which, as we pointed out, no one would dare do since the writings of Adolf Weber, Pohle, and Böhm-Bawerk—the decisive question would still need an answer. If labor unions actually had the power to raise the average wage of all workers above the rate that would prevail without their intervention, the question remains, How high can wages go? Can average wages go so high that they absorb all “unearned” income and must be paid out of capital? Or is there a lower limit at which this rise must stop? This is the problem the “power theory” must answer with regard to every price. But until today no one has ever tried to solve the problem.

We must not deal with the power problem by calling authoritative intervention “impossible,” as did older liberalism. There cannot be any doubt that labor unions are in the position to raise wage rates as high as they wish if the state assists them by denying protection to all workers willing to work, and either pays unemployment compensation or forces employers to hire workers. But then the following occurs:

The workers in essential enterprises are in the position to extract any arbitrary wage from the rest of the population. But ignoring even that, the shifting of the wage boost to consumer prices can be borne by the workers themselves, but not by capitalists and entrepreneurs whose incomes did not rise on account of the wage boost. They now must curtail capital accumulation, or consume less, or even eat into their capital. What they will do, and to what extent they will do it, depends on the size of their income reduction. Surely everyone will agree that it is inconceivable thus to eliminate or merely greatly to curtail property income without at least reducing or halting capital formation and very likely consuming capital (after all, there is nothing in the way of unions that could keep them from raising their demands to levels that absorb all “unearned” income). But it is obvious that the consumption of capital does not permanently raise the workers’ wages.

The etatist and social-liberal roads to higher wages of workers diverge. But neither leads to the goal. As social liberalism cannot possibly wish to halt or reduce capital formation, much less cause capital consumption, it finally faces the alternative: either capitalism or socialism. Tertium non datur (“There is no third road”).

41Marx did not recognize that by adopting the Banking Principle he acknowledged the foundation on which Proudhon’s exchange-bank ideas were based. Marx had no clear conception of banking; in many cases he uncritically followed the Banking Theorists. How little he understood of the problems is visible in each of the few remarks he added to the excerpts, as, for instance, on the Catholic character of the monetary system and the Protestant character of the credit system (Das Kapital, vol. III, pt. II, 3rd ed., Hamburg, 1911, p. 132). Even more characteristic is another remark that connects with the basic principle of the Banking Principle that “the emission of a certain quantity of one-pound notes replaces an equal quantity of sovereigns.” According to Marx, “a sleight of hand well known to all banks!” (Ibid., vol. I, 7th ed., Hamburg, 1914, p. 84.) What is the purpose of this “sleight of hand”? Banks were not interested in attracting sovereigns through the issue of notes. They were interested only in granting more credits through the issue of more notes and thereby raising their interest income. This “sleight of hand” was well known to banks, but not that mentioned by Marx.
42Palyi, “Ungelöste Fragen der Geldtheorie” [Unsolved questions of monetary theory], vol. II, p. 514.
43Only subjects have selfish “special interests” and do not know what is good for them. Government officials and “the sovereign” are always unselfish and wise.
44See Pohle, Die gegenwärtige Krisis in der deutschen Volkswirtschaftslehre [The contemporary crisis in German economics], 2nd ed., Leipzig, 1921, p. 29 et seq.
45See Adolf Weber, Der Kampf zwischen Kapital und Arbeit [The struggle between capital and labor], 2nd ed., Tubingen, 1920, p. 411 et seq.
46Böhm-Bawerk, “Macht oder ökonomisches Gesetz” [Control or economic law], Collected Works, edited by Weiss, Vienna, 1924, p. 230 et seq. [English-language edition: Shorter Classics of Böhm-Bawerk (South Holland, Ill.: Libertarian Press, 1962), vol. I, p. 139 et seq.]
47Cassau, Die sozialistische Ideenwelt vor und nach dem Kriege [The socialistic world of ideas before and after the war], vol. I, p. 136.
48See Weber, op. cit., p. 405.