Most people’s first exposure to economics occurs in their 7th grade social studies class, or at least somewhere in that vicinity, then high school seniors often take it in high school. To introduce students to the topic, the teacher explains that there are three main approaches a country can take: socialism, capitalism, or an in-between system that gets labeled a “mixed economy.”
The teacher then goes on to explain the merits and demerits of each system. Since the teacher is usually biased, one of the alternatives is inevitably painted as the most favorable one. In my own experience of this lesson—and I suspect many can relate—the “mixed economy” was held up as the least-bad option. The extremes were viewed with suspicion; the middle incorporated the best of both worlds, avoiding the excesses of pure capitalism or socialism.
Looking at the political landscape today, it’s clear that this “middle ground” position is, by far, the most popular. It’s simply common knowledge that both capitalism and socialism cause serious problems when taken to the extreme—knowledge that, in many cases, was graciously handed down to us by our grade 7 social studies teachers. But this seemingly common-sense approach gets the issue wrong in a number of important ways.
The Myth of the “Mixed Economy”
The first issue with the middle ground position is that there’s really no such thing as a “mixed” economy. As Ludwig von Mises explains in his magnum opus Human Action, a market economy and a socialist economy are mutually exclusive in a very technical sense, so mixing them, even in theory, is impossible:
The market economy or capitalism, as it is usually called, and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialist. Production is directed either by the market or by the decrees of a production tsar or a committee of production tsars.
What gets euphemistically called a “mixed economy,” Mises explains later in the book, is more accurately called a system of interventionism. It is still a degree of market economy, but instead of a free market, it’s a hampered market.
This has implications far beyond changing our terminology. Once we see that there is no mixing capitalism and socialism, the very concept of a spectrum between them is vitiated, and thus, so is the concept of a middle ground. As Mises writes in another place, “Interventionism is not a golden mean between capitalism and socialism. It is the design of a third system of society’s economic organization and must be appreciated as such.”
Rather than thinking of capitalism, socialism, and interventionism as being in a line, think of them arranged in a triangle. There are simply three independent systems to choose from, and none of them is “in between” any of the others.
Aside from being more economically accurate, this new configuration also helps us avoid the temptation of the middle ground fallacy, also known as the argument to moderation. The middle ground fallacy is the assumption that the best position must be the compromise between two extremes—sometimes it is, of course, but often it’s not. It’s quite likely that this fallacy has played a role in the current popularity of the “middle ground” interventionist position. Mises hints at this with his “golden mean” comment. It’s tempting to assume that the middle is best.
“But,” object the interventionists, “our position hardly stems from blind adherence to the middle for its own sake. We have genuine concerns about unfettered capitalism that we believe interventionism can mitigate.”
An Aversion to Freedom
One common concern is that—in an unhampered market—people would buy things that are bad for them. If the government didn’t regulate food, drugs, cars, houses, and so on, consumers might opt for more dangerous options because they are cheaper, leading to more deaths and injuries.
Others might be concerned about inequality. If the government doesn’t provide basic services like education, roads, libraries, and public parks, they fear that society would quickly be split into the haves and the have-nots.
Still others are concerned that specific industries would come under pressure. If the government lifts all protections, such as tariffs, wouldn’t that spell disaster for some businesses?
The common theme in these and countless other objections is an aversion to the consequences of freedom. People cite these issues as evidence that the free market “doesn’t work,” but what they really mean is that it would produce outcomes that they personally find distasteful. At their core, these arguments boil down to saying: “The problem with freedom is that people would get to do what they prefer to do, instead of what I would have them do.” To which I would respond: yes, that’s precisely what freedom is all about.
It’s completely understandable to be concerned about what people would do if the government didn’t intervene in the economy. It’s quite possible that society would look very different, that some would lose their jobs, and that the rich and poor would become more stratified.
But it’s important to understand that just because the free market would produce outcomes we don’t always like, that doesn’t mean there’s something fundamentally wrong with it. It’s quite presumptuous to say that a system is objectively broken simply because it doesn’t always give us what we personally want or we don’t know how certain things would work.
Milton Friedman summed up this theme well when he said, “A major source of objection to a free economy is precisely that it...gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.”
A Capitalist Dystopia?
The other major category of objection to the free market is perhaps best described as “it would usher in the apocalypse.” Two of the more common dystopian predictions are that free markets would lead to environmental disaster and that monopolies would take over and charge a fortune for everything. However, these predictions are entirely unfounded.
Regarding the environment, it’s important to remember that the free market is based on private property rights, and polluting someone else’s property is clearly an invasion of those rights. As such, a true free market would hardly allow the kind of unchecked pollution that is often feared. Now, it’s true, a property owner could mine or otherwise destroy their property as much as they wanted so long as there was no impact on the surrounding land, air, or water. But that just comes back to the above point about freedom—the objection is essentially, “He should be forced to use his land according to my [or government’s] preferences, not his own.”
As for monopolies taking over, this fear is based on the assumption that firms always benefit from merging and expanding. But this has been shown to be economically incorrect, specifically by Ronald Coase and Murray Rothbard. The economic theory accords with our real-world experience. Ask yourself this: if the market has a constant tendency toward concentration, why isn’t every single industry as concentrated as antitrust laws will allow?
The Problem with Interventionism
As the above discussion hopefully demonstrates, the supposed issues with pure capitalism are not really issues at all. True, a considerable degree of pluralism needs to be tolerated, but aside from that there’s nothing inherent in the system that prevents it from working extremely well.
There are, however, inherent issues with interventionism (and, of course, with socialism, but that goes without saying). As Henry Hazlitt shows in Economics in One Lesson, pretty much every conceivable intervention creates more problems than it solves. The reason these interventions remain popular despite this is that we focus on the immediate and visible consequences, which tend to be positive, while ignoring the long-run and invisible consequences, which tend to be negative. Rothbard’s analysis in Power and Market likewise demonstrates many serious problems inherent in the interventionist approach—how it harms personal utility, creates cartels, and wastes resources. Thus, far from fixing a broken system, interventionism actually breaks a working system.
So what would a better grade 7 social studies model look like? As discussed earlier, there are three possible systems: a free market, a hampered market, and socialism. While there is no spectrum between capitalism and socialism, there is a spectrum within interventionism, from a very high degree of intervention to almost none—and, in a sense, the pure free market is just the non-interventionist extreme on this spectrum.
The only real downside of the free market is that people are allowed to do things we don’t like. The downsides of interventionism—and these become more prominent as we move toward higher degrees of intervention—are that economic well-being is compromised and liberty is violated. Given these realities, the only reasonable position for those who cherish freedom and prosperity is the radical one: a pure market economy.
