A Critique of Interventionism

The history of the last decades can be understood only with a comprehension of the consequences of such inter­vention in the economic operations of the private property order. Since the demise of classical liberalism, intervention­ism has been the gist of politics in all countries in Europe and America.

The economic layman only observes that “interested par­ties” succeed again and again in escaping the strictures of law. The fact that the system functions poorly is blamed ex­clusively on the law that does not go far enough, and on cor­ruption that prevents its application. The very failure of interventionism reinforces the layman’s conviction that pri­vate property must be controlled severely. The corruption of the regulatory bodies does not shake his blind confidence in the infallibility and perfection of the state; it merely fills him with moral aversion to entrepreneurs and capitalists.

But the violation of law is not an evil that merely needs to be eradicated in order to create paradise on earth, an evil that flows from human weakness so difficult to uproot, as etatists so naively proclaim. If all interventionist laws were really to be observed they would soon lead to absurdity. All wheels would come to a halt because the strong arm of gov­ernment comes too close.

Our contemporaries view the matter like this: farmers and milk dealers conspire to raise the price of milk. Then comes the state, the welfare state, to bring relief, pitting common interest against special interest, public economic view against private point of view. The state dissolves the “milk cartel,” sets ceiling prices, and embarks upon criminal prosecution of the violators of its regulations. The fact that milk does not become as cheap as the consumers had wished is now blamed on the laws that are not strict enough, and on their enforcement that is not severe enough. It is not so easy to oppose the profit motive of pressure groups that are injurious to the public. The laws must there­fore be strengthened and enforced without consideration or mercy.

In reality, the situation is quite different. If the price ceil­ings were really enforced, the delivery of milk and. dairy products to the cities would soon come to a halt. Not more, but less milk, or none at all, would come to the market. The consumer still gets his milk only because the regulations are circumvented. If we accept the rather impermissible and fal­lacious etatist antithesis of public and private interests, we would have to draw this conclusion: the milk dealer who violates the law is serving the public interest; the govern­ment official who seeks to enforce the ceiling price is jeopar­dizing it.

Of course, the businessman who violates the laws and regulations in order to produce regardless of government obstacles is not guided by considerations of public interest, which the champions of the public interest belabor con­tinually, but by the desire to earn a profit, or at least to avoid the loss which he would suffer complying with the reg­ulation. Public opinion, which is indignant at the baseness of such motivation and the wickedness of such action, can­not comprehend that the impracticability of the decrees and prohibitions would soon lead to a catastrophe were it not for this systematic disregard of government orders and prohibi­tions. Public opinion expects salvation from strict com­pliance with government regulations passed “for the protec­tion of the weak.” It censures government only because it is not strong enough to pass all necessary regulations and does not entrust their enforcement to more capable and in­corruptible individuals. The basic problems of intervention­ism are not discussed at all. He who timidly dares to doubt the justification of the restrictions on capitalists and entre­preneurs is scorned as a hireling of injurious special inter­ests or, at best, is treated with silent contempt. Even in a discussion of the methods of interventionism, he who does not want to jeopardize his reputation and, above all, his ca­reer must be very careful. One can easily fall under the sus­picion of serving “capital.” Anyone using economic argu­ments cannot escape this suspicion.

To be sure, public opinion is not mistaken if it scents cor­ruption everywhere in the interventionist state. The corrup­tibility of the politicians, representatives, and officials is the very foundation that carries the system. Without it the sys­tem would disintegrate or be replaced with socialism or cap­italism. Classical liberalism regarded those laws best that afforded least discretionary power to executive authorities, thus avoiding arbitrariness and abuse. The modern state seeks to expand its discretionary power—everything is to be left to the discretion of officials.

We cannot here set forth the impact of corruption on pub­lic morals. Naturally, neither the bribers nor the bribed real­ize that their behavior tends to preserve the system which public opinion and they themselves believe to be the right one. In violating the law they are conscious of impairing the public weal. But by constantly violating criminal laws and moral decrees they finally lose the ability to distinguish be­tween right and wrong, good and bad. If finally few eco­nomic goods can be produced or sold without violating some regulation, it becomes an unfortunate accompaniment of “life” to sin against law and morality. And those individ­uals who wish it were different are derided as “theorists.” The merchant who began by violating foreign exchange controls, import and export restrictions, price ceilings, et cetera, easily proceeds to defraud his partner. The decay of busi­ness morals, which is called “inflation effect,” is the inevi­table concomitant of the regulations that were imposed on trade and production during the inflation.

It may be said that the system of interventionism has be­come bearable through the laxity of enforcement. Even the interferences with prices are said to lose their disruptive power if the entrepreneurs can “correct” the situation with money and persuasion. Surely, it cannot be denied that it would be better without the intervention. But, after all, public opinion must be accommodated. Interventionism is seen as a tribute that must be paid to democracy in order to preserve the capitalistic system.

This line of reasoning can be understood from the view­point of entrepreneurs and capitalists who have adopted Marxian-socialistic or state-socialistic thought. To them, private property in the means of production is an institution that favors the interests of landowners, capitalists, and entre­preneurs at the expense of the public. Its preservation solely serves the interests of the propertied classes. So, if by mak­ing a few painless concessions these classes can salvage the institution that is so beneficial to them, and yet so harmful to all other classes, why jeopardize its preservation by ada­mantly refusing the concessions?

Of course, those who do not share this view regarding “bourgeois” interests cannot accept this line of thought. We do not see why the productivity of economic labor should be reduced through erroneous measures. If private property in the means of production actually is an institution that favors one part of society to the detriment of another, then it should be abolished. But if it is found that private prop­erty is useful to all, and that human society with its division of labor could not be organized in any other way, then it must be safeguarded so that it can serve its function in the best possible way. We need not here discuss the confusion that must arise about all moral conceits if law and moral precepts disallow, or at least revile, something that must be preserved as the foundation of social life. And why should anything be prohibited in the expectation that the prohibi­tion will be largely circumvented?

Anyone defending interventionism with such arguments is undoubtedly seriously deluded regarding the extent of the productivity loss caused by government interventions. Surely, the adaptability of the capitalist economy has ne­gated many obstacles placed in the way of entrepreneurial activity. We constantly observe that entrepreneurs are suc­ceeding in supplying the markets with more and better prod­ucts and services despite all difficu1ties put in their way by law and administration. But we cannot calculate how much better those products and services would be today, without expenditure of additional labor, if the hustle and bustle of government were not aiming (inadvertently, to be sure) at making things worse. We are thinking of the consequences of all trade restrictions on which there can be no differences of opinion. We are thinking of the obstructions to produc­tion improvements through the fight against cartels and trusts. We are thinking of the consequences of price con­trols. We are thinking of the artificial raising of wage rates through collective coercion, the denial of protection to all those willing to work, unemployment compensation, and, finally, the denial of the freedom to move from country to country, all of which have made the unemployment of mil­lions of workers a permanent phenomenon.

Etatists and socialists are calling the great crisis from which the world economy has been suffering since the end of the World War the crisis of capitalism. In reality, it is the crisis of interventionism.

In a static economy there may be idle land, but no unem­ployed capital or labor. At the unhampered, market, rate of wages all workers find employment. If, other conditions be­ing equal, somewhere workers are released, for instance, on account of an introduction of new labor-saving processes, wage rates must fall. At the new, lower rates then all work­ers find employment again. In the capitalist social order un­employment is merely a transition and friction phenomenon. Various conditions that impede the free flow of labor from place to place, from country to country, may render the equalization of wage rates more difficult. They may also lead to differences in compensation of the various types of labor. But with freedom for entrepreneurs and capitalists they could never lead to large-scale and permanent unem­ployment. Workers seeking employment could always find work by adjusting their wage demands to market condi­tions.

If the market determination of wage rates had not been disrupted, the effects of the World War and the destructive economic policies of the last decades would have led to a de­cline in wage rates, but not to unemployment. The scope and duration of unemployment, interpreted today as proof of the failure of capitalism, results from the fact that labor unions and unemployment compensation are keeping wage rates higher than the unhampered market would set them. Without unemployment compensation and the power of la­bor unions to prevent the competition of nonmembers will­ing to work, the pressure of supply would soon bring about a wage adjustment that would assure employment to all hands. We may regret the consequences of the antimarket and anticapitalistic policy in recent decades, but we cannot change them. Only reduction in consumption and hard la­bor can replace the capital that was lost, and only the forma­tion of new capital can raise the marginal productivity of la­bor and thus wage rates.

Unemployment compensation cannot eradicate the evil. It merely delays the ultimately unavoidable adjustment of wages to the fallen marginal productivity. And since the compensation is usually not paid from income, but out of capital, ever more capital is consumed and future marginal productivity of labor further reduced.

However, we must not assume that an immediate aboli­tion of all the obstacles to the smooth functioning of the cap­italist economic order would instantly eradicate the conse­quences of many decades of intervention. Vast amounts of producers’ goods have been destroyed. Trade restrictions and other mercantilistic measures have caused malinvest­ments of even greater amounts that yield little or nothing. The withdrawal of large fertile areas of the world (e.g., Russia and Siberia) from the international exchange system has led to unproductive readjustments in primary production and processing. Even under the most favorable conditions, many years will pass before the traces of the fallacious poli­cies of the last decades can be erased. But there is no other way to the greater well-being for all.