A Critique of Interventionism

In Germany, the classical country of interventionism, the need to deal seriously with an economic critique of inter­ventionism was scarcely felt. Interventionism came to power without a fight. It could ignore the science of eco­nomics created by Englishmen and Frenchmen. Friedrich List denounced it as being injurious to the interests of the German people. Among the few German economists, Thünen was scarcely known, Gossen completely unknown, and Hermann and Mangold without much influence. Men­ger was “eliminated” in the Methodenstreit. Formal science in Germany did not concern itself with economic achieve­ments after the 1870s. All objections were brushed aside by branding them special interest statements of entrepreneurs and capitalists.9

In the United States, which now seems to assume leader­ship in interventionism, the situation is quite different. In the country of J. B. Clark, Taussig, Fetter, Davenport, Young, and Seligman, it is impossible to ignore all the achievements of economics. It was to be expected, therefore, that an attempt would here be made to prove the realizabil­ity and suitability of interventionism. John Maurice Clark, formerly a University of Chicago professor and now, as was his great father John Bates Clark, professor at Columbia Uni­versity in New York City, has undertaken this very task.10

We regret, however, that only a single chapter with a few pages deals with the fundamental problems of intervention­ism. Professor Clark distinguishes between two types of so­cial regulation of economic actions: regulation of incidental matters, “those in which the state is dealing with matters which are incidental to the main transaction,” and regula­tion of essential matters, “those in which the ‘heart of the contract’ is at stake and the state presumes to fix the terms of the exchange and dictate the consideration in money or in goods, or to say that the exchange shall not take place at all.”11 This distinction roughly coincides with our distinc­tion between production and price intervention. It is clear that an economic consideration of the system of interven­tionism cannot proceed any differently.

In his analysis of “control of matters incidental to the con­tract” J. M. Clark does not arrive at any conclusion other than ours in an analysis of production intervention. He too must conclude that “such regulations impose some burdens on industry.”12 This is all that interests us in his discussion. His examination of the political pros and cons of such inter­vention is irrelevant for our problem.

In his discussion of control of the “heart of the contract,” which roughly corresponds to price intervention, Clark first mentions the American control of interest rates. It is circum­vented, he asserts, through additional incidental charges that raise the nominal rate to the borrower. An illegal com­merce has developed in small loans to consumers. Inasmuch as decent people do not engage in such transactions, they are the sphere for unscrupulous operators. As such transac­tions must shun the light of publicity, exorbitant interest rates are demanded and granted, which exceed by far the rates that would prevail if no rates were fixed. “Charges equivalent to several hundred per cent per year are the com­mon thing. The law multiplies the evil of extortion ten­fold.”13

Nevertheless, Professor Clark does not believe that rate fixing is illogical. In general, the loan market even for this category of consumer loans is to be left free, with a law to prohibit an interest rate higher than the market rate. “The law . . . may render a great service in preventing the exac­tion of charges which are materially above the true market rate.” Therefore, the simplest method, according to Clark, is “to fix a legal rate for this class of loans which liberally covers all costs and necessary inducements, and to forbid all charges in excess of this rate.”14

Surely, when the interest regulation sanctions the market rates or even exceeds them, it can do no harm. It is useless and superfluous. But if it fixes a rate that is lower than that which would develop in an unhampered market, then all the consequences described so well by Clark must emerge. Why, then, the rate fixing? Clark’s answer: it is necessary to avoid unfair discrimination.15

The concept of “unfair” or “undue discriminations” orig­inates in the field of monopoly.16 If the monopolist as seller is in the position to classify the potential buyers according to purchasing power and desire intensity, to whom he offers his commodity or service at different prices, then he does better without a uniform price. Such conditions are given in most cases of means of transportation, electric power plants, and similar enterprises. The freight rates of railroads represent a nearly classical case of such a differentiation. But without further explanation one cannot call this practice “unjust,” an interventionist charge so naively and resent­fully made against monopolists. However, we need not be concerned with the ethical justification of intervention. From a scientific point of view, we merely must observe that there is room for government intervention in the case of monopoly.

But there is also a differential treatment of the various classes of buyers that runs counter to the interests of mo­nopolies. This may be the case where the monopoly is man­aged as a part of a larger enterprise in which the monopoly serves objectives other than greatest profitability. Let us disregard all cases in which the monopolist either is a com­pulsory association or acts under its influence, seeking to achieve certain national, military, or social objectives. Freight rates, for instance, may be set to accommodate for­eign trade, or municipal services may be priced according to customers’ income. In all such cases the interventionists approve of the differentiation. To us, only those cases are significant in which the monopolist resorts to differentia­tion that runs counter to his profit interests. It may be that he takes into consideration the interests of his other enter­prises that are more important to him. Or he wants to disad­vantage a buyer for personal reasons, or force him to do or not to do something. In the United States, railroads have favored individual shippers through concessions of lower freight rates, which often forced their competitors to close their businesses or sell them at depressed prices. The public generally censured such practices because they promoted industrial concentration and formation of monopolies. Pub­lic opinion viewed the disappearance of competition in in­dividual industries with great alarm. It failed to recognize that competition takes place among producers and sellers not only within each individual branch of production, but also between all related goods, and in the final analysis, between all economic goods. And it did not recognize that the monopolistic price charged by the few genuine monopolies—mining and similar primary production—is not so detrimental to all, as the naive foes of monopolies are willing to assume.17

But there is no talk of monopoly in Clark’s case of the loan market for consumers, small farmers, merchants and trades­men. How is it possible to practice unfair discrimination? When one lender does not lend at the market rate the bor­rower may simply go to another. Of course, it cannot be denied that everyone is inclined—especially among the bor­rowers of this lowest category—to overestimate his own credit rating, and call the rates demanded by creditors too high.

J. M. Clark proceeds from a discussion of interest regula­tion to that of minimum wages. “Artificial” wage boosts, he believes, lead to unemployment. The rise in wages raises production costs, and thus the product price. The quantity that was sold at the lower price can no longer be marketed at this higher price. On the one hand, this leaves unsatisfied buyers who would like to buy at the no longer quoted lower price, and on the other hand, it causes unemployment of workers who are willing to work at lower wage rates. Fi­nally, entrepreneurs will be willing to bring this potential demand and supply together.

So far we can again agree with Clark. But then comes an assertion that completely misses the mark—that is, that “the regulations affecting the incidental conditions of employ­ment” must have the same consequences since they too raise production costs.18 But this is not correct. If wages are freely determined in the labor market, no raise in wages above the market rate can occur as a result of interventions, such as the shortening of labor time, mandatory insurance of workers at the expense of employers, regulations of work­shop conditions, vacations of workers with full pay, et cetera. All these costs are shifted to wages and are borne by the workers. This fact could be overlooked because such social interventions were introduced mainly at a time when real wages were rising and the purchasing power of money was falling. Thus, net wages paid to workers continued to rise in terms of both money and purchasing power despite the ever-rising social costs placed on the employer. His calculations include not only the workers’ wages, but also all costs resulting from their employment.

Clark’s further remarks have no bearing on our problem. He believes that wage increases, like other interventions on behalf of workers, “may prove self-sustaining through rais­ing the level of personal efficiency, through furnishing an added stimulus to the employer’s search for improved methods, and through hastening the elimination of the least efficient employers and transfering their business to those who will conduct it more efficiently.”19 All this can also be said about an earthquake or any other natural catastrophe.

Professor Clark is trained too well in theory and is too per­ceptive not to notice how untenable his reasoning actually is. He concludes, therefore, that the question of whether or not a given intervention is a “violation of economic law” is ba­sically “a question of degree.” In the final analysis, Clark as­sures us, we must consider how severely the intervention affects production costs or market prices. The law of supply and demand is “no thing of precision and inexorable rigid­ity.” Many times “a small change in costs of production” has no effect at all on final prices—when, for instance, the price is usually quoted in round numbers and the merchants absorb small changes in costs or wholesale prices. Clark’s fi­nal word: “A large increase in wage rates may be a ‘violation of economic law,’ in the sense in which we are using the term, where a small increase would not be.”20

Upon careful reflection, Professor Clark yields to all the objections by those writers who call interventionism unsuit­able and illogical. It is obvious and undeniable that the quantitative consequences of an intervention depend on the severity of the intervention. A small earthquake destroys less than a big one, and a very small earthquake may leave no visible traces at all.

It is utterly irrelevant that Clark nevertheless clings to the statement that such interventions can be made and advo­cated. He must admit that this leads to further measures in order to alleviate the consequences. For instance, when price controls are imposed, there must be a rationing in order to remove the discrepancy between supply and de­mand. And it will be necessary to stimulate production di­rectly because the normal impetus will be lost.21 At this point Clark unfortunately discontinues his discussion. Had he proceeded he would necessarily have come to the conclu­sion that there are only two alternatives: either to abstain from all intervention, or, if this is not the intention, to add ever new interventions in order to eliminate “the discrep­ancy between supply and demand which the public policy has created,” until all production and distribution are controlled by the social apparatus of coercion, that is, until the means of production are nationalized.

In the case of minimum wage legislation it is a very unsat­isfactory solution for Professor Clark to recommend that the workers who lost their jobs be employed in public works.22 And when he points at “energy, intelligence and loyalty” calling for government intervention, he merely reveals his embarrassment.23

In his second to last sentence of this chapter dealing with fundamentals, Clark concludes that “government can do a great deal of good by merely seeing to it that everyone gets the benefit of the market rate, whatever that is, and thus prevent the ignorant from being exploited on account of their ignorance.”24 This concurs completely with the posi­tion of classical liberalism: government shall be limited to the protection of private property and the elimination of all obstacles to free market access for individuals or groups of individuals. This is nothing but another wording of the principle: laissez faire, laissez passer. It is insignificant that Professor Clark apparently believes that a special informa­tion program is necessary for the attainment of this objec­tive. Ignorance of the market situation alone cannot prevent potential buyers or workers from exploring the situation. If the sellers and entrepreneurs are not hampered in searching for customers and workers, their competition will reduce goods prices and raise wages until the market rate is at­tained. But whatever it be, classical liberal principles are not violated if government undertakes to publish relevant data on the formation of market prices.

The result of Clark’s inquiry into our problem thus does not contradict our own analysis earlier in this essay. Despite Clark’s eagerness to prove that the popular interventions are not unsuitable and illogical, he did not succeed in adding anything but the observation that the consequences are in­significant if the intervention is quantitatively unimportant, and that important interventions have undesirable conse­quences that need to be alleviated through more interven­tion. At this point Clark unfortunately halted his discus­sion. If he had proceeded to its conclusion, which he should have done, it too would have clearly revealed the only alter­native: either private property in the means of production is permitted to function freely, or control over the means of production is transferred to organized society, to its appara­tus of coercion, the state. It would have revealed that there can be no other alternative but socialism or capitalism.

Thus, Clark’s work also, which is the most complete ex­pression of American interventionism, can come to no other conclusion in its discussion of the basic questions of inter­ventionism. Interventionism is a system that is contra­dictory and unsuitable even from the point of view of its sponsors, that cannot be carried out logically, and whose in­troduction in every case can effect nothing but disturbances in the smooth functioning of the social order based on pri­vate property.

We owe the most recent German discussion of our prob­lem to Richard Strigl, a member of the Austrian School. Although not so outspoken as J. M. Clark, he too sympathizes with interventionism. Every line of his work, which seeks to analyze theoretically the wage problems of intervention­ism,25 clearly reflects his desire to acclaim as much as possi­ble social policy in general and labor union policies in par­ticular. All Strigl’s statements are carefully worded in the same manner that authors of previous centuries worded theirs in order to escape inquisition or censure.26 But all the concessions which his heart grants to interventionistic thinking concern only secondary matters and the formula­tion of doctrine. Regarding the problem itself, Strigl’s per­ceptive analysis comes to no conclusion other than that drawn in scientific economic analysis. The gist of his doc­trine is visible in the sentence: “The greater the service a worker can render, the more he will earn, provided his ser­vice is useful in the economy; it does not matter whether his wage is determined in the free market or agreed upon by collective contract.”27 It obviously grieves him that this is so, but he cannot and will not deny it.

Strigl emphasizes that artificial wage increases create un­employment.28 This is undoubtedly the case where wages are raised in individual industries only, or in individual countries only, or where they are raised unevenly in differ­ent industries and countries, or where monetary policies are used to stem a general rise in prices. Undoubtedly Strigl’s case is important for an understanding of present-day con­ditions. For a thorough understanding of the problem, how­ever, we must rely upon another basic assumption. To have universal validity our analysis must assume that the rise in wages occurs evenly and simultaneously in different indus­tries and countries, and that monetary factors do not inter­vene. Only then can we completely understand interven­tionism.

Of all the interventionist measures none is probably under stronger attack in Germany and Austria than the eight-hour workday. Many believe that the economic emer­gency can be met only be repealing the eight-hour law: more work and more intensive work are needed. It is taken for granted that the lengthening of labor time and the im­provement in labor efficiency would not be accompanied by higher wages, or at least that the increases would trail the rising labor efficiency, so that labor would become less expensive. Simultaneously, a reduction in all kinds of “social costs” is demanded, such as the elimination of the “welfare tax” pay­able by the businessman in Austria. It is tacitly assumed that he would retain the savings from such cost reductions, and that his labor costs would thus be reduced indirectly. Efforts to reduce wages directly are insignificant at the pres­ent time.

In social journals and economic literature, the discussion of the problems of the eight-hour day, and the intensity of labor reveals a slow but steady progress in economic under­standing. Even writers who do not hide their bias for inter­ventionism, admit the cogency of the most important argu­ments against interventionism. Seldom do we still meet the blindness in a fundamental understanding of such matters that characterized our literature before the war.

Surely, the supremacy of the interventionist school has not yet been overthrown. Of Schmoller’s state socialism and etatism and of Marx’s egalitarian socialism and communism only the names have survived in political life; the socialist ideal itself has ceased to exert a direct political effect. Its fol­lowers, even those who were willing to shed blood to bring it about a few years ago, have now postponed it or given up entirely. But interventionism as Schmoller and Marx advo­cated it—Schmoller, as a foe of all “theory,” quite unhesitat­ingly; Marx with bad conscience about its insoluble contra­diction to all his theories—now dominates the climate of opinion.

We need not examine here whether the political condi­tions are ripe for the German people and other leading nations to turn away from interventionistic policies. An im­partial analysis of the state of affairs may show that in­terventionism continues to advance. This can hardly be denied for Great Britain and the United States. But surely it is as futile today as it was in the past to defend intervention­ism as meaningful and purposeful from the point of view of economic theory. In fact, it is neither meaningful nor pur­poseful from any point of view. There is no road from eco­nomics to interventionism. All interventionistic successes in practical politics were “victories over economics.”

• 9See the relevant description of this method by Pohle, Die gegenwärtige Krisis in der deutschen Volkswirtschaftslehre [The present crisis in German economics], 2nd ed., Leipzig, 1921, p. 115 et seq.
• 10J.M. Clark, Social Control of Business (Chicago: University of Chicago Press, 1926).
• 11Ibid., p. 450. To avoid any misunderstanding I would like to emphasize that this distinction has nothing to do with the public-law distinction between essen­tialia, naturalia, and accidentalianegotii (the indispensably necessary, natural re­sources, and contract matters).
• 12Ibid., p. 451.
• 13Ibid., p. 453 et seq.
• 14Ibid., p. 454 et seq.
• 15Ibid.
• 16See the voluminous American literature: Nash, The Economics of Public Utili­ties, New York, 1925, p. 97, 371; Wherry, Public Utilities and the Law, New York, 1925, pp. 3 et seq., 82 et seq., 174. See also Clark, op. cit., p. 398 et seq.
• 17See my Gemeinwirtschaft, Jena, 1922, p. 382 et seq. [English-language edition: Socialism (London: Jonathan Cape, 1936), p. 391 et seq.], also my Liberalismus, Jena, 1927, p. 80 et seq. [English-language edition: The Free and Prosperous Common­wealth (New York: D. Van Nostrand Co., Inc., 1962), p. 92 et seq.].
• 18Clark, op. cit., p. 455.
• 19Ibid.
• 20Ibid.
• 21Ibid., p. 456.
• 22Ibid.
• 23Ibid., p. 457.
• 24Ibid., p. 459.
• 25See Strigl, Angewandte Lohntheorie. Untersuchungen über die wirtschaftlichen Grundlagen der Socialpolitik [Applied wage theory. Inquiries into the economic foundations of social policy], Leipzig and Vienna, 1926.
• 26Ibid., especially p. 71 et seq.
• 27Ibid., p. 106.
• 28Ibid., p. 63 et seq., p. 116 et seq.