Economic Freedom and Interventionism

There are no ivory towers to house economists. Whether he likes it or not, the economist is always dragged into the turmoil of the arena in which nations, parties, and pressure groups are battling. Nothing absorbs the minds of our contemporaries more intensely than the pros and cons of economic doctrines. Economic issues engross the attention of modern writers and artists more than any other problem. Philosophers and theologians today deal more often with economic themes than with those topics which were once considered as the proper field of philosophical and theological studies. What divides mankind into two hostile camps, whose violent clash may destroy civilization, is antagonistic ideas with regard to the economic interpretation of human life and action.

Politicians proclaim their utter contempt for what they label as “mere theory.” They pretend that their own approach to economic problems is purely practical and free from any dogmatic prepossessions. They fail to realize that their policies are determined by definite assumptions about causal relations, i.e., that they are based on definite theories. Acting man, in choosing certain means for the attainment of ends aimed at, is necessarily always guided by “mere theory”; there is no practice without an underlying doctrine. In denying this truth, the politician tries in vain to withdraw the faulty, self-contradictory, and a hundred-times refuted misapprehensions directing his conduct of affairs from the criticism of the economists.

The social function of economic science consists precisely in developing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks. The less these quacks are able to advance plausible objections to an economist’s argument, the more furiously do they insult them.

Sound Money versus Inflationism and Expansionism

At the beginning of our century the governments of the civilized nations were committed either to the so-called classical gold standard or to the gold exchange standard. Their conduct of monetary and credit policies was, to be sure, not free from mistakes, and they indulged in a certain amount of credit expansion. But when compared with conditions after 1914, they were moderate in their expansionist ventures and spurned the fantastic projects of the so-called “monetary cranks” who advocated boundless inflation and credit expansion as the patent medicine for all economic ills.

Yet this rejection of the plans which aimed at making people prosperous through increasing the quantity of money and fiduciary media was not founded upon a satisfactory cognition of the inevitable and undesired consequences of such a policy. The governments were disinclined to deviate from traditional standards of monetary management because the troubles engendered by earlier inflations had not yet been obliterated from the memory of the older statesmen and some vestiges of the prestige of the classical economists still prevailed. Professors and bankers loathed the writings of Ernest Solvay (1838-1922), Silvio Gesell (1862-1930), and a host of other expansionists. But hardly anybody knew why these authors were wrong or how to refute them. In fact the doctrines generally accepted by the treasuries, the central banks, the financial press, and the universities did not differ essentially from the ideas advanced by the “monetary cranks.” These champions of a sweeping social reform to be accomplished by monetary measures only carried the official doctrine to its ultimate logical consequences. It was to be expected that in a coming emergency, such as a great war or revolution, those in office would turn away from their cautious reserve and that orgies of inflation and credit expansion would be rife.

Such was the state of monetary and credit theory when my Theory of Money and Credit was published.1  I tried to construct a theory based entirely upon the modern subjectivist methods of dealing with economic issues, the marginal utility concept. What was called “inflation” at that time and is passionately praised today under the labels of deficit spending and pump-priming can never make a nation more prosperous. It may bring about a shift of income and wealth from some groups of the population to other groups, but it invariably tends to impair the prosperity of the whole nation. In my book, I pointed out that the phenomenon of interest, i.e., the higher valuation of present goods as against future goods, is an ineluctable category of human conduct which does not depend on the particular structure of society’s economic organization; it cannot be abolished by any statutes or reforms. Endeavors to keep the rate of interest below the height it would attain on a market not sabotaged by credit expansion are doomed to failure in the long run. In the short run they result in an artificial boom which inevitably ends in a crash and slump. The recurrence of periods of economic depression is not a phenomenon inherent in the very course of affairs under laissez-faire capitalism. It is, on the contrary, the outcome of the reiterated attempts to “improve” the operation of capitalism by “cheap money” and credit expansion. If one wants to avert depressions, one must abstain from any tampering with the rate of interest. Thus was elaborated the theory which supporters and critics of my ideas very soon began to call the “Austrian theory of the trade cycle.”

As expected, my theses were furiously vilified by the apologists of the official doctrine. Especially abusive was the response on the part of the German professors, the self-styled “intellectual bodyguard of the House of Hohenzollern.” In exemplifying one point, a hypothetical assumption was made that the purchasing power of the German mark might drop to a one-millionth of its previous equivalent. “What a muddle-headed man who dares to introduce?if only hypothetically?such a fantastic assumption!” shouted one of the reviewers. But a few years later the purchasing power of the mark was down not to one-millionth, but to one-billionth of its prewar amount!

It is a sad fact that people are reluctant to learn from either theory or experience. Neither the disasters manifestly brought about by deficit spending and low interest rate policies, nor the confirmation of the theories in my Theory of Money and Credit by such eminent thinkers as Friedrich von Hayek, Henry Hazlitt and the late Benjamin M. Anderson have up to now been able to put an end to the popularity of the fiat money frenzy.*  The monetary and credit policies of all nations are headed for a new catastrophe, probably more disastrous than any of the older slumps.

The Economic Theory of Socialism

Sixty years ago Sidney Webb boasted that the economic history of the century is an almost continuous record of the progress of socialism. A few years later an eminent British statesman, Sir William Harcourt, asserted: “We are all Socialists now.” There cannot be any doubt that all nations were pursuing policies which were bound to result finally in the establishment of all-round planning exclusively by the government, i.e., socialism or communism.

Yet nobody ventured to analyze the economic problems of a socialist system. Karl Marx had outlawed such studies as merely “utopian” and “unscientific.” As he saw it, the mythical productive forces which inevitably determine the course of history and direct the conduct of men “independently of their wills” would in due time arrange everything in the best possible way; it would be a vain presumption of mortal men to arrogate to themselves a judgment in these matters. This Marxian taboo was strictly observed. Hosts of pseudo-economists and pseudo-experts dealt with alleged shortcomings of capitalism and praised the blessings of government control of all human activities; but hardly anybody had the intellectual honesty to investigate the economic problems of socialism.

To put an end to this intolerable state of affairs I wrote several essays and finally a book on socialism.2  The main result of my studies was to prove that a socialist commonwealth would not be in a position to apply economic calculation. When socialism is limited to one or to a few countries only, the socialists can still resort to economic calculation on the basis of prices determined on the markets of non-socialist countries. But once all countries adopted socialism, there would no longer be any market for the factors of production, the factors of production would no longer be sold and bought and no prices would be determined for them.

This means that it would become impossible for a socialist management to reduce the various factors of production to a common denominator and thereby resort to calculation in planning future action and in appraising the result of past action. Such a socialist management would simply not know whether what it planned and executed was the most appropriate procedure to attain the ends sought. It would operate in the dark. It would squander scarce factors of production, both material and human (labor). The paradox of planning is precisely that it abolishes the conditions required for rational action based on weighing cost (input) and result (output)..What is advocated as conscious planning is in fact the elimination of conscious purposive action.

The socialist and Communist authors could not help admitting that my demonstration was irrefutable. To save face they radically reversed their argument. Until 1920, the year in which my thesis on economic calculation was first published, all socialists had declared that the essence of socialism was the elimination of the market and market prices. All the blessings which they expected from the realization of socialism were described as the result of this abolition of the price system. But now they are anxious to show that markets and market prices can be preserved even under socialism. They are drafting spurious and self-contradictory schemes for a socialism in which people “play” market in the way children play war or railroad. They do not comprehend in what respect such childish play differs from the real thing it tries to imitate.

The Middle Way

Many politicians and authors believe that they could avoid the necessity of choosing between capitalism (laissez faire) and socialism (communism, planning). They recommend a third solution which?as they say?is as far from capitalism as it is from socialism. In imperial Germany this third system was called Sozialpolitik; in the United States it is known as the New Deal. Economists prefer the term used by the French, interventionism. The idea is that private ownership of the means of production should not be entirely abolished; but the government should “improve” and correct the operation of the market by interfering with the operations of the capitalists and entrepreneurs?by means of orders and prohibitions, taxes, and subsidies.

But interventionism cannot work as a permanent system of society’s economic organization. The various measures recommended must necessarily bring about results which?from the point of view of their own advocates and the governments resorting to them?are more unsatisfactory than the previous state of affairs which they were designed to alter. If the government neither acquiesces in this outcome nor derives from it the conclusion that it is advisable to abstain from all such measures, it is forced to supplement its first steps by more and more interference until it has abolished private control of the means of production entirely and thus established socialism. The conduct of economic affairs, i.e., the determination of the purposes for which the factors of production should be employed, can ultimately be directed either by buying and abstention from buying on the part of consumers, or by government decrees. There is no middle way. Control is indivisible.

It is interventionism that produces all those evils for which a misguided public opinion indicts laissez-faire capitalism. As has been pointed out above, the endeavors to lower the rate of interest by means of credit expansion generate the recurrence of depression. Attempts to raise wage rates above the height they would attain in an unhampered market result in prolonged mass unemployment. “Soak-the-rich” taxation results in capital consumption. The joint outcome of all interventionist measures is general impoverishment. It is a misnomer to call the interventionist state the welfare state. What it ultimately achieves is not improving but lowering the common man’s welfare, his standard of living. The unprecedented economic development of the United States and the high standard of living of its population were achievements of the free enterprise system.

The Interconnectedness of All Economic Phenomena

Economics does not allow any breaking up into special branches. It invariably deals with the interconnectedness of all phenomena of acting and economizing. All economic facts mutually condition one another. Each of the various economic problems must be dealt with in the frame of a comprehensive system assigning its due place and weight to every aspect of human wants and desires. All monographs remain fragmentary if not integrated into a systematic treatment of the whole body of social and economic relations.

To provide such a comprehensive analysis is the task of my book Human Action, a Treatise on Economics (New Haven: Yale University Press, 1949). It is the consummation of lifelong studies and investigations, the precipitate of half a century of experience. I saw the forces operating which could not but annihilate the high civilization and prosperity of Europe. In writing my book, I was hoping to contribute to the endeavors of our most eminent contemporaries to prevent this country from following the path which leads to the abyss.

Reprinted from Plain Talk, September 1949.

• 1<em>Die Theorie des Geldes und der Umlaufsmittel</em>, first German-language edition, 1912; English translation, <em>The Theory of Money and Credit</em> (J. Cape, 1934; Yale, 1953; FEE, 1971; and Liberty Fund, 1980).
• *F. A. Hayek (1899- ), author of The Road to Serfdom (1944) was appointed Nobel Laureate economist in 1974. Henry Hazlitt (1894- ), economic journalist, was the author of the popular Economics in One Lesson. B. M. Anderson (1886-1949) was well known as the economist for the Chase Bank.
• 2<em>Die Gemeinwirtschaft</em>, first German-language edition, 1922; English language translation, <em>Socialism</em> (J. Cape, 1936; Yale, 1951; J. Cape 1969; Liberty Fund, 1981).