Economic Freedom and Interventionism

The social and economic meaning of institutions may change in the course of history while their legal definition and character remain unaltered. Whenever this is the case, serious misunderstandings originate that lead astray the reasoning not only of the masses but also that of economists and politicians.

Let us deal with two outstanding examples.

Land Reform

The reformers and revolutionaries of the precapitalistic ages aimed at a radical transformation of land ownership. As they saw it, God had given the land as an endowment to all men. As far as any man’s estate exceeds the size needed for the support of his family, he deprives others of what by rights is their due. Nobody has from the point of view of natural law the right to keep as his own more than his legitimate share. In order to establish a fair social order, all land has to be confiscated and redistributed in equal portions to all heads of families. Then the most blatant inequalities of social and economic conditions will disappear. There will no longer be any poverty. All men will be equal.

Such was, still in the 20th century, the program of the Social Revolutionaries, the most popular party of Imperial Russia and the early years of Lenin’s dictatorship. Many politicians of Latin America and of some nations of the Old World still today warmly recommend the same policies and their endeavors meet with sympathetic approval in the United States and in other Western countries.

It can easily be understood how such a program originated in a milieu of feudal conditions. Under feudalism and kindred systems the inequality in the size of the individual inhabitants’ land holdings was an outcome of the political and military order of governmental affairs. A rigid caste system assigned to everybody a definite place in the social hierarchy and a definite position in the economic organization. The individual was born and died in the rank and circumstances inherited from his ancestors. The villein, the peasant, bemoaning his poverty and servile peasant status, could not think of any other way of betterment than that of confiscation of all land holdings and a fair redistribution.

But under the conditions of the capitalistic market society this program of land reform no longer makes any sense. In the market economy the consumers daily decide anew who should own the material factors of production and how much anybody should own. By their buying or abstention from buying the consumers allot control of the material factors of production to those who know how to use them in the best and cheapest way for the satisfaction of the most urgent wants of the consumers. Ownership of land means in the market economy the sovereignty of the consumers. The owners are mandataries of the consumers as it were, bound to employ their property as if it were entrusted to them by the people. When they fail in this regard, they suffer losses. Then they are forced to improve their management or, finally, they go bankrupt. Others who know better how to serve the consumer replace them.

Ownership of land as of all other material factors of production is an asset in the market economy only for those who use it in the best possible way for the satisfaction of the consumers. The idea that inspired the plans for so-called agrarian reform is nonsensical in the market economy. Under the conditions of modern methods of agricultural management, a more or less equal distribution of the soil among the farming population is merely a scheme for granting privileges to a group of less efficient producers at the expense of the immense majority of consumers. The operation of the market tends to eliminate all those farmers whose cost of production is higher than the marginal costs needed for the production of that amount of farm products the consumers are ready to buy. It determines not only the size of the farms as well as the methods of production applied; it determines no less what fields should be tilled and what fields should be left fallow.

Favoritism for Debtors

Another example of the survival of atavistic reform ideas is provided by the popularity of government interference to favor debtors at the expense of creditors.

When more than 2500 years ago Solon in Athens resorted to such a policy and when more than 400 years later in Rome the Gracchi brothers adopted a similar course, they could consider their policies as a method of favoring poor people at the expense of richer ones. Before the 19th century only the well-to-do could lend money and reap interest on funds lent. But capitalism has radically changed these conditions too. Under the modern credit organization the more opulent strata are more often debtors than creditors. They own mortgaged real estate, business firms that are indebted to the banks and insurance companies, common stock of corporations that have issued corporate bonds. On the other hand the common man is a creditor insofar as he has taken out insurance policies, has savings deposits with commercial banks and savings banks, owns bonds whether government issued or corporate, and is entitled to receive retirement and old age pensions.

The most spectacular manifestation of the misinterpretation of the economic meaning of the present-day creditor-debtor nexus was provided by the program of the National-Socialist-German-Labor-Party, the Nazis. Their economic expert, Gottfried Feder, coined the slogan “Brechung der Zinsknechtschaft“ that can by and large be translated as “Destruction of Interest Slavery.” It was adopted as Point II of the “unalterable” Party Program that aimed at the “Abolition of any Income acquired without Labor and Pain.” The popularity of this slogan was irresistible in Germany in the 1920s and early 1930s. In vain did some economists criticize it. One of the few newspapers that tried to block the Nazis’ way to power once published a headline, “Do you, average reader, know that you are a creditor?” The German voters who practically unanimously voted for Hitler certainly did not know it.

Neither do the average men in other countries. The governments can embark upon the inflationary policies they style “deficit spending” and “an easy money policy” because there is no opposition on the part of the masses of people whose endeavors to provide for their old age and for the future of their children are frustrated. In spite of all the unfavorable experiences they had with the monetary policies of the past, the voters look with indifference upon the effort to preserve sound money.

The most momentous virtue of the gold standard is precisely the fact that it makes the determination of money’s purchasing power independent of the ambitions and machinations of political parties and pressure groups. It thus prevents inflationary policies and thereby protects the savings of the common man. But unfortunately this fact is ignored by the millions of Americans who are the owners of many billions of savings accounts, bonds, and insurance policies. Thus the deficit spending and easy money policy of the American government does not find any opposition on the part of the parties that dominate the political life of the nation.

Mises wrote this short essay on primitive economic ideas for inclusion in the 1966 Festschrift for Jacques Rueff published on the occasion of his 70th birthday. It has previously appeared only in French.