In the summer of 1940, Austrian economist Ludwig von Mises arrived in the United States as a refugee from war-torn Europe. Mises had been professor of international economic relations at the Graduate Institute of International Studies in Geneva, Switzerland, for six years, having left his native Austria in 1934. He was 59 years old when he came to America and had to begin the difficult process of starting a new life in a country he had visited only twice before many years earlier.
Thirty-three years later, when he died at the age of 92 in New York City, Mises had created the foundation of what today is a new and vibrant Austrian school of economics in America. But those first years in America were difficult for him. For a long time, he wasn’t able to find a permanent teaching position. And the intellectual environment of wartime America was hostile to the free-market, classical-liberal philosophy that he uncompromisingly espoused.
But Mises immediately set to work establishing himself in his new home. He spent part of the autumn of 1940 writing a short book that he entitled Government and Business, but he was unable to find a publisher for it. The manuscript has remained unpublished until now. Bettina Bien Greaves of The Foundation for Economic Education has prepared it for publication and it is now available for the first time under the title Interventionism: An Economic Analysis.
Those who are well acquainted with Mises’s writings on government regulation of market activity will not find anything radically new or different in this exposition. But the special merit of this “lost” manuscript is the clear and logical formulation that he gives to his famous critique of the interventionist state and its consequences. Indeed, it brings together in a lucid summary all of the arguments that Mises developed against interventionism and the government-hampered economy.
In brilliant fashion, Mises begins his analysis by explaining the nature of the free-market economy and the impossibility of a rationally functioning socialist order. The consumers are the sovereign agents to whose wishes the producers must submit in their production decisions if they are to earn profits and avoid losses.
Through the competition of entrepreneurs desiring to employ factors of production for various enterprises, market prices emerge for the means of production. These market prices for goods and resources then provide the tools for knowing the values and alternative uses for labor, land, and resources in different lines of production that assure their rational allocation in the service of consumer demands. By abolishing private property, competition, and market prices, socialism does away with the only rational method for the efficient use of the scarce means available to serve people’s ends in society.
Market prices integrate the diverse actions of multitudes of people participating in the social system of division of labor. They ensure that supplies are tending to match market demands. They direct resources into those avenues likely to service the most highly valued wants of the consuming public. They assist the entrepreneurs, who guide the production processes of the economy, in anticipating the direction of future market conditions.
Government controls and regulations that set prices or interfere with the competitive formation of prices on the market, therefore, prevent the smooth and effective coordination of those multitudes of human actors whose plans and actions are mutually interdependent for success.
Mises then presents his famous critique of price and production interventions: they inevitably generate imbalances in the market that will force the government to either repeal the existing interventions or extend them in the futile attempt to use new interventions to compensate for the distortions its prior interventions have created, until finally the market has been supplanted by the command economy through a process of incremental expansion of the regulations and controls.
In neat, clear fashion Mises outlines the Austrian theory of the business cycle. The market rate of interest, he reminds us, grows out of the fact that individuals in general place a greater value on fulfillment of desired ends closer to the present than in the future. Hence, for individuals to be willing to forgo the present use of the income and resources at their disposal, they must be offered a premium as compensation. That premium is the rate of interest.
Monetary expansion introduced through the banking system is an attempt to lower interest rates below their market-determined level. The expansion makes it appear that a greater amount of real savings is available for investment purposes than is actually the case. Investment projects in excess of real savings are begun under the influence of these below-market rates of interest. The resulting imbalances and misdirections of scarce investment resources create the conditions for an eventual crisis and depression. Mises also analyzes the futility and contradictions in government foreign exchange controls in an inflationary setting.
In an insightful discussion of the war economy and war financing, Mises points out that the costs from government borrowing to finance its current expenditures can never be shifted to the future and to later generations. Whether the government covers its expenditures through taxing or borrowing, the goods and resources the state wants to have at its disposal today must come out of people’s consumption and production activities in the present. Borrowing only creates the politically advantageous false illusion that government can provide the “benefits” promised from its current expenditures with no burden upon the citizenry in the present.
He also points out that if a war must be fought in self-defense against an aggressor, there is no more efficient method for redirecting the society’s resources into the manufacture of war materiel than the profit system of private enterprise. The resort to wartime controls and production planning can only weaken a nation’s ability to efficiently defend itself.
Finally, Mises discusses the political, social, and economic consequences of interventionism. As an instrument for coercive interference with the results of the market economy, the interventionist state becomes a mechanism for those who are unwilling or unable to succeed in the open competitive arena to use the power of the state to gain a privileged position for themselves at the expense of the rest of the society through protections, subsidies, monopolies, and restrictions.
The interventionist state also reduces the freedom of the peaceful individual to pursue his ends as he finds most advantageous and instead makes him a pawn in the hands of the state. The end product of interventionism, therefore, must be the undermining of the free society and a reduction in the material and spiritual benefits that are possible only in a free-market economy.
LINK: Interventionism: An Economic Analysis by Ludwig von Mises