The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Author’s Preface
• Interventionism
• Introduction
• 1.: The Problem
• 2.: Capitalism Or Market Economy
• 3.: The Socialist Economy
• 4.: The Capitalist State and the Socialist State
• 5.: The Interventionist State
• 6.: The Plea For Moral Reform
• I.: Interference By Restriction
• 1.: The Nature of Restrictive Measures
• 2.: Costs and Benefits of Restrictive Measures
• 3.: The Restrictive Measure As a Privilege
• 4.: Restrictive Measures As Expenditures
• II.: Interference By Price Control
• 1.: The Alternative: Statutory Law Versus Economic Law
• 2.: The Reaction of the Market
• 3.: Minimum Wages and Unemployment
• 4.: The Political Consequences of Unemployment
• III.: Inflation and Credit Expansion
• 1.: Inflation
• 2.: Credit Expansion
• 3.: Foreign Exchange Control
• 4.: The Flight of Capital and the Problem of “hot Money”
• IV.: Confiscation and Subsidies
• 1.: Confiscation
• 2.: The Procurement of Funds For Public Expenditure
• 3.: Unprofitable Public Works and Subsidies
• 4.: “altruistic” Entrepreneurship
• V.: Corporativism and Syndicalism
• 1.: Corporativism
• 2.: Syndicalism
• VI.: War Economy
• 1.: War and the Market Economy
• 2.: Total War and War Socialism
• 3.: Market Economy and National Defense
• VII.: The Economic, Social, and Political Consequences of Interventionism
• 1.: The Economic Consequences
• 2.: Parliamentary Government and Interventionism
• 3.: Freedom and the Economic System
• 4.: The Great Delusion
• 5.: The Source of Hitler’s Success
• VIII.: Conclusions
• Reading References

1.

The Alternative: Statutory Law versus Economic Law

Measures of price control are directed at fixing prices, wages, and interest rates at amounts different from those prevailing in the unhampered market. The authority or the group expressly or tacitly entrusted by the authority with power to control prices fixes them as maximums or minimums. The police power is used to enforce these decrees.

The aim underlying such interference with the price structure of the market is either to privilege the seller (in the case of minimum prices) or to privilege the buyer (in the case of maximum prices). The minimum price should make it possible for the seller to achieve better prices for the goods he is offering; the maximum price should enable the buyer to acquire the goods he desires at a lower price. It depends on political conditions just which group the authority will favor. At times maximum prices have been established, at times minimum prices; at times maximum wages, at times minimum wages. Only for interest rates have there been only maximums, never minimums. Political expediency has always demanded such a course.

Out of the controversies over governmental regulation of prices, wages, and interest rates, the science of political economy developed. For hundreds and even for thousands of years the authorities have attempted to influence prices through the use of their power apparatus. They have imposed the heaviest penalties on those who refused to obey their orders. Innumerable lives have been lost in this struggle. In no other field has the police force displayed more eagerness to use its power, and in no other case has the vindictiveness of the authorities found more enthusiastic support by the masses. And still all these attempts failed of their objective. The explanation which this failure has found in the philosophical, theological, political, and historical literature precisely reflects the opinion of the authorities and of the masses. It was maintained that human beings were egoistical and bad by nature and that the authority had been too weak and too reluctant to use force; what were required were hard and ruthless rulers.

Realization of the truth had its origin in the observations of the effects of such measures in a narrowly confined field of application. Among the price control measures, particular importance attaches to the attempts of the authority to impart to debased coins the same value as to coins of full metallic content, and to maintain a fixed exchange ratio between the precious metals gold and silver, and later between metallic money and depreciated paper money. The reasons which caused the failure of all such attempts were early realized and were formulated in the law named after Sir Thomas Gresham.* From these early beginnings it was still a long way to the great discoveries of the Scottish and English philosophers of the eighteenth century, that the market followed certain laws which bound all market phenomena in a necessary relation.

The discovery of the inevitable laws of the market and exchange was one of the great achievements of the human mind. It laid the cornerstone for the development of liberal sociology† and gave rise to liberalism and thus brought with it our modern culture and economy. It paved the way for the great technological achievements of our time. It was at the same time the starting point of a systematic science of human action, that is, of economics.

The pre-scientific mind distinguished between the good and the bad, the just and the unjust in human action. It believed that human behavior could be evaluated and judged by the established standards of a heteronomous moral law. It thought that human action was free in the sense of not being subject to the inherent laws of human behavior. Man should, it argued, act morally; if he acted differently God would punish him in the hereafter if not during his lifetime; man’s actions do not have any other consequences. Therefore, there need be no limit to what the authority might do as long as it did not come in conflict with a stronger power. The sovereign authority is free in the exercise of its power provided it does not exceed the boundaries of the territory in which it is sovereign; it can accomplish everything it desires. There are physical laws which it cannot change; but in the social sphere there are no limitations on what it may do.

The science of political economy began with the realization that there is another limit for the sovereignty of those in power. The economist looks beyond the state and its power apparatus and discovers that human society is the outcome of human cooperation. He discovers that there prevail laws in the realm of social cooperation which the state is unable to modify. He recognizes that the process of the market, which is the result of these laws, determines prices and that the system of market prices provides the rationale of human cooperation. Prices no longer appear as the result of an arbitrary attitude of individuals dependent on their sense of justice but are recognized as the necessary and unequivocal product of the play of market forces. Each specific constellation of data produces a specific price structure as its necessary corollary. It is not possible to change these prices—the “natural” prices—without having previously changed the data. Every deviation from the “natural” price releases forces which tend to bring the price back to its “natural” position.

This opinion is directly contrary to the belief that the authority can alter prices at will through its orders, interdictions, and penalties. If prices are determined by the structure of data, if they are the element in the process which effects social cooperation and which subordinates the activities of all individuals to the satisfaction of the wants of all members of the community, then an arbitrary change of prices, that is one independent of changes in the data, must necessarily create a disturbance in social cooperation. It is true that a strong and determined government can issue price orders and can cruelly revenge itself on those who fail to obey. But it will not achieve the aim it seeks through the price orders. Its intervention is but one of the data in the market which produces certain effects according to the inevitable laws of the market. It is extremely doubtful whether the government will be pleased with these effects and it is extremely doubtful whether the government will not consider them, when they appear, as even less desirable than the conditions it sought to change. At any rate these measures do not achieve what the authority wants to accomplish. Price interventions are, therefore, from the standpoint of the initiating authority not only ineffective and useless, but also contrary to purpose, harmful, and thus illogical.

Anyone attempting to refute the logic of these conclusions denies the possibility of analysis in the field of economics. There would otherwise be no such thing as economics and everything that has been written on economic matters would be meaningless. If prices can be fixed by the authority without producing a reaction in the market which is contrary to the intentions of the authority, then it is futile to attempt an explanation of prices on the basis of market forces. The very essence of such an explanation of market forces lies in the assumption that each constellation of the market has a corresponding price structure and that forces operate in the market which tend to restore this—“natural”—structure of prices if it is disturbed.

In their defense of price controls, the representatives of the Historical School of Political Economy, and nowadays the Institutionalists, reason quite logically from their viewpoint because they do not recognize economic theory. To them economics is merely an aggregate of authoritarian orders and measures. Illogical, however, is the argument of those who on the one hand study the problems of the market with the methods of theoretical analysis but on the other hand refuse to admit that price control measures necessarily produce results contrary to purpose.

The only alternatives are statutory law or economic law. Prices are either arbitrarily determined by the individuals in the market and may, therefore, be channeled by orders of the authorities in any desired direction; or prices are determined by the market forces commonly called supply and demand and the intervention of the authority affects the market as but one of many factors. There is no compromise possible between these two viewpoints.

[* ][Sir Thomas Gresham (1519–1579) pointed out that debasing the money led to a decline in the value of English coins and to gold’s leaving the country and thus was credited with developing “Gresham’s law.” Also see below, p. 47.—Editor]

[† ][Mises uses “sociology” here to mean the science of human action. He later came to consider “sociology” inexpedient for use in that sense; in his major work, Human Action (1949) he used the term “praxeology” to refer to the science of human action.—Editor]