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 Economic Consequences

Interventionism is not an economic system, that is, it is not a method which enables people to achieve their aims. It is merely a system of procedures which disturb and eventually destroy the market economy. It hampers production and impairs satisfaction of needs. It does not make people richer; it makes people poorer.

Concededly, the interventionist measures may give certain individuals or certain groups of individuals advantages at the expense of others. Minorities may obtain privileges which enrich them at the expense of their fellow citizens. But the majority, or the whole nation, stands only to lose by interventionism.

Let us, for instance, consider the tariff. It is quite possible to grant privileges to a group of producers, let us say the owners of copper mines; the consumers will suffer while the mine operators will gain. But if every line of production and every kind of labor is to be afforded equal protection, everyone has to give up as consumer what he gains as producer. More than that, everyone suffers because the protection shifts production from the most advantageous natural conditions, and thus diminishes the productivity of capital and labor, that is, it increases production costs. A tariff establishing just one or a few protective duties may serve the individual interests of certain groups; a comprehensive tariff system can only decrease the satisfaction of all.

But these restrictive measures are still comparatively harmless. They reduce the productivity and make people poorer but they permit the process to continue to function. The market can adjust to isolated restrictive measures. The effects are different in the case of measures designed to fix prices, wages, and interest rates at points different from what they would be in the unhampered market. If they are measures which intend the elimination of profits, they paralyze the working of the market economy. Not only do they divert production from the ways which lead to the best and most efficient satisfaction of the consumers’ demand; they cause waste of both capital and labor; they create permanent mass unemployment. They may bring about the artificial boom, but with it they bring in its wake a depression. They change the market economy into chaos.

Popular opinion ascribes all these evils to the capitalistic system. As a remedy for the undesirable effects of interventionism they ask for still more interventionism. They blame capitalism for the effects of the actions of governments which pursue an anti-capitalistic policy.

The case of monopoly is particularly significant. It is possible, even probable, that in a market economy, which is unhampered by government intervention, there will be conditions which temporarily may give rise to the appearance of monopoly prices. We may regard it as probable, for instance, that even in the free-market economy an international mercury monopoly might have been formed, or that there might be local monopolies for certain building materials and fuels. But such isolated instances of monopoly prices would not yet create a “monopoly problem.” All national monopolies and—with a few exceptions—all international monopolies owe their existence to tariff legislation. Were the governments really serious about fighting monopolies they would use the effective means they have at their disposal; they would remove the import duties. If they merely did this the “monopoly problem” would lose its importance. Actually, the governments are not interested in eliminating monopolies; rather, they try to create conditions to enable producers to force monopoly prices on the market.

Let us assume, for example, that the domestic plants working at full capacity produce the quantity m of a given good and that domestic consumption at the world market price p plus the import duty d (that is at the price p plus d) amounts to quantity n—n being larger than quantity m. Under such conditions the tariff will enable the domestic producers to obtain for their products a price above the world market price.1 The protective tariff is effective; it accomplishes its purpose. This is, for instance, the case of the wheat producers in the European industrial countries. If, however, m (i.e., quantity produced) is larger than the domestic consumption at world market prices, then the import duty does not give any advantage to the domestic producers. Thus, an import duty on wheat or on steel in the United States would fail to have any effect on prices; it would not by itself lead to a price increase for the domestic output of wheat or steel.

If, however, the domestic producers want to obtain advantages from the tariff protection even when m is larger than the domestic consumption at world market prices, they have to form a cartel, a trust, or some other form of monopolistic combination and agree to reduce production. Then they are in a position, provided the state of demand (the shape of the demand curve) permits it, to force the consumer to pay monopoly prices which are higher than world market prices, but lower than the world market price plus the import duty. What in the first instance is attained directly by the tariff must in the second case be accomplished by the monopoly organization which the protective tariff makes possible.

Most of the international cartels were only made possible because the totality of the world market was separated into national economic areas by tariffs and related measures. How insincere the governments are in their attitude toward monopolies is most evident in their efforts to create world monopolies, even for articles for which the conditions required to form monopolies call for special measures over and above tariff legislation. The economic history of the last decade shows a number of measures of different governments designed—though not successfully—to create world monopolies for sugar, rubber, coffee, tin, and other commodities.

To the extent that interventionism accomplishes the aims which government is seeking, it also creates an artificial scarcity of goods and price increases. As far as the governments pursue other than these two aims, they fail; rather, effects appear which the governments themselves consider even less desirable than the conditions they tried to remove. Out of this chaos to which interventionism leads, there are only two ways of escape—the return to an unhampered market or the adoption of socialism.

The unhampered market economy is not a system which would seem commendable from the standpoint of the selfish group interests of the entrepreneurs and capitalists. It is not the particular interests of a group or of individual persons that require the market economy, but regard for the common welfare. It is not true that the advocates of the free-market economy are defenders of the selfish interests of the rich. The particular interests of the entrepreneurs and capitalists also demand interventionism to protect them against the competition of more efficient and active men. The free development of the market economy is to be recommended, not in the interest of the rich, but in the interest of the masses of the people.

[1. ]For simplicity’s sake we disregard transportation costs. However, there would be no particular difficulty involved in introducing them into the calculation as well.