The Online Library of Liberty

A project of Liberty Fund, Inc.

• Titles In the Liberty Fund Library of the Works of Ludwig Von Mises
• Acknowledgments
• Preface
• Introduction
• Monetary and Economic Policy Problems Before, During, and After the Great War
• Part 1: Austro-hungarian Monetary and Fiscal Policy Issues Before the First World War
• Chapter 1: The Political-economic Motives of the Austrian Currency Reform 1
• Chapter 2: The Problem of Legal Resumption of Specie Payments In Austria-hungary 1
• Chapter 3: The Foreign Exchange Policy of the Austro-hungarian Bank 1
• Chapter 4: On the Problem of Legal Resumption of Specie Payments In Austria-hungary
• Chapter 5: The Fourth Issuing Right of the Austro-hungarian Bank 1
• Chapter 6: Financial Reform In Austria 1
• Chapter 7: The General Rise In Prices In the Light of Economic Theory 1
• Chapter 8: On Rising Prices and Purchasing Power Policies 1
• Chapter 9: Disturbances In the Economic Life of the Austro-hungarian Monarchy During the Years 1912-1913 1
• Part 2: Economic Policy Issues In the Midst of the Great War
• Chapter 10: On the Goals of Trade Policy 1
• Chapter 11: Inflation 1
• Chapter 12: On Paying For the Costs of War and War Loans 1
• Chapter 13: Remarks Concerning the Problem of Emigration 1
• Part 3: Austrian Fiscal and Monetary Problems In the Postwar Period
• Chapter 14: Monetary Devaluation and the National Budget 1
• Chapter 15: For the Reintroduction of Normal Stock Market Practices In Foreign Exchange Dealings 1
• Chapter 16: On Carl Menger’s Eightieth Birthday 1
• Chapter 17: How Can Austria Be Saved?
• Chapter 18: The Claims of Note Holders Upon Liquidation of the Bank 1
• Chapter 19: The Austrian Currency Problem Thirty Years Ago and Today 1
• Chapter 20: The Restoration of Austria’s Economic Situation 1
• Chapter 21: The Austrian Problem 1
• Chapter 22: The Gold-exchange Standard 1
• Chapter 23: The Social Democratic Agrarian Program 1
• Chapter 24: America and the Reconstruction of the European Economy 1
• Chapter 25: The Currency and Finances of the Federal State of Austria 1
• Chapter 26: The Economic Crisis and Lessons For Banking Policy 1
• Part 4: Interventionism, Collectivism, and Their Ideological Roots
• Chapter 27: The Economic System of Interventionism 1
• Chapter 28: Economic Order and the Political System 1
• Chapter 29: Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923 1
• Appendixes
• Appendix A: Maxims For the Discussion of Methodological Problems In the Social Sciences: Paper Delivered At the Private Seminar 1
• Appendix B: Short Curriculum Vitae of Mayer Rachmiel Mises of Lemberg 1

CHAPTER 27

The Economic System of Interventionism1

Two economic systems are struggling for supremacy. On the one hand there is the capitalist system—that is, private ownership of the means of production—advocated by liberalism; on the other hand, there is the socialist or communist system—that is, collective ownership of the means of production supported by socialists of all shades.2 Between these two systems, however, there is a third system, interventionism, which its adherents and supporters claim is neither socialism nor capitalism, and avoids the drawbacks of both while combining the advantages of each. It is applied today by almost all governments, and virtually all political parties advocate it in one or another form.3

Interventionism does not want to abolish private ownership of the means of production but only to restrict it. It declares, on the one hand, that unlimited private ownership of the means of production is harmful to society; but it maintains, on the other hand, that public ownership of the means of production—socialism—is, either in general or at least for the time being, impractical. Thus it wants to create some third way: a state of society that is midway between private ownership of the means of production, on the one hand, and collective ownership of the means of production, on the other hand. In this way the “excesses” and damages of capitalism are supposed to be prevented, while the advantages of free initiative and vitality, which socialism cannot provide, are preserved.

The method that is used is “interventions” in economic life. By such interventions we mean isolated commands of social control (through the regulation of the state) that force the owners of the means of production and the entrepreneurs to use the means of production at their disposal in a way different than they otherwise would. “Isolated commands” means that the commands do not form a part of a system of interventions that regulates all production and distribution, and would thereby eliminate private ownership of the means of production and put collective ownership (socialism) in its place. The commands that we have in mind, no matter how much they may pile up, are to be regarded as isolated commands as long as they are not issued as a plan to direct the whole economy in place of the individuals’ pursuit of profit guided by the forces of the market. The term “means of production” is to be understood to mean all goods of a higher order, that is, all goods that are not yet ready for use or consumption by the consumers; this includes all those goods that retailers have in stock and are designated as “ready for use” in the commercial sense.

The interventions can be of two kinds: they can be either production-restricting interventions, that is, orders that directly obstruct or impede production, or price-restricting interventions, which amount to the same thing as setting the prices of goods and services other than as they would be formed on the unhampered market.

Production-restricting interventions, by their very nature, can have no other effect than to reduce the productivity of economic activity. No more will be said about them here. We will limit ourselves exclusively to the treatment of price-restricting interventions; for this purpose we will investigate price controls ordered by the authorities that legally specify a maximum price.

At the price that is formed on the unhampered market, or would have been formed if the government had not prevented the free formation of prices, the costs of production are covered by revenues. If a lower price is ordered by the authorities, the revenues fall below costs. If it is not a question of nondurable goods that can undergo a rapid loss of value if kept in storage, the dealers and producers will refrain from selling them in order to hold on to their goods in the hope of more favorable times, for instance, in the expectation that the official order will soon be rescinded. If the authorities do not want their command to result in the product in question completely disappearing from the market, they cannot limit themselves to fixing the price; at the same time, they must also order that all existing stocks be sold at the prescribed price.

But even that does not suffice; at the ideal market price, supply and demand would have matched each other. Now, since the price has been set lower by official decree, the quantity demanded has increased while the supply remains unchanged. The available supplies are not enough to satisfy fully all who are ready to pay the prescribed price. The market mechanism that normally brings supply and demand into balance by changes in price no longer operates. Now people who would be ready to pay the price prescribed by the authorities must leave the market without having achieved what they want. Those who got there earlier or who know how to exploit some personal relationship with the sellers have already acquired the entire supply; the others are left empty-handed. If the authorities want to avoid this consequence of their intervention, which goes directly counter to their intentions, they must go further and add rationing to the price controls and the mandatory selling of the existing stock. An official regulation determines how much of the product can be allotted to each applicant at the prescribed price.

But once the supply is used up that was on hand at the time the intervention was introduced, a very difficult problem then arises. Since selling at the price prescribed by the authorities is no longer profitable, its production is either cut back or completely stopped. If the authorities want to have production continued, they must oblige the producers to produce, and for this purpose they must also set the prices of raw materials and semifinished goods, as well as workers’ wages. These commands, however, cannot be limited to the one or the few branches of production that the authorities want to regulate because they consider these products to be especially important. They must extend the commands to encompass all branches of production; they must regulate the prices of all goods and every labor cost, and the conduct of all entrepreneurs, capitalists, landowners, and workers.

If they were to leave some branches of production free, then capital and labor would flow into them, and the goal that the authorities wanted to reach with their first intervention would completely fail. But the authorities imposed price controls on this particular line of production precisely because of the importance they attached to there being an ample supply of this particular good. It runs completely against their intention if precisely because of the intervention there is now less of this good than before.

Thus, one sees that the isolated intervention—in our case the maximum price—imposed on the working of an economic order based on private ownership of the means of production fails to achieve the purpose that its advocates want to attain; it is—from the point of view of its advocates—not merely useless but really counterproductive, because it dramatically makes worse the “evil” that the intervention was supposed to fight. Before the price control was enacted, the commodity was—in the opinion of the authorities—too expensive; now it disappears from the market. But this was not the intention of the authorities, who wanted to make the item available to the consumer at a lower price. From their own viewpoint, the impossibility, now, of obtaining the article must appear as the greater, the far greater evil. In this sense, one can say that isolated interventions are useless and counterproductive, and such an interventionist economic system is unworkable and inconceivable, in that it contradicts economic logic.

If the authorities do not want to get things back on track by reversing the first isolated intervention—revoking the price control—then they must follow this first intervention with others. The command to sell at no price higher than the one prescribed must be followed not only by the command to sell existing stocks at this price and to introduce rationing; it is also necessary to impose price controls for higher-order goods and wage rates, and finally to impose compulsory labor on both entrepreneurs and workers. Furthermore, these regulations cannot be limited to one or a few branches of production, but must include all branches of production. There is simply no other choice: either desist from isolated interventions in the workings of the market or instead turn over the entire management of production and distribution to the authorities. Either capitalism or socialism; there is no middle way.

It is the recognition of this fact that leads liberalism to reject interventionist intrusions in the arena of economics. Liberalism opposes authoritarian interventions not out of hostility to the state, not because of any insistence on natural law, but out of a sober recognition of the facts. It rejects direct commands by the state and the municipalities in economic affairs because it is convinced that unhampered entrepreneurial activity leads to greater productivity, that is, to a better provision of the consumers; and it rejects governmental interventions into the activities of entrepreneurs because it is of the opinion that the authorities cannot reach the goals that they wish to attain through this method.

[1. ][This article originally appeared in German in Mitteilungen des Deutschen Hauptverbandes der Industrie, vol. 11, no. 31 (July 31, 1930).—Ed.]

[2. ][On Mises’s general critique of the “impossibility” of comprehensive socialist central planning in replacing a functioning, competitive market economy due to the former’s inability to undertake efficient “economic calculation” for allocating scarce factors of production among competing uses in a complex system of division of labor, see Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” (1920) in F. A. von Hayek, Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism (London: George Routledge, 1935), pp. 87-130, and Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Fund, [1951] 1981), especially pp. 95-194, also, Bureaucracy (Indianapolis: Liberty Fund, [1944] 2007), especially pp. 17-46, and Human Action: A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996), pp. 689-715. In addition, see Richard M. Ebeling, “Economic Calculation Under Socialism: Ludwig von Mises and His Predecessors,” in Austrian Economics and the Political Economy of Freedom (Northampton, Mass.: Edward Elgar, 2003), pp. 101-35, and “Why Socialism is ‘Impossible,’” The Freeman: Ideas on Liberty (October 2004), pp. 8-12.—Ed.]

[3. ][On the “Austrian” theory on the nature, workings, and limits of interventionism as an economic system in place of the competitive market economy, also see Ludwig von Mises, Liberalism: The Classical Tradition (Indianapolis: Liberty Fund, [1927] 2005), pp. 37-75, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1929] 1996), Interventionism: An Economic Analysis (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1940] 1998), Human Action, pp. 716-79, and Planning for Freedom: How the Market System Works (Indianapolis: Liberty Fund, [1980] 2008). Also, Murray N. Rothbard, Power and Market: The Government and the Economy (Menlo Park, Calif.: Institute for Humane Studies, 1970); Israel M. Kirzner, “The Perils of Regulation: A Market-Process Approach,” in Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985), pp. 119-49; Sanford Ikeda, Dynamics of the Mixed Economy: Toward a Theory of Interventionism (London: Routledge, 1997); and Richard M. Ebeling, “The Free Market and the Interventionist State: The Political Economy of Public Policy,” in Austrian Economics and the Political Economy of Freedom, pp. 203-30.—Ed.]