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• 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 28

Economic Order and the Political System1

Economic and political liberalism go hand in hand, and appeared in history at the same time. Only in the second half of the nineteenth century did political parties begin to believe that in the long run it was possible to successfully combine liberalism and democracy with interventionist, statist, and socialist economic policies. This view is still firmly held in Western Europe and the United States. It is the source of the prevailing confusion that surrounds all political and economic policy ideas and concepts. In recent decades—and this can hardly be contested—the abandonment of economic liberalism has gone hand in hand with the retreat from parliamentarianism and with imposed restrictions on the political freedom of the citizenry.

Soviet Russia, which leads in the flight from economic liberalism, has been the first to proclaim dictatorship, to declare parliamentary government and freedom to be “bourgeois prejudices,” and to eliminate all the institutions that ought to protect the individual against the arbitrary power of government.2 No other state has gone so far in either abolishing private ownership or in establishing the unrestrained despotism of the political authorities.

But the Russian example has been followed by many other countries, even if less radically and especially with less cruelty and bloodshed. Year by year dictatorship advances and parliamentary government and democracy lose ground.3 Only yesterday many Englishmen expressed the idea that Western Europe and the states founded by Western Europeans around the world were immune from all dictatorial ventures. The nations that had created modern culture, they thought, would never abandon such essential elements of their culture as representative government and the citizens’ right to political freedom. Today the parliamentary constitution of France is already seriously threatened; in England itself, the land of habeas corpus, a party advocating dictatorship is raising its head;4 and in the United States a great writer believes he must warn his countrymen about the danger of losing their freedoms.5

Especially in the last few years there has been an uninterrupted and triumphant advance of interventionism on the one hand and of dictatorship on the other. Is this an accidental coincidence, or is there a real connection between the two?

The democratic system rests on the market economy with private ownership of the means of production. Each penny represents a ballot. Consumers, by their conduct in buying and abstaining from buying, control the market system. Entrepreneurs and capitalists are forced to follow the instructions that the consumers give them on the market. If they are unable to fulfill the desires of the market in the best and least expensive way, they experience losses; finally, if they do not change their conduct in time, they are removed from their favored position into other roles where they no longer have control over some of the means of production, and therefore can no longer do harm.

The market selects the entrepreneurs and capitalists—it makes them rich; the market can also make them poor again and remove them from their position, if they fail to satisfy consumer wants. It is true that on the market there are universal but not equal voting rights. Voting power increases with the size of income. But this greater voting power is itself the result of the voting of the market. It can be won and held only by the test of the market, by the successful use of the means of production that is in compliance with the wishes of consumers. In a capitalist economy that is not restrained by government intervention, ownership is the result of a daily plebiscite of the consumers, who have a sovereign and revocable mandate. Even though landownership has its origin in precapitalist times, the wealth of the landowners must meet this test if it is to be preserved; therefore, real estate, too, is subject to the law of the market.

The structure of political democracy corresponds to the democratic structure of the market. The citizen as well as the consumer decides who should direct production according to his desires; just as he replaces the entrepreneur and the capitalist who does not satisfy his consumption wants with other men, so it is granted to the hands of the electorate to replace political leaders who do not lead where the voter wants to go. Just as the market sees to it that production is directed according to the desires of the consumers, so a democratic constitution makes sure that governmental power is exercised in agreement with the political ideals of the electorate.

Now political democracy has decided against the economic democracy of the market. Whether one welcomes this or deplores it, it is an incontestable fact that public opinion today wants to replace the capitalist economy with a system in which it is the government that manages production and distribution rather than the market. No longer will people put up with, as a universally employed slogan coined by the Marxists says, the “anarchy of production”—that is, the absence of coercion and the freedom of the market. People want interventionism, statism, the planned economy, and socialism. The outcome of every election confirms anew that the masses do not want capitalism but want a controlled economy. Even in the dictatorial states where there are no elections, this, too, is the will of the masses.

One may argue that if there were free elections in Germany they would produce a different outcome than those that resulted in the last several votes.6 But no one supposes that any German opposition to the current government is striving for the return to capitalism. It, too, wants a planned and controlled economy, although under the direction of a different leader and for other foreign and domestic purposes. The insoluble conflict in the policies of the “Left parties” of England, France, and the United States is that they advocate a planned economy while refusing to realize that they are preparing the way for dictatorship and the abolition of civil liberties.7 Their conceptual confusion is so great that they wish to fight for the preservation of democracy in cooperation with Soviet Russia.8

The adherents of those dictatorships that are called “fascist” have clearly acknowledged and expressed the fact that in a state in which the economy is directed by the government it is meaningless to talk about democratic constitutions and the freedom of the individual. The National Socialists argue as follows: if the farmer is no longer free to cultivate his field as he wishes and to dispose of the produce of his soil, and if the entrepreneur is no longer allowed to manage his company according to his own ideas, then writers, artists, and scholars will not be allowed to create as they wish, either.9

If the economy rests entirely in the hands of the authorities, then those authorities can prevent the publication of all unacceptable intellectual writings and suppress the activities of all groups of which they disapprove. Even any claimed right to freedom of conscience, freedom of inquiry, and of expression of opinion will not help. The power of the totalitarian state is so great that it can take control over every conceivable activity without arousing resistance. Schiller was able to evade the tyranny of the twelve dukes of Württemberg by fleeing to the nearby “abroad.”10 Where will a sanctuary be open for a persecuted genius if all states become totalitarian?

The paradox of modern times is the fact that the democratic era that was created by liberalism led to the rise of both economic freedom and political democracy. William E. Rappard presents this development in a masterly way based on the example of his native Switzerland. No other man could have created such a work. Originally from the French-speaking part of Switzerland, culturally a citizen of all three ethnic regions of his homeland, and connected with the Anglo-Saxon tradition by scholarship at the oldest and most eminent university of the New World, Rappard has been active not only as a researcher and teacher.11

As a Swiss statesman and a brilliant representative of that Geneva internationalism that is working for the pacification of our weapons-choked world, he has experienced the history of our times as an active participant. Succinctly and factually, Rappard sketches out in his new book L’individu et l’état dans l’évolution constitutionnelle de la Suisse [The Individual and the State in the Constitutional Evolution of Switzerland] the path that Switzerland has followed from the patriciate of the eighteenth century through wars, revolutions, and party struggle to the liberalism and democracy of the constitutions of 1848 and 1874.

His analysis clearly shows how the mobilization of the citizenry in exercise of their political rights was the outgrowth of the development of political democracy; it was also the starting point for the new economic interventionism, which has now become a threat to political democracy.12 Rappard always speaks only as a historian who follows Ranke’s principle of simply presenting things as they were. Only in the final chapter does he articulate the problem with which Switzerland today is confronted. It is necessary to choose. “Should our liberal and democratic achievements be sacrificed to our statism?” Rappard asks. “Or do we wish to sacrifice our statism for our love of liberty and our desire for self-government?”

Switzerland, Rappard thinks, cannot evade the need to make this decision. The direction of current policies cannot be continued. Statism, today, lives by consuming the wealth created by the capitalist economy. Statism has extraordinarily raised the cost of living, created an extravagant administrative apparatus, pursued a protective tariff policy, practiced deficit spending in funding federal highways, and used its alcohol monopoly to lavishly distribute subsidies to now one and then another special interest, but always to agriculture. Either statism must be given up due to its financial shortcomings, or the economy must be restructured along the lines of the example of Russia, Germany, and Italy. That, however, cannot be done without some sort of dictatorship, Rappard says, since the Swiss people will not be inclined to freely choose to have their standard of living decreased.

No one has previously formulated the political and economic policy problems of our time so clearly and with such relentless consistency as Rappard. In the face of this formulation the dogmas and illusions collapse that for decades have ruled the politics of the civilized nations. The conditions in England, France, and the United States are not unlike those in Switzerland. Thus Rappard’s book acquires universal significance beyond the geographic, historical, and material borders of the country in question. It will direct the political thinking of all those who in the current generation possess a mature sense of civic responsibility.

[1. ][This article originally appeared in German in Wiener Wirtschaftswoche, vol. 5 (1936) as a review of William E. Rappard, L’individu et l’état dans l’évolution constitutionnelle de la Suisse [The Individual and the State in the Constitutional Evolution of Switzerland] (Zurich, 1936).—Ed.]

[2. ][The Russian Czar, Nicolas II, abdicated in March 1917 during the First World War. A provisional government was formed of Left-oriented political parties. This government was overthrown in the Bolshevik coup d’état of November 7, 1917. A free election for a Constituent Assembly was held on November 25, 1917, which resulted in the Socialist-Revolutionary Party winning 40.1 percent of the vote, the Bolsheviks 24 percent, and a variety of other parties, including the Constitutional Democratic Party (4.7 percent) and the Mensheviks (1.5 percent), winning the rest. The Constituent Assembly met once on January 5-6, 1918. Vladimir Lenin, the leader of the Bolsheviks, declared that his party would not accept any decisions of the Assembly, and the Assembly was prevented from meeting again by Red Guard units under Bolshevik command. A three-year civil war soon broke out that resulted in the victory of Lenin’s Bolshevik (Communist) Party, which then dictatorially ruled over what became the Soviet Union until December 1991. Marxists argued that the liberal idea of freedom—including freedom of speech, the press, religion, association, the voting franchise, and freedom of enterprise and trade—was a “bourgeois” illusion to make “the masses” believe they were free when in fact they were the victims of “wage slavery” and exploitation by the ruling capitalist class, who used the power of the state to maintain their private control over the means of production. Only socialism would provide “real freedom” for people through collective ownership of the means of production, along with central planning that would assure “production for use” rather than “production for profit.”—Ed.]

[3. ][When Mises wrote this article in 1936, virtually the only functioning democracy in Central and Eastern Europe was Czechoslovakia. All the other nations in this part of Europe had totalitarian political regimes (Fascist Italy and Nazi Germany) or authoritarian regimes with political dictatorship, restrictions on civil liberties, and economic systems of control and intervention. See William E. Rappard, “Nationalism and the League of Nations Today,” in Problems of Peace,Eighth Series:Lectures Delivered at the Geneva Institute of International Relations (Freeport, N.Y.: Books for Libraries, [1934] 1968), pp. 17-19:For generations and, in some cases, for centuries, all nations within the orbit of our Western civilization have, through wars and revolutions, been striving to secure for all their members, greater physical and moral security, greater political equality, greater individual freedom. Greater security, that is, more assured protection against the violence of their fellow-citizens and against the arbitrary oppression of their Governments. Greater equality, that is, less discrimination on grounds of race, or sex, or religious and philosophical creed, and social position. Greater freedom, that is, more latitude for the self-expression and self-assertion of the individual in the face of the authority of tradition, and of the State. Guarantees for the protection of the fundamental rights of man; the abolition of arrest without trial and imprisonment for debt; the suppression of slavery; the extension of the suffrage to all and thereby the subordination of the Government to the will of the people, that is, of the majority of the people; parliamentary control of the budget, that is, no taxation without representation; the recognition of the freedom of thought, of speech, of assembly, of the Press, the independence of the Judiciary, and the autonomy of the university; such are some of the ideals for which our fathers, grandfathers, and great-grandfathers fought, bled, and died. Such are some of the conquests of human dignity over barbarism, of knowledge over ignorance, of right over might, which they triumphantly achieved and which they proudly bequeathed to us.And such are some of the ideals which, after the greatest struggles in human history, we, their children of the twentieth century, through stupidity and cowardice are, sometimes with the blind enthusiasm of mad fanaticism and sometimes with the dull resignation of impotence, disavowing, renouncing, abandoning. The individual, the family, the local or regional community, everything and everybody are being sacrificed to the State. The State, itself, once held to be the protector and the servant of the people, is in several countries of our Western civilization being turned into a weapon for oppressing its own citizens and threatening its neighbors, according to the capricious will of one or of a few self-appointed individuals. These individuals, whether they style themselves chiefs, leaders, or dictators, are all what free men of all times, under all climes, have combated as tyrants. They are today acclaimed as heroes by hundreds of thousands of European youths, welcomed as saviors by millions of European bourgeois, and accepted by tens of millions of European senile cowards of all ages.—Ed.]

[4. ][Mises is referring to the British Union of Fascists (BUF), founded by Sir Oswald Mosley (1896-1980), who had served in the Labor Party government in 1929, but broke away in 1931. After visiting Italy, he was inspired to form the BUF in 1932 on the model and ideology of Mussolini’s Italian fascist movement. The BUF was banned in 1940 and Mosley was first interned and then placed under house arrest for the remainder of the Second World War.—Ed.]

[5. ][Mises is referring to an article by American journalist and political analyst Walter Lippmann, “The Permanent New Deals,” Yale Review (June 1935); Lippmann extended the core elements of his argument in his book An Inquiry into the Principles of the Good Society (Boston: Little, Brown, 1937), which in its critique of the planned society and the regulated economy relies heavily on Mises’s and Friedrich A. Hayek’s analyses of the economic unworkability of the state-managed economy and the dangers to political and personal freedom with the elimination of the market order.—Ed.]

[6. ][In the German national election of July 1932, the National Socialist German Workers (Nazi) Party won 37.8 percent of the vote, the Social Democratic Party won 21.9 percent, and the Communist Party won 14.6 percent. In the national election of November 1932, the Nazis lost votes, winning 33.1 percent, the Social Democrats, 20.4 percent, and the Communists, 16.9 percent. The German president, Paul von Hindenburg, appointed Adolf Hitler as chancellor on January 30, 1933. Following the Reichstag fire in March 1933, Hitler consolidated powers in a way that shortly resulted in his becoming absolute dictator—the Führer—in Germany until the Allied victory over Nazi Germany in May 1945.—Ed.]

[7. ][This general theme on the relationship between economic liberty and political freedom was one developed by a number of writers in the 1930s, along the lines of Mises’s argument. Of note among them were Gustav Cassel, From Protectionism Through Planned Economy to Dictatorship, the sixth Richard Cobden Lecture (London: Cobden-Sanderson, 1934); Francis W. Hirst, Liberty and Tyranny (London: Duckworth, 1935) and Economic Freedom and Private Property (London: Duckworth, 1935); William Henry Chamberlin, Collectivism: A False Utopia (New York: Macmillan, 1936); Walter Lippmann, An Inquiry into the Principles of the Good Society. This was also the central theme of F. A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, [1944] 2007). See also Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (New Haven: Yale University Press, 1944) and “Socialism Versus European Democracy,” The American Scholar (Spring 1943), pp. 220-31.—Ed.]

[8. ][Mises is referring to the “popular front” movement of the mid and late 1930s. In May 1934, the Communist Party of the Soviet Union inaugurated what became called the “popular front” of all those parties united in their opposition to fascist governments and ideas. This replaced Soviet opposition to all cooperation with socialist parties and movements not controlled by Moscow. In June 1934, the socialist government in France made an alliance with the French Communist Party, and the French government entered into a defense treaty with the Soviet Union in 1935. The Soviet government also used the popular front movement to violently gain control of the antifascist movement in Spain during the Spanish Civil War (1936-39). The popular front movement collapsed in August 1939, with the Soviet-Nazi nonaggression pact, which included a secret protocol between Moscow and Berlin to divide Poland between Nazi Germany and the Soviet Union in case of war, and for the Baltic Republics to be recognized as part of the Soviet sphere of influence.—Ed.]

[9. ][On the structure and workings of the Nazi planned economy, see Gunter Reimann, The Vampire Economy: Doing Business Under Fascism (Auburn, Ala.: Ludwig von Mises Institute, [1939] 2007); and Walter Eucken, “On the Theory of the Centrally Administered Economy: An Analysis of the German Experiment,” Economica, Part I (May 1948), pp. 79-100, and Part II (August 1948), pp. 173-93.—Ed.]

[10. ][Friedrich von Schiller (1759-1805) was one of Germany’s most famous poets and playwrights. He fell out of favor with the Duke of Württemberg in 1782 due to the Duke’s displeasure over the themes in several of his plays. After being placed under a fortnight’s arrest, and an order written by the duke commanding him to write no more comedies and not to interact with anyone outside the principality of Württemberg, Schiller escaped during the dead of night. After first living in Mannheim and then Leipzig, he finally settled in Weimar in 1787, where he soon formed an enduring and close friendship with Johann Wolfgang von Goethe.—Ed.]

[11. ][William E. Rappard (1883-1958) was the cofounder of the Graduate Institute of International Studies in Geneva, Switzerland, and one of the leading classical liberals in Europe in the interwar period. Born in New York of Swiss parents, he studied economics at Harvard University and at the University of Vienna before the First World War. He supposedly influenced Woodrow Wilson in arranging for the League of Nations to have its headquarters in Geneva, and was an active advocate of international peace and free trade; he served on the League of Nations Mandates Committee, and was a member of the Swiss delegation at League of Nations Assembly meetings. Rappard developed the themes discussed in this review in his University of Chicago Harris Lectures, The Crisis of Democracy (Chicago: University of Chicago Press, 1938). For a brief biography of Rappard’s life and work, see Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,” Ideas on Liberty (January 2000), pp. 33-41.—Ed.]

[12. ][See William E. Rappard, “The Relation of the Individual to the State,” Annals of the American Academy of Political and Social Science (January 1937), pp. 215-18:The revolutions at the end of the eighteenth century . . . were essentially revolts of the individual against the traditional state—expressions of his desire to emancipate himself from the ties and inhibitions which the traditional state had imposed on him. . . . After the rise of individualism, which one may define as the emancipation of the individual from the state, we had the rise of democracy, which one may define as the subjection of the state to the will of the individual. In the latter half of the nineteenth century and up to the present, the individual, having emancipated himself from the state and having subjected the state to his will, has furthermore demanded of the state that it serve his material needs. Thereby he has complicated the machinery of the state to such a degree that he has again fallen under the subjection of it and he has been threatened with losing control over it. . . . The individual has increasingly demanded of the state services which the state is willing to render. Thereby, however, he has been led to return to the state an authority over himself which it was the main purpose of the revolutions in the beginning of the nineteenth century to shake and break. . . . The individual demanding that the state provide him with every security has thereby jeopardized his possession of that freedom for which his ancestors fought and bled.—Ed.]