Some Thoughts on Interventionism

     

In his lead essay, Sandy Ikeda discusses what he calls the “Misesian Paradox.” This paradox refers to the prevalence of interventionism despite Mises’s claim that it is contradictory and unsustainable. In addition, Sandy makes the distinction between “Regulatory Dynamics” and “Transfer Dynamics” and discusses some implications and pattern predictions related to these concepts. In what follows, I would like to focus three points which I hope will lead to further discussion.

The first two issues deal with the relationship and implications of Sandy’s distinction between Regulatory Dynamics and Transfer Dynamics. I understand the purpose of this distinction and don’t disagree with it conceptually. That said, I am not sure the implications of the distinction are as clear as he suggests. He writes, “TD [Transfer Dynamics] exacerbate Kirznerian sheer ignorance and the Hayekian knowledge problem to a lesser degree [than Regulatory Dynamics].” How do we know this to be true? Sandy’s logic is that Regulatory Dynamics distort relative prices to a greater degree than Transfer Dynamics, but it all depends on the scale and scope of the two types of interventions. One could imagine a scenario where the perverse impact of a regulatory intervention is potentially small compared to a transfer intervention. Adding another minor step to the business licensing process, an example of a regulatory intervention, may very well be less damaging to the operation of the market process than significantly taxing wealth created through productive entrepreneurship. The broader point is that there is nothing that allows us to make a general ex ante claim about the relative magnitude of these two types of interventions without more clarity regarding the specifics of the scale and scope of regulations and transfers.

The same issue applies to Ikeda’s ranking of the disruptive consequences of various types of interventions. He writes,

However, consider a hypothetical situation where there is a fixed monetary rule that is both predictable and credible. Is this regulatory intervention more or less distortionary than an environment characterized by significant regime uncertainty where private actors suffer from the threat of unpredictable and large-scale transfers by the government? According to Sandy’s list, the monetary policy would be more disruptive, but it is unclear that this must necessarily be the case. Without further clarification regarding the type, scale, and scope of intervention, I am unable to subscribe to Sandy’s pattern prediction that “the closer a system comes to pure welfare-state capitalism, in which TD predominate, the more relatively sustainable over time it will be compared to those that are characterized mainly by RD.”

Second, after reading Sandy’s essay, I was left wondering how exactly transfers and Transfer Dynamics fit into Mises’s broader critique of interventionism. In his treatments of the dynamics of interventionism, Mises focused mainly, although not exclusively, on government efforts to regulate the market instead of on issues of redistribution. Introducing transfers into the framework raises a host of possibilities but also some important questions and tensions that need to be addressed. For example, which government transfers are subject to the dynamics of interventionism? Is it all government transfers or only a subset of transfers and why? Answering these questions is important for delineating the applicability and limits of the critique of interventionism.

Mises advocated government-induced transfers to fund its basic functions -- e.g., courts, police, defense. He did not see these transfers as being subject to the dynamics of interventionism because the means (taxation) were consistent with the stated ends (the provision of certain services) of policymakers, but things are not that simple. The transfer and provision of these services has a series of unintended consequences which perversely influence certain aspects of the market process and may contribute to failure relative to the stated goal of the policy.

Consider, for example, the government provision of defense and security. To fund these activities the government raises revenue through taxation, but the story doesn’t end with the initial transfer. The provision of defense requires the redirection of scarce resource from the private sector to the public sector. In response to these new profit opportunities, entrepreneurial alertness is redirected from satisfying private consumers to satiating political actors. This all might be fine and well as long as the output meets the stated policy goal of enhancing the public welfare through increased security, but there is evidence that this is often not the case. Much of what falls under the purview of “national defense” benefits a small number of individuals while often generating public bads, including conflict, waste, fraud, and corruption.[13] In these specific instances, the means employed do not align with the specified goal of the policy.

This logic can be generalized beyond the provision of defense. In almost all cases, government transfers intended to produce a stated policy outcome fail at least partially, and often significantly. In some instances police protect citizens’ person and property, while in other cases they undermine their rights. Welfare programs help some people in need but are also subject to fraud, waste, and corruption. How do these and similar types of transfers fit into the critique of interventionism?

The final point I would like to raise relates to the Misesian Paradox. Why does interventionism appear to be so sustainable despite Mises’s claim to the contrary?  One answer is that, under certain conditions, it is sustainable. Sandy hints at this in one line of his essay when he writes, “Capitalism is very resilient. While there is indeed a limit to the amount of interventionist pounding it can absorb, it may have a higher, though not unlimited, tolerance for that sort of thing than Mises estimated.” Mises recognized that interventionism could sustain for at least some period. In Human Action he writes that “interventionism aims at confiscating the ‘surplus’ of one part of the population and at giving it to another part. Once this surplus is exhausted by total confiscation, a further continuation of the policy is impossible.”[14]

The surplus, however, is not fixed and static, but, rather, constantly evolving. As long as entrepreneurs have some freedom to act in a productive manner, new profit opportunities emerge that contribute to existing wealth. This is not to argue that interventions (both regulatory and transfer) do not reduce overall wealth for the general populace below what it would have been absent the interventions. Instead, it is to point out that as long as the wealth created by productive entrepreneurs is greater than the wealth destroyed by interventions, the mixed system can sustain because there will be a sufficient reserve fund to cover the cost of government meddling in the economy. 

To provide one example, consider the rise of the sharing economy. The entrepreneurs driving these innovations have found ways to work around and undermine the burden of previous interventions which had limited entry and competition in certain markets. In many markets the introduction of these services has made previous interventions (e.g., taxi medallions) increasingly irrelevant even though they remain officially on the books. Despite these regulations, there was some space for entrepreneurs to discover new means of creating wealth. In some locations these innovations have been met with new regulations, but in others they have not. This provides one illustration of how wealth creation can occur even in the presence of government interventions which harm general welfare.

It is quite possible that at some point interventions will become so burdensome that the cumulative negative effects will trump the wealth created by productive entrepreneurship. When this occurs the Mises-Ikeda critique will come into its own and interventionism will be unable to continue once the surplus of existing wealth is exhausted. However, until this happens -- it cannot be predicted ex ante -- the mixed economy can sustain as long as the wealth generated from productive activities outpaces the costs associated with existing interventions and the implementation of new interventions.

It is important to note that this line of reasoning does not take issue with the logical cohesion (whether the means are suitable for achieving the stated ends) of the mixed economy but, instead, the practical sustainability of the system. Recognizing that the system can persist is different from claiming that interventions advance the general welfare, which they do not for the reasons that Mises and Ikeda highlight in their work. That is, interventionism can be logically incoherent yet sustainable due to the wealth created by productive entrepreneurs, which buffers the costs of interventions.

[13.] See Thomas K. Duncan and Christopher J. Coyne, “The Overlooked Costs of the Permanent War Economy,” The Review of Austrian Economics 26(4) 2013: 413-31; Christopher J. Coyne, “Lobotomizing the Defense Brain,” The Review of Austrian Economics 28(4) 2015: 371-96; and Christopher J. Coyne, Courtney Michaluk, and Rachel Reese, “Unproductive Entrepreneurship in U.S. Military Contracting,” Mimeo, 2016.

[14.] Ludwig von Mises, Human Action: A Treatise on Economics, in 4 vols., ed. Bettina Bien Greaves (Indianapolis, IN: Liberty Fund, 2007), vol. 3, p. 585. </titles/1895>.