On the Importance of the Dynamics of Interventionism

     

All of the commentators in this symposium, including me, have identified various issues and tensions with the Mises-Ikeda (and one could also add Rothbard[37] and Kirzner[38]) rendering of the dynamics of interventionism. I believe all of the points raised are important and, hopefully, will lead to further discussion. But I also think it is important not to forget the power of the dynamics of interventionism as an analytical framework.

The theory of the market process[39] is one of the defining contributions of those working in the Austrian tradition. This theory offers insight into how economic actors, guided by prices and profit and loss, coordinate their actions. The theory assumes some established conditions, such as well-defined and well-enforced property rights. Within this framework, certain pattern predictions emerge regarding the tendencies of the market and the allocation of resources. What happens when the unhampered market becomes hampered? Exploring the answer to this question is why the dynamics of interventionism are so important.

The dynamics of interventionism provide a means of tracing the series of adjustments resulting from some initial intervention into the market. In doing so it focuses on both the direct and indirect effects of interventions into markets. Of course, those working in the Austrian tradition are not the only ones to recognize these dual effects. Textbook discussions of rent controls, for instance, discuss both the direct effects—shortage—and indirect effects—less investment in upkeep and new housing—of price controls. But the dynamics of interventionism add more meat to the bones of these discussions of unintended consequences by providing a means of studying the step-by-step effects of interventions on the broader market process.

At the core of this discussion is how interventions warp the ability of actors to engage in economic calculation. By distorting prices and profit/loss, economic actors receive signals that do not reflect the true underlying conditions that would be signaled absent the intervention. This is important because interventions do not just affect the allocation of resources in the immediate area of intervention, but also throughout the broader structure of production. If one appreciates the theory of the market process, then one should likewise appreciate the dynamics of interventionism since the two are related.

The dynamics of interventionism also bring to the forefront many of the, often implicit, assumptions of intervention. For example, interventionism assumes that interveners know what the desired outcome should be. It also assumes that interveners can design interventions to achieve that end. Finally, it assumes that interveners know the opportunity cost of scarce resources—that is, what would have been produced and how. These insights are relevant for claims such as: government intervention X caused economic development. Economic growth requires reallocating scarce resources to new and better uses. Claiming that government intervention can cause development requires certain assumptions about the economic knowledge possessed by interveners. The dynamics of interventionism shed light on the assumptions being made while also emphasizing the importance of subsequent distortions due to the initial intervention.

As I noted in my initial response to Sandy’s lead essay, among other issues, I believe that the claim that interventionism is unstable is too strong absent further clarification of specific conditions. Some of the other commentators in this symposium have raised this same point. My purpose here is to note that we should not lose sight of the importance of the dynamics of interventionism for understanding the consequences of government intervention into market. This understanding is empirical in nature and requires one to explore the specific conditions under which interventions are designed and implemented. These conditions will influence the trajectory of interventions and their overall effect on economic activity.

For the most part, I don’t view this as being at odds with what the previous commentators have noted. Mises may have overstated the inevitability claim, but, in pointing this out, we need to be sure not to understate the relevance and importance of the dynamics of interventionism for understanding the effects of government intervention on the market process.

[37.] Murray N. Rothbard, Power and Market: Government and the Economy. Fourth Edition (Auburn, Alabama: Ludwig von Mises Institute, 2006). <https://mises.org/library/power-and-market-government-and-economy>.

[38.] Israel M. Kirzner, “The Perils of Regulation: A Market-Process Approach,” [1979] in Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985) pp. 119-149. <http://fff.org/explore-freedom/reading-list/perils-regulation-marketprocess-approach-1979/>.

[39.] Israel M. Kirzner, "Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach,” Journal of Economic Literature, vol. 35, no. 1 (March 1997), pp. 60-85. <https://econfaculty.gmu.edu/pboettke/summer/summer%20docs/kirzner1997.pdf>.