Mises on “interventionism” as a third way between the free market and socialism (1930)

Ludwig von Mises

In 1930 the Austrian economist Ludwig von Mises (1881-1973) warned about the temptation faced by many economists and politicians of seeking a “third way” between “capitalism” and “socialism”. Mises termed this third way “interventionism” and criticised it for being very unstable with the tendency to slip into more fully fledged socialism over time:

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.

In 1922 Mises had written a detailed attack on fully fledged socialism as it was being practised in the new Soviet Union. He joined with Hayek in pointing out the vital role played by free market prices in telling producers and consumers what goods and services were in highest demand, and what were the most appropriate raw materials to use in creating those goods and services. In the absence of free pricing and the possibilities of “price discovery” by entrepreneurs, rational economic production was “impossible.” However, as the economic crises of the 1920s got worse many supporters of “capitalism” thought the socialist critique of it was partly true and thus capitalism needed to be reformed by a variety of government directed interventions in the economy. The hope of the “interventionists” was to preserve the productive powers of pure capitalism with the possibilities of more “rational planning” offered by socialism. In 1930 Mises turned his sites on this “third way” in this essay in order to show that the hope of the interventionists was a false one because each intervention disrupted the operations of the market causing either surpluses or shortages. These in turned required further interventions in order to solve the problems caused by the first intervention, and so on, and so on, until a system of nearly complete socialism would be reached. Thus, for Mises the “third way” was just socialism introduced gradually rather than in one hit. Mises returned to this topic again in 1940 with his book Interventionism: An Economic Analysis.