Can Government Intervention Work?

In order to understand Mises’s theory of interventionism, we must not only distinguish an interventionist economy from capitalism and socialism, but also how Mises’s economic analysis of interventionism relates to the “invisible hand” of the market process. According to Mises, capitalism is an economic system defined by a particular set of institutions, which include private property in the means of production (i.e. land, labor, and capital) and freedom of contract under the rule of law. A capitalist system is governed by the demands of consumers for goods and services, which in turn guide entrepreneurs to direct the means of production according to their most valued consumer uses. The buying (and abstaining from buying) of final goods by consumers, and the buying (and abstaining from buying) of the means of production by entrepreneurs, generates a system of market prices that coordinates the activities of producers, as well as profit (and loss) signals to transmit information when they have (or have not) used the means of production in a manner that satisfies the most valued human wants. The emergence of social cooperation under the division of labor is Adam Smith’s “invisible hand” in action.

A socialist economic system is one in which private property and free-market money pricing in the means of production are abolished. Whether labelled as communism or fascism, socialism of any variety implies that the means of production are governed not by consumer demands but dictated by government orders. Private property and free money pricing are effectively abolished. For Mises, the question of whether a capitalist system is superior to a socialist system, in terms of increasing the overall welfare of society, is not predicated on the possibility of either system eliminating entrepreneurial error and economic waste. Rather, given that error of decision-making will always exist in an uncertain world, the relevant question is which system will incentivize individuals to identify that an economic error has been made and learn from it. Without private property, money prices, and profit-and-loss signals, a government bureaucrat directing production “will be like the captain of a ship to sail the high seas without the resources of science or art of navigation” (Mises 2011, p. 9). By abolishing the invisible hand of the market process, the result of implementing socialism, pushed to its logical outcome, can only be the substitution of the visible hand of totalitarianism.

However, Mises draws a distinction between the institutional preconditions of capitalism and socialism to highlight the distinct features of interventionism, or what Mises also refers to as a “hampered market economy” (2011, p. 10). As the name suggests, interventionism is not synonymous with socialism, but refers to an economic system in which the government, or a de facto regulatory authority backed by government force, interferes with the operation of the market economy without eliminating it altogether. Interventions in the form of taxes, subsidies, monopoly privileges, or price controls are issued directly by government officials, or indirectly by a regulatory authority, forcing entrepreneurs to employ the means of production different from the way in which they would have been in an unhampered market. “Do not these interventions perhaps produce results which, from the government’s point of view, appear even less desirable than the conditions in the free-market economy which it seeks to change?” (Mises 2011, p. 11). The answer rests on understanding the relationship between interventionism and the invisible hand, which has been best restated by Milton and Rose Friedman in Free to Choose (1980). Capturing what Mises had argued 40 years prior, Friedman and Friedman write, in “the government sphere, as in the market, there seems to be an invisible hand, but it operates in precisely the opposite direction from Adam Smith’s: an individual who intends only to serve the public interest by fostering government intervention is ‘led by an invisible hand to promote’ private interests, ‘which was no part of his intention'” (Friedman and Friedman 1980, pp. 5-6).

Mises illustrates not only the economic consequences of interventionism, but also its social and political ramifications. In order to understand the process by which interventionism generates unintended or otherwise undesirable consequences by its proponents, Mises highlights two points. First, if government intervention is intended to eliminate what are regarded as undesirable consequences of an unhampered market process, it must distort the institutional precondition upon which an unhampered market is based: private property. Secondly, the act of intervening into the market process, however well-intended it may be, implies redirecting the means of production with the deliberate result of benefiting one group of individuals at the expense of another. Such an act of intervention, by definition, is a means for the creation of special privileges (Mises 2011, p. 21). For example, tariffs aimed at promoting the general welfare of the nation, in terms of securing domestic production of a good or service and preventing job loss in a particular industry, cannot do so without creating an artificial scarcity and a special monopoly privilege for that industry and its workers. Consumers must pay higher prices as a result of this monopoly privilege, leaving them with less income to spend on other goods and services, thereby placing these other industries and its workers at a disadvantage. The overall effect is contrary to the intent of promoting the general welfare. Pushed to its logical conclusion, therefore, “a comprehensive tariff system can only decrease the satisfaction of all” (Mises 2011, p. 78), as illustrated in the U.S. by the undesirable consequences of the Smoot-Hawley Tariff of 1930, which deepened the Great Depression. Other forms of intervention, such as inflation, regarded as a measure intended to benefit impoverished debtors at the expense of rich creditors, has the opposite effect, particularly when the “rich have invested their wealth in plants, warehouses, houses, estates, and common stock and consequently are debtors more often than creditors” (Mises 2011, p. 41).

These undesirable consequences of interventionism, particularly in the case of price controls, illustrate how its intended effects are predicated on a false dichotomy between consumers and producers in the market process. The nature of the market process is one in which buyers compete against buyers by offering higher prices for a good or service, and sellers compete against sellers by offering lower prices for a good or service. However, every seller is a consumer when they purchase the means of production and other intermediate goods required for final production. Thus, the market process is one in which buyers and sellers are cooperating by exchanging their property rights, not competing with each other, and this holds just as well in a labor market when producers compete against each other to provide capital to raise the productivity of workers, allowing workers to sell their labor at higher (rather than lower) wages.

The nature of price controls, however, undermines the social cooperation of the market process and generate the dynamics of interventionism, resulting in buyers cooperating for privileges against sellers (such as in the case rent controls) and sellers cooperating for privileges against buyers (as in the case minimum wages). However, competition for privileges, by definition, can never be in the general interest of either buyers or sellers. For example, in the case of minimum wages, which may intend to raise the wages of workers, has the undesirable effect of benefiting some group of workers who remain employed at higher wages, leaving another group of workers unemployed. For Mises, then, it is no accident that by restricting the supply of labor, trade union workers are proponents of higher minimum wages (2011, pp. 32-34). Producers of final goods and services are consumers of labor, and therefore the law of demand applies to the labor market as it does to any market.

What is even more important for understanding the deleterious effects of interventionism is not just the seen desired effects, but the unseen undesirable effects. Suppose, for example, the government regards the market price of milk as undesirably high, setting a price control with the aim of making milk more affordable for final consumption. Cows not only produce milk, but also other dairy products, such as butter, yogurt, or cheese. The undesirable result of a price ceiling on milk will be that more cows will be made available for producing other dairy products. Less milk will be made available to the market contrary to the intent of the price ceiling. The government regulator is now left with two choices: either the price ceiling can be removed to eliminate its undesirable consequences; or, the regulator can intervene once again to mitigate the unintended consequences of the price ceiling, such as placing restrictions on the amount of milk available for dairy products, so that more milk will be made available for final consumption. However, if the regulator regards the return to the unhampered market as undesirable, then the regulator is left with no choice other than to continue this process of intervention for subsequent unintended consequences. The logical outcome will be government control of land, labor and capital to prevent resources from being repurposed to uses other than raising dairy cows. Such an example illustrates an important lesson made by Mises: interventionism, if pushed further consistently and persistently, must lead toward socialism (Mises 2011, pp. 28-29, 80). But, such an outcome is not inevitable if public opinion changes regarding government intervention (Mises 2011, p. 12).

Mises’s Interventionism should not be read as the last word as to why government intervention fails to work. Rather, as illustrated by a growth of literature building on the theoretical insights of Mises (see Lavoie 1982, Sanford 2005, and Boettke, Leeson, Coyne 2007), Interventionism provides an essential input into a progressive research agenda for understanding the dynamics of interventionism across time and place, including agricultural policy (Rajagopalan 2023), international trade policy (Smith 2022), and the provision of public goods (Candela and Geloso 2020).

Interventionism also clarifies some misleading claims regarding public policy. The case against government intervention, and in favor of a free-market capitalism, is not synonymous with favoring “deregulation” when we understand that capitalism by its very definition implies the existence of a built-in, regulatory mechanism: private property itself. Moreover, Interventionism illustrates that, contrary to popular opinion, the case in favor of a private-property capitalist system is not synonymous with privileging the interests of capitalists. Rather, the “particular interests of the entrepreneurs and capitalists also demand interventionism to protect them against the competition of more efficient and active men. The free development of the market economy is to be recommended, not in the interest of the rich, but in the interest of the masses of the people” (2011, p. 81). Therefore, to the extent that interference into a private-property rights framework distorts the incentives and knowledge embodied in market prices as well as profit-and-loss signals, interventionism cannot be the cure to correct for alleged maladies identified with capitalism, such as monopoly power, macroeconomic instability, mass unemployment, artificial scarcities, etc. Rather, interventionism is the very cause of such maladies, specifically by distorting private property and serving as a means to create monopoly privileges for the benefit of special interest groups.

References

Boettke, Peter J., Coyne, Christopher J., and Peter T. Leeson. (2007). “Saving Government Failure Theory from Itself: Recasting Political Economy from an Austrian Perspective.” Constitutional Political Economy, vol. 18, no. 2, 127-143.
Candela, Rosolino A., and Vincent J. Geloso. 2020. “The Lighthouse Debate and the Dynamics of Interventionism.” The Review of Austrian Economics vol. 33, no. 3, pp. 289-314.

Friedman, Milton and Rose Friedman. (1980). Free to Choose: A Personal Statement. New York: Harcourt Brace Jovanovich.
Ikeda, Sanford. 2005. “The Dynamics of Interventionism.” Advances in Austrian Economics, vol. 8, pp. 21-57.

Lavoie, Don C. (1982). “The Development of the Misesian Theory of Interventionism.” In Israel M. Kirzner (Ed.), Method, Process, and Austrian Economics: Essays in Honor of Ludwig von Mises (pp. 169-183). Lexington, MA: Lexington Books.
Mises, Ludwig von. (2011). Interventionism: An Economic Analysis. Indianapolis: Liberty Fund.

Rajagopalan, Shruti. 2023. “Mises’s Dynamics of Interventionism: Lessons from Indian Agriculture.” Southern Economic Journal vol. 89, no. 3, pp. 657-679.

Smith, Nathaniel W. (2022). “A Robust Analysis of Trade Policy: The Chicken and Softwood Lumber Wars.” Journal of Entrepreneurship and Public Policy vol. 11, no. 2/3, pp. 273-291.

Footnotes

[1] Interventionism: An Economic Analysis, by Ludwig von Mises. Liberty Fund, Inc. Also available free online at the Online Library of Liberty: Interventionism: An Economic Analysis, by Ludwig von Mises.