No Intermediate System• We can distinguish two different ways theeconomy can be organized: capitalism andsocialism.• Under socialism, production is centrallycontrolled. This doesn’t have to be formalownership.
No Intermediate Continued• Another system is the free market, based onsocial cooperation and voluntary exchange.• There is no third system. Mises elsewherementions syndicalism.• An objection comes up: what happens if thegovernment owns someindustries, e.g., railroads? Why isn’t this anintermediate system?
Answer to Objection• This is not a valid objection. If the governmenttakes over production of something within amarket economy, this is still a marketeconomy.• Nationalized industries must still sell theirproducts on the market. They compete formoney from consumers.
Problems of Nationalized Industries• These industries don’t face the samepressures to meet consumer demands asprivate businesses.• If a government service loses money, it can getmore money through taxes.• Also, bureaucrats who operate businessesaren’t risking their own funds. They are justplaying at the market.
Calculational Chaos• Mises showed in Socialism that a fully socialisteconomy can’t work.• It can’t decide how to use production goodsthat can be used in different ways.• The only way to allocate resources efficientlyis though calculation in money. This requiresmarket prices.
Chaos Continued• The calculation argument doesn’t apply onlyto full socialism.• Introducing socialist elements in a marketeconomy creates “islands of calculationalchaos.”• Rothbard wrote about this in MES.
Interventionism• The government can interfere with the freemarket in another way than taking overproduction of goods and services.• It can pass laws that restrict markettransactions in certain ways. E.g., pricecontrol, including minimum wage laws andrent control, and tariffs.
Interventionism Continued• These interventions don’t create a thirdsystem between capitalism and socialismeither.• They only hamper the working of the freemarket economy.
A Pattern of Argument• Mises’s criticism of interventionism follows acharacteristic pattern of argument.• The pattern is that we first take the goal thatthe interventionist wants.• Then, we show that the intervention won’tachieve this.• This is a value-free method of criticism.
Price Control• Suppose that the government thinks that theprice of milk is too high.• At the high price, the poor find it hard to buymilk.• The government decides to impose amaximum price on milk to make it easier forthe poor to buy milk.
Price Control Continued• What will happen? At the lower price, moremilk will be demanded by consumers. Butsuppliers won’t supply more.• Marginal sellers, i.e., those making the leastreturn, will leave the business of selling milk.• Note that Mises assumes that people in thebusiness don’t all earn the same return. Theywould only do so in equilibrium.
Result of Price Control• As a result of the government’s action, lessmilk is available.• This was not what the price control wassupposed to do.• This is an example of a criticism that doesn’tmake a value judgment.
Rent Control• Exactly the same process takes place with rentcontrol.• The aim of rent control is to make morehousing available for the poor.• At the rent-controlled price, more housing isdemanded than is available.• Landlords who can’t make money willwithdraw housing from the market and avoidmaking repairs.
More Rent Control• The result is again that the aims of rentcontrol aren’t achieved.• More housing does not become available forthe poor.
Minimum Wage Laws• Minimum wage laws are supposed to raisewages for workers. They are not intended toharm workers.• A minimum wage is a price floor. Moreworkers will want to work at the minimumwage than employers are willing to hire.• Workers who aren’t worth the minimum wageto the employer will be fired or not hired.
More Interventions• Again, the intervention fails to achieve thegoal.• Tariffs make products mote costly forconsumers.• By decreasing competition, they enable cartelsto be formed.
Reaction to Failure• What happens when intervention fails?• The government may respond with moreintervention.• Milk sellers under price control complain thatthey can’t make a profit. The government mayrespond by imposing price controls on theirsuppliers, to lower their costs.
Failure Continued• These new interventions will also fail.• If the government responds with still moreinterventions, this will lead to totalgovernment control of the economy.• This took place in Germany in WWI (theHindenburg plan) and also in Britain in WWIand WWII.• Churchill brought socialism to Britain, not thepost-war Labour Government.
Nazi Economics• Although the Nazi regime kept the form ofprivate property, it was a type of socialism.• Prices and wages were set by governmentdirectives.• The Marxist interpretation of Nazism is thatbig business was in control. But actually, thegovernment ran things.
Mises and Government• Mises opposes the slogan “that government isbest which governs least.”• He says government should fulfill its properfunctions, i.e., defense and protection.• This can be interpreted in a way consistentwith anarchism, although Mises didn’t go thisway.
Government Continued• The key point is that force should be restrictedto defense and protection. Force cannotjustifiably be used for other things in the freemarket.• This would be true also under anarcho-capitalism.• The restriction of force is Mises’s point here,not whether defense and protection must beprovided by a monopoly agency.