The Problem of Interventionism

Many politicians and authors believe that they could avoid the necessity of choosing between capitalism (laissez faire) and socialism (communism, planning).  They recommend a third solution which--as they say--is as far from capitalism as it is from socialism.  In imperial Germany this third system was called Sozialpolitik; in the United States it is known as the New Deal.  Economists prefer the term used by the French, interventionism.  The idea is that private ownership of the means of production should not be entirely abolished; but the government should "improve" and correct the operation of the market by interfering with the operations of the capitalists and entrepreneurs--by means of orders and prohibitions, taxes, and subsidies.  --Ludwig von Mises.  The Why of Human Action

From a purely logical perspective, the idea of creating a third system that is neither capitalism nor socialism is nonsensical.  In the final analysis, capitalism means that the factors of production (i.e., the machines, the factories etc.) are privately owned and socialism means that these same factors are collectively owned.  But the terms capitalism and socialism cover all conceivable possibilities.  One either owns a factor of production or one do not own it.  There cannot possibly be some sort of state in the middle in which property is not really owned but it is also sort of owned simultaneously.  Trying to merge two conflicting ideologies is why such confusion exists in the first place.  A person cannot be simultaneously dead and alive, nor can a social philosophy be simultaneously in favor of and against ownership in the means of production.  

A Hayekian, i.e., someone subscribing to the major theses of Nobel Laureate economist Friedrich A. Hayek, might begin an analysis of the problems of interventionism by distinguishing between spontaneous order and animistic design.  The issue at hand is whether one has to deliberately design order or whether a complex organization can organize itself without outside interference.  Hayek views the interventionist idea of trying to deliberately plan the organization of society as naive and self-defeating.  He wrote that

to the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralising [sic] decisions, and that a division of authority will actually extend the possibility of overall order.  (The Fatal Conceit, 76-77).

Moreover, Hayek warns that interventionism, which inhibits the process of spontaneous ordering of society, can impede the entire process of advancing civilization.  He notes that "it would seem as if, over and over again, powerful governments so badly damaged spontaneous improvement that the process of cultural evolution was brought to an early demise" (The Fatal Conceit, 44).   Hayek sees interventionism and planning as a deliberate attempt to suppress competition; the suppression of competition causes the inefficiency problem described earlier.  "Competition is a process of discovery," writes Hayek, "a procedure involved in all evolution, that led man unwittingly to respond to novel situations; and through further competition, not through agreement, we gradually increase our efficiency" (The Fatal Conceit, 19).

The idea that intervening in the spontaneous ordering process of the market leads to deliberate attempts to suppress competition is supported by the historical evidence of the American Progressive Era.  According to Gabriel Kolko in his seminal reinterpretation of this era of American history, interventionism is a conservative policy designed to protect the existing arrangement of economic resources from competition.  Kolko summarized his exploration of the conditions in numerous industries during this period by writing that

the economic and industrial development of the United States from 1890 until World War I assured a fluidity of conditions that made economic rationalization and stability by voluntary means substantially impossible.  If the growth of big business was spurred by the expanding urban markets, the consolidation of the economy into a few hands was made impossible by the shifting locations of markets and resources--changes that meant few companies were sufficiently well managed to hold on to their share of the market and prevent new entries.  America was too diverse, the economic resources and opportunities too decentralized, to prevent the creation of an American economic frontier.  The idea that economic opportunities were closed to middle-level wealth is not in accord with the facts.  There was sufficient product and service development--the distribution and service industries increase sharply in this period--to dispel that notion (The Triumph of Conservatism, 54).

Hayek's abstract observation that "competition is a process of discovery" and Kolko's description of the much less regulated (less interventionist) Progressive Era are consistent.  Kolko's descriptions of what happens in a minimally regulated and minimally interventionist economy are full of stories of continuous innovations with new discoveries being made.  For example, Standard Oil was challenged by the innovations of new entrants.  "In this area," writes Kolko, "the independent oil companies led the field, pioneering in gas stations in the same way that they had surpassed Standard in developing improved tank cars and trucks as well as most of the major innovations in petroleum chemistry" (42).  Or consider the discovery process in action in the minimally interventionist steel industry of this period of history.  "U.S. Steel failed to alter the location of its facilities sufficiently or to improve its technology at a time when its competitors were rapidly moving ahead" (38).

Kolko stressed the highly competitive nature of this minimally interventionist period of American history because he wanted to compare and contrast it with the following interventionist period (say the pre-World War I and post-World War I periods).  The minimally interventionist period began with observations on a dynamic capitalism, i.e., a period completely consistent with the discovery process stressed by Hayek.  Kolko wrote that

to the extent that Joseph A. Schumpeter was correct in holding that each significant new innovation was embodied in a new firm and the leadership of new men in a still dynamic capitalism--and that firms that do not innovate die--it can also be said that important competitive trends were inherent in the economic structure.  (The Triumph of Conservatism, 29).

However, the Progressive Era ends with a number of government interventions and regulations.  In the introductory quotation, Mises puts the word "improve" in quotations when he wrote that the intention of interventionism is to "'improve' and correct the operation of the market by interfering" because Mises wants to stress that the idea of "improvement" is a sham.  The motivation is not to improve the functioning of the free market but rather to hinder its functioning.  Interventionism is simply a protection racket to protect the existing successful firms from the dynamic discovery process of the free market.  Without the government intervention, the market process of continual change and learning keeps pushing forward.  The government interventions, then, become the only effective way to shut down the discovery process of the market with its attendant competitive features.  Kolko summarizes this process of interventionism as a form of protectionism when he observes that

As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could rationalize the economy.  Although specific conditions varied from industry to industry, internal problems that could be solved only by political means were the common denominator in those industries whose leaders advocated greater federal regulation.  Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.  (The Triumph of Conservatism, 4-5, emphasis mine).

What intervention seems to then lead to is a process of "self-socialization" of industry.  The industries become less and less "private" and more and more "public" in the sense that the operation of industries becomes more and more wrapped into the political process.  Mises notes already in a work from 1932, entitled The Myth of the Failure of Capitalism, that businesses were continually integrating themselves, freely, into the government and political sphere.  Mises writes that "statist writers have hailed this politically motivated 'tendency of big enterprise to socialize itself,' i.e., to let interests other than regard for 'the maximum profit for the shareholders' guide the administration of the enterprise" (Selected Writings of Ludwig von Mises, Volume 2, 189).  The reason for why these big businesses want to "socialize themselves" is because to do so is in the best interests of the managers and directors.  Mises continues by noting that "directors of large enterprises nowadays no longer think they need to give any consideration to the interests of the shareholders, since they feel themselves thoroughly supported by the state and that they have interventionist public opinion standing behind them" (Selected Writings of Ludwig von Mises, Volume 2, 189).  Mises's interpretation implies that the managerial class of high level corporate directors are engaged in an expropriation of the property of the shareholders in order to make themselves into well-paid quasi-bureaucrats.  Of course, bureaucrats function in a world without market competition because bureaucrats do not have to seek voluntary consent; instead, they can use the coercive power of the state to force compliance on the part of the public.  In other words, interventionism then leads to the total death of competition, which implies a total death of the discovery process.  All of this implies a death of innovation and progress.  The dynamic discovery process of capitalism that existed in the minimally regulated days of the early Progressive Era have been replaced by a bureaucratic and static interventionist environment.  This means that the managerial class benefits at the expense of the rest of society.  Society benefits from competition and its discovery process; society suffers when a locked in group of managerial elites kills off competition with its discovery process in order for this small managerial elite to enjoy the fruits that accrue to a small but politically connected elite.  Therefore, interventionism is not a solution, nor is it a third-way.  It is not a solution that differs from both capitalism and socialism.  Instead, interventionism is just a process that leads to, in the end, the self-socialization of business.  Interventionism will end in socialism with the monopoly state owning or controlling all the factors of production.