A Comment on the Political Rhetoric Used Against the System of Laissez-Faire

Politics certainly is full of hyperbole and exaggeration.  One of the phrases that really needs to be dropped from the political lexicon is that of "group XYZ is being exploited."  Exploitation is one of those terms that gets thrown around a lot; in fact, everyone seems to accuse everyone else of being an "exploiter."  The general line seems to be "my philosophy will help out the masses of the poor" but "the wonderful reforms are being stopped by some evil exploiters."  Now, it does not take an expert to identify such sentiments as being the stock-in-trade of leftist writers.  At the heart of Marxian propaganda is, after all, the so called "Iron Law of Wages," which claims that the evil capitalist exploiters set the wage rates so low that if wage rates were to fall any further then the entire exploited labor classes would be wiped out and would quite literally drop dead.  So, the exploiters, the capitalist class, must, assuming that they want to keep their slave laborers alive for future plundering, then keep the wages set at the "subsistence level."  To raise the wages any higher would be pointless; why pay a slave more money if you don't have to?  To lower the wages any lower would be pointless; how can you exploit dead people?  Ignoring the obvious logical contradiction here in this process of Marxian thought (since it is illogical to say that wages are set by the capitalists at a subsistence level and then to insist that the lot of the workers "progressively" gets "worse and worse"), one might be surprised to learn that laissez-faire capitalist writers make exactly the same claims against socialism.  Socialism is the system of exploitation, not laissez-faire.  Socialism is a system of tyranny.  Socialism will lead to the progressive pauperizing of the laboring classes; capitalism will pour a horn of plenty out on them.


In fact, these types of accusations are among some of the oldest criticisms made against socialism in general.  According to F. A. Hayek, socialism, at least modern socialism, (since one can easily study pre-Marxian communism, the so called utopian socialists, and one can go back even further in history to some very early communist-like experiments such as the Munster experiment in the 16th century) has its origins in a reaction against classical [not to be confused with the modern American or Canadian usage; the modern usage of "liberalism" is totally different from what is being described here] liberalism steaming from the French Revolution.  Hayek is rather blunt in his observations regarding the totalitarian origins of socialism.  Hayek states in his famous work, The Road to Serfdom, that

the extraordinary thing is that the same socialism that was not only early recognized as the gravest threat to freedom, but quite openly began as a reaction against the liberalism of the French Revolution, gained general acceptance under the flag of liberty.  It is rarely remembered now that socialism in its beginnings was frankly authoritarian.  The French writers who laid the foundations of modern socialism had no doubt that their ideas could be put into practice only by a strong dictatorial government.  (76)

In Mises's 1947 work, which was originally published by the Foundation for Economic Education under the title of Planned Chaos, now simply called the Epilogue to Socialism, he mentions the writings of the "heretic" Trotsky, who was a rival and a later a victim of comrade Stalin.  Trotsky, writes Mises, "saw things realistically" when he describes the inner workings of the Soviet Union.  Trotsky declared that

in a country where the sole employer is the State, opposition means death by slow starvation.  The old principle:  who does not work shall not eat, has been replaced by a new one:  who does not obey shall not eat."  This confession settles the issue.  (Epilogue to Socialism, 538)

In other words, under socialism, the only liberty that a person has is either to obey or to die.  Just as socialist writers accuse capitalism of offering a "false liberty" (and socialism will then bring "full liberty") so capitalist writers accuse the socialists of offering up "totalitarianism under the banner of liberty."  For example, Mises in his article entitled The Individual in Society, has to this to say about "socialist freedom":

They define liberty as the opportunity to do the "right" things, and, of course, they arrogate to themselves the determination of what is right and what is not.  In their eyes government omnipotence means full liberty.  To free the police power from all restraints is the true meaning of their struggle for freedom.

To really emphasis this point in which each side accuses the other of being the "real villain," consider the "plight of the laboring classes."  Even here it might be a bit misleading on my part to suggest that the socialists are the natural allies of the "workers."  (See Mises, Theory and History,  82).   Socialism is more of a product of the intellectuals in ivory towers than a philosophy of the shop floor worker.  The actual workers, the actual people who get their hands dirty, are more likely to favor interventionism and syndicalism than pure Marxian socialism.  All I am trying to say is that capitalism is normally vilified as the enemy of the laboring classes by most anti-capitalist schools of thought.

Mises, in his work on theoretical capitalism, called Liberalism:  The Classical Tradition, notes that there are actually five different systems of organizing the cooperation of individuals:  the system of private ownership of the means of production, the system of private ownership of the means of production with periodic confiscation of all wealth and its subsequent redistribution, syndicalism, the system of public ownership of the means of production, and the system of interventionism (37).  The fact remains, that all systems claim to be workable, whether or not that is true or false is the job for scientific reasoning to ascertain.  Moreover, no system claims that it is purposefully trying to harm the "poor" and the "laboring classes."  Again, what one claims to be true and what actually happens in reality can be very different things or even contradictory things.  The point is that laissez-faire asserts that it is the only system that can benefit the "poor" and the "laboring classes."  Actually, laissez-faire goes further and asserts that everybody wins under its system.  Mises asserts in Liberalism:  The Classical Tradition that

Liberalism [i.e., laissez-faire capitalism] has demonstrated that the antagonism of interests, which, according to a widely prevalent opinion, is supposed to exist among different persons, groups, and strata within a society based on private ownership of the means of production, does not, in fact, occur.  Any increase in total capital raises the income of capitalists and landowners absolutely and that of workers both absolutely and relatively.  As regards their income, any shifts in the various interests of the different groups and strata of society--the entrepreneurs, capitalists, landowners, and workers--occur together and move in the same direction as they pass through different phases in their fluctuations; what varies is only the ratio of their shares of the social product.  (127, emphasis mine)

In conclusion,  all of the claims made by "leftist" authors against capitalism have been turned around and used against them.  Laissez-faire capitalist authors have argued that socialism and interventionism are the real villains, the real tyrants who want to enslave humanity to the omnipotent state.  Socialism and interventionism provide a "false liberty" because they are really just forms of totalitarianism; socialism and interventionism harm the workers or benefit some workers at the expense of others.  Since everybody accuses everybody else of being the evil exploiters while still asserting that his own system is the only path to an improved standard of living for the masses, how does one decide who is right and who is wrong.  The starting point is to realize that judgments of value are not scientific.  Calling your opponent "an exploiter" is not a legitimate approach to a scientific discussion.  The solution is to study the cause and effect nature of each proposed system.  For example, if I were to implement a system of government interventions in the labor market, what will be the result.  Will it benefit some labor?  All labor?  No labor?  By studying cause and effect, one can get around the name calling, which is just a distraction.

 

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.