The Dynamics of Intervention: Regulation and Redistribution in the Mixed Economy: Volume 8

Don Bellante

Advances in Austrian Economics maintains a strict policy of double-blind refereeing. The current volume, however, contains contributions unusual for this series, such as underground classics previously available only as samizdat manuscripts and an article appearing earlier in a refereed scholarly journal. It was therefore decided that not all contributions would be subjected to the normal refereeing process.

This volume of Advances in Austrian Economics brings together a number of studies, but split along two fields of concentrations. The primary, which makes up the vast majority of the pages of the volume, is dedicated to an examination and re-appreciation of the insight of the Austrian School of Economics usually referred to as the theory of interventionism and closely associated with the research of the Austrian School giants Ludwig von Mises and F.A. Hayek (e.g. Mises [1929] 1996 [1940] 1998; Hayek, [1944] 1976). Together they formulated and applied an innovative theory of how government intervention may come to have a dynamic character, where intervention in one area will tend to generate still more and still farther-reaching interventions. The second is a small section with a debate between on one hand, Walter Block and William Barnett and on the other, Gordon Tullock, which is part of a long on-going debate on Austrian business cycle theory, which initially began elsewhere (Tullock, 1987, 1989; Salerno, 1989; Wagner, 2001; Block, 2001).

In almost all aspects of social life government intervention seems much more pervasive and intrusive today than ever before – at least in many of the Western countries. Governments seem year by year to consume still more resources and to regulate the details of the actions and interactions of their citizens still further.

The term “dynamics of interventionism” refers to a social process, i.e., a sequence of adjustments to change over time, among a great many individuals, who largely share a common set of rules of interaction.¹ It is constituted by the unintended consequences at the interface between the governmental and market processes, when the scope of government is either expanding or contracting in relation to the market. Interventionism is the doctrine or system based on the limited use of political means (i.e., legitimized violent aggression (Oppenheimer, 1975[1914])) to address problems identified with laissez-faire capitalism. Thus, an intervention refers to the use of, or the threat of using, political means to influence non-violent actions and exchanges. Supporters of interventionism do not completely reject the institutions of capitalism, such as private property and the price system, but do favor using piecemeal interventions that extend beyond so-called minimal-state capitalism² in order to combat suspected failures or abuses they associate with the unhampered market. Examples of this would include, but are not limited to, market power, externality, asymmetric information, income inequality, racial and sexual discrimination, and the business cycle.

This paper will develop some of the social and political implications of the Austrian theory of interventionism originally presented by Ludwig von Mises and Friedrich A. Hayek.¹ Specifically, it stresses the inherently destabilizing and retrogressive characteristics of the interventionist dynamic within a market system and argues that the dislocations produced by political intervention in the market system ultimately require the replacement of the price mechanism by a completely different system for the allocation of resources based on arbitrary political decision-making (the Zwangswirtschaft type of social organization discussed by von Mises). These points will be developed within the framework of an analytical model of the structure and dynamics of political capitalism as it has evolved historically in the U.S.

Praxeology is defined by Rothbard (1962, p. 64) as “The formal implication of the fact that men use means to attain various chosen ends.” While men use means to attain ends in areas other than economics (e.g., war, voting), the dismal science is the only deeply elaborated subdivision of praxeology. Rothbard (1962, p. 63) defines praxeological economics in contrast withpsychology [and]…the philosophy of ethics. Since all these [three] disciplines deal with the subjective decisions of individual human minds, many observers have believed that they are fundamentally identical. This is not the case at all. Psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should man value? Praxeology and economics deal with any given ends and with the formal implications of the fact that men have ends and employ means to attain them.¹

Mises (1949[1963], p. 692) explains that market-failure justifications for state actions, such as economic regulation “ascribe to the state not only the best intentions but also omniscience.” He then points out that neither assumption is valid: government is not benevolent since both, those who are employed by the state and those who demand state actions, have subjective self-interests, and it is not all knowing since knowledge is widely dispersed and the cost of coordination is infinitely high, particularly without market profits and prices as coordinating mechanisms. Furthermore, Mises suggests that dropping either assumption undermines the conclusions that state intervention is necessarily desirable even if some sort of market failure is actually identified. Austrian economists in the Mises tradition have tended to focus on the knowledge problem in their challenges to regulation, however. Many Austrians obviously recognize the interest problem, of course, but they often assume it away in order to illustrate that government interference with markets is not desirable even if it is well intended. In contrast, public-choice analysis tends to focus on the interest problem as source of government failure, although some public-choice analysts also obviously recognize the knowledge problem. Indeed, this difference in perspective is so pronounced that Ikeda (1997, p. 240) explicitly distinguishes between Public Choice and Austrian political economy by suggesting that the Austrian approach assumes benevolence on the part of government officials, while the public-choice approach assume narrow interests.¹ Ikeda (1997, p. 150) also suggests that the separation of these two approaches is justified because “Austrian political economy and public choice are each capable of standing on their own [so] public-theorists…find it optimal simply to continue to pursue their research along the line of either the former or the latter approaches.” The following presentation questions this assertion. Instead, both assumptions should be dropped, and the resulting integrated Austrian-public-choice model should be expanded to include assumptions about the relationships between regulations, property rights security, and both market and political behavior.²

Of all the various interventions into the market economy, which have been invented and implemented by man and state, those that historically have caused the gravest consequences in the advanced industrialized economies surely are the inflationist policies, which lead inexorably to the business cycle in all of its various aspects and manifestations. In this paper, we shall attempt to trace through a number of socio-economic consequences and implications of the business cycle. We are convinced that ultimately the business cycle has political implications, which are just as far reaching and grave as its numerous economic consequences.

A crisis typically has three characteristics. First, a crisis is unexpected, a complete surprise. Second, a crisis is normally unpleasant in that current plans are found to work less well than had been anticipated. Third, a crisis requires an urgent response of some kind. That is to say, an immediate change of plans is expected to reduce or avoid the worst consequences associated with the unpleasant surprise. These characteristics imply that not every public policy problem is a crisis, because many public policy problems are anticipated or long-standing. The present social security problem faced by most Organization of Economic Cooperation and Development (OECD) nations is not a crisis, although it is a serious problem. Other policy problems are clearly worsened rather than improved when current policies are abandoned. This may be said of constitutional law, in cases in which minor unexpected problems arise from longstanding political procedures. Other policy problems lack immediacy, even when they are unanticipated. This might be argued, for example, of global warming, which was unanticipated prior to 1990 yet is anticipated to take decades to emerge. Not every serious problem is a crisis.¹

This paper is about something which, at least superficially, looks like a conflict between public choice theory and Austrian social science, in particular as represented by Friedrich Hayek and Ludwig von Mises. What I am referring to is the conflict between the so-called Median Voter Theorem, on the one hand, and the Austrian contention that there is no “middle way”, on the other. The Median Voter Theorem, as the reader knows, is often formulated within the framework of a left-right continuum, and it says that the decision taken will correspond to the position of the median voter. Thus, if the voters are distributed in a roughly symmetrical way along the left-right continuum, the decision will be a position somewhere close to the middle of the scale. The Austrians, on the contrary, claim that there is no such thing as a middle of the road outcome. Only socialism and liberalism are real alternatives.

Individuals tend to seek out communities and organizations that appeal to their beliefs and values. They gravitate to positions and responsibilities that suit their personal aspirations and ambitions, and in such pursuits they succeed best. In The United States of Ambition: Politicians, Power, and the Pursuit of Office, Alan Ehrenhalt (1992) argues that the political process tends to select for those who most believe in it and make a career of it. He suggests that one advantage held by the Democratic party (over the Republican party) is that the Democratic party is more thoroughly a party of active government, so it better attracts “people who think running for office is worth the considerable sacrifice it entails” (p. 224). Not only does the political process tend to attract those who believe in it, it also tends to prosper believers.

In recent decades, Homer's millennia old story of Ulysses and the Sirens has become a popular and frequently used metaphor for illustrating the importance of institutions, not least constitutional ones (cf., e.g., Elster, 1985; Finn, 1991, 3ff; Elster, 2000; Zakaria, 2003, pp. 7 and 250). In one retelling the story goes like this:The Sirens were sea-nymphs who had the power of charming by their song all who heard them, so that the unhappy mariners were irresistibly impelled to cast themselves into the sea to their destruction. Circe directed Ulysses to fill the ears of his seamen with wax, so that they should not hear the strain; and to cause himself to be bound to the mast, and his people to be strictly enjoined, whatever he might say or do, by no means to release him till they should have passed the Sirens’ island.Ulysses obeyed these directions. He filled the ears of his people with wax, and suffered them to bind him with cords firmly to the mast. As they approached the Sirens’ island, the sea was calm, and over the waters came the notes of music so ravishing and attractive that Ulysses struggled to get loose, and by cries and signs to his people begged to be released; but they, obedient to his previous orders, sprang forward and bound him still faster. They held on their course, and the music grew fainter till it ceased to be heard, when with joy Ulysses gave his companions the signal to unseal their ears, and they relieved him from his bonds.¹

Many of us who believe that governments continue to grow relentlessly, at least in the economically advanced countries, have been criticized by analysts who claim that in fact the growth of government has petered out or slowed substantially. Those who advance such claims perceive us to be needlessly alarmed, and they fault us for a failure to acknowledge the decisive turn of events associated with the so-called Reagan and Thatcher revolutions of the 1980s. Not to worry, they exhort us; the statists are on the run, and a brave new world of market-oriented liberalism shimmers on the horizon (Boaz, 2003).

A typology of interventionism can categorize regulations, taxes, and subsidies both theoretically and as they sequentially unfold in practice. This typology is inspired by, but broader than, the Mises interventionist thesis, which, similar to Madison's lament, recognizes the propensity of intervention to expand from its own shortcomings in the elusive quest to achieve economic rationality (Lavoie, 1982, p. 180; Ikeda, 1997, pp. 41–46; Bradley, 2006).

Over the last century, governments throughout the established democracies have increasingly sought to regulate land markets via all manner of interventions. Such policies have typically been defended on the ‘market failure’ grounds of orthodox welfare economics. Absent government action, it is argued, price signals will not be reflective of the relevant opportunity costs, owing to the prevalence of externality and public goods problems in the market for land.

Much progress has been made in public opinion regarding drug prohibition. The policy has been an utter failure, very expensive, and increasingly disliked by people around the world. As a result, several states have passed drug reform legislation that reduces penalties for the production, distribution, and consumption of previously prohibited substances such as narcotics and marijuana. Other states have placed more resources in drug treatment programs (demand reduction) instead of drug interdiction efforts (supply reduction). In North America, several states in the US and Canada have passed medical marijuana legislation to take advantage of the well-known medical benefits of marijuana (Piper, Matthew, Katherine, & Rebecca, 2003).

In The Road to Serfdom, Hayek argued against planned economies that “the close interdependence of all economic phenomena makes it difficult to stop planning just where we wish…once the free working of the market is impeded beyond a certain degree, the planner will be forced to extend his controls till they become all-comprehensive” (Hayek, 1944, p. 79). According to Hayek, and especially Mises, there exists no stable condition in-between laissez faire capitalism and the planned economy. Once politicians engaged in acts of interventionism further interventions would successively lead them towards a condition where the state fully planned and controlled the economy and civil society. According to Austrians, ‘interventionism’ thus represented an unstable and self-reinforcing condition (Burton, 1984, p. 110). In John Gray's words “whenever an interventionist policy…fails to achieve the desires result, the practical and theoretical response of the interventionist ideologue is to demand an extension of the policy to new fields…interventionist policies will always interpret the failure of any such policy, not as a reason in favour of its abandonment, but rather as one supporting its wider application”(Gray, 1984, p. 32).

It is frequently claimed that the interventionist economic policies which the Nazi government began to pursue as soon as it had come to power were ideologically motivated (cf. Barkai, 1990). There is undeniably some truth in this hypothesis – after all, an important strand in German political and economic thought, which goes back to the age of absolutism and which flourished in the post-World War I period, favored state power and state control of society (Mises, 1944b). Still, Nazi interventionism may have had stronger foundations than just ideology. It is the hypothesis of this article that it was rather grounded in the structure of the state erected by the Hitler regime. Far from being the monolithic power bloc proclaimed by its propagandists, the Third Reich was in fact composed of a plethora of political authorities, government offices, and bureaucratic departments supplemented by an increasing number of “Reich-Plenipotentiaries”, “Special Representatives”, and other satraps of Hitler who were appointed to solve specific problems and were never recalled. It is claimed here that it was the power struggles waged by these individuals and bureaucratic agencies which boosted the increasingly interventionist policies of the Nazi regime.

The idea of spontaneous orders dating back to Mandeville and elaborated at length by the Austrian School of Economics (Menger, Hayek) is no doubt a major contribution to the understanding of society (Hamowy, 1987). It offers great insights into how human beings solve coordination problems by unintentionally creating mechanisms for social interaction such as the market, money, language, science and law (Hamowy, 1987; Petsoulas, 2000). Such a successful concept must have its limits somewhere, as a concept which explains everything covers nothing. I wish to explore this question by relating the evolution of European integration after the Second World War to the Hayek theory of a spontaneous order. Perhaps Hayek contributed most to the elaboration of Adam Smith's vision of a self-correcting social order that needs little direction and control (Boettke, 1998). Hayek underlined time and again the importance of spontaneous processes with the entailed claim that government must adopt an attitude of humility towards conventions that are not the result of intelligent design, the justification of which in the particular instant may not be recognizable, and that may appear unintelligible and irrational (Hayek, 1960, 1982).

In “Why the Austrians Are Wrong About Depressions,” Professor Tullock (1987, p. 73) makes some statements that are incorrect and others which, properly interpreted, refute or at least, fail egregiously to support, his thesis that the Austrian theory of the trade cycle is incorrect. We begin by considering one of Tullock's minor points in Section 2 and then consider his major point in Section 3. In Section 4 we take to task Tullock (1989), also on this same topic, and conclude in Section 5.

Perhaps I should begin with a little discussion of how I got involved with Austria to begin with. This will also include the rather bizarre way I got into economics. I was a student in the University of Chicago law school and they required all such students to take a one-quarter course in economics under Henry Simons, one of the founders of the Chicago school. He was a proponent of the view that depressions were caused by deflation. I found myself in complete agreement, and still am.