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Von Mises “Middle-of-the-road policy leads to socialism”

Vocabulary:
l.2 “booty”: plunder (= stolen by pirates)
l.11 “amenities”: contributing to comfort
l.17 “to mitigate”: = to moderate
l. 17 to preclude: to prevent
l. 30 peremptory = arbitrary
l. 30 havoc = devastation
l. 32 greed = excessive desire to acquire
l. 32 lest = for fear that
l. 33 unhampered = no obstacle
l. 45 marginal = small
l. 52 abortive = ineffective
l. 68 to meddle = to intervene (= negative)
l. 92 sham = fraud
l. 98 guise = appearance
l. 106 hothouse = greenhouse
l. 107 slump = downward trend
l. 110 injudicious = silly
l. 128 endeavors = efforts (US)
l. 138 Attlee = Labour Prime Minister from 1945 to 51 (UK)
l. 140 installments = regular payments (US)

Commentary

This is an excerpt from an address to a private social club in New York . It was delivered by
Ludwig von Mises, a neoliberal economist who was famous for his 1944 publication entitled
Bureaucracy. This excerpt is argumentative as the use of the personal pronoun “I” shows (l.21).
The text deals with the assessment by von Mises of what he terms “interventionism” (l.21),
that is government intervention in the economy. This address must be considered against the
background of the post-war era.
After exceptional wartime conditions which had turned round the American economy, the
latter was growing steadily since, from 1948 to 1952, Gross Domestic Product growth stood at 4.82%
a year on average (GDP, that is all goods and services produced in a country). Keynesian policies
prevailed in the United States (US) after the Great Depression in the 1930s and the Second World
(WWII). This was lamented by neoliberals such as von Mises, three years after the foundation of
Mont Pelerin Society. This organization comprised other famous neoliberal economists such as
Friedrich von Hayek and Milton Friedman who rejected excessive government intervention.
Why does von Mises consider “interventionism” as a threat to society and the economy? The
first part of the commentary deals with the opposition between free markets and socialism and the
second part tackles the dangers of “interventionism” as viewed by von Mises.

Before socialism and capitalism can be opposed, the approach of von Mises to socialism must
be analysed (ll.7-11). According to him, the government, as a “central authority” (l.7), controls
everything, not just production (ll.8-9) but also the lives of individuals (ll.7-8). Such a perspective is
reminiscent of that adopted by von Hayek in his famous work entitled Road to Serfdom which he
published in 1944. Indeed, the two economists closely associate economic freedom and political
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freedom. The reference to communism in the Soviet Union and eastern Europe is here implicit. These
countries were indeed characterized by state control of the economy and by a totalitarian regime.
As it is defined by von Mises (ll.5-7), capitalism is based on “private enterprise” (ll.5-6) and
on competition. Consumers’ power to choose (ll.6-7) is compared to citizens’ right to vote
(“abstention” l.6). Such a rationale had already been used by von Mises in 1944 in his work entitled
Bureaucracy. Consumers buy the best products at the lowest possible prices and they ensure reliable
companies outperform competitors in free markets. The implicit conclusion to be drawn is that
capitalism is democratic and acts as a guarantee of political and economic freedom.
According to von Mises, socialism and capitalism are “irreconcilable” (l.12). What underpins
their opposition is the central issue in society, that is the optimal “supply of useful commodities and
services” (l.5) Suggesting that such an optimal distribution is allowed by capitalism is reminiscent of
a concept put forward by classical economist Adam Smith in the 18th century, the invisible hand of
the market. This means competition ensures the interests of the majority are furthered. To von Mises,
the fundamental rationales of capitalism and socialism directly run counter to each other (ll.15-6). He
argues there can be no middle way like “interventionism” (ll.16-7).
Von Mises alludes to the factors which led to “interventionism”. The Great Depression in the
1930s provoked “depression and mass unemployment” (l.99). In the United States there were indeed
12.6 million unemployed in 1933. As a consequence, laissez-faire, that is low levels of government
intervention, came to considered as an “evil” (ll.30). This prompted government intervention with
Democratic President Franklin Delano Roosevelt who implemented the New Deal from 1933 to 1938.
The National Industrial Recovery Act of 1933 for instance set up public works under the federal
Public Works Administration to fight unemployment. The jobless were hired to build schools,
colleges, hospitals, dams, bridges and roads. Such a macro-economic policy is exposed by von Mises
who delineates is consequences.

The means of government intervention referred to in this text must first be explored. Von
Mises quotes “minimum wage rates” (ll. 91-2). In 1933, the National Industrial Recovery Act stated
that industries should establish codes and guarantee minimum wages to workers. The 1938 Fair Labor
Standards Act set the minimum wage set at 40 cents an hour, thus making government intervention
unmistakable. The latter runs counter to the neoliberal notion that markets are self-regulating. To be
so, they must remain free from the government and any distortion it may inflict on markets.
Interest rates defined as the price of money are set by the central bank and are another way to
intervene in the economy. Low interest rates (l.95) tend to boost investments and consumption as
was argued by British economist John Maynard Keynes in the 1930s. He considered that government
intervention is necessary to tackle a very serious economic crisis and such an approach to interest
rates could help revive the economy. Yet, according to von Mises, the inevitable consequence is
inflation, that is a rise in prices (l.98). This is the worst problem for neoliberals who call themselves
monetarists (they focus on the amount of money in circulation, that is the money supply). There is
indeed an increase in the money supply above the rate of economic growth, in particular because of
high public spending (ll.101-2). Any recovery is bound to peter out (ll.98-9). The government should,
von Mises argues, focus on the supply side of the economy, that is foster corporate competitiveness
(ll.105-6).
Interestingly, von Mises refers to another influence which may distort markets, in particular
the labour market. He views trade unions (l.92) as unavoidably violent and harmful for the economy
since their demands prevents the flexibility of the latter market which is no longer governed simply
by the law of supply and demand.
The main example of government intervention von Mises explores is price controls which he
lists in the milk market (ll.38-77). His demonstration aims at establishing two points. First, price
control mechanisms invariably backfire (for instance regarding the milk supply ll.44-5). Secondly,
price controls are only the tip of the iceberg as their failure makes it necessary to control the whole
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milk market in the end (ll.75-7). Yet, it may be argued that such controls on prices and wages were
imposed during the Second World War (WWII) and that the effects he describes did not affect the
American economy.
Finally, the consequences of “interventionism” must be studied. “Interventionism” fails (this
is to him the main factor behind the depression, ll.99-101) and leads to socialism, that is
totalitarianism (ll.114-8). He views economic and political freedoms as intertwined and this was also
argued by neoliberals such as von Hayek and Friedman. He uses the example of post-war Britain as
a mixed economy with the co-existence of the public and private sectors (l.125). He compares it to
“the Germany of Hitler” (l.125) and thus uses his personal experience to underpin his reasoning. He
was born in Austria and of Jewish origin. He worked as an academic in Geneva from 1934 to 1940
and had then no possibility to go back to his own country as he would face persecution. To von Mises,
the preservation of property rights (ll.87-81) is only apparent in a mixed economy but we may
question the relevance of such a comparison as political freedom prevailed in post-war Britain,
although the country’s macro-economic policies were based on government intervention.

According to von Mises, a mixed economy which he terms “interventionism” cannot be

justified to prevent the excesses of capitalism since it only constitutes a long-term road to socialism
and communism. Such a rationale shows how radical neoliberal economists can be in their support
for free markets as they reject the very idea of a mixed economy. At the time, their views went
unheeded since Keynesian policies prevailed after the Second World War with for instance
Democratic Presidents Harry Truman until 1953 or Lyndon Johnson from 1963 to 1968. Jimmy Carter
was the first Democratic President to implement neoliberal policies like the deregulation of airlines
in 1978 or trucking in 1980.