Broken Capitalism, Lecture 1

David GordonMises AcademyJune 18, 2013

No Intermediate System

• We can distinguish two different ways the economy can be organized: capitalism and socialism.

• Under socialism, production is centrally controlled. This doesn’t have to be formal ownership.

No Intermediate Continued

• Another system is the free market, based on social cooperation and voluntary exchange.

• There is no third system. Mises elsewhere mentions syndicalism.

• An objection comes up: what happens if the government owns some industries, e.g., railroads? Why isn’t this an intermediate system?

Answer to Objection

• This is not a valid objection. If the government takes over production of something within a market economy, this is still a market economy.

• Nationalized industries must still sell their products on the market. They compete for money from consumers.

Problems of Nationalized Industries

• These industries don’t face the same pressures to meet consumer demands as private businesses.

• If a government service loses money, it can get more money through taxes.

• Also, bureaucrats who operate businesses aren’t risking their own funds. They are just playing at the market.

Calculational Chaos

• Mises showed in Socialism that a fully socialist economy can’t work.

• It can’t decide how to use production goods that can be used in different ways.

• The only way to allocate resources efficiently is though calculation in money. This requires market prices.

Chaos Continued

• The calculation argument doesn’t apply only to full socialism.

• Introducing socialist elements in a market economy creates “islands of calculational chaos.”

• Rothbard wrote about this in MES.

Interventionism

• The government can interfere with the free market in another way than taking over production of goods and services.

• It can pass laws that restrict market transactions in certain ways. E.g., price control, including minimum wage laws and rent control, and tariffs.

Interventionism Continued

• These interventions don’t create a third system between capitalism and socialism either.

• They only hamper the working of the free market economy.

A Pattern of Argument

• Mises’s criticism of interventionism follows a characteristic pattern of argument.

• The pattern is that we first take the goal that the interventionist wants.

• Then, we show that the intervention won’t achieve this.

• This is a value-free method of criticism.

Price Control

• Suppose that the government thinks that the price of milk is too high.

• At the high price, the poor find it hard to buy milk.

• The government decides to impose a maximum price on milk to make it easier for the poor to buy milk.

Price Control Continued

• What will happen? At the lower price, more milk will be demanded by consumers. But suppliers won’t supply more.

• Marginal sellers, i.e., those making the least return, will leave the business of selling milk.

• Note that Mises assumes that people in the business don’t all earn the same return. They would only do so in equilibrium.

Result of Price Control

• As a result of the government’s action, less milk is available.

• This was not what the price control was supposed to do.

• This is an example of a criticism that doesn’t make a value judgment.

Rent Control

• Exactly the same process takes place with rent control.

• The aim of rent control is to make more housing available for the poor.

• At the rent-controlled price, more housing is demanded than is available.

• Landlords who can’t make money will withdraw housing from the market and avoid making repairs.

More Rent Control

• The result is again that the aims of rent control aren’t achieved.

• More housing does not become available for the poor.

Minimum Wage Laws

• Minimum wage laws are supposed to raise wages for workers. They are not intended to harm workers.

• A minimum wage is a price floor. More workers will want to work at the minimum wage than employers are willing to hire.

• Workers who aren’t worth the minimum wage to the employer will be fired or not hired.

More Interventions

• Again, the intervention fails to achieve the goal.

• Tariffs make products mote costly for consumers.

• By decreasing competition, they enable cartels to be formed.

Reaction to Failure

• What happens when intervention fails?• The government may respond with more

intervention.• Milk sellers under price control complain that

they can’t make a profit. The government may respond by imposing price controls on their suppliers, to lower their costs.

Failure Continued

• These new interventions will also fail.• If the government responds with still more

interventions, this will lead to total government control of the economy.

• This took place in Germany in WWI (the Hindenburg plan) and also in Britain in WWI and WWII.

• Churchill brought socialism to Britain, not the post-war Labour Government.

Nazi Economics

• Although the Nazi regime kept the form of private property, it was a type of socialism.

• Prices and wages were set by government directives.

• The Marxist interpretation of Nazism is that big business was in control. But actually, the government ran things.

Mises and Government

• Mises opposes the slogan “that government is best which governs least.”

• He says government should fulfill its proper functions, i.e., defense and protection.

• This can be interpreted in a way consistent with anarchism, although Mises didn’t go this way.

Government Continued

• The key point is that force should be restricted to defense and protection. Force cannot justifiably be used for other things in the free market.

• This would be true also under anarcho-capitalism.

• The restriction of force is Mises’s point here, not whether defense and protection must be provided by a monopoly agency.