Ludwig von Mises' Decisive Blows Against Interventionism

Mises ranges widely over all sorts of interventions into what would otherwise be a free market economy, and strikes decisive blows at these unwise public policies. Here are some examples:

Entrepreneurship

“The entrepreneurs do not form a closed class or order. Any individual may become an entrepreneur…” (Mises, 1940, p. 3).3 It is impossible to underestimate the importance of this insight. Consider the situation before entrepreneurship was first “invented,” first undertaken by anyone. The situation might have been something along the following lines: there were hundreds of self-employed individuals—each fishing, grabbing coconuts, or something similar. Let us suppose they were all of similar productivity—each garnering 10 units of food, clothing, and shelter each day, which they daily consumed. But one of them saved a unit of sustenance every day. After a week, he turned to his neighbor with the following proposition: hey, come work for me, and I will pay you 15 units. How could our budding entrepreneur afford to pay such amount? Specialization and division of labor: two people, working together, could produce far more than double what each could produce on his own. Thus, the first “business firm” was born. It was an “immaculate conception.” Was there anything untoward going on? Of course not. There was no “exploitation” involved here. Voluntary action was the order of the day at each step of the process for both employer and employee. If this is not a powerful antidote to the socialists who claim that the entrepreneurial formation of the firm is “exploitative,” then nothing is.

Minimum Wage Law

As I write this review, news of the 2021 Nobel Prize in Economics Award has just been made public.4 The winners are David Card, Joshua D. Angrist, and Guido W. Imbens.5 What contribution of theirs was singled out for this honor? Why, their work on the minimum wage law.**

Mises never won the Nobel Prize in economics. This, in my assessment, casts serious doubt on the worth of that award. It is interesting in this regard to compare Mises’ view of this legislation with that of Card, Angrist, and Imbens. In the view of the latter, the different policies between New Jersey and Pennsylvania demonstrate that the minimum wage law actually raises compensation for the unskilled while there is little or no attendant unemployment for this demographic. This “research” has been subjected to numerous and devastating refutations, all of which would appear to escape the notice of the Nobel Committee.6

What, in sharp contrast, is Mises’ view of this pernicious legislation? He states as follows, “The authoritatively fixed wage rate tends to cause permanent unemployment of a considerable part of the labor force” (p. 30). Note the word “permanent.” This is in sharp contrast to the fact that these three economists have found no short term or temporary unemployment in their “natural experiments.” And, of course, they would not. It takes time for economic alterations to come into effect. When the minimum wage rose from $.40 to $.75 in 1949, virtually all elevators were manually operated. This law was highly successful in almost doubling the take home pay of all manual operators of elevators–in the short run. Not one of them was fired immediately after this new dispensation went into effect. At the lower wage, this type of labor and unsophisticated capital equipment was highly competitive with automatic elevators. Not at $.75, however. But it takes a few months to make this alteration. Nowadays, of course, the unemployment rate for manual operators of elevators is 100%, as it was in the early 1950s after the changeovers took place.

Professors Card, Angrist, and Imbens would do well to contemplate this statement of Mises’: “If by an act of intervention wages are fixed at a point higher than the one given by market conditions, a part of the labor supply cannot be employed; unemployment rises. It is precisely the same situation as in the case of commodities. If the owners of commodities ask a price above the market they cannot sell their entire stock” (p. 32).

There are “recalls” for all sorts of things in the modern era: cars, dishwashers, pharmaceuticals, etc. There are none, unhappily, for economists who do not realize that a price floor—set above equilibrium—will necessarily create a surplus. In the labor market this is called unemployment; in the goods market it is characterized as unsold surpluses.

Confiscatory Taxation

Mises published this book in 1940. Yet, in reading it now, it is as if he were consulting the headlines circa fall 2021 yet again. Says the author of this book in what might be easily construed as a warning to the tax woke:

• “Popular opinion is inclined to believe that the taxing away of huge incomes does not concern the less wealthy classes. This is a fallacy. The recipients of higher incomes usually consume a smaller proportion of their incomes and save and invest a larger party than the less wealthy. It is only through saving that capital is created. Only that part of income that is not consumed can be accumulated as capital. By making the higher incomes pay a larger share of the public expenditures than lower incomes one impedes the operation of capital and eliminates the tendency, which prevails in a society with increasing capital, to increase the marginal productivity of labor and therefore to raise wages” (p. 51). And this is to say nothing of the well-known phenomenon of tax shifting.

At present, “The top 1 percent paid a greater share of individual income taxes (38.5 percent) than the bottom 90 percent combined (29.9 percent).”7 Yet, this is widely deemed “unfair” amongst the powers that be. Well, perhaps it is- unjust to the rich, not to the poor. However, as Mises eloquently demonstrates, if you have the best interests of the poor at heart, the last thing you want to do is to de-capitalize the economy and lower the productivity, and hence wages, of the less well-to-do.

Profit

In yet another issue that could have been seized from the headlines of 2021, Mises states:

• When the self-styled ‘progressives’ use the word profit they rant and rave. They would like to completely eliminate profits. In their view, the entrepreneur should serve the people altruistically, not seek profits. He is either not to receive anything—or to be content—if his business is successful, with a small margin over his actual costs. That the entrepreneur has to bear the possible loss is never objected to.

• But the profit orientation of the activities of the entrepreneurs is precisely what gives sense and meaning, guidance and direction, to the market economy based on private ownership of the means of production. To eliminate the profit motive is to transform the market economy into chaos” (p. 58).

This attack on profits is highly objectionable. These “progressives” do not realize that the profit and loss system enables us to cooperate with one another. Let us say we decide we are too fat. We need to eat more rabbit food and less of what makes life worthwhile. Do we have to petition Washington, DC and ask them to tell farmers, bakers, grocers, etc., to produce more carrots and broccoli and less ice cream and chocolate? Not a bit of it. All we need do is purchase more of the former and less of the latter. Then profits will rise in the former, fall in the latter. According to Adam Smith’s “invisible hand” theory, the profit and loss system will work its wonders and entrepreneurs will be led by it so as to produce what is necessary for us to lose weight. But this means that profits must rise for leafy vegetables! If they are not allowed to do so, then we run into the “chaos” about which Mises warned us. Imagine if all the millions of changes of taste of this sort had to be accommodated by Washington, DC. “Chaos” might be too kind a description of what would ensue.

Quibbles with the King

According to that old aphorism of Ralph Waldo Emerson’s, “When you strike at the king, you must kill him.” Mises is, clearly, the “king” of economics. I am, equally clearly, not. I doubt that I will “kill him” with but a few criticisms of this otherwise magnificent book of his, but I feel obligated to at least register where he and I depart, and to explain why.

Sovereignty

I diverge from Mises when he writes: “… the consumers, not the entrepreneurs, determine the direction and scope of production. In the market economy, the consumers are sovereign” (p. 2). I much prefer Rothbard’s (1962) notion that under laissez-faire capitalism, both sides are sovereign. This latter author characterizes this phenomenon as “individual sovereignty.” Yes, the consumer wields the thumbs up or down power, but the businessman initiates production. All market activity is of necessity unanimous. Both sides are kings, not just one.

The Mixed Economy

In the view of Mises: “If within a society based on private ownership of the means of production some of the means are publicly owned and operated, this still does not make for a mixed system which would combine socialism and private property… The publicly owned enterprises, too,… must fit into the mechanism of the market economy; they are subject to the same laws of the market. In order to maintain their position they, too, have to strive after profits or at least avoid losses” (p. 5).

This position is difficult to defend. The Army Corps of Engineers killed some 1,900 people in the aftermath of Katrina (Rockwell and Block, 2010). Their levies malfunctioned. Were that division of government a private company, it would have been sued into bankruptcy. Ditto for the National Highway and Traffic Safety Administration, which manages the nation’s highways, upon which just under 40,000 people perish in traffic fatalities annually (Block, 2009). Yet these managers are still in business. Something similar could be said about the United States Post Office and numerous other government enterprises. Their losses are met with ever more subsidies from taxation, not bankruptcy. When there are publicly owned and operated businesses in an otherwise free economy, these are islands of socialism.

The State

According to Mises: “In a market economy, the State concerns itself with the protection of the life, health, and private property of its citizens against force or fraud. The state insures the smooth working of the market economy by the weight of its coercive power. It refrains, however, from any interference with the freedom of action of the people engaged in production and distribution so land as such actions do not involve the use of force or fraud against… others” (pp. 8-9).

Yes, “coercive power” is accurate, but the rest of this sounds like it could have been written in the civics textbook for middle-schoolers. This does not sound like any state ever known in the history of mankind. The governments of Monaco, Lichtenstein, Singapore, and Hong Kong (before the Chinese takeover) come closest to this ideal, but even they use “coercive power” in a manner that violates rights. They all are financed by compulsory taxation. As for the overwhelming majority of governments that have ever ruled on this third rock from the sun, the less said about them in this context the better.

Monopoly

Mises errs, too, in his view that there can be any such thing as monopoly, or monopoly prices, in the system of laissez faire capitalism. Yes, of course, there can be monopolies in the mixed economy, based upon government privileges and restrictions, but these are totally incompatible with economic freedom.

Mises states: “… price control measures can be used with some degree of effectiveness… (in)… the case of monopoly prices. The price control measure may succeed in the case of monopoly prices if it does not intend to lower the prices below the point at which the competitive price would be in the nonmonopolized, unhampered market” (p. 29). And again, “… many industries would be able to exact monopoly prices and to realize monopoly profits… ” (p. 63).8

Rothbard (1962) expends an entire chapter refuting the idea that a monopoly, or a monopoly price, can co-exist with economic freedom. Yes, there can be a single seller of wheat, or oil, or copper, or any other product in a given geographical area but it is impossible to distinguish the prices that emanate from this institutional arrangement from perfectly competitive prices.

Conclusion

I have spent almost as much space nit picking at this book as I have in praising it. This might give the very false impression that I am neutral about it. I am not at all. Mises made magnificent contributions all throughout this book; space limitations prohibit me from delving into all of them. But I would mention in this regard in addition to what I covered in Part I of this review, his contributions on war and peace, foreign policy, his analysis of the economics of Hitler, Stalin, and Mussolini, tariffs and international trade and finance, the war economy, corporativism, hot money, credit expansion, production for profit versus production for use, and much, much more. I highly recommend this book.

Footnotes

** I mistakenly said that Angrist and Imbens contributed to Card’s work on the minimum wage. Only very indirectly so if at all. Rather, their contribution had to do with natural experiments, not the minimum wage law. I owe this correction to my friend David Henderson.

[1] Ludwig von Mises. 2011[1940]. Interventionism: An Economic Analysis. Indianapolis, IN: Liberty Fund.

[2] Mises, Ludwig von. [1949] 1998. Human Action, Scholars’ Edition. Auburn: Mises Institute. Also available at Econlib: Human Action.

[3] All otherwise unidentified quotes are from this one book, now under review.

[4] Nobel Prizes, Economic Sciences. Angus Deaton, 1968.

[5] Alan B. Krueger would have assuredly shared in this prize but for his demise in 2019. This claim of mine is based on the fact that he, along with Card, authored the classic analysis of the minimum wage based upon so-called “natural experiments.” See in this regard Card and Krueger. 1994.

[6] See for example Deere, Murphy, and Welch, 1995; Neumark and Wascher, 1995.

[7] Summary of the Latest Federal Income Tax Data, 2020 Update. Tax Foundation, Feb. 25, 2020.

[8] See also p. 78.

Bibliography

Block, Walter E. 2009. The Privatization of Roads and Highways: Human and Economic Factors; Auburn, AL: The Mises Institute

Card, David and Alan Krueger. 1994. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” American Economic Review, Vol. 48, No. 4, pp. 772-793.

Deere, Donald, Murphy, Kevin M., Welch, Finis. 1995. “Employment and the 1990-91 Minimum-Wage Hike.” American Economic Review. 85, no. 2, May, pp. 232-237.

Mises, Ludwig. 2011[1940]. Interventionism: An Economic Analysis. Indianapolis, IN: Liberty Fund.

Neumark, David and William Wascher. 1995. “Minimum wage effects on employment and school enrollment.” Journal of Business Economics and Statistics. Vol. 13, No. 2, pp. 199-207.

Rockwell, Jr., Llewellyn H., and Walter E. Block. 2010. “The Economics and Ethics of Hurricane Katrina,” American Journal of Economics and Sociology , Vol. 69, No. 4, October, pp. 1294-1320. http://www.walterblock.com/wp-content/uploads/V.335_The-Economics-and-Ethics-of-Hurricane-Katrina.pdf

Rothbard, Murray N. (2004 [1962]). Man, Economy, and State, Auburn AL: Ludwig von Mises Institute, Scholar’s Edition; http://mises.org/rothbard/mes/chap16d.asp