To understand the effects of interventionism and find out what it is, we have to state what capitalism and socialism in economic terms are, because they are sometimes defined in different ways.
Capitalism, or market economy, is an economic system based on private ownership of factors of production. Man has the full right to own and dispose of his property according to his own discretion and preferences, until it doesn’t violate the law. In a market economy, in its most laissez-faire form, the law is limited to protecting the functioning of the market and its participants from aggression. The law thus protects the life and health of the person and his or her property and freedom to dispose of it.
In a market economy, man produces and engages in trade with others. He exchanges the value he has produced for that created by others. Since the value is subjective, each party values the good it receives more than one she gives away. Hence, we say that voluntary exchange is always beneficial for both parties, otherwise it wouldn’t happen at all. The market itself, as Ludwig von Mises describes it in his work “Human Action: A Treatise on Economics”:
“is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor. The forces determining the-continually changing-state of the market are the value judgments of these individuals and their actions as directed by these value judgments. The state of the market at any instant is the price structure, i.e., the totality of the exchange ratios as established by the interaction of those eager to buy and those eager to sell.”
The market information system is a price system. Only prices are able to objectify the dispersed, incomplete, subjective knowledge of people, which is only revealed in their actions. We’ve already talked about the price formation process in the “Price Discovery” video. Prices inform entrepreneurs what is to be produced, where it is to be produced, in what quantities and with what factors of production. Entrepreneurs make their decision on the basis of an economic calculation which is only possible if market prices exist. In order to succeed, the entrepreneur must find a way to create maximum value for the consumer with the least possible investment. However, this doesn’t change the fact that it is the consumers, through their choices, who decide what is to be produced, as it is their wishes that the producers must obey. The need to separate the roles of producer and consumer is necessary for economic analysis, but in reality people are both consumers and producers and produce to meet each other’s needs. A crucial part of a market economy is that production and consumption are determined and regulated by the market which is the result of peoples actions. Mises calls it “the nerve-center of the capitalist system”.
Capitalism can be contrasted with socialism or a planned economy – a system in which the factors of production are “socialized”. The economy is no longer subject to consumer preferences. In a socialist system, it is the central planners who decide what is to be produced and how to distribute consumer goods. There is no market of factors of production in socialism. Where there is only one owner of the factors of production, regardless of whether it is the state or the collective, there is no market exchange for them. Therefore the market prices of these factors are not determined and they do not exist. This in turn makes economic calculation impossible. The problem of economic calculation in socialism requires a separate discussion, so we will devote a separate film to it. Mises in his book “Interventionism: An Economic Analysis” distinguishes two models of socialist economy.
The first is Marxist or Soviet socialism. Mises describes this system as purely bureaucratic. The whole economy is managed in a bureaucratic way, like the army. Production come from higher positions, and companies that are basically “government departments”, must produce what is imposed on them.
The second model of the socialist economy is the national-socialist economy, which Mises called the German system. Mises tells us that the difference between the national-socialist economy and soviet socialism is that the former, seemingly and nominally, maintains private ownership of the means of production, entrepreneurship, and market exchange. Entrepreneurs do the buying and selling, pay the workers, contract debts, and pay interest and amortization. But they are entrepreneurs in name only. The government tells these seeming entrepreneurs what and how to produce, at what prices, and from whom to buy, at what prices, and to whom to sell. The government decrees to whom and under what terms the capitalists should entrust their funds and where and at what wages laborers should work. Market exchange is but a sham. As all prices, wages, and interest rates are being fixed by the authority, they are prices, wages, and interest rates in appearance only; in reality they are merely determinations of quantity relations in authoritarian orders. The authority, not the consumers, directs production. This is socialism with the outward appearance of capitalism. The labels of the capitalistic market economy are retained, but they signify here something entirely different from what they mean in the true market economy.”
What is important for us, however, is that in both types of socialism described above, it is the government, not the market, that determines production and consumption.
The fact that several companies will be nationalized in a market economy doesn’t mean that we are dealing with a socialist economy, just as agreeing to a small amount of private initiative in a socialist system does not yet mean a transition to a market economy. Mises writes: „If within a society based on private ownership of the means of production some of these means are publicly owned and operated, this still does not make for a mixed system which would combine socialism and private property. As long as only certain individual enterprises are publicly owned, the remaining being privately owned, the characteristics of the market economy which determine economic activity remain essentially unimpaired. The publicly owned enterprises, too, as buyers of raw materials, semi-finished goods, and labor, and as sellers of goods and services, must fit into the mechanism of the market economy; they are subject to the same laws of the market”.
So how do we distinguish when a market economy ends, and a socialist economy begins? That’s exactly what Murray Rothbard asked Mises which is described in the book „Making economic sense”:
“One time I asked Professor von Mises, the great expert on the economics of socialism, at what point on this spectrum of statism would he designate a country as “socialist” or not. At that time, I wasn’t sure that any definite criterion existed to make that sort of clear-cut judgment. And so I was pleasantly surprised at the clarity and decisiveness of Mises’s answer. “A stock market,” he answered promptly.
A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist.”
So, as we can see, the boundary is the existence of a stock exchange. Let us note that in Polish People’s Republic there was no stock exchange. In the USSR too. There was no stock exchange in North Korea until today. In Nazi Germany the number of stock exchanges was reduced from 21 to 9 in 1935, and by 1936 citizens were forbidden to buy foreign shares.
So, what is interventionism? It is based on the fact that private ownership of the means of production still exists, but the state is actively involved in regulating the economy through orders, bans, restrictions or controls. Mises calls interventionism “a hampered market economy” or “domestic policy of governmental interference with business“. The market exists, but its functioning is disrupted in various ways. What are these ways? What are their effects? Is interventionism a possible and sustainable “third form of social interaction”? Is there a so-called “third way”, which combines the advantages of capitalism and socialism and is devoid of their disadvantages? The answers to these questions will be sought in future films.