The New Wave Swells

Depressed by recent political events, I took Ludwig von Mises' Human Action off the shelf and cracked it open. I read chapter 36, "The Crisis of Interventionism." If you follow either link, you can read the chapter free online. You'll become smarter if you do. Mises is one of the few authors that always leaves you smarter after reading him.

By interventionism, Mises means government interference in the economy (but not all-out socialism). It goes by many other names: mixed economy, welfare state, the third way, liberalism, progressivism, compassionate conservatism, Rockefeller Republicanism, regulation, moderation and the middle of the road.

This chapter could have been written yesterday, but it was written 60 years ago and published in 1949. For instance:

The idea underlying all interventionist policies is that the higher income and wealth of the more affluent part of the population is a fund which can be freely used for the improvement of the conditions of the less prosperous. The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor.

And this sounds familiar:

The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting [p. 857] it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. In recommending a greater allowance for the schools he simply stresses the point that it would be a good thing to spend more for education. He does not venture to prove that to raise the budgetary allowance for schools is more expedient than to raise that of another department, e.g., that of health. It never occurs to him that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich.

Mises explains how government interference in the economy always makes things worse. The subsequent economic crisis is then blamed on the elements of freedom left in the economy, prompting the state to intensify intervention until finally there is full socialism.

All varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which -- from the point of view of their authors' and advocates' valuations -- is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.

Mises explains that we are heading for the German style of socialism (also known as fascism). Elsewhere he calls it "socialism on the German plan."

Marching ever further along the path of interventionism, all those countries that have not adopted full socialism of the Russian pattern [p. 859] are more and more approaching what is called a planned economy, i.e., socialism of the German or Hindenburg pattern. In regard to economic policies, there is nowadays little difference among the various nations and, within each nation, among the various political parties and pressure groups. The historical party names have lost their significance. There are, as far as economic policy is concerned, practically only two factions left: the advocates of the Lenin method of all-round nationalization and the interventionists.

And yet, part of Mises's argument doesn't seem right:

Yet the age of interventionism is reaching its end. Interventionism has exhausted all its potentialities and must disappear.

This was written 60 years ago, but we're still muddling along in the interventionist middle of the road. We have not crossed the Rubicon of "all-round nationalization" or dictatorship; we still have economic calculation. Obviously, interventionism was not "reaching its end" in 1949. What happened?

I think the problem is that Mises was basing his ideas on the German model that he lived through. Germany went from Bismarck's welfare state to Hitler's fascist dictatorship in around 50 years, or two and a half generations. America, with its Enlightenment heritage of individualism, was more receptive to better ideas.

And better ideas were being written and publicized just as Mises wrote Human Action. The free market movement was led by Ayn Rand, who created the first moral defense of capitalism. In addition, Leonard Read founded the Foundation for Economic Education.

These good ideas had an impact on the Republican Party, and on one man in particular, Barry Goldwater. He understood that interventionism was bad. In his Presidential campaign of 1964 he stood for small government. Although Goldwater lost in a landslide to LBJ, he changed the Republican Party and America. For awhile the Republican Party stood for smaller government and rolling back the welfare state. (The pragmatist Richard Nixon expanded government egregiously, but never as a moral crusade because he knew he was betraying Goldwater's principles.)

Ronald Reagan, who entered politics as a follower of Goldwater, brought free market, small government ideas into his Presidency starting in 1981 -- albeit in a frustratingly mixed bag that was in many ways a triumph of symbolism over substance. His supply side economics helped stimulate the economy. But his legacy is terribly compromised by his bringing the religious right to prominence in the party, planting the seeds of its own demise.

The Republican Party as a small government party lasted about two generations, 40 years; it is now over.

Senator John McCain, who will be the 2008 Republican Presidential nominee, repudiates the Goldwater paradigm. He admits his ignorance of economics. He pits profits against patriotism. He is a "national greatness" or big government Republican. Unlike any Republican since Teddy Roosevelt, he speaks of big government with the zeal of a moral crusader. He dreams of founding national service programs. He is an explicit statist, collectivist and altruist who believes that morality lies in sacrificing for something greater than self-interest.

If I am right, then the free market or "libertarian" movement in Republican Party forestalled the crises Mises thought were imminent. The forestalling has ended. The next President will be Obama, Clinton or McCain. All three are, to use Mises' terms, "interventionist dilettantes and demagogues." They all speak as if Human Action had never been written; they labor in dangerous ignorance, planning all the ways the state will spend the money it takes from rich capitalists. In their stupidity they will make the same errors interventionists have made throughout history. They will destroy wealth and freedom.

We are about to see a new wave of interventions in the economy, and a new round of crises brought on by those interventions. Will America respond with confusion or clarity? There are good ideas and solutions out there -- but will they find an audience? Will they prosper?

UPDATE: Slight revision.