Part 6. The Hampered Market Economy
Chapter 27. The Government and the Market
1. The Idea of a Third System
Private ownership of the means of production, market economy or capitalism, and public ownership of the means of production, socialism or communism or planning, can be neatly distinguished.
Each of these two systems of society's economic organization is open to a precise and unambiguous
description and definition.
They can never be confounded with one another.
They cannot be mixed or combined.
No gradual transition leads from one of them to the other.
Their aversion is contradictory.
With regard to the same factors of production, there can only exist private control or public
control.
If, in the frame of a system of social cooperation, only some means of production are subject
to public ownership, while the rest are controlled by private individuals, this does not make
for a mixed system combining socialism and private ownership.
The system remains a market society, provided the socialized sector does not become entirely
separated from the non-socialized sector and lead a strictly autarkic existence.
In this latter case, there are two systems independently coexisting side by side, a capitalist
and a socialist.
Publicly owned enterprises operating within a system in which there are privately owned
Enterprises and a Market, and socialized countries exchanging goods and services with
non-socialist countries are integrated into a system of market economy.
They are subject to the law of the market and have the opportunity of resorting to economic
calculation.
If one considers the idea of placing by the side of these two systems, or between them,
A third system of human cooperation under the division of labor, one can always start only
from the notion of the market economy, never from that of socialism.
The notion of socialism with its rigid monism and centralism that vests the power to choose
and to act in one will exclusively, does not allow of any compromise or concession.
This construction is not amenable to any adjustment or alteration, but it is different with the
scheme of the market economy.
Here the dualism of the market and the government's power of coercion and compulsion suggests
various ideas.
Is it really peremptory or expedient, people ask, that the government keep itself out of
the market?
Should it not be a task of government to interfere and to correct the operation of the market?
Is it necessary to put up with the alternative of capitalism or socialism?
Are there not perhaps still other realizable systems of social organization which are neither communism nor pure and unhampered market economy?
Thus people have contrived a variety of third solutions, of systems which, it is claimed, are as far from socialism as they are from capitalism.
Their authors allege that these systems are non-socialist because they aim to preserve private ownership of the means of production,
and that they are not capitalistic because they eliminate the deficiencies of the market economy.
For a scientific treatment of the problems involved, which by necessity is neutral with regard to all value judgments, and therefore does not condemn any features of capitalism as faulty, detrimental or unjust, this emotional recommendation of interventionism is of no avail.
The task of economics is to analyze and to search for truth.
It is not called upon to praise or to disapprove from any standard of preconceived postulates and prejudices.
With regard to interventionism, it has only one question to ask and to answer.
How does it work?
2. The Intervention
There are two patterns for the realization of socialism.
The first pattern, we may call it the Lenin or the Russian pattern, is purely bureaucratic.
All plants, shops and farms are formally nationalized.
They are departments of the government, operated by civil servants.
Every unit of the apparatus of production stands in the same relation to the superior
The second pattern, we may call it the Hindenburg or German pattern, nominally and seemingly
preserves private ownership of the means of production and keeps the appearance of ordinary
markets, prices, wages and interest rates.
There are, however, no longer entrepreneurs, but only shop managers, Betriebsführer, in
the terminology of the Nazi legislation.
These shop managers are seemingly instrumental in the conduct of the enterprises entrusted
to them.
They buy and sell, hire and discharge workers, and remunerate their services, contract debts
and pay interest and amortization.
that in all their activities they are bound to obey unconditionally the orders issued
by the government's supreme office of production management.
This office, the Reichswirtschaftsministerium in Nazi Germany, tells the shop managers what
and how to produce, at what prices, and from whom to buy, at what prices, and to whom to
sell.
It assigns every worker to his job and fixes his wages.
It decrees to whom and on what terms the capitalist must entrust their funds.
Market exchange is merely a sham.
All the wages, prices and interest rates are fixed by the government.
They are wages, prices and interest rates in appearance only.
In fact, they are merely quantitative terms in the government's orders determining each
Research Citizens' Job, Income, Consumption and Standard of Living.
The government directs all production activities.
The shop managers are subject to the government, not to the consumer's demand and the market's
price structure.
This is socialism under the outward guise of the terminology of capitalism.
Some labels of the capitalistic market economy are retained, but they signify something entirely
are very different from what they mean in the market economy.
It is necessary to point out this fact in order to prevent a confusion of socialism
and interventionism.
The system of interventionism, or of the hampered market economy, differs from the German pattern
of socialism by the very fact that it is still a market economy.
The authority interferes with the operation of the market economy but does not want to
to eliminate the market altogether. It wants production and consumption to develop along
lines different from those prescribed by an unhampered market, and it wants to achieve
its aim by injecting into the working of the market orders, commands and prohibitions for
whose enforcement the police power and its apparatus of violent compulsion and coercion
stand ready.
But these are isolated acts of intervention.
It is not the aim of the government to combine them into an integrated system which determines
all prices, wages and interest rates, and thus places full control of production and
consumption into the hands of the authorities.
The system of the hampered market economy or interventionism aims at preserving the
The dualism of the distinct spheres of government activities on the one hand and economic freedom
under the market system on the other hand.
What characterizes it as such is the fact that the government does not limit its activities
to the preservation of private ownership of the means of production and its protection
against violent encroachments.
The government interferes with the operation of business by means of orders and prohibitions.
The intervention is a decree issued, directly or indirectly, by the authority in charge
of the administrative apparatus of coercion and compulsion, which forces the entrepreneurs
and capitalists to employ some of the factors of production in a way different from what
What they would have resorted to if they were only obeying the dictates of the market.
Such a decree can be either an order to do something or an order not to do something.
It is not required that the decree be issued directly by the established and generally
recognized authority itself.
It may happen that some other agencies arrogate to themselves the power to issue such orders
Procedures or Prohibitions, and to enforce them by an apparatus of violent coercion and
oppression of their own.
If the recognized government tolerates such procedures, or even supports them by the employment
of its governmental police apparatus, matters stand as if the government itself had acted.
If the government is opposed to other agencies' violent action, but does not succeed in suppressing
It is important to remember that government
interference always means either violent action or the threat of such action.
Government is, in the last resort, the employment of armed men, of policemen, gendarmes, soldiers,
prison guards and hangmen.
The essential feature of government is the enforcement of its decrees by beating, killing
and imprisoning.
Those who are asking for more government interference are asking ultimately for more compulsion
and less freedom.
To draw attention to this fact does not imply any reflection upon government activities.
In stark reality, peaceful social cooperation is impossible if no provision is made for
violent prevention and suppression of antisocial action on the part of refractory individuals
and groups of individuals.
One must take exception to the often repeated phrase that government is an evil, although
a necessary and indispensable evil.
What is required for the attainment of an end aimed at is a means, the cost to be expended
for its successful realization.
It is an arbitrary value judgment to describe it as an evil in the moral connotation of
the term.
However, in face of the modern tendencies toward a deification of government and state,
it is good to remind ourselves that the Old Romans were more realistic in symbolizing
3.
The Delimitation of Governmental Functions Various schools of thought, parading under
the pompous names of philosophy of law and political science, indulge in futile and empty
The Theory of Money and Credit
However, no such thing as natural law and a perennial standard of what is just and what
is unjust.
Nature is alien to the idea of right and wrong.
Thou shalt not kill is certainly not part of natural law.
The characteristic feature of natural conditions is that one animal is intent upon killing
Other Animals, and that many species cannot preserve their own life except by killing others.
The notion of right and wrong is a human device, a utilitarian precept designed to make social
cooperation under the division of labor possible.
All moral rules and human laws are means for the realization of definite ends.
There is no method available for the appreciation of their goodness or badness other than to
scrutinize their usefulness for the attainment of the ends chosen and aimed at.
From the notion of natural law, some people deduce the justice of the institution of private
property in the means of production.
Other people resort to natural law for the justification of the abolition of private
property in the means of production.
As the idea of natural law is quite arbitrary, such discussions are not open to settlement.
State and government are not ends, but means.
Inflicting evil upon other people is a source of direct pleasure only to sadists.
Established authorities resort to coercion and compulsion in order to safeguard the smooth
operation of a definite system of social organization.
The sphere in which coercion and compulsion is applied and the content of the laws which
are to be enforced by the police apparatus are conditioned by the social order adopted.
As state and government are designed to make this social system operate safely, the delimitation
of governmental functions must be adjusted to its requirements.
The only standard for the appreciation of the laws and the methods for their enforcement
is whether or not they are efficient in safeguarding the social order which it is desired to preserve.
The notion of justice makes sense only when referring to a definite system of norms, which
in itself is assumed to be uncontested and safe against any criticism.
Many peoples have clung to the doctrine that what is right and what is wrong is established
from the Dawn of the Remotest Ages and for Eternity.
The task of legislators and courts was not to make the laws, but to find out what is
right by virtue of the unchanging idea of justice.
This doctrine, which resulted in an adamant conservatism and a petrification of old customs
and institutions, was challenged by the doctrine of natural right.
To the positive laws of the country, the notion of a higher law, the law of nature, was opposed.
From the arbitrary standard of natural law, the valid statutes and institutions were called
just or unjust.
To the good legislator was assigned the task of making the positive laws agree with the
natural law.
The fundamental errors involved in these two doctrines have long since been unmasked.
For those not deluded by them, it is obvious that the appeal to justice in a debate concerning
the drafting of new laws is an instance of circular reasoning. De legge ferenda, there
is no such thing as justice. The notion of justice can logically only be resorted to
De legge lata. It makes sense only when approving or disapproving concrete conduct from the
The Point of View of the Valid Laws of the Country
In considering changes in the nation's legal system, in rewriting or repealing existing
laws and writing new laws, the issue is not justice but social expediency and social welfare.
There is no such thing as an absolute notion of justice not referring to a definite system
of social organization.
It is not justice that determines the decision in favor of a definite social system.
It is, on the contrary, the social system which determines what should be deemed right
and what wrong.
There is neither right nor wrong outside the social nexus.
For the hypothetical isolated and self-sufficient individual, the notions of just and unjust
are empty.
Such an individual can merely distinguish between what is more expedient and what is less expedient
for himself.
The idea of justice refers always to social cooperation.
It is nonsensical to justify or to reject interventionism from the point of view of
a fictitious and arbitrary idea of absolute justice.
It is vain to ponder over the just delimitation of the tasks of government from any preconceived
standard of perennial values.
It is no less impermissible to deduce the proper tasks of government from the very notions
of government, state, law and justice.
It was precisely this that was absurd in the speculations of medieval scholasticism, of
by Fichte, Schelling and Hegel, and of German Begrieff's U.S. Prudence.
Concepts are tools of reasoning.
They must never be considered as regulative principles dictating modes of conduct.
It is a display of supererogatory mental gymnastics to emphasize that the notions of state and
and sovereignty logically imply absolute supremacy and thus preclude the idea of any limitations
on the state's activities.
Nobody questions the fact that a state has the power to establish totalitarianism within
the territory in which it is sovereign.
The problem is whether or not such a mode of government is expedient from the point
of View of the Preservation and Functioning of Social Cooperation.
With regard to this problem, no sophisticated exegesis of concepts and notions can be of
any use.
It must be decided by praxeology, not by asperious metaphysics of state and right.
The philosophy of law and political science are at a loss to discover any reason why government
should not control prices and not punish those defying the price ceilings decreed, in the
same way as it punishes murderers and thieves.
As they see it, the institution of private property is merely a revocable favor graciously
granted by the Almighty Sovereign to the wretched individuals.
There cannot be any wrong in repealing totally or partially the laws that granted this favor.
No reasonable objection can be raised against expropriation and confiscation.
The legislator is free to substitute any social system for that of the private ownership of
the means of production, just as he is free to substitute another national anthem for
that adopted in the past.
The formula cartel et notre bon plaisir, for such is our good pleasure, is the only maxim
As against all this formalism and legal dogmatism, there is need to emphasize again that the
only purpose of the laws and the social apparatus of coercion and compulsion is to safeguard
the smooth functioning of social cooperation.
It is obvious that the government has the power to decree maximum prices and to imprison
The problem of interventionism is not a problem of the
The correct delimitation of the natural, just and adequate tasks of state and government.
The issue is, how does a system of interventionism work?
Can it realize those ends which people, in resorting to it, want to attain?
The confusion and lack of judgment displayed in dealing with the problems of interventionism
are amazing indeed.
There are, for instance, people who argue thus.
It is obvious that traffic regulations on the public roads are necessary.
Nobody objects to the government's interference with the car driver's conduct.
The advocates of laissez-faire contradict themselves in fighting government interference
with market prices and yet not advocating the abolition of government traffic regulation.
The fallacy of this argument is manifest.
The regulation of traffic on a road is one of the tasks incumbent upon the agency that
operates the road.
If this agency is the government or the municipality, it is bound to attend to this task.
It is the task of a railroad's management to fix the timetable of the trains, and it
is the task of a hotel's management to decide whether or not there should be music in the
and the Dining Room. If the government operates a railroad or a hotel, it is the government's
task to regulate these things. It is not an instance of government interference with the
operation of the market economy that the postmaster general chooses the pattern and the color
of the postage stamps. With a state opera, the government decides which operas should
be produced and which not. It is a non sequitur to deduce from this fact that it is also a
task of the government to decide these things for a non-governmental opera.