# The Basic Tenets of Real Liberalism, Part IV: Interventionism, Social Conflict, and War **URL:** **By** David Hart, Walter E. Grinder **Published:** December 1, 1983 --- “If the state attempts to artificially lower the price of a commodity, say grain, below the market price the interventionist dynamic is set in motion.” ## Recommended Reading. Ludwig von Mises, _The Clash of Group Interests and Other Essays_ (New York: Center for Libertarian Studies, 1978). Ludwig von Mises, “The Middle of the Road Leads to Socialism,” in _Planning for Freedom_ (South Holland, IL: Libertarian Press, 1962). Ludwig von Mises, “War and the Economy,” in _Nation State, and Economy_ (New York University Press, 1983), trans. Leland B. Yeager. Murray N. Rothbard, _Power and Market_ (Kansas City: Sheed Andrews and McMeel, 1977). In the previous issue of the _Humane Studies Review_ we showed that the belief in the natural harmony of the free market has been part of the liberal tradition for centuries. Equally ancient is the idea that intervention by the state disrupts social peace and destroys individual wealth. One of the most sophisticated supporters of this idea of state disruption is the Austrian economist Ludwig von Mises. In a short but important essay found in _The Clash of Group Interests and Other Essays_ (New York: Center for Libertarian Studies, 1978) Mises argues that social and economic groups relate harmoniously and peacefully only under a system of private property and the free market. However, Mises goes further than many other liberals with his view that it is only government action that creates any group conflict which does exists. By creating a mechanism whereby those with access to state power and privilege can benefit at the expense of those not so privileged, the state also creates classes (or “caste” as Mises called them to avoid confusion with Marxist ideas of class). Mises’s concept of the radical opposition between the state and economy is used by Murray Rothbard very effectively to show that in every area of economic life intervention by the state is disruptive, inefficient, and the cause of class conflict. See Murray N. Rothbard, _Power and Market_ (Kansas City: Sheed Andrews and McMeel, 1977). We will return to the important question of class in a future issue, after our discussion of Mises’s theory of interventionism. Mises’s key insight, which forms the basis of his theory of interventionism, is the following: once the state begins to disrupt the peaceful operations of the free market, a dynamic process is set in motion which leads to further interventions by the state. According to Mises, each intervention in the voluntary and harmonious interactions of market participants leads to unintended, deleterious economic and social consequences, which in turn demand further interventions to “correct” the new problem _ad infinitum_. Mises calls this process “interventionism” and his theory of interventionism is explored in the essay “The Middle of the Road Leads to Socialism,” in _Planning for Freedom_ (South Holland, IL: Libertarian Press, 1962). > “Mises’s key insight...is: once the state begins to disrupt the peaceful operations of the free market, a dynamic process is set in motion which leads to further interventions...” ## Price Controls An example which is commonly given to illustrate this process is price control. If the state attempts to artificially lower the price of a commodity, say grain, below the market price the interventionist dynamic is set in motion. First of all, producers have less incentive to supply the good because they cannot be adequately recompensed for their troubles. To the extent that production does continue, there is less profit to invest in expansion or improving yields. Secondly, consumers are presented with a lower-priced commodity and may attempt to increase their consumption of the good. The result of reduced supply and increased demand is enormous pressure for black markets, corruption of regulatory officials, and other measures to get around the restrictions. If the state wishes to maintain its policy of low grain prices (as many African and Latin American states do) it must either “eliminate” black marketeers and enforce price controls more stringently (as the Soviet government did in the early period of “war communism” when they literally eliminated private producers for selling on the black market), or it must force farmers to expand supply. Many states achieve the latter by taking over the production of food so they can ensure that production is not “diverted” or curtailed in response to prices. The final step in this process is the “collectivization” of agriculture. ## Kinds of Socialism Mises clearly saw that interventions would continue until a comprehensive, authoritarian system of control was finally established. Depending upon the context in which he was working, Mises coined the following terms to describe the end-product of the process of interventionism. The most general term he used was “command economy” or _Zwangswirtschaft_ which emphasized the coercive aspects of interventionism. Because interventionism has many features in common with fully-fledged socialism Mises also used the term “state socialism,” thus stressing the primary role of the state in directing the economy. A third expression for the same phenomenon is “war socialism,” not surprising given the fact that under cover of so-called war measures the state massively increased its power over the economy. Mises observed the acceleration of interventionist measures personally during the catastrophe of the First World War and shortly afterwards wrote an important analysis of the phenomenon in “War and the Economy,” in _Nation, State, and Economy_ (New York University Press, 1983), trans. Leland B. Yeager. Mises observed that: > War socialism was only the continuation at an accelerated tempo of the state-socialist policy that had already been introduced long before the war. (p. 176) An interesting discussion of the attempt by Mises and others to come to terms with the problem of interventionism can be found in Gerold Ambrosius, _Zur Geschichte des Begriffs und der Theorie des Staatskapitalismus und des staatsmonopolistischen Kapitalismus_ (Tübingen: J. C. B. Mohr, 1981). Some scholars, unaware of Mises’s contribution, have attempted to explain the problem in other ways. The idea of “organized capitalism” is the topic of _Organisierter Kapitalismus_, ed. Heinrich A. Winkler (Göttingen: Vandenhoek und Ruprecht, 1974). The problem of this approach is that the question of who organizes capitalism is not properly examined. The private organization of business is, of course, necessary and does not disrupt the economy. Only the organization of business by and through the state is disruptive and unfair to those who are excluded or who have to pay for another’s privileges. The value of Mises’s analysis is that he understands the market and therefore never makes this fundamental mistake. The growth of the interventionist state accelerated markedly during the first half of the twentieth century, the watershed being the massive interventions undertaken by all states during the First World War. It was during this period that the main forms of modern interventionism developed: the war economics of the American and Western European nations, the Fascist regimes of inter-war Germany and Italy, the semi-military economies of Latin America and inter-war China and Japan, the various attempts to establish communism, and the modern welfare states with which most of us are familiar. > “The result of reduced supply and increased demand is enormous pressure for black markets, corruption of regulatory officials, and other measures to get around the restrictions.” Mises’s theory of interventionism can be used very effectively to explain the origin and operation of this phenomenon. It is important for classical liberals to develop Mises’s theory further and to be able to use the theory to analyze in detail the ways in which interventionism has historically appeared. Although the interventionist tide now may be beginning to turn, the interventionist state continues to exist and it is vital to understand how it arose, how it functions, and how the inevitable crises it engenders can be used to bring about change. We only have space to discuss a few manifestations of the interventionist state in this essay, but we hope that the books and articles we suggest will lead the reader to pursue the topic further. “Although the interventionist tide now may be beginning to turn, the interventionist state continues to exist...” ## The Command Economy The _Zwangswirtschaft_ has existed in a relatively pure form in the economic system established by the Bolsheviks in the Soviet Union. Roger Pethybridge and Paul Craig Roberts have convincingly shown how the catastrophic economic failures of Bolshevik Russia inevitably arose out of the experiments in war communism and the attempt to exterminate the market by force. It is interesting to note that the Bolsheviks used the example of the German war economy (war socialism in Mises’s terminology) for their own economy. Since Marx had not described how the socialist economy would work and since the best model Lenin could come up with was the Post Office it is not surprising that the Bolsheviks turned to German militarism as an example of functioning state control of the economy. See Roger Pethybridge, _The Social Prelude to Stalinism_ (London: Macmillan, 1977) and Paul Craig Roberts, “War Communism: A Re-examination,” _Slavic Review_, June 1970, vol. 29, no. 2, pp. 238–61. A similar and perhaps even bloodier experiment in abolishing the market took place in Cambodia after 1975. On the extremes to which Pol Pot and the Khmer Rouge went in following their anti-market, interventionist logic, see François Ponchaud, _Cambodia Year Zero_ (Harmondsworth: Penquin, 1978) and William Shawcross, _The Quality of Mercy: Cambodia, Holocaust, and Modern Conscience_ (London: Andre Deutsch, 1984). The extensive militarization of German industry and society which took place during the First World War is discussed in Ludwig von Mises, _Nation, State, and Economy: Contributions to the Politics and History of Our Time_, trans. Leland B. Yeager (New York University Press, 1983); Gerald D. Feldman, _Army, Industry, and Labor in Germany 1914–1918_ (Princeton University Press, 1966); and Martin Kitchen, _The Silent Dictatorship: The Politics of the German High Command under Hindenburg and Ludendorff 1916–1918_ (London: Croom Helm, 1976). The phenomenal growth of the interventionist state before and during the First World War is not confined to the continent of Europe. The American experience is well covered by James Gilbert, _Designing the Industrial State: The Intellectual Pursuit of Collectivism_ (Chicago: Quadrangle Books, 1972); Gabriel Kolko, _The Triumph of Conservatism: A ReInterpretation of American History, 1900–1916_ (Chicago: Quadrangle Books, 1963); James Weinstein, _The Corporate Ideal in the Liberal State, 1900–1918_ (Boston: Beacon Press, 1968); and Stephen Skowronek, _Building a New American State: The Expansion of National Administrative Capacities, 1877–1920_ (Cambridge University Press, 1982). ## American Socialism On the militarization of the American economy, see Murray N. Rothbard, “War Collectivism in World War 1,” in _A New History of Leviathan: Essays on the Rise of the American Corporate State_, ed. Ronald Radosh and Murray N. Rothbard (New York: E. P. Dutton, 1972); and Robert D. Cuff, _The War Industries Board: Business–Government Relations During World War One_ (Baltimore: John Hopkins University Press, 1973). A more ambitious survey and synthesis of the problem of the militarization of the economy which has considerable relevance for the U.S. in this period is William H. McNeill, _The Pursuit of Power: Techology, Armed Force, and Society since A. D. 1000_ (University of Chicago Press, 1982). ## War Socialism German fascism which developed during the 1930s and 1940s is another textbook example of a command economy. It is especially important for students of Austrian economics because Mises’s experience of the Nazi takeover and his observation of the German economy led him to develop the theory of interventionism in the first place. In a similar fashion, the Bolshevik attempt to eliminate the market during the period of war communism led Mises to question the possiblity of rational economic calculation under socialism. A good place to begin unravelling the complexities of the German fascist economy is the excellent collection of essays in _Fascism: A Reader’s Guide. Analyses, Interpretations, Bibliography_ (Harmondsworth: Penquin, 1982), ed. Walter Laqueur, especially the article by Alan S. Milward, “Fascism and the Economy,” pp. 409–53. Also recommended is Milward’s _War, Economy and Society, 1939–1945_ (University of California Press, 1979) for the general problem of the take–over of the economy by the state during the war. The nature of the fascist economy raises some important questions about the general problem of interventionism. Some conservatives argue that Fascism is a unique occurance, having more to do with Hitler’s personality than with government intervention in the German economy. Others argue that Fascism is just one kind of government intervention which was not unique to Germany in the 1930s and which therefore could be repeated in slightly different forms under the right circumstances. A contemporary but still useful interpretation of fascist interventionism which reveals the relationship between big business and the fascist state is given by Robert A. Brady, _The Rationalization Movement in German Industry: A Study in the Evolution of Economic Planning_ (University of California Press, 1933); _The Spirit and Structure of German Fascism_ (London: Victor Gollancz, 1937): and _Business as a System of Power_ (New York: Columbia University Press, 1943). For a more recent discussion of this question, see Arthur Schweitzer, _Big Business in the Third Reich_ (Bloomington: Indiana University Press, 1964) and the debate between Henry A. Turner and Dirk Stegman: Stegman, “Zum Verhältnis von Großindustrie und Nationalsozialismus 1930-1933. Ein Beitrag zur Geschichte der sog. Machtergreifung,” _Archiv für Sozialgeschichte_, vol. 13, 1973, pp. 399-482; Turner, “Großunternehmertum und Nationalsozialismus 1930-1933, “ _Historische Zeitschrift_, vol. 221, no. 1, 1975, pp. 18-68; and Stegman, “Antiquierte Personalisierung oder sozialökonomische Faschismum-Analyse? Eine Antwort auf H. A. Turners Kritik an meinen Thesen zum Verhältnis von Nationalsozialismus und Großindustrie vor 1933,” _Archiv für Sozialgeschichte_, vol. 27, 1977, pp. 275-296. > “Some conservatives argue that fascism is a unique occurance, having more to do with Hitler’s personality. . . .Others argue that (it) is just one kind of government intervention which was not unique to Germany and which therefore could be repeated. . . under the right circumstances.” While the European economics were becoming more and more interventionist during the inter-war period a similar process was taking place in America with FDR’s New Deal. For a penetrating and disturbing analysis of the growth of a command economy under President Roosevelt, see _As We Go Marching_ (New York: Free Life Editions, 1973) by the “Old Right” libertarian John T. Flynn. This book first appeared in 1944 and, like his contemporary Robert Brady, Flynn draws realistic and frightening parallels between the economic systems created by German and Italian fascism and the economic developments taking place in America during the 1930s. In particular Flynn analyzes the movement towards centralized decision-making and the way in which the state prevented private businesses from conducting their own affairs. Roosevelt explicitly modelled the interventionist New Deal measures on the experience of the First World War and even re-employed the same people. This aspect of the New Deal is discussed by William E. Leuchtenburg, “The New Deal and the Analogue of War,” in _Change and Continuity in Twentieth Century America_, ed. John Braehen, Robert Brenner, and Everett Walters (New York: Harper and Row, 1966). ## State Socialism One of the most disturbing features to emerge from the Second World War was a group of industrial interests which benefited from the militarization of the economy. Instead of producing and selling for the market, these firms produced for and sold to the state. The resources to pay for military products were diverted away form individual consumers and the firms which peacefully and productively supplied them. Apart from being an enormous financial burden the Military-Industrial Complex (to use President Eisenhower’s expression) was able to influence government policy and thereby entrench its privileges and perpetuate the distortion of the economy. Two recent treatments of the cosy alliance between the state and certain industrial interests are by Benjamin Franklin Cooling, _War, Business, and American Society: Historical Perspectives on the Military-Industrial Complex_ (Port Washington, NY: Kennikat, 1977) and _War, Business, and World Military-Industrial Complexes_ (Port Washington, NY: Kennkikat, 1981). The interventionist state has gone further in Western Europe than in the United States. The legacy of war, fascism, large and well-organized socialist parties, and a tradition of statist intervention has meant that the freedom allowed business has been much less that found in America. The European problem must be seen in the light of the extraordinary events of the last hundred years. The important inter-war years are covered by Charles S. Maier, _Recasting Bourgeois Europe: Stabilization in France, Germany, and Italy in the Decade after World War I_ (Princeton University Press, 1981), especially the section “Corporative State in Corporatist Europe,” pp. 545-78. The tradition of state intervention in France is discussed by Richard F. Kuisel, _Capitalism and the State in Modern France: Renovation and Economic Management in the Twentieth Century_ (Cambridge University Press, 1983). The problems facing the victorious powers at the end of the Second World War were similar to those of the First. Politicians in both cases were keen not to allow the market to usurp their power and influence. The debate begun by Maier raises important questions. See Charles S. Maier, “The Two Postwar Eras and the Conditions for Stability in Twentieth-Century Western Europe,” _American Historical Review_, April 1981, vol. 86, no. 2, pp. 327-52, and the comments by Schuker, Kindleberger, and Maier’s reply, pp. 353-67. > “Since the Second World War, the state has been the focus of a constant battle between interest groups for political control.” Since the Second World War, the state has been the focus of a constant battle between interest groups for political control. Political control or influence is vital for unions, public servants, farmers, and protected industries such as steel and aerospace to gain privileges or to protect their existing ones. On the way interest group politics has distorted the European economies, see _Organizing Interests in Western Europe_; _Pluralism, Corporatism, and the Transformation of Politics_, ed. Suzanne Berger (Cambridge University Press, 1983); Phillipe C. Schmitter, “Still the Century of Corporatism,” _Review of Politics_, 1974, vol. 36, pp. 85–128; and _Planning, Politics, and Public Policy: The British, French, and Italian Experience_, ed. Jack Hayward and Michael Watson (Cambridge University Press, 1975). ## Socialism Unlike that in the U.S.A. where economic life has been largely independent of the state, industrial development in Europe has gone ahead with considerable state intervention and this legacy remains quite powerful to this day. The background to state control and interference is provided by Barry Supple, “The State and the Industrial Revolution, 1700–1914,” in _Fontana Economic History of Europe_, ed. Carlo M. Cipolla (1973), vol. 3; and _The State and Economic Growth_, ed. Hugh G. J. Aitken (New York: Social Science Research Council, 1959). In the German case, the state has always assumed a privileged position in the economy as Gerold Ambrosius, _Der Staat als Unternehmer: offenliche Wirtschaft und Kapitalismus seit dem 19. Jahrhundert_ (Göttingen: Vandenhoeck und Ruprecht, 1984) shows. The extent of modern intervention is clearly demonstrated in _Big Business and the State: Changing Relations in Western Europe_, ed. Raymond Vernon (London: Macmillan, 1974) and Andrew Shonfield, _Modern Capitalism: The Changing Balance of Public and Private Power_ (Oxford University Press, 1969). Armed with Mises’s theory of interventionism and some knowledge of twentieth century American and European command economies, one is in a position to come to grips with the thorny problem of class. Mises clearly understood that there was an element of truth in the Marxist claim that modern societies were conflict-ridden. The apparent paradox of a classical liberal theory of class analysis is resolved if we return to Mises’s argument in _The Clash of Group Interests and Other Essays_. Here Mises distinguishes between the Marxian and the liberal idea of exploitation. Whereas Marx saw conflict in the very nature of exchange and wage-labor, Mises and other classical liberals see class and class conflict as the inevitable result of the politicization of market relations. They reject the Marxist idea of exploitation utterly and replace it with their own unique interpretation based on individual property rights. Thus there is a liberal theory of class conflict, the theory and history of which we will discuss in the next issue. > “Whereas Marx saw conflict in the very nature of exchange and wage-labor, Mises and other classical liberals see class and class conflict as the inevitable result of politicization of market relations. They reject the Marxist idea of exploitation utterly and replace it with their own unique interpretation based on individual property rights.” _David Hart, the editor of the Humane Studies Review, has studied history and political philosophy at Macquarie University in Sydney, Australia; the Johannes Gutenberg Universität in Mainz, West Germany; and Stanford University in California. He is currently working on a PhD in French Liberal Thought at King’s College, Cambridge._ _Walter E. Grinder is Executive Vice President in charge of Academic Affairs at the Institute for Humane Studies and a Senior Editor of the Humane Studies Review. He has edited Albert Jay Nock’s essay, Our Enemy the State (New York: Free Life Editions, 1073) and coauthored with John Hagel III, “Toward a Theory of State Capitalism: Ultimate Decisionmaking and Class Structure,” Journal of Libertarian Studies, 1977, vol.1, no. 1, pp. 59–79._