The central problem of our time is the economic organization of society. It is not necessary to adhere to historical materialism in order to recognize this or to realize, as well, that upon the manner in which society solves this problem depends on the resolution of many others which today appear to be insoluble, such as the discovery of a way to overcome and transcend present nationalisms, the establishment of peaceful conditions in the world, and the utilization for constructive ends of the latest wonderful discoveries of science. Throughout the course of history we find various types of economic structures; however, humanity cannot, at a given moment, choose an economic system in the same way as a man with unlimited time or money might pick one of the trips offered by a tourist agency. The only alternative that exists for a serious thinker today is that between a free economy and a controlled economy.
But is there no third road? Is it not intolerable to attempt to push us into one or the other pigeonhole, that of supporters of economic freedom or of believers in state control? The purpose of the present work is to submit this widely-held belief in a "middle way" to a critical examination.
The name of the third road is interventionism. Its practical importance derives from the fact that in Mexico as in the United States and in those European countries where debate is still possible, there are many people who reject communism, sometimes even with horror because of its excesses and persecutions, but who at the same time, deluded by a persistent and insidious propaganda, are unwilling to declare themselves in favor of capitalism, which they believe to be the cause of poverty, or of crises, or of social injustice, or an order inferior from an ethical point of view. Whatever truth there may be in these structures, and notwithstanding the fact that I believe each one of them to be the result of misinterpretation or of stark ignorance both of the facts and of economic theory, this is clearly not the occasion to expose and refute them. I would rather inquire into what lies behind such broad but vague labels as "capitalism" or "socialism" and examine and evaluate the essential characteristics of each system.
Characteristics of Capitalism
It will be found, for example, that capitalism is characterized by the existence of the following institutions:
1. freedom of enterprise, that is, freedom to engage in the work, activity, or business desired, to develop it and to reap the benefits which may result therefrom, as well as to suffer the losses which it may produce;
2. private ownership, not only of consumer goods, but also of natural resources, capital, and productive goods;
4. a free market, with freedom of choice by the consumers, freedom to make any deal, and a price system.
On the other hand, what distinguishes socialism and communism is centralized control of the means of production in the hands of the state. The essential thing is that, ultimately, under socialism, only one will decides. This demonstrates its ineradicably dictatorial character, the inanity of attempts to combine socialism with free competition and the price system, and the confusion of those people who imagine that a planned economy is compatible with liberty and democracy.2
An Attempt to Clarify
Once the discussion is undertaken on this more concrete ground, it will gain in clarity and objectivity. When it is realized that planned economy implies that we may be directed to do any work, if necessary as forced labor; that we can be deprived of all right to property; that all of us will become public employees; and that we may even be forbidden to decide what we shall eat, I am sure that believers in this system will be much fewer and that there action; (c) finally, socialism would like to proceed in accordance with accepted standards of morality and preserve freedom, especially civil and political freedom, and democracy; communism rejects traditional morality, and although it speaks, for tactical reasons, of "true liberty" and "popular democracy," it is fundamentally antiliberal and anti-democratic.
These differences are secondary and are not sufficient to obscure the main question, which is that of the location of control over economic life. Moreover, the last difference, the most important, is no more than a pious hope. The road followed by England, despite the extremely strong liberal tradition of its people and the fact that it has not passed beyond the initial stages of socialization proves this quite conclusively will be a large number of men resolved to defend the system of economic freedom which has lifted great parts of humanity out of the misery in which they lived until the eighteenth century. The dispute between two opposing systems of liberty and regimentation, is interventionism that has gained ground.Even so, the complexity of modern life, the difficulty presented by economic problems—especially those provoked by a third of a century of mistaken policies (since the First World War and especially since the Great Depression)—the fact that not everyone can analyze them and apply or follow the reasoning of economic theory, and other circumstances to which I shall refer later, leave more than one opportunity for the appearance and espousal of interventionist theories.
In fact, in the dispute between the two opposing systems of liberty and regimentation, is interventionism that has gained ground.
Unlike capitalism and communism, which are well-defined forms of organization readily distinguishable from each other, interventionism does not constitute a third structure different from these two. Interventionism does not seek to destroy the fundamental institutions of a free economy or to displace it. Neither does it have as a declared purpose the establishment of a centralized direction of the means of production. Its object is a combination, a solution intermediate between capitalism and communism, in which the disadvantages and abuses of the former would be eliminated without falling into the evils and pernicious consequences of the latter. For this purpose, liberty is restricted and all the resources of the state are put into play, with the threat or the ultimate application of that power which it alone can wield, that is, coercion and violence. Since interventionism and socialism are in agreement insofar as both criticize a free economy, what characterizes and identifies the former is the feature which I have just noted and from which it derives its name: the intervention by the state, the utilization of its apparatus and power in all cases where the functioning of the system of freedom produces a result different from that which the proponents of interventionism consider ethical or desirable.
What a noble purpose! What a neat solution! To preserve the advantages of individual initiative without falling into any of the dangers of collectivism. To couple the energies of society and the unity of the state, and in one single harmonious effort, to attain justice, social peace, and prosperity. It should not be surprising that this beautiful utopia has seduced generous and enlightened minds from the remotest times.
In fact, although there are some who present it as the latest novelty, interventionism is as old as history. In the first written legislative compilation which has been preserved, the Code of Hammurabi, we find laws which fix prices; and this form of intervention, together with innumerable others, persisted in Egypt, China, Greece, Rome, the Middle Ages, the Renaissance, the Mercantile Age, and the French Revolution, and emerges in our day with greater pretensions than ever.
The Market in Operation
A complete examination of interventionism, which does not claim to be a substitute for the market system but simply a corrective measure, should start with a study of the operation of the free market. In this way it would be possible to determine the accuracy of the two central arguments of the critics of the free market: the assertion, on the one hand, that even if the system of economic freedom does tend toward the optimum application of productive resources, and therefore toward the largest possible output, conditions never really correspond to the basic assumptions of laissez-faire theory, and so the latter is, to that extent, limited and deficient; and the emphasis, on the other hand, upon those results of the free play of individual interests which are deemed undesirable. But let us grant those points to the opposing side, despite the fact that some are inaccurate and others are greatly exaggerated. In any case, the conclusion which rightly follows when one finds an imperfection in the working of the free market is the need of improving it and of achieving its efficient operation, not of disorganizing and destroying it. The primary aim of interventionism is not different from that or capitalism, or even communism.Since interventionism bases all its claims on its alleged ability to accomplish better results than a free economy, let us investigate how it operates in its turn and, more concretely, whether it can attain the aims which the governments and the persons who resort to it declare that they pursue.
In the economic field, these aims cannot but be greater abundance for the greatest possible number of the inhabitants of a country. In other words, the primary aim of interventionism is not different from that of capitalism or even of communism.
In case there is any doubt about this, it is sufficient to call attention to the name with which the partisans of the latest brand of interventionism have baptized their creation: they call it the "welfare state," that is, a political body which has as its objective the welfare of the masses. And the welfare which is promised is, in the first place, economic welfare.
Classes of Intervention
Although official intervention takes extremely varied forms, analysis permits us to classify them into three groups: (1) measures whose principal object is to divert the factors of production from the channels which they would have entered in a free market, toward others preferred by their authors: (2) measures whose object is to modify the data which are a result of the market; (3) measures whose object is to change the distribution of production and, in general, of wealth.
The intervention of the first class can be either direct (prohibition of certain industries, decrees to the effect that enough factories or firms exist in certain lines, production quotas) or indirect (protective tariffs, subsidies). In order to modify the indications of the market, recourse is had to price-fixing (only for the sake of brevity do I use this word, since the figures selected as a result of the decision of an entity with compulsory force cannot be considered as prices, which, by definition, are the result of the interaction of individuals in the market). In practice we find both maximum prices (rents, consumer goods) and minimum prices (parity prices for certain agricultural products, salaries), and we observe that sometimes the government decrees them and imposes them directly, while on other occasions it permits this to be done by private groups (legalized monopolies, labor unions), to which it lends the support of its authority, or permits them the use of physical force and violence (strikes, shutdowns of plants and offices). In the three types of measures which I have mentioned, recourse is had to the fiscal powers of the government; nevertheless, it is in the case of the third group of measures that this kind of official activity (provision of free services, progressive income, and inheritance taxes) is resorted to most frequently.
Restriction Invariably Diminishes Production of Goods and Services
Based on this outline of the most frequent forms of interference, let us examine the results to be expected from each one. As I pointed out above, its operation, its yield, are the only criteria with which to judge the so-called third road in the economic field, for it is in precisely this respect that it presents itself as superior to the capitalistic system which it criticizes. In other words, what interventionism has to prove is that it can increase production, raise the general standard of living, and consequently assure greater welfare to all the population.
The deflection of production into channels different from those which it would enter in an unhampered market is so obviously restrictive that it is no exaggeration to speak of restrictionism when designating the totality of measures which the state employs for this purpose. In every case, it prohibits a certain kind of production (in the broadest sense of the word and including, therefore, commerce, personal services, banking, and transportation), or certain procedures are forbidden or are made more difficult or more expensive. It could be stated a priori that, given the tendency of the free market to the optimum use of the factors of production and to the maximum satisfaction of the most urgent human needs, these shackles can result only in a deterioration of the productive process and in the impoverishment of the community. A detailed examination of any one of the restrictive devices will fully corroborate this.
Let us suppose a restriction of the number of factories dedicated to a certain branch of production or the quantity of articles which they can manufacture. Let us suppose also that this restriction is complied with or is enforced. Naturally, the price of the product concerned will go up; the profits derived from the industry in question will increase. Those who participate in it, salaried workers, investors, entrepreneurs, will be better off from receiving their respective incomes more surely or even in greater proportion than before. It would seem, therefore, that the measure is beneficial in general and that it should be approved.
Gains Offset by Losses
Whoever believes this suffers from evident myopia. When the consumers find themselves obliged to pay more for the restricted item, they will automatically have less to spend on other articles. Consequently, what the interested parties in industry A gain, those who depend on industries B, C, and D will lose. No net advantage whatsoever exists for society. On the contrary, and since wealth is created through expending a certain quantity of the factors of production and since restriction of that quantity cannot increase but only diminish the amount of goods produced, from the general viewpoint the result is a net loss, equal to amount to that of the production which was prevented.Interventionism produced a result exactly opposite of the one it sought. One group gained, but at the expense of the community. Taken as a whole, the latter is poorer and not richer. Interventionism not only did not attain its objective but produced a result exactly opposite to the one it sought.
Even easier is the demonstration in the case of price fixing, a demonstration which has been given so many times that one feels reluctant to take up the reader’s time with it. The function of prices is to achieve a balance between supply and demand. When the government immobilizes them at a level lower than the one determined by the market, demand increases, since buyers will feel more inclined to acquire goods and since there will also be a great increase in the number of those who could not do so at the previous price, but who find it possible at the fixed price. If instead, prices are set at levels higher than those established on the market, it will be the sellers who will flock to it, and supply will exceed demand. In either instance, the market fails to fulfill its functions; a new principle for the distribution of available goods becomes indispensable, and queues, rationing, and the black market appear in the one case, and overproduction and chronic unemployment in the other. This is due to the fact that in addition to allocating the articles already produced, prices fill a mediate but even more important function, that of guiding and directing the production.
Prices are signals, indications, to producers, of the fields in which there exists an unsatisfied demand and in which production should, therefore, be intensified; and of those others where supply cannot be wholly absorbed and in which, future production should consequently be curtailed. Producers respond to these stimuli to the fullest extent possible in each set of circumstances, because of their desire to obtain profits and to avoid losses. And the result for society is the employment of the factors of production in those directions which will satisfy the most important and urgent needs of the consumers.
Changing the Signals
Let us consider now what happens in a system in which the signals have ceased to function truthfully, that is to say, in which the government orders buyers and sellers to abide by certain amounts whose only likeness to prices lies in the fact that they are expressed in legal tender currency. If the official figure is lower than the market price, marginal producers—those whose costs are highest—will lose money and will be eliminated. The other producers will continue their activities but will not increase their investments; on the contrary, they will divert to other ends the nonspecific factors at their disposal and will even retire completely as soon as they can do so, in order to engage in the production of goods which offer greater profits. As a result, the supply of the controlled commodity, the more important since it is generally a staple of life, will diminish instead of increasing as the government desired.
Exactly the same thing will happen, except in the opposite direction, in the case of minimum prices or salaries. When the authorities discover that not all the farmers who cultivate a certain crop can earn sufficient money to continue producing it, they set a parity price below which it may not descend. Now, the unsatisfactory former price was not capricious; there was a reason for it and this could only be an excess of supply or a lack of demand. The imposition of minimum prices perpetuates these conditions and prevents production from adjusting itself to consumption, by keeping marginal producers in business and by even attracting new producers who, if they had been confronted with a lower price, would have applied their resources to the production of different goods.
And so, with controlled prices, as with restrictive measures, the real result that is attained is exactly the opposite of the one sought by their proponents. The conditions that are created are not better, but worse than those which existed prior to their establishment. Some groups may be benefited and enriched, but society as a whole loses and is impoverished.
Not Income, but Expense
I shall not attempt here to discuss the method of redistributing wealth represented by the inflationary and credit expansion policies followed by most contemporary governments. As for the other measures aimed at achieving a distribution different from that determined by the capitalistic order—for example, by organizing gratuitous or semi-gratuitous services (low-cost housing programs, socialized medical services—it is so obvious that they entail an expenditure rather than an income that when attempts are made in their defense the arguments revolve exclusively around the justice of providing them. In other words, the proponents of these measures avoid justifying them in the economic field, in which interventionism boasts of its power to win the argument and in which it is the purpose of this document to examine them. If we do so, it will be easy to verify that, since the state cannot provide anybody with anything which it has not previously, and more or less surreptitiously, taken away from him or which it does not take away from other producers, the net effect of its absorption of all kinds of activities is to transfer from the interested parties to the administration the power to decide and to spend.
On the whole, this must have less efficient results and yield a smaller return for the community, because to the less perfect satisfaction (always from the point of view of the consumer) of the needs which one wants to fill must be added the disturbances originated by politics and the complications, mistakes and immoralities of bureaucracy. Above all, the social resources available for these purposes do not increase just because the heavy body of the state is interposed between them and their use, but rather diminish through having to bear the high and ever-increasing cost of the services so deceptively called free.
In general and independently, therefore, of the use to which the government puts the funds which it collects, there is no doubt but that taxation beyond certain limits discourages the accumulation of capital, as in the United States, or even has the opposite result of encouraging the dissipation and consumption of existing capital, as in England. Matters are, of course, much worse in the case of expropriations and confiscations, especially when they are not isolated and extraordinary acts, since they can only be compared in their effects to those cataclysms which paralyze even the will to reconstruct and after which recovery is as slow as it is painful.No country can make itself richer by taking away from some people in order to give to others.
Again, the failure of the ambitious interventionist program is confirmed; no country can make itself rich by taking away from some people in order to give to others and by terrorizing and demoralizing all of them. It is true that whoever cuts the cake—in this case, the state and, more concretely, professional politicians, their friends, and the groups which support them or which they favor—gets the best share; yet neither does the total distributed become greater nor is the general mass of the population benefited, but rather it becomes more impoverished by such distribution.
As a result of the foregoing, it can be stated with certainty that isolated interventionist measures do not produce wealth, but scarcity—not abundance, but poverty. This is not a value judgment; neither is it a case of condemning these measures because they limit freedom and lead to totalitarianism. In the field which belongs to economic science, that of showing us the consequence of our actions and of enabling us to behave consistently, it can be demonstrated that the results of state interventionism are contrary to the aims that it seeks and that from the point of view of those who want intervention—not from my point of view or in the opinion of the friends of capitalism—it ends in a situation which is worse than the one it set out to improve. Interventionist policies must, therefore, result in failure and frustration, or else go on, extending both horizontally and vertically until they end in complete economic control and in socialism of the Nazi type.
This course must offer a great temptation to those who have embarked upon interventionist adventures and represents one of the greatest threats of such a policy. Upon observing that the maximum price fixed for milk, for example, causes this product to disappear from the market, let us fix the prices of other activities and commodities, such as pasteurization, milk containers transportation. If production has been diverted to butter and cheese, let us fix their prices and limit the amount which can be made of them. If this does not produce the desired result either, let us freeze the salaries of such persons as may be engaged in the milk industry or even of those connected with it, and go a step further and prevent the producers by force from abandoning this field. If the supply of milk grows less every day, let us follow the internal logic of interventionism and take the ultimate step: let us control everything, without exception. Then we shall have eliminated the market completely, we shall find ourselves at the opposite extreme from where we started, and we shall have established a system which is indistinguishable from the communism which we began by repudiating.
There is no doubt, therefore, that interventionism constitutes an extremely efficacious instrument in the struggle begun some time ago for the purpose of destroying the liberal society in which, in spite of everything, we still live. In the first place, it lends invaluable support to those who are working to establish communism but who realize that they would meet very strong opposition if they openly advocate that form of economic organization. Interventionalism complicates and aggravates economic problems. Perhaps even more serious is the fact that interventionism complicates and aggravates economic problems to such a degree that the majority of people, among them the majority of the classes which previously performed the most important of directive functions, that of supplying the ideas which guide society, are bewildered and perplexed and even come to believe that these problems admit of no perfect solution. But does not this situation cause surprise?
If, in the field of ideas, the failures of interventionism are indisputable, if not only the bankruptcy of this policy but also its catastrophic effects and the danger which it presents are visible on all sides, especially in those countries which have carried it the furthest, why does it not pass forever into oblivion, ashamed of the confusion which it has wrought and of the countless ills which it has brought upon humanity? The explanation is complicated, but in my opinion, it should be attempted because it will help to dissipate the mental fog which has descended upon a great number of our fellow men and left them irresolute and deprived of the will to respond to the challenge of our times.
Reasons for Confusion
Let me list briefly some of the reasons for this:
(a) Man is by temperament a compromiser, especially when confronted with matters which he does not understand and which he thinks do not affect him directly. The majority believes that the debate concerns only a mythical class, "the capitalist" or "the bankers," and the government. What is more natural than to think that each one must be partly right and that as between the freedom demanded by the former and the complete control which everyone instinctively fears, the solution must lie in the golden mean of interventionism?
(b) Both in economic matters and in general, without the aid of science, our perception and interpretation of phenomena are rough and misleading. Scientific knowledge aims precisely at broadening our field of vision and our understanding and making them more accurate. But just as an ignorant person does not observe that the world is round, so also in economic matters he sees no further than the near and immediate effects of an act or a policy. The masses are incapable of understanding the secondary consequences which those acts or policies generate in time or space; nor will they follow the long and rather complicated reasoning necessary to explain them. Since interventionist measures seem at first to be successful and may benefit special groups, a man without economic knowledge needs no further proof to be convinced of their efficacy.
(c) In the economic process we all have a dual personality: on the one hand, we are producers; on the other, consumers. Although frequently and with a notorious lack of logic, government intervention is asked against consumers when prices decrease, and protests are made and official aid invoked against producers when prices increase, the predominant interest of the majority of people is their interest as producers. This is more direct and specialized since the interests that consumers have in common are diffuse and lend themselves but little to the organization of groups which would further them. And thus we see that in the democratic countries the voters cast their ballots in favor of their interests as producers and against the general welfare, which would usually coincide with their interest as consumers.
Interventionism Is Unstable
Whether the explanations which I put forward are accepted or whether other causes are found for the regrettable blindness of our contemporaries in face of the disaster of interventionism, I repeat that this system has won ground since the First World War opened the door to it. Is it to be anticipated that it will continue, as it has up to now, to extend and intensify itself more all the time?
It is not to be believed. Interventionism has lived off the reserves accumulated under capitalism and thus has succeeded in hiding to some extent its excesses; but these reserves have already been dissipated in some countries, while in others, their exhaustion is only a question of time. Either humanity has a lucid moment and holds back on the edge of the abyss, or else it plunges into it.Interventionism is essentially unstable as I believe I have demonstrated because it is not a real third system but a makeshift which fluctuates between the capitalism from which it starts and the communism which it does not wish to reach. Consequently, either humanity has a lucid moment and holds back at the edge of the abyss, or else it plunges into it and into the new dark age of which a terrifying prelude has been furnished us by Hitler’s Germany and Stalin’s Russia.
What cannot be doubted is the danger in which we live. Let us not forget that interventionism constitutes a seeming but in fact self-defeating and suicidal solution which does not raise the standard of living but lowers it, which does not create wealth but consumes it. Its basic philosophy is mistaken and pernicious. Like the collectivism to which it believes it is raising an obstacle, it mistrusts the individual and his innate capabilities and seeks salvation in an entity supposedly free from his limitations and weaknesses, which would be outside of society and superior to it. In practice, interventionism is nothing but statism. Moreover, by attributing to the state an omniscience and an omnipotence which nothing justifies—neither theoretical reasoning nor historical experience—interventionism professes a true idolatry of the state and is even inferior in this aspect to communism, which at least in theory does not exalt the state and even speaks, deludedly, of its fading away.
In the same way, interventionism is inimical to individual liberty. It is not a question simply of the fact that its specific means of action are orders and prohibitions and that it necessarily implies a reduction of liberty and an increase in compulsion. The evil stems from a much deeper source, from the fact that contrarily to the naive thesis that it is possible to separate what is economic from what is not, liberty is indivisible. Since there exist no purely economic motivations which can be separated from the other objectives which we seek in life, any diminution in the sphere of economic liberty results in a loss of freedom in other fields. In other words, there is no economic sector of life inferior to others and clearly marked off from them, in which it would be possible for the state to project itself without resultant ill effects upon personal liberty. All intervention in the means implies an intervention in the ends. Automatically, the decision as to what objectives we must fulfill and as to the relative rank of the values which they tend to realize, is shifted to a great extent from the individual to the state, until it is completely absorbed by the latter in communism, which for this reason, is inescapably totalitarian.
The Greatest Danger: The Statification of Life
What can be surprising, after the foregoing, about the necessary results, observable everywhere, of statism and of the abandonment of liberty? The state grows and hypertrophies until it assumes the proportions of a Leviathan or a Behemoth. Instead of being a center of union and a representative of the general interest, it becomes a cause of conflict and an instrument of private appetites upon which each group brings pressure or which it is anxious to dominate in order to apply governmental compulsion and strength for its own benefit. Political institutions become deformed and corrupt, because, having been conceived for other purposes and in a different atmosphere, they prove inadequate in a state which is impatient of restrictions and hampered by law. Not only in public life and in the administration does immorality increase as a result of the power which the organs of the state acquire over economic matters, but the people as a whole become accustomed to the phenomena which accompany interventionism: smuggling, bribery, black market, governmental favors; they cease to believe in self-reliance and lose their sense of responsibility, seeking prosperity at the expense of others and changing from citizens to subjects and from free men towards of the government.
The problem of interventionism is not, as may be seen, purely economic, but much more general. Although its political and social repercussions are, undeniably, of the utmost importance, I continue to believe that it is only after subjecting it to economic analysis that one can pass a decisive judgment on it. And I would conclude, with Ortega y Gasset:
"This is the greatest danger which threatens civilization today: the statification of life, state interventionism, the absorption of all social spontaneity which, in the final instance, sustains, nurtures, and impels human destinies."