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Wednesday, April 15, 2015

The Incoherence of the Mixed Economy

Collectivism is at least coherent and consistent

We tend to think of the unhampered competitive market and collectivist central planning as polar opposites. And they are indeed opposites in fundamental ways. There is, however, one crucial feature that the free market and collectivism have in common: logical coherence.

But what does this mean for the mixed economy?

Laissez-faire is a coherent doctrine

The doctrine of the unhampered market is logically coherent and noncontradictory in the sense that at its heart lies a clearly defined organizing principle: competition.

Competition among entrepreneurs stimulates both efficiency and, more importantly, innovation. At the same time, it constrains the economic influence of any particular person or group. My previous column “How Does Paris Get Fed?” explained how market prices that emerge from the exchange of private property under the right rules of the game enable people to cope with scarcity, human and natural diversity, and imperfect knowledge.

Collectivism is also coherent

In that column, I also explained how the absence of private property means no markets, market prices, or profit and loss to guide people in the use of resources. In that environment, competition can’t serve its organizing function, and the result is systemic failure. Consequently, collectivism in practice — the closest the world has come is perhaps the so-called period of “war communism” in the early Soviet Union — must eventually fail and has indeed always failed. Rational economic calculation is impossible, yet the doctrine of collectivism is logically coherent.

What I mean is that there is still a central, organizing principle behind collectivism: central planning. Markets can’t function under collectivism because there’s no private property. Nevertheless, collectivism still has to answer the central question of economics — how people in a great society can cope with scarcity, diversity, and imperfect knowledge — so something must substitute for the unplanned, impersonal forces of the market. The substitute is deliberate central planning, devised and implemented by a central authority. That’s true even if in practice it always fails when it runs up against reality.

I realize that this explanation may sound contradictory, so let me try to give an analogy.

In the old days, doctors often bled sick people, with the idea that doing so would rid the body of “noxious humors.” Very often, this practice killed the patient, and with today’s medical knowledge, we understand why. Even so, bloodletting was common practice for thousands of years, because, given the understanding of the time, it made good sense. There was a principle — an incorrect one as it turned out — but the procedure was at least noncontradictory.

So while modern economics teaches us that thoroughgoing collectivism will not work for a large population, the doctrine itself, like laissez-faire, is internally consistent.

The illogic of the “mixed economy”

Interventionism is the doctrine that you can use political power beyond the level of the minimal state to consciously improve the outcomes that would be produced under laissez-faire.

The result of interventionism is called the “mixed economy” because it’s an attempt to combine the best of two worlds: the efficiency and innovativeness of the private ownership of the means of production (capitalism) with central planning to correct capitalism’s errors and excesses (collectivism). Or, as the great Austrian economist Ludwig von Mises explains,

It is claimed that this system of interventionism is as far from socialism as it is from capitalism, that as a third solution to the social problem it stands midway between the two systems, and that while retaining the advantages of both it avoids the disadvantages inherent in both.

These two systems, capitalism and collectivism, organized according to two diametrically opposite principles — spontaneous order and deliberate design — mix as well as oil and water. Trying to blend them produces chaos because it’s impossible to combine two contradictory organizing principles into a coherent system. “There is nothing that could mitigate the opposition between these two contradictory principles. They preclude each other,” Mises said. Here are two examples.

Minimum wage

Supporters of minimum-wage laws usually say they want to increase the hourly wage to a level that will provide people with a “living wage.” But there’s no principle to determine what a living wage is, nor can there be, because there’s no objective standard. Even the current poverty rate that people often use as a benchmark is arbitrary, set at a percentage of the median income. There’s little or no theory behind it (other than monopsony, which is rarely invoked and is highly limited in its application in any case). If it’s possible to increase anyone’s wages arbitrarily without ill effect, why not increase everyone’s wages? If arbitrarily raising the cost of labor will “stimulate the economy,” why not pass a law raising all input costs (for land, capital, management, raw materials, etc.)? Interventionists won’t do that because they are unwilling to apply their logic consistently.

The typical response is to take each instance on a case-by-case basis. In other words, expediency replaces principle.

Income redistribution

A consistent collectivist would push for the complete equality of outcomes. She would argue that wealth, income, and all endowments should be the same across all members of society. She might well realize that achieving such outcomes may be highly impracticable, but at least it’s a coherent goal to aim at. The case is different for the interventionist, who once again is unwilling to go whole hog.

His goal, such as it is, is “greater” equality. But what does that mean? F.A. Hayek in The Road to Serfdom uses the analogy of a group of people who enthusiastically agree that they want to take a trip together somewhere but who can’t agree on a destination. And the trip, once embarked on, has no logical stopping point, because short of complete equality (which interventionists don’t want), it’s always possible to go a little further toward “greater” equality. We can say the same thing about setting an acceptable minimum wage.

That’s part (but not all) of the reason interventionism puts policy onto a slippery slope in which one intervention sets the stage for another, then another, and another, and so forth. Says Mises:

It then becomes logically impossible to oppose tendencies which want to subject all activity of the individual to the care of the state. Why only protect the body from the harm caused by poisons or drugs? Why not also protect our minds and souls from dangerous doctrines and opinions imperiling our eternal salvation? Depriving the individual of the freedom of the choice of consumption logically leads to the abolition of all freedom.

Expediency is not a principle

Ad hoc, case-by-case decision making means there is no consistent principle at work. Again, on a doctrinal level, the principle of central planning is at complete odds with the principle of competition; a planned order is not a spontaneous order. That is why Mises characterizes the doctrine of interventionism as illogical, unworkable, and contradictory: “In this sense it may be said that limited intervention is illogical and unsuitable, that the economic system that works through such interventions is unworkable and unsuitable, and that it contradicts economic logic.”

Strictly speaking, then, unlike laissez-faire and pure collectivism, the interventionist mixed economy is not really a system at all. Unfortunately, it’s the “system” under which almost everyone today is living. It doesn’t have to be that way.

You can read a Portuguese version of this article here

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.