Ludwig von Mises Explains (and Solves) Market Failure

Last week Major Freedom, a relentless and indefatigable web-Austrian troll – and with a name like that, I predict a bright future for him as a professional wrestler should he ever tire of internet trolling — who regularly occupies Scott Sumner’s blog, responded to a passing reference by Scott to F. A. Hayek’s support for NGDP targeting with an outraged rant against Hayek, calling Hayek a social democrat, a description of Hayek that for some reason brought to my mind Saul Steinberg’s famous New Yorker cover showing what the world looks like from 9th Avenue in Manhattan.

saul_steinberg_newyorker

Hayek was not a libertarian by the way. He was a social democrat. If you read his works closely, you’ll realize he was politically leftist very soon after his earlier economics works. Hayek was actually an economist for only a short period of time. He soon became disenchanted with free market economics, and delved into sociology where his works were all heavily influenced by leftist politics. He was an ardent critic of government, but not because he was anti-government, but because the present day governments were not his ideal.

Hayek favored central banks preventing NGDP from falling yes, but he was a contradictory writer. It is dishonest to only focus on the one side of the contradiction that supports your own ideology. If you were honest, you would make it a point that Hayek also favored monetary denationalization, of competitive free market currencies. He wrote a book on that for crying out loud. His contradictions are “Hayekian.” NGDP targeting is merely the Dr. Jekyll to his Mr. Hyde.

Then responding to the incredulity of another commenter at his calling Hayek a social democrat, the Major let loose this barrage:

From [Hans-Hermann] Hoppe:

According to Hayek, government is “necessary” to fulfill the following tasks: not merely for “law enforcement” and “defense against external enemies” but “in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market.” (Because at all times an infinite number of goods and services exist that the market does not provide, Hayek hands government a blank check.)

Among these goods and services are:

“…protection against violence, epidemics, or such natural forces as floods and avalanches, but also many of the amenities which make life in modern cities tolerable, most roads … the provision of standards of measure, and of many kinds of information ranging from land registers, maps and statistics to the certification of the quality of some goods or services offered in the market.”

Additional government functions include “the assurance of a certain minimum income for everyone”; government should “distribute its expenditure over time in such a manner that it will step in when private investment flags”; it should finance schools and research as well as enforce “building regulations, pure food laws, the certification of certain professions, the restrictions on the sale of certain dangerous goods (such as arms, explosives, poisons and drugs), as well as some safety and health regulations for the processes of production; and the provision of such public institutions as theaters, sports grounds, etc.”; and it should make use of the power of “eminent domain” to enhance the “public good.”

Moreover, it generally holds that “there is some reason to believe that with the increase in general wealth and of the density of population, the share of all needs that can be satisfied only by collective action will continue to grow.”

Further, government should implement an extensive system of compulsory insurance (“coercion intended to forestall greater coercion”), public, subsidized housing is a possible government task, and likewise “city planning” and “zoning” are considered appropriate government functions — provided that “the sum of the gains exceed the sum of the losses.” And lastly, “the provision of amenities of or opportunities for recreation, or the preservation of natural beauty or of historical sites or scientific interest … Natural parks, nature-reservations, etc.” are legitimate government tasks.

In addition, Hayek insists we recognize that it is irrelevant how big government is or if and how fast it grows. What alone is important is that government actions fulfill certain formal requirements. “It is the character rather than the volume of government activity that is important.” Taxes as such and the absolute height of taxation are not a problem for Hayek. Taxes — and likewise compulsory military service — lose their character as coercive measures,

“…if they are at least predictable and are enforced irrespective of how the individual would otherwise employ his energies; this deprives them largely of the evil nature of coercion. If the known necessity of paying a certain amount of taxes becomes the basis of all my plans, if a period of military service is a foreseeable part of my career, then I can follow a general plan of life of my own making and am as independent of the will of another person as men have learned to be in society.”

But please, it must be a proportional tax and general military service!

The disgust felt by the Major for the crypto-statist Hayek is palpable, reminiscent of Ayn Rand’s pathological abhorrence of Hayek for tolerating welfare-statism. Ah, but Ludwig von Mises, there is a man after the Major’s very own heart.

In distinct contrast, how refreshingly clear — and very different — is Mises! For him, the definition of liberalism can be condensed into a single term: private property. The state, for Mises, is legalized force, and its only function is to defend life and property by beating antisocial elements into submission. As for the rest, government is “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 imprisonment. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.”

Moreover (and this is for those who have not read much of Mises but invariably pipe up, “but even Mises is not an anarchist”), certainly the younger Mises allows for unlimited secession, down to the level of the individual, if one comes to the conclusion that government is not doing what it is supposed to do: to protect life and property.

Well, the remark about Hayek’s support for — perhaps acquiescence in would be a better description — conscription (see the Constitution of Liberty) reminded me that in Human Action no less – for the uninitiated that’s Mises’s magnum opus, a 900+ page treatise on economics and praxeology — Mises himself weighed in on the issue of military conscription.

From this point of view one has to deal with the often-raised problem of whether conscription and the levy of taxes mean a restriction of freedom. If the principles of the market economy were acknowledged by all people all over the world, there would not be any reason to wage war and the individual states could live in undisturbed peace. But as conditions are in our age, a free nation is continually threatened by the aggressive schemes of totalitarian autocracies. If it wants to preserve its freedom, it must be prepared to defend its independence. If the government of a free country forces every citizen to cooperate fully in its designs to repel the aggressors and every able-bodied man to join the armed forces, it does not impose upon the individual a duty that would step beyond the tasks the praxeological law dictates. In a world full of unswerving aggressors and enslavers, integral unconditional pacifism is tantamount to unconditional surrender to the most ruthless oppressors. He who wants to remain free, must fight unto death those who are intent upon depriving him of his freedom. As isolated attempts on the part of each individual to resist are doomed to failure, the only workable way is to organize resistance by the government. The essential task of government is defense of the social system not only against domestic gangsters but also against external foes. He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.

There it is. With characteristic understatement, Ludwig von Mises, a card-carrying member of the John Birch Society listed on the advisory board of the Society’s flagship publication American Opinion during the 1960s, calls anyone opposed to conscription an abettor of those aiming at the enslavement of all. But what I find interesting in Mises’s diatribe are the two sentences before the last one in the paragraph.

He who wants to remain free, must fight unto death those who are intent upon depriving him of his freedom. As isolated attempts on the part of each individual to resist are doomed to failure, the only workable way is to organize resistance by the government.

Here Mises says that we have to defend ourselves to maintain our freedom, otherwise we will be enslaved. OK. And then he says that voluntary self-defense will not work. Why won’t it work? Because the market isn’t working. And what causes the market to fail? “Isolated attempts on the part of each individual to resist” will fail. In other words, defense is a public good. People will free ride on the efforts of others. But Mises has the solution. Impose a draft, and compel the able-bodied to defend the homeland and force everyone to pay taxes to finance the provision of the public good, which the unhampered free market is unable to do on its own. Of course, this is just one example of market failure, but Mises doesn’t actually explain why the provision of national defense is the only public good. But, analytically of course, there is no distinction between national defense and other public goods, which confer benefits on people irrespective of whether they have paid for the good. So Mises acknowledges that there is such a thing as a public good, and supports the use of government coercion to supply the public good, but without providing any criterion for which public goods may be provided by the government and which may not. If conscription can be justified to solve a certain kind of public-good problem, why is it unthinkable to rely on taxation to solve other kinds of public-good problems, whose existence Mises, apparently unbeknown to himself, has implicitly conceded?

With the logical rigor that his acolytes find so compelling, Mises concludes this particular diatribe with the following pronouncement:

Every step a government takes beyond the fulfillment of its essential functions of protecting the smooth operation of the market economy against aggression, whether on the part of domestic or foreign disturbers, is a step forward on a road that directly leads into the totalitarian system where there is no freedom at all.

Let’s think about that one. “Every step a government takes beyond the fulfillment of its essential function of protecting the smooth operation of the market economy against aggression . . . is a step forward on a road that leads into the totalitarian system where there is no freedom at all.” Pretty scary words, but how logically compelling is this apodictally certain praxeological law?

Well, I live in Montgomery County, Maryland, a short distance from US Route 29. When I visit Baltimore about 35 miles from my home, I often come back from Baltimore via Interstate 70 which starts at a park-and-ride station near Baltimore and continues for about 2153 miles to Cove Fort, Utah. I am happy to report that I have never once driven from Baltimore to Cove Fort. In fact the first exit off of Interstate 70 puts me on US Route 29. What’s more, even if I miss the exit for Route 29, as I have done occasionally, there are other exits further down the highway that allow me to get to Route 29; just because I drive the first four miles on Interstate 70 from Baltimore, it doesn’t necessarily follow that I will wind up in Cove Fort, Utah. So this particular example of the supposedly impeccable Misesian logic sure seems like a non-sequitur to me.

 

19 Responses to “Ludwig von Mises Explains (and Solves) Market Failure”


  1. 1 Kevin Donoghue November 17, 2014 at 9:27 am

    Ah, Mises; Friedman’s story is a gem:

    One incident above all impressed George [Stigler] and me. In the course of a spirited discussion of policies about the distribution of income among a group that included Hayek, Machlup, Knight, Robbins, and Jewkes among others, Ludwig von Mises suddenly rose to his feet, remarked, “You’re all a bunch of socialists,” and stomped out of the room.

  2. 3 Diego Espinosa November 17, 2014 at 9:58 am

    Why Mises and MMT are the “challenge” to econ is beyond me. It’s like countering a mis-applied evolutionary theory with Creationism.

    Better to get the theory right. This is what complex systems aims to do. Thermodynamics with an open, not closed, system. Introducing entropy and self-organization. No scientist would object if asked to referee the question.

  3. 4 philippe101 November 17, 2014 at 12:01 pm

    So-called ‘anarcho-capitalism’ – the bizarre and incoherent belief system which ‘major freedom’ is devoted to – essentially advocates a modern form of feudalism, in which states are ‘privatised’. So their response would be that ‘private armies’ could provide defence for ‘paying customers’. These ‘private armies’ could potentially be as powerful as existing armies.

    See, they don’t actually have a problem with governments or with states, (and those that say they do are lying, dissembling or just arbitrarily redefining words to mean anything at all) – what they are actually opposed to is public government, especially democracy. So long as the government is ‘privately owned’ by some sort of feudalistic overlord or ‘corporation’, they aren’t actually opposed to it.

    But don’t expect straight answers on this subject from any of them, as the whole thing is just confused waffle. The only actual point of the incoherent nonsense that is ‘anarcho capitalism’ is to provide some sort of rhetorical justification for the irrational feelings of odd people who have a pathological hatred of democracy, welfare, fiat money, anyone who disagrees with them, etc. It also greatly appeals to goldbugs.

  4. 5 gofx November 17, 2014 at 7:00 pm

    David, I don’t see your post as that much of a “gotcha” moment. In fact, it just seems to show that even someone who advocated so much for liberty (Mises) might still be capable of underestimating the scope of voluntary cooperation as it could be applied to a group’s defense. After all, we have seen the development of an all-volunteer military in the United States (per Friedman). On the other hand, I still had to register for the Selective Service, as do all males turning 18, I believe. So in the end, Mises might be prescient.
    I think Major Freedom’s posts do us all a service by forcing us to think about the impacts of a policy or idea through the lens of “what does this mean for or in the context of freedom and liberty”. Now most believe there are inevitable trade-offs in terms of maximal individual liberty and the need for government. Certainly the U.S. founders struggled with that and came up with their version. But its ok to know what the “math” is.

  5. 6 LK November 17, 2014 at 9:44 pm

    A great post.

    Mises also argued that short-term government debt and deficits were the best war to finance war:

    http://socialdemocracy21stcentury.blogspot.com/2013/05/mises-on-war-debt-not-what-you-would.html

    Also, regarding the difference between Mises and the extremist Rothbardians, it is because Mises is a utilitarian in his ethics that he ultimately can accept limits to the market. For example, Mises said this:

    “Economics neither approves nor disapproves of government measures restricting production and output. It merely considers it its duty to clarify the consequences of such measures. The choice of policies to be adopted devolves upon the people. But in choosing they must not disregard the teachings of economics if they want to attain the ends sought. There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule”
    Mises, L. 1998 [1949]. Human Action: A Treatise on Economics, Ludwig von Mises Institute, Auburn, Ala. p. 741.

    See my post here:

    http://socialdemocracy21stcentury.blogspot.com/2010/10/was-mises-socialist-why-mises-refutes.html

    Also, on Mises’ idea that any kind of government intervention leads to socialism or chaos, it is one of his ridiculous and incoherent ideas, as George J. Schuller pointed out a long time ago when reviewed “Human Action”:

    http://socialdemocracy21stcentury.blogspot.com/2010/10/was-mises-socialist-why-mises-refutes.html

    http://socialdemocracy21stcentury.blogspot.com.au/2010/10/rothbard-on-mises-utilitarianism-why.html

  6. 7 andrew lainton November 17, 2014 at 11:22 pm

    Think of Keynes Opinion of Road to Serfdom
    ‘In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.’

  7. 8 philippe101 November 18, 2014 at 5:38 am

    gofx, ‘major freedom’ doesn’t care about freedom or liberty, or even human life, actually. The only thing he cares about is his own weird conception of ‘private property’. Read some Hoppe to see that what MF advocates is actually a system of hierarchical authoritarian power and control.

    The problem with you people is that your rhetoric is so fundamentally dishonest you’ve practically lost all ability to think rationally.

  8. 9 Lee A. Arnold November 18, 2014 at 5:50 am

    I think we should go in the other direction. I think we should study the question of whether we can print money on a continuous basis to pay for some portion of big social spending, e.g. some portions of education, healthcare, infrastructure, environment and retirement. 1. It must be on items which cannot create moral hazard in recipients, and in addition we need voters’ understanding to monitor and safeguard against government capture. 2. It need not cause inflation. 3. There is no reason why the expansion of all money in the economy must be linked to the private return on investment and the (presumed) increase of productive efficiency which creates that return. 4. There is no reason why the various kinds of return to investment in “human capital” need to be cost-benefitted in the same numeraire. 5. The private financial system does not have the human resources to manage enough investments to make the current system work, and relies instead upon easily-traded debt and its derivatives. 6. The private financial system has expanded to such a large percentage-share of the GDP that its own need for profit is choking the non-financial “real” economy, and also causing a continuous Minsky condition. 7. The private financial system is not more transparent than government and it may be less so. 8. At the point where they are “too big to fail”, private bankers should be restricted to the salaries of government employees.

  9. 11 dan November 18, 2014 at 6:15 am

    Well naturally, it matters not a twit what Hayek, Mises or Keynes think thought or wrote. Though, what they wrote can be an illumination of the way the world works and prod our own thinking towards a clearer understanding.

    Its no particular surprise that Austrian’s leading thinkers had to deal with market failure, nor that they concluded that collective action was part of the solution. After all, they live in a world where there are market failures and collective action has improved outcomes (though perhaps not yet optimized them).

    All great truths, certainly those worth fighting for, are balanced by contradictory truths. Ah to fight for freedom, together! Many hands make light work, but too many cooks spoil the broth and so on, and any one of us could go on, and on (Fire!, but not in a crowded theater). We don’t live in a world where anything is always and everywhere true.

    It’s a delight none-the-less to see Hayek’s enumeration of some of those things government should provide, better to see him struggling to come up with a system for identifying what those things are, and even better yet that he leaves such provision entirely open ended! Wow! There’s a thought, open ended government, according to Hayek; who’d a thunk? But yes, how else can you have freedom, including free markets, or even, dare we say freedom from government, without… government.

    The actual problem is so much more interesting than the ideological barrage of agenda.

    But, as a parting note, let me just add a repetition once more of my own pet peeve of the day. The provisions of government – however defined – is entirely independent of monetary policy in any given year. So lets always ask those cheery proponents of a big Fed, and a little government just exactly how do you answer those questions Hayek was thinking about, and Mises was thinking about, when they concluded that we, collectively can act when markets fail.

  10. 12 David Glasner November 18, 2014 at 12:09 pm

    Kevin, Whatta guy!

    Travis, Actually, Hayek in The Constitution of Liberty dismissed distributive justice as a justification for reward in a capitalist economy.

    Diego, Clearly, we have our work cut out for us.

    Phillipe, Despite his attempt to recruit Mises to the anarcho-capitalist cause, Mises himself always rejected the idea of anarcho capitalism. I was just showing that Mises did not consistently apply his basis for rejecting the anarchist position. Mises stopped speaking to Rothbard when Rothbard started advocating collaboration with the New Left and adopted what Mises considered to be a pro-Communist foreign policy in the 1960s. As far as I know, Mises never again spoke to Rothbard.

    gofx, I think that what my post shows is that beneath the thin veneer of cold rationalism with which Mises sought to adorn his work, there was a storm of turbulent emotions, perhaps borne of frustration and disappointments and who knows what else; the extreme and often angry statements that one repeatedly finds throughout his writings, and his frequent arguments, as often with friends and allies as with his opponents, were a reflection of his only partially suppressed inner turmoil. Sorry for the pop-psychology, but I just could not control myself.

    LK, Thanks for the compliment and for the very interesting references and links.

    Andrew, A wonderful quote, to be sure, but I doubt that Keynes would have had a similar reaction to Human Action.

    Lee, Interesting set of talking points. Are you going to write this up and publish it anywhere?

    Phillipe, Thanks for the links.

    Dan, People can have very different views about the size of government and the range of functions that the government should undertake. Usually those questions can be answered without reference to the state of the business cycle. My views about the appropriate range of government function do not necessarily depend on my views about monetary policy and vice versa..

  11. 13 Benjamin Cole November 20, 2014 at 8:31 pm

    Well, not even. If my Mises declares that government has a role in protecting private property and transactions from domestic gangsters and trepidations, then what’s a Mises say to other people polluting my private air land and water?

    David Friedman, anarcho-capitalist, calls for pollution taxes. Actually not a bad idea.

  12. 14 Ilya November 21, 2014 at 10:32 am

    David,

    Do you think Human Action is worth reading? Is the value of the book worth going through 900 page?

  13. 15 Blue Aurora November 22, 2014 at 11:45 pm

    I find myself somewhat speechless by this.

  14. 17 David Glasner July 1, 2016 at 7:45 am

    Ilya, sorry for the long lag in responding. I read Human Action in maybe 1967 just as I was getting interested in economics. I would not recommend reading it to learn economics, but if you are interested in understanding what Mises was all about and his way of thinking and who influenced him, it is worth reading. But it depends on your tolerance for reading sermons.


  1. 1 link dump | Increasing Marginal Utility Trackback on December 10, 2014 at 3:09 pm
  2. 2 Mises Goes Rogue | EconSchool Trackback on April 22, 2015 at 6:23 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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