Dynamics of the Mixed Economy

Sanford Ikeda

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134878673
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftstheorie

Dynamics of the Mixed Economy applies the insights of modern Austrian political economy to examine economic policy in mixed economies.
It compares and contrasts standard approaches to the growth of the state (including public choice) with that of modern Austrian political economy; examines in detail the nature and operation of the interventionist process in the context of nationalization, regulation and the welfare state; analyzes conditions that produce instability under laissez-faire capitalism; argues that the interventionist process is a 'spontaneous order'; and offers several 'pattern predictions' regarding the character and behaviour of really existing economies.

1: THE CHALLENGE OF THE MIXED ECONOMY

In 1920 Ludwig von Mises, Austrian economist and social theorist, predicted the inevitable failure of collectivist central planning.¹ Since then the inevitable has come to pass. Yet the collapse of “really existing communism” represents both a vindication of and a challenge to “Austrian political economy,” of which Mises was perhaps the leading modern exponent. That is, while recent events seem to have borne out Mises's prognosis, they present at the same time the challenge of explaining (1) why systems that have practiced some of the most extreme forms of governmental social management in history have (or had) survived for so long,² and (2) what lies ahead for more market-oriented mixed economies such as the United States. They also raise the question of whether current Austrian political economy is capable of making broad predictions about the behavior of mixed economies that are similar in nature to those Mises made about collectivism.

What is perhaps unknown, especially among those who have only recently come to appreciate Mises's vision and analysis of the inherent flaws of collectivism,³ is that he also addressed the fundamental questions and concerns confronting mixed economies today. Mises published Kritik des Interventionismus (Critique of Interventionism) in 1929, nine years after his initial assault on the intellectual basis of socialism and in the same year that marked the beginning of the world-wide economic crisis that followed nearly a decade of government monetary manipulation. In this later work, Mises declared the mixed economy “contradictory and illogical,” and dared the advocates of government intervention, in a manner reminiscent of his debate with the advocates of collectivism, to present a set of logically consistent and workable principles sufficient to establish the intellectual foundations of the mixed economy. In contrast to the earlier controversy, however, this invitation has gone essentially unanswered and his critique has been largely neglected outside of Austrian circles.⁴ And while his reasoned case against central planning has finally received some measure of the attention and appreciation it deserves, his critique of interventionism, the doctrine of the mixed economy, is still lost in the wilderness. This book is an effort, at what appears to be a timely moment in history, to reintroduce a revised version of Mises's analysis of the mixed economy into the current conver-sation on public policy. Its point of departure is Mises's critique of interventionism, the development of which spans a number of writings over several decades, beginning in 1912 with a short appraisal of price controls in The Theory of Money and Credit (1971:254–9) and culminating in a lengthy discourse in his Human Action (1966:716–861) in 1949.⁵

STATEMENT OF PURPOSE

The purpose of the present study is to update, extend, and, to some degree, re-interpret and revise the Misesian critique. It will update this critique by bringing to it the contributions of other scholars in the Austrian tradition, such as Friedrich Hayek's studies of knowledge and coordination and Israel Kirzner's investigations into the nature of entrepreneurship and the market process, which, whether Mises fully recognized them or not, have by now become an integral part of that tradition. It will also incorporate in an important way the insights of scholars who are neither economists nor explicitly of the Austrian tradition, such as Charles Murray, Nathan Glazer, and James Q.Wilson, much of whose research in social policy and bureaucratic organization is nonetheless highly germane and complementary to the issues addressed here.

This updating, I believe, itself extends Mises's framework by advancing new avenues of inquiry. For while Mises's general approach to the analysis of interventionism provides a fruitful beginning, in its present form it is less than ideally suited for combining the dynamics of both traditional regulation and those of the welfare state into a unified framework.⁶ I will therefore attempt to demonstrate the relation between the analysis of interventions that more directly affect market prices, the dynamics of which I maintain are central to Mises's critique, and those that are intended primarily to transfer income and wealth, the dynamicsof which I believe unfold in a parallel yet somewhat different manner. These two kinds of intervention, and the dynamics to which they give rise, have thus far been inadequately contrasted and compared.⁷ Hence, one of the goals of this study is to take the first steps toward unifying the price-dynamics of Mises's critique with the transfer-dynamics that underlie the welfare state. Although my efforts here represent only a beginning, I try to indicate the direction in which a general theory of interventionism, in contrast to a mere critique of the regulatory state,⁸ should proceed.

Finally, I will re-interpret and revise Mises's critique in a manner that is both more consistent with developments in the modern Austrian theory of markets and more fruitful analytically. This will be especially true with regard to the analysis of the welfare state, state-sponsored monopoly, and the stability of the minimal state.

In this way I hope to provide an outline of a general framework that will help us better to understand all mixed economies and the dynamics that drive them. While, of course, each really existing mixed economy differs from all others owing to cultural, institutional, and ideological factors, I hope to isolate the essential similarities that make efforts in the direction of such a general framework worthwhile. Drawing on Hayek and Kirzner I show that interventionism is really a process of entrepreneurial adjustments in both the private and public sectors, where these adjustments tend to be both unanticipated and undesirable (from the viewpoint of the interveners) owing to radical ignorance, complexity, and dispersed information.⁹ This framework helps to explain not only why states expand, but, equally important, the factors that contribute to and shape the dynamics of the contraction of state activities and the characteristics of the contraction process. It also yields potentially observable implications (or “pattern predictions”) that help to explain, among other things, why in practice nearly all economies in the world are and have been mixed economies and why examples of pure collectivism or capitalism are and have been so rare.

With the collapse of really existing communism we are forced to bring our attention to bear more intently on the range of economic systems that comprise the middle ground between pure capitalism and collectivism—the mixed economy—and away from constructs such as complete central planning that are, at least for the time being, far removed from reality.¹⁰ This is not to deny that the debate between the advocates of capitalism and collectivism has provided extremely useful insights for the analysis and critique of mixed economies. On the contrary, this debate has illuminated the basic forces within each that, when brought together in the attempt to form a compromise system or “middle way,” generate instability. Indeed, close attention to these dynamics is particularly timely and important because it is toward the middle of the politico-economic spectrum that failed and failing communist governments appear to be groping in search of a new paradigm to guide their social and economic policies. That is, if “really existing capitalism”—the interventionist mixed economy—rather than laissez-faire capitalism is likely to become, after the demise of really existing communism, the ruling doctrine of our times, it behooves us to devote greater attention to understanding the way it works. The primary objective of this study, therefore, is to examine the nature and causes of the processes that emerge in mixed economies as an unintended consequence of limited government intervention.

The remainder of this chapter provides an overview and critique of current economic explanations of the scope of state activity (for a more detailed discussion of the differences between the various approaches see Appendix A). It first examines the general contributions of the so-called “public choice” approach to the analysis of political processes and institutions in comparison with traditional regulation economics. It then assesses the suitability of public choice, in its present form, for addressing the concerns of this study—the analysis of the dynamics underlying state expansion and contraction. Next, it reviews and evaluates specific models of government growth,¹¹ both public choice and non-public choice, again from the viewpoint of whether they embody an appreciation for these issues. A final section summarizes the conclusions of this chapter, more explicitly defines the scope and method of this book, and then provides an overview of the remaining chapters.

THE ECONOMIC THEORY OF REGULATION AND PUBLIC CHOICE

Narrowly defined, the “economic analysis of regulation” refers to the use of neoclassical economic theory¹² to examine the positiveand normative effects of specific kinds of government-imposed constraints on economic activity with respect to particular markets in the economy. Traditional regulation economics is concerned with tracing the effects, for example, of legal constraints on rates of return on capital in public utilities, of controls on prices or entry conditions in particular industries, or of regulations that are intended to address health, safety, and environmental concerns.¹³

Another approach to economic regulation, however, is to recognize that public authorities, for whatever reason, may frequently fall short of or even fail to achieve their declared aims, and then to inquire into why this might be the case.¹⁴ Now, there are basically two ways to think about why the programs and policies of modern governments might not achieve their goals. First, public authorities may lack the necessary knowledge to execute their plans successfully, creating a gulf between the actual outcomes and the ones they intended to produce. Second, public authorities may possess or have the capacity to possess the necessary knowledge, but actually follow a less open agenda by making their actual intentions different from the ones that they announce. Hence, perceived policy failure can result from an inconsistency between actual and intended outcomes or from a discrepancy between announced and actual intent. (It can also, of course, result from a combination of the two.) A growing body of scholarship originating¹⁵ from seminal studies by alumni of Aaron Director's work-shop at the University of Chicago,¹⁶ political economists at the University of Virginia,¹⁷ and others,¹⁸ now known collectively as “the new political economy,” or as we will refer to it here “public choice,”¹⁹ has greatly increased the scope of traditional regulation economics largely by following the second course and differentiat-ing between the announced and the actual intent of public policy. Austrian political economy has for the most part followed the first course.

In his outstanding survey, Dennis Mueller broadly defines public choice as “the economic study of non-market decision-making, or simply the application of economics to political science” (Mueller 1989:1), in which “the basic behavioral postulate…is that man is an egotistic, rational, utility maximizer” (ibid.: 2). Public choice, then, differs from the traditional view of regulation, first in its subject-matter—the incentives facing persons in their “public choice roles,” i.e., “in their various capacities as voters, as candidates for office, as elected representatives, as leaders or membersof political parties, as bureaucrats” (Buchanan 1979:13)—and, second in its postulate that these persons are just as likely to pursue selfish interests, à la utility maximization, in their roles as public servants, as they are in their “private choice” roles. The advent of public choice has provided economists, political scientists, and the general public with a scientifically rigorous alternative to the “public interest” view of public policy,²⁰ which in effect treats persons who have moved from the private sector to government employment as having been thereby transformed from self-interested profit-seeking actors into public-spirited and selfless public servants. In public choice, regulators and regulated alike are liable to use any means open to them, including state-sanctioned compulsion and coercion, to achieve their selfish goals. Public choice, as Buchanan aptly puts it, is “politics without romance” (Buchanan and Tollison 1984:11).

While public choice recognizes that not all political ends people pursue, acting alone or in groups, have a narrowly self-interested focus, it does claim that the postulate of utility maximization that underlies this perspective enables theorists, by including narrow self-interest as a choice variable, to explain a great deal of what happens in the political process. One way it can do this is by drawing attention away from the idiosyncracies of the particular personalities involved in the political process and directing it toward the incentive structures built into the political institutions within which these persons operate. Thus, for example, because representative democracy often imposes relatively high costs of information for some persons or groups compared to others, excessive growth in the budgets of bureaucracies is hard to detect, politicians engage in misleading political campaigns, and special-interest groups seek to install government-sponsored programs that concentrate benefits on themselves while spreading the costs among all taxpayers. Because of the power of the median voter under majority rule, wealth from the rich (and sometimes the poor) is transferred to the middle class, political parties become more alike, and extremist candidates lose elections. And because the state discriminates among beneficiaries according to its own criteria when it hands out favors, individuals and groups have an incentive to expend valuable resources to qualify, thereby increasing their chances of prevailing over rivals competing for the same rewards.²¹

Rascals all?

Since these phenomena typically reduce social welfare—through the deadweight losses resulting from the redistributional aspect of all these activities—much of the normative theory of public choice points toward the desirability of reform. Reform of the political process, however, is somewhat problematic from the public-choice perspective. For one thing, a concerted effort to “throw the rascals out” is difficult for the same reason that rascals are able to abuse their positions in the first place—high or asymmetric transaction costs—and only when the per capita loss to the public from letting them stay in office is greater than the per capita cost of throwing them out will it be rational for citizens to do the latter. More fundamentally, reducing waste in government and making it less vulnerable to interest-group pressure is, from the standpoint of public choice, more a matter of altering the incentive structure in the political process by reforming political institutions and, if necessary, altering the constitutional foundations of government, than of replacing incumbents with public-spirited persons who idealistically place the collective interest above their own and their immediate constituents’ interest. Throwing out the rascals, therefore, would solve very little in the long run, unless this were a step toward more dramatic institutional reform.

But this is so largely because public choice assumes that all public choosers are, in a sense, rascals, be they private-interest groups that have captured passive bureaucrats and legislators or powerful public agents increasing their wealth at the expense of a docile legislature and general citizenry. Thus, in an early contribution to public-choice theory, The Politics of Bureaucracy, Gordon Tullock announced: “I propose, therefore, to give special emphasis to the behavior of an intelligent, ambitious, and somewhat unscrupulous man in an organizational hierarchy” (Tullock 1965:26; emphasis original). In so doing, Tullock set an early and important precedent in the public-choice research program.

Not surprisingly, some, perhaps a great many, remain unconverted to the public-choice view. Steven Kelman, for example, argues on the contrary that “public spirit is widespread enough so that the role the government plays in our lives is more worthy of admiration and faith than of dislike and cynicism” (Kelman 1987:10), and so “when people try to achieve good public policy, the result tends to be good public policy” (p. 209; emphasis original).Similarly, James Q.Wilson observes: “What is surprising is that bureaucrats work at all rather than shirk at every opportunity” (Wilson 1989:156).²² But dropping the postulate of narrow self-interest would severely reduce the explanatory power of public choice. While it might still retain some power—much of the work on cycling and rational voter ignorance might perhaps remain, for example—certainly a great many other interest...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• 1: THE CHALLENGE OF THE MIXED ECONOMY
• 2: THE MEANING OF INTERVENTIONISM
• 3: THE USE OF KNOWLEDGE IN GOVERNMENT AND CATALLAXY
• 4: TOWARD A THEORY OF INTERVENTIONISM I: THE FRAMEWORK
• 5: TOWARD A THEORY OF INTERVENTIONISM II: ROADS TO COLLECTIVISM
• 6: THE INSTABILITY OF THE MINIMAL STATE
• 7: IMPLICATIONS AND PATTERN PREDICTIONS
• 8: WHITHER THE MIXED ECONOMY?
• Appendices
• NOTES
• REFERENCES