Economic Myths #11 - The Mixed Economy

[First published on Free Life]

The world’s political systems today are, generally, neither fully despotic on the one hand nor completely free on the other. Instead, most of us languish under so-called “social democracy”, a curious mixture in which a degree of sovereignty in the form of voting rights reside in the citizenry while political leadership and control remains distinct in the form of various functionaries such as Presidents, Prime Ministers, Congressmen and Members of Parliament.

A libertarian might contend, of course, that such a social democratic system ends up being worse for individual liberty than a dictatorship or monarchy. The important point, however, is that the ideological extremes have been blended into some kind of soup which, at least from the de jure point of view, represent neither total freedom on the one hand nor total despotism on the other.

In exactly the same way, neither do our economic systems represent any ideological purity. We are neither fully capitalist nor are we completely socialised. Instead we have to put up with some kind of “mixed” economy that contains both capitalistic and socialistic elements.

Although the relationship between economic and political systems is one joined at the hip, the justification of social democracy on the one hand and of the mixed economy on the other appears to come from different directions.

Democracy, rightly or wrongly, is believed to a good and noble thing in its own right – a positive and independently justifiable improvement over any other option. The mixed economy, however, appears to be based on little more than the intellectually slothful adage that “the truth lies somewhere in the middle”.

Capitalism will bring us massive economic prosperity and improvement in the standard of living – but, so it is alleged, it leads also to unstable business cycles and encourages greed, selfishness and extensive inequalities in wealth and income. Socialism, on the other hand, may make things “fairer” and more equal; yet, in the face of a hundred years’ worth of evidence, it is difficult not to conclude that it decimates the productive capacity of a nation and the standard of living stagnates or even reverses. The “correct” system “must”, so the argument goes, lie in between these two points so that we can take the best of both systems while avoiding the alleged pitfalls. Hence we end up with the mixed economy.

The first question we might as well ask when tackling this fallacy is that if we adopt a position somewhere in between the two “extremes” then what argument is there to suggest that we will end up with the best aspects of each system rather than the worst? In spite of the socialistic element of our economy income inequality and wealth concentration in the hands of a few elites seems to be worsening, not getting better; and in spite of the capitalistic element we have failed to have any meaningful growth since at least the onset of the global financial crisis ten years ago. May be it is the alleged good parts of each system that are cancelling each other out rather than the bad?

The fundamental flaw, however, is that the assessment of capitalist and socialist economies that identifies their good and bad characteristics is partly wrong. These wrongly diagnosed parts are then exaggerated in making the case for a mixed economic system.

The good aspects of capitalism, private property and free exchange – such as economic progress and marked increases in the standard of living – are, as we know from “Austrian” economics, entirely true; the bad aspects, on the other hand – selfishness, inequality, greed, the business cycle, and so on – are largely false or misstated.

Capitalism does not encourage anyone to be greedy or selfish at all – it just gives you the freedom to be either as greedy or as altruistic as you like, provided that you fulfil those ends through voluntary trade and do not engage in outright theft or fraud. The aspect of capitalism that its opponents do not like is that people, when set free, usually choose to pursue their material welfare as the first priority. However, the resulting increase in productivity confers upon people the wherewithal to be more charitable out of choice. Thus we should not be surprised to learn that many of the great charitable or humanitarian institutions – such as the Salvation Army, the YMCA, the Scout Movement and the Rotary Club – were founded in the nineteenth or early twentieth centuries, the relatively most capitalistic period in history.

Moreover, the business cycle, as we know, is not an inherent feature of a free market economy, but is caused instead by the artificial creation of credit, something that is only sustainable with state central bank sponsorship.

However, in spite of these truths, whenever some justification is made for the “mixed” economy, we will still hear “greed”, “selfishness”, “inequality” and “boom and bust” being cited and emphasised in an attempt to cajole people into accepting a blended economic system.

Turning to socialism, we know that such a system would obliterate all productivity and the standard of living would sink far below that to which we are now accustomed. Its bad aspects are, therefore, all true. Yet the good aspects – greater equality, fairness, and anything that can be categorised under the current, in-vogue term of “social justice” – are all patently false.

Socialism does not create any equality at all; it does not result in every portion of wealth in existence being carved up into equal shares for everyone to then enjoy. Instead, it transfers the power over whole resources from private producers (who must maintain their ability to satisfy consumers in order to retain that privilege) to politicians and bureaucrats. Nationalising an industry does not give you, the average citizen, any greater access to the goods and services tied up in that industry. Rather you are pushed further to the bottom of the heap than before as the political lords and masters decide what that industry will produce, what prices you will pay and what level of service you will receive. You are stuck with whatever they decide to give you – providing that the inefficiency and waste of state run industries has anything left to give.

Nor will you have any greater ability to control how resources are used in a socialised economy compared to in a capitalist economy. The very reason why property rights and exclusive ownership exist is precisely because there is no agreement on how resources should be used. This problem exists under socialism as it does under capitalism and one person’s decision must, at some point, overrule all others. If you are to have any influence in this regard in a socialised system then it will be restricted to a handful of catch-all elections every four or five years or so. In the meantime you have to suffer whatever it is that the electoral victors throw down from their table.

Under capitalism, however, your voting influence is felt all the time in a highly specific manner through your spending habits. If a producer fails to produce what you want at a price that you can pay then he loses you there and then, while resources at his disposal are transferred to other producers who can meet your needs. Not so under socialism where you have to put up with whatever the upper elite, controlling all resources, decides will be produced.

Furthermore, providing social safety nets and welfare states in pursuit of some kind of “social justice” does not result in a society that is more caring and sharing. If anything, the adage “from each according to his means to each according to his needs” completely disintegrates any moral fervour. By separating individual productivity from individual reward, wealth creation is no longer an endeavour in which each person tries to better his own life and the lives of his friends and family. Instead, it becomes an exercise in “stockpiling” – the digging of a communal trough to which a person contributes that which he is able according to his “means” and from which he slurps out according to his “needs”. Unsurprisingly, every person seeks to minimise the amount he has to put in through toil and sweat while maximising that which he can take out in goods and services that he can enjoy in return for minimal effort.

The result of this is a population that fails to cultivate its talents towards increasing wealth such as hard work, responsibility and self-reliance and replaces them with characteristics that make them needy and pitiful, with an added layer of laziness, corruption and freeloading. This is precisely the problem faced by our bloated welfare states today and why they are completely bankrupt – demand has swollen to such an extent while supply has been hopelessly dwindled. None of this is exactly the antidote to “greed” and “selfishness” that advocates of the mixed economy might expect.

Moreover, the resulting shortages in a socialist system usually spawn black markets and underground trade, increasing the scope of legally defined criminality and, in worst case scenarios, penalising the population for attempting to acquire what should be every day goods and services – as has happened in the social democratic paradise of Venezuela.

A further fallacy that is often used to justify the mixed economy is the assertion that private enterprise does some things “better” than the state while the state does other things “better” than private enterprise. Thus we are encouraged to look at the “evidence” to decide who can do what better.

The obvious retort to this is by what standard do you conclude that something is being done “better” by either the state or by private enterprise – and, moreover, by what standard do we judge whether a certain activity should be carried on at all?

Private enterprises make this judgment through the profit and loss test; the quantity and quality of resources devoted to production of a good and service is rationed by its ability to make a profit, indicating the relative height of its demand by consumers. If a service is of low quality or unavailable to certain sections of the population it is simply because consumers are not willing to support a more extensive level of production in that particular industry.

For example, the fact that broadband internet was not, in the UK, extended to all rural communities leads our evidence-obsessed policymaker to conclude that this is a case of “market failure” – an instance where the private enterprise has rendered itself unable to provide something that it “should” provide, and so the state must step in.

This is utter nonsense. If the “free market” has failed to provide broadband internet to rural areas then it simply means that the more extensive resources necessary to do so compared to urban areas were required more urgently to produce other goods and services that people wanted to buy. Any “evaluator” who determines from the “evidence” that the state is needed for rural broadband cabling is necessarily substituting his own value judgments for everyone else’s, denying them the goods that they really demand and giving them those that they do not (or, more accurately, denying resources to one set of people who are willing to pay for them in favour of another set who are not).

Nor can we fall back on the assertion that the state should run “essential” industries for there is no such thing as an “essential” industry. Humans do not evaluate goods and services in whole, homogenous concepts such as “fire services”, “health services”, “electricity”, and so on. Rather, each good or service is demanded in specific quantities in specific times and places.

For instance, while we may think of “medicine” as “important” we can easily imagine ourselves in a situation where we would prefer to do something “unimportant” like watching television rather than produce another bottle of penicillin. Moreover, some people may not want penicillin at all if they maintain their health. The difficult task is not, therefore, determining whether penicillin is generally more “important” than television – it is identifying the precise point at which we stop devoting resources to the production of penicillin (and, thus, the point at which continuing to do so would be a waste) and move them instead towards producing television sets. This is something that can be done only by the profit and loss test of the free market. Any other judgment is necessarily arbitrary and at variance with the demands of consumers.

In any case, as libertarians, we might also ask if an industry is really critical then why on earth would you want it in the hands of the state where it can be royally screwed up? And why would it even need to be under state control? If the good or service produced is heavily in demand then profit opportunities will abound and private entities will have no problem in meeting that demand. It is, in fact, the unessential industries with low demand that struggle to stay afloat without state support.

The real reason why we have ended up with the mixed economy is, in fact, pragmatic rather than principled. Capitalism is the goose that has laid the golden egg and any decimation of capitalism would very quickly destroy the standard of living of the citizenry, prompting a swift revolution. Yet the state yearns for power and control and cannot be content with letting things be; it therefore has to paint capitalism as this necessary evil that must be stewarded and supervised – like a dangerous pet which, if managed “correctly”, will cuddle and comfort us instead of biting us on the backside.

Ironically, of course, it is state interference attempting to inject a socialistic element to the economy that brings about the chaos and injustice that is blamed on capitalism. We have boom and bust precisely because of state-sponsored credit creation, while the rich are getting richer and the poor poorer because the government bails out these cronies from the resulting disarray at the expense of the rest of us. Indeed, having a “safety net” against the alleged “sink or swim” nature of capitalism has turned out very well if you are an investment banker. None of this would happen in a genuine, capitalist economy.

The mixed economy is therefore nothing but an unjustifiable charade, built upon alleged weaknesses of capitalism and supposed strengths of socialism that simply do not exist.  Genuine economic prosperity for everyone in a fair and just society populated by morally healthy individuals can come about only through unfettered private property and free exchange – not through the state’s attempt to meddle with it.