Interventionism

Interventionism refers to the doctrine of the limited use of political power to address the perceived shortcomings of laissez-​faire capitalism. Thus, public choosers (i.e., persons such as voters, politicians, and public authorities with access to legitimized aggression) employ interventions to attempt to promote outcomes they prefer compared with those of the unhampered market process. After the delegitimization of communism in the 1990s, interventionism has become the dominant policy doctrine throughout the world.

The economist and social historian Murray Rothbard has classified interventions into three types: autistic, binary, and triangular. Autistic interventions are those that interfere with individual, nonexchange activities, such as speech and religious observances. Binary interventions force exchanges between private individuals, on the one hand, and the state, on the other hand, and include taxation and subsidies. Finally, triangular interventions refer to the state-​mandating exchanges among two or more private individuals, examples of which are income redistribution, price and production controls, and environmental, health, and civil rights regulations.

Governments intervene for a variety of political, fiscal, and ideological reasons, although a particular kind of intervention may serve more than one purpose. A tax on cane sugar, for example, can raise tax revenues at the same time that it favors producers of corn syrup. The focus here is on interventions that have an economic rationale. The justification for economic interventionism is commonly called market failure, and, in principle, the kinds of market failure that interventions are claimed to solve range from income inequality and problems caused by the business cycle to monopolies and pollution. Among these failures are those relating to sexual and racial discrimination, urban sprawl, and climate change, and they encompass moral hazards and adverse selections due to lack of willpower and the systematic miscalculation of risk. Although these failures are often claimed to provide a theoretical basis for interventionism, in practice, political agents also use market- failure arguments merely to camouflage their opportunistic manipulation of the political process to further personal ends, a phenomenon known as rent seeking. In this case, there is a divergence between public choosers’ announced and actual intentions.

Whatever the motive, it is important to note that interventionism does not advocate the complete abolition of private property or thoroughgoing central planning. Interventionism promises to combine the best elements of capitalism with those of collectivism while avoiding the shortcomings of each. Indeed, the principal attraction of interventionism is that it putatively retains the basic institutions and benefits of capitalism, especially its wealth-​creating capabilities, while promising to draw on these productive forces to achieve the particular objectives of public choosers (e.g., more spending to end racism, poverty, or climate change). In this way, interventionism differs from socialism and other forms of collectivism, although at just what point interventionism shades into the latter is not well defined. The politico-​economic system that results from interventionism is sometimes called the mixed economy. Problems arise, of course, when the political objectives of a mixed economy conflict or when different groups of public choosers cannot agree on how to rank ends that compete for the same resources.

Although historically the concept of interventionism was identified and analyzed by the Austrian School of political economy, in particular by Ludwig von Mises, the phenomenon to which it refers has been treated from a variety of ideological viewpoints. At one end of the political spectrum, there is the post-​Marxian analysis of Claus Offe, whose discussion of the dynamics and ultimate crisis of legitimization of the welfare state, a form of interventionism, is remarkably similar to that of the Austrians. At the other end is traditional public choice theory, associated with James M. Buchanan and Gordon Tullock, which emphasizes the tendency under redistributive institutional “rules of the game” to generate economic inefficiencies as political opportunism crowds out market-​based self-​interest. A prime example of this approach is their analysis of rent seeking, which is the expenditure of valuable resources to acquire government-​created privileges that generate no net benefit.

Because of its historical link, however, the present discussion focuses on the Austrian School, which, in contrast to public choice theory, places a greater emphasis on knowledge problems than on incentive problems. It is possible to dichotomize assumptions about the knowledge that public choosers have as being either perfect (i.e., there is no possibility for their regretting their decision) or imperfect (i.e., genuine errors are possible) and about their motives as being either benevolent (i.e., aimed at promoting the general welfare) or opportunistic (i.e., involving gain at the expense of another). The public choice approach tends to assume that public choosers do not make systematic mistakes and that they are opportunistic, whereas Austrians have typically assumed, for methodological reasons, that public choosers are well meaning, but not particularly well informed. For Austrians, public policy fails when actual outcomes diverge from intended outcomes. Finally, in contrast to both public choice and Austrian political economy, supporters of interventionism perforce assume that public choosers not only act benevolently, but always do so with sufficient knowledge.

The defining characteristic of interventionism also is the source of contradictions that result in profound systemic instability. That is, the attempt to combine a decentralized private property order with elements of collectivism and central planning inevitably generates consequences that tend to frustrate the intentions of benevolent public choosers. The interventionist dynamics in such cases are therefore the result of unintended consequences and of public choosers’ ill-​informed responses to them—consequences that emerge at the interface of the market and governmental processes.

The market process consists of the exchange relations that form and dissolve dynamically under a regime of economic freedom and a framework of private property rights, free association, and the rule of law. Complex networks and social cooperation emerge from these relations without the need for central direction and as a result of the perceptions and decisions of an enormous number of individuals. This decentralized decision making is driven by profit seeking, constrained by both legal rules and ethical norms, and guided by relative prices that are generated through free exchange. The process is emergent and self-​sustaining.

In contrast, the governmental process consists of a dynamic that takes place within the governmental apparatus, that is, the legislature and bureaucracy, which is typically hierarchical and where well-​defined property rights are relatively problematic. Decision making is motivated by the desire to preserve or acquire political power, whether in the context of democratic or dictatorial institutions, rather than from profit seeking. Thus, although networks can and do emerge spontaneously in the governmental process in response to changing circumstances, the integrity of government requires maintaining a stable structure of command and rule-​following that severely constrains its ability to adjust. Therefore, compared with the main adjustment mechanism of the market process, entrepreneurial profit seeking, the governmental process—voting and legislation, in the case of democracies; command and control under dictatorship—tend to be relatively sluggish. Finally, the governmental process is financed primarily through the redistribution, rather than the creation, of wealth. Although it is possible that these two processes can, to some extent, coexist, as their spheres of operation overlap, the mutually exclusive nature of their underlying principles generates cumulative contradictions.

A simple illustration of the dynamics of interventionism can be seen by analyzing the imposition of price ceilings on certain commodities, such as gasoline. The attempt here is to direct an impersonal adjustment process toward a preconceived outcome. Although the intent of regulators may be to help motorists by keeping prices low, the immediate result, as elementary economic theory conclusively shows, is to create a gasoline shortage. If the regulators attempt to cope with the shortage by intervening further and imposing price ceilings on the inputs that go into the production of gasoline, such as oil or labor, further shortages in those markets will ensue. Unless the authorities reverse course, which they can do at any step in the regulation process, the market process will ultimately break down and systemic failure will occur as centralized decision making displaces the decentralized decisions of the market. At some point, authorities will have to decide whether to abandon their interventionist policy in favor of more consistently collectivist planning methods or to dramatically disintervene in the direction of significantly greater economic liberty. One can find other examples of this dynamic at the macro level in the form of business-​cycle policy and more locally in the history of large-​scale urban planning.

There are at least two conceptual questions raised by this example. First, why would policymakers take so long to correct their errors? We may call this policy myopia. Second, if interventionism is so unstable a system (indeed, it is debatable whether it constitutes a system at all), why has it been so widespread and apparently enduring for at least a century? We may call this the paradox of intervention. One explanation for policy myopia is that politically connected agents opportunistically employ political means with full knowledge of the consequences. As already noted, rent seeking is an important part of the modern political landscape and can explain much of the 20th century’s march toward statism. But even if agents do not engage in such opportunism—if they are, for example, benevolent—imperfections in knowledge can induce a myopia that handicaps their ability to realize that the consequences of their interventions may at some level contravene their intentions.

Under complete collective ownership of property, the “knowledge problem” of harnessing knowledge that is dispersed across society that is relevant to the successful completion of any given plan cannot be rationally solved. Agents will not have market prices and profits to reveal to them when they are or are not making errors. In the case of the mixed economy, although it is less-​than-​full collectivism, interventions tend to undermine the certainty and security that agents have in their property rights, rendering prices, profits, and losses to that degree less reliable guides to their decision making. As the public sector expands, this tendency to leave property rights less definite and enforceable makes it increasingly difficult for all agents, including benevolent policymakers, to learn whether their actions have been effective, even from their own point of view. Additionally, distortions in prices and profits will result from the interventions, as is the case with price controls. Therefore, interventionism affects the politico-​economic system with respect to incentives and knowledge.

Interventionism also has what F. A. Hayek has characterized as a psychological impact that changes underlying norms of acceptable behavior, especially those that might constrain the use of political means. If an agent sees others using public policy to enrich themselves at the taxpayers’ expense, that an increasing range of choices come to rely on political considerations, or that government is promising a growing number of persons job security and the like, it follows that the use of political means to achieve private ends becomes increasingly acceptable. This process reinforces the incentive- and knowledge-​related tendencies toward government expansion.

The resolution to the “paradox of interventionism” rests on the observation that if the various politico-​economic systems in the world pursue interventionist policies, most will tend to cycle between laissez-​faire capitalism and complete collectivism—the realm of the mixed economy. First of all, minimal states will tend to be unstable for the same reason that interventionist ones are: Even minor interventions have negative unintended consequences that will likely set an interventionist dynamic into motion. As a result, minimal states will be rare. Second, once the scope of government begins to expand under an interventionist dynamic, it becomes increasingly difficult to detect and correct its underlying policy errors. The drift will be toward bigger government. Third, economic calculation and solving the knowledge problem is impossible under complete collectivism. Consequently, maximal states also will be rare.

At any given time, most systems will therefore be interventionist, and the dynamics of interventionism will tend to push them gradually toward collectivism, whereas the occasional systemic failure will plunge some either toward the minimal state or toward more thoroughgoing collectivism, where, however, they cannot remain for long. Thus, although interventionism is an unstable system (indeed, it is not really a coherent system at all), it does not mean that it is transitory, especially given the wide range of mixed economies.

Further Readings

Hayek, F. A. The Road to Serfdom. Chicago: University of Chicago Press, 1972 [1974].

Ikeda, Sanford. Dynamics of the Mixed Economy: Toward a Theory of Interventionism. New York: Routledge, 1997.

Kirzner, Israel M. “The Perils of Regulation.” Discovery and the Capitalist Process. Chicago: University of Chicago Press, 1985.

Mises, Ludwig von. Interventionism: An Economic Analysis. Bettina Bien Greaves, ed. Irvington-​on-​Hudson, NY: Foundation for Economic Education, 1998.

Offe, Claus. Contradictions of the Welfare State. John Keane, ed. Cambridge, MA: MIT Press, 1984.

Rothbard, Murray N. Power and Market: Government and the Economy. Kansas City, MO: Sheed Andrews & McMeel, 1977.

Tullock, Gordon, Arthur Seldon, & Gordon L. Brady. Government Failure: A Primer in Public Choice. Washington, DC: Cato Institute, 2002.