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Note: Prepared for Symposium on Austrian Economics, University of Hartford, June 22–28, 1975. It has been published here without changes other than with regard to references. This paper represents merely one phase of an extended collaborative effort between Walter Grinder and myself (i.e. John Hagel) Our ultimate objective is to present a detailed and comprehensive analytical model of the structure and dynamics of the state capitalist system as it has evolved historically in the U.S. This model will synthesize the theoretical insights of Austrian economics with concrete historical and sociological analysis. Since this particular paper addresses merely one dimension of a broader analytical mode, the reader is advised to see as well Walter Grinder and John Hagel, ‘‘Towards a Theory of State Capitalism: Ultimate Decision-Making and Class Structure’’, a paper presented at the second Libertarian Scholars Conference in October 1974. A revised version of this paper will appear in the first issue of the forthcoming Journal of Libertarian Studies.

1. PREFACE

This paper will develop some of the social and political implications of the Austrian theory of interventionism originally presented by Ludwig von Mises and Friedrich A. Hayek.1 Specifically, it stresses the inherently destabilizing and retrogressive characteristics of the interventionist dynamic within a market system and argues that the dislocations produced by political intervention in the market system ultimately require the replacement of the price mechanism by a completely different system for the allocation of resources based on arbitrary political decision-making (the Zwangswirtschaft type of social organization discussed by von Mises). These points will be developed within the framework of an analytical model of the structure and dynamics of political capitalism as it has evolved historically in the U.S.

2. THE MARKET PROCESS

For an audience such as this, it will presumably not be necessary to develop in great detail the arguments on behalf of the efficiency and desirability of the unhampered market process for the allocation of scarce resources.2 Nevertheless, it is important to stress certain fundamental characteristics of the market process which are essential for an understanding of the full consequences of political intervention.

Pure market systems are characterized by a constant equilibrating process, which adjusts to the dynamic of change in a manner designed to achieve an optimum allocation of economic resources. Austrian economists in particular have stressed the fact that the operation of the market system can only be understood as the process of information dissemination occurring over time and that it is highly misleading to conceptualize the market system as a static structure. Static structural approaches to economic analysis and the related tendency to focus exclusively on aggregate constructs rather than on the purposive action of individuals have been major factors underlying the prevalent misunderstanding of the dynamics of market economies.3

The market process is essentially a learning process designed to provide an optimum information flow to market participants, ensuring that existing misallocations of resources are perceived and remedied. As a learning process, the market ensures both an optimum amount of malinvestment and an optimum amount of resource idleness.4 Professor Israel Kirzner’s recent study on entrepreneurial decision-making within the market process has focused attention on the strategic role of the entrepreneur’s alertness to price discrepancies in the dissemination of information.5

In advanced technological societies, the process of change (the ‘‘forces of divergence’’, to use Ludwig Lachmann’s phrase) tends to accelerate and increase in complexity. As a consequence, the entrepreneurial process of adjustment becomes more refined and highly specialized in a constant effort to maximize the speed and flexibility of response and even the slightest interference with this entrepreneurial activity will seriously weaken the ‘‘forces of convergence’’ within the market system. In the absence of such interference, a pure market system is a dynamic and yet self-contained system lacking any endogenous tendencies to depart from the competitive market process.

Perhaps one of the most serious misconceptions concerning market economies is that they should conform to an idealized, structural model of perfect competition. As a consequence, it has become common wisdom that market systems cannot persist over time because of an ‘‘inherent’’ tendency to deviate from the ideal of perfect competition and to encourage the unhampered growth of monopolies which critically distort the market process. The concept of a market process is meant to describe a ‘‘real world’’ phenomenon and, since the real world is constantly changing, static models of perfect competition inevitably distort our understanding of market economies. As Hayek argued in his critique of such models, ‘‘competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis.’’6 The model of perfect competition is irrelevant as a standard for measuring the effectiveness of the competitive market process since, at any point in time, a situation considered to be monopolistic by such a standard may represent an optimal allocation of resources within the market system. The theoretical analysis of economies of scale within individual firms confirms that these firms attain an optimal size on the unhampered market within the context of an on-going process of change and not necessarily in relation to some abstract, normative concept of perfect competition.7

Moreover, there are compelling theoretical reasons to insist that cartels and other attempts to insulate market participants from competitive pressures through voluntary agreements will ultimately be frustrated by the market process itself.8 While cartels and other agreements strive to preserve uniform prices as a means of curbing competitive activity, the widely divergent cost structures of each firm participating in the agreement constitute a strong incentive for the more efficient producers to withdraw in an effort to capture a wider share of the market. Usually, the final breakdown of such cartel arrangements is preceded by a period of growing, covert nonprice competition among the cartel participants.

In fact, the concept of monopoly acquires a meaningful sense only if it is restricted to situations in which a market participant has relied on the nonmarket device of political intervention to insulate himself from the process of competition on the market, thereby permitting him to enjoy a rate of return which deviates substantially over time from the return which would have been possible on an unhampered market. The inherent instability of voluntary cartel arrangements and the essential role of political intervention in preserving monopoly positions on the market is not only theoretically demonstrable, but has also been amply confirmed by American historical experience.9

 

3. THE ECONOMIC MEANS AND THE POLITICAL MEANS

To understand the full implications of the interventionist dynamic within market systems, it is necessary to make a preliminary distinction between two fundamentally incompatible means for the acquisition of wealth in society: the economic means and the political means. As originally formulated by the German sociologist, Franz Oppenheimer, the economic means refers to the acquisition of wealth through production and voluntary exchange within a market system.10 The political means, in contrast, involves the use of coercion to confiscate and appropriate wealth accumulated through the economic means. By its very nature, the political means benefits one group only at the expense of another and the institutionalization of the political means within the state precipitates a process of class conflict, which pervades the entire society and profoundly influences the subsequent evolution of both the political and economic system.

In an earlier paper, we presented a schematic outline of the class structures characteristic of a system of political capitalism and, while a detailed presentation of this outline is neither possible nor appropriate here, it is necessary to identify two prominent elements of this class structure before proceeding with the present analysis.11 First, the term ‘‘political class’’ represents a broad category encompassing all those individuals and groups in society who are net beneficiaries of the political means. Within the political class, a numerically much smaller group may be isolated and identified as ‘‘ultimate decision-makers’’ within the political capitalist system in the sense that they are largely responsible for defining the parameters within which policy formulation and debate occurs. This group, as technically defined, constitutes a ruling class. For reasons discussed in the earlier paper, we believe that the fusion between state and ‘‘private’’ interests which occurs in the banking sector will lead to the emergence of a ruling class drawn in large part from this area of the economy.

The introduction of the political means within a market system generates an interventionist dynamic that is inherently destabilizing and retrogressive.12 The economic means and the political means are incapable of coexisting in a stable relationship within a single social system since there is an expansionist tendency inherent in the latter which will cause it to occupy an increasingly dominant position within the social system. Von Mises characterized the tension between the market process and political intervention in the following manner:

The conflict of the two principles is irreconcilable and does not allow of any compromise. Control is indivisible. Either the consumers’ demand as manifested on the market decides for what purposes and how the factors of production should be employed or the government takes care of these matters. There is nothing that could mitigate the opposition between these two contradictory principles. They preclude each other.13

The inevitable antagonism between these two means for the acquisition of wealth in society stems from the fact that political intervention within the market system does not simply achieve a transfer of wealth, it also necessarily produces distortions and disturbances within the pricing mechanism which regulates the flow of information within the economy. These dislocations are internalized within the market system, producing an ‘‘objective’’ misallocation of resources that generates demands for further political intervention. The Austrian theory of interventionism is an ecological theory which stresses the inter-related and interdependent nature of the market system such that a discrete intervention in one part of the system has farreaching, and often unforeseen, consequences in other parts of the system. The evolution of political capitalism, therefore, is ultimately determined by the deepening contradictions between the economic means and the political means within the social system.

 

4. SPECIFIC EXAMPLES OF DISLOCATIONS PRODUCED BY INTERVENTIONISM

In his essay ‘‘Middle-of-the-Road Policy Leads to Socialism’’, von Mises illustrated the expansionist character of interventionism by using the example of price regulation for milk products. Presumably, such a policy originates in the determination that milk is an ‘‘essential’’ commodity and that consumers should be able to obtain this commodity at a ‘‘reasonable’’ price. Yet, assuming that the price ceiling is set at some point below the prevailing market price for milk, this intervention in the price mechanism will have a variety of unintended consequences. Since the production and distribution of milk will no longer be as profitable as it once was, the resources involved in these activities will begin to shift over time to other, more profitable, activities and the supply of milk will begin to decrease relative to demand (which will be stimulated by the artificially low price of milk). Government planners who had originally sought to assure the availability of milk to consumers will thus be confronted with the option of either repealing the original price regulation or extending the scope of price regulation to cover the various factors of production necessary for the production of milk in an effort to increase the profitability of marginal producers. If the latter option is chosen, it is possible that it will be accompanied by a system of rationing to ensure that ‘‘needy’’ consumers will have access to the dwindling supplies of milk.

The latter option, however, merely raises the identical dilemma for planners on another level as the supply of each of the factors of production subject to the new price controls begins to decline as well. If pursued to its conclusion, the eventual result of a relatively innocuous policy designed to ensure the availability of milk at a ‘‘reasonable’’ price will be to expand the scope of price regulation until it encompasses the entire economy.14 As von Mises indicated:

Price control is contrary to purpose if it is limited to some commodities only. It cannot work satisfactorily within a market economy. The endeavors to make it work must needs enlarge the sphere of commodities subject to price control until the prices of all commodities and services are regulated by authoritarian decree and the market ceases to work.15

Certainly, if anyone needed further proof of this principle, our most recent experiment with wage and price controls should have settled all doubts.16 Another example of the disastrous consequences of price regulation may be seen in the policy of regulating the price of natural gas.17 Not only has such a policy resulted in steady decreases in the supply of natural gas, it has also precipitated widespread dislocations within the entire energy sector and reinforced our growing dependence on foreign energy imports. These developments in turn have been a major factor in proposals for mandatory ‘‘conservation’’ regulations, massive state subsidies for alternative energy R&D projects and creation of a state-owned corporation to undertake exploration for additional natural gas supplies. While much of this paper will focus on the role of political intervention in ‘‘protecting’’ and ‘‘strengthening’’ private corporations, natural gas price regulation illustrates another dimension of the process – the utilization of the political means by oneprivate economic interest group against another prominent interest group.18 In this case, electric utility companies and other large industrial consumers of natural gas were instrumental supporters of natural gas price regulation as a means of substantially lowering their own production costs.

While price controls offer a particularly convenient illustration of the unfolding of the interventionist dynamic, a similar process is precipitated by any form of political intervention in the market system: tariffs, subsidies, inflationary monetary expansion, etc. The complexity of the market process and the necessarily imperfect information of political actors assures that as long as the market process continues to function, in however limited form, each intervention will tend to bring about a state of affairs which, even from the point of view of the people who sponsored the intervention, is ‘‘worse’’ than the state of affairs prevailing ex ante. However, the consequences of each intervention may require considerable time before they become apparent and, even then, it is not always immediately apparent that the initial intervention was the cause of the subsequent distortions in the market system.

 

5. THE EXPANSIONIST TENDENCIES OF INTERVENTIONISM

  Political intervention in the market system thus introduces an inherent element of instability, persistently confronting policy-makers with the option of either expanding or contracting the scope of intervention. As von Mises suggested, ‘‘interventionism cannot be considered as an economic system destined to stay’’19 – it is necessarily a transitional system, unable to remain at any one stage for a prolonged period of time. Furthermore, there is a crucial distinction between the ‘‘instability’’ characteristic of market systems and the instability generated by political intervention. Market instability is a manifestation of its equilibrating mechanisms adapting to the inexorable process of change and striving to fulfill the changing expectations of market participants. Political intervention, in contrast, substantially increases the degree to which the expectations of the market participants remain unrealized as the learning function of the price mechanism is progressively short-circuited and the misallocation of economic resources grows more pervasive. The instability associated with political intervention thus indicates that the imbalance between the ‘‘forces of divergence’’ and the‘‘forces of convergence’’ is steadily increasing within the market system, resulting in a corresponding decline in consumer welfare.

While political intervention in market systems is not inevitable, certain sociological factors suggest that, in the absence of a broadly held individualist, market-oriented ideology, there will be a strong temptation to rely on the political means instead of the economic means in attaining specific goals. A basic corollary of the praxeological ‘‘action axiom’’ holds that human action will be undertaken only if it is anticipated by the actor that he will be able to substitute a more satisfactory state of affairs for his present less satisfactory condition. This ‘‘action axiom’’ corollary acquires considerable significance when considered in association with ‘‘Epstean’s Law’’ as cited by Albert Jay Nock: man tends to satisfy his needs and desires with the least exertion.20 Since expropriation usually requires less exertion than production, the political means will represent an attractive alternative to the economic means for a broad range of individuals – particularly those who lack the ability to produce efficiently on the unhampered market. This conclusion is further reinforced by the observation that individuals relying on the political means characteristically hold a relatively high time preference and, even if they had the understanding necessary to realize the ultimate consequences of political intervention, they would probably prefer to maximize short-term returns.

Similar arguments may be advanced to support the contention that there will be a tendency to expand the scope of political intervention once it is initiated rather than to abandon the original interventionist measures and remove the cause of the market distortions. Moreover, a democratic political system tends to reinforce this tendency. As the misallocation of resources resulting from a particular interventionist measure becomes apparent, political pressure will be generated to remedy its adverse consequences. Since the cause and effect relationship between political intervention and the subsequent distortions in the market system are usually not readily apparent and since politicians will generally prove extremely reluctant to admit that the earlier measures were mistakes, they will not surprisingly prefer to expand the scope of intervention by proposing additional measures to cope with the new problems.

This tendency is strengthened by the fact that the beneficiaries of the political means who can clearly perceive the prospect of large, and relatively short-term, financial gains will usually appear more vocal and better organized than the fragmented non-beneficiaries who are often unaware of the long-term adverse consequences of interventionist measures. The members of the ruling class, representing the leading economic interests underpolitical capitalism, retain their essential role as ultimate decision-makers by defining the parameters within which policy-making occurs.21 The thrust and shape of interventionist policies in a political democracy, therefore, results from the centralization and manipulation of democratic demands for the purposes of the economic/political elite. Historically, the leading interventionist measures in the American economy have been proposed and actively supported by prominent leaders in business and finance to promote their own interests.22 The myth of the ‘‘businessman as a persecuted minority’’ has performed a major role in obscuring this historical reality and, to be able to identify the acting individuals who have promoted the steady expansion of political interventionism, it is first necessary to penetrate this myth.23

It is important to stress, however, that the underlying interventionist dynamic in state capitalist systems is characterized by inherent tendencies which are independent of, and do not require, conscious intrigue within the economic/political elite. Of course, each interventionist act requires a conscious choice among its initiators – the point here is that the over-all pattern of a rapid expansion of the scope of intervention within the market economy need not have been foreseen, or intended, by the economic/political elite at the time that the initial interventionist measures were introduced.

There is one significant exception to the pattern of expanding political intervention, which arises in certain ‘‘crisis’’ situations where the alternative to abandoning particular interventionist programs would require a fundamental and sudden transformation of economic, social and political relationships. At such points, the economic/political elite will probably attempt to contract the scope of intervention even in the face of widespread public sentiment favoring additional expansion. However, these rare reversals are not sufficient to halt the interventionist trend since it is inconceivable that the economic/political elite will ever fully abandon political intervention in the market and the remaining intervention will lead to everintensifying dislocations requiring further intervention.

Prominent historical examples of such ‘‘crisis’’ situations were the establishment of the National Recovery Administration during the New Deal and the more recent experiments with systematic wage/price controls during the Nixon administration. On a more limited scale, the critical housing shortages resulting from the adoption of rent control legislation in large urban areas have generated popular demands for massive public housing projects and the economic/political elite, confronted with the prospect of socialization of the housing market, has been forced to reconsider the desirability of the original rent control legislation.

 

6. ZWANGSWIRTSCHAFT: THE CULMINATION OF INTERVENTIONISM

The dislocations produced by political intervention in the market system lead to a continued deterioration of the integrative and coordinative function of the price mechanism. Both Carl Menger and Ludwig Lachmann have analyzed the role of the price mechanism in regulating the information flow through a series of input/output prices between the higher and lower orders of production in the capital structure and distortions in these prices have particularly serious consequences for the market system as a whole.24 The resulting dislocations and continued expansion of political intervention culminates in the emergence of a fundamentally different social system that replaces the price mechanism as a device for the allocation of resources by an intricate network of arbitrary political decision-making.

This movement from a market to a non-market system of centralized and arbitrary decision-making results in the crystallization of a socialist or, more appropriately, fascist set of economic relationships. Such a system has been alternatively labeled Zwangswirtschaft by von Mises and Ordnungswirtschaft by Robert Brady. As von Mises has indicated, the labels and outward appearances of a market system are preserved in a system of Zwangswirtschaft, but the task of allocating economic resources has decisively shifted from the market to the political system.25 Thus, on a more concrete level, ultimate decision-making within the social system is transferred from Wall Street to Washington. Von Mises noted that prices, wages and interest rates in this new system are no longer what they appear to be, instead ‘‘they are merely quantity relations in the government’s orders.’’26

As all economic issues begin to acquire political meaning – a necessary result of the departure from the price mechanism as a means of allocating economic resources – the role and size of the state apparatus begins to expand at an accelerating rate. The significance of the shift in the locus of ultimate decision-making is not that different people would be making the decisions since, in fact, in most cases the same people will be involved as personnel transfers between corporate offices and government offices become increasingly common. The real importance of the shift involves the abandonment of the price mechanism and its replacement by a system of decision-making operating within a completely different set of parameters and constraints. This transition process is a lengthy one since the full consequence of interventionism emerge only gradually over time and may be either accelerated or prolonged through various measures.

 

7. WAR AND INFLATION: CATALYSTS OF INTERVENTIONISM

  Before outlining the major stages of the interventionist dynamic, attention should be focused on the role of two categories of interventionist measures, which are instrumental in defining the length and specific shape of the transitional process. First, the institutionalization of the political means in the form of the state necessarily requires regularized channels for financing the activities of the state apparatus. The very existence of the state thus presupposes systematic intervention in the market process and it is futile to pretend that this form of intervention, unlike other forms, is somehow compatible with the unhampered market system.27

While direct taxation is the most dramatic method of financing state activity, it is progressively supplemented by more indirect forms of deficit financing that are far less conspicuous among the public. Specifically, a growing reliance on borrowing through the sale of government bonds provides the basis for an intimate cooperation between the state and the banking institutions, which become heavily involved as intermediaries in the sale of these bonds. This mutually supportive relationship that develops between the state and banks is further enhanced by measures which authorize the monetization of the state debt, permitting banks to issue notes by using government bonds as part of their asset base. These arrangements for the financing of state activity reinforce the strategic position of the banking sector within the state capitalist system and are an important element in the explanation of the fact that the earliest and most systematic forms of state intervention often occur in the banking sector.28

In analyzing the interventionist dynamic in various historical contexts, the conclusion becomes inescapable that wars and war preparations have performed an essential role in accelerating the process of interventionism within the market system.29 This insight is hardly a novel one; both the Manchester School of Richard Cobden and John Bright and the doctrinaire laissez-faire adherents in the Anti-Imperialist League in the U.S. at the turn of the century explicitly perceived the necessary correlation between war and domestic interventionism and, as a result, became actively involved in the peace movements of their day.30 Unfortunately, it is an insight which the contemporary conservative movement tended to forget in the aftermath of World War II. While war-related intervention in the market system has farreaching consequences, it is particularly important to note that the vast increase in the revenue needs of the state apparatus which inevitably occursduring war serves to consolidate further the intimate relationship that is forged between the state apparatus and the banking sector in state capitalist systems.

The traditional maxim that ‘‘war is the health of the state’’ should be amended to read that ‘‘war and inflation are the health of the state.’’31 The close inter-relationship between these two dimensions of statist health becomes apparent in the often explicit reliance on war preparations as an inflationary pump-priming mechanism either to accelerate recovery from a depression or to postpone the downturn of the business cycle.32 Single project expenditures by the state apparatus generally assume growing importance in the demand management policies adopted during the latter stages of the inflationary upswing. In this type of expenditure, characteristic of both the military and space programs, funds are directed into clearly focused, long-term projects in which cost considerations assume only secondary importance. The expenditures may thus be manipulated to reach individual firms or specific industries which are encountering financial problems. In this manner, they are useful instruments in sustaining the demand for the products of the higher orders of production, which have become over-extended as a consequence of the inflationary monetary expansion policies adopted by the state.

War-related expenditures represent a prominent form of single project expenditures since they prove far more acceptable to the economic/political elite than equivalent levels of expenditures in social welfare programs. While defense expenditure programs continue to represent a relatively minor share of total GNP, such aggregative comparisons are characteristically misleading for they entirely overlook the qualitative role of military contracts in assuring the profitability of individual firms in defense-oriented industries.

Perhaps the greatest impact of military expenditures occurs in the sphere of research and development (R&D) activity. According to one source, 80% of the R&D work conducted in the United States since World War II has been financed by defense, space and Atomic Energy Commission expenditures.33 The consequence of this pattern of financing has been summarized by Seymour Melman in his recent book The Permanent War Economy:

For example, as research in electronics was channeled into military and related applications a few industries, notably computers, gained from the government sponsored research in their fields, but a host of consumer electronics industries like radio and television manufacturing, left to their own devices, have suffered massive depletion, closing of factories, transfer of work abroad and loss of employment opportunity in the United States ... This effect on technical research is an important part of a larger process: a minority portion of the national product often shows decisive impact on theeconomy as a whole. A succession of major industries have been undermined for want of fresh technology [and] capital ... 34

This channeling of R&D activity thus inevitably has a profound impact in determining the future shape and evolution of the structure of production by subsidizing technological research in certain areas and neglecting others.

 

8. STAGES IN THE EVOLUTION OF THE INTERVENTIONIST DYNAMIC

The transition from pure market systems to Zwangswirtschaft which results from the interventionist dynamic may be conveniently subdivided into three stages – pure market systems, political capitalism and fascism (as specifically understood by the concept of Zwangswirtschaft). The two latter stages in fact represent variants of the broader category of state capitalism that encompasses any social system in which the economic means and institutionalized forms of the political means coexist. While certain parameters define each stage, it must be emphasized that each stage is an ideal model and that no social system has existed which belonged entirely to one of these stages without any elements of the others also present. Hence, considerable variations are possible in the historical manifestations of each stage. The stages outlined in this ideal model nevertheless serve a highly useful analytic function in isolating and identifying the trends underlying the expansion of political interventionism.

The characteristics of pure market systems have already been briefly discussed in this paper and it is necessary here only to point out that this stage, in its ideal form, has never existed historically.35 The institutionalization of the political means in the state is a pervasive theme in the history of mankind and, by its very existence, the state precipitates an interventionist dynamic in market systems which then progressively depart from the ideal model. A rigorous understanding of the requirements of the pure market system indicates that the institutionalization of the political means is fundamentally incompatible with the economic means essential to the market process.36

Once the institutionalization of the political means has occurred, the social system enters into a lengthy transitional phase known as political capitalism. This period in fact represents an aggregation of three overlapping sub-stages which reflect an evolving level of sophistication in the utilization of the political means. The first sub-stage involves the use ofpolitical intervention by individual corporate leaders for their own narrowly defined benefit. The political means may be employed either to acquire or to protect an economic position within the market system which would be insulated from competitive pressures. Examples of political intervention characteristic of this period include direct subsidies, state contracts and charters to monopolize a specific commercial activity.

The second sub-stage serves as the focus of Gabriel Kolko’s illuminating historical study, The Triumph of Conservatism.37 In this sub-stage, the political means is employed on a more systematic level to achieve the ‘‘rationalization’’ and ‘‘stabilization’’ of specific industries. ‘‘Rationalization’’, which emerges as a predominant consideration of the economic/political elite during this and subsequent periods, acquires a rather specific meaning defined by Kolko as ‘‘the organization of the economy and the larger political and social spheres in a manner which will allow corporations to function in a predictable and secure environment permitting reasonable profits over the long run.’’38 Specific examples of political intervention in this sub-stage include the establishment of a broad array of regulatory commissions and the cartelization of the banking sector through such institutions as the Federal Reserve System.

The third sub-stage in the evolution of political capitalism is attained as the scope of political intervention expands to encompass the entire social system. This represents the ‘‘highest’’ form of political capitalism and it reflects the emergence of a cohesive ruling class capable of defining its own interests within the context of a broader system of political intervention. In other words, it presupposes a ‘‘systems’’ or ‘‘class’’ consciousness on the part of the leading representatives of the economic/political elite which permits them to adopt a long-range perspective in pursuing their interests. For example, during this period the scope of political intervention is considerably broadened to encompass an extensive system of social welfare legislation formulated and implemented by prominent representatives of the economic/political elite in an attempt to promote social stability and co-opt the potentially troublesome labor movement into the governing coalition.39 James Weinstein’s book, The Corporate Ideal in the Liberal State, concentrates on this phase of the historical evolution of political capitalism in the U.S., stressing the critical role of corporate leaders in the National Civic Federation in mobilizing support for social welfare legislation.40

Despite the expanding scope of political intervention within the transitional stage of political capitalism, the market mechanism, even though greatly hampered and distorted, remains the essential means for transmitting the information necessary for the allocation of economic resources. However, one of the central assumptions of the corporate liberal consensus forged during the evolution of political capitalism is that the state has a duty to ensure full employment within the economic system and this duty in turn requires a progressive socialization of costs for ‘‘private’’ economic activity. As a consequence, an intricate network of legislation and government agencies emerges to perform this task. One of the fundamental contradictions in the political capitalist system is that the interventionist measures designed to assure full employment of economic resources are precisely those which render it impossible for the market process to attain even the more limited objective of optimal resource allocation.

 

9. THE SYSTEM OF ZWANGSWIRTSCHAFT

  The socialization of private costs represents an essential element in the transition from political capitalism to the next, culminating stage of the interventionist process. By socializing costs and refusing to allow inefficient enterprises to fold, political capitalism denies market participants the ability to act on the basis of information transmitted through the price mechanism and thus make necessary adjustments in the allocation of economic resources. The price mechanism is therefore rendered increasingly ineffective as more and more allocational decisions are assumed by the state apparatus. In John T. Flynn’s description of this process, the government ‘‘will insert itself in the structure of business, not merely as a policeman, but as partner, collaborator and banker.’’41

As one of the consequences of the progressive abandonment of the price mechanism, the state increasingly relies on corporativist forms of social organization to provide control mechanisms for coordinating the social system. Robert Brady, in his study of fascist social systems, has designated the industrial and professional groups which provide the organizational infrastructure for the economic system as Spitzenverba¨nde or ‘‘peak associations.’’42 These peak associations constitute the organizational embodiment of the fusion between state and private economic activity that culminates in the Zwangswirtschaft system. On a somewhat different level, Robert Caro’s recent biography of Robert Moses, The Power Broker, provides an analysis of the system of ‘‘authority capitalism’’ which Moses actively promoted in the New York metropolitan area.43 This system is based on a complex network of semi-‘‘independent’’ authorities and commissions that provide another organizational model for the fusion of public and private spheres that might be extended to the national level. In additionto isolated urban experiments in ‘‘authority capitalism’’, other examples of an advanced stage of integration between the state apparatus and ‘‘private’’ corporations may be pinpointed in the banking sector, the sprawling ‘‘military-industrial complex’’ and the atomic energy industry.

A thin line separates the frontier between advanced political capitalism and Zwangswirtschaft and only the detached historian with the perspective of time will be able to determine when the line is eventually crossed. At several points in recent American historical experience – under the National Recovery Administration in the 1930s and, more recently, under Nixon’s wage/price controls – the system of political capitalism appears to have approached the dividing line but then the economic/political elite, perhaps in recognition of the profound social transformations which would be precipitated by such measures, has withdrawn them and shifted to other policies to deal with the same problems.

Once this frontier has been crossed, and the institutions of Zwangswirtschaft have been consolidated in the social system, political planners will encounter the identical allocational dilemma which von Mises and Hayek, in their critique of socialist economic systems, argued must ultimately defeat any attempt to replace the price mechanism by central planning as a means for the allocation of economic resources.44 A system of economic fascism, representing the culmination of a lengthy process of interventionism, is just as unstable a social configuration as any of the transitional phases of political capitalism. The transition to this new social system may be cushioned somewhat by the presence of a capital structure accumulated over time but, as this begins to disintegrate and social welfare begins to decline rather precipitously, popular dissatisfaction may be expected to increase, necessitating even harsher repressive measures. It is also likely that reform movements will arise within the ranks of the planners, resembling similar movements in the Communist bloc countries and hesitantly seeking to re-establish some sort of price mechanism. Whatever the specific outcome, it is clear that Zwangswirtschaft, like the interventionist systems that preceded it, cannot offer a permanent solution to the contradictions inherent in interventionism.

 

10. THE EVOLUTION OF IDEOLOGY: THE SUBJECTIVE DIMENSION OF INTERVENTIONISM

  In tracing the evolution of political capitalism, it is instructive to note that it is characterized by frequent lags in subjective perceptions of changingobjective economic conditions among members of the coalescing ruling class and that these lags are often the source of considerable political tension. During the initial stages of political capitalism, the predominant ideology remains essentially a variant of conventional laissez-faire doctrines. Beneficiaries of interventionist measures continue to support the market system as the most desirable form of economic organization moderated, however, by occasional and strictly limited political intervention. The necessity for specific interventionist measures is rationalized with often dazzling ingenuity by demonstrating the ‘‘special’’ circumstances that render the market process inadequate to secure the desired end (always stated in terms of a vaguely defined ‘‘public interest’’).

As the range of exceptions broadens and, in particular, as the highly disruptive consequences of sporadic interventionist measures in the capital market become apparent, the dominant ideology undergoes a fundamental transformation. The business cycle precipitated by expansionary monetary policies becomes associated with the ‘‘laissez-faire’’ economic system and prominent economic interests adversely affected by the dislocations accompanying the business cycle begin to support more comprehensive controls on the market process. Seeking to rationalize and stabilize, first, individual industries and then the economic system as a whole, a consensus eventually emerges concerning the necessity, and the desirability, of a more sophisticated and systematic form of political intervention. This consensus emerges only with difficulty and proponents of systematic political intervention inevitably encounter considerable opposition from increasingly isolated segments of the economic/political elite.45

In the Anglo-American historical experience, perhaps one of the most important factors in the shift from traditional laissez-faire economic doctrines to more explicit interventionist ideologies occurred during the 1930s when leading proponents of Austrian business cycle theory appeared unable, from within their theoretical framework, to explain the causes of the secondary depression which then gripped both the U.S. and England.46 These expressions of uncertainty and the failure to present a systematic explanation of the causes underlying the secondary depression tended to discredit the entire theory and paved the way for more enthusiastic support for theoretical systems which professed not only to understand the causes of the business cycle but also insisted that instruments were available to moderate, if not eliminate, the adverse consequences of the business cycle and simultaneously attain the elusive goal of full employment.

The more sophisticated systems approach to political intervention reached its highest ideological expression in Keynesian theoretical economic doctrines, which offered both an explanation of the contemporary economic situation and a policy framework for responding to the secondary depression. While the language employed by the leading Keynesian theorists expressed a fundamental break with the status quo, the fact that many of the specific policies proposed by the Keynesians were already an established part of the interventionist arsenal certainly helps to explain the receptivity of policy-makers within the economic/political elite to this new theoretical system. Thus, the Keynesian theoretical system provided a comprehensive framework for ‘‘rationalizing’’ and expanding the isolated interventionist measures of the preceding period.

In an even more profound sense, the Keynesian mode of analysis represents merely one variant of macro-economic theory that emerged during the early decades of the twentieth century. In addition to Keynes, Wesley Clair Mitchell, John R. Commons and Irving Fisher elaborated comparable theoretical frameworks for macro-economic analysis, which provided the underpinnings of the doctrines of the ‘‘monetarist’’ school.47 The macroeconomic orientation shared by both the Keynesian and monetarist schools were particularly adapted to the advanced stage of political capitalism which emerged following the cartelization of the banking system under the Federal Reserve System.

The systematic and sustained intervention in the capital market undertaken during this period generated effects on a ‘‘macro-economic’’ level which seemed inexplicable in terms of acting individuals and seemed to require a separate theoretical framework for analysis. Such a conclusion, of course, was misleading and, under the guise of ‘‘explaining’’ the dynamics of advanced industrial economies, these theoretical formulations remained permanently trapped at the level of describing superficial manifestations, rather than penetrating the substance, of political capitalism. The underlying causes of the economic distortions arising under political capitalism thereby remained unanalyzed. Of course, such misleading modes of analysis also tend to serve objective interests by focusing attention on artificial aggregate constructs and effectively obscuring the extent to which specific individuals in society benefit from political intervention at the expense of other individuals.

The problem addressed by the Keynesian theoretical system is precisely the problem which advanced political capitalism confronts in an increasingly acute form: how to prolong the expansionary growth of the economic system by maintaining effective demand for the higher orders of production without subjecting the economic system to accelerating rates of inflation. Historically, as already mentioned in an earlier section, the most important policy instrument in the Keynesian arsenal for maintaining effective demand has been military-related expenditures. An example of the explicitly Keynesian dimension to contemporary military expenditures is provided by the following excerpt from a study by an economist:

Capital expenditure items within the military budget, which are particularly consumptive of labor, tend dually to counteract cyclical unemployment and to stimulate those basic industries that frequently receive the initial and most severe impact of economic recession. In this manner, the allocation of resources to the military should become less disruptive of the civilian economy. Along with other similarly designed programs, they are able to assist in placing a floor under the economy so as to cushion cyclical declines in employment and production.48

War, and the threat of war, also serves a particularly valuable ideological function by facilitating the mobilization of popular support for government policies. By focusing attention on an external enemy – an undifferentiated ‘‘we’’ confronting an equally undifferentiated ‘‘they’’ – the threat of war further obscures the ‘‘who benefits?’’ questions raised by domestic interventionism. The compatibility between Keynesian economic policies and as system of economic fascism dominated by an increasingly war-oriented state apparatus, a compatibility which even Keynes himself acknowledged,49 is based at least in part on the recognition that enemies have become an economic necessity for political capitalism.50 The growth and consolidation of a sprawling domestic and foreign ‘‘military-industrial’’ complex is accompanied by the emergence of an ideological paradigm of national security management, which incorporates the Keynesian theoretical system.51 This new paradigm, which focuses attention on the economic system and the military system as interdependent components of a broader, over-arching system, represents a culmination of the ideological evolution associated with political capitalism.

Keynesian demand management policies presupposed the existence of a self-contained economic system so that the dislocations produced by interventionism will not be externalized in the sphere of international trade. In The Road to Serfdom, Hayek commented on the tendency of collectivism to become particularistic and exclusive’’, observing that

The definitely antagonistic attitude which most planners take toward internationalism is further explained by the fact that in the existing world all outside contacts of a group are obstacles to their effectively planning the sphere in which they can attempt it. It is therefore no accident that, as the editor of one of the most comprehensive collective studies on planning has discovered to his chagrin, ‘‘most ‘planners’ are militant nationalists.’’52  

Thus, economic nationalism tends to strengthen with the sustained implementation of a Keynesian program of domestic interventionism and these nationalistic tendencies in turn reinforce the broadening of the concept of national security to embrace economic and political, as well as purely military, concerns. In fact, every policy issue that arises tends to be evaluated explicitly in terms of its impact on this broadly defined national security. Moreover, as the Keynesian paradigm proves increasingly unable to ‘‘explain’’ the contradictions inherent in political capitalism, the ideological paradigm of national security management already provides a more comprehensive theoretical framework for responding to the intensifying dislocations threatening the viability of the entire system.

 

11. ZWANGSWIRTSCHAFT AND THE QUEST FOR IDEOLOGICAL HEGEMONY

  While much of the foregoing analysis has concentrated on the growing ‘‘rationalization’’ and centralization of political intervention in the economic system, there are also strong parallel tendencies compelling ideological uniformity with the social system. One of the central themes stressed by Hayek in The Road to Serfdom is that comprehensive planning presupposes complete unity with regard to a scale of priorities necessary to select among competing planning objectives. Thus, ‘‘an economic plan, to deserve the name, must have a unitary conception.’’53 Since complete unanimity cannot be achieved within the framework of democratic political institutions: ‘‘the conviction grows that, if efficient planning is to be done, the direction must be ‘taken out of politics’ and placed in the hands of experts – permanent officials or independent autonomous bodies.’’54 The conflict between democratic political institutions and planning was summarized by Hayek:

Our point, however, is not that dictatorship must inevitably extirpate freedom but rather that planning leads to dictatorship because dictatorship is the most effective instrument of coercion and the enforcement of ideals and, as such, essential if central planning on a large scale is to be possible. The clash between planning and democracy arises simply from the fact that the latter is an obstacle to the suppression of freedom which the direction of economic activity requires.55

Moreover, since comprehensive planning requires ‘‘general acceptance of a common Weltanschauung, of a definite set of values,’’56 the transition to a system of Zwangswirtschaft is accompanied by increasing efforts to assert ideological hegemony over the social system and thereby mobilize popular support for the planning priorities selected within the state apparatus. As a consequence, ideological purity becomes a prominent concern and the educational system in particular is progressively integrated into the overarching system subjected to national security management. Just as the marketplace of goods has been progressively subjected to controls, so must the marketplace of ideas submit to the dictates of the state as ‘‘wrong’’ ideas are perceived as a potentially disruptive element within the system and hence as a threat to the national security. To quote Hayek once again:

The most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everybody believe in those ends. To make a totalitarian system function efficiently, it is not enough that everybody should be forced to work for the same ends. It is essential that the people should come to regard them as their own ends. Although the beliefs must be chosen for the people, and imposed upon them, they must become their beliefs, a generally accepted creed which makes the individuals as far as possible act spontaneously in the way the planner wants.57

 

12. INTERVENTIONISM AS A PROCESS OF RETROGRESSION

In analyzing the evolution of political capitalism and its eventual transformation into a qualitatively different system, it should be stressed that each stage in the interventionist process is socially and economically retrogressive in comparison with the preceding stage. In seeking to promote full employment of economic resources, the interventionist policies adopted under political capitalism in fact promote a highly wasteful misallocation of resources from the consumer’s point of view, thereby resulting in widespread malinvestment and, in the ultimate irony of political capitalism, ensuring the impossibility of full employment.

Zwangswirtschaft is clearly the most retrogressive system of all since it entails the final abandonment of the only mechanism, which can effectively assure the optimum allocation of economic resources – the market price mechanism. In its place, a highly bureaucratic and centralized planning apparatus emerges, becoming heavily dependent on national security related expenditure programs. As von Mises and Hayek have persuasively demonstrated, the abandonment of the market price mechanism inevitably results in a deterioration of economic welfare. Even more importantly, however, such as system of comprehensive planning also necessarily entails a rapid surrender of political, social and intellectual freedom.

 

13. A CONCLUDING COMMENT: THE FUTILITY OF REFORMISM

This analysis of the dynamic of political interventionism in state capitalist systems leads to a disturbing conclusion: interventionism, once initiated, is an inherently retrogressive and unstable social and economic process which, if not halted, leads inevitably to a variant of economic fascism and, ultimately, to either economic stagnation or collapse. While a detailed analysis of the strategy necessary to oppose such a process of social retrogression effectively is probably not appropriate here, it must be stressed that opposition to this process through any gradualist strategy will fail to reverse the interventionist dynamic and reformist movements will always be manipulated to produce even greater intervention in the market process. The utopians are those who believe that limited reforms can ever be effective in the face of such firmly entrenched interests benefiting from the systematic application of the political means. Only the simultaneous presence of the objective conditions of an economic ‘‘crisis’’ or panic within the state capitalist system and the subjective conditions of a strong ideological movement firmly adhering to an anti-interventionist ethic will provide an opportunity to halt the interventionist dynamic and to return to a pure market system.