Latest posts by Richard Ebeling (see all)
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For months, now, the mass media and the financial markets have anxiously watched and waited to see the outcome of a war of words, accusations, and threats that have been fought between Greece and its Eurozone and European Union partners.
Over several decades Greek governments accumulated a fiscally unmanageable debt and have been unwilling to introduce any meaningful, long-term economic and budgetary reforms to get the country’s political-economic house in order.
Greece’s Euro and EU partners have warned that Greece may be formally or informally expelled from the common currency and, perhaps, from the economic union if the terms for a new series of loans based on domestic Greek reforms and some debt restructuring cannot be agreed upon.
However, in the whirlwind of often sensational and uncertain daily new events, it is sometimes useful and even necessary to step back and try to take a look at the wider context of things in which those current events are occurring.
Greek and European Union Crisis is the Result of Collectivism
The fiscal and other economic policy problems that are plaguing Greece are simply the highly magnified and intensified problems that are affecting many of the other European nations
Many of them have accumulated large national debts that press upon the fiscal capacities of their taxpayers. They all have highly regulated markets and restricted labor markets. They all have aging populations expecting generous government-funded pensions as the years go by. They all have costly welfare state “entitlement” programs that must be financed through taxes and deficit financing.
They also share a generally anti-capitalistic mentality. Intellectuals, politicians, many in the electorates, and most certainly the national and EU bureaucrats neither understand nor advocate the classical liberal ideal of truly free markets or the wider political philosophy of individualism and individual rights to life, liberty, and honestly acquired property.
The market-oriented entrepreneur is neither trusted nor valued. Rather than seen as an innovator and creator of new, better, and less expensive products serving the betterment of the general consuming public, the business enterpriser is considered an exploiter, a manipulator and “selfish” profit-seeker only doing damage to the society in which he operates.
The free enterpriser must be either heavily controlled or regulated, or he must be put out of business. The only good businessman is the one who works hand-in-hand with politicians and bureaucrats to manipulate and restrict markets for their mutual advantages.
The fact is that whether it is the EU political leadership and bureaucrats in Brussels or the local politicians and bureaucrats in the respective national capitals of the member countries, they all reflect one general political-economic set of policies: those of the interventionist-welfare state with its regulation of markets, its redistributive policies, and its use of state power to benefit some at the expensive of others through favors and privileges of one type or another.
Greece’s version of these problems and policies are in its essentials no different from those in the other Eurozone and European Union member states. Only the degree to which they have all come together in the current crisis has magnified the seriousness and consequences for all to see when such policies are carried far enough.
What, then, are the European Union and its member states such as Greece to do to start escaping from the current crisis and other similar crises in the future?
Ludwig von Mises’ Analysis of Europe’s Dilemma – Seventy Years Ago
Over seventy years ago, while Europe was being destroyed in the carnage of the Second World War, the famous Austrian economist, Ludwig von Mises, wrote a series of essays on how the European nations might recover from the ravages of totalitarianism and total war through which they were living.
Ludwig von Mises (1881-1973) was one of the most well-known free market economists of the twentieth century. Internationally renowned for his demonstration of the unworkability of socialist central planning and the inherent contradictions of interventionist-welfare state, as well as his development of the “Austrian” theory of money and the business cycle, Mises worked in the years between the two World Wars as a senior economic policy analyst for the Vienna Chamber of Commerce in his native Austria. In this role he witnessed and analyzed the growth of government power and control across Europe, as well as in his own country, in the 1920s and 1930s.
Mises explained how Europe’s financial and economic policy problems were the culmination of traveling down the collectivist road of government regulation, control and planning:
“For two generations now the policy of the European nations has been based on nothing else than preventing and eliminating the function of the market as the regulator of production. By duties and trade-policy measures of other sorts, by legal requirements and prohibitions, by the subsidization of uncompetitive enterprises, by the suppression or throttling of business that offers unwelcomed competition to the spoiled children of the political regime through the regulation of prices, interest rates and wages, the attempt is made to force production into paths which it otherwise would not have taken . . .
“The result of these policies is the severe economic crisis under which we suffer today. The crisis had its starting point in mistaken economic policy, and it will not end until it is recognized that the task of governments is to create the necessary preconditions for the prosperous operation of the economy, and not squandering more on foolish expenditures than the industry of the population is able to provide.”
The Politicized Economy of Power, Privilege and Connections
Mises also understood the political and economic corruption to which such a strangling system of government interventionism leads. He explained it with great cogency in the waning year of the Weimar Republic in Germany a few months before Adolf Hitler and his Nazi Party came to power in January of 1933.
In an essay on “The Myth of the Failure of Capitalism” (1932), Mises described the essence of the politicized economy that replaces a free market-oriented economy in an increasingly interventionist system:
“In the interventionist state it is no longer of crucial importance for the success of an enterprise that the business should be managed in a way that it satisfies the demands of consumers in the best and least costly manner.
“It is far more important that one has ‘good relationships’ with the political authorities so that the interventions work to the advantage and not the disadvantage of the enterprise. A few marks’ more tariff protection for the products of the enterprise and a few marks’ less tariff for the raw materials used in the manufacturing process can be of far more benefit to the enterprise than the greatest care in managing the business.
“No matter how well an enterprise may be managed, it will fail if it does not know how to protect its interests in the drawing up of the custom rates, in the negotiations before the arbitration boards, and with the cartel authorities. To have ‘connections’ becomes more important that to produce well and cheaply.
“So the leadership positions within the enterprise are no longer achieved by men who understand how to organize companies and to direct production in the way the market situation demands, but by men who are well thought of ‘above’ and ‘below,’ men who understand how to get along well with the press and all the political parties, especially with the radicals, so that they and their company give no offense. It is that class of general directors that negotiate far more often with state functionaries and party leaders than with those from whom they buy or to whom they sell.
“Since it is a question of obtaining political favors for these enterprises, their directors must repay the politicians with favors. In recent years, there have been relatively few large enterprises that have not had to spend very considerable sums for various undertakings in spite of it being clear from the start that they would yield no profit. But in spite of the expected loss it had to be done for political reasons. Let us not even mention contributions for purposes unrelated to business – for campaign funds, public welfare organizations, and the like.
“Forces are becoming more and more generally accepted that aim at making the direction of large banks, industrial concerns, and stock corporations independent of the shareholders . . . The directors of large enterprises nowadays no longer think they need to give consideration to the interests of the shareholders, since they feel themselves thoroughly supported by the state and that they have interventionist public opinion behind them.
“In those countries in which statism has most fully gained control . . . they manage the affairs of their corporations with about as little concern for the firm’s profitability as do the directors of public enterprises. The result is ruin.
“The theory that has been cobbled together says that these enterprises are too big to allow them to be managed simply in terms of their profitability. This is an extraordinarily convenient idea, considering that renouncing profitability in the management of the company leads to the enterprises insolvency. It is fortunate for those involved that the same theory then demands state intervention and support for those enterprises that are viewed as being too big to be allowed to go under . . .
“The crisis from which the world is suffering today is the crisis of interventionism and of national and municipal socialism; in short, it is the crisis of anti-capitalist policies.”
In Mises’ description, we find all the elements of what plagues the modern Western economies, including the United States. The politicizing of market decisions and outcomes with government support for those financial institutions and corporate enterprises defined as “good big to fail.” The pervasiveness of “crony capitalism,” with “connections” and government-business partnerships that serve the political class and anti-market business groups at the expense of consumers and those who wish to freely compete on a more open market. And the use of taxpayers’ dollars to feed the network of those receiving the favors, privileges, protections, and subsidies that government has the power to hand out in various and sundry ways.
A New Politics and Economics of Freedom for Prosperity
In 1940, Ludwig von Mises came to the United States as an exile from the tyrannies covering the map of Europe under the onslaught of the early Nazi conquests. From this new platform, Mises proceeded to write a series of papers and monographs during the war years outlining the changes that would have to be implemented to restore Europe’s freedom and prosperity.
(Most of these essays and monographs are published in, Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises: Vol. 3: The Political Economy of International Reform and Reconstruction[Liberty Fund, 2000]).
To reverse this trend towards and consequences from political and economic collectivism, Mises argued that it was necessary to bring about a reawakened understanding of the principles of free market capitalism and classical liberalism And what needed to be implemented were economic policies consistent with those principles to create the institutional foundation for free men to interact for mutual benefit and material improvement.
The most fundamental changes to establish the foundations for the political and economic revival of Europe, Mises said, involved the mentality of the people. The first of these changes in thinking, he said, required no longer focusing primarily upon the short-run gains from various economic policies. Indeed, the economic calamities of the 1930s and the war through which Europe was then passing represented the fruits of a political economy of the short run. “Of course, there are pseudo-economists preaching the gospel of short-run policies,” Mises admitted. “‘In the long-run we are all dead,’ says Lord Keynes. But it all depends upon how long the short run will last.” And in Mises’ view, “Europe has now entered the stage in which it is experiencing the long-run consequences of its short-run policies.”
Practical politics in the earlier decades of the twentieth century had been geared to providing immediate benefits to various groups that could be satisfied only by undermining the long-run prospects and prosperity of society. In the new postwar period, Mises said, taxes could no longer be confiscatory. International debts could no longer be repudiated or diluted through currency controls or manipulations of exchange rates. Foreign investors could no longer be viewed as victims to be violated or plundered through regulations or nationalization of their property.
The countries of Europe needed to design economic policies with a long-run perspective in mind. European recovery would require capital, and this would mean attracting foreign capital investment to assist in the process. Foreign private sector investors – especially American investors – would be reluctant unless they had the surety that there would be a protected and respected system of property rights, strict enforcement of market contracts for domestic and foreign businessmen, low and predictable taxes, reduced and limited government expenditures, balanced budgets, and a non-inflationary monetary environment.
These were the institutional preconditions for the economic reconstruction of Europe, Mises argued. Once these general changes had been made, governments would have done all in their power to establish the general political environment that would be most conducive to fostering the incentives and opportunities for the people of Europe to start the recovery and rebirth of their own countries.
The entrepreneurs, however, were the ones who were most despised and plundered by governments in that interwar epoch of interventionism and economic nationalism (many of whom ended up being killed by the Nazis during World War II due to the fact that in Central and especially Eastern Europe a large percentage of the entrepreneurs had been members of the Jewish community).
The lifeblood for European recovery had been lost, particularly in Eastern Europe. There would have to be a new respect and regard for these creative men of the market in order to foster the emergence of a new generation of such individuals. “If there is any hope for a new upswing it rests with the initiative of individuals,”Mises said. “The entrepreneurs will have to rebuild what the governments and the politicians have destroyed.”
The Need to End Special Interest Politics and Privileges
The second change needed in the European mentality, Mises said, was an end to special interest group politics. Governments throughout the interwar period had followed a “producer policy,” in which individual manufacturers, farmers, and workers in various niches in the system of division of labor formed coalitions to gain favors for themselves at the expense of others in the society.
At the behest of trade unions, governments intervened, supported, and subsidized policies that in the longer run resulted in restrictions in output, misdirections of capital, and restraints on labor markets. Such policies had to be abandoned because they work counter to the integrative role prices and competition were meant to play in assuring coordination of markets, and the incentives and ability for capital formation. Producer-oriented policies were better called “production-curtailing policies,” Mises said, since they serve to protect the less competent producers from the rivalry of the more competent. Europe could ill afford to indulge in favors for the less efficient and less productive if the ravages of war were to be overcome quickly.
Third, Europe needed to give up the redistributive welfare state. Mises stated emphatically that, it is the duty of honest economists to repeat again and again that, after the destruction and the waste of a period of war, nothing else can lead society back to prosperity than the old recipe – produce more and consume less.
Who would be left to be taxed in any “tax the rich and subsidize the poor” scheme in a setting in which war has made practically everyone a “have-not,” when the focus of economic policy should be to foster capital formation, not wealth redistribution? “There is no other recipe than this,” Mises declared. “Produce more and better, and save more and more.”
Unless these changes occurred in people’s thinking, Europe’s path to reform and reconstruction would be more difficult and protracted than it needed to be. Neither the war nor its destruction stood in the way of Europe’s future. Ideas would determine what lie ahead.“What ranks above all else for economic and political reconstruction is a radical change of ideologies,” Mises said. “Economic prosperity is not so much a material problem; it is, first of all, an intellectual, spiritual and moral problem.”
And this intellectual, spiritual and moral problem could only have its solution in a restoration of a political philosophy of individualism and the economic policies of free market, liberal capitalism, in the view of Ludwig von Mises.
Today’s Europe Still in the Grip of Collectivist Ideals and Policies
It is true that Europe, today, does not have to recover from a devastating war, with its costs in human lives and physical property, and its resulting dramatic consumption of capital.
But today’s Europe suffers from its own destructive economic policies that hamper businesses and the spirit of entrepreneurship; siphon off the life-blood of enterprise and capital formation through the heavy burdens of taxes and straightjacketing anti-competitive regulations; rigid labor markets and generous welfare states that reduce the adaptability to change and lowers the incentives for people to want to be gainfully employed in profitable enterprises; and growing national debts to feed the costs of these unsustainable systems that threaten other European countries with the same fiscal abyss that has been facing Greece.
Greece’s and the European Union’s economic and political crisis will not be resolved through a new debt deal between the government in Athens and the European authorities. It will be merely one more stop-gag “solution” to a problem whose nature is endemic to the current ideology and politics of State-Power and collectivism.
Its real solution requires something deeper and more comprehensive: a revival of the classical liberal ideal of individualism and the economics of free market capitalism. This, unfortunately, is not likely to occur any time soon.