Posted by: Dirk | July 29, 2015

Von Mises and the Position of the State in the Market

I am preparing a course in Origins of Political Economy and look for writings on money and credit. One of the first texts I encountered has been von Mises with his “The Theory of Money and Credit“. Chapter four titled Money and the State starts with §1 The Position of the State in the Market:

THE position of the State in the market differs in no way from that of any other parties to commercial transactions. Like these others, the State exchanges commodities and money on terms which are governed by the Laws of Price. It exercises its sovereign rights over its subjects to levy compulsory contributions from them; but in all other respects it adapts itself like everybody else to the commercial organization of society. As a buyer or seller the State has to conform to the conditions of the market. If it wishes to alter any of the exchange-ratios established in the market, it can only do this through the market’s own mechanism. As a rule it will be able to act more effectively than anyone else, thanks to the resources at its command outside the market. It is responsible for the most pronounced disturbances of the market because it is able to exercise the strongest influence on demand and supply. But it is none the less subject to the rules of the market and cannot set aside the laws of the pricing process. In an economic system based on private ownership of the means of production, no government regulation can alter the terms of exchange except by altering the factors that determine them. Kings and republics have repeatedly refused to recognize this.

While this is quite interesting as a provocative statement, I am not sure whether this counts as (modern economic) science. Von Mises does not look into the balance sheets of central bank, government, banks and private sector, but instead writes down claims that he does not give any justification for (perhaps he does so later). Given that the state is the monopoly issuer of the thing that discharges tax liabilities I don’t think that the above paragraph is correct. Given that states engaged in economic policy, often determined by powerful business lobbies, the state hardly “has to conform to the conditions of the market”. Just the opposite, it creates them through regulation. Here is an excerpt from an article by the New Yorker:

Since the death-spiral session, utilities around the country have sought to slow the growth of solar: by supporting laws and regulations that would reduce targets for renewable energy; by ending “net metering” laws that force utilities to pay solar customers retail prices for the surplus energy they put back on the grid; by imposing “connection fees” to make up for lost revenues. Much of the campaigning has been spurred by the right-wing American Legislative Exchange Council and funded by various groups linked to the Koch brothers and their fossil-fuel fortune.

The state is not external to the people, enterprises and other institutions. I think that it is wrong to divide state and market. In modern states, they are intertwined. Maybe this topic should go in my course to create a debate about what terminology to use (dichotomy of state and market) and what we recognize as (economic) “science” over the centuries. Of course, the view that science has on reality influences that reality, which makes it a reflective mechanism. And that is also where the power of economics lies.

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Responses

  1. “The state is not external to the people, enterprises and other institutions. I think that it is wrong to divide state and market.”

    Of course the state is always external to the people, enterprises and all VOLUNTARY and peaceful institutions because it is based upon the initiation of violence. “We” and not doing things to “ourselves” for the reason that “we” and “ourselves” are two different groups of people.

  2. “As a rule it will be able to act more effectively than anyone else, thanks to the resources at its command outside the market. It is responsible for the most pronounced disturbances of the market because it is able to exercise the strongest influence on demand and supply. BUT IT IS NONE THE LESS SUBJECT TO THE RULES OF THE MARKET AND CANNOT SET ASIDE THE LAWS OF THE PRICING PROCESS”. [The next sentence tends to make the previous sentence unclear].

    Mises differentiated between a state seeking resources from a relatively free market via taxes and price controls and one where it has taken significant control via socialism as explained in the subsequent paragraph:

    “Kings and republics have repeatedly refused to recognize this. Diocletian’s edict de pretiis rerum venalium, the price regulations of the Middle Ages, the maximum prices of the French Revolution, are the most well-known examples of the failure of authoritative interference with the market. These attempts at intervention were not frustrated by the fact that they were valid only within the State boundaries and ignored elsewhere. It is a mistake to imagine that similar regulations would have led to the desired result even in an isolated State. It was the functional, not the geographical, limitations of the government that rendered them abortive. THEY COULD HAVE ACHIEVED THEIR AIM ONLY IN A SOCIALISTIC STATE WITH A CENTRALIZED ORGANIZATION OF PRODUCTION AND DISTRIBUTION. In a State that leaves production and distribution to individual enterprise, such measures must necessarily fail of their effect.”

    Further, Mises taught that socialism completely destroys the pricing process and thus the essential process of economic calculation leading to mass impoverishment.

    Mises’ Austrian Business Cycle Theory is based upon the observation that artificial credit expansion distorts prices in a false and unsustainable manner which is the cause of the boom/bust cycle. As such, these problems cannot (by definition) cannot be blamed upon a free market.

  3. As I read in 1973, Murray Rothbard described the three types of violent intervention in the voluntary free market starting on page 1057 of:

    “MAN, ECONOMY, AND STATE A TREATISE ON ECONOMIC PRINCIPLES
    WITH POWER AND MARKET -GOVERNMENT AND THE ECONOMY”

    starting with the chapter entitled “FUNDAMENTALS OF INTERVENTION”

    https://mises.org/library/man-economy-and-state-power-and-market


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