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1. Broken Capitalism, Lecture 1
David Gordon
Mises Academy
June 18, 2013

2. No Intermediate System
• We can distinguish two different ways the
economy can be organized: capitalism and
socialism.
• Under socialism, production is centrally
controlled. This doesn’t have to be formal
ownership.

3. No Intermediate Continued
• Another system is the free market, based on
social cooperation and voluntary exchange.
• There is no third system. Mises elsewhere
mentions syndicalism.
• An objection comes up: what happens if the
government owns some
industries, e.g., railroads? Why isn’t this an
intermediate system?

4. Answer to Objection
• This is not a valid objection. If the government
takes over production of something within a
market economy, this is still a market
economy.
• Nationalized industries must still sell their
products on the market. They compete for
money from consumers.

5. Problems of Nationalized Industries
• These industries don’t face the same
pressures to meet consumer demands as
private businesses.
• If a government service loses money, it can get
more money through taxes.
• Also, bureaucrats who operate businesses
aren’t risking their own funds. They are just
playing at the market.

6. Calculational Chaos
• Mises showed in Socialism that a fully socialist
economy can’t work.
• It can’t decide how to use production goods
that can be used in different ways.
• The only way to allocate resources efficiently
is though calculation in money. This requires
market prices.

7. Chaos Continued
• The calculation argument doesn’t apply only
to full socialism.
• Introducing socialist elements in a market
economy creates “islands of calculational
chaos.”
• Rothbard wrote about this in MES.

8. Interventionism
• The government can interfere with the free
market in another way than taking over
production of goods and services.
• It can pass laws that restrict market
transactions in certain ways. E.g., price
control, including minimum wage laws and
rent control, and tariffs.

9. Interventionism Continued
• These interventions don’t create a third
system between capitalism and socialism
either.
• They only hamper the working of the free
market economy.

10. A Pattern of Argument
• Mises’s criticism of interventionism follows a
characteristic pattern of argument.
• The pattern is that we first take the goal that
the interventionist wants.
• Then, we show that the intervention won’t
achieve this.
• This is a value-free method of criticism.

11. Price Control
• Suppose that the government thinks that the
price of milk is too high.
• At the high price, the poor find it hard to buy
milk.
• The government decides to impose a
maximum price on milk to make it easier for
the poor to buy milk.

12. Price Control Continued
• What will happen? At the lower price, more
milk will be demanded by consumers. But
suppliers won’t supply more.
• Marginal sellers, i.e., those making the least
return, will leave the business of selling milk.
• Note that Mises assumes that people in the
business don’t all earn the same return. They
would only do so in equilibrium.

13. Result of Price Control
• As a result of the government’s action, less
milk is available.
• This was not what the price control was
supposed to do.
• This is an example of a criticism that doesn’t
make a value judgment.

14. Rent Control
• Exactly the same process takes place with rent
control.
• The aim of rent control is to make more
housing available for the poor.
• At the rent-controlled price, more housing is
demanded than is available.
• Landlords who can’t make money will
withdraw housing from the market and avoid
making repairs.

15. More Rent Control
• The result is again that the aims of rent
control aren’t achieved.
• More housing does not become available for
the poor.

16. Minimum Wage Laws
• Minimum wage laws are supposed to raise
wages for workers. They are not intended to
harm workers.
• A minimum wage is a price floor. More
workers will want to work at the minimum
wage than employers are willing to hire.
• Workers who aren’t worth the minimum wage
to the employer will be fired or not hired.

17. More Interventions
• Again, the intervention fails to achieve the
goal.
• Tariffs make products mote costly for
consumers.
• By decreasing competition, they enable cartels
to be formed.

18. Reaction to Failure
• What happens when intervention fails?
• The government may respond with more
intervention.
• Milk sellers under price control complain that
they can’t make a profit. The government may
respond by imposing price controls on their
suppliers, to lower their costs.

19. Failure Continued
• These new interventions will also fail.
• If the government responds with still more
interventions, this will lead to total
government control of the economy.
• This took place in Germany in WWI (the
Hindenburg plan) and also in Britain in WWI
and WWII.
• Churchill brought socialism to Britain, not the
post-war Labour Government.

20. Nazi Economics
• Although the Nazi regime kept the form of
private property, it was a type of socialism.
• Prices and wages were set by government
directives.
• The Marxist interpretation of Nazism is that
big business was in control. But actually, the
government ran things.

21. Mises and Government
• Mises opposes the slogan “that government is
best which governs least.”
• He says government should fulfill its proper
functions, i.e., defense and protection.
• This can be interpreted in a way consistent
with anarchism, although Mises didn’t go this
way.

22. Government Continued
• The key point is that force should be restricted
to defense and protection. Force cannot
justifiably be used for other things in the free
market.
• This would be true also under anarcho-
capitalism.
• The restriction of force is Mises’s point here,
not whether defense and protection must be
provided by a monopoly agency.