Oskar Lange and the Free Market’s Sustainability Problem

In 1937, when socialism was still an idea people took quite seriously, Polish economist Oskar Lange wrote as his contribution to the ongoing “Socialist Calculation Debate” an article describing how a socialist economy could avoid the calculation problem and need for private property to which Ludwig von Mises called attention seventeen years earlier in his magnificent article “Economic Calculation in the Socialist Commonwealth.” Lange based his scheme on Léon Walras’s model of perfection competition, with the idea of a socialist economy structured to imitate all the price-generating functions of a market economy. This theory was termed ‘market socialism.’

But if a market socialism system is designed simply to work in the same way a capitalist system does, why bother transitioning to socialism? Separate from the issue of equality, or lack thereof in a capitalist system, Lange also saw a problem with sustainability—and not sustainability in the manner for which the Left today advocates. Lange explains at length in the second half of the article:

In a system based on the pursuit of private profit each entrepreneur has the natural tendency to exploit all possibilities of increasing his profit. The tendency to restrict competition is as natural for private enterprise as the tendency to protect the value of old investments is natural for private ownership of capital […]

No private entrepreneur or private capitalist can be expected to renounce voluntarily an opportunity to raise his profit or the value of his investment […]

As long as the maximisation of profit is the basis of all business activities it is unavoidable that industrial and financial corporations should try to use their economic power to increase profits or the value of their investments by proper State intervention. And unless the executive and legislative organs of the State are abstract metaphysical entities beyond the reach of any earthly influence, they will yield to the pressure of those powers.1

The problem Lange identifies is paradoxical but legitimate: Free, prosperous markets lead to unfree, wasteful markets. It is in the interest of profit-seeking individuals to do whatever is within their power and within the law to beat their competition, and so long as the means to do so through institutionalized force remain, individuals in businesses and special interest groups will continue to lobby government for economic restrictions in their favor. Even if the markets of the world were freed from government intervention tomorrow, without some substantial change in institutions, by next week business interest would be successfully lobbying for competition-curbing legislation. Lange thought he had the solution:

Thus, monopoly, restrictionism, and interventionism can be done away with only together with private enterprise and the private ownership of the means of production, which, from being promoters, have turned into obstacles of economic progress.2

But the dangers of government-granted monopoly cannot be solved by government itself holding the monopoly and waste resulting from limiting competition cannot be improved by doing away with real competition altogether. The Austrians would later address the error in doing so.

Those who favor a free market often advocate for constitutional restrictions to prevent government from taking an interventionist role in the economy, but even with separation of powers, the enforcement of restrictions on government ultimately must be enforced by that same government. It is not a matter of if government will eventually grant itself power to intervene in the economy, only a matter of when. As H. L. Mencken writes, “Under republics, as under constitutional monarchies, the history of government is a history of successive usurpations.”3 Mencken goes on: “Most of the so-called constitutional checks, in fact, have yielded, at one time or other, to [pressure].”4

No matter how the restrictions on government are written, the meaning can be contorted  through interpretation, or blatantly ignored, in order for legislators to have their way. This was exemplified in the 1942 case of Wickard v. Filburn. The current Wikipedia entry for the case outlines the details concisely:

A farmer, Roscoe Filburn, was growing wheat for on-farm consumption in Ohio. The U.S. government had established limits on wheat production based on acreage owned by a farmer, in order to drive up wheat prices during the Great Depression, and Filburn was growing more than the limits permitted. Filburn was ordered to destroy his crops and pay a fine, even though he was producing the excess wheat for his own use and had no intention of selling it.

The Supreme Court interpreted the United States Constitution’s Commerce Clause under Article 1 Section 8, which permits the United States Congress ‘To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes’. The Court decided that Filburn’s wheat growing activities reduced the amount of wheat he would buy for chicken feed on the open market, and because wheat was traded nationally, Filburn’s production of more wheat than he was allotted was affecting interstate commerce. Thus, Filburn’s production could be regulated by the federal government.5

By this logic, any action or corollary inaction, because it will in some way effect the transactions one makes or would have made, is within the domain of interstate commerce and may be legally regulated.

If government, even with strict and supposedly unambiguous guidelines, cannot be restrained from intervening in the economy and thus creating monopolies and causing waste, then the responsibility must fall on the voting population, or so goes a common argument. Thomas Jefferson is quoted as saying that “Eternal vigilance is the price of liberty.” But is it reasonable to believe that a population could possibly remain eternally vigilant, even as the State slowly but surely boils the water in which the people sit?

Public choice theory leads us to believe otherwise. Because an individual in business has far more to gain from anticompetition legislation in his industry being passed than the average taxpayer stands to gain from it being voted down, businesses will be more incentivized to lobby for regulation than the population will be to protest against it. In fact, the typical voter may not even be aware of the bill or have any rational reason to be aware, much less concerned.

If neither constitutional restriction nor the voters can be counted upon, what, then, can be done to ensure a lasting free market? So long as the state exists, the state will continue to legislate and regulate, intervene and restrict. The idea of eliminating government altogether to free markets permanently sounds risky and makes people uncomfortable, but it is an alternative that should be considered and debated. All free marketeers should keep in mind that just as important as the question “How could a free market do that?” is the question “How do we keep the government out of the free market?”

Footnotes

  1. Oskar Lange, “On the Economic Theory of Socialism: Part Two” The Review of Economic Studies Vol. 4, No. 2 (1937), 131-32.
  2. Ibid., 132.
  3. H. L. Mencken, Notes on Democracy (New York: Dissident Books, 2009), 139.
  4. Ibid., 83.
  5. http://en.wikipedia.org/wiki/Wickard_v._Filburn
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: