In my opinion, Ludwig von Mises’s most significant intellectual contribution came in his 1920 article “Economic Calculation in the Socialist Commonwealth.” He asked, “How will actual, honest-to-goodness socialism as Karl Marx called for it–’the abolition of private property’–work?” He concluded that it wouldn’t. Mises did not only criticize socialism in its most extreme form. Over his long career, he asked the same questions about government intervention more generally. He concluded that there is no way to intervene forcibly in the economy and fix a particular problem once and for all. The “solutions” will create a host of other unanticipated problems that will further call for more intervention.
Let’s illustrate the process with a thought experiment (one based on something that happened, though). Start with a perfectly-free market (which has never actually happened–remember, it’s a thought experiment). Now suppose that to help American dairy farmers, the US government enacts milk price supports. They pick a minimum price and then stand ready to buy any surplus milk farmers cannot sell at the supported price. Let’s do what Henry Hazlitt did in Economics in One Lesson and look for the intervention’s unintended consequences.
Dairy farmers are ecstatic as price supports mean higher prices and higher profits in a guaranteed market. The laws of supply and demand rear their heads, though, and we get the predictable consequences of a price floor. Dairy farmers ramp up production because it is now worth their while to produce more milk at the government-guaranteed price. Producers waste the resources going into the production of all that excess milk: the increased amount supplied is worth less to consumers than it costs to produce. There’s a good reason the free market wouldn’t make that much milk.
Meanwhile, the higher price means consumers buy less. The gap between the amount supplied and the amount demanded is the surplus the government buys up at the supported price, and it has to go somewhere. The government can dump it in the ocean. Or they could turn it into cheese and store it.
All of this, of course, requires resources. That means taxes, which in turn means the government is going to have to develop tax collection and tax enforcement capabilities. I won’t get into the theory of optimal taxation here. Still, even the least-bad taxes can distort people’s incentives and sacrifice gains from trade. Suppose we finance the price support with an income tax, in which case people work a little bit less, and society is worse off to the tune of the lost output.
The devil is in the details when it comes to taxation. What should we count as “income?” How should different kinds of income be taxed? Measuring income is harder than it initially appears because people don’t live on money-denominated wages, interest, rent, and profit alone. How we tax people’s income changes how they receive their income. A lot of my income, for example, comes in the form of job security and intellectual satisfaction.
I get paid to read, write, think, and speak about things I find fascinating, and thanks to tenure, I would be tough to fire. I have, in other words, what Bryan Caplan describes as “a dream job for life,” and while my salary is taxed, the “dream job” and “for life” parts aren’t. That doesn’t seem fair. An executive or a short-order cook who is willing to sacrifice leisure and satisfaction for more income is taxed for doing so. In contrast, a substantial chunk of my compensation–job satisfaction and job security–comes to me tax-free.
Fairness and definitions aside, taxation is costly because of how it affects incentives, and in the United States, the amount of time and treasure spent complying with the tax code is simply staggering. Some countries do it better than others, but the US tax code will likely remain a costly dog’s breakfast of incoherent and contradictory incentives.
Collecting the taxes the government needs to support milk’s price creates a host of complications and other unintended consequences. I want to focus on just one more for the time being: the effect of milk price supports on the poor, who now face higher milk prices at the grocery store. The effects run the gamut from “didn’t notice the price change” to “counting pennies at the cash register and deciding what to put back because milk is a bit more expensive.” In other words, it’s a policy my family barely notices. It hits hardest where people can least afford it.
Of course, you might respond, there’s an intervention for that, as well: income transfers from the rich to the poor. Income transfer policies tend to be conditional, and only certain foods are WIC-eligible. Fresh vegetables? Absolutely. Canned vegetables? No. Nuts? No. Kellogg’s Corn Flakes? Yes. Up to 30 ounces of canned fish? Yes–if you’re in the category “full breastfeeding moms & women pregnant with or breastfeeding multiples.” And that doesn’t even get into the Supplemental Nutrition Assistance Program (aka “food stamps”).
Do you want help from one of these programs, or do you want to be a vendor? Good luck figuring all that out from either side. Eligibility and compliance are costly, to say nothing of the need to monitor programs for fraud and deal with the effect of high-profile fraud cases or even just plain resentment from people who are upset at being taxed to pay for others’ meals. The person in the back of the line has an opportunity to resent the person at the front of the line paying for groceries with an EBT card.
The person at the front of the line is tired and resentful, thanks to the time and energy she had to spend just to secure the EBT card. A social worker in line resents the customers judging the people who come to him for help and resents the hulking bureaucracy that gets in the way of his efforts to help. Right-wing readers resent economists like me for “coddling the lazy.” Left-wing readers resent economists like me for “blaming the victim.” If the system produces anything, on net, it seems to be resentment.
Of course, all of this requires more taxes, more rules, and more enforcement–more barriers, in short, to production and employment. It’s not too hard to see how helping dairy farmers creates an unintended vortex of intervention. The results threaten popular support for free markets because people see poverty and chaos and conclude (incorrectly) that it is an inevitable result of a blinkered “just leave it to the market” ideology even though the problems started when we decided not to just leave milk prices to the market. Intervention tends to beget intervention, which tends to beget still further intervention. In the long run, we are all worse off than we would have been had we just been able to avoid getting the government involved in the first place.
This article was helped quite a lot by a presentation Shruti Rajagopalan gave at the 2020 Southern Economic Association meeting.