From reddit:
It seems to me that Mises was very clear that there was no such thing as a “third” system of economics. There was only capitalism and socialism. But he also talked a lot about a “hampered market economy”. Is this not considered a “third system” as an “in-between” for socialism and capitalism because he thought it was unstable and eventually had to go one way or the other, or was there some other reason?
The redditor then quotes Mises:
Private ownership of the means of production (market economy or capitalism) and public ownership of the means of production (socialism or communism or “planning”) can be neatly distinguished. Each of these two systems of society’s economic organization is open to a precise and unambiguous description and definition. They can never be confounded with one another; they cannot be mixed or combined; no gradual transition leads from one of them to the other; they are mutually incompatible. With regard to the same factors of production there can only exist private control or public control.
– Ludwig von Mises, Human Action
As a public service, Smiling Dave will explain.
Human Action is an advanced textbook, analyzing and explaining how an economy works, setting out the different types of economies, defining what has to be defined. His point here is that when studying an economy that uses division of labor, there are two categories, with every possible economic system falling into exactly one or the other, but not both.
What are the two big divisions? Simple. Either there is one guy calling the shots and telling everyone what to do, or there isn’t. If there isn’t one guy calling the shots, the only other possibility is that everyone is dependent on the decisions of everyone else.
For example, if there a Stalin or a Mao setting up Five Year Plans and Great Leaps Forward, they can do as they please. Nobody can make them sell copper at $5 a pound, but they can tell everyone what price to sell their wares at, and what wares they should make. There is one boss, free of everyone, and everyone else are but his slaves and robots.
That’s one system, what Mises defines as Socialism. And indeed, it was the standard definition in his time. [Who knows how they define it now. Ask your local Socialist].
Then there’s another system, where one guy does not call all the shots. So by definition, there is at least one industry that can do as it pleases. The very existence of these guys ties the hands of Mao and Stalin. They can no longer tell everyone the Next Great Leap Forward is to install copper pipes in every home, because the copper industry might not be making enough pipes, and are unwilling to do so. Or they may charge very high prices for their pipes, making it prohibitively expensive to install in every home.
Notice how if Stalin owned the copper industry as well, he would have no problem. He would command all his minions to enter the copper industry, and to sell cheap. Problem solved. His plans do not depend on anyone elses decisions, because nobody else has anything to decide.
[In fact, the only limitation Stalin faces is a physical one. If there just does not exist enough copper, he can’t install it everywhere he wants. Mises proved that a command economy, one guy running the shots, must very quickly deplete itself of all resources, but we digress. Do a search here for Calculation Problem, if you are interested in pursuing this].
So this other kind of economy, where there are at least two people with independent control of parts of the economy, he defined as market economy. The point is that all Socialist Economies [=one guy in charge] are the same, and can be analyzed and studied as a group. What can be proven by Austrian Economics of one is true of all of them.
Market Economies, too, are all the same. Whether there is total freedom, as in a 100% free market, or partial freedom, with the govt seizing some of the industries or resources, the laws governing all these markets are the same. Because, like a game of chess, no player can make a move without considering what the other players are doing. This decisive fact is the starting point for understanding all markets that are not Socialist.
DA: All very fine, Smiling Thaddeus Dave, but you can’t explain away reality. There are plenty of instances in the real world of the govt nationalizing some firm or industry, but not all firms and industries. That’s a mixed economy. Mises is wrong.
SD: Of course that reality is true, and no one is denying it. But let me ask you this. Are the economic laws that govern a free market the same as those that govern a socialist economy?
DA: Of course not. That’s something all economists agree to. Marxists say socialist economies are far better, that the economic laws operating on a socialist economy lead to happiness for all, as opposed to the economic laws of a free market, that leads to misery for all but a handful. Austrians say the opposite is true, more or less. But one thing they both agree on is that the laws of the two economies are far far different, by the very nature of the two economies.
SD: So far so good. What about the economic laws governing a mixed economy?
DA: I guess, since a mixed economy is somewhere between the two, the laws governing it will be a grab bag, some the same as a free market, some the same as a socialist economy. Or maybe all the laws will be at work, of both economies, but in a diluted form. Or maybe there is a third set of completely different economic laws that apply to those mixed economies.
SD: There you go. It is precisely to disagree with all you said just now that Mises wrote there is no such thing as a mixed economy.
DA: So he was not talking about whether there are countries where the govt took over an industry or two, but whether the theoretical economic laws operating on those countries are the same as the laws operating in a totally free market, or not.
SD: Yup. What some economists call a “mixed economy”, where the govt owns some things, but not everything, Mises is dismissing as an unnecessary theoretical distinction. There are no new laws unique to these economies. The laws governing a totally free market govern these economies, too. There is no difference if the govt owns Ford Motors, or Henry Ford does, as far as the economy as a whole is concerned. [Of course, it makes a great deal of difference for Ford Motor Company, which is guaranteed to go bankrupt very quickly, but that’s another story].
DA: That’s a very theoretical question, Dave. Why didn’t he decide to talk about something any Tom, Dick and Harry can offer an opinion on? I mean, it would be so much easier for me to argue if he was talking about a fact, not about an abstract theoretical question.
SD: Sorry, Devil, Human Action is not a history book. It is an advanced economics text, written for an audience with a certain degree of economic knowledge.
DA: So to prove him wrong, I’m going to have to prove there is a third set of laws for these “mixed economies”? Well, I can’t do that, but at least I can demand he provide a proof that he is right.
SD: Indeed you can. And it’s in his book.
Devil’s Advocate: That’s it, Dave? Aren’t you going to quote Mises on pages 259-260 and page 712 of Human Action, and show that he wrote exactly what you said?
Smiling Dave: No, Devil, my work here is done.
DA: Pretty please.
SD: Oh, all right! Here’s Mises in Planning for Freedom:
If within a society based on private ownership of the means of production some of these means are owned and operated by the government or by municipalities, this still does not make for a mixed system which would combine socialism and private ownership.
As long as only certain individual enterprises are publicly controlled, the characteristics of the market economy determining economic activity remain essentially unimpaired.
The publicly owned enterprises, too, as buyers of raw materials, semi-finished goods, and labor and as sellers of goods and services must fit into the mechanism of the market economy. They are subject to the law of the market; they have to strive after profits or, at least, to avoid losses.
DA: But that’s exactly what you’ve been saying, Dave.
SD: 🙂
Smiling Dave on Austrian Economics. 
Don’t. You. Ever. Stop.
Your blog is a pleasure to read on what is otherwise a dull uninspiring mundane subject.
On another note, how many suckers are there for bitcoins? It seems like there is one born every second. If one were to compare the bitcoin mania to tulip mania, where along that curve is bitcoin mania at, considering that the rate of suckers getting in doesn’t vary from century to century!
Again love your blog!
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Thank you Pramod.
I don’t know the answer to your q. My impression is that most people right now don’t even know bitcoin exists.
So there is a whole fertile field of pockets waiting to be picked.
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Hey, just wanted to say I think this was a great exposition on the subject. Really good! I hope you keep it up!
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Thank you.
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Hmm… is it true that economic archetypes – capitalism and socialism – have their own separate and distinct laws of operation.
But I disagree that economic analyses of interventions will draw on both “without confusion.”
Working out the economic effects of minimum wage laws, say, requires reasoning that has no employment in the analysis of either pure free market or pure socialism.
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Here’s an analogy to explain what I mean, taken from the world of math. Let us examine group theory. There are commutative and non commutative groups. The underlying laws all groups obey apply to both of them. However, commutative groups have special laws that apply only to them [as do non commutative groups]. These special laws ultimately are based on the underlying theory of groups, but they apply only in the situation of a commutative group.
As for analysis of minimum wage laws, the way I see it is as follows. The reasoning is always the same, the same basic laws of economics, always derivable from the initial assumptions of Austrian Economics. The analysis would go something like this: Given the laws of economics, what would be the effect of imposing a minimum wage?
The answer would be something like this: By the law of economics that says, ceteris parebis, that people will not do something see they feel causes them any kind of loss if they can avoid it, then we can conclude that an employer will not hire someone if that causes the employer to lose money. Thus, if by law he has to pay the worker more than the worker is worth, he will not hire him. Thus a minimum wage ensures that some people will be priced out of the labor market, increasing unemployment.
The standard laws of AE were the ones used. They were applied to the given situation.
Rereading the article, I could have worded it more precisely, I suppose. It might be rephrased something like this: The given situations of a socialist economy and of a free market lead to different conclusions about what will happen in them, [just as the two situations of having or not having a minimum wage]. But the given situation of a so called mixed economy will conform to all the laws of a free market. There will not be a third set of conclusions, different from those of a free market and of a socialist one.
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If we define economics as the science of the fact that humans make choices, then its laws of the “human nature” will be reflected in all three of capitalism (C) and socialism (S) and interventionism (I). After all, human nature remains under any economic system.
I suppose that’s why some writers of economics textbooks (like David Friedman) aim to teach us not economics but how to “think like economists” (for which I make a bit of fun of Friedman in my book). So, the law of diminishing marginal utility, say, will be obeyed in any economic system.
Now regarding our C and S, Mises writes: “There are two different kinds of social cooperation: cooperation by virtue of contract and coordination, and cooperation by virtue of command and subordination or hegemony.” But is minimum wage one or the other?
Suppose the government tells Smith: you are to employ Jones for $10 / hour. You’ll lose money, but if you disobey, we’ll shoot you. This is clearly a working out of a hegemonic relationship between the state and Smith.
But what if the government says: If you, Smith, are to employ anybody — and you don’t have to — then you must pay them at least $10 / hour. Smith still is not in full control of his prices, but the hegemony is less pronounced. Smith has the freedom to choose whether to employ Jones.
If there are _degrees_ of coercion and different _ways_ of coercing, then the hallmark of I is “unintended consequences.” The state is softer on the people than under full-blown socialism, and it is this indecisive “weakness” that results in the unique dynamics of the mixed economy.
Here’s what I say about this in my book:
“Lovers of freedom understand that interventionism is an internally inconsistent, self-contradictory system. This Misesian point must be rightly understood. It has been objected that the dominant form of economic organization today is interventionism which shows no signs of disappearing or collapsing on itself. This objection misconstrues the insight. …
“The paradoxes and inconsistencies of interventionism and socialism are logical first and practical only second. That economic system A is better than system B does not entail that people must of necessity substitute A for B. It does not even entail that 20,000 years from now or after however long, B will finally prevail. A person can live his whole life facing severe inner turmoil in his feelings, thinking, and acting without either resolving those problems and achieving “inner peace” or allowing them to destroy his life for good. A society can similarly twist slowly in the wind for centuries without discovering either the wheel and carriage or the utility of libertarianism.
“All Mises means that if a person took praxeology and economics seriously as intellectual disciplines; steadied his mind, as if logic were a martial art; and tried to work out how to achieve the greatest prosperity for the greatest number (or happiness given decent nature and virtue), even of himself and his children in the long run, then he would be forced by the power of his own pure reason to decide in favor of laissez-faire.”
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I’m not disagreeing with the factual parts of what you say.
But we are not talking about the same topic. The q I was addressing was Mises’s statement that there is either private ownership or state ownership of the means of production, and there is no third way. I was explaining what he meant by there not being a third way, to wit, that an economy where the state owns some, but not all, of the means of p. will function exactly like a free market.
You are discussing a different topic, not state ownership of the means of production, but state intervention in the economy without taking actual ownership. Certainly a minimum wage law is not an example of the state taking ownership of means of production. Mises has a whole section in HA about state intervention in the economy.
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Hmm, legal “ownership” is distinct from economic “control”; and even ownership is not a monolithic thing; rather, there is a bundle of rights each of which can be acquired separately from the others.
So, sure, for any such right, either an individual or the government owns it. There is no third way. That sounds a little… trivial, however.
Interventionism, i.e., all the “interesting” cases, arises precisely because the government claims for itself some rights over a means of production yet leaves other rights to the entrepreneur.
For example, it tells Jones: if you sell your labor, you cannot ask for less money than we decree. But you are free, however, to enter any profession you like. Or: you can become a doctor, but you need to be licensed. So, the state owns a “bit” of Jones; it “owns some, but not all, of the means of p.” If the precise pattern of ownership is important regarding the economic consequences of interventions, then it is not true that an interventionist economy “will function exactly like a free market.”
Also, if the government owns a substantial portion of the economy outright, then Rothbard argued that this would create “islands of calculational chaos” which, if government continues its nationalization, will eventually join up and eliminate all rationality from the economy.
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Thank you for your interesting comment.
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