Stiglitz Calls for Socialism on the Installment Plan

Finding a balance between government regulation and market forces is key to improving a country's economy, but there is not just one way to achieve this, according to Joseph Stiglitz .

"We now recognize that especially after the crisis, unregulated markets can not work. We need both government and markets," said Stiglitz, Nobel Laureate in Economic Sciences and professor at the Columbia University.

He made the remarks at the 16th World Congress of the International Economic Association held at Tsinghua University in Beijing, China.

Attempting to find a way between free markets and total control of the economy may be a new concept to Stiglitz, but, it has been a concept floating around for a very long time.

Ludwig von Mises discussed the myth of a third way during a speech he delivered in 1950 at the University Club of New York.:

The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.

...if the trend of this policy will not change, the final result will only in accidental and negligible points differ from what happened in the England of Attlee and in the Germany of Hitler.

During his speech Mises showed how a simple interventionist step can ultimately lead to total control of the economy:

The interventionists emphasize that they plan to retain private ownership of the means of production, entrepreneurship and market exchange. But, they go on to say, it is peremptory to prevent these capitalist institutions from spreading havoc and unfairly exploiting the majority of people. It is the duty of government to restrain, by orders and prohibitions, the greed of the propertied classes lest their acquisitiveness harm the poorer classes. Unhampered or laissez-faire capitalism is an evil. But in order to eliminate its evils, there is no need to abolish capitalism entirely. It is possible to improve the capitalist system by government interference with the actions of the capitalists and entrepreneurs. Such government regulation and regimentation of business is the only method to keep off totalitarian socialism and to salvage those features of capitalism which are worth preserving. On the ground of this philosophy, the interventionists advocate a galaxy of various measures. Let us pick out one of them, the very popular scheme of price control.

The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese or meat. There will be less milk available for the consumers, not more. This, or course, is contrary to the intentions of the government. It wanted to make it easier for some people to buy more milk. But, as an outcome of its interference, the supply available drops. The measure proves abortive from the very point of view of the government and the groups it was eager to favor. It brings about a state of affairs, which?again from the point of view of the government?is even less desirable than the previous state of affairs which it was designed to improve.

Now, the government is faced with an alternative. It can abrogate its decree and refrain from any further endeavors to control the price of milk. But if it insists upon its intention to keep the price of milk below the rate the unhampered market would have determined and wants nonetheless to avoid a drop in the supply of milk, it must try to eliminate the causes that render the marginal producers' business unremunerative. It must add to the first decree concerning only the price of milk a second decree fixing the prices of the factors of production necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from restricting output. But then the same story repeats itself on a remoter plane. The supply of the factors of production required for the production of milk drops, and again the government is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk. Thus the government is forced to go further and further, fixing step by step the prices of all consumers' goods and of all factors of production?both human, i.e., labor, and material?and to order every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can be omitted from this all-round fixing of prices and wages and from this obligation to produce those quantities which the government wants to see produced. If some branches were to be left free out of regard for the fact that they produce only goods qualified as non-vital or even as luxuries, capital and labor would tend to flow into them and the result would be a drop in the supply of those goods, the prices of which government has fixed precisely because it considers them as indispensable for the satisfaction of the needs of the masses.

But when this state of all-round control of business is attained, there can no longer be any question of a market economy. No longer do the citizens by their buying and abstention from buying determine what should be produced and how. The power to decide these matters has devolved upon the government. This is no longer capitalism; it is all-round planning by the government, it is socialism.

When Stiglitz says,"We now recognize that especially after the crisis, unregulated markets can not work. We need both government and markets."

He is proving Mises point. It was central bank intervention (money printing) that was at the core of the recent financial crisis, supported by FDIC creation of moral hazard which caused depositors to be unconcerned about the investments made at the banks where they deposited their money, and this was all intensified by government programs to direct investments in the direction of the housing market.

And so because of these three interventions, which caused the crisis, Stiglitz, as an interventionist, is doing exactly what Mises predicted. He is calling for more intervention in the economy. Where does it stop? It won't stop, until the entire economy is controlled. It is socialism developing on the installment plan. Mises saw it coming decades ago.