In one of his early writings, Ludwig von Mises argued that mixed economies, which could not bear the label of license-fair capitalism or socialism, were inherently unstable. His claim was that once a government intervention was initiated, it thwarted economic calculations in a way that changed behavior. Once the unintended consequences of the intervention begin to manifest themselves, policymakers must either intervene once more or reverse the policy. Ultimately, an economy can be free or it can be centrally planned. It cannot be a mixture of the two.
This original insight, later expanded by Mrs. herself and refined by scholars such as Sanford Ikeda and Robert Higgs, became known as the “dynamics of interventionism.” It has become a key element of literature, emphasizing the conditions necessary for the creation and preservation of a liberal-democratic system (i.e., open political competition with a limited state). Simply put, it says that government intervention creates waves in the economy.
The problem is that the main part of this theory comes against the other, which is well accepted in economics: the theory of regulatory capture. Although this theory had many early prototypes, its first official description was produced by George Stigler in the 1970s. It has a deceptively simple point: economic calculations are needed to create control. In that view, not only are regulations desired and understood by economic actors, but the consequences of those regulations are also fully understood. This means that a group asking for a price limit is aware that rationing will occur (and that coupon will be issued). The adjustments that people make are permanent and there is no need to force economies to move in the direction of socialism or to overturn them out of control. Under that scene, there is no ripple.
This view conflicts at first glance. A recent study with German Belgil and Rosolino Candela has been published Public choice, However, we argue that they are actually complementary. The main difference between them is whether there is an effect that could result from government intervention Absolutely Predicted by regulators. If the regulator To be able to Predictably, the intervention does not need to weaken the economy. If that doesn’t happen, it’s time to dump her and move on. The ability to predict is primarily concerned with how bureaucrats and politicians benefit through intervention. Since they do not claim the full benefit or loss of their decision, both are unable (or unwilling) to access the knowledge necessary to predict the long-term consequences of their actions. More importantly, the cost of acquiring knowledge increases as we move forward.
The result is that the timing of unexpected results will change. The immediate or short-term consequences can be fully understood, while the long-term consequences will not be (which initiates the dynamics of the intervention).
On paper, my co-author and I propose a case study based on the economic history of electricity in Canada. In the early 1900’s, the populous province of Ontario began nationalizing its electrical industry. The goal was to provide cheap electricity to producers and rural farmers far from the big city of Toronto. By 1921, the process was complete. Until the mid-1920s, politicians, bureaucrats, manufacturers and peasants understood and liked the impact of the government’s policy of providing electricity at low market prices. They realized that subsidies meant adding additional power, and that these additions would raise taxes to finance them. But what they did not expect was that the demand for electricity was as resilient. The increase in demand was much higher than expected. Politicians and bureaucrats rushed for a solution. Rationing was out of the question for political reasons. New generating stations to cover unexpected waves were much more expensive than they had planned. This means raising taxes, something that was out of the question for political reasons. The only option was to build a high-voltage transmission line to the neighboring province of Quebec and import from there.
Quebec, Canada’s second largest province, was a growing (and completely private) electrical industry, low cost due to its extensive network of wide and fast flowing rivers. Private companies were more than happy to sign contracts with Ontario Crown Corporation for large purchases, unless they could charge a market price. From 1926 to 1932, the largest utilities in western Quebec (which borders Ontario) signed a huge provision agreement with the Ontario Crown Corporation. Between the completion of the first interstate high-voltage transmission line in 1928 and 1934, Quebec’s electricity exports to Ontario rose from 4 percent to 19 percent of total production, a significant increase.
Ghasamaja said that higher demand from Ontario means higher prices in the Quebec markets connected to Ontario. My co-authors and I found that the causal effect of being connected to Ontario by high-voltage transmission lines after 1928 was that prices had risen from 13 percent to 21 percent.
This high price in Quebec has caused a political backlash in the province. Before 1928, Quebec pushed the trend to the rest of North America. While the rest of the subcontinent was moving towards greater public ownership, most of the few cities in Quebec that initially opted for public ownership were in the process of privatizing their utilities. After 1928, some cities began to consider larger regulations and full public ownership. Some big cities have rejected their contracts with private firms. By 1935, the Quebec Liberal Party (which had been in power since the late 1890s) was divided over the question of nationalization of electrical utilities. In the 1936 election the Liberals opposed nationalization (soon at best), and were annihilated by the Union National (the consolidation of the abandoned Conservative Party and the liberals who withdrew from the party). The swing against liberal candidates was strongest in constituencies that were connected to Ontario by high-transmission lines, suggesting that price increases fuel the nationalization movement. In the late 1930s, additional layers of pricing regulations were added, and by 1944, the largest electrical utility had been nationalized.
The story here is simple: nationalization in Ontario from the 1900s to the early 1920s resulted in control and nationalization of Quebec in the 1930s and 1940s. The dynamics of interfering in the game!
No Ontario bureaucrat could expect such policy development in the neighboring province after the nationalization was completed. Yes, they are Something The effects of the intervention – short-term. However, failure to predict long-term consequences meant Something Bureaucrats and politicians (not in Ontario) were forced to add some extra layer of government intervention decades later to deal with the consequences of previous rounds of intervention.
This example is not common. This is very important. This means that when someone says “what could be wrong” after proposing policy intervention, the answer should be “a lot that we will understand many years from now.” The detrimental wave of government intervention could be far-reaching in the future – that doesn’t mean they don’t exist.
Vincent is jealous
Vincent Geloso, a senior fellow at AIER, is an assistant professor of economics at King’s University College. He holds a PhD in Economic History from the London School of Economics.