Interventionism is an economic policy perspective favoring government intervention in the market process aiming to correct supposed market failures and promote the 'general welfare' of the people. An economic intervention is an action taken by a government or international institution in a market economy in an effort to impact the economy beyond the basic regulation of fraud and enforcement of contracts and provision of public goods.
The real answer here is if we can indeed take the 'good side' of each economic system (free market capitalism in one side and government run socialism on the other) and if the resulting arrangement can be archived and mantained.
One can raise an argument that whenever government do some kind of intervention on the free market in order to address some supposed marked deficiency it may yield some unintended consequences which in turn will be blamed as another marked deficiency and require another intervention. This process can lead a circle in which each new intervention reduces the freedom of the market bring the economy one step closer to socialism.
Now let us analyze the reasons for this. The government hears people complain that the price of milk has gone up. And milk is certainly very important, especially for the rising generation, for children. Consequently, the government declares a maximum price for milk, a maximum price that is lower than the potential market price would be. Now the government says: “Certainly we have done everything needed in order to make it possible for poor parents to buy as much milk as they need to feed their children.”
But what happens? On the one hand, the lower price of milk increases
the demand for milk; people who could not afford to buy milk at a
higher price are now able to buy it at the lower price which the
government has decreed. And on the other hand some of the producers,
those producers of milk who are producing at the highest cost (the
marginal producers) are now suffering losses, because the price which
the government has decreed is lower than their costs. This is the
important point in the market economy. The private entrepreneur, the
private producer, cannot take losses in the long run. And as he cannot
take losses in milk, he restricts the production of milk for the
market. He may sell some of his cows for the slaughter house, or
instead of milk he may sell some products made out of milk, for
instance sour cream, butter or cheese.
Thus the government’s interference with the price of milk will result
in less milk than there was before, and at the same time there will be
a greater demand. Some people who are prepared to pay the
government-decreed price cannot buy it. Another result will be that
anxious people will hurry to be first at the shops. They have to wait
outside. The long lines of people waiting at shops always appear as a
familiar phenomenon in a city in which the government has decreed
maximum prices for commodities that the government considers as
important. This has happened everywhere when the price of milk was
But what is the result of the government’s price control? The
government is disappointed. It wanted to increase the satisfaction of
the milk drinkers. But actually it has dissatisfied them. Before the
government interfered, milk was expensive, but people could buy it.
Now there is only an insufficient quantity of milk available.
Therefore, the total consumption of milk drops. The children are
getting less milk, not more. The next measure to which the government
now resorts, is rationing. But rationing only means that certain
people are privileged and are getting milk while other people are not
getting any at all. Who gets milk and who does not, of course, is
always very arbitrarily determined.
Whatever the government does, the fact remains, there is only a
smaller amount of milk available. Thus people are still more
dissatisfied than they were before. Now the government asks the milk
producers (because the government does not have enough imagination to
find out for itself): “Why do you not produce the same amount of milk
you produced before?” The government gets the answer: “We cannot do
it, since the costs of production are higher than the maximum price
which the government has established.” Now the government studies the
costs of the various items of production, and it discovers one of the
items is fodder.
“Oh,” says the government, “the same control we applied to milk we
will now apply to fodder. We will determine a maximum price for
fodder, and then you will be able to feed your cows at a lower price,
at a lower expenditure. Then everything will be all right; you will be
able to produce more milk and you will sell more milk.”
But what happens now? The same story repeats itself with fodder, and
as you can understand, for the same reasons. The production of fodder
drops and the government is again faced with a dilemma. So the
government arranges new hearings, to find out what is wrong with
fodder production. And it gets an explanation from the producers of
fodder precisely like the one it got from the milk producers. So the
government must go a step farther, since it does not want to abandon
the principle of price control. It determines maximum prices for
producers’ goods which are necessary for the production of fodder. And
the same story happens again.
The government at the same time starts controlling not only milk, but
also eggs, meat, and other necessities. And every time the government
gets the same result, everywhere the consequence is the same. Once the
government fixes a maximum price for consumer goods, it has to go
farther back to producers’ goods, and limit the prices of the
producers’ goods required for the production of the price-controlled
consumer goods. And so the government, having started with only a few
price controls, goes farther and farther back in the process of
production, fixing maximum prices for all kinds of producers’ goods,
including of course the price of labor, because without wage control,
the government’s “cost control” would be meaningless.
Moreover, the government cannot limit its interference into the market
to only those things which it views as vital necessities, like milk,
butter, eggs, and meat. It must necessarily include luxury goods,
because if it did not limit their prices, capital and labor would
abandon the production of vital necessities and would turn to
producing those things which the government considers unnecessary
luxury goods. Thus, the isolated interference with one or a few prices
of consumer goods always brings about effects—and this is important to
realize—which are even less satisfactory than the conditions that
Before the government interfered, milk and eggs were expensive; after
the government interfered they began to disappear from the market. The
government considered those items to be so important that it
interfered; it wanted to increase the quantity and improve the supply.
The result was the opposite: the isolated interference brought about a
condition which—from the point of view of the government—is even more
undesirable than the previous state of affairs which the government
wanted to alter. And as the government goes farther and farther, it
will finally arrive at a point where all prices, all wage rates, all
interest rates, in short everything in the whole economic system, is
determined by the government. And this, clearly, is socialism.
What I have told you here, this schematic and theoretical explanation,
is precisely what happened in those countries which tried to enforce a
maximum price control, where governments were stubborn enough to go
step by step until they came to the end. This happened in the First
World War in Germany and England.