Annette Godart-van der Kroon is president of the Ludwig von Mises Institute Europe, having taken up the position in 2001. Since then the Institute has hosted a large number of events on various topics that influence politics in Brussels. Previously she worked as adjunct referendary at the Ministry of Defence in the Department of Judicial Affairs at the Hague and as a lawyer at the Court of Utrecht and in Roermond in the Netherlands, specializing in civil affairs. She has given numerous speeches on juridical, philosophical, and economic issues and has published books, articles, and comments on these topics. Her publications include two books on the theories of von Hayek and articles on Schopenhauer’s theory of law published in the Schopenhauer-Jahrbuch in 2003. She is also a member of the Mont Pelerin Society and has participated in Liberty Fund meetings. She enjoys opera, reading, and horseback riding.
We are going through a period where some governments in developed countries are intervening in the markets as never before, with quantitative easing on a massive scale. The failure to intervene, however, is now frequently cited as one of the causes of the crash. How do you view this?
As President of the European Mises Institute I have been able to view the global crash of 2008–09 through the eyes of the Austrian school of economists, who are champions of capitalism and liberalism and who are vigorously against government intervention in the markets. However, we are going through a period of intensive intervention which began around 2009 and which looks as if it will last at least until deep into 2011. The question of how to view all this is a complex one and needs to be answered in several stages. I would start by pointing out that Ludwig von Mises, whose writings and thought lie at the heart of the Austrian school, is against unnecessary government intervention. Period. But one needs to understand what is meant by intervention. Not everything governments do to maintain the freedom of the markets or to maintain individual freedoms is not intervention. That is simply government doing its proper job. What is not the proper job of government, for example, is to intervene to affect prices. I will come back to this point in a moment to explain why the market’s ability to set prices through the actions and decisions of individuals is such a fundamental matter in the eyes of the Austrian school.
Let us take an example. Wheat and other grain crops are currently at record highs. There is a long history of governments intervening to set the price of bread, and it has never turned out well. So even though food crop prices are extremely high, we do not hear calls in Europe or the United States for government to set the price of grain. Everyone believes that this would be folly, and unworkable in a global market. What we do have, though, is demands from interventionists—one thinks particularly of President Nicholas Sarkozy of France—for special taxes to be introduced to discourage speculators in commodities. When in doubt, blame “speculators.”
Intervention is very popular among the political classes. It enables politicians to be seen to be active, to be doing things, to be seizing the initiative. It is seen as an easy route to votes. However, the problem with intervention, as von Mises pointed out, is that it creates issues which then lead to the need for further intervention, and so on. What the Austrian school shows us is that when you start traveling along this road, you begin to erode personal freedoms and government becomes more and more oppressive.
Now let us look at the 2008 global crash. People, including the media, begin their analysis of the crash from the standpoint that it was all caused by greed and shortsightedness on the part of the bankers, which pushed them to take bigger and bigger risks on derivatives based on the US housing market. Increased foreclosures in the US subprime housing market then triggered losses that were multiples of the underlying sums, resulting in the need for massive government intervention to bail out the “too big to fail” banks.
On this analysis, what was needed—what would have prevented the crash—was more vigorous intervention of a different kind, regulatory intervention, with the regulator as a proxy for government. This regulation did not happen. It failed to happen because the United States was pursuing “light-touch” regulation as advocated by former Secretary to the Treasury Alan Greenspan. Now that the crash has happened, light-touch regulation is out of fashion and we are witnessing a massive wave of reregulation both in the United States and in Europe, aimed at the financial services sector. Again, intervention is seen very much as a positive force, necessary to control an unruly market.
What is not seen in all of this is the deep collusion, interference by the back door, between the bankers and government that created the conditions for the crash. The US administration under President Clinton was on a mission to enable poorer Americans to own their own homes. This is one of the major factors at the root of the US subprime debacle. Banks were positively encouraged to relax lending standards. In other words, where risks would have been properly priced by the market at a certain level, a thumb was put in the scales to drive the cost of mortgages down to the point where it could be deemed to be affordable.
Once you start skewing the market in this way, you lose your frame of reference. From there it was a short hop to self-certified mortgages where applicants were encouraged to misstate their income since no one would check on it. At the same time, the biggest banks in the United States were able to proceed to riskier and riskier lending and more and more opaque derivatives trading precisely because they knew that government would intervene to save them if things went wrong. None of this represents the proper functioning of the market. It represents, instead, a market pulled out of shape by interventionism. Let us now look at the importance of allowing the market to set prices. Friedrich Hayek, the Nobel laureate and student of von Mises, put this very well. Economists in the early part of the 20th century liked to talk about the “given” data. Hayek argued that in fact data were never “given” in that easy fashion, since in a complex economy information is complex and dispersed. No one person sees it all or sees all its connections and ramifications. On this basis Hayek created his theory of pricing.
Prices, in a free market, act as a guide to behavior. They enable individuals to make decisions about the resources they have at their disposal in order to achieve whatever goals they have set themselves. However, an individual can only make these decisions freely if he/she is completely free and secure in the possession of those resources. Security of private property, in other words, is fundamental. The proper role of government is to protect individual freedom by ensuring private property rights, whether that property is money, land, a business, or the proceeds from a business. So prices, produced by the operation of a free market, and the security of private property, which gives people an incentive to engage in the market, are the foundations for a thriving capitalist society. Insofar as we move away from this, we start to destroy the foundations that make capitalism possible.