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Planning for Freedom

May 31, 2005

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[Address delivered before the American Academy of Political and Social Science, Philadelphia, Pa., March 30, 1945, and reprinted in Planning for Freedom]

1. Planning as a Synonym for Socialism

The term "planning" is mostly used as a synonym for socialism, communism, and authoritarian and totalitarian economic management. Sometimes only the German pattern of socialism—Zwangswirtschaft—is called planning, while the term socialism proper is reserved for the Russian pattern of outright socialization and bureaucratic operation of all plants, shops, and farms.

At any rate, planning in this sense means all-around planning by the government and enforcement of these plans by the police power. Planning in this sense means full government control of business. It is the antithesis of free enterprise, private initiative, private ownership of the means of production, market economy, and the price system. Planning and capitalism are utterly incompatible. Within a system of planning, production is conducted according to the government's orders, not according to the plans of capitalists and entrepreneurs eager to profit by best filling the wants of the consumers.

But the term planning is also used in a second sense. Lord Keynes, Sir William Beveridge, Professor Hansen, and many other eminent men assert that they do not want to substitute totalitarian slavery for freedom. They declare that they are planning for a free society. They recommend a third system, which, as they say, is as far from socialism as it is from capitalism, which, as a third solution of the problem of society's economic organization, stands midway between the two other systems, and while retaining the advantages of both, avoids the disadvantages inherent in each.

2. Planning as a Synonym for Interventionism

These self-styled progressives are certainly mistaken when they pretend that their proposals are new and unheard of. The idea of this third solution is very old indeed, and the French have long since baptized it with a pertinent name; they call it interventionism. Hardly anybody can doubt that history will link the idea of social security, more closely than with the American New Deal and with Sir William Beveridge, with the memory of Bismarck whom our fathers did not precisely describe as a liberal.

All the essential ideas of present-day interventionist progressivism were neatly expounded by the supreme brain-trusters of imperial Germany, Professors Schmoller and Wagner, who at the same time urged their Kaiser to invade and to conquer the Americas. Far be it from me to condemn any idea only on account of its not being new. But as the progressives slander all their opponents as old-fashioned, orthodox, and reactionary, it is expedient to observe that it would be more appropriate to speak of the clash of two orthodoxies; the Bismarck orthodoxy versus the Jefferson orthodoxy.

3. What Interventionism or Mixed Economy Means

Before entering into an investigation of the interventionist system of a mixed economy, two points must be clarified:

First: 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. When it is attempted to mitigate or to eliminate this dependence by covering the losses of such enterprises with subsidies out of public funds, the only result is a shifting of this dependence somewhere else. This is because the means for the subsidies have to be raised somewhere. They may be raised by collecting taxes. But the burden of such taxes has its effects on the public, not on the government collecting the tax. It is the market, and not the revenue department, which decides upon whom the tax falls and how it affects production and consumption. The market and its inescapable law are supreme.

4. Two Patterns of Socialism

Second: There are two different patterns for the realization of socialism. The one pattern—we may call it the Marxian or Russian pattern—is purely bureaucratic. All economic enterprises are departments of the government just as the administration of the army and the navy or the postal system. Every single plant, shop, or farm, stands in the same relation to the superior central organization as does a post office to the office of the Postmaster General. The whole nation forms one single labor army with compulsory service; the commander of this army is the chief of state.

The second pattern—we may call it the German or Zwangswirtschaft system—differs from the first one in that it, seemingly and nominally, maintains private ownership of the means of production, entrepreneurship, and market exchange. So-called entrepreneurs do the buying and selling, pay the workers, contract debts and pay interest and amortization. But they are no longer entrepreneurs. In Nazi Germany they were called shop managers or Betriebsfuhrer. The government tells these seeming entrepreneurs what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. The government decrees at what wages laborers should work and to whom and under what terms the capitalists should entrust their funds. Market exchange is but a sham. As all prices, wages, and interest rates are fixed by the authority, they are prices, wages, and interest rates in appearance only; in fact they are merely quantitative terms in the authoritarian orders determining each citizen's income, consumption, and standard of living. The authority, not the consumers, directs production. The central board of production management is supreme; all citizens are nothing but civil servants. This is socialism, with the outward appearance of capitalism. Some labels of the capitalistic market economy are retained, but they signify here something entirely different from what they mean in the market economy.

It is necessary to point out this fact to prevent a confusion of socialism and interventionism. The system of hampered market economy or interventionism differs from socialism by the very fact that it is still a market economy. The authority seeks to influence the market by the intervention of its coercive power, but it does not want to eliminate the market altogether. It desires that production and consumption should develop along lines different from those prescribed by the unhindered market, and it wants to achieve its aim by injecting into the working of the market orders, commands, and prohibitions for whose enforcement the police power and its apparatus of coercion and compulsion stand ready. But these are isolated interventions; their authors assert that they do not plan to combine these measures into a completely integrated system which regulates all prices, wages, and interest rates, and which thus places full control of production and consumption in the hands of the authorities.

5. Only Method of Permanently Raising Wage Rates for All

The fundamental principle of those truly liberal economists who are nowadays generally abused as orthodox, reactionaries, and economic royalists, is this: There are no means by which the general standard of living can be raised other than by accelerating the increase of capital as compared with population. All that good government can do to improve the material well-being of the masses is to establish and to preserve an institutional setting in which there are no obstacles to the progressive accumulation of new capital and its utilization for the improvement of technical methods of production. The only means to increase a nation's welfare is to increase and to improve the output of products. The only means to raise wage rates permanently for all those eager to earn wages is to raise the productivity of labor by increasing the per-head quota of capital invested and improving the methods of production. Hence, the liberals conclude that the economic policy best fitted to serve the interests of all strata of a nation is free trade both in domestic business and in international relations.

The interventionists, on the contrary, believe that government has the power to improve the masses' standard of living partly at the expense of the capitalists and entrepreneurs, partly at no expense at all. They recommend the restriction of profits and the equalization of incomes and fortunes by confiscatory taxation, the lowering of the rate of interest by an easy money policy and credit expansion, and the raising of the workers' standard of living by the enforcement of minimum wage rates. They advocate lavish government spending. They are, curiously enough, at the same time in favor of low prices for consumers' goods and of high prices for agricultural products.

The liberal economists, that is, those disparaged as orthodox, do not deny that some of these measures can, in the short run, improve the lot of some groups of the population. But, they say, in the long run they must produce effects which, from the point of view of the government and the supporters of its policies, are less desirable than the previous state of affairs they wanted to alter. These measures are, therefore, when judged from the point of view of their own advocates, contrary to purpose.

6. Interventionism the Cause of Depression

It is true, many people believe that economic policy should not bother at all about long-run consequences. They quote a dictum of Lord Keynes: "In the long run we are all dead." I do not question the truth of this statement; I even consider it as the only correct declaration of the neo-British Cambridge school. But the conclusions drawn from this truism are entirely fallacious. The exact diagnosis of the economic evils of our age is: we have outlived the short-run and are suffering from the long-run consequences of policies which did not take them into consideration. The interventionists have silenced the warning voices of the economists. But things developed precisely as these much abused orthodox scholars had predicted. Depression is the aftermath of credit expansion; mass unemployment prolonged year after year is the inextricable effect of attempts to keep wage rates above the level which the unhampered market would have fixed. All those evils which the progressives interpret as evidence of the failure of capitalism are the necessary outcome of allegedly social interference with the market. It is true that many authors who advocated these measures and many statesmen and politicians who executed them were impelled by good intentions and wanted to make people more prosperous. But the means chosen for the attainment of the ends aimed at were inappropriate. However good intentions may be, they can never render unsuitable means any more suitable.

It must be emphasized that we are discussing means and measures, not ends. The matter at issue is not whether the policies advocated by the self-styled progressives are to be recommended or condemned from any arbitrary preconceived point of view. The essential problem is whether such policies can really attain the ends aimed at.

It is beside the mark to confuse the debate by referring to accidental and irrelevant matters. It is useless to divert attention from the main problem by vilifying capitalists and entrepreneurs and by glorifying the virtues of the common man. Precisely because the common man is worthy of all consideration, it is necessary to avoid policies detrimental to his welfare.

The market economy is an integrated system of intertwined factors that mutually condition and determine one another. The social apparatus of coercion and compulsion, i.e., the state, certainly has the might to interfere with the market. The government or agencies in which the government, either by legal privilege or by indulgence, has vested the power to apply violent pressure with impunity, are in a position to decree that certain market phenomena are illegal. But such measures do not bring about the results which the interfering power wants to attain. They not only render conditions more unsatisfactory for the interfering authority. They disintegrate the market system altogether, they paralyze its operation, they bring about chaos.

If one considers the working of the market system as unsatisfactory, one must try to substitute another system for it. This is what the socialists aim at. But socialism is not the subject matter of this meeting's discussion. I was invited to deal with interventionism, i.e., with various measures designed to improve the operation of the market system, not to abolish it altogether. And what I contend is that such measures must bring about results which from the point of view of their supporters are more undesirable than the previous state of affairs they wanted to alter.

7. Marx Condemned Interventionism

Karl Marx did not believe that government or trade union interference with the market can attain the beneficial ends expected. Marx and his consistent followers condemned all such measures in their frank language as reformist nonsense, capitalist fraud, and petty-bourgeois idiocy. They called the supporters of such measures reactionaries. Clemenceau was right when he said: "One is always a reactionary in somebody's opinion."

Karl Marx declared that under capitalism all material goods and likewise labor are commodities, and that socialism will abolish the commodity character both of material goods and of labor. The notion "commodity character" is peculiar to the Marxian doctrine; it was not used before. Its meaning is that goods and labor are negotiated on markets, are sold and bought on the basis of their value. According to Marx the commodity character of labor is implied in the very existence of the wages system. It can disappear only at the "higher stage" of communism as a consequence of the disappearance of the wages system and of payment of wage rates. Marx would have ridiculed the endeavors to abolish the commodity character of labor by an international treaty and the establishment of an International Labor Office and by national legislation and the allocation of money to various national bureaus. I mention these things only in order to show that the progressives are utterly mistaken in referring to Marx and the doctrine of the commodity character of labor in their fight against the economists whom they call reactionary.

8. Minimum Wage Rates Bring About Mass Unemployment

What these old orthodox economists said was this: A permanent rise in wage rates for all people eager to earn wages is only possible as far as the per-head quota of capital invested and concomitantly the productivity of labor increases. It does not benefit the people if minimum wage rates are fixed at a level above that which the unhampered market would have fixed. It does not matter whether this tampering with wage rates is done by government decree or by labor union pressure and compulsion. In either case, the outcome is pernicious to the welfare of a great section of the population.

In an unhampered labor market, wage rates are fixed by the interplay of demand and supply at a level at which all those eager to work can finally find jobs. In a free labor market, unemployment is temporary only, and never affects more than a small fraction of the people. There prevails a continuous tendency for unemployment to disappear. But if wage rates are raised by the interference of government or unions above this level, things change. As long as only one part of labor is unionized, the wage rise enforced by the unions does not lead to unemployment, but to an increased supply of labor in those branches of business where there are no efficient unions or no unions at all. The workers who lost their jobs as a consequence of union policy enter the market of the free branches and cause wages to drop in these branches. The corollary of the rise in wages for organized workers is a drop in wages for unorganized workers. But if fixing of wage rates above the potential market level becomes general, workers losing their jobs cannot find employment in other branches. They remain unemployed. Unemployment emerges as a mass phenomenon prolonged year after year.

Such were the teachings of these orthodox economists. Nobody succeeded in refuting them. It was much easier to abuse their authors. Hundreds of treatises, monographs, and pamphlets sneered at them and called them names. Novelists, playwrights, politicians, joined the chorus. But truth has its own way. It works and produces effects even if party programs and textbooks refuse to acknowledge it as truth. Events have proved the correctness of the predictions of the orthodox economists. The world faces the tremendous problem of mass unemployment.

It is vain to talk about employment and unemployment without precise reference to a definite rate of wages. The inherent tendency of capitalist evolution is to raise real wage rates steadily. This outcome is the effect of the progressive accumulation of capital by means of which technological methods of production are improved. Whenever the accumulation of additional capital stops, this tendency comes to a standstill. If capital consumption is substituted for an increase of capital available, real wage rates must drop temporarily until the checks to a further increase in capital are removed. The malinvestment, i.e., the squandering of capital that is the most characteristic feature of credit expansion and the orgy of the fictitious boom it produces, the confiscation of profits and fortunes, wars and revolutions, are such checks. It is a sad fact that they temporarily lower the masses' standard of living. But these sad facts cannot be brushed away by wishful thinking. There are no other means to remove them than those recommended by the orthodox economists: a sound money policy, thrift in public expenditures, international cooperation for safeguarding durable peace, economic freedom.

9. Traditional Labor Union Policies Harmful to the Worker

The remedies suggested by the unorthodox doctrinaires are futile. Their application makes things worse, not better.

There are well-intentioned men who exhort union leaders to make only moderate use of their powers. But these exhortations are in vain because their authors do not realize that the evils they want to avoid are not due to lack of moderation in the wage policies of the unions. They are the necessary outcome of the whole economic philosophy underlying union activities with regard to wage rates. It is not my task to inquire what good effects unions could possibly bring about in other fields, for instance in education, professional training, and so on. I deal only with their wage policies. The essence of these policies is to prevent the unemployed from finding jobs by underbidding union rates. This policy splits the whole potential labor force into two classes: the employed who earn wages higher than those they would have earned on an unhampered labor market, and the unemployed who do not earn anything at all. In the early thirties money wage rates in this country dropped less than the cost of living. Hourly real wage rates increased in the midst of a catastrophic spread of unemployment. For many of those employed, the depression meant a rise in the standard of living, while the unemployed were victimized. The repetition of such conditions can only be avoided by entirely discarding the idea that union compulsion and coercion can benefit all those eager to work and to earn wages. What is needed is not lame warnings. One must convince the workers that the traditional union policies do not serve the interests of all, but only those of one group. While in individual bargaining the unemployed virtually have a voice, they are excluded in collective bargaining. The union officers do not care about the fate of non-members and especially not about that of beginners eager to enter their industry.

Union rates are fixed at a level at which a considerable part of available manpower remains unemployed. Mass unemployment is not proof of the failure of capitalism, but the proof of the failure of traditional union methods.

The same considerations apply to the determination of wage rates by government agencies or by arbitration. If the decision of the government or the arbitrator fixes wage rates at the market level, it is superfluous. If it fixes wage rates at a higher level, it produces mass unemployment.

The fashionable panacea suggested, lavish public spending, is no less futile. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from commercial banks, it means credit expansion and inflation. Then the prices of all commodities and services must rise, whatever the government does to prevent this outcome.

If in the course of an inflation the rise in commodity prices exceeds the rise in nominal wage rates, unemployment will drop. But what makes unemployment shrink is precisely the fact that real wage rates are falling. Lord Keynes recommended credit expansion because he believed that the wage earners will acquiesce in this outcome; he believed that "a gradual and automatic lowering of real wage rates as a result of rising prices" would not be so strongly resisted by labor as an attempt to lower money wage rates. It is very unlikely that this will happen. Public opinion is fully aware of the changes in purchasing power and watches with burning interest the movements of the index of commodity prices and of cost of living. The substance of all discussions concerning wage rates is real wage rates, not nominal wage rates. There is no prospect of outsmarting the unions by such tricks.

But even if Lord Keynes' assumption were correct, no good could come from such a deception. Great conflicts of ideas must be solved by straight and frank methods; they cannot be solved by artifices and makeshifts. What is needed is not to throw dust into the eyes of the workers, but to convince them. They themselves must realize that the traditional union methods do not serve their interests. They themselves must abandon of their own accord policies that harm both them and all other people.

10. The Social Function of Profit and Loss

What those allegedly planning for freedom do not comprehend is that the market with its prices is the steering mechanism of the free enterprise system. Flexibility of commodity prices, wage rates and interest rates is instrumental in adapting production to the changing conditions and needs of the consumers and in discarding backward technological methods. If these adjustments are not brought about by the interplay of the forces operating on the market, they must be enforced by government orders. This means full government control, the Nazi Zwangswirtschaft. There is no middle way. The attempts to keep commodity prices rigid, to raise wage rates and to lower interest rates ad libitum only paralyze the system. They create a state of affairs which does not satisfy anybody. They must be either abandoned by a return to freedom of the market, or they must be completed by pure and undisguised socialism.

The inequality of income and fortunes is essential in capitalism. The progressives consider profits as objectionable. The very existence of profits is in their eyes a proof that wage rates could be raised without harm to anybody else than idle parasites. They speak of profit without dealing with its corollary, loss. Profit and loss are the instruments by means of which the consumers keep a tight rein on all entrepreneurial activities. A profitable enterprise tends to expand, an unprofitable one tends to shrink. The elimination of profit renders production rigid and abolishes the consumers' sovereignty. This will happen not because the enterprisers are mean and greedy, and lack these monkish virtues of self-sacrifice which the planners ascribe to all other people. In the absence of profits the entrepreneurs would not learn what the wants of the consumers are, and if they were to guess, they would not have the means to adjust and to expand their plants accordingly. Profits and loss withdraw the material factors of production from the hands of the inefficient and convey them into the hands of the more efficient. It is their social function to make a man the more influential in the conduct of business the better he succeeds in producing commodities for which people scramble.

It is therefore beyond the point to apply to profits the yardstick of personal merit or happiness. Of course, Mr. X would probably be as happy with 10 million as with 100 million. From a metaphysical point of view, it is certainly inexplicable why Mr. X should make 2 million a year, while the Chief Justice or the nation's foremost philosophers and poets make much less. But the question is not about Mr. X; it is about the consumers. Would the consumers be better and more cheaply supplied if the law were to prevent the most efficient entrepreneurs from expanding the sphere of their activities? The answer is clearly in the negative. If the present tax rates had been in effect from the beginning of our century, many who are millionaires today would live under more modest circumstances. But all those new branches of industry which supply the masses with articles unheard of before would operate, if at all, on a much smaller scale, and their products would be beyond the reach of the common man.

The market system makes all men in their capacity as producers responsible to the consumer. This dependence is direct with entrepreneurs, capitalists, farmers, and professional men, and indirect with people working for salaries and wages. The economic system of the division of labor, in which everybody provides for his own needs by serving other people, cannot operate if there is no factor adjusting the producers' efforts to the wishes of those for whom they produce. If the market is not allowed to steer the whole economic apparatus, the government must do it.

11. A Free Market Economy Best Serves the Common Man

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The socialist plans are absolutely wrong and unrealizable. This is another subject. But the socialist writers are at least clear-sighted enough to see that simply to paralyze the market system results in nothing but chaos. When they favor such acts of sabotage and destruction, they do so because they believe that the chaos brought about will pave the way for socialism. But those who pretend that they want to preserve freedom, while they are eager to fix prices, wage rates, and interest rates at a level different from that of the market, delude themselves. There is no other alternative to totalitarian slavery than liberty. There is no other planning for freedom and general welfare than to let the market system work. There is no other means to attain full employment, rising real wage rates and a high standard of living for the common man than private initiative and free enterprise.


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