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A. The Problem of Growth
In recent years economists and journalists alike have been heavily emphasizing a new concept—”growth,” and much economic writing is engaged in a “numbers game” on what percentage, or “rate of growth,” “we” should have next year or in the next decade. The discussion is replete with comparisons of the higher rate of country X which “we” must hurriedly counter, etc. Amidst all the interest in growth, there are many grave problems which have hardly been touched upon. First and foremost is the simple query: “What is so good about growth?” The economists, discoursing scientifically about growth, have illegitimately smuggled an ethical judgment into their science—an ethical judgment that remains unanalyzed, as if it were self-evident. But why should growth be the highest value for which we can strive? What is the ethical justification? There is no doubt about the fact that growth, taken over as another dubious metaphor from biology, “sounds” good to most people, but this hardly constitutes an adequate ethical analysis. Many things are considered as good, but on the free market every man must choose between different quantities of them and the price for those forgone. Similarly, growth, as we shall presently see, must be balanced and weighed against competing values. Given due consideration, growth would be considered by few people as the only absolute value. If it were, why stop at 5 percent or 8 percent growth per year? Why not 50 percent?
It is completely illegitimate for the economist qua economist simply to endorse growth. What he can do is to contrast what growth means in various social conditions. In a free market, for example, every person chooses how much future growth he wants as compared to present consumption. “Growth,” i.e., a rise in future living standards, can be achieved, as we have implicitly made clear throughout this volume, only in a few definable ways. Either more and better resources can be found, or more and better people can be born, or technology improved, or the capital goods structure must be lengthened and capital multiplied. In practice, since resources need capital to find and develop them, since technological improvement can be applied to production only via capital investment, since entrepreneurial skills act only through investments, and since an increased labor supply is relatively independent of short-run economic considerations and can backfire in Malthusian fashion by lowering per capita output, the only viable way to growth is through increased saving and investment. On the free market, each individual decides how much he wants to save—to increase his future living standards —as against how much he wants to consume in the present. The net resultant of all these voluntary individual decisions is the nation's or world's rate of capital investment. The total is a reflection of the voluntary, free decisions of every consumer, of every person. The economist, therefore, has no business endorsing “growth” as an end; if he does so, he is injecting an unscientific, arbitrary value judgment, especially if he does not present an ethical theory in justification. He should simply say that, in a free market, everyone gets as much “growth” as he chooses to obtain; and that, furthermore, the people as a whole benefit greatly from the voluntary savings of others who do the saving and investing.
What happens if the government decides, either by subsidies or by direct government ownership, to try to spur the social rate of growth? Then, the economist should point out, the entire situation changes. No longer does each person elect to “grow” as he thinks best. Now, with compulsory saving and investing, investment can come only at the expense of the forced saving of some individuals. In short, if A, B, and C “grow” because their standard of living rises from compulsory investment, they do so at the expense of D, E, and F, the ones who were compelled to save. No longer can we say that the social standard of living, the standard of living of each active person, rises; under compulsory growth, some people—the coerced savers—clearly and demonstrably lose. They “grow” backward. Here is one reason why government intervention can never raise society's rate of “growth.” For when individuals act freely on the market, every one of their actions benefits everyone, and so growth is truly “social,” i.e., participated in by everyone in the society. But when government acts to force growth, it is only some who grow at the expense of the retrogression of others. The Wertfrei economist is therefore not permitted to say that “society” grows at all.
Growth, therefore, is demonstrably not the single absolute value for anyone. People on the market all weigh growth against present consumption, just as they weigh work against leisure, and all goods against one another. If we fully realize that there is no such existent entity as “society” apart from individuals, it becomes clear that “society” cannot grow at the expense of imposing losses on some or most of its members. Suppose, for example, that a community exists where the bulk of the population do not want to “grow”; they would rather not work very hard or save very much; instead they would loll under the trees, pick berries, and play games. To advocate the government's coming on the scene and forcing these people to work and save, in order to “grow” at some time in the future, means to advocate the compulsory lowering of the standard of living of the bulk of the populace in the present and near future. Any sort of achieved production, under this scheme, however great, would not be “growth” for society; instead it would be retrogression, not only for some but for most people. An economist, therefore, cannot scientifically advocate compulsory growth, for what he is really doing is attempting to impose his own ethical views (e.g., more hard work and saving is better than more leisure and berries) on the other members of society by force. These members greatly lose utility as a result.
Furthermore, it must be emphasized again that in cases of coerced saving the saver reaps none of the benefit of his sacrifice, which is instead reaped by government officials or other beneficiaries. This contrasts to the free market, where people save and invest precisely because they will reap some tangible and desired rewards.
In a regime of coerced growth, then, “society” cannot grow, and conditions are totally different from those of the free market. Indeed, what we have is a form of the “free rider” argument against the free market and for government; here the various “free riders” band together to force other people to be thrifty so that the former can benefit.76
Even if we set these problems aside, it is doubtful how much the coercing free riders can benefit from these measures. Many considerations treated above now come into play. In the first place, the growth and success of the compulsory free riders discourage production and shift more and more people and energy from production to the exploitation of production, i.e., to compulsory free riding. Secondly, we have seen that if government itself does the “investing” out of the confiscated savings of others, the result, for many reasons, is not genuine investment, but waste assets. The capital built out of coerced savings, then, instead of benefiting the consumers, is largely wasted and dissipated. Even if government uses the money to subsidize various private investments, the results are still grave; for these investments, being uneconomic in relation to genuine consumers’ demand and profit-and-loss signals on the market, will constitute malinvestment. Once the government removed its subsidies and let all capital compete equally in serving consumers, it is doubtful how much of this investment would survive.
Although we have no intention of dealing here to any extent with an empirical problem like Soviet economic growth, we may illustrate our analysis by noting the hullabaloo that has been raised in recent years over the supposedly enormous rate of Soviet growth. Curiously, one finds that the “growth” seems to be taking place almost exclusively in capital goods, such as iron and steel, hydroelectric dams, etc., whereas little or none of this growth ever seems to filter down to the standard of living of the average Soviet consumer. The consumer's standard of living, however, is the be-all and end-all of the entire production process. Production makes no sense whatever except as a means to consumption. Investment in capital goods means nothing except as a necessary way station to increased consumption. When capital investment takes place in the free market, it deprives no one of consumption goods; for those save who voluntarily choose investment over some present consumption. No one is required to sacrifice present consumption who does not wish to do so. As a result, the standard of living of everyone rises continually and smoothly as investment increases. But a Soviet or other system of compulsory investment lowers the standard of living of almost everyone, certainly in the near future. And there is every indication that the “pie-in-the-sky” day when living standards finally rise almost never arrives. In short, government “investment,” as we have noted above, turns out to be a peculiar form of wasteful “consumption” by government officials.77
There is another consideration that reinforces our conclusion. Professor Lachmann has been diligently reminding us of what economists generally forget: that “capital” is not just a homogeneous blob that can be added to or subtracted from. Capital is an intricate, delicate, interweaving structure of capital goods. All of the delicate strands of this structure have to fit, and fit precisely, or else malinvestment occurs. The free market is almost an automatic mechanism for such fitting; and we have seen throughout this volume how the free market, with its price system and profit-and-loss criteria, adjusts the output and variety of the different strands of production, preventing any one from getting long out of alignment.78 But under socialism or with massive government investment, there is no such mechanism for fitting and harmonizing. Deprived of a free price system and profit and-loss criteria, the government can only blunder along, blindly “investing” without being able to invest properly in the right fields, the right products, or the right places. A beautiful subway will be built, but no wheels will be available for the trains; a giant dam, but no copper for transmission lines, etc. These sudden surpluses and shortages, so characteristic of government planning, are the result of massive malinvestment by the government.79
The current controversy over growth, is, in a sense, the result of a critical error made by “right-wing” economists in their continuing debate with their “left-wing” opponents. Instead of emphasizing freedom and free choice as their highest political end, the rightist economists have stressed the importance of freedom as a utilitarian means of encouraging saving, investment, and therefore, economic growth. We have seen above that conservative opponents of the progressive income tax have often fallen into the trap of treating saving and investment as somehow a greater and higher good than consumption, and therefore of implicitly criticizing the free market's saving/consumption ratio. Here we have another example of the same lapse into an implicit, arbitrary criticism of the market. What the modern “leftist” proponents of compulsory growth have done is to use the venerable arguments of the conservatives as a boomerang against them, and to say, in effect, to their opponents: “Very well. You have been maintaining that saving and investment are of critical importance because they lead to growth and economic progress. Fine; but, as you yourselves implicitly grant, the free market's proportion of saving and investment is really too slow. Why then rely upon it? Why not speed up growth by using government to coerce even more saving and investment, to speed up capital further?” It is evident that conservatives cannot counter by reiterating their familiar arguments. The proper comment here is the analysis we have been expounding—in short: (a) By what right do you maintain that people should grow faster than they voluntarily wish to grow? (b) Compulsory growth will not benefit the whole of society as will freely chosen growth, and it is therefore not “social growth”; some will gain—and gain at some distant date—at the expense of the retrogression of others. (c) Government investment or subsidized investment is either malinvestment or not investment at all, but simply waste assets or “consumption” of waste for the prestige of government officials.
What, in point of fact, is economic “growth”? Any proper definition must surely encompass an increase of economic means available for the satisfaction of people's ends—in short, increased satisfactions of people's wants, or as P.T. Bauer has put it, “an increase in the range of effective alternatives open to people.” On such a definition, it is clear that compulsory saving, with its imposed losses and restrictions on people's effective choices, cannot spur economic growth; and also that government “investment,” with its neglect of voluntary private consumption as its goal, can hardly be said to add to people's alternatives. Quite the contrary.80
Finally, the very term “growth” is an illegitimate import of a metaphor from biology into human action.81 “Growth” and “rate of growth” connote some sort of automatic necessity or inevitability and have for many people a value-loaded connotation of something self-evidently desirable.82
Concomitantly with the hubbub about growth there has developed an enormous literature about the “economics of underdeveloped countries.” We can here note only a few considerations. First, contrary to a widespread impression, “neoclassical” economics applies just as fully to underdeveloped as to any other countries. In fact, as P. T. Bauer has often stressed, the economic discipline is in some ways sharper in less developed countries because of the extra option that many people have of reverting from a monetary to a barter economy. An underdeveloped country can grow only in the same ways as a more advanced country: largely via capital investment. The economic laws which we have adumbrated throughout this volume are independent of the specific content of any community's or nation's economy, and therefore independent of its level of development. Secondly, underdeveloped countries are especially prone to the wasteful, dramatic, prestigious government “investment” in such projects as steel mills or dams, as contrasted with economic, but undramatic, private investment in improved agricultural tools.83,84
Thirdly, the term “underdeveloped” is definitely value-loaded to imply that certain countries are “too little” developed below some sort of imposed standard. As Wiggins and Schoeck point out, “undeveloped” would be a more objective term.85
Because of its spectacular burst of popularity, something must here be said of the recent “stages of economic growth” doctrine of Professor Rostow. Highly recommended as “the answer to Marx” (as if Marx had never been “answered” before), Rostow divines five stages of economic growth through which each modern nation passes; these center around the “take-off” and include “preconditions” of take-off, drive from take-off to “maturity,” and, as the final stage, “high mass-consumption.”86 In addition to committing the common fallacy of assuming some sort of automatic rate of “growth,” Rostow adds many others of his own, among which are the following: (a) the resumption of the futile modern search for nonexistent “laws of history”; (b) the discovery of such “laws” by way of that hoary fallacy of late nineteenth-century German thought, “stages of history,” with each arbitrary stage somehow destined to evolve automatically into the next; (c) the undue stress—here, as in other ways, closer to Marx than most critics realize—on sheer technology as the fons et origo of economic development; (d) the deliberate mixing of government and private firms as equally capable of “entrepreneurship”; and (e) reliance on the fallacious concept of “social overhead capital,” which must be mainly supplied by the government before “take-off” is achieved. Actually, as we have seen, there are not different stages of economy, each subject to its own laws, but one single economics which applies to any level of development and explains any degree of “growth.” Rostow's final stage of “high mass consumption” is particularly open to question. What was more characteristic of the early, “take-off” stage of the Industrial Revolution in Britain than precisely the shift of production toward mass consumption of cheap, factory-made textile goods? Mass consumption was a feature of the Industrial Revolution from the beginning; it is not, contrary to a popular myth, some sort of new condition of the 1950's.87,88
- 76. This is the first line of argument for government intervention analyzed in Appendix B below.
- 77. In many cases, these “investments” are not simply bureaucratic errors; they pay welcome gains to government officials in “prestige.” Every “underdeveloped” government seems to insist on its steel mill or its dam, for example, regardless whether it is economic or not (therefore usually not). As Professor Friedman astutely points out:
The Pharaohs raised enormous sums of capital to build the Pyramids; this was capital formation on a grand scale; it certainly did not promote economic development in the fundamental sense of contributing to a self-sustaining growth in the standard of life of the Egyptian masses. Modern Egypt has under government auspices built a steel mill; this involves capital formation; but it is a drain on the economic resources of Egypt ... since the cost of making steel in Egypt is very much greater than the cost of buying it elsewhere; it is simply a modern equivalent of the Pyramids, except that maintenance expenses are higher. (Milton Friedman, “Foreign Economic Aid: Means and Objectives,” Yale Review, Summer, 1958, p. 505)
- 78. Cf. L.M. Lachmann, Capital and Its Structure. Also see P.T. Bauer and B.S. Yamey, The Economics of Under-Developed Countries (London: James Nisbet and Co., 1957), pp. 129 ff.
- 79. On the subject of compulsory saving and government investment, see the noteworthy article of P.T. Bauer, “The Political Economy of Non-Development” in James W. Wiggins and Helmut Schoeck, eds., Foreign Aid Re-examined (Washington, D.C.: Public Affairs Press, 1958), pp. 129–38. Bauer writes:
... if development has meaning as a desirable process, it must refer to an increase in desired output. Governmental collection and investment of saving effect production which is not subject to the test of voluntary purchase at market price. ... Increased output through this method is at best an ambiguous indicator of economic improvement. ... If the capital is not provided voluntarily, this suggests that the population prefers an alternative use of resources, whether current consumption or other forms of investment. (Ibid., pp. 133–34)
- 80. P.T. Bauer, Economic Analysis and Policy in Underdeveloped Countries (Durham, N.C.: Duke University Press, 1957), pp. 113 ff. On Soviet economic growth Bauer and Yamey make this salutary comment:
The meaning of national income, industrial output and capital formation is also debatable in an economy when so large a part of output is not governed by consumers’ choices in the market; the difficulties of interpretation are particularly obvious in connection with the huge capital expenditure undertaken by government without reference to the valuation of output by consumers. (Bauer and Yamey, Economics of Under-Developed Countries, p. 162)Also see Friedman, “Foreign Economic Aid,” p. 510.
- 81. For a critique of various metaphors illegitimately and misleadingly imported from the natural sciences into economics, see Rothbard, “The Mantle of Science.”
- 82. The presumably excessive growth of cancerous cells, for example, is generally overlooked.
- 83. The prolific writings of Professor Bauer are a particularly fruitful source of analysis of the problems of the underdeveloped countries. In addition to the references above, see especially Bauer's excellent United States Aid and Indian Economic Development (Washington, D.C.: American Enterprise Association, November, 1959); his West African Trade (Cambridge: Cambridge University Press, 1954); “Lewis’ Theory of Economic Growth,” American Economic Review, September, 1956, pp. 632–41; “A Reply,” Journal of Political Economy, October, 1956, pp. 435–41; and P.T. Bauer and B.S. Yamey, “The Economics of Marketing Reform,” Journal of Political Economy, June, 1954, pp. 210–34.
The following quotation from Bauer's study on India is instructive for its analysis of central planning as well as development:
As a corollary of reserving a large (and increasing) sector of the economy for the government, private enterprise and investment, both Indian and foreign, are banned from a wide range of industrial and commercial activity. These restrictions and barriers affect not only private Indian investment, but also the entry of foreign capital, enterprise and skill, which inevitably retards economic development. Such measures are thus paradoxical in view of the alleged emphasis on economic advance. (Bauer, United States Aid, p. 43) Bauer's chief defect is a tendency to underweigh the role of capital in economic development.
- 84. It is fascinating to discover, in 1925–26, before Soviet Russia became committed to full socialism and coerced industrialization, Soviet leaders and economists attacking central planning and forced industry and calling for economic reliance on private peasantry. After 1926, however, the Soviet planned economy deliberately planned uneconomically for forced heavy industry in order to establish an autarkic socialism. See Edward H. Carr, Socialism In One Country, 1921–1926 (New York: Macmillan & Co., 1958), I, 259 f., 316, 351, 503–13. On the Hungarian experience, see Ray, “Industrial Planning in Hungary,” pp. 134 ff.
- 85. Wiggins and Schoeck, Scientism and Values, p. v. This symposium has many illuminating articles on the whole problem of underdevelop-ment. In addition to the Bauer article cited above, see especially the contributions of Rippy, Groseclose, Stokes, Schoeck, Haberler and Wiggins. Also see the critique of the concept of underdevelopment in Jacob Viner, International Trade and Economic Development (Glencoe, Ill.: Free Press, 1952), pp. 120 ff.
- 86. W.W. Rostow, The Stages of Economic Growth (Cambridge: Cambridge University Press, 1960). Perhaps some of the popularity may be due to the term “take-off,” which is certainly in tune with our aeronautical and space-minded age.
- 87. On the complex of fallacies involved in the search for “laws of history,” see Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957); for a critique of earlier “stage theories” of economic history, see T.S. Ashton, “The Treatment of Capitalism by Historians” in F.A. Hayek, ed., Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 57–62. Some of the fallacies of the “social overhead” concept are refuted in Wilson Schmidt, “Social Overhead Mythology” in Wiggins and Schoeck, Scientism and Values, pp. 111–28, although Schmidt himself clings to several. On the superiority of private over government entrepreneurship and innovation, and in significance for development, see Yale Brozen, “Business Leadership and Technological Change,” American Journal of Economics and Sociology, 1954, pp. 13–30; and Brozen, “Technological Change, Ideology and Productivity,” Political Science Quarterly, December, 1955, pp. 522–42.
Another Rostow fallacy is the adoption of the late nineteenth-century German theory that a strong centralized state was a necessary precondition for the emergence of Western capitalism. For a partial critique, see Jelle C. Riemersma, “Economic Enterprise and Political Powers After the Reformation,” Economic Development and Cultural Change, July, 1955, pp. 297–308.
Finally, for a keen and pioneering discussion of many aspects of coerced development, see S. Herbert Frankel, The Economic Impact of Under-Developed Societies (Oxford: Basil Blackwell, 1953). For a contrasting case study of the free-market road to development, see F.C. Benham, “The Growth of Manufacturing in Hong Kong,” International Affairs, October, 1956, pp. 456–63.
- 88. For a critique of Rostow, stressing his mechanistic view of history and a technological determinism that neglects the vital ideas creating technology and political institutions, see David McCord Wright, “True Growth Must Come Through Freedom,” Fortune, December, 1959, pp. 137–38, 209–12.