Mises Daily

Home | Library | New Economic Reform in Freeworld

New Economic Reform in Freeworld

April 18, 2012

Tags Free MarketsMedia and Culture

Peter named the territory over which he ruled Freeworld. He was installed in Washington in a decrepit, smelly old building which someone, evidently with a fine sense of irony, had once named The White House. This, he was told, was where the old capitalist emperors used to live.

"Alone?" he asked — "with all this floor space?"

He assigned apartments in it to Adams and other officials.

"I am going to introduce my new economic reform immediately," he told Adams.

"We can't afford any such diversion now," Adams protested. "The first thing to do is to prosecute the war against Bolshekov. We have the planes and the trained aviation personnel; but he still has the factories. He will immediately build up a new air force. What we must do is to set up airplane factories, motor works, aluminum smelters. We must build up an army, a navy, a merchant marine. We must expand steel capacity — "

"I know, I know," said Peter. "You are entirely right. But it will take several years for Bolshekov to build up an air force to challenge the one we already have. And it will certainly take years for us to do what you propose. My reforms, instead of diverting us, will enable us to do all these things faster."

Adams shrugged his shoulders resignedly.

Peter delivered his first Freeworld radio speech. He announced his new reform.

But it was one thing to declare that there would be "private ownership of the means of production." It was quite another thing to work out the details. It was all very well to say that the individual worker would hereafter own his own hammer, sickle, plow, saw, or paintbrush. But what about a great machine on which many men worked? Especially if it was an integral part of a whole set of machines constituting a factory? Could each worker own a different part of the machine? Could each worker own a specific part of a whole factory — one a part of the roof, another a part of a floor, another a window? What would happen if one worker quarreled with the others and wanted to take his particular piece of the factory away with him?

"The problem is insoluble," said Adams. "The factories, the railroads, the means of production must be owned in common."

Peter refused to give up. He thought at last of a solution.

A factory, a locomotive, any great machine whatever, was a unit. It couldn't be broken up into pieces to be owned separately. But it could be owned jointly, and not necessarily by everybody in Freeworld. It could be owned simply by those who actually had to do with its operation.

"My idea is wonderfully simple, Adams," Peter explained. "Suppose, for example, there are a hundred workers in a textile factory, including the managerial force. Then the ownership of that factory would be divided among the hundred workers. Each would own one-hundredth as his share — "

"Just as I said, chief. The ownership would have to be in common."

"Let me finish, Adams. There would be an enormous difference. These hundred workers wouldn't have to wait for orders from a central point, perhaps hundreds or thousands of miles away, to learn precisely what they could make in their factory. They could do what they saw had to be done by their managers on the actual spot — "

"But if we don't have central planning, chief — "

"We'll come to that later. I've thought of a wonderful way in which individual ownership can be reconciled with joint ownership, and it combines the advantages of both. Our problem is to divide the ownership of a factory into, say, a hundred parts so that each worker can own an equal share. Yet we don't want to have the factory itself broken up into a hundred parts. And we don't want any owner tied to his share for life. He might want to move away, or he might prefer to own something else instead. So what do we do?"

Adams shrugged his shoulders.

"We give each worker," Peter went on triumphantly, "the right to share in one-hundredth of all the advantages or gains that flow from the ownership and operation of that factory! And we also give him the right to sell that right — to exchange it for anything else he wants instead!"

Adams still looked doubtful.

"And it seems to me that the simplest way to do that, Adams, is to give each worker, say, an engraved certificate, declaring that he has the right to a one-hundredth share in the ownership of the factory. Each one of these certificates would be called a 'share.' Any owner would have the right to exchange his share, if he wanted, for a share of any other factory — or even for consumption goods."

"All that is very ingenious, chief. But I still foresee some serious problems."

"For example?"

"Well, suppose one factory has a hundred workers and a second factory, just as big and just as valuable, has only fifty. You would be giving those in the second factory twice as much value as those in the first."

"We will have to work that out," said Peter. "I suppose we will have to do quite a lot of wild guessing. But we can be thankful that we now have a consumers' goods market."


"Because we may be able to estimate the comparative values of at least some factories by the comparative values and quantities of the consumers' goods they turn out."

"But how about mines, say, turning out raw materials?"

It was Peter's turn to shrug his shoulders. "We can't assure absolute equity. We'll just have to guess. We'll try as far as possible, of course, to give everybody an equal share."

"That's only one of the problems I see," Adams said. "Here's another, just as important. Some people are in factories making shirts. Others are on farms raising tomatoes. Each of these groups, I agree, could form part of joint enterprises that would exchange their products with others. But how about the people who work on making roads? How about the people who repair the sewers? How about firemen? How about policemen? What sort of 'shares' are you going to give them, for example?"

Peter thoughtfully lit a cigarette. "Maybe we'll have to work out something special for them. Maybe for the factory that employed a hundred people, for example, we'd print a hundred and ten shares instead of a hundred, and distribute the extra ten among those outside the factory to whom we couldn't assign any other kind of ownership. Let's call in the statisticians from our new Freeworld Supreme Economic Council and dump the whole problem in their lap."

The statisticians prepared a plan. The work of detailed calculation was assigned to hundreds of regional boards, and by those in turn to hundreds of thousands of individual factories, workshops, stores and collective farms. The detailed calculations became mountainous.

Peter wasn't happy about the plan. It was obviously full of guesswork, and on a wholesale scale. But he could think of no way of removing the guesswork. He had to start somewhere, he decided, somehow.

He approved the plan; and on Adams' advice he put it into operation with a flourish. He proclaimed a Freeworld holiday. There were speeches, bands, parades and fireworks. Every day speakers on the radio, on street corners, in shops and factories, explained the plan. Everyone seemed to tingle with anticipation concerning what he was personally going to own. The general feeling reminded Peter of how he himself used to feel at his childhood birthday parties in Bermuda, to which his mother used to invite his tutors and for which she used to bake a special cake, anyone's slice of which might turn out to contain some special little souvenir or prize.

No sooner was the new distribution made than markets developed in production goods, and even in the "shares" issued to each person. These markets bore a striking similarity to those that had developed in consumption goods when Peter had first permitted freedom of exchange. The shares were traded in on separate "stock exchanges." These began by a few brokers meeting on street corners (nicknamed "curb" markets); but trade soon grew to the point where the brokers met in large rooms with great blackboards on them on which the changing quotations were chalked up.

As with consumer goods, the company shares were at first quoted in terms of the number of cigarette packages for which they would exchange.

Then happened precisely what Peter had feared. He had hoped that all the shares would sell or exchange for approximately the same amounts. Instead, wide discrepancies developed. For some shares people bid two, three or four times as much as for others. Those who had the less valuable shares complained of discrimination.

Peter did his best. He pointed out that nobody was forced to sell, and that every group could make their shares worth more by working harder — or even, if they wished, and if their factories could be converted, by producing different goods from those they were already producing.

One of the first results of the change was a tremendous turnover in managers. Under the communist system, managers were selected for their ideological fervor, for their passion for communism, for their ability to make rousing speeches, for their adroitness in producing excuses for not meeting production quotas, for their docility and subservience, for their meticulous care in making out reports in triplicate or quadruplicate and keeping all paper work neatly in order. But the owner-workers now seemed to care for only one thing. Each group of shareholders wanted a manager who knew how to increase their income and the value of their shares. They threw out every manager who failed — however ingenious his explanation for his failure, or however expert he was in slapping backs and kissing babies — and they chose a manager who they thought knew how to succeed, or who had shown by his record somewhere else that he did know how.

Another result of the private ownership of productive property was that equality of income soon ceased. In the factories, for example, the managers were often rewarded out of all proportion to the rewards of the average worker. The workers in a plant seemed willing to pay their top manager almost any amount — provided only that he could increase the value of their own shares, or the income from their own shares, by an even greater amount. The better the manager, they found, the greater the overall productivity of the plant; and therefore the greater the income to be divided among all of them.

But the quickest and most dramatic results of the new reform were on the land. Here there were few problems of common ownership. The collectives were broken up into smaller units. Usually the land was divided up pro rata, and particular parcels of it were assigned to individual families. It was only where this division would have resulted in individual plots of land obviously too small for economical cultivation that several families would agree to work a larger piece of land in common. But in such cases the plot was usually too small anyway to yield a tolerable living for the several families involved, and in the course of time the others would usually sell their share to some one family. A few former members of the collectives went into the business of owning or working tractors, and renting them out by the day to farms too small to afford to keep them all year round.

The yield per acre of all crops grew amazingly; yet the soil was better conserved than ever. The attitude of the peasants toward their work and toward the land changed completely. They worked as never before. No work seemed like drudgery to them.

They took a pride in their land and developed a love of it such as even Peter had not dreamed to be possible.

When he asked one of these new peasant-proprietors about his changed attitude, his explanation was simple: "The more work I and my family put into the farm, the better off we are. Our work is no longer offset by the laziness and carelessness of others. On the other hand, we can no longer sit back and hope that others will make up for what we fail to do. Everything depends on ourselves."

Another farmer-owner put it this way: "The greater the crop we raise this year, the better off my family will be. But we also have to think of next year and the year after that, so we can't take any risk of exhausting the soil. Every improvement I put into the farm, whether into the soil or into the buildings, is mine; I reap the fruits of it. But there is something that to me is more important still. I am building this for my family; I am increasing the security of my family; I will have something fine to turn over to my children after I am gone. I don't know how I can explain it to you, Your Highness, but since my family has owned this land for itself, and feels secure in its right and title to stay here undisturbed, we feel not only that the farm belongs to us but that we belong to the farm. It is a part of us, and we are a part of it. It works for us, and we work for it. It produces for us, and we produce for it. You may think it is just a thing, but it seems as alive as any of us, and we love it and care for it as if it were a part of ourselves."

"The whole thing is just a miracle," conceded Adams. "If I wanted to coin an aphorism I would say: The magic of private property turns sand into gold."

Meanwhile, fascinating developments began to take place in the new markets for raw materials and for production goods. There was now a market for everything that could be exchanged. There was a market and a price for coal, steel and pig iron, for lead, zinc and copper, for rubber, jute and marble, for cattle, hides and leather, for raw cotton, raw wool and flax, for silver, platinum and gold.

At first the prices of all of these were stated in terms of cigarette packs. But after a few months this system came to seem ridiculous, and broke down. Prices of great quantities of raw materials, and of the precious metals, had to be stated in terms of thousands and thousands of cigarette packs. The demand for cigarette packs as a medium of exchange became far greater than the demand for them for smoking. Cigarette packages began to assume so high a value as a medium of exchange, in fact, that it came to seem criminally wasteful to smoke them — though their use for smoking had been the sole source of their original value.

So people took to using the rare metals as mediums of exchange and common standards for stating high prices or the prices of large-quantity transactions. In some markets silver would be used for this purpose, in others platinum, in still others gold. But it proved troublesome to be constantly translating these prices into each other, especially as the price of each of the metals was constantly changing in relation to the others.

Gradually and almost imperceptibly the habit developed of translating all prices into gold for common comparison. Gold became the medium of exchange for all large transactions. Cigarettes were now used as such a medium only in small transactions. In time the value of cigarettes themselves was commonly stated in terms of gold.

Another curious thing happened. Once gold had established itself as the medium of exchange, it had a higher value in relation to silver and platinum, and to everything else, than it had before.

"How do you think that happened, chief?" asked Adams.

"As nearly as I can make out," said Peter, "the reason is this. The demand for gold as a medium of exchange has now become an additional source of demand above that for ornament, teeth filling, or any of gold's other original uses."

"But why, chief, out of all the commodities, should gold have become the medium of exchange."

"Well, it was obviously an enormous convenience that some one thing should eventually become the common medium of exchange. Such a medium, of course, would have to have certain qualities in order to serve satisfactorily. When you start to think of what these qualities ought to be, as I did the other day, you will find that gold combines them better than practically anything else."

"What qualities are they?" Adams asked.

"Well, before anything can become a medium of exchange, it must have a high measure of acceptability for its own sake. Gold has this. It must have a high value with small bulk, so that it can be easily carried in pockets or easily shipped from place to place. Gold, again. It must not be perishable; it must not evaporate like alcohol, rot like eggs or rust like iron. It must, in short, keep permanently. Gold, again. It mustn't vary in quality, like wheat, eggs, meat or a thousand other things. One part must be as valuable, weight for weight, as any other part, provided it is the same material. Gold, again. It must be easily divisible, so that it can be cut into any desired size without losing value, or pass from hand to hand in any standardized size. Gold, again. It must have stability of value. Gold has this because the current year's production is always small compared with the accumulated stock. It must be easily recognized for what it is, so that it cannot be easily imitated. Most people can tell real gold instantly, because there is nothing quite like it. It is beautiful to look at; it has an unmistakable ring; it is malleable and impressible, and takes a sharp stamp. And, if you wish, you can always make a final acid test."

"Then you don't think, chief, that the emergence of gold as the medium of exchange was a mere accident?"

"It looks much more to me, Adams, like the survival of the fittest."

When gold first began to emerge as the medium of exchange after Peter's reform, it was exchanged in small bars weighing a hundred grams each. These were stamped, marked, cut and assayed by people who now made a regular profession of being "goldsmiths." But soon prices of everything were commonly quoted in terms of grams of gold, or "goldgrams." People did not actually exchange anything as small as a gram of gold, but gradually the goldsmiths began to stamp small round disks of gold of as small a weight as ten grams. One of these was known as a "ten-gram piece." These disks came to be called "coins." After a while, people no longer asked what the value of any other commodity was in terms of gold. The value of any other object was simply stated as its "price" in gold. Later this was simply referred to as its "price." Most of the time, when talking of the "price" of this or that object, people did not even stop to think that this meant its exchange value in relation to a gram of gold. They began to talk of a "goldgram" as if it were something by itself, apart from a specific weight of gold. Instead of referring to gold as a common medium of exchange, by which all goods were exchanged in an indirect or "triangular" way instead of being bartered directly against each other, people simply referred to the coins and the goldgram as "money." The "price" of anything meant its price in money.1

All this came about by such a gradual and apparently spontaneous and automatic process of evolution that few people appreciated its full significance. But Peter realized that a sort of miracle had come about. His two inventions — first, freedom of exchange of consumers' goods, and second, private ownership of the means of production and free exchange of the means of production — had solved the problem of economic calculation! Or rather, they had given rise to a free market system, a free price system. And it was this that had solved the problem of economic calculation.

[This article is excerpted from chapter 32 of Time Will Run Back (1951). For a summary of this science-fiction novel by the great Henry Hazlitt, see "A Tale of the Reinvention of Capitalism " by Edward Wayne Younkins.]


  • 1. The reader is once more reminded that all these terms are merely the nearest English equivalents to those in the original Marxanto, or Revised Marxanto, text. – The Translator.

Follow Mises Institute