Against the Tide

IX

Austerity*

THE INTERNATIONAL CRUSADE AGAINST LUXURY

Not long ago I wanted to buy a new briefcase in a shop in Copenhagen, because my old one was too worn, and I felt it was not a bad idea to buy good quality leather goods in a country famous for its cattle. The shop assistant said he was sorry, but he did not have what I wanted; all he could offer me was a rather dubious substitute, since articles made of genuine cowhide were not sold in Denmark. When I asked with some surprise what happened to all the Danish cowhides, I was told that certainly they were used for the manufacture of briefcases, but that these were a luxury which Denmark could not afford today. Hence they were all exported, and I would surely have no trouble at all buying the best Danish briefcases in Geneva.

Now, as an economist I ought to have known that to begin with. I should have been professionally familiar with the odd game that is being played at present in international trade, in which I had joined in my modest little way by vainly trying to buy a briefcase in Copenhagen. It is not a very new game, since it was fashionable centuries ago in the age of mercantilism. It can be described roughly as follows. Every country takes pride in manufacturing quality products of all kinds, which are not absolutely essential but which we rightly value. Everyone, the rich and the poor, likes these so-called luxury goods and is prepared to work and to save in order to acquire them. But more and more governments take steps to withhold them to the extent possible from their own subjects—I rightly use the word—by exporting the country’s home-produced luxury goods and not admitting any foreign ones. The end result of this international practice is that there are few countries left nowadays where the world’s “luxury goods” can be bought freely or in reasonable quantities. They are not necessarily rich countries, such as the United States or Switzerland, but include also a country like Belgium, which was impoverished and ravaged by the war but, unlike other war-devastated countries, took the road of sound common sense and matter-of-fact hard work.

The reasons usually marshaled to justify this international crusade against luxury look quite plausible. Our country, it is said, is too poor to afford things that are not absolute essentials. Houses and wheat are more necessary than Swiss watches: thus runs this simple philosophy. People accept it all the more readily as—although the demagogues invariably fail to point it out—the good things of this world are in any case so rare that they can be enjoyed only by a minority against whom it is always easy to mobilize envy, suspicion, and self-righteous virtue. And thus nations can only too easily be persuaded not to contradict their governments openly when they do their best to export all the home-produced luxury goods and keep out those produced abroad.

A FEW BASIC MISCONCEPTIONS

All this sounds plausible enough, as I said. No doubt, therefore, many people will be surprised when they have to be told that this philosophy of “austerity” is all wrong. It rests on very insecure, logical arguments, and it leads to measures that are harmful and contradictory. Today’s crusade against “luxury” is one of the strongest among the forces that deprive our civilization of its finest fruits, take the inner mainspring out of life, and pull the nations down more and more to the level of dreary drudgery and “controlled poverty.” For this anti-luxury and big-brother philosophy is unfortunately one of the most effective means by which a bureaucracy suppresses everything, as during the decline of antiquity, and seeks to prove its indispensability and to extend its grip. Yet it is this very bureacracy that constitutes the real luxury that nations can no longer afford, but there are few who have the courage to say it.

Where is the fallacy? The first objection that comes to mind is that it is impossible to define objectively what is a luxury good. Swiss watches are today one of the chief victims of the international crusade against luxury. But who can maintain that first-class timepieces are a luxury in our age that owes so much to the correct measurement of time? Decisions of this kind are the thin end of the wedge for arbitrariness, and, of course, it is common knowledge to what extent the trade policy of governments is today based on arbitrariness.

But the real error lies deeper. It does not really matter whether the government calls something a luxury or not, so long as it is left to us, as adult human beings, to decide whether we can afford it or not. But it is precisely the presumption of modern collectivist bureaucracy that deprives us of this freedom of decision when it bars or restricts the import of certain products with the justification that “the nation” cannot afford this or that. The whole argument against importing “luxury goods” presupposes that bureaucracy knows better than the consumers what is good and useful for the latter, and that it therefore has to take strict measures to make sure that a particular quantity of wheat is imported rather than some other quantity of oranges, or a particular quantity of paper (in large part used by the bureaucracy itself) rather than a certain number of good quality shoes or watches. In other words, the government has the astonishing audacity to require of us that we should prefer its arbitrary list of priorities to our own. It relies on people’s not thinking about such things, simply forgetting that no hungry man or woman would rather have coffee than groats or that consumers wanting new houses above all other things are likely to put their money into dwellings and not into automobiles. When we ask whether a country can “afford” Swiss watches, fine textiles, refrigerators, or good shoes, we are really asking something quite different. What we are really asking is whether the demand for these products on the part of the country’s consumers as a whole is an expression of their preference for these products rather than for others of which the consumers already have enough, or which they regard as less essential. To put it differently: the fact that, in response to the consumers’ orders, private trade imports oranges indicates that a broad class of people, who really ought to know whether oranges are something they want, has come to the conclusion that they can “afford” oranges. These peculiar people are called consumers, and it is for them that providence has caused this delicious fruit to ripen.

All this, I fear, may sound almost improper to persons who specialized in what might be called social prudery. They will wax indignant and inquire how we can claim to equate the interests of the rich with those of the country as a whole, which certainly is poor.

I am very sensitive to this reproach and hasten to repudiate it as unjust. First of all, it has to be said that if the “luxury goods” under discussion are to make any difference at all in the national accounts, they cannot possibly be only goods of interest to the “rich.” But this correction is not enough. It has to be granted, of course, that in the case of a very unequal distribution of income, it is perfectly possible for some people to go hungry in a country while others buy imported oranges. But it is a common fallacy to believe that by prohibiting the import of oranges or refrigerators we feed the hungry, clothe the naked, or give shelter to the homeless. So long as the government does not apply internal social measures that have the effect of correcting the unequal distribution of income and simply skims off the purchasing power standing ready to purchase luxury goods, so long is the prohibition of luxury imports a useless attempt to cure an illness by treating its symptoms. Instead of buying foreign luxury goods, people will now spend their money on home-produced ones. If a British consumer cannot buy a good Swiss watch that will last him for a lifetime, he will turn to, say, whisky, cigarettes, the dog races, or the movies. That this is actually happening is probably common knowledge. It is a fact that under the system of socialist consumer regimentation more money has been spent in Great Britain in recent years on drink, tobacco, and entertainment than ever before.

If restrictions on imports of luxury goods are supposed to force the nation into greater thrift, such a policy is bound to fail because it does not do away with the purchasing power available for the purchase of nonessentials, but merely diverts it into other and most often less desirable channels. To give a really elementary illustration: if a man wants to give his wife a watch for Christmas but is prevented by import restrictions from doing so, it is most unlikely that he will offer her a savings book instead. He will try to get hold of some other luxury article, with which both of them will be less happy. As far as the nation is concerned, the end result will be luxury expenditure in at least the same amount, but with less satisfaction and a less economic use of the national resources.

“BALANCE-OF-PAYMENTS CRISIS”

Up to this point the reader has no doubt followed us readily enough, but perhaps he will think that the real problem has not yet been touched upon. Although import restrictions on luxury goods can hardly help a nation to a more economic use of its resources, is it not the chief merit of these restrictions that they lead to the conutry’s scarce foreign exchange reserves being used as sensibly and economically as possible? This argument, I fear, appears self-evident and irrefutable today to most people, and yet it rests on incomplete and over-simplified conclusions. Any child can understand that if coffee imports are restricted there will be more foreign exchange available for wheat imports, or less exports will be needed for “squaring” the balance of payments. If economics were as simple as that, all the clever books that have been written in the last two hundred years about this problem of the “balance-of-payments crisis” could be pulped. The only trouble is that we have forgotten what is written in those books and what practical experience in these two centuries should have taught us. A little more knowledge of these relationships is needed to understand that mere import restrictions can do just as little to cure a “balance-of-payments crisis” as bloodletting can do for a serious internal disease. To explain this, we will confine ourselves to the following three points.

1. At the time of the great German inflation, economists in Germany talked with justified scorn of the “God-given balance-of-payments deficit.” A so-called balance-of-payments crisis is, in fact, not an isolated accident that suddenly befalls a country’s international economic relations, but, as is at long last being rediscovered today, it is the result of an imbalance in the economy as a whole. It is the external expression of the economic overstrain from which a country suffers, because the simultaneous claims of consumption and investment on productive capacity are too high. This excess of claims is identical with inflationary pressure, which tends to drive up all prices and, hence, also the price of foreign money (the foreign exchange rates). If the government neither prevents this inflationary excess of claims nor allows the price rise to re-establish equilibrium at a higher level, that is, if the government’s policy is one of “repressed inflation,” as we call it, the balance of payments, in its turn, will be subject to heavy strains and in these circumstances (inflationary excess of purchasing power without a new price equilibrium at a higher level) will display the well-known symptom of a scarcity, especially of those foreign currencies that are not as yet subject to the same manipulation (“hard” currencies). The cause of the “balance-of-payments crisis,” therefore, is an excess of claims on national output, an inflationary excess for which the government, and it alone, is responsible. The right treatment for the “crisis” is not to restrict imports, but to cut down on the government program that is responsible for the excess, or else to let foreign exchange rates rise until they fulfill the inherent function of all prices, namely, to balance supply and demand. This is the only effective method, but modern bureaucratic governments like it the least, because it diminishes their bureaucratic establishment and their power.

2. Import restrictions have repercussions that the more ingenuous of their advocates are apt to overlook. The most immediate and important repercussions are felt by exports. Reciprocity is of the essence in trade, and any restriction of imports must sooner or later lead to a fall in exports. This applies to all kinds of goods, essential and inessential alike. When the British government prevents Englishmen from buying a Swiss watch or going to the Alps for a holiday, this measure tends to prevent certain Swiss from ordering a suit of English cloth. This repercussion on exports is instantaneous nowadays in the case of economic relations between soft-currency countries with bilateral economic agreements. In the case of a hard-currency country like Switzerland, the repercussion takes a more roundabout way. But it most certainly will take place eventually. Many governments seem to think that they can go on indefinitely acquiring Swiss francs or gold by free exports to Switzerland, while at the same time keeping out a large part of Swiss export goods under the pretext that they are “luxury articles.” But obviously such a hard-currency country must finally get into a position where it is forced in self-defense to curb imports in its turn, so long as the other countries carry on with their practice. This would mean great hardship for the export industries of such a country, which depends so largely on the export of high-quality goods, and it will be worth remembering at that time that the country owes its plight to an ideology dear to the hearts of collectivists and to the import practices of governments that are keeping out “luxury goods” on principle, as an essential ingredient of their socialist program. It is the height of fatuity to talk of the “chaos of capitalist crisis” in connection with possible difficulties for the Swiss watch industry, as a social democratic paper recently did with hardly veiled glee.

3. There are yet other and highly important repercussions which leave scant grounds for hoping that compulsory import restrictions can overcome a “balance-of-payments crisis.” Most of the war-devastated countries of Europe are basing their reconstruction on the simple idea that, with the help of a gigantic and comprehensive control apparatus, imports are to be compressed to a minimum, while everything that, in the government’s view, the nation can do without should be exported. The idea is that this is the way to reconstitute the country’s real capital as fast as possible. This is the philosophy of “austerity” with which we are concerned here, and we have already mentioned two reasons for its likely failure. Import restrictions and export promotion do not necessarily imply a corresponding net saving on the part of the economy as a whole. Unless the controls are turned into a truly collectivist and total tyranny, which among other things completely abolishes freedom of consumption and work, they will not achieve their purpose. It has to be remembered, furthermore, that the reconstitution of the nation’s real capital depends not only upon what part of a given total product is absorbed by immediate consumption and what part allocated to investment, but it also depends just as much upon the size of the total product. Nothing could be more pointless than a policy that prevents people from buying what they want and at the same time paralyzes their willingness to work, their initiative, and their inclination to save, which cannot thrive except in an atmosphere of freedom, confidence, and optimism. This is precisely the effect of all these European systems of officially dictated “austerity.”

There seems to be a growing awareness today that the countries that put their trust in this all-too-simple reckoning of rigorous import restrictions and artificial export expansion have not been well advised. Why should anyone work hard when his earnings will not buy anything more than the bare necessities and when, therefore, he cannot see what good it will do him to save? This is the sort of reasoning that people are bound to adopt, and quite understandably so. The result is that the country continuously loses on the production account what it may temporarily gain on the foreign trade account. There are, indeed, good reasons for assuming that in the long run the losses on the one account outrun the gains on the other. Except in wartime, when people, too, are in a state of emergency, all efforts to raise output by moral appeals, posters, decorations, or propaganda plays will yield disappointing results. The spectacle of a government conducting a useless publicity campaign for more work or more saving is enough to characterize the country concerned as one in which collectivist economic policy turns the nature of things inside out. Posters like “Work or Want,” or “Save more—Buy less” are warning signals indicating that the country’s economic government is fundamentally wrong. The healthiest and most effective incentive for working as much as feasible is to give people a chance to buy good things or to go abroad on a holiday when they work hard. And it is only when people know that their money will buy something good, not only today but also later, that they will save.

THE LIMITS OF FORCED CAPITAL FORMATION

Among the war-devastated countries of Europe, Belgium stands out as a country that followed the line of sound common sense and, instead of indulging in fashionable “austerity” and pursuing the will-o’-the-wisp of forced capital formation on a gigantic scale, opened its frontiers to consumer goods and thus gave people the necessary incentive to work. It seems that the country did not have cause to regret its decision. Clearly, the Belgians recognized the great danger of forced investment’s creating an inflationary pressure at a time when the warehouses were empty of consumer goods. This is, incidentally, a point most meritoriously underscored in the so-called Harriman Report of November 8, 1947, in which distinguished U. S. economists reported to President Truman on the economic problems of the Marshall Plan. It is stated in this report that many European countries had overextended themselves with their collectivist investment programs and, in spite of their dearth of consumer goods, were aiming at a rate of accumulation far higher even than in the United States. The fully justified advice to these countries is to cut back sharply on their construction and modernization programs until the European economic recovery has made more progress.

But other views still prevail; witness the minister of a Western European country who, last fall, wished to convince another visiting American commission of the soundness of his country’s economy and as the most conclusive evidence conducted the visitors from one building site to the next. More than that, his tactics succeeded. All of us are inclined to think that where something is being built, something useful is being done. But there is no particular merit in building as such; everything depends on whether it fits harmoniously into the economy as a whole. And in this respect the determining factors are, first, whether the total volume of building at a given moment is correct, and, second, whether within this setting the right things are being built. The fact that a country is busy building proves neither the one nor the other, if the country concerned is a collectivist one, where decisions regarding both the total volume of investment and its nature are taken without reference to the consumers. The consumers, of course, are just the people who are not asked what they want, which is no doubt why some collectivists, who have now lost some of their fashionable appeal, with involuntary humor still call such an economic system a “want-satisfaction” economy. The distinguishing feature of such an economy is that consumption can be compressed very much by controls to the benefit of investment, and it is a further distinguishing feature of collectivist systems throughout history that they have always taken advantage of this possibility and always tend toward a combination of maximum investment with minimum consumption. Their rationale is “austerity,” but just as in the past the bon plaisir du prince was eventually hedged in by limitation, so it is becoming obvious today that collectivist-forced capital formation is not all plain sailing. Its limitations are clearly visible today, and they mean that ambitious government programs, drawn up without consideration for natural human reactions, must be cut back.

“Austerity” is bad economics and a false calculation, because it works against people’s willingness to work and to save, both so necessary today. But then, this glum philosophy is tailor-made for all planners, collectivists, and “commissars.” It gives them an occupation, power, and importance. It lends their speeches the dignified accents of unworldly asceticism and patriotic concern and supplies them with an opportunity to make the consumer the scapegoat for their misconceived economic policies. We may say in all seriousness that they seem to have taken the habit of considering the consumer as someone who gets in the way and causes trouble, but whom, unfortunately, no one has yet managed to abolish. In their eyes it is sheer impudence for the consumer to wish to spend the money he has earned on buying something he wants, and it is improper of him to demand “luxury goods.” He is curtly put in his place, and an attempt is made to intimidate him with economic sophisms. It is certainly not going too far to say that the mentality today prevalent throughout the world is well described in these terms, with the sarcasm it deserves.

When people can no longer buy the “luxury goods” they would like to have, they prefer to buy the luxury good called leisure and to work less. But this, of course, is the one luxury good which really does the most serious harm today to the countries of Europe.

* Neue Zürcher Zeitung, March 21, 1948.