Economics of the Free Society

The factors which determine the optimum location for each kind of production constitute the object of a special theory of location. See O. Englander, “Standort” in Handwörterbuch der Staatswissenschaften (4th ed.); Th. Brinkmann, Economics of the Farm Business (Berkeley, Calif., 1935); Alfred Weber, Theory of the Location of Industries (Chicago, 1928); E.A.G. Robinson, The Structure of Competitive Industry (London, 1935); T. Palander, Beiträge zur Standortstheorie (Stockholm, 1935); Edgar M. Hoover, The Location of Economic Activity (New York, 1948); A. Lösch, The Economics of Location, tr. by William H. Woglom and Wolfgang Stolper (New Haven, Conn., 1954); Melvin L. Greenhut, Plant Location in Theory and in Practice: The Economics of Space (Chapel Hill, N.C., 1956); W. Isard, Location and Space-Economy (London, 1957).

The several factors determining the location of a given industry combine in a complicated way either to reinforce or to offset each other. They include climate, quality of the soil, proximity of the sources of raw materials, proximity of markets, availability of qualified and inexpensive labor, proximity of complementary industries, transport facilities, the political climate, tax advantages, etc. According to the importance of the one or the other factor, the best location will be near the sources of raw materials (the canning industry, for example), or in the vicinity of large sales outlets (the milling industry), or in an area where there is a reservoir of skilled workers (the garment industry in large cities), etc. If the sources of needed raw materials are in widely separated places (the iron ore and the coke which are used in the production of iron, for example), the choice of location will depend on the comparative importance of the raw materials in question. It is of fundamental importance to determine, in the particular case, whether it is more advantageous to locate production near a given factor or to have this factor transported to some previously selected location. Just as Mohammed was compelled to go to the mountain, so mining operations must, perforce, be undertaken on the spot where the ores are located, and agriculture where the terrain and climate are favorable to the particular crop being raised. But should mining or agricultural operations be undertaken wherever these minimum conditions are realized? That will depend on the advantages to be derived from mining or tilling the soil on the one hand and the costs of transporting the goods to market on the other. If the latter are too high, the land may not be worth cultivating, regardless of the quality of the soil, nor the mine worth operating, regardless of the grade of ore.

If we confine our attention to agriculture for the moment we can see that the optimum location of agriculture will be determined by such fixed natural data as the quality of the soil and climate as well as the costs of shipment to market. The close proximity of the market has the same effect as an improvement of the soil, which is why vegetable farms, among other types of production, are established around large cities. But while the natural factors of agricultural production are immobile and for all practical purposes unchangeable, the transport factor is subject to relatively rapid change: transport costs may decline or the old markets may disappear and new ones arise. The result is likely to be a significant change in the optimum locations for the different branches of agriculture. A good example of this is the case of German agriculture The industrialization of Germany and the sharp drop in overseas shipping costs in the 19th and early 20th centuries conjointly exercised their influence to remove the optimum location for grain production farther and farther away from Germany, while the optimum location for the production of higher types of goods such as meat, dairy products, and vegetables moved perceptibly closer to Germany. For generations, the efforts of German commercial policy were nevertheless directed to circumventing, at great sacrifice to the people, the effects of this shifting of the optimum location.

We have already made reference in the text to the fact that our economic system founded on the social division of labor presupposes the existence of a corresponding juridical order which, as the expression “civil code” indicates, is also a civic order. The essentially liberal principles of our juridical order—sanctity of the person, the right of private property, inheritance rights, freedom of contract, freedom to choose one’s job or profession, constitutional guarantees against the arbitrary use of state power—constitute the indispensable legal framework of our economic system. See George Ripert, Aspects Juridiques du Capitalisme Moderne (Paris, 1946); F. Böhm, Wettbewerb und Monopolkampf (1933); W. Eucken, The Foundations of Economics (London, 1950); W. Lippmann, The Good Society (Boston, 1937); M. Watkins, “Business and the Law,” Journal of Political Economy (April, 1934); A. Egger, Ueber die Rechtsethik des schweizerischen Zivilgesetzbuches (1939); Cooke, “Legal Rule and Economic Function”, Economic Journal (March, 1936). The problems connected with the legal framework of the economic system have been the subject of special study in the annual volumes of ORDO, Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, ed. Walter Eucken and Franz Böhm (Düsseldorf, 1948 ff.).

The comparison of the multilateral structure of domestic trade and international trade is illustrative of the essential features of both. The flow of multilateral international trade takes place as follows: Austria exports knitted goods to England, England exports yarn to Germany, Germany exports chemical products to the United States, the United States exports wheat to Brazil, Brazil exports coffee to Turkey, and Turkey exports tobacco to Austria. Since coffee does not grow in Austria, Turkey uses the exchange she has acquired from her export of tobacco to Austria to pay for the coffee she must import from Brazil. The consequence is for the balance of trade of Austria to be favorable vis-à-vis one country, England, and unfavorable vis-à-vis another, Turkey. Formerly, a large share of international trade was actually carried on in this roundabout way. As a result of this complicated crosswiring of the international trade mechanism, there would be no necessity of Country A buying the industrial products of Country B simply because it was supplying Country B with raw materials. In this ingenious international network, it was a thoroughly normal occurrence for the trade balance of a country to be persistently favorable vis-à-vis one country and persistently unfavorable vis-à-vis another. It is no exaggeration to say that the growth of the world economy to its present dimensions would have been impossible without multilateral trade. Thanks to multilateralism, industrial nations could obtain essential raw materials without the least difficulty by a chain of exports running through three, four, or more countries. For the nations linked together by this network there existed no economic need for colonies. Indeed, in the liberal era, colonies did not have very much economic importance. Thanks to multilateralism, moreover, the raw materials-supplying countries could sell their goods on a homogeneous world market, pay their foreign debts, and maintain the value of their currencies without chronic difficulties.

It is only by considering the operation of the world economy in the liberal era that we can measure the ravages caused in recent decades by the destruction of multilateral trade. Foremost among the instruments of destruction have been the preferential clauses of reciprocal trade agreements, the progressive disappearance of the most-favored-nation principle from such agreements, and most pernicious of all, the increasing resort to exchange control and to clearing agreements of the kind described in the text of this chapter. The ultimate effect of the use of these devices was a short-circuiting of the world economy with the following predictable results: a decline in world trade, the breakup of the world economy into separate blocs, the politicalization of international economics, uneconomical alterations in the composition and direction of imports and exports, price rises in the bilateral blocs (termed with involuntary irony “Grossraum economies”) with a consequent diminishment of the competitiveness of these blocs in the still free sector of the world economy, chronic “dollar shortages” and recurring balance of payments crises. The great progress made in the restoration of health to the world economy in recent years is a reflection of the extent to which destructive bilateralism has been overcome by multilateralism. See The Network of World Trade (Geneva: League of Nations, 1942); M. S. Gordon, Barriers to World Trade (New York, 1941); W. Röpke, International Economic Disintegration (London, 1942); W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959). See also the following note.

The points discussed in the text show how absurd it would be to see in the disintegration of the world economy, which still has not been completely halted, the beginning of a new kind of world economy constructed on the principles of the planned economy. Even if we ignore for the moment the catastrophic effects on present living standards which a deliberate reduction of multilateral to bilateral trade—the “short-circuiting” of the world economy noted above—would entail, we are driven on the unpleasant truth that the disintegration of the foundations of a liberal world economy will prove even more fatal to any future planned world economy. This hypothetical planned world economy, required as it will be to regulate international economic relations in the smallest detail, will be in even greater degree than the liberal world economy dependent upon a functioning world monetary system and upon a secure international juridical system. The very least that planned economy implies is centralized control of all economic life. Planned economy is statism in its fulness. A world state is the sine qua non of a planned world economy, but no such world state exists. It is absurd to speak of the possibilities and the chances of a planned world economy precisely at the moment when the equivalent of the world state which the liberal era had created (an international legal, monetary, and moral framework) has disappeared. It is little short of ridiculous for the advocates of the planned world economy to continue to hold to an ideology which must cause the downfall of any world economy, regardless of the label it bears. Or to put it differently, we cannot destroy the philosophical and political foundations of the liberal world economy and hope thereby to build an antiliberal world economy; for lacking these foundations, such an economy will be even less capable of functioning than the liberal world economy. We do not have far to seek to discover what the real character of a “planned” world economy would be, minus the gold standard and minus a sound moral and juridical system, for this is the world economy we now have and whose deficiencies we are still struggling painfully to make good. See W. Röpke, International Economic Disintegration (London, 1942); W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959); W. Röpke, Economic Order and International Law (Academy of International Law, Leyden, 1955).

See my article “Die unentwickelten Länder als wirtschaftliches, soziales, und gesellschaftliches Problem” in the anthology Entwicklungsländer—Wahn und Wirklichkeit (Zurich, 1961).

See W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959); W. Röpke, “Gemeinsamer Markt und Freihandelszone” in ORDO, Vol X (Düsseldorf, 1958); W. Röpke, “Zwischenbilanz der europäischen Wirtschaftsintegration,” in ORDO, Vol. XI (Düsseldorf, 1959).

Adam Smith’s formulation of the law of the extent of the market can easily lead to serious misunderstanding. This law is concerned not so much with the extent of the market in space nor with the number of people participating in market transactions, but rather with total purchasing power as it manifested on the market. We must not, therefore, confuse people and square miles with francs, shillings, or dollars. It is francs, shillings, and dollars which are the determining factors. Because purchasing power is possessed individually, it must not be concluded that total purchasing power is equal to the sum of the purchasing power in the hands of individuals. This is the fallacy committed by all who imagine that the possibilities of disposing of goods are limited by the size of the population. There are, doubtless, certain demands of low elasticity whose total amounts are determined by the number of demanding individuals. This is especially true of the demand for grains. But excepting these inelastic needs, an equal amount of goods may be demanded by many poor men or by a few rich men. The number of Christmas trees demanded in any one year will obviously be determined by the number of families in the market for Christmas trees, but the number and the value of the gifts placed under the Christmas trees will vary from one family to another, according to the income in each case. We may conclude from this that an intensification of the division of labor can be effected as much by increasing the purchasing power of the existing population as by increasing the population itself. See W. Röpke, “Die säkulare Bedeutung der Weltkrisis,” Weltwirtschaftliches Archiv, Vol. 37 (1933); Allyn A. Young, “Increasing Returns and Economic Progress,” Economic Journal, Vol. 38 (1928); W. Röpke, Crises and Cycles (London, 1936), pp. 4 ff.

The inquiry into the economic significance of the size of population (quantitative population problem) is still in a very unsatisfactory state for the relationship in question is one which eludes exact measurement. This increases the likelihood, unfortunately, that the population problem will be debated in subjective and emotional contexts of one kind or another. Partisan discussion of this sort has contributed greatly to confusing the economic issues involved. The following references are suggested: H. Wright, Population (London, 1933); W. Rappard, “De l’optimum de population,” Zeitschrift für schweizerische Statistik und Volkswirtschaft (63rd year, 1927); L. Robbins, “The Optimum Theory of Population,” in London Essays in Economics in Honour of Edwin Cannan (London 1927); H. Dalton, “The Theory of Population,” Economica (March, 1928); J. J. Spengler, “Population Theory” in A Survey of Contemporary Economics, Vol. II (1952); S. S. Cohn, Die Theorie des Bevölkerungsoptimums (1934 [a dissertation for the University of Marburg under the direction of the author and containing extensive bibliography]); E. F. Penrose, Population Theories and Their Application (Stanford University, 1934); D. Villey, Leçons de démographie (Paris, 1957).

The prevailing pessimism with which the possible slowing up of the rate of population growth is viewed is certainly the result, in large part, of failure to think through the relationships involved. It is to be noted, however, that the deceleration of population growth may result in an alteration of the structure of the economy which can mean financial loss and painful readjustment for individual sectors. In particular, those for whose output demand is inelastic will be unable to count on new extensions of the market. Chief among the branches of production that will be affected in this way is grain production, whereas the production of higher types of agricultural goods such as meat, dairy products, etc. will probably tend to profit from structural shifts of the kind in question.

The giant industrial firm with its army of proletarians, its workers’ quarters, its impersonality, its unfreedom, is surely one of the most disturbing phenomena of our economic system. It is important, therefore, that the following points be kept in mind: (1) the giant firm is not always and under all circumstances a higher type of industrial mechanism just as a skyscraper is not under all circumstances a superior form of architecture. See W. Röpke, Mass und Mitte (Zurich, 1950), pp. 176-200; S. R. Dennison, “The Problem of Bigness,” The Cambridge Journal (November, 1947); (2) the problems associated with mass production would not disappear with the advent of socialism. On the contrary, they would become even more vexatious, for then the last remnants of self-reliance, spontaneity, and of a way of life suited to the nature of man would be obliterated by the mammoth economic machine of the state. Indeed, it is highly probable that the socialist worker, having only one choice of employers, viz., the state, would become even more dependent and unfree than at present; (3) the hope that the giant enterprise can be “humanized” is not a vain one. Much can be done to restore to the worker the opportunity of expressing himself creatively in his work and to enable him to see that what he is doing has meaning and value for himself and for the community. See W. Hellpach, Gruppenfabrikation (1922); E. Rosenstock, Werkstattaussiedlung (1922); O. Veit, Die Tragik des technischen Zeitalters (1935); W. Röpke, “Zur Renaissance des Berufsgedankens,” Soziale Praxis (31st year, 1922); G. Briefs, The Proletariat (New York, 1937); W. Röpke, The Social Crisis of Our Time (Chicago, 1950); W. Röpke, Civitas Humana (London, 1948); L. Hacker, B. Selekman, et. al, The New Industrial Relations (Ithaca, N.Y., 1948). In this connection, it is interesting to note that Japanese industry—thanks to the electric motor and the combustion engine which have considerably reduced the advantages of the big mass-production plant—has exhibited a marked tendency to develop as a congeries of small independent enterprises (K. Akamatsu and Y. Koide, Industrial and Labour Conditions in Japan [Nagoya, 1934]).