International Economic Disintegration

APPENDIX GENERAL SOCIOLOGICAL CAUSES OF THE ECONOMIC DISINTEGRATION AND POSSIBILITIES OF RECONSTRUCTION

By ALEXANDER RÜSTOW, Ph.D.

Professor at the University of Istanbul

BY an impressive convergence of evidence the whole preceding investigation has led to the conclusion that the present catastrophic disintegration of world economy is only a manifestation of a more general disintegration of the whole economic structure and, at the same time, only a symptom of a general social and psychological decomposition. The author has repeatedly emphasized that a true understanding (and therefore also an effective treatment) of the pathological state of society can be attained only if this is clearly recognized. But the limits set by an essentially economic inquiry naturally made it difficult to treat in detail the more deep-seated causes of the disease, which are of a non-economic nature.

These social and psychological causes of the disease constitute the subject of my own investigation: “Zur geistesgeschichtlichen Ortsbestim mung der Gegenwart, Versuch einer Zwischenbilanz unserer Zeit” (The Present Age in the Light of the History of Thought: A Provisional Appraisal of Our Times1). While Professor Röpke’s treatise and mine are in complete harmony in regard to fundamental concepts, they supplement one another in regard to the different fields of research. The same problem confronted us both, only inversely: whereas Professor Röpke emphasized the economic aspects, only touching upon the sociological questions, I concentrated upon the sphere of sociology and the history of thought, being unable to deal more than cursorily with the economic aspects of my problem.

It was, therefore, with the greatest pleasure that I accepted Professor Röpke’s kind invitation to add a chapter to his book. In this chapter I shall attempt to connect our respective studies, to present more coherently and explicitly some of the interrelations between the fields of economics, sociology, and the history of thought, to which he could refer only more or less incidentally, and, finally, to sketch the positive programme which we envisage.

DEFICIENCIES OF LIBERALISM: THEIR SOURCE IN THE HISTORY OF THOUGHT

Liberalism was the dominant philosophy of life in the Western World during the nineteenth century. We shall use the term to denote liberalism of the commonplace and “popular” kind rather than the more refined forms of liberal philosophy which were expounded by certain eminent thinkers and scientists but remained without much influence. Even among the founders of economic liberalism, especially in the writings of Adam Smith himself—whose breadth of vision and balance of judgment provoke again and again our admiration—there are numerous germs of ideas which, if further developed, would have prevented the fatal development to be described below. It was perhaps not a mere accident, however, that those ideas bore no fruit and remained without noticeable influence on the subsequent development.

This common liberalism was the principal determinant of the course of economic policy and was dominant to an extent and degree commensurate with the expansion and progress of the modern economic system.

This connexion with common liberalism was first a blessing, but later a curse for the economic system. Professor Röpke’s enquiries in this volume point out time and again that the present disintegration of world economy, as well as of the social structure supporting it, is based, to a large extent, upon certain deficiencies of liberalism itself.

Liberalism is, in its essence, a general human attitude which can and does find expression in all spheres of human activity. But it is characteristic of the historical development of the liberalism of the eighteenth and nineteenth centuries that its fundamental concepts were applied essentially only in the economic sphere. In practice, liberalism meant for the nineteenth century predominantly economic liberty, i.e. freedom of the market system based upon predominant competition.

This position of economics in relation to the whole system of liberalism arose to a large degree from the developments in the field of thought and, more particularly, in that of science. This was so because liberalism as a science had made its epoch-making discovery in the sphere of economic theory. This discovery was that of the automatism of the market economy, of the self-adjustment which takes place in the competitive system by means of the mechanism of supply and demand, and of the harmony which is established and maintained by means of this subconscious adjustment between the egoism of the individual and the greatest welfare of all.

Although Adam Smith may be credited with having been the first to disclose this economic law with precision, we must realize that the general conception of such an invisible harmony has its origin in the more distant past. In the history of the philosophy of the Western World, the idea of an invisible harmony appears for the first time in the cosmological conception of Pythagoras and the Pythagoreans and also in the teachings of the Ionian philosopher Heraclitus of Ephesus which were expressly applied to the sociological and political sphere. For the latter it is the divine Logos, the world reason, which pervades and guides everything, from the whole course of the universe down to the actions of men, and which blends everything into the magnificent harmony of one great cycle. However little man, with his traditional lack of understanding, is aware of it, he is nevertheless part of it in all his being and in all his actions. He is bearer and executor of this will which he himself does not apprehend. Only the philosopher, the wise man, and above all Heraclitus himself are—in contrast to the primitive, blind, and deaf multitude—conscious of this invisible harmony and of its hidden sense. The special application of this idea to economics is, it is true, far from the mind of this ancient philosopher. But, as a citizen of one of the leading commercial cities of his time, he uses the monetary flow in trade, the exchange of goods for gold and of gold for goods, as a means of illustrating the circuit-process in the macrocosm.

These teachings of Heraclitus were taken over by the Stoics, who made them the basis of their philosophical system and particularly of their anthropology, their ethics, and their politics. Since the popular Stoic philosophy exerted a tremendous influence upon the whole Hellenic-Roman world, Heraclitus’ theory became an important element in all ancient learning including the early Christian. Although it could hardly be harmonized with Christian dogma and Christian ethics, it spread and gained new influence, beginning with the Renaissance, and played an important part in the development of Western rationalism. On account of this development, the doctrine of the divine harmony found its way to the Physiocrats, and the economic circuit of their ordre naturel, which they conceived as being a miracle of perfection and wisdom, is undoubtedly derived from the Stoics and therefore finally from Heraclitus. At the same time, in the teachings of the Physiocrats appears a second, equally theologico-metaphysical line of thought, viz. that of Chinese Taoism.2

Adam Smith’s doctrine of the automatism of the market economy, which was to become the corner-stone of modern liberalism, is the perfection of the Physiocratic conception of the ordre naturel. The “invisible hand” of his doctrine unmistakably contains a vestige of Pythagorean mysticism, and the beneficial harmony which it guides is nothing more than the Logos of Heraclitus and the Stoics and the Tao of Lao-tse, except that it is converted into the Christian anthropomorphic language of deism. The laws of Market economy which Adam Smith rationally demonstrated—in order not to say revealed—were at the same time divine and natural laws in the sense of Spinoza’s formula, which is also valid for deism: deus sive natura.3 It is the task of man to comprehend—with insight, gratitude, and reverence—these divine laws which govern economics; to remove the obstacles which stupid traditionalism or unenlightened selfishness has put in their way and which prevent them from having their beneficial effects; and to realize thereby, to the advantage of all, the highest possible benefit which a benevolent providence has provided.

The mercantilism which Adam Smith encountered as the governing economic policy had set itself, as the goal of attainment, the greatest possible national wealth. But it had, for lack of enlightenment, tried to attain this end by means which were insufficient and indeed defeated their own ends. It had only disturbed the beneficial automatism of the economic laws by its officious meddling. It was now confronted by the call, “Laissez-faire! Laissez-passer!” which at the same time was a summons to honour God and an adjuration not to allow short-sighted human anxieties to interfere with the eternal wisdom of the natural laws.

But if the market mechanism of the free competitive economy partook of divine dignity and benevolence and of the severity and universal validity of a natural law, then it would manifestly be presumptuous as well as fruitless to act as if the validity and benevolence of the market mechanism might depend upon sociological conditions belonging to the humble human sphere. Such an attitude would have been totally incompatible with those views and doctrines. The eye, dazzled by the mystic light of rational economic revelation, was blind to problems lying in the obscurity of sociology.

This then was the most fundamental reason for the “sociological blindness,” to characterize it briefly, of liberal economics (and of all unenlightened liberalism)—its blindness to the extreme importance of sociological needs and requirements which lay outside its sphere, as well as to its own sociological conditions. Both of these will have to be examined more closely in the course of our studies.

Liberalism did not retain for long, however, the deistic providentialism and optimism of Adam Smith, although Bastiat took it up again later on. It became secularized by Say with classical French lucidity, was made a matter of middle-class ethics by the Prussian followers of Kant and was transformed in England into Manchester utilitarianism. But the theologico-metaphysical note was not by any means lost in the turn toward pessimism which Malthus and Ricardo gave to the doctrine.

The traces of theology and metaphysics, still apparent in Adam Smith’s doctrine, gradually disappeared from economic theory. The natural consequence is that we have become accustomed to look at the founders and classics of our own theory from the point of view of rationalists and to neglect their theologico-metaphysical characteristics as mere superficialities of the fashion of the times, much in the same way as we now regard the wig of Adam Smith’s portraits. It was therefore all the more necessary, in contrast to the usual attitude, to emphasize and throw light upon this point and to bring out the last traces of older ideas even where they were undoubtedly in the process of disappearing.

Care-free optimism and pusillanimity, which characterized a large part of the propaganda of liberal economics to the end, were persistent and fateful emotional consequences of the theological optimism which at first inspired liberalism and liberal economics. In every game there must be losers as well as winners, and the game of the market economy is no exception to this rule. This game demands, like any other, a certain stamina, a readiness to accept setbacks and losses should they occur. Instead of being frank about the fact that the extraordinary chances of gain which the game of the market economy offers for the good players are accompanied by chances of loss for those who are less capable or less fortunate, and that all those who want to participate in this game are obliged to take their chance, the propaganda promised prosperity and happiness to all without exception. But what is the inevitable result of an education which promises everything and demands nothing? The result in this case was that a type of player was bred, particularly in countries where the hardening tradition of Calvinism was non-existent, who enjoys playing a game only as long as he wins, but who, the moment he begins to lose, runs off in a huff and refuses to continue playing. This behaviour of the bad loser could be observed in the attitude of many entrepreneurs who went begging to the government to protect them against even the smallest losses.

But the most important intellectual form in which the original theologico-metaphysical character of liberal economics continued to exist was the belief in the autonomy, the unconditional validity of the economic laws. As we shall see later in greater detail, this superstitious belief prevented the necessary sociological conditions from being secured in economic life, so that, beginning with the last decades of the nineteenth century, an unmistakable degeneration of the market economy set in. A further consequence was that the manifestations of degeneration which had grown out of the sacred laissez-faire were regarded by economic theory as endogenous, unavoidable, and characteristic of economic liberty. This conviction, which can be understood only in the light of its theologico-metaphysical origin, was so powerful that it was regarded as self-evident and beyond all discussion; the liberal defenders and the socialist assailants of economic liberty were in perfect agreement on this point. The liberals were of the opinion that the disadvantages had to be borne because they were unavoidable and that very little could be done, out of humanitarian considerations, to mitigate their worst consequences by means of social reform. The socialists, on the contrary, defended the view that this economic system, which was inherently incapable of improvement, had to be completely abolished and replaced by an entirely different system which, for the sole reason that it was different, would also be better. As the degeneration of the free economy progressed and as its consequences became more and more unbearable, the belief in the inevitability of this development led to the conviction that the revolutionary escape of socialism was the only possibility. All were agreed that “aut sit ut est—aut non sit” applied to capitalist economy, the only difference being that the liberals accepted the first and the socialists the second part of the alternative.

It had been expected that the spread of the free economy would bring about positive ethical and sociological results as well as an improvement in moral standards, a humanization, and an integration of society. But competition as such, appealing as it does solely to selfishness as a motivating force, can neither improve the morals of individuals nor assist social integration; it is for this reason all the more dependent upon other ethical and sociological forces of coherence.

On the basis of the mistaken idea of the central position of economics, which it had inherited from liberalism, socialism was inevitably forced to demand that the necessary social integration should take place within economic life itself and on this basis to reject the competitive system altogether. But it is a fact that there are more numerous and more effective means of integration of a political, ethical, and religious nature outside the realm of economics itself. These must be utilized with particular vigour if it is decided, for sound reasons, to desist from integration within the economic system itself.

Liberalism overlooked the sociological necessity of searching outside the market for that integration which was lacking within it. Instead, it proclaimed that the competition should be applied as a universal principle even in non-economic fields, and as a consequence of this attitude a progressive disintegration and atomization of the body politic set in as soon as the fund of the inherited integration had been spent.

During the early period of liberalism, however, there existed a large fund of other ethical and sociological forces of integration which were taken over from earlier periods and were capable of securing the necessary conditions for a smooth functioning of the free economic system. These forces were supported by the same classes of society that supported liberalism and the independence of economics. The rightly famous religio-sociological studies of Max Weber do not prove all they try to prove, but they show at least a close historical connexion between the pietistic-Christian ethics of the lower middle class and the advancing capitalistic-liberal conception of economics. These two parallel trends had to assert themselves against the degenerated morals of feudalism, based upon force and privilege on the one hand and the laziness of fossilized beneficiaries of guild privileges on the other. It is indisputable that the victorious advance of the new over both these trends meant an advance in human morality and integration. But this advance occurred because of the ethical-religious content of this mixture, and not because of the economic freedom to which it was ascribed.

If all this related mainly to the internal economic development of the various states, it must not be overlooked that parallel developments took place, though at a later stage, in the field of international trade. In this field Bentham had already emphasized that free trade brought about an international solidarity, and his pupil, Cobden, had taken this belief as the basis of his propaganda for free trade, which almost resembled a secular crusade. In fact, international solidarity increased noticeably during this period of expanding free trade even though, measured on an absolute scale, it always remained unsatisfactory. To ascribe this internationally integrating effect to free trade and to consider it to be a fulfilment of the prophecies of Bentham and Cobden was an error in perspective similar to that which we have mentioned in the preceding analysis of the conditions of national economic life.

The real contribution to international integration in this period arose from the fact that the liberal philosophy was dominant in all the major participating countries, and from the Pax Britannica in its last, Victorian humanized, and diluted phase.4 These international ideologies formed the latent basis for the development of international law during the nineteenth century—the simultaneous breakdown of the sub- and superstructure, which has taken place in recent years before our eyes, has made this relation clear to us contemporaries. These ideologies, not the free trade which expanded at the same time, were the integrating element. They alone created that degree of international integration which free trade needed as a basis and without which it would not have been possible. As a network of international commercial treaties was the form in which free trade was realized, it was imperative that the ethical maxim “pacta sunt servanda,” which was their indispensable condition, should be recognized. This maxim was at that time still guaranteed by the above-mentioned ideologies. The most-favourednation system of that time would have been just as impossible if one could not have been perfectly certain, in contrast to the now predominant abuse of commercial treaties as weapons of an aggressive foreign policy, that such treaties would be regarded as of purely commercial concern, a means of increasing foreign trade.

Even though internal and external integrating effects, which really should have been credited to certain other contemporary factors, were mistakenly ascribed to economic freedom, this remained a mistake of a purely theoretical nature as long as these accompanying conditions were effectively maintained along with economic liberty. But when these accompanying conditions disappeared, and with them their beneficial effects, this error of theory became disaster in practice, because it helped to prevent correct diagnosis and effective treatment of the serious deficiencies which now made their appearance.

We know to-day, indeed, that the satisfactory functioning of the market mechanism does not take place autonomously, but is completely dependent upon the fulfilment of certain sociological and institutional conditions. Self-interest and common interest, the coincidence of which it was the great accomplishment of classical liberalism to have discovered, are co-existent only in that part of the social sphere in which these conditions can be and are fulfilled.

The first and most essential of these sociological conditions is the strict limitation of the freedom of the market to pure efficiency competition, and at the same time complete and unconditional maintenance of the freedom of this efficiency competition. We shall see later what this condition demands of the structure and attitude of the state. One consequence is that every kind of cut-throat competition, as well as every attempt to gain a competitive advantage outside the market itself or by other means than through a corresponding service, must be excluded as being disloyal. Efficiency competition alone places the selfish interests of the producer inevitably in the service of the consumer and leaves him no other means of gaining an advantage over his competitor than by supplying the consumer with better or cheaper goods. The most important and dangerous forms of these means of procuring an advantage outside the market are monopolies and subsidies or their equivalents.

Monopolism makes efficiency competition impossible, whether by means of law, or by legally secured agreement, or also, in rare cases, by the utilization of natural or technical circumstances. By political means, subsidizing (or its equivalents) provides a group of producers with public advantages which are not available to other producers and whose costs have to be borne by consumers and other producers. In practice, monopoly is based, as a rule, either completely or partially upon state intervention, because it is either specially created by law or made possible and even favoured by the actions or the attitude of the state. The beneficiaries, to be sure, usually conceal or even deny this.

Such phenomena, which interfere with the efficiency of the market economy, spread increasingly from the last quarter of the nineteenth century onwards, and led to a progressive degeneration of the market economy. State and public opinion, whose task it should have been pitilessly to kill every such manifestation in the germ, in order to protect the freedom of the market and so to make a fair efficiency competition possible, not only did nothing of the kind, but even assisted this development in many ways—by legislation, jurisdiction, administration, trade policies, customs, freight tariffs, &c. To the basic blindness and fallacious ideas of the theorists which we have already discussed, must be added numerous other motivating factors: ignorance of public opinion and of the masses about the functioning of the market system; megalomania, the desire to establish records; and both hidden and evident influences of financially powerful pressure-groups upon the state, politics and public opinion. Wherever, under the pressure of injured competitors, legislative measures were taken against monopolism, as, for instance, in the case of the anti-trust laws in the United States and of the German Kartellverordnung,5 they remained generally ineffective and principally served the purpose of silencing importunate petitioners. Effective results will be achieved by eliminating monopolies and not merely by controlling them.

Following the same lines was the trend, connected for the most part with monopolistic tendencies, towards over-concentration of factories and the grouping of businesses into mammoth enterprises. This, too, occurred under the protection of the superstitious belief in the inevitability of the development, and was accompanied by the enthusiastic applause of the megalomaniac public. It was justified only to a minor degree by technical and economic considerations, while in most cases the maximum size compatible with these considerations was surpassed.

In the face of all these fateful tendencies, the state needed, in addition to the insight which it lacked, the force and independence necessary to fulfil its rigorous duties of policing the market. But as weak a state as possible was the ideal state for liberalism. The weaker the state and the more it was forced to confine itself to the maintenance of order and security, the less would it be tempted, so it was thought, to encroach upon the sphere of the free economic system. The ideal which liberalism set itself was a weak but at the same time neutral and independent state; no one noticed that these two requirements were contradictory or grasped the obvious sociological truth that the strength and independence of a state are interdependent variables, and that only a strong state is powerful enough to preserve its own independence.

The failure to recognize this sociological truth soon became fateful. Long before the state let its powers be reduced to the sole function of maintaining public security it had passed that critical point where its force and authority became insufficient for the maintenance of its independence and where, therefore, it began to succumb to the attacks of pressure-groups, whose lust for subsidies knew no bounds. These pressure-groups could, when they were not agrarians, be generally identified as monopolists or would-be monopolists who need the assistance of the state to realize their purpose. A little later they were joined by the unionized workers.

The democratic, parliamentary structure of some of the economically leading states caused the economic corruption to spread to the internal policy of the state, to the political parties, and to the parliamentarism itself. The political parties were slowly transformed into parliamentary agencies of economic pressure-groups and were financed by them. Not a single one of these parties and not a single one of the groups which supported them was at first able to win a parliamentary majority by its own strength alone. (This is particularly true for the multi-party systems modelled after the French system. The same phenomena were observed within the Anglo-Saxon two-party system, but more under the surface and within the parties themselves, and were therefore somewhat weaker.) A coalition of several parties was therefore necessary for the formation of a majority, and this coalition came into existence in the compromise form of the so-called log-rolling and spoils system. Even the opposition parties were able to find a way of sharing the spoils by means of blackmail. A crisis of parliamentarism, a crisis indeed of the state itself, was the unavoidable consequence. Italy and Germany, and France, too, became victims of such crises.

The pathological form of government which developed in this way was that of pluralism, the history of which has not yet been written, though this would be very desirable, as it would make it possible to learn at least something from this unfortunate experience. The date of the beginning of pluralism in Europe may be fixed: the time of Bismarck’s decisive change in internal policy in 1878-79 and his shift to a policy of tariff protection, as a result of which Germany became the leader of this fateful road. We have here the rare case of a responsible statesman initiating a development with consciously bad intentions. The traditional parties, which were based on sentiment and conviction, had refused to follow Bismarck’s brutal Realpolitik; with complete cynicism he therefore decided to transform and break them up into separate groups distinguished by their interests, believing that he could keep these under his control by feeding them from the state trough. His successors found that a state which begins to feed the beasts of organized business interests will finally be devoured by them.

This fateful policy did not remain confined to Germany. Even such healthy and in many ways exemplary little democracies as Switzerland6 and Sweden were not able to resist it. It is one of the most serious reproaches to the New Deal in the United States that it has generalized and intensified, to an alarming extent, this feeding from the state trough, which had, however, already begun with the tariff policy, the silver policy, &c.

Such a decay of democracy, which its supporters and opponents alike regarded as an endogenous and unavoidable development, caused tendencies and parties to appear which were fundamentally anti-democratic. Their parliamentary tactics consisted in abusing the rules of liberal parliamentarism for the purpose of weakening democracy and its organs. Such an attitude should have been regarded as hostile to the state, and should have logically brought about the proscription and expulsion of its protagonists. But, instead, the liberal principles of tolerance were meekly and inappropriately applied even here. The superstitious belief in the universal applicability of the liberal principles, which always prevented the recognition of the way in which sociological conditions limited the validity of those principles, was called upon to justify this attitude. In this way anti-democratic parties were allowed to grow up like mushrooms. They demagogically exploited the degeneration of the market economy and its injurious consequences and, in a most unscrupulous manner, took part in the corrupt game of parliamentarism. The consequence was that in Italy and Germany those parliamentary parties which had at first made possible the entry of anti-parliamentarians into the government were soon elbowed out by their unscrupulous colleages, so that the game of pluralism ended in a totalitarian one-party dictatorship.

The same fateful mistake of admitting innately foul players on an equal footing was made, not only in the internal policy of the states, but also in their foreign policy. Its explanation can be found in the same blindness of liberalism to the limited applicability of the liberal principles; a blindness arising out of the sub-theological pseudo-universalism, the catastrophical consequences of which we have repeatedly encountered.

Even the rough outline of this brief review shows to what extent the present world catastrophe in all the affected spheres—economics, internal and external politics—has been caused by the same fatal weaknesses and mistakes of liberalism. The most serious mistake lies with its pseudo-universalism, its blindness to the conditioning framework and to the sociological pre-requisites which limit its own validity. This otherwise hardly conceivable blindness was, as we have seen, caused by the theologico-metaphysical origin of the liberal philosophy of life and of economics. This theologico-metaphysical origin gave liberalism and liberal economics, at a time when the world was still dominated by theology, a tremendous missionary force and a formidable impetus. Its apostles felt themselves carried by the conviction: Dieu le veult! But it contained a fateful defect, and finally contributed to the breakdown of liberalism and to our present world catastrophe.

POSSIBILITIES OF REINTEGRATION: THE “THIRD WAY”

The mistaken sub-theological pseudo-universalism of liberalism was, as we have seen, also responsible for the rise of radical anti-liberal collectivism. If liberalism is by nature unconditional and unlimited, and if the fatal consequences of these characteristics are unavoidable and unchangeable, then, it was argued, the only salvation lay in the resolute renunciation of the liberal principle itself and the acceptance of collectivism and totalitarianism.

As long as collectivism remained the credo of an aggressive and proselyting minority it was possible for its supporters to promise themselves and others that its realization would bring the millenium, the heaven on earth. But since various types of collectivism have become fearful realities in several great countries, thereby showing the true character of collectivism to the outside world, every judicious and well-meaning person must find himself between the devil and the deep sea when confronted with the alternative: liberalism or collectivism. Nothing remains for us but to search with the courage of despair, for the “Third way,” which will lead us away from broken-down liberalism on the one hand and collectivism on the other towards a new life of human dignity.

This “third way” has already been implied in our criticism of the weaknesses and mistakes of the old liberalism, and it was also the yardstick with which Professor Röpke has measured the disintegration of world economy and the aberrations which have brought it about. For this reason we shall attempt to sketch once more the programme of the “third way” as far as this is possible in the short space at our disposal.7 As it consists essentially in a fundamental revision and renaissance of liberalism, it will be simplest to retain the previously applied method of criticizing the old liberalism and its realization in capitalism. That is precisely the point in historical evolution at which we find ourselves in the non-totalitarian states at present.

If we have confined ourselves more or less to economics, we have done so solely because Professor Röpke’s thesis concerns itself mainly with this field. We are of the opinion, in opposition to the traditional conception which is still widely held to-day, that the boundless over-evaluation of economics is one of the symptoms of the disease of the nineteenth century and one of the mistakes of the old liberalism. It is time that economic activity, in spite of its evident importance, is relegated to the subordinate position which it has always held except in the nineteenth century. Man does not live by bread alone. It must also be recognized that even within the economic sphere itself the vital and anthropological aspects which cannot be measured are more important than the essentially economic one which can. Because the economic machinery exists to serve man and not vice versa—what a time that was when such an evident truth had to be pointed out!—the “vital situation” of man is a non-economic value within the economic sphere. Economics is merely a means, the “vital situation” the end.

This fundamental truth is one of those which the old liberalism overlooked because of its “sociological blindness,” and from this oversight arose the belief of the liberals, which was taken over by the socialists, that the happiness of the working individual was proportionate to his wage and in inverse relation to the number of working hours. But the deep discontent of the modern industrial labourer is in reality caused by his “vital situation,” unworthy of human beings, by the artificial existence in the big cities which are so far removed from nature, by the decay of the family, by life in the slums, by conditions in factories where workers are herded together, by the mechanical specialization of their work, by the speed of mass-production, and by the equal tempo and bewildering futility of the amusement and diversion of big city life. That the industrial workers in Dutch, Swiss, German, and other countries, driven by instinctive self-help, managed to have a suburban garden, however small and mean, is a touching proof of the fact that “the good man, in his unconscious urge, has well an instinct of the one true way”—and this in spite of wrong theories instilled into him. The suburban garden is nothing more than the attempt, undertaken at a small cost, to return, at least to some extent, to the “vital situation” of the peasant.

It is, however, much more effective and satisfactory when the industrial worker is placed in semi-peasant conditions, when he lives with his family in his own small home in the country, and when he owns his own plot, which absorbs his and his family’s hours of leisure or days of unemployment, and from which he derives a revenue, thus making it possible for him to provide to a greater or less extent for his own sustenance (as is the case in some districts of France, Switzerland, Württemberg, &c.). This semi-peasant condition gives him, above all, the feeling of attachment to the soil, of closeness to nature, and of unity with his family and with past and future generations. The same applies to rural home industry (fabrique dispersé) and to home work wherever these are organized under fairly satisfactory conditions.

The fullest realization of all these factors is naturally attained by the peasant himself and by the rural artisan or tradesman. It is there fore a great comfort to know that more than half of humanity is still to be found in this “vital situation” which is truly compatible with human dignity.

Urban artisans, small tradespeople, shopkeepers, and people in the so-called liberal professions take part in the sociological advantages of this “vital situation,” and particularly in its independence, dignity, and close family life.

When one starts from the other end of this scale of values and regards the “vital situation” of the city proletariat as that which is essentially unsatisfactory, one is glad to find that this inhuman condition is the lot of only a fraction of humanity. But even this fraction can and must be substantially reduced; the “vital situation” of those who nevertheless remain in the proletarian condition must be radically improved. It must be recognized that here lies the main task of social policy which should be resolutely taken in hand. In doing so we must get rid of a superstitious fatalism which believes that the position of the industrial worker of the big cities is the inevitable fate of all of humanity.

It goes without saying that such a task is linked up with the other one to devise an agricultural policy which takes account of the peasant and his standard of life.

This leads us to the problem of economic concentration and the size of enterprises. It was shown above that more often than not the degree of concentration which has been attained in the industrial countries far surpasses, for pathological reasons, the real optimum size. It follows that as the size of enterprise which is most profitable has been surpassed because of unsound non-economic considerations, sound non-economic considerations justify the reduction of the size of enterprises below that at which the maximum profit is attained. An economic policy tending in this direction could attain surprising results in the reduction of the size of enterprises and in a corresponding increase in the number of independent plants of small and medium size. The decentralization of industry and its dispersion to rural areas could be greatly facilitated by such measures. It should be mentioned that this would also make the whole economic structure more elastic.

The desire for monopolistic positions was an important motive for excessive concentration. It has already been shown that it would be desirable to forbid all private monopolies by law. We cannot concern ourselves here with proposing methods of realizing this aim. Industries enjoying natural, technical, or other inevitable monopoly conditions should be taken over by the state; this has already been done in many cases, for instance in public utilities.

A strong and prudent state policy of policing the market should be instituted, with the corresponding legislation, jurisdiction and administration, so that a fair degree of efficiency competition can be strictly maintained in the whole realm of private market economy. Every form of cut-throat competition should be made punishable by law.

Just as a free economic system needs a market police, with strong state authority for its protection and maintenance—in complete contradiction to the views of laissez-faire liberalism—so is the same state intervention necessary in other spheres of economic life—for economic as well as for non-economic reasons. A strong and independent state is the prime condition in every case, but state intervention must be restricted to the indispensable minimum; it must not be in opposition to the functioning of the market mechanism or disturb the structure of the market; it must, on the contrary, maintain them. Above all, the state must anticipate the final outcome of large structural changes which would entail frictional losses and hardships during the transition if they were left to take care of themselves, and must see that they are made quickly without such losses and sufferings. I have called this kind of intervention, which contrasts strongly with what has so far been practised, “liberal interventionism.”8

The problem of crises would very likely be reduced to the tolerable, not to say idyllic, proportions of the pre-war period. It is nevertheless not out of place to consider ways and means of securing a minimum standard for times of crises should the proposed system be accepted. Such measures, however, must be based, in contrast to the contradictory minimum wage policy which has so far been in effect, upon an adjustment between fat and lean years. The same idea is expressed in the most recent proposal of Mr. Keynes, with which we are in complete agreement.

Although all these measures of economic policy will lead to a considerable reduction of the greatest inequalities in the distribution of income and wealth, it is nevertheless necessary to satisfy the demand for economic justice in the most fundamental and radical manner. Only those inequalities of income which arise from inequalities of accomplishment and from the conditions of efficiency competition are compatible with this demand for justice. Most unjust of all are the inequalities in the conditions existing at the start of economic life, derived in part from unequal inheritances, which depend only upon how carefully one chooses one’s parents. This being the case, we are led to demand equal opportunity and just initial conditions for all. The fulfilment of this demand is closely related to the problem of the size of enterprises. An equal economic start is almost automatically provided in family enterprises of farmers, of artisans, and of small traders (if the population remains stationary), and therefore necessitates little state intervention; no one inherits more than one enterprise, and enterprises which are not absorbed in this way must be distributed to those who possess none. In the case of large enterprises, the same result can be obtained by a division of the property titles, which must be treated by inheritance laws in the same way as small enterprises (the problem of a growing population can in this way be taken into consideration).

As such a distribution of inheritance for the purpose of providing an equal economic start benefits only those of a more mature age, it must be supplemented by equality of educational opportunity. No one must be deprived of an education which corresponds to his gifts and character. Scholarships which are at present provided for gifted persons with insufficient means tend in this direction, but they must be systematically extended.

A true maximum of economic and social justice could be attained by means of such a combination of just initial conditions and free efficiency competition. Because of a sociological blindness and reluctance to interfere, as well as egoism and feudal sentiment, one did not realize that the traditionally unlimited right of inheritance was a feudal element which gave its semi-feudal-plutocratic character to capitalism. This was the source of the bad conscience which was so typical of latter-day liberalism in face of the indisputably reasonable demands for justice made by the socialists. But the collectivist economy which the socialists desired presents, as we know to-day, an even greater violation of these demands for justice. The purely fictitious equal-share-for-everyone in the socialized wealth of the community does not prevent the factual exercise of property rights and of economic direction from being transferred to fewer hands in a system of state economy, and from becoming more concentrated than it would ever be under private capitalism. The practical application of socialism means, therefore, an even greater violation of social justice which socialism itself so rightly demands than that existing under the capitalist liberalism which we know. These demands can be satisfied, therefore, not in a collectivist but in an individualistic manner.

Such a radically liberal and individualistic economic system is not only the sole system among those from which we can choose which can bring about a realization of the demands for economic justice, but also the only one which guarantees a maximum of liberty and human dignity. We know to-day how liberty and human dignity fare in totalitarian economic systems. When justly and generally divided, individual property is the only solid basis known to us upon which liberty, independence, and the human dignity of all individuals can be built. In this lies the only real, essential and non-economic justification of private property. It was again a fatal rationalistic generalization that the passionate ethical and social attacks upon private property have been directed by the socialists against private property as such, instead of against the unjust inequality of its distribution, which was solely a consequence of the traditional law of inheritance.

These two highest non-economic values, justice and liberty, would even justify great economic sacrifices. Such sacrifices are, however, not necessary, as the same economic system which safeguards these values is, strangely enough, also the most productive of all economic systems known to us. The competitive system is the only system which can use the strongest and most common of all human forces of everyday life—the egoism of man—as an unrestricted agent for its own benefit, while all the other systems are forced to lead a permanent, exhaustive fight against it. The competitive system thus provides justice and liberty on the one hand and the highest economic benefit on the other.

 

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9 The original (German) edition of this book will be published during the current year, while an English translation is under preparation. Two sections have been previously published in the Friedenswarte (ed. by Professor Hans Wehberg, Geneva): “Bedingungen des Weltfriedens,” 1938, vol. xxxviii, No. 1, and “Zur soziologischen Ortsbestimmung des Krieges,” 1939, vol. xxxix, No. 3. Cf. also my contribution to the Colloque Walter Lippmann (held in August 1938, in Paris at the International Institute of Intellectual Co-operation), published by the Librarie de Médicis, Paris, 1939.

10 These most important connexions have been studied in detail by L. A. Maverist: “Chinese Influence upon the Physiocrats,” Economic History, February, 1938; and “The Chinese and the Physiocrats,” Economic History, February, 1940. Since, moreover, a monograph on this problem has been announced (E. Schorer-Laforêt: “L’influence de la Chine dans la genèse et le développement de la doctrine physiocrate,” Pirou Etudes, VIII, Paris, Sirey), there is no need to go into it here more thoroughly. It should be noted, however, that Lâo-tse, the founder of Taoism, was an elder contemporary of Heraclitus. Both belong—like Buddha and Mahavira—to the sixth century B.C., the magnificent and fatal century of metaphysics. The question suggests itself whether this striking coincidence in time also implies, in spite of geographical separation, some kind of reciprocal influences. If so, there would have met again in the eighteenth century trends in the history of thought which had taken separate roads two and a half millenniums before.

11 The metaphysical dignity of economic theory was further enhanced by the fact that it is the only branch of Geisteswissenschaft which is capable of deductive treatment more mathematico. This fact was of utmost importance for a period when mathematics was considered the only true science and the only legitimate model for other sciences; a period, moreover, when mathematics—and everything that was capable of rising to its height—was still encircled by the numinous nimbus with which Pythagoras and Plato had surrounded it. Cf. the well-known investigations by Wilhelm Hasbach: Die philosophischen Grundlagen der von François Quesnay und Adam Smith begründeten politischen Oekonomie, Jena, 1890, and Untersuchungen über Adam Smith und die Entwicklung der politischen Oekonomie, Leipzig, 1891.

12 Crude disciples of Friedrich List, who himself was not too refined intellectually, have thereby characterized the whole free trade propaganda as a devilish trick on the part of England, which, like a wolf in sheep’s clothing, tried to persuade the others to open their gates to the English trade expansion. In the meantime, it has become obvious that these people only searched for others behind a door which they themselves wanted to use for their own concealment.

13 The present author, who was then one of the responsible officials of the German Ministry of Economy, shares in the paternity of this law. From the beginning he was under no illusion as to its real character as explained above.

14 Cf. William E. Rappard, L’individu et l’Etat dans l’évolution constitutionelle de la Suisse, Zürich, 1938.

15 For a more thorough exposition and causal explanation I must refer again to my Ortsbestimmung der Gegenwart.

16 In my paper, “Freie Wirtschaft—starker Staat” (Free Economy—Strong State), delivered at the last annual conference of the Verein für Sozialpolitik at Dresden, 1932. Schriften des Vereins für Socialpolitik, vol. 187, Munich, 1932. pp. 62-69.

• 1Cf. my paper “A Value Judgment on Value Judgments” in which I am explaining my attitude in this very important methodological question. It will probably be published in the “American Economic Review.”
• 2The following pages are largely based on a memorandum which the author wrote together with Professor Alexander Rüstow (University of Istanbul) in the summer of 1938.
• 3See also: W. Röpke, Die entscheidenden Probleme des weltwirtschaftlichen Verfalls, Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1938, No. 4.
• 4In current literature there is already some evidence that the understanding of the scientific situation outlined above is growing. See E. F. M. Durbin, “Methods of Research—A Plea for Co-operation in the Social Sciences,” Economic Journal, June, 1938; A. Löwe, Economics and Sociology: a Plea for Co-operation in the Social Sciences, London, 1935: F. Akerman, Das Problem der sozialökonomischen Synthese, Lund, 1938. The essential things have been said on a wider scientific scale by A. N. Whitehead, Science and the Modern World, New York, 1926; and by Ortega y Gasset, El Tema de Nuestro, Tiempo, Madrid, 1923.
• 5See Der deutsche Aussenhandel unter der Einwirkung weltwirtschaftlicher Strukturwandlungen, l.c., pp. 362-363.
• 6The vast literature on this subject has recently been enriched by M. J. Bonn, The Crumbling of Empire, The Disintegration of World Economy, London, 1938; and by Lionel Robbins, The Economic Causes of War, London, 1939.
• 7See my own approaches to these problems given in the article: “Kapitalismus und Imperialismus,” Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1934, pp. 370-386; and in my book Crises and Cycles, pp. 4-6.
• 8Cf. Röpke, Crises and Cycles, London, 1936, p. 88n.
• 9The purpose of this book is to make a new and more promising approach to the diagnostics of that long-run crisis in international economic relations which is one of the most striking symptoms of the general economic, social, and political crisis of occidental society. I believe that the urgent necessity of such an approach has been enhanced rather than diminished by the outbreak of the war. However, I would betray my own philosophy if I regarded this book as anything more than a mere beginning, an invitation to constructive criticism, and a way of opening or furthering a discussion for which the world seems to be ripe. In submitting this book to criticism, I am not afraid to expose myself as one who believes not only in the scientific legitimacy but even in the utmost scientific necessity of employing a measure of judgments, which is ultimately based on a definite conception of what is wrong with the world, and of what should be done in order to put it right again. Those who are shocked by such an attitude may be reassured that I gave more thought to this methodological problem than I am able to explain on this occasion.
• 10(b) This crisis puts social science in a new situation, which is itself highly critical and which no partial investigation in any field of this science whatever can ignore without running the risk of missing its aim. Nobody conversant with the current development of the social sciences can overlook the fact that the feeling of being on insecure ground is becoming more and more widespread, until even the most tenacious followers of the traditional lines of approach sense the need for reorientation. The growing literature on methodological questions even in countries like England, where it was formerly distinctly unpopular, is a sure token of this scientific situation, as is also the fact that it has been felt necessary to open the present report in such a roundabout way as would have appeared rather strange even five years ago.
• 11As the present historical crisis finds its first, its most painful and its most conspicuous manifestation in the economic sphere, and since the nineteenth century has accustomed us to treat the economic problems as the main ones, it is easy to understand why the crisis is conceived primarily as an economic one and why, therefore, the traditional approaches of economics have been relied upon thus far. Whether or not this traditional conception corresponds to the inner convictions of our scholars and statesmen, it is at least exemplified in the character of by far the greater part of scientific activity in our field. Accordingly, men and means have been mobilized, during the last ten years, on an unprecedented scale. Facts have been piled up sky-high; conferences have been held in endless succession; economic analysis has been brought to an ever greater degree of refinement (and, incidentally, to an ever greater degree of unreality); vast and detailed programmes of research have been elaborated; a complicated machinery of institutionalized science has been set up; and questionnaires have been sent to almost every country and to every section of the population. It would surely be no pessimistic over-statement to say that nobody feels that this hectic activity has brought us any nearer the fundamental diagnosis which alone could serve as the basis for effective therapy.
• 12The real cause of this deficiency in the social sciences seems to lie just in the narrowness of our economic conception and the lack of courage and ability in really synthetic interpretation to connect the economic phenomena with the wider aspects of society. There is, in fact, increasing evidence that the real epicentre of the earthquake does not lie by any means in the strictly economic sphere, but rather that the economic disturbances are only the external manifestations of a deeper organic disease, of which overemphasis on economic matters—a legacy of the nineteenth century—is only one of the many symptoms. If that is true, then it becomes clear that the traditional approach is doomed to failure and that a new point of departure has to be found.
• 13That the development of world economy has been, first of all, a process of intensification is as important as it is evident. It can be deduced from the fact that the most highly developed countries showed the greatest percentage of world trade, which, in view of the reciprocal nature of trade, proves that the bulk of world trade must have belonged to economic interchange within the high-capitalistic sphere itself. This deduction is corroborated by a number of calculations of the relative intensity of this “intraindustrial” economic interchange. One of these calculations, made by the Kiel Institut für Weltwirtschaft und Seeverkehr, shows that the commodity trade between the industrial countries of Europe (Belgium, Germany, France, Great Britain and Ireland, Italy, Austria and Switzerland) amounted in 1913 to 30.2 milliard RM (=$7.2 milliard), which was equal to about one-third of the total reciprocal trade between all industrial and agricultural countries of the world. The same story is told by the calculation that out of average total exports of industrial Europe (comprising the same countries) during the years 1909–1913 slightly more than one half (51%) constituted an exchange of goods among these countries themselves. It is also a well-known fact that such leading countries as England and Germany were practically each other’s best customers. In 1913, for example, exports from the United Kingdom to Germany formed 7.74% of the total export trade of the former (higher than the percentage of any other country except British India), while imports from Germany into the United Kingdom as a percentage of the total import trade (11.56%) were surpassed only by those from the United States. Another very interesting illustration of the same tendency is to be found in the development of reciprocal trade between the two leading industrial countries outside of Europe, i.e. the United States and Japan.
• 14There is no denying the fact that world economy and capitalism have been to a large extent forced upon the “new” countries by political pressure and in some cases—as in the opening-up of China—by undisguised war. The problems thus presented are, at the present moment, far from a universally accepted solution; but it seems clear that no satisfactory study of international economic integration and disintegration could evade them. This holds especially true for one of the many aspects of the problem of economic imperialism—the difficult question of whether and how far extensification and intensification of world economy were, and perhaps still are, correlated to each other. In other words, was it not just the spatial expansion of capitalism which kept the whole mechanism of dynamic development going, by providing more and more new markets for the surplus production which constantly increased as productive technique improved, by giving the necessary stimulus to entrepreneurial initiative and speculative optimism and by allowing the “play” essential for any working mechanism? Allowance must also be made for the possibility that the existence of an economic “frontier” in world economy may have been instrumental in providing that psychological atmosphere essential for the breadth of outlook, which is the basis of a liberal commercial policy. This refers not only to the exploitation of new markets, but also to the opening of overseas territories to human settlement. Thus the vast problem of international migrations would also have to be studied in this context.
• 15There is no denying the fact that world economy and capitalism have been to a large extent forced upon the “new” countries by political pressure and in some cases—as in the opening-up of China—by undisguised war. The problems thus presented are, at the present moment, far from a universally accepted solution; but it seems clear that no satisfactory study of international economic integration and disintegration could evade them. This holds especially true for one of the many aspects of the problem of economic imperialism—the difficult question of whether and how far extensification and intensification of world economy were, and perhaps still are, correlated to each other. In other words, was it not just the spatial expansion of capitalism which kept the whole mechanism of dynamic development going, by providing more and more new markets for the surplus production which constantly increased as productive technique improved, by giving the necessary stimulus to entrepreneurial initiative and speculative optimism and by allowing the “play” essential for any working mechanism? Allowance must also be made for the possibility that the existence of an economic “frontier” in world economy may have been instrumental in providing that psychological atmosphere essential for the breadth of outlook, which is the basis of a liberal commercial policy. This refers not only to the exploitation of new markets, but also to the opening of overseas territories to human settlement. Thus the vast problem of international migrations would also have to be studied in this context.
• 16Full treatment of this set of problems must wait till a later occasion. At this juncture let it suffice to emphasize that this is not only important for a full appraisal of the past development, but even more so for a diagnosis of the present situation of world economy and for a prognosis of its future. It is obvious that it would make a tremendous difference if it were really true that spatial expansion (for both goods and men) has been one of the indispensable and irreplaceable springs behind the development of a highly integrated world economy up to 1914. Here, then, is another of those strategic factors we are looking for, though it seems probable, even at the present stage of enquiry, that the result would be a refutation rather than a corroboration of popular views. But, since here as elsewhere popular views are a very important element in shaping actual policies, a convincing refutation amounts in itself to a constructive action. It may be added that, if there is a grain of truth in this theory, the “saving-investment” approach made familiar by recent developments in business cycle theory will probably indicate the most promising direction of analysis. The problem, therefore, will be encountered again in that part of this investigation reserved for the relationship between economic stabilization and economic nationalism.