International Economic Disintegration

CHAPTER XXII PROBLEMS AND AVENUES OF RESEARCH

TO acknowledge the importance of the subject is one thing and to tackle it scientifically another. The first task, as always, is to bring order into the problems involved and to arrange them according to their relative importance. It seems appropriate to indicate, as follows, some of the most important problems and the direction in which the solution may be found:

(a) The stabilizing or unstabilizing effect of economic nationalism as such (i.e. apart from a business cycle policy supported by economic nationalism) compared with the opposite effect of free international trade. The first question is how far the connexion of a national economy with the world economy leads in some respects to more national stability and in others to more national instability. Here it seems highly necessary to correct certain views which are very widespread to-day, views which unduly stress the possible shocks coming from abroad and the limited potentialities of national economic control under a liberal system, without clearly recognizing the function of foreign trade as an efficient shock-absorber. It was, after all, no accident that before the Great War national economic fluctuations were limited within fairly tolerable bounds during just that period of high international economic integration, which found its most telling expression in the smooth working of the gold standard. It is no use objecting to this argument that that period was also practically free of exogenous disturbances, for these are new elements which have to be assimilated or surmounted under any economic system. It is precisely one of the most common mistakes of the new unorthodox school to make the economic system itself responsible for results due to those present exogenous disturbances with which we have to cope in any case and which cannot be indefinitely compensated by the tricks of monetary nationalism; on the contrary, there is every reason to fear that such highly unorthodox policies may only add to the exogenous forces of dislocation and dissolution. The sober fact remains that not one of the least important reasons for the greater economic stability before the Great War is to be found in that a highly integrated and smoothly working world economy is an equilibrating factor of the first rank.

There are a number of reasons for this, which have often been explained.1 Especially noteworthy among them is the fact that the existence of a wide and freely accessible world market helped to provide an outlet and a compensating factor during the depression and thus to prevent the development of a secondary depression. This was possible because the wider the world market is, the easier it becomes to find markets with different business conditions. There is every reason to suspect that it is precisely the present disintegration of world economy which is largely responsible for the present difficulty in breaking the deadlock of depression and thus for the formidable problem of the secondary depression. Since it is this problem which is giving rise to the new-fangled policies of national economic stabilization and thus to more economic nationalism, we find ourselves to-day in a vicious circle of economic nationalism, less spontaneous stability, policies of nationally contrived stability, more economic nationalism, more international economic disintegration and still less spontaneous stability. In such a vicious circle the advocates of national economic stabilization may claim with some superficial truth that their policies are only a response to the new situation, but the more fundamental truth is surely that they are trying to argue out of a vicious circle of which their shortsighted reasoning is merely a subjective counterpart. If we want to get out of this vicious circle of facts as well as of reasoning the first step to be taken is to recognize its existence and to re-establish the somewhat obscured truth that a wide and integrated world economy is preponderantly a stabilizing rather than an unstabilizing factor.

(b) Protectionism as an appropriate measure of business cycle policy for combating the depression. Whereas under the preceding point we examined the question of whether more or less permanent economic nationalism may serve to make the national economy more stable, there remains the more special problem of whether the introduction of new, or the reinforcement of already existing, protective measures is a suitable temporary expedient for overcoming a depression. It can hardly be denied that the use of protection as an equilibrating instrument during a depression cannot be dismissed a priori as unsound. During this period it may serve two purposes. First, it may help to restore the external equilibrium of a country without having recourse to devaluation and too much wage-cutting. Secondly, some new protection here and there may give a stimulus to new investments and thus serve to overcome the deadlock of the secondary depression. In this case, the free trade argument is not quite convincing, since the social loss brought about by protection may be more than compensated by the social gain derived from the reduction of unused productive capacity and from priming the whole economic process. However, to admit protection as a possibility in “provocative therapy”2 is not to say that it is a particularly recommendable one. Its worst side is that tariffs, once introduced, are very hard to remove. Furthermore, it will be difficult to keep this remedy within the very restricted limits where it does more good than harm. There are other and less dangerous methods than this, and it is quite arguable that a policy of public initiative is to be preferred to this method of giving encouragement to private initiative. Finally, the tariff method is applicable only if there were hitherto no tariffs or only very low tariffs. In cases where tariffs have already become the backbone of industrial monopolies, the interests of recovery will be better served by removing or substantially lowering them rather than by introducing new tariffs. And that is now the case practically everywhere.

(c) Economic nationalism as an auxiliary, an instrument or a consequence of the policy of national economic stabilization (“full employment”). Here we arrive at the real problem of the character, of the justification and of the international implications of the new radical type of business cycle policy aiming at the perpetuation of “prosperity” and “full employment” on a strictly national scale by bold credit expansion, large public investments and, in the last resort, by more and more control of the entire national economic process. It is, of course, impossible to do real justice to this very difficult problem without entering into an extensive discussion of the theories and ideologies underlying these policies. Since this will lead us too far at the present moment we must confine ourselves to stating some of the more important problems involved and to offering some tentative solutions. As this will inevitably reflect more or less the personal attitude of the writer, reference should be made to some of his publications on the subject.3

The first problem which presents itself is that of the possibilities of a stabilizing business cycle policy in an “open system,” i.e. without recourse to excessive economic nationalism and that sort of internal economic planning which demands as its external counterpart some degree of autarky. To analyse this problem seems to be all the more necessary as common opinion to-day leans toward the view that those possibilities are extremely restricted so that there is a clear alternative between a policy of internal economic stability on the one hand and a policy of linking up the national economy with world economy on the other hand. According to this view national economic stability is practically to be had only by way of an “autonomous business cycle policy,” i.e. a policy of national business regulation controlling the national factors determining the economic process (investments, savings, consumption, prices, wage rates) without consideration to external equilibrium, so that one must be prepared to apply more or less violent measures against the consequences of external disequilibrium. In this respect we have to do not only with the well-known “doctrine of alternative stability”4 referring to the choice between internal stability and stable exchange rates or, to be more specific, the gold standard. The problem of the necessity of an autonomous business cycle policy is much wider than that. For on the one hand it has to be asked whether some instability in exchange rates (actual or potential) will not be compatible with continued international economic integration so as to widen the possibilities of national stabilization compatible with world economy;5 and on the other hand we have to face the problem of whether a policy of national “full employment” will not lead sooner or later to external consequences which cannot be coped with even by devaluation, so that in the end rigid exchange control with all its vast consequences becomes inevitable. Furthermore, the momentous question arises whether national economic stability must really presuppose measures of such a nature that a conflict with international economic relations is bound to ensue sooner or later, or whether national economic stability can be achieved to a large extent by measures other than those having as their consequence more economic nationalism. In this connexion the terms “stability” and “full employment” should be carefully scrutinized in view of the apparent misuse made of them to-day in many quarters. Both are sweeping notions which should be used only with great caution. They are “global” concepts which are apt to dull our sense for the details and for the component parts which make up the “average.” This becomes particularly clear if we consider the notion of “full employment.” This concept has a dangerous propaganda value since every person wants full employment in a reasonable sense, and there is nobody who would regard prolonged involuntary mass unemployment as anything but a national calamity of the first order. But that does not mean that there is not a residual unemployment which must be considered as normal. There must always be a minimum of jobless people if the economic process is to have the necessary “play,” and if the number of unemployed falls below this minimum the condition of the national economy is hardly less pathological than if the number of unemployed increases beyond the minimum. In this case “full employment” becomes really “over-employment” as in Germany before the outbreak of the present war. Furthermore, it must be remembered that the different labour markets of a country are largely separate compartments between which there is so little communication that full employment may be reached in one trade—the problem of the “bottle-necks”—while a large amount of unemployment may still persist in others.

Having determined the more or less wide margin left to a policy of economic stabilization in an “open system,” we shall have to turn to the second problem of what a policy of economic stabilization carried beyond that margin really involves. To that end we have to weigh the possible ultimate consequences of such a policy against those of one which remains within that margin, but without neglecting all the possibilities of stabilization to be achieved in this way. By making such a balance-sheet we would be able to assess the real price to be paid for pursuing a policy of full employment at all costs, and we would be better prepared for making the right choice. Here are a number of important sub-questions which have to be studied. There is, first of all, the question of the really stable character of a national investment boom which is the essential feature of a policy of full employment. Can such a boom be maintained indefinitely or does it contain, as the traditional theory states; some cumulative elements which will make themselves progressively felt? It is the answer to this question on which everything else hinges, but in spite of the vast recent literature on this subject it can hardly be said that we understand it thoroughly at the present moment. It may be said, however, that recent developments in the field of business cycle theory have done little to shake the well-established opinion that a boom cannot be driven beyond a certain point without bringing about a cumulative process of disequilibrium. For the fact remains that beyond this point tensions, dislocations and disproportionalities of all sorts make themselves increasingly felt. If this is so the consequences of a policy aiming at the perpetuation of a boom would be incalculable. We could not hope to postpone the day of reckoning indefinitely by piling up one boom upon another, for sooner or later a point would be reached at which the crisis could only be further postponed by measures which result in the tearing asunder of our economic system after the Nazi example. A consistent policy of “full employment” would lead us gradually to economic collectivism and its inevitable counterpart of political and even cultural Totalitarianism. The external reactions to such a policy would have to be met by a water-tight system of exchange control and by planned regulation of foreign trade, and we would end up finally at the complete control of wages, prices, investments and consumption, a control which could not be made really effective without concentration camps and all the other comforts of a totalitarian collectivist regime. If our reasoning is well founded, then, a policy of “full employment,” in the radical sense now fashionable, would set us on a road whose end would hardly be to the taste of most advocates of that policy. It would be the road which oddly enough would lead us from cheap money to the concentration camp.

The least we can say, therefore, is that there would appear to be good reasons for being sceptical of the advantages claimed for the investment boom to which we referred. To this conclusion the recent experiences in Germany seem to lend ample support. The undoubted achievements of the policy of full employment in that country should not make us overlook the fact that it is only after full employment has been achieved that the real problems and dangers begin.

Up to this point of full employment, the means for the additional investments could be obtained by credit expansion without inflationary consequences, since the idle reserves of man-power and productive capacity make it possible to increase production at an equal pace with the increase of the circulating media. So far credit expansion is compensatory, not inflationary. Moreover, the limits beyond which credit expansion must not be driven without the danger of inflation may be considerably widened by a severe exchange control and by ruthless efforts to keep down wages and prices. But although the limits may be made rather elastic they cannot be stretched indefinitely. Sooner or later it has to be realized that the ultimate limits of this policy have been reached. Then we have an entirely new situation in which three courses are open. The first is to stop the wave of investments and to run the danger of a severe economic crisis which such a sudden stop is bound to involve. The second is to continue the credit expansion which now means inflation pure and simple. There is the more promising third course of a policy which tries to preserve full employment without inflation by pumping the means necessary for further investments out of the existing volume of general purchasing power. This means that, by force or persuasion, money has to be taken away from the consumers who now become more and more a rather annoying class of people.

Is this last course likely to lead to a new stable situation? That is the question. In answering it we must first admit that the boom itself, however contrived and artificial, has by increasing the national income largely created the fund which may be expected to pour out the higher tax returns or savings put at the disposal of the government. For a while, therefore, no great difficulties are to be anticipated. But for how long? This is where we see the fundamental difference between the first “compensatory” phase of the boom and the subsequent one of full employment. Whereas, during the first phase, additional investments really made for easier money and capital markets, they mean now, on the contrary, a real tapping of the available capital resources and therefore a tightening of the money and capital markets. In the first phase, investments were part of the machinery of credit expansion while, during the second, they are really consuming credit. The first signs of financial tension will become noticeable: the interest rate tends to rise, the stock exchanges show an inclination toward bearishness, the banks cannot move as freely as before, and the apparent impossibility to oppose anything against these tendencies except inflation in whatever disguise is bound to give the first shock to the belief in permanent prosperity. The problem which has to be faced now is simply this: is it conceivable that the total volume of purchasing power may be tapped by taxes and loans to such an extent as is necessary for permanently keeping up the investment activity of the boom? In other words: is it possible to restrict to the necessary amount that part of production catering to immediate consumption? Can the workers, the iron and everything else be spared in this sector of the economy in order to be used for automobile roads, concrete fortifications and similar governmental investments? Now, there would be no reason to be pessimistic in this respect if the part of total purchasing power claimed by investments of that sort were reasonable in amount and, what is more, represented a fixed percentage of national income. It is precisely here, however, where the improbability lies. For reasons known to every student of the theory of business cycles it is to be expected that every boom will tend to gain momentum as it proceeds until, in snow-ball fashion, a breakdown finally becomes inevitable.

The foregoing remarks, far from exhausting this very intricate subject, will serve only as a suggestive example for the kind of considerations which seem indicated and fruitful here. There are other possibilities for approaching the same subject and for making the choice of policies as rational as possible. Thus it should be made quite clear that a policy of full employment at all costs, supposing as it does the familiar combination of internal planning and external autarky, will in all probability have political, social, and cultural implications which will make the price to be paid for this “totalitarian” full employment appear unbearably high to many who would otherwise be quite disposed to flirt with the idea. In the same vein it may well be asked whether a country will really be prepared to take the consequences in the sphere of international economic relations and the ensuing privations which a nationalist policy of full employment is likely to bring about. Furthermore, it is quite clear that the different countries are in a very unequal position for carrying through such a policy. If the autonomous business cycle policy in the German sense should become the fashion everywhere, the small countries would hardly have any other choice than to join economically (and finally also politically) one of the great countries or a bloc of countries; and in the same class with the small countries would be those countries whose economic structure makes foreign trade the prime factor in national economic life. What the universal application of a policy of full employment would mean for the world economy in general and especially for the countries practising it at present, is a problem to which little or no consideration has been given so far, but it is obvious that it is of the utmost importance. It is more than likely that the consequences would be such as to make the policy of full employment much less attractive than it appears to-day, when only a few countries are practising it. Since the international spread of such a policy would necessarily lead to a more or less complete break-up of world economy into bilateralism, some of the earlier conclusions (see Chapter III (b)) would appear applicable here.

Finally, it must be observed that the present radical trends in the policies of national economic stabilization and “full employment” are largely influenced by the idea, so popular to-day, that the occidental world has to face a secular tendency towards deflation which threatens to make the machinery of the market economy more and more unworkable. According to this philosophy of the “mature economy” the long-run development of the “propensity to consume,” of “liquidity preference,” and consequently of the amount of spontaneous private investments forthcoming, will eventually condemn the capitalistic world to a chronic state of under-investment (= over-saving) and under-employment, if matters are left to private initiative and to the traditional automatic working of the market system. A community, so runs the argument, which becomes always richer, but whose natural fields of expansion and investment are more and more limited by a slackening rate of population increase, by reduced possibilities of geographical expansion, and by the lessened probabilities of revolutionizing inventions, will eventually find itself between two millstones, the one of which will be the increasing “propensity to save” (= the decreasing “propensity to consume”) and the other the decreasing “propensity to invest.”6 In other words: if we persist in investing too little relative to what we save as a community (or better perhaps: what we would save with greater investments, and therefore a greater volume of national income), We are doomed, unless the government takes the economic process into its own hands.

It is difficult to discover any logical flaw in this argument. Nor can it be denied that such a development is not altogether impossible and that, judged superficially, it offers a rather tempting hypothesis for explaining the actual economic conditions to be found in more than one country. But to admit this is one thing; to accept it as an established truth is quite another. So far we have only concerned ourselves with certain assumptions which have already been formulated during previous periods of acute depression, but which have been refuted again and again by subsequent developments.7 Whether they are better founded to-day is a quaestio facti to which it is hardly possible to give a categorical answer. It should be noticed, however, that the arguments against the theory of the “mature economy” have recently become increasingly numerous and more convincing.8 At all events, it would be rash to base the theory of the “mature economy” on our present experiences in a completely disintegrated world whose psychological reactions are now quite abnormal, a state of affairs which is partly due to those very radical economic policies the growth of which the philosophies of a “mature economy” have encouraged. It must be stressed that this theory of a secular tendency towards underinvestment is apt to create its own evidence by encouraging radical interventionism and collectivism which are themselves among the most effective means of discouraging the private propensity to invest.9 We should never lose sight of the fact that the proper functioning of our economic system depends in the end on the harmonious co-operation of sensitive psychological reactions which cannot endure more than a certain amount of strain. It is difficult, for instance, to determine completely the influence which the theory of the “mature economy” has exerted in the United States on a business cycle policy which has not altogether encouraged the average propensity to private investments. A too hasty acceptance of this theory may, therefore, easily help to create the general conditions on which its own validity depends.

These last remarks open up new possibilities of investigation which, in spite of their extreme importance, seem so far to have been recognized only by a few. We are referring in particular to the point that there is hardly any appreciation of the fact that the problem of economic stabilization is not just one of business cycle policy proper but also, in the last resort, one of the economic and social structure in toto. This problem, in turn, can only be understood against a background of the general cultural crisis. The economic crises of to-day, in their severity, in their tendency towards recurrence and in their tenacity, cannot ultimately be understood—as was said at the beginning of this book—except as the manifestation of a world which has been proletarianized10 and deprived largely of its regulatory forces and of the appropriate psychological atmosphere of security, continuity, confidence and balanced judgment. It is not by accident that economic disturbances are weighing most heavily now on those countries which are leading in “proletarianization,” i.e. on the United States, England, and Germany. The real remedy of the disease, therefore, is to be found in a comprehensive and long-run policy of attacking the ultimate cause which is to be found in the pathological state of the economic and social structure.11 Let us state the problem in the simplest possible terms: We assume that there is a rather large grain of truth in the theory that (a) our economic system needs a certain dynamic élan provided by large investment opportunities and that (b) the slackening rate of population increase and similar factors are likely to dull this élan by diminishing natural investment opportunities. If from this assumption, however, the conclusion is drawn that in order to save economic stability the increase of population must be instigated again or that the government ought to rack its brains to find public investment opportunities and to carry them through within a more and more collectivist system we are bound to say that, in the last resort, the one suggestion is just as absurd as the other and that both entail the severest judgment which can be passed on our economic system or on its collectivist successor. An economic system which must be propped up by such measures would reveal itself thereby as senseless and absurd; it would be the “crazy economy” of Tugan-Baranowski. If Socialists to-day base their claims on the alleged superiority of the collectivist regime in inventing investment projects and in carrying them through they are giving only another proof of their failure to understand what is really wrong with our economic system. What ought to be done instead is: (a) to restore the smoothness of the psychological reactions of the market economy and to reinforce the genuine dynamism provided by competition (within the sphere in which and under the socio-political conditions under which it can really work); (b) to reduce the top-heaviness of our economic system by industrial decentralization, by less division of labour wherever it is possible, by the resolute return to smaller economic units and the encouragement of independent, economically stable and humanly satisfactory forms of work and life and by the other means of unmaking mass society to which we shall return in the last part of this book.12 In the boldest and most challenging terms: let us join Candide and cultivate our garden. If the objection were made that we cannot afford this luxury one should remember that the starting point of all these considerations has been precisely the assumed embarras de richesse of the “mature economy.” If we cannot afford to relax somewhat in our strictest economic rationalism because of the alleged tendency towards over-saving, then the whole problem does not exist.

On the whole it seems that many people are approaching this problem in a sort of “Maginot mentality.” They think that all we need is some kind of an organizational “fortification” behind which we may establish ourselves in order to be automatically safe against economic disturbances—some bomb-proof monetary system or some sort of planned economy. We know how disastrous such a Maginot mentality may become and how little it may protect us against unpleasant surprises. In fact, the problem of economic stability can hardly be solved definitely in this way, not even by the most rational money and credit policy, and this for the very reason that it is not a mere problem of business cycle policy, but in the last resort one of the entire economic and social structure. The economic crises of to-day, as we know, cannot ultimately be understood but as the manifestation of a world which has been proletarianized and deprived largely of its resilience, of its regulating forces, and of the appropriate psychological climate of security, continuity, confidence, and measure. In other words, the economic crises which have become so uncontrollable are part of a world which, economically and socially, has grown “lumpy.” It is, therefore, not by accident that they are heaviest in those countries which have gone furthest on the road to proletarianization, mechanization, centralization and social lumpiness, i.e. Germany, England and the United States. The last cause of economic instability seems to lie where ordinary common sense would look for it more than anywhere else: in the top-heaviness of the whole system; in excessive concentration and dovetailed organization; in the dangerously high percentage of wage income; in the slowness of adjustment which, with more and more concentration and interlacement, is bound steadily to increase; in the fact that the way of adjustment is growing longer and longer and involving ever more and ever greater business units while the adaptability of the single unit has decreased accordingly.

In order to avoid any possible misunderstanding, let us state that we do not want to minimize the importance of a rational business cycle policy which, by regulating the volume of money, savings or investments, is to act on the mechanical motion of the economic process as a whole. Even at best, however, there will remain a residue of disturbances with which we must cope, and this residue has become greater while the individual capacity of absorbing shocks has become smaller. An extreme example of this tendency was perhaps, until very recently, the American farmer who, by extreme specialization, had made himself dependent on the current money income to such a degree that, in case of a crisis, lie had to face starvation just as well as the industrial worker. At the other, more happy end of the scale we find the Swiss worker who, in the case of emergency, may get his lunch from his garden, or his dinner from the lake and earn his stock of potatoes by helping on his brother’s farm in the autumn.

It seems unnecessary at the present moment to say more on this subject of the relation between economic nationalism and economic stabilization. This relation is so obvious that it should be clear to everyone, and equally unquestionable should be the importance and the necessity to study it carefully. There remained only to show the direction in which such a study could be usefully made, and it is hoped that this has now been done.

 

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13 See for instance: H. Dietzel, Weltwirtschaft und Volkswirtschaft, 1900, and Dietzel’ article on “Agrar-Industriestaat oder Industriestaat?” in the Hand-wörterbuch der Staatswissenschaften, 4th edn., vol. i. The International Labour Office has just published a special investigation (Employment, Wages and International Trade, Geneva, 1940), which shows that from 1926 to 1936 there has been a close correlation between the changes in foreign trade and those in employment in the different countries. Those whose foreign trade fell off most in the great depression had the worst unemployment, and those whose foreign trade increased least in the recovery showed the smallest improvements in employment.

14 W. Röpke, Crises and Cycles, London, 1936, pp. 198-200.

15 Crises and Cycles, London, 1936; “Vollbeschäftigung,” Economist (Dutch), 1938, No. 7-8; “Konjunkturpolitik am Scheidewege,” Neue Zürcher Zeitung, 9th June, 1938; “Krisenfeste Zwangskonjunktur?,” Neue Zürcher Zeitung, 9th February, 1939; “Totalitarian Prosperity: Where does it End?” Harper’s Magazine, July, 1939.

16 W. Röpke, Crises and Cycles, I.e., pp. 164-173.

17 See H. Belshaw, “Stabilization in a Dependent Economy,” The Economic Record (Melbourne), vol. xv, Supplement, April, 1939. pp. 40-60.

18 See the particularly clear statement of this philosophy by Alvin H. Hansen in his paper on “Economic Progress and Declining Population Growth,” The American Economic Review, March, 1939.

19 It is amusing to note what Macauley wrote one hundred years ago in the Edinburgh Review, January, 1830, on the attitude referred to above: “To almost all men the state of things under which they have been used to live seems to be the necessary state of things. . . . Hence it is, that though, in every age, everybody knows that up to his own time progressive improvement has been taking place, nobody seems to reckon on any improvement during the next generation. We cannot absolutely prove that those are in error who tell us that society has reached a turning point—that we have seen our best days. But so said all who came before us, and with just as much apparent reason. . . . On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?” (pp. 564-565).

20 Cf. Willford I. King, “Are we Suffering from Economic Maturity?” The Journal of Political Economy, October, 1939; Karl Brandt, Long-time Shifts in Human and Natural Resources (mimeographed paper of the Food Research Institute, Stanford University); Gottfried von Haberler, Prosperity and Depression, 2nd edn., Geneva, 1939, pp. 244-247.

21 Much is made, for instance, of the argument that a more stationary population will deprive the building trade of one of its most powerful incentives to continuous new investments. At closer scrutiny, this argument proves to be totally unfounded. On the one hand, it is quite untrue that the demand for new houses is, even to an appreciable degree, dependent on the increase of population, a belief which, immediately after the war, led to a fatally erroneous estimate of the new housing requirements in Germany. Changes in taste, in the distribution of population and production, obsoleteness of old dwellings, the increase of per capita real income and the cost of building are the decisive factors of the building market. On the other hand, it can hardly be stressed too forcefully that it is precisely the constant increase of building costs brought about by monopoly and intervention which, in many countries, is nearly killing the incentive to new investments in buildings. This seems to be the case especially in the United States where the building business is said to have “priced itself out of the market” by the joint efforts of producers and distributors of building materials, trade unions, owners of patents, financing agencies and building regulations to produce rigidity and stagnation (Harry D. Gideonse, Organized Scarcity and Public Policy, Public Policy Pamphlet No. 30, Chicago, 1939, pp. 21-22). Under these circumstances it appears really too convenient to ascribe the deficiency of investments to the advent of the “mature economy.”

22 Cf. p. 242, n. 3.

23 Cf. Part x of this book.

24 Here are some excellent remarks made on the subject by a French writer: “Pour conjurer les diverses crises, pour sauver la société, on propose des remèdes rapides et bouleversants (nationalisation, monnaie fondante, autarcie économique, etc., sans parler de la guerra à laquelle tout le monde pense en silence). Ces remèdes donnent la fièvre aux nations. Fièvro consumptive, hélas! et non réactive, qui, au lieu de balayer les impuretés, détruit les réserves. Les nations cherchent le salut dans ce qui les tue. Chaque essai novateur représente un coup de fouet qui communique à l’organisme collectif une vigueur factice au prix de la consumption d’une réserve vitale. On dilapide les plus obscures, les plus profondes ressources du corps social (je pense à des choses aussi diverses que la stabilité monétaire, la continuité et la saine spécialisation professionnelles, I’insertion de l’individu dans les vieux cadres locaux, familiaux et religieux), au profit d’une réussite éphémère, d’une euphorie d’agonisant. Le salut de l’heure présente a pour rançon la dégradation de I’avenir. Que sait on aujourd’hui—même dans les états autoritaires—de la vraie politique, de cette sagesse patiente et silencieuse qui regarde, qui crée des réserves? Le stigmate essentiel du socialisme (et quelle nation n’est pas aujourd’hui plus ou moins infestée du virus socialiste?) réside là; il méconnaît, il détruit les réserves, les lentes réserves dormantes, la patience conservatrice des organes profonds. Là où sont les puits de la vie—les puits de la tradition, de l’autorité, de l’expérience où s’abreuve obscurément la caravane sociale—il voit des parasites et des obstacles.” (Gustave Thibon, “De l’esprit économique,” Civilisation, March, 1939.) The author is a French peasant who, in his spare time, mastered Latin and Greek and became a shrewd observer of contemporary life.

• 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.
• 9In anticipation of a probable objection, it may be noted that if the development caused by population increase is put under the heading “extensification,” the “intensification” referred to previously (pp. 11-12) appears inexact. In order to get “net intensification” that part would have to be deducted which is due to “vertical extensification,” an operation which is impossible.
• 10H. Rittershausen, Die Valorisierung des Goldes als Währungs- und Aussenhandels problem, Weltwirtschaftliches Archiv, January, 1938, p. 32.
• 11Cf. H. Rittershausen, l.c., p. 34; F. Lutz, “A Note on Gold Movements in the Present International Monetary System,” Review of Economic Studies, October, 1937.
• 12pp. 62-64.
• 13The 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.
• 14(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.
• 15As 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.
• 16The 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.
• 17That 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.
• 18There 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.
• 19There 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.
• 20Full 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.
• 21There is another, though more unusual, sense in which the development of world economy can be conceived as a process of extensification. Spatial extension of capitalism means, in the last resort, not the incorporation of additional square miles, but of additional men living and working on them. The same effect, however, can be achieved by population increase within the orbit of the old trading area; and this is, of course, what happened during the nineteenth and early twentieth century on an unprecedented scale. Spatial (horizontal) extension, then, finds its counterpart in demographic (vertical) extension; and the analysis of both can be largely, though not entirely, conducted on similar lines. Considering the present slackening in the rate of increase of the population of the Western World and the probability that the time is soon coming when this will remain constant, no proof is needed of the importance of an elucidation of this problem for a diagnosis and prognosis of present developments in international capitalism.
• 22In the economic field, the socio-political disintegration of the world finds its most immediate and important expression in the dissolution of the old monetary-financial mechanism, which was based on the gold standard and the elaborate machinery of international credit connected with it. The international legal and moral order, as it existed before, was a working substitute for a world state, and the gold standard based on this order similarly functioned as a world money. Now, when the one went by the board, the other had to go too. It is only logical that, in this field too, order and the sense of international community should have been replaced by disorder, arbitrariness and a more or less frank disregard for international relations, though only a few of the advocates of the new monetary trends seem to realize that what they are recommending is part of the general process of international dissolution. The cold-bloodedness and almost rollicking spirit with which leading countries have thrown off the uncomfortable burden of the gold standard is, indeed, in complete accordance with the spirit of our times. If they have any excuse, it is the fact that they pushed over the table when already more than one partner had ceased to play the game. The gold standard, as cannot be repeated too often, assumes that the rules of the game are being strictly observed by the leading countries. It can well be asked what would have been the reaction if, in 1910, a country with an inflow of gold had prevented the gold from engendering the slight increase of the price level, which was necessary to restore the international balance, or vice versa in the case of an outflow of gold. To-day, under the regime of paper standards and exchange equalization funds, international gold movements, which formerly were an indispensable agent of international economic integration, have become a factor of disequilibrium rather than of equilibrium; instead of being a link joining the different national economies, they are driving them still further apart; instead of working for international integration, they are working for international disintegration. The mechanism of the exchange equalization funds tends to work in a direction inverse to the gold standard by turning gold inflows into a contraction and gold outflows into an expansion of credit. It is not to be wondered at that, under these conditions, the tendency to look on the gold reserve as a war chest, which under no circumstances must be allowed to fall below a certain minimum, is spreading everywhere, now that the old gold mechanism which had given sense to international gold movements has been destroyed.
• 23In the economic field, the socio-political disintegration of the world finds its most immediate and important expression in the dissolution of the old monetary-financial mechanism, which was based on the gold standard and the elaborate machinery of international credit connected with it. The international legal and moral order, as it existed before, was a working substitute for a world state, and the gold standard based on this order similarly functioned as a world money. Now, when the one went by the board, the other had to go too. It is only logical that, in this field too, order and the sense of international community should have been replaced by disorder, arbitrariness and a more or less frank disregard for international relations, though only a few of the advocates of the new monetary trends seem to realize that what they are recommending is part of the general process of international dissolution. The cold-bloodedness and almost rollicking spirit with which leading countries have thrown off the uncomfortable burden of the gold standard is, indeed, in complete accordance with the spirit of our times. If they have any excuse, it is the fact that they pushed over the table when already more than one partner had ceased to play the game. The gold standard, as cannot be repeated too often, assumes that the rules of the game are being strictly observed by the leading countries. It can well be asked what would have been the reaction if, in 1910, a country with an inflow of gold had prevented the gold from engendering the slight increase of the price level, which was necessary to restore the international balance, or vice versa in the case of an outflow of gold. To-day, under the regime of paper standards and exchange equalization funds, international gold movements, which formerly were an indispensable agent of international economic integration, have become a factor of disequilibrium rather than of equilibrium; instead of being a link joining the different national economies, they are driving them still further apart; instead of working for international integration, they are working for international disintegration. The mechanism of the exchange equalization funds tends to work in a direction inverse to the gold standard by turning gold inflows into a contraction and gold outflows into an expansion of credit. It is not to be wondered at that, under these conditions, the tendency to look on the gold reserve as a war chest, which under no circumstances must be allowed to fall below a certain minimum, is spreading everywhere, now that the old gold mechanism which had given sense to international gold movements has been destroyed.
• 24No wonder that every country, which is not important enough to be able to turn the tide, will tend to revise its position in international economy and pay more attention to the risks involved. Thus, in this sense too, international disintegration is spreading. Moreover, it has to be remembered that international disintegration is likely to be a cumulative process, because present conditions make it imperative that, in spite of the trend toward autarky, international trade must go on somehow, however crippled its form and however reduced its volume. International trade as conducted in this age of economic nationalism, however, will inevitably become an additional source of political conflicts, frictions and jealousies, so that a particularly vicious circle ensues: socio-political disintegration—economic disintegration—more socio-political disintegration and so on. The utmost minimum of international friction is to be expected at the two opposite extremes of complete free trade and of complete autarky. If every nation gave up intercourse with the wicked world and retired into unmitigated autarky, as Japan did during the Tokugawa Period (up to 1868), economics would offer no occasion for friction. But such, is the present state of the world, that the different nations are almost as far from the one extreme of complete autarky as from the other of complete economic freedom, and for the reasons explained earlier it cannot be otherwise. The present combination of economic nationalism and the need for a rather large amount of international trade—a necessity brought about by production technique, the enormous growth of population and the wants of this population—is giving international trade just that character, which makes for a maximum of international friction.