International Economic Disintegration

IT is easy to reach agreement on the paramount importance of the general changes in national economic structures for all manifestations of international economic disintegration. It may even be said that such statements suffer precisely from being all too obvious, or even trivial, to be either worthy or capable of further fruitful analysis in connexion with the subject of this enquiry. It is hoped that there is no need to point out again that such a defeatist attitude would entail an arbitrary and dangerous limitation of our understanding of what is happening around us. But there arises the question how such a discouragingly broad subject can be usefully investigated without either leading to a mere superficial survey or to an inaccessible Chimborasso of learning. This same question must occupy us again and again and must be answered in accordance with what has been said in the introductory part of this enquiry and on various other occasions. The primary want which is felt is surely not the supply of mere facts allowing the description of the growth of collectivism and of similar changes in national economic structures, and it is not to be expected that further factual studies lacking guiding principles would enlighten us. What is wanted is rather to make use of these facts for finding the answer to questions which first have to be asked and to suggest new factual studies whenever those questions demand them.

After having stressed again the question of proper procedure as determined by the nature of the problem, it is not possible at the present moment to do more than give a few hints as to the directions in which the research may be usefully undertaken, so that it may possess from the outset the right perspective which is so often lacking in comprehensive studies of this kind. What do we want to know and why do we want to know it? That is the question, here as elsewhere.

What we want to know first of all is the causal interdependence between the changes in national economic structures and international economic disintegration. It has already been made clear how the national changes are generally reacting on international trade. It goes without saying that this question needs further elucidation. For this purpose, it will be necessary to supplement a general analysis by a detailed study of the international effects of the different kinds of changes, which would have to be arranged according to their main groups. In general, it is to be presumed that the final result of such an analysis will rather unequivocally point to a disintegrating effect of those changes on international trade, in the sense explained in the first part on the meaning of international economic disintegration.

One has to bear in mind, however, that there is not a one-way causal relationship between national changes and international trade. Not only is the change in national economic structures conducive to international economic disintegration, but also the latter is instrumental in furthering the tendencies toward the internal growth of collectivism, planning and monopolism.

That protection creates conditions propitious to the formation of national monopolies and may even become the necessary, if not sufficient, pre-requisite of their development, is a fact too well known to need further elaboration. More far-reaching even is the effect of international economic disintegration on national economic policies aiming at collectivist organization and planned control of economic life. For it is obvious that the loss of resilience of international trade is largely responsible for that increase of economic instability which is calling forth the new and unconventional policies of national economic stabilization. Above all, however, it should be noted that a large part of present collectivism and planning owes its origin to the fact that it is hardly conceivable to have a planned foreign trade and a liberal domestic trade, so that sooner or later the new forms of commercial policy will demand as their internal counterpart a corresponding change of the national structure of production and markets in the direction of more regimentation and control. The experience of countries like Germany and Italy clearly shows that the establishment of a rigid system of exchange control can hardly fail to set the whole national economy on the road to total planning. But after these countries, armed with the formidable new weapons of exchange control, governmental trade monopolies and collectivist organization, had started to play havoc with world trade, one country after another found it necessary to adapt itself to the situation created by the introduction of planned methods in international trade, especially by the spread of bilateral clearing mechanisms. In order to do this it was not sufficient to follow the totalitarian states merely in their commercial policies. It soon became evident rather that it was necessary to accept also more and more the internal counterpart—governmental interference and organization. If the industry of such a country was hitherto hardly organized at all, it now became imperative to found export cartels or similar organizations as weapons for the new struggle on the world markets; and if the government had so far held itself aloof from taking a hand in commercial transactions, it soon found out that it had to do something in order to guarantee the actual purchase or sale of commodities in the amount promised to another government in a strictly bilateral agreement. In this way the germs of collectivism and planning may insidiously creep in from outside and, after having infested the national economy, re-act on international trade by giving a further impulse to international economic disintegration. Thus we have finally a vicious circle of intertwined causes and effects: international economic disintegration and internal structural changes.

Consequently, we arrive at the conclusion that one of the causes of the present national changes is to be sought in international economic disintegration itself. Without philosophizing about which came first, the chicken or the egg, we would surely not make a great mistake in regarding the national changes as the really strategic factor which is ultimately responsible for having started the vicious circle. If that is true, it becomes obvious that not only our attempts at a causal analysis of international economic disintegration, but also all fruitful endeavours to find the right remedies, must culminate in an interpretation and explanation of the most important national changes.

To this purpose the first task is to make a list of the main groups of national economic changes likely to have a bearing on international trade in the general manner explained above. Such a list might include the following headings:

1. The growth of monopoly and semi-monopoly.

2. The growth of the size of firms and plants and the increasing rigidity due to the importance of overhead costs.

3. Growing resistance to change due to psychological, political or technological reasons and growing necessity of change brought about by conditions on the supply or on the demand side.

4. Increasing cost rigidities.

5. The advance of interventionism and planning in all their various forms.

6. Changes in the financial structure of society.

7. Changes in public finance (increasing percentage of national income claimed by governments, growing importance of national differences in the burden of taxation, new forms of taxation encroaching more and more upon the economic process, &c.).

8. Changes in demand and in the distribution of incomes.

9. The growing importance of social policies in connexion with the problem of the proletariat.

10. Changes in population (slackening rates of increase, changed composition as to age, sex and distribution over rural and urban communities).

For each of these groups it will be necessary to have a reasoned description of what is really happening and especially why it is happening, and it will be useful to do this with a wholesome amount of scepticism as to the alleged inevitability of these happenings. Of particular importance in this respect is unquestionably an examination of the present trend toward monopoly and concentration referred to under points 1 and 2, because it is this trend which denotes the profoundest and most far-reaching change of our economic structure and which affords an especially plausible motive for remoulding it on collectivist lines, assuming that the trend is too powerful to be curbed. The prevailing opinion to-day seems to hold indeed that, owing to technological reasons, the tendency toward monopoly and concentration is so powerful as to be practically unavoidable. According to the adage that it is not so much the facts themselves that move the world as the opinions about the facts, the practical importance of the common opinion on monopoly and concentration can hardly be overrated. All the more imperative is the need of shedding more light on this problem. In spite of the vast literature now available on the subject of competition and monopoly, especially on the theoretical implications of the increase in size and of the decrease in the number of firms (“imperfect” or “monopolistic competition”), we are still very far from understanding the most important points. This is due partly to the incomplete interpretation of the facts already known, partly to the failure to put the right questions, and partly to the insufficient knowledge of the facts which are made relevant by raising the right questions.1

Approaching this subject in the simplest terms, we do well to start from the undeniable fact that there are very conspicuous cases of the growing importance of fixed capital equipment, which is bound to increase overhead cost and thereby the optimum size of the firm. This is well illustrated by the example of the cement industry. In order to produce 1000 metric tons of cement it was necessary to use in the different periods from 1855 to 1935:2

It would be easy to find in a number of other industries examples which are at least equally impressive. It is not to be wondered at that the conviction has become very popular that modern technology is more and more confirming the Marxian prophecy as to the concentration of production in fewer and fewer plants; and, looked at more closely, all arguments to-day in favour of collective economic control, of economic nationalism and of overthrowing the traditional mechanism of the market and profit economy are found to be ultimately rooted in this conviction. The idea is even so strongly implanted in the contemporary mind that those who dare to dissent are easily regarded as simply ill-informed about one of the most certain phenomena of our time. The ideological flavouring of this conviction, however, shows the greatest variety, because it either serves to create or to foster a pro-monopolistic atmosphere (by showing monopoly and big business to be in accord with technological progress) or to reveal the actual extent of monopolistic distortion of our market economy and to attract public attention to the necessity of the social control of monopolies. Now the question is not whether concentration and monopoly are actually growing in importance—for they unquestionably are—but rather whether or how far this is due to a “natural” gravitation or to exogenous circumstances which can largely be altered, if so desired. In other words: how far is this growth of big corporations and monopolies to be attributed, not to technology, but to state measures like tariffs; quotas; the legal regulation of corporations, holding companies, trade associations, patent rights or bankruptcy; court decisions; railroad rate regulations and a number of other acts and arrangements which we are only too prone to take for granted?

There are two main problems to be attacked by appropriate methods. The one concerns the facts themselves. What we want to know is how far modern technology is really increasing the optimum size of the productive unit. One way to get a clearer idea about this is to study modern technology itself and to group the developments into those increasing and those decreasing the optimum size of the productive unit. No comprehensive enquiry of this sort has become known so far, at least not in published form, which is rather surprising considering the enormous importance of the topic. It is permissible to presume that the result of such a purely technological study would surprise the believers in bigness, since it is already obvious to the layman that such important innovations like electrical power, the internal combustion engine and elaborate machines of the smallest size must have gone a long way toward diminishing the superiority of the bigger plant. This is even true in the field of transportation, where the unusually high percentage of fixed capital makes the case for the big unit especially strong. It can be shown that even here cencentration and monopoly have to fight against great odds.3 The modern development of motor highroad transportation surely signifies, to a large extent, the triumph of the smaller over the larger unit, though it must not be ignored on the other hand that against this fact there must be set the triumph of mass production in the automobile industry. The latter exemplifies the interesting fact that, quite often, modern technological developments lead at the same time to more concentration here and to less concentration there. The same is true in the case of the manufacture of elaborate machines of a size and price suitable for smaller shops,4 and also of electric power stations and the manufacture of electrical appliances. It remains to be seen, however, whether even the highly concentrated industries are not capable of being broken up quite profitably into those parts which must remain centralized for technological and organizational reasons and those which lend themselves to de-centralization. The example of Japan, where the small industries play such an amazing rôle and where even locomotives are said to be manufactured in their component parts by small family shops, may aptly illustrate this point.5

To all this must be added that technology is by no means all, other factors being the nature of demand and the problems of psychology and business organization. As to the nature of demand it is quite clear that wherever mass production affects the kind and quality of products it is dependent on the existence of a mass demand for those mass products. Consequently, it is the consumer who ultimately determines the spread of mass production whenever there is the choice between the mass product and the same product manufactured in a more individual manner, as, for example, in the case of furniture and similar commodities. If the consumption habits of a country, as it is still largely the case in France, favour the high-priced product of a superior quality and of a more individual taste compared with the cheaper, but more vulgar and solid mass product, all technological paeans of mass production become pointless. There is therefore a close connexion between mass production and mass civilization as it is determining consumption habits. It goes without saying that this statement is applicable only to the group of consumption goods and even here not to all of them.

On the other hand, we have to realize the limitations of the technological advantages of mass production and of the bigger plant which are set by some factors of psychology and business organization. The most rational organization on the biggest scale and the most gigantic and elaborate machines are of no avail if insufficient heed is given to the human factor which ultimately determines the smooth running of the plant organization. If the growth of technique and organization is to be a blessing instead of a curse, it must remain “à la taille de l’homme.” As Montaigne said so well more than three centuries ago: “Si avons-nous beau monter sur des échasses, car, sur des échasses encore faut-il marcher de nos jambes. Et sur le plus haut trône du monde, nous ne sommes assis que sur notre cul.” If technique and organization are allowed to grow beyond the human dimensions, the taille de l’homme, adverse consequences of various kinds will ensue, consequences affecting not only the factory itself but also possibly the entire society. Taking into account all these consequences, including those of a sociological character (mass civilization), we feel entitled to put forward the hypothesis that a technique and organization of production which allows the cheapest production on the basis of the calculable cost elements, may mean the most expensive kind of production for society as a whole. But that is by no means all, for the zealots of technology and organization quite often not only disregard those wider social consequences, but are inclined to overestimate even the technological and organizational possibilities of Bigness; and a large public is ready to follow them in their exaggerated enthusiasm. Our age seems to be characterized by a curious tendency toward megalomania and an instinctive delight in the technically impressive which are subconsciously colouring our views.6 Giant factories and corporations arrest our attention, while the great number of smaller industries is less conspicuous. The foundation of a new great corporation or of a new cartel finds the widest publicity, while the liquidation of old ones more often than not remains unnoticed. In this way a quite distorted picture of the proportions between the bigger and the smaller industries may develop in our mind. It is all the more necessary to correct this popular picture by careful factual studies.7

Finally, we must not forget the quite irrational motives which often lead to the growth of plants and corporations and to the formation of trusts: considerations of business prestige and publicity, the lust of power and the same mere pleasure in accumulating which drives others to collect stamps. It is a well-known fact that motives of this sort may be responsible for investing corporate savings within the corporation’s own plant beyond the limit set by the rate of interest which would have been paid if the capital were to be raised on the market.

So much for these possibilities of describing the facts. The other group of problems presents itself if we turn to an interpretation and to a theoretical analysis of the facts relevant to the phenomenon of the industrial concentration. It is here where, among others, the discussion on the meaning and implications of imperfect competition finds its place, a discussion which certainly leaves the impression that, in spite of the work done by Chamberlin, Joan Robinson, Miksch, Stackelberg and others, the last word has not been said so far. The same must be said on the subject of the economics of overhead costs, which lends itself so easily to misuse on the part of monopolistic interest groups. If there is some growth in the importance of fixed capital and overhead costs, to what extent is it really true that this makes competition more and more unpractical and the need of private or public control more and more undebatable? Why should it not be expected that the greater risks involved in a larger share of fixed capital would exert a regularizing influence on the influx of money capital into the industry in question? How would things work themselves out if the entrepreneurs of those industries did not count on support from government intervention or monopoly and if the risks entailed by the heavy outlay of fixed capital became apparent in overinvestment and overproduction? These are some of the questions which seem pertinent in this connexion, suggesting that much scepticism is appropriate with regard to the ideology of overhead costs. The least that can be said on this subject is that there is much which is too easily taken for granted and which at the same time serves the interests of powerful groups not to be identified with the common interest.

At the present stage of the enquiry it would be both unwise and inexpedient to do more than to indicate the range of problems to be envisaged under the caption of this part and to suggest possible ways of tackling them. It is a subject which seems rather remote from the immediate objective of the whole enquiry, but it is hoped that enough has been said to dispel this impression and to replace it by the other one, that if we want to go deeper into the matter we cannot afford to dismiss this most important subject because of its apparent remoteness.

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8 Cf. on the whole question of the “inevitability” of monopoly: L. Robbins, The Economic Basis of Class Conflict and Other Essays in Political Economy, London, 1939, pp. 45-80, and the excellent little pamphlet by Harry D. Gideonse on Organized Scarcity and Public Policy (Public Policy Pamphlet No. 30, Chicago, 1939). I refer also to my critical review of H. Levy’s Industrial Germany in Economica, February, 1936.

9 Frankfurter Zeitung, No. 554, 30th October, 1938. It is interesting to note that annual amortization of plant had risen by 1935 to 23% of total turnover as against 10 to 14% before the Great War.

10 See Kurt Wiedenfeld, Die Monopoltendenz des Kapitals im Spiegel der Verkehrsmittel, Jena, 1937.

11 A good example of this trend is the recent development of the shoe industry in some countries. For England it has been shown that both the monopolistic organization of the shoe-machine industry and the greater variability of output has led to a distinct decrease of the optimum size of shoe factories (H. C. Hillmann, “Size of Firms in the Boot and Shoe Industry,” The Economic Journal, June, 1939, pp. 276-293).

12 Cf. T. Uyeda, The Small Industries of Japan, London, 1938.

13 Cf. Justice Brandeis, The Curse of Bigness, New York, 1934; Hyacinthe Dubreuil, La fin des monstres, Paris, 1938; C. F. Ramuz, A la taille de l’ homme, Paris, 1938.

14 Among the studies already made on this subject, some American investigations are of special interest: Big Business: Its Growth and Its Place, published in 1937 by the Twentieth Century Fund, Inc., and The Modern Corporation and Private Property (New York, 1932) by Adolf A. Berle and Gardiner C. Means. The Twentieth Century Fund report states that 80% of all non-governmental economic activity is carried on by the medium-sized or small corporations, by firms which are not incorporated at all or by individuals, and Berle and Means arrive at rather the same result. It should be added, however, that such statistical studies have to face many serious problems and dangerous pitfalls. Consult on these: W. L. Crum, “On the Alleged Concentration of Economic Power,” The American Economic Review, March, 1934, pp. 69-88 (accusing Berle and Means of having even overestimated the growth and importance of concentration) and Edwin B. George, “How Big is Big Business?,” Dun’s Review, March, 1939. The same problem has been studied on a local scale by W. H. Hench, Trends in the Size of Industrial Companies in Philadelphia from 1915 through 1930, Philadelphia, 1938. This author found that there was little evidence of growth toward the single stable size. “The outstanding characteristic throughout the investigation has been that of change, either growing or declining, and not of stability.”

• 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.
• 8The 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.
• 9(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.
• 10As 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.
• 11The 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.
• 12That 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.
• 13There 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.
• 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.