International Order and Economic Integration

I THE DECAY OF THE WORLD-ECONOMY

The remarks of the preceding chapter have proved how much the peace, order, security, justice and welfare of all countries depend on the creation of a common will of the nations to overcome the present decay of the world-economy and to find new bases for free and universal international economic transactions. The sources of resistance, which operate against the formation of such a will, are so numerous and so powerful, that one might be tempted to give up hope, to let things take their course, and thus to acquire temporarily the reputation of being a realistic thinker. No one, however, who knows what is at stake can allow himself such resignation. It is quite unjustified as long as no irrevocable decisions have been taken and the hope exists of dealing with the resistance by getting at its psychological roots. The deepest of these roots however, next to collectivistic ideology, is perhaps fear.

Fear, defined as an unreasonable and immeasurable exaggeration of possible dangers is indeed a basic trait of the present-day resistance to a world-wide economy. What, then, are the individual sources of this fear of the world-economy?

We are certainly not mistaken, if we seek the psychological basis of this anxiety in the fact that the memory of the once well-functioning world economy has become paler and paler, whereas the decay has persisted for so long, that many can scarcely imagine how international economic relations are to be regulated other than by offices, forms, prohibitions and authorizations, quotas, controls, exchange-control and clearing-contracts. The fear of the world-economy is therefore in a quite general sense a tendency to shy back from the unknown and the familiarity with existing conditions. So our first task must be to refresh the memory of the world-economy, as it existed heretofore and therefore to depict its decay, in order to make clear to what unbearable conditions people believe we must get used.

THE OLD WORLD-ECONOMY

Just as a healthy human-being worries little about the enormously complicated combination of his organs, which gives him health, and only discovers in illness on how many preliminary conditions it depends, so did the civilized world also accept the functioning of international economic transactions as quite natural and recognized only when it was shattered, its complicated structure and the number of the conditions, on which its functioning had to rely. Actually it is only today, when the world-economy no longer exists, that we are beginning to unveil the mystery of its effectiveness and to realize how involved in fact something was which once seemed so simple and natural. For our purposes we are limiting ourselves to the following main-points:

1. The world-economy was basically a system of interdependence and intercommunication.

That is to say: there was a connection between all national markets, which made the world-market practically a uniform whole. What comprehends all economic relationships into a national economy in a manner which seems to us quite natural and brings about what we call economic integration was present to a great extent also within the world-economy: one could buy more or less unhindered in the cheapest market and sell on the dearest and in this way bring about a balance of price and markets by what is called in the language of the stock-exchange ‘Arbitrage’. This condition of genuine economic integration within the world-economy was in practice so far fulfilled, that the difference between national and international economic integration was only one of degree and expressed the natural obstacles rather than the enforced and therefore more burdensome ones. Certainly there were tariffs but their importance was on an average not appreciably greater than those of the transport-costs. Both were obstacles, which had to be overcome in international transactions, without their being able to eliminate the freedom of the transactions which linked the individual national markets into a world-market and limited international price-differentials for goods on the world-markets to a minimum.

2. Representing, as if did such a system of intra-communication the world-economy was also a multilateral system, actually in a double, not always clearly distinguished sense: (a) in as much as an important part of world-trade actually developed multilaterally (actual multilateralism) and (b) in so far as that in practice the entire world-trade could have developed multilaterally (potential multilateralism)1). The potential multilateralism was at least as important as the actual, for only the ever-present possibility of changing over from bilateral to multilateral transactions made of the world-economy a completely interdependent and interconnected system, which, in simple words, amounted to a situation in which one could at any time buy in the cheapest market and sell in the dearest. But whereas the actual multilateralism can be measured statistically, the potential one evades by its very nature every attempt at measurement. All we can say about it, is this: the potential multilateralism stands or falls by certain preliminary conditions of international economic transactions, among which the freedom of international payments and the absence of a ‘planned’ regulation of foreign trade stand at the head.

3. The world-economy was, thanks to a really international monetary-system (Gold standard) practically a global payments community. That is to say: thanks to the stable parities in the very small margin between the gold export and gold import points, thanks to the gold standard’s own mechanism for the preservation of these parities and above all to the unlimited freedom in the exchange of the currencies themselves (convertibility), the juxtaposition of national currencies was no factor which exercized an active influence on the flow of goods. As the rate of exchange was subject to no changes, at least not between those countries whose trade made up the bulk of international economic transactions, as such changes were not for a moment considered possible and exchange itself was completely free, the world-economy was a payments community like every individual national economy and the gold standard practically a world-wide payments system. However clear this effect was, yet it is only today, when the worldwide payments system has been wrecked, that we realize that it was dependent on more numerous basic conditions, than at that time seemed to be the case. The effectiveness of the gold standard was in fact simultaneously condition and effect of the entire economic system of that time and along with the latter, subject to the same political, legal and moral hypotheses. We know today that the so-called ‘automatic’ character of the gold standard was dependent on the constant will of all governments and all Central Banks, to maintain this character and moreover, on a certain measure of conscious control. It was a mechanism, which could dispense neither with constant lubrication by short-term international capital-transactions nor with the guiding hand of London as leading financial-centre of the world2).

4. The world-economy, with the free-trade area of Great Britain as its nucleus, was paralysed by no kind of prohibitive import duties on the part of the other main countries. Certainly protectionism had constantly advanced since the seventies of the last century and had become a more and more serious problem; admittedly here lay the seed of impending disintegration. It is nevertheless beyond doubt, that government interference with international trade were up to 1914 held within limits which allowed the world-economy to function. Bearable tariffs, the general application of most-favoured nation treatment and the stabilization of customs duties by long term commercial contracts together ensured this result. The animosity with which the issue was fought out at that time between Free-Traders and Protectionists, was certainly not unjustified, but present day experiences however teach us how much it meant, that the protectionism of that period managed to limit itself to ‘orthodox’ measures. Thus we get the impression today that both schools of commercial thought – the Free-Traders and the Protectionists – had overestimated the importance of their dispute. It should not be forgotten that up to 1914, in spite of all protectionist obstructions, the world-economy had constantly developed. We must further not forget to place the level of customs duties in relation to the reduction of transport and production-costs which took place during the same period, and it must be considered that, if Protectionism was intent upon the aim of holding-up world economic integration, that it achieved this aim far less than commercial liberalism the opposite one.

5. The world-economy was a system of basic freedom not only in the international movement of goods, but also in the international movement of capital and human beings.

The fact that the gold standard excluded any monetary risk involved in long term capital investments abroad, the insignificance of governmental interference with the international movement of capital and not least the political and moral integration of the world, which permitted men to trust in peace, fidelity to contractual obligations and legal security, – all this led to gigantic international movements of capital becoming an important symbol of a world wide economy. Added to the international mobility of capital was that of human beings and their working-power. Immigration-restrictions were almost totally absent, and men made use of the opportunity thus offered to them to reach countries of high wages and lies social pressure, to an extent which is unique in history. This intensive movement of capital and men made an appreciable contribution towards the economic integration of the world and helped to even on the conditions of production and levels of income, a process which appears to us quite natural if it is going on inside a national economy. Thanks to the harmonious combination of the flow of goods and capital, thanks to the effectiveness of the gold standard and the smooth functioning of the international credit mechanism the ‘transfer’ or large amounts of capital caused no difficulties. Moreover nervous movements of capital of a short-term kind (‘hot money’) were as good as unknown and in this way disturbances were avoided, which were to become so fateful after the first World War.

THE WORK OF DESTRUCTION

Even these few hints make it clear that we must understand by world-economy not a mere statistic total of imports and exports of all countries, but the definite form of an international economic order, which approximates international economic transactions to national in degree, if not in kind. From this it follows that there must be really international markets, a really international formation of prices and that freedom in the choice of buyer and seller which is an indispensible part of any such international economic integration. World-economy, as we saw, can only exist in the form of a really international market, price and payment community, which presupposes an interdependent, intercommunicating and multilateral economic system with an international monetary system, a minimum of import and export restrictions and with basically free international movement of the mobile production factors (labour and capital). Anyone who finds it difficult to comprehend the sense and implication of these conditions, should bear in mind, that such an international economic system must provide for mobility in the flow of money and goods and opportunity to exploit regional price-differentials (‘Arbitrage’) which we take for granted in a national economy. As soon as this possibility is no longer present within a national economy – let us say between Geneva and Zurich, a real economic disintegration will occur with the result that we can now no longer speak of a uniform national economy, but only of a juxtaposition of more or less incoherent economic relations. If one counted together the turnovers still taking place within the national economy, the resulting figure would perhaps be as impressive as ever but it is obvious that this mere quantum would correspond to a completely changed ‘quale’ a mere addition of isolated economic acts, which lack all unity and inner relationship. The name ‘national economy’ would have lost its sense.

The parts are lying in his hand
But lacking is the mental bond.

Exactly what would occur within a national economy if it were no longer a market, price and payment community, has happened in the world-economy, since it has stopped to an increasing extent during the last twenty years being a multilateral interdependent and intercommunicating system. Since we have had to deal with a real and vast disintegration of the world-economy, which has been produced by the disintegration of the multilateral network, the international monetary-system, the most favoured nation principle and that minimum of commercial freedom, which in spite of a policy of national protective tariffs has been guaranteed. By the transition from the orthodox interventionism of the traditional protective tariffs policy to the unorthodox (planning, collectivist) methods of the commercial policy (quotas, prohibitions, foreign-trade monopolies, exchange-control and clearing-contracts), from multilateralism to bilateralism, from the international gold standard to monetary nationalism, from freedom of payment to exchange-control and from the policy of the most favoured nation principle to that of discrimination and preferences, the world-economy has been made into what a national economy would be, if the market, price and payments community were interrupted from town to town and from canton to canton. Just as such a national economy would be little worthy of its name, so is there little sense in continuing to refer to such a disintegrated world-economy in this way.

This destruction is the work of the governments, who have adopted the above-named measures of economic policy, the ones from evil intention, others from negligence, weakness or lack of insight and still others from self-defence or after extreme resistance and in pessimistic resignation. If we are to lay the chief guilt at the door of Germany with its policy of autarky directed by the vested interests of the vast grain-growing estates and of heavy industry, or the United States, which the more it had, as chief creditor of the world, to open its doors to the goods of its debtors, the higher it raised its tariffs, or Great Britain, which torpedoed a tariff-reduction agreement between Holland und Belgium (Ouchy-Conference of 1932) by an appeal to the most-favoured nation clause, whereas it tied its own commercial bonds with the Dominions even tighter, or small and medium-sized states which competed with each other in narrow-minded economic nationalism? It is in truth extremely difficult to decide the question of guilt, and more useful than all mutual accusations is the common admission: nostra culpa, nostra maxima culpa.

This destructive character of commercial policy results in a small degree from the limitless sharpening of the traditional protective tariff policy, in a large degree however from the advancement of new measures of commercial policy. Their common characteristic is the aim of submitting international economic acts to a conscious quantitative regulation. Here we are dealing, in other words, with unorthodox measures, which result together in the new system of a ‘planned’ commercial policy in contrast to the earlier free economic system, and correspond to a domestic economy, which we term collectivist (arbitrary economy). If it was previously left to the otherwise free foreign-trade, to react to protective tariffs in the desired manner, these reactions should now be replaced by official orders. It is the command of the state, which puts itself in the place of the market and with brutal directness and by conscious planning gives foreign trade the desired form and the desired scope3).

And what since then is desired is a foreign trade, which is left as little as possible to the regulating forces of competition and corresponds to an increasing economic nationalism, to which German economic writers at that time gave the name ‘autarky’. It is further a foreign-trade which at every moment strictly obeys the wishes of the government and promptly adapts itself to every sudden change in these wishes. Finally it is a foreign trade, which is so steered that it becomes an important part of an over-all collectivist system, its possible disturbing influences are cushioned before they impart themselves to the domestic markets which are subject to planning and control. If protective tariffs fixed by long term commercial agreements were the heart of the earlier trade policy and served the relatively modest goal of protection and the promotion of individual economic branches, the new commercial policy is becoming more and more an instrument of a complete screeming of the whole national economy which is rigid with and dominated by monopoly and interventionism.

Since about 1931 a revolution has taken place in international commercial policy, which has disintegrated the world-economy. It was a revolution of aims and a corresponding one of means. Until this point economic nationalism had almost everywhere a definite and limited aim: to guarantee producers protection from foreign competition according to the conditions of their branch of production. The traditional method of commercial policy was in line with this aim of protecting production from case to case: it was the policy of import duties, which otherwise left the way free for international trade and hindered it neither by exchange-control nor by state trading monopolies. Governments limited their interventions to a merely qualitative (liberal) control of foreign-trade, and the quantitative control, ‘unorthodox’, collectivist control and ‘planning’, was only of secondary importance after the removal of the traces left over from the first world war except in Soviet Russia, which in this way showed itself to be a highly-disturbing foreign body in the world-economy.

Then after the collapse of the international credit and payment system in the year 1931 and with the shattering of the national monetary systems, the disturbing change which is well-known to us set in. Instead of the individual protection of the producer another and more comprehensive goal begins to dominate the foreign trade policy of the nations. More important than the protection of the individual producer is from now onwards the screening of the national economy as a whole, the currency and the more or less controlled and planned national economic system from influences and disturbances coming from outside. It is no longer the competitive ability of individuals which stands in the foreground, but the equilibrium of the balance of payments, which before 1914 was never mentioned in the highly developed countries and only temporarily or on the fringe of discussion from 1920 to 1931.

To this radical change of aim corresponded the no less radical change of methods in foreign economic policy. In the service of the new and compretensive task there now developed suddenly that system of collectivist isolation, which is crowned by monetary control, and this system has remained till today predominant in Europe as well as in the greater part of the world. The result is the disintegration of international economy, in Europe and throughout the world. That is the point, which for all further considerations in this book we must constantly bear in mind.

THE CONSEQUENCES

What this distinction of the world-economy, which is essentially the work of the new control-by-planning methods of commercial policy, means for the prosperity and peace of the peoples, need not be further explained at this point. We prefer to complement the general ideas, which the reader may be presumed to possess on this subject, by emphasizing the following points:

1. The dissolution of the world-economy means the tendency to displace multilateral by bilateral commercial relations and in this way the destruction of the international market, price and payments community. In this way the deep and real sense of the word ‘disintegration’ is fulfilled.

2. The dissolution of the world-economy causes an unsteadiness in international trade hitherto unknown 4). To the geographical disintegration of the world-economy by bilateralism, corresponds the lack of continuity in time; collectivist foreign trade is, quite characteristically, given to abrupt changes in extent, composition and geographical direction, according to the instructions from the central authorities by which it is adjusted to the continual changes in trade agreements, whose term of validity becomes shorter and shorter and to the ever-changing economic conditions which, under bilateralism, are no longer kept in balance by the steadying influence of the world-economy. Corresponding to the general character of collectivism, the government is now living from hand to mouth in foreign trade, by detecting now here, now there opportunities for buying or selling, by now throttling imports and increasing exports, because the domestic production of a commodity tends to surpluses, now increasing imports and throttling exports, because an item is in short supply. A globe-encompassing world-economy, which represents a coherent whole and is solely subject to the conditions of production-technique, transport-routes, private business-relations and the consumer-habits of the free market economy, conditions which do not as a rule change abruptly, such a world-economy, which furthermore enjoys the stabilizing influence of the largest imaginable area and a long-term settlement of commercial policies and monetary conditions is the very image of steadiness, continuity and reliability. Collectivist foreign trade, however, becomes more erratic, temperamental and unreliable in proportion as it is removed from the stabilizing forces of the world and subjected to the control of the central authority.

Two remarks are necessary to complement these general statements:

To actually understand the unsteady, frankly anarchistic character of collectivist foreign trade, one should bear in mind that it is the essence of collectivism to change the entire national economy into a kind of giant firm, which stands under centralized direction and therefore has the possibility of buying and selling, without having to adjust its prices to the costs incurred in the production of every single article. It becomes a gigantic department store, which can vary prices within the overall costs according to circumstances, whereas the consumer or tax-payer pays the difference. That, however means that such a collectivist state can at any time by powerful and sudden dumping-operations or by the buying-up of goods throw the world-markets into the greatest confusion and in this way become a peace-disturber of the first order, from whom one can expect surprises at any moment.

As long as Russia with its insignificant foreign trade was the sole case of this kind, the rest of the world could to a certain extent put up with such a seat of disturbance. After, however, National Socialist Germany had trod the same path, the disastrous influence of the collectivist principle on the world-economy became evident, and the world has since learned more from the Third Reich than it realizes. In this way we come to our second remark. The national socialist example shows that one country after another came to believe it necessary to meet the collectivist disturber of the peace with the same weapons. In this way, however, not only did the disaster spread, but the collectivist countries were also taught that, the more imitators their example found, the more difficult did their situation become. In this way it was proved that the collectivist principle in foreign-trade, in contrast to that of the freemarket economy is essentially a principle of disharmony and parasitism.

FORCES OF AGGRAVATION AND SELF-HEALING

The remarks just made already indicate that the dissolution of the world-economy by collectivism has a fatal tendency to unleash forces, which drive it further and render a reversal of the process more difficult.

Collectivist propaganda has an infectious effect, in particular as a more or less pronounced inclination towards collectivism is to be found almost everywhere. This infectious effect is strengthened by the fact, that the example of the collectivist countries faces one country after another with the question as to why it should be the dupe. Even if it prefers to defend itself by boycotting and a commercial isolation of the collectivist country, instead of applying collectivist methods itself: (example: the United States towards National Socialist Germany) some compulsory foreign trade is inevitable. Countries remaining faithful to the world-economy as a rule themselves, like Switzerland, forced to apply the control-by-planning methods of bilateralism and of clearing-agreements, when dealing with collectivist countries, and it is not always easy to avoid reactions on the domestic economy or on the remaining free commercial relations. In short, every country is sooner or later faced with the serious question whether, in face of the growing uncertainty and unsteadiness of international transactions it must not thoroughly review its relationship to the world-economy.

The further this development advances and tears down one country after the other into the whirlpool and the more the mere passing of time accustoms all to such a caricature of the world-economy, so much the more does the memory of its origins and the responsibilities fade. People tend to, that just as they have slipped into this whirlpool, there must also be a way for them to get out of it, and every government adopts the habit of pleading its powerlessness and the necessity for ‘howling with the wolves’. With a kind of exceptio plurium – we are experiencing that once more in the case of the abolition of monetary control in Europe which is recognized as urgently necessary – the responsibility of the individual countries for this unsatisfactory state of affairs is blurred because instead of boldly deciding to reverse the process, every country lays the blame at the door of other countries, the spirit of the time and inevitable circumstances. Every country waits for the good example of another, with the result that all wait in vain. People argue as if the dissolution of the world-economy were not the work of men, but a dark fate to be ascribed to higher powers, whereas in truth individual countries have taken over the leadership in descent and now individual countries too must take over the leadership in the about-turn. If the plea is made that nothing can be changed in conditions which have once been established, it should also be admitted, that there is no degree of dissolution, which could not be defended with such a comfortable argument. Unfortunately one must admit that the return is in fact more difficult than the descent. As in nature, where perhaps the deforestation of a country shows sometimes the impossibility of repairing the damage, there are in social life, too, irreversible processes or processes to be reversed only with difficulty. While today’s dissolution of the world-economy is not an irreversible process like an advanced inflation, yet one cannot fail to see that it is one not easy to reverse. What weighs most heavily here is perhaps the fact that economic nationalism creates ‘vested interests’, which defend the status quo with extreme obstinacy and which, in this connection, despise no means. In addition we must consider the fact that this nationalism is closely interwoven with a more or less collectivist pattern of the domestic economy and can only be removed along with it. The further this fusion has progressed and the deeper the interference with the economic process has become, which is the inevitable corollary of a collectivist commercial policy, as, indeed of, every unorthodox interventionism, so much the greater is the resistance which every attempt at a thorough revision has to meet. These forces of aggravation are, however, opposed by forces of self-healing, and it is undeniable that the latter have been effective since 1945. At last there are factors, which put certain limits to the dissolution of the world-economy. It is for once the well-known fact, that even a collectivist trade policy does not succeed in suppressing all the forces of the market, which intra, praeter et contra legem urge a liberation and restoration of the laws of supply and demand. Even the most severe punishments and the sharpest controls cannot make the brutal interference with the market 100% effective or eliminate the natural gravitation towards competition. The more state intervention is directed against this gravitation, the more violent is the pressure to be applied, the stronger in turn, is the counter-pressure, and which of them will turn out to be stronger in the end, cannot be prophesied with certainty.

Now there is another special reason why the isolationist and oppressive apparatus of a collectivist commercial policy has something so violent and unnatural about it and why the strongest pressure must be exercised, in order to reach the goal at least in some measure and for some time. The world economic disintegration means a retrogression in the development towards ever more intensive economic relations, and this, moreover, at a single point determined by political circumstances, namely on the state-frontiers. Autarky does not, indeed, signify a romantic reversal of the entire economic development to the idyllic level of past centuries, but only of developments extending the frontiers. But what can national boundaries mean in the long run, of which Seneca even in his day said: O quam ridiculi sunt fines hominum? Let us state immediately at this point, that there is no area of the earth where the absurdity of this situation strikes one more and is at the same time more unbearable than in Europe! Nowhere is the contrast between the possibilities of economic development and its actual restraint by the narrowness of a national policy of isolation more challenging than here, where the greatest masses of human and material economic forces crowd together in the smallest space, but bump everywhere into the hedges of a jealous neighbour.

That primitive economic intercourse, to which collectivism is turning back the world economy, may have been thoroughly normal in previous centuries, but it stands in a contradiction which is in the long run insupportable, to an economic system, which is so integrated and rationalized and based on such a highly developed technique of production and transport as we have today. For this reason it is so unconvincing, if one represents the world economy of the most recent past as something abnormal and artificial, which after a brief flowering has been condemned to decline. What is really abnormal and artificial is rather the attempt to bring about this decline by all possible means.

This explains why economically leading countries such as National Socialist Germany had to move heaven and earth to reach only a relative degree of autarky, and why a country is by such convulsive efforts involved in the most severe economic, social and finally even political crises and sinks deeper and deeper into the morass of collectivism. This is further the reason why the romantic economic policy of autarky has in truth the paradoxical consequence of ending in a highly unromantic over-organization, over-bureaucratization and over-rationalization within its boundaries, and why such a policy can never find rest, but be subject to its own dynamic force, which continually set it new and unforeseen problems and tomorrow throws overboard the equilibrium so laboriously established today. And so we may then finally expect with good cause, that the forces of world-economic integration, which are today being suppressed with all violence, will sooner or later once again make themselves felt. Naturam expellas furca tamen usque recurret. It is in fact difficult to block the current of world transactions: somehow it will carve out a new bed for itself, after all the vast disturbances which such a process brings with it, but which could have been avoided, if one had not attempted to fight against the natural course of things.

All these sentences were written more than fifteen years ago amid the outbreak of war. If I examine them today and compare them with the present state of the world, the truth seems to have been well confirmed, that the antinomy between the disintegration of the world-economy and the dynamic overall development tends towards finding a balance. In the reintegration of world economy appreciable progress has been made, which will yet be discussed in more detail and the urge to further loosen up the still existing fetters is unmistakeable. It is, however, just as indisputable, that it is precisely this disintegration of the world-economy, which is still advancing, although admittedly at a lessened pace, which provides as always the drag-chain of the overall economic development of the west. The balance of payments disturbances, the lack of equilibrium in foreign trade, the lack of an international monetary system, exchange-control, bilateralism, trade restrictions of all kinds and not least the continual stoppages in the movement of international capital – everything together produces confusion, misdirection of the factors of production, lack of equilibrium, restriction of development and a paralysis of the productive potential of the entire western world, whose growth can be read from the figures of a production which has meanwhile so astonishingly increased. These figures can and should not however hide from us the fact that there is still something fundamentally wrong with the economic system of the west, and the origin of this confusion is to be sought in the continuing disintegration of international transactions, which deprives the increase in overall productivity of a great part of its fruits and rather increases the tension between the various economic areas of the world. The situation is in truth more paradoxical than ever before.

All that will perhaps be more readily understood in the small countries than in the large, and in this way we come to a point, at which a few common misapprehensions must be corrected5). We have in recent decades got used to seeing in the great number of small sovereign states, a number increased by the last peace treaties, one of the most important causes of the decay of world government and therefore to expect a recovery by the creation of greater economic units. Again and again we hear in this connection of the multiplication of customs frontiers since the first World War, of the ‘Balkanization’ of Europe and similar things, until we are almost convinced that the freedom of international trade would unquestionably be tremendously furthered, if the colourful political map were simplified and reduces to a few great economic powers.

In fact we are here dealing with half and quarter truths, which are almost worse than complete errors. Certainly small countries have in recent decades paid homage to economic nationalism in a very stupid and narrow-minded way, but the striking thing in this case was less the damage they inflicted on the world economy than that which in ignorance of their industrial possibilities they inflicted on themselves. The ambition of many of these countries to be at all costs self-sufficient in pencils or motor-cars, was certainly ridiculous and highly expensive. But one would certainly lose all sense of proportion, if one did not admit that it was a policy which was in the first instance very costly for the country itself, and that the protective tariff policy of some large states has inflicted far greater damage to the world-economy than all the autarkic extravagances of the Balkan countries taken together. That this is so often overlooked, is once again a result of the habit of thinking in square kilometers and not in economic power.

To separate truth and error, we must distinguish between two types of small states, namely, those which like Switzerland, Holland, Sweden or Belgium have reached a very high economic level and have become exporting industrial countries standing on the fringe of over-population, and the others, which like Rumania or Bulgaria are still in the phase of development from an agrarian into an industrial country. The small countries of the first type will on account of their economic structure and on account of their smallness be forced, to a far greater extent than the large states, to acknowledge the advantages of the world-economy and to pursue a moderate trade policy. They are so to speak great free port areas, for which a lively and as far as possible undisturbed exchange of goods is a really vital question, of direct topicality for every moderately perceptive inhabitant. They must, in order to be able to give nourishment and employment to their numerous population, bow to the necessity for exploiting the advantages of the international division of labour. Every attempt at autarky would be suicide for them and they know it.

Naturally even here there will appear tendencies to convert the economic advantages of the small state into disadvantages and instead of, like a free port area, obtaining the goods cheaply from all parts of the world and paying with a few highly-specialized products, to try to produce goods inside the country, for which the cost of production must be high as a result of the very smallness of the country. However the consequences of such a misdirected policy make themselves evident so quickly, painfully and directly, that the authorities must soon call a halt and turn round, if they do not wish to gravely wrong the vital interests of their own country and conjure up unforeseeable economic, social and political consequences. The smaller a country is, the less it is in a position to restore the disturbed equilibrium in foreign trade by a devaluation rather than a continued and flexible adaptation of costs and prices. Once again, it is the smallness of such a country and its great dependence on foreign trade which see to it that the damage of such a policy of national recklessness is usually greater than its usefulness.

As all these inferences are familiar to the inhabitants, they follow far less than the inhabitants of large states the temptations of economic irrationality, propaganda for autarky, exchange-control or devaluation falls here on stoney ground, whereas it is easier than in the great countries to convince men of the necessity for a flexible price and wage system, without which free international economic intercourse cannot exist. An appeal to the necessary consideration for export – and in this way indirectly for import – may, if the domestic flexibility of prices and costs is endangered by interventionism or monopolism (including that of the Trades-Unions), count on meeting with understanding from an unusually large part of the population. For the same reason, cartels (which may be very numerous, as they are in Switzerland) can here pursue their harmful practices only within certain limits, which are not to be overlooked.

So at the present time these small states can become real islands of economic reason. They are not only no decrepit monuments to uneconomic organization and backwardness, not only no disturbers of the peace of the world-economy and obstacles to its development, but apparently especially created so there should still be on the earth nations who are at least compelled by circumstances to show a minimum of economic reason. In fact, if these small states did not exist, they would have to be invented today. Considered like this, they have not only a raison d’être – which is quite obvious –, but are actually an urgent necessity. To give irrefutable proof of this, lies in their own hands.

It is quite different with the second group of small states, which have, it is true, a political and military weakness and a smallness of extent or population in common with the first named, but are yet completely different from them regarding their economic importance and structure, in that they are poor and are still more or less on the level of agricultural states. As they have little to fear for the nourishment and occupation of their humble population and foreign trade is for them no issue of absolutely vital importance, economic nationalism finds here a relatively wide scope. Multiplying the number of such small states, such as happened through the splitting up of the old Austro-Hungarian monarchy, means in fact a retrogression in the rationality of the world-economy. As it is however in this case a question of poor countries, the damage for the world-economy is on the whole far less great than one would suppose, if one considered the map instead of world trade statistics. This is the only case which corresponds to the great states’ popular idea of the disadvantages of the small countries for the world economy, but this just for a reason which very much lessens their importance for the world as a whole.

So we come to the conclusion that the widespread ideas of the economic role of the small states are indistinct and superficial, so much so that they practically reverse the true facts. We are either dealing with an economically highly developed small state, whose commercial policy is of importance for the world-economy: then it is just this economic structure that obliges such a state to show more self-restraint in commercial policy than the great states observe, – naturally presupposing a minimum of intelligence. Or, however, we are dealing with a small state, which, thanks to its slighter economic development can indulge in very daring experiments in autarky; then it is just this different economic structure, which keeps the damage to the world economy within narrow limits. Put in another way: Small states, which are really of importance to the world-economy, are, because of their smallness, estimable – and today particularly indispensible – supports of the world economy. The latter can only gain, if such small states are preserved or even increase in number, at least so long as little prospect exists of the entire world embracing free trade. It can likewise only gain, if the small states of the other type unite into larger economic units. The implications resulting for Europe’s new political order, are obvious. They can be summed up in the phrase, that the absorption of the economically highly developed small states by an European Customs Union under present-day conditions would probably only remove an indispensible brake on economic unreasonableness, whereas for the small states of the south-east European type the opposite is true. This is at the same time an earnest exhortation to the economically highly developed small states, to live up to their world economic rôle without side-stepping, we need scarcely add.

It can therefore hardly be maintained, that economically highly developed small states such as Switzerland are a burden on the world-economy in fact, it is just the great states who can make life difficult for such countries. It is not the great countries, who can complain that the commercial policy of such small states disturbs the world economy, but on the contrary those small states, who can complain about the great states, when they put greater and greater difficulties in the way of the foreign trade so vital for the small states. If the large countries continue along this fateful path in the future, they can bring it to the point where our small states, surrounded by trade barriers, are suffocated, but it would be to add irony to injury, if one spoke condescendingly of the economic straits of the small states. It is the commercial narrow-mindedness and pettiness of the great states, not that of the small states, which is at issue.

In this way all that is necessary has been said about the question of a country’s economic viability, a question habitually put for nations of small extent and with scanty raw material resources. It is now clear, that we are dealing with a very questionable and misleading conception which, as the examples of recent history prove, can have a bad influence on politics too.

The most recent of these examples is still fresh in the memory: Western Germany after the last World War. The idea, that this rump, which had resulted from the unfortunate decisions of the victors, was, on account of its separation from the agrarian hinterland of Eastern Germany not economically ‘viable’, was to a great extent responsible for the fact that the decision to deliver Western Germany from the devastating effects of inflationary economic planning and to set it on its feet by the restoration of a free market economy, with a sound monetary system, was protracted through years of misery and only executed by the reform of the 20th of June 1948. In actual fact there was no sensible reason why, in spite of all the devastation, mutilation and impositions, if only the right course of economic policy was adopted, this country should not develop ‘viability’ as some kind of ‘greater Belgium’, i.e. as a predominatingly industrial country which defrays the costs of its existence by paying for the net import of food-stuffs and raw materials with the export of industrial goods and services. What mattered only was that after the evil nightmare of collectivism and ‘repressed inflation’, an economic order should be made effective, which released the productive forces of the country, after they had been paralysed and squandered by the worst economic confusion which ever a socialist planned economy had brought upon an unhappy land of the industrial west.

The idea of a Western Germany, which was not ‘viable’, because it is cut off from its agrarian hinterland, is based on a very elementary fallacy in economic reasoning. The agrarian surpluses of Eastern Germany had always had to be paid for with the industrial surpluses of Western Germany, and so the only difficulty existed in replacing, until the hoped-for early moment of reunification, this previous exchange by one between Western Germany and the rest of the world with its surpluses of agrarian products and raw materials and its desire to sell them in exchange for German industrial products. But given these surpluses and this wish and given further the diminished productive energy of Western Germany, why should those difficulties be insuperable, if one only brought the productive forces of Western Germany to life again through a return to economic reason. Everyone knows, that Western Germany’s born since 1948 has answered this question in the most convincing manner.

The idea of economic ‘viability’ suffers, as this example shows, from an unduly organic conception of the ‘national economy’, i.e. from a mistake in reasoning, which is known to us as ‘Begriffsrealismus’ or ‘fallacy of misplaced concreteness’ (Whitehead) with all its totally disastrous effects. It by-passes the truth, that the drawing of a political frontier changes nothing in the substance of the economic process as a constant exchange of goods produced by division of labour, unless such a political frontier is used to hinder this exchange by political means. In this however the ‘incomplete state’, whose ‘viability’ is being doubted, has the least interest of all, so that it is as a rule the other ‘viable’ states, which limit its possibilities of existence by their commercial policy.

Obviously therefore the economic ‘viability’ of a state is not a function of its size and its equipment with natural riches, as Switzerland proves to our satisfaction. And who doubts that even a mere city-state like Tangier is anything but ‘unviable’? Size, density of population and the raw material resources of a country determine solely the degree of its dependence on foreign trade and in this way both its own interest in a free world economy and its vulnerability through the enchaining of free trade.

It is understandable, that the conception of the economic ‘viability’ of a state always crops up in the discussion, when it is a question of the new creation of an ‘incomplete’ state by the division of a larger one, not however in the case of a small state already long in existence. In 1919 the ‘vital capacity’ of Austria was discussed, and after the last World War that of Western Germany or Pakistan, not that of Switzerland or Norway. Just this should be sufficient proof of the true nature of the problem. It lies in the difficulties of a change and adaptation, which we have studied in the example of Western Germany, not, however in a lasting ‘unviability’ of the new state. It goes without saying that the more economic nationalism and collectivism hamper international exchange, not only the greater are those difficulties of adaptation, but also the less favourable are the permanent conditions of a small and ‘non-complete’ national economy. But that is only a new aspect of a truth which is already sufficiently known to us, that the modern nationalist and collectivist economic policy, in other words the increasing fusion of imperium and dominium, gives to the size and the natural riches of a state an economic importance, which they do not possess in a free world economy and in a liberal economic order. Whether and in how far a political act, such as the drawing of a frontier, has economic importance, depends on whether and to what extent the predominating economic order of the countries gives economic importance to the state-frontiers. That socialism increases this importance to a maximum, is the catastrophe of our time.

 

NOTES

6. (p. 156) Multilateralism:

For details see: W. RÖPKE, Die Gesellschaftskrisis der Gegenwart, 5th edition, Erlenbach-Zürich, 1948, p. 399 et seq.; W. RÖPKE, International Economic Disintegration, London, 1942, p. 30 et seq.; The Network of World Trade, League of Nations Publication, Geneva 1942; ALBERT HIRSCHMANN, Etude statistique sur la tendance du commerce extérieur vers l’équilibre et le bilatéralisme, Conférence Permanente des Hautes Etudes Internationales, Bergen, 1939, Institut International de Coopération Intellectuelle, Paris.

7. (p. 157) The Financial Structure of the World Economic System:

The best presentation known to me: ROGER NATHAN, Le rôle international des grands marchés financiers, Paris, 1938. The transfer mechanism of that time up to 1914 is described and analysed in an exemplary manner by J. VINER, Canada’s Balance of International Indebtedness 1900-1913, Cambridge (Massachusetts), 1924.

8. (p. 161) The Destruction of the World Economic System by Collectivism:

Compare M. S. GORDON, Barriers to World Trade, New York 1941; J. B. CONDLIFFE, The Reconstruction of World Trade, New York 1940; W. RÖPKE, International Economic Disintegration, London, 1942, Description of important stages in the futile defensive battle: E. W. RAPPARD, Le nationalisme économique et la Société des Nations, Cours de l’Académie de Droit International, Paris 1938; W. E. RAPPARD, Post-War Efforts for Freer Trade, Geneva Research Centre, Geneva 1938; Commercial Policy in the Interwar Period: International Proposals and National Policies, League of Nations Publication, Geneva 1942.

The distinction between free market (conforming) and collective (non-conforming) trade policy was presented clearly for the first time by: G. HABERLER, Liberale und planwirtschaftliche Handelspolitik, Berlin 1934. Furthermore: G. HABERLER and M. HILL, Quantitative Trade Controls: Their Causes and Nature, League of Nations Publication, Geneva 1943.

On the conflict between the free market and collective sectors of world economy: J. VINER, Trade Relations between Free-Market and Controlled Economies, League of Nations Publication, Geneva 1943; O. LONG, Les Etats-Unis et la Grande-Bretagne devant le IIIe Reich (1934-1939), un aspect du conflit des politiques commerciales avant la guerre, Geneva, 1943; W. GRAF, Der Außenhandel zwischen marktwirtschaftlich organisierten und zentralgeleiteten Volkswirtschaften, Zürich, 1951.

9. (p. 163) The erratic Character of Collectivist Foreign Trade:

I have dealt exhaustively with this aspect of the disintegration of the world economy under the heading ‘The erratic character of world trade’ in my English book ‘International Economic Disintegration’ (p. 45 et seq.) and have also provided statistical proof. As regards the unreliability and uncertainty introduced into business life by collectivism by virtue of its nature, see also: F. A. HAYEK, Der Weg zur Knechtschaft, Erlenbach-Zürich, no date, p. 101 et seq.

10. (p. 168) The Part played by the Small States in the World Economic System:

This subject, which has so far been much neglected, has recently been dealt with in a manner largely agreeing with my statements by K. W. ROTHSCHILD, The Small Nation and World Trade, Economic Journal, April 1944. The case of Switzerland: W. E. RAPPARD, La Suisse et le marché du monde, ‘Die Schweiz als Kleinstaat in der Weltwirtschaft’, St. Gallen, 1945.

• 1. (p. 25) The Sociology of War:
• 2. (p. 27) War of Conflict and War of Aggression:
• 3. (p. 31) The inadmissable over-simplification of the peace problem:
• 4. (p. 57) Communist Imperialism:
• 5. (p. 74)
• 6That the various factors are interwoven with extraordinary intricacy becomes particularly evident in the dramatic catastrophe of international interrelations which we call war). One of the moral perversities with which our age is afflicted was to deny at times the supremely catastrophic character of war, until two world wars brought disillusionment – let us hope for ever. For centuries the time-honoured belief existed that war was, as a rule, one of the incomprehensible evils of the world system, which – like the other Horsemen of the Apocalypse – Pestilence, Hunger and Death – had to be borne with resignation. Pacifism, in the sense of a mass movement directed towards the abolition of war, only became possible after the beginning of the modern age, when war, like all other things alleged to be the Will of God, came to be regarded in the light of critical and ameliorative reason, and, together with other social institutions, as a work of man which it would be quite possible to alter. Thus instead of being a subject of theology, war became a subject of sociology. Has it in this way become entirely comprehensible? To be honest we must admit that we are still very far from understanding it. Although men have at all times pondered over the phenomenon of war, and although recent generations especially have amassed a gigantic literature on the sociology of war, all that progress adds up to is that we possess a fairly complete list of the possible causes of war and that we realize the extraordinary intricacy which links these causes and which excludes any monistic theory of war sociology. Only a separate and comprehensive volume could do justice to the epistemology which results.
• 7In order to understand in detail what an international peace based on justice must accomplish, the various categories of war must be distinguished. Above all a difference must be made between two types of war, the importance of which is not lessened by the fact that they have often been combined with each other in the course of history and that there are borderline cases in which it is not easy to say whether the one or the other type predominates. A war may arise either through a conflict over concrete claims, which may be compared with a case under civil law (war of conflict), or through an act of violence which corresponds to a breach of the peace under criminal law (war of aggression) ). Whereas individual legal disputes arising from contentions of personal honour or material claims are finally settled by judicial decision, international conflicts of this kind may easily lead to war, as long as a decision by force of arms, which corresponds to the ordeal of the Middle Ages, is not abolished through obligatory international legal procedure, and before this is the case we shall continue to regard war rather as a tragic chain of events than as a vicious action. From their very nature such wars of conflict make it difficult to clarify the question of guilt, provided one of the warring parties – as is however often enough the case – does not misuse the conflict as an excuse for a war of aggression, or does not oppose the readiness of the antagonist to come to an understanding with inexcusable intransigence. This last applies on the whole to the case of the first world war, whereas we should not hesitate to characterize the second in its origin and in all its phases purely as a war of aggression, after it had already been preceded by the wars of aggression in China and Abyssinia.
• 8Is not then the solution of the war problem in reality very simple and only dependent upon the firm determination of the governments and the peoples? If this were our opinion we should be contradicting ourselves, since earlier on we termed just such thinking ‘internationalism’ and warned our readers against it. In actual fact this contradiction is only an apparent one. To explain it we should consider that the problem can be regarded from various angles. In formulating the solution of the war problem so sharply and smoothly above, we were regarding it from the juridical angle. Here in fact everything appears much simpler than it actually is. To be content with such considerations is to lapse into that monistic way of thinking which may be termed legalism and which is no better than economism or any other one-sided outlook. In indicating the legal solution the question has still not been answered as to the conditions under which the peoples and governments would be prepared to accept it firmly and undeviatingly. This question however brings us back to the higher level of the sociological, ethical and political considerations with which we started).
• 9Already in the first German edition of this book, which appeared at the end of the war, attention was diverted, with an outspokenness which at that time was understood by only a few, from the recently overthrown totalitarianism of the Axis powers to the new threat to peace and international order presented by the last remaining totalitarianism of Russian Communism). This danger has meanwhile grown so enormous that all questions of international order today must be considered in its perspective. This fact emerged very clearly in the foregoing section. Everything is of a temporary nature, everything is in a state of constant tension, everything is doubtful, as long as the world is overshadowed by this danger. What is the nature of this danger, and how can it be abolished? A book which deals with the fundamental problems of international order must at least give some indication of the lines along which these questions which weigh so heavily upon us are to be answered, if it is not to lack the foundation of hard and fast reality which the middle of this century demands.
• 10(1) Instead of the world state, which is an indispensable setting for a world economy, but which did not exist, a practicable and robust substitute was found, and that in a way with which, on a limited scale, the Res Publica Christiana of the Middle Ages may be compared). This substitute was the international ‘open society’ (Henri Bergson)) of that liberal age, a sort of unwritten ordre public international, a secularized Res Publica Christiana, which for that reason spread all over the globe. It is the ‘communitas seu res publica hominum sub Deo’ of St. Thomas Aquinas, to which natural law gave the double roots of universalism, which postulates the brotherhood of man, and of personalism, which postulates the inviolability of the individual, but replanted out of the spiritual earth of Christian Theism into the loose soil prepared by the Renaissance, by Humanism, Enlightment and Liberalism, while the addition ‘sub Deo’ was gradually suppressed and finally dropped). No description can be given here either of the complicated structure of this international ‘open society’ of the 19th century and its manifold workings, nor of the theological, philosophical, moral and sociological forces which underlay this effective substitute for a world state and which penetrated among even the lowest intellectual classes). It must suffice to say that these forces which created the universalist system of the ‘open society’ of the 19th century are for the greater part rooted – as indeed is only to be expected – in the same soil which produced the predominantly ‘liberal’ social, political and economic systems of the same age. What first strikes us in considering this order is the respect it enjoyed, which is only accentuated by the bad conscience or apologetics accompanying cases of infringement, which made it possible for international law to be regarded as a genuine law, on a par or even superior to that of the national state; for the world to be united through a network of long-term agreements which therefore made for the stabilization of international relationships; for tensions between large and small states to be continually adjusted – the unjustly suspected ‘balance of power’ – and for a high degree of agreement to exist regarding legal conceptions and national standards of justice. This external order was, however, fostered by the moral and political atmosphere of the ‘open society’, of the secularized Res Publica Christiana; to which a considerable and by no means unwholesome measure of Pax Britannica was added.