International Order and Economic Integration

II THE FEAR OF COMPETITION

THE GENERAL FEAR OF COMPETITION

In the last chapter we found the basic cause of today’s fear of a world economy to be that the days of a genuine world economy are long past, and that its chaotic condition has become a matter of habit. Fewer and fewer people can still conceive that something like a real world economy was once possible, and even fewer that anything like it could become possible once more. They shrink back from it as from an adventurous journey to a completely unknown country, and only the smallest number will take the trouble to study the detailed descriptions of this country as provided by economics. But their willingness to succumb to all sorts of special forms of fear of a world economy is all the greater, and this is what we now have to consider. We will begin with the type which we will call the general fear of competition.

The fear of foreign competition and the resulting wish to obtain the best possible protection against it have, of course, at all times been the real motive behind modern protectionism. But up to the time of the first World War it was as a rule more a case of fear of competition in definite branches of production than of general fear of competition which imagined a possible inferiority of the national economy as a whole vis-à-vis foreign countries. The United States of America have always been an important exception in this respect; in their case the tendency was from the beginning to base protectionism on the argument that the lower wages paid in other countries represented a danger to almost the whole of the national economy, so that every cost advantage abroad must be met by a corresponding import duty. While this principle, which derives from the general fear of competition, was designated as ‘scientific’ by protectionist propaganda, and finally even gained official approvement in the American Tariff Act of 1922, the leading economists in the same country had little difficulty in proving that it was scientifically untenable.

The novelty of the present day situation is that from being an exception this general fear of competition has become the rule. While it used to be limited to countries, which, like the United States, enjoyed a particularly high wage-level that had ostensibly to be protected against ‘social dumping’ on the part of countries with a lower wage-level, there is hardly a country left today which does not feel inferior all along the line for one reason or another to some specific or to all foreign nations. This has firmly established the conception among many people that an entire national economy could be overthrown in competition by foreign nations like a private firm, and thus driven to bankruptcy. Nobody seems to take much notice of the conspicuous fact that this fear of competition is reciprocal and is motivated by precisely contrary arguments in the individual countries. On the one hand the rich countries with a high wage-level (like the United States) fear the competition of poorer countries with their ‘sweated wages’, and on the other the poor countries fear the rich ones with their superior production technique. Even at best, it is obvious that only one of these two fears can be well-founded, but not both at the same time. Or are both of them unfounded, since they cancel out and only result from confused and untrained thinking? This is, in fact, the case.

Anyone who is acquainted with the theory of foreign trade will understand at once what we are driving at when we refer to the so-called ‘Law of Comparative Costs’, which was mentioned earlier on (p. 145)1). It does in fact follow from this law that even a nation which is inferior in production all along the line can not only participate profitably in free international trade, but actually depends on it in order to improve its position in life, and conversely that a nation of superior productivity all along the line will deprive itself of the advantages of its position if it does not enter into free trade relations with the inferior countries. The division of labour between these two types of countries takes place in such a way that the inferior ones specialize in those branches of production where their inferiority is least, while the superior ones specialize in the branches of production where their superiority is greatest. The inferior country must, admittedly, resign itself to the fact that it must compensate for the disadvantages of its production conditions by lower wages, while the superior country enjoys the advantages of production in the shape of a higher wage-level. Were both countries not to specialize in the relatively most favourable branches of production, the wages would have to be lower in both cases.

The following conclusion may be drawn from this: The higher wages paid in the superior country are a consequence of its superiority in production and of the advantage deriving from dovetailing into the international division of labour, while the lower wages paid by the inferior country are a consequence of its inferiority in production, which would, however, be lower still if division of labour with the superior country were to cease.

So if the superior nations fear the difference in wages as compared with the inferior nations, their fear is directed at the result of their own superiority. Conversely, if the inferior nations fear the superior production of the other, their fear is directed at a fact which they could use to excellent profit by mitigating the consequences of their inferiority by free trade with the superior country. The high wages in superior countries are in no way imperilled by imports from countries with a lower wage-level, but are promoted, since this import permits of specialization in the relatively most advantageous branches of production. In the inferior countries it is conversely the imports from countries with a higher wage-level (i.e. more favourable production conditions) which support the wage-level, since they also permit of specialization in the relatively most advantageous (i.e. in this case the least unprofitable) ways of production. To put it differently: In the superior countries productive superiority and a high wage-level, and in inferior countries productive inferiority and a lower wage-level form two aspects of one and the same thing. While the unfavourable effect of the high wage-level on the ability to compete internationally is compensated in the first case by a general superiority in production, the unfavourable effect of general inferiority in production is compensated in the second case by the lower wage-level.

The answer might, of course, be: but in this case what is to prevent the superior countries, say, at present the United States, from producing goods – without asking the economists – in the manufacture of which their superiority is not so great? Why not include goods, such as china ware or high-class watches, which are relatively labour-intensive? Well, they are not prevented by knowledge of the law of comparative costs, which one can hardly expect, but by a very compelling objective fact, namely, the higher wage-level of their country. Industrialists who do not see to it that the general level of wages corresponds to the productivity in those branches where the country’s superiority of production is most pronounced, and who manufacture goods which it would be better not to produce in this country in view of the law of comparative costs, will immediately discover its efficacy in practice. They will complain that the wages in this country are too high for production of this kind, and they cannot, therefore, compete with other countries where the wages are lower. In good or bad faith they will present the matter as though it were a particularly spiteful action on the part of nations with a lower wage-level and a menace to the interests of their own people, and will talk of ‘sweated wages’, ‘social dumping’, or, in the case of agriculture, of ‘black grease’, and guileless people will believe them. But we now know the facts of the case: whoever complains of wage competition from abroad, and talks of ‘nigger wages’, rightly or wrongly – depending on whether the complaint is justified – accuses himself as a producer acting contrary to the common interest, because he for his part does not make the relatively best use of the productive resources of the country, and thus reduces the national rate of productivity. He can only choose between molesting us with his unfounded complaints or else branding his own production as parasitic upon the nation’s economy.

Anybody taking the trouble to understand the theory of international trade, must admit that the ‘sweated wages’ argument of economic nationalism in its generalization is unworthy of thoughtful people. In reality ‘nigger wages’ are the remuneration of people whose only hope it is that such modesty in their demands will suffice to balance their disadvantageous production conditions to the point where they can sell us something, the production of which would entail for us a surrender of the advantages of international division of labour.

Now we understand that wages in the Unites States are high not because of, but despite American protectionism, since the aggregate productivity of the country is so great that the existence of individual parasitic productions does not impair it very much. This certainly means that the wages of certain categories of workers can be raised by protectionism, but only at the cost of the aggregate wage level. This becomes quite obvious when we envisage the ‘sweated wages’ argument being applied with unswerving consistency, and all imports being barred. In this case nobody could doubt any longer that the tremendous decrease in the country’s aggregate productivity would make a serious decrease in real wages unavoidable.

We thus see that a rich country (i.e. one which can produce to advantage and therefore pay high wages) need not fear competition with a poor country, and that on the contrary a certain pattern of an advantageous division of labour, corresponding to the law of comparative costs, will develop between the two countries. We even realized that it cannot take all the consequences resulting from this unfounded fear of competition without committing an act of economic self-mutilation. The United States of America have certainly gone a frighteningly long way in order to deprive by their protectionism themselves and the rest of the world of the mutual advantages of an international division of labour and to develop industries behind tariff walls which would otherwise have been prevented by high wages, but in the end they had of necessity to permit the continued existence of a substantial part of the foreign trade. It follows from this conversely that Europe’s fear of the superior competition of the United States is fundamentally unjustified. For if the American wage-level alone makes certain branches of production incapable of competition on the American domestic market without high protective tariffs against countries with a lower level of wages, how can the United States be capable of ruining by their competition every imaginable branch of production in our own country, including those which they can preserve in face of our competition even on the American home-market only by high protective tariffs?

This also puts paid to a contemporary pseudo-theory, the wide acceptance of which far into the ranks of economic experts only goes to prove that knowledge of even the most elementary tenets of economics has been lost to a frightening degree in our days. We mean the idea of a ‘dollar shortage’, not from the aspect to be dealt with later on, namely that of a disequilibrium in the dollar balance of many countries, which is due to monetary policy and can in every case be remedied by monetary measures, but in the sense of a permanent state of affairs, explained by the superior position of the United States in production and in world trade, which condemns the other countries for all eternity to get the worst of it in their economic relations with this wonderland. What I mean is the idea that the dollar balance must forever show a gap which can only be closed by severe import restrictions or American grants.

The amount of ingenuity which has been expended to render so foolish an idea credible is almost unbelievable. It was alleged that American productivity was simply so much greater than that of Europe, or at least than that of the countries suffering from the peculiar disease known as ‘dollar shortage’. Or, as even the British ‘Economist’ put it in an unguarded moment in 1943, a country which ‘needs’ so little of what the other countries have to offer, while they ‘need’ so much from it, makes it impossible to achieve an equilibrium in the balance of payments on a basis of freedom. It can be stated that the mission of economics since two centuries has been nothing less than to render such conceptions impossible once and for all. As though this ‘need’ made any sense – unless it were with regard to definite price relations and in connection with a definite rate of exchange, and as though there were not the theory of comparative costs – this basic law of international trade which can withstand all attacks – to explain the accomplishment of an equilibrium in international trade even under such unusual circumstances! It is naturally understood that if a country’s productivity is lower all along the line than that of another country, its level of income must be correspondingly lower and that the rate of exchange must not falsify this relationship, if the equilibrium of the balance of payments is not to be disturbed. But this also means that if the equilibrium is disturbed and the currency of the more productive country becomes ‘tight’, it is due to the fact that the less productive country is insisting on an income and a rate of exchange which are unduly ‘pretentious’, i.e. they do not correspond to the true relation of productivities. This is exactly what has happened in most European countries after the war.

Anyone who still has difficulty in accepting as convincing our train of thought – in which we only give expression at the same time to common sense and to communis opinio doctorum – should seek elucidation of the case in another way. Ever since the beginnings of economics in the 18th century external trade has been compared to a machine, which permits us to reduce the cost of our supply of goods, thus promoting the ultimate purpose of economy. This comparison is still most useful in correcting distorted views. For it is a fact that the machine and foreign trade have the common property of enabling us to achieve a better production result with a given expenditure of productive resources. Thus obstruction of foreign trade has exactly the same effect as the destruction of a machine: it lowers the aggregate economic productivity. Or, as an old economist (the anonymous author of the publication ‘Consideration on the East India Trade’, which appeared in 1701) put it: ‘It (i.e. the ban on imports) has the same result as if we were to destroy a machine or a ship-route, so that the work which is done by a few, must now be done by many’. Protective tariffs have for the same reason also been called ‘negative railways’. But if foreign trade, like technical progress, is such an instrument which reduces the cost of our supplies, it is only because certain articles can be manufactured abroad more cheaply than at home for the most varied reasons, and conversely because other articles can be made more cheaply at home than abroad. But it is quite incomprehensible why it should make any difference for what reason foreign countries can produce more cheaply – to put it more precisely, whether they can do so by reason of technical (or natural) superiority or by reason of lower wages. Can the difference perhaps lie in the fact that the reference to lower wages appears to offer protectionists the advantage of being able to impart a solicitous social undertone to their propaganda, and to secure them the alliance of the workers?2)

It is, however, true, that there is hardly any erroneous judgment in economics which does not after all, contain a grain of truth. The same applies here. There is no getting round the fact that a division of labour beneficial to all is developing between countries with different wage-levels and different productivity, it is the basis of a substantial part of both world trade and the existence of the nations. And yet we are faced with a problem here, which we must not only admit, but must acutally stress. This problem arises out of the fact that the competitive conditions of the nations, – whether based on technical and natural conditions of production or on differences in the wage-level – constantly undergo changes which necessitate the formation of a new pattern of international division of labour. The transition from the old to the new pattern of division of labour is, however, coupled with friction, losses, and disturbances of equilibrium, and adaptation to the new situation is not always easy. The actual problem we are faced with here is therefore a dynamic one, and will be the graver the more sudden and frequent are the changes in competitive conditions, and the more vigorous the resistance offered to adaptation with in the individual national economies.

FEAR OF FOREIGN AGRARIAN COMPETITION

The idea that the entire national economy could be reduced to bankruptcy like a private firm by the competition of foreign countries – which we have proved to be erroneous – is frequently encountered in the form of a more specific fear that the agriculture of a country might be ruined if exposed to the superior competition of foreign countries. Is such fear of competition at least reasonably well-founded when it is thus limited to the agricultural production?

The evidence that all branches of production of a country cannot be ruined simultaneously is logical and conclusive, and any attempt to refute it would be ridiculous. The fear of possible ruin in an individual branch of production even if it is as large and important as agriculture, cannot be refuted with the same conclusiveness. It would be theoretically conceivable that a country might be so superior in industrial production and so inferior in agricultural production that the high wages paid by the superior industry would force it in a world of free trade to reduce and extensify agricultural production to a degree which would entitle us to speak of the ‘ruin’ of agriculture. But it can be demonstrated that such a case is most improbable and would presuppose conditions which would hardly ever coincide.

Anybody who believes it to be possible or even probable that, say, Swiss agriculture would fall a victim to foreign competition given free foreign trade, must in fact assume that it would fare like a special industry for which Switzerland is simply not suited, and which, should it exist, could be preserved only by far-reaching protective measures. It is not at all easy to think of an example for such an industry, but perhaps the manufacture of motor-cars in Switzerland would be a suitable example for our purpose. If such production existed today, it is obvious that it would fall a victim to competition with the American car-industry, or would have to be preserved by an almost complete ban on the import of motor-cars. But this in no way implies that the entire Swiss industry dealing with vehicles, lorries, assembly or car accessories would succumb to American competition together with the manufacture of motor-cars, not to speak of Swiss industry as a whole. On the contrary, the pressure of foreign competition would result in a shift to those branches of industry in which the absolute or relative productive advantages of Swiss industry could develop most easily. Why should this not apply to agriculture as well? There are of course branches of agricultural production for which Switzerland is so ill-suited that they could not exist in free competition with superior foreign countries. But why should there not be the same possibilities of changing over within agriculture as there are in industry, yes, and even within a single branch of industry as in the motor-car industry?

It would indeed be a completely new doctrine that agriculture is tied to a definite form and kind of production and must stand or fall with it. It would not be easy to defend this revolutionary theory against the evident fact that agriculture is the very type of economy encountered on all latitudes and longitudes in the most varied forms and with a universality not to be found in industry, and against the absolutely elementary agricultural theory of location established by J. H. v. Thünen a hundred years ago, which explains this diversity of agricultural forms of production and their geographic distribution. It can be demonstrated in a hardly refutable manner – and which has not so far been refuted – what conclusions may be drawn from this theory of location for international division of labour in agriculture and for the determination of that farming pattern which is so appropriate to a country, say, like Switzerland, that it can be preserved without a policy of protection and subsidies imposing an undue burden on the remainder of the economy3).

I have tried to explain details of the nature of this farming pattern in my earlier books ‘Die Gesellschaftskrisis der Gegenwart’ and ‘International Economic Disintegration’, so that I need not repeat myself here. It is the farming pattern of Thünen’s ‘inner ring’, which is characterized by specialization in so-called high-grade farm production, but at the same time takes into account the special demands of agriculture as a complicated organic production, by copying Danish agriculture, which is the model of an agriculture thus adapted to world economy, and avoiding any one-sidedness, and striving for a mixture of animal husbandry and tillage, which imparts to family farming a high degree of stability and self-sufficiency in times of crisis, and is indispensable also for reasons of agricultural technique. This is the best structure for agriculture in the industrialized countries, which makes it possible to attain the high aim of a farming policy which maintains and strengthens intensive family farming with a minimum of protective measures and subsidies and thus a minimum burden for the remainder of the national economy. For the reasons I stated earlier on it is an unprecedented stroke of good luck that this form of agriculture, which is economically suitable for the industrialized countries, is at the same time the most desirable one for sociological reasons, as it is an intensive type of family farming, demanding maximum intelligence and energy, occupying a comparatively large number of people, and producing high-quality goods.

Were agriculture in these industrialized European countries to compete–in direct contradiction to rational distribution of locations in the world economy – with the mechanized wheat-production of the European or extra-European fringe zones, or with the production of vegetable fats in tropical regions, which is favoured by the climate, it will indeed be seen that it cannot do so, since such disregard to economic common sense would have to be paid for by a multiple of the production costs. It is then placed in the curious position of speaking with the same indignation of ‘dollar wheat’ and ‘black grease’, and is faced with the contradictory necessity of demanding prohibitive protection both against countries with high and with low agricultural wages. But in this case it is, in fact, not a question of whether such a country must chose between agricultural ruin and the most far-reaching protection of agriculture, but whether it should give preference to a form and kind of agriculture appropriate to the economic position or to one which is not appropriate. This is, however, a decision which must be taken not only as regards agriculture, but also for every other branch of economy, and is tantamount to the question whether a country should make the most rational use of its meagre productive resources or not. This involves at the same time a decision between prosperity and poverty and high and low wages, for it is obvious that a reduction in the aggregate productivity of the country due to exclusion from the advantages of international division of labour must lead to a decrease of the level of real wages. Moreover, this will take place by the painful détour – linked with the gravest social and political struggles – via unemployment in the export industry, a rise in the cost of living and oppressive taxation of the masses.

It is no irrefutable axiom that a country must make the most economic use of its meagre resources of production. On the contrary, one may well be of the opinion that there are aims which justify some loss of economic efficiency if there is no other means of achieving them. If we had no other choice left but that of abandoning farming as we know and love it, or far-reaching protection of agriculture with all its consequences, it might very well be recommended to pursue the latter as far as consideration of the non-agricultural population would altogether permit. It would be an exceedingly difficult decision, the more so in a country where the population is crowded together in a narrow space and on poor soil, and depends for mere existence on foreign trade, but one could not reproach those who recommend it, thoroughly as it would have to be considered. The salient point is, however, that on the average we are not faced with such a decision. For this reason we should also refuse to have such a decision thrust on us4) by an unfounded fear of foreign agricultural competition.

FEAR OF INDUSTRIAL COMPETITION FROM THE AGRARIAN STATES

Industry, like agriculture in highly developed countries, also has its specific fears of competition, and this too, has in common with all kinds of fear that it exaggerates a certain danger immoderately. In so far as it concerns the fear of having great difficulty later on in competing with mass-manufacture which a highly productive country like the United States developed to an enormous degree during the war, all that needs to be said has been stated already in the first section of this chapter. But industry has another worry as regards competition: It is not likely that the progressive industrialization (which received an additional and tremendous impetus through the war) of the agrarian and primary producing countries will steadily reduce the sales prospects of the old industrialized countries? We now intend to prove as convincingly as possible that this fear is also only partly justified and then only under certain conditions. We shall do this, not by setting a vague optimism against an equally vague pessimism, but by confronting confused ideas with some logical considerations and indisputable experiences5).

Reflection and experience show that the industrialization of a country must go through a certain series of stages. It begins with the simplest consumer goods industries, for which the domestic market suffices in the initial stage, and for which the available labour training will do; only then does it proceed slowly to other kinds of production to the degree in which in industrial experience and the domestic market expand. This classical curriculum of industrialization – in which, as proven by economic history, the coarser textile goods industry has consistently formed the starting point – will naturally deviate in individual cases, in consequence of the special conditions in a country (traditions of trade, existence of raw materials, size of the domestic market, etc.), but the example of the Soviet Union during the two last decades has shown that it cannot be reversed even in extreme cases.

It is therefore an indisputable fact that the capital goods production of the old industrialized countries will profit directly by the industrialization of new countries. In fact, it can ask for nothing better. The answer of the pessimists in the old industrialized countries to this has always been that it is a very shortsighted way of making profits, and that it amounted to economic suicide since it meant nurturing one’s own competitors. This argument was used in vain and quite wrongly already at the beginning of the 19th century in England, in an attempt to prevent the export of machinery to the Continent.

But even these incorrigible pessimists do not thereby contest the exceedingly favourable effects of industrialization on the capital goods industries of the old industrialized countries. So here we have a first and obvious compensation for the decrease in imports of those goods, which the new country is now manufacturing itself. But what happens next?

As a rule the following happens:

1. Imports of capital goods have the tendency of not only remaining constant, but of actually rising with increasing industrialization, even if the latter has already reached the stage where certain cruder machines and other capital goods are manufactured at home. The explanation of this phenomenon is that the diminishing import of simpler machinery which is due to rising industrialization is outstripped by rising imports of higher-grade machinery.

2. While the import of those consumer goods which are now produced at home is decreasing, the import of other consumer goods shows a rising trend. If industrialization is not pursued in such an absurd way that it leads to impoverishment of the country rather than to its economic prosperity, it involves development of the economic resources, modernization, refinement of requirements, enhancement of the aggregate purchasing power of the population and with all this a rise in the turnover of foreign trade. Certain simple things are, admittedly, now manufactured at home, but the quality products of the consumer goods industry are all the more in demand, and in the production of such goods the old industrialized countries have a double advantage: that of their long experience in production, which is based on a mature scientific and technical civilization, and on the economies of scale, which the size of the available national and international market permits them.

3. As a rule industrialization means growing imports (or diminishing exports) of industrial raw materials and foodstuffs and thus an increase in sales of the remaining agrarian and primary producing countries, which in turn acquire greater purchasing power in respect of industrial products, and thus indirectly offer compensation to the old industrialized countries. This process can be observed particularly well in the case of the United States, the industrialization of which in the 19th and 20th century imparted an ever-growing importance to the agricultural exports of Canada and Argentina, thus making them increasingly important as buyers for European industry.

All these are the effects of industrialization, rendered probable by consideration and confirmed by experience. In so far as a statistical picture can be obtained already today, developments between the two World Wars have also followed this line throughout, and that despite the fact that the industrialization in many countries took place at this time with a haste and artificiality contrary to economic common sense.

This comparatively favourable judgment must, of course, be correctly understood. It naturally does not mean that industrialization is a painless process. It must even be stated most emphatically that it involves a shift which will hit certain industries in the old industrialized countries – which participate in this process only in a negative way by the drop in imports in the new industrialized countries – very hard and may annihilate them. Decisive results will in each case depend on the skill and energy with which each country manages to change over by adaptation and increased efficiency from hopeless industrial positions to new and more promising ones. The more the industrial tradition of a country is characterized by quality and versatility the more rapidly and more smoothly will it come into the enjoyment of the compensations, which – as has been demonstrated – is offered by the industrialization of new countries.

Our analysis shows above all that the adaptation of the old industrialized countries will move in two main directions: on the one hand in the direction of growing importance of the export of high-class consumer goods (for instance fine and superfinished textiles) or new consumer goods, and on the other in the direction of a rise in the share of capital goods in aggregate export, which also shows a tendency for low-grade quality to be superseded by highgrade quality. The foreign trade statistics of the leading industrialized nations do in fact show that the actual developments are completely in line with our analysis. This applies in particular to the consistent rise in the share of capital goods and the consistent drop in the share of consumer goods in the overall exports of these countries.

Occasionally we hear the remark that present day industrialization of the agrarian countries is particularly dangerous to the old countries because the progress of industrial technology now more or less permits every country to develop to perfection any desired industry and to produce whatever it wants. No less a man than Lord Keynes, who had a tendency towards dogmatic simplification, once expressed so pessimistic a view. We know now what an immeasurable exaggeration this is. Even today there are limits to industrialization, and the classical series of stages in which it of necessity takes place have not undergone any substantial changes despite all the progress of industrial technology. Locomotives cannot be produced in Turkey, nor electric turbines in Brazil, nor motor-cars in South Africa, and though it is easier than it used to be to set up a certain production of consumer goods somewhere by means of machines which are simple to operate and which work automatically, it is in turn far more difficult than it used to be to produce such machines oneself. A fact which is, moreover, consistently forgotten, is that such machines pay for themselves only if a certain minimum in the way of sales is achieved, which is naturally difficult to achieve in the newly industrialized countries.

The present tendency of many countries to promote and accelerate industrialization by all the means of a mercantilist trade policy far beyond what appears to be economically justified, is admittedly all the more dubious. It is true that industrialization always took place also in the past under the protecting hand of the state, but the degree of promotion and protection nowadays transcends by far all the history examples of the 19th century, above all ever since the old industrialized countries themselves enriched the instrumentarium of protectionism by the unfortunate inventions of import quotas and currency control. This will be referred to later on.

 

NOTES

6. (p. 178) The General Fear of Competition:

I have tried to explain the principal features of the law of comparative costs, on which the analysis of the text rests, but which is often misunderstood even in scientific circles, in my books ‘Die Lehre von der Wirtschaft’, 7th edition, Erlenbach-Zürich, 1954, p. 214 et seq. and p. 223 et seq., and ‘Weltwirtschaft und Außenhandelspolitik’, Berlin and Vienna, 1931, p. 30 et seq. With regard to the conclusions to be drawn therefrom in respect of refutation of the general fear of competition, compare also: G. HABERLER, Der Internationale Handel, Berlin, 1933, p. 103 and 183 et seq.; F. W. TAUSSIG, Principles of Economics, 3rd edition, New York, 1932, Vol. 1, p. 493 et seq; F. W. TAUSSIG, Free Trade, the Tariff, and Reciprocity, New York, 1924, p. 48 et seq., 70 et seq., and 134 et seq. The theory of comparative costs is one of those quite obvious truths of economics which can, admittedly, be subtilized but cannot be refuted. Now as ever it is one of the main keys to understanding of international trade, and it must be understood in order to avoid the dangerous fallacies and the dreadful going astray of politics.

7. (p. 183) ‘Social Dumping’:

It is mainly Japan which is known for this as its exports caused a stir and apprehension everywhere before the last war, since that country’s very low level of wages, which corresponded to the poverty of the nation on the one hand and to the increase in population on the other – the latter led to a doubling of the number of inhabitants between 1875 and 1935 – and its peculiar system of industrial production, based largely on family enterprises, and other circumstances, enabled it to offer a number of general consumer goods on the world markets at sensationally low prices. It is undeniable that the remaining industrialized countries were thereby faced with a very serious problem of the dynamic kind they are now once more faced with, as has been explained in the text. It must not, however, be forgotten, that this Japanese competition in the first place involved goods of lesser quality, which largely corresponded to the low purchasing-power demand of the population of the tropical colonies. Since this population would in any case have hardly been in a position to buy the better and more expensive goods of the other industrialized countries, the danger of Japanese competition was often exaggerated. It would probably have been in line with a sensible international division of labour to permit unrestricted Japanese exports to the colonies, thus serving the purpose of all parties: that of the Japanese from whom this export represented – and will in future represent – a necessity in view of the over-population of their country, that of the natives in the European colonies – remember Indochina – and finally that of the other industrialized nations, which would have been able to export all the more other goods to Japan and the colonial territories. A triangular trade increasing the prosperity of all would thus have developed, and nobody can tell whether Japan would then have trodden the path to conquest. The omissions of the past should be remedied after this war. The same suggestion is made by: N. F. HALL, Enquête préliminaire sur les mesures d’ordre national et international visant à relever le niveau d’existence, League of Nations Publication, Geneva, 1938, p. 74 et seq.

This is the juncture where reference must emphatically be made to the mistake of viewing the lower wages paid in overseas countries like Japan or India as an ‘unfair’ competitive advantage, which must be compensated both in the interests of the standard of living in these countries and in that of the workers in the western industrialized countries by a rise in wages and adaptation to western working conditions. A large part of the activities of the International Labour Office is based on this mistake, and the eagerness to set up a trade union monopoly according to the western example in these countries is also inspired by it. Anybody who calls to mind the law of comparative costs, knows what the trouble is: it ignores the fact that these countries must compensate for their lower productivity of labour by these low wages, if they wish to enjoy the advantages of a balanced foreign trade and raise their standard of living by it. Thus an international social policy of levelling the wages and working conditions would have the thoroughly unsocial result of rendering the workers in these countries unable to compete, and, since they cannot emigrate, they would be condemned to unemployment and even greater poverty. The case of the Middle East oil refineries offers an example of this, as does the recent statement by a British commission of experts that India is no longer a lucrative field for investments, since labour is nowadays more expensive there than in Europe. Cf. with the article by J. V. VAN SICKLE, The International Labour Office; An Appraisal, The Southern Economic Journal, April, 1946.

8. (p. 185) The Optimal Structure of Agriculture in the Industrialized Countries:

There are two misunderstandings regarding the optimal structure of agriculture characterized by intensive ‘production on farms which concentrate on meat and dairy produce’. Though these have been plainly stressed already in both of my books mentioned in the text I will elucidate them here once more. First of all it is quite wrong to say that such agriculture implies, neglect of tillage. Tillage is, on the contrary, within certain limits valuable for the biological and economic balance within the farming enterprise and also in view of a higher degree of self-sufficiency which diversity of production lends to the farming family. Secondly it is wrong to think that such an agrarian structure would unduly imperil an assured supply of food in times of war. On the contrary, it specifically permits of a particularly rational provision – i.e. one at the minimum cost to the national economy – in case of war, since owing to a lucky chance those foodstuffs which are under these circumstances preferably left to foreign production (specially grain, oil and sugar) are particularly suitable for long-term storage, while live-stock and the enhanced fertility of the soil resulting from such agricultural reform represent further valuable reserves in case of war.

9. (p. 187) Protectorates in Agriculture:

The cautious formulation of the text provides a possibility of finding justification for a policy of deliberately sacrificing economic efficiency on behalf of specially endangered regions, which are at the same time specially worth preserving. There just happen to be pronounced ‘distressed areas’ in agriculture as there are in industry – stagnating members of the economy as a whole, which have difficulties in maintaining themselves even during periods of the most lively general economic activity, and which are threatened by depopulation. Switzerland is constantly worried about its hill-farmers, France has been suffering so severely and persistently from a trend of concentration towards the capital which is laying fallow the provinces, that J. F. GRAVIER, geographer of the Sorbonne, has been able to write a book entitled ‘Paris et le désert français’, which has almost become a classic already; Great Britain had to struggle for decades with the problem of the so-called ‘distressed areas’. These ‘distressed areas’ afford a responsible economic policy only two possibilities. Either we resign ourselves to the migration of enterprises and people, in which case the economic losses of, and hardships imposed on, the people by such a displacement should be mitigated as much as possible, or else the extra-economic reasons for staying such ‘social erosion’ are so momentous, that it is felt that the remainder of the economy can be expected to bear the cost of constant direct or indirect subsidies. The case of the Swiss hill-farmers, who can be maintained only by permanent subsidies of all kinds in view of the overall economic development of the plains which cannot be attained in the mountains is a specially impressive example of this, but the Swiss people has rightly decided to pay this price to maintain them.

10. (p. 187) Industrialization of the Agricultural States:

I have made a detailed statement, provided with statistical evidence, in my book ‘International Economic Disintegration’.

• 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.