Chapter IX. Economic Development and the Problem of International Economic Order

CHAPTER IX ECONOMIC DEVELOPMENT AND THE PROBLEM OF INTERNATIONAL ECONOMIC ORDER

In Chapter VIII, the major aspects of international economic order were treated in a general way. But can our judgment in favor of the liberal economic order and its policy implications be maintained in a world consisting of regions with widely differing degrees of economic development? Is it not conceivable that the collectivist approach, despite its numerous grave disadvantages, is more conducive to economic growth than a free market system?

THE PROBLEM

To answer these questions, we must first be aware of the fundamental problem of economic “underdevelopment.” This problem lies beyond the veil of statistical data relating to national per-capita income or to the percentage of the population employed in agriculture. One must go back to “all the elements that affect a nation’s capacity to produce goods and services; its natural resource base; the quantity and quality of its labor force, the amount and kinds of capital available to its industry and agriculture; and to the institutions, attitudes, and habits that determine the effectiveness with which all these economic resources are used.”1

The first underdeveloped country was Great Britain. It could be called this from the moment its inhabitants initiated the process of capital accumulation and systematically applied scientific discoveries to production. The particular kind of European culture and the stage of religious and intellectual emancipation which it had reached made it possible to create “institutions, attitudes, and habits” favorable to the process of industrialization. This process had its negative sides, if we remember the price which had to be paid for capital formation within one single country. But the misery of the working population which Engels had so stirringly described in his Die Lage der arbeitenden Klasse in England (1848) gave way, during the later decades of the nineteenth century, to a rising participation of labor in the general increase of productivity, translated into rising real wages. And productivity could even more rapidly be improved by specialization of production in accordance with international comparative advantage.

When other European countries followed England on her way to industrialization and there emerged—in North America, Australia, and New Zealand—new, vast “underdeveloped” areas, the process of capital accumulation became less painful. A stock of capital seeking profitable investment opportunities already existed (and there was nothing to prevent it from being exported); the effectiveness of the international division of labor was increasing, moreover, due to a greater diversification of supply and demand that was made possible by industrial production, the effectiveness of the international division of labor was increasing.

Thus, the economic starting point of development can be seen in the existence of primitive and inefficient production techniques which are usually applied by a predominantly agrarian population, complemented by a growing awareness of the possibility of improving these techniques by rationalization and participation in international trade.

But economic development is not a mere question of capital accumulation; it is a process showing a close interdependence with the social and cultural development of a country. Its success therefore depends on the population’s preparedness not only to passively accept the deep-going changes of their traditional way of life associated with the introduction of new production methods, but also to actively participate in the movement for modernization and eventually to assume the economic and political responsibilities created by, and safeguarding the continuance of, development. As has already been pointed out, European cultural and social patterns had reached a point at which the emerging new elites, keen on innovation, could rely on a general willingness to respond to their call, even though it had first to be awakened. And, since the overseas settlers belonged to the same cultural orbit, the social and human problems found a solution that was parallel with those posed by economic development. At the same time, international economic relations were greatly facilitated by the open society which prevailed in the liberal age.

In the underdeveloped countries of today, the economic starting point is the same as that which the more advanced nations were concerned with one and a half centuries ago. The essential difference, however, lies in the fact that a relatively small group of Asian, African, and Latin American leaders, pressing for industrialization is faced with populations still deeply embedded in their accustomed ways of life; their way of acting and thinking is under the spell of cultures fundamentally different from that which formed the basis of the original movement for economic advance. The problem, therefore, is not only that of modernizing the economy, but, far more important, that of transforming society to prepare the human ground for development. That this is a very lengthy process and stands in striking contrast to the technical possibilities of economic growth is the crux of the problem.

The economic side of this problem can be summarized thus. These countries are characterized by a large agricultural overpopulation in which marginal productivity may fall to zero. Consequently the same quantity of food and raw materials may be produced with less labor, the surplus population being available for employment in the newly created industrial centers. A net gain in productivity is thus expected to accrue.

But the problem goes deeper than that. To build up factories, expand mining, etc., a minimum amount of both overhead facilities and capital equipment is necessary. Hence, the few available resources must be devoted to the production of investment goods while the workers engaged in this production must “wait,” i.e. content themselves with a low income until the stream of consumption goods eventually begins to flow. It, therefore, appears at first sight that it is the industrial workers who, by their abstention from consuming the “equivalent” of what they produce, finance economic progress. Yet, how is it to be assured that these laborers, who were drawn from the agricultural districts, will continue to receive the food which they had previously consumed? In other words: how can the farmers still engaged in cultivating the soil be prevented from retaining that part of their produce which need no longer be shared with those who have left their native village? The answer is simple: the farmers cannot be induced to sell their “surpluses” in the town markets unless they are offered useful manufactured goods in exchange. But it is exactly these that are lacking since the tools have yet to be created with which to produce them. There is little hope of persuading those peasants, who must get used to the very idea of producing for a market, to part with goods which they themselves badly need in exchange for some unknown commodities to be received in a distant future. Unless the necessary supplies are either forcibly taken from them or borrowed abroad, economic development is doomed to a halt even before it could effectively be started. The two just-mentioned methods constitute, indeed, the only real alternatives to economic stagnation in the underdeveloped countries.

If a country wishes to benefit from foreign capital in the same way as did, in earlier decades, the United States and Australia, it must observe the rules of a liberal international economic order, that is, aim at a maximum international division of labor based on the freedom and stability of international legal and financial relations. To the extent to which it allows government intervention to interfere with the capital and commodity flows set into motion by the autonomous market mechanisms, the country insulates itself from the world market. The amount of private capital that will still be forthcoming will, to this extent, depend less on relative interest rates than on a wider or narrower range of political considerations.

Chatterjee regards the basic issue between the collectivist and the liberal approach as “the conflict which lies between economic development through maximum participation in foreign trade, and development which makes foreign trade a residual, a by-product of home investment plans. The maximization of the degree of participation in foreign trade means that the country concerned produces those commodities which it can produce at a lower comparative cost and exchanges a part of what it produces for those goods for which its comparative advantage is smaller. The minimization of the importance of foreign trade implies that the country is attempting to produce anything that it is physically able to produce, regardless of cost, and importing those items which it is not able to produce.”2

THE SOCIALIST APPROACH

Marxist theory of economic development focuses on the capitalist production process. We remember that it is thought to be the historical role of capitalism to accumulate and revolutionize the means of production until the time is “ripe” for society to move to a higher economic order. The claim that economic development is to take place under a socialist economic order could thus be regarded as contrary to Marxist doctrine.

It was Lenin who laid down the policy directives to be followed by an already socialistic though still underdeveloped country. The founder of the world’s first socialist state assigned to the Communist Party and to the central authorities of the Soviet Union the same role that was formerly assumed by the capitalists: to accumulate capital. The basic feature of this policy is known: forced cencentration of resources in heavy industry, financed by a severe depression of general living standards. The question of agricultural supplies was “solved” first by the officially sanctioned pillage of the peasants by the “armed workers” during the period of War Communism and, after the interval of the period of New Economic Policy, by forced collectivization, subjecting agricultural production to the central control of the state.

Most leaders of the Third World today, though openly opting for the socialist method of industrialization, shrink from recurring to such flagrant measures. There are two important factors which enable them seemingly to combine their collectivist predilections with the advantages of an open society.

“Monopoly Capital” and State Planning

There, after all, does exist a Marxist—or rather neo-Marxist—theory of economic development, which, as we remember, was advanced by R. Hilferding:

The export of capital has, particularly in the form of industrial and finance capital, greatly accelerated the upheaval of social conditions and the drawing of the earth into the orbit of capitalism. Capitalistic development did not take place autonomously in each country; together with capital, the capitalistic conditions of production and exploitation were also imported and always at their most advanced stage. In the same way that today a newly arising industry does not develop from handicraft techniques to modern giant establishments, but is founded initially as a capitalistic enterprise, capitalism itself is being imported in its latest stage into a new country; it therefore exerts its revolutionizing effect with much greater force and in a much shorter time than was required, for example, by the capitalistic development of Holland or England.3

Since the most advanced stage is that of “Monopoly Capital,” and since the joint stock company assumes in it the cardinal role of financing the process of industrialization,4 the policy implications from this theory are now self-evident. To start economic development from the bottom by gradually improving agricultural production techniques, by raising the general cultural level of the population, and by waiting for the spontaneous establishment of small, local industries is clearly not in accordance with the requirements of “historical development.” The only efficient way of catching up with the most advanced countries as rapidly as possible is seen to lead one through a peculiar kind of economic order, characterized by a combination of “Monopoly Capital” and socialist state control.

The “capitalist” side of this order is described by Chatterjee: “What has taken hold of the minds . . . of the members of the restrictionist school, is the Schumpeterian thesis of beneficial effects on economic growth of monopolies. These monopolies can often be brought into being, buttressed, and bolstered by restrictions on trade and payments . . . in addition, these restrictions mean that within the country itself potential competitors in a given industry cannot get the necessary foreign exchange for building up additional productive capacity. . . . Furthermore, exchange control discourages the entry of foreign capital and thereby dissuades foreign capitalists from setting up establishments in competition with domestic firms.”5

The advantage of monopolies is seen in their role as “shock absorbers” whereas the abnormally high profits are justified, following neo-Marxist doctrine, because they give rise to new capital formation. But whenever these profits, in the state authorities’ judgment, cease to serve the desired purpose, a welcome pretext to nationalize these undertakings offers itself.

The socialist side of this development conception is represented by the central governments planning the structural transformation of the national economy, centered around the construction of certain key industries. Admittedly, the price mechanism is of little avail to guide the authorities’ decisions as to what kind of plants are to be built, where, and with how important capacities. But, experts assert, there exists a “second principle” of profitability, which

arises from the fact that large movements of resources within the economy will have effects which are disproportionately different from marginal movements. In consequence, the planner must satisfy himself not only that further marginal movements would serve no useful purpose, but also that there is nothing to be gained by large movements of resources, amounting to a considerable alteration in the structure of the economy.6

The economic implications of such a procedure are not concealed by the same group of experts:

If one is working in terms of large structural readjustments, both cost and productivity are difficult to measure, and one is left to rely much more on qualitative judgments which can be checked only by the event itself.7

Thus, Mises’ theory on the impossibility of rational resource allocation in a centrally planned economy holds good also for a developing country. Only, it is here even more relevant because all factors of production—usually with the exception of labor-are extremely scarce and the price to be paid for faulty investments falls as a correspondingly heavy burden on an already poor population.

The collectivist policy of forcibly breaking through the vicious circle of poverty and stagnation is accompanied by an internal economic policy of low interest rates and relatively high wages, leading to a distortion of real scarcity relations.8 It is self-evident that the state-sponsored part of economic development demands a highly protectionist trade policy. That these ambitious plans can, if at all,9 be achieved only by open or repressed inflation (the modern, more disguised forms of robbing the poor, as F. Machlup once characterized this procedure) is an accepted part of the collectivist theory of economic development.10 All these symptoms of economic nationalism will not fail to lead to a progressive closure of the national economy, with all of its familiar consequences.

The gap between the government’s plan targets and the means at its disposal now becomes visible in the form of an acute shortage of foreign exchange, making increasingly severe quantitative trade restrictions and exchange control “necessary.” This gap has received the magic name of “structural balance of payments disequilibrium” and is nothing other than Machlup’s deficit in the “program balance of payments.” The underlying foreign trade theory is that advanced by F. List: while it is admitted that considerable benefits can be derived from the international division of labor according to comparative advantage, this does not apply, it is thought, to the initial stages of a developing country. The primitive economy is first to be prepared for the rough winds blowing from the world market. The government must, in this transitional period, assure “balanced growth” and a favorable development of the terms of trade.

The fundamental weakness of this theory is the fact that to the degree to which the internal economy is cut off from the world market by national planning, the objective criterion for determining comparative advantage is lost. Even if the government at first honestly intended an eventual opening of the economy, the moment judged appropriate will probably never arrive since the planned structural changes that are not in accordance with comparative advantage always need more, not less, protection, lest the misallocation and even the waste of resources be revealed by international competition. The creation of powerful interests by the infant industry tariff was already clearly pointed out by Hilferding. The more the economy is cut off from the rest of the world, the stronger these interests against international competition will become.

The Politicalization of International Capital Movements

This policy has, however, “also destroyed the prerequisites . . . on which the financing of the economic development of these countries through the voluntary engagement of Western capital depends. . . . There thus seems to remain only one way out: if the source of capital movements based on the free market cannot even with the best intentions be made to flow into our countries, then the well of political capital provision must be tapped; what refuses freely to stream must, under the pressure of diplomatic conferences, propaganda, and more or less concealed threats, be pumped to the surface even at the risk of its evaporating and oozing away in that same heat of passions which had already dried up the source.”11

Here, we touch the second aspect of the neo-Marxist theory of economic development. It is represented by the endeavor to “free” international capital movements from the element of exploitation which they allegedly have contained in the past. Large international capital movements which had developed entire continents in the past are, in socialist terminology, only the transfer of value destined to produce surplus value abroad. This definition has much greater appeal to the minds of power conscious African and Asian leaders than do individual freedom, scarcity prices, and interest rates. It is, therefore, not surprising that development planners have been, to say the least, indifferent with respect to the effects of their nationalistic policies on private international capital flows. Their absence was frequently presented as a fatal, unalterable reality and, moreover, as additional proof of how little “capitalists” really cared for the suffering masses of the newly developing continents.

At the same time, however, new sources of capital appeared which ideological as well as political argumentations had opened up. Following an old Marxist thesis it was announced that every international transaction concluded between the citizens of differently developed communities was a disguised act of exploitation of the poorer by the richer partner. The closer international economic relations became between these two kinds of nations, the more scope presented itself for exploitation, a process which was crowned by the taking over of political power by colonial states. The latter were now, according to this theory, in a position to derive the full benefit from capitalistic development within their countries12 and, in addition, to feed this development with cheap raw material supplies “taken away” from their overseas territories which were, by such practices, doomed to eternal poverty and backwardness. Hence, it was nothing but a rightful claim on the part of the newly developing independent countries to receive back part or all of what had been extorted from them.

However, the real picture is far more complex: it also contains impressive achievements by the former colonial powers for the development of their ancient protectorates. Yet, these powers, failing to subject the accusations against them to an honest and objective analysis, frequently seemed to accept these incriminations and act accordingly. This fact and the fear of the new countries’ being drawn over into the “socialist camp” account for the continued preparedness of the advanced countries to grant them large governmental credits and gifts.

But this “political capital formation” has a number of peculiarities. In the first place, voluntary saving is replaced by forced saving in the form of additional taxes to be paid by the citizens of the advanced industrial states. These sums are disposed of without a scrupulous investigation into the economic profitability of the projects in which they are to be invested; such an inquiry and corresponding control of the progress achieved would be regarded as an inadmissible interference with the sovereignty of the receiving country.13

Secondly, there is no guarantee that this intergovernmental aid will, in its end effect, result in a lasting rise of productivity in the developing country. The fact that it partly or even wholly fills the ever-widening gap of the program balance of payments may only mean that the funds are used to neutralize the mistakes and deficiencies of government planning.14 B. R. Shenoy gives a typical illustration of this: “While the Indian planners spoke about investments, inflation and government expenditures have swelled the demand for consumption goods of all kinds.”15 This led to a flight or hoarding of private capital and to the smuggling of gold to which a considerable part of foreign grants was devoted. Thus, “the problem of such foreign aid lies in the fact that the expansion of inland capital formation due to it remains far below its actual volume.”16 Interest and amortization payments therefore become an “unbearable burden for the population if debts are contracted to serve wasteful purposes. The predominant way of thinking of the Indian planners seems to consist of taking up additional borrowings to finance old liabilities.”17

“Do the Western countries help the individual citizens in the underdeveloped countries or do they help the various pro-socialist governments in order to enable them to act with all the more power against free entrepreneurship?” asks the Venezulan economist N. Zuloaga and adds: “In my country today private capital owned both by residents and foreigners is fleeing abroad. It does so because it fears socialism . . . and interventionism. At the same time, our government is offered considerable aid by foreign governments and international organizations.”18

Thus, the collectivization and therefore politicalization of economic development leads necessarily also to the politicalization of international capital movements. These intergovernmental grants either lead to political dependence (as was already pointed out in the section on international capital movements), or they must be given without economically sound strings attached to them. Hence, to the extent that political capital is obtainable abroad, a collectivist economic policy, with its disregard of relative scarcities and marginal productivity, can be pursued without imposing on the population the same hardships that the Soviet Union had imposed in the 1920’s and 1930’s. The “only” price to be paid by the citizens is a stagnant and eventually much slower rise of their living standards19 than would be possible under a free market system.

THE LIBERAL APPROACH

The first target of liberal criticism of the collectivist conception of economic development is the kind of economic order the latter entails. Enough has been said on its major weaknesses so that no repetition is required. Liberals wish to see government planning and monopoly replaced by a free market economy, resting on internal and external competition.20 Against the collectivist objective of keeping up a stable, effective demand corresponding to full employment of labor and resources—which is only possible by being sheltered from external disequilibrating effects—they set the goal of increasing productivity and elasticity to adjust to changing market conditions, even if this involved “friction, losses, and disturbances of equilibrium.”21

Liberals therefore favor a political and economic order also for the developing countries in which the activities of the state are limited to the provision of infrastructure,22 the efficient raising of the educational level of the population, and the setting up of an institutional framework that is favorable to the mobilization of private initiative and capital formation.23 Investment funds are to be attracted to the home economy from both internal and external sources.24 Hence, it is an important function of government policy to create and maintain a political and economic climate of stability and confidence. Abstention from inflationary policies is the foremost requirement, especially also with regard to the social injustice they involve.

Liberal authors underline the importance of an absence of direct trade and payments controls: they are therefore referred to as the “convertibility school.” This school emphasizes the arbitrariness, uncertainty, and clumsiness of centralized decisions which, under a regime of exchange control, determine the use to be made of a country’s foreign exchange. These characteristics and the all-around protective effects of a “nationalization of payments” (Röpke) have very unfavorable effects on economic growth. Furthermore, the obligation to sell foreign exchange earnings at a fixed rate below that corresponding to the real market situation discourages the efforts of exporters to do business abroad and directs them to the more profitable home market. Against the collectivist argument that exchange control provides a valuable instrument of social policy in that it facilitates the import of basic consumption goods at the expense of luxuries, the liberals maintain that an unequal distribution of income will persist as long as human services, especially managerial and technical skills, are scarce and need a material incentive to come forth. Thus, the real problem is not rewarding these services according to their quality and scarcity, but the danger of dissociating personal income from performance which often occurs in a market form dominated by monopolies, not to speak of a comprehensively planned economy. In addition, if the demand for luxuries can no longer be satisfied by imports, the corresponding purchasing power, unless it is taxed away, will reappear on the home market, thereby directing internal resources into the production of such goods. This involves higher real costs than if the corresponding imports had not been forbidden. All these consequences can only be prevented by increasingly comprehensive state planning.

It is no contradiction, but rather a completion of the liberal position, if the government is also expected to lay down general rules and conditions to be observed by foreign investors, rules which are designed to limit or to eliminate their possibility of building up power positions. What is important is that these regulations remain a constant and foreseeable factor in the calculations of capital owners and that they interfere as little as possible with the economic requirements of the country.25

Liberals also emphasize the fundamental importance of increasing the productivity of agriculture, where climate and soil conditions permit such a policy, as against a premature state-sponsored industrialization. It is recognized that the requirements for this program are (1) an efficient agrarian reform, breaking the power of an unproductive feudal aristocracy, and (2) diffusion of more productive methods of cultivation and of better tools among the peasants. At the same time, those branches of primary production are to be encouraged which offer the best prospects for exports. Manufacturing should start, as far as possible, from existing forms of production. “The process of development thus initiated, with its increase in mass incomes, should naturally result in the rise of individual industries which, since they cater to specific local needs, can do without crutches.”26

But this program, so liberals stress, can only be fruitful if the more advanced countries—themselves—“open their markets to the goods produced in the developing areas at adequate and stable conditions.”27 Their egoistic and shortsighted protectionism provides water to the mills of the restrictionist school. Moreover, what is gained by the small group employed by or owning the protected industries in say the United States must be paid not only by all American consumers in the form of higher internal prices, but by every individual taxpayer in the form of millions given away by their government as political capital.

Finally, the convertibility school stresses the necessity of all foreign aid being accompanied by an effort of the receiving country itself. This aid is to be concentrated on certain development projects that are in harmony with the geographical and economic requirements of the country. No money must be given away à fond perdu in the name of a false charity.28 At the same time, however, “development policy must be freed from the East-West conflict and is to be regarded as the really central task of the world for the next fifty years.”29

SUMMARY AND CONCLUSIONS

Due to the cumulative nature of controls30 the particular economic organization of an underdeveloped country at any one time has no decisive importance. What does matter is the outlook of the responsible authorities, i.e. their faith in restrictions or in convertibility as the most appropriate method of economic development.

The latter assures freedom of choice of consumption which, besides being a democratic postulate, may be regarded as an important incentive for production. It can be termed a “policy of honesty” in that emphasis is placed on real costs, real prices, and real incomes, and that growth does not depend on deceiving income receivers by only nominally raising wages. It also promotes greater efficiency and flexibility of the economy, allowing the dynamic element to work itself out without restraint. Finally, it is closely tied to the general cultural advance of the population by giving it the necessary time to adjust itself to the new social patterns and live up to the requirements of a free society.

Conversely, the restrictionist approach permits a consciously planned rate of growth and visible results of economic advance through the concentration of productive resources on large industrial projects. “It is . . . due to greater predictability of results of investments in industry and lesser predictability of agriculture that industry receives more emphasis than agriculture.”31 If the results of industrial investments are to be measured, e.g. by the number of plants constructed in a given year or even by any quantitative output figure, then this statement may hold true. As soon as we introduce value considerations, however, it can be assumed that in most cases the devotion of resources to improve agricultural cultivation methods is more productive (though less visible) than their concentration in industry.

By subjecting consumption to production, there is nothing to prevent planners from creating sufficient effective demand to clear the market. But this is possible only at the price of inflation and restrictive trade policies. Chatterjee observes that “there are enough imponderables in the economy which cause one to prefer a bird in the hand to two in the bush—more certain, but less efficient growth of the planned economy, to the more efficient but less certain growth of the market economy.”32 This attitude is most plausible to those to whom “the urge for development is irresistible” and who have “no desire to wait any more,”33 irrespective of what this may imply for the socio-cultural and political prospects of their countries.

It must thus be admitted that, from the standpoint of one country, having solely the economic side of development in mind, one cannot give an unequivocal answer as to the most appropriate method of growth to be chosen. But when we approach the same question from the angle of world welfare, it can no longer be doubted that it is the liberal approach which is superior to the collectivist. “If the convertibility school is concerned with the maximization of world income, the restrictionist school occupies itself with the maximization of national income. It poses the question whether from the standpoint of a given nation a larger share of a smaller world income would not be bigger than the smaller share of a larger world income.”34

But, the gains achieved by the restrictionist school would only be of a temporary character. The collectivist path to economic development presupposes a continued willingness of the advanced countries to fill the gaps in the program balance of payments and to make up for at least part of the misallocation of resources resulting from this kind of policy. But even if “political capital” can be obtained (which depends to no small degree on the collectivist inclinations of Western governments), there is the inescapable fact that the importance of efficiency considerations increases in the long run so that without an increasing rate of capital imports a breakdown will in all probability become inevitable.

Furthermore, the possible economic advantages to be derived from trade and exchange controls diminish as more and more countries adopt the same measures. The final picture would be the replacement of an international economic order by the game of rope pulling, the consequences of which have become all too familiar to us. And, as considerations of Staatsräson gain ground over the mere exchange of commodities at market prices, the result may be economic warfare, following its own special laws: “its tactics are aimed at the strategic objective of undermining the economic foundations of the opponent, of obstructing his economic consolidation and development and of hitting thereby indirectly his military power.”35

NOTES TO CHAPTER IX

36Ellsworth, P. T., The International Economy. New York & London, Macmillan, 1964, pp. 483-84.

37Chatterjee, I. K., op. cit., p. 14.

38Hilferding, R., op. cit., pp. 406-7.

39See pp. 52-53.

40Chatterjee, I. K., op. cit., pp. 182-83.

41United Nations, Measures for the Economic Development of Under-Developed Countries. Report by a Group of Experts. New York, May 1951, paragraph 149.

42Ibid., paragraph 194. Cf. also the discussion of Barone’s model on pp. 133-35.

43High wages thus result in a “contrived scarcity” (P. T. Bauer) of labor, leading to a higher capital intensity than economically justified in these countries. This effect is, moreover, in contradiction to the goals of full employment which is naturally subscribed to by all collectivist governments.

44Once again, the Chinese Great Leap may serve as an illustration. It suffered frustration not only because of the withdrawal of Soviet advisors, technicians, and development aid, but mainly because of “human bottlenecks.” Whereas centralized planning is often justified by the absence of private initiative and the low cultural level of the masses, no attention is given to the problem where the state is to take from the army of experts and skilled workers indispensable for the setting up and fulfillment of national plans of industrialization. If the government refuses to wait until the general social and cultural level has reached a stage at which a responsible middle class may become the agent of economic development—a process which can be accelerated by a patient and well devised policy of education and the demonstration of new methods adapted to the special conditions of the individual countries—its only alternative is to adopt force. But even this policy finds its limits in the physical and psychological reactions of the population, as was proved by the Chinese experiment. The premature concentration of capital in large industrial enterprises equipped with the latest machinery, but with insufficiently qualified personnel, is therefore a major factor accounting for the waste of scarce productive resources by collectivist governments, not to mention the inefficiency and corruptibility of an all too hastily created bureaucracy.

45Cf. also Chatterjee, I. K., op. cit., pp. 21-22: “If full utilization of capacity at any point of time is considered to be a condition of economic growth and if at the same time it is to be assured that monopolistic profits should be reaped, there is no escape from a policy which permits demand to run ahead of supply (supply at any time being full capacity output), nor is there any getting away from the consequences of such a policy: inflation at home and closure of the economy. It can he seen that each of the elements involved in the restrictionist position—an increase in the degree of monopoly, emphasis on employment, propensity to inflate, emergence of disequilibrium in the balance of payments, rise of trade and payments restrictions—is partial by itself, but mutually complementary. Taken together, these elements represent a way of development.” Italics added.

46Röpke, W., “Unentwickelte Länder,” ORDO, V (1953), p. 105.

47I.e. without its “inherent contradictions” which were simply “transferred” to the colonial areas. The fact that Rosa Luxemburg’s theory was shown to be scientifically untenable by both socialist and liberal economists was no reason not to appeal to it. And in fact, the psychological crop to be derived from it is considerable.

48A typical example was Nasser’s attitude toward Western agencies negotiating the financing of the Assuan project. The first condition the World Bank attached to a loan was an Egyptian guarantee that it was in fact used exclusively for the construction of the barrage. Secondly, Egypt was to take the obligation to prevent inflation resulting from the inflow of these large sums. Both demands were rejected by the Egyptian government because of their “colonialistic” character and their “interference” with the internal affairs of the country.

49“The historical irony . . . lies in the fact that thereby the program is executed by the West to a critical degree in the spirit of the same national planning which in the national economic policy of the individual underdeveloped countries creates a national-autarkic socialism and therefore becomes a major obstacle for the success of a policy of economic development.” Röpke, W., loc cit., p. 69.

50Shenoy, B. R., “Der richtige Weg zu Indiens Fortschritt.” In Hunold, A. (ed.), Entwicklungsländer, Wahn und Wirklichkeit. Erlenbach/Stuttgart, E. Rentsch Verlag, 1961, p. 151.

51Ibid., p. 152.

52Ibid., pp. 153-54.

53Ibid., pp. 226-27.

54This statement is not invalidated by the fact that governments may produce impressive statistical evidence on economic growth. It is not the quantity of output of heavy industry that matters, but its economic usefulness, i.e. a comparison between its costs of production and the corresponding world market prices.

55“One thing is certain: the more the country participates in international trade, the more it finds that those items of national production establish themselves as exports which can compete price-wise and quality-wise with foreign products and those items of national consumption which do not meet competition from domestic products show themselves up as imports.” Chatterjee, I. K., op. cit., p. 17.

56Röpke, W., International Order and Economic Integration, p. 182. He continues: “The actual problem we are faced with here is 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 against adaptation within the individual national economies.”

57Many authors are prepared to admit intergovernmental aid for this purpose. That this provision requires a careful and extensive planning has been shown by K. Hesse who devoted a study to the analysis of the contribution of private firms to economic development during the colonial age. He extensively discusses the first Ten-Year-Plan for the development of the Congo under Belgian domination as well as the instructive examples provided by the Gezira scheme and the Managil project in the Sudan. “It is in the continuation of the performance during the last decades, not in the rupture with it, that a solution of the new task [i.e. the development of independent states, E. T.] is to be found,” writes the author after having subjected the bright as well as the dark sides of the intervention of private firms to a scrupulous analysis. Cf. Hesse, K., Entwicklungsländer und Entwicklungshilfen an der Wende des Kolonialzeitalters. Berlin, Duncker & Humblot, 1962, p. 337.

58Hesse refers to the Gezira scheme when he writes: “Here as in many other big development projects of the past one did not stop at making use of ‘cheap colonial labor power,’ but labor was combined with machinery. Maybe that thereby not unimportant sections of the population had to remain outside the production process; on the other hand, higher output at less cost could more rapidly be achieved which in turn resulted in increased tax receipts of the administration, leading to higher expenditures of general development and social services. To find in this respect the right measure, not to renounce, on the one hand, technical progress as a means of economic development, always to create, on the other, new jobs for manual workers, technical and commercial staff as well as for government officials—all this can be regarded as one of the most essential tasks of future development policy which can learn many things from past experience.” Ibid., pp. 347-48.

59M. Heilperin e.g. attaches decisive importance to internal capital formation and to a corresponding climate of economic stability based on private initiative. He indeed sees in private capital formation at home a necessary precondition for an adequate inflow of foreign capital. Cf. Entwicklungsländer, Wahn und Wirklichkeit, p. 224.

60“It should now be clear that competition, rise of productivity, monetary discipline, equilibrium of the balance of payments and convertibility of currencies form part of another network where one can take all or none of them and these apparently dissimilar elements can be pieced together to indicate another line of development.” Chatterjee, I. K., op. cit., p. 22.

61Röpke, W., “Unentwickelte Länder,” loc. cit., p. 84.

62Van Sickle, J., “Alte und neue Theorien des wirtschaftlichen Wachstums.” Entwicklungsländer, Wahn und Wirklichkeit, p. 120.

63“Conscience is a matter for the individual, not for national governments.” Quoted from J. Jewkes in Röpke, W., loc. cit., p. 70. Cf. also Hesse, K., op. cit., p. 359. A. Rüstow proposed the creation of a “Club of the Respectable and the Trustworthy” to be constituted by those developing countries which are determined loyally to honor their obligations toward foreign investors. If the rules of this Club were strictly applied, its members would find it much easier to obtain foreign capital and, at that, at much more favorable conditions. Cf. Entwicklungsländer, Wahn und Wirklichkeit, pp. 217-18. It is interesting to note that such a “Club” has in fact been constituted by the countries who signed the Investment Code of the International Bank for Reconstruction and Development.

64Scheel, W. W., Verfahren und Formen der Zusammenarbeit mit den Entwicklungsländern. Bonn, 1961, quoted by Hesse, K., op. cit., pp. 17-18.

65“In practice the signal that the time has come for comprehensive planning is usually provided by the emergence of shortages. Because of the demands being made upon the economy, some resource or other becomes acutely scarce, e.g. labor or food, or foreign exchange, and the symptoms of inflation appear. This scarce resource may then have to be rationed, and this cannot be done satisfactorily without knowing how important it is in every part of the economy.” Measures for the Economic Development of Under-Developed Countries, paragraph 204. It is assumed by the authors of this report that this knowledge can be gained only by comprehensive planning!

66Chatterjee, I. K., op. cit., p. 158.

67Ibid.

68Ibid.

69Ibid., italics added.

70Linder, W., in Neue Zürcher Zeitung, No. 5323, December 9, 1964.

1.“Socialism, then, will flourish in proportion as the consciousness grows that there is something vitally wrong in the industrial organization of society.” Guthrie, W. B., Socialism Before the French Revolution. New York, Macmillan, 1907, p. 68. As Robert Owen expresses it: “Until society can be made to understand the impracticability of improving its conditions under the existing circumstances and can be induced to change these circumstances in toto, no real advantages can be obtained for mankind.” Lectures on an Entire New State of Society. London, 1820, p. 138.
2.Cf. Karl Marx’s 11th Thesis on Feuerbach. In Borkenau, F. (ed.), Karl Marx. Frankfurt/M., Fischer, 1956, p. 42.
3.The term “liberal” is used here in its original European sense. “Liberalism is a belief in the value of human personality, and a conviction that the source of all progress lies in free exercise of individual energy; . . . it therefore involves a readiness to use the power of the state for the purposes of creating the conditions within which individual energy can thrive, of preventing all abuses of power, of affording to every citizen the means of acquiring mastery of his own capacities and of estabhshing a real equality of opportunity. . . .” Encyclopaedia Britannica, Vol. XIII, 1959, p. 999d.
4“It follows from what has been said that the system here established, if it is to be realized, should be adopted or rejected in entirety.” Fichte, J. G., op. cit., p. 103.
5Freyer, H., op. cit., p. 26.
6Heuss, A., “Hellas. Die archaische Zeit.” Propyläen Weltgeschichte, ed., G. Mann and A. Heuss, Berlin, Propyläen Verlag, 1962, III, p. 373.
7Ibid.
8“They will go to mess and live together like soldiers in a camp. . . . They alone of all the citizens may not touch or handle silver or gold, or be under the same roof with them or wear them, or drink from them. And this will be their salvation, and they will be the saviors of the State.” Quoted from Republic, Book I, in Gray, A., The Socialist Tradition. Moses to Lenin. London, Longmans, 1946, p. 19.
9Plato, Laws. With an English translation by R. G. Bury, London, Heinemann, 1926, Vol. I, Book I, p. 9.
10Ibid., Vol. II, Book XII, p. 477.
11Ibid., Book VII, p. 135.
12Ibid., p. 149.
13Ibid., Book XII, p. 547.
14Ibid., p. 537.
15Ibid., p. 521.
16Ibid., Book VII, p. 185.
17Ibid., Book XI, p. 413.
18Ibid., Book VIII, p. 171.
19Ibid., Vol. I, Book IV, pp. 257-59, italics added.
20Ibid., Vol. II, Book VIII, p. 185.
21Ibid.
22Ibid., p. 187.
23Ibid., Book XII, p. 503.
24Ibid. Plato lays down the following rules: “First, no man under forty years old shall be permitted to go abroad to any place whatsoever; next, no man shall be permitted to go abroad in private capacity, but in a public capacity permission shall be granted to heralds, embassies, and certain commissions of inspection. . . . These men, when they return home, will teach the youth that the political institutions of other countries are inferior to their own.” Ibid., p. 505.
25Ibid., p. 507.
26Ibid.
27Ibid., p. 509.
28Ibid., p. 511.
29Ibid. “The officials . . . shall have a care lest any such strangers introduce any innovation, and they shall duly dispense justice to them, and shall hold such intercourse as is necessary with them, but to the least extent possible.” Ibid., p. 513.
30Guthrie, W. B., op. cit., p. 64.
31Ibid.
32Ibid., p. 68.
33More, Sir Thomas, The Utopia. In Latin from the edition of March 1518 and in English from the first edition of Ralph Robynson, translated in 1551, edited by J. H. Lupton. Oxford, Clarendon Press, 1895, p. 118.
34Ibid., p. 119.
35Ibid., p. 140.
36SOCIALISTS HAVE CONCLUDED that something is fundamentally wrong with the “society” in which they live. Consequently, they feel compelled to change it.
37SOCIALISTS HAVE CONCLUDED that something is fundamentally wrong with the “society” in which they live. Consequently, they feel compelled to change it.
38The main target of socialist criticism, therefore, is the liberals’ stress on individual freedom and utility. Such freedom and utility, it is argued, lead to particularism and chaos. Since the profit motive is founded on considerations of individual as distinct from collective welfare, it is, in the opinion of socialists, totally unsuitable as a means of regulating the economy. Unlike the liberals, therefore, the socialists are primarily preoccupied with the exaltation of the community, and the subordination of the individual to it.
39Freyer compares the inner organizational structure of an ideal commonwealth with the “cosmos of the Greek philosophers: finite, round and numerically ordered so that it can simply and clearly be governed by static laws.” To this self-inclusive system all forces not rooted in its laws, and which therefore threaten to interfere with its proper functioning, must appear hostile and dangerous. The only choice a Utopian author leaves his reader is an uncompromising take it or leave it. Hence, a utopia must be strictly isolated from the rest of the world; “all factors and forces which by their nature transgress borderlines and join countries, must at the outset be viewed suspiciously in utopias.”
40Freyer compares the inner organizational structure of an ideal commonwealth with the “cosmos of the Greek philosophers: finite, round and numerically ordered so that it can simply and clearly be governed by static laws.” To this self-inclusive system all forces not rooted in its laws, and which therefore threaten to interfere with its proper functioning, must appear hostile and dangerous. The only choice a Utopian author leaves his reader is an uncompromising take it or leave it. Hence, a utopia must be strictly isolated from the rest of the world; “all factors and forces which by their nature transgress borderlines and join countries, must at the outset be viewed suspiciously in utopias.”
41Mankind will always be indebted to Plato for the prototype of the ideal commonwealth. This author lived at a time when democracy, the long cherished political order of Athens, had degenerated into a “bustle of rancour and baseness.” In this period of political disintegration and liberated individualism, Socrates had been sentenced to death and executed by the Athenian authorities. The rising philosophical school of the Sophists relativized all moral institutions as being solely dependent on human will in general, and that of the strong in particular.
42Against this philosophical anarchism Plato set his theory of the objective existence of absolute principles, the highest of which was justice. Justice may be recognized by an intelligible act and thus refuses to tolerate any authority besides itself, not even that of laws. “What is just can only be discerned for each individual case with respect to the Idea and by the one who possesses the necessary capability; that is, by the philosopher. . . . The just in the highest sense, hence the one who discerns, is therefore himself the law and thus above the rigid letter.”
43Human domination is thus openly admitted, but it must be domination by the chosen few endowed by nature, as an old Greek legend has it, with golden hearts. Plato’s goal is to found a state which would personify the moral Idea. The first prerequisite for such a state is unity of purpose, directed at the attainment of absolute justice. The second step is to devise a way of life for the “lovers of wisdom” which would bring them into closest communication with the Idea and its dictates. To achieve this end, Plato established severe rules for the philosophers, forbidding them to have families and private possessions and forcing them into a life of military discipline. Here, for the first time, the ideal of asceticism was linked with the denunciation of gold and silver which was identified with wealth and was regarded as the last cause of human greed and egoism.
44Plato, well aware that his Politeia was not realizable on this earth, designed, in his “Nomoi,” a second-best State in which the rulers were less enlightened and therefore, as the title indicates, in need of a coherent framework of guiding laws. Plato retains the military structure in the interior, he even defines “the well-constituted State” as one which “ought to be organized in such a way as to be victorious in war over all other States.” Elsewhere he writes:
45The main principle is this: that nobody, male or female, should ever be left without control, nor should anyone, whether at work or in play, grow habituated in mind to acting alone and on his own initiative, but he should live always, both in war and peace, with his eyes fixed constantly on his commander and following his lead.
46For this purpose, it is necessary to liberate the citizens from their “lust for wealth which allows a man no leisure time for attention to anything else save his own private property.” And the author continues: “That the laws previously ordained serve to repress the majority of desires, is not surprising.” This is so because “all our laws must always aim at one single object which, as we agreed, is quite rightly named ‘Virtue.’” The State and its citizens are identical in that they both require “the salvation of laws;” therefore, “everyone shall regard the friend or enemy of the State as his own personal friend or enemy.”
47For this purpose, it is necessary to liberate the citizens from their “lust for wealth which allows a man no leisure time for attention to anything else save his own private property.” And the author continues: “That the laws previously ordained serve to repress the majority of desires, is not surprising.” This is so because “all our laws must always aim at one single object which, as we agreed, is quite rightly named ‘Virtue.’” The State and its citizens are identical in that they both require “the salvation of laws;” therefore, “everyone shall regard the friend or enemy of the State as his own personal friend or enemy.”
48For this purpose, it is necessary to liberate the citizens from their “lust for wealth which allows a man no leisure time for attention to anything else save his own private property.” And the author continues: “That the laws previously ordained serve to repress the majority of desires, is not surprising.” This is so because “all our laws must always aim at one single object which, as we agreed, is quite rightly named ‘Virtue.’” The State and its citizens are identical in that they both require “the salvation of laws;” therefore, “everyone shall regard the friend or enemy of the State as his own personal friend or enemy.”
49For this purpose, it is necessary to liberate the citizens from their “lust for wealth which allows a man no leisure time for attention to anything else save his own private property.” And the author continues: “That the laws previously ordained serve to repress the majority of desires, is not surprising.” This is so because “all our laws must always aim at one single object which, as we agreed, is quite rightly named ‘Virtue.’” The State and its citizens are identical in that they both require “the salvation of laws;” therefore, “everyone shall regard the friend or enemy of the State as his own personal friend or enemy.”
50For this purpose, it is necessary to liberate the citizens from their “lust for wealth which allows a man no leisure time for attention to anything else save his own private property.” And the author continues: “That the laws previously ordained serve to repress the majority of desires, is not surprising.” This is so because “all our laws must always aim at one single object which, as we agreed, is quite rightly named ‘Virtue.’” The State and its citizens are identical in that they both require “the salvation of laws;” therefore, “everyone shall regard the friend or enemy of the State as his own personal friend or enemy.”
51Internal economic life is strictly regimented. Thus, “each several craftsman in the State shall have one single craft and gain from it his living.” Or again:
52The Law-wardens must meet in consultation with experts in every branch of retail trade, and at their meetings they must consider what standard of profits and expenses produces a moderate gain for the trader, and the standard of profits and expenses thus arrived at they must prescribe in writing; and this they must insist on—the market stewards, the city stewards and the rural stewards, each in their own sphere.
53Most of the Greeks arrange for their food to be derived from both land and sea, but our people will derive it only from the land. This makes the lawgiver’s task easier.
54For if the State was to be on the sea-coast, and to have fine harbors, and to be deficient in many products, instead of productive of everything—in that case it would need a mighty savior and divine lawgivers, if, with such a character, it was to avoid having a variety of luxurious and depraved habits. As things are, however, there is consolation in the fact of that eighty stades. Still, it lies unduly near the sea, and the more so because, as you say, its harbors are good; that, however, we must make the best of. . . . Our State has compensation in the fact that it is all-productive; and since it is hilly, it cannot be highly productive as well as all-productive; if it were, and supplied many exports, it would be flooded in return with gold and silver money—the one condition of all, perhaps, that is most fatal, in a State, to the acquisition of noble and just habits of life.
55What remains of foreign trade is severely guarded by the State. It is true that “no toll shall be paid in the State by anyone either on exported goods or on imports,” but this is practically meaningless since
56Frankincense and all such foreign spices for use in religious rites, and purple and all dyes not produced in the country, and all pertaining to any other craft requiring foreign imported materials for a use that is not necessary, no one shall import; nor, on the other hand, shall he export any of the stuff which would of necessity remain in the country. . . .
57In regard to arms and all instruments of war, if there is need to import any craft or plant or metal or rope or animal for military purposes, the hipparchs and generals shall have control of both imports and exports, when the State both gives and takes, and the Law-wardens shall enact suitable and adequate laws therefor; but no trading for the sake of gain, either in this matter or in any other, shall be carried on anywhere within the boundaries of our State and country.
58the intermixture of States with States naturally results in a blending of characters of every kind, as strangers import among strangers novel customs: and this result would cause immense damage to peoples who enjoy a good polity under right laws.
59reputation in the eyes of others, whether for goodness or the reverse, is a thing that should never be lightly esteemed.
60The State may send out “inspectors,” i.e. men over fifty years of age and of great merit, “who desire to survey the doings of the outside world in a leisurely way.” But they must be “incorruptible, so as to confirm thereby such of his native laws as are rightly enacted, and to amend any that are deficient.” On their return, the inspectors will report to a “mixed body of young men and old” on “anything important they may have learnt elsewhere.”
61The State may send out “inspectors,” i.e. men over fifty years of age and of great merit, “who desire to survey the doings of the outside world in a leisurely way.” But they must be “incorruptible, so as to confirm thereby such of his native laws as are rightly enacted, and to amend any that are deficient.” On their return, the inspectors will report to a “mixed body of young men and old” on “anything important they may have learnt elsewhere.”
62The State may send out “inspectors,” i.e. men over fifty years of age and of great merit, “who desire to survey the doings of the outside world in a leisurely way.” But they must be “incorruptible, so as to confirm thereby such of his native laws as are rightly enacted, and to amend any that are deficient.” On their return, the inspectors will report to a “mixed body of young men and old” on “anything important they may have learnt elsewhere.”
63But if, on the other hand, such an inspector appears to be corrupted on his return, in spite of his pretensions to wisdom, he shall be forbidden to associate with anyone, young or old; wherein if he obeys the magistrates, he shall live as a private person, but if not, he shall be put to death.
64All foreigners—whether in a public capacity or on a private visit—are, immediately upon their arrival, taken care of by State officials or by priests. Plato is especially distrustful of that “inevitable emigrant” choosing “summer, as a rule, for his annual visits.”
65“Plato was the intellectual father of socialists as well as of philosophers.” But whereas he “had a more general abstract end in view . . . , More was interested in the practical solution of actual and present social problems, and busied himself with plans to alleviate existing unfortunate conditions.” These conditions resulted from the enclosure movement in sixteenth-century England. Therefore, “the appearance of ‘Utopia’ marks the beginning of the modern social problems as they show themselves in the incipient stages of the capitalistic period.”
66“Plato was the intellectual father of socialists as well as of philosophers.” But whereas he “had a more general abstract end in view . . . , More was interested in the practical solution of actual and present social problems, and busied himself with plans to alleviate existing unfortunate conditions.” These conditions resulted from the enclosure movement in sixteenth-century England. Therefore, “the appearance of ‘Utopia’ marks the beginning of the modern social problems as they show themselves in the incipient stages of the capitalistic period.”
67“Plato was the intellectual father of socialists as well as of philosophers.” But whereas he “had a more general abstract end in view . . . , More was interested in the practical solution of actual and present social problems, and busied himself with plans to alleviate existing unfortunate conditions.” These conditions resulted from the enclosure movement in sixteenth-century England. Therefore, “the appearance of ‘Utopia’ marks the beginning of the modern social problems as they show themselves in the incipient stages of the capitalistic period.”
68The Island of which Hythloday enthusiastically reports is in the form of a horseshoe and its shores are washed by a calm and friendly sea. However, when Utopus first conquered “Abraxa,” it was a peninsula. This wise king made it an island by cutting an isthmus of fifteen miles. The entry into Utopia’s inviting bay is, moreover, made treacherous by nature because of dispersed rocks and shallows—the safe passages being known only to the fortunate inhabitants themselves.
69that they do not think felicity to rest in all pleasure, but only in that pleasure that is good and honest. . . . They define virtue to be a life ordered according to nature . . . and that he does follow the course of nature who in desiring and refusing things is ruled by reason.
70This greatly simplifies the economic process. Both men and women work and, since private property is unknown, there is no distinction between rich and poor. Hence, an idle class which must be supported does not exist. In addition, the demand for goods and services is reduced because homespun garments “are throughout all the Island of one fashion . . . seemly and comely to the eye, fit both for winter and summer.” Simple but abundant meals are taken in common, and whatever else is produced is done so in good and lasting quality. Hence, six hours of daily work are sufficient to provide for the Utopians’ necessities; the rest of the time is devoted to common recreation, games, and studies. But even so, the inhabitants cannot help producing surplus. All commodities are stored in warehouses or markets;

Socialism and International Economic Order