Socialism and International Economic Order

CHAPTER VIII LIBERAL VERSUS SOCIALIST ECONOMIC ORDER, A COMPARATIVE ANALYSIS

PRELIMINARY REMARKS

Here we must reflect for a moment. Do not our conclusions with respect to socialist international economic relations strikingly coincide with those drawn up by Hilferding with respect to the monopolistic stage of capitalism? Does not the growth of mighty industrial combines equally destroy the price mechanism based on competition and replace it by power, arbitrariness, and chance? Are we not faced here, to use Marxist language, with an irresistible evolution of the material conditions of production which necessarily leads to socialism?

If we examine the problem of industrial concentration more closely, there are three main factors to be considered: (1) technical progress and improvements in the organization of production may, indeed, frequently encourage the growth of large enterprises; this growth is, however, (2) preeminently dependent on the economic requirements of the market; this aspect plays a particularly important role in view of the considerable investment and the corresponding high proportion of fixed costs which are involved in large-scale production. Furthermore, technical inventions usually bring about (3) an increase in the division of labor. Hence, where industrial agglomerations arise, a great number of small, specialized enterprises simultaneously spring up, nourishing the large factories with their supplies and extending their services to the finished products of these giants. This fact, together with the growing importance of tertiary production, may actually account for a diminution in the average size of firms.1

We are thus entitled to the assumption that there were strong political forces at work that contributed to the rise and consolidation of “Monopoly Capital” in the form of financial integration of control. Apart from outright government interventions such as subventions, price fixing, etc., four major factors have had a decisive influence on the rise of monopolies: corporation laws, tax policies, patent laws, and trade restrictions.2 It was correctly perceived by Hilferding that trade restrictions, under the guise of infant industry protection, played a particularly harmful role in this process. There is no reason to conclude, however, that these government policies are “inevitable.” In fact, as soon as their dangerous implications became more generally recognized, a strong antitrust movement gained ground in public opinion which was theoretically elaborated and sustained by the neo-liberal school.

As for the aggressiveness which characterized the foreign policies of the major industrial powers in the decades preceding World War I, it was mainly due, as Schumpeter also admitted and even stressed, not to the inherent forces of capitalism, but to the association of the bourgeoisie with the detainers of state power who used it according to their own specific political interests which were different, if not entirely contrary, to those of the former.3 Hence, we may conclude that “imperialism is not only no essential part of capitalism, but indeed a phenomenon alien and contrary to its economic system.”4

One word may yet be said on the question of crises. If this problem is approached in a scientific way, one will not fail to discover that economic disequilibria are not restricted to a free market economy, but are due to the complicated structure of modern economy in general.5 Under capitalism, a cumulative contraction process is usually caused by the interest rate not reflecting the true scarcity of capital and a corresponding overinvestment. But we have already seen that forced capital accumulation is a typical feature also of centrally planned economies. Since no rational price mechanism guides the planning authority’s decisions, bottlenecks and major disproportionalities will be even more frequent in a collectivist than in a liberal economy. But they will not result in a conspicuous reversal of the economic process—the economic function of which is the correction of a false allocation of resources—i.e. in unused capacities6 and unemployment. Productive resources will remain as scarce as they have ever been; the only effect of such imbalances will be either stagnation or an extremely slow rise of the general standards of living.7

BALANCE OF PAYMENTS ADJUSTMENT AND NATIONAL MONETARY POLICIES

Three Concepts of the Balance of Payments

The balance of payments “is a record of all transactions, real and financial, which have taken place over a past period of one or more years between the country’s residents and residents of other countries, the record being kept in the form of doubleentry bookkeeping with each credit entry balanced by an offsetting debit entry, and vice versa.”8 For the responsible agencies of economic policy, the balance of payments serves essentially the same purpose as does an efficient accounting system for a business enterprise: it provides ex post information about the quantities, qualities, and prices of goods and services bought and sold, and about the lending and borrowing of capital. The totals of active and passive entries necessarily balance and the only problem involved in this accounting balance of payments is the self-evident fact that each country must cut its coat according to its cloth, i.e. limit its international expenditures according to its available means of payment.

But this fact, which is as self-evident to the individual as it is to the regional authorities within a state, may conflict with what Machlup calls the programme balance of payments, that is, “a statement of sources and uses of foreign funds, expected or planned, over a future period of one or more years, based upon the nation’s capital and consumption requirements, and on a programme of meeting an excess of requirements over resources by recourse to foreign finance expected or sought.”9 Major emphasis is placed “not on what is effectively demanded, but on what is felt to be desirable with reference to some accepted standards.”10 In other words, this concept characterizes the desire of governments, because of political considerations, to break through the economically determined limits just mentioned. With the progressing politicalization of economic life also in “capitalist” countries, this concept acquires increasing importance. It is therefore a collectivist concept and we shall soon return to it.

In order to understand the real problem, a third concept must be introduced: the market balance of payments which “is a model of a given situation in the foreign exchange market, characterized by the effective demand and supply of foreign exchange at the given exchange rate and at alternative, hypothetical rates.”11 The difference between this and all other markets is this: “supply and demand on this very special market are decisively determined by the circumstances which we call elements in economic circulation, i.e. the amount and speed of circulation of the money, the aggregate expenditure and income, level of prices and costs, briefly the plus or minus of the aggregate demand or aggregate supply, the regulation of which in the last analysis is in the hands of the authorities of a country—the Central Bank and the Minister of Finance—who open or close the taps releasing money and credit as the case may be.”12 If it is thought, and for good reason, that it is desirable to stabilize the price on this market (that is, exchange rates), it may happen that for a shorter or longer period the demand for foreign currencies exceeds, at this price, their supply or vice versa. Then, we speak of balance of payments deficits or surpluses.

Röpke compares the exchange market to a hinge that links the national monetary system, with its resulting price and cost structure, to the international one. “An ‘adverse balance of payments’ thus either shows—depending on the angle from which the facts are viewed—that the price, i.e. the rate of exchange, does not correspond to this international relationship of circulation elements and that the ‘hinge’ is therefore wrong, or else that this relationship is disturbed and therefore demands a change in that the domestic money and credits tap is turned off.”13 We can see that the balance of payments problem is essentially a monetary one and recognize the decisive importance of an effective international currency system.

International Payments Adjustment in a Liberal Economic Order

Such a system was created, in the nineteenth century, by the gold standard. It consisted of an automatic balance of payments adjustment provided that those responsible for the national monetary policies conformed with its basic “rules of the game.” National currencies were defined in terms of gold; whenever the demand for one currency tended to exceed its supply, the gap was filled by gold shipments. At the same time, a continued gold outflow from a country gave the signal to restrict the national volume of circulating media. The corresponding measure of increasing the discount rate was often sufficient to restore balance of payments equilibrium by setting into motion international short-term capital movements in favor of the deficit country. A gold inflow, on the other hand, induced the central bank to adopt an expansive monetary policy. The gold standard thus implied a close harmonization of national economic and monetary policies; it was a true international monetary system despite the absence of a world state, lending “the same qualities of homogeneity, stability, and convertibility to international payment transactions as characterized national payments.”14 It therefore led automatically to a distribution of international liquidity which was in accordance with the participation of each state in international trade.

Certain conditions, to be sure, had to be fulfilled for its proper functioning. “Just as the Gold Standard is founded on the idea of a meaningful mechanism, so is the economic order of free competition. And just as the system of a free market economy is based on the wise pessimism of Adam Smith who aimed at a workable economic system without demanding more of anyone than to follow his interest, so not too much is expected from central bank directors either: they must, in accordance with their interests, not command, but obey the Gold mechanism, just as the individual economic subject, under free competition, does not determine price movements, but only reacts to them. The principles of the Gold Standard are thus identical with those of a free economic order—the system of the Gold Standard simply results from the application of these general principles to monetary matters.”15

The gold standard was thus the natural corollary of that international order prevailing in the nineteenth century, which had, lastly, also inspired Marx’s internationalism. In this “secularized Res Publica Christiana”16 national frontiers had a limited political, but no economic, significance. It was an international order marked by a close network of private long-term agreements based on a general respect for international law. With the gradual disappearance of the common moral and economic convictions on which it was based, not only this ordre public international broke down, but with it eventually also the gold standard (1931).17

The International Impact of National Full Employment Policies

While international economic stability had, before 1914, ranked highest among the economic policy goals of nations, this situation changed in the 1930’s and especially after World War II. This development was principally due to the far-reaching influence exercised by John Maynard Keynes’ book, The General Theory of Employment Interest and Money, on both “capitalist” and socialist economists. The author’s preoccupation with the causes that led to the Great Depression provided the basis for his revolutionary conclusions. It was contended that in a developed economy, savings tended to exceed profitable investment opportunities and that, therefore, aggregate spending in a given period of time was smaller than total income. This was thought to lead to a contraction of national income in the following period. Similarly, the deflationary process would continue until aggregate national expenditures just equaled gross national product. At this point, a greater or lesser quantity of economic resources, especially of labor, would have become unemployed. Yet, the argument runs, precisely because it was a point of equilibrium, no market forces would be at work to remedy this precarious situation.

If Keynes’ challenge of the classical theory regarding the self-adjustment of the market had already won the sympathy of many socialists, the policy implications of this theory almost seemed to efface the division line that had hitherto opposed collectivist and free-market economists. An increased awareness of the undesirable economic, as well as political, consequences of complete centralized planning and a corresponding desire to maintain capitalism “as far as possible”18 united considerable efforts to work out and put into practice economic policies on Keynesian lines.

What are the main aspects of this policy? Clearly, total demand for goods and services must be increased until that point of equilibrium is attained at which there is full employment of all factors of production. This can essentially be achieved in three ways: (1) by keeping the interest rate below its equilibrium level to encourage private investment; (2) by having the state step into the “deflationary gap” and undertake investments of its own; and (3) by redistributing income from the rich to the poor, thereby increasing the “marginal propensity to consume.” These are indeed the policy prescriptions of the “new economics.”

The problem of international payments adjustment has received differing treatments by the economists advocating this program. Following Keynes, they leave no doubt that in the case of a conflict between economic goals, that of national full employment should receive absolute priority. It is regarded as legitimate to defend one’s own country by tariffs or other restrictions against imported unemployment. It is thought equally justified to prevent the fruits of national full employment policies from partly escaping, in the form of increased imports, to a neighbor state where relatively lower prices prevail. But “if a world economic model is constructed under the assumption that all governments pursue a policy of full employment, then the classical theory of international trade again becomes relevant.”19 In Keynes’ words:

It is the policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment program directed to an optimum level of domestic employment which is twice blessed in the sense that it helps ourselves and our neighbors at the same time. And it is the simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally, whether we measure it by the level of domestic employment or by the volume of international trade.20

A. Paulsen, the author of a German introductory text to Keynesian economics, continues: “No country needs to fear losses of employment through imports because these will not fail to be offset by exports, and a worldwide economic exchange will attain, to the advantage of all, the best use of productive possibilities.”21 However, he at once adds: “But the question remains open whether the balances of payments also will be in equilibrium under these conditions.”22

Does this statement not suggest that the classical theory of international trade, notwithstanding the author’s earlier assertion, must be thoroughly revised to fit the new policy requirements in each state? Keynes himself leaves no doubt that he recommends “the opposite”23 to the measures of adjustment brought about by the gold standard.24 His emphasis on autonomous interest rates indeed constitutes an important step away from a unified international monetary system.

When examining the three basic aspects of full employment policy more closely, it becomes obvious that these measures are highly indicated in a depression, i.e. in a situation in which idle resources in all branches of the economy exist.25 The real problem is thus not whether to apply these recommendations in an emergency but rather when to stop applying them. This involves a hypothetical judgment by the responsible policy-makers; and this judgment depends not only on their degree of faith in the restorative forces of the market once they are revived, but also on the outcome of a closely related issue: that of looking at matters in the short versus the long run.

This problem of a correct judgment acquires outstanding importance in view of the fact that the artificial stimulation of effective demand may result in inflationary pressures long before complete full employment is achieved. This possibility and even probability is due to the emergence of bottlenecks during the period of upswing. It could be mitigated by imports, but, as we have seen, Keynesian economists are particularly suspicious of a “loss of employment” through imports during this phase. Sharing the basic convictions of their master, they will tend to continue deficit spending and cheap money policy even at the price of inflation.

Keynes had not only foreseen a general price rise, resulting from his recommendations, but considered this rise to be inevitable because of the impossibility of adjusting nominal wages downward. In other words, prices had to rise faster than wages during an upswing in order to reduce real wages and thereby increase employment. This argument, however, becomes ineffective once the assumption of money illusion is no longer tenable. But even if it still holds good for the earlier phases of economic revival, union pressure, in view of the continuing increase in living costs, has often led to the tying of wages to a consumer price index which makes further reductions in real wages impossible. Yet, with recovery well under way, unions usually go farther than this: when demanding wage increases, it is not the overall rise of productivity of the economy, but their bargaining power which ultimately determines the wage level. If the authorities wish to maintain full employment at that level, the central bank must be willing to meet the additional financial requirements of the economy.

It can thus be seen that a government pursuing full employment policies is menaced by two kinds of inflation: demand inflation and cost inflation. The danger of inflation is increased by the distortions of the national economy’s productive structure resulting from these policies.26 It is no less aggravated by the inherent Keynesian dislike of saving, which is translated, by the welfare state, into decreased incentive for the man on the street to provide for his own future needs.27

Full employment policies and their monetary consequences cannot leave unaffected international economic relations in general, and international payments adjustment in particular. The reason for this is the emphasis Keynes and his followers place on the word “autonomous.” It implies that to attain the desired goal, the government must not be impeded either by the external repercussions of its measures or by the price mechanism, particularly the price on the capital market. To the degree, therefore, to which the action of these mechanisms is restricted, an arbitrary constituent enters into each national economy. This constituent distinguishes it from other national economies even though the latter, too, are committed to full employment policies. And the resulting differences are accentuated by factors such as tax laws and social security charges. Even more important is the fact that trade union policy is not identical in each state. It may be more or less aggressive, pursued with more or less responsibility for the general needs of the national economy. In the same way, increases in the productivity of labor differ from country to country. Hence, the inflationary pressures originating from the labor market may vary greatly.

The elements just described combine to create differing degrees of inflation in each state. But as soon as this is recognized, international payments adjustment at stable exchange rates can no longer be left to the free forces of the market without incurring the risk of chronic balance of payments surpluses and deficits.

Under these conditions, a government is faced with two alternatives. It can, first, retain stable exchange rates and perhaps adjust the “hinge” to the state of its relative level of inflation. But this will only temporarily alleviate its international payments difficulties. If it continues to permit a degree of inflation which is at great variance with that abroad, imbalances will not fail to reappear, even if trade agreements have been concluded. Unless deficits are paid in gold or an officially accepted foreign currency, partner states necessarily become creditors of countries where inflation is most advanced and may be unwilling to prolong this involuntary state of affairs.28 The inflating governments, if they are unable to obtain long-term credits (which, however, would only postpone the necessary internal adjustments), but cling to stable exchange rates, are therefore forced to introduce restrictionary measures going far beyond tariff increases. Such measures are direct quantitative controls and exchange control.29 In this context we can only mention a few typical issues involved in these measures. Such issues are: quota problems, the effect of export and import restrictions on national income and prices, commodity and payments agreements, bilateral clearing, multiple rates and cross-rates, exchange discrimination, and state trading. Originally introduced to meet balance of payments difficulties, these devices set into motion a vicious circle which leads to a progressive collectivization of the entire economy.30

Keynes himself was too familiar with international economic matters not to have understood this and its disintegrative implications for international economic cooperation. Here is his famous statement:

Let goods be homespun whenever it is reasonably and conveniently possible, and above all let finance be primarily national. . . . A greater measure of national self-sufficiency and economic isolation among countries than existed in 1914 may tend to serve the cause of peace rather than otherwise.31

He also admitted that “national self-sufficiency and a planned domestic economy” logically belonged together.32 The author did not conceal his sympathies for mercantilism, despite his recognition that

the mercantilists were under no illusions as to the nationalistic character of their policies and their tendency to promote war. It was national advantage and relative strength at which they were admittedly aiming.33

Yet, Keynes concluded:

But intellectually, their realism is much preferable to the confused thinking of contemporary advocates of an international fixed gold standard and laissez-faire in international lending who believe that it is precisely these policies which will best promote peace.34

If, however, a government is still basically committed to a free market economy, it may choose the second alternative, that of abandoning stable exchange rates. F. A. Lutz summarizes the advantages of freely fluctuating exchange rates as follows: “Countries that have a particularly high degree of inflation (either because wages rise particularly rapidly or because inflation is generated at the demand side) do not need to lose reserves, they can simply let the rate of their currency drop. Those that have a balance of payments surplus do not need to defend themselves against an imported inflation, since their central bank is no longer under the obligation to buy foreign exchange to uphold the exchange rate; one could not reproach these countries for accumulating exchange reserves at the detriment of others, one would not demand from them constantly to give credits to foreign countries in spite of the fact that interest at home may be higher than that abroad; the exchange rate of their currency would simply rise. Each state may, at home, pursue the kind of monetary policy it wishes to pursue . . . without having again and again to impede international trade and capital movements by controls or to recur to deflation.”35

It is impossible, in this context, to analyze the theory of flexible exchange rates. We agree with the author just quoted and many others that, in spite of its manifold shortcomings, this system provides the most adequate international solution under the conditions described in this paragraph—a solution, to be sure, which reflects the degree of international disintegration due to economic nationalism. The fundamental and permanent cause of today’s international payments problem is, in Gunnar Myrdal’s words, “the unwillingness of the national welfare states to accept the infringements on their policies of economic stability and economic equality that an automatic trade and payments system would imply if it were to bring about changes in the national economies corresponding to changes in international economic relations.”36 But it follows that the more internal economies are politicalized (i.e. converted into fields of experimentation for different economic and ideological convictions), the more political frontiers will become “lines to separate from one another the widely differing markets whose conditions of supply and demand are, however, uniform within each nation and collectively determined.”37

The disintegrative effect of full employment policies on international economic order was perceived by liberals even before the Keynesian recommendations became the general source of inspiration for economic policy-makers. W. Röpke, F. A. Hayek, M. Friedman, and many others consequently warned against losing sight of the prerequisites of an international division of labor. The basic relationships involved in the economic cooperation among nations are well summarized by I. K. Chatterjee: “There are three elements in the situation—the exercise of monetary sovereignty, fixed exchange rates, and freedom of the holders of domestic currency to buy foreign currency with domestic currency. In a changing world, a country can easily combine two and not three of them. The combination of monetary sovereignty with freedom of payments gives one a system of flexible exchange rates. When monetary sovereignty is associated with fixed exchange rates, the result is a loss of freedom of payments. When fixed exchange rates and freedom of payments are desired, monetary sovereignty has to be sacrificed,”38 i.e. subjected to the needs of external equilibrium. Only the third alternative forms the basis of a true liberal international economic order.

The Collectivist Solution

But, just as numerous economists advocating a free market economy refused, because of fear of inflation, to apply Keynesian remedies whenever a slight disturbance appeared in the economy, so did a number of socialists refuse to stop with Keynes at what may be called modified capitalism. These authors continue to aim at full-scale national planning. “For,” one of them asks, “can the State really, by following the Keynesian prescription, maintain full employment without setting inflationary tendencies to work, unless it is in a position to control, broadly, what is to be produced and when, and what is to be charged for it, and also the broad distribution of purchasing power, as well as its global amount?”39

But centralized planning involves, as we have seen, a complete separation of national monetary systems. What does this really mean to international economic relations?

Foreign exchange is no longer demanded and supplied on a free market between individuals, but pooled in the hands of the foreign trade monopoly. The concept of the market balance of payments thus loses its relevance in a socialist economy. The program balance of payments, as represented by lists of import “requirements” set up by governments to fit in with their national plans, becomes all the more important. The degree to which they can satisfy these needs in their order of priority depends on the total quantity of foreign exchange earned by exports—indirectly, therefore, on the extent to which one state’s negotiators succeeded in improving its terms of trade at the expense of the other. It also depends on the size of gold40 and foreign exchange reserves and the possibility of taking up credits. All these factors are vital for national plan fulfillment. The relative power positions of the various states will therefore have the last word in determining the provisions of the bilateral trade agreements on which the volume of these magnitudes essentially depends.

Because of the complete separation of national price levels and the impossibility of rational valuation, nothing exists which could be called a collectivist international monetary policy. Exchange rates are centrally fixed in the same way as all collectivist prices; any parity will do.41 In the same way, the problem of balance of payments equilibrium is reduced to a mere juxtaposition of quantities. Due to the uncertainties of foreign trade and internal production, unplanned surpluses or, more probably, deficits usually arise. In the first case, imports or foreign exchange reserves may be increased; in the second, if credits cannot be obtained and gold is not available for export, either imports must be cut down or goods and services withdrawn from home consumption and sold abroad. This process of “balance of payments adjustment” has certainly the advantage of being swift and effective; but it is more effective if the socialist economy can sell its additional exports on the world market at foreseeable prices than if it has to dispose of them in another socialist country within the framework of bilateral trade agreements. At once the political element is reintroduced because the collectivist partner state may not be willing to acquire commodities that are not provided for by its national plan. It will certainly not let this favorable opportunity slip by without improving its terms of trade vis-à-vis the country experiencing international payments difficulties. The existence of a free world market thus continues to play an important role for a centrally planned economy; it can be compared to a magnetic field by which the collectivist state is alternately attracted and repelled.

The monetary approach to the problems of collectivist international trade shows that there is nothing “absolute” in money, as many socialists are inclined to believe. Just as national currencies can effectively be approximated to form part of a world currency—if they are managed according to the rules of the gold standard—money is “nationalized” along with all other facets of the economy under collectivism, i.e. reduced to serving the will of the collectivist planners. There is thus no hope in searching for a monetary reform to remedy international economic disintegration since its basic cause is the very nature of the collectivist economic order itself and the policy of economic nationalism it necessarily implies.

THE INTERNATIONAL PROBLEM OF RAW MATERIALS

The Liberal Solution Resting on the Divisibility of Ownership and Its Invalidation in Times of War

Following L. v. Mises we can distinguish three kinds of ownership with respect to the means of production (including natural resources): the juristic ownership of the original proprietor, the economic ownership of the entrepreneur who combines the various factors of production by directly disposing of their uses, and the ownership of the services and products derived from these means. These three kinds of ownership have differing functions dependent upon the economic order being considered. In a small, agricultural economy situated outside exchange society, the land, ploughs, draught animals, etc., as well as their final products, are owned and disposed of by all members of the tribe or family, as represented by its head or chief. We can speak here of an exclusive ownership in the sense that all of its constituents serve the needs of the members of the community only.

This exclusiveness disappears when we are faced with an economy based on an extensive division of labor and a corresponding market not only for the final products, but also for the factors of production, including the funds with which to set up factories, open mines, etc. The owners of capital, land, and labor receive their incomes on the basis of the productive contributions of their respective services, as valued by the market. This is the device by which the division of ownership becomes possible42 and which forms, generally speaking, the condition for rational price formation.

The legal ownership of the means of production yields a reward only as long as it is used—or transferred in economic ownership to be used—to fulfill the requirements of the consumers. “Durable production goods can be shared according to the divisibility of the services they provide.”43 The market prices of these services (i.e. interest earnings), by linking the last buyer’s valuations to the quantity of capital available, make it imperative for the owners of the means of production to use their resources—including raw materials—in accordance with the effective demand of the consumers.44

In a society in which political frontiers have no economic significance, the nationality of buyers and sellers is irrelevant. The more that distant countries are drawn into multilateral commercial relations with each other by the price mechanism, the more the productive resources of the world are used in accordance with the comparative advantage of each region, and the more efficiently the welfare producing “machine,” with which the international division of labor has often been compared, is allowed to work. In the liberal age there existed no international problem of raw materials: they were simply bought and sold like any other commodity and the gold standard saw to it that those able to pay for them had free “access” to cover their needs.

The conflict between the international character of raw material needs and the possibility of exclusive national political control over their resources only appeared during World War I when the regular supply of certain raw materials became decisive for the governments’ war efforts, and with it the policy of cutting off the enemy from their sources of raw materials. The capacity to use natural resources came more and more to be identified with their actual occurrence within a country’s own national frontiers. This way of looking at the matter subsisted even after the termination of hostilities. Very few recognized that it rested on a confusion of the aims and methods of war economy with those prevailing in peacetime. Whereas “the critera of effectiveness of an economic policy in time of war relate entirely to the ability to sustain military power,” those in time of peace “relate to the living standards of the people. . . . A power economy demands the highest possible degree of self-containment with respect to all essential raw materials and foodstuffs, as well as for important manufacturing operations. A standard of living economy demands specialization of production in accordance with comparative advantage and exchange with the widest possible outside area.”45

Thus, whereas the divisibility of ownership is characteristic of a peacetime economy, it is replaced in times of war or preparations for war by exclusive ownership following national borderlines. To this “fundamental incompatibility of war economics and peace economics” (Staley) corresponds the clash between the system of free enterprise and the particular objectives introduced by power economy. The latter naturally tends to unite the entire economy under government control because only in this way can all efforts efficiently be directed to the central goal. International economic interdependence is regarded as synonymous with military vulnerability. The resulting obstruction against foreign trade, and this policy only, leads to a close and seemingly plausible connection between political sovereignty and raw materials sources, between the “poverty” of a country and its claim to the extension of its vital space.

The Fichtean solution of this problem, a reshuffling of political territories, would only lead to new armed conflicts and corresponding war preparations. It is precisely “the dominance of the war economy” which “must be broken, and this can only be done if measures can be taken which remove the ever-present ‘assumption of violence’.”46 The real difficulty is, however, that once this dominance prevails in one single country which is powerful enough to threaten the security of its neighbors, they cannot help placing their own economies, too, on the rails leading to the strengthening of national military power. Aggressive economic nationalism is thus the effect as well as the cause of international political instability and the competitive raw materials race for national armaments.

The Collectivist Solution

With the abandonment of a rational price mechanism reflecting national and international scarcities, a collectivist economy forfeits the advantages to be derived from the division of the ownership of the means of production and of the raw materials sources. Instead, these are disposed of exclusively by governments. In fact, a collectivist economic order is, by its internal structure, identical with a war economy which, as we remember, served as a model to many collectivist authors.

This implies that it is economically and politically vital for the socialist state to have adequate “access” to those raw materials sources which do not lie within its own territory. But these sources are now controlled by other sovereign states. As long as a free international economy exists, collectivist trade can be based on world market prices. However, these prices reflect the supply and demand conditions of only the free market economies; their applicability to the differing economic structures characterizing centrally planned economies is therefore limited.

This circumstance is not altered by the fact that socialist international cooperation may already start with the common exploitation of natural resources in a specified country, agreed upon by two or more governments. Who is to provide the investment funds, the necessary buildings, machinery, labor power, etc., and at what price? In what proportion is the yearly output of raw materials to be divided between the partner states? What goods can be obtained in exchange for the direct or processed export of these raw materials? All these issues and many more will retain their political character and be decided accordingly, whereas the real economic questions concerning the possible alternative uses to which each individual factor of production involved in the project could nationally or internationally be directed must remain unanswered because it would be absurd even to raise them.

The exclusive ownership of raw material sources and other “essential” commodities will therefore form an integral part of the national sovereignty rights of a collectivist government-rights which can effectively be used by a skillful alternation of foreign economic policy at times granting and at times withholding supplies. The problem is sharpened by the fact that the production of these materials requires large-scale investments which, however, are not allowed to be included adequately into prices by the labor theory of value. This circumstance more than once gave rise to enormous profits derived by a powerful socialist country from trade with less powerful brother nations.

So there will be poor and rich countries and their “class status” will depend not so much on the respective levels of economic development or on the technical, moral, and intellectual skill of their inhabitants, as on the size of the territory under their sovereignty and the quantity and quality of raw materials under their control. At the same time, their efforts to achieve economic independence will cause governments to exploit all natural resources within their jurisdiction, even if this involves high economic sacrifices for their populations. Insofar as the less favored nations can purchase their raw materials requirements on the world market, they are able to mitigate the effects of their poverty by only giving up exports (or gold) representing the same value—as determined by the world market—as that of their imports. In a world consisting exclusively of socialist states, they must resign themselves to either a relatively low general standard of living47 or accept political along with economic dependence—which may eventually come down to the same result.

THE INTERNATIONAL POPULATION PROBLEM

The successful struggle against epidemic diseases and the progress of technology during the nineteenth century made possible an unprecedented increase of the European population. The effects of the law of decreasing returns on which Malthus had based his pessimistic prophecy were superseded by those of an ever greater increase in productivity due to industrialization, a revolution in agricultural production methods, and an extensive international division of labor which resulted in a steady rise of living standards. Spontaneous large-scale migrations from the overpopulated areas to the new continents regulated by civil law only tended to bring about a worldwide equalization of labor productivity.

Toward the end of the nineteenth century, governments began to introduce increasingly severe restrictions on immigration. These policies aimed at optimizing the size of their population with respect to the economic resources of their countries, account being taken of general racial and cultural aspects. Moreover, they were influenced by a growing trade union pressure brought about by fears of a depression of wages or even unemployment through the influx of cheap foreign labor.48

These restrictions reduced the possibility of relieving the densely settled areas of the world from the pressure of overpopulation by free migrations. Collectivists therefore proposed schemes for a planned international migratory movement with which we are already familiar. But what objective criteria are to be adopted to determine “the volume of labor available for transference and permanent settlement abroad?” Where are these people finally to be settled? These questions remain unanswered whereas the theories which give rise to them disclose a disregard for individual freedom and for firmly established political facts such as national and trade union policies concerning immigration. Socialist authors thus ignore the political conflicts involved in their proposals, or they must be prepared to accept force as a means of realizing them—an eventuality not altogether foreign to the collectivist tradition.

Yet, a sure way out of the problem of overpopulation does exist and that is extensive international trade. If men are no longer permitted to move to places where productivity is highest, capital can still flow to their country, attracted by the high interest rate prevailing there and raising the efficiency of native labor. In addition, by participating in the international division of labor, these countries are able to exchange on the world market those goods in which their relative handicap is least for commodities produced in regions with comparatively more abundant productive equipment or superior fertility of the soil. Thus, free international economic cooperation is a fairly adequate substitute for immigration barriers in balancing the level of income and the standards of living in the world, and “this levelling up . . . is carried out not so much by taking from the rich and giving to the poor, as by making the production on the entire globe as rational as possible and by exploiting the total economic potential of the world to the maximum.”49

Unfortunately, immigration restrictions were followed by an increasing degree of direct and indirect trade controls. Their basis, as we know, rests in the spread of economic nationalism under the impact of Keynesian doctrines. “How can national full employment, at wages which correspond to the high qualifications of our workers, be maintained,” argue the trade union leaders of the industrialized countries, “when they have to face the competition of imports produced by ‘sweated labor’?” “What sense can international trade have for us,” ask the inhabitants of the more backward countries, “if our productive equipment is hopelessly inferior to that of the richer nations?” These questions are as demagogically suggestive as their implications are economically false.50 But this kind of argumentation, reinforced by the adverse effects of interventionist policies on the balance of payments, has been a powerful factor in the introduction of international trade restrictions.51 It was not realized that these measures convert an originally economic problem into a political one:

“If the channels of world transactions are more and more blocked, if the daily changing friendships and enmities are opening and closing markets, if the entire intricate mechanism of the liberal world economy is rusting . . . if international movements of capital become the solemn exceptions, if . . . there are fewer and fewer countries in which one could become even a dustman without possessing the appropriate passport—then the question of raw materials and colonies is no longer a mere phantom: then there are satiated and proletarian peoples, and then there is for many countries a population problem in the sense that the relationship between the size of the population and the politically dominated area is more unfavorable than elsewhere.”52

If such are the effects of government policies which are still based on a system of free enterprise, what will be the consequences of a comprehensively planned economic order on the international population problem? Since the quantity and quality of internationally exchanged goods and services correspond even less to the factor endowments of each country than in the “mixed” type of economy considered before, problems of overpopulation must become even more pressing. This assumption may be confirmed by official statistical data showing greatly varying average densities of settlement per square mile of national territories, which, just as in the case of raw materials, may give (and have given) rise to government claims to an extension of “vital space” at the expense of the less densely populated areas. Yet, it is highly improbable that these claims will be accompanied either by planned international migrations to alleviate the problem for the time being or even by complaints of one government against another for closing its frontiers to immigration. The reason for this surprising peacefulness is not difficult to perceive if we remember that labor is a factor of production—indeed the only one according to socialist doctrine—and that all factors of production are extremely scarce with respect to the permanent pressure of planned demand upon them. The socialist government has no difficulty in employing all available labor forces; it will, on the contrary, even tend to mobilize housewives and retired people to participate in production and it can do so because, as we have seen, there is no direct link between the productive contribution of the individual and his real rewards. The central planning agency is in no way compelled to adjust the planned proportion of consumption goods in the national product to an increased demand. It can simply absorb the additional purchasing power thus created by raising the prices of these goods. It it wishes to avoid a resulting deterioration of living standards—although it may then profit from an abnormal reaction of total labor supply—it can expand consumers’ goods production, but to a lesser extent than that of capital equipment. In other words, since it is the government that decides on the volume of total savings and since it naturally tends to further the growth of the investment sector at the expense of light industry and agriculture, labor power must be regarded as the foremost source of national capital and hence of the political power of the new class.53 However densely settled a socialist country may be, it will thus continue to suffer from an apparent shortage of workers. The problem of overpopulation may serve as a useful argument for an aggressive foreign policy—it is disguised within the country by the kind of economic organization characteristic of collectivism.

Overpopulation assumes, as all other disguised disequilibria do under socialism, the form of unnecessarily low living standards. But no one really knows whether and to what extent this relative poverty is due to the just-mentioned factor, or whether it is due to the general shortage of capital and raw materials, the “incapability” or “bourgeois mentality” of factory managers and planning department heads, or perhaps to the machinations of the “enemies of the people” within and without the frontiers of the socialist state. This obscurity can only be removed by replacing the collectivist system of watertight economies by a free and intercommunicating international economy.

THE PROBLEM OF INTERNATIONAL CAPITAL MOVEMENTS

The various geographical areas of the world, dominated by national states, differ with respect not only to their population and raw material resources, but also to the amount of their past savings translated into capital accumulation. This results in different prices for the use of capital in different regions, reflecting its scarcity relative to the other factors of production. The interregional productivity levels can therefore be approximated to each other by letting capital flow freely to places where it earns the highest return. This is, in fact, the essence of the liberal solution.

However, there are two fundamental problems connected with international capital movements. The first is that of risk which is present in all investment activity, but which is now aggravated by the fact that capital is usually tied down for a long period in a country under a different jurisdiction. The success of an investment project therefore depends not only on the investor’s correct estimation of the national or international market situation at the time it bears its fruits, but also on the economic policies pursued by the government of the capital receiving country. If the latter insists on its autonomy and fails, e.g. to take efficient measures against inflation so that the introduction of direct trade restrictions and exchange control eventually become “inevitable,” investment prospects in that country become unfavorable despite apparently promising returns. This point will play an important role in the next chapter.

Secondly, international capital movements were often used by governments as instruments of political pressure and gave, in turn, rise to international tensions demanding government intervention.54 A regular international flow of capital therefore depends on the degree to which private economic activities are dissociated from political implications, and possible disputes arising out of them can be settled outside the field of high diplomacy. “The growth of international capital investment thus reflects the increasing integration of the world’s economic organization. Indeed, the amount of these long-term boundary-crossing investment ties is in a certain sense a measure of . . . the extent to which the mechanism of production and distribution over the world is becoming unified in spite of political separatism.”55

But the very essence of a collectivist economic order is the centralization and politicalization of national capital. It may be recalled that Keynes’ principal demand was an autonomous interest rate. But this politicalization manifests itself even more in a centrally planned economy. On the one hand, the productivity of a factory and its ability of plan fulfillment is closely related to the quantity and quality of its capital equipment. Hence, there will be fierce competition for more capital allocations between both the different branches of the economy, represented by rival state agencies, and the factory managers.56 But on the other hand, the planning authority is unable to decide rationally where in the economy investment is most urgently required.

No collectivist state will therefore consider itself to be in a position to spare capital for foreign investment, unless important political advantages can thereby be gained. This is the case, for example, when the capital of a leading socialist country participates in the exploitation of vital raw materials of a smaller one. This may, and in actual practice has, become a pretext for an increasing interference by the dominant state in the internal economic affairs of the weaker partner, under the pretext of “coordination and harmonization of national plans.”

Apart from such direct investment, credits can also assume the form of bilateral swing credits or even convertible currencies. But the more that the latter are “needed,” the more non-economic strings are likely to be attached to their lending. Thus, the best safeguard of a socialist country—especially if it is small and relatively poor—against exploitation is its absention from taking foreign credits from other socialist countries. It will pursue a corresponding policy that is subject, however, to a qualification already made in another context: that “aids” are not forced upon it by its more mighty neighbors.

SUMMARY AND CONCLUSIONS

All major problems connected with the international movement of labor, capital, goods, and services on the one hand, and the offsetting monetary flows on the other, are solved in a liberal economic order by the working of “automatic” mechanisms, sensitively registering all past and thereby guiding all present economic actions and reactions. Their international effectiveness depends on a self-imposed limitation of the state’s sovereignty, resting on the twofold conviction that (1) the different problems with which the two fields of dominium and imperium are faced demand different kinds of solutions and (2) there exists a close interdependence between the general political and social framework of a nation and its economic order. If the former is to be constructed on liberal principles, the latter necessarily rests on free enterprise. But only if this conviction is shared by a majority of states can a true international order and its corollary, an effective international monetary system, arise.

This division of sovereignty between national governments and the anonymous forces of the market has been considerably jeopardized by national full employment policies and has led to a corresponding politicalization of the economy. This process is completed by full-scale national planning. Automatic mechanisms are and must be thrown overboard by the collectivist state since their essence, that they work independently of human will, is incompatible with the postulate of conscious economic control. The most important consequence of this fact is a total separation of national economies. In these economies, international economic relations are tolerated only insofar as they do not interfere with national planning. Because of this, only one thing seems to be absolutely certain for the representatives of the mutually negotiating socialist governments, and this is the exact opposite of the principle that had guided Plato: that to have more of a given commodity is better than to have less of it. Hence no international economic equilibrium deserving this name can be attained under this system.

NOTES TO CHAPTER VIII

57For further details, cf. Röpke, W., “Klein- und Mittelbetrieb in der Volkswirtschaft.” ORDO I (1948), pp. 155-74; Jewkes, J., “Are the Economies of Scale Unlimited?” In: Economic Consequences of the Size of Nations. Proceedings of a Conference Held by the International Economic Association in Lisbon, 1957. London, Macmillan, 1960; v. Lenel, O., “Wachstum der Wirtschaft und Wachstum der Unternehmungen.” ORDO XV/XVI (1965), pp. 141-65.

58Cf. Machlup, F., The Political Economy of Monopoly; Business, Labor and Government Policies. Baltimore, Johns Hopkins Press, 1952, 544 p.

59The combination of private economic initiative with the requirements of Staatsräson was particularly marked in Germany after the unification of the Reich. Thus, A. R. L. Gurland wrote: “The joining of powerful social forces to the state apparatus doubtless constituted the internal political motive which led Bismarck from free trade to protectionism.” Gurland, A. R. L., “Wirtschaft und Gesellschaft im Übergang zum Zeitalter der Industrie.” Propyläen-Weltgeschichte, VIII, p. 326. The same author underlines another important aspect in this connection: the process of cartelization gave rise to a special class of organizational bureaucrats that developed their own, vested interests. These “full-time employees of organizations, almost all university graduates, very often lawyers who had not infrequently obtained their positions through the recommendations of the Korps . . . originated from a middle class that failed to keep pace with industrialization and that no longer quite believed in social advancement through entrepreneurial risk taking. As learned people and reserve officers, they considered the organizational hierarchy as a substitute for what remained inaccessible to them: easy wealth and rise into the privileged upper class. Not having any fortune of their own nor responsibility for business risks, they distrusted the ‘mercenary spirit’ of the entrepreneurs and managers who had to make their decisions on the basis of financial and not of ‘national’ or ‘macroeconomic’ considerations. . . . They were less interested in daily problems of profitability, consumer needs, and higher living standards than in tariff protection, ‘vital space,’ and national prestige.” Ibid., p. 335, italics added. Though Gurland refers here to Germany, similar observations could be made wherever cartelization gained momentum. But do these bureaucrats not show a striking resemblance to the “new class” in that they concentrate power in their hands without having to assume a corresponding responsibility? International disorder and the assumption of violence thus seem to appear where this kind of people succeeds in influencing both public opinion and the foreign policy of their respective states.

60Röpke, W., Internationale Ordnung. Erlenbach/Zürich, E. Rentsch Verlag, 1945, p. 98.

61“It was under the auspices of the market economy, not of collectivism, that modern, highly differentiated society introduced itself into economic history. This led to the serious optical delusion that the disharmonies resulting from differentiation would be something proper to the market economy only.” Röpke, W., Civitas Humana. Grundfragen der Gesellschafts und Wirtschaftsreform. 3rd ed., Erlenbach/Zürich, E. Rentsch Verlag, 1949, pp. 343-44.

62Not infrequently, there do occur uncompleted projects. The enormous waste of economic resources—particularly scarce in a developing country—involved in overambitious industrialization programs has been illustrated by the complete failure of the Chinese “Great Leap.” According to eyewitnesses, there are incompleted factory buildings all over the country, doomed to destruction by winds and rain. Expensive machinery is also perishing for lack of qualified use and attendance.

63Here, another “advantage” of a hermetically closed economic system becomes apparent. The population in socialist economies has no possibility of comparing its living standards with those beyond its national frontiers. It can only make intertemporal comparisons. Hence, there will be a widespread feeling, greatly encouraged by official propaganda, that the slightest increase in the provision with consumers’ goods must be credited to the centrally planned economic system and is the result of the wise measures taken by the “benevolent” government.

64Machlup, F., “Three Concepts of the Balance of Payments and the So-Called Dollar Shortage.” Economic Journal, March, 1950, pp. 46-47.

65Ibid., p. 46.

66Ibid.

67Ibid.

68Röpke, W., International Order and Economic Integration, p. 200, italics original.

69Ibid., p. 201.

70Ibid., p. 76.

71Lutz, F. A., “Goldwährung und Wirtschaftsordnung.” Originally published in 1935, reprinted in Geld und Wahrung. Gesammelte Abhandlungen von F. A. Lutz. Tübingen, Mohr, 1962, p. 21, italics original.

72Röpke, W., op. cit., p. 74.

73“The Gold Standard of the years 1925-31 was fundamentally impossible because it was the point of intersection of two completely incompatible ideas that were separated by a century—the idea of a free economic order of the beginning 19th century and the idea of national planning of our time. The marriage entered into by these two ideas in the postwar Gold Standard was not a happy one. Each of the two partners impeded the other in fully displaying its intrinsic nature—no wonder the marriage ended in divorce after six years.” Lutz, F. A., op. cit., p. 22.

74“Competition as far as possible—planning as far as necessary!” Grundsatzprogramm der Sozialdemokratischen Partei Deutschlands (Basic Program of the Social Democratic Party of Germany). Bad Godesberg, 1959. Published by the Vorstand der Sozialdemokratischen Partei Deutschlands, Bonn, 11/59, p. 14.

75Paulsen, A., Neue Wirtschaftslehre. Einführung in die Wirtschafttheorie von John Maynard Keynes und die Wirtschaftspolitik der Vollbeschäftigung. Berlin and Frankfurt, Verlag Franz Vahlen, 1958, p. 325.

76Keynes, J. M., The General Theory of Employment Interest and Money. New York, Harcourt, Brace, 1936, p. 349.

77Paulsen, A., op. cit., p. 325.

78Ibid.

79Keynes, J. M., op. cit., p. 349.

80“The establishment of a link between the quantity of money and gold makes it possible for the central bank to increase money only in accordance with the inflow of gold. It must restrict an increase of money if it approaches its reserve limit. The gold basis thus forces a scarcity of the quantity of money in the entire system and leads in the long run again and again to a harmonization of the natural and the market rate of interest.” Lutz, F. A., op. cit., p. 9, italics original.

81To discuss the question whether and to what extent a redistribution of income, through progressive taxation, is recommendable in this and all other phases of the business cycle would exceed the scope of this study.

82Particularly from a failure to distinguish between frictional and structural unemployment.

83Due to this discouragement of savings and the retention of the interest rate below its equilibrium, that is, that level which reflects the relative scarcity of capital, full employment policies are menaced by the danger of over-investment, which, as we have seen, is the most fundamental cause of crises.

84Involuntary credit giving occurs also under the gold exchange standard if a major reserve currency country is faced with a chronic balance of payments deficit. In this case it necessarily becomes the debtor of surplus countries even though capital in these countries may be relatively more scarce than in the deficit country. The United States’ balance of payments deficit over the last years has given rise to such a situation. Proposals to remedy it range from the creation of a world central bank (R. Triffin) to a return to the gold standard with or without an increase in the price of gold.

85“The whole complex of national policies . . . introduces rigidities—from an international point of view—that limit the possibilities of adjustment to ensure balance of payments equilibrium without short-term controls over international trade and payments.” Myrdal, G., An International Economy. Problems and Prospects. 1st edition, New York, Harper, 1956, p. 48.

86For a detailed analysis of this process, cf. Röpke, W., “Repressed Inflation.” Kyklos, Vol. I, 1947.

87Quoted from Yale Review, summer, 1933, in Hazlitt, H., The Failure of the “New Economics.” An Analysis of the Keynesian Fallacies. Princeton, Van Nostrand, 1959, p. 338.

88Ibid.

89Keynes, J. M., The General Theory of Employment Interest and Money, p. 348, italics original.

90Ibid.

91Lutz, F. A., “Das Problem der internationalen Währungsordnung.” In ORDO, Vol. X (1958), pp. 142-43.

92Myrdal, G., op. cit., p. 48.

93Röpke, W., International Order and Economic Integration, p. 96.

94Chatterjee, I. K., Economic Development, Payments Deficit and Payment Restriction. Geneva, Droz, 1963, p. 34.

95Cole, G. D. H., “The Socialists and the Keynesians.” Quoted from Socialist Economics. London, Gollancz, 1950, in Ebenstein, W., op. cit., p. 793. Cole answers the question: “I do not think it can” (ibid.).

96When socialism conquers the world, the use assigned by Lenin to gold will be very much the same as that in More’s Utopia. “ Meanwhile, we must save the gold in the R.S.F.S. . . . , sell it at the highest price, buy goods with it at the lowest price. When living among wolves, howl like wolves.” The Importance of Gold (1921). Selected Works, Vol. IX, pp. 299-300.

97“It is a question of definition whether one refers to exchange rates at all, since these have become mere magnitudes of calculation for the central planning commission and can be arbitrarily determined and just as arbitrarily changed by it.” Graf, W., op. cit., p. 79.

98“To drink coffee, I do not need to own a coffee plantation in Brazil, an ocean steamer, and a coffee roasting plant, though all these means of production must be used to bring a cup of coffee to my table. Sufficient that others own these means of production and employ them for me. In the society which divides labor, no one is the exclusive owner of the means of production either of the material things or of the personal element, capacity of work. All means of production render services to everyone who buys or sells on the market.” Mises, L. v., Socialism. An Economic and Sociological Analysis. London, J. Cape, 1936, p. 41, italics added.

99Ibid., p. 40.

100“If we are disinclined here to speak of ownership as shared between consumers and owners of the means of production, we should have to regard consumers as the true owners . . . and describe those who are considered as the owners in the legal sense as administrators of other people’s property.” Ibid., pp. 4142. Mises refers to the following verses of Horace: Si proprium est quod quis libra mercatus et aere est/quaedam, si credit consultis, mancipat usus/qui te pascit ager, tuus est; et vilicus Orbi/cum segetes occat tibi mox frumenta daturas/te dominum sentit, das nummos: accipis uvam/pullos ova, cadum temeti. Epistol II, 1958-63.

101Staley, E., Raw Materials in Peace and War. New York, Council of Foreign Relations, 1937, p. 20.

102Ibid., p. 36.

103Fichte’s parable—cf. p. 19—could serve as a useful ideological palliative.

104The principle that strong and wealthy labor movements must help labor in the more backward areas to rise “has been proclaimed a thousand times. It is a favorite subject of resolutions of international congresses, where the practical and immediate is never liked and general principles are the rage. Yet in practice, the trade unions of the countries with the highest standard of living, such as the United States, New Zealand, Australia, South Africa (in certain industries), etc., have always been conspicuous for their coolness in matters of international solidarity. International solidarity is something always eagerly invoked by the weak. Hardly more than perfunctory lip-service is generally paid to it by the strong and by the well-to-do. . . . The gulf between the abstract and the concrete, the ideal and the practical, is wide indeed.” Borkenau, F., Socialism National or International. London, Routledge, 1942, p. 12.

      The idea that immigration increases unemployment “is based on the error . . . that the total sum of productive work to be mastered is of a fixed preestablished size, a cake, so to speak, from which no one can cut a bigger piece without another’s faring badly. After all, . . . the absolute limit of the total volume of work to be done is determined by the sum of our wants; in practice, therefore, it lies in the infinite. . . . The problem of unemployment relates consequently not to the entire volume, but to the correct composition of production; the problem is one of equilibrium, not of absolute total volume.” Röpke, W., International Order and Economic Integration, p. 143. Therefore, the economic structure of the immigration country as well as the type of immigration are of relevance and it is well conceivable that immigration, by alleviating bottlenecks in certain fields of occupation, may create complementary jobs for hitherto unemployed home labor.

105Ibid., p. 146.

106Their fallacy is exposed in every textbook on international economics. It is due to a failure to grasp the substance of the theory of comparative costs.

107That these restrictions highly encourage monopolistic practices and are therefore pressed for by interest groups is no invalidation of our contention that economic nationalism resulting from basically collectivist policies is at the root of this development. The close connection between these two phenomena will be treated in the next chapter.

108Röpke, W., op. cit., p. 139.

109Hence, emigration is not only forcefully repressed by socialist governments, it is indeed often regarded as high treason to be punished by long years of imprisonment, if not by death.

110For a detailed analysis, cf. Agad, J., Der politische Faktor in den internationalen privaten Kapitalbewegungen. Geneva, Descombes, 1961, 216 p.

111Staley, E., War and the Private Investor. A Study in the Relations of International Politics and International Private Investment. New York, Garden City, Doubleday, Doran & Co., 1935, p. 15.

112Whose success in this respect will soon appear in the form of higher bonuses.

• 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.
• 36Ibid., p. 157.
• 37Ibid., pp. 170-71.
• 38Ibid., pp. 171-72.
• 39Ibid., p. 245.
• 40Ibid., p. 244.
• 41Ibid., p. 154.
• 42Ibid., pp. 154-55, italics added.
• 43Ibid., p. 179.
• 44Ibid., p. 251.
• 45Guthrie, W. B., op. cit., p. 54.
• 46Fichte, J. G., op. cit., pp. 4-5.
• 47“I have described property as the exclusive right to actions, by no means to things.” Ibid., pp. 5-6, italics original.
• 48Ibid., p. 4.
• 49Ibid., p. 56, italics original.
• 50Ibid., p. 14.
• 51Ibid., p. 19.
• 52Ibid., p. 26, italics added.
• 53Ibid.
• 54Ibid., p. 27, italics original.
• 55Ibid.
• 56Ibid.
• 57SOCIALISTS HAVE CONCLUDED that something is fundamentally wrong with the “society” in which they live. Consequently, they feel compelled to change it.
• 58SOCIALISTS HAVE CONCLUDED that something is fundamentally wrong with the “society” in which they live. Consequently, they feel compelled to change it.
• 59The 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.
• 60Freyer 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.”
• 61Freyer 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.”
• 62Mankind 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.
• 63Against 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.”
• 64Human 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.
• 65Plato, 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:
• 66The 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.
• 67For 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.”
• 68For 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.”
• 69For 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.”
• 70For 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.”
• 71For 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.”
• 72Internal 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:
• 73The 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.
• 74Most 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.
• 75For 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.
• 76What 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
• 77Frankincense 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. . . .
• 78In 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.
• 79the 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.
• 80reputation in the eyes of others, whether for goodness or the reverse, is a thing that should never be lightly esteemed.
• 81The 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.”
• 82The 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.”
• 83The 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.”
• 84But 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.
• 85All 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.”
• 86“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.”
• 87“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.”
• 88“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.”
• 89The 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.
• 90that 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.
• 91This 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;
• 92from hence the father of every family or every householder fetches whatsoever he and his have need of, and carries it away with him without money, without exchange, without any gage or pledge. For why should anything be denied to him; seeing there is abundance in all things, and that it is not to be feared lest any man will ask more than he needs.
• 93then of those things whereof they have abundance, they carry forth into other countries great plenty; as grain, honey, wool, flax, madder, purple dye, felles, way, tallow, leather and livestock. And the seventh part of all these things they give frankly and freely to the poor of that country. The residue they sell at a reasonable and mean price. By this trade of traffic or merchandise, they bring into their own country not only great plenty of gold and silver, but also all such things as they lack at home, which is almost nothing but Iron. And by reason they have long used this trade, now they have more abundance of these things than any man will believe.
• 94Now, therefore, they do not care whether they sell for ready money or else upon trust to be paid at a day, and they have the most part in debts. But in so doing they never follow the credence of private men, but the assurance or warrantise of the whole city, by instruments and writings made in that behalf accordingly. . . . The most part of it they never ask. For that thing which is to them of no profit, to take it from others to whom it is profitable, they think it no right nor conscience. But if the case so stand that they must lend part of that money to another people, then they require their debt; or when they have war.
• 95Of course, the Utopians will never go to battle because of unsettled trade matters. But they will do so
• 96in defence of their own country or to drive out of their friends’ land the enemies that had come in or . . . to deliver from the yoke and bondage of tyranny some people that be oppressed with tyranny. Which things they do by mere pity and compassion.
• 97There may be still another occasion for war. It may happen that the Utopian population (despite institutional attempts at regulation) so increases that it “exceeds the due number throughout the whole island.” In such a case,
• 98they build up a town under their own laws on the nearest part of the mainland where the inhabitants have much waste and unoccupied ground, receiving also the inhabitants to them, if they will join and dwell with them. . . . But if the inhabitants of that land will not dwell with them, to be ordered by their laws, then they drive them out of those boundaries which they now mark out for themselves. . . . For they account this the most just cause of war when any people holds a piece of ground void and vacant to no good nor profitable use, keeping others from the use and possession of it which notwithstanding by the law of nature ought thereof to be nourished and relieved.
• 99The Utopians readily observe this law by returning the colonizers to their native cities as soon as the Island’s number of inhabitants has become deficient. Beyond that, only “very few” go to foreign countries and this only “for some reasonable cause” such as trading.
• 100Utopia’s chief instruments of war are gold and silver. These precious metals are used to hire mercenaries and to lavishly reward foreign agents charged with the outright murder of a hostile prince or to “procure occasions of debate and dissention to be spread among their enemies.” The Utopians themselves, though well trained and prepared for war, fight only if they must to defend their country.
• 101“The first socialistic theorist, Sir Thomas More,” wrote his Utopia as a reaction against the social evils of his time. General humanitarian feelings and a strong empathy with the miserable lot of the poor classes merged, in the eighteenth century, into the powerful current of thought which was set free by the Enlightenment. History and politics were now subjected to the analysis of reason. A natural and reasonable social, political, and economic order was supposed to exist, derivable from the knowledge of human character. The “social contract” offered a normative formula which indicated how society should be built if its construction were influenced only by reason and not also by error, lust for power, and custom.
• 102Johann Gottlieb Fichte, at the turn of the century, combined French rationalism and radicalism with German nationalism. Unlimited freedom, he wrote, means no freedom at all since “no one may appropriately put something into effect and rely for one moment on its duration. This antagonism of the free forces can only be counteracted by the individuals making a mutual agreement.” This agreement restricts the liberty of its participants equally and contains the assignment of an exclusive right to a determined “free” activity to each participant. The agreement thereby constitutes property.
• 103Johann Gottlieb Fichte, at the turn of the century, combined French rationalism and radicalism with German nationalism. Unlimited freedom, he wrote, means no freedom at all since “no one may appropriately put something into effect and rely for one moment on its duration. This antagonism of the free forces can only be counteracted by the individuals making a mutual agreement.” This agreement restricts the liberty of its participants equally and contains the assignment of an exclusive right to a determined “free” activity to each participant. The agreement thereby constitutes property.
• 104it is the State’s function to assign property to each and then only to protect his corresponding rights.
• 105unless it fixes the exact number of those who are permitted to work in a given branch and provides for production of the necessary means of subsistence for all. It is only through this closure that a branch of activity becomes the property of the class which works in it.
• 106the superfluous is always to be set behind the things which are indispensable or hard to dispense with. . . . All should first have enough to eat and be permanently accommodated before anyone decorates his dwelling; all should have warm and comfortable clothes before anyone puts on a sumptuous gown. . . . It is inadmissible to say ‘I can pay for it.’ It is very unjust that one person is able to afford the unnecessary whereas his fellow citizens lack the essentials.
• 107The government guarantees not only work, but also a ready market to its citizens. This is possible on the basis of the general plan. Prices are fixed by the State, and have a legal character.
• 108The State is obligated to guarantee to all citizens, by law and coercion, the conditions resulting from this equilibrium of mutual intercourse. Yet it is unable to do so if any person outside its laws and dominion has any influence on this equilibrium. It is therefore imperative to cut off the possibility of such an influence. All intercourse with foreigners must be forbidden and made impossible to its subjects.
• 109the government, in order to continuously guarantee its subjects the fulfillment of their customary needs, must be able to rely on the fact that a certain quantity of goods is being traded. How can it count on the foreigner’s contribution to this quantity since he is outside the government’s dominion? It is to fix and warrant the price of a commodity. How can it succeed with respect to the foreigner if it is unable to determine those prices which prevail in his country and at which he buys the raw materials? If the government sets him a price which he cannot afford, he will henceforth avoid its market and deficiency in the satisfaction of customary needs will result. It is to guarantee to each subject the sale of his products at the due price. How can it do so if the subject sells on foreign markets where different commodity relations prevail which it can neither survey nor influence?
• 110a closed commercial state just as it is a closed imperium of laws and individuals.
• 111Each man as well as each commodity belongs either to its jurisdiction or it does not: “there is no third choice.” It follows that any foreign trade that may be judged necessary falls to the exclusive competence of the government “just as it alone is to decide on war, peace, and alliances.”
• 112Each man as well as each commodity belongs either to its jurisdiction or it does not: “there is no third choice.” It follows that any foreign trade that may be judged necessary falls to the exclusive competence of the government “just as it alone is to decide on war, peace, and alliances.”