Studies in Economic Nationalism

CHAPTER VII

ECONOMIC NATIONALISM SINCE WORLD WAR II: COLLECTIVIST PLANNING AND ECONOMIC NATIONALISM

I

At this final stage of our discussion a further short excursion into semantics appears indicated as a supplement to the analysis of basic concepts proposed in Chapters I and II. I use in the title of the present chapter the term “collectivist planning”, rather than “economic planning”, in order to forestall a possible misunderstanding. Advocates of planned economies often hope to confound their opponents by pointing out that every purposeful action, whether private or public, requires planning and that there is nothing very special about taking cognizance of that fact in the field of economics. Professor Gunnar Myrdal suggested in an essay on “The Trend towards Economic Planning”2 that “the term ‘economic planning’ and perhaps still more bluntly ‘planned economy’ contains a tautology. … The word ‘economy’ by itself implies, of course, a co-ordination of activities, directed towards a purpose. It implies a subject, a will, a plan, and a rational adaptation of means towards an end or a goal. To add ‘planned’ in order to indicate that this co-ordination of activities has a purpose, does not make much sense or cannot, anyhow, be good usage.” Nevertheless, he finds it necessary to use that terminology throughout the balance of his essay. Clearly, when we speak of economic planning, we mean something else than the fact of a rational juxtaposition of ends and means. By giving the word “planned” too comprehensive a meaning we would render it useless for the purpose of intellectual clarification. In order to be useful, it has to be defined in a more restrictive sense and in opposition to something else. Myrdal perceives that, for he quickly knocks down his own man of straw and opposes planned economies to liberal economies.

It is to avoid this kind of confusion, at times unwitting and at times deliberate, that I propose to use here the term “collectivist planning” to describe a form of economic organization where the government, acting on behalf of the community (as the phrase goes), determines by authority the distribution of resources between various uses and of end-products between various users. The liberal economy, by contrast, leaves such determination to the operation of the price system and of the mechanism of free markets. Collectivist planning is, then, a notion opposed not only to laissez faire (an opposition particularly dear to the proponents of collectivist planning, as it greatly facilitates their arguments) but also to economic liberalism, which, unlike laissez faire, involves important elements of deliberate policy on the part of the public authorities. Now the line between a liberal economy, as distinct from laissez faire, and a planned economy (in the collectivist sense) is not always an easy one to draw. Yet, as already pointed out in Chapter I, it is an important distinction to make. Liberal economic policies will always be designed in such a way as to protect and supplement the price system rather than interfere with it or substitute something else for it. Just when public policy starts interfering with the operation of the price mechanism may be difficult to establish in marginal cases; nevertheless, with the use of a modicum of “horse sense” (without which one cannot get very far in the realm of social sciences and in the realm of human relations generally), one cannot fail to distinguish between policies which are truly liberal and those which stultify the market economy and constitute a prelude to collectivist planning.

Let us add, in passing, that certain concepts wich have been introduced rather recently into economic analysis favour a collectivist approach to economic policy-making. These are the “global” or “aggregative” concepts, such as aggregate demand, gross national product, net national income, and many others. These concepts are very useful tools of knowledge but their use by policy-makers is not devoid of risk. They provide a strong temptation for the policy-maker to try to influence these magnitudes directly, whereas, in a liberal society, changes in these magnitudes are always the indirect outcome of a very large number of individual decisions, freely taken. There is one exception to that rule and it is to be found in the field of monetary relations. Under central banking the total amount of money in circulation not only can but must be determined by a central monetary authority. It is a characteristic feature of a liberal economy that the amount of money in circulation should be controlled while everything else is left to the operation of the market (with some correctives and supplements as need arises). Actually, the concept of “aggregate demand” for goods and services has become the most important single tool used by the collectivist planner in western societies.

The mercantilists were, in one respect at least, forerunners of the collectivist planners of today. They regarded the desired condition of the trade balance (i.e. an export surplus) as something to be striven for by deliberate policy, rather than left to spontaneous economic processes. The adoption of a number of authoritarian economic controls was the result of that attitude. The concept of a centralized plan covering all the various aspects of the national economy was, however, alien to the mercantilists. The real precursor of collectivist planning is, of course, Fichte. Unlike free trade, collectivist planning has not been, by and large, the result of doctrinal influence but rather an outgrowth of empirical situations, rationalized ex post facto. As Professor Myrdal rightly points out in the essay cited above, economic planning is not a marxist concept and there is no reference to planning in the works of Marx. It is a concept, however, which inevitably had to grow out of the doctrines which deprecated private property and the market system. As pointed out in Chapter II, the advocates of public ownership of the means of production did not come to grips with the problem of centralized planning as long as their schemes were proposals on paper only. As soon as these were adopted in practice, the question had to arise of how the nationalized means of production were to be operated and co-ordinated — and then the gates were thrown open to collectivist planning.

What would have happened to socialism in that respect if it had not been for the Bolshevik Revolution of 1917 is an idle, albeit a very intriguing, speculation. By suppressing private property almost overnight and by nationalizing all the means of production — and all this in the midst of external war and internal revolution — the Soviet regime could not have avoided centralized planning even if it had wanted to. We have since learned that a war economy must, to a large extent, be a centrally planned economy, and in newly sovietized Russia war was compounded with revolution, while the entire “class” of private entrepreneurs was quickly and by no means bloodlessly “liquidated”.

After a few years many western socialists began to look to the Soviet system as a model, indignant maybe at its oppressive features but fascinated by its economic “plan”. That the connection, in that system, between planning and oppression was far from fortuitous, these early enthusiasts of economic planning have curiously failed to see. As recently as 1937, Professor G. D. H. Cole of Oxford extolled the virtues of “socialist planning” in the U.S.S.R.3 A vast “planistic” literature developed on both sides of the Atlantic in the twenties and thirties; in the latter decade the economic depression greatly stimulated its growth. Nevertheless, there is no single modern writer who could possibly be singled out as a leading exponent of economic planning. If one considers the degree of wishful thinking which permeates the literature on economic planning of the western world when matters such as its impact on individual freedom or its impact on international relations are concerned, one can find no better antidote than old Fichte, whose logic was relentless and who spent no time paying lip service to victims of his system.

Keynes, in all fairness, cannot be regarded as a “prophet” of collectivist planning, although most of his practical proposals actually stimulated collectivism and did much damage to liberal economic policies. Keynes’ contrast with Fichte is very interesting. Fichte deliberately promoted a system which in our day would have been described as collectivist, but his practical influence in that direction was nil; Keynes, on the other hand, never endorsed the collectivist creed, but had a very strong influence on the rising collectivists who were in search of a prophet more urbane and more up to date than Marx. All in all, however, there is no single individual writer in our day who might be regarded as the authoritative spokesman for the collectivist position. Because of that, it will be necessary in this chapter to quote from the writings of several members of this school of thought in order to illustrate those phases of the collectivist doctrine which are particularly relevant to the present inquiry.

II

“We are all aware nowadays of the strong case for State planning and control”, says Professor James E. Meade in the opening pages of his Planning and the Price Mechanism4 (the word “all” is one with which one might pick a quarrel, but let us ignore it for the present). This he attributes largely to “welfare considerations”, three in number. The first is “the inter-war experience of mass unemployment. By the end of the 1930’s there was widespread, in fact practically general,5 agreement that the State should at least intervene to control the total demand for goods and services.” The second consideration is “a growing realization of the shocking inequalities of income and property which laissez faire had produced.” He notes that during the inter-war years “there was developing a school of thought which held the view that an effective remedy could be found only through so extensive a system of State control of the community’s resources as to make possible a centrally planned distribution of the product of industry.” The third condideration Professor Meade finds in “a growing consciousness of those wastes of competition which result when there is, for one reason or another, a divergence between the private and the social interest in an economic act.” 6 He gives certain examples of waste more in the nature of abuses than of typical features of the competitive economy and adds that these abuses “convinced many persons that it would be wise to replace the profit motive which could have such ugly results by planned production for the common good.” 7

To the pre-war arguments in favour of planning, Meade adds “a special post-war argument” applying to the transitional period. Now, no one would, of course, deny that the great destruction caused by war would require special remedial measures involving a similar degree of centralized planning as that incident to the conduct of war. A liberal economist would add that such a transitional period should be as short as possible and that the centralized planning should give way, at the earliest possible time, to the free operation of the market economy. This, however, does not seem to be Professor Meade’s conclusion, and it certainly is not the conclusion of the school of economists who favour collectivist economic planning per se, as intrinsically superior to a free economy. As regards these economists, the three reasons for collectivist planning put forward by Meade seem to be a very good explanation of their point of view.

Having accepted planning, Professor Meade examines two methods of carrying it out: one without the use of the price mechanism, the other with. To the former he rightly objects and, considering how favourable to state planning his general outlook is, these objections are worth quoting in his own word:

In the first place, the method of direct controls contains a threat to personal freedom. It is not merely that it threatens our freedom of choice as consumers, important though this is. … But the most dangerous threat to freedom arises from the problem of allocating labour as a factor of production among its various alternative employments. …

In the second place, a system of direct quantitative controls is the breeding ground for spivery and corruption. It is the father of black markets and carries with it an insidious threat to public morality. …

Thirdly, such a system of planning through direct controls involves the use of much manpower and other economic resources merely in working the controls.8 …

Fourthly, the method of control by the quantitative allocation of resources … is bound to be clumsy, inefficient and wasteful as compared with a properly functioning price system.9

There can be no quarrel with any of these statements. Nor can one take issue with Professor Meade when he declares that “money and the pricing system are among the greatest social inventions of mankind.” 10

And so we are in a dilemma if the objectives of state planning as formulated by Meade are accepted (as he accepts them and I do not); and if one objects to the methods of direct planning by government decree (as both he and I do), then what is one to do? Professor Meade speaks for the entire school of what one might call the “urbane” collectivists (in contradistinction to the “bull in the china shop” collectivists) when he looks to the so-called “indirect” controls for a solution. These he describes as making “a controlled and planned use of money and pricing systems.” 11 He continues as follows:

Such a solution would combine as much as possible of the decentralized freedoms and peculiar efficiencies of the price mechanism with that large extension of the field for State planning and control over total money demand, over the distribution of income and property, and over private monopoly which is necessary to avoid the chief evils of the inter-war system. And a controlled use of inducements, through the mechanism of the money and price system, although, for reasons already examined, it could scarcely be relied upon alone to accomplish the rapid and large structural changes which are needed, might do much to influence the adjustments required in the present transitional period.

Professor Meade describes his own proposals as “an efficient middle way” between Soviet communism and American capitalism. He calls this “the liberal-socialist solution” — a rather contradictory and confusing use of words — and formulates as follows the three fundamental conditions of its success:

First, that the total monetary demand for goods and services is neither too great nor too small in relation to the total supply of goods and services that can be made available for the purchase; secondly, that there is a tolerably equitable distribution of money income and property so that no individual can command more than his fair share of the community’s resources; and, thirdly, that no private person or body of persons should be allowed to remain uncontrolled in a sufficiently powerful position to rig the market for his own selfish ends.12

The vagueness of these three conditions is apparent as soon as one tries to search beyond the sound of the words for their meaning: how does one establish the proper relationship between the total of money measured in monetary units and a heterogeneous aggregate of goods and services? What is “a tolerably equitable distribution of money income”? Who is to tell what is an individual’s “fair share” of the community’s resources? How is the control over excessive private economic power to be made fully effective? No workable system can be built on such vague precepts. The “practical proposals” which form the substance of Professor Meade’s book are made, on the whole, of the same materials as the three “fundamental conditions” quoted above.

In practice, the middle course, in so far as it has been experimented with, has been far more successful in reducing the efficiency of the free economy than in providing the advantages of planning which its proponents seek to achieve. When the “middle course” doesn’t succeed, advocates of planning have an easy enough excuse for its failure; it is not comprehensive and far-reaching enough. And so the drift towards more collectivism goes on until complete state control over economic life becomes a reality. Looked upon as a series of expedients, the “middle course” obviously exists; but as a consistent body or doctrine, there is no room for it. Intellectual consistency — and practical stability — can only be achieved by either a liberal economic system, in which the state does not attempt to do the architect’s work in relation to the economic system, or by a collectivist system, where the state undertakes to be architect, administrator, and judge, all in one. Some British socialist writers, like G. D. H. Cole, saw this very clearly when, as already noted, they declared in the thirties that the Soviet system was the only true case of socialist planning then in existence. On the other hand, the failure of the Labour government in Great Britain to achieve any success in planning over the six years of its career is an indication that the “middle of the road” schemes are far better on paper than in reality. To plan more effectively the British government would have had to turn away more and more from democratic principles and to disregard increasingly those freedoms which may survive under a system of “monetary controls” but which must surely perish under “direct” methods of centralized planning.

III

We must not stray, however, from the main line of our inquiry. Having briefly surveyed the various approaches to collectivist planning and formulated some critical comments concerning the “urbane” collectivist position, let us now examine the international consequences of collectivist planning. To a collectivist, foreign trade is, of course, a very inconvenient factor, liable to upset his most careful calculations through some accidental occurences in the external world. If only all countries had planned economies and thereby (let us hope) were to become rational and foreseeable entities, the foreign trade of planned economies might still be rationally foreseeable — but there are, alas, countries that would not plan centrally and whose unwillingness to do so interferes with the most carefully laid plans of the planners.13 Such is the complaint of the “planners”. From complaining of the “inconveniences” of foreign trade to advocating policies of insulation, there is only one step. Here again Fichte’s doctrines are our best guide, for he was clear-headed where collectivists of today are not. What Fichte saw and they do not see are the evil consequences of partial insulation. Fichte’s logic, as we know, led him to postulating full isolation — a proposal which is, of course, utterly impracticable and could not be seriously entertained by anybody in the modern world.

Closest to this concept of isolation comes the Keynesian notion of a country’s reducing its foreign trade to a minimum so as to increase to the utmost its freedom of national economic action. As we have seen, Keynes never carefully examined the implications of his proposal. Neither have those who continued to Offer it as a principle of sound economic policy at the time of international conferences drawing up a charter for the proposed International Trade Organization. Nevertheless, the concept of insulated national economies is a necessary corollary of collectivist economic planning. Because of the “disturbing effects” of international trade the former is inconceivable without the latter. The latter, of course, is essentially nationalistic and leads to policies which could not but seriously disturb the world economy and keep it in a condition of disintegration and chaos.

Today, we fortunately have at our disposal a large body of practical experience with which to support the thesis of the incompatibility of national planning with a workable international economy. But pure reasoning could settle the case beyond any reasonable doubt. I have referred already to the Fichtean analysis. Among contemporary writers, none has presented the case more clearly and convincingly than Professor Lionel Robbins, whose book Economic Planning and International Order appeared in 1937. It is one of the most important studies in this field and one which should be read by every student of this subject. What Professor Robbins shows very clearly is the disruptive effect upon the world economy of planning carried out by national states. He then examines the possibilities of international planning on a world scale and arrives at the conclusion that world planning would involve as much of a loss of liberty as does national planning. The distribution of capital and labour, no longer brought about through the market process, would have to be subjected to “some mechanism of authoritative control”, while “decision with regard to these issues would tend to gravitate more and more into the hands of men not subject to democratic control.” And so we should be moving into a dictatorial system in which “mass propaganda, stunt trials and secret coercion would become the normal instruments of government,” while “individual freedom and variety would suffer final extinction”.14

Luckily, world planning could only follow upon the establishment of a world state, and that is not at present on the cards. The advocates of such a political enterprise, however, might find it a sobering thought that, if established, a world state might easily lead, in certain circumstances, to world despotism. Everybody is free to pick his own daydreams and, with Professor Robbins, I should choose world liberalism instead.

IV

A planned economy that wishes to be insulated from the world economy has at its disposal a number of devices, some of them already known to the mercantilists, others introduced in more recent times. The most important are import quotas and exchange controls. The former consists in the licensing by the government of specified quantities of imports of particular goods, the latter involves the licensing by the government of all foreign payments and the obligation upon the residents of the country to surrender to the government all receipts in foreign currency in exchange for national currency. In order to arrive at a system of import quotas, the governement must establish what it regards as a desirable pattern of the country’s import trade, involving the setting up of a system of priorities, the determination of maximum quantities for the importation of the various goods, and the allocation of this total among the various importers. In a more advanced stage of collectivism, there are no private importers any more, for the state has assumed a monopoly of foreign trade. Then state trading replaces the quota system.

Exchange control plays a major role in the type of collectivist planning where trade and finance are (at least temporarily) left in private hands but are subject to strict governmental supervision. In order to evolve a system of exchange control the government has again to lay down plans for foreign payments and enforce those plans through allocations of foreign exchange and other devices. The system of exchange control has many technical aspects, such as the manipulation of foreign exchange rates and the operation of multiple rates (i.e., making the national currency available to some buyers more cheaply than to others). In a free market economy, the rates at which the various currencies exchange for one another are closely inter-related and so-called arbitrage transactions lead to a uniformity of “cross-rates” of exchange in the various foreign exchange markets of the world. One of the first effects of exchange control, however, consists in a suppression of arbitrage.15 Under a regime of free international payments and free foreign exchange markets, we obtain — as we did under the gold standard — a very close approximation to a world currency; in a system of exchange control this approximation to a world currency disintegrates into a maze of unrelated national currencies which only the most stringent regulations and draconian enforcement procedures can prevent, up to a point, from turning into the black marketeer’s paradise.

It will be appropriate here to define more closely the two concepts of multilateral trade and bilateralism. We call multilateral trade a system in which a country seeks the appropriate monetary policies to keep its payments with the outside world in balance without expecting them to balance with any particular country. The surplus achieved in trade relations with one country or group of countries is used to pay off debts incurred in commercial and financial transactions with other countries. In order that this multilateral system may operate, any country which earns a credit balance in its dealings with a second country must be able to use that balance freely to pay a debt to a third country.16 Hence the freedom of international payments is a condition of multilateralism, while the introduction of exchange control tends to limit greatly its scope and eventually destroys it altogether.

What takes its place is bilateralism, a trading system in which every country seeks to balance its payments with every foreign country taken separately. Both reasoning and experience show that bilateralism tends to erstrict trade below the level it would achieve under a system of multilateral payments. Normally, transactions are not in balance between any two countries. If surpluses earned in one place cannot be used to pay off deficits incurred somewhere else, accounts must be balanced either by expanding the exports of the “deficit” country to the “surplus” country, or by reducing the former country’s imports. In practice, the second is the more likely course, for it is far easier to use controls for the purpose of restriction rather than of expansion. That such a bilateralist system would tend to place the weaker country at the mercy of the stronger is pretty obvious and has been amply verified by the experience of Nazi trade in the thirties and of Soviet trade more recently. The system of controlling and restricting imports is frequently combined with measures that promote exports artificially by subsidy or by exchange rate manipulation.17 The entire fabric of international trade relations becomes distorted and subject to arbitrary decisions; it is, indeed, a strange paradox that the more countries plan and control their foreign trade, the less previsible becomes the pattern of world trade for each and every one of them. The relative stability of trade currents in a liberal world is replaced by the wilfulness of governmental decisions.

Bilateralism brings again into the foreground a wide acceptance of one of the mercantilist fallacies, against which Adam Smith protested with particular indignation, the notion that a country should buy from countries that buy from it rather than from countries where it can obtain the goods it needs on more advantageous terms.18 Thus, by seeking insulation from the world economy, the economic nationalists of today have evolved a system which combines some of the least excusable fallacies of the mercantilists with the grimmest aspects of the Fichtean blueprint. At the same time, they make the world rife with economic conflict.

So that the reader, appalled by what he has read, should not think that I am building up a man of straw for the only purpose of knocking it down, I shall now quote some specific comments from the collectivist literature of the last fifteen years.

V

In 1944, having already acquired world fame as author of what is known as the “Beveridge Report”,19 Sir William H. (later Lord) Beveridge published under the title Full Employment in a Free Society a most comprehensive blueprint for a planned society. His concern is with the maintenance of what he calls full employment (and what most people would call overfull employment). His proposals are for a comprehensive government regulation of economic life, wich can be classed under the following six headings:

(1) A long-term programme of planned public expenditures including the regulation of private business investments, subsidies to consumers, etc.

(2) State control of banking, including the nationalization of the Bank of England: “The banking system must clearly function in accord with the general financial policy of the State.” (page 178.)

(3) Control over the location of industry, which “must be exercised ultimately by a central authority making a national plan for the whole country.” (page 170.)

(4) “Organized mobility of labour”, involving a compulsory use of employment exchanges for all young people under eighteen, who “should be fitted into occupations adapted to their capacities” by these governmentally run agencies. “It is desirable to put an end to the aimless, unguided search for work … there can be no opposition of principle to … requiring the actual engagement to be made either through the exchange or an approved agency such as a trade union.” (pages 171-2.)

(5) Permanent price control: “Price control … will concentrate upon essential goods and services and upon those in the supply of which there is a temporary scarcity.” (page 203.)

(6) State control of foreign trade: “The whole trend of the argument of this Part of the Report [dealing with international implications of full employment] is towards a management of international trade, in place of leaving it to unregulated competion.” (page 238.)20

The Beveridge blueprint is a very consistent one. Although the words “free society” appear in the title of the book, and although its author is a faithful member of the British Liberal Party, he lets fall by the wayside, one after another, all the tenets of a liberal society, including even the principle of private property. The list of “essential liberties” which he enumerates in his book “does not include liberty of a private citizen to own means of production and to employ other citizens in operating them at a wage. … if … it should be shown by experience or by argument that abolition of private property in the means of production was necessary for full employment, this abolition would have to be undertaken.” 21 A strange statement for a liberal to make! It throws some light on the contemporary crisis of the British Liberal Party and may explain why liberals have had to look for a home in recent years either in the “progressive” wing of the Conservative Party or in the “conservative” wing of the Labour Party. Are we not right, in the light of his own statements, to regard Beveridge as a collectivist? His programme is certainly one that any collectivist could adopt and that every liberal should scorn. However tempting it would be to analyse it at length and to examine in detail the concept of “full employment” from which the whole trouble started, let us turn to Beveridge’s views on international trade. He offers a very good case-study of a collectivist approach to that subject.

No British writer in his senses could, of course, adopt in 1944 the Fichtean formula for an isolated economy. “Britain must have imports; she must have exports to pay for the imports,” Beveridge wisely remarks, and then adds: “She must have international trade up to a certain minimum.” 22 The words which I have underlined are characteristic. Foreign trade is indispensable for Britain but only “up to a certain minimum” — beyond that, never mind. There follovs a discussion which it is important to quote in full:

The first point to realize is that Britain’s chances in international trade are not unfavourable. … The countries which produce food and raw materials need markets and have largely developed their economic systems to supply markets of which Britain is, for many articles, the largest and most important. They are not only willing but anxious to sell to us. Should we then try to make specific bargains with them — bargains advantageous to both parties — so that we shall take their goods and they ours? Should we confront them with the clearcut alternative: we give you a stable market here, if you give us a stable market for our exports; but if you are not prepared to do the letter, you cannot have our custom ? This type of arrangement is normally called “bilateralism”; it is a form of barter, although all actual transactions are made in the currency of the countries concerned. But the currency which either country surrenders in payment for its imports is a blocked currency; it cannot be used only to pay for the purchase of goods of the country from which it was issued. Should we on the other hand, attempt to return to a “multilateral” system — to a system along the lines of the gold standard, under which countries make their purchases wherever they find them cheapest and sell their exports wherever they can, and do not attempt to balance the purchases from one particular country against the sales made to that particular country? Under a multilateral system, the currency received for exports to one country can be spent on imports from any other country. No one can say: “the currency I have given you for your goods must be considered as blocked; you can spend it or keep it; but if you want to spend it you must spend it on my goods and on nobody else’s”.23

This is an excellent statement of the dilemma which was confronting Great Britain at the end of the war and which confronts every country when it tries to take stock of its international position and evolve a rational foreign economic policy. Indeed, Beveridge’s definition of the alternatives is a gem of clear definition, but what of his actual recommendations?

“It is obvious”, he says, “that a multilateral system has great advantages. Bilateralism is akin to barter, … it is workable but clumsy.” (p. 217). Indeed, he could say that bilateralism has other disadvantages than clumsiness as compared with multilateralism. These have been enumerated in the preceding section of the present chapter. Instead, Beveridge proposes three criteria, upon the prior fulfilment of which, he claims, the adoption of multilateralism must eventually depend:

First, each of the participating nations must aim at full employment within its borders and must do so without relying on export surpluses as the principal means to full employment. Second, each of the participating nations must be prepared to balance its accounts with the rest of the world; for that purpose any nation which, for any reason, systematically sells abroad in goods or services more than it buys from abroad, and so has an export surplus, must be prepared to grant long-term loans sufficient to enable the rest of the world to pay for those exports, without losing gold or other reserves essential for international liquidity. Third, each of the participating nations must aim at a certain stability of economic behaviour — continuity in tariff, subsidy, foreign exchange and other economic policies — and must refrain from introducing important changes in these policies without prior consultation with the other participants. 24

These are not unreasonable requirements. Much depends on how they are interpreted in terms of actual policy. No believer in a free economy will deny that economic policy should aim everywhere at the maintenance of as high a level of economic activity and employment as can be achieved without inflation. No one would argue that a country aiming at export surpluses as a means of promoting domestic full employment is adopting a mercantilist policy entirely alien to a liberal philosophy. The balancing of a country’s accounts with the rest of the world can be achieved either by giving the greatest possible scope to the spontaneous operations of the free market (in combination, as under the gold standard, with appropriate domestic policies) or by seeking to bring the credit and the debit sides of the country’s foreign accounts into balance through deliberate manipulations, such as exchange control. Beveridge favours the latter as against the former alternative, but that stands in complete contradiction with the principles of multilateral trade. Finally, when speaking of stability in a country’s economic behaviour, he refers to continuity in tariff, subsidy, and other policies. He includes in his list policies which stand in conflict with the principles of multilateralism, such as exchange control and export subsidies. Nor could his policies, by their very nature, be administered with an eye to continuity.

We thus find abundant contradictions in the Beveridge statement of prerequisites for multilateral trade. As any reader of paragraphs 316-35 of the book will readily see, Beveridge’s heart is not really in the matter. His real attitude is found later, in paragraph 356, where he declares:

International trade, both for imports and for exports, will on the whole have to come under public management, in place of being left to market forces either competitive or monopolistic. The organs which serve for planning at home will serve also for planning in a wider sphere.25

In spite of all the lip service paid to multilateral trade earlier in his report and in spite of having quite clearly seen the disadvantages of bilateralism from the point of view of the international division of labour, Beveridge produces in the above passage a succinct statement of the basic collectivist view on foreign trade. In this he is, even more than Keynes and equally unknown to himself, a faithful follower of Fichte. To make his position abundantly clear, Beveridge resorts to what we might call the “parable of the fire-escape”. It, too, deserves quotation in full, for it, too, is a gem of its kind — albeit of a very peculiar kind:

In terms of convenience for traffic, world-wide multilateral trade may be likened to an elevator, speedy but capable of going out of action. Regional multilateral trade may be likened to a staircase, less speedy but consistent with reasonable comfort. Bilateralism is the fire-escape, clumsy but certain.26

This parable is so entirely and fundamentally wrong that it is surprising to see it used by so learned a man as Lord Beveridge. Everyone knows that we can have and generally do have in a building an elevator, a staircase, and a fire-escape, all three of them. We don’t need to make a choice and have a fire-escape instead, say, of an elevator; we can have them all. Not so with various trading systems: we cannot have them all at once, we must make a choice and that choice is of the greatest importance for the future both of our well-being and of our liberties. Multilateralism is the trading system of free men and it is also the trading system which gives to the world economy maximum scope as well as adaptability to changing conditions. Multilateral trade extending to a part of the globe is the next best thing, although it lacks the long-range stability of world-wide multilateralism; it is something which we may have to put up with while conditions are not favourable to having the system on a world scale. There is no difference in kind between geographically limited multilateralism and universal multilateralism. The difference in kind, however, is basic when it comes to bilateralism. Beveridge’s fire-escape is not a fire-escape at all; it is a prison staircase! Bilateralism is a trading system not of free citizens but of unfree subjects. It is the trading system in which individual deals are subject to government control and licensing and which minimizes the international division of labour and the advantages resulting from international commerce. We are living in an age in which the payment by vice of its homage to virtue — as de La Rochefoucauld would have it — has become so widespread as to obscure greatly the political and economic literature of the time. Instead of saying that they favour bilateralism, the collectivists of today say that they favour multilateralism but … “But” has become one of the most widely used words of the dictionary and it has immensely contributed to the intellectual confusion of our days. The use of misleading analogies belongs to the same category.

VI

Reluctantly or not, the incompatibility between multilateral trade and national planning is recognized, as it must be, by the advocates of the latter. In listing the main defects of the planned economy — a list which would have turned a less staunch believer in economic planning than he into a liberal — Gunnar Myrdal refers to “the tendency of our economic planning to become autarkic”, and continues :

All our countries have committed themselves to full employment. It was found out during the thirties that, to some extent, it was possible to alleviate a depression by restricting imports and further, that internal expansion during an international deflationary development required import restrictions as protection. Everybody knows that internationally these national policies counteract each other and, on balance, tend to spread and deepen a depression. But, in a worldwide deflationary development, restricting imports from abroad will stand out as a financial necessity to any individual country which has to try to keep up employment at home.

If the planned economy in a country instead develops in an inflationary direction, which for reasons already given will be a more ordinary course, again this country will have to restrict its imports even if there is no general trend toward deflation abroad. The too large incomes will tend to increase the demand for import goods and decrease the supply of export goods. This is a fact which economists overlooked until very recently, that in a system of planned economies both national inflation and international deflation tend to make import restrictions necessary.

To these Professor Myrdal adds another and, to my mind, more fundamental reason why collectivist planning turns in the direction of economic nationalism or a quest for self-sufficiency (i.e. autarky):

It is possible to plan home consumption and internal demand with some degree of certainly, including the substitution of home produce for imported goods. Export is so much more difficult to calculate and investment for the production of export goods carries greater risk. It is very natural indeed, if, with the stress now given to full employment, the planner prefers security, particularly as the world is now developing.27

The reader might almost think that he is still reading Chapter V of the present book, where nearly the same reasons are cited that were given by Fichte, the grim prophet of national isolation!28

Probably the most outspoken and the most forthwright postwar statement of the collectivist position will be found in a report on National and International Measures for Full Employment prepared in 1949 by a group of five U.N. experts: 29

While the return to multilateralism and currency convertibility is the declared aim of the great majority of nations — alongside the policy of internal stability and full employment, as laid down in the Charter of the United Nations — it is important to realize clearly how far these aim are complementary and how far one is a precondition of the other. The system of bilateral trading and exchange control is undoubtedly a most powerful weapon for maintaining full employment and a high level of production within the countries participating in such a system, in the face of serious fluctuations emanating from non-participating countries. It is not, however, in itself a major source of economic instability and cannot therefore be regarded as an obstacle to the successful pursuit of domestic full employment policies by any country. The justification for bilateral methods of trade will undoubtedly disappear once the present structural disequilibrium in international trade has been removed and countries have succeeded in eliminating major fluctuations in their balances of payments arising from inadequate or unstable effective demand. However, in the successful attainment of the twin goals of full employment and the creation of a relatively free multilateral trading system, the former must certainly take precedence over the latter: while countries can pursue full employment policies even without a multilateral trading system, the restoration of multilateralism without the attainment of internal economic stability in the trading countries is impossible.30

Although the usual lip-service is paid to multilateralism in the first lines of the above quotation, this is entirely nullified by the dogmatic statement with which the paragraph ends. It is the centre of the paragraph and especially the passages I have underlined which contain the meat of the United Nations experts’ position. That their report, which is a monument to economic nationalism, should have been issued with high appreciation by the United Nations itself, is one of the most significant paradoxes of our time.

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1 The scope of the present chapter is limited in the two following ways: in the first place, only the late war and early postwar (World War II) economic literature is considered, for it is there that we find the best guide to the intellectual “climate” of the economic nationalism of the past fifteen years. In the second place, as regards the motivation of national planning, I have concentrated on full employment planning as example, rather than on economic development planning. The implications for international economic relations are the same, or sufficiently so, I think, to justify this limitation (without which the present chapter could easily have become as long as the six chapters that precede, taken jointly).

“National political machinery is strong and effective and has a firm basis in people’s attitudes of allegiance and solidarity … Machinery for international co-operation is by contrast weak and ineffective, and it lacks a solid basis in people’s valuations and expectations. … Under these circumstances, internationalism tends more and more to be relegated to abstract utopianism. There is in the world of today so little possibility of giving reality to such strivings that they appear unrealistic and impractical; they are dreams and theories, while economic nationalism is realistic and practical” (p. 34).

“While foreign markets. determined by the actions of other governments and groups thus increasingly involve economic risks, one of the surest and simplest means of stabilizing the conditions for production and emoloyment at home consists in regulating imports. Such public controls usually have the political advantage — at least immediately — of shifting the effects of adverse developments on to the foreigner, while helping domestic industries or leaving them undisturbed” (p. 39).

These are typical quotations — their number could be greatly multiplied. With the western countries moving increasingly away from economic nationalism during the past decade. it is the underdeveloped countries which are nowadays its principal practitioners. To their problems the books cited above are primarily addressed. One final quotation. will exemplify the kind of doctrine they are being taught: “The advice underdeveloped countries are now often gratuitously given to abstain from interfering with foreign and from tampering with foreign exchanges is in most cases tantamount to advice not to bother about economic development” (Economic Theory and Under-developed Regions, p. 94). His own advice is: more planning and as much trade control and exchange control as desired! It is in these underdeveloped regions of the world that economic nationalism is fighting its supreme battle.