2 ESSAYS BYWILHELM ROEPKE

Johannes Overbeek

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Ropke, Wilhelm, 1899-1966.2 essays.

Essays originally published in 1951 and 1957.Contents: The problem of economic order-Welfare,

freedom, and inflation.1. Economic policy. 2. Inflation (Finance).

3. Welfare economics. I. Overbeek, Johannes.II. Ropke, Wilhelm, 1899-1966. Welfare, freedom,and inflation. 1987. III. Title. IV. Title:.Two essays. V. Title: Problem of economic order.VI. Title: Welfare, freedom, and inflation.HD82.R682 1987 338.9 86-33982ISBN 0-8191-6125-X (alk. paper)ISBN 0-8191-6126-8 (pbk. : alk. paper)

All University Press of America books are produced on acid-freepaper which exceeds the minimum standards set by the National

Historical Publication and Records Commission.

CONTENTS

I. THE PROBLEM OF ECONOMIC ORDER

First Lecture 1

Second Lecture; The First Stage of the Discus-sion: The Nature of the Problem 12The Second Stage of the Discus-sion: The Different Solutionsof the Problem 18

Third Lecture;

Fourth Lecture;

The Third Stage of the Discus­sion: The Choice Between thetwo Possible SolutionsThe Issue of LibertyThe Issue of the Control of

PowerThe Issue of Economy Efficiency

The Third Stage of the Discus­sion: The Choice Between Twopossible Solutions (Again)The Issue of Efficiency (Contin­ued): The Problem of InflationThe Issue of International Inte-

grationThe Fourth Stage of the Discus­sion: The "Third Way"

2425

2830

35

35

41

44

II. Welfare, Freedom and Inflation

Facing the Future 49Reflections on the Welfare State 69Keeping Money Honest 83Creeping Inflation: The Managerial Disease of the

Public Economy 93

iii

PREFACE

This book presents two essays by the late ProfessorWilhelm Roepke published in 1951 and· 1957. Thejustification for republishing them lies in the factthat they are still very relevant, especially now thatthe prevailing drift of academic opinion has changed atthe expense Ef Keynesian economi'CS aiid... demecI'aticsocialism.

The first part of this work consists of fourscholarly lectures on the problem of economic orderdelivered in Cairo. The achievements of socialistsystems are compared with those of the market economy.They were published by the National Bank of Egypt. Thesecond part of this volume is made up of fourcompositions - two on the welfare state and two oninflation. This section has more the character of atract stating the case against the welfare state.These pieces were written with a British audience inmind. The two pa,ts of this publication are cqgerent

ut they were not written as a consistent whole.There ore some over ap IS inevltab e.

As the editor I have limited myself mostly to thewriting of an introduction and the usual editorialchanges including the correction of obvious printingerrors, an occasional footnote or clarification, aswell as . translations of quotations in foreignlanguages. During this undertaking I have remainedattentive to the needs of the American reader whichalso made me revise a few unclear statements. However,nothing essential was altered.

Thanks are due to the University of the VirginIslands which supported this project by providingsecretarial assistance. Grateful acknowledgement ismade to the son of Professor Roepke, Mr. BartholdRoepke, for his permission to reprint these essays.

v

INTRODUCTION

The following two essays by Professor WilhelmRoepke published in 1951 and 1957 are of more thanhistorical interest. The writing on economic ordercontains an illumin~ting analysis of the various typesof SOCialism a~~ tb~~: ;mpact on human freedom, thedi§tributioD oj pn;er , economic efficiency ~ and'international integration. Both pieces include aP<1wErfal waLning against the long-term effects of thewelfare state N1:Iioh, as we have learned in recenttimes, ~ounts to chronic ipflation, low productivity,~low economic growtb, a Qunitive and C6hfiscatory ~taxsystem, ecnnomic strangulation by state regulatoryactivity, a -gradual erOSlon of individual freedom andself-determination and finally the loss of the truespirit of individual responsibility without which thefree society cannot function. Yet, in many nationsthere still exists a widespread popular support for thewelfare state which suggest that only too few peoplehave learned from the experience of recent decades insuch countries as England and the Scandinavianstates.

Wilhelm Roepke was born in Schwarmstedt (Germany)on OatQEer 10, 1899. H~S father was a physiciqp. Heparticipated in the firsf world war and as he nimselfput it in the preface of his book "International Orderand Economic Integration", he had to come face to facewith the terrible crisis in the history of humansociety which the first world war signified.

Once the war was over, he studied economics at theUniversi ty Qf Marburg LGe,rmany). In 1923 he marriedEva Fincke with whom he had tnree children. His firstacademic appointment was obtained in 1924 at theUniversity of Jena. From there he moved to theUniversity' of Gtaz' and in 1929 he went to theUniversity of Marburg as a full professor. At thattime Roepke waS oIle of the tew German economists whodid not endorse the teachings of the all-powerfulGerman Historical School and the so-called "AcademicSocialists" with their neglect of analytical economictheory and their approval of far-reaching governmentintervention. In the mean time (1927-'28) he visited

vii

the United States as a scholar sponsored by theRockefeller Foundation which allowed him to familiarizehimself with American farm problems. He left Marburgin 1933 after Hitler seized power. About a week afterthat event, Roepke delivered a speech in Frankfurt/Mainwhich was very critical of the Nazis. Then hevoluntarily exiled himself and his family.

From 1933 to 1937 he taught at the University ofIstanbul (Turkey) which gave him the opportunity towork and live in a non-Western environment. In hiscourses and seminars at the Graduate Institute inGeneva, he often told his students that he had beendeeply influenced by this experience. Here in Turkey,he said, he was forced to realize that he was not onlya German but before all a European and a product ofWestern civilization.

In 1937 Roepke accepted an appointment as professorof international economics at the Graduate Institute ofInternatiQJ~al Studies of the Universj t¥.-OJ GQRQ"a, inGeneva, Sw1:tzetlati~ Where he stayed until his untimelydeath in 1966. Untjl ~u;~~~a~~world.. -war llrhewa~ . always in close conta~l1ith [ Y 19 voJr:M:tses whotaught at the same es . ent between 1934 and 1940.In f ct, througho 's was one of thefew German ~cQDQmists ~o m:~nteined a closeintellectual 1ink to the Austrian scbooT·'QCjTiC'Q'Domics •....'_.' ~............... ~

After 1945 Roepke became Cl o sQly 8S59ciated withthe economic and monetary policies carried out by hisfriend Dr. Ludwig Erhprd who became kno~s thearchitect of .-the Germap "Economic Miracle". AsErhard's eco~omic advisor, the latter's neo-liberaleconomic policles clearly bore Roepke's stamp. As iswell-known these policies produced an unexpectedlyrapid economic recovery in a country ruined bytotalitarian economic policies and war. Roepke used totell his students that the German economic miracle wasno miracle at all but simply the predictable result ofthe application of sound economic policies.

Another major post-war event was the foundation ofthe Mont Pelerin Society in 1~7. Kt the suggestion ofF.A. Hayek and w. Roepke, an infor~al meeting ~f agroup of'" European and ~rllel1call ~lars Has ~ized

viii

near Vevey (Switzerland). All participants were strongbelievers in political, economic and moral freedom andafter 10 days of discussions it,was decided that thegroup should convert itself into a permanentassociation. The Mont Pelerin society has grown instatus and membership to the present day and continuesto organize annual meetings.

Roepke's scholarly publications are too numerous tobe stated here but his research program can perhaps bedivided into three major phases. During the firstperiod of his career which lasted until about 1937,Roepke was mainly an economic theorist with the theoryof the trade cycle as his area of concentration. Thus,he published "Crlses and Cycles" in 1936 and anintroductory text in 1937 entitled: "Economics of theFree Society".

During the second interval which lasted from 1938to the early post-war period Roepked turned to thesubject of international economic relations. Thisstage of his research produced such works as"International Economic Disintegraton" (1942) and"International Order and Economic Integration" (1959).

The last and third phase was characterized by thegrowing conviction that many pressing social issuesrequir:d research beyond the scope of technicaleconomIC theory. Thus, like Von Mises, Hayek andothers, Roepke moved into the direction of intellectualhistory and political and social philosophy. Thisperiod which roughly lasted frgm tQQ po.t-war period ~his ~eatb ~~ 19f;~ produced such contributions a§"Civias Hllm;ga" {1~44). "The Social Crisis of OurTime" (] 950), "The Problem of Economic Order" (1951) ,"wel.fare Freedom and Inflation" (1957) and "A HumaneEconomy: The Social Framework of the Free Market"which first appeared in a German edition in 1958. Thelatter works devoted ad great deal of attention to thestudy of the political and social environment in whicneconomic systems operate. During the late 1950's andthe early 1960's Roepke regularly lectured on the topicof economic systems. Had he been able to live andpublish for many more years, he probably would haveexpanded his research in this direction.

For ahere-below

number of reasonsretain a strong

ix

both essayscontemporary

reproducedrelevance.

They obviously contain elements of what is now known aspo\ilhJic choice economics as well as components ofAustrian economics, contemporary monetarism and supply­side economics. At the time of their writing, Roepkeclearly appreciated the general principle which inmore recent years has become the heart of supply-sideeconomics. The basic philosophy of supply sideeconomics recognizes that human beings act and reactknowingly and respond to incentives. People willchange their behavior when incentives such as tax rulesare modified. High taxes tend to distort individualchoice with negative effects on the supply ofproductive inputs. In "The Problem of Economic Order"Roepke subscribes to the idea that a highly progressiveincome tax "profoundly changes the motives andincentives of the economic process". (1) Under a systemof confiscatory taxation, writes Roepke, "people willtend to prefer leisure to work, safety to risk, routineto initiative and consumption to saving. (2) Comparableobservations appear in "Welfare, Freedom andInflation". (3)

Thus it seems clear that some important ideasproposed by contemporary supply siders can also befound in earlier works of such economists as Roepke. Aclose look at his writings even reveals that longbefore it happened, Roepke predicted that misguidedgovernment intervention in the economic process wouldinevitably lead to the stagflation problem whichplagued the U.S. and some other industrial economiesduring the 1970's and beyond.

(1) W. Roepke, The Problem of Economic Order,Cairo: National Bank o~gypt, 1957; p. 7.

(2) Ibid. p. 8.

(3) W. Roepke, Welfare, Freedom and Inflation,London: Pall Mall Press, 1957, p. 45.

x

The Problem of Economic Order

I

FIRST LECTURE

If I were asked to say what appeared to me as oneof the gravest features of our time I would answer:One of the worst things is that people do not seem tostop and think and to ask themselves quietly whatexactly they are doing. "We must do something, nomatter what" seems to be the unspoken motto of our agewhich prompts people to rush from one thing to another.In this hectic activity, we are apt to take fiction forreality, to fool ourselves and others with catch­phrases and make-beliefs, to be afraid to be alone withour own mind and to go to the real roots of the matterat hand, to act instead feverishly, to ask one questionafter another without staying for an answer like Pilateor to answer questions which are put in the wrong way.We live from hand to mouth, in our ideas as well as inour actions. More and more people no longer know whatit means to put first things first and to think interms of the principles involved. Consequently, onlyvery few still have a real philosophy which separatesthe essential from the accidental and which putseverything in its place. We lose sight of the realends while becoming entangled in the means. We do notknow any longer what we really want or shouldreasonably want, or we want at the same time thingswhich are utterly incompatible with each other, likecollectivist planning and liberty under the law, likefederalism and socialism, like internationalintegration and national sovereignty enhanced to the n­th power by economic administration centralized in thehands of the government, or like inflation andstability. We advertise grandiose plans for therealization of which almost all pre-requisites aremissing and which are already obsolete at the momentthey are published by the government.

The truth is that at heart, we feel helpless, but,being afraid to admit it, we are organizing committeesand sub-committees, we are rushing from one conferenceto another, and finally we pretend to be satisfied withresolutions which have no meaning or which are a tissueof contradictions like the famous Havanna Charter ofthe International Trade Organization. As Aldous Huxleysays in his novel Time must have a stop, "Ours is theAge, not of any poet or thinker or novelist, but of theDocument." Our Representative Man is the travelingnewspaper correspondent, who dashes off a best sellerbetween two assignments."

2

These tendendies are really alarming. They tellthe sociologist and philosopher more than anything elseabout the real drift of our age. They had becomenoticeable already after the first World War, and weare still suffering from their disastrous consequences.For a while there was real hope that this dire harvestof unthinking haste and self-deceptive superficialitywould awaken people to their responsibility. Today wehave to admit that so far we have hoped in vain.Confusion, loss of orientation and lack ofphilosophical insight are worse than ever, and so weare drifting on an uncharted sea. We are running aftercurrent events, instead of stopping to reach the solidground of principles and to ask ourselves seriouslywhat might have been the reasons why so much goodwill,energy, intelligence, time, and money have been wastedor not given the result we had a right to expect. WhatI said more than fifteen years ago at an internationalconference at Geneva is unfortunately still true today:We behave like a doctor treating with ointments what hebelieves to be itching while the sombre truth is thatit is syphillis.

The analysis of the mental tendencies of our ageshows that we have lost the faculty of tbinking infundamental terms, -tnaE we have become unable to seethe ge c Ions of , at we

o aistinguish between what is different or whatis essential and that our thinking is crumbling intodisconnected bits and our policy into a series of stop­gaps, like the pOlicy which goes to day under thephrase of "full employment." Its stupendousintelligence did not prevent our time from becomingalarming unwise.

2.

The unfortunate tendency which I have criticizedcan be observed in almost all fields of humanrelations. But the economist has perhaps particularlystrong reasons to stress it and to draw attention toits disastrous consequences. Seen from his point ofview, the present states of world appears largely to bethe effect of the confusion of economic thought. Icould develop this idea in may directions, but I wouldlike to emphasize two aspects of this grave situationwhich are closely connected.

The one is the dissolution of the body of

3

generally accepted economic principles by wellknownscientific trends which recently led a convincedfollower of' the late Lord Keynes in England to thehighly creditable confession "that we should be betteroff with the old Political Economy.n(l) In Economicsas almost everywhere else, with all our cleverness, wehave become decidedly less wise, while knowing more andmore about less and less. We have lost the sense ofproportion--so indispensable for every economist--whileanalysing the curiosities of hypothetical economicsituations and forgetting what has a bearing on realeconomic life. In spinning out the fine threads of the ~New Economics, we forget the most elementaryprinci-ples ?of economics, and 'Wti lIe stressing what might ,. a-t ''',best in highlyexce·· . -over 100~--(wh amos eerennlal truths. While proudly ,parading our elaborate 'equat ons un tsimp e common e which con withhuman reactions and ins y are-:'whfI lng the trees prone tooverlook the 0

It is impossible indeed not to look withconsiderable uneasiness at the type of the "moderneconomist" as he developed after Keynes' revolutionarybook, whom Keynes himself regarded with alarm at theend of his days., It is the type of man who isobsessed by one thing, i.e. "effective demand," whichhe thinks must be kept up at whatever cost, while heforgets the working of the mechanism of prices, wages,interest and exchange rates. Whereas formerly a goodeconomist was a man who knew how to assess the relationof the actual economic forces and whereas formerlyjudgment, experience, and a sense of proportion wererated higher than the formal skill in handling certain

(1) Roy Harrod, Are these Hardships Necessary?,London 1947, p. 58 where he says: " ••• we have no bodyof received opinion, fairly widely understood to takethe place of the place of the old doctrines, and thereis consequently no force strong enough to check theGovernment in its aberrations. People are quite atloss in these matters... Indeed it might well beargued that we should be better off with the oldPolitical Economy which, with all its shortcomings,succeeded for a long time in retaining its hold uponthe mind of the average well-informed citizen."

4

research techniques introduced illegitimately from thenatural sciences into economics--today glory goes tohim who knows how to expres more or less hypotheticalstatements in mathematical symbols and curves.

All this leads to another calamity which isthreatening the foundations of our civilization. Whyis it that the whole West has become so desperatelyentangled in problems which seem almost insoluble? Ibelieve one of the principal reasons for this is to besought in the fact that we simply fail to solve themost elementary task of any society which is that ofhaving a workable economic order. We fail in this taskbecause our mental laziness prevents us from seeingeven what it is all about. And because we do not seeit we throw ourselves into the arms of the state, someout of sheer helplessness, others in rapturousenthusiasm. In this way, by leaving to the State theresponsibility for something we no longer understand,we tend to end up in Collectivism and everything thatgoes with it.

To discuss this cardinal problem of economic orderin detail is the subject of these lectures. The firsttask would be to define precisely the term itself. Butbefore we do so it appears necessary to discuss somepreliminary questions.

There is no denying the fact that to deal with theproblem of economic order is to tread on a very hotground indeed where political passions are rife andsocial disputes are raging. The economist who is boldenough to intrude into this battlefield of presentideologies and social religions must be prepared to behandled rather roughly. He will learn that there istoday a "Rabies Economica" which is just as bad if notworse than the old dreaded "Rabies Theologica." Whatcan be done about it and how can the dignity of sciencebe saved under such circumstances?

More than half a century ago, in 1897, a greateconomist, Maffeo Pantaleoni, gave, in the very citywhere I corne from, an inaugural lecture which was tobecome famous. Its title was "On the logical nature ofthe differences in opinion which divide economists" andone of his conclusions was the witty statement thatthere are only two schools of economists, the school ofthose who understand economics and the other of thosewho do not. Of course, Pantaleoni's statement was

5

always a playful oversimplification if not a mere jest.If it were ever true--even in the field of propertheory of which he was speaking--it certainly hasbecome absolutely erroneous today. We have not onlythe clash between the Keynesian approach and theconventional economics which splits the happyPantaleonian One World of Economics almost hopelessly"into two realms of logic"(J.M. Clark). There issomething much more dangerous and insidious: the clashof "social religions" penetrating into the science ofeconomics itself. \

Let us take as an example the present diSCUSSion?about the "dollar shortage" and the "balance ofpayments deficit" as they take place even amongprofessional economists. I know by bitter experiencethat, even here, it has sometimes become very difficulto reach an understanding. If we show that the term"dollar shortage" has no real meaning except eitherwith regard to a given rate of exchange or with regardto a desirable increase of national consumption orinvestment, we quickly realize that such sober analysesare profoundly shocking to the well-thought-of of todaywho do not like them for two reasons: 1) because theydo not digest the idea of a balance of payments whosedisequilibrium is not a God-ordained calamity needingcareful planning but the result of certain nationalpolicies which can be changed if one wishes, 2)because they react against the suggestion that "dollarshortages" or deficits of the balance of payments maybe the result of pOlicies which are deemed desirable,such as what is called nowadays "full employment."

If that is true already in the field of puretheory, understanding in the field of economic policyhas become almost impossible. That is the desperatesituation which is a real challenge to the economistand the social philosopher. He must make equallydesperate efforts to prevent the discussion fromdegenerating into mere namecalling. To this laudableend, two maxims seem to be particularly useful.

The first maxim for giving more scientific dignityto our present discussions of the issues of economicpolicy is to begin always with ascerta.ining the commonground of general aims and ideals without which nodiscussion is possible anywhere and which we can use as

6

the point of ultimate reference and as objectivecriteria when our views become more and moreconflicting in the further course of our discussion.If only we agree on the ultimate ends--on liberty,democratic government, justice, peace, the necessity ofprotecting the individuals and groups againstuncontrolled power, material mass welfare, and so on-­it must be possible to reduce our discussion of theissues of economic policy to a debate which is merelyone about the best means to achieve those ends. Theright procedure, therefore, would be to begin with whatis common ground and then to work our way step by stepup to more and more debatable ground as we come tomatters of detail and concrete decisions on the bestpossible means. That will also be the procedure to beadopted in the course of these lectures.

For the same purpose of reducing as far aspossible the ground of combat, it is further necessaryto apply a second maxim. It consists in makingdistinctions where before there was the habit oflumping different things together. I spoke of tn-e­ult~e ends and problems. Now, the important thingis to realize that there are, for economic and socialreform, quite different ends and problems and that forthese quite different answers must be given.

Consider, in this connection, the case of theardent socialist. He finds that there is very muchwrong with our world, and we all probably agree withhim. His enthusiastic conclusion will be that"Capitalism" must be replaced by "Socialism." But itis safe to say that, in most cases, the socialist willfind it very hard to define the one as well as theother. The idea uppermost in his mind will be that nowthere is "anarchy" and "jungle" and that afterwardsthere will be order, justice, and planning. Hisopponent, defending not "Capitalism" but the marketeconomy, will explain that both theory and ampleexperience prove that socialism is most likely to be abitter disappointment. All the time it is quiteprobable that they will talk at cross purposes becausethe socialist has in mind quite different problems tobe solved whereas his opponent never meant the marketeconomy to be the answer to all these problems but onlyto one of them, i.e., our special problem of economicorder. He will say with Shaw that "no sane person

7

refuses to wear spectacles because they do not cure atooth-ache."

Here is perhaps the point where I should say a fewwords on what could be usefully understood by"Socialism." Properly speaking, of course, the task ofdefining it is even more hopeless than that of definingsimilar terms of our political vocabulary likecapitalism, liberalism, or democracy. The word"socialism" has become so much a mere receptacle ofvague sentiments, passions, desires, emotions, andideas that it has lost almost every vestige ofascertainable meaning and therefore almost every valuein a scientific discussion. Nevertheless, it may servea good purpose to do something else and to find out atleast the most important meanings of actual socialistmovements and policies today. In this respect, I thinkit is possible to distinguish altogether three mainmeanings of socialism:

~~ a policy whose aim it is to bringabout a radical change in the distribution of incomeand proper.!l.J>y all the meanswhlctT-ttfake up the ~nW91faie Wtate, i.e. generally speaking by takingcontinuously from the ones and giving to the others. (2)Strictly speaking, such a policy can be pushed quitefar without changing what we call the economic order,neither taxes on the one hand nor social services onthe other necessarily interfere with the process of themarket economy. There is in other words, nothing inthe technique of the welfare state which can be calledsocialist in the sense of something necesarily oppositeto the market economy. The interesting question,however, is whether this is not again one of the caseswhere quantity finally changes to quality. We can no

(2) It is important to see all the implicationsof this definition and to realize that all stress islaid on distributional change brought about by thecontinuous working of the fisal machinery of thegovernment. There is another kind of policy combatinginequalities which consists in abolishing as far aspossible the conditions under which unjust inequalitiesmay arise (monopoly, privileges, feudal landownership,etc.). This policy constitutes, of course, a commonground for socialists and liberals.

8

longer doubt that once the fiscal system takes morethan a certain maximum share of the national income itceases to be a mere machinery to change thedistributional aspect of the market economy. Quiteapart from the eventuality that, by price subsidies,modern fiscal policies may entirely falsify the pricemechanism, they introduce into the economic systemprofound changes of various kinds. In the modernwelfare state, fiscal pOlicies may indeed be pushed sofar that they serve an . 1 new ~eal which we maxcall that of the tion sulhsti on: That ISto say: the individual consumer becomes suspec, heis no longer thought fit to decide the use of hISincome; the government does it for him to an everlarger extent by leaving him the smaller part of hisincome to be enjoyed within the narrow conditions ofsome system of "austerity" while using the remainderfor the provision of collective goods of everydescription. Fiscal policy becomes almost a new end initself, and the larger the quota of the national incomeclaimed the better. This ideal of what might be termedFiscal Socialism appears all the more progressive aswith increased public budgets there is an increasingscope also for using the fiscal policy, by varying thesize and the kinds of revenues and public expenses, forwhat is now called "functional finance," i.e. forpolicies of "full employment." Within this newframework of policies, public finance ceases to beneutral for the simple reason that, beyond a certainpoint, reached in more and more countries today, theburden of taxation, particularly that of personaldirect taxation and of business taxation, willprofoundly change the motives and incentives of theeconomic process. People will act very muchdifferently than before. As a recent German author (G.Schmoelders) puts it: "The belief is utopian that, ina national economy burdened with such tax rates (60 to100 percent, or even more), the entrepreneur wouldstill shape his economic actions faithfully after therules of the individual search for profit which havebeen valid for 150 years, while profit and incometaxation aim either to take away from him the fruits ofhis work or to give them to others." But people notonly will act differently and make business lessrational than before. Their incentives to work or tofulfill their functions in the economic process will beconsiderably weakened, with the consequence that totalproduction may be most unfavourably affected. Under

9

the crushing burden of taxation as we find it today inso many countries, people will ten~ to prefer leisureto work, safety to riS~ routine to initiative, andconsumption to saving. We conclude that evidently,socialism in this first sense of a distributional andfiscal system seems to have little to do with theeconomic structure as such, but the order of magnitudeinvolved today together wjth the aims and t~e technlque-of this system makes this ore

seems, therefore, impossible to discusstoday the problem of economic order and its possiblechanges without due regard to this factor of thechanged size and position of public finance which havebeen brought about by "Fiscal and DistributionalSocialism."

2) Socialism as a policy which primarily wants tosolve the problem of 4RQ~&triaJ property and of theposition of tAQ uerker as it aepefl8s QR this property.-It seems that, not so long ago, it has been possible,at least in a country so litle doctrinaire as GreatBritain, to pass for a good socialist while championingthe solution of this problem of property in our age bythe restoration of private property. That, at least,was the stand taken by the Labour leader RamsayMacDonald who, in 1924, defined the socialist as thebest defender of private property "since he consideredit a good so great that everybody ought to havesome. ft (3)

Today, such a socialist belief in private propertyhas become as anachronistic as the one in free trade.Not only on the Continent but even more so in GreatBritain, the modern socialist recognizes only onesolution of the problem of industrial (and evenagrarian) property: the chan e of rivate into publicproperty by what he cal ationalizatlo. In this, heis following particularl ~-I~;Maur-x-whosemain concernwas precisely this socia-legal asp;ct of l:!;;e;-apitalism"as presented by the private ownership of the means or ~

production while he cared much less for thedistributional aspect and neglected entirely theproblem of the economic order itself.

(3) W.A. Orton, The Liberal Tradition, New Haven,1945, p. 110.

10

3) Socialism as a policy which is not so muchconcerned with the question as to who owns the means ofproduction as wi~~e ottlQr question as to how .. theyshould be coordinated in the economic process ttlelf,~n other words, with the questlon of economlC order.As socialism in the second sense is mainly connectedwith the name of Karl Marx, socialism in this thirdsense has been~ really Ibunded h¥ St. Simon, thes er of lanning, interventlotilsltt dcontrol, and it is not b aCCl e s ldea w ·ch

a been e 0 e lrst b an engineerin mind an nf e shadow 0 the Ecole Polytec nlque ln ParisJ shouldhave found so many of lts champlons among scientists,engineers and industrial organizers among whom not theleast important has been Walter Rathenau, who inventedthe term "planned economy" itself.(4) For to solve theproblem of economic order by governmental planning isnothing else than to try to organize the whole nationaleconomy on the pattern of a single huge factory and toapply to it the principle of t~e blue-print. Whereas,in the second case, we recognize socialism asnationalization we encounter it here as planning,centrally administered economy, or Office Economy as Ilike to call it. What that exactly means will bediscussed here in due course. The important thing torealize at this point is that both are essentiallydifferent things. It is possible to have, up to apoint, socialism as nationalization without socialismas planning, as it is possible to have socialism asplanning without socialism as nationalization. Tonationalize this or that industry, though changing

(4) Henri de Saint-simon (1760-1825). Frenchsocialist philosopher entertained a passionate desireto reform science and society. In such publications as"On the Industrial System" (1821-'22), he set forth avision of a technocratic state characterized by large­scale industrialization under planned scientificguidance. The future society would be administered byengineers, scientists, industrialists and artists.

Walther Rathenau (1867-1922). Germanindustrialist, public official and economist served asminister of reconstruction and foreign minister during1921 and 1922. Rathenau wrote extensively on socialand economic problems. His work includes several bookson economic planning (ed.)

11

industrial ownership, does not necessarily involve achange in the principles of economic order. It ispossible that the economic process as a whole willcontinue to be mainly determined by prices andcompetition and not by the plans and orders of thegovernment. There are examples of socialistgovernments, after the first and also the second WorldWar, which thought that socialism meant primarilynationalization of select industries while they did notseem even to see that, besides that, there was anentirely different and independent problem, i.e. thatof economic order as the way of regulating the economicprocess as such. On the other hand, we have theexample of the Nationalsocialist government in Germanywhich adopted the most thorough system of Saint­Simonian socialism in the sense of the social techniqueof planning while leaving the problem of industrialproperty formally untouched. I say "formally": thatis to say that while, in this case, the legal title ofproperty remained intact, its substance was graduallyemptied once the privati? entrepreneur became a mereagent of the omnipotent government

3.

This survey of three main meanings of contemporarysocialism as a practical policy illustrates what Imeant when I said that it is 50 important to keep thedifferent problems apart and to separate the problem ofeconomic order from others which are perhaps equallyimportant but entirely different. In the course of thepresent lectures, we may find that there are goodreasons to believe that the so-called market economy asa solution of the problem of economic order is vastlysuperior to the Office Economy. But to say this is notto overlook the fact that there are other problems tobe solved and not necessarily being solvedsimultaneously by the market economy: the problems ofdistributive justice, of social security, of property,of power, of the human aspects of industrial masssociety and so on. I shall have to say more aboutthese other problems at the end of my lectures. Ourimmediate task, however, is to consider now exclusivelythe problem of economic order for whose dispassionatediscussion the field has been somewhat cleared by thisfirst lecture.

Let me finish today with one last remark. In allthese discussions on types of economic policies and

12

economic systems there is one particualr danger ofwhich particularly the man of science has to beware.It is the danger o{ mere intellectual j SID by which~ Imean the failure to transl:~e ~~eoret;caJ b~~-prLRts;ln~~ realftY= which .is n;~ O;;1y economiC j;;t alsopQ1::::J:Lical, s()<:iQIQ.qical and almost everything inaddition. When studying so many projects of economicand soclal reform one has the uneasy feeling that theirauthors never asked themselves the simple question:Who is to carry through all those fine-spun schemes?What is the state like which is to execute them? Whereis the administration efficient and honest enough toput them into daily practice? Where are the mencapable, devoted--and healthy enough to assume thedirection? In all those projects, and particularlythose of a collectivist kind, there is above all the"human bottle-neck" to consider, but it is exactly thiswhich is all too often entirely overlooked.

There is a story told of the well-known ItalianPrime Minister Giolitti which illustrates very wellthis point. When a delegation of professors hadexplained once more a dazzling reform project Giolittiis said to have answered: "I agree entirely with youand your plan. I only have one objection which is thatyou only have to write down all those beautiful thingswh i 1e I have to impl emen t them." You wi 11 admi t tha tthere is wisdom in this reply. There is indeed littleuse in making blueprints of theoretically perfectmachines for the economic process which have the onebut capital fault that they do not work because men,governments and societies are as they are,--whichreminds us of the saying of Lichtenberg, the greatGerman essayist of the 18th century, that it is a pitythat the social philosopher cannot, like the professorof physics, make models of his utopian republics to seethat they do not work. We need economic systems andmonetary standards which correspond both to the averageintelligence and the average morality of man. Theyhave to be fool-proof, and they must suppose neitherheroes nor saints nor intellectual giants but men withtheir average ethics and brains.

SECOND LECTURE

1.

The first stage of the discussion:problem

The nature of the

13

In the first lecture, an attempt was made to clearthe ground in various ways. We gave a preliminary ideaof the sUbject and, particularly an effort was made tonarrow the controversial ground as far as possible.One of the main results of all these endeavours hasbeen to convince us that it is quite wrong to believethat, in the discussions on the economic order, thedividing line~mQst ~e Aeeessari~y between socialistsand pOR socialiSts. The two types of economic order­which we hCive to consid"er--tbe markQt eGgAomy and the.­9ffic5t...._e-CQRemy are, manifestly hardly more· tban tu~~ social teehniques of esLab~ing an ec~omicorder whic~ can be combined with quite differ-e-n~t---­

general systems of economy, policy, culture, and humanrelations, although they have themselves far-reachingconsequences. Those consequences of the office economyare such that the liberal and democratic socialistshould have no less reason to dislike them than thenon-socialist while, I repeat, he has enough scope lef~for reforms in other directions which should fairlysatisfy them.

When we now proceed to study those consequences ofthe two techniques of economic order we rememberanother maxim mentioned in the first lecture: to go onfrom the uncontroversial ground cautiously to more andmore controversial ground where, increasingly,subjective elements of political valuation areinvolved. To this end, I suggest that we carry thesubsequent discussion through three main stages whichcan be characterized by the following capitalquestions.

(1) What is the problem involved?(2) What are the possibilities to solve it?(3) Which of these should be preferred?(4) If we should find that the liberal solution(market economy) is to be preferred--what are thereforms with which it should be combined in order to bemade politically feasible and socially acceptable?

Let me begin then with the first stage of thediscussion where we ask for the nature of the probleminvolved whenever we speak of the "economic order."

What we have in mind speaking of an economic orderis precisely the following: For the social economy asa whole the same problem must be solved which isfamiliar to every farmer who, all the time, has to

14

decide, carefully and weighing all circumstances, howto use in every detail his land, his capital and hislabour resources so as to produce the right things inthe right proportions. Given at every moment thescarcity of the productive forces, society has toprovide an ever changing answer for the ever changing

tPrOblem: what use shall we make of these scarceresources? . Shall we produce this or rather that, andhow much of this and how much of that? That soundsvery simple, but probably no one but the trainedeconomist can have a fairly appropriate idea of theimmense difficulties which this problem involves. Heknows that it is not only a question of simple largegroups of commodities like food, clothes, or houses,but one of the boundless varieties within these largegroups. All these almost innumerable individualcommodities and services, among which we have to makeour choice continuously, must be there in the rightproportions, at the right place and at the rig~t momentif the economic process is to work in a fairly orderlymanner. The initiated is equally aware of the factthat all this implies at the same time the momentousdecision as to whether we should produce more forcurrent consumption or for the capital equipment of thecommunity, a decision which means what is technicallyknown as the temporal order of the economic process.The trained economist will also understand at once ourhints as to many other choices to be made if there isto be economic order, choices which are as important asthey are difficult and which have to be madecontinuously changing circumstances.

But order in this sense of the right choice, ofproportions and harmony, is not all. Like a watchwhich contains as its vi tal par-t-s- not oRly a balancebut also a spring, a worxable econo~ sy&tQm Ret on~:~;s ~t alsQ-i.~cen~~ve§...~ What matters is not

t at, at every mlnu~, we produce the right thingin the right proportions, at the right moment, at theright place, and with the right technique, but alsothat all this happens on the level of maximum quantityand quality. This level will be reached and maintainedif everybody gives his best, and everybody will givehis best if the economic process is provided everywherewith the proper incentives corresponding to humannature as it is--neither angel nor beast as Pascal has

15

said.(5) Society must be so arranged that we find itnatural to work hard and conscientiously and to live upto our functions as entrepreneur, merchant, farmer,worker, scientist, inventor or artist as best as wecan. At the same time we must feel encouraged to thinkof the future by saving and investing. All this musthappen naturally, smoothly, and spontaneously while wefeel at once that something must be fundamentally wrongin a country where the most natural actions of man likeworking, caring for his family, saving, creating newthings or raising children must be instigated bypropaganda, radio speechies, medals, moralizing,conferring the distinction of "heroes of work" ortheatrical performances. It is the most elementarywisdom to put man under conditions which bring out whatis 'best in him and which make him work, save and investas natural expressions of his vitality without hisbeing even remotely a saint or a hero. Every economicsystem which, for its functioning, requires saints orheroes is condemned as utterly unworkable, and onlyfools and fanatics still refuse to submit to thiswisdom which is proved by the experience of all ages.A wise social system is that which releases the fullactivity of man so natural to him while at the sametime, it curbs his hidden tigerish tendencies which,unfortunately, are no less natural to him.

The distinction between the two principal problemsto be solved in order to constitute what we call theeconomic order--that is to say, that of order properlyspeaking and that of incentives--is of a significancefar from being generally understood. The two tasksmust be kept strictly apart, and if only one of them isunsolved there is not yet an economic order. That is,among other things, very important for settling aquestion which has been hotly debated during thediscussion on the economic possibilities of socialism.After it had been shown convincingly that the pricemechanism of the market economy is indispensable for arational organization of production and the right

(5) Blaise Pascal (1623-1662) was a Frenchreligious thinker, mathematician and scientist. Heinvented the first calculating machine in 1645. Hismost famous work "Pensees" (Thoughts) contains a set ofdeeply personal meditations (ed.).

16

allocation of resources, socialists were at first moreor less nonplussed until ingenious plans were presentedto overcome his difficulty by building into thesocialist economy a sort of synthetic competitivesystem. There will be a few today who still take thisidea seriously, but we can now say exactly what isparticularly wrong with it. While it is quiteconceivable that, even in a socialist state,competition between persons or departments can be used,under certain conditions, for the purpose of providingincentives it is not thinkable that it could be usedalso as a means of directing the economic process inthe way it is used in the market economy. For eitherit is the planning authority which directs or it isnot. If it is not the planning authority which isdirecting the economic process but competitive pricebidding, then we have no longer a collectivist systembut a market economy. "Competition can be used toimprove efficiency, but as a mechanism of direction foran important section of the economy it cannot beapplied without the abdiction of the centralauthority."(G)

There is another point which ought to be stressedto avoid misunderstanding. When we speak of"incentive" as the second prerequisite of economicorder we include a most important function: thewillingness of all to reach and to carry through theright decisions which are necessary for an orderlyeconomic process. In order to see what is meant by an"orderly economi~ process," we must remember that oneof the main problems of continuous coordination is toavoid what is nowadays called "bottlenecks" in theeconomy, i.e. all sorts of disproportionalities anddisharmonies which now here, now there may bring thewhole economic process standstill. They may appeareverywhere, not only in the shape of a shortage of rawmaterials like coal or tin but also in the insufficientsupply of insignificant supplementary goods whichsuddenly, by their absence, become all-significant,just as the biggest dinner-party can be spoiled by thesmallest toothache. As the experience of the National­socialist planning in Germany shows, it may be the

(G) W. Eucken, On the Theory of the CentrallyAdmlnistered Economy: An Analysis of the German Exper­iment, Economica, May 1948, p. 94.

17

sudden deficiency of wooden cases and other packingmaterials or nails or a certain kind of screws whichbrings the flow of production to a stop. Or it may beglassjars for honey or jam or a thousand other smallthings which play such an inglorious role in thestories we hear from the communist countries behindthe Iron Curtain today.

It is quite significant that this phenomenon ofbottlenecks has been quite neglected in former discus­sions about the theory of collectivism, and even todayits real importance is far from being generally under­stood. Here, as at so many other points, former timeshad been without experience, and it is only now, aftercollectivism has been made the object of various exper­iments, that we are wiser and that we discover problemswhere formerly things had been taken more or less forgranted. The point is, of course, that "bottlenecks"in the sense of a situation where certain goods cannotbe obtained in the right quantities at current priceswere unknown in former times of a fairly working marketeconomy with its free pricing mechanism. They maketheir appearance only when prices are prevented frombringing about prompt equilibrium, whatever the circum­stances. And it is here, of course, where we find alsothe cause of those disturbances. Bottlenecks are theconstant and inevitable result of collectivism, astatement which we must bear in mind when we come todiscuss the merits or demerits of the office economy.

Why does collectivism (office economy) invariablyproduce bottlenecks? To avoid bottlenecks, there mustbe an efficient regulating agent or, better, a correctindicator of where, in the process of production andconsumption, an increase or a decrease of a certaincommodity IS wanted. But there must be also anefficient force securing a speedy reaction of producersand consumers to this indicator. It is one thing toknow where bottlenecks occur or threaten to occur, andto what extent, and to send out directions to theproducers and consumers to act accordingly. It isquite another thing to secure prompt obedience to thesedirections. Prices are orders given by the market toproducers and consumers to expand or to restrict. Ifthe market economy is replaced by the office economythese orders in the shape of prices must be replaced byorders literally issued by the political authority.Now, the difference between the two kinds of economic

18

order is not only that the office economy finds itdifficult to provide a substitute for prices as anindicator of where to expand and where to restrict.The difference is also that producers and consumerswill react promptly to price changes (the orders ofthe market) but not to orders of the central authority.In other words: (a) the orders issued by the centre ofthe office economy are clumsy and wrong, and (b) thereaction to them is slow and uncertain. It isdeficient not only as a system of regulation andcoordination but also as one of incentives andreactions.

2.

The second stage of the discussion: the differentsolutions of the problem

Order and incentive--they are the two capitalproblems which must be solved if we want to have aworking economic system, now as ever, and they must besolved continuously, noiselessly, and spontaneously.The problem has been solved once we have found areliable system of regulating and instigating forces.But where is the solution?

If we examine this question thoroughly and if wetake into account only the modern world with its highlydeveloped division of labour and its interdependence ofproducers, we find that, in the last resort, there areonly two solutions: coordination or subordination,liberty or command. Coordination (liberty): thatmeans that kind of economic order which is provided bythe market, competition and the free price and which,in contrast to vulgar misconceptions, is working, inspite of its many weak~esses, with an astonishingdegree of exactness and determinateness which is thevery opposite of arbitrariness. Subordination(command): that means that kind of economic orderwhere the decisions which I mentioned are reached andenforced by the government. We call the first systemthe market economy while the second goes under suchnames as Planning, Command Economy, centrally directedeconomy, or Office Economy. This second system is, toall intents and purposes, also tantamount to what wecall Collectivism or Socialism in the sense of thatsocial technique which has been mentioned in the firstlecture. It goes without saying that people may want

19

collectivism for very different reasons and combine itwith quite different social philosophies.

If we use the term "collectivism" or "socialism"in this precise sense of a definite economic order wemust admit that National-socialism as well asBolshevism are collectivism or socialism; they are evenspecimens which we may call "beautiful" in the callousway in which doctors speak of a "beautiful .cancer.Moreover, we are entitled to say that, so far,Nationalsocialism has been, besides Bolshevism, theonly example of a really comprehensive collectivistsystem which has been working in peace-time for quite along while.

If we want to find our way out of the presentconfusion, it is of the utmost importance to keepclearly in mind this alternative between two systemsof order and incentive. We must assume the habit ofthinking in terms of "economic orders" and use this asthe criterion whenever people try to enlist oursympathy for all sorts of projects of reform.

We must spare no effort to understand the problemand its alternative solutions. To this end, let ustake a simple example and remember that there are twoways of building a house. In fact--incredible as thismay seem to many people in western countries today--ahouse may come into existence because of anentrepreneur finding it profitable to risk his capitalin this venture, because of workers finding itprofitable to work at certain wages, because of peoplefinding it profitable to give up their savings formortgages at a certain rate of interest, and finallybecause of still other people finding it profitable torent rooms at certain rates of rent. On the other hand,a house may be built by order of the government, which"apportions" the necessary raw materials, which gives-­in the shape of subsidies or cheap credits--money wrungfrom the community by taxes, loans, or inflation, which"directs" the necessary labour force, and which finally"distributes" the dwelling space according to some moreor less reasonable system of priority. Or to takeanother example: shall our food be produced andmarketed because the farmer finds it profitable, orbecause a policeman may come and arrest him if he fallsshort of the ordered amount of deliveries? Let us alsovisualize the whole atmosphere in which the two

20

systems are working and their different psychologicalclimates. Then we realize that in the case of themarket economy we are "customers" who are being"served," whereas, in the office economy we hear quitea different language. There we see a bureaucracy which"orders," "seizes," "licenses," "allocates,""releases," "distributes," "controls," "blocks," and,abov~ all, "forbids," threatens and punishes. If youseriously disturb and finally destroy the order of themarket economy, you must be prepared to go the wholelength of the other way of the office economy, and youmust be sure that it will work, i.e. that it will solvethe double problem of order and incentive.

In this connection, there are some special pointswhich need further elucidation:

(1) When the two types of economic order areconfronted, there are many people who still seem towork with the idea that the market economy is thesynonym of everything which is unplanned, disorderly,disconnected, anarchical, in short that it is the"jungle" of competition and of unbridled "naturalforces," whereas the office economy seems to recommenditself among other things because it makes an end ofthis mess. Now, it is one of the surest tests of aneconomic education to know that the price mechanism,far from being "unplanned" and anarchical, reallyachieves a system of coordination of economic forceswhich is remarkable and whose description makes up themajor part of traditional economics. In recognizingthis working of the price mechanism, there should be nodifference between socialists and non-socialists. Butthat is not all. In reality, there is almost no betterway to state the difference between the two economicsystems than by saying that the outstanding feature ofthe market economy is, as I remarked, its astonishingprecision and the objectively compelling force of thedirection which the market economy issues in the shapeof prices, whereas it is the office economy which lacksthis exactness and this objectively compelling force ofits decisions. There is no arguing with a free price,a free stock-exchange quobation, or a free exchangerate. They are the true measure of the scarcities inquestion relative to the other economic data of thewhole economic process at a particular moment. Theyspeak out an objective truth, and as long as there iscompetition there is no scope for arbitrariness. They

21

are objective points of reference which can be taken asreliable guide-posts for rational decisions, and, assuch, are welcome also to the leaders of an officeeconomy whenever they can find such guide-posts.Contrariwise, the central authority of the officeeconomy is quite at sea in all its decisions. What isthe right value of timber at this moment or of anyother commodity which corresponds to the wholeconstellation of economic data? What commoditiesshould be imported and in what quantities? Whatcommodities should be exported and in what quantities?The central authority simply does not know. It guessesor, worse, it reaches snap decisions which are quitearbitrary and which are coloured by some subjectiveidea of the planners. These decisions will be alwaysbiased, and one principal bias of the planner is:Caveat emptor--let the consumer beware! That is tosay: the office economy will almost always show a biastoward reaching decisions which favour spectacularconstruction schemes and other investments whileletting the consumer take the consequences in the formof "austerity" and hardships. The office economy tendsto become a gigantic machinery for forced saving, butthere is no objective criterion whether the particularkind of investment is fairly well chosen. We mustremember this character of the office economy as afumbling economy working with an appalling amount ofarbitrariness when we discuss later the question of theeconomic efficiency of both types of economic order.

(2) A second point is of such importance that itis the real clue to much that will be explained lateron in this lecture. It is already implicit in what Ihave said on the difference between the two types ofeconomic order, but it has to be made as explicit aspossible. What I mean is the essentially politicalcharacter of the office economy. While the marketeconomy separates the two spheres of economic actionand political sovereignty (of dominium and imperium) itis the salient point of the office economy that itmerges these two spheres. It means the thoroughpoliticalization of economic life. The market economygives to economic life a position not too dissimilarfrom that of organized religion in a state which isbased on the principle of the separation of state andchurch. The office economy, however, gives to economiclife the position of religion in a state based on theprinciple of what is called "Caesaro-Papism." It is

22

"Caesaro Economism." This is the real key to most ofthe perplexing problems of collectivism as we shallsee.

(3) If I said that the alternative between themarket economy and the office economy is a strict one,and that it exhausts the possibilities of a solution, Imay be misunderstood. It may be objected that it isobviously possible (and certainly also desirable) tohave a sort of mixed system where the two types arecombined in various manners. That, of course, is apalpable truth, and it would be foolish to deny it. Itis precisely the idea of some desirable mixed systemwhich my friends and I have been developing long sinceunder the name of the "Third Way." What I mean here,however, is something quite different; that there aretwo and only two principles of economic order which canbe applied in every individual case. In other words:between the free price and the order of the officethere is nothing but anarchy. If it is not the pricewhich is coordinating and stimulating the economicprocess, it must be the order of the office if theproblem of coordination and stimulation is to besolved. Either the one or the other, and both excludeeach other. That is so important to grasp becauseotherwise there is no protection against all sorts ofconfused ideas. Common to all these ideas is thedesire to find some principle of economic order whichis neither the price nor the order of the office. Butwhenever we exam~ne such proposals we shall find thattheir authors failed t~ understand the logic of theproblem of economic order. All of them are motivatedby the wish to avoid both the devil of prices and thedeep blue sea of bureaucracy by inventing some sort ofwhat I would like to call Ersatz-Socialism. (7)Its main varieties are:

(a) The so-called "market socialism" (0. Lange,Lerner, and others) i.e. the idea that the recognizedadvantages of the price mechanism could be used by theoffice economy. There are, however, only twopossibilities. If prices are genuine and free thecentral authority really capitulates to the market. Orif they are not, they are unable to coordinate and to

(7) Counterfeit socialism is perhaps a preferableterm (ed.).

23

regulate the economic process.

(b) Projects of the type of the Tennessee ValleyAuthority, often presented as the philosopher's stonein this search for something which is neither marketeconomy nor office economy. As a matter of fact, theT.V.A. may be justly regarded as a bold andconstructive piece of regional development orindustrial decentralization or antimonopoly policy,but it is obvious that it is an integral part of themarket economy of the united States where the Americanprice mechanism determines what should be produced andhow much of it.

(c) Cooperativism, i.e. the idea that, bydeveloping consumers' and other cooperatives to theextreme, it should be possible to get some sort of"industrial democracy" superseding the market economywithout' being an office economy either. Coopera­tives, to be sure, are a very valuable form of moderneconomic organization, but it is impossible tounderstand how the awkward alternative can be avoided.Either the different cooperatives will trade with eachother as independent firms--then there will be somesort of a price system though based on the mostbaffling combination of monopolies with all itsindeterminateness of price formation; or thecooperatives are merged into one gigantic concern--thenwe have necessarily a centrally directed economy whichis compelled to achieve coordination and stimulation byorders instead of fr~e prices and competition.

(d) Corporativism or Syndicalism, i.e. the ideathat a new economic order being neither market economynor office economy, can be organized by some sort ofindustrial self-government based on the cooperation ofindustrial groups or managed by trade-unions or acombination of trade-unions and employers. The mostrecent example of this is the drive in Germany for whatis called co-determination by which the trade-unionsnot only want to make the workers responsible andcooperative partners of industry (which is highlydesirable), but also aim at a new form of economicorder which they call economic democracy. That is ahighly confusing mixture of ideas. On the one hand,there is the urgent problem of how to put on a morehuman basis the relations between employers and workersinside the factory, a problem arising from the peculiar

24

nature of large-scale production. On the other hand,there is the altogether different problem of whatshould be the forces of coordination and stimulationfor the national economy as a whole. In this respect,there are only two possibilities: (l) The trade-unionsand work-councils really succeed in attaining such aposition that they control the whole economic process,which means that a minority usurps the power of thestate and executes, on their own account, a self­appointed office economy. (2) The trade-unions eitherdo not succeed in attaining the power or refrain fromusing it, in which case we are thrown back upon theprice system, though again of a kind which involves allthe inconveniences of monopolistic group control. Thuswe arrive at very much the same results as in the caseof cooperativism.

THIRD LECTURE

The third stage of the discussion: the choice betweenthe two possible solutions

Having defined the problem of economic order anddescribed the two principles among which we have tochoose in order to solve it, we are now able to tacklethe decisive question: which of the two possibilitiesshall we prefer, free coordination by markets, prices,and competition or compulsory subordination? While wecould conduct our discussion so far on neutral groundit now becomes inevitable that the debate implies moreand more points where opinions are bound to clashbecause the ultimate decision must be a political one.There is no denying the fact that, at this point of ourdiscussion, the scientists will find it increasinglydifficult to keep it above the level of politicalpassions. Even here, however, we must spare no effortto narrow the field of mere controversy and to appealto arguments which are based on scientific reasoning.

To this end, it appears convenient to organize thediscussion in such a way that we examine the case foror against both principles of economic order from thepoint of view of altogether four main issues. Theseare: liberty, control of power, efficiency, andinternational integration. In all these respects,severe indictments have been pronounced against thecollectivist principle of economic order, and it willbe our task now to find out whether and how far they

25

are justified.

1. The issue of liberty

We begin with the issue of liberty. Theindictment levelled against collectivism under thisaspect and the arguments on which it is based will befamiliar to everyone now, particularly after ProfessorHayek's famous book on "The Road to Serfdom" of whichthis issue is the main theme. I think, therefore, thatI can be rather brief on this point. (8)

The indictment may be stated like this:Nationalsocialism and Communism are both characterizedby a definite "social technique" (which I call that ofthe "office economy") which also "democratic" socialismclaims to be the only genuinely "socialist" technique.Here as well as there we find the same "socialtechnique," although it is being made the means forquite different political ends. We all agree that theexperiences made so far with "totalitarian"collectivism are most frightful. Is there not a realdanger, therefore, that "democratic" collectivism mayalso lead to rather the same result if not stopped intime? Is there any guarantee that the same "socialtechnique" may in the end not bring about the same lossof freedom, no matter how respectable the intentionswere at the beginning?

More and more economists and sociologists of ourtime are inclined to give a pessimistic answer to thesequestions. They say: the tyranny of totalitariansocialism is no mere accident. Totalitarianism andsocialism are, in the last resort, only two aspects ofthe same system which subjects man in all hisactivities to the omnipotent state with its allembracing bureaucracy. The totalitarian state must besocialist because it needs a social technique whichsubjects to the government the whole economic life ofthe nation. Vice versa, a government which uses this

(8) See also:Freedom, Chicago:1962 (ed.).

M. Friedman, Capitalism andThe University of Chicago Press,

26

technique, while trying to remain a free democracy,must become totalitarian sooner or later because thistechnique supposes, with relentless logic, atotalitarian state with its centralized power andomnipotent bureaucracy.

Are these economists and sociologists right? I amafraid they are. The social technique, which we call"socialist," means a comprehensive Planned Economy(office economy). The economy of what plan? Who isits author? Central planning involves a certainallocation of productive forces, determining what toproduce and how much of each product. In the marketeconomy, as we saw, this question is being settled bythose whose business it is: the consumers. Theprocess of the market economy is like an uninter­rupted referendum on what use should be made (at everyminute)~ of the productive resources of the community.In this continuous plebiscite, every piece of money isa voting bulletin. The socialist office economy meansthat this "democracy of the consumers" is abolished(curiously enough in the name of what many socialistscall "economic democracy") and replaced by theallocation of productive forces planned and enforced bythe government. The allocation is transferred from themarket to the government office, and the population nowhas to accept that use of the productive resourceswhich the government thinks best. "Does anyone--so Iwrote ten years ago in my book on "The Social Crisis ofOur Time"--seriously believe that not only the electionof this planning team but also the millions ofindividual decisions which it has to make every day canbe based on democratic principles and that the sphereof individual liberty can still be safeguarded?"

While, for the full development of my arguments, Imay be permitted to refer to my book on "The SocialCrisis of Our Time" (Chicago University Press) which Ijust mentioned, I want to add some importantqualifications. When we maintain that it will beimpossible to preserve, under collectivism, anessentially free society with the rule of law, civicrights and parliamentary control, we really mean thatit is "extremely unlikely under normal circumstances."That is equivalent to saying that, under highlyabnormal circumstances, it might be possible to havetemporarily a good deal of collectivist planningwithout totalitarian tyranny. That is the case of war

27

collectivism, and with a temperament like the Britishit might be feasible to extend such a system far intopeacetime without mortal danger to liberal democracy.

Here we come to the momentous problem of"democratic" socialism on which I want to make thefollowing remarks: (1) It is, of course, an insult tolump together democratic socialists ("social­democrats" of continental Europe or "labour socialists"in England) with Nationalsocialists and Communists. Wehave no right to doubt the sincere humanitarian anddemocratic ideals of most democratic socialists andtheir excellent intentions. But intentions may bequite immaterial forJ:he ultimate outcome. It is quitearguable that the difference between totalitarian anddemocratic socialism may be merely that between wilfulmurder (of liberty and civic rights) and homicide bynegligence. It is inexcusable to associate democraticsocialists with totalitarian murderers. But libertymay be killed just the same, and one must be afraidthat, for the victims, there is no appreciabledifference. (2) It is true that, in the case of GreatBritain and even of Norway, democracy has remainedessentially intact, in spite of serious inroads. Toreconcile this with the theory of the "Road toSerfdom," we have, first, to remember that all it wantsto do is to point to a danger which may be greater orsmaller according to the degree in which thecollectivist principle is put into practice. If it isbeing realized only gradually we are also threatenedonly by degrees.

(3) In this respect, it is important to note that,in Great Britain, democracy and liberty continue tolive (though somewhat precariously) because socialistplanning does not live. Anybody knowing England couldalways be sure that, if she really had to face the grimalternative between socialism and liberty, she wouldchoose liberty. The capital issue is here thedirection of labour which is indispensable for anyeffective central planning. Although the Britishgovernment has been equipped with this power, the ideahas been so unpopular that compulsory direction oflabour has never been practised on any significantscale. What that means, however has been expressed bya competent British observer (Professor J. Jewkes, TheTwilight of Planning in Great Britain, "Farmand," Oslo,1951, No.7) in the momentous statement that "Planning

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in any real sense has been virtually abandoned." Arecent official paper on the "Plan for Coal"illustrates this by the remark that "the estimates offuture performance are not forecasts, still lesstargets." Whereupon Professor Jewkes asks quiteproperly: "If these Plans are not forecasts and nottargets, what are they?" No one seems to know really.Here we get a glimpse of that "muddled economy" whosemain feature, as we shall see, is everywhere at leastone thing: constant inflationary pressure.

(4) Even for this hybrid economy we do well,however, to remember what A. de Tocqueville has said onsuch a system one hundred years ago. "The monarchextends over the surface of society a web ofinsignificant orderly, meticulous and complicated ruleswhich prevent even the most imaginative minds and themost vigorous souls to reveal themselves and overshadowthe masses. He does not crush people's will but hesoftens and bends it while ruling their lives. Herarely compels individuals to undertake something buthe persistently opposes their action, he does notdestroy, but he prevents projects from coming intoexistence, he does not tyrannize, he hampers, heobstructs, he irritates and stupefies. Eventually hereduces the nation to a flock of timid and industriousanimals with the government as their shepherd. I havealways believed that this kind of organized sweet andpeaceful serfdom can, much easier than people imagine,be combined with some superficial appearances offreedom." (Alexis de Toqueville, Democracy inAmerica).

2. The issue of the control of power

Closely connected with the issue of liberty isthat of the control of power in society. One of themost weighty criticisms to be made of our entireeconomIC and social system refers, indeed, to thedisquieting concentration of economic and social powerin the form of monopoly, privileges, giantcorporations, pressure groups, monster associations,including the trade-unions, and other organisations.Almost everywhere, modern development favours an exces­sive accumulation of power of men over men, and since

29

it is in the very nature of power to be abused--"Powertends to corrupt, and absolute power corruptsabsolutely" (Lord Acton)--the problem of how to controlsuch excess of power is one of the most important inour society. To the socialist the idea which suggestsitself to solve this problem is to abolish the system("Capitalism") in the midst of which the concentrationof power developed and which--very unjustly--is maderesponsible for it. That, however, is a tragic mistakebecause, in this way, we are bound to make things im­measurably worse. There is no getting away fom thefact that collectivism involves the maximumcentralization of the economic process in the hands ofthe government and the entire politicalization ofeconomic life, together with the corresponding immenseincrease of the concentration of power.

If the problem of our time is "concentration,"collectivism means that we want to cure it by hyper­concentration. At present, monopoly is bad enough.But present monopolies under "capitalism" arescattered, limited and largely offsetting each other,always subject to the constant pressure of potentialcompetition, suspiciously watched by public opinion,and confined to the strictly economic sphere.Collectivism, however, would mean that we get one bigand all-comprising monopoly of the state. Thiscolossal monopoly of the collectivist state would notonly be imcomparably bigger than the most frightfulprivate monopoly but it would also represent somethingentirely different, because it would be no longerconfined to the economic sphere. This colossalmonopoly would be at the same time the absolute masterof our entire life. Collectivism promises to achieve aSuper-Monopoly which would be the "perfect monopoly" ofthe theoretical models of economic science, but at thesame time it would bless us with an all-embracingmonopoly from which there is no escape.

We heartily agree with the socialists in seeing inthe concentration of power and in monopoly one of thecapital problems of our age. But socialism offers notonly no solution to the problem but promises a state ofthings which would make it immensely worse. One cannotcure the evil of concentration by more concentration.The only cure is decentralisation of which therestoration of an essentially competitive marketeconomy is one of the most important aspects.

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That is also the reason why "socialization"(Socialism No.2, as I called it in the first of theselectures) is no solution of the problem of bigindustrial property and its corrresponding con­centration of power. Here the same reasoning holdstrue: it is absurd to solve the problem ofconcentration by hyper-concentration. By concentratingindustrial property in the hands of a new owner, theState--that is what "socialization"means--we only carrythe process of concentration of property to itsultimate end. And what makes this even more absurd isthe fact that this new owner is at the same time ourpolitical sovereign. He is identical with thegovernment, the administration, the law-courts, thepolice, the army. Neither will be a solution of thehuman problem of the big factory and of industrialproperty be found on this road of "socialization." Howto persuade the British coal miner that he "owns" thecoal mines or the railway clerk that he "owns" therailways? How far does "socialization" mean any changefor them? They will feel even more than before to bemere cogs in the wheels of big industry, and the morethe government becomes the sole owner of the means ofproduction the more the worker will be deprived even ofthe important possibility of choosing among severalemployers. By voting for socialism, he will haveenslaved himself to an anonymous and all-powerfulbureaucracy. On the other hand, we have to rememberthat, as far as the human problem of property isconcerned, the biggest public park is a poor substitutefor the smallest private garden.

3. The issue of economic efficiency

The third issue to which we turn is that ofeconomic efficiency. It is a scientificallyestablished fact that the market economy ("capitalism"in vulgar phraseology) has proved to be a highlyefficient system of order and incentives, and no lesserman than Karl Marx has told us in dithyrambic terms inhis "Communist Manifesto" how great this efficiency hasbeen. Can the office economy provide a system of orderand incentives which is at least of equal economicefficiency? There were always strong reasons why thisquestion should be answered in the negative, and theevidence of recent experience seems to affirm thisview.

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Those reasons have been for the most part alreadyexplained in the second of these lectures when wecompared the two types of economic order. There aretwo principal points. First: how should it be possibleto solve, in every detail, the gigantic problem ofdirecting the economic process of a modern industrialnation according to a pre-conceived plan? Second: howis the office economy to find working substitutes forthe intellectual and moral incentives of the marketeconomy?

As a matter of fact, collectivism will be largelydeprived of precisely those incentives which, in theaverage, are the most powerful, i.e. those arising fromthe desire of man to improve his own economic positionand that of his family. Given the dangerous but mostefficient natural force of individualism, how is itpossible to harness this torrent of self-interest andto conduct it over the turbines of production? Themarket economy shows how it can be done. By franklyappealing to private initiative, it makes individualsuccess dependent on a corresponding productive per­formance, provided that markets are competitive.Contrariwise, it is the enormous drawback of the officeeconomy that, instead of harnessing this force andusing it, it has to fight against it and to replace thenatural incentives of the market economy by fear,artificial emulation, hysteria, and propaganda.Whenever a government turns to the office economy itenters a struggle against human nature which, except inwar-time with its feverish patriotism, will bog downthe economic process in red-tape, police measures, andcontrols and compel the government to use all its powerto enforce its orders. But there will always be thelegal jurisdiction of the official plans and thereality of black markets and passive resistance.

What may be the ultimate consequences ofcollectivism has been shown, in the most impressiveway, by the example of Germany where this pOlicy hasbeen pursued for more than ten years until the reformof the summer of 1948 restored, in large parts of theGerman economy, the market economy, with the astoundingresults which are generally known. Everybody shouldstudy, very carefully and with an open mind, thisGerman experience in order to understand the processwhich slowly but inevitably dissolves and paralyzes thenational economy wherever the German example of

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planning, collectivism, and "repressed inflation" hasbeen followed.

The story of German collectivism is that of theprolonged and obstinate attempt of the government totake care of the economic functions which prices,costs, and exchange rates can no longer perform oncethey are prevented by the government from following thelaws of supply and demand. with relentless logic, theGerman experience has established the-proof that, inthe long run, this attempt is bound to fail, becausethe task is impossible. Sooner or later, all valuesbecome wrong because they no longer register relativescarcity as they must if there is to be ord~r. Conse­quently, there is disorder, arbitrariness, and waste onan appalling scale. At the same time, the incentivesto work, to save, to invest, and to show initiative areprogressively destroyed. Too little is produced, andthis little is largely not what should be reasonablyproduced or at least not in these quantities, and thislittle which is being produced in the wrong way is, toa large extent, also being used in the wrong way. Inthe end, there are chaos, paralysis and controlledmisery insufficiently camouflaged by misleadingproduction statistics. In Germany, this collectivistsystem has broken down completely amidst absurdities towhich only the pen of a Swift could have done justice.Germany has thus become the principal country where noserious and honest observer can hold the view thatbureaucracy is a better planner than the market. Hereonly the wilfully blind can deny that the government isnot only a complete failure as a planner but alsoincapable of replacing the incentives of the marketeconomy, unless it is prepared to follow the exampleof totalitarianism which shows that fear and hysteria,for some time and to some extent, might be used assubstitutes for the incentives of the free man.

When describing this German experience I mentionedthe word "repressed inflation." This is a hint to amost important aspect of collectivism of which I havesaid so far very little. In fact, the economicsignificance of collectivism cannot be grasped if we donot realize that it is invariably bound up withinflationary pressure. The connection is a twofoldone. One is now quite familiar to a wider public. Itis now generally understood how and why inflationarypressure, whatever its origin, leads in our time to

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what we call "repressed inflation." In contrast to the"open inflation" after the first world war, almostevery government now will do its utmost to curb theeffects of inflation on prices, wages, or exchangerates by collectivist controls which prevent thosevalues from reaching their natural level where supplyand demand will be in equilibrium. Since I may referto my own analysis of this phenomenon of repressedinflation (Kyklos, vol. 1, 1947, no. 1, and vol. 1,1947, no. 3) I will be excused from stating explicitlyand at greater length what would be only a repetitionof what I have written in those studies. It will besufficient here to say that what repressed inflationamounts to is a system of fictitious valuescompulsorily enforced. The longer it lasts the morefictitious such values tend to become, both in thesense that they correspond ever less truly to the realscarcities and in the other sense that, for thisreason, ever less economic transactions are being madeon the basis of such fictitious values. The distortionof all value relations, the increasing importance ofillegal dealings at the cost of the shrinking "offi­cial sector" and the ever greater conflict between theimpulses of the market and the administrationstruggling desperately to maintain its authority--allthis may lead finally to that extreme disorder andparalysis of which post-war Germany will forever remainthe classical example. Since, in this system ofrepressed inflation, prices will be kept down in thedegree in which a commodity is deemed essential, itsultimate effect will be that a premium will be set onthe non-production of the most needed goods whereas theproduction of non-essentials which can be bought freelywill flourish. At the end of repressed inflation inGermany things had reached that absurd stage where theofficial price of one metric ton of wheat wasapproximately equal to what one had to pay for a lady'shat. Whenever you wanted to buy something beyond theallotted rations of essential goods you had to fallback on more or less artistic ash-trays, hair-oil orperfumes of dubious quality or other fancy goods-­unless you went to the black markets. It paid toproduce those goods but it was heroism to produce wheator shoes. The economic system which developed undersuch circumstances could be called an "artistic ash­tray economy." In such an economy, there may be "fullemployment" warming the heart of Sir William Beveridge,but it will be one combined with an appalling degree of

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general misery which is all the less bearable as it islncreasing rather than diminishing. (9) In the end,money not only loses--as it does in the final stages ofan open inflation--its function to serve as the normalmedium of exhange and the measure of value but, on topof this, it ceases to give the necessary impulses toproduction, until people come to the conclusion (asthey did in Germany in the years 1946 and 1947) thatyou had to make up your mind whether you wanted to workor to earn money. Open inflation is bad enoughbecause it is the cause of crying injustices, waste andunbalanced production. Repressed inflation is, ifanything, somewhat worse because it adds paralysis tounbalanced production and unjust distribution.

So much on the one sort of connection betwee9inflation and collectivi~ It --rg- somewhat lessgene~lly understood that the connection also works theothe~ In the case--of repressed inflation,it is inflation which leads to collectivist controlsand planning. But it is no less true that it iscollectivism which leads to inflation. It is of thegreatest importance to realize that, just ascollectivism nowadays fqllows inflation, inflationfollows collectivism, for reasons which make inflationactually a regular counterpart of collectivism. Inother words: collectivism serves just as well for anattempt to mitigate the open harms of inflation asinflation serves for an attempt to mitigate the openharms of collectivism.

(9) William Henry Beveridge (1879-1963) Britishpolitical official and economist was most influentialin the creation of Britain's post World-War II socialsecurity system. In a document entitled "SocialInsurance and Allied Services" (1942) he recommended acompulsory insurance scheme "from the cradle to thegrave" to be administered by the state. In asubsequent work named "Full Employment in a FreeSociety" (1944) he defined full employment as asituation in which the amount of vacant jobs wouldalways exceed the number demanded. He advocated large­scale public spending to reach and maintain such fullemployment (ed.).

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This second connection, while not yet familiar towider circles, is so important that I propose toreserve some more remarks to this subject in thebeginning of my fourth and last lecture.

FOURTH LECTURE

The third stage of the discussion:the two possible solutions

the choice(Again) •

between

3. The issue of efficiency (continued):of inflation

the problem

At the end of the preceding lecture, I stated thatthere is a two-way connection between collectivism andinflation: collectivism added to inflation in order torepress it (repressed inflation) on the one hand andinflation added to collectivism on the other. Afterhaving explained the first connection, I promised tosay a few words on the latter.

Regarding this connection, we have to realize thatit is still a rather obscure field of scientificinquiry which stands badly in need of being exploredmore fully. But so much is already clear both on thebasis of experience and reasoning that collectivismseems to be necesarily accompanied by inflationarypressure. For this various reasons are given.

The first reason is that the Office Economynaturally comprises full and discretionary control ofmoney and credit without having at its disposal alarmsignals which are objective, promptly working andefficient. Groping more or less in the dark, itfollows, for comprehensible reasons, the course ofinflation as that of the least resistance which, if itis an error, always seems immensely preferable to whatis vaguely dreaded as "deflation."

The second reason is that the Office Economy needsconstant inflationary pressure which is to compensatefor the paralyzing effects of central planning and en­cumbering controls. Here is to be found the solutionof the mystery why the machinery of the nationaleconomy goes on at all under central planning. Thetruth is that the inefficiency of the collectivist sys­tem is largely concealed by the effects of inflation.

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A third reason is that, under a collectivistsystem, the claims on the public budget will be suchthat the budget deficit tends to become a chronicailment or that, if a balance is achieved for sometime, it is largely based on an inflated nationalincome which makes an otherwise unbearable tax burdenjust bearable. Following the interesting suggestionswhich have been made by Colin Clark, we may consider italmost an axiom that if the quota of the nationalincome claimed by the state reaches 25% (as it doestoday in Great Britain and many other countries) thetax burden involved cannot be supported, in the longrun, without the value of money giving way under such astrain.(10) In other words: such tax burdens generateinflationary pressure.

The most disquieting aspect of this inflationarypressure is that it tends to be constant, perpetuatingthereby also the policy of repressing this inflation bycollectivist controls. Since it is collectivism itselfwhich is the main reason for this constant inflationarypressure the vicious circle is thus complete.

Here we have to remember a particular reason ofthis constant inflationary pressure under collectivism.It is the wellknown fact that all these more or lesscollectivist systems are committed to that definitepolicy which is called "full employment." In this asin all other aspects, they follow the example ofNational-socialist Germany where "full employment" hadbeen the main agent in making the economic system evermore collectivist. It seems indispensable, at thisjuncture, to say a few words on this concept and thepolicies inspired by it. As those will know who evercame across my own writings of the early thirties (mybook "Crises and Cycles," my contribution to theCassel-Festschrift and my article in the "EconomicJournal," September, 1933), I have been one of those

(10) Colin Clark, Public Finance and Changes inValue of Money, Economic Journal, December, 1945, andhis recent article "Is Britain Heading for a BigInflation?," The Manchester Guardian, September 18,1951. Roepke's "quota" is more commonly referred to as"government spending as a percentage of the nationalincome" (ed.).

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who at the very depth of the Great Depression,advocated a bold policy of credit expansion in order toovercome what I then proposed to call the "secondarydepression" with its mass unemployment and its downwardspiral of prices, wages, and production. But to workwith the concept of "full employment" now and assomething of permanent value seems to me a gross andextremely dangerous misunderstanding, and it is mostunfortunate that, some time ago, the Secretariat of theUnited Nations lent its authority (whatever this is) tothe report of so-called experts on "Full Employment"which is so full of fantastic ideas and recommendationsas to sound at times almost like a parody. The simplestarting point of "full employment" pOlicies today isthe idea that practically every kind of unemployment iscaused by what is called a lack of "effective demand"so that all we have to do is to fill this gap all thetime by additional money and credit, either forinvestments or for consumption or for both. This isnot the moment to analyze this post-Keynesian doctrinein all its aspects and to expose its fallacies. Themain point is: It is simply not true that everyunemployment is caused by a general disturbance of themonetary circulation (deflation) and therefore capableof being cured by filling the gap. This occurs muchmore rarely than we think after the experience of theGreat Depression. There will always be some amount ofunemployment due to causes which have nothing to dowith money: people doing the wrong things, or workingwith the wrong methods or at the wrong places, orpeople being unemployed as a consequence of wagepolicies by which organized labour "prices itself outof the market" or as the effect of internationaldisturbances and what not. It is quite true that, inthe short run, practically every unemployment, howevercaused, can be removed by increasing "effectivedemand," but--except in periods of prolonged depressionwith a general high degree of "unused capacities"--todo this means simply inflation. To recommend this"full employment at whatever cost" is exactly what theKeynesian doctrine has degenerated to nowadays. Andthe policy to which so many countries are now committedcorresponds to this simple theory. But a policy whichsees in any amount of unemployment a suffficientreason for increasing "effective demand" is necessarilytantamount to a policy of constant inflationarypressure. And since now most governments have learntfrom Hitler how to repress inflation by collectivist

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controls, "full employment" is responsible for most ofthe collectivist policies today--with the consequencesfor international trade which I still have to consider.

The present policy of "full employment" as one ofconstant inflationary pressure cannot be quiteunderstood without reference to the pressure of thetrade-unions for ever higher wages which are notjustified by a corresponding increase of productivity.That was also the way in which the late ProfessorSchumpeter saw the problem as he explained it in hispaper "The March into Socialism" (American EconomicReview, May, 1950) which he wrote towards the end ofhis days and which I recommend very highly in this con­nection. The disquieting fact is, indeed, that thetrade-union pressure for excessive wages tends tocreate unemployment eyen in times of prosperity, butsince the governments in question are committed to"full employment" there is a parallel continuoustendency to remove this unemployment by monetarymeasures. The entire economic policy of such countriesthreatens more and more to develop into a continouscompetition between a wage policy which seeks to pushup wages .lbove ':he equIJ ibrium /)f th~ leD0ur nlarkF".t(and which, beca 113e of ".F1II empl~1men-' conjiti0~js, ;.;bound to be successful) and a credit policy which, tocounteract the effects of this wage policy, seeks toincrease employment. Once more, then, we face theprospect of constant inflationary pressure which givesrise to corresponding collectivist repression.

This danger appears so great that it seems highlyappropriate to mobilize all available counter-forcesand to remember that it is time-honoured wisdom to putall possible brakes on the money-issuing power ofgovernments. It is high time to correct a wrongperspective in this matter. Indeed, the memory of thedisastrous deflation of the early thirties still makesmany people incapable of seeing things in their rightproportions. The shock of that distant experience hasbeen so great that they still fail to realize that,throughout history, the danger of inflation has alwaysbeen infinitely greater than that of deflation.Inflation is an ever present temptation and, under allcircumstances, the line of least resistance. There isno organized lobby to oppose it. Its beginningsproduce agreeable effects while it takes a long timeuntil everybody recognizes it as a social catastrophe,

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whereas deflation is a bitter experience from the verybeginning. A government resourceful and unscrupulousenough to make, by appropriate theories, inflationfairly acceptable and to dispel possible fears willrarely be unpopular. As far as I know, all statesmenresponsible for a major inflation have peacefully diedin their beds whereas, in our times, there is at leastone (Rassin in Czechoslovakia after the first WorldWar) who has been murdered because he was heldresponsible for a policy of deflation. Even whenfinally the evil consequences of inflation--the drugwhich is so stimulating in the beginning--becomeapparent the government will always be able to postponethe day of reckoning by finding pretexts and scapegoatslike "profiteers," "speculators" or people unpatrioticenough to withdraw their capital from such a country,and it will be quick to learn from totalitariangovernments the trick of "repressed inflation."

The secular trend is indeed towards inflation andnot towards deflation. During the last centuries,there never was a safer bet than this that, ageneration hence, a gold piece would preserve itspurchasing power while a note would have lost aconsiderable part of it. Nev~r has -a 90verRment~1en 0 unlimited power over monei without misusing i ,r~

fo urpose tlon. eprive governmentsf this power and to make money independent of their

arbitrary decisions or lack of insight has been one ofthe main functions of the gold standard, its otherfunction being to make possible--by the same"depolitization" of money--a truly internationalmonetary system. Never was this "depolitization" ofmoney more essential than in our age of mass democracywhich, with all its sociological forces and ideologies,may be called a vast machinery for producing inflation.

After the universal downfall of the gold standard,there has been left in many countries a last strongcounterweight against the unlimited power ofgovernments over money. It was the--more or lessrelative--independence of central banks. Even thislast obstacle against the unlimited power ofgovernments ove·r money, however, seems to be doomed inour time because it is regarded as an intolerableinfringement of democracy. Independent central banksappear to our modern Jacobins as so many Bastilleswhich must be razed to the ground.

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That leads us to the most important point I haveto make in this context. If inflation is always alurking danger it is so especially in our time ofcollectivist and inflationist ideologies and policies.For more than twenty years now, we have been discus­sing everywhere the general issues of the free economyand of collectivism, and this discussion will go on asfiercely as ever. There is one point, however, whichnow may be regarded as being fairly settled byexperience. It is now obvious--and that was also theopinion of Professor Schumpeter--that the final resultsof all these pOlicies of "full employment," of"planning," of "cheap money," of the "welfare state,"of "functional finance," of the "maximum pressure oftaxation" and so on has been a steadily progressinginflation which has been interrupted only by occasionalrecessions, partial adjustments--and unjustifiedwarnings against deflation.

We had better face, indeed, the hard fact that thewhole world is saddled with a chronic problem ofinflation. After the outbreak of the Korean crisis, ithas only taken on an acute and particularly dangerousform, seemingly rebellious to milder treatments, nowthat on the previous and chronic "democratic andsocial" inflation there has been grafted a dose ofoldfashioned "military" inflation. It was thecombination of both which made the hitherto concealeddanger open to all eyes.

To see this is a very important point in thegeneral debate for and against the free economy (marketeconomy) • For we recognize now that to fight for afree market economy not only means to fight for thefreedom of markets, but also against chronic inflationand the erosion of the purchasing-power of money whichit involves. Until quite recently, I fear, the strongbut subtle reasons were hardly understood which explainwhy the collectivist destruction of the market economyin our time is necessarily connected with a process ofconstant inflationary pressure. Today, the fact itselfat least should be obvious to everyone. The advocatesof the market economy cannot be fully understood if itis overlooked that their determined resistance tocollectivism comprises an equally determined resistanceto inflationism. The one resistance is as determinedas the other because the one danger is as great as theother. That, however, is so because the source of thedanger is the same here as well as there.

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Inflation is as old as the power of governmentsover money, and as old as inflation are also thepatched-up theories whose aim it is to conceal or tojustify it. But there is something new in our age.Formerly, inflation was at least something which wasdone with a bad conscience, and the theories with whichit was draped were, after all, like hypocrisy, theproverbial tribute which vice pays to virtue. All thathas been changed now. The governments and socialgroups which now cooperate to bring about the"perpetual inflationary pressure" (of which ProfessorSchumpeter spoke) are able to work with theories ofacademic respectability which not only give them backtheir good conscience but seem to turn sin intopositive virtue. As a last line of resistance and as asort of reassurance against the final consequences ofmonetary and fiscal recklessness governments bent uponinflation can always fall back on the device of"repressed inflation" with its collectivist controls.As long as possible, inflation will be denied as anoptical illusion and the very term will be namedinappropriate. But when this line can no longer betaken because the inflationary pressure has become tooobvious there is always time to apply the panacea ofrepressed inflation. In other words: in the field oftheory, inflation will be argued away and in practiceforbidden.

4. The issue of international integration

After having considered the problem of the twotypes of economic order under the various aspects ofliberty, dispersal of social power, and efficiency(including that of monetary order), we arrive finallyat the issue of international integration which,curiously enough, is both the least explored and yet asimportant as any. If the collectivist order is notcompatible with liberty, if it leads to an intolerableconcentration of power, and if it sadly lacks inefficiency--is it an agent of international integration

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or disintegration. (11)

Here again, we are able to begin with statingsomething which is hardly controversial any longer. Itis both obvious and proved by experience that even amild and incomplete collectivist system, provided thatit is organized on a national scale and within theborders of a single national state, must inevitablylead to international economic disintegration in thestrictly technical sense of dissolution of theinternational economic order by inconvertibility ofcurrencies and bilateralism. National collectivismmakes it indispensable to supplement the internalsystem of planning by all those well-known measures ofexternal control which culminate in exchange control.Exchange control is not a sufficient but a necessarycondition of collectivism; it is its real key-stonewithout which the whole structure is bound tocollapse. There is no measure, however, whichinterferes more radically with international economicintegration than exchange control. It is the realPandora's box from which come all the calamities ofinternational economic disorder of today.

No doubt, then, that national collectivism (in allits grades and varieties) has proved to be realdynamite for international trade, and nowhere is itseffect more devastating than in Europe. As far as Isee, few socialists still deny that collectivism ascarried through on the national scale has led us intoan impasse. Where is the way out?

There are only two possibilities. Either weovercome national collectivism by organizingcollectivism on an international scale--or we restorethe market economy.

(11) For a fuller explanation of my views, I referto my articles: "The Economic Integration of Europe,"Measures (Chicago), 1950, no. 4, and "European EconomicIntegration," Time & Tide (London), 2 and 9 June, 1951.

A weIll-known publication in this field is: L.Robbins, Economic Planning and International Order,London: MacMillan, 1937 (ed.).

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Now the important point is that internationalcollectivism is neither practicable nor desirable. Tounderstand this we must first remember that to replacethe market economy and the price mechanism by planningmeans to make the economic process government­controlled like the army. It involves the thorough"politicalization" of economic life which now becomesentirely dependent on the administration which givesits orders and enforces them by its penal sanctions.International collectivism (planning) , therefore,supposes an international State equipped with all theprerogatives and sovereign powers of the nationalStates which it supersedes. To merge national systemsof planning is to merge the Governments on which theywere depending into an international super-State.

European economic integration--to takeimportant example--by. he collect~i~vA'~__~~planning, theref~re, requlres a realGovernment which does with the Europeans,their nationality, exactly what the national planninadministrations have been doing so far with theirespective subjects. To visualize such a politicalunion would be difficult at any time. What makes thprospect cloud-cuckooland in our case, however, is thvery fact that this super-State would be equipped witthe same degree of power and the centralization whichplanned economic system requires. It is, to say theleast, most 9nlikely that, short of impending or actualwar, such a State will ever come into existence as avoluntary act of free nations.

That this reasoning is correct is implicitlyadmitted by all Socialists who champion a EuropeanFede as nly feasible form of Euro eanG~rnment At the sam ,t ey cannot e unaware~ the fact (which is obvious, at least, to mostsubjects of the Swiss Federation) that collectivistplanning and federalism a~compatible with eachother. We conclude then: the very fact which wouldmake a European super-State strictly necessary--apolicy of international planning--makes it nothingshort of chimerical. That is what the Marshall Planadministration found out by experiment and it would beeasy to show that the never ending difficulties ofBenelux tell very much the same story.

But even if the task were less impracticable we

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should realize that the collectivist method of bringingabout the economic integration of (let us say) Europewould not be desirable. Besides the generalinconveniences of collectivism, we must realize thatcollectivist integration of Europe would be entirelydifferent from liberal integration, because it would bebought at the cost of less integration with the rest ofthe world. It is only logical to expect that all theconsequences of national collectivism--isolation,dislocation of trade channels, autarkic tendencies,disequilibrium, disorder of international payments-­would re-appear then in the relations between Europeand the rest of the world. If there is generalagreement that national planning causes the gravestdisturbances of international trade and internationalpayments, Continental planning would mean that thosedisturbances would only be repeated on a highergeographical level. And every step in this directionwould be tantamount to adding one further stone to theconstruction of a European "Grossraum" (superexpanse)in the sinister sense of the term.

There is, then, no getting away from the fact thatthe impasse brought about by national collectivism withits waste, autarky, and international disintegrationcannot be overcome by making collectivisminternational. There only remains, therefore, theother course which means to dismantle the nationalsystems of planning, autarky and inflationary pressureand to restore, in their essentials, the marketeconomy and the working of the price mechanism,nationally as well as internationally.

The fourth stage of the discussion: The "Third Way."

We are now at the end of our discussion of therival systems of economic order under the aspect of thefour capital issues of liberty, dispersal of power,efficiency and international integration. Althoughthe final decision as to what system we should preferwill be a political one, our analysis has at least themerit of enabling us to make this choice as rational aspossible and to see clearly what is involved. But, forthis final judgment, a vital element would be lackingwithout a full discussion of the imperfections of themarket economy itself and the possibilities to correctthem within the framework of this system.

45

This question of the reform of the market economyis the subject of a vast and wide-ranged discussionwhich has developed during the last twenty yearsbetween economists and sociologists of variouscountries, and this discussion still goes on. The aimof these endeavours is to elaborate a well-balanced andundogmatic but humane programme of economic and socialreform which reconciles the immense advantages of thefree market economy with the claims of social justice,stability, dispersal of power, fairness and theconditions of life and work which are proper to Man.In the course of this discussion, the old controversybetween Socialism and "Capitalism" has lost most of itsmeaning. The real issue now is whether it may bepossible to preserve (or to restore) a society of FreeMen by developing, in the West, a workable type ofmarket economy which is acceptable and politicallypossible because it gives a fairly satisfactory answerto the challenging problem of the fate of man in ourproletarianized, urbanized, industrialized and highlycentralized society. It is this vast programme whichmy friends and I have in mind when we speak of the"Third Way." It is a difficult task which summons allthe intelligence, human understanding, goodwill andenergy which is available in the present world. If wefail in this, I see no escape from collectivism andtyranny. For this is the real alternative to serfdom.How crushing the weight of responsibility, howmomentous this hour in the world's history, but alsohow inspiring the very difficulty and importance ofthe task and how indispensable it is to view it fromfar beyond the level of party strife and group interestand under a wider angle than that· of narrowideologies--all that I have never felt more intenselythan at this place and hour when I had theunforgettable privilege to speak of one of the mostcrucial issues of our civilization on the very spotwhere it began six thousand years ago.

Welfare, Freedom and Inflation

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I

FACING THE FUTURE

Let the reader throw his mind back to hischildhood, and recall one of those mythical heroes whohas set his mind on carrying out, against death and thedevil, the most difficult and seemingly impossible oftasks. I do not think that any such protagonist couldhave been faced with a more appropriate task than thatwhich I have voluntarily assumed in agreeing to writethis essay. I have only done so after deep and soul­searching thought. Far from giving way to what somewill doubtless think a frivolity ill-suited to my age,I have, rather, yielded to an overpowering feeling thatit is something that must be done, however unrewardingit may be. My purpose is to present an opinion,carefully substantiated and, I hope, unequivocal, on amatter which uniquely affects the interests, andarouses the passions, of everyone living in the freeworld and which has, at the same time, become so muchthe preserve of specialists that it very nearly eludesall attempts of those who do not enjoy specialistknowledge to grasp it. There can be few, if any,amongst my readers whose interests, passions and, insome cases, specialist knowledge are not engaged inthis problem--which may best be described as how tomake provision against the vicissitudes of life in asociety like ours which we still call--or still like tocall--free. I fear I am involving myself in asituation very much like that of a Daniel in a lion'sden of the committed, and I have enough experience toknow what the devoted are capable of when they comeface-to-face with a firm opinion solidly opposed totheir own--one which they find both unanswerable andirremovable.

Be that as it may, I am quite certain that theanalysis on which I am embarking will be of real use,not only to myself, but to my readers as well. Mypurpose is to help, with the impartiality of anoncommitted person to direct attention to the mattersof principle involved, to bring down, as I sincerely

59

hope, the temperature of the discussion to a reasonablelevel and to impart at least some clarity andprecision to arguments, which, whatever else one maysay about them, are not likely to be settled in theimmediate future.

To forearm ourselves in advance against thechances and changes of life--both those which arecalculable, and therefore insurable, and those whichare likely to come without warning out of the blue-­to provide ourselves with a cushion against adversity,in short, to make provision for our future, is achallenge to which everyone of us has to respond. Theimpulse to meet this challenge is "deeply rooted inevery human being who has reached the stage of moralmaturity, and all efforts to eradicate it will destroysomething which is an integral part of the humancharacter. It is, in any case, a reassuring fact thatsuch eradication requires considerable effort, andthat, however successful it may appear to have been, italways leaves odd ends of roots around which are sureto sprout again before very long.

Nowadays, all provision against the risks inherentin living operates within a closely knit society whichis characterised by a highly developed division oflabour and, therefore, by a degree of interdependenceand general entanglement of interests such as no otherperiod in history has known. The result is, as in allother fields of social development, aninstitutionalization and collective organizationthrough which provision against possible misfortune inthe future is shifted further and further away from theindividual and closer and closer to the public sphereof action. The ripe--some would say overripe, if notalready rotten--fruit of this process is what is knownas the Welfare State.

AN IMMEDIATE DANGER

I do not think it would be wrong to say that thisterm, the Welfare State, arouses rather mixed feelingsin most of those who hear it. To put it as mildly aspossible, people have been getting more and moreworried over the problem for the last ten years or so.It is a highly involved problem which concerns everyone of us, and a fair and informed judgment can beneither enthusiastically approving nor sourly

51

disapproving. Everybody knows that there are largesections of the population which cannot be lefthelplessly exposed to events that may plunge them intowholly undeserved distress, and that this is not simplya matter of political calculation, but a human realitywith a moral justification. Where individuals orgroups are unable to shoulder the burden of providingfor themselves, society must provide for them.Nevertheless, accepting that as true, the experiencegathered in a number of countries since the war hasmade it clear that the modern conception of what iscalled the Welfare State carries with it a notaltogether unwarranted suggestion of possible misuseand dangerous excess. The more scientific enquirerquickly senses the serious threat to the stability ofthe economy, the state and society as a whole, and alsoto the freedom, responsibility and spontaneity of humanrelations. The desire for security, which is perfectlynatural and legitimate in itself, can easily become anobsession. Those who give in to it, consciously orunconsciously, will find that, in the long run, itmeans 'g i vi ng up freedom and human d ign i ty , and theywill have lost their security as well, for itsinevitable result is a constant erosion of the value ofmoney. security is one of those things which recedefarther and farther into the distance the moredesperately and passionately they are pursued.

This is no mere fantasy born of an ingrainedpeSSlmlsm; it is a real and immediate danger. Wecannot hope to counter it unless we put a stop to ourpresent drift and turn to face it, armed with a clearand discerning judgment.

What then is involved?

A PIED PIPER SLOGAN

Let us begin with the seductive slogan which hascaused considerable harm allover the world by theconfusion of mind it has brought about. I mean theslogan of "freedom from want," coined by anunparalleled master of attractive formulae, the latePresident of the united States, Franklin D. Roosevelt,and launched as part of a request list of freedoms withwhich everybody is now familiar.

A little thought will show very clearly that this

52

is primarily a demagogic misuse of the word "freedom";for "freedom from want" means nothing more than theabsence of something which is undesirable, not unlike"freedom from pain" or any other unpleasantness we mayconjure up. This purely negative concept cannot beaccepted on an equal footing with positive freedom,which is one of our highest moral concepts withoutwhich genuinely moral conduct, guided by the sense ofduty, would be impossible. An inmate of a prisonenjoys "freedom from want" in its purest form, but hewould feel mocked if we were to praise this as a realfreedom and tell him that others should envy him.Should we not, then, be wary of following the PiedPiper tune of "freedom from want" to the point where wefind ourselves deprived of all genuine freedom andplaced in a situation all too little distinguishablefrom that of real prisoners?

If we look at this slogan more closely, wediscover something strange: what is, in point of fact,meant by "freedom from want" is actually indissolublybound up with compulsion. We are brought to thisconclusion through the following line of thought.

To be in a state of want means to be, for onereason or another, in a situation in which we lack thenecessary means of subsistence and are unable toprovide them by our own efforts, either because we areill, or unemployed, or bankrupt, or temporarily unableto work, or too young, or too old. We can be freedfrom this want only if means are put at our disposalwhich come from somebody else's contribution to theexisting volume of production. In other words, inorder to remedy our distress we have to consume goodsat a time when we are not in a position to contributeto their production.

The most simple and least problematic example ofsuch provision for subsistence in bad times is when weare able, though not at the moment in a position toproduce anything, to consume goods which we haveourselves accumulated during an earlier phase ofproductive effort. But, apart from the obviously veryimportant case of house ownership, which ensures us aroof over our heads in times of distress, theaccumulation of goods against possible want at a laterdate is, neither for the individual nor the nationaleconomy, the normal thing to do. That is not a

53

practical way of taking precautions in a highlycomplicated society like ours. Saving money against arai~y day and then using it up when the rainy dayarrlves, does not mean that we are actually consumingbutter and bacon which were produced at an earlierdate, and stored up somewhere so that they could bedrawn upon in the case of need. On the contrary, ifsuch stores did exist they would be a symptom of aserious disturbance in the routine of economiccirculation. Using up our savings means, normally,that we get our supplies from current production on thestrenght of a title which we have acquired by anearlier productive effort, in witness whereof societyhas equipped us with money. In other words, and in anutshell: in times of distress we live by consumingwhat somebody else is producing for us, whilerestricting his own consumption. This is--subject tocertain qualifications and refinements to be discussedlater on--how real provision is made for the nation asa whole. In the aggregate, it is the contemporarieswho produce both for themselves and for those who arein distress, i.e., those who are for the momentconsumers only, and are not contributing to the processof production.

That, then, in rough outline, is the pattern bywhich, in modern society, future risks are anticipatedand provided against.

The title on the strength of which those indistress are permitted to draw goods from the currentflow of production introduces another question.Provision against future risks can be made in twocompletely different ways, and it is here that we findourselves at the road junction where one of the twoarms of the signpost points in the direction of theWelfare State.

THE ALTERNATIVE TO COMPULSION

Provision against the changes and chances of lifemay be provided either by one's own resources or comefrom outside; that is to say, I can either take my ownprecautions against a rainy day by using my own moneyon my own responsibility, or I can shift this burden onto the shoulders of others. Provision from outside canbe voluntary, if, for instance, I borrow money orappeal to the charity or the clan spirit of my kinsmen

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or of some other group which will, in turn, count on mewhen another of its members finds himself in need ofhelp. Everything else is compulsion, and sincecompulsion is simply the last resort in the absence ofa voluntary response, the conclusion is that compulsoryprovision for others is felt as a burden imposed by thepower of the State, and it is, therefore, very properto speak about "social burdens," as the phrase runs, inthis connection.

Now it is obvious that the slogan which waslaunched by President Roosevelt, and which found aready echo allover the world, the slogan of "freedomfrom want", was not meant to be an appeal to us to showmore foresight in providing for our own life. What itdemands is rather a maximum of provision from outside,based on the coercive powers of the State. If this isso, then "freedom from want"obviously means thatcertain individuals are permitted to consume withoutproducing, while others produce, but are compelled bythe State to refrain from consuming part of what theyhave produced. This is the sober, basic fact whichmust be put into the foreground of our considerations.Three corollaries follow from it.

ROBBING PETER TO PAY PETER

First, it becomes obvious that the very widespreadidea that there is something like a monetary fourthdimension from which the claims for support at times ofgenuine or imagined distress can be satisfied is highlyillusory. Peter can only be given what is taken fromPaul, and if we demand that "the State" should help us,we are asking it to supply us with somebody else'smoney, the fruit of his own efforts or his savings.Looking at it in this way, it becomes quite obviousthat such help cannot really be taken for granted, asthe generosity of the State usually is, for the Stateis actually no~hing more than an intermediary linkbetween those whb are to give and those who take. TheState cannot hand out more than what it has taken fromothers, be it by taxation or by the imposition of otherduties or by the insidious and appallingly unfairmethod of inflation, which is simply a camouflaged

55

taxation of those who have to restrict their spendingbecause their incomes do not rise as fast as the valueof money falls.

It is, thus, only fair that any demand for help,from whatever side it may come--and there are hardlyany groups now which would be ashamed to clamour forit--should be regarded as a strict exception andsubjected to a careful test and a close scrutiny. Onecannot constantly increase the number of those who areto be supported, and thus the total of funds requiredfor that purpose, without reaching, sooner or later, apoint where the resources of those who have to foot thebill without getting any return will become too slim topay for all of it. Thereafter, the whole systemgradually comes to be run in such a way that the masseswho take from the State in one form or another are atthe same time requested to give to the State in oneform or another. A policy of robbing Peter to pay Paulis in itself far from commendable, but when itdegenerates to the point where it involves taking fromalmost everybody so as to give to almost everybody, andwhen as a result, it becomes increasingly difficultfor the individual to find out whether this strangegame of give and take leaves -him with a net surplus ora net deficit, it amounts merely to a senseless pumpingof money backwards and forwards within society.

Now this point has, in fact, been reached someconsiderable time ago in those countries, like Britainand the Scandinavian States, which may be referred toas the models of the modern Welfare State. Well­informed economists, of whom I will only mention Mr.Colin Clark (Welfare and Taxation, 1954), have becomemore and more outspoken about the Welfare Stateillusion which is thus revealed. To those observers,it has become increasingly obvious that provision forthe masses, enforced by the coercive powers of theState, has long ceased to be paid out of the ruthlesslysqueezed higher incomes of the wealthy but has to bepaid, in the main, by the masses themselves. Thisagain means simply that their money is juggled fromtheir right-hand into their left-hand pockets. Apartfrom becoming increasingly nonsensical, this practiceis also becoming increasingly dangerous, because, quiteapart from its dampening effect on individual effortand responsibility, it involves the expenditure oflarge sums by a vast public machine constantly growing

56

in size and power; its price is a dull, grey society,in which public spirit, voluntary serVlce to thecommunity, creative leisure, brotherliness, generosityand the true sense of belonging to a human family areall smothered by resentment in the higher and envy inthe lower income groups. What is left is the pumpingsystem of Leviathan, the modern, insatiable State. TheWelfare State can thus advance to the point--and hasdone so in more than one country--where its pumpingsystem is an illusion for all, a purpose in itself,which suggests the heretical question whether everybodywould not be rather better off if the Welfare Statewere to be reduced to its indispensable minimum ofoutside provision, and where the money which could besaved in this way were to be left to the individuals tomake provision for themselves in their own way, or tojoin voluntary arrangements by groups.

PROGRESS UP OR PROGRESS DOWN?

This leads us to the second point in ourexamination into possible forms of provision againstfuture misfortune. If it is accepted that the modernWelfare State is nothing but an ever-expanding systemof publicly organised compulsory provision, then itfollows that it enters into competition with otherforms of provision available in a free society:personal provision, by saving and insurance, orvoluntary collective provision by families and groups.The more compulsory provision encroaches upon the otherforms, the less room will be left for individual andfamily provision, as it absorbs resources which mightbe devoted to this purpose and at the same timethreatens to paralyse the will towards individualprovision and for voluntary mutual assistance. Worsestill, it is impossible to stop or turn back on thisroad once one has advanced beyond a certain point,because the weakening of self-reliance and mutualassistance automatically gives rise to increasingpressure for further public provision for the masses,which, in its turn, still further paralyses individualprovision and voluntary mutual assistance.

This should be a sobering thought; no effortshould be spared to avoid reaching this point of noreturn. Where it has already been reached, noexpedient should be left untried to reduce the inflatedWelfare State to manageable proportions and to widen

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the field for individual provision and voluntary mutualassistance. No further argument is needed to explainwhy this must be one of the first and foremost tasks ofour time, if we are to enjoy the benefits of a soundand well-balanced society, for here we stand at acrossroads where one way leads to a free and the otherto a pre-collectivist way of life. The increase in theprosperity of the masses and in the incomes of wage andsalary earners is a highly welcome helping hand in sucha transition, in contrast to the early phases ofindustrialization when large sectors of the populationwere suddenly reduced to the status of proletariansthrough the decay of the old paternalistic system ofsociety and when there was, therefore, a tremendousneed for assistance and welfare relief too vast to bedealt with adequately except through the State.

If we look at what has happened from this point ofview, we find that it is quite wrong to regard themodern Welfare State with its mechanical and compulsorymass relief as a sign of progress, or as a response toa genuine need of our time. The precise opposite turnsout to be true, if we cast our minds back over asufficiently long period and avoid the mistake ofconcentrating on the distress wrought by the war andits consequences. What is today hailed as progress canreally only'be justified by the special conditions of aphase of economic and social transition which existedfor a short time but which we are about to leave behindus. It is all too often forgotten that anyone who isserious about human dignity should measure progressless by what the state does for the masses than by thedegree to which the masses can themselves solve theproblem of their rainy days out of their own resourcesand on their own responsibility. This, and only this,is worthy of free and grown-up persons, certainly notconstant reliance on the State for an assistance which,as we have seen, can, in the last analysis, come onlyout of the pockets of the taxpayers themselves or froman enforced reduction of the standard of living ofthose whom inflation really hits. Alternatively, is itreally progress if we classify more and more people aseconomic wards to be looked after by that colossalguardian, "The state"? Would it not be much moreprogressive if more and more members of the broadmasses were permitted to reach the status of economic"grown-ups", thanks to rising incomes resulting fromtheir own labour?

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It is a separate question as to how far compulsoryWelfare State provision should actually go. But itwould be a considerable progress in the right directionif we were all to decide that the Welfare State shouldno longer be glorified as an ideal but regarded, atbest, as a necessary evil, an emergency arrangementwhich was indispensable as long as the great masseswere too poor, and too depressed by their proletarianstatus, to help themselves, and too sharply cut offfrom the old social organism to rely on the solidarityof real small communities. This emergency arrangementcan be dispensed with to the degree to which we areable to overcome the infamous results of theproleterianisation and uprooting of the masses, whichstemmed from the industrial revolution. Mass relieforganised by the State is the crutch of a society whichis crippled by the proletarian status of many of itsmembers and our prime purpose should be to help thepatient to get well enough to discard his crutches.This would be real progress, and the yardstick of ouraccomplishment will be how far we succeed in wideningthe field of individual provision and mutual assistancewhile narrowing down the field of compulsory publicrelief. To that same degree we will overcome theproletarian form of existence and the mass character ofsociety, and not the least of our achievements will beour triumph over the very real danger that man may bereduced to the status of an obedient domesticatedanimal in the State's big stables, crammed togetherwith other similar animals, all of them more or lesswell-fed by the patron.

CERTAIN STATE MEASURES ESSENTIALWITHIN LIMITS

This, then, will give us a clear indication whichway to go, and the way is clearly towards less, notmore, Welfare State, and more, not less, individualself-reliance and voluntary mutual assistance. But,and this leads me to the last of my three points: itis, of course, perfectly clear that the problem ofprovision against the vicissitudes of life cannot be:solved in our time without a minimum of compulsory~rovision by the State. Old-age pensions, sicknessinsurance, unemployment relief, all those institutionswhich are as familiar to us as railway stations andpost offices must of course keep their place in a soundsystem of provision in a free society, although one

S9

cannot say they are exactly heartwarming. It is nottheir necessity which seems doubtful, only theirdegree, their organization and the spirit in which theyare run.

The degree, the organisation and the spirit ofthis minimum of compulsory public provision will in thefizst instance have to be determined by reference totheir purpose. This is the point where thephilosophers disagree: personalism{l) versuscollectivism, freedom versus concentration of power,spontaneity versus super-organization, humanism versuswelfare technique, the desire of modern "mass-produced"men to shirk their own responsibility, to evadedecisions, and' to find escape in state-guaranteedsecurity versus the ideal of an individual life and anindividual responsibility. But all those who haveclearly recognized the dangers of the modern WelfareState, which can be no more than hinted at here, andabout which more will be said in the next essay, willagree with me if I say that the purpose of socialinstitutions cannot reasonably be to misuse the fiscalpower of the State in order to build up a system ofgeneral provision for all State's subjects or for anall-encompassing organisation of social security.Still less should the problem of providing for the weakand helpless be used as an excuse for levelling downall incomes and all property ownership. That would bea real revolution and it would be hard to exaggeratethe dark side of its inevitable consequences, whichhave already become clear enough and in an appallingmanner, in those countries which have ventured outtoo far in this direction.

If we want .to avoid all this, we must limit ourpurpose to giving the weak and helpless somet~ing tohold on to, to putting a floor under their feet whichwill prevent their falling into bitter distress andpoverty; no less, no more. The help e~tendedin thisway should be simply a supplement made avai1ab1e whenindividual and group provision are inadequate; itshould not be looked on as the normal method of facing

(1) "Individualism" is probably a more appropriateterm in this context (ed.).

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misfortunes. This applies in par,ticular to the whollylegitimate demand for old age support and for relieffor those who become prematurely unable to work owingto physical disability, and the only dignified formsuch provision can take is a genuine social insurance,which does not depend exclusively on State subsidiesand which sweetens compulsion by the knowledge of theindividual concerned that he has earned his pension byhis own contributions and in his own right.

One of the tests by which the rightness of themeasure can be judged is whether such a satisfaction ofminimum security requirements does or does not weakenthe spirit of voluntary self-help and mutual groupassistance, by which the bare minimum is supplemented.It has been learned from experience gathered inSwitzerland and in the United States, where despite, orperhaps because of, a comprehensive old-age insurancesystem, the total of savings and of life insurance hasappreciably increased, that such a gratifying and en­couraging development is ihdeed possible, whereas themodel countries of the extreme Welfare States--Britainand the Scandinavian countries--provide discouragingcounter-examples--not without serious consequences forthe soundness and balance of their national economies.A good survey of the respective contributions ofprivate insurance and social insurance in the UnitedStates is provided by Chester C. Nash: TheContribution of Life Insurance to Social Security inthe United States (International Labour Review, July1955). The corresponding figures for Switzerland aregiven by Emile Marchand: The Evolution of Insurance inSwitzerland (Journal des Associations Patronales,1956) •

SOME ILLUSTRATIONS

An illuminating illustration is provided by thefact that in Switzerland the total of insurancecompanies' capital and savings rose from 11.5 billions.frs. in 1946 (when the federal system of old-agepensions was introduced) to 16.3 billion s.frs. in1954. Thus, individual protection through savingincreased even more than through state insurance(according to the Statistical Yearbook of Switzerland).The statistics are rather incomplete and do not,therefore, provide the full picture, as neither savingfor the acquisition of securities nor assistance by

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private enterprises are included: they are,unfortunately, unascertainable. A further illustrationwhich de-serves to be mentioned is that in 1953, thelast year for which these figures have been pUblished,payments by insurance companies exceeded those by thefederal system of old-age pensions by 100 millions.frs. An authoritative American comment says: "Thegovernmental old-age pension organisation has created asecurity floor below which no worker is permitted todrop. Additional provision for old age has been madeon a considerable scale by the existing facilities ofprivate insurance. The introduction of publicprovision has not completely turned the masses awayfrom private insurance; on the contrary, it has helpedto increase the number of those who turn to privateinsurance in order to broaden the basis of existencewhich has been created by such public arrangements."(2)

It is only if we are mindful that there arenatural limits to the Welfare State which cannot beexceeded without a corresponding penalty, and it isonly if we reduce its scope, where it is excessive, tothe proportions which correspond to its reasonablepurposes, that we shall be able to steer clear of theultimate extreme danger which threatens to killeverything, including our efforts to expand the sphereof individual provision by saving and insurance. Weall know what this danger is. The whole world isalready in its grip; it is the progressive erosion ofthe value of money by creeping inflation.

It is because we have allowed the Welfare State toexceed its proper bounds that we now find ourselvessubjected at an increasingly alarming rate to thechronic disease of our currencies. This has come aboutin several ways, by inflationary expansion ofgovernment spending as well as by the paralysis ofsaving. But in having this effect, the Welfare Statebecomes self-defeating, and what has been hailed as agreat social measure of progress will in the end provethe most damaging social experiment one can imagine.

(2) Nash, The Contribution of ••• p. 4 et seq.

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A QUESTION OF SOCIAL PHILOSOPHY

The obvious conclusion of all these considerationsis that the problem of provision against thevicissitudes of life in a free society is not in thefirst instance a technical question of socialadministration or mass relief, let alone a question ofpolitical opportunism; it is rather a problem of socialphilosophy. In order that we may think constructivelyabout it, we must begin with a clear idea of what webelieve to be a sound society; only then will we knowhow to distribute the weight on the scales, how far toencourage the strength, responsibility and savingspirit of the individual and the natural solidarity ofsmall communities, with the family first and foremost,or alternatively how far to encourage the alreadyalmost irresistible drift towards collectivism, stateomnipotence, machine-like organisation and thereduction of human beings to the status of minors. Allthis is being brought about with the best intentionsisometimes under the flag of "solidarity of thegenerations", or even 'solidarity of the living", andit sounds all very attractive; all the same it hasneven been sufficiently thought out in the light ofsocial philosophy. We must also realise that we haveto choose, in the end, between the individual and thefamily on the one hand and collectivism on the otheror, to put it quite bluntly, between the social climateof freedom and its exact opposite. Whoever thinks thisis a mere twisting of words has not understood what isat stake today.

There are two points we should not overlook. Oneis the fact that the Welfare State contains nothing initself which would set a limit to its own activities.It has on the contrary the opposite and very strongtendency towards further and further expansion. Thusit is urgently necessary that the appropriate limits beset from outside. This continuing expansion of theWelfare State, the tendency to cover more and morepotential insecurity, to increase its benefits, andwith them also the burdens it imposes, is highlydangerous, because expansion is easy and tempting,while any going back on a measure which is laterrevealed as ill-advised is difficult and may well provepolitically impossible. One would scarcely imaginethat Britain would have instituted her National HealthService in its present form had it been known

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beforehand what would happen to it, or even if certainimportant aspects of it had been gone into thoroughlybeforehand, questions which today appear elementary. Aleading British economist says this of the NationalHealth Service: "The important economic question aboutthat scheme was this: if there is a service the demandfor which at zero price is almost infinitely great, ifno steps are taken to increase the supply, if the costcurve is rising rapidly, if every citizen is guaranteedby law the best possible medical service and if thereis no obvious method of rationing, what will happen? Ido not recall any British economist, before the event,asking these simple questions."(3) It is hardly lessdifficult to say how this risky step could today bereversed, and it seems that all one can do is to put upwith things as they are with as much good grace as pos­sible. Any further step on the road towards thesupport state should, therefore, be taken with theutmost circumspection, with the ideal pattern ofsociety in mind and in the certain knowledge that itcannot be undone any more than the voting age can beraised once it has been reduced.

A SOURCE OF NATIONALISM

The other point which should be given most earnestconsideration is a fact which is too easily blurred bythe social phraseology of our time namely, that outsideprovision by direct or even indirect governmentalcompulsion means that social safeguards are draggedinto the sphere of politics with all the obviousconsequences involved; provision against thevicissitudes of life is placed at the mercy of domesticpolitics and state bureaucracy, with the result thatthe tendency of politics to encroach ever more widelyon the field of social life is steadily encouraged.The result of this is just another paradox to be placedalongside all the others, namely that lip-service tointernationalism is accompanied, in reality, by anincreasing nationalism. Since the national governmentis both the organiser of welfare and the compulsiveagent, the fact that economic and social life becomeobjects of political action means that they become

(3) J.Washington:

Jewkes, in "Economics and Public Policy",1955, p. 96.

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nationalized themselves, which, in its turn, means thatan excessive social integration grows up within theframework of the national state, making all the moredifficult the process of international integration.The more frequently appeals are made to the "solid­arity" of people who share the same passport or thesame national residence, the more they are forced intoa self-supporting, economically isolationist "nationalcommunity", the more complete is the "nationalization"of human beings at the expense both of the freeinternational community of nations and of internationalsolidarity. In the nineteenth century, Renan coinedthe famous definition of a nation as a "perpetualplebiscite", but we are now approaching the day when wecan define it as a pension fund, a compulsory insuranceorganisation with the passport or certificate ofresidence acting as a free insurance policy, as aperpetual income pumping-system. (4) While saving andprivate insurance are forms of provision which belongto the sphere of economics, the market, private law andfreedom, and are not, therefore, confined by nationalboundaries, public provision belongs to the realm ofpolitics, collectivist organisation, public law andcompulsion and, therefore, tends to lock up peoplewithin their national boundaries. Social services,whose backbone is governmental coercion, are by theirnature nationalized services, and social insurance issimply nationalized insurance, barring, of course, theremote possibility of a world state in which Germans,Italians, Ethiopians and people from Argentina are allintegrated into a single world pension fund.

It would be frivolous to disregard all thoseconsiderations, unfamiliar though they may be to some.Understanding of them is necessary if we want to knowprecisely where we are going when we decide upondetails of the technical organisation of social policy.

(4) Ernest Renan (1823- 1 92) French historian andphilosopher. He wrote several influential works suchas "The Life of Jesus" (1863), "The Intellectual andMoral Reform of France (1872) and "The Future ofScience" (1891). The second book cited above containshis political views (ed.).

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While some steps in a rather questionable direction areunavoidable, we should at least take them reluctantlywhen we must and realise that we are putting up with anecessary evil and that the dangers of this road growmore serious with every step we take on it. We shouldbe very clear in our minds about which is the rule andwhich is the exception, which is the sound, normalthing to do and which an unavoidable deviation from it.The rule, the norm, the gladly accepted ideal, if weare serious about the basis of our culture, should beself-reliance and the various forms of voluntary mutualassistance within existing communities; the idealshould be that of a well-run household, an ideal whichwe cannot sacrifice without endangering the very basisof free society and without reducing the differencebetween a Communist society and ours to a meredifference in degree.

IS INDIVIDUAL PROVISION IMPRACTICABLE?

Those who feel unable to advance any argument ofmerit to disprove this decisive conclusion but havelittle inclination to agree with it may now assume theair of superiority which the realist enjoys in dealingwith a fantastic idealist, and claim that self-relianceand spontaneous voluntary mutual assistance just do notwork these days, at least not to the extent which wouldpermit us to reduce compulsory provision to the pointwhere it would be but a supplement to self-help. Herewe meet with a defeatist attitude which masks a certainmeasure of satisfaction. It is, in fact, the kind ofresignation which, while pretending to submit toinescapable facts, contributes itself to the creationof the conditions which are used to justify stateintervention. If it is assumed that, in our time, theproblem of the welfare of the masses cannot be solvedexcept by collective and compulsory arrangements, andthat an expansion of individual provision lies outsidethe bounds of possibility, then the obvious conclusionis that compulsory provision will have to take care ofso much that the masses, burdened by correspondinglyhigh contributions and taxes and unworried about theirfuture, will finally have neither the economic abilitynor the moral readiness to look after themselves. Thusall that need be done is to organize a sufficientlyradical and broad compulsory welfare system to be ableto declare triumphantly that individual provision is atbest a pipe dream. But all this goes to prove merely

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what we know already, namely, that the Welfare State isalways in danger of running into a vicious circle, andof this we should beware.

Some people even go so far as to represent far­reaching individual provision not only as hopeless buteven as undesirable from the point of view of thenational economy. They say that so much saving wouldbe more than our modern monetary system could bear. Wemust avoid a spate of "over-saving," which might plungethe economy into deflation, depression andunemployment. The capital accumulated must be absorbedby investments. And where should these come from? Theanswer is that this argument is an exaggeration ofpopular Keynesianism, and it is only to be regrettedthat we can no longer ask the Insurance Director Keyneshimself what he thinks of this attempt to advance hisideas as an argument against the human effort to securea personal foothold by saving and insurance.

The first point that is overlooked is that ageneral expansion of individual provision presupposeshigh average incomes and that these must come from ahigh level of economic productivity. This again isdependent on a genuine--not an artificial or inflation­ary--economic growth which in its turn relies on highinvestment balanced by genuine saving, if it is to benoninflationary. A rising rate of saving in theprocess of increasing individual provision is, indeed,urgently necessary in order that the high mass income,which alone renders rising savings possible, may bemaintained without resort to an inflationary financingof investment. It is a matter of course that theseadditional investments, which not only balance, butrely on additional savings, would also includeinvestments abroad. Moreover, as I indicated earlier,there is still a wide field in which the question ofthe balance of saving and investment is no problem atall; this is where house ownership is acquired, with orwithout a garden, which represents one of the mostdesirable forms of individual provision. It reallywould not make sense to suggest that this would renderthe equilibrium between saving and investmentproblematic.

Tohighlycould

speak in quiet concrete terms, it would bedesirable if individual provision everywhere

reach the same degree it has attained in

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Switzerland or the United States. But it is clear thathere as well as there, the head-ache to watch out foris inflation, not deflation. Switzerland in particularprovides good evidence against the theory of"oversaving." Certainly she ought to have run into allthe difficulties predicted by the post-Keynesians, asher old age insurance is run according to theprinciple of previous capital accumulation, and herrate of individual provision is high. In fact,however, if the record saving in Switzerland has ledto any problem at all, it is to the fall in interest asa source of income, not investment lagging behindsaving. As saving rises with economic growth, itprovides, at the same time, the basis of further non­inflationary growth.

Non-inflationary, to be sure. This is always thedecisive point. The one thing on which individualprovision by saving and insurance must rely isconfidence that the value of money will remainconstant; where such confidence is weakened, self­reliance will likewise peter out. Where radicalprojects of collective security give further vigorousimpulses to active inflationary tendencies--as ishappening in France today and may happen in Germanytomorrow--they will secure the triumph of compulsoryover individual provision--and at the same time thetriumph of inflation, and through that the disruptionof the free economy and the free society.

I have come to the end of my brief survey,although the subject is far from being exhausted. Butperhaps I may be permitted to say more by referring toa personal experience of my own. Not so long ago, Istood, deeply moved, before one of the mostoverpowerIng of all works of occidental art, thepaintings by Tintoretto on the walls and ceilings ofthe halls in the Scuola di San Rocco at Venice. ThisScuola di San Rocco was one of those ecclesiasticalwelfare societies which in that Adriatic Republic ofmerchants solved the problem of provision for the weakin their own way: without its work Venice could neverhave existed for over a thousand years without arevolution. The unselfishness of that brotherhood wasmatched by that of the artist of whom it is reportedthat he did not ask for any fee for his tremendouswork.

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Let us make the bold assumption that there is,today, an artist of the rank of Tintoretto. Could weimagine a Welfare State office which would have himdecorate its rooms, and could we imagine a Tintorettowho, carried away by his task, would sacrifice himselfto this work, for the greater glory of God, and for thesake of beauty and charity?

Cruel questions.Welfare State.

But then, we have the modern

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II

REFLECTIONS ON THE WELFARE STATE

More than decade ago, a large section of societyturned enthusiastically to the concept of acomprehensive State Welfare Scheme. It was thought atthat time, both by laymen and experts, that after thewar the future would belong to this Welfare State. Infact, people everywhere (particularly in thosecountries which were entirely or preponderantly underSocialist influence) eagerly set to work to create aState which would guarantee security and adjustincomes. Fear of a great wave of post-warunemployment--a fear nourished by false economicpredictions --proved to be a strong driving force. Nocountry was able to escape altogether from theuniversal trend towards the Welfare State. The voicesof the few who criticised and gave warning faded awaywithout echo.

Today, the time should be ripe for drawing up abalance sheet of experiences and opinions, and forposing the question: how has the ideal of the WelfareState vindicated itself? It cannot be doubted that theworking of the modern Welfare State has had, on theaverage, an effect ranging from disillusion anddisappointment to anxiety and bitterness. So it is notto be wondered at that what was an inspiring ideal afew short years ago is now a drab, everyday activity,coming increasingly under the cross-fire of criticism.

CHANGES OF VIEW

Even Lord Beveridge, the originator of the famous"Beveridge Plan", seems to have crossed over into thecamp of the disillusioned sceptics; and ProfessorPigou, who contributed more than anyone else to thetheoretical foundations of the Welfare State, todaypoints out that the Welfare State can become a

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cumulative danger to the productivity of a country. (5)In an article entitled "Welfare and Taxation", whichappeared in 1954, Colin Clark (another notedtheoretician) directs at the general concept of theWelfare State a criticism whose sharpness andradicalism could hardly be exceeded. He demonstratesthat in Great Britain, generally speaking, it would nowbe more profitable for the broad masses to renounce thestate system of social services and to _use thecontributions paid for these services in the form oftaxation, to make, provision for their own future. Inthe "Revue de Paris" some years ago, the eminent Frenchhistorian Pierre Gaxotte applied the same hereticalidea to French conditions. He asked whether anythingwould really be different (except that freedom would besubstituted for compulsion), if the whole socialinsurance system were to be abolished tomorrow andwages increased by the amount of the contributionspreviously paid by employers and employees, with aninvitation to those previously covered by socialinsurance to make their own arrangements thenceforth.

Bertrand de Jouvenel advanced some very sharpcriticisms along the same lines in his essay, "TheEthics of Redistribution" (1951) criticisms which, amere decaded ago, would certainly have fallen on deafears. Even a German Socialist (not one of thestaunchest) recently ventured to remark in the "GermanInquiry" that precisely owing to the development of theWelfare State, the humanization of the State which wasthe noble goal of Pestalozzi is giving way more andmore--even on this side of the Iron Curtain--to adisastrous state-regimentation of humanity.

These are just a few lines of the picture whichemerges today when we attempt to find out how thereality of the modern Welfare State is reflected in theminds of thinking people. If we try to interpret theactual situation, and, in so doing, select from theabove-mentioned criticisms those which appear to be ofuse, a striking contradiction at once becomes apparent.

(5) Diogenes, July 1954.

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On the one hand, it is incontestable thatorganized State aid has its historical origin andpurpose in that period between the old pre-industrialsociety and the highly-developed industrial society oftoday when the outworn social fabric was disintegratingand the individual, released from its bonds, foundhimself a virtually helpless proletarian. Anunforeseen vacuum arose, and with it a need forassistance; only with the greatest difficulty couldthis need have been satisfied without State aid. Onthe other hand, the system of State-organised publicassistance in the modern Welfare, State, with itsrestraints and controls, rapidly becomes redundant;paradoxically at the very time when in the economicallyadvanced countries that interim period has been largelysuperseded, so that the opportunities for voluntaryself-help and group-help have become incomparablybetter.

THE WOODEN LEG

State-organized mass welfare is the "wooden leg"(crutch?, ed.) of a society crippled by itsproletariat. It was an unavoidable expedient, based onthe presumed economic and moral infancy of the classesthat rose out of the disintegration of the old society.To the extent that this phase has been superseded inthe countries that consider themselves advanced--atleast so far as concerns the material position of thewage-earner, who is now able (though not necessarilywilling) to insure himself--the principle of theWelfare State has lost its urgency. Yet it is hard tounderstand why, now that its machinery is less urgentlyrequired, the Welfare State is spreading even furtherafield. An institution which derived its originalpurpose from a purely temporary critical phase ineconomic-social development is now called "progress";it is apparently forgotten that the sensible way tomeasure progress is by the extent to which we canmanage today without that "wooden leg"--without it, andwithout the restraints and controls which areinseparable from it. Is it really progress continuallyto enlarge the circle of those who are to be treated,economically speaking, as infants to be dragooned bythe state for their own good? Or should we not ratherseek to raise up the mass of the people into economicmaturity--to this extent diminishing the scope of theWelfare State instead of increasing it?

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It is only when we realize that the aim of themodern Welfare State diverges widely from the purposeof its precursors that what seemed so hard tounderstand acquires a meaning. There is absolutely nodoubt about it; the Welfare State of our time hasdeveloped, in the majority of countries, not only inits scope and technique, but also in principle --insuch a manner, that something fundamentally new hasarisen. Nothing less than a revolution has takenplace; and more and more people are, it seems,beginning to realise that is a revolution that gnaws atthe very roots of our society.

A REVOLUTIONARY DEVELOPMENT

Many efforts have recently been made to reduce toa short formula this transformation, as fundamental asit is critical, which the Welfare state has undergone.Thus, it has been said that the development of socialpolicy during the last 100 years has passed throughthree major phases. The first was the phase ofindividual assistance, graduated according to actualindividual need; this developed into the phase ofcompulsory national social insurance; and thisculminated finally in the present phase--a generalprovision, aimed at an all-embracing insurance.According to another interpretation, not very differentfrom the first, the original intention was that thewelfare scheme should make itself superfluous anddisappear as quiCkly as possible, i.e., as soon as ithad performed its function. But (according to thisinterpretation) that original intention is beingreplaced by the idea that State aid should become apermanent institution, even though it might operateonly in certain well-defined cases, until finally thenew revolutionary principle should prevail--a principlewhich turns the State into a revenue-pumping station,working day and night, with its tubes, valves, suctionand pressure streams, exactly as it was described byits inventor, Lord Beveridge, more than a decade ago.

Whichever way we look at it, the revolutionarycharacter of this latest phase of development isevident. There is a world of difference between aState which protects unfortunates, as the need arises,from falling below subsistence-level, and a State where(in the name of economic equality, but at the expenseof an increased blunting of individual responsibility)

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a large pa~t of private income is continually being fedinto the pumping station of the Welfare State andredistributed by the State, with considerable wastagein the process. Everything into one pot, everythingout of one pot--this is quite seriously becoming theideal. Out of the old, soundly conservative,philanthropic principle that even the poorest shouldhave as roof over his head, has arisen somethingcompletely different: the all-embracing socializationof income-expenditure, born of the egalitarian andState-deifying theory that every extension of Stateprovision for the masses is a milestone of progress.But as soon as genuine, individual need, assessed ineach particular case, ceases to be the yardstick ofassistance, the poorest and weakest very often come offworst.

This revolutionary character of the modern WelfareState can be detected in every little detail. It givesrise to the unceasing expansion of mass insurance tomore and more classes who would, if left alone, makeprovision for themselves, but who are now placed underState tutelage instead. Equally striking is anotherpeculiarity of the Welfare State, inherent in itsnature. Whereas, as has been said, State aid wasformerly intended to be a subsidiary measure and toguarantee no more than a minimum (being a meresubstitute for self-insurance), State provision is nowbecoming more and more the normal way of satisfyingneeds--very often scarcely concealing its claim toprovide a maximum, even a luxuriant standard of living.

SPECIFIC INSTANCES

Perhaps all this becomes clearer, when we studyspecific instances of the transformation. If we beginwith the field of education, we see that, in the placeof the approved principle of helping gifted students bymeans of scholarships but demanding that other studentspay at least part of the cost of higher education,Great Britain and other countries are increasinglyaccepting the idea of a unified system of Stateeducation, open to everyone free of charge in all itsstages, that is to say, a completely socialized system.The idea that people should normally be expected tomake sacrifices for the education of their childrenhardly dares to raise its head today; though it ispossible that the results of this cultural Jacobinism,

which areresponsibleswing of

becomingfor theopinion

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increasingly apparent, arefact that even in this field aseems to be taking place.

The field of housing is possibly an even more aptsource of illustration, since all countries areconcerned with the way in which the principle of theWelfare State has justified itself in this connection.Out of the time-honoured principle that on the fringeof the housing market there do exist problems where itis only proper that a helping hand (to whoever itmay belong) should be extended, something completelydifferent has developed. (The situation is blamed onthe immediate consequences of the war--but this excusecannot be used indefinitely.) I refer to thedevelopment of a permanent pOlicy of progressivesubsidization of rents, partly at the expense of apolitically weak minority, i.e., the house owners, andpartly at the expense of the tax-payer (who is, ofcourse, largely identical with the subsidized tenant).We have reached a stage when, to many people, it soundsstrange when we ask the question why the earlier ruleno longer holds good; that anyone who can afford tobuy his suit out of his own pocket at the market priceshould also pay an economic price for his lodging. Howdoes it come about that an otherwise perfectlyreasonable citizen, who would be ashamed to let anybodyelse pay for his refrigerator, his motorcycle or hislunch, has come to look on it as his unassailable rightto shift part of the burden of the economic cost of hislodging onto someone else's shoulders? The probableanswer is that he has failed to realise that that iswhat rent-control amounts to.

Let us take, as a further example, the difficultquestion of health insurance. Here, too, it ispossible to trace clearly the passage from the oldsocial pOlicy to the Welfare State conditions of today.The original principle was that the frequentlyintolerable risk of a costly operation and long illnessshould be removed from particularly weak shoulders.But out of this has emerged the socialization of thehealth service (reaching its peak in the BritishNational Health Service), i.e., the exception has beenturned into the rule for almost everybody, andoccasional assistance has been put on a permanentbasis. This means that we are getting further andfurther away from the norm, which was that people who

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are in position to look after themselves in every otherrespect ought also, in principle, to include incidenceof sickness in their private budget, possibly byavailing themselves of existing private insurancearrangements. The condition into which compulsoryhealth-insurance has fallen in the majority of Westernindustrial countries certainly makes it relevant toremember that norm, and to seek a remedy for it. Thereare three main lines along which such a remedy could befound. First, by limiting compulsory health insuranceto those classes for whom the risk means a seriousburden, and whom it would be difficult to persuade toinsure themselves voluntarily; second, by makingconcessions to varied, decentralised forms ofassistance such as to are be found in Switzerland; and,third, by introducing a system of individual feepayment which would really be felt by the participant,but which would not involve any real hardship.

AUTOMATIC AND IRREVERSIBLE EXPANSION

In trying to grasp the significance of the WelfareState, as briefly outlined in the above examples, tothe culture, the society, the economy, and the generalconditions of our time, it is not possible to do morehere than to bring up some of the most importantpoints.

We begin with a circumstance that gives specialweight to all the difficult considerations we shalldiscuss; this is the fact that the dangers of theWelfare State are to be taken all the more seriouslybecause there exists in its nature nothing that wouldof itself set bounds to it. It has no built-inchecking ~echanisrn. It rather tends, on the contrary,to spread itself over ever-widening areas; and thismakes it all the more necessary that limits be set toit from outside--unless we wish to get tangled in avicious circle. This continuous expansion of theWelfare State, is inclined to embrace more and more ofthe uncertainties of life and of a steadily increasingportion of the population. It also tends to set itsbenefits and taxes at an increasingly high level, whichis quite disastrous; for every step forward is easyand tempting, but every retraction of a step recognisedafter the event as having been ill-considered, isdifficult, and eventually becomes a political

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impossibility.

LOSS OF INDIVIDUAL RESPONSIBILITY

Now, this path along which we must take each stepso carefully, indeed reluctantly, leads to he centreof gravity of society being pushed further and furtherupwards, away from the true, parochial community withits human warmth, towards the impersonality of Stateadministration and its attendant vast and impersonalorganisations. This, in its turn, involves anincreasing centralization of decision andresponsibility, and a growing collectivization of theconditions of the individual's welfare and, therefore,of his way of life. The inevitable effect of thisprocess should be examined carefully in all itsaspects. Hitherto, we have relied on certain reactionsof the individual to considerations of risk andindividual responsibility. Now, however, it appearsthat, on account of the upward movement of the socialcentre of gravity in the Welfare State, these reactionsare becoming increasingly weakened and distorted. Thesecret mainspring of society, inherent in theindividual and his will for self-assertion, threatensto grow slack if the levelling machine of the WelfareState blurs the positive results of greater personalefforts as well as the negative results of lack ofpersonal effort.

It is the extreme individualism of the past whichis largely to blame for the present development towardsthe opposite extreme of the modern Welfare State withits mechanized mass welfare. Surely the mark of ahealthy society is that the centre of gravity ofpersonal planning and responsibility should lie, as faras possible, between the two extremes of the individualand the State; that is to say, in the small, genuinecommunity, most of all in the primary, indispensableand most natural of all communities--the family unit.Thus it should be our task to promote the developmentof all those small and intermediate communities, of somany varied types, as far as we can; and to promote atthe same time "group-help" within whatever circlesstill accept free will, a sense of responsibility andhuman warmth which avoid the cold impersonality of themodern mass-welfare machine.

It is undeniable that the Welfare State iscertainly an answer to the decomposition of the genuine

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community which has taken place in the last 100 yearsand which burdens our time with one of its mostgrievous defects--call it, as we will, centralization,proletarianization or anything else. But it is a falseanswer; and it is this that formed the core of ourcriticism of the Beveridge Plan more than a decade ago.Far from providing an effective cure for the sicknessof our culture, the Welfare state merely soothes a fewof the symptoms; and the price we pay is that ofallowing the sickness itself to grow steadily worseuntil it becomes incurable. Can it be insight on thepart of the initiator of the Beveridge Plan, that hehas, in the meantime, become the author of a book on"Voluntary Action"?

MORALLY ROTTEN

Even worse than this, however, is the fact that ifthe modern Welfare State makes it more and more itsbusiness to distribute welfare and security in alldirections--now in favour of this group, now in favourof that group--it must degenerate into an institutionwhich is morally rotten and which must, therefore,finally destroy itself. It will come to correspondmore and more to the malicious definition of the Stategiven by Frederic Bastiat 100 years ago: "The greatillusion through which everybody endeavours to live atthe expense of everybody else." It will also justifyDean Inge, who defined politics as the art of takingmoney out of the pockets of the opposite side'ssupporters, putting it into the pockets of one's ownsupporters and living by this art. (6)

The morality of the policy of robbing Peter to payPaul is very far from obvious, especially when almosteverybody is giving and taking at the same time, sothat it becomes harder and harder to know, on balance,whether one is giving or receiving. In the same way,it might be advisable to avoid the question of morals,

(6) William Ralph lnge (1860-1954) Englishclergyman and scholar combined in his writingsclassical scholarship, philosophy and contributed formany years to the "Evening Standard". His distinctivepessimism earned him the title "the gloomy dean" (ed.).

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when social resentment or thoughtless fighting forone's own interest leads to claims on the hard-earnedincome of others, and so to confiscatory taxation. Thecontinual staking of claims for assistance andinsurance which can only be satisfied at the expense ofsomebody else is made easier for both individuals andgroups by a kind of mental short-circuit, namely, thehabit of seeing the State as an economic fourthdimension and forgetting that in the long run--or,indeed, the short run--it is the taxpayers who mustfill its coffers. The modern Welfare State, however,is well adapted to concealing the fact that demandingmoney from the State always means demanding itindirectly from somebody else, who has to pay for it byway of taxation. It amounts to a transfer of pur­chasing power effected by the State.

A FALSE BELIEF

The more this principle of the Welfare State isextended, the nearer the time comes when the giganticpumping station will turn into a universal deception,an end in itself, really helping nobody at all otherthan the operatives who live by it and who, quitenaturally, have every interest in not letting thedeception be discovered. In order to understand thisbetter, we must realise that few beliefs havecontributed more to the latest development of theWelfar~ State than has the conception, which arose inthe nineteen-thirties, of an immense social wealth(resources) to some degree paralyzed by insufficientfinal demand. Permanent full employment brought aboutby deficit spending would make this wealth real,tangible and enjoyable. Redistributive policies wouldmake its fruits available to all classes. At the sametime (this was an especially popular inference which itwas then believed could be drawn from the Keynesiantheory) , such redistribution of income--with theresulting increase in mass consumption--seemed the bestmeans of securing full employment and keeping thesource-reservoir of the Welfare State replenished.Only this faith (kindled through the Great Depressionand its effects) in a kind of automatic self-financingof the radical Welfare State can explain the lack ofconcern which peopled have for so long shown over theproblem of how to finance such a policy.

The time of illusion is now past. It has become

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clear that any serious attempt to run a Welfare Statenecessitates stirring up the distribution of income toits very depths with the tax-collector's whisk andassigning to the lower income-groups a share in thefinancing of the Welfare State. But this amountsmerely to a transfer of purchasing-power from the left­hand into the right-hand pocket, by diverting it, withtremendous wastage, through state channels. It is notjust that, bewitched by the myth of "poverty amidstplenty," society has overestimated the potential wealthof the Welfare State even in the most favourablecircumstances, and underestimated its cost and waste;the essential point is that the Welfare State, in itsextreme form, has shown itself to be a primary cause ofthe restriction of total productivity.

A BRAKE ON PRODUCTION

It is impossible to argue today that the financingof the Welfare State can be confined to the tapping of"unearned" and "functionless" income. It is obviousthat it is becoming necessary to extend income­levelling taxation to incomes of quite another kind,i.e., to incomes which have their origin in genuineproductivity. Such productivity not only earns its ownreward, but also presupposes it as a spur. Theproductive classes cannot be bled white without theirproductivity being crippled; and, anyhow, their tax­paying capacity is utterly insufficient to satisfy theclaims of the Welfare State. This makes oppressivetaxation of the masses inevitable. Furthermore, thequestion is already being asked--especially by ColinClark--whether the total burden of taxation broughtabout largely by the claims of the Welfare State ispermanently compatible with a free economy, or evenpossible without constant inflationary pressure.

USES OF SURPLUS INCOME

There is another circumstance that explains thelargely illusory character of the modern Welfare State.Very many people believe that taxation of the higherincome groups simply means a limitation of expenditureon the part of those groups and that what is siphonedoff from their purchasing power can thus be directed tosocial benefits for the lower income groups. Thisis an obvious elementary error; for it should beobvious that higher incomes provide the foundations

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which are essential to certain functions of society.Capital formation, investment, cultural expenditure,patronage of the arts and many other things could belisted under that head. Now, the more the higherincome groups are eradicated by progressive taxation,the less likely it is that functions of this kind willbe carried out--and, since they are vital to anyhealthy society, there is no alternative but for themto be taken over by the State.

This means, however, that to the extent that thepurchasing power which has been tapped at the higherincome levels is not available for such purposes asprivate investment and the sponsoring of the arts.Therefore, tax receipts must be used by the state toreplace the private contributions to investment,culture, the arts, etc., which have been frustrated bytaxation. Thus, to the extent that the State has toassume these functions, its primary aim as a welfaremechanism must be abandoned, however meritorious oressential such a welfare mechanism may be. Even if wethink well of the Welfare State because it might todayeducate a genius, such as Gauss, at its own expense, weought to remember that, in the actual case of Gausshimself, this ~as, in effect, done by the Duke ofBrunswick and others in an admirable and whollyunbureaucratic manner. In short, it is not the masseswho gain through confiscatory taxation of higherincomes, but the State, which thus acquires extra powerand influence, and, of course, the Civil Service too,with all its inexhaustible demands. The consequence isan extraordinary promotion of modern absolutism, withits centralisation of decision in all the mostimportant fields--in capital formation and capitalexpenditure, in education, research, art and politics.

BOREDOM AND CLASS RIGIDITY

Thus we are getting an increasing socialisation ofrevenue expenditure, especially in fields of thehighest importance for society as a whole. At the sametime, the general atmosphere becomes oppresive.Charity, honorary functions, liberality, conversation,leisure, everything that Burke included in the expres­sion, "unbought graces of life", all these arestrangled by the choking grip of the State. It is aparadoxical consequence of the Welfare State, thateverything is becoming commercialized, that everythingis becoming an object of calculation, that everything

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is being gathered up into the orbit of the nationalrevenue-pumping station. If honorary functions arerarely performed any longer, either because there arenot enough wealthy people or because the spirit ofcitizenship is becoming dulled and is turning intovexation in the upper classes and into envy in thelower classes, all we can expect is a universalprofessionalization and commercialization. Narrowerand narrower grows the scope for such income as isavailable for charity, a cultivated way of life, and acertain liberality of expenditure; rarer and rarerbecomes the climate in which liberalism, variety, truecommunity, and nobleness can thrive.

Therein lies one of the causes of the deadlyboredom which seems to be a distinguishing feature ofthe radical Welfare State; and this result of theWelfare State cannot be taken too seriously. There isanother cause, related to the first. It is to be foundin the fact that the Welfare State, contrary to itsproclaimed goal, is inclined to petrify the classstructure of society and to make it more difficultrather than easier to move from one class into another.Rigorous taxation, above all the steeply progressiveincome tax, which is an inherent feature of the WelfareState, necessarily strikes exactly those incomes whichare high enough for capital formation and theassumption of business risks. It is surely obviousthat, just because of this (and because of otherreasons which cannot be discussed here) the promotionof new undertakings and the formation of property isbecoming more and more difficult. Surely this meansthat it is far harder than it used to be for anyone towork his way up out of the vast mass of propertylesswage-earners, and correspondingly less attractive evento make the attempt--especially since the Welfare Stateprovides comfortable spoon-feeding for the domesticatedmasses. Surely only those large enterprises whichalready exist are favoured. (7) At the same time, lifein such a State is about as inspiring and amusing as a

(7) See also: L. von Mises, Human Action,Chicago: Contemporary Books, PP:--808-809 and F.A.Hayek, The Constitution of Liberty, Chicago: The Univ.of Chicago Press, 1960, pp. 320-321 (ed.).

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game of cards in which the winnings are predestined tobe divided equally among all the players. In fact, thetask of climbing the social ladder from class to classmust, in circumstances such as these, become less andless exciting. All that remains is to pick on thecareer of State- or union-official, for the members ofthese new classes are steadily becoming the realsupporters and the real beneficiaries of the system.

A SOURCE OF INEQUALITY

These are not the only considerations whichprovoke the question: does not the Welfare State, inpoint of fact, succeed in defeating its own proposedends? The same question may be asked in another sense.Is not the Welfare State's claim that it implementsequality as questionable as its claim that it resolvesclass distinctions? It does implement equality in onesense (although a doubtful one); but in another,decisive and relevant sense it does not. By means ofthe continual diversion of income effected by theState. greater material equality is created. But atwhat price? Since this policy inevitably brings abouta greater and greater concentration of power in thehands of the administration which directs the flow ofincome, the distribution of power must becomecorrespondingly less equal and who would deny that thedistribution of power, imponderable though it may be,is incomparably more important than the distribution ofmaterial wealth? For it is the distribution of powerthat decides the freedom or bondage of man.

In effect, the modern Welfare State, in thedimensions to which it has already grown and threatensto grow in the future, seems to be the primarymechanism through which the subjection of theindividual to the State is being achieved throughoutthe non-Communist world. The problems it is designedto solve, it does not solve--or only apparently solves;on the contrary, it makes them even more serious, andeven less susceptible of an effective solution. Whatit does do, however, is to enhance the power of theState to gigantic dimensions, and finally "it pressesevery nation to the point where it becomes nothing morethan a herd of frightened beasts of burden whoseshepherd is the Government." It forces us to reflectthat this vision of de Tocqueville's has, a hundredyears after he wrote these words, every prospect ofbecoming the reality of our own day.

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III

KEEPING MONEY HONEST

It is generally admitted today that, since thewar, the economy of almost every country is, to agreater or less degree, under the influence ofinflationary pressure; this is in marked contrast towhat everyone had expected. Basically wrong economicpolicy was based on these expectations. It has beenwidely recognized that the great, and possibly vital,problem affecting our future is not, as was generallybelieved immediately after the war, deflation. Inretrospect we can now see that another long period ofinflation began with the outbreak of the Second WorldWar; it still persists and there is no visible end toit. Although, in most cases, it is not a dramaticallyobvious "hot inflation", it is none the less stubbornand insidious, a creeping, chronic condition ofcontinually declining money values which becomessteadily more apparent; a "cold inflation" which,without rising to fever pitch or showing other alarmingsymptoms, is for that very reason all the moredangerous. This problem is quite rightly beginning toovershadow all others; it is to be hoped that it willbecome the focal point on which economic, social andfinancial policy is concentrated and that thesepolicies, thus re--orientated, will finally put an endto its evil influence.

This process seems all the more evil since itsactual nature is obscure. It fits into no knownpattern of experience but appears to be something quitenew in economic history, the cause of which is so farunknown. It is scarcely surprising that there is greatconfusion on all sides, and that new attempts to find asolution are continually being made. There is noobvious, increasing flood of money, no printing-pressworking overtime, no easily detected source ofinflationary pressure which can be blamed. Only onething is certain: goods continue to grow slowly butobviously dearer and there is little prospect of areversal of that trend. In most countries it is not aquestion of a deficit in State finances, the usualsource of "hot inflation", and, in countries likeGermany or Switzerland, the familiar symptom of

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inflation; nor is it a question of a deficit in thebalance of payments with consequent pressure onexchange rates. On the contrary, we are increasinglymystified by being told that it is actually a surplusin the balance of payments that is one of the mainsources of inflationary pressure. This presents uswith an extraordinary new conception best described asa "dilemma of imported inflation".

NEED FOR NEW PATTERNS OF THOUGHT

What are we to make of it? Some take the easy wayout and simply deny that the/process even exists; theysay there is no inflation today and what we take to beinflation is only an optical illusion; it is quitenormal for prices to rise slowly, they say; they alwayshave. Others merely give up looking for a reason andblame an alleged historical factor (the, "InflationAge"), or more vaguely, institutions or conditions(institutional inflation) • Or else charges andcountercharges are levelled; labour blames theemployers, the employers blame labour or both blame theGovernment.

It is certainly a difficult problem and it willobviously be hard to solve. One fact, however, standsout clearlyl and should therefore rank high in oursearch for a solution. Whatever may be the nature of"cold inflation", it must in any case be an excessdemand developing from a surplus of money and thissurplus must originate where money is produced, i.e.,in the Central Bank, which not only produces spot cashbut in most countries, has means at its disposal whichenable it to control the production of spot cash bymanipulating the liquidity of the banks. This isclearly the tap which would only have to be turned offsufficiently firmly to stop any leakage. This is anunassailable fact and the responsibility of the CentralBank is therefore undisputed. This is the point atwhich all the threads meet.

SOFTENING UP THE WILL TO RESIST

These threads have, however, become extremelytangled and here we find the main difficulty. Intheory it is indisputable that the Central Bank could,by restricting credits, cause a shortage of money to

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such an extent that every inflationary tendencywhatever its origin, whether due to an export tradesurplus, or to a rise in investments or in wages, couldbe suppressed. Alternatively, the Government couldproduce the same result by immobilising a large budgetsurplus--though this wouldd be less commendable sinceexperience has shown the dangers of such an action. Inpractice, however, it is doubtful whether the CentralBank (or the Government) could do either of thesethings under existing social and political conditions,since such restrictions would produce harmful results,primarily unemployment. It is, therefore, extremelyimportant not to allow inflationary tendencies arisingfrom economic and social causes to develop, thussparing the Central Bank the necessity of imposing toosevere restrictions. It is also equally important thatthe desire for the stabilization of the value of moneyshould be so unassailable and overwhelming, that allother aims will be subordinated thereto and that anyrestriction which the Central Bank finds it necessaryto impose will be backed by the unqualified approval ofthe public.

Seen from this viewpoint, the creepinginflation" of our times appears as the result ofcomponents, i.e., the inflationary tendency ofeconomy and the softening of the will to resist.

A NEW LIGHT ON SAVINGS

"coldtwothe

If we ask what are the inflationary tendenciesarising from the economy, we find that they areprimarily resulting from a tension between, and from anoverloading of, the economic forces such as in the pasthave frequently been encountered in the movement of themarket we call a "boom," with its symptoms of a rise inprices and costs, delivery difficulties, optimisticforecasts and a general tendency to change from moneyto goods (or investments). The origin of the excessdemand which exerts pressure on the market and forcesprices up is, as any market expert will know, a rise ininvestments always provided that they do not pass acritical point either in pace or extent. This criticalpoint is most likely to be passed when the employmentof productive forces by investment and the immediateemployment of income represented by the building offactories and the manufacture of machinery is notbalanced by a corresponding accumulation of consumptive

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purchasing power by way of savings. An overheating ofthe economy by increased investment will thus occurwhen current savings, which are produced by individualscutting down their personal consumption, are no longesrable to balance increased demand through investment,with the result that investments are correspondinglyfinanced by what are called "alternative" savings, thatis to say, by the expansion of credit. (8)

All this is familiar ground on which we need wasteno more time. The theory that an increase in savingsis of the greatest importance to the economy shouldreceive serious attention, for this would have adamping, relaxing, and cooling effect on a boom. Themore investments are financed out of savings, i.e.,by reduced consumption, self-imposed by the consumerrestricting his own purchasing power, the higher thecritical point in the rise in investment and the longerthe boom can continue before reaching the danger point.A similar result would be achieved by importing moneycapital and consumer goods. (9)

(8) Here Roepke basically endorses the theory ofinvestment inflation of the Austrian School ofEconomics, derived from its theory of the businesscycle. If, through expansionary monetary policy and/orvoluntary credit creation by commercial banks, loansare made available at artificially low interest rates,entrepreneurs will start to invest and resources willbe reallocated in order to be put to work in thecapital goods industries. An inflationary situation iscreated because the total amount of resources has notincreased. Had the extra loanable funds come out ofincreased savings, households would by definition haveconsumed less thus releasing resources producingconsumer goods. With consumer demand unchanged andinvestment demand on the rise, resource prices such aswages go up with higher product prices as a result(ed.) •

(9) Imported money capital may validate moreinvestment while increased foreign supplies ofconsumer goods tend to reduce the rate of increase ofthe i r pr ices. (ed • )

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Thus savings, which were once regarded withdisfavour in theories applicable only to depressionperiods, now return to the place of honour which soundcommon sense has always reserved for them. Whetherthey will rise or fall in esteem, as a result of anychange of circumstances or through the operation oflegislation, is something which will have a profoundefffect on all economic, financial and social politics.It is now equally clear that "negative savings" a goodexample of which is credit purchasing, will seriouslyprejudice the situation.

In the above-mentioned symptoms of an overheatedboom we have a situation in which the increase ininvestments are no longer covered by savings and must,therefore, be financed by new credits. They not onlypress on unused production factors, but, at the sametime, they give rise to an inflationary pressure onfinal demand, even though there is no reason to assumethat all these inflationary investments are"economically desirable", or "useful", or to label anycurtailment of them as prejudicial to progress andmodernisation. We can hardly expect the employersthemselves to force such curtailment of investment; itis rather the task of the Government, or, failing theGovernment, of the Central Bank. The point is thatcurtailment is essential if we are to ward off thedangerous inflationary tendencies of a boom, and thusavoid painful repercussions which could only bepostponed at the price of further credit inflation.

So much for the source of inflation attributableto the over-investment of a boom. It is no more asensational novelty than the problem with which theCentral Bank is faced. This is not the actual dangertoday, which is to be found rather in a new and unusal(at any rate in extent) set of circumstances which hasset in motion an inflationary mechanism of aparticularly malicious and intractable nature. It ishere that we find the decisive factor in the presentsituation; one might almost call it the seat of anacute neuralgia in the politico-social system. What wemean is that doses of inflation are continuously beinginjected by the labour market once the boom, gluttedwith over-investment, has created the necessaryconditions. This should be freely discussed today,particularly in the interests of the salary-and wage­earners themselves, for the danger is so great that

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well-mentioned reluctance to discuss it would virtuallyamount to complicity. Further, what is happening is soobvious and so irrefutable that those who accept itcould no longer be accused of bias; all the more sosince the problem has now been carried far outside thebounds of party politics.

OVER-EMPLOYMENT

To help us see more clearly, we can draw on pastexperiences. From what we already know, we can assumethat the exhaustion of all reserves of productionfactors, which occurs in boom periods, results in arise in wages together with a corresponding- rise inprices which becomes increasingly difficult to absorbthrough increased production. In an increasing numberof branches of industry full employment develops intothe familiar condition of "over-employment," in whichthe number of vacancies exceeds that of suitableapplicants. Not so many years ago a leading economist,Lord Beveridge, considered this an ideal condition, butonly some eighteen months ago even he was obliged toacknowledge his error in a striking letter to The Times(20th February, 1956). In actual fact, over-employmentis so far from the ideal as to be at the reverse end ofthe spectrum; it is something to be dreaded since itcannot be maintained without continuous inflationarypressure. It might even be regarded as a definition ofinflation in itself for, even without trade unions,wages will, wherever too many employers are chasing toofew workers show a tendency to rise beyond the point atwhich they can be brought into accord with monetaryequilibrium; higher wages automatically increase finaldemand without providing any corresponding increase inproduction. Any attempt to counter over-employment,with its inherent danger of cost-inflation, by means oflabour-saving and production-increasing investmentswill only serve to create an even more serious infla­tionary situation than before, since, in an overheatedboom, investments have already passed beyond the safetypoint.

All this would still be no more than the fruit ofpast experience were it not for the fact that two newfactors have now appeared which make today's "creepinginflation" an entirely new and unparalleled phenomenon.The first is that the natural tendency towardsinflation, a familiar feature of all booms in the

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leading countries, is aggravated by the trade unionswhose power (and I write very circumspectly) frequentlyappears to be controlled only by their own insight andsense of responsibility. But less and less reliancecan, from day to day, be placed on these limitingfactors, for the growing power of the trade unionsmakes it increasingly difficult, whatever thecircumstances, for any correction of inflationary wageincreases to be effected by decreasing wages: thepolitical and social difficulties are virtuallyinsurmountable. Thus, rises both in wages and inprices and costs become a one-way spiral reachingsteadily upwards.

The second entirely new factor is that it hasbecome more difficult, one might even say impossible,for the Government and the Central Bank to counteractcost inflation, caused by over-employment andencouraged by trade union monopoly, by restrictingmoney and credit. This is particularly true when itcreates a threat to "full employment" and might beexpected, if only temporarily, to make some degree ofunemployment inevitable. To the economic novelty oftrade union monopolistic power we must add the equallyimportant factor of the popular demand for "fullemployment" as an all embracing, unassailable dogma towhich the Government and the Central Bank are committedby democratic necessity if not by actual legislation.That these new factors are closely allied is abundantlyclear. Taken together they provide the explanation ofthe "creeping inflation" of our day.

AUTOMATICS OF WAGES

The familiar and dreaded wage-price spiral must beregarded in this light. We are not dealing with apurely mechanical process in which wages and pricesdrive each other upward. This is not so even where--asin Denmark and certain other countries--we encounterthe evil system of wage automatics, where wages areadjusted by means of a sliding scale index. The wage­price spiral needs something even in addition to thatto give it continuous movement, i.e., repeatedinjections of further money. If this were not so,employers would not be able to pay higher wages withoutreducing their labour force. Nor would consumerspossess the necessary purchasing power to enable themto take up the existing quantity of goods at the higher

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prices by which employers pass on the wage increase.(This is really only a somewhat uncomplimentary way ofs~ying that employers use this method to reconcile wagerIses which they are unable to absorb by increasedproduction with the continued employment of dearerlabour) • The wage-price spiral, therefore, needscontinuous boosting from those responsible for theamount of money in circulaton, since if they did notboost it in this way, the rise in wages due to over­employment and the power of the trade unions wouldresult in the unemployment of part of the labourforce.

TRADE UNIONS CURRENCY

This brings us to the salient point. For where aneconomy slips into the state of over-employmentcharacteristic of an over-heated boom, it will, with afurther rise in wages--and this is normally hardlyavoidable, and is fostered and made practicallyinevitable by trade union policy--find itself facedwith the fatal dilemma of having to choose betweeninflation and unemployment, depending on whether or notwage increases receive monetary accommodation. To putit in another way, a country will then have reached thepoint at which the stability of money values, "fullemployment" and further wage increases can no longer bereconciled with each other. One of the three will haveto be sacrificed leaving a combination of the other two(money value stability and full employment, money valuestability and wage increases or full employment andwage increases). Those who insist on an "expansive" or"dynamic" or any other attractively labelled wagepolicy, but at the same time abjure even a negligibleand temporary impairment of 100 per cent "fullemployment", will not only have to make the best ofafurther crumbling of money values but will also have toassume the actual responsibility for that happening.They are, in effect, prime examples of a vast mass ofpeople who, while complaining about inflation simul­taneously support other demands which, if accepted,would make inflation inevitable.

THE ISSUING BANKS ARE NOTSOLELY RESPONSIBLE

It is clear, therefore, that it would be unfair tosaddle the Central Bank with the whole responsibility.

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The Bank is in the highly uncomfortable position of anautomobile driver who knows that he only needs to brakesharply to avoid an accident, but is faced withirresponsible pedestrians allover the place as well aswith a greasy road surface on which he might skid ifhe applied brakes too sharply. We naturally expect himto brake but the irresponsible behaviour of thepedestrians and the greasy road must also beconsidered.

This picture approximately fits the realsituation: naturally, the final decisions rest withthe Central Bank, but an undisciplined wage policy,supported by a boom and over-investment and fed byover-employment, threatens to force onto it moreresponsibility than public opinion, the Government andthe dogmatic insistence on "full employment" willallow. At this point the Central Bank may feel itselfunder the necessity to adopt a continued expansive orinsufficiently restrictive monetary policy in order tokeep the wage-price spiral in motion. It is, thus,true to say that the trade union leaders--and theexpansion-conscious employers--today share theresponsibility for the currency, as the Swedish tradeunions recently recognised with their welcome resolveto prevent further wage increases in the interest ofthe fight against inflation. The same view wasrecently expressed by a leading British economist, J.Hicks, when he spoke of trade union currency as thecurrency of today.

CREDIT RESTRICTION INADEQUATE

The more disciplined the wage policy the easier itis for the Central Bank to fulfil its responsibilities.Thus, the sooner the trade unions apply the brake thebetter the chance of saving the economy from thewhirlpool of over-employment, since without self­restraint it becomes increasingly difficult to controlinflationary forces without causing a considerabledegree of unemployment. The creeping inflation of ourtimes can be halted only when the discipline of variouseconomic groups coincides with an early and courageouscredit restriction by the Central Bank enjoying thefull support of both the public and the Government.Discipline alone without simultaneous creditrestriction will remain mere rhetoric and would, at thebest, be inadequate. Credit restriction alone withoutself-control on the part of economic groups could, in

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theory, suffice, but would, in practice, be extremelydifficult and, to the extent required, would, undercertain circumstances, be impossible. The one requiresthe other. Both must, however, be supported by thegeneral conviction that the unassailability of moneyvalues must ,be the highest aim of economic and socialpolicy, and that a further crumbling of money valueswould be not only an event which would contribute tothe utter discredit of all those responsible, but wouldalso be an unforgivable error, since to accept thedevelopment of inflation as a permanent process isitself an admission of defeat. Nor should we everforget the very real danger that a slow, steadyincrease in prices might finally develop into the flameof hot inflation.

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IV

CREEPING INFLATION

THE MANAGERIAL DISEASE OF THEPUBLIC ECONOMY

A larger and what is most certainly a steadilyincreasing proportion of the population is realizingthat creeping inflation (which I referred to in theprevious essay), is one of the most serious problems ofour day, and that it is of the greatest practicalsignificance for everyone of us. It is, therefore,scarcely surprising that the discussion of inflationarytendencies is growing like a swelling flood. Inparenthesis, let me say at once for the benefit ofGerman readers who are, with justification, speciallynervous about inflation that the tendencies in thatdirection are more strictly checked in Germany than inmost other countries and that I do not overlook thefact that Germany is showing a healthy reaction to thethreat which entitles us to hope for an eventual andsuccessful mobilisation of all her strategies ofdefence.

For the present, however, we are a very long wayoff any effective mastery of the problem; indeed, wemust ask ourselves whether the real, underlying causesof the constant pressure of inflaton under which we aresuffering do not lie very much deeper than most peoplethink. Surely it is time to enlarge the area ofdiscussion, and to carry it into a field where theillness of money appears as a moral and a socialdisease.

In the previous essay I have anticipated thisdisturbing interpretation of what is going on bypointing out that today's universal inflationaryprocess clearly has no historical parallel. Even thelong-term periods of prosperity and depressionstretching over some twenty-five years, which can betraced in the economic history of the nineteenth and

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early twentieth centuries, and which were usuallyconnected with long-term movements in gold production,provide, for a variety of reasons, very little of ananalogy. For example, it has, as everybody knows,become improbable that we shall in the future have aperiod of deflation to correct a rise in prices, thoughit is possible, and indeed probable, that we shall havesetbacks in economic activity of shorter duration andlesser intensity.

If then the phenomenon as such is new, there mustbe new causes which bring it about. If we disregard"imported inflation", it appears that there areessentially two chains of cause and effect which worktogether to produce the inflation we are experiencing.One can be classified as investment inflation, that isto say a demand which cannot be satisfied out ofcurrent production, and which is itself the result ofan excess of investment over current savings. Theother causal chain begins with increases in wages whichare not matched by equivalent increases in productivityand which in their turn result in an increased demandnot covered by current production. This increase indemand similarly ends in inflation (wage inflation) if,out of fear of a drop in business activity, currencyand credit policies do nothing to check it.

INVESTMENT AND WAGE INFLATION

Earlier booms have made us familiar with thephenomenon of investment inflation, not necessarily ontoday's scale but similar in character. Yet in thecase of wage inflation we cannot find any parallel inearlier events. Now the forces which generate thisnovelty operate in such a way that they are able to putup an extraordinary resistance to any attempt tocontrol them through currency and credit policy. Thestrength of the trade unions in our generation, owingto which a series of wage increases unmatched bygreater production has become almost normal procedure,is nearly as great a stumbling block as the sacred anduntouchable dogma of full employment, an economic stateof affairs which strengthens the trade unions but whichis in fact inseparable from further increases in wagesand consequent further inflation. The longer those whodirect currency and credit policy shrink from bringingthis wage inflation to an end by restrictive monetarypolicies, even at the risk of a certain amount of

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temporary and sporadic unemployment, the more difficultwill it be for them to overcome this resistance towhich I have drawn attention.

That is, to put it as concisely as possible, theframework within which, as I see it, we must view theprocess of inflation if we are to understand how itoperates and how to isolate not only its causes butalso the relevant curative measures. Wage inflationquite clearly emerges as the critical problem on whichattempts to combat inflation in most countries breakdown. If we had to deal only with an investmentinflation, we should find ourselves tackling a taskwhich has always presented itself in the course of aboom; that is a very different thing from having tofight against wage inflation, which involves usimmediately and intimately in some of the most profoundproblems of the modern mass societies of industrialstates.

That does not mean that investment inflation andwage inflation are not very closely connected with eachother; indeed they are so closely related that onefeels inclined to lift an eyebrow at those labourleaders who try to divert attention away from wageinflation towards investment inflation in an effort toshift responsibility onto the entrepreneur and hisdesire for investment. They seem to overlook the factthat it is precisely the fact of investment inflationthat ensures continued full employment and thus createsthe conditions under which unrestrained wage claims andconsequent wage inflation are possible. Conversely,wage inflation reacts upon investment inflation becauseit is an incentive to capital investments which comefrom saving out of wages; furthermore, both types ofinflation stem from the same source, that is, anexpansionist, or insufficiently restrictive, currencyand credit policy. It follows that we do not find theone without the other; and that is of the greatestpractical significance, for the extraordinarily strongresistance set up against any attempt to control wageinflation necessarily makes the struggle againstinvestment inflation, which in itself ought to beeasier even in today's politico-social environment,infinitely more difficult. Anyone who believes thathis interest lies in investment inflation must put upwith wage inflation, and vice versa. There is verylittle sense in trying to toss the ball ofresponsibility from one side to the other. Between

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those interested in investment inflation and thoseinterested in wage inflation there is, in fact, analmost absolute solidarity, invisible because it liesbehind the open disputes on the labour market. But thereal seat of resistance, the hard core which is asfrightening as it is new, remains wage inflation withthe repercussions which I have described. If this werenot the case, the smouldering inflation of today wouldnot really be a problem of the first importance, and wewould have ceased to trouble ourselves over it longsince.

INVESTMENT IN EXCESS OF SAVING

However, since the two principal components oftoday's mechanism of inflation, excessive investmentand excessive wages, are inseparable, we cannotconcentrate solely on the latter, but must examine theformer a little more closely as well. I do not thinkthat nowadays one need to emphasize the fact thatexcessive investment does not refer to an excess inrelation to what can be justified on technical groundsand as economically profitable, but an excess inrelation to current savings: that is to say, inrelation to the general readiness to reduce consumptionso as to provide the capital to build factories orequipment. On top of this excess of investment oversavings, we are faced with an increase in aggregatedemand which exceeds aggregate supply, and a consequentover-loading of the economy which as always and quitenaturally, responds with inflationary pressure. Youcan hardly reproach the individual entrepreneur if,subject as he is to the competition of the open market,he takes advantage of such opportunities as come hisway to finance his investment programme even at therisk of contributing to such an excess demand upon theeconomy. The avoidance of such a result is not,indeed, his business; it is for those responsible forcurrency and credit policy to take the necessaryprecautions by putting credit facilities a little moreout of the reach of those who are anxious to make newinvestments. It is commonly supposed to be a virtue ofthe State that it stands outside the market and canfreely do what the economy demands; it goes withoutsaying, therefore, that we can ask the State, inaccordance with the theory that public finance is aneconomic tool, to back up the restrictions of theCentral Bank by prudent limitation of its own spending.That the State fails in this duty, as so much

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experience shows today, increases our respect neitherfor the State nor for Parliament nor for the theoriesin question.

If a disequilibrium between savings andinvestments is partly responsible for today'sinflationary pressure, it follows that we must lookinto the causes which have driven investment so steeplyupwards. If, in answer, we are referred to the furiouspace of technical progress, to the growth of populationwhich has visited us like an unforeseen flood, to thehunger for capital of the under-developed countries, tothe international armament race, to the capitalrequirements of hire purchase, house building and manyother similar demands, then we are brought to aconclusion which makes nonsense of the anxiety over theadequacy of economic growth expressed in the theorieswhich owe their inspiration to Keynes. Our anxiety isprecisely the reverse; how can we acquire partialcontrol over the forces of economic growth? And how wecan ensure that the present abnormally high demand forcapital can be met out of genuine savings instead offrom the poisonous sources of inflation and taxation.In the interests of a healthy economic and socialstructure it is to be hoped that even corporate savingswhich, within limits, are essential andunobjectionable, should again become merely asubsidiary source, since, if they are too freelytapped, they are apt to turn foul! But that is aquestion which does not really belong to this sectionon inflation worries. '

TOO LITTLE SAVED

A further matter is whether forces which determinethe accumulation of savings are not equally responsiblefor the investment inflation of our day. This questionmust be answered emphatically in the affirmative.Indeed, I believe it furnishes us with one of theprincipal clues to an understanding of presentinflationary tendencies. Fundamentally, insufficiencyof savings and wage inflation are closely related inorigin. The pressure of inflation would be muchslighter if more were saved; and more would be saved ifthere were not particular factors keeping the formationof savings under continual downward pressure. If wename these factors, we are at the same time laying barean essential cause of smouldering inflation. If youcould remove them, the pressure of inflation would

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diminish to a corresponding degree, or, to look at itfrom a different angle, the Central Bank would need toturn the credit screw less tightly to combat over­investment. Thus a discussion of the inflationarytendencies at work leads us to an examination of therestrictions on savings now operative. That is withoutdoubt a cardinal point. The total weight of taxation,progressive personal taxes hostile to the accumulationof wealth, the "negative saving" of hire purchase, and,above all, the constant expansion of the Welfare State,which undermines both the will and the power of theindividual to practise thrift, are the principal forcesmilitating against savings, and accordingly theimmediate causes of constant inflationary pressure. Inaddition, and as a direct consequence, confidence inthe stability of money, in the absence of which therecannot be any substantial saving, is shaken; sooner orlater that becomes inevitable, and. thus the viciouscircle is closed--just as vicious a circle as that intowhich wage inflation leads us.' And so, in both cases,we are concerned with something new, something whichhas never been seen before, something "modern", as isproudly emphasized by the accredited agents of thesuper-State, of super-taxation, of the super-WelfareState and of all the institutions which turn the act ofsaving sour.

But what is new in this situation, what thereforeshows up in the constant inflationary pressure of ourage as a historical novelty, is the product of profoundmoral and social changes which ought really to becharacterised as pathological, if only because theirfinal result is a disease of money, "the democratic­social" inflation of the present day.

INDIVIDUAL SAVING UNDERMINED

Almost every day the careful observer of modernpolitical life can see for himself what forces areoperating in this field. The most recent example, isprovided by the German Rentenreform. (10) The reformitself and the way in which it was driven through theBundestag are depressingly disproportionate to the

(10) The law linking old age pensions with prices,wage levels and productivity.

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almost immeasurable responsibility which the Governmentand the peoples' representatives have taken uponthemselves. The mildest verdict on what has happenedcan be borrowed from the words of the London Citizen inRichard III:

"All may be well; but, if God sort it so,'Tis more than we deserve, or I expect.'

Unfortunately, there can be no doubt that in onerespect it goes anything but well; the Law ignoreseverything which urgently recommends a completereversal of policy and the encouragement of individualthrift and individual responsibility. On the contrary,it gives most powerful support to further attacks onthe accumulation of savings, not only because it is anexpansion of compulsory State welfare services, butabove all because it is based on a system whichcompletely lacks any actuarial basis. Those who areresponsible for this bludgeoning of the will to savecannot be excused either on the ground that they wereignorant of the arguments against their point of view,or on the ground that they had marshalled anysatisfactory arguments in their own defence.

THE STATE ENCOURAGES INFLATION

When we turn our attention to the vast expansionof national budgets, and to the consequent increase intaxation which forces savings below the level necessaryto finance the investment essential to any economicgrowth free from an inflationary expansion of creditwe find ourselves face-to-face with what might becalled the sixty-four dollar question: what share doesthis fiscal elephantiasis have in chronic inflation?It has, of course, a direct share in so far as anadditional demand is created by the budget itself,whether it is in deficit, as in France, or whether, asin Germany, there is a sterilized budget surplus, whichmust inevitably be liquidated in due course, thuscausing a disbursement indistinguishable from thatoccasioned by a budget deficit. The higher theproportion of the national income confiscated by theState through taxation, the more depressed the levelof savings becomes; the lovely conception of taxationas a balancing mechanism has long since been shatteredby the facts of politico-social life.

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But even if we turn our backs on this particulareffect of the gigantic size of the modern budget, thereare several other reasons why it tends to encourageinflationary movements. Quite apart from an excessivebudget's unfavourable influence on savings, there isthe fact that if government spending as a percentage ofthe national income--and here the theory put·forward bythe English economist, Colin Clark, is certainlycorrect--exceeds a certain figure, the criticalproportion being about 25 per cent, the pressure on thenational economy cannot be borne without an eventualfall in the value of the money. The point is--and itmust be emphasised again and again--that, in the longrun, this gigantic tumour of exaggerated taxationdestroys the efficiency of the interest rate as anessential weapon in the battle to secure equilibriumbetween the money supply and production; what it meansis that the interest rate, as a factor in productioncosts, becomes steadily less important than thetaxation burden. The consequence is a progressiveenfeeblement of the discount policy of the Central Bankas a brake on inflation.

A HALT TO STATE EXPENDITURE

All thinking people have realised for a long timethat the share the State allocates to itself out of theeconomy in these days is in the long run incompatiblenot only with a free but even with a remotely healthystate of society. It is a problem which heads the listof the great problems of our time; it is one which,given the evident danger of a chronic inflation, iscrying out for a solution. On the other hand, theextraordinary difficulties in the way of anysatisfactory solution are there for all to see. Sincevery little can be expected from savings in mereadministration costs, everything depends on the abilityat least to prevent any further increase in Stateactivities, for they are the determining factor in theamount of State expenditures. This is a most favourabletime to prevent such an increase for no time could bemore favourable than a period of general economicgrowth such as we are now enjoying; it makes itpossible for us to reduce the State's share of thetotal, not, through a once and for all cut in Stateexpenditures, which would be extremely difficult but bya gentle diminution of its proportionate share, amethod which would not involve any extraordinary

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sacrifices on the part of the general public. When canthe problem ever be resolved if not now, when a generaleconomic expansion can be used to reduce the tumoursimply be means of moderation and wise caution?

THE CENTRAL BANK UNDER STRAIN

Perhaps all these points we have considered makeclearer what is meant by saying that the inflationaryprocess of today is so complicated, and evolves in suchspecial circumstances, that the Central Bank simplydoes not have the means to control it effectively. Wenow see that this must be properly understood. Itdoesnot mean that if the Central Bank is properly armedwith all the modern instruments of monetary policy-­which is not always the case (take, for example, acountry like Switzerland)--and does not have to relysolely on the weapon of discount policy, which isnowadays less effective than it was, it cannot dealwith the pressure of demand, in what~ver way it arises,through a correspondingly severe policy ofrestrictions. Quite on the contrary, the Central Bankcan act today as it used to in the past. Nevertheless,we have to face the question, which is becomingincreasingly grave, whether the Central Bank, labouringunder an inflationary pressure which springs from somany sources, does not have to deal with phenomenawhich are essentially political and social in theirnature, and which it is totally unequipped to handle.Are we not asking a little too much from it? Wageinflation, investment inflation, the impulses towardsinflation created by the budget, and now as in Germany,"imported inflation"--all this the Central Bank wouldhave to correct by a still greater tightening of thecredit screw. That is what the theory demands, and wealso must ask the Central Bank to do whatever it can;but who can say whether what is possible is the samething as what is necessary?

WEAKENED FIGHTING SPIRIT

It is obvious that the approach in the struggleagainst inflation must be just as broad-based as itscauses; the heavy artillery of the Central Bank mustretain its position in the centre and use its heaviestfiring power. This necessary broadening of the frontmeans, that the struggle will be not only a longdrawn out one and subject to endless ups and downs, but

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that it will have to be fought in depth as well. Anyhope of some kind of "co-existence" based 'on indexcalculations is just as much an illusion as similarhopes in the field of world politics. Fundamentally,what is important is the morale of the troops whichhave to fight inflation; and the fact that this moraleis none too good today gives all the more weight tothe argument that modern inflation is essentially anethical and social problem. That is precisely why noeasy, quick and simple solution can be found, least ofall a solution based simply on the techniques of moneyand credit policy.

WANT OF MODERATION AND PATIENCE

We can see the problem in its true perspectivewhen we come to realize that inflation is the way inwhich a national economy reacts to a continuousoverstraining of its capacity, to demands which areextravagant and insistent, to a tendency towards excessin every sphere and all circles, to presumptuous over­confidence in oneself, to a frivolous attempt always todraw bigger cheques on the national economy than it canhonour and to a perverse desire to combine what isincompatible. People want to invest more than savingspermit; they demand wages higher than the growth ofproductivity justifies; they want more imports thanexports can earn; and above all, the government, whichshould know better, raises its claims on thisoverstretched economy higher and higher. Thus, there isa riot of claims and an insufficiency of goods producedto meet them. Just as there are organs in the humanbody, in which, if consistently abused, ailments slowlybut surely accumulate, eventually taking their revenge,so the national economy has its own equally sensitiveorgan. That organ is money. It becomes feeble andceases to resist, and it is this enfeeblement which wecall inflation, a dilation of money so to speak, amanagerial disease of the national economy.

DECAY OF LEGALITY

We may thank heaven that there are brakes andcounterforces. One of the most efficacious is that acountry which is too frivolous in its lack ofdiscipline in the monetary field is soon brought face­to-face with the immediate consequences in the form ofa balance of payments deficit and a lack of foreign

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exchange reserves. The smaller a country is, thegreater its dependence on external trade, and the morecare is taken not to absolve it from its responsibilityfor monetary discipline, the more effective the brakewill be. After the credit mechanism of the EuropeanPayments Union had already done much to impair theefficacy ,of that brake, the Common Market Agreement, asit is at present formulated, threatens still further toweaken its functioning in Europe.

But even all these considerations do not serve tocarry us to the ultimate roots of the inflationaryprocess. We do not discover them until we recognizethat inflation, and the spirit which nourishes it andaccepts it, is merely the monetary aspect of thegeneral decay of law and a decline of respect for law.It requires no special astuteness to realise that thevanishing respect for private property is veryintimately related to the numbing of respect for theintegrity of money and its value. In fact, laxityabout private property and laxity about money are veryclosely bound up together; in both cases what is firm,durable, earned, secured and designed for continuitygives place to what is fragile, fugitive, fleeting,unsure and ephemeral. And that is not the kind offoundation on which free society can long remainstanding.