The Controlled Economy

by Faustino Ballvé

The origin of the modern planned economy. The “weaknesses” of the system of free enterprise and their supposed remedies. The “lack of mobility of resources.” The “unjust distribution of wealth.” Redistribution and confiscation. Government control of prices and wages. Foreign-exchange controls and restrictions on international trade. Planning in the backward countries. Planning and communism.

During the First World War the governments of the belligerent countries as well as of some neutral countries demanded of their parliaments the power to interfere in economic affairs. They justified these demands on such grounds as military secrecy, the priorities required by the war effort, and, in the neutral countries, the necessity of parrying the blows that the violence of the conflict was directing against normal economic life in the form of scarcity and high prices. After the war, came the return to normalcy, with all its attendant problems, and the supervening crises.

The waters, it seemed, would not return to their accustomed, peaceful courses, and in Germany the word Planwirtschaft made its appearance. Oblivious of the origin of the disorder, people said that the modern economy is too complicated to be allowed to go its way all by itself; it was necessary for “experts” to draw up plans and for the governments to put them into effect. There was no dearth of experts nor of governments desirous of extending the sphere of their authority nor of bureaucrats ready to take advantage of opportunities for easy and well-paid jobs in the new offices that governmental intervention in economic affairs required. There followed a veritable flood of books on the controlled economy or economic planning. Franklin D. Roosevelt embarked on the New Deal in the United States, with results absolutely spectacular and deceptive.¹ Lord Keynes published his General Theory of Employment, Interest and Money,² the schools of economics produced at top speed generations of pedantic “economists” who saw the way to paradise in the unending expansion of the civil service, and the world was overwhelmed by an epidemic of government “controls” that recalled the dreadful outbreak of influenza that also followed the First World War.

The “planners” want, so they say, to save the system of free enterprise; yet in fact they are themselves, as Friedrich von Hayek has demonstrated in his famous book, The Road to Serfdom³ the—albeit in many cases unwitting—harbingers of communism. Their aim, as stated by W. A. Lewis,⁴ is to remedy the “weaknesses” of the system of free enterprise, which allegedly consist in the lack of mobility of resources, the unjust distribution of wealth, and the absence of equilibrium in international trade. The remedies proposed for these “weaknesses” are, briefly, taxes and subsidies, government intervention to fix wages and prices, foreign-exchange controls, and restrictions on international trade.

It is proposed that the alleged lack of mobility of resources be corrected by the imposition of taxes on idle money that does not find its way into the market and by means of subsidies for essential industries. The first is the remedy of Keynesianism, and the second is the policy of expansionism. Measures that succeed in stimulating people to buy have the effect of pushing up commodity prices and inducing a rise in the cost of living, because if more money finds its way into the market without any concomitant increase in the supply of goods available, the latter rise in price. On the other hand, the money that is offered for these goods in the market does not go into investments: it is not used to build houses or to increase industrial installations, both of which are prerequisites of an increase in the standard of living. What is needed to bring about an improvement in people’s well-being is to bring, not more money into the market, but more goods that can be bought with the same amount of money or even with less, if that is possible.

Hence, it is considered necessary to complement this policy by stimulating production. No account is taken of the fact that the best way of accomplishing this end is to provide an incentive for money to enter production rather than to enter the market for consumers’ goods. Instead, what is done is exactly the contrary. And then, for lack of private resources, public funds must be allocated to production; that is, instead of channeling into productive enterprises the money of those who have saved it, what is used for this purpose is public funds, which, in the last analysis, have to be taken away from the consumers. The latter, as a result of this combination of policies, lose both ways: through the increase in prices and through the taxes designed to pay for the subsidies. And when the taxes imposed on the consumers do not produce enough revenue, the governments resort to inflation and a policy of currency expansion, thereby imposing an additional burden on the consumer, because it makes his money worth less.

Thus, the money that was supposed to be withdrawn from saving and investment in order to enter the market for consumers’ goods finally finds its way into investment anyway through taxes and inflation, but it does not do so by way of the normal channels. Instead, the government is given discretionary power to dispose of private property as it sees fit and, in effect, to direct production in accordance with plans inspired by utopian economic ideas or, what is worse and no less frequent, by concern for the interests of pressure groups. What is produced is no longer what the consumer demands, but what the government wants; and the consumer finds himself deprived of his right to choose, that is, of his liberty, guaranteed by the constitution, but in fact taken away by the government and replaced by a state of tutelage.

Let us next turn our attention to the so-called unjust distribution of wealth. Efforts to correct this supposed unjust distribution are made sometimes by way of taxation and sometimes by way of government interference in the determination of wage rates and prices.

State intervention by way of taxation is of either a corrective or a confiscatory character. In regard to the first, Professor Lewis says that in England twenty per cent of the national income goes to two per cent of the population, that this is excessive, and that half of the income of this minority should be taken away by taxation. He fails to take into account three facts:

1.  These so-called privileged people are also the ones who already pay the greater part of the taxes without needing to be especially singled out for this purpose.

2.  Most of what they earn they do not consume, because the capacity for consumption is limited, however prodigal and extravagant may be its scale (though in that case, according to Keynes, it performs a useful service for society, because it brings money to the market). Their earnings go chiefly into investments: the construction of houses and the production of goods and services beneficial to the community and tending to raise and improve the general standard of living.

3.  The redistribution of this surplus would not result in any appreciable gain for those in the lower income brackets (scarcely ten per cent, in fact), and, on the other hand, the money so distributed would find its way into the market for consumers’ goods and raise their prices, while being withdrawn from investments. The effect of such a policy must be to make commodities even scarcer and prices even higher than they already are.

Nevertheless, Lewis and those of his persuasion, not content with such measures, go on to propose the outright confiscation of capital. They want to take capital out of private hands by means of confiscatory legislation and turn it over to the government. And what would the government do with the money? It can do only one of two things: either spend it in an unproductive way (e.g., by expanding the bureaucracy and the police force or embarking on a questionable program of public works), in which case production is curbed while the population continues to increase and the general standard of living falls; or else employ the money in production directly or through so-called semipublic or “autonomous” agencies, which, for all practical purposes, is socialism—the very thing that the protagonists of a controlled economy profess to wish to avoid with their measures to correct the “weaknesses of a free economy.”

Along these same lines, and “to mitigate the sufferings of the poor,” the advocates of a controlled economy propose to redistribute wealth through the control of prices and wages—but not of all prices and wages, for that would be socialism, which, they say, they wish to avoid. They want to fix the prices of essential articles of consumption that might otherwise sometimes be out of reach of the poor. But this project, so well-intentioned in theory, proves impossible in practice. No producer will be willing to continue in an unprofitable line of production, for it must be remembered that commodities are expensive, not because of the whim of the producer—free competition takes care of that—but because of their costs of production. If the government fixes prices below costs, the producer either will cease production entirely or will have to be subsidized. And as the subsidies are paid by the government out of the public treasury, the result is that what the consumer saves in price he pays in taxes. On the other hand, the very cheapness of a product leads to its more prodigal consumption, and it soon becomes necessary to resort to a policy of rationing. But this too fails to solve the problem. When there is rationing, everyone makes sure to take the full amount of his allotted quota even if he does not need it, for in that case he can resell it in the black market or use it for less urgent needs, such as feeding cattle the bread rationed for human consumption. At the end of the last war, when the policy of bread-rationing was abandoned in France, the government was surprised to find that in a free market the French consumed less bread than when it was rationed.

It is less feasible to fix wage rates. Even Lewis recognizes, for example, that a general increase in wages is futile, because it inevitably gives rise to a corresponding, and sometimes greater, increase in prices. Nevertheless, he insists that wage rates be raised in those cases in which they are too low. But when this happens, it is precisely because market prices do not allow of higher wages, since the commodities in question are in abundant supply. If, in such circumstances, wage rates are raised, production becomes unprofitable, the industry in question disappears, the market is deprived of its product, and the workers engaged in its production, finding themselves unemployed, enter the competition for jobs in other industries, whose wage rates they thereby depress.

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General monetary controls will not concern us here. But there is a special type of monetary control—foreign-exchange control—that, for all practical purposes, is nothing but a particular method of controlling international trade.

The control of international trade is characteristic of tendencies toward both nationalism and socialism. It began almost simultaneously in the Soviet Union and in nationalist Germany. There is nothing extraordinary in this, since nationalism inevitably leads to socialism, and socialism to nationalism. Practically every socialist regime has to be nationalist, and vice versa: in either case what is involved is simply a form of totalitarianism. It is not possible to put a nationalist economic policy into effect without taking over control of production and distribution, and this is what socialism is essentially. On the other hand, it is impossible to take over control of production and distribution without inevitably putting into effect a policy of economic nationalism. In both cases there is but one producer and distributor, viz., the state. Sometimes, as in the Germany of Hitler and the Italy of Mussolini, the appearance of an economy of free enterprise is kept up, but in fact it is not that at all, because the producer and the distributor have no other alternative than to obey the regulations established by the state. As a German industrialist said during the Hitler era, “The difference between Russia and Germany consists in the fact that in Russia the producer is a bureaucrat who neither reaps profits nor suffers losses, whereas in Germany he is a bureaucrat who only suffers losses.”

The advocates of a controlled economy become indignant when they are accused of being nationalists and socialists and consider themselves the saviors of free enterprise in a period of crisis. They recognize, as does Professor Lewis, the superiority of international exchange on the world market under a regime of free, private enterprise, but they nevertheless champion a policy of government intervention because they have not been able to liberate themselves from the myth of the Volkswirtschaft. The international free economy is the best, says Professor Lewis, but it “needs to be strengthened” by means of government intervention in order to maintain an equilibrium in the balance of payments. And what can the state do to maintain this equilibrium?

It is not possible, says Professor Lewis, to attain equilibrium by restricting imports.

National income cannot be increased by avoiding imports, since this will result only in diverting resources to the production of articles of domestic consumption, thereby withdrawing them from the most profitable export markets. Nor can domestic employment be increased by reducing imports because this would reduce exports to the same extent.

His solution is, like that of all the advocates of planning, neither to restrict nor expand international commerce as a whole, but to divert it by facilitating or impeding certain imports and exports in order to bring about corrective adjustments dictated by political or ideological considerations. The method chosen for accomplishing this end is foreign-exchange control. There are many varieties of foreign-exchange control, but it consists essentially in the state’s collecting the price of exports and paying for imports, on behalf of the interested parties, in sound money (gold or dollars), but paying the exporter and recovering from the importer an arbitrarily determined amount in the national currency.

In sum, imports are paid for with the proceeds from exports, and the former extend only as far as the latter permit, exactly as in a free economy. The only difference is that in this case neither the importer nor the exporter is a free agent in carrying on his business, nor does either one of them receive or pay the world market price, but an arbitrarily set price. The distribution thereby effected is unjust and discriminatory, besides being burdened with the expenses of government intervention. Hence, this system of intervention does not succeed in achieving either a more equitable distribution of wealth or a greater mobility of goods and labor or even an increase in international trade. On the contrary, such state intervention is unnecessary, costly, arbitrarily discriminatory, and extremely detrimental to individual liberty.

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From this brief exposition of the principles underlying the controlled economy two conclusions clearly emerge: (1) They in no way succeed in avoiding the “weaknesses of a free economy.” (2) They produce, instead, new evils, viz., scarcity, high prices, and the suppression of individual liberty. Nevertheless, as a last line of defense, it is proposed that they be applied to the so-called backward countries.

Thus, Earl Parker Hanson, the great explorer,⁵ believes in the economy of free enterprise, but recommends, nevertheless, a planned economy for the backward countries in order to accelerate their progress without waiting for them to undergo the normal development that individual initiative would bring about.

Interesting in this respect is the opinion of Lewis, himself an advocate of economic planning, as expressed in his little book on the subject, so often cited here, in which there is an appendix especially devoted to a consideration of this question. He says there:

. . . . planning requires a strong, competent, and incorrupt government. . . . .

Now a strong, competent, and incorrupt administration is just what no backward country possesses, and, in the absence of such an administration, it is often much better that governments should be laissez faire than that they pretend to plan. . . . .

But the difficulty which faces these governments is that they cannot expand their own services unless they can raise money to pay for them, and they cannot raise all the money they need because their peoples are too poor. . . . .

If governments of backward countries try to finance their investments by creating money, they will cause an inflation. . . . .

Foreign capital cannot be avoided, even if the government decides to build and operate all the plants itself. The machinery must come from abroad; . . . . backward countries are too poor to be able to provide much capital simply by cutting down luxuries. If they are to industrialize themselves substantially, they have either to cut severely the consumption of necessaries, or else to borrow abroad. A ruthless dictatorship can cut consumption to the desired extent, but a democracy will always have to rely largely on foreign capital. . . . .

And he concludes as follows:

It can thus be seen that planning in backward countries imposes much bigger tasks on governments than does planning in advanced countries. . . . . For, if the people are, on their side, nationalistic, conscious of their backwardness, and anxious to progress, they willingly bear great hardships and tolerate many mistakes. . . . . Popular enthusiasm is both the lubricating oil of planning, and the petrol of economic development. . . . . We can understand the claims of Russia in the 1930’s or of Jugoslavia today to have awakened this dynamic enthusiasm. . . . .⁶

But what does it all lead to in the end? Is not Hayek right when he says, in his The Road to Serfdom, that the controlled economy drifts inevitably toward communism?

The policy of economic planning, then, is absolutely untenable theoretically; but, besides, in spite of the great prestige that it still enjoys, especially in the economically less important countries (while those in which it was first introduced, like Germany, England, France, and the United States, are abandoning it), its material collapse is only a matter of time. As Professor von Mises appropriately puts it, the countries that are committed to a program of economic planning are giving their peoples the illusion of prosperity at the price of liquidating their reserves. When these are exhausted, a great catastrophe is inevitable unless the people open their eyes before they fall over the precipice.⁷