IV. Welfare State and Chronic Inflation

Among these slowly spreading cancers of our Western economy and society, two stand out: the apJparently irresistible advance of the welfare state and the erosion of the value of money, which is called creeping inflation. There is a close link between the two through their common causes and mutual reinforcement. Both start slowly, but after a while the pace (Iuickens until the deterioration is hard to arrest, and this multiplies the danger. If people knew 151 A HUMANE ECONOMY what awaits them at the end, they would perhaps stop in good time. But the trouble is-and here we link up directly with. the preceding chapter-that it is extraordinarily difficult to make the voice of reason heard while there is still time. Social demagogues use the promises of the welfare state and inflationary policy to seduce the masses, and it is hard to warn people convincingly of the price ultimately to be paid by. all. All the more reason is there for those who take a more sober and longer view to redouble their efforts to undeceive the others, regardless of violent attacks from social dema gogues, who are none too particular in their choice of means, and from the officials of the welfare state itself.

Another characteristic common to the welfare state and chronic inflation is that both show, clearly and alarmingly, how the po.. litical forces referred to in the preceding chapter undermine the foundations of a free and productive economy and society. Both are the outcome of mass opinions, mass claims, mass emotions, and mass passions, and both are directed by these forces against prop" erty, law, social differentiation, tradition, continuity, and common interest. Both turn the state and the ballot into means for advancing one part of the community at the expense of the others in the direc .. tion in which the majority of voters push by means of their sheer weight. Both are an expression of the dissolution of firm moral principles which were formerly accepted as self-evident. Limits and Dangers of the Welfare State There are, however, considerable differences between the welfare state and chronic inflation. Against inflation, the only proper atti ..

tude is one of resolute and indignant rejection; the slightest quali .. fication of this attitude is wrong. But the concept of the welfare state encompasses much that cannot simply be rejected out of hand. Our concern, therefore, is not simply to condemn the welfare state as such but to determine its limits and dangers. We must observe the maxim put forward in the preceding chapter, namely, that the 152 WELFARE STATE AND CHRONIC INFLATION economist who is anxious to live up to his responsibilities must he careful which side he supports. There can be no doubt that the time when the welfare state stood in need of our assistance and advocacy has passed. There is no like lihood that the indispensable minimum of government-organized security will be lacking in this era of mass democracy, robust social powers, unleashed egalitarianism, and almost habitual "robbery by the ballot." On the other hand, it is very likely indeed that this minimum may be dangerously exceeded, to the detriment of the people, the health of society, and the strength of our economy.

There need be no hesitation, therefore, about which side we should support with whatever strength we may possess. It is the limits and dangers of the welfare state which require our critical attention, rather than its increasingly doubtful blessings. A remarkable change has certainly taken place in all countries since 1945. The words "Beveridge Plan" should suffice to recall the time, more than a decade ago, when many circles enthusiastically welcomed the idea which found in the Beveridge Plan its most in teresting expression. 1 Laymen and experts alike thought then that the postwar future belonged to such a "welfare state." In fact, keen efforts were made everywhere, and most of all in countries exclu sively or largely dominated by socialist influences, to create such a state of guaranteed security and incoltne equalization. Additional impetus was lent to this development by mistaken forecasts, which gave rise to the fear of a great wave of unemployment after the war.

The enthusiasm has been dissipated everywhere, even in Great Britain and the Scandinavian countries. The ideal of the welfare state has given way to its everyday practice. Disillusionment and disappointment, even misgivings and bitterness, are spreading, and critical voices are raised which are not to be ignored. 2 Few people can still close their eyes to the contrast between the extra ordinary successes of a social and economic order relying on the regulating and stimulating forces of the market and free enterprise, on the one hand, and on the other the results of a continuous redis153 A HUMANE ECONOMY tribution of income and wealth for the sake of equality. It is a con trast which is intolerable in the long run. One or the other will have to yield-the free society and economy or the modern welfare state. To use the words of another distinguished British economist, Lionel Robbins, a man who weighs his words carefully, "the free society is not to be built on envy."3 The strange thing is that this bloated welfare state of ours is really an anachronism. Organized public assistance for the eco nomically weak originated and had significance in a definite pe riod of economic and social history, the period between the pre industrial and today's advanced industrial society, when the old social pattern dissolved and the individual, deprived of its support, hecame a helpless proletarian. Thus a vacuum was created and there was a need for relief and assistance which could hardly have heen met adequately without public funds, private charity notwith standing. The paradox is that today the modern welfare state car ries to an excess the system of government-organized mass relief precisely at a moment when the economically advanced countries have largely emerged from that transition period and when, there fore, the potentialities of voluntary self-help by the individual or group are greatly enhanced.

Government-organized relief for the masses is simply the crutch of a society crippled by proletarianism, an expedient adapted to the economic and moral immaturity of the classes which emerged from the decomposition of the old social order. This expedient was neces sary as long as most factory workers were too poor to help them selves, too paralyzed by their proletarian position to be provident, and too disconnected from the old social fabric to rely on the soli darity and help of genuine small communities. It can be dispensed with in the degree in which we may hope to overcome that inglori ous period of proletarianization and rootlessness. In so far, then, as the advanced countries have emerged from that phase and can count upon a normal degree of individual provi dence, the principle of the welfare state has outlived its necessity. 154 WELFARE STATE AND CHRONIC INFLATION It is difficult to understand why the welfare state grows so exuber antly just now when it has lost much of its urgency. People regard as progress something which surely derives its origin and mean ing from the conditions of a now all hut finished transition period of economic and social development. They forget that if we are to take respect for human personality seriously, we ought, on the con trary, to measure progress by the degree to which the broad masses of the people can today be expected to provide for themselves out of their own means and on their own responsibility, through sav ing and insurance and the manifold forms of voluntary group aid.

Only this is ultimately proper to free and mature men; they should not constantly look to the government for help which in the last resort can be paid for only out of the taxpayers' pockets or by the restrictions which the devaluation of money forces upon its victims. Are we to call it progress if we continuously increase the number of people to be treated as economic minors and therefore to remain under the tutelage of the state? Is it not, on the contrary, progress if the broad masses of the people come of age economically, thanks to their rising incomes, and become responsible for themselves so that we can cut down the welfare state instead of inflating it more and more? If government-organized fllass relief is the crutch of a society crippled by proletarian ism and enmassment, then we should direct all our efforts to being able to do without this crutch. This is true progress, from whatever point of view we look at it. It can be measured by our success in steadily widening the area of indi vidual and voluntary group providence at the expense of compul sory public providence. In the same measure we shall also overcome proletarianization and enmassment and the overriding danger of degrading man into an obedient dOlnestic animal in the state's giant stables, into which we are being herded and more or less well fed.

The objection is sometimes raised against this viewpoint that while it is true that economic improveruent has lessened the masses' needs for public help, the loosening of family ties has increased these needs. It cannot be denied that family ties have loosened. But 155 A HUMANE ECONOMY we may ask whether the masses' need for help has not been far more diminished by higher incomes than increased by the loosening of family ties. Secondly, we may observe that there is no reason at all why we should simply accept the dissolution of family and fam ily solidarity. A short time ago, a member of the House of Com mons movingly described her father's plight in order to prove how inadequate the welfare state still is. But this is no proof of the urgency of public help; it is merely an alarming sign of the disap pearance of natural feelings in the welfare state. In fact, the lady in question received the only proper answer when another member of Parliament told her that she should be ashamed if her father was not adequately looked after by his own daughter.

The modern welfare state, which appears an anachronism in the light of these reflections, would be incomprehensible if we failed to consider that it has changed its meaning. Its essential purpose is no longer to help the weak and needy, whose shoulders are not strong enough for the burden of life and its vicissitudes. This purpose is receding and, indeed, frequently to the detriment of the neediest. Today's welfare state is not simply an improved version of the old institutions of social insurance and public assistance. In an increas ing number of countries it has become the tool of a social revolution aiming at the greatest possible equality of income and wealth. The dominating motive is no longer compassion but envy.4 Taking has become at least as important as giving. In the absence of a sufficient number of genuinely needy people, they have to be invented, so that the leveling down of wealth to a normal average, which satisfies social grievances, can be justified by moralistic phrasemaking. The language of the old paternal government is still current and so are its categories, but all this is becoming a screen that hides the new crusade against anything which dares exceed the average, be it in income, wealth, or performance. The aim of this social revolution is not achieved until everything has been re duced to one level, and the remaining small differences give even greater cause for social resentment; on the other hand, it is im156 WELFARE STATE AND CHRONIC INFLATION possible to imagine a situation in. which social resentment finds nothing to fasten on any more. In these circumstances there can be no foreseeable end to this developruent as long as the fatuous social philosophy which underlies the modern welfare state is not recog nized and rejected as one of the great errors of our time. 5 The in creasingly obvious ill effects of the welfare state, which include chronic inflation, should help to bring us to our senses.

Several approaches are possible in trying to define more closely the revolutionary change of which the welfare state is an expres sion. We could say, for example, that it is the outcome of a three stage development during the last one hundred years, beginning with the stage of individual relief graded according to genuine needs, passing through public social insurance, and ending up in today's stage of universal, all-encompassing security. Another in terpretation is related to the first. It is that the first stage was one of assistance and was designed to be self-liquidating as soon as possible; this was followed by the idea that government help should become a permanent institution, though a selective one, to be drawn upon only in well-defined cases. The last stage is that of today's revolutionary principle, which turns the state into an income pump, working day and night, with tubes and valves, with suction and pressure flows, just as its inventor Lord Beveridge described it more than ten years ago.

Whichever way we look at it, the revolutionary character of the most recent phase of the developrnent is obvious. A whole world divides a state which occasionally rescues some unfortunate indi vidual from destitution from another state where, in the name of economic equality and to the accompaniment of the progressive blunting of individual responsibility, a sizable part of private in come is constantly sucked into the pumping engine of the welfare state and diverted by it, with considerable friction losses. Every thing into the same pot, everything out of the same pot-this is becoming the ideal. As an astute British critic sarcastically puts it: "Everything must be free and equal--except the progressive taxa157 A HUMANE ECONOMY lion out of which it is all financed." (Walter Hagenbuch, in Lloyd's Bank Review [July 1953], p. 16).6 The sound old conservative and philanthropic principle that even the poorest should have something to fall back on has changed into quite another: the spreading socialization of the use of income, resting on the leveling and state-idolizing theory that any expansion of social services for the masses is a milestone of progress. Since in this system genuine individual need, as ascertained from case to case, ceases to be the standard of relief, it so happens, as we have said, that the poorest and weakest are frequently the losers. The unmistakably collectivist character of the welfare state leads in the extreme case to what another British critic, Colm Brogan, has called the pocket-money state. It is a state which deprives people of the right to dispose freely of their income by taking it away from them in taxes and which, by compensation, and after deduction of the extraordinarily high. administrative costs of the system, takes lover the responsibility for the satisfaction of the more essential needs, either wholly (as in the case of education or medical care) or in part (as in the case of subsidized housing or food). What people eventually retain from their income is pocket money, to be spent on television or football pools.

A hundred years ago Heinrich Heine epitomized the ideal of an egalitarian and collectivist epicureanism in the following lines: o sugar peas for all the world, Let pods yield up their marrow; The heavens above we gladly leave To angel and to sparrow. 7 The "sugar peas for all the world" have come true, thanks to a socialization of life such as Heine would have abhorred, notwith standing his theoretical flirtation with socialism. But whether they make up for what Heine irreverently describes as "the heavens above" is another and very doubtful question. 158 WELFARE STATE AND CHRONIC INFLATION The situation which the leading welfare-state countries have al ready reached, and which others are aiming at, startlingly coin cides with the famous vision which Alexis de Tocqueville, Heine's contemporary, saw in his mind's eye when he described the coming state in his classical work Democracy in America: "[The govern ment] covers the surface of society with a network of small com plicated rules, minute and uniform, through which the most original minds and the· most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom foreed by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd." (Vol. II, Book IV, Chapter 6, p. 319.) A leading German socialist recently ven tured the remark (in an article in the Deutsche Rundschau) that, thanks to the development of the welfare state, the "humanization of the state," Pestalozzi's noble aim, was giving way, even this side of the Iron Curtain, to the "e1tatization of man."

So much for the revolutionary eharacter of the modern welfare state. Its traces are ubiquitous. One of them is the apparently irre sistible extension of public providence to ever wider classes who would certainly provide for themselves if left alone but are now put under the tutelage of the state. Equally striking is another peculi arity of the modern welfare state which is intimately connected with its nature. In the old days, public assistance· was, as we noted, intended as a subsidiary and temporary substitute for people's own provision for themselves and as such was meant to safeguard only a certain minimum; nowadays, public services are increasingly becoming the rule, often with the hardly veiled intention of meet ing maximal or, indeed, luxury standards. Nothing is, in any case, dearer to the hearts of the new ideologists of fiscal socialism than 159 A HUMANE ECONOMY the highest possible taxation, and we can be certain that they feel no irresistible urge to economize in fields where they can confer blessings upon the broad masses of voters.

Perhaps we can make all of this even clearer if we illustrate the change with a few examples. A very fruitful field for this purpose is, again, housing policy. Almost all countries are familiar with this particular manifestation of the welfare state. The old and com mendable principle that there are a few marginal problems on the housing market which justify a helping hand has been transformed beyond recognition. With the war and its consequences as a pre text, it has been replaced by a long-term policy of low rents, first at the expense of the politically weak minority of landlords, who are thus to all intents and purposes expropriated in some countries; then at the expense of the taxpayers, who, of course, largely coin cide with the subsidized tenants, so that they pay in taxes what they save in rent; and then at the expense of the tenants of non subsidized new buildings, whose rents are pushed up by the system of rent control; and finally at the expense of the nation's capital stock. We have reached the point where it seems odd even to ask why everybody should not, as used to be the rule, payout of their own pocket the full cost price of their apartment just as they pay for their clothes.

Another very characteristic change has taken place in the equally important field of education. In many countries, the old and tested principle of helping gifted young people with scholarships, but for the rest expecting parents to make a contribution to the cost of their children's higher education, has been replaced by the ideal of a public and uniform system of education that is free at all levels and thereby completely socialized. One hardly dares put forward the notion that there is nothing wrong in expecting parents nor mally to make a sacrifice for their children's education. The conse quences of this kind of educational Jacobinism are becoming ever more visible, and they may eventually lead to a swing in public opinion. In Great Britain, where the development has gone furthest, 160 WELFARE STATE AND eHRONIC INFLATION parents who are prepared to make personal sacrifices in order to offer their children a better education than they receive free in the state's school machine are suspected of not having the right "social"

attitude. Again one might ask why it should he proper and natural to pay all the expenses of an automobile out of one's own pocket but shift the expenses onto the state, that is, onto the taxpayer and hence possibly back onto oneself, in the case of the education of one's children; but, as in other cases, the very question is heretical and a sign of reprehensible views.8 As a last important example, let us take the admittedly difficult one of medical services. The road from old-style social policy to the modern welfare state can again be clearly traced. The original principle that the economically weakest should be relieved of the risk of costly operations or prolonged sickness has gradually changed in our generation to something entirely different. Step by step, health services have been socialized, the British National Health Service being the summit this side of the Iron Curtain; the exception has become the rule and the assistance granted for genu ine needs has been transformed into a permanent system.

In this manner we are getting further and further from the rule that people who can provide for themselves in other respects should, in principle, also provide in their private budget for sickness, rely ing, if they wish, on insurance as an institution invented for the risks of the unforeseeable. This should at any rate be regarded as the sound and normal principle appropriate to a market economy, and it should find the widest possible application. The situation into which compulsory health insurance has got in the majority of the Western industrial countries urgently suggests that we should remind ourselves of this principle. Compulsory health insurance itself is seriously ill nearly everywhere, and a recovery must be sought in the following principal ways: first, compulsory insurance should be limited to those classes for whom the risk of sickness constitutes a serious burden and who are not easily amenable to voluntary insurance; secondly, we should encourage all those mani161 A HUMANE ECONOMY fold forms of decentralized assistance for which Switzerland may be held up as a model; and thirdly, we should introduce into all systems of sickness insurance universal and sizable individual cost contributions which can easily be adjusted in cases of hardship.9 Let us now try to assess the significance of this welfare state for modern civilization, society, economy, and public life. Naturally, we can do no more than stress a few salient points.

We begin with a circumstance that is of particular importance in view of all the misgivings already mentioned and still to he men tioned. The dangers of the welfare state are the more serious he cause there is nothing in its nature to limit it from within. On the contrary, it has the opposite and very vigorous tendency to go on expanding. All the more is it necessary to impose limits from with out and to keep a sharp and critical eye on it. By its continuous expansion, the welfare state tries to cover more and more uncer tainties of life and ever wider circles of the population, but it also tends to increase its burdens; and the reason why this is so danger ous is that while expansion is easy and tempting, any repeal of a measure later recognized as hasty is difficult and ultimately po litically unfeasible. It is hard to imagine that Great Britain would have set up the National Health Service in its present far-reaching form if people had realized in advance how it would work. out, or even if some questions, which now appear elementary, had been raised and thought through in time. 10 It is equally hard to imagine how this venture could be undone today and so people try to make the best of it. But any further step along the road to the welfare state should be considered with the utmost caution, with a very clear view of the consequences and in the knowledge that, like the reduc tion of the minimum voting age, it is normally irreversible.

The welfare state not only lacks automatic brakes and not only gathers impetus as it moves along, it also moves along a one-way street in which it is, to all intents and purposes, impossible or, at any rate, exceedingly difficult to turn back. What is more, this road 162 WELFARE STATE AND CHRONIC INFLATION undoubtedly leads to a situation where the center of gravity of society shifts upwards,· away fro:m genuine communities, small, human, and warm, to the center of impersonal public administra tion and the impersonal mass organizations flanking it. This im plies growing centralization of decision and responsibility and growing collectivization of the individual's welfare and design for life. The effects of this development should he examined carefully in all respects. So far we have been able to rely on the reactions of individuals who know that they must assume responsibility for cer tain risks; but we must be clear in our minds that the welfare state, hy shifting the center of gravity of decision and responsibility up wards, weakens or distorts these reactions. What is the effect on production if individuals are relieved of the consequences of bad performance but at the same time also deprived of incentives for ;good performance, especially performance entailing some risk?

What is the effect on such important decisions as those relating to saving and investment? What happens to the birth rate, which in the past was limited, to some extent, by the fact that the individual remained responsible for his own family, whatever its size, whereas now he is relieved of that responsihility or even allowed to cash in -on procreation? These are some of the questions which every un prejudiced person ought to ask today. The individual and his sense of responsibility constitute the secret mainspring of society, and this mainspring is in danger of slackening if the welfare state's leveling machine lessens both the positive effects of better performance and the negative ones of worse performance. It is not surprising that some observers, in cluding no less a man than Field Marshal Montgomery, should be gin to wonder whether the overgrown welfare state is not well on the way to undermining the moral and social health of the nation which succumbs to its temptation!;. Something of this kind must have been in Goethe's mind when, two years before the French Revolution, he wrote this prophetic sentence: "I must say, 1 heA HUMANE ECONOMY lieve that humanism will eventually prevail; but I am afraid that at the same time the world will become a huge hospital, with every one nursing his neighbor." (Italienische Reise II, Naples, May 27, 1787.) Nor must we pass over in silence another question, which has already been put in all seriousness and which, indeed, can hardly be evaded. It is the question of whether the crushing costs of the welfare state, which can no longer be reduced without political inconvenience, are not one of the major factors impairing the free world's resolution and the strength of its military defense against the Communist empire and thus forcing the West to concentrate more and more on nuclear defense. To be sure, this does not pre vent precisely those who sympathize most with the welfare state from wanting to snatch from the West even this last desperate weapon .which the welfare state has left it.

The past's extreme individualism is not least to blame for the reversal which has brought about the opposite extreme, the modem welfare state. It is surely the mark of a sound society that the cen ter of gravity of decision and responsibility lies midway between the two extremes of individual and state, within genuine and small communities, of which the most indispensable, primary, and natural is the family. And surely it is our task to encourage the develop ment of the great variety of small and medium communities and thereby of group assistance within circles which still have room for voluntary action, a sense of responsibility, and human contact and which avoid the cold impersonality of mass social services. The modern welfare state is, without any doubt, an answer to the disintegration of genuine communities during the last one hundred years. This disintegration is one of the worst legacies the past has left us, whether we call it mass civilization, proletarianization, or any other name. But it is the wrong answer. I said this more than ten years ago, when it was the essence of my criticism of the Bev eridge Plan. Far from curing this disease of our civilization, the welfare state alleviates a few symptoms of the disease at the cost of 164 WELFARE STATE AND CHRONIC INFLATION its gradual aggravation and eventual incurability. It is, for instance, a lamentable misunderstanding of the problem to permit the family allowance funds to absorb into the state's income-pumping system even the family itself.

There is worse to come. If the modern state increasingly takes it upon itself to hand out welfare and security on all sides-first to the advantage of one group, then of another-it must degenerate into an institution which fosters moral disintegration and prepares its own eventual doom. We are again reminded of Frederic Bastiat's malicious definition; the modern state fits it more and more closely. It also confirms Dean Inge, who pessimistically re garded politics as the art of conjuring rnoney out of the pockets of the opposite party into those of one's own party and making a liv ing thereby. The morally edifying character of a policy which robs Peter in . order to pay Paul cannot be said to be immediately obvious. But it degenerates into an absurd two-way pumping of money when the state robs nearly everybody and pays nearly everybody, so that no one knows in the end whether he has gained or lost in the game.

It would also be well not to bring in rnorality when social griev ances and ruthless pressure-group politics end up in claims to the well-earned income and property of others, and hence in the con fiscatory taxation with which we have all become familiar. It is true, of course, that people do not always realize that when they turn to the state for the fulfillment of their wishes their claims can be satisfied only at the expense of others. We have met the un derlying sophism before. It rests on the habit of regarding the state as a kind of fourth dimension,. without stopping to think that its till has to be filled by the taxpayers as a whole. A money claim on the state is always an indirect claim on somebody else, whose taxes contribute to the sum demanded; it is a mere transfer of purchasing power through the mediuITl of the state and its com pulsory powers. It is astonishing for how long this natural and simple fact can be obscured by the rnodern welfare state.

165 A HUMANE ECONOMY The more widely the principle of the welfare state is applied, the closer comes the moment when the giant pumping engine turns out to be a deception for everybody and becomes an end in itself, which eventually serves no one except the mechanics who make a living out of its manipulation, namely, bureaucrats. They naturally have an interest in obscuring the· facts. There is, however, one cir cumstance which should help us to understand how this deception can be worked for so long; it is the fact that few things have con tributed more to the most recent development of the welfare state than the concept, born of the Great Depression, that society was im mensely rich but that its wealth remained potential as long as mone tary .circulation was faulty, and could be transformed into actual wealth by increasing effective demand. The wealth so liberated from its slumbers would then be justly distributed by the welfare state. At the same time-and this is one of the most popular conclusions drawn from the Keynesian doctrine-this redistribution of income would increase mass consumption and reduce saving and would thus be the best means of insuring full employment and keeping the welfare state's springs flowing.

It was the depression of the thirties which fostered this faith in a sort of self-financing of the comprehensive welfare state, another kind of "fourth dimension"; and it is this faith alone which can explain the recklessness with which the problem of the cost of the welfare state has been neglected for so long. Today the time of illusions is past. It has become clear, and it is widely said, especially in Great Britain,11 that if one seriously wants to put the welfare state into practice, one has to use taxation to stir up income distribution at all levels and has to draw even on the lowest income groups to help finance the cost. The burden of the system of mass social services, which the state enforces, can no longer be borne by the higher incomes alone but must be placed on the shoulders of those same masses whose interests the system is to serve. This means that to a large extent the money is conjured from people's right pocket into their left, with a detour via the treasury 166 WELFARE STATE AND CHRONIC INFLATION and the enormous friction losses entailed thereby. It has become clear now that, under the spell of the "poverty amidst plenty" illu sion, people overestimated the potential wealth even in the most favorable case. It has also become c:lear that there is a price to be paid in the form of the costs of ever lTIorepowerful state machinery, of a blunting of the will to work and of individual responsibility, and of the dreary grayness of a soeiety in which vexation at the top and envy at the bottom choke civic sense, public spirit, creative leisure, neighborliness, generosity, and genuine community. What remains is the pumping engine of Leviathan, the insatiable modern state.

The utmost limit of the welfare state, then, lies at that point where its pumping engine begins to deceive everybody. Some na tions have already reached this point. One may ask the heretical question of whether everyone would not be better off if the welfare state were dismantled, except for an indispensable minimum, and if the money thus saved were left to non-governmental forms of social services. 12 The question gains in urgency by the fact that there are legitimate doubts about whether the enormous tax bur den, to which the commitments of the welfare state contribute de cisively, is in the long run at all cOJmpatiblewith a free economic order and whether it can continue without permanent inflationary pressure. Another very grave aspect of this development generally receives but scant attention. It is that fashionable social phraseology is apt to obscure the fact that the direct or indirect compulsion inherent in the welfare state tends to politicize social security. Theconse quences are obvious. Security from the risks of life is at the mercy of both the state's bureaucracy and political strife. Thus our so richly paradoxical age praises as progress that which, in fact,en hances the power of the national state. The more we appeal to the solidarity of people of the same nationality or domicile and the more we fuse them into a "national community" in which money is transferred backwards and forwards, the more perfectly shall we 167 A HUMANE ECONOMY "nationalize" man to the detriment of a free international com munity of peoples and their solidarity.

In the nineteenth century, Ernest Renan could still define a na tion as a "plebiscite de tous les jours"; now we are approaching the day when we can define it as a pension fund, a compulsory in surance scheme in which passport and certificate of residence are a free insurance policy, an income pump de tous les jours. Saving and private insurance are forms of provision against risks which belong to the area of economic rationality, the market, private law, and freedom. They are not bounded by national frontiers. The field of private investment and insurance is the whole world; but na tional social security falls into the area of politics, collectivist or ganization, public law, and compulsion and therefore locks people in behind the bars of the national state. Social services whose back bone is the state's compulsion are, strictly speaking, national serv ices, and social insurance is nothing but national insurance unless, of course, we think of a world state, where Germans, Ital ians, Argentinians, and Ethiopians join in a world pension fund.

The list of the welfare state's paradoxes and illusions is not yet exhausted. A further circumstance deserves mention. Very many people imagine that taxation of the higher income brackets merely implies restriction of luxury spending and that the purchasing power skimmed off from above is channeled into "social" pur poses down below. This is an elementary error. It is quite obvious that larger incomes (and larger wealth) have so far mainly been spent for purposes which are in the interests of all. They serve functions which society cannot do without in any circumstances. Capital formation, investment, cultural expenditure, charity, and patronage of the arts may be mentioned among many others. If a sufficient number of people are wealthy and if they are dispersed, then it is possible for a man like Alexander von Humboldt to pay out of his own pocket for scientific ventures of value to everyone or for Justus von Liebig to finance his own research. Then it is possible, too, that there should be private teachers' posts and thou168 WELFARE STATE AND CHRONIC INFLATION sands of other rungs on the ladder on which the gifted can climb and the very variety of which makes it much more likely that some help will be forthcoming somewhere, whereas in the modern wel fare state their fate depends upon the decision of one single official or upon the chances of one single examination. 13 If, then, the higher income groups are crushed by progressive taxation, it is obvious that some of their functions will have to be dropped and, since they are indispensable, taken over by the state even if it is only the maintenance of some historic monument which used to be private property. To this extent, at any rate, the purchasing power taken from above is not at the disposal of the welfare state. It must be reserved for the purpose of paying, with public funds, for private services made impossible by taxation.

This nullifies the aim of the welfare state. If the welfare state should claim any merit for educating, say, a genius like Gauss at public expense, the answer is that in the actual case of Gauss the task was discharged excellently and quite unbureaucratically, not only by the Duke of Brunswick, but also by a lot of others who would today be prevented from doing so by the welfare state's taxa tion or would, at any rate, be left with little incentive or inclination to spend their money in this way. In this case, then, the upper income groups' loss of purchasing power is not matched by any gain on the part of the lower income groups. The benefit goes not to the masses but to the state, which waxes in power and influence. At the same time, a powerful stimu lus is given to modern state absolutism, with its centralization of decisions on very important matters, such as capital formation, in vestment, education, scientific research, art, and politics. What used to be personal and voluntary service is today at best state service, centralized, impersonal, cOlupulsory, crudely stereotyped, and bought at the price of curtailed freedom.

Inevitably, such socialization of income uses for socially im portant functions must make a country's moral climate oppressive. Kindliness, honorary office, generosity, quiet conversation, otium 169 A HUMANE ECONOMY cum dignitate, everything which Burke calls by the now familiar name of the unbought graces· of life-all of that suffocates under the stranglehold of the state. Everything-paradoxically in a wel fare state-is commercialized, everything an object of calculation, everything forced through the state's money-income pump. Hardly anything is done on an honorary basis any more because few can afford it; civic sense and public spirit are transformed into vexa tion at the top and envy at the bottom. In these circumstances everything that is done is done professionally and for money. There is a narrower margin of income available for free gifts, voluntary sacrifice, a cultivated way of life, and a certain breadth of spending, and for this reason the climate is not congenial to munificence, diversity, good taste, community, and public spirit.

Civilization is blighted. ~, This is one of the roots of the leaden boredom which-as we have had occasion to note earlier-seems to be a distinguishing feature of the advanced welfare state. Another root of this evil is closely connected. It is that the welfare state, contrary to its pro claimed aim, tends to petrify the economic and social stratification and may impede rather than facilitate movement between classes. Severe taxation, especially in the form of steeply progressive in come taxes, must surely hit those incomes most which are high enough to allow for the accumulation of wealth and the assump tion of business risks.l 4 Is this not bound (for a number of other reasons, too, which this is not the place to discuss) to make it more difficult to set up new businesses and to acquire property? Does this not imply that it is becoming much harder for anybody to work himself up above the broad, low plain of propertyless income earners? And does it not also become far less attractive even to try to do so, especially since the welfare state itself takes care of a sort of comfortable stall-feeding of the domesticated masses? Is this not bound to work to the benefit precisely of existing large firms?

At the same time, life in such a country becomes about as exciting and entertaining as a game of cards in which the winnings are 170 WELFARE STATE AND CHRONIC INFLATION equally divided between the partners at the end. It seems a hopeless undertaking in these circumstances to try to raise oneself eco nomically or socially, unless one chooses to go into administration, whether public or in the big associations. It is. the officials who increasingly become the pillars and beneficiaries of this system, not excluding the growing number of functionaries in the multi plying and spreading international organizations. In this respect, then, we may ask whether the out-and-out welfare state does not counteract one of its own maj or purposes. The same question arises in another context. Like the welfare state's claim that it loosens class stratification, i.ts claim to be an instrument of equality is very doubtful. While it certainly does work towards equality in the sense discussed so far, it does not do so in another, a cruc~al and wholly desirable sense. The continual compulsory re distribution of income undoubtedly furthers material equality. But at what price? This policy inevitably implies a growing concen tration of power in the hands of the administration which directs the income flow, and this no less inevitably implies growing in equality in the distribution of power. Would anyone deny that the distribution of this non-material good, power, is incomparably more important than the distribution of material goods, since the former is decisive for men's freedom and unfreedom?

To say this is to say no less than that the modern welfare state, in the dimensions to which it has grown or threatens to grow, is most probably the principal form of the subjection of people to the state in the non-Communist world. The welfare state does not solve, or solves only partially, the problerns which it is intended to solve; on the contrary, it makes them less susceptible to serious and genu ine solutions. By contrast, it causes the power of the state to assume giant proportions "until each nation is reduced to nothing better than a flock of timid and industrious working animals, of which the government is the shepherd." It forces us to accept the idea that Tocqueville's vision has every chance of coming true now, after a hundred years. 171 A HUMANE ECONOMY The Problem of Social Security in a Free Society Thus we have to be alert to the grave dangers which this develop ment entails for the health of state, economy, and society alike and for freedom, sense of responsibility, and naturalness in human relations. The desire for security, while in itself natural and legiti mate, can become an obsession which ultimately must be paid for by the loss of freedom and human dignity-whether people realize it or not. In the end, it is clear that whoever is prepared to pay this price is left neither with freedom and dignity nor with security, for there can be no security without freedom and protection from arbitrary power. To this exorbitant price must be added another, as we shall shortly see, namely, the steady diminution of the value of money. Surely, every single one of us must then realize that security is one of those things which recede further and further away the more unrestrainedly and violently we desire it.

We can counter these dangers only if we refuse to drift with the current. First of all we have to guard against confusing slogans. One of the most dangerous and seductive of them is the expression "freedom from want," which was coined by that master of the alluring phrase, the late President Roosevelt, as part of the familiar list of four freedoms. We only have to think a little to realize that this is, in the first place, a demagogic misuse of the word "freedom." Freedom from want means no more than absence of something disagreeable, rather like freedom from pain or whatever else may occur to us. How can this be put on a par with genuine "freedom" as one of the supreme moral concepts, the opposite of compulsion by others, as it is meant in the phrases freedom of person, freedom of opin ion, and other rights of liberty without which we cannot conceive of truly ethical behavior and the acceptance of duties? A prisoner enjoys complete "freedom from want," but he would rightly feel taunted if we were to hold this up to him as true and enviable freedom. We would do well to refuse to follow this ratcatcher's 172 WELFARE STATE AND CHRONIC INFLATION tune of "freedom from want" right into a state which robs us of true freedom in the name of the false and where, unawares, we hardly differ from the prisoner, except that there might be no es cape from our jail, the totalitarian or quasi-totalitarian state.

If we pursue this line of thought, we discover something rather strange. The truth is that what is ll1eant by "freedom from want" is practically inseparable from co:mpulsion, that is, the exact op posite of freedom. The reason is as follows. To be in want means to he in a situation, for whatever reasons, in which we lack the means of subsistence and are unable to procure them by current earnings because we are ill or unemployed or bankrupt or too young or too old. We are freed from this want only if we can dispose of means from a source other than our cur rent production. Thus provision must be made for us to be able to consume without producing at the same time. The simplest and least problematic case is that we consume what we have set aside out of previous production. One important in stance is to own a house, built or bought in better days, which will provide us with the vital good of shelter in bad days, too. But apart from that, the practice of accumulating goods against needy times is not the rule, either for the individual or for society as a whole. This is, in fact, not what happens in our highly differen tiated society. If we have laid aside money and now use it up, this is not the same as if we ate up butter and lard previously produced and waiting for us in some store. Such stores would, on the con trary, be symptoms of grave disturbances in the circular flow of the economy. Normally, the consumption of our nest egg means that we are provided for out of current production by virtue of a title thereto acquired through earlier productive effort and certified by society in the form of money. In other words, if we think it through carefully, we live in times of need by consuming what someone else produces and does not himself consume. If we neglect for the mo ment certain qualifications and refLnements to which we shall re turn later, this is what relief means in the context of society as a 173 A HUMANE ECONOMY whole: contemporary work also produces on behalf of those who, in straitened circumstances, consume without producing.

By what title the needy draw on the current flow of production is quite another question. The pursuit of this question leads us to a cross-roads where one arm of the signpost points to the welfare state. Emergencies can be provided for either by the individual's own providence or by extraneous relief. It is self-providence if I have, by my own exertions and on my own responsibility, provided for the vicissitudes of life through saving or insurance; it is extraneous relief· if I shift this burden onto others. Extraneous relief may be voluntary; I may, for example, borrow or accept charity or the help of my family or some other group, which, in return, counts upon me when another member is in need of help. For the rest, it is compulsory, and since· this compulsion would not otherwise be necessary, it is considered as a burden imposed by the power of the state. This is rightly expressed in the very name "social charges," which indeed are, in practice, indistinguishable from the tax burden.

Now it is evident that the slogan "freedom from want" is not meant as an appeal for more self-providence, for saving and in surance. It was not understood in this domestic sense of good hus bandry, either by Roosevelt or by the masses. What is implied is extraneous relief, not voluntary but compulsory, and on a large scale. But in that case all that "freedom from want" means is that some people consume without producing while others produce and are forced by the state to forgo consumption of some of their own production. That is the sober and elementary fact. It justifies three conclusions. First, we see once more how thoughtless is the· notion of a sort· of fourth dimension, a cornu copia out of which the claim of any class for help in genuine or alleged need can be satisfied. It cannot be repeated too often that what is given to the one must be taken from the others, and when ever we say that the state is to help us, we are laying a claim to somebody else's money, his earnings or his savings.

174 WELFARE STATE AND CHRONIC INFLATION This brings us to the second point. If it is true that the modern welfare state is nothing but a steadily spreading system of gov ernment-organized compulsory providence, it must obviously com pete with the other forms by which a free society provides for it self: self-providence by saving and insurance and voluntary aid through family and group. The more the compulsory system spreads, the more it encroaches upon the area of self-providence and mutual aid. The capacity to provide for oneself and for mem bers of one's family or community diminishes and, what is worse, so does the willingness to do so. Worst of all, it is only too evident that there can be no stopping on this road because the less able and willing the welfare state's citizens become to provide for them selves and help others, the more pn~ssing becomes the demand for further expansion of public mass providence, leading to further curtailment of the ability and willingness to provide for oneself and voluntarily help others. It is yet another vicious circle.

This constitutes a further urgent warning that we must not allow the welfare state to develop to its critical point. Should, unfortun ately, this point already be reached, then we must do everything in our power to bring about a contraction of this disproportionate welfare state and to widen the area of self-providence and volun tary aid in spite of strong political and social resistance. To widen this area is one of the foremost tasks today if we want a sound and well-balanced society. This surely needs to be stressed no more; we are at the cross-roads of a free and a pre-collectivist society. The road we must take is plainly mapped: not more welfare state but less; not less self-providenee and voluntary aid but more. Here I come to my third point. We cannot, nowadays, do without a certain minimum of compulsory state institutions for social se curity. Public old-age pensions,health insurance, accident insur ance, widows' benefits, unemployment relief-there must naturally be room for all these in our concept of a sound social security sys tem ina free society, however little enthusiasm we may feel for them. It is not their principle which is in question, hut their ex tent, organization, and spirit.

175 A HUMANE ECONOMY The extent, organization, and spirit of that minimum of com pulsory public providence will be mainly determined by the purpose in view. This is where opinions finally divide. It is a matter of the personal approach versus the collectivist, freedom versus concen tration of power, decentrism versus centrism, spontaneity versus organization, human judgment versus social technique, responsible husbandry versus irresponsible mass man. After everything we have said, we surely need neither specify nor justify our choice. The purpose of minimum compulsory public providence must not be abused to set up a general system for taking care of all citizens and an all-pervasive social security organization. Least of all must the problem of relief for the weak and helpless be taken as a pretext for leveling out all differences in income and wealth. We need not repeat where that road leads. It is the road of social revolution, with all of its far-reaching consequences.

If we reject all this, our purpose can only be to support the really weak and helpless, to give them enough sustenance so that they do not become destitute-no more and no less. This assistance should he subsidiary only, to help out where the individual's own re sources or voluntary aid prove inadequate; it should not become the normal form of satisfying the need for security. The proper measure is not transgressed as long as such public providence does not weaken the impulse towards voluntary self help and group aid to supplement the bare subsistence minimum. The experience of Switzerland and the United States shows that, the introduction of comprehensive obligatory old-age insurance notwithstanding, total savings and private life assurances have risen considerably. This proves that such a desirable development is possible, whereas Great Britain and the Scandinavian countries, the models of the extreme welfare state, furnish discouraging ex amples of the contrary.15 These considerations surely make one thing· crystal clear. It is that the problem of social security in a free society is not primarily Qne of the technique of social insurance or social administration, 176 WELFARE STATE AND CHRONIC INFLATION and still less one of political expediency, but one of social philoso phy. Before we go into actuarial mathematics, we must have a clear picture of what we mean by a sound society. Only then shall we know on which side to put the emphasis: whether we are to strengthen the individual's resources, sense of responsibility, and thrift, as well as the natural solidarity of small groups, above all the family, or whether we are to give yet further impetus to the al ready almost irresistible modern tendency toward collectivism, the omnipotence of the state, mechanical organization, and the tutelage of man. Once we consider the direction. in which we move in the two cases, it must be evident that ultimately the choice lies between the individual and family on the one side and collectivism on the other or, to put it plainly, between the climate of freedom and its opposite. To consider this a mere eInpty phrase is to fail to grasp what is at stake today.

It would be frivolous to ignore these considerations. They are necessary if we want to know in what direction we are moving as we make decisions on particular questions of social policy tech nique. We may feel that we cannot avoid many a step in the wrong direction, but at least we should take them reluctantly, knowing that we are accepting a necessary evH and that each additional step along this road increases the danger. We certainly should take no such steps without a very clear and firm idea of what is the rule and what the exception, what the sound norm and what the possibly tolerable deviation. If we are earnestly concerned about the ultimate foundations of our civilization, our rule and norm and our cheer fully accepted ideal should be security through individual effort and responsibility, supplemented by mutual aid. It is the ideal of the "well-ordered house," and we cannot abandon it without shak ing the very foundations of a free society and making its difference from Communism no more than a Iuatter of degree.

In no circumstances should we allow ourselves to be misled by the argument that it is no longer possible in our age to give first place to self-providence and voluntary mutual aid and to reduce 177 A HUMANE ECONOMY public providence to a subsidiary minimum. This is defeatism, and it does not become any more convincing for generally being asso ciated with a barely concealed distaste for the former course of action. It belongs to the category of insincere resignation, which, by capitulating before allegedly immutable facts, contributes to its own justification. If we start out from the argument that in our age the problem of social security for the masses can be solved only by means of collective compulsory action and that any con siderable widening of the private zone is an illusion, then we shall end up by loading so much onto the compulsory system that the masses, burdened as they are with correspondingly high contribu tions and taxes and relieved of any care for their future, will be neither able nor willing to provide for themselves. If only the com pulsory system is sufficiently thoroughgoing and comprehensive, it is easy triumphantly to denounce self-providence as a pipe dream.

But all that is thereby proved is the familiar fact that the welfare state has a fatal tendency to get into a vicious circle from which we must escape. It would be somewhat surprising if no one had thought of de claring self-providence by the masses as not only hopeless but as a catastrophe for the economy. It has indeed been said that our modern economic system could not possibly digest so much sav ing. If "excess saving" is not to plunge the economy into deflation, depression, and unemployment, the capital thus accumulated must be absorbed by investment. But where are the investment oppor tunities on the scale presumed? Our reply is that this is a pseudo Keynesian exaggeration and oversimplification. It is a pity that we do not know what Keynes himself would have said, as chairman of an insurance company, about this attempt at playing off his theory against people's endeavor to better themselves by saving and insurance.

In the first place, this argument neglects the fact that if the prac tice of self-providence is to be at all possible, it presupposes high 178 WELFARE STATE AND CHRONIC INFLATION average incomes resting on high national productivity. This, in turn, presupposes genuine economic growth not artificially whipped up by inflation, and such growth depends upon appropriately large investment, which, if inflation is to be avoided, must be covered hy true saving. If, then, growing self-providence leads to a higher savings ratio, we have an urgent need for these extra savings in order to avoid a situation in which the high mass incomes, which we must assume by definition, do not rest upon the precarious foundation of inflationary investment. Moreover, as I have men tioned before, a by no means negligible part of self-providence takes place in an area where the question of balance between saving and investment does not arise at all, namely, when people acquire property in the form of a house and garden, which is one of the most important and desirable forms of self-providence. It is surely absurd in this case to speak of balancing saving and investment.

To take a concrete example, a country like Germany would gain a great deal if only it attained to the degree of self-providence com mon in Switzerland or the United States. But in both cases the problem is one of inflation, not deflation. Although Switzerland is the classical country of savers, polieyholders, and private pension funds, saving is insufficient to contain inflationary tendencies and to finance investment projects. The unusually high amount of sav.. ing in Switzerland has not given rise to any problem of how to prevent investment from lagging hehind savirlg and thereby re leasing deflationary tendencies. Thus the problem itself is a pseudo problem which may drive us into the fold of a compulsory state system of social security. To the extent that saving has risen in Switzerland and in the United Slates with the growth of the economy, this increased saving at the same time is the condition of further non-inflationary growth. 16 Another argument is sometimes adduced. It is that a compulsory state system of social security has a great advantage over self..

providence in that it does not require prior capital accumulation 179 A HUMANE ECONOMY and needs to raise only the currently necessary means each year, thereby living from hand to mouth. Is this not much cheaper, it is said, and does it not, therefore, make possible much more com prehensive and generous social benefits for the masses? This simple procedure, which has been called the pay-as-you-go method, is in fact applicable also to mutual aid in smaller groups, but on the large scale necessary for mass social services, it is obvi ously reserved to the state, with its powers of compulsion. How ever, this is anything but an advantage. It is not enough to appeal to the elementary principle that any social payments must, in real ity, always be covered by current production. Another circum stance needs to be stressed, and it adds an important qualification to an axiom we have mentioned before: the extent of current pro duction is decisively influenced by previous investment, and unless this investment is to have inflationary effects, it must as a general rule be covered by saving.

Therefore, a pension system resting on capital accumulation makes a considerable contribution to national capital formation as a determining factor of the national product. The system thus tends to increase the national fund of goods out of which the social pay ments, translated into goods, are made. A pay-as-you-go system, on the other hand, would stop up this source of capital formation and, unless a substitute can be found, hamper the growth of the social product. The more comprehensive such a system is, how ever, the less cart a substitute be counted upon. It is bad enough that social-insurance funds may impair the genuine and traditional forms of self-providence and thereby private capital formation, but at least they fill the gap with a sort of collective saving. But a pay as-you-go system would retain the disadvantage of weakening self providence without compensating the diminution of private capital formation by collective saving.

It is difficult to think of a worse combination. But in a mass democracy there is an extraordinary temptation to choose this method because it offers the possibility of organizing a compre180 WELFARE STATE AND CHRONIC INFLATION hensive and generous system of soeial payments without the awk ward restriction of capital covera.ge. The temptation is all the greater since it is possible with this system also to adjust social payments currently to the price and wage increases that are due to chronic inflation. German politicians recently succumbed to this temptation in spite of warnings to the contrary. This is an alarm ing sign of the times. There is every reason to expect that this exam ple will soon be followed elsewhere. 17 However, considerations of this kind, though necessary and not to be evaded just because of their technicalities, have the danger ous tendency to obscure from view the wider questions which should never be lost sight of in any discussion of the development of the modern welfare state. It may be well to return to these ques tions once more, if only to conclude the argument by stressing them. Two ideas above all need to be made quite clear.

The first is one with which we are already familiar. It is impos sible fully to grasp what is at stake today without constantly keep ing in mind that the system which goes by the name of welfare state is in the process of altering our society in one particular direc tion: in the name of equality and :mediocrity it is choking every thing above the average. We are moving towards a situation where the "common man" is relieved of his responsibilities and the "un common man" robbed of his ke~nness. But since above-average ability is the real condition of production, and at the same time so rare that it needs most careful cultivation and encouragement, it is not difficult to see what fate we are thus preparing for ourselves. The prospect is made even darker by the fact that the masters of the Communist empire are shrewd enough to encourage and reward above-average ability as best they can. What Charles Morgan wrote some years ago has lost none of its pertinence today: "The central crime against a society impoverished as ours has been is by no means to be happier or abler or healthier or more enterprising than other men, but to be a dependent mediocrity, fattening upon the state."18 181 A HUMANE ECONOMY The other idea may be expressed by a simple image. Let us imag ine that we are looking at one of the greatest works of Western art, Tintoretto's wall and ceiling paintings in the halls of the Scuola di San Rocco at Venice. This was one of those benevolent fraternities which in their time and in their fashion solved the problem of helping the poor and without which the city of the lagoons would hardly have survived a thousand years without revolution. The devotion of the friars was matched by the artist's, who is said to have taken no fee for his enormous work.

Now suppose, for the sake of argument, that there were a painter today of Tintoretto's stature. Can we imagine any welfare-state authority asking him to decorate its offices? And can we imagine a Tintoretto, absorbed in his task, painting his great work in self. less devotion to the glory of God, beauty, and love of man? These are cruel questions. But then we have the modern welfare state. The Welfare State on the International Plane Be that as it may, the fact remains that whatever we may have to say against the welfare state, the problems which it tries to solve are real enough. There are the economically weak, who are to be helped by the economically strong; there are the poor and the rich, between whom there ought to he no yawning gulf. If this is true of individuals, why not of whole nations? Are there not "poor" na tions and "rich," "economically underprivileged" and "privileged"

ones, and can the discrepancy between them not furnish plausible enough grounds for a claim to "equalization" such as underlies the welfare state? Why, then, not have a welfare state on the interna tional scale, with some nations giving, either voluntarily or com pulsorily, and others receiving? The idea is tempting and as such is by no means new. We met it twenty or thirty years ago in the Fascist and Nazi catchwords of the haves and the have-nots. We remember the violence with which 182 WELFARE STATE AND CHRONIC INFLATION Mussolini launched. what he called the class struggle of the prole tarian peoples against the satisfied and possessing peoples, and the Nazis demanded living space for themselves.19 At that time it was advanced industrial nations which insisted upon their right to a fair share in the raw-material resources and colonization areas of the underdeveloped countries; now it is the latter themselves which have taken up the battle cry of international "social justice." In these countries and in the Western world the economic develop ment of underdeveloped areas has become a slogan pressed home with more force than most others which we hear today, and there is .no mistaking the strong emotional overtones which are so famil iar a feature of the national welfare state. 20 The claim to overtake the lead in wealth established by others and the desire for equalization in the well-being of whole nations are pitched in the same key as the claims of the "underprivileged"

against the "privileged" which, on the national plane, have led to the conception and creation of the welfare state. No perceptive ob server of the current discussion on the development of underde veloped countries can help being struck with the tone of demand, defiance, and grievance on the part of those who believe themselves to he "disinherited," with the note of envy on their side and of "social conscience" and fear of envy and resentment (and their exploitation by Communism) on the other. It is hardly surprising in these circumstances that in the Western world the program of the economic development of underdeveloped areas finds its most active supporters among those who, in their own countries, advo cate the welfare state, economic planning, socialization, and infla tionary policies. The development of underdeveloped countries has become one of the most important fields for the champions of these ideologies. 21 Our first reply is that the analogy does not hold. One cannot equate nations and individuals without becoming guilty of that very common sophism which A. N. Whitehead calls the "fallacy of misplaced concreteness" or political anthropomorphism. 22 More183 A HUMANE ECONOMY over, there is no question here of provision for the future and so cial security against risks; what is involved is a claim of those who are. economically less successful to the wealth of those who are more successful. The champions of this idea have in mind not the legitimate but the unlawful and revolutionary aspects of the slogan of the welfare state, but they are not honest enough to say so clearly. Nor do they recognize that such international equalization of wealth could be brought about in no other way than by coercion on the part of an international state. If they gave this some thought, they would have to admit that it would be utopian to count on the creation of world government. But our weightiest objection is per haps that they misunderstand the problems facing the underdevel oped countries.

What is the meaning of economic development in an underde veloped country? The definition is not an easy one. We may per haps best put it this way: such countries try to repeat the process of economic growth which Great Britain was the first to achieve at the time of the industrial revolution and which has since taken place in one country after another. We are now beginning to have a better insight than before into the nature of this process. Above all, we are beginning to realize how difficult the start is bound to be and how many sacrifices it entails and how great is the diversity of the conditions which determine the pace and success of develop ment. At the time of early capitalism in England, and later in the other industrial countries of Europe, the United States, Canada, and all other countries, including Russia, the principal questions were these: Where is the necessary capital to be found? Where are the workers to be found whom industry needs? Where is the entre preneurial spirit to come from, with its initiative and industrial leadership, which are indispensable for the take-off into the dynamic forms of the modern industrial economy? Where is technical ex perience to come from which clearly is equally indispensable?

And finally, where are the agricultural surpluses to be found with which to feed the growing industrial and urban population? 184 WELFARE STATE AND CHRONIC INFLATION The pioneer country of the modern industrial economy, Great Britain, had the most difficult time in· all these respects because it had to rely on its own resources. This is particularly true of the problem with which the first of our questions is concerned and which is of paramount importance, namely, the problem of capital accumulation· to set economic development in motion. The task was no less than to make the "critical start" of economic development without any appreciable influx of capital from abroad and to draw on the country's own resources in accumulating the capital neces sary for the construction of machinee and factories, railways and ports, and other investment. This could only be done at the cost of restricting the consumption of a people which, at that time, was still poor and at the cost of other hurdens, hardships, and sacri fices. The price of the "critical start" -of the necessary sharp kink which sends the capital-supply curve steeply upwards at a stage when the fruits of development in the form of growing social product have not yet matured-was, in England, a situation which we have become accustomed to deseribi.ng as the misery of early capitalism, a habit due to the influence of Marxist propaganda and of a bias in the tradition of theoretical economics which has only now been overcome.

But there is no need to go to the other extreme. Whatever light modern economic historians may have shed on this period, it was grim enough. 23 Nevertheless, a sobering thought imposes itself. Nowadays, when this process of "autarkic industrialization" is re peated in many of the underdeveloped countries, we understand better than hefore that a period of at least relative restriction of mass consumption for the purpose of a rapid increase in domestic capital formation is an indispensable condition for the economic development of a country which cannot count on foreign capital aid. In England, capitalism had, as it were, to starve itself upwards, and it is not surprising that the British industrial revolution was not at once associated with that growth of mass incomes which was expected of the new technical miracles. What is astonishing is only 185 A. HUMANE ECONOMY how quickly even the pioneer country of industrialization man aged, in spite of enormous difficulties, to get beyond the "critical start," to raise the situation of the masses steadily, and to improve the originally so oppressive labor conditions. All this was done without the frightful and prolonged privations of Russian Com munism, without forced-labor camps, secret police, and firing squads.

The mention of Russian Communism brings us to the essential point. However difficult the beginning may have been in England because the central problem of capital supply had to be solved by the country's own efforts, the nations which followed England's example had far fewer difficulties. I have in mind the development of Western and Central Europe, the United States, Australia, South Africa, Argentina, and Canada. Their economic development was facilitated by·their being able to draw on the capital accumulation and on the economic and technical experiences of the earliest in dustrial countries, England and those immediately following-pro vided only that the other conditions of economic development indicated in our list of principal questions were fulfilled. This was, in fact, mostly the case. All this happened quietly, without anybody making a big "problem" out of it, without international organizations, programs, conferences, committees, and officials, without any pangs of moral and political conscience on the part of the developed countries and without fear of the possible consequences of inadequate help, and also without that mixture of begging, threats, and blackmail with which the underdeveloped countries appeal to conscience and fear.

Nobody dreamed of assuming compassionate attitudes towards the poor devils of the American prairies, the Australian bush, or the pampas of the Argentine; trusting their ability and good faith, one lent them money at 5 per cent and considered that this was a good bargain for both sides. But one thing was, of course, always taken for granted and therefore not even discussed, namely, the existence 186 WELFARE STATE AND CHRONIC INFLATION of the whole body of conditions and institutions which justified such trust and formed a free and firm bond between the developed and underdeveloped countries: freedom of international movement of goods, capital, people, and ideas, the rule of law, the market economy, respect for money and everything this implies. Russian Communism was the first great example of the fact that a developing country which chooses an economic and social system incompatible with the conditions of such a free flow of aid from the developed countries makes such aid impossible. If such a coun try insists on economic development, it condemns itself to the extra ordinarily difficult path of autarkic industrialization after the Brit ish pattern. The Kremlin masters thought for a while that they could escape this inexorable logic, but Stalin's first Five Year Plan showed that they had grasped it. Communism has meant not only the hard necessity to make the critical start by the privations of Russia's consumers and peasants, but also the choice of a method, the collectivist, under which the hmrdships of such national "self financing" of development are inordinately aggravated by the in herent weaknesses of a collectivist eeonomic order.

What is the misery of early British capitalism in comparison with the immense sacrifices of the Soviet experiment? The British had to wait a little while for the increase in mass prosperity and an im provement in labor conditions-but what is this in comparison with the long and still continuing sufferings of the masses in the Communist state? Nor should we :forget that Moscow's autarkic and collectivist method made the solution of another development problem much harder, namely, the problem of feeding the growing industrial and urban population. In England and in the other Western countries, development waE; accompanied by a steady and considerable increase in agricultural yields, and at the same time, the free world economy enabled the produce of the vast new culti vated areas of the New World to be used for feeding the industrial countries; but in Soviet Russia, COlnmunist economic methods led 187 A HUMANE ECONOMY to a decline in agriculture which even now does not seem to have been made good, if we are to judge by Russian statistics and the observations of Moscow's rulers.

Today's underdeveloped countries have to decide for themselves whether to solve the key problem of capital supply according to the West's international and market method or according to Moscow's autarkic and collectivist one. With the first method, the problem will be solved in the way which was normal and natural hitherto, and still is in the case of a country like Canada, that is, by a free and spontaneous influx of foreign capital. But if these countries' own policies of nationalism and socialism destroy the conditions of such capital supply, they have no right to complain of its absence, let alone to claim international charity. Such underdeveloped countries thereby maneuver themselves into a position where they clamor all the more vociferously and urgently for the kind of capital aid which we might call political and which corresponds to the concept of an international welfare state. If individuals in the Western countries have insufficient con fidence in the government of an underdeveloped country to entrust it, of their own free will, with their savings, then these individuals are to give up their savings by compulsion, via their own govern ments, without reward and without hope of repayment-spurred and applauded by international officials who, themselves, pay no taxes.

If an underdeveloped country cannot tap the source of foreign capital markets because of its own nationalist and socialist policies, then it must seek a supply of political capital. The money which will not flow freely has to be pumped up by means of diplomatic conferences, propaganda, and open or disguised threats, even at the risk that the flow may evaporate or trickle away in the heat of the same passions which have already dried up the original source. When it becomes impossible to turn to the market and private in vestors, the governments of the West, and through them the tax payers, have to be mobilized. 188 WELFARE STATE AND CHRONIC INFLATION This is the simple state of affairs to which the confusing multi plicity of action in this field can be reduced. Many underdeveloped countries refuse to satisfy the conditions necessary for a voluntary flow of capital from the West. They reserve to themselves all sorts of rights and devices, such as taxation, expropriation, exchange control, expulsion of foreign technicians, company law discrimina tion, and so on, and they refuse to pay in interest, dividends, and salaries the price without which no capital aid can be offered even in the most favorable case. All the more passionately do these countries proclaim their right to receive such aid for nothing and by way of the compulsion which "'\Vestern governments have to exert upon their taxpayers in order to raise the required capital. By the same crazy logic, the sums demanded become more and more fantastic.

In these circumstances it is more than ever necessary to stress the sober facts which cut the ground from under this concept of an international welfare state. Those underdeveloped countries which, by their policies and principles in economic and social matters, create the necessary conditions-the right climate-for private in vestment, obtain Western capital through the market. Fortunately, this species has not yet quite died out. The others, which do not create these conditions, have no right to complain about the conse quences. As they make their own bed, so must they lie on it. If a country resorts to political means to obtain capital aid by begging, defiance, or threats, it cannot invoke the argument of necessity. If it sets its policies by the lodestar of nationalism and socialism and persists in doing so, it must pay the price. If it does not want to pay the price, it must alter its policies.

That is the clear alternative. We should not let it be obscured any longer, not even by reference to certain undeniable facts which dis tinguish many of today's underdeveloped countries from the normal cases of the past. It is true that some of the most important of the underdeveloped countries suffer from unprecedented overpopula tion, but this is no reason why they should, in addition, pursue poli189 A HUMANE ECONOMY cies which scare foreign capital away and so make the position worse. Egypt has become a warning example of this kind of thing. It is also true that, unlike the classical Western cases, many under developed countries lack some of the essential conditions of indus trialization, especially potential entrepreneurs and skilled labor; but in such cases it may well be asked whether it would not be better to do without industrialization rather than to enforce it by the methods of nationalism and socialism.

The Theoretical Background of Chronic Inflation After this excursion, let us return to our main subject. We now have to examine the close link which exists between the modern welfare state and the chronic inflation of our age, which we have had occasion to mention more than once. In order to see the con nection, we must examine and analyze chronic inflation itself. We need not waste much time on refuting attempts to deny that inflation has become chronic. It does, of course, afflict different countries in different degrees, according to the resistance, more or less energetic, of the government and the central bank. It occurs throughout a whole range of temperatures: "hot" inflation in coun tries where the value of money is melting away rapidly, unless "open" inflation is transformed into "repressed" inflation 24-but this is a measure which only Communist countries can apply at all successfully today; "temperate" inflation in most underdeveloped countries and pronounced welfare states; and "cold" inflation in countries which, like Switzerland, West Germany, and Belgium, have hitherto been most successful in combating inflation. These international differences in the temperature of inflation generate difficult problems for international payments, of which we shall have more to say later. But inflation in some form or other is today endemic in all countries, and no one denies it, not even those who might have an ideological or practical interest in pretending that there is no inflation.

190 WELFARE STATE AND CHRONIC INFLATION By contrast, it is not at all redundant to stress the point that to day's world inflation has not suddenly overtaken us during the last few years but is part of a long-term inflation. Apart from short and insignificant interruptions, there has, since 1939, been a rising tide of increasing volume and decreasing purchasing power of money so much so that one could rightly speak of the "great inflation. "25 The dollar, the Swiss franc, not to mention sterling and other cur rencies ravaged by the war, have during the last twenty years lost half, or more, of their value, in terms of increased prices. The end of the process is not in sight. Throughout history, inflation has often afflicted one country or another. But during the last five hun dred years, it has happened only four times that the deterioration of money was not limited to one nation but spread to the whole economically developed world: the era of the Spanish silver fleets, the French Revolution and Napoleonic Wars, during and after the First World War, and now, in our own time. All of these were catastrophes, but it looks as if the last were the worst. It differs from its predecessors in some essential characteristics to the point of being historically unique.

First of all, repressed inflation had never before been expe rienced; this particular form of inflation was unknown in the past because it presupposes a hitherto unknown degree of state power. It was for our time that this combination of inflation and collectiv ism was reserved. In other words, this is the first great inflation of the collectivist age. This leads us to the second novelt.y. Our inflation is the first to be marked, unequivocally and almost exclusively, by the ideolo gies, forces, and desires of modern rnass democracy. It is a demo cratic and social inflation and comes close to meeting the predic tion which a distinguished American social philosopher made more than thirty years ago: "It is not yet elear that it is going to be pos sible to combine universal suffrage with the degree of safety for the institution of property that genuine justice and genuine civiliza tion both require ••••If property sltands for work in some sense 191 A HUMANE ECONOMY or other of the word, and if money is the conventional symbol of property, the ends of justice tend to be subverted if this symbol fluctuates wildly; thrift and foresight become meaningless; no man can be sure that he will receive according to his works. Inflation of the currency amounts in practice to an odious form of conn.sca tion."26 The third essential feature peculiar to our own "great inflation"

is that its time limits cannot be strictly defined and that its period does not end with a definite return to monetary stability. Rather, it is the acute stage of a chronic pathological process fed by forces which are now permanently operative, and as such, it is not sus ceptible to any quick or lasting cure. The inflation of our time is intimately connected with some of its most obdurate ideas, forces, postulates, and institutions and can be overcome only by influenc ing these profound causes and conditions. It is not just a disorder of the monetary system which can be left to financial experts to re dress, it is a moral disease, a disorder of society. This inflation, too, belongs to the things which can be understood and· remedied only in the area beyond supply and demand. We have seen earlier that the inflation of our time is a bitter irony of history. It has come to pass in contradiction of gloomy forecasts and of the economic policy concepts deriving from them.

These concepts were based on the fear of deflation and it was an important cause of the "great inflation" that they were but very slowly recognized and admitted as inapplicable. The blame for inflation must be .laid at the door of the whole trend of postwar economic policy in most countries, that mixture of planning, wel fare state, cheap-money policy, fiscal socialism, and full-employ ment policy; but to understand this policy trend, we must go back to the revolution in economic theory which furnished the ideas and catchwords of inflationary policy and which is, above all, linked with the name of J..M. Keynes. His theory is seductively brilliant and elegant. However, this is not· the place to discuss the separate links in the chain of thought 192 WELFARE STATE AND CHRONIC INFLATION which led Keynes and his followeJrs to their bold conclusions or to show why the chain does not hold. 27. Our main concern here is the result of this "new economics" for the theoretical basis of economic policy. We may say briefly that a. whole generation of economists was so exclusively brought up to operate with economic aggregates that it forgot the things which until then were the real content of economic theory and which should never be forgotten: namely, that the economic order is a system of moving, and moved, sepa rate prices, wages, interests, and other magnitudes. Keynes's ag gregative functions made the plain mechanism of single prices look outdated and uninteresting, and we witnessed the development of a sort of economic engineering, with a proliferation of mathe matical equations. In the past, to be a good economist meant being able to assess the relationship between currently operative forces, and sound judgment, experience, and common sense counted for more than formal skill in handling methods illegitimately trans ferred from the natural to the social sciences; but the limelight came increasingly to be occupied by a type of economist who knew how to express hypothetical statements about functional relation ships in mathematical formulas or curves.

This new method was one part of the training of the new genera tion of economists and economic policy makers; another was the idea that saving is, at best, unnecessary and may be harmful. It follows that a policy measure is good when it increases effective demand and bad when it threatens to diminish effective demand. But if saving· and good husbandry are represented as enemies of economic progress, the leveling of income differences, which so cialists had so far demanded only on moral pretexts, can be put forward as a command of economic reason. The danger of inflation was reduced to a vague and remote possibility; the thing to be feared constantly was what was usually somewhat imprecisely described as deflation. Budgetary deficits, leveling taxes which diminish both. the ability and the willingness to save, artificially low interest rates, a combination of growing popular consumption 193 A HUMANE ECONOMY and investment stimulation, expenditure and credits on all sides, mercantilist foreign-trade policies with the twin purposes of miti gating the effects of those other policies on the balance of trade and of creating export surpluses as a further stimulant for the domestic money flow-all of these practices now received the blessing of economic science. Any protest was dismissed as stupid and old-fashioned, and when a government such as that of postwar Germany resolutely adopted an opposite course, it had to face a drumfire of criticism.

Now, when no one can deny any longer that inflation is indeed with us, we ought not to forget that this is the seed which Keynes has sown. No honest person can overlook how abundantly it is hearing fruit. The profound economic and social dis~rder which faces us in this inflation was prepared by an intellectual one. With out Keynes, or, rather, without The General Theory of Employ ment, Interest and Money, the science of economics would no doubt be poorer, but the nations would be richer to the extent that the soundness of their economy and currency would be less impaired by inflation. In so far as the full danger of inflation is now gen erally recognized, there may be wider understanding for the rea sons why the writer and his friends, who quickly took a decided stand against the destructive effects of deflation in the thirties, equally quickly took a decided stand against the Keynesian doc trines later, when the danger of inflation became apparent.

There can be no doubt that Keynesianism contributed decisively to the utterly wrong postwar orientation of the Western world, which, taught only to fear and combat deflation, followed the ban ner of "full employment" right into permanent inflation. In spite of all the warnings of the old-style economists, the danger was recog nized too late. It has become exceedingly difficult to face about to wards the true enemy, inflation. We should never have forgotten that over the course of centuries there has always been more danger of inflation than of deflation. Inflation is always a lurking temptation and at all times the way of 194 WELFARE STATE AND CHRONIC INFLATION least political and social resistance. Both inflation and deflation are monetary diseases, but, unlike deflation, inflation has an initial pleasant stage for wide circles of the population, and above all for the politically most influential, beeause it begins with the euphoria of increased economic activity and other boom symptoms. By and large, things happen just as they are described in the second part of Faust in the famous paper-money scene : "You can't imagine how it pleased the people." But that is precisely the dangerous se duction of inflation: it begins with the sweet drops and ends with the bitter, whereas deflation is most disagreeable from the very out set and is marked by the unpleasant symptoms of depression, unem ployment, a wave of bankruptcies, the closing down of factories, losses all along the line, and contraction of economic activity . It follows that of the two diseases, inflation is the rule and deflation the exception. In the course of the centuries, no wager has been more of a certainty than that a piece of gold, inaccessible to the inflationary policies of governments, would keep its purchasing power better than a bank note.

There was never much likelihood that governments would abuse their power to create money for the purpose of deflation, and today, in the age of paper currencies and the prevalence of infla tionary ideologies and interests, this probability has, to all intents and purposes, become nil. All the greater is the danger that gov ernments, swayed by weakness, ignorance, and lack of responsibil ity, may yield to these ideologies and interests and pursue policies which either cause, or at least favor or fail to obstruct, inflation. It is no exaggeration to say that hardly any government ever pos sesses absolute power over money without misusing it for inflation, and in our age of mass democracy the probability of such misuse is greater than ever before. To wrest this power from governments and to make the mone tary system independent of their arbitrariness, ignorance, or weak ness was one of the essential functions of the gold standard; hav ing so withdrawn money from politics, the other and equally im195 A HUMANE ECONOMY portant function of the gold standard was to create a truly interna tional currency system.28 Never has it been more essential to keep money out of politics than in our age of mass democracy. After the demise of the gold standard, a last counterweight against absolute government power over money remained, in the form of a certain degree of independence on the part of central banks. But this dam, too, has now broken in many countries, and in others it is so under mined that it is becoming less and less effective. Independent cen tral banks seem to be among the Bastilles which give our. modern Jacobinism no peace until they are razed to the ground.

Inflation is as old as the power of government over money, and equally old are the theories and ideologies which, while not always justifying inflation, at least excuse it. What is new in our times is that such theories were never before so daring and subtle and that the ideologies supported by these theories were never before so pow erful as since the beginning of our own period of inflation. This is the background which we have to keep in mind in examining more closely the chronic inflation of the present day. The Nature of Chronic Inflation Today's chronic inflation is all the more uncanny because its nature is difficult to assess. It does not fit into any conceptual cliche but is something new in economic history. It therefore has to be traced to hitherto unknown causes. No wonder, then, that there is a great confusion and no end to guessing. We do not see a flood of money swelling visibly or any printing presses working day and night. Except in the simple case of a country where infla tion is, in old-fashioned manner, due to budgetary deficits, most people look in vain for the source of inflationary pressure and do not know whom or what to hold responsible for it. Only one thing is plain: slowly but inexorably, everything becomes more and more expensive, and it is hard to see how this could change. In many countries there is no sign of a budgetary deficit, which is the eus196 WELFARE STATE AND CHRONIC INFLATION tomary source of inflation; in countries like Germany and Switzer land, even the familiar symptoms of balance-of-payments deficit and pressure on the exchange rate are absent. Earlier periods of long-term price rises, such as the so-called prosperity period before 1914, for various reasons do not lend themselves to a comparison if only because they used to alternate with equally long depression periods, whereas we now know only too well that, apart from a comparatively short and mild recession as in the winter of 1957-58, such alternation has become highly improbable. Moreover, such recessions, with their measure of unemployment, do not necessar ily interrupt inflation, as the exanlple of the United States shows.

This is embarrassing. Some tried until recently simply to deny the process and to maintain that w'hat was called inflation was just a bogy. It was quite normal, and always had been so, that prices rose slowly, some said, without stopping to think whether it really had always been so and whether, secondly, our era's rising produc tivity should not properly cause prices to fall, so that we should really begin to worry when prices failed to show any tendency to fall. Is it not already inflation if prices simply remain stable? Others abandon altogether the search for cause and responsibility and lay the blame on the broad shoulders of historical necessity they speak of the "age of inflation" as if this were inevitable. Or else they vaguely blame institutions and circumstances about which nothing can be done. Often enough there is a clear implication that in any case it does not matter too :much. We have got used to such oracular pronouncements as "institutional inflation" or "cost in flation." Or, finally, everybody accuses everybody else: the workers accuse the employers, the employers the workers, and the govern ment accuses both.

It is indeed a nagging problem which is obviously not easy to solve. But one thing should be clear in this case, too, and may therefore serve as a first point of orientation in any discussion. Whatever the nature of the process of chronic inflation, there must be an excess of total demand over total supply. Since the supply 197 A HUMANE ECONOMY of goods is steadily rising, the imbalance between supply and de mand is obviously not due to a sudden deficiency of supply, and excess demand must therefore be due to additional money reaching the market. Neglecting the possibility that this additional money may have been previously hoarded and is now put into circulation or that it is left idle for shorter periods and more quickly spent (increase in the velocity of circulation of money), the extra· money can come only from where money is created. This means that it can ultimately be traced back to the central bank, which not only cre ates cash but in most countries disposes of means to influence bank liquidity and so to favor or disfavor the creation of bank money.

It is in the central bank that we have to look for the tap which needs only to be closed firmly to stop the dripping. This fact can hardly be denied, and it puts the ultimate responsibility squarely on the central bank. It is here that all the tangled plumbing con verges. Theoretically, at any rate, it is indisputable that the central bank could use the instruments of credit restriction to reduce the quan tity of money sufficiently to counteract all inflationary tendencies, whatever their origin. In practice, on the other hand, we are imme diately faced with the difficulties connected with the very nature of contemporary inflation tendencies. The next step in our analysis must therefore be to examine the sources of today's inflationary pressure. There are in all four such sources of inflation. The first two exist only in a few countries, whereas the last two operate every where and constitute the real problem of present-day chronic inflation.

The first source is fiscal inflation. In its simplest form it is due to a budgetary deficit. This needs no further explanation, but, as we have mentioned before, this sort of classical inflation is today serious only in a few countries, mainly in Brazil and, until quite recently, in France. More complicated forms of fiscal inflation are at work in a far greater number of countries where the hudgetis 198 WELFARE STATE AND CHRONIC INFLATION used to give demand a shot in the arm; this may take the form, as in Germany, of spending previously accumulated budget surpluses, in which case the effects are mueh the same as if inflation were due to budget deficits, or it may take the form of transforming savings into consumption through the budget. We shall have more to say about this later. The second source is imported inflation, as it has been called. What is meant is an inflationary impulse from abroad that comes in such a manner that another country's inflation causes an influx of currency which the central bank transforms into domestic cur rency. In the absence of forces compensating the inflationary ef fects of the influx of foreign currency, foreign inflation can, in fact, be propagated to a country which is more successful than others in containing its own dom.estic inflation. This can happen on two conditions: first, the difference between inflationary pres sure in the two countries concerned must be large; and second, exchange rates must remain unaltered in spite of this divergence of national currency policies. This gives us the key to overcoming this form of inflation; it can be brought to an end by modifying either of the two conditions. In any event, this form of inflation is today significant only in Germany and raises least problems. 29 We need not dwell on it any further in this context, though it may become a major problem for many Western European countries in the event that the inflation in the United States should prove un manageable.

The third source, investment inflation, takes us right to the cen ter of the problem which today preoccupies and alarms all Western countries. It is an excessive strain on economic resources, a symp tom of the boom finding expressi.on in overinvestment. The posi tion becomes critical when the lllse of productive resources by investment and the immediate creation of incomes due to the con struction of plant and machines are' not matched by a correspond ing immobilization of purchasing power through saving and the reserves of unutilized resources are exhausted. An inflationary 199 A HUMANE ECONOMY boom thus occurs when current saving, which represents private consumption forgone, is no longer sufficient to balance the increase in demand due to investment and when investment is financed by a substitute for saving, that is, credit expansion. To the extent that this happens, investment presses on the dwindling reserves of un utilized resources and gives rise to inflationary excess demand.

One point needs to be stressed here. It is a matter of excess in vestment in relation to the true saving of the· population and not from the point of view of the single business firm where invest ment may be justified technically and by market conditions. The single· entrepreneur will always, and sometimes indignantly, tend to defend his investment program against the reproach that it may be excessive. We have another kind of excess in mind, an excess, that is, over the economy's readiness, expressed in terms of saving, to release the resources necessary for the construction of factories or power stations as well as the consumer goods corresponding to the wages paid therefor. Such an excess of investment over saving constitutes additional demand not covered by goods; it overstrains the economy, and, as always, the economy responds with inflation. The single entrepreneur can hardly be blamed if, under the impact of market conditions and competition, he takes advantage of possi bilities to finance his investment program, even at the risk of thereby contributing to the national overstrain. It is not up to him to avoid this; it is up to those who are responsible for monetary and credit policy. He should, however, willingly support their ef forts to re-establish equilibrium between saving and investment by tightening credit conditions. It is high time, too, that the state, which is subject to neither market nor competition, should curtail its own investment programs.

Now if today's inflationary pressure is in part due to excess in vestment in relation to saving, we may ask what are the reasons which have pushed up investment so steeply in our times. In reply, we may point to impetuous technical progress, the tidal wave of population growth, the urgent capital demand of the underdevel oped countries, the international defense effort necessitated by 200 WELFARE STATE AND CHRONIC INFLATION Communist imperialism, the ca.pital requirements of housing (which are artificially enhanced by rent control), and many other things. This list also gives us the reasons which today completely invalidate the fear of inadequate growth potentials, a fear which the economic theory inspired by Keynes has found so difficult to shed during these last twenty years. Our fear is the opposite one. Our problem is how to contain the extraordinarily vigorous forces of growth and how to make sure that the vastly increased capital demand is satisfied by genuine saving and not by the poisonous sources of inflation and taxes-which sources, incidentally, closely communicate beneath the surface.

This brings us to the other aspect of the imbalance between in vestment and saving. If there is too much investment on the one side, there is too little saving on the other. There arises the ques tion of whether here, too, special forces favor inflation by impair ing the ability and inclination to save. This is indeed so. There can he no doubt that in looking for these forces we are on the track of one of the essential causes of the historic uniqueness of today's chronic inflation. Every act of saving diminishes the pressure of demand on avail able supplies. It therefore has a dampening, relaxing, and cooling effect on the inflationary boom. To the extent that investment is financed by saving, the critical point of overinvestment is shifted upward, and the boom can continue for a longer period without reaching the danger line. With large saving, there is less need for the central bank to counteract inflation by credit restrictions. Large saving is the most effective means of neutralizing any inflation, whether it is due to overinvestment or to another cause. Nor is this all. Large saving and a large numher of savers· imply the existence of broad circles of persons and institutions whose attitudes and interests cause them to support sound money. This, in turn, means a broadening of the anti-inflationary front, without whose pressure no active fight against inflation can he expected from the central bank or the government.

Thus saving, which got such poor marks in the theories inspired 201 A HUMANE ECONOMY by Keynes, is again assigned the place of honor which common sense always regarded as saving's due. How to maintain and pro mote saving, and a host of problems concerning the quantitative effect on saving of different circumstances, laws and taxes-these are the questions which today determine the whole complexion of economic, financial, and social policy. It is also becoming clear that the "negative" saving of consumer credit may well cause the situation to deteriorate considerably. The question of how to promote saving becomes the more serious by reason of the fact that saving is an activity which an economy and society based on free impulses can least take for granted and rely upon. Yet the very freedom of economy and society depends upon sufficient voluntary saving. The motives which induce people to save are not nearly as dependable as those which cause them to produce, invest, and consume. Keynes and his school quite rightly pointed out that it is possible to go ahead with producing, investing, and consuming without saving at the same time, but they neglected to make sufficiently clear the price which must be paid, namely, inflation and loss of freedom.

In any event, the motives for saving are highly sensitive and vulnerable, and very little would probably be saved if nature and society had not created very strong inducements to save, such as illness, debility in old age, uncertain expectation of life, and the institution of the family. These inducements to save are a powerful support for our economic and social freedom, but they can be sys tematically destroyed if one only tries. This is precisely what we are busy doing nearly everywhere now, in the age of the welfare state and loosening family ties, forgetting that we are thereby chopping away at the very roots of our free society and economy. To say it briefly, today's super-state, with its super-budget, super taxation, and super-welfare programs, has developed into a colossal apparatus for dissaving and, at the same time, an apparatus of inflation and growing compulsion. To close the vicious circle, this same inflation, which is due to insufficient saving, gravely impairs 202 WELFARE STATE AND CHRONIC INFLATION further saving because it shakes lthe saver's confidence in the sta bility of his savings' value.

This development is well epitonlized in the story of an old miner which a pit manager from the Ruhr told me recently. The old man had put aside a tidy sum for his and his wife's old age, but sud denly he decided to blow it all and to spend his little fortune on a luxury television set and other things. Surprised, the manager asked him why he had suddenly changed his mind and was spending all his savings; the old miner replied that the welfare state was now taking care of him anyway and there was therefore no reason why he should deny himself the immediate enjoyment of what he had set aside for his old age. Two things are now clear. First of all, it is plain that inflationary pressure and saving are like force and counterforce. Processes which weaken the counterforce at the same time strengthen and cause inflation, and these causes are highly effective nowadays. But it is also plain that the obstacles to saving which are among the causes of today's inflation were rarely, if ever, so widely effec tive before. Indeed, some of theml were unknown. We have found what we were looking for; a cause which is historically as new as today's chronic inflation. The causes of the diminution of saving are indeed novel; they have never happened before; they are "modern," as the advocates of super-state, super-taxation, and super-welfare state will no doubt tell us proudly. Another thing is worth remembering: this new thing by which we can explain the permanent inflationary pressure of our age as new in its turn is the result of profound moral and social changes, and of changes which must be regarded as pathologicall, if only because their ultimate effect is a disease of money, the "democratic-social" inflation of our age.so However, obstacles to saving are only one of the aspects which we have to consider if we want to understand that today's chronic inflation has no historical precedents and must therefore be ex plained by equally unprecedented causes. We shall encounter the 203 A HUMANE ECONOMY other and at least equally important of these historically unique inflationary forces as we turn to wage inflation, the last of the four sources of inflation which are operative today.

Wage Inflation The meaning of the term "wage inflation" is no doubt more or less clear. The labor market is the source of continuous new doses of inflation because wages are pushed up so high that the balance between money and goods is disturbed. This happens when the increase in demand because of higher wages is not matched by a corresponding increase in the supply of goods, or in other words, when it is not justifiedhy a corresponding increase in productivity. The result is inflationary excess demand. It follows that not all of the wage increases to which we have become accustomed nowadays are inflationary. The productivity of labor is certainly rising because of technical progress, expanding investment, and organizational improvements, and we should there fore normally expect a certain increase in the 'wage level. The con tinually rising price of labor would be a pure blessing if the pro ductivity increase which higher wages reflect were more or less evenly distributed over all kinds of labor. But in actual fact, it is strongly concentrated on mechanized mass production, while other branches, though affected in varying degrees, lag far behind. This is what causes the problem. The high wages which are possible and natural in industrial mass production and which, thanks to the spreading of automation, promise to go on rising become deter mining for the overall wage level. The result is the kind of struc tural prosperity which we see in the United States; it has its ad vantages, but it also has its serious problems.

The most striking result of this process is that the articles of in dustrial mass production-the gadgets and technical marvels, from automobiles to television sets-are more inflation-proof than others. They may even become cheaper as other prices are forced· all the 204 WELFARE STATE AND CHRONIC INFLATION higher. Certain goods and services whose productivity increases fall markedly short of those current in industrial mass production feel the impact of the rising labor costs generated by the latter. The process seems to be irresistible. Handmade and individual-quality products, personal services, anything made to measure or according to individual tastes, anything produced without stop watch and assembly line and now. automation, anything not made to the same last-all of these become more and more expensive and finally exceptional, like a book of unusual quality which can count on only a limited number of readers. It is easy to forget that the prosperity of the automobile and radio is flanked by a decline in all of these other spheres, by impoverishment and shortages which depress the real value of those same high labor incomes which cause them.

That our barber will raise his prices next year is almost as certain as tomorrow's sunrise, even without other contributing factors, that is, even if· wage inflation were not at work. Further consequences follow. One of them is that people begin to "do it yourself" in their spare time instead of calling in the pro hibitively expensive skilled worknlan. Like Tom Sawyer, we may persuade ourselves and others that whitewashing a fence is a rare pleasure and a privilege, and, of eourse, as long as this return to self-sufficiency does not beCOlnea drudgery, it is that much progress and gain. Otherwise we have the charming situation in which there are two different wage levels set side by side: the open "American" of high money wages and the secret "Japanese" of our domestic drudgery, with its necessarily low valuation of our own work and time. Another consequence is the certain prospect that important serv ices like building, nu;rsing, and catering, as well as some staple products whose production cannot easily be mechanized, will go on rising in price until a substitute is found. An example is European coal. Contrary to American coal, European-and especially Ruhr coal has to be mined in such geological conditions that mining can he mechanized only within limits which cause its productivity to 205 A HUMANE ECONOMY lag considerably behind the productivity level of industry. In this case there is the additional factor that labor is less and less attracted to mining, so that mining wages actually have to exceed industrial wages~ As a result, we shall have to face a long-term rise in coal prices until we have sufficient other sources of energy, even without simultaneous wage inflation. 31 Alternately, if cheaper sources of power actually do become available, we may have to face a general depression in coal mining such as is already in evidence in Germany and Belgium.

One last important consequence deserves to be mentioned in this context. It is that agriculture occupies a special position. In spite of mechanization and rationalization, agricultural labor remains, on the whole, manual, at least in Europe, and when, as in the United States, an attempt is made to turn it into a kind of mechan ized factory labor, nature sooner or later takes her revenge. Thanks to the determining influence of industrial wages pushed up by mass production, agricultural products would, like those of the crafts man, become steadily more expensive were it not that, unlike the latter and all other services, agricultural products have to face competition from the rest of the world, where production condi tions are usually entirely different. Take the European example again. In spite of tractors and milking machines, agricultural pro ductivity falls far short of the industrial level and costs rise con tinually; yet there is little elbow room for compensating price rises. At the same time, the industrial and urban consumers have a justified interest in low agricultural prices, and agriculture cannot, therefore, widen its elbow room by keeping off foreign competitors.

This is the real cause of the difficulties, grievances, and worries of European farmers. The best that can be expected is that the cost increases due to industrial "prosperity" can be offset by rationaliza tion of agriculture to such an extent that only a tolerable residue remains to be offset by protective measures. All of this, we repeat, would happen also in the absence of infla tionary influences. Productivity-or, to be theoretically correct, 206 WELFARE STATE AND CHRONIC INFLATION marginal productivity-is a legitimate and decisive determinant of wages, and international wage differentials are undoubtedly, in the last analysis, due to differences in productivity, which, in turn, is essentially determined by the capital intensity of production. It is therefore normal, natural, and in accordance with the elementary laws of economic theory that a country's average wage level should rise when productivity rises. Nothing is further from the truth than that this must necessarily have inflationary consequences. Does this imply that we shall be safe from the inflationary effects of wage increases as long as the latter do not outrun simultaneous produc tivity increases? Do we have SOIne kind of safeguard in a field otherwise apparently dominated by power, arbitrariness, or vague claims for justice? We have every reason to be doubtful, if only because, in all of the examples by which we have illustrated the long-term tendency of rising prices for individual services, the in fluence of a general increase in productivity can, in fact, not be separated from inflationary price rises.

No one would deny the validity of the proposition that wage in creases must be matched by corresponding productivity increases in order not to have inflationary effects. This is the least we must insist upon. But if we think a little more carefully about the rela tionship between wages and productivity and if we try to apply the above formula in practice, we see that it is inadequate and open to dangerous abuse. While the parallelism of wage and productiv ity increases may safeguard us against the worst excesses of wage policy, it does not offer any guarantee that wage increases will not have inflationary effects. Is it economically rational and does it correspond to the nature of the market economy, to allow all pro ductivity increases to be taken up by higher wages, since these productivity increases are, after all, largely due to technical prog ress, improved production methods, and higher capital input? Is it not right that productivity increases should also benefit the firm and the consumer, the former by higher profits in proportion to its current and future capital and the latter by lower prices? And if 207 A HUMANE ECONOMY wages are really to rise to the extent of productivity increases, how are the latter to be calculated? And how is it possible to prevent the maximum productivity increase in mass production industries from unj ustifiedly pulling along the wages of other branches with smaller productivity increases, down to the crafts, catering, and agriculture? Here, as everywhere else, we are getting into the habit of thinking in statistical terms, but is this at all· compatible with the nature of the market economy? Are we not going dangerously astray with our "market economy by statistics"? Where is the boundary between what is normal, natural, and in accordance with the laws of the market economy on the one.side and its inflationary violation on the other?

The process of a wage rise due to a productivity rise is normal and healthy as long as it comes to pass by means of the forces of the market and not by a combination of social power and statistics. What happens in the former case is that a wage increase in one of the industries where productivity rises most-say, the automobile industry-spreads to other industries and sectors, not because pro ductivity statistics are used as an argument, but under the influence of supply and demand on the labor market. The primary wage in crease attracts workers from elsewhere, and the actual or threatened loss of workers causes wages to rise also in branches where pro ductivity has risen only slightly or not· at all. At the same time, wage movements in the two spheres of the primary and secondary wage increase will level out; since the industries where wages rose first because productivity rose most attract labor, wage increases there will be damped as much as they are promoted elsewhere. By its very propagation, the primary wage increase will automatically lose some of Its impetus, if only we allow the labor market to be have as we expect all other markets to behave.

Three consequences follow. First of all, the productivity increase (which we assume to have generated the process) will, rationally and equitably, be translated into wage increases only in part, while another part will be taken up by price reductions or by higher 208 WELFARE STATE AND CHRONIC INFLATION profits for the capital which enables productivity to ris6. Secondly, the primary wage increase will spread, in gradually diminishing waves, to other sectors of the economy and so cause the productive resources to concentrate slowly but steadily on those branches where productivity is at or near the maximum. On the further con dition that the central bank does not continually expand credit and so relieve the labor market of the responsibility for unemployment due to exceeding the equilibrium wage rate, no inflationary effect will follow from the wage increase due to the original productivity rise and from the propagation of that wage increase.

It is natural, inevitable, and of no danger from the monetary point of view that a country's average wage level should reflect the general level of productivity (whieh is largely determined by capi tal intensity) and should follow its rises. But it is unnatural, avoid able, and very dangerous for the currency when the connection between wage level and productivity is established, not by the market, but by recourse to productivity statistics, which in any case are invariably doubtful. More and more often in our days the sta tistically calculated productivity rise of the most favored industries is taken as justifying a claim for a corresponding wage increase. In that case no productivity increase: can prevent the wage increase from becoming inflationary, and, unhampered by the laws of the market, the productivity increase will be fully translated into a wage increase instead of leaving room also for a price reduction and profit rise. If we replace the laws of supply and demand on the labor market with productivity statistics and give the latter all the weight of the monopolistic trade-unions' social power, then we tread a dangerous path. It is superfluous to comment on a wage policy which is not even based on statistics but plays only the trump card of social power.

Unfortunately, it is becoming the rule today that wage policy, at best, keeps abusing the argument of productivity increases and more often than not neglects it altogether. In these circumstances it is the most dangerous source of inflation. 209 A HUMANE ECONOMY The principal reason why wage inflation is so dangerous is that it creates its own conditions of cumulative development. As the in flationary boom proceeds, full employment reaches the stage more properly defined as overfull employment. In a growing number of industries job vacancies exceed the number of suitable applicants, and this state of affairs cannot continue without further inflationary pressure. Indeed, it is of the essence of inflation.32 Even in the absence of trade-unions, the excess of demand over supply on the labor market would necessarily push up labor costs. This is a dan gerous tendency as such and was not unknown in previous boom periods; what is new is that in all countries this tendency is now strongly reinforced by trade-unions, whose power seems to be limited by nothing except their sense of responsibility. Thus a cost inflation due to overfull employment is reinforced by the monopoly power of trade-unions. At the same time, government and central banks find it much more difficult to stem the tide of this inflation by means of restrictive monetary and credit policy.

Another danger of overfull employment is that it may set off a wage-price spiral in which rising wages and prices keep pushing each other up, especially and most effectively in the presence of the fatal system of a sliding scale of wages determined by the cost of-living index. However, it would be wrong to imagine that gov ernment and central banks are powerless in the face of this mecha nism. The truth is that the wage-price spiral presupposes continual injections of new money. Otherwise employers would be unable to pay the higher wages without dismissing workers, and consumers would not have the purchasing power to buy the previous amount of goods at higher prices. Unless, therefore, the wage-price spiral is continually supported by the authorities which control the vol ume of monetary circulation, the wage increases due to overfull employment would inevitably render part of the labor force unem ployed. It follows that when an economy gets into the stage of overfull employment (in the precise sense defined above) which is peculiar to chronic inflation, further wage increases become almost 210 WELFARE STATE AND CHRONIC INFLATION inevitable because of the combination of overfull employment and trade-union monopoly, and as a result, the economy finds itself faced with the grave alternatives of inflation or unemployment.

Normally, excessively high wages should have the same effect as any other excessively high prices, namely, to render part of the labor force unsalable (as the Americans say, "labor pricing itself out of the market"). In otller words, workers would have to be dis missed. If the authorities responsible for monetary circulation wish to prevent this, they must tolerate credit expansion, or loosen credit restriction, to the extent of allowing the inflational wage-price spiral to go on. Monetary and credit policy is reduced to a continu ous race between wage increases, which are a potential source of unemployment, and inflationary credit expansion designed to can cel this potential effect of each new round of wage increases. We have now touched upon the central point of the whole dis cussion about present-day chronic inflation. We are in a situation in which full employment and rising wages can no longer be com bined without inflation. In other words; we cannot have all three: stable money, full employment, and further wage increases. We have to sacrifice one in order to preserve any combination of the other two: stable money and full employment without further wage increases, or stable money and wage increases without full employ ment, or full employment and wage increases without stable money.

Those who now insist upon an "expansionary" or "dynamic" wage policy under any label must accept a steadily progressing crum bling of the value of money and, indeed, the blame of being prin cipally responsible for it. They are the most striking prototypes of all those thousands who keep complaining about inflation and hold others responsible for it but who, at the same time, raise and sup port claims which make inflation inevitable. Some trade-unions still take the trouble to base their wage claims on productivity increases. We have already pointed out that this argument is frequently abused. Moreover, even the most favorable price and wage statistics hardly lend themselves to supporting 211 A HUMANE ECONOMY further wage claims now. But the decisive objection is that as long as overfull employment prevails and as long as trade-unions keep the monopoly powers they now possess in most industries, wages are bound to rise above the level justified by productivity increases.

With overfull employment, the labor market is a sellers' market, and even a wage rate determined by free competition is bound to be inflationary; much more so, of course, a wage rate to which trade-union power imparts a monopolistic element and which there fore exceeds the theoretical competitive wage rate. Surely, just when trade-unions operate in a sellers' market, they can hardly be expected magnanimously to forego exploiting such a unique oppor tunity for monopolistic price policy. Still less can they be expected to use their power in order to prevent wages reaching even the level corresponding to free demand and supply in a situation of overfull employment, a level which in itself has certain inflationary effects. It is obvious that the only thing to be expected of trade-unions in this situation is that they will go on making it worse. Nor can we look to the employers for any real improvement. How are they to put up serious resistance against wage claims in a situation of overfull employment when, moreover, continuous credit expan sion-or insufficient credit restriction-enables them to pay a larger wage bill without much detriment to profitability and with out dismissing workers? In addition, wage inflation and invest ment inflation are so closely linked as to be almost inseparable because both draw in the same manner on the source of expan sionary, or insufficiently restrictive, credit and monetary policy. If anyone thinks that he stands to gain by investment inflation (or by any other type of inflation, including imported inflation), he will have to take wage inflation into the bargain and vice versa. There is little sense in passing the ball of responsibility backwards and forwards. The beneficiaries of wage inflation and investment infla tion (or any other form of current inflation) eventually have com mon interests, which are concealed behind the bargaining on the labor market. Nevertheless, the real seat of resistance, the hard 212 WELFARE STATE AND CHRONIC INFLATION core, the disturbing and intractable novelty, is wage inflation and the chain of its effects.

Nor, on reflection, is there any hope of escaping the wage-price spiral and the dilemma it creates by means of increased investment designed to offset the higher wages with higher productivity. This would be adding fuel to the flames; far from avoiding wage infla tion by means of accentuating investment inflation, both would be aggravated. We conclude that no one can relieve the authorities responsible for monetary and credit policy 0:£ the dilemma. It is a heavy burden; just how heavy becomes dear when we consider that the country concerned is by now caught in a whirlpool from which it can escape only if a sufficiently restrictive monetary and credit policy reduces overfull employment to normal full employment so that the labor market ceases to be a sellers' market and the buyers gain a slight predominance. But once the country is caught in the whirlpool of inflationary overfull employment, this can hardly be done without putting up with some temporary unemployment as a price for winning the battle of inflation. It is in this light that we must understand the recent remark, made by a British expert, that it is "almost certain that stable prices cannot be maintained [in Great Britain] at a level of demand that keeps unemployment much lower than 2 per cent."33 Wage inflation, then, can be stopped effectively only if the cen tral bank refuses to play the game and restricts credit until the chain reaction of overfull employment and trade-union power, wage increases, price increases, and more wage increases is broken.

The more restrained trade-unions are in exploiting their strong bargaining position, the smaller is the required dose of credit re striction. On the other hand, the longer the central bank waits until it turns off the tap of credit and the further it lets matters drift, the more difficult the operation becomes because the amount of tem porary unemployment involved would then be much more painful. The decision is always difficult. At present, it is made even more 213 A HUMANE ECONOMY difficult by another circumstance, which is also a novelty in our age and which we must also take into account if we want to understand the uniqueness of our chronic inflation. Monopolistic trade-union power is new, and so is the disinclination to save; the third novelty is the overriding and dogmatic conviction that "full employment" is to be valued above all else and allows no compromise-not even a normal measure of dispersed and temporary unemployment hav ing nothing in common with the terrible mass unemployment of the Great Depression. Governments and central banks feel constrained by public opinion to accept this dogma, even if they are not, as in the United States, obliged by law to do so. At the very least, this dogma holds such sway as to have prevented any government or central bank, so far, from seriously attempting to interrupt the chain reaction. The pressure on the authorities is further aug mented by the fact that it has become part and parcel of the full employment dogma to deny the above-mentioned relationship be tween wage level, inflation, and unemployment and to regard as the outcome of perverse economic theory the necessary conclusion that there must be a certain, however small, number of unemployed. 34 We end up with the fatal attitude of viewing every slight increase of unemployment as a failure on the part of the central bank and of blaming it for neglecting its guardianship of full employment.

The truth is, of course, that the central bank has to defend the purchasing power of money against the consequences of a reckless wage policy. But as long as this attitude prevails, there is a con stant danger that any determined effort to suppress wage inflation will be called off again at the fir.st sign of the slightest fall in em ployment, whereupon the spiral of wages and prices is once more given free play. In discharging its responsibilities, the central bank is not unlike a motorist who knows that by pushing hard on the brake pedal he can prevent an accident but who also knows that pedestrians are inconsiderate and undisciplined and that the road is so slippery that he might lose control of his car if he braked too sharply. Both 214 WELFARE STATE AND CHRONIC INFLATION are mitigating circumstances. Nevertheless, we expect him to re member his brakes and not to rely on honking and shouting. The sooner he recognizes the danger and operates the brakes, the better.

This is an accurate enough picture of the unenviable position of the central bank. It certainly has the ultimate responsibilty. But overfull employment, ruthless exploitation of trade-union power and the simultaneous inflationary impulses from elsewhere threaten to require more from the exercise o:f this responsibility than public opinion, government, and the full-ernployment dogma are prepared to accept. In these circumstances the independence of the central bank is invaluable, and so is a management which intelligently and vigorously takes advantage of its independence. It should now be clear what is nleant by the statement that the present-day inflationary process is such that the power of the cen tral bank hardly sufficesto control inflation. We see that this must be understood correctly. It does not mean that a central bank equipped with all the tools of modern credit policy, so that it does not need to rely solely on the blunted weapon of discount policy, is unable to eliminate excess dema.nd, from whatever source, by appropriate restrictions. There is no doubt whatever that the bank of issue can do this, now as before. The real and disturbing ques tion is whether the central bank can apply the brakes sufficiently strongly, because the ensuing fall in employment, which is almost inevitable in view of the trade-unions' wage policy, will no doubt call forth such political and social resistances that the bank's action is paralyzed or even nipped in the hud at the stage of decision.

There is yet more to it than that. Wage inflation is the most im portant and intractable form of inflation but, as we have seen, not the only one. All the other sources of inflation are active at the same time, reinforce each other, and combine with wage inflation. This is true not only of investment inflation, which is so intimately connected with wage inflation, but also of fiscal inflation and, in the particular case of Germany, imported inflation. Given the ubiquity of inflationary pressure, we may be justified in wondering 215 A HUMANE ECONOMY whether it is not asking too much of the central bank to neutralize all of these inflationary impulses with the shock absorber of credit restriction. This is, of course, what theory requires, and in fact the central bank should do everything in its power. But whether this is enough remains an open question. Three other measures are imperative. Every effort should be made to induce the trade-unions to refrain from exploiting their monopoly position to the full by appealing to their reason and sense of responsibility, backed by the increasingly obvious damage which the race between wages and prices inflicts on the workers' own interests. At the same time, fiscal inflation must be stopped. It must be stopped by cutting down government expenditure and not by the dubious means of higher taxation, which would be contrary to the long-term goal of reducing the elephantiasis of the budget and eliminating fiscal socialism. 35 Thirdly, any inflationary sources due to balance-of-payments surpluses must be stopped up. For the rest, we repeat emphatically, the bank of issue must, all difficulties notwithstanding, energetically restrict credit until investment has been reduced to the-we hope rising-level of saving and wage claims to a level at which they do not cause wage inflation. If the trade-unions should persist in making excessive claims, they will eventually find that employers are no longer able to raise wages, and they will therefore have to face the choice of yielding or of putting up with unemployment.

Conclusions and Prospects What conclusions are we to draw from all this? First of all, surely, that in inflation the defense must fight on as broad a front as that of inflation's causes; furthermore, the heavy artillery of the bank of issue must occupy the center and be used with the maxi mum of firepower. But the broadening of the front is not enough; the hattle against so tough an enemy, pressing in from all sides, is 216 WELFARE STATE AND CHRONIC INFLATION hound to he long and fluctuating and must he fought in depth as well. The main thing is the fighting Inorale .of the defense~ We are obliged to admit that this is anything but brilliant. To say this is to say once more that the chronic inflation of our age is a moral and social problem. For this very reason it is also a problem which is not susceptible to any comfortable, quick, and simple solution or to one of mere monetary and. credit techniques.

The right way of looking at this problem is to regard inflation as an economy's reaction to a continuous and multiple strain on its resources. It is a reaction to extravagant and impatient claims; to a tendency toward excess in all fields and among all classes; to in consistent and confused economic, financial, and social policies which disregard all time-tested principles; to the p;resumption of taking on too much at one time; to the recklessness of always draw ing more hills of exchange on the economy than it can honor; to the obstinacy of always wanting to combine what cannot be com bined. People want to invest more than saving allows; they claim wages higher than those correspond.ing to the rise in productivity; they want to consume more than current income can pay; they want to earn more with exports than the latter can yield the economy by way of imports; and on top of all this, the govern ment, which should know better, keeps extending its own claims on the economy's strained resources. Demands proliferate while the necessary cover of goods is missing. If any man should con tinually sin against all the rules of reasonable living, some organ of his body win slowly but surely sltrfter from the accumulation of his mistakes; the economy, too, has a very sensitive organ of this kind. This organ is money; it softens and yields, and its softening is what we call inflation, a dilatation of money, as it were, a mana gerial disease of the economy.

The trouble is that we lack counterforces of a spiritual, moral, and social nature~ In the realm of ideas we no longer have definite 217 A HUMANE ECONOMY convictions and guiding principles; in the realm of interests the anti· inflationary front is neither strong nor broad enough to meet the inflationary one, and, as we have seen, the welfare state makes gaping breaches in the front of those who have a vital interest in suppressing inflation. Wages and pensions geared. to the cost-of living index do the rest. The result is that respect for money and its inviolability has lost its force. To show how far we have already gone in this direction, let me tell two stories from the financial history of France. 36 At the close of 1870, in one of his country's gravest moments, Gambetta was organizing the Republic's resistance at Tours. He requested the local representative of the Bank of France to help him in his desperate need of money by printing bank notes. At the time, the request was an enormity, and in fact, Gambetta, Jacobin firebrand though he was, as well as an all-powerful dictator, had to give way to the flat refusal of a banker who would not accept even an extreme national emergency as an excuse for the crime of infla tion. Gambetta eventually succeeded in raising a loan of two hundred million francs, which Morgans lent him at 7 per cent.

The second story is perhaps even more impressive. A few months later, in March, 1871, the leaders of the Commune in Paris were tempted to lay their hands on the gold reserves and printing plates of the Bank of France and thus finance their revolution. But in the midst of a pitiless civil war, these hard-boiled revolutionaries with stood the temptation. The Bank of France was as inviolable to them as was the franc Germinal--both the creations of the tyrant Na poleon, who had endowed them with inviolability, although he was otherwise not in the habit of limiting the power of the state in any way. Both of these incidents reveal that money used to be sacrosanct in the very same country whose governments and parliaments have since shown a most spectacular disrespect for money. Any com parison with our times must fill us with consternation and shame. 218 WELFARE STATE AND CHRONIC INFLATION We cannot help being touched, impressed, and troubled in reading these stories of Gambetta and the Commune, and if we are honest with ourselves, we must admit that this deference of the raison d'etat to the inviolability of money was a valuable spiritual asset.

We can but lament its loss and adrnit that it throws us back into the age of the princely forgers of the late Middle Ages and early modern times.3 7 Much has contributed to the undermining of the respect for money and its value. Immeasurable damage has been done, above all, by that revolution in economic theory whose disastrous effects we have already stressed. Its destructive work can hardly be un done now, but we are at least entitled to expect repentance and frank confession. Let us hope that the time will soon come when Keynes, to use one of Jacob Burckhardt's expressions, will be recognized as one of the great intellectual ruiners of history like Rousseau and Marx. We are faced with a phenomenon of intellectual and moral de cadence, and we meet it in various degrees and forms. It ranges from limp resignation to the crumbling value of money to a mix ture of regret and scarcely concealed satisfaction and, ultimately, to open cynicism. In fact, it is just foul play, but this is now often forgotten.

It is nothing short of monetary cynicism, and thoroughly con temptible, to regard the slowly advancing chronic inflation of our times as both possible and desirable, in the sense that it is the price which people ought to be prepared to pay for an unlimited duration of the boom, with overfull employment, continuous wage increases, and "economic growth." This argument of "simmering permanent inflation" is not only morally objectionable and decadent, it is also logically untenable. Inflation is precisely one of those things which cannot be conceived of as permanent because once it is recognized, it loses the leisurely pace which must he a feature of constant and "controlled" inflation. Once people suspect more generally-as they 219 A HUMANE ECONOMY must do sooner or later-that we live in an "age of inflation," they will increasingly behave in such a manner that an explosive chain reaction is set off, to use the terminology of nuclear physics. Cost of-living clauses will be more widely introduced, and they will ef fectively accelerate inflation. To maintain overfull, or even only full, employment will eventually require increasingly stronger in jections of inflation poison in order to offset the unfavorable effects of rising wages on employment. At the same time, progressing in flation will diminish saving and raise the rate of interest, and ever more inflation will be needed in order to maintain investment at the level necessary to prevent the collapse of the boom. In the end, only the complete destruction of the currency will be able to put off the final crisis for one more, short, period of grace. a8 It is bad enough that this monetary cynicism is foolish. It is much worse that it is morally objectionable. It is part of the cyni cism to take this designation with a smile. If we want to go to the roots of the chronic inflation of our times, then we must recognize that the mental attitude which generates inflation, tolerates it, re sists it but feebly, or defends it cynically is the monetary aspect of the general decline of the rule of law and of respect for the law.

Democracy, as we have seen, degenerates into arbitrariness, state omnipotence, and disintegration whenever the decisions of govern ment, as determined by universal suffrage, are not contained by the ultimate limits of natural law, firm norms, and tradition. It is not enough that these should be laid down in constitutions; they must be so firmly lodged in the hearts and minds of men that they can withstand all onslaughts. One of the most important of these norms is the inviolability of money. Today its very foundations are shaken, and this is one of the gravest danger signals for our society and state. I would remind those of my readers who know it of Jeremias Gotthelf's story The Black Spider. For the benefit of those who do not know it, I should explain that it is a tale in which reality and legend interweave in the sinister power of a devilish spider which 220 WELFARE STATE AND CHRONIC INFLATION unleashes the disaster of the plague in a peaceful world, until even tually people manage to lock it into the beam of a farmhouse in Bern by means of a plug.

This black spider is the symbol of an infernal force irrupting into a peaceful society. The symbol may very well be applied to infla tion. Inflation, too, has, throughout history, set out to plague us until it was finally locked in by the plug of the gold standard. But in the despair of a devastating deflation, the nations pulled the golden plug out a quarter of a century ago. Since then, the black spider has been abroad again. We know that such views will be met with a disdainful smile. It is out of place. We shall be told of the reasons which allegedly make a gold standard impossible today-but what do they all boil down to, ultimately, except that we simply do not have the' de termination and the strength to tame inflation once more? Are the conditions for a successful taming of inflation different from those of replacing the golden plug? 221 CHAPTER V Centrism and Decentrism The Dividing Lines in Social Philosophy and Economic Policy I return once more to the subject of inflation, which we have just examined from all sides, in full awareness of its overwhelming importance. I would like to relate an experience I had a few years ago. It so happened that on one and the same day I came across two statements, both of which concerned money but which arrived at such completely divergent and indeed irreconcilable conclusions that they were explicable only as being derived from two opposing social philosophies. One was made by a distinguished American economic expert. The very title of the article which contained it was provoking: "Inflation or Liberty?" It was an early warning of the danger of progressive inflation, the kind of warning which must now be recognized by all as justified. The author came to the con clusion that a nation can preserve its freedom only with the help of sound money but that in a modern mass democracy the monetary system could not remain sound if it was at the mercy of govern ment, parliament, political parties, and powerful pressure groups in the absence of sufficient countervailing forces. The other state ment reached me through a German news agency. A university professor of moderate socialist tendencies violently criticized the "fatal deflationary policy" of the German central bank and de manded that "the democratic means of guiding the economy, 222 CENTRISM AND :DECENTRISM namely, money and credit, should be placed in the hands of de mocracy."