§ 10. THE GENERAL SOURCES OF DISTURBANCE.

The real nature of our present economic order is characterized on the one hand by an extremely great differentiation of the productive processes (the division of labour), and on the other by the lack of any central, conscious planning authority to guide this vast complicated machinery. It is a blend of the finest differentiation and almost complete anarchy, and is based upon a boundless wealth of voluntary decisions, and upon freedom in production and consumption and in the lending and borrowing of credit. Economic theory shows by what inherent laws these millions and billions of individual decisions and economic acts are so welded together that this anarchist type of economy, which is capitalism, does not lead to a state of chaos, but actually makes capitalism capable of very high achievements, causing the achievements of the economic systems of the past to seem insignificant, and also assuring to the economic system of our day a position superior to that of any collective system of the future. That a social system of such extreme differentiation and complexity is likely to possess a very unstable equilibrium and to be subject to manifold disturbances is at once obvious. The miracle is not that it functions amid continuous disturbances and oscillations, but that it functions at all, and with such comparatively good results. That is the great miracle which has again and again fired the curiosity of men in modern times and has given rise to the science of economics.

The only way to understand the phenomena of economic fluctuations and disturbances, crises and unemployment, is to realize at the very outset that our present social order is an economic system based upon division of labour carried to its extreme limits. In any study of crises and cycles, it must be realized from the first that in such a vastly complicated, knife-edged economic organization as that of to-day held together by the bond of voluntary decisions, frictionless co-operation cannot be expected. It is inevitable that the individual parts of the process will fit in with each other sometimes better and sometimes worse, and it is at least conceivable that the disturbances and frictions may become so great that the whole machinery will at times come to a complete standstill—with the paradoxical effect that millions of people who are able and willing to work must sit with idle hands, because they can find no work, although the distress of the masses during this very period of crisis cries out for an increase in production. If things are going badly in a country of self-supporting peasants like China, for instance, because over-population leaves too little land for each individual, the obvious thing is for the peasant to work more. He would not understand the phenomenon of unemployment and would think it a good joke if he were told that there are countries where work has become a boon for which men beg as for bread, and that those who do extra work in their spare time are hated by their fellows as “double wage-earners.” He would consider this a grotesque state of affairs, and we should be obliged to agree with him. But we should have to reply that the periodic recurrence of this grotesque state of affairs is the price which we must pay for the enormously higher productivity of an economic system based on the logical carrying out of the principle of the division of labour. The susceptibility of the economic process to disturbances of equilibrium grows with the degree of the division of labour, but so does the productivity of the economic system as a whole. If we wish to avoid all disturbances of equilibrium, we must return to Robinson and his miserable standard of living; and if we do not wish to do that, we must be prepared to accept the greater instability of the economic system. That is the dilemma in which we find ourselves.

But the choice is no longer ours, since the increase in productivity due to the increasing division of labour, and the production technique made possible thereby, have led to a tremendous growth of population throughout the world, so that we cannot diminish the present degree of the division of labour without endangering the existence of countless millions of people and with it the existence of our social order—a very hard and sober fact which puts an end to all the dreams of economic romanticists and autarkists, but should also put a necessary damper on the usual optimistic appraisal of the growth of population and the equally common pessimistic view of the present decline in that growth.⁹ In other words, the pronounced instability, combined with the top-heaviness and complexity, of our economic system, based as it is upon a high degree of division of labour, are the high price which we must pay for an increased productivity, which has resulted partly in greater prosperity and partly in a tremendous increase in population; and as far as this latter result is concerned, we are no longer masters of our decisions but prisoners of our fate. This must be kept in mind in passing judgment on the growth of population in the past, as well as the decline of population in the present and the future. If the present world economic crisis is perhaps already a sign that the more and more stilted industrialism based on the division of labour has reached its limit, the falling tendency of the birth-rate of the present day and of the future certainly deserves special consideration in this connexion. If the growth of population in the past was a factor making for expansion and instability, the decline of population in the future will be a factor making for stability.¹

The instability of our present economic system, due to the division of labour, is now being rendered still greater by the fact that with the increasing division of labour the technique of production has changed in such a way that the production of consumption goods is becoming more and more indirect, and follows the roundabout way of the previous production of producers’ goods (machines and the products necessary for the construction of these machines, transport, building, &c.). The modern process of production is therefore not only based on the division of labour, but is an indirect process following circuitous and therefore time-absorbing routes. If the division of labour as such demands that the producers should estimate each other’s demand for goods correctly, in order to avoid disturbances of equilibrium, the special production technique connected with this system of division of labour leads to the further necessity of correctly estimating also the demand for intermediate products, and the volume of the intermediate products must be kept in the proper ratio to that of the final products, and this despite the difficulties involved in the time-absorbing character of our production process. It is easy to see that we have here a storm centre of the first rank. That it is indeed the principal disturbing factor, round which every adequate theory of crises and cycles must be built, will be shown later.

In so far as a socialist state maintains the present-day scale of the division of labour and the production technique described—and it will have no other choice, unless it immediately exterminates a considerable part of the population—it, too, must inevitably fall a victim to the disturbances which arise from the complexity of the economic system. It is therefore quite wrong to assume that a socialist regime would be able to bring about a state of affairs from which crises and disturbances were absent. Moreover, there is reason enough to assume that the bureaucratic, centralized organization of the socialist state, with its inevitable abolition of the pricing mechanism of the free market, would lose the indispensable measuring-rod of direction and economic calculation, and would finally provoke such violent disturbances that the further continuance of this system would prove altogether impossible. The reader should therefore be warned against drawing conclusions from a comparison of the present state of the Russian economy, which has only had a few years in which to test its staying power, with the present state of the capitalistic world, which has shown, over a period of more than a hundred years, not only that it is capable of continued existence, but that it is able to create prosperity, in spite of all its crises That a socialist system may succeed in building electricity works and things of like nature in gigantic style causes us as little astonishment as the successful building of the Cheops pyramid. In both cases the only astonishing thing is the tremendous social pressure and the great capacity for restricting consumption, which make such investments possible, and the politico-social system which withstands such pressure.

Russia is to-day experiencing a boom which, like the boom in a capitalist country, is characterized by the forcing upwards of investment activity, and the prudent observer will wait and see what the final end of the Russian investment orgy will be. Russia cannot avoid the necessity of finding a new equilibrium of the national economy at the end of the investment period (which can be lengthened until the unhappy population are in a state of complete misery); and exactly as in the case of a capitalistic boom, this new equilibrium is all the harder to find, the steeper has been the rise of the investment curve. It will soon dawn upon us that the verdict of many people on the present Russian “prosperity” is as short-sighted and lacking in historical perspective as their verdict on the American “prosperity” of a few-years ago, and that they fail to foresee the possible end, although the lack of foresight and perspective in this case is still more inexcusable, (1) because the American lesson lies behind us, (2) because the weak places in the Russian investment boom are still more obvious, and (3) because its violence can be plainly read in the simultaneous impoverishment of the Russian people while a capitalist boom usually leads to a rise of consumption. It does not show any very deep understanding of economics to assume that something is to be gained by replacing the ensemble of individual decisions, guided by self-interest, which is characteristic of capitalism, by the control of government authority. The contrary is true.

It is a striking fact that, in contrast to this view, popular opinion in many countries to-day takes it for granted that a Socialist Economy (which is, technically speaking, equivalent to a totally Planned Economy) has, whatever its other shortcomings may be, at least the advantage of being a cycle-proof economy. It seems that this opinion rests mainly on a kind of short circuit of reasoning. There is, of course, no denying the fact that, theoretically, an economic system is conceivable in which the typical disturbing factors of our present economic system are eliminated by a suitable management of the whole economic process in its every detail. To admit this is one thing, but it is quite another thing to jump to the conclusion that the magic word “Planning” suffices to open the door to this—in many respects rather dubious—paradise, promising to make the world safe for stability. It is not sufficiently recognized that “Planning” is only just a word vaguely indicating the general principle of Socialist Economy, and it is a safe bet that the overwhelming majority of our planners have probably no inkling of the gigantic problems which lie behind this word. In fact, Collectivist Economic Planning presents so many and such crushing difficulties that there is very little prospect of its coming anywhere near the productivity of our present economic system (even in its present deplorable state) and of its guaranteeing an harmonious balance of the economic body.² The socialist economic system will in all probability lead both to diminished productivity and to a greater lack of economic balance, and these two effects are closely interrelated.

As it is, the economic disharmony which promises to become a chronic ailment of the Socialist Economy will show this marked difference from the temporary disharmony of the Capitalistic Economy, that it will not become manifest at the place of its origin but will be shifted from the economic apparatus on to the shoulders of the consumers. In other words, the original tumour will breed, as it were, metastases in the more distant parts of the economic body. There will be no more bankrupt firms, and, given a certain inventive faculty for disposing somehow of embarrassing masses of human beings, there will not even be unemployed as we know them to-day. But that, of course, does not mean that we have got rid of the innate economic disharmonies. What it means is rather that we shall have destroyed both the machinery registering the place of their origin and those forces which, under our present economic system, work automatically to do away with them. The economic machinery continues to “function” in a way, but the population, besides being deprived of elementary personal liberties, will have to bear the consequences of the economic disharmonies by being worse off than before. “Crises” in the Socialist State of perfect Planning will be characterized, then, by the fact that people will suffer by them as consumers rather than as producers while the economic apparatus will show, at best, the outward appearance of being in some sort of order. But the latter, as already indicated above, is not an advantage but a great disadvantage as compared with capitalism. Hence the result we are most likely to get will be as follows: The socialist system of Total Planning will probably succeed, in a very short time, in turning the present paradoxical “poverty amidst plenty” into the more respectable “poverty amidst shortage”; but as the innate economic disharmonies will be a lasting feature of this system, the poverty is bound to become just as chronic as the corresponding disharmonies. What we get in exchange, then, for capitalism with all its shortcomings is poverty and disharmony being greater than ever before and becoming chronic into the bargain—and this without the economic, political, and personal liberties for which even the poorest unemployed in the capitalistic countries will regretfully yearn when it is too late. It is perhaps pertinent to add that the colour of the political flag under which the system of Total Planning is launched makes, of course, absolutely no difference.³

It is hardly possible to over-emphasize the fact that every economic system, no matter how organized, which is based on a very high degree of division of labour and on a technique of production as complicated as the present one, is bound to be exposed to all sorts of dynamic disturbances. On the other hand, however, it would not be defensible to deny that the regulating principle of the capitalistic economy—the fundamental freedom of individual decisions and economic acts, which is bound up with the private ownership of the means of production and with competition—leads on its side to specific disturbances, which could perhaps be avoided by a modification of this regulating principle. It is indisputable that competition can lead producers astray into economic conduct which is guided more by the behaviour of the competitors than by considerations of the general economic interest. In this way the boom, like the depression, can easily assume an exaggerated form, and so to-day a considerable weakness of our individualistic competitive system is observable in the fact that no single entrepreneur believes that he dare take on new investments (a fact which explains the duration and acuteness of the present depression) as long as investments do not show a general tendency to rise.

In addition to the division of labour, the pronounced and growing importance of the production of producers’ goods, and the special regulating principle of our economic system, there is the fact that our economy rests upon the use of money and credit, a further very serious source of trouble. Although it is an indispensable simplifying method to represent the complicated economic process of to-day as a procedure in which money is only an auxiliary and ultimately goods are exchanged for goods, it would be false to ascribe a merely passive rôle to money in economic life. On the contrary, changes in the volume of money (or of credit) and in the velocity of circulation of money can call forth changes and disturbances in the economic process, which are so important that one group of economic theorists (the adherents of the so-called monetary theory of the cycle) see the ultimate cause of economic fluctuations in happenings within the money and credit sphere.

Furthermore, it is important to note that freedom in the application of money income is indissolubly bound up with the regulating principle of our economic order. This freedom means, on the one hand, freedom of the individual to determine how much of his income he shall spend and how much he shall save, and in what way he shall save, and, on the other hand, it means his freedom to choose the goods on which he shall spend his money. As the economic equilibrium can only be maintained if the component parts of production correspond to the application of the individual incomes (while this application can be more quickly changed than the corresponding components of production), it is obvious that this freedom to consume and to save is a further source of disturbance of the first order.

Finally, our economic system is, like every other, exposed to the disturbances which force their way into the economic process from without, either through nature or through politics. Particularly important in this connexion are the fluctuations of harvests, by reference to which attempts have been made to explain crises and cyclical fluctuations. But none of the representatives of this climatological theory of the cycle has succeeded in fully proving his contention.⁴ The same is true of population changes, which doubtless represent a dynamic factor of great importance, but are not sufficient to explain crises and cycles.⁵