CHAPTER I. INTRODUCTION.

This volume has been written during the worst and most widespread economic crisis ever recorded in the annals of economic history, that is to say, at a time when the problem of economic crises and cycles may claim to be one of preponderating interest, when the intolerable burden of the depression is threatening to endanger the very existence of the economic system, and when many people believe that it is a question not of a crisis within the capitalist system, but of a crisis of capitalism itself. The writing of this book thus belongs to a time when economic events are crowding close upon each other’s heels, when the abnormal is becoming the rule, and when the revision of many principles in the practice as well as in the theory of economics is being forced upon us. While this unique period offers many advantages for the writing of such a book, it also makes for manifold dangers.

It is, for instance, an important advantage that both the author and his readers have the doubtful privilege of having become acquainted with the phenomenon of a crisis in all its forms, expressions, and consequences, in a rather painful and direct manner, and that both parties bring to the subject the passionate interest due to a question which has become a problem of existence not only for countless individuals, but also, gradually, for the whole of the social system of the Western World. On the other hand, we must not overlook the grave dangers. A time when economic events are crowding close upon each other’s heels is not the time for distilling and bottling the fine wine of economic knowledge—it is in fact a time when even the science of economics is undergoing a process of fermentation. Many new facts are revealed to the eye of the student who gazes into the maelstrom of the crisis, but a considerable time must elapse before these facts can be incorporated into the structure of economic theory as permanent component parts. The onlooker must therefore try to interpret accurately what he sees, and must disentangle the ever-changing opinions of the passing hour from those new facts which give promise of possessing permanent value in the future and of waiting upon intellectual development without participating in all its nervous spasms. But however earnestly he may try the author cannot prevent a work like the present from becoming more quickly “dated” to-day than would be the case in normal times. Nor can he prevent it from paying, in some respects at least, for its greater directness and closeness to life with the danger of more rapidly losing its freshness.

There is another danger of which both author and reader must beware: that of viewing the matter in the wrong perspective; that is to say, attaching too much importance to the events of the moment and consequently failing to see things in their historical perspective. Let us not be too hasty in expressing the opinion that Providence is doing us a special favour by allowing us to witness (or even to be instrumental in introducing) a new epoch of world history, and let us remember that world history is no ephemeral growth. We must have enough historical sense to know that nothing in the world lasts for ever, not even our present social and economic system; but, on the other hand, we must also have enough historical sense to see things in their historical perspective. In a word, let us not be affected by the prevailing nervousness which in certain individuals borders already on hysteria.

Only people devoid of historical sense could so quickly forget that it is a mere matter of fifteen years since the World War brought greater suffering to humanity than the present world crisis has done, and that the alterations in the economic system which then took place (disintegration of world economic relations, national autarky, suspension of the gold standard and all-embracing economic regimentation) have been of far greater import than the changes now being brought about by the pressure of the crisis. At that time, too, there were people who were quick to assume that the war-time economy had come to stay, who talked of the “dethronement” of gold and predicted the end, once and for all, of the competitive economic system, and the definite bankruptcy of Liberalism. And yet, after the war, with almost elemental force, all that was said to be dead—world economy, the gold standard, capitalism and liberalism—came into being again, and swept away the hysteria engendered by the war as if it had been the figment of a dream! It would be well if we at the present time were to keep cool and collected, and to behave in such a way that when in days to come we look back upon the vortex of this crisis we need not blush at the recollection of any hysteria. We may venture, without undue optimism, to predict that those who have not let the outcry of loud-mouthed prophets and reformers turn them from their belief in the lasting validity of the principles which have given the economic and social system of the West all its greatness will be proved right in the end. We must at least reckon with the possibility that after this devastating crisis, as after the war, most of what is to-day being so loudly decried and reviled will come into its own again.

This belief that the present world crisis spells nothing less than the total collapse of our present economic and social system, a kind of last judgment, a “crisis to end crises,” as it were, is indeed so popular nowadays that the substance of this book would seem rather shallow if we were to pass lightly over this problem. If it were true that we must abandon the wreck of our present economic system, leaving it to break up, and seek salvation on the shores of the promised land of planned, and, necessarily, autarkic economy, then what follows in the subsequent pages would be little short of a necrologue on the Splendours and Miseries of capitalism. It would not be without value, but it would mean something different from what the author intends it to be. Let us therefore consider the problem in more detail.¹

Our first task is to make sure what the problem means. As it is, the question as to whither our economic system is drifting may mean two different things. In the first meaning, it amounts to a prognosis of the economic future of the Western World, by weighing up all the forces and counter-forces and estimating the ultimate outcome, independently of whether we prefer to lend our support to this process or to counteract it. In the second sense, the question assumes a more practical aspect, so that the answer may help us determine what direction the economic policy to be pursued at the present time should take. This will become clear at once if we reflect that, even if we were utterly pessimistic for the future of our economic system, we might still be driven to mobilize all our energies in favour of an economic policy directed against such a disastrous development. Just when we are inclined to give a pessimistic answer to the question in its first sense, in full realization of the peril hanging over the economic system of the Western World, we may feel it the more our duty to advocate a policy which may still have a chance of diverting what we think will be a disaster. Everything depends on the question as to whether the economic system can be preserved if only man will bring his efforts to bear, or whether there are unequivocal forces of an objective nature, mercilessly undermining the system. There can be no doubt that it has happened before, in the history of mankind, that forces of this kind have brought about a situation where men had to realize that a new epoch had begun. The invention of gunpowder brought the whole period of the knights and their armies to a close, and every attempt to struggle against this trend would have been quixotic foolishness.

The question which must be put clearly and directly is this: Can we discover to-day objective forces of development which will finish with the competitive system just as unequivocally and mercilessly as the invention of gunpowder finished with chivalry? All depends on the answer to this question, for if the answer is in the negative no vague and mystical philosophizing can conceal the fact that the disintegration of our economic system is by no means a fate to which we have blindly to submit, but a fate delivered into our own hands.

Exactly what has actually happened that might force us to abandon the competitive system like a sinking wreck? Various answers have been given to this question, but when we come to examine them more closely none of them is really impressive, let alone convincing. The first answer we are likely to hear is that the outlets for capitalistic expansion being greatly reduced, capitalism is condemned to stagnation and internal disintegration. Two things are usually understood by this : the slackening rate of the increase of population and the end of colonial expansion. The idea seems to be that, owing to these two facts, capitalism has to face restricted markets for the surplus product constantly increasing with the advances in productive technique. An argument along these lines sounds plausible, but it cannot stand the test of a more careful examination. Even if we suppose for a moment that the theory of capitalist expansion being hopelessly restricted is true, it seems impossible that this can have acted as a cause of the present depression since it is obvious that the spatial and demographic restrictions on expansion have existed for decades without having prevented a fully fledged boom several years ago. We must allow, however, for the remote possibility that this restriction may have acted, up to the present, only latently, and that after the world crisis had been started by other causes, it may have exerted its paralysing effect openly and to its full extent. Therefore, the fundamental question to be raised is this : Is it really true that capitalism, in order to extend its markets, is continuously in need of fresh supplies of human beings and of unexplored territories? Put this way, the question can, of course, be answered only in the negative, for it is obvious that goods are not paid for with human beings or square miles but with incomes, and these incomes owe their origin to the successful production of other goods. In other words, the fundamental fallacy, which is at the bottom of the argument in question, is simply that it confounds human beings and square miles with purchasing power, and so far it is only an interesting variety of what Whitehead aptly calls the “fallacy of misplaced concreteness.”² It is a gross error of thinking which might be properly ignored in merciful silence were it not repeated monotonously every day. At the same time, it is a good example of the crude overproduction theory with which we shall have to deal later on (§ 11). It is interesting to note, moreover, that the neo-Marxian theory of economic imperialism has been based principally on the same sort of fallacies, a fact which is a good illustration of the tenacity with which survivals of Marxist thinking linger on in contemporary thought on economic, social, and political problems.³

To sum up, there is no reason whatever why our economic system must of necessity rely, for selling its increasing volume of products, on the wants of fresh supplies of babies or of newly discovered islands in the Pacific Ocean, and equally no reason whatever why an increasing productivity of our economic system could not be used for the fuller satisfaction of the wants of human beings already in existence or already within the trading area of the present world economy. There is no secret force within the mechanism of capitalism which should hinder it from expanding intensively instead of extensively. Apparently it cannot be too often repeated that the possibilities of intensive expansion are inexhaustible so long as the last Hottentot has not become a millionaire, and it seems that this has to be emphasized again and again before it is generally understood. It goes without saying that such an intensive expansion cannot continue without a corresponding increase of purchasing power, but it is also a matter of course that, so far as this prerequisite is concerned, intensive expansion is in no way different from extensive expansion.

We may conclude that the spatial and the demographic restrictions on expansion as far as they are real facts, are a long way from making the decay of capitalism an inevitable necessity. The wants of men remain just as unlimited as before. This is not to say, of course, that, owing to the trend of development depicted above, the composition of wants might not be altered. In fact, there are wants which, being easily satisfied for each individual, can, on the whole, only be extended by the increase of men. That is especially true in the case of grain. Consequently it does not seem unlikely that the present agricultural crisis—as far at least as it is a world-wide crisis of grain production—may be closely connected with the falling off in the rate of increase of the population of the bread-eating nations, a causal relationship intensified on the supply side by the improved technique of grain production (the combine, the tractor, and “dry farming” being well-known examples). This unfortunate development has, in turn, contributed tremendously to an intensification of the universal economic depression since the grain-importing countries of Europe, impelled by certain ideologies, did not resist the temptation to avert, by all possible means, from their own grain producers the consequences of the relative over-expansion of the world production of grain. As is invariably the case in State intervention of this kind, the ultimate price to be paid for it was not duly reckoned with. As in so many other instances, these nations thought they could protect themselves against some unpleasant draught coming from the world markets by just shutting the door and living happily ever after.⁴ It was quite otherwise. Not only were these drastic measures apt to imperil the other branches of agriculture and to infect them also with the bacillus of depression, but they turned out to be deadly blows for the world economy as a whole and, consequently, also for the industries of the grain-importing countries.⁵ Undoubtedly, this has been one of the biggest charges of dynamite to be exploded beneath the foundations of the world economy. There is consequently a subtle causal connexion between the changed dynamics of world population and the present universal crisis of our economic system. But it must be emphasized that the nature of this causal connexion is quite different from what the prophets of doom have in their minds, and that the causal sequence lacks the inevitableness which is generally supposed.

Another argument which seeks to show that capitalism must of necessity go to pieces as a consequence of objective driving forces, supposes, following on the well-beaten tracks of Marxian philosophy, that the tendency towards larger units of enterprise is a natural and inevitable one, and draws the usual gloomy conclusions-from this seemingly relentless drive towards the Bigger and Better. Again, it is very doubtful whether the inevitability is as cogent as it is supposed to be. It can, in fact, be shown that the very popular opinion to which we are alluding is nothing else than a gross exaggeration which is not always sufficiently recognized as such. In still very important sections of our economic system, i.e., in agriculture, in the small trades and the like, nothing of this sort is going on. But even in the case of industry it can be argued that the trend towards bigger units has, very often, less to do with real advantages derived from the increased size of the unit than with a certain megalomania which has been such a characteristic trait of the “gay ’twenties,” with consequences which have become only too manifest during the present depression. Everywhere we witness to-day a decided decline of the “skyscraper principle,” not only in architecture but also in the economic sphere.

Almost everywhere it becomes a fact beyond dispute that dimensions have outgrown the optimum size and must now be reduced, by a very painful process, to more reasonable proportions. It would be very interesting to have the testimony of engineers as to how far enterprises have been inflated beyond the technical optimum scale by a pathological predilection for mere size, by considerations of prestige and other irrational motives, and how far the recent development in the technique of machinery—especially the spread of the electromotor and the gasoline engine—has, in many directions, exerted even a lowering influence on the optimum size. In this connexion it should not be forgotten that, for example, the automobile signifies after all the triumph of the small unit over the larger one, so far as the business of locomotion is concerned. Thus it seems by no means true that natural forces are driving the world in the not too cheerful direction of the “skyscraper principle,” and so it is equally untrue that we have helplessly to submit to structural changes in our economic system which an inevitable development of this kind might bring about. The breakdown of the “skyscraper principle” would have been still more complete to-day if so many governments had not obstructed the process of readjustment by all kinds of subsidies and interventions. It is beside the point to declare that many firms have become so large that they represent, as the phrase often goes, “national institutions” which the government can no longer to their own fate. The recent example of the Citroen Works in Paris, in vain imploring the French Government to socialize its heavy losses, plainly shows that the governments can perfectly well leave these giants alone, without the community as a whole being any the worse off by it. The question as to whether the State should, in these cases, support the cracking pillars or let them fall is a question of expediency, without any cogent necessity in favour of the former policy, and still less convincing is the alleged necessity for the following up of the socialization of losses by the entire socialization of the whole firm. State subsidies of any kind must remain a very rare exception if the mechanism of capitalism is to work according to its well-tested rules, but it cannot be said that they mark the downfall of capitalism, and still less that, once this policy has been started, there is no way back. Again, we find no sign of any fate from which there is no escape.⁶

The point just considered is very closely related to another one. Modern capitalism, it is widely believed, is not only inevitably drifting toward an economic system composed of ever larger units, paving thereby the way to socialism, but also towards monopoly so that planned economy seems to become more and more a necessity demanded by logic as well as by social justice. In answer to this popular contention, it cannot be overemphasized that it is nothing short of a complete myth. It is absolutely untrue that competitive capitalism is of necessity developing into monopolistic capitalism. On the contrary, the truth is that there is a natural gravitation towards competition rather than towards monopoly, and this gravitation is commonly so strong that very rarely, indeed, has a monopoly come to life in the absence of more or less violent engineering on the part of the State. Even when the natural tendency towards monopoly has the appearance of being extremely strong as in the case of the iron and steel industry in Germany, which enjoys high tariff protection, the government had to do its utmost in order to effect a monopolistic combination. It is doubtful whether there would be many monopolies in the world if the State, in order to offset the natural gravitation toward competition, had not weighted the scales with its authority, its jurisdiction, and its general economic policy in the direction of fostering the formation of monopolies. This must be stated the more emphatically since the opposite opinion is almost invariably maintained in a manner indicating that it is regarded as being beyond any possible discussion. This and the ideological predilection for the monumental, the big scale, for organization and regimentation, is, of course, very conducive towards creating the atmosphere in which monopoly flourishes. So is the widespread feeling that the days of capitalism seem to be numbered, and that the competitive system is a contemptible and petty thing unworthy of our modern age and in need of being replaced by a system rigidly regimented and consciously organized. All the catch phrases of our time like “orderly marketing,” “wasteful competition,” “rugged individualism,” “corporativism,” and so forth cannot deceive us as to the enormous contribution they make towards adding to this pro-monopolistic atmosphere. There is no reason, however, why the governments could not reverse their economic policy so as to lend support to the natural gravitation towards competition instead of working against it. True, it does not look just at present as if the governments were particularly eager to do this, but that is evidently less the fault of capitalism than the product of an ideology which we have still a legitimate right to attack if we are concerned for the happiness and welfare of the world.

One of the most characteristic ingredients of the present mass psychology seems to be the general distrust of the mechanism of our economic system, a distrust based on the belief that something has happened to this mechanism which makes it a mechanism no longer to be relied upon. Nobody unfamiliar with the intricacies of this mechanism can be blamed for this distrust to-day when, on the surface of things, everything seems to point to a complete breakdown of the capitalistic machinery. Nor can it be denied that, in the present world crisis, the mechanism, though still working to a perfectly amazing degree, is working extremely unsatisfactorily. But again, the point is, exactly how far this is due to any inherent defect of the machinery and how far it is due to sand being liberally thrown into it, and, consequently, how much hope there is of getting it back into working order so that it may be able to pull the world out of the present impasse. The subsequent chapters will throw some light on all these points by explaining the structure of the machinery and its dynamics and by describing the dominant features of the present situation. Much depends also on the question as to whether there is any real choice left to us, in other words, whether socialism, with its essential technique of planned economy, is a really workable alternative, from which we might legitimately expect greater economic harmony and stability. This question, which is strangely neglected in current literature and as regards which far too much is taken for granted, will also be specially dealt with in a later section to which the reader is expressly referred as being one of particular importance.

There is one point, however, which should have a more prominent place among these remarks of a more general character. Reverting to the growing distrust in the mechanism of capitalism, we have to note that this distrust, once it is started by a number of circumstances, shows a most unfortunate tendency to amplify itself, since the deterioration of the mechanism engendered by the distrust and by the interventions evoked by it seems to warrant a still deeper distrust and so on. In this respect mankind bears a close resemblance to the centipede who had previously moved quite cheerfully without giving much thought to the complicated machinery of his legs; obsessed, however, by the idea that laissezfaire is a thing of the past, planning being the fashion instead, and losing confidence in his machinery of locomotion, he starts nervously to count his legs, but the more he counts the more he loses his ability to move, until, exhausted by the vicious circle thus set up, he goes back to his old well-tested method. This resemblance is most striking to-day in the field of international economic policies where it is most obvious that the method of the nervous centipede has made such progress that the end of this part of our economic system is already distressingly near at hand, with disastrous consequences for the structure of the national economies and for the outcome of the different recovery programmes now being conducted on a national basis. This international part of our economic mechanism, which was once a wonderful piece of machinery, is, indeed, utterly out of order to-day, and it is not easy to see how it could be repaired. It must not be forgotten, however, that one of the main reasons for this lamentable development has been the deliberate destruction of the gold standard. A nice theoretical case could indeed be made out for a world economy without gold and for a system of managed currencies, and it has been an easy task to ridicule the orthodoxy of the gold standard. But the glove is now on the other hand. The theoretical case has been tested by experience and found utterly defective, its main fault being, perhaps, the fact that the psychological side has been entirely overlooked.

Anyone trying to analyze the ultimate causes of the present-day world economic chaos cannot fail to realize that the destruction of the gold standard and the monetary imbroglio engendered by it has—in addition to the agrarian policy already referred to—played a leading role. The experience of the last years has shown how devastating are the consequences if the mechanism of the international monetary system is knocked to pieces, with a contempt, mingled with pity, for an old-fashioned ideal and with an almost cynical delight in the unorthodox. A system, which ran smoothly and provided the world economy with the necessary supply of international credits, has, in fact, been replaced by a system which is characterized by fear, confusion, paralysis, red tape, and illegal trading. Instead of entering on long theoretical discussions with the adversaries of the gold standard and those who despise the idea of stable exchange rates, it seems to be sufficient now to point silently to the present state of the world economy and, perhaps, to add laconically “Your work!” A world economy without gold has proved, in fact, a world economy suffocated by hysteria and officialdom, mitigated by illegal trading. It will be extremely difficult to get the world out of this state again, but it is obvious that the process of restitution must begin with the restoration of the gold standard which must be followed, if it is to work again to satisfaction, by a complete scrapping of the present watertight compartments between the different nations. There is no reason why this could not be done if only the world wants it to be done, and there is every reason why it should be done. In order to see this clearly, one has to realize that there is no other way out if we want the world to be saved from a disaster of incredible magnitude. The idea that a sort of planned world economy, effected through the present devices of quotas, clearing agreements, &c., developed into an orderly system, might offer a promising alternative is very ill-founded, and that for a reason which is not yet clearly recognized.

It is obvious that a planned world economy is equivalent to a dense network of commercial treaties dealing with the minutiae of international economic relations. It is, therefore, absolutely dependent for its functioning on an atmosphere of honesty, fairness, and continuity which has been a concomitant of the Liberal epoch and which is now slowly dying with it. In a world in which the fundamental principle of a civilized society pacta sunt servanda is more and more regarded as a Liberal prejudice a planned world economy is a fortiori an absolute impossibility. In other words, the same forces which are undermining the old Liberal world economy are also destroying the moral and legal foundations on which a planned world economy must be based, and the irony of it is that most of the planners are the same persons who are doing their utmost to lend their support to these sinister forces, apparently impelled by the curious idea that you can eat the cake and have it.⁷ The world is to-day living from a moral (and intellectual) capital accumulated during the Liberal epoch, and is consuming it rapidly, but the increasing difficulties of the new methods in international economic policies give a foretaste of that to which the world is rapidly coming. So a planned world economy is no real alternative at all, the only alternatives being the return to a Liberal world economy or complete chaos. In either case, the present attempts at planning in international relations have no future at all, the numerous assertions to the contrary notwithstanding. With these attempts the world resembles to-day a man who, having fallen down a precipice, is holding himself above the abyss by aid of a shrub which he happened to grasp : despite his boastful assertions that this is “the real thing,” his only choice is to be rescued from above or sooner or later to fall down into the abyss below. Let us add that the rope for rescuing him must not be of paper but must have a strong golden thread in it. Here, as everywhere else, the essential thing is to make the choice clear.

Mention has already been made of the lamentable fact that the world is to-day living from the psychic capital accumulated during the Liberal epoch. I believe that this is the gravest and most important feature of the present situation, and, indeed, the most difficult to alter since it is so deeply rooted in the contemporary mind. But it is also a point which must be rightly understood if we do not want to be misled in our own attitude towards it. What we must always bear in mind is the conclusion which we reached previously, i.e., that nothing has happened to our economic system, such as threatens to blow it up just as the invention of gunpowder blew up the feudal system, in an irresistible and objective manner. The things threatening our economic system are no outward forces of this kind but ideologies of every description. The effect may, of course, be just the same, but the essential difference must not be ignored. Just by emphasizing this difference, it may still be possible to hinder the ultimate triumph of these destructive ideologies. For one of the most dangerous aspects of the Antiliberal and Anticapitalist strategy is to discourage any possible resistance by presenting things that are purely ideological as irresistible forces of an objective nature which are taking their course outside our control and regardless of our independent aims. This trick—invented, by the way, by Karl Mars—cannot be too strongly opposed. This can be done by pointing out that these things are taking their course not outside of our control and independently of our will but with their very aid. Everything depends upon the strength of our control and of our will and upon there being a sufficient number of men in the world who, fighting to the last ditch, are willing to face even the chance of the ultimate defeat of their cause, following the gallant motto : “Victrix causa deis placuit sed victa Catoni.”

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¹ The author has given to this question a fuller and somewhat different treatment in his article “Die säkulare Bedeutung der Weltkrisis,” Weltwirtschaftliches Archiv, January 1933.

² A. N. Whitehead, “Science and the Modern World,” New York, 1926, p. 75. Cf. also L. Robbins, “An Essay on the Nature and Significance of Economic Science,” 2nd ed., London, 1932, p. 51.

³ This important subject has been dealt with at greater length by the author in his article “Kapitalismus und Imperialismus,” Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1934, pp. 370-386.

⁴ The same will be shown later on when we come to consider the possibilities of nationalist monetary policies.

⁵ The whole process has been demonstrated by the author for the case of Germany in his book German Commercial Policy, London, 1934.

⁶ Even the much discussed case of the great commercial banks in Central Europe (the Creditanstalt in Austria, the Darmstädter und Nationalbank in Germany, &c.) is no real exception though it certainly comes nearer to supporting the argument in question, the averting of the crash really having been a social necessity. But here two points are to be considered. First, the socialization of deposit banks, though hardly to be recommended, cannot be said to jeopardize capitalism, any more than the socialization of the other money-providing institution, i.e., the central banks. Secondly, there is no reason why the governments who kept those banks afloat should, after some necessary changes of the banking system, not go out of the business of banking again after a while.

⁷ The idea developed above may be explained in yet another way. It is generally recognized that the world economy as compared with the national economy labours under two distinct disadvantages. The first is that there is no international legal system enforced by a World State; the second is that there is no worldwide monetary system. In spite of these two disadvantages, world economy has been able to develop during the last century because it has been possible to find substitutes for the institutions that are lacking. The lack of an international legal system based upon a World State has been compensated by a system of long-term international contracts and by a high degree of loyalty in keeping them. The lack of a world-wide monetary system has been mitigated by the gold standard. Both these substitutes are creations of the Liberal Era.

Planned Economy undoubtedly means an economic system centralized in the State. It is radical “Etatism.” But there is as yet no World State. Consequently, international planning means radical “Etatism” without a corresponding State. The thing is even more absurd since to-day international planning is being demanded at a moment when even the substitutes by which Liberalism has been able to mitigate the lack of a World State are being undermined by the same illiberal forces which are behind the demand for international planning.