Chapter III: The Structure of the Division of Labor

“Because it is my social function to supply the world as well as I can with a certain thing, therefore I dread the world’s being so well supplied with it that I shall be able to get little or nothing for supplying more. It is impossible to exaggerate the importance of this consideration, or the penetrating and intimate nature of its bearing on every aspect of the social question.”

PHILIP H. WICKSTEED

The Common Sense of Political Economy (1910)

1. The Meaning of the Division of Labor

Our economic system is distinguished from its primitive prototypes before all else by its extreme specialization of labor, or what we call the division of labor. It is this central fact to which we must return again and again for an understanding of the modern world. Today, most people are engaged almost exclusively in the production of goods and services intended not for themselves but for others, with each one producing always the same goods and the same services. Except for some sectors of the agricultural economy—and even these have diminished rapidly in importance—the modern producer personally consumes only a fraction, if anything, of his specialized output. In some instances, it is true, the small farmer will produce first for his own needs and then exchange his surplus for other products. But it is difficult to imagine a Ford or a Krupp producing automobiles and cannon first for themselves and their families and then supplying to others the surplus which they cannot use. Even the worker in a shoe factory will buy his shoes, as a rule, in a shop, and it is improbable that he will recognize the pair that he buys as the one he himself has made.

To estimate correctly the role of the division of labor in the building of our civilization is the business of the sociologist and the economic historian. What is important for us to note here is the fact that the division of labor has enormously increased the productivity of human labor. The reasons for this are as follows:

(1) The division of labor allows each man to specialize in the kind of work best suited to his capacities.

(2) The division of labor tends to concentrate the production of each commodity in the place where natural conditions are most favorable (the spatial division of labor), a fact which is of great importance in connection with the international division of labor. It is the division of labor alone which brings it about that every type of production, within the national economy or within the world economy, can be established in the most favorable location.¹

(3) It is specialization alone which permits the complete development of professional skill and the acquisition of that experience which distinguishes the specialist from the mere amateur. Thanks to the division of labor, a fund of experience, of knowledge, and of skill can be preserved and increased throughout the generations.

(4) The division of labor avoids the loss of output which ordinarily accompanies the change from one type of work to another.

(5) The division of labor—and here we touch on a most important point—makes possible the use on a vast scale of tools and machines. Because of the large outlays which are required for the purchase of such equipment, it can be profitably used only when it is fully used. It is not worthwhile to make a hammer to drive a single nail into a wall and many a handyman has had to have recourse to the carpenter rather than buy an expensive tool for which he could find only occasional use. Those familiar with farming know that the principal obstacle to the use of farm machinery lies in the peculiarities of agricultural production which prevent maximum use of the equipment. The economic principle in question is this: the use of machines is more limited and thus more dependent on an advanced division of labor, the more specialized are such machines; at the same time, the yield of a machine ordinarily increases with its degree of specialization. The secret of the low-priced automobiles which Henry Ford was the first to put on the market after World War I lay in the huge number of units produced; for these made possible the mechanization and automation of the entire Ford operation. The specialized machines required for this type of production are extravagantly expensive but they produced, thanks to the volume of output, a car which was at one time the cheapest in the world.

To achieve such high levels of output Ford was required, it is true, to limit production to a single model and to leave this model unchanged year in and year out. Ultimately, the exigencies of public taste forced him to replace the outmoded model by more fashionable ones. To this end, he spent millions for completely new machinery and tools.

A good example of the interrelationships between advanced specialization of the machine and greater output and of the resulting concentration of production in the hands of specialists is the manufacture of automobile bodies by means of special presses. So costly are these tools that only a very large number of orders can yield lower costs and, ultimately, lower prices. The consequence has been the emergence of a special body-building industry serving the automobile manufacturers.

From the last mentioned advantage of the division of labor is deduced an important economic principle. The use of tools and machinery in production means that consumption goods are not produced directly, but via the preceding manufacture of production goods (raw materials, machines, transport facilities, etc.). The more there is of this roundabout production and the larger the quantity of capital employed, the more “capital-intensive” will such production become. This introduces a new complication into the division of labor. For, given the difference between consumption goods and production goods (capital goods), it is apparent that a large part of a country’s total production serves for the production of capital goods and not for the production of consumption goods, and that the production of capital goods must itself become a specialized branch of manufacturing. We must picture the entire process of production as a series of descending levels. At the highest level, raw materials are procured; at a lower level, capital goods are manufactured; and at the lowest level, consumption goods are produced. Just as specialization and division of labor characterize production on any one level (horizontal division of labor), so also we find a division of labor between the different levels of production (vertical division of labor). In other words, there is not only a division of labor between the production of shoes and the production of paper, but also a division of labor between the production of shoes and the production of the fore-products (tools, machines, leather, hides, etc.) which enter into the manufacture of shoes.

2. The Social Division of Labor and the Role of Money

The complex ramifications of the division of labor—horizontal as well as vertical—lead us to consider how the various operations occurring under the division of labor are coordinated with one another. There are alternative methods of achieving such coordination, each of which leads to a different form of the division of labor. Consider, for instance, the internal organization of a factory. The management of the factory divides the process of production into various partial operations and assigns these operations to the appropriate workers. Management then sees to the coordination of the whole by means of continuous instructions. This is what we may call the industrial division of labor.

Now division of labor exists not only in the interior of this factory, but also between this factory and other factories, between one artisan and another, between a farmer and a physician. We see at once that this kind of division of labor differs sharply from the first. The different operations are here independent and are not submitted to the control of a central authority charged with the coordination of the actions of each individual segment of the total economic system with all the others. We have already seen that it is the process of exchange (the market mechanism) which assumes the task of coordinating the activities of these independent units. We may speak, in this case, of a social division of labor.

In our contemporary economic system, the two kinds of division of labor coexist: the industrial division of labor within a plant, a factory, etc., and the social division of labor among the different independent plants and factories. Notwithstanding, it is precisely this social division of labor which distinguishes our economic system from a wholly socialist system. For in the latter system, the industrial division of labor prevails throughout the entire economy, displacing the social division of labor. This characteristic feature of socialism is at the same time a clue to one of its principal weaknesses. It is well known that certain enterprises have attained such excessive size that the managements of these enterprises are no longer able to control and coordinate their operations with efficiency. And many a giant concern has been ruined for not having observed the limitations of size which the requirements of efficiency impose. Imagine the result should the whole economy of a country be transformed into a single huge enterprise!

The concept of the social division of labor embraces most of the essential features of our economic system. It connotes not only the independence of the producer, but also the whole series of rights and liberties associated with such independence: private ownership of the means of production, right of inheritance, freedom of contract, freedom to choose one’s occupation, and many others.² To think in terms of the social division of labor is to assume that exchange dominates economic life, not the direct exchange of one good for another, but the indirect exchange of a good for money (sale) and of money for a good (purchase). Money, in short, is the indispensable lubricant of a developed exchange economy; and by the same token it is essential to a system founded upon an extensive social division of labor. It is useful to inquire into the reasons why this is so.

Any school boy who has ever swapped stamps with his friends knows that an exchange can take place without money. But he will remember equally well that these primitive exchanges did not take place without some difficulty. He will recall that an exchange of postage stamps could take place only if just the duplicates he possessed were lacking to his friend and vice versa, and if the value of the exchanged duplicates was approximately the same. These conditions lacking, the limit of barter (exchange in kind) was reached. The youthful collector was then obliged to do business with a stamp dealer, whose existence is predicated upon the imperfection of exchanges in kind.

By way of further illustration, consider the plight of a butcher who wishes to exchange meat for a chair. Assume that through some ill luck the local carpenter is a vegetarian, and that he wants bread instead of meat for his chair. If we imagine this situation as arising in some period before the invention of money, it is clear that the butcher will be forced to go to the baker and to exchange his meat for bread. Suppose further that at this moment the baker does not require meat but a pair of shoes. Even were we to put a stop at this point to our butcher’s travails, this simple example shows that the butcher will be required first to exchange his meat for shoes, then the shoes for bread, and finally the bread for the chair which he originally wanted. He would be required in effect to make an extended detour in order to arrive at his goal. The longer this detour and the longer the associated chain of exchanges, the more difficult does the process of moneyless exchange become until it ends by being completely impossible. During the severe housing shortage which existed in Germany in the inter-war period, there were few persons who were not compelled to participate in a so-called “housing exchange ring”—a chain of exchanges of rent-controlled dwellings which frequently extended throughout all Germany. For the system to succeed, it was necessary that no link in the chain of exchanges be missing, and that the individual who wished to move from Breslau to Hamburg be not seized at the last moment with an attack of appendicitis. The participants in these transactions could never thereafter conquer their instinctive repulsion for the word “exchange,” nor could they find enough words of praise for the invention of money which, as a medium of exchange and as a common denominator of the values of all goods, does away at one stroke with the difficulties of exchange in kind. This is, of course, not the only service rendered by money, but it is the earliest and the most important. Money emerges in consequences as an indispensable element in our economic system, one which is inseparable from all economic processes and which gives rise to many special problems. A full discussion of money and of monetary problems is reserved for the next chapter. Our chief concern at this point is to make clear the role of money in the social division of labor.

From my childhood, I recall a strange contract which my father, a country doctor, had concluded with the village barber. Both had agreed not to send bills to each other but instead to pay in kind what one owed to the other. In today’s international trade, this would be called a clearing agreement. After some time, a prolonged illness of the barber resulted in my father having an excess of credit (clearing surplus). This credit was used up by compelling us children to have our hair cut rather oftener than we liked. The moral of the story is simple: the elimination of money had provoked a disequilibrium of supply and demand. The process of exchange, which if effected by means of money would have extended over many intermediate links, was now reduced to two links only. And this “short-circuiting” of the exchange process entailed a shifting of accustomed expenditures which upset the private mechanism of choice and of limitation of demand. “Multilateral trade,” as it is called in international economics, had in our case become “bilateral,” with results which corresponded in small to the results of international clearing agreements.³ A multilateral exchange without money is a technical impossibility; a moneyless bilateral exchange is possible, but it is uneconomic in the highest degree. The exceedingly complex exchange transactions of the present day (which depend upon money as intermediary) yield us, precisely in virtue of their multilateral character, the priceless advantages of a rational system for achieving both national and international equilibrium. To the extent that it represents genuine economic integration, the world economy presupposes the existence of multilateralism. But multilateralism requires, in turn, that the international circulation of the different national monies (convertibility) be not hindered by the prohibition of convertibility (exchange control).

But rendering multilateral exchange possible is not the only service money provides. As the common denominator of all goods, it is an objective unit of measurement applicable to everything which enters the market. It makes similar, things which are different; and it solves the problem, otherwise insoluble, of adding together apples and pears. Thanks to the continuous exchange of goods against money and to the social division of labor upon which such exchange is contingent, prices are formed without which there can be no rational economic calculation. If we pass the whole of economic history in review and sift the experiences of every age and of every locale, we shall find that no economy, however rudimentary, has been able to function without calculation in prices and money. Year in and year out proposals are made for replacing calculation in money by some other “natural economic” calculation (for example, in the form of hours of work or in units of physical energy). All such schemes must be viewed by the economist as the mathematician views “solutions” to the problem of squaring the circle, or as the Patent Department views designs for the construction of a perpetual motion machine, namely, with a shrug of the shoulders and regret for such vain employment of effort. To resist the logic of the indispensability of money is simply to indicate that one has not yet understood that things economic have quite a different dimension than things physical, technical, and physiological, and that in economics we are not concerned with volumes or weights or horsepower, but with subjective estimates of value which assume an objective and measurable form only in an act of exchange accomplished with money.

This is a fact to keep clearly in mind in judging the performance of a Communist system. Where this performance is measured in terms of the increase in production of one or the other commodity, it is unscientific to conclude from the addition of such numbers that the Communist economic system’s accomplishments for the welfare of the masses can be even distantly compared with those of the non-Communist (market) systems. The point at issue is not the physical, but the economic productivity of a system. This can be measured only by means of real prices, and these are by definition excluded in a Communist system. Moreover, increases in genuine economic productivity can only be promoted within a system of genuine prices (market economy) formed according to the processes which are peculiar to the free society.

3. The Conditions Necessary to an Intensive Division of Labor

In order that money may properly fulfill its function of making possible an extended social division of labor it must possess various attributes (which will be considered later in detail), especially uniformity and constancy of value. It is the business of the state to establish a disciplined and stable monetary system so that money will enjoy general confidence and unite the disparate operations of the division of labor in a single payment community. To this is related another condition required for a wide extension of the social division of labor. The great risks implicit in an extreme dependence of all individuals in society upon each other are tolerable in the long run only where an efficiently administered legal system and an unwritten but generally accepted code of minimum moral precepts assure to the participants in the division of labor that they will be able to carry on their activities in an atmosphere of mutual confidence and security. Economic history is a constant illustration of the truth that the intensity of economic activity rises or falls in the degree to which these conditions are fulfilled. Likewise, the spatial extension of economic activity is limited as a rule to the radius within which such conditions, i.e., monetary and legal security, obtain. This is nothing less than the first principle underlying the rise and fall, the expansion and contraction of the economic system itself.

A significant division of labor can develop only in the degree to which the prerequisites of a monetary system, a legal system, and an appropriate moral system are met. History records frequent instances in which these conditions have been maintained for considerable periods within the frontiers of a single state. The intensification of international economic activity, however, has always encountered special difficulties because the creation of an international monetary and legal community has invariably collided with and will in the foreseeable future continue to collide with the unyielding sovereignty of the individual states. This is the chief reason why the progress of the international economy has, even under the most favorable circumstances, lagged behind the development of the several national economies. Because there is no world state, the world economy has lacked a homogeneous monetary system: for such a system depends necessarily upon the existence of a homogeneous international legal order.

It is worthy of note, nonetheless, that the international economy has flourished over the past hundred years in spite of these lacks because substitutes were found for what was lacking. The lack of a uniform international monetary system was offset by the gold standard. Scrupulously observed by the principal nations, it resulted in the whole world becoming a single payment community; it banished distrust in the solidity of the monetary foundations of international trade and international capital movements. The obligations imposed on all the participating countries by the scrupulous observance of the gold standard formed a part of the network of written and unwritten rules which made up for the lack of a single international juridical system. The whole world was encompassed in a system of long term agreements based on a universally recognized international law and upon a high degree of accord in respect to the interpretation of such law and of the legal codes of the individual states. International transactions were conducted in an atmosphere of loyalty and fair play in which the disregard of the obligations imposed by the international legal and moral system was regarded as the act of men without honor, honesty, or scruples.

The actual world crisis is from this point of view instructive in the highest degree. For the very disappearance of the aforementioned conditions has shown how exceptionally important and necessary they are. The nineteenth century’s network of guarantees in respect to security, uniformity, continuity, and fair play, and the adjustment of national policies to the requirements of international order, resulted in an approximate substitute for world government. But all of this was the creation of an epoch, of a state of mind from which the modern world has far removed and from which it in the future may remove still farther.

The foundations of the world economy have been chipped away to the point where the whole structure has become highly unstable. Less and less are nations disturbed by the flaunting of the international proprieties. Almost as a matter of course, governments manipulate their monetary systems for exclusively national ends, block foreign assets, interfere with international payments, practice dumping, expropriate private property, direct the flow of imports and exports now here, now there, at the whim of almost daily changing enmities and friendships, and impose without let or hindrance tariffs, quotas, and prohibitions of all kinds.

The dangerous feature of this process of disintegration is that it is accelerated by its own momentum. In international relations, as elsewhere, “marginal morality” has a tendency to become the dominant morality. If one country can, with impunity, disregard the rights of its neighbors, other countries, unwilling to be dupes, will follow suit. But it is not alone the contagious effects of bad example which foster international disintegration. Every country may legitimately question whether in the light of growing monetary, legal, and moral insecurity it ought not to revise its relations with the world economy. Because there is no world state, the international division of labor, unlike the national division of labor, is a precarious and relatively unstable system. Where a country is significantly involved in the international division of labor, it entrusts a part of its economic life to factors over which it wields only a very slight control and which consequently can cause it disagreeable surprises. In fairness to its own citizens, such a country can adhere to the international division of labor only if the risks implicit in such adherence are reduced to the minimum we have described. During the last hundred years, thanks to the gold standard and to the legal and moral obligations assumed by the gold standard countries, participation in the international division of labor was both possible and profitable. In the changed circumstances of the present, and with the probability of even more radical changes in the future, it has become suddenly obvious that the whole of international trade, with its immense material advantages, depends on conditions which formerly were so taken for granted they were hardly ever mentioned. It is only now, when they have begun to disappear, that the full importance of these conditions is revealed.⁴

It may be assumed that there are few persons today who take the plight of the world economy lightly and who do not recognize the tragic character of the disintegration of the international division of labor, the underlying cause of which has been the gradual weakening of the extra-economic framework of the international society. The true visage of the world economy is now visible: an economy minus its essential monetary, legal, and moral foundations. A genuine restoration of the world economy will prove impossible so long as these foundations are not reestablished. Till then, we must content ourselves with the patchwork aids and ad hoc institutional arrangements whose services to this date, it is conceded, have been considerable.

A fact which it is necessary to emphasize in this connection is that the shock to the foundations of the world economy has not been of equal intensity throughout the globe. Thus, the greatest damage has been done where Communist collectivism has swallowed significant parts of the former world economy. This loss is due not alone to the irreconcilability of the political and moral beliefs of the Communist and the free world countries, but to the incompatibility of the dominant economic systems in their respective spheres of influence. Even within the non-Communist world there exists a sharp line of demarcation between the developed countries and the “underdeveloped” countries, due primarily to the fact that the latter countries lack the conditions which inspire the trust so necessary to normal international movements of commodities and capital. In spite of all the disorders to which in our time a country such as Belgium was exposed following its liberation of the Congo, we continue to make available to this country, i.e., Belgium, loans at 4½ per cent interest. We do so because it never occurs to us to doubt the Belgians’ word that they will live up to their contracts. But there is no rate of interest under today’s conditions capable of opening the private capital markets of the developed countries to the Congo or to most of the other underdeveloped countries. This is the essence of the much discussed contemporary problem of the “underdeveloped countries.”⁵

That is the one facet of the situation. The other is that in spite of the defects of the world economy, we can expect some countries which are linked to each other by geographic contiguity and common cultural and political interests and traditions to attain a degree of international ‘‘economic integration” which can hardly be hoped for in the world at large. This is the justification and the explanation for the regional economic consolidations of recent years, among which the Common Market and the European Free Trade Zone, are the most significant;⁶ these very blocs, however, and their exclusive character, testify to the continuing lack of worldwide coordination.

But the most important and all too frequently ignored international fact of our time is that the unprecedented extension of the division of labor beyond national frontiers over the past one hundred years has been accompanied by an equally unprecedented increase in the world’s population. A severe contraction of the division of labor would mean, therefore, that millions of people who owe their lives to the division of labor would have the door of life, so to speak, shut in their faces, inasmuch as the conditions which made possible their birth, their existence, and their livelihood, would suddenly have vanished. We are thus bound in this case-to employ a much abused term of speech—to an inexorable destiny which no longer permits us the liberty of glorifying a policy of heroic retreat. Given the immense increase in population of the nineteenth and twentieth centuries (the reasons for which we shall consider presently), we have no alternative—unless we would willingly provoke a frightful catastrophe—other than to maintain the economic apparatus which alone has made possible this growth in population, whether or not this apparatus, for one reason or another, is to our liking. We simply cannot turn back the economic clock to 1700, or even to 1800, without thereby reducing the population capacity of the world to the lowest level of those times. To turn back the clock would be tantamount to ordering the destruction of millions of lives.

4. The Division of Labor and the Number of Men (the Population Problem)

The relationship between the division of labor and population movements, which we have just touched upon, is so important that it merits closer investigation. This relationship is a reciprocal one: the extension of the division of labor increases productivity, thereby augmenting the capacity of the economy to absorb population in-creases. But the converse is equally true: an increase in population permits, in turn, the attainment of a greater degree of division of labor. As Adam Smith has shown in a celebrated passage of his Wealth of Nations (Book I, Chapter 3), this reciprocal relationship is clear from the fact that the division of labor is inevitably limited by the extent of the market (law of the extent of the market). The division of labor is limited, that is to say, by the number of possible purchasers of the goods produced, a high degree of specialization becoming profitable only where output levels can be high. One of the factors that most affects the extent of the market—though obviously not the only one—⁷ is the size of the population. Is a continual increase in population therefore desirable?

It is useful here to recall that the nineteenth century, which is associated with the greatest population increase in history, was ushered in with a doctrine which expected from population growth only misery, want, and famine. This was the pessimistic theory of Robert Malthus (1766-1836). Since Malthus uttered his cry of alarm, more than a century has elapsed, and in this period many events have occurred which put his doctrine in an entirely different light. The populations of the industrial countries have multiplied many times over and yet the average standard of living in these countries has risen to an extraordinary degree. Simultaneously, the agricultural production of the world has increased in many countries to an extent where there is more concern about the problems of overproduction than of insufficiency. Concurrently, in one country after another techniques which permit the separation of sexuality and procreation have been ever more widely disseminated. Old mores have succumbed to new attitudes until the practice of birth control has become increasingly a simple matter of habit. The result has been a sharp decline in the birth rates of almost all the countries within the orbit of Western civilization.

At the same time, however, other occurrences caused populations in the civilized world to increase sharply in absolute terms. The gigantic strides in recent times of hygiene, medicine, and standards of living offset falling birth rates by declines in death rates. The decline in death rates occurred, first, among the youngest age groups. While in former centuries perhaps two of every ten children survived the hazards of infancy, it became possible in the nineteenth century to keep them all alive. Now if this development is not immediately redressed by an equally lower birthrate, there inevitably results a sharp vertical increase in population. This is precisely what happened in the civilized world of the nineteenth century and which is still happening in the young countries of the Western world and in the so-called underdeveloped countries. The extraordinary population growth of the nineteenth and twentieth centuries is thus the result not of a rise in the birth rate, but of a decline in the death rate in conjunction with a continuing high birth rate. Two historical developments overlapped each other: the newly discovered hygienic techniques caused a rapid decline in the death rate while the birth rate, influenced still by deeply rooted traditional mores, continued to hold to the old high levels. This is a thoroughly natural phenomenon, for though the death rate can be lowered by external and collective measures, a fall in the birth rate is a long term process, growing out of slow changes in people’s attitudes. To express the point in more drastic terms: the chlorination of the communal water supply will result in an immediate and rapid decline in the death rate, but it will not reduce the birth rate.

Those countries which are now coming under the influence of Western civilization are experiencing just what the older nations experienced in the nineteenth century. The death rate declines at once and sharply, whereas the birth rate does not follow this decline until much later; as a result, population spurts up like a string bean after the rain. Sooner or later, there will occur a moment when the birth rate in such countries is “Westernized” and adjusts to the lowered death rate. The headlong increase in population in such case slows and may ultimately cease altogether. Most Western countries have come rather close to the final stages of this evolution of which they were the inaugurators. How very risky it is, however, to project a given trend dogmatically into the future, particularly where population movements are concerned, is shown by the example of the United States and France in which birth rates recently have risen to a remarkable degree. But there is little concern today over this phenomenon, in contrast to the fears of Malthus and his time. On the contrary, for contemporary Western statesmen, it is declines in birthrates which are the greatest source of worry.

The several reasons for this curious change in attitude can be examined here only briefly. The emphasis given to the national interest, for instance, is considerably greater today than in Malthus’ time. We tend to be concerned lest the birth rate in our own country fall below that of other countries. In addition, we have learned to pay more heed than formerly to the unfavorable consequences of a falling birth rate. There are a variety of motives, of course, which underlie conscious restriction of family size and their moral content will be found to be decidedly uneven. There is no doubt that the small family is quite often the result of deliberate selfishness which, if widely practiced, can weaken the moral fiber of a whole people, not to speak of the religious objections thereto. Here we have the genesis of a tragic situation wherein the modern rationalist spirit, under whose aegis the startling decline in the death rate took place, may overreach itself and in its fall drag down both the birth rate and the moral health of the nation. Clearly, the birth rate must be adapted to the exigencies of a diminished death rate if social and economic catastrophe is to be averted. But if free rein is given to the forces able to bring about an equilibrium of births and deaths, namely, to rationalist thought, the decline in the birth rate may get out of hand.

In the final analysis, of course, declines in the death rate will encounter natural limits set by the present state of medical knowledge in the advanced countries. The birth rate, on the other hand, can theoretically fall to zero. Hence, it is conceivable that an overlapping of population movements such as we have described above could again take place, but in an inverse sense this time (stable or slightly rising death rate plus rapidly falling birth rate), resulting in an absolute diminution of population.

A further circumstance which has caused the decline in the birth rate to be regarded in an unfavorable light is its differential character. The experiences of all countries show that birth rate declines begin at the apex of the social pyramid, with the well-to-do and educated classes having one child or no children, whereas the poorer members of society typically beget numerous offspring. Indeed, more often than not, it is the drunkards and the feeble-minded who have the most children. The unfortunate aspect of such a differential decline in the birth rate is that parents who would normally transmit to their children exceptional gifts of heredity and who have the material means of providing them with a good education are not reproducing themselves. Clearly, the qualitative and eugenic aspects of population movements must be taken into consideration as well as the merely quantitative aspects. But these matters, about which there is much discussion at present, require a breadth of treatment which our present inquiry does not permit.

The main reason why the present decline in the birth rate is regarded differently than it would have been in Malthus’ time must be sought in the domain of economics. The fact is that the enormous population increases of the nineteenth century have not resulted in an impoverishment of the masses; the catastrophe foretold by Malthus has not taken place. On the contrary, the population explosion has been accompanied by striking increases in the average standard of living. It is to be observed, however, that the population increases of the nineteenth century took place under special conditions which are not likely to recur. The same historic forces which resulted in a lowering of the death rate and thus in an explosive increase in population—viz., the scientific spirit, the belief in “progress,” the breaking of the fetters of tradition—all these led to industrialization, to world trade, to the colonization of new rich lands of vast extent. England and Germany, and the other countries for which Malthus predicted overpopulation, solved the problem of feeding their additional millions by superimposing on the agrarian foundation of the national economy an industrial second floor. Concurrently, huge surpluses of foodstuffs were being produced in the new overseas territories, in great part by people who had in the course of the nineteenth century emigrated from the Old World.

But these are unique developments which are not likely to be repeated. The globe in the interim has been fully preempted and mankind no longer has at its disposal a second valley of the Mississippi or a second Argentina. Consequently, those countries which are only now experiencing the vertical upsurge in population which the industrial nations of Europe experienced in the nineteenth century are finding the population problem ever more difficult to solve. This is true of countries such as Italy and Japan, whereas Russia is in the fortunate position, as a result of its enormous territorial acquisitions in the nineteenth century (not to speak of its more recent gains), of being assured of an almost inexhaustible supply of room for further population increases.

To return to Malthus: the population increases which he predicted would be fraught with the direst consequences for mankind have, in fact, taken place, and at a rate which would have been inconceivable in his day. But the catastrophe which he foretold has failed to materialize. Later, as the nineteenth century merged into the twentieth, Malthus’ first prophecy was proved false: the rate of population increase fell sharply. Do any of Malthus’ pessimistic theories still have validity?

To judge Malthusianism fairly, we should distinguish in it two parts: prophecy and analysis. Prophetic Malthusianism had argued that an ineluctable law of nature will cause population to increase unrestrainedly to the limits of the available food supply. Subsequent developments proved this prediction to be completely false. Population growth is not subject to any unyielding natural law; it is a phenomenon of the civilized world and hence an extremely complex phenomenon resulting from the combination of a wide variety of factors. The failure of these prophecies to come true does not, however, constitute a refutation of analytic Malthusianism. This is concerned simply with determining whether a given population increase should be judged as good or evil. It is this question alone which possesses interest for us today.⁸

But the question in this form is too vague to admit of an unambiguous reply. The answer depends on the aspect from which population growth is viewed. He who is concerned primarily with the size of the country’s military establishment will answer differently than the pacifist; he who considers the emergence of cities with millions of inhabitants as evidence of the progress of civilization will answer differently than the lover of solitude who views the rise of the masses as a development inimical to civilization. A final answer to the question of whether population increases are good or bad is thus dependent on one’s value judgments and is outside the competence of strictly scientific inquiry. The economist must content himself with the more restricted but still very important task of studying the effects of population increases on the material welfare of individuals. But even this limited inquiry is itself so difficult and so complex that space does not permit us to pursue it in any but the broadest outlines.

The invariable answer made to those who are skeptical of the supposed material benefits of population increases is that since each man is born not only with a mouth but with a pair of arms, population growth increases not only consumption but production. Each human being, so runs the argument, creates his own additional economic room and, indeed, enlarges it since population growth permits of a greater degree of division of labor. According to this optimistic theory, population growth will result not in a lessening but in an increase in the average standard of living. Is this widely held opinion solidly established in fact?

That population growth allows of the attainment of a greater degree of division of labor is a fact on which we agreed at the beginning of this chapter. But this is no proof of the truth of the optimist population theory and for three reasons. First, population growth is, as we have seen, not the only condition required for an enlargement of the market. Secondly, the division of labor cannot be extended indefinitely without encountering dangers and difficulties (which we shall presently specify) which set effective limits to the process. The division of labor, moreover, cannot exist on an extended scale in the absence of those extra-economic conditions of whose importance the present world situation has made us painfully aware. A fateful nexus of cause and effect brings it to pass that precisely those internal and external political tensions caused by population growth contribute to the undermining of the foundations upon which an intensive division of labor rests. As the historical experiences of the most heavily populated countries show, these tensions soon lead to radicalism in internal and external policy. It is unfortunate but true that our mass civilization has served to enfeeble rather than strengthen the fundaments of order and security which an intensive division of labor requires.

At the very least, it must be conceded, we have no guarantee that population growth of itself will assure the maintenance of the extra-economic conditions necessary to an intensive division of labor in as automatic a fashion as it assures the existence of the necessary economic factor, to wit, the extension of the market. It is an enviable brand of optimism which, in the face of these reflections and in the face of the difficulties the world is currently experiencing, can continue to view with unconcern further population increases. But such optimism becomes a veritable enigma after examination of a third point. The productivity-increasing effect yielded by an intensification of the division of labor, which in turn results from an increase in population, is in direct conflict with an opposite productivity-diminishing effect caused by the increasing scarcity of the factors of production (land, natural resources, capital) relative to the increasing population. The growing population intensifies competition for these factors, raises their costs, and thus diminishes their yield, relatively speaking. Which one of these conflicting tendencies will prevail cannot be determined in advance; but obviously, the answer will be decisive in judging whether a given population increase will increase or diminish economic welfare.

Let us once again review these complex and exceedingly important considerations. Let us note, first, that it is not the total production of a country with which we are here concerned; for then countries such as China or India with their fabulous resources and enormous national incomes would be the richest countries and not the poorest. What is decisive, rather, is the amount of production per caput of the population. If we call this amount the social share (total production divided by total population), we may pose the following decisive question: what is the effect of population growth on the social share of production? Does it increase or diminish it? The answer to this question, however, depends upon whether the increase in production which follows population growth develops proportionately, over-proportionately, or under-proportionately to such population growth. In the first case (if we ignore certain incidental influences on production such as inventions, etc.), the social share remains the same despite the increasing population; in the second case, it increases, and in the third, it diminishes. To put the matter in more familiar terms, the increase of population in the first case leaves the average standard of living unaffected; in the second case it raises it, and in the third case, it lowers the standard. It is obvious that it cannot be determined in advance which of the three cases will occur, all three being possible in principle.

If we disregard the—for our purposes—uninteresting case in which the increase in production is proportional to the increase in population, there remain the possibilities of an over-proportional or an under-proportional production increase. If population growth brings in its train an over-proportional increase in production, we have a case of underpopulation because a population increase would now be to the economic advantage of the nation. If, on the other hand, population growth is accompanied by an under-proportional production increase, we are faced with overpopulation because continued population growth is no longer economically desirable. At some point between the condition of underpopulation and the subsequent condition of overpopulation is found the optimum population. When a country has reached the point of optimum population, it is placed before the necessity of opting for either an increase in the standard of living or an increase in population. One excludes the other. As population continues to grow, this optimum point must be reached, sooner or later, in every country; and it must be considered as exceeded when the social share of production is smaller than it would have been with a smaller population, other things being equal.

The foregoing considerations should serve to correct a number of misconceptions, for example, the belief that technical progress and the bringing of new lands under cultivation will continue indefinitely to furnish the wherewithal for additional millions of human beings. No one denies, of course, that the possibilities of increasing production are still very great. But this is completely irrelevant to the problem we are here analyzing. The question of prime interest is whether mankind would not be better off if these increases in production were not always accompanied by population increases. Why is it necessary that every enlargement of economic room which is achieved by the labors and the ingenuity of the existing population be immediately filled by millions of new individuals instead of serving to increase the well-being of those now on earth?

The point of significance here is that it is not legitimate to regard an increase in the social share of production as proof of the absence of an overpopulation problem. For the increase in the social share might have been still greater if the population had not increased. Such would be the case where the increase in production, which caused the increase in the social share, were the result not of a population increase but of technological and organizational innovations. By itself, a rise in the average standard of living does not, therefore, exclude the possibility that a country may be suffering from overpopulation in the sense here defined. The rise in the living standards of many European countries during the past fifty years is no proof that these countries had not already passed the optimum population point. What follows will help to clarify this relationship.

The sudden rise in living standards during the past one hundred years ought not be allowed to conceal the fact that this rise has not been as great as we might have expected considering the extraordinary increase in the productivity of the economic system in this period. There is a certain disproportion here which demands explanation. This is the disproportion between “progress and poverty,” a phenomenon which has perennially engaged the attention of socialists of every shade of belief and which has prompted them to seek its cause in alleged basic defects of our economic system. An inveterate complaint of such persons is that under our economic system “economics” destroys what “technology” gains. It is not surprising to find that it is the technicians who tend to entertain this opinion and to regard economists with the same indignation and condescension that military men are wont to display towards diplomats. We have not the space to examine the multitude of misconceptions upon which this attitude of the socialists and the technicians is based. Did space permit, we could make a number of points calculated to enlighten the technicians, in particular, for example, that 100 per cent efficiency is no more to be expected from the economic system than from the most perfect motor. One thing, in any case, is certain: the lag of standards of living behind technological progress and increases in productivity cannot be explained by the fact that a part of what was properly owing to the people of the fruits of such progress has been withheld in favor of a few rich capitalists. This theory, abandoned today by almost all serious socialists, is refuted by a simple calculation which shows how little the average income of the population would increase if recourse were had to a rigorously equal distribution of the existing wealth, even under the much too favorable assumption that total production would not suffer from such action. How then can the apparent contradiction be explained? The only explanation which remains is that technological progress has served mainly to facilitate the existence on earth of a larger number of people instead of serving to increase the living standards of the existing population. It appears that the “disproportions” engendered by capitalism are in large part explained by the fact that this economic system had to spread its immense creative force for well-being in two directions at once: (1) to increase average standards of living and (2) simultaneously to give a foothold in life to huge numbers of newcomers. It is evident that the dilemma of having to choose between an “increase in population” and an “increase in the standard of living” is not a dilemma of yesteryear alone. It is one which at present confronts such countries as Japan, India, and Egypt in particularly acute form.

It would take us too far afield to expatiate here on the qualifications, and they are many, which must be brought to the theory of optimum population. To forestall misunderstanding, it must be emphasized that the theory is concerned only with the purely material and individual consequences of population growth.⁹ Thus, even when a country has passed the economic optimum of population, an increase in population may still be deemed desirable for non-economic reasons. But within this wide range of possibilities, it is useful to have a clear idea about the alternatives which exist and to weigh these against each other.

There are, in sum, three possibilities. The first is to brake the rate of population increase by increasing the death rate. This method, obviously, cannot be part of a conscious demographic policy, although there are those who believe that the modern paraphernalia of hygiene, inoculation, and medical care with which we are surrounded from the cradle to the grave have their disadvantages. For these techniques conflict with the selection of the fittest individuals and thus weaken our natural forces of resistance to, for example, epidemics still unknown. That such epidemics, conjoined with the atom bomb and bacillus warfare, might make short shrift of our modern mass civilization is a possibility. But no one seriously entertains the idea that we can consciously decide to increase the number of deaths. Thus, if we wish to restrain population increases, we shall have to reestablish an equilibrium between births and deaths, not by increasing the death rate, but by lowering the birth rate, a method which is already in wide use in many countries. That this is a method attended with considerable risks and disadvantages has already been noted. Among these disadvantages must be included the fact that a decline in the birth rate causes a shift in the age structure of the population in favor of the aged, a development which cannot be regarded as good in all circumstances. The full significance of these dangers and disadvantages becomes apparent when we recall the alternatives which are open to us.

A conscious increase in the death rate is, as we have seen, out of the question. There remain only the alternatives of braking population increases by lowering the birth rate, or of perpetuating the disequilibrium between births and deaths by allowing population to increase unrestrainedly. Let us reflect on exactly what this latter course would mean. It would mean that an increase in world population which issued from a special set of causes and may be considered, in virtue of its extraordinary tempo and extent, a phenomenon unique in history, would suddenly be regarded as the normal experience of the human race. Every thinking person must reject this view and admit that, sooner or later, it will become necessary to restrain such population increases as we have witnessed in recent times and to reestablish the rate of growth which is sanctioned by history. So why not sooner than later? A cogent argument for present action is the fact that we are compelled, under modern conditions, to pay a double price for continued population growth: in the form of a very probable decline in average standards of living, and in the form of a certain increase in the rigidity and instability of our economic system as the result of a division of labor which is becoming ever more extreme. It is this last effect of which we must now speak.

5. The Dangers and the Limits of the Division of Labor

It is well known that too intensive a division of labor can result in the atrophy of certain of our vital functions. There are several reasons for this. To begin with, the greatest part of our waking hours is spent on the job which yields us our daily bread. To be compelled to pass these hours in the performance of one narrowly confined operation is to cause the atrophy not only of certain muscles of the body, but of faculties of the mind and spirit as well. The highly specialized man is robbed of the chance to experience the fulness of his own personality; he becomes stunted. The country youth who comes from an unspecialized milieu will quickly adapt himself to city life. Indeed, it is a popular maxim that the “small town boy” makes good in the big city. On the other hand, the specialized industrial worker who goes to the country is, more often than not, a failure. Modern man does less and less by himself for himself. Canned foods replace those that were once prepared at home; ready-made clothes are substituted for those formerly made by mother or wife; the phonograph, the radio, and now television drive out the music once made around the family piano; football “fans” crowd gigantic stadia to experience on the vicarious level thrills that were once procured by genuine participation. And this vicarious way of life is extended even to letting others manufacture our thoughts and our opinions through the instruments of the press, the radio, and the movies. If credence be given to information emanating from certain cities that the demand for illegitimate children for adoption exceeds the supply, then we have reached the point where people even have their children made by others. Thus, as it encroaches on new fields of human activity, the division of labor leads increasingly to mechanization, to monotonous uniformity, to social and spiritual centralization, to the assembly-line production of human beings, to depersonalization, to collectivization—in a word, to complete meaninglessness which may one day generate a terrible revolt of the masses thus victimized. If there were not at this time evidence of encouraging countermovements, if the birth rate had not already begun to decline, thus freeing us from the principal mechanism of this development, we might easily imagine that we were moving full tilt towards the dreadful termite state of which Aldous Huxley has given us such a shocking glimpse in his Brave New World.

The dangers of an intensive division of labor lie not only in the fact that specialized work causes the impairment, through lack of use, of important human faculties, but also in the fact that it reduces the human content of the specialized work itself. Thus, we have the worker in a modern mass-production plant going through the same monotonous motions day after day to make some part of whose end use he may be only dimly or not at all aware, an object which in any case is being made for total strangers in whom he has not the slightest interest, nor they in him. This may kill the joy of work and the pride of craftsmanship. There is a tendency, moreover, for quality to worsen when it is performed for anonymous third parties, with advertising making up in aggressiveness what the goods lack in quality. But lest we exaggerate these evils, it is well to remember that we are speaking here only of dangers and tendencies. It is not true that specialized work is always more monotonous than non-specialized work, particularly since the progress of technology (automation) has made it possible to turn over to the machine, in large part, precisely those motions which are most monotonous. We would be equally in error if we were to believe that genuine enjoyment of work, meaningful work content, professional pride, and quality performance are necessarily denied to the highly specialized worker. Much can be done to restore real meaning to the work of the specialist by the right kind of plant organization and by awakening in him the professional pride of the craftsman in work well done. The problems of excessive specialization are primarily problems of large industrial establishments, so that the forces opposing industrial concentration (and the strength of these has been too often underestimated) may be expected to mitigate the evils here described.¹⁰

But much more immediate and obvious than the moral-cultural dangers we have mentioned are those which arise from the mutual dependence of one individual upon another which the method of specialization requires. The denser and the more complex the division of labor, the more difficult it will be to achieve harmonious coordination and the more widespread will be the reverberations of every disturbance of this complicated process. A simple example will serve to illustrate what this means.

Let us assume that a collection has been taken up for the construction of military aircraft, and let us see what effects this action will have upon a country’s economy. The action begins with the contribution of money by different people and it ends with the construction of planes of metal and wood for the use of the state for whom the collection was originally taken up. The question we must ask is: How are all those goods and services which the citizens, by virtue of their contributions, must forego, changed into aeroplanes? The case would be simple enough if all of the things which the donors renounce could be immediately used in the construction of aeroplanes; no change would then occur in the country’s economy beyond the substitution of one group of buyers (the state) for another (the donors). But this is a marginal case which we may exclude from our inquiry. Ordinarily, the donors are required to forego the consumption of quite different things than wood and metal.

In Turkey, some years ago, just such a collection as we have been describing was taken up. The population was urged to forego during the Kurban-Bayram (the Mohammedan spring festival) the feasts of mutton traditional on this occasion for the benefit of the national subscription for the construction of military aircraft. But why give up mutton? The Turkish government could no more make airplanes out of sheep than governments in Christian countries could make them out of Christmas trees or Easter eggs.

We can, at this point, glimpse the complications which a collection taken up for the construction of airplanes will involve. Let us suppose that the amount of my subscription compels me to give up a bouquet of flowers, or a taxi ride, or an evening at the theatre. The result of my sacrifice is to upset in some degree the markets which counted on my purchases. The bouquet wilts in the flower shop, the taxi driver awaits me in vain, my seat in the theatre stays empty. Each of the enterprises concerned sees its profits decline as the result of my abstentions. And these losses entail still further losses since the florist, the taxi owner, and the proprietor of the theatre will have to forego certain planned expenditures of their own in view of their diminished receipts. In all these cases, acts of consumption are foregone without others appearing to take their place. Moreover, the sacrifice which I impose on myself is multiplied throughout the economy until at last, by series of devious detours, production is adapted to the change in the flow of purchasing power. Disturbances of this kind affect, in the first instance, goods and services which cannot be used in alternative ways. We speak of such goods and services as having a “specific” character. The effects of such disturbances may be more clearly visualized if we compare the entire process of production to the biological process which goes on in a tree. As the sap mounts in the tree and penetrates to the very ends of the leaves, so production, as it advances from raw material to finished manufacture, removes farther and farther from goods with numerous alternative uses to direct itself towards the creation of goods having a more and more specific character. The cut flowers offered for sale represent, literally and figuratively, the “leaves” for which there is no alternative use. These “leaves” must wilt, unconsumed, if there occurs a change in the flow of purchasing power such as we have described. A rearrangement of production which will be adapted to the change in patterns of demand will take place ultimately, but such rearrangement requires time and inevitably entails some economic loss.

The problem we have just analyzed can be called the general problem of economic transfer, of which the much discussed “transfer problem” of Germany in connection with its World War I reparations payments represents a special case. It arises wherever there are changes in the flow of purchasing power regardless of the causes of such changes. Changes in taste and fashion, in the tax and expenditure policies of the state, in the velocity of circulation of money, fluctuations in harvests or in savings and investments, migrations, the rise and fall of population, inflation and deflation, the vicissitudes of foreign trade, technological progress, wars and revolutions—each of these can be the source of progressive disturbances in the structure of the division of labor. The more suddenly these changes occur, the greater is the amplitude and the severity of the disturbances they provoke.

There are a number of such changes, however, which it would be counter to the general interest to resist. Thus, if the consumers decide to spend less for alcohol and more for sport, if the urban population turns from rye bread to white bread, or from bread in general to vegetables, fruit, eggs, meat and cheese, or from automobiles to boats, it would be hardly proper for us to oppose these changes in demand in the interest of the producers of alcohol, of rye, of wheat, and of automobiles who are affected by these changes. For this would be favoring private interests against the general interest in defiance of the elementary economic truth that we produce in order to consume, and not consume in order to produce. We would evidence a like disregard for the general interest if we opposed changes in the flow of purchasing power and in the structure of production resulting from the introduction of cheaper methods of obtaining one or another good or service. Such a cheapening of production can take place in two ways which are basically similar in principle and in effect: by progress in technology and organization and by foreign trade. To take deliberate measures to destroy that which lightens our eternal struggle against scarcity, to dismantle the machines which can produce more cheaply than the old methods, to bar imports—all of this would doubtless be in the interest of the producers directly affected. But then it would also be in the interest of doctors to make the manufacture of cheap and efficacious remedies illegal, and in the interest of living authors to ban the publication of cheap editions of their dead confrères and to agitate against the translation of foreign writers.

In the last-named cases, we mean to direct attention to the attempts made in the interest of certain producers to oppose the lessening of the scarcity of goods which the general interest demands. But we can go a step further and consider the efforts, camouflaged usually in pseudo-economic theories, to increase the scarcity of commodities in the selfish interest of the producers and to have it believed that such increases in scarcity are advantageous in terms of general economic welfare. The hoodlum who has broken all the windows in the block may not have been hired by the local glazier for this job, but that he has acted in the interest of this glazier is just as certain as that he has grossly injured the general interest. An amusing variation on this same theme is the case of the East Prussian farmer who, many years ago, recommended with a straight face that German vegetable production be transferred to the maximum extent possible to Eastern Prussia, first, because the harsh climate of this area would necessitate the building of greenhouses, thus encouraging the iron, glass, and coal industries and secondly, because the higher costs of transport to German centers of consumption would stimulate the railroad and, indirectly, the coal industries. On the same reasoning, it would be possible to draw up a much longer list of promising developments that would follow the transfer of the whole of world agriculture to the spacious ice fields in the vicinity of the North Pole. Needless to add, this Prussian farmer’s proposal was accompanied by a demand for a drastic increase in the German tariff on vegetable imports.

The proposal of our Prussian farmer was not the gesture of a clown but simply a particularly flagrant example of the kind of thinking which is encountered daily under multiple guises and which is one of the most influential undercurrents in the economic policies of every modern state. For this reason, the author has been somewhat reluctant to tell, even in jest, such an anecdote as the preceding. The uninstructed might have taken the Prussian farmer at his word! The instances in which the efforts of private interests to maintain or increase scarcity have been applauded as acts beneficial to the general interest are certainly numerous enough to justify such concern.

Plainly, it is in the interest of the individual producer to maintain or even increase the scarcity of the goods or services he supplies. But since the whole purpose of a rational human economy is to lessen scarcity, we have here an irreconciliable antagonism between individual and general welfare, between the interest of the individual and the interest of the commonweal. This is a perversity which in a self-sufficient, exchangeless economy would appear completely absurd. It is something which is peculiar to an economy based on the division of labor; indeed, it is legitimate to describe such an economy as marred by a latent and persistent disharmony between the private interests of the producers and the general welfare. It is no exaggeration to say that this disharmony is one of the gravest defects from which our free society suffers.

But what is of still more concern than this disharmony is the growing ease with which the special interests of the producers customarily prevail over the general interest. The reasons for this are, in large part, psychological in origin. Thanks to the division of labor, each one of us in our role as producers is desirous of keeping our goods and services as rare, and therefore as expensive as possible in relation to other goods. By the same token, in our role of consumer, each of us is desirous of having abundance and cheapness prevail in all categories of goods other than those which we ourselves happen to produce. But since the consumer’s interest is spread over innumerable goods, the judgment of each man in economic matters is determined more by his position as producer than by his position as consumer. The concentration of producer interests in a given case will normally permit these interests to enjoy easy victories over the divided consumer interests. Thus, though the interests of the consumers taken as a whole are greater and more encompassing than the opposed interests of the producers in question, the latter will be easily able to override the dispersed and hence ineffectual power of the consumers. The producers’ task is made all the easier by the use of pseudo-economic theories which lull consumers into accepting their own impotence as a normal and beneficial state of affairs.

There is another important fact, closely connected with that just mentioned, which explains the ability of producers to exploit consumers. In our economic system, the general interest is secured by the mechanism of competition. In recent decades, however, increasing success has attended efforts to discredit competition as something egoistic and inimical to an integrated society. The result has been a substantial weakening of the psychological supports of competition. And the attackers of competition have been all the more successful to the extent that they have managed to identify it as “liberal” (in the European sense), thereby stamping it as an object meriting general contempt. Such attacks conveniently ignore the fact that it is the liberal economic philosophy^* which recognizes the latent disharmony between consumer and producer and which sees in competition the means of mitigating this disharmony and thus of safeguarding the consumers’ interests. Piquantly enough, the enemies of competition answer this argument by saying that it was liberalism, after all, which developed the doctrine of the harmony of economic interests. Thus we find the real advocates of disharmony engaging with high glee in the task of obstructing those who seek to mitigate the evil by ridiculing them as the naive adherents of outworn doctrines of “harmony.” But our economic system can remain viable only if this disharmony is redressed by effective and continuous competition. Of course, we cannot overlook the fact that competition occasionally entails costly shifts in the structure of production which must be weighed against its long run benefits to the whole community. These considerations must, at all events, underlie any constructive economic policy, i.e., one which aims at minimizing the losses and inconveniences caused by such shifts in production and at mitigating the personal hardships involved without hindering the adjustment itself.

The extreme sensitivity of a society founded on a highly developed division of labor means that a disturbance in one sector of the economy (as illustrated by our innocuous miniature example of the collection for aeroplanes) will be transmitted, avalanche-style, through the whole of the system. A proper awareness of this sensitivity helps us understand more fully those disquieting phenomena known as “boom” and “bust,” or the cyclical alternation of prosperity and depression. A study of cyclical movements must properly begin with the recognition that in a mechanism as complicated and differentiated as that of the modern economic system a degree of friction among the moving parts cannot be avoided. It is inevitable that the different parts of this most complex machine will mesh with each other sometimes better, sometimes worse. We can understand now—and when we have become familiar with the sources of monetary disturbances and the especial complications connected with the production of capital goods we shall understand even better—how the friction among the moving parts of the economic machine may become so great as to result in the total breakdown known as a depression. Remembering our miniature Turkish example, we can also understand why “overproduction” may be found, paradoxically, side by side with increasing poverty and why a depression can lead to unemployment and “excess capacity.” Where the structure of production and the flow of purchasing power significantly diverge, the economy suffers from a glut of cut flowers, passengerless taxis, unoccupied theatre seats, and of other and even more important kinds of “unused capacity”: superabundance in the midst of poverty.

The paradoxical character of a Western depression becomes even more apparent when we consider the effects of a depression on the undifferentiated economy of a country like China. For the Chinese peasant of the pre-Communist era, content with the subsistence that could can be eked out on the land, “hard times” occurred when the pressure of rising population caused the average peasant holding to shrink. The obvious remedy, in such case, was to work the available land harder and longer. The Chinese peasant would have been unable to comprehend the Western phenomenon of unemployment. He would have taken it as a joke in rather bad taste to be told that there are countries where at times a job may become an envied privilege, begged for like bread, where those who hold two jobs are hatefully labeled “moonlighters.” Such things he would have held to be grotesque and irrational and we must admit that he is not far wrong. These periodic absurdities are nevertheless the price we must pay for the extraordinary productivity of a highly refined division of labor. The greater the refinement of the division of labor, the less is the economic system able to resist internal and external disturbances but conversely, the greater is its productivity. To ensure a state of equilibrium that would be proof against all disturbance, we would have to return to the primitive and impoverished conditions of a Robinson Crusoe-type economy. If this alternative repels, then we must accept the present economic system with its sensitivity and its instability.

This is the dilemma on which we are driven. But as a matter of fact we are no longer free to choose. The die is cast. For the growth of productivity which accompanied the extensive and intensive development of the division of labor is now claimed as a birthright by the new millions of individuals who owe their very existence to it. We cannot go back, we cannot cause a contraction in the division of labor without putting in peril the lives of numberless millions of human beings and thereby the very existence of our social order. This is the fact, as brutal as it is prosaic, which explodes the fond reveries of economic romanticists and autarkists. It is a fact, moreover, which should lead us to view with anxiety the continuation of the present rate of population growth and to hail its diminishment with a feeling of relief. The contemporary instability of the economies of all advanced countries indicates that our industrial civilization with its ever more extreme division of labor may be approaching some sort of limit in this respect. Moreover, when the political consequences of mass civilization are taken into account, it is patent that the psycho-moral fundaments of our society have become increasingly inadequate in respect to the existing degree of division of labor.

In the space of one unique century, mankind has simply attempted too much at once. Too much emphasis cannot be placed on the fact that the chief cause of our present difficulties must be sought not in the kind of economic system we have, but in a division of labor which has been carried to an unhealthy extreme. A socialist economy, compelled as it would be to preserve the present degree of division of labor, would change nothing in this respect. We shall have occasion later in a special section (Chapter VIII) to study these matters in detail.

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^*The contemporary use (or abuse) of the term “liberal” in the United States to designate a philosophy which advocates increasing government interference into private life should not be confused with the meaning which Europeans attach to it. By Europeans, liberalism is still understood in its pristine sense of freedom from governmental regimentation; this is the sense in which Röpke employs the term throughout. Implicit in Röpke’s use of “liberalism,” at the same time, is an important distinction between old-style liberalism (“paleo”-liberalism), which is identified with economic laissez-faire, and neoliberalism in which the positive role of the state in establishing the juridical, competitive, and monetary framework necessary to a viable market economy is recognized and supported.—Translator’s note.

NOTES

1. (p. 42) The Location of Production

The factors which determine the optimum location for each kind of production constitute the object of a special theory of location. See O. Englander, “Standort” in Handwörterbuch der Staatswissenschaften (4th ed.); Th. Brinkmann, Economics of the Farm Business (Berkeley, Calif., 1935); Alfred Weber, Theory of the Location of Industries (Chicago, 1928); E.A.G. Robinson, The Structure of Competitive Industry (London, 1935); T. Palander, Beiträge zur Standortstheorie (Stockholm, 1935); Edgar M. Hoover, The Location of Economic Activity (New York, 1948); A. Lösch, The Economics of Location, tr. by William H. Woglom and Wolfgang Stolper (New Haven, Conn., 1954); Melvin L. Greenhut, Plant Location in Theory and in Practice: The Economics of Space (Chapel Hill, N.C., 1956); W. Isard, Location and Space-Economy (London, 1957).

The several factors determining the location of a given industry combine in a complicated way either to reinforce or to offset each other. They include climate, quality of the soil, proximity of the sources of raw materials, proximity of markets, availability of qualified and inexpensive labor, proximity of complementary industries, transport facilities, the political climate, tax advantages, etc. According to the importance of the one or the other factor, the best location will be near the sources of raw materials (the canning industry, for example), or in the vicinity of large sales outlets (the milling industry), or in an area where there is a reservoir of skilled workers (the garment industry in large cities), etc. If the sources of needed raw materials are in widely separated places (the iron ore and the coke which are used in the production of iron, for example), the choice of location will depend on the comparative importance of the raw materials in question. It is of fundamental importance to determine, in the particular case, whether it is more advantageous to locate production near a given factor or to have this factor transported to some previously selected location. Just as Mohammed was compelled to go to the mountain, so mining operations must, perforce, be undertaken on the spot where the ores are located, and agriculture where the terrain and climate are favorable to the particular crop being raised. But should mining or agricultural operations be undertaken wherever these minimum conditions are realized? That will depend on the advantages to be derived from mining or tilling the soil on the one hand and the costs of transporting the goods to market on the other. If the latter are too high, the land may not be worth cultivating, regardless of the quality of the soil, nor the mine worth operating, regardless of the grade of ore.

If we confine our attention to agriculture for the moment we can see that the optimum location of agriculture will be determined by such fixed natural data as the quality of the soil and climate as well as the costs of shipment to market. The close proximity of the market has the same effect as an improvement of the soil, which is why vegetable farms, among other types of production, are established around large cities. But while the natural factors of agricultural production are immobile and for all practical purposes unchangeable, the transport factor is subject to relatively rapid change: transport costs may decline or the old markets may disappear and new ones arise. The result is likely to be a significant change in the optimum locations for the different branches of agriculture. A good example of this is the case of German agriculture The industrialization of Germany and the sharp drop in overseas shipping costs in the 19th and early 20th centuries conjointly exercised their influence to remove the optimum location for grain production farther and farther away from Germany, while the optimum location for the production of higher types of goods such as meat, dairy products, and vegetables moved perceptibly closer to Germany. For generations, the efforts of German commercial policy were nevertheless directed to circumventing, at great sacrifice to the people, the effects of this shifting of the optimum location.

2. (p. 45) The Economic System and the Law

We have already made reference in the text to the fact that our economic system founded on the social division of labor presupposes the existence of a corresponding juridical order which, as the expression “civil code” indicates, is also a civic order. The essentially liberal principles of our juridical order—sanctity of the person, the right of private property, inheritance rights, freedom of contract, freedom to choose one’s job or profession, constitutional guarantees against the arbitrary use of state power—constitute the indispensable legal framework of our economic system. See George Ripert, Aspects Juridiques du Capitalisme Moderne (Paris, 1946); F. Böhm, Wettbewerb und Monopolkampf (1933); W. Eucken, The Foundations of Economics (London, 1950); W. Lippmann, The Good Society (Boston, 1937); M. Watkins, “Business and the Law,” Journal of Political Economy (April, 1934); A. Egger, Ueber die Rechtsethik des schweizerischen Zivilgesetzbuches (1939); Cooke, “Legal Rule and Economic Function”, Economic Journal (March, 1936). The problems connected with the legal framework of the economic system have been the subject of special study in the annual volumes of ORDO, Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, ed. Walter Eucken and Franz Böhm (Düsseldorf, 1948 ff.).

3. (p. 47) Multilateral and Bilateral Trade Movements

The comparison of the multilateral structure of domestic trade and international trade is illustrative of the essential features of both. The flow of multilateral international trade takes place as follows: Austria exports knitted goods to England, England exports yarn to Germany, Germany exports chemical products to the United States, the United States exports wheat to Brazil, Brazil exports coffee to Turkey, and Turkey exports tobacco to Austria. Since coffee does not grow in Austria, Turkey uses the exchange she has acquired from her export of tobacco to Austria to pay for the coffee she must import from Brazil. The consequence is for the balance of trade of Austria to be favorable vis-à-vis one country, England, and unfavorable vis-à-vis another, Turkey. Formerly, a large share of international trade was actually carried on in this roundabout way. As a result of this complicated crosswiring of the international trade mechanism, there would be no necessity of Country A buying the industrial products of Country B simply because it was supplying Country B with raw materials. In this ingenious international network, it was a thoroughly normal occurrence for the trade balance of a country to be persistently favorable vis-à-vis one country and persistently unfavorable vis-à-vis another. It is no exaggeration to say that the growth of the world economy to its present dimensions would have been impossible without multilateral trade. Thanks to multilateralism, industrial nations could obtain essential raw materials without the least difficulty by a chain of exports running through three, four, or more countries. For the nations linked together by this network there existed no economic need for colonies. Indeed, in the liberal era, colonies did not have very much economic importance. Thanks to multilateralism, moreover, the raw materials-supplying countries could sell their goods on a homogeneous world market, pay their foreign debts, and maintain the value of their currencies without chronic difficulties.

It is only by considering the operation of the world economy in the liberal era that we can measure the ravages caused in recent decades by the destruction of multilateral trade. Foremost among the instruments of destruction have been the preferential clauses of reciprocal trade agreements, the progressive disappearance of the most-favored-nation principle from such agreements, and most pernicious of all, the increasing resort to exchange control and to clearing agreements of the kind described in the text of this chapter. The ultimate effect of the use of these devices was a short-circuiting of the world economy with the following predictable results: a decline in world trade, the breakup of the world economy into separate blocs, the politicalization of international economics, uneconomical alterations in the composition and direction of imports and exports, price rises in the bilateral blocs (termed with involuntary irony “Grossraum economies”) with a consequent diminishment of the competitiveness of these blocs in the still free sector of the world economy, chronic “dollar shortages” and recurring balance of payments crises. The great progress made in the restoration of health to the world economy in recent years is a reflection of the extent to which destructive bilateralism has been overcome by multilateralism. See The Network of World Trade (Geneva: League of Nations, 1942); M. S. Gordon, Barriers to World Trade (New York, 1941); W. Röpke, International Economic Disintegration (London, 1942); W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959). See also the following note.

4. (p. 51) International Economy and International Law

The points discussed in the text show how absurd it would be to see in the disintegration of the world economy, which still has not been completely halted, the beginning of a new kind of world economy constructed on the principles of the planned economy. Even if we ignore for the moment the catastrophic effects on present living standards which a deliberate reduction of multilateral to bilateral trade—the “short-circuiting” of the world economy noted above—would entail, we are driven on the unpleasant truth that the disintegration of the foundations of a liberal world economy will prove even more fatal to any future planned world economy. This hypothetical planned world economy, required as it will be to regulate international economic relations in the smallest detail, will be in even greater degree than the liberal world economy dependent upon a functioning world monetary system and upon a secure international juridical system. The very least that planned economy implies is centralized control of all economic life. Planned economy is statism in its fulness. A world state is the sine qua non of a planned world economy, but no such world state exists. It is absurd to speak of the possibilities and the chances of a planned world economy precisely at the moment when the equivalent of the world state which the liberal era had created (an international legal, monetary, and moral framework) has disappeared. It is little short of ridiculous for the advocates of the planned world economy to continue to hold to an ideology which must cause the downfall of any world economy, regardless of the label it bears. Or to put it differently, we cannot destroy the philosophical and political foundations of the liberal world economy and hope thereby to build an antiliberal world economy; for lacking these foundations, such an economy will be even less capable of functioning than the liberal world economy. We do not have far to seek to discover what the real character of a “planned” world economy would be, minus the gold standard and minus a sound moral and juridical system, for this is the world economy we now have and whose deficiencies we are still struggling painfully to make good. See W. Röpke, International Economic Disintegration (London, 1942); W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959); W. Röpke, Economic Order and International Law (Academy of International Law, Leyden, 1955).

5. (p. 51) The Problem of the “Underdeveloped” Countries

See my article “Die unentwickelten Länder als wirtschaftliches, soziales, und gesellschaftliches Problem” in the anthology Entwicklungsländer—Wahn und Wirklichkeit (Zurich, 1961).

6. (p. 52) International Economic Integration

See W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959); W. Röpke, “Gemeinsamer Markt und Freihandelszone” in ORDO, Vol X (Düsseldorf, 1958); W. Röpke, “Zwischenbilanz der europäischen Wirtschaftsintegration,” in ORDO, Vol. XI (Düsseldorf, 1959).

7. (p. 53) The Law of the Extent of the Market

Adam Smith’s formulation of the law of the extent of the market can easily lead to serious misunderstanding. This law is concerned not so much with the extent of the market in space nor with the number of people participating in market transactions, but rather with total purchasing power as it manifested on the market. We must not, therefore, confuse people and square miles with francs, shillings, or dollars. It is francs, shillings, and dollars which are the determining factors. Because purchasing power is possessed individually, it must not be concluded that total purchasing power is equal to the sum of the purchasing power in the hands of individuals. This is the fallacy committed by all who imagine that the possibilities of disposing of goods are limited by the size of the population. There are, doubtless, certain demands of low elasticity whose total amounts are determined by the number of demanding individuals. This is especially true of the demand for grains. But excepting these inelastic needs, an equal amount of goods may be demanded by many poor men or by a few rich men. The number of Christmas trees demanded in any one year will obviously be determined by the number of families in the market for Christmas trees, but the number and the value of the gifts placed under the Christmas trees will vary from one family to another, according to the income in each case. We may conclude from this that an intensification of the division of labor can be effected as much by increasing the purchasing power of the existing population as by increasing the population itself. See W. Röpke, “Die säkulare Bedeutung der Weltkrisis,” Weltwirtschaftliches Archiv, Vol. 37 (1933); Allyn A. Young, “Increasing Returns and Economic Progress,” Economic Journal, Vol. 38 (1928); W. Röpke, Crises and Cycles (London, 1936), pp. 4 ff.

8. (p. 57) Quantitative Aspects of the Population Problem

The inquiry into the economic significance of the size of population (quantitative population problem) is still in a very unsatisfactory state for the relationship in question is one which eludes exact measurement. This increases the likelihood, unfortunately, that the population problem will be debated in subjective and emotional contexts of one kind or another. Partisan discussion of this sort has contributed greatly to confusing the economic issues involved. The following references are suggested: H. Wright, Population (London, 1933); W. Rappard, “De l’optimum de population,” Zeitschrift für schweizerische Statistik und Volkswirtschaft (63rd year, 1927); L. Robbins, “The Optimum Theory of Population,” in London Essays in Economics in Honour of Edwin Cannan (London 1927); H. Dalton, “The Theory of Population,” Economica (March, 1928); J. J. Spengler, “Population Theory” in A Survey of Contemporary Economics, Vol. II (1952); S. S. Cohn, Die Theorie des Bevölkerungsoptimums (1934 [a dissertation for the University of Marburg under the direction of the author and containing extensive bibliography]); E. F. Penrose, Population Theories and Their Application (Stanford University, 1934); D. Villey, Leçons de démographie (Paris, 1957).

9. (p. 61) The Economic Consequences of a Decline in the Rate of Population Growth

The prevailing pessimism with which the possible slowing up of the rate of population growth is viewed is certainly the result, in large part, of failure to think through the relationships involved. It is to be noted, however, that the deceleration of population growth may result in an alteration of the structure of the economy which can mean financial loss and painful readjustment for individual sectors. In particular, those for whose output demand is inelastic will be unable to count on new extensions of the market. Chief among the branches of production that will be affected in this way is grain production, whereas the production of higher types of agricultural goods such as meat, dairy products, etc. will probably tend to profit from structural shifts of the kind in question.

10. (p. 64) The Problems of the Giant Enterprise

The giant industrial firm with its army of proletarians, its workers’ quarters, its impersonality, its unfreedom, is surely one of the most disturbing phenomena of our economic system. It is important, therefore, that the following points be kept in mind: (1) the giant firm is not always and under all circumstances a higher type of industrial mechanism just as a skyscraper is not under all circumstances a superior form of architecture. See W. Röpke, Mass und Mitte (Zurich, 1950), pp. 176-200; S. R. Dennison, “The Problem of Bigness,” The Cambridge Journal (November, 1947); (2) the problems associated with mass production would not disappear with the advent of socialism. On the contrary, they would become even more vexatious, for then the last remnants of self-reliance, spontaneity, and of a way of life suited to the nature of man would be obliterated by the mammoth economic machine of the state. Indeed, it is highly probable that the socialist worker, having only one choice of employers, viz., the state, would become even more dependent and unfree than at present; (3) the hope that the giant enterprise can be “humanized” is not a vain one. Much can be done to restore to the worker the opportunity of expressing himself creatively in his work and to enable him to see that what he is doing has meaning and value for himself and for the community. See W. Hellpach, Gruppenfabrikation (1922); E. Rosenstock, Werkstattaussiedlung (1922); O. Veit, Die Tragik des technischen Zeitalters (1935); W. Röpke, “Zur Renaissance des Berufsgedankens,” Soziale Praxis (31st year, 1922); G. Briefs, The Proletariat (New York, 1937); W. Röpke, The Social Crisis of Our Time (Chicago, 1950); W. Röpke, Civitas Humana (London, 1948); L. Hacker, B. Selekman, et. al, The New Industrial Relations (Ithaca, N.Y., 1948). In this connection, it is interesting to note that Japanese industry—thanks to the electric motor and the combustion engine which have considerably reduced the advantages of the big mass-production plant—has exhibited a marked tendency to develop as a congeries of small independent enterprises (K. Akamatsu and Y. Koide, Industrial and Labour Conditions in Japan [Nagoya, 1934]).