Chapter IX: Structure of the Economy; Economics and the World Crisis

“It is a pity that the philosopher and the reformer cannot set up models of their republics and of their reforms, for it requires a high order of talent in philosophical speculation to be able to predict that such schemes will not work. On the other hand, it needs only a combination of boldness and enthusiasm to cause the more naive members of the public to barter their ancestral acres for a share of stock in the riches of the South Sea.”

G.CH. LICHTENBERG (1742-1799)

1. Structure and Mechanism of Our Economic System

This book has set itself the difficult task of describing the several parts of the economic system and the way in which these parts work together. The author’s task would have been easier and do doubt he could have ingratiated himself with many a contemporary reader if he had given free rein to his feelings and, out of his own antipathy to the many degenerate features of our economic system, had constructed an arsenal of charges against it, culminating in a demand for its complete overthrow. But these degenerate aspects are so obvious to everybody, they are the subject of such an extensive and overly emotional literature, that it is the duty of the scholar to emphasize the other side of the picture and to lead the discussion back to an understanding of the foundations of our economic system. And thereby it becomes clear that a number of these degenerate features are, in fact, closely linked to fatal lack of understanding of what constitutes the real character of our economic structure.

Sheer indignation, no more than impassioned pleas for economic revolution, can accomplish very little. The urge to surrender to emotions of this kind is very strong, for it is a normal human trait to set small store on what one already possesses and to clothe with the romantic aura of perfection what one would like to possess. The first duty of an economist aware of his immense responsibility is, nevertheless, to oppose with all his strength this natural inclination and to establish an exact understanding of two things: the economic system which we have and the one which we would establish in its place. The next step is to apply this deepened insight into the real nature of the economic structure to the discovering of ways by which it can be freed of its imperfections and degeneracies, and its power to function increased instead of diminished. Only when this step has been taken are we at liberty to choose between our economic system and a more or less collectivistic one, for only then will we have the full awareness of all that we would give up, and all that we would receive, in choosing the one or the other. If the welfare of our fellow men means anything to us, we should not risk the surrender of an economic system whose structure we have not even taken the trouble to study, against one which has existed up to now only in our over-stimulated imagination and which might cruelly deceive our hopes.

It is, indeed, disquieting to find how small a minority in any country really understands the essence of our economic system. Actually this should occasion no surprise, for such understanding is gotten only by patient and thorough study of the science which investigates economic interrelationships, unruffled by the attacks to which it has been subject at all times—today more so than ever (a point to which we shall return later on). But how many bother to make this effort? That the number is so small is in itself a cause for concern, since the overwhelming majority of those who are engaged in passing random judgments on our economic system seek to disparage the minority who do understand it as ignorant and biased—a spectacle to be met with in no other science. Probably the very fact that our time has so little understanding of its own economic system is not the least of the reasons why the world finds itself in its present lamentable condition.

Our economic system is misunderstood by most people probably because they regard certain of its more puzzling phenomena as harmful and senseless outgrowths of “capitalism.” The truth is that the phenomena in question may conceal a certain useful function which must be fulfilled in every economic system, or they may simply prove to be the more or less inevitable ingredients of any economic system whatever.¹ Certain things are regarded as unique historical occurrences which, in fact, we find reappearing in every age and at every stage of economic development. We have encountered this logical error so often in the course of our inquiry that a few remarks should suffice to dispose of it. Thus, in a previous chapter, we discussed at length all the dangers and disturbances which arise from an extreme division of labor.’ Now, since our economic system is the first in history to be characterized by an extraordinarily differentiated division of labor, many are easily tempted to blame the resulting disadvantages on our economic system, and to seek a solution in collectivism (socialism) without realizing that in so doing they are guilty of confounding two different things. They confuse the principle of a highly differentiated division of labor (which, in contrast to the pre-capitalistic economic system, characterizes both our economic system and the collectivist one) with the mere method of coordination in respect to which a collectivist economic system would be distinguished from our own. They have an antipathy to our economic system on account of its centralization, its artificiality, its complexity, and its impenetrability. Since collectivism appears to be the opposite of this economic system, they regard it as a foregone conclusion that it will deliver us from these evils. They fail to realize that a collectivist economic system can no more avoid the evils flowing from exaggerated differentiation than our own, since both are outgrowths of the same economic-historical epoch. Still less are they aware that a collectivist system would, in all probability, also carry us still farther away from that idyllic stage of economic history which the world left behind it when it passed over to capitalism. Thus we arrive at the height of confusion when the same people who untiringly attack the rationalist, mechanical, and artificial character of our economic system with its industrialization, its proletarianization and urbanization, seek salvation in planned economy and centralized organization, i.e., in an economic structure which will be still more rationalist, still more mechanical, and still more artificial than the existing one. Does this not suggest the plight of avalanche victims struggling to dig their way out of the snow, but burying themselves ever deeper because they have lost their ability to sense which way is up and which is down? A large portion of mankind seems to find itself today in this unfortunate situation.

As these reflections show, there will always be a tendency to misjudge our economic system in the absence of a clear realization that its replacement by a collectivist system would change the form, but not the substance, of many phenomena. This fact makes it more than questionable whether such a change would be for the better. Thus, the great to-do which is made about advertising and distribution costs is coupled with a failure to take into account the fact that a collectivist economic system would also have to reckon with the corresponding costs connected with the setting up of an apparatus for the distribution of goods (including propaganda). The only question would be, then, whether these costs in a collectivist economic system would be lower than under the existing system; and there are enough reasons for assuming that they would be higher. Still another instance of where complaints are brought to the wrong department is found in the case of big industry, among the less happy features of which the depersonalization of work and the dependence of the worker stand foremost. It is, however, clear that the techniques of production such as are found in big industry would certainly be taken over by the collectivist state, with the result that the dependence of the worker would actually become even greater since he would no longer be able to choose among different employers. As the collectivization of agriculture in Russia demonstrates, we must actually expect an extension of mass-production techniques to areas which, in our economic system, have this far successfully preserved the form of the small enterprise. This is an expectation which is supported by the fact, among others, that every totalitarian state has for political reasons a burning interest in the agglomeration of dependent, easily fanaticized and controlled masses.

Finally, we know from preceding chapters that phenomena such as costs, prices, profitability, interest, and rent can in no way be construed as devilish inventions of “capitalism.” On the contrary, they constitute an ingenious and thoroughly intelligible mechanism and serve for the fulfillment of tasks with which any economic system whatsoever is faced. Together they comprise that apparatus needed to achieve general economic equilibrium for which the collectivist state must find an equivalent, though, as we have already seen, the probability of its being able to do so is remote.

It appears that there are many people who, even though they have a clear understanding of the regulatory mechanism of our economic system, experience especial difficulty when it comes to a proper appreciation of the dominant role played by the profit principle in the sphere of production. In their legitimate indignation over everything that seems to them to emphasize self-interest at the expense of the community, in their anger at cupidity and usury, they sense behind the dominance of the profit principle something vaguely immoral. In reality, things are far more complex than they appear. True, men today, as always, strive for maximum satisfaction of their desires, but these desires, as always, are very different from one another. Some seek honor and power, others a modest degree of happiness, still others are most content when engaged in the service of the commonweal, and the rest have ambitions only to satisfy to the maximum their purely material needs. But all fear poverty and social degradation. The dominance of the profit element in production is no proof, therefore, that the springs of economic activity are less diverse today than at other times. This circumstance shows only that in the profit principle we have a sure and indispensable criterion for determining whether or not any given enterprise may be fitted into the context of the national economy or not. The dominance of the profit principle merely brings it about that an entrepreneur who fits into this context is rewarded by the market; he who does not is punished by the market. The reward is as high as the penalty is severe, but it is precisely in this way that we are assured of the selection of persons qualified to direct the process of production. And since the fear of loss appears to be of more moment than the desire for gain, it may be said that our economic system is (in the final analysis) regulated by bankruptcy/ The collectivist state must find an equivalent regulatory principle: in the place of profitability it will have to establish another criterion of success and another system of selecting the managers of production. It is very doubtful if such an equivalent can be found. In any case, the fact that those who direct the process of production (the entrepreneurs) personally enjoy the fruits of success and personally suffer all the losses incident on failure is one of the most important (if unfortunately often abused) principles of our economic system. It would be difficult to prove that it is either unnatural or unpurposeful.

But all of this is valid only under one condition, whose importance we must make every effort to grasp if we would understand the structure of our economic system and the true extent of the distortion which it has undergone in recent times. The road which leads to profit may be entered only the condition that an equivalent economic service is rendered in return. At the same time, there must be assurance that deficient performance will find its inexorable punishment in the losses and finally in the bankruptcy proceedings which remove the incompetent persons from the ranks of those responsible for production. Similarly, the use of underhanded methods to obtain income (without corresponding service) and the avoidance of penalties for deficient performance (by shifting losses to others’ shoulders) must be prevented. For the fulfillment of this condition our economic system disposes of two devices. The first is that responsibility and risks (chances for gain and loss) are coupled closely together. Here we encounter one of the most disturbing disfigurements of the modern economic system. The fact is that the growth of the corporation with its much discussed but unfortunately too seldom remedied abuses has led more and more to the assumption of risks by the community (“socialization of losses”). This and many other developments have resulted in a considerable weakening of the coupling principle, a situation which obviously must receive primary attention in any plan of economic reform which is to be truly effective. No less vexing problems arise with respect to the second device, with which the reader is already familiar, viz., competition. All the hardships that it implies and all the admittedly serious problems which it encompasses cannot get rid of the fact that our economic system stands or falls with competition, since only competition can tame the torrent of private interests and transform them into a force for good. It is competition which sees to it that the high road to profit is entered only by the rendering of an equivalent service (business principle). To restrict competition, then, is to jeopardize the principle of economic reciprocity. If this much is clear, then the conclusion can no longer be avoided that the growth of monopoly represents an extremely serious disfigurement of our economic system. The state can effectively fight monopoly by energetically opposing restrictions of competition and by carefully avoiding economic policies which favor the formation of monopolies.² For this, however, it is necessary to have a strong state—impartial and powerful—standing above the mêlée of economic interests, quite contrary to the widely held opinion that “capitalism” can thrive only where there is a weak government. The state must not only be strong; unmoved by ideologies of whatever brand, it must clearly recognize its task: to defend “capitalism” against the “capitalists” as often as they try to travel a more comfortable road to profit than the one indicated by the sign “principle of service” and to shift their losses onto the shoulders of the community.

These reflections should help us to clear up another prevailing misunderstanding. This is the notion that our economic system is one based on “production for profit” in which mere profitability determines what should be produced, whereas the collectivist economic system ensures “production for use,” i.e., production oriented to the needs of mankind. Our investigations up to now, however, leave no doubt that insofar as the principle of service is safeguarded by competition, our present economic order guarantees “production for use,” since the delicate and incorruptible scales of the market determine what is profitable and what is not. This means, simply, that the dominance of the service principle is synonymous with the sovereignty of the consumers. Can our economic system be described as anything else than as production for use when, through the simple working out of its principles, the desires of the consumers incite producers to attain maximum levels of output? And have we not even a greater right to so describe our economic system, the more doubtful it has become (upon mature deliberation and in the light of the experiences undergone in the meantime) whether a collectivist economy, even conceding that its leaders have the best of intentions, can be oriented to the “needs” of the population? If we examine the real conditions obtaining in the collectivist countries, both those that have collapsed and those still carrying on, does it not appear to be a cutting bit of sarcasm to describe collectivism as “production for use”?

The point of view from which this time-worn question must be answered has shifted decisively within the last decade. When this book first appeared there still existed in the developed countries a market economy which functioned after a fashion. Then the question at issue was how, on the one hand, to improve this economic order in spite of its numerous defects and to demonstrate the possibilities of a satisfactory reform of the market economy; on the other hand, it was imperative that the deceptions which lay in wait for those who pinned their hopes on collectivism be unmasked. In the interim, collectivism has changed from the phantasy-adorned ideal it once was to the hard and sober reality seen in the middle twentieth century. He who praises it speaks no longer of a utopia, of some distant paradise, but of an experiment which has been carried out repeatedly in a most thoroughgoing way and under the most diverse conditions, and which has shown itself to be the “grand illusion” of the postwar era. Hence, it is no longer the spokesman for the market economy but the collectivist who has been placed on the defensive. He finds himself compelled to clear collectivism of a five-fold charge: 1) that it is unable to solve satisfactorily the problem of order and productivity in the economy; 2) that it conflicts with our elementary ideals of freedom and justice; 3) that instead of showing the way to a solution of monopoly it leads us into an ineluctable and all-embracing state supermonopoly which is worse than private monopoly; 4) that it is incompatible with the prerequisites of an international community; 5) that it makes inevitable chronic inflation. On the one hand, there has been no serious effort up to now to refute this fivefold charge. On the other, we have had no example as yet of where collectivism has eventuated in a genuine order which would T3e compatible simultaneously with a government grounded on the principles of freedom and law and with a free international community.³

2. The Collectivist Alternative

Since the collectivist alternative owes a good part of its allure to a lack of understanding of the competitive system and the possibilities which it encompasses, the subject need not detain us too long. As the example of the slogan “production for use” has already shown, many of the labels tacked on to collectivism are hopeful but misleading. The same holds true for the fashionable comparison of the collectivist “planned economy” with “capitalist anarchy.”

Since everyone today uses planned economy in a most imprecise way, an exact definition of this term should be our first order of business. The expression is frequently used in such a general way as to include every politico-economic activity of the state since in every such instance a plan of some kind is involved. Thus, the imposition of a tariff is part of the government’s plan to build up the productive potential of the country. Streets and railroads are always built according to a given plan drawn up for the economy as a whole, so that it is incorrect to designate as examples of planned economy the public works projects which are initiated in many countries as emergency measures to combat depression. Cities, too, have, as a rule, been built according to a certain plan without its being necessary to resort to the term planned economy. Finally, the monetary and credit policies of many countries have for decades been based on certain principles aimed at regulating the economy, and they too have nothing to do with the concept of “planned economy.” If all of this is planned economy, the concept loses all meaning. In such case, we would have had planned economy as far back as the beginnings of human economy, for economic life has always been subject to certain norms and influences at the bottom of which was the idea of some sort of purposeful direction. In this sense, the present-day market economy is, of course, also a “planned economy”; for the legal-institutional framework of this economic system was also constructed on the basis of systematic deliberations respecting the whole of the national economy.

But even if we take the concept of planned economy in a narrower sense and understand, thereby, a centrally administered economy as distinguished from a self-regulating one, we cannot deny that the present-day economic system possesses the attributes of a planned economy. For although our economic system, as we have seen in an earlier part of this book, may lack the conscious central direction of a collectivist economy, it is nevertheless directed in a certain way by the market and the formation of prices. In an undistorted competitive system, the plan of production is established by persons whose qualifications for the job we cannot very well question, viz., the consumers. The collectivist state, on the other hand, is placed before the dilemma either of imitating the competitive system, more or less, and basing its production plan on the wishes of the consumers (however ascertained), or of establishing a plan based on other considerations to which the consumers will be compelled to submit. In the latter case, the decisions as to what will or will not be produced will be made on the basis of the thoroughly subjective notions of the leaders of the collectivist state; consumer freedom is at an end, and the population must agree to that use of the productive forces of the country which the dominant group in the government of the moment has decided is good. This, as can be easily shown, is how every planned economy in fact ends up. What results then is a thoroughgoing economic dictatorship which is inconceivable with-out a simultaneous political dictatorship possessed of the necessary means of coercion. So incompatible is the collectivist planned economy with freedom and the development of personality that this very statement would be added to the long list of crimes meriting death which the penal code of the collectivist state must include. Hence, to want to fight simultaneously for freedom and for planned economy would be to give evidence of a serious degree of mental confusion.

The collectivist planned economy differs from the “plan” of the market economy not only because it forces the population to submit to a plan designed to operate over a long period of time but also by reason of the particular methods with which it carries out its plan. Whereas the market economy is founded on the complicated interplay of the decisions freely made by all groups entering the market, the collectivist planned economy aims at replacing this spontaneous process by commands from above, and at turning over to a group of government officials the responsibility for decisions respecting the use to be made of the economy’s productive resources. The collectivist planned economy thus substitutes a government fiat for the spontaneous reaction mechanism of the market, so that in the interest of clarity it might better be designated as economy of the bureaucrats or command economy. It is not necessary to list here again the enormous, even insurmountable difficulties which such a system would have to struggle with. We can sum up in one sentence all that we have thus far said: the uncorrupted market economy is the functioning planned economy of those whose business it is; the collectivist economy is the non-functioning planned economy of those whose business it is not.

That the collectivist economy is indeed the non-functioning economy of those whose business it is not, thus combining inferior economic performance with serfdom, is shown by the continuous failure of the Soviet Government’s propaganda efforts to prove the contrary. In order to avoid being misled by this propaganda, and by the judgments of those who consciously or unconsciously lend themselves to Soviet purposes, the following facts must be stressed.

The Iron Curtain, with its barbed wire, mined border strips, machine guns, walls, and dire penalties for every attempt to escape from the prison, proves that the Communists seek by all possible means to hide two things: on the one hand, they endeavor to prevent their own subjects from learning about real conditions in the non-Communist world, and on the other, they permit the non-Communist world to learn only so much about life in Communist countries as is considered useful. In both cases, an unhindered investigation of the truth is prevented wherever possible.

But those who are so anxious to conceal the truth admit their own weaknesses in so doing. If the Communist state could proudly point to economic accomplishments as can the United States, France, Italy, Switzerland, or Germany, there would be no reason for it to shun the light like a night owl. This circumstance alone makes it probable that economic conditions in the Communist world are, today as yesterday, as bad as economic theory would lead us to expect they would be. Nowhere is this more apparent than in that part of the Communist empire which—to the vexation of Communists everywhere—is not able to completely seal off the truth, viz., the Soviet Union.

Only this isolation of the Communist world, joined with the thoughtlessness of the Western world, can explain the recent success of Communist propaganda in spreading the idea that Communism is at the threshold of economic achievements which can stand comparison with those of the free countries and the free economy. Here and there the suggestion is even taken seriously of the possibility that the Communist Assyrians may one day overtake us. This intellectual confusion in the free world—exhibited even by many whose economic training should have made them know better—has been all the more successful to the extent that Communist propaganda has been able to beat the drums for such technical marvels as Sputnik and its successors. But is it not obvious that while such enormously costly individual accomplishments give evidence of a number of things, for example, of special abilities in certain areas (and the ruthless concentration of scarce means in these areas), they are no proof at all of the existence of an efficient economic system? Do not such “accomplishments” in a country where the most basic consumer goods are lacking represent the pinnacle of waste? Is it not clear that they are no more useful in terms of the people’s welfare than the Egyptian pyramids (which were the result of the same combination of technical genius and inhuman concentration of economic power), but considerably more ugly and ephemeral? And what are we to think of the streams of naive tourists to Russia who repeat with the pride of a Marco Polo that they were not required to do without anything?

In the light of such confusion in the evaluation of the Communist economic system, it is urgently necessary to draw attention to the following fundamental considerations. It is clear in the first place, that such a regime will make every effort to create as favorable an image as possible of its economic accomplishments and that in its dressing up of the facts, it can go much farther (thanks both to its insulation from the outside world and to the circumstance that no internal contradiction of the official line is permitted) than many a statistician of the free world would believe imaginable. Every piece of information originating in the Communist world must be regarded as colored by propaganda (unless the opposite can be proven), if not as plain swindle. In the interpretation of these data, expert detective techniques are required and even then there is no assurance of being able to extract the truth from such slippery witnesses.

But sufficient evidence is available, and this is the second point, to put a very unfavorable light on the Communist economy. What is undeniable, and more or less openly conceded by the Communist despots themselves, is the failure of Communism in agriculture, i.e., in precisely that branch of production upon which the population depends for supplies of the most elementary and essential goods. What this failure, which is tantamount to catastrophe, really signifies may be seen in figures published in a recent issue of the American Monthly Labor Review and derived from official Soviet sources. The data show that the Russian population constitutes a pyramid of wage earners—the base of which, equaling two-thirds of all wage earners, consists of 40 million persons earning the lowest wages (less than 600 rubles a month)—who even in 1960 were hardly able to buy more than the barest essential foodstuffs. For these foodstuffs, moreover, the wage earners in question had to work longer hours than in 1928 (18 per cent longer for bread, 153 per cent longer for milk, and 190 per cent longer for eggs). All experience shows that the totally inadequate performance of Communist agriculture is a result of the application to this sector of the Communist principle of collectivism (collective farming), with a resulting paralysis of incentives to produce. Tito proved himself cleverer in his decision to abandon this Communist principle and to restore the individual peasant economy.

But with respect to industry—and this is the third point—it is equally undeniable that in the Communist economy, even apart from the efforts at statistical prettying-up, very substantial increases in output have been registered in steel, coal, cement, oil, and electricity. These increases are very unequally distributed in the individual industrial sectors, but that changes nothing with respect to the fact that what has occurred is what is today referred to as economic growth. And since Russian growth commenced from a very low level, it is not unexpected to find this growth showing exceptionally large increases in relative terms. But only those will be astonished by such figures who have failed to note the statistical illusion involved. When, for example, we are told that the production of electrical energy in Russia is expected to increase between 1957 and 1965 by 123 per cent but in the United States by only 68 per cent, the significant neglected fact is that in the United States the percentage increase is measured from a much higher initial level. In truth, the absolute increase in electrical energy in the United States turns out to be more than half again as large as the Soviet increase, yielding an expected total output of energy in 1965 2½ times the expected Soviet total in that year.⁴ Nor may we overlook in this connection the extraordinary help provided by the free world (in the form of the highest quality equipment and machinery) to a Communist empire dedicated to its destruction.⁵ That Western entrepreneurs are so conscienceless as to strengthen our deadly enemy in this way, and Western governments so weak as to permit this, is one of the most humiliating and incomprehensible evidences of our intellectual and moral weakness.

But even when the illusions of statistics are disregarded, the very concept of economic growth which underlies all these comparisons is one which must be regarded with serious misgivings. Many persons—among whom the American professor W.W. Rostow must count as having made a particularly egregious contribution to the prevailing confusion—conceive of the process of growth as one in which the prime consideration is to increase investment in industry as much and as rapidly as possible so that the economy, like an airplane, will “take off” and climb ever higher. This is a purely technical concept in which the problem of economic order is completely overlooked. The belief that a functioning economic system results from the simple addition of individual production statistics betrays little thought and little real training in the fundamentals of economics. Apart from the fact that such statistics tell us nothing of the quality of the commodities in question (which in the Communist economy is usually notoriously poor), they relate merely to purely physical productivity. But this is of no help in answering the question of whether the problem of economic order has been satisfactorily solved: whether the factors of production have been properly allocated, whether the right things have been produced in the right proportions, whether the various branches of production are properly coordinated one with another so that the well-known “bottlenecks” are avoided; or whether, on the contrary, there are not continuous wastes and mistakes with the result that physical increases in output are converted into a general improvement in living standards only at great cost and after long delay.

Here then we discover the reason—this is the fourth point—why the exceptionally large increases in the output of important raw materials in the Communist countries have produced only very small improvement in their general living standards. Substantial shortages of every conceivable sort of commodity and bottlenecks of all kinds are a matter of course in the Communist economy. The foreign tourist customarily receives only a very inadequate impression of these conditions since he is continuously shepherded through model developments and never learns what it is like in a Communist country to have to buy a pail or to have a broken pane of glass replaced. He never learns what it means in such a country to have to find food, shelter, and clothing and to be plagued day in and day out by insufficiencies of every sort. He will receive even less information about the fact that wherever the Communist economy functions well to some extent, it is due only to manifold concessions made to the market economy (more or less legally free markets, free migratory workers, etc.) and to a substantial degree of corruption and bribery. Without these departures from “planned economy” the system would function even worse than it does.

In the fifth place, the tourist, like many others, is inclined to measure Communist development against the wrong yardstick. For the person who is condemned to dwell in such countries, and who has the misfortune to be cut off from the rest of the world, it is not unnatural to compare the present provision of commodities in his country with some earlier period, and to be impressed by what may seem to be a noticeable improvement. It would indeed be very surprising if decades of striving and sacrifice to improve the apparatus of production had not produced some kind of result. Something, in the end, must come out of such a machine. But if we want to know whether the Communist economic system has justified all the struggles and all the sacrifices we must apply to it an entirely different yardstick. We must not compare the present situation with some prior situation, but rather we should ask what a free economy would have achieved with such striving and such sacrifices, or by how much less effort and how many fewer sacrifices the present (Communist) living standards could have been attained in such a free economy. Otherwise expressed: that an improvement has occurred is undeniable, but it is an improvement which is not only pitifully inadequate to the need, but accomplished at a cost to the people that a free economy would have made unnecessary. Still otherwise expressed: the Communist economy suffers from a huge disproportion between outlay and yield because it is burdened with enormous losses, diseconomies, and wastes.

Therewith we arrive at the final and most important point. No reasonable person has ever maintained that a Communist economy is an impossibility, but the proofs have always been overwhelming that a Communist economy—as a system designed to serve the needs of the people—is a tragic failure. Conversely, however, Communism’s very ability to operate without regard for the people’s welfare enables it, with slave-driving techniques, to extract the uttermost both from workers, who are subject to the edicts of the sole employer, the state, and from consumers who are deprived by a variety of cunning devices of the fruits of their labor to the end that state investments shall increase.

The real accomplishment of Communism consists in the fact that it can concentrate economic resources wherever it appears politically purposeful to do so, be this in spectacular buildings and industrial projects, in the propagandizing and undermining of the rest of the world, or in armaments with which it can simultaneously hold the world in the spell of its threats.

If the results of the Communist economy are to be judged negatively in respect to its services to the welfare and happiness of mankind, it is equally necessary to give it positive marks for its unexampled concentration of economic effort in the service of a policy whose openly avowed objective is the conquering of the world. Communism—”The greatest organized unhappiness of the greatest number,” as it was called recently by the London Times in a parody of Jeremy Bentham’s well-known aphorism—represents on these selfsame grounds an immense and still increasing danger for the whole world.

All of us have the feeling that a fair judgment of Communism must avoid both underestimating it and overestimating it. Many incline, on the one hand, toward underestimation because they wish to avoid supporting the efforts of Communist propaganda, because they believe complacently in the superiority of the free world, or because they welcome reasons which dispense us from the need for vigilance and for constant effort to keep pace militarily and economically with our Communist rivals. Many incline, on the other hand, to over estimation because they are anxious to avoid self-deception, or because without being Communists they are collectivists, to the extent of feeling a certain sense of satisfaction at alleged proofs of the economic capabilities of Communism, and finding therein reasons for promoting their own collectivist ideas. Still others incline in this direction because they are intellectual snobs, and yet others because they are looking for a new reason for slackening the vigilance and efforts of the free world: viz., the alleged hopelessness of ever being able to match the Communist colossus.

What this amounts to is an extremely confused and therefore dangerous situation which must be put to an end. We must avoid overestimating Communism as an economic system serving mankind. But it is equally incumbent on us not to underestimate it as a system of the most extreme concentration of economic power in the service of politics—in the service of a politics whose ultimate goal to destroy and enslave the free world can be ignored only by the hopelessly blind among us. To our misfortune, most of those who in the free world belong to the Left, conspire to do the exact opposite in that they vastly overestimate the Communist economy as an economic system but simultaneously woefully underestimate it as the instrument of a world imperialism. The result is that they refuse to draw the hard conclusions required for the strengthening of our own economic counter-weapons. To allow ourselves neither to be bluffed nor lulled—that is what is required if we want to learn how to deal with Bolshevism.

3. The German Experiment in Noninflationary Market Economy

It would seem as if one of the world’s most important industrial countries deliberately subjected itself to the experiment of demonstrating in succession (1) that collectivism requires not only political unfreedom but leads to disorder, waste, and low living standards, and (2) that the opposite economic system of the market economy is not only a prerequisite for political and intellectual freedom, but also the road to economic order and to prosperity for all the people as well. The country in question is Germany. Under the rule of the National Socialists it gave the world the example of a collectivist economy—which of necessity became increasingly inflationary and of which the chief marks were planned economy, price control, wage control, capital control, and exchange control. And the whole world showed great zeal in endeavoring to follow this example as rapidly as possible. Indeed, until quite recently the almost universally encountered brand of economic policy was, in essence, the National Socialist variety; and in not a few countries—the so-called underdeveloped ones—it is a policy which is still very much in vogue. Where this system led in Germany has been described in an earlier section of the book (Chapter IV, Section 4) which dealt with the phenomenon of repressed inflation.

It was the complete bankruptcy of this inflationary collectivism which (as indicated earlier) made possible the subsequent legendary economic revival of the non-Communist half of Germany. The success of this reform was so extraordinary, and the transition from poverty and hopelessness to prosperity and feverish economic activity so sudden, literally from one day to the next, that the term “German economic miracle” gained world-wide currency.

But the German accomplishment was nonetheless—in economic terms—no miracle at all, if the essence of the reform of 1948 is clearly understood. Its success was on the contrary precisely what its architects had expected. The real miracle lay in the fact that in this particular country and in a world still under the spell of inflationism and collectivism, it proved possible politically and socially to return to the economic reason of the market economy and to monetary discipline. It was then that the spectacular success of this reform which, from election to election, broadened the initially narrow political base of the market economy and finally compelled even the socialists to throw away, more or less convincingly, most of the planks in their economic platform.

It was, to be sure, a long time before the inflationists and collectivists of every kind and degree bowed to the irrefutable evidence of the facts and abandoned their attempts, as numerous as they were scientifically untenable, to minimize or even deny the unexampled and historically unique success of the German economic reform of 1948. Outside Germany there still appear to be some diehards who—either out of ignorance of the facts and interrelationships, or against their better judgment—resist admitting that here is to be found the most convincing case in all history against collectivism and inflationism and for market economy and monetary discipline.

In what did the German reform consist? A complete answer to this question cannot be given here since it would necessitate the analysis of many and in part complex issues.⁶ It is sufficient for our purposes, however, to limit ourselves to a simple observation. The essence of the German economic reform corresponds to the sickness which it was intended to cure. If the sickness was that combination of collectivism and inflation which we have designated as repressed inflation, the therapy for it had to consist, on the one hand, in the elimination of inflationary pressure and, on the other hand, in the elimination of the apparatus of repression (maximum prices, rationing, controls and other interferences with free prices) and the restoration of market freedom, free prices, competition, and entrepreneurial incentives. Freedom in the realm of goods, discipline in the realm of money—those were the two principles upon which rested the German economic revival from 1948 onwards, and they have remained the foundation of German prosperity in spite of all the many concessions made to interventionism and the welfare state.

The reform of 1948 was constituted, then, of two parts: the overcoming of inflation and the dismantling of the apparatus of repression. The first was accomplished by the monetary reform, the second by the economic reform represented in the restoration of the market economy. Thus were the twin pillars of genuine economic order reconstructed from the chaos and the paralysis of the inflationary planned economy: the steering and motive power of free prices and the stability of the value of money. Both made it possible in a few years for a war-devastated rump state, swollen with refugees, whose cities had been destroyed to the extent of 50 per cent and more, to develop a “hard,” fully convertible currency, to become the chief creditor nation of Europe, and finally, even to be found worthy of helping the leading power of the free world, the United States, out of its balance of payments difficulties with credits of one kind or another. German foreign trade, after having fallen to zero during and after the war, expanded within a decade to the point where Germany assumed the number two position in world trade (after the U.S.). Later, Japan—using the same recipes-achieved similar results.

In reality, as we have suggested, the situation was more complex than we have presented it here. It was not always easy to maintain, uninterrupted, the course of such a noninflationary market economy. The temptation was strong to give in to an anchronistic Keynesianism and to fight the persisently high level of unemployment, due to the continuing stream of refugees from the East, with a program of inflationary investments. The American occupation authorities exerted, over a considerable period, strong pressure on the German government and the German central bank in this direction. Fortunately, the Germans withstood both the pressure and the temptation, so that Germany was preserved from a relapse into the National Socialist policy of repressed inflation. But it was a long time before this problem of structural unemployment was solved by a patient policy of adaptation and adjustment. An essential prerequisite for this policy, as well as for the enormous increase of investment (which represented the real motor of the German revival), was the restrained wages policy of the German labor unions, who had the good sense to wait upon the fruits of real prosperity, and a tax system which provided the necessary incentives for entrepreneurs to invest.

Thus it was that Germany, with its particular version of market economy (termed “social market economy”), gave the world an example of a constructive and internationally responsible economic policy, following its prior repellent example, under the National Socialists, of an economically destructive and internationally disintegrative economic policy. This was a not ignoble way of attempting to make good the damage caused by the former bad example. It is certainly not at all flattering to our age that the world—so quickly, zealously, and obstinately—determined to follow Germany’s former bad example of a collectivist-inflationary policy, that the occupation authorities in Germany in the immediate postwar period insisted on the continued implementation of such policies in the conquered country, and that this same world delayed as long as possible in following Germany’s new good example, and then only with mistrust, incomprehension, and hostility. But the weight of the evidence and the sheer logic of the situation finally won the day. The events of the German case spoke too clear and compelling a language to be misunderstood, with the result that one country after another followed the German lead, more or less faithfully, more or less successfully, but unquestionably in the direction of more market economy and greater monetary discipline. A particularly impressive example of this general development is the case of France which, by finally (end of 1958) adopting the German recipes of monetary discipline and market economy, succeeded in converting its chronic balance of payments deficit into a sizable surplus.

4. The Third Road

Having had a glimpse of the rather unattractive future which the collectivist alternative holds in store for us, let us return now to our own economic system. We find that this system is composed of a complicated network of contractual relationships which, however, join together to produce an ordered whole—thanks to the mechanism of the market. It is a combination of freedom and order, representing what is probably the highest level to which these two ideals can simultaneously attain. Moreover, it is a combination which has bestowed on the human race an unparalleled increase in its standard of living. Obviously, this combination of freedom, order and progress is far from being perfect. Often the three principles are found to be in conflict with one another so that frequent compromises must be made among them, sometimes at the cost of the one, sometimes at the cost of the other.

To the admission that our economic system is characterized by unstable equilibrium, we must hasten to add the fact that small disturbances, affecting a limited sector of the economy, can generally be overcome with ease and with hardly perceptible effort by means of the steering mechanism of the market. The market economy is also able to adjust with surprising rapidity and elasticity to most changes in economic “data” (methods of production, size of population, consumption habits, etc.). However, from time to time grave and total equilibrium disturbances take place: we have spoken of them in the previous chapter, and we have seen how they may be most effectively overcome.

The admission that our economic system undoubtedly contains within itself the seeds of crisis does not really signify too much. For the admission must be qualified by two circumstances, neither of which we can afford to overlook. The first of these is the undeniable fact that the disturbances, which for decades have affected the economic life of most countries and which finally culminated in the Great Depression (1929-33), owe their severity and extent primarily to the external shocks which have afflicted the world since 1914. It is a real miracle that our economic system has not completely collapsed in consequence, and we have the right to ask whether another sort of economic system would have exhibited similar powers of resistance. The point is that our economic system ought not to be made the scapegoat for the political sins of our generation. Moreover, it is a fact that in this same period our economic system has been deformed in ever-increasing degree by interventions and degeneracies of every conceivable sort, to the point where it is almost unrecognizable. The result is that the system has become increasingly less able to fulfill its functions, less elastic, and less maneuverable. It has lost this adaptability and this flexibility precisely at a time when these qualities are most urgently needed, since economic conditions are changing more quickly and more radically than ever before. But in a fatal chain of reactions, the disproportion between the need and the ability to adapt have led to measures of policy and to interventions which as an end result have served only to widen the gap.

To find a way out of this vicious circle is one of the most important of the many crushing responsibilities which our generation has to shoulder. This is so difficult that not a few have turned away from their responsibility in despair. It remains, nevertheless, one of those problems upon the satisfactory solution of which hangs the fate of our Western civilization.

There is no doubt about the fact that our economic system needs a complete “overhaul,” if we wish to arrest the process of degeneration before it ends in an intolerable degree of unproductivity and—what is worse—corruption and injustice. To accomplish this, some-thing more is required than a mere freeing of the system from “nonassimilable” interventions of the state. The job cannot be done by merely adopting a negative approach and abstaining from action, i.e., by a return to simple “laissez-faire” methods. Of much more significance in the shaping of a constructive policy are the abundant proofs that the structure of the market economy is not nearly as simple as its friends, as well as its enemies, have maintained. We now know that its functioning depends upon a whole series of economic, juridical, moral, psychological, and political conditions, none of which are simply “given,” and which, in any event, must be largely restructured to fit the changed needs of the present. Above all it will be necessary to overhaul, with the help of trained economists, the legal framework of our economic system (bankruptcy laws, corporation laws, patent laws, monetary and banking laws, and antitrust laws).

Just as we ought not to let ourselves be led astray in the execution of this task by ideological name-calling, so ought we to take care not to allow ourselves to be paralyzed by the weak-willed fatalism of those who would have us believe that the dissolution of our economic system is a matter of fate, to struggle against which would be mere quixotism. This belief that economics is subject to ineluctable laws of evolution—a part of the abundant residue of Marxist thought still current in our time—is no more justified today than it was previously, and is all the less appropriate to a generation which prides itself on possessing more courage and energy than did its predecessor.

There is in our time hardly a more urgent task than to find a way out of the sterile struggle between the champions of a “free” economy, as it was formerly known, and the protagonists of a socialist economic order which, with its endless disappointments, we have come to know so well. It is the economist who is especially inclined to warn against over-emphasis of the economic factor in history; but he may nevertheless be permitted the observation that our whole civilization is everywhere entangled in seemingly insoluble problems because it has not succeeded in the elementary task of constructing an efficient and humane economic order. We may add that our world has failed in this task precisely because it has not clearly understood what the issues really are.

Our first duty, then, is to determine precisely what the problems are which must be solved. The truth is that it would be hard to exceed the confusion which today prevails on this point. The origin of the confusion is rooted in two basic fallacies. In the first place, there is too little regard for the fact that there are a number of different problems to be solved, most of which must be kept separate from one another. Stemming directly from this fallacy is the second fallacy, viz., the belief that all these different problems can be solved once for all with a single ready-made solution, be it that of the flagwavers for the free or for the socialist economy. Both errors must be avoided.

If we now examine the present condition of the Western world, and ask ourselves where we must begin in reforming our economic and social system, we find but four cardinal problems, each of which is different from the others and each requiring its own solution: 1) the problem of order; 2) the social problem; 3) the political problem of the distribution of power and 4) the moral-vital problem, as we may describe it in brief.

As far as the problem of order is concerned, the reader of this book is now sufficiently aware of what is at issue. Just as the individual farmer must reflect on the use he will make of each unit of his land, capital and available labor power—in order that the right items will be produced and in the right proportions—so too must the national economy as a whole reflect on the use it will make of its resources. Not only individuals but society as a whole is faced with the question: what use shall be made of the given productive resources? Ought we to produce this or that, and how much of this or that? It is unnecessary to comment again on the enormous difficulty and complexity of this task. Suffice it to say that a well-ordered economy results in the right things being produced in the right proportions at the right time in the right place and with the right methods of production. It ensures simultaneously that an optimum effort will be made by all those engaged in the process of production, so that the right goods will be produced, and that they will be of the best possible quality and available in the largest possible quantities. It also sees to it that people will take heed of the future, that they will save and invest.

We can clarify what has been said with an illustration. Just as a watch needs not only a balance wheel to regulate its running, but also a spring to keep it running, so is a satisfactory economic system not possible without an efficient system of regulatory and propulsive forces. The present condition of many countries is characterized by a serious lack of these regulatory and propulsive forces. Because the problem of economic order familiar to previous generations is no longer understood, our contemporaries have destroyed the existing system of regulatory and propulsive forces and are unable to find a substitute for it. Indeed, they have failed to realize that anything has been destroyed. Inexperienced fingers have been meddling with the delicate machinery of the watch: they have bent its spring and balance wheel. It makes little difference how much the watch is shaken; it will not run properly as long as the spring and balance wheel are not repaired.

Order and incentive in the economy—these, then, are the two cardinal problems around which everything revolves and which from minute to minute must be freely and noiselessly solved. We find, however, if we extend our inquiry back to first principles, that there are only two possible solutions to these problems (if we exclude the special case of the self-sufficient peasant economy). The two possible solutions, as we know already, are those of freedom and command. That of freedom means the strict adherence to an order functioning with astonishing regularity through the medium of the free market with its freely fluctuating prices. That of command, however, means an economic order in which order and incentive are placed in the hands of the consciously ordering, planning, inciting, commanding, and command-enforcing state. The one we call market economy, the other command economy, planned economy, centrally administered economy, collectivist (socialist) economy. It cannot be too strongly emphasized that as far as the task of ordering economic life is concerned, we have only this exclusive choice between market economy and command economy. We cannot take refuge in some third alternative, in cooperatives, trade unions, in undertakings patterned after the much-cited but much misunderstood Tennessee Valley Authority, corporatism, industry council plans, vocational orders, or any other form of “ersatz” socialism. We must choose between price or state command, between the market or the authorities, between economic freedom or bureaucracy. Having tried out both systems, however, we know only too well that, in fact, we have no further choice in the matter. It has been shown that Western man is not free to opt for a collectivist system, since the latter is unable to guarantee an effective system of order and incentives which would be compatible with freedom and with the existence of an international community. He who chooses the market economy must, however, also choose: free formation of prices, competition, risk of loss and chance for gain, individual responsibility, free enterprise, private property.

This choice—and herewith we return to the heart of our argument—has nothing whatsoever to do with what was formerly understood under the terms “free economy” or “capitalism.” The new orientation of economic policy—along a path which the author has designated as the “third road”—consists precisely in this: that we recognize the impassibility of the socialist road without our feeling it necessary, on that account, to return to the old worn-out road of “capitalism.” Two important planks must be included in this new program whose aim it is to ensure the existence of a natural order. The first calls for a stable framework which, as already observed, is indispensable to a well-ordered market economy. This in itself means that the state has a number of important tasks to fulfill: the establishment of a healthy money system and a prudent credit policy which together will serve to eliminate an important source of economic disturbances. Such a framework will also necessitate a legal system carefully constructed to prevent, as far as possible, abuse of the freedom of the market and to ensure that the road to success will be entered only through the small door of reciprocal service. In a word, this framework should be designed so as to reduce to a minimum the numerous imperfections of the market economy.

This is the first part of the program, one which of itself will provide the state with enough to do. The second becomes necessary due to the fact that, in addition to solving the problem of order, there are further tasks to be done. The market economy, of itself, will furnish a solution only to the problem of order. To determine whether it can provide answers to the other problems, even if only partially, requires more exact investigation. We want not only to produce maximum quantities of the right goods as economic order prescribes, but also, once this problem has been satisfactorily solved, to see other ideals realized as well.

And herewith we come to the other three key problems with which we began our main discussion. There is, to repeat, the social problem. This means that we are not satisfied with the existing order as a whole, but are concerned to provide security and protection to the weak by a certain correction of the distribution obtaining under the market economy. It is not necessary, however, to sacrifice order for the sake of social policy, nor social policy for the sake of order. There is, further, the political problem of the distribution of power. This, too, should be carefully distinguished from the problem of order, though it is necessary to add that the problems connected with the distribution of power are to a large extent solved by the whole process of the market economy, in which no economic and consequently no political power groups can long prosper.

There remains what we have called the moral-vital problem. This expression is to be understood as meaning that although it is very important that we have a well-ordered, productive, and just economy, it is at least as important to ask what the effects of such a system are on the moral and spiritual condition of man—on those intangibles which constitute the real meaning of his existence and the foundation of his happiness. How does this system affect man in his capacity as a person called to revere the Most High, as neighbor and citizen impelled toward community with his fellowmen, as member of a family and as worker? The material goods with which a well-ordered and highly productive economy furnishes us are indispensable, but they are only a means. The end, on the other hand, is a life which is complete and meaningful, adapted to the nature of man. In our time this kind of life is most gravely men-aced by mechanization, depersonalization, proletarianization, breakup of the family, the growth of a mass society, and other items on the debit side of our urban-technical civilization. The rejection of the market economy by many on these counts appears to stem from the most worthy motives. Such persons must bear in mind, however, that the market economy makes no pretense of providing solutions to the problems described above. It merely supplies the framework within which we must seek the answers to these last and most fundamental questions. In the absence of a market economy these problems are, in fact, insoluble; only such an economy can guarantee us order in freedom, without which all the rest is in vain. This is not the place to describe in detail an economic policy of this kind; in any case, it will be one which has freed itself from the “idolatry of impressive-sounding slogans”.⁷ Its outlines are denoted, first, by the fact that instead of regulating and commanding—doing violence to the laws of the market economy—it seeks to attain its goal by cooperating with these laws: to reestablish a genuinely competitive economy, thereby providing an offset to the frictions, hardships, and difficulties inherent in a developed economy. Such a policy will distinguish sharply between measures which are adapted to our economic system (conformable), and those which are in conflict with it (nonconformable), and will favor the former with the same resolve with which we choose to drink ethyl instead of methyl alcohol. This means that it will follow as far as possible the indirect, organic method of exerting influence on economic life, and not the direct method which consists in the promulgating of decrees. It means, further, that economic policies as such will be designed so as to avoid, as far as possible, interferences with the process of price formation, and that they will be applied either before or after this process.

This “third road” of economic policy is, above all, a road of moderation and proportion. It is incumbent upon us to make use of every available means to free our society from its intoxication with big numbers, from the cult of the colossal, from centralization, from hyper-organization and standardization, from the pseudo-ideal of the “bigger and better,” from the worship of the mass man and from addiction to the gigantic. We must lead it back to a natural, human, spontaneous, balanced, and diversified existence. It is incumbent upon us to end an epoch in which mankind, in the triumph of its technological and organizational accomplishments and in its enthusiasm over the vision of a future of unending growth and unrestrained progress, forgot man himself: forgot his soul, his instincts, his nerves and organs, heedless of the centuries’ old wisdom of Montaigne (Essays, Book III, Chap. 13), that even on the highest stilts we must still walk with our legs and even on the world’s highest throne we must still sit on our bottom.⁸

Such a “road” signifies, above all, the favoring of the ownership of small and medium-sized properties, independent farming, the decentralization of industrial areas, the restoration of the dignity and meaning of work, the reanimation of professional pride and professional ethics, the promotion of communal solidarity. The prospects for the success of such a policy would be not too good, were it not for the fact that a slow-down in population increases is eliminating one of the principal causes of the rise of the proletariat, and were it not obvious that the advantages which up to now have been attributed to large scale enterprises have been seriously exaggerated. The notion that we are faced with an irresistible trend toward large-scale enterprise has been shown to be completely inapplicable to the broadest and most important segments of the economy, particularly agriculture, the handicrafts, and small business. Even with respect to industry, it can be assumed that the notable increase in average-sized enterprises in recent decades is explainable less in terms of the technical-economic advantages which would be thereby gained, than as a reaction to that megalomania to which the world has so heedlessly surrendered. It is everywhere apparent that the dimensions of many areas of our lives—economic as well as noneconomic—have expanded far beyond the optimum, and that they must be deflated to more reasonable proportions, a process which will prove to be painful but, in the long run, beneficial. In this connection, there must be due recognition of the fact that contrary to a widely held opinion, technological development itself has very often had the effect of strengthening the viability of the small as opposed to the large-scale enterprise.

But whatever specific form the economic policy of the future will take, it will stand no chance of success if it is not shaped by experts thoroughly acquainted with the structure and mechanism of our economic system and if it is not executed with the understanding, the support and the cooperation of the broad masses of the population who know what is at stake. To bring this to pass is the great practical task of the science of human behavior which we call economics. Economics can successfully accomplish this task only if it is not itself sucked into the vortex of the contemporary crisis of civilization, and if it does not finally fall victim to the uncomprehending attacks to which it is exposed at present. It is reported that Napoleon once took umbrage at the obstinate behavior of one of his officials and reprimanded him for it. The honest servant replied: Sire, one can support oneself only on that which offers resistance. The same may be said of the science of economics.

NOTES

1. (p. 233) “Capitalism”

The reader will have noticed that this popular description of our economic system has been employed only seldom in our text, and as a rule in quotation marks. There are good reasons for this. As coined and circulated by Marxism, the term has retained up to the present so much of its hate-filled significance and class-struggle overtones that its usefulness for the purposes of scientific discussion has become extremely questionable. In addition, it provides us with only a very vague notion of the real essence of our economic system. Instead of promoting understanding, it merely arouses the emotions and obscures the truth. Walter Eucken deserves especial credit for his efforts to arrive at a clear definition of the economic system and thereby of the term capitalism as well; see his The Foundations of Economics (London, 1951). See also: Alexander Rüstow, Ortsbestimmung der Gegenwart, Vol. 3 (Erlenbach-Zurich, 1957), pp. 159 ff.; W. Röpke, Civitas Humana (London, 1948).

2. (p. 236) Competition as a Problem of Economic Policy

The problem of competition—its function, its conditions, its institutional framework and its evolutionary tendencies—is being given an ever-increasing amount of attention in the most recent literature, and rightly so, since it is this central problem which gives rise to all the other symptoms of the present crisis of our system. Increasingly, the confusion erected about this key question of our economic system by some confused persons, and by some very unconfused monopoly interests, is being summarily dispelled. Hearteningly, it is now recognized—in opposition to alleged ineluctable processes of evolution—that our economic system can in the final analysis continue to exist only as a competitive system. See: F. Böhm, Wettbewerb und Monopolkampf (Berlin, 1933); F. H. Knight, The Ethics of Competition (London, 1935); C. J. Ratzlaff, The Theory of Free Competition (Philadelphia, 1936); W. H. Hutt, Economists and the Public, a Study of Competition and Opinion (London, 1936); L. Einaudi, “Economia di concorrenza e capitalismo storico. La terza via fra i secoli XVIII e XIX,” Revista di Storia Economica (Turin), June 1942; W. Eucken, Wettbewerb als Grundprinzip der Wirtschaftsverfassung (Munich, 1942); Monographs of the Temporary National Economic Committee (Washington, D. C; 1940/41); J. M. Clark, Alternative to Serfdom (New York, 1948); T. W. Arnold, The Bottlenecks of Business (New York, 1940); C. v. Dietze, “Landwirtschaft und Wettbewerbsordnung” Schmollers Jahrbuch, 1942, No. 2; W. Röpke, The Social Crisis of Our Time (Chicago, 1950); W. Röpke, Civitas Humana, op. cit.; Walter Lippmann, The Good Society (Boston, 1937); L. Miksch, Wettbewerb als Aufgabe (2nd ed.; Godesberg, 1947); C. D. Edwards, Maintaining Competition (New York, 1949); C. E. Griffin, An Economic Approach to Antitrust Problems (New York, 1951); ORDO, Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft (published annually since 1948, Düsseldorf), with important articles by F. Böhm, W. Eucken et al.; see also W. Röpke, article “Wettbewerb-Konkurrenzsystem,” Handwörterbuch der Sozialwissenschaften.

3. (p. 238) The Crisis of Collectivism and the Problem of Economic Order

The ideas outlined in the text have been developed at greater length by the author in his short papers Die Krise des Kollektivismus (1947) and The Problem of Economic Order (Cairo, 1951) and in his book Mass und Mitte (Zurich, 1950). On the problem of order see also: L. Robbins, The Economic Problem in Peace and War (London, 1947); J. M. Clark, Alternative to Serfdom, op. cit.; John Jewkes, Ordeal by Planning (London, 1948); Henry C. Simons, Economic Policy for a Free Society (Chicago, 1948).

4. (p. 243) The Soviet Economy

The pioneer works studying the claims and realities of the Soviet economy are: G. Warren Nutter, The Growth of Industrial Production in the Soviet Union, (Princeton, 1962); Colin Clark, The Real Productivity of Soviet Russia, (printed for the use of the Internal Security Subcommittee, Committee on the Judiciary, U. S. Senate, Washington, 1961); Naum Jasny, Soviet Industrialization 1928-52, (Chicago, 1962); and Abram Bergson, The Real National Income of Soviet Russia Since 1928, (Cambridge, [Mass.], 1962).

5. (p. 243) Western Aid to the Soviets

A fascinating study of the Western contribution to the construction of the Soviet industrial and agricultural base has been made by Werner Keller in his book, recently translated from the German, East Minus West Equal Zero, (New York, 1961).

6. (p. 248) The Example of the West German Economic Revival

The German experiment in monetary discipline and economic freedom may be studied in detail in the following works: Ludwig Erhard, Prosperity through Competition (New York, 1958); The Mainsprings of the German Revival (New Haven, 1955); David McCord Wright, Post-War West German and United Kingdom Recovery (Washington, D. C: American Enterprise Association, 1957); Egon Sohmen, “Competition and Growth: West Germany” in American Economic Review, December 1959, and the subsequent discussion thereon, American Economic Review, December 1960; W. Röpke, “Das deutsche Wirtschaftsexperiment—Beispiel und Lehre” in the Symposium Vollbeschäftigung, Inflation und Planwirtschaft (Erlenbach-Zurich, 1951; W. Röpke, Ein Jahrzehnt sozialer Marktwirtschaft in Deutschland und seine Lehren (Cologne, 1958); W. Röpke, Ist die deutsche Wirtschaftspolitik richtig? (Stuttgart, 1950). On the technique of the monetary reform of 1948 see: F. A. Lutz, “The German Currency Reform and the Revival of the German Economy” in Economica, May 1949.

7. (p. 256) Scientific Directives for Economic Policy

In the text the author has remained true to his early thoughts on this topic as developed in his article “Staatsinterventionismus,” Handwörterbuch der Staatswissenschaften, 4th ed., supplementary volume, (1929). There too an outline of a theory of economic policy may be found. See also: A. C. Pigou, The Economics of Welfare (4th ed., London, 1932); M. St. Braun, Theorie der staatlichen Wirtschaftspolitik (Leipzig-Vienna, 1929); L. Mises, Planned Chaos (Irvington-on-Hudson, N. Y., 1947); O. Morgenstern, The Limits of Economics (London, 1937); H. Laufenburger, L’intervention de l’Êtat en mattère économique (Paris, 1939); C. Bresciani-Turroni, Economic Policy for the Thinking Man (London, 1950); Th. Pütz, Theorie der allgemeinen Wirtschaftspolitik und Wirtschaftslenkung (1948); William A. Orton, The Economic Role of the State (London, 1950); W. Eucken, Grundsätze der Wirtschaftspolitik (1952).

8. (P. 257) The Third Road

For a complete statement of the author’s program of a “third road,” ranging far beyond the purely economic factors see: W. Röpke, The Social Crisis of Our Time, op. cit.; W. Röpke, Civitas Humana, op. cit.; W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959); W. Röpke, Mass und Mitte, op. cit.; W. Röpke, A Humane Economy (Chicago, 1960).

9. (p. 258) Essence and Method of Economics

Instead of defending economics in detail against the attacks to which it is continuously being subjected, the author has preferred in this book to let economics speak for itself and thus to give the reader the opportunity of making his own judgment as to whether this science is really as impractical, unmodern, reactionary, socially noxious, or rationalistic as its despisers so untiringly declaim. The economist must learn not to be dissuaded from his real task by such attacks, and to recognize that he will remain unloved by the special interests and political adventurers. On methodological problems see: W. Eucken, The Foundations of Economics, op. cit.; L. Robbins, An Essay on the Nature and Significance of Economic Science (2nd ed., London, 1935); O. Morgenstern, op. cit.; L. von Mises, Human Action (New Haven, 1949); A. Rüstow, “Zu den Grundlagen der Wirtschaftswissenschaft,” Revue de la Faculté des Sciences Économiques de l’Université d’Istanbul, 1941; L. v. Mises, Grundprobleme der Nationalökonomie (1933); W. Röpke, A Humane Economy, op. cit.

INDEX