The Creative Thrust of Capitalism; M. S. Rukeyser

The Creal; of Cap; MERRYLE STANLEY RUKEYSER WHILE the unaware and the fan tasy builders have been gleefully pointing to the imminent decline of capitalism, the world of reality in Southeast Asia, West Germany, and elsewhere has since World War II demonstrated the enor mous potentials of the open mar ket free choice system in' accel erating productivity. On my recent visit to the Ori ent, I was struck with the potency of ideas and philosophy in im proving hitherto meager levels of material well-being. Certainly Taiwan, Hong Kong, South Korea, Singapore, and even Japan are without large natural resources, but the industriousness of their work force under improved man agement and increased foreign in vestment have delineated the complex factors that make for accelerated growth. Mr. Rukeyser is well known as a business con sultant, lecturer, and columnist. The secret success ingredients have included the introduction of better methods and increased use of capital goods - labor-aiding machinery - under conditions that enlarge indi vid ual freedom of choice and incentives. Such dis ciplines as improving technology, increasing capital investment, and introduction of new management techniques stand in sharp contrast with the effortless panaceas sugar coated with labels of "liberalism"

and socialism. Socialism's appeal is based largely on emotional fac tors rather than on relative per formance in achieving better liv ing under competing systems. If little Taiwan is used as a microcosm for fact finding, it be comes clear that there are broadly two approaches to problem solv ing. One is the purely demagogic approach of ignoring costs .and individual preferences and assur ing perpetuation of even unwanted 33 34 THE FREEMAN January activities through the "miracle" of subsidies. If, by way of illustra tion, railroad labor, material, and tax costs are out of line with revenues, the easy solution lies in clamoring for subsidies. Sim ilarly, if arbitrary lifting of con struction wages far out of rela tionship to productivity results in prohibitively high costs, the "remedy" is for the state to sub sidize the operation. Yet the per sistent use of such uneconomic approaches in New York City and elsewhere, in the face of historic frustration, has been to deteri orate real estate and cause much needed new housing construction to be stillborn. Making the land lord stand between the home renter and inflation has caused unthinkable shortages and human degradation. But the uninformed, seeking scapegoats, fail to see that those who insist on rent ceil ings without corresponding ceil ings on costs are in the position of the man who murdered his father and mother and then pleaded for clemency on the ground he was an orphan.

Consequences 01 Intervention The chaos in real estate is not a testament to weaknesses of the free market. On the contrary,' it springs from decades of bureau cratic interference with the op eration of a free market. Such approaches are self-defeat ing. The Republic of China on the island of Formosa turned from such folly. It acts on the belief that progress lies in technological improvements which cut costs through improved productivity. It takes creative talent for inno vators to devise methods for mak ing two blades of grass grow where but one grew before, but political hopefuls persist in pon tificating that we'll subsidize you if you can't get costs down to a level customers are able and will ing to pay. The providers of sub sidies are being liberal with other people's money. They interfere with the essentials of a competi tive system in which the customer is the boss. By buying or with holding orders, the consumer in a free economy decides what should be produced, in what quan tities and according to what spec ifications. When there are subsi dies, however, government forci bly steps in and weakens the capacity of the customer to disci pline the businessman. Instead .of resting the survival of an enter prise on pleasing potential buyers, the inefficient hope to get by through pressuring politicians.

When the businessman recoups part of his costs out of levies by government on the taxpayers, the customer is weakened in his sov ereign rights at the market place.

1971 THE CREATIVE THRUST OF CAPITALISM 35 Instead of facing the discipline of innovating or perishing, the inefficient producer rests on his laurels and hopes to live on the crutch of subsidies. But this makes everyone poorer, since in efficiency and waste are thus socialized, not eliminated through new and improved techniques. The creative energy inherent in economically prudent operating principles has caused a growth rate in Taiwan (Formosa) far above the 5 per cent a year target set by the U.N. for emerging un derdeveloped nations. Taiwan had been handicapped by fifty years of stagnation under Japanese over lords. Only 25 per cent of. its scarce land - about 2.3 million acres - is arable; and industry fifteen years ago was primitive. Personal incentives under the Chiang Kai -shek regime were heightened by the sale of govern ment owned land to farmers. Taiwan vs. Mainland China With massive economic aid from the United States which came to an end in 1965, Taiwan with its forward thrust in farm ing and in commerce and industry, has become a yardstick for meas uring the high cost on the Chi nese mainland of operating there in accordance with Leninist-Marx ist doctrine.

Since 1953, the Republic of China (Taiwan) reports an an nual increment in economic activ ity of 8 to 10 per cent, while the mainland was stagnating. Para phrasing Marie Antoinette's "Let 'em eat cake" at the time of the French Revolution, the mainland communists were in effect telling their underfed people: "Let 'em eat propaganda." More impressive than the im perfect statistical information about mainland China has been the eagerness of its nationals to escape, as evidenced by the num ber of people pressing to get into Hong Kong, whose population rose from 600,000 at the end of World War II to in excess of 4,000,000. Meanwhile, per capita income in Taiwan rose from a bare $43 in 1952 to $258 in 1968. In agriculture, if 1952 is taken as 100, production of farm prod ucts in Taiwan in 1969 had grown to 226. While the total area culti vated increased only two or three per cent, the yield per acre was doubled. The intensification re sulted not only from technical farming procedures, but also through land reform, better farm credit facilities, and rural elec trification. So impressive have these gains been that the Taiwan Government has recently been sending out at its own expense technical missions to emerging countries in Africa, Latin Amer36 THE FREEMAN January ica, and elsewhere to demonstrate how to fight hunger by producing more on available farm acreage.

The results reflect a consolidation of many changes, including pest control, crop rotation, mechani zation on farms, and better moti vation of farmers. Principal crops include rice, wheat, soybeans, sweet potatoes, and vegetables, and the little island nation also produces peanuts, sesame, pine apples, and sisal. As a result, Tai wan has not only become self sufficient in food, but actually ex ports some. In industry since 1952, the an nual rise has been 14.2 per cent and in manufacturing 15.1 per cent. Despite the sharp percentage gain in wages, labor rates and living standards are still low not only by U.S. and Western European standards, but also in comparison with Japanese levels. Japan has been experiencing a labor shortage, and has diverted some of its industrial production to Taiwan, South Korea, and else where, where labor has been more abundantly available. Japan and the noncommunist nations in Southeast Asia, including Hong Kong, and Singapore, have suc ceeded with negligible natural resources. The countries import raw materials and export finished goods. Originally they traded primarily on low labor costs, but with the rise in prosperity there has been a partial narrowing of the gap between Southeast Asian labor costs and those in the West.

Such emerging competition poses new problems for the United States; we can no longer ignore high money wage rates here on the ground that we possess unique means of offsetting them through technology. Japan· and its neigh bors have adopted sophisticated technology. Investment Makes the Difference Taiwan has gone in diametri cally the opposite direction from collectivization in mainland China. This is evidenced by the fact that private enterprises in Taiwan have grown 14-fold over the last 18 years, whereas governmental economic operations there, in cluding enterprises formerly owned by the Japanese and turned over to the government, and pow er, railway, highway, ports, and communications - all in the pub lic sector - have meanwhile mul tiplied only 5 times. In contrasting the approach· in Taiwan with that of mainland China, a spokesman for Taiwan said: "Communist China. has al ways been against 'material in.,.

centives,' although small doses of such rewards existed both in agri culture and industry. The 'Cul tural Revolution' tried to eliminate 1971 THE CREATIVE THRUST OF CAPITALISM 37 even these small doses, but re cently there has again been less denunciation of material rewards which seems to indicate that some enterprises are again resorting to this 'reactionary' practice. "The low productivity in China is also due to lack of investment capital." Republic of China officials as sert that the island nation is now internally generating enough cap ital to finance its continuing de velopment. The earlier strides made in Taiwan were made possible not only by better management meth ods and better disciplined workers but by capital formation. This was set in motion by investment by foreigners, including Chinese liv ing overseas. These figures, sup plied by the Taiwan Government, show the trend: FOREIGN INVESTMENTS BY COUNTRY (Expressed in units of $l,OOO-U.S.Currency) United Year States ~pan Others Total 1953 1,881 160 2,041 1954 2,028 14 50 2,092 1955 4,42'3 4,423 1956 1,009 1,009 1957 11 37 48 1958 1,116 1,116 1959 100 45 145 1960 14,029 309 14,338 1961 4,288 1,301 375 5,964 1962 738 2,664 639 4,041 1963 8,734 1,397 216 10,347 1964 10,223 728 916 11,867 1965 31,104 2;081 1,955 35,140 1966 17,711 2,447 746 20,904 1967 15,726 15,957 7,005 38,688 1968 34,555 14,855 4,035 53,445 1969 27,882 17,642 36,697 82,221 TOTAL 174,442 60,753 52,634 287,829 Progress Abroad Matched by Deterioration at Home While there have been new laboratory demonstrations since World War II in Japan, Southeast Asia, West Germany, Republic of South Africa, and elsewhere of the vitality of the free market and the competitive system, there has been in the United States, the world's traditional showcase of free enterprise, an increased tend ency to whittle away ati the system.

Right now, after giving lip service for more than a genera tion to freer international trade, this country, under the pressure of rising competition from Japan, West Germany, and elsewhere, has been reversing policy and discuss ing the achievement of salvation through restrictive quotas rather than through establishing better technology which would enable Americans to hold their own with out artificial props. After World War 1, fear of the foreigner resulted in increased im migra tion restrictions in this country, with rigid quotas. This was done to save the relatively well paid jobs of domestic work ers. But capital is international, and, while the movement of men was restricted, capital flowed across boundaries. Through direct investment American· companies opened their own facilities in for eign labor markets. Thus, there 38 THE FREEMAN January was leakage in the primitive ef fort to preserve jobs on a basis other than competitive efficiency.

Now, in face of the hazard of pricing ourselves out of markets, there has been talk in the House Ways and Means Committee of setting import restrictions on shoes, textiles, and other products. But, even if such quotas would temporarily appear to do the job, they would tend to lead to blind alleys. If Japan, for example, is restricted on shipping textiles to the United States, its enterpris ers will strive for survival through capturing a substantial part of the foreign markets to which American firms are still exporters. The prime objection to seeking salvation by restraining the free dom of the marketplace is that it diverts attention from real prob lems. The basic issues are the need ed changes in U.S. technology, laws, collective bargaining procedures, relations between govern ment and business, and in man agement policies to heighten effi ciency in making and distributing goods and services. Certainly the inflationary policy of the Federal government and the class bias in the labor-management laws can not be swept under the rug. In his State of the Union Message two years before he retired, President L. B. Johnson, while giving a goodie to the unions in recom mending repeal of Section 77B of the Taft Hartley Act assuring freedom of the states to pass right-to-work laws, significantly suggested a review of the whole field of labor-management legisla tion. The concepts in existing Fed eral labor-management laws are obsolete and reflect the depression bred fears of 1935 when the Wag ner Act was passed. The need is to let economic forces operate through the open competition of the unhampered market. ® IDEAS O~ LIBERTY The Methods of Capitalism AMONG the "less developed" countries, as the term is most often used, almost all have at least one thing in common. They are countries that desire capital but have not yet put into practice the methods of capitalism.

H A R OL D M. F L E MIN G, States, Contracts and Progress CLARENCE B. CARSON Throttling the Bailroads VIRTUALLY everyone who has any interest in and knowledge of the transportation situation in the United States must agree that the railroads are in trouble and that their difficulties are very closely related to a host of other trans port problems. The vast Penn Central system is bankrupt. One after another once famous passenger trains have been cut, and less well known ones have long since been canceled. Most companies say that they lose money on their commuter busi ness. Street transportation com panies in most cities are generally money losers. Traffic congestion Dr. Carson is a frequent contributor to THE FREEMAN and other journals and the author of several books, his latest being The War on the Poor (Arlington House, 1969). He is Chairman of the Social Science Department at Okaloosa-Walton College in Florida.