"Planning" vs. the Free Market; H. Hazlitt

Henry Hazlitt "PLANNING" Vs. THE FREE MARKET WHEN WE DISCUSS ((economic plan ning," we must be clear concerning what it is we are talking about. The real question being raised is not: plan or no plan? but whose plan? Each of us, in his private capacity, is constantly planning for the fu ture: what he will do the rest of to day, the rest of the week, or on the weekend; what he will do this month or next year. Some of us are plan ning, though in a more general way, ten or twenty years ahead. We are making these plans both in our capacity as consumers and as producers. Employees are either Henry Hazlitt, among so many notable accomplish ments, is the author of the bestselling and recently revised Economics in One Lesson. At the 1962 meeting of the Mont Pelerin Society in Knokke, Belgium, he delivered an address, .. 'Plan ning' vs. the Free Market," which appeared in The Freeman of December 1962. The issue continues to plague the people of many lands, and bears further stUdy today.

298 planning to stay where they are, or to shift from one job to another, or from one company to another, or from one city to another, or even from one career to another. Entrepreneurs are either planning to stay in one loca tion or to move to another, to expand or contract their operations, to stop making a product for which they think demand is dying and to start making one for which they think de mand is going to grow. Now the people who call them selves ((Economic Planners" either ignore or by implication deny all this. They talk as if the world ofpri vate enterprise, the free market, supply, demand, and competition, were a world· of chaos and anarchy, in which nobody ever planned ahead or looked ahead, but merely drifted or staggered along. I once engaged in a television debate with an emi nent Planner in a high official posi~~PLANNING" VS. THE FREE MARKET 299 tion who implied that without his forecasts and guidance American business would be ~(flying blind." At best, the Planners imply, the world of private enterprise is one in which everybody works or plans at cross purposes or makes his plans solely in his ~(private" interest rather than in the upublic" interest.

Now the Planner wants to substi tute his own plan for the plans of everybody else. At best, he wants the government to lay down a Master Plan to which everybody else's plan must be subordinated. It Involves Compulsion It is this aspect of Planning to which our attention should be di rected: Planning always involves· compulsion. This may be disguised in various ways. The government Planners will, of course, try to per suade people that the Master Plan has been drawn up for their own good, and that the only persons who are going to be coerced are those whose plans are ~~not in the public interest." The Planners will say, in the newly fashionable· phraseology, that their plans are not Himperative," but merely ~(indicative." They will make a great parade of ((democracy," free dom, cooperation, and noncompul sion by ~(consulting all groups" ((Labor," ((Industry," the Govern ment, even ((Consumers Represen tatives"-in drawing up the. Master Plan and the specific ((goals" or ((tar gets." Of course, if they could really succeed in giving everybody his pro portionate weight and voice and freedom of choice, if everybody were allowed to pursue the plan of pro duction or consumption of specific goods and services that he had in tended to pursue or would have pur sued anyway, then the whole Plan would be useless and pointless, a complete waste of energy and time.

The Plan would be meaningful only if it forced the production and con sumption of different things or dif ferent quantities of things than a free market would have provided. In short, it would be meaningful only insofar as it put compulsion on somebody and forced some change in the pattern of production and con sumption. There are two excuses for this coercion. One is that the free market produces the wrong goods, and that only government Planning and di rection could assure the production of the ((right" ones. This is the thesis popularized by J. K. Galbraith. The other excuse is that the free market does not produce enough goods, and that only government Planning could speed things up. This is the thesis of the apostles of ((economicgrowth." The "Five-Year Plans" Let us take up the ((Galbraith" thesis first. I put his name in quota tion marks because the thesis long 300 THE FREEMAN May antedates his presentation of it. It is the basis of aU the c;ommunist ((Five Year Plans" which are now aped by a score of socialist nations. While these Plans may consist in setting out some general ((overall" percent age of production increase, their characteristic feature is rather a whole network of specific ((targets"

for specific industries: there is to be a 25 per cent increase in steel capac ity, a 15 per cent increase in cement production, a 12 per cent increase in butter and milk output, and so forth. There is always a strong bias in these Plans, especially in the com munist countries, in favor of heavy industry, because it gives increased power to make war. In all the Plans, however, even in noncommunist countries, there is a strong bias in favor of industrialization, of heavy industry as against agriculture, in the belief that this necessarily in creases real income faster and leads to greater national self-sufficiency. It is not an accident that such coun tries are constantly running into ag ricultural crises and food famines. But the Plans also reflect either the implied or explicit moral judg ments of the government Planners. The latter seldom plan for an in creased production of cigarettes or whisky, or, in fact, for any so-called ((luxury" item. The standards are al ways grim and puritanical. The word ((austerity" makes a chronic appear ance. Consumers are told that they must ((tighten their belts" for a little longer. Sometimes, if the last Plan has not been too unsuccessful, there is a little relaxation: consumers can, perhaps, have a few more motor cars and hospitals and playgrounds. But there is almost never any provision for, say, more golf courses or even bowling alleys. In general, no form of expenditure is approved that can not be universalized, or at least ((majoritized." And such so-called luxury expenditure is discouraged, even in a so-called ((indicative" Plan, by not allowing access by promoters of such projects to bank creditor to the capital markets. At some point government coercion or compulsion comes into play.

AusterityLeads to Waste This disapproval and coercion may rest on several grounds. Nearly all ((austerity" programs stem from the belief, not that the person who wants to make a ((luxury" expenditure can not afford it, but that ((the nation" cannot afford it. This involves the assumption that, if I set up a bowl ing alley or patronize one, I am somehow depriving my fellow citi zens of more necessary goods or ser vices. This would be true only on the assumption that the proper thing to do is to tax my so-called surplus in come away from me and turn it over to others in the form of money, goods, or services. But if I am allowed to keep my ((surplus" income, and am 1981 ~~PLANNING" VS. THE FREE MARKET 301 forbidden to spend it on bowling al leys or on imported wine and cheese, I will spend it on something else that is not forbidden. Thus when the British austerity program after World War II prevented an English man from consuming imported lux uries, on the ground that ~~the na tion" could not afford the ~~foreign exchange" or the ~~unfavorable bal ance of payments," officials were shocked to find that the money was being squandered on football pools or dog races. And there is no reason to suppose, in any case, that the ~~dollar shortage" or the ~~unfavorable balance of payments" was helped in the least. The austerity program, insofar as it was not enforced by higher income taxes, probably cut down potential exports as much as it did potential imports; and insofar as it was enforced by higher income taxes, it discouraged exports by reo stricting and discouragingproduc,· tion.

Bureaucratic Choice But we come now to the specific Galbraith thesis, growing out of the agelong bureaucratic suspicion of luxury spending, that consumers generally do not know how to spend the income they have earned; that they buy whatever advertisers tell them to buy; that consumers are, in short, boobs and suckers, chroni cally wasting their money on trivi alities, if not on absolute junk. The bulk of consumers also, if left to themselves, show atrocious taste, and crave cerise automobiles with ridic ulous tailfins. The natural conclusion from all this-and Galbraith does not hesi tate to draw it-is that consumers ought to be deprived of freedom of choice, and that government bu reaucrats, full of wisdom-of course, of a very unconventional wisdom should make their consumptive choices for them. The consumers should be supplied, not with what they themselves want, but with what bureaucrats of exquisite taste and culture think is good for them. And the way to do this is to tax away from people all.the income they have been foolish enough to earn above that required to meet their bare ne cessities, and turn it over to the bu reaucrats to be spent in ways in which the latter think would really do people the most good-more and better roads and parks and play grounds and· schools and television programs-all supplied, of course, by government.

And here Galbraith resorts to a neat semantic trick. The goods and services for which people voluntar ily spend their own money make up, in his vocabulary, the ~~private sec tor" of the economy, while the goods and services supplied to them by the government, out of the income it has seized from them in taxes, make up the ~~public sector." Now the adjec302 THE FREEMAN May tive ttprivate" carries an aura of the selfish and exclusive, the inward looking, whereas the adjective ttpub_ lic" carries an aura of the demo cratic, the shared, the generous, the patriotic, the outward-looking-in brief, the public-spirited. And as the tendency of the expanding welfare state has been, in fact, to take out of private hands and more and more take into its own hands provision of the goods and services that are con sidered to be most essential and most edifying-roads and water supply, schools and hospitals and scientific research, education, old-age insur ance and medical care-the ten dency must be increasingly to asso ciate the word ttpublic" with everything that is really necessary and laudable, leaving the ttprivate sector" to be associated merely with the superfluities and capricious wants that are left over after every thing that is really important has been taken care of.

If the distinction between the two ttsectors" were put in more neutral terms-say, the ttprivate sector" versus the ttgovernmental sector," the scales would not be so heavily weighted in favor of the latter. In fact, this more neutral vocabulary would raise in the mind of the hearer the question whether certain activi ties now assumed by the modern welfare state do legitimately or ap propriately come within the govern mental province. For Galbraith's use of the word ttsector," ttprivate" or ttpublic," cleverly carries the impli cation that the public ttsector" is le gitimately not only whatever the government has already taken over but a great deal besides. Galbraith's whole point is that the ttpublic sec tor" is ttstarved" in favor of a ttpri_ vate sector" overstuffed with super fluities and trash. The Voluntary Way The true distinction, and the ap propriate vocabulary, however, would throw an entirely different light on the matter. What Galbraith calls the ttprivate sector" of the econ omy is, in fact, the voluntary sector; and what he calls the ttpublic sector"

is, in fact, the coercive sector. The voluntary sector is made up of the goods and services for which people voluntarily spend the money they have earned. The coercive sector is made up of the goods and services that are provided, regardless of the wishes of the individual, out of the taxes that are seized from him. And as this sector grows at the expense of the voluntary sector, we come to the essence of the welfare state. In this state nobody pays for the edu cation of his own children but every body pays for the education of every body else's children. Nobody pays his own medical bills, but everybody pays everybody else's medical bills. Nobody helps his own old parents, but everybody else's old parents.

1981 ((PLANNING" VS. 'rHE FREE MARKET 303 Nobody provides for the contingency of his own unemployment, .his own sickness, his own old age, but every body provides for the unemploy ment, sickness, or old age of every body else. The welfare state, as Bastiat put it with uncanny clair voyance more than a century ago, is the great fiction by which everybody tries to live at the expense of every body else. This is not only a fiction; it is bound to be a failure. This is sure to be the outcome whenever effort is separated from reward. When peo ple who earn more than the average have their (~surplus," or the greater part of it, seized from them in taxes, and when people who earn less than the average have the deficiency, or the greater part of it, turned over to them in handouts and doles, the pro duction of all must sharply decline; for the energetic and able lose their incentive to produce more than the average, and the slothful and un skilled lose their incentive to im prove their condition.

The Growth Planners I h~ve spent so much time in ana lyzing the fallacies of the Galbraith ian school of economic Planners that I have left myself little in which to analyze the fallacies of the Growth Planners. Many of their fallacies are the same; but there are some impor tant differences. The chief difference is that the Galbraithians believe that a free market economy produces too much (though, of course, they are the ((wrong" goods), whereas the Growthmen believe that a free mar ket economy does not produce nearly enough. I will not here deal with all the statistical errors, gaps, and fal lacies in their arguments, though an analysis of these alone could occupy a fat book. I want to concentrate on their idea that some form of govern ment direction or coercion can by some strange magic increase pro duction above the level that can be achieved when everybody enjoys economic freedom.

For it seems to me self-evident that when people are free, produc tion tends to be, if not maximized, at least optimized. This is because, in a system of free markets and private property, everybody's reward tends to equal the value of his production. What he gets for his production (and is allowed to keep) is in fact what it is worth in the market. If he wants to double his income in a single year, he is free to try~and may succeed if he is able to double his production in a single year. Ifhe is content with the income he has-or if he feels that he can only get more by exces sive effort or risk-he is under no pressure to increase his output. In a free market everyone is free to max imize his satisfactions, whether these consist in more leisure or in more goods.

304 THE FREEMAN May But along comes the Growth Planner. He finds by statistics (whose trustworthiness and accuracy he never doubts) that the economy has been growing, say, only 2.8 per cent a year. He concludes, in a flash of genius, that a growth rate of 5 per cent a year would be faster! There is among the Growth Plan ners a profound mystical belief in the power of words. They declare that they ~~are not satisfied" with a growth rate of a mere 2.8 per cent a year; they demand a growth rate of 5 per cent a year. And once having spoken, they act as if half the job had already been done. If they did not assume this, it would be impos sible to explain the deep earnestness with which they argue among them selves whether the growth rate ~~ought" to be 4 or 5 or 6 per cent. (The only thing they always agree on is that it ought to be greater than whatever it actually is.) Having de cided on this magic overall figure, they then proceed either to set spe cific targets for specific goods (and here they are at one with the Rus sian Five-Year Planners) or to an nounce some general recipe for reaching the overall rate.

But why do they assume that set ting their magic target rate will in crease the rate of production over the existing one? And how is their growth rate supposed to apply as far as the individual is concerned? Is the man who is already making $50,000 a year to be coerced into working for an income of$52,500 next year? Is the man who is making only $5,000 a year to be forbidden to make more than $5,250 next year? If not, what is gained by making a specific ~~annual growth rate" a governmen tal ~~target"? Why not just permit or encourage everybody to do his best, or make his own decision, and let the average ~~growth" be whatever it turns out to be? The way to get a maximum rate of ~~economic growth"-assuming this to be our aim-is to give maximum encouragement to production, em ployment, saving, and investment. And the way to do this is to main tain a free market and a sound cur rency. It is to encourage profits, which must in turn encourage both investment and employment."It is to refrain from oppressive taxation that siphons away the funds that would otherwise be available for invest ment. It is to allow free wage rates that permit and encourage full em ployment. It is to allow free interest rates, which would tend to maxi mize saving and investment.

The Wrong Policies The way to slow down the rate of economic growth is, of course, pre cisely the opposite of this. It is to discourage production, employment, saving, and investment by incessant interventions, controls, threats, and harassment. It is to frown upon prof1981 ((PLANNING" VS. THE FREE MARKET 305 its, to declare that they are exces sive, to file constant antitrust suits, to control prices by law or by threats, to levy confiscatory taxes that dis courage new investment and siphon off the funds that make investment possible, to hold down interest rates artificially to the point where real saving is discouraged and malin vestment encouraged, to deprive employers of genuine freedom of bargaining, to grant excessive im munities and privileges to labor unions so that their demands are chronically excessive and chroni cally threaten unemployment-and then to try to offset all these policies by government spending, deficits, and monetary inflation. But I have just described precisely the policies that most of the fanatical Growth men advocate.

Their recipe for inducing growth always turns out to be-inflation. This does lead to the illusion of growth, which is measured in their statistics in monetary terms. What the Growthmen do not realize is that· the magic of inflation is always a short-run magic, and quickly played out. It can work temporarily and un der special conditions-when it causes prices to rise faster than wages and so restores or expands profit margins. But this can happen only in the early stages of an infl~ tion which is not expected to con tinue. And it can happen even then only because of the temporary acquiescence or passi vity of the labor union leaders. The consequences of this short-lived paradise are malin vestment, waste, a wanton redistri bution of wealth and income, the growth of speculation and gambling, immorality and corruption, social resentment, discontent and up heaval, disillusion, bankruptcy, in creased governmental controls, and eventual collapse. This year'seu phoria becomes next year's hang over. Sound longrun growth is al ways retarded.

In Spite of "The Plan" Before closing, I should like to deal with at least one statistical argu ment in favor of government Plan ning. This is that Planning has ac tually succeeded in promoting growth, and that this can be statis tically proved. In reply I should like to quote from an article on economic planning in the Survey published by the Morgan Guaranty Trust Com pany of New York in its issue of June 1962: There is no way to be sure how much credit is due the French plans in them selves for that country's impressive 41/2 per cent average annual growth rate over the past decade. Other factors were working in favor of growth: a relatively low starting level after the wartime de struction, Marshall Plan funds in the early years, later an ample labor supply siphonable from agriculture and from obsolet.e or inefficient. industries, most 306 THE FREEMAN recently the bracing air of foreign com petition let in by liberalization of import restrictions, the general dynamism of the Common Market, the breakthrough of the consumer as a source of demand. For the fact that France today has a high de gree of stability and a strong currency along with its growth, the stern fiscal discipline applied after the devaluation of late 1958 must be held principally re sponsible.

That a plan is fulfilled, in other words, does not prove that the same or better results could not have been achieved with a lesser degree of central guidance. Any judgment as to cause and effect, of course, must also consider the cases of West Ger many and Italy, which have sustained high growth rates without national plan ning of the economy. The Free Price Mechanism In brief, statistical estimates of growth rates, even if we could accept them as meaningful and accurate, are the result of so many factors that it is never possible to ascribe them with confidence to any single cause. Ultimately we must fall back upon an a priori conclusion, yet a conclusion that is confirmed by the whole range of human experience: that when each ofus is free to work out his own economic destiny, within the framework of the market econ omy, the institution of private prop erty, and the general rule of law, we will all improve our economic con dition much faster than when we are ordered around by bureaucrats.

i IDEAS ON LIBERTY THIS powerful master of all capitalists who coordinates their produc tion, and in fact plans their whole economy, is· none other than the people themselves who exercise their power by means of the free price mechanism, which is the most efficient instrument for directing and planning an economy that has yet been devised. The production and investment of the apparently independent capitalists are directed by the rise and fall of the prices of commodities and services. A movement of prices will tell producers far quicker than can any state economic planner what their masters, the consumers, want them to produce and where to invest their capital. The free price mechanism, by preventing waste and by giving swift directions to capitalists, which must be obeyed on pain of bankruptcy, has made the multiple economy the most effi cient system for supplying the wants of the people that the world has ever known.

GEORGE WINDER, "Centralized or Multiple Economies"