III. Rigid Systems of Economic Policy

CHAPTER III RIGID SYSTEMS OF ECONOMIC POLICY Excessive use of either feeling or reason IS generally a source of trouble. There are at least two economic systems posing-as scientific which fall into this error: Socialism and Liberalism. It is not desired here to make these two co.nceptions the obj ects of an investigation extending to their more general aspects and underlying principles. The pur pose is merely to sketch their essential relations as systems of economic policy, relations that may be either positive or negative, to theoretical economics. Nor will any account be taken of the circumstance that many of their sponsors are guilty of a fault not uncommon in the newest social-philosophical systems, viz., what is called a " syncretism of method," that is, a jumbling together of different kinds of scientific Dlethod in the endeavour to "prove" or "refute" arguments. They are not the only people to fall into this error, but nowhere else does one find such a clear example of it.

The first fact to observe is that both these schools of economic policy are concerned with systems, that is, that all the individual maxims of economic policy are supposed to connect up with each other into a com pletely integrated whole, and this unity is supposed to, derive from a clearly defined attitude to economic theory and from its application to economic policy. As it is such a definite and, as will be seen, categorical opinion which is here involved, it is convenient to 16 RIGID SYSTEMS OF ECONOMIC POLICY 17 distinguish these systems from all other possible systems by denominating them" rigid" systems. It is of the essence of both systems that they claim to know what is "best" for the whole, the State, the economy, or whatever the whole in question may be at the time. Both systems must have a clear conception of the thing in which this "best" expresses itself, in so far as the idea admits of clarity; it must also be possible to give some measure which is scientific as well as practical for the variations in the state of the general welfare. All this presupposes that it is possible in some way to define welfare. And this brings us to the first difficulty. Modern research, which has paid great attention to purity of method, has shown conclusively that all ideas which are ultimately reducible to the conception of a " social value," are untenable as scientific concepts. Moreover, it makes no diff,erence whether these conceptions of social value come from adherents of modern theory or from earlier socialist writers. In the one case we have a defence, and in the other an indictm,ent of capitalism.

Both interpretations are scientifically meaningless, because they are based only upon opinions, standards of value, feelings, &c., and nev,er on economic science, with which they have nothing to do. These systems of economic policy seek their support, however, not where they can in fact obtain it-outside of the sphere of science-but almost exclusively in economic science, where they cannot possibly find it. We are not con cerned with the moral, ethical, or other merits of Liberalism or Socialism. Our interest is only in the difficulties of a logical nature in which they become involved as the result of their claiming support from economic science. What thes,e difficulties are has never c 18 THE LIMITS OF ECONOMICS been made really clear. They will be illustrated here from the example of the econolnic policy of Liberalism. I t has already been pointed out that every attempt at the practical application of economics gives rise to the necessity of reorganizing and completing the data.

This necessity is present even on the assumption that econo.mic theory as such is in its highest degrees of abstraction perfect. It is a question simply of the corrections which are rendered necessary by the pro cess of application. In any case such an assumption can be made only provisionally. It must be altered as we proceed, to allow for a twofold dynamic force: (a) the developnlent of economic theory itself and (b) the development of the economic system. Besides these there is the change in ideals of economic policy and the economic attitude to be taken into account. Shifts in the organizational structure of the economic system have frequently received, and were bound to receive, a great deal of attention. The whole historical school was built up on them, and to-day it is the American institutionalists (themselves closely related to the historical school) who have selected this field for special study. Owing to its inherent difficulties, however, they have got no further than making ambitious plans. Meanwhile, the attacks which they launch against theory are based on a mis conception of its nature and on an overestimation of their own haphazard sphere of work, and therefore do not come within the scope of the present discussions.

Nevertheless, it is regrettable that so many efforts have produced no acceptable schematic study of the stages of development of the economic system. It would be very convenient to be able to state concretely the characteristic differences between the structure of RIGID SYSTEMS OF ECONOMIC POLICY 19 the present-day economic system and that of the economic system of fifty or a hundred years ago. At the same time, such a study of the stages of develop ment is by no means a prerequisite for arriving at an understanding of the general tendency in the develop ment, albeit a very storluy one, of the economic system of all countries during the last decades. More over, what particular direction this development takes is a matter of indifference, and for our purposes it is immaterial that the tendency is towards more capitalistic methods of production, ,that technical pro gress is being achieved, and that in almost every country the freely competitive system is being visibly replaced by a system with a strong tendency towards monopolies. All these trends could be exactly reversed, and yet there would still exist the fact of the con tinuous change in the economic organization to which our economic knowledge is to be applied.

As long as it is merely a question (as it is here) of considering formal relationships of the kind described, these facts are quite sufficient to enable us to formulate the essential propositions. We have only to point to the progress that has been made in economic science itsel£. This may not seem so simple, as there are but few sciences which are in such an objectively unsatis factory condition as economics, particularly as it is characterized, in addition,. by the fact that economists seem to hold such widely divergent views on many questions. It should be expressly noted that this con dition is not a real and inherent condition of economic science. It is only as it appears from the outside to someone who sums up the contents of the views which individuals hold about it. For in reality there can be only One knowledge, one science, and conse20 THE LIMITS OF ECONOMICS quently one doctrine; all others must be false or must implicitly mean the same thing.

If factual statements and the conflict between the narrower technical views-which, as in every science, is one of the marks of development-are to be avoided, the progress of economic science must be illustrated indiTectly. This may be done by pointing out a paradox in the views of the schools of thought which are convinced of the identity of economics with Liberalism o.r Socialism. The dilemma is a simple one, only it is never clearly stated. The fundamental claim of Liberalism is that of non-intervention, the demand that complete freedom should be left to .all economic activities, so as to attain the maximum wel fare of all the separate individuals and therefore of the community as a whole. This claim has-apart from quite unimpo.rtant variations in its formulation remained the same from the beginning: it is the only one which satisfies the demands of the Liberal econo.mists for strictness and logical accuracy . Neither does it matter which of the two variants of the Liberal attitude one chooses, whether it is that according to which the "right" economic policy claims that economic events must be allowed .an entirely free course, even at the risk of the original state of com pletely free competition being removed by the rise of monopolies and trade unions; or whether it is that which demands that the state should not be merely in the position of a "night watchman," but should do more, and see that the original state of free competition is kept unimpaired.

In order to maintain free competition, in the case that there are tendencies towards monopoly, the Liberal state must, then, intervene, although intervenRIGID SYSTEMS OF ECONOMIC POLICY 21 tion is in general radically opposed to economic Liberalism. From this it follows that there must evidently be two kinds of intervention, or, to speak in terms of systems, two kinds of interventionism, a " gbod " one and a " bad" one. Where the economic conditions are complicated, it obviously needs a very thorough investigation in order to establish to which of the two categories any particular measures belong. It is still more difficult to discover what concrete measures should be applied, in brder that the whole economic system may develop more and more closely in the direction of the Liberal system of competition. The doctrine of economic Liberalism fails, however, to prescribe any rules whatever concerning this.

When we come to Marxian Socialism, the dilemma is exactly analogous. If one is really convinced that the law of the concentration of industry and the impoverishment of the proletariat is true, and that this state of affairs is followed by the nationalization of the means of production with its alleged goo>d results, then the desire of Marxian Socialists must be to see this process run its full course. Thus the worse the condition of the workers, and the larger the business firms making gigantic profits, the better. Any ,inter ference in the form of social insurance, or un~m ployment relief, &c., would be to delay the process and should be rej ected. The Socialists themselves would have for the time being to pursue a policy inimical to the workers, in order to hasten the realiza tion of their well-being at a later date. Apart from the paradox that Marxism is really anti-interven tionist and that one of the types of Liberalism would have to enforce at least one large group of interven tions, it would be very hard on the living generation of 22 THE LIMITS OF ECONOMICS Marxists if the era of the beneficent nationalization of the means of prod uction were not to come in their life-time.

The rise of economic Liberalism belongs to the period of classical economics and dates back more than a hundred years. In so far as it bases itself on an application of economic theory, undoubtedly the best it could do. was to appeal for support to the then pre vailing "classical school" of Adam Smith and Ricardo; .and, furthermore, it could only be a question of the application of that theory to the economic con ditions of that time. Lastly, in so far as the economic theory of its time also was only an empirical science, just as to-day, and therefore lacked the lustre of the theory of ultimate reality, a priori display, or any thing of that nature, it could only have arisen through observation and scientific elaboration of the empirical material which was actually available at that time. True, it may already have been possible in this early, and in many respects glorious, period to formulate some quite general propositions, but it was clear even at that time that these propositions w,ere not necessarily final. Thus, if one tried to deduce canons of economic policy from the then current interpretation of economic relationships, they had obviously to be of a transient nature and were always open to revision.

Hence we have the curious dilemma that Liberalism either cannot be justified by reference to modern theory, or that this enthronement (ostensibly based upon economic theory as such) of economic Liberalism has arisen independently of all economic theory, or, as it were, intuitively, in anticipation that it would later be c'orrobora ted by economic theory, when once the latter was perfected. We shall here disregard the prognosis RIGID SYSTEMS OF ECONOMIC POLICY 23 also resulting from this attitude, to the effect that no later changes in the economic system could possibly have any influence on the principle of economic policy once it was set up. If economic science was already so far completed at the time Qf Adam Smith and David Ricardo that its real moral-philosophical problem-for after all it is a science of life-which consists in finding application, was already solved, all later work in the building up of this science can only be in the nature of quite unessential embellishment, painting of details, and so on, but can never yield a single grain of further kno.wledge which could be relevant to economic policy. If one were concerned only to deduce the basic rules of economic policy from economics, one could draw up a canon which need contain no.thing but the rule that all interference with the economic system is harmful and must therefore be abandoned, or (for the second kind of Liberalism) that the original conditions of free competition must be maintained at all costs. If the State then still wants to provide the luxury of instruction in eco.nomics, all well and good, but it must be aware that its only purpose is the satisfaction of intellectual requirements. The practical significance of such studies would be somewhat like that of studying the shifting of consonants in the Indo-European languages for the purpose of dealing with the business corre spondence of the large export firms. This example sho.uld suffice to show the untenable position into which economic Liberalism is pressed when it relies on a rigid formula, appeals to "economic theory,"

and asserts that this situation can never change. If, however, it is once admitted that it is possible, through the later development of economic theory since 24 THE LIMITS OF ECONOMICS Ricardo, to reach other primarily purely theoretical interpretations, diverging from Ricardo's, of the course of economic processes, then the fundamental claim of economic policy also totters. An a priori, immutable conception Qf the "nature" of the economic system is replaced by the chance, the mere possibility of a certain degree of probability, that the original principle will still be verified in the future. Economic Liberalism is, however, thereby stripped of the absolute validity which it has autocratically bestowed upon itself, and falls into definite dependence upon the day-to-day development of economic theory. It would, indeed, have been a miracle: as Pallas Athene sprang from the head of Zeus, so the eternal principle of the " right economic policy" would have had to spring from classical economics. But almost all the fundamentals taught by the classics and the physiocrats were improved, changed, rejected, or reconstructed by later eco.nomic theory. The classical system as such, as a body of interdependent proposi tions, has had to give way to ,another system, and, in spite of this, the practical application is supposed to have remained the same! Can knowledge, then, be preceded by application? It is as though Archi medes, when he discovered the principle of hydro mechanics while stepping into his bath, had at once been able to put it into practice, and produce a miracle of electro-mechanics, such as wireless, although the Hertzian waves were only discovered, and the radio theoretically explained, 2000 years later. This alone is sufficient to show the theoretical absurdity of any fixed postulate of economic policy which is ostensibly based upon the application of science. And the same applies to Socialism-where God is merely called by RIGI!? SYSTEMS OF ECONOMIC POLICY 25 another name-as its logical position is no different.

It is even more crassly visible there, especially in Marxian Socialism, and may be disposed of in exactly the same way. It is especially important to grasp these points clearly, because they lead to the corollary that the alleged necessity of a political-moral Liberalism as an essential correlate to economic Liberalism-a necessity which is said to be such that the latter can succeed only if the former appears in its trainis untenable historically as well as theoretically. Political Liberalism rests on quite different bases from economic Liberalism; for in political Liberalism it is a question of values and, it may be assumed, of never-varying human nature, as opposed to the constantly changing artifice of the economic system. If intelligent champions of eco.nomic Liberalism try to justify it by asserting its identity with economic theory, they are treading upon dangerous ground in a twofold sense: first, they are sacrificing the absolute validity of their principle, and are subj ecting their attitude towards economic policy to the state of the economic knowledge prevailing-at the moment, and, secondly, they are implicitly exposing themselves to the reproach of obliterating the difference between the planes of the" is " and the" ought to be " ; in other words, they do not understand that from the mere stat,ement of a fact it is impossible to deduce whether this fact is good or bad, or whether it should continue to exist or disappear. This proves that the" purifica tion" of the social sciences, which was begun with great success by certain methodologists, has unfor tunately not yet been completed in every sphere.

}foreover, the sovereign contempt for economic26 THE LIMITS OF ECONOMICS historical changes, which was not out of place with a tautological formulation of economic laws, and rigid dogmatism in the matter of economic policy, can no longer be tolerated. As economics is a purely empirical science, the changes in the structure of the economic system, already spoken of above, must play an important part in the structure of the theory. To-day it is our experience that semi-monopolistic forms of economic organization are being investigated more and more thoroughly with respect to their theoretical effects. This is only b.ne example to which many more might easily be added. I t will be unnecessary to do more than indicate other reasons, which lie outsid·e of economics, for the inade quacy of rigid systems of economic policy. Quite obviously these two systems leave two. things out of account: the alteration in the whole conception of the aims of economic policy, and changes in the so-called "economic mentality" or "economic attitude."

History, particularly of recent times, gives plenty of examples of the case where people simply no longer wish to be independent and have individual respon sibility, but desire the State to maintain them and declare them eligible for a pension, if possible from birth. There are examples as well of their turn ing away again from such ideas. Sometimes it is not considered dignified to take any interest in economic affairs at all, while at other times the passion of the whole world is focused upon them. Consequently the scope of the task of the State and thus also the extent to which it intervenes, its preoccupation with the incomes of its citizens, &c., varies. This is quite apart from the fact that these variations are already to. a large degree forcibly determined by the quantitative RIGID SYSTEMS OF ECONOMIC POLICY 27 expansion of the State itself, the growth of population, and new technical data.

These quantitative or qualitative changes in the scope of State activity sometimes involve new claims on the services of economic theory. Clearly it is not a matter of indifference whether economic theory has already thoroughly investigated the effects which follow upon such great changes in the economic atti tude, or whether it is only ready to furnish an adequate and new interpretation at the last minute. "Eco nomic attitude" is not, of course, an exactly definable concept, but its meaning will be sufficiently clear. Naturally, one must be careful not to fall into the widespread error of concluding that economic theory is not applicable because it belongs to pre-War days for instance, and therefore cannot interpret the present. When it is emphasized that important changes take place in the economic system, it must at the same time not be forgotten that the majority of things and functional relationships remain unchanged and thus the majority of propositions and principles still retain their applicability. Here again one must guard against extremes. The weight of the argument given above thus rests not on the economic-historical changes, which are neglected by the rigid systems, but on the development of the theory, in particular in so far as the latter assumes the form of making state ments, which are an improvement upon previous ones, about an invariable empirical object. To avoid mis understandings, let it again be emphasized that the " historical" method is not applicable. This is men tioned here because proponents of the a priori method, which has here been rejected, are liable to see in every 28 THE LIMITS OF ECONOMICS appeal to experience and reality the ghost of the nega tion of theoretical, i.e., scientific, work.

The question whether there can be any system of economic policy at all will still have to be raised. The only form this question can take is to ask whether (a) it is possible for the individual measures to be related to each other logically: i.e., whether they are governed by a single leading principle of such a kind that the adoption of anyone measure can be brought into an objective logical relationship with all others; or whether (b) it is only possible to establish a relationship of results, ,an interdependence of economic effects whereby individual acts are brought into har mony with one another.