IV. The Distribution of Effects of Economic Policy

CHAPTER IV THE DISTRIBUTION OF EFFECTS OF ECONOMIC POLICY The considera tions which follow are devoted primarily to the question of whether it is possible to determine the manner in which the effects of interven tionist measures are diffused over the economic system. The best way of treating this problem is to start out from the assumption that there is to be a transition from one existing state of the economic system to another state the nature of which has to be worked Qut anticipatorily on the basis of new data, namely, the proposed measures of intervention. In accordance with our remarks on the freedom from value judg ments of scientific concepts, it must be emphasized that it is not a question of stating whether state B is in general" better" or " of a higher value" than state A (for that is the postulate), and it follows that it is also, unnecessary to show whether a greater or lesser total welfare results. The problem here is rather to show the course of effects. These can be expressed in terms of the maintenanee, gain, or loss of economic positions expressed in money, goods or prospects. This is the exclusive task of eC'onomic science and not to establish whether the totality of these shifts represents a plus or minus for the community as a whole.

Whether the effects described by the scientific analysis are to be considered good or bad is a matter for general politics to decide. The fulfilment of the task of determining the effects of measures of econo.mic policy requires the applica .. 29 30 THE LIMITS OF ECONOMICS tion of economic theory: in practice the place of economic theory is likely to be taken by some kind of amateur economics (what is called in German " Vulgarokonomie "), which is a combination of bald assertions and the gleanings of practical experience. The investigation of the distribution of effects is of importance for the added reason that it almost auto matically reveals the nature of the sectional interests involved. In general, the reactions of tho.se who are affected by the measure will be such that the man who anticipates a profit from it will be in its favour while the man who believes himself adversely affected by it will be against it. So long as individuals, whether they be private persons, firms, branches of industry or social groups, classes, &c., have a voice in some way or other in determining the composition and aims of economic policy, these factors are of immense importance. It is only in an absolutist State that they ,can be pushed into the background and, even then, that is possible only as long as the effects ,are no.t such as to lead to a violent political upheaval or a general economic collapse. There are examples of this in history from time immemorial and it seems that history is likely to repeat itsel£ in the future.

The effects of the adoption of ,a measure of economic policy have a place-incidence and a time-incidence. By the former is meant that the effects are felt by various people, and by the latter that the effects felt by a given group of people are spaced out over time :or that similar effects are felt by different people ·at .different points of time. Now it depends on the manner of diffusion what the reactio.n will be, and what is of primary importance-how visible will be the results of the measure of economic policy. The EFFECTS OF ECONOMIC POLICY 31 totality of the measures may be designated economic policy simpliciter, and the term "interventionism" may be used to denote an attitude embodying the desire for permanent protection and continuous inter ference. As was remarked at the beginning, it is always a question of fixing new data of which the effects are not dissimilar in principle from those of the rest of the data. Changed economic data may originate in nature (as, for example, bad harvests and a rise in the price of grain) or may spring from human actions (as, for example, an increase in the price of grain resulting-from the formation of a pool).

I t is all the same to the consumers of the grain which of the two is the cause of the increase in price or whether it is attributable, in the third place, to Government intervention (such as the introduction of a tariff or the prohibition of imports). The interest of the theorist in the matter is, however, quite different: it does not stop at the question as to whether those favourably or unfavourably affected have a share in determining the economic policy and, if so, in what form. It makes a difference whether the influence is transferred in a general way to some plaee such as Parliament, or whether it is still possible for the individual groups to have a direct voice in the measures directly or indirectly affecting them. The latter may be regarded as the normal case, but for the sake of simplicity we shall leave it out of account for the present and shall assume that the economic politician will wish to form his own opinion quite independently.

Let us start out from a state of equilibrium and assume, by way of example, that the aim of economic policy is to preserve this equilibrium against external 32 THE LIMITS OF ECONOMICS disturbances caused, say, by a very rapid advance in the technique of production, achieved by some country abroad , resulting in a substantial reduction in the priee of a commo.dity which is also produced at home. Now, according to our methodological assumptions, it is not possible to demonstrate "scientifically" that some thing must or must not be do.ne since it is no part of the business of science to. make programmes. Nevertheless, these are the alternatives: (Ia) either the home industry may at once reduce its costs corre spondingly by introducing a similar improved or cheaper method of production, or (Ib) it may not; or (2) the invasion of its market may be prevented by a sufficiently high tariff or a prohibition of the import of the commodity. Hence it follows that in case (la) ev,erything proceeds in the ordinary way: but those incomes which are identical with the prices of the reduced cost elements (for instance, wages) will have suffered a reduction. This will be wholly or partly compensated by the increas·ad demand for the product caused by the fall in price, and it will depend upon the so-called elasticity of demand for this com modity whether the changes balance each other. In (1b) there is nothing else to do but to close down the home factories at a rate roughly depending on the extent to which their plant is already depreciated.

This means dismissal of workmen and managerial staff, loss of capital, and a fall in the value of the shares of firms in the industry, reduced tax revenue, and a falling-off in consumption on the part of those immediately affected. If, however, alternative (2) is chosen and a tariff imposed, nothing is apparently changed in the economic system in question, for the price remains the EFFECTS OF ECONOMIC POLICY 33 same, the workers keep their jobs, the foreign product is perhaps entirely pushed Qut of the home market, and everything seems to be in perfect order. These are, other things being equal, the three possible courses. NQW the economic politician has to decide first of all which one he considers fo be techni cally possible (he has to establish, for instance, whether as required by (la), the wages and other cost factors can in fact be reduced quickly and sufficiently, or whether trade unions and other influences are likely to prevent this); and, secondly, he has to decide which seems to him the desirable course to take by reason of its conforming to what is considered to be a superior objective. It may also happen that, even given the possibility of an immediate adjustment, an import duty will be introduced, because the "general wel fare of the community" or the political constellation demands the keeping up of wages. From this it follows that the first fact necess,ary to realize is that every advantage has to be purchased at the price of a sacrifice. Thus in (la) the price of the cheapen ing to the consumer of the commodity concerned is the decline in income of the squeezed cost factors, and, inversely, the keeping up of the price of the com modity by the imposition of a tariff is the cost which the consumers have to bear in order that the incomes of the workers in the industry concerned, which would otherwise be reduced (in (Ia)), may remain the same.

These are the chief effects which may tentatively be called "visible" effects; but as there exists a reci procal interdependence over the whole of the economic sy,stem, there will also be present invisible effects which the conscientious economic politician cannot leave Qut of account. Even in the case of the effects D 34 THE LIMITS OF ECONOMICS just quoted, it generally happens that anything in the nature of damage or loss makes a deeper impression upon the mind, and so here the declin,e in wages makes more impressiQn than the satisfaction of the consumers in being able to buy more cheaply, which may even be condemned if the commodity in questio.n falls under the category of a " luxury article." If-to keep to the example already cited-things are allowed to run their course in accordance with (lb), it becomes evident that there is a local and temporal distribution of the so-called favourable and unfavour able effects, which may be regarded as typical and which is of supreme psychological importance. In their place-incidence the unfavourable eff·ects are con fined to a narrow , easily assignable area (the closed factories, the unemployed, the machines which have become valueless, &c.); the same is true of the time incidence, as these unfavourable effects usually set in at the moment when the whole situation is at its climax.

Now one oJ the most important empirical principles of human life-one which has therefore come to play an important role in economics-teaches us that any occurrence which belongs to the present, like all present events, is estimated and felt more deeply than one which lies in the future. The more distant things are in the future the less they are taken into acco.unt and used as a basis for conduct, until, finally, very remote possibilities no longer enter into the calcula tions at all, or are considered only by a few isolated individuals. The massing together of the disadvan tageous effects within a small area, and their charac teristic of being concentrated in the present, thus gives them a much greater significance psychologically than wo.uld be the case if they were distributed evenly EFFECTS OF ECONOMIC POLICY 35 along with the other effects. (Note that " disadvan tageous," "unfavourable," &c., are always to be understood in the above-defined sense of a change in money values or incomes, and not, therefore, in any meta-eco.nomic sense. ) There may, moreover, be unfavourable elements w hQse effect is postponed; but even if they were more extensive than the immediate ,effects, the politicians would but seldom accord them proportionate attention.

Now when we come to consider the advantages accru ing from these events, the opposite becomes evident and the case is again typical. The £avouDs which the consumers enj os in the form of the lower price are ,distributed over a number (often extraordinarily large) {)f people, who can only in the rarest cases be counted and identified (in sharp contrast to the concretely calculable number of factory workers losing their jobs). The consumption of the commodity takes place only gradually over time, for the most part in the future, which is underestimated. Thus, psycho logically, the situation is much more unfavourable. This holds good even when, as here, we are thinking primarily only of the possibility of ascertaining and nO,t of appraising the repercussions. Finally, there are psychological factors also entering in. The economic politician who is seeking after knowledge should, of course, be able to overcome impediments of that kind, but even if the spirit is able and willing, the flesh, as we all know, is often weak.

Without making any judgment as to its ultimate value, we may call the course of affairs described above "the 'right' one in the laisser-faire sense." In ,contrast to it there is the" interventionist" economic policy , which-on the basis of the psychological cir36 THE LIMITS OF ECONOMICS cumstances just ou.tlined and the lack of a precise realiza tio.n of the more remote effects-purposes to solve the difficulties by means of a tariff. Now this time the typical distribution of advantages and disad vantages is exactly rev:ersed. There is a local-temporal concentration of advantages, as the factories again become busy, and a local-temporal dispersion of the damage to the consumers, who, moreo.ver, appar ently suffer no "real" harm, that is, no positive deprivation of something they previously possessed, but merely do not come into the enjoyment of a reduc tion in price, which would b.therwise have, accrued to them. It is superfluous to elaborate these effects further, as the result is the exact converse of the state of affairs described above.

So far we have spoken only of the direct, more or less immediately detectable eff,ects. It is, however, the task of economics to go beyo.nd this point and to make a thorough examination of the secondary effects '. and repercussions, which necessarily also enter into the question. For otherwise it would, of course, be a simple matter to survey the effects and would not require the aid of science. It will shorten the argu ment, and will at the same time give the right emphasis to the great complications arising out of the investiga tion even of a quite simple case, if we drop the assump tion so far made of equilibrium as a starting point. Up till now it was assumed that the disturbance under discussion was the only one present, so that all move ments away from equilibrium in the economic system concerned were attributable to this one known cause. Actually, in the concrete reality ,to which our proposi tions must apply, the matter looks essentially different: the idea that one has to do with an EFFECTS OF ECONOMIC POLICY 37 equilibrium as a starting point is misleading . We ought rather to assume as starting-point a situation which may, perhaps, be termed a " disequilibrium,"

that is, one which merely tends towards an equili brium. But even the word " situation" is not quite appropriate, as what is involved is simply a short phase of a rapidly moving process. Important as the event described in the above example in its relation to economic policy may be, its true significance can only be appreciated if we know in addition, the forces that have brought the process to the phase in which the event occurs. This is extremely difficult. As soon as we have to do with movements of economic quantities which derive from other often unknown causes, it is generally quite impossible to ascertain whether occur rences which may seem to be direct or immediate effects are actually so, or whether they are not due to entirely different circumstances. To make the right choice here requires a very wide knowledge and experience, and a gift for seeing things in their right proportions.

In order to give a further elucidation (unfortunately only of the difficulties) let us go back once more tQ the example of the introduction of a t.ariff. A direct loss could not be proved under the given assumptions; but economics must draw the economic politician's atten tion to the fact that the ousting of the foreign goods from the home market causes a curtailment of the total volume of international trade carried on between the two eountries, so that the foreign country is now no longer in a position to import the same amount of some other commodity. Goods must be exchanged for goods; but what comm'o.dity the other country will no longer buy is a qumstio facti, just as it is likewise a qUfEstio facti whether the loss suffered by the export 38 THE LIMITS OF ECONOMICS industries of the country introducing the tariff does not cause more workers to become unemployed, and a much greater fall in the value of fixed capital, than would have happened had the line of business originally affected by the foreign competition been closed down.

The point, however, with which we have been dealing from the outset, namely, the establishing-of the local and temporal distribution of the effects, again comes into the foreground, even though in the nature of things we cannot achieve absolute certainty in ascribing the individual events to others of more remote origin. The detriment to the export industries is not precisely asc.ertainable. It is distributed over a large number of firms and industries, and stretches out over unknown periods of time. Even those affected by it cannot in the early stages either exa(;t!y foresee their own fate or prepare themselves for it. Economic theory rightly eliminates from its con siderations so-called "frictions," that is, its considera tions hold good as a rule under the hypothesis that during the perio.d of time which must be allowed for the working out of the various factors influencing the individual processes, no impediments appear which escaped inclusion in the original assumptions. Thus if we say, for instance, that when the wages in an industry are reduced the workers will leave that industry and migrate to other trades, then all the inferences which are based upon this statement assume that these migrations actually do take place. In the domain of economic policy it is not possible to proceed in this way, since it must be taken into account that this high degree of abstraction is not valid, as it becomes apparent that people do not move away imme diately, partly because they are ignorant of labour EFFECTS OF ECONOMIC POLICY 39 conditions elsewhere, and partly because they are induced to stay, even at much lower wages, by extra economic factors (family reasons, for instance), or because they have not at their disposal the means necessary for moving, &c. These circumstances (which must be introduced into the formulre of pure theory somewhat in the nature of what is called in modern logic a " quantificator ") mean something more than a mere shift in the degree of abstraction. If the degree of abstraction is lowered, the alleged tendencies while being, it is true, limited and slowed down, are not completely diverted from their course and, as it were, reversed. As in the above example the forces dealt with by economic theory still operate.

The part played by frictions has not yet been suffi ciently investigated by economists. In recent times there has emerged the still very obscure idea that alongside the hitherto prevalent economic theory, which is of the "long-run" type (that is, it deals with such long periods of time that the forces tending to a new equilibrium can work themselves out quite undisturbed by other forces), we must place a second " short-run" theory. And there may be some who desire to treat frictions similarly. One should be vastly sceptical of such an attempt at division, as in its present form it would amount to trying to find two kinds of truth. What is more probably needed is an attempt to fix the time-element into its proper place in general theory. If that were done successfully, the difficulties would fall away of themselves. As is well known, the time element has long been regarded as the chief crux in economics. Nevertheless, it may be noted here that it is quite permissible to talk of " fric tions " as long as the hindrances or impediments to 40 THE LIMITS OF ECONOMICS which we give this name do not become independent causes of an economic kind, of the same category and order as those which were taken into account at the outset of our investigations.

In dealing with economic policy as opposed to economic theory, things are, of course, somewhat different. If it is a question of evaluating decisions of economic policy, the period of time to be taken into account generally plays a quite decisive role. It should be clear from what has been said above that it is always a difficult matter to calculate for long periods, not only because the number of coefficients of uncertainty which enter in, and which have to be taken into account at various points, increases with the length of the period, but also because every event which lies in the more distant future is discounted. The concept of the "time period" must, of course, be taken in a purely relative sense depending on the purpose of the measure. The economic politician-let us assume the Government-is often faced with a serious dilemma: a measure may be recognized as correct in principle, but the period necessary to ensure its success may be so long that before that time is passed undesired secondary effects emerge which make it practically impossible to take what is recognized to be the right course. As long as he is dealing only with general theory, the economist is in a much better posi tion, as he does not require to bother about this aspect of the matter. He lets industries pass away, migrate or spring up without having to care what happens to the participants as individuals. He is in a position similar to that of any statistician examining mass phenomena, who has perhaps to calculate a percentage of accidents, but would be greatly embarrassed if he EFFECTS OF ECONOMIC POLICY 41 had to select a definite group of persons or even definite individuals to whom these accidents were to happen.

A typical illustration is the so-called compensation theory which teaches that the workers who are thrown out of their j 0 be by technical progress will in the course of time again find employment elsewhere, parti cularly in the production, directly or indirectly, of the labo.ur-saving machines t.hemselves. Assuming that this thesis is correct, it means, if we act according to it, that we must disregard the individual fate of those affected, who become unemployed. This would demand a hard decision, which is, however, generally made impossible by the fact that this process which the theorist may rightly regard as "harmless" and " unimportant" in a higher sense, is precisely the first to call for action and for a definite policy, since it is the individuals affected who arouse the sympathy of the general public. Countless incidents of the kind are known to economic history, from the machine wreckers of the first industrial revolution to the most recent enemies of progress. They bring with them also characteristic popular theories, such, for example, as the current doctrine of "technocracy," which in its absurdity distracts attention from the real questions involved. The nature of the decision, then, will depend solely upon the general conceptions of value upon which the Government bases its general policy.

The position will often be such as to make it b.bvious that 30me branch of industry is irremediably doomed to extinction-as, for instance, coachbuilding or wharves for sailing ships-and that it would be utterly foolish to prohibit automobiles and steamships. The decision, however, will not always be so simple, because it may happen that 42 THE LIMITS OF ECONOMICS there are too many people (who are, what is not least important, voters) attached to the declining industry, too much sentiment clings to it, or too much capital is invested in it; in short, there are tou many " vested interests," so that, in the vague hope that some sort of miracle may happen, no definite stand is taken, or at any rate not at the right time. The reader neea only be reminded of the struggle between rail and road which is at present taking place in every country. The questions touched upon here have an extremely important, general, political aspect. The more unstable is the system of government and the greater the influence of topical problems upon its behaviour-the nearer, in fact, it is forced into contact with the changing fortunes of the ups and downs of every kind, political and other, in economic activity-the less it will be inclined to pursue a long-term economic policy. In any case it will not often be able to do so, as it is never certain that the succeeding Government will not take up an entirely different attitude, and interfere with the long-term measures introduced by it, an occurrence which would result in the loss of the capital already invested, &c. It is only where a long-term policy is based upon fairly general opinions that a certain degree of continuity is guaranteed, as, for instance, in the State management of forests, where it would scarcely occur to a Government suddenly to have all the woods cut down. As a ,rule, financial policy, of course, is much more mobile in character!

It may be concluded, quite apart from any political valuation, that the Government, which will be able to make the most use of the propositions laid down by EFFECTS OF ECONOMIC POLICY 43 economIC theory, will be the Government whose economic decisions are directed by some definite and imlnutable State purpQse. In many countries, there .. fore, liberal democracy is the form of government most inimicable to the use of economic theory, a state of affairs ,vhich is particularly noticeable in times of economic stress. Contemporary history offers a number Qf striking examples of this. In periods of rising economic prosperity these things do not play anything like such an important role; but still this is true only if one is not obliged to acknowledge the real cause of crises as being the existence of an exces .. sive economic boom, V\rhich it may very well be correct to do. We may now apply this analysis to estimating the importance, for the actual course of economic policy, of the distribution and accumulation, as described above, of effects of interventionist and other measures of economic policy. For, however paradoxical it may seem, it is possible to make pronouncements about the " trend" of economic policy, that is, about the general direction of its development, without dealing at all closely with its concrete details at any particular moment. Such propositions are necessarily of a general nature, but there are plenty of examples to support the observation that the course of economie policy is determined~ in the first place, by the nature of the technical opportunities for obtaining representa tion of the various sectional interests, and, in the second place, by the resultant effective representation of those interests. This also holds good for States with highly autocratic and absolutist Governments. In fact, in such States the experience has frequently been that one o.r several" pressure groups" have succeeded 44 THE LIMITS OF ECONOMICS in exerting a determining influence upon the form of government itself. In general, this is dependent upon whether it is technically possible or not to organize the interests. This possibility is practically non existent in the case of the so-called "consumers' interests," which cannot even be precisely defined.

The repeated abortive attempts, in various countries, of associations of consumers in the towns to defend themselves, for example, against an increase in the cost of living brought about by an agrarian-protec .. tionist economic policy, are sufficient to illustrate this fundamental point. It is easy (given, of course, the suitable apparatus such as unions) for those interests to make themselves heard which can be clearly dis tinguished and easily made public, and the injuring of which is follo.wed by a concentration of effects in the present or in the immedia te future. As we know, in such circumstances the other interests which would be " favoured" if the natural course of events were unim peded are in a perceptibly unfavourable position. Their case is considered to be much less deserving, 8.nd, owing to the distortion of the estimation of future events, it is almost always impossible for those who believe they can foresee their future detriment, for example, to stir up their fellow-sufferers to a course of action equal in efiectiveness to that of their doubly favQured opponents.

It has been shown that the c1ustering of the effects, and their incidence in the present, always works in favour of a policy of interference. As a consequence of this and of the principle mentioned above relating to the organization of the representation of sectional interests, it follo.ws, in diametrical opposition to the prevailing opinion, that where the forces are allowed EFFECTS OF ECONOMIC POLICY 45 free play th~ economic system tends to become increas ingly rigid as a result of continuous protective inter ference. This condition would remain unaltered even if representation and co-ordination of all the interests in economic boards and councils or permanent cor porations were to be in some way forcibly imposed. On.ce such a condition is created, what generally happens-a point which cannot be discussed in detail within the confines of this essay-is that each group lets itself be bribed by all the others to vote dis honestly lor measures not in conformity with its own interests. This is the true interpretation, however much the proceedings may be clothed in beautiful generalities. This observation refers particularly to the domain of commercial policy, but it applies, as experience shows, to all other spheres also. Thus if " consum'ers " were also represented as an organized group in such a corporation , it would not make the slightest difference to the principle set out above; indeed, it is to be presumed, on the contrary, that the mere m'ention of the "purchasing - power argument" would ensure the other groups of the upper hand, for there is nothing before which" con sumers " stand in greater awe than the threa t of a loss of purchasing power. And it has just been shown that this is quite often destroyed locally, how ever fallacious the theory of purchasing power other wise is.

Therefore a higher court of app'eal is required if a stop is to be put to the process Qf the continuous gro.wth of intervention, which, as must again be repeated, stamps all economic policy with the tendency to create rigidity in the economic system. This court of appeal can only lie in the general government of the 46 THE LIMITS OF ECONOMICS State itself, which sets the aims that the measures of ~conomic policy are intended to achieve. But here it becomes a question of the creation 0.£ aims and ends, .and no longer merely of the problem of the appro priateness of various means to given ends, and of what services economic theory can render in the solving of that problem. The way in which we find o.urselves obliged to overstep the original confines of our analysis when investigating these questions is of it.self very significant. For it expresses a fact that is almost ;always completely neglected in discussions of economic policy, namely, that economic policy is eo ipso policy in the wider sense. That is to say, that all the inter ventionist measures of economic policy taken together luerge into the whole social framework, and must therefore be regarded from a much wider angle than that of the possible application of a single discipline.

We shall have something more to say of this later.