V. The Mutual Inderdependencies of Measures of Economic Policy

CHAPTER V THE MUTUAL INTERDEPENDENCIES OF MEASURES OF ECONOMIC POLICY rrhe question of whether a rigid and immutable 'System of economic policy can be justified by reference to a rational and continuous application of economic theory has been answered in the negative. This, how .ever, still leaves unanswered the further question as to whether the measures of economic policy form a logical whole. It is to this subject that the considera tions of the present chapter are devoted. I t is expedient to distinguish two kinds of such an integral interdependence: a logical interdependence and an interdependence of effects. We shall first ,examine the meaning of the former. General mention of such an interconnexion has already been made in ,our discussion of the possible rigid systems, and it was shown to. be present in these systems inasmuch as they postulate a logical coherence of all the Ineasures. That postulate can only be satisfied if the problem of the " optimum of social welfare" can be satisfactorily solved. This task exists not only for the rigid systems but also for any other system that may be chosen, and that is the reason why it must be ,discussed again here. A logical interconnexion pre supposes that all the measures of economic policy harmonize with one another in such a way that the ,advantage which accrues to group A is, for instance, judged just as great as that experienced, perhaps at .a later date, by group B, it being' possible to combine 47 48 THE LIMITS OF ECONOMICS the two groups in a variety of ways according to character and numbers. Such a statement means scientifically that all a~sertions of this kind are dependent on a definite idea of what is "best socially." This may be possible in the sphere of ultimate values or .aims, but has nothing at all to do with anything connected with or deduced from economic theory. But even the ruling aim is extremely vague, as is proved by the state bf uncer tainty in which all administrators of economic policy always find themselves in the long run, as well as by the fact that no system of government has ever arrived at effectiv'ely establishing a scale of valuation of intermediate aims or ends.

This is no mere accident, for the economic process is dynamic in nature and the tasks of eCQnomic.policy, no matter what the scale of values laid down, are shaped only by this dynamic force. The variety in the nature of the empirical event is so great that it is never possible to work out beforehand either in general or in detail all the guiding prin ciples which may be required later on. There is thus a problem of application, as it were, for the sphere of the objectives of economic policy as well as for economic theory. This is not intended to deny that it is possible to have a rational structure of aims of economic policy. For the present, however, we must content ourselves with saying (1) that this structure is not an inference from eCQnomic theory and, further, (2) that it has no a priori character, but (3) that it embraces all possible or already adopted concrete measures (relating to an actually given concrete empirical economic system).

Hence it follo.ws that the same kind of problem MUTUAL INTERDEPENDENCIES 49 of completing the aims crops up every time the relevant changes in the economic system have taken place. No further argument is necessary here to show that the situation is then exactly analogous to that which arises in the application of economic theory. It is enough to establish as a fact that even if, in spite of all the difficulties, a theoretical scale of values could be drawn up, empirically-factually there is no unique determinacy of the " optimum of social value." This means that other ways of estab lishing a unifying principle in economic policy must be sought. The necessities of the moment are too varied and too changeable for it to be possible to do without a casuistry for filling the gaps in the theory and a day-to-day revision of the scale of valuations. It must be pointed out once more, however, that the analysis given here proceeds under the assumption that, even while the empirically conditioned changes and the refinements of the value concepts rendered necessary by them are actually taking place, no change takes place in the actual system of ultimate values.

By that is meant that there is no change in the primary principles from which all others have to be deduced. It is, of course, possible for this to happen and it frequently does happen, but it is sufficient for present purposes to refer back to the earlier part of the exposition. If we want to lessen the degree of abstraction of the lines of thought just developed and come closer to reality, we must recognize that there is scarcely a single economic system for which economic policy has been arranged according to any such strict scale of values. It is true to say that economic policy follows a large number of conflicting points of view all at the E 50 THE LIMITS OF ECONOMICS same time, that it is continually changing its motives, that very dissimilar means (in the sense of their technical suitability) are applied for the individual aims in view, and that the rationality of the measures adopted, taking regard to the aims, fluctuates violently from time to time. The situation in practice might be likened to the building of a bridge over a raging torrent to an unknown bank, at night, by the light of a flickering torch, with constantly changing materials and according to plans and ideas that are continually altering.

The state of affairs just described is far from satis factory. If the possibility of establishing a logical cohesion of the measures is very slight and if, on the contrary, there is a certain amount of justifica tion for the presumption of almost complete anarchy among them (rendered inevitable by continual dissolu tions and changes of the forms of government, for example) questions will still remain open which are the more urgently in need of scientific analysis in that they are of lasting practical importance. Such are the two questions whether there is not after all some unifying principle and, if there is, whether further deductions can be made from it. The answer is that there definitely is a systematic interconnexion in the indirect sense of the material interdependence of all the economic measures that are put into operation. J nst as all economic acts are interrelated in the case of the single individual, and all individuals are in turn connected up with one another in the exchange economy, and every exchange act influences every other in some way or other, BO each measure of economic intervention has an effect upon all the others whether they are already in existMUTUAL INTERDEPENDENCIES 51 ence or as yet only planned. This at once brings out an important fact, namely, that it makes a great deal of difference whether a measure is imposed when the initial conditions are those of an entirely free equilibrium or whether it is imposed when at the outset there is only a tendency towards equilibrium in which, however, various types of measures of economic inter vention of various " ages" have already been put into operation. The latter cannot, as should be clear from the preceding arguments, be regarded as spon taneous "changes in data," as the data created by them are of a different kind from those previously in existence. Moreover, it is a point worthy of special emphasis that the measures of economic policy adopted at any time work themselves out at different speeds within the same economic system. Thus forestry policy is a matter of several decades, and will only come to fruition at a distant date, whereas the devalua tion of the currency, for instance, is a matter Qf a few hours and may to a certain extent make all the other measures illusory, or may strengthen some measure in their effects, and so on.

This interdependence is the characteristic feature of all economic measures actually put into operation. We might, therefore, speak of the" principle of the fusion of effects of economic policy." This does not mean either the existence of a strictly observed plan or the achievement of complete harmonization of the indi vidual steps and measures in the sense of their being unified under some common principle. It merely expresses the fact that all the economic quanti ties and events in large measure, if not entirely, auto matically fuse into one another, and are thus linked together without the inten tion and even contrary to 52 THE LIMITS OF ECONOMICS the expectations of the framer. We have then to deal with an interdependence of effects. Now it would be incumbent upon economic policy to take this con nexion, which is sometimes already known, into account when dealing with new measures. This is an extremely difficult problem, which is insoluble, or at any rate not soluble exactly. Let us assume that a: acts of economic policy have taken place at various points of time in a certain economic system; it then makes a great difference whether the (.x + l)th act takes place soon or after a considerable lapse of time, as the extent of the fusion of all the earlier acts into one another and into the general framework of the economic data will be very different at the two periods.

Economic policy, however, would in turn have to take this fusion itself into account as a new datum. It is unnecessary to describe the difficulties in more detail, although the state of affairs is one where the most com plicated theoretical and methodological problems rise up like the heads of the hydra. From the point of view of practice-which alone concerns us here-they are almost insignificant for the reason that the degree of precision of economic policy in general is so small that it would be indulging in gross self-deception to attach any weight to them. However negative these lines of thought may seem for the mom,ent, they give one important positive con clusion from which a number of others may be deduced. The integral interrelatedness in every economic policy expresses itself in the price move ments and relative price shifts; it is therefore neces sary to keep economic policy free from inconsistencies.

For if this were not done, the effects of the individual measures would clash with each other, and this would MUTUAL INTERDEPENDENCIES 53 perforce find expression in unforeseen price move ments, which would destroy the bases of the separate measures. Now it is at this juncture that scientific criticism can usefully begin and with some prospect of success (ev,en among large sections of the public). Even if it is admitted that the many hindrances which stand in the way of rational economic policy, and which have been indicated in the course of this dis cussion, are all present, it is still possible, taking various degrees of abstraction and, if circumstances are favourable, taking the particular concrete cases, to prove whether measures are inconsistent with each other or not. If it is our intention to reduce the cost of living, and at the same time we introduce agricul tural tariffs; if we want to keep the currency stable and yet do something which increases the money circulation; or if we want to decrease unemployment and at the same time preach that wages should he kept up, we shall not reach our goal. In these and a thousand other cases there is always an either-or: you cannot have your cake and eat it. * In the examples quoted the incompatibility can be clearly seen because of its obvious character. In general, however, the int,erconnexions are much more complicated and it often requires a real flair to discover the inconsistencies in more remote places. There is much for economic theory to do in this sphere, but at present little oppor tunity is accorded to it in the pursuit of what should be its primary task.

The principle of the freedom from inconsistency of economic policy is the only scientific-economic prin* In 1928 the mere enumeration of some such inconsistencies in the economic policy of a certain country cost an interna.tionally famous economist his professorship.

54 THE LIMITS OF ECONOMICS ciple which can be formulated without passing value judgments. Its validity is quite independent of the specific content of the measures. This principle gains a peculiar importance, from the fact that from it may be deduced rules of more general application which are capable of giving some sort of guiding line to economic policy without ever infringing the precept of freedom from value judgments. In view of the extreme diffi culty just pointed out above of proving first of all that effects of economic measures can be unchallenge ably determined and traced to definite causes, and, secondly, of finding a tolerably reliable measure of these effects, it is clear that the fulfilment o£ this principle is not a matter which is within the province of the layman. If economic science is ever to obtain a place in the world, this is the place. There is a vast territory, indeed, open to the scientist who keeps his laboratory of ideas, theories and experiments at the disposal of the practical man.

Only he whose mind has fully grasped the complex of factors described here will realize in what a sho.ck ing condition so-called " economic policy " is in most countries. There can scarcely be any other depart men t of social life that is such a mixture of noble endeavour and the most unscrupulous, yet sho.rt sighted, advancement of self-seeking interests, amid a flaunting display of ignorance of every kind. It would be making a mistake and indulging in romantic optimism to believe that this condition will ever improve effectively, permanently and universally. The reasons for this lie deeply rooted in the structure 0.£ the exchange economy as such and will be dealt with in more detail in a later chapter. They reach, moreover, into the innermost core of human nature MUTUAL INTERDEPENDENCIES 55 • to that point where it seems essentially unchangeable. So far, we have built up only formal propositions, that is, such as are independent of the concrete content of economic policy, propositions which may be applied, whatever the aims of economic policy in view. Our most important conclusion related to the unvarying nature of economic theory in the face of all conceivable economic aims, and hence the error of all those opinions which, based upon a syncretism of method, claim that economics is identical with liberalism or socialism. It is a co.nclusion which, however, should be obvious rather than surprising, and is one which it is most essential to keep always in mind. It relates to a condition which can never change, and which remains as inflexible as the fact that 2 x 2 = 4. This is a simple enough fact, but the proof of it is, accord ing to modern mathematics, very complicated. It is fortunate that the proof of the seemingly very difficult thesis of the unvarying nature of economic theory is quite simple and will always remain so.

I£, as was shown, there is no bridge between theory and policy, in the sense that " scientific" liberalism, collectivism, or socialism can be deduced from science, the reverse of this state of affairs is also true. This means that a repudiation of liberalism, socialism or collectivism, on political grounds, proves absolutely nothing against economic theory. And that holds good for every kind of economic theory, independent of whether it has been taught, developed b.r discarded simultaneously with the sys.tem of economic policy under attack. The fact that these elementary relation ships have to be pointed out and emphasized at all to-day shows the low intellectual level ·o.n which dis cussions on vital questions of the social sciences are 56 THE LIMITS OF ECONOMICS at present being conducted in an increasingly large number of countries. In this point, of the independence of economic theory from its practical application, economics is no different from any of the other sciences. The situation here is so uni versal that it is strange to have to lay so much emphasis on it in economics. In physics it makes no difference how the law of gravity is applied; and it is all the same whether the laws of gas are utilized for the building of motors to drive agricul tural machines or to drive tanks. Thus example might be added to example, and all the sciences passed in review, and yet the result would be the same in every case. It is probably a defect of will that makes one want to find an exception in economics. With regard to the validity of economic propositions, it is likewise irrelevant whether one introduces tariffs on the basis of them, or proclaims free trade; the law of supply and demand operates in both cases; the conditions of exchange between the countries are always regulated in accordance with the laws o.f comparative costs.

Now when we come to the concrete constituents of economic policy, it is important to observe first of all that whatever may be the nature of the practical situation, whether the economic situation tQ be changed is to be considered good, bad or "catas trophic," only a few means and methods, in the last analysis, are ever proposed and utilized. Rough rules of thumb, such as tariffs, import prohibitions, maximum prices, subsidies, depreciation of the currency, moratoria, strikes, lock-outs, inflations, and things of that kind, are the limits of what wisqom is capable. Even the formulation of the reasons for the decision for or against such a measure is correMUTUAL INTERDEPENDENCIES 57 spondingly primitive, and always makes use Qf the same arguments. The development of economics goes on almost entirely unheeded, except that in the mone tary sphere there appear signs of a closer union between the progress of theory and practical monetary policy, which, however, is n'o.t always the most fruit ful. In particular, it was this which in the years just after the war produced the unfortunate idea of stabilizing prices and economic activity, an idea which, however, soon suffered the discredit it deserved.

(This is not to be confused, of course, with inter national currency stabilization.) If the idea reappears to.-day in the form that the aim of a rational economic policy is not the stabilization of all prices, but " only" of those of the factors of production, such a proposal sho.ws that the lessons of the great depression 01 1929-19?? have obviously been without effect upon the sponsors of this idea. The fact that these rules of thumb are the sole methods employed by economic policy is in some respects a co.mforting one. Some of them are right (i.e., they are appropriate to their purpose) and some are wrong. Economic theory will already have accom plished a great deal when it, or rather its representa tives, succeeds in securing that only the right methods (those adequate for the aims involved) are applied. There is nothing much more that can usefully be said about this here. One may rest assured that it is to a great extent a question of the technique of presenta tion, of the personal influence of the economists, and particularly of the application of modern statistical material, which can slowly but surely bring about a change in this matter in countries with an educ_ate,l public. But even apart from that, there is room for 58 THE LIMITS OF ECONOMICS a little hope: the simple fact that one IS limited to rules of thumb is in no wise the outcome of an immutable principle, but merely bears witness to the fact that there is very little chance of being able to deal with new situations better than has been done up to the present. Why should better educated people not discover new ways, by rapidly finding new ru~e8 to fill the gaps which may come to light during the application of the theory? Of course, the realist (who is in such cases called a sceptic) will find ample reasons for declaring that this is improbable, and many of these reasons, which we, to.o, shall discuss later, may speak in favour of his thesis. Looked at from the point of view of method alone, there are no funda mental difficulties here, and nobody is to be robbed of the hope that what difficulties there are CQuld be overcome.

Applying an analogy from mathematics, the task of economic policy might be described thus: the problem is one of reaching a definite goal, as, for instance, maximizing the volume of trade with another co.untry. The ideal solution would be the introduction of com plete free trade, even though it were one-sided. From the practical standpoint, however, we will assume that this course is impossible, because, for example, o.ne of its accompanying effects would be the ruin of an important section of the population, which for political reasons must at all costs be kept in its present position. This exigency must theref'o.re be inserted in the data and modifies the problem of economic policy substantially, along the lines that it is necessary to find that method which conforms as closely as possible to the ideal, theoretically best solution, but still guarantees the existence of these particular groups MUTUAL INTERDEPENDENCIES 59 of the po,pulation under the required minimum con ditions. Instead of the shortest line, the " geodetic line" must therefore be found, "geodetic" being the name given in mathematics to those lines which form the shortest distance between two points when the space in which they QCcur is no longer euclidean.

These geodetic lines comply with the conditions of non-euclidean spaces: they belong to the systems of " elliptical" or "hyperbolical" geometry. It is just the same in economics , where the general proposi tions must, so to speak, be transformed into " elliptical" or " hyperbolical " ones if they are to be applied in concrete practical cases. The error made by many people has been that they have tried in doctrinaire manner to discover the comparatively simple relations of theory exactly repeated in practice. It is probably superfluous to mentio.n that though the relations illustrated by this analogy are closely con nected with the differences between different levels of abstraction more explicitly discussed at the beginning, they by no means coincide with them. It is not difficult to find a simple example of the misinterpretations which laymen constantly put upon economics in this respect. One need only think of the usual discussion on free trade. This generally pro ceeds along the lines that it must be granted the free traders that, with free trade, the total volume of trade in society would be considerably increased and the economic system would be much better provided with goods, but, so the argument continues, "free trade could not suddenly be introduced overnight." The supposition that it would have to happen so suddenly comes from listening to a theory which was formu lated under the conditions most favourable to it (that 60 THE LIMITS OF ECONOMICS is, they were also the most abstract conditions), and from naIvely and directly transferring that theory to concrete circumstances. Now it is in this application that the very problems which interest us here lie, as should have been brought out very well in the example of the geodetic line. It is extremely wearisome to encounter the same foolish objections reiterated over and over again. The free trader, as the general public or industrial federations usually conceive of him, is scarcely more than a legend.

It is the same group of misunderstandings which cause it to be said from time to time that someone has, say, radical economic views, but repeatedly turns traitor to them when put in the position of carrying them into effect. The fact that all radicals, once they are members of the Cabinet, become tame after a while, does not necessarily mean a "betrayal," but merely that even they have their "problems of application" to solve for their various species of radicalism, and that, as they have to fit their own methods into those of others, they have to make sub stantial modifications of their programmes. Great reforms in the economic system can only take place gradually. Incidentally, it is worth noticing-that the feeble echo which economic theory customari! y finds among the public is in the end due very largely to the economists themselves. Several circumstances are to blame for it. The public insists that a scientist who builds up theories about economic affairs., should be in closest touch himself with these affairs, and should know what is going on around him, just as a sick man does not like being treated by a doctor who is himself ill. And it is true that it is absurd for MUTUAL INTERDEPENDENCIES 61 theory to be out of touch with practical life; unfor tunately, however, it is a common and distressing experience to find theorists who are in this position.

However great the gap between the theoretical and the practical mind may be, it must to this extent at least be bridged. The further and much more weighty reason, however, is that economists who have sinned against the spirit of their science have repeatedly either surrendered their scientific knowledge under pressure or political forces or strong interests (in particular, all those who possess no really deep grasp of theoretical analysis are exposed to this danger), or-and it is difficult to know which is worse -have asserted that economic theory is identical with some chosen attitude towards economic policy. Economic theory has always to fight on several fronts at once, so that hard-won territory has easily been lost again here and there. If to-day the thesis is prevalent that economic theory and economic-and ultimately even political-liberalis.m or socialism have something in common, the effect must be to prejudice theory for a long time to come, and to an extent which cannot yet be estimated. Hence it should be one of the first duties of the economist to defend the thesis that economic theory is independent or systems or economic policy. The claims which this makes upon methodological discernment and general intelligence are surely not overwhelming.

After this short digression· we turn now to the question of whether there is not after all a solution of the dilemma which still remains. This dilemma. consists first and foremost in the fact that the con centration of the unfavourable effects in the present, both where measures are applied and where they are 62 THE LIMITS OF ECONOMICS not, and the dispersion of the advantages in the future, or alternatively of the d~sadvantages in the present, belongs to the normal character of economic policy, independent of its specific details. The practice of economic policy in the past has lessons to teach which, while not perhaps ranking as principles, are nevertheless worthy of the closest attention. They speak against the popular opinion in matters of economic policy, which is without any doubt in favour of a maximum of intervention. Though it may be impossible to deduce economic liberalism logically from economic theory, liberalism has certain practical advantages. On the other side, the method of specially . chosen measures of intervention in the economic system is the logically superior type of economic policy, which nevertheless appears to be encumbered with countless practical difficulties and disadvantages.

This great contrast would really give a rightly conceived liberalism the better chances of success. It has many practical advantages. Its principle of allow ing as much freedom as possible in the economic system is suited to general and long-run application, there is no waste in isolated actions, and it has been tested tolerably well and over the widest areas and longest periods of all the methods of economic policy ever consciously applied. Interventionism, on the other hand, constantly finds itself faced with new situations, it is full of inconsistencies, never guarantees a complete survey of all the factors involved, and never finds confirmation in practice, because what should constitute proof always represents nothing more than a new situation. Liberal economic policy is therefore often a sign of the str'ength of the State's MUTUAL INTERDEPENDENCIES 63 power, and is thus qui te consisten t even with an authoritarian form of government.

Interventionism, on the other hand, is we~kness, not only on the part of those who beg for the inter vention, but also of the State, which allows itself to be persuaded into granting special privileges. As it is beyond the scope of this study to concern itself with the setting of aims, perhaps this contrast ing of economic systems will suffice, and the thread which leads from here to other provinces of social life may be allowed to drop. Instead, we turn to other problems.