WHEN WE DISCUSS “ECONOMIC PLANNING,” 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 future: what he will do the rest of today, the rest of the week, or on the weekend; what he will do this month or next year. Some of us are planning, though in a more general way, ten or twenty years ahead.
We are making these plans in our capacity both as consumers and as producers. Employees are either 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 location 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 demand is going to grow.
Now the people who call themselves Economic Planners either ignore or by implication deny all this. They talk as if the world of private enterprise, the free market, supply, demand, and competition, were a world of chaos and anarchy, in which nobody ever planned ahead, but merely drifted or staggered along. I once engaged in a television debate with an eminent Planner in a high official position 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 “public” interest.
Now the Planner wants to substitute 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.
Planning Means Compulsion
It is this aspect of Planning to which our attention should be directed: Planning always involves compulsion. This may be disguised in various ways. The government Planners will, of course, try to persuade 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 “imperative,” but merely “indicative.” They will make a great parade of “democracy,” freedom, cooperation, and noncompulsion by “consulting all groups”—“Labor,” “Industry,” the Government, even “Consumers’ Representatives” — in drawing up the Master Plan and the specific “goals” or “targets.” Of course, if they could really succeed in giving everybody his proportionate weight and voice and freedom of choice, if everybody were allowed to pursue the plan of production or consumption of specific goods and services that he had intended to pursue or would have pursued 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 consumption of different things or different 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 consumption.
There are two excuses for this coercion. One is that the free market produces the wrong goods, and that only government Planning and direction can 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 can speed things up. This is the thesis of the apostles of “economic growth.”
The Galbraith Thesis
Let us take up the “Galbraith” thesis first. I put his name in quotation marks because the thesis long antedates his presentation of it. It is the basis of all the Communist “Five-Year Plans,” which are now aped by a score of socialist nations. While these Plans may consist in setting out some general overall percentage 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 capacity, 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 Communist countries, in favor of heavy industry, because it gives increased power to make war. In all the Plans, moreover, even in non-Communist countries, there is a strong bias in favor of industrialization, of heavy industry as against agriculture, in the belief that this necessarily increases real income faster and leads to greater national self-sufficiency. It is not an accident that such countries are constantly running into agricultural crises and food famines.
But the Plans also reflect either the implied or explicit moral judgments of the government Planners. The latter seldom plan for an increased production of cigarettes or whiskey or, in fact, of any so-called “luxury” item. The standards are always grim and puritanical. The word “austerity” makes a chronic appearance. 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 cannot 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 promotors of such projects to bank credit or to the capital markets. At some point government coercion or compulsion comes into play.
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 cannot afford it, but that “the nation” cannot afford it. This involves the assumption that, if I set up a bowling alley or patronize one, I am somehow depriving my fellow citizens of more necessary goods or services. This would be true only on the assumption that the proper thing to do is to tax my so-called surplus income 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 forbidden to spend it on bowling alleys 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 Englishman from consuming imported luxuries, on the ground that “the nation” could not afford the “foreign exchange” or the “unfavorable balance 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 restricting and discouraging production.
But we come now to the specific Galbraith thesis, growing out of the age-long 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, chronically wasting their money on trivialities, if not on absolute trash. The bulk of consumers also, if left to themselves, show atrocious taste, and crave cerise automobiles with ridiculous tailfins.
The natural conclusion from all this—and Galbraith does not hesitate to draw it—is that consumers ought to be deprived of freedom of choice, and that government bureaucrats, 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 necessities, and turn it over to the bureaucrats to be spent in ways which the latter think would really do people the most good—more and better roads and parks and playgrounds and schools and television programs—all supplied, of course, by government.
“Private” vs. “Public” Sector
And here Galbraith resorts to a neat semantic trick. The goods and services for which people voluntarily spend their own money make up, in his vocabulary, the “private sector” 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 adjective “private” carries an aura of the selfish and exclusive, the inward-looking, whereas the adjective “public” carries an aura of the democratic, 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 considered to be most essential and most edifying—roads and water supply, schools and hospitals and scientific research, education, old-age insurance and medical care—the tendency must be increasingly to associate the word “public” with everything that is really necessary and laudable, leaving the “private sector” to be associated merely with the superfluities and capricious wants and vices that are left over after everything that is really important has been taken care of.
If the distinction between the two “sectors” were put in more neutral terms—say, the “private sector” versus the “governmental 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 activities now assumed by the modern welfare state do legitimately or appropriately come within the governmental province. For Galbraith’s use of the word “sector,” “private” or “public,” cleverly carries the implication that the public “sector” is legitimately not only whatever the government has already taken over but a great deal besides. Galbraith’s whole point is that the “public sector” is “starved” in favor of a “private sector” overstuffed with superfluities and trash.
The true distinction, and the appropriate vocabulary, however, would throw an entirely different light on the matter. What Galbraith calls the “private sector” of the economy is, in fact, the voluntary sector; and what he calls the “public 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 education of his own children but everybody pays for the education of everybody else’s children. Nobody pays his own medical bills, but everybody pays everybody else’s medical bills. Nobody helps his elderly parents, but everybody else’s elderly parents. Nobody provides for the contingency of his own unemployment, his own sickness, his own old age, but everybody provides for the unemployment, sickness, or old age of everybody else. The welfare state, as Bastiat put it with uncanny clairvoyance more than a century ago, is the great fiction by which everybody tries to live at the expense of everybody 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 people 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 production of all must sharply decline; for the energetic and able lose their incentive to produce more than the average, and the slothful and unskilled lose their incentive to improve their condition.
The Growth Planners
I have spent so much space in analyzing the fallacies of the Galbraithian 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 important 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 market economy does not produce nearly enough. I will postpone for the moment discussion of some of the statistical errors, gaps, and fallacies in their arguments. Here I want to concentrate on their idea that some form of government direction or coercion can by some strange magic increase production above the level that can be achieved when everybody enjoys economic freedom.
It seems to me self-evident that when people are free, production 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 contribution to production in a single year. If he is content with the income he has—if he feels that he can only get more by excessive effort or risk—he is under no pressure to increase his output. In a free market everyone is free to maximize his satisfactions, whether these consist in more leisure or in more goods.
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. How does he propose to achieve this?
There is among the Growth Planners 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. And once having spoken, they act as if half the job had already been done. If they did not assume this, it would be impossible to explain the deep earnestness with which they argue among themselves 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 decided on this magic overall figure, they then proceed either to set specific targets for specific goods (and here they are at one with the Russian Five-Year Planners) or to announce some general recipe for reaching the overall rate.
But why do they assume that setting their magic target rate will increase 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 governmental “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?
Statistical Fallacies
Now let us get back to some of the statistical errors and fallacies that I mentioned a little while back.
One of them will be plain from what we have just been discussing. This is the fallacy of speaking of a “national” rate of growth. The ambiguity of this should be evident. A gross rate of growth of national income may appear in the official statistics accompanied by an increase in the population of the country. One can have a growth in gross national product (GNP) accompanied by a fall in per capita incomes. Even aside from this, it should be obvious that an average increase in per capita incomes in a country does not necessarily tell us much regarding the fate of individuals. An average increase in per capita incomes may mask a fall in the incomes of some groups if this is more than offset by a rise in the incomes of others. For example, if the rich got richer and the poor got poorer, the average per capita figures might still conceivably show a rise.
Again, there are several pitfalls in dealing with percentage figures. The smaller the base from which we start, the less the absolute increase in the production of anything has to be in order to show a very large percentage increase. To begin with an extreme example, if only one family in a country has a bathtub, and the next year fifty families get one, the rate of growth is 5,000 per cent. But once everybody in that country has a bathtub, net growth may stop. This principle applies to houses, automobiles, radios, television sets, and everything else. From the day of his birth, a boy baby grows in weight an average of 195 per cent in his first year. He never even approaches this record thereafter.
It should not be surprising that there has been found to be a long-run tendency for industrial growth rates to slow down as the level of production in any country gets higher. This results partly from the enlargement of the base, and partly from a physical satiation point in human needs.
Let us take the history of a specific economic product—television. Output of television sets in the United States in 1946 was 7,000. In 1947 this output had risen to 200,000, making a growth rate of 2,757 per cent. In 1948 the United States produced 975,000 sets—making a growth rate of only 387 per cent. In 1949 output rose to 3,029,000 sets—but the growth rate was only 211 per cent. In 1950 production jumped to 7,464,000 sets; but the growth rate now was only 146 per cent. Though output was accelerating enormously in absolute amounts, percentage rates of growth were constantly falling. And after 1950 the rate of growth of annual output for a time stopped entirely. Yet the United States continued to turn out between 6 million and 11 million sets a year—and, of course, now has the highest total number of sets working, old and new, in its history. As of 1967, these were estimated to total 94.2 million. Yet many other countries in the world must now be surpassing the United States’ rate of growth in this particular product. The more backward the country, probably the higher the present growth rate in production or purchase of television sets.
Not Volume but Value
Suppose we turn now to some of the more basic general problems raised in the compilation of total gross national output figures. The first thing we have to remember is that these are not and cannot be purely objective figures. What we are measuring is not physical volume or weight, but value. The statistician is forced to resort to his own arbitrary values. Shall he include, for example, in the national income figures the compensation of burglars, blackmailers, and drug peddlers? How is he to draw the line between what are usually called economic goods and such activities as washing, shaving, and playing for amusement on the piano? Yet such activities do not differ from the same activities carried on for money as services to other people—such as nursing, barbering, and giving concerts. The statistician is forced to include only items that are dealt in on the market.* But this excludes all do-it-yourself activities, which in total are probably enormous, and it excludes all the products of the family economy, including all the activities of housewives. So we get the paradox, for example, that when a man marries his cook, the value of her work disappears from the national income accounts.
But there are further problems. How is the statistician to treat government activities? Official figures practically always do include these in making up the national income accounts. But there is no market test or gauge of their value. Most people would admit that policemen, firemen, and judges make a contribution to the national income equivalent to the cost of their services. But how about a host of bureaucrats whose activities might merely redistribute income, or might actually restrain and disrupt production through imposition or enforcement of unwise regulations?
Again, how do we count government redistribution of income through subsidized housing, farm price supports, Social Security pensions, doles to the unemployed, subsidized medicine, etc.? Most government statisticians count the income that is handed out to the recipients without deducting from the gross national product figures the income that is taxed away from those who are forced to contribute.
To illustrate, let us take an elementary example. Suppose, in a community of three persons, that two persons have an annual income of $3,000 each and the third has no income at all. The community income is $6,000. Now suppose the government levies a tax of a third, or 33 1/3 per cent, on the two persons who have the $3,000 income, and gives the $1,000 that it takes from each of them to the third person. Then these two people have left only an income of $2,000 to match the income of $2,000 given, say, to the unemployed person. The amount of total income in that community is the same as it was before. The disposable income of each person is $2,000; and their total income is $6,000. But many government statisticians would still credit the first two persons with their original earned income of $3,000 each. So that with their earnings of $6,000, plus the $2,000 given to the unemployed person, the three of them would now be credited with a total income of $8,000—an increase of 33 1/3 per cent. Thus redistribution of wealth and social welfare plans almost invariably increase the gross national product estimate.
Measuring Leisure and Liberty
But now we come to still another problem in the statistical measurement and comparison of national income or gross national product figures. All these figures measure national output multiplied by the monetary value of that output. But they do not measure leisure or the satisfactions of leisure. Yet these are primary concerns in individual welfare. In the United States there is, on the average, a forty-hour working week. A couple of generations ago, there was a sixty- or seventy-hour typical working week. Now a community that can turn out its national product in an average week of forty hours is obviously immensely better off in economic satisfactions than another community of equal numbers that turns out the same physical product but requires a seventy-hour average working week to do it. I will not elaborate upon this, but simply point out that it is only one of the considerations that make any precise comparison of national incomes of different countries invalid.
Of course all economic planning, as we have already seen, must necessarily involve compulsion and coercion—in other words, a loss of liberty on the part of the citizens. This loss of liberty is a substantial cost, which some of us would rank very high; but it is never counted by the economic planners. Again, like the loss of leisure, the loss of liberty is another factor that makes statistical comparisons between, say, the GNP of the United States and Soviet Russia misleading and invalid.
All economic planning by a government involves problems of arbitrary allocation, arbitrary quotas for thousands of commodities and services, allocations of work, and allocations of income and consumption. And among the most serious of these, though the Growth Planners almost never mention it, are what we may call intertemporal problems and allocations.* When the Growth Planners decide that we must grow economically 5 or 6 per cent a year, or whatever rate, they are arbitrarily deciding that we are entitled to consume only a certain percentage of our income in any year, and must save and invest the rest in order to have greater production in the future. But is it always and under all conditions desirable to sacrifice the present to the future? Is it always desirable for the present generation to consume less so that people still unborn (whom we do not even know) should consume more? I shall not try to answer this question. I wish merely to point out here that economic growth has a cost—that the higher we wish to make this rate of economic growth, the more we must restrain and constrict consumption in the present to make it possible. This cost is entirely ignored by most of the Growth Planners.
Finally, we have to ask, what is it that is measured by the gross national product figures? What is being measured is the marginal market value of thousands of goods and services, in terms of money, multiplied by the total quantities of such goods and services. (Of course any inflation of the currency will multiply this figure correspondingly without adding an iota to the economic satisfaction that anybody gets. I will come back to this in a moment.) What I wish to point out here is that if we increase the supply of anything (with the money supply remaining constant), the marginal value of that commodity, and hence its price, falls. So if there is no inflation of the currency, an increase in production leads to a fall in prices. And this fall in prices is likely to be much greater proportionately than the increase in production. It has been recognized for many years, for example, that a larger wheat crop will ordinarily have a smaller total dollar market value than a smaller crop. This, in fact, is a basis of all crop restriction schemes. But this merely illustrates a wider principle. It is not “value-in-use,” but scarcity, that determines “value-in-exchange,” or money price. Water is an indispensable commodity that ordinarily commands no price at all. If more and more things became plentiful (except dollars), the national income, as measured in dollars, might begin to fall. And if we could imagine a situation in which everything we could wish for were in as adequate supply as air and water, we might have no (monetary) national income at all!
Inflation vs. Growth
Most of the advocates of economic growth through government action in fact put their major faith in one overall policy—inflation.
This policy, however, is almost never recommended under that name. The Growth Planners simply argue (along Keynesian lines) that growth has been slow or business stagnant because of an “insufficiency of aggregate demand”; and they think this can be rectified by more government spending. Some of these Planners are candid enough openly to advocate government deficits. For they recognize that if the increased government spending is paid for out of increased taxation, then the taxpayers lose exactly as much “purchasing power” as the government gains. They also recognize that if the increased government spending is financed by a bond issue bought by individuals out of real savings, the bondbuyers lose as much purchasing power for other things as the government gains.
They recognize, finally, that if the government raises, say, $10 billion in the investment market, this either leaves just that much less funds available for investment in private industry or pushes up interest rates. And high interest rates, other things being equal, discourage business expansion and investment.
So the only way to get the “increased purchasing power” is to increase the money supply. If a country is already frankly on a paper-money basis, it merely runs the printing presses a little faster. If, like the United States, it is on the semblance of a gold standard, it does this through the central bank. The usual process is for the bank to buy government securities in the open market and “monetize” them.
But does the increase in money supply necessarily promote economic growth? If there is already full employment and no substantial idle capacity, the new money will simply lead to an increase in wages and prices. If there is less than full employment, the new money can, it is true, at least temporarily increase employment if it leads to an increased demand for products or to higher prices for products without also leading to correspondingly increased wage rates.
Those who propose the inflationary solution for unemployment always forget to ask themselves what has caused the unemployment. The long-run cause will always be found to be some discoordination of prices and wages. This can take many forms. Commonly wage rates in some lines will be too high in relation to prices or to the demand for particular products. But wage-price coordination, in such cases, can be restored and maintained if there are free-market wages and free-market prices flexible in both directions. Inflation is not necessary to restore such coordination. Moreover, any price-wage adjustment brought about by inflation is likely to be only temporary. For labor unions, finding more demand for their services, or trying to “catch up” with rising living costs, demand still higher wages, with the result that the discoordination of wages and prices may be brought about all over again, and the situation can be cured once more only by a still further dose of inflation.
As long as the government authorities encourage or tolerate a system that makes it possible for unions constantly to demand and secure uneconomic wage rates, to which prices can be adjusted only by successive doses of inflation, the authorities must encourage the continuance and perpetuation of such discoordination. This must retard economic growth.
Inflation Falsifies Calculation
Inflation is not only unnecessary for economic growth. As long as it exists it is the enemy of economic growth. It distorts and falsifies economic calculation. An economy grows and functions at its maximum rate when the relationship of prices and wages and profits, and the whole balance of production among thousands of different commodities and services are such as to lead toward an equalization of profit margins because of correct anticipations of the relationship of supply and demand, of prices, production and costs.
But when inflation forces up prices, prices do not all rise in the same proportion and at the same rate. It becomes very difficult for business men to distinguish between what is lasting and what is merely temporary, or to know what the real demands of the consumers will be or what the real costs of their own operations are. Orthodox accounting practices will give misleading results. Depreciation and replacement allowances will be inadequate. Profits will be overestimated and overstated. Businessmen everywhere will be deceived. They will be using up their real capital when they think they are increasing it. They will think they have profits or capital gains when they really have losses.
A vital function of the free market is to penalize inefficiency and misjudgment and to reward efficiency and good judgment. By distorting economic calculations and creating illusory profits, inflation will destroy this function. Because nearly everybody will seem to prosper, there will be all sorts of maladjustments and investments in the wrong lines. Honest work and sound production will tend to give way to speculation and gambling. There will be a deterioration in the quality of goods and services and in the real standard of living.
The price and wage rises brought about by inflation will lead to public demands for price and wage controls. The government will be only too receptive to such demands because price and wage controls tacitly put the blame for the inflation on those who are getting the prices and wages rather than on the government’s policies. But these price and wage controls will reduce, distort, and disrupt production, and do far more harm than even the inflation itself.
What is likely even before price control is the institution of some sort of exchange control, to prevent the quotation of the home currency from falling in terms of other currencies. But the effect of such an exchange control, overvaluing the domestic currency, will be to bring about a deficit in the balance of payments. It will discourage exports, because they will be overpriced compared with foreign goods. It will encourage imports. The exchange authorities, to prevent this, will institute a quota and licensing system. But this will disrupt foreign trade.
I have yet to mention what many will consider the most important reason of all why inflation must in the long run retard rather than accelerate economic growth. Its effect must be to discourage monetary savings, and to encourage personal spending on immediate consumption. To this extent it must discourage and reduce capital formation, the principal cause of economic growth.
Of course inflation does temporarily stimulate investment in certain directions. When it is going on it makes nearly every venture look profitable in monetary terms. It therefore provides a strong incitement to reinvestment of profits and to the purchase of equity shares (though not of mortgages and bonds). But, as we have already seen, inflation falsifies all the signals and confuses and distorts economic calculation. What it tends to stimulate is malinvestment. By directing investment into the wrong channels it leads to great waste and must retard properly balanced growth over the long run.
The long-run effect of inflation, in sum, can only be to reduce and distort production and to retard economic growth. Of course this effect can be concealed from many people, perhaps a majority, for a long time. For prices, wages, and incomes will all be constantly going higher in monetary terms. The official gross national product figures will be constantly soaring. The euphoria can temporarily lull all misgivings. But eventually the bitter moment of truth must arrive.
Summary
The way to get a maximum rate of “economic growth”—assuming this to be our aim—is to give maximum encouragement to production, employment, saving, and investment. And the way to do this is to maintain a free market and a sound currency. 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 investment. It is to allow free wage rates that permit and encourage full employment. It is to allow free interest rates, which would tend to maximize saving and investment.
The way to slow down the rate of economic growth is, of course, precisely 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 profits, to declare that they are excessive, to file constant antitrust suits, to control prices by law or by threats, to levy confiscatory taxes that discourage 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 malinvestment encouraged, to deprive employers of genuine freedom of bargaining, to grant excessive immunities and privileges to labor unions so that their demands are chronically excessive and chronically 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 Growthmen 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 under 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 inflation that is not expected to continue. And it can happen even then only because of the temporary acquiescence or passivity of the labor union leaders. The consequences of this short-lived paradise are malinvestment, waste, a wanton redistribution of wealth and income, the growth of speculation and gambling, immorality and corruption, disillusionment, social resentment, discontent, upheaval and riots, bankruptcy, increased governmental controls, and eventual collapse. This year’s euphoria becomes next year’s hangover. Sound long-run growth is always retarded.
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 of us is free to work out his own economic destiny, within the framework of the market economy, the institution of private property, and the general rule of law, we will all improve our economic condition much faster than when we are ordered around by bureaucrats.
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