Planning for Growth

October 1, 1962

In a free economic system, production tends to be maximized. This is because, in such a system of private property and free markets, everybody’s reward tends to equal the value of his production. What he gets for his effort or his product, and is allowed to keep, is what it is worth in the market. In a free market, therefore, everyone has the incentive to maximize his satisfactions, whether these consist in more goods or in more leisure.

But along comes the Growth Planner. He finds by statistics (whose reliability he never questions) that the economy has been growing, say, “only” 2.8 percent a year. Whatever the rate is, he decides that it ought to be greater. How does he propose to increase it?

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 percent a year. They demand, say, an annual growth rate of 5 percent. And once they have spoken, they act as if half the job had already been done. If they did not assume this, it would be hard to explain the deep earnestness with which they argue among themselves whether the growth rate “ought” to be 4 or 5 or 6 percent.

MAGIC TARGET 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 making $52,500 next year? Is the man making $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 simply encourage everyone to do his best, or permit him to make his own decision, and let the average growth be whatever it turns out to be?

The way to get a maximum rate of “economic growth”—assuming this to be our aim—is to give maximum encouragement to production, 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 encourage full employment.

HOW TO SLOW DOWN

The way to slow down the rate of economic growth is of course precisely the opposite of all 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 them to be excessive, to file constant antitrust suits, to control prices by law or by threat, to levy confiscatory taxes that discourage new investment and siphon away the funds that make investment possible, to hold down interest rates artificially to the point where real saving and real investment are discouraged, to deprive employers of real 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 this by increased government spending, deficits, and monetary inflation. But we 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 fail to 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. The consequences of this short-lived paradise are malinvestment, waste, gambling, social discontent, disillusion, bankruptcy, increased governmental controls, and eventual collapse. This year’s euphoria becomes next year’s hangover. Sound long-run growth is always retarded.