Appendix B

APPENDIX B ALLEGED DEFECTS OF CAPITALIST SOCIETIES AND THE CHANCES OF ELIMINATING THEM IN SOCIALIST SOCIETIES THIS IS an appendix in the true sense of the word, in as far as it is not essential to the discussion of our subject. The-objections to the capitalist market economy which will be considered here, are, strictly speaking, outside the scope of the book. Nevertheless there are good reasons for investigating them, ifonly because they have been advanced in several of the works dealing with economic calculation, and so introduced into the discussion. Moreover, many consider a descrip tion of the price-mechanism incomplete that does not state the more important objections.! Here, there can obviously be no question of anything like a complete or systematic assessment. of capitalism versus socialism. We shall merely take up those objections, essentially economic ones, which with greater or lesser relevance have. been brought into this special discussion. It is impossible to treat the objections systematically, for they are heterogeneous and have been advanced independently by different writers. The present writer's comments on these objections are subjective and not "wertungsfrei". This is due both to the nature of the subject and that of the objections.

It is alleged that the capitalist price-economy admits of simul taneous existence of unemployment, excess of goods and unexploited productive capacity; that the. price-mechanism works too slowly, that producers' efforts to satisfy the needs of the community are fortuitous. Too little, it is said, is known about what is going on: rival invest ments are made in the same and in competing branches, and the extent of saving and investment are unknown. It is objected that many "risks" are taken; that there is much "waste"; that factories are built only to be abandoned, that means of transport are made that prove unserviceable, with the result that work men have to be dismissed. It is doubted whether economic progress is lMrs. Barbara Wootton asserts in Lament for Economics (PP.159 and 162) that criticism of a "non-market economy" amounts to an implied defence of existing institutions. Such a conclusion is logically unjustified, as it is quite conceivable that a person may have objections to a market econorny as well as to a "non-market economy". According to Mrs. Wootton's logic, her criticism of capitalist societies would amount· to an implied defence of socialism. If her reasoning were correct, she herself would be guilty of the very thing for which she upbraids others.

N 201 202 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY compatible with the maintenance of private capitalism. Advertising is said to be another form of waste, because competing industries employ enormous sums (much time and labour) on advertisements that neutralize each other; it is further objected that the advertisements appeal to the public's lowest instincts. Attention is drawn to the growing number of middlemen, traders, salesmen, .and forwarding agents to show that the private capitalist society is tending to change from aproductive society into a distributive society. A further objection is that in certain respects the price-mechanism does not work at.all, e.g. in cultural and social spheres. It is also maintained that the price-mechanism is imperfect in capitalist societies because of the existence of cartels and monopolies. It is alleged that the technical optimum does not coincide with the financial optimum, and that in capitalist calculations no account is taken of the destruction of aesthetic values. Again, that the price mechanism does not allow of the satisfaction of "negative prefer ences" and that it is not possible to pay for avoidance of the production of goods which one does not like.

Another objection, probably the one most frequently made, is that the distribution of income and capital is inequitable in the capitalist society; that the differences in the incomes of individuals is enormous, and that people who do nothing to benefit society receive huge in comes; that with such an unequal distribution of money, the society does not .attain the maximum satisfaction of needs, because the sub.jective value of money differs between rich and poor. Lastly, it is asserted that economic inequality, class differences, propaganda and factors of environment, prevent the masses in a capitalist society from enjoying real liberty of thought. The most serious objections concern-and it is importa.nt to keep this in mind-conditions that are connected with, and partly the result of, the trade cycle. Unemployment, famine, distress, surplus goods, overproduction, over-investment, under-production and underconsumption, are in reality all consequences of the ups and downs of the trade cycle (and, to a certain extent, of the .price mechanism not being allowed to function).

It is obviously impossible in a short appendix to discuss the complex of causes and preconditions which constitute the problem of the trade cycle. A certain light is, however, thrown on the problem by dis cussing the possibility of eliminating fluctuations in a socialist society ~ This possibility will depend on the form of socialism and planned economy that is attempted. Professor Mises reproaches the socialists for promising a society with rapid development, despite the fact that ALLEGED DEFECTS OF CAPITALIST SOCIETIES 2;03 in their writings they are concerned with a static society. In their criticism of the capitalist society they refer to phenomena in a pro gressive society and paint in glaring colours the friction occasioned by economic changes which must occur in such societies. We are still assuming a dynamic, progressive society, that is to say, a society that aims' at progress and a rising standard of living and in which there occur changes of different kinds: changes in productive technique, in the accumulationof, capital, in the size and age-com position of the population and in its tastes and needs.

Let us confine, ourselves for the time being to a socialist society with a central authority equipped with sovereign powers. Such a society will in. one respect have a better chance of eliminating trade fluctuations than capitalist and competitive societies, since the central authority can control investments and the rate· of progress in such a way as to avoid those jerks in investment activity which are so charac teristic of the capitalist society. However, even in a socialist society with sovereign planned direc tion there will be variables that cannot be eliminated, such as the ch~nge between summer and winter, if the society in question is situated in the temperate zone. Nor can changes in the yield from crops be eliminated. Both are changes that alter the volume of pro duction and the extent of employment (the two most important factors of the trade· cycle). In an industrialized society with well developed division of labour any alteration in economic activity will mean that the suppliers of tools, machinery and. materials will also experience a change in demand. This will also affect the demand from the suppliers and their capacity to employ labour. Also dealers and the middle men will experience a reduction in their turnover, which will lead to fresh readjustments.

There are· variables which .the central authority in theory should be able to eliminate, but which it will find very hard to do in practice, namely alterations in the size and age composition of the population. In theory there is nothing to forbid rearing of children or to have children being artificially bred a' fa "Brave New World", but it is , unlikely that this would be tolerated in any society to-day. There are further variables which a sovereign central authority could easily eliminate, but which would necessitate sacrifices of which only very few are aware and which are seldom formulated precisely. The central authority could put an end to the closure of factories and transfer of labour due to technical progress by preventing the use of modern methods of production and by shelving labour-saving in ventions. But this would exclude technical progress, which. is· in compatible with the assumption of a progressive society.

The central authority could also eliminate readjustments due to 204 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY alterations in taste and needs, but the price of doing so would be the abolition of consumers' free choice. It can be maintained that the consequences of the trade cycle are so serious, that they should be eliminated at any price. This decision is a political, not an economic, one, but it should be noted that the price in this case is retarded tech nical progress and the abolition of consumers' free choice and the free choice of occupation and place of work. If the central authority should decide to disregard the desires and needs of the members of the community, it would also be able to eliminate the disturbances due to the fact that production in any modern industrialized society is roundabout and time-consuming. In this case the central authority would fix the values of final products by decree, irrespective of whether the members of the community agreed to their valuations or not. Theoretically, there is nothing ·to prevent a central authority from producing goods which are not wanted by the community. A sovereign central authority can, in order to prevent readjustments and transfer of manpower, embark upon "wild" production, by which is here understood production of goods not desired by the members of the community. In this case "erroneous" investments could obviously be avoided.

IJ~ however, the central authority aims at economic progress and production for needs, and further accepts free choice of goods and employment, this will introduce two of those variables which in capitalist societies cause changes in the volume of employment and production, in other words trade fluctuations. But cannot a socialist community avoid the cumulative effects of trade depressions which are so typical of the capitalist market economy? The answer depends partly upon what kind of socialist society we assume: shall the central authority aim at progress or shall it continue production irrespective of whether there is a demand for the products or not? Another equally important factor is the degree of industrial development of the society in question. In a society with a natural economy and self-sufficient family-units a decline in production or employment in one quarter will presumably not make itself· felt in other quarters. The epidemic nature and cumulative effects of the trade depression are inseparable from monetary economy, industriali zation, and division of labour. It is often said that "a depression is the price paid for economic progress"; it can with equal right be said that the depressions are the price we pay for the advantages of monetary economy, industrialization, and division of labour. If we will do without these rational devices, the chances of eliminating the trade cycle are enhanced, but to do so will certainly entail a considerable reduction in our standard of living.

ALLEGE]) :l:)EFECTS OF CAPITALIST SOCIETIES 2.05 If it is held, as it is by many English socialist economists, that a pre requisite for economic calculation is that the socialist community should introduce competition, and if the competition is assumed to be between indivIdual business units, the possibilities for eliminating trade fluctuations will grosso modo be equally slight in the socialist as in the capitalist society. One argument in favour of the contention that socialist communities can eliminate trade fluctuations is that in such communities there will be no trade secrets. One Hsits between glass walls", it is said. It is an interesting argument, but not convincing. In the first place the number of secrets kept by business-men in capitalist societies. is not as large as is generally thought. For one thing there is much exchanging of technical and economic data among members of cartels. Even among pure competitors many examples of co-operation will be found, especially in the U.S.A., but also elsewhere. In Norway, for instance, there exists a bureau for extensive exchange of ideas between firms competing with each other. (Credit clearing, business research, exchange of data regarding technical progress and of ideas to reduce costs.) In the second place, even if we assume a society with a sovereign central authority, this authority will naturally be acquainted with its own plan, but in such a society this is of less importance since the central authority's valuation of the final result is the only one allowed.

If, on the other hand, one assumes, as here, that there will be com petition between the managers of the state trust and monopolies, data can undoubtedly be obtained and distributed, and perhaps more easily than in a capitalist society, but the control department cannot instruct the managers' of these autonomous concerns to alter their production plans on the basis of what it learns from these data, for to do so would be to abandon the assumption of competition.! Now, it can be objected that neither of the two extreme alternatives assumed can be accepted, neither a sovereign central authority with abolition of free choice of goods and employment, nor competition lCapitalist societies have means of eliminating the uncertainty inherent in the fact that managers of concerns have no knowledge of expansions made in other quarters. The expansion of the apparatus of production takes many forms, but the most important, such as the construction of ships and factories, can be ascertained without great difficulty even in a capitalist society. If the League of Nations or another international body would concentrate on the rapid collection and distribu tion of such data, not only through monthly publications, but immediately through the daily press, capitalist societies too might obtain the alleged advantage of "sitting between glass walls". At the same time there ought to be constant reminders that economic development is not linear, but wave-like. This would mean in practice that in boom-times the public would be reminded that recessions will come, and in times of depression that there ate things called recoveries, a fact which politicians and business men are equally· apt to forget.

206 ECON'OMIC CALCULA 'frON IN THE SOCIALIST SOCIETY between autonomous business units. It nlay be said that one is n10rc likely to get a planned society with a sovereign central authority which will try to pay some regard to the wishes of the consumers. If, how ever, the wishes of the consumers are to be considered at all, it 'will mean-in a dynamic society-that the central authority sooner or later must make transfers of labour. It should be stressed that'there is unemployment even if the workers get subsidies. Even capitalist societies can-and partly do-support unemployed workers. The price paid for. readjustments and necessary transfers of labour may in socialist societies take the form of a lower standard of living, deprivations, and confiscation by introducing new monetary units. The fact that the development will ex ~ypotheosi depend entirely on an individual person or a small group of persons whose word is law, may easily result in even larger disproportionate investments of capital, and thereupon larger readjustments than in the capitalist society.

There is no reason to expect greater foresight regarding technical development and the future wishes of consumers from a central authority than from the thousands of autonomous concerns in the capitalist society where managers and owners are more ot less de pendent for their, living on the correctness of their judgment. If a central authority should prove unwilling to admit to mistakes, the development will continue in the same false direction, so that the final readjustment may well be more painful than the trade fluctuations of the capitalist society. Before turning to the objecdons made by that group of economists who can suitably be called "disharmonists", it must be mentioned that it is not only trade fluctuations that lead to the production of goods which no one wants to buy and to the destruction of food whilst people go hungry; these things are also due to the fact that the price mechanism is not being allowed to work. The periodic accumulation of goods which were formerly a passing phase-of the trade cycle, are, in part, being made permanent by state intervention and price sub sidies. This creates an entirely new situation in which the possibility of adjustment and of mitigating fluctuations is considerably reduced (see p. 193).

No objection to the price-mechanism is more unjustified than the assertion that it causes accumulation and destruction of goods. The cause of these deplorable occurrences is not to be found in the price mechanism, but in the fact that the price-mechanism is not allowed to work. That· goes for wheat, pigs, coffee, fruit, and many other com modities, the production of which has been interfered with. Subsidies ALLEGED· DEFECTS OF CAPITALIST SOCIETIES 207 and prices fixed by law above market prices stimulate production and scare consumers away. The result is that the increasing stock, un saleableat those high prices, must finally be destroyed. In relation to this, it must be mentioned that there is i connection between the extent of unemployment and the creation of monopolies in the labour market. There is little reason to believe that a high price for manpower does not influence demand as for all other commodities.

If it is held to be of decisive.importancein eliminatingtrade fluctua tions that there should be equalization of income and demand for consumer. goods-in itself a highly doubtful contention-this can be achieved by other means than the payment· of higher wages by em ployers. It is worth noting that several of the young English socialist economists (see Chapter XIII) hold that competition is a necessary pre requisite for economic calculation in the socialist society. They do not say precisely what degree of freedom in price formation and competition they claim for the socialist· community, but what they desire seems to be a competition freer than that to be found in the capitalist society to-day .. An insistence on this point from the socialist economists would be important in these days, when the weight of words to a large extent depends on the political label attached to those who speak them.

Another thing which is held against the capitalist market economy is that the efforts of producers to satisfy the needs of the community are haphazard.! There is no real foundation for this objection. The adaptation of production to the needs of the community is· indeed the main concern of the private producer, and it is the constant subject of discussion between managers and their salesmen and agents. It is just the producers' ability to judge the needs of the consumers which determines \'vhether or not he shall be able to keep in business (see page 198). Not only is the effort to satisfy existing needs not fortuitolls, but the business man is constantly making experiments and investiga tions to determine the needs of the public, both in the laboratory and by means of the sample products he sends out in order to avoid fortuity. . On the other handjt is true that the capitalist society does not know exactly the extent of savings and investment. It is difficult to say what this ignorance implies. On this subject leading economists hold diametrically opposite points of view. A socialist community will have knowledge both of existing and future accumulation of capital. If this is an advantage, it. must be balanced against the disadvantage that in lAmong others, Barbara Wootton in Lament for Economics.

208 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY a socialist society the individual members of the community have no influence on these decisions and that saving is compulsory. Another objection made is that in the capitalist society there is waste because factories are closed down. Factually this allegation is correct. In the capitalist society factories are constantly being closed down, machines and means of production constantly being discarded. This can be a result of irrlperfect foresight, but it can also be, and in most cases is, an expression of progress. In a community with a changing population and ever varying needs and tastes, where methods of production change and the accumulation of capital varies, readjust ments are inevitable if progress is the goal. Such readjustments involve transfer of labour from one factory to another, from declining branches of industry to vigorous ones, from badly managed factories to well managed ones. It may be objected that progress is too quick~ There are, indeed, many attempts being made to slow it down. Many of the activities of labour unions and other organizations demonstrate clearly their preference for security over progress. If it is true that inventions are sometimes bought up and laid aside, this is another expression that some people prefer slower progress in order to defend their vested interests.

While some reproach the market economy for too rapid progress, others maintain that progress and the raising of the standard of living can never be rapid enough. This is a question of valuation. One thing, however, is certain: the closing down of obsolete factories and the scrapping··of means of production due to technical development is not waste, but the very opposite. In crass conflict with the above objection is the allegation that the capitalist society is incompatible with economic progress. Dr. Oskar Lange writes, for example: "The real issue is whether the further maintenance of the capitalist system is compatible with economic progress".l He admits that "capitalism has been the carrier of the greatest economic progress ever witnessed in the history of the human race".2 But, "The question arises ... whether the institutions of private property of the means of production and of private enterprise will continue indefinitely to foster economic progress, or whether, at a certain stage of technical development, they turn, from being pro moters, into becoming shackles of further advance. The last is the contention of the socialists." 3 l"On the Economic Theory of Socialism" in Review of Economic Studies, 1937, p.128.

20p. cit., p. 128. 3/bid., p. 128.

ALLEGED DEFECTS OF CAPITALIST SOCIETIES 209 Dr. Lange's argument is that "A private enterprise, unless forced by competition to do otherwise, .will introduce innovations only when . the old capital invested is amortized, or if the reduction of cost is so pronounced as to offset the devaluation of the capital already invested . . . . "1 Thus he does admit the existence of competition, yet omits to pay any attention to its consequences. The actual situation is that competition does force concerns to introduce improvements and to modernize their plant even when the capital invested is not amortized. While most complain of too rapid development, the incessant scrapping of means of production and the ceaseless introduction of improvements and new methods, Dr. Lange is afraid of the opposite, and alleges that "interventionism andrestric tionism are the dominant economic policies". 2 He forgets to mention that the responsibility for the most objectionable interventions and restrictions, namely those imposed by law, must be laid at the door of the politicians. State intervention represents a step towards socialism, and socialist tendencies, at any rate, cannot be used as a reproach against the capitalist society; One accusation against the capitalist society which seems to carry considerable weight in certain groups is that advertising constitutes waste and influences the consumers' choice by making them buy things contrary to their wishes and real interests. However, there are two forms of advertisement. There is that which points out new goods and new services; this must be regarded as a natural and useful service, and it has even been admitted that the socialist society will also have to avail itself of this kind of advertising. It should be stressed that the term "new" should not be confined to such goods and services which have not previously existed, but should also apply to those which can be produced at new prices which put them within the reach of new groups of buyers. The greatest advantage of modern mass production is that it gives the consumers the advantage of cheap buying, and it is self-evident that new possibilities for buying cheaply should come to the· knowledge of the consumer.

The other form of advertisements are those which tell of goods already being offered in the market. The objections brought forward against this form are conflicting, but both imply an unwarranted criticism of the competitive market economy .. The first argument is that already mentioned, viz. that individuals are influenced to buy things other than those they desire. This seems to imply that the choice of goods is too limited. The other argument is that it would be only pleasant and soothing to the nerves to have prescribed what one lOp. cit., p. 129. 2/bid. 130.

2 I 0 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY should choose; it is troublesome for the consumer to have so many goods from which to choose, it is said. This argument implies the existence of a confusing and overwhelming number of commodities. The decisive point is whether advertisements of existing goods represent waste or not. This is not a simple question. At any rate, it is quite obvious that the individual producer does not regard advertising as waste, for in that case he would nor advertise. The business man's attention to the rentability of advertising is a factor of importance for judging the whole problem. The time and labour employed in advertising represent namely a partial saving on other accounts, among them personal selling. The increased production and· turnover due to advertising further means .lower fixed costs per unit. From the public's point of view it would seem to be an advantage to have the widest possible choice, but on the other hand it must be admitted that the value of advertisements which merely hammer in a name, appears doubtful. The social utility of advertising becomes particularly doubtful when several undertakings in the same branch of industry each hammer in the name of their product. Professor Mises writes 1 that the socialist state would be sayed all costs of advertising and all outlay for travellers and salesmen, but he thinks it likely that it would have to employ more people in distribution.

Mises recalls now troublesome and expensive distribution was during the war, and also raises the question of whether ration cards. will cost less than advertisements, and whether the huge apparatus and numerous personnel required for rationing is cheaper than the outlay on salesmen and agents. Professor Mises concedes too much when he says that the socialist society will be saved all advertising. Announcements of new and cheaper goods will still be needed in socialist societies. Besides, agents and middlemen are needed for other things than selling, for example to speed up transport and to distribute goods rationally so as to avoid small parcels being sent over long distances. Another criticism against the capitalist society is that advertisements are not always in accordance with the actual facts. It is hinted that the public is hoodwinked. This is a surprising accusation when one con siders that advertising schools and textbooks teach that the pre condition of successful advertising is that it is true and honest. Lies and exaggerations belong to the childhood of advertising, at any· rate in the Northern hemisphere. It is a well-known fact that exaggerated and false advertisements militate against their purpose· and destroy the reputation of the advertiser. In his speech opening the International Advertising Convention in Glasgow on 27th July, 1938, Lord SouthlSee Socialism,p. 153.

ALLEGED DEFECTS OF CAPITALIST SOCIETIES 2 I I wood of Fernhurst said, "Advertising has reversed Abraham Lincoln's dictum. Success on the scale achieved by these great advertisers is gained not by trying to fool· some of the public all the time or all of the public some of the time, but only by keeping faith with all of the public all of the time. It is an exacting course-but reputableadver tisers know that it is the only course".l How unfounded this broad accusation of false advertising is, would also appear from the investi gations made by the American Federal Trade Commission during th.e fiscal year, 1937. It investigated 576,032 newspapers, periodicals and radio advertisements, and found that only one advertisement in every 160 "appeared to be false or misleading". 2 Another objection of a slightly different kind is that advertising in the capitalist society appeals to the public's lowest instincts. Advertise ments of this type cannot at any rate repel the majority of consumers; if they did, they would have soon, disappeared. This rather Victorian objection is based on an resthetic valuation which makes it difficult to discuss. In this· age of psycho-analysis and behaviourism there is, besides, little reason to be incensed at advertisements containing sexual, eupeptic or olfactory allusions.

The allegation that the. number of middlemen, salesmen, and forwarding agents is increasing in the capitalist society, and that this is changing it from a productive to a distributive society, is correct, but it does not constitute an objection. Forthe business community this development may be unwelcome because it means sharper competition, but for the consumers an increase in the number of distributive agents means better service. When one considers the great advances that have been made in the sphere of pure production, it is perfectly natural that attempts should also be made to improve the distributive appara tus. It may be mentioned in passing that this objection conflicts with one made by the other disharmony economists, namely that the capitalist society produces too much and neglects the distribu_tion of goods. 3 It is quite correct to say that the price mechanism is imperfect in l"See The Influenceof Advertising upon the Life of the Peoples", 1938, pp. 4-5.

2See Futurum, Stockholm, No.1, 1938, p. 56. 3In Britain without Capitalists, London, 1937, written by a group of anonymous economists, the extension of the distribution apparatus in capitalist countries is called a fotm of "decaying capitalism" and "parasitism" (p. 84). On p. 133, how ever, it is stated that in the socialist community the number and size of shops will be determined by the demands of the consumers, and that shops will be able to remain open as long as is required "without any fear of sweating any distributive workers". Shift work can be employed just as well in shops as in factories, and if the workers desire it some shops may remain open throughout the 24 hours of the day (p. 135). What was a symptom of decay in the capitalist society has here become a sign of strength ~n the socialist community.

2.12 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY the capitalist society, especially in those where the law has introduced monopolies and cartels and restricted prices. Its growing imperfec tion due to price controls and state interference represents, however, a stage in the development towards socialism and can in no way be an objection against the capitalist market economy. It is also true that the price-mechanism does not work in cultural and social spheres. This, however, is no argument for doing away with it in other spheres. Moreover, it should be kept in mind that the price-mechanism in the capitalist society does exert a certain influence even in cultural and social spheres, in so far as the market economy furnishes price data with which to calculate. It is also correct to say that the "technical optimum" does not coincide in the capitalist society with the "financial optimum". Here as in many other cases, the statement is pointing to an existing fact, but, as in so many other cases, it does not amount to an objection. The preference for financial optima instead of technical optima is one of the capitalist market economy's greatest advantages, provided economical, and therefore rational, use of resources is the goaL The whole raison d'etre of economic calculation is to find the "economic optimum" and to see that the input does not become larger than the output. If one aims at the "technical optimum", one runs the risk of such absurdities as, to take an example already used, molybdenum being used for making toy swords. (This question has been discussed in various parts of the book, particularly in Chapters IV and VIII.) The assertion that in capitalist calculations no account is taken of the destruction of resthetic values is not quite correct. If the resthetic value of a piece of land is evident, nothing prevents the community from sacrificing something to preserve it. Nevertheless, it must be admitted that the demand for resthetic values is not always expressed in terms of money in such a \vay as to make it available as a factor of calculation. However, it is just as possible in capitalist states, as in socialist ones, for the public, through preservation societies or other means, to stop open destruction of things of resthetic value.

The objection that the price-mechanism cannot satisfy "negative preferences" and that one cannot pay to avoid things one does not like, was put forward by E. F. M. Durbin in his paper "The Social Significance of the Theory of Value".! Many of Dr. Durbin's views are most interesting, but some of the conclusions which Mrs. Wootton lEconomic Journal, December, 1935.

ALLEGED DEFECTS OF CAPITALIST SOCIETIES 213 has drawn from them and enlarged on in her book 1 do appear rather far fetched. One can scarcely reproach a mechanism for not being able to do what it was never intended to do. A machine cannot pro duce pink roses. Mrs. Wootton laments that one cannot pay to have the difference between riches and poverty levelled out; she realizes that she can contribute to this by giving away her fortune, but· com plains that it is little use the individual person doing so "since the fortune of one. rich man will not go far among the great multitude of the poor". This lament appears very artificial and not very fair either. If one regards equalization· of income to be so great a blessing as Mrs. Wootton does, one must expect the price to be high. The most frequent charge made against the capitalist market economy is that the distribution of income and fortune is unjust. It is not possible to determine objectively what is just and what is unjust.

Some people understand by just distribution an equal per capita dis tribution. Others understand distribution according to needs (deter mined by age and sex). Others again think that distribution should be made according to contribution, that is to say according to the useful ness of each individual to the community. Others again think that distribution ought to be made according to "merit", which is a hazy idea to which we shall revert later. There is no denying that differences in income and capital at any one time are very large in the. capitalist societies, but it is not logical to infer that they are unjust (see p. 41). The discussion of socialism has shown tp.at some advocates ftnddifference in income more obnoxious than low incomes. Others, however, think that difference in income is of subordinate importance and that the main thing must be to raise the average as well as the lowest incomes as high as possible. Those holding this latter view will naturally consider the existence of large incomes and fortunes a low price for economic progress for all layers of society.

Whatever one's views on this question, there is no basis for adducing large differences in income as an obj ection against capitalism and an argument for socialism, unless it is certain that these differences ,can be eliminated in the socialist society. This appears extremely doubtful. In any kind of society the distribution of income will at any given time either bea matter of power or depend on the value set by his fellows on the services and goods. provided by the individual.. Both alter natives are thinkable in a socialist society. There can be a central authority which sovereignly determines the income of·· each social group or of each individual; under this assumption, arbitrary decisions are likely. If it were possible to introduce free competition (an un likely assumption in a socialist society) income would be distributed lLamentfor Economics.

2 14 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY according to a scale of value set by the consumers. Since the con tribution will necessarily vary from individual to individual the second alternative will also mean that there will be wide differences in re muneration. 1 Distribution of income "according to merit" is a misty goal, but it is surprisingly general, not least among artists and scholars. The point of departure is that there must be something wrong with the dis tribution of income, when intelligent, gifted and industrious brain workers have small incomes, while ignorant manufacturers of pins or chewing gum may have· huge incomes. One can understand and sympathize with this point of view, but it must be realized that it is really a strongly individualistic and "undemocratic" one. What really lies behind it is a desire for differentiated wages and to have one's own subjective valuation taken as the basis and not the valuation of the general public, which, as expressed in the effective demand, has already shown that the products of the manufacturer of pins and chewing gum are in greater demand than those of the artists and scholars.

The third and most probable possibility is that in a socialist society income would be distributed according to the sovereign decisions of the central authority. When so much power is concentrated in the hands of a few, it is most likely that the matter will be decided entirely arbitrarily. Stalin has rewarded individual authors with high salaries and this, no doubt, accounts for the enthusiasm of many intellectuals for Soviet Russia, but it must be added that these high salaries are paid only on the condition that the author writes nothing but what is acceptable to the authorities. One of the results of our examination of the possibilities of calculation under different forms of distribution was to show that the distribution of purchasing power in a socialist com munity without competing markets must depend on power to an even greater degree than in other societies, where the income is distributed simultaneously with the production on the basis of more or less free formation of prices.

An investigation of wage relationships in Soviet Russia must surprise those who hold that differences in -remuneration will be done away with in the socialist societies. Max Eastman has made a com parison 2 between wages in Soviet Russia and in the U.S.A., the capitalist state .par excellence. Eastman refers to· statistics given in the New Republicof 15th July, 1936, where the salaries of the heads of such lWe have assumed that individuals vary in respect of physical strength, in telligence, artistic and spiritual gifts, etc. One of the many paradoxes of our day is the tendency to disregard these differences when it comes to work, at the same time as a tremendous amount of time, energy and interest is employed to measure the least fractional difference in athletic accomplishments. 2The End of Socialism in Russia, London, 1937.

ALLEGED DEFECTS OF CAPITALIST SOCIETIES 2 I 5 large American companies as Chile Copper Company, Curtis Publish ing Company, and Consolidated Oil are reported. He·shows that their salaries are often 50 to 100 times higher than the relative average wage for non-skilled labour. For the Russian wages Eastman refers to an article by Leon Sedov in the New International of February, 1936, in which the author quotes, among other sources, from Pravda of February, 1933, where it is stated that while the miner who is not a Stakhanovist gets from 400 to 500 roubles a month, a Stakhanovist can receive 1,600 roubles. An assistant can get 160 roubles, if he is not a Stakhanovist, and 400 roubles if he is. Seclov also states that a certain named manager of a mine received 8,000 roubles a month and that engineers can earn from 80 to 100 times more than non-skilled work men. In his review! of Barbara Wootton's book Plan or No Plan Professor Frank H. Knight asserts that on pp. 155-156 she states that wages can vary from 80 to 1,000 roubles a month. 2 This may be countered by saying that there still remains the great difference that in the socialist societies income from investments will not exist. This assertion, however, 1S not correct. Incomes from investment are not necessarily banned in the socialist state. Socialism means that the right to private ownership of means of production is abolished, but not that of interest-bearing securities. In Soviet Russia it has been possible to buy State Bonds bearing 7 per cent interest, and to pay money into a savings bank, where it is free of both income tax and death duties. The interest has been up to 10 per cent. 3 . When it is possible to earn from 10 to 100 times more than the average wage and besides to invest one's money at high interest rates, there will be good chances for making fortunes.

In the discussion on unequal distribution of income and fortune it is often said that the socialist society will be classless. What has just been said makes it clear thatthis is not the case. For other reasons the concentration of power inevitable when one or few· persons manage all means of production-the privileges will necessarily be greater than in any competitive capitalist society .. It is often said that the alleged classlessness of the socialist society w1l1 bring about far reaching changes, the most· important of which is an alteration in people's mental attitude. This question of whether people's psyche IJournal of Political Economy, 1935. • 2This reference to the height of wages is not to be found in the English edition, although the American edition is stated to be a photographic reproduction· of the English. 3See inter alia Eastman's book. Barbara Wootton writes that the interest the public is generally given is "such as exceeds the wildest dreams of fancy of the investor in the public loans of the capitalist countries". (Plan or No Plan, p. 72.) L. E. Hubbard states that the interest on personal savings accounts is 8 per cent plus I per cent on fixed term deposits. (Soviet Money and Finance, London, 1936, p.86.) 2 I 6 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY will change under socialism is of fundamental importance for the future of the socialist society. It will be remembered that several of the solutions of the problem of calculation are simply based on the assumption 1 that such a change will take place (see p. 25).

Economists hold strongly divergent views both on the relationship between institutions and psychological attitude and on the particular consequences of the right to private ownership of property. On the one side there are those who hold that the right of private ownership is an institutionalist phenomenon in which one will find the roots of most social evils. On the other side are those who see in private ownership a great source of strength which forces us to undertake economic calculation and to minimize costs, and which acts as a stimulant to new enterprise, at the same time as the necessity of bearing losses provides the necessary brake. The right of private owners hip is an institutionalist phenomenon in so far as it can be abolished under other forms of society, but it can also be said that the desire to acquire private property is bound up with the instinctive urge to protect one's mate and children and is thus linked with the reproduc tive urge. (See also the remarks on the instinct to save on p. 95.) The argument that the right to private ownership is a necessary stimulant is often countered by saying that it is out-of-date. 2 It is said that the joint-stock companies of capitalist societies show that as far as means of production are concerned the right of ownership and that of disposal can be separated without injury. The analogy is too slight to have any value as proof. In the first place, many, and probably most, limited companies were set up with the object of limiting responsibility. This means that in most, but not in the largest, com p-anies, those who manage the means of production are in fact the owners. In the second place even in those companies where the right of ownership and disposal are separate, it will generally be found that (I) those who manage the means of production are share-holders, that is to say, they have a share in the ownership, and (2) that the managers are partly remunerated according to profit, that is to say, their incomes depend on the surplus, which is the same sort of stimu lant as that of ownership. In the third place it must be kept in mind that the private ownership of a concern does not merely carry the right to the surplus, but also means bearing the risk of a loss. One can imagine socialist societies giving their business managers an incentive in the form of a bonus, but they are by definition prevented from giving them that. special attitude that comes from risking one's IProfessor Mises says succinctly: "It is an evasion of the problem to put one's faith in the hope that the moral purification of mankind ..." Socialism, p. 2.17.

2See, inter alia, A. R. Sweezy: "The Economist's· Place under Socialism" in Exploration in Economics.

ALLEGED DEFECTS OF CAPITALIST SOCIETIES 2 I 7 own means. Finally, in the capitalist societies there are to be found in practically every branch of industry side by side with joint-·stock companies concerns where management and ownership, formally or in actual fact, are in the same hands. This means that there exist privately owned concerns playing their part in determining the degree of efficiency and the tempo of modernization. The result is that even managers without owner-interest are forced to keep their con cerns on the same level. In a socialist community there cannot possibly be competition from privately owned concerns. The last of the objections mentioned-it is really not. an economic one-is that there is no real freedom of thought in the capitalist society since the opinions and tastes of the masses are influenced by propa ganda, the example of the upper classes and other factors connected with their environment.

This. is to give a quite special meaning to the expression freedom of thought. In general usage we understand by freedom of thought the possibility of expressing opinions in speech and writing. Used in this sense, it is not correct to say that freedom of thought does not exist in the capitalist society. If, however, the expression is taken to mean the capacity for independent thinking without being influenced by one's surroundings, the argument is in itself correct. This, however, does not mean that it is an argument against the capitalist society. The opinion and tastes of the masses are influenced in any and every society by propaganda, by milieu and by the example of the ruling class. The criticism implied in the assertion is unjustified. There is, indeed, little reason to believe that freedom of thought in whatever sense-will be greater in the socialist than in the capitalist societies. In the first place, in both societies, since people live in social groups, they will be influenced by social factors. Secondly, socialist societies will also have their upper classes. In any modern indus trialized society there will necessarily be superiors and subordinates, which of itself must lead to class divisions. Nor can the socialist community eliminate emulation .. Even if one assumes both economic and athletic competition being eliminated, there will still remain rivalry in the choice of mate (at any rate as long as reproduction remains a matter for the two sexes). Irrespective of which faculties~ intellectual, physical, or artistic-are rated highest in the community, there will always be individuals who get further than the others, and in the end they will form an elite or upper class which will set its stamp upon the others. The same will happen ifan entire social group or a definite profession is made pre-eminent. When, after the revolution in Russia, the manual labourers were made· the upper class, the former o 2 18 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY upper classes had to copy them in order to save themselves and obtain the same rights, such as, e.g., that of their children being allowed to attend school. Even if one gives the phrase "upper class" the re stricted meaning of a social group having economic power (which is quite unreasonable) there will still be an upper class in the socialist society. The elimination of the right to own means of production is in this connection of minor significance. It is not the right of owner ship as such that creates an economic upper class in capitalist societies, but the power and the opportunity to buy things which follow the right of private ownership. Social groups having this opportunity and kind of power will be found in the socialist state as welL The power of the leaders of a socialist society will indeed be infinitely larger than that wielded by any individual in a capitalist society, since they will have at their disposal the entire means of production in the community. If a socialist society, in a natural desire to achieve optimum division of labour and thereby maximum productivity, pays wages far in excess of the average, this would provide extensive possibilities for the formation of an economic upper class. If, in addition, there are facilities for investing money at high rates of interest free of tax· and death duty (as in the Soviet Union) there will in fact be exceptionally good possibilities for the formation of an upper class.

With regard to the third factor which is supposed to destroy the masses' freedom of thought, propaganda, .the danger is that in the socialist society it will be both more extensive and more intensive. There are many reasons for this. An individual, or group of in dividuals, invested with· such large powers· as the leaders of a socialist community will have, ~ill naturally identify their own interests with those of the community. It is inevitable that they will believe that they are strengthening the state by suppressing all criticism of the system and of themselves. Besides, from a purely psychological point of view it is difficult for someone who has sovereign powers in one field (the economic) to be tolerant and liberal in others. From the technical point of view, the facilities for expressing divergent views will be either eliminated or greatly reduced in socialist societies, since the right to private ownership of the means of communication and dis semination such as printing machinery and halls for meetings, will by definition have been abolished. That this reasoning is correct is confirmed by developments in all socialist societies, both Marxist and national-socialist ones. Not only are certain views forbidden to be heard or read, but people are obliged to listen to chosen opinions.

The leaders' fear of criticism is so great that they have also abolished the artist's right to free development and· the scientist's freedom of investigation. In a period when a question mark is affixed to all values and conALLEGED DEFECTS OF CAPITALIST SOCIETIES 2.19 ceptions, when war is recommended as healthy training for youth and when the promptings of blood and instinct are given an equal value with the thoughts of the head, there is no objective foundation for denouncing such a policy. We shall, however, confine ourselves to stating that freedom of expression, freedom of artistic development and freedom for scientific investigation have been decisive factors in the development of mankind .• One may consider this development as p~og~essive o~ ~et~ogressive, but it cannot be denied that the elimina tion of these factors will have far-reaching effects that can change both the rate and direction of development. This, however, brings us to what are the· possible, or probable, consequences of socialism, and that is a subject on which we shall not embark, for in this work we have sought to follow the example of the scientist, who, afraid of being accused of taking political sides, omits to condemn even the forces which are destroying the very foundation of his work, namely his freedom to investigate and explore. This is a form of objective passivity which the author finds as admirable in its coolness, as it is difficult to understand.