Thoughts on economics and liberty

The Webb’s “refutation” of Mises and Hayek in their 1935 book extolling Soviet communism

Sidney and Beatrice Webb, the intellectual forces behind Fabian socialism, wrote a 1150 page book extolling soviet communism, and Pigou PROFUSELY PRAISED THE BOOK IN HIS 1936 review in the Fabian mouthpiece, the Economic Journal. The book:


The Abstract Economist’s Criticism of a Planned Economy

There is one school of economists, which has adherents in all the western countries, who do not trouble to dispute the actual achievements of the planned economy of the USSR, because they claim to possess a science according to which these achievements are logically impossible. It is only fair to set forth, even if succinctly, the argument which convinces such an economist that a planned economy must, by the very nature of its being, fail to produce the results that it claims.

Such an economist asserts, in the first place, that the absence in a planned economy from the great part, of the field of distribution, of a completely free market among individual buyers and individual sellers, must necessarily prevent the maximum satisfaction of the aggregate of consumers taken as a whole. What he calls the “price mechanism”, based on perfect freedom of competition among buyers and sellers in such a market, coupled with unhampered liberty to any entrepreneur to produce whatever he chooses, and complete freedom of movement from market to market, both of commodities seeking purchasers and of purchasers seeking commodities, necessarily result, the deductive economist would say, in the whole aggregate of consumers getting, in return for the whole aggregate of their expenditure, the very maximum that is possible of what they themselves decide to be their heart’s desire.[1] Or, with greater circumspection, he may declare that such a perfect freedom for buyers and sellers alike, must certainly result in a greater aggregate satisfaction of the consumers’ conscious wants than the decisions, whether as to what shall be produced, or at what price each commodity shall be sold, made by even the wisest legislature or government department.

The deductive economist’s second assertion about a planned economy, such as that of the Soviet Union, would be that its abolition or supersession of the motive of pecuniary profit in the entrepreneur or other proprietor of the productive enterprises of the community, and also in the merchants and traders who move the commodities to the markets in which they are most keenly in demand, must necessarily result in a less assiduous attention to the wants and desires of the whole community of consumers. It is, such an economist declares, the desire for profit, the determination to make profit, and the expectation of being able to make profit, that alone calls forth the greatest energy and persistence in the mine-owner, the manufacturer, the merchant, the wholesale trader and the shopkeeper, or anyone who acts in any of these capacities. It is this motive, selfish as it seems, that drives the capitalist to engage in business, to risk the loss of his capital, to make or adopt new inventions, and to strive to satisfy, to the utmost degree and at the lowest cost, the wants and desires of the consumers, on whose continued purchases any lasting success in profit-making ultimately depends. Such an economist will confidently assert that, at any rate over the greater part of the field of production and distribution, there is no known substitute for the incentive of pecuniary profit, without which, even under the wisest government, the methods of production must inevitably stagnate, and the nation’s aggregate output decline in quality, and even in quantity per head of population, whilst the efficiency of distribution would very largely disappear, to the incalculable loss in satisfaction of the consumers.

Dealing in greater detail with the planned economy of Soviet Communism, the deductive economist of the western world would point out that, if the Soviet Government fails to debit each of its capital enterprises with annual interest, at an appropriate percentage upon the amount of capital invested in them, its failure to add this interest to the cost of production deprives that government, and the public, of the data necessary for a decision as to which of the proposed new works it is economically most advantageous to proceed with first; and indeed, also of the data which might lead to the judgment that some of them involve too large an expenditure of the nation’s capital to be economically justified. The only system, it is asserted, on which a community can obtain the maximum return for its investments of capital, is one which takes for its guide such a continual allocation of capital as will result in the return yielded to the last increment of capital employed in each of the enterprises being always uniform.[2] This optimum distribution of the nation’s aggregate capital, it is declared, is that to which, under perfect freedom of competition, unfettered private enterprise is always tending to approximate. Such an optimum allocation of capital, it is asserted, will never be reached, or even attempted, by any government. In particular, it is urged (quite forgetting the grounds of the decision in the USSR) that the whole policy of Soviet Communism is constructing gigantic productive works scattered all over the USSR, and therefore not always at the economically most advantageous place, and its haste in developing mass production by the use of the latest machinery, at a time when capital is relatively scarce, has resulted in the consumers getting positively less to eat and less to wear than if the handicraftsman and the kulak had been left free to enlarge their own more primitive enterprises. It is suggested that it would even have paid the USSR to have imported the cheap machine-made products of western Europe and America in return for more timber, grain and furs, putting its scanty capital into enlarging these industries, rather than sink that capital in the attempt to make the USSR self-sufficient in the supply of every kind of machinery (as if there were no other consideration to be taken into account!).

Finally, the deductive economist of the western world denies that under the best planned economy there can be, in a community continuing to make inventions, to discover new sources of wealth, or even to change its fashions, any complete abolition of involuntary unemployment—even long-continued mass unemployment. Such ever-recurrent unemployment, it is declared, is the price that must inevitably be paid for the freedom to invent and explore, the freedom to substitute new methods for old, and even the freedom to alter tastes and habits, upon which the very progress of mankind depends. Such an economist may sometimes admit that the community as a whole may rightly relieve the sufferings of the involuntarily unemployed, as it might the victims of an earthquake. But the deductive economist is more apt to hint, if not openly to declare, that mass unemployment under the operation of the “price mechanism” is merely a result of the “rigidity” of the wage-scales of the wage-earners, even more than that of the rates of interest demanded by investors; a rigidity which obstructs the operation of the law of supply and demand. The amount of unemployment, it is sometimes asserted, is a function of the cost of labour. If the wage-earners would let the “price mechanism” apply freely to the remuneration of labour, and, in bad times, accept lower wages, there would be fewer unemployed. If wages were low enough, it seems to be held, in face of all the facts, that no person would be involuntarily unemployed, perhaps except, transiently, a few individuals, through temporary maladjustments of the market!

A Communist Reply to the Economist’s Criticism

The economic thinkers in the USSR to-day would, we fear, deal very summarily with such criticisms of the economists of the western world as we have ventured to set forth.[3] The claim that the operation of the price mechanism in an absolutely free market necessarily secures the maximum satisfaction then and there possible of the wants and desires of the whole aggregate of consumers, would be simply laughed to scorn. In the first place, it would be objected that such perfect. freedom is demonstrably incompatible with the actual organisation of any human society that has ever existed. It is, in fact, no better than an economic myth, and one which cannot be shown to be capable of application in any community whatsoever. Even as an economic myth, it must be rejected as logically indefensible, because by its very nature it is dependent on any number of unstated and arbitrary assumptions, such as the institution of individual ownership in the means of production; the universal application of laws against theft and fraud of the particular kind now in force in western Europe and the United States; and the existence of a police force capable of rigidly enforcing such laws. But, even assuming that such a mythical argument could have any cogency, the communist absolutely denies that there is any ground for the inference that the price mechanism, under complete freedom of production for a free market, ensures the maximum satisfaction of the consumers’ desires. The “price mechanism” does not even purport to have regard to the wants or desires of all the members of the community, but only to those of such of them as possess purchasing power. It is only what he calls “effective demand” that the deductive economist claims to satisfy. It is only those having “effective demand “who are allowed votes in what has been termed a “continual referendum on what shall be produced and consumed”. Yet in every country of capitalist civilisation a considerable number of persons at any time, and in every recurring slump millions of persons, find themselves, through no fault of their own, for longer or shorter periods, without any purchasing power, and yet with imperative wants and desires which are “effective” enough to cause suffering and even death, but which do not constitute any “effective demand” that the economist will recognise.

Moreover, the economist’s whole inference of “maximum satisfaction”, even of “effective demand”, is logically unsound, unless it can be shown that equal amounts of purchase price represent, to different purchasers, equal sacrifices of happiness. It is obvious that this cannot be demonstrated. On the contrary, the very inequality in individual wealth, which exists to a greater or lesser degree in every human society short of complete communism, necessarily involves the uncomfortable fact that purchase prices, of equal amount in money, represent, in different buyers, extreme differences in sacrifice. It follows that there is absolutely no ground for the inference that these equal prices purchase equal satisfactions. The London crowds returning home from city offices, overtaken by heavy rain, incur the cost of taking public vehicles very largely according to their degrees of opulence: the wealthy banker takes a cab in the least shower; the salaried manager yields to the expense if the rain gets slightly worse; the junior clerk turns up his collar and holds out until he can reach the underground railway; whereas the girl typist, sharing her scanty wage with a sick mother, trudges homeward drenched, before she will part with the price of to-morrow’s dinner. But it is not merely the maximum satisfaction of desires that the price mechanism fails to secure. It is plain that, with unequal incomes, there is not even a decent measure of justice secured in a community of persons having unequal needs.[4] The “price mechanism” in the free market does not even ensure a maximum of social efficiency in wealth production, because this requires the exaction of less work from the sick and the weak than from the hale and strong, and the provision for the former of more care and sustenance than for the latter; whereas the prices for their labour, which provide their respective purchasing powers, tend, in a free market, to be more or less proportionate to their value to the profit-making employer, and this value is almost in inverse ratio to their needs!

But the communist has a far stronger reason for objecting to the economist’s argument in favour of production for a free market. The economist apparently can never rid himself of the conception that the main object of society must be to enable and promote the maximum accumulation of individual riches. For the sake of this all-important end, he will put up with the existence, and even the increase, of inequality in opulence among individuals and social classes, and the existence of a destitute proletariat whose wages do not suffice to maintain their families in health. For this end he insists on buying labour in the cheapest market, actually preferring, in many cases, children to adults, women to men, and even weaklings to the strong, if only he can get them at a low enough wage. For this end, he exploits the labour of backward races, incidentally destroying their indigenous social order, and recklessly introducing among them disease and demoralisation. For this end, he will allow the unrestrained using up of the future resources of the community; the careless destruction of the forests; the reckless draining of the oil-fields; even the destructive exhaustion of the soil itself. The amenity, the beauty, even the healthiness of the country will be sacrificed to the supreme end of a maximum of production, not of wealth to the community but of riches to the entrepreneurs, to the very accumulation of which, it is claimed, society owes its material progress. It is interesting to contrast, with the criticism of the western economists, the ends that are sought in the planned economy of the USSR. Both the First and Second Five-Year Plans were avowedly governed, not by the question of how to secure the greatest profit or personal riches for a small minority of entrepreneurs and captains of industry—not even the greatest amount of wealth for the whole of the present generation—but by considerations not taken into account at all by the individual profit-maker, of whom the western economist habitually thinks. There was, first of all, the need for national defence, which is a terribly expensive service, not yielding pecuniary profit to the citizens as such. There was the requirement, deemed imperative for strategic reasons, of the quickest possible industrialisation of the country, irrespective of the economic cost that might be thereby incurred, in order that the USSR might become practically self-sufficient before the capitalist powers were able to combine to attack it, or to blockade it. There was the imperative necessity, as it was, after prolonged consideration, deemed to be, of mechanising agriculture, as the only way of quickly increasing the gross output of foodstuffs to an extent that would ensure, even if not a maximum yield of profit each year, yet enough food in the famines which had heretofore desolated Russia every five or ten years. Then there was the conception that justice as well as humanity demanded that all the various peoples which together make up the USSR should be brought up to a common level of civilisation. This required that the new industrialisation should be extended to all parts of the Soviet Union, even if this involved some sacrifice of the greatest possible immediate wealth to the dominant race. The same conception demanded that positively more should be done for the women and the children than for the male adults, and more for the backward races and the backward districts than for those which had already made more progress. All this emphasised the importance, even for the sake of productive efficiency, of rapidly developing the education of an exceptionally backward population and of equipping the whole area with hospitals, doctors and nurses, and generally the expensive apparatus of a Public Health service to fight disease and lessen the excessive infant mortality. The judgments and the decisions on all these matters may have been right or they may have been wrong. But no person of common sense can deny that they were of supreme importance to the well-being of the community and that they had to be made on other grounds than their effect on the personal riches of the minority of investors, or even than the amount of pecuniary profit or loss that they involved to the existing generation. Can we wonder, when the planned economy is found to be determined to an extent that is relatively great, by such ends as these rather than by considerations of what would yield the maximum profit—and this profit to be enjoyed by only a minority of the population—that the economist’s criticisms fail to secure in the USSR even the amount of attention that they deserve I Whilst the western economists count as success solely the maximising of exchange values in relation to production costs, the soviet planners take account of every purpose of an enlightened community.

[1] “The actual direction of industry, the decision whether more wheat shall be produced and less corn [maize], or more shoes shall be produced and less hats,” writes an American economist, “is left to the choice of independent producers who make their decision with reference to the state of the markets.” To him it scenes clear that prices in the market-places are in effect a continual referendum on what men wish to produce, what they wish to consume, where they wish to work, and where they wish to invest their savings” (article by Dr. Benjamin N. Anderson, junior, on “A Planned Economy and a National Price Level”, in the Chase Economic Bulletin, July 9, 1933).

[2] Any government, of course. finds that it has to take into account needs and results incommensurable by the economists’ arithmetic. The London County Council does not debit its parks with interest on their capital cost, as it is quite impossible to measure in money the returns that they make to the community; and quite futile to compare the relative cost and utility of an expensive open space in a densely crowded central area, with those of a less costly open space on the edge of the mass of houses, where the use by the public is largely prospective.

[3] It would be hard to convey, to the economists of the western world, the depth of the contempt felt for their reasoning by the economists of the USSR—unless by the estimate, that it is at, least equal to that felt by most of the economists of the western world for the reasoning of their Russian colleagues ! We venture to suggest that the reciprocal ignoring of each other’s studios and the reciprocal contempt for each other’s arguments is, on both sides, unworthy of what should be a matter of serious common investigation.

[4] The communist may safely admit that, if it must be accepted that personal satisfaction is accurately measured by retail price, the conclusions of Professor Mises and Professor Hayek are correct. But it is obvious that, in a population having unequal incomes, they are glaringly at variance with the facts. Other opponents of soviet Communism admit that it “cannot be assailed in this position. If the problem consists of making the economic system serve extra-economic ends” —such, we suggest, as national defence, the improvement of Public Health and a universalisation of culture— “then the planned economy provides an excellent solution” (Economic Planning in Soviet Russia, by Boris Brutzkus, 1935. p. 230).

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Sanjeev Sabhlok

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