Time for NATO to Close Its Door
The Alliance Is Too Big—and Too Provocative—for Its Own Good
POLITICIANS accuse the science of political economy of having failed. On the other hand, there are economists who see in politics nothing but a crude and undisciplined force which upsets their field of activity. The discussion would be more productive if only a little more effort could be devoted to arriving at an understanding of one or two cardinal problems affecting the relations between the state and economic life, and hence the relations between politics and political economy.
To the politicians I would suggest that, before accusing economics of having failed, they might first find out more about the recent results of scientific investigation in that field. Political economy is in a bad way. Although still a comparatively young science, it probably has made more rapid progress during the past few decades than has been made in any other branch of intellectual endeavor. But in the whole scientific domain progress always implies increasing complexity. Far from being simple, social life is infinitely complicated. How, then, can we expect to succeed in reducing the science of social life to a few simple formulas? In the field of natural science, the most ambitious layman readily admits that he does not understand the atomic theory or the quantum theory or the doctrine of relativity. But in questions of political economy anyone seems to imagine himself competent to pass authoritative opinions, even though he has never troubled to acquire the faintest idea of the many useful results of laborious economic investigation and reasoning. The worst of it is that there are even university professors in the ranks of these "laymen," a fact which tends especially to puzzle and confuse the non-specialist and the politician. It surely would be impossible today in a great university in any civilized country for anyone to teach physics if he knew no more about the atomic theory or the theory of relativity than the average newspaper reader -- that is to say, nothing. But it seems to occasion no surprise that in every country there are professors of political economy who have never so much as heard of the new theoretic conceptions achieved in their own science during the past thirty years. There is no need to mention names. As a matter of fact, this science -- or rather those representatives of it who know its modern significance -- has never been so unanimous as it is today concerning recent economic events. If we consider the complexity of the questions here at issue, we must realize that such unanimity is no more a mere matter of course than would be the complete agreement of a number of physicians sitting in consultation on an exceptionally difficult case. Nor would the authority of the science concerned in either case be impaired by whatever differences of opinion might arise concerning diagnosis and treatment.
On the other hand, there are some scientists who approach their task too light-heartedly, treating politicians with the sovereign contempt shown by Archimedes toward the intruding Roman legionary at Syracuse. While a conscientious politician ought certainly to study what economic science says will probably be the results of a certain course of action before he embarks on it, the economist is arrogant if he expects political decisions to be taken exclusively on economic grounds. The economist, remaining within his own domain, simplifies his question -- indeed, he has no other choice -- by restricting himself to individual economic motives. He lives in the realm of economic reason and rejects any motives of an extra-economic, not to say anti-economic, nature. To mix these motives up with economics is, in his eyes, disturbing, senseless, criminal. To the politician, on the other hand, this world of extra-economic or anti-economic motives is his world, the world which it is his great task to master. In the mouths of many snobs and intellectuals the phrase "a clever politician" has a disagreeable flavor. But actually it is a title of distinction for any man in public life, provided he does not fail to measure up to legitimate intellectual and ethical standards. Just as in economic life the merchant has his place alongside the technician, so political life needs in addition to the scientifically trained official the politician who is well versed in his art.
The "new era," which really dates from the year 1914, is not defined by economic facts. This statement runs counter to current and customary ideas and therefore needs some amplification. The questions here at issue are of decisive significance, if a clear insight is to be obtained into the problem of the relations between the state and economic life. The most characteristic feature of this new era is the change in primary mental conditions. What I have in mind here may be discussed under three heads:
1. The ascendancy of politics over economics -- an ascendancy which had seemingly been ended by the social developments in the last decades before the war -- never was more pronounced than it is today. This is true in the field of foreign no less than domestic politics. Despite its absurdity, the thesis that the origins of the World War were economic still finds millions of adherents. The World War started in Vienna regardless of the fact that the former Austro-Hungarian monarchy represented the most perfect and the most satisfactorily balanced economic unit in pre-war Europe. This did not prevent that old-established monarchy from falling to pieces, and concurrently reducing Europe to a heap of ruins, because the mere existence of such a half-absolutist and supra-national state was a negation of the democratic and nationalistic trends of the times. Nor had the antagonisms between Germany and France ever been economic in origin. From the economic point of view, indeed, France's recovery of Alsace-Lorraine was almost calculated to embarrass her, implying as it did increased competition in agriculture as well as important industries and thus adding to her economic worries. In the same way, economic considerations were never factors in the antagonism between Austria and Russia. Nor was the economic value of the South Tyrol and Trieste for Italy ever great enough in itself to create her desire to own those regions; and today the maintenance of the ports of Fiume and Trieste, without any economic hinterland, is a very expensive affair for Italy. But such economic considerations were not enough to prevent the political antagonisms which had grown up from ending in armed conflict.
Similarly, the peace treaties show hardly a trace of economic considerations. The successor states to Austria-Hungary and Russia, viewed as economic units, are absurd and impossible, and constitute one of the elementary sources of the European crisis. Their economic absurdity is aggravated by the fact that, instead of joining forces, these small and medium-sized states have shut themselves off from one another. Evidently, then, they are prepared to pay a price for the enjoyment of their national self-consciousness. They do not adjust their political conduct to the laws of economic reasoning. Their principal goal is to consolidate themselves as nations and to acquire power; and they are quite willing to subordinate their economic interests and policies to those aims, even at a heavy sacrifice. The non-economic character of the grave international crisis now shaking Europe to its foundations is so evident that there is no need to dwell on it.
Though less obvious, it is none the less certain that the great domestic upheavals which have taken place all over Europe likewise spring from sources that are not economic in nature. Neither the bolshevik nor the fascist nor the National Socialist revolution can be explained on economic grounds. Any attempt to do so leads us astray. To say this seems paradoxical, especially in the case of bolshevism, which parades before the world as a purely economic system. In pre-bolshevik Russia literally all the economic and social premises for building a socialistic commonwealth were lacking. There was really no question there of the dialectic transition by which, according to the Marxian doctrine, any highly developed industrial state is supposed to be forced into socialism -- for the simple reason that there was no such thing in Tsarist Russia as a highly developed capitalism with its attendant bourgeois and proletarian classes. Fascist Italy did not seek an economic revolution. Her chief aim has been to organize her national self-consciousness. Her whole creation of economic and social organizations, "corporations," is secondary and accidental. Nor is National Socialism to be explained by the economic crisis in Germany. The six millions of unemployed whom Hitler found when he came to power did not compose the army of his followers. On the contrary, the vast majority of the unemployed were in the socialist camp, which Hitler proceeded to destroy. National Socialism can be explained only by its non-material factors; its economic program holds the very last place on the list of reasons for its success.
2. The war and its aftermath aroused the self-consciousness of the masses all over the civilized world. They had to be called upon for the accomplishment of the tasks imposed by the war, and this in turn made it necessary to provide for their elementary needs. In America this aspect of the war never gained anything like the significance which it had in Europe; in America the fate of single individuals was not affected by the war so deeply and so all-inclusively. All the same, no country has remained entirely unaffected by the moral and intellectual consequences of the war any more than by its political and economic effects. I will not attempt to depict "The Revolt of the Masses;" that has been done in definitive form by Ortega y Gasset. The only thing in which I am interested here is the profound and neglected truth that economic conditions had nothing whatever to do with the fact that millions and millions of men of all nations had to live for four years in the trenches, exposed to daily hazards; that during those four years they were forced back into primitive conditions of existence; that during those four years they were cut off from all their social, class and family connections.
The fate of the millions in the trenches was also decisive for the fate of the more numerous millions who remained at home. These were torn loose from their traditional moorings almost as completely as the soldiers at the front. Hardly a factory was able to carry on its customary production; in most cases new ways of manufacture had to be devised almost overnight, under new technical and commercial conditions. In the same way, with men fighting and women suddenly taking over the exhausting labor formerly performed by the men, social standards lost their significance. When marriages are sundered, families destroyed, friendships dissolved, and professional connections broken there is no room for purely traditional activities and ideas.
The new generation looks at every aspect of the world with completely changed eyes. This war generation is no longer conscious of class distinctions or class prejudices. It regards the blessings of technical civilization not with trusting eyes but skeptically. But while there can be no doubt that it has become brave unto death, it is none the less hungry for life. It is ready for anything. In its inmost nature it is revolutionary. This changed attitude towards life has opened up a breach between the older and the younger generation, in the democratic west no less than in fascist Central Europe or in the bolshevik east. And let me repeat and stress that this changed attitude is not due to economic causes; it represents the mental and moral effects of the war.
3. This changed mental and psychological disposition produced by the war encounters a change in the structure of the scientific spirit. Science today regards all problems as soluble by scientific methods. The inventor's genius has been replaced by the laboratory; daring conceptions have given way to the organized labor of the ant-hill. The aims of scientific reasoning, scientific planning, scientific willing, have advanced into the infinite, into the realm of the irrational; but the methods of scientific investigation have been rationalized down to the last detail.
If we would understand the crisis that has overtaken political liberalism we must grasp this phenomenon in its full meaning. The laissez-faire policy is in irreconcilable conflict with the restless mental attitude characteristic of the present time. The modern social consciousness finds it intolerable to let things go as they please in the political and economic sphere. It has become insufferable to be forced to face social and economic problems with resignation, while in all other spheres it has become customary to grapple with any problem whatsoever in a systematic way and to feel confident that it will be solved successfully. In short, this modern social consciousness resents it as an insupportable contradiction that man, who by adopting systematic methods can subject matter and natural forces to his will and press them into his service, should in economic and social life have to submit to the dispensations of a fate which he neither acknowledges nor comprehends.
Let us examine from this angle the changed aspect of the state and the equally changed aspect of economic life.
The state of 1934 is no longer the state of 1914. The present state has to deal with a different people and a different task. The state of 1914 had its place somewhere on the periphery of economic and social life; but the state of 1934 has been transferred to the very center, and it can never be pushed back again to the periphery. We shall therefore have to find ways and means to establish it permanently in the center. The internal unrest which has taken hold of all the great nations, and which in some cases has led to revolutionary movements, originates in an infinitely difficult and laborious process -- the process by which the masses, with their newly gained self-consciousness and political power, are to be organized for the performance of the tasks and duties of the state, these tasks and duties, moreover, being more numerous and infinitely more complicated than ever before.
The war saw universal military service put into actual execution for the first time. Even in those countries where general service had been introduced as a matter of principle, it was of practical concern only to a minority of the total population able to bear arms. The war for the first time caused the entire nation to be called up for the defense of the state. It followed as a matter of course that political power was also distributed among the entire adult population. Even the Anglo-Saxon countries have known universal suffrage in the literal sense only since the war. When masses formerly excluded from political activity are given the vote in quiet times, they promptly become part of the traditional structure of national life. But if this happens at a moment when a political earthquake has all but buried tradition, a startling problem in political education is produced. So far it has been solved nowhere during the post-war period. It remains a momentous problem of our time.
The problem is also related to the new technical developments. Radios and movies have brought the masses nearer to politics, and political leadership nearer to the masses. A new type of political "leader" is needed -- a leader able to capture the imagination of the masses, to whom he is now in a position to appeal directly and daily through the visual sense as well as by the spoken word; a leader who can explain the most complicated matters in plain and plausible language; a leader who claims liberty of action and knows how to defend it at any time, with the aid of the masses, against the political machine.
Up to this point -- but no further -- the problem is the same, whether in a democracy or in a dictatorship. That is why so many superficial observers in Europe are tempted to call President Roosevelt a dictator or to discern symptoms of a coming crisis for democracy in America -- and this at a moment when the American democracy is probably furnishing the most incontestable proof of its power and competence in the entire course of its history.
The transformation of the state is paralleled by the transformation of economic life. The capitalistic economy which dominated the century preceding the World War had been developing at a changing rate of progress, but continuously. "Today" was closely connected with "yesterday" and with "tomorrow." Thus, in adopting economic measures one was able to rely on an increasing store of tradition and experience. Freedom of movement was taken as a matter of course -- whether of persons or goods or capital. The direction of such movements depended almost exclusively on the capitalistic laws governing the market conditions. Year after year, millions of human beings emigrated from the crowded European countries with a low standard of living to the colonial countries in America and Asia. The stream of men was followed by a stream of capital, attracted by better-than-average chances of profit just as the immigrants had been attracted by the chances of attaining a higher standard of living. During the middle of the nineteenth century, Europe for a time was governed by free trade and liberalism. Its fundamental principles remained unshaken up to the war. An international economic system had thus developed which resulted in a real and steadily growing division of labor, bringing all nations the blessings of rapidly increasing wealth.
The war ended this continuity of economic development. The war destroyed traditions of international trade that had been built up in the course of more than a hundred years. All countries alike became hothouses in which industry was "forced" in one definite direction, namely to meet the needs of the war. The war in a few years transformed creditor nations into debtors, and debtor nations into creditors. The war succeeded in ruining the soundest currencies of the world. It paralyzed liberty of movement, not only of men but even of ideas. Thus it could happen, for example, that great technical advances were made in America during the war or during the first years of the post-war period about which Germany heard nothing whatever.
After the world had been reduced to chaos, tradition and experience were no longer of any avail. The fact that the two last decades witnessed the failure of so many old and conservative leaders in finance and industry, while upstarts and adventurers flourished everywhere, is to be explained simply enough by the circumstance that the compass-needle which during the quiet years before the war had guided the course of all economic endeavor, had now ceased to function. Among all the various indices hardly a single one remained unchanged. Production and consumption, currency and credit, technical methods and habits of life, underwent a complete transformation -- almost, one might say, overnight. Those who were not bound by any tradition, the daring adventurers, had their chance in those years. The old conservatives no longer could find elbow-room.
It may be quite true that, from the standpoint of economic theory, the crisis of 1929-1933 is in no way different from any of the crises of the past century -- in its causes, in its progress, in the therapeutic measures to be taken. During each severe crisis of the nineteenth century contemporary observers were convinced that it was essentially different from all former crises, that it admitted of no comparison with any other, and that therefore any automatic recovery was out of the question. They believed, in short, that the past had to be buried, since in some sense or other a new era had been ushered in. And on each of these occasions the traditional economic system seemed finally to have been overcome. Today we are really justified in speaking of a new era. But it is not new in the sense that a crisis of capitalism has been brought about by any economic factors or developments, such as Karl Marx had in view when he spoke of the dialectic transition from capitalism to socialism (in accordance with the immanent law of the system). Quite the contrary, what is really new is here again to be found in the extra-economic sphere. The war has created an economic situation which simply cannot be mastered without the aid and intervention of the state. The states, and they alone, were able gradually to reconstitute the world markets, which had been destroyed by political events and not by any economic crisis. The emergency bridges which had to be built across the trenches isolating one blockaded country from another were built by the states. The international debts represented in the main an accumulation of political debts. The freedom of movement of men, goods and capital, destroyed by the war, has not been restored to this day. Whether, or when, or to what extent it will ever be restored in the future remains an open question.
But the relation between the state and economic life has been radically changed, not only with respect to foreign intercourse, but also in the internal domain. Today the state has to deal with problems entirely foreign to it in the past. In all countries the war has bequeathed a financial problem bigger than any hitherto dreamt of; debts, normal public expenses and taxes everywhere have multiplied. And now the state finds that people no longer strive to exclude it from the economic and social sphere, as was the case in the nineteenth century, but on the contrary are determined and ready to invoke its aid at any moment, in any public emergency. The people have come to regard the state which organized the war as all-powerful. During the war the state made it its business to feed and clothe not only the army, but the civilian population as well; it also regulated the exchange of money and commodities and exercised a dictatorship over production and distribution. And while the state claimed this absolute power as a matter of course, it also did not hold back from acknowledging its own social obligations. Here is a fact pregnant with meaning; the state became for a time the absolute ruler of our economic life, and while subordinating the entire economic organization to its military purposes, also made itself responsible for the welfare of the humblest of its citizens, guaranteeing him a minimum of food, clothing, heating and housing. The famous cards for bread, fat, sugar, coal, underwear and shoes are not yet forgotten in Europe; and the war-time laws for the protection of tenants are still maintained, in one form or another, in many countries. This whole experience precludes even the wish to revive liberalism in the Manchester meaning.
Most people view the consequences of this crisis somewhat naively, in terms of the antithesis between capitalism and planned economy. I say "naively," because most of us picture capitalism to ourselves as a conservative, reactionary principle, and "planned economy" as a radical, progressive principle. Actually, it is just the other way around. Capitalism is inclined, for better or for worse, to liberate forward-driving forces; a planned economy is inclined to put artificial restraints upon those forces and to crystallize them at a given point. Such a statement will, I know, provoke a storm of protest and raise many doubts; but one has to take risks in sketching in rough outline a situation so vast and complicated. Suppose I try to make my meaning clear in the fewest possible words.
Any economy, and therefore a capitalistic economy, requires planning. Every business man has to plan, and the larger his enterprise, the more careful and far-sighted must his planning be. A coal mine operator, in setting out to sink a shaft which at the earliest can be made ready in five years, must work according to a Five Year Plan that will take into account costs, possibilities of interruptions, and prices which are apt to prevail when finally the new coal reaches the market. A great electrical concern must try to estimate just how the demand for current is to develop over a term of years, in order to determine where to build turbines and how many. The same is true of all industries, almost without exception. The management of such an enterprise has to "plan" in the very same way that the "planning commission" of a socialist community has to "plan," and it has very much the same data to work with -- the birth rate, for example, the probable number of marriages, the foreseeable development in technical methods, and so on.
The differences between the "planned" and the "capitalistic" systems come down, rather, to the following:
1. Under capitalism, the business-man makes a miscalculation at his own risk; his mistake in the worst case spells economic ruin for him. The errors of a planning commission are paid for by the community at large.
2. If a hundred thousand business-men are planning away, each on his own account, the mathematical chances that shrewdness and folly will offset each other to a certain extent are incomparably greater than is the case where the decision as to the economic fate of a nation is entrusted to one central brain.
3 (and most important). Capitalism functions under an objective law made manifest through the market -- through prices and interest rates. The dictator, under capitalism, is the consumer. In the long run, production is determined by what the consumer is willing and able to buy. Such a dictator is subject to human influences like any other, and, in principle, it does not matter whether the influence is exerted through advertising, persuasion, party-intrigues, or a pretty woman. No dictator lives in a vacuum; though a dictator, he is none the less a human being, responsive to all human motives. But he is also, none the less, a dictator. The capitalistic business-man can never escape the dictatorship of the market (the case of the monopoly we shall consider later on), and the market, at least in countries where oversupply rather than undersupply is the rule, is in turn determined by the consumer.
Under planned economy the dictator is not the consumer but the producer -- the state -- which prescribes how the consumer is to deport himself, what and how much he is to eat, what clothes he is to wear, where he is to live, what manner of life he is to follow. And the moment the socialistic state acquires dictatorship over the consumer (in other words over the citizen who becomes forthwith a subject) it also assumes control over technical progress.
That, perhaps, may make clear why I view a socialistically planned economy as embodying a conservative reactionary principle. An essential part of its very nature is a tendency to simplify things, make them "manageable," and therefore to crystallize everything at a given point.
To illustrate, one need only consider the parallel developments in technical invention and in manners of living during these past thirty years. Changes in dietary customs have revolutionized conditions in agriculture. The fact that women have come to wear lighter clothes has occasioned a crisis in cotton-growing. The radio and the talking-picture, which today play a leading rôle in the lives of the masses, were inconceivable fifteen years ago. The use of the automobile as a commonplace vehicle has transformed the manners of living of the western peoples more profoundly than any other technical development of the last 150 years. The invention of the safety-razor should have put the barber out of business; instead, the switching of women from pigtails to bobbed hair has given the barber's business an importance no one could ever have dreamed it would have. For all such developments there would be no place whatever in a socialized "plan," for they have all been, as they will always remain, unforeseeable, owing their origin either to chance or to genius.
Differences of opinion are possible as to the importance to be attached to all such things. Here again the final judgment does not fall within the economic sphere. Recognizing the economic and technical superiority of capitalism, a person may still be a communist because the communist ideal as such, or the remedying of certain incidental defects in capitalism, may seem more important, more worth striving for. But that is not the decisive point. The decisive questions are whether individual freedom can exist apart from private property and freedom of consumption, and how highly one is to prize individual freedom. For even were capitalism incurably affected by all the evils ascribed to it by its opponents, it would still be a blessing to be defended to the last ditch if it were the only thinkable economic system under which individual freedom -- freedom not only in the material sphere but freedom of thought, speech and movement -- could be assured, and if a socialistically planned economy precludes such freedom by nature and definition.
The real antithesis between capitalism and planned economy is therefore necessarily involved with the antithesis between democracy and dictatorship. And we have seen that this latter antithesis is unsolvable in the economic field.
Fortunately, however, this antithesis is irreducible only in the domain of dialectic. As we have demonstrated, the capitalistic state has for a long time been located at the very center of business and it cannot and will not withdraw from that position. The problems with which it has to deal have ceased to be problems of ends: they are problems of means. How can the state meet the obligations that have been thrust upon it, without ruining business? How can it attain and preserve a maximum of social justice along with a maximum of economic efficiency? The state was gradually edged into the management of economic life at a time when it was not aware of doing any such thing and was far from wanting to do it. The problem that confronts it today is to make that management practical, to make it aware of its aims and purposes.
The question has to be considered along three lines: 1. Control of production. 2. Control of the distribution of national income. 3. Credit control and fiscal policy.
1. The scope of state control of production is relatively limited. It comes down, after all, to the problem of monopolies. For a generation or more the monopoly question has had a greater influence on political life in the United States than in any European country. The answer which the Americans found for it was to break up the monopoly and establish legal guarantees for free competition. The recent "codes" have to some extent taken the edge off this tendency in American political feeling, though it is apparent that the tendency as such is quite as strong as it ever was.
We must not forget, however, that another solution for the monopoly problem is possible: toleration of monopolies and governmental supervision of them. That has been the European solution, as developed more particularly in Germany. In most of Europe, railroads and public utilities are owned by governments, national or municipal. As regards control of industrial monopolies (in the form of trusts or cartels), practical results have been only moderately satisfactory. But the harm in that is not very serious; after all, the problem of industrial monopolies is far less important than the heated public discussion which it arouses might lead one to suppose. Even when there is no government interference, the limits within which the power of a monopoly can assert itself are very strictly prescribed. The monopoly or half-monopoly is commonly regarded as economically dangerous not only because the consumer may be exploited, but more especially because the excessive earnings of those who enjoy monopolies stimulate over-capitalization, which in the end represents economic waste. I do not believe that that view is sound, or at least I do not consider it very important. I can think of no important case, either in America or Europe, where any real misdirection of investment is to be attributed to earnings from monopolies. But in any case, the fact that such-and-such an investment was wrong can ordinarily be determined in an objective sense only when the crisis resulting from it, real or apparent, has long since been overcome. Not till the next boom period does it become plain what has been rational or irrational in a given economic scheme.
Agriculture does not follow the law which business follows. Experiments like the A.A.A. may therefore be ignored in this connection. Agriculture turned to state control of production earlier and more generally than industry. There were so many causes for this, economic and non-economic, that I can hardly touch upon them here. In the farming world the technical revolution affected an especially conservative class of people, more than ordinarily resistant to change, and less adaptable to new circumstances. In agriculture, therefore, the state is promptly called in to halt or attenuate the working of economic laws. The state is now fulfilling that function by sheltering agricultural products -- in different ways and to differing extents -- from the law of supply and demand which rules the open market. Everywhere the farmer is winning the special treatment which he demands.
2. But the system of production is not (except for out-and-out communists) the central point in the struggle in the political field. More and more the main way to drag the state into interference with business is through controlling the distribution of national revenue. Continuously greater and more varied needs of the masses are forever demanding and finding collective satisfaction. The great pot into which private initiative throws its product is being divided up more and more along collective lines. The state is pushing its activity in this connection further and further afield, and is assuming more and more of the responsibilities which used to be entrusted to private individuals. In this respect the United States has still much further to go than Europe, where it is taken for granted that educational institutions, hospitals, theatres, picture galleries, should be maintained by the national or local government and not by private organizations. Actually, whether railroads or electrical plants are in private or public hands is much less important than the apostles of either system are inclined to pretend. In America, generally speaking, both those utilities are under private control. In Germany, electricity and railroad transport are both under public control. Fundamentally, none the less, the problems for both countries are the same. But the manner in which the state applies its policy of rate fixing is obviously becoming more and more important every day; for, both absolutely and relatively, the technique of traffic and of power supply plays a vastly more important rôle in social and economic life today than it did thirty or, say, fifty years ago. A much larger share of national income is being spent on railroads, automotive transport (in its relation to railroads, road-building, etc.) and electrical power than before, and to that extent a far larger proportion of this income is being made subject to governmental interference.
The housing problem will doubtless become even more important from this point of view in the years ahead. The rebuilding of the great cities of the civilized world is to constitute the great problem of the next decades. The masses of city dwellers live in buildings which do not in the least correspond to the technical and economic possibilities of our time. Strictly private initiative can hardly cope with the housing problem. The city of the future cannot be allowed to grow up wild; it has to be brought under a building plan. So far as one can foresee, this undertaking cannot be financed by private resources any more than the railroads or the schools can do without public support.
However, the most important and decisive step taken by the state in relation to the distribution of national income has been in the matter of unemployment insurance. This is the most typical product of the war-time conception that the state is called upon to guarantee a minimum subsistence to all its citizens. I doubt whether even the United States can very much longer avoid a system of organized public relief for the unemployed -- whether it takes the form of insurance or some other form makes little difference. It is unendurable, both morally and from the standpoint of social utility, that millions of people who are out of work through no fault of their own should be abandoned to private charity. That is humiliating to giver and receiver alike, and the sense of humiliation, the feeling that hungry millions are dependent on the generosity of the rich, constitutes what is perhaps one of the greatest dangers to the capitalistic economic system. But however one looks at the matter, there can be no doubt that in guaranteeing subsistence to large numbers of its population the state is coming to apply a very considerable fraction of the social product to purposes which are determined by considerations not of an economic but of an entirely different order.
3. The problem of the unemployed drives the state to the last and most painful step. It cannot rest satisfied with dividing the pot which capitalistic production sets before it. The most urgent considerations force it to make sure that the pot is abundantly and regularly filled. And that brings us to the question that today overshadows all others -- the question of state control over business cycles.
The question as to whether and how far the state can control trade cycles and prevent crises must be put in the forefront of all current social and political thinking. The problem has very complicated and far-reaching ramifications. It may be said in the broadest sense to dominate the whole field of statesmanship in the latter's bearing on credit and finance.
Here again we must go back to the war days. The war gave governmental finance a quantitative significance that had never been dreamed of before. Public debts and public expenditures leapt into huge figures; and, since the war, state budgets the world over have taken on an altogether different structure. Two items which had played a subordinate rôle, or no rôle at all, have now come to constitute overwhelming and permanent burdens: interest on debts, and war pensions. Nowhere more conspicuously than in the domain of public finance has the state been forced from the border regions to the center of economic life. In most countries, in the old days, from five to ten percent of the national income had been sufficient to cover public obligations and expenditures. After the war the proportion rose in many countries to fifty percent, and even higher. So far as interest on debts is concerned, the state is undertaking nothing more than a redistribution of income, since the bondholders who collect their interest are also taxpayers. And the same is true, of course, of war pensions. But that makes the tax policy of the state and its credit policy only the more important -- it is far from being a matter of indifference whether a government taps one source of income or some other in order to pay its debts. As things have turned out, the burden of debt which the war left in its wake has become unbearable, in the long run, for everybody concerned. For long years after the war there was a disposition in all European countries to play with the idea of a tax on capital in order to get free of part, at least, of the war debt. In some countries the thing was even put through.
But in the end all governments have followed the most practical road to a reduction of the war debt burden: devaluation of currency. The United States has been the last of the Great Powers to fall in with that policy, although in America the pressure of private debts played a more important part in bringing about devaluation than the public debt. But meantime the experience of the war has not been forgotten. The war showed to what unheard of lengths the state could go in controlling the capital market and in drawing on it for its own purposes; and it is altogether natural that once it has used that resource for war purposes it is tempted to use it also for the emergencies of peace.
Budget policy, tax policy, credit policy, currency policy -- all go to make up one indivisible unit. Anything done in any one of those departments has its effect on all the others. As master of taxation, the state is in direct control of a large portion of the national income; as master of railroad and public utility rates the state is in indirect control of another large portion of the national income; as master of the credit markets the state has indirect command over investments; this state therefore cannot avoid taking currency under its control.
In broaching this theme I have no intention of touching on controversial matters connected with the recent currency policy of the United States. But ever since there have been centralized banking systems, the state has been coming closer and closer to control over currency. Since the war, we have seen the state everywhere taking charge of currency policy, however differently the formal and legal relation between government and central bank may be regulated in different countries. When important decisions have to be made, such formal differences count for little. Whether the Exchequer has the greater influence on the Bank of England or the Bank of England on the Exchequer is always a question of the individuals who happen to be in charge; but it is unthinkable that the Bank of England and the Exchequer could ever embark on conflicting policies. This is all the more true of France, to say nothing of Germany or Italy.
But once the state comes into possession of the decisive instruments of power in capitalistic economy -- money and credit -- it at once finds itself becoming responsible for prosperity and depression. That is an entirely new feature in the eventful history of the relations between state and business. It is, however, the logical consequence of an unmistakable development. Can the state assume any such responsibility and meet it -- even halfway? That is the last and the most serious question which faces the state today. What it has been doing is nothing less than assuming responsibility for the whole economic fate of the nation.
I could not, within the scope of this article, even so much as allude to the theory of economic cycles. Whether the depression with which we are struggling is one of those normal cyclical developments that have been constantly recurring in the undulatory movement of capitalistic business ever since we have been able to follow its history, or whether it has an exclusively political background and so requires exclusively political remedies -- that question I must leave aside. From the theoretical standpoint, the determining cause of the depression is a maladjustment between savings and investments. Every boom tends to drive investments above the savings' quota, and so to bring on a crash through an overstretching of credit. The readjustment takes place as the volume of credit is reduced, through the bankruptcy and shrinking of business, to the point where the supply of capital becomes more abundant, money becomes cheaper, and inducements are again offered to investors. The storm signal for a crash is the rapid rise of interest rates to abnormal heights (in 1929 call money reached 20 percent in New York). A sign of recovery is seen in a revival of the issuance of securities as a result of low interest rates on money. Whether this time this automatic recovery from depression through the cycle of credit expansion -- credit restriction -- new credit expansion, has failed we have no way of knowing, since everywhere, in Europe as well as in America, the impatience of governments has interfered with the "natural" course of things.
The forces which underlie that interference we have tried to lay bare in this article. State interference with the development of the cycle has not been voluntary, it has not been accidental, it has not been avoidable. But in saying that we have unfortunately said nothing as to its chances of success.
As long as the state handles itself as though it were a private business man there is not much danger. The private business man is on the lookout to keep a profitable relation between outlay and earnings. He will borrow money at three percent when he can use it in a business that promises four or five percent. If and so long as the state does nothing except replace private initiative, because the latter has been crippled by fright or inertia, it can do no great damage. But danger and damage appear in the offing when the state spends money for the mere sake of spending, regardless of economic purposes and returns. That means wastage of capital. In that case the state behaves like a spendthrift who enjoys himself for a longer or shorter period, but who some day stands face to face with ruin. The power of the state comes to an end at the point where the mechanism of the money and credit system begins to break down. The limit of the state's control of business is the line where inflation gets out of control. On that the mechanism of government itself breaks to pieces. Inflation may lead to the collapse of a governmental system.
(I must leave no room for doubt as to the fact that I see no such danger in Mr. Roosevelt's budget policy, provided it is really carried out to the end along present lines. The President does not seem to be contemplating the permanent replacement of private by public initiative. On the contrary, by concentrating the execution of great public enterprises in a short period of time, he merely is giving such strong encouragement to private initiative that the capitalistic machine will, so to speak, keep on running by itself. Danger will materialize only in case the impulse given to private initiative proves inadequate or merely ephemeral. In that case, the government will be faced with pressure from the masses and might have to carry on its program of expenditures on the original, or on an even larger, scale.)
Thus the problem of the relationship between political power and economic law becomes acute in a new and not yet sufficiently explored sense. A generation or more ago, science (in Boehm-Bawerk) had established the fact that inside the private capitalistic sphere the allotment (imputation) of national income to capital interest and wages can be only very slightly shifted by political pressure either from government or trade unions. But the state's present assumption of power over business becomes effective on a much higher plane. The state now claims the staggering prerogative of setting itself up as lord and master over the economic destiny of the nation, whereas in an earlier day it tried at the most to control conflicting group interests inside the economic framework. But here also the power of the state meets limits that are set by economic law. The conservative, of course, shudders at the mere attempt. He regards it as sheer insolence for the state ever to presume such a thing, for it ever to venture to interfere in the handiwork of God. And anyone who has enough imagination to appreciate the manifold and complicated nature of social processes can share that alarm. The conservative stands in awe and dread before the complexity of life. The radical takes things more lightly, partly because he does not know much about them, partly because he is not afraid of them so far as he feels himself a match for them. If the understanding and humble conservative finds himself involuntarily but unavoidably in alliance with inertia, the powerful ally of the aspiring radical is ignorance.
For the moment, however, the decision between the two does not rest with us, nor can we venture to prophesy what the future will be. Perhaps the conservative and the radical will join hands in the great and noble enterprise of political and economic education. Whether the state is to show itself equal to the gigantic task which history has thrust upon it is a question of the moral and intellectual qualification of leaders and masses alike. On this question hangs the destiny of capitalism and democracy.