Chapter VIII:
Can We Restore Flexibility Without Planning?

IT WILL be recalled that in Chapter V we undertook to wind up the attack on the problem of the workability of the present system by posing for discussion the question whether, within the framework of liberal capitalism, necessary readjustments could be made to render it workable, assuming the requisite conditions for further operation are found. And, pursuing this line of inquiry, we discussed in the last three chapters the debt maladjustments. It was pointed out that, in the United States, under the New Deal or under the processes of deflation which have been largely held in abeyance or counteracted by government inflation, we have not, as yet, appreciably decreased our debt total. And it was seen that those countries in which debt burdens have been extinguished by inflation and currency devaluation have gone communist or fascist, or are in acute economic crisis. The present debt burden, we concluded, must be drastically reduced in a more tolerable way than through either the orderly processes of bankruptcy and foreclosure or the disorderly processes of inflation and devaluation. Furthermore, a debtless economy is indicated as, perhaps, the only formula for preserving any measure of private ownership and management. Getting rid of debt burdens in a satisfactory manner, and getting on under a system of private ownership without debts, or with only partners’ and shareholders’ capital, will require the intervention of a strong executive state.

There still remain to be considered many areas of maladjustments other than debts. To these we cannot devote the space their discussion in an adequate manner would require. We can only mention briefly, with a summary statement of broad principles, the facts that the price structure, supply and demand, and the movement of goods and capital in national and international trade, since the War, have shown increasing inflexibility or failure to find working adjustments, one with he other. Thus, during the boom, the prices of finished goods did not fall as fast as the costs of producing them. Increased use of power and increased efficiency lowered production costs, while increased use of credit by powerful monopolies, in collusion with the bankers (both to hold surpluses off the market and to finance consumption at artificially high prices) served to keep the prices of raw materials and finished products from falling with the fall in production costs.

As a result of the increasingly large spread between selling prices and production costs, so caused, huge business profits were made. These profits gave support to an absurd inflation of market prices of common stocks, real estate, and earning properties generally, such inflation being aided by our friends the bankers through making available for pure speculation on common stock price changes as much as eight billion dollars at one time.

In this way the stock market collapse of 1929 was rendered inevitable, and in this way the magnitude of the collapse was determined by the magnitude of the speculative abuses. And thus, since the bubble burst, just as business and financial leaders conspired to keep prices artificially high during the boom, practically every one has conspired during the depression to keep production costs from following the drop in wholesale prices of raw materials and finished manufactures. By production costs I refer particularly to the cost of money for new investment — interest — the cost of government — taxes — and the costs of labor — wages. These production costs have not fallen as fast as selling prices, with the result, naturally, that profits have declined all the way to large minuses or losses in many industries, and with the further result that millions of workers who could not be profitably employed have been thrown out of work and kept out of work. The facts stated are matters of such common knowledge that it seems wholly unnecessary to give figures or elaborate explanations.

Now all literate exponents of the theory of capitalism will say, in different ways, that a smoothly working capitalism demands flexibility in the movement of prices, costs and wages, quick responsiveness in the adjustment of supply and demand to each other, and fluidity in the national and international flow of goods and investment capital. If exponents of this theory, and business men who voice its dogmas somewhat more crudely than the pure theorists, would only avoid the use of the term and concept freedom, and use terms like fluidity, flexibility, or adjustability, there would be less confusion of nought about these problems. Freedom can mean either easy adjustability or legal freedom to do what, in the circumstances, practically impossible. Every one with an informed opinion on the subject agrees that many readjustments are now needed and that any social system must give a satisfactory performance in the making of readjustments. And most experts, even those with the most widely divergent interests and purposes, could agree fairly well as to what are the readjustments required to make any given social system work. But how can there ever be understanding, not to say agreement, among persons having conflicting interests and purposes if some of them insist on using vague terms like freedom or economic freedom? The question, Freedom for whom to do exactly what?, always remains unanswered.

About the only workable definition of economic freedom or political freedom would be what is within the law and within the limits of practicability. And such a definition begs too many questions to be of much use. Whenever the restoration of economic freedom, or greater freedom in price, wage, or international trade movements, is advocated, what is meant is usually a return to some past legal regime and to some past economic situation, in which a great many people were far from free to do many things they considered desirable and wanted to do.

The advocate of more economic freedom may hope to return to some idealized past legal regime by having certain laws, like tariff measures, repealed, and certain governmental policies, such as the dole or various types of recently inaugurated business regulation, abandoned. And he may hope to return to the general economic situation of the past, which he now idealizes, by auto-suggestion, which he calls a restoration of confidence. He rarely recognizes that what he calls confidence is mostly the product of material conditions, and that material conditions are not chiefly produced by states of mind. A certain state of mind may have brought early fortune hunters to the coal fields of Pennsylvania, the gold fields of California, or the cornfields of the Mississippi Valley. But a state of mind did not put the coal and gold there, or make the soil of the Mississippi Valley richer than that of the Italian peninsula or northern Germany. What the intelligent and public spirited advocates of more economic freedom really want, then, whether they stress tariff reform or more laissez-faire in some other respect, is greater adjustability of the economic factors to changing conditions, and better conditions to which to make adjustments.

If terms and concepts like adjustability are used, it will be found that both the fascists and communists also want a high degree of adjustability of economic factors. The problem, of course, is how to get it under the given system in question or in favor. Fascism and communism must achieve satisfactory adjustments or readjustments from day to day largely through State planning and intervention. Liberal capitalism must expect such adjustment and readjustment to happen automatically under a given regime of law enforcement as a result of the play of private initiatives. The question really at issue throughout this book is whether we can reasonably expect that the system will give a better performance in the way of adjustment and readjustment to changing conditions if we modify the legal regime in the direction of repealing or abandoning some of the present laws or government policies of economic interference, or if we modify the present legal regime with different types of intervention, but in a way which leaves the liberal capitalist system substantially intact. In other words, briefly put, Is more or less laissez-faire the way to get better or prompter adjustments? Or, Will the factors of capital and labor, bankers, business managers, investors and wage earners work out better the problems of prompt and successful adjustment if given more legal freedom and if interfered with less by government?

Now it would be ideal for purposes of settling arguments and making scientific observations if the American elections of 1936 were fought on the issue of more or less laissez-faire, and if the winner kept his campaign pledges and really gave the country a stiff dose of laissez-faire. Then we could make some useful comparisons and perhaps draw some instructive and valid conclusions based on pure experimentation.

Unfortunately, however, while some Republican arch-conservative may well run on a platform which includes a fulsome homage to laissez-faire to obtain Park Avenue and Wall Street financial contributions, the platform will also include all sorts of vote-catching promises of special favors to regional, economic and class interests, such as the tariff-sheltered American industries, agriculture, the West, the South, the A.F. of L. and the veterans, most of which promises will be inconsistent with laissez-faire.

And whatever the promises of laissez-faire made, the laissez-faire candidate, if elected, which seems improbable, would continue to enlarge the present measure of state interventionism under the pressure of group lobbies and desperate economic and social predicaments. So nothing conclusive, or even instructive, about the merits of more laissez-faire is likely to be proved by any course of events, for the excellent reason that no political party or leader in power, or likely to come into power, is going to give us more laissez-faire.

The advocates of more laissez-faire, however, are a sufficiently important and respectable influence, on the whole, to merit a serious answer based, as it must then be, on theoretical calculation rather than any proof of the pudding by the eating. And it cannot be repeated too often that laissez-faire is the only authentic formula under liberal capitalism for effecting necessary readjustments in the formation of prices, the movements of trade, or the balancing of supply and demand. Adequate refutation of the argument for more laissez-faire would have to include a thorough examination of the basic assumptions of liberal laissez-faire, something which is done sketchily in different connections throughout this book.

A briefer and, it would seem, a fairly impressive refutation of the argument for more of what is commonly called economic freedom, or what is really less government interference with the doing by certain people of certain things as the proper way to insure satisfactory adjustments and readjustments under the present system, is merely to point to the universally admitted fact that the leaders of business and finance were directly responsible for the chief initiatives and policies which caused the maladjustments we are now told can be corrected by giving these same leaders more freedom. The failure of prices to fall as production costs fell during the boom period was one of the achievements of our financial and industrial magnates, and was their proudest boast at that time. Who lent hundreds of millions of dollars for the maintenance of the price of copper, coffee, sugar and innumerable other commodities at prices which did not correspond to the indications of supply and demand? What could be sillier than the attempt to make it appear that tariff interferences with foreign trade are the work of the politicians, when, as a matter of fact, tariffs have always been written at the dictation of the most powerful business or economic interests?

It is an obviously desirable thing to have greater flexibility or adjustability in the price, wage, cost structure, or in the movements of supply and demand. But more laissez-faire or freer trade is not the way to attain it. Neither are the processes of parliamentary democracy. On the contrary, history and present day experience are full of demonstrations that the more there is of what is commonly called laissez-faire, economic freedom, democracy or parliamentary government, the more economic maladjustments there will be, and the more difficult of readjustment they will prove. Not only high finance and big business contributed to the freezing of prices and the maintenance of artificial conditions of supply and demand during the boom; but the masses, through their democratically elected political representatives, and through their labor union leaders, supported in every possible way the perpetuation of all these now universally denounced maladjustments. And during the depression, who has opposed deflation or the adjustment downwards of prices more than the bankers, the landlords, the manufacturers, and the labor union leaders? The so-called deflationists have only advocated deflating the other fellow. Thus the industrialist and banker have quite logically argued for a reduction in wages, but they have combined to support the opposition of the landlord, banker and mortgage owner to a wholesale liquidation of bad real estate loans, which would have brought rent down and thus helped enormously towards making lower wages acceptable.

No one economic or professional class can be given all or most of the blame for the stickiness of prices or the inflexibility of economic adjustments under the liberal capitalist system. All economic classes are offenders. One can only say that the greater the economic or political power exercised at a given time, the greater the blame for these maladjustments. It is on this ground that the bankers deservedly come in for so much blame. But they are quite right in most of their charges against their clients who, in 1929, wanted the follies of inflation and who, in 1935, want the folly of attempting to present the necessary scaling down of debts. The industrialists are quite right in most of their complaints against labor leaders for demanding wages which cannot be paid with full employment of now unemployed labor. But to the industrialists attaches greater blame for the inflexibility of prices than to the labor union leaders, because the initial and strongest force in checking a general adjustment downward of prices, including the price of labor, has been, ever since the War, the unholy alliance between large scale industry and finance to stabilize prices and increase profits on bases which were obviously unsound and necessarily impermanent. The labor union leaders merely sought to play the same game, though always with poorer cards. Under the New Deal, the farmers have been playing the same game through the A.A.A., with the farm vote and President Roosevelt’s agricultural obsessions as their high cards.

It needs little argument, and no new evidence, to establish the point that all the important economic factors or group interests have, both before and during the depression, used economic and political power equally to prevent the adjustments in prices, supply, demand, and trade and capital movements essential to the proper operation of the system. These interferences contributing to the collapse of the boom, and they are now contributing to the prevention of recovery, not that recovery would eventuate if these interferences were ended.

What, however, does call for considerable argument is the point, one of the major points of this book, that, under the liberal regime and in the present world situation the economic. actors cannot be expected to behave in a way either to prevent or correct unbearable economic maladjustments. It is impossible to show why each and every specific reform proposal would fail to bring about better total adjustment or maintain easier adjustability. The proposals are too numerous and too complicated. Within any brief space, one can only attack the fundamental premises of the classical case for the economic harmonies of the game as it is supposed to be played under the liberal regime, and reiterate the fact that these harmonies are largely either fictions or incidents of a past frontier and pioneer era. The rebuttal of the liberal case in this respect is largely a matter of saying that more of the poison will not eventually prove an antidote.

The strongest case for economic liberalism today is made out by those who are hardly less vigorous than the extreme radical in denouncing the abuses of economic power by monopolies and the financial leaders. This case is well stated in a collection of critical essays entitled The Economics of the Recovery Program, published by seven members of the economics department of Harvard University. The essays are extremely naive and unsophisticated which, of course, makes them the best sort of liberal defense. In the final essay, Economics versus Politics, the writer strikes a high note in the great liberal symphony when he says (page 176) that The cornerstone of the ‘liberal’ program was the law and ethics of property and contract, which in spirit or intention are the law and ethics of common honesty in all business relations, and in the relations between government and business. Honest business is not pursuit of power and advantage over others; [It would be interesting to hear the comments of competitors crushed by the great and now flourishing business trusts on this pearl of academic naiveté. L.D.] it is production and exchange of goods and services on terms of mutual advantage to both parties in every transaction.

It is the basic premise of the preceding quotation, which is also that of Bentham, Rousseau, Adam Smith and economic liberalism, which is utterly untrue. And it is the untruth of this premise which explains so much of the absurdity of liberal economic doctrine. If, contrary to these assumptions about successful human beings not loving power, about the nature of the results of success in competition, and about the ways of men in so-called free market, it happens that monopolies arise and perpetrate great abuses, or that the country as a whole goes on a mad speculative orgy trying to get something for nothing instead of producing and exchanging goods and services in terms of mutual advantage to both parties in every transaction, these good liberals do not re-examine their premises.

They merely try to bolster them up with even more absurd explanations and recommendations. They will berate the wicked monopolies for their anti-liberal conduct, and talk vaguely about the curse of bigness, forgetting that some of the best things in our civilization we owe to the technical achievements of monopolies — achievements which small-unit enterprise could never have realized. They will then ask for laws to control these monopolies, forgetting that, under liberal rules, one predatory millionaire bank official and market manipulator will have more influence in the making, interpreting, and administering of laws than all the economics professors and liberal theorists in the country put together. They will try to make it appear that financial abuses or misdeeds are the work of a small minority of the total number of financial leaders, forgetting the fact that the financial and large industrial institutions form a series of closely integrated networks of management and control in which no important policies or acts can be committed by any considerable number of higher-ups without fully engaging the responsibility of all the large financial institutions and industrial corporations, or rather of their heads.

Of course, the responsible policy-deciding heads of the two hundred largest corporations which control over two-thirds of our corporate wealth are very much of a minority of the total number of members of the business community. But if ninety-five percent of all the business men and bankers are small fry and consequently never in on the promotion of bad financing, the manipulation of stocks (including those of the largest banks in New York) with the aid of the resources of the entire country, or have no share in combinations and conspiracies in restraint of trade and market freedom, it is childish to assume that these misdeeds of high finance and captains of industry are not participated in by the majority of business men and bankers who are small fellows simply because the latter do not approve of such doings.

Nothing better knocks into a cocked hat the liberal assumption about financial evils being largely the work of unscrupulous and irresponsible individuals who temporarily occupy positions of power than the patent fact that the whole country went mad on a speculative orgy in which the chief objective was to get something for nothing. This may be thought of as an abuse of economic power by the mighty or as an abuse of economic freedom to trade by the many. It was both. The number of the actual gamblers was relatively small. John Flynn thinks it was well under a million. But whatever the number, it was too large to be called an insignificant minority. And it was too inclusive of all classes to be called unrepresentative.

Still more annihilating of the liberal assumptions about the economic or social wisdom of the people in the free market is the fact that the foolish and anti-social attempts of several hundred thousands of gamblers on price changes to get something for nothing enjoyed the high approval of the people as a whole, an approval which was voiced repeatedly by almost every important political leader from the President down.

The liberal apology that these nation-wide speculative waves are temporary attacks of mass insanity is too shallow for serious consideration. The fact always is that a boom ends because the operation of mechanical factors over which the speculators and the community as a whole can exercise no staying influence finally forces it to end. The end of the speculative madness is not started through a return of the people to sanity in this respect. The return to sanity begins when a considerable number of the alleged insane perceive that the mechanical or impersonal factors which they cannot control are gradually closing in on their speculative operations.

Then they begin to retreat. Several bear raids on the market were started during the boom, but none of them succeeded in turning the tide of speculative madness until finally, in October, 1929, one of them met with enough support from the mechanical factors which had got sufficiently out of joint to make a further rise in prices on prevailing scale quite impossible to maintain with the available credit resources. The people do not come to their senses in a speculative boom until material factors knock sense into them. If trying to get something for nothing be madness or badness, hundreds of thousands indulge in, and the nation approves of, this madness and badness as long as the mad, bad speculators can get away with it.

Thus we are warranted in saying that the follies and misdeeds in finance and speculation, or the so-called free market as well as the abuses of economic power by monopolies, are usual, within the limits of the lawful and practicable, and in no sense the acts of minorities or exceptional individuals. Barring in the main, acts of common forgery, embezzlement and simple theft, which, on the evidence available from prosecutions appear to have been committed only by a minority of bank officials, it may be said that acts which were clearly anti-social, abuses of power, and productive of grave economic maladjustments, have been committed with the full responsibility of the partners or directors of every large New York investment banking house or commercial banking corporation.

As for the speculative follies of the masses of stock market gamblers, they must be recognized to have happened on a scale no with social consequences which completely invalidate some of the most fundamental liberal premises about the intelligence and decency of the conduct of the people in the free market under the regime of liberal law. As for monopoly abuses of power producing maladjustments, it seems fair to formulate he following explanations: From the time when a liberal regime began to emerge out of the earlier feudal pattern, economic competition under the liberal capitalist rules — whatever the changes in these rules, and they have been many — has always resulted in a few winners and many losers, with the great masses always remaining in a status of marked inferiority to the wealthy few by reason of the consequences of inequalities in wealth. Money is power.

Human nature has not changed materially under liberal capitalism. The masses have not the intelligence or the humanity, nor the winners the magnanimity, which liberal assumptions have postulated. Economic power is used for oppression and mischief. Economic opportunities in the free market are freely used by the masses in ways to cause grave social maladjustments. Laws and customs, establishing the rules of the game, get made in ways which are wholly different from those posited by liberal theory. Given certain basic liberal principles securing property rights and the enforcement of contracts, the less the amount of government interference, the greater the abuses of economic power and opportunity both by the monopoly and the individual shoe-string trader in the free market.

It is of the greatest importance in this connection to emphasize that the economic winners get the laws they want through financial pressures and lobbies, and, through having the courts packed with judges who were their former employees, they get most of the breaks in interpretation and development of judicial theory which is as important a part of the law as the statutory law. Thus, the economic winners have achieved for the perpetrators of economic or anti-social offenses an almost complete immunity. To illustrate this point, comparison may be made between the law governing the professional conduct of military officers and the law governing the conduct of bank and corporation officials.

An army officer is court-martialed for conduct alleged to be unbecoming an officer and a gentleman. If convicted, the lightest penalty must be dismissal. A navy captain is always tried for the loss of a ship, and has the burden of proof to show that it was due to no fault or negligence on his part.

How funny it sounds to talk of trying a bank president who sold his own bank stock short while advising his friends and customers to buy it, on the charge of conduct unbecoming a bank president and a gentleman. No liberal capitalist code or discipline requires or, consistently with our constitutional guarantees, can require a banker to act like a gentleman. How utterly inconsistent with liberal norms of law it would be to put on the responsible heads of banks and big corporations which are wrecked or badly mismanaged, the burden of proof to show that they had not been guilty of negligence of duty.

Even the rules of evidence applied in the trial of economic or anti-social offenses, such as tax evasion or noncompliance with technical banking regulations, follow entirely different theories from the rules of evidence applied in trials of offenses against the person. Every week someone is executed for a murder on which conviction was had on purely circumstantial evidence. But when a millionaire income-tax dodger, or violator of banking laws, or security fraud laws, is brought to trial, circumstantial evidence is not only barred but such standards, of proof of criminal intent are set by the courts as to make conviction virtually impossible. The millionaire tax dodger can even have the judge charge the jury that if it finds the unlawful act charged was committed in the belief that it was lawful, such belief being based on legal advice, the jury should not convict. Fancy a judge charging a jury in a murder case that, if the accused is found by the jury to have committed the homicide in the mistaken belief that he was acting in legitimate self-defense, such belief being based on previous legal advice, the jury ought not to convict of murder. Under liberal capitalism, the economic winners largely determine the making, interpreting, and administering of the rules.

The maladjustments caused by monopolies and anti-social uses of legitimate economic opportunities in the free market are due to exercises of liberties granted by the liberal system, and to inhibitions placed by this system on the power of government to regulate economic activity and prevent anti-social conduct. Obviously, anti-social conduct by important economic personalities should be prevented by regulation rather than be prosecuted after commission of the wrongful act. If the laws and administrative practices or customs were determined by the college professors and political and economic theorists, who constitute themselves the authorized exponents of the system, their statement of theory and their defenses of the system might have more consistency with the facts. But laws and administrative customs, under any regime, must be determined by those who have power, and not by those whom they subsidize.

It is not a weakness of the liberal capitalist system that it protects monopolies and permits concentration of economic power in a few hands. For this is inevitable and may have many desirable results; but those allowed such power do not exercise it in a way to meet the imperatives of social order, and cannot be coerced by the liberal state so to exercise such power. A strong authoritarian, executive state, commonly called fascist, has the merit not of eliminating monopolies or trading in the market, but of exercising, with adequate instrumentalities, an ample power over monopolies and the market to enforce a workable scheme of national interest. The authoritarian state can say Stop to business or in the market, as the liberal state cannot do. It is an interesting fact that the liberal state can prevent pedestrians and cyclists from using express highways, or whites and orientals from intermarrying, without violating, any of the rights of man, but cannot regulate market practices or child labor without running afoul of all sorts of constitutional difficulties.

More liberal liberty merely means more power to the economic winners, who, it should not be necessary to add, are not exactly, We, the people. Changing the scheme of economic liberties or government interference may also, and incidentally, mean a different set of economic winners. Thus, if we repealed all tariff duties, or completely stopped relief payments to the destitute and unemployed, or abandoned all counter deflationary policies, we should have a long and bitter economic war, from which would eventually emerge a new set of economic winners — that is, if complete chaos did not supervene during the conflict.

But, after the international trade war following tariff repeal, or after the capital-versus-labor-strike war following a sharp turn to laissez-faire, had been won, the new economic winners would promptly avail themselves of liberal liberties to have laws and administration modified to suit their interests. We should then be as far from story book liberalism as we are now and as we have always been. The same tendency to create maladjustments, and the same inabilities to effect readjustments, would still be manifest. The obvious conclusion emerging from any searching inquiry into the possibilities of maintaining adequate adjustments and prompt readjustments in anything but a pioneer, frontier economy is that this must be a supreme feat of social management or government. Its performance has to be the function professional pride, and self-interest of a political leadership of the nation. To achieve readjustability under liberalism we would have to restore the frontier.