Economic Growth--Reality and Mirage
DECEMBER 01, 1960 by WILLIAM HENRY CHAMBERLAIN
Mr. Chamberlin, noted author and speaker on political and economic affairs, has observed at firsthand the conditions of growth on either side of the Iron Curtain.
The supposed necessity of forcing a more rapid rate of growth for the American national economy is one of the two main talking points of the statists and planners at the present time. The other is the idea that too little money is being spent for public purposes, that Americans are undertaxed and don’t know how to spend their money wisely anyway, so that it will be all the better for them if an all-wise and omnicompetent government relieves them of much of the task of deciding how to spend, or save, what they earn.
There has been much play with the idea that we are in a production race with the Soviet Union, that our very national survival depends on winning this race. But this whole idea of an economic race between two countries with profoundly different social and economic systems, ideals, and goals is far more complex than it is to determine who won a hundred-yard dash. The complexity is enhanced because Soviet methods of economic computation are highly suspect to most foreign economists who have studied the subject. And their suspicions recently received confirmation from an unimpeachable Soviet source.
One of the oldest Soviet economists, S. G. Strumilin, in an essay on "Investment Effectiveness," recently received in this country, admits that official Soviet figures on industrial growth are unreliable because of the practice of double counting. For instance, in estimating over-all Soviet industrial output, sheet steel is counted twice, first when it emerges from the factory, second when it is used in trucks or other manufactures requiring steel.
Economic growth is certainly desirable, just as health is desir- able for the body. But growth that is stimulated by inflation may be a deceptive mirage, as is growth that ignores such important elements as quality of output and free consumer choice. This is why the very considerable increase in Soviet industrial output which has taken place in the last forty years (and could have been naturally expected in a country of Russia‘s size, population, and natural resources, regardless of the economic system) has had so little visible effect on the standard of living of the Russian people.
The experience of the United States shows that steady growth on an ever expanding base is the normal condition of an economy that is still, despite much state interference and distortion, predominantly private in ownership and incentives. Real gross national product over the period 1909-1957 grew at an annual compound rate of 2.9 per cent a year. This rate was somewhat stepped up, to 3.8 per cent, between 1948 and 1957.
Of course, the increase in population made the figures of per capita growth somewhat smaller, 1.5 per cent for 1909-1957, 2 per cent for 1948-1957. However, the upward trend is unmistakable and completely explodes the Marxist gloom-and-doom theory that the rich are predestined to become richer and fewer, while the poorbecome more numerous and poorer.
It is noteworthy that some of the most conspicuous successes in solving social and economic problems have followed the application of the method of economic freedom, while state intervention has led to some of the biggest fiascos.
A Solution to Poverty
John Steinbeck’s novel, The Grapes of Wrath, dramatized the plight of the "Okies," Oklahoma farmers who were impoverished as a result of a prolonged drought. Under a statist regime the Okies would probably have been "directed" to go to work elsewhere. Under a free system many of them piled into their battered cars and took off for California. In the beginning, as Steinbeck’s novel showed, the going was hard. But the saga of the Okies had a happy ending, which has not been so much publicized. They were easily absorbed into aircraft, oil, and other industries and are now mostly solid citizens of California.
The same thing, on a larger scale, occurred in Germany. Since the war ended, some twelve million Germans and people of German stock either were forcibly expelled from their homes and dumped penniless into the German Federal Republic or fled from political oppression and economic lack of opportunity in Soviet-ruled East Germany. This means that more than one out of every five of the citizens of the Federal Republic is an expellee or a refugee. The problem of absorption created all sorts of initial difficulties, crowding for the older inhabitants, job difficulties for the newcomers. In this case a plausible case might have been made for some compulsion. But the West German authorities remained true to their principle of economic freedom.
They did what was possible to help the refugees help themselves and find a new start as workers, farmers, owners of small industries. But they never said to them: "So many of you must go here, so many there." And the result has brilliantly vindicated the reliance on individual initiative. Many of the refugees are to be found in leading positions. By their hard work they became pacemakers for the other Germans. To a considerable extent they replaced Germany‘s war casualties. Today Germany‘s problem is not one of unemployed, unhappy refugees; it is one of shortage of labor.
A Colossal Failure
On the other hand, one of America‘s biggest and costliest experiments in government intervention, the attempt to maintain prices of many farm products atprice levels above the market, has been a resounding failure from every standpoint. Farmers remain dissatisfied; taxpayers are mulcted; consumers are robbed; there is resentment in Canada and other countries which are trying to market their crops on a commercial basis.
Another striking example of the folly and harmfulness of government intervention in the free market is the practice, more widespread in Europe than in the United States, of rent control. The result of this experiment, which amounts in many cases to outright expropriation of the owners of rental housing, is that deterioration of housing and difficulty in finding new apartments are in direct proportion to the severity of the rent control. (Its consequences are to be seen at their worst in France where the depreciation of the currency has reduced the real value of rents to virtually zero. The natural consequence is stagnation in the private building market and an almost complete neglect of upkeep of apartment houses which yield no revenue to their owners. The European country where there is no housing shortage is Belgium, which took the sensible and logical step of abolishing rent control some years ago.)
So, while growth in an economy is certainly desirable, some con ditions and qualifications must be laid down, if desirable growth is not to degenerate into undesirable "growthmanship," a mere playing with figures, a mirage and a deception. After all, as Mr. W. Allen Wallis, special assistant to President Eisenhower and executive vice-chairman of the Cabinet Committee on Price Stability for Economic Growth, very sensibly said in a recent address:
"Growth is not an end in itself. We do not live to grow; we grow to live better. And we do live better, not only by consuming better, but also by working under better conditions…. A unique feature of our economic growth has been the broad sharing of progress among all groups. We represent the nearest approach to a classless society."
Growth is healthy when it responds to genuine demand and satisfies human needs. It is unhealthy and deceptive when it is undertaken by the fiat of state planners or when it receives the narcotic stimulus of currency inflation, which robs the people of their savings and leads in the end to far worse difficulties than those against which it is sometimes mistakenly invoked as a quack remedy.
Overproduction in general cannot occur, provided that the free market is permitted to function normally—a condition that is, alas. seldom realized in modern times. But a mature and productive economy like the American can conceivably turn out more of some particular commodity than home and foreign markets can absorb. None in America, for instance, goes hungry for lack of bread or other wheat products. It is merely silly to force the growth of unusable agricultural surpluses or industrial goods for which there is no market. The remedy for such situations is to shift to other more profitable forms of production.
One of the considerations that makes comparisons between American and Soviet growth rates so misleading as to be downright futile is the very different levels of output on which the economies are operating. For instance, United States output of passenger cars is about 6 million a year, as compared with about 100,000 in the Soviet Union. So a Soviet "growth" of 100 per cent would be the equivalent of an American growth of less than 2 per cent.
Other factors that should make for a fairly high Soviet growth rate and that do not apply to the United States may be noted. Having stinted their people in consumer goods for four decades, the Soviet government has no reason to fear saturated needs of such goods. Masses of Russians are being transferred from agriculture, with its low productivity, to industry, with its higher value of output. The Soviet Union is able to take advantage of technology that has been developed in other countries. As Mr. Wallis puts it:
"In other words, Russian growth is more rapid because they are still in the area where improvement is easy and the way has been shown, whereas we are more heavily involved in the difficult tasks of expanding productivity in medicine, journalism, education, engineering, and other services. There is no possibility that the Russian economy will overtake ours at any time in the visible future, certainly not in this century." (Italics supplied)
Much of the oratory of those who are concerned with increasing the American rate of economic growth contains more heat than light, more insistence on the end than specific consideration of the means. Insofar as recommendations in this field are more or less specific, they tend to run to "pump-priming" or inflationary devices, to be counteracted by price and wage controls. The whole recipe seems calculated to sound the death knell of a free economy.
Political Barriers to Progress
There are measures which would be calculated to increase growth, but these measures are not politically popular. It is a matter of common observation that the countries which "plow back" large shares of output into investment have the fastest rate of growth. Germany is a good example of a country that is investing much and growing fast, while Great Britain shows the opposite trend in both respects. The American practice of high graduated direct income taxation is not favorable to growth, because it siphons off for federal, state, and local government needs much of the capital that would otherwise be available for reinvestment.
The huge annual expenditure on subsidies and storage charges for the supposed benefit of the farmers is an example of misdirection of financial resources. If this whole fantastic program for the taxation of the whole community for the benefit of one section were swept away, the big farmers who get most of the subsidies would still be able to make a profit, more of the marginal farmers would go into manufacturing and service industries, and large sums of money which are now simply wasted would be available for financing new expansion projects.
Still another aid to growth would be the maintenance of a reasonable relationship between wage increases and improvement in productivity. It is the countries where the trade unions have been most restrained and moderate in their demands, Germany and Switzerland, which show the best results in booming foreign trade and full employment.
"Cures" that Kill
But, since economically sound moves are not believed to possess the greatest appeal to voter pressure groups, the danger is that any legislation designed to promote growth may be framed along the wrong lines. It might more or less without conscious intention and desire carry us back to a war economy where price control temporarily and partially offset inflation and the shortages and imbalances in the market were suppressed by rationing of consumers and controls over manpower and materials. This war economy is almost indistinguishable from the Soviet normal peace economy; and this goes far to explain such Soviet progress, lopsided and unbalanced though it is, as has actually taken place. As Henry C. Wallich, Yale economist, member of the President’s Council of Economic Advisers, and author of one of the best analyses of the German "economic miracle," says in his stimulating little book, The Cost of Freedom:
"If we were prepared to restrict the consumer, control prices, wages, materials, and manpower, and if nothing counted but an increase in output —with the government as the principal customer —we might generate growth enough to outgrow the Russians.
Our economy would also have become so like theirs, however, that the meaning of the competition would have vanished." (Italics supplied)
Mr. Wallich goes on to point out that only a dictatorship could operate a centrally controlled economy, run with ruthless disregard of the consumer —a perfect definition, incidentally, of the Soviet economy.
In short, economic growth that is the result of individual investment and normal market demand is both healthy and, if one may judge from past historical experience, quite assured. Efforts to force growth by government action unrelated to real consumer needs and to the volume of genuine savings must be viewed with considerable suspicion and misgiving, as pointing to the introduction of permanent state controls and creeping socialism.