Planning vs. The Free Market
MAY 01, 1981 by HENRY HAZLITT
Henry Hazlitt, among so many notable accomplishments, is the author of the best-selling and recently revised Economics in One Lesson.
At the 1962 meeting of the Mont Pelerin Society in Knokke, Belgium, he delivered an address, “’Planning’ vs. the Free Market,” which appeared in The Freeman of December 1962. The issue continues to plague the people of many lands, and bears further study today.
When we discuss “economic planning,” we must be clear concerning what it is we are talking about. The real question being raised is not: plan or no plan? but whose plan?
Each of us, in his private capacity, is constantly planning for the future: what he will do the rest of today, the rest of the week, or on the weekend; what he will do this month or next year. Some of us are planning, though in a more general way, ten or twenty years ahead.
We are making these plans both in our capacity as consumers and as producers. Employees are either planning to stay where they are, or to shift from one job to another, or from one company to another, or from one city to another, or even from one career to another. Entrepreneurs are either planning to stay in one location or to move to another, to expand or contract their operations, to stop making a product for which they think demand is dying and to start making one for which they think demand is going to grow.
Now the people who call themselves “Economic Planners” either ignore or by implication deny all this. They talk as if the world of private enterprise, the free market, supply, demand, and competition, were a world of chaos and anarchy, in which nobody ever planned ahead or looked ahead, but merely drifted or staggered along. I once engaged in a television debate with an eminent Planner in a high official position who implied that without his forecasts and guidance American business would be “flying blind.” At best, the Planners imply, the world of private enterprise is one in which everybody works or plans at cross purposes or makes his plans solely in his “private” interest rather than in the “public” interest.
Now the Planner wants to substitute his own plan for the plans of everybody else. At best, he wants the government to lay down a Master Plan to which everybody else’s plan must be subordinated.
It Involves Compulsion
It is this aspect of Planning to which our attention should be directed: Planning always involves compulsion. This may be disguised in various ways. The government Planners will, of course, try to persuade people that the Master Plan has been drawn up for their own good, and that the only persons who are going to be coerced are those whose plans are “not in the public interest.”
The Planners will say, in the newly fashionable phraseology, that their plans are not “imperative,” but merely “indicative.” They will make a great parade of “democracy,” freedom, cooperation, and noncompulsion by “consulting all groups”-“Labor,” “Industry,” the Government, even “Consumers Representatives”—in drawing up the Master Plan and the specific “goals” or “targets.” Of course, if they could really succeed in giving everybody his proportionate weight and voice and freedom of choice, if everybody were allowed to pursue the plan of pro duction or consumption of specific goods and services that he had intended to pursue or would have pursued anyway, then the whole Plan would be useless and pointless, a complete waste of energy and time. The Plan would be meaningful only if it forced the production and consumption of different things or different quantities of things than a free market would have provided. In short, it would be meaningful only insofar as it put compulsion on somebody and forced some change in the pattern of production and consumption.
There are two excuses for this coercion. One is that the free market produces the wrong goods, and that only government Planning and direction could assure the production of the “right” ones. This is the thesis popularized by J. K. Galbraith. The other excuse is that the free market does not produce enough goods, and that only government Planning could speed things up. This is the thesis of the apostles of “economic growth.”
The “Five-Year Plans”
Let us take up the “Galbraith” thesis first. I put his name in quotation marks because the thesis long antedates his presentation of it. It is the basis of all the communist “Five-Year Plans” which are now aped by a score of socialist nations. While these Plans may consist in setting out some general “overall” percentage of production increase, their characteristic feature is rather a whole network of specific “targets” for specific industries: there is to be a 25 per cent increase in steel capacity, a 15 per cent increase in cement production, a 12 per cent increase in butter and milk output, and so forth.
There is always a strong bias in these Plans, especially in the communist countries, in favor of heavy industry, because it gives increased power to make war. In all the Plans, however, even in noncommunist countries, there is a strong bias in favor of industrialization, of heavy industry as against agriculture, in the belief that this necessarily increases real income faster and leads to greater national self-sufficiency. It is not an accident that such countries are constantly running into agricultural crises and food famines.
But the Plans also reflect either the implied or explicit moral judgments of the government Planners. The latter seldom plan for an increased production of cigarettes or whisky, or, in fact, for any so-called “luxury” item. The standards are always grim and puritanical. The word “austerity” makes a chronic appearance. Consumers are told that they must “tighten their belts” for a little longer. Sometimes, if the last Plan has not been too unsuccessful, there is a little relaxation: consumers can, perhaps, have a few more motor cars and hospitals and playgrounds. But there is almost never any provision for, say, more golf courses or even bowling alleys. In general, no form of expenditure is approved that cannot be universalized, or at least “majoritized.” And such so-called luxury expenditure is discouraged, even in a so-called “indicative” Plan, by not allowing access by promoters of such projects to bank credit or to the capital markets. At some point government coercion or compulsion comes into play.
Austerity Leads to Waste
This disapproval and coercion may rest on several grounds. Nearly all “austerity” programs stem from the belief, not that the person who wants to make a “luxury” expenditure cannot afford it, but that “the nation” cannot afford it. This involves the assumption that, if I set up a bowling alley or patronize one, I am somehow depriving my fellow citizens of more necessary goods or services. This would be true only on the assumption that the proper thing to do is to tax my so- called surplus income away from me and turn it over to others in the form of money, goods, or services. But if I am allowed to keep my “surplus” income, and am forbidden to spend it on bowling alleys or on imported wine and cheese, I will spend it on something else that is not forbidden. Thus when the British austerity program after World War II prevented an Englishman from consuming imported luxuries, on the ground that “the nation” could not afford the “foreign exchange” or the “unfavorable balance of payments,” officials were shocked to find that the money was being squandered on football pools or dog races. And there is no reason to suppose, in any case, that the “dollar shortage” or the “unfavorable balance of payments” was helped in the least. The austerity program, insofar as it was not enforced by higher income taxes, probably cut down potential exports as much as it did potential imports; and insofar as it was enforced by higher income taxes, it discouraged exports by restricting and discouraging production.
But we come now to the specific Galbraith thesis, growing out of the agelong bureaucratic suspicion of luxury spending, that consumers generally do not know how to spend the income they have earned; that they buy whatever advertisers tell them to buy; that consumers are, in short, boobs and suckers, chronically wasting their money on trivialities, if not on absolute junk. The bulk of consumers also, if left to themselves, show atrocious taste, and crave cerise automobiles with ridiculous tailfins.
The natural conclusion from all this—and Galbraith does not hesitate to draw it—is that consumers ought to be deprived of freedom of choice, and that government bureaucrats, full of wisdom—of course, of a very unconventional wisdom—should make their consumptive choices for them. The consumers should be supplied, not with what they themselves want, but with what bureaucrats of exquisite taste and culture think is good for them. And the way to do this is to tax away from people all the income they have been foolish enough to earn above that required to meet their bare necessities, and turn it over to the bureaucrats to be spent in ways in which the latter think would really do people the most good—more and better roads and parks and play grounds and schools and television programs—all supplied, of course, by government.
And here Galbraith resorts to a neat semantic trick. The goods and services for which people voluntarily spend their own money make up, in his vocabulary, the “private sector” of the economy, while the goods and services supplied to them by the government, out of the income it has seized from them in taxes, make up the “public sector.” Now the adjective “private” carries an aura of the selfish and exclusive, the inward-looking, whereas the adjective “public” carries an aura of the democratic, the shared, the generous, the patriotic, the outward-looking—in brief, the public-spirited. And as the tendency of the expanding welfare state has been, in fact, to take out of private hands and more and more take into its own hands provision of the goods and services that are considered to be most essential and most edifying—roads and water supply, schools and hospitals and scientific research, education, old-age insurance and medical care—the tendency must be increasingly to associate the word “public” with everything that is really necessary and laudable, leaving the “private sector” to be associated merely with the superfluities and capricious wants that are left over after everything that is really important has been taken care of.
If the distinction between the two “sectors” were put in more neutral terms—say, the “private sector” versus the “governmental sector,” the scales would not be so heavily weighted in favor of the latter. In fact, this more neutral vocabulary would raise in the mind of the hearer the question whether certain activities now assumed by the modern welfare state do legitimately or appropriately come within the governmental province. For Galbraith’s use of the word “sector,” “private” or “public,” cleverly carries the implication that the public “sector” is legitimately not only whatever the government has already taken over but a great deal besides. Galbraith’s whole point is that the “public sector” is “starved” in favor of a “private sector” overstuffed with super fluities and trash.
The Voluntary Way
The true distinction, and the appropriate vocabulary, however, would throw an entirely different light on the matter. What Galbraith calls the “private sector” of the economy is, in fact, the voluntary sector; and what he calls the “public sector” is, in fact, the coercive sector. The voluntary sector is made up of the goods and services for which people voluntarily spend the money they have earned. The coercive sector is made up of the goods and services that are provided, regardless of the wishes of the individual, out of the taxes that are seized from him. And as this sector grows at the expense of the voluntary sector, we come to the essence of the welfare state. In this state nobody pays for the education of his own children but everybody pays for the education of everybody else’s children. Nobody pays his own medical bills, but everybody pays everybody else’s medical bills. Nobody helps his own old parents, but everybody else’s old parents. Nobody provides for the contingency of his own unemployment, his own sickness, his own old age, but everybody provides for the unemployment, sickness, or old age of everybody else. The welfare state, as Bastiat put it with uncanny clairvoyance more than a century ago, is the great fiction by which everybody tries to live at the expense of everybody else.
This is not only a fiction; it is bound to be a failure. This is sure to be the outcome whenever effort is separated from reward. When people who earn more than the average have their “surplus,” or the greater part of it, seized from them in taxes, and when people who earn less than the average have the deficiency, or the greater part of it, turned over to them in handouts and doles, the production of all must sharply decline; for the energetic and able lose their incentive to produce more than the average, and the slothful and unskilled lose their incentive to ira-prove their condition.
The Growth Planners
I have spent so much time in analyzing the fallacies of the Galbraithian school of economic Planners that I have left myself little in which to analyze the fallacies of the Growth Planners. Many of their fallacies are the same; but there are some important differences.
The chief difference is that the Galbraithians believe that a free market economy produces too much (though, of course, they are the “wrong” goods), whereas the Growthmen believe that a free market economy does not produce nearly enough. I will not here deal with all the statistical errors, gaps, and fallacies in their arguments, though an analysis of these alone could occupy a fat book. I want to concentrate on their idea that some form of government direction or coercion can by some strange magic increase production above the level that can be achieved when everybody enjoys economic freedom.
For it seems to me self-evident that when people are free, production tends to be, if not maximized, at least optimized. This is because, in a system of free markets and private property, everybody’s reward tends to equal the value of his production. What he gets for his production (and is allowed to keep) is in fact what it is worth in the market. If he wants to double his income in a single year, he is free to try—and may succeed if he is able to double his production in a single year. If he is content with the income he has—or if he feels that he can only get more by excessive effort or risk—he is under no pressure to increase his output. In a free market everyone is free to maximize his satisfactions, whether these consist in more leisure or in more goods.
But along comes the Growth Planner. He finds by statistics (whose trustworthiness and accuracy he never doubts) that the economy has been growing, say, only 2.8 per cent a year. He concludes, in a flash of genius, that a growth rate of 5 per cent a year would be faster!
There is among the Growth Planners a profound mystical belief in the power of words. They declare that they “are not satisfied” with a growth rate of a mere 2.8 per cent a year; they demand a growth rate of 5 per cent a year. And once having spoken, they act as if half the job had already been done. If they did not assume this, it would be impossible to explain the deep earnestness with which they argue among themselves whether the growth rate “ought” to be 4 or 5 or 6 per cent. (The only thing they always agree on is that it ought to be greater than whatever it actually is.) Having decided on this magic overall figure, they then proceed either to set specific targets for specific goods (and here they are at one with the Russian Five-Year Planners) or to announce some general recipe for reaching the overall rate.
But why do they assume that setting their magic target rate will increase the rate of production over the existing one? And how is their growth rate supposed to apply as far as the individual is concerned? Is the man who is already making $50,000 a year to be coerced into working for an income of $52,500 next year? Is the man who is making only $5,000 a year to be forbidden to make more than $5,250 next year? If not, what is gained by making a specific “annual growth rate” a governmental “target”? Why not just permit or encourage everybody to do his best, or make his own decision, and let the average “growth” be whatever it turns out to be?
The way to get a maximum rate of “economic growth”—assuming this to be our aim—is to give maximum encouragement to production, employment, saving, and investment. And the way to do this is to maintain a free market and a sound currency. It is to encourage profits, which must in turn encourage both investment and employment. It is to refrain from oppressive taxation that siphons away the funds that would otherwise be available for investment. It is to allow free wage rates that permit and encourage full employment. It is to allow free interest rates, which would tend to maximize saving and investment.
The Wrong Policies
The way to slow down the rate of economic growth is, of course, precisely the opposite of this. It is to discourage production, employment, saving, and investment by incessant interventions, controls, threats, and harassment. It is to frown upon profits, to declare that they are excessive, to file constant antitrust suits, to control prices by law or by threats, to levy confiscatory taxes that discourage new investment and siphon off the funds that make investment possible, to hold down interest rates artificially to the point where real saving is discouraged and malinvestment encouraged, to deprive employers of genuine freedom of bargaining, to grant excessive immunities and privileges to labor unions so that their demands are chronically excessive and chronically threaten unemployment—and then to try to offset all these policies by government spending, deficits, and monetary inflation. But I have just described precisely the policies that most of the fanatical Growth-men advocate.
Their recipe for inducing growth always turns out to be—inflation. This does lead to the illusion of growth, which is measured in their statistics in monetary terms. What the Growthmen do not realize is that the magic of inflation is always a short-run magic, and quickly played out. It can work temporarily and under special conditions—when it causes prices to rise faster than wages and so restores or expands profit margins. But this can happen only in the early stages of an inflation which is not expected to continue. And it can happen even then only because of the temporary ac-quiescence or passivity of the labor union leaders. The consequences of this short- lived paradise are malinvestment, waste, a wanton redistribution of wealth and income, the growth of speculation and gambling, immorality and corruption, social resentment, discontent and upheaval, disillusion, bankruptcy, increased governmental controls, and eventual collapse. This year’s euphoria becomes next year’s hangover. Sound long-run growth is always retarded.
In Spite of “The Plan”
Before closing, I should like to deal with at least one statistical argument in favor of government Planning. This is that Planning has actually succeeded in promoting growth, and that this can be statistically proved. In reply I should like to quote from an article on economic planning in the Survey published by the Morgan Guaranty Trust Company of New York in its issue of June 1962:
There is no way to be sure how much credit is due the French plans in themselves for that country’s impressive 41/2 per cent average annual growth rate over the past decade. Other factors were working in favor of growth: a relatively low starting level after the wartime destruction, Marshall Plan funds in the early years, later an ample labor supply siphonable from agriculture and from obsolete or inefficient industries, most recently the bracing air of foreign competition let in by liberalization of import restrictions, the general dynamism of the Common Market, the break-through of the consumer as a source of demand. For the fact that France today has a high degree of stability and a strong currency along with its growth, the stern fiscal discipline applied after the devaluation of late 1958 must be held principally responsible.
That a plan is fulfilled, in other words, does not prove that the same or better results could not have been achieved with a lesser degree of central guidance. Any judgment as to cause and effect, of course, must also consider the cases of West Germany and Italy, which have sustained high growth rates without national planning of the economy.
In brief, statistical estimates of growth rates, even if we could accept them as meaningful and accurate, are the result of so many factors that it is never possible to ascribe them with confidence to any single cause. Ultimately we must fall back upon an a priori conclusion, yet a conclusion that is confirmed by the whole range of human experience: that when each of us is free to work out his own economic destiny, within the framework of the market economy, the institution of private property, and the general rule of law, we will all improve our economic condition much faster than when we are ordered around by bureaucrats.