The Twilight of the Planners
MAY 01, 1964 by WILLIAM HENRY CHAMBERLAIN
Mr. Chamberlin is a skilled observer and reporter of economic and political conditions at home and abroad. In addition to writing a number of books (his latest, The German Phoenix: Duell, Sloan & Pearce), he has lectured widely and is a contributor to The Wall Street Journal and numerous magazines.
The idea that authoritative state planning of economic life is the road to swift, efficient national development is the grand illusion of the twentieth century. Would-be planners are a stubborn breed and do not give up easily. But, on the record of practical results, the prestige of planning has never been so low. The pragmatic value of such essential instruments of a free economy as the unhampered operation of the free market and the maintenance of an international system of free exchange convertibility has never been so high. Planning, of course, substitutes the arbitrary judgment of bureaucrats for the infinitely surer guideline of market demand as to what manufactured articles and commodities, and how much, should be produced.
The recovery of Europe from postwar desolation to its present state of booming prosperity would never have taken place if early reliance on rationing, bilateral trade, government allocation of resources had not been scrapped and replaced by the normal methods of a free economy. And in this connection much credit is due to such statesmen as Ludwig Erhard in Germany, Reinhard Kamitz in Austria, the late Luigi Einaudi in Italy, and to truly liberal (not statist "liberal") economists, such as Jacques Rueff, Wilhelm Roepke, the late Walter Eucken, and, last but far from least, the late Per Jacobsson, who by their writings and official and unofficial reports strongly influenced the return to traditional economic wisdom.
Jacobsson was a mighty battler against the dangers of inflation and the fallacies of "dirigism," the European word for state directed economy. His reports for the Bank for International Settlements in Basel were beacon lights of common-sense realism. And in the post which he occupied until his death as Secretary-General of the International Monetary Fund he was able to strike many blows for three basic economic freedoms, free movement of men, money, and goods across frontiers.
Jacobsson’s contacts as representative of the IMF included the leading statesmen of Europe; and the transformation of the French franc from one of the softest currencies in Europe to one of the hardest may be, at least in part, the result of one of his talks with General de Gaulle. He recalled the fact that not the least of Napoleon’s achievements was the creation of a stable French currency, an achievement which long outlasted his empire. De Gaulle showed lively interest at the mention of the name of Napoleon and shortly after this talk measures were put into effect which stopped the continual erosion in the value of the franc.
Another military head of state, General Franco of Spain, proved amenable to the arguments of Erhard and Rueff, whom he hadinvited to Spain to offer advice as to how best to revive the Spanish economy, which had been limping along under a good deal of government interventionism. Controls were abolished or relaxed, the currency was stabilized, tourists flocked into the country in increasing numbers, and exports boomed.
All over the world there are dozens of concrete illustrations of the immediate visible benefits that accrue when planning and control are tossed overboard and the economy is permitted to function freely. One of the latest is in the Philippines where there were strikingly favorable results when President Macapagal decided to take a chance on freedom, struck off controls, and left the national currency, the peso, free to sink or swim. Its head was kept above water and Philippine exports and the entire economy visibly gained as freer relations prevailed in national and international trade.
Problems in India
Another underdeveloped Asian country, India, has followed the different road of planning, and the results, despite vast injections of American economic aid, have not been encouraging, to put it mildly. A very distinguished Indian economist, Professor B. R. Shenoy, who has served his country on several international agencies, in recent lectures and articles in the United States has painted a devastating picture of the failure of planning in India to promote the general welfare.
An extreme concentration on heavy industry, to the neglect of India’s basic occupation, agriculture, has saddled the country with white elephants—or, as Professor Shenoy calls them, with reference to a famous Indian memorial palace, Taj Mahals—expensive to build and keep up and producing goods which could be purchased far more cheaply abroad. The social objectives of India’s three five-year plans, improvement of living conditions for the masses of the people, and reduction of unemployment, have not been realized. Per capita consumption of food is below the ration allotted to prisoners in jail and the per capita consumption of cloth, another indicator of general well-being, has declined. Expansion in employment has not kept pace with the birth rate.
And, although Prime Minister Nehru and his colleagues are committed to a somewhat vaguely defined Indian socialism, the effect of the planned, controlled economy has been to enrich the bureaucracy and the businessmen who get in on the ground floor of the big racket of paying necessary bribes for import licenses which may be sold on the illegal market. To quote Professor Shenoy in The New Individualist Review:
Freedom-loving people, in the name of preserving and spreading freedom, are unwittingly financing and otherwise sustaining socialist policies which thus far—sensational projects and schemes apart—have yielded little else than social injustice, unemployment, poverty, and conflict. Though the Indian planners and their overseas supporters are full of promises and hope, these policies can hold out prospects of nothing better for the future… Statist policies in India might have been abandoned long ago, but for the intervention of foreign aid, which kept the coffers of the prodigal replenished as they became depleted, the moral support lent to statist policies by visiting "experts" from overseas, and the colossal gains in money and power which these policies yield to the politician and civil servant.
The Indian planners are repeating a blunder which Soviet planners committed in the first years of the Bolshevik Revolution. At that time, when Russia was terribly devastated by the consequences of World War I, violent revolution, and civil war, Trotsky and other communist leaders, with the cooperation of some theoretical economists, worked out a blueprint for recovery based on the restoration first of all of transportation and heavy industry, with satisfaction of consumer desires given a later priority.
This scheme broke down under the pressure of hard realities. With hunger stalking the cities and famine in large rural areas, Lenin reversed course by declaring the New Economic Policy, which amounted, in substance, to freeing the peasants from the compulsory requisitions of war communism and allowing agriculture and small industry to revive before tackling the reconstruction of such industries as iron and steel and machine building. This is only one of many examples of the topsy-turvy effect of trying to regulate economic activity by bureaucratic planning.
India has at least not gone the full way to totalitarianism, with its destruction of all freedom of speech and press and expression. Professor Shenoy makes no secret of his views, but retains his post as director of the School of Social Sciences at Gujarat University, in Ahmedabad. A Freedom Party, headed by the veteran nationalist political figure, C. Rajagopalachari, is able to function and its organ, Swarajya ("Freedom") keeps up a drumfire of criticism, of which the following excerpt from an article by Rajagopalachari is a good example:
Nationalization does not reduce costs. Experience has amply demonstrated this. We can imagine that by saving profits we can reduce costs. But the actual cost including wastage increases when there is no room for the profit motive. This has been seen in numberless cases by the Public Accounts Committees of Parliament. The market economy involves profits as well as losses. The hope of profits attracts enterprise and capital. Loss punishes inefficiency, error, and lapse of attention, and it is the individual who suffers, not the taxpayers. Efficiency is screened by the profit and loss system and those winning through are more efficient managers of resources than persons advanced to managerial positions by politicians. Going back to the cliché quoted in the beginning, if we remove the hope of profit we shall not alleviate distress or misfortunes, but only increase them.
Mistakes of the Red Chinese
The disastrous effects of despotic state planning, unalleviated by any semblance of free political institutions, are most visible in Red China. While gullible visitors may bring back rose-colored impressions from carefully guided and controlled trips and while the Chinese Reds, like Mussolini, seem to have made the trains run on time and cleaned up to some extent the sketchy sanitation of the cities, there is one popular verdict on Chinese communism which no thoughtful student can disregard. This is the mass flight of Chinese, many of them poor peasants and unskilled laborers, to the haven of free enterprise, Hong Kong—a movement on a scale never duplicated in China in pre-communist times.
It is difficult to exaggerate the misfortunes which economic planning, carried out by ignorant and inexperienced bureaucrats, has brought to the long-suffering Chinese people. There have been mass uprootings of human beings, originally for the purpose of bringing peasants to work on industrial and transportation projects. Then, when it was necessary to cut back industrial production sharply after the withdrawal of Soviet economic aid, the same people were thrown back on the villages, where there was neither work nor land for them.
In the "Great Leap Forward," the result of which was that the Chinese economy only escaped a broken neck by large-scale purchases of grain from capitalist Canadian and Australian farmers to relieve famine conditions, there were countless absurdities of direction from above. There was an idiotic effort to force people to make steel in their own backyards with the aid of home forges. Not surprisingly, the output all proved worthless. Deep plowing, unsuitable and destructive for China’s rice fields, was ordered from above and enforced against the practical experience of the peasants. A water conservation program, undertaken without proper geological study, led to the digging of canals in unsuitable places, which made large areas of arable land alkaline.
Africa, Take Note
Whereas the failures of private enterprise cause loss only to private individuals, the failures of compulsory state planning lower the standard of living for the whole population. This was clear to Emmanuel John Hevi, a student from Ghana. He spent over a year in Red China and came away with a very different impression from that which the Chinese, hoping to send him back to Africa as an indoctrinated communist, had aimed to give him. His book is full of concrete examples of overwork and undernourishment of the Chinese people, of incredibly shoddy goods turned out in state factories, of extraction from the peasants of 70 per cent of their produce in taxes. Mr. Hevi sums up his case as follows:
Exploitation of man by man may have been abolished in Red China; but in its place they have exploitation of man by the state. That is Chinese socialism… I think three major factors have led to China’s present plight: first, a myopic agricultural policy; secondly, the overtaxing of the peasants; and thirdly, a frantic haste to industrialize, partly for internal economic reasons, but partly, also, to impress the world, and the consequent excessive emphasis on heavy industry, to the neglect and detriment of other sectors of national development.1
Similar colossal blunders of state planning have taken place in the Soviet Union and its European satellite states. One of the biggest in recent years in Russia was Khrushchev’s decision to put in grain crops on naturally arid lands in Central Asia, better suited to grazing. Now, it seems, this is being reconsidered, after the Soviet Union found itself obliged to order large supplies of grain from the unplanned economies of Canada, Australia, and the United States.
The record of the part of Germany under Soviet control, the so-called German Democratic Republic, is also studded with miscalculations, involving big wastage of labor and capital investment. Considerable effort was devoted to enlarging the harbor of Rostock, on the Baltic Sea. But Rostock is a port without an economic hinterland. A huge new steel plant was built in Eisenhuettenstadt (originally Stalinstadt) in the Oder River Valley; but the iron ore had to be brought 1,400 miles from Krivoi Rog, in the Soviet Union, and coke supplies from Poland are inadequate. Unit costs of production are consequently extremely high. An airplane factory in Dresden was such a production failure that it had to be closed down.
No Method of Calculation
One of the many defects of a planned economy is that it affords no means of determining what the cost of any product or service should be. And one of the surest signs that this is the twilight of the planners is the groping around, even in communist-ruled countries, for some effective substitute for the pricing which the free market, when allowed to function, performs smoothly and efficiently. A Soviet economist named Liberman has offered several suggestions pointing in this direction; but Khrushchev, vacillating between centralization and decentralization of his cumbersome apparatus of state economic administration, cannot make up his mind whether these can be applied without departing from Marxist doctrine. When I visited Yugoslavia some years ago a communist editor, explaining the attempt to give more autonomy in production and marketing decisions to individual enterprises, remarked: "We are trying to create capitalism—without capitalists."
Planning is advocated on the ground that some problems are too big and difficult to be solved without an element of state direction and compulsion. In this connection two experiences are worth recalling. John Steinbeck, in The Grapes of Wrath, gives a moving picture of how some poverty-stricken and drought-ridden farmers in Oklahoma pulled up stakes and traveled in their battered jalopies to California in search of greener pastures. On a visit to Southern California I asked what had become of these "Okies." "Oh, most of them have become substantial citizens, holding good jobs," was the reply. Would it have been better for the "Okies" if some planning agency had possessed the power to tell them where to go, what kind of work to take up?
More recently, in the immediate aftermath of the war, the German Federal Republic faced an "Okie" problem many times multiplied. Between ten and fifteen million Germans and people of German origin, natives of the German provinces which were turned over to Poland, of the Soviet Zone, of Czechoslovakia, Yugoslavia, and Romania, driven by force from their homes or fleeing before advancing Soviet armies or not wishing to live under communist rule, came pouring in a destitute tide of migration into the shrunken frontiers of Free Germany. The social and economic crisis might well have been regarded as demanding state intervention. But Economics Minister Erhard had made his bet on freedom. The expellees were given food and shelter, but were left free to choose their own places of settlement and forms of work. And today there is not an unemployed refugee left in Germany and the danger cloud of an embittered, pauperized minority has passed entirely from the horizon.
Put to the test of practical results, economic freedom wins over state planning hands down, everywhere, under all circumstances. And planning, even in totalitarian states, has entered the twilight zone of frequent and demonstrated failure.
1 See An African Student in China by Emmanuel John Hevi (Praeger, 1963), pp. 94, 95.