THE ECONOMIC PROBLEMIN PEACE AND WAR

THE ECONOMIC PROBLEMIN PEACE AND WAR

Some Reflections on Objectivesand Mechanisms

BY

LIONEL ROBBINSPROFESSOR OF ECONOMICS INTHE UNIVERSITY OF LONDON

LONDONMACMILLAN & CO. LTD

195 0

This book is copyright in all countries whichare signatories to the Berne Convention

First Edition 1947Reprinted 1950

PRINTED IN GREAT BRITAIN

FOREWORD

THE following lectures were 'given at Cambridge on theMarshall foundation in the spring of this year. In pre-paring them for publication, I have made no attempt todisguise the fact that they were written to be spokenaloud. Save for purely stylistic corrections and theinsertion of a few sentences here and there, designed torelieve undue compression or to reinforce a point, theyremain as they were delivered. I should like to take thisopportunity of thanking the metrlbers of the EconomicsFaculty at Cambridge for their friendly invitation andfor the great kindness which they showed to a veryimperfect lecturer.

LIONEL ROBBINSTHE LONDON SCHOOL OF ECONOMICS

~May 1947

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vPAGECONTENTS

LECTUREFOREWORD

I. THE MECHANISMS OF DISTRIBUTION AND THEOBJECTIVES OF PRODUCTION

I. Purpose of the Lectures2. The Mechanism of Distribution 53. Objectives of Production 10

II. THE RATIONALE OF THE WAR ECONOMY 29I. Why the War Controls were Necessary 292. The Effectiveness of Control in War-time 433. The Difficulties of Control when War is Over 50

III. THE CONTROL OF PRODUCTION IN PEACE-TIME 57I. The Problem of the Transition 572. General Financial Planning 673. Collectivism or Competitive Order 73

vii

LECTURE I

THE MECHANISMS OF DISTRIBUTION ANDTHE OBJECTIVES OF PRODUCTION

I. Purpose of the Lectures

WHEN your Faculty Board was so kind as to invite me todeliver these lectures, I am afraid I accepted in .a veryunreflecting spirit. To appear, so to speak, under theauspices of the great founder of your tradition is a privi-lege which perhaps few of us would be strong-mindedenough to refuse. But when I came to consider theresponsibilities which I had assumed, I confess I becamesomewhat alarmed. For six years I had been engaged innon-academic pursuits. For the last year I had beenengaged in a painful effort at re-education~ I can nowjust begin to trust myself to put a curve on the board andto engage in mild altercation with my friends who .arein better training. But that, at this stage of my intel-lectual re-conversion, I should put before you theoreticalnovelties and new analytical constructions was unthink-able; I should be disgraced, and you would be bored,by the venture. Yet the other obvious alternative, thatI should choose as my theme some special episode of theeconomic history of the war with which I had had some

The Economic Problem in Peace and Waracquaintance, was almost equally unattractive. I wouldnot wish to delay my own re-education by living toomuch in the past. You would not wish to hear me retell,from perhaps a slightly different point of view, incidentswhich, in their main outlines, have already become partand parcel of the staple courses in contemporary economichistory.

Eventually I came to the conclusion that the difficultymight in part be met if I addressed myself to considera-tions of a rather broader nature. The war has cut someof us off from opportunities of research and speculation.But this ~iscontinuity has not been without some com-pensating advantages. It has afforded insights into thephysiology of the body economic in conditions of unusualstrain. It has offered opportunities of putting some, atleast, of our beliefs to the test of.fact. I t has affordedan interval in which, our entanglement in the contro-versies of the. past being suspended, we could reconsiderold positions without that acute attachment to alreadyinvested intellectual capita~, which, in normal time~~makes it so difficult to change one's position. To-day,freed from the pressure of day-to-day. business and thelimitations of official discretion, we find ourselves con-fronted once more with the necessity of establishing ageneral perspective. Might it not, therefore, be worthwhile to seize this opportunity of continuing, so to speak,the process of self-re-education in public and to ask wherewe stand to-day on some of the broader questions? Towhat extent has the experience of war confirmed, to what

Mechanisms ofDistribution and ObJ-ecti-ves ofProductionextent has it enlarged or confounded our beliefs concern-ing what economic policy can do for the advancement ofhuman welfare? To tackle such questions broadside on,-in the form of systematic analysis, would be unbearablypretentious, even i~ in the space of three lectures, it werenot physically impracticable_ B~t to proceed by way ofreflection and reformulation in the light of recent ex-perience and present problems might perhaps offer amethod of approach which would -make the problemmuch more manageable.

That, at any rate, is the method which I intend topursue in these lectures. I propose to put to myself: asit were, some of the larger questions of economic policyand to ask: to what extent have my views on thesematters been modified or confirmed by the experience ofwar; to what extent do the needs of the contemporarysituation call for reformulation or reaffirmation of doc-trines to which in the past I have been led to attachimportance? In my first lecture, I propose to discusssome of the basic objectives of production and distribu-tion; in the second, the rationale of the war economyand its applicability to the problems of transition andpeace; in the third, a mode of approach to the problemsof planning and control in peace-time which seems to memore in harmony with the findings of economic analysisand the requirementsofa free society.

Let me try to make a little more precise the thoughtwhich has been at the back of my mind in preparing theselectures fordelivery. Those ofus who became economists

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The Economic Problem in Peace and Warin the inter-war period were brought up upon textbookswhich purported to furnish an explanation ofthe economicsystem of the day: and one of the central preoccupationsof these works was the nature and functions of price. Ina system based predominantly on private property andthe division of labour, the price system, we were taught,served three main purposes: to secure the distribution ofgiven goods; to indicate the preferences of the citizensconcerning what goods should be produced in the future;and to provide a stimulus and a guide to the organizationof production. We have lived through a period in whichthe operation of price and the price system has. been, toa large extent, suspended. We are living in a .period inwhich many doubts prevail concerning the part whichprivate property and the market have to play in theorganization of production. What light has this experi-ence to throw upon the doctrines of the past? Whatplace in our general perspective should be occupied bythe controversies about organization? It is this kind ofproblem to which I shall be trying to formulate somebroad indication of attitude. In all that I have to say Ishall be concerned only with the most general questionsof principle; save for digressions and illustrations, I shallnot touch at all upon detailed problems. In particular,I shall refrain almost altogether from international appli-cations, although in practice in the next few years theseare likely to occupy the foreground of atte~tion. Thereis much that I should like to say about these things. ButI conceive that for an academic economist the first duty

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Mechanisms ofDistribution and ObJ-ectives ofProductionin any intellectual stocktaking is to make sure where hestands on the broadest fundamentals. There will alwaysbe plenty of others only too ready to proceed from thead hoc to the general.

2. The Mechanism ofDistribution

I turn first to the function of price as a means fordistributing given goods. H!ere what I have to say willbe reasonably brief. For, in this connection at least, Iam inclined to think that the experience of war vindi-cates completely the doctrine of the textbooks, namely,that with given goods and a given distribution of incomeand capital- please note this second qualification-there is nothing li;ke the market mechanism for gettingthe goods into, roughly speaking, the right hands.

At first sight this may seem unbearably paradoxical.For, with the outbreak of war and the consequentialdevelopment of severe scarcities, we abandoned free pricesand went over to rationing on a large scale. Nor, in myjudgment, was this policy without complete justification,both in the needs of the situation and in the tradition ofclassical political economy. From the time of DavidHume onwards, economists have held that conditions ofsiege justified the imposition of rationing; and, in therecent six years' siege, some of us devoted much time todevising new methods of carrying out the classicalprescription.

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The Economic Problem in Peace and WarBut the reason for this lay, not in any deficiency of

the price system as a means of distributing given -goodswith given incomes, but rather in the universalfy heldconviction that, in conditions of siege, the initialdistri-bution of purchasing power operating through the marketwould have resulted in an unsatisfactory distribution ofgoods. A free price would have cleared the market.With free prices there would have been no queues and noshop shortages. But the superior power to demand ofthose with relatively higher incomes and capital, includ-ing, do not let us forget, the better paid wage' earners,would have left too little available for those at the bottomof the scale; and since it was not deemed practicableto carry taxation to the point at which the distributionof power to demand approximated to the condition ofequality considered equitably appropriate to a siege,supplementary measures had to be adopted. It was notthe price system as such which was wrong, it was theinitial distribution of money. If the distribution of in-come and property had happened to correspond to whatfor the time being was considered equitable, then theonly argument for rationing would have been the beliefthat, in the special conditions prevailing, people did notknow what was best for them or for the children forwhom they were responsible.

But this is not the only moral to be learnt from the warexperience. It was not possible to go very far with thetraditional methods of rationing before their limitations,as compared with the price system, became very painfully

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Mechanisms ojDistribution and Objectives ojProductionapparent. Where you are dealing with commoditieswhich are easily standardized and which are in universaldemand - margarine, tea, bacon, for example - theadoption of single-line rationing, on a completely egali-tarian basis, or upon very simple classifications of assumedneed, does not work very badly. Even here, of course,tastes differ; some may get more, and some less, thanthey would upon an all-wise allocation according to need.On the whole, however, the system does achieve roughjustice. But as soon as you get beyond this, into the realmof commodities which are less capable of standardization,and which are the object of more varying needs and tastes,it becomes completely inapplicable. A uniform ration oftrousers or tinned fruit would be absurd. As you allknow, it was to meet these difficulties that point rationingwas adopted.

But what was this but the re-establishment, at least onthe demand side, of fhe essential features of the pricesystem? Point values are prices, point allotments cash.The difference was solely that the initial distribution ofpower to demand was different. And despite the scepti-cism of those to whom the elementary laws of supplyand demand had all the unacceptability of new truth,the system did what was expected of it. It has notalways worked perfectly. The fact that, on the supplyside, .points are not in every respect the same as moneyand that there is no incentive in the shape of point profitsto move goods without direction, precludes the attainmentof the full automatism of the price system. But such

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The Economic Problem in Peace and Warimperfections 'as have developed on the demand sidehave all sprung from unwillingness to use the mechanismsufficiently vigorously - the reluctance of public officialsto change prices is an interesting sociological phenomenon.When the system has been worked as it should be, it hassatisfied all expectations.

Now the moral I draw from all this is very simple.There is nothing wrong with the market as such as amechanism for distributing goods; quite the contraryindeed. The objections, such as they are, apply not tothe market, but to the configuration of power to demandto which the market responds. Hence I should argueas a normal rule - I make no generalization on waremergencies - that, if it is felt that the working of themarket results in a distribution of goods which is notequitable, the remedy is to be found, not in suspendingthe market or in falsifying the system of prices, but ratherin direct operation on the level of net incomes andproperty either by way of taxation or by way of sub-sidies to persons. If it is thought that the rich get toomuch, then they should be taxed. If it is thought thatthe prices of essential commodities are too high for thepockets of the lowest group of income receivers, thengive them money. O~ if it is felt that the poorest con-sumers are so silly or so irresponsible that they cannotspend increased money incomes properly either for them-selves or (what is more important) for their children, thengive them income in kind, as in the free milk schemes.But do not throw the baby out with the bath-water by

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Mechanisms ofDistribution and Objectives ofProductionsuspending the market or by fixing prices below the pointof market equilibrium. That way lies frustration andmuch economic waste.

If I might divagate, for one moment, into questions ofcontemporary policy, I would say that this conclusion hasa very urgent application to our present condition. It istrue that we are not yet out of the wood of quasi-~iegeconditions; we must not judge too harshly the ad hocarrangements of the transition. But it is also true thatwe are in a condition in which it is more than usuallydesirable that full scope should be given to the operationof cash incentive. And, as I see it, we are following apolicy which is self-contradictory and self-frustrating. Weare relaxing taxation and seeking, wherever possible, tointroduce systems ofpayments w11ich fluctuate with output.And, at the same time, our price fixing and the conse-quential rationing systems are inspired by egalitarianprinciples. The result is that we get the worst of bothworlds. We suffer the inconveniences of rationing andshop shortages and we do not get the incentive effect ofinequalities of payment. I cannot believe that, in thelong run, this is a good plan. Let us .by all means seekto .prevent hardship and gross inequality; my Utopia asregards the national minimum income lies quite as farto the left as most of you would regard as desirable.But let us do this via taxation and income from civilrights (i.e. family allowances and the like) rather thanmuddle about with systems of artificial prices which aregrossly'\vasteful, which frustrate incentive and which

9 B

The Economic Problem in Peace and Warmake it progressively more difficult to get into anythinglike equilibrium.

3 Objectives of ProductionI now turn to what, I submit, is a much more interest-

ing, because more controversial, aspect of the pricesystem - its function, not as a means of distributing givengoods but as a means for deciding what goods should beproduced in the future.. To what extent do we still agreethat it is a good thing, that, the distribution of capitaland income being given, production should be directed byreference to anticipated demand? Note please that I amnot asking how production should be managed, whetherit should be on a basis of private or public enterprise orsome mixture of these principles. I am asking whetherit is the consumers' choice which should rule or some othercriterion. The question of organization is analyticallyquite distinct from the question of objectives; and,although I shall have a good deal to say about it later on,it is essential to the deployment of my .argument that itshould be kept quite separate at this stage. For the wholeof this lecture, if it helps you to keep calm,. you may

im~gine that I am discussing the criteria of policy in acompletely collectivist community.

To establish a sense of proportion and to provide abasis for comparison in this connection, it is desirable torealize that in no circumstances are all goods chosenthrough the market. Even in the profoundest times of

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Mechanisms ofDistribution and ObJectives ofProductionpeace and in the most laissez-faire offree economies thereis an important group of goods, the so-called public goods,which are chosen another way. Roads, lighthouses, theapparatus of collective sanitation, parks, public museumsare examples of this class, the distinguishing feature ofwhich is that the benefits are indiscriminate and conse-quently cannot be chosen on the basis of individual pri~ebidding. Security is another such good; from the analyti-cal point of view, as I shall be arguing next time, one ofthe most salient characteristics of the war economy is avast extension of the. production of goods for the provisionof this kind of benefit.

Now there are two aspects of the processes wherebythese goods are chosen which are highly significant whencontrasted wit~ the operation of the price system.

In the first place, they involve the overriding ofminorities. Be the method of decision never so demo-cratic, then, save in the limiting case of unanimity, theremust always be those who vote for such production andthose who vote against. There are those who think thesatisfaction to themselves (or to others) worth what theywill have to give up; and there are those who are of thecontrary opinion. But, once the decision is taken, thenegative votes are ignored. The arterial road is built,and those who did not want it can u,se it or not as theyplease; in. any case, they pay the taxes. There is, so tospeak, in all this an irreducible element of coercion - thedifference between a tax and a purchase price.

In the second place, if we consider these decisionsI I

The Economic Problenl, in Peace and Warrealistically, we must recognize that, with tIle mostdemocratic political machinery conceivable, it is stretch-ing language very far indeed to speak as if the mechanismof particular decisions was, in fact, democratic. It isperhaps possible to conceive that in a small governmentalarea, a town borough, for instance, there might be anelection solely devoted to a proposal to make a park; inwhich case, if they were told of the costs involved as wellas of benefits promised, the electorate might truly be saidto decide for or against. But in the majority .of cases thisis not possible. There is not one, there is a number ofsuch projects to be decided upon, with a much greaternumber of alternative aspects of expenditure; and de-cision by election is unthinkable. In any case, mostnational elections are fought about other issues. Theresult is that the actual decisions are not made by theelectorate at all but by bodies. of ministers or officials,who mayor may not be paying much attention to niceshades 'of desirability to the public. The most that canbe hoped of democratic control in such cases is thatquestions may be asked in Parliament; and, if decisionsare very flagrantly unpopular, they may become thesubject of retrospective censure at subsequent elections -if nothing more important happens to be on the tapis,which perhaps is not very often.

Contrast what happens when goods - private goods,we rna)' call them~ are called into being through themarket.

In. the first place, there need be no overriding of12

Mechanisms ofDistribution and Objectives ofProductionminorities. The sums in the hands of the consumers are,so to speak, proportionate claims on the services of thefactors of production. Within the limits of these claimsany idiosyncrasy may be satisfied. If a factor of pro-duction is in' great demand in one use, the amount whichmay have to be spent to command its services in otheruses will be greater than otherwise would be the case.But, provided the consumers are willing to pay, they mayhave it where they will. No one is compelled to buywhat he does not want. Individual payments are at leastproportionate to individual benefit.

In the second place, the ultimate control must rest withthose who are immediately concerned with use or enjoy-ment. Now, of course, it is not true, as some haveincautiously claimed, that even under the most perfectmarket system,consumers decide directly what shall beproduced in the future. That decision is the business ofthe immediate controllers of production; and it is a mostimportant question of policy to,. determine what rules andmechanisms are most appropriate to make these decisionsconform to the probable requirements of the consumers.But, assuming for the purposes of this argument that thatquestion has been settled, assuming that we have a com-petitive order, corrected, if you will, by judicious taxesand subsidies, or a collectivist order run according to therules of Lange or Lerner - or some improved system-then although the consumers do not make the immediatedecisions, they will, so to speak, have continuous rightof veto. The producers ,,,,ill decide in anticipation of

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The Economic Problem in Peace and Wardemand. But the consumers '\-viII decide whether theanticipations were correct. Whatever may be the actualdeficiencies of the market on the supply side, it is certainlycapable, on the demand side, of providing, as it were, aprocess of election which not only allows proportionateregistration of minority opinion, but also provides forcontinuous review of producers' decisions by those mostimmediately concerned with their ultimate results.

At once I want to guard against a possible misunder-standing. In making these comparisons between themechanisms available for choosing different kinds ofgoods, I am not seeking to prejudice you against publicgoods 'as such. I should no more question the necessityof some public goods than the necessity of. the state itself.To remove all doubt, let me say explicitly that I suspectthat at tq.e present time there is considerably more needfor public goods than it has been customary to assume inthe past; we can probably do with a good deal moreindiscriminate benefit. But at the same time I wouldargue - and this, of course, is the real reason for mycomparisons -" that where there exists the possibility ofan apparatus of choice, not involving the overriding ofminorities ~nd more directly responsive to individualpreferences, then there seems to be a primafaciecase in itsfavour. It is not to deny extensive and important functionsto the state or ample scope for the production of publicgoods, to argue that, if there exists a method of puttingthe ultimate decision regarding private goods in the handsof those who enjoy them, rather than having recourse to

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Mechanisms ofDistribution and Objectives ofProductionthe more indirect methods necessary elsewhere, the pre-sumption is in favour of using it. I would argue this, notmerely on grounds of consumers' utility, but also ongrounds of efficiency of the political mechanism.

It is not such a very long time ago that such a con-clusion would have been fairly generally accepted - atany rate in the main centres of western civilization. Butin our own day, partly because of war which necessarilyputs the individual at a discount, partly because of thepopularity of schemes for over-all collectivist control ofproduction, which carry with them a certain bias towardsthe standardization of consumption, it has come understrong criticism. Some of this criticism seems to me tobe fundamentally unacceptable, some to point to reallacunae in the traditional analysis. In any.case, I think itmay be useful to examine what is said. In doing this Imust ask you once again to bear in mind that what isunder discussion is, not the reaction of different supplymechanisms to given consumers' preferences, but con-sumers' preference as expressed in the market as a criterionfor judging the effectiveness of different types of supply.

I do not think we need waste much time on the com-plaint that the choice of goods on this principle involvesthe production of luxuries before necessities, cigars beforecalories, cars before cottages, etc. etc. This argument,although very popular, clearly rests on a confusion betweenthe price system considered as ,a mechanism and the distri-bution of income to which it may be made to respond.I hope that what I have said already sufficiently covers

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The Econo1nic Problem in Peace and Warthis matter. If you: think that incomes should be com-pletely equal or proportionate to some conventionalconception of need, well and good. That is no argumentagainst allowing the citi2tens to bid for what they wishwith their incomes, .and taking these bids as the criterionof what should be produced. If, as is more probable, youhold that, for reasons of incentive and perhaps of de-centralization of initiative and power, some differentiationis necessary, then you must not grumble if the markettransforms inequality ofnet money incomes into inequalityof real incomes. The belief that, in normal times, it isparticularly sensible to try to mix the principles and torun an. egalitarian real income system side by side withan inegalitarian money income system seems to me some-what simpliste. You can do it on special occasions. ~utif you try to make it the regular plan you are likely to runinto difficulties. You can fool some of the people someof the time. But that is about the limit.

Much more formidable is the argument that peopledo not know what is good for them and that therefore asystem which chooses private goods on a basis of indi-vidual choice is likely to ~ead to less happiness or lesswell-being, than one which is based upon wise prescrip-tions from above. This is the well-known attitude ofpaternalism. \Ve all know the imposing apparatus ofpleading by which it has been supported. At the oneend are attempted demonstrations of the supposedly badresults of specific choices: at the other, metaphysicalarguments that in an apparatus of constraint is to be

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Mechanisms ofDistribution and Objectives ofProductionfound the basis of more perfect freedom, realization ofthe best self, attainment of true liberty and so on aridso forth....

No~ in the workaday life of this world it is importantnot to be doctrinaire. I imagine we should all be preparedto admit that many bad results may follow from theignorance of consumers, though, in the majority of cases,it is easy to think of better ways of remedying this thana general suspension of freedom. Education, the require-ment of proper labelling of bottles, the enforcement ofpublic tests of quality and safety, and, occasionally,indirect taxes and subsidies - these are measures ofcorrection not usually regarded as inappropriate to afree society. We should all agree, too, to the proper pro-tection of minors. A reasonable belief in freedom foradults does not imply complete freedom for the occupantsof the cradle.

But considerations of this sort do not really touch theheart of the issue. It is not a question of what measuresare to be taken in order that consumers may know thetechnical nature of what they are choosing. _ Nor is it aquestion ofwhat restraints are to be placed upon children.The question is rather what is to be done about choicewhich is not the victim of technical ignorance or obviousfraud. What is to be done about the choices of peoplewho are not minors? And here I think the lines of dis-tinction, although sometimes blurred by sophistry, arereally very clear in essence. Do we believe in control byconsumers or do we not?

The Economic Problem in Peace and WarOn this, although I am very far from desiring to under-

estimate the weight of the sincere arguments which canbe adduced on the side ofpaternalism, my own convictionsare very definite. I hold that there is an essential arro-gance - a sin of pride if you wish - in believing that weare so competent to decide for others the way of life theyshould follow that we should wish to assume to ourselvescompulsory powers ofcontrol. And I hold too - you mayregard it as even more of a superstition - that no choicecan be regarded as having much ethical value if it is notin some sense free. I do not agr~e with many of thepreferences of my fellow citizens. I yield to no one .theright to describe them as silly, vulgar, self-frustrating, evenwrong, ifyou wish to use that sort of language. But I holdthat these are matters for argument and persuasion ratherthan coercion; and that, although there is no guaranteein the nature of things that the free society will also be agood society, yet that it is somehow in the nature of thingsthat only a society which has freedom in this sense canever hope to achieve that which is good. That is to say,good government is no substitute for self-government andit is an essential function of the state to make as muchself-government as possible available.

But now I come to an argument which, from our pointof view as economists, is much more interesting and insome respects even more importallt- an argument whichrests upon the denial of the sharp line which I have beendrawing between the public goods which cannot be chosenby means of a market and the private goods which can.

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Mechanisms ofDistribution and ObJ-ectives ofProductionGranted, it is said, that in the case of goods where thebenefit of consumption is purely private, there may exista presumption in favour of individual choice, yet thereare also goods of a more mixed nature where there is,so to speak, a considerable penumbra of indiscriminatebenefit or detriment associated with private consumption.You may bid for these goods on an estimate of the differ-ence which' they make to your private enjoyment. Butthe addition to the sum-total of enjoyment associated withtheir use is either greater or less than this; and yourcalculation leaves out these other elements altogether.This analysis no doubt is familiar to many of you - likemost alleged novelties, it is to be found in that great bookThe Economics of Welfare. It is parallel in type to theanalysis which draws our attention to the externaleconomies and diseconomies of production; indeed theindiscriminate benefits and damages which it revealshave been called the external economies and diseconomiesof consumption.

Now from a' formal point of view, so far as I can see,this analysis is incontestable; and I can think of at leastone case where it has implications which, in my judgment,are very important for practice. I refer to the uncon-trolled development of real property. Here is a pleasanthillside_ If you pay, you can procure a plot and inducea builder to erect for you an agreeable dwelling. What_could be more delightful? But if, at the same time, otherconsumers are moved by the same impulse, the result .. isinsensibly changed. The total picture, which affects your

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The Economic Problem in Peace and Warenjoyment and theirs, never comes into the market; andthe end product may easily be something in which thequality of enjoyment is substantially lower than mighteasily have been the case if collective forethought hadpaid some attention, not so much to the design of thebuildings - I have some suspicions of official- architects- but at least to the layout of plots and road facilities.An apparatus of choice which is focussed entirely on dis-criminate benefit, to the neglect of what is indiscriminate,may thus easily leave out here something which is vitallysignificant for the texture aJ?-d tone of daily life. Who canlook at the shambles which is Greater London to-day,without acknowledging that with all the increase inprivate happiness which has come from this proliferationof villadom - and the increase is very real - sometllingquite.fundamental has been forgotten?

But, important as this argument may be in particularcases, it is easy to see how frightfully it may be abusedas a justification for general paternalism. There is scarcelyanything which I can do outside the privacy of my homewhich has not some overtone of indiscriminate benefit ordetriment. The clothes I wear, the shows I frequent, theflowers that I plant in my garden, all directly, or throughthe mysterious influence of fashion, influence the enjoy-ments and satisfactions of others. Even what is done

.remote from the perception of others can be conceived tohave this aspect. The fact that other people lead a wayof -life different from my own, that they like and buypictures and books of which I disapprove and give private

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Mechanisms ofDistribution and Objectives ofProductionbanquets of sacred meat and forbidden wines, can clearlybe the occasion to me of most intense mortification. Isthis to be included in the calculus of external economiesand diseconomies? I can think offew forms of totalitarianregimentation of consumption whichcould not find someformal justification by appeal to this analysis. It is noaccident that the Hegelian philosophers, whose methodicalsapping of the intellectual foundations of liberty has beenresponsible for so many of the evils of our day, alwaysmade a bee-line for Mill's useful distinction between self-regarding and other-regarding actions, and concentratedall the acid oftheir anti-libertarian hatreds upon diSSolvingthe core ofgood sense underlying this useful, ifnot perhapsperfectly phrased, distinction.

Hence I would urge that we must be very watchful.We must not let our distrust of paternalism blind us tothe real importance of some special cases which thisanalysis helps us to understand. Bllt we must be ever onthe alert against letting formal analysis without concreteinvestigation be made the pretext for undervaluing insti-tutions which have an important part to play in the lifeof a free society. vVe must realize that too much stresson the penumbra of indiscriminate benefit may easily leadus to ignore the solid core of benefit which is discriminate.And if the exponents of totalitarian methods try to rushus with vague and unproved generalizations about" thevalues of social life as a pattern " and the mystic joys oftribal unity, we must be prepared to come back with aninsistence that variety anq spontaneity are also collective

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The Economic Problem in Peace and Warvalues which the wise man will hesitate to jeopardize.

All this of course is a matter of opinion concerningultimate values far beyond the scope of the kind ofanalysiswith which I am principally concerned. But of one thingwe can be tolerably certain. The market is .a vigorousinstitution, capable of adapting itself to many changesof public policy expressed in taxes, subsidies, particularprohibitions, general regulations and the like, .and stillcontinuing to perform its essential function of registeringthe preferences of the consumers .spending their incomeswithin this framework. But any attempt to supersede themarket on a gr,and scale and to substitute other values asa basis for controlling production must necessarily bringabout an .almost total change in the relation between theindividual and society as we have hitherto known it intimes of peace. Where private goods are chosen on thesame basis as public goods, there the response of the pro-ductive organization to individual wants and fanciesnecessarily becomes so attenuated as for all practicalpurposes to be non-existent - instead of the daily market,the quinquennial election; instead of the detailed voteon individual goods, the total plan on a take-it-or-Ieave-itbasis.

It is here I think that experience in time of war of themechanisms whereby the kinds and quantities to be -pro-duced are actually chosen in such a system, gives a morevivid sense of the differences in-yolved than any amountof imaginative speculation. Our theories of state actionusually imply, not merely infinite wisdom on the part of

22

MechanisrJ}s ofDistribution and Objectives ofProductionadministrators, but also infinite time in which to use it.It is not until you have sat in the smoke-filled committeerooms working. against time to get snap decisions fromMinisters who, through no fault of their own, are other-wise preoccupied, that you realize sufficiently the limita-tions of these assumptions. Nor are the more fundamentalof these limitations removable by improvements oforganization. You may reform your system of ministerialcommittees. You may augment the number of theiradvisers. You may employ troops of investigators toascertain the reactions of consumers.. You may stretchthe sympathetic imagination to the utmost to seek toprovide, within the limits of your plan, the kind of varietywhich you conceive to be desirable. You may sincerelybelieve that the process as you work it is, in some sense,good for the people. But I cannot think that, if you arehonest with yourself, you can believe that such a system,involves, or can involve, such degree of freedom for theconsumer to get what he wishes, such an active participa-tion in the daily moulding of social life, as a system whichis based upon demand prices. The word democracy is sovariously used nowadays that it is perhaps futile to discussthe question whether the approval of a total quantitativeplan, not based upon market values, is or is not democratic.But it is very clearly skies apart from a system - whethersocialist or individualist does not matter - which doesfollow the market.. I have no doubt that some at least ofthose who talk broadly of the acceptance in will andunderstanding of the plan by the people sincerely believe

23

The Economic Probleln in Peace and Warthat their words have some meaning. But I personallyfind it hard to .believe that the process of choice t.hus con-ceived, with its apparatus of high-pressure propaganda,its apoplexy at the centre and apathy at the extremities,can possibly mean, even in an Hegelian sense, an activeparticipation in so~ial initiative which is remot.ely com-parable to that which can be realized where the consumer'sbid is the criterion. And I see no aid to the prospects ofpolitical democracy (whose problems, heaven knows, aredifficult enough without further complication) from thegeneral " politicalization " of decisions regarding privategoods.

But what about the choice between present and future?To what extent are we content to base our investmentpolicy on the propensities of the consumers? Note pleasemy terminology. I say " base our policy upon". I donot say " let it be determined by" ; the imperfections ofthe capital market as a mechanism for marrying the pro-pensity to consume and the disposition to invest are sonotorious that it is especially necessary, in this connection,

." to make it clear that it is criteria and not the mac~in~ryofcontrol which are under discussion. Most ofthe over-allplans that we know in practice have their main raisond'etre in an attempt to raise the rate of capital creationabove the point which it would have reached, if theinvestment plan had been based upon - the probablevolume ofvoluntary saving in a condition of brisk employ-ment. From the standpoint I have been adopting, whatis there to say about such projects?

24

Mechanisms ofDistribution and Objectives ofProductionI am fairly clear that we are here in a region where

extreme purism is apt to become somewhat ridiculous. Itwould be absurd to suggest that in the modern world,with its joint-stock companies undertaking so large a pro-portion of the aggregate volume of saving, the collectivepropensity to consume bears any narrow or immediaterelation to private propensities - though that may wellbe an argument for reform of the law relating to the distri-bution of profits rather than against any attempt to bringtotal accumulation into relation with the inclinations ofthe consumers. Moreover, a substantial fraction of thecapital accumulation of the present day tends to go tothe production of public goods; and it is not usuallyurged by economists that these should always be financedby borrowing. And finally, if we are very purist in thisconnection, we must be very careful as to the degree towhich~ in other contexts - before other audiences - weextend ex cathedra blessing to the vagaries of gold supplyat various periods of history. There can be little doubtthat a slightly rising price level, due to suitable monetarypolicy or fortunate monetary accidents, may quite per-ceptibly alter the volume of annual accumulation; andI doubt very much whether, taking into account all themanifold complexities of life, we should all want to frownupon this.

But having said this and thus having paid my tributeto fashionable argument, I should like to enter my protestagainst fashionable exaggerations. It is one thing to admitthat there is a good deal that is arbitrary in the collective

c

The Economic Problem in Peace and Warpropensity to consume as registered through current in-stitutions and that some slight gingering-up of capitalaccumulation by monetary tendencies probably does notdo much harm and may do some good. It is quite anotherthing to argue that it is usually a good thing to force uponthe different members of the community, through theapparatus of politics, a rate of accumulation funda-mentally out of relation to their true preferences formu-lated individually. Through the obscure mists of historyit is perhaps possible to perceive cases where, takingeverything into account - including the danger of war,-decisions of this sort may be said to have been justified.Such cases may recur in the future. But I find it difficultto discover, in the principles of the free society, any clearjustification for such methods as a general procedure. Iam not greatly impressed by appeal to Ramsey's demon-stration that we should seek to reach " bliss" at a pacemuch smarter than our private inclinations make prob-able; I acknowledge some obligation to posterity but notnecessarily all that. And when it is argued that politicaldecisions to go forward with plans of this sort are asdemocratic as decisions based upon estimates of voluntarysavings, I am afraid that I remain very sceptical. It mayvery well be that if the people are told through the radiothat a gigantic development plan is the true road to re-covery they will welcome it. But can we be so sure whichway their votes would go, if the same thing were put tothem in terms of restriction of current consumption. Iconfess that when I look around and see important com-

26

Mechanisms ofDistribution and ObJ-ectives ofProductionmunities whose political equilibrium is obviously en-dangered by lack of consumption goods asked to acquiescein vast plans which necessarily involve, either importof capital on a scale which is "quite improbable or anindefinite prolongation of shortages, I wonder wheremoderation and good sense have gone. And I find it noconsolation at all that, in present conditions, these ill-considered schemes are very likely to break down. Generalchaos is no cure for collective schizophrenia.

And now I have almost done. My reflections on thefunctions of demand price as the criterion of future" pro-duction have led me into very deep waters. I began witha contrast between mechanisms of choice and the logic oftheir mode of operation. I have been led to the thresholdof the great controversies of our day in which two con-ceptions of the ends of the state are in mortal conflict witheach other. At this point I must desist, although I hopeI have left you in no doubt where my own sympathies lie.The questions which are involved here are questions whichfar transcend the scope ofeconomic analysis: they involveindeed the most ultimate questions of all concerning thenature and purpose of society.

But I have one concluding observation. As I have saidalready, the question which I have been discussing here,the question relating to the criteria of production, is notthe same as the question whether production should beorganized on a collectivist or an individualist basis: youcan conceive a private organization of production whichministered widely to collective demand; you can con-

27

The Economic Problem in Peace and Warceive a colle..ctivist organization of production which wasdirected to satisfying the demands of private consumers.And, important as is this question of organization, I aminclined to urge that the question I have been discussingis to-day even more important. The questions of owner-ship and organization are certainly very fundamental;the differences which separate those who believe inover-all collectivism from those who believe in privateproperty and decentralized initiative are serious. But I.have the strong conviction that it is the dispute about endswhich matters most. If we can agree upon ends, dis-cussion of the question of means can be much calmer andmore dispassionate. An individualist who recog.nizes theimportance of public goods and a collectivist who re-cognizes the desirability of the maximum freedom ofindividual consumption will find many points of agree-ment in common. The biggest dividing line of our dayis, not between those who differ about organization assuch, but between those who differ about the ends whichorganization has to serve.

That, at least, is my excuse for dwelling at some lengthon these problems of general objectives before proceedingto the more specifically economic problems oforganizationand control which will be the subject of the followinglectures.

LECTURE II

THE RATIONALE OF THE WAR ECONOMY

My first lecture was devoted chiefly to a discussion of theobjectives of economic policy, of the choice of goods to beproduced and the mechanism whereby this choice can beascertained. My lecture to-day will be concerned witha much more concrete survey of certain aspects of theeconomic system which evolved during the recent hostil-ities. I proceed this way rather than towards an immediatediscussion of peace-time organization, because I believethat the contrast and comparison of the necessities ofpeaceand war brings into sharp reliefsome of the main problemswhich contemporary discussion is apt to overlook. I shalltry to deal with three problems: why the war controlswere necessary, why they worked as well as they did andwhy they are now very obviously failing to do the job.

I. Why the War Controls were Necessary

To go back for a moment to the viewpoint of my lastlecture, it should be clear, as I hinted then, that thedecision to make war is akin to the decision to furnishany other kind of public service. It is a decisio~ which

29

The Economic Problem in Peace and Warcan only be made by the political organ of state - youcannot conceive a choice of peace or war which wasexpressed through the market. But in the case of modernwars, which are essentially a struggle for existence, it is adecision which has a peculiar overriding status. He whowills the end wills the means. The nation which decidesupon total war must be supposed to decide, whether itrealizes it fully or not, upon all the consequential decisionswhich are necessary to bring the war to a satisfactory con-clusion. That is to say, it must be supposed to decide upona suspense of its capacity to decide upon a host of matterswhich, in more normal conditions, it is not to be supposedit would surrender at all willingly. No doubt this is agrotesque rationalization of what actually happens in thestress of mass emotion. But it is the only way of makingsense, or democratic sense, of what follows.

The die having been cast, however, there remains thequestion of organization. On what basis is the life of thecommunity to be run while the war is taking place? Arethe means of making war to be procured through themechanism of the free market or is that mechanism to besuspended? Is it to be a matter of business as usual or amatter of war-time collectivism? In the light of recentexperience, you may think this question to be frivolous;and, lest your prejudices should be unnecessarily aroused,I will confess to you at once that I propose tq answer infavour of war-time collectivism. But if we approach thematter with completely open minds, the answer is notimmediately obvious. After all, many public goods are

3

The Rationale of the War Economysupplied by private enterprise; why not the public good,success in total war?

Let me try to state the argument in favour of privateenterprise. This will probably irritate you. But if youbear in mind that later on I am going to help you out bydeveloping several, as they seem to me, very powerfularguments against it, you may be able to sit through theordeal. It is always worth while trying to understand thepoint of view of the other side - although I fancy that,in this question, there are very few who can be so describednowadays, at least on this side of the Atlantic.

From the economic point of view the making of war isessentially a matter of command over resources. Hence,it is argued, the essential problem is a problem of publicfinance. If the government is willing to tax sufficientlydrastically and to arrange its borrowing on a non-inflationary basis, there need arise no occasion for moredirect controls. If the .government is .willing to takeenough purchasing power out of the hands of the citizens,there need be no fear of inflation and no fear that privatedemand will make hampering claims on factors of pro-duction which should be transferred to the public sector.In the private sector, any rise which takes place in theprice of consumption goods will reflect a state of realscarcity and will help to choke off demand, so obviatingthe possibility ofqueues and shortages. In the war sector,the stimulus of profit, unimpeded by the delays andcontradictions almost necessarily inherent in a system ofcentral control, will result in a response of supply to any

31

The Economic Problem in Peace and Warextent deemed desirable. On this side, too, the pricemechanism can be expected to perform its customaryallocatory functions. The alleged necessity for controlarises simply from the fear of inflation; if a properfinancial policy is pursued this fear is illusory.

Such, in very crude outline, is the case for regardingpublic finance as the essential instrument of the wareconomy - the fiscal theory of war control, as it may becalled, if we like short labels. And, whatever we maythink of its ultimate validity, I think that, if we are to befair, we m~st aCknowledge that it is a theory with anintellectual basis which is not to be regarded as con-temptible; it is not just a collection of prejudices andslogans. We must acknowledge too - what should giveus, as economists, some prejudice in its favour - that itis not lacking in courage. It contemplates financialmeasures more drastic than any government has beenwilling to attempt in any major war. It is to be mostsharply distinguished from the fatuous and easy-goingview which urges business as usual and no untowardincreases in t.axation - the view which has so often beenadopted in practice and which has so inevitably led tochaos and inflation. The fiscal theory is not a theorywhich has been tried and has failed. It is a theory whichno government has ever had the will to make the effective'basis of pqlicy in a war of any great dimensions.

I am, indeed, prepared to go beyond these tepidacknowledgments and to urge that in a certain range ofcases there is real force and validity in this kind of pre-

32

The Rationale of the War Economyscription. For the conduct of the small wars of the liberalage in which this theory was current, I have little doubtthat it was good advice. When all that was required forthe success ofoperations was some enlargement ofa volun-teer army, some quickening of munition replacement,the belief that finance was the sinews of war and thata courageous use of the tax instrumellt was the main de-sideratum of economic policy was surely thoroughly justi-fied. There was no need to transform the whole basis ofproduction and distribution in order to muster resourcesfor the wars of the mid-nineteenth century. The chiefdanger there was not that munitions or recruiting wouldbe short but that money wOl1ld be too plentiful. To insistupon taxation rather than recourse to t4e printing presswas sound practical wisdom.

But when we come to the wars of our own age, withtheir vast demands on men and materials, their acutescarcities, and their utter domination o~ the field ofbusiness confidence, then, as I see it, the fiscal theoryloses its cogency. Indeed, I would say that the attemptto apply it to such a situation is an apt illustration of thedangers, of which Marshall so often warned us, of takinguniversal methods of analysis to be universal principles ofapplication, of believing that what can be confidentlyasserted of small changes can be equally confidentlyasserted of large, and that reactions which may be ex-pected within a given structure of customs and expecta-tions may still be expected to follow if that structuredoes not exist. I do not say that in conditions of total

33

The Economic Problem in Peace and Warwar a vigorous financial policy is not necessary; I amsure it is. But I do say that there are strong theoreticalgrounds, in my judgment adequately borne out bypractice, for believing that it is not enough. Let me tryto demonstrate this in greater detail.

May I begin with a somewhat practical consideration.The advocates of the fiscal theory are apt sometimes tospeak as if any degree of inflation which occurs duringwar-time must be attributed entirely to moral cowardiceon the part of the governments concerned, and to urgethat, in pure theory at least, inflation is something whichis wholly avoidable. Hence~ it is argued, any controlswhich depend for their justification upon the presence ofinflation are, strictly speaking, unnecessary.

There is something heroic about this position whichmust surely command our admiration. But I doubtvery much whether it is tenable, at any rate, if " puretheory" takes account of time intervals and other intract-able data. Of course, if the system is in a severe state ofunder-employment when war breaks out or when rearma-ment begins, a good deal of money may be spent withoutgiving rise to any developments which can properly beregarded as inflationary. The under-employment at theoutset of the U .8. machine was doubtless responsible forthe degree to which it was possible there to increase pro-duction without resorting to the severer measures of ourover-all regimentation. But, assuming that fairly briskbusiness prevails, then it seems to me that to believe thatyou can get through without some initial inflationary

34

The Rationale of the War Economyexpansion is to ignore very obvious facts. It is surely notopen to question that, if need arises, money will have tobe spent. In war, time is more important than money- it is the one priority which is virtually absolute; and todelay the maximum acceleration of expansion in the warsector for reasons of financial purism would be folly. Butit is equally unquestionable too that, whereas increasedexpenditure must start from the word " go ", increasedrevenue can only come in after an interval. Our theoriesof public finance are all too apt to ignore the time-lagsin tax collection. The gap, therefore, must be filled byincreased borrowing; and it is not easy to see how, inpractice, some of this borrowing will not be inflationary.It is tempting to conceive a movement of interest ratesarid an informal rationing of credits which would keepthis process in check. But contracts on governmentaccount are entitled to unlimited credit. To disentanglethe sheep from the goats in this respect in such manneras to apply limits only to demands which had no relation,direct or indirect, to the war sector would be a matter ofextreme difficulty. Indeed, its successful performanceassumes the existence ofjust such an apparatus of controlsas the fiscal thery assumes to be unnecessary.

In saying this I am anxious not to be misunderstood.I am not seeking to provide any justification for departurefrom the most rigorous financial precepts. Nor do I wishto question the considerable public service which theadvocates of this theory may render incidentally by insist..ing, in season and out of season, on the necessity for

35

The Economic Problem in Peace and Warfinancing the war by non-inflationary measures. But Iconfess to ~ sneaking conviction that the zealots of thistheory import an atmosphere of extreme unreality intothe discussion, if they argue as if, in practice, no inflationneed take place and that hence. there is no need for theother measures which the threat of inflatien may makenecessary. Quite apart from the obvious political diffi-culties in bringing ministers and popular assemblies to animmediate realization of the need for the most drasticfinancial measures, I am inclined to believe that thetechnical reasons I have adduced make it extremely im-probable that some degree of inflation can be avoided.

Nevertheless, I should be extremely sorry to rest thecase against the sufficiency of the fiscal. theory upongrounds of the inevitability of inflation. After all, thedegree of inflation which is unavoidable is strictly limited.If that were all that were involved, there would be a strongcase for letting prices rise to the level of the limited ex-pansion and then proceeding 'on the basis of the pricesystem and free enterprise. I am convinced, however, thatthere are deeper analytical reasons why, where total waris involved, this argument rests upon mis~pprehension~It is to these matters that I now wish to direct yourattention.

Consider first the manning of the armed forces. I t hasbeen the tradition of this country to recruit its peace-timeforces on a voluntary basis, with rates of pay and otherattractions so adju.sted in relation to the prevailing wagelevel as to secure the numbers deemed desirable; and in

36

The Rationale of the War Economythe smaller wars of a less brutal age this system still per~sisted. Yet, on the two recent occasions when we. havebeen fighting for our existence, it has had to be abandonedin favour of conscription. I wonder whether, at this timeof day, there is anyone who would seriously argue that itwould have been wise to rely on voluntary recruitment.It is quite true, as I expect many of you who have beenconscripted are thinking, that the market system was notput to a very severe test. Rates of pay were not raisedso as greatly to increase the differential attraction ofservice. Doubtless, if they had been raised enough, manymore would have been tempted in. But would it havebeen prudent to rely upon this incentive? Might there'not have .been so many people whose voluntary supplyprice in this line of production was virtually infinite, thatessential requirements were left unfulfilled? There is,I think, a very solid utilitarian justification for the popularview that, when the safety ofthe state is seriously threat-ened, the obligation to pay taxes in money becomessupplemented by the obligation, so to speak, to pay taxesin kind, to render dues not only in money but in theservices ofwhatever factors happen to be at one's disposal.

It is not only in the armed forces that the supply oflabour needs to be assured. It is necessary also that thereshould be adequate man-power for munition-making andother essential services. Here, too, in conditions of. totalwar, to rely only on the market mechanism is to leave toomuch to the play ofindividual idiosyncrasy. In the recentwar, although in this sphere the approach to compulsion

37

The Economic Problem in Peace and Warat first was much more.. ~.~ntative and indirect than in thesphere of military service, we eventually reached a stateof affairs in which virtually the whole adult populationunder the pension age was subject to powers of direction.It is true that the analogy with conscription must not bepushed too far. More recourse was had to the simulusof differential rates of pay; in a just view of the historyof the war due tribute should be paid to the part playedby voluntary movement in the initial process ofreshuffiing.Moreover, when the shift had taken place, rates of paywere never on the army basis; this, not only because ofthe possibility of trade union resistance but because, theutmost "'output per head being essential, it was necessaryfor there to be full opportunity for increased earnings,both by way of piece rates and by way of overtime pay-

m~nts. But when all account has been taken of the scopeleft to the cash incentive, the fact remains that the marketproved inadequate and that it was found necessary tosupplement its action by a strong framework of com-pulsion. It was found necessary, too, to limit the pro-duction of non-essential private goods lest any labour notsubject to immediate compulsion should be tempted tolinger there rather than turn to work on more essentialbusiness.

Similar considerations apply to the use of materialresourceS. Reliance upon a voluntary response to afinancial incentive is reasonable enough when the responseneeded is small in relation to the total national resources.But when it is essential that the response shall be total---:

38

The Rationale of the War Economythat no resources which could be useful remain unused- or put to uses that are not essential - it is not enough.Powers must be taken to commandeer and direct the useof stocks, plants, land and means of transport, and, if,necessary, to prohibit their use for other purposes.Nothing must be withheld. In total war, the agreeableliberty not to take the price offered if one prefers other-wise, must necessarily be in suspense.

There is another aspect of this matter which I thinkdeserves separate attention. To be reasonably certain ofa sufficient and swift response to a change in the con-ditions of demand, it is necessary for the entrepreneursto be reasonably certain that the change is not suddenlyto be reversed before they have had a chance to amortizethe capital investment. Now in war-time this degree ofcertainty is not present. The risk factor which theentrepreneur has to take account ofis altogether abnormal.The duration of war is unknown. The danger of enemyaction by land and sea may be very great. In suchcircumstances, the immediate financial incentive wouldhave to be inordinately great if unguaranteed privateenterprise were to be induced to take the risks of erectingspecial installations in vulnerable places, of importingover perilous seas, of locking up capital in undertakingsthe demand for whose products must collapse on theunknown date when hostilities come to an end.. If it isnecessary to the state to be assured that these things willbe done, the state must bear at least part of the risk. Itmust be prepared to give special guarantees, to under-

39

The Economic Problem in Peace and Warwrite special undertakings and even itselfto go into businesson a very large scale.

So much for the conditions of supply. But what aboutthe mechanism for the allocation ofresources? Here, too,conditions are completely different from anything whichis assumed in the peace~timemodels. The theory of thenormal market as a means of allocating the factors ofproduction rests essentially on the assumption of limitedpower to demand. If the system is in a state of fairly fullutilization and if there is some over-all check on monetaryexpansion, then the extent .to which any particular pricecan be bid up is limited. The various concerns, with theirlimited finances, bid against one another. As the pricesrise, some demands are choked off until the availablesupplies are parcelled out according to the demandswhich still remain active. There are all sorts of com~ments and criticisms which can be made upon the work-ing of this process. But it would be .silly to deny that,in a rough and ready way, it can be made to performwhat is expected of it.

In war-time, however, it is different. The competitorsin the market, or some of them at any rate, are workingto government orders. So far as they are concerned,credit is virtually unlimited. Many of them will beworking on a cost plus profit basis - this not becausethe aut~orities are ignorant of the palpable objections tothis. method, but because, at the outset at least, there isno time to fix up anything else. Even where this is notthe case, there is no practical limitation on what they

4

The Rationale of the War Economymay spend in order to get the necessary resources. Thereis, therefore, virtually no limit on the possible upwardmovement of prices. There are present all the theoreticalconditions necessary for a cumulative Wicksellian process.To argue that this can be defeated by appropriate move-ments of the interest rate does not seem to me a very help-ful or practical suggestion. It would be interesting to seethe rate of interest which would secure a proper allocationof alloy steel between Admiralty and Ministry of Supplycontractors.

In such circumstances recourse is had to price fixing.But if the mechanism of the market is thus paralysed,it is necessary to provide other means for the performanceof its functions. On the demand side, quantitative alloca-tion is necessary; on the supply side, a machinery ofcontrol which brings it about that the diminution ofprospective profits in one line does not lead to diversionof resources to others.

For somewhat different reasons you get a similar sus-pension of the market mechanism in regard to the supplyof final products, not .merely in the war sector, but alsoin what is left of the sector for the supply of private goods.As I argued in my first lecture, the development of severeshortages in the supply of essential consumption goodstends to bring about a situation in which, under uncon-trolled prices, the pressure on the real incomes of thepoorest consumers is felt to be intolerable; and since, insuch circumstances, supply is likely to be inelastic, thewindfall profits which result will be the object Of par-

41 D

The Economic Problem in Peace and Warticular resentment. It is perhaps conceivable that sucha situation could be dealt with by taxation and bymeasures of forced saving which would reduce expendi-ture to a level of virtual equality. In practice, however,this is a vain hope. It is not merely reluctance to tax,it is also fear of the effects on incentive, which really putsthis alternative out of court. In its absence, there isnothing for it but recourse to price fixing and rationingand the further measures of control of supply which suchp~licies make inevitable..

For all these reasons, the necessities of supply, theabnormal conditions of risk, the unreliability of marketprice as an allocation mechanism when government credit'is unlimited, and the development of severe shortage onthe consumption front, it is surely clear that in a majorwar the fiscal theory of war economy must break down.And if it breaks down anywhere, it is likely very shortlyto break down everywhere. It is true that not all theembarrassments and difficulties which I have indicatedare likely to be immediately apparent. The developmentof severe shortage takes time; some parts of the economyare much more vulnerable than others. But there is asort ofsnowball logic about this kind ofintervention. Youintervene here to fix prices, or to sustain supply,. andautomatically you are drawn on to prevent developmentselsewhere from frustrating your original intention. Onceyou are committed anywhere to this kind of policy on alarge scale, it is almost inevitable that you will find your-self committed nearly everywhere else. This is not an

42

The Rationale of the War Economyargument for a pedantic multiplication of controls for thesake of control. But it is all argument for recognizing theinherent necessities of total war and, if the necessarymechanism is not planned already, losing no time inmaking your preparations. In such conditions there canbe nothing more dangerous than delaying action in thehope that some fluke of circumstance will make it un-necessary to grasp the nettle. It is perhaps a legitimatesource of satisfaction that, in this country with its tradi-tions of a free economy, this was sooner perceived andmore effectively acted upon than in enemy countrieswhere authoritarian ideologies had so muddled the headsof those in control that they no longer realized thenecessities of the system which they were trying to operate.

2. The Effectiveness of Control in War-timeThis brings me to my second main problem. The

reasons I have given may be quite sufficient to explainwhy private enterprise and the market were inadequate.But they do not explain at all why the controls whichwere put in their place succeeded as well as they did.And this is a real problem. You have to be very naiveindeed to believe that to suspend the market and to takeextraordinary powers of control, in itself, makes thingsvery easy. The general presumption indeed is the otherway. Central control is really not at all easy. Theincentive of private gai~, however poorly you may think

43

The Economic Problem in Peace and Warof it from the ethical point of view, does provide somestimulus to effort and economy. If it is removed orpartially suspended and replaced by orders from thecentre, there is no certainty in the nature of things thatthe machine will continue to work smoothly. There is nocertainty that the orders will be obeyed. There is nocertainty that, in the absence of orders from the centre,people will continue to act in a more or less useful manner.

But supposing this difficulty is surmounted, there stillremains the general problem of planning. The market,with all its imperfections, does provide some basis ofeconomic calculation, some more or less automatic basisof allocation. If it is suspended, if the prices which persistare no longer the resultant of the various forces of supplyand demand, on what basis are you to plan? Here areyour various resources, your labour force, your stocks andyour material equipment, many of which, having regardto the exigencies of war, are obviously out ofplace in theirpeace-time uses. What computations of the gain and lossof various possible shifts are feasible without a pricesystem? As you know, the problem of calculation in acollectivist community was the subject of extensive debatein the years before the war. Some of us urged that itwould be difficult, and some that it would be easy, toestablish a system of market prices on the basis of whichsuch a society could plan. But most of us agreed that,in the absence of prices of some sort, a rational dispositionof resources would usually be extremely difficult: and, sofar as I can see, nothing that happened during the war

44

The Rationale oj the War Economydid anything to shake that general presumption.

How then did it come about that, having substitutedcontrol from the centre for dispersed initiative and sus-pended the mechanism which makes normal economiccalculation possible, we managed to struggle through?

In attempting to answer this question I do not thinkwe shall get the picture into proper perspective if we donot recognize the part played by the sense of socialobligation and unity of purpose which ou~ peculiar perilsinvoked. This'is not a matter which has much analyticalinterest; there is not much to say about it for textbookpurposes. But you will find many things very hard toexplain if you leave it out of account. Let me take onesmall instance from a vast field of possible examples - thecomparative success of the price-fixing regulations. Anyonewho knows the machinery which was supposed to workthese regulations must admit that it would have beencompletely inadequate for its purpose if there had notexisted a strong disposition to co-operate on the part oftraders and merchants. You used to read from time totime of the activities of the local price committees andoccasional prosecutions in the courts. But you will getthings completely out of perspective if you believe thatit was this apparatus of coercion which was responsiblefor the comparative infrequency ofblack-market activities.It was the will to co-operateand the sense of responsibilityofthe majority of those to whom these regulations applied.Had there been no such will, no such sense ofresponsibility,the regulations would have broken down over a large

45

The Economic Problem in Peace and Warfield, as they are clearly beginning to break down at thepresent day. This is but one example of the generalatmosphere which made so many difficult things easy.In the absence of such a spirit of spontaneous solidarityonly the forcible liquidation of all opponents of the regimecould have made possible so high a degree ofmobilization.

Of course this is only part of the story. If spontaneouszeal and co-operativeness were one side of the shield,universal powers of direction wyre the other. I havementioned the disposition of the people first, because Iam fully convinced tJ'lat in the absence of this dispositionthe apparatus of coercion would have jammed. But theapparatus was there none the less, and if you wish tounderstand why the materials and the labour were,roughly speaking, to be found where it was intended thattiley sho~ld be, you must take into account, not only theunique disposition of the people but also the all-embracingpo\vers of contr.o~~anddirection on the part of the govern-

-mente At the peak of war mobilization only the old andwomen with you-b.g children could take jobs or leave jobswithout the permission of the Ministry of Labour andNational Service, and the producer who was not underorders, direct or indirect, was the rarest ofrare exceptions.

All this is fairly obvious although, perhaps, now thatmany of these powers have lapsed, it is apt to be forgotten.What is not so obvious, but what I am convinced isabsolutely fundamental.to a proper understanding of whathappened, was the immense simplification of the generalplanning problem which arose from the peculiar nature

46

The Rationale of the War EconorJ1.)Jof the war emergency. You all know that in generalequilibrium analysis there occur certain limiting cases -e.g. when all supply curves are parallel to the x axis-when an otherwise intolerably complex problem suddenlybecomes capable of being understood in terms of com-paratively simple formulae. I am inclined to argue that,in the first approximation at least, the planning problemin total war presents a somewhat analogous case. Letme try to explain what I mean.

In total war there is only one prime object of policy,the achievement of total vict~ry. To that object all otheraims are subordinate, by that criterion all special opera-tions must be judged. Whatever may be ~the outcome ofvictory, whether it be a positive. gain or a position per-ceptibly worse than that from which you started, if thealternative is annihilation, then, "vhile the will to survivepersists at all, no sacrifice seems too great. What is tocome after does not matter; if there is no victory thereis no future. The nice calculations of the advantages anddisadvantages ofalternative compromise positions, charac-teristic of the wars of other times, are inappropriate here.Total war is a matter of death or victory. It is the natureof the case that there is no intermediate position.

In such circumstances the major problem of allocation,the allocation of resources between private and publicconsumption, undergoes a most drastic simplification.For the time being private consumption, which normallyis an end in itsel~ becomes something which is purelyinstrumental. Attention to private welfare is certainly an

47

The Economic Problem in Peace and Warimportant matter: up to a certain point, indeed, it hasan almost absolute priority over almost everything else.But it is important merely, so to speak, for operationalreasons. If the people are not in good health and goodheart, the conduct of the war may be endangered. Butbeyond that point, in this calculus ofhell-fire and despera-tion, the value of additional private welfare is zero;direct operations claim everything. Thanks to the totali-tarians, it is in the service of this hideous logic that wehave had to spend the best years of our lives.

Hence the division between the private and the publicsect.ors becomes, as it were, a merely technical business.You have to ask what is the minimum which will keep thepeople alive and fighting fit - and having made sure thatenough resources in the shape of shipping, stocks andman-power are devoted to this end, you can push every-thing else into the war sector. No doubt this way ofputting things conceals many difficulties. The determina-tion of the minima necessary to maintain health andmorale is by no means an easy matter; the doctors donot always agree on what is necessary for health; thepoliticians debate endlessly how much au~terity is toler-able. But the fact remains that, if you can treat con-sumption as something to be determined by reference tothis kind of criterion and ignore all other considerations,the simplification of the allocation problem is so great asto be virtually a change in its nature.

So far as the public sector is concerned, the position issomewhat different. Here the problem of action is still

48

The Rationale of the War Economyessentially a problem of choice between alternati,:,es-political economy and military strategy are both branchesof the general theory of rational action. The solution ofthese problems involves complicated weighing of themilitary effectiveness of different uses of resources, attackfrom the Channel Ports or from Mediterranean bases, theenlargement of the army or the production of bombingaircraft. No one who, has assisted in any way in thebusiness of strategic planning will wish to minimize thedifficulty or the complexity of the choices which have tobe made. Nevertheless the number of alternative broadstrategic plans which promise hope of military success isseverely limited; and, once the decisions are taken onthis plane, much of the detail is consequential. The day-to-day problems of allocating scarce labour, scarcematerials, scarc'e capacity, scarce shipping between thedifferent claimant departments were very formidable.But in the last resort they were matte'rs for the DefenceCommittee; it was the big strategic decisions which reallygoverned everything else. No doubt, in decisions of thissort, .the absence of an over-all yardstick, capable of re-ducing to a common denominator the relative gain andcost of alternative operations, must be a profound limita-tion on the possibility of rational action. If'a militaryintuition goes wrong, its consequences may be catastrophic,in a sense which is seldom to be expected of any decisionwhich can be governed by cash computations. But thefact remains that the narrowness of the ultimate objective,the defeat of the enemy, gives a certain unity to the frame-

49

The Economic Problem in Peace and Warwork of planning which at least makes possible some sortof direct decision which is not wholly arbitrary. It wasfor that reason, I am convinced, that despite the suspension~ of the ordinary apparatus of calculation and the absence

ofany.objective value denominator of the ultimate physicalresources, our machinery of control did not -lack a certainminimum of coherency and force.

We must not exaggerate the degree of efficiency of ourwar-time arrangements and improvisations. The degreeof waste and misdirection was doubtless such that if anybut the highest stakes of all had been at. issue, this kindof cost alone would have been judged to be prohibitive.But the end was not wholly an accident. "The reasonyou won and we lost", the wretched Speer is reported tohave said, "was that you made total war and .we did not."

3. The Difficulties of Control when War is OverBut now the war is over ~nd we are confronted with

new problems and animated by different aspirations; and,in this position, it is obvious that the machinery ofcontrol,or what is left of it, is not working particularly well. Isthis. a matter of accident - a matter of personal deficiencyor political mismanagement? Or is there some morefundamental change which brings it about that themachine is now less adequate to its task? This, youmay remember, was the third general problem which Ipromised to tackle in this lecture.

5

The Rationale of the War EconomyNow I have no doubt that you suspect, and I have no

concern to deny, that I have no particular love for war-tim~ controls as normal institutions for a society at peace.I shall be talking more about this problem in my nextlecture. But I should like to makeit clear, here and now,that I am by no means of the view that, in our presentstate of acute disequilibrium, the immediate abandon-ment of the control system is advisable. On th.e contrary,I am against it. But while I do not wish to see themechanism precipita.tely dismantled, I do think that thetroubles from which we are now suffering offer a veryvivid illustration of the difficulties inherent in its use whenit is put to tackle peace-time problems. It will clear theway for more positive proposals next time if I proceed todevelop this a little further.

The first thing to realize is that the allocation problemhas once again completely changed its nature. You canno longer express the object of economic policy in termsof a single concrete objective. Gone is the yardstick ofmilitary effectiveness. Gone is the willingness of thecitizens to be clamped down to a minimum standard ofconsumption. Housing, capital re-equipment, the needsof the balance of payments, the insistent demand of theconsumer for something more on which to spend hismoney, all in their manifold complexity of detail jostleshoulders, so to speak, struggling for higher allocations ofresources. Of course, if it gives you any satisfaction, youcan still provide a formal description of the ultimate goalwhich has a unitary appearance. Nobody is likely to

51

The Economic Problem in Peace and Warquarrel with the statement that the object of policy shouldbe to maximize welfare over time. But this is to state theproblem, not to solve it. In the absence of a measuringrod, however conventional, the problem of maximizationremains unresolved.

Consider, for instance, the allocation of timber.Heaven knows that, during the war, this problem wassufficiently difficult. Hutments, boxing, sleepers, pit-props,aeroplanes, vehicles - there was a vast list of possibleusers which had to have their claims examined and prunedso as to fit the available supplies. But in the last analysisthe criteria were comparatively simple. First of all, youhad to ask of any claim of the civil departments, " Is this"absolutely necessary for maintaining minimum stan-dards ?" If not, it could be cut out. Then, if it werea claim for a war use or for an essential service, you hadto ask, " How important is the marginal application herecompared to marginal applications elsewhere?"; andalthough that was very hard to decide in detailed cases,you always had your general strategic plan as an ultimatecourt of reference. But now you have no such simplecriterion by which to judge applications. Timber isneeded for export, both for manufacture and consign-ment; the opportunities of selling different quantities atdifferent prices in different markets are almost infinitelyvarious. Timber is needed for housing and construction :there is no easy method of deciding between the claimsof dwelling-houses, schools, hospitals, factory constructionand so on. Over a vast field of manufacture for the home

The Rationale of the War Economymarket, timber is in urgent demand. By what yardstickare marginal products to be compared in all these multi-tudinous uses? Of course, the process of allocation con-tinues; it is not true to say that there are no plans. TheKing's business must be carried on. But who among us.would be willing to assert with any degree of confidencethat one pattern rather than another is most likely tomaximize welfare?

This is only one example of the increased difficultieswhich develop everywhere, as soon as the peculiar simpli-fications arising from concentration on a single strategicplan have ceased to be possible. And, in many ways, theexample I have given underestimates the difficulties. For,after all, timber is not an ultimate factor of production.At a pinch we could have relatively more timber if wewere willing to pay even higher prices and sacrifice evenmore foreign exchange, that is to say, sacrifice otheressential imports. We could have more foreign exchangeif we were willing to sacrifice more domestic consump-tion or more capital re-equipment. Until there is somecommon denominator to which you can reduce, if notall, at least most, of the multitudinous alternative uses ofyour heterogeneous resources, all particular productionplans are necessarily shots in the dark. It is clear thatsome are likely to be more sensible than others. But theextent to which you can hope to plan without the possi-bility of really bad mistakes is limited.

I am afraid there is no way out of these difficultiesby the frequent reiteration of the magic formula, social

53

The Economic Problem. in Peace and Warpriorities. The authors of this incantation have had agrand run for their money in the popular press and else-where. But if we wish words to communicate thoughtrather than to create a comfortable state of mind, I mustsay that they are singularly unhelpful. For the wordpriority, in its technical conl10tation, stands for anadministrative device which is just the reverse of whatis wanted at the present moment. To grant priority toany particular product is to rule that, for the time being,any manufacture of that product has a prior right overall others for the necessary services and materials. Butalthough, in a severe emergency, it may be useful toresort to this expedient, as a general method of regulatingeconomic life it spells chaos and confusion. An economicdisposition of resources cannot possibly be achieved, ifyoudecree that all resources of a certain kind are to go to oneuse, none to any of the others - all your alloy steel totanks, none to battleships and various kinds of engines.The economic problem is essentially a problem, of regulat-ing the quantities which go to different uses and securingsome rough equality of yield at the margin. It is aproblem not of priority but of allocation. If, therefore,the demand for action on a basis ofsocial priorities istakenin a technical sense, it is positively misleading. If, how-ever, it is merely to be regarded as a metaphorical way'of speaking, it is simply a re-statement of the problem.We need an allocation of resources ,,,,hich will satisfy thevarious objectives we have in mind. But we have noobjective measure either of the conflicting ends or the

54

The Rationale ofthe War Economyeffectiveness of the alternative means; and neither .thepublic nor the ministers find it easy to agree on arbitraryrulings. And the more democratic you try to be, themore difficult the task becomes.

Hence demands for strong men, planning committees,new organs of government and 80 on and so forth.

" But even if we had a rigid over-all quantitative five-year plan of the kind which it is so fashionable to demand,and even if the nature of this plan were not such as todefeat one of the main requirements of the present situa-tion, "vhich is maximum decentralization and flexibility,we should still be in difficulties on account of the lack ofsanctions to enforce it. I alluded last time to our para-doxical position as regards the cash incentive. I havehinted to-day at the passing of that sense bf llnity andobligation whicll, in the absence of cash incentive andcompulsion, still gave impetus and momentum to much ofthe working of the war economy. My survey would notbe complete, however, if I did not direct your attentionto the almost' total disappearance of those powers ofcontrol which are almost essential to the smooth runningo