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Toward Liberty: Essays in Honor of Ludwig von Mises on the Occasion of his 90th Birthday, September 29, 1971, vol. 1, ed. F.A. Hayek, Henry Hazlitt, Leonrad R. Read, Gustavo Velasco, and F.A. Harper (Menlo Park: Institute for Humane Studies, 1971).

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Ways to Communism
Giuseppe Ugo Papi

1. A dynamic development theory.

In the absence of a real flowering of dynamic theories of economic development and even of a more modest bud, we hope not to be accused of immodesty if we recall an explanation of the development which tries to clarify “the inner reasons of the movement”; today we could also say the inner reasons of the “feedback.” These reasons can be discovered in the fact that “external economies” and “internal economies” in the productive enterprises are mutually conditioning each other.

Starting about 30 years ago, our explanation of the economic development of a country or region has been based on a rigorous concatenation of “external economies” and “internal economies” with regard to production enterprises. A country's economic development process begins with the creation of “external economies” by the State or by international collaboration. These economies derive: (a) from the production of “general public services” - administration of justice, national defence, police, public hygiene and health, education at all levels; (b) from the production of “special public services” - that is “divisible into sales units": transports, postal, telegraph and telephone communications; (c) from the creation of “public works” - roads, ports, power stations. The production of general and special public services and the creation of public works tend to reduce the “risks” and the “production costs” of the various goods and services in the budget of every consumer, in the budget of every producer. In this way, State activity succeeds in promoting “external economies” with regard to enterprises. State action results in the formation of a more favourable environment for the economic growth of the country or region: as indispensable premise for every “internal economy” in the production enterprises.

It is, in fact, technological progress that constantly creates the most unforeseeable economies within an enterprise: namely the “internal economies.” This creation can go on only up to the stage permitted by the “receptivity of the environment” in which production activity is taking place. All further technological progress requires “other external economies” to come into being: for instance, an expansion of markets, which can be achieved by a process of integration of the economic structures of different countries and is able to ensure greater receptivity to the internal economies brought about by new technologies.

Nevertheless here again, once the creation of internal economies has reached a certain stage, other “external economies” are necessary - for example, an influx of foreign capital - for the application of further technical progress. And so on.

The two series of economies - external and internal - condition each other. They harmonize with each other in more effective combinations of production factors. They give rise to “favourable events” for production activity. And it is these “events” that ensure the increase of a country's real revenue. This, in extreme synthesis, is a dynamic explanation of economic development: quite different from most theories and models of a static or comparatively static nature.

2. Some examples of external economies.

“External economies,” after all, are ways and means apt to remove ecological, economic, social, tribal obstacles existing in a given community. The external economies concern “man” and the “environment” in which the man is bound to live. They concern, for example, all measures dealing with hygiene, the composition of the food diet, the state of health of the individual. They equally concern conditions in which man is sheltered, the conditions in which he works. They concern all measures to develop the qualities of a child through education - according to a specific type of civilization - and through instruction at every level: from kindergarten to public school, various types of vocational training centres, high schools, colleges and universities. All these external economies are undeclinable premise of a development process.

To dwell on any one of the external economies - for example on instruction and education - allows one to examine in depth some concepts which may help to understand the dynamic process of development.

3. Some obstacles to economic development. Characteristics of developing countries themselves.

We have to realize there are many obstacles to economic development.

Some obstacles spring from the same characteristics of developing countries. For instance: dependence on agriculture as a means of livelihood and source of income or the greater part of population; low level of domestic savings which leads to the financing of most investment from external sources, usually foreign aid; high level of “subsistence farming”; rapid rate of urbanization due to the attraction of the towns for their far wider range of social amenities as well as for the difference between rural and urban incomes, considerably higher; lack of trained personnel and of entrepreneurships; greater importance of export in the past growth of the economies; urban requirement for food rapidly increasing, so that domestic supplies are not sufficient and increased demand is difficult to satisfy by increased imports.

Even an attenuation - if not a complete elimination - of such obstacles requires decades of “structure policy": namely decades of appropriate initiatives and of assiduous work from public authorities as well as from private individuals.

But many other kinds of obstacles have tremendous influence on the private and public economic activity. Unfortunately they are rarely denounced to the public: for instance, the population explosion; the behavior of public authorities; the misuse of macroeconomic tools; the various steps of a progressive collectivization of the economic activity.

4. Indispensable conditions to arrive at national planning of State activity.

A) Reference to a “theory of economic development

Leaving aside the problem of population explosion - a peculiar field of economics - in what concerns the conduct of the public authorities, every government which pursues the objective of a balanced economic development of its own country - that is to say, increase in income, both total and “per capita”; better distribution of the income between the members of the collectivity; elimination of eventual income differences between the different “production sectors” and between the “different regions” of the country in order to translate into practice such a development - cannot neglect having recourse to an “adequate explanation” of the very process by which the development off a country is achieved: namely to a sequence, which the authorities must bear in mind when they adopt this or that measure of economic policy. We have just tried to offer an example of such an explanation.

B) Prior study of the problems presented by the principal sectors of economic activity

If, then, it is necessary to broach dynamic research to explain a process of economic development and to examine by which means private individuals and responsible authorities can, in harmony, give birth to external and internal economies in each productive undertaking, it appears indispensable to seek every possibility of “creating” such economies, sector by sector of production, it could even be said undertaking by undertaking in each sector. So the second condition indispensable to arrive at a rational planning of State activity is the prior detailed knowledge of the problems of each sector of economic production. If such a preliminary knowledge is neglected, the development of a given country remains threatened.

C) Rigorous coordination of State activity. The concept of an organic system of taxation

A third condition to be respected is that any Government - which concentrates its efforts to promote a balanced economic development of a country - cannot dispense with a preliminary, rigorous coordination of its threefold activity: a) activity of raising of revenues by taxation and of savings by public loans; b) activity of public expenditure; c) activity of interventions in the most varied sectors.

With regard to taxation activity, it is well known that ordinary taxation entails a reduction of consumption on the holders of small and medium fixed incomes. It hardly encourages new investment. It sterilizes savings. It produces, on the economic structure of a country, effects of which it would be vain to make an abstraction.

To parry this damage, attempts have been made to fix some “conditions” which a taxation system should respect in order to permit an increase in the real national income. These conditions lend themselves to bringing into practice a “taxation organism” which attempts to specify the “optimum taxation": namely the minimum cost of a State taxation for the collectivity and, at the same time, the economic limit of the State activity in the field of taxation. The more a Government, under the pressure of daily vicissitudes, is obliged to draw away from these conditions, the more the cost of taxation tends to increase for the collectivity, the more the economic limit of the State activity tends to be overcome.

A parallel notion of “public expenditure organism” can be drawn. Public expenditure can be destined for the production of “general” public services. And the notion of “public expenditure organism” exactly designates a group of expenditures the substantial part of which is able to create such “new incomes.” So, as in the case of the “taxation organism”, the “public expenditure organism” tends to mark the economic limit of the expenditure activity of the State. We can see, on the one hand, the receipts technique, on the other, the expenditure technique both affect the income of a country.

5. “State intervention organism”

Alongside these two State activities, already so vast, there is another, of no smaller proportions: the activity of “interventions”, which are neither the collection of taxes, nor the issue of loans, nor public expenditure.

Also the notion of “intervention organism” tends to achieve the maximum efficiency in the State action, the maximum compatibility between different public interventions and the economic limit of the intervention of the State.

One could ask oneself what is the usefulness of such notions of “organism.” Well, it is easy for an individual, in the presence of a limitation of goods, to follow a “rational conduct” and to use the “mimimum” of the goods available to reach certain aims. But for the State, always subjected to the most diverse pressures, the notion of a “rational conduct” is rather vague. Thus an “analysis of the consequences” of vast sectors of public activity - taxation, expenditure, interventions - tends to specify the conditions of the greatest economic efficacy to which the conduct of the State should aspire and, at the same time, the economic limit of the State activity.

Diverse circumstances, multiple considerations, cause the State to deviate from these conditions. However, a farsighted Government can try to set up the “three organisms”, especially when, in the interest of all the members of the collectivity, it intensifies efforts to develop the real income of the country.

Quite obviously, the rigorous coordination of the complex activity of the State should extend to the numerous private organisms in the life of which the State, directly or indirectly, participates in many ways.

In this way, the coordinated activity of the State and, at the same time, of the undertakings in which the State is interested, would give rise to a complex of public and para-state actions capable of directing - because of its weight and its very considerable width - the very action of the individuals in collectivity.

6. Constant rate of increase in real savings in the private sector.

A fourth condition is still to be filled in order to have an efficient planning of public activity: stability of the purchasing power of the currency. In point of fact the notion itself of “intervention organism” implies, for instance, that the policy of the Central Bank is not to be thwarted by the policy of the State Treasury.

As the issue of Treasury Bonds is the prerogative of the Government, the efficacy of the monetary policy of a country rests on the harmony between the directives of the Central Bank and the directives of the Treasury, insofar as the extension of public indebtedness is concerned.

At the same time the State Treasury could not engage a public expenditure always in excess of revenues, without contrasting any stabilizing directive of the Central Bank.

7. Equilibrium between the activity of individuals and the activity of the State.

At this point of the analysis, we are in position to realize that the notions of “taxation organism”, “expenditure organism”, “intervention organism”, bring to light the economic limit of the threefold activity of the State.

If the multiple State activities go beyond this limit, to the point of gradually “invading” the sphere of private activity, the inevitable result will be a reduction in the rate of growth of the national income. And such a result should suggest at its turn the advisability for the State of re-tracing its steps and of permitting private individuals to develop more their own activity. It seems preferable for the State to find a more stable equilibrium between the sphere of public activity and the sphere of activity of private individuals, a more stable equilibrium between what a State can offer to a collectivity, without lowering too much the standard of living of its citizens, and what the collectivity can reasonably expect from the public powers.

8. Further obstacles to economic development: indiscriminate use of macro-economic tools.

Unfortunately the four conditions indispensable for a rational planning very rarely are satisfied, so increasingly difficult has it become to reach an equilibrium between public and private activity. At the same time the indiscriminate uses of macro-economic instruments lend themselves to hiding and blurring situations and perspectives.

It does not appear superfluous to recollect criticism of general character springing forth - for many years and from so many different sources - on the indiscriminate utilization of macro-economic tools in the development economics. Recently in a volume of essays in honour of Fredrick von Hayek, Professor Peter Bauer has authoritatively underlined incongruities of such an utilization, some of which we also had occasion of criticizing since 1952.1

9. Consequences of the incongruities in the utilization of macroeconomic tools. Gross Domestic Product grows, but the cost of production grows faster.

For our part we would like to draw attention to certain consequences springing from such an indiscriminate utilization of macroeconomic tools, which can influence the behavior of public authorities.

One misunderstanding is very frequent. In various countries, the heads of the financial departments like to bring out the increases in the Gross National Income; sometimes even higher than those envisaged by official development programmes. A growing income is certainly a favourable sign, however, not in an absolute sense. Because if, while the income grows, there is an even greater growth in the “cost” to produce it, the possibility for the national economy of competing with the economy of other countries weakens. The rate of economic development is attenuated.

10. Rise in costs of the productive undertakings.

There are many reasons for which, in the undertaking of producing goods and services, the cost of production grows, independently from events of the productive process, and tends, to a large extent, to make deceptive the increase in the Gross National Product.

The cost of production grows, in the private undertakings, because of the recourse of the State to the capital market. In spite of the high level of fiscal pressure, revenue from taxation is not sufficient to meet the expenditure; all the other “current” revenues are required. Thus, to meet public investment, the State has to borrow a large part of the private savings flowing toward the capital market.

As the “deficits” in the budgets of the local bodies, of the social security bodies, of the nationalized undertakings are growing, so the State is obliged to take even greater recourse to the capital market in order to provide for public investment, in order to pay the residual liabilities, in order to block the gaps in the public balance sheets.

The cost of production for the private undertakings grows because of hundred of millions of working hours lost as a result of strikes. The cost of production for the private undertakings grows because of the considerable number of paid public holidays.

In many ways the public activity directly or indirectly promotes increases in the production costs of the undertakings. It is indeed a good thing that Gross National Product grows. But it is not enough. It is “savings”, “amortization” and “investment” which ensure the continuity of the rate of development. Only from a growing flow of private savings it is possible to achieve a rate of development beneficial to all categories of citizens.

11. Misunderstandings on the concept of employment.

Another example of Daltonism created by an indiscriminate use of macro-economic instrument is offered by the belief that an increase in the number of employed always represents an index of economic development of the country. Unfortunately, this is not the case. The number of employed is an index, when the employed person achieves an output higher than what he costs. If the increase in productivity is less than a half of its hourly cost, an increase in employment does not always mean an increase in income for the country. It means only increase in costs for the undertakings in which it takes place.

12. Planning is not a remedy for national imbalance.

Often planning is considered as an absolute remedy for sectorial and regional imbalances. Now the plan - the Programme - represents only one of the possible dimensions of certain phenomena in the future: population, consumption, production, foreign trade. If, in the course of time, even one of these dimensions takes shape to an extent which differs from that envisaged by the Plan, all the others, harmonized with it, must be reviewed. So, instead of being an unchangeable prediction, the programme is nothing more than a general and possible “point of reference” for the political conduct both of the individual and of the collectivity in the next five - or seven, or ten - years. It would be a mistake to consider the programme as something which cannot be derogated, as it often should be, in contrast to a fundamental “law.”

It happens that by the circumstances political action is required quite apart from the Programme, for instance, because some forecasts in the Programme do not correspond to the changing reality.

What are the consequences of such a detachment of effective political action from the Programme?

The budget no longer gives a certainty with regard to the size of total state expenditure. The budget does not retain connection with the Programme. And the Programme more and more reveals its character of simple hypothesis. What really matters is that what is envisaged in the Plan - and whatever else, through political action, takes place outside the Plan - is inspired to the greatest possible extent, by the aims of the economic development. Unfortunately this is not a recurrent reality.

13. Planning is scarcely efficient when contrasting objectives are considered.

In the past - in spite of the absence of public Plans, in the striking forms of this second post-war period - the economic limits of public action, which today the Programme would like to make more easily visible, were assessed and gradually controlled with no less rigour in the course of time, at least up to such time that the government of the country kept to “shrewd” administration of everything public. Today, Plans are the “vogue.” However, one fact remains. Plans remain inoperative if they contain contrasting objectives. For instance, it is not conceivable - with the excuse of the plan - to want, at one and the same time, the economic development of the country and the achievement of various “social” targets. Either these targets take first place - then economic development marks time - or the economic and social development takes first place - then the social targets will be reached, and certainly in a more lasting manner, as and when the progressive development of the country makes it possible.

14. Progressive collectivization of the national economy.

What happens then? The lack of respect for the indeclinable conditions of a correct programming, the misunderstandings with regard to certain basic concepts will put an ever greater distance between public activity and the hoped-for equilibrium with the activity the individuals. The consequence is an encroachment of public activity on that of the private individual, a progressive “publicization”, “nationalization”, “collectivization.” The evidence is given by the following facts: the absorption of savings flowing towards the capital market on the part of the State, which issues its own securities, or offers a guarantee for the payment of the interest of securities issued by others; the “punitive” taxation of “risk capital” which drives savers away from shares and suggests their sale, bringing about the lethargy of the Stock Exchanges of the country; in some countries the continual postponement of a serious discipline of the joint stock companies; the setting aside of the creation of “savings bonds” as an instrument for the collection of even the smaller disposable sums of the families; the negligence in constituting “Investment funds”, as a means of spreading shareholding among the various social classes, and in a position to compete also with those which exist abroad; the existing high cost of debenture issues on the capital market.

These factors, drive the private undertakings to contract debits in the first instance with parastate bodies - IRI, the Institute of public utility works - and afterwards with the banks, not greatly inclined towards investment. The banks, overflowing with deposits and called upon to place among savers, on the one hand, the securities issued by the State or with the guarantee of the State and, on the other hand, the securities issued by the borrowing undertakings, find it convenient to sell to the Public bodies packets of private securities, which day by day become more inconvenient for the banking organism. In this way - alongside the direct subjection of the private undertakings to public bodies for the financing of their activities - there is, to a no lesser extent, the subjection arising through the banks which sell large packets of private securities to public undertakings.

15. Further factors of collectivization.

Still further factors of collectivization are the enormous increases in the Funds of the Public bodies; the considerable privileges, laid down by law, in favour of these bodies, the production and trading concessions granted to them, with the exclusion of private undertakings; the facilities granted to these bodies - for example, the guarantee of the State - never granted to individual entrepreneurs; the increasingly widespread interest of the public bodies in private productive sectors, which have nothing whatever to do with the aims of each. Frequent is the example of a public body which takes over textile undertakings with an ever bigger decrease in private investment in the sector, and which tries to invest the funds received by the State in the purchase of shares of private enterprises (chemical industry), definitely altering the proportion between public and private activity.

The process of collectivization does not even spare the sorely afflicted farmer. The intention of transforming “metayage” into renting, the proposals of Europe 1980 - the second Mansholt Memorandum, so frequently revised - are there to show it.

Recently a bill has been presented to the Italian Parliament which tries to eliminate the renting contract by reducing the rentals due to the owner at a level considerably lower than the level of taxation of the owner due to the State. So a million small owners are damaged. Investments of private savings in agriculture are definitely discouraged for hundreds of billion lire.

More and more, even in countries where the National planning is called “indicative”, the Programme is no longer conceived as a simple “projection” and “forecast.” National planning implies a precise indication of policies aimed at achieving a rate of development which ensures the full employment of resources in contrast with elementary economic reasoning.

Last, but not least: under the growing domination of leftist parties, syndicates—by frequent and prolonged strikes, by every kind of violence and aggression to persons and to properties—try to disrupt and definitely crack public as well as private enterprises.

The process of collectivization of the economy of a country, exceeding the equilibrium proportion between public and private activity, promotes imbalance between costs and prices, imbalances in private as well as in public budgets, fundamental disequilibrium in the balance of payments of the country. The ways to communism jeopardise the increase in the total real income. So starts the instability in the purchasing power of the currency. A kind of instability that could never be attributed to “shortcomings” in the international monetary system which, according to some writers, does not present the degree of elasticity to absorb, or compensate, the mentioned imbalances. Affirmation naive, if not impudent. In point of fact the instability of the purchasing power of a currency depends to the largest extent upon the uneconomic conduct of the public authorities of a country.

These are some apparently painless ways to communism which many governments are following, ways perfectly opposite to those which can favour the economic and social development of a country or of a region.

16. Increase of national income cannot be imposed by a central authority.

Secular and world experience, in its double dimension of time and space, documents that the increase in the total real income of a country is not commanded from above. The increase in the real income of a country starts from below. It starts from potentiating the human element. It starts from the creation of “external economies”, which condition the degree of receptiveness of the “internal economies”, or technological progress. It starts from the efficiency of the “undertakings”, in which it is necessary to reactivate the formation of the incomes for the productive factors - thus the formation of profit, saving and self-financing. It starts - the increase in the real income of a country - from the respect of the activities of the private individual, activities which constitute the “primum mobile” of the development. Activities which are all the more fruitful, the more they are left free to be carried on.

It has been, after all, this progressive harmonization between public powers and free enterprise which has assured, in the more advanced countries, the best, the most lasting result which civilization of today has ever managed to create. In the absence of harmonization between private and public activity there can be no development either of the low-income, or of the industrialized countries.

[1]“Statistica e macroeconomica”, “Rivista di Politica economica”, Roma, 1952.

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