The Online Library of Liberty

A project of Liberty Fund, Inc.

• Acknowledgements
• Part One: Introduction
• Walter E. Grinder, In Pursuit of the Subjective Paradigm: Walter E. Grinder
• Austrian Economics In the Present Crisis of Economic Thought
• Part Two: Setting the Stage
• The Significance of the Austrian School of Economics In the History of Ideas
• The Role of Expectations In Economics As a Social Science
• Professor Shackle On the Economic Significance of Time
• The Science of Human Action
• Model Constructions and the Market Economy
• Part Three: the Market Process
• Some Notes On Economic Thought, 1933–1953
• Methodological Individualism and the Market Economy
• Economics As a Social Science1
• Ludwing Von Mises and the Market Process
• Part Four: Problems In Macroeconomic and Capital Theory
• Complementarity and Substitution In the Theory of Capital
• Mrs. Robinson On the Accumulation of Capital
• Sir John Hicks On Capital and Growth: (review Article)
• Sir John Hicks As a Neo-austrian: (review Article)
• A Reconsideration of the Austrian Theory of Industrial Fluctuations
• Part Five: On Economic Policy
• Causes and Consequences of the Inflation of Our Time
• The Market Economy and the Distribution of Wealth
• Cultivated Growth and the Market Economy
• Appendix: Economic Writings of Ludwig M. Lachmann

PART FIVE

ON ECONOMIC POLICY

Causes and Consequences of the Inflation of Our Time

1.

The subject with which I am to deal is of an economic, but at the same time of a historical nature. While inflationary processes have been the concern of economists for almost as long as coherent economic thought can be said to have existed, any comparison between the outstanding features of “the inflation of our age” and those of other epochs, such as my subject clearly requires, involves the perspective of history. This dual nature of my task presents a problem of method and approach. This problem stems, not from any fundamental incompatibility between the economic and the historical approach, but from a certain tendency inherent in modern macro-economic analysis. In economic analysis, as in all generalizing thought, we build in our minds “models” of reality by deducing necessary consequences from hypotheses arbitrarily chosen. Of course we are all aware that the more “realistic” our assumptions are, the closer to reality we may hope our conclusions to be. But since it is always impossible to include the whole of reality in our set of assumptions, the selection of the components of this set cannot but be arbitrary. The historian studying the changes which a given society has undergone through time faces the same problem of selection since he, too, has to confine himself to a limited number of features. There is thus, in principle, insofar as the arbitrary selection of topics for inclusion in either the analytical model of the economist or the “observation model” of the historian is concerned, no incompatibility at all between the two approaches.

But the recent development of economic theory in the direction of a stronger emphasis on macro-economic problems analysed in terms of variables and the relationships between them, makes it in fact very unlikely that an economist constructing a model of inflation and a historian studying inflationary processes through time, will both select the same features as of primary importance, and will abstract from the same features as of only secondary significance. The modern economist, immersed as he is in examining systems of functional relationships between macro-variables, has to abstract from the human purposes, attitudes, and ideas which lie behind them, while the historian can hardly follow him in this practice as these very things form the essential subject-matter of all history.

Reprinted from South African Journal of Economics 35 (December 1967).

We hear much nowadays of consumption functions, input-output tables, and capital-output ratios. Nobody bothers to explain why, in a world of rapid changes in attitudes, tastes, and techniques, such variables as these should be expected to subsist, nor why, if there is change, such change should follow a definite and predictable pattern. But it must surely be clear that where our task is the explanation of change in time, no argument in which human ideas and attitudes which might prompt such change are ignored or abstracted from, will be worth serious consideration. When we try to explain the specific character of the inflationary processes of our time it must be one of our foremost tasks to grant ideas and attitudes a prominent place in our scheme of explanation.

2.

When we look at any of our price indices, whether of wholesale or consumer prices, either before or after 1958, it is the relentless character of the annual price rises which leaves the most striking impression. Between 1939 and 1966 we find not a single year in which the price index is not higher than in the preceding and lower than in the next year.

Two contrasting aspects of this situation appear to us to call for notice. On the one hand, one cannot but be surprised at the extent to which this state of affairs has come today to be generally accepted as a perhaps undesirable, but inevitable feature of economic life in advanced Western society. We all know that we are living in a world in which prices can only rise but never fall. When we speak of “fighting inflation,” what we really mean is that we hope to reduce the rate of price rise. Perhaps, in our bolder moments, we even imagine a period of stable prices which might last a number of years. But I have never met anybody, economist or layman, who actually thought that the continuous price rise of the last three decades might one day be reversed and that we may live to see a decade or so of falling prices. I imagine that if such a person were to turn up at this conference, he would at once create something of a sensation.

Economists, on the other hand, notoriously slow to grasp and absorb into their thinking historical change in thought and institutions that happens during their own life-time, have thus far been reluctant to probe the implications of the facts mentioned for theory and practice. Recent discussions of the so-called “reverse yield gap” are evidence of this reluctance the main reasons for which have to be sought in the history of economic thought. So much of our thinking on prices and monetary matters, classical, neo-classical, and Keynesian, is consciously or subconsciously based on the assumption of a world of prices flexible in both directions, upward and downward, that our reluctance to recast some of our conceptual tools in a mould more appropriate to a world of unidirectional price change is not perhaps altogether surprising. Nor is it inexcusable. When we remember that all modern economists are trained to think in equilibrium terms, in terms of a coherent “economic system” of which the “price system” forms part, we shall find it easy to understand why their minds boggle at what Sir John Hicks has called The Fixprice Method,1 a description by which, as its author puts it, “It is not implied ... that prices are never allowed to change—only that they do not necessarily change whenever there is demand-supply disequilibrium.”2

After all, even Keynes, as late as in his Treatise on Money of 1930, assumed prices flexible in both directions. It is only natural that the facts of the new situation should permeate our thinking but gradually and that we are slow, perhaps slower than we should be, to come to grips with them.

On the other hand, it is not often realised what a new situation it really is that we confront. It gradually came into existence, so far as I can judge, in the course of the 1920s. Before that time prices often did fall, even as late as in the years immediately after the First World War. In that world, so different from ours, it was generally taken for granted that periods of rising prices will be followed by falling prices.

Perhaps the most striking example of this change is found in the fact that a hundred years ago, in what was already an industrial economy, it was taken for granted that the results of inflation have to be wiped out by deflation and falling prices: the liquidation of the “Greenback period” in America in the years after the Civil War took the form of a prolonged process of deflation. Between 1865 and 1879, with a mild rise in the stock of money which had been inflated between 1861 and 1865, a very rapid rise in the gross social product caused a “drastic and sustained price decline.” As Schumpeter put it, in those 14 years, “the economic organism was allowed to grow into its monetary coat.” As Professor Friedman and Mrs. Schwartz have described it, “The price level fell to half its initial level in the course of less than fifteen years and, at the same time, economic growth proceeded at a rapid rate.... Their coincidence casts serious doubts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible.”3

While prices were halved within 14 years, the net national product doubled between 1869 and 1879. Net national product per capita (at 1929 prices) rose from 188 to 295 dollars.4 The rapid growth was not confined to manufacturing industries in which employment increased by one-third during the decade.

“The number of farms rose by over 50 per cent from 1870 to 1880 for the U.S. as a whole. The average value per acre apparently increased despite the sharp decline in the price of farm products—clear evidence of a rise in economic productivity. The output of coal, pig iron, and copper all more than doubled and that of lead multiplied sixfold.”5

3.

Why do all these facts sound to us like tales from a lost world? This is an economic no less than a historical question.

Inflation means that the social product falls short of the total claims made upon it. The “real value” of each money claim is then reduced by the price rise. With given claims a sufficient rise in the social product may eliminate inflation. But in a growing economy inflation will become endemic if the rate of growth of claims continues to exceed the rate of growth of the social product. This is evidently the situation of Western society today. The fundamental cause of our inability to stop the inflation of our age is our inability to control the creation of claims to shares in the social product.

It may be thought that the problem might be at least mitigated, if not cured, by inducing at least some holders of claims to postpone them. No doubt increased savings will reduce inflationary pressure. But in a world in which prices do not fall, such persuasion as is required to make people save more is increasingly less likely to succeed as these holders realise that by postponing their claims they can only lose but never gain. They are far more likely to convert their claims into real resources which, if at some hazard, may be turned into sources of future real income streams, thus safeguarding them against certain loss. But this of course means that such claims are not postponed but, on the contrary, currently exercised.

Every attempt to assess the major causes of the inflation of our age will therefore have to start from the fact of the creation of excessive claims to the social product. Here we have to distinguish, more carefully than has been done in the past, between the sources of such claim creation and the monetary channels through which the claims are exercised. Economists appear to have taken it for granted that control of inflation means control of the monetary channels through which such claims flow. We shall have to take a wider view. But it may well be, as a matter of history, that at a time when the number of possible sources of such excessive claims was small, virtually confined to governments and large business concerns with easy access to the capital and money market, control of the monetary channels was in itself sufficient to check inflation.

History shows many examples of successful anti-inflationary credit policy. In our world the sources of claim creation are more diffuse while our monetary system is, at the same time, more complex and more difficult to control. We can no longer take it for granted that successful control of the monetary channels means success in the struggle against inflation.

Nevertheless it remains true that one major cause of the inflation of our age lies in the high degree of elasticity of our supply of money. With a metallic money the inflationary process we have witnessed during the last three decades would have been impossible. A system of credit money in which the creation of money requires little beyond agreement between lender (bank) and borrower, and in which a large and widely held stock of near-money assets will at once start flowing into any gap opened by a “credit squeeze,” is evidently something very different from, and far more unwieldy than, anything the central bankers of la belle époque ever had to contend with.

A second major source of the inflation of our age we have to find in the manner in which prices of industrial goods are determined in our world. These are very largely “list” or catalogue prices. In the case of resale price maintenance the producer even determines the price which the consumer will have to pay. But with or without resale price maintenance, the producer in the large majority of cases determines the price at which he will sell the product to his customer who is a “price taker”: he can only accept the price or refuse to buy. The producer is his own price setter. In setting his price, to be sure, the producer must take his bearings from the market and has to take account of the elasticity of demand confronting him. But, firstly, in our age of inflation most producers have learnt to distinguish between the short-run elasticity of demand immediately after a price increase and the long-run elasticity which will prevail once the economy has digested another bout of all-round inflation. Secondly, to take one's orientation from sales expectations is in principle something different from taking it from current market prices. The latter is not a mere figment of the imagination of economic theorists building models of “perfect competition.” In the nineteenth century world such a mode of orientation really existed.

Price setting by industrial producers is a relatively new phenomenon, and a concomitant of the decline of the wholesale merchant as an economic intermediary. Before 1900, in a world in which most goods were produced by relatively small-scale producers, prices were set in markets dominated by merchants whose economic function it was to equate a demand and a supply the sources of which were equally beyond their control. Maximising their profits meant for them maximising their turnover. Hence they had to fix equilibrium prices reflecting every change in either supply or demand. Marshallian market equilibrium theory largely reflected this concrete situation which prevailed in the real world at the time when Marshall wrote. What matters for us is that this type of market required price flexibility in both directions if merchants were to maximise turnover. Producers and consumers alike had no choice in accepting these flexible market prices. The separation of the function of price setter from that of producer was thus the basis of price flexibility.

The modern consumer is still in the position of a price taker, but the modern producer is not. Having assumed the function of price setter left vacant by the demise of the wholesale merchant,6 he naturally exercises it in such a fashion as to maximise his long-run profits rather than, as the merchant did, his short-run turnover. He will deal with an excess supply by reducing his output rather than by letting price drop. He can afford, as his forebear could not, to let his conduct at every moment be prompted by expectations largely reflecting rule-of-thumb interpretations of the contemporary world. He will avoid anything that might “spoil the market.” And since he knows, as we all do, that he is living in a world of unidirectional long-run price change, and that any cost economy within his reach will sooner or later be swallowed up by wage demands, he will be loath to reduce his price even where he could gain an immediate market advantage. To reduce price when one knows very well that before long one will have to raise it again is not sound business strategy.

A cost increase, on the other hand, can be converted into a price increase by a stroke of the pen where producers are price setters. Of course, fear of “spoiling the market” may act here, too, as an obstacle. But long experience has by now taught our producer that in granting wage demands, where all his competitors are in the same position as he is, he need not hesitate to recoup himself by a price increase, and that so far as the relative price of his product to product prices outside his industry is concerned, the next round of wage increases in the country will soon rectify his position.

We now come to the third, and most important, cause of our inflation: the relentless nature of wage demands following upon one another, industry by industry, in what by now in most industrial countries has become a customary and well-established pattern. The subject is only too familiar.7 We shall confine ourselves to three comments designed to set the phenomenon in historical perspective.

Our first two causes, while being necessary major conditions of inflation, are really only conditions. Neither the elastic nature of money supply nor the modern method of fixing industrial prices could by themselves have produced the phenomena we all know. As regards the “administered prices” in particular, there is little reason to doubt that modern industrialists would prefer stable prices and costs to unidirectional change in both. The really decisive force of our inflation has to be sought in the driving power of trade unions, and the environment, intellectual and institutional, within which they operate today.

The main original function of trade unions, as of cartels, was to prevent a movement of otherwise competitive prices which had taken place during a boom from being reversed during the subsequent slump; no wage rate must ever be allowed to fall. Once this had become an article of faith generally accepted in modern mass society, trade unions had to assume a new function to justify their continued existence. An economy with stable wage rates and prices gradually falling with higher productivity holds no attraction for trade unions. While it may present difficult problems to the setters of “administered” prices, it makes trade unions redundant. The option for an economy with steadily rising wage rates is therefore a natural option for a type of organization which otherwise would be left without any significant economic function.

But how were trade unions able to make their interests prevail above all others, including the social interest in a stable price level? How exactly did it come about that the annual creation of excessive claims on the social product became part of the accepted ritual of modern society, a social norm the more compelling for being an unwritten norm?

It seems to us that this process is unintelligible unless we pay some attention to the historical changes which the institutions of collective bargaining have undergone in the last half-century. When in the early 1920s most countries of the West followed the British example and set up such institutions, adding arbitration by an “impartial” arbiter in some cases, the prevailing climate of opinion was still such that the market economy with its autonomous and coherent price system was largely taken for granted. Sceptics were silenced by pointing out to them that “bargaining” is of the essence of market activity and that “collective bargaining” is a more sophisticated, perhaps a more civilised, method of attaining equilibrium wage rates. Few doubted that the existence of prices coordinated by the price system would set fairly narrow limits to the area of wage bargaining.

As we all know, the outcome has been a very different one. Instead of the price system containing the area of wage bargaining within narrow limits, the autonomous price system has been destroyed in the process. The wage level of each industry is no longer governed by an autonomous price system existing independently of it. On the contrary, the price system, if we still can speak of such, has become today the cumulative result of all the industrial wage bargains and consequent price adjustments which have taken place in time. Life on the “wage standard” means that the prices of industrial goods, at each moment in time, reflect, not the relative strength of the forces of demand and supply, but the relative bargaining power of the various trade unions at the moments when the last bargains were struck. Nobody expects the present set of prices to last beyond the date at which the next wage agreement is due for revision.

The institutions of collective bargaining which half a century ago were so confidently expected to add new luster to the market economy, have instead destroyed the autonomous price system on which this economy must rest.

4.

We must now turn to the consequences of our contemporary process of inflation. Some of these are so well known that we shall have to spend very little time on them. But certain others are less familiar. It would seem, in particular, that the effects of our contemporary mode of price increases (discontinuous rather than continuous) on relative prices, and the functioning of the economic system as a whole, have thus far received too little attention.

It goes without saying that monetary policy in a world of unidirectional price change presents problems that were unknown to our grandfathers.8

Formerly, when a central bank was slow in pulling the anti-inflationary brakes, so that prices had actually risen before it took action, it knew that the price rise could and would be reversed. An error in timing could be rectified in time. In our world a central banker must have the eye of an eagle and the perceptive qualities of a cat to detect new sources of inflationary pressure at once; otherwise it will be too late. In our world an error in timing is not rectifiable. In fact, the soundest rule of monetary policy today is probably that we can never do too much to check inflation, because whatever we are doing will not be enough.

It is also pretty clear that lenders are now becoming reluctant to deliver their fortunes into the hands of the wage bargaining parties. The “reverse yield gap” and the present level of interest rates are of course merely the first signs of the growing awareness of what is going on. No doubt in time a standard of deferred payment other than current money, a standard beyond the reach of wage bargainers and obliging bankers, will be devised. Borrowers will discover that they can borrow more readily and at lower interest rates if they are willing to shoulder the risk of debt depreciation.9

I have been asked to devote some attention, in this paper, to the effects of our contemporary inflation on the distribution of incomes, but frankly do not find this a rewarding subject. In the first place, we lack a standard of comparison. Since all countries which have a market economy have been affected by this inflation, none can serve as a measuring rod. I find myself unable to conjure up an image of what our world would be like without this inflation.

Secondly, it seems unlikely that the classical scheme of the theory of income distribution, couched as it is in terms of classes of income recipients, yields any interesting results in the circumstances of our age. Of course fixed-income recipients suffer, but whether wage earners or profit earners gain more at their expense it is hard to say.

In former times there may have been “profit inflations” in which wage earners suffered temporarily by the belated adjustment of wage rates. In our world, with the contemporary mode of price setting described above, profit recipients can recoup themselves partly at once by setting higher prices, but partly, so far as sales volume is concerned, only gradually as the new bout of inflation permeates the rest of the economy. As regards the distribution of real incomes, then, the most significant differences appear to exist not between wage earners and profit earners, but between people operating in different sectors of the economy. And these differences stem, not from the movement of absolute prices, but from the discontinuous mode of change of relative prices. This is most clearly seen in the case of the wage earners in any given industry. While they gain a relative advantage over all their fellow citizens every time their wage rates rise, they are on the losing side every time this happens in another industry. Nor is this a surprising result. Keynes, after all, showed that, except for the existence of fixed prices and incomes, changes in the wage unit will have no effect on the distribution of incomes. Of course, in our world there is no such thing as a “wage unit” and all the more interesting effects stem from relative wage and price changes.

We have to remember that far more important than these income changes are the capital changes concomitant with every inflation, the capital gains and losses made by debtors and creditors. With the hire-purchase system, workers may become debtors and thus benefit from inflation in a way for which no income statistics render an account, another reason why the analysis of inflationary processes in terms of real income changes seems so unrewarding. Perhaps I need to do no more than hint at the economic implications of the well-known fact that in an inflation the firms most heavily in debt will appear the most profitable, since the “return on the equity” here includes an element of capital gain. Such firms will naturally find it easier than their rivals to attract new capital for expansion. We may conclude that all inflation, quite apart from the effects on the relative price structure presently to be discussed, gives rise to a tendency towards a distortion of the capital structure. There is no longer an unambiguous criterion by which we could measure the relative performance of firms. Inflation offers another instructive example of how inseparable income and capital gains really are.

5.

Let me now draw your attention to a contemporary phenomenon which is not usually regarded as a consequence of the inflation of our age: the appearance of schemes of Economic Development Programming, promoted by governments, in countries whose economic systems conform to the pattern of the market economy; of what the French call “indicative planning” by government agencies.

I shall argue that a case can be made for such programmes as guideposts to entrepreneurial decision-making in a world in which relative prices, no longer responsive to market forces, no longer flexible in both directions, have largely lost their erstwhile function of guiding entrepreneurs in their actions.

There can of course be no doubt that, seen politically, Economic Programming is simply an extension of the principle of the full employment policy. The modern welfare state, having once taken responsibility for permanent full employment, is compelled, by the very nature of the forces inherent in modern mass society, to take the next step and make itself responsible for the maximum growth rate of incomes. But why should it be thought that the achievement of this aim cannot be left to the play of the market forces in what is, after all, a market economy?

The answer usually given to this question is, perhaps not surprisingly, couched in Keynesian terms. Economists advocating indicative planning will, as a rule, tell us that the market economy may not at all times make full use of all existing resources, and that to achieve this requires a coordination of the expectations of all entrepreneurs which market forces alone are unable to accomplish.

I regard this as an inadequate answer. Keynes was exclusively concerned with unemployment in industrial society. In Britain and France at least, the two countries which have in recent years been the protagonists of indicative planning, there has been no serious unemployment for almost three decades; hence their planning can hardly be justified in Keynesian terms. But if we are to include among our terms of reference resources other than labour, as well as extend them to malemployment, rather than unemployment, of labour, we are in any case unable to use the Keynesian tools.

A much stronger case for indicative planning can be made by simply asking how relative prices in our world, set in most cases by a “mark-up” on existing wage rates and material costs which nobody expects to last, can possibly act as guideposts to entrepreneurial action. Evidently they cannot. Prices, in a world in which they cannot fall, cannot reflect the forces of demand; they are not equilibrium prices. It is true that even disequilibrium prices may guide entrepreneurs, but they obviously can do this only where they are free to move in response to demand as well as supply, and it is precisely this which in our world they cannot do any more.

We simply no longer have a price “system” worthy of this name. The existing structure of relative prices reflects the history of past wage bargains and is thus nothing more than the cumulative result of a series of historical accidents. Of course it is governed by relative costs, but is no longer affected by disequilibrium of demand and supply. What does affect it are new wage bargains. A fall in demand for our product consequent upon a price rise may be safely disregarded for the good Keynesian reason that new wage bargains in other industries will in any case modify the demand for our product. Our price lasts as long as our wage bargain does. Everybody knows it and acts accordingly.

As I have pointed out elsewhere,10 the opponents of Economic Programming have sometimes harmed their cause by claiming more for the price system of the market economy than can fairly be done. In particular, we must beware of confusing the general equilibrium system of Walras and Pareto, which assumes a stationary world, with the market economy of the real world. In the former all action is determined by present prices, while in the real world entrepreneurs will have to let themselves also be guided by expectations of future prices and sales. But while it is true that in an uncertain world present prices cannot offer entrepreneurs more than a basis of orientation for their plans, it is also true that the disappearance of this basis must constitute a serious loss. In the light of this fact it is easy to understand how the idea could gain ground that economic growth might be promoted by offering entrepreneurs another basis of orientation, in lieu of the vanished price system, couched this time in terms of coordinated expectations about future quantities of goods. The market economy, having lost its traditional steering-wheel, is to be offered another device for the coordination of expectations. If this account of the background of the idea of Economic Programming is accepted, it would also explain why in most programmes prices play such a minor part.

The question then arises whether it is really possible to estimate future output trends for a large number of goods while disregarding their relative prices. The programming of economic development will largely have to be guided by available resources. The aim must be to overcome shortages in some sectors coexisting with unused resources in others. Can this aim be achieved without a price system in which relative prices reflect the relative scarcity of goods? Is it likely that the planners can do better here than the market can?

We have to remember that the shortages and surpluses we are able to observe in our world are as likely to be the result of short-run price distortion as of long-run trends. A surplus in the supply of a certain good and the corresponding excess capacity in the industry producing it may be simply due to the fact that its price has recently risen ahead of other prices, while a shortage may be due to a wage level which has not been revised for a long time. The surplus will probably vanish once other prices start moving upward and the shortage disappear after the next wage rise. I do not deny that surpluses and shortages which are due to other causes, and therefore of a less ephemeral nature, exist in our world. Of course in a world of unexpected change many such causes exist. My point is that we are quite unable to distinguish surpluses and shortages indicative of long-run trends from those reflecting relative price distortion. At the moment of observation it is impossible to tell the one kind from the other. In this respect the economist-planners are no better off than the entrepreneurs. In a world in which quantities and prices are no longer coordinated by market forces neither can by itself any longer serve as a useful guide to action.

It seems therefore that the same event the existence of which appears to call for a new basis of orientation for the entrepreneurial assessment of long-run trends, viz. the disappearance of a coherent price system governed by demand and supply, must by the same token deprive this new basis of orientation of any economic significance it might have.

Professor H. M. Robertson, the first discussant, felt that the title of Professor Lachmann's paper was inadequate. Professor Lachmann had discussed “Causes and Consequences of the Inflation of Our Time,” but he had also discussed causes and consequences of our ways of thinking about inflation in these times. He had thrown doubt on the usefulness of the currently fashionable macro-economic variables when discussing the phenomenon of inflation. But he had then assumed that a particular once-for-all change in attitudes and techniques had occurred in the last 30 years, and that henceforth, for all time, a maxim of policy would persist which had, historically speaking, only very recently become widely accepted, viz. that whenever there was any threat to the maintenance of full employment, action would be taken to increase the flow of money incomes sufficiently to take up the slack, wherever it appeared, and regardless of the labour shortages which would be caused elsewhere in the economy. Professor Robertson asked whether this recent revolution in thought was so complete that it had now come to a standstill and could be written into the macro-economic functions which would describe, explain, and govern all post-Keynesian economies, though any such variables, or rather, parameters, would have been absent from the functions appropriate to pre-Keynesian economies.

In his paper the author had fairly and squarely joined the ranks of the institutionalists, but he did not carry his institutionalism far enough. The institutions judged responsible ought to be described and analysed in some detail.

Undoubtedly there might be flashes of truth in the view that the really decisive force of our inflation had “to be sought in the driving power of trade unions, and the environment, intellectual and institutional, within which they operate to-day”; yet he (Robertson) believed that much more knowledge both of the actual pattern of wage changes and of the role of the trade unions in the processes of change had to be acquired before the decisive nature of this sort of explanation could be verified.

If the movements of wages and trends towards labour-cost-push inflation in South Africa were more thoroughly analysed on an institutional basis, the analysis would have to go much more deeply than any mere mention of the general role of trade unions in a world in which prices and wages could virtually never again move downwards. Such analysis should involve a deeper investigation not only into trade union structure but also into other elements in our political structure as well: elements which underlay much of the influence exerted by trade unionism itself upon the progress of inflation in this country, but elements which had perhaps contributed more strongly in other ways.

In regard to the emergence of Economic Development Programming as a consequence of inflation he felt that Prof. Lachmann had not derived economic development programming (and the forms which its “indicative planning” tended to take) from inflation itself. He really derived it as a further consequence of the same series of causes to which he ascribed the origins of the inflation of our times.

Professor D. Hobart Houghton, the second discussant, felt that he could not go the whole way with Prof. Lachmann in accepting the modern price structure as almost completely devoid of any competition. While it was true that prices, as a whole, tended to move upwards he was not sure whether it was true of all relative prices and questioned whether it took into account sufficiently the new techniques which replaced processes which had priced themselves out of existence in the modern world.

He endorsed Prof. Robertson's comments about the trade unions. Professor Lachmann had over-emphasized the upward pressure of trade union collective bargaining. Not merely the trade unions, but the whole population of democratic countries were essentially responsible for cost-push inflation. The main strength of the inflation of our time was that we expected it to continue but we as citizens of a democratic society were in one way or another making its continuance inevitable. One wondered whether democratic representative government, let alone the trade union movement, was compatible with the maintenance of the value of a currency unit, unless a powerful watchdog were set to uphold the currency status.

Dr. Holloway expressed the view that the discussants had not got down to the basic facts of inflation, for the reason that no attempt had been made to count the cost in terms of

• (a) undermining the whole economic system; and
• (b) undermining the freedom of the individual.

Inflation had, he said, turned the scale in favour of debtors and had brought about a quiet, relentless civil war between producers and authoritarian monetary managers. To avoid the collapse of the machinery of production they had no option but to load their prices. Inflation was disintegrating the economy. Monetary inflation had been the cause of all this. Cost inflation and demand inflation were merely symptoms, merely consequences. There could be no civilization without discipline. To expect this discipline to come from an army of bureaucrats was a vain hope. Whence this pathetic faith in bureaucrats? he asked. Bureaucrats were but a cross-section of the community; they were no supermen.

There was only one way of getting discipline into our economic relations and that was by having more money which had value on account of its intrinsic properties.

Mr. K. A. H. Adams, commenting on Lachmann's paper, said that another possible cause of inflation could be based on observations that Pareto's Law of Income Distribution had occurred in South Africa each year for the past 50 years. The Pareto index had increased from about 2 to 2.5 in this period and implied a certain concentration of incomes and people. In employee groups the income distribution was far more concentrated, principally because the top salaries in the Public Service had been limited to unnaturally low values.

The concentrated public service salary pattern set a model for the whole country and caused personnel migration, dissatisfaction and eventually an elevation of incomes in sub-groups, he said. With a more expanded income pattern in the public service the difficulties could be minimised, reaching negligible proportions probably when the pattern was twice as concentrated as the income distribution in the population. In this way inflation could be restrained.

J. Katzenellenbogen doubted whether there were many producers who had the resources to be their own price setters and who were able to ignore the market and able to let their prices withstand the elasticity of demand and supply. He felt that the South African system was still to a large extent based on a very competitive market and producers in the main used the price mechanism even in the short run. There were many small and medium-sized individual producers who had to face a competitive society and who could make inroads into it only by an attack from a price point of view.

R. L. Kraft stated that it was commonly held that wages went up and never came down. In a recent preliminary survey of wage costs in the various sectors of South African manufacturing industry he had discovered that the influence of collective bargaining on average wage cost per employee was not decisive. He also felt that wage costs per employee could and did fall in certain sectors. Wage behaviour reflected, among other things, the skills requirements of industries as well as the higher degree of automation and the mechanical complexity of these industries.

M. B. Dagut asked whether Prof. Lachmann, who believed that institutions were responsible for the continuing of inflation, did not also believe that there was some merit in the new type of institution tried abroad such as a prices and incomes board.

Dr. Timmerman said that as far as South Africa was concerned it might be the case that the unions were not so well organised as those overseas. Nevertheless they did exercise upward tendencies on prices. He also felt that technical workers, most of whom were not union members, had greatly influenced costs. He suggested increased productivity and longer hours of duty as the only remedy.

Prof. Lachmann replied in conclusion that while the only thing that he believed possible and socially acceptable was a combined price and wages policy, such a policy would require the introduction of a system of universal price control which we knew from experience was not a job to be well done.

In our world, he said, prices and wages were not flexible in the downward direction. He submitted that there had been some forces which had produced the downward inflexibility of wage rates and prices, which were also to be held responsible for the long-run upward trend of prices. There really could be no doubt about it. He would go further than Dr. Holloway and say that a society which was unable to control the creation of claims on its social product was a sick society. One of the evils of inflation was of course the capital losses of the savers which at the other end must correspond with certain capital gains. It seemed that some economists had acquired a view that those economic phenomena of which we had no record, and because capital gains and losses did not figure in our national income accounts, did not exist. Capital gains and losses did matter because a capitalistic economy was steered by them. There was also the view that the capital losses of the savers in an inflationary economy was a correctable thing and although this was not social justice it did not matter for the economy as a whole because what some lost others might gain. There was also the effect which such capital losses might have on price formation. He had no doubt that some of the wage increases which had been granted in the Western world for the last twenty years had partly been financed from such capital gains which, however, could not generally be maintained.

NOTES

The Market Economy and the Distribution of Wealth

Everywhere today in the free world we find the opponents of the market economy at a loss for plausible arguments. Of late the “case for central planning” has shed much of its erstwhile luster. We have had too much experience of it. The facts of the last forty years are too eloquent.

Who can now doubt that, as Professor Mises pointed out thirty years ago, every intervention by a political authority entails a further intervention to prevent the inevitable economic repercussions of the first step from taking place? Who will deny that a command economy requires an atmosphere of inflation to operate at all, and who today does not know the baneful effects of “controlled inflation?” Even though some economists have now invented the eulogistic term “secular inflation” in order to describe the permanent inflation we all know so well, it is unlikely that anyone is deceived. It did not really require the recent German example to demonstrate to us that a market economy will create order out of “administratively controlled” chaos even in the most unfavorable circumstances. A form of economic organization based on voluntary cooperation and the universal exchange of knowledge is necessarily superior to any hierarchical structure, even if in the latter a rational test for the qualifications of those who give the word of command could exist. Those who are able to learn from reason and experience knew it before, and those who are not are unlikely to learn it even now.

Reprinted from Mary Sennholz, ed., On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (New York: D. Van Nostrand, 1956).

Confronted with this situation, the opponents of the market economy have shifted their ground; they now oppose it on “social” rather than economic grounds. They accuse it of being unjust rather than inefficient. They now dwell on the “distorting effects” of the ownership of wealth and contend that “the plebiscite of the market is swayed by plural voting.” They show that the distribution of wealth affects production and income distribution since the owners of wealth not merely receive an “unfair share” of the social income, but will also influence the composition of the social product: Luxuries are too many and necessities too few. Moreover, since these owners do most of the saving they also determine the rate of capital accumulation and thus of economic progress.

Some of these opponents would not altogether deny that there is a sense in which the distribution of wealth is the cumulative result of the play of economic forces, but would hold that this cumulation operates in such a fashion as to make the present a slave of the past, a bygone an arbitrary factor in the present. Today's income distribution is shaped by today's distribution of wealth, and even though today's wealth was partly accumulated yesterday, it was accumulated by processes reflecting the influence of the distribution of wealth on the day before yesterday. In the main this argument of the opponents of the market economy is based on the institution of Inheritance to which, even in a progressive society, we are told, a majority of the owners owe their wealth.

This argument appears to be widely accepted today, even by many who are genuinely in favor of economic freedom. Such people have come to believe that a “redistribution of wealth,” for instance through death duties, would have socially desirable, but no unfavorable economic results. On the contrary, since such measures would help to free the present from the “dead hand” of the past they would also help to adjust present incomes to present needs. The distribution of wealth is a datum of the market, and by changing data we can change results without interfering with the market mechanism! It follows that only when accompanied by a policy designed continually to redistribute existing wealth, would the market process have “socially tolerable” results.

This view, as we said, is today held by many, even by some economists who understand the superiority of the market economy over the command economy and the frustrations of interventionism, but dislike what they regard as the social consequences of the market economy. They are prepared to accept the market economy only where its operation is accompanied by such a policy of redistribution.

The present paper is devoted to a criticism of the basis of this view.

In the first place, the whole argument rests logically on verbal confusion arising from the ambiguous meaning of the term “datum.” In common usage as well as in most sciences, for instance in statistics, the word “datum” means something that is, at a moment of time, “given” to us as observers of the scene. In this sense it is, of course, a truism that the mode of the distribution of wealth is a datum at any given moment of time, simply in the trivial sense that it happens to exist and no other mode does. But in the equilibrium theories which, for better or worse, have come to mean so much for present-day economic thought and have so largely shaped its content, the word “datum” has acquired a second and very different meaning: Here a datum means a necessary condition of equilibrium, and independent variable, and “the data” collectively mean the total sum of necessary and sufficient conditions from which, once we know them all, we without further ado can deduce equilibrium price and quantity. In this second sense the distribution of wealth would thus, together with the other data, be a DETERMINANT, though not the only determinant, of the prices and quantities of the various services and products bought and sold.

It will, however, be our main task in the paper to show that the distribution of wealth is not a “datum” in this second sense. Far from being an “independent variable” of the market process, it is, on the contrary, continuously subject to modification by the market forces. Needless to say, this is not to deny that at any moment it is among the forces which shape the path of the market process in the immediate future, but it is to deny that the mode of distribution as such can have any permanent influence. Though wealth is always distributed in some definite way, the mode of this distribution is ever-changing.

Only if the mode of distribution remained the same in period after period, while individual pieces of wealth were being transferred by inheritance, could such a constant mode be said to be a permanent economic force. In reality this is not so. The distribution of wealth is being shaped by the forces of the market as an object, not an agent, and whatever its mode may be today will soon have become an irrelevant bygone.

The distribution of wealth, therefore, has no place among the data of equilibrium. What is, however, of great economic and social interest is not the mode of distribution of wealth at a moment of time, but its mode of change over time. Such change, we shall see, finds its true place among the events that happen on that problematical “path” which may, but rarely in reality does, lead to equilibrium. It is a typically “dynamic” phenomenon. It is a curious fact that at a time when so much is heard of the need for the pursuit and promotion of dynamic studies it should arouse so little interest.

Ownership is a legal concept which refers to concrete material objects. Wealth is an economic concept which refers to scarce resources. All valuable resources are, or reflect, or embody, material objects, but not all material objects are resources: Derelict houses and heaps of scrap are obvious examples, as are any objects which their owners would gladly give away if they could find somebody willing to remove them. Moreover, what is a resource today may cease to be one tomorrow, while what is a valueless object today may become valuable tomorrow. The resource status of material objects is therefore always problematical and depends to some extent on foresight. An object constitutes wealth only if it is a source of an income stream. The value of the object to the owner, actual or potential, reflects at any moment its expected income-yielding capacity. This, in its turn, will depend on the uses to which the object can be turned. The mere ownership of objects, therefore, does not necessarily confer wealth; it is their successful use which confers it. Not ownership but use of resources is the source of income and wealth. An ice-cream factory in New York may mean wealth to its owner; the same ice-cream factory in Greenland would scarcely be a resource.

In a world of unexpected change the maintenance of wealth is always problematical; and in the long run it may be said to be impossible. In order to be able to maintain a given amount of wealth which could be transferred by inheritance from one generation to the next, a family would have to own such resources as will yield a permanent net income stream, i.e., a stream of surplus of output value over the cost of factor services complementary to the resources owned. It seems that this would be possible only either in a stationary world, a world in which today is as yesterday and tomorrow like today, and in which thus, day after day, and year after year, the same income will accrue to the same owners or their heirs; or if all resource owners had perfect foresight. Since both cases are remote from reality we can safely ignore them. What, then, in reality happens to wealth in a world of unexpected change?

All wealth consists of capital assets which, in one way or another, embody or at least ultimately reflect the material resources of production, the sources of valuable output. All output is produced by human labor with the help of combinations of such resources. For this purpose resources have to be used in certain combinations; complementarity is of the essence of resource use. The modes of this complementarity are in no way “given” to the entrepreneurs who make, initiate, and carry out production plans. There is in reality no such thing as A production function. On the contrary, the task of the entrepreneur consists precisely in finding, in a world of perpetual change, which combination of resources will yield, in the conditions of today, a maximum surplus of output over input value, and in guessing which will do so in the probable conditions of tomorrow, when output values, cost of complementary input, and technology all will have changed.

If all capital resources were infinitely versatile the entrepreneurial problem would consist in no more than following the changes of external conditions by turning combinations of resources to a succession of uses made profitable by these changes. As it is, resources have, as a rule, a limited range of versatility, each is specific to a number of uses.1 Hence, the need for adjustment to change will often entail the need for a change in the composition of the resource group, for “capital regrouping.” But each change in the mode of complementarity will affect the value of the component resources by giving rise to capital gains and losses. Entrepreneurs will make higher bids for the services of those resources for which they have found more profitable uses, and lower bids for those which have to be turned to less profitable uses. In the limiting case where no (present or potential future) use can be found for a resource which has so far formed part of a profitable combination, this resource will lose its resource character altogether. But even in less drastic cases capital gains and losses made on durable assets are an inevitable concomitant of a world of unexpected change.

The market process is thus seen to be a leveling process. In a market economy a process of redistribution of wealth is taking place all the time before which those outwardly similar processes which modern politicians are in the habit of instituting, pale into comparative insignificance, if for no other reason than that the market gives wealth to those who can hold it, while politicians give it to their constituents who, as a rule, cannot.

This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society.

In this process he is successful who understands earlier than any one else that a certain resource which today can be produced when it is new, or bought, when it is an existing resources, at a certain price A, will tomorrow form part of a productive combination as a result of which it will be worth A'. Such capital gains or losses prompted by the chance of, or need for, turning resources from one use to another, superior or inferior to the first, form the economic substance of what wealth means in a changing world, and are the chief vehicle of the process of redistribution.

In this process it is most unlikely that the same man will continue to be right in his guesses about possible new uses for existing or potential resources time after time, unless he is really superior. And in the latter case his heirs are unlikely to show similar success—unless they are superior, too. In a world of unexpected change, capital losses are ultimately as inevitable as are capital gains. Competition between capital owners and the specific nature of durable resources, even though it be “multiple specificity,” entail that gains are followed by losses as losses are followed by gains.

These economic facts have certain social consequences. As the critics of the market economy nowadays prefer to take their stand on “social” grounds, it may be not inappropriate here to elucidate the true social results of the market process. We have already spoken of it as a leveling process. More aptly, we may now describe these results as an instance of what Pareto called “the circulation of elites.” Wealth is unlikely to stay for long in the same hands. It passes from hand to hand as unforeseen change confers value, now on this, now on that specific resource, engendering capital gains and losses. The owners of wealth, we might say with Schumpeter, are like the guests at a hotel or the passengers in a train: They are always there but are never for long the same people.

It may be objected that our argument applies in any case only to a small segment of society and that the circulation of elites does not eliminate social injustice. There may be such circulation among wealth owners, but what about the rest of society? What chance have those without wealth of even participating, let alone winning, in the game? This objection, however, would ignore the part played by managers and entrepreneurs in the market process, a part to which we shall soon have to return.

In a market economy, we have seen, all wealth is of a problematical nature. The more durable assets are and the more specific, the more restricted the range of uses to which they may be turned, the more clearly the problem becomes visible. But in a society with little fixed capital in which most accumulated wealth took the form of stocks of commodities, mainly agricultural and perishable, carried for periods of various lengths, a society in which durable consumer goods, except perhaps for houses and furniture, hardly existed, the problem was not so clearly visible. Such was, by and large, the society in which the classical economists were living and from which they naturally borrowed many traits. In the conditions of their time, therefore, the classical economics were justified, up to a point, in regarding all capital as virtually homogeneous and perfectly versatile, contrasting it with land, the only specific and irreproducible resource. But in our time there is little or no justification for such dichotomy. The more fixed capital there is, and the more durable it is, the greater the probability that such capital resources will, before they wear out, have to be used for purposes other than those for which they were originally designed. This means practically that in a modern market economy there can be no such thing as a source of permanent income. Durability and limited versatility make it impossible.

It may be asked whether in presenting our argument we have not confused the capital owner with the entrepreneur, ascribing to the former functions which properly belong to the latter. Is not the decision about the use of existing resources as well as the decision which specifies the concrete form of new capital resources, viz. the investment decision, a typical entrepreneurial task? Is it not for the entrepreneur to regroup and redeploy combinations of capital goods? Are we not claiming for capital owners the economic functions of the entrepreneur?

We are not primarily concerned with claiming functions for anybody. We are concerned with the effects of unexpected change on asset values and on the distribution of wealth. The effects of such change will fall upon the owners of wealth irrespective of where the change originates. If the distinction between capitalist and entrepreneur could always easily be made, it might be claimed that the continuous redistribution of wealth is the result of entrepreneurial action, a process in which capital owners play a merely passive part. But that the process really occurs, that wealth is being redistributed by the market, cannot be doubted, nor that the process is prompted by the transmission of knowledge from one center of entrepreneurial action to another. Where capital owners and entrepreneurs can be clearly distinguished, it is true that the owners of wealth take no active part in the process themselves, but passively have to accept its results.

Yet there are many cases in which such a clear-cut distinction cannot be made. In the modern world wealth typically takes the form of securities. The owner of wealth is typically a shareholder. Is the shareholder an entrepreneur? Professor Knight asserts that he is, but a succession of authors from Walter Rathenau2 to Mr.Burnham have denied him that status. The answer depends, of course, on our definition of the entrepreneur. If we define him as an uncertainty-bearer, it is clear that the shareholder is an entrepreneur. But in recent yeats there seems to be a growng tendency to define the entrepreneur as the planner and decision-maker. If so, directors and managers are entrepreneurs, but shareholders, it seems, are not.

Yet we have to be careful in drawing our conclusions. One of the most important tasks of the entrepreneur is to specify the concrete form of capital resources, to say what buildings are to be erected, what stocks to be kept, etc. If we are clearly to distinguish between capitalist and entrepreneur we must assume that a “pure” entrepreneur, with no wealth of his own, borrows capital in money form, i.e., in a non-specific form, from “pure” capital owners.3

But do the directors and managers at the top of the organizational ladder really make all the specifying decisions? Are not many such decisions made “lower down” by works managers, supervisors, etc.? Is it really at all possible to indicate “the entrepreneur” in a world in which managerial functions are so widely spread?

On the other hand, the decision of a capital owner to buy new shares in company A rather than in company B is also a specifying decision. In fact this is the primary decision on which all the managerial decisions within the firm ultimately depend, since without capital there would be nothing for them to specify. We have to realize, it seems, that the specifying decisions of shareholders, directors, managers, etc., are in the end all mutually dependent upon each other, are but links in a chain. All are specifying decisions distinguished only by the degree of concreteness which increases as we are moving down the organizational ladder. Buying shares in company A is a decision which gives capital a form less concrete than does the decision of the workshop manager as to which tools are to be made, but it is a specifying decision all the same, and one which provides the material basis for the workshop manager's action. In this sense we may say that the capital owner makes the “highest” specifying decision.

The distinction between capital owner and entrepreneur is thus not always easily made. To this extent, then, the contrast between the active entrepreneurs, forming and redeploying combinations of capital resources, and the passive asset owners, who have to accept the verdict of the market forces on the success of “their” entrepreneurs, is much overdrawn. Shareholders, after all, are not quite defenseless in these matters. If they cannot persuade their directors to refrain from a certain step, there is one thing they can do: They can sell!

But what about bondholders? Shareholders may make capital gains and losses; their wealth is visibly affected by market forces. But bondholders seem to be in an altogether different position. Are they not owners of wealth who can claim immunity from the market forces we have described, and thus from the process of redistribution?

In the first place, of course, the difference is merely a matter of degree. Cases are not unknown in which, owing to failure of plans, inefficiency of management, or to external circumstances which had not been foreseen, bondholders had to take over an enterprise and thus became involuntary shareholders. It is true, however, that most bondholders are wealth owners who stand, as it were, at one remove from the scene we have endeavored to describe, from the source of changes which are bound to affect most asset values, though it is not true of all of them. Most of the repercussions radiating from this source will have been, as it were, intercepted by others before they reach the bondholders. The higher the “gear” of a company's capital, the thinner the protective layer of the equity, the more repercussions will reach the bondholders, and the more strongly they will be affected. It is thus quite wrong to cite the case of the bondholder in order to show that there are wealth owners exempt from the operation of the market forces we have described. Wealth owners as a class can never be so exempt, though some may be relatively more affected than others.

Furthermore, there are two cases of economic forces engendering capital gains and losses from which, in the nature of these cases, the bondholder cannot protect himself, however thick the protective armor of the equity may happen to be: the rate of interest and inflation. A rise in long-term rates of interest will depress bond values where equity holders may still hope to recoup themselves by higher profits, while a fall will have the opposite effect. Inflation transfers wealth from creditors to debtors, whereas deflation has the opposite effect. In both cases we have, of course, instances of that redistribution of wealth with which we have become acquainted. We may say that with a constant long-term rate of interest and with no change in the value of money, the susceptibility of bond holders' wealth to unexpected change will depend on their relative position as against equity holders, their “economic distance” from the center of disturbances; while interest changes and changes in the value of money will modify that relative position.

The holders of government bonds, of course, are exempt from many of the repercussions of unexpected change, but by no means from all of them. To be sure, they do not need the protective armor of the equity to shield them against the market forces which modify prices and costs. But interest changes and inflation are as much of a threat to them as to other bondholders. In the world of permanent inflation in which we are now living, to regard wealth in the form of government securities as not liable to erosion by the forces of change would be ludicrous. But in any case the existence of a government debt is not a result of the operation of market forces. It is the result of the operation of politicians eager to save their constituents from the task of having to pay taxes they would otherwise have had to pay.

The main fact we have stressed in this paper, the redistribution of wealth caused by the forces of the market in a world of unexpected change, is a fact of common observation. Why, then, is it constantly being ignored? We could understand why the politicians choose to ignore it: After all, the large majority of their constituents are unlikely to be directly affected by it, and, as is amply shown in the case of inflation, would scarcely be able to understand it if they were. But why should economists choose to ignore it? That the mode of the distribution of wealth is a result of the operation of economic forces is the kind of proposition which, one would think, would appeal to them. Why, then, do so many economists continue to regard the distribution of wealth as a “datum” in the second sense mentioned above? We submit that the reason has to be sought in an excessive preoccupation with equilibrium problems.

We saw before that the successive modes of the distribution of wealth belong to the world of disequilibrium. Capital gains and losses arise in the main because durable resources have to be used in ways for which they were not planned, and because some men understand better and earlier than other men what the changing needs and resources of a world in motion imply. Equilibrium means consistency of plans, but the redistribution of wealth by the market is typically a result of inconsistent action. To those trained to think in equilibrium terms it is perhaps only natural that such processes as we have described should appear to be not quite “respectable.” For them the “real” economic forces are those which tend to establish and maintain equilibrium. Forces only operating in disequilibrium are thus regarded as not really very interesting and are therefore all too often ignored. There may be two reasons for such neglect. No doubt a belief that a tendency towards equilibrium does exist in reality and that, in any conceivable situation, the forces tending towards equilibrium will always be stronger than the forces of resistance, plays a part in it.

But an equally strong reason, we may suspect, is the inability of economists preoccupied with equilibria to cope at all with the forces of disequilibrium. All theory has to make use of coherent models. If one has only one such model at one's disposal a good many phenomena that do not seem to fit into one's scheme are likely to remain unaccounted for. The neglect of the process of redistribution is thus not merely of far-reaching practical importance in political economy since it prevents us from understanding certain features of the world in which we are living. It is also of crucial methodological significance to the central area of economic thought.

We are not saying, of course, that the modern economist, so learned in the grammar of equilibrium, so ignorant of the facts of the facts of the market, is unable or unready to cope with economic change; that would be absurd. We are saying that he is well-equipped only to deal with types of change that happen to conform to a fairly rigid pattern. In most of the literature currently in fashion change is conceived as a transition from one equilibrium to another, i.e., in terms of comparative statics. There are even some economists who, having thoroughly misunderstood Cassel's idea of a “uniformly progressive economy,” cannot conceive of economic progress in any other way!4 Such smooth transition from one equilibrium (long-run or short-run) to another virtually bars not only discussion of the process in which we are interested here, but of all true economic processes. For such smooth transition will only take place where the new equilibrium position is already generally known and anticipated before it is reached. Where this is not so, a process of trial and error (Walras' “tâtonnements“) will start which in the end may or may not lead to a new equilibrium position. But even where it does, the new equilibrium finally reached will not be that which would have been reached immediately had everybody anticipated it at the beginning, since it will be the cumulative result of the events which took place on the “path” leading to it. Among these events changes in the distribution of wealth occupy a prominent place.

Professor Lindahl5 has recently shown to what extent Keynes's analytical model is vitiated by his apparent determination to squeeze a variety of economic forces into the Procrustean bed of short-period equilibrium analysis. Keynes, while he wished to describe the modus operandi of a number of dynamic forces, cast his model in the mold of a system of simultaneous equations, though the various forces studied by him clearly belonged to periods of different length. The lesson to be learned here is that once we allow ourselves to ignore fundamental facts about the market, such as differential knowledge, some people understanding the meaning of an event before others, and in general, the temporal pattern of events, we shall be tempted to express “immediate” effects in shor-period equilibrium terms. And all too soon we shall also allow ourselves to forget that what is of real economic interest are not the equilibria, even if they exist, which is in any case doubtful, but what happens between them. “An auxiliary makeshift employed by the logical economists as a limiting notion”6 can produce rather disastrous results when it is misemployed.

The preoccupation with equilibrium ultimately stems from a confusion between subject and object, between the mind of the observer and the minds of the actors observed. There can, of course, be no systematic science without a coherent frame of reference, but we can hardly expect to find such coherence as our frame of reference requires ready-made for us in the situations we observe. It is, on the contrary, our task to produce it by analytical effort. There are, in the social sciences, many situations which are interesting to us precisely because the human actions in them are inconsistent with each other, and in which coherence, if at all, is ultimately produced by the interplay of mind on mind. The present paper is devoted to the study of one such situation. We have endeavored to show that a social phenomenon of some importance can be understood if presented in terms of a process reflecting the interplay of mind on mind, but not otherwise. The model-builders, econometric and otherwise, naturally have to avoid such themes.

It is very much to be hoped that economists in the future will show themselves less inclined than they have been in the past to look for ready-made, but spurious, coherence, and that they will take a greater interest in the variety of ways in which the human mind in action produces coherence out of an initially incoherent situation.

NOTES

Cultivated Growth and the Market Economy

1.

In looking around for a suitable subject for this address I have been struck, once again, by the limited range of topics available to an academic economist on occasions such as this. In this age in which, the narrower the range of one's speciality the higher the reputation one is able to enjoy, there are few fields in which his knowledge can permit him to speak with competence and with the confidence that he has anything worthwhile to say. Moreover, where his own field of interests lies on a level of abstraction to which he cannot very well expect a “captive” audience to follow him willingly, and not merely for the sake of politeness, this field, too, is barred to him.

Last year I endeavoured to solve the problem by inviting my audience to follow me in an exploration of the deeper causes of the inflation of our time, which we found partly in certain characteristics of the economic institutions of modern society, and largely in the climate of opinion within which these institutions have to function. Alas, such themes, in which the topical impinges upon the abstract, and which permit the academic economist to display the practical relevance of supposedly esoteric issues, are rare.

Yet I have come to think that there is one kind of contribution such an academic economist might make that may be of wider interest, viz.: to clarify the terms in which controversial opinions on an economic issue are expressed. For we often find cases in which controversy on an economic issue is due not so much to different observations of facts, nor to differences in value judgements (in which latter case the economist as such can have nothing to say), but to the fact that different economists relate the facts observed and the practical issues in hand to different conceptual frameworks. In such cases we say that they “do not speak the same language” or “misunderstand each other's terms” because these belong to different conceptual structures. Here it is possible to feel that the economist whose chief interests lie in the field of theory may perhaps render a service by helping to make it clear where and how the conceptual frameworks of the contestants differ from each other, and by thus contributing towards the elucidation of the issues at stake.

Presidential address delivered at the Thirty-sixth Annual General Meeting of the Economic Society of South Africa held in Pretoria on 16th August 1963. Reprinted from South African Journal of Economics 31 (September 1963).

In what follows I shall endeavour to make a contribution of this nature with regard to the controversy on non-coercive Planning or Economic Budgeting in the course of which some of my fellow-economists have of late expressed their views on the compatibility of certain forms of PLANNING with the principles and modus operandi of a Market Economy.

I have to make it clear at the outset that I shall not plead for or against this or that type of Planning. My task will be to find out whether or not a certain type of Planning would be possible within the framework of a Market Economy. Whether or not it is, or will be, possible in practice, and if so, whether it should be adopted in the present situation in this country, are entirely different questions on which I do not feel competent to pronounce. For, let me add that I lack all practical knowledge of the subject. My knowledge of it, such as it is, is all derived from reading books and articles on various forms of Planning in different countries and at different times. It is truly academic—in the worst of possible senses. But it may be just for this reason that I think I have been able to detect, in the controversy mentioned, certain differences in shades of meaning, in approach and conceptual structure, and in particular in what is implicitly taken for granted, that may seem of no interest to the man of action absorbed in his task, but are of interest to those concerned with the clarification of controversial issues.

In turning now to this task of elucidation I shall first deal with the fundamental concepts involved. Later on I shall have something to say about certain economic problems likely to be encountered by a policy of cultivating growth by concerted action.

2.

What are the essential characteristics of the new Planning? In the first place, it has nothing whatever to do with the kind of Central Planning typical of the countries under the domination of Communism. Private enterprise is safeguarded and all Planning is private planning by entrepreneurs. Nor is it akin to the form of Planning we found, e.g., in Nazi Germany before 1939 (what Walter Euken called Zentralverwaltungswirtschaft) which so largely employed compulsion over what were otherwise still private producers. The new Planning uses no compulsion, it leaves the entrepreneurs the free choice of their resources—but it tries to persuade them to plan and act otherwise than they would have done, had they drawn up their respective plans in isolation from each other.

The essence of Economic Budgeting, this new non-coercive type of Planning, as I understand it, is, then, the continuous exchange of information among entrepreneurs about each other's intentions, which will enable every entrepreneur, in making his plan, to know what every one else plans to do. Also, since certain projections of expected future trends in the economic system are being shown to them, it is hoped and expected that they will take them into account. In other words, we find here a method, not of engineering growth by decree, but of cultivating it by creating the conditions, at least so far as entrepreneurial knowledge goes, which may give rise to it. The analogy of the gardener, as distinct from the engineer, naturally suggests itself.

How far all this is really feasible, or would produce results notably different from what would happen without such concerting of plans, only experience can show. I would hesitate to draw too far-reaching conclusions from the French example. In the first place, the economic theorist must show some caution in interpreting economic history. We never know how much of what happened was due to the special circumstances of time and place, and how much to underlying economic forces. Secondly, French planning methods themselves have changed in seventeen years.

In any case, we are here concerned not with feasibility but with conditions and implications. When we ask how far such Planning is compatible with the existence of a Market Economy, we are really asking: Are the conditions which make the existence of a Market Economy possible such that better knowledge obtained by exchange of information is likely to cause faster growth?

What we have to deal with, then, is an endeavour to coordinate the plans of entrepreneurs, investment plans as well as plans about the use of existing resources, ex ante. It is true that in a Market Economy the market process would in any case produce co-ordination, but it would do so only ex post. Economic Budgeting means that the participants, entrepreneurs and economic planners, acting in concert, determine the collective environment within which each private planner carries out his own plan. The fact that he knows, or at least hopes to, what plans the others—be they customers or suppliers, or even potential rivals—will follow, offers him points of orientation which should reduce his uncertainty and, in favourable circumstances, enable him to make more definite plans. Individual plans are thus being attuned to each other. Each entrepreneur is able to carry out his plans with a greater assurance than he could do otherwise.

We must now take a closer look at the social and political background of the scheme. The modern State in its Western version, which promotes such schemes for faster economic growth, is what has come to be known as a Welfare State: it has taken over the responsibility for satisfying more and more needs. Already it has made itself responsible for Full Employment. It may be said that taking on the responsibility for growth is merely a further step along the same road. But it is a step which must be regarded with great misgivings, in general and not merely on economic grounds.

In the first place, we have to ask ourselves: Where and when is this process to end? Secondly, it means that more and more economic phenomena will become political issues—with all that this means in the age of the mass electorate! It is difficult to contemplate with equanimity a situation in which, whether a government can stay in power, will depend on its ability to persuade the electorate that the rate of growth of the national economy could not possibly have been higher, and in which the opposition will have to address itself to refuting this claim. Already it is possible to sense a certain note of hysteria in some discussions, even academic, on growth. Can we economists relish the prospect of an era in which the range of political jugglery with economic concepts is thus greatly extended, until one day perhaps the question whether a country's “actual growth” was what was “warranted,” not to mention its “natural rate,” becomes a favourite topic for comment in the columns of the daily press? Perhaps the pages adjacent to the sports columns would provide an appropriate place for such a feature.1

Let us remember two facts. First, “Economics is the study of mutual interference: any ‘abnormal’ movement cannot long continue without sooner or later bringing into play corrective movements.”2 Secondly, all policy consists in the simultaneous pursuit of a number of objectives, the relative significance of each of which has to be continuously weighed against that of the others. “Growth” cannot be pursued in isolation from other economic objectives.

We now have to confront our main question, viz. whether Economic Budgeting of the kind described above is compatible with the principles and modus operandi of the Market Economy.

A Market Economy is an economy in which all want-satisfying activities are carried out by individuals. Units of production are organised by individual entrepreneurs (who usually act in groups). The very essence of the Market Economy consists in the continuous Market Process, the never-ending course of entrepreneurial action set in train by price-cost differences, actual or expected. In exploiting these profitable opportunities entrepreneurs adjust supply to demand thus reducing existing disequilibria. If their activity is unhampered, and if no new changes supervened, their action should in the end wipe out the very price-cost differences which originally motivated it. Of course this never happens. In the real world equilibrium does not exist.

We therefore have to distinguish sharply between this “ideal type” of a Market Economy and what is often now called the neoclassical model, as it has emerged from the work of Walras, Pareto and Cassel. This model denotes a closed system in which equilibrium prices and equilibrium quantities produced and exchanged are all mutually determined. The Market Economy, on the contrary, is an open system. Its prices and quantities are not equilibrium prices and quantities; hence they are not determinate. They very possibility of making profits stems from the absence of equilibrium. The Market Economy essentially rests on a mechanism of adjustment, but of adjustment to ever-changing circumstances. To put one's trust in the Market Economy is not to assert a faith in the final attainment of equilibrium, nor even in the efficacy of the equilibrating forces, which might be hampered or deflected before attaining their goal. It is to assert a faith in the beneficial results of the continuous Market Process the modus operandi of which I have tried to sketch.

There is another important difference between the neo-classical equilibrium system and the Market Economy which lies behind the dichotomy “closed system—open system.” This difference concerns the kind of knowledge assumed. In the former case we have to assume that all those who participate in market action leading towards equilibrium actually know the equilibrium position before it is reached. Otherwise it is hard to see how it can be attained. But it has been pointed out that equilibrium theory, for all its sophistication and ostensible precision, fails to explain where entrepreneurs derive such knowledge from.3 Equilibrium theory has to assume a state of knowledge shared by all participants as a datum the origin of which is left in the dark.

In the Market Economy, on the other hand, we can assume no such state of knowledge. Each entrepreneur, at each moment, has to make the most profitable use of the resources at his disposal, including his knowledge. Naturally he will do his best to improve the latter. Entrepreneurial action is a good example of “learning by doing.” But there is here no such thing as a common state of knowledge shared by all which we could regard as a datum. On the contrary, it is knowledge superior to that of others which brings success. A common state of knowledge may emerge, perhaps, in the end, as the net result of these diverse actions. It would then last only until circumstances change again.

From the fact that in a Market Economy everybody is engaged in the exploitation of profitable opportunities inherent in price-cost differences, actual or expected, it does not follow that all such opportunities in existence at any moment will actually be exploited. There may well be “gaps” due to that incomplete knowledge which is a feature of reality, as distinct from the neo-classical model. Some profitable opportunities will be neglected. We cannot even say that these will be the least profitable. It all depends on the distribution of knowledge among entrepreneurs, and this is a matter about which we can say nothing in general.

In the light of these circumstances, the conclusion that a scheme for the exchange of information and subsequent action based upon it is incompatible with the principles and modus operandi of the Market Economy does not appear to be warranted. The Market Economy is an open system. We cannot say what concrete action an entrepreneur confronted with a given situation will actually take. It depends on his interpretation of it. Hence, we are unable to say that Economic Budgeting will deflect the course of his action from what it would be otherwise, since we simply do not know what that might have been. A closed system, like the Walrasian, would permit us to say that. But it has no counterpart in reality, as equilibrium is merely a figment of the imagination of the model-builders.

Similar reasoning applies to the question of the effect on entrepreneurial knowledge. Economic Budgeting certainly will change the distribution of knowledge among entrepreneurs in the direction of greater similarity. But, as we saw, no assumption about the mode of distribution of this knowledge is included among the fundamental postulates of the Market Economy. In it changes in knowledge happen every day. The Market Economy is neutral with respect to the knowledge required of its actors. Again, it would be different in a general equilibrium model in which a certain state of knowledge has to be assumed. But for the reasons given no such model can serve as a standard of comparison for anything that happens in the real world.

3.

We now have to address ourselves to the question, in what way Economic Budgeting by the co-ordination of entrepreneurial plans can lead to a higher rate of growth than would otherwise exist. In general, our answer has to be, by widening knowledge about the possible use of resources and its consequences. But what specific results might be achieved in this way? What are the plants we are thus enabled to cultivate in our garden?

There are in general, so far as I can see, three methods of promoting faster growth:

• (1) By increasing investment at the expense of consumption. But, whether this takes place in the form of demand inflation or otherwise, e.g., by taxation, this method could hardly be called noncoercive. I shall therefore ignore it.
• (2) By making full use of resources that would otherwise not be used, or not fully used. This is of course the essence of Keynesian teaching. As regards labour, I have nothing new to say. But as regards capital and natural wealth I shall have something to say later on.
• (3) By reducing the amount of malinvestment. I trust you will forgive me as one who has, for some time, taken a special interest in problems of capital structure, if I not merely find this a congenial theme, but also if I see in the possible reduction of malinvestment the most promising avenue for cultivating growth by means of the coordination of plans within a Market Economy.

Every capital good exists in a specific form which limits the range of its possible uses: it has limited versatility. Each capital good therefore depends for its efficient use on the support of other capital goods complementary to it. Malinvestment may arise in many ways through faulty expectations, but failure of complementary capital goods to become available is one of them.

The market process tends to produce a coherent complementarity pattern throughout the economic system ex post, but it does its work by compelling the scrapping of those capital goods which do not fit into this pattern, or at least their removal to other spheres of production where a pigeon-hole can be found for them, usually with a concomitant capital loss. The market process tends to eliminate the results of malinvestment but cannot prevent its occurrence.

The question now before us is, whether it is possible by coordinating investment plans of many entrepreneurs ex ante to prevent such a waste of resources. If we succeed in this we can make a given amount of investment yield more output; we obtain a higher rate of growth per unit of investment input. To illustrate this possibility let me give you two well-known examples of malinvestment which might be prevented by coordination of plans.

There is, firstly, the case, often mentioned by critics of the Market Economy,4 where, owing to the market structure, an increase in demand for the product leads to excess capacity. Let us assume that the demand for a certain product rises by m. If the marginal capital output ratio in the industry is 3, an investment of 3 m in the industry is required. But if the industry consists of ten firms each of which hopes to attract the additional demand entirely to itself, 30m will actually be invested with the result we can all imagine. It is possible to see the primary function of Economic Budgeting in the prevention of this kind of excess capacity.

There is, secondly, the case where capital investment in an industry cannot be profitably used for lack of complementary capital resources at other stages of production. This may result either from weakness of what has come to be known as the infra structure or from what we shall have to call “weakness of the super structure.” The latter happens where, e.g., the possibilities opened up by a new capital good are not exploited by the consumption goods industries, or where lack of an adequate sales organization hampers the sale of a new consumption good. Even in such cases we need not doubt that the market process will ultimately lead to the growth of such complementary resources, in infra structure and super structure, as will be required. The question before us is whether by co-ordination of plans and concerted action such a result can be brought about earlier, or without the temporary waste of resources.

I see the chief importance of growth point planning in the possibility of anticipating the effects of growth in some industries on the composition of output and the capital structure of others. And I see the significance of input-output tables in that they enable us, I will not say to “forecast,” but to form an idea about the changes in the composition of the flow of circulating capital between earlier and later stages of production which a given change in output is likely to entail. It is to be hoped that in assessing the effects of output changes on capital requirements it will become possible to extend this type of analysis to fixed capital which does not enter the input-output streams.

So far I have spoken of the prevention of excess capacity. But there are also interesting problems resulting from the existence of excess capacity the occurrence of which could not be prevented. It may be the result of malinvestment of the past, or of sudden changes in demand or in technique of production. Of the numerous problems we meet here I shall confine myself to two.

• (1) The problem of how to use excess capacity, i.e., capital resources which are excessive in the industry in which they happen to be, is really a problem of making the best use of what has turned out to be unsuccessful investment of the past. The question before us here is really how to draw from these resources an output stream different from the one for which they were originally planned, but the value of which still exceeds direct costs. The problem here is that there can be few entrepreneurs with that comprehensive knowledge of the whole economy required for a successful shifting of such resources. No doubt a Market Economy would after a time produce a specialist in such capital regrouping operations, perhaps from the ranks of industrial bankers. On the other hand, the comprehensive knowledge at the disposal of growth point planners might enable them to do it more expeditiously. An example of what I have in mind is what would happen in a mining district in which the mines are exhausted and in which the infra structure (houses, transport, power, etc.) complementary to mining resources is still physically intact now that it has lost its complements. The infra structure is specific to the area but not specific to the economic activities taking place in it. There is here evidently a case for the centralised collection and subsequent diffusion of information about such alternative activities in order to increase the range of possible uses of these temporarily complementless capital resources.
• (2) On the other hand, all unexploited mineral and other natural wealth is also a kind of complementless excess capacity provided by Nature. This case is the exact opposite of the one just discussed, since here it is precisely the lack of complementary capital in the form of the infra structure, as well as of more specific capital resources like mining equipment, etc., which prevents us from exploiting all this wealth at one and the same time. Here location in space presents the greatest problem. If the infra structure were not specific to an area we could move it about to meet the changing needs of the areas presently to be exploited. The hard fact of its specificity compels the making of economic decisions about the exploitation of such wealth, which calls again for the application of comprehensive knowledge about the likely effects of changes in the mode of exploitation of such resources on the rest of the economy. Here, too, we can see scope for concerted action.

4.

Lastly, I come to the question, whether the practice of Economic Budgeting is at all compatible with the principles of competition. Does not competition require the competitors to act in ignorance of one another's intentions, with their minds directed solely to market prices, actual or expected? Will these business men, exchanging information, learning about one another's plans, agreeing among one another to avoid excess capacity, not end up by constituting a super-cartel—with the benevolent connivance of the planners?

This is a serious and difficult question. It is a question I dare not shirk since I did promise to devote myself to the clarification of concepts in this controversial issue. At the same time it is a question which has been raised in the controversy. It might even be said that it is the central question.

Now the main difficulty in answering it can be stated briefly. At bottom it is the same difficulty we encountered before. The only concept of competition we could use as our criterion exists only within the framework of an equilibrium model. It is the well-known notion of pure or perfect competition. But in the real world it does not exist. The Market Economy, on the other hand, certainly requires competitive markets. But in spite of valiant attempts to work out a concept of “workable competition” to serve as a criterion for a Market Economy, we have not succeeded (yet?) in finding one that would be suitable. We are unable to say how competitive a Market Economy has to be.

Moreover, in reality it would be quite impossible for all markets within a Market Economy to be equally competitive. Hence, whatever our criterion is to be, some might fall within it, others not. How, then, do we determine the permissible scope of the Market Economy? What range of dispersion of market conditions do we have to use as our criterion, and how is this range to defined? This is of some importance for our problem since Economic Budgeting, as we saw, concerns not merely relationships between producers for the same market but also between suppliers and customers at different stages of production. In practice we often find that the problems arising in such inter-industrial relations are solved by means of vertical integration, e.g., coal-iron-steel, or by similar devices. It seems that they are hardly compatible with the competitive character of a Market Economy. But in the absence of a clearly defined criterion of such competition as is required by the principles of the Market Economy, how are we to judge them? The same applies to Economic Budgeting.

But I do not think we should rest content with the negative conclusion that the case against the compatibility between Economic Budgeting and the Market Economy cannot be proved as long as we do not know how much competition the latter requires. I think we should go a step further.

I said earlier on that in a Market Economy there is no such thing as a common state of knowledge, but that everybody acts on his own individual knowledge. But is it not one of the purposes of Economic Budgeting, perhaps the most important, to produce just such a common state of knowledge? It seems to me that here we have to consider the social function of competition.

In a Market Economy, everybody, producer and consumer, is continuously engaged in acquiring new knowledge, testing and diffusing it. The very fact, e.g., that successful innovations will be imitated, illustrates this. The Market Economy as it were, sends out its agents in various directions on reconnaissance duties. What they bring back is then tested, in workshop and marketplace, and the consumer ultimately decides what he likes best. Technical progress requires experiments in various directions, and this entails product differentiation.

But this is not the only way in which new knowledge can be acquired, tested and diffused. Sometimes this task is delegated to a special agency, say a research institute, which then puts the new knowledge at the disposal of all by direct communication.

It now seems to me that the knowledge to be diffused by means of Economic Budgeting may be such as to lend itself to this second method of diffusion. Or, to put this distinction in another way: Competition is an excellent method of reducing our ignorance in those cases in which division of labour will be most useful. But there are other cases in which the best results will be obtained by close cooperation of specialists in a narrow field and the subsequent direct communication of their results to those who can make use of them. The knowledge conveyed by input-output tables, for instance, appears to be of this second kind. In other words, in those cases where we can obtain knowledge otherwise than through the market process, competition is not a necessary requirement either.

We need not doubt that, in the absence of a scheme such as the one under discussion, wherever the exchange of information is of mutual profit to entrepreneurs, the Market Economy would still evolve institutions which serve this end. European economic history in the age of free enterprise offers many examples of this. I find this view perfectly compatible with a belief that a public agency, guided by competent economists, could do it more expeditiously and perhaps more thoroughly. I should not care to say, however, which way fewer mistakes are likely to be made.

Earlier on I promised you not to plead for or against this or that type of Planning, but to confine myself to the elucidation of conceptual differences. In so doing I drew attention, in particular, to what appear to me to be important differences between the “ideal type” of the Market Economy and the neo-classical equilibrium model. In this regard we found that different assumptions about distribution of knowledge among entrepreneurs and its diffusion between them called for special notice.

I believe it to be no accident that thus, in probing a practical problem of economic organization, we have found ourselves at last confronted with a problem concerning knowledge. This fact in my view should serve us as a warning against a narrowly materialistic interpretation of the subject of our discipline.

“Economics is not about goods and services; it is about human choice and action,” Ludwig von Mises has said. To which I would add, if you will permit me such an obiter dictum as a concluding remark, that the knowledge we gain from economic study is not knowledge about things but knowledge about knowledge. This is the strongest reason I can think of why the study of our discipline must not be pursued as though it were a natural science.

NOTES

[[1]]John Hicks, Capital and Growth (Oxford: Oxford University Press, 1965), Ch. VII.

[[2]]Ibid., p. 78.

[[3]]Milton Friedman and A. J. Schwartz, A Monetary History of the United States 1867–1960 (New York: National Bureau of Economic Research, 1963), p. 15.

[[4]]Ibid., p. 37, Table 2.

[[5]]Ibid., p. 35.

[[6]]It is not impossible that in the future the modern chain store will come to assume the wholesale merchant's former role of a price setter. The extent to which this will happen must evidently depend on the degree of “countervailing power” these retail organizations contrive to acquire.

[[7]]For a concise explanation of the implications of the “Labor Standard” see J. R. Hicks, “Economic Foundations of Wage Policy,” Economic Journal 65 (September 1955):389–404.

[[8]]The first to have pointed this out was, to my knowledge, the German economist Alfred Tismer in his book Grenzen der Diskontpolitik (Munich: Duncke & Humblot, 1932). See also J. K. Galbraith, “Market Structure and Stabilisation Policy,” Review of Economics and Statistics 39 (May 1957):124–33.

[[9]]Economists have thus far paid little attention to these possibilities, although we teach our first-year students that medium of exchange and unit of account need not coincide. For a notable exception see Joan Knox, “Index-Regulated Loan Contracts,” South African Journal of Economics 32 (December 1964):237–52.

[[10]]“Cultivated Growth and the Market Economy,” South African Journal of Economics 31 (September 1963):165–74.

[[1]]The argument presented in what follows owes a good deal to ideas first set forth by Professor Mises in “Das festangelegte Kapital,” in Grundprobleme der Nationalökonomie, pp. 201–14. [English trans. in Epistemological Problems of Economics (New York: D. Van Nostrand, 1960), pp. 217–31.]

[[2]]Vom Aktienwesen, 1917.

[[3]]This definition has, of course, certain social implications. Those who accept it can hardly continue to regard entrepreneurs as a class access to which is impossible for those with no wealth of their own. Whatever degree of the “imperfection of the capital market” we choose to assume will not give us this result.

[[4]]For a most effective criticism of this kind of model building see Joan Robinson, “The Model of an Expanding Economy,” Economic Journal 62 (March 1952):42–53.

[[5]]Erik Lindahl “On Keynes' Economic System,” Economic Record 30 (May 1954): 19–32; 30 (November 1954):159–71.

[[6]]Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), p. 352.

[[1]]The effect of the current obsession with growth on the quality of economic theorizing has been no less disastrous. “In tackling the problems of economic growth, economists in the last decade or so appear to have adopted the custom of discarding their habitual apparel and instead donning that of the planner or technocrat. Indeed the recent cataract of journal articles and books on this obsessive subject have set a deplorable standard in economic writing. It would seem that the ability to manipulate a second order difference equation—plus, perhaps some passing reference to holy works—is the only qualification required of the writer. At any rate, it is often the only one displayed.” E.J. Mishan, Economica 29 (February 1962):88.

[[2]]See previous footnote.

[[3]]G. B. Richardson, Information and Investment (London: Oxford University Press, 1960), Chapter I.

[[4]]See, e.g., Joan Robinson, Economic Philosophy (London: C. A. Watts & Co., 1962), p. 136.