Planning and the Price Mechanism (Routledge Revivals)

The Liberal-Socialist Solution

James E. Meade

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136259081
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftstheorie

First published in 1948, this book outlines a solution to contemporary economic problems in the post-war years. This solution aims to make the best use of our price mechanism, free initiative and competition, but also involves the socialization of certain monopolistic concerns and the state control of the price mechanism in such a way as to maintain full employment, to achieve an equitable distribution of income and property, and to restore equilibrium to our balance of payments. It is an outline of that middle way which the author calls the Liberal-Socialist solution.

CHAPTER I

THE PROBLEM STATED

The basic principles of our economic policy are once more in the melting pot. Should we in peacetime continue a policy of economic planning? Or should we restore the working of the price mechanism? We have to resolve this issue both for the solution of the immediate and pressing problems of the transition from war to peace and also for the construction of a more permanent and lasting economic system. This book is one more contribution to the debate on this great issue. It is an attempt to sketch the principles of a middle way which no country has as yet fully attempted, but which, in the opinion of the author, it might be the genius of this country to develop.

Let us, then, plunge in medias res by posing the basic questions to be discussed. Should the State formulate a central economic plan for the use of the community’s resources? If so, by what means should it be carried out? Should the means of production, distribution and exchange be nationalized, so that the State can acquire a more or less complete control over economic life? Or should the State hope to achieve its economic ends by exercising a number of direct controls—such as rationing, licensing, labour direction, production direction—over an economy which consists primarily of private enterprise? Or can the State hope to achieve its ends by working out a plan for the use of the community’s resources in co-operative consultation and voluntary agreement with employers’, workers’ and consumers’ representatives, which will then be implemented by a gigantic gentleman’s agreement on a national scale? Or can the State hope to achieve its plans by so rigging the market—through price and wage controls and changes in the rate of interest, the rate of exchange, and rates of taxation and subsidies—that private business and private persons are induced to do that which the State plans that they should do? Or were Adam Smith and his followers after all right? Would it be better for the State to withdraw from business and to let the unregulated price system determine the use of the community’s resources?

(a) The Case for State Control and Planning.

We are all aware nowadays of the strong case for State planning and control. I will leave altogether on one side the argument from considerations of National Defence. During the war this consideration was, of course, paramount; and the principles and modalities of State intervention had then to be considered practically entirely from the point of view of achieving the single national objective, with which all citizens were in agreement, of bringing all economic resources to bear upon the achievement of victory. In peacetime this consideration is also of great importance, now that it is known that any future war will be a total war; to mention only two examples, the localization of industry has a strategic importance and the protection of particular industries must be considered from the point of view of the possible requirements of a future war. But I wish to leave this matter on one side and to consider the central issue of State planning and intervention solely from the point of view of the economics of welfare.

The “welfare” arguments for extensive State intervention are not, of course, a post-war phenomenon. In this country they were much developed during the inter-war period, and it is, I think, possible to trace them to three main strands of inter-war experience.

First and foremost was the inter-war experience of mass unemployment. By the end of the 1930’s there was widespread, in fact practically general, agreement that the State should at least intervene to control the total demand for goods and services so that the community should not again experience periods in which in all industries and regions simultaneously there was a deficient demand for goods and services and so for labour. And some persons had drawn the further conclusion that for action to be effective on these lines the State must plan in some detail the use of all the community’s resources in order to ensure for them full and productive employment.

Secondly, there was a growing realization of the shocking inequalities of income and property which laissez-faire had produced. There was widespread agreement that something more should be done about it; and, here again, there was developing a school of thought which held the view that an effective remedy could be found only through so extensive a system of State control of the community’s resources as to make possible a centrally planned distribution of the product of industry.

Thirdly, there was a growing consciousness of those wastes of competition which result when there is, for one reason or another, a divergence between the private and the social interest in an economic act. The meanness of sprawling ribbon development and of the unplanned growth of suburbia ; the wastes of much competitive advertisement whereby the consumer was bluffed and deceived rather than informed ; the exploitation of consumers and workers by monopolistic concerns which were in a sufficiently powerful position to rig the market in their favour:—all these convinced many persons that it would be wise to replace the profit motive which could have such ugly results by planned production for the common good.

But in addition to these pre-war arguments there is a special post-war argument for the transitional period through which we are now passing. The whole structure of our economy has to be changed on a scale and with a speed which is quite unprecedented in normal times of peace. Huge numbers of persons have had to be transferred from the Armed Forces and from war production to production for peacetime purposes. Some of the tasks on which these persons are employed are themselves of a special and temporary nature, such as the repair of war damage and deficiencies, so that further extensive changes will be required. In 1947 we had an adverse balance of current payments of some £675 millions a year; we are to end 1948 with our balance of payments balanced. This means a vast increase in exports or decrease in imports. The whole structure of relative supplies, of relative prices and costs, must be changed extensively and rapidly.

Now it is arguable that there are many things which the uncontrolled pricing system can manage well in a position of fairly calm equilibrium, which it cannot manage even tolerably if conditions are undergoing such cataclysmic changes. When it is a question of it becoming a little more profitable to produce this, and a little less profitable to produce that, private risk-bearers can reasonably plan their operations to meet the changed circum-stances, and thus gradually move resources to where they are most required by society. Mistakes will be made; but the evil social effects of even these mistakes can often be met by the shock-absorber of stocks. If slightly too few bricks are in fact being produced for the number of houses in process of building, the building industry can live on its stock of bricks until the higher price of bricks which will result stimulates a greater output. But when the number of houses to be built may change by a huge percentage, this percentage itself depending upon supplies of imported timber* the purchase of which in turn will depend upon whether the engineering industry can treble or only double its exports, which in turn will depend upon whether the State’s demands for armaments and munitions are to be halved in the course of the year, it is difficult for private risk-bearers to judge with any accuracy how many bricks to plan to produce.

In such circumstances, there is a strong argument for the State centrally to put together a picture of the way in which all the main pieces of the jig-saw puzzle will fit together into a coherent whole, say, a year or so ahead. Whether or not this picture should then be used merely to inform private risk-bearers of what they would be wise to anticipate, or should be used as a planned pattern to which the future economy of the country should be compelled or induced to adhere, is, of course, another matter which raises the central controversial issue which it is the purpose of this book to discuss.

Moreover, when changes are large and rapid and, in particular, when they may need to be reversed again quickly, there are special difficulties in relying solely on the price mechanism for the purpose of bringing them about. For example, suppose that it is necessary to increase the manpower in the textile industry by a large percentage in a short period of time. The price mechanism would operate through a rise in the wages of textile workers relatively to other workers. This rise might have to be very great indeed in order to attract the desired number of workers into the textile industries within the desired period. Thereafter, the rate of textile wages might have to be put down again sharply in order to prevent a continuing influx into the industry. But there are obvious difficulties in raising textile wages by 100 per cent, and a year later reducing them again almost to the previous level.

In the case of many commodities this last argument does not apply. For example, if steel is very short now but will become plentiful in two years’ time, to raise the price of steel by 100 per cent, now and to reduce it again to its previous level in two years’ time may be most useful in that it would give exactly the right inducement to postpone all postponable demands for steel. But here another difficulty presents itself—namely, the problem of equity. If the commodity in question is produced by private enterprise, should the private producers be allowed to reap the scarcity windfall profits which would result from such a use of the price mechanism?

(b) Planning without Prices.

There are many persons who would wish to solve our basic problems through the formulation of a State plan giving quantitative targets for the output of each industry of any importance and for the use by these various industries of all the factors of production of any importance. Such a quantitative plan would in many cases also cover the main uses of the planned production of each industry—how much, for example, of the output of the engineering industry was to be exported, how much used for each main form of capital development at home, how much for the provision of certain durable consumers’ goods, and so on. The whole plan would then be implemented by a series of State controls. Raw materials and capital goods would be allocated and licensed to achieve their planned use; labour, if the proponents of this system are both clear-headed and honest, would be directed to the planned employments; and the consumption of many, if not of all, products would be subject to rationing and licensing. Full employment and security would be achieved, since the plan would account for all available resources. Equity would be assured, since by rationing and licensing of consumption each citizen would be guaranteed a fair share of the product. The social wastes of competition would be avoided since the plan would take account of social, and not private, interests. A consistent and coherent plan would be constructed for rapidly changing conditions so that at every stage each component would dovetail into an harmonious whole.

The above is, no doubt, in many respects a caricature. But it will serve to demonstrate certain dangers and disadvantages of methods of planning which rely not upon the price mechanism but upon direct control over quantities of production and consumption. For on examination such a system is found to be not very attractive.

In the first place, the method of direct controls contains a threat to personal freedom. It is not merely that it threatens our freedom of choice as consumers, important though this is. Why, for example, should I be prevented from spending foreign exchange on foreign books or foreign travel if I am willing to spend so much less than my fair share on other imported goods or on home-produced goods which could be sold abroad for foreign currency? The pricing method (e.g., by auctioning the available supplies of foreign exchange to the highest bidder) would permit this. The method of direct controls must imply an arbitrary decision by an anonymous official as to whether I can visit my foreign friends or read their publications.

But the most dangerous threat to freedom arises from the problem of allocating labour as a factor of production among its various alternative employments. The method of the pricing system would be to allow relative wage rates to rise in those occupations in which there was a relatively high demand for labour and to decline in those occupations in which there was a relatively low demand, and to see that there was the greatest possible ease of movement from the low-paid to the high-paid occupations. The alternative, the direction of labour, is the hallmark of the Servile State; and it is a sobering observation that there appears to be at present a widespread preference for this alternative.

In the second place, a system of direct quantitative controls is the breeding ground for spivery and corruption. It is the father of black markets and carries with it an insidious threat to public morality. To make it a crime, or at least bad form, to buy in the cheapest and sell in the dearest market is to expose every citizen every day of his life to a temptation to break the law or the recognized conventions of society. To give central and local officials the daily task of handing out, on what must inevitably be to a large extent arbitrary considerations, pieces of paper called permits or licences of great value to the fortunate but limited number of recipients is to expose our fine and honourable public service to a strain which may in the end prove unbearable.

Thirdly, such a system of planning through direct controls involves the use of much manpower and other economic resources merely in working the controls. There can be no doubt that the system of free markets, though, of course, it involves some manpower, is much less expensive than a system of planned allocations. In this connection it is interesting to note that the number of central and local government officials increased by 700,000 between 1939 and 1947. This increase is not, of course, to be explained solely by the growth of direct economic planning. But, on the other hand, it does not take into account the effort expended by the private citizen and by private business itself in coping with the controls.

Fourthly, the method of control by the quantitative allocation of resources, quite apart from the real costs of manpower in running the controls, is bound to be clumsy, inefficient and wasteful as compared with a properly functioning price system. Take, for example, the apparently simple question whether one should plan to substitute steel for timber for a certain purpose in building. Is it economic to do so? What are the factors which the official concerned must take into account?

He must first consider the technical possibilities of substituting steel for timber in this particular use. How much more steel is required to replace a given amount of timber, and what will be the effect on the quality of the building? Unfortunately for him, the people who really know about this are not his fellow-officials but the technicians in the building industry who have a vested interest in the question and have, let us suppose, set their hearts upon getting the timber rather than the steel, because, at the arbitrary money prices fixed for steel and timber, it happens to pay them most that way.

Then there is the question where the extra steel should come from if the substitution in building is made. Should less steel be allocated for the production of cars? If so, can less steel be used per car? If so, with what effect upon the quality of the car? And what additional supplies of alternative materials will then be required by the car industry? And where should they come from? Or must the output of cars be reduced owing to lack of steel? If so, by how much? And what is the importance to the domestic economy of this country not to have less cars or to the balance of payments not to face a reduction in the export of cars? Or should it not be cars that should be affected, but a particular sort of industrial plant, or railway locomotives, or one or more of the other thousand and one end products of steel? If so, which, and to what extent, and with what further repercussions?

What, on the other hand, should be done with the timber which is saved? Should it go to railway sleepers or to packing cases? Or can it release the use of some other material in some other industry? If so, what and where are the myriad alternative possibilities, and what is the importance of each from the point of view of the welfare of our consumers, of the efficiency of our industry and of our export drive?

Perhaps after all it would be better to produce more steel. If so, what should one give up producing in order to get the additional labour? Coal? Bricks? One could run through a long list. But this would only shift the problems from steel to other commodities. One would now have to consider all the direct and indirect effects of reduced supplies of coal or bricks or the other commodities selected for reduced production.

Or perhaps one could import less timber and more steel. Here one may be able to reach a fairly unequivocal answer; for one can judge whether the decreased purchase of timber will save more dollars than the increased purchase of steel will cost. The firm foundation of the price mechanism at last!

In fact it is the miracle of a properly working pricing system that it will answer all these questions simultaneously, taking into account all the relevant considerations, without a centralized bureaucracy attempting to solve, without the necessary knowledge, the myriads of simultaneous equations involved. If the prices charged to domestic consumers of steel and timber bear the same relationship to each other as the prices at which steel and timber can be purchased in foreign markets, each user will, to maximize his own profit, substitute steel for timber or timber for steel if the saving in cost (and so in foreign exchange) is sufficient to compensate for any real loss in the quality of his product. If the prices of the various products which are made out of steel or other materials correspond to the costs of producing them, consumers will be induced to purchase few of the products which contain much steel, if steel is relatively scarce and therefore high in price. If the price of coal, bricks and steel all correspond to the value which the users of these commodities will place upon them—and the users will themselves take into account the possibilities of substitutes and of alternative uses— then automatically more steel and less bricks will be produced if steel is really more needed throughout its myriad uses than bricks and coal are needed through the myriad uses of bricks and coal. And the export trade will automatically be concentrated on those things which we can produce most efficiently and which have the smallest content of the scarcest, and therefore most expensive, materials.

There can be no doubt that money and the pricing system are among the greatest social inventions of mankind. Properly used they should be capable of giving each individual a general command over his fair share of the community’s resources; of allowing each individual to decide for himself—where private choice is appropriate—in what form he will exercise this command; of allowing initiative to individual producers and merchants—where technical conditions permit—to produce what is most wanted, in the most economical manner, in the markets where supplies are most needed; in short, of combining freedom, efficiency and equity in social affairs.

(c) The Controlled Use of the Money and Price Mechanism.

We are faced then with this dilemma. State planning and intervention seem to be needed to prevent the recurrence of mass unemployment, to ensure a tolerably equitable distribution of income and property, to avoid the anti-social wastes of much of the competitive process, and to co-ordinate the vast changes required in our economic structure in the present temporary, but perhaps somewhat prolonged, period of transition from war to peace. On the other hand, when one examines the possibilities of quantitative planning, one cannot but be appalled by the prospects of insidious threat...

Table of contents

• Front Cover
• Planning and the Price Mechanism
• Title Page
• Copyright
• Title Page
• Copyright
• Preface
• CONTENTS
• Chapter I. The Problem Stated
• Chapter II. The Control of Inflation and Deflation
• Chapter III The Distribution of Income and Property
• Chapter IV. The Problem of Monopoly
• Chapter V. Financial Policy and the Balance of Payments
• Appendix I. The Arithmetic of the Amalgamation of National Insurance, Children’s Allowances, Food Subsidies and Income Tax.
• Appendix II. The International Monetary Fund, the International Trade Organization and the United Kingdom Balance of Payments.
• Index