E. 12. [Democracy and Economic Crisis] [a] , [1]

(draft)

I have been invited to contribute to this volume in my capacity of economist. But in what I say I propose to eschew technical matters. I shall try, rather, to describe in broad outline the type of economic problem with which the world is now confronted. This description ought to bring out clearly the peculiar nature of the political crisis which the economic crisis has precipitated.

It is often said that democracy is now on its trial or even that it stands condemned by its apparent inability to relieve the economic tension. Bewildered by the confusion that lies around, maddened by its lack of comprehension and hopeless inability to decide on what lines economic experiment should be made, seeking relief from the frustration so engendered, the human spirit turns aside to its age-long familiar expedient of political experimentation. It cannot be confident that the political experiments will yield an economic solution, for it is its very ignorance of where the economic solution should be sought that impels it towards political change. But any activity, even if misguided and fruitless, brings its own satisfaction. [2]

Yet in this political experimentation much that is precious may be lost, as events in Germany show only too clearly. The political system has evolved so as to secure certain things of value to the individual, freedom of thought, freedom of conscience, a minimum of self-respect. Sudden arbitrary disturbances and contortions of this system almost certainly involve a loss in all this field. And will economic gain accrue to set against this loss? It is hardly probable. For the political gropings are blind and random. They represent reaction from a painful stimulus the source of which is unknown.

The origins of the pain are not, however [b] , completely unknown to all. There is in existence sufficient knowledge to show the way to a substantial measure of relief. But political conditions are not such that the knowledge can be translated into effective action. This is not an argument for political revolution, because there is no reason to suppose that the new political organisation thrown up will be any better adapted to the task of translation. Democratic machinery is not of itself ill adapted. Its failure to translate this particular knowledge into action is due to the special aspiration and aims of the parties within the democratic structure. Those aspirations have been determined by past events. How they arose and why they are now an obstruction is precisely the story I have to tell. The tale will necessarily be brief and simplified, perhaps beyond recognition by the historian. I claim for it sufficient substance of truth to justify its moral.

Its moral is indeed of vital importance. For if only it is apprehended, political retrogression may yet be avoided. The overthrow of a democracy has democratic origins. In the normal course of democratic life opinion, springing up in high places, in the minds of thinkers or of natural leaders, flows over the countryside. Opinion may relate to this or to that. It may be discontent with the working of democracy itself. That last opinion can only become effective when it has spread over a broad area, sapped self-confidence and thus undermined the vitality of democracy. This discontent is even now flowing forth; the undermining process is at work. If the moral of this tale were learnt, the flow would be intercepted; good news would replace bad news. Democracy need not be abandoned; but the aims of political parties need re-adjustment. Liberty and self-respect need not be sacrificed.

The point is this. Democracy presents the spectacle of endless debate, committees, compromises embodying meaningless formulae, finally ineffectiveness. And, one says, that is democracy--see how it works. Is this conclusion right? The lamentable results observed may be due to the absence of any ideas in the minds of political leaders appropriate to the occasion. Dictatorship in these circumstances would be no improvement. The execution of bad ideas is not better than no execution. It is not demonstrated that democratic machinery fails to give effective expression to appropriate ides. The World Economic Conference is a good example. [3] In all the length and breadth of that discussion, there was no idea adequate to the situation. If a single power had been able to dictate its solution to the Conference, would the result have been better? No; in my judgment worse--much worse. The failure of the Conference was not due to the need to secure agreement, but to the ultimate worthlessness of the proposals before it. But there are in the world ideas adequate to the situation, or, if not fully articulated ideas, knowledge which could be translated by political leaders into appropriate ideas. Why are political minds not acting as a translating medium? This brings me back to the main story.

It is important in reflecting on these matters to grasp and hold firmly in the mind the distinction between what may be called the old economic problem and the new. The omission to do so will lead to hopeless confusion of thought, and has already lead to muddled and ineffective action. Alfred Marshall professed that for him the dominating interest in economic study was the desire to solve the problem of poverty. [4] That is the old problem. It is a familiar theme. And, though old, it is by no means obsolete. Man has been physically unable to produce by his efforts sufficient goods to satisfy the requirements of all, and the available goods have been divided out in a manner that few have considered satisfactory, the dissatisfied differing in the vehemence of their condemnation.

By a facile contrast, the modern problem has been called that of abundance. This formulation is quite absurd. If before there were too few goods, there are certainly not now too many. We are not suffering from repletion; our wants have not been over-satisfied. Our physical ability to produce goods has indeed improved, but it is still deficient in relation to our need for goods. But to this physical inability there has recently been added in striking degree an inability of organisation. Before the physical ability was less, but it was more fully realised. Now with an improving physical ability we are finding it more difficult to organise it, so as to reap the full advantages which it offers. The new problem is that of organising the physical ability. Why has this problem arisen now? What are its political corollaries? It is necessary first to consider the attitude of economists and politicians to the old problem. What service did the economists consider that they could provide? Their prime interest was in the way in which the physical resources at our disposal were distributed among different occupations. How should land, labour and capital be divided among various productive activities so as to yield in fullest measure the goods which man most desires? The classical answer to this problem was that the best division would occur, if producers were allowed to seek, without political impediment, their own greatest profit. The political corollary of this doctrine was Free Trade and laisser-faire in matters relating to industry and commerce.

The ideas was simple and readily amenable to political interpretation. A division of opinion naturally arose between those who were concerned to achieve the economic desideratum and those who were tender to vested interests. Thus the economists fell into a natural alliance with those who sought to abolish political privileges. Economic and political vested interests were often interlocked.

Men of humane disposition with a special eye for the sufferings of the poor might reasonably be expected to join with the economists, since, if they were unwilling to subscribe to chimerical and utopian schemes of social change, this seemed the only practicable line of advance towards their objective. The party of progress was thus, until the late nineteenth century, mainly concerned with an attack upon obstructions and impediments.

While economists sought by laissez-faire to obtain in this manner the most advantageous disposition of productive resources, what was their attitude to the unequal distribution of the product? On this topic economists have had little to add to the conclusions of common sense. An economist might share the plain man's disaffection with the existing system, but he had no specific contribution to the subject. As time passed the dissatisfaction of the average man grew more lively. Finally the progressive party in politics became associated with attempts to redress the injustice in some small measure by the provision of social services and the imposition of progressive taxation.

Legislation of this kind may be thought of as a compromise between individualism and socialism. It is important to inspect the nature of the compromise closely and its relation to the laisser-faire desired by the economists. The socialists were those who regarded economic inequality with the greatest aversion, and held that a just distribution could not be achieved until the system of private enterprise was abolished. Productive resources must be transferred to state ownership. The ameliorative legislation was not and could not be a substantial contribution to their objective.

Before the war socialist dreams seemed remote enough. The socialists were only a small section of those who desired a redistribution of the product of industry. The main body believed that gradual but steady work at ameliorative legislation was the only practicable course and would achieve results of considerable value.

What was the attitude of the economists? We have seen that in the early nineteenth century there was a confluence of political and economic streams of thought, each tending to burst the dams of vested interest. In considering the implications of the economic doctrine it is well to bear this in mind. There was a commingling of the streams of thought and some confusion as well. Each school of thought obtained adventitious assistance from the other. In order to re-canalize, it is necessary to examine not the obiter dicta of classical economists, but the inner logic of their economic argument. The best distribution of productive resources would be achieved if the prices paid by consumers for goods were proportional to the real cost of producing them; they would be proportional if rewards to producers were equal in different occupations; rewards would be equal if producers were perfectly free to leave a field of low reward in favour of a higher one. Such is the sole economic argument of substance [c] for laisser-faire, though economists often spoke as if they had much more ammunition than this. On the basis of this argument, restraints on producers cannot be condemned provided that they affect all equally; progressive taxation cannot be condemned.

So far as the inner logic of the laisser-faire argument goes, therefore, there was nothing to prevent economists supporting the ameliorative legislation provided it dealt even-handedly with all. There was every reason to oppose Protection because that does not and cannot so deal. Objectors often held that it was illogical to favour legislation which protected the working class standard of life while condemning tariff reform. It was the objectors who did not understand the logic of free trade. The sweeping terms in which economists had defended laisser-faire gave the objectors colour. The classical economists' contribution was confined to a doctrine of how to distribute productive resources among different occupation. It could therefore be properly used against a system, such as Protection, which led to a re-allocation of productive resources, but not against forms of state interference, such as the social services and progressive taxation, which did not affect the existing allocation. The economists could support the ameliorative legislation without compromising their essential doctrine; there was no lack of logic.

The economists' theory regarding the proper allocation of productive resources among occupations is simple and inexpugnable. But it is not very easy to comprehend without some mental effort, and the true doctrine of Free Trade, which is based upon it, is correspondingly difficult. The wide popularity of Free Trade is due to the fact that it was possible to represent it as meaning cheap goods for consumers. This is the popular version of the economists' conclusion. And on the whole it is a fair one, since the best distribution of productive resources among occupations will be the distribution most beneficial to consumers, and will consequently lead, ceteris paribus, to lowest prices. The fact that the phenomenon--low prices--which is symptomatic of the benefit conferred by Free Trade was popularly confused with the real benefit has unfortunate repercussions at present. At a time when it is urgent to raise prices, it is often thought that Free Trade being essentially designed to secure low prices has become unimportant or even harmful. Our leaders seem to be divided between those who mistaking the specious for the real argument for free trade think, like Lord Snowden, that low prices cannot be bad, [5] and those who, not knowing any argument for free trade want to raise prices by Protection! No wonder that we wonder aimlessly!

Two economic problems have been discussed. One is the allocation of the productive resources to the right occupations, on which the economists have pronounced with cogency. The other is the re-distribution of the goods when produced among the different individuals and classes of the community, to which the socialists have wished to subordinate all else. Neither of these is the specifically modern problem.

The specifically modern problem is that of unemployment. Unemployment is normally thought of in terms of labour, but in this context it may well be used in the broader sense of the failure of productive resources generally to be fully utilized. Factories lie idle; new capital cannot find channels of investment; the cultivation of the soil is restricted. The classical economists' doctrine lays down the condition for the best distribution of productive sources among different occupations. It might be better to put it negatively and say that it lays down the condition for productive resources not being distributed wrongly among occupations. The condition does not preclude the possibility that some of the productive resources will not be distributed among occupations at all, that is, that they will just not be utilised.

This is a grave lacuna in economic theory, which has not always been frankly admitted. There has perhaps been an implicit suggestion that the lacuna does not exist, and that laisser-faire would ensure full employment. It is not possible to find cogent arguments in favour of this suggestion. An argument might be constructed as follows. If factors of production, whether land, labour or capital, find themselves unemployed, they will, in a system of complete individualism, offer their services at a lower price and thus secure employment in accordance with the law of demand, which prescribes that any service when offered more cheaply will be bought in greater quantity. This argument contains a fallacious transition from the part to the whole. The law of demand is limited in its application to the relation between the price and the quantity purchased of a commodity, which is one among a number on the market. If a group of labourers reduce the price at which they offer their services there will be a transfer of demand from other commodities to that which they produce. This principle cannot be generalised; for if all classes of labour reduce their offer price there will be no transfer. The gain of employment of the cheaper class was due to the transfer; if there is no transfer, no class of labour gains additional employment. There is just a little more in favour of the view that wage reduction might secure additional employment for labour than this negative suggests. If labour comes to be offered at a lower price, while the offer prices of other factors of production, capital, enterprise and land remain the same, the factors will come to be used in different proportions in the productive process labour more freely and the other factors more sparingly. Labour will be substituted for other agents of production. Thus a reduction in the offer price of labour, the offer prices of other factors remaining the same, may lead to some increased employment of labour at the expense of the other factors. But if all the factors of production are partly unemployed and all seek greater employment, a reduced offer price by all of them cannot be shown to increase employment. Factors of production constitute the consumers. Their incomes shrink as the price they offer for their services is reduced. The market for goods shrinks in proportion to the cost of making them and is therefore incapable of absorbing more goods in the aggregate when they are offered at a lower price. The law of demand only applies to the market for one commodity or group of commodities and cannot be applied, without fallacy, to the market for goods in general.

In the model of the economic system constructed by the classical school, there is no mechanism for ensuring that full employment shall occur. Fairly full employment did occur in the days when the model was constructed, and the absence of a problem was no doubt the cause of the absence of scientific enquiry into the matter. Looking back we may ask why fairly full employment did occur and be left wondering.

An explanation on the following basis may be suggested. [6] The modern economic system had its origins in a system in which each man worked either in order to consume its own product or to sell it on his own account. If his market deteriorated he did not abandon work; often on the contrary he worked harder to make good his diminished receipts per unit of output by increasing output. The capitalist system works differently; faced by a recession of demand the capitalist may find it best to meet the situation by turning off hands, who then have to fend for themselves and draw relief of some kind from another source.

The transition from one system to another proceeded slowly. Each step was a small one. But as capitalism grew the trade cycle became steadily more marked. Since the war the amount of output compared to the total world output that is produced by men working on their own account has receded enormously. But it was producers of this type which gave stability to the old system and whose decline may be responsibility for the growing instability of output as a whole with which we are now faced. [7]

This explanation is only thrown out tentatively and may be incorrect. That it is only a partial one is suggested by the phenomena of the trade cycle, which manifested themselves in the nineteenth century. Depressions in production were followed by a recovery with a regularity which indicates something more than mere chance.

Study of the trade cycle has been intensively pursued by economists since the war. The perplexities of this subject are directly connected with the lacuna in the old economic theory already mentioned. Just because they were ignorant what the forces were which would keep the economic system in a full employment position in a regime of laisser-faire and whether there were any such forces, economists were at a loss where to look for explanations of the movements to and from such a position. Indeed the old economics not only fails to explain if there are forces tending towards a full employment position, but gives no clue as to what kind of forces are required to fulfil this function. If these things had been known, trade cycle analysis would have been greatly facilitated.

None the less trade cycle study has been productive of positive results. In particular reference must be made to the great work of Mr. Keynes. [8] His theoretical construction is incomplete and imperfect, but it goes far towards providing a coherent account of the matter. The fruits of these studies undertaken by many, constitute the knowledge, which, in favourable conditions, might be translated by political leadership into a programme of action. It is true that there is still much doubt and uncertainty. And there are sceptics and dissentients. If the work of translation were seriously set about, it would probably be of immense value to the analysis itself. Obscurities of thought would be cleared up; masses of verbiage masquerading as analysis would be left untranslated and untranslatable.

The immediate position with which we are faced is that of great unemployment of productive resources, with consequent misery and a political tension, which is threatening civilisation itself. Immediate action is required. An important lacuna has been revealed in the theoretic construction, on which the advocacy of laisser-faire was based. It is not known to contain a mechanism for securing full employment. Those who wish us to lop away the excrescences of state-interference may well be asked what feature it is in the completely free system which they wish to restore that will ensure full or even greater employment. What feature was it that they claim did once ensure full employment? They cannot answer, for they do not know. It would be wicked therefore to undo any part of that body of ameliorative legislation which has raised and safeguarded the standard of living of labour and has tended to redistribute wealth in a more equitable fashion, at the instance of those who are unable to specify what benefit would come from doing so. This would be to sacrifice certain good to a blind hope.

Our present mixed system of individualism and state interference miserably fails to secure full employment. There is no reason to suppose that a system of complete individualism would succeed better. What follows?

Socialists of the left wing desiring the rapid introduction of equality have always urged that the state should assume control of the means of production and distribution. This alone would secure the desired result. Patchwork and compromise with capitalism are useless. Now, they may hope that the desired day is approaching, since capitalism is demonstrably functioning in a feeble way. Men of more moderate views, hitherto sceptical of the possibility or desirability of sudden and sweeping social change, may find themselves moving towards a more extreme position. The gradual process is arrested, the piece-meal gains of the past are jeopardised by the incidence of the depression. Perhaps, they think, the extreme men are right; nothing can ultimately be gained by further compromise. We ought to take the plunge; the way of slow progress is blocked. They may even give ear to the specious reasonings of those who attribute the depression to past gains, to high wages, the social services, high taxation. And is it not really true that the failure of capitalism to give full employment points to thorough-going socialisation?

Such a line of thought is in my view idle and injurious. It is offensive to good judgment both about the possible and the desirable. It is difficult to talk sensibly about what is possible. Who knows? It may be that in the future we shall be able to formulate laws about the balance of power in a stable society. Meanwhile we must be content with guessing. In a modern western society with a strong middle class smoothly and gently graded, the resistances to a movement suddenly to introduce social equality would be invincible. The attempt to obtain a democratic majority for such a change would be of no avail, since the social system is stronger than the democracy. If, through foolish leadership, a socializing party became really committed to such a policy and obtained a majority of votes, the resistances would be evoked and democracy would be suspended in the ensuing conflict, perhaps not to be restored for generations. In such an event the extremist leadership would have gained nothing and lost for the progressive cause its best asset.

Nor can I conceive of a sudden social upheaval as desirable, even if it could be achieved without strife. Adjustment to a slowly changing environment can be made without excessive suffering. The pain caused by a sudden change would not be compensated by anything that the beneficiaries might gain.

All this is not to impugn the idea of social equality itself. It is difficult not to believe that if civilization is maintained and the ideas of reason tend to find their realization, some system embodying it will ultimately be evolved.

But, it might be urged, this criticism of a programme of thorough-going socialization is misplaced. With the accession of the gradualist school to it, the objective of social equality is deferred. No social upheaval is contemplated; the existing social system will be liquidated very slowly and gently; full compensation will be given, and so on. Thorough-going socialization is now to be regarded not primarily as a means to drastic redistribution, but as a means to efficiency. The productive and distributive system will be nationalised overnight, or in rapid stages, and then, efficiency and economic progress being once more achieved, the process of social amelioration will be continued gradually but steadily.

There are two cardinal objections to such a defence. One is that it presupposes too nice a power of discrimination. The programme of rapid socialization, so long associated with social equality, will probably call forth the full resisting power of the middle classes, whatever disclaimers are made. To press it is therefore to run excessive risk. The second and more important objection is that the programme is grossly uneconomic. If the real aim is to restore immediate efficiency, the means are far too cumbersome and elaborate. Some political interference is needed, but not so much. The host of problems to which such a re-organization would give rise would distract attention, overstrain the resources for centralized organization available and waste too much of the energy and initiative now harnessed to production.

The doctrine of complete laisser-faire is rightly discredited and discarded. Ameliorative legislation superimposed on a system of private enterprise yielded substantial benefits, so long as there was fairly full employment. Now it is not enough. Thorough-going socialism is too much.

So far the possibility of a middle way has not been sufficiently clearly apprehended. Formerly one party of progressive men, loving, tangible, practicable and immediate gain, were content to press forward with the social services; the other kept their eyes on far off things, true socialism. Both were concerned with the old problem of redistribution. As the new problem became grave, and the moderate party was frustrated, it divided. Some were converted to the far off dreams, others relapsed into reaction, others remained dumbfounded, dispirited and defeated. The new problem has not been faced by politicians.

It is not yet clear how much state interference the solution of the new problem will entail. Experience alone can show. Whatever may be said for and against the socialization of particular industries, that is not the appropriate remedy for the specific problem. It is a question of restoring efficiency to the productive system. Now particular industries have been run with varying degrees of efficiency both formerly and recently. Our present trouble is not a general all-round lapse into inefficiency, a deterioration in the quality of industrial leadership; it is not the sum of a number of troubles arising in each industry. Rather it is connected with the mechanism of exchange, affecting industries generally, and inducing but not caused by peculiar difficulties in each. The appropriate remedy for this special trouble, therefore, is not to deal with the individual industries seriatim, but to strike at the root of it and apply the right reform to the mechanism of exchange.

The political impasse is due to the fact that the state intervention required, which may have to be far reaching, smacks of socialism, indeed is from one point of view socialism, and is therefore shunned by the conservative elements in politics. On the other hand when socialists say, "we now wish to go further than mere extension of the social services, a mere radical cure is called for by our present ills", they are thought to refer to the rapid re-distribution of wealth to which all round nationalization has always been regarded as the means; and middle class resistance is accordingly evoked. And when socialists refer to a more radical cure, this is probably what they do mean. Thus the aspirations of the two main parties being what they are, neither is well qualified to convert the democracy to a programme for curing the present distress. As for liberalism--that could only become an effective political instrument of recovery in a democracy if it could undergo such regeneration and transmutation that is severed for ever the links which attach it to the advocacy of laisser-faire and won the confidence and support of the main mass of labour.

On what conditions could the socialists, now representing the principal body of progressives, fulfil the role? They must disavow and disclaim utterly with lips and hearts the idea that they wish to introduce a sudden social revolution. In doing so, they would lose nothing, for they would merely be disclaiming the desire for what in any case will not happen. It is beyond their power to realise it. The example of Russia is inapplicable to strong middle-class countries. With the strength gained by such a disavowal, they could press forward with the old task of building up and making more secure the standard of living of labour and, furthermore, they could inaugurate a scheme of centralised control, in which a curious experiment is now being made in America, designed to introduce a mechanism into the system of private enterprise for achieving full utilization of productive resources. At present the moderate and the extreme paths are both blocked. By repudiating the extreme path, they could give themselves the strength to unblock the moderate one.

Extremism is a natural reaction from the blocking of the normal channels of advance. In England in particular it is a reaction from the cant and humbug by which the Labour Government was discredited in 1931 and friends seduced from their loyalty. But though natural, it is useless and injurious. The reasons against desiring sweeping changes are as great now as they were before. A big obstacle has appeared in the path of gradual amelioration. To shy off before it into extreme courses is mere escapism and defeatism. The plodding and patient effort required to remove the obstacle and resume progress is irksome. A temporary lapse into anger and bitterness is only human. Dreams of scaling the precipice outright may be entertained for a moment. But the sane man will soon get back to work on removing the obstacle from the road that takes him upwards. If he hesitates too long before doing this with talk of scaling the precipice, his worth as a leader becomes rightly suspect.

Disavowal of the aim of rapid social revolution does not involve repudiation of the idea of a new social order. That will come easily enough in the later stages, when it has become conformable with the point of view of the preponderance of people. Their point of view will be determined by their occupations and their interests. On the side of occupation there will be a steady growth of government service and a transformation of business through the growth of size and of the scope of science and method into an occupation more and more akin to government service. Opportunities for the more adventurous kind of business of quick money making will be progressively narrowed through the imposition of central controls. The purely chrematistic man will be squeezed out. Then, civilization provides her own interests. These, if their growth be not impeded by political repression and turmoil, will spread and take deeper root. Riches will come to be without honour, or savour. In the atmosphere of the future, class distinctions will be transformed and economic injustice be rectified without violent strife. These later stages of social evolution will be achieved so much more simply and easily when the time is ripe, that it is folly to court disaster by attempting to rush them now. One task is to hold hard to what we have, to avert the political reaction with which we are threatened, and to work laboriously to traverse the nearer reaches, which are within our power.

It remains to say something of the mechanism for securing fuller utilization of productive resources. To some extent the problem is solved by being thus simply formulated. The appropriate party should say: we are determined to secure full employment, with the assistance of whatever state intervention may be necessary, without on the one hand degrading the standard of living which has been achieved for labour--and been shown in the near past to be consistent with fairly full employment--and on the other without aiming at any drastic redistribution of wealth. A government with this clear objective would not fail. What bars progress at present is the reluctance of one party to embark on sufficient state intervention to guarantee success and resistance to the other whose plans for state intervention are rightly supposed to be involved with schemes for drastic and sudden social change.

The economist can do something more than formulate the problem. He can point out that its solution does not consist in tinkering with particular industries. He can point out that restriction of production is the reverse of what is needed. Study of the trade cycle seems to have yielded this much of result, that recessions in production are associated with fluctuations in the value of money and that a stable money is required. Monetary stability can only be secured with the co-operation of the banking system. It is not likely that banking action would be sufficient by itself. The state may have to intervene directly in controlling the volume of monetary demand. This control might take two forms. 1. It might consist of regulating the volume of capital output in the country. 2. It might consist of deliberate variations in the balance between the money received in taxation and the money distributed as incomes by the government (and by local authorities) to its servants and debt holders.

Regulation of the volume of capital output is intimately connected with monetary stabilization and control over the forces generating the trade cycle. The state may intervene (1) by a suitable policy of timing public works (2) by the control over new issues through a National [d] Investment Board [9] (3) by subsides to approved capital construction combined with an appropriate degree of control over the subsidized enterprises and (4) by the guarantee of interest on approved undertakings. In operating such a policy it would be necessary for the authorities to establish rules not only for testing schemes on their own merits, but also for regulating the total volume of such schemes with a view to stabilizing the level of activity in the country as a whole. The immediate problem, is of course, to increase the level of activity and raise the general level of prices by a policy of capital expansion.

There is a more direct method of increasing or decreasing the flow of monetary demand. By a strong policy of redeeming debt with money received in taxation the authority may nip in the bud an incipient inflation. Conversely, when it is desired to check a slump or create an expansion, the authority may increase the demand for goods, without raising their cost of production, by injecting new money into the system. It would not be desirable to do this entirely by an additional note issue. The proportion of notes in circulation to the deposits of the community is determined by habit and convenience. If the government added to the volume of notes in circulation while leaving the volume of deposits unchanged, the notes would merely be returned to the banks. It would be desirable therefore for the government to inject new money both by increasing its credits with the banks on which it could draw and making an additional issue simultaneously. The amount of notes issued would be much smaller than the increase of credit. There is no reason of principle why the notes issued for reflationary purposes should be free of an interest charge and the extra credits not. It would be desirable to make a change in the Bank Act enabling the government to inject new money in either form, equally free of interest. [10] Certain consequential adjustments of banking practice would be necessary, but they would not be of fundamental importance nor entail substantial losses to the banking system.

Reform of this kind could be achieved outright, with the details of policy alone requiring settlement, by a government so minded. It might not be enough. Some organization of industries into cartels, with a policy the reverse of that usually pursued, by which expansion rather than restriction was made remunerative by a system of fines and bounties could also be attempted. Employment subsidies could be given. A government single-minded and known to be single-minded in pursuit of the aim formulated [e] , and willing to intervene in economic affairs until success was achieved, would not fail.

The American democracy is sanctioning just such an experiment. It appears, from a distance, to be operating with considerable muddle-headedness. That it is making the experiment is a great advantage. [11] How long will European democracies lag behind?

A word may be said on the issue of nationalism versus internationalism. In this field too, alternatives are offered with as fallacious a claim to covering all possibilities as those of laisser-faire and universal socialization. On the one hand it is said, quite wrongly, we must give private enterprise a completely free field in which to work out its own salvation or we must take over the whole thing; on the other, with equal lack of truthfulness, that we must either secure international agreement for concerted action or pursue our own course regardless of international repercussions. Since our problem is new, a solution cannot be found without some experimentation, and it is therefore foolish to expect to secure international agreement in advance. Even if agreement could be secured, it would probably be undesirable, since countries might find themselves committed to action which a little experience proved to be wrong. For this reason as well as for the reason that so few of the parties to it had formulated the problem itself, the World Economic Conference was clearly foredoomed to futility. Each country must act for herself, or in conjunction with such others as are willing to co-operate in sympathy.

It by no means follows that each country should be regardless of the repercussions of her actions abroad, and set about the task of recovery in a nationalist frame of mind. Each country should undertake to restore the level of economic activity, but should shun devices, such as competitive exchange depreciation, protection, or import quotas, which manifestly injure others (and probably themselves) in the process.

The classical doctrine that free trade secures the best distribution of a nation's productive resources among different lines of trade remains substantially correct; and it remains important. In a completely socialized economy other means could no doubt be devised for securing this distribution. For the present, Free Trade appears to be the best method to hand. The desire to get tariff barriers reduced, or at least, the lip service paid to it, at the World Economic Conference was therefore a perfectly respectable one and worthy of applause. [12] But Free Trade, the benefits of which have been explained, has not been shown to be a cure for the specifically modern problem of the unemployment of productive resources. [13] The primary emphasis which some liberals give to it at this juncture is therefore misplaced, and is symptomatic of ignorance of the nature of the new problem.

Reference was made at the Conference to the desirability of raising the general level of prices. This was more relevant to the problem of unemployment. Unfortunately the British delegates who favoured raising the general level of prices, condemned the most practicable means of achieving the objective, large scale Public Works, while the French who favoured Public Works, condemned the objective. [14]

It is sometimes said that advance in Great Britain entirely depends on world recovery, owing to the importance of our export trades. This is clearly an exaggeration. Given the existing distribution of British industry, complete restoration is impossible without an expansion of our export markets. But partial recovery is not impossible. The re-stimulation of demand and output in Great Britain might be made to proceed far, while our export trade remains atrophied. Only when we reached the point when, owing to the shortage of labour elsewhere, it became necessary to transfer labour from the export trades that might be re-employed in them in the event of full world recovery, could the question arise whether we ought to proceed further in advancing our own recovery or await developments in the outer world. But we are now far from being in such a position. Much ground has to be covered before we attain to it. Moreover an actual revival of output [f] in this country might be expected to have favourable repercussions abroad, and a strenuous policy of isolated advance here, always provided that weapons deleterious to the foreigner (Protection, etc.) were not used to secure it, would thus go some way towards solving the problem of our export trades, which the specious hold out as an argument for inaction or anti-foreign nationalism.

The view that nothing can be accomplished without general international agreement is another form of the escapism and defeatism, which we have already seen sapping the energies of the progressive elements in politics. Reluctant to shoulder the practicable tasks they seek refuge in agitating for the impracticable. The difficulty of achieving the impracticable becomes an excuse for inertia. Those who still believe in laisser-faire may observe this stultification with some degree of satisfaction.

To summarize, the problem of poverty and particularly the problem of mal-distribution, has come more and more to the front in recent years and has largely determined political alignments. That we are now confronted with a problem of a wholly different nature has not yet been assimilated by the political mind. That it cannot be solved without intervention by the central government seems clear. Conservatives are reluctant to recognise this, because the introduction of appropriate controls would make the old order recede farther into the background. Socialists rightly perceive that their old line of advance is blocked for the time. This perception leads the very timid into conservatism and reaction. Extremists welcome the impasse as an opportunity to press for, and perhaps, as they think, to achieve, a social revolution. But they are merely beating their wings against the resisting power of the present social order, which, at all times sufficient to check them, is reinforced by the alarm and uncertainty prevalent in an economic depression. Fear, bewilderment and frustration of the reason drive men back to older instinctive habits, and the old habits are precisely those adapted to sustaining an authoritarian political order. Socialists hitherto sceptical of revolution but unwilling to relapse completely from their socialistic faith have tended to be converted to revolution, as the only way out of the impasse. They have rightly perceived that ameliorative legislation is not enough; if there is to be something more, that something must surely be what their colleagues of the left have long been whispering in the ears. But they are wrong. For what was whispered was primarily a solution of the old problem. Conversion to it is merely adhesion to a solution thought [g] out to solve the old problem. It might incidentally solve the new one too; but the old objections to this solution remain.

Hence the political atrophy. Yet the need for action has never been more urgent. The new problem differs from the old in this respect, that it is a problem of crisis. Failure to solve the old problem was compatible with political stability; there was room for trial and error; time was of comparatively little account. The continuance of poverty was lamentable but did not necessarily entail worse things: sleeping dogs could lie. But economic recession and deterioration, the sharp pain of new adversity, stimulate the sufferer to action. And if a programme of suitable action is not offered by political leaders, man will seek relief in his old bad habits, political reaction and war. The immediate future of civilization will be jeopardized.

Perhaps the conservatives will be converted and set about the task of economic recovery. They could certainly gain democratic support for it. Success would give them an immense accretion of strength and vitality. To one for whom the safeguarding and improvement of labour standards seems of paramount importance, this acquisition of strength by those who have not these things at heart must appear fraught with danger. Such a conversion must however be held to be better than no conversion.

The conversion required of socialists is of a rather different kind. To them the notion that the state should intervene to secure full employment is not a new one. But in their minds this notion is interlocked with another notion that the state should intervene to usher in a new social order. So long as they are so interlocked, they must both remain ineffective. The conversion that is required of socialists is a renunciation and a disavowal. They must disentangle from its other socialist elements and formulate clearly a policy of state intervention to secure economic recovery and re-employment. They should proclaim a staunch loyalty to the fight for existing standards and for advance all along the line. They must disclaim loudly and convincingly the aim of a quick social revolution. Only on these conditions can they become the agents of recovery and avert impending disaster.

It may be well to introduce a note of scepticism even with regard to my own story. It has never been shown that there is any mechanism in the system of private enterprise for securing full employment. But it has not been shown that there is no such mechanism, still less that full employment is incompatible with private enterprise. In the past there has been some confidence that, while unfettered private enterprise is wasteful in allowing lapses away from full employment to occur, it does provide a mechanism of recovery, that expansion follows depression by some sort of inner law. The nature and even the existence of this law is unknown, but it may none the less be at work. The present depression is far more severe than any of the past: but it may be of the same nature, and forces may now be at work within the system generating revival. If this is so, drastic state intervention may, after a further lapse of time, prove unnecessary in the present emergency. Things may get well of their own. The obstacle which the depression opposes to social advance will then disappear. If this happens, it is not rash to predict that the old forces of moderate socialism will get to work again seeing that the old road is clear, and achieve further successes. Extremism will accordingly be undermined.

These considerations do not take the force out of my argument. Rather they add to it. In the first place, since we do not know that the recovery will come of its own and hardly have greater grounds for believing that full recovery will come than that it will not, and since, if it does not, prognostications of disaster are likely to be fulfilled, it is essential to act as if recovery would not come of its own. Secondly, this doctrine of the ineluctable advance of the Trade Cycle in a system of un-controlled private enterprise, suggests not only release from our present distress but another relapse into it or something worse. The evils which we may escape on this occasion will threaten again, and, perhaps, descend. In the intervening phase of prosperity people will be lulled into a false sense of security. There will be less inducement to hammer out a policy of appropriate state intervention then than now; but it will not be less important that this should be done. This consideration increases therefore rather than diminishes the force of my argument that politicians should take cognisance of the new economic problem and devise a suitable plan of action. The problem of securing full employment then becomes merged into the more general one of preventing industrial recession and eliminating the Trade Cycle. The broader problem will require measures of the same general nature as the immediate one.

The programme outlined is one of state intervention to control the level of industrial output as a whole, through currency policy, banking policy--state control of the whole banking system would only be required in the unlikely event of its inability to secure loyal co-operation [15] --public finance, investment control, and, perhaps, through a system of fines and bounties operating even-handedly with different industries. This policy is prior to and independent of the re-organization and possibly nationalization of particular industries, which can be considered on its own merits, in each case. It is independent of, though its success would immediately facilitate, the policy of further advance towards the new social order.

  1. 1. This untitled article was written as a contribution to a book, which does not seem to have been published. Within a couple of years (certainly well before the revival reached its apex in 1937), Harrod wrote an additional footnote on a separate sheet, explaining the origin of the article:
    • Footnote to be appended to page 1 of article by R. F. Harrod.

      This article was written in mid-1933 when the up-swing of the trade cycle has not proceeded so far as it has now. Its language is appropriate to the situation as it was then. None the less I claim that the moral is still valid for the reasons given in the concluding paragraphs.

    Reference to the World Economic Conference, held in June and July 1933, as a recent event, and a sentence also recurring in the Chatham House memorandum "Continuity of Values and the Long-term International Problem" (here as essay 13 ), dated 26 October 1933 (see [jump to page] and [jump to page] ), suggest that this paper was written towards the end of summer 1933--probably before term began in Oxford, as a note to the typist at the top of the first page of the manuscript draft (see source note a ) instructs that a copy of the Ts should be sent at Harrod's London address.

    2. The following alternative opening paragraph, substituted by the first two in the version reproduced here, was crossed out from the manuscript draft:

    • I have been invited to contribute to this volume in my capacity of economist. But in what I say I propose to eschew technical matters. I shall try, rather, to describe in very general terms what type of problem it is that the <present> economic difficulties of the world have set us, and its relation to political and intellectual progress. It is of the utmost importance that those who feel themselves unable to form an opinion about the proper economic recipes for our disorders--an opinion which cannot well be formed without much foil, patience and the laborious acquisition of a precise, logical, even mathematical, apparatus of analysis--should yet have an intellectual view about the general nature of the trouble, the reason for the failure of experts to get their prescriptions accepted or even to agree about them, and the political implications of that failure. Does it render democratic institutions suspect, does it point towards communism, towards dictatorship? And what of the threat to peace, to intellectual liberty, to civilized life itself which appears to have been born of that failure?

    3. The Monetary and Economic Conference (World Economic Conference) was held in London from 12 June to 27 July 1933, with the participation of representatives of 64 governments. It aimed at re-establishing international exchanges, which were disrupted by the world slump and the following monetary disorder. Participating countries had different perspectives, which it was not possible to conciliate. France and the other five golden block countries maintained that to reach the aim it was necessary to restore the gold standard; Britain held instead that it was necessary to raise prices. The American delegation received inconsistent instructions, as the conference was called under the Hoover administration but held when Roosevelt started experimenting with some active intervention; moreover, the dollar had been devaluated only a couple of months earlier (see note 4 to press item 16 ). Eventually both Britain and the United States refused to anchor their currencies to gold. The other topic under discussion regarded tariffs and quotas: although the conference aimed at a general reduction of tariffs, none of the countries actually contemplated reducing their own.

    4. "I have devoted myself [...] to the problem of poverty, and [...] very little of my work has been devoted to any inquiry which does not bear on that" (A. Marshall, evidence given before the Royal Commission on the Aged Poor, 5 June 1895, in Official Papers by Alfred Marshall, London: Macmillan, 1926, p. 205).

    5. Philip Snowden (1864-1937), Chancellor of the Exchequer in the first and second Labour governments, then Lord Privy Seal in the National Government until his resignation in September 1932, was a strenuous free-trader and a defender of financial orthodoxy.

    6. An autograph addition, consisting in this paragraph and the following, substitutes the following passage in the Ms and Ts drafts:

    • An explanation on these lines may be suggested. The modern economic system has its origins in a system of self-subsistence. Two hundred years ago most people lived largely on the produce of their own toil. In a world of Robinson Crusoes there is no problem of unemployment. The individual works for what he wants and there is no market to mediate between his efforts and their reward. The division of labour and exchange slowly gained ground. Each step was a small one. The full employment position may have been one of unstable equilibrium but there was no change large enough to disturb it substantially. The growth of commerce proceeded slowly and by small steps. During the War and after it there have been changes in the course of commerce of unprecedented dimensions. It may be that the system has throughout been one of unstable equilibrium, lacking a self-righting mechanism, and that hitherto it has worked fairly steadily simply because it was undisturbed. At last we have had sudden changes large enough to reveal its inherent defect. At the same time we have had a notable shrinkage in the relative volume of that industry, which retains more of the features of old self subsistent industry than any other, agriculture in all its forms.

    7. This line of thought was further developed in a memorandum on "Continuity of Values and the Long-term International Problem" read in November 1933 before the Group on International Monetary Problems at the Royal Institute of International Affairs (essay 13 , [jump to page] ), and was later resumed in The Trade Cycle (Harrod 1936:8 , pp. 32-34).

    8. J. M. Keynes, Treatise on Money (1930).

    9. For an earlier reference to a National Investment Board see the 1931 pamphlet on "[Tariffs and Development Policy]" (essay 7 , [jump to page] and note 14 ).

    10. On Harrod's view regarding interest-free loans see note 8 to letter 385 .

    11. A few months after writing this passage, Harrod promoted a collective letter to President Roosevelt, commenting on the New Deal policy: see letter 329 of 20 November 1933.

    12. See note 3 to this essay.

    13. In the margin of the Ms draft (see source note a to this essay), Harrod noted: "Further violent inroads on the freedom of trade in recent times have been largely the effect of economic recession, though they may have aggravated it." This was not typed, possibly because of a distraction by the typist. Harrod also annotated "effect not cause", but crossed this remark out.

    14. The British attitude in favour of raising prices was clearly stated by Prime Minister Neville Chamberlain during the opening debate. As to public works, on 13 July Walter Runciman, the President of the Board of Trade, declared: "the United Kingdom considered that nothing would be gained at present by developing its public works policy. ... It had terminated its own schemes, and would not re-open them no matter what might be done elsewhere" (the relevant passages are cited in E. O. G. Shann, "The World Economic Conference", Economic Record, December 1933, pp. 170-73). The French could not share the objective of raising prices, as their own prices were already higher than the British ones: see, for an international comparison, A. Sauvy, Histoire économique de la France entre les deux guerres (Paris: Economica, 1984), vol. 1, pp. 200-206.

    15. Harrod discussed at more length of the socialization of the banking system in a memorandum on "Central Banking" read before the New Fabian Research Bureau and the Society for Socialist Inquiry and Propaganda in January 1932, here reproduced as essay 8 .

    1. a. Two versions of this document are extant: an AMs, not dated, 21 pages, in HCN 11.8.1, and a TD, not signed nor dated, untitled, 34 pages, with numerous autograph corrections and additions, with an introductory note also in Harrod's hand (see note 1 ), in HP V-112. The Ts is a transcription of the Ms; Harrod, however, introduced further corrections and amendments. While in the Interwar Papers and Correspondence the amended TS has been used as the copy text, with the exceptions of the transcription errors indicated in source note c and in editorial note 13 to this essay, here the MS is transcribed instead.

      b. Ts: «howver».

      c. Ts: «substance,»; the comma does not appear in the Ms draft.

      d. Ms: «national». (This paragraph and the next are autograph additions to the Ts draft)

      e. Ts: «forumlated».

      f. Ts: «outpur».

      g. Ts: «throught».

Group on International Monetary Problems.

Note for third Autumn Discussion.


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Democracy and Economic Crisis

I have been invited to contribute to this volume in my capacity of economist. But in what I say I propose to eschew technical matters. I shall try, rather, to describe in broad outline the type of economic problem with which the world is now confronted. This description ought to bring out clearly the peculiar nature of the political crisis which the economic crisis has precipitated.

It is often said that democracy is now on its trial or even that it stands condemned by its apparent inability to relieve the economic tension. Bewildered by the confusion that lies around, maddened by its lack of comprehension and hopeless inability to decide on what lines economic experiment should be made, seeking relief from the frustration so engendered, the human spirit turns aside to its age-long familiar expedient of political experimentation. It cannot be confident that the political experiments will yield an economic solution, for it is its very ignorance of where the economic solution should be sought that impels it towards political change. But any activity, even if misguided and fruitless, brings its own satisfaction. [2]

Yet in this political experimentation much that is precious may be lost, as events in Germany show only too clearly. The political system has evolved so as to secure certain things of value to the individual, freedom of thought, freedom of conscience, a minimum of self-respect. Sudden arbitrary disturbances and contortions of this system almost certainly involve a loss in all this field. And will economic gain accrue to set against this loss? It is hardly probable. For the political gropings are blind and random. They represent reaction from a painful stimulus the source of which is unknown.

The origins of the pain are not, however [b] , completely unknown to all. There is in existence sufficient knowledge to show the way to a substantial measure of relief. But political conditions are not such that the knowledge can be translated into effective action. This is not an argument for political revolution, because there is no reason to suppose that the new political organisation thrown up will be any better adapted to the task of translation. Democratic machinery is not of itself ill adapted. Its failure to translate this particular knowledge into action is due to the special aspiration and aims of the parties within the democratic structure. Those aspirations have been determined by past events. How they arose and why they are now an obstruction is precisely the story I have to tell. The tale will necessarily be brief and simplified, perhaps beyond recognition by the historian. I claim for it sufficient substance of truth to justify its moral.

Its moral is indeed of vital importance. For if only it is apprehended, political retrogression may yet be avoided. The overthrow of a democracy has democratic origins. In the normal course of democratic life opinion, springing up in high places, in the minds of thinkers or of natural leaders, flows over the countryside. Opinion may relate to this or to that. It may be discontent with the working of democracy itself. That last opinion can only become effective when it has spread over a broad area, sapped self-confidence and thus undermined the vitality of democracy. This discontent is even now flowing forth; the undermining process is at work. If the moral of this tale were learnt, the flow would be intercepted; good news would replace bad news. Democracy need not be abandoned; but the aims of political parties need re-adjustment. Liberty and self-respect need not be sacrificed.

The point is this. Democracy presents the spectacle of endless debate, committees, compromises embodying meaningless formulae, finally ineffectiveness. And, one says, that is democracy--see how it works. Is this conclusion right? The lamentable results observed may be due to the absence of any ideas in the minds of political leaders appropriate to the occasion. Dictatorship in these circumstances would be no improvement. The execution of bad ideas is not better than no execution. It is not demonstrated that democratic machinery fails to give effective expression to appropriate ides. The World Economic Conference is a good example. [3] In all the length and breadth of that discussion, there was no idea adequate to the situation. If a single power had been able to dictate its solution to the Conference, would the result have been better? No; in my judgment worse--much worse. The failure of the Conference was not due to the need to secure agreement, but to the ultimate worthlessness of the proposals before it. But there are in the world ideas adequate to the situation, or, if not fully articulated ideas, knowledge which could be translated by political leaders into appropriate ideas. Why are political minds not acting as a translating medium? This brings me back to the main story.

It is important in reflecting on these matters to grasp and hold firmly in the mind the distinction between what may be called the old economic problem and the new. The omission to do so will lead to hopeless confusion of thought, and has already lead to muddled and ineffective action. Alfred Marshall professed that for him the dominating interest in economic study was the desire to solve the problem of poverty. [4] That is the old problem. It is a familiar theme. And, though old, it is by no means obsolete. Man has been physically unable to produce by his efforts sufficient goods to satisfy the requirements of all, and the available goods have been divided out in a manner that few have considered satisfactory, the dissatisfied differing in the vehemence of their condemnation.

By a facile contrast, the modern problem has been called that of abundance. This formulation is quite absurd. If before there were too few goods, there are certainly not now too many. We are not suffering from repletion; our wants have not been over-satisfied. Our physical ability to produce goods has indeed improved, but it is still deficient in relation to our need for goods. But to this physical inability there has recently been added in striking degree an inability of organisation. Before the physical ability was less, but it was more fully realised. Now with an improving physical ability we are finding it more difficult to organise it, so as to reap the full advantages which it offers. The new problem is that of organising the physical ability. Why has this problem arisen now? What are its political corollaries? It is necessary first to consider the attitude of economists and politicians to the old problem. What service did the economists consider that they could provide? Their prime interest was in the way in which the physical resources at our disposal were distributed among different occupations. How should land, labour and capital be divided among various productive activities so as to yield in fullest measure the goods which man most desires? The classical answer to this problem was that the best division would occur, if producers were allowed to seek, without political impediment, their own greatest profit. The political corollary of this doctrine was Free Trade and laisser-faire in matters relating to industry and commerce.

The ideas was simple and readily amenable to political interpretation. A division of opinion naturally arose between those who were concerned to achieve the economic desideratum and those who were tender to vested interests. Thus the economists fell into a natural alliance with those who sought to abolish political privileges. Economic and political vested interests were often interlocked.

Men of humane disposition with a special eye for the sufferings of the poor might reasonably be expected to join with the economists, since, if they were unwilling to subscribe to chimerical and utopian schemes of social change, this seemed the only practicable line of advance towards their objective. The party of progress was thus, until the late nineteenth century, mainly concerned with an attack upon obstructions and impediments.

While economists sought by laissez-faire to obtain in this manner the most advantageous disposition of productive resources, what was their attitude to the unequal distribution of the product? On this topic economists have had little to add to the conclusions of common sense. An economist might share the plain man's disaffection with the existing system, but he had no specific contribution to the subject. As time passed the dissatisfaction of the average man grew more lively. Finally the progressive party in politics became associated with attempts to redress the injustice in some small measure by the provision of social services and the imposition of progressive taxation.

Legislation of this kind may be thought of as a compromise between individualism and socialism. It is important to inspect the nature of the compromise closely and its relation to the laisser-faire desired by the economists. The socialists were those who regarded economic inequality with the greatest aversion, and held that a just distribution could not be achieved until the system of private enterprise was abolished. Productive resources must be transferred to state ownership. The ameliorative legislation was not and could not be a substantial contribution to their objective.

Before the war socialist dreams seemed remote enough. The socialists were only a small section of those who desired a redistribution of the product of industry. The main body believed that gradual but steady work at ameliorative legislation was the only practicable course and would achieve results of considerable value.

What was the attitude of the economists? We have seen that in the early nineteenth century there was a confluence of political and economic streams of thought, each tending to burst the dams of vested interest. In considering the implications of the economic doctrine it is well to bear this in mind. There was a commingling of the streams of thought and some confusion as well. Each school of thought obtained adventitious assistance from the other. In order to re-canalize, it is necessary to examine not the obiter dicta of classical economists, but the inner logic of their economic argument. The best distribution of productive resources would be achieved if the prices paid by consumers for goods were proportional to the real cost of producing them; they would be proportional if rewards to producers were equal in different occupations; rewards would be equal if producers were perfectly free to leave a field of low reward in favour of a higher one. Such is the sole economic argument of substance [c] for laisser-faire, though economists often spoke as if they had much more ammunition than this. On the basis of this argument, restraints on producers cannot be condemned provided that they affect all equally; progressive taxation cannot be condemned.

So far as the inner logic of the laisser-faire argument goes, therefore, there was nothing to prevent economists supporting the ameliorative legislation provided it dealt even-handedly with all. There was every reason to oppose Protection because that does not and cannot so deal. Objectors often held that it was illogical to favour legislation which protected the working class standard of life while condemning tariff reform. It was the objectors who did not understand the logic of free trade. The sweeping terms in which economists had defended laisser-faire gave the objectors colour. The classical economists' contribution was confined to a doctrine of how to distribute productive resources among different occupation. It could therefore be properly used against a system, such as Protection, which led to a re-allocation of productive resources, but not against forms of state interference, such as the social services and progressive taxation, which did not affect the existing allocation. The economists could support the ameliorative legislation without compromising their essential doctrine; there was no lack of logic.

The economists' theory regarding the proper allocation of productive resources among occupations is simple and inexpugnable. But it is not very easy to comprehend without some mental effort, and the true doctrine of Free Trade, which is based upon it, is correspondingly difficult. The wide popularity of Free Trade is due to the fact that it was possible to represent it as meaning cheap goods for consumers. This is the popular version of the economists' conclusion. And on the whole it is a fair one, since the best distribution of productive resources among occupations will be the distribution most beneficial to consumers, and will consequently lead, ceteris paribus, to lowest prices. The fact that the phenomenon--low prices--which is symptomatic of the benefit conferred by Free Trade was popularly confused with the real benefit has unfortunate repercussions at present. At a time when it is urgent to raise prices, it is often thought that Free Trade being essentially designed to secure low prices has become unimportant or even harmful. Our leaders seem to be divided between those who mistaking the specious for the real argument for free trade think, like Lord Snowden, that low prices cannot be bad, [5] and those who, not knowing any argument for free trade want to raise prices by Protection! No wonder that we wonder aimlessly!

Two economic problems have been discussed. One is the allocation of the productive resources to the right occupations, on which the economists have pronounced with cogency. The other is the re-distribution of the goods when produced among the different individuals and classes of the community, to which the socialists have wished to subordinate all else. Neither of these is the specifically modern problem.

The specifically modern problem is that of unemployment. Unemployment is normally thought of in terms of labour, but in this context it may well be used in the broader sense of the failure of productive resources generally to be fully utilized. Factories lie idle; new capital cannot find channels of investment; the cultivation of the soil is restricted. The classical economists' doctrine lays down the condition for the best distribution of productive sources among different occupations. It might be better to put it negatively and say that it lays down the condition for productive resources not being distributed wrongly among occupations. The condition does not preclude the possibility that some of the productive resources will not be distributed among occupations at all, that is, that they will just not be utilised.

This is a grave lacuna in economic theory, which has not always been frankly admitted. There has perhaps been an implicit suggestion that the lacuna does not exist, and that laisser-faire would ensure full employment. It is not possible to find cogent arguments in favour of this suggestion. An argument might be constructed as follows. If factors of production, whether land, labour or capital, find themselves unemployed, they will, in a system of complete individualism, offer their services at a lower price and thus secure employment in accordance with the law of demand, which prescribes that any service when offered more cheaply will be bought in greater quantity. This argument contains a fallacious transition from the part to the whole. The law of demand is limited in its application to the relation between the price and the quantity purchased of a commodity, which is one among a number on the market. If a group of labourers reduce the price at which they offer their services there will be a transfer of demand from other commodities to that which they produce. This principle cannot be generalised; for if all classes of labour reduce their offer price there will be no transfer. The gain of employment of the cheaper class was due to the transfer; if there is no transfer, no class of labour gains additional employment. There is just a little more in favour of the view that wage reduction might secure additional employment for labour than this negative suggests. If labour comes to be offered at a lower price, while the offer prices of other factors of production, capital, enterprise and land remain the same, the factors will come to be used in different proportions in the productive process labour more freely and the other factors more sparingly. Labour will be substituted for other agents of production. Thus a reduction in the offer price of labour, the offer prices of other factors remaining the same, may lead to some increased employment of labour at the expense of the other factors. But if all the factors of production are partly unemployed and all seek greater employment, a reduced offer price by all of them cannot be shown to increase employment. Factors of production constitute the consumers. Their incomes shrink as the price they offer for their services is reduced. The market for goods shrinks in proportion to the cost of making them and is therefore incapable of absorbing more goods in the aggregate when they are offered at a lower price. The law of demand only applies to the market for one commodity or group of commodities and cannot be applied, without fallacy, to the market for goods in general.

In the model of the economic system constructed by the classical school, there is no mechanism for ensuring that full employment shall occur. Fairly full employment did occur in the days when the model was constructed, and the absence of a problem was no doubt the cause of the absence of scientific enquiry into the matter. Looking back we may ask why fairly full employment did occur and be left wondering.

An explanation on the following basis may be suggested. [6] The modern economic system had its origins in a system in which each man worked either in order to consume its own product or to sell it on his own account. If his market deteriorated he did not abandon work; often on the contrary he worked harder to make good his diminished receipts per unit of output by increasing output. The capitalist system works differently; faced by a recession of demand the capitalist may find it best to meet the situation by turning off hands, who then have to fend for themselves and draw relief of some kind from another source.

The transition from one system to another proceeded slowly. Each step was a small one. But as capitalism grew the trade cycle became steadily more marked. Since the war the amount of output compared to the total world output that is produced by men working on their own account has receded enormously. But it was producers of this type which gave stability to the old system and whose decline may be responsibility for the growing instability of output as a whole with which we are now faced. [7]

This explanation is only thrown out tentatively and may be incorrect. That it is only a partial one is suggested by the phenomena of the trade cycle, which manifested themselves in the nineteenth century. Depressions in production were followed by a recovery with a regularity which indicates something more than mere chance.

Study of the trade cycle has been intensively pursued by economists since the war. The perplexities of this subject are directly connected with the lacuna in the old economic theory already mentioned. Just because they were ignorant what the forces were which would keep the economic system in a full employment position in a regime of laisser-faire and whether there were any such forces, economists were at a loss where to look for explanations of the movements to and from such a position. Indeed the old economics not only fails to explain if there are forces tending towards a full employment position, but gives no clue as to what kind of forces are required to fulfil this function. If these things had been known, trade cycle analysis would have been greatly facilitated.

None the less trade cycle study has been productive of positive results. In particular reference must be made to the great work of Mr. Keynes. [8] His theoretical construction is incomplete and imperfect, but it goes far towards providing a coherent account of the matter. The fruits of these studies undertaken by many, constitute the knowledge, which, in favourable conditions, might be translated by political leadership into a programme of action. It is true that there is still much doubt and uncertainty. And there are sceptics and dissentients. If the work of translation were seriously set about, it would probably be of immense value to the analysis itself. Obscurities of thought would be cleared up; masses of verbiage masquerading as analysis would be left untranslated and untranslatable.

The immediate position with which we are faced is that of great unemployment of productive resources, with consequent misery and a political tension, which is threatening civilisation itself. Immediate action is required. An important lacuna has been revealed in the theoretic construction, on which the advocacy of laisser-faire was based. It is not known to contain a mechanism for securing full employment. Those who wish us to lop away the excrescences of state-interference may well be asked what feature it is in the completely free system which they wish to restore that will ensure full or even greater employment. What feature was it that they claim did once ensure full employment? They cannot answer, for they do not know. It would be wicked therefore to undo any part of that body of ameliorative legislation which has raised and safeguarded the standard of living of labour and has tended to redistribute wealth in a more equitable fashion, at the instance of those who are unable to specify what benefit would come from doing so. This would be to sacrifice certain good to a blind hope.

Our present mixed system of individualism and state interference miserably fails to secure full employment. There is no reason to suppose that a system of complete individualism would succeed better. What follows?

Socialists of the left wing desiring the rapid introduction of equality have always urged that the state should assume control of the means of production and distribution. This alone would secure the desired result. Patchwork and compromise with capitalism are useless. Now, they may hope that the desired day is approaching, since capitalism is demonstrably functioning in a feeble way. Men of more moderate views, hitherto sceptical of the possibility or desirability of sudden and sweeping social change, may find themselves moving towards a more extreme position. The gradual process is arrested, the piece-meal gains of the past are jeopardised by the incidence of the depression. Perhaps, they think, the extreme men are right; nothing can ultimately be gained by further compromise. We ought to take the plunge; the way of slow progress is blocked. They may even give ear to the specious reasonings of those who attribute the depression to past gains, to high wages, the social services, high taxation. And is it not really true that the failure of capitalism to give full employment points to thorough-going socialisation?

Such a line of thought is in my view idle and injurious. It is offensive to good judgment both about the possible and the desirable. It is difficult to talk sensibly about what is possible. Who knows? It may be that in the future we shall be able to formulate laws about the balance of power in a stable society. Meanwhile we must be content with guessing. In a modern western society with a strong middle class smoothly and gently graded, the resistances to a movement suddenly to introduce social equality would be invincible. The attempt to obtain a democratic majority for such a change would be of no avail, since the social system is stronger than the democracy. If, through foolish leadership, a socializing party became really committed to such a policy and obtained a majority of votes, the resistances would be evoked and democracy would be suspended in the ensuing conflict, perhaps not to be restored for generations. In such an event the extremist leadership would have gained nothing and lost for the progressive cause its best asset.

Nor can I conceive of a sudden social upheaval as desirable, even if it could be achieved without strife. Adjustment to a slowly changing environment can be made without excessive suffering. The pain caused by a sudden change would not be compensated by anything that the beneficiaries might gain.

All this is not to impugn the idea of social equality itself. It is difficult not to believe that if civilization is maintained and the ideas of reason tend to find their realization, some system embodying it will ultimately be evolved.

But, it might be urged, this criticism of a programme of thorough-going socialization is misplaced. With the accession of the gradualist school to it, the objective of social equality is deferred. No social upheaval is contemplated; the existing social system will be liquidated very slowly and gently; full compensation will be given, and so on. Thorough-going socialization is now to be regarded not primarily as a means to drastic redistribution, but as a means to efficiency. The productive and distributive system will be nationalised overnight, or in rapid stages, and then, efficiency and economic progress being once more achieved, the process of social amelioration will be continued gradually but steadily.

There are two cardinal objections to such a defence. One is that it presupposes too nice a power of discrimination. The programme of rapid socialization, so long associated with social equality, will probably call forth the full resisting power of the middle classes, whatever disclaimers are made. To press it is therefore to run excessive risk. The second and more important objection is that the programme is grossly uneconomic. If the real aim is to restore immediate efficiency, the means are far too cumbersome and elaborate. Some political interference is needed, but not so much. The host of problems to which such a re-organization would give rise would distract attention, overstrain the resources for centralized organization available and waste too much of the energy and initiative now harnessed to production.

The doctrine of complete laisser-faire is rightly discredited and discarded. Ameliorative legislation superimposed on a system of private enterprise yielded substantial benefits, so long as there was fairly full employment. Now it is not enough. Thorough-going socialism is too much.

So far the possibility of a middle way has not been sufficiently clearly apprehended. Formerly one party of progressive men, loving, tangible, practicable and immediate gain, were content to press forward with the social services; the other kept their eyes on far off things, true socialism. Both were concerned with the old problem of redistribution. As the new problem became grave, and the moderate party was frustrated, it divided. Some were converted to the far off dreams, others relapsed into reaction, others remained dumbfounded, dispirited and defeated. The new problem has not been faced by politicians.

It is not yet clear how much state interference the solution of the new problem will entail. Experience alone can show. Whatever may be said for and against the socialization of particular industries, that is not the appropriate remedy for the specific problem. It is a question of restoring efficiency to the productive system. Now particular industries have been run with varying degrees of efficiency both formerly and recently. Our present trouble is not a general all-round lapse into inefficiency, a deterioration in the quality of industrial leadership; it is not the sum of a number of troubles arising in each industry. Rather it is connected with the mechanism of exchange, affecting industries generally, and inducing but not caused by peculiar difficulties in each. The appropriate remedy for this special trouble, therefore, is not to deal with the individual industries seriatim, but to strike at the root of it and apply the right reform to the mechanism of exchange.

The political impasse is due to the fact that the state intervention required, which may have to be far reaching, smacks of socialism, indeed is from one point of view socialism, and is therefore shunned by the conservative elements in politics. On the other hand when socialists say, "we now wish to go further than mere extension of the social services, a mere radical cure is called for by our present ills", they are thought to refer to the rapid re-distribution of wealth to which all round nationalization has always been regarded as the means; and middle class resistance is accordingly evoked. And when socialists refer to a more radical cure, this is probably what they do mean. Thus the aspirations of the two main parties being what they are, neither is well qualified to convert the democracy to a programme for curing the present distress. As for liberalism--that could only become an effective political instrument of recovery in a democracy if it could undergo such regeneration and transmutation that is severed for ever the links which attach it to the advocacy of laisser-faire and won the confidence and support of the main mass of labour.

On what conditions could the socialists, now representing the principal body of progressives, fulfil the role? They must disavow and disclaim utterly with lips and hearts the idea that they wish to introduce a sudden social revolution. In doing so, they would lose nothing, for they would merely be disclaiming the desire for what in any case will not happen. It is beyond their power to realise it. The example of Russia is inapplicable to strong middle-class countries. With the strength gained by such a disavowal, they could press forward with the old task of building up and making more secure the standard of living of labour and, furthermore, they could inaugurate a scheme of centralised control, in which a curious experiment is now being made in America, designed to introduce a mechanism into the system of private enterprise for achieving full utilization of productive resources. At present the moderate and the extreme paths are both blocked. By repudiating the extreme path, they could give themselves the strength to unblock the moderate one.

Extremism is a natural reaction from the blocking of the normal channels of advance. In England in particular it is a reaction from the cant and humbug by which the Labour Government was discredited in 1931 and friends seduced from their loyalty. But though natural, it is useless and injurious. The reasons against desiring sweeping changes are as great now as they were before. A big obstacle has appeared in the path of gradual amelioration. To shy off before it into extreme courses is mere escapism and defeatism. The plodding and patient effort required to remove the obstacle and resume progress is irksome. A temporary lapse into anger and bitterness is only human. Dreams of scaling the precipice outright may be entertained for a moment. But the sane man will soon get back to work on removing the obstacle from the road that takes him upwards. If he hesitates too long before doing this with talk of scaling the precipice, his worth as a leader becomes rightly suspect.

Disavowal of the aim of rapid social revolution does not involve repudiation of the idea of a new social order. That will come easily enough in the later stages, when it has become conformable with the point of view of the preponderance of people. Their point of view will be determined by their occupations and their interests. On the side of occupation there will be a steady growth of government service and a transformation of business through the growth of size and of the scope of science and method into an occupation more and more akin to government service. Opportunities for the more adventurous kind of business of quick money making will be progressively narrowed through the imposition of central controls. The purely chrematistic man will be squeezed out. Then, civilization provides her own interests. These, if their growth be not impeded by political repression and turmoil, will spread and take deeper root. Riches will come to be without honour, or savour. In the atmosphere of the future, class distinctions will be transformed and economic injustice be rectified without violent strife. These later stages of social evolution will be achieved so much more simply and easily when the time is ripe, that it is folly to court disaster by attempting to rush them now. One task is to hold hard to what we have, to avert the political reaction with which we are threatened, and to work laboriously to traverse the nearer reaches, which are within our power.

It remains to say something of the mechanism for securing fuller utilization of productive resources. To some extent the problem is solved by being thus simply formulated. The appropriate party should say: we are determined to secure full employment, with the assistance of whatever state intervention may be necessary, without on the one hand degrading the standard of living which has been achieved for labour--and been shown in the near past to be consistent with fairly full employment--and on the other without aiming at any drastic redistribution of wealth. A government with this clear objective would not fail. What bars progress at present is the reluctance of one party to embark on sufficient state intervention to guarantee success and resistance to the other whose plans for state intervention are rightly supposed to be involved with schemes for drastic and sudden social change.

The economist can do something more than formulate the problem. He can point out that its solution does not consist in tinkering with particular industries. He can point out that restriction of production is the reverse of what is needed. Study of the trade cycle seems to have yielded this much of result, that recessions in production are associated with fluctuations in the value of money and that a stable money is required. Monetary stability can only be secured with the co-operation of the banking system. It is not likely that banking action would be sufficient by itself. The state may have to intervene directly in controlling the volume of monetary demand. This control might take two forms. 1. It might consist of regulating the volume of capital output in the country. 2. It might consist of deliberate variations in the balance between the money received in taxation and the money distributed as incomes by the government (and by local authorities) to its servants and debt holders.

Regulation of the volume of capital output is intimately connected with monetary stabilization and control over the forces generating the trade cycle. The state may intervene (1) by a suitable policy of timing public works (2) by the control over new issues through a National [d] Investment Board [9] (3) by subsides to approved capital construction combined with an appropriate degree of control over the subsidized enterprises and (4) by the guarantee of interest on approved undertakings. In operating such a policy it would be necessary for the authorities to establish rules not only for testing schemes on their own merits, but also for regulating the total volume of such schemes with a view to stabilizing the level of activity in the country as a whole. The immediate problem, is of course, to increase the level of activity and raise the general level of prices by a policy of capital expansion.

There is a more direct method of increasing or decreasing the flow of monetary demand. By a strong policy of redeeming debt with money received in taxation the authority may nip in the bud an incipient inflation. Conversely, when it is desired to check a slump or create an expansion, the authority may increase the demand for goods, without raising their cost of production, by injecting new money into the system. It would not be desirable to do this entirely by an additional note issue. The proportion of notes in circulation to the deposits of the community is determined by habit and convenience. If the government added to the volume of notes in circulation while leaving the volume of deposits unchanged, the notes would merely be returned to the banks. It would be desirable therefore for the government to inject new money both by increasing its credits with the banks on which it could draw and making an additional issue simultaneously. The amount of notes issued would be much smaller than the increase of credit. There is no reason of principle why the notes issued for reflationary purposes should be free of an interest charge and the extra credits not. It would be desirable to make a change in the Bank Act enabling the government to inject new money in either form, equally free of interest. [10] Certain consequential adjustments of banking practice would be necessary, but they would not be of fundamental importance nor entail substantial losses to the banking system.

Reform of this kind could be achieved outright, with the details of policy alone requiring settlement, by a government so minded. It might not be enough. Some organization of industries into cartels, with a policy the reverse of that usually pursued, by which expansion rather than restriction was made remunerative by a system of fines and bounties could also be attempted. Employment subsidies could be given. A government single-minded and known to be single-minded in pursuit of the aim formulated [e] , and willing to intervene in economic affairs until success was achieved, would not fail.

The American democracy is sanctioning just such an experiment. It appears, from a distance, to be operating with considerable muddle-headedness. That it is making the experiment is a great advantage. [11] How long will European democracies lag behind?

A word may be said on the issue of nationalism versus internationalism. In this field too, alternatives are offered with as fallacious a claim to covering all possibilities as those of laisser-faire and universal socialization. On the one hand it is said, quite wrongly, we must give private enterprise a completely free field in which to work out its own salvation or we must take over the whole thing; on the other, with equal lack of truthfulness, that we must either secure international agreement for concerted action or pursue our own course regardless of international repercussions. Since our problem is new, a solution cannot be found without some experimentation, and it is therefore foolish to expect to secure international agreement in advance. Even if agreement could be secured, it would probably be undesirable, since countries might find themselves committed to action which a little experience proved to be wrong. For this reason as well as for the reason that so few of the parties to it had formulated the problem itself, the World Economic Conference was clearly foredoomed to futility. Each country must act for herself, or in conjunction with such others as are willing to co-operate in sympathy.

It by no means follows that each country should be regardless of the repercussions of her actions abroad, and set about the task of recovery in a nationalist frame of mind. Each country should undertake to restore the level of economic activity, but should shun devices, such as competitive exchange depreciation, protection, or import quotas, which manifestly injure others (and probably themselves) in the process.

The classical doctrine that free trade secures the best distribution of a nation's productive resources among different lines of trade remains substantially correct; and it remains important. In a completely socialized economy other means could no doubt be devised for securing this distribution. For the present, Free Trade appears to be the best method to hand. The desire to get tariff barriers reduced, or at least, the lip service paid to it, at the World Economic Conference was therefore a perfectly respectable one and worthy of applause. [12] But Free Trade, the benefits of which have been explained, has not been shown to be a cure for the specifically modern problem of the unemployment of productive resources. [13] The primary emphasis which some liberals give to it at this juncture is therefore misplaced, and is symptomatic of ignorance of the nature of the new problem.

Reference was made at the Conference to the desirability of raising the general level of prices. This was more relevant to the problem of unemployment. Unfortunately the British delegates who favoured raising the general level of prices, condemned the most practicable means of achieving the objective, large scale Public Works, while the French who favoured Public Works, condemned the objective. [14]

It is sometimes said that advance in Great Britain entirely depends on world recovery, owing to the importance of our export trades. This is clearly an exaggeration. Given the existing distribution of British industry, complete restoration is impossible without an expansion of our export markets. But partial recovery is not impossible. The re-stimulation of demand and output in Great Britain might be made to proceed far, while our export trade remains atrophied. Only when we reached the point when, owing to the shortage of labour elsewhere, it became necessary to transfer labour from the export trades that might be re-employed in them in the event of full world recovery, could the question arise whether we ought to proceed further in advancing our own recovery or await developments in the outer world. But we are now far from being in such a position. Much ground has to be covered before we attain to it. Moreover an actual revival of output [f] in this country might be expected to have favourable repercussions abroad, and a strenuous policy of isolated advance here, always provided that weapons deleterious to the foreigner (Protection, etc.) were not used to secure it, would thus go some way towards solving the problem of our export trades, which the specious hold out as an argument for inaction or anti-foreign nationalism.

The view that nothing can be accomplished without general international agreement is another form of the escapism and defeatism, which we have already seen sapping the energies of the progressive elements in politics. Reluctant to shoulder the practicable tasks they seek refuge in agitating for the impracticable. The difficulty of achieving the impracticable becomes an excuse for inertia. Those who still believe in laisser-faire may observe this stultification with some degree of satisfaction.

To summarize, the problem of poverty and particularly the problem of mal-distribution, has come more and more to the front in recent years and has largely determined political alignments. That we are now confronted with a problem of a wholly different nature has not yet been assimilated by the political mind. That it cannot be solved without intervention by the central government seems clear. Conservatives are reluctant to recognise this, because the introduction of appropriate controls would make the old order recede farther into the background. Socialists rightly perceive that their old line of advance is blocked for the time. This perception leads the very timid into conservatism and reaction. Extremists welcome the impasse as an opportunity to press for, and perhaps, as they think, to achieve, a social revolution. But they are merely beating their wings against the resisting power of the present social order, which, at all times sufficient to check them, is reinforced by the alarm and uncertainty prevalent in an economic depression. Fear, bewilderment and frustration of the reason drive men back to older instinctive habits, and the old habits are precisely those adapted to sustaining an authoritarian political order. Socialists hitherto sceptical of revolution but unwilling to relapse completely from their socialistic faith have tended to be converted to revolution, as the only way out of the impasse. They have rightly perceived that ameliorative legislation is not enough; if there is to be something more, that something must surely be what their colleagues of the left have long been whispering in the ears. But they are wrong. For what was whispered was primarily a solution of the old problem. Conversion to it is merely adhesion to a solution thought [g] out to solve the old problem. It might incidentally solve the new one too; but the old objections to this solution remain.

Hence the political atrophy. Yet the need for action has never been more urgent. The new problem differs from the old in this respect, that it is a problem of crisis. Failure to solve the old problem was compatible with political stability; there was room for trial and error; time was of comparatively little account. The continuance of poverty was lamentable but did not necessarily entail worse things: sleeping dogs could lie. But economic recession and deterioration, the sharp pain of new adversity, stimulate the sufferer to action. And if a programme of suitable action is not offered by political leaders, man will seek relief in his old bad habits, political reaction and war. The immediate future of civilization will be jeopardized.

Perhaps the conservatives will be converted and set about the task of economic recovery. They could certainly gain democratic support for it. Success would give them an immense accretion of strength and vitality. To one for whom the safeguarding and improvement of labour standards seems of paramount importance, this acquisition of strength by those who have not these things at heart must appear fraught with danger. Such a conversion must however be held to be better than no conversion.

The conversion required of socialists is of a rather different kind. To them the notion that the state should intervene to secure full employment is not a new one. But in their minds this notion is interlocked with another notion that the state should intervene to usher in a new social order. So long as they are so interlocked, they must both remain ineffective. The conversion that is required of socialists is a renunciation and a disavowal. They must disentangle from its other socialist elements and formulate clearly a policy of state intervention to secure economic recovery and re-employment. They should proclaim a staunch loyalty to the fight for existing standards and for advance all along the line. They must disclaim loudly and convincingly the aim of a quick social revolution. Only on these conditions can they become the agents of recovery and avert impending disaster.

It may be well to introduce a note of scepticism even with regard to my own story. It has never been shown that there is any mechanism in the system of private enterprise for securing full employment. But it has not been shown that there is no such mechanism, still less that full employment is incompatible with private enterprise. In the past there has been some confidence that, while unfettered private enterprise is wasteful in allowing lapses away from full employment to occur, it does provide a mechanism of recovery, that expansion follows depression by some sort of inner law. The nature and even the existence of this law is unknown, but it may none the less be at work. The present depression is far more severe than any of the past: but it may be of the same nature, and forces may now be at work within the system generating revival. If this is so, drastic state intervention may, after a further lapse of time, prove unnecessary in the present emergency. Things may get well of their own. The obstacle which the depression opposes to social advance will then disappear. If this happens, it is not rash to predict that the old forces of moderate socialism will get to work again seeing that the old road is clear, and achieve further successes. Extremism will accordingly be undermined.

These considerations do not take the force out of my argument. Rather they add to it. In the first place, since we do not know that the recovery will come of its own and hardly have greater grounds for believing that full recovery will come than that it will not, and since, if it does not, prognostications of disaster are likely to be fulfilled, it is essential to act as if recovery would not come of its own. Secondly, this doctrine of the ineluctable advance of the Trade Cycle in a system of un-controlled private enterprise, suggests not only release from our present distress but another relapse into it or something worse. The evils which we may escape on this occasion will threaten again, and, perhaps, descend. In the intervening phase of prosperity people will be lulled into a false sense of security. There will be less inducement to hammer out a policy of appropriate state intervention then than now; but it will not be less important that this should be done. This consideration increases therefore rather than diminishes the force of my argument that politicians should take cognisance of the new economic problem and devise a suitable plan of action. The problem of securing full employment then becomes merged into the more general one of preventing industrial recession and eliminating the Trade Cycle. The broader problem will require measures of the same general nature as the immediate one.

The programme outlined is one of state intervention to control the level of industrial output as a whole, through currency policy, banking policy--state control of the whole banking system would only be required in the unlikely event of its inability to secure loyal co-operation [15] --public finance, investment control, and, perhaps, through a system of fines and bounties operating even-handedly with different industries. This policy is prior to and independent of the re-organization and possibly nationalization of particular industries, which can be considered on its own merits, in each case. It is independent of, though its success would immediately facilitate, the policy of further advance towards the new social order.

1. This untitled article was written as a contribution to a book, which does not seem to have been published. Within a couple of years (certainly well before the revival reached its apex in 1937), Harrod wrote an additional footnote on a separate sheet, explaining the origin of the article:

Footnote to be appended to page 1 of article by R. F. Harrod.

This article was written in mid-1933 when the up-swing of the trade cycle has not proceeded so far as it has now. Its language is appropriate to the situation as it was then. None the less I claim that the moral is still valid for the reasons given in the concluding paragraphs.

Reference to the World Economic Conference, held in June and July 1933, as a recent event, and a sentence also recurring in the Chatham House memorandum "Continuity of Values and the Long-term International Problem" (here as essay 13 ), dated 26 October 1933 (see [jump to page] and [jump to page] ), suggest that this paper was written towards the end of summer 1933--probably before term began in Oxford, as a note to the typist at the top of the first page of the manuscript draft (see source note a ) instructs that a copy of the Ts should be sent at Harrod's London address.

2. The following alternative opening paragraph, substituted by the first two in the version reproduced here, was crossed out from the manuscript draft:

I have been invited to contribute to this volume in my capacity of economist. But in what I say I propose to eschew technical matters. I shall try, rather, to describe in very general terms what type of problem it is that the <present> economic difficulties of the world have set us, and its relation to political and intellectual progress. It is of the utmost importance that those who feel themselves unable to form an opinion about the proper economic recipes for our disorders--an opinion which cannot well be formed without much foil, patience and the laborious acquisition of a precise, logical, even mathematical, apparatus of analysis--should yet have an intellectual view about the general nature of the trouble, the reason for the failure of experts to get their prescriptions accepted or even to agree about them, and the political implications of that failure. Does it render democratic institutions suspect, does it point towards communism, towards dictatorship? And what of the threat to peace, to intellectual liberty, to civilized life itself which appears to have been born of that failure?

3. The Monetary and Economic Conference (World Economic Conference) was held in London from 12 June to 27 July 1933, with the participation of representatives of 64 governments. It aimed at re-establishing international exchanges, which were disrupted by the world slump and the following monetary disorder. Participating countries had different perspectives, which it was not possible to conciliate. France and the other five golden block countries maintained that to reach the aim it was necessary to restore the gold standard; Britain held instead that it was necessary to raise prices. The American delegation received inconsistent instructions, as the conference was called under the Hoover administration but held when Roosevelt started experimenting with some active intervention; moreover, the dollar had been devaluated only a couple of months earlier (see note 4 to press item 16 ). Eventually both Britain and the United States refused to anchor their currencies to gold. The other topic under discussion regarded tariffs and quotas: although the conference aimed at a general reduction of tariffs, none of the countries actually contemplated reducing their own.

4. "I have devoted myself [...] to the problem of poverty, and [...] very little of my work has been devoted to any inquiry which does not bear on that" (A. Marshall, evidence given before the Royal Commission on the Aged Poor, 5 June 1895, in Official Papers by Alfred Marshall, London: Macmillan, 1926, p. 205).

5. Philip Snowden (1864-1937), Chancellor of the Exchequer in the first and second Labour governments, then Lord Privy Seal in the National Government until his resignation in September 1932, was a strenuous free-trader and a defender of financial orthodoxy.

6. An autograph addition, consisting in this paragraph and the following, substitutes the following passage in the Ms and Ts drafts:

An explanation on these lines may be suggested. The modern economic system has its origins in a system of self-subsistence. Two hundred years ago most people lived largely on the produce of their own toil. In a world of Robinson Crusoes there is no problem of unemployment. The individual works for what he wants and there is no market to mediate between his efforts and their reward. The division of labour and exchange slowly gained ground. Each step was a small one. The full employment position may have been one of unstable equilibrium but there was no change large enough to disturb it substantially. The growth of commerce proceeded slowly and by small steps. During the War and after it there have been changes in the course of commerce of unprecedented dimensions. It may be that the system has throughout been one of unstable equilibrium, lacking a self-righting mechanism, and that hitherto it has worked fairly steadily simply because it was undisturbed. At last we have had sudden changes large enough to reveal its inherent defect. At the same time we have had a notable shrinkage in the relative volume of that industry, which retains more of the features of old self subsistent industry than any other, agriculture in all its forms.

7. This line of thought was further developed in a memorandum on "Continuity of Values and the Long-term International Problem" read in November 1933 before the Group on International Monetary Problems at the Royal Institute of International Affairs (essay 13 , [jump to page] ), and was later resumed in The Trade Cycle (Harrod 1936:8 , pp. 32-34).

8. J. M. Keynes, Treatise on Money (1930).

9. For an earlier reference to a National Investment Board see the 1931 pamphlet on "[Tariffs and Development Policy]" (essay 7 , [jump to page] and note 14 ).

10. On Harrod's view regarding interest-free loans see note 8 to letter 385 .

11. A few months after writing this passage, Harrod promoted a collective letter to President Roosevelt, commenting on the New Deal policy: see letter 329 of 20 November 1933.

12. See note 3 to this essay.

13. In the margin of the Ms draft (see source note a to this essay), Harrod noted: "Further violent inroads on the freedom of trade in recent times have been largely the effect of economic recession, though they may have aggravated it." This was not typed, possibly because of a distraction by the typist. Harrod also annotated "effect not cause", but crossed this remark out.

14. The British attitude in favour of raising prices was clearly stated by Prime Minister Neville Chamberlain during the opening debate. As to public works, on 13 July Walter Runciman, the President of the Board of Trade, declared: "the United Kingdom considered that nothing would be gained at present by developing its public works policy. ... It had terminated its own schemes, and would not re-open them no matter what might be done elsewhere" (the relevant passages are cited in E. O. G. Shann, "The World Economic Conference", Economic Record, December 1933, pp. 170-73). The French could not share the objective of raising prices, as their own prices were already higher than the British ones: see, for an international comparison, A. Sauvy, Histoire économique de la France entre les deux guerres (Paris: Economica, 1984), vol. 1, pp. 200-206.

15. Harrod discussed at more length of the socialization of the banking system in a memorandum on "Central Banking" read before the New Fabian Research Bureau and the Society for Socialist Inquiry and Propaganda in January 1932, here reproduced as essay 8 .

a. Two versions of this document are extant: an AMs, not dated, 21 pages, in HCN 11.8.1, and a TD, not signed nor dated, untitled, 34 pages, with numerous autograph corrections and additions, with an introductory note also in Harrod's hand (see note 1 ), in HP V-112. The Ts is a transcription of the Ms; Harrod, however, introduced further corrections and amendments. While in the Interwar Papers and Correspondence the amended TS has been used as the copy text, with the exceptions of the transcription errors indicated in source note c and in editorial note 13 to this essay, here the MS is transcribed instead.

b. Ts: «howver».

c. Ts: «substance,»; the comma does not appear in the Ms draft.

d. Ms: «national». (This paragraph and the next are autograph additions to the Ts draft)

e. Ts: «forumlated».

f. Ts: «outpur».

g. Ts: «throught».

Group on International Monetary Problems.

Note for third Autumn Discussion.