Liberty and a Planned EconomyThe Road to Serfdom by Friedrich A. Hayek; John Chamberlain; The Modern Case forSocialism by John Putnam; Theory of National Economic Planning by Carl LandauerReview by: B. S. KeirsteadThe Canadian Journal of Economics and Political Science / Revue canadienne d'Economique etde Science politique, Vol. 11, No. 2 (May, 1945), pp. 281-285Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/137578 .

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Review Articles

LIBERTY AND A PLANNED ECONOMY

The Road to Serfdom. By FRIEDRICH A. HAYEK. With foreword by JOHN CHAMBERLAIN. Chicago: University of Chicago Press [Toronto: W. J. Gage & Company]. 1944. Pp. xii, 250. ($3.50)

The Modern Casefor Socialism. By JOHN PUTNAM. Boston: Meador Publish- ing Co. 1943. Pp. 180. ($1.50)

Theory of National Economic Planning. By CARL LANDAUER. Berkeley and Los Angeles: University of California Press. 1944. Pp. viii, 190. ($2.00)

PROFESSOR CROCE has said somewhere that liberalism is a universal concept that stands for the widening of human horizons. Whatever liberals at a particular epoch may set as their goals-the restriction of absolute monarchy, the abolition of slavery, freedom of speech and conscience, the destruction of cartels-their aims have a common quality, which is the extension and pro- tection of the individual's rights against the abuses of power and privilege. The liberal may well fear, as Montesquieu did, the tyranny of the mob, and regard with suspicion the democrat who believes that the majority, in all things, must have its way over the minority. This is not to say, however, that liberals are not loyal to the principles of representative and responsible government. The long association of the liberal and the democratic traditions shows that, in fact, liberals have believed that political sovereignty cannot safely be entrusted to any lesser group than the people as a whole, without creating a governing class, possessed of special powers which inevitably would be used against the liberties of the individual. Indeed, to obey a power which does not consult the common interest of the people as a whole and is not derived from the will of the mass of individuals acting as a group, is to sacrifice an essential freedom. Who is free that is coerced to obey an authority in the constitution of which he plays no part and whose laws establish an order conceived in the interest, not of the community, but of a special class?

But the establishment, throughout the nineteenth century, of democratic forms of government did not in itself guarantee the individual citizen against improper coercion. A majority may be a wilful tyrant. The apparatus of the modern state created an administrative power, against the abuse of which a constant vigilance had to be maintained. Difficult as liberals found it to draw the line between proper coercion in the common interest and intrusion on individual rights, the courts, in fact, succeeded in a workable delimitation. An overt act contrary to the common interest and in contravention of law was a punishable offense. Criticism of the law or of legally established institutions, protest against the acts of authority, not constituting overt acts against the interests or liberties of others, were permissible. More, the individual must be guarded and protected in his right to protest and criticize, for only so could a true notion of the common interest emerge and develop.

This resolution of the dilemma of liberal democracy, coupled as it'was with a faith in competition to regulate a free economy in the common interest, has become increasingly difficult in this century. Repeatedly the need for the state to regulate business enterprise in the common interest or to carry out its increasing public functions has necessitated intrusion on what were tra-

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ditionally regarded as essential individual liberties. The expropriation of land for construction of a public highway definitely infringes the individual's right to dispose of his property. If he wishes to fight the expropriation he must do so, in the first instance, at any rate, before an administrative tribunal charged with the duty of protecting the public, not the individual, interest. His appeal to the courts is limited to points of law. An employer of labour will find his right or liberty to "hire and fire" in conflict with a trade union's liberty to bargain collectively, to impose union shop clauses, and so forth. Actual legal regulation may attempt to define and restrict both these liberties in the public interest. The decline of competition, the old regulator in the common interest of the economic system, has brought in its train a mass of

regulatory legislation intended to protect the commonalty against the abuses of concentrated economic power.

Here then is the problem of the modern liberal: how to achieve full and adequate protection of the citizens-President Roosevelt's "little man"- against the tyranny and abuse of "economic royalty" without, at the same time, creating a huge, technical, and irresponsible state bureaucracy.

Professor Hayek's book is meant to be devoted to this problem. Yet, brilliant and penetrating as it is, it loses much of its potential value and

significance because it entirely mis-states the problem itself. Professor Hayek sees the problem in terms of a free choice between the nineteenth century liberal state 'and competitive economy and a monstrous socialist society governed by the fiats of an irresponsible and tyrannous bureaucracy. In his construction of the familiar capitalism v. socialism controversy he consistently holds up the economists' ideal model of a competitive economy in a liberal free-trade world in contrast to the actual workings of the Nazi and Soviet States. Now that is not just unfair argument; it is a faulty formulation of the problem which Professor Hayek could not honestly have achieved had he been as familiar with political history and theory as he is with economic history and theory. In the modern state, as we have said, the problem of freedom arises in a twofold form in any community. It may be more acute in a socialist state; that is uncertain. To cite the Nazi and the Soviet regimes is a bit unworthy. Nazism is not socialist in any recognizable western form and the political institutions of Soviet Russia are-in part a heritage of the Czarist r6gime. Revolutions accomplish certain specific changes, but social institutions and traditions in general continue along familiar patterns. There is no necessary reason to believe that the establishment of a socialist economy in Great Britain would be coupled with the overthrow of parliamentary insti- tutions and the establishment of a Gestapo. There is, however, every reason to fear that the continued growth of administrative powers and the continued concentration of economic power-whether the economic institutions are formally capitalistic or socialistic in pattern, and the distinction is blurring- does constitute a twofold menace to liberty. To this liberal thinkers must find an answer.

Liberal socialists believe the answer to lie in the socialization of the mo-

nopolies, the abolition of concentration of economic power, and the develop- ment, pari passu, of parliamentary and legal machinery to bring this vast

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Review Articles

state apparatus under the control of the elected representatives of the people. To these liberal socialists Professor Hayek has much of great value to say. He shows them how great is their task. He indicates the difficulty in peace- time of a definition of the common economic good; the temptation to the public authority to decide itself on "what is good for the people," instead of letting people decide on what they want. He is sceptical of any successful operation of the price mechanism in such an economy.

Again he shows the socialists the dangerous company they keep; the men who have travelled this road before them. He underlines the preoccupation of socialists with the problems of economic control and administration, their failure to see and to tackle the political problem of preventing bureaucracy. He lectures them for their doctrinaire, evangelical self-righteousness, their contemptuous dismissal of honest advocacy against them, and points out, properly, that this attitude of mind is but an easy step from intolerance and abuse of power.

Finally he shows, in a brilliantly clear restatement of Professor Robbin's Economic Planning and International Order, the immense difficulties of socialist planning on an international scale, and the dangers of conflicting national plans in the absence of an international order. This book should make healthy reading for thoughtful socialists, should bring them to a full realization of the difficulties and the problems that they have not thought through and have too easily dismissed. If the liberal socialist fails to meet this challenge and to develop a solution, in the liberal spirit, of the problem of bureaucracy as well as of the problem of economic welfare, the intolerant and the doctrinaire will wrest from him the leadership of the socialist movement, and then the evils Professor Hayek foresees may well come to pass.

Professor Hayek's own solution of the problem of securing liberty in the modern state is to break up the cartels and trusts and re-establish a com- petitive order. He distrusts people who talk of inevitable and irreversible historical trends. This is healthy historical scepticism and a valuable piece of debunking, but it lacks profundity. The problem of historical determinism is much more difficult than Professor Hayek allows, just as it is more debatable than the people he attacks suggest. The forces that determine the pattern of events cannot be allowed to be inevitable "natural forces," and no one seriously supposes they are; those who talk most about them are among the most ardent advocates of policies which imply a conscious and effective human volition. But it is probable that at any moment of history past decisions, past developments, traditions, attitudes, habits of thought, and the pattern of social institutions combine very definitely to limit the area of free and con- scious choice. At present, considering not only the technical developments that would appear to make a return to competition unlikely for economic reasons, there are also the hostile attitudes of important social groups, trade unions and industrialists alike, in Great Britain, the developed political institutions of utility regulation and administration and a general, and not unwarranted, public disapproval of the ethics of the competitive system. Thus, though the methods of control and regulation, the exact form of our

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The Canadian Journal of Economtics and Political Science

public institutions is, so to speak, in our hands, a definite reversal to a strictly competitive economy seems unlikely.

Professor Hayek, it is true, sharply attacks the economists who believe that the economies of scale make the trust both inevitable and desirable. He cites the report on "Concentration of Economic Power" made for the Tempor- ary National Economic Committee of the Seventy-seventh Congress to the effect that large scale businesses enjoy no advantages in efficiency over those of small and medium scale. This argument, however, is scarcely conclusive. The Report which he cites is itself open to the criticism that its definitions both of efficiency and of scale are unsatisfactory, and there is certainly a wealth of conflicting evidence which Professor Hayek ignores. The studies of Pro- fessor Florence and others suggest the real truth to be that in certain industries the technical combinations are such that maximum efficiency can be achieved on a comparatively small scale of enterprise. In other industries optimum scale is much larger. The present reviewer has found, for example, that

optimum size in the boot and shoe industry is achieved at a small scale of

operation, say a factory employing one hundred men. Optimum scale in

newsprint, however, is a mill of not less than 250 tons per diem, probably more. Such an establishment would employ from five to six hundred men. All general conclusions, such as Professor Hayek draws, are really meaning- less. A return to competition may indeed be possible, as Professor Hayek desires, in those industries in which competition yet partially exists. In those industries in which it has completely disappeared its restoration would be difficult to the point of impracticability.

Professor Hayek's book, while salutary for the socialist, is thus dangerous in the hands of the writers of newspaper editorials. It will lend them doubtful arguments which they will use with the prestige of his great authority in sup- port of untenable positions, further to confuse the public mind as to the real issues to be faced and the real problems to be solved.

Mr. Putnam has written a book which goes to show how real are the

dangers of doctrinaire socialism, to which Professor Hayek repeatedly adverts.

Here, indeed, is the evangelist with the simple faith, the certainty of conviction, the intolerance of contrary views. Mr. Putnam's is a propagandist book which does not even conceive some of the problems that Professor Hayek raises. Yet with all its shortcomings, Mr. Putnam's book does serve to show the real achievements of a socialist r6gime in solving the problems of economic

security and in enlarging the scope and possibilities of life for the masses who, under capitalism, lack the security, the means, and the educational opportuni- ties, if not the freedom, to live rich and full lives.

Professor Landauer, however, has written a book of another sort. Here, if you will, is the answer to Professor Hayek. Whatever the type of state, the economic machine, today, must be controlled in the public interest. The controls of socialist and Keynesian thinkers are not too far apart. As Pro- fessor Lerner has said, the old controversy is dead, or should be. Professor Landauer takes up the problem of consumers' choice. Contrary to Professor

Hayek's contention, he shows it can be solved. He discusses the adminis- tration of the plan, the public control of the planning authorities, the defence

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of the individual, and the reconciliation of labour's rights with the powers of management. The mass of socialist economic literature cited and the studied detachment of the discussion combine to establish that socialists have given attention to the problems of administration, of protection of individual rights, consumers' choice, trades union privileges, and all the other questions for which the liberal must have concern. If the socialist movement has its bigots and intolerant fanatics-and capitalism has defenders in the daily press whom one scarcely regards as impartial, tolerant, and scholarly advocates-it has also its liberal adherents, its careful, cautious analysts who, like Professor Hayek, have a real concern for the liberties and happiness of the individual citizen, a real appreciation of the problems to be solved, and, I think one might say, unlike Professor Hayek, an impartial and realistic approach to their solution.

B. S. KEIRSTEAD McGill University.

THE ECONOMICS OF CONTROL

The Economics of Control: Principles of Welfare Economics. By ABBA P. LERNER. New York [Toronto]: The Macmillan Company. 1944. Pp. xxiv, 428. ($3.75)

PROFESSOR LERNER'S recent book deals with the economics of a society controlled with respect to the level of employment, the operation of mono- polistic enterprises, and the distribution of income, but non-doctrinaire with respect to the means by which these controls are maintained. Its underlying hypothesis is that a competitive society is by its very nature unstable in organization, tending always to develop monopoly and monopsony.

The special theory of a controlled society in a closed economy is developed in Professor Lerner's first eighteen chapters. It is compared on the one hand with the theory of a collective society and on the other with the theory of uncontrolled capitalism. In the last four chapters of the book, the theory is broadened to apply to an economic society which is one of a group of trading nations. There intervenes between the two groups another group of seven chapters dealing with the special topics of "functional finance"; interest, investment, and employment; the relation of marginal efficiencies of invest- ment to marginal productivity; and several other topics in the special fields in which Professor Lerner has made so many contributions. Because this material is so well-known, it will be given practically no attention in this review.

The outstanding characteristic of the theoretical treatment is the astonish- ing simplicity of the methods used. The book contains no mathematics (except a few simple formulae) and only five graphs of type commonly used in "orthodox" theory. Otherwise it depends upon exceptionally skilful exposition of the relationships involved.

All through the theoretical treatment runs the argument for the controlled society. -Against a collectivist economy, the case is very simply based upon the danger to democracy. But with respect to uncontrolled capitalism, it is argued

of the individual, and the reconciliation of labour's rights with the powers of management. The mass of socialist economic literature cited and the studied detachment of the discussion combine to establish that socialists have given attention to the problems of administration, of protection of individual rights, consumers' choice, trades union privileges, and all the other questions for which the liberal must have concern. If the socialist movement has its bigots and intolerant fanatics-and capitalism has defenders in the daily press whom one scarcely regards as impartial, tolerant, and scholarly advocates-it has also its liberal adherents, its careful, cautious analysts who, like Professor Hayek, have a real concern for the liberties and happiness of the individual citizen, a real appreciation of the problems to be solved, and, I think one might say, unlike Professor Hayek, an impartial and realistic approach to their solution.

B. S. KEIRSTEAD McGill University.

THE ECONOMICS OF CONTROL

The Economics of Control: Principles of Welfare Economics. By ABBA P. LERNER. New York [Toronto]: The Macmillan Company. 1944. Pp. xxiv, 428. ($3.75)

PROFESSOR LERNER'S recent book deals with the economics of a society controlled with respect to the level of employment, the operation of mono- polistic enterprises, and the distribution of income, but non-doctrinaire with respect to the means by which these controls are maintained. Its underlying hypothesis is that a competitive society is by its very nature unstable in organization, tending always to develop monopoly and monopsony.

The special theory of a controlled society in a closed economy is developed in Professor Lerner's first eighteen chapters. It is compared on the one hand with the theory of a collective society and on the other with the theory of uncontrolled capitalism. In the last four chapters of the book, the theory is broadened to apply to an economic society which is one of a group of trading nations. There intervenes between the two groups another group of seven chapters dealing with the special topics of "functional finance"; interest, investment, and employment; the relation of marginal efficiencies of invest- ment to marginal productivity; and several other topics in the special fields in which Professor Lerner has made so many contributions. Because this material is so well-known, it will be given practically no attention in this review.

The outstanding characteristic of the theoretical treatment is the astonish- ing simplicity of the methods used. The book contains no mathematics (except a few simple formulae) and only five graphs of type commonly used in "orthodox" theory. Otherwise it depends upon exceptionally skilful exposition of the relationships involved.

All through the theoretical treatment runs the argument for the controlled society. -Against a collectivist economy, the case is very simply based upon the danger to democracy. But with respect to uncontrolled capitalism, it is argued

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