Principles of Economic Planning

W. Arthur Lewis

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9781032809915
• eBook ISBN:
  9781135033132
• Topic: Business
• Subtopic: Business General
• Index: Business

Discussing the problems arising from a mixed economy, Principles of Economic Planning argues for a system of controls that combine and encourage the best features of laissez faire and state planning.

Chapters covering the following are included:

* Money
* Investment
* Foreign Trade
* Mobility
* The Social Control of Business
* Nationalization

Appendices on economic union and planning in developing countries are also included.

I

Why Plan?

THE dispute between planning and laisser-faire is not a dispute between order and anarchy in economic life. All serious political thinkers, and not least the laisser-faire philosophers, start with the proposition that production and distribution must be controlled to the service of social ends. The point at issue is simply how much of this control may be invisible, and how much must be visible. The invisible control, extolled by the laisser-faire protagonists, is that which the market exercises; the visible control, favoured by the planners, is that which is organised by the state.

The control exercised by the market is none the less real and powerful because it is invisible. In a free economy production is controlled by demand. Capitalists cannot produce what they like; self-interest drives them to produce what they can sell, and that is determined by what people demand, and by how much they demand of it. Production for profit is thus, by ‘the invisible hand’, transmuted into production for use. By the same agency the distribution of income is controlled. Producers cannot charge what they like, for the forces of competition are ever driving prices down to the level of costs, and for ever driving capitalists to improve their efficiency. The free market is thus a powerful instrument of social control, which directs production to the service of demand, stimulates progress, and eliminates excessive earnings.

The case against the invisible control, in favour of state control, cannot proceed by way of blank denial. It is obvious that the invisible hand exists, and that its influence is beneficial. Neither can the case be founded, as some suppose, on attacking the self-interest which is the driving force of the market economy. For every economic system devised for ordinary human beings must have self interest as its driving force. This does not make an economic system anti-social. The purpose of such a system, indeed the very nature of an economic system, is the mechanism through which, by making what society needs most become what is most profitable to the individual, it transmutes individual self-interest into the public good. Even if the economic system were completely planned from the centre it would need a mechanism by which those who planned well, or executed their orders well, were rewarded above those who planned badly or were poor executants. No; the case against the market economy is not that it does not tend to promote the social good. The dispute is whether state control could not do better, either as an alternative, or as a supplement.

Socialism and the State

In any comparison between the state and alternative social institutions which can serve the same purpose, the state starts, either with the dice loaded against it, if one is a liberal, so that it must do not just as well but much better if it is to be accepted; or with the dice loaded in its favour, if one is a fascist, so that it will be accepted unless it does much worse. Much of the current worship and denunciation of planning springs from these personal predispositions rather than from any objective consideration of particular merits.

The controversy over the role of the state is as old as human society, and so is its offshoot, the dispute about planning. We know of no society, in any place or time, in which the state has not played an active part in regulating production and distribution, or in which there have not been advocates of greater regulation and advocates of less. In our own day the advocates of greater regulation are more on the left, and the advocates of less are more on the right, but this has not always been so; the dispute about planning cuts right across left and right, and has nothing to do with the dispute about socialism.

As the pendulum swings, the powers of the state fluctuate between being too great and being too small. In 18th century England the state handicapped progress by regulating the economy excessively. The attack on the state was thus led by the progressives, and resisted by the conservatives. In the first half of the twentieth century the pendulum has been swinging the other way. The conservatives, who in the 18th century defended planning, now have to resist it; and the left, which was advocating laisser-faire, now has to denounce it. This is why in our day the left is associated with planning and the right with laisser-faire; but if we examine the basic philosophies of left and right in Britain we shall not find that either is fundamentally committed either for or against the state. Both are for and against the state according to circumstances.

Socialism, in particular, contrary to popular belief, is not committed either by its history or by its philosophy, to the glorification of the state or to the extension of its powers. On the contrary, the links of socialism are with liberalism and with anarchism, with their emphasis on individual freedom, and in opposition to the extended state. The nineteenth century socialists were not predominantly well disposed to the state, and in the blue prints of socialist society which they constructed the state receives frequently only a minor role. The state, for example, plays little part in the socialist schemes of Robert Owen, or William Morris or J. L. Bray. Marx, of course, tried to discredit all pre-Marxian socialists by dubbing them ‘utopian’; but even Marx says little about the role of the state in the new socialist society, and that little is derogatory. It was Lenin, not Marx, who made ‘the dictatorship of the proletariat’ the central feature of Marxian socialism. Apart from Lenin, the only other important socialist in the nineteenth century whose socialism essentially involved a powerful state machine was Sidney Webb. The Fabian Society never wholly followed Webb in his glorification of the state even in his own day; and the leader of the next generation of Fabians, G. D. H. Cole, was a fervent exponent of Guild Socialism, a form of socialism in which the state has only a very attenuated role. For Fabians the last word on this subject was said not by Sidney but by Beatrice Webb, who wrote in 1894:

How far, I wonder, will the collectivist principle carry us? The thinkers of fifty years ago believed as firmly in individualism as we believe in collectivism—probably more uncompromisingly; for the men and women of today distrust general principles even though they be prepared to use them. And yet it is easy to see now that the settled conviction of the individualists that government should be limited to keeping the ring clear for private individuals to fight in, was based on the experience of a one-sided and corrupt participation of the government in industrial organisation, and not on any necessary characteristic of state action. Face to face with the government action of their own day they were to a large extent right. Is it not possible that it is the same with collectivism? Public administration is the alternative to private enterprise, and since private enterprise is corrupt and selfish we propose to supersede it by democratic control. But it is, on the face of it, as unlikely that the collectivist principle will apply all round as that the individualist principle would solve all the social problems of fifty years ago. I do not think that we Fabians believe in more than a limited application of the collectivist principle; though, as practical politicians we think that we are as yet nowhere near the margin of cultivation, that we can cultivate this principle vigorously for all that it is worth, in all directions without exhausting its vitality. But of one thing I feel certain. The controversy which seems to us now so full of significance and import will seem barren and useless to our great-grandchildren; they will be amazed that we fought so hard to establish one metaphysical position and to destroy another. (Our Partnership, pp. 117–8.)

Opposite views of other socialists could equally be quoted, for there is no single socialist view of the state or of the part that it should play. The fact is that it has been with socialists, as it has been with liberals and conservatives, that some are for extending the powers of the state, and some for reducing these powers. The Liberal Party, after all, once had a Cabinet that included Asquith, Winston Churchill and Lloyd George, with as diverse a collection of views on the state as one could find anywhere; and the Conservative Party now runs in harness Winston Churchill and R. A. Butler. The dispute on the role of the state is not a dispute between parties, but runs right through the parties themselves.

Socialists have rather lost their perspective of this, and have sometimes seemed to welcome every extension of state powers. Perhaps this is because the two most recent influences, Lenin and Webb, were both worshippers of the state. But some confusion is also due to misunderstanding the socialist attitude towards property. Socialism and nationalisation of property are now commonly identified, but this is as great an error as the identification of socialism and the extended state. Socialism is not, in the first instance, about property any more than it is about the state. Socialism is about equality. A passion for equality is the one thing that links all socialists; on all others they are divided. Because they are concerned about equality socialists have to be concerned about property, since the present system of property is the most important cause of inequality. But subject to the over-riding claims of equality, socialism is not committed to any one way of dealing with property, and property can be handled in many ways that are not inconsistent with socialism. For example it can be redistributed so that each family has the same amount; this is what is done after agrarian revolutions, and though it retains individual ownership of property it is not inconsistent with socialism, as Tito has recently reminded Stalin, so long as the distribution is just, and so long as there is enough land to go round without condemning each family to work on too small and uneconomic a unit. Redistribution of land is frowned on by socialists in overcrowded Europe, but it is the essence of socialistic objectives in the newer and less crowded parts of the world. Or, secondly, property can be handed over to the workers to be operated cooperatively, on a profit sharing basis; this, and not nationalisation, was the favourite of socialist writers in the 19th century. Even in the third alternative, where property is nationalised, the role of the state is not necessarily large; the state can hand industries over to public boards and tell them to get on with the job without any central planning at all, leaving it to the public trust to buy and sell in the market, and to be regulated by demand just as would any private firm. So long as these different ways of handling property are all based on equality we cannot say that one is more socialist than the others, for socialism is not a particular way of dealing with property; it is a demand for equality and social justice.

It is also a demand for individual liberty. In the dispute about the powers of the state the traditions of socialism are rooted in liberalism. The bias of socialists, in recent times, has come to be in favour of using the state in place of other social institutions, but this is only a recent growth. The real traditions of socialism are opposed to this. The liberal tradition is to hand nothing over to the state that cannot be done nearly as well by some other social institution. Socialists who cannot go as far as this should at least pause before assuming that every suggested extension of the state has the traditions of the socialist movement on its side.

The Market Economy

The object of this digression has been to prepare the ground for impartial consideration of the merits of visible and invisible controls. The dispute, we have seen, is not about objectives but about efficiency. The market economy tends to control production and distribution in the public interest; the question is whether planning could not do better, either as an alternative, or as a supplement.

Even the greatest worshipper of laisser-faire has never suggested that there should be no state. Everyone agrees that there are certain minimum functions for which it is absolutely essential. Adam Smith listed defence, justice, education and roads and communications. Economists following in his footsteps have expanded the list, and reduced it to general principles. Enshrined in the textbooks as beyond controversy, the state has duties in respect of (a) things which only the state can enforce (e.g. justice, defence); (b) things which diffuse benefits for which the beneficiaries cannot be charged (e.g. lighthouses); and (c) things in which the judgment of the state is superior to that of the citizens. This last is a growing category: the state now claims to know better than its citizens for how many years they should send their children to school, between what hours they should drink, what proportion of income should be saved, whether cheap housing is better than cheap cigarettes, and so on. Whether any particular case fits into one of these categories is frequently open to dispute, but the categories are well accepted as laying the absolute minimum of functions for the state.

The case against laisser-faire is much more formidable than this. It rests on the following counts.

First, under a laisser-faire system income is not fairly distributed; and as a corollary of this, less urgent goods are produced for wealthy people while the poor lack education, health, good food, decent houses and ordinary comforts which could be supplied instead. This is no longer denied. The price mechanism rewards people according to the scarcity of the resources (labour and property) that they possess, but it does not itself contain any mechanism for equalising the distribution of scarcities. For justice in distribution we have clearly to summon the forces of the state.

The second weakness is related; the market mechanism does not humanise the wage relation. This is not a simple issue. Employment for wages arises out of the fact that the workers do not own the instruments with which they work. Some socialists have wished to abolish this relation altogether by redistributing property to the workers, as is done in agrarian revolutions, to be worked either individually or in cooperative groups. Any other solution, whether it leaves property to capitalists or hands it over to the state, retains the wage relation, and can seek only to humanise it by guaranteeing the worker’s rights, and by insisting on his sharing in decisions. Of course it is arguable that in perfect competition and in full employment employers would have to court labour, so that the price mechanism, rid of its imperfections, would ensure to labour protection of its rights. Perhaps it would, but the state is a much more certain protection.

This brings us to the third defect of the market economy, its instability. Private enterprise in the creation of money produces cycles, unemployment and misery. To be sure, state enterprise in the creation of money has had no better record; the case for private enterprise in this field rested for centuries on the unchallengeable ground that control by the state had always proved to be much worse. The present unanimity of British thinkers in favour of state control of money (there is no similar unanimity in the U.S.A.) is very recent, and due only to conviction that new secrets have been discovered which reverse the advantages in favour of the state.

Equally inadequate, on the fourth count, is the market’s handling of foreign monies. The case that foreign trade is self-regulating was argued long and stoutly by the protagonists of laisser-faire, but the same advances in monetary theory have now finally exploded this myth. Foreign trade must be regulated by the state.

Fifthly, the market economy is ineffective in coping with major change. Where resources need to be moved in considerable degree, its methods are too slow and cruel. Scarcities are not quickly eliminated, with the result that a few persons receive abnormally large incomes at the public’s expense, and that scarce commodities are unjustly distributed; and at the same time over-production is not quickly reduced, with the result that other persons suffer abnormally low incomes. State action to speed the mobility of resources is clearly needed.

Next, the market economy is wasteful. Competition induces producers to improve their techniques; but it also induces them to spend heavily on sales promotion, and to evade standardisation. But here the case is not so clear. The case for laisser-faire in the 18th and 19th centuries was the wastefulness and stupidity of bureaucratic operations; on the subject of waste we must clearly not proceed by simple generalisations.

This part of the case against the market economy is bound up with the final count, the fact that the merits of the market depend on the existence of competition, and that perfect competition is rare. It is clear that nothing in the market mechanism itself either establishes or maintains competition. Only state action can assure competition. In this, as in so much else, the market economy cannot function adequately without positive support from the state.

Planning by Direction

It has been possible to state the counts in this indictment of laisser-faire so briefly because they are now accepted by most serious political thinkers. There are no longer any believers in laisser-faire, except on the lunatic fringe. There are many who denounce planning in fierce language, and who appear by implication to be arguing for laisser-faire, but, on closer examination there are always a few pages in their books which give the game away. The truth is that we are all planners now.

That is not to say that we believe in all forms of planning or in complete central planning. Laisser-faire can be complete, or it can be modified by state action at many crucial points. Similarly planning can be complete, or it can be combined with a market economy in various degrees.

In fact, the central issue in the discussion of planning is not whether there shall be planning but what form it shall take, and in particular whether the state shall operate through the price mechanism or in supercession of it. Suppose, for example, that the government decides that, in the interests of children’s health, the production of milk ought to be increased. No one questions that this is a reasonable sort of decision for the government to make. But there are many ways of fulfilling this plan, some more direct than others, and some more effective. It might pass a law making it illegal for those responsible for a child to give the child less than one pint of milk a day (just as it is illegal to give the child less than a stipulated amount of education). Or it might increase family allowances, and urge parents to spend the increase on extra milk. Or it might issue free milk tickets to each child, and refund the cost to milk retailers. Or it might purchase milk, and feed this to children in schools. These are measures it might take on the side of demand; they have their parallel on the side of supply. It might pay subsidies to milk producers, thus reducing the price and stimulating both consumption and production. It might set up its own state farms, and give the milk away. Or it might pass a law instructing each milk producer to increase his output by a stipulated amount. All these ways of fulfilling the milk plan are forms of planning, and of course a planner may reject some and accept others. The fundamental difference is between methods that achieve their result by persuasion and those that achieve it by command. Making milk cheaper is an inducement to extra consumption, and paying milk subsidies is an inducement to extra production; both are planning through the price mechanism. On the other hand, ordering people to purchase more milk or producers to produce more is planning by direction. The real choice we have to make is between planning by inducement, and planning by direction.

Complete planning by direction is just as much ruled out as is complete laisser-faire. To begin with, it cannot be applied to consumption. The Government knows better than the citizen how he should spend his income in certain spheres; we all admit this, but they are limited spheres. Bye and large the citizen demands freedom of choice in consumption; freedom to spend his money as he pleases. Rationing is abhorred, except in emergency, and so is payment of wages in kind. There must, therefore, be money, and a consumers’ market. This is a severe limitation on planning, for it means that the results of planning are tested in the consumers’ market. If, for example, too many resources are deyoted to investment, a general shortage show...

Table of contents

• Cover Page
• Half Title page
• Series
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Note.
• Why Plan?
• Fair Shares for all
• Money
• Investment
• Foreign Trade
• Mobility
• The Social Control of Business
• Nationalisation
• How to Plan
• Appendix I On Economic Union
• Appendix II On Planning in Backward Countries