Paul Mattick 1945

Remember the Wrapper

Source: Western Socialist, Boston, USA, September 1945;
The Economics of Control. Principles of Welfare Economics. By Abba P. Lerner. The Macmillan Company, New York, 1944 (428 pp.; $3.75);
Transcribed: by Adam Buick;
Proofed: and corrected by Geoff Traugh, August 2005.

It is difficult to review Professor Lerner’s study, not because it is intricate, but because it seems so superfluous. As trying as it is to read this work it is almost inconceivable that Lerner could spent twelve years on its preparation and writing; particularly these last twelve years of crisis, depression, fascism and war. And yet it is quite understandable from the academic point of view, that is, from the position which with regard to economics and politics, generally prefers to stay away from the world of reality in order to delve deeper into spheres of empty speculation where neither truth nor error matters.

Lerner himself, of course, is deeply convinced of the realism of his enterprise, the more so since his proposals deal with the urgent problems of control and welfare, with society in transition from laissez-faire to collectivism. Despite his intentions, however, he deals only with constructions of his own mind and of the minds of those with whose school of economic thought he identifies himself. Since this is quite an amazing school, it might be well to deal with Lerner’s book in spite of its intrinsic insignificance as regards the concrete problems it sets out to solve yet only obscures by a false kind of reasoning.

This false reasoning has a long history. If classical economy, despite its restriction to value problems because of its pre-occupation with the exchange processes, was still concerned with the problems of production, the so-called “modern economics” attempted mainly to eliminate the value problem by transferring it from the sphere of labor to that of the individual consumer. Value was said to represent the utility of a particular commodity to its individual buyer. Because different commodities possess different degrees of utility to different consumers, the latter, by deciding for themselves what they want and in what quantities they desire most, determine production and the allocation of resources. The principle of diminishing utility explains why an individual, consuming a particular commodity, is bound to reach a point where he will be ready to give up consuming this in favor of that commodity. This point is considered the consumer’s margin of use for a particular commodity, and this margin is the all-important factor in economic analyses because, presumably, it allows for mathematical treatment. The meaning of this approach to economics was twofold. On the one hand, it created the illusion of a possible “scientific” understanding and control of markets and prices and, on the other hand, it lent a “democratic air” to the market economy, which, seemingly, served to satisfy justly and economically all the various desires and wants of all the individuals of all the existing classes in all of society.

This, however, is not the place to offer an additional exposition and refutation of the marginal utility theory, nor to deal with its present-day varieties and technical refinements which tend to draw all economic categories into its analyses. Still, it must be said that its proponents proceed from the illusion that economics can be dealt with independently of class relationships and that its findings are applicable to any form of society. This may help to explain the astonishing flexibility of this school, which started out to prove the eternalness and rationality of the capitalist system because of the regulative automatism of the price-system, and ended up proclaiming that the price-mechanism would reach its full maturity and greatest importance only in the socialist society to come.

The Great Depression, however, demanded of the academic economists more than abstract theories that served the ideological needs of the past, or were by some, projected into the future. A queer mixture of old doctrines and new monopolistic and governmental practices was then developed in Maynard Keynes’ theories. The “socialistic wing” of “modern economics,” that is, people like Oscar Lange and Abba P. Lerner, soon succumbed to the ambiguous theoretical reasonings of Keynes and his followers, which found their nourishment in “National Socialism” and in the “New Deal.” It was not so long ago then, that these economists associated themselves with the reformist wing of the labor movement and attempted to prove that only a radical “socialistic” system of distribution, and therewith production, could really actualize the findings of the science of the economy. For a time Lerner even flirted with left-wing bolshevism, attempting to do for Trotsky what, at a later time, Lange did so successfully for Stalin’s Russia.

In view of his past, the first thing that Lerner does is to apologize for it. “Originally,” he says, his work “was to be a development of the theory of the price mechanism of a socialist society.” Russia and Germany convinced him, however, “that the maintenance and further development of the democratic way of life, as it grew under capitalism and was extended by the labor movement within the capitalist society, not only formed a far more essential part of the socialist ideal than the negative ‘abolition of private property in the instruments of production’ but was in much greater need of careful tending.” Although Lerner still contrasts the economics of control with the economics of laissez faire, to him control doers not necessarily mean collectivism. It suggests “the deliberate application of whatever policy will best serve the social interest, without prejudging the issues between collective ownership and administration or some form of private enterprise.” In brief, Lerner deals with the principles of welfare economics to be realized by a benevolent government solely interested in the well-being of the whole of society.

Assuming that such a government could exist and that it would adopt Lerner’s principles in all their ramifications, and assuming further that it would find no opposition of any kind from anywhere, that the social practice would follow Lerner’s suggestions and plans, consistently and without interference, there would be no reason not to agree with Lerner that the application of his theory might lead to the kind of social welfare he is capable of imagining. And only with these pre-suppositions would it be worthwhile to test seriously the logical consistency and the possibility of an empirical verification of his theory. But there is no such government anywhere in the world, and social relationships are determined everywhere by a variety of competing and struggling classes — and group-interests which prevent the realization of a policy that serves the social interest. As Lerner thinks no longer in terms of “socialism,” he does not speak of a society as it might some day come into being, but of improvements on present-day society. To think, however, that this society could change into something approaching Lerner’s fantasy is to disregard all of its previous history, its bloody present, and its recognizable trend towards a still greater and more murderous chaos.

To be sure, it is out of the existing society that better social relationships must evolve in order to change the exploitative system into truly social production and distribution. But such changes involve the sphere of distribution only after production-relationships have been altered. The capitalist division of labor alone, not to speak of the capitalist need to accumulate for the sake of accumulation in order to safeguard the exploitative practices, prevents any kind of “welfare economics” as envisioned by Lerner. Out of the struggle between capital and labor, which means between those profiting and those suffering from modern methods of exploitation, there may arise a non-exploitative society, but never from the “reconciliation of liberalism and socialism” as Lerner assumes. He may teach for many years to come in order that the capitalists may learn as he hopes, “to see economic activity as a means of satisfying the needs of the people.” But so long as they are capitalists they will keep on doing what they are doing now, that is, disregard society to safeguard their particular interests. If, according to Lerner, the capitalists must learn to think socialistically, the socialists must learn to think capitalistically, that is, must “learn that it is not absolute collectivism but the extension of democracy that counts.” But the “democracy” to be extended consists of the “right” of the rulers to exploit the ruled and of the equal “right” of the ruled to suffer exploitation. To extend these democratic “rights” Lerner proposes, strangely enough, to abolish them by insisting that the government must “control the resources of society to see that they are utilized in the best possible manner.”

According to Lerner, three main problems face the controlled economy: employment, monopoly, and the distribution of income. But before he deals with these problems in what he thinks are concrete terms, he fulfils his professional obligation as a text-book writer. And here, where it means nothing, he is often quite daring, but not quite too daring. By a procedure of separation and integration he goes from the abstract to the concrete, but an air of artificiality penetrates all the steps of his analysis. The textbook part deals in marginal utility terms and techniques with ideas such as the quantitative and qualificative problems of the principle of the diminishing marginal substitutability between goods, the equalization of marginal substitutability, etc., etc., which describe things like “the ideal allocation of fruit and meat” between two individuals, leading to an “exact formulation of the common sense principle that goods should go where they are most useful.”

Lerner points out that this principle is closely approximated automatically by free exchange and upset mostly by the existence of monopolies. Monopoly power, therefore, should not be exercised in the interest of individuals but, if unavoidable, should be used by the government for non-monopolistic ends. As there are non-transferable goods, such as “haircuts and permanent waves,” he further points out that barter would not be advisable and money should be used in the distribution process.

In order to secure an optimum distribution of goods there should be an optimum division of income. As the principle of diminishing marginal utility states that “the greater a man’s income, the less significant to him is a given absolute rise in income,” it follows that a redivision of income should be in accordance with the idea of giving to those who have greater need, for “probable total satisfaction is maximized by that division of income which equalizes the marginal utilities of incomes of all the individuals in the society.” In plain words, Lerner favors an equal division of income. Hurriedly, however, he adds that “an absolutely equalitarian division of income is not directly applicable to practical policy,” because it may be “desired to produce as great an income as possible for the division among the members of society, and if a greater total income would be produced if the division of income were less equalitarian, a compromise cannot be avoided.” And thus, once again, we have merely some new lyrics to a very old tune.

Indeed, the tune to which Lerner writes is as old as capitalism itself and is usually related to Adam Smith. It is the old laissez faire ideology, embellished with an awkward phraseology that has to serve as an attempt to fit ideas connected with the changing reality into the stale and stationary framework of bourgeois economics. Now, as before, competition equates supply and demand via the price system and in accordance with the needs of the people. If monopolistic practices interfere, governmental “counterspeculation” has to bring about what Adam Smith thought the law of the market would accomplish without human interferences. But it is still the price mechanism and a Rule, offered by Lerner, “that equalizes the value of the marginal products of each factor in each of its uses,” which, in his view, will assure that “each individual is induced, while seeking his own interest, to do that which is in the social interest.”

The social interest is served not only by competition but also by “competitive speculation,” which, according to Lerner, is “useful even when the speculator makes a profit out of undertaking to sell things that he does not possess, however much that may savor of unholy magic or even downright trickery. For the speculator is then, in effect, indirectly shifting goods from a future use to a present use, and he makes his profit out of the social benefit that comes from persuading people to consume more now rather than leave goods until next year when they will not be needed as urgently as they are needed now.” Whereas the selling of things which are not there is both profitable to the seller and useful to society, because selling things which are not there leads to buying things which do exist, and whereas in Lerner’s view, “production includes speculation,” as far as his study is concerned production never seems to include labor. He writes: “labor is never mentioned as a concrete factor of production, because classical economists and socialists have regularly got into trouble by dealing with labor as a factor of production or as the sole factor of production. The difficulties arise from the almost unavoidable confusion of labor as an instrument of production that is capable of producing one product or another, and labor as the human beings in whose welfare the writer is interested.” He hopes “by keeping away from labor to avoid these confusions.”

Labor as a “factor of production” among many others, including “selling short,” or as an “instrument of production” like any other piece of machinery, needs, of course, no special consideration in Lerner’s scope of reasoning. Labor as “human beings” are close to his heart, but as “instruments of production” they are subject to the rule of competition and to Lerner’s particular Rule for the attainment of a series of nice equations that illustrate the way towards an economic optimum. These rules, as he often points out, benefit everybody. He says for instance, that in private enterprise there is a “close identity of the interests of the manager with the social interest”; for “every dollar that the manager of a free enterprise can save society is a dollar saved for himself, and only if he does the very best possible is he able to make a normal income for himself.” To be sure, having once upon a time been a sweat-shop worker himself, Lerner admits, although reluctantly, that the efficiency brought about by competition “can lead to a tyrannous disregard for the welfare of the workers and an inhuman red-tapism that would ultimately mean less and not more efficiency.” But since, according to this same Lerner, the sickness contains the cure, there is no real need to worry about this dreadful possibility. If the principle of efficiency continues to rule, exploitation will stop where it becomes unprofitable, that is, where labor collapses as “human beings” while doing its very best as “instruments of production.”

And thus it goes on and on; from simple equations to more complex equations, from isolated parts of the distribution and production process to combinations and ever greater involvements. It all tends, like all previous bourgeois economic theory, to resolve into an apology for the present-day capitalistic practices of the so-called “democratic” nations in which Lerner has made his home. The “identification of perfect competition with the optimum use of resources,” he says, “is merely one way of bringing about the optimum use of resources that is possible under certain technical conditions of production.” The optimum can also be reached, or may only be reached, “by the application of the Rule in conditions where it is technically impossible to reproduce all the symptoms of perfect competition. Indeed, it is because of this impossibility that perfect competition often destroys itself and the optimum use if resources can only then be obtained via the application of the Rule by collective agencies or by artificial maintenance of perfect competition by counterspeculation supported by state subsidies.” Lerner is for both, for private enterprise and for governmental regulation, because he still has to face both in his capacity as a contemporary economist.

He tends to show greater sympathy towards the government, however, and not only because he is a child of his time, but also because the government need not destroy competition but can use it as an instrument of control. This bias in favor of the government comes to light most clearly in Lerner’s attitude towards taxation. By equating taxation with surplus, he points to the government’s capacity to control all resources and the whole proceeds of exploitation. “All the income over and above what is necessary to keep the population healthy enough to keep on working,” he says, “constitutes surplus.” Taxes are imposed on surplus. Tax policy must be directed towards the safeguarding of the optimum use of resources. Both an increase or a decrease in taxes may lead to either a negative or a positive deviation from the optimum, for which reason each kind of taxation must carefully be investigated to discover what it might do with regard to the economic optimum.

From all this it follows that Lerner favors the popular policy of “deficit financing.” He tries to improve upon it by introducing “functional finance.” Functional finance should, he says, be completely determined by the principle of maintaining full employment and a chosen rate of investment. The instruments to this end are government borrowing and lending, taxes and bonuses, buying and selling. With these instruments the government can affect both consumption and the rate of interest. Taxes enter the picture, Lerner explains, “not as a means of raising money, but as a mean of cutting down private spending.” Private spending is cut down, of course, to make government spending possible, and this transaction must appear in Lerner’s economy as a way of raising money for the government. Aside from this curious kind of “debunking” on the part of Lerner, he offers nothing new in the line of practical proposals as to how the government can take from Paul to give to Peter in order to safeguard its own existence and the existence of the capitalist system of labor exploitation.

True to tradition, the last part of Lerner’s book deals with foreign trade, although present-day “foreign trade” would serve much better as a starting point for any up-to-date work on economics. After all, this is the age of imperialism and world wars, of Nazi “trade” in Russia and Poland, and Russian “trade” in Poland and Germany, and so forth. But along with the Wrigley Company, Lerner has removed the sign “Remember Pearl Harbor” to replace it with the more innocent one “Remember this wrapper.” He is back in the world of chewing gum and ladies’ hose and their marginal utility to the living skeletons of Bombay and the bomb-crazed populations of Europe and Asia. He offers them, with some modifications of course, what he offers the folks at home, that is, plenty of competition and his own Rule to get “the optimum utilization of resources over all the countries taken together.” Perfectly seriously, he writes that “it is not too much to say that any permanent peace among nations, which must avoid the exploitation of any nation by other nations will have to be based on a general agreement to abide by a Rule of the same nature on which our whole analysis is built.” Certainly this is not “too much to say,” because nothing at all has been said by saying it, nothing at all with regard to what a controlled economy actually means in any particular country and in the world at large.