The Economics of the Future

Lying at the basis of most of the difficulties of our twentieth-century society, including revolutions and wars, has been the failure of the industrial system to provide full employment. Leo Cherne in “The Rest of Your Life” warns us that this problem has not been solved by the war. Professors Ayres and Lerner, writing in a more scholarly vein, seek to demonstrate that the problem cannot be solved until we overhaul our economic theory and its resultant beliefs. These three discussions of the basic problem are aimed at different audiences. Any reader will enjoy the lively Cherne book even though he may violently disagree with some of the guesses. Professor Ayres writes for the serious reader with some background of philosophy and economics; whereas Professor Lerner will be readily understood only by the professional social scientist.

“The Rest of Your Life” is a bold attempt to predict conditions in the post-war world. “On the first day after the armistice,” Mr. Cherne promises “two keys to the future will already be available. The first and most important will be that the war will have solved no basic probems. As a matter of fact it will have made a good many of them more complicated. . . . The second clue is . . . a growing gap between attitude and action. This gap is the difference between what we believe and what we do. And more often than not there is a real conflict between the two.”

Using these two clues and their corollaries he ruthlessly disillusions the reader concerning the immediate future of the United States. Some of the difficulties which are not likely to be solved arise from the psychological effects of war. “For the next decade we are accumulating an overdose of apathy, callousness, and lassitude in this decline of the spirit. If the world is rotten, let it rot. The philosophy of ‘take what you can whenever and wherever you can’ will gain new recruits.” Other difficulties will remain unsolved because of the split between beliefs and actions. Nothing effective will be done to provide for immediate full employment because of the belief that private industry should handle the situation. The full capacity of the economy will not be used because of the fear of government enterprise.

The recent conditioning of the American people provides added grounds for pessimism. “Had the American people not gone through the great depression of the thirties, the prediction might be otherwise. The next four years would probably be years of great inflation, high production, and speculation, almost full employment. But the naivete is gone. We’ll all ‘wait and see’—remembering unemployment as a burned child fears the flame.” The winter of 1946, he thinks, will probably mark the most severe period of the crisis, and only government spending will cure it. At that point new economic theories will have to be recognized, and private enterprise will have to accept the government as “an ally” in producing employment. “America will have changed some of its basic concepts in its struggle with the problem that dogged every step of our pre-war years, and that hung like a grim shadow over the land even with the first rays of peace.”

If America changes its economic concepts under the conditions and in the direction that Mr. Cherne suggests, Professors Ayres and Lerner will be among the respected prophets of the new order. While Mr. Cherne simply notes the future possibilities, they explore the reasons for these developments, and suggest similar, but more fully elaborated cures.

The essence of Professor Ayres’ argument in “The Theory of Economic Progress” is that technological change established the institutions of capitalism, and technological change will modify those institutions now that they are no longer suitable to its needs. Mr. Cherne’s recognition of the conflict between what we believe and what we do is explained as the age-old conflict between technological and ceremonial behavior that has reached an acute stage in our society because of the failure of the ceremony to fit the basic needs of the situation. We are depending upon what Veblen called “ceremonial adequacy,” meaning the determination of competence by ritual rather than technological demonstration. “It is this opposition which is our primary concern, and especially as it effects the development and conduct of the industrial economy. In that process the ceremonial behavior system is opposed to technological activity in this sense, that whereas technology is of its own character developmental, the ceremonial function is static, resistant to and inhibitory of change.”

Philosophically, the way out of this conflict is to adopt John Dewey’s instrumentalism. According to Professor Ayres, we must recognize that there are not ideal ends for which everyday life is but a means, but that ends and means are all one. Our ceremonial ends must continuously be altered to fit the nature of the changing technological means. Truth must not be viewed as an unchanging abstraction, but merely as a series of statements that satisfactorily explain a given situation.

In the field of practical economics, a substitution of means that will provide full employment for the abstract “truths” of classic value theory is the basic need. War and unemployment are the result “of the fundamental defect of the capitalist system: deficiency of consumer purchasing power.” Corrective means must take the form of government-initiated redistribution of income that will increase and control purchasing power. He contends that such government “interference” will not stifle “free enterprise,” if this term is properly understood. Free enterprise should mean freedom of choice between many occupations. This freedom is a product of industrialism. “So long as technological development continues, no amount of ‘regimentation’ can prevent the emergence of new occupations and the consequent enlargement of the occupational opportunities open to the community.”

In “The Economics of Control” Professor Lerner’s theoretical analysis of the possible functioning of a “controlled economy” is a more technical discussion of these new ideas that represent what is perhaps the first fundamental change in “classic” economic theory since the days of Smith and Ricardo. Classic laissez-faire had no place for government within its complete structure of economic laws. Government was supposed simply to provide the order and security necessary for the free functioning of economic man. When Government conducted its own business, it was assumed that, despite its sovereignty, it obeyed the same “laws” as private institutions.

Professor Lerner and other like-minded disciples of Lord Keynes are in effect putting Government into the classic system as a continuously active force that obeys different laws from those controlling private institutions. The element of sovereignty, particularly as it controls taxation and spending, is the primary factor that frees Government action from the laws of the market. Very ingeniously Professor Lerner shows that under present technological conditions the classic laws of the market can only operate properly under a higher degree of government control. Only Government can bring about the pressures necessary to establish prices that will equate maximum supply and demand or, more exactly, make Marginal Social Benefit equal Marginal Social Cost. Only it can insure the new enterprise necessary for full employment. In a word, Government can be the ideal stabilizing factor that the classic system always lacked.

The Government can act in this way by enforcing this fundamental rule: “If the value of the marginal (physical) product of any factor is greater than the price of the factor, increase output. If it is less, decrease output. If it is equal to the price of the faetor, continue producing at the same rate.” (For then the right output has been reached.) The Ministry of Economic Planning, by appropriate orders to plant managers, would see to it that the “Rule” was carried out. Any monopolistic interference with the best use of goods would be met by a Board of Counter Speculation, that would determine the proper competitive price and guarantee it to all buyers or sellers as the case might be.

As in the case of the other two writers, Professor Lerner sees government spending as a necessary corrective for unemployment, but he presents more detailed theoretical analyses of how such policy should operate. Functional finance, as he calls his approach, would disregard budget balancing, per se, or the size of the national debt. When there was a trend toward increasing unemployment, taxes would be reduced and government spending increased; when a trend toward a speculative boom occurred, the reverse procedure would be used. Using this system, the national debt would presumably not increase to any considerable ex-’ tent; but if technological changes should force prolonged government expenditure in excess of taxes, it would be unimportant, since the service charges on domestically held government debt are owed by the people to themselves, and hence their collection and payment is simply a matter of income distribution—a monster bookkeeping operation.

Vested ideas have proven far more difficult to alter than material situations. It may be many years before practical politicians and business administrators accept the theorizing of Professors Ayres and Lerner, even though as practitioners they employ many of the recommended techniques. The history of the New Deal has demonstrated the lack of any clear philosophical understanding of the new economic relationships. But to this reviewer, these scholars, and the men of similar views who have such great current influence in Great Britain, are in the vanguard of a major advance in economic theory. They are working out the means by which capitalism may avoid succumbing to either socialism or fascism.