Freeman

ARTICLE

Private Ownership... A Must

JUNE 01, 1967 by HENRY HAZLITT

EDITOR’S NOTE: Henry Hazlitt, well-known economic journalist and scholar, has written many books, including a novel about the rediscovery of capitalism by a young Russian after all the eco­nomic and political writing of the past, except that of the Marx­ists, has been wiped out. The hero, Peter Uldanov, performs the prodigious feat of recreating by his own mental effort ideas that it has in fact taken generations of great economists to develop and refine.

This novel, originally appearing in 1951 as The Great Idea, was revised and republished in 1966 as Time Will Run Back with a new Preface from which this article is drawn by permission of the publisher.

Time Will Run Back may be obtained from Arlington House, 81 Centre Avenue, New Rochelle, N. Y. 10801. 368 pp., $6.00.

If capitalism did not exist, it would be necessary to invent it —and its discovery would be rightly regarded as one of the great tri­umphs of the human mind. But as "capitalism" is merely a name for freedom in the economic sphere, the theme might be stated more broadly: The will to freedom can never be permanently stamped out.

Under complete world totalitar­ianism (in which there was no free area left from which the to­talitarian area could appropriate the fruits of previous or current discovery and invention, or in which its own plans could no long­er be parasitic on knowledge of prices and costs as determined by capitalistic free markets) the world would in the long run not only stop progressing but actually go backward technically as well as economically and morally — as the world went backward and re­mained backward for centuries after the collapse of Roman civili­zation.

A centrally directed economy cannot solve the problem of eco­nomic calculation, and without private property, free markets, and freedom of consumer choice, no organizational solution of this problem is possible. If all economic life is directed from a single cen­ter, solution of the problem of the exact amounts that should be pro­duced of thousands of different commodities, and of the exact amount of capital goods, raw ma­terials, transport, etc. needed to produce the optimum volume of goods in the proper proportion, and the solution of the problem of the coordination and synchroni­zation of all this diverse produc­tion, becomes impossible. No sin­gle person or board can possibly know what is going on everywhere at the same time. It cannot know what real costs are. It has no way of measuring the extent of waste. It has no real way of knowing how inefficient any particular plant is, or how inefficient the whole sys­tem is. It has no way of knowing just what goods consumers would want if they were produced and made available at their real costs.

The System Breaks Down

So the system leads to wastes, stoppages, and breakdowns at in­numerable points. And some of these become obvious even to the most casual observer. In the sum­mer of 1961, for example, a party of American newspapermen made an 8,000-mile conducted tour of the Soviet Union. They told of visiting collective farms where seventeen men did the work of two; of seeing scores of buildings unfinished "for want of the pro­verbial nail"; of traveling in a land virtually without roads.

In the same year even Premier Khrushchev complained that as of January 1 there were many mil­lions of square feet of completed factory space that could not be used because the machinery re­quired for them just wasn’t avail­able, while at the same time in other parts of the country there were the equivalent of hundreds of millions of dollars worth of machinery of various kinds stand­ing idle because the factories and mines for which this machine was designed were not yet ready.

At about the same time G. I. Voronov, a Communist party Presidium member, said: "Who does not know that the national economy suffers great difficulties with the supply of metals, that the supply of pipes is inadequate, that insufficient supplies of new ma­chinery and mineral fertilizers for the countryside are produced, that hundreds of thousands of motor vehicles stand idle without tires, and that the production of paper lags?"¹

In 1964 Izvestia itself was com­plaining that the small town of Lide, close to the Polish border, had first been inundated with boots, and then with caramels —both products of state factories. Complaints by local shopkeepers that they were unable to sell all these goods were brushed aside on the ground that the factories’ pro­duction schedules had to be kept. Such examples could be cited endlessly, year by year, down to the month that I write this. They are all the result of centralized planning.

The most tragic results have been in agriculture. The outstand­ing example is the famine of 1921­22 when, directly as a result of collectivization, controls, and the ruthless requisitioning of grain and cattle, millions of peasants and city inhabitants died of dis­ease and starvation. Revolts forced Lenin to adopt the "New Economic Policy." But once more in 1928 more "planning" and enforced collections of all the peasants’ "surpluses" led to the famine of 1932-33, when more millions died from hunger and related diseases. These conditions, in varying de­gree, come down to the present moment. In 1963 Russia again suf­fered a disastrous crop failure. And in 1965, this agrarian nation, one of whose chief economic prob­lems in Tzarist days was how to dispose of its grain surplus, was once more forced to buy millions of tons of grains from the West­ern capitalist world.

Problems in Industry

The industrial disorganization has been less spectacular, or better concealed—at least if we pass over that in the initial phase between 1918 and 1921. But in spite of ex­travagant claims of unparalleled "economic growth," Russia’s prob­lems of industrial production have been chronic. Since factory output goals are either laid down in weight or quota by the planners, a knit­wear plant recently ordered to pro­duce 80,000 caps and sweaters pro­duced only caps, because they were smaller and cheaper to make. A factory commanded to make lamp­shades made them all orange, be­cause sticking to one color was quicker and less trouble. Because of the use of tonnage norms, ma­chine builders used eight-inch plates when four-inch plates would easily have done the job. In a chandelier factory, in which the workers were paid bonuses based on the tonnage of chandeliers pro­duced, the chandeliers grew heavi­er and heavier until they started pulling ceilings down.

The system is marked by con­flicting orders and mountains of paperwork. In 1964 a Supreme So­viet Deputy cited the example of the Izhora factory, which received no fewer than 70 different official instructions from nine state com­mittees, four economic councils, and two state planning committees — all of them authorized to issue production orders to that plant. The plans for the Novo-Lipetsk steel mill took up 91 volumes com­prising 70,000 pages, specifying precisely the location of each nail, lamp, and washstand.

Yet in 1964, in Russia’s largest republic alone, deliveries of 257 factories had to be suspended be­cause their goods were not bought. As a result of the consumer’s stif­fening standards and increased in­clination to complain, $3 billion worth of unsellable junk accumu­lated in Soviet inventories.2

Remedial Measures

Such conditions have led to des­perate remedial measures. In the last couple of years, not only from Russia but from the communist satellite countries, we get reports of massive decentralization pro­grams, of flirtations with market mechanisms, or more flexible pric­ing based on "actual costs of pro­duction" or even on "supply and demand." Most startling, we hear that "profits" is no longer a dirty word. The eminent Russian econ­omist, Liberman, has even ar­gued that profit be made the fore­most economic test. "The higher the profits," he has said, "the greater the incentive" to quality and efficiency. And equally if not more miraculous, the Marxian idea that interest represents mere ex­ploitation is being quietly set aside, and in an effort to produce and consume in accordance with real costs, interest (usually at some conventional rate like 5 per cent) is being charged not only on the use of government money by shops and factories, but against the construction costs of plants.

On the surface all this looks in­deed revolutionary (or "counter­revolutionary"); and naturally I am tempted to hope that the com­munist world is on the verge of rediscovering and adopting a com­plete capitalism. But several weighty considerations should warn us against setting our hopes too high, at least for the immedi­ate future.

The "New Economic Policy"

First, there is the historical re­cord. This is not the first time that the Russian communists have veered toward capitalism. In 1921, when mass starvation threatened Russia and revolt broke out, Len­in was forced to retreat into his "New Economic Policy," or NEP, which allowed the peasants to sell their surplus in the open market, made other concessions to private enterprise, and brought a general reversion to an economy based on money and partly on exchange. The NEP was actually far more "capitalistic," for the most part, than recent reforms. It lasted till 1927. Then a rigidly planned econ­omy was re-imposed for almost forty years. But even within this period, before the recent dramatic change, there were violent zigs and zags of policy. Khrushchev an­nounced major reorganizations no fewer than six times in ten years, veering from decentralization back to recentralization in the vain hope of finding the magic balance.

He failed, as the present Rus­sian imitation of market mechan­isms is likely to fail, because the heart of capitalism is private property, particularly private property in the means of produc­tion. Without private property, "free" markets. "free" wages, "free" prices are meaningless con­cepts, and "profits" are artificial. If I am a commissar in charge of an automobile factory, and do not own the money I pay out, and you are a commissar in charge of a steel plant, and do not own the steel you sell or get the money you sell it for, then neither of us really cares about the price of steel ex­cept as a bookkeeping fiction. As an automobile commissar I will want the price of the cars I sell to be set high and the price of the steel I buy to be set low so that my own "profit" record will look good or my bonus will be fixed high. As a steel commissar you will want the price of your steel to be fixed high and your cost prices to be fixed low, for the same reason. But with all means of production owned by the state, how can there be anything but artificial competi­tion determining these artificial prices in such "markets"?

In fact, the "price" system in the USSR has always been chaotic. The bases on which prices are de­termined by the planners seem to be both arbitrary and haphazard. Some Western experts have told us (e.g., in 1962) that there were no fewer than five different price levels or price-fixing systems in the Soviet Union, while others were putting the number at nine. But if the Soviet planners are forced to fix prices on some purely arbitrary basis, they cannot know what the real "profits" or losses are of any individual enterprise. Where there is no private owner­ship of the means of production there can be no true economic cal­culation.

Elusive Costs of Production

It is no solution to say that prices can be "based on actual costs of production." This over­looks that costs of production are themselves prices—the prices of raw materials, the wages of labor, etc. It also overlooks that it is precisely the differences between prices and costs of production that are constantly, in a free market regime, redirecting and changing the balance of production as among thousands of different com­modities and services. In indus­tries where prices are well above marginal costs of production, there will be a great incentive to in­crease output, as well as increased means to do it. In industries where prices fall below marginal costs of production, output must shrink. Everywhere supply will keep ad­justing itself to demand.

But in a system only half free — that is, in a system in which every factory was free to decide how much to produce of what, but in which the basic prices, wages, rents, and interest rates were fixed or guessed at by the sole ultimate owner and producer of the means of production, the state — a decen­tralized system could quickly be­come even more chaotic than a centralized one. If finished prod­ucts M, N, 0, P, etc. are made from raw materials A, B, C, D, etc. in various combinations and proportions, how can the individ­ual producers of the raw ma­terials know how much of each to produce, and at what rate, unless they know how much the produc­ers of finished products plan to produce of the latter, how much raw materials they are going to need, and just when they are go­ing to need them? And how can the individual producer of raw ma­terial A or of finished product M know how much of it to produce unless he knows how much of that raw material or finished product others in his line are planning to produce, as well as relatively how much ultimate consumers are go­ing to want or demand? In a com­munistic system, centralized or de­centralized, there will always be unbalanced and unmatched pro­duction, shortages of this and un­usable surpluses of that, duplica­tions, time lags, inefficiency, and appalling waste.

Private Property the Key

It is only with private property in the means of production that the problem of production becomes solvable. It is only with private property in the means of produc­tion that free markets, with con­sumer freedom of choice and pro­ducer freedom of choice, become meaningful and workable. With a private price system and a private profit-seeking system, private ac­tions and decisions determine prices, and prices determine new actions and decisions; and the problem of efficient, balanced, co­ordinated, and synchronized pro­duction of the goods and services that consumers really want is solved.

Yet it is precisely private prop­erty in the means of production that communist governments can­not allow. They are aware of this, and that is why all hopes that the Russian communists and their satellites are about to revert to capitalism are premature. Only a few months ago the Soviet leader, Kosygin, told Lord Thomson, the British newspaper publisher: "We have never rejected the great role of profits as a mechanism in eco­nomic life… [But] our underly­ing principle is inviolate. There are no means of production in pri­vate hands."3

The communist rulers cannot permit private ownership of the means of production not merely because this would mean the sur­render of the central principle of their system, but because it would mean the restoration of individual liberty and the end of their des­potic power. So I confess that the hope that some day an idealistic Peter Uldanov, miraculously find­ing himself at the pinnacle of power, will voluntarily restore the right of property, is a dream like­ly to be fulfilled only in fiction. But it is certainly not altogether idle to hope that, with a growth of economic understanding among their own people, the hands of the communist dictators may some day be forced, more violently than Lenin’s were when the mutiny at Kronstadt, though suppressed, forced him to adopt the New Economic Policy.

Yet any attempt to decentralize planning while retaining central­ized ownership or control is doomed to failure. As a recent writer ex­plains it:

If the state owns or controls the major resources of the economy, to allow for local autonomy in their utilization invites utter chaos. The Soviet planners, then, are caught on the horns of a serious dilemma. They find that their economy is becoming too complex and diverse to control minutely from above; yet they can­not really achieve the tremendous productiveness of a decentralized economy without relinquishing com­plete ownership or control of the na­tion’s resources.4

 

—FOOTNOTES—

1 See New York Times, Oct. 29, 1961.

2 For the foregoing and other ex­amples, see Time, Feb. 12, 1965.

3 New York Herald-Tribune, Sept. 27, 1965.

4 G. William Trivoli in National Re­view, March 22, 1966.

 

***

Inflation Erodes Investment

Inflation reduces the value of financial assets such as savings accounts, bonds, pension plans and insurance policies. These in­vestments have a constant face value, and rising prices mean the dollars a person gets back will buy less than the ones he put in. Inflation, therefore, tends to shift purchasing power from these investors, who are essentially lenders, to borrowers.

The notion once was popular that lenders were usually rich and borrowers often poor. If this idea ever were true, it is no longer valid in these affluent times. Surveys show that every income grouping of individuals — even the lowest — now has more finan­cial assets than indebtedness. Put another way, every income group is a net lender, on the average, and thereby stands to lose purchasing power through inflation. Who are the "poor" debtors who stand to gain? All levels of government rank high among them.

It would be disastrous if inflation caused a reduction in the amount of money saved and invested in new or expanded factories, offices, farms, and stores. This process is the mainspring of eco­nomic growth and, because of modern technology, requires huge amounts of extra funds every year.

From Inflation and/or Unemployment by Lawrence C. Murdoch, Jr., Federal Reserve Bank of Philadelphia.

ASSOCIATED ISSUE

June 1967

ABOUT

HENRY HAZLITT

Henry Hazlitt (1894-1993) was the great economic journalist of the 20th century. He is the author of Economics in One Lesson among 20 other books. He was chief editorial writer for the New York Times, and wrote weekly for Newsweek. He served in an editorial capacity at The Freeman and was a board member of the Foundation for Economic Education. 

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