The Failing Dynamo
MAY 01, 1969 by WILLIAM HENRY CHAMBERLAIN
Mr. Chamberlin is a skilled observer and reporter of economic and political conditions at home and abroad. In addition to writing a number of books, he has lectured widely and is a contributor to The Wall Street Journal and numerous magazines.
A modern economy is a complex machine that requires for smooth and efficient operation a powerful smoothly functioning dynamo. The necessary component parts of this dynamo are private property and ownership, willingness to save and invest, wage and salary incentives adjusted for work of differing degrees of skill, diligence, and efficiency and, last but by no means least, a reasonable opportunity to earn a profit. Let all those factors function and a productive, efficient economic operation is assured. Tamper with one or more of them, and trouble is in sight.
There have been many examples of this in modern times, of which the most remarkable, on the favorable constructive side, is the German recovery from the ruin and desolation of World War II. To some extent under the Nazi rule and to an increasing extent after the outbreak of war, Germany lived under a regimented economy. The evil consequences which this always brings to the consumer were, of course, aggravated by unprecedented devastation of the larger cities and towns by air bombardment.
The Germany taken over by the Allies after the surrender in the spring of 1945 was a shambles, the cities in ruins, practically no motor transport except as brought in by the occupation powers, industrial output at a standstill, the only functioning hotels or places of public accommodation being those requisitioned by the Allied authorities.
Most important of all, perhaps, the essential lifeblood of industry and commerce — a currency with some stability of value — had been another war casualty. Nazi finance during the war had been more and more inflationary. And the occupiers, partly by design, partly by negligence, completed what the Nazis had begun, issuing vast quantities of irredeemable and essentially worthless marks.
The result was that during the first years after the end of the war German currency had become, for all practical purposes, as worthless as it was in the great inflation of 1922-23 when a dollar could buy as much as a trillion marks. Since some medium of exchange was necessary, a lively informal substitute was found in cigarettes. A tip in paper marks was scorned, while a gift of a few cigarettes was gratefully received.
Fortunately, the Morgenthau Plan, with its underlying idea of destroying Germany’s mines and heavy industries, was never put into full effect. But enough of its vindictive spirit got into early prohibitions and limitations on industrial output to discourage any reasonable hope of recovery. All the elements essential to the functioning of the industrial dynamo were destroyed; and the Germans, naturally one of the most industrious of peoples, had no real incentive to get back to peaceful labor.
The Curative Power of Freedom Is Demonstrated
It was against this dreary and desolate background that the genius of one man, Ludwig Erhard, Minister of Economics in the reviving German Government, hit on the idea that made possible Germany’s amazing advance, literally, from rags to riches. The idea was to restore the missing dynamo to the stalled economy. First, there was a currency reform, harsh but necessary and inevitable. The substance of the reform was that the one new mark was issued for every 16 old marks. But the old marks were practically worthless and the new marks were real money, good for purchases in stores.
Next came the complete scrapping of rationing and controls. Self-government was being returned gradually and the German authorities were not permitted to change any single fixed price or fixed wage. But there was a loophole; the whole system could be swept away with impunity. Probably it was felt that no German would venture to take such a drastic step. But Erhard was prepared to make this bold wager on the curative power of economic freedom.
When General Clay, military Governor of the American Zone, informed Erhard that all the American economic experts were gravely concerned about the consequences of throwing away such political crutches as price and wage control, Erhard replied: "So are mine." But the economic experiment was allowed to stand and may be largely credited for what was often called "The Economic Miracle."
In the first years, there were moments of touch-and-go; Erhard was obliged to set about promoting the reconstruction of the national economy with painfully thin reserves. A sharp rise in prices seemed to threaten the experiment; some bureaucrats began to dust off old schemes for rationing and price control. But Erhard believed that the free market carried its own cure. As prices rose, so did production. Through the 1950′s, Germany maintained one of the most stable price levels in the world. One victory for the free economy followed another. The Federal Republic began to sweep ahead of the whole of prewar Germany in production and exports. From a country that was virtually bankrupt when its new currency was launched, Germany became a magnet, drawing gold from all over the world because of its consistently favorable balance of payments. The visible standard of living showed steady growth. Germany owes its postwar political stability, so different from the picture of left-wing and right-wing extremism under the Weimar Republic, to Erhard’s logically applied philosophy of a capitalist market economy.
Despite these accomplishments in freedom, a noisy, violent minority of German students express their ingratitude and lack of understanding in current exaltation of primitive communists like Che Guevara and Mao Tse-tung and the denunciations of capitalism and free enterprise.
What’s Wrong with Britain?
While Germany since the war has given the most convincing practical demonstration of the immense creative power of the free market and of the dynamic quality of the profit motive, other countries have moved in a different direction. On repeated visits to Britain since the war, with varying time intervals between them, I have invariably found British economists and publicists concerned with the question: "What’s the matter with Britain?"
The most obvious symptom of what people on the European continent sometimes call "the British disease" is the chronic inability of this country, renowned as the workshop of the world in the early phase of the Industrial Revolution, to square its international accounts, to equalize its balance of payments. Not only has Britain carried out a reduction in the value of the pound from $2.80 to $2.40, but there are frequent rumors that the devaluation dose will have to be repeated, in one form or another. The internationally respected weekly, The Economist, recently came out in favor of a "floating pound," not tied to a fixed rate of exchange. It is easy to imagine the direction in which the pound, in view of its persistent weakness, would almost certainly "float."
While London remains one of the liveliest of European capitals and Britain is a magnet for American and other tourists, symptoms of the "British economic disease" are evident on every hand. Two of the most obvious are the slack, indifferent tempo of work and the frequency with which work is stopped or slowed down, often for the most frivolous causes. On a recent visit I met two English couples who were settling down for residence in their native country after long periods of assignment abroad. Both had remarkably similar stories to tell of the extreme difficulty of obtaining reliable service from carpenters, repairmen, and other workers who were needed for refurbishing houses and apartments. There is a familiar British postwar saying that seems to express the philosophy of these workers: "I couldn’t care less."
An item from a British newspaper speaks for itself:
"Thieves made off one night with a pile of unwatched scaffolding. The police noted that the thieves completed the removal in half the time regular workers would have required for the job."
Another feature of British industrial life is the frequency with which some service is interrupted by irregular or wildcat strikes, often called for such causes as how long the "tea break" should be, members of which union should be entitled to drive screws in a construction job, or some other local issue over which management or the proverbial innocent bystander — the public — can exercise little, if any, control. The economic loss inflicted on the national economy, including the damage to industries not directly affected, is analyzed as follows in a recent issue of The Economist:
"Over 90% of strikes in this country are of the genre known as ‘unofficial’ stoppages, which means that they are generally called without notice by whoever is at that moment the effective holder of power on any particular factory’s floor…. The great majority of strikes in other countries take place at the end of a union’s one-year or two-year or three-year contract…. The industrial disruption caused by such end-of contract strikes is a tiny fraction of the disruption caused in Britain when suddenly — because of some row about a tea break — many motor factories have no brakes to install. That is why Britain has lost more of its national income through strikes in the 1960′s than other industrial countries. The familiar figures purporting to show the opposite deliberately count only man-hours directly spent on strike and not the much more important consequent loss of work through interruption of supplies; they are a blatant British exercise in national self-delusion."
Taxes Kill Incentives
Overshadowing and, indeed, accounting for many other negative aspects of the British economic scene, the low working morale, the frequent irregular interruptions of normal working hours, the slowness of labor and management alike to accept innovations calculated to speed up productivity, is the incentive-killing system of taxation which often leads to counterproductive results.
The famous British historian, Macaulay, once observed that the Puritans objected to the cruel sport of "bear-baiting" not because it gave pain to the bear, but because it gave pleasure to the spectators; and some of this alleged Puritan psychology seems to have entered into the framing of British taxation. (There is no reason for Americans to feel self-righteous on this count; the trend toward skyrocketing costs of Federal, state, and municipal government, unless checked, may shortly find taxes as burdensome in America as they are in Britain today.)
Nothing is more essential to the functioning of the economic dynamo that drives the machine to ever-higher standards of productivity than the element of incentive for all involved in the working process. Such incentives in Britain today have been diminished almost to the vanishing point. There have been cases when wealthy Britons have felt obliged to emigrate in their late years, because their death in Britain would leave their heirs only confiscatory inheritance taxes, or death duties, as the British call them.
Some British films have been high earners of desired dollars and other foreign currencies. But so savage are the levies on high incomes that British film producers will sometimes not go to the trouble and labor of turning out a second film. Workers in factory and mine have little interest in qualifying for more skilled jobs because this means transfer to a higher bracket in taxation. The rewards to management are too small, after taxes, to encourage the maximum effort that would vastly aid the lagging balance of payments.
Britons often express regret over the tendency of young scientists, doctors, and other professional men who contribute so much to a country’s assets to seek greener pastures in the United States, Canada, and Australia. Taxes are not the whole story; superior research facilities and other considerations also play a part. But the lack of adequate material rewards, due largely to excessive taxation, is a most important factor.
Similar Problems in the U.S.
Even occasional glimpses of the sputtering British economic dynamo (further affected by continuous inflation; one British acquaintance remarked: "It would make as much sense to save last year’s snow as the pound sterling.") convey the impression that a vicious circle has been created. The fierce incidence of taxation discourages the extra effort that would enormously improve national productivity and encourages the "couldn’t care less" mentality, affording no help in a struggle to maintain a stable currency and an even balance of payments.
One need not look far to see a similar trend toward those twin evils — government overspending and increasing taxation — in the United States. The Federal tax rate in this country still falls short of the British, although it contains such features, weighted against the saver, as the capital gains tax, undue reliance on direct as against indirect forms of taxation, and the double taxation at the individual and corporation level of sums paid out as dividends.
But the United States taxpayer must reckon on additional pillage at the hands of state and municipal authorities. (For all practical purposes he has lost control of the right to determine the level of his own taxes, one of the primary issues of the American Revolution.) Massachusetts, the state with which I am most familiar, during the last decade has set a record of financial mismanagement which would arouse the envy of the proverbial drunken sailor; and New York and other states which specialize in extravagant "welfare" programs of subsidized idleness are little, if at all, behind.
In Massachusetts, with the merry cooperation of Republican governors and Democratic legislatures, the cost of running the state has trebled within the last ten years. The proceeds of a new tax are exhausted as soon as the levy is imposed; there have been three tax increases in the last four years.
The financial resources of the middle class are becoming exhausted; taxation increasingly removes incentives and discourages production. Unless American taxpayers find some means of curbing the monstrous extravagance of the Federal and state welfare programs, with their false promises of something for nothing, the American economic dynamo, like the British, will sputter and fail.