All Commentary
Thursday, December 1, 1960

Economic Growth–Reality and Mirage

Mr. Chamberlin, noted author and speaker on political and economic affairs, has observed at firsthand the conditions of growth on either side of the Iron Curtain.

The supposed necessity of forcing a more rapid rate of growth for the American national economy is one of the two main talking points of the statists and planners at the present time. The other is the idea that too little money is being spent for public purposes, that Americans are undertaxed and don’t know how to spend their money wisely anyway, so that it will be all the better for them if an all-wise and omnicompetent government relieves them of much of the task of deciding how to spend, or save, what they earn.

There has been much play with the idea that we are in a produc­tion race with the Soviet Union, that our very national survival depends on winning this race. But this whole idea of an economic race between two countries with profoundly different social and economic systems, ideals, and goals is far more complex than it is to determine who won a hun­dred-yard dash. The complexity is enhanced because Soviet methods of economic computation are highly suspect to most foreign economists who have studied the subject. And their suspicions re­cently received confirmation from an unimpeachable Soviet source.

One of the oldest Soviet econ­omists, S. G. Strumilin, in an es­say on “Investment Effective­ness,” recently received in this country, admits that official Soviet figures on industrial growth are unreliable because of the practice of double counting. For instance, in estimating over-all Soviet indus­trial output, sheet steel is counted twice, first when it emerges from the factory, second when it is used in trucks or other manufactures requiring steel.

Economic growth is certainly desirable, just as health is desir- able for the body. But growth that is stimulated by inflation may be a deceptive mirage, as is growth that ignores such important ele­ments as quality of output and free consumer choice. This is why the very considerable increase in Soviet industrial output which has taken place in the last forty years (and could have been naturally ex­pected in a country of Russia‘s size, population, and natural re­sources, regardless of the econ­omic system) has had so little vis­ible effect on the standard of liv­ing of the Russian people.

The experience of the United States shows that steady growth on an ever expanding base is the normal condition of an economy that is still, despite much state in­terference and distortion, pre­dominantly private in ownership and incentives. Real gross national product over the period 1909-1957 grew at an annual compound rate of 2.9 per cent a year. This rate was somewhat stepped up, to 3.8 per cent, between 1948 and 1957.

Of course, the increase in popu­lation made the figures of per capita growth somewhat smaller, 1.5 per cent for 1909-1957, 2 per cent for 1948-1957. However, the upward trend is unmistakable and completely explodes the Marxist gloom-and-doom theory that the rich are predestined to become richer and fewer, while the poorbecome more numerous and poorer.

It is noteworthy that some of the most conspicuous successes in solving social and economic prob­lems have followed the application of the method of economic free­dom, while state intervention has led to some of the biggest fiascos.

A Solution to Poverty

John Steinbeck’s novel, The Grapes of Wrath, dramatized the plight of the “Okies,” Oklahoma farmers who were impoverished as a result of a prolonged drought. Under a statist regime the Okies would probably have been “di­rected” to go to work elsewhere. Under a free system many of them piled into their battered cars and took off for California. In the beginning, as Steinbeck’s novel showed, the going was hard. But the saga of the Okies had a happy ending, which has not been so much publicized. They were easily absorbed into aircraft, oil, and other industries and are now mostly solid citizens of California.

The same thing, on a larger scale, occurred in Germany. Since the war ended, some twelve million Germans and people of German stock either were forcibly expelled from their homes and dumped pen­niless into the German Federal Republic or fled from political op­pression and economic lack of opportunity in Soviet-ruled East Germany. This means that more than one out of every five of the citizens of the Federal Republic is an expellee or a refugee. The problem of absorption created all sorts of initial difficulties, crowd­ing for the older inhabitants, job difficulties for the newcomers. In this case a plausible case might have been made for some compul­sion. But the West German au­thorities remained true to their principle of economic freedom.

They did what was possible to help the refugees help themselves and find a new start as workers, farmers, owners of small indus­tries. But they never said to them: “So many of you must go here, so many there.” And the result has brilliantly vindicated the reliance on individual initiative. Many of the refugees are to be found in leading positions. By their hard work they became pacemakers for the other Germans. To a consider­able extent they replaced Ger­many‘s war casualties. Today Germany‘s problem is not one of unemployed, unhappy refugees; it is one of shortage of labor.

A Colossal Failure

On the other hand, one of America‘s biggest and costliest ex­periments in government inter­vention, the attempt to maintain prices of many farm products atprice levels above the market, has been a resounding failure from every standpoint. Farmers remain dissatisfied; taxpayers are mulc­ted; consumers are robbed; there is resentment in Canada and other countries which are trying to mar­ket their crops on a commercial basis.

Another striking example of the folly and harmfulness of govern­ment intervention in the free mar­ket is the practice, more wide­spread in Europe than in the United States, of rent control. The result of this experiment, which amounts in many cases to out­right expropriation of the owners of rental housing, is that deterio­ration of housing and difficulty in finding new apartments are in di­rect proportion to the severity of the rent control. (Its conse­quences are to be seen at their worst in France where the depre­ciation of the currency has re­duced the real value of rents to virtually zero. The natural conse­quence is stagnation in the pri­vate building market and an al­most complete neglect of upkeep of apartment houses which yield no revenue to their owners. The European country where there is no housing shortage is Belgium, which took the sensible and logical step of abolishing rent control some years ago.)

So, while growth in an economy is certainly desirable, some con ditions and qualifications must be laid down, if desirable growth is not to degenerate into undesirable “growthmanship,” a mere playing with figures, a mirage and a de­ception. After all, as Mr. W. Allen Wallis, special assistant to Presi­dent Eisenhower and executive vice-chairman of the Cabinet Committee on Price Stability for Economic Growth, very sensibly said in a recent address:

“Growth is not an end in itself. We do not live to grow; we grow to live better. And we do live bet­ter, not only by consuming better, but also by working under better conditions…. A unique feature of our economic growth has been the broad sharing of progress among all groups. We represent the nearest approach to a classless society.”

Healthy Growth

Growth is healthy when it re­sponds to genuine demand and satisfies human needs. It is un­healthy and deceptive when it is undertaken by the fiat of state planners or when it receives the narcotic stimulus of currency in­flation, which robs the people of their savings and leads in the end to far worse difficulties than those against which it is sometimes mis­takenly invoked as a quack remedy.

Overproduction in general can­not occur, provided that the free market is permitted to function normally—a condition that is, alas. seldom realized in modern times. But a mature and productive econ­omy like the American can con­ceivably turn out more of some particular commodity than home and foreign markets can absorb. None in America, for instance, goes hungry for lack of bread or other wheat products. It is merely silly to force the growth of un­usable agricultural surpluses or industrial goods for which there is no market. The remedy for such situations is to shift to other more profitable forms of production.

One of the considerations that makes comparisons between Amer­ican and Soviet growth rates so misleading as to be downright fu­tile is the very different levels of output on which the economies are operating. For instance, United States output of passenger cars is about 6 million a year, as compared with about 100,000 in the Soviet Union. So a Soviet “growth” of 100 per cent would be the equivalent of an American growth of less than 2 per cent.

Other factors that should make for a fairly high Soviet growth rate and that do not apply to the United States may be noted. Hav­ing stinted their people in con­sumer goods for four decades, the Soviet government has no reason to fear saturated needs of such goods. Masses of Russians are be­ing transferred from agriculture, with its low productivity, to in­dustry, with its higher value of output. The Soviet Union is able to take advantage of technology that has been developed in other countries. As Mr. Wallis puts it:

“In other words, Russian growth is more rapid because they are still in the area where im­provement is easy and the way has been shown, whereas we are more heavily involved in the dif­ficult tasks of expanding produc­tivity in medicine, journalism, education, engineering, and other services. There is no possibility that the Russian economy will overtake ours at any time in the visible future, certainly not in this century.” (Italics supplied)

Much of the oratory of those who are concerned with increas­ing the American rate of economic growth contains more heat than light, more insistence on the end than specific consideration of the means. Insofar as recommenda­tions in this field are more or less specific, they tend to run to “pump-priming” or inflationary devices, to be counteracted by price and wage controls. The whole recipe seems calculated to sound the death knell of a free economy.

Political Barriers to Progress

There are measures which would be calculated to increase growth, but these measures are not polit­ically popular. It is a matter of common observation that the coun­tries which “plow back” large shares of output into investment have the fastest rate of growth. Germany is a good example of a country that is investing much and growing fast, while Great Britain shows the opposite trend in both respects. The American practice of high graduated direct income taxation is not favorable to growth, because it siphons off for federal, state, and local gov­ernment needs much of the capi­tal that would otherwise be avail­able for reinvestment.

The huge annual expenditure on subsidies and storage charges for the supposed benefit of the farm­ers is an example of misdirection of financial resources. If this whole fantastic program for the taxation of the whole community for the benefit of one section were swept away, the big farmers who get most of the subsidies would still be able to make a profit, more of the marginal farmers would go into manufacturing and service industries, and large sums of money which are now simply wasted would be available for fi­nancing new expansion projects.

Still another aid to growth would be the maintenance of a reasonable relationship between wage increases and improvement in productivity. It is the countries where the trade unions have been most restrained and moderate in their demands, Germany and Switzerland, which show the best results in booming foreign trade and full employment.

“Cures” that Kill

But, since economically sound moves are not believed to possess the greatest appeal to voter pres­sure groups, the danger is that any legislation designed to pro­mote growth may be framed along the wrong lines. It might more or less without conscious intention and desire carry us back to a war economy where price control tem­porarily and partially offset infla­tion and the shortages and im­balances in the market were sup­pressed by rationing of consumers and controls over manpower and materials. This war economy is al­most indistinguishable from the Soviet normal peace economy; and this goes far to explain such So­viet progress, lopsided and unbal­anced though it is, as has actually taken place. As Henry C. Wallich, Yale economist, member of the President’s Council of Economic Advisers, and author of one of the best analyses of the German “eco­nomic miracle,” says in his stimu­lating little book, The Cost of Freedom:

“If we were prepared to restrict the consumer, control prices, wages, materials, and manpower, and if nothing counted but an in­crease in output —with the gov­ernment as the principal customer —we might generate growth enough to outgrow the Russians.

Our economy would also have be­come so like theirs, however, that the meaning of the competition would have vanished.” (Italics sup­plied)

Mr. Wallich goes on to point out that only a dictatorship could op­erate a centrally controlled econ­omy, run with ruthless disregard of the consumer —a perfect defini­tion, incidentally, of the Soviet economy.

In short, economic growth that is the result of individual invest­ment and normal market demand is both healthy and, if one may judge from past historical experi­ence, quite assured. Efforts to force growth by government ac­tion unrelated to real consumer needs and to the volume of genu­ine savings must be viewed with considerable suspicion and mis­giving, as pointing to the intro­duction of permanent state con­trols and creeping socialism.

  • William Henry Chamberlin (1897-1969) was an American historian and journalist. He was the author of several books about the Cold War, Communism, and US foreign policy, including The Russian Revolution 1917-1921 (1935) which was written in Russia between 1922-34 when he was the Moscow correspondent of The Christian Science Monitor.