All Commentary
Friday, January 1, 1971

The Creative Thrust of Capitalism


Mr. Rukeyser is well known as a business con­sultant, lecturer, and columnist.

While the unaware and the fan­tasy builders have been gleefully pointing to the imminent decline of capitalism, the world of reality in Southeast Asia, West Germany, and elsewhere has since World War II demonstrated the enor­mous potentials of the open mar­ket free choice system in accel­erating productivity.

On my recent visit to the Ori­ent, I was struck with the potency of ideas and philosophy in im­proving hitherto meager levels of material well-being. Certainly Taiwan, Hong Kong, South Korea, Singapore, and even Japan are without large natural resources, but the industriousness of their work force under improved man­agement and increased foreign in­vestment have delineated the complex factors that make for accelerated growth.

The secret success ingredients have included the introduction of better methods and increased use of capital goods—labor-aiding machinery—under conditions that enlarge individual freedom of choice and incentives. Such dis­ciplines as improving technology, increasing capital investment, and introduction of new management techniques stand in sharp contrast with the effortless panaceas sugar­coated with labels of “liberalism” and socialism. Socialism’s appeal is based largely on emotional fac­tors rather than on relative per­formance in achieving better liv­ing under competing systems.

If little Taiwan is used as a microcosm for fact finding, it be­comes clear that there are broadly two approaches to problem solv­ing. One is the purely demagogic approach of ignoring costs and individual preferences and assur­ing perpetuation of even unwanted activities through the “miracle” of subsidies. If, by way of illustra­tion, railroad labor, material, and tax costs are out of line with revenues, the easy solution lies in clamoring for subsidies. Sim­ilarly, if arbitrary lifting of con­struction wages far out of rela­tionship to productivity results in prohibitively high costs, the “remedy” is for the state to sub­sidize the operation. Yet the per­sistent use of such uneconomic approaches in New York City and elsewhere, in the face of historic frustration, has been to deteri­orate real estate and cause much needed new housing construction to be stillborn. Making the land­lord stand between the home renter and inflation has caused unthinkable shortages and human degradation. But the uninformed, seeking scapegoats, fail to see that those who insist on rent ceil­ings without corresponding ceil­ings on costs are in the position of the man who murdered his father and mother and then pleaded for clemency on the ground he was an orphan.

Consequences of Intervention

The chaos in real estate is not a testament to weaknesses of the free market. On the contrary, it springs from decades of bureau­cratic interference with the op­eration of a free market.

Such approaches are self-defeat­ing. The Republic of China on the island of Formosa turned from such folly. It acts on the belief that progress lies in technological improvements which cut costs through improved productivity. It takes creative talent for inno­vators to devise methods for mak­ing two blades of grass grow where but one grew before, but political hopefuls persist in pon­tificating that we’ll subsidize you if you can’t get costs down to a level customers are able and will­ing to pay. The providers of sub­sidies are being liberal with other people’s money. They interfere with the essentials of a competi­tive system in which the customer is the boss. By buying or with­holding orders, the consumer in a free economy decides what should be produced, in what quan­tities and according to what spec­ifications. When there are subsi­dies, however, government forci­bly steps in and weakens the capacity of the customer to disci­pline the businessman. Instead of resting the survival of an enter­prise on pleasing potential buyers, the inefficient hope to get by through pressuring politicians. When the businessman recoups part of his costs out of levies by government on the taxpayers, the customer is weakened in his sov­ereign rights at the market place.

Instead of facing the discipline of innovating or perishing, the inefficient producer rests on his laurels and hopes to live on the crutch of subsidies. But this makes everyone poorer, since in­efficiency and waste are thus socialized, not eliminated through new and improved techniques.

The creative energy inherent in economically prudent operating principles has caused a growth rate in Taiwan (Formosa) far above the 5 per cent a year target set by the U.N. for emerging un­derdeveloped nations. Taiwan had been handicapped by fifty years of stagnation under Japanese over­lords. Only 25 per cent of its scarce land—about 2.3 million acres—is arable; and industry fifteen years ago was primitive. Personal incentives under the Chiang Kai-shek regime were heightened by the sale of govern­ment owned land to farmers.

Taiwan vs. Mainland China

With massive economic aid from the United States which came to an end in 1965, Taiwan with its forward thrust in farm­ing and in commerce and industry, has become a yardstick for meas­uring the high cost on the Chi­nese mainland of operating there in accordance with Leninist-Marx­ist doctrine.

Since 1953, the Republic of China (Taiwan) reports an an­nual increment in economic activ­ity of 8 to 10 per cent, while the mainland was stagnating. Para­phrasing Marie Antoinette’s “Let ‘em eat cake” at the time of the French Revolution, the mainland communists were in effect telling their underfed people: “Let ‘em eat propaganda.”

More impressive than the im­perfect statistical information about mainland China has been the eagerness of its nationals to escape, as evidenced by the num­ber of people pressing to get into Hong Kong, whose population rose from 600,000 at the end of World War II to in excess of 4,000,000. Meanwhile, per capita income in Taiwan rose from a bare $43 in 1952 to $258 in 1968.

In agriculture, if 1952 is taken as 100, production of farm prod­ucts in Taiwan in 1969 had grown to 226. While the total area culti­vated increased only two or three per cent, the yield per acre was doubled. The intensification re­sulted not only from technical farming procedures, but also through land reform, better farm credit facilities, and rural elec­trification. So impressive have these gains been that the Taiwan Government has recently been sending out at its own expense technical missions to emerging countries in Africa, Latin America, and elsewhere to demonstrate how to fight hunger by producing more on available farm acreage. The results reflect a consolidation of many changes, including pest control, crop rotation, mechani­zation on farms, and better moti­vation of farmers. Principal crops include rice, wheat, soybeans, sweet potatoes, and vegetables, and the little island nation also produces peanuts, sesame, pine­apples, and sisal. As a result, Tai­wan has not only become self-sufficient in food, but actually ex­ports some.

In industry since 1952, the an­nual rise has been 14.2 per cent and in manufacturing 15.1 per cent. Despite the sharp percentage gain in wages, labor rates and living standards are still low—not only by U.S. and Western European standards, but also in comparison with Japanese levels. Japan has been experiencing a labor shortage, and has diverted some of its industrial production to Taiwan, South Korea, and else­where, where labor has been more abundantly available. Japan and the noncommunist nations in Southeast Asia, including Hong Kong, and Singapore, have suc­ceeded with negligible natural resources. The countries import raw materials and export finished goods. Originally they traded primarily on low labor costs, but with the rise in prosperity there has been a partial narrowing of the gap between Southeast Asian labor costs and those in the West. Such emerging competition poses new problems for the United States; we can no longer ignore high money wage rates here on the ground that we possess unique means of offsetting them through technology. Japan and its neigh­bors have adopted sophisticated technology.

Investment Makes the Difference

Taiwan has gone in diametri­cally the opposite direction from collectivization in mainland China. This is evidenced by the fact that private enterprises in Taiwan have grown 14-fold over the last 18 years, whereas governmental economic operations there, in­cluding enterprises formerly owned by the Japanese and turned over to the government, and pow­er, railway, highway, ports, and communications—all in the pub­lic sector—have meanwhile mul­tiplied only 5 times.

In contrasting the approach in Taiwan with that of mainland China, a spokesman for Taiwan said: “Communist China has al­ways been against ‘material in­centives,’ although small doses of such rewards existed both in agri­culture and industry. The ‘Cul­tural Revolution’ tried to eliminate even these small doses, but re­cently there has again been less denunciation of material rewards which seems to indicate that some enterprises are again resorting to this ‘reactionary’ practice.

“The low productivity in China is also due to lack of investment capital.”

Republic of China officials as­sert that the island nation is now internally generating enough cap­ital to finance its continuing de­velopment.

The earlier strides made in Taiwan were made possible not only by better management meth­ods and better disciplined workers but by capital formation. This was set in motion by investment by foreigners, including Chinese liv­ing overseas. These figures, sup­plied by the Taiwan Government, show the trend:

FOREIGN INVESTMENTS BY COUNTRY

(Expressed In units of $1,000-U.S. Currency)

 

Year

United States

Japan

Others

Total

1953

1,881

160

2,041

1954

2,028

14

50

2,092

1955

4,423

4,423

1956

1,009

1,009

1957

11

37

48

1958

1,116

1,116

1959

100

45

145

1960

14,029

309

14,338

1961

4,288

1,301

375

5,964

1962

738

2,664

639

4,041

1963

8,734

1,397

216

10,347

1964

10,223

728

916

11,867

1965

31,104

2,081

1,955

35,140

1966

17,711

2,447

746

20,904

1967

¹5,726

15,957

7,005

38,688

1968

34,555

14,855

4,035

53,445

1969

27,882

17,642

36,697

82,221

TOTAL

174,442

60,753

52,634

287,829

 Progress Abroad Matched by Deterioration at Home

While there have been new laboratory demonstrations since World War II in Japan, Southeast Asia, West Germany, Republic of South Africa, and elsewhere of the vitality of the free market and the competitive system, there has been in the United States, the world’s traditional showcase of free enterprise, an increased tend­ency to whittle away at the system.

Right now, after giving lip service for more than a genera­tion to freer international trade, this country, under the pressure of rising competition from Japan, West Germany, and elsewhere, has been reversing policy and discuss­ing the achievement of salvation through restrictive quotas rather than through establishing better technology which would enable Americans to hold their own with­out artificial props.

After World War I, fear of the foreigner resulted in increased im­migration restrictions in this country, with rigid quotas. This was done to save the relatively well paid jobs of domestic work­ers. But capital is international, and, while the movement of men was restricted, capital flowed across boundaries. Through direct investment American companies opened their own facilities in for­eign labor markets. Thus, there was leakage in the primitive ef­fort to preserve jobs on a basis other than competitive efficiency.

Now, in face of the hazard of pricing ourselves out of markets, there has been talk in the House Ways and Means Committee of setting import restrictions on shoes, textiles, and other products. But, even if such quotas would temporarily appear to do the job, they would tend to lead to blind alleys. If Japan, for example, is restricted on shipping textiles to the United States, its enterpris­ers will strive for survival through capturing a substantial part of the foreign markets to which American firms are still exporters.

The prime objection to seeking salvation by restraining the free­dom of the marketplace is that it diverts attention from real prob­lems. The basic issues are the need­ed changes in U.S. technology, laws, collective bargaining pro­cedures, relations between govern­ment and business, and in man­agement policies to heighten effi­ciency in making and distributing goods and services. Certainly the inflationary policy of the Federal government and the class bias in the labor-management laws can­not be swept under the rug. In his State of the Union Message two years before he retired, President L. B. Johnson, while giving a goodie to the unions in recom­mending repeal of Section 77B of the Taft Hartley Act assuring freedom of the states to pass right-to-work laws, significantly suggested a review of the whole field of labor-management legisla­tion. The concepts in existing Fed­eral labor-management laws are obsolete and reflect the depression-bred fears of 1935 when the Wag­ner Act was passed. The need is to let economic forces operate through the open competition of the unhampered market.

 

***

The Methods of Capitalism

AMONG the “less developed” countries, as the term is most often used, almost all have at least one thing in common. They are countries that desire capital but have not yet put into practice the methods of capitalism.<