Socialism and International Economic Order

SOCIALISM
AND INTERNATIONAL
ECONOMIC ORDER
By
ELISABETH L. TAMEDLY
The CAXTON PRINTERS, Ltd.

CALDWELL, IDAHO
1969
© 1969 BY
ELISABETH L. TAMEDLY
Library of Congress Catalog Card No. 69-11702
Printed and bound in the United States of America by

The CAXTON PRINTERS, Ltd.
CaldwelL Idaho 83605
110400
To my mother and O.R.
FOREWORD
THE CREATION OF AN efficient institutional framework for regu-

lating international economic relations is one of the fundamental
concerns of economists. Theorists and practitioners recognize
that international trade has been one of the major sources of
economic well-being; they know that no state can renounce such
a wealth-generating activity. Yet, the increase of obstacles to
the interchange of goods and services between nations since
1914 has led to what is generally termed economic disintegra-
tion.
A great deal of literature undertakes to describe and analyze
these various obstacles. However, little effort has been devoted
to the investigation of the fundamental causes of economic dis-
integration—causes that can only be explained by theories and
philosophies that engender changes in the internal economic
and political orders of nations. This study is an inquiry into
these fundamental determinants of international economic co-
operation.
These determinants will be more easily understood if the
primary characteristics of an international economic order are
examined. Two such characteristics can be distinguished. The
first concerns relationships among individuals residing in dif-
ferent areas of the world who deal with each other on the basis
of private interests. Clearly, the problem of their economic in-
tercourse on a worldwide level is essentially identical to that
with which any restricted community is faced. This problem
has been solved in the past by the establishment of private law
which delineates certain minimum standards of behavior and is
enforced by the community.
The second aspect of the problem is inherent in the exist-
ence of sovereign national states. For centuries, men have at-
tempted to devise a system of international law that could sub-
viü FOREWORD
ject states, as private law subjects individuals, to the rule of
commonly accepted codes and to the judgments of an interna-
tional arbitration agency in cases of disputes between national
governments. All these systems have been frustrated by the fact
that the creation of an international coercive force which would
automatically enter into action when any state refused to com-
ply with the provisions of international law has been regarded
as an inadmissible interference with sovereignty. Even univer-
sal and compulsory recourse to a supranational court is usually
rejected on the same grounds.
Intergovernmental relations therefore have a fundamentally
anarchic character. Ultimately, of course, they, too, constitute
human relationships, but with the difference that they are based
not on a convened standard of right and wrong, but on power.
It is a country's political and military strength, on the one hand,
and the political and military strength of its opponents, on the
other, that form both the basis and the limit of national aspira-
tions. The last resort is war which, as Karl von Clausewitz said,
is "nothing but the continuation of state policy with other
means."1
It follows that the theory of international economic order is
concerned with two basically different types of human relation-
ships: those that belong to the private sphere of the individual
and which are amenable to the rule of law—the "dominium"—
and those that are backed by sovereign national power—the
"imperium" (W. Röpke). The essential question to be an-
swered by this theory is whether, and how far, the element of
order in international relations can be extended over the ele-
ment of arbitrariness; the prevalence of peace and stability over
the "assumption of violence."
It is not difficult to see that individual human relationships
are characterized by a tendency toward universalism, as distinct
from the realm of political domination which presupposes a
clearly defined national territory. This universalism is brought
about by the institutional and the specific economic laws which
govern dominium. These economic laws characteristically work
independently of any single human will. They result, via the
price mechanism, in the coordination of millions of individual
decisions. Conversely, the very essence of the political sphere
is the reign of human will—that of the stronger (or the majority)
FOREWORD ix
over the weaker (or the minority). The principle of coordina-
tion is here replaced by that of subordination. Hence, it be-
comes very important to know which fields of human activity
are subject, within a given state, to imperium and which are left
to the regulating influence of market values and private law. In
other words, it is the internal political constitution of a country
that provides the final answer to the question of whether politi-
cal frontiers will also become economic and human division lines
or whether the forces of dominium are strong enough within
each nation to restrict political power and arbitrariness at home.
In practice, the international community can only be ap-
proached to a greater or lesser degree. The very fact that na-
tional states were able to develop shows that the urge toward
social integration within them was far stronger than it was with
outside groups which, in turn, were merging into separate politi-
cal units. Tradition, national character, and differences in histo-
rical evolution led to widely differing legal, moral, and institu-
tional settings among nations. Yet, to the extent that the bene-
ficial effects of international trade were becoming more vividly
discerned, and to the extent that the division of power as well
as the safeguard of individual liberties against the State were
accepted as the leading principles of political theory, it became
possible to speak of an international open society. This society
constituted a community bound by an unwritten rule of law
and a set of generally recognized standards, principles, and
values. These principles included a voluntary renunciation of
national sovereignty by a state's monetary authorities who
shaped policies not according to the will of the government,
but according to the dictates of international commodity and
capital flows. Such an international economic order was largely
realized in the nineteenth century.
In short, the problem of international economic order is the
problem of approximating the legal and moral climates between
national states so that citizens, free to move, to buy, and to sell
wherever they like, gain a feeling of confidence and security far
beyond the limits of their own political territory. To the degree
that this goal can be achieved, international relations will fol-
low the rules of dominium rather than the rules of imperium.
"It is the spirit of commerce which cannot coexist with war, and
which sooner or later takes hold of every nation. For, since the
x FOREWORD
money power is perhaps the most reliable among all the powers
subordinate to the state's power, states find themselves impelled
(though hardly by moral compulsion) to promote the noble
peace and to try to avert war by mediation."2
The underlying problem of international economic disinte-
gration, then, is caused by powerful forces that seem to restrict
"the spirit of commerce" originating from the individual's
sphere.
The objective of this investigation is to study the effect of
socialism on the framework of international economic coopera-
tion. Without attempting an elaborate definition of socialism,
we shall use this term to indicate a social order in which all
economic activities are consciously determined (planned) by
a restricted group that represents society. This group is con-
ceived of as an elite which, due to its members' alleged super-
ior character, knowledge, and intelligence, is regarded to be
best qualified to determine society's real needs and to use so-
ciety's productive apparatus to best satisfy these needs. The
socialist concept of the future international economic order is
that of a world united under a single government and centrally
planned by experts for the benefit of all peoples.
However, the present world is divided into national states,
governed by particular economic and political systems. The
principal questions which will form the object of this analysis
are therefore the following:
—Is the continuing existence of separate political units
compatible with the postulates of socialism and, if so,
what is the internal political and economic organization
that characterizes a socialist state?
—How will this organization affect the object of rever-
sing international economic disintegration?
—Is the socialist ideal of a future international economic
order identical with the postulate of an open society?
If not, what is the essential difference?
—What forces are at work, under socialism, that will
induce "the creation of a single world economy regu-
lated by the proletariat of all nations according to a
common plan" (Lenin) ?
FOREWORD xi
This book is divided into three parts. Socialist views on in-
ternational economic cooperation are, for the most part, given
only implicitly; they must be distilled from the general philo-
sophical context of their author. Part I therefore contains brief
summaries of the most relevant socialist systems and the inter-
national implications of their ideas. Here, the authors speak for
themselves. A critical evaluation of their thoughts is given in
the Summary and Conclusions section at the end of each chap-
ter. By acquiring an understanding of the ideological roots of
socialist thought, it becomes possible to judge objectively the
validity of the socialist claim that their system, being outside
any social order hitherto known, is not amenable to analysis
with traditional intellectual tools. Only if this claim proves
unfounded will it be admissible to apply the familiar "box of
tools" to a theoretical investigation of the impacts of socialism
on the international economic order. These impacts are ana-
lyzed in Part II. Part III reviews the major aspects of interna-
tional economic cooperation such as is realized by the Council
of Mutual Economic Aid (Moscow). Although research was
completed before the introduction of economic reforms in the
Eastern European countries, the latter illustrate the problems
faced by these states rather than impair the conclusions of this
investigation.
The late Wilhelm Röpke, whose lifelong work was centered
on the interrelationship of political, economic, and social orders
and their effects on international peace and cooperation, intro-
duced me to the subject of this book. Without the encourage-
ment and helpful criticism which he was able to give me until
the completion of the first draft, this study may not have been
possible.
I would like to express my thanks for the advice and assist-
ance which I received from the Graduate Institute of Interna-
tional Studies, in Geneva, Switzerland, especially from its Di-
rector, Professor Jacques Freymond and also from Professors
Gerard Curzon and Miklós Molnár. The opportunity to use the
well documented libraries of the United Nations' European Of-
fice and the University of Geneva was a decisive advantage. My
warm appreciation goes to the personnel of these libraries for
their expert and friendly assistance.
I express my gratitude to the Earhart Foundation in Ann
xii FOREWORD
Arbor, Michigan, for a grant that made the completion of this
book possible. I also sincerely thank Professor Arthur Kemp,
Claremont, California, for his kind cooperation and advice.
South Pasadena
June, 1967
TABLE OF CONTENTS
Part I.
SOCIALIST THEORIES AND THEIR IMPLICATIONS
FOR AN INTERNATIONAL ECONOMIC ORDER
Page
INTRODUCTION 1
Chapter I. IDEAL COMMONWEALTHS - - - - - - 5

Introduction - - - - - - - - - - - - - 5
Plato: Politeia and Nomoi 6
Sir Thomas More: Utopia 10
}ohann Gottlieb Fichte: Der geschlossene
HandeL·staat 13
Summary and Conclusions 19
Notes to Chapter I 20
Chapter II. THE PRE-MARXIAN SOCIALISTS 24
The Sociological Roots of an Emerging Anti-
Capitalistic Theory - - - - - 24
Robert Owen 26
C. H. de Saint-Simon and His Followers - - - - 28
Pierre-Joseph Proudhon: from Anarchy to
Federalism 33
Notes to Chapter II - - - - - - - - - - - 40
Chapter III. KARL MARX A N D HIS FOLLOWERS: THEIR

CRITIQUE O F T H E CAPITALIST M O D E O F
PRODUCTION - - - - - 44
Introduction -– 44
The Elements of Marxian Political Economy - - 46
Concentration and Centralization of Capital - - 47
xiv TABLE OF CONTENTS
Page
Capitalism and the World Market - - - - - - 50
Marx's Views 50
Rise of Finance Capital 52
T h e Seeds of a F u t u r e Socialist O r d e r - - - 56
Lenin's Thesis . . 58
Notes to Chapter III - - - - - 61
Chapter IV. ORGANIZATION I N S T E A D O F LAISSEZ-
FAIRE; INTERWAR PROGRAMS F O R A
SOCIALIST W O R L D O R D E R - - - - - - 65
General Ideas 66
Production for Needs 66
Science 67
The Representatives of Collectivity - - - - 68
Human Solidarity 70
The Internationalist Approach 71
International Control of Raw Materials - - - 72
International Migrations 75
International Money and Credit Control - - 77
Methods of Achieving World Planning - - - 80
Notes to Chapter IV 87
Chapter V. THE COLLECTIVIST STATE-THE
TRANSITIONAL STAGE FROM CAPITALISM
TO WORLD PLANNING 92
Marxism and the National State 92
Marxism and Economic Organization 95
Marx and Engels 95
Lenin - - 97
Stalin 100
The National Socialist Approach 102
The Foreign Trade System of a Collectivist State - 105
The State Monopoly of Foreign Trade - - - 106
Collectivist Foreign Trade and the Theory of
Comparative Costs - - - 108
The Problem of External and Internal
Equilibrium - – 109
Long-Term Capital Movements - - - - - HO
The Future Socialist International Order - - 112
Summary and Conclusions -113
Notes to Chapter V - 114
CONCLUSION TO PART I - - 120
TABLE OF CONTENTS xv
Part II.
INTERNATIONAL ECONOMIC ORDER VERSUS
STRUGGLE FOR WORLD DOMINATION:
A THEORETICAL ANALYSIS OF THE INTERNATIONAL
ECONOMIC IMPLICATIONS OF SOCIALISM
Page
INTRODUCTION 125
C h a p t e r VI. T H E PROBLEM O F VALUE AND

E C O N O M I C CALCULATIONS IN A
COLLECTIVIST ECONOMY - - - - - - 128
The Problem - - 129
Socially Necessary Labor - - - - - - - - 1 3 0
The "Mathematical Solution" - - 133
The Impossibility of a Rational Evaluation of
Capital Goods under Collectivism 135
T h e " M a r k e t S o l u t i o n " of S o c i a l i s m - - - - - 1 3 7
Critical Objections - - - 139
The "Theory of Planning' According to Sweezy - 143
Summary and Conclusions - - 145
Notes to Pages 125-127 and to Chapter VI - - - 146
C h a p t e r VII. P L A N N E D F O R E I G N T R A D E A N D ITS
CONSEQUENCES FOR INTERNATIONAL
ECONOMIC RELATIONS - - 150
The Place of Foreign Trade in Ideal
Commonwealths - - - - - - - - - - - 150
Plato - - - - - - - - - - - - - - 150
Thomas More - - - - - - - - - - - 151
Johann Gottlieb Fichte - - - - - - - - 153
T h e Pre-Marxian Socialists' Attitude to
International Economic Relations - - - - - 155
Robert Owen - - - - - - - - - - - 155
Saint-Simon and His Followers - - - - - 155
Pierre-Joseph Proudhon - - - 156
The General Problem of International Economic
Relations under Socialism - -– 157
The Permanent Pressure on Internal Resources 158
The Impossibility of Measuring Profitability of
Individual Foreign Trade Transactions - - 160
xvi TABLE OF CONTENTS
Page
Trade Relations between Collectivist and Free
Market Economies 161
Trade Relations between Collectivist States - 162
Notes to Chapter VII - 167
Chapter VIII. LIBERAL VERSUS SOCIALIST ECONOMIC

ORDER. A COMPARATIVE ANALYSIS - - 170
Preliminary Remarks 170
Balance of Payments Adjustment and National
Monetary Policies 172
Three Concepts of the Balance of Payments - 172
International Payments Adjustment in a
Liberal Economic Order - - - - - - 173
The International Impact of National Full
Employment Policies 175
The Collectivist Solution - - - - - - - 181
The International Problem of Raw Materials - - 183
The Liberal Solution Resting on the Divisibility
of Ownership and Its Invalidation in Times
of War - - 183
The Collectivist Solution - - - - - - - 186
The International Population Problem - - - - 188
The Problem of International Capital Movements - 191
Notes to Chapter VIII - - - - - - - - - - 194
C h a p t e r IX. ECONOMIC DEVELOPMENT AND THE

PROBLEM OF INTERNATIONAL ECONOMIC
ORDER 199
The Problem 199
The Socialist Approach 203
"Monopoly Capital" and State Planning - - 203
The Politicalization of International Capital
Movements - . _ . - 206
The Liberal Approach 209
Notes to Chapter IX 214
Chapter X. THE FUNDAMENTAL PROBLEM OF

WORLD PLANNING; CONCLUSION TO
PART II - - 217
TABLE OF CONTENTS xvii
Page
The Internationalist Approach: a Critical
Examination - - - - - - - - - - - - 217
The "Explosive Effect of Collectivism" - - - - 220
Who W h o m ? - - - 222
Conclusion - - - - - - - - - - - - - 226
Notes to Chapter X - - - - - 2 2 7
Part III.
THE TEST BY PRACTICAL EXPERIENCE
INTRODUCTION - - - 231
Chapter XL THE "SOCIALIST" WORLD MARKET" - - 232

The Soviet System of Economic Planning: A Short
Survey - - - - - - - - - - - - - - 232
The Main Aspects of Centralized Decision-
Making and the Problem of Constructing an
Efficient Administrative Hierarchy - - - 233
The Foundations of Soviet Managerial
Behavior 236
The Problem of Economic Rationality - - - 239
National Planning, International Solidarity and the
Council of Mutual Economic Aid 241
The Initial Years Characterized by an Autarkic
Industrial Development within Each
Country - - 242
Attempts at Closer Cooperation within
Comecon by Plan Coordination - - - - 244
Soviet Proposals for a Central Comecon
Planning Agency - - - - - - - - - 247
The "Dialectical" Contradiction between the
International Character of Socialist
Production and the National Ownership
of the Means of Production - 250
The Basic Problems of Socialist International
Economic Intercourse 252
The Effects of the Foreign Trade "Mechanism"
Operating in Each C.M.E.A. Country - - 253
The Need for an Objective Measure of
Profitability for International Economic
Transactions 257
xviü TABLE OF CONTENTS
Page
P r i c e F o r m a t i o n o n t h e Socialist W o r l d M a r k e t :
Theories a n d Reality - - - - - - - - 263
International Clearing b e t w e e n C.M.E.A.
Countries - - - - - - - - - - - - 264
The Problems Connected with East-West Trade - 266
Foreign Trade Problems with C.M.E.A.
Countries as Seen from the West - - - - 267
Foreign Trade with "Capitalist" Countries as
Seen from the East - - - 269
The Prospects of East-West Trade - - - - 270
Summary and Conclusions - - - - - - - - 2 7 1
N o t e s t o C h a p t e r XI - - - - - - - - - - 2 7 3
CONCLUSION - - - - - - - - - - - - 2 8 0
BIBLIOGRAPHY - - - - - - - - - - - 2 8 4
INDEX OF AUTHORS - - - - - - - - - 3 0 1
PART I
SOCIALIST THEORIES AND THEIR IMPLICATIONS
FOR AN INTERNATIONAL ECONOMIC ORDER
INTRODUCTION
SOCIALISTS HAVE CONCLUDED that something is fundamentally

wrong with the "society" in which they live.1 Consequently,
they feel compelled to change it.2
This uncompromising will to reform is directed toward a
thorough transformation of existing social and political institu-
tions. Concurrently, it postulates a basic change in human char-
acter in the sense of "freeing" men from their narrow, egoistic
outlooks. To arrive at lasting happiness and justice, it is thought
that human beings must be taught to place more value on the
well-being of the community, of which they are but subordi-
nated members, than on personal comfort. A third element is
added by the socialist's contention that history moves in the
direction of ever more perfect social conditions—even though it
is generally agreed that this development must be aided and
accomplished by a restricted group of individuals (aristoi) who
possess the indispensable insight into what is just and right and
what is therefore in accordance with history. Most socialists
are convinced that such absolute knowledge and wisdom really
exist. Hence, they demand that all "command positions" of so-
ciety be transferred to men of superior capacity and character
and that these men be given the necessary freedom to carry out
their designs. At the root of this postulate is the belief that man-
kind has been granted the ability to create a near perfect social
order on this earth.
The main target of socialist criticism, therefore, is the lib-
erals'3 stress on individual freedom and utility. Such freedom
and utility, it is argued, lead to particularism and chaos. Since
the profit motive is founded on considerations of individual as
distinct from collective welfare, it is, in the opinion of socialists,
totally unsuitable as a means of regulating the economy. Unlike
the liberals, therefore, the socialists are primarily preoccupied
2 SOCIALISM AND INTERNATIONAL ECONOMIC ORDER
with the exaltation of the community, and the subordination of
the individual to it.
The desire to abolish private property has often been iden-
tified with socialism. But this is true only to a very limited ex-
tent. The authors advocating such a system, from Plato to Owen
and his followers (the "communistic" authors as they came to
be called) have always constituted a minority among socialist
writers. Moreover, the motives underlying their theories were
by no means uniform in character. Most socialists, however,
while leaving the share of consumer goods allotted by the com-
munity to the exclusive enjoyment of the individual, have advo-
cated the collectivization of the means of production. Two
major reasons have been advanced in support of this measure:
(1) it was alleged to be a requirement of "distributive justice"
and (2) it was said to constitute the necessary prerequisite for
a rational and sagacious control of the production process. A
particular group of socialists was not slow to perceive that this
control could be achieved equally well without legally abolish-
ing the private property of capital goods. This group knew it
was sufficient to replace individual with centralized decision-
making to arrive at the same result. Hence, the essence of
socialist doctrine, despite divergence of detail, is the demand
for the collective and centralized control of the economic
process.
Socialists usually speak of "society," "community," or "col-
lectivity" as the basic units of their proposed order. But where
are these units located, and in what way are they to share the
world's geographical surface and natural resources? How do
the authors whose views will soon be examined deal with the
problem of territorial delimitation? We shall encounter four
major methods of looking at these questions.
The first group of authors devote their attention to the con-
struction of an abstract, ideal commonwealth and place special
emphasis on the internal setup of that commonwealth. The
prototype of this imaginary state is a happily ordered island
situated in the midst of an ordinary, defective world. Relation-
ships with this world are consequently regarded as undesirable
and to be minimized in order to safeguard the achieved stand-
ard of social perfection. This Utopian approach is treated in
Chapter I.
INTRODUCTION 3
A second group of socialists simply ignore the existence of
national states and conceive the future world as consisting of
small, socialistically organized communities whose relations
are governed by brotherly love and mutual interests. Such a
community can then be thought of as extending to cover the
whole world under one single, hierarchically organized body
which will guide economic activity and distribute its fruits to
those who have the greatest need. These ideas are the subject
of Chapter II.
A third group of authors start with the assumption that the
greatest evil is to be seen not in the existence of distinct political
units, but in the division of mankind into two classes—the ex-
ploiting and the exploited. Abolish exploitation and the sys-
tem on which it rests, say these authors, and you will create an
order of perfect harmony and justice. Representatives of this
order will consciously combine man's efforts with the world's
abundant resources to achieve plenty for everyone and univer-
sal peace; this age-long dream of all peoples will at last become
reality. This is the Marxist approach, dealt with in Chapter III.
Chapter IV is devoted to the practical proposals and impli-
cations which socialists advance midway between the realm of
ideology and concrete reality. The authors reviewed in this
chapter, and indeed in the entire first part, need by no means
be "officially" recognized socialists. Their writings or opinions
were selected because they appeared relevant to this context,
and not because of the author's political affiliations.
Finally, some writers consider the area within which collec-
tive control is to be exercised over economic, as well as political,
matters to be identical with the territory dominated by an exist-
ing State. This group represents most modern socialists includ-
ing Marx and Lenin. Their theories on the dictatorship of the
proletariat and the international economic implications of the
collectivist state are described in Chapter V. The same chapter
also contains a section which illustrates the "national socialist"
approach.
Socialism is usually regarded as a profoundly internationalist
movement. This is because of its emphasis on human equality,
solidarity, and brotherhood—ideals which suffer no human di-
vision lines. But is collective (that is, centralized economic and
political) control, whatever the territory on which it is exer-
cised, compatible with a true international economic order?
Let us seek an answer in the writings of the socialists them-
selves.
NOTES TO PAGES viii-xi

1. Clausewitz, Karl v., On War. Prefatory note. In Seldes, G., The Great Quota-
tions. New York, Lyle Stuart, 1960, p. 160.
2. Kant, Immanuel, Zum ewigen Frieden. Königsberg, 1795, reprinted in Fried-
rich, C. J., The PhiL·sophy of Kant. Immanuel Kant's Moral and Political
Writings. New York, The Modern Library, 1949, p. 455, italics original.
NOTES TO PAGES 1-4

1. "Socialism, then, will flourish in proportion as the consciousness grows that
there is something vitally wrong in the industrial organization of society."
Guthrie, W. B., Socialism Before the French Revolution. New York, Macmillan,
1907, p. 68. As Robert Owen expresses it: "Until society can be made to un-
derstand the impracticability of improving its conditions under the existing cir-
cumstances and can be induced to change these circumstances in toto, no
real advantages can be obtained for mankind." Lectures on an Entire New
State of Society. London, 1820, p. 138.
2. Cf. Karl Marx's 11th Thesis on Feuerbach. In Borkenau, F. (ed.), Karl Marx.
Frankfurt/M., Fischer, 1956, p. 42.
3. The term "liberal" is used here in its original European sense. "Liberalism is
a belief in the value of human personality, and a conviction that the source of
all progress lies in free exercise of individual energy; . . . it therefore involves
a readiness to use the power of the state for the purposes of creating the con-
ditions within which individual energy can thrive, of preventing all abuses of
power, of affording to every citizen the means of acquiring mastery of his own
capacities and of establishing a real equality of opportunity. . . ." Encyclopaedia
Britannica, Vol. XIII, 1959, p. 999d.
CHAPTER I
IDEAL COMMONWEALTHS
INTRODUCTION
How is THE SOCIALIST world order to be accomplished? Most

reformers know it cannot be established in one stroke. They are
also aware of the two main obstacles to its realization: individual
selfishness, and the traditional institutions and customs which
are embodied in the existing State. This new world order must
therefore be implemented outside the spheres which are domi-
nated by these two factors, at some distant place beyond the
oceans. What mainly interests us here is not the geographical
location, but the intellectual elaboration of that basic unit which
is to form the kernel of future order.
"Let us found a State" said Socrates when opening discus-
sion in "Politeia." In this work Plato endeavors to design a
model state which may one day be turned into reality by men
of action. The Utopias treated in this chapter are not unbridled
phantasies of their authors; rather the authors are, as H. Freyer
rightly points out, animated by a responsible political will.
Their commonwealths—calculated to exercise a manifest in-
fluence on their contemporaries—are therefore "a closed, con-
sistent, convincing and so to speak viable world . . . which,
if non-existent, could at least be real in theory."1 This world is
consciously organized and balanced. As Johann Gottlieb Fichte
writes:
In government, as well elsewhere, everything possible must be con-
ceptualized; whatever can be computed must cease to be left to blind
chance, in the hope that chance will make it.2
Thus, Utopian writers do not propose to overcome the State,

but only to change its structure. A utopia is a state that pos-
sesses the proper solution to all human problems—and more
than that: it is identical with this solution. Human conflicts
cease to exist; individual and community, dominium and im-
perium, all merge into one. Every part is bound together by the
common, righteous cause, and the one derives its perfection
from the other. The old antinomy between personal freedom
and central control, manifested by constraint and even terror, is
replaced by perfect harmony.
The citizens of such a Utopian State, whose lives are spent
between collective work and leisure, are so happy, so free from
fear and worry, that they eagerly encourage other peoples, and
eventually all mankind, to follow their example.
Freyer compares the inner organizational structure of an
ideal commonwealth with the "cosmos of the Greek philoso-
phers :finite,round and numerically ordered so that it can simp-
ly and clearly be governed by static laws."3 To this self-inclu-
sive system all forces not rooted in its laws, and which therefore
threaten to interfere with its proper functioning, must appear
hostile and dangerous. The only choice a Utopian author leaves
his reader is an uncompromising take it or leave it.4 Hence, a
Utopia must be strictly isolated from the rest of the world; "all
factors and forces which by their nature transgress borderlines
and join countries, must at the outset be viewed suspiciously in
Utopias."5
PLATO: POLITEIA AND NOMOI

Mankind will always be indebted to Plato for the prototype
of the ideal commonwealth. This author lived at a time when
democracy, the long cherished political order of Athens, had
degenerated into a "bustle of rancour and baseness."6 In this
period of political disintegration and liberated individualism,
Socrates had been sentenced to death and executed by the Athe-
nian authorities. The rising philosophical school of the Soph-
ists relativized all moral institutions as being solely dependent
on human will in general, and that of the strong in particular.
Against this philosophical anarchism Plato set his theory
of the objective existence of absolute principles, the highest of
which was justice. Justice may be recognized by an intelligible
act and thus refuses to tolerate any authority besides itself, not
even that of laws. "What is just can only be discerned for each
individual case with respect to the Idea and by the one who
IDEAL COMMONWEALTHS 7
possesses the necessary capability; that is, by the philosopher.
. . . The just in the highest sense, hence the one who discerns,
is therefore himself the law and thus above the rigid letter."7
Human domination is thus openly admitted, but it must be
domination by the chosen few endowed by nature, as an old
Greek legend has it, with golden hearts. Plato's goal is to found
a state which would personify the moral Idea. The first pre-
requisite for such a state is unity of purpose, directed at the
attainment of absolute justice. The second step is to devise a
way of life for the "lovers of wisdom" which would bring them
into closest communication with the Idea and its dictates. To
achieve this end, Plato established severe rules for the philoso-
phers, forbidding them to have families and private possessions
and forcing them into a life of military discipline.8 Here, for the
first time, the ideal of asceticism was linked with the denuncia-
tion of gold and silver which was identified with wealth and
was regarded as the last cause of human greed and egoism.
Plato, well aware that his Politeia was not realizable on this
earth, designed, in his "Nomoi," a second-best State in which
the rulers were less enlightened and therefore, as the title in-
dicates, in need of a coherent framework of guiding laws. Plato
retains the military structure in the interior, he even defines
"the well-constituted State" as one which "ought to be orga-
nized in such a way as to be victorious in war over all other
States."9 Elsewhere he writes:
The main principle is this: that nobody, male or female, should ever
be left without control, nor should anyone, whether at work or in play,
grow habituated in mind to acting alone and on his own initiative, but
he should live always, both in war and peace, with his eyes fixed con-
stantly on his commander and following his lead.10
For this purpose, it is necessary to liberate the citizens from

their "lust for wealth which allows a man no leisure time for
attention to anything else save his own private property."11
And the author continues: "That the laws previously ordained
serve to repress the majority of desires, is not surprising."12 This
is so because "all our laws must always aim at one single object
which, as we agreed, is quite rightly named Virtue.' "13 The
State and its citizens are identical in that they both require "the
salvation of laws;"14 therefore, "everyone shall regard the friend
or enemy of the State as his own personal friend or enemy."15
Internal economic life is strictly regimented. Thus, "each
several craftsman in the State shall have one single craft and
gain from it his living."16 Or again:
The Law-wardens must meet in consultation with experts in every
branch of retail trade, and at their meetings they must consider what
standard of profits and expenses produces a moderate gain for the trader,
and the standard of profits and expenses thus arrived at they must pre-
scribe in writing; and this they must insist on—the market stewards, the
city stewards and the rural stewards, each in their own sphere.17
By the location Plato gives to his State—it is to be situated

on a lonely stretch of Crete, eighty stades away from the s e a -
he implies that he aims at maximum self-sufficiency. Thus, we
read:
Most of the Greeks arrange for their food to be derived from both
land and sea, but our people will derive it only from the land. This makes
the lawgiver's task easier.18
And again:
For if the State was to be on the sea-coast, and to have fine harbors,
and to be deficient in many products, instead of productive of everything
—in that case it would need a mighty savior and divine lawgivers, if, with
such a character, it was to avoid having a variety of luxurious and de-
praved habits. As things are, however, there is consolation in the fact of
that eighty stades. Still, it lies unduly near the sea, and the more so be-
cause, as you say, its harbors are good; that, however, we must make the
best of. . . . Our State has compensation in the fact that it is all-produc-
tive; and since it is hilly, it cannot be highly productive as well as all-
productive; if it were, and supplied many exports, it would be flooded
in return with gold and silver money—the one condition of all, perhaps,
that is most fatal, in a State, to the acquisition of noble and just habits of
life.19
What remains of foreign trade is severely guarded by the

State. It is true that "no toll shall be paid in the State by any-
one either on exported goods or on imports,"20 but this is prac-
tically meaningless since
Frankincense and all such foreign spices for use in religious rites, and
purple and all dyes not produced in the country, and all pertaining to any
other craft requiring foreign imported materials for a use that is not nec-
essary, no one shall import; nor, on the other hand, shall he export any
of the stuff which would of necessity remain in the country. . . .21
In regard to arms and all instruments of war, if there is need to import
any craft or plant or metal or rope or animal for military purposes, the
hipparchs and generals shall have control of both imports and exports,
when the State both gives and takes, and the Law-wardens shall enact
suitable and adequate laws therefor; but no trading for the sake of gain,
either in this matter or in any other, shall be carried on anywhere within
the boundaries of our State and country.22
It can be seen that foreign transactions are to cover only

"essentials" and that they are to be conducted on the basis of
strict barter. Foreign exchange reserves—in the form of precious
metals—are therefore unnecessary.
As with the movement of commodities, the lawgiver must
also concern himself with the movement of men across the
State's frontiers. His prescriptions are a compromise between
two antagonistic tendencies. On the one hand,
the intermixture of States with States naturally results in a blending of
characters of every kind, as strangers import among strangers novel cus-
toms: and this result would cause immense damage to peoples who enjoy
a good polity under right laws.23
On the other hand, the State must not "get the reputation of
adopting harsh language," since
reputation in the eyes of others, whether for goodness or the reverse, is a
thing that should never be lightly esteemed.24
The State may send out "inspectors," i.e. men over fifty years
of age and of great merit, "who desire to survey the doings of
the outside world in a leisurely way."25 But they must be "in-
corruptible, so as to confirm thereby such of his native laws as
are rightly enacted, and to amend any that are deficient."26 On
their return, the inspectors will report to a "mixed body of
young men and old" on "anything important they may have
learnt elsewhere."27
But if, on the other hand, such an inspector appears to be corrupted
on his return, in spite of his pretensions to wisdom, he shall be forbidden
to associate with anyone, young or old; wherein if he obeys the magis-
trates, he shall live as a private person, but if not, he shall be put to
death.28
All foreigners—whether in a public capacity or on a private

visit—are, immediately upon their arrival, taken care of by
State officials or by priests. Plato is especially distrustful of
that "inevitable emigrant" choosing "summer, as a rule, for his
annual visits."29
SIR THOMAS MORE: UTOPIA

"Plato was the intellectual father of socialists as well as of
philosophers."30 But whereas he "had a more general abstract
end in view . . . , More was interested in the practical solution
of actual and present social problems, and busied himself with
plans to alleviate existing unfortunate conditions."31 These
conditions resulted from the enclosure movement in sixteenth-
century England. Therefore, "the appearance of 'Utopia' marks
the beginning of the modern social problems as they show them-
selves in the incipient stages of the capitalistic period."32
The sixteenth-century was also the age of overseas discov-
eries. The living conditions of the newly found lands and peo-
ples, as they were related by the tales and reports of the ex-
plorers, seemed to be a challenging contrast to the misery which
was thought to be provoked by the progress of productive meth-
ods based on private property. The qualities of primitive so-
ciety began to be studied and soon became identified, especially
by the "natural" philosophers of the eighteenth century, with
happiness and equality. It was believed that nature had granted
every man equal access to the fruits of the land, originally
owned in common. The influence of this philosophy can be
seen in Thomas More's work.
The Island of which Hythloday enthusiastically reports is in
the form of a horseshoe and its shores are washed by a calm
and friendly sea. However, when Utopus first conquered
"Abraxa," it was a peninsula. This wise king made it an island
by cutting an isthmus of fifteen miles.33 The entry into Utopia's
inviting bay is, moreover, made treacherous by nature because
of dispersed rocks and shallows—the safe passages being known
only to the fortunate inhabitants themselves.
The secret of the Utopians' joyful life lies in the fact
that they do not think felicity to rest in all pleasure, but only in that
pleasure that is good and honest. . . . They define virtue to be a life
ordered according to nature . . . and that he does follow the course of
nature who in desiring and refusing things is ruled by reason.34
This greatly simplifies the economic process. Both men and

women work and, since private property is unknown, there is
no distinction between rich and poor. Hence, an idle class
which must be supported does not exist. In addition, the de-
mand for goods and services is reduced because homespun gar-
ments "are throughout all the Island of one fashion . . . seemly
and comely to the eye, fit both for winter and summer."35 Sim-
ple but abundant meals are taken in common, and whatever else
is produced is done so in good and lasting quality. Hence, six
hours of daily work are sufficient to provide for the Utopians'
necessities; the rest of the time is devoted to common recreation,
games, and studies. But even so, the inhabitants cannot help
producing surplus. All commodities are stored in warehouses
or markets;
from hence the father of every family or every householder fetches what-
soever he and his have need of, and carries it away with him without
money, without exchange, without any gage or pledge. For why should
anything be denied to him; seeing there is abundance in all things, and
that it is not to be feared lest any man will ask more than he needs.36
To provide against poor harvests, stocks sufficient for two

years are accumulated. When the present and possible future
requirements of the community are thus met,
then of those things whereof they have abundance, they carry forth into
other countries great plenty; as grain, honey, wool, flax, madder, purple
dye, felles, way, tallow, leather and livestock. And the seventh part of
all these things they give frankly and freely to the poor of that country.
The residue they sell at a reasonable and mean price. By this trade of
traffic or merchandise, they bring into their own country not only great
plenty of gold and silver, but also all such things as they lack at home,
which is almost nothing but Iron. And by reason they have long used
this trade, now they have more abundance of these things than any man
will believe.37
Here More implies that Utopia's balance of payments shows

a permanent surplus. However, in this respect, she is also be-
having like an ideal creditor country:
Now, therefore, they do not care whether they sell for ready money or
else upon trust to be paid at a day, and they have the most part in debts.
But in so doing they never follow the credence of private men, but the
assurance or warrantise of the whole city, by instruments and writings
made in that behalf accordingly. . . . The most part of it they never ask.
For that thing which is to them of no profit, to take it from others to
whom it is profitable, they think it no right nor conscience. But if the
case so stand that they must lend part of that money to another people,
then they require their debt; or when they have war.38
Of course, the Utopians will never go to battle because of

unsettled trade matters.39 But they will do so
in defence of their own country or to drive out of their friends' land the
enemies that had come in or . . . to deliver from the yoke and bondage
of tyranny some people that be oppressed with tyranny. Which things
they do by mere pity and compassion.40
There may be still another occasion for war. It may happen

that the Utopian population (despite institutional attempts at
regulation) so increases that it "exceeds the due number
throughout the whole island."41 In such a case,
they build up a town under their own laws on the nearest part of the
mainland where the inhabitants have much waste and unoccupied ground,
receiving also the inhabitants to them, if they will join and dwell with
them. . . . But if the inhabitants of that land will not dwell with them, to
be ordered by their laws, then they drive them out of those boundaries
which they now mark out for themselves. . . . For they account this the
most just cause of war when any people holds a piece of ground void and
vacant to no good nor profitable use, keeping others from the use and
possession of it which notwithstanding by the law of nature ought thereof
to be nourished and relieved.*2
The Utopians readily observe this law by returning the

colonizers to their native cities as soon as the Island's number of
inhabitants has become deficient. Beyond that, only "very few"
go to foreign countries and this only "for some reasonable
cause"43 such as trading.
Utopia's chief instruments of war are gold and silver. These
precious metals are used to hire mercenaries and to lavishly
reward foreign agents charged with the outright murder of a
hostile prince or to "procure occasions of debate and dissention
to be spread among their enemies."44 The Utopians themselves,
though well trained and prepared for war, fight only if they
must to defend their country.
JOHANN GOTTLIEB FICHTE: DER GESCHLOSSENE HANDELSSTAAT

"The first socialistic theorist, Sir Thomas More,"45 wrote his
Utopia as a reaction against the social evils of his time. General
humanitarian feelings and a strong empathy with the miserable
lot of the poor classes merged, in the eighteenth century, into
the powerful current of thought which was set free by the En-
lightenment. History and politics were now subjected to the
analysis of reason. A natural and reasonable social, political,
and economic order was supposed to exist, derivable from the
knowledge of human character. The "social contract" offered
a normative formula which indicated how society should be
built if its construction were influenced only by reason and not
also by error, lust for power, and custom.
Johann Gottlieb Fichte, at the turn of the century, combined
French rationalism and radicalism with German nationalism.
Unlimited freedom, he wrote, means no freedom at all since
"no one may appropriately put something into effect and rely
for one moment on its duration. This antagonism of the free
forces can only be counteracted by the individuals making a
mutual agreement."48 This agreement restricts the liberty of its
participants equally and contains the assignment of an exclusive
right to a determined "free" activity to each participant. The
agreement thereby constitutes property.47
The outward manifestation of this multilateral contract and
of the corresponding unification of human activity is, as Fichte
sees it, the Vernun†tsstaat (Rational State). To the customary
assumption "that property exists independently of the State, and
that the latter needs only to safeguard the present state of prop-
erty in which it finds its citizens without inquiring into the law-
fulness of the acquisition," Fichte opposes the idea that
it is the State's function to assign property to each and then only to pro-
tect his corresponding rights.48
In the Vernunftsstaat, agriculture, manufacture, and com-

merce form the three main categories of economic activity. The
rce
groups of citizens engaged in these fields are bound by a net-
work of contracts that contain the "negative" provision that
each group stick exclusively to its own profession and the "posi-
tive" stipulation that each group supply the others with what
they require to carry out their trade to common satisfaction. It
is the State which gives a legal status to these contracts and
watches over their execution. By doing so, however, it cannot
remain a passive observer. On the contrary, it actively partici-
pates in the economic process to the point of comprehensively
planning it. Fichte distinguishes four aspects of this activity:
1. The membership of the three main corporations must be cal-
culated in proportion to the production possibilities of agricul-
ture. Furthermore, the State cannot guarantee work to every-
one
unless it fixes the exact number of those who are permitted to work in a
given branch and provides for production of the necessary means of sub-
sistence for all. It is only through this closure that a branch of activity
becomes the 'property of the class which works in it.49
2. Each citizen is to be assured his proportional share of all

agricultural and manufactured products of the country in such
a way that all members of the State may live on an "equally
agreeable" standard. This implies that
the superfluous is always to be set behind the things which are indis-
pensable or hard to dispense with. . . . All should first have enough to
eat and be permanently accommodated before anyone decorates his
dwelling; all should have warm and comfortable clothes before anyone
puts on a sumptuous gown. . . . It is inadmissible to say 1 can pay for
it.' It is very unjust that one person is able to afford the unnecessary
whereas his fellow citizens lack the essentials.50
3. The government guarantees not only work, but also a ready

market to its citizens. This is possible on the basis of the general
plan.51 Prices arefixedby the State, and have a legal character.
4. Fichte now comes to the fourth and principal aspect of his
Vernunftsstaat:
The State is obligated to guarantee to all citizens, by law and coer-
cion, the conditions resulting from this equilibrium of mutual intercourse.
Yet it is unable to do so if any person outside its laws and dominion has
any influence on this equilibrium. It is therefore imperative to cut off
the possibility of such an influence. All intercourse with foreigners must
be forbidden and made impossible to its subjects.52
This is because
the government, in order to continuously guarantee its subjects the ful-
fillment of their customary needs, must be able to rely on the fact that a
certain quantity of goods is being traded. How can it count on the
foreigner's contribution to this quantity since he is outside the govern-
ment's dominion? It is tofixand warrant the price of a commodity. How
can it succeed with respect to the foreigner if it is unable to determine
those prices which prevail in his country and at which he buys the raw
materials? If the government sets him a price which he cannot afford,
he will henceforth avoid its market and deficiency in the satisfaction of
customary needs will result. It is to guarantee to each subject the sale of
his products at the due price. How can it do so if the subject sells on
foreign markets where different commodity relations prevail which it
can neither survey nor influence?53
Fichte is very emphatic on the external consequences of the

Rational State. It is
a closed commercial state just as it is a closed imperium of laws and in-
dividuals.54
Each man as well as each commodity belongs either to its juris-

diction or it does not: "there is no third choice."55 It follows that
any foreign trade that may be judged necessary falls to the ex-
clusive competence of the government "just as it alone is to de-
cide on war, peace, and alliances."56
This has important consequences for the monetary system
in that the State becomes free from all ties resulting from cus-
tomary international economic intercourse:
A closed commercial state . . . can turn into money whatever it desires,
provided only that it declares to accept this and no other money. . . . It
would thus create a national currency without even raising the question
as to whether this money would or would not be accepted abroad, since
for a closed commercial state foreign countries are as good as non-
existent.57
Furthermore,
A closed commercial state is utterly indifferent to whether there is, to
speak in customary language, a large or a small circulation of money.
The total sum of circulating money simply represents the total quantity
of publicly traded goods.58
Fichte gave clear policy directives by which to achieve the

closed commercial state. His rigorous and analytic mind dis-
tinguished the following mutually complementary government
actions and decrees:
In the first place private foreign trade is to be made impos-
sible by depriving citizens of all international means of pay-
ment.59 This deprivation must be preceded by the following
measure:
Immediately before the promulgation of the new national currency,
the government buys all foreign goods existing in the country. . . . This
purchase takes place partly in order to assess the available stock and the
present needs for these commodities, and partly in order to centralize
their price fixing.60
As a third measure, the government sets up a foreign trade

monopoly:
By the same stroke with which it introduces the new national cur-
rency, it is to take over all assets and liabilities resulting from foreign
trade.61
Henceforth, the government will decide which commodities

will continue to be exported and imported.62
Fourthly, the government creates a central clearing agency
which immediately takes control of and liquidates all interna-
tional claims to and from its citizens. The method hereby
adopted is the following:
The government pays to or claims world currency from the foreigner
and then pays to or claims national currency from the citizen.63
The same method of control will be applied to all foreign trade

transactions and their corresponding payments. The separation
of currencies will be paralleled by a separation of the internal
price level from that prevailing on the world market.64 There-
fore,
the citizen does not buy at the price the government pays to the foreigner
for a commodity, but at the one prescribed by internal law with due con-
sideration for the citizen's fair subsistence during the time he resells it.65
Exports are to be similarly regimented. The prices of foreign
goods are gradually raised so as to break the citizens of their
habit of desiring them, the final aim being "that the State com-
pletely isolates itself from any foreign trade."66
Fifthly, "simultaneously with the execution of these mea-
sures the State is to move into its natural frontiers."67 This leads
us to an interesting point of Fichte's political theory. He writes:
Certain areas of the earth's surface, including their inhabitants, are
clearly destined by nature to form political units. They are separated
from the rest of the earth by large rivers, seas, inaccessible mountains.
. . . It is these indications of nature as to what is to remain united and
what is to be separated that one has in mind when speaking, in modern
politics, of the natural frontiers of empires; a consideration which should
be taken far more seriously than is commonly done. Nor is sole emphasis
to be placed on strong and militarily well protected frontiers, but much
rather on productive independence and self-sufficiency.™
The author concludes: governments

will speak of the necessity of rounding off their borders and assert that,
in view of their other lands, they cannot exist without this fertile province
and that mine or salt work, always dimly thinking of the acquisition of
their natural frontiers.69
Wars are therefore inevitable and must be fought by the

State, though "not properly speaking by the peoples, to whom,
if only they are united, it can be indifferent under whose name
or dynasty this takes place."70
The State, once it has reached its legitimate goal,
must give and be able to give its neighbors the guarantee that it will
henceforth refrain from further expansion. However, it can give this
guarantee only on the condition of becoming a closed commercial state.
Closure of territory, and closure of commercial intercourse are mutually
interrelated and complementary measures. A state which adheres to the
ordinary system of commerce and aims at supremacy in world trade, re-
tains a continuing interest in expanding beyond its natural frontiers in
order to increase its trade and hence its wealth. . . . To the closed com-
mercial state, on the other hand, not the slightest advantage can accrue
from an expansion beyond its natural frontiers since its whole constitu-
tion is calculated only for its given extension.71
The Vernunftsstaat, finally, establishes the foundations of

the future closed economic order. It does so by systematically
exploring the production possibilities of the country with re-
spect to import substitutes and by setting up plans accordingly.
In its calculations, the government must, on the one hand, dis-
tinguish "between such needs which can really contribute to
well-being and others which merely serve prestige purposes."72
On the other hand, it will not be difficult to find adequate sub-
stitutes for foreign products if neither trouble nor costs are
spared.73 The government
has enough means to try everything at its own costs and calmly await
success. Within the country, this costs nothing more than a piece of
money which it can easily produce.74
At this time, foreign trade is still being transacted so that

the State can use all foreign exchange reserves for building up
the fundaments of the present and future economy.75 Fichte has
so much confidence in the size and efficiency of the Rational
State's gold and silver stock that the latter's purposeful devotion
to the preparation of war—the acquisition of raw materials and
armaments—may exclude any serious resistance of its enemies
so that it may reach its goal without bloodshed and almost without strik-
ing a blow, and that its operation is more like an occupational campaign
than a war.78
Fichte imagines the future world to be divided among a

number of closed commercial states that have reached their
natural frontiers. Their mutual trade is severely restricted to
those commodities which, for climatic reasons, cannot be pro-
duced in certain countries. It is to be conducted on a bilateral
basis:
Between such states, destined by nature to a continuing barter, a trade
agreement could be reached according to which one partner is pledged
for eternal times to grow for the other a certain quantity of wine in ex-
change for the delivery of a specified quantity of corn. Neither partner is
to aim at a profit, but at an absolute equality of value. Hence, there
would be no need for money for such trade, only for clearing.77
Beyond that, each nation must content itself with the level
of production made possible by the natural and social condi-
tions within its borders.
Questions such as: why should I not have a commodity in the same
perfection as that manufactured in another country, comes down to ask-
ing: why am I an inhabitant of this country, and amounts to the same as
if the oak tree should ask: why am I not a palm tree and vice versa.
Every man must content himself with the sphere in which nature has
placed him and with everything that comes from this sphere.78
SUMMAKY AND CONCLUSIONS

A study of ideal commonwealths leads to two important in-
sights : first, it sheds light on our problem regarding the internal
nature of a socialist state and its external consequences. The
community, or rather its top representatives, allocate resources
and productive tasks, distribute income and consumption goods,
and conduct relations with the outside world. Hence, the forces
of dominium are completely paralyzed; international trade and
foreign policy are considered as one single field, belonging
more than anything else to the exclusive competence of the
State. Fichte's treatise on the closed commercial state is, in its
clarity and consistency, as yet unsurpassed as a textbook on the
theory of socialist foreign economic relations.
But secondly, by reading Utopian authors, one already en-
counters the particular method of socialist reasoning. It basi-
cally consists of placing concreteness on abstract terms. By re-
garding the State, as Plato does, as a model of human perfec-
tion, the State acquires a higher form of reality than that pos-
sessed by the individual. From this comes the postulate to give
utmost freedom to the State and "repress the majority of de-
sires" of its citizens. The intellectual design of a perfect institu-
tion, its endowment with unlimited power, and the belief that
this institution suddenly awakens to independent life is the
device which permits these authors to turn their backs on the
real source of social problems: the weaknesses of human char-
acter. By subjecting the imperfect individual to the perfect
state, the individual either becomes perfect himself, as in More's
Utopia, or, at least, his selfish impulses are brought under the
stern control of virtue, as embodied by the State.
Just as the individual has control only over his proper body
and soul, so the State's actions, as Fichte emphasized, must
necessarily be limited strictly to the territory under its control.
Thus, the decisive question is this: what principles will govern
the relationships between the various States? If all States have
become ideal commonwealths, founded upon the same internal
principles, governments should play the same role on the inter-
national level as individuals do within the State; for a world
order can only be established if the various communities readily
submit to the interests of the whole. These interests, and this
follows from the inherent logic of Utopias, must be embodied
in the decrees of a central world authority possessing a power
over the States similar to the power the States possess over
the citizen. But this implies the complete disappearance of
the hitherto sovereign States, i.e. their merging with and there-
fore subjection to a comprehensively planned world commu-
nity. If, however, the individual States should refuse to sac-
rifice themselves in this way—if they insist on their freedom
of action and on their being the last resort of truth and virtue
—international tensions and eventually war would become in-
evitable, unless international relations were strictly minimized.
In Part II of this study we shall go more deeply into the anal-
ysis of "closed commercial States" and their implications for
peace and international order.
If, however, the ideal commonwealth is thought of as a sin-
gle unit, surrounded by "ordinary" peoples and countries, its
establishment signifies a disruption of the existing international
order. Utopia becomes a heterogeneous body within this order,
and both must view each other with increasing mutual suspi-
cion. More than that, the outside world is forced, if it wishes
to entertain relations with Utopia, to introduce certain features
alien to its system, but typical for that of this strange, isolated
community (such as state trading). It must constantly fear hos-
tile propaganda, subversive activities, and "wars of liberation."
Thus, the assumption of war is by no means absent from the
works of Utopian authors. On the contrary, the internal struc-
ture of the ideal commonwealth, as is most impressively illus-
trated by Plato's State, corresponds to strict military discipline,
eased only by the citizens' preparedness to accept it joyfully.
Living space and "natural frontiers" are regarded as the legiti-
mate goals of warfare.
NOTES TO CHAPTER I
1. Freyer, H., Die politische Insel. Eine Geschichte der Utopien von Platon bis
zur Gegenwart. Leipzig, Biographisches Institut, 1936, pp. 22-23.
2. Fichte, J. G., Der geschlossene HandeL·staat. Jena, Fischer, 1920 (originally
published in 1800), p. 12.
3. Freyer, H., op. cit., p. 26.
4. "It follows from what has been said that the system here established, if it is to
be realized, should be adopted or rejected in entirety." Fichte, J. G., op. cit.,
p. 103.
5. Freyer, H., op. cit., p. 26.
6. Heuss, A., "Hellas. Die archaische Zeit." Propyläen Weltgeschichte, ed., G.
Mann and A. Heuss, Berlin, Propyläen Verlag, 1962, III, p. 373.
7. Ibid.
8. "They will go to mess and live together like soldiers in a camp. . . . They alone
of all the citizens may not touch or handle silver or gold, or be under the
same roof with them or wear them, or drink from them. And this will be their
salvation, and they will be the saviors of the State." Quoted from Republic,
Book I, in Gray, A., The Socialist Tradition. Moses to Lenin. London, Long-
mans, 1946, p. 19.
9. Plato, Laws. With an English translation by R. G. Bury, London, Heinemann,
1926, Vol. I, Book I, p. 9.
10. Ibid., Vol. II, Book XII, p. 477.
11. Ibid., Book VII, p. 135.
12. Ibid., p. 149.
13. Ibid., Book XII, p. 547.
14. Ibid., p. 537.
15. Ibid., p. 521.
16. Ibid., Book VII, p. 185.
17. Ibid., Book XI, p. 413.
18. Ibid., Book VIII, p. 171.
19. Ibid., Vol. I, Book IV, pp. 257-59, italics added.
20. Ibid., Vol. II, Book VIII, p. 185.
21. Ibid.
22. Ibid., p. 187.
23. Ibid., Book XII, p. 503.
24. Ibid. Plato lays down the following rules: "First, no man under forty years
old shall be permitted to go abroad to any place whatsoever; next, no man
shall be permitted to go abroad in private capacity, but in a public capacity
permission shall be granted to heralds, embassies, and certain commissions of
inspection. . . . These men, when they return home, will teach the youth that
the political institutions of other countries are inferior to their own." Ibid., p.
505.
25. Ibid., p. 507.
26. Ibid.
27. Ibid., p. 509.
28. Ibid., p. 511.
29. Ibid. "The officials . . . shall have a care lest any such strangers introduce
any innovation, and they shall duly dispense justice to them, and shall hold
such intercourse as is necessary with them, but to the least extent possible."
Ibid., p. 513.
30. Guthrie, W. B., op. cit., p. 64.
31. Ibid.
32. Ibid., p. 68.
33. More, Sir Thomas, The Utopia. In Latin from the edition of March 1518 and
in English from the first edition of Ralph Robynson, translated in 1551, edited
by J. H. Lupton. Oxford, Clarendon Press, 1895, p. 118.
34. Ibid., p. 119.
35. Ibid., p. 140.
36. Ibid., p. 157.
37. Ibid., pp. 170-71.
38. Ibid., pp. 171-72.
39. Ibid., p. 245.
40. Ibid., p. 244.
41. Ibid., p. 154.
42. Ibid., pp. 154-55, italics added.
43. Ibid., p. 179.
44. Ibid., p. 251.
45. Guthrie, W. B., op. cit., p. 54.
46. Fichte, J. G., op. cit., pp. 4-5.
47. "I have described property as the exclusive right to actions, by no means to
things." Ibid., pp. 5-6, italics original.
48. Ibid., p. 4.
49. Ibid., p. 56, italics original.
50. Ibid., p. 14.
51. Ibid., p. 19.
52. Ibid., p. 26, italics added.
53. Ibid.
55. Ibid.
56. Ibid.
58. "The wealth of a person does not depend on how many pieces of money he
possesses, but on how large a part of total circulating money he holds." Ibid.,
p. 42.
59. "Every possibility of world trade presupposes the availability of a universally
accepted means of exchange. . . . Hence, our task should be solved in the
following way: all world money possessed by the citizens, that is all gold and
silver, should be brought out of circulation and exchanged for a new national
currency which would be valid only inside the country." Ibid., pp. 99-100,
italics original.
60. Ibid., p. 111.
61. Ibid.
62. "The import and use of commodities which serve prestige purposes only can
at once be prohibited." Ibid., p. 115.
64. Fichte clearly realized this and also the danger of inflation it implies. There-
fore, in order to assure the success of the monetary reform, "the government
formally renounces, for eternal times, to increase arbitrarily and to its own
advantage the quantity of circulating national money." Ibid., p. 103. The
author goes so far as demanding that the centrally fixed prices must be con-
stitutionally laid down and guaranteed.
65. Ibid., p. 114.
67. Ibid., p. 119.
69. Ibid., pp. 95-96.
70. Ibid.
71. Ibid., p. 98.
72. Ibid., p. 94.
73. Ibid., p. 93.
74. Ibid., p. 118 (note). This, however, is in contradiction to Fichte's apprehen-
sions against inflation. Cf. footnote 64 of this chapter.
75. "Foreign machines should be bought and imitated at home. Promise of money
defeats any prohibition." Ibid., p. 117. Moreover, the government "should
attract, from abroad, at whatever cost, great personalities who are competent
in the applied sciences. . . . By paying rewards which no other governments
can afford, people will hurry to offer their services." Ibid., p. 116.
76. Ibid., p. 119.
77. Ibid., pp. 122-23.
78. Ibid., p. 16.
CHAPTER II
THE PRE-MARXIAN SOCIALISTS
THE SOCIOLOGICAL ROOTS OF AN EMERGING ANTI-

CAPITALISTIC THEORY
THE PROFOUND SOCIAL and economic changes brought about by
the Industrial Revolution decisively influenced socialist thought.
The body of socialist doctrine advanced during the early nine-
teenth century had a twofold aspect: (1) continued utopistic
speculation and (2) a sharp theoretical criticism of existing con-
ditions. Both elements supplied the raw material out of which
Karl Marx and Friedrich Engels were to forge their compre-
hensive theoretical system of "scientific socialism." What most
occupied the minds of social thinkers at that time was the strik-
ing contrast emerging between the huge increase of wealth
which was made possible by the mutually enforcing develop-
ment of the division of labor and machinery, and the concur-
rent misery of a large and growing portion of the population.1
Some authors, of whom Fourier is the most representative,
reacted to these developments by simply turning their backs
on the blessings of the industrial age, inescapably accompanied,
as it seemed to be, by misery and ugliness. They instead advo-
cated their own version of a return to nature: the establishment
of small, self sufficient associations in the countryside where in-
habitants would live mainly from gardening.
Other authors, such as Sismondi, came out with criticism
against the generally accepted economic theories of the classi-
cal-orthodox school. Sismondi reproached Ricardo and Say
because their method of theoretical abstractions converted
economics, in his view, into a "chrematistic" science and thereby
lost man from its sight. Sismondi's historical and sociological
approach to economic problems led him to emphasize the so-
cial suffering caused by the disequilibria of the market and the
ensuing process of readjustment. His criticism of the economic
THE PRE-MARXIAN SOCIALISTS 25
and social conditions of his time served as a starting point for
many subsequent socialists.
In the first half of the nineteenth century, socialist criticism
became more and more directed against and crystallized around
certain principal institutions with which capitalism was identi-
fied. Private wealth was interpreted as being "derived from the
unsurrendered earnings of the working class"2 and "the pos-
session of that which gives power over and commands the labor
of man."3 Competition was denounced as the triumph of the
principle of struggle over harmony and solidarity. Crises came
to be explained by the theory of overproduction and the dis-
placement of labor by machines. Finally, many authors refused
to make any distinction between trade and treachery and ex-
ploitation since trade was not based on what they felt was the
only just principle: the exchange of equal amounts of labor.
Charles Hall, for example, saw the essence of international trade
to be in the export of vital goods in exchange for luxuries; these
luxuries were intended to be consumed by the rich whereby
the latter "commit greater waste than it would otherwise be
in their power to do."4
What conclusions were drawn by the early socialist theorists
with respect to international economic cooperation in a future
order of production? One author writes: the remedy for the
described deficiencies
is to find an unfailing market for all sorts of useful produce. The system
of cooperative industry accomplishes this, not by the vain search after
foreign markets throughout the globe which are no sooner found than
overstocked or glutted by the restless competition of the starving pro-
ducers, but by the voluntary union of the industrial classes in such num-
bers as to afford a market to each other by working together for each
other, for the direct and mutual supply by themselves of all the most
indispensable wants in the way of food, clothing, dwelling and furniture.5
But what will happen to the State? And who is going to de-
termine which "industrial class" is to produce which commo-
dities and in what quantities? Let us see what three of the
major socialists in the first half of the nineteenth century (or
"forerunners of socialism" as some choose to call them) have
to say on these subjects.
ROBERT O W E N
Early socialists, especially those in Britain, were influenced

by Robert Owen's tireless and many-sided endeavors. We are
concerned, however, only with his theoretical writings, pri-
marily his conception of a completely renewed, happy, and
harmonious society.
For Owen, the fundamental causes of all evils are the in-
stitutions of private property and free competition, interpreted
by him as the unhampered struggle for individual profit. What
is lacking in society is "an accurate acquaintance with the sci-
ence of human nature, or the individual and social character of
man."6 It is hence Owen's purpose to familiarize his readers
with what he calls the Science of Society. "It consists of four
parts only . . . the production of wealth, the distribution of
wealth, the formation of character and domestic and foreign
arrangements of government."7
The most important aspect is the knowledge of human char-
acter. Man can control, as Owen sees it, neither his "constitu-
tion at birth" nor "the effects of external circumstances," both
of which determine his character. But once his external en-
vironment is satisfactorily changed, all problems hitherto gov-
erning human relations will disappear:
New circumstances must be created around mankind which must be
in accordance with human nature and with the Science of Society. By
this change of circumstances the most perfect individual character will be
formed and the most perfect social arrangements will be introduced and
rendered permanent. To obtain these results, the population of the
world must be divided into such numbers and classed in such a manner
that each individual may obtain the greatest amount of permanent ad-
vantages that human nature can possess.8
Owen therefore proposes to organize humanity into "Vil-

lages of Unity and Mutual Cooperation," with individual mem-
bership not to exceed two thousand.9 As regards the first aspect
of the Science of Society,
new combination of production . . . would constitute a system for the
human creation of production, forming its due proportion in the grand,
general scientific system of society . . . , would provide all that would be
desired to support life, in the best state of existence; and provisions for
the animal wants of our nature would be made with the same order and
regularity with which the seasons succeed each other.10
The "animal wants of our nature" are food, clothing, and

shelter; their quantity and quality can be scientifically deter-
mined.11 Thus, "the waste of capital and labor by unnecessary
establishments and by the production of useless or injurious
articles"12 will strictly be avoided. Hence, the new system will
possess
powers to create a superfluity of all things useful or rationally desirable
for the whole population; powers more than abundant to satisfy the
wishes of all.13
because these powers are "properly combined and rightly di-

rected.14
Concerning the distribution of the goods produced between
the associated members, Owen writes:
As the easy, regular, healthy, rational employment of the individuals
forming these societies will create a very large surplus of their own prod-
ucts beyond what they will have any desire to consume, each may be
freely permitted to receive from the general store of the community what-
ever they may require. This, in practice, will prove to be the greatest
economy.15
But what will, finally, be the relations between the various

associations? Unlike the ideal commonwealths, Owen's Villages
are not closed against each other:
There will be the best means of communication adopted between all
the communities: the best roads, railways and water communications—
upon which there will be the best that can be constructed of carriage and
water conveyances for commodities and persons.16
At this stage, Owen once again summarizes the qualities of

his proposed order17 as if, without its moral foundations, the
system of the "beneficial interchange" could not fully be
grasped. Then he continues:
These two points being ascertained,18 they will know what particular
commodities will be the most beneficial to create in their own community,
for their own consumption, and what to exchange with their own surplus
production, for the same amount of labor in the surplus productions of
other, similar communities. . . . As truth and perfect sincerity will be the
sole practice of all the members of these communities, the amount of
labor in, or the real prime cost of every commodity produced, will be
accurately ascertained and be publicly known.19
In the more advanced state of these superior social communities, there
will be no trafficking between the members of the same association. All
interchange of commodities will be effected between community and
community; and on the only just principal—that is the real amount of
labor in one article against the real amount of labor in the article for
which it is exchanged.20
However, Owen relegates economic activity as a whole to

the second place: "education will be the chief object of interest
in the community, because it will comprise the greater part of
the operations of its members."21 As a result of this "general su-
perintendence of the individual from birth to maturity,"22
the re-created or new-formed man will be enabled easily to subdue the
earth and make it an ever-varying paradise, the fit abode of highly in-
tellectual moral beings, each of whom, for all practical purposes, will be
the free possessor and delighted enjoyer of its whole extent, and that
joy will be increased a thousandfold, because all his fellow-beings will
equally enjoy it with him.23
C. H. DE SAINT-SIMON AND H I S FOLLOWERS

Whereas Owen puts forward the design of a "new milieu"
as the prerequisite for the full development of what is best in
human nature, C. H. Comte de Saint-Simon attempts to discover
the directing principles of the new social order emerging from
historical evolution. What are the basic facts of this new order?
"A review of the history of society has shown that the indus-
trial class has continually gained in importance at the expense of
the others who have been losing it."24 France is "a nation which
is essentially industrial, but whose government is essentially
feudal."25 The bourgeoisie, having accomplished the great rev-
olution, now "lies heavy with the noble class on the industrial
class."26
Against this background, Saint-Simon circumscribes "the
real objectives of my ambition":
to organize a great industrial establishment, to found a scientific school
of improvement, and to contribute, in one word, to the progress of en-
lightenment and to the betterment of the lot of humanity.27
Leaving feudalism behind, "human species . . . has been des-
tined to transgress from a governmental or military regime to
an administrative or industrial regime."28
How will this future regime work without government?
The industrialists will constitute the first class of society; the most
influential industrialists will, free of charge, assume the direction and
administration of the public fortune; they will make the law and deter-
mine the mutual ranks of the other classes; they will attach to each
class the importance which is in proportion to the services which each
will render to industry. . . . When this result is achieved, tranquillity will
be completely assured, public prosperity will advance with all possible
speed, and society will enjoy whatever individual and collective happi-
ness human nature may claim.29
Does this mean the abolition of private property? No, only

the disappearance of les oisi†s (the idle). But Saint-Simon
stresses the necessity "that talent and possession not be di-
vided."30 Therefore, "property should be constituted so as to
stimulate its owner to use it in a most productive way."31
Scientific research has, in the past, been carried on sepa-
rately in each specialized field; it was now necessary to arrive
at a great synthesis and to establish the one generally valid law
which would manifest itself in all sub-branches of science.32
Consequently,
in a society organized to the positive goal of working for its prosperity
by means of the sciences, the fine arts, and the crafts, the most important
political act is that of fixing the direction where society is to advance.
This act is no longer attributed to men of social functions; it is exercised
by the social body (corps social) itself; it is in this way that Society,
taken collectively, may effectively exercise sovereignty, which then does
not consist of an arbitrary opinion exalted into law by the masses, but of
a principle derived from the very nature of things that man has done
nothing but recognize as appropriate and necessary.33
Politics therefore cease to exist, or rather, they are merged

into "the science of production."34 But this science, Saint-Simon
argues, must be complemented by a renewed spiritual power
which alone can provide a firm basis for a future order of things.
This great, unifying force is to be the Church, propagating a
purified Christian message. The essence of this message is this:
Men must behave toward each other as brothers; and this principle,
which belongs to primitive Christianity, will undergo a transfiguration.
. . . This regenerated principle will be presented as follows: religion must
direct society toward the great goal which is the fastest possible amelio-
ration of the lot of the poorest class.36
This improvement must be physical as well as moral. The

new clergy not only will attend to religious matters, but also
will monopolize knowledge; science and religion are, in fact,
considered identical. And if these two powers unite,
the power of Caesar which is impious in its origin as well as its preten-
sions, will be completely annihilated.38
As to the final picture of the world without states, Saint-

Simon envisages it as follows:
The new Christianity is called to bring to a triumph the principles of
general ethics in the struggle which exists between these principles and
those schemes which aim at obtaining a particular advantage at the
expense of the public weal. This regenerated religion is called to consti-
tute all peoples in a state of permanent peace . . . it is called to unite
the learned, the artists, and the industrialists, and to appoint them as
the general managers of the human species as well as of the special in-
terests of each people which make it up . . . it is finally called . . . to
declare as impious all doctrines which recommend to men means for
obtaining eternal life other than to work with full capacity toward the
amelioration of the life of their fellow-beings.37
It can be seen that Saint-Simon's ideas are founded on the

two basic elements we have already encountered in Owen's
work: the existence of an objective science of economic admin-
istration, coupled with the moral principle of brotherly love.
Saint-Simon's followers set themselves the task of completing
and spreading the master's theories in the journal Le Produc-
teur. But by developing his doctrine, they gave it a definite
direction toward collectivism. In their Doctrine de Saint-Simon
Exposition Premiere Année jointly written by P. Enfantin and
S. A. Bazard, they erected "one of the most important monu-
ments of modern socialism (Menger)."
They maintained that it was entirely false to focus (as
most historians did) historical investigation on the individual
instead of on le corps organise;38
Humanity . . . is a collective being (être collectif) which develops it-
self; this being has grown from generation to generation just as an in-
dividual man grows in the succession of his ages. While growing, this
being has obeyed a law which is its physiological law: and this law is
progressive development.39
One aspect of this "law" is the fact that

national hatreds are progressively wearing away, and the peoples, ready
to form a complete and definitive alliance, offer us the beautiful spec-
tacle of humanity gravitating toward UNIVERSAL ASSOCIATION.40
But all other human institutions are equally affected by this

evolution; hence, Saint-Simon's disciples rode a frontal attack
against private property and devised a rather detailed system of
collective economic control:
Property is a social fact, and is subject, like all social facts, to the law
of progress; it can thus be differently interpreted, defined, and put into
practice in different ages.41
In our time, it is argued, we must view property first in its his-

torical context: and here we see that general human evolution
is marked by a "diminution of the exploitation of men by
men."42 However, exploitation still prevails and is due to private
property and heredity.43 Therefore,
if, as we proclaim, humanity is heading toward a state in which all in-
dividuals are classed according to their capacity and rewarded accord-
ing to their accomplishments, it is evident that property such as it exists
today must be abolished.44
But there is another reason for this abolition. Economically

speaking, property is identical with the instruments of labor.
At present, "the owners and capitalists are the trustees of these
instruments; it is their function to distribute them to the work-
ers."45 But this function is assigned to them by "the chance
of birth" and is therefore discharged with little enlightenment.
Moreover, they are lacking "a profound knowledge of the rela-
tionships existing between production and consumption"46 so
that disequilibria and greater or lesser disturbances of the
economy are the inevitable consequences:
This is because the instruments of labor are distributed by isolated
individuals who ignore both industrial and human needs and the means
of satisfying them.47
Hence, the first step toward the new order "consists of trans-
ferring the right of inheritance to the state which has become an
association of the workers."48 In this association,
it is no longer the owners . . . who determine the choices made in the
enterprises and the destiny of the workers. A social institution will be in-
vested with these functions which today are so poorly discharged. It
will supervise the use of instruments of production and will preside over
the material production process; thereby it will be in a position to over-
look the entire process and will perceive all parts simultaneously of the
industrial machinery. . . . It is thus able to assess general and individual
needs and to entrust the most meritorious industrialists with the instru-
ments of labor. . . . In one word, industry is organized, everything is
linked together and calculated in advance: the division of labor is per-
fected, the combination of efforts becomes stronger each day.49
As the most suitable instrument of this organization, the

Saint-Simonians advocate a hierarchically constructed general
system of banks, with a central bank at the top guiding and
coordinating the entire economy through a network of local
and specialized agencies:
All needs would converge toward the higher banks; all efforts would
diverge from them: the general bank would allocate credits, that is, in-
struments of labor, to the local units only after having balanced and
combined the various operations. And these credits would then be dis-
tributed among the workers by special banks, representing the different
branches of industry.50
This carefully constructed organization is accompanied by

an equally careful selection of the new elite: "The only claim to
wealth (droit à la richesse), that is, to the disposition of the in-
struments of labor, will be the capacity of putting them into
operation."51 But this principle must be supplemented by an-
other, still higher principle in order to produce the desired re-
sults :
The essence of the question is who will have authority, who will class
men according to their capacities, who will appraise and reward their
performance; and we answer: whatever the extension of the association
which one has in view: it is the one who loves most the social destiny.82
The close bond between the "science of production" and re-

ligion,53 already propagated by Saint-Simon, is thus emphati-
cally reaffirmed by his followers. Without this bond, no in-
ternational order is possible; when it has been established, hu-
man evolution will overcome the stages of "family, city, nation,"
and will arrive at "Church,"64 the final goal of this evolution,
which is synonymous with universal association in happiness
and peace. "The division of power into secular and spiritual,
the separation of the Church from the state"65 led to the devel-
opment of "military associations" instead of "universal"56 ones.
The Saint-Simonians therefore propose to reestablish "the unity
of doctrine and activity"57 as the only means of creating "order
on the entire globe."68 This order is described as follows:
In the state of association . . . each particular group will see its pros-
perity and growth in that of all the other groups. . . .59 The elements of
continued struggle within each association will become weaker as sever-
al associations are united into one. . . . This development can be expressed
by the constant growth of the reign of love, harmony, and peace.60
Exploitation of man by man . . . this characterizes human relations
in the past: exploitation of nature by man associated to man: this is the
picture of the future.61
PIERRE-JOSEPH PROUDHON: F R O M ANARCHY TO FEDERALISM

With Proudhon, we enter an era of social and political
thought which was deeply marked by Hegelian influence. The
author reviewed in this section has often been called a brilliant
dialectic; yet "no one could accuse him of having an orderly
mind. He was never a system-maker, and was usually more at
home in criticism than in construction."62 The last part of this
remark, however, is not true of Proudhon's later years; his own
life, too, was marked by a dialectal evolution.63 We are particu-
larly interested in his later writings.
The balancing of antagonistic forces—this is Proudhon's
catchword, and it is the task to be solved by social science. He
clearly distinguishes himself from the "communists," who wish
to destroy property, and the "socialists," who, in their exaltation
of equality, neglect liberty. "What I am postulating for prop-
erty is its justification and balance."64 Proudhon also boasted
that he was the first to have recognized that
instead of restricting the economic forces the exaggeration of which is
fatal, they should be balanced one against the other. . . . What society is
searching for is the equilibrium of its natural forces.65
Proudhon proposes to establish this equilibrium by the in-
troduction of what he calls the système mutuelliste promising
and assuring "service for service, value for value, credit for
credit, guarantee for guarantee."66 With the elimination of the
monopoly of private property and the droit d'aubaine attached
to it,67 this state could be achieved. Then, Proudhon thought,
all values would clearly be definable in terms of labor and justly
exchangeable against one another. Contracts would take the
place of governments whose function as oppressor would no
longer be needed:
Once capital and labor are united, society will exist by itself and no
longer need government.68
Proudhon's mutualism thus points straight toward anarchy.

During the last years of his life, Proudhon turned his atten-
tion to the basic problems of international order. He wrote:
Even though, in 1840, I set out with anarchy as the conclusion to my
critique of the idea of government, I finished with federation as the nec-
essary basis for European international law and, later, for the organiza-
tion of all states.69
In 1861, Proudhon published La paix et la guerre. In this

treatise he explains that war is one manifestation of "that anta-
gonism which we accept as the law of humanity and nature."70
Wars are waged between two powers
with a view to a new state of things which, in providential order, must
be substituted to the old one, whether the war's aim be the formation of
a new state replacing others or simply the determination of their exten-
sions and mutual relations.71
In contrast to these aims, however, "the first, universal and

unchanging cause of war . . . is the lack of means of subsistence
. . . the upsetting of economic equilibrium . . . pauperism."72
Proudhon proceeds to show that there is a striking contradiction
between the cause and the goals of war, the cause belonging to
the economic, the goals to the political sphere:
It is evident. . . that, instead of having one problem to solve, we have
two: a political problem concerning the formation, delimitation and dis-
solution of states . . . and an economic problem relating to the organiza-
tion of productive faculties and to the distribution of services and goods.73
A distinction must therefore be made between "the right to
force" on the one hand and "economic rights" on the other; be-
tween "the public sphere, the one and only goal of conquest,
and the private estates (propriétés particulières) situated
beyond its reach."74 In the nineteenth century, the economic
question has become preeminent; "woe to the nation which,
forgetting itself, asks from the weapons what only science, labor,
and liberty can give."75
The economic sphere is essentially characterized by a mu-
tuality of interests despite the fact that human antagonism still
asserts itself:
But there is this enormous difference that in industrial struggles, the
really defeated are only those who have fought cowardly or not at all.
. . . In the realm of labor, production follows destruction; the consumed
forces are revived after their destruction.76
As this new antagonism gains ground, the old one recedes;

"the increase in influence which one is forced to admit for labor,
is at the expense of raison d'Etat,"77 that is, war. Proudhon's
theory did not pass without criticism, but his opponents were
unable to shake the author's basic conviction that economy and
peace belonged to one fundamental category of international
relations, politics and war to the other:
They have admitted that it did not appertain to war to solve questions
relating to credit, wages, association, exchange; yet there always remained
a political question—one could almost say an international petitory—to be
settled, on which rested the entire economic structure. To this I reply,
using the same style, that the petitory is constantly being modified and
transformed by the possessory; that, as property . . . tends . . . to fall
entirely under commercial jurisdiction, the state . . . tends to assume
a purely administrative character and be reduced to budget regulations;
that, as these things happen, international relations tend to dissolve into
purely economic relations which dispels the hypothesis of a jurisdiction
by force.18
Although maximum freedom from government interven-

tion is the ideal of the economic sphere, some kind of authority
must exist. Proudhon's next task is to find a balance between
these two antagonistic forces. He distinguishes between two
kinds of authority: monarchy and "panarchy," or "commu-
nism,"79 which is characterized by centralized administration
and undivided power, and democracy or self-government which
is founded on liberty and law.80
With arbitrariness fatally entering politics, corruption soon becomes
the soul of power and society is dragged, without pause or mercy, on to
the endless path of revolutions. That is where the world is today.81
The escape from this dilemma is federation, freely entered

into by communities or states:
A federative contract aiming, in general terms, at guaranteeing to the
federated states their sovereignty, their territory, the freedom of their
citizens; at settling their disputes; at providing for general measures per-
taining to the security and common prosperity . . . this contract then, in
spite of the magnitude of the interests involved, is essentially restricted.
The authority charged with its execution is never allowed to prevail
over its constituting members; I mean that the federal attributes can
never exceed in number or reality, those of the communal and provincial
authorities, just as the latter cannot exceed the rights and prerogatives
of man and the citizen. If it were otherwise, . . . the federation would
again become a centralization of the monarchic type.82
The internal structure of the federate system is thus seen

to be the exact opposite of the internal structure of hierarchy
and administrative centralization. But the political order must
be complemented by a free economic order, designed so that it
does not give "ceaseless causes for dissolution."83
Proudhon maintains that all states based on undivided pow-
er are, by their nature, annexationist:
In such systems . . . one can say that the idea of natural frontiers is
a fiction or rather a political fraud; rivers, mountains, and seas are re-
garded in them not as territorial limits, but as obstacles over which the
freedom of the sovereign and of the nation provides a challange for tri-
umph. And this is the natural outcome of its underlying principle: the
faculty of possessing, accumulating, commanding, and exploiting is in-
finitely great, limited only by the universe itself. . . . Nothing can stop
its encroaching advance [of the State, E.T.] except the collision with an-
other State, just as aggressive, and capable of defending itself.84
The international implications of a truly federal system are

quite different. Such a system, again by its nature, excludes
aggression:
By virtue of the principle which, by limiting the treaty of federation
to mutual defense and to a few other objects of common utility, guar-
antees to each State its territory, its sovereignty, its constitution, the
freedom of its citizens and, over and above, leaves it with more authority,
initiative, and power than it gives up, federation is automatically re-
stricted . . . with the result that a federation provides a guarantee both
to its own members and to its non-federated neighbors.85
And Proudhon concludes:

A federate people is a people organized for peace; what use could
it make of armies? . . . No need for alliance or commercial treaties: be-
tween free nations, common law is enough. Freedom of exchange . . .
freedom of circulation and residence within the limits of the respect due
to the laws of each country. . . . Such is the idea of federation and such
are its consequences.88
SUMMARY AND CONCLUSIONS

The ideas and doctrines advanced by the pre-Marxian so-
cialists form the counterpart of classical economic theory. But
they do not attempt to provide answers to those basic questions
that concerned Adam Smith and David Ricardo. Whereas these
authors had asked: what principles guide men in their economic
activities? Socialist authors are tormented by the fact of in-
equality. Their investigations are directed to discovering the
causes of human injustice and to abolishing the "system" which
has created them.
Socialist authors, therefore, focused most of their attention
on the moral foundations of human behavior. Economic phe-
nomena were analyzed only with respect to their own ethical
standards. They began with the assumption that a perfect order
of society exists the principles of which merely await human
detection. These principles could not be anything but simple,
consistent, absolutely reliable, and generally valid. Hence, all
phenomena which were not of this nature were considered as
being the outcome of a deficient economic and social system.
Similarly, human behavior was regarded as fundamentally vir-
tuous and altruistic; if it did not appear as such in reality, this
again was thought to be due to the defects of the existing order
of things.
Power can be defined as the ability of its holder to claim a
greater share of the available goods and services than is justi-
fîed by his contribution to the production of these goods. Lib-
erals usually agree with this definition and therefore insist on
the restriction of political power; they include in the term "con-
tribution to production" the productive services of labor, land,
and capital, and leave the valuation of these services to the mar-
ket. Socialists, on the other hand, consider this contribution to
consist of labor only. Hence their demand that trade, to be just,
should be governed by the principle of an equal exchange of
labor; hence also their view that the most dangerous form of
power is economic power, that derived from private ownership
of the means of production. Socialists cherished the labor
theory of value as a "law" which explained the true character
of economic relationships and also provided a sure criterion for
man's deviation from the "natural" and the "just." At the same
time, this law was presented as one of those unshakable guide-
lines on which a future socialist order would be built.
Robert Owen was primarily concerned with the perfection
of human character. His emphasis on education to "truth and
perfect sincerity," a persistent element in later socialist doctrine,
illustrates the process by which imperfect human beings are to
be transformed into the perfect members of a perfect commu-
nity. Under the impact of this education the problem of eco-
nomic exchange would disappear along with all other human
problems, just as they had already been eliminated in Utopia.
A true international community built on justice and mutual
solidarity would emerge. Owen himself could have written
Mores key phrase that people would no longer "think felicity
to rest in all pleasure, but only in that pleasure that is good and
honest."
Conversely, the "technocrats" among the socialist writers
advocated a world scientifically organized for maximizing pro-
duction. The Saint-Simonians' writings provide a logical syn-
thesis of pre-Marxian socialist ideas. A confined circle of men
is to unite "renewed spiritual power" and the knowledge of the
"science of production." But Saint-Simon makes it clear that
religion has precedence over economic organization as it must
"declare as impious all doctrines which recommend to men
means for obtaining eternal life other than to work with full
capacity toward the amelioration of the life of their fellow-
beings." Once "men . . . behave toward each other as brothers,"
the centralized direction of the economy will be a relatively
simple and easily understandable task. The corresponding
droit à la richesse will be exercised by men of talent and good
will. At the same time, it is argued, society will no longer be at
the mercy of human whim because humanity's great goals will
be decided by the corps social itself.
In the passages quoted on pages 29 to 31, the basic method
of socialist reasoning, already referred to, is radically restated:
an abstract and, at that, not defined concept takes on life and is
endowed with the ability to provide super-human leadership.
This être collecti†, to be sure, is not yet perfect, as Plato's State
was. But a new constituent of socialist thought is introduced
which bridges the gap between the present and the future:
the idea of a progressive development of the corps social. The
fundaments of socialist philosophy thus appear in full outline
already at this juncture: their cornerstone is constituted by an
autonomously living collective being, the embodiment of a
principle not created by the human mind, but discernible by
it, which by successive historical stages grows toward the goal
where this perfect principle will govern all human relations.
The final stage is thought to be attained when the development
of human character will have reached the maturity already pos-
sessed by the corps social; and this stage will permit humanity
to advance from "exploitation of man by man" toward "exploita-
tion of nature by man associated to man."
But again the question arises: will this collective body read-
ily relinquish its unrestricted power over the economic and
political life within its jurisdiction to larger and larger social
bodies? Are its representatives likely to do anything more than
talk about the necessity of creating a super corps social to which
all individuals and formerly autonomous communities alike
would owe obedience and subordination—unless this new body
would be placed under their own, exclusive, leadership?
Owen and the Saint-Simonians, relying on religion, the
Science of Society, and the Law of Progress, did not hesitate
to answer this question in the affirmative. But this answer is
founded on the basic dilemma of socialist reasoning which re-
sults from the identification of the corps social with the men rep-
resenting it. The philosophy of the perfect state demands un-
limited authority and power; yet authority can only be wielded
by imperfect individuals, free neither of selfishness nor of ar-
bitrariness and power-lust. Furthermore, an absolute measure
of value and objective scientific criteria permitting matters of
lower importance to be subordinated to those of higher im-
portance, a central element of socialist theory, do not exist.
It is therefore impossible to judge what is the common interest
save by an authoritative decision which, however, has validity
only within a given community or state. What if la force qui
attire et qui renvoie (Pecqueur) on the national level refuses to
let itself be attracted to and repelled by a supranational au-
thority?
It was this problem of unrestricted domination and its effects
on personal freedom and international order which foremost
occupied Proudhon in his later years. He found that in human
affairs there could be no unity of activities and harmony of
wills because their very essence was steeped with antagonism.
Hence, the solution was to be seen not in the concentration of
power, but in its restriction and division, coupled with a strict
separation of dominium and imperium. Proudhon considered
the individual's freedom to look after his own interests—which,
to be sure, he sharply distinguished from the freedom to ex-
ploit one's fellow-beings—to be the safest foundation for in-
ternational peace and integration. He thereby drew upon him-
self the contempt of the man whose work will now be examined.
NOTES TO CHAPTER II
1. See, however, Hayek, F. A., Capitalism and the Historians. London, Routledge,
1954, p. 192.
2. Bray, J. F., Labour's Wrongs and Labour's Remedy (1838-1839). Quoted in
Beer, M., A History of British Socialism. London, Bell, 1920, Vol. I, p. 240.
3. Hall, C , The Effects of Civilisation on the People in European States (1805).
Quoted in Gray, A., op. cit., p. 264.
4. Quoted ibid., p. 267.
5. Thompson, W., An Enquiry into the Principles of the Distribution of Wealth
Most Conducive to Human Happiness (1824). Quoted in Beer, M., op. cit.,
p. 228.
6. Owen, R., The Book of the New Moral World Containing the Rational System
of Society. London, Effinghaus Wilson, 1836, p. 91.
7. Owen, R., Lectures on an Entire New State of Society. On the New Religion.
London, l82O(?),p. 17.
8. Ibid., p. 136.
9. Arrangements are proposed "by which the production and distribution of
wealth, the forming of the character and the governing of the whole, may be
the most easily and the most beneficially conducted. With this view, the dwell-
ings will be erected and arranged; a portion of land will be annexed, sufficient
to enable the members of the associations to raise, at all times, a full supply of
agricultural productions; manufactures will be established. . . ." Ibid., p. 139,
italics added.
10. Ibid., p. 41.
11. "That many luxuries in meat and drinks which are ardently sought after by
the wealthy, are destructive to their health of body and mind, all physicians
as well as all intelligent persons . . . readily admit." Ibid., pp. 161-62. These
luxuries will therefore not be produced. Conversely, each member is to
dwell in a separate flat of two rooms in which he may receive friends or stay
alone as he wishes.
12. Ibid., p. 69.
14. Ibid.
15. Report to the County of Lanark, reprinted in The Life of Robert Owen. Lon-
don, Effinghaus Wilson, 1858, IA, p. 303.
16. Lectures, p. 100.
17. "In our new and superior state of society, the sole object will be to obtain and
secure the greatest happiness for all its members—all being considered chil-
dren of the same family and entitled to the same care, perfection and advan-
tages. Arrangements will therefore be made in the first instance to produce
and distribute, in the best manner, the most valuable wealth for the use of
the individuals belonging to each family community. The parties will be
taught what is the best wealth for them to possess and use and the best
mode to produce and acquire it." Lectures, p. 99, italics added.
18. Cf. footnote 17 of this study.
19. For an extensive discussion of Owen's labor theory of value, cf. Report, pp.
278 seq.
21. Lectures, p. 139.
22. Ibid., p. 113.
23. New Moral World, p. 98.
24. Catéchisme politique des industriels. In Oeuvres publiés en 1832 par O. Rod-
rigues. Paris, Capelle, 1841, p. 48. Saint-Simon defines the "industrialists" as
all those who actually produce useful things no matter whether in agriculture
or in industry.
25. Ibid., p. 37.
26. Ibid., p. 43.
27. Vie de Saint-Simon écríte par lui-même. 1st fragment, ibid., p. XIX.
28. Catéchisme, p. 97, italics original.
29. Ibid., p. 47.
30. Hubbard, M. G., Saint-Simon. Sa vie et ses travaux. Suivi de fragments des
plus célèbres de Saint-Simon. Paris, Guülaumin, 1857, p. 74.
31. Saint-Simon, C. H., Vues sur la propriété et L· liberté (1818). In Oeuvres,
p. 268. It is an interesting detail that Saint-Simon thought himself to be in
complete agreement with the author of The Wealth of Nations.
32. Saint-Simon thought that this was Newton's law of universal gravitation.
33. Organisateur, 1819, cf. Hubbard, M. G., op. cit., p. 233.
34. De I'Industrie, 1816, quoted ibid., p. 157.
35. Nouveau Christianisme, in Oeuvres, pp. 177-78, italics original.
36. Ibid., pp. 146-47.
37. Ibid., pp. 156-57.
38. Doctrine de Saint-Simon Exposition Premiere Année 1828-1829. 2nd ed.,
Paris, Au Bureau de l'Organisateur, 1830, p. 113.
40. Ibid., p. 109, capital letters original.
41. Ibid., p. 191.
42. Ibid., p. 172.
43. Defined as "the privilege to levy a premium on the labor of others" (ibid., p.
182) and again: "The faculty of living on the labor of others in complete
idleness." (Ibid., p. 188.)
44. Ibid., p. 188.
45. Ibid., p. 190.
46. Ibid., p. 191.
47. Ibid., p. 192. In the original, the entire phrase is printed in italics. We quote
here, for curiosity's sake, the views held by the authors on orthodox economics
—an interesting contrast to that held by the master: "Laissez faire, laissez
passer! such has been the necessary solution, such has been the only general
principle which they have proclaimed. The economists . . . have entrusted
to personal interest the realization of the great percept without being aware
that each individual, whatever the extension of his field of vision, is incapable,
at the milieu where he lives and at the depth of the valleys, of judging the
whole which can only be discovered at the highest peak." What is the result
of competition, "this mortal struggle? A few lucky ones triumph; but at the
price of the complete ruin of innumerable victims. . . . Hence the countless
catastrophies, these commercial crises frightening the spectators and stopping
the execution of the best projects." Ibid., pp. 90-91.
48. Ibid., p. 187.
49. Ibid., pp. 193-94, italics original.
50. Ibid., p. 207.
52. Ibid., p. 210 footnote, italics original.
53. "The distribution of the instruments and products of industry is not the only
objective of the governments of future societies; another distribution claims
the paternal cares of the directors of humanity: to inspire all men, to develop,
to cultivate in them feelings, knowledge, and liabits apt to rendering them
worthy of being members of a loving, ordered, and strong society; to prepare
each of them, according to his vocation, to contribute to it his love, intelligence,
and strength; education, in one word, which embraces the entire life of each
being, his general destination and his particular profession . . . , is the most
important aspect of the social system." Ibid., pp. 41-42, italics original.
54. Ibid., p. 147.
55. Ibid., p. 166.
56. Ibid., p. 172.
57. Ibid., p. 160.
58. Ibid.
59. Ibid., pp. 145-46.
60. Ibid., p. 151.
62. Cole, G. D. H., A History of Socialist Thought. London, Macmillan, 1953-
61, Vol. I, p. 201.
63. Correspondance A. Micaud. December 25, 1855, quoted by H. M. Moysset
in his Introduction to La Guerre et la Paix. Paris, Riviere, 1959, p. 3.
64. La propriété fait indispensable. Quoted in Maury, L., La Pensée vivante de
P. J. Proudhon. Textes choisis et prefaces. Paris, Ed. Stock, 1942, p. 10.
65. Quoted in Gide, C , and Rist, C , Histoire des doctrines économiques. 7th ed.,
Paris, Sirey, 1947, p. 329 footnote, italics original.
66. Quoted in Gray, A., op. cit., p. 245.
67. Proudhon meant by this the "community of the gifts of nature and the ex-
change of the products of labor only." Quoted in Gide, C., and Rist, C., op.
cit., p. 344.
68. Quoted in Gide, C., and Rist, C , op. cit, p. 344.
69. Correspondance, XII, pp. 220-21, quoted in Puech, J. L., and Ruyssen, T., "Le
fédéralisme dans l'oeuvre de Proudhon." Introduction to Du Principe Féd-
ératif et ouevres dìverses sur les problèmes politiques européens. Paris, Riv-
iere, 1959, p. 53, italics original.
70. La paix et la guerre, p. 482.
71. Ibid., pp. 477-78.
72. Ibid., p. 326.
73. Ibid., p. 462.
74. Ibid., p. 461.
75. Ibid., p. 466.
76. Ibid., p. 484.
77. Ibid., p. 485.
79. Du Principe Fédératif, p. 274. It is to be expected that an absolutist govern-
ment "will be the more insufficient, oppressive, odious to its subjects and con-
sequently instable in that the State will have become larger. History has con-
served the memory of, and modern centuries have supplied examples of,
these frightful monarchies, shapeless monsters, real poltitical mastodons which
a better civilization should progressively eliminate." Ibid., p. 289.
80. Ibid., pp. 275 and 279.
81. Ibid., p. 307.
82. Ibid., pp. 319-20. Proudhon defines the socialist communities as the "minia-
ture image of all absolutist states. One who joins an association of this kind,
particularly if it is to be perpetual, is surrounded by more fetters and is sub-
ject to more charges than he had initially." Ibid., p. 319.
83. Ibid., p. 354. Proudhon adds, however, that a free economic order must not
rest on exploitation.
86. Ibid., p. 550.
87. This is not denied by socialist authors. But this authority will, as the Saint-
Simonians see it, be facile et douce for all those who have let themselves be
convinced of the righteousness of the final goal to be achieved. And Constantin
Pecqueur writes: "Freedom can only exist in association; in the unity of ac-
tivities, the harmony of wills, and the conformity of fundamental beliefs. . . .
But where all this is, there is necessarily also authority, the center, a force
which directs, which attracts and repels; and we repeat: this authority is
always tuned to general customs and universal morality; it is despotic, hard,
and intolerant or the reverse, just as society deserves and desires it." Théorie
nouvelle d'économie sociale et politique ou Etudes sur Vorganisation des
sociétés. Paris, Capelle, 1842, pp. 456-57. Italics added.
CHAPTER III
KARL MARX AND HIS FOLLOWERS: THEIR CRITIQUE

OF THE CAPITALIST MODE OF PRODUCTION
INTRODUCTION
Karl Marx, driven to investigate contemporary social prob-

lems by his powerful intellect and by an ardent desire to change
the world, never quite succeeded in shaking off the influence
of Hegel under whom he had studied in Berlin. For the last
time in the history of human thought, Hegel had attempted to
explain the universe and man's relation to it by one single sys-
tem. Hegel taught that the dialectic development of human
history was marked by, and its essence found in, the increasing
self-realization of the Spirit toward a unity of the rational with
the real. This Spirit was manifested in a growing human con-
sciousness which, by the act of understanding, assimilated and
thereby mastered all objects until absolute knowledge was at-
tained. This knowledge was regarded as synonymous with the
reintegration (Rückkehr zu sich selbst) of the Spirit.1
Hegel regarded the State as the nodal point between the
self-realization of the Spirit and man's cooperation in this
process. In fact, he came to regard the Prussian State as the last
phase of history—the very union of the rational with the real,
the divine upon earth. Marx, discarding this conclusion from
the outset, nevertheless accepted the theory of history moving
in progressive stages toward a definite and superior goal, and
of man's ability to control this process. However, one of Marx's
principal points of divergence was his view that "it is not the
consciousness of men that determines their being, but on the
contrary, their social being determines their consciousness."2
Marx summarized his theoretical framework as follows:
In the social production which men carry on they enter into definite
relations that are indispensable and independent of their will; these
relations of production correspond to a definite stage of development of
their material powers of production. The totality of these relations of
KARL MARX AND HIS FOLLOWERS 45
production constitutes the economic structure of society—the real foun-
dation, on which legal and political superstructures arise and to which
definite forms of social consciousness correspond. The mode of produc-
tion of material life determines the general character of the social, politi-
cal, and spiritual processes of life.3
Thus, he clearly distinguishes the mode of production as the

fundament of any historical stage from the particular "legal
and political superstructure" built on it at that time. And this
distinction now provides him with the tools for the explanation
of that issue in which he is interested foremost, the problem of
social change. He continues his summary:
At a certain stage of their development, the material forces of pro-
duction in society come in conflict with the existing relations of produc-
tion, or—what is but a legal expression for the same thing—with the prop-
erty relations within which they had been at work before. From forms
of development of the forces of production these relations turn into their
fetters. Then occurs a period of social revolution. With the change of
the economic foundation the entire immense superstructure is more or less
rapidly transformed.4
He goes on:
The bourgeois relations of production are the last antagonistic form
of the social process of production; not in the sense of individual antago-
nisms, but of conflict arising from conditions surrounding the life of
individuals in society. At the same time, the productive forces developing
in the womb of bourgeois society create the material conditions for the
solution of that antagonism. With this social formation, therefore, the
pre-history of human society comes to an end.5
It is apparent that the science of economics has no inde-

pendent place in Marxian analysis; the only function attributed
to it is the explanation of social phenomena. And since Marx
is interested in the social phenomena of the capitalist period
only, he sets himself the task, as he writes in the preface to Vol-
ume I of Capital, "to lay bare the economic law of motion of
modern society."8 This basic law he and Friedrich Engels had
already stated in the Communist Manifesto (1848):
The history of all hitherto existing society is the history of class
struggle.7
Applying this law to the period under consideration, it follows
that the relations between capital and wage labor determine the entire
character of the mode of production.8
Hence, Marx's "economic" investigations are concentrated on

these relations. His approach is of a "highly socialized nature"
(G. D. H. Cole): "Individuals are dealt with only insofar as
they are the personifications of economic categories, embodi-
ments of particular class relations and class interests."9
THE ELEMENTS OF MARXIAN POLITICAL ECONOMY

The essential elements of Marx's theoretical structure are:
"commodities," "abstract labor," and "surplus value," all con-
cepts which belong to a particular, namely the capitalist, mode
of production. Surplus value is derived from the capitalist's
power to compel the suppliers of labor to work more hours than
are "socially" necessary to produce their means of subsistence.
Marx defines the value of both commodities and labor as ex-
pressing "the connection that exists between a certain article
and the portion of the total labor time of society required to
produce it."10 Because wages represent only the value of labor
thus defined, the capitalist is able to appropriate part of his
produce for nothing. For a detailed discussion of these con-
cepts, the reader is referred to Paul M. Sweezy's The Theory of
Capitalist Development.11
Marx calls the expansion of surplus value (or more precisely
of that part of it which is being reinvested by the entrepreneur)
accumulation. He regards accumulation as the driving motor
of the capitalist mode of production:
Competition makes the immanent laws of capitalist production to be
felt by each individual capitalist as external coercive laws. It compels
him to keep constantly extending his capital, in order to preserve it, but
extend it he cannot except by means of progressive accumulation.12
The capitalist thus cannot help acting in this way; his desire
"to expand the value under his control (to accumulate capital)
springs from his special position in a particular form of organ-
ization of social production."13
Accumulation, hov/ever, means the production of more capi-
tal goods. But the introduction of additional productive equip-
ment sets labor free, more labor than can be employed in the
manufacture of new machinery. This surplus is called by Marx
the Reserve Army; its function is to check wages and to uphold
the rate of surplus value.
The process of capital accumulation and with it the size of
the Reserve Army are subject to cyclical fluctuations. Marx
advanced varying explanations for these fluctuations, but most
of his followers later referred to passages scattered in Volume
III of Capital, such as
The ultimate reason for all real crises always remains the poverty and
restricted consumption of the masses as opposed to the drive of capitalist
production to develop the productive forces as though only the absolute
consuming power of society constituted their limit.14
Here, Marx clearly takes up the thread of the undercon-

sumption theorists. "Properly understood . . . , 'underconsump-
tion' and 'over-investment' are opposite sides of the same coin."15
Both are due to the fact that "in capitalistic society the means of
production cannot become effective unless they have been
turned beforehand into capital, i.e. the means of exploitation
of human labor."16
CONCENTRATION AND CENTRALIZATION OF CAPITAL

The accumulation process necessarily implies an increase,
or, in Marx's words, a concentration of capital17 in the hands of
individual capitalists. At the same time, however, this con-
centration changes the production process itself because it
raises not only the "organic composition of capital," but also
the percentage of fixed equipment within "constant capital."18
The latter is a direct consequence of the competitive struggle
which compels the entrepreneurs to lower their costs by ra-
tionalization. Thus,
with the development of the capitalist mode of production, there is an
increase in the minimum amount of individual capital necessary to carry
on a business under normal conditions.19
The growth of capital requirements may, however, outstrip the

concentration of capital and will therefore lead to its centrali-
zation: this involves the "transformation of many small into
few large capitals." Hence, "it only presupposes a change in
the distribution of capital already to hand and functioning."20
This introduces an "altogether new force" into capitalist
production:
the credit system. . . . By unseen threads it draws the disposable money,
scattered in larger or smaller masses over the surface of society, into the
hands of individual or associated producers. It is the specific machine
for the centralization of capitals.21
Concurrent with the development of the credit system there

emerges the stock company, the main characteristics of which
are described by Marx as follows:
1. An enormous expansion of the scale of production and of enter-
prises that was impossible for individual capitals . . .
2. The capital . . . is here directly endowed with the form of social
capital (capital of directly associated individuals) as distinct from
private capital. . .
3. Transformation of the actually functioning capitalist into a mere
manager, administrator of other people's capital and of the owner
of capital into . . . a mere money capitalist.22
The stock company must therefore be regarded as a tran-

sitory element in the progress from the capitalist to the socialist
mode of production.
Marx's description of the centralization of capital was de-
veloped by Rudolph Hilferding into a coherent theory of cor-
porations and of the new aspects they introduce into the capi-
talist mode of production. The freeing of the industrial capi-
talist from the function of industrial entrepreneur23 results in the
rise of two distinct groups: the company directors and the ban-
quiers. Hilferding, generalizing the German experience, assigns
to the banquiers an increasingly important role in the capitalist
production process because their institutions form the principal
reservoirs of "financial capital."24 But in addition, the banquiers
are now able to manipulate their portefeuilles of negotiable se-
curities in such a way as to assure themselves a majority not only
in the larger stock companies, but also in their subsidiaries.
A circle of people is emerging who, due to their own capital
strength or as the representatives of the concentrated strength of capital
owned by others (bank presidents), are represented on a great number of
company boards. A kind of personal union is thus formed between the
different stock companies as well as between these and the banks, a factor
which must be of the greatest influence on the policy of these companies
since a common interest of possession (Besitzinteresse) arises among the
various companies.25
Unlike this group, the managers, having no funds of their own,

become mere employees.
The stock company finds accumulation greatly facilitated.
The financial means at its disposal are large enough to enable
its executives to achieve more security and stability by the for-
mation of reserves. Thus,
the expansion of a capitalistic enterprise having been converted into a
stock company, freed from the fetters of individual ownership, can now
take place purely according to technical requirements.26
This strengthens its competitive position with respect to

those entrepreneurs whose scope of action is still limited by
their personal capital. But the growing power position of the
stock companies on the market is not wholeheartedly welcomed
by the banks:
The victory of one enterprise is the defeat of others in which the bank
was equally interested. . . . Hence the bank is aiming at establishing
monopoly.27
The door is thereby opened to the combination movement; the

formation of cartels, mergers, and trusts and the increased cen-
tralization of banks provoke each other.28 Thus,
the capital magnate and the finance capitalists increasingly unite the
control of total national capital by controlling bank capital.29
This excessive centralization of capital and power in the

hands of a small and, at that, decreasing group of persons has
important economic and political consequences. In the first
place, it destroys the price mechanism:
When monopolistic combinations abolish competition, they abolish
the sole means of realizing an objective price law. Price ceases to be an
objective magnitude; it becomes the calculated result of those who will-
fully and consciously fix it. . . . Instead of being necessarily independent
from the will and consciousness of the participants, it becomes arbitrary
and subject to chance.30
Secondly, the tendency to expand investment following

technical innovations is restrained by the fact that competition
no longer compels the entrepreneurs to rationalize production
to the same degree as was necessary prior to the monopolistic
control of markets. Hence, the accelerated rate of accumula-
tion will exceed capital requirements so that it will become
imperative to look for favorable investment opportunities
abroad.
Thirdly, therefore, "Monopoly Capital'31 will induce a pro-
found change in international economic relations. On the one
hand, it will become vital to eliminate external, along with in-
ternal, competition. On the other hand, the ground must be pre-
pared for capital export.
CAPITALISM AND THE WORLD MARKET

But we have rushed ahead. Let us return for a moment to
competitive capitalism to which Marx devoted the bulk of his
analysis, and summarize his implications on the nature of in-
ternational trade under this mode of production.
Marx's Views
We have seen that "in order that capital may be able to
arise and take control of production, a definite stage in the
development of trade is assumed."32 Capital accumulation
necessarily leads to an ever broadening extension of the market
until it embraces the whole world:
The old-established national industries . . . are dislodged by new in-
dustries, whose introduction becomes a life and death question for all
civilized nations, by industries that no longer work up indigenous raw
material, but raw material drawn from the remotest zones; industries
whose products are consumed, not only at home, but in every quarter of
the globe. . . . In place of the old local and national seclusion and self-
sufficiency, we have intercourse in every direction, universal interde-
pendence of nations. And as in material, so also in intellectual produc-
tion; the intellectual creations of individual nations become common
property.33
Elsewhere Marx writes: "The credit system and competition
of the world market [form] the basis and the vital element of
capitalist production."34 The progress of industrialization and
the development of world trade react upon and enforce each
other. Marx describes "the dual nature of this effect" as follows:
Since foreign trade cheapens partly the elements of constant capital
and partly the necessities of life for which the variable capital is ex-
changed, it tends to raise the rate of profit by increasing the rate of sur-
plus value and lowering the value of constant capital. It generally acts
in this direction by permitting an expansion of the scale of production.
It thereby hastens the process of accumulation, on the one hand, but
causes the variable capital to shrink in relation to constant capital, on the
other, and thus hastens a fall in the rate of profit. In the same way, the
expansion of foreign trade, although the basis of the capitalist mode of
production in its infancy, has become its own product . . . with the
further progress of the capitalist mode of production, through the innate
necessity of this mode of production—its need for an ever expanding
market.35
This passage implies, however, that the workers, unlike the

capitalists, derive no benefits from the international division of
labor. To the extent to which expenditures for the workers'
means of subsistence are reduced by the import of cheap food-
stuffs, the value of their labor power also diminishes. Carey's
view is completely false, Marx argues,
that the wages of the different nations are directly proportional to the
degree of productiveness of the national working days. . . . The whole of
our analysis of the production of surplus value shows the absurdity of this
conclusion.36
Marx draws a sharp division line between his own, "qualitative"

value analysis and the view of "the F ree Trade bagmen"; the
former
has shown that the form or expression of the value of a commodity
originates in the nature of value, and not that value and its magnitude
originate in the mode of their expression a> exchange value. . . . The
modern hawkers of Free Trade who must g it rid of their article at any
price, on the other hand, lay most stress on the quantitative aspect of the
relative form of value. For them, there cons quently exists neither value
nor magnitude of value anywhere except in its expression by means of
the exchange relation of commodities, that s, in the daily list of prices
current.37
The author concludes that international exchange, under capi-
talism, lastly "only transfers the contradictions to a wider sphere
and gives them greater latitude.'"38
Rise of Finance Capital

In the concluding parts of Hilferding's book, entitled The
Economic Policy of Finance Capital, one feels almost a kind
of nostalgia in those passages in which the author treats the
period of free trade. This period, Hilferding writes, was char-
acterized by the undisputed advantage of British industrialism
which required both unhampered import of foodstuffs and raw
materials—hence the abolition of the Corn Laws in 1846—and
the freedom of exports of manufactured goods to all parts of
the world. Britain had
only a minor interest in the possession of colonies. . . . The demand for
active colonial policy, which was very expensive, raised taxes, and weak-
ened the parliamentary regime at home, receded before free trade prop-
aganda.39
The "newcomers," especially the United States and Ger-

many, however, had already somewhat modified the pure free
trade doctrine in that, following the recommendations of Carey
and List, they introduced tariffs to protect their infant industries.
The rationale of these tariffs was to accelerate economic de-
velopment within the United States and Germany until equal
footing was reached with England, and free trade could be
permitted. But from the outset they necessarily introduced
monopolistic elements into the economic order of the protected
states. Whereas British industry had developed organically
from small beginnings to its later greatness, German capitalism,
once freed from its political fetters,
could of course . . . not repeat the British experience. Endeavors were
rather to be made to start development at home, if possible, from the
technical and economic level already reached by the more advanced
country.40
Because of a general lack of accumulation, the German

stock company assumed, along with the functions already de-
scribed, a new one; it became the instrument
for raising the necessary capital which . . . was not only unavailable to
the individual industrial capitalist, but to the capitalist class as a whole.41
In this way, the money owned by the other classes could be

concentrated and placed at the disposal of industry. It is there-
fore not surprising that
not England, the free trade country, but protectionist Germany and the
United States have become the model countries for capitalist develop-
ment.42
But
this coincidence of tariff protection with the financing of industry through
the banks was, with rapid industrial development, bound to encourage
tendencies for cartelization which in turn created a new interest in tariff
protection, thereby changing its function.43
The new function of tariffs guarantees to cartels, in addi-

tion to their continued existence, an extra profit corresponding
to the difference between the protected home market price and
the world market price. As more and more countries isolate
themselves with high tariff walls, however, the export of com-
modities and thereby the advantages derived from large-scale
production become severely limited. But if the sale of goods
across national frontiers is restricted, capital is still free to flow
abroad. It is the more ready to do so in that it is available in
sufficient quantities to the monopolists and is attracted by extra
profits abroad. Protection thus becomes a
motive for transferring, instead of commodities, the production of com-
modities itself. . . . It thus becomes possible for a developed country to
overcome the detrimental impact of tariff protection on the profit rate
by means of capital export.44
Already Marx had pointed out that the export of investment

funds was due not to an absolute, but only to a relative surplus
of capital in the lending country—relative, that is, to the existing
level of employment and consumption.45 Whereas it lies, Marx-
ists repeat, in the general nature of capitalism to keep this level
below its optimum, this "contradiction" becomes even more ap-
parent as competition is being replaced by "Monopoly Capital."
As J. A. Hobson put it:
It is not industrial progress that demands the opening up of new
markets and areas of investment, but mal-distribution of consuming power
which prevents the absorption of commodities and capital within the
country.46
Hilf erding elaborated a systematic theory of the policy of fi-

nance capital and its economic and political consequences.
Capital export is defined as "the export of value which is des-
tined to produce surplus value abroad."" This policy is gov-
erned by three objectives:
(1) the creation of an economic territory as large as possible, which
is, (2) fenced off by protective tariff walls against foreign competition
and therefore, (3) becomes the sphere of exploitation of the national
monopolistic combines.48
1. The Importance of Economic Territory. High tariff protec-

tion divides the world into separate economic units and thereby
reduces or even destroys the preconditions for a rational inter-
national division of labor according to comparative advantage.49
The greater the territory under national jurisdiction, the less
the disadvantages due to the "slackening development of the
forces of production" are felt. Small countries are most severely
affected by the disintegration of a formerly unified world mar-
ket, whereas larger areas adjust more easily to both natural and
economic changes and, what is most important to monopolists,
they tend to increase profits. Thus, the size of territory pos-
sessed by a state is in strong correlation to the international
competitive position of its most powerful groups.
2. Enclosure of Economic Territory by Tariff Walls. This, and
the corresponding exclusion of foreign competition, constitute
the vital basis for the existence of cartels. For the latter, "the
endeavor to increase tariffs becomes as unrestricted as the en-
deavor for profits."50
3. Exclusive Exploitation by National Monopolistic Combines
is an objective relating to colonial policy. It raises several as-
pects which will, according to socialist doctrine, eventually seal
the doom of capitalism. In the first place,
the export of capital has, particularly in the form of industrial and finance
capital, greatly accelerated the upheaval of social conditions and the
drawing of the earth into the orbit of capitalism. Capitalistic develop-
ment did not take place autonomously in each country; together with
capital, the capitalistic conditions of production and exploitation were
also imported and always at their most advanced stage.51
The development of transport facilities was a decisive mile-

stone in the history of capital export. The construction of roads
and railway lines absorbed extensive funds, but at the same
time opened new markets and cheapened overseas products.
Whether or not the final effects of this process were beneficial
to the native country depended, according to Hilferding, on
the use which was made of foreign capital apart from being
invested in infrastructure. If it was invested in local consump-
tion goods industries, the favorable consequences could not
be denied in spite of the fact that the transfer of profits to the
mother country extraordinarily slowed down the further de-
velopment of capitalism. Economic emancipation became im-
possible, however, whenever the capitalist classes
were aiming at securing the domination over raw materials for their
rapidly developing capital goods industries,52
leaving no basic materials to the native countries with which

they could build up their own industries.
However, the penetration of capitalism into the "nations
without history" does not proceed smoothly; the necessary prop-
ertyless labor force53 and a legal framework have as yet to be
created. Usually, these things cannot be achieved satisfactorily
without the application of force and this in turn calls for in-
tervention by the metropolitan State.
This is the second important aspect of the drive of finance
capital for reaching its goals: it cannot attain them unless it
captures the State to serve its immediate interests in spite of
the fact that these interests are diametrically opposed to those
of the majority of the citizens. This alliance of powerful private
groups with government is not only necessary to repress native
resistance to capitalistic exploitation; it becomes imperative if
one remembers that the monopolistic groups of other developed
countries are faced with the same problems and also invoke
the help of their official authorities.
Competition on the world market, where the price of a commodity is
the only determining factor, is replaced by competition on the capital
56 SOCIALISM AND INTERNATIONAL ECONOMIC ORD¢R
market. . . . Capital export now becomes a means for securing the indjis-
trial market for the capital exporting country. The receiving state has no
choice: it becomes a debtor and dependent on the creditor whose terftis
it must accept. . . . The struggle for markets becomes the struggle for
investment opportunities of loanable funds between national bank groups.
Because, due to the international equalization of interest rates, econorflic
competition is confined within relatively close limits, the economic strug-
gle rapidly grows into a struggle for power which is waged with political
weapons.54
The outcome of this struggle decisively depends on the si¡ze

of the territory dominated directly by a State and indirectly by
its finance capital. The corresponding rush for interest sphei†es
and colonies generates severe conflicts between national states
and further tends to strengthen their internal and external pow-
er and, with it, the importance of armaments industries, fi-
nance capital develops an ideology entirely contrary to the old
liberal ideals of the bourgeoisie. It
does not want freedom, but domination; it does not care for the inde-
pendence of the individual capitalist, but demands his joining combina-
tions. It abhors the anarchy of competition and stands for organization,
yet only with the aim of competing on higher and higher levels. But in
order to achieve this, to maintain and increase its predominance, it Re-
quires . . . a politically powerful state which does not need to have regard
to the opposite interests of other states in shaping its commercial poli¢y.
Finance capital finally presupposes a state which is strong enough to
pursue an expansionary policy and annex colonies.55
Finance capital thus eliminates humanitarian illusions and

realistically considers politics
to be the business of capitalistic syndicates at one time struggling against
each other, at another time reconciled.56
The Seeds of a Future Socialist Order

This statement leaves open two possibilities with regard 0
future development. Will imperialist wars, leading to the self-
destruction of the capitalist system, become inevitable, or c'o
sufficient elements of peace and stability survive which, though
certainly not capable of upholding capitalism forever, rendi
possible a gradual and constitutional transition to socialism?
For Hilferding, imperialist wars are probable though n†>t
inevitable. He and numerous other socialist authors who, after
the outbreak of World War I, came to be called "opportunists"
by Lenin, thought to discern some encouraging features of this
capitalistic phase which were destined to prepare the working
class for its leading role. Jean Jaurès, summarizing Hilferding,
thus wrote:
Interests become more and more diversified, mobilized, intermingled,
and enlaced; the great cooperations of industrial and financial capitalism
are at work across the frontiers of races and tariffs; and the banks, the
great banks, establish themselves behind the enterprises; they finance
and subsidize them, but by doing so, they coordinate their activities in the
same manner that they subsidize far off branches in all countries and be-
yond the seas. This is how the power of the banks is set up, coordinating
capital flows, interweaving interests. . . .57
Does this passage not evoke the picture of a future socialist

world order strikingly similar to that outlined by the Saint-
Simonians? Jaurès in fact envisages la grande banque at the
center of all economic activity, impartially allocating capital
among the different countries according to their labor resources
and market potentials. The various, by then of course socialist,
states (démocraties éclairées et autonomes) will both fruitfully
cooperate with and exercise their control over this central
agency, and under these conditions, economic expansion will
take place peacefully, "without territorial monopoly, without
industrial monopoly, without tariff monopoly."58
Thus, for Jaurès, the existence of these monopolies still con-
stitutes a threat to international stability. Karl Kautsky goes
one step farther, developing an idea belonging to Hilferding
which the latter author had mentioned briefly. It suggests the
possibility of a giant cartel, directing world production and
eliminating crises.59 Kautsky writes:
From the purely economic point of view it is not impossible that
capitalism will yet go through a new phase, that of . . . ultra-imperialism60
which would be characterized by "the joint exploitation of the

world by internationally combined finance capital."61
The constitutional socialists thus stress the uniting and
peaceful aspects of the policy of finance capital. They follow
the corresponding tactic of letting the fruit take its time to ma-
ture until it is ripe to be picked by the socialist parties. They
are the precursors of the "internationalist approach" to the
problem of a socialist world order which will be treated in the
next chapter.
Lenin's Thesis
Unlike the "opportunists," Lenin, relying heavily on Hil-
ferding, maintained that finance capital was by its nature
bellicose. The need for ever larger protected markets, he
taught, and the growing requirements of the advanced indus-
tries for raw materials make it imperative for the monopolistic
combines, backed by their respective states, to dominate large
and rich territories. Since no "free" areas remain, the capitalists
divide the world among themselves. They do this
not out of any particular malice, but because the degree of concentration
which has been reached forces them to adopt this method in order to get
profits. And they divide it in proportion to "capital," in proportion to
"strength," because there cannot be any other system of division under
commodity production and capitalism.82
In accordance with this strength, "capitalist alliances based

on the economic division of the world"63 come and go until a
constellation is reached which makes the starting of a new war
of redívision a promising enterprise. The rise of new imperialist
powers and the divergent rates of economic development in the
various parts of the world—a typical feature of capitalism, es-
pecially in its monopolistic stage84—make recurring wars inevi-
table. These are fought not only over agrarian, that is, under-
developed areas: even highly industrialized regions form the
object of conquest for hegemony-minded states.65 For Lenin,
therefore, imperialism is definitely the last stage of capitalism
which will be overthrown by the revolutionary proletariat.

Marx's analysis of the development of capitalism incorpo-
rated various elements. To the basic principles of earlier anti-
capitalist economic theory centering around labor value, he
added his own version of Hegelianism, that is, historical ma-
terialism.
The idea of a progressive historical development had, as we
remember, already dominated the Saint-Simonian school. The
idea now becomes the cornerstone of "scientific socialism."
It is suggested that history is a dialectical evolution, marked by
the struggle between two antagonistic classes. Each class has
its historically determined task to fulfill, but it must go off the
stage as soon as the "material forces of production" have estab-
lished a new mode of production, releasing new forces and de-
manding new institutions for their future development. This
doctrine is not proved by Marx; it nevertheless provides the
basis on which he builds his theoretical edifice.
Capitalism, with all its peculiarities (such as the law of
value, accumulation and concentration of capital, and crises)
is but an historical stage in human evolution. But because this
evolution is regarded as a rational process, there must be a point
at which human inequality and exploitation will disappear.
This, then, is the final and logical goal of historical develop-
ment. It will be achieved when the most progressive class van-
quishes its former exploiters by a worldwide revolution and
establishes new and final "property relations" excluding social
antagonisms.
These two basic elements of Marxist doctrine then—(1) ra-
tional historical development and (2) relations of production,
leading to the concept of classes—provide the key to under-
standing the future international order which the author of
Capital and his followers anticipated. The internationalization
of all human affairs, so forcefully initiated by capitalism, will
be brought to its logical conclusion under socialism: the world
community. "The workingmen have no country."66 Just as
they are uniting as a class to throw off the yoke of capitalist
exploitation, they will be bound together by a deep unity of
purpose and solidarity after having achieved their common aim.
This will provide the safe fundament on which to build the
socialist world order.
According to this doctrine, men are not free to choose the
economic order under which they wish to live. Either they have
understood historical materialism and are working for the ac-
celerated advent of socialism; or, if they cling to the principles
of capitalism, they are to be regarded as the defenders of ex-
ploitation. To illustrate the method of Marxist argumentation,
the following passage written by Lenin is quoted:
The bourgeois reformists, and among them particularly the present-
day adherents of Kautsky . . . try to belittle the importance of facts of
this kind [i.e. imperialistic wars, E. T.] by arguing that it would be
"possible" to obtain raw materials in the open market without a "costly
and dangerous" colonial policy; and that it would be "possible" to increase
the supply of raw materials to an enormous extent "simply" by improving
agriculture. But these arguments are merely an apology for imperialism,
an attempt to embellish it, because they ignore the principle feature of
modern capitalism: monopoly. Free markets are becoming more and
more a thing of the past. . . . Where, except in the imagination of the
sentimental reformists, are there any trusts capable of interesting them-
selves in the condition of the masses instead of the conquest of colonies?67
And the same author asks:

Is it not a fact that the more rapidly trade and capitalism develop, the
greater is the concentration of production and capital which gives rise to
monopoly? And monopolies have already come into being—precisely
out of competition.68
Thus, there is no use in yearning for things which definitely

belong to the past; instead, all attention must be focused on
clearing the road of history by promoting the socialist cause.
But what will be the fate of national states in a future so-
cialist order? Marx, as we shall see in Chapter V, did not ignore
their reality; but he believed that national states were the po-
litical superstructure corresponding to the capitalist mode of
production and that they would eventually be displaced by the
international class solidarity of the proletariat.
Was Marx accurate in discarding the State as a primordial
reality from his theoretical system and in building the latter on
the concept of class? Is it admissible to deal only with "person-
ifications of economic categories" instead of with individuals?
On the answer to these questions depends not only the sound-
ness of his explanation of capitalism, but also the validity of his
implications relative to an integrated socialist world order.
For the time being, states still exist, and very powerful and
aggressive ones at that, as the authors on imperialism attempted
to show. What is, in their view, the common feature of these
states? That a small minority has succeeded in taking over
government and in running the state's affairs to its own, exclu-
sive interests. Clearly, dominium is here united with imperium,
and a thorough organization of all human activities serves the
purpose of national power politics. This is precisely the kind of
state against which Proudhon so eloquently warned his readers.
The question of whether Hilferding's theses correctly reflect
"capitalist" reality at the turn of the century is irrelevant to this
context. But we are interested in the international economic
consequences of an "enclosed" centralized state, consequences
which were accurately analyzed by this author. This raises two
interesting points. If Lenin is right in maintaining that it is "the
latest stage of capitalism" which produces such undesirable
results, what becomes of socialist theory propagating to con-
tinue and complete the international division of labor brought
about by the forces of capitalism? Conversely, if Hilferding's
conclusions are the outcome not of a particular historical stage,
but of a particular internal political setup of states, socialists can
hope to restore peace and order only by postulating a decen-
tralized and depoliticalized internal order. Our investigations
so far have shown that this would lead to an inner contradiction
of socialist thought.
NOTES TO CHAPTER III

1. For more details cf. Tucker, R. C , PhiL·sophy and Myth in Karl Marx. Cam-
bridge, Cambridge University Press, 1961, Chapter II.
2. Preface to A Contribution to the Critique of Political Economy (Zur Kritik der
politischen Oekonomie). Berlin, 1859, quoted in Bottomore, T. B. (ed,), Karl
Marx. Selected Writings In Sociology And Social Phihsophy. New York, Mc-
Graw-Hill, 1964, p. 51.
3. Ibid.
4. Ibid., pp. 51-52.
5. Ibid., pp. 52-53.
6. Capital: A Critical Analysis of Capitalist Production. Volume I, edited and
translated by D. Torr, London, Allen & Unwin, 1949, p. xix, italics original.
7. The Communist Manifesto (1848). English translation of 1888, edited by
Friedrich Engels, quoted in Ebenstein, W., Great Political Thinkers. Plato to
the Present. New York, Holt, Rinehart & Winston, 1964, p. 691.
8. Preface to Volume I, p. xix.
9. Ibid., p. xvi.
10. Capital, I, p. 74.
11. Sweezy, P. M., The Theory of Capitalist Development. Principles of Marxian
Political Economy. New York, Oxford University Press, 1942, 398p.
12. Capital, I, p. 130.
13. Sweezy, P. M., op. ctt., p. 84.
14. Capital, III, pp. 472-73.
15. Sweezy, P. M., op. cit., p. 183. Rosa Luxemburg in her book Die Akkumúla-
tion des Kapitals traced the necessity of capitalist expansionism to overseas ter-
ritories back to the impossibility to "realize" at home that part of surplus
value which is not consumed by the entrepreneur. For the capitalist countries
as a whole, the only way out of this dilemma was to sell their surplus pro-
duction to non-capitalist consumers. However, the backward areas of the
world were thereby gradually drawn into the capitalist orbit so that this escape
from the basic contradictions of capitalism could only be a temporary one.
Rosa Luxemburg's theory was severely criticized by numerous socialist authors
and was to be completely overshadowed by R. Hilferding's analysis of finance
capital which became the basis of Lenin's doctrine of imperialism.
16. Engels, F., Herrn Eugen Dührings Umwälzung der Wissenschaft. 6th ed., Stutt-
gart, Dietz, 1907, p. 298.
17. "Concentration of the means of production and of the command over labor
. . . is identical with accumulation." Capital, I, p. 640.
18. According to Marx, the value of any commodity produced under capitalist
conditions is expressed by the sum of c ("constant capital," i.e. materials and
machinery used up in production), v (the outlay for wages), and s (surplus
value). The "organic composition of capital" is given by the ratio: c .
19. Capital, I, p. 640.
20. Ibid.
21. Ibid., p. 641.
22. Capital, III, p. 427.
23. Hilferding, R., Das Finanzkapital. Marx-Studien, Vol. 3, Wien, Wiener Volks-
buchhandlung, 1927, p. 112.
24. I.e. capital in money form which is transformed into industrial capital. Ibid.,
p. 283.
25. Ibid., p. 132.
26. Ibid., p. 138.
28. Ibid., p. 280.
29. Ibid., p. 284.
30. Ibid., p. 286.
31. Sweezy suggests to replace the term "Finance Capital" by "Monopoly Capital"
since, as the possibilities of large-scale industries to plough back their profits
increase, the influence of bank financing decreases. The real source of capital
is shifted into the monopolized enterprises themselves.
32. Capital. Vol. II (The Process of Circulation of Capital), edited by F. Engels,
Moscow, Foreign Languages Publishing House, 1957-1959, p. 31.
33. The Communist Manifesto. Quoted in Ebenstein, W., op. cit., p. 693.
34. Capital, III, p. 109.
35. Ibid., p. 232.
36. Capital, I, pp. 574-75.
37. Ibid., p. 30.
38. Capital, II, p. 468.
39. Hilferding, R., op. cit., p. 378.
40. Ibid., p. 382.
41. Ibid., p. 383.
42. Ibid.
KARL MARX A N D HIS FOLLOWERS 63
43. Ibid., pp. 383-84.
44. Ibid., p. 389.
45. "If capital is sent abroad, this is not done because it absolutely could not be
applied at home, but because it can be employed at a higher rate of profit in
the foreign country. But such capital is absolute excess capital for the em-
ployed laboring population and for the home country in general. It exists as
such alongside with relative over-population, and this is an illustration of how
both of them exist side by side, and mutually influence one another." Capital,
III, p. 251.
46. Hobson, J. A., Imperialism. A Study. 3rd ed., London, Allen & Unwin, 1938,
p. 85.
47. Hilferding, R., op. cìt., p. 395, italics added.
48. Ibid., p. 412.
49. "Protective tariff implies a restriction of economic territory and thereby a
slackening development of the forces of production because it diminishes the
optimum size of factories, impedes specialization, and thwarts international
division of labor, which causes capital to flow to those production branches
for which a country is best suited. This has all the more importance in that
. . . tariffs are frequently the result of political power struggles between the
different industrial groups." Ibid., p. 391.
50. Ibid., pp. 385-86.
51. Ibid., p. 406.
52. Ibid., p. 419.
53. This is done by the "expropriation of the natives from whom the land and
hence the traditional basis of their subsistence is taken away. . . . Expropria-
tion at the same time converts these natives into a proletariat which becomes
the helpless object of exploitation." Ibid., p. 401. Another possibility to achieve
the same result presents itself, according to Hilferding, by the introduction of
a tax system which exacts from the natives such high contributions that they
are unable to meet them except by incessant work in the service of foreign
capital. Ibid., p. 402.
54. Ibid., pp. 408-9.
55. Ibid., p. 426. Joseph Schumpeter, in his essay "The Sociology of Imperial-
ism" (reprinted in his Imperialism and Social Classes. Translated by H.
Norden, edited by P. M. Sweezy, Oxford, Blackwell, 1951, pp. 3-130), arrives
at very similar conclusions. He underlines, however, that "export monopolism
does not grow from the inherent laws of capitalist development" (ibid., p. 117,
italics original); its aggressive designs are rather the outcome of pre-capitalist
forces, "survivals of the autocratic alignment of interests and they endure
wherever the autocratic state endures on the old basis and with the old
orientation. . . . They bear witness to the extent to which essentially imperialist
absolutism has patterned not only the economy of the bourgeoisie, but also its
mind—in the interests of autocracy and against those of the bourgeoisie itself"
{ibid., pp. 124-25). However, "such factors will be politically overcome in
time, no matter what they do to maintain among the people a sense of constant
danger of war, with the war machine forever primed for action. And with
them, imperialisms will wither and die" (ibid., p. 130).
The same author, in his famous book Capitalism, Socialism and Democracy,
4th ed., London, Allen & Unwin, 1957, "tried to show that a socialist form of
society will inevitably emerge from an equally inevitable decomposition of
capitalist society" (ibid., p. xiü). Curiously enough, he says nothing about
the international economic consequences of socialism, but seems to take for
granted the doctrine of the Saint-Simonians and most other socialists that
autocratic states essentially belong to a past phase of historical development
and will, in due course, disappear along with the international conflicts they
have engendered.
56. Hilferding, R., op. cit., p. 428.
57. Speech held on November 19, 1909, quoted in Freymond, J., Lénine et
Timpérialisme. Lausanne, Payot, 1951, pp. 46-47.
59. Hilferding, R., op. cit., p. 372. The author adds, however, that he thinks such
a state of affairs socially and politically impossible due to the conflict of in-
terests which, far from being reconcilable, would be sharpened to the extreme.
60. Die Neue Zeit, April 30, 1915.
61. Ibid.
62. Lenin, V. I., Imperialism, The Highest Stage of Capitalism. New York, Inter-
national Publishers, 1951, p. 75.
63. Ibid.
64. Ibid., p. 63.
65. Ibid., p. 45.
66. Communist Manifesto, in Ebenstein, W., op. cit., p. 701.
67. Lenin, V. I., op. cit., p. 83.
CHAPTER IV
ORGANIZATION INSTEAD OF LAISSEZ-FAIRE;

INTERWAR PROGRAMS FOR A SOCIALIST WORLD
ORDER
What shape is the socialist world economy to assume? We

have seen that Marx and his followers were primarily concerned
with depicting capitalist society in its historical development;
very rare and short are the passages in Capital that refer to the
guiding principles of the system which is to replace the existing
one. But one need not be too surprised at this fact: if it is
History which ultimately governs human affairs, there is as yet
no necessity (it is in fact quite out of place) to speculate on the
details of the future order. When the time becomes ripe, all
questions will be resolved and the parts will merge into a
marvelous whole.
Nevertheless, one thing in the writings of socialists was cer-
tain: that the new order would be stripped of all those evils
which characterized capitalism and imperialism. War was the
most detestable of these evils; hence, after the termination of
hostilities in 1918, a general feeling was spreading throughout
the world that peace and socialism were identical and that man
must consciously set about creating a new, international society
based on socialist fundaments.
According to socialist doctrine, under capitalism, "freedom"
means the unrestricted faculty of the rich to amass wealth at the
expense of the poor. It also implies the unbridled course of
history toward "the highest stage of capitalism." In contrast,
under socialism, man will deliberately plan the present as well
as the future order, with a view to the attainment of universal
peace and social justice, that is, to the achievement of "real"
liberty. Thereby, all human beings will benefit equally from
technical progress and the rational organization of industry and
agriculture. This will become possible because the profit mo-
tive will be replaced by the conscious collective control of all
economic activity.1
The general idea of international planning today is based upon a
conception of world development which is both rational and hopeful. In
discussing world planning we have in mind the fact that the world is
grappling with difficult economic and social issues and that a concen-
trated effort must be made to substitute peaceful and progressive change
for mere drift or for arbitrary and violent action.2
Albert Thomas defines the basic socialist attitude toward

the future world order as follows:
For protectionism and free trade, both considered to be formulas of
struggle and competition, we substitute the principle of association among
the peoples by the international organization of exchange.3
And he adds what Hilferding already had implied:4 "Our posi-

tion is thus not half way between protectionism and free trade,
but outside of it."5
GENERAL IDEAS
Let us begin with a review of the general principles on which
this new world order is to be built. Again it must be emphasized
that we are interested in the ideas of authors proposing a collec-
tivist solution to the problem of international economic order
and not in their party membership.
Production for Needs

Economic activity will henceforth be subjected to the "real"
needs of man. But, one may ask, do not needs also underlie
effective demand in the capitalist system? Since the incomes
of consumers differ widely, socialists answer, an economic sys-
tem guided by the price mechanism alone leads to the produc-
tion of luxury goods, while at the same time some basic needs
of the masses go unsatisfied.6 In addition, it is argued, people
do not accumulate wealth merely to provide for their subsist-
ence or to enhance their physical comfort; rather, the posses-
sion of property has become an accepted symbol of status and
honor, a measure of social importance attained by its owner.
Wealth is therefore spent not according to the owner's personal
propensities, but according to the conventional standards of
the "leisure class," resulting in "conspicuous waste."7 H. D.
ORGANIZATION INSTEAD OF LAISSEZ-FAIRE 67
Dickinson distinguished between "needs," which "are what we
really require for life, efficiency, and enjoyment," and "wants,"
which "are what we think we require."8 If the consumer, as
asserted by orthodox economic theory, was really the autono-
mous judge of his own needs, advertising and salesmanship, the
great "waste caused by another waste,"9 would be senseless.
It follows that, with the elimination of the squandering of
time and resources, "the aggregate economic wants of a com-
munity might conceivably be satisfied at some point in the ad-
vance of industrial efficiency."10 When this point is reached,
the problem of income distribution will lose its relevance.
In the meantime, however, the dilemma between "distribu-
tive justice" and maximum incentive to productive effort per-
sists and is recognized by many socialists. There is no agree-
ment among them on how to solve this important question.
Science
But even if the interests of income receivers may not be
identical, another powerful factor working for compromise still
exists: science. In the first place, the progress of the natural
sciences leads to more efficient production techniques; second-
ly, it is thought, the perfection of "scientific management" con-
tributes to the rational organization of production units;11 and
thirdly, extensive statistical research12 is to be placed in the ser-
vice of economic planning. These three branches of modern
science will supply the central authority with all the necessary
information to carry out its planning task to general satisfaction
and to expand wealth to hitherto unknown dimensions.
Research is the handmaiden of planning. It helps, by elim-
inating mere opinion and whim,
to narrow the area of conflict within which compromise had to be
achieved in order that any plan may be formulated.13
Science enables men to control the present as well as the

future. It will teach statesmen "to think in terms of centuries
instead of, at most, in terms of one or two decades."14 It will
"throw a mighty beam far into the future, enabling progress
to forge ahead with a new speed, a new purposefulness, and a
new security from quagmires, blind alleys and precipices."15 As
steam gives way to electricity and as electricity will some day
be superseded by atomic energy production, so scientific prog-
ress demands that an obsolete economic order be replaced by
a system better adapted to newly created requirements and pos-
sibilities. And this system will be collective control.
The Representatives of Collectivity

If control is synonymous with comprehensive centralized
planning, what exactly does "collective" mean? Various an-
swers are given to this decisive question:
The solidity and permanence of the organization itself can be guar-
anteed only by recourse to a higher principle, to an authority guiding,
coordinating and controlling the whole movement. . . . It will no doubt
appear at once that this body can only be the League of Nations. 16
writes G. de Michelis. "The greatest need of modern age," says

A. Salter, "is to bring the specialized inventions and specialized
activities of mankind under the control of collective reason."17
To which, however, G. A. Johnston comments:
The collectivity contains many ingredients in addition to reason, and
for the control of social economic planning it is necessary to distil the
reason from the unreason in the collectivity.18
Yet he admits that, "as to the manner in which collective reason

should exercise control over social economic planning, it is as
yet too soon to expect any agreement."19
Lenin is more precise. In a socialist society, the supreme
political and economic power is to reside with the Communist
Party. The Party is to be "the conscious expression of the
struggle of the proletariat for the overthrow of the yoke of the
bourgeoisie."20 This follows from his own theory and from that
of Marx that socialism will not come peacefully, but must be
preceded by the revolutionary smashing of the ruling classes.
But, "not a single class in history has achieved power without
producing its political leaders, its prominent representatives
able to organize a movement and lead it."21 These representa-
tives must therefore assume "the role of vanguard" which, how-
ever, "can be fulfilled only by a party that is guided by an ad-
vanced theory."22 This theory the workers are unable to pro-
duce;23 therefore, the enlightened Party must give a definite di-
rection to the spontaneous awakening of the masses, that is, turn
it into "the awakening to conscious life and struggle."24
Lenin repeatedly emphasized the contrast which exists be-
tween the spontaneity of the masses and the conscious action of
the Party. Spontaneity must never be allowed to put "restraint
on the initiative and energy of class conscious fighters," because
Marxism, on the contrary, gives a gigantic impetus to the initiative
and energy of Social Democrats, opens up for them the widest perspec-
tives and, if one may so express it, places at their disposal the mighty
force of millions and millions of workers "spontaneously" rising for the
struggle.25
In this context, Lenin cites with approval Kautsky's remarks on

the new draft program of the Austrian Social Democratic Party:
Modem socialist consciousness can arise only on the basis of profound
scientific knowledge. Indeed, modern economic science is as much a
condition for socialist production as, say, modern technology, and the
proletariat can create neither the one nor the other, no matter how much
it may desire to do so . . . both arise out of the modern social progress.
. . . Thus, socialist consciousness is something introduced into the pro-
letarian class struggle from without (von Aussen Hineingetragenes) and
not something that arose within spontaneously (urwüchsig),26
Lenin concludes:
Since there can be no talk of an independent ideology being devel-
oped by the masses of the workers in the process of their movement, the
only choice is: either bourgeois or socialist ideology. There is no middle
course. . . . Hence, to belittle socialist ideology in any way, to deviate
from it in the slightest degree, means strengthening bourgeois ideology.27
Thus, science, or rather socialist ideology—the two are

synonymous in Lenin's parlance—does not only "narrow the
area of conflict," it indeed excludes it. If, nevertheless, eco-
nomic, social, and political problems subsist under socialism,
this will be due to remnants of "bourgeois ideology."
Already Marx had foreseen that these remnants will die
hard. He therefore considered the dictatorship of the proletariat
to be a necessary historical stage on the road toward complete
communism, the final era when classes, and with them national
states, would have, as Engels put it, withered away. Then, and
only then, would there reign "association, in which the free de-
velopment of each is the condition for the free development of
all."28
Human Solidarity
Underlying this theory is the Marxist assumption of an un-
conditional class solidarity among the toiling peoples of the
world. E. Milhaud extends this solidarity, as the pre-Marxian
socialists had done before him, to embrace all mankind. This
solidarity is for him "the primordial reality of our time." Thus,
the problem does not consist of artificially establishing this solidarity, but
of allowing it to assert itself and to develop naturally, within a normal
framework, for the benefit of all.29
Hence, there can be no doubt about the objectives of eco-

nomic planning which is "defined as a system wherein the com-
petent authority or authorities give a general direction to eco-
nomic activities, in pursuance of definite aims and in accord-
ance with plans for the realization of these aims."30 These are:
wealth, security, happiness, and progress. Only the methods
of achieving them are subject to discussion. But these discus-
sions received a definite direction through wartime experience
during 1914-18:
All economic and military efforts aimed at victory, and the main fac-
tors capable of ensuring victory, were the material resources placed at
the disposal of the armies and the people's morale. Tremendous needs
had to be satisfied and supplies were not adequate to meet these needs.
It was therefore necessary to weigh up the respective importance of
various needs and to regulate their satisfaction according to priority. . . .
When, in 1917, the United States also entered into the coalition, its
economic field of operation covered the whole globe and regulated to an
ever-increasing extent the production as well as the purchase and dis-
tribution of goods. . . . The principle of distribution according to needs
was supplemented by the principle of production according to needs. . . .
The method by which the war had been won would make possible the
reconstruction of devastated areas and the development of the wealth
and resources of the world for the common good of all its peoples.31
If socialism thus means the general direction of economic

activities by a central authority, the all-important question must
again be raised: what is to be the geographical area within
which this authority may exercise its functions? In other words:
will the future international order constitute a system in which
economic relations are being conducted between socialistically
organized states or communities, or will it be governed by one
single world plan, set up by a powerful, supranational autho-
rity? The remainder of this chapter deals with ideas relating
to the second alternative; the next chapter will describe the
major aspects of the collectivist state, and Marxian state doc-
trine in particular.
THE INTERNATIONALIST APPROACH

The internationalist approach received a strong impetus from
the establishment, after World War I, of the League of Nations
and the International Labor Organization (I.L.O.). The form-
er was regarded as the manifestation of the peoples' determi-
nation to establish universal peace, while the latter proved that
social justice was really an international postulate and had be-
come generally recognized as such.
To socialists, however, it appeared to be insufficient to lay
down only the legal, political, and social groundwork of peace.
In 1924, Leon Jouhaux expressed this general current of thought
as follows:
Can we forget the role of economic factors in this field? How can we
conceive of having truly organized peace among peoples if we have al-
lowed antagonisms of interest to arise and grow between them, which, at
certain moments, may cause them to fall upon each other? . . . Only
security in political relations gives rise to an economic policy based on
agreement and cooperation and only an economic policy of agreement
and cooperation gives rise to security in political relations.32
Jouhaux considered the Economic Committee of the League

and the I.L.O. as constituting the starting point for an Interna-
tional Economic Council
which will appear, beyond doubt, to be necessary to the final organiza-
tion of peaceful economic relations among peoples.33
"To extirpate the very causes of war, particularly its eco-

nomic causes,"34 by economic organization—this becomes the
Leitmotiv of constitutional socialists. Charles Gide, in a mem-
orandum addressed to the French government in 1919, defined
the peaceful collaboration of peoples as the "organizing of world
production as economically as possible, so as to utilize all the
earth's resources and the capacities of each nation in the best
interests of all."85 And, Paul Boncour further developed Jou-
haux's proposals in a speech to the 1924 League Assembly:
The financial and economic agencies of the League of Nations and
its assemblies will one day, when security will have been firmly built,
have to deliberate on such great issues as raw material quotas, markets,
and problems of immigration and emigration. Without a solution of these
problems—let there be no illusions on this—our entire edifice would be
ruined by internal upheavals.36
Two years later, Painlevé again emphasized the necessity of

taming the brutal economic forces by rational means dictated
by the internationalist spirit. And President Wilson's declaration
in 1917 was not forgotten, claiming "equal rights for all peoples,
big and small, to participate under just conditions in the eco-
nomic resources of the globe."
Hence, socialists thought it imperative
that for the purpose of developing a concrete programme for the realiza-
tion of these general objectives, a series of permanent expert committees
be set up to study the application of these principles37 to such problems
as migration, raw materials, and so on. Such committees would be re-
quired to prepare not only general factual statements, but specific pro-
posals of policy.38
International Control of Raw Materials

After the termination of the war in 1918, the general short-
age of goods and services, particularly that of basic raw mate-
rials, was acutely felt everywhere. The buying and selling of
vital commodities across national frontiers had increasingly
come under the control of nationalistic governments. It was
thus considered necessary to grasp the nature of the problem
and then to find the means of remedying it. Lawley distin-
guished two main aspects; on the one hand,
there is this question of the monopoly of certain raw materials by a small
number of countries and the necessity of providing an adequate access to
supplies of such materials for all countries.39
And on the other,
it is essential to prevent disequilibrium between production and con-
sumption, and to provide regular and ample markets for producing coun-
tries at prices which are fair to producers.40
He concluded:
In both cases, the need for action is urgent; and the only permanent
solution is along the lines of international collective control.41
The Inter-Allied and Neutral Cooperative Conference held

in Paris in 1919 had come to the same conclusion when it stated
the principles to guide international cooperative policy: (1)
distribution of raw materials among nations according to their
needs, (2) collaboration of public bodies with national coop-
erative organizations to ensure the just distribution of imported
and all other commodities at a just price, (3) creation of an in-
ternational statistical office compiling data relating to needs,
resources, and conditions of production and consumption in
each country, and preparing plans for an organized interna-
tional division of labor.42
These three principles form, in fact, the essence of the so-
lution of the raw materials problem as proposed by coUectivist
speakers and authors, although they are given different stress.
Baldesi, the Italian workers delegate at the first Session of the
International Labor Conference, considered the scarcity of raw
materials to be chiefly responsible for unemployment.43 Tittoni,
in 1920 an Italian representative on the League Council, stated
that, in many respects, "raw materials are unearned commo-
dities for people who hold them."44 And Balfour outright advo-
cated the Proudhonian idea that
raw materials, found on a country's territory should, in all fairness, be
considered as the common property of the whole world. They are the
work of nature and man should not monopolize them.45
In a report presented in 1921 to the Economic and Financial

Commission of the League, Professor Gini came to the conclu-
sion that "economic considerations agree in demonstrating the
inopportuneness of a policy which abandons the nations to the
slow restorative work of natural forces."46 Therefore, in his
view, the League should accept as its duty the equitable con-
trol of raw materials and food supplies, especially with a view
to the event of a blockade against an aggressor state.
What are the concrete steps to be taken to prevent the dis-
equilibrium between the production and consumption of raw
materials? Lawley drew up an impressive, though somewhat
undifferentiated list of economic, political, and religious per-
sonalities—among whom neither the Japanese Foreign Minister
Hirota nor the names of Dr. Goebbels and "Herr Hitler"47 are
missing. These personalities denounced the present system,
and some of them urged the League to summon a world con-
ference for the sole purpose of "discussing how the vast stores
of national resources and the tremendous unsatisfied markets
of the world can be organized and regulated for the service of
mankind."48
This conference never took place. However, some interest-
ing proposals were forthcoming to solve the problem. In the
first place, it was considered necessary that the Colonial Powers
should abandon their exclusive rights over colonies and place
them under League mandate.49 Secondly, a "co-ordinating in-
ternational body" was to be created:
This body will, at once, control production and, in controlling markets,
will ensure fair distribution to all countries according to ascertained
needs. Doubtless, eventually it will exercise this function of controlling
production without the intervention of national producers through their
international organizations and agreements; but, as a first step, it could
have a Section to register, and thus control, international agreements con-
cluded by producers, which have become necessary.50
Such agreements—whatever form they may take—are al-

ready being concluded with a special effort to protect producers
from excessive market fluctuations and to assure them not only
stable, but also higher than equilibrium prices. Although the
partners are still the owners or directors of private enterprise,
guided solely by the aim of maximizing profits,
it is better that such enterprises should be organized internationally than
that competition and international anarchy should prevail. Moreover,
embodying in some degree the collective principle, they prepare the way
for a larger and firmer form of international organization.51
As a next step, negotiations should be opened between the

major interest groups which are (1) "all producing countries
. . . and all branches of production of the raw material, together
with all artificial or synthetic products or substitutes there-
for";52 (2) the consuming countries and industries; (3) the
representatives of the final consumers; (4) the workers' rep-
resentatives. When "complete understanding" is reached be-
tween these four groups about quantities, prices and mutual
control,53
then, Agreements should ultimately be made by the responsible Govern-
ments in the producing countries, which should (and this would) ensure
the effective execution of the Agreements.
These
should be registered with the League of Nations with a special Office or
Section of its Economic Organization . . . and a measure of coordination
of the production and distribution of these various essential commodities
would be effected.64
Once it is recognized that the real problem is "economic

rather than political and territorial," that its essence is "the fear
of monopoly, of the withholding of essential colonial raw ma-
terials,"55 and once the above-mentioned mechanism is set into
motion,
in due course, doubtless, there will be public international undertakings,
performing the necessary functions in the production and distribution of
these commodities in relation to the central world economic organization.
As a stage on the road in that direction, central organizations, under pub-
lic ownership or control may be created, as happened during 1914-1919,
for a cooperative purchase of such commodities and distribution on a
quota-basis according to ascertained needs.56
International Migrations
As regards the force represented by labor, it has become almost a
commonplace that some countries, which suffer from serious overpopula-
tion, are without one or both of the other two factors of production, while
others, which are better off as to raw materials or capital, are still very
sparsely populated.57
Two possible solutions offer themselves: (1) the overpopu-

lated areas receive a just share in the world's natural resources
—as is advocated by Baldesi—or (2) the world population it-
self be more evenly distributed:
To relieve the congestion in overcrowded countries by transferring
their surplus to unpopulated areas, would open the way to the full ex-
ploitation and consummation of the economic potentialities of the world.58
But, according to the theory of the Reserve Army, relative

overpopulation does exist also due to technical progress. There-
fore a careful planning of international migratory movements
becomes necessary. De Michelis considers the I.L.O. to be the
most suitable agency for the task
of evaluating in countries suffering from severe unemployment or severe
overpopulation the volume of labor available for transference and per-
manent settlement abroad. In the process of execution this investigation
will gain increasing precision as progress is made in the correlative in-
quiry concerning the land suitable for receiving the workers, and there-
fore capable of undergoing profound economic transformation.59
Other authors imply that in a future world order absolute

overpopulation may become an acute danger.60 They therefore
take account not only of numbers, but also of races and do not
exclude the "scientific" planning of the globe's population it-
self.61
The problem of international migrations was discussed at
the Stuttgart Congress of the Second International in 1907. The
Australian, South African, and some American delegates wished
to exclude nonwhite immigrants on the grounds that they threat-
ened the living standards of the white workers. The other dele-
gations, while not accepting any discrimination according to
race and color, "were however, quite prepared to take a stand
against the deliberate importation of bodies of immigrants for
the purpose of undermining the standards of living of the work-
ers in the countries of immigration and to press for public regu-
lation of immigration with this end in view."62 At the same time,
however, "the resolution carried by the Congress stressed the
need for the education and organization of immigrant workers
and for the extension to them of the same wages, working con-
ditions, and social and economic rights as were accorded to the
indigenous workers."63
International Money and Credit Control

In a system of private appropriation, most capital originates
from accumulated profits, that is, "the absorption of an unjust
share of the product of industry."64 In reality, however, capital
is regarded as a "collective surplus,"85 produced by cooperative
effort. But under capitalism, "the surplus is invested not where
it is most needed from the point of view of the needs of the
world's peoples as a whole, but from the point of view of
private and national interests, of maximizing quickly obtainable
profits."66
Thus, to form the obvious counterpart to the international
control of raw materials, international collective intervention
is pre-eminently required in this field also. However, the ulti-
mate goal is much broader than this: the main objective of in-
ternational investment control is to be the equalization of liv-
ing standards among all workers, and of economic develop-
ment in general.67 With private appropriation the exclusive-
ness of nationalistic property claims will also disappear. In-
stead, the principle will prevail
that workers as a whole have a right to the accumulations of property
and knowledge from the past.68
Consequently,
rich nations must be compelled to make some surrender of possessions
and wealth to poor ones.69
With the general recognition of government deficit spending

as an effective countercyclical measure, numerous proposals
were advanced for the international coordination of national
public works schemes. For this purpose, the Employers' Dele-
gate from the 1933 International Labor Conference urged the
establishment, under League auspices, of a permanent inter-
national agency. Albert Thomas suggested the construction
of an international net of motor roads through Europe, totaling
nearly nine thousand miles and costing about eight hundred
million dollars. Other plans were put forward for the develop-
ment of Eastern European infrastructure.
The precondition for the realization of these plans is of
course the existence of an efficient international monetary and
credit system, important now, but considered still more import-
ant in the future world order:
When one renounces laissez-faire policy and takes to intervention, it
becomes natural to look for more radical measures and to attempt to go
to the source of the evil, and to aim at a priori directing economic activ-
ities instead of merely correcting their disordered outcome.70
What is therefore most urgently needed is a universal monetary

standard, furnishing the planning authorities "with a reliable
financial instrument to serve both as a medium of exchange and
as a store of value."71 As human intelligence has successfully
evolved "universal, reliable, stable, and unchanging measures
of length and weight,"72 it must at last invent
a monetary system which will enable planners to plan without fear that
uncontrolled price fluctuations will wash their plans away like castles in
the sand.73
Albert Thomas, speaking for the I.L.O., still believed that

gold provided the most suitable fundament for an international
monetary system. But, he asked,
should gold be allowed to be affected by all those political, economic,
financial, and industrial circumstances which sometimes so profoundly
alter its purchasing power?74
And he answered by quoting R. McKenna:

Let the gold standard be made to work satisfactorily—that is, let it
give a stable value to money—and they will be quite ready to go back to
it.75
What conditions must be fulfilled for this purpose? "The

Rt. Hon. Reginald McKenna (Great Britain) suggests, as a
credit policy, that trade requirements should be met without
regard to gold movements, the discount rate being fixed in re-
lation to general economic conditions, e.g. the volume of pro-
duction, the conditions of employment, home and foreign price
movements, the growth of population and potential productive
capacity."76 Other authors proposed the pooling of the world's
gold resources; Professor Edie, of Chicago University, for ex-
ample, came out for the creation of a "gold League of Nations."
Conversely, there are authors who believe that the reten-
tion of the gold standard constitutes a serious obstacle to effi-
cient industrial activity and economic progress. They also point
to the waste of productive capacity and effort involved in the
production and storage of gold. Lawley is one in this group:
World production and trade have been throttled by the worship of
gold. . . . The suffering peoples are ready for revolutionary economic
changes. They await deliverance through an enlightened national and
international financial monetary policy, ministering to human needs.
They do not exclude very unorthodox financial measures as experiments.
This crisis has shown that gold and cash or currency are not essential to
international trade which is exchange of commodities and services.77
Great hopes were attached, by socialists, to the Bank of In-

ternational Settlements (B.I.S.) created in 1930. Lawley
writes:
Animated by a desire to promote collective economy, the Bank could
dictate the world's monetary evolution along collective lines. It could
use its funds to develop backward regions and to promote public works,
such as electrification and improved transport facilities. In fact, it could
plan the world's economic development in cooperation with a League
organ planning world economic development as a whole.78
An interim proposal was made by Professor Edgar Milhaud,

based on the experiences gained by the general recourse to in-
ternational barter, and assigning a major role to the B.I.S. Dur-
ing the period from 1928 to 1932, he writes, there occurred a
severe drain of gold reserves in forty countries; they therefore
looked for methods apt to eliminate, as far as possible, the use
of money in international trade. There emerged a network of
bilateral trade agreements which, in spite of all its disadvan-
tages, prevented international economic relations from collaps-
ing. Furthermore, "the principle of reciprocity in foreign trade
found increasing acceptance."79 What Milhaud suggested
then, was to retain this international compensation and clearing
system, but to place it on a "plurilateral," and eventually an
"omnilaterai" basis.
The essential objective to be attained is to enable the various countries
to resume their buying abroad without having to fear that the equilibrium
of their economy will be upset and thereby their financial situation
worsened and their currency exposed to renewed dangers. . . . Hence, it
is vital to link every foreign purchase made by a country to the certainty
of a corresponding sale from this country. To this end, the states agree
among themselves to the effect that foreign transactions are settled not
by the transfer of gold or exchange reserves, but by means of special
vouchers (bons d'achat) the only function of which is to buy goods and
services from the issuing country.80
By this system of international bills of exchange issued and

honored by governments, which would replace the gold stand-
ard, Milhaud sought to ensure equality of value in international
transactions. Furthermore, international credits—given in the
form of bons d'achat—would automatically become tied to the
subsequent delivery of goods and services. Consequently,
financial difficulties, which today stand in the way of solving the prob-
lem of large-scale international public works, would be lessened due to
the interest which creditor countries would acquire in lending funds.81
Lawley comments:
The widespread resort to organized barter is another indication that
only collective action can solve modern economic and, in particular, trad-
ing problems.82
Methods of Achieving World Planning

What are the fundamental measures proposed by socialists
to achieve the rational economic organization of the world?
Association of the three factors in the production of wealth—labor,
land and raw materials, and capital—and their combination with a view
to maximum output.83
writes an author rather vaguely. "Syndical organization of na-

tional and international industries,"84 suggests E. Milhaud, re-
viving Louis Blanc's formula, but stressing the necessity of ade-
quate control. But this control, he thinks, will not be difficult:
The State, the industries consuming the output of the syndicated in-
dustry, and the workers of these industries form the elements, the con-
currence of which ensures the organization of such control from within.85
Albert Thomas wholeheartedly agrees with the program of

the International Cooperative Alliance which he quotes:
the creation of a cooperative order established in the interest of the en-
tire community and based on mutual assistance and "self-help."86
The system of cooperation establishes direct relationships be-

tween production and consumption; and, by its efforts to use
savings rationally, it gives a satisfactory answer to the require-
ment expressed in many resolutions "regarding the necessary
regulation of capital movements."87 Cooperation is the mani-
festation of "a converging effort of wills:"88
Already we see that . . . coordinating international bodies are emer-
ging which confront needs and resources and ensure stable transactions
based on equitable reciprocity.89
At the same time, however, Albert Thomas stresses the

necessity to respect
the desire of each nation and of each people to preserve the degree of
independence which is indispensable if it is to peacefully develop the
resources of its genius, all of its moral and spiritual values.90
A writer in Politique91 suggested the creation of an Interna-

tional Bureau of Production to be directed by intelligent and
competent businessmen. Just as a certain coordination of cen-
tral bank policies was achieved by regular contacts within the
B.I.S., so managers and directors should come together and
deliberate on vital questions of production. Their conclusions
reached after careful study would become public and binding.
The Bureau, cooperating with the League and the I.L.O., would
have adequate authority to have its decisions observed by the
industries of the various countries. It would also supervise
producers' agreements and entertain close contacts between
cartels.
Another similar suggestion was made in 1935 by the U.S.
Secretary of Commerce, D. Rooper, with respect to the es-
tablishment of an international board to divide the world ex-
port makers among the producing and manufacturing nations.92
Consciously or unconsciously following Jaurès, many so-
cialists are not unwilling to approach international economic
control from the basis of the "latest" forms of private initiative,
especially of international cartels:
Businessmen have started to abandon more completely as obsolete the
idea that unrestricted competition ensures the best interests of producers,
while certainly consumers are coming to see that, whatever dangers un-
regulated trusts and monopolies may present, competition does not give
them the best terms. Reduced costs, as the basis of lower prices and
stability, ensuring the worker smoother employment and thus augmenting
his purchasing power, and as a source of economy to the employer, es-
pecially through the enabling of a wiser use of capital, and surer and
accessible markets, these are some of the fruits of large scale, coordinated
organizations.93
It is clear: every kind of control is welcomed by socialists

as the useful starting point for further control and as a hopeful
step on the way to achieving comprehensive world planning.
For the conception of unorganized labor, which is translated by the
law of supply and demand, and leads to the "struggle for life," socialism
substituted a scientific organization of production and exchange whose
elevated moral and social aims are unassailable from the point of view of
justice and human fraternity.94
But what about the economic point of view? Albert Thom-

as' answer is clear:
We have arrived at the most perilous stage of economic evolution. To
pass beyond it, we must not be held back by the illusions of the doctrines,
now outworn of laissez-faire. . . . 95
And, in his last speech, held in 1932 at the International Labor

Conference, he said:
They say: impossibility of social security charges; they say: economic
impossibilities, and at the same time the world seems to overflow with
possibilities of wealth and production. Raw materials—they are there.
Stocks are not diminishing—they are increasing! Men and workers—they
are there. . . . What then is lacking? What is lacking is organization; the
possibility of combining all these elements, the desire to put all these re-
sources to work . . . according to the postulates of social justice. What is
lacking is the supreme initiative which makes possible international de-
cision-making.96
This initiative must be embodied, in Lawley's view, in a

central organization. Production plans must be drawn up ac-
cording to the comparative advantage of the various regions
of the world:
It will be most essential that the central body is equipped with an
expert staff to provide it with a thorough knowledge of production costs.
When international production is organized on the true basis of inter-
national collective economy, the international organization will fix prices,
on which the exchange of goods will occur, bearing in mind the payment
of proper wages and salaries, collective transportation, the covering of
capital costs, and the cost of maintenance and repairs of plant and ma-
chinery.97
On the basis of such "true economic prices,"98 international ex-

change will be centrally planned and stable:
The manipulations and instability of the capitalist exchange system
—with varying exchange rates (and quotations of stocks and shares) will
no longer exist."
As to the monetary system, "the best solution would be a

uniform international currency,"100 managed and controlled by
the B.I.S. But this will be of relatively minor importance be-
cause the Milhaud plan
contains the seeds of the new forms of economic practice in regard to
international exchange of the future, inasmuch as it emphasizes that the
distribution of goods and services and not the passage of money is the
vital thing in economic life.101
As regards investment, "only a central International Autho-

rity can determine in the world's general interest, where credit
should be allocated."102 The capital charges included in prices
will, because of the eventual collective ownership of funds,
not be at all similar to those when a return on private capital has to be
envisaged. . . . What is now called interest on such capital will go to
the collectivity.103
Yet, whatever the approach to the question of international

collective organization and whatever forces are stressed as the
most appropriate for its achievement, it is generally recognized
that the final goal cannot be realized without the active partic-
ipation of national governments—•which must of course be col-
lectivist governments. Great hopes were attached by socialists
to the National Economic Councils established by France and
Germany, as well as to the Italian National Corporations Sys-
tem; such organs were to join, under League auspices, into a
World Economic Council, eventually to be responsible for
world planning. Plans were proposed to give representation,
in this Council, also to workers' and consumers' interests—in an
analogy to the International Labor Organization in which gov-
ernments, as well as employers and workers, are represented.
However,
the basis of its work must be a firm foundation laid by authoritative
National Economic Councils.10*
Here then, the "internationalist" approach merges with the

theory of those socialists who have considered, from the begin-
ning, the complete collectivization of national economies to
constitute the sine qua non for a planned world order. Thus,
there is lastly only one way leading to this order: and it leads
through the separate political unit that is formed by the State.

In this chapter, the future socialist international order, con-
ceived as the final stage of historical, economic, and human de-
velopment, has been presented in full outline. It is a world
united under one single control: for the first time, efforts were
made to convert the age-old dream of a world government into
concrete reality. Political conflicts, arising from national sover-
eignty, will be replaced by the complete integration of the
world's peoples into one great community. Economic disputes
will, so socialists believe, equally belong to the inglorious past,
because economic affairs are no longer to be conducted by in-
dividuals. A central authority will take care of them, and will
direct men, capital, and raw materials to those places and uses
which are the most beneficial to the world as a whole.
It is tacitly implied that with the aid of science, an objective
order of priority can be established between all possible eco-
nomic objectives; this already traditional socialist belief is cou-
pled with the conviction that a thus wisely balanced world plan
will meet with the full approval of all segments of the world
population. They will therefore joyfully accept and carry out
the decisions and directions of the universal government, know-
ing that they are in their best interests.
Marx and Lenin are more realistic on this subject. They ex-
pect this solidarity to come forth from the working class only.
For them, a socialist world order can only be thought of after
the revolutionary annihilation of the bourgeoisie and of the
economic, political, and ethical principles for which it stands.
Thus, as they see it, the immediate future has no peaceful in-
ternational order, but an embittered struggle for domination in
store, the outcome of which must be the victory of the prole-
tariat. This is, for Lenin, synonymous with the arrival to power
of the Communist Party. The leaders of this party do not de-
rive power from any kind of democratic consent on the part of
the workers, but from History and from their advanced knowl-
edge based on History. It is one of their very tasks to render this
truth accessible to the masses and to awaken their class con-
sciousness. Hence, the Party's scope of action must be unre-
stricted.
Leninist theory thus continues the already familiar utopistic
tradition by relying on the fundament of socialist philosophy:
the autonomous life of the corps social. The Party constitutes,
just as Plato's State and the Saint-Simonian être collecti† had
done, a body independent of the will of the individuals which
it claims to represent. The terms "working class" and "Com-
munist Party" are nevertheless used interchangeably; although
individual party members may err, "the Party is always right."
It is, like Utopia, the model of human perfection. At the same
time, it is regarded as the only truly international force. Claim-
ing to be the outward expression of Marx's class theory, it appar-
ently suffers no territorial limitation. It follows that the Com-
munist Party must, by its nature, aim at world domination. It
is to constitute that supreme authority of which Pecqueur had
spoken, the center of all countries and continents, la force qui
dirige, qui attire et qui renvoie.
To be sure, constitutional socialists and collectivists, to
whose views this chapter has largely been devoted, would re-
ject the concentration of such absolute power in the hands of a
small elite. Nevertheless, they too fall victim to Utopian think-
ing. The term "collective" has for them a magic attraction; all
their various and often contradictory theories and proposals
rest on the assumption that there exists a higher reality than
that in which individuals and national governments are the
main actors. They believe that the representatives of collectiv-
ity, whoever they are, alone possess the necessary insight to
solve all those problems with which "capitalism" grapples in
vain. This way of thinking is best illustrated by the demand to
place colonies under collective administration. Does the prob-
lem of colonies not arise from the fact that the states possessing
them deliberately exclude the citizens of other nations from
free access to them? How is it then to be expected that a state
practicing such a policy will readily consent to relinquish these
territories to a supranational agency? It seems very improbable
that it will allow itself to be convinced by "collective reason"
to renounce its power politics. Hence, unless force is applied,
everything must remain as it was before. In the same way, the
other problems with which the authors of this chapter were
concerned have their origin in an extensive use (and abuse),
by national governments, of their sovereignty. Is there any
chance of these governments suddenly becoming "reasonable"
and submitting their actions to the dictates of an international
organization?
The socialist authors attempt to evade this basic dilemma
by postulating collectivist states, that is, states which have abol-
ished, within their jurisdiction, private economic initiative and
replaced it with a central national plan. This, according to them,
is the necessary precondition for a rationally planned world or-
der. Now it is clear that this change in the internal economic
order may only occur (again setting aside force) if the citizens
can be persuaded that the economic power, henceforth to be
invested with their governments, will be used for their best in-
terest, i.e. to raise their standards of living more effectively than
could be accomplished by a free market economy. On the other
hand, the authors under review presuppose that the new so-
cialist governments will abolish national power politics and
be inspired by true international solidarity. Hence we must ask
the decisive question: are the national obligations of these gov-
ernments toward their citizens and their international solidarity
mutually compatible? Only if it could be shown that the world
planning authority would allocate the various resources pre-
cisely in the same way as do national governments; only if,
therefore, national plans could be regarded as different, but
complementary parts of a single world plan, so that it would be
irrelevant which particular authority is drawing them up—only
then would the problem of world planning be, theoretically,
solved. However, because a socialist world order openly aims
at a redistribution of resources, a taking from the rich and a
giving to the poor, and because the different peoples of the
world have reached widely differing stages of economic de-
velopment, the criteria which would determine the world plan
would be entirely different from those of the national plan.
Consequently, who is to dispose of the productive resources in
the various parts of the globe becomes an issue of utmost im-
portance.
Thus, not a fundamental solidarity, but rather a fundamental
conflict of interests prevails among collectivist states for which,
as we shall see, the necessity of politically and economically
controlling as many raw material sources and strategic points as
possible becomes even more imperative than for their "imper-
ialist" predecessors. Hence, a voluntary abolishment of politi-
cal power, to which, under collectivism, all spheres of a coun-
try's internal life are subjected, and a corresponding "growth"
of a unified socialist world economy, must be regarded as
Utopian.
NOTES TO CHAPTER IV
1. "The cure for world disorder is not the replacing of closed national economies
by open ones and the encouragement of freedom of trade between nations.
What is required is international collective intervention to ensure that the
dominant force in international economic life is no longer the quest for pri-
vate and national profit. National and private economic ambition and self-
assertion must submit to the collective will." Lawley, F. E., The Growth of
Collective Economy. Vol. II: The Growth of International Collective Economy.
London, King & Son, 1938, pp. 4-5.
2. Lorwin, L. L., "The I.L.O. and World Economic Policy." International La-
bour Review No. 4, April, 1936, p. 458.
3. "Protectionnisme, Libre-échangisme et Organisation Internationale des
échanges." Report presented to the XHIth Congress of Federation Nationale
des Cooperatives de Consummation held in Lille on May 13 and 14, 1926,
reprinted in Annales de I'Economie Collective, Vol. 18, Nos. 202-4, April-
June, 1926, p. 97.
4. "To the bourgeois dilemma: protection or free trade, the proletariat provides
the answer: neither protection, nor free trade, but socialism, organization and
production, conscious control of the economy not to the advantage of the capi-
tal magnates, but to the advantage of all society which eventually will subject
to itself the economy as it has subjected nature since it had discovered its
basic laws of motion." Hilferding, R., op. cit., p. 472.
5. Thomas, A., foe. cit., p. 99.
6. These ideas were first expressed by Sismondi.
7. Veblen, T., The Theory of the Leisure Class. In What Vehlen Thought. Se-
lected Writings. Edited by W. C. Mitchell, New York, The Viking Press, 1936.
8. Dickinson, H. D., Economics of Socialism. London, Oxford University Press,
1939, p. 31.
9. Ibid., p. 36.
10. Veblen, T., op. cit., p. 226.
11. "The principle of scientific management is being applied to national industries
and to national economy. It must be carried a step further and be applied to
the whole international economic system." H. S. Person's address to the World
Social and Economic Planning Congress, quoted in Lawley, F. E., op. cit.,
p. 371.
12. Statistics—the quantitative study of social and economic phenomena—is in fact
regarded as the essential preliminary instrument of planning. "Stock taking
must evidently be the first step toward any comprehensive scheme of world
order." Archer, W., The Great Analysis. A Plea for a Rational World Order.
London, Williams & Norgate, 1931, p. 25.
13. Lorwin, L. L., loc. cit., p. 461.
14. Archer, W., op. cit., p. 21.
15. Ibid.
16. "A World Programme of Organic Economic Reconstruction." International
Labour Review, Vol. XXIV, No. 5, November, 1931, p. 504.
17. Quoted in Johnston, G. A., "Social Economic Planning." International Labour
Review, Vol. XXV, No. 1, January, 1932, pp. 76-77.
18. Ibid., p. 77. Cf. also W. Archer: "At any rate, we assume that some group of
men (and women?) capable not merely of voting 'aye' or 'no' on a cut-and-
dried proposition, but of sustained and accurate collective thinking, is en-
trusted with the task of planning the new order of things." Op. cit., p. 11,
italics added. And elsewhere: "A collective thought, emanating from a col-
lective brain, consciously organized for inquiry and reflection on a planetary
scale, would command . . . a wholly new order of critical attention." Ibid.,
p. 37.
19. Johnston, G. A., he. cit., p. 77.
20. Lenin, V. I., Preliminary Draft of Theses on the National and Colonial Ques-
tions (June, 1920). Selected Works in Twelve Volumes, translated from the
Russian and issued by the Marx-Engels-Lenin Institute, Moscow and London,
Lawrence & Wishart, 1936-39, Vol. X, p. 232.
21. Lenin, V. I., The Urgent Tasks of Our Movement (December, 1900). Ibid.,
Vol. II, p. 13.
22. Lenin, V. I., What Is To Be Done? (1901-2). Ibid., p. 48, italics original.
23. "The history of all countries shows that the working class, exclusively by its
own effort, is able to develop only trade union consciousness, i.e. it may itself
realize the necessity for combining in unions, for fighting against the employers,
and for striving to compel the government to pass necessary labor legislation,
etc. The theory of socialism, however, grew out of the philosophic, historical,
and economic theories that were elaborated by the educated representatives of
the propertied classes, the intellectuals. According to their social status, the
founders of modem scientific socialism, Marx and Engels, themselves belonged
to the bourgeois intelligentsia." Ibid., p. 53.
24. Ibid.
25. Ibid., p. 70. At the time this pamphlet was written, no split had occurred as
yet between "Social Democrats" and "Communists." The Russian Party
adopted the name "communist" only in 1918.
26. Neue Zeit, 1901-2, quoted ibid., p. 79, Lenin's italics.
27. What Is To Be Done? Ibid., p. 63, italics original.
28. Communist Manifesto, in Ebenstein, W., op. cit., p. 703.
29. Milhaud, E., "La paix, la cooperation et les accords économiques entre Etats."
Ånnales de VEconomie Collective, Vol. XVII, Nos. 187-89, January-March
1925, p. 39.
30. Milhaud, E., "National Planning, International Planning, and International
Exchanges." Annals of Collective Economy, Vol. XXI, No. 1, January-March,
1950, p. 145.
32. Speech held before the Third Commission of the League Assembly, quoted in
Milhaud, E., "La paix, etc.," he. cit., pp. 31-32.
33. Ibid., p. 32.
34. Boncour, P., quoted ibid, p. 33.
35. Quoted in Lawley, F. E., op. cit., p. 31.
36. Quoted in Milhaud, E., he. cit., p. 33.
37. I.e. "the equalization of opportunities of all countries with regard to raw ma-
terials, credits, markets, e t c '
38. Lorwin, L. L., he. cit., p. 464.
39. Lawley, F. E., op. cit., p. 160.
40. Ibid.
41. Ibid., pp. 160-61.
43. "Before the war we witnessed periodic crises due to over-production which
caused distress among the working masses, in spite of abundance of products.
Since the war we have noticed, in certain countries, the contrary phenomenon
of insufficiency of production due to the scarcity of raw materials to industry.
This phenomenon had similar results, that is to say very grave unemployment,
accompanied by the misery which follows the closing of factories or reduction
of their staff. Wherefore it is very important to demand that the League of
Nations should study the question of a just distribution of raw materials. . . ."
Quoted in Lawley, F. E., op. cit., p. 22.
46. Ibid., p. 27.
47. Ibid., p. 246.
48. G. Lansbury in a letter to The Times, August 28, 1935.
49. "The time is long overdue when the League should face manfully, with the
willing cooperation of the Great Powers, the task of putting on a mandate and
perhaps a joint mandate basis all colonial possessions. To achieve this would
remove a potent cause of war." Lawley, F. Ê., op. cit., p. 244.
50. Ibid., pp. 235-36.
51. Ibid., p. 237.
52. Ibid., p. 238.
53. But "international agreement and organization must not be on the basis of
restricted production. . . . There must be a central mechanism for attempting
to relate production to real needs and to make these needs into effective pur-
chasing power. All nations must have an equal right of access to supplies
according to needs. Prices must remunerate producers on a reasonable 'public
utility' basis but there must be no artificial maintenance of a high price level."
Ibid., pp. 238-39.
54. Ibid., pp. 239-40.
55. /fc»d.,p.242.
56. Ibid., p. 238.
57. De Michelis, G., "A World Programme of Organic Economic Reconstruction."
International Labour Review, Vol. XXIV, No. 5, November, 1931, p. 497.
58. Ibid., p. 498.
59. Ibid., p. 502.
60. "When once the routine of life was established, the chief difficulty would be
to maintain the just balance between population and subsistence; for the people
would probably show a constant tendency to breed beyond the margin fixed
by the established standard of comfort." Archer, W., op. cit., p. 15.
61. Ibid., p. 35.
62. Cole, G. D. H., op. cit., Vol. III/I, p. 74.
63. Ibid.
64. Lawley, F. E,, op. cit., p. 2.
65. Ibid., p. 3, cf. also pp. 44 seq.
66. Ibid., p. 3. Milhaud describes the same process in terms more akin to the
theory of Hilferding. Cf. "Les Accords économiques entre Etats." Annales
de I'Economie Collective, Vol. XVII, Nos. 187-89, January-March, 1925, p. 66.
67. Ibid.
68. Hall, R. L., Economic System of a Socialist State. London, Macmillan, 1937,
p. 230.
69. Lawley, F. E., op. cit., p. 5. This idea reoccurs in the closing chapter of his
book: "All large economic enterprises should be governmentalized in some
form, so as to internationalize all wealth whose utility is too general to allow
its exploitation to be reserved for one single nation." Ibid., p. 425.
70. Milhaud, E., ibid., p. 63, italics original.
71. Johnston, G. A., loc. cit., p. 74.
72. Ibid., p. 75.
73. Blackett, Sir Basil, The Function of Finance in International PL·nnkig. Quoted
in Johnston, G. A., ibid., p. 75.
74. Report of the Director. International Labor Conference, 16th Session, Geneva,
1932, p. 60.
75. Speech made at the Ordinary Assembly of Shareholders of the Midland Bank
Limited, January 30, 1933, quoted ibid., p. 60.
76. Lawley, F. E., op. cit., p. 390. The author refers to McKenna's Post-\Var Bank-
ing Policy. A Series of Addresses. London, 1928.
77. Ibid., pp. 391-92.
78. Ibid., p. 115.
79. Ibid., p. 326.
80. Milhaud, E., "Trêve de l'Or et Clearing des Transactions. Plan pour le rétab-
lissement des échanges internationaux." Annales de I'Economie Collective,
Vol. XXV, Nos. 284-88, February-June, 1933, p. 73, italics added.
81. Ibid., p. 94.
82. Lawley, F. E., op. cit., p. 334.
83. De Michelis, G., foe. cit., p. 496.
84. Milhaud, E., "Accords, etc.," loc. cit., p. 70.
85. Ibid., p. 72.
86. Thomas, A., "Protectionnisme, etc.," loc. cit., p. 109.
87. Ibid., p. 112.
88. Ibid.
89. Ibid.
90. Ibid., pp. 109-10.
91. "Politique" (journal), mentioned in text on p. 81. No. 6, June 15, 1930.
92. Daily Herald, January 31, 1935.
93. Lawley, F. E., op. cit., p. 378.
94. Franq, R., L'économie rationnelle. Quoted in Lawley, F. E., op. cit., p. 371.
95. Report presented to the Thirteenth Congress of the National Federation of
Consumers' Cooperative Societies at Lille, 1926, quoted in Lawley, F. E., op.
cit., p. 364.
96. "L'O.I.T. face au problème de l'organisation de l'économie. Les derniers en-
seignements et le supreme appel d'Albert Thomas." Annales de TEconomie
Collective, Vol. XXIX, Nos. 335-42, May-December, 1937, p. 166.
97. Lawley, F. E., op. cit., p. 374.
98. "The theory of the capitalist market price, which dies hard among economists,
will then have died. Market price, under capitalism, has no relation to the
true economic price which is based on actual economic services conceived as
collective functions, without reference to the need, under private capitalism,
of assigning part of the product of industry to be utilized as private profit in
a competitive market." Ibid., pp. 387-88.
99. Ibid., p. 388.
100. Ibid., p. 392.
101. Ibid., pp. 386-87.
102. Ibid., p. 390.
103. Ibid., pp. 374-75.
104. Ibid., italics added.
CHAPTER V
THE COLLECTIVIST STATE-THE TRANSITIONAL

STAGE FROM CAPITALISM TO WORLD PLANNING
MARXISM AND THE NATIONAL STATE
The man who had summoned the proletarians of the world

to unite never allowed himself to speculate along the lines de-
scribed in Chapter IV. He bitterly attacked Bakunin's anti-
State view of the future international order, even though both
subscribed to the doctrine defining the State as the institution-
alized form of oppression. Yet, for Marx, the latter was also a
necessary historical category. As capitalism had a specific his-
torical task to fulfill, so had the national state, created by the
capitalist class and used as its instrument:
The executive of the modern state is but a committee for managing
the common affairs of the whole bourgeoisie.1
Consequently, a collision between the ruling classes and

the forces of socialism became inevitable, but, and this is the
essential point, the State was not to be destroyed by the "inter-
national proletariat"; it was instead to be conquered by the
national working classes in each state:
Though not in substance, yet in form, the struggle of the proletariat
with the bourgeoisie is at first a national struggle.2
The proletariat's aim is to achieve political power:

Political power, properly so called, is merely the organized power of
one class for oppressing the other. If the proletariat during its contest
with the bourgeoisie is compelled, by the force of circumstances, to or-
ganize itself as a class; if, by means of a revolution, it makes itself the
ruling class, and, as such, sweeps away by force the old conditions of
production, then it will, along with these conditions, have swept away
the conditions for the existence of class antagonisms, and of classes gen-
erally, and will thereby have abolished its own supremacy as a class.3
THE COLLECTIVIST STATE 93
For international relations this means:
In proportion, as the exploitation of one individual by another is put
an end to, the exploitation of one nation by another will also be put an
end to. In proportion, as the antagonism between classes within the na-
tion vanishes, the hostility of one nation to another will come to an end.4
This is an early statement of the familiar "withering away"

theory. But this process, according to Marx, is able to begin
only in a "higher phase of communistic society" when both
individual character and the forces of production have reached
a stage of development which makes possible its organization on
the principle "from each according to his ability, to each ac-
cording to his needs."5 However,
between capitalist and communist society lies the period of the revo-
lutionary transformation of the one into the other. There corresponds to
this also a political transition period in which the State can be nothing
but the revolutionary dictatorship of the proletariat.6
The dictatorship of the proletariat is characterized by two

basic functions: the gradual extinction of all traces of capitalism
and the construction of socialism. To fulfill these tasks, the State
must undergo a complete transformation. There can be no
question of the socialist state's continuing to operate (†ortwirt-
schaften) with the administrative apparatus inherited from cap-
italism; it must shatter it. Parliamentary control, being regarded
as the control by the possessing classes,7 is to be replaced by a
pyramid of workers' councils wielding both executive and leg-
islative powers.8 This system is called, by Lenin, democratic
centralism. "Insofar as these councils are representative insti-
tutions, there is democracy. Insofar as the greater power goes
with the higher council and insofar as the unity of the nation
is not to be broken, there is centralism."9 Both Marx and Lenin
stress the fact that this system has nothing in common with tra-
ditional federalism. In fact, it is an entirely new form of com-
munity which could best be characterized, as Engels has sug-
gested, by the word "Gemeinwesen," as opposed to "State."
It follows from Marx's writings that the dictatorship of the
proletariat is to be instituted in the wake of a victorious and
separate revolution of the working class in each state and that
"the unity of the nation should not be broken up." But this
postulate is clearly in contradiction to Point 9 of the program
adopted by the Social Democratic Workers' Party of Russia in
1903 containing "the recognition of the right of self-determina-
tion to all nationalities contained in a State."10 It is impossible,
in this context, to trace the various views held by the major so-
cialist protagonists such as Rosa Luxemburg, Otto Bauer, Karl
Renner, and Karl Kautsky—on this question at the turn of the
century. Both Marx and Lenin have unmistakably pointed out
that "it is to the class-struggle that we must subordinate the
demand for national self-determination."11 And Lenin argues
dialectically:
We demand the freedom of self-determination—not because we dream
of an economically atomized world, nor because we cherish the ideal of
small states, but on the contrary, because we are for large states and for
a coming closer, even a fusion, of nations, but on a truly democratic, truly
international basis. . . .12 For the advantages of large states, both from
the point of view of economic progress and from the point of view of
the interest of the masses, are beyond doubt, and these advantages in-
crease with the growth of capitalism.13
Socialism will
lead to the complete elimination of all national friction, of all national
suspicion, to the speedy establishment of intimacy between and amalga-
mation of nations, culminating in the "withering away" of the state.14
This process will result in

the creation of a single world economy regulated by the proletariat of all
nations according to a common plan.15
The practical solution of the self-determination issue,

adopted by Lenin and his successor, sheds important light on
the major point of interest in this context—the kind of internal
order corresponding to the dictatorship of the proletariat. In
an article published in Pravda on October 10, 1920, Stalin ana-
lyzed the proper relations to be established between Central
Russia and the different nationalities which have been united
under Czarist domination:
The demand for the secession of the border regions from Russia . . .
must be rejected . . . because it is fundamentally opposed to the interests
of the mass of the peoples both of the centre and of the border regions.
Apart from the fact that the separation of the border regions would un-
dermine the revolutionary might of Central Russia . . . , the seceded
border regions themselves would inevitably fall into bondage to interna-
tional imperialism.16
In 1922, only two years later, considerations relating to the

internal economic situation, foreign policy, and the "structure
of Soviet power" led to the establishment of the Union of Soviet
Socialist Republics. This structure, "being international by its
intrinsic nature . . . systematically fosters the idea of unity
among the masses and impels them towards amalgamation."17
Stalin described the nature of unified economic cooperation as
follows:
The People's Commissariats of Finance, National Economy, Food,
Labor and Inspection shall continue within each of the contracting
republics, but in such a way as to operate in accordance with the in-
structions of the corresponding central Commissariats of the Union.18
Some months later, at the 12th Congress of the Communist

Party of the Soviet Union, he said:
The political basis of the dictatorship of the proletariat consists mainly
and primarily of the central, the industrial regions, and not the border
regions which are peasant countries. If we over-emphasize the peasant
border regions at the expense of the proletarian districts, a fissure in the
system of the dictatorship of the proletariat may result. . . . It should be
borne in mind that besides the right of nations to self-determination there
is also the right of the working class to consolidate its power and to this
latter right the right of self-determination is subordinate.19
MARXISM AND ECONOMIC ORGANIZATION
Marx and EngeL·

To the transitional political period—the dictatorship of the
proletariat—there will correspond, according to Marx, a "first
phase" of economic organization:
What we have to deal with here is a communist society, not as it has
developed on its own foundation, but, on the contrary, just as it emerges
from! capitalist society; and which is thus in every respect, economically,
morally and intellectually, stamped with the birthmarks of the old
society from whose womb it emerges. Accordingly, the individual pro-
ducer receives back from society—after the deductions have been made
—exactly what he contributes to it. What he has contributed to it is his
individual quantum of labor. . . .
Here obviously the same principle prevails as that which regulates
the exchange of commodities, as far as this is exchange of equal values.
Content and form are changed, because under the altered conditions no
one can give anything except his labor, and because, on the other hand,
nothing can pass into the ownership of individuals except individual
means of consumption. . . . Hence, equal right here is still in principle—
bourgeois right, although principle and practice are no longer at logger-
heads.20
This right, however, has severe defects:

One man is superior to another physically or mentally and so supplies
more labor in the same time, or can labor for a longer time; and labor, to
serve as a measure, must be defined by its duration or intensity, otherwise
it ceases to be a standard of measurement. The equal right is an unequal
right for unequal labor. It recognizes . . . unequal individual endowment,
and thus natural privileges in respect to productive capacity. . . . Further,
one worker is married, another not; one has more children than another,
and so on. Thus, . . . one individual will in fact receive more than an-
other, one will be richer than another. . . . Right can never be higher
than the economic structure of society, and the cultural development con-
ditioned by it.21
The "altered conditions" to which Marx refers, are, of course,

the outcome of the fact
that society openly and directly takes possession of the productive forces
which have outgrown all control except that of society as a whole.22
Friedrich Engels devotes particular attention to the pro-

duction side of a socialist economy:
As soon as society takes possession of the means of production and
uses them in direct socialization for production, the labor of everyone,
however different may be its specifically useful character, immediately
becomes social labor. The quantity of labor contained in a product no
longer needs to be determined in a roundabout way; everyday experience
directly shows how much of it is needed on the average. Society can
simply compute how many labor hours are contained in a steam-engine,
in a hectolitre of wheat of last year's crop, in a hundred square yards of
cloth of a certain quality. It will not even consider expressing labor
quantities specified for production . . . in any other unit . . . than in its
natural, adequate, absolute measure: time. . . . Hence, society, under the
above conditions, does not ascribe values to the products. . . . To be sure,
society will continue to be aware of how much labor will be required for
the production of each commodity. It will have to draw up its production
plan according to the available means of production including, in partic-
ular, labor forces. It is the utility of the various commodities, balanced
against each other and with respect to the quantities of labor necessary
to their production that will eventually determine the plan. People will
settle everything very simply, without interference of the much talked
of value.23
Socialist planning will, according to Engels, achieve con-

siderable economies of productive resources first because of its
superior organization, secondly because there will be no more
crises, and thirdly, because
it sets free for the community at large a mass of means of production and
of products, by doing away with the senseless extravagance of the ruling
classes of today, and their political representatives.24
Consequently,
the government of persons is replaced by the administration of things,
and by the conduct of processes of production. The state is not "abol-
ished." It withers away.25
With respect to the international division of labor, Engels

writes:
Capitalistic industry has already made itself relatively independent
of local barriers of its raw materials' production sources. . . . A society
freed from the barriers of capitalistic production can go much farther. By
producing a generation of universally educated producers who under-
stand the scientific foundations of the entire industrial production and of
whom each has worked himself through numerous production branches,
it creates a new productive force that more than counterbalances the
work of transport involved in the supply of raw materials and fuels from
longer distances.26
Lenin
The "higher phase of communistic society," Lenin main-
tained, was foreseen, though never "promised" by the great so-
cialists, since it "presupposed both a productivity of labor un-
like the present and a person unlike the present man in the
street."27 For the time being,
the Socialists demand the strictest control by society and by the state of
the amount of labor and the amount of consumption. But this control
must start with the expropriation of the capitalists and must be carried
o u t . . . by a state of armed workers.28
The Communist Party, having fulfilled its task "to capture

political power and to suppress the resistance of the exploiters"29
was now faced with
the organization of accounting, of the control of large enterprises, the
transformation of the whole of the state economic mechanism into a sin-
gle huge machine, into an economic organism that will work in such a
way as to enable hundreds of millions of people to be guided by a sin-
gle plan. Such was the enormous organizational task that rested on our
shoulders.30
However,
our work of organizing nation-wide accounting and control of production
and distribution under the guidance of the proletariat has lagged very
much behind our work of directly expropriating the expropriators.31
And this in spite of the fact that accounting and control

have been so utterly simplified by capitalism that they have become the
extraordinary simple operations of checking, recording and issuing re-
ceipts which anyone who can read and write and who knows the first
four rules of arithmetic can perform.32
The Soviet government must make use of the latest achieve-

ments of capitalism33 as regards the best auditing methods as
well as such devices as the Taylor system and scientific manage-
ment. But its principal task is an educational one:
The fight to instill into the minds of the masses the idea of Soviet state
control and accounting . . . the fight to break with the cursed past which
taught the people to regard the gaining of bread and clothes as a "private"
matter, as buying and selling, as a transaction "which concerns only my-
self"—is a great fight of world-historical significance, a fight between so-
cialist consciousness and bourgeois-anarchist spontaneity.34
The authorities must also, by all means, raise labor produc-

tivity. This "first of all requires that the material basis of large-
scale industry shall be assured, viz. the development of the pro-
duction of fuel, iron, the engineering and chemical industries."35
It is also necessary to improve the discipline and organization
of labor:
The form of coercion is determined by the degree of development of
the given revolutionary class. . . . Large-scale machine industry— . . .
the material productive source and foundation of socialism—calls for
absolute and strict unity of will which directs the joint labors of hun-
dreds, thousands and tens of thousands of people. . . . But how can strict
unity of will be assured? By thousands subordinating their will to the
will of one.36
The Communist Party, "with the transition of all power—

this time not only political and not even mainly political, but
economic power, that is, power that affects the most deep-seated
foundations of every-day human experience—to a new class,"37
is faced with a historically unique and therefore particularly
difficult task.
It goes without saying that in view of the supreme importance and
the supreme difficulty of the organizational tasks that confront us, when
we must organize the most deep-seated foundations of the human exist-
ence of hundreds of millions of people on entirely new lines, it is impos-
sible to proceed according to the proverb "measure your cloth seven
times before you cut it." Indeed, we are not in a position to measure a
thing innumerable times and then cut out and fix what has been finally
measured and fitted. We must build our economic edifice in the process
of work, trying out this or that institution, watching their work, testing
them by the collective common experience of the toilers and, above all,
by the results of their work. . . . It goes without saying that if even in a
short space of time we have again and again to alter types, regulations
and organs of administration in various branches of national economy,
there is nothing in this that can give grounds for pessimism, although, of
course, it may give considerable grounds for angry outbursts on the part
of the bourgeoisie.38
However, Lenin points out that

the possibility of building up socialism depends entirely upon whether
we shall be able . . . to safeguard our internal economic independence
for a given transitional period.39
Hence, one of the first measures of the Soviet government was

the establishment of a state monopoly of foreign trade.
Stalin
Stalin, with more than a decade of centralized state planning
to look back upon, contributed three "new" aspects to the theory
of socialist economy. The first refers to the character of eco-
nomic laws: while it is true that they exist independently of the
mode of production adopted,
it has been proven that society is not powerless with respect to the laws;
that it can, by knowing the economic laws and by relying on them, limit
the sphere of their action, use them in the interest of society and take
them into account as this is done with the forces of nature and its laws.40
The author illustrates this by "the objective law of harmo-

nious and proportioned development of the national economy"
governing socialism, which he contrasts to "the law of com-
petition and anarchy of production prevailing under the capi-
talist regime."41 What is the nature of the first-mentioned ob-
jective law? Here is Stalin's dialectic answer:
The law of a harmonious development of the national economy offers
to our planning agencies the possibility of correctly planning social pro-
duction. But possibility should not be confused with reality. . . . In order
to convert this possibility into reality, one has to study this economic law,
to master it, one has to learn how to apply it with full knowledge of what
is involved. . . . One cannot say that our annual plans and our five-year
plans fully reflect the requirements of this economic law.42
Secondly, Stalin analyzes the role of the law of value under

socialism. As far as commodity production in the USSR still
exists and it does at the present stage of historical development
—the law of value asserts itself. Is this a good thing? the author
asks and answers:
It is not bad. . . . The calamity is not that the law of value influences
our production. The calamity is that our economic and planning experts,
with few exceptions, have a poor knowledge of the effect of the law of
value, that they fail to study it and do not know how to account for it.
This explains the confusion which still exists in our price policy. Here is
an example among so many others. Some time ago, it was decided to ad-
just the relation of cotton and corn prices in the interest of cotton culti-
vation, to fix the price of corn sold to the cultivators of cotton, and to
raise the price of cotton delivered to the State. Our economic and plan-
ning experts now came out with a proposition which could not but sur-
prise the members of the Central Committee since it was suggested to fix
the price of a ton of corn almost at the same level as that of a ton of cot-
ton, the price of a ton of corn being identical with that for a ton of bread.
. . . Perforce, the Central Committee itself had to attend to this matter, to
lower the price of corn and to raise that of cotton.43
This does not mean, however, that the law of value directs
production with respect either to its volume or to its propor-
tions, as under capitalism.44 It is only allowed to work insofar
as it does not collide with the law of proportional and harmo-
nious development and the centrally established plans based
upon it. If its sphere of action had a greater scope, as some com-
rades suggested that it should have, one could rightly ask:
Why should not our light industries be fundamentally developed
since they are more remunerative than heavy industry which is sometimes
less remunerative or at times not remunerative at all? . . . It is clear that,
by following the recommendations of these comrades, we had to re-
nounce the primacy of the production of the means of production on the
production of consumer goods. . . . This would mean the impossibility of
an increasing growth of our national economy.45
Stalin's third contribution to socialist economic theory is

found in this statement:
The most important economic result of the second world war and of
its consequences for the economy has been the disintegration of the single
universal world market. . . . One has witnessed . . . the detachment of
China and the other European countries having adopted popular democ-
racy from the capitalist system in order to form, with the Soviet Union, a
sole and powerful socialist camp, opposed to the camp of capitalism. . . .
We have now two parallel world markets and they, too, are opposed to
each other.46
This is how the author views the nature of the socialist world
market:
The experience of this cooperation shows that no capitalist country
could have given equally efficient and technically qualified assistance to
the people's democracies than that which they received from the Soviet
Union. The fact is that on the basis of this cooperation there is the sin-
cere desire to help one another and to achieve general economic progress.
As a result, we observe rapid industrial development in these countries.
One can say with assurance that, with such a rhythm of industrial devel-
opment, these countries will soon no longer need to import goods from
capitalist countries, but will themselves feel the necessity of selling the
surplus of their production abroad.47
When reading this passage, one must wonder whether Stalin

had read More's Utopia. We shall examine more closely these
contentions, along with the nature and results of socialist in-
ternational economic cooperation, in the last part of this study.
T H E NATIONAL SOCIALIST APPROACH

It is interesting to note that the internal structure of the col-
lectivist state became equally elaborated by another line of
thought, represented with particular force and clarity in Ger-
many. The authors in question, philosophers and historians
alike, approached the subject not from the premise of interna-
tional solidarity, but from the viewpoint of national might and
greatness. They drew their inspiration from the Prussian state
which, as we have already seen, was regarded by Hegel as the
most perfect manifestation of historical development, the iden-
tification of reason with reality.48 It is impossible, in this con-
text, to give more than a few highlights to illustrate this line of
economic and political speculation which eventually resulted in
the establishment of the National Socialist state.
The State is seen as an "ideal, total personality placed above
the individual."49 Or one can read:
The State . . . is the intimate union of the entire physical and spiritual
needs, of the entire physical and spiritual wealth, of the entire internal
and external life of a nation to a great, energetic, infinitely moved and
living whole.50
It is impossible to achieve the national state

as long as minds are divided by a twofold desire, the one to live in civic
order in the state . . . the other to exempt oneself again from the entire
civic order, to cut oneself out of the same state with one's family, one's
private life, one's most intimate feelings, even with one's religion.51
Hence, there can exist no human sphere outside the State.

All property should lastly belong to the State. The Ministry of
Foreign Affairs is to supervise if not outright to conduct foreign
trade. It is only "the free and powerful intercourse of the states
among them"52 which has ultimate reality in international re-
lations. At the same time, states cannot possibly be subjected
to international law, for it would far exceed the capacity of any
single human being to act as an arbitrator in international dis-
putes.53
Clearly, this doctrine has its roots in the theory of the Uto-
pian State. It was radically restated by Oswald Spengler after
the end of the first world war:
World history is the history of states. The history of states is the his-
tory of wars. Ideas, if they press toward a decision, assume the form of
political units, states, peoples, parties. They will be fought out with
weapons, not with words. . . . War is the eternal form of higher, human
existence and states exist for the sake of wars; they are the expression of
the readiness for war.6*
States are thus not only territorial and political units, they
are also the embodiment of ideas. In our day, and this is
Spengler's main contribution, two sets of ideas are clashing: the
Prussian state idea and British parliamentary liberalism.
English society is founded on the difference between rich and poor,
the Prussian one on that of command and obedience.55
Therefore,
the old Prussian spirit and the socialist way of thinking, which today hate
each other with the hatred of brothers, are one and the same.58
The deep, inner antagonism between Prussia and Britain is

therefore that between socialism and capitalism. The socialist
idea is basically "will to power, struggle for the happiness not of
the individual, but of the whole. Frederick William I and not
Marx was, in this sense, the first conscious socialist."57
International socialism does not as yet exist,58 since social-
ism necessarily differs in each country:
A true international is only possible by the victory of one race over all
others and not through the dissolution of opinions into a colorless mass.
. . . We Germans who are placed in this century, interwoven with our
being into faustic civilization, have rich, untapped possibilities in us and
huge tasks before us. To the international which is irrevocably in the
making, we have the idea of world organization, of world state, the Eng-
lish that of world trusts and world exploitation, the French nothing to
contribute... . With Prussianism, the idea of order in true socialism stands
and falls. . . . The true international is imperialism, domination of the
faustic civilization, hence of the whole earth, by one creative principle,
not by compromise and concession, but by victory and destruction.59
Spengler, as Marx before him, thus envisages, for the time

being, not a peaceful international order, but a war or series
of wars for supremacy. A war, to be sure, not between classes,
but between national states for the "leading principle" (Leit-
prinzip) they stand for. And that also other motives besides the
ideological ones will play a decisive role in these conflicts, is
expressed by Moeller van den Bruck, the famous author of Das
dritte Reich:
The German nation is astir. Its path is blocked. It has lost its bearings.
It seeks peace. It seeks work: and fails to find it. We are becoming a
nation of proletarians.60
Germany's overpopulation is a severe problem although it

"is part of Nature's design. Nature must solve the problem."61
It will do so by allowing Germany to found a "Third Empire"
which will include territories large enough to provide ample
living space for its population.
The only question is whether the national elements in the German
working-classes will have the power and the will to wheel the proletarian
battle front in a "national-socialist" direction; or rather to wheel it right
round, so that the forces which were directed to class war against our
own nation shall face the foreign foe. Our political fate hangs on the
answer.62
These themes were discussed earlier by the "realpolitische

Sozialisten" in their monthly review, Sozialistische Monatshefte,
of whom Karl Kautsky, the spokesman of the German Social
Democrats, admitted that "many of their lines of thought live
on today in national socialism."63 These socialists openly advo-
cated an active colonial policy to be pursued by the Social Dem-
ocratic Party of Germany:
The vital economic interests of the peoples cannot be violated by
whatsoever principles, they wipe out these principles and prevail.64
Concerning postwar plans for a closer economic cooperation in

Central Europe, another author writes:
The central European plans for a rapprochement are good insofar as
they fit into the framework of general German economic and world po-
litical progress.65
It is important to grasp the fact

that the organization of the world through economic imperialism (wirt-
schaftlichirnperiale Durchorganisierung der Welt), in which the European
continent represents one big economic complex, forms the essential pre-
requisite for the creation of a socialistic way of production.68
But this process of "Durchorganisierung" can only take place

at the basis of national policies;67 hence it becomes decisive for
the socialist parties to pursue an independent foreign policy.
This evidently presupposes a strong state and a corresponding
government endowed with full power.68 In regard to this,
Werner Sombart develops his "Führerprinzip" which
culminates in the assumption of a supreme will of the leader who can
receive his orders only from God. . . . The volonté generate which is to be
realized, is a metaphysical, not an empirical reality, it has nothing to do
with the volonté de tous, the leader cannot ascertain it by a plebiscite, he
must know it and he can have learned it only by revelation. Therefore
also, he does not need the consent of the "people" for the justification of
his acts . . . the statesman serves not the interest of the people, only the
national idea.69
The national economy is to be centrally planned "since only

this leads to the necessary unity and consistency":70
The "whole" we have in mind is the national economy merged into a
harmonious unity. It follows from this that the national economy must
have a certain completion, seclusion, self-sufficiency which give it a stable
equilibrium. We stand for this national economic principle (nationalwirt-
scha†tliche Prinzip) for strategic, ethnical, and economic reasons. But
mainly out of the consideration that socialism, that is, as we know, a well
planned order of the community, requires for its realization an economic
body which, in all its activities, is essentially independent of occurrences
abroad.71
THE FOREIGN TRADE SYSTEM IN A COLLECTIVIST STATE

The above statement coincides remarkably, in its essence,
with Lenin's determination "to safeguard our internal economic
independence" and in fact with the theories of most socialists
reviewed so far. During the 1930's, a growing number of econ-
omists attempted to elaborate a general theoretical framework
for a collectivist economy, parallel to the one developed for a
liberal economic order. Naturally, these theoretical investiga-
tions drew much of their inspiration from the introduction, in
1928, of the first Russian Five-Year Plan. In fact, most of them
consisted of a more or less detailed description of the economic
system, or more precisely the organizational structure, of the
world's First Socialist Power. But gradually, some basic fea-
tures of a centrally planned economy were worked out, one of
which was indeed the fact that the corollary to this order was
"a watertight economic system."72
The State Monopoly of Foreign Trade

Whether the problem of international economic relations
was approached from the viewpoint of "international solidar-
ity," as was done for example by G. D. H. Cole,73 or from the
internal nature of the collectivist economic order itself, all
authors agreed that national planning implied a "unified con-
trol over its foreign trade."74 Hall, Mossé, and Dickinson devel-
oped a consistent theory of collectivist foreign trade on the ba-
sis of the "national" approach. Mossé, after having shown that
free trade is utterly incompatible with a centrally planned eco-
nomic order,15 asserts that a trade organization directed by a
state monopoly of foreign trade necessarily corresponds to this
order:
The directing bodies of the economy determine the goals and limits
of foreign trade. The principal objective is to procure to the country, first,
goods and services which are indispensable and which it cannot obtain at
home and, secondly, those which can be obtained by international ex-
change more advantageously than by producing them at home. However,
in order not to depend on foreign countries, extra-economic concerns may
demand home production, even under unfavorable conditions. Economic
considerations regarding the future may yield the same result (List), be-
cause it may be advantageous, for the time being, to renounce profitable
purchases in order to develop productive forces internally.76
Thus, state planning necessarily begins with fixing general

economic goals to be achieved in a given period of time. This
authoritative decision is made, as implied in the above passage,
with respect to national interests, even if this means a temporary
reduction of international trade and hence world welfare. The
next step consists of so combining and balancing all available
productive resources as to ensure fulfillment of the plan. In this
process, foreign trade has an important task:
The main objective of foreign trade is to acquire certain foreign goods
and services. It is thus imports which are the goal, exports being only the
means to pay for them, that is, to force the supplier to deliver them. This
reduces the problem of foreign trade to its true position whereas, in the
liberal-individualistic economy, the fragmentary vision of particular inter-
ests arbitrarily cuts out a portion of reality and makes the means, exports,
appear to be the end, and neglects the essential thing: imports.77
Hence, it falls to the monopoly of foreign trade, assisted by

its various specialized departments, (1) to set up national im-
port and export plans which are to be integrated into the gen-
eral plan; (2) on the basis of these plans, to conclude interna-
tional treaties and individual contracts; (3) to supervise, in
every aspect, the correct execution of foreign trade operations.78
However, it cannot do all these things unless it finds itself in
close cooperation with another state monopoly: the monopoly
handling international payments.
The monopoly of foreign trade entails the monopoly of foreign ex-
change, since foreign exchange operations are nothing but the means of
settling commercial operations. The maintenance of a foreign exchange
market is no longer required when external operations are no longer con-
ducted by private enterprises.79
Mossé clearly outlines the full consequences of this system,

but by doing so, he essentially repeats what Fichte had said
140 years earlier:
The state monopoly of foreign payments implies the complete separa-
tion of the monetary system from the external monetary systems. . . . The
conversion rate of internal money into external currencies is fixed by the
Administration of Foreign Trade as are the conditions under which it is
permitted to obtain foreign exchange (tourists, students, etc.)80. . . . The
Administration of Foreign Trade deals with internal enterprises on the
basis of internal money and with foreign enterprises in an international
unit of general use, that is a certain gold weight. . . . In order to assure the
watertightness of the internal monetary system, the export and re-import
of internal means of payment are prohibited.81
Collectivist Foreign Trade and the Theory of Comparative Costs

All authors under review maintain that the principle of com-
parative costs will not only be observed under collectivism, but
will be much more effective than in an individualist economic
order. Yet, Mossé admits that
in a planned economy, the volume of operations is determined by the plan
which may not go as far as the optimum.82
And Dickinson enumerates the following qualifications to this

principle:
(1) The State Economic Commission must discriminate between sup-
plies of cheap foreign goods that are permanently cheap owing
to low real costs of production and those that are only temporarily
cheap;...
(2) A planning authority ought to be able to look ahead and forecast
future trends a) in costs of export goods, b) in costs of goods
that compete with or might compete with imports and c) in the
barter terms of trade.83
Mossé underlines the particularities of collectivist foreign

trade based on comparative costs. In the first place,
there is no need for a fixed relation between the two currencies; neverthe-
less, profitability calculations are easy. The Administration of Foreign
Trade, in fact, expressly combines imports with exports. It has a complete
vision of the phenomenon of exchange. It reasons and calculates as do
the theoreticians of international trade.84
Secondly, "internal disturbances, caused by international ex-

change, can be remedied."85 What Mossé and other authors have
in mind are the social as well as the economic costs which, they
assert, can now correctly be assessed by the central planning
authority, the social costs including the losses due to transfer-
ence of productive resources, especially of labor, to new eco-
nomic uses as a result of foreign trade.
The cost of change can and must be calculated in its entirety by ad-
ding to the internal value of the product exported in "payment" the losses
incurred by the renunciation of an existing line of production. The ex-
change is deemed advantageous only if the value of the imported product
is higher than the value of the exported product—including these costs.86
Socialists recognize, however, that the actual problem of
collectivist foreign trade does not merely consist of determining
the quantities of two given goods to be exchanged—the case on
which the above reasoning is based—but also of knowing what
groups of commodities should most rationally be exported and
imported. Several methods of calculation were proposed in
this respect, but the main difficulty is found to exist in the fact
that "for want of a free foreign exchange market, there does not
8
exist an objectively determined exchange rate.""87
The Problem of External and Internal Equilibrium

It is deemed essential for a collectivist state to seek a balance
of the current account. Short-term borrowing and lending to
cover temporary surplus and deficits are to be used only to a
very restricted extent. This applies especially to trade relations
with capitalist countries where the danger exists "that the so-
cialist community would find itself more deeply involved than
it cared to be in the financial complexities of non-socialist coun-
tries."88 According to Mossé neither credit taking nor the export
of gold is an appropriate means of achieving international equi-
librium "since they invoke a certain dependence on foreign
countries or a loss of substance and, what is more, they cannot
be used permanently."89
The foreign trade administration has the great advantage
"of knowing, with precision and exactness, the true situation of
the international accounts"90 at any moment in time. If an im-
portant deficit is appearing, the agency can easily modify its
foreign trade plans by making more home goods available for
export or by cutting down imports.
Mossé maintains that a collectivist economy is better
adapted than a liberal-individualist economic order to solve the
basic dilemma91 which exists between optimum international
economic relations and internal equilibrium:
The Administration of Foreign Trade assumes, in this respect the role
of a sluice; it buys foreign goods at world market prices and sells them
again, at internal prices, to internal enterprises. In the same way, it buys
at internal prices and resells on the basis of world market prices; the sluice
is the means of preventing the operation of the law of communicating ves-
sels which imposes an identical level on each vessel. At the same time, it
makes possible relations between two water pools with different levels.
The error of the classical theory consisted of the belief that relations are
possible only among systems which are on the same horizontal level and
that they bring about this levelling. The collectivist economy, on the
contrary, admits the difference of levels as a given fact and seeks to es-
tablish relations all the same.92
Mossé thus contrasts the subordination of national to inter-

national equilibrium and the corresponding world economy
conceived by the classics as a unified, interdependent system to
its exact opposite, represented as the ideal of collectivism: the
breaking up of the world system into separate national econo-
mies which tolerate international economic intercourse only in-
sofar as they do not upset the painfully calculated international
equilibrium.
Long-Term Capital Movements

We remember that according to socialist theory, capital ex-
port is closely tied to the "basic contradictions of capitalism,"
especially those of its imperialistic phase. It was thought that,
with the introduction of a socialist economic order, the "mal-
distribution of consuming power which prevents the absorption
of commodities and capital within the country"93 would eo vpso
be eliminated. Hence, it would be quite consistent with the
just-mentioned doctrine if international economic relations be-
tween collectivist states were to be strictly limited to the move-
ment of goods and services. This, in fact, is Mossé's position, as
we have seen.
Nevertheless, most socialist authors concede in principle that
international long-term borrowing and lending may have ad-
vantages to both partners if they take place in accordance with
the relative abundance of capital at home and abroad, as ex-
pressed by interest rates.94 Dickinson observes, however, that
in making these calculations95 the planning organ of a socialist commu-
nity would need to take into consideration the net effect on the national
dividend of foreign borrowing and lending. That is to say, it would have
to compute not only the return on capital at home and abroad, but also
the effect of the import or export of capital on the return of labor. This
suggests that a socialist community, acting on purely economic calcula-
tions, would be more ready to import capital and less ready to export
capital than a capitalist economy under similar conditions.96
But there are other difficulties. Hall points to the fact that
international borrowing requires "careful adjustment of the in-
dustrial structure"97 by the borrowing country at the moment
of importing capital as well as at the time when it must pay it
back by additional exports. And he warns:
It is easy to make mistakes about the gain to be expected from ex-
penditure of capital on a large scale; and when the saving required is to
be done by others, the temptation to resort to borrowing to overcome
temporary difficulties is great.98
Considerations of a political nature must also be taken into ac-

count:
It seems to be inexpedient to allow private capital to develop the coun-
try . . . since the success of the whole system depends on the possibility
of unified control. The borrowing must be done by the state, and in order
to take advantage of the lower rates available elsewhere, strict guarantees
would be necessary which would hamper the political relations of the
country."
And Dickinson comments:

Borrowing from abroad makes the socialist community dependent on
foreign and possibly hostile countries; hence it should be avoided as much
as possible on political grounds. Lending abroad, if carried out on a
large scale and over a long period of time, would turn the community into
a corporate exploiter of workers living in other communities; it would
undermine its morale and create in the debtor country a sense of resent-
ment that would embitter international relations and might lead to con-
flict. On social and political grounds, therefore, there is a case against
it.100
Owing to the socialist theory that capital export is simply

the transfer of value destined to produce surplus value abroad,
this problem is usually viewed only from the lender's point of
view which is regarded as immoral. But does not the rationale
of international capital movements lie in the raising of labor
productivity in those countries where capital is relatively
scarce? Socialists do not ignore this problem, but, in their opin-
ion, it must be solved by truly socialistic principles, that is, by
gifts and disinterested aid to be given by the more advanced
states to their poorer brethren. However, the realization of
these principles, it is maintained, must await the time when
all states will have become socialist communities.
The Future Socialist International Order

Thus, the authors reviewed in this section, like those re-
viewed earlier, firmly believe that a true system of international
division of labor cannot be achieved unless its participants be-
come collectivist states:
Trade between socialist countries will exemplify the principles of nine-
teenth-century economic liberalism: it will be a mutual benefit and a force
making for peace.101
Yet, the results of his analysis led the author who wrote these
lines to the following complementary remarks:
Strictly speaking . . . , this harmony of interests applies without any
serious qualification to the exchange of goods. . . .102 The import and
export of capital, although beneficial to both parties, may give rise to
conflicts of interest between debtor and creditor communities. . . . The
migration of peoples, especially where they are of widely different social
conditions, may also be grounds of economic disharmony. . . . War for
possession of territory is conceivable between a community with a sparse
population, abundant national resources and a high standard of life and
a community with a dense population, few natural resources and a low
standard of life.103
But the author minimizes the force of his objections by as-

serting that such disharmonies v/ould be "improbable in prac-
tice."104 As a matter of fact,
It is improbable that a number of independent socialist common-
wealths would isolate themselves, each in its own distinctive economic
system, when self-interest and socialist principle alike would impel them
to adopt an integrated system of economic planning and costing.105
Thus, the socialists of all denominations strictly adhere to

the conception of a gradual and progressing fusion of socialist
states into a worldwide system of planned economic coopera-
tion. C. Bettelheim consistently applied Marx's distinction be-
tween the two phases of communism to international economic
relations when he wrote:
In the first phase, economic relations are essentially trading relations,
but their purpose is not mercantile. It is a question of coordinating ex-
changes in such a way that these may contribute to the parallel develop-
ment of the various planned economies. The nature and magnitude of the
exchanges are then determined by the various national economic plans.
External trade is an instrument of coordination and of "mutual collabora-
tion in economic development" (Mikojan). The political significance of
external trade becomes decisive. This signification can be expressed, in
particular, in the prices charged, which can be "privileged prices"; credit
conditions and the various forms of reciprocal technical aid that supple-
ment purely trading relations.
In the second phase it seems that the integration of the various eco-
nomic plans must progressively increase which means that it will be nec-
essary to consider more and more the possibility of redistributing certain
productive forces among the planned economy countries and taking into
consideration not only relative saving of labor, but also absolute saving.106
The internal structure of a collectivist state is comparable to

a pyramid in which the "unquestioning submission to a single
will" (Lenin) is an absolute necessity, a will that governs "die
most deep-seated foundations of the human existence of hun-
dreds of millions of people." Yet, this will is independent of the
wishes of these millions; it is "a metaphysical, not an empirical
reality" (W. Sombart). The state organization that it requires
is the exact opposite of Proudhon's federation: the greatest, in-
deed all, power resides at the top of the pyramid. The lower
agencies are reduced to receiving and executing central "in-
structions," whether they are ethnic groups, "democratically
elected workers' councils," or appointed state officials. This is
the implication of "democratic centralism" and this, also, is in-
terpreted by Spengler as forming the essence of the "old Prus-
sian spirit."
Because state planning is identical with "unified control," it
is self-evident that this control is to include all factors and re-
sources of production available within the political frontiers of
existing national states. The breaking up of these into smaller
units is considered to be contrary to historical development. In
fact, larger and larger states are called for by the progressing
forces of production and this means that more and more pro-
ductive resources are to be united under a single control. This
process is to find its completion when the "supreme will" will
have extended its droit à la richesse over the entire globe.
Whose will and whose right?
That of the working class, represented by the Communist
Party, is one answer. But, because "the struggle of the pro-
letariat with the bourgeoisie is at first a national struggle" (Com-
munist Manifesto), each state will emerge, after a successful
revolution, with separate directing "single wills," embodied by
national communist parties. Whose droit à la richesse is grad-
ually to be increased at the expense of whom and from whose
will is the common world plan finally to emanate? These issues
will be taken up again in Part II.
The "national socialist" thinkers have replaced the concept
of class war by the "national idea." In their theory, international
socialism is identical with imperialism, the "domination of . . .
the whole earth by one creative principle" (Spengler). Or, as
Plenge expressed it:
T h e m o s t i m p o r t a n t a n d critical question f o r socialism . . . is neces-
sarily this: what people is pre-eminently summoned to power, because it
is the exemplary leader in the organization of peoples?10'7
The fourth section of this chapter showed that interwar

economists concerned with the theory of a collectivist economy
fully confirmed Fichte's theories with respect to foreign trade.
A full discussion of its implications will follow in Chapter VII.
NOTES TO CHAPTER V
1. Communist Manifesto, quoted in Ebenstein, W., op. cit., p. 692.
5. Critique of the Gotha Programme. Published by F. Engels in Neue Zeit, 1891,
newly translated by Bottomore, T. B., in Karl Marx. Selected Writings in
Sociolgy and Social Philosophy. New York, McGraw-Hill, 1964, p. 258.
6. Ibid., p. 256.
7. Marx, K., Adresse des Generalrats (der internatwnaL·n Arbeiter-Assoziation)
über den Bürgerkrieg in Frankreich 1871. In Borkenau, F. (ed.), Karl Marx.
Frankfurt/M., Fischer, 1956, p. 173.
8. Ibid., p. 176.
9. Chang, S. H. M., The Marxian Theory of the State. Ph.D. Dissertation, Phila-
delphia, University of Pennsylvania, 1931, p. 116.
10. Farner, K., and Pinkus, R. (eds.), Der Weg des Sozialismus. Quellen und
Dokumente vom Erfurter Programm 1891 bis zur Erklärung von Havanna 1962.
Hamburg, Rowohlt, 1964, p. 21.
11. Lenin, V. I., The National Question in Our Programme (July, 1903). Selected
Works, Vol. II, p. 330, italics original.
12. The Right of Nations to Self-Determination. New York, International Pub-
lishers, 1951, p. 72.
13. Ibid., p. 76.
14. Ibid., p. 90.
15. Preliminary Draft of Theses on the National and Colonial Questions, prepared
for the Second Congress of the Communist International in June, 1920. Point
8. Selected Works, Vol. VIII, p. 234.
16. Reprinted in Marxism and the National and Colonial Question. New York,
International Publishers, 1936, p. 79.
17. Ibid., p. 123.
20. Critique of the Gotha Programme, quoted in Bottomore, T. B., op. cit., pp.
256-57, italics original.
21. Ibid., pp. 257-58.
22. Engels, F., Herrn Eugen Dührings Umwäízungen der Wissenschaft. 6th ed.,
Stuttgart, Dietz, 1907, p. 300.
24. Ibid., p. 304.
26. Ibid., p. 320. Karl Kautsky envisages the future international order as follows:
"State boundaries will lose . . . the character they had up to the present. Since
production will no longer be private, but social, since the profit of individual
entrepreneurs ceases to be their propelling force, all 'protective tariffs,' the
source of artificial profits and capital accumulation, will lose their significance.
But, with the abolition of tariffs the seclusion of states into artificial economic
units will also come to an end." Die Befreiung der Nationen. Stuttgart, Dietz,
1917, p. 46. Elsewhere, however, the same author writes: "The final goal of
development, once the proletariat has achieved political power, is the unifica-
tion of all production units into one huge state firm, that is the transformation
of the state into one single economic cooperative. . . . Production of commodi-
ties and private ownership of the means of production are overcome; the new
economic cooperative which grows out of the state possesses all means of pro-
duction which it needs and it produces essentially by itself all that is necessary
to itself and to its members." Grundsätze und Forderungen der Sozialdemok-
ratie, 2nd ed., Berlin, Verlag Vorwärts, 1898, p. 25, italics original.
27. State and Revolution. Selected WorL·, Vol. VII, pp. 88-89, italics added.
28. Ibid., p. 89, italics original. "The Soviet government is nothing more nor less
than the organizational form of the dictatorship of the proletariat, the dicta-
torship of the advanced class." Immediate Tasks of the Soviet Government.
Selected Works, Vol. VII, p. 338.
29. The Fundamental Tasks of the Party after the Seizure of Power by the Pro-
letariat, Vol. VII, p. 315.
30. Ibid., p. 287.
31. Ibid., p. 325.
32. State and Revolution, he. cit., pp. 92-93.
33. "We, the party of the proletariat, have no other way of acquiring the ability to
organize large-scale production of the trust-type except by acquiring it from
thefirst-classcapitalist specialists." Fundamental Tasks, loc. cit., p. 375, italics
original.
35. Immediate Tasks, loc. cit., p. 330.
36. Fundamental Tasks, loc. cit., pp. 341-42, italics added. Lenin continues:
"Given ideal class consciousness and discipline on the part of those taking
part in the common work, this subordination would more than anything re-
mind one of the mild leadership of a conductor of an orchestra. It may assume
the sharp forms of a dictatorship if ideal discipline and class consciousness are
lacking. But be that as it may, unquestioning submission to a single will is
absolutely necessary for the success of labor processes that are based on large-
scale industry. . . . The technical, economic and historical necessity of this is
obvious, and all those who have thought about socialism have always regarded
it as one of the conditions of socialism." Ibid., p. 342, italics original.
37. Ibid., p. 387. It may, here, be referred to a controversy between Lenin on the
one and Trotsky and Bucharin on the other side, who reproached the former
of approaching production problems "politically" instead of "economically."
This is how Lenin defends himself: "The theoretical uncorrectness of this is
most striking. Politics are the concentrated expression of economics. . . .
Politics cannot but have precedence over economics. To argue differently means
forgetting the ABC of Marxism. . . . Without a proper political approach to the
subject the given class cannot maintain its rule, and consequently cannot solve
its own production problems." Once Again the Trade Unions. The Present
Situation and the Mistakes of Trotsky and Bucharin (January, 1921). Selected
Works, Vol. IX, pp. 54-55, italics added.
38. Ibid.
39. Fundamental Tasks, he. cit., p. 326, italics added.
40. Les problèmes économiques du socialisme en U.R.S.S. Numéro special des
Cahiers du communisme, Revue théorique et politique mensuelle du Comité
Central du Parti Communiste Français, November, 1952, p. 6.
41. Ibid., p. 7.
42. Ibid.
43. Ibid., p. 16.
44. "Naturally not. In reality, in our economic system the law of value asserts it-
self within a strictly limited framework." Ibid.
45. Ibid., pp. 17-18. Increasing economic growth is regarded as another "funda-
mental law of socialism." As concerns the problem of profitability, Stalin ex-
plains: "If one considers profitability not from the point of view of the various
enterprises or branches of production, nor for the period of one single year,
but from the point of view of the entire national economy and for a period of
ten to fifteen years for example—which would be the only means of correctly
approaching the question . . . , then the momentary and precarious profitability
of the various enterprises and branches of production cannot maintain any
comparison with the superior form of a solid and constant profitability: the
profitability which we derive from the effect of the law of harmonious develop-
ment and planning of national economy." Ibid., p. 18.
47. Ibid., p. 23.
48. It must be stressed that, in what follows, we are not concerned with describing
the real nature of the Prussian state, the appreciation of which would re-
quire a separate, differentiated study. We are interested solely in the inter-
pretation which Prussianism received by certain German political thinkers and
in the influence of this interpretation on the theory of the collectivist state.
49. "Personality means not only greatest possible autonomy, but also greatest pos-
sible autarky and a harmonious union and development of all inner forces and
abilities." Meinecke, F., Weltbürgertum und NationaL·taat. Studien zur Gene-
sis des deutschen NationaL·taates. München and Berlin, O. Oldenbourg, 1919,
p. 819.
50. Müller, A., Die Elemente der Staatskunst. Berlin, 1809, Vol. I, p. 51.
51. Müller, A., Vorlesungen über Friedrich II. Quoted in Meinecke, F., op. cit,, p.
152.
52. Die Elemente der Staatskunst, Vol. Ill, p. 215.
53. "How would he be able to omnipresently permeate the life of these powerful
individuals?" Ibid., Vol. I, p. 283.
54. Spengler, O., Preussentum und Sozialismus. München, Becksche Verlagsbuch-
handlung, 1919, p. 54, italics added.
55. Ibid., p. 45.
56. Ibid., p. 8.
57. Ibid., p. 43.
58. "What really exists, the international of slogans, Marxism as a phrase, can only
for decades and, at that, to a much lesser degree than the noise of congresses
and the optimism of proclamations makes one assume, awaken in the workers
of all countries a feeling of solidarity. In reality, this union is restricted to the
belief that it exists." Ibid., p. 83.
60. Quoted in Butler, R. D., The Roots of National·Sociaüsm. London, Faber &
Faber, 1941, p. 258.
61. Quoted ibid.
62. Quoted ibid., p. 262. Moeller observes "a regrouping of men and nations. All
anti-liberal forces are combining against everything that is liberal." Quoted
ibid., p. 259.
63. Kautsky, K., Sozialisten und Krieg. Ein Beitrag zur Ideengeschichte des Sozial-
ismus von den Hussiten bis zum Völkerbund. Prag, Orbis, 1937, p. 345.
64. Winnig, A., "Die Kolonien und die Arbeiter." Sozialistische Monatshefte, May
18, 1915, p. 222. The reaction of the French socialists to the German socialists'
suggestion to surrender overseas territories in the name of international justice
and proletarian brotherhood is well summarized by the socialist Charles And-
ler: "Since it [our colonial empire, E.T.] was constituted at the immense ex-
penditure of billions, scientific efforts and blood, it may be a good teutonic
joke to intend to persuade us that it must be 'shared' with the more prolific
countries of industrial Europe, but not much more of this is needed to increase,
in the French socialists, that repugnance against the German 'comradeship'
which is intensified after each international congress." Le socialisme imperia-
listic dans I'Allemagne contemporaine. Dossier d'une polémique avec J. ]aurès
(1912-13). Paris, Bossard, 1918, p. 57.
65. Schippel, M., "Mitteleuropa und Partei." Sozialistische Monatshefte, May 31,
1916, p. 541.
66. Cohen, M., "Sozialdemokratische Aussenpolitik und sozialdemokratischer Par-
teitag." Ibid., October 4, 1920, p. 741.
67. Poetzsch, H., "Der Krieg und die sozialistische Internationale." Ibid., Decem-
ber 9,1914, p. 1227.
68. Sombart, W., Deutscher Sozialismus. Berlin-Charlottenburg, Buchholz &
Weisswange, 1934, p. 212. Cf. also the socialist professor Plenge: "It is high
time to recognize the fact that socialism must be power policy, because it is
organization." Quoted from an article in the socialist journal Die Glocke in
Hayek, F. A., The Road to Serfdom. London, Routledge, 1944, p. 128, italics
added.
69. Deutscher Sozialismus, p. 213, italics added.
70. Ibid., p. 280.
71. Ibid., p. 284, italics added. The author continues: "It is self-evident from what
has just been said that German socialism rejects the hitherto prevailing order
of the world economy as contrary to its innermost nature."
72. "The Theory of Planned Economy. A Study of Some Recent Works." Inter-
national Labour Review, Vol. XXXVI, No. 3, September, 1937, pp. 371-93.
73. This author distinguishes between nationalistic planning, such as is increasingly
being adopted by capitalist governments, and planning "under the right aus-
pices" which is to be effected "by those who mean to use it . . . for the libera-
tion of the vast productive energy which is now lying unused all over the world
by creating a system of organized international exchange on a basis of mutual
advantage and superseding tariffs and other restrictive devices by large-scale
arrangements for the collective interchange of complementary products." This
is what Cole calls a "fully developed system of international planning." Cf.
"The Planning of International Trade." In: Studies of World Economics. Lon-
don, Macmillan, 1935, p. 185.
74. Ibid., p. 178.
75. "In the particular case of a collectivist economy, especially during the period
of construction, the danger of external influences is much greater [than in a
liberal-individualistic economic order, E.T.]. Free communication with for-
eigners may lead to wastes of energy and, to say the least, tend to constitute,
within, a heterogeneous economic sector; its contacts with the dominant col-
lectivist system create additional difficulties. Moreover, free relations with the
outside world cannot even be thought of in a system in which economic ac-
tivity is no longer a private affair; from the moment the state and its agencies
administer the whole of economic activity, there is no reason for making an
exception in favor of external relations and to withdraw them from its control."
Mossé, R., L'économie collectiviste. Paris, Pichon, 1939, p. 179, italics added.
76. Ibid., p. 180. Cf. also Hall, R. L., Economic System of a Socialist State. Lon-
don, Macmillan, 1937, p. 218: Before any foreign trade is to take place, the
"Socialist state . . . should first decide the question as to whether there are any
key industries which are necessary to the economic structure or to the conduct
of any wars in which it has reason to expect that it may be involved. . . . The
importance to be attached to this factor will obviously depend on the likelihood
of supplies being interrupted, whether by wars or by other circumstances which
may alter the world supplies." As to the infant industry argument, H. D. Dick-
inson writes: "A socialist community could foster infant industries without the
fear that they would become infant Gargantuas devouring the substance of
whole provinces in their greed. No private vested interests would be created
by such a policy of development nor would protected industries develop that
penumbra of submarginal undertakings which makes it almost impossible to
remove protection from an industry under capitalism even though the more
efficient establishments no longer need it." Economics of Socialism, p. 175.
77. Mossé, R., op. cit., p. 181. The whole passage is printed in italics.
78. Ibid., p. 182.
79. Ibid.
80. These conditions must, according to Dickinson, include "the right of individ-
uals to order books and newspapers from abroad," this being "an essential
guarantee of political freedom." Op. cit., p. 178, footnote 2.
81. Mossé, R., op. cit., p. 184, italics original.
82. Ibid., p. 190.
83. Dickinson, H. D., op. cit., p. 173.
84. Mossé, R., op. cit., pp. 190-91. In the original, this passage is all in italics.
85. Ibid., p. 192.
86. Ibid., p. 193.
88. Dickinson, H. D., op. cit., p. 181.
89. Mossé, R., op. cit., p. 199.
90. Ibid.
91. "The real problem is to maintain, and even to develop, external economic re-
lations without disturbing the internal structure." Ibid., p. 203.
92. Ibid., italics original.
93. Hobson, J. A., op. cit., p. 85.
94. "The collectivist state's own rate of interest represents its estimate of the mar-
ginal productivity of its own capital." Hall, R. L., op. cit., pp. 27-28.
95. I.e. balancing capital export against the use of additional imports bought from
its proceeds.
96. Dickinson, H. D., op. cit., p. 182, italics added.
97. Hall, R. L., op. cit., p. 228.
98. Ibid., p. 229.
99. Ibid.
100. Dickinson, H. D., op. cít., p. 182.
101. Ibid., p. 187.
102. Cf., however, ibid., p. 177, where Dickinson observes: "Where a socialist com-
munity was trading with another socialist community (if such existed) or with
a capitalist community that had adopted a now popular policy of totalitarian
state regulation of foreign trade, a situation would arise similar to that called
'bilateral monopoly' by the theoretical economists, in which it is probable that
there is no determinate stable position of equilibrium, but in which either
party has an incentive to get the better of the other by the use of fraud and
force." Italics added.
103. Ibid.
104. "The spread of birth-control throughout the world is leading to a state of
affairs in which population dearth and not population pressure is the most
likely danger to civilization." Ibid., pp. 187-88.
105. Ibid., p. 172, footnote.
106. Bettelheim, C , L·es problèmes théoriques et pratiques de la pL·nif\cation. 2nd
ed., Paris, Presses Universitaires de France, 1951, p. 345. The English trans-
lation was taken from the English edition. Bettelheim calls "relative labor
costs" those which arise as a result of the fact that national economic policies
are being independent of the world economy. They can only be overcome and
replaced by absolute labor costs if the world economy becomes one planned
unit so that "each region would specialize in the kinds of production for which
it was absolutely (and not only relatively) best situated." Ibid., p. 354, foot-
note 2.
107. Quoted in Hayek, F. A., op. cit., p. 128, italics added.
CONCLUSION TO PART I
The introduction of a socialist system of society engenders

profound economic and political changes. What are the effects
of these changes—to repeat the question we have already asked
at the beginning of this inquiry—on international economic co-
operation?
Chapters I through V have yielded two important results. In
thefirstplace, a future world will be constituted, at least for the
foreseeable period of time, by sovereign political units having at
least the same extension as they have under the present order
of things. But a thorough modification will occur, secondly, in
the internal structure of these states: the division between im-
perium and dominium, which characterized a liberal society,
will give way to "collective," that is, to political control of all
human activities.
At this point we must remember the socialists' refusal to ad-
mit analysis of their systems with "bourgeois" intellectual tools.
Can this attitude be seriously upheld? Our answer is no. The
claim for the uniqueness of a socialist state is rooted in the
particular method of socialist reasoning which, as we have seen,
explains social, economic, and political problems not with ref-
erence to human nature, but with reference to good and bad in-
stitutions, interpreted as living organisms. In the framework
of this philosophy, the socialist state cannot be anything but
the good institution; as for its shortcomings, they are blamed
either on capitalism or on the inability of immature men to ful-
fill the corps social's expectations. Characteristically, the group
of power holders is alternately identified with, and dissociated
from, the collective body, depending upon the requirements of
"time and place."
However, our review of socialist thought in this part has
shown that the socialist state is subject to the same inherent
CONCLUSION TO PART I 121
laws that have governed all other past and present states. Hu-
man character being what it is, the single most important cri-
terion for judging the international effects of a given state is its
internal order, that is, the degree to which power is divided
between the citizen and the government, on the one hand, and
among the various government agencies on the other. Not sur-
prisingly, the national socialist current of thought arrived at
fundamentally the same results as did socialist philosophy.
Both systems of poltical speculation justify the high degree of
power concentration in the hands of a few by reference to a
superhuman collective being with a will of its own, a will that
is merely "translated" by the holders of power.
Socialism thus implies that it is the State and its representa-
tives who will acquire command over all national productive re-
sources. It is no longer the individual, guided by market prices
and risking his own capital, who makes production decisions,
but the central planning authority, disposing of the wealth of
the entire nation. This involves a basic decision concerning the
two main sectors of national production (investment versus
consumption goods). Since every state wishes to develop its
productive powers which constitute the foundation of its po-
litical power as rapidly as possible, governments will tend to
give priority to the development of heavy industry. Yet, at the
same time, they have promised to raise the standard of living of
their working population.
A constant balance is therefore to be struck between Staats-
räson on the one hand and "social justice" on the other; and the
satisfaction of both goals depends on the variety and quantity
of productive resources actually available within the politically
dominated territory of the collectivist state. Thus, the size of
the territory and its natural endowment are of utmost import-
ance for the establishment of an ambitious national plan.
Each collectivist state is a watertight economic system. Its
trade relations with other collectivist states are characterized
by a situation of bilateral monopoly. Numerous authors re-
viewed in this part have pleaded for a complete self-sufficiency;
others have advocated a close and "brotherly" cooperation
among states.
Because no state can be found which has in its territory all
the raw materials necessary for modern industrial development,
the "access" to vital resources which "belong" to other countries
will be determined by negotiations between partner states.
What are the typical forms under which these negotiations are
conducted? What principles determine their outcome? And
what forces are at work, under this system of production and
exchange, to establish the kind of international order which is
the "final goal of history," that is, world planning and the with-
ering away of the state? These questions will form our main
preoccupation in the next part of this investigation.
PART II
INTERNATIONAL ECONOMIC ORDER VERSUS
STRUGGLE FOR WORLD DOMINATION: A
THEORETICAL ANALYSIS OF THE INTERNATIONAL
ECONOMIC IMPLICATIONS OF SOCIALISM
INTRODUCTION
We have seen in Part I that socialism leads to a profound

transformation of the internal order of national states which,
nevertheless, continue to exist as independent political units.
There will be only national "collectivities" represented by their
respective national governments. A world state, acting on be-
half of humanity as a whole, will still be a far-off goal; its es-
tablishment would presuppose the subjection of the hitherto
sovereign states to a world authority in the same way as the in-
dividuals are subjected, within each state, to the comprehensive
control of all activities by their respective state authorities. But
at the same time, the state, or the party with which the state
is identified, is regarded as a vital autonomous personality evol-
ving according to its proper laws, which are considered to be
entirely independent of individual will. Hence, this higher en-
tity demands freedom, not subjection. It can recognize no au-
thority above itself other than "history."
Thus, the basic problem facing a future world constituted by
socialist states is this: individuals are no longer free to trade and
move across frontiers, and thereby to establish a network of
international relations outside the political sphere; yet national
governments, now also responsible for international trade, re-
fuse, in a regular way, to submit to judicial procedures that are
regarded by them as an infringement of their sovereign rights.
Consequently, "the process of substitution of government busi-
ness for private business is in the international field . . . also a
process of transformation of private quarrels into inter-govern-
mental quarrels."1
In Part II we propose, from a theoretical point of view, to in-
vestigate the basic changes brought about by the introduction
of socialism into the internal economic order of each national
state. Only by acquiring a thorough understanding of the way
in which this order must necessarily function can one grasp the
fundamental problem underlying international economic rela-
tions between collectivist states.
Under socialism, obviously, goods and services will continue
to be produced and their output will require land, raw materials,
labor, buildings, machines, and managerial talent. Under cer-
tain conditions and with certain combinations of these factors,
production results will be more favorable than under other con-
ditions and combinations. Or again, production in one branch
of industry or factory can only be increased if in another branch
productive resources are either withdrawn or not increased in
the same rhythm as in the former. This is so because productive
resources continue to be scarce. Therefore, the problem that
arises, just as in a liberal economic order, is how to allocate
and combine given factors of production so as to achieve opti-
mum output relative to demand, i.e. to maximize the utility of
production.
But this "utility" means two different things for a free mar-
ket and a collectivist economy.2 In the former, the personal util-
ity considerations of the final consumer, translated by the price
mechanism into corresponding production decisions, is guid-
ing economic activity. Under socialism, it is the central plan-
ning authority itself which decides upon the utility of this or
that group of commodities and fixes an order of priority among
them according to which it then draws up the national produc-
tion plan. Thus, in a liberal economic order the entrepreneur
takes his production goals "from the market" and is concerned
exclusively with the most rational combination of productive
resources, the prices of which he regards as given. Conversely,
the central planning agency decides on both what goods to pro-
duce and how to allocate the nationally available resources.
Hence, it is of the utmost importance whether the "plan-
ning principle"3 (Sweezy) is able to supply this agency with a
rational criterion comparable to the price mechanism which col-
lectivism has abolished; a principle able to guide central eco-
nomic decisions which, as Lenin said, "affect the most deep-
seated foundations of every-day human existence." This prob-
lem will form the subject of Chapter VI. In Chapter VII we
shall apply our findings to the problem of international eco-
nomic exchange between collectivist states. Chapter VIII will
INTRODUCTION 127
compare our conclusions to the liberal solution of the prob-
lem of international economic order.
Today, the clash between the collectivist and the liberal con-
ceptions of economic order is particularly felt in the newly in-
dependent states of Asia and Africa and manifests itself in the
propagation of rival and mutually exclusive theories and policies
of development. The analysis of the international economic
consequences of these theories, in Chapter IX, will complement
the results of our investigations. In Chapter X, we shall examine
the prospects concerning the formation of a collectivist world
state.
CHAPTER VI
THE PROBLEM OF VALUE AND ECONOMIC

CALCULATIONS IN A COLLECTIVIST ECONOMY
The socialist founding fathers openly refused to express

themselves in detail on the working of a socialist economic or-
der. "When Lenin, in 1917, wrote State and Revolution, he had
no conception of the problem of economic calculation and of
the difficulties involved in centrally directing the economic
process of a modern national economy. His goal was 'to or-
ganize the entire economy according to the model of the post
office'. . . . This is not surprising: for one who believes, with
Marx, in the predetermination of historical development, eco-
nomic calculations in a centrally administered economy pose
no problem to be mastered beforehand by thought."4
By the socialists' outright rejection of the classics' "chrem-
atistic" approach and by substituting for it a purely sociological
and historical way of thinking, the real nature of the economic
problem5 was bound to escape their notice. Since land and na-
tional resources were regarded as the "gift of nature" to all men
and capital as the result of past collective labor belonging to the
community as a whole, they acquired the meaning of a def-
initely given stock independent of human effort. Furthermore,
as a logical conclusion to the socialist theory, which stated that
capitalism constantly tended toward overproduction, this stock
was considered as something plentiful and even overabundant,
providing it was wisely used to meet the requirements of social
justice. Hence, national economy, united under conscious col-
lective control, was understood as a system of clearly deter-
mined quantitative relationships which could be reduced to a
common unit of account by the true and absolutely valid eco-
nomic measure: labor time.
The problem of centrally directing the national economy was
therefore envisaged as being very similar to that of designing
and constructing a building: however huge and complex this
PROBLEM OF VALUE AND ECONOMIC CALCULATION 129
building was to be, the problem of its erection could be solved
by trained experts. Thus, under collectivism, a capable eco-
nomic "architect" would draw up the national plan, assisted by
his no less competent "engineer" doing the static calculations.
In such a system, there would be no place left for spontanteous-
ly arising and constantly fluctuating market values. It is an ever
recurring theme in socialist writings that the future economic
and social order will be simple, easily understandable, and man-
ageable. The progressive development of history toward rea-
son cannot be conceived otherwise.
F. A. Hayek remarks with respect to this approach: "To treat
the existing economic order as merely an 'historical phase' and
to be able to predict from the laws of historical development'
the emergence of a better future system became the hallmark
of what was then regarded as the truly scientific spirit."6 The
same author said elsewhere: "To start here at the wrong end,
to seek for regularities of complex phenomena which could
never be observed twice under identical conditions, could not
but lead to the conclusion that there were no general laws, no
inherent necessities determined by the permanent nature of the
constituting elements and that the only task of economic sci-
ence, in particular, was a description of historical change. It
was only with this abandonment of the appropriate methods of
procedure, well established in the classical period, that it be-
gan to be thought that there were no other laws of social life
than those made by men, that all observed phenomena were
only the products of social or legal institutions, merely 'histo-
rical categories' and not in any way arising out of the basic
economic problems which humanity has to face."7
By rejecting the universal validity of logic, the theoretical
framework of Marxism successfully prevented the progress of
non-socialist economic science from shaking its foundations.
It is therefore not surprising that it was liberal economists who,
for the first time, investigated the nature and the possibility of
a solution of the economic problem under collectivism.
THE PROBLEM
"The problem," writes Hayek, "which the director of all
economic activities of a community would have to face, would
only be similar to those solved by an engineer if the order of
importance of the different needs of the community were fixed
in such a definite and absolute way that provision of one could
always be made irrespective of cost. If it were possible for him
first to decide on the best way to produce the necessary supply
of say food as the most important need, as if it were the only
need, and would think about the supply of say clothing, only if
and when some means were left over after the demand for food
had been fully satisfied, then there would be no economic prob-
lem. . . . But the task would cease to be merely technological in
character and would assume an entirely different nature if it
were further postulated that as many resources as possible
should be left over for other purposes. Then the question arises,
what is a greater quantity of resources. If one engineer pro-
posed a method which would leave a great deal of land but
only little labor for other purposes, while another would leave
much labor and little land, how in the absence of any standard
of value could it be decided which was the greater quantity? . . .
The economic problem arises therefore as soon as different pur-
poses compete for available resources. And the criterion of its
presence is that costs have to be taken into account. Costs here,
as anywhere, mean nothing but the advantages to be derived
from the use of given resources in other directions."8
It follows that, because productive resources are scarce with
respect to human wants, costs are a fundamental economic cate-
gory in every kind of economic order. It is the "fact that one
central authority has to solve the economic problem of distrib-
uting a limited amount of resources between a practically in-
finite number of competing purposes that constitutes the prob-
lem of socialism as a method."9 This infinite number of com-
peting purposes naturally includes production for foreign mar-
kets, hence the cost problem is primarily relevant also for in-
ternational economic transactions. On its solution depends not
only the rational planning of foreign trade, but the nature of
socialist international economic relations in general.
SOCIALLY NECESSARY LABOR

We have seen in Chapter V that the economic problem did
not fail to assert itself in Russia immediately after the Bolshevic
party's seizure of power, although it was obscured for a time by
the requirements of "war communism." It was to this problem
that Lenin referred when he figuratively spoke of the cloth
which was to be measured before it was cut. If it cannot be
measured seven times, can it at least be measured once?
A Russian professor, observing in the thirties the revolution-
ary changes in his country's economy, speaks of an "atrophy of
economic calculation" which "has taken place along with the
precipitate growth of Socialism."10 In spite of a "minute su-
pervision of the superficial conduct of employees, of the con-
sumption of materials, of machines and of stock" resulting in an
"abnormal disproportion between the producing and control-
ling mechanisms,... this system . . . provided no guarantee as to
the economic rationality of the process of production as a whole;
nor did it possess that decisive significance which the calcula-
tion of costs possessed under capitalism."11
To remedy this state of affairs, N. Bucharin and, especially,
A. W. Tschajanow proposed calculations in kind.12 Tschajanow
reduced the different elements of input and output to a common
unit with which he attempted to ascertain the degree to which
the state undertakings were rationally organized.13 "Now it is
clear," Brutzkus comments, "that the value of all these units
will be very hypothetical or entirely arbitrary. They will only
have any real significance insofar as they are worked out on the
basis of a common principle of value; the author, however, did
not succeed in doing this."14
Calculations of this kind were therefore rapidly abandoned.
Russian economists turned to the writings of the founders of
"scientific socialism" from which they hoped to obtain the true
solution. And indeed, there it was clearly stated that labor con-
tinued to form the basis of value, at least in the "first phase" of
socialism. Marx recognized that differences in the quality and
intensity of work existed and that this circumstance restricted
the practical use to be made of labor as a measure of value. But,
he failed to indicate a way out of the dilemma caused by this
fact and by his postulate that each worker is to receive "exactly"
what he has given to society.
Here, the fundamental weakness of his "socialized" ap-
proach becomes apparent. He once admitted that it is impos-
sible to ascertain the "product" separately for each individual
laborer; one could only speak of the product of the working
class as a whole. But this statement implies no more than that a
given country is entitled to all it has produced in a certain
period of time, a pure tautology. To the real questions—how
is the individual's share to be determined? and who will decide,
and according to what criteria, what kinds and quantities of pro-
ductive resources are to be "deducted" from current consump-
tion, i.e. reserved for capital accumulation?—Marx only replies
that as long as these are problems at all, the "birth marks of the
old society" are still effective. It must be left to history to efface
them.
Therefore, an altogether different approach was needed to
analyze the practical applicability of the labor theory of value
to rational economic calculations. Brutzkus, who undertook
this analysis, arrived at the conclusion that value calculations
based on labor were wholly unable to provide a satisfactory
solution of the economic problem. Here are his arguments:
In the first place, "the unit of value is not simply the amount
of time worked, a labor day for example; it is a labor day of a
given productivity which productivity is assumed to be normal.
. . . As, however, in a single undertaking which produces par-
ticular commodities, the labor of all sorts of specialists is em-
ployed, and as each of them does different kinds of work, it will
be necessary to determine a suitable normal labor day for each
type of work."15
Secondly, in each productive unit, labor of highly varying
quality is employed resulting from differences in both training
and natural skills and talents. Labor, uniting one or all of these
advantages, is relatively scarce; "is it reasonable to evaluate it,
as an item of daily expenditure, according to the same standards
as have been set up for unskilled labor?"16 The solution pro-
posed by Marxists to arrive at a common denominator of labor
is entirely unpracticable.
According to Marxist doctrine, the "socially necessary labor
time" is calculated as the average normal labor day in a certain
branch of industry. But the economic significance of this con-
cept depends on the number of undertakings which make up a
given branch. Yet, and this is Brutzkus' third objection, even
if such an average is based on the labor results communicated
to the central authority by a considerable number of productive
units, "such evidence could only claim to have any objective
value in the rare cases where all undertakings had approxi-
mately the same kind of structure; that is to say where the com-
binations of various kinds and various qualities of labor [includ-
ing 'dead' labor, i.e. capital, E.T.] were roughly the same in all
undertakings."17 The more widely capital endowment differs
among the various firms, the less is the comparison between la-
bor costs economically conclusive.18
Thus, in addition to the weaknesses just mentioned, the basic
deficiency of the labor theory of value—a heritage of the pecu-
liar socialist approach to economic problems—is that it ignores
the relative scarcity of the other two factors of production: land
and capital. Hence, it is impossible to arrive, by this method,
at rational values for each commodity and service, values which
reflect its relative scarcity and thereby assign to it its proper
place in the process of production.
THE "MATHEMATICAL SOLUTION"

The essence of the economic problem, let us repeat, lies in
the requirement of converting given productive resources into
final consumers' goods to the extent that maximum satisfac-
tion of wants is achieved. The unknowns are therefore the kinds
of consumption goods, the quantity of each, and the kinds and
quantities of primary and semi-finished products which finally
yield these consumption goods at least cost. This implies a
choice of the most appropriate technical procedures among the
far greater number of known procedures. And unknown are
also those quantities of goods which are to be received by each
individual against his contribution to the production process.
These are hundreds of thousands of values, all mutually de-
pendent. They are to be determined by the arithmetic problem
which is called economy.19
In an article entitled "The Ministry of Production in the Col-
lectivist State" published in 1908,20 E. Barone proposed to solve
this problem for a collectivist economic order without falling
into the Marxian "errors and contradictions." Following Pareto
and Walras, he maintained that "the old and simple ideas of
demand and supply and cost of production suffice not only to
construct into a system of equations the most important inter-
relations of economic quantities, but also to treat the various
dynamic questions which relate to the greater or smaller wel-
fare of individuals and of the community."21
A lengthy mathematical analysis led this author to the evi-
dence "(1) t n a t the system is perfectly determined: there are
as many equations as unknowns; (2) that the Ministry of Pro-
duction . . . comes to the conclusion that production should be
so organized that . . . the cost of production may be minimized
and that the equivalents for the products and for the additions to
capital may be such as will correspond to their respective cost
of production; (3) that the system of the equations of the col-
lectivist equilibrium is no other than that of the free competi-
tion. 22
When, therefore, "there is no intention of restricting saving
and the creation of new capital to narrower limits than in the
old regime . . . the total consumption of products and of con-
sumable services can be scarcely different from what it was be-
fore."23 This is an interesting conclusion and implies that the
collectivist system is, at its best, able to produce the same wel-
fare as a competitive economy. K. P. Maier goes one step far-
ther: he is prepared to concede that the efficiency of a centrally
administered economy may be 100%—providing that the central
agency comprehended with perfect exactness the data of its
arithmetic problem and that it was able to calculate with ut-
most swiftness since these data are subject to daily, frequently
hourly, change.24
Here, however, resides the crux of the matter. Barone him-
self had to admit that the only way for the Ministry of Produc-
tion to determine the most economically advantageous tech-
nical coefficients was through experiments.25 "It is on this ac-
count that the equations on the equilibrium with the maximum
collective welfare are not soluble a priori on paper."28
Let us clarify the implications of this. If the experiments
are to be conducted "on a very large scale," this cannot be done
without the creation of new productive units and/or the ex-
pansion of existing capacities; both measures require important
investment outlays. It is true that the productive equipment of
smaller units can be transferred to the larger ones; but this also
involves considerable costs and general economic repercussions
and the question arises, which undertakings are to be closed
down and which to be enlarged. The economic justification of
this decision and of the additional capital absorbed appears,
however, only after the event. But in the meantime, many
economic data have changed as a result of these transactions:
capital has become more scarce elsewhere, the abandoned small
factories are now used for other purposes, and members of the
staff formerly employed by them have found other work.
The proposed system of experiments would, therefore, pro-
duce the required information only under the entirely unreal-
istic assumption of the ceteris paribus clause. Since the experi-
ments are initially based on arbitrary decisions and since, as we
now see, these decisions cannot, or can only very insufficiently,
be corrected later on, their economic consequences will enter
into the system of equations of the next period. The economic
measures taken by the central administration on the basis of
these calculations will, hence, include an important arbitrary
element. This cannot be avoided even if the data assembled
are precise and are worked up into a national plan within a very
short time. But again, even though, with the latest computers,
the final calculations may be speedily executed, the gathering
and processing of relevant economic data necessarily remains,
to say the least, a very time-consuming operation.27 Therefore,
"by the time the equations were solved, the information on
which they were based would have become obsolete and they
would need to be calculated anew."28
It is thus evident that Barone's article and all similar at-
tempts provide no solution for the economic problem in a col-
lectivist system. There is "no hope in this direction of discover-
ing the relative scarcities of alternative kinds of investment."20
THE IMPOSSIBILITY OF A RATIONAL EVALUATION OF

CAPITAL GOODS UNDER COLLECTIVISM
Where, then, lies the solution of the economic problem un-
der collectivism? As early as 1920, L. v. Mises30 showed that
there was no solution at all under this mode of production. This
fundamental problem can only adequately be solved if each
article, to whatever stage of production it belongs, possesses its
own, objective value which indicates its scarcity with respect
to all other commodities. But certain conditions must be ful-
filled to enable this value to arise and serve as a reliable basis for
economic calculations.31 Besides the existence of a universally
accepted medium of exchange, the principal condition is that
"not only must goods of a lower, but also those of a higher order
come within the ambit of exchange,"32 since it is only through
exchange that commodities acquire value. But this exchange
must be based on the private ownership of the means of pro-
duction because only this institution can provide an effective
system of reward and punishment and thereby prevent the
wasteful use of resources.
But in a socialist society, only consumption goods will be
subject to exchange and therefore to the subjective valuation
by the individual. The resulting exchange relationships will
form the basis on which prices are fixed, for this sector, by the
central administration.33 But since production goods, in a so-
cialist community, are collectively owned, "they are an inalien-
able property of the community and thus res extra commer-
cium."3i The use of money does not alter this situation; "money
could never fill in a socialist state the role it fills in a competitive
society in determining the value of production goods."35
What are the consequences of this fact? It is certainly not
impossible to establish a national economic plan according to
the government's preference lists—independently of whether
these preferences do or do not coincide with those of the final
consumers. It is not economic calculations, but solely the will
of the central agency that forms the decisive element. "But
once the decision has been taken, the real task of rational eco-
nomic direction only commences, i.e. economically, to place the
means at the service of the ends. That can only be done with
some kind of economic calculation. The human mind cannot
orient itself properly among the bewildering mass of interme-
diate products and potentialities of production without such
aid."38
Yet, because capital goods are now directly allocated by the
State, they have lost their objective exchange value. Nor can
the rate of interest be determined any longer. Hence, neither
the scarcity of the capital stock as a whole nor that of its various
components can effectively be measured by the national plan-
ning authority. The same indeterminateness prevails in respect
to rent and wages.37 "Unless it is possible to ascertain the prod-
uct of labor directly, the central authority does not know what
wages it can afford to pay to any particular kind of labor, and
is therefore unable to direct the available labor supply into
those branches of production in which it can satisfy the highest
effective demand and in which on that account the highest
wages can be paid."38
Mises therefore draws the following picture of a socialist
society: "There will be hundreds and thousands of factories
in operation. Very few of these will be producing wares ready
for use; in the majority of cases what will be manufactured will
be unfinished goods and production goods. All these concerns
will be interrelated. . . . In the ceaseless toil and moil of this
process, however, the administration will be without any means
of testing their bearings. It will never be able to determine
whether a given good has not been kept for a superfluous length
of time in the necessary processes of production, or whether
work and material have not been wasted in its completion. How
will it be able to decide whether this or that method of produc-
tion is the more profitable?"39
Only private ownership of the means of production and their
exchange on the free market can give rise to a pricing mechan-
ism; "without a pricing mechanism, there is no economic cal-
culation."40 In the absence of the compass of economic calcu-
lation, however, "we have the spectacle of a socialist economic
order floundering in the ocean of possible and conceivable eco-
nomic combinations."41
THE "MARKET SOLUTION" OF SOCIALISM

As a reaction against the challenge contained in the volume
Collectivist Economic Planning, a group of socialists, headed by
Oscar Lange, advanced the so-called "Market Solution" of so-
cialism. The writers in question42 attempted to construct a so-
cialist model in which "the preferences of the consumers, as ex-
pressed in their demand prices, are the guiding criteria in pro-
duction and in the allocation of resources,"43 just as in a compet-
itive economy.
It is true, Lange concedes, that there will be "no prices of
capital goods in the sense of exchange ratios on the market"44 in
a socialist economy. But he reproaches Mises for not having
distinguished between "price in the ordinary sense, i.e. the ex-
change ratio of two commodities on a market"45 and its "gener-
alized meaning of 'terms on which alternatives are offered'."48
And he adds: "It is only prices in the generalized sense which
are indispensable to solving the problem of allocation of re-
sources. To solve the [economic, E.T.] problem, three data are
needed: (1) a preference scale which guides the acts of choice,
(2) knowledge of the 'terms on which alternatives are offered,'
and (3) knowledge of the amount of resources available."47
Lange argues that whereas the data under (1) and (3) can be
regarded as given, it can be shown with the instruments of the-
oretical economics that "the 'terms on which alternatives are
offered,' are determined ultimately by the technical possibilities
of transformation of one commodity into another, i.e. by the
production functions."48
To the objections made by Hayek and Robbins against the
practical possibility of working out such a solution, Lange an-
swers by saying that the Central Planning Board will never at-
tempt to solve the problem with the help of innumerable equa-
tions, but will find the right "terms on which alternatives are
offered" by trial and error. It will start with a certain, probably
historically given set of prices and "see to it that all managers
of plants, industries, and resources do their accounting on the
basis of the prices fixed by it and not tolerate any use of other
accounting."49 On the basis of these prices, managers are held
to calculate and to run their undertakings exactly in the same
way as capitalist entrepreneurs.50 Prices not corresponding to
relative scarcities would soon result in commodity surpluses
and deficits and be adjusted until equilibrium prices are
reached. "Thus, the accounting prices in a socialist economy
can be determined by the same process of trial and error by
which prices on a competitive market are determined."51 This
applies also to the interest rate in the short run. In the long
run, however, capital accumulation will have to be centrally
planned and the interest rate correspondingly arbitrary. But
this is not a disadvantage, in Lange's opinion, because of the
fact that the Central Planning Board possesses a "much wider
knowledge of what is going on in the whole economic system
than any private entrepreneur can ever have."52
A similar solution is proposed by H. D. Dickinson. Pricing,
in a socialist economy, is to start from the impulses given by the
consumption goods sector to that producing capital goods. Con-
sequently, consumers' demand, via the selling agencies' orders,
will determine the economy's need for the "ultimate factors of
production." Taking into account their available quantities in
the short run, the central administration will, for each factor,
"fix a price which, according to the demand schedule, will just
ensure its full employment. . . . Ultimately, by a process of suc-
cessive approximation, a true economic price for each factor will
be established which can then be used for costing purposes
wherever the factor is used."53 By this method, not only the
prices of all production goods, but also rent, interest, and risk
premiums—which of course serve only accounting purposes-
can be derived. Decisions on new capital formation, however,
must fall within the competence of the "organs of public econ-
omy."
CRITICAL OBJECTIONS
Is the problem of rational resource allocation under socialism
solved by this solution? It invites several critical remarks which
raise doubts against a promptly given affirmative answer. In
the first place, a contradiction exists between economic plan-
ning presupposed also by the "Market Solution," being defined
as "the making of major economic decisions . . . by the conscious
control of a determinate authority,"5* and the requirement of
consumers' sovereignty. Either production is governed by con-
sumers' preferences, or by conscious central control; it cannot
be loyal to both. This antinomy clearly appears when Dickin-
son, at the end of his book, proposes to include consumer goods
in the price lists to be centrally fixed.55 The author, besides for-
getting that he had earlier derived costs of production from pre-
suming autonomous consumer goods prices, is thus forced, by
the logic of his own arguments, to substitute comprehensive
state planning for mere price fixing on the basis of consumers'
sovereignty from which he had started. "Thus," one can read
in the Introduction to his inquiry "unplanned collectivism, al-
though logically thinkable, is unlikely to occur in practice."56
The dilemma between central planning and individual de-
cision making also appears, secondly, when these economists
speak of price fixing in general. It is not said in what intervals
prices are to be readjusted. Lange once remarked that such ad-
justments would "constantly" be made. However, in the race
between the continual changes of economic data and the adap-
tation of prices to them, the central authority could at best keep
constant the distance between the two. But, since these changes
are far from proceeding regularly, it is to be expected that price
fixing would increasingly lag behind the events. Dickinson
sometimes speaks of "falling" and "rising," then again of "re-
duced" and "raised" prices. But if prices are adjusted only oc-
casionally in accordance with ex post surpluses and deficits,
how will the resulting disequilibria be corrected? Will the
commodities which are more scarce than indicated by their
price in the meantime be rationed or will the last comers have
to go without them even if, in the case of primary and interme-
diary goods, this may imply a temporary interruption of pro-
duction? Socialists assert that the advantages of central price
fixing would be considerable since the state agency would be
able, from a "glass house," to follow the relevant economic
data." But we have already seen that this heirloom from Saint-
Simonism is an illusion in the absence of rational value calcu-
lations.
Thus, the immediate consequence of price disequilibria will
be the emergence, among the responsible managers, of losers
and winners. But since prices are no longer determined by
anonymous market forces, but by men, who will be on the
winning and who will be on the losing side will depend on good
personal connections with high state officials rather than on
managerial skill and effort. The only possibility of taking en-
ergetic measures against the vested interests and abuses thus
generated would be complete state planning.
Thirdly, the "terms on which alternatives are offered," a con-
cept which essentially belongs to the engineer's competence,
can by no means fulfill the same functions as do market prices.
By substituting one for the other, Lange confused a technical
with an economic problem. This becomes evident if we remem-
ber that the most precise production possibilities curve—which,
at that, can be drawn for two goods only—taken by itself leaves
open an infinite number of choices. The final choice can only
be made on the basis of exchange values which alone are able to
indicate the point at which one of the innumerable, technically
determined combinations of resources optimally corresponds
to market requirements. Hayek anticipated the answer to
Lange's objections when he described the real problems in-
volved in this procedure as follows:
"It is impossible to decide rationally how much material
and new machinery should be assigned to any one enterprise
and at what price (in an accounting sense) it will be rational
to do so, without also deciding at the same time whether and
in which way the machinery and tools already in use should con-
tinue to be used or be disposed of. . . . In order to be able to do
so it will be necessary to treat every machine, tool or building
not just as one of a class of physically similar objects, but as an
individual whose usefulness is determined by its particular
wear and tear, its location and so on. . . . This means that in
order to achieve that degree of economy in this respect which
is secured by the competitive system, the calculations of the
central planning authority would have to treat the existing body
of instrumental goods as being constituted of almost as many
different types of goods as there are individual units."58
This problem is still more complicated by the fact that the
quantity of available resources is not determined, as both Lange
and Dickinson have presumed. What is known, perhaps, is the
total amount of coal, mineral, etc. reserves of which a country
disposes; but the question still remains how much of it is to be
mined in a given year and whether the exploitation of such na-
tural resources is economic at all.
Thus, a collectivist economic order must necessarily and
admittedly be based on some major initial decisions taken, as
Stalin had said, from the viewpoint of the national economy as
a whole and with profitability considerations covering one or
more decades—to put it bluntly, on a political, not an economic,
judgment. Under collectivism, as we have seen, the planning
authority determines both national demand and supply. Hence,
there cannot exist any prices or "exchange ratios" other than
those fixed by the government itself; and these prices are, con-
sequently, unsuitable for controlling the efficiency of produc-
tion.
But we must now ask: since the "Market Solution" of social-
ism inevitably leads to comprehensive national planning, is it
not conceivable to nationalize the means of production, yet
leave all enterprises free to continue their business on a com-
petitive market, with free prices, as under capitalism? This
raises the fundamental question of whether we can retain in-
dividual economic leadership without private ownership of the
means of production.
In a liberal economic order, it is the profit and loss account
of a firm which, on the basis of past performance, decides
whether the capital at the entrepreneur's disposal should be ex-
panded, contracted, or whether the firm should be shut down.
It is therefore the extent to which the risk taking of the entre-
preneur was economically justified that determines the contin-
ued exercise of his functions, or his removal from his responsi-
bilities. But his willingness to take risks depends on his bal-
ancing possible losses against prospective gains. He alone—or
the shareholders to whom he is responsible—must bear the full
consequences of his actions and must suffer a reduction of his
(their) assets if his calculations and his decisions based on them
have ended in failure. The fact that the owner of capital has the
choice between investing his funds in his own enterprise and
offering them on the capital market enables him to compare
his prospective gains (and possible losses) with the interest rates
—which include premiums corresponding to the different de-
grees of risk—prevailing on that market. It thereby provides
a wholesome check for too bold undertakings. Economically
speaking, the price mechanism, if it is allowed to work properly
on the capital market as well, directs scarce productive resources
to those places where they are most rationally used with respect
to consumers' preferences; but it becomes effective only if pri-
vate ownership of the means of production is guaranteed.
The problem of risk will continue to exist in a socialist econ-
omy based on competition and consumers' freedom of choice,
and with it, the losses due to it. But now these losses are borne
by the community as a whole, that is, the state organ represent-
ing it. Therefore, it is this agency which decides on the allo-
cation of capital to the individual commercial and productive
agencies. But what is the criterion according to which the le-
gitimacy of a risk and, correspondingly, the profitability of an
undertaking is to be judged? "The decision about the amount
of capital to be given to an individual entrepreneur and the de-
cision thereby involved concerning the size of an individual
firm under a single control are in effect decisions about the most
appropriate combination of resources. It will rest with the cen-
tral authority to decide whether one plant located at one place
should expand rather than another plant situated elsewhere.
All this involves planning on the part of the central authority
on much the same line as if it were actually running the en-
terprise."59 But who is now to be made responsible for possible
mistakes? A socialist economy based on free competition will
be characterized by recurring conflicts of competence, with
managers and planning officials each blaming the other. "It
will at best be a system of quasi-competition where the person
really responsible will not be the entrepreneur, but the official
who approves his decisions and where in consequence all the
difficulties will arise in connection with freedom of initiative
and the assessment of responsibility which are usually associ-
ated with bureaucracy."60
We can therefore conclude that the device of a competitive
socialist system relieves us neither theoretically nor practically
from the basic choice between the two kinds of economic order
and their respective solutions of resource allocation. Indeed,
the "principle of planning" constitutes the only alternative to
the price mechanism.
THE "THEORY OF PLANNING" ACCORDING TO SWEEZY

Decentralized decision making under socialism must hence
be regarded, in P. Sweezy's opinion, only as a "model . . . de-
signed to serve a definite and relatively restricted theoretical
purpose."61 If realized, it would reproduce "some of the worst
features of capitalism and fail to take advantage of the con-
structive possibilities of economic planning."62 What Sweezy
has in mind here is the elimination of uncertainty and risk. To
this end, the Central Planning Board must (1) lay down "cer-
tain general goals such as the building up of heavy industry, the
rehousing of a specified portion of the population, and the de-
velopment of hitherto backward regions;"63 (2) draw up an
investment plan "translating the general goals .. . into quantita-
tive terms; so many new factories, railroads, power plants,
mines, apartment houses, schools, hospitals, and so forth" and
establish, on this basis, "schedules of the different kinds of ma-
terials and labor which will be required;"84 (3) "estimate con-
sumer demand for all products which compete for resources
with the investment plan and draw up a second set of sched-
ules showing the different kinds of materials and labor which
will be required;"65 (4) by harmonizing both kinds of schedules
and adapting them to current and prospective supplies, "work
out a general plan for the development of the economy over
the period in question."66 The Central Planning Board will is-
sue concrete and binding directives to the managers with re-
spect to plan fulfillment. Rational allocation of resources will
still be possible, Sweezy asserts; he refers to Lange who "may
be regarded as having finally removed any doubts about the
capacity of socialism to utilize resources rationally."67 This is,
then, the essence of what Sweezy calls the "planning principle"
that is to guide the socialist economy.
It is true that both Lange and Dickinson considered their
conclusions on rational price formation under socialism to be
valid also for an economy guided, ceteris paribus, not by the
consumers', but by the central agency's preferences. But how
can exact plan fulfillment be expected from the managers who,
at the same time, are left free to compete on a socialist market
for labor and intermediary materials? We have already seen
that the existence of centrally fixed "as if" prices, even if they
can eventually be approximated to true scarcity prices, fail, ex
definitione, to lead to a balance of supply and demand. If, how-
ever, the director of a plant is unable to purchase all the factors
of production which he needs at existing prices, either he can-
not fulfill his part of the plan, or resources must be physically
allocated to him in which case prices will lose their function as
rational units of calculation. This was clearly stated by Lange
himself: "Outside of the distribution of consumers' goods to the
citizens, rationing has to be excluded as a method of equalizing
supply and demand. If rationing is used for this purpose, the
prices become arbitrary."68
Hence, Sweezy's "theory" only restates the fact that compre-
hensive planning necessarily rests on political decisions. On
what criteria are those "certain general goals" to be laid down?
Is it economically justifiable to build up heavy industry in a
predominantly agrarian country, and if so, at what optimum
rate of growth? Since the "harmonizing of schedules" implies
the cutting down of incompatible production targets, which
schedule is to enjoy priority: the government's investment plan
or the estimated consumer demand? These and many other
relevant questions are not even raised by this author.
Furthermore, Sweezy adheres to the common socialist view
that once the economic targets are given, the quantity and qual-
ity of the factors of production are automatically determined
and can be represented by a system of commodity balances such
as this:
COMMODITY X
Origin of Supply Use
A. Inland Production A. Inland Consumption
1. —
2.
3. .
B. Imports B. Exports
C. Decrease of Stocks C. Increase of Stocks
TOTAL SUPPLY TOTAL USE
Enough has been said on this subject to prove that this is not
so. Costs cannot be assessed through the compilation of statis-
tical data; they have to be minimized with the aid of economic
calculations. Material balances can only be drawn up when
the basic valuations have taken place; quantity alone never in-
dicates the extent to which scarcity is being overcome. The
"principle of planning," therefore, fails to solve the problem of
rational resource allocation under socialism.

We have seen that the existence of money prices is a neces-
sary, but not a sufficient, condition for carrying out economic
calculations. There must exist, in addition, a free market for
consumption as well as for production goods. The freedom of
initiative granted to individual entrepreneurs must be coupled
with direct and immediate repercussions of the effects of their
decisions on the private capital used in the operations, regard-
less of whether this takes the form of equity shares or is di-
rectly owned by the responsible manager. Only these additional
requirements confer upon prices the ability to measure the value
of both a given stock of commodities and one single unit. Cal-
culations based on these prices are reliable guides for produc-
tion decisions because, from the viewpoint of the individual
director, input prices are independent of those of the final
product. Moreover, both have a cogent character in that pro-
ducers acting on anticipations not justified by the market are
compelled within a relatively short period of time either to ad-
just their program to effective demand or to lose their status as
entrepreneur.
The theories of neither centralized planning nor of the
"Market Solution" of socialism and Lange's distinction between
market prices and the "terms on which alternatives are offered,"
have invalidated Mises' contention that the economic problem
cannot be rationally solved under socialism. Since the central
planning agency now determines both national supply and de-
mand, autonomous price formation must necessarily be replaced
by price fixing. The latter, if it is not to be entirely arbitrary,
takes place according to rough estimates of average costs; in the
absence of independent values marginal costs are no longer as-
certainable. But this is precisely why prices can no longer pro-
vide information on the rational allocation and use of productive
resources.
This fact will play an important role in our considerations
on the nature of international economic relations under social-
ism to which we now turn. The neglect of these problems by
socialists was one of the main reasons that these relations re-
ceived so little attention in the works of socialist writers.
NOTES TO PAGES 125-127

1. Viner, J., "International Relations Between State-Controlled National Econo-
mies." In Readings in the Theory of International Trade, London, Allen & Un-
win, 1950, p. 439.
2. Whereas the terms "collectivist" and "socialist" can and will be used inter-
changeably to denote comprehensive economic control exercised by govern-
ments, they differ with respect to the formal ownership of the means of pro-
duction: in a socialist economy, these are publicly owned; but it is, as was de-
monstrated by Germany under Hitler, quite possible to run an economy on
collectivist lines without legally abolishing private property of the means of
production. What really matters is the fact that in both cases it is the govern-
ment which plans national production and correspondingly determines the
use to be made of capital goods and raw materials.
3. "Insofar as the allocation of productive activity is brought under conscious
control, the law of value loses its relevance and importance; its place is taken
by the principle of planning. In the economics of socialist society the theory
of planning should hold the same basic position as the theory of value in the
economics of a capitalist society." Sweezy, P. M., The Theory of Capitalist
Development, p. 57.
NOTES TO CHAPTER VI
4. Eucken, W., Grundsätze der Wirtschaftspolitik. Ed. Eucken, E., and Hensel, K.
P., Bern/Tübingen, Francke/Mohr, 1952, p. 211.
5. "The fact that in the present order of things . . . economic problems are not
solved by the conscious decision of anybody has the effect that most people are
not conscious of their existence. Decisions whether and how much to produce
are economic decisions in this sense. But the making of such decisions by a
single individual is only part of the solution of the economic problem involved.
The person making such a decision makes it on the basis of given prices. The
fact that by this decision he influences these prices to a certain, probably very
small, extent, will not influence his choice. The other part of the problem is
solved by the functioning of the price system. But it is solved in a way which
only a systematic study of the working of this system reveals" and, for its work-
ing, "it is not necessary . . . that anybody should understand it." Hayek, F. A.
(ed.), Collectivist Economic PL·nning. Critical Studies on the Possibilities of
Socialism. London, Routledge, 1935, pp. 7-8.
6. Hayek, F. A. (ed.), Capitalism and the Historians. London, Routledge, 1954,
p. 23.
7. Collectivist Economic PL·nning, p. 12.
8. Ibid., pp. 5-6.
9. Ibid., pp. 16-17.
10. Brutzkus, B., Economic PL·nning in Soviet Russia. London, Routledge, 1935, p.
12.
11. Ibid., p. 13.
12. Cf. also Neurath, O., Durch die Kriegswirtschaft zur Naturalwirtschaft.
München, 1919, and Bauer, O., Der Weg zum Sozialismus. Wien, 1899.
13. "For example, in applying his method to agriculture, he makes this sort of
calculation: the production of 1,000 units of grain requires the following ex-
penditure: 30 units of labor, 90 units of means of subsistence, 8.6 units of land,
0.2 units of transport, 25.6 units of buildings, 0.4 units of stock, 1.5 units of
materials, 0.03 units of heating." Brutzkus, B., op. cit., p. 14.
14. Ibid.
15. Ibid., p. 16.
16. Ibid., p. 17.
17. Ibid., p. 19.
18. "Thus, the fact that rope made in factories is, according to the labor account,
less costly than that made by the home-workers, is no reason to conclude that
rope factories must be enlarged; if the community suffers from a shortage of
capital, then it is more likely that the rope factories will have to be liquidated
after the existing machines are worn out and that the entire production of rope
will have to be transferred to the home-workers. In actual fact our impover-
ished state has again and again acted in this way, and it has been right to do
so." Ibid., p. 21.
19. Cf. Maier, K. F., "Der Wirkungsgrad der Wirtschaftsordnung." In ORDO,
Jahrbuch †ür die Ordnung von Wirtschaft und Gesettschaft. Vol. V, Düssel-
dorf-München, Küpper vorm. G. Bondi, 1953, pp. 51-61.
20. Reprinted in Collectivist Economic PL·nning, Appendix, pp. 245-90.
21. Ibid., p. 246.
22. Ibid., p. 274.
23. Ibid., p. 290.
24. Maier, K. F., loc. cit., p. 52.
25. "The determination of the coefficients economically most advantageous can
only be done in an experimental way and not on a small scale, as could be
done in a laboratory; but with experiments on a very large scale, because often
the advantage of the variation has its origin precisely in a new and greater
dimension of the undertaking. Experiments may be successful in the same
sense that they may lead to a lower cost combination of factors; or they may
be unsuccessful, in which case the particular organization may not be copied
and repeated and others will be preferred which experimentally have given
better results." Collectivist Economic PL·nning, p. 288, italics original.
26. Ibid.
27. It would be interesting to investigate further the effect that modern computers
may have on efficient resource allocation under collectivism. They introduce,
as H. S. Simpson of Columbia's Graduate School of Business has pointed out,
the possibility of calculating the rate of change of change. But, the accelerating
pace of social and economic change at the same time results in an urgency to
act more speedily on management decisions. This necessity therefore demands
a greatly enhanced overall flexibility of the economic system. But the major
brake on progress in all societies is not technology, but human character. This
question therefore boils down to the problem of what incentives are built into
an economic order to encourage a managerial behavior corresponding to the
newly created possibilities. Some aspects of this problem will be described in
Part III.
28. Robbins, L., The Great Depression. London, Macmillan, 1934, p. 151.
29. Ibid.
30. Mises, L. v., "Economic Calculations in the Socialist Commonwealth." Trans-
lated and reprinted in Collectivist Economic PL·nning, pp. 87-130.
31. In fact, it fulfills three distinct functions: it determines the initial allocation of
resources to their various productive uses, it controls production processes al-
ready under way, and it makes it possible to reduce all goods and services to a
common unit of account.
33. However, since it belongs to the exclusive competence of the central admini-
stration to determine the total volume of consumption goods, the prices affect
only the distribution of the planned stock of commodities among the citizens.
Centralized planning is thus incompatible with consumers' sovereignty.
35. Ibid., p. 92.
36. Ibid., p. 103.
37. G. D. H. Cole admits this by writing: "In a planned socialist economy, there
can be no objective structure of costs (represented by the current level of
wages, rent, and interest). Costs can be imputed to any desired extent" ac-
cording to the public policy of the State. Quoted from his book Economic
PL·nning, New York, 1935, by Lange, O., On the Economic Theory of Social-
ism. Minneapolis, University of Minneapolis, 1952 (first published in 1938),
p. 80.
38. Halm, G., "Further Considerations on the Possibility of Adequate Calculation
in a Socialist Community." In CoUectivist Economic PL·nning, p. 167.
39. Ibid., p. 106.
40. Ibid., p. 111.
41. Ibid., p. 110.
42. Such as H. D. Dickinson, A. P. Lerner, R. L. Hall.
43. Lange, O., and Taylor, F. M., On the Economic Theory of Socialism. Minne-
apolis, University of Minneapolis, 1952 (first printed in 1938), pp. 72-73.
44. Ibid., p. 61.
45. Ibid., p. 59.
46. Lange refers here to a term used by Wicksteed which indeed plays an im-
portant role in modern economic analysis under the name of "opportunity
costs."
47. Ibid., p. 60.
48. Ibid., p. 61.
49. Ibid., p. 81.
50. "One rule must impose the choice of the combination of factors which mini-
mizes the average cost of production." Ibid., p. 75. The other rule "deter-
mines the scale of output by stating that output has to be fixed so that marginal
cost is equal to the price of the product." Ibid., p. 76.
51. Ibid., p. 87.
52. Ibid., p. 89.
53. Dickinson, H. D., Economics of Socialism, pp. 99-100.
54. Ibid., p. 14.
55. "The prices at which consumption goods were offered for sale would be based
on the prices of the goods entering into their production (cost of production)
and would thus relate individual demand to the scarcity of the resources avail-
able for satisfying it." Ibid., p. 113.
56. Ibid., p. 17.
57. "A socialist economy would be able to put all the alternatives into its economic
accounting . . . as a result it would also be able to convert its social overhead
costs into prime costs." Lange, O., op. cit., p. 104.
58. Hayek, F. A., "The Present State of the Debate." In CoUectivist Economic
PL·nning, pp. 208-9.
59. Ibid., pp. 236-37.
60. Ibid., p. 237.
61. Sweezy, P. M., Socialism. New York, McGraw-Hill, 1949, p. 233.
62. Ibid.
63. Ibid., p. 235.
64. Ibid.
65. Ibid.
66. Ibid., p. 236.
67. Ibid., p. 232.
68. Lange, O., op. cit., p. 93, italics added.
CHAPTER VII
PLANNED FOREIGN TRADE AND ITS

CONSEQUENCES FOR INTERNATIONAL
ECONOMIC RELATIONS
The foreign trade monopoly of a collectivist state must make

decisions of the following nature: what kinds and quantities
of goods and services are to be imported and exported? What
are the prices at which these goods are to be bought and sold?
What criterion is to be used to measure the profitability of these
transactions? Evidently, if there exists no reliable method of
ascertaining scarcity, these questions cannot be answered sat-
isfactorily.
We shall start this chapter by going back once again to the
socialists treated in Part I. We shall now examine the place for-
eign trade holds in their doctrines and the international eco-
nomic consequences of their ideas in more detail than could be
done in Part I. The ground will thereby be prepared for the
consideration of our problem from a general point of view.
THE PLACE OF FOREIGN TRADE IN IDEAL COMMONWEALTHS
Plato
Foreign trade is clearly recognized by Plato as an agent
working for a general increase in productivity and welfare. Yet,
international exchange is to be minimized or even abolished, at
least as far as goods for use by individuals are concerned. It is
left entirely to the authorities' discretion to decide which im-
ports are "necessary" and which are not, no consideration being
given to the citizens' wishes or traditional religious customs.1
Quite another matter is the importing of commodities that
are required by the State for military purposes: here, the Law-
wardens are free to purchase whatever is needed and pay for
the acquired goods with exports. Since the State is "all produc-
tive," its authorities will have a sufficient range of commodities
PLANNED FOREIGN TRADE 151
at their disposal with which to satisfy the claims of foreign ex-
porters. The question of the real costs involved in such transac-
tions, costs which are ultimately borne by the population, could
not concern a man whose major preoccupation was to free hu-
man hearts from the lust of wealth. On the contrary, every
measure restricting economic welfare was openly welcomed by
him as a means of furthering his moral end. One could charac-
terize Plato's leading maxim with the phrase: to have less of
a thing is better than to have more of it. This principle, how-
ever, applies only to the individual; the State must retain ab-
solute freedom to abundantly provide for its needs which serve
to strengthen its internal and external position.
Thomas More
A seemingly different picture is given by Sir Thomas More
in his Utopia which is the socialist prototype of a rationalized
and standardized economy producing great surpluses. The
problem of scarcity does not arise. Goods are no longer traded,
but freely distributed to each according to his needs. Interna-
tional trade assumes the form of gifts offered by a happy com-
munity to the less fortunate peoples of the world. More leaves
no doubt that this really Utopian result is due not to a prodi-
gious productivity of the island, nor to some other supranatural
factor, but exclusively to "a life ordered according to nature."
What kind of order is this? One in which the demand side
of the economic problem is considerably simplified. The pro-
gram of production is strictly limited: it covers some basic food-
stuffs, standardized clothes and buildings, and a few objects
destined for "common recreation, games, and studies." In the
language of modern economic theory, only those goods and ser-
vices are produced in Utopia for which the elasticity of demand
is very low. This is a common characteristic of all "essentials."
In other words, the demand for these commodities reaches the
saturation point relatively rapidly, beyond which the possession
of them would be accompanied by disutility. And since in a
statical economic system these goods are constantly reproduced
in the same quantities and qualities, there is no impetus to
accumulate hoards: everyone will indeed only take what he
effectively needs.
What happens, however, if the Utopians begin to desire ar-
ticles which have not hitherto been produced? Or where will
they be led by a sudden change in their frame of mind which
will cause them to prefer more leisure time to the overabun-
dance of not very useful products? Or, finally, what course will
events take when Utopian traders discover that, in exchange for
their surpluses, valuable goods can be obtained abroad which
greatly increase their own and their fellow citizens' comfort of
life? Clearly, in all these cases the economic problem would at
once make itself felt. The unconsumed surplus of home goods
would rapidly disappear and with it the Utopians' willingness
to give it away. Productive resources would become scarce.
But, the economic problem does not arise in Utopia for the
simple reason that its inhabitants "do not think felicity to rest
in all pleasure, but only in that pleasure that is good and hon-
est." It is neither good nor honest, nor "according to nature," to
desire more than one can have. And all one can have in Utopia
are six hours of work, the abundant or even overabundant pro-
vision of one's basic needs, and standardized entertainment.
No other choice has been left to the individual citizen by the
wise king Utopus.
Nevertheless, this king had foreseen the eventuality of an
emerging scarcity: that of land. And he had also indicated the
solution of this problem: war and annexation of "void" terri-
tories. Such procedures would be in accordance with the "law
of nature" since a "natural" proportion between the size of the
population and the territory to be occupied by it was assumed
to exist. But what if Utopia itself came to suffer from a deficient
population and a corresponding overabundance of land? Would
other peoples equally be entitled, by invoking the "law of na-
ture," to claim part of its territory? Obviously, this turn of
events is excluded by the geographical location of Utopia and
the impossibility of access to its lands by foreigners, a situation
consciously brought about by its founder. The implications
of this closedness would also be experienced by those citizens
who, on their trips abroad, would seek goals other than those
approved by the community.
Thus, we can see that despite apparent dissimilarities, More's
Utopia and Plato's Just State greatly resemble each other. Both
are subjected to the rule of "virtue" and "reason' as embodied
by the State. In both, therefore, the citizen must be content
with what the State has accorded him. The only difference be-
tween the two is that authority in Utopia has already become
facile et douce, whereas in Plato's commonwealth it harshly re-
presses "the majority of desires." Even in Utopia, however, this
authority would soon be felt by all those who, in their personal
aspirations, failed to "follow the course of nature." Its closure
against the outside world thus not only protects the ideal State
from outward foes, but enables it to deal effectively with pos-
sible rebels within its frontiers. It is the indispensable condition
in maintaining absolute power.
Johann Gottlieb Fichte

This was most clearly perceived by J. G. Fichte who, in the
title of his small book, had already underlined the preeminent
importance of this requirement. He described, with rigorous
logic, all major aspects of a centrally planned economic order.
By so doing, he went into greater detail than any "scientific so-
cialist" was to do for more than a century after him.
Again, the basis of the national plan is formed by a list of
essential commodities decided upon by the State. Fichte, like
most other socialist authors, presupposes a naturally given order
of priority among the various commodities and services; it is
also nature which prescribes a fixed relationship between agri-
cultural and industrial production. Hence, for him, the eco-
nomic problem remains unrevealed and state planning is con-
sidered identical with the calculation of merely quantitative
relationships. The author realized, however, that the transition
from an open to a closed economy would involve economic
losses to the country. But, since these losses would affect only
the welfare of individuals, whereas the state would emerge with
greatly increased powers and strength, they were irrelevant in
Fichte's point of view.
Conversely, Fichte, with unusual perspicacity, is aware of
the "perennial conflict between national planning and foreign
trade";2 and he gives a consistent explanation for this fact. The
proposed solution consists, as we know, of a "strictly closed
commercial state," the only one, in the author's view, which is
compatible with the Vernun†tsstaat. This is so because it safe-
guards to the fullest degree the liberty exercised by the State
in internal economic matters, especially as regards monetary
and price policy. With stern consequence, he enumerates the
five preliminary steps which make it possible for the govern-
ment to systematically destroy dominium—the necessary pre-
condition for the hermetic closure of state frontiers.
How does Fichte envisage future international relations?
Since foreign trade is to be eliminated as far as possible, the
State cannot be indifferent to the size of its territory and the
raw materials resources it controls. And indeed, its preoccu-
pation with this problem, more precisely its aspirations to
achieve productive independence and self-sufficiency, are re-
garded by Fichte as the Vernunftsstaat's legitimate policy:
Again, it is nature which predestines certain parts of the globe
to form political units. The author clearly recognizes that nat-
ural frontiers cannot be achieved without war; he recommends
getting it over as quickly as possible or, even better, so strength-
ening the power of the State intent on closing its frontiers that
defense becomes a hopeless affair for its less powerful neighbors.
These territories can then be swallowed up "peacefully" and be-
come the natural borderlands of the few remaining Superstates.
Once these natural frontiers are achieved, however, it is al-
leged that all sources of international conflict will be removed
and that eternal peace will reign.
Here Fichte, who had up to now been so extraordinarily
realistic, clearly becomes Utopian. He fails to see that by postu-
lating a comprehensively planned internal order and a corre-
sponding rupture of all economic links with the outside world,
he really converts the economic problem into a political one.
Productive resources are no longer freely bought and sold, but
are allocated by a political authority; and this authority can
count on them only to the extent that they are actually under its
jurisdiction. But, however great the territory dominated by it,
and however richly endowed with natural resources it might
be, there will always be raw materials outside the frontiers of a
given state that are desirable, unless it has brought the whole
world under is domination. Hence, the practical limits to the
claims and aspirations of powerful states are drawn not by
"nature," but by the determined resistance of other, equally
powerful, nations. International peace, and a very uneasy one
at that, will therefore only be assured if all states acquire ap-
proximately the same strength and if the formation of an alli-
ance between some of them will at once be countered by the
establishment of an equally powerful counter-alliance. As soon
as this balance of power is upset, aggressive wars become in-
evitable. Under these circumstances we can no longer speak
of an international order.
THE PRE-MARXIAN SOCIALISTS' ATTITUDE TO

INTERNATIONAL ECONOMIC RELATIONS
Robert Owen
The combination of ideology and economics is particularly
noticeable in Owen's works. All basic aspects and problems of
Utopia discussed in the preceding section are present. Even
the question of natural frontiers is hinted at by Owen's remark
that each community will "annex" sufficient land enabling it to
live on its produce. Thus, this author, too, aims at closed, self-
sufficient associations, notwithstanding the fact that he speaks
of a "free" international intercourse. We have just seen the
fundamental incompatibility of such an order with centralized
planning.
Saint-Simon and His Followers

Saint-Simon and especially his successors were the first so-
cialists who consciously concerned themselves with the prob-
lems of optimum resource allocation. At the same time, they
recognized the existence of a fundamental difference between
the economic and the political sphere. They perceived that,
whereas the latter was characterized by the use of force, which,
by clashing with rival forces, must eventually lead to armed
conflicts and repression, the former required peace and the de-
velopment of productive resources according to its own, proper
laws. They concluded that politics must be prevented from in-
terfering with the peaceful and beneficial economic forces
closely allied to the progrès des lumières.
But the great error of the Saint-Simonians is their failure to
understand that the essence of the political sphere is power and
arbitrariness and that it is from these characteristics that wars
and international disorder originate. Instead, they consider
politics as only that power which is handled by wrong, ineffi-
cient, and reactionary persons and classes. These are identified
with those who, at present, are the governors of national states.
The solution advocated by this school now becomes very sim-
ple: power must be transferred to the true representatives of
collectivity, those who are best qualified for the task of orga-
nizing and administrating the affairs of society. By this proce-
dure, it is thought, two problems would be solved by one stroke:
the problem of efficient resource allocation and that of interna-
tional peace and order. The removal from their command posi-
tions of those, it is argued, who no longer fulfill the require-
ments of history and "industry," will result in the disappearance
of the national states themselves, products of a past era and
the source of incessant conflicts. Conversely, the new elite will
possess not only absolute knowledge, but will also be inspired
by the highest ethical principles so that the economic affairs of
the entire globe could safely be entrusted to them. Politics
would be converted into the "science of production."
Thus, the basic fact that gives rise to the economic problem
—scarcity—continues to be ignored. What the Saint-Simonians
really recommend is the politicalization of economics, not the
opposite, as they thought. Furthermore, we have seen that
socialism can only be introduced in each state separately, a
process which strengthens, not weakens, the power of national
governments. But national collectivism is impossible without
the closure of state frontiers, and this in turn enhances the pos-
sibility of international conflicts. The Saint-Simonian doctrine
therefore contains all the essential characteristics of an ideal
commonwealth, but embraces the whole world. It is the mis-
apprehension of the real nature of power and the unawareness
of the economic problem that prevented these authors from
perceiving the fundamental problem of international economic
order under socialism.
Pierre-Joseph Proudhon
It was reserved to Proudhon to elaborate, with admirable
clarity and eloquence, the basic qualitative difference that dis-
tinguished the economic from the political sphere. The solu-
tion to the problem of social organization could not, for him,
be found in taking power away from inappropriate persons and
conferring it, greatly enlarged, upon men of "perfect" knowl-
edge and wisdom. What was required was the separation of the
two domains and both the horizontal and the vertical division
of political power. But this could only be achieved by a society
built de bas en haut, a state organization based on federalism,
that is, on maximum individual and regional freedom.
Proudhon's uncritical adoption of the labor theory of value
obscured to him the basic fact of the scarcity of all productive
resources. But he recognized that the forces of dominium (pos-
sessoire) and only these could create and maintain a peaceful
international order.
We can only conjecture what would have been Proudhon's
choice had he been clearly faced with the alternative: "monop-
oly" of private property—which, under a regime of free compe-
tion is, for all that, less "detestable" and more "justified" than he
initially thought—or the unrestricted power monopoly of the
state, destroying dominium and bringing all human activities
under the control of a single, political will. What is certain is
the rigorous logic of this fundamental alternative: one can ig-
nore, but not escape it.
THE GENERAL PROBLEM OF INTERNATIONAL ECONOMIC

RELATIONS UNDER SOCIALISM
We can now consider the problem of collectivist economic
intercourse in a general way. Our own analyses as well as those
of the socialists themselves have shown that the collectivist state
represents a watertight economic system" (Mossé). It does not
follow, however, that the state must necessarily suspend its
economic relations with the outside world. Theoretically, it is
quite conceivable that the planning authority not only contin-
ues, but even extends, as Cole had envisaged it, its foreign trade
relations. We need, therefore, to examine those essential fea-
tures of a socialist economy that are likely to influence the deci-
ions of the monopoly of foreign trade.
The Permanent Pressure on Internal Resources

The central economic agency has, at the beginning of a
planning period, certain amounts of productive resources at its
disposal. Obviously, a first requirement of state planning is to
fully employ these resources. This requirement is closely tied
to a second one: to achieve maximum growth of production.3
But this raises the problem of the proportions that consumption
and investment goods are to hold in national production. The
planning authority will have a natural inclination—or in fact,
an obligation imposed upon it by a radical theory of industriali-
zation—to increase the share of investment goods in total output,
since it is on the volume of the productive equipment possessed
by the state that its economic growth rate depends. But this
tendency clashes with the postulate of raising the population's
standard of living. The actual solution adopted is the outcome
of a political decision made by the government.
By inquiring into the causes and motives of entrepreneurial
behavior, the classics discovered the price mechanism which
enabled economic science to arrive at generally valid conclu-
sions and principles that characterized a free market economy.
These principles are no longer allowed to solve the economic
problem under collectivism; it therefore becomes even more
imperative to search for certain regularities of outlook and be-
havior of those men who actually exercise the droit à la richesse
in the name of national collectivities.
But this way of approaching economic problems under col-
lectivism is contrary to the socialist method. This method con-
sists, as we have seen, of the dogma—it is impossible to call it
otherwise—that it is not ordinary men, but Têtre collecti† itself,
represented, for Lenin, by an advanced and infallible vanguard
party, which is making the vital economic decisions according
to the requirements of "science" or history. Consequently, these
decisions cannot be anything but right and in the true interest
of the community as a whole. "Scientific socialism," by insisting
on the absolute primacy of a coherent body of doctrine over
practical problems, thus takes over from the founders of ideal
commonwealths the Utopian method of treating economic and
social problems. To questions relating to these problems, not the
economist, but the ideologist will supply the "correct" answer.
But Engels had already recognized that the existence of
classes is due to the fact, characterizing any economy based on
division of labor, that a group of persons, liberated from directly
productive work, is called upon to attend to the common affairs
of society, most particularly to the disposal of the means of pro-
duction.4 Thus, the only real difference which, in this respect,
takes place with the advent of socialism is the replacement of
one such group by another. This "new class," as M. Djilas5 re-
ferred to it, has developed, like any other social class, its proper
outlook and interests. But it differs from its predecessors by
the possession of a hitherto unknown concentration of power.
It will certainly be its foremost concern to use this power for
the consolidation of its own position.
Since we are concerned, after all, with normal human beings,
it cannot be expected that they will, as Saint-Simon had en-
visaged it, gratuitously direct the administration of public for-
tune. On the contrary, this class will, just as its predecessors
did, secure to its members all those goods and services which
add to the comfort of life. It can easily do so because it controls
the entire flow of national production and because the distribu-
tion of this "cake" takes place on arbitrary lines. The raising of
general living standards will be in its interests only insofar as
this measure provides an additional incentive for the productive
effort of the population, additional, that is, to the socialist law
compelling every citizen to work.
Conversely, the decision-makers have a strong and imme-
diate interest in developing those branches of the economy that
contribute to the production of capital goods: i.e. heavy indus-
try. They thereby enlarge not only the "public fortune," but
also their exclusive power to dispose of it. Moreover, a collec-
tivist economy will always be in need of a relatively greater pro-
portion of investment goods and raw materials than a free mar-
ket economy in order to make up for the losses resulting from
mistakes of planning and uneconomical use. But in addition, a
well developed national heavy industry is a direct source of
political power, since it is indispensable for an independent
armaments program. The "new class" derives its privileged
position from this very power and has every reason to devote
as many available resources as possible to the production of
primary and intermediary products.
Yet, since for propagandistic as well as for economic and
political reasons mass welfare cannot be altogether neglected,
there will be, in a collectivist economy, not only full employ-
ment, but constant overemployment of productive resources,
accompanied by a permanent shortage6 of labor, materials, and
capital. But neither can the relative scarcities of the factors of
production be measured exactly, nor is there a mechanism which
would punish the decision-makers or at least compel them to
correct their mistakes within a reasonable period of time.
This overemployment of resources is felt by the individual
managers7 as well as the state officials responsible for foreign
trade planning. Whether they receive the necessary inputs in
the quantity, quality, and at the time required, will depend
much more on their skill and personal connections than on the
physical allocations of the plan. Unforeseen imports will fre-
quently be required to meet bottlenecks; at the same time, im-
ports will tend to be cut down and brought into line with the
limited amount of goods and services available for export.
The Impossibility of Measuring the Profitability of

Individual Foreign Trade Transactions
This throws new light on the "primacy of imports over ex-
ports" praised as the great advantage of collectivist foreign
trade. The excess of demand over supply spills over also into
international economic relations, and the foreign trade monop-
oly is faced with the impossible task of procuring a maximum
of imports for a minimum quantity of exports.8
But, the central agencies are unable to ascertain the net
gain involved in any particular transaction. Here, as in all other
branches of the economy, global estimates relating to the over-
all profitability of foreign trade must replace marginal calcula-
tions. "The question faced by the organs responsible for foreign
trade thus reads: 'How much would it cost our national econ-
omy if we ourselves had to produce the commodities which we
could purchase abroad by means of the foreign exchange earned
by the sale of export goods?' These costs are to be compared
with those incurred by the production of export goods; the result
will yield the profit or loss from foreign trade."9 These calcula-
tions, however, cannot be based on an objective exchange rate
maintaining a true price link at least for the internationally
traded commodities. This fact, together with the arbitrariness
of the internal costs themselves, will necessarily distort even
these very rudimentary calculations.
Trade Relations between Collectivist and

Free Market Economies
In the case of collectivist states trading with free market
economies, scarcity prices are involved at least on one side of
the arithmetic problem. The various solutions advanced by
socialist authors to optimize trade relations10 boil down to an
extension of the "trial and error" method also to cover interna-
tional economic transactions. Whereas Lange had attempted
to achieve true scarcity prices within the economy, Mossé hopes,
by this method, to find a correct exchange rate. But just as the
"Market Solution" and the consumers' sovereignty presupposed
by it collided with the "principle of planning," there also exists
an insurmountable conflict of conscious national economic con-
trol and the postulate to direct production according to the in-
terplay of international supply and demand. Thus, Bettelheim,
who aimed at arriving at internal prices reflecting international
values, was aware of his proposal involving a certain subordi-
nation of the national economy to the requirements of world
economy.11 This, however, he thought to be harmful only if one
single collectivist country was confronted with a world con-
sisting of free market economies. In such a case, plan disturb-
ances caused by the instability of world market prices could
only be avoided, he wrote, by resorting to the highest possible
degree of autarky, that is, by assigning to the international trade
the role of a "security valve."12
Moreover, as Mossé had rightly seen, to leave international
transactions to the free discretion of individual managers is in-
compatible with the internal structure of a collectivist economy.
This does not, however, prevent the collectivist state from tak-
ing advantage of its monopolistic position vis-à-vis its partners
in a free market economy composed not of states, but of in-
dividual entrepreneurs. It is true, as E. Heuss pointed out, that
"because of the high urgency of import goods there will be a
very rigid import demand."13 But this disadvantage can often
be compensated for by means of price discrimination both in
buying and in selling goods. By this procedure, the state can
considerably improve its terms of trade.
In addition, it can swiftly take advantage of sudden eco-
nomic disequilibria and adapt its foreign trade policy to the
political requirements of its Ministry of Foreign Affairs with
respect to each state. In fact, this versatility is in striking con-
trast to the internal clumsiness of every planned economic sys-
tem since, to use J. Jewkes' phrase, "the plan itself is the enemy
of readjustment."14
Trade Relations between Collectivist States

What can be said about a future international order con-
sisting exclusively of collectivist states—a situation which is ob-
viously the goal of most socialist authors? Can the element of
instability originating from world market prices be so reduced
that international trade, instead of leading to economic dis-
integration, achieves an ever greater and more fruitful exten-
sion of the international division of labor?
This is possible, socialist assert, because the volume and
conditions of mutual exchange are specified prior to the es-
tablishment of national plans; these will not finally be drawn
up until the different quantities and qualities of exports and im-
ports have been internationally agreed upon so that they can be
safely and reliably incorporated into the various national plans.
But again, the emergence of the economic problem must
upset these expectations. According to what criteria is the value
of deliveries and counter-deliveries to be determined? If we
turn to socialist writings, we are only told that brotherly love
and solidarity will replace "mercantile" trade. Yet, if we re-
member the basic feature of a collectivist economy—the con-
stant overemployment of all factors of production—and, further-
more, the aims and goals of the new class in each state, we can
see that a collectivist economy, however rich it may be, has no
resources to spare. These will only leave the country if an ap-
propriate countervalue is obtained in exchange. This counter-
part may be economic as well as political; but the political ad-
vantages, e.g. of spectacular gifts to developing countries, will
only arise as long as rival (socialist and nonsocialist) states are
competing for the sympathies of these countries. They are the
outcome of power politics, not of proletarian solidarity. Inter-
national gifts can therefore by no means be considered a per-
manent feature of socialist economic relations.
To learn more about the nature of these relations, we shall
follow W. Eucken's method and accompany an agent of a na-
tional foreign trade monopoly—assuming for simplicity's sake
that it will always be the same person—through the different
stages of his work. The morning he starts it, he will find on his
desk numerous documents indicating the country's planned
needs of raw materials, intermediary products, etc. on the one
hand, and the kinds and quantities of goods which will prob-
ably be available for export on the other. Based on these doc-
uments and extensive additional consultations with the central
planning agency, he will establish a list of goods and services
to be imported ranked according to their priority,15 and an ex-
port list headed by those commodities which are least needed
with respect to plan fulfillment. Prices will play a role only in-
sofar as they do not conflict with the orders received from the
highest planning officials.
Armed with these lists and with instructions to obtain as
many high priority goods in exchange for as few exports as
possible, our agent will be sent out to meet a delegate from
another socialist country who will produce similar lists and will
be under the same obligations. Negotiations will begin. If
prices once played a minor role in establishing basic lists, they
now lose all importance since there is no rational exchange rate
which could make national quotations internationally compar-
able. Conversely, our delegate will discover that his colleague
at the green table wishes to purchase from his state very much
the same kind of commodities as those contained on his own
import lists, namely: vital raw materials and capital goods. On
the other hand, he shows little inclination to accept as a pay-
ment for these valuable goods commodities which also in his
country have lowest priority. After innumerable telephone
calls to their respective capitals and tough bargaining over
every item and counter-item (without, however, knowing their
real values), they will eventually reach a compromise, prob-
ably covering only a small part of their original lists. It is ob-
vious that this compromise is only formally called "economic."
It is, in fact, a political agreement concluded between two sov-
ereign states. Each international trade contract now becomes
an act of high diplomacy and it ceases to be an intergovern-
mental issue only when it has been carried out to the satisfaction
of both parties. But what if either the received qualities, quan-
tities, or the date of delivery give rise to complaints? No inter-
national court exists which could effectively settle such mat-
ters of dispute.
Our two foreign trade agents will now negotiate with other
socialist countries' delegates over the commodities left on their
lists until the whole world—or that part of it which is occupied
by socialist states—will be covered by a network of bilateral
trade agreements. These negotiations could not, practically,
take place on a multilateral level since it is already difficult
enough to determine the kinds and quantities of goods to be
exchanged between only two countries. But this inevitability of
bilateralism leads to a severe restriction in the volume of for-
eign trade because "it involves an effort to achieve a predeter-
mined quantitative ratio of exports of country A to country B
to the exports of country B to country A."18 It therefore "con-
sists in the breaking up of a country's external market into a
series of isolated segments."17 An optimal international division
of labor thus becomes impossible.
This system of political negotiations has further grave de-
fects. The subject of these negotiations is formed by most vital
economic matters and the degree to which ambitious national
plan targets can be achieved depends considerably on their
outcome. "Needs" will therefore certainly continue to play a
major role in international economic relations—but only one
special category of them is sure to find satisfaction. This in-
cludes neither the "needs" of the different populations, nor
those which can be met by the spending of a given amount of
money. It includes solely those needs that are backed by po-
litical power.
Graf therefore compared the character of collectivist trade
negotiations to the game of "rope pulling": "Whereas in the
game it is either superior muscular strength, swift surprising
grasping, or the utilization of small elevations of the ground
which may decisively contribute to victory, it is, in 'rope pull-
ing' at the table of bilateral economic negotiations between
centrally directed economies, the economic and political power
position of the participating states, but at times also the dex-
terity and cunning of their delegates."18
In the absence of a rational criterion of value, the negotiat-
ing delegates, even if they were ordered to do so, could not
possibly find that point at which both partners could derive
"equal" advantage from the agreement. In reality, interests are
diametrically opposed. Every economic advantage secured by
one country automatically means a political advantage, and
hence a superior initial position in the next round of negotia-
tions. It at the same time represents a loss to its trading part-
ner resulting in a corresponding diminution of its power.
If eventually an "order" is crystallized, this will be due to
the emergence of one or more strong states having acquired the
power to force whatever "contracts" they wish upon the smaller
countries within their sphere of influence. They at the same
time assume the role of international arbiter in the case of dis-
putes between these. It is characteristic of collectivist foreign
trade that the borderline between international economic co-
operation and economic exploitation is thin and not clearly de-
finable. The more powerful one collectivist state becomes with
respect to other socialist countries, the more easily foreign trade
can be used as an instrument of exploitation and subordina-
tion.19 Thus, one must envisage the future international scene
as composed of a few, almighty superstates surrounded by their
satellites and struggling for world domination. A stable "peace"
will only be reached if one big sun succeeds in incorporating
all other big and small states of the world into its own planetary
system. Then, and only then, will the road become free for a
"single world economy, regulated by the proletariat of all na-
tions according to a common plan' (Lenin).20 Stalin under-
stood this and did not hesitate to follow the corresponding road
with utmost determination.

The authors treated in the first two sections of this chapter
were entirely unaware of the real nature of the economic prob-
lem. They equally ignored, with the exception of Proudhon,
the political consequences resulting from a transformation of a
liberal into a collectivist economic order. These consequences,
however, decisively affect international economic relations un-
der socialism.
The mere existence of a foreign trade monopoly introduces
an important element of power into the field of international
economics. This element becomes the predominant character-
istic of socialist foreign trade relations since the kind and
amount of exports and imports cannot rationally be determined,
account being taken of marginal costs involved in each separate
transaction. The proposed substitutes to guide efficient foreign
trade planning are unable to avoid the use of existing, arbi-
trarily fixed prices and exchange rates as the basis for compar-
ing home costs with world market prices. Therefore, these
methods to assess foreign trade profitability must remain global.
Paradoxically, their accuracy is improved by basing these cal-
culations on world market prices formed by the free interplay
of supply and demand; but at the same time, a collectivist econ-
omy is forced to protect itself against the repercussions of in-
ternational trade with free market economies even at the heavy
price of autarky.
Conversely, in commercial relations between collectivist
states, the respective power positions of the different states play
a decisive role. Each state aims at securing favorable terms of
trade; hence, the interests of the collectivist trading partners,
in the great majority of cases, do not complement, but conflict
with each other so that the energies of national planning agen-
cies will be much absorbed by strengthening their countries'
power in view of the inevitable "rope pulling" with other so-
cialist states.
All these considerations lead to the following conclusions:
"Central direction of the production process of national econo-
mies which participate in international trade will . . . always
lead to a distortion of international trade which moves no longer
in channels prescribed by the comparative advantage of the
individual countries so that the total utility which could accrue
to the world from an international division of labor is very con-
siderably reduced."21
Under these circumstances, the problem of international
economic order cannot be solved by socialism. The mutual re-
lations between collectivist states are characterized by a high
degree of instability which can only be eliminated by the rise
of one nation to a hegemonial position and the subordination
of all others to its dictates. Nothing general can be said on the
actual volume of foreign trade: it can be greater, smaller, or the
same as that between free market economies. But since eco-
nomic dependence means political dependence, national plan-
ning boards will attempt to produce basic raw materials and in-
termediary products as far as possible within their own territory
over which alone they have full control. This and the fact that
trade relations are conducted on a bilateral basis give reason to
expect a considerable reduction in the volume of international
exchange under socialism. As against this tendency, however,
"trade" can be forced upon small nations by their more power-
ful socialist brother nations.
The principal characteristic common to all collectivist econ-
omies is the general shortage of commodities. As a conse-
quence, a socialist state that is in a position to offer "attractive"
goods is also able, providing it has the necessary autonomy, to
attach both economic and political strings to the acquisition of
these commodities. This politicalization of international eco-
nomic relations is the logical outcome of socialism which had
already led to the politicalization of the internal economies.
State frontiers gain utmost economic importance in that they
now hermetically separate the autonomously planned national
economies from one another. At the same time, the unification
of political with economic power and the resulting loss of an
objective measure of value make it imperative for each state to
rule over a territory as large as possible and to regard the raw
materials occurring within its frontiers as belonging to its ex-
clusive possession. The final aim of every collectivist state must
be the achievement of economic independence. Fichte's con-
clusions, drawn in 1800, have lost nothing of their validity.
NOTES TO CHAPTER VII

1. This is quite consistent with the theory of the Just State, which says that the
latter is itself the highest moral authority. Hence religion, as far as it is not
embodied in the State, becomes indeed "unnecessary."
2. Heilperin, M. A., Studies in Economic Nationalism. Geneva/Paris, Droz/
Minard, I960, p. 86.
3. The goal of simply maximizing production has of course no meaning without
a common and rational unit of value. Conversely, there is no difficulty in
stating that the construction of new buildings has increased by x%, the produc-
tion of steel by y%—as long as these categories do not undergo any qualitative
change.
4. Engels, F., Antidühríng, pp. 303-4.
5. Djilas, M., The New CL·ss. An Analysis of the Communist System. New York,
Praeger, 1957, 214 p.
6. Which become even more acute by the various bottlenecks resulting from
deficient planning.
7. It is possible today to advance a genuine theory of managerial behavior under
socialism. Instead of prices and costs, the parameters are (1) the provisions
of the plan and (2) the accompanying system of stimuli and punishments de-
vised by the planning authority. The latter is of decisive importance in this
respect, in contradistinction to the former, which will only be respected as
long as the personal interest of the manager, as determined by the amount of
extra premiums he expects to receive (respectively his fear of losing his job,
perhaps even his life), coincides with the requirements of the plan. Cf. Balas-
sa, B., The Hungarian Experience in Economic PL·nning. New Haven, Yale
University Press, 1959, 285 p.
8. Impossible because this represents one equation with two unknowns: the solu-
tion is therefore indeterminate.
9. Graf, W., Der Aussenhandel zwischen marktwirtschaftlichen und zentral-
geleiteten Volkswirt$chaften. Zurich & St. Gallen, Polygraphischer Verlag,
1951, p. 60.
10. Cf. ibid., pp. 65 seq.
11. Bettelheim, C , Les problèmes théoriques et pratiques de L· pL·nification. 1st
ed., Paris, Presses Universitares de France, 1946, pp. 290-91.
12. Ibid., 2nd ed., 1951, p. 345.
13. Heuss, E., Wirtschaftssyteme und Internationaler Handel. Zurich & St. Gallen,
Polygraphischer Verlag, 1955, p. 200.
14. Jewkes, J., Ordeal of PL·nning. London, Macmillan, 1948, p. 175. An excellent
illustration of the "efficient" functioning of a collectivist foreign trade system
was provided in the early 1930's when the Soviet Union increased her exports
of agricultural raw materials in spite of a sharp depression of world market
prices for these products, and a serious shortage of these materials in the
country itself. She did so because she urgently needed the planned amount of
foreign exchange in order to buy the capital goods indispensable for the suc-
cess of the first Five-Year-Plan. The prices of these imports, however, had de-
clined much less than those of her exports so that by this deterioration of the
terms of trade the real costs of Russian industrialization greatly increased. To
Western observers speaking of "dumping" Soviet economists retorted that this
was not dumping at all, only the consequences of their foreign trade system.
This is, of course, quite true, and one is free to call "dumping" only a trade
policy practiced by private monopolies, although this does not change the fact
that the behavior of both kinds of monopolists have the same origin, i.e. their
ability of determining prices. This policy is indeed the more harmful for the
proper functioning of a free international economy if practiced by a state
agency able to throw on the international markets any part of the national
product without having to fear possible bankruptcy. This example also shows
how little those responsible for shaping Soviet economic policy were, and had
to be, concerned with internal living standards.
15. Highest priority is accorded to those complementary products without which
the plan cannot be fulfilled which, however, are unavailable in a given state,
be it for technical or for natural reasons. These are followed by goods which
can be produced at home, but only at considerably higher costs than in for-
eign countries. "Next will come a long series of all commodities where there
exists a cost disparity in favor of the foreign country, but one which diminishes
by extending this list. This last category of goods occupies a particularly large
part in the intercourse among market economies." Conversely, "the central
agency will restrict its purchases to the commodities ranked in the first two
categories." Heuss, E., op. dt., p. 190.
16. Ellis, H., "Bilateralism and the Future of International Trade." In: Readings
in the Theory of International Trade, etc., p. 416.
17. Ibid., p. 419.
18. Graf, W., op. dt., p. 90.
19. This is best illustrated by the following political joke, circulating in an Eastern
European country: "The Soviet Union is delivering us clay. We are making
bricks of it. With the bricks we construct factories. In the factories we produce
machines. We sell the machines to the West, receiving steel in exchange. We
are sending this steel to Russia. In exchange, we again receive clay."
20. See p. 94.
21. Lutz, F., "Geldpolitik und Wirtschaftsordnung." In ORDO, II (1949), p. 222.
CHAPTER VIII
LIBERAL VERSUS SOCIALIST ECONOMIC ORDER,

A COMPARATIVE ANALYSIS
PRELIMINARY REMARKS
Here we must reflect for a moment. Do not our conclusions
with respect to socialist international economic relations strik-
ingly coincide with those drawn up by Hil£erding with respect
to the monopolistic stage of capitalism? Does not the growth
of mighty industrial combines equally destroy the price mech-
anism based on competition and replace it by power, arbi-
trariness, and chance? Are we not faced here, to use Marxist
language, with an irresistible evolution of the material condi-
tions of production which necessarily leads to socialism?
If we examine the problem of industrial concentration more
closely, there are three main factors to be considered: (1) tech-
nical progress and improvements in the organization of produc-
tion may, indeed, frequently encourage the growth of large en-
terprises; this growth is, however, (2) preeminently dependent
on the economic requirements of the market; this aspect plays a
particularly important role in view of the considerable invest-
ment and the corresponding high proportion of fixed costs
which are involved in large-scale production. Furthermore,
technical inventions usually bring about (3) an increase in the
division of labor. Hence, where industrial agglomerations arise,
a great number of small, specialized enterprises simultaneously
spring up, nourishing the large factories with their supplies and
extending their services to the finished products of these giants.
This fact, together with the growing importance of tertiary pro-
duction, may actually account for a diminution in the average
size of firms.1
We are thus entitled to the assumption that there were
strong political forces at work that contributed to the rise and
consolidation of "Monopoly Capital" in the form of financial
LIBERAL VERSUS SOCIALIST ECONOMIC ORDER 171
integration of control. Apart from outright government inter-
ventions such as subventions, price fixing, etc., four major fac-
tors have had a decisive influence on the rise of monopolies:
corporation laws, tax policies, patent laws, and trade restric-
tions.2 It was correctly perceived by Hilferding that trade re-
strictions, under the guise of infant industry protection, played
a particularly harmful role in this process. There is no reason
to conclude, however, that these government policies are "in-
evitable." In fact, as soon as their dangerous implications be-
came more generally recognized, a strong antitrust movement
gained ground in public opinion which was theoretically elabo-
rated and sustained by the neo-liberal school.
As for the aggressiveness which characterized the foreign
policies of the major industrial powers in the decades preceding
World War I, it was mainly due, as Schumpeter also admitted
and even stressed, not to the inherent forces of capitalism, but
to the association of the bourgeoisie with the detainers of state
power who used it according to their own specific political in-
terests which were different, if not entirely contrary, to those of
the former.3 Hence, we may conclude that "imperialism is not
only no essential part of capitalism, but indeed a phenomenon
alien and contrary to its economic system."4
One word may yet be said on the question of crises. If this
problem is approached in a scientific way, one will not fail to
discover that economic disequilibria are not restricted to a free
market economy, but are due to the complicated structure of
modern economy in general.5 Under capitalism, a cumulative
contraction process is usually caused by the interest rate not
reflecting the true scarcity of capital and a corresponding over-
investment. But we have already seen that forced capital ac-
cumulation is a typical feature also of centrally planned econo-
mies. Since no rational price mechanism guides the planning
authority's decisions, bottlenecks and major disproportionalities
will be even more frequent in a collectivist than in a liberal
economy. But they will not result in a conspicuous reversal of
the economic process—the economic function of which is the
correction of a false allocation of resources—i.e. in unused
capacities6 and unemployment. Productive resources will re-
main as scarce as they have ever been; the only effect of such
imbalances will be either stagnation or an extremely slow rise
of the general standards of living.7
BALANCE OF PAYMENTS ADJUSTMENT AND NATIONAL

MONETARY POLICIES
Three Concepts of the Balance of Payments

The balance of payments "is a record of all transactions, real
and financial, which have taken place over a past period of one
or more years between the country's residents and residents of
other countries, the record being kept in the form of double-
entry bookkeeping with each credit entry balanced by an off-
setting debit entry, and vice versa."8 For the responsible agen-
cies of economic policy, the balance of payments serves essen-
tially the same purpose as does an efficient accounting system
for a business enterprise: it provides ex post information about
the quantities, qualities, and prices of goods and services bought
and sold, and about the lending and borrowing of capital. The
totals of active and passive entries necessarily balance and the
only problem involved in this accounting balance of payments
is the self-evident fact that each country must cut its coat ac-
cording to its cloth, i.e. limit its international expenditures ac-
cording to its available means of payment.
But this fact, which is as self-evident to the individual as it
is to the regional authorities within a state, may conflict with
what Machlup calls the programme balance of payments, that
is, "a statement of sources and uses of foreign funds, expected or
planned, over a future period of one or more years, based upon
the nation's capital and consumption requirements, and on a
programme of meeting an excess of requirements over resources
by recourse to foreign finance expected or sought."9 Major em-
phasis is placed "not on what is effectively demanded, but on
what is felt to be desirable with reference to some accepted
standards."10 In other words, this concept characterizes the
desire of governments, because of political considerations, to
break through the economically determined limits just men-
tioned. With the progressing politicalization of economic life
also in "capitalist" countries, this concept acquires increasing
importance. It is therefore a collectivist concept and we shall
soon return to it.
In order to understand the real problem, a third concept
must be introduced: the market balance of payments which "is
a model of a given situation in the foreign exchange market,
characterized by the effective demand and supply of foreign
exchange at the given exchange rate and at alternative, hypo-
thetical rates."11 The difference between this and all other
markets is this: "supply and demand on this very special mar-
ket are decisively determined by the circumstances which we
call elements in economic circulation, i.e. the amount and speed
of circulation of the money, the aggregate expenditure and in-
come, level of prices and costs, briefly the plus or minus of the
aggregate demand or aggregate supply, the regulation of which
in the last analysis is in the hands of the authorities of a coun-
try—the Central Bank and the Minister of Finance—who open
or close the taps releasing money and credit as the case may
be."12 If it is thought, and for good reason, that it is desirable
to stabilize the price on this market (that is, exchange rates), it
may happen that for a shorter or longer period the demand for
foreign currencies exceeds, at this price, their supply or vice
versa. Then, we speak of balance of payments deficits or sur-
pluses.
Röpke compares the exchange market to a hinge that links
the national monetary system, with its resulting price and cost
structure, to the international one. "An 'adverse balance of pay-
ments' thus either shows—depending on the angle from which
the facts are viewed—that the price, i.e. the rate of exchange,
does not correspond to this international relationship of circu-
lation elements and that the 'hinge' is therefore wrong, or else
that this relationship is disturbed and therefore demands a
change in that the domestic money and credits tap is turned
off."13 We can see that the balance of payments problem is es-
sentially a monetary one and recognize the decisive importance
of an effective international currency system.
International Payments Adjustment in a Liberal Economic

Order
Such a system was created, in the nineteenth century, by
the gold standard. It consisted of an automatic balance of pay-
ments adjustment provided that those responsible for the na-
tional monetary policies conformed with its basic "rules of the
game." National currencies were defined in terms of gold;
whenever the demand for one currency tended to exceed its
supply, the gap was filled by gold shipments. At the same time,
a continued gold outflow from a country gave the signal to re-
strict the national volume of circulating media. The correspond-
ing measure of increasing the discount rate was often sufficient
to restore balance of payments equilibrium by setting into mo-
tion international short-term capital movements in favor of the
deficit country. A gold inflow, on the other hand, induced the
central bank to adopt an expansive monetary policy. The gold
standard thus implied a close harmonization of national eco-
nomic and monetary policies; it was a true international mone-
tary system despite the absence of a world state, lending "the
same qualities of homogeneity, stability, and convertibility to
international payment transactions as characterized national
payments."14 It therefore led automatically to a distribution
of international liquidity which was in accordance with the
participation of each state in international trade.
Certain conditions, to be sure, had to be fulfilled for its
proper functioning. "Just as the Gold Standard is founded on
the idea of a meaningful mechanism, so is the economic order
of free competition. And just as the system of a free market
economy is based on the wise pessimism of Adam Smith who
aimed at a workable economic system without demanding more
of anyone than to follow his interest, so not too much is expected
from central bank directors either: they must, in accordance
with their interests, not command, but obey the Gold mechan-
ism, just as the individual economic subject, under free com-
petition, does not determine price movements, but only reacts
to them. The principles of the Gold Standard are thus identi-
cal with those of a free economic order—the system of the Gold
Standard simply results from the application of these general
principles to monetary matters."15
The gold standard was thus the natural corollary of that
international order prevailing in the nineteenth century, which
had, lastly, also inspired Marx's internationalism. In this "se-
cularized Res Publica Christiana"16 national frontiers had a
limited political, but no economic, significance. It was an in-
ternational order marked by a close network of private long-
term agreements based on a general respect for international
law. With the gradual disappearance of the common moral and
economic convictions on which it was based, not only this ordre
public international broke down, but with it eventually also the
gold standard (1931).17
The International Impact of National Full Employment Policies

While international economic stability had, before 1914,
ranked highest among the economic policy goals of nations, this
situation changed in the 1930s and especially after World War
II. This development was principally due to the far-reaching
influence exercised by John Maynard Keynes' book, The Gen-
eral Theory of Employment Interest and Money, on both "cap-
italist" and socialist economists. The author's preoccupation
with the causes that led to the Great Depression provided the
basis for his revolutionary conclusions. It was contended that
in a developed economy, savings tended to exceed profitable
investment opportunities and that, therefore, aggregate spend-
ing in a given period of time was smaller than total income.
This was thought to lead to a contraction of national income
in the following period. Similarly, the deflationary process
would continue until aggregate national expenditures just
equaled gross national product. At this point, a greater or lesser
quantity of economic resources, especially of labor, would have
become unemployed. Yet, the argument runs, precisely because
it was a point of equilibrium, no market forces would be at work
to remedy this precarious situation.
If Keynes' challenge of the classical theory regarding the
self-adjustment of the market had already won the sympathy
of many socialists, the policy implications of this theory almost
seemed to efface the division line that had hitherto opposed col-
lectivist and free-market economists. An increased awareness
of the undesirable economic, as well as political, consequences
of complete centralized planning and a corresponding desire
to maintain capitalism "as far as possible"18 united considerable
efforts to work out and put into practice economic policies on
Keynesian lines.
What are the main aspects of this policy? Clearly, total
demand for goods and services must be increased until that
point of equilibrium is attained at which there is full employ-
ment of all factors of production. This can essentially be
achieved in three ways: (1) by keeping the interest rate below
its equilibrium level to encourage private investment; (2) by
having the state step into the "deflationary gap" and undertake
investments of its own; and (3) by redistributing income from
the rich to the poor, thereby increasing the "marginal propen-
sity to consume." These are indeed the policy prescriptions of
the "new economics."
The problem of international payments adjustment has re-
ceived differing treatments by the economists advocating this
program. Following Keynes, they leave no doubt that in the
case of a conflict between economic goals, that of national full
employment should receive absolute priority. It is regarded
as legitimate to defend one's own country by tariffs or other re-
strictions against imported unemployment. It is thought equal-
ly justified to prevent the fruits of national full employment
policies from partly escaping, in the form of increased imports,
to a neighbor state where relatively lower prices prevail. But
"if a world economic model is constructed under the assumption
that all governments pursue a policy of full employment, then
the classical theory of international trade again becomes rele-
vant."19 In Keynes' words:
It is the policy of an autonomous rate of interest, unimpeded by in-
ternational preoccupations, and of a national investment program di-
rected to an optimum level of domestic employment which is twice
blessed in the sense that it helps ourselves and our neighbors at the same
time. And it is the simultaneous pursuit of these policies by all countries
together which is capable of restoring economic health and strength in-
ternationally, whether we measure it by the level of domestic employ-
ment or by the volume of international trade.20
A. Paulsen, the author of a German introductory text to

Keynesian economics, continues: "No country needs to fear
losses of employment through imports because these will not
fail to be offset by exports, and a worldwide economic exchange
will attain, to the advantage of all, the best use of productive
possibilities."21 However, he at once adds: "But the question
remains open whether the balances of payments also will be in
equilibrium under these conditions."22
Does this statement not suggest that the classical theory of
international trade, notwithstanding the author's earlier asser-
tion, must be thoroughly revised to fit the new policy require-
ments in each state? Keynes himself leaves no doubt that he
recommends "the opposite"23 to the measures of adjustment
brought about by the gold standard.24 His emphasis on autono-
mous interest rates indeed constitutes an important step away
from a unified international monetary system.
When examining the three basic aspects of full employment
policy more closely, it becomes obvious that these measures are
highly indicated in a depression, i.e. in a situation in which idle
resources in all branches of the economy exist.25 The real prob-
lem is thus not whether to apply these recommendations in an
emergency but rather when to stop applying them. This in-
volves a hypothetical judgment by the responsible policy-mak-
ers; and this judgment depends not only on their degree of
faith in the restorative forces of the market once they are re-
vived, but also on the outcome of a closely related issue: that
of looking at matters in the short versus the long run.
This problem of a correct judgment acquires outstanding
importance in view of the fact that the artificial stimulation of
effective demand may result in inflationary pressures long be-
fore complete full employment is achieved. This possibility and
even probability is due to the emergence of bottlenecks during
the period of upswing. It could be mitigated by imports, but,
as we have seen, Keynesian economists are particularly sus-
picious of a "loss of employment" through imports during this
phase. Sharing the basic convictions of their master, they will
tend to continue deficit spending and cheap money policy even
at the price of inflation.
Keynes had not only foreseen a general price rise, resulting
from his recommendations, but considered this rise to be in-
evitable because of the impossibility of adjusting nominal wages
downward. In other words, prices had to rise faster than wages
during an upswing in order to reduce real wages and thereby
increase employment. This argument, however, becomes in-
effective once the assumption of money illusion is no longer
tenable. But even if it still holds good for the earlier phases of
economic revival, union pressure, in view of the continuing in-
crease in living costs, has often led to the tying of wages to a
consumer price index which makes further reductions in real
wages impossible. Yet, with recovery well under way, unions
usually go farther than this: when demanding wage increases,
it is not the overall rise of productivity of the economy, but
their bargaining power which ultimately determines the wage
level. If the authorities wish to maintain full employment at
that level, the central bank must be willing to meet the addi-
tional financial requirements of the economy.
It can thus be seen that a government pursuing full employ-
ment policies is menaced by two kinds of inflation: demand in-
flation and cost inflation. The danger of inflation is increased
by the distortions of the national economy's productive struc-
ture resulting from these policies.28 It is no less aggravated by
the inherent Keynesian dislike of saving, which is translated,
by the welfare state, into decreased incentive for the man on
the street to provide for his own future needs.27
Full employment policies and their monetary consequences
cannot leave unaffected international economic relations in gen-
eral, and international payments adjustment in particular. The
reason for this is the emphasis Keynes and his followers place
on the word "autonomous." It implies that to attain the desired
goal, the government must not be impeded either by the ex-
ternal repercussions of its measures or by the price mechanism,
particularly the price on the capital market. To the degree,
therefore, to which the action of these mechanisms is restricted,
an arbitrary constituent enters into each national economy. This
constituent distinguishes it from other national economies even
though the latter, too, are committed to full employment pol-
icies. And the resulting differences are accentuated by factors
such as tax laws and social security charges. Even more import-
ant is the fact that trade union policy is not identical in each
state. It may be more or less aggressive, pursued with more or
less responsibility for the general needs of the national econ-
omy. In the same way, increases in the productivity of labor
differ from country to country. Hence, the inflationary pres-
sures originating from the labor market may vary greatly.
The elements just described combine to create differing de-
grees of inflation in each state. But as soon as this is recognized,
international payments adjustment at stable exchange rates
can no longer be left to the free forces of the market without
incurring the risk of chronic balance of payments surpluses
and deficits.
Under these conditions, a government is faced with two al-
ternatives. It can, first, retain stable exchange rates and per-
haps adjust the "hinge" to the state of its relative level of infla-
tion. But this will only temporarily alleviate its international
payments difficulties. If it continues to permit a degree of in-
flation which is at great variance with that abroad, imbalances
will not fail to reappear, even if trade agreements have been
concluded. Unless deficits are paid in gold or an officially ac-
cepted foreign currency, partner states necessarily become cred-
itors of countries where inflation is most advanced and may be
unwilling to prolong this involuntary state of affairs.28 The in-
flating governments, if they are unable to obtain long-term
credits (which, however, would only postpone the necessary
internal adjustments), but cling to stable exchange rates, are
therefore forced to introduce restrictionary measures going far
beyond tariff increases. Such measures are direct quantitative
controls and exchange control.29 In this context we can only
mention a few typical issues involved in these measures. Such
issues are: quota problems, the effect of export and import re-
strictions on national income and prices, commodity and pay-
ments agreements, bilateral clearing, multiple rates and cross-
rates, exchange discrimination, and state trading. Originally
introduced to meet balance of payments difficulties, these de-
vices set into motion a vicious circle which leads to a progres-
sive collectivization of the entire economy.30
Keynes himself was too familiar with international economic
matters not to have understood this and its disintegrative im-
plications for international economic cooperation. Here is his
famous statement:
Let goods be homespun whenever it is reasonably and conveniently
possible, and above all let finance be primarily national. . . . A greater
measure of national self-sufficiency and economic isolation among coun-
tries than existed in 1914 may tend to serve the cause of peace rather
than otherwise. 31
He also admitted that "national self-sufficiency and a planned

domestic economy" logically belonged together.32 The author
did not conceal his sympathies for mercantilism, despite his
recognition that
the mercantilists were under no illusions as to the nationalistic character
of their policies and their tendency to promote war. It was national
advantage and relative strength at which they were admittedly aiming.33
Yet, Keynes concluded:

But intellectually, their realism is much preferable to the confused
thinking of contemporary advocates of an international fixed gold stand-
ard and laissez-faire in international lending who believe that it is pre-
cisely these policies which will best promote peace.34
If, however, a government is still basically committed to a

free market economy, it may choose the second alternative, that
of abandoning stable exchange rates. F. A. Lutz summarizes
the advantages of freely fluctuating exchange rates as follows:
"Countries that have a particularly high degree of inflation
(either because wages rise particularly rapidly or because in-
flation is generated at the demand side) do not need to lose
reserves, they can simply let the rate of their currency drop.
Those that have a balance of payments surplus do not need to
defend themselves against an imported inflation, since their
central bank is no longer under the obligation to buy foreign
exchange to uphold the exchange rate; one could not reproach
these countries for accumulating exchange reserves at the det-
riment of others, one would not demand from them constantly
to give credits to foreign countries in spite of the fact that in-
terest at home may be higher than that abroad; the exchange
rate of their currency would simply rise. Each state may, at
home, pursue the kind of monetary policy it wishes to pursue
. . . without having again and again to impede international
trade and capital movements by controls or to recur to de-
flation."85
It is impossible, in this context, to analyze the theory of
flexible exchange rates. We agree with the author just quoted
and many others that, in spite of its manifold shortcomings, this
system provides the most adequate international solution un-
der the conditions described in this paragraph—a solution, to
be sure, which reflects the degree of international disintegra-
tion due to economic nationalism. The fundamental and per-
manent cause of today's international payments problem is,
in Gunnar Myrdal's words, "the unwillingness of the national
welfare states to accept the infringements on their policies of
economic stability and economic equality that an automatic
trade and payments system would imply if it were to bring
about changes in the national economies corresponding to
changes in international economic relations."38 But it follows
that the more internal economies are politicalized (i.e. con-
verted into fields of experimentation for different economic
and ideological convictions), the more political frontiers will
become "lines to separate from one another the widely differ-
ing markets whose conditions of supply and demand are, how-
ever, uniform within each nation and collectively determined."37
The disintegrative effect of full employment policies on in-
ternational economic order was perceived by liberals even be-
fore the Keynesian recommendations became the general source
of inspiration for economic policy-makers. W. Röpke, F. A.
Hayek, M. Friedman, and many others consequently warned
against losing sight of the prerequisites of an international di-
vision of labor. The basic relationships involved in the eco-
nomic cooperation among nations are well summarized by I. K.
Chatterj ee: "There are three elements in the situation—the ex-
ercise of monetary sovereignty, fixed exchange rates, and free-
dom of the holders of domestic currency to buy foreign cur-
rency with domestic currency. In a changing world, a country
can easily combine two and not three of them. The combina-
tion of monetary sovereignty with freedom of payments gives
one a system of flexible exchange rates. When monetary sover-
eignty is associated with fixed exchange rates, the result is a loss
of freedom of payments. When fixed exchange rates and free-
dom of payments are desired, monetary sovereignty has to be
sacrificed,"38 i.e. subjected to the needs of external equilibrium.
Only the third alternative forms the basis of a true liberal in-
ternational economic order.
The Collectivist Solution

But, just as numerous economists advocating a free market
economy refused, because of fear of inflation, to apply Keynes-
ian remedies whenever a slight disturbance appeared in the
economy, so did a number of socialists refuse to stop with
Keynes at what may be called modified capitalism. These au-
thors continue to aim at full-scale national planning. "For," one
of them asks, "can the State really, by following the Keynesian
prescription, maintain full employment without setting in-
flationary tendencies to work, unless it is in a position to con-
trol, broadly, what is to be produced and when, and what is to
be charged for it, and also the broad distribution of purchas-
ing power, as well as its global amount?"39
But centralized planning involves, as we have seen, a com-
plete separation of national monetary systems. What does this
really mean to international economic relations?
Foreign exchange is no longer demanded and supplied on
a free market between individuals, but pooled in the hands of
the foreign trade monopoly. The concept of the market bal-
ance of payments thus loses its relevance in a socialist economy.
The program balance of payments, as represented by lists of
import "requirements" set up by governments to fit in with
their national plans, becomes all the more important. The de-
gree to which they can satisfy these needs in their order of
priority depends on the total quantity of foreign exchange
earned by exports—indirectly, therefore, on the extent to which
one state's negotiators succeeded in improving its terms of trade
at the expense of the other. It also depends on the size of gold40
and foreign exchange reserves and the possibility of taking up
credits. All these factors are vital for national plan fulfillment.
The relative power positions of the various states will therefore
have the last word in determining the provisions of the bilateral
trade agreements on which the volume of these magnitudes
essentially depends.
Because of the complete separation of national price levels
and the impossibility of rational valuation, nothing exists which
could be called a collectivist international monetary policy.
Exchange rates are centrally fixed in the same way as all col-
lectivist prices; any parity will do.41 In the same way, the prob-
lem of balance of payments equilibrium is reduced to a mere
juxtaposition of quantities. Due to the uncertainties of foreign
trade and internal production, unplanned surpluses or, more
probably, deficits usually arise. In the first case, imports or for-
eign exchange reserves may be increased; in the second, if
credits cannot be obtained and gold is not available for ex-
port, either imports must be cut down or goods and services
withdrawn from home consumption and sold abroad. This
process of "balance of payments adjustment" has certainly the
advantage of being swift and effective; but it is more effective
if the socialist economy can sell its additional exports on the
world market at foreseeable prices than if it has to dispose of
them in another socialist country within the framework of bi-
lateral trade agreements. At once the political element is rein-
troduced because the collectivist partner state may not be will-
ing to acquire commodities that are not provided for by its
national plan. It will certainly not let this favorable opportu-
nity slip by without improving its terms of trade vis-à-vis the
country experiencing international payments difficulties. The
existence of a free world market thus continues to play an im-
portant role for a centrally planned economy; it can be com-
pared to a magnetic field by which the collectivist state is al-
ternately attracted and repelled.
The monetary approach to the problems of collectivist in-
ternational trade shows that there is nothing "absolute" in mon-
ey, as many socialists are inclined to believe. Just as national
currencies can effectively be approximated to form part of a
world currency—if they are managed according to the rules of
the gold standard—money is "nationalized" along with all other
facets of the economy under collectivism, i.e. reduced to serving
the will of the collectivist planners. There is thus no hope in
searching for a monetary reform to remedy international eco-
nomic disintegration since its basic cause is the very nature of
the collectivist economic order itself and the policy of economic
nationalism it necessarily implies.
THE INTERNATIONAL PROBLEM OF RAW MATERIALS
The Liberal Solution Resting on the Divisibility of

Ownership and Its Invalidation in Times of War
Following L. v. Mises we can distinguish three kinds of own-
ership with respect to the means of production (including nat-
ural resources): the juristic ownership of the original proprie-
tor, the economic ownership of the entrepreneur who combines
the various factors of production by directly disposing of their
uses, and the ownership of the services and products derived
from these means. These three kinds of ownership have differ-
ing functions dependent upon the economic order being con-
sidered. In a small, agricultural economy situated outside ex-
change society, the land, ploughs, draught animals, etc., as well
as their final products, are owned and disposed of by all mem-
bers of the tribe or family, as represented by its head or chief.
We can speak here of an exclusive ownership in the sense that
all of its constituents serve the needs of the members of the
community only.
This exclusiveness disappears when we are faced with an
economy based on an extensive division of labor and a corre-
sponding market not only for the final products, but also for
the factors of production, including the funds with which to
set up factories, open mines, etc. The owners of capital, land,
and labor receive their incomes on the basis of the productive
contributions of their respective services, as valued by the mar-
ket. This is the device by which the division of ownership be-
comes possible42 and which forms, generally speaking, the con-
dition for rational price formation.
The legal ownership of the means of production yields a
reward only as long as it is used—or transferred in economic
ownership to be used—to fulfill the requirements of the con-
sumers. "Durable production goods can be shared according
to the divisibility of the services they provide."43 The market
prices of these services (i.e. interest earnings), by linking the
last buyer's valuations to the quantity of capital available, make
it imperative for the owners of the means of production to use
their resources—including raw materials—in accordance with
the effective demand of the consumers.44
In a society in which political frontiers have no economic
significance, the nationality of buyers and sellers is irrelevant.
The more that distant countries are drawn into multilateral
commercial relations with each other by the price mechanism,
the more the productive resources of the world are used in ac-
cordance with the comparative advantage of each region, and
the more efficiently the welfare producing "machine," with
which the international division of labor has often been com-
pared, is allowed to work. In the liberal age there existed no
international problem of raw materials: they were simply
bought and sold like any other commodity and the gold stand-
ard saw to it that those able to pay for them had free "access"
to cover their needs.
The conflict between the international character of raw ma-
terial needs and the possibility of exclusive national political
control over their resources only appeared during World War I
when the regular supply of certain raw materials became de-
cisive for the governments' war efforts, and with it the policy of
cutting off the enemy from their sources of raw materials. The
capacity to use natural resources came more and more to be
identified with their actual occurrence within a country's own
national frontiers. This way of looking at the matter subsisted
even after the termination of hostilities. Very few recognized
that it rested on a confusion of the aims and methods of war
economy with those prevailing in peacetime. Whereas "the
critera of effectiveness of an economic policy in time of war re-
late entirely to the ability to sustain military power," those in
time of peace "relate to the living standards of the people. . . . A
power economy demands the highest possible degree of self-
containment with respect to all essential raw materials and
foodstuffs, as well as for important manufacturing operations.
A standard of living economy demands specialization of pro-
duction in accordance with comparative advantage and ex-
change with the widest possible outside area."45
Thus, whereas the divisibility of ownership is characteristic
of a peacetime economy, it is replaced in times of war or prep-
arations for war by exclusive ownership following national bor-
derlines. To this "fundamental incompatibility of war eco-
nomics and peace economics" (Staley) corresponds the clash
between the system of free enterprise and the particular ob-
jectives introduced by power economy. The latter naturally
tends to unite the entire economy under government control
because only in this way can all efforts efficiently be directed
to the central goal. International economic interdependence is
regarded as synonymous with military vulnerability. The re-
sulting obstruction against foreign trade, and this policy only,
leads to a close and seemingly plausible connection between
political sovereignty and raw materials sources, between the
"poverty" of a country and its claim to the extension of its
vital space.
The Fichtean solution of this problem, a reshuffling of po-
litical territories, would only lead to new armed conflicts and
corresponding war preparations. It is precisely "the dominance
of the war economy" which "must be broken, and this can only
be done if measures can be taken which remove the ever-pres-
ent 'assumption of violence'."46 The real difficulty is, however,
that once this dominance prevails in one single country which
is powerful enough to threaten the security of its neighbors,
they cannot help placing their own economies, too, on the rails
leading to the strengthening of national military power. Ag-
gressive economic nationalism is thus the effect as well as the
cause of international political instability and the competitive
raw materials race for national armaments.
The Collectivist Solution

With the abandonment of a rational price mechanism re-
flecting national and international scarcities, a collectivist econ-
omy forfeits the advantages to be derived from the division of
the ownership of the means of production and of the raw ma-
terials sources. Instead, these are disposed of exclusively by
governments. In fact, a collectivist economic order is, by its
internal structure, identical with a war economy which, as we
remember, served as a model to many collectivist authors.
This implies that it is economically and politically vital for
the socialist state to have adequate "access" to those raw ma-
terials sources which do not lie within its own territory. But
these sources are now controlled by other sovereign states. As
long as a free international economy exists, collectivist trade
can be based on world market prices. However, these prices
reflect the supply and demand conditions of only the free mar-
ket economies; their applicability to the differing economic
structures characterizing centrally planned economies is there-
fore limited.
This circumstance is not altered by the fact that socialist
international cooperation may already start with the common
exploitation of natural resources in a specified country, agreed
upon by two or more governments. Who is to provide the in-
vestment funds, the necessary buildings, machinery, labor pow-
er, etc., and at what price? In what proportion is the yearly
output of raw materials to be divided between the partner
states? What goods can be obtained in exchange for the direct
or processed export of these raw materials? All these issues
and many more will retain their political character and be de-
cided accordingly, whereas the real economic questions con-
cerning the possible alternative uses to which each individual
factor of production involved in the project could nationally
or internationally be directed must remain unanswered because
it would be absurd even to raise them.
The exclusive ownership of raw material sources and other
"essential" commodities will therefore form an integral part of
the national sovereignty rights of a collectivist government-
rights which can effectively be used by a skillful alternation of
foreign economic policy at times granting and at times with-
holding supplies. The problem is sharpened by the fact that
the production of these materials requires large-scale invest-
ments which, however, are not allowed to be included ade-
quately into prices by the labor theory of value. This circum-
stance more than once gave rise to enormous profits derived by
a powerful socialist country from trade with less powerful
brother nations.
So there will be poor and rich countries and their "class
status" will depend not so much on the respective levels of eco-
nomic development or on the technical, moral, and intellectual
skill of their inhabitants, as on the size of the territory under
their sovereignty and the quantity and quality of raw materials
under their control. At the same time, their efforts to achieve
economic independence will cause governments to exploit all
natural resources within their jurisdiction, even if this involves
high economic sacrifices for their populations. Insofar as the
less favored nations can purchase their raw materials require-
ments on the world market, they are able to mitigate the effects
of their poverty by only giving up exports (or gold) represent-
ing the same value—as determined by the world market—as that
of their imports. In a world consisting exclusively of socialist
states, they must resign themselves to either a relatively low
general standard of living47 or accept political along with eco-
nomic dependence—which may eventually come down to the
same result.
THE INTERNATIONAL POPULATION PROBLEM

The successful struggle against epidemic diseases and the
progress of technology during the nineteenth century made pos-
sible an unprecedented increase of the European population.
The effects of the law of decreasing returns on which Malthus
had based his pessimistic prophecy were superseded by those of
an ever greater increase in productivity due to industrialization,
a revolution in agricultural production methods, and an exten-
sive international division of labor which resulted in a steady
rise of living standards. Spontaneous large-scale migrations
from the overpopulated areas to the new continents regulated
by civil law only tended to bring about a worldwide equaliza-
tion of labor productivity.
Toward the end of the nineteenth century, governments be-
gan to introduce increasingly severe restrictions on immigration.
These policies aimed at optimizing the size of their population
with respect to the economic resources of their countries, ac-
count being taken of general racial and cultural aspects. More-
over, they were influenced by a growing trade union pressure
brought about by fears of a depression of wages or even unem-
ployment through the influx of cheap foreign labor.48
These restrictions reduced the possibility of relieving the
densely settled areas of the world from the pressure of over-
population by free migrations. Collectivists therefore proposed
schemes for a planned international migratory movement with
which we are already familiar. But what objective criteria are
to be adopted to determine "the volume of labor available for
transference and permanent settlement abroad?" Where are
these people finally to be settled? These questions remain un-
answered whereas the theories which give rise to them dis-
close a disregard for individual freedom and for firmly estab-
lished political facts such as national and trade union policies
concerning immigration. Socialist authors thus ignore the po-
litical conflicts involved in their proposals, or they must be pre-
pared to accept force as a means of realizing them—an even-
tuality not altogether foreign to the collectivist tradition.
Yet, a sure way out of the problem of overpopulation does
exist and that is extensive international trade. If men are no
longer permitted to move to places where productivity is high-
est, capital can still flow to their country, attracted by the high
interest rate prevailing there and raising the efficiency of native
labor. In addition, by participating in the international divi-
sion of labor, these countries are able to exchange on the world
market those goods in which their relative handicap is least for
commodities produced in regions with comparatively more
abundant productive equipment or superior fertility of the soil.
Thus, free international economic cooperation is a fairly ade-
quate substitute for immigration barriers in balancing the level
of income and the standards of living in the world, and "this
levelling up . . . is carried out not so much by taking from the
rich and giving to the poor, as by making the production on the
entire globe as rational as possible and by exploiting the total
economic potential of the world to the maximum."49
Unfortunately, immigration restrictions were followed by
an increasing degree of direct and indirect trade controls. Their
basis, as we know, rests in the spread of economic nationalism
under the impact of Keynesian doctrines. "How can national
full employment, at wages which correspond to the high qual-
ifications of our workers, be maintained," argue the trade union
leaders of the industrialized countries, "when they have to face
the competition of imports produced by 'sweated labor'?"
"What sense can international trade have for us," ask the in-
habitants of the more backward countries, "if our productive
equipment is hopelessly inferior to that of the richer nations?"
These questions are as demagogically suggestive as their im-
plications are economically false.50 But this kind of argumenta-
tion, reinforced by the adverse effects of interventionist policies
on the balance of payments, has been a powerful factor in the
introduction of international trade restrictions.61 It was not
realized that these measures convert an originally economic
problem into a political one:
"If the channels of world transactions are more and more
blocked, if the daily changing friendships and enmities are
opening and closing markets, if the entire intricate mechanism
of the liberal world economy is rusting . . . if international move-
ments of capital become the solemn exceptions, if . . . there are
fewer and fewer countries in which one could become even a
dustman without possessing the appropriate passport—then the
question of raw materials and colonies is no longer a mere phan-
tom: then there are satiated and proletarian peoples, and then
there is for many countries a population problem in the sense
that the relationship between the size of the population and the
politically dominated area is more unfavorable than else-
where."52
If such are the effects of government policies which are still
based on a system of free enterprise, what will be the conse-
quences of a comprehensively planned economic order on the
international population problem? Since the quantity and qual-
ity of internationally exchanged goods and services correspond
even less to the factor endowments of each country than in the
"mixed" type of economy considered before, problems of over-
population must become even more pressing. This assumption
may be confirmed by official statistical data showing greatly
varying average densities of settlement per square mile of na-
tional territories, which, just as in the case of raw materials, may
give (and have given) rise to government claims to an exten-
sion of "vital space" at the expense of the less densely populated
areas. Yet, it is highly improbable that these claims will be ac-
companied either by planned international migrations to alle-
viate the problem for the time being or even by complaints of
one government against another for closing its frontiers to im-
migration. The reason for this surprising peacefulness is not
difficult to perceive if we remember that labor is a factor of pro-
duction—indeed the only one according to socialist doctrine—
and that all factors of production are extremely scarce with re-
spect to the permanent pressure of planned demand upon them.
The socialist government has no difficulty in employing all avail-
able labor forces; it will, on the contrary, even tend to mobilize
housewives and retired people to participate in production and
it can do so because, as we have seen, there is no direct link be-
tween the productive contribution of the individual and his
real rewards. The central planning agency is in no way com-
pelled to adjust the planned proportion of consumption goods
in the national product to an increased demand. It can simply
absorb the additional purchasing power thus created by raising
the prices of these goods. It it wishes to avoid a resulting dete-
rioration of living standards—although it may then profit from
an abnormal reaction of total labor supply—it can expand con-
sumers' goods production, but to a lesser extent than that of
capital equipment. In other words, since it is the government
that decides on the volume of total savings and since it naturally
tends to further the growth of the investment sector at the ex-
pense of light industry and agriculture, labor power must be
regarded as the foremost source of national capital and hence
of the political power of the new class.53 However densely
settled a socialist country may be, it will thus continue to suffer
from an apparent shortage of workers. The problem of over-
population may serve as a useful argument for an aggressive
foreign policy—it is disguised within the country by the kind of
economic organization characteristic of collectivism.
Overpopulation assumes, as all other disguised disequilibria
do under socialism, the form of unnecessarily low living stand-
ards. But no one really knows whether and to what extent this
relative poverty is due to the just-mentioned factor, or whether
it is due to the general shortage of capital and raw materials,
the "incapability" or "bourgeois mentality" of factory managers
and planning department heads, or perhaps to the machina-
tions of the "enemies of the people" within and without the
frontiers of the socialist state. This obscurity can only be re-
moved by replacing the collectivist system of watertight econ-
omies by a free and intercommunicating international economy.
THE PROBLEM OF INTERNATIONAL CAPITAL MOVEMENTS

The various geographical areas of the world, dominated by
national states, differ with respect not only to their population
and raw material resources, but also to the amount of their past
savings translated into capital accumulation. This results in
different prices for the use of capital in different regions, reflect-
ing its scarcity relative to the other factors of production. The
interregional productivity levels can therefore be approximated
to each other by letting capital flow freely to places where it
earns the highest return. This is, in fact, the essence of the
liberal solution.
However, there are two fundamental problems connected
with international capital movements. The first is that of risk
which is present in all investment activity, but which is now
aggravated by the fact that capital is usually tied down for a
long period in a country under a different jurisdiction. The suc-
cess of an investment project therefore depends not only on
the investor's correct estimation of the national or international
market situation at the time it bears its fruits, but also on the
economic policies pursued by the government of the capital
receiving country. If the latter insists on its autonomy and fails,
e.g. to take efficient measures against inflation so that the in-
troduction of direct trade restrictions and exchange control
eventually become "inevitable," investment prospects in that
country become unfavorable despite apparently promising re-
turns. This point will play an important role in the next chapter.
Secondly, international capital movements were often used
by governments as instruments of political pressure and gave,
in turn, rise to international tensions demanding government
intervention.54 A regular international flow of capital therefore
depends on the degree to which private economic activities are
dissociated from political implications, and possible disputes
arising out of them can be settled outside the field of high di-
plomacy. "The growth of international capital investment thus
reflects the increasing integration of the world's economic or-
ganization. Indeed, the amount of these long-term boundary-
crossing investment ties is in a certain sense a measure of . . . the
extent to which the mechanism of production and distribution
over the world is becoming unified in spite of political separa-
tism."55
But the very essence of a collectivist economic order is the
centralization and politicalization of national capital. It may
be recalled that Keynes' principal demand was an autonomous
interest rate. But this politicalization manifests itself even more
in a centrally planned economy. On the one hand, the produc-
tivity of a factory and its ability of plan fulfillment is closely
related to the quantity and quality of its capital equipment.
Hence, there will be fierce competition for more capital allo-
cations between both the different branches of the economy,
represented by rival state agencies, and the factory managers.66
But on the other hand, the planning authority is unable to de-
cide rationally where in the economy investment is most ur-
gently required.
No collectivist state will therefore consider itself to be in a
position to spare capital for foreign investment, unless import-
ant political advantages can thereby be gained. This is the case,
for example, when the capital of a leading socialist country
participates in the exploitation of vital raw materials of a small-
er one. This may, and in actual practice has, become a pretext
for an increasing interference by the dominant state in the in-
ternal economic affairs of the weaker partner, under the pretext
of "coordination and harmonization of national plans."
Apart from such direct investment, credits can also assume
the form of bilateral swing credits or even convertible curren-
cies. But the more that the latter are "needed," the more non-
economic strings are likely to be attached to their lending. Thus,
the best safeguard of a socialist country—especially if it is small
and relatively poor—against exploitation is its absention from
taking foreign credits from other socialist countries. It will pur-
sue a corresponding policy that is subject, however, to a qualifi-
cation already made in another context: that "aids" are not
forced upon it by its more mighty neighbors.

All major problems connected with the international move-
ment of labor, capital, goods, and services on the one hand, and
the offsetting monetary flows on the other, are solved in a liberal
economic order by the working of "automatic" mechanisms,
sensitively registering all past and thereby guiding all present
economic actions and reactions. Their international effective-
ness depends on a self-imposed limitation of the state's sover-
eignty, resting on the twofold conviction that (1) the different
problems with which the two fields of dominium and imperium
are faced demand different kinds of solutions and (2) there
exists a close interdependence between the general political
and social framework of a nation and its economic order. If the
former is to be constructed on liberal principles, the latter nec-
essarily rests on free enterprise. But only if this conviction is
shared by a majority of states can a true international order and
its corollary, an effective international monetary system, arise.
This division of sovereignty between national governments
and the anonymous forces of the market has been considerably
jeopardized by national full employment policies and has led
to a corresponding politicalization of the economy. This process
is completed by full-scale national planning. Automatic mech-
anisms are and must be thrown overboard by the collectivist
state since their essence, that they work independently of hu-
man will, is incompatible with the postulate of conscious eco-
nomic control. The most important consequence of this fact
is a total separation of national economies. In these economies,
international economic relations are tolerated only insofar as
they do not interfere with national planning. Because of this,
only one thing seems to be absolutely certain for the represent-
atives of the mutually negotiating socialist governments, and
this is the exact opposite of the principle that had guided Plato:
that to have more of a given commodity is better than to have
less of it. Hence no international economic equilibrium de-
serving this name can be attained under this system.
NOTES TO CHAPTER VIII

1. For further details, cf. Röpke, W., "Klein- und Mittelbetrieb in der Volks-
wirtschaft." ORDO I (1948), pp. 155-74; Jewkes, J., "Are the Economies of
Scale Unlimited?" In: Economic Consequences of the Size of Nations. Pro-
ceedings of a Conference Held by the International Economic Association in
Lisbon, 1957. London, Macmillan, 1960; v. Lenel, O., "Wachstum der Wirt-
schaft und Wachstum der Unternehmungen." ORDO XV/XVI (1965), pp.
141-65.
2. Cf. Machlup, F., The Political Economy of Monopoly; Business, Labor and
Government Policies. Baltimore, Johns Hopkins Press, 1952, 544 p.
3. The combination of private economic initiative with the requirements of
Staatsräson was particularly marked in Germany after the unification of the
Reich. Thus, A. R. L. Gurland wrote: "The joining of powerful social forces
to the state apparatus doubtless constituted the internal political motive which
led Bismarck from free trade to protectionism." Gurland, A. R. L., "Wirtschaft
und Gesellschaft im Übergang zum Zeitalter der Industrie." Propyläen-Welt-
geschichte, VIII, p. 326. The same author underlines another important aspect
in this connection: the process of cartelization gave rise to a special class of
organizational bureaucrats that developed their own, vested interests. These
"full-time employees of organizations, almost all university graduates, very
often lawyers who had not infrequently obtained their positions through the
recommendations of the Korps . . . originated from a middle class that failed
to keep pace with industrialization and that no longer quite believed in social
advancement through entrepreneurial risk taking. As learned people and re-
serve officers, they considered the organizational hierarchy as a substitute for
what remained inaccessible to them: easy wealth and rise into the privileged
upper class. Not having any fortune of their own nor responsibility for busi-
ness risks, they distrusted the 'mercenary spirit' of the entrepreneurs and man-
agers who had to make their decisions on the basis of financial and not of
'national' or 'macroeconomic' considerations. . . . They were less interested in
daily problems of profitability, consumer needs, and higher living standards
than in tariff protection, 'vital space,' and national prestige." Ibid., p. 335,
italics added. Though Gurland refers here to Germany, similar observations
could be made wherever cartelization gained momentum. But do these bu-
reaucrats not show a striking resemblance to the "new class" in that they con-
centrate power in their hands without having to assume a corresponding re-
sponsibility? International disorder and the assumption of violence thus seem
to appear where this kind of people succeeds in influencing both public opinion
and the foreign policy of their respective states.
4. Röpke, W., Internationale Ordnung. Erlenbach/Ziirich, E. Rentsch Verlag,
1945, p. 98.
5. "It was under the auspices of the market economy, not of collectivism, that
modern, highly differentiated society introduced itself into economic history.
This led to the serious optical delusion that the disharmonies resulting from
differentiation would be something proper to the market economy only."
Röpke, W., Civitas Humana. Grundfragen der GeselL·chafts und Wirtschaftsre-
form. 3rd ed., Erlenbach/Zürich, E. Rentsch Verlag, 1949, pp. 343-44.
6. Not infrequently, there do occur uncompleted projects. The enormous waste
of economic resources—particularly scarce in a developing country—involved
in overambitious industrialization programs has been illustrated by the com-
plete failure of the Chinese "Great Leap." According to eyewitnesses, there
are incompleted factory buildings all over the country, doomed to destruction
by winds and rain. Expensive machinery is also perishing for lack of qualified
use and attendance.
7. Here, another "advantage" of a hermetically closed economic system becomes
apparent. The population in socialist economies has no possibility of compar-
ing its living standards with those beyond its national frontiers. It can only
make intertemporal comparisons. Hence, there will be a widespread feeling,
greatly encouraged by official propaganda, that the slightest increase in the
provision with consumers' goods must be credited to the centrally planned
economic system and is the result of the wise measures taken by the "bene-
volent" government.
8. Machlup, F., "Three Concepts of the Balance of Payments and the So-Called
Dollar Shortage." Economic Journal, March, 1950, pp. 46-47.
9. Ibid., p. 46.
10. Ibid.
11. Ibid.
12. Röpke, W., International Order and Economic Integration, p. 200, italics
original.
13. Ibid., p. 201.
14. Ibid., p. 76.
15. Lutz, F. A., "Goldwährung und Wirtschaftsordnung." Originally published in
1935, reprinted in Geld und Währung. Gesammelte Abhandlungen von F. A.
Lutz. Tubingen, Mohr, 1962, p. 21, italics original.
16. Röpke, W., op. cit., p. 74.
17. "The Gold Standard of the years 1925-31 was fundamentally impossible be-
cause it was the point of intersection of two completely incompatible ideas that
were separated by a century—the idea of a free economic order of the beginning
19th century and the idea of national planning of our time. The marriage en-
tered into by these two ideas in the postwar Gold Standard was not a happy
one. Each of the two partners impeded the other in fully displaying its in-
trinsic nature—no wonder the marriage ended in divorce after six years." Lutz,
F. A., op. cit., p. 22.
18. "Competition as far as possible—planning as far as necessary!" Grundsatzpro-
gramm der Sozialdemokratischen Partei Deutschl¤nds (Basic Program of the
Social Democratic Party of Germany). Bad Godesberg, 1959. Published by
the Vorstand der Sozialdemokratischen Partei Deutschlands, Bonn, 11/59, p. 14.
19. Paulsen, A., Neue Wirtschaftslehre. Einführung in die Wirtschafttheoríe von
John Maynard Keynes und die Wirtschaftspolitik der Vollbeschäftigung. Ber-
lin and Frankfurt, Verlag Franz Vahlen, 1958, p. 325.
20. Keynes, J. M., The General Theory of Employment Interest and Money. New
York, Harcourt, Brace, 1936, p. 349.
21. Paulsen, A., op. cit., p. 325.
22. Ibid.
23. Keynes, J. M., op. cit., p. 349.
24. "The establishment of a link between the quantity of money and gold makes
it possible for the central bank to increase money only in accordance with
the inflow of gold. It must restrict an increase of money if it approaches its
reserve limit. The gold basis thus forces a scarcity of the quantity of money
in the entire system and leads in the long run again and again to a harmoniza-
tion of the natural and the market rate of interest." Lutz, F. A., op. cit., p. 9,
italics original.
25. To discuss the question whether and to what extent a redistribution of income,
through progressive taxation, is recommendable in this and all other phases
of the business cycle would exceed the scope of this study.
26. Particularly from a failure to distinguish between frictional and structural un-
employment.
27. Due to this discouragement of savings and the retention of the interest rate
below its equilibrium, that is, that level which reflects the relative scarcity of
capital, full employment policies are menaced by the danger of over-investment,
which, as we have seen, is the most fundamental cause of crises.
28. Involuntary credit giving occurs also under the gold exchange standard if a
major reserve currency country is faced with a chronic balance of payments
deficit. In this case it necessarily becomes the debtor of surplus countries even
though capital in these countries may be relatively more scarce than in the
deficit country. The United States' balance of payments deficit over the last
years has given rise to such a situation. Proposals to remedy it range from the
creation of a world central bank (R. Triffin) to a return to the gold standard
with or without an increase in the price of gold.
29. "The whole complex of national policies . . . introduces rigidities—from an
international point of view—that limit the possibilities of adjustment to ensure
balance of payments equilibrium without short-term controls over international
trade and payments." Myrdal, G., An International Economy. Problems and
Prospects. 1st edition, New York, Harper, 1956, p. 48.
30. For a detailed analysis of this process, cf. Röpke, W., "Repressed Inflation."
Kykfos, Vol. I, 1947.
31. Quoted from Yale Review, summer, 1933, in Hazlitt, H., The Failure of the
"New Economics." An Analysis of the Keynesian Fallacies. Princeton, Van
Nostrand, 1959, p. 338.
32. Ibid.
33. Keynes, J. M., The General Theory of Employment Interest and Money, p.
348, italics original.
34. Ibid.
35. Lutz, F. A., "Das Problem der internationalen Währungsordnung." In ORDO,
Vol. X ( 1958), pp. 142-43.
36. Myrdal, G., op. cit., p. 48.
37. Röpke, W., International Order and Economic Integration, p. 96.
38. Chatterjee, I. K., Economic Development, Payments Deficit and Payment Re-
striction. Geneva, Droz, 1963, p. 34.
39. Cole, G. D. H., "The Socialists and the Keynesians." Quoted from Socialist
Economics. London, Gollancz, 1950, in Ebenstein, W., op. cit., p. 793. Cole
answers the question: "I do not think it can" (ibid.).
40. When socialism conquers the world, the use assigned by Lenin to gold will be
very much the same as that in More's Utopia. ' Meanwhile, we must save the
gold in the R.S.F.S. . . . , sell it at the highest price, buy goods with it at the
lowest price. When living among wolves, howl like wolves." The Importance
of Gold (1921). Selected Works, Vol. IX, pp. 299-300.
41. "It is a question of definition whether one refers to exchange rates at all, since
these have become mere magnitudes of calculation for the central planning
commission and can be arbitrarily determined and just as arbitrarily changed
by it." Graf, W., op. cit., p. 79.
42. "To drink coffee, I do not need to own a coffee plantation in Brazil, an ocean
steamer, and a coffee roasting plant, though aÛ these means of production
must be used to bring a cup of coffee to my table. Sufficient that others own
these means of production and employ them for me. In the society which
divides labor, no one is the exclusive owner of the means of production either
of the material things or of the personal element, capacity of work. All means
of production render services to everyone who buys or selh on the market."
Mises, L. v., Socialism. An Economic and Sociological Analysis. London, J.
Cape, 1936, p. 41, italics added.
43. Ibid., p. 40.
44. "If we are disinclined here to speak of ownership as shared between consumers
and owners of the means of production, we should have to regard consumers
as the true owners . . . and describe those who are considered as the owners
in the legal sense as administrators of other people's property." Ibid., pp. 41-
42. Mises refers to the following verses of Horace: Si proprium est quod quis
libra mercatus et aere est/quaedam, si credit consultis, mancipat usus/ qui te
pascit ager, tuus est; et viücus Orbì/ cum segetes occat tibi mox frumenta
daturas/ te dominum sentit, das nummos: accipis uvam/ pullos ova, cadum
temeti. Epistol II, 1958-63.
45. Staley, E., Raw MateríaL· in Peace and War. New York, Council of Foreign
Relations, 1937, p. 20.
46. Ibid., p. 36.
47. Fichte's parable—cf. p. 19—could serve as a useful ideological palliative.
48. The principle that strong and wealthy labor movements must help labor in
the more backward areas to rise "has been proclaimed a thousand times. It is
a favorite subject of resolutions of international congresses, where the practi-
cal and immediate is never liked and general principles are the rage. Yet in
practice, the trade unions of the countries with the highest standard of living,
such as the United States, New Zealand, Australia, South Africa (in certain
industries), etc., have always been conspicuous for their coolness in matters
of international solidarity. International solidarity is something always eagerly
invoked by the weak. Hardly more than perfunctory lip-service is generally
paid to it by the strong and by the well-to-do. . . . The gulf between the ab-
stract and the concrete, the ideal and the practical, is wide indeed." Borkenau,
F., Socialism National or International. London, Routledge, 1942, p. 12.
The idea that immigration increases unemployment "is based on the error . . .
that the total sum of productive work to be mastered is of a fixed preestablished
size, a cake, so to speak, from which no one can cut a bigger piece without
another's faring badly. After all, . . . the absolute limit of ¾e total volume of
work to be done is determined by the sum of our wants; in practice, therefore,
it lies in the infinite. . . . The problem of unemployment relates consequently
not to the entire volume, but to the correct composition of production; the
problem is one of equilibrium, not of absolute total volume." Ròpke, W.,
International Order and Economic Integration, p. 143. Therefore, the eco-
nomic structure of the immigration country as well as the type of immigration
are of relevance and it is well conceivable that immigration, by alleviating
bottlenecks in certain fields of occupation, may create complementary jobs for
hitherto unemployed home labor.
49. Ibid., p. 146.
50. Their fallacy is exposed in every textbook on international economics. It is
due to a failure to grasp the substance of the theory of comparative costs.
51. That these restrictions highly encourage monopolistic practices and are there-
fore pressed for by interest groups is no invalidation of our contention that
economic nationalism resulting from basically collectivist policies is at the root
of this development. The close connection between these two phenomena will
be treated in the next chapter.
52. Röpke, W., op. cit., p. 139.
53. Hence, emigration is not only forcefully repressed by socialist governments,
it is indeed often regarded as high treason to be punished by long years of
imprisonment, if not by death.
54. For a detailed analysis, cf. Agad, J., Der politìsche Faktor in den international-
en privaten Kapitalbewegungen. Geneva, Descombes, 1961, 216 p.
55. Staley, E., War and the Private Investor. A Study in the Relations of Inter-
national Politics and International Private Investment. New York, Garden
City, Doubleday, Doran & Co., 1935, p. 15.
56. Whose success in this respect will soon appear in the form of higher bonuses.
CHAPTER IX
ECONOMIC DEVELOPMENT AND THE PROBLEM

OF INTERNATIONAL ECONOMIC ORDER
In Chapter VIII, the major aspects of international economic

order were treated in a general way. But can our judgment in
favor of the liberal economic order and its policy implications
be maintained in a world consisting of regions with widely dif-
fering degrees of economic development? Is it not conceivable
that the collectivist approach, despite its numerous grave disad-
vantages, is more conducive to economic growth than a free
market system?
THE PROBLEM
To answer these questions, we must first be aware of the
fundamental problem of economic "underdevelopment." This
problem lies beyond the veil of statistical data relating to na-
tional per-capita income or to the percentage of the population
employed in agriculture. One must go back to "all the elements
that affect a nation's capacity to produce goods and services;
its natural resource base; the quantity and quality of its labor
force, the amount and kinds of capital available to its industry
and agriculture; and to the institutions, attitudes, and habits
that determine the effectiveness with which all these economic
resources are used."1
The first underdeveloped country was Great Britain. It
could be called this from the moment its inhabitants initiated
the process of capital accumulation and systematically applied
scientific discoveries to production. The particular kind of Eu-
ropean culture and the stage of religious and intellectual eman-
cipation which it had reached made it possible to create "in-
stitutions, attitudes, and habits" favorable to the process of in-
dustrialization. This process had its negative sides, if we re-
member the price which had to be paid for capital formation
within one single country. But the misery of the working popu-
lation which Engels had so stirringly described in his Die Lage
der arbeitenden Klasse in England (1848) gave way, during
the later decades of the nineteenth century, to a rising partici-
pation of labor in the general increase of productivity, trans-
lated into rising real wages. And productivity could even more
rapidly be improved by specialization of production in accord-
ance with international comparative advantage.
When other European countries followed England on her
way to industrialization and there emerged—in North America,
Australia, and New Zealand—new, vast "underdeveloped" areas,
the process of capital accumulation became less painful. A stock
of capital seeking profitable investment opportunities already
existed (and there was nothing to prevent it from being ex-
ported ); the effectiveness of the international division of labor
was increasing, moreover, due to a greater diversification of
supply and demand that was made possible by industrial pro-
duction, the effectiveness of the international division of labor
was increasing.
Thus, the economic starting point of development can be
seen in the existence of primitive and inefficient production
techniques which are usually applied by a predominantly
agrarian population, complemented by a growing awareness of
the possibility of improving these techniques by rationalization
and participation in international trade.
But economic development is not a mere question of capital
accumulation; it is a process showing a close interdependence
with the social and cultural development of a country. Its suc-
cess therefore depends on the population's preparedness not
only to passively accept the deep-going changes of their tradi-
tional way of life associated with the introduction of new pro-
duction methods, but also to actively participate in the move-
ment for modernization and eventually to assume the economic
and political responsibilities created by, and safeguarding the
continuance of, development. As has already been pointed out,
European cultural and social patterns had reached a point at
which the emerging new elites, keen on innovation, could rely
on a general willingness to respond to their call, even though it
had first to be awakened. And, since the overseas settlers be-
longed to the same cultural orbit, the social and human prob-
ECONOMIC DEVELOPMENT 201
lems found a solution that was parallel with those posed by
economic development. At the same time, international eco-
nomic relations were greatly facilitated by the open society
which prevailed in the liberal age.
In the underdeveloped countries of today, the economic
starting point is the same as that which the more advanced
nations were concerned with one and a half centuries ago. The
essential difference, however, lies in the fact that a relatively
small group of Asian, African, and Latin American leaders,
pressing for industrialization is faced with populations still
deeply embedded in their accustomed ways of life; their way
of acting and thinking is under the spell of cultures fundamen-
tally different from that which formed the basis of the original
movement for economic advance. The problem, therefore, is
not only that of modernizing the economy, but, far more im-
portant, that of transforming society to prepare the human
ground for development. That this is a very lengthy process
and stands in striking contrast to the technical possibilities of
economic growth is the crux of the problem.
The economic side of this problem can be summarized thus.
These countries are characterized by a large agricultural over-
population in which marginal productivity may fall to zero.
Consequently the same quantity of food and raw materials may
be produced with less labor, the surplus population being avail-
able for employment in the newly created industrial centers.
A net gain in productivity is thus expected to accrue.
But the problem goes deeper than that. To build up fac-
tories, expand mining, etc., a minimum amount of both over-
head facilities and capital equipment is necessary. Hence, the
few available resources must be devoted to the production of
investment goods while the workers engaged in this produc-
tion must "wait," i.e. content themselves with a low income un-
til the stream of consumption goods eventually begins to flow.
It, therefore, appears at first sight that it is the industrial work-
ers who, by their abstention from consuming the "equivalent"
of what they produce, finance economic progress. Yet, how is
it to be assured that these laborers, who were drawn from the
agricultural districts, will continue to receive the food which
they had previously consumed? In other words: how can the
farmers still engaged in cultivating the soil be prevented from
retaining that part of their produce which need no longer be
shared with those who have left their native village? The an-
swer is simple: the farmers cannot be induced to sell their "sur-
pluses" in the town markets unless they are offered useful manu-
factured goods in exchange. But it is exactly these that are lack-
ing since the tools have yet to be created with which to pro-
duce them. There is little hope of persuading those peasants,
who must get used to the very idea of producing for a market, to
part with goods which they themselves badly need in exchange
for some unknown commodities to be received in a distant fu-
ture. Unless the necessary supplies are either forcibly taken
from them or borrowed abroad, economic development is
doomed to a halt even before it could effectively be started.
The two just-mentioned methods constitute, indeed, the only
real alternatives to economic stagnation in the underdeveloped
countries.
If a country wishes to benefit from foreign capital in the
same way as did, in earlier decades, the United States and
Australia, it must observe the rules of a liberal international eco-
nomic order, that is, aim at a maximum international division
of labor based on the freedom and stability of international legal
andfinancialrelations. To the extent to which it allows govern-
ment intervention to interfere with the capital and commodity
flows set into motion by the autonomous market mechanisms,
the country insulates itself from the world market. The amount
of private capital that will still be forthcoming will, to this ex-
tent, depend less on relative interest rates than on a wider or
narrower range of political considerations.
Chatterjee regards the basic issue between the collectivist
and the liberal approach as "the conflict which lies between
economic development through maximum participation in for-
eign trade, and development which makes foreign trade a re-
sidual, a by-product of home investment plans. The maximi-
zation of the degree of participation in foreign trade means that
the country concerned produces those commodities which it
can produce at a lower comparative cost and exchanges a part
of what it produces for those goods for which its comparative
advantage is smaller. The minimization of the importance of
foreign trade implies that the country is attempting to produce
anything that it is physically able to produce, regardless of cost,
and importing those items which it is not able to produce."2
THE SOCIALIST APPROACH

Marxist theory of economic development focuses on the
capitalist production process. We remember that it is thought
to be the historical role of capitalism to accumulate and revolu-
tionize the means of production until the time is "ripe" for so-
ciety to move to a higher economic order. The claim that eco-
nomic development is to take place under a socialist economic
order could thus be regarded as contrary to Marxist doctrine.
It was Lenin who laid down the policy directives to be fol-
lowed by an already socialistic though still underdeveloped
country. The founder of the world's first socialist state assigned
to the Communist Party and to the central authorities of the
Soviet Union the same role that was formerly assumed by the
capitalists: to accumulate capital. The basic feature of this
policy is known: forced cencentration of resources in heavy in-
dustry, financed by a severe depression of general living stand-
ards. The question of agricultural supplies was "solved" first
by the officially sanctioned pillage of the peasants by the "armed
workers" during the period of War Communism and, after the
interval of the period of New Economic Policy, by forced col-
lectivization, subjecting agricultural production to the central
control of the state.
Most leaders of the Third World today, though openly
opting for the socialist method of industrialization, shrink from
recurring to such flagrant measures. There are two important
factors which enable them seemingly to combine their collec-
tivist predilections with the advantages of an open society.
"Monopoly Capital" and State Planning

There, after all, does exist a Marxist—or rather neo-Marxist
—theory of economic development, which, as we remember,
was advanced by R. Hilferding:
The export of capital has, particularly in the form of industrial and
finance capital, greatly accelerated the upheaval of social conditions and
the drawing of the earth into the orbit of capitalism. Capitalistic de-
velopment did not take place autonomously in each country; together
with capital, the capitalistic conditions of production and exploitation
were also imported and always at their most advanced stage. In the same
way that today a newly arising industry does not develop from handi-
craft techniques to modern giant establishments, but is founded initially
as a capitalistic enterprise, capitalism itself is being imported in its latest
stage into a new country; it therefore exerts its revolutionizing effect with
much greater force and in a much shorter time than was required, for
example, by the capitalistic development of Holland or England.3
Since the most advanced stage is that of "Monopoly Cap-

ital," and since the joint stock company assumes in it the cardinal
role of financing the process of industrialization,4 the policy im-
plications from this theory are now self-evident. To start eco-
nomic development from the bottom by gradually improving
agricultural production techniques, by raising the general cul-
tural level of the population, and by waiting for the sponta-
neous establishment of small, local industries is clearly not in
accordance with the requirements of "historical development."
The only efficient way of catching up with the most advanced
countries as rapidly as possible is seen to lead one through a
peculiar kind of economic order, characterized by a combina-
tion of "Monopoly Capital" and socialist state control.
The "capitalist" side of this order is described by Chatter-
jee: "What has taken hold of the minds . . . of the members of
the restrictionist school, is the Schumpeterian thesis of benefi-
cial effects on economic growth of monopolies. These monop-
olies can often be brought into being, buttressed, and bolstered
by restrictions on trade and payments . . . in addition, these re-
strictions mean that within the country itself potential competi-
tors in a given industry cannot get the necessary foreign ex-
change for building up additional productive capacity. . . . Fur-
thermore, exchange control discourages the entry of foreign
capital and thereby dissuades foreign capitalists from setting up
establishments in competition with domestic firms."5
The advantage of monopolies is seen in their role as "shock
absorbers" whereas the abnormally high profits are justified,
following neo-Marxist doctrine, because they give rise to new
capital formation. But whenever these profits, in the state au-
thorities' judgment, cease to serve the desired purpose, a wel-
come pretext to nationalize these undertakings offers itself.
The socialist side of this development conception is repre-
sented by the central governments planning the structural
transformation of the national economy, centered around the
construction of certain key industries. Admittedly, the price
mechanism is of little avail to guide the authorities' decisions as
to what kind of plants are to be built, where, and with how im-
portant capacities. But, experts assert, there exists a "second
principle" of profitability, which
arises from the fact that large movements of resources within the econ-
omy will have effects which are disproportionately different from mar-
ginal movements. In consequence, the planner must satisfy himself not
only that further marginal movements would serve no useful purpose,
but also that there is nothing to be gained by large movements of re-
sources, amounting to a considerable alteration in the structure of the
economy.8
The economic implications of such a procedure are not

concealed by the same group of experts:
If one is working in terms of large structural readjustments, both cost
and productivity are difficult to measure, and one is left to rely much
more on qualitative judgments which can be checked only by the event
itself.7
Thus, Mises' theory on the impossibility of rational resource

allocation in a centrally planned economy holds good also for a
developing country. Only, it is here even more relevant because
all factors of production—usually with the exception of labor-
are extremely scarce and the price to be paid for faulty invest-
ments falls as a correspondingly heavy burden on an already
poor population.
The collectivist policy of forcibly breaking through the vi-
cious circle of poverty and stagnation is accompanied by an
internal economic policy of low interest rates and relatively high
wages, leading to a distortion of real scarcity relations.8 It is
self-evident that the state-sponsored part of economic develop-
ment demands a highly protectionist trade policy. That these
ambitious plans can, if at all,9 be achieved only by open or re-
pressed inflation (the modern, more disguised forms of rob-
bing the poor, as F. Machlup once characterized this pro-
cedure ) is an accepted part of the collectivist theory of econom-
ic development.10 All these symptoms of economic national-
ism will not fail to lead to a progressive closure of the national
economy, with all of its familiar consequences.
The gap between the government's plan targets and the
means at its disposal now becomes visible in the form of an
acute shortage of foreign exchange, making increasingly severe
quantitative trade restrictions and exchange control "neces-
sary." This gap has received the magic name of "structural bal-
ance of payments disequilibrium" and is nothing other than
Machlup's deficit in the "program balance of payments." The
underlying foreign trade theory is that advanced by F. List:
while it is admitted that considerable benefits can be derived
from the international division of labor according to compara-
tive advantage, this does not apply, it is thought, to the initial
stages of a developing country. The primitive economy is first
to be prepared for the rough winds blowing from the world
market. The government must, in this transitional period, as-
sure "balanced growth" and a favorable development of the
terms of trade.
The fundamental weakness of this theory is the fact that
to the degree to which the internal economy is cut off from the
world market by national planning, the objective criterion for
determining comparative advantage is lost. Even if the govern-
ment atfirsthonestly intended an eventual opening of the econ-
omy, the moment judged appropriate will probably never arrive
since the planned structural changes that are not in accordance
with comparative advantage always need more, not less, protec-
tion, lest the misallocation and even the waste of resources be re-
vealed by international competition. The creation of powerful
interests by the infant industry tariff was already clearly pointed
out by Hilferding. The more the economy is cut off from the
rest of the world, the stronger these interests against interna-
tional competition will become.
The Politicalization of International Capital Movements

This policy has, however, "also destroyed the prerequisites
. . . on which the financing of the economic development of
these countries through the voluntary engagement of Western
capital depends. . . . There thus seems to remain only one way
out: if the source of capital movements based on the free market
cannot even with the best intentions be made to flow into our
countries, then the well of political capital provision must be
tapped; what refuses freely to stream must, under the pres-
sure of diplomatic conferences, propaganda, and more or less
concealed threats, be pumped to the surface even at the risk of
its evaporating and oozing away in that same heat of passions
which had already dried up the source."11
Here, we touch the second aspect of the neo-Marxist theory
of economic development. It is represented by the endeavor
to "free" international capital movements from the element of
exploitation which they allegedly have contained in the past.
Large international capital movements which had developed
entire continents in the past are, in socialist terminology, only
the transfer of value destined to produce surplus value abroad.
This definition has much greater appeal to the minds of power
conscious African and Asian leaders than do individual free-
dom, scarcity prices, and interest rates. It is, therefore, not sur-
prising that development planners have been, to say the least,
indifferent with respect to the effects of their nationalistic pol-
icies on private international capital flows. Their absence was
frequently presented as a fatal, unalterable reality and, more-
over, as additional proof of how little "capitalists" really cared
for the suffering masses of the newly developing continents.
At the same time, however, new sources of capital appeared
which ideological as well as political argumentations had
opened up. Following an old Marxist thesis it was announced
that every international transaction concluded between the citi-
zens of differently developed communities was a disguised act
of exploitation of the poorer by the richer partner. The closer
international economic relations became between these two
kinds of nations, the more scope presented itself for exploita-
tion, a process which was crowned by the taking over of po-
litical power by colonial states. The latter were now, according
to this theory, in a position to derive the full benefit from cap-
italistic development within their countries12 and, in addition,
to feed this development with cheap raw material supplies "tak-
en away" from their overseas territories which were, by such
practices, doomed to eternal poverty and backwardness. Hence,
it was nothing but a rightful claim on the part of the newly de-
veloping independent countries to receive back part or all of
what had been extorted from them.
However, the real picture is far more complex: it also con-
tains impressive achievements by the former colonial powers
for the development of their ancient protectorates. Yet, these
powers, failing to subject the accusations against them to an
honest and objective analysis, frequently seemed to accept these
incriminations and act accordingly. This fact and the fear of
the new countries' being drawn over into the "socialist camp"
account for the continued preparedness of the advanced coun-
tries to grant them large governmental credits and gifts.
But this "political capital formation" has a number of pecu-
liarities. In the first place, voluntary saving is replaced by
forced saving in the form of additional taxes to be paid by the
citizens of the advanced industrial states. These sums are dis-
posed of without a scrupulous investigation into the economic
profitability of the projects in which they are to be invested;
such an inquiry and corresponding control of the progress
achieved would be regarded as an inadmissible interference
with the sovereignty of the receiving country.13
Secondly, there is no guarantee that this intergovernmental
aid will, in its end effect, result in a lasting rise of productivity
in the developing country. The fact that it partly or even wholly
fills the ever-widening gap of the program balance of payments
may only mean that the funds are used to neutralize the mis-
takes and deficiencies of government planning.14 B. R. Shenoy
gives a typical illustration of this: "While the Indian planners
spoke about investments, inflation and government expendi-
tures have swelled the demand for consumption goods of all
kinds."15 This led to a flight or hoarding of private capital and
to the smuggling of gold to which a considerable part of foreign
grants was devoted. Thus, "the problem of such foreign aid
lies in the fact that the expansion of inland capital formation
due to it remains far below its actual volume."16 Interest and
amortization payments therefore become an "unbearable bur-
den for the population if debts are contracted to serve wasteful
purposes. The predominant way of thinking of the Indian
planners seems to consist of taking up additional borrowings
to finance old liabilities."17
"Do the Western countries help the individual citizens in
the underdeveloped countries or do they help the various pro-
socialist governments in order to enable them to act with all
the more power against free entrepreneurship?" asks the Ven-
ezulan economist N. Zuloaga and adds: "In my country today
private capital owned both by residents and foreigners is fleeing
abroad. It does so because it fears socialism . . . and interven-
tionism. At the same time, our government is offered consider-
able aid by foreign governments and international organiza-
tions."18
Thus, the collectivization and therefore politicalization of
economic development leads necessarily also to the politicaliza-
tion of international capital movements. These intergovern-
mental grants either lead to political dependence (as was al-
ready pointed out in the section on international capital move-
ments), or they must be given without economically sound
strings attached to them. Hence, to the extent that political
capital is obtainable abroad, a collectivist economic policy, with
its disregard of relative scarcities and marginal productivity,
can be pursued without imposing on the population the same
hardships that the Soviet Union had imposed in the 1920's
and 1930's. The "only" price to be paid by the citizens is a
stagnant and eventually much slower rise of their living stan-
dards19 than would be possible under a free market system.
THE LIBERAL APPROACH

The first target of liberal criticism of the collectivist con-
ception of economic development is the kind of economic or-
der the latter entails. Enough has been said on its major weak-
nesses so that no repetition is required. Liberals wish to see
government planning and monopoly replaced by a free market
economy, resting on internal and external competition.20
Against the collectivist objective of keeping up a stable, effective
demand corresponding to full employment of labor and re-
sources—which is only possible by being sheltered from external
disequilibrating effects—they set the goal of increasing produc-
tivity and elasticity to adjust to changing market conditions,
even if this involved "friction, losses, and disturbances of equi-
librium."21
Liberals therefore favor a political and economic order also
for the developing countries in which the activities of the state
are limited to the provision of infrastructure,22 the efficient rais-
ing of the educational level of the population, and the setting
up of an institutional framework that is favorable to the mobili-
zation of private initiative and capital formation.23 Investment
funds are to be attracted to the home economy from both in-
ternal and external sources.24 Hence, it is an important function
of government policy to create and maintain a political and
economic climate of stability and confidence. Abstention from
inflationary policies is the foremost requirement, especially also
with regard to the social injustice they involve.
Liberal authors underline the importance of an absence of
direct trade and payments controls: they are therefore referred
to as the "convertibility school." This school emphasizes the
arbitrariness, uncertainty, and clumsiness of centralized deci-
sions which, under a regime of exchange control, determine the
use to be made of a country's foreign exchange. These charac-
teristics and the all-around protective effects of a "nationaliza-
tion of payments" (Röpke) have very unfavorable effects on
economic growth. Furthermore, the obligation to sell for-
eign exchange earnings at a fixed rate below that corresponding
to the real market situation discourages the efforts of exporters
to do business abroad and directs them to the more profitable
home market. Against the collectivist argument that exchange
control provides a valuable instrument of social policy in that
it facilitates the import of basic consumption goods at the ex-
pense of luxuries, the liberals maintain that an unequal dis-
tribution of income will persist as long as human services, es-
pecially managerial and technical skills, are scarce and need a
material incentive to come forth. Thus, the real problem is not
rewarding these services according to their quality and scar-
city, but the danger of dissociating personal income from per-
formance which often occurs in a market form dominated by
monopolies, not to speak of a comprehensively planned econ-
omy. In addition, if the demand for luxuries can no longer be
satisfied by imports, the corresponding purchasing power, un-
less it is taxed away, will reappear on the home market, thereby
directing internal resources into the production of such goods.
This involves higher real costs than if the corresponding im-
ports had not been forbidden. All these consequences can
only be prevented by increasingly comprehensive state
planning.
It is no contradiction, but rather a completion of the liberal
position, if the government is also expected to lay down general
rules and conditions to be observed by foreign investors, rules
which are designed to limit or to eliminate their possibility of
building up power positions. What is important is that these
regulations remain a constant and foreseeable factor in the cal-
culations of capital owners and that they interfere as little as
possible with the economic requirements of the country.25
Liberals also emphasize the fundamental importance of in-
creasing the productivity of agriculture, where climate and soil
conditions permit such a policy, as against a premature state-
sponsored industrialization. It is recognized that the require-
ments for this program are (1) an efficient agrarian reform,
breaking the power of an unproductive feudal aristocracy, and
(2) diffusion of more productive methods of cultivation and of
better tools among the peasants. At the same time, those
branches of primary production are to be encouraged which
offer the best prospects for exports. Manufacturing should start,
as far as possible, from existing forms of production. "The
process of development thus initiated, with its increase in mass
incomes, should naturally result in the rise of individual indus-
tries which, since they cater to specific local needs, can do with-
out crutches."26
But this program, so liberals stress, can only be fruitful if
the more advanced countries—themselves—"open their markets
to the goods produced in the developing areas at adequate and
stable conditions."27 Their egoistic and shortsighted protection-
ism provides water to the mills of the restrictionist school. More-
over, what is gained by the small group employed by or owning
the protected industries in say the United States must be paid
not only by all American consumers in the form of higher in-
ternal prices, but by every individual taxpayer in the form of
millions given away by their government as political capital.
Finally, the convertibility school stresses the necessity of all
foreign aid being accompanied by an effort of the receiving
country itself. This aid is to be concentrated on certain devel-
opment projects that are in harmony with the geographical and
economic requirements of the country. No money must be
given away à fond perdu in the name of a false charity.28 At the
same time, however, "development policy must be freed from
the East-West conflict and is to be regarded as the really central
task of the world for the next fifty years."29

Due to the cumulative nature of controls30 the particular
economic organization of an underdeveloped country at any
one time has no decisive importance. What does matter is the
outlook of the responsible authorities, i.e. their faith in restric-
tions or in convertibility as the most appropriate method of eco-
nomic development.
The latter assures freedom of choice of consumption which,
besides being a democratic postulate, may be regarded as an
important incentive for production. It can be termed a "policy
of honesty" in that emphasis is placed on real costs, real prices,
and real incomes, and that growth does not depend on deceiving
income receivers by only nominally raising wages. It also pro-
motes greater efficiency and flexibility of the economy, allowing
the dynamic element to work itself out without restraint. Fi-
nally, it is closely tied to the general cultural advance of the
population by giving it the necessary time to adjust itself to the
new social patterns and live up to the requirements of a free
society.
Conversely, the restrictionist approach permits a conscious-
ly planned rate of growth and visible results of economic ad-
vance through the concentration of productive resources on
large industrial projects. "It is . . . due to greater predictability
of results of investments in industry and lesser predictability of
agriculture that industry receives more emphasis than agricul-
ture."31 If the results of industrial investments are to be mea-
sured, e.g. by the number of plants constructed in a given year
or even by any quantitative output figure, then this statement
may hold true. As soon as we introduce value considerations,
however, it can be assumed that in most cases the devotion of
resources to improve agricultural cultivation methods is more
productive (though less visible) than their concentration in in-
dustry.
By subjecting consumption to production, there is nothing
to prevent planners from creating sufficient effective demand
to clear the market. But this is possible only at the price of
inflation and restrictive trade policies. Chatterjee observes that
"there are enough imponderables in the economy which cause
one to prefer a bird in the hand to two in the bush—more cer-
tain, but less efficient growth of the planned economy, to the
more efficient but less certain growth of the market economy."32
This attitude is most plausible to those to whom "the urge for
development is irresistible" and who have "no desire to wait
any more,"33 irrespective of what this may imply for the socio-
cultural and political prospects of their countries.
It must thus be admitted that, from the standpoint of one
country, having solely the economic side of development in
mind, one cannot give an unequivocal answer as to the most
appropriate method of growth to be chosen. But when we ap-
proach the same question from the angle of world welfare, it
can no longer be doubted that it is the liberal approach which
is superior to the collectivist. "If the convertibility school is
concerned with the maximization of world income, the restric-
tionist school occupies itself with the maximization of national
income. It poses the question whether from the standpoint of
a given nation a larger share of a smaller world income would
not be bigger than the smaller share of a larger world income."34
But, the gains achieved by the restrictionist school would
only be of a temporary character. The collectivist path to eco-
nomic development presupposes a continued willingness of the
advanced countries to fill the gaps in the program balance of
payments and to make up for at least part of the misallocation
of resources resulting from this kind of policy. But even if
"political capital" can be obtained (which depends to no small
degree on the collectivist inclinations of Western governments),
there is the inescapable fact that the importance of efficiency
considerations increases in the long run so that without an
increasing rate of capital imports a breakdown will in all prob-
ability become inevitable.
Furthermore, the possible economic advantages to be de-
rived from trade and exchange controls dimmish as more and
more countries adopt the same measures. The final picture
would be the replacement of an international economic order
by the game of rope pulling, the consequences of which have
become all too familiar to us. And, as considerations of Staats-
räson gain ground over the mere exchange of commodities at
market prices, the result may be economic warfare, following
its own special laws: "its tactics are aimed at the strategic ob-
jective of undermining the economic foundations of the op-
ponent, of obstructing his economic consolidation and develop-
ment and of hitting thereby indirectly his military power.'"35
NOTES TO CHAPTER IX
1. Ellsworth, P. T., The International Economy. New York & London, Macmillan,
1964, pp. 483-84.
2. Chatterjee, I. K., op. cit., p. 14.
3. Hilferding, R., op. cit., pp. 406-7.
4. See pp. 52-53.
5. Chatterjee, I. K., op. cit., pp. 182-83.
6. United Nations, Measures for the Economic Development of Under-Developed
Countries. Report by a Group of Experts. New York, May 1951, paragraph
149.
7. Ibid., paragraph 194. Cf. also the discussion of Barone's model on pp. 133-35.
8. High wages thus result in a "contrived scarcity" (P. T. Bauer) of labor, leading
to a higher capital intensity than economically justified in these countries. This
effect is, moreover, in contradiction to the goals of full employment which is
naturally subscribed to by all collectivist governments.
9. Once again, the Chinese Great Leap may serve as an illustration. It suffered
frustration not only because of the withdrawal of Soviet advisors, technicians,
and development aid, but mainly because of "human bottlenecks." Whereas
centralized planning is often justified by the absence of private initiative and
the low cultural level of the masses, no attention is given to the problem where
the state is to take from the army of experts and skilled workers indispensable
for the setting up and fulfillment of national plans of industrialization. If the
government refuses to wait until the general social and cultural level has
reached a stage at which a responsible middle class may become the agent of
economic development—a process which can be accelerated by a patient and
well devised policy of education and the demonstration of new methods adapted
to the special conditions of the individual countries—its only alternative is to
adopt force. But even this policy finds its limits in the physical and psychologi-
cal reactions of the population, as was proved by the Chinese experiment. The
premature concentration of capital in large industrial enterprises equipped
with the latest machinery, but with insufficiently qualified personnel, is there-
fore a major factor accounting for the waste of scarce productive resources by
collectivist governments, not to mention the inefficiency and corruptibility of
an all too hastily created bureaucracy.
10. Cf. also Chatterjee, I. K., op. cit., pp. 21-22: "If full utilization of capacity at
any point of time is considered to be a condition of economic growth and if
at the same time it is to be assured that monopolistic profits should be reaped,
there is no escape from a policy which permits demand to run ahead of supply
(supply at any time being full capacity output), nor is there any getting away
from the consequences of such a policy: inflation at home and closure of the
economy. It can he seen that each of the elements involved in the restrictionist
position—an increase in the degree of monopoly, emphasis on employment, pro-
pensity to inflate, emergence of disequilibrium in the balance of payments,
rise of trade and payments restrictions—is partial by itself, but mutually com-
plementary. Taken together, these elements represent a way of development''
Italics added.
11. Röpke, W., "Unentwickelte Lander," ORDO, V (1953), p. 105.
12. I.e. without its "inherent contradictions" which were simply "transferred" to
the colonial areas. The fact that Rosa Luxemburg's theory was shown to be
scientifically untenable by both socialist and liberal economists was no reason
not to appeal to it. And in fact, the psychological crop to be derived from it
is considerable.
13. A typical example was Nasser's attitude toward Western agencies negotiating
the financing of the Assuan project. The first condition the World Bank at-
tached to a loan was an Egyptian guarantee that it was in fact used exclusively
for the construction of the barrage. Secondly, Egypt was to take the obligation
to prevent inflation resulting from the inflow of these large sums. Both demands
were rejected by the Egyptian government because of their "colonialistic"
character and their "interference" with the internal affairs of the country.
14. "The historical irony . . . lies in the fact that thereby the program is executed by
the West to a critical degree in the spirit of the same national planning which
in the national economic policy of the individual underdeveloped countries
creates a national-autarkic socialism and therefore becomes a major obstacle
for the success of a policy of economic development." Röpke, W., loc cit., p. 69.
15. Shenoy, B. R., "Der richtige Weg zu Indiens Fortschritt." In Hunold, A. (ed.),
Entwicklungsländer, Wahn und Wirklichkeit. Erlenbach/Stuttgart, E. Rentsch
Verlag, 1961, p. 151.
16. Ibid., p. 152.
17. Ibid., pp. 153-54.
18. Ibid., pp. 226-27.
19. This statement is not invalidated by the fact that governments may produce
impressive statistical evidence on economic growth. It is not the quantity of
output of heavy industry that matters, but its economic usefulness, i.e. a com-
parison between its costs of production and the corresponding world market
prices.
20. "One thing is certain: the more the country participates in international trade,
the more it finds that those items of national production establish themselves
as exports which can compete price-wise and quality-wise with foreign products
and those items of national consumption which do not meet competition from
domestic products show themselves up as imports." Chatterjee, I. K., op. cit.,
p. 17.
21. Röpke, W., International Order and Economic Integration, p. 182. He con-
tinues: "The actual problem we are faced with here is a dynamic one and will
be the graver, the more sudden and frequent are the changes in competitive
conditions and the more vigorous the resistance offered against adaptation with-
in the individual national economies."
22. Many authors are prepared to admit intergovernmental aid for this purpose.
That this provision requires a careful and extensive planning has been shown by
K. Hesse who devoted a study to the analysis of the contribution of private
firms to economic development during the colonial age. He extensively dis-
cusses the first Ten-Year-Plan for the development of the Congo under Bel-
gian domination as well as the instructive examples provided by the Gezira
scheme and the Managil project in the Sudan. "It is in the continuation of the
performance during the last decades, not in the rupture with it, that a solution
of the new task [i.e. the development of independent states, E. T.] is to be
found," writes the author after having subjected the bright as well as the dark
sides of the intervention of private firms to a scrupulous analysis. Cf. Hesse, K.,
Entwicklungsländer und Entwicklungshilfen an der Wende des Kolonialzeit-
alters. Berlin, Duncker & Humblot, 1962, p. 337.
23. Hesse refers to the Gezira scheme when he writes: "Here as in many other
big development projects of the past one did not stop at making use of 'cheap
colonial labor power,' but labor was combined with machinery. Maybe that
thereby not unimportant sections of the population had to remain outside the
production process; on the other hand, higher output at less cost could more
rapidly be achieved which in turn resulted in increased tax receipts of the ad-
ministration, leading to higher expenditures of general development and social
services. To find in this respect the right measure, not to renounce, on the one
hand, technical progress as a means of economic development, always to create,
on the other, new jobs for manual workers, technical and commercial staff as
well as for government officials—all this can be regarded as one of the most
essential tasks of future development policy which can learn many things from
past experience." Ibid., pp. 347-48.
24. M. Heilperin e.g. attaches decisive importance to internal capital formation
and to a corresponding climate of economic stability based on private initiative.
He indeed sees in private capital formation at home a necessary precondition
for an adequate inflow of foreign capital. Cf. Entwicklungsländer, Wahn und
Wirklichkett, p. 224.
25. "It should now be clear that competition, rise of productivity, monetary dis-
cipline, equilibrium of the balance of payments and convertibility of currencies
form part of another network where one can take all or none of them and
these apparently dissimilar elements can be pieced together to indicate another
line of development." Chatterjee, I. K., op. cit., p. 22.
26. Röpke, W., "Unentwickelte Lander," he. cit., p. 84.
27. Van Sickle, J., "Alte und neue Theorien des wirtschaftlichen Wachstums."
Entwicklungsländer, Wahn und Wirklichkeit, p. 120.
28. "Conscience is a matter for the individual, not for national governments."
Quoted from J. Jewkes in Röpke, W., foe. cit., p. 70. Cf. also Hesse, K., op.
cit., p. 359. A. Rüstow proposed the creation of a "Club of the Respectable
and the Trustworthy" to be constituted by those developing countries which
are determined loyally to honor their obligations toward foreign investors. If
the rules of this Club were strictly applied, its members would find it much
easier to obtain foreign capital and, at that, at much more favorable conditions.
Cf. Entwicklungsländer, Wahn und Wirklichkeit, pp. 217-18. It is interesting
to note that such a "Club" has in fact been constituted by the countries who
signed the Investment Code of the International Bank for Reconstruction and
Development.
29. Scheel, W. W., Verfahren und Formen der Zusammenarbeit mit den Entwick-
lungsìändern. Bonn, 1961, quoted by Hesse, K., op. cit., pp. 17-18.
30. "In practice the signal that the time has come for comprehensive planning is
usually provided by the emergence of shortages. Because of the demands being
made upon the economy, some resource or other becomes acutely scarce, e.g.
labor or food, or foreign exchange, and the symptoms of inflation appear. This
scarce resource may then have to be rationed, and this cannot be done sat-
isfactorily without knowing how important it is in every part of the economy."
Measures for the Economic Development of Under-Devehped Countries, para-
graph 204. It is assumed by the authors of this report that this knowledge can
be gained only by comprehensive planning!
31. Chatterjee, I. K., op. cit., p. 158.
32. Ibid.
33. Ibid.
34. Ibid., italics added.
35. Linder, W., in Neue Zürcher Zeitung, No. 5323, December 9, 1964.
CHAPTER X
THE FUNDAMENTAL PROBLEM OF WORLD

PLANNING; CONCLUSION TO PART II
As a conclusion to Part II, the fundamental problem of

world planning is examined. Our exposition is based on the
threefold answer that has been given by socialists to the cardi-
nal question: who is to make the economic decisions for the
peoples of the world? It is recalled that the following bodies
were envisaged to fulfill this function: (1) international organ-
izations; (2) the authorities of an international federation; and
(3) an internationally oriented vanguard party.
THE INTERNATIONALIST APPROACH: A CRITICAL EXAMINATION

Chapter IV expounded that line of socialist thought which
saw the League of Nations and its affiliated organizations as the
nucleus of future world planning. But the different theories
and proposals put forward were rather confused.
We have seen that the raw materials problem and its "just"
solution received special attention. It was argued that raw ma-
terials are to be "considered as the common property of the
whole world."1 But what is the practical significance of such a
statement? Who is to supply the necessary capital for the open-
ing of mines, the provision of transport material, etc.? Accord-
ing to what criterion are the different "needs" for these com-
modities to be ascertained? Clearly, we are in the midst of the
collectivist economic chaos. The granting of certain raw ma-
terials to one group or nation will automatically result in other
groups or nations receiving less of them. In any case, each
individual unit will "need" more than even the wisest and most
kindly disposed international organization can ever meet. Inter-
national solidarity will therefore give way to international dis-
satisfaction and antagonism.
Then again, there is talk about "regular and ample markets"
and "just prices." What are just prices? If they are to be "fair
to producers," they usually result in restricting demand; if the
consumers' point of view is to prevail, producers may no longer
be able to meet their costs and will curtail production. Thus,
the best a giant conference in which all interest groups are
represented2 could perchance achieve would be to fix raw ma-
terials prices at their equilibrium level: but this is exactly what a
free market does on its own. In all other cases artificial scarcities
or surpluses are bound to arise, calling for the massive, but arbi-
trary intervention of the international authority.
The same is true for international investment planning. If it
is to take place according to "needs," all one can say with cer-
tainty is this: resources will be drawn away from the advanced
areas in order to raise productivity in the economically under-
developed parts of the world. This means, in the most favor-
able of cases, a renunciation of economic growth in the richer
countries from whose citizens, however, the same productive
effort is expected to be maintained. But, since "workers as a
whole have a right to the accumulations of property and knowl-
edge from the past,"3 there would be "hardly a worker in the
'advanced' countries whose real income would not be severely
diminished"4 in order to enable his poorer brethren to catch up
with his living standard.
We have seen in Chapter IX that the backwardness and
poverty of vast territories is not only, and not even mainly, a
technical problem, but essentially an educational and cultural
one. The sacrifice incurred by the more productive workers
would therefore bear no relation to the results achieved in the
backward areas. "Mankind as a whole is still desperately poor:
the abolition of inequality on a world scale, even if it involves
no diminution of world production, would do little to raise the
average. But one may well ask whether the workers of the
advanced countries would stand it."5
It is, under these conditions, extremely improbable that
total output would remain stable, not to speak of its sustaining
its previous rate of growth. On the contrary, it has convinc-
ingly been shown by Hayek6 that a certain degree of economic
inequality, among individuals as well as among nations, is a
powerful and indispensable factor for the expansion of wealth.7
Hence, the time during which the advanced peoples would have
THE FUNDAMENTAL PROBLEM OF WORLD PLANNING 219
to "wait" would cover several generations if not centuries. Rob-
bins therefore rightly asks: "Is not such a system, unless con-
trolled by the most rigid dictatorial methods, continually in dan-
ger of dissolution into antagonistic regional units?"8
The inability of the authors of the "internationalist ap-
proach" to understand value and the functioning of market
mechanisms is also revealed by their monetary theories. Again
we find the idea that a currency system should be so constructed
that its units may be used by planners as the "universal, reliable,
stable, and unchanging measures of length and weight."9 Or it
is implied that the gold standard can give stable value to money
only if national monetary authorities deliberately disregard its
rules, i.e. pursue a policy of economic nationalism! Finally,
Lawley points to the Milhaud plan as a magic formula which
makes money altogether unnecessary.
But of course, Milhaud's clearing system only seemingly
avoids the fundamental problem of international monetary ad-
justment. If his bons d'achat are not to be convertible, we have
ordinary bilateralism which works also without this device.
If, on the other hand, a country is allowed to use its earned bons
for the settlement of its debts in a third country, then the vari-
ous national bons must either be officially defined in terms of
each other, or their price must be left free. In other words, we
have a system of stable or fluctuating exchange rates. If, now,
some countries continuously buy more from the outside world
than they are able to sell to it—because, by definition, these
transactions are not allowed to upset their economic equilibrium
—the price of their bons d'achat will either depreciate with re-
spect to those of other countries or, beyond a certain point, the
creditor countries will be unwilling to accumulate more of these
bons which will be comparable to a "soft" currency. Two possi-
bilities are open to these debtor countries: they can bring their
house in order by reestablishing a direct link between their
national economic policies and the requirements of international
equilibrium, or they can abandon convertibility and resort to
trade controls and bilateralism. The official devaluation of their
bons is no lasting solution if it is not combined with one set of
the just-mentioned measures.
Thus, there exists no loophole by which one could escape
the fundamental choice between a multilateral economic order
on the one hand, resting on the principle of communicating
vessels, i.e. free enterprise and coordinating mechanisms based
on the private ownership of the means of production, and a
system of hermetically closed economic units on the other, be-
tween which economic intercourse is subjected to political con-
trol. This dilemma could only be circumvented by bringing the
whole world under a unified central control. But this would
mean the replacement of international order by international
domination; the world authority would still be faced with those
fundamental economic problems which have formed the main
subject of this study.
But let us return to the "internationalist approach." Besides
those already referred to, it has another basic weakness which,
in fact, dooms the whole literature on this subject to a theoreti-
cal exercise in socialist economics. Since world planning implies
the handing over of economic decision-making from the com-
petence of national to that of international bodies, it cannot
possibly be achieved as long as the majority of national states
is still founded on a liberal economic order, that is, as long as
this decision-making is invested in the individual citizen and
does not, therefore, belong to the public sphere. Governments
can alienate sovereign rights only to the extent to which they
really possess them. This was clearly recognized by the authors
under review who consistently postulated the collectivization
of national economies as a sine qua non for world planning.
THE "EXPLOSIVE EFFECT OF COLLECTIVISM"

Thus, the first step toward a future international socialist
community was conceived as the coexistence of collectivist
states planning their mutual trade and granting each other
"political prices" (Bettelheim). The superiority of the final
goal seemed to be so convincing that no tears were shed as to
the disintegrating effect which these discriminatory trade pol-
icies—and the institution of collectivism itself—were bound to
have on the hitherto existing international order. The latter
was, anyway, along with capitalism itself, doomed to destruc-
tion.
The final goal itself has been described, with minor varia-
tions, by all socialists alike. Most authors considered an inter-
national federation freely entered into by socialist states as the
intermediary stage preceding the eventual fusion of the latter
into a unified world system. Does this theory represent a way
out of that state of group anarchism which we have found to be
typical for a world composed of collectivist states?
Our analysis has shown that this is impossible, at least as far
as force is excluded as a factor to attain the desired goal. This
is so because of the "explosive effect of collectivism" (Röpke):
"On whatever geographical scale the free market economy is
being replaced by collectivism and dirigisme, the fusion of
economic process and government sovereignty will always set
a political and economic barrier between these spheres of com-
mand and the rest of the world. This maximum degree of con-
centration toward the interior will always be at the expense of
disintegration towards the exterior, in the precise sense that
payments and market community (convertibility and multi-
lateralism) is destroyed which made the once-existing genuine
world economy, in spite of everything, appear as a mere geo-
graphical extension of the integration which prevailed within
the national economies. The sphere in which the compulsory
control of the economic process takes place must be identical
with the sovereign political unit where authority enforces its
economic plan. So much the deeper yawns the cleft which
separates this order-cell from the other political monads. In
short: since within the sovereign sphere of command, only a
single plan and not the competition of different regional plans
can be tolerated, the placing of the economy under official con-
trol means an extreme 'concentration of power'—accompanied
by the break-up of the next highest communities."10
This explosive effect becomes already apparent at the lowest
scale: "If, within a nation, a collectivist body is organized on a
regional level, it must disrupt the national body."11 In the same
way, collectivism is incompatible with federalism and regional
or communal self-administration, "since in the case of collec-
tivism from below the lower political bodies (cantons, prov-
inces, states) destroy the central authority and in the case of
collectivism from above, the central authority stifles its mem-
bers."12
Röpke calls the paradox of national socialism the sharp con-
trast which exists between "the internationalistic ideology from
which socialism has taken its beginning" and "the practice of
collectivist foreign economic policy which with compelling
rigor must try to keep away from the national planned economy
all disturbing effects from outside which escape its grasp and to
preserve it in its centrally determined compactness."13 To it
corresponds the paradox of international socialism: since "eco-
nomic planning, which, by its very nature, implies a radical po-
litical direction of the economy, always presupposes a state in
which the threads of the planning and directive force meet, it
can only extend as far as the sovereign political power ex-
tends."14
Thus, economic integration along collectivist lines means, as
we have seen, the handing over of the control over national re-
sources (le droit à la richesse), hitherto exercised by national
governments, to a supranational collectivist state. Some mem-
bers of the different national "new classes" will perhaps rise to
power positions in the central organs of the enlarged state; but
the great majority of them will be degraded to mere order ~re-
ceivers and transmitters from above, just as the hitherto sover-
eign country will sink to a mere province whose economic wel-
fare will depend exclusively upon the judgments of a distant
government, centralized to the utmost. The task of this gov-
ernment will be to equalize living standards and to plan the
economic process according to the requirements of "interna-
tional social justice." We have already seen the disastrous con-
sequences of this policy. It can therefore be concluded that
for once, the interests of the governing circles and the citizens
of each country15 will be identical in firmly resisting the aban-
donment of national economic power to a collectivist superstate.
The wider the difference between the levels of economic
development attained by the various "integrating" countries,
the stronger will be their resistance against fusion. Hence, the
demand for the creation of a collectivist world state on federal
lines must be regarded as Utopian.
WHO WHOM?
Orthodox Marxists will at once concede that nothing can
indeed be expected either from international organizations
(with "bourgeois" majorities), or from "nationalistic," even
though collectivist, governments. The one elementary force
which will be the decisive factor in accomplishing the task set
to it by history is the international working class, united and
led to the final goal by its "conscious expression," the Commu-
nist Party.
In the days prior to World War I, there in fact seemed to
exist a unified international proletariat, symbolized by the Sec-
ond International. Its leaders periodically met to discuss and
elaborate a uniform line of policy for "Social Democracy." And
one of the burning problems was the national question, that
is, the role of sovereign states and the fate of national minorities
in a future socialist order.
Three possible ways were open to a socialist policy of nation-
alities and all three were embodied in a different "theory."
There was, first, the Polish position, represented by Rosa Lux-
emburg, which reduced states and nationalities alike to cultural
and language units and wished to hand over both economic and
political power (the latter was asserted to lose its significance
under socialism!) directly to a world agency.16 Secondly, the
Austrian O. Bauer came out for the effective realization of the
right of self-determination in that he was prepared to grant
cultural as well as economic-political autonomy to whatever
people or local group desired to form an independent state.
Finally, Lenin, faithful to Marxist doctrine, considered national
states, such as they actually existed, as the historically given
and therefore "necessary" political units, the fundament on
which the proletariat was to build its power.
But as soon as this last-mentioned development is admitted
—and this is, as will be recalled, the essence of Marxism—one
can no longer speak of "Social Democracy" as representing the
world proletariat. Instead, there are national parties represent-
ing national working classes. "Socialist internationalism" only
exists to the extent that the leaders of these national movements
succeed in reaching agreement on a unified international policy.
This is exactly what was attempted within the Second Inter-
national; the fundamental antinomy between the national in-
terests of socialist parties and the international solidarity of
all workers did not appear until shortly before the outbreak of
World War I. The German Socialists' voting for the war credits
in the Reichstag brought an end to the illusion of international
socialism in the sense of an overriding community of interests
shared by the world's working classes.
The establishment in Russia of "the first stable Socialist Re-
public in the World" marked the decisive turn in the develop-
ment of socialism from wishful thinking to political reality. This
Republic was not created by the unanimous vote or even a ma-
jority of the Russian population, nor, at that, by the Russian pro-
letariat itself. It was introduced by the Vanguard Party claim-
ing to speak for this proletariat even though the latter had not
yet awakened "to conscious life and struggle" (Lenin). To
bring this about was one of the very tasks of this party. It drew
its justification from historical materialism.
With this political event, "the international obligations of
the working class of Russia" were "coming to the forefront with
particular force."17 They found their embodiment in the Com-
munist International set up in Moscow in 1919. Its aim was the
overthrow of capitalism all over the world and its replacement
by the dictatorship of the proletariat.18 Such are the principles
on which the actions of this body were to be based:
The experience of the victorious dictatorship of the proletariat in
Russia has clearly shown even to those who are unable to think . . . that
absolute centralization and the strictest discipline of the proletariat are
one of the fundamental conditions for victory over the bourgeoisie.19
And: the Communist Party "alone is capable of leading the pro-

letariat in the most ruthless, decisive, and final struggle against
all the forces of capitalism."20
But, since each state has its own, separate communist or-
ganization, the question arises: which of these parties is to lead
the movement, which is to be at the top of the centralized pyra-
mid and is to issue, therefrom, its directives to "the proletariat"?
Or, to put it differently: who is to command and who is to obey?
Lenin stresses the decisive importance of "the correctness of
the political leadership exercised by this vanguard . . . the cor-
rectness of its political strategy and tactics" and thereby decides
this question. Which leadership could be more "correct" and
experienced than the one which had already fought out a vic-
torious revolution and had established the first Socialist Repub-
lic?
Thus, it is clear: it is the Russian proletariat, or rather the
Russian Communist Party, which is to assume the unquestioned
leadership of the world proletariat. International socialism is
revived again, but no longer on the basis of equality among the
different national parties, as manifested in democratic votes.
The Third International was "uncompromisingly hostile to the
social-chauvinist traitors and to the vacillators of the 'Centre'."21
What was to replace democratic equality was the principle of
subordination to the absolute leadership of a national Com-
munist Party.22 But since the same party had identified itself
with the Soviet Russian government, it became increasingly
difficult to distinguish between those policies which were to
promote the international class struggle and those which were to
serve the specific national interests of the U.S.S.R.
After World War II, the development of socialism as a po-
litical reality entered into a new phase. It was characterized
by the establishment of communist regimes in numerous East-
ern European and later also Asian countries. Consequently,
"the question of the relationships between socialist countries,
between workers parties, between democratic movements . . .
has imposed itself with all its force."23 This problem could, for
political as well as psychological reasons, no longer be solved
in the ruthless manner in which Stalin had attended to the
question of national minorities within the Soviet Union itself.
In this new situation, Leninist doctrine provided only two rather
vague statements which were to guide the relations between the
Soviet Union and the newly created socialist states: on the one
hand, "the real interest of a people cannot be . . . , under so-
cialism, in contradiction to the interest of the other peoples";24
on the other, there was to be a "close military and economic alli-
ance" between them, made imperative by the common enemy:
capitalism.
The way in which these formulas were applied in practice
was disclosed in a pamphlet from the pen of M. Djilas (then
still a prominent leader of the Yugoslav Communist Party),
published as an official document of the Yugoslav government
after Stalin's break with this country in 1948. Djilas wrote:
It goes without saying that Lenin could not foresee, in all its details,
the concrete forms which would be assumed by the relationships be-
tween Socialist States. . . . Still less could he foresee that the first coun-
try where the proletariat would seize power would also be the one which
wanted to impose on the new socialist States relationships based on in-
equality. . . . How, for example, could Lenin have imagined that the
U.S.S.R., through the expedient of mixed societies and numerous other
means, would extort super-profits from Rumania, Bulgaria, Hungary, etc.,
and would exploit weak and retarded socialist countries, noisily referring
to all this as "assistance?"25
The Soviet leaders, Djilas continues, refuse to admit differ-

ences in the way to build socialism in each country. Instead,
the government of the U.S.S.R. has passed from the position of interna-
tionalism to that of nationalism. It was the first to introduce into the re-
lationships between socialist States the principles of capitalistic trade
(the dollar as a basis of exchanges among socialist States, and as a prin-
ciple: sell your worst merchandise as dearly as possible, and buy, what is
best, as cheaply as possible), a principle which inevitably, by the very
force of economic laws, results in the realization of super-profits and in the
exploitation of those who are weak and little advanced by those who are
strong and advanced. Such economic relationships serve also as a model
for political relationships; in socialist States, those regimes must be sup-
ported which, for the sake of 'international,' "higher' ideals, agree to the
inequality of rights and to the exploitation of their country. In this way,
docile and vassal governments and countries are created instead of free
and equal socialist countries. . . . The methods of imperialist exploitation
did not fail to engender imperialistic political methods which are well
known to us (calumny, espionage, border provocations, assassination, and
arrests of innocent persons who did not approve of such a "policy" and of
such methods: the control of all State activities of the socialist countries
by the intelligence service of the U.S.S.R., the creation of secret factions
in the various communist parties in order to control the line which they
follow, the assemblies which they hold, and their leaders; black propa-
ganda aimed at the conditions and difficulties of the various countries and
going so far as threatening occupation, the utilization of the international
struggle for peace to intimidate the various socialist countries and workers
parties . . .). It is on this basis that the hypocritical relationships between
the communists of the U.S.S.R. and the communists of the other parties
and even between communists within a same party were formed.26
CONCLUSIONS
This passage, quoted from a then leading Marxist ideologist
speaking for a small socialist country, both proves and illustrates
what has been said in the last paragraph and, in fact, what nec-
essarily follows from this whole analysis. These consequences
do not arise from a particular "maliciousness," to use Marxist
terminology, of the leaders of a dominating power; they assert
themselves because the principle of subordination, politically
as well as economically, is the necessary concomitant of the
collectivist system.
In the meantime, socialist reality has entered a fourth phase
with the rise of Continental China to a second dominant power.
Two "solar systems" are emerging within the socialist camp.
But at the same time, some smaller socialist states make use of
this new constellation by increasing their freedom of action.
They can do so by "autonomously" extending their economic
(and political) relations with capitalist countries. The final out-
come of these developments as well as of the great contest be-
tween the two fundamental conceptions of economic and po-
litical order must as yet be awaited.
NOTES TO CHAPTER X
1. Seep. 73.
2. See p. 74.
3. See p. 77.
4. Robbins, L., Economic PL·nning and International Order. London, Macmillan,
1937, p. 214.
5. Ibid.
6. Hayek, F. A., "Grundtatsachen des Fortschritts." ORDO, IX (1957), pp.
19-42.
7. "If today some nations can rise in a few decades to a standard of material com-
fort which the West needed hundreds, even thousands of years to attain, is it
not evident that their way, far from being made more difficult, was facilitated
by the fact that the West was not compelled to share its material successes
with the rest; that it was not retained, but able to progress far ahead? The
countries of the West are not only wealthier because they have advanced tech-
nical knowledge, but they also have greater advanced technical knowledge be-
cause they are wealthier. And the gratuitous gift of knowledge, for which
the leaders paid dearly, enables the successors to reach the same level with
far fewer sacrifices." Ibid., pp. 32-33.
8. Robbins, L., op. cit., p. 218.
9. See p. 78.
10. Röpke, W., International Order and Economic Integration, p. 98, italics original.
11. Ibid.
12. Ibid., p. 99.
13. Ibid., p. 100.
14. Ibid., p. 105.
15. This applies even to the most backward countries, which, according to socialist
doctrine, would only gain by a fusion. No nationalist development planner, as
we have seen, would agree of his own accord to renounce an autonomous eco-
nomic policy and to place "world welfare" above national welfare.
16. In its essence, Rosa Luxemburg's doctrine is thus identical with that of the
Saint-Simonian school.
17. Lenin, V. I., The Tasks of the Proletariat in Our Revolution (1917). In
Selected Works, Vol. X, p. 3.
18. Cf. Lenin, V. I., The Third International and Its PL·ce in History (1919). Ibid.,
p. 31.
19. Lenin, V. I., One of the Fundamental Conditions for the Success of the Bol-
sheviks. Ibid., pp. 60-61.
20. Lenin, V. I., Theses of the Fundamental Tasks of the Second Congress of the
Communist International (1920). Ibid., p. 165.
21. Lenin, V. I., The Third International and Its PL·ce in History. Ibid., p. 13.
22. This resulted in a split, in most countries, between socialists ("communists")
who were prepared to accept this absolute leadership from Moscow and those
who were not ("constitutional socialists").
23. Djilas, M., Lénine et Us rapports entre états socialistes. Le Livre Yougoslave,
1949, p. 10.
24. Ibid., p. 24.
25. Ibid., p. 18.
26. Ibid., pp. 74-76.
PART III
THE TEST BY PRACTICAL EXPERIENCE
INTRODUCTION
In this concluding part we will examine the reality of collec-

tivist international economic intercourse. It would, of course,
far exceed the scope of this study to deal exhaustively with the
by now very numerous instances of (more or less) centrally
planned economies conducting foreign trade relations. Thus,
we shall set aside the international economic consequences of
western war and postwar planning as well as the day-to-day
problems faced by underdeveloped countries that are organized
along socialist lines. Also enough literature exists on the nature
of German external economic relations during the period of
National Socialism—although no more illuminative example
can be found for studying the intimate connection between col-
lectivism and bilateralism.
We shall focus our attention on the diverse aspects of eco-
nomic cooperation among those countries which claim to have
realized, within their borders, a truly socialist (that is, Marx-
ist/Leninist) economic order and thereby to have laid the
foundation for universal peace, brotherhood, and proletarian
internationalism. It is recalled that Stalin spoke rejoicingly of
the emergence of two parallel world markets as the most signifi-
cant postwar result. Since, up to 1917, there had only been one
international economic order—that based on individual enter-
prise—Stalin's statement clearly implies that the "two separate
world markets" are governed by different and obviously not
intercommunicating principles. What, then, is the basis on
which are founded the economic relationships between the
socialist countries east of the Elbe? What criteria determine the
activities of their organized expression, the Council of Mutual
Economic Aid (abbreviated by its initials C.M.E.A. or referred
to as "Comecon") ?
CHAPTER XI
THE "SOCIALIST WORLD MARKET'
As has been shown in the course of this study, no system of

international economic cooperation can be fully grasped with-
out a thorough understanding of the workings of its constituting
parts, that is, of each internal national economy. We, therefore,
begin with a brief outline of Soviet planning methods; methods
which were also adopted by the Eastern European countries
soon after the Communist parties there arrived at power fol-
lowing the victories of the Red Army in 1945. After a short
historical digression on the development of mutual international
economic intercourse between the C.M.E.A. countries, we will
analyze the fundamental problems connected with this inter-
course. In doing so, we will endeavor to draw on as many East-
ern European sources as possible. Finally, a word will be said
on the effects of the examined problems and policies on East-
West trade.
THE SOVIET SYSTEM OF ECONOMIC PLANNING: A SHORT SURVEY

The following aspects characterize the foundations of Rus-
sia's planned economy, as Lenin had envisaged them:
(1) utmost centralization of economic decision making;
(2) loyal and accurate implementation of this plan by the
masses, which is to be achieved by their awakening to "so-
cialist consciousness";
(3) the proper use of accounting and control in everyday eco-
nomic operations.
These three aspects, in fact, conceal the fundamental and

hitherto unsolved problems of Soviet-type economies. The first
THE "SOCIALIST WORLD MARKET" 233
major difficulty is the organization of a well-oiled, nationwide
machinery that receives, elaborates, and passes on orders and
controls their proper execution at the various subordinate levels.
Secondly, the question arises of how to induce individuals, es-
pecially enterprise managers, to comply with plan prescriptions
(the problem of incentives). Finally, one is faced with the ba-
sic issue regarding the rationality of the entire economic process.
The Main Aspects of Centralized Decision Making and the

Problem of Constructing an Efficient Administrative Hierarchy
The often-repeated cardinal goal of Soviet planning is the
rapid development of the U.S.S.R.'s economy based on the con-
sciously planned growth of her productive forces.1 The Leninist
maxim of building up large-scale industry was, as Stalin saw it,
not a sufficient measure for achieving this purpose:
The core of industrialization, its very basis, consists of the develop-
ment of heavy industry (fuel, metal, etc.), and of the expansion, as a last
resort, of the output of the means of production of our own engineering.2
The priority accorded to the development of heavy indus-

try has repeatedly been reaffirmed as the dominant feature of
Soviet economic policy.3 It reveals a second important aspect
of socialist planning: the drive for autarky.4 Its implication is
clear: the country's economic life is to be separated from that
of the rest of the world; industrialization is to be achieved by
the efforts and privations of the "toiling masses" alone. Further-
more, the promised ultimate end of this industrialization, the
rise of living standards, is to be attained only after the comple-
tion of long and therefore costly roundabout processes of pro-
duction. Hence, these methods require considerably more in-
vestments than if an outright increase in the output of consumer
goods was the goal. However, such methods directly contrib-
ute to the consolidation and expansion of the power of that body
which claims to speak on behalf of the proletariat: the Commu-
nist Party. This body has assumed the exclusive right to dispose
of the nation's riches, that is, of those commodities which are
not consumed in any given period. It is only natural that its
representatives have a strong predilection for steadily raising
the share of investment goods in national income, most particu-
larly of those products which are deemed indispensable for the
"defense capacity of the U.S.S.R." Nevertheless, it is an ever
recurring theme of propaganda that under socialism, "the com-
plete concordance of social requirements with the interests of
the individual toilers and collectives constitutes the most im-
portant propelling force of our economic and social develop-
ment."5
Thus, Soviet-type decision making at the top, based on
Lenin's principle of "democratic centralism," is a relatively sim-
ple affair. It represents, to say it again,
a single system built on the basis of the strictest subordination of lower
units to the direction and control of superior agencies, the decisions of
which are binding.6
It is one will, that of the supreme leader of the Communist

Party, or perhaps, in more recent times, a majority within its
highest ranks, that decides autonomously on the major lines of
national resource use. It is this will which determines the basic
structure of the Soviet economy. Once the basic goals are thus
formulated, the corresponding instructions are passed on to
Gosplan (the U.S.S.R.'s central planning office). This agency
then works out a comprehensive and consistent plan for the na-
tional economy, covering usually seven years.7
But here some of the real problems become apparent. At
this juncture, they are of a twofold character. Soon after 1917,
the leading Party and state officials could not but realize that to
plan and control all of their country's economic activities was a
venture which far exceeded the capacity of their restricted num-
ber. Some of their powers, therefore, had to be delegated to
subordinate agencies. One of the basic and still unsolved prob-
lems is the determination of the proper degree to which eco-
nomic power is to be divided and of the kind of hierarchical
structure which best corresponds to it. "It was through contin-
ued modifications in economic organization, mostly described
by Western authors as a fluctuation between centralization and
decentralization, that the correct organizational form was to be
detected."8 The centralized character of economic decision
making was, of course, not to be impaired by these experiments;
yet, difficulties have kept arising from the subordinate agencies'
attempts to expand their competence at the expense of the cen-
ter.
Earlier, the Soviet planning and control apparatus embraced
a varying number of industrial ministries situated in Moscow.
These ministries exercised their functions through local branch
offices (glavki). In 1957, they were replaced by regional eco-
nomic councils (sovnarkhoz); henceforward, industrial units
were administered by these local authorities independently of
their specific fields of activity. Through this reorganization,
Khrushchev proposed to combat the unfavorable effects of "de-
partmentalism"—only to replace it by a new, no less harmful
phenomenon: "local patriotism."
The second main set of problems is connected with the
transcription of the general economic directives, as issued by
the highest Party and state organs, into concrete plan targets
on every level of fulfillment. The method used is that of phys-
ical planning. On the basis of past statistical information, in-
put norms ("transformation coefficients") are calculated which
provide the data for the establishment of material balances.9
Since the system of equations underlying these quantitative
balances cannot be solved simultaneously, planning begins with
the compilation of balances for materials considered especially
important ("funded" or "centrally planned" goods), and only
gradually extends to all inputs and outputs. As these calcula-
tions are underway, enterprises are expected to communicate
their latest achievements. Theoretically, these figures, properly
elaborated by the intermediary agencies, must reach the central
planning office in time for it to take account of them in the final
version of the plan. In practice, however, this stream of in-
formation becomes obstructed at different levels of the organi-
zational hierarchy so that, at the decisive point in time, Gosplan
disposes only of incomplete statistical data. This fact, along
with the very method of drawing up material balances, results
in disequilibria between supplies and requirements and in the
problem of "secondary effects."10 Under these circumstances,
even the most conscientious planners could not possibly avoid
grave inconsistencies. The actual procedures adopted, most
frequently consisting of the transference of supplies from the
consumption to the investment goods sector, tend, in their ar-
bitrariness, to increase these imbalances. Consequently, the
"planning principle" alone is unable to fulfill even the task of
quantitative allocation and distribution of materials. It is for
this reason that money prices continue to play a major role. This
important problem will presently be treated in greater detail.
But still other difficulties arise from the Soviet planning sys-
tem. Deficient coordination of partial plans is one of them:
The Gosplan department that establishes the plan for the most im-
portant items for sovnarkhoz and the enterprise is not at all interested in
either prime costs or profitability. Ask the head expert of the department
in which firm this or that production can be executed more cheaply. He
has no idea of it. Another department, which is not much concerned with
money values, draws up the gross production plan. A third section, de-
parting from the principle that prime costs are to be lowered continually
and labor productivity is to be raised, plans the targets concerning prime
costs, the number of staff to be employed, and the wage fund. Stocks of
materials and intermediary products are planned by numerous other de-
partments. But there is no Gosplan department responsible for the coor-
dination of these plan tasks.11
Frequent plan changes give additional reasons for com-

plaint:
Constant changes of plans (since the beginning of the year the plan-
ning organs made more than 250 changes affecting the Moscow industry
relative to the volume of production, the items to be produced, and the
supply of commodities) disarrange the normal work of enterprises.12
At the same time, managers and local economic councils are

suffering from an excessive rigidity of plans; they do not possess
the right of altering central prescriptions according to suddenly
arising economic requirements. This difficulty becomes all the
more serious if it is remembered that plans are prepared for a
period of seven years and that the targets are laid down months
or even years before the plan is put into operation.
The Foundations of Soviet Managerial Behavior

We have reached the second nodal point at which, in a cen-
trally planned economy, the orders issued from above are re-
ceived by the lowest units of the pyramid. Establishments are
organized, in the U.S.S.R. on a so-called independent basis:
their output (quantity, quality, and assortment) as well as their
inputs are prescribed by the plan; but the corresponding de-
livery contracts are concluded among the firms themselves at
centrally fixed prices. Payments are made exclusively through
bank accounts held with the local branch of the state bank
which sees to it that they meet the requirements of the plan.13
Each enterprise keeps its own bookkeeping accounts; the dif-
ference between its prime costs and sales prices appears as its
planned profits (or planned loss) to be paid to (or covered by)
the state budget.
The Soviet government, keen on rapid industrial growth,
was not slow to perceive that in order to stimulate individual
effort, it had to introduce a highly differentiated system of
wages and premiums. Besides a basic, but usually insufficient
salary, the administrative personnel of an enterprise receive
bonuses in varying proportions to the fulfillment and overful-
fìllment of the input, output, and profitability plans, the main
stress being laid on the fulfillment of quantitative production
targets. This system of extra rewards provides the decisive pa-
rameter for managerial behavior. Its significance grows in posi-
tive correlation to the deficiencies and even contradictions of
the central plan. What are the practical implications?
Since the premium rises progressively with the rate of over-
fulfillment, thefirmis interested in low plan targets. It will con-
tinually tend to balance the gains to be derived from all too
favorable production results against the risk of the superior au-
thorities' raising, based on this performance, its plan targets
for the next period. As regards its input demands, the enter-
prise, concerned with assuring its plan fulfillment, tends to ask
for more investment and intermediary material allowances than
it actually needs. In doing so, it must take into account, on the
one hand, Gosplan's opposite policy of cutting down input re-
quirements and, on the other, the fact that it will be hard
enough to procure the needed commodities even though their
allocation to the firm has been centrally approved.
Managerial behavior in this respect cannot be fully under-
stood without a fundamental notion of Soviet price policy. Ac-
cording to official theory, "commodity production" (in the
Marxist sense) is retained only in the consumer goods sector.
It was held "that in the sphere of socialist state property the law
of value no longer operated. And since, in essence, we believed
that the prices of production goods were subject to no laws at
a l l . . . , a considerable percentage of them did not even express
prime costs—they were subsidized prices."14
Thus, input prices were (and are) far from reflecting rela-
tive scarcities; they therefore play a very subordinate role in the
enterprises' activities. As the author just quoted observes: "the
material incentives connected with the firm's performance fre-
quently encouraged enterprise activities which were opposed
to the interests of the national economy."15 Since, e.g., produc-
tion goals are often prescribed in quantitative terms, more pre-
miums can be earned by simply increasing the weight of the
goods produced. The consequent scarcity of important ma-
terials throughout the economy and the centrally devised sys-
tem of bonuses which causes enterprises to be interested only
to a very limited extent in plan fulfillment with respect to prof-
itability, quality, and the stipulated date of delivery, time and
again interrupt the smooth functioning of the planned ma-
chinery. In their attempt to counteract these unfavorable ef-
fects, enterprises accumulate hidden reserves and attempt to
control production phases preceding their own. This pheno-
menon also prevails in the Eastern European countries. "The
situation is such," writes the official Hungarian newspaper,
that due to the peculiarities of our price system and the system of stimu-
lation, the advantages accruing to the national economy from specializa-
tion show up as losses for the production enterprises and vice-versa; plant
autarky leads, in the enterprise accounts, to a lowering of prime costs.
According to common sense, however, it should be impossible to com-
pete, as regards costs, with a specialized plant. As things are, it is not
surprising that our enterprises pursue autarky and manufacture every-
thing themselves, down to the screw.16
The same autarkic tendencies were observable, prior to 1957,

in the different ministries which all endeavored, as far as pos-
sible, to extract their own fuel and process their own basic ma-
terials. Khrushchev's reforms were unable to alter this basic
trend in Soviet-type economies, since trade dependence contin-
ues to be a risky affair under conditions referred to in Western
literature as a sellers' market. As long as the deficiencies of cen-
tral planning methods prevail and the managers' "socialist con-
sciousness" falls short of the desired standard, the officials of
economic councils, themselves endeavoring to maximize their
bonuses, cannot be expected to act otherwise with respect to
their regions than did their predecessors with respect to their
branches.
The Problem of Economic Rationality

"Can this be called state planning? This is nothing but
chaos, it is the cheating of the Party and the state!"17 This angry
exclamation was made in Moscow at the 22nd Party Congress in
1961. Something was felt to be fundamentally wrong. What
was it? And who was responsible?
Stalin's economic policy was characterized by the absence
of any theoretical model elaborated for a centrally planned
economy. It was an attempt "to solve theoretical problems by
administrative decrees."18 Nor was economic research encour-
aged or even permitted since this would have necessarily led to
a critical examination of the specific economic structure created
by the almighty dictator.
However, with the growing complexity of the Soviet econ-
omy and the social changes entailed in this development, and
as the practical implications of central planning became more
evident, it was realized that mere accounting on the enterprise
level was not sufficient for ensuring the rationality of economic
conduct. Economists increasingly came to perceive the vital
necessity, also for a socialist economy, of a rational price sys-
tem.
The ensuing debate centered around the problem of what
was to be the proper basis from which to calculate planned
profit and hence to form prices: should it represent a certain
percentage of total prime costs including the input price of ma-
terials purchased by the firm? In such a system, generally
adopted in the Eastern European countries, "of two products of
equal value [always in the Marxist sense, E.T.], that commo-
dity appears to command a higher price which contains more
materials, i.e. which, in its earlier production phases, has passed
through more enterprises. The resulting divergence of price
relations from value relations is economically senseless."19 As
against this method of price determination, orthodox Marxists
come out for planned profits to be computed onto the value
added by each enterprise (i.e. wages and amortization). And
a third group of authors favors the inclusion, into the "price
basis," of some sort of interest.20 Some advocate the introduc-
tion of world market prices, and still others recommend models
based on input-output calculations and mathematical program-
ming to arrive at a price system that is optimal from the plan-
ner's point of view.
Attention is also given to the problem of flexibility versus
stability of prices. An Eastern European author writes: eco-
nomic and technical changes at home and abroad make it nec-
essary "that prices follow as closely as possible those objective
conditions which they are to reflect, i.e. that prices be of maxi-
mum elasticity. But this is only one side of the medal. There
are weighty arguments also for stability.... It is easier to under-
stand and evaluate the information contained in prices, it is
easier to plan, to assign tasks, and to control their execution."21
Prices that are too elastic introduce an element of insecurity
into the planned system; a medium position must therefore be
found: "we aim at stability as long as this is meaningful, and
we are flexible if this is necessary for rational decisions."22
Most of these proposals aim at abolishing the hitherto exist-
ing dual price system, that is, at establishing, through uniform
prices for all sectors of the economy, a direct profitability link
between the production of investment and the production of
consumption goods. Yet, it is affirmed
that even a carefully chosen price basis and a corresponding price system
cannot operate satisfactorily unless it conforms to the planning, control-
ling, etc. system, in short to all the other elements of our economic mech-
anism.23
It can be seen that these price discussions must find their

limit where they touch the foundations of the Soviet economic
system (systemkonstituierender Bereich2*), characterized as it
is by the unrestricted domination of the economy by the Com-
munist Party. Nor is the political principle of the priority
accorded to the development of heavy industry to be subjected
to any criticism (zielkonstituierender Bereich25), although "the
Soviet leadership seems to have recognized that the one-sided
preference of heavy industry has become, at the present stage
of Soviet economic development, an impediment to a high
growth rate of the general economy which continues to be one
of its goals."26 Hence, economic research must be restricted to
the problem of increasing the efficiency of that relatively subor-
dinate sphere of activity (instrumentaler Bereich27) which is
concerned with the execution of the central plan.
However, it lies in the nature of things that economists are
led, by their investigations, beyond the problem of improving
certain efficiency indices:
Even ideally constructed indices give nothing by themselves. It is
not indices that matter, but the system of linking enterprises with the
national economy, the planning methods, the evaluation of and reward
for the performance of productive collectives.28
Whereas J. Libermann wishes to combine the strengthening

of central planning with "decentralized" enterprise activity,
some Polish economists, headed by O. Lange, advocate price
fixing by the state on the basis of marginal costs (i.e. of the
variable production costs of the least efficient producer). There
is even a group demanding "that all commodity prices should
be determined on the market by the interplay of supply and de-
mand which would ensure their proportionality with produc-
tion costs."29 But how would such a system be compatible with
central planning and the particular preferences of the Com-
munist Party? Clearly, the Eastern European economists are
faced with an insoluble dilemma. As to the practical results of
the price discussion, L. Maizenberg summarizes them as fol-
lows:
We have not yet agreed on a method of determining the socially nec-
essary outlays on the production of goods.30
NATIONAL PLANNING, INTERNATIONAL SOLIDARITY

AND THE COUNCIL OF MUTUAL ECONOMIC AID
To what extent does Stalin's statement31 on the nature of
the socialist world market correspond with the domestic eco-
nomic characteristics created by himself and his followers? In
this section, we confine ourselves to describing briefly the evo-
lution of foreign trade relations between Comecon countries
and to recording some general observations made by Eastern
European authors concerning this evolution. In the next sec-
tion, the specific problems connected with the international eco-
nomic intercourse of centrally planned economies will be dis-
cussed.
The Initial Years Characterized by an Autarkic

Industrial Development within Each Country
After the Russian victories in Eastern Europe in 1945, the
Communist parties in this area prepared the ground for taking
over full power at the appropriate moment. By the late 1940's,
they were firmly established in the government of each "peo-
ple's democracy," and it seemed only natural to their leaders
to look to the first socialist power of the world for guidance and
help in building up a socialist economy in their own countries.32
This meant a policy of forced industrialization with the
emphasis placed on the development of heavy industry.33 Yet,
the small, predominantly agrarian countries failed to dispose of
the vast natural resources on which the Soviet government
could rely. This policy, which aimed at the rapid development
of nearly all branches of production in all countries, without
considering their comparative advantage or any other criterion
of economic rationality, left little scope for extensive interna-
tional exchange. Moreover, the inherent rigidities of domestic
planning soon appearing also in these countries, accompanied
by a general shortage of the same, essential commodities all
over the "socialist camp," increased the party officials' prefer-
ence for home resources.
By the adoption of Soviet rules of industrialization, the East-
ern European economies were closely tied to that of the U.S.S.R.
which became both their principal supplier of raw materials
and their chief "customer." "The Soviet objective of more
energy and more machinery seems to have been little more
than the amassing of goods needed for reinvestment and de-
fense. If there was further rationalization of duplicating this
pattern, it was doubtless that eventual exports of these products
to the U.S.S.R. would contribute to its cycle of accumulation.
Shipments of primary materials were less in demand because
the Soviet endowments of minerals (other than fuel), and of
manpower for their extraction, were considered adequate, and
because no food imports were required by the Soviet consump-
tion plans."34
The serious disproportionalities resulting from this policy
had disastrous consequences on the internal economies of each
country affected; consequences which, a few years later, were
depicted in most vivid colors by the Communist spokesmen
themselves. Must, therefore, the foundation of the Council of
Mutual Economic Aid in 1949 not be regarded as the expres-
sion of the Communist party's determination to place the in-
ternational economic intercourse of their countries on foun-
dations more akin to proletarian internationalism? When look-
ing at the first communique with its stress on national sover-
eignty and equality, one is tempted to answer this question in
the affirmative. The impartial observer, familiar with the gen-
eral facts and trends of economic cooperation on both sides of
the Iron Curtain, however, will be surprised to read, in the same
declaration, about "the dictatorship of the Marshall Plan" and
its alleged disrespect of national sovereignty and national eco-
nomic interests. Could it not be that Moscow, concerned about
the success of the Organization of European Economic Coop-
eration and the attraction that this body might exercise on the
Eastern European countries, was creating new institutional ties
by which to attach these states more closely to its own orbit?
Considering the international tensions prevailing at that time, I.
Ágoston concluded "that the creation of the Council of Mutual
Economic Aid was motivated more by political than by eco-
nomic reasons."35 As to the emphasis on sovereignty, "the Soviet
government did not then see this formula as a potential obstacle
to group action. In its relations with Comecon governments it
was de facto as much at the head of a centralist administration
as de jure within its own frontiers. Inside the U.S.S.R., the exer-
cise of Union-Republican sovereignty in any restrictive or pre-
emptive sense was held to be impossible."36
Until 1954, intra-bloc economic relations remained sub-
stantially unchanged. Each country was anxious to fulfill its
"trade" obligations vis-à-vis the Soviet Union;37 but such bi-
lateral treaties as existed between the people's democracies
themselves were only partially executed. Under an economic
system where all governments were in bad need of the same
materials and products and where trade dependence could
make things only worse, it was considered safest to stick to one's
own resources—no matter how high the costs for such a policy
might be in terms of general welfare. "The theoretical justifi-
cation of national autarky in the socialist economic system was
based on the idea that the combination of the Marxian theory
of labor value with the fundamental law of socialism: propor-
tional and planned development which necessarily implies in-
dustrialization, was only possible within the framework of a
8
closed economy.""38
Attempts at Closer Cooperation within Comecon by Plan

Coordination
After Stalin's death, numerous facts and problems hitherto
ignored made their pressing appearance. The internal eco-
nomic situation39 in each people's democracy had deteriorated
to a point where the Communist parties saw themselves com-
pelled to abandon, for a short interval to be sure, the forced
development of heavy industry. The economic senselessness
of national autarky became evident to everyone: it was to be
replaced by a policy aiming at the autarky of the whole
C.M.E.A. group. What form was this new socialist international
division of labor to assume?
Obviously, it was to be strictly planned. But a choice had
to be made between the two fundamental alternatives: either
the whole area was henceforward to be governed by one single
plan, or economic sovereignty was to be retained and national
plans correspondingly "harmonized" by mutual negotiations
within Comecon. The second alternative was adopted, the
method of "multilateral plan coordination," described by R.
Noetel as follows:
"Multilateral cooperation within this group means unani-
mous decisions of the member states directly interested in all
matters of coordination concerning production and foreign trade
plans for one year, five years, or fifteen years, i.e. the considera-
tion of each country's plans, their possibilities of specialization
and large-scale production, their natural resources and, in prin-
ciple, their production costs. It means the subsequent incor-
poration of these unanimous decisions into the national plans of
the same duration with respect to production and commerce
and, finally, it means commercial agreements concluded be-
tween governments and commercial arrangements on the en-
terprise level within a framework always restricted to pairs of
member states."*0
From 1956 onward, it was decided, as a reaction to the suc-
cessful establishment of the Common Market, to strengthen the
Council of Mutual Economic Aid by the creation of numerous
specialized subagencies. These subagencies sometimes suc-
ceeded in reducing waste by distributing productive tasks ac-
cording to excessive capacities already in existence, or by rec-
ommending specialization in certain types of products, thereby
furthering large-scale production. However, whenever these
recommendations entailed deep-going modifications in the eco-
nomic structure of member countries (an effect which became
unavoidable in view of the very similar internal economic set-
ups inherited from the Stalin era), they lost much of their ap-
peal. This is not surprising since these changes involved either
(1) new investments, the funds for which a planning office
could only raise by withdrawing them from other uses esti-
mated at least as important from the national point of view,
(2) the conversion of enterprises to new production programs
(a measure fiercely resisted by the managers), or (3) the out-
right scrapping of plants, the erection of which had cost heavy
sacrifices to the national economy.
In addition, national plans can more easily be coordinated
in theory than in practice. The following passage, quoted again
from the official Hungarian party newspaper, gives an idea of
the actual difficulties involved:
We have just elaborated our development plan for 20 years for metal-
lurgical industry. Since the consumer industries failed to communicate
to us any information regarding their future requirements, we were
obliged to base ourselves, when preparing the 20-year plan, on the earlier
consumption trends of the industries of transformation as well as on the
data of world statistics. It is self-evident that this procedure contains
numerous sources of error. It would be urgent to undertake a systematic
study of the national economy's requirements in view of the fact that in-
vestments in metallurgical industry and the evolution of this branch are,
for a long period, determining the production possibilities of the me-
chanical industry.41
It is clear that these defects must have serious consequences

when it comes to the fulfillment of international agreements
based on these long-term plans. "If the other member countries
have, in their turn, drawn up their plans with error margins of
similar dimensions—and chances are high that this be the case
—the practical value of the international coordination of these
plans, as considered from their fulfillment side, must be negli-
gible."42
Furthermore, despite the progress made in the appreciation
of international trade, there was no intention of casting over-
board the "fundamental economic law of socialism." Thus, the
Eastern European Communist parties, assembled in Moscow
in 1958, issued a communique43 demanding the rapid develop-
ment of production of all raw and basic industrial materials in
all member countries, without regard to costs. Similarly, the
Basic Principles of Comecon, published in 1962, states that in-
ternational plan coordination must combine
the socialization of production with the complex (diversified) develop-
ment of each member country in order to assure in it the most rational
utilization of economic and natural resources, including labor reserves.44
Special stress is being laid on the separate development, in each

country, of the mechanical, and more recently also of the chem-
ical, industries. Hence, inter-product specialization between
Comecon members has made relatively little progress; inter-
national cooperation is usually restricted to the exchange of
complementary commodities within the same branch and raw
materials not (or not sufficiently) available on a country's own
territory.45
The U.S.S.R.'s own attitude was, for once, little suited to
serve as a model for the smaller C.M.E.A. states' economic
policy. "The Soviet Union would commit its exports under
planned trade, but reserved to itself the production of a full
profile of outputs. The attitude that Comecon was something
essentially for the other parties was tacitly reflected in the
press."46 At the same time, however, it continued to hold its
key position in the smaller Eastern European countries' foreign
trade. "When one refers to the cooperation perspectives within
C.M.E.A. in the fields of petroleum, cotton, and others, one con-
tinues, as a matter of fact, to speak of cooperation taking place
mainly between the Soviet Union as supplier and the other
4
countries as buyers.""47
Soviet Proposals for a Central Comecon Planning Agency

In 1962, Nikita Khrushchev implied in an article a possi-
ble reversal of Soviet autarkic policy:
International specialization is advantageous not only to small coun-
tries, but also to such large states as the Soviet Union. . . . The Soviet
Union is even prepared to reduce its output of some kinds of manufac-
tures if it proves more expedient to produce them in other C.M.E.A. coun-
tries.48
This concession to socialist international division of labor

was, however, linked with the proposal that the Council of
Mutual Economic Aid should establish "a unified planning or-
gan, empowered to compile common plans and to decide or-
ganizational matters."49 The same subject was also discussed
by International Affairs (Moscow) exactly at the time when the
Khrushchev article was published:
The economic laws inherent in Socialism rule out any development
of the Socialist countries as a mosaic, as tight, separate national entities.
Already, the resources at the disposal of the Socialist countries must be
used in the most rational way, a fact which underlies the coordination
of their long-term national economic plans, itself an important step to-
ward the consolidation of the world Socialist system of economy into a
single whole. . . . As their respective economic levels even off and the
economic barriers between them are erased, increasing importance will
attach to the rational planned distribution of means and resources in the
common interest.50
And the author concludes that, from 1970 onward,

there will be a much greater tendency to draw up a single national-eco-
nomic plan for the whole system.51
Underlying these reform plans was the argument that the

immobility of national productive resources can be overcome
only by withdrawing them from the economic sovereignty of
the member states and placing them under a "higher" form of
"international" ownership. Ágoston comments: "According to
the Soviet conception, the common plan signifies at the same
time a federation among states. In such an event, the fate of
the people's democracies could well resemble what the federal
states or economic regions are at present in the U.S.S.R. and
there would no longer be question of international collaboration
or integration. The entire problem would become the internal
affair of a supranational state."52
Despite official propaganda assertions, however, national
and bloc interests do not converge. As an Hungarian author
expressed it:
The main problem consists of the fact that national interests and the
economic conceptions of each country fail automatically to coincide with
the interests of the rest. In fact, due to differences in the levels of de-
velopment inherited from capitalism, the contradiction between national
and common interests almost necessarily appears.53
Here we touch upon the crucial point of a dispute which

was conducted "between those who sought maximum efficiency
within the group, thus largely concentrating output on existing
producers, and those—notably Rumania—who would postpone
that aim until all members had reached roughly similar levels
of industrialization."54 The theory advanced by an East German
author to the effect that "active industrialization," i.e. the devel-
opment of heavy industry, was to be reserved to countries dis-
posing of the necessary economic prerequisites for such a policy,
whereas the others should raise labor productivity through the
expansion of agriculture ("passive industrialization"), was re-
jected by the latter group as un-Marxist.
But the "gradual removal of historical differences in the eco-
nomic development levels of socialist countries," one of the
C.M.E.A. aims laid down in the Basic Principles, cannot be
efficiently and rapidly achieved unless the relatively richer
countries place capital at the disposal of their less advanced
brother-nations. Yet, as we have already seen, no socialist coun-
try has any resources to spare, and no affirmation of proletarian
internationalism can make up for or alter this fundamental fea-
ture. Hence, the less developed nations in the socialist bloc
must basically rely on their own resources, a practice openly
approved by the Basic Principles. This circumstance certainly
does not hasten the equalization of development levels. It is
these countries which, for good reasons, offer the most severe
resistance against any attempt to cut short this vicious circle by
supranational planning. Thus, a Rumanian economic journal
replied to a Moscow professor having suggested
a detailed study of the location of the new big industrial projects in the
lower Danube region, bearing in mind the interests of the whole of the
world socialist economy as well as the most efficient development of the
entire territorial production complex of the lower Danube55
as follows:
Is it necessary again to remind the author that two-thirds of the ter-
ritory to which he refers is an integral part of the territory of the Ru-
manian People's Republic, an independent and sovereign socialist state?
On this territory nobody has anything to study, neither in detail, nor in
lesser detail, without authorization from the Rumanian government, for
both the efficient use of resources and the location of objectives, as well
as any other problems, big or small, are of the exclusive competence of
the Rumanian government and people. The Rumanian regions in the
"district" of the lower Danube are developing within the framework of,
and according to, the interests of Rumania's national economy and this is
the sole way in which their resources may serve the interests of strength-
ening socialism as a world system, interests to which schemes of the
kind we are now discussing cannot but cause serious prejudice. . . . The
more projects of this kind are made in the name of deepening economic
cooperation between member countries of the Council of Mutual Eco-
nomic Assistance, the less public opinion will understand the relation
between these proposals and the basic principles on which C.M.E.A. is
founded.56
The same journal takes a stand against the "possibility and

utility of the seasonal and permanent migration of the popula-
tion between various socialist countries"57 by asserting that
This notion of the international "migration" of the population is in-
compatible with socialism.58
To conclude, the Rumanian and other Eastern European

countries' successful defense of their national and economic sov-
ereignty led to a tacit abandonment of Khrushchev's proposals
for a Comecon planning agency in 1963, a victory which can
only be understood within the context of the sharpening Sino-
Soviet dispute. The return to the coordination of long-term eco-
nomic plans as "the basic method of operation of the C.M.E.A.,"
however, meant the continuance of resource immobility and of
the set of unsolved problems relative to international specializa-
tion within the socialist camp.
The "Dialectical" Contradiction between the International

Character of Socialist Production and the National
Ownership of the Means of Production
The struggle between Eastern European nationalism and
what may be called Soviet internationalism became a funda-
mental reality of "socialist cooperation," a reality which neither
the organs of Comecon, nor even the spokesmen of the different
Communist parties themselves, could pass over any longer in
silence. Though the underlying problems are viewed, as is to be
expected, from the tenets of dialectical materialism, it is not
without interest to quote some recent passages on this subject.
"The socialist economy" writes a leading Soviet expert on
Comecon affairs,
is the result of the interaction of two progressive tendencies: in the first
place the tendency of strengthening its national economy, its indepen-
dence and sovereignty, and secondly the tendency toward an increasing
rapproachment of the socialist countries, toward their cooperation of pro-
duction and toward a mutual exchange of their experiences59 in the
building of socialism. . . . However, overestimation of one side of this
twofold process and underestimation of the other creates serious difficul-
ties for the development of cooperation between socialist countries.60
An Hungarian author comments:

In the present phase of development of the socialist world economy,
increasingly extensive international economic relations are conducted by
historically conditioned national economies which are characterized by a
separate ownership of the means of production and by socialist economic
planning; they determine, independently and according to their own esti-
mates, the use to be made of the natural and economic resources in their
ownership as well as of the results of their economic efforts. . . . The
separateness of ownership and the national economic objectives founded
on national sovereignty do not coincide in all cases with the objective re-
quirements of planned cooperation arising from their mutual economic
dependence and from their interlaced plans of reproduction.61
And T. Kiss, the author of an Hungarian textbook on the

Council of Mutual Economic Aid, speaks of a ("nonantagonis-
tic" to be sure)
contradiction between the internationalization of production and the
state character of economic pL·nning.62
How is this contradiction to be resolved? Most authors can

offer nothing more precise than the statement that state plan-
ners must strike a "fair" balance between their own national in-
terests and a C.M.E.A. optimum based on the development re-
quirements of the whole bloc.
But this dialectic interaction between nationalism and in-
ternationalism received a rather wide interpretation at the
Rumanian Party Congress in July, 1965. E. Bodnaras pointed
out that
the socialist order warrants the most suitable conditions for the all-around
development of the nation, the display of its creative power and capa-
cities, the socialist state being the main guarantor of this development.
The nation as an historical formation is far from being out-dated; it is
only in socialism that it finds the preconditions to fully assert and main-
tain itself, the precondition to make use of its entire capacity. The in-
dependence and sovereignty of the nation and of the socialist state are
thus objectively founded postulates.63
And N. Ceausescu, the First Secretary of the Rumanian Com-

munist Party, added:
The ways and means by which each party solves its tasks cannot be
the subject of discussions. It is the exclusive right of each party to
elaborate independently its political line as well as the forms and methods
of its activity and to determine the objectives by creatively applying the
general truths to the concrete conditions of its country, and contributing
in this way to the enrichment of the stock of common revolutionary ideas
and of the common revolutionary experiences.64
It thus becomes clear that behind the "nonantagonistic con-

tradiction" between socialist nationalism and internationalism
lurks the basic antinomy between national autarky and interna-
tional central planning. The stand which each author—or, at
that, each country—takes in this vital matter is revealed by the
emphasis given to one or the other side of the "twofold process."
As to those who still seem sincerely to believe in the "balanced"
approach, one of their representatives summarizes the actual
difficulties involved as follows:
In practice, the creation of productive structures which are of opti-
mal efficiency with respect to the community can only be achieved if the
relative advantages and disadvantages arising from such structural modi-
fications can be satisfactorily balanced or compensated for each partici-
pant. .. . We must, above all, mention the problem that the organizational
state (the cooperational mechanism of the socialist world economy and
even its backbone, the C.M.E.A.) is not sufficiently developed to measure
exactly in value terms (efficiency) the actual effects of the satisfaction
of the different requirements from the viewpoint of the member countries
as a whole. Without this, however, it is impossible to ascertain either the
real extent of relative advantages and disadvantages arising from coop-
eration, or their equalization, nor can the absolute amount of secondary
results be calculated and duly distributed. . . . This circumstance not only
restricts the conscious implementation of the requirements of planned and
proportional development in the economic intercourse of socialist coun-
tries, but also prevents the recognition of the objective character of these
requirements.85
The author is touching here the cardinal problems of so-

cialist international economic cooperation which will now be
examined in more detail.
T H E BASIC PROBLEMS OF SOCIALIST INTERNATIONAL

ECONOMIC INTERCOURSE
"While C.M.E.A. was busy with production specialization,
it has failed to elaborate the concrete principles of socialist in-
ternational division of labor."68 It is thus openly admitted that
the allocation of productive tasks to member countries by Come-
con, notwithstanding the fact that it was based on "multilateral
agreement," took place essentially according to arbitrary lines.
Admittedly, even within a national economy, planners do not
"see clearly"67 when prescribing goals and allocation resources.
All the problems and difficulties described in the first section
of this chapter make themselves felt even more pressingly in
international economic relations.
What then are the pertinent problems? They refer to three
major issues relevant to foreign trade operations. In the first
place, we must again deal with organizational matters, now con-
cerning the domestic foreign trade apparatus of each country.
Secondly, the central theme of value and efficiency will occupy
us again. Thirdly, the problems connected with international
payments will be analyzed.
The Effects of the Foreign Trade "Mechanism"

Operating in Each C.M.E.A. Country
The Hungarian situation, not very different from that pre-
vailing in the other C.M.E.A. countries, is characterized by A.
Rába in his article on "Export and Economic Mechanism"88 as
follows:
"The problem . . . consists of the fact that production and
realization are economically separated. . . . No economic con-
tact comes into being between the producing enterprise and the
foreign customer and this is not only because of the interven-
tion of the foreign trade company, but also because of the inter-
ference of the whole system of central instructions. This system
is not built on material incentives channeling the performances
of both the foreign trade and the producing enterprise . . . into
a favorable direction.. ..
"In our country . . . , the producing enterprise's goal of ac-
tivity does not point toward realization and the satisfaction of
needs, but toward production itself, more exactly .. . toward the
fulfillment of the directives which prescribe bindingly and mi-
nutely the quantity to be produced. But not only is the volume
of production (and in many cases also the assortment and qual-
ity ) fixed for the enterprise; the rhythm of production and com-
modity prices are also centrally determined. . . . The commodity
listed in the export plan goes to the foreign trade enterprise.
Just as the producing enterprise is obliged to produce the goods
prescribed by the plan, so the foreign trade enterprise is under
obligation to accept them. The producing enterprise is thus not
basically concerned with selling problems: its assignment is pro-
duction, the selling being done by the foreign trade enterprise.
"This concatenation of directives and prescriptions strongly
limits the enterprises' scope of action. Its consequences are det-
rimental from numerous points of view:
a) The industrial enterprise aims at drawing up and having
accepted a production program which, given its produc-
tion capacities, it can fulfill with minimum effort. It
therefore refuses to disclose all its reserves to the plan-
ning authorities and endeavors to achieve 'security,' all
the more so since the fulfillment of its plans depends on
numerous factors (allocation of materials, the amount of
foreign exchange available for imports, deliveries from
cooperating partners, quality of purchased inputs)
which are outside its control. As a result of these un-
certainties—and since our entire economic system neither
encourages nor even enables enterprises to take risks—
the enterprises' plan suggestions as regards quantity, as-
sortment, etc., fall behind the optimum and fail suffi-
ciently to reflect market demand as communicated to
them by the foreign trade companies. The final plan
targets are the result of a compromise between the loose'
(in the above sense) enterprise plan suggestions and the
'stretching' demands of the central planning authorities.
b) Industrial enterprises 'fight' for obtaining more input al-
locations than absolutely necessary. . . . This tendency
probably—and it has been proved in many cases—leads
to the uneconomic use of scarce productive resources.
c) Whereas an enterprise producing export goods is shel-
tered by the greater or lesser security conferred on it by
the 'sellers' market' prevailing at home, the foreign trade
enterprise has to face the uncertainties of the 'buyers'
market' abroad. The foreign trade enterprise . . . itself
plans cautiously since, on the one hand, it is at the mercy
of the producing enterprise and since, on the other, it at-
tempts to protect itself from the risks connected with
market fluctuations and because it reckons with the
'stretching' demands of the central planning authorities.
d) As a result of these circumstances, planned production
for foreign trade is generally unable to take into due con-
sideration the qualitative, technical, etc., requirements
of the various markets. The risk of losing a market fails
to affect—apart from exceptional cases—the producing
enterprises. And as regards the foreign trade enterprises,
they are exclusively concerned with the fulfillment of
their own plan indices and are therefore frequently in-
different to the real conditions of production.
e) Finally, it must be mentioned that our system of eco-
nomic direction breaks down export activities into short
periods covering one year. . . . This rigid subdivision in-
terrupts the continuance of economic activity. Enter-
prises are obliged to adjust their delivery contracts to the
one-year plans. Input orders must be given in advance
of the plan (even if orders from the foreign customer
have not come in yet) because later on the plants run the
risk of no longer receiving their raw materials in time.
Furthermore, these one-year arrangements . . . also re-
strict market and technical research, activities the results
of which become effective . . . only in the long run."
All these detrimental effects, Rába continues, are aggra-

vated by the separation of internal prices from those prevailing
outside the national economy. "The producer delivers an article
made for export to the foreign trade enterprise at essentially the
same (fixed) price which he would have received from a home
user. But since export production generally requires more effort
at the same prices, the producing enterprise often feels exports
to be burdensome. .. . The foreign sales price is independent of
the home price received by the producer: the system of price
equalization causes the latter to be indifferent to the effects of
the obtainable foreign exchange price. This provides also one
of the elements which contribute to the 'sheltering' of the pro-
ducer from the demand conditions and value judgments pre-
vailing on the foreign market."69
The price equalization account is credited for all net gains in
foreign transactions and is conversely charged for net losses,
foreign prices being converted at the official exchange rate.
Usually, the account shows a deficit which is financed by the
state budget. The extent to which foreign trade has been sub-
sidized by the state (and hence lastly by the consumers) is il-
lustrated by the following figures for East Germany:. 770
Price Equalization Account—Annual Deficits

(billions of Ost Mark)
1950 0.960
1951 1.521
1952 1.428
1953 2.029
1954 3.548
1955 3.822
1956 3.918
A further difficulty lies in the slow functioning of the for-
eign trade apparatus itself. New ideas and proposals referring
to changed market requirements must be submitted for approval
to no less than three government agencies: the competent com-
mission of the foreign trade monopoly; the national planning
bureau; and the Ministry of Finance. By the time the docu-
ment is returned, duly signed and approved, the market has
probably changed and calls for new adjustments.
Reform proposals, therefore, necessarily focus on the prob-
lem of how to integrate organically the nation's foreign trade ac-
tivities within the framework of the general plan. They are al-
most inevitably reduced to the demand for a greater indepen-
dence of both the producing and the foreign trade enterprises.
Some interesting innovations were recently introduced in
Czechoslovakia: their goal is a closer and branch-wide coopera-
tion between the two. The system of premiums is changed so as
to interest the producing enterprises in foreign trade results.-
The latter are even to participate, in proportion to their perform-
ance, in the foreign exchange earnings (not converted into na-
tional currency!) of their products. At a later stage of this re-
form it is intended to establish a direct connection between for-
eign and home prices.71 The results of these measures are as yet
to be felt.
In some other Eastern European countries, certain produc-
ing enterprises possess the "right of autonomous exportation,"
but only with respect to the capitalist market. The "indepen-
dent" delivery contracts concluded by them are subject to the
approval of the foreign trade monopoly and no foreign exchange
funds are placed at their disposal.
The Need for an Objective Measure of Profitability

for International Economic Transactions
We now come to the crucial issue of socialist international
economic cooperation: the problem concerning the economic
rationality of foreign trade transactions. "International eco-
nomic relations between socialist states mainly materialize in
the form of an exchange of commodities."72 What commodi-
ties are to be exchanged? What lines of production are to be
"given" for specialization to what countries? Obviously, these
questions cannot rationally be decided in the absence of an ob-
jective measure for home costs, a measure which, as we have
seen, is lacking in the Eastern European economies.
As things are, the following method is still used for the de-
termination of exports and imports: "The national 'material
balances' exhibit a surplus of one product and a deficit of an-
other, and these become respectively the export availability and
the import requirement."73 Until very recently, these surpluses
and deficits were readjusted according to an "efficiency index"
relating foreign exchange receipts to the foreign exchange price
of imported inputs incorporated in a reviewed commodity. This
procedure naturally encouraged the export of goods containing
as few imported raw materials and as much home labor as pos-
sible, thereby leading to a substantial waste of scarce domestic
labor and other resources. Yet, it also occurred that, when the
state felt itself to be in urgent need of foreign exchange, just
any available commodity was exported, no matter how "effi-
cient" this transaction was. It could thus happen, Hungarian
authors relate,74 that some of these commodities were sold
abroad for less than had been spent on their import contents!
Almost every issue of economic journals and periodicals that
have been published in the Comecon countries during the last
few years contains the ever more pressing demand for a price
system correctly reflecting home costs. The various and often
contradictory proposals advanced for this purpose as well as
the ideological taboos connected with this problem have already
been presented.
The persistent deficiences of the price system have led a
growing number of economists to elaborate efficiency indices
intended to serve as a secondary tool for the assessment of eco-
nomic rationality. It is impossible to describe here even the
major index constructions proposed or to discuss the problems
involved in them.75 It must suffice to quote, for the sake of illus-
tration, some Polish figures indicating the home costs in zloties
(the Polish monetary unit) necessary to produce 1 ruble's worth
of foreign exchange with regard to the following commodities:76
Hard coal 2 Coal derivatives 6.1
Brown coal 1 Cement 21.0
Tinplate 3.5 Cotton and silk
Electrolytic zinc 3.5 fabric 50.0
Carbide 12.5 Woolen fabrics 11.0
Calcined soda 14.0 Sugar 11.9
Coke 5.8 Molasses 4.4
Tinned ham 1.5
Average efficiency value of all items analyzed: 4.0
Average excluding hard coal: 7.1
Official exchange rate: 1 zloty=l ruble.
The efficiency index used for the calculation of these values

is expressed by the following formula:
p
"wp ¯ a 2
where
W p =domestic costs in zloties, in a given phase of produc-
tion
aj = t h e zloty-value of all inputs which have been used in
production and which command a world market value
a2 =same as a l5 but at their foreign exchange value
P ^ =world market price of the commodity.
The wide variations of the above figures ranging from 50 for

cotton and silk fabric to 1 for brown coal, show that the commo-
dities traded by Poland have very different "foreign trade effi-
ciences." It is not difficult to perceive, moreover, that these in-
dices can only demonstrate which exports (or imports) are more
rational than others. They provide no information as to a coun-
try's foreign trade optimum.
But these constructions have further serious defects. It is
impossible to avoid calculating with home costs (W p in the
above formula). But "costs generally do not express the value
of products." Hence, "it is entirely correct to deduct from ex-
penses the total amount of planned profits accumulated in each
product in very different proportions77 and to reconvert the ex-
penses for imported materials into foreign exchange in order
to arrive at real prime costs. However, when making the cal-
culations in practice, it is very easy to forget that even the real
prime costs reflect only part of the export products' value."78
Another Hungarian author therefore observes:
The calculations of indices is extremely complex and the indices are
static; their elaboration requires a relatively long time and it thus fre-
quently occurs that the newly elaborated economic indices have already
become obsolete. In addition, these calculations fail to embrace all export
commodities and are covering only a small percentage of imports.79
Yet, even the limited information conveyed by these indices

fails to be translated into practice:
During the last years, no considerable improvement has occurred in
the efficiency of either our exports or of the structure of our import-re-
placing products; the results with respect to the utilization of the ad-
vantages accruing to us from both our participation in the socialist inter-
national division of labor and our economic intercourse with capitalist
countries have remained unsatisfactory.80
This is so because the observance of the results of efficiency

calculations, however limited their use may be, would clearly
interfere with the discretionary power of the highest state au-
thorities in the same way as an improved price system would
do. This interference is all the more rejected by the party organs
because it lies in the nature of these procedures that they tend
to be progressively applied to the vital questions of the national
economy as a whole. For example, the first authors to have pro-
posed efficiency calculations in the Eastern bloc could not begin
their article without the observation that
the efficiency of production as a method is subordinate to the class strug-
gle for the victory of socialism; thus, the economic requirements regarding
the safeguarding of national independence, the predominance of the
socialist forms of production, the consolidation of political power and,
finally, the raising of the social and cultural level, have to be made to pre-
vail at the expense of efficiency.81
Yet, in the very same article, the authors raise the ominous
question: what place is the national economy to occupy in the
international division of labor? and make it unmistakably clear
that the autarkic policy hitherto pursued had catastrophic re-
sults for the entire economy. Some years later, T. Liska sug-
gests going back to "the really given, on principle unchange-
able, data at the time of planning"82 and, based on these realities,
"to calculate, with the help of linear programming, the main
[macroeconomic, E.T.] proportions themselves which at present
are approximated by estimates."83 And he reaches the weighty
conclusion:
The increase of the investment share and the additional accumulation
achieved thereby can only be justified by a more rapid increase in the
living standard, attained within a foreseeable time. . . . With an adequate
price system, even the enterprises and branches of the producers' goods
industry can show the degree to which they have contributed to the con-
sumptive fund.84
However, for the time being, it is still the Communist Party

and it alone which determines the major proportions of the na-
tional economy. Its decisions are not founded on any objective
measure of scarcity, on consumers' preferences, or on interna-
tional requirements. But since every Party has somewhat dif-
ferent ideas on how best to develop its national economy and
since there exist no common principles of socialist pricing, the
various national price lists are inadequate for the comparison
of international values. Under these circumstances, it is impos-
sible to conceive of a unified monetary system governing the
Comecon area. It is impossible even to establish a rational link
between the different national currencies by means of a realis-
tic exchange rate:
In our foreign trade system, there is at present no direct connection
between the exchange rate, price relations, and the development of inter-
national economic relations. . . . Numerous economists in the socialist
countries hold the view that under socialism, the exchange rate is inde-
pendent not only of the balance of payments, but also of the relative price
levels prevailing in the different countries and on the world market.85
According to this conception,

the determination of the exchange rate is no economic activity, and it is
therefore economically irrelevant at which level the state fixes it.86
As a result of this theory,

it is impossible to answer one of the most important questions regarding
the extension of international division of labor, viz. what production or
what foreign trade commodity structures are promoting the saving of
social labor and the rise of productivity in the various countries.87
In the last few years, increasing attention has been devoted,

in the C.M.E.A. countries, to the problems connected with the
determination of a calculative exchange rate. Exchange rates
can theoretically be determined in accordance with (1) gold
parities; (2) purchasing power parity; and (3) the amount of
foreign exchange earned by a unit of traded commodities. As
regards the first alternative, all Eastern European countries
have, indeed, defined their currencies in terms of gold. How-
ever, "the fact that all currencies of the Eastern bloc simply lack
the preconditions for convertibility into dollars or another hard
currency precludes any direct link with gold . . . and hence the
fixing of a realistic gold parity."88 Etschmann speaks in this re-
spect of a pure farce, devised to give an apparently solid foun-
dation to communist monetary policies in the eyes of foreigners
as well as those of the unexperienced citizen. All Western and
most Eastern authors agree that these rates are strongly over-
valued and therefore without any use for assessing foreign trade
profitability.
Referring to the second alternative, K. Pécsi writes:
Since the exchange rate is dependent on the price system, it is neces-
sary, in order to give it economic content and allow it to express price
relations correctly, to approximate the price systems and mechanisms of
socialist countries, to abolish, in essence, the dual price system, etc.89
But he adds:
In the absence of these necessary prerequisites, it is as yet impossible
to establish a uniform exchange rate able to serve the purposes of eco-
nomic analysis, to supply a criterion for investment cooperation and, for
the products of joint enterprises, to examine foreign trade efficiency and
to provide the basis for international clearing.90
Noetel sees, it is true, in the ruble devaluation of January 1,

1961, "the application of the principle of comparing the pur-
chasing power of producers' prices in the Soviet Union ex-
pressed by the purchasing power of world market prices."91
But, he continues: "This change . . . has of course no direct in-
fluence on the decisions relative to any export or import trans-
action."92
There thus remains only the third alternative for arriving at
a more realistic exchange rate.
The great majority of economists agrees to the necessity of departing
from the Forint93 costs of "producing" (by way of exports) the various
foreign currencies. There is also agreement on the principle that the ex-
change rate must be at least as high as to enable inland prices for imports
to cover the inland costs of the offsetting exports. . . . Opinions differ as to
. . . whether (1) the basis of the exchange rate is to be the average ratio
of foreign exchange earnings or whether (2) it is to be determined at the
upper limits of the expenses incurred for foreign exchange production.94
The author quoted favors an exchange rate to be fixed according

to the "expenses incurred in the production of the least efficient
tenth or fifth of the exports necessary to keep the balance of
payments in equilibrium."95 He admits, however, "that it would
be very difficult, on the basis of our present statistics, to ascer-
tain the average exchange rate of these export ranges accord-
ing to the various foreign currencies."96 And one of his col-
leagues observes:
One cannot identify the G-index [i.e. Forint/Dollar, E.T.] of the least
efficient export product with the marginal exchange rate unless the
present volume and composition of our exports could be regarded as
optimal. Yet no one having sufficient insight into the present situation of
our foreign trade could earnestly affirm this.97
Thus, no efficiency indices, however perfectly constructed,

can avoid calculating with existing domestic prices and costs.
Yet, it is impossible to make these prices and costs reflect rela-
tive scarcities unless a thoroughgoing economic reform is in-
troduced; a reform which would be tantamount to the abolition
of central planning itself. But any scientific research advancing
too far in this direction cannot even be tolerated by the Com-
munist parties in power. Hence, the arguments of Eastern
European economists must turn round in a vicious circle: the
deeper the latter come to understand the interdependence of
economic phenomena, the more their theoretical debates will
be conducted in an academic vacuum.
Price Formation on the Socialist World Market:

Theories and Reality
Eastern European economists have, for some time, been
concerned with elaborating the foundations for a unified inter-
national socialist price system. They have necessarily encoun-
tered the very same problems just analyzed. However, these
discussions shed a new light on the inseparability of economic
from political matters characteristic of the Comecon countries.
Khrushchev's appeal "to find economic instruments to stim-
ulate the interests of socialist countries in increasing coopera-
tion and specialization in developing mutually advantageous
trade"98 was answered by a Bulgarian proposal suggesting man-
hours as the basis for independent socialist prices. But, ac-
cording to an East German estimate made in 1958, the index of
industrial labor productivity in the Eastern European coun-
tries shows the following variations, with Czechoslovakia as
base:99
Bulgaria 57 Rumania 99
Hungary 57 G.D.R. 90
Albania 58 Czechoslovakia 100
Poland 84 U.S.S.R. 120
Such a price system would therefore clearly disfavor exports

that require a high investment share. Hence, it was rejected by
the more developed C.M.E.A. partners:
The use of national labor outlays as trade prices between C.M.E.A.
members as a principle would make mutual advantage in the exchange of
goods more difficult and would hinder the achievement of a rational in-
ternational division of labor. . . . Factors influencing price relationships
must also find expression in the autonomous price structure, so that such
prices express the economic conditions of all the economies cooperating in
the C.M.E.A.100
And Tálas hits the nail on the head, when he writes:

The exchange of equal national labor . . . would by no means serve the
optimal development of socialist productive forces; it is contrary to the
real content of the cooperating states' sovereignty, let alone the fact that
it represents an outright contradiction to Marx's labor value theory.101
The debate concerning an independent Comecon price basis

involves, in fact, nothing less than the economic sovereignty
and independence of the Council's members. It lies in the na-
ture of socialist prices that they are not autonomously formed,
but imposed from above. And since, as we have seen, there are
no rational and objective guidelines for price-fixing, the entire
issue becomes a question of simple power: who is to impose on
whom "socialist prices" and thereby his political will?
For the time being, the economic intercourse between so-
cialist countries is based on world market prices. This is not
the place to describe in detail the various methods adopted to
"correct" these prices; it may just be pointed out that they di-
rectly affect the respective countries' terms of trade and are
therefore subject to embittered disputes. Frequently, prices are
fixed by bilateral negotiations each year so that one and the
same commodity has different quotations within the Comecon
area as well as through successive rounds of negotiations.
International Clearing between C.M.E.A. Countries

As it is impossible to arrive at an ex ante equilibrium of the
"material balances," the planners are unable to foresee with
precision the development of their national balance of pay-
ments. Unplanned surplus and deficits frequently arise; at the
same time, each C.M.E.A. country has been under obligation
to balance, at the end of each year, its trade with every other
brother state taken separately. Not until 1959 were provisions
introduced to ease this rigid bilateral clearing. Noetel noted "a
really spectacular increase of bilateral trade"102 due to these
provisions; yet the fact remains that "the system of payments
between socialist states is characterized by pure and simple
barter."103
Formally, the ruble acts as the instrument of international
monetary settlement. But since it is not convertible, bilateral
balances must be settled by additional commodity deliveries
which, under a system of central planning, represent an addi-
tional sacrifice to the national economies affected. In view of
the general shortage of capital, the C.M.E.A. members avoid
granting swing credits to each other, especially since these bear
only very low interest. A few triangular compensation arrrange-
ments have occurred, but their extended use finds its limits in
the deficiencies of a centrally planned and administered system.
In 1963, the Comecon countries agreed to set up an Inter-
national Bank of Economic Cooperation,104 which started its
operations in January, 1964. Strict bilateral balancing was to
be replaced by "a balance of receipts and expenditures in trans-
ferable rubles within the calendar year with all the other con-
tracting parties as a whole."105 Also, more attention was to be
given to a precise ex ante planning of balance of payments sur-
plus and deficits and to the inclusion of such imbalances into
trade agreements with third countries. Are these measures a
first step toward a more general multilateral clearing within the
Comecon area?
True multilateral payment arrangements are impossible to
achieve by an economic system in which home costs cannot
objectively be assessed and where therefore a rational link be-
tween national currencies does not exist. The "transferable"
ruble would fulfill the conditions of multilateralism only if all
other member currencies could be defined by a single and
realistic exchange rate with regard to the Soviet monetary unit
(and also to each other) and if any C.M.E.A. country holding
such rubles was free to buy with them whatever it desired, if not
in the Comecon area as a whole, at least in the U.S.S.R. But
such advantages are incompatible with the principle of national
planning. International economic relations between Comecon
countries will therefore continue to be forced into restrictive bi-
lateral channels.106 And this circumstance is little altered by the
fact that the new Comecon Bank is not only to provide "lubricat-
ing" commercial credits, but also is to finance joint investment
projects at very low interest rates.
Recently, a high official in the Polish Ministry of Finance,
H. Kotlicki, proposed the introduction, by degrees, of ruble con-
vertibility.107 According to this suggestion, debtor countries are
to pay in gold approximately 10% of their liabilities to the Come-
con Bank. This provision would, in Kotlicki's view, tend to in-
crease both the financial discipline of Comecon countries and
the quality of the products they offer to each other. However,
Czechoslovak authors already warned against the consequences
of such a measure which would cause the less efficient C.M.E.A.
partners to shrink back from an extension of their foreign trade.
Some countries may even be led into a kind of commercial
"flight into the West," a nightmare which for years has haunted
many Soviet economists and state officials. It is not surprising
that the U.S.S.R. has openly rejected the Polish proposal. In
doing so, "Moscow has apparently been concerned not only
about the Soviet shares in the proposed gold coverage, but to
an equal extent also about the implied East-West political-eco-
nomic quintessence of the Polish convertibility suggestions—
about the question relative to the control of trade in the Soviet
Bloc."108
The continued survival of separate national sovereignties in
a collectivist economic order thus precludes a unified interna-
tional monetary system.
THE PROBLEMS CONNECTED WITH EAST-WEST TRADE

The basic characteristic of a socialist economy, that is, the
subjection of the economic sphere to political control, is at the
bottom of all problems hitherto analyzed. It is nowhere more
evident than when East-West trade is discussed. Here, two
economic systems founded on entirely different principles and
conceptions meet with and react to each other, one system
openly proclaiming its firm determination to undermine and
eventually to smash the other.109
The unfortunate Western intervention in Siberia in 1918
served as a confirmation of the theory that imperialism con-
stituted a deadly menace to a young socialist country. It gave
Stalin a welcome ideological explanation for the hardships his
autarkic industrialization program imposed on the Soviet peo-
ples. But we have already seen that autarky is an inherent fea-
ture of a centrally planned economy. It also appears whenever
the economic control of one state authority, necessarily limited
regionally or branchwise, conflicts with that of another.
After World War II, Western "strategic controls" of exports
to the Soviet Bloc were again used as a pretext for the reorienta-
tion of the Eastern European countries' trade to fit Russian pur-
poses. One passed over the fact in silence110 that these con-
trols were provoked by the aggressive postwar policies of the
U.S.S.R. itself.
Foreign Trade Problems with C.M.E.A. Countries

as Seen from the West
The classical theory of international trade no longer holds
for trade relations with socialist countries in which real costs
cannot be assessed. Cheap sources of supply from the C.M.E.A.
Bloc, therefore, do not justify a corresponding shift of resources
in the Western partner states; to the extent that such changes
nevertheless occur, the socialist foreign trade monopoly and
through it the Foreign Ministry obtain a fruitful field for manip-
ulating the internal market of its capitalist partners. This cir-
cumstance is of special avail in the case of Eastern large-scale
orders for productive equipment. These orders usually have,
via the acceleration principle, more or less far-reaching effects
on the supplying country's internal economy, depending upon
the latter's existing capacities. Conversely, the supply of vital
commodities by Comecon countries (e.g. Russian oil) may—
and is frequently intended to—lead to a dangerous economic
dependence of the West.
On the other hand, communist trade relations with Western
countries are accompanied with increased personal contacts
between the principal agents of the two systems. Such contacts
tend to correct stubborn ideological prejudices. This factor and
the opportunity given to Eastern European officials of forming
independent judgments on the Western economic and political
order constitute an important political potential for the free
enterprise countries.
The form under which East-West trade takes place is usu-
ally a bilateral trade agreement containing a list of goods or
commodity groups to be exchanged. But this list can more
easily be agreed upon on paper than executed in practice. On
the one hand, the socialist foreign trade monopoly remains free
to switch its orders from one country to another for both politi-
cal and economic reasons (e.g. foreign exchange availabilities
or shortages). On the other hand, no Western government can
guarantee that the goods offered by the Eastern European states
will provoke sufficient interest in private traders and entrepre-
neurs so that they will actually be imported. The problem in-
volved in the bargaining position of the two trading partners
must also be mentioned: an individual enterprise, competing
with many others, is faced with a powerful state agency. Yet, as
we know, the Western disadvantage is frequently offset by the
rigidity of socialist demand for a specific product, a fact which
has led to relatively higher prices for commodities delivered to
the East. This tendency is reinforced by the restricted use
which Western countries or entrepreneurs can make of a bi-
lateral credit balance accumulated against an Eastern state. If
no one can be found who is willing to acquire these sums at
the agreed exchange rate, they must be disposed of on the in-
ternational currency market at a disagio—a. risk which will na-
turally be included in the initial price calculations.
This fact, and Western reluctance to grant most-favored-
nation treatment to the centrally planned economies, has led
Eastern European economists to complain of "capitalist" trade
discrimination against the exports of their countries. However,
it should be remembered that the most-favored-nation clause
is a device built wholly on the assumption of international trade
between free market economies. It is, in fact, one of the char-
acteristics of international economic intercourse between free
market and centrally planned economies that the latter force
their proper forms of cooperation on their Western partners.
Thus, for instance, "it is generally known that a great part of
[Western, E.T.] export industry was feeling very well under
the protection of bilateral contingents."111 A number of political
problems therefore arises, for the Western countries, from East-
West trade. If they do not wish to emerge as the net losers—
and this question must be judged following the same method
that is adopted in the socialist countries themselves, consider-
ing economic as well as political aspects—they should subject
this trade to conscious government control and mutually har-
monize their commercial policies.
Foreign Trade with "Capitalist" Countries

as Seen from the East
Officially approved Eastern European textbooks and articles
on foreign trade openly advocate self-sufficiency of the C.M.E.A.
Bloc as the long-term goal of socialist economic policy. They
not only refer to the alleged aggressiveness of the imperialist
camp and the corresponding necessity for their countries to at-
tain economic independence; they also point out that the
"chaos" of the world market and its unpredictabilities provide a
constant source of disturbance to the planned machinery of
their national economies. In addition (though less empha-
sized), East-West trade finds itself in direct competition with
the extension of the socialist international division of labor and
the strengthening of Comecon.112 The conclusion is obvious:
East-West trade must be reduced to a minimum.
Yet it is clear that both the abundance and the variety and
quality of "capitalist" goods and services have a great attraction
to socialist planners, especially those from the small Comecon
countries. The increase of trade with the West beyond the ex-
tent dictated by the strict necessities of the plan would bring
a twofold advantage: in the first place, it would in some way
rationalize at least the import side of the foreign trade of these
countries since the conditions for the acquisition of these goods
are objectively defined by market prices. Thus, it is reported
that Rumania has been able to raise the rate and efficiency of
her industrial growth by purchasing the latest Western factory
equipment.113 But it will of course still be true that the coun-
try's exports are composed of those goods which are apt to find
a Western buyer, whatever price they may bring, without re-
gard to their production profitability. Secondly, this trade
would lead to a loosening of the political ties by which the
C.M.E.A. countries are bound to the U.S.S.R.
But the smaller Eastern European governments' willingness
to expand their trade with the West finds its limits not only in
the distrust with which the Soviet Union views all such at-
tempts, but also in their acute shortage of convertible curren-
cies. Frequently, these countries' exports are unable to meet
the much higher quality requirements of the Western consumer.
Here, the deficiencies of the planning apparatus described
above constitute a special encumbrance. This is why these
states are pressing for long-term credits from their Western
trade partners.
The Prospects of East-West Trade

What, then, are the prospects of East-West trade? A num-
ber of Western authors, among them A. Nove and F. L. Pryor,
are warning against an overemphasis of the political factors by
the West. They point to the increased attention that is being
devoted by socialist planners to purely economic considerations
and to the probability that the rise of living standards in the
C.M.E.A. countries will gradually weaken the impact of com-
munist ideology. Therefore, the West should renounce its dis-
criminatory commercial policies and expand East-West trade
which is beneficial to both parties. It is argued that the markets
for Western goods lying east of the Elbe are unlimited; but that
the West must also consent to buy more from these countries
since otherwise no lasting trade expansion can take place.
This proposal cannot be discussed in length here since this
would involve a thorough examination of the deep political and
social forces now at work in the C.M.E.A. Bloc. Yet, our pre-
vious analysis has yielded two results that are relevant in this
context: a certain "liberalization" of scientific inquiry has, in-
deed, occurred. We have seen that the burning economic prob-
lems are openly discussed and that today audacious theoretical
conclusions and even policy recommendations are allowed to
be printed in these states—a thing unheard of in Stalin's times.
However, the Communist parties in this area still adhere to the
principles of Marxism-Leninism and to their unlimited power
position derived from it. It is due to this fact that so little prog-
ress has been made in the realization of the economists' reform
suggestions. The importance of this fact can only be grasped if
one considers the enormous national economic costs that have
been caused by the lack of rational value criteria, irresponsible
planning, slow administration, and the drive for autarky. The
"true representatives of the workers and of the people" do not
hesitate to impose these costs on their population.
In view of this unchanged fact it is to be hoped that the
extension of East-West trade will go hand in hand with a con-
certed though carefully prepared and differentiated policy of
the Western industrialized countries.
Foreign trade, which is the principal form of socialist "in-

tegration," shows the lowest expansion rate next to agriculture
in the Comecon countries' economies. Five main reasons ac-
count for this fact and conspicuously contradict the often re-
peated principles of socialist internationalism and brotherhood;
reasons which are inherent in the political and economic system
adopted by the Eastern European countries headed by the
Soviet Union:
(1) The absence of a rational value criterion and the corre-
sponding impossibility of international cost and price com-
parisons;
(2) inconsistent planning and the slow and deficient working
of the administrative apparatus;
(3) a system of material rewards stimulating enterprise actions
which are contrary both to the interests of the national
economy and to the planners' intentions;
(4) a resulting drive for autarky on all levels, from the indi-
vidual company up to the national planning office;
(5) the obstinate survival of national sovereignty which leads,
due to its enlarged internal powers, to a complete separa-
tion of national price systems.
It is for these reasons that the national antagonisms inher-

ited in this area from earlier times were unable to be tempered
by socialist economic cooperation. They grew, in fact, more
intense as a result of the overall competition of these countries
for raw materials and favorable production assignments from the
Council of Mutual Economic Aid. The number of obstacles for
the expansion of fruitful international trade between Comecon
members is increased by "the uncertainty of being able to ob-
tain, in the narrow framework of bilateralism, the products
which become the speciality of another member or to dispose
of their own specialized products on the other's markets."114
Generally, international production specialization is accom-
panied by a price rise of the commodities agreed upon, a factor
which particularly prejudices those trade partners that re-
nounce the earlier production phases of these commodities.
The "socialist world market" is characterized by resource
immobility. There have been, as yet, very few instances of in-
ternational lending and investment cooperation; international
migrations have outright been declared as "incompatible with
socialism." Here, as well as with respect to the problem of con-
structing a workable international monetary order, the basic
contradiction of socialism again becomes apparent: socialism
first concentrates economic power in the hands of a small group
representing a particular "collectivity" and then expects the
holders of this internally unlimited power to show a degree of
self-imposed restraint in their relations with other collectivities
which cannot even be found in Utopia. The manifold obstacles
to international economic cooperation under collectivism can
only be removed by the "internationalization" of the internal
orders realized in each socialist state, that is, by the abolition
of hitherto sovereign governments and the subjection of their
territories to the will of a single, all-powerful superstate.
Numerous proposals have been advanced for remedying
the chaotic situation of domestic prices. They range from the
suggestion to introduce a free market economy—with the re-
tention, to be sure, of public ownership of the means of pro-
duction—to orthodox Marxist conceptions based on the labor
theory of value and the dual price system. But these debates
have little affected economic practice in the C.M.E.A. coun-
tries due to the party hierarchies' determined resistance against
any interference with their discretionary power. As interesting
as Czechoslovakia's and Hungary's recent price reforms may be
in detail, these countries' economies continue to bear the marks
of this fundamental dilemma.
Can it nevertheless be maintained, as it often is, that the
Soviet-type economies have, in recent years, successfully ap-
proached efficiency and rationality?. The enormous economic
waste that occurred in the Stalin era due to negligence, in-
competence, and total irresponsibility—a waste which is "un-
necessary" even in a centrally planned economy—has certainly
been reduced in the past decade. Great progress has also been
made in the scientific investigation of economic laws and their
general economic interdependence. Yet, the Communist par-
ties in power are well aware that a consistent implementation
of the results of this economic research would shake the foun-
dations of the socialist economic structure. They combat the
"decentralizing" tendencies within their countries just as the
most powerful of them, the Communist Party of the Soviet
Union, is gravely concerned about the centrifugal forces within
the Comecon area dominated by it. The fundamental issue of
socialist integration: the conflict between national economic
sovereignty and centralized planning on a supranational level,
is still unresolved. Power will have the last word in deciding
this issue, a power which is decisively influenced by the political
developments both within and without the Communist Bloc.
These developments will also have a decisive impact on the
final solution of the question as to whether the C.M.E.A. Bloc
will permanently and hermetically be separated from the rest
of the world or whether the victory of common sense and mu-
tual economic advantage will lead to a true and worldwide
economic integration.
NOTES TO CHAPTER XI
1. This objective has, for decades, been expressed by the slogan that the Soviet
Union must, within the shortest possible time, catch up with and surpass the
most developed capitalist countries, especially the U.S.A.
2. Speech given in 1926, quoted in Kaser, M., Comecon. Integration Problems
of the PL·nned Economies. London, Oxford University Press, 1965, p. 18.
3. E.g. in Pravda, October 19, 1961: "Heavy industry has always played and will
play the leading role in expanded production. The party will continue un-
flaggingly to concern itself with its growth, considering this as the decisive con-
dition for the creation of the material-technical basis for swift technical progress,
as the basis for the strengthening of the defense capacity of the socialist state."
4. Stalin wrote: "The country of the dictatorship of the proletariat, in conditions
of capitalist encirclement, cannot remain economically independent if it does
not produce at home the instruments and means of production." Quoted in
Kaser, M., op. cit., p. 18.
5. Ulbricht, W., "Die Anwendung der Leninschen Prinzipien der sozialistischen
Wirtschaftsführung in der D.D.R." Wirtschaftswissenschaft, Vol. XI, No. 3,
March 1964, p. 357. Cf. also Gáspár, S., "A part vezetö szerepéröl" (On the
Leading Role of the Party). Társadalmi Szemle, Vol. XIX, No. 10, 1964, p. 3:
The most important prerequisite of the party's leading role is its possession of
those qualities by means of which it understands and formulates the interests,
wishes, and aspirations of the working class and the entire working population,
lays down the strategies and tactics of the struggle and is able to secure, by
its organizational activities, the implementation of the policies thus deter-
mined." Italics original.
6. Quoted from BoL·haya Sovetskaya Entisikhpedia (USSR) in Kaser, M., op.
cit., p. 26.
7. There also exist long-term "perspective plans" covering fifteen or twenty years.
8. Knirsch, P., "Grundzüge und Perspektiven der sowjetischen Wirtschaftspoli-
tik." Neue Zürcher Zeitung, December 24, 26, 27, and 28 (Nos. 4956, 4964,
4975, and 4987), 1961; separate reproduction, p. 6.
9. See p. 145.
10. Revisions in the balance of one product usually entail a wave of corrections
affecting other inputs and outputs which in turn engender further revisions and
so on in an almost infinite chain.
11. Report of the Director of Omsk Tyre Factory in Pravda, October 5, 1962.
12. Ibid., November 4, 1962.
13. The chief function of the state bank is thus the control of managerial per-
formance.
14. Esze, Z,, "Érték és árvita. A szocializmus árúviszonyainak megismerése" (The
Debate on Value and Prices; The Proper Understanding of Commodity Rela-
tions Under Socialism). Közgazdasági Szemle, Vol. XII, No. 4, 1965, p. 443.
Since Soviet planning methods served as a model to all Eastern European coun-
tries, socialist price policy can be illustrated by the following example, pub-
lished in the Polish Gaspodarska Planowa, 1960, No. 6, p. 3, relating to hard
coal:
Average prime Average sales
costs per ton price per ton Prices covering
Year (zlotìes) (zloties) costs (percent)
1950 62.14 53.22 85

1951 62.22 54.82 88
1952 73.82 57.37 78
1953 102.41 74.88 71
1954 110.86 73.45 66
1955 120.39 72.35 60
1956 163.18 128.25 79
1957 222.49 128.91 58
1958 225.26 128.84 57
1959 236.01 128.98 55
15. Esze, Z., loc. cit., p. 444.
16. Népszabadság, August 31, 1962.
17. Pravda, October 20, 1961.
18. V. Iljitchev's speech on the 22nd Party Congress, Pravda, October 26, 1961.
19. Esze, Z., loc. cit., p. 450. This is so because the prices of some commodities
contain, for extra-economic reasons, a greater percentage of planned profit than
others.
20. That this problem is still subject to ideological dispute becomes evident from
the following recently printed passage: "Does not the charge for the use of
capital imply a violation of the Marxist theory of value? . . . Since the main
task consists of the minimalization of labor costs, and since society disposes of
its instruments—i.e. capital goods—only to a limited extent, the use of capital,
considered as the reflection of the scarcity of the material factors, can be
reckoned among real costs." Pirittyi, O., "Vita a szocialista árrendszerröl"
(Debate on the Socialist Price System), Közgazdasági Szemle, Vol. XI, Nos.
7-8, 1964, p. 974.
21. Balázsy, S., "További mechanizmusproblémák a külkereskedelemben" (Fur-
ther Organizational Problems in Foreign Trade). Ibid., Vol. XII, No. 5, 1965,
p. 587.
22. Ibid. However, one has only to consider that the Soviet price reform, having
become effective on January 1, 1965, "is the result of a preparatory work
carried out since 1960 to which practically the whole economic administrative
apparatus has contributed" (Haffner, F., "Die Revision der Industriepreise in
der Sowjetunion zum 1. Januar 1965." Osteuropa-Wirtschaft, July 1946, p. 1)
in order to get a glimpse of the practical difficulties involved in the problem
of centralized price fixing. This renders Balázsy's vague statement meaningless.
23. Esze, Z., loc. dt., p. 457.
24. Hoehmann, H. H., "Zur Entwicklung der sowjetischen Wirtschaftslehre." Ost-
europa-Wirtschaft, December, 1964, p. 11.
25. Ibid., p. 12.
26. Ibid., p. 13.
27. Ibid.
28. Libermann, J., "Plan, Profit, Premium." Paper reprinted in Pravda, September
9, 1962.
29. Kurowski, S. J., "Rynek i plan." 1957, quoted in Machowski, H., "Die Preisdis-
kussion und die Industriepreisreform vom 1. Juli 1960 in Polen." Osteuropa-
Wirtschaft, April, 1964, p. 25.
30. Ekonomicheskaja Gazeta, March 9, 1963, translated and reprinted in "Price
Policy and Theory." Problems of Economics, Vol. VI, No. 12, 1964, p. 27.
31. See pp. 101-2.
32. The granting of this assistance was even more "self-evident" to the Soviet gov-
ernment itself which was thereby correctly fulfilling its "historical role." We
can read in the 1960 version of the History of the Communist Party of the
Soviet Union: "The international character of the dictatorship of the prole-
tariat gave rise to a fundamentally new, hitherto non-existent function of the
Socialist State—the function of assisting other countries in the building of So-
cialism and of establishing international Socialist relations. . . . The path
travelled by the Soviet people is the highroad of Socialist development for the
working people of all countries. The main features and laws of development
of the Socialist revolution and of the building of Socialism in the U.S.S.R. are
not of local, specifically national, significance: they are of international import-
ance." Quoted in Kaser, M., op. dt., p. 17.
33. At the same time, however, de-industrialization became the fate of Eastern
Germany. The large-scale dismantling of industrial facilities by the Soviet
Union was estimated at 70 billion Reichsmark.
34. Kaser, M., op. dt., p. 19.
35. Ágoston, I., L·e marché commun communiste. Principes et pratique du COME-
CON. Geneva, Droz, 1964, p. 22.
36. Kaser, M., op. dt., p. 19.
37. Thus, during 1946-53, Poland delivered Silesian coal to the Soviet Union at a
price that covered only transport costs. The total Soviet gains from this trans-
action are estimated at $900 million. In the years immediately following World
War II, the Soviet Union also exacted reparation payments from Eastern Ger-
many, Hungary, Rumania, and Bulgaria. In these and other states under her
influence, she converted, in addition, enterprises formerly owned by Ger-
man nationals into the so-called Mixed Companies over which she exercised
exclusive control. They were not dismantled until 1954, when the Soviet shares
were "bought back" against heavy sums by the respective governments.
38. Ágoston, I., op. cit., p. 220.
39. "The main contradiction was that in spite of the rapid growth of production,
the standard of living not only failed to rise, but even declined to a certain
extent." Közgazdasági Szemle, Vol. IV, No. 3, 1957.
40. Noetel, R., "Les relations économiques de 1'Union soviétique avec les pays de
l'Est européen." Revue économique et sociale, April 21, 1963, p. 83, italics
added.
41. Népszabadság, April 2, 1963. The author, S. Énekes, continues: "This study is
all the more urgent as one begins at last to recognize that metallurgical products
cannot be produced during decades without the modernization and improve-
ment of their quality."
42. Âgoston, I., op. cit., p. 113.
43. Pravda, May 25, 1958.
44. New Times (Moscow), 1962, No. 27.
45. "The crucial fact of Comecon's history from its foundation to the present is that
the rapid growth of its aggregate production has not been accompanied, as in
other world economic groups, by a relatively more extensive international divi-
sion of labor, either among its members or with the rest of the world." Kaser,
M., op. cit., p. 16.
46. Ibid.
47. Noetel, R., loc. cit., p. 97. Cf. also Âgoston, I., op. cit., p. 163: "It is one of
the characteristic aspects of cooperation within C.M.E.A. that the U.S.S.R.
possesses an absolute preference right as to the purchase of investment goods
and equipment produced by the people's democracies."
48. Kommunist, August 1962.
49. Ibid.
50. Karkhin, G., "Socialist Community: Possibilities and Prospects." International
Affairs (Moscow), August 1962, pp. 19-20.
51. Ibid., p. 19.
53. Apró, A., A szocialista országok gazdasági együttmüködése (Economic Coop-
ation Between Socialist States). Budapest, Kossuth Könyvkiadó, 1964, p. 252.
54. Kaser, M., op. cit., p. 121, cf. also pp. 161 seq.
55. Valev, E., in Vestnik Moskovskogo universiteta: Seriya geografia, No. 2, 1964.
56. Vita economica, June 12, 1964.
57. P. Alampiev's lecture, delivered to the Fourth Congress of the Geographical
Society of the U.S.S.R. in 1964.
58. Quoted in Kaser, M., op. cit., p. 166.
59. In fact, the organization of technical collaboration and the interchange of ex-
pertise have provided a field for successful Comecon activities. Âgoston ob-
serves, however, that the reception by one country of technical experts and
elaborated projects from abroad is not always an unmixed blessing. The re-
ceiving country may see itself obliged to develop "this or that branch of in-
dustry the choice of which does not belong to itself and the economic efficiency
and profitability of which may be doubtful. The resulting waste of national
resources may be far greater than the gain from technical assistance." Op. cit.,
p. 207.
60. Bogomolov, O., "Erfahrungen aus der wirtschaftlichen Zusammenarbeit der
Lander des R. G. W." Wirtschaftswissenschaft, Vol. XII, No. 4, April, 1964,
p. 535.
61. Tálas, B., "A szocialista világgazdasági kapcsolatok néhány elméleti kér-
déséhez" (Theoretical Questions Concerning Socialist Economic Relations).
Közgazdasági Szemle, Vol. XI, No. 9, 1964, pp. 997-998, italics added.
62. Kiss, T., A szocialista országok gazdaságì együttmüködése (Economic Coopera-
tion of Socialist States). Budapest, Kossuth Kiadó, 1961, p. 129.
63. Neue Zürcher Zeitung, No. 3104, July 24, 1965, italics original.
64. Ibid., No. 3054, July 20, 1965, italics original.
65. Tálas, B., loc. cit., pp. 1007-8, italics original.
66. Kiss, T., op. cit., p. 131.
67. Esze, Z., loc. cit., p. 444.
68. Rába, A., "Export és gazdasági mechanizmus" (Export and Economic Mech-
anism). Külkereskedelem, Vol. IX, No. 7, 1965, pp. 199-201, italics original.
69. Ibid., p. 201.
70. Quoted from Forster, W., "Das Aussenhandelssystem und Valutamonopol der
UdSSR und ihrer Satellitenstaaten," in Das Unternehmertum und die politische
Gefahr der Gegenwart, Frankfurt/M., 1956, by Etschmann, R., Die Währungs-
und Devisenpolitik des OstbL·cks und ihre Austvirkungen auf die Wirtscha†ts-
beziehungen zwischen Ost und West. Ph.D. dissertation, Bonn, Rheinische
Friedrich-Wilhelms Universität, 1959, p. 37.
71. "The New System of Foreign Trade Direction in Czechoslovakia." Külkereske-
delem, Vol. IX, No. 5, 1965, pp. 142-43.
72. Tálas, B., loc. cit., p. 999.
73. Kaser, M., op. cit., p. 36. "Our economic system," writes a Polish author, "is
an abracadabra of prices, costs, and salaries. No sage could possibly tell what
is rational and what is not." Trybuna L·udu, November 18, 1956.
74. Liska, T., and Máriás, A., "Economic Rationality and International Division of
Labor." Közgazdasági Szemle, 1954, No. 1, pp. 75-94.
75. Some types of indices show a higher export efficiency for products containing
many imported materials than for those with less or no import contents. Others
neglect the capital tied down in the production of a given export good. A third
group only examines efficiency in the "last phase" of production, etc., etc. For a
detailed analysis of these indices, cf. Ágoston, I., op. cit., pp. 233 seq.
76. Gospodarska PL·nova, 1957, No. 2.
77. In Hungarian economic language the term "accumulation" is used for denoting
the total amount of planned profits being accumulated in each product as it
passes from one enterprise to another. It is recalled that this question represents
the central issue in the debate concerning socialist price reforms.
78. Nagy, A., "A külkereskedelem optimalizálása és az ösztönzés" (The Optimization
of Foreign Trade and Material Stimulation) Közgazdasági Szemle, Vol. XII,
No. 2, pp. 214-15.
79. Balázsy, S., "Termelöi árak-devizaárak-árkiegyenlítés" (Production Prices, For-
eign Exchange Prices, Price Equalization). Közgazdasági Szemle, Vol. XI,
No. 9, 1964, p. 1059.
80. Nagy, A., he. cit., p. 216.
81. Liska, T., and Máriás, A., loc cit., p. 76.
82. I.e. the working population, land and known natural resources, productive
capacities at the beginning of the planning period, the level of national income
attained, and its present subdivision into consumption and investment; the
known possibilities of technical progress, and the estimated interplay of sup-
ply and demand.
83. Liska, T., "A gazdasági számítások továbbfejlesztéséért" (Toward the Further
Development of Efficiency Calculations). Közgazdasági Szemle, Vol. VIII,
No. 3, 1961, p. 305.
84. Ibid.
85. Kövér, K., "A valutaárfolyam néhány elméleti problémája a szocializmusban"
(Theoretical Problems Relative to the Exchange Rate Under Socialism). Ibid.,
Vol. XI, Nos. 7-8, 1964, p. 919.
86. Ibid., p. 920.
87. Ibid., p. 921.
88. Etschmann, R., op. cit., p. 93.
89. Pécsi, K., "A beruházási együttmüködés néhány nemzetközi pénzügyi vonat-
kozása a K.G.S.T. országokban" (The International Monetary Aspects of In-
vestment Cooperation Between the C.M.E.A. Countries). Közgazdasági
Szemle, Vol. XI, No. 4, 1964, p. 430.
90. Ibid.
91. Noetel, R., he. cit., p. 99.
92. Ibid.
93. Basic unit of Hungarian currency.
94. Balázsy, S., he. cit., p. 1062, italics original. Applied to our example on p. 250,
the problem would be whether the calculative exchange rate ought to be fixed
at 4, or 7.1 zloties per ruble (average index) or at 50 or some average of the
least efficient items (marginal index).
95. Balázsy, S., "További mechanizmusproblémák a kiilkereskedelemben" (Further
Problems of Foreign Trade Mechanism). Közgazdasági Szemle, Vol. XII, No.
5,1965, p. 581.
96. Ibid.
97. Nagy, A., he. cit., p. 215.
98. Kommunist, No. 12, 1962.
99. Wirtscha†tswissenscha†t, No. 4, 1963, p. 553.
100. Ibid., No. 4, 1964, pp. 601 and 608.
101. Tálas, B., he. cit, p. 1010, italics added.
102. Noetel, R., he. cit., p. 991.
103. Âgoston, I., op. cit., p. 258.
104. In fact, an international bank has already been in existence since 1957, but it
remained not very effective.
105. Birladeanu, A., in Pravda, October 25, 1963.
106. An Eastern European C.M.E.A. expert wrote: "Polish investments in coal ex-
traction were discouraged by the fact that it was difficult to obtain, in bilateral
transactions, sufficient indispensable commodities from each of the countries
that wished to purchase Pofish coal." Kiss, T., "The Effects of Economic Co-
operation Between Socialist Countries on the Development of the Hungarian
Economy." Társadalmi Szemle, 1958, No. 11, pp. 796-815.
107. Neue Zürcher Zeitung, No. 3245, August 6, 1965.
108. Ibid.
109. We can read in the Great Soviet Encyclopedia: "The development of Soviet
foreign trade is of first-rank importance for (Soviet) political relations." And
the East German Secretary of Foreign Trade declared: "Foreign trade has not
only the task of appreciably bettering the standard of living of our people;
through its activity in the Capitalist world, foreign trade must also . . . support
the peace-loving forces in these countries and strengthen them in their fight
against the robbing monopolists." Both statements quoted in Pryor, F. L,, The
Communist Foreign Trade System. Cambridge (Mass.), M.I.T. Press, 1963,
pp. 163 and 170.
110. A practice also adopted by not a few authors of pertinent books published out-
side the Communist Bloc.
111. Etschmann, R., op. cit., p. 110. This author also gives a detailed description of
the West-German bilateral trade agreements with the Comecon countries and
their practical results. In order to avoid the permanent granting of swing
credits, the federal government introduced, in 1956, the restricted converti-
bility of the D-Mark (Beko-Mark) in order to encourage these countries to
accumulate balance of trade surpluses with Western Germany.
112. "The fact that the C.M.E.A. member countries maintain their relations with
the capitalist market limits, to a very large extent, the possibilities for intro-
ducing a price system which would differ too much from capitalist prices.
Countries which would be placed at a disadvantage by this new system and
the exports of which could obtain a better price on Western markets, would
not fail to make an attempt at reorienting their trade in this direction." Ágoston,
I., op. cit., p. 231.
113. Apparently, this country now disposes of sufficient workers and experts specially
trained for operating and taking care of this equipment.
CONCLUSION
The three basic approaches to the subject of this investiga-

tion have yielded identical results. They can be summarized
under the following points:
(1) L·ss of objective national and international value criteria;
(2) politicalization of the economy, or in other words, the sub-
jection of dominium to imperium and the nationalization of
the economic process;
(3) a corresponding disintegration of the international econ-
omy.
The political and economic system concomitant with social-

ism is characterized by utmost centralization. All vital decisions
are made at the top of a power pyramid by one man or by a re-
stricted group of persons. In theory, the intermediary and lower
agencies' only function consists of the faithful implementation
of these decisions and orders. Underlying this conception of
political and economic government is, as we have seen, the
idea of a confined circle of individuals to whom, either because
of their extraordinary intellectual capacity, their moral standing,
or because of their advanced knowledge of the course of history,
the fate of mankind must be entrusted. These aristoi should be
endowed with unlimited power: only this is thought to guaran-
tee the final victory of reason and solidarity over selfishness and
inequality.
But since no generally valid principle exists which would un-
objectionably qualify these persons for their high responsibility,
their selection, in practice, is made in accordance with their ex-
pertise in the game of power. Power therefore becomes the
pivot of any socialist order. And because power, in order to be
CONCLUSION 281
efficient, must be exclusive, care must be taken that neither
the will of other men or groups, nor any "spontaneous" mechan-
ism interferes with the will of the supreme leader or group. Yet,
this power is by nature limited: it is limited by a state's terri-
tory; it is also limited by the fact that the economic process of
modern society demands the delegation of important compe-
tences to subordinate agencies. The latter in turn tend to de-
velop exclusive power positions that rival both each other and
the central authorities. Because, however, these various human
wills clash without the intervention of an autonomous principle
of order, the result is either chaos or the stern subordination of
all to the will of the strongest. This alternative applies to the
internal situation of collectivist states no less than to interna-
tional relations between them and with free market economies.
What are the reasons, in view of the logical unassailability
of these arguments—and of practical experience confirming
them—for the fact that most men have failed to recognize their
impact, that they indeed continue to associate socialism with
a true international order?
In the first place, whenever traditional social relations were
being broken up in the course of history, the resulting physical
and psychic insecurity experienced by the masses caused them
to eagerly accept prophecies for a millenium in which they
would combine freedom from material worries with domination
over (and punishment of) the evildoers of this world. In an
ideal future, where the distinction between rich and poor and
indeed all "artificial" barriers separating humanity would be
abolished, it was felt to be self-evident that national border
lines would be the first to disappear. And historical material-
ism added a new dimension to this hope: since "already" under
capitalism, important strides had been made in the direction
of internationalism, socialism would complete this historical
process and lead to a "withering away" of the state.
It is, secondly, in opposition to the interests of socialist
rulers to have the conflict between these ideological assertions
and actual political practice scientifically investigated. How-
ever, under the coverage of orthodox language, small Eastern
European governments have tacitly abandoned Marxist-Lenin-
ist internationalism and have adopted Otto Bauer's views on au-
tonomous nationality.
One can observe, thirdly, a marked reluctance on the part
of Western intellectuals to think these matters to their end and
take a definite stand. Many of them uncritically accept collec-
tivist ideas as the most "progressive" ones; others fail to see the
forest for the trees; they become confused by the countless prop-
aganda phrases, humanitarian appeals, and arguments pro and
contra socialism. Still others are deeply concerned over the de-
fects of "capitalism" itself, especially over the rise of powerful
monopolies and pressure groups which ruthlessly override the
public interest as well as the legitimate cause of the small and
the weak.
This study has shown that socialism cannot solve these defi-
ciencies. Furthermore, despite its internationalist aspirations,
it is not capable of accomplishing stable international peace and
order. If we postulate a true democracy, society is to be built
not on centralization, but on federalism and decentralized de-
cision making much as Proudhon had outlined it a century ago.
But it is impossible to realize this political order without its
economic counterpart: a free market economy based on com-
petition. The demand of modern liberals for a political frame-
work to be established and for policies to be conducted by the
state to ensure a smooth national and international function-
ing of this economy fundamentally distinguishes itself from the
recommendations of the laissez-faire protagonists. It aims at
combining the individual's rightful desire for protection against
undeserved blows with the maximum possible separation of
dominium from imperium. Whether such a system can still be
called capitalism is irrelevant; what matters alone is that the
solution of today's pressing economic problems must be sought
not in the undifferentiated enhancement of government power,
but in a carefully planned economic policy that is "in conformity
with the market."
The author of this study was warned by a Western socialist
professor against indiscriminately using the term socialism for
the manifold shades and aspirations of this movement. He
pointed out that his socialism had nothing in common with the
economic and political system in force in the Eastern European
countries. We do not know whether his conceptions fall under
the definition of socialism underlying this investigation—the
core of which is the postulate for centralized state direction of
CONCLUSION 283
the economic process. What can be affirmed with certainty is
that every measure decreed by the state that represents a direct
interference with the forces of supply and demand—such as
price stops, import quotas, exchange control, and prohibitive
tariffs—constitutes one step away not only from a free enter-
prise economy, but also from an integrated international eco-
nomic order.
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INDEX TO AUTHORS
—A— —E —
Agad, J., 196 Edie, J. H., 78
Agoston, I., 243, 247, 275-79 Ellis, H., 169
Alampiev, P., 276 Ellsworth, P. T., 214
Andler, C , 117 Enekes, S., 276
Apró, A., 276 Enfantin, P., 30
Archer, W., 88, 90 Engels, F., 24, 45, 62, 69, 93, 96-97, 115,
159,168, 200
- B - Esze, Z., 274, 275, 277
Bakunin, M., 92 Etschmann, R., 261, 278, 279
Balázsy, S., 275, 277, 278 Eucken, W., 147, 163
Baldesi, C , 73, 76
Balfour, A. J., 73 - F -
Barone, E., 133-35 Fichte, J. G., 5, 13-19, 21, 22, 23, 107,
Bauer, O., 94, 147, 223, 281 114, 153-54, 167, 197
Bauer, P. T., 214 Forster, W., 277
Bazard, S. A., 30 Fourier, F., 24
Bettelheim, C , 112, 119,161, 168, 220 Franq, R., 91
Birladeanu, A., 278 Frederick William I, 103
Bismarck, O. von, 194 Freyer, H., 5, 6, 20, 21
Blackett, Sir B., 90 Friedman, M., 181
Blanc, L., 80
Bodnaras, E., 251 - G -
Bogomolov, Ó., 276 Gáspár, S., 274
Boncour, P., 72, 89 Gide, C., 72
Borkenau, F., 197 Gini, L., 73
Bray, J. F., 40 Goebbels, J., 74
Brutzkus, B., 131-32, 147 Graf, A., 164, 168, 169, 197
Bucharin, N., 116, 131 Gurland, A. R. L., 194
Guthrie, W. B., 4, 21, 22
- C -
Carey, H. C , 51, 52 - H -
Ceausescu, N,, 251 Haffner, F., 275
Chang, S. H. M., 114 Hall, C., 25, 40
Chatterjee, I. K., 181, 197, 202, 204, 213, Hall, R. L., 90,106, 111, 118,119, 149
214-16 Halm, G., 149
Clausewitz, K. von, viii, 4 Hayek, F. A., 40, 129, 138, 141, 147, 149,
Cohen, M., 117 181, 218, 227
Cohn, N. R., 317 Hegel, G. W. F., 44,102
Cole, G. D. H., 42, 46, 90, 106, 118, 148, Heflperin, M. A., 167, 216
157, 197 Hesse, K., 215, 216
Heuss, A., 21
_D- Heuss, E., 161, 168, 169
Dickinson, H. D., 67, 88, 106, 108, 110, Hilferding, R., 48, 52-56, 57, 58, 61, 62-
111, 118, 119, 138-41, 144, 149 64, 66, 87, 170, 171, 203, 206, 214,
Djilas, M., 159, 168, 225-26, 228 215, 216
INDEX TO AUTHORS 301
Hirota, L., 74 Menger, K., 30
Hitler, A., 74, 147 Michelis, G. de, 68, 76, 90
Hobson, J. A., 53, 63, 119 Milhaud, E., 70, 79-80, 83, 89, 90, 219
Hoehmann, H. H., 275 Mises, L. von, 135-37, 146, 148, 183, 197,
Horace, 197 205
Moeller van den Bruck, A., 104, 117
- I - More, Sir T., 10-13, 19, 21, 102, 151-52
lljitchev, V., 274 Mossé, R., 106-10, 118, 119, 157, 161
Müller, A., 117
Jaurès, J., 57, 81 Myrdal, G., 181,196
Jewkes, J., 162, 168, 194, 216 - N -
Johnston, G. A., 68, 88, 90 Nagy, A., 277, 278
Jouhaux, L., 71-72 Nasser, G. A., 215
-K- Neurath, O., 147
Kant, E., 4 Newton, I., 41
Karkhin, G., 276 Noetel, R., 244, 262, 264, 276, 278
Kaser, M., 273, 274-77 Nove, A., 270
Kautsky, K., 57, 60, 69, 94, 104, 115, 117 - O -
Keynes, J. M., 175-83, 192,196
Khrushchev, N. S., 235, 238, 247, 249, Owen, R., 2, 4, 26-28, 30, 38, 39, 40-41,
263 155
Kiss, T., 250, 277, 278 - P -
Knirsch, P., 274 Painlevé, P., 72
Kotlicki, H., 266 Pareto, V., 133
Kovér, K., 278 Paulsen, A., 176, 196
Kurovski, S. J., 275 Pecqueur, C., 40, 43, 85
Pécsi, K., 261, 278
- L - Person, H. S., 88
Lange, O , 137-38, 140, 141, 144, 146, Pirittyi, O., 275
149, 161, 241 Plato, 2, 5-10, 19, 20, 21, 85, 150-51, 152,
Lansbury, G., 89 153,194
Lawley, F. E., 72, 74, 79, 80, 82, 87, 89, Plenge, J., 114
90, 91, 219 Poetzsch, H., 117
Lenel, O. von, 194 Proudhon, P. J., 33-37, 40, 43, 61, 113,
Lenin, V. I., x, 3, 57, 58, 60, 61, 68-69, 156-57 165, 282
84-85, 88, 93-94, 97-99, 105, 113, 115, Pryor, F. L., 270, 278
116, 126, 128, 131, 158, 165, 203, 223,
224, 225, 226, 228, 232, 234 -R-
Lerner, A. P., 149 Rába, A., 253, 255, 277
Libermann, J., 241, 275 Renner, K., 94
Linder, W., 216 Ricardo, D., 24, 37
Liska, T., 260, 277 Robbins, L., 138, 148, 219, 227
List, F., 52,106, 206 Rooper, D., 81
Lorwin, L. L., 87, 88, 89 Röpke, W., viii, 173, 181, 194, 195, 196,
Lutz, F. A., 169, 180,195, 196 198, 210, 215, 221, 227
Luxemburg, R., 62, 94, 215, 223, 228 Rüstow, A., 216
- M - - S -
Machlup, F., 172, 194, 195, 205, 206 Saint-Simon, C. H. de, 28-33, 38, 41, 42,
McKenna, R., 78, 90 155,159
Maier, K. F., 134, 148 Salter, A., 68
Maizenberg, L., 241 Say, J. B., 24
Malthus, T. R., 188 Scheel, W. W , 216
Máriás, A., 277 Schippel, M., 117
Marx, K., 3, 4, 24, 44-48, 50-51, 53, 58, Schumpeter, J., 63, 171
59, 60, 62, 65, 69, 84, 85, 92-96, 103, Shenoy, B. R., 208, 215
112, 114, 128, 131-32, 174, 264 Sickle, J. van, 216
Meinecke, F. von, 117 Simpson, H. S., 148
302 INDEX TO AUTHORS
Sismondi, J. C. L. Simonde de, 24, 87 Trotsky, L., 116
Smith, A., 37, 174 Tschajanow, A. W., 131
Socrates, 5, 6 Tucker, R. C, 61
Sombart, W., 105, 113, 117
u
Spengler, O., 103-4, 113, 114, 117 T„ , „, n ~ ~
Staley, F., 185, 197, 198 Ulbncht, W., 273
Stalin, J. W., 94, 100-102, 116, 141, 165, _ v _
225, 231, 233, 239, 241, 244, 266, 270, ValeV; E ^ 2 76
Sweezy, P. M, 46, 61, 62, 126, 143-44, vfner"fJ ^ 4 6 7 ' 88
147, 149 ' `'
W
_T- ¯ ¯
Tálas, B 264, 277, 278 ¾¾ ¡% UQ
Taylor, F. M., 149 Wil w 72
Thomas, A., 66, 77, 80-81, 82, 87, 90 Winnie A. ' l l 7
Thompson, W., 40 '
Tittoni, G., 73 - Z -
Triffin, R., 196 Zuloaga, N., 209

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SOCIALISM

The CAXTON PRINTERS, Ltd.

Library of Congress Catalog Card No. 69-11702

Printed and bound in the United States of America by

THE CREATION OF AN efficient institutional framework for regu-

Chapter I. IDEAL COMMONWEALTHS - - - - - - 5

Chapter III. KARL MARX A N D HIS FOLLOWERS: THEIR

C h a p t e r VI. T H E PROBLEM O F VALUE AND

Chapter VIII. LIBERAL VERSUS SOCIALIST ECONOMIC

C h a p t e r IX. ECONOMIC DEVELOPMENT AND THE

Chapter X. THE FUNDAMENTAL PROBLEM OF

Chapter XL THE "SOCIALIST" WORLD MARKET" - - 232

SOCIALISTS HAVE CONCLUDED that something is fundamentally

NOTES TO PAGES viii-xi

NOTES TO PAGES 1-4

How is THE SOCIALIST world order to be accomplished? Most

Thus, Utopian writers do not propose to overcome the State,

PLATO: POLITEIA AND NOMOI

For this purpose, it is necessary to liberate the citizens from

By the location Plato gives to his State—it is to be situated

What remains of foreign trade is severely guarded by the

It can be seen that foreign transactions are to cover only

All foreigners—whether in a public capacity or on a private

SIR THOMAS MORE: UTOPIA

This greatly simplifies the economic process. Both men and

To provide against poor harvests, stocks sufficient for two

Here More implies that Utopia's balance of payments shows

Of course, the Utopians will never go to battle because of

There may be still another occasion for war. It may happen

The Utopians readily observe this law by returning the

JOHANN GOTTLIEB FICHTE: DER GESCHLOSSENE HANDELSSTAAT

In the Vernunftsstaat, agriculture, manufacture, and com-

2. Each citizen is to be assured his proportional share of all

3. The government guarantees not only work, but also a ready

Fichte is very emphatic on the external consequences of the

Each man as well as each commodity belongs either to its juris-

Fichte gave clear policy directives by which to achieve the

As a third measure, the government sets up a foreign trade

Henceforth, the government will decide which commodities

The same method of control will be applied to all foreign trade

The author concludes: governments

Wars are therefore inevitable and must be fought by the

The Vernunftsstaat, finally, establishes the foundations of

At this time, foreign trade is still being transacted so that

Fichte imagines the future world to be divided among a

SUMMAKY AND CONCLUSIONS

THE PRE-MARXIAN SOCIALISTS

THE SOCIOLOGICAL ROOTS OF AN EMERGING ANTI-

Early socialists, especially those in Britain, were influenced

Owen therefore proposes to organize humanity into "Vil-

The "animal wants of our nature" are food, clothing, and

because these powers are "properly combined and rightly di-

But what will, finally, be the relations between the various

At this stage, Owen once again summarizes the qualities of

However, Owen relegates economic activity as a whole to

C. H. DE SAINT-SIMON AND H I S FOLLOWERS

Does this mean the abolition of private property? No, only

Politics therefore cease to exist, or rather, they are merged

This improvement must be physical as well as moral. The

As to the final picture of the world without states, Saint-

It can be seen that Saint-Simon's ideas are founded on the

One aspect of this "law" is the fact that

But all other human institutions are equally affected by this

In our time, it is argued, we must view property first in its his-