Employment by Collectivism
As matters now stand (in early 1976) unemployment has remained at disturbingly high levels for so long that some governmental action aimed at correcting this situation is politically essential. In the absence of a clear understanding of the cause of unemployment, such as that developed in this present work, the only expedient that is being suggested in governmental circles and in the media is to expand the application of the two kinds of actions that are currently regarded as the only available means of reducing the amount of unemployment: (1) inflationary stimulation of the economy to produce more jobs in the private sector, and (2) additional public employment. According to the findings outlined in the preceding chapter, these measures will improve employment to some extent because, and only because, they accomplish a reduction of the survival limit, and the extent to which they accomplish their objective will depend on the amount of that reduction.
The effectiveness of an employment program in reaching its primary objective is not, however, the only point that needs to be taken into consideration in evaluating the overall merit of the program. Most devices of this nature, including the two mentioned above, involve costs of one kind or another, either direct costs of operation, or indirect costs due to unfavorable effects on other aspects of the economy. For a complete assessment of the desirability of any such action we therefore need to weigh whatever results are obtained against the costs that are involved. Before proceeding to the identification of more effective and efficient measures we will examine the current program from this overall standpoint, so that we will have a base for comparison when we appraise the new proposals. In this chapter we will discuss the public employment, and Chapter VIII will then explore the effect of inflation on the employment situation.
Public employment, as applied in an individual enterprise economy, is, of course, a small-scale application of collectivism: authoritarian control over employment and production. From the relation between the survival limit and the volume of employment it is easy to understand why the collectivists can promise full employment. This relation applies with equal force to a collectivist economy, despite the common assumption that socialism and other collectivist forms of economic organization are governed by a set of economic principles entirely different from those applicable to the American individual enterprise system. Like so many of the other misconceptions that have vitiated the usefulness of present-day economics, this assumption is the result of inexact and superficial consideration of the pertinent facts. In reality, the basic principles applicable to one type of economic organization must be applicable to all types; otherwise they would not be basic principles. Man cannot alter the rules that govern his activities; the basic laws of nature take no heed of human institutions. All natural laws are expressions of basic truths, and they are universally valid without regard to the nature of the prevailing economic organization. Certain principles may have no significance under some economic systems. In a barter economy, for instance, the principles governing the use of money have no meaning, but the laws are still on the statute books of nature, and if the use of money is inaugurated, they take hold immediately.
So it is with the matter of employment. Socialism has access to no source of jobs that is not equally available to any other economic system. It cannot alter the basic fact that the volume of employment is a function of the survival limit, nor can it evade the relationship between the survival limit and productive efficiency. But it solves the employment problem by dropping the survival limit to zero, subsidizing the less productive units at the expense of the community as a whole, and ignoring efficiency: a solution which is entirely feasible, although extremely costly, under any economic system. Of course, this is effective as a job provider. As soon as we cease to require the work to meet any prescribed standards of usefulness, there are an infinite number of jobs available. All that we need to do is to admit defeat, and then there will be no more economic battles to fight.
In a collective economy it is not necessary for a job to meet any rigid standards of productivity. All too often there is no requirement that any tangible values at all result from the work. Leaf-raking and boondoggling are not unique products of emergency organizations created during depressions and other times of economic stress; they are merely very visible manifestations of a situation that is inevitable when government is the employer. Productive efficiency is not something that comes about automatically. It is achieved only by hard work and sustained effort, and unless the attainment of a certain standard of productivity is mandatory, efficient production cannot be expected.
This is not a question of willingness. An incompetent factory manager cannot secure efficient production no matter how good his intentions may be, nor can a competent manager secure efficient production from inefficient equipment. The only effective answer to the problem of attaining productive efficiency is a system which sets up definite standards, and then ruthlessly eliminates those enterprises and those managers that are unable to meet these standards. Everyone knows that the individual enterprise system, wherever it has been allowed to operate, has been vastly more productive than socialism, communism, or any other collective economy. The advocates of collectivism have a large assortment of alibis and excuses for this state of affairs, and contend that a collective economy could be more efficient if properly administered, but a careful examination of the underlying principles makes it plain that the superiority of the individual enterprise system from a productivity standpoint is not accidental, but inevitable. Whenever our raw material is an assortment or a random mixture, the recognized method of getting a product that meets high standards is to identify and screen out the sub-standard units.
The advocate of collective institutions is inclined to look upon productive efficiency as a matter of motivation, and it is his contention that it is quite feasible to set up an effective substitute for the pecuniary rewards upon which the individual enterprise presumably relies. Public recognition of accomplishments, he points out, may be as effective a stimulant as greater earnings. Whether or not this contention is valid as a general proposition is rather questionable. Boulding tells us that “This (the matter of incentives) is a problem which is extremely difficult for any large collectivized system of distribution to solve”.41 But in any event, motivation is no more than a secondary consideration in the operation of the individual enterprise system. This system rewards the efficient performers, to be sure, but its high productive efficiency is not due primarily to the motivation generated by these rewards; it is a result of the fact that the system ruthlessly eliminates those who do not measure up to its standards. This is something that publicly owned enterprises cannot duplicate. D. P. Moynihan points out, “We have never been able to create in government the equivalent of the market where you get rewarded for good performance, penalized for bad”.42
In spite of the widespread prejudice against inequality, it is nevertheless true that the human race displays a wide range of individual abilities in every line of endeavor. Clear-thinking observers must recognize this fact, even if they deplore it. As Frank Knight states the case: “Sentimentally, I abhor inequality perhaps as much as anyone; but nature has clearly ordained otherwise”.43 It may be possible to motivate all individuals to substantially the same degree (although this is very doubtful), but great differences in individual ability are unavoidable, and a system which has no provision for identification and removal of the less capable managers and supervisors, together with the enterprises that are no longer technologically justified, cannot be anywhere near as efficient as one that does.
The built-in mechanism for elimination of the least efficient producers, and the least efficient operations of each individual producer, is the explanation for the tremendous superiority which the individual enterprise system has always shown over all collective economic systems; the primary reason why the United States is now so far ahead of any other country in its productive capacity and standard of living; the reason why a free enterprise country like West Germany could snap back so quickly from an economic disaster of major proportions; the reason why a collective enterprise cannot compete on even terms with individual enterprises and can only exist where it has a subsidy or a monopoly enforced by the state. The productive efficiency of any economic organization is dependent primarily on the effectiveness of the provisions which this organization makes for the handling of the functions which call for the exercise of business skill and ingenuity. The most effective provision that can be made for insuring efficient performance of these functions is to remove those individuals and those enterprises which fail to measure up to current standards. This the individual enterprise system does, but the collective systems do not.
These facts have not gone entirely unnoticed by the economists. Boulding, for example, tells us, “It would be remarkable indeed if the individuals whose heredity and upbringing had granted them unusual capacities for innovation were at the same time individuals whose position in society automatically gave them control over the resources needed to make innovations”44 and also that “Economic progress cannot take place unless there is some provision in society for processes which are judged in some way ‘superior’ to displace those which are judged by similar criteria to be ‘inferior’… It is in this sense that competition can be said to be a prerequisite of progress”.45 And the socialistic complaints about “wasteful” competition are well dismissed by J. M. Clark in this statement: “Economists… recognize that it (competition) may not be strong enough unless it is sufficiently severe to be called ‘destructive’ or ‘cutthroat’ by some of those who are exposed to it. This is largely because one of its important services is to weed out inefficient enterprises more rigorously than a human judge or jury would have the hardihood to do”.46
In the individual enterprise system, where the consumers’ preferences, expressed through the market mechanism, are in command, productive efficiency is the requirement for continued existence of the production unit, and the survival limit is a definite criterion that determines whether the efficiency in any given case is or is not adequate. In a collectivist economy, where the ultimate control is in the hands of the political authorities, the requirement for the survival of an economic enterprise is that its political effects must be favorable from the standpoint of the rulers. Of course, some degree of productive efficiency is necessary to prevent unfavorable political reactions, but efficiency is not a primary consideration. For instance, abandonment of unprofitable enterprises, an action that is essential for high productivity, and is achieved automatically in the individual enterprise system, is extremely difficult in a collectivist economy because it has adverse political effects. Where efficiency is required for survival, we get efficiency. Where the requirement for survival is political advantage, we get political advantage, not efficiency.
Collectivist economic programs are often portrayed as innovations, something new on the economic scene that holds great promise for the future, but the truth is that the authoritarian type of economic organization is one of the oldest of human institutions, and has been applied to all sizes and kinds of economic communities, from the isolated tribe to the largest of nations. The original authoritarian economy, the communal organization, antedates the private property system by tens, perhaps hundreds, of thousands of years, and there is no middle ground between the two that has not already been covered in the course of the long swing from the original communal plan to the present-day semi-individualistic economies.
The primitive forms of economic organization were based on the family model. In the family there is no definite attempt to correlate benefits received with efforts expended; on the contrary, the very young and the very old live entirely on the products of the efforts of those of working age. As families expanded into groups of families, and groups coalesced into tribes or communities, the family type of economic organization, the communal system, was carried along. Even today a substantial part of the population of the earth lives under this system. The nomadic tribes, for instance, perform their work under the direction of the chiefs, the products of their hunting, fishing and other efforts are gathered in a common storehouse, and the needs of each member of the group are met from this storehouse in accordance with policies dictated by custom or the will of the heads of the tribe.
As the size of the political unit increased—small tribes became large tribes, and large tribes became nations—the work involved in directing the economic activities of the community soon exceeded the capability of any one individual and some provision had to be made for assistance. Two main lines of development have been followed in transferring these economic functions from the political chief to other individuals, and all of the prevailing economic organizations of the present day are products of one or the other of these lines of development, or else are combinations of the two in varying proportions.
The first expedient that was employed for the purpose of lightening the burden of the chief was that of assigning some of the duties to assistants and advisers, while maintaining the centralized authority. To meet the demands resulting from still further increases in the size of the units this authoritarian organization was expanded by the creation of sub-chiefs—viceroys, governors, local administrators, etc.—each with his own complement of assistants and advisors, and all responsible to the authority of the chief of state. The primary functions of such organizations were—and still are—political rather than economic. Some of the subordinate officials may be assigned exclusively to economic responsibilities even in the smaller groups, and in the larger units the economic administrators often have a considerable degree of autonomy, but it is important to keep in mind that the ultimate authority in this type of organization is always political. The entrepreneurial functions, the actions that determine the efficiency with which labor and the services of capital are converted into goods, are performed by subordinate officials working under the direction of and subject to the authority of the political chief, and political considerations therefore take precedence over all others.
The second main line of development of economic organization is based on transferring the primary responsibility for economic functions from the political hierarchy to the individual workers and owners of capital. Even in the very early stages of growth of organized societies it must have been obvious that there are substantial advantages in the employment of individual initiative in carrying on trade between economic units, as we find merchants on the scene even at the dawn of recorded history. By this time many of the rulers had also discovered that there are likewise definite advantages to be gained by permitting farmers to plan their own production, retain ownership of their products, and sell them wherever they can obtain the best prices, thus relieving the state of all of the responsibilities of production and marketing, and leaving it only the relatively simple and pleasant task of taxing the proceeds. From the very beginning this individual enterprise system proved itself vastly more efficient than the rival authoritarian form of economic organization, and as a result it is now, and has been ever since it originated, the prevailing economic system wherever it is permitted by the political authority.
The undeniable fact is that an increased amount of state control over the economy is a reversion to the primitive rather than an advance into new territory. This is not necessarily an argument against such a change. We are, however, entitled to take notice of the principle that evolutionary processes are normally irreversible, and that those who attempt to swim against the tide of change seldom make much progress. It is not impossible, but it is clearly improbable, that good results will be accomplished by an attempt to reverse a trend which has continued for thousands of years. We should be ready to make such an effort if careful analysis shows that the change is truly desirable, but it is well to be very cautious whenever we know that the odds are decidedly against the type of a change that is being contemplated.
The contention that “things are different now” is particularly likely to be misleading. Many persons sincerely believe that more authoritarian control is necessary because the present-day economic system has become too complicated to be handled in any other way, but when we look far enough back into the past to eliminate the effect of short-term fluctuations, we find that the trend away from centralized direction of economic life and the trend toward greater complexity have gone hand in hand through the ages.
Those who propose to provide jobs for everyone by socializing commerce and industry, in whole or in part, are in effect telling us that the way to get around our present difficulties is to eliminate the standards of productivity by which our economic system is now governed, and to put labor to work on anything that comes along, regardless of how little, in terms of consumer values, is accomplished. But letting down the bars by going to socialism and dropping the survival limit to zero does not exempt us from the operation of economic laws. The stern realities cannot be dodged that easily. We still get only what we produce, no more, no less. If we exempt some individual activities from the requirement that they must produce enough values to justify themselves, we merely transfer the burden to others. If we abandon the productivity limits entirely by adopting socialism, we pay through a general reduction in the standard of living. Someone must feed and clothe those who are assigned to work on pyramid building or its equivalent; someone must make up the deficiency when socialized enterprises are exempted from the rule that they must produce enough to pay their own way.
These comments are equally applicable whether we are considering a completely socialized economy, a single government operated business enterprise, or an employment program that depends upon public works or other public service employment. The difference is only in degree. Public works as a haven for the unemployed have gained a very widespread acceptance in recent years. The general public reaction to the welfare principle: maintaining the unemployed in idleness on a bare subsistence scale of living, is decidedly unfavorable, and although it is commonly recognized that employment on public works is considerably more expensive than welfare payments or unemployment compensation, there is a general feeling that the workers are better off doing something than being idle. It is also argued that whatever useful work is accomplished, however meager it may be, is better than nothing. It must be admitted that there is some merit in these contentions. As long as we limit the choice to public works or nothing, there is a good case for public works. But there is no good reason why we should be satisfied with a program that rests its case on being better than nothing at all. The objective of this present work is to formulate a program that will provide employment which is self-supporting, and therefore will not be a burden on the community at large. Under the circumstances, we will have to judge the public works proposals by the extent to which they measure up to this much more rigid standard.
Unfortunately, public works originated for the purpose of providing employment are inherently low in value. This is self-evident in the case of projects originated in the middle of a depression period such as that of the thirties. Almost all of these projects are items which have already been passed over by the local communities as not worth the cost, even in good times when nonessential projects can be judged by a much more liberal standard. Furthermore, there is little or no incentive toward construction efficiency, since efficiency tends to defeat the primary purpose of the work, that of providing employment for the maximum number of workers. Even the best of these projects therefore has a very low value, and they grade sharply down to those of the leaf raking variety which have no value at all discernable to the naked eye.
It has been suggested that it would be possible to curtail government construction in boom times and have a budget of needed projects ready to be started immediately whenever an employment emergency develops. No doubt some increase in the project values would result if such a program could be carried out. It is questionable, however, if the proponents of this plan have given sufficient consideration to the obstacles in the way of making it a success. In particular, they are overlooking the very important fact that, in spite of the many extravagant and unnecessary projects that find their way into the public works programs, most public improvements in normal times are undertaken because they are needed. If the school population increases, we need another school building; if the City Hall burns down, we must replace it; if the traffic gets too heavy for some of our streets, we must widen them; if the city expands, we must extend the sewer system. We cannot justify letting these things go for an indefinite period of years until we happen to have a depression. Of course, there are some items of a long range character that can be saved until the time is ripe from an employment stand-point, but such jobs constitute only a relatively small fraction of the projects carried out under public auspices.
Furthermore, it is not as simple as it sounds to have these projects all planned and laid away on ice ready to be brought forth on short notice. Detailed plans drawn up a dozen years ago are not likely to be of much use for today’s construction. In the meantime the needs have changed, the environment of the proposed project has probably been modified, the availability of construction materials has undoubtedly undergone important changes, technical knowledge has widened, and the world in general has moved along to the point where the, original plans are, in all probability, as out of date as last year s fashions. By the time the projects can be restudied and redesigned, the business cycle is likely to have passed on to another phase, where the additional government spending operates in the wrong direction. Instead of the balanced employment condition at which the public works proposal is aimed, actual experience with previous experiments along this line indicates that if we adopted a full scale policy of utilizing public works as an employment regulator we would find ourselves at times with millions of unemployed in spite of the firm commitment to full employment, while at other times we would have millions of workers engaged on government projects of limited utility when genuinely productive jobs in private industry could have materialized.
In view of these points, and all of the human factors involved, it is extremely doubtful if even the best of intentions will increase the project values materially. We must face the fact that low values are inherent in the conception of public works for employment purposes. If we confine these works to projects justified on a merit basis, we secure higher values but eliminate most of the benefit to employment, since the need for additional public works and the need for stimulation of employment are largely non-coincident. If we make employment the primary consideration, values drop.
An important point is that the total value of all current public works proposals is not equal to the sum of the values placed on the individual projects when they are separately appraised. Total public works values are limited by the proportion of their income that the taxpayers are willing to divert from other uses to financing these projects. When the public works expenditures begin to encroach significantly on personal standards of living, the value of additional public works projects falls to near the zero mark.
One of the major weaknesses of the scheme of using public works as an employment balance wheel is that when business is subnormal and additional employment sources are particularly needed, the ability and willingness of the public to buy improvement projects in lieu of goods for personal use are both at a minimum. In the 1930 depression, families actually went without adequate food and clothing while they were buying highway beautification and mural paintings. No one would submit to this knowingly and voluntarily; it is possible to carry out such a program only under the cloak of misrepresentation: repetition of the false assertion that there is not enough work in normal productive activities.
When we subject the public works proposal to the other tests of a sound auxiliary employment plan, it fares little better. It is extremely poor from the standpoint of fitting the worker to the job. Only a fraction of the unemployed workers have ever done construction work before, and for many of them there is an unpleasant physical ordeal to be faced. As the proportion of women in the work force continues to increase, this factor will assume still greater significance. The wage scales and other labor policies on the “made work” projects are generally unsettling to business, and last, but not least, such a program provides an ideal vehicle for political maneuvering by the party in power, a definite menace to the national welfare.
The only sound public works policy is to recognize public improvement projects as a way of spending, and to consider them on their merits in comparison with other ways in which we might wish to use our income. Diversion of any part of the national productive capacity to public works when it could be used to better advantage in the production of some other class of goods is a waste of our resources and a demonstration of inefficiency.
The foregoing comments with respect to public works are equally applicable to other kinds of public service employment, and the whole concept of public jobs as a means of alleviating unemployment must therefore be condemned as a costly and inefficient method of handling the situation. We can do much better than this.