Government Relations to Business


By E. G. NOURSE, Director, Institute of Economics, The Brookings Institution

Delivered at the Institute of the American Council of Public Relations, January 20-24, 1941

Vital Speeches of the Day, Vol. VII, pp. 276-279

I. The Solid Basis of Laissez Faire

MOST businessmen, as lay economists, pin their faith to Adam Smith, generally regarded as father of the modern science of economics—if it is a science. The doctrines which he developed and which they accept and promulgate can be briefly summarized under two heads. (1) As to government, let its activities in the field of business be limited to the very minimum necessary for the maintenance of property rights and peaceful life. (2) As to business, let the system of private capitalism grow naturally under free enterprise, and the law of supply and demand will operate naturally to establish the right prices. Such prices will direct economic activity into the most productive channels and thus promote to the fullest possible extent the national prosperity. These principles he conceived as embodying universal truth capable of achieving "the wealth of nations."

Adam Smith's conclusions still commend themselves to us as based on hard-headed observation and precise and penetrating reasoning from the processes of business as he observed them. The modern businessman is fully justified in making these principles foundation stones in his general scheme of economic thinking. But if truths are stated in universal or highly generalized terms, we have to look atthem very sharply to make sure as to the characteristics of the situations to which they apply and of the adaptations of or additions to the basic principle which are needed when we come to deal with other situations which depart more or less from the broad fundamental pattern. Sir Isaac Newton's law of gravity was stated in terms of solid bodies falling free in a vacuum. It applies still to a tri-motored, air-sealed, stratosphere airliner. But the law in its simple categorical form cannot be held to explain how a body weighing more than a transcontinental locomotive rises from the earth to a desired height, follows a designated course, and comes down gently to a landing that would hardly crack an eggshell.

If we are going to get real guidance from what our fathers learned about the successful conduct of business affairs, we cannot simply go on reciting the law of supply and demand, free enterprise, "capital, the creator," "preserve the profit motive," and "the American way" like parrots without real understanding of the meaning of these great principles and how they can be applied with scientific understanding and engineering skill to practical problems by which we are surrounded. To understand the solid basis on which Smith's doctrine of laissez faire rested and—properly interpreted—still rests, we need to consider the precise character of the situation out of which he derived it.

This raises first the question what kind of government activity in business it was that he was trying to lessen or eliminate. The answer is that it was the restrictive, aristocratic, exploitative efforts of governments whose programs of action were characteristically based on court intrigue, personal favoritism, and the enrichment of favored individuals or classes. To clear away this under brush of monopolized opportunity and exploitation of both workers and consumers was absolutely imperative if exploration and settlement of the new lands and discovery and development in the new realms of scientific technique were to march forward. It is equally true today that we must not permit government to pass laws or follow administrative procedures which make economic activity a matter of special privilege rather than universal opportunity in which the best man can win.

In the second place, with the government stopped from building fences across the field of economic opportunity or herding men about in it, Smith's system demanded that each individual should be free to hold and direct his own property as well as his own labor to whatever line of endeavor seemed to him most promising. His basic principle was that every man is the best judge of his own economic advantage. If he is left free to follow that advantage as he sees it, he will be guided to the place of greatest productiveness. If a better opportunity appears, he is free to shift his labor and his capital to that point. Hence the nation's life is constantly self-adjusting in the light of the most intimate knowledge of millions of individuals guided by self-interest and free to follow that interest wherever opportunity leads. Their individual efficiencies add up to the highest attainable efficiency of the nation.

Note please that this is a logical picture of a system based on pure individualism, complete mobility, and something approaching perfect knowledge. These were conditions that came to their closest approximation in Smith's time and that of other early classic writers. Hence his doctrine of laissez faire rested on a solid practical basis.

II. Information and Responsibility vs. Criticism and Irresponsibility

Turning from Adam Smith, who launched the school of laissez faire in 1776 and John Stuart Mill who put the cap-stone on the structure nearly 100 years ago, we face the current question: How are the basic truths formulated by the expounders of private capitalism, free enterprise, and governmental non-interference to be applied today so that we may be guided by the best thought of the past and yet not allow an inadequate form of statement to blind us to the needs of a nation which has come through another century of economic evolution? Has government changed from the days of royal corruption and aristocratic favor to one of democratic concern for, and specialized ability to serve, the whole public interest? Is this change such that the frontier of government participation, though still conforming to the general rule "as little as is needed for safety and order" must now be drawn at a somewhat different line than in Adam Smith's day? Even by Mill's time the advent of political liberalism had begun to change the picture.

Second we must ask ourselves how the structure of private capitalism and the gospel of free enterprise can utilize the profit motive to maximize national well-being in an age when the individualism of capital ownership and of mental and physical effort characteristic of the end of the 18th century and early 19th has given way to the techniques of mass production which characterize the 20th. It was good old wine, but how can we put it in the new bottles?

When it comes to the role played by government in our economic life, it is commonly described by two quite divergent phrases. The typical American businessman, particularly since the advent of the New Deal, is likely to refer to it as "government interference in private business." The typical "New Dealer" is likely to refer to it as "planned economy." But between these two partisans, persons of more judicial and objective tendencies are prone to talk of "governmental participation" in the nation's business. This reflects an emphasis on the fact that the orderly conduct of complex modern business requires considerable active participation on the part of government, not merely in maintaining order and defining property rights, but also in implementing the processes of commercial and financial organization, establishing and enforcing standards of commodities and of conduct and of actually carrying on certain activities besides military defense, for which private enterprise has shown itself to be too lacking either in courage or in co-ordination. Let us take the heat out of current discussions and try to take the longer rather than the shorter look at the economic interest even as applied to the individual business concern. It then becomes clear that the question boils down to one of how much responsibility for economic well-being is to be assumed by anyone other than the individual and, if it is in any degree to be centralized, in whose hands it will be vested and under what scheme of accountability.

The businessman who complains of government "meddling" certainly does not want the government to withdraw completely from any of the major functional activities which it has undertaken—organizational, regulatory, educational, insurance, recreative. But he does complain bitterly that the public, through its government, has undertaken to exercise a participating role which outrages his sense of proper placing of responsibility. Not less does it outrage his belief as to the basis of intimate understanding and direct responsibility on which the exercise of such functions must be based. He finds the bureaucrat sadly lacking in knowledge as to the minute but important details of his day-to-day business. He finds the best-drafted rule too inflexible to permit of quick adjustment to the swiftly changing conditions of actual business. He finds the bureaucrat irresponsible in the sense that he doesn't have to meet the pay roll on Saturday night."

But when we get on the other side of the fence we discover that this charge of inadequate information and lack of responsibility can also be stated in reverse. The government as spokesman for all the people may charge that the businessman gets his nose down on his own desk where he can't see anything beyond the cost of a traditional article under a routine method or the immediate profit on the moment's deal. Government may see business as callously irresponsible in the matter of maintaining supplies, reducing costs, assuring quality, and, above all, of providing employment in proportion to available resources.

III. Divergence of Opinion Between Businessmen and Bureaucrats

The friction that we find today between businessmen and government agencies is due very largely to the fact that the two groups are talking different languages or are trying to follow different roads. The business viewpoint is largely: Leave us free to seek the greatest profit and the country will attain its greatest possible prosperity. The bureaucratic view, on the other hand, is: Give us authority to promote the national welfare, and the people—farmers, laborers, savers, managers—will get the most possible as sharers in thisgeneral welfare. But both these propositions have to be scrutinized carefully, and both need to be somewhat qualified.

If the unit of business enterprise were still the individual worker with his tools and each used his freedom to get maximum prosperity then these separate achievements would add up to maximum welfare of the whole people. But if free enterprise means freedom of the strong, with all the weapons and armor that they can acquire, to grow in size and power at the expense of the weak, then it doesn't necessarily add up.

This is particularly true when the goal of free enterprise is changed from individual prosperity to maximum profit for a company of gigantic proportions whose life and fortunes are distinct from the lives and fortunes of the thousands of individuals who constitute its personnel. If the businessman as executive in such a business unit is to be given freedom of enterprise, it must include responsibility for the considerable block of the population whose fortunes are dependent on his leadership. Recent interpretations of "the profit motive" have been something very different from the individual free enterprise of Adam Smith's day.

But if the captain of industry has not yet shown himself a fully satisfactory trustee for the welfare of his group, neither can government nor the bureaucrat claim that distinction. They like to say that these great issues of economic life must be put in the hand of someone free of the partisan ties of a particular business and concerned only with "the common good." This is the idealistic character of national economic and social planning.

Of course we want intelligent and co-ordinated action in our national affairs. But the common good can be defined in a democracy only by the 135,000,000 persons who alone can say whether they are happy or unhappy. Some general matters can be broadly defined and entrusted to governmental agencies for administration. But actual operative control must be kept flexible and subject to adjustments by the people technically informed, quick to get knowledge of changed conditions, and qualified to decide what compromises with reality they will make in order to get the best practical result. This means as little government management as possible in business and decentralization of the planning function. This implies business management responsible for the welfare and responsive to the needs and capacities of all its members.

IV. Government in Business and Business in Government

There can be no hard-and-fast rule as to how far private business should go and how far government should go in the economic realm. They both are on trial, and under our democratic procedures we shall eventually work out the line of division accordingly as one or the other shows ability to produce results. The businessman is likely to think of himself as the natural ruler of the economic world. He is unwilling to share his rule either with the government above or the mass of the population beneath.

This is his interpretation of private capitalism. But it is not the only interpretation. Among Adam Smith's less remembered teachings was that of the "division of labor." The question of just how functions should be divided among laborers, white collar workers, scientists, executives, and even bureaucrats, in order to get the most productive business organization, is still in process of being worked out.

The actual decision as to who shall be employed and when and how, as to how or whether savings shall be invested, and whether the plant in which they are invested shall be fullyused or partly used devolves today on only 1 or 2 per cent of the working population. The results of their decisions determine the performance of the whole economic system, set the national standard of living. But only an occasional one among this executive group can claim to be professionally trained for this task of national management. When science appeared on the frontier of the old arts or techniques, the managers brought in the best-trained scientists they could find and now operate under their guidance. They allocate millions of dollars to scientific research.

But in the field of economics they are willing—in fact insistent—to go on their own horse-trading instincts under guidance of "the profit motive." Hardly a dollar spent for what they call business research in fact goes into economic research, designed to put the nation's productive life on a basis of permanent high efficiency. As a result, the government tries to engineer prosperity from the outside instead of the inside, where alone it can be naturally generated. And the young men who acquire professional training in economics flock to the place where someone is ready to employ their talents—the government bureau.

The sad result of this reliance on native shrewdness, this inability to appreciate the value, or unwillingness to face the facts of scientific business analysis is not merely to starve business management. It seriously impairs the ability of even the best trained economists to function efficiently. They are not permitted access to the only adequate laboratory in which to continue their explorations—namely, the inside workings of actual business concerns. Though we long ago outgrew the stage of "trade secrets" as the backbone of industrial technique, we are still on that level of mystery and personal magic in the economic sphere. Deprived of opportunity to study business operations in the only truly scientific way—by experience and controlled experiment—these young professionals become the "starry-eyed theorists" of whom the businessman complains and of whom he is—to a great extent rightly—afraid. But he has it in his power to take over, to educate, and to use this personnel to complement his own talents in a modernly professional team of management which will make free enterprise under private capitalism really click.

V. The Challenge of Free Enterprise

Thus we come back to the deeper meaning of "free enterprise," which we considered in our first discussion. Free enterprise was one of the three foundation stones upon which our nation was founded—"political independence and local autonomy, religious toleration or freedom of worship, and freedom of economic enterprise." It is still an outstanding feature of the American Way. We do not propose to go over to national socialism. We do not propose to have a Party or its Leader decide what our national aims and program of work shall be. We are not ready to give every youth a "work book" in which to record how his life is spent from youth to old age, in that calling to which he is assigned, in those locations to which he is sent by the labor commissar.

On the other hand, we cannot as free citizens of a democracy accept any interpretation of free enterprise which simply means that only present business management or its heirs and assigns may captain the economic system. We shall not be satisfied to rely exclusively upon them and their present philosophy and practices to implement the productive powers of men with brains and muscles that they want to employ in satisfying their needs and the wants of their families. Free enterprise must give scope to the enterprise of all our citizens, not simply a small fraction called in the older phrase "the capitalist class," or in the newer phrase "the managementgroup." Such would be but a stagnant, dog-in-the-manger interpretation of free enterprise. We cannot and should not expect the working power and the voting power of a young, vigorous, democratic nation to accept it for any considerable time.

It is a difficult task which confronts the American business man. It had no counterpart in the days when Adam Smith expounded the doctrine of laissez faire appropriate to his time. That was a counsel of government "hands off" whilst the Invisible Hand of personal, individual self-interest guided the economic process automatically along the road to national well-being.

Today, most men who seek to follow that guidance find the roads they would like to follow hedged in, toll-gated, detoured, and blind-ended in ways too numerous to mention. The Invisible Hand of a universal principle has been superseded by the visible hands of business executives, labor organization executives, and public administrators. These hands must make the right moves or disaster will follow. These moves must be controlled by sound understanding of theeconomic forces with which they deal. They must be based on continuous scientific analysis of the succeeding situations as they emerge. Above all, they must be made harmonious and consistent one with another.

As an economic engineer, I have a deep-seated conviction that in the field of actual operation economic life can be carried on more efficiently under private direction than under public direction. It can there be brought to its highest efficiency. The challenge which free enterprise throws down to the businessman is, will it be brought to this level of truly efficient performance? It is not on that plane of performance or even of real intention today. Nor will it be until capital management and labor management are willing to sit down together as equals to formulate the terms of a just partnership. That done, they can demand of government and secure from government (since between them they are the overwhelming voting majority) a useful complementary role of service to internally well-organized industry, with no fear of government overstepping its essential bounds of usefulness.