The Return to "Enlightened Despotism


By RUFUS S. TUCKER, Chief Economist, General Motors Corporation, Former Analyst of the U. S. Departments of Commerce and of the Treasury

Delivered before the Academy of Political and Social Science, Philadelphia, Pa., March 30, 1945

Vital Speeches of the Day, Vol. XI, pp. 395-399.

MR. von Hayek in his very able and timely book The Road to Serfdom maintains that socialism and its less radical manifestation, government planning, inevitably lead to serfdom, citing the examples of Germany, Italy and Russia. The word "serfdom" is not literally correct, since that institution historically included an hereditary factor and a residential one. Under serfdom the son of a farm laborer or tenant, was bound to continue as such on the farm where his father had been. Under modern totalitarianism heredity would not in theory determine one's economic position, although both in Germany and Russia there have been exceptions to this rule, and workers would certainly be transferred from place to place in accordance with the decrees of the State. However the seniority rules now imposed on wage earners make voluntary transference from job to job very difficult, and the loans to farmers to assist them in buying their farms have the effect of tying them to one place for twenty years, on penalty of losing their life's savings. But the modern totalitarianism resembles the medieval serfdom in the essential point, which is that the individual's economic activities are not determined If Us own choice but by authority. The word "serfdom", therefore, is a sufficiently close description of totalitarianism. The question is, therefore, does government planning of the sort now rife in Britain and the United States inevitably lead to totalitarianism?

Of course human activities require a certain amount of planning. Every individual or business must plan and the government also must plan its own legitimate activities. These legitimate activities may include without any danger the provision of information for individuals to aid them in their planning. But when the government attempts to suppress other sources of information and other than the official interpretation of the information supplied, or to draw up a master plan and use pressure to force individuals to conform to it, we are beyond the only meaning of planning that is consistent with free enterprise and individual liberty, except, of course, during war, when all laws, including those of economics, are silent. Modern planners whether of the Communist, Nazi, Fascist, Socialist or New Deal variety have gone far beyond that point.

Perhaps a good workable definition of "planning" for the purposes of the present discussion would be: "Systematic interference by the government with the processes of production and consumption, with the object of increasing the national income." This would exclude governmental activities for the purpose of national defense or the enforcement of the community's moral standards, or in areas not accessible to private enterprise.

As the phrase, "planned economy," is generally used by its advocates, it means the direction of all or a large part of the nation's important economic activities by the government or by some organization controlled by the government and endowed with quasi-governmental powers. Since any body that controlled the economic activities of the nation and had in addition the powers already possessed by government would be able to control the total of human activities, "planned economy" as outlined by its leading advocates is merely a modification of totalitarianism, phrased in language not so shocking to the ears of free men as the language of Communism and Fascism. In 1935 President Roosevelt publicly stated that fact when he said: "In 34 months we have built up new instruments of public power. In the hands of a people's government this power is wholesome and proper, but in the hands of political puppets, of an economic autocracy, such power would provide shackles for the liberties of the people." But what are the President's appointees if they are not political puppets, and how can the vast agglomeration of governmental bodies for the control and financing of all industry and agriculture be regarded as anything but an economic autocracy? Their funds are provided for them out of taxes or loans collected forcibly from the people. They have succeeded in many cases in destroying the power of the Courts to review their decisions; and individuals affected by their decisions, even when the Courts are theoretically available, can obtain no redress because of the expense and delay involved, and if they attempt to do so are subject to persecution and defamation from all the henchmen of the new order and their supporters in the press and on the platform. A notable example at the present time is the controversy over Bretton Woods, in which sincere advocates of an intelligent foreign financial policy are accused of selfish motives and branded, paradoxically, as being at the same time isolationists and international bankers; and for many years we have seen sincere opponents of the fascistic tendencies of the Administration falsely condemned as Fascists.

Planning is universally admitted to require centralized direction, equipped to act more promptly and vigorously than parliamentary or other forms of representative government have shown themselves able to act in the past. Hence planning, even when competently and honestly carried out, is the antithesis of democracy, as we have in America understood and admired the term. But experience shows that it has usually been either incompetent or dishonest. Planning is advocated by persons with academic and theoretical backgrounds, as a means of improving the general welfare. It is advocated by persons of a certain moralistic disposition, who like to see everything done in an orderly manner and are appalled by the irregularities and unpredictabilities of free enterprise; and by warm-hearted idealists who like to think that the ills of the world can be instantly and permanently cured by some easy formula; and by congenital meddlers—the Lady Bountiful type—who get a warm glow of satisfaction from the feeling that they are controlling the lives of other people for their victims' own good. These more or less idealistic groups are assisted by office-seeking politicians, self-seeking pressure groups, and notoriety-seeking publicists. Being human, they would make as many mistakes as private businessmen, even if the job were no harder than running a private business. But the job is infinitely harder, although many persons seem to be unable to realize it. When a private businessman makes a mistake he either finds it out pretty quickly and corrects it, or else the sheriff and the receiver in bankruptcy correct it for him. But when a governmental planner makes a mistake all he has to do is to persuade the voters that his critics are scoundrels, and then he can go on repeating his mistakes for another term of office and paying for them with other people's money; and if he uses that money to lengthen his term or to increase his power can he be blamed for it? That is only what dictators and tyrants have done regularly since the dawn of history. Is it fair to expect every president to be a Washington?

Lord Acton once remarked that "All power corrupts, and absolute power corrupts absolutely," If the word "corrupt" is used in the narrow sense of financial corruption or corruption of personal morals, that is not universally true. But power does corrupt judgment and respect for the opinions and rights of others. It removes men from the opportunity of discussing matters with their equals, and causes them to be surrounded by special pleaders, flatterers, and yes-men. Even when unpleasant facts cannot be overlooked, power leads men to adopt the dangerous doctrine that the end justifies the means, and to do evil that good may result. And if sometimes we find that the evil is done to those whom we hate, and the good results only to the dictators and their partisans, that is only natural and comparatively unimportant.

The idea of governmental planning for the economy is not new. On the contrary it was taken for granted during most of recorded history. Free private enterprise was unthinkable in most countries during the greater part of ancient and medieval times.

In the eighteenth century all economic activities in Europe outside of Britain and Holland, were narrowly circumscribed by law or tradition. All governments were despotic, though usually well-intentioned. The thinking men of the time were continually devising schemes to improve the lot of their fellow men, and many of these schemes were tried out by many governments. Most of these schemes were startlingly like those that have recently been discovered by our pink intelligentsia, and by the large recent crops of Ph.D's in Economics who obtained their licenses to pose as experts on governmental and business activities without ever having had any business experience and without apparently ever having studied economic history or political science. It would seem that the only device for promoting prosperity that was not tried out in the 18th century, although it was discussed under the name of laissez-faire, was the scheme of free enterprise.

Dean Swift, in Gulliver s Travels (1726) wrote a very amusing satire on some of the bright ideas current in his time. Sober historians record the tragic fate of France when in 1720 the king was persuaded by John Law that the unlimited issue of bank notes would make the nation prosperous. Specialists in the literature of economic theory are acquainted with the doctrines of Bernard de Mandeville, who declared that spending was the key to prosperity, that individual thrift was harmful to society, and extravagance and spending for vicious purposes made money circulate and increased the purchasing power of the people. How like this sounds to the present-day attacks on saving, and the Keynesian doctrine that government spending increases the national income, even if the spending is for the purpose of building pyramids or digging holes in order to fill them up again.

Specialists in public finance recall also the theory of Dr. Richard Price, (1771) who declared that a national debt need not be a burden, because a properly devised sinking fund would pay it off automatically without pain to the taxpayers. That theory was eagerly accepted by most of the finance ministers of that day, except our own Alexander Hamilton. Perhaps Dr. Price's theory was as intellectually respectable as the modern one that a national debt need not be a burden because the principal need not be paid and we owe the interest to ourselves.

Governmental planning on a pseudo-scientific basis, however, reached its apex in the latter half of the eighteenth century, the era of the so-called "enlightened despots." Frederick II of Prussia, Catherine of Russia, Joseph II of the Holy Roman Empire, Charles III of Naples and Spain, Peter Leopold of Tuscany, and Joseph I of Portugal all attempted to reform and regulate the economic structures of their respective nations in accordance with the idealistic aspirations of the leading thinkers of the time, and with the aid of highly trained economists, statisticians, and experts in administration. In fact the science of statistics was invented as an aid to such efforts; courses in statistics and cameralistics, the science of governmental regulation, were offered in the universities. Many of the publicists of that era held up China as the model of efficient government, just as many modern planners hold up Russia, and probably for the some reason, that they knew very little about actual conditions in the country they took for a model.

The group of theories that these statesmen took for their guide is generally known as mercantilism. What were the results of their activities? The least altruistic and most skeptical of the lot—Frederick of Prussia—left Prussia stronger and perhaps more prosperous, and left a highly-trained and capable civil service for the use of Bismarck and Hitler. Catherine of Russia, starting in as an idealist, became embittered by her failures and undid some of her own reforms, She also left a legacy of autocracy and governmental control of business to her successors to the present time. The emperor Joseph II, probably the most sincere and idealistic of them all, and assisted by the most highly trained bureaucrats, strove diligently for ten years to combine the welfare state with the authoritarian state, but his planned economy failed to make Austria strong or its people prosperous. The other despots mentioned accomplished some temporary good, but their governments were all swept away by the French revolution or the conquests of Napoleon.

All of the eighteenth century planners had inherited a tradition of despotism. They and most of the thinkers of the time, outside of England and Holland, took for granted that despotism was essential for efficient national planning. In England the situation was complicated by the happy genius of the British for inconsistency; the government and the leading thinkers favored planning, but the people were instinctively opposed to controls. The survivals of medieval and Elizabethan regulations were badly enforced, and new regulations were blocked. I suspect that it was more than a coincidence that the common man was better off in England and Holland than in any of the planned economies, and that England was the country that made the most prog ress in industry and commerce in the eighteenth century. The cotton textile industry, especially, where the industrial revolution originated, was free from regulation, and clothing for the masses was cheaper in England than anywhere else in Europe.

Although England was comparatively free from national planning in the home island, the colonial policy of George III was a good example of it. In full accordance with the prevailing sentiment of acknowledged experts, George III attempted to regulate the commerce and industry of the American colonies. In order to strengthen the British Empire and promote the welfare of his subjects, as he thought, he forbade the colonies to set up iron manufactures, or to produce textiles for export, or to settle West of the Appalachians, or to sell certain products except to England, or to sell other products anywhere except in England, or to trade intheir own ships with the West Indies or any country of Northern Europe. These regulations were not intended as acts of oppression against the colonists; they were intended to promote the military strength and economic welfare of the empire. They resulted, as you all know, in the loss of the colonies and the establishment of a new nation, which adopted for itself a constitution intended to prevent its own government from repeating the mistakes of George III, and permeated by a wholesome dread of centralized power.

A modern might conceivably remark that the experience of the eighteenth century has no bearing on our present situation, because, first, despotism is not essential for national planning, and second, our would-be planners are more intelligent and have more knowledge of economic principles. Both of these claims I deny.

I will not on this occasion elaborate the proof that effective governmental planning of a nation's economic activities is inconsistent with political freedom, or what Americans have known as democracy. Mr. von Hayek has done a good piece of work on that. Mr. von Mises, I believe, has done even a better one, for American readers. And the words and actions of many of the planners themselves show that if they have their way the ten articles of the Bill of Rights will be whittled down to two: the right to vote for the party in power, and the right to receive a job (nature unspecified) from the party in power. The ninth and tenth articles of the Bill of Rights have already been completely destroyed, the first, fourth, fifth, sixth, seventh and eighth have been repeatedly violated by officials and cut down by court decisions. And of course the federal government has usurped many functions that were reserved by the Constitution to the States.

Let us not be deceived by the soothing words of the planners and their hypocritical or unintelligent protestations of belief in free enterprise. On September 14, 1936, Hitler said: "Germany will guard jealously the principle of private enterprise. I will never permit bureaucratization of German industry. I am convinced that there must be competition to bring the best to the top. Of course, whenever private interests clash with the interests of the nation the good of the community must come before profits to the individual."

Now for the second point: Are the proposals of today's planners sounder than those of the planners of two hundred years ago? No, for in important respects they are essentially the same, and where they differ the difference is oftenfor the worse.

The over-all objectives were practically the same—to increase the nation's prosperity. The mercantilists talked more about wealth and were more outspoken about military strength; the moderns prefer to talk about income and emphasize its distribution as well as its amount. Both groups place the interest of society or of the state above those of the individual, or at least insist that the proper way to benefit the individual is to benefit the society of which he is a part, and that his own efforts to better himself unless carefully controlled will be either futile or detrimental to others.

In general, the means recommended are the same, ranging from education and propaganda through loans, subsidies, and discriminating taxes, to fines and jail sentences and deprivation of means of livelihood. In Russia they have freely employed capital punishment and exile, and although our American planners have not yet advocated such drastic measures, they have as a rule found it easy to excuse the Russian procedure. These objectives and means were and are carried out and used by large numbers of highly-trained experts in well-paid nonelective government positions with security of tenure and pensions upon retirement.

Coming down to specific points: The mercantilists desired a large population, fully employed, and for that reason favored the immigration of able-bodied workers. Modern planners say less about population as such, though emphasizing the necessity of reducing the death rate and perhaps increasing the birth rate. They are silent on the immigration of able-bodied workers, although apparently most members of the American planners' coterie favor free admission of persons seeking refuge here from the European planners and the consequences of their activities. They are vigorously outspoken in favor of full employment, setting up a goal of more jobs than there will be workers.

The mercantilists insisted on an adequate supply of homegrown food. They tried to increase the product of agriculture. Some modern planners have tried to reduce the supply of food coming to market, so as to maintain or increase farmers' profits. The contrast between these views is not, I think, flattering to the modern planners.

Both groups advocate control of the location of industry, the nature and amount of the output, the conditions of work. Both are highly conscious of the danger of overproduction, and plan for export outlets to take care of the surplus product, as well as for direct limitations on output.

Both favor and try to stimulate exports as a means of maintaining a high level of employment or high price levels. They resort to very complicated tariffs and commercial treaties to further that end. They are unwilling to admit imports that might threaten the volume of domestic employ-men. To avoid the necessity of taking such imports, the mercantilists favored imports of gold or silver, hoping thereby to maintain prices and profits and also to have a reserve to help in case of future wars; the modern planners at present scoff at gold and advocate gifts to foreigners, and large credits for long periods, frequently on flimsy security. Only twelve years ago, however, they raised the price of gold in order to stimulate exports and raise the level of domestic commodity prices, but the result instead was to bring about an enormous import of gold, and a stimulus to gold mining all over the world. Whereas the eighteenth century planners had learned from experience the advantages of a currency fixed in value, modern planners willingly resort to changes in the value of their currencies in order to promote their political or social policies. In fact the British at Bretton Woods refused to abandon their right to devalue their currency at will, for that reason.

The mercantilists' desire for gold imports was partly because of their desire to build up a treasury against emergencies. Many modern planners on the other hand favor building up a government debt, which is, of course, an easier thing to do.

According to the mercantilists taxation should be used not only as a means of obtaining revenue, but also to penalize or encourage certain types of activity. They tried to avoid taxes that would reduce production. The modern planners believe in incentive taxation, but they also wish to redistribute income, and to avoid taxes that might reduce consumption.

The mercantilists aimed at a balanced budget as an ideal, and welcomed surpluses. Modern planners usually give lip service to a balanced budget, but have much to say about the stimulating effects of deficits.

The mercantilists took for granted that government expenditures should be for useful purposes. They spent large sums on roads, canals, and other public works. The modern planners favor public works, but they are not limited to productive expenditures; the Keynesian multiplier works according to schedule, even if the government expenditures, politely called investments, are for leaf-raking or the destruction of German and Japanese industrial plants. The mercantilists controlled wage rates, usually trying to hold them down, either that the goods produced by laborers might compete in price with foreign products, or that the laborers should not live too luxuriously. Modern planners control wage rates, usually trying to raise them in times of peace, and to hold them down in time of war, in so far as that can be done without losing too many workingmen's votes. They also control profits and salaries and interest and rents, in order that wage earners may live more luxuriously and the recipients of other forms of income less so.

The mercantilists controlled prices of specific commodities while in general working for a gradually rising price level by stimulating the circulation of money. So do the moderns.

The mercantilists controlled the quality of goods, ostensibly to protect consumers. The result was to hamper innovation and reduce consumers' choice. The same holds true now.

These experiments in mercantilist planning have been summarized by Eli F. Heckscher as follows: "The contempt of mercantilists for religion and ethics, their desire to subject individuals to the state, their belief in a somewhat mechanical social causation without belief in a pre-established harmony, made them even more ruthless in their insistence upon setting aside all sorts of time-honored customs and human needs and presented a strong contrast to the fundamentally humanitarian attitudes which followed. Moreover in this respect as in most others the ability of mercantilist statesmen to achieve what was required by their programs was very limited; and their attempts at directing economic life without violence remained mostly on paper. In practise they had recourse to almost all the time-honored methods of coercion."

These experiments in national planning were so unsatisfactory that the political philosophers and the general public of the following decades turned away from that ideal in the direction of laissez-faire; and under the comparatively free systems of the nineteenth century the population and wealth of Europe expanded to an unprecedented degree. The liberal movement of the nineteenth century consisted mainly of getting rid of government controls and enlarging the liberties of the individual citizen. By a paradoxical process of semantics the name "liberal" is now claimed by a group that is striving to narrow the liberties of the individual citizen and restore a system like that against which the original liberals revolted.

This nation started out with a philosophy of political and economic liberalism and adhered to it in the main for 140 years, with highly beneficent results, although there were occasional lapses and detours onto the road of totalitarianism. The protective tariff was a manifestation of economic planning, in which sectional and other selfish interests played a large part. Many states played with state banks, railways, and canals, which they dropped after getting their fingers burned. After the Civil War a strong party advocated greenbacks, a form of managed currency intended to reduce the burden of both public and private debts. But the modern trend toward centralized nation-wide planning received its impetus from the first World War and was made possible in this country by the Federal Reserve Act and the income-tax amendment.

It is no accident that the depression after 1929 was the longest in modern history, and also the one in which governments made the most vigorous attempts to prevent readjustments of prices and wages. It was also preceded by a boom that more than any previous peacetime boom in history was based on credit provided by government-controlled banks that were managed by persons confident of their ability as economic planners.

The Federal Reserve Act was intended, reasonably enough, to improve the banking system by reducing seasonal fluctuations in interest rates, removing obstacles to the flow of funds from state to state, reducing the dependence of banks on the stock exchange, and improving the quality of bank supervision. Its powers were extended during the war to help finance the government. After the war the Reserve Board took upon itself the task of smoothing out the business cycle, by means of changing discount rates and open-market operations. Its success in minimizing the depressions of 1924 and 1927 was widely acclaimed by economists here and abroad, and led directly to the extraordinary booms in real estate and stocks which in turn made inevitable the extraordinary collapse of values in 1929.

It is said that the chief instigator of the open-market operations was wise enough to suggest restraints before the crash came, but, if so, he was not wise enough to foresee that restraints, or the withdrawing of favors once given to politically influential groups, are among the rarest and most difficult of political phenomena.

The Federal Reserve easy-money policy was assisted by repeated pronouncements by the President and the Secretary of the Treasury, reassuring the public that prosperity was here to stay. Foreign loans were floated on an immense scale; they were attractive to investors because they promised higher rates of return than could be obtained from domestic securities. They were also urged, not only by the persons directly interested in arranging them, but also by public-spirited internationalists and academicians, as a means toward international peace and prosperity, and as a means of maintaining the volume of exports, especially agricultural exports.

Alongside the Federal System was built up in the twenties a set of government lending agencies (Federal Land Banks, Intermediate Credit Banks), intended to save farmers from the results of their unwise speculation in farm lands during and immediately following the war, and to prolong the agony of farmers on marginal farms. As a result many marginal farms were kept in cultivation and many unwise mortgages were maintained or incurred, and when the demand for farm products fell off after 1929 the collapse in farm prices and losses to farmers were much greater than they would have been without this well-meant but ill-judged assistance.

The planners in England were following similar policies. By keeping interest rates artificially low the Bank of England drove British capital into illiquid investments in foreign markets, while at the same time foreign capital, largely belonging to banks, was invested in London in highly liquid forms. As a result when the crash came and foreign bankers withdrew their funds from London the British devalued their currency. In plain language the nation went bankrupt. Bad financial practices have occurred in both London and New York on many previous occasions, but this time they were more disastrous, because they were the result of national policies deliberately undertaken as a result of an economic plan.

I need not go into the developments since 1932. If the Republicans chastised us with whips the New Dealers have chastised us with scorpions. There are however two points that should be borne in mind: one, that the measures I have mentioned in the eighteenth century and in the 1920's were not merely practical expedients grasped upon by harassed politicians, but were logical steps in carrying out national policies in accordance with what was supposed to be the best opinion of economists. They were real examples of economic planning. Second, that each step leads to another and longerone, powers once granted require enlargement; palliatives applied at one place cause eruptions elsewhere; a two billion dollar deficit leads to a forty billion dollar one; a two percent tax on large incomes develops into a 90 per cent tax; special favors must be met by extending similar favors to the complainants; critics must be silenced; nonconformists made to conform; Congress must be brought into public contempt if it tries to assert its rights and perform its duties' and the public must be kept soothed by more and more high-sounding promises.

Mr. Robert Frost, in his recent poem "A Masque of Reason" makes a character say: "I hate a tendency; the minute you get on one it seems to start right off accelerating." That generalization certainly applies to governmental economic planning.

Yes, we are on the road to serfdom, and farther along than most of us realize. It is a downhill road and the further we proceed the faster we travel. It does not lead to a bright future, but circles around to the land of darkness from which our ancestors came. But if enough of us consult our maps and compasses and consider the accounts of previous travellers on that road, we can still turn back from it and resume once more our march along the highway of individual liberty, progress, and prosperity. We can once more recognize the dignity of the human individual and restore to him the right to pursue his own ideal of happiness in his own way, subject only to the rights of other individuals to do the same, and free from the coercion, benevolent or otherwise, of those who set themselves up to be at first our guardians and then our masters.