A new economic fallacy came of age in the course of the last prewar decade and threatens to play havoc with the future peace of the world. This fallacy consists in saying that a country’s national prosperity depends, essentially, upon a centralized planning of its economic life. Those who propound this point of view usually confuse full employment with prosperity and state the problem in terms of the former rather than of the latter objective.
They do not object, in principle, to international trade or to such measures as might improve international economic relations. They claim, however, that so long as the world economy is unstable, a country can best serve its own interests and those of the rest of the world by pursuing its own full employment program. They often go on to say that, if only each country adopted a full employment program suited to its particular circumstances, a great step forward would be taken on the path to world economic stability.
They argue that the greatest source of barriers to world trade is to be found in depressions and in the fear of depressions; should that fear be eliminated by appropriate measures of national planning, it would be much easier for a country to let down barriers to imports, since those imports would not interfere any longer with national economic stability. Most of these spokesmen are unwilling to accept any limitations on the freedom of national action in planning for full employment.
The doctrine briefly described in the preceding paragraphs can be attributed to many contemporary writers. Its chief intellectual sponsor has undoubtedly been John Maynard (later Lord) Keynes. In his Tract on Monetary Reform, published in 1923, Keynes emphasized the conflict which, in his opinion, existed between internal and international monetary stability and cast his influential ballot in favor of the former.
Turning from monetary to general economic issues, in 1933 he espoused the cause of national self-sufficiency. In his last major work, which was to become the vade mecum of the “Keynesians,” he launched another vigorous attack against world trade. “If nations can learn,” he wrote, “to provide themselves with full employment by their domestic policy … there need be no important economic force calculated to set the interest of one country against that of its neighbors.”1
One hundred and thirty-six years earlier another book had appeared which linked together self-sufficiency and peace. It was The Closed Commercial State by Johann Gottlieb Fichte, the German philosopher and first rector of the University of Berlin. Fichte, however, realized that individual countries would have to expand their territory and, therefore, go to war to achieve self-sufficiency, whereas Keynes did not even realize that the lovely fruit of national self-sufficiency, which he so glowingly described, concealed the ugly and poisonous worm of war.
On the contrary, he was obsessed by the fallacious idea that, in the past, international trade had been a source of wars. If nations would only provide themselves with full employment by their national policy, he argued,
there would no longer be a pressing motive why one country need force its wares on another…. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases … but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.2
These conceptions of international economic relations are based upon several misapprehensions; their net outcome is an intensification of economic nationalism. Indeed, it can be said that by placing in a faulty perspective the problem of national prosperity, these doctrines lead us inescapably to a conclusion which surely their authors would be the first to repudiate—namely, that prosperity and peace are contradictory objectives, that the quest for the former places the latter in jeopardy, and that mankind can be prosperous only in a world living in a shadow of war.
Yet Keynes’s views have been taken up by followers throughout the world. In the United States, for example, Professor Alvin H. Hansen of Harvard propounds the view that if all countries would secure full employment at home, the stage would be set for a liberalization of foreign trade. America’s principal contribution to world prosperity, he argues, is to maintain full employment at home.3
No one would disagree with the statement that the world cannot be prosperous unless the United States is prosperous and that an American economic depression would cast a shadow upon the prosperity of the world. But the question arises, what else is necessary on the part of the United States to promote world prosperity besides being prosperous herself?
We know from the experiences of the thirties that measures aimed at national prosperity can lead to an increase of trade barriers and other obstacles to international economic intercourse. In order for American prosperity (or that of any other important country) to promote effectively the prosperity of other countries, it is indispensable that the national market should be wide open to the produce of other countries and that national capital should be free to seek investments in foreign countries. Thus American prosperity is a condition of international prosperity, provided it is sought by measures which are favorable to international trade and capital movements. It is also a mistake to argue as if world prosperity were dependent upon American prosperity, but American prosperity depended only upon America’s own domestic economic policies.
“In order for American prosperity (or that of any other important country) to promote effectively the prosperity of other countries, it is indispensable that the national market should be wide open to the produce of other countries and that national capital should be free to seek investments in foreign countries.”
Actually, as a careful study of the 1929 breakdown would clearly show, the causal factors underlying that breakdown were not all located within the United States but were widely spread throughout the world economy. The fact that America’s prosperity in the years preceding the crash was accompanied by a growing precariousness of the international economic equilibrium rendered the depression, when it came, worse both for this country and for the rest of the world than it might have been, had the United States imported substantially more during the twenties and lent quite a bit less, especially on short term.
In brief, a proper conception of the relationships between American prosperity and that of the rest of the world would place them in a relation of mutual dependency rather than imply that American full employment planning is necessary for the welfare of the world, regardless of what forms that planning takes.
The Keynesian notion of prosperity attributes an excessive importance to the level of employment as against that of living standards. “Full employment” (whatever that ambiguous term may statistically mean) can be attained at various levels of well-being and within various types of social organizations. We can have full employment in a slave society in which the majority of people live on a subsistence level, and we can have full employment in a free society in which people enjoy high and rising standards of living.
Were it not for the seemingly indestructible specter of the mass unemployment of the thirties, we would realize that political freedom and economic well-being, rather than full employment, are the real objectives of our quest.
In a prosperous economy, to be sure, there are adequate opportunities for employment for all men and women willing and able to work. But an economy in which there is full employment need not necessarily be prosperous. If the international division of labor is a source of prosperity and well-being, then its curtailment reduces national prosperity below the level it might otherwise achieve. And since the days of Adam Smith economists and their readers have been made increasingly aware of the connection between this division of labor and the growth of standards of living.
The Wealth of Nations proved a time bomb which several decades after publication blasted out of existence the controls and restrictions on international trade which England inherited from the mercantilist period, and which had become a serious handicap to her economic growth. One hundred and seventy years after the publication of Adam Smith’s immortal work, Keynes’s magnum opus devoted many pages to a brilliant, if unconvincing, attempt at rehabilitating mercantilism, by showing that its spokesmen were in reality very farsighted men from whom much could be learned that was of great value in our own days.
This Keynesian “rehabilitation” of mercantilists was a sign of the times. For the mercantilists were economic nationalists par excellence, that is to say, they subordinated all considerations of economic policy to the fundamental desideratum of national power. The mercantilist period was a period of recurrent warfare, and the economic doctrines of that time were very much concerned with the problem of making a country strong for war.
Today we know that political sentiment dictates economic policies, that economic nationalism is merely an aspect of nationalism tout court, and that in a world dominated and obsessed by nationalism, policies aimed at better international economic relations are like tender plants at the mercy of strong northern winds.
Perhaps the mercantilists were not unaware of the importance of the international division of labor as a source of prosperity and well-being. But, since their concern was mostly with national power, they paid less attention than we do to the problem of national welfare. In the mercantilist revival of our own days, however, we are faced with a brand new fallacy, which consists in linking national prosperity with national full employment planning and in minimizing the importance of foreign trade.
Much more importance is attached to national planning than to the international division of labor as a basis for national well-being. To seek prosperity within an insulated national economy rather than within a closely integrated world economy is a fallacy which arises by attaching an exaggerated importance to short run aspects of the problem and by ignoring the long-run effects of these short-run processes.
As Henry Hazlitt has emphasized in his recent book, Economics in One Lesson, most economic fallacies are due to such failures to take the “long view” of economic processes. What our neomercantilists, taking the “short view,” usually offer as a choice is full employment at home with limited foreign trade as against freer international trade tied up with domestic unemployment. In doing that they draw false conclusions from the historic evidence that is before us.
In particular, they tend to mistake the desperate attempts, in the thirties, to fight unemployment by promoting exports while keeping down imports, with the normal operations of international trade. But the “beggar-my-neighbor” policies of the depression years were in themselves a consequence of the economic nationalism of the twenties and of the failure to achieve in the thirties enough international collaboration to develop joint policies in fighting the depressions. The effect of the nationalistic ways of curing national depression was to increase the obstacles to international trade, to precipitate a further disintegration of the world economy, and to place each country’s economic life upon a very uncertain basis.
The disintegration of the world economy, far from being attributed by them to economic nationalism, was then used by the neomercantilists to justify the adoption of still more nationalistic policies. In a disorganized world economy, it looked as if each country had its “own” business cycle, the elimination of which was the proper objective of national policy.
Policies of national planning had the effect of disturbing the relations between the country’s economy and the currents of the world economy. In consequence, the erroneous notion gained increasing acceptance that the business cycle is a national phenomenon, and that a country may best preserve its prosperity by insulating itself against the evil disturbances originating in foreign lands. Prosperity thus came to be regarded as a national virtue and depression as an imported evil.
Considering that economic theory clearly shows the organic connections that exist between the upward and downward phases of a business cycle, this political dissociation of prosperity from depression strikes one as utterly nonsensical. Nonetheless, it has exercised a profound influence upon the course of economic policy and theoretical discussion.
What made the issue between economic nationalism and internationalism in our own time different from what it has been in the past is the emergence of collectivism. In its various forms, collectivism represents a growing control by the national government over the country’s economic activity. Such collectivism promises prosperity through centralized planning. Since, however, the national government can only plan economic activity (and nationalize resources and industries) within the national boundaries of the state, international relations become inevitably subordinated to national plans. Hence the impatience with international relations evidenced by collectivists.
Thus collectivism promotes the segregation of countries from one another; it emphasizes the importance of national boundaries. Indeed, it makes territorial expansion once more worthwhile because, within the wider area, there are more resources and a greater scope for planning. Thus collectivism takes us further and further away from the kind of world envisaged by the liberal thinkers of the 19th and 20th centuries—a world in which political boundaries would gradually become mere administrative divisions; a world of free trade, free capital movements, and free migration; a world in which peace as well as prosperity would be indivisible and sought by common action of all mankind.
Such a world seems today much further removed from the realm of practical realizations than it had been in the days of Richard Cobden. But, whereas Cobden, his predecessors, and his followers, all inspired by the Wealth of Nations, realized that the same road leads to prosperity and to peace, the collectivistic and neomercantilistic writers of today seek prosperity along a road which necessarily takes us further and further away from peace. Only a reversal of policy, a return to the Smithian ideas, can save us from a further exacerbation of economic nationalism.
This article is excerpted from Studies in Economic Nationalism. It was first published in Conflicts of Power in Modern Culture: Seventh Symposium of the Conference of Science, Philosophy, and Religion (New York, 1947).
1. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), p. 382.
2. Ibid., pp. 382–83.
3. See Alvin Harvey Hansen, America’s Role in the World Economy (New York: W.W. Norton & Co., 1945).