The market, planning and public ownership, 1931–40
We must plan or perish.
Election slogan, 1931 The market mechanism will be neither retained as the tyrannical arbiter of the economy nor yet done away with and replaced by a predetermined plan, but . . . transformed until it itself becomes an instrument of the plan.
John Strachey, Left News, 1941 Given then that the health of capitalism could be restored in some measure by the apposite combination of monetary, fiscal, exchange rate and wage policies, given that the evil of mass unemployment could be largely eliminated, living standards raised and economic progress resumed, what need was there for the construction of a socialist economy and what form should it take?
As regards the first question, many emphasized the temporary nature of the respite that expansionary policies would provide, arguing that unless fundamental changes of a socialist nature were made to existing economic arrangements the forces making for depression would reassert themselves. What socialism offered was not only a way of ending the depression but also the creation of a stable economic order that would act as a bulwark against future slumps.
Yet while many socialist writers believed that macroeconomic stabilization policies of the kind that they proposed would introduce a measure of order into capitalism, they also considered that economic life would remain essentially anarchic and chaotic as long as economic decision-making was rooted primarily in a self-interested individualism. Only socialism would permit the conscious, rational, planned conduct of economic activity necessary to ensure long-termeco- nomic stability and thence sustained, non-cyclical economic growth. In this regard, as one recent commentator has it, ‘the deluge that overcame Labour between August and October 1931 provided the stimulus for the wider acceptance within the Labour Party of the idea of the planned economy’, with planning even on the agenda of the TUC by the end of that year.1
Socialist planning was also seen as something that was fundamental to the economic progress being enjoyed by the Soviet Union, most obviously in its capacity to avoid the mass unemployment that was afflicting western industrial
economies. Members of the NFRB had made their pilgrimage to the Soviet Union in 1932 and returned much impressed with what they had seen.2And certainly, as Toye has made clear, ‘it is not true . . . that interest in Soviet-style planning was restricted to Labour’s left-wing’.3
Many also stressed that even the implementation expansionary policies in a capitalist context would require intervention in the economy along socialist lines.
In this view the management of the level of aggregate investment would require publicly controlled institutions, such as a national investment board, which would be given the powers necessary to make a significant impact on the functioning of the capital market. In addition many believed that such macroeconomic man- agement would necessitate a substantial extension of social ownership to furnish the means of controlling the investment plans of key sectors of industry. The apposite conduct of monetary policy in particular would require the nationalization of the Bank of England and, many believed, that of the joint stock banks and major insurance companies as well.
Then there was, for some, the problem that intervention of the kind mooted to stabilize capitalism would probably damage what dynamism and vitality it still possessed, ‘undermin[ing] the incentives and initiative of private investors and private captains of industry without setting up in their place the new driving force of Socialism’.4Again, to circumvent this difficulty, it would be necessary to extend social ownership and create a more fully socialised economy in order to establish motives for efficient productive activity other than those of profit and self-interest.
Finally, many writers accepted that while economic stabilization policies laid the basis for a substantial improvement in the material position of the working classes and a more equitable distribution of wealth, further measures of a socialist kind would be required to realize more fully the ideals of liberty, equality and fraternity. Specifically, they emphasized the fundamental role that an extension of public ownership would play in the business of redistribution, in conjunction with a redistributive fiscal regime.
Socialism was therefore seen by writers in the 1930s as essential for sustained economic and social progress. It was needful on grounds both of equity and efficiency and this chapter is concerned with what different writers believed the transition to, and operation of, a socialist economy would entail. Specifically it will focus on socialist discussion of the nature, instruments and objectives of planning, the role of public ownership and the problem of rational economic calculation under socialism. While, therefore, the previous chapter was largely concerned with how socialist political economists believed capitalism might be saved, this is concerned with their views as to how it might subsequently be transformed.
As we have seen, Fabians, such as the Webbs, stressed the importance of the scientific management of economic affairs on the basis of public ownership. In a socialist commonwealth they envisaged collective decision-making rather than egotistic impulses as determining the quantity and quality of what was produced, the distribution of the national product and the allocation of scarce resources.
The Webbs embraced the idea of a planned economy, though, with the possible Building a socialist economy 109
exception of their Constitution for the socialist commonwealth of Great Britain, they contributed little to its theoretical articulation. Indeed, as one commentator has made clear, ‘despite the near universal dedication to the rhetoric of “conscious and deliberate direction” few had any specific ideas as to what exactly this implied for actual economic policy [and] . . . planning came to serve for many socialists in the 1930s the same purpose fulfilled earlier by the ethic of gradualism’.5That said, on this the Webbs were clear: the market could not play a fundamental role in their vision of a socialist economy. And, as the 1930s progressed, they like others on the Left were to view the marketless planning that was pursued in the Soviet Union with increasing enthusiasm.
In contrast, liberal socialists such as Hobson saw things differently. The market, given a more equitable distribution of wealth, could be used to transmit to pro- ducers and planners a relatively accurate conception of what society wanted and of how best, therefore, the nation’s resources might be allocated. And most of the writers with whom we will be concerned in this chapter believed that, to a greater or lesser extent, planning andthe market must be accommodated within a socialist economy; that given certain preconditions the market could be used as a means of determining prices and gathering the information necessary for the economic calculation and decision-making of socialist planners. In short, what the 1930s witnessed, and what this chapter discusses, is the resurgence of a liberal or market socialism. There were, though, exceptions to this general trend and a consideration of the political economy of G. D. H. Cole will be used to illustrate this.
Barbara Wootton: Fabian echoes
In the 1930s Barbara Wootton was one important participant in the debate among socialist political economists that revolved around planning and the market in the context of a socialist economy. Her major contribution to it was Plan or no plan(1934), a work that influenced, amongst others, the young Douglas Jay. In some respects this book, like those of many of the writers whose work will be discussed in this chapter, reflected a positive attitude to the market mechanism.
At the same time, it expressed definite Fabian concerns about how it might be utilized within a planned socialist economy. The positive aspect comes across clearly at the outset of the book with Wootton stressing that, before any con- sideration of the failings of the price mechanism or any search for possible substitutes could be usefully undertaken, it was imperative to understand the functions it had performed and what the market economy had actually achieved.
‘It is only if we clearly understand the job that a piece of machinery has to do . . . that we can judge the efficiency of its working’ and ‘before we make any criticism of this form of organisation, we must give due weight to the commonplace that in the last century and a half this system has provided the mass of people with an abundance and a variety of forms of consumption never before equalled in the history of mankind’.6Such a view of things and such a positive attitude to the market, expressed as it was in 1934, certainly marked a significant break with much of what had gone before.
And as Wootton saw it, there was ‘nothing in the nature of the price mechanism which would prevent it from functioning in an egalitarian society’.7The reason why an egalitarian society resting on such a basis had not yet emerged had nothing to do with the incompatibility of socialism and the market mechanism but was due rather to the fact that ‘the left-wing liberal school of thought, whose dreams are pervaded with images of such a society, does not count very numerous or influential adherents’.8In this regard Plan or no plancan be seen as an attempt to set about the necessary business of persuasion and to provide that school with a more substantial theoretical underpinning.
Wootton did though identify important deficiencies in the market mechanism.
With respect to income distribution, for example, it failed to match effort and reward. So while accepting that interest and ‘normal’ profits were economically necessary payments, which needed to be made even in the context of a totally planned economy, this did not make them morally defensible. There was, as she saw it, ‘all the difference in the world between being paid for the sweat of your brow, and being paid for giving permission to someone else to use the plant and materials of which you are the owner’.9Powerful moral arguments could therefore be levelled against the inequitable manner in which the existing economic system functioned and Wootton can be seen as shifting the critique of rent and interest from economic to moral ground. For the ‘old’ Fabians, such payments had no economic justification; for Wootton, and as we shall see for Douglas Jay, they were ethically indefensible. Yet she believed that these failings might be rectified while still retaining the price mechanism, in particular, by means of redistributive taxation. She could therefore conceive of a society where there were ‘no marked inequalities in the conditions of living’ but where ‘economic questions were settled by reference to the price mechanism’.10
Wootton also considered that the existing price system was characterized by certain institutional rigidities that had been built into it, especially over the previous two decades. These prevented the market functioning in the manner suggested by orthodox economic theory and, in particular, impaired its allocative efficiency.
Specifically, the public regulation of price movements, which ‘under a price economy are the recognized signals that a new orientation of production is due’, had had this effect, inhibiting economic growth and ultimately damaging the interests of those whom price regulation was supposed to benefit. ‘Thus we are getting the worst of both worlds . . . neither the crude vigorous growth of Victorian capitalism nor the ordered progress of a planned economy.’11
The market also had deficiencies of a macroeconomic nature. Most obviously there was the periodic incidence of slumps that Wootton saw as resulting from the false expectations, limited knowledge and ‘clusters’ of mistakes that characterized the behaviour of participants in a market economy. Here, while acknowledging his influence, Wootton believed that Hobson’s thinking had led many into error.
The system was not flawed in the manner he had suggested. ‘It is not the rules of the game’, as she put it, ‘that bring us to stagnation’ but the fact that ‘we have not learnt to follow the rules accurately’.12That is, the essential problem was that economic actors failed to acquire and act on accurate information. To some degree Building a socialist economy 111
the fault lay with the economic actors themselves but in large part too it lay with the monetary system which, as writers such as Hayek (Prices and production) and Keynes (Treatise on money) had shown, created the informational problems and con- sequent errors in decision-making that were the major precipitant of the economic booms and the slumps that followed.
There was, however, no need for drastic remedies. It should be possible by way of monetary reform to ‘change the oil without redesigning the whole engine’.13The elimination of the ignorance and errors, the ‘clusters of mistakes’ that caused macroeconomic disturbances, did not necessitate the abandonment of the pricing mechanism. To begin with, it was wrong to suppose ‘that those who live under that [price] system will always behave as foolishly in the future as they have done in the past’.14More importantly, the appropriate contracyclical conduct of monetary policy would allow capitalism to circumvent ‘the periodical choke-ups which arise from the fact that everybody’s plans are made in complete independence of everyone else’s’.15Wootton stressed, therefore, that, despite the depth and the prolonged nature of the slump that was being experienced, ‘the chances of a revival of capitalism . . . are very much greater than they are reckoned by many socialists’.
In addition, and in contrast to some socialist writers, she went on to make the point that ‘the recurring depressions of capitalism [had] been setbacks on an upward coursenot stages of a progressive decline’.16
Yet a policy that aimed, finally, to eliminate mass unemployment would require more than this. There would also have to be the conscious matching of aggregate supply and aggregate demand and this would involve planning of a kind that could be implemented effectively only under a more ‘socialised system of output’. As Wootton saw it, this was because a ‘capitalist community’ did not dare permit
‘public authorities’ to set in motion plans to provide employment, for the resultant increase in output would inevitably bring down prices and diminish profitability.
Within a ‘socialized’ economy, such considerations would not apply.
Further, while planning could in some measure be usefully applied to a capitalist economy, it was the case that ‘unless planners have full control of the main instruments of production’ there would be a major obstacle in the way of effective planning, ‘and control practically implies ownership’.17So Wootton, like other socialist political economists of the period, supported the extension of public ownership on the grounds that it gave planners the necessary power to plan effectively.18 Specifically, it allowed them to make saving and capital accumulation a social act.
This was important because, as Wootton and others believed, taxation had reduced the capacity of private savers to fulfil this function adequately. In this regard the public ownership of productive capacity was necessary to allow the appropriation at source of a sufficient part of the economic surplus to ensure both a high level of capital investment andincreased social service provision.
There is in all this much that anticipated the broad outlines of the kind of socialist economic thinking that was to be articulated more fully in the late 1930s by Jay, Meade and Durbin amongst others. The manner in which Wootton discussed the market and the functions it performed while critical was not dismissive. Her recog- nition of what the market did and the difficulties of setting economic calculation
on a different basis also marked a departure from much (in terms of socialist political economy) that had gone before and anticipated some of what is to be found in the works of Meade and Jay. So too did her discussion of the resilience of capitalism, its longevity and the remediability of some of its central, macroeconomic defects.
Thus Wootton, in Plan or no plan, made clear that capitalism had achieved much and, rightly managed, could achieve more.
For all that she carried with her more than a little Fabian baggage. This is apparent at a number of points but most obviously where she discussed ultimate objectives. For, after a peaceful transition to socialism by way of a gradual extension of public ownership to embrace ‘the instruments of production’, Wootton envisaged the creation of a new planning authority that would have control over the greater part of the nation’s productive capacity. Wootton also considered that this authority might come to make certain decisions on the basis of information different from that provided by the price mechanism. However, she also considered that, as regards the price of consumer goods and the distribution of labour, the planning authority might seek to use the information that the market provided.
For this planning authority to function effectively, Wootton also believed that it would have to secure the support and the services of what she saw as a rapidly expanding middle class. ‘The appealing and simple motif of the class war [had therefore] to be dropped.’19Successful economic planning required ‘an extremely high standard of administrative competence’ and that competence must come, primarily, from the ranks of the middle classes. Like the Webbs, Wootton had a technocratic rather than a democratic conception of planning. It was necessary to ‘recognise once and for all that economic administration is a job for experts and hand it over to them. Detailed democratic control of economic affairs is at best a hopeless morass and at worst . . . a hypothetical pretence.’20
All this went hand in hand with a generally favourable view of the Soviet Union that again mirrored the attitude of the Webbs and, as we shall see, G. D. H. Cole.
Wootton saw Soviet planners as having the ‘power of trying out new and bold ventures . . . which is one of the most conspicuous points of contrast with the Western world, suffering as the latter does from widespread and disabling paralysis of the collective will’. Further, the Soviet Union was characterized by a considerable measure of equality and no unemployment.21For Wootton, therefore, an extension of economic democracy to encompass the planning process would simply replicate the paralysis afflicting contemporary capitalism.
Wootton, like the Webbs, saw planning as something that would involve the transcendence of class or sectional interests. Successful planning, after all, would
‘require that an entire nation, ignoring its sectional and class conflicts of interest, should unite in doing something which is to the evident advantage of practically all the members of that nation’. Through planning there was, as she saw it, the real possibility of identifying and pursuing collective objectives that transcended the class divide. In that regard, like the Fabians, Wootton saw ‘the motif of class warfare’ as redundant.22
Building a socialist economy 113
E. F. M. Durbin: economic planning and economic power
As we have seen in the previous chapter Durbin, after some initial scepticism, came to believe that the state could move the economy back towards a full employment position by means of the appropriate combination of monetary and fiscal policy.
Under the influence of James Meade, and to a lesser extent Keynes, that belief strengthened as the 1930s progressed, to the point where he considered that it was possible, through state action, to maintain full employment indefinitely. Yet growing optimism as to what might be achieved by way of expansionary macro- economic policies never led Durbin to question the need for planning and the extension of public ownership over a considerable part of the economic system.
Both were seen as fundamental to the construction and maintenance of a more buoyant, crisis-free economy and a more just and equitable society.
There were a number of reasons why Durbin believed this to be the case. First, he saw contemporary capitalism as characterized by certain irreversible devel- opments which, in the longer term, would destroy its dynamism. Specifically, Durbin cited the growth of trade union power, the redistributive taxation that had financed expanded expenditure on social welfare provision and increasing ‘central control of industry, trade and finance’. Trade union power had ‘jammed’ the labour market and in so doing had destroyed ‘the freemoving, self-adjusting, perfectly sensitive, competitive capitalism of the theoretical textbooks’. Redistributive taxation had struck ‘heavily at the funds available for capital accumulation and economic progress’, while the 1930s had witnessed moves in the direction of a cartelization of British industry that had necessarily resulted in the growth of restrictive monopoly power. What had emerged as a consequence of the latter development was, in Durbin’s words, a kind of ‘state-organized, private property, monopoly capitalism’.23
As Durbin saw it, all these developments could be traced to a popular reaction to the insecurity and inequality generated by an unrestrained capitalism or, as he phrased it, ‘a short-sighted adaptation of the institutions of laissez-faire capitalism to the needs of ordinary men and women’.24However, shortsighted or not, democracy and democratic pressures made such developments inevitable and, short of the overthrow of democracy itself, irreversible. While capitalism might be stabilized, therefore, its long-term dynamism and flexibility would become increasingly precarious unless apposite socialist policies were pursued.
For that reason alone social ownership had to be extended and the state had to set about the task of economic planning. Given this the state or state-controlled institutions had to take over the function of saving and accumulation to maintain an adequate rate of capital investment. Further, nationalization andplanning were necessary to circumvent the adverse consequences of the growth of monopoly power. Even after the extension of social ownership, decisions as to pricing and output could not be left in the hands of nationalized corporations because the managers of even socialized concerns would have an interest in restricting output and maximizing the surplus that they generated. As Durbin put it in 1934, in an