Time Will Run Back

by Henry Hazlitt

  He paused.

  “What do you intend to do now?” asked Adams quietly. “Do you want to recall all the extra money outstanding? That would bring about a panic in the middle of the war.”

  “You’re right,” agreed Peter. “Prices would fall; profit margins would be wiped out; manufacturers would shut down; workers would be asked to take lower wages and wouldn’t understand why; unemployment would develop, and resentment and bitterness; new injustices would be created, without necessarily correcting more than a few of the old.... No; we couldn’t withdraw the extra money from circulation. But that is only another reason why you shouldn’t have issued it in the first place!”

  “What do you intend to do, then?” Adams asked.

  “At least we can stop issuing any more, Adams. At least we can freeze the circulation where it is. We can increase taxation, and float bond issues to be paid for out of people’s savings—”

  The telephone rang. It was Hamilton, the Secretary of Defense.

  “Our forces have just captured the airfield outside of Edinburgh, chief! In a week the whole of Scotland should be in our hands!”

  Chapter 42

  I’M sorry,” said Adams, “but whatever caused the increase of prices, at least I tried everything to stop it. For example, I put maximum price ceilings on the necessaries of life—”

  “I was coming to that,” said Peter. “Let’s take the case of beef.”

  “I’m glad you pick beef,” said Adams, “because I acted with great boldness there. You remember that before the war beef was selling at only 50 cents a pound. I kept seeing it climb till it doubled to a goldgram a pound. Then I acted. I ordered the price rolled back to 50 cents a pound—”

  “Why?”

  “Because a goldgram a pound is outrageous.”

  “Why? Because you were used to seeing it at only 50 cents a pound?”

  “Well... partly that. But the sellers of beef were profiteering.”

  “Any more than anybody else? On the average, didn’t most prices double? Didn’t most wages double? Didn’t most incomes double—as measured in your new cheaper monetary unit?”

  “But beef is a necessity of life! The poor can’t afford beef at a goldgram a pound!”

  “Now let’s analyze that,” said Peter. “Let’s go back for a moment to the reason why beef went up in the first place. I’ve looked up the figures and find that until you started to fix its price the production and supply of beef didn’t go down. So its price didn’t go up because beef was scarcer. It went up because you cheapened the value of the monetary unit by printing more money. You blew up the supply of money, so to speak. You blew it up not with more real value but merely by pumping in more air. So a good name for that process would be monetary inflation—”

  “That’s a good phrase,” said Adams, “but it has nothing to do with the particular problem with which I was faced. The poor just can’t afford beef at a goldgram a pound.”

  “Could they have afforded it at 50 cents a pound before your inflation started?”

  “Well—perhaps they could.”

  “But after your inflation started, the poor, on the average, had twice as many goldgrams in their pockets as they had before. The prices of other things had also doubled, so the sellers of those things had twice as many goldgrams. And the wages and income of the poor, like the income of everyone else, had also about doubled. Therefore the poor man—if his cash holdings and income had been affected in the same relation as everybody else’s—did not have to give up any greater percentage of his cash holdings or any greater percentage of his income to buy a pound of beef at one goldgram than he had had to give up to buy it previously at 50 cents.”

  Adams looked as if he were thinking seriously about this. He did not answer.

  Peter continued. “In rolling back the price of beef to 50 cents a pound after cash holdings and incomes and other prices had doubled, in other words, you did precisely the same thing you would have done if, before the inflation, you had arbitrarily cut back the price of beef to 25 cents a pound.”

  “I was trying to protect people against the consequences of high prices,” persisted Adams.

  “You were trying to ‘protect’ the public against the consequences of the very monetary inflation you yourself had imposed upon them,” retorted Peter.

  Adams was silent again. “I still say that the poor can’t afford to pay a goldgram a pound for beef,” he said finally. “Only the rich would buy the beef. Why should the rich be allowed to buy all the beef?”

  Peter sighed hopelessly.

  “Let’s try it once more,” he said. “You rolled back the price of beef from a goldgram to 50 cents so that more people could buy beef. Right?”

  “Right.”

  “But even at 50 cents a pound there are people who feel that they cannot afford beef, or cannot afford as much as they would like. Right?”

  “Right.”

  “So why didn’t you cut the price to 25 cents a pound?”

  “But it hadn’t been 25 cents a pound; it had been 50 cents a pound. I considered 50 cents a fair price.” “Because that was the price you were accustomed to. Is the ‘fair’ price the price one is accustomed to?”

  Adams did not answer. Peter continued:

  “And even if you had cut the price to only 25 cents a pound, there would probably still have been people who couldn’t afford to buy beef, or not as much of it as they would like?”

  Again Adams was silent.

  “And at any price whatever there would still have been some people, Adams, who could not afford beef. So why not order the producers to give the beef away? Why not order all the producers to give everything away? Wouldn’t that be the logical corollary of the principle on which you acted?”

  “Only for a few selected necessities.”

  “Then you would order only the producers of necessities to give them away? That would be a wonderful incentive for producing necessities, wouldn’t it?”

  Adams did not answer. Peter went on:

  “I’m not going to stop until I’ve stripped every layer from this onion. Let’s look at another implication of your argument. How does our free enterprise system work, and what makes it work? We decided that in it each person was entitled to the value of his own production—to the value of his own contribution to a completed product—and that each person actually tended to get that through the competition of the market. Well, I produce beef, say, at a market value of 100 cents a pound. Anybody who thinks he can raise, process and sell beef for less than that is entitled to try. Anybody who thinks I’m making a bigger profit at beef than he is at something else is entitled to abandon his own line and take up mine. Now while I’m getting 100 cents a pound for beef you’re getting 25 cents a pound for potatoes. So in effect you exchange four pounds of your potatoes for one pound of beef. And presumably this comes about, at least in the long run, because, say, the cost of production of a pound of beef is equal to the cost of production of four pounds of potatoes. But now comes along a bureaucrat and orders me to surrender two pounds of my beef for four pounds of your potatoes, or to take only two pounds of potatoes for my pound of beef—”

  “Or he could cut all prices equally,” said Adams, “and keep the exchange ratio the same—”

  “Assuming he could make that work, what would he accomplish? He would then cut the income of the ‘poor’ as much as he would cut the price of beef!”

  Adams was silent again.

  “And incidentally,” Peter continued, “by trying to keep all prices and cost relationships precisely what they were before the outbreak of war, your bureaucrat would delay or prevent the very changes in the structure of production that are most necessary. For what we are trying to do now is to maximize the production of goods needed in war and to minimize the production of goods needed only in peace. And the way to do that most quickly is to make the profits of war production more attractive and the profits of mere ‘peace-goods’ production less attractive. That wou
ld also quickly bring about a higher wage scale in war-goods production than in civiliangoods production. And all this could be most quickly accomplished under a free and flexible price and wage system, not under an arbitrarily petrified price and wage system.”

  “But all I tried to do, chief, was to fix the price of a few selected commodities—”

  “All right, Adams; then let’s come back to that. You are trying to force one particular set of producers to sell for less than their previous relative profit margin, or perhaps even for less than their costs of production. You are trying to force them to make an exchange in which they do not get, like other producers, the exchange value of what they produce, but only half the exchange value of what they produce. Are you surprised that you have merely made beef scarce? Are you surprised that it has practically disappeared from the market? You are discriminating against one group of producers—”

  “They ought to be patriotic enough—” began Adams.

  “They simply couldn’t go on producing even if they wanted to,” retorted Peter. “Losses would eventually force them to quit production. So, with your well-meant efforts, you have been harshest toward the very producers who are turning out the things most needed, and you have forced scarcities of the very things you were trying to make more plentiful. By lowering the price of necessities you have lowered the profit margin on necessities, and encouraged people to move into the production of luxuries where they can get larger profit margins!”

  “But everybody ought to be satisfied with a reasonable profit!” insisted Adams.

  “Ah, yes,” Peter went on. “And that brings me to another point. I see that you have been trying to control profits.”

  “I certainly have,” said Adams proudly. “I’m not going to have anyone profiteer out of this war. I am not going to have anyone profiteer when others are making sacrifices, risking and losing their lives—”

  “I would like to impose equality of sacrifice in this war just as much as you would,” retorted Peter. “Unfortunately, that isn’t the way war works—which is precisely one of the reasons for not having a war if you can help it. You can’t have a system of equality and justice within an institution, like war, that rests only on superior violence, force and might. In a war there can be only one commander-in-chief; in a regiment there can be only one colonel; in a company there can be only one captain; in a squad there can be only one corporal. One man loses his life and seven survive: you can’t arrange it so that each of them is one-eighth killed. One man loses his leg and five are whole: you can’t equalize it by arranging that each shall lose only part of his left foot.”

  “But profits are something that you can equalize.”

  “Now let’s look at the results of trying to do that. The first thing you did when the war broke out was to let contracts that gave the contractor his costs of production plus 5 per cent net profit—”

  “Five per cent was plenty.”

  “And what was the result? The result was that you got tremendous wastes in production. Instead of the utmost economy and efficiency in the allocation of productive resources, you got deliberate extravagance, intentional inefficiency.”

  “But how do you know that?” asked Adams, amazed. “I allowed nothing to be published about it because I thought it would demoralize the war effort. Who told you about that?”

  “No one,” replied Peter. “I didn’t have to ask. Nothing else could have happened. What you did was to reverse all the free market incentives. Instead of penalizing extravagance and wastefulness, you put a premium on them.”

  “I allowed merely a flat 5 per cent—”

  “Precisely. And you overlooked elementary arithmetic. If the contractor’s expenses were 100 goldgrams on an item, he made a profit on it of 5 goldgrams. If he could succeed in getting his production costs down to only 80 goldgrams, he made a profit of only 4 goldgrams. In other words, if he increased the efficiency of his production, and so released more scarce capital and scarce labor for other war production, he was penalized by having his profit reduced. But if he could succeed in doubling his costs of production on each item, either by carelessness or deliberate ingenuity, then he doubled his profits on it. If he could get the item to cost 200 goldgrams, he could make 10 goldgrams instead of 5-”

  “But I abandoned that system as soon as we found all that out,” protested Adams.

  “And what did you substitute?”

  “I substituted a system under which the government wins both ways. The contract is first negotiated at a flat price. This puts a ceiling on the contractor’s profit, and if his unit costs of production run above the initial contract price he is just out of luck: he loses the difference. Whereas—and here is where I think I was ingenious—if he makes too big a profit margin on the contract we step in and renegotiate it, reducing the price.”

  “What is ‘too big’ a profit margin?”

  “We won’t say in advance, but everybody understands from the record of renegotiation so far that anything above 6 or 7 per cent per unit will be regarded as excessive.”

  “I grant you that that system is at least less vicious than the first one,” said Peter. “But let’s see what happens under it. A government contractor finds that he is making 8 per cent per unit profit. What incentive has he to cut his costs of production? What incentive has he to make shells, say, more economically, so that he can either make more of them with his present labor and equipment or release part of his labor to make other war materiel no less urgent?”

  “If he is a true patriot—” began Adams.

  “If he is a true patriot he will cut costs even though he loses by it. But if he is not a true patriot he will do nothing to economize, because his net income will not be improved by economies?”

  “That is correct,” conceded Adams.

  “In other words, if half your war contractors are true patriots they will constantly search for economies anyway, even if they lose money by them; but if the other half are not true patriots they will continue to produce extravagantly and waste essential resources? In still other words, in order to get economy and efficiency in war production, or to prevent waste, you depend entirely on true patriotism, but certainly not on your own contract system, which makes for the opposite?”

  Adams did not reply.

  “Tell me,” Peter continued: “would you apply this system also to the workers, so that every time an individual worker learned to cut costs or to increase his efficiency you reduced his pay?”

  “I’ll admit that the new system doesn’t give as much incentive as it might to reduce production costs and increase efficiency,” Adams said; “but at least it avoids the error of the previous cost-plus system, which put a positive premium on waste.”

  “Does it? Suppose your manufacturer signs a contract and finds himself about to make a unit profit of 20 per cent before your government renegotiators get around to him. He knows he will be cut back to 7 per cent. But if he puts some of his friends and his nephews and his Uncle Charley, whom he has been having to support anyway, on his payroll, he can get the unit profit down to 7 per cent before the government renegotiators arrive. Or suppose he could economize by getting rid of needless workers but would only arouse the resentment of the union by doing so, and would not make any profit out of it anyway? Aren’t these foolish positive and negative temptations to place before him?”

  “How big a profit do you consider reasonable?” Adams’ tone was challenging.

  “I never think of the problem that way,” Peter answered. “I think only of the deterrents and incentives necessary to get the greatest efficiency and economy and the maximum balanced production. There is no such thing as a flat, uniform, ‘reasonable’ profit. Such a profit would prevent all the productive adjustments that it is necessary for a dynamic economy constantly to make, whether it is to adjust itself to changing supply and demand, changing tastes of consumers, the change from peace production to war production, or what not. What counts is not absolute profits, but onl
y relative profits and losses. There is never such a thing as a uniform ‘rate’ of profit anyway, unless it is imposed by government decree; there is only an average profit or loss which can be roughly calculated by statisticians but which is meaningless for the individual producer. Even a profit of 20 per cent may not seem ‘reasonable’ enough for him if he can make 30 per cent producing something else. On the other hand, a profit of less than 1 per cent might prove a big incentive to economy and production if the only alternative were a loss.”

  “What are you going to do,” asked Adams, “about public resentment against big individual profits?”

  “I can only blame your own speeches and your own policies for helping to stir up that resentment,” retorted Peter. “You have to make up your mind. Which are you more eager to do: prevent ‘profiteering’—or win the war?”

  “We must beat Bolshekov, of course—”

  “Then let us make that aim No. One, and subordinate everything else to it. Let profits be whatever they have to be to get the greatest possible war production. Maybe we can get at the thing that bothers you by some form of war profits tax; but that’s another story. The point is that if we are more eager to stop so-called profiteering than we are to win the war, we may lose the war and everything with it.”

  “So your verdict, in brief,” Adam summed up, despondently, “is that I have done a wretched job?”

  Peter suddenly felt ashamed of himself.

  “I’m sorry. I apologize. No: my verdict is that in the field of economic policy you have made some very serious mistakes, which have held up the progress of the war. But on the side of military strategy, which I have studied with an equal readiness to be critical, your record has been magnificent. You are a genius as an organizer and an executive. Had I been in charge of military strategy, and the actual day-to-day conduct of the war, I should probably have made an unholy botch of it.... And so, if this is agreeable to you, I am going to appoint you Secretary of Defense with complete powers—except that I shall assume charge of internal political and economic policy.”