For a Stable Market Economy


Littauer Professor of Political Economy, Harvard University


THE post-war planned world which American business faces can best be described as a modernized market economy. The old market economy has broken down. It failed us utterly in the two decades between the two world wars. If the democratic governments of the world were not now planning and constructing new institutional arrangements to make the market economy function more smoothly than it has done in the past, the future would be black indeed.

Those who think that a reversion to the institutional arrangements of the nineteenth century would give us, in the world we live in, stability and prosperity are not realists. They are nostalgic dreamers. Their thinking is frozen in the fixed patterns of the past. We cannot meet the problems of today by institutions suitable to conditions that no longer exist.

World War I was unfortunately not fought out to a definitive conclusion. The peace proved to be a mere interlude. The constellation of national groupings remained as before. Germany continued to be the threatening giant on the continent of Europe. Similarly, in economic matters, we returned to the status quo ante. We were not convinced that a new world was upon us. We tried to pour new wine into old bottles. Everywhere there was an effort to revert to pre-war policies and to restore pre-war conditions.

This effort failed. Price instability, boom and deflation, the breakdown of the gold standard, the destruction of multilateral trade and the international price system, the substitution of various improvised mechanisms born of desperation: multiple currencies, competitive exchange depreciation, import quotas, and exchange control — all these came of the effort to return to policies no longer suited to the needs of the modern world. Have we anything better to look forward to today than a repetition of the chaos that followed World War I?

Happily we have. Everywhere today governments are planning new policies and new programs. The plans are not hasty improvisations. They have emerged out of the bitter experiences between the two wars. They are the product of two decades of hard thinking. In place of the confusion and the frustration that prevailed after World War I, there is now a program. Among the democracies there is sufficient agreement to warrant the hope that this program will be put into effect.

The goal is a workable market economy, one that will not break down at the first sign of rough weather, as happened after the last war. The plans involve not only international monetary, financial, and trade arrangements, but also full employment. The domestic and the international plans are interrelated and interdependent. The aim is to achieve a sustained market, high business volume, and rising real income. The market economy, international and domestic, cannot function well without a sustained volume of demand for goods and services.

The victory we seek must be an economic victory no less than a military one. The Nazi “New Order” about which we heard so much in 1940, when Germany had conquered nearly the whole of Western Europe, and the “East Asia Co-prosperity Sphere” of Japan were fascist answers to the breakdown of the world economy. We must devise a democratic answer to this breakdown. This is the meaning of the planned world the democratic countries are now building.

Among the many pillars of this new world order are the International Monetary Fund and the International Bank for Reconstruction and Development.

The International Monetary Fund is a modernized gold standard. It combines stability of exchange rates with orderly adjustment . If a country has made a mistake and finds itself loaded with a wrong exchange rate, as England did in the twenties, under the Fund it can make the needed adjustment without loss of prestige and without being branded an international outlaw. Adjustment cannot be made in the Fund arbitrarily, but only in accordance with the “rules of law” established by international agreement. The new plans do not substitute a government of men for a government of law. They establish new moorings to tie to, new canons of conduct.

The Monetary Fund provides a monetary mechanism through which a world market for private traders can function effectively. It represents a kind of planning without which private international trading would gradually disappear. It substitutes international rules of law in monetary matters in place of the arbitrary nationalistic governmental interferences with which we were cursed in the decade prior to World War II. The new moorings do not leave us adrift on an open sea as we were when the Great Depression came. Thus the Monetary Fund represents that kind of “planned world” which promotes the workability and smooth functioning of the market economy.

The Fund arrangement will give us an international monetary system operating under international management in accordance with “rules of law.” It is not an arbitrary and irresponsible monetary system. It is a mechanism suitable for the conditions of the twentieth century, just as the old gold standard was reasonably well suited to the conditions of the nineteenth century. The goal is the same: a workable market economy.

Much the same may be said of the International Bank for Reconstruction and Development. We know that the international capital market functioned badly in the twenties. The erratic and financially irresponsible character of much of the international lending in the twenties contributed a great deal to the boom and the collapse. The international money and capital market did not, under the automatic market forces, prove a good guide for investment and production.

We need a new institution which will make the international capital money market a workable mechanism in a well-functioning market economy. The Bank will not supplant private investment. It will guide private funds into urgently needed basic development and improvement projects. It will raise the productivity of backward countries and thereby increase the level of world trade. And by so doing, it. will open new fields for private investment, undertaken quite apart from the Bank. It can, moreover, be expected that the standards under which the Bank must operate, according to the provisions in the agreement, will place international lending all around on a sounder, more responsible basis.

The international price system has become a pretty sick institution under the impact of trade barriers and discriminatory trade practices. The Hull trade agreements have at any rate helped to check the disorders and started us in the right direction. We need to extend these agreements and to supplement them with a more general multilateral arrangement. There should, moreover, be established an International Trade Authority through which, by international research and voluntary coöperation, the various members in the family of nations could together promote an expansion of world trade.

We have set up the United Nations Relief and Rehabilitation Administration to promote an orderly transition to peacetime production of food and other essentials. We are in process of instituting the Food and Agriculture Organization of the United Nations to promote higher nutritional standards throughout the world and thereby to extend the market for agricultural products. It also is an organization designed to improve the workability of the market economy.

An international agency has been proposed which would accumulate and hold buffer stocks of the more important agricultural commodities with a view to stabilizing market prices. Such an arrangement would permit the free play of market forces for each commodity, within upper and lower price limits, adjusted from time to time according to supply and demand. We have seen between the two wars how disastrous violent fluctuations in raw-material prices can be. The proposal under consideration would not supplant the market. It would, I believe, contribute to a more orderly market. It would help to make the market economy work.

Finally, at Dumbarton Oaks it was proposed that an Economic and Social Council should be set up, to make recommendations on its own initiative with respect to economic, social, and humanitarian matters, and to coördinate the work of the various international economic organizations. In particular, it was intended to secure coöperation among the various member governments in their efforts to cope with depressions, which are contagious and spread from country to country. We know that if one country attempts an expansionist program all alone, its imports will rise and it will get into balance-of-payment difficulties. Accordingly, it may be compelled to take measures which restrict trade and exchange and which tend to destroy international prosperity. It is therefore important that countries move along together in a coördinated manner in their anti-depression policies.


DOMESTIC policies aiming at high levels of production and employment are of international concern because of their effect upon the demand for goods and services. Demand is the final source of trade. Without high levels of employment and purchasing power, the real motive force behind international trade is lacking. The acceptance, especially by the leading nations, of the responsibility to maintain high income and employment levels would make a fundamental contribution to a better-functioning market economy.

Thus an important part of the “planned world” upon which the democracies are embarking relates to domestic policies of full employment. A violently fluctuating market, such as we have had in the past, is not a good guide to production. The total demand for goods and services has not been adequate or sufficiently stable to provide sustained business volume.

Modern democratic countries have plans to correct this defect in the market economy. They are not so naive as to believe that the millennium has arrived or that perfection will be achieved. But they have a program, and they mean to pursue it with vigor.

The British government, in the White Paper on Employment Policy, has accepted as one of its primary aims and responsibilities the maintenance of a high and stable level of employment after the war. And it has announced the policy it expects to follow in pursuance of that aim. The government has stated that it is prepared to accept in the future the responsibility for taking action at the earliest possible stage to arrest a threatened slump. It recognizes that this is a new approach and a new responsibility for the state.

In its report to Parliament, the government stated that a country will not suffer from mass unemployment so long as the total demand for goods and services is maintained at a high level. It analyzed total demand into (1) consumers’ expenditures, (2) private capital outlays, and (3) government outlays. In particular it has announced the intention of managing its own budget, with special reference to its capital expenditures, so that the government will serve as a balance wheel to the private sector of the economy.

The Canadian government similarly has made a report to Parliament in which it stated unequivocally, as a major aim of government policy, the adoption of a high and stable level of employment and income. The government made it clear that it was selecting full employment as its goal. Yet it was mindful that employment and incomes will be subject to fluctuations and that these cannot be overcome without much patient and resourceful work.

The government listed a variety of programs designed to achieve these ends. They include: international arrangements, such as the Bretton Woods proposals, to promote export trade; provision of credit for new enterprises through the establishment of a Canadian Industrial Development Bank; encouragement of house building by providing for financing at low rates of interest for homeowners, and by low-rental housing projects. In the National Housing Act of 1944, provision was made for direct grants to municipalities of half the net cost of slum clearance. Consumption expenditures will be stimulated by the Family Allowance Act of 1944, effective July 1 of this year, which will make substantial payments in respect of children up to sixteen years of age.

The Canadian government indicated its support of additional social security measures, including old-age pensions and health insurance. It announced its firm intention to institute a system of managing its capital expenditures, including public works and the development of natural resources, so that they will contribute to the stabilization of employment and of income. Finally, the government proposed to finance scientific research, to continue and expand after the war the work of the National Research Council, and to establish and operate a technical and scientific information service to make the results of research and technical knowledge available to industry all over Canada.

A similar program has for some time been in operation and is currently undergoing further development in Sweden. The Swedish Post-war Economic Planning Commission has recently made a number of significant reports. The general objective is to influence investments in order to stabilize as far as possible the fluctuations of business activity. Sweden being heavily dependent upon exports, it is the aim of the government to offset any incipient decline by bringing about an increase in domestic investment activity as soon as the trend becomes evident.

The Minister of Finance has had an inventory drawn up by the local authorities throughout the country, and by the state-owned economic undertakings, of the various useful public works and investment projects which might be started in order to check a down turn. This inventory is being minutely planned so that it can be employed on a flexible basis — either spread out over a long period or concentrated within a brief period to stop a threatened slump. In selecting the public works projects, particular attention is being paid to the ability of each project to contribute rapidly toward increasing the national income.

With respect to private capital outlays, there has been set up a special Investment Council consisting of representatives of private industry and of the Swedish government. Its tasks are to observe the trend of business activity and to make recommendations on the basis of its findings.

Plans are being made to stabilize the construction of dwellings at a steady high level. Once the present housing shortage is remedied, a result expected in about three years, the rate of demolition of old buildings will be accelerated on a systematic basis.

While the United States has not yet officially adopted the goal of full employment as a national policy, or outlined a concrete program in pursuit of that aim, there are nevertheless evolving in the work of many agencies and departments of the government the component parts of an overall employment policy. These relate to development of resources, agriculture, rural electrification, public works and development projects, housing, social security, public health, education, taxation, fiscal and monetary policy, lending operations, plans for small and new industries, reconversion, and many other matters. Moreover, the public discussion and public hearings on the Murray Full Employment Bill are currently focusing the attention of the entire nation on the paramount issue of our generation.


THE United Nations Conference at San Francisco has elevated the Economic and Social Council to a rank in the new world organization equal to that of the Security Council and the General Assembly. The proposed Economic Council will coördinate the various specialized international economic institutions such as the Fund, the Bank, and the Food and Agriculture Organization. It will also be charged with the duty of constantly being on the alert with respect to basic causes of economic rivalries and national conflicts growing out of inadequate access to raw materials, and out of trade obstacles and discriminations.

Furthermore, — and this is a fact of the very greatest importance, — the economic and social section in the new United Nations Charter will include the pledge by the signatories to promote within each country the goal of full employment.

It is therefore clear that leading democratic countries are not content to leave their economic destiny to good luck or chance. There is, however, no intention to supplant the market economy. Rather they plan to make it work more effectively. The democracies are firmly committed to a system of private enterprise. They are convinced that personal freedom is safeguarded best by a system in which workers can select among a wide variety of job opportunities offered by numerous employers.

They believe in a mixed system in which economic decisions are widely diffused — a system in which production is mainly by private enterprise, but in which the state, by adequately supplying those needs which it alone can serve, is able to act as a balance wheel to the economy. In the countries in which social reform is the farthest advanced, communism and fascism have not the slightest chance. Wherever the people as a whole participate actively in social affairs through voluntary organizations of all kinds, there the social order is more secure.

The democracies are planning a more stable market with higher business volume for private producers. It is in this sense that we are witnessing the development of a planned world. But production continues to be guided by market forces. Private enterprise will produce whatever the market calls for. Such a “planned world” is neither communism nor socialism. It is the coöperative effort of enlightened democratic countries to establish a market economy free from the violent fluctuations and breakdowns which we have witnessed time and again in the past.

I am convinced that the democratic countries have learned a great deal from the events of the last two decades. I am convinced that we are building a better world — one in which private enterprise can, and will, flourish and expand, and one that will yield a rising living standard to the people as a whole.

There will always be those who look upon change with dismay, and who see only doom and disaster ahead. But nothing can be more certain than this: failure to make adaptation to change means decay. These adaptations we may call, if we wish, a “planned world.” And business in all the democracies, I feel certain, will more and more join with labor, agriculture, and government to guide and mold the planning so that it will be sound and constructive and will promote a better-functioning market economy.