Market Planning and the Role of Government

Does the United States government tailor its military procurement to what private industry wants to sell? Is our foreign policy, or Russia’s, or Western Europe’s, shaped by the needs and desires of industries? These are stark questions, and even to raise them may smack of doctrinal heresy. But they are raised here in this second, of three papers based on Professor Galbraith’s trail-breaking book THE NEW INDUSTRIAL STATE, to be published, in June by Houghton Mifflin.

by JOHN KENNETH GALBRAITH

IN FACT since Adam and as a matter of settled doctrine since Adam Smith, the businessman has been assumed to be subordinate to the market. In last month’s article I showed that modern highly technical processes and products and associated requirements of capital and time lead inevitably to planning — to the management of markets by those who supply them. It is technology, not ideology, that brings this result. The market serves admirably to supply simple things. But excellent as it may be on muskets, it is very bad on missiles. And not even the supply of components for the modern automobile can be trusted to the market; neither is it safe to assume that the market will absorb the necessary production at a remunerative price. There must be planning here as well.

The principal planning instrument in the modern economy is the large corporation. Within broad limits, it determines what the consumer shall have and at what price he shall have it. And it foresees the need for and arranges the necessary supply of capital, machinery, and materials.

The modern corporation is the direct descendant of the entrepreneur. This has kept us from seeing it in its new role. Had the corporation been an outgrowth of the state, which we readily associate with planning, we would not be in doubt. The modern corporation has, in fact, moved into a much closer association with the state than most of us imagine. And its planning activities are extensively and systematically supplemented by those of the state.

Let us consider first the regulation of prices in the modern economy and the means by which public behavior is accommodated to plan. Here, I should warn, we encounter some of the more deeply entrenched folk myths of our time, including a certain vested interest in error on the part of both economists and businessmen. If one takes faith in the market away from the economist, he is perilously barren of belief. So, he defends the market to defend his stock of knowledge. And the large corporate enterprise needs the concept of the market as a cover for the authority it exercises. It has great influence over our material existence and also our beliefs. But accepted doctrine holds that in all of its behavior it is subordinate to the market. It is merely an automaton responding to instructions therefrom. Any complaint as to the use or misuse of power can be met by the answer that there is none.

Control of prices is an intrinsic feature of all planning. And it is made urgent by the special vagaries of the market for highly technical products. In the formally planned economies — that of the Soviet Union, for example — price control is a forthright function of the state, although there has been some tendency in recent times to allow some of the power over prices to devolve on the socialist firm. In the Western-type economies, comprehensive systems of price control have come about by evolution and adaptation. Nobody willed them. They were simply required by circumstance.

The power to set minimum industrial prices exists whenever a small number of firms share a market. The innocent at the universities have long been taught that small numbers of firms in the market — oligopoly, as it is known — accord to sellers the same power in imperfect form that has anciently been associated with monopoly. The principal difference is the imperfect nature of this monopoly power. It does not permit the exploitation of the consumer in quite such efficient fashion as was possible under the patents of monopoly accorded by the first Elizabeth to her favorites or by John D. Rockefeller to himself.

But in fact, the modern market shared by a few large firms is combined, in one of the more disconcerting contradictions of economic theory, with efficient production, expansive output, and prices that are generally thought rather favorable to the public. The consequences of oligopoly (few sellers) are greatly condemned in principle as being like those of monopoly but greatly approved in practice. Professor Paul Samuelson, the most distinguished of contemporary economists, warns in his famous textbook on economics that “to reduce the imperfections of competition" (by which he means markets consisting of a small number of large firms or oligopoly) “a nation must struggle perpetually and must ever maintain vigilance.” Since American markets are now dominated by a very small number of very large firms, the struggle, obviously, has been a losing one and is now lost. But the result is that the economy functions very well. Samuelson himself concludes that man-hour efficiency in the United States “can hardly help but grow at the rate of three per cent or more, even if we do not rouse ourselves.” A similar conflict between the inefficiency of oligopoly and the efficiency of an economy composed thereof is present in every wellregarded economic textbook. Samuelson agrees that technology and associated capital use are what improve efficiency. But these are precisely what require that there be planning and price control.

And here we have the answer. Prices in the modern economy are controlled not for the purposes of monopolistic exploitation. They are controlled for purposes of planning. This comes about as an effortless consequence of the development of that economy. Modern industrial planning both requires and rewards great size. This means, in turn, that a comparatively small number of large firms will divide the production of most (though not all) products. Each, as a matter of ordinary prudence, will act with full consideration of its own needs and of the common need. Each must have control of its own prices. Each will recognize this to be a requirement of others. Each will foreswear any action, and notably any sanguinary or competitive price-cutting, which would be prejudicial to the common interest in price control. This control is not difficult either to achieve or to maintain. Additionally, one firm’s prices are another firm’s costs. So, stability in prices means stability in costs.

THE fact of control is far more important than the precise level at which prices are established. In 1964 in the United States, the big automobile companies had profits on their sales ranging from 5 percent to over 10 percent. There was security against collapse of prices and earnings for firms at either level. Planning was possible at either level of return. All firms could function satisfactorily. But none could have functioned had the price of a standard model fluctuated, depending on whim and reaction to the current novelties, from, say, $1800 to $3600, with steel, glass, chrome, plastics, paint, tires, stereo music, and labor moving over a similar range.

However, the level of prices is not unimportant. And from time to time, in response to major changes in cost — often when the renegotiation of a wage contract provides a common signal to all firms in the industry — prices must be changed. The prices so established will reflect generally the goals of those who guide the enterprise, not of the owners but of those who make the decisions. Security of earnings will be a prime objective. This is necessary for autonomy — for freedom from interference by shareholders and creditors. The next most important goal will be the growth of the firm. This is almost certainly more important than maximum profits. The professional managers and technicians who direct and guide the modern firm do not themselves get the profits. These accrue mainly to the shareholders. But the managers and technicians do get the benefits of expansion. This brings the prestige which is associated with a larger firm and which is associated with growth as such. And as a very practical matter, it opens up new executive jobs, new opportunities for promotion, and better excuses for higher pay.

Prices, accordingly, will be set with a view to attracting customers and expanding sales. When price control is put in the context of planning, the contradiction between expectation of monopolistic exploitation and expectation of efficiency, which pervades all textbook discussion, disappears. Planning calls for stability of prices and costs, security of return, and expansion. With none of these is the consumer at odds. Reality has, by its nature, advantages of internal consistency.

I must mention here one practical consequence of this argument, namely, its bearing on legal action against monopoly. There is a remarkable discrimination in the way such measures, notably the antitrust laws, are now applied. A great corporation wielding vast power over its markets is substantially immune. It does not appear to misuse its power; accordingly, it is left alone. And in any case, to declare all large corporations illegal is, in effect, to declare the modern economy illegal. That is rather impractical — and would damage any President’s consensus. But if two small firms making the same product seek to unite, this corporate union will be meticulously scrutinized. And very possibly, it will be forbidden. This may be so even though the merged firm is miniscule in size or market power as compared with the giant that is already a giant.

The explanation is that the modern antimonopoly and antitrust laws are substantially a charade. Their function is not to prevent exploitation of the public. If great size and great market power led to such exploitation, our case would long since have been hopeless. Their function is to persuade people, liberal economists in particular, that the market still exists, for here is the state vigilantly standing guard. It does so by exempting the large firms and swatting those that seek to become larger.

The French, Germans, and Japanese either do not have or do not enforce such laws. That is because they are not impelled similarly to worship at the altar of the market. They quietly accept the logic of planning and its requirements in size for effective market control. There is no indication that they suffer in consequence.

When prices for a particular product are set by a few large firms, there is little danger of price-cutting. This part of the control is secure. There does remain a danger of uncontrolled price increases.

In particular, when a few large firms bargain with a strong union, conflict can be avoided by acceding to union demands. And there is not much incentive to resist. There is a common understanding among the firms that all will raise their prices to compensate for such a settlement. If demand is strong enough to keep the economy near full employment, it will be strong enough to make such price increases feasible. These price increases, in turn, set in motion demands for further wage increases. Thus, the familiar upward spiral of wages and prices proceeds. And this too is prejudicial to planning. The individual firm, moreover, cannot prevent such price increases; they are beyond its control as a planning unit.

So here, more and more we follow the practice of the formally planned economies. We rely on the state to set maximum wages and prices. In the United States as in Britain this is done with great caution, circumspection, and diffidence, somewhat in the manner of a Victorian spinster viewing an erotic statue. Such action is held to be unnatural and temporary. Economists accord it little or no standing in economic policy. They say it interferes with the market. Unions also dislike it: they say it interferes with free collective bargaining. Businessmen disapprove: they say it interferes with their natural freedom of decision on prices. But what everyone opposes in principle, all advanced countries end up doing in practice. The answer once more is clear. In a market economy, such ceilings would be unnecessary. But they are an indispensable counterpart of economic planning and of the minimum price control that already exists.

This priceand wage-setting by the state could be dispensed with by having such a shortage of demand that it would be impossible for firms to raise prices and unions to raise wages. That is to say, we could do without such controls by rehabilitating the market for labor and industrial products. It would not then be possible to raise wages in response to prices or prices in response to wages. But that would mean unemployment or greater uncertainty of employment, and it would mean greater market uncertainty for producers — for businessmen. Despite everyone’s affection for the market, almost no one wants these results. So we have strong demand, small unemployment, reliable purchases, and the maximum price and wage controls that these require. And we try to avert our eyes from this result. It would be simpler were we to recognize that we have planning and that this control is an indispensable aspect.

THIS leads to another subject, the management of what people buy at the controlled prices.

The key to the management of demand is effective influence over the purchases of final consumers. The latter include both private individuals and the state, If all such purchases are under effective control, there will then be a reliable demand throughout the system for raw materials, parts, machinery, and other items going into the ultimate product. If the demand for its automobiles is secure. an automobile company can accord its suppliers the certainty of long-term contracts for their planning. And, even in the absence of such contracts, there will still be a reliable and predictable flow of orders. How, then, are the individual consumers managed?

As so often happens, change in modern industrial society has made possible what change requires. The need to control consumer behavior arises from the exigencies of planning. Planning, in turn, is made necessary by extensive use of advanced technology and the time and capital this requires. This is an efficient way of producing goods; the result is a very large volume of production. As a further consequence in the economically advanced countries, goods that serve elementary physical sensation — that prevent hunger, protect against cold, provide shelter, suppress pain — include only a small and diminishing part of what people consume. Only a few goods serve needs that are made known to the individual by the palpable discomfort or pain that is experienced in their absence. Most are enjoyed because of some psychic or aesthetic response to their possession or use. They give the individual a sense of personal achievement; they accord him a feeling of equality with his neighbors; they make him feel superior; or they divert his mind from thought or the absence of thought; or they promote or satisfy sexual aspiration; or they promise social acceptability; or they enhance his subjective feelings of health, wellbeing, and adequate peristalsis; or they are thought to contribute to personal beauty.

Thus it comes about that as the industrial system develops to where it has need for planning and the management of the consumer that this requires, we find it serving wants which are psychological in origin. And these are admirably subject to appeal to the psyche. Hence they can be managed. A man whose stomach is totally empty cannot be persuaded that his need is for entertainment. Physical discomfort will tell him he needs food more. But though a hungry man cannot be persuaded to choose between bread and a circus, a well-fed man can. And he can be persuaded to choose between different circuses and different foods.

By giving a man a ration card or distributing to him the specific commodities he is to consume, the individual can be required to consume in accordance with plan. But this is an onerous form of control, and it is ill adapted to differences in personality. In advanced industrial societies, it is considered acceptable only in times of great stress or for the very poor. (Even in the formally planned economies—the Soviet Union and the Eastern European states — the ration card is a manifestation of failure.) It is easier, and if less precise, still sufficient, to manage people by persuasion rather than by fiat.

Though advertising will be thought of as the central feature of this persuasion, and is certainly important, it is but a part of a much larger apparatus for the management of demand. Nor does this consist alone in devising a sales strategy for a particular product. It often means devising a product, or features of a product, around which a sales strategy can be built. Product design, model change, packaging, and even performance reflect the need to provide what are called strong selling points. They are as much a part of the process of demand management as the advertising campaign.

The first step in this process, generally speaking, is to ensure a loyal or automatic corps of customers. This is known as building customer loyalty and brand recognition. If successful, it means that the firm has a stable body of customers who are secure against any large-scale defection. Being thus reliable and predictable, they allow planning.

A purely defensive strategy will not, however, suffice. In line with the goals of its directing organization, the firm will want to expand sales. And such effort is necessary to hold a given position. The same will be true of others. Out of these efforts, from firms that have the resources to play the game (another advantage of size), comes a crude equilibrating process which accords to each participant a reasonably reliable share of the market.

Specifically, when a firm is enjoying a steady patronage by its existing customers and recruitingnew ones at what seems a satisfactory rate, the existing strategy for consumer management — advertising, selling methods, product design — will be considered satisfactory. The firm will not quarrel with success. However, if sales are stationary or slipping, this will call for a change in selling methods—in advertising, product design, or even in the product itself. Testing and experiment are possible. And sooner or later, a formula providing a suitable response is obtained. This will lead, in turn, to countering action by the firms that are then failing to make gains. And out of this process a rough but reliable equilibrium between the participants is achieved.

It does not always work. There are Edsels. But it is the everyday assumption of those who engage in management of demand that if sales of a product are slipping, a new selling formula can be found that will correct the situation. By and large, the assumption is justified. Means, in other words, can almost always be found to keep the exercise of consumer discretion within safe or planned limits.

Management of the consumer on the scale that I have just outlined requires that there be some comprehensive, repetitive, and compelling communication between the managers of demand and those who are managed. It must be possible to win the attention of those who are being managed for considerable periods of time without great effort on their part.

Technology, once again, solved the problem it created. Coincidentally with rising mass incomes came first radio and then television. In their capacity to hold effortless interest, their accessibility over the entire cultural spectrum, and their independence of any educational qualification, these were superbly suited to mass persuasion.

Television was especially serviceable. Not since the invention of speech has any medium of communication appeared which is so readily accommodated to the whole spectrum of mental capacity.

There is an insistent tendency among social scientists, including economists, to think that any institution which features singing commercials, shows the human intestinal tract in full or impaired operation, equates the effortless elimination of human whiskers with the greatest happiness of man, and implies that exceptional but wholesome opportunities for seduction are associated with a particular make of automobile is inherently trivial. This is a great mistake. The modern industrial system is profoundly dependent on this art. What is called progress makes it increasingly so.

And the management of demand so provided is in all respects an admirably subtle arrangement in social design. It works not on the individual but on the mass. An individual of will and determination can, in principle, contract out from under its influence. This being the case, no individual compulsion in the purchase of any product can ever be established. To all who object there is a natural answer: You are at liberty to leave! Yet there is no danger that enough people will ever assert this choice — will ever leave to impair the management of mass behavior.

IN THE nonsocialist economy, the modern large corporation is, to repeat, the basic planning unit. For some planning tasks, we see that it is exceedingly competent. It can fix minimum prices. It can sufficiently manage consumer wants. And it can extract from revenues the savings it needs for its own growth and expansion. But some things it cannot do. Though the modern corporation can set and maintain minimum prices, it cannot, we have seen, set maximum prices and wages; it cannot prevent wages from forcing up prices and prices from forcing up wages in the familiar spiral. And while it can manage the demand for individual products, it cannot control total demand — it cannot ensure that total purchasing power in the economy will be equal, or approximately equal, to the supply of goods that can be produced by the current working force.

There are two other planning tasks that the large corporation cannot perform. It cannot supply the specialized manpower that modern technology and complex organization and planning require. It can train, but on the whole, it cannot educate. And it cannot absorb the risks and costs that are associated with very advanced forms of scientific and technical development — with the development of atomic power, or supersonic air transports, or antimissile defenses, or weapons systems to pierce these defenses, or the like requirements of modern civilized living.

This leads to a conclusion of great importance. The shortcomings of the large corporation as a planning instrument define the role of the modern state in economic policy. Wherever the private corporation cannot plan, the state comes in and performs the required function. Wherever the modern corporation can do the job, as in setting minimum prices or managing consumer demand, the state must remain out, usually as a matter of principle. But the corporation cannot fix maximum prices, so we have the state establishing wage and price guideposts or otherwise limiting wage and price increases. The private firm cannot control aggregate demand, so the state comes in to manipulate taxes, public spending, and bank lending — to implement what we call modern Keynesian policy. The private firm cannot supply specialized manpower, so we have a great expansion in publicly supported education. Private firms cannot afford to underwrite supersonic aircraft. So governments — British, French, or American — come in to do so and with no taint of socialism.

Our attitudes on the proper role of the state are firmly fixed by what the private corporation can or cannot do. The latter can set minimum prices for cigarettes, persuade people to buy a new and implausible detergent, or develop a more drastic laxative. This being so, such planning activity is naturally held to be sacred to private enterprise.

The planning functions of the state are somewhat less sacred. Some still have an improvised or ad hoc aspect. Thus, restraints on wages and prices are perpetual emergency actions; though fully accepted, Keynesian regulation of aggregate demand is thought to be occasioned by the particular imperatives of full employment and growth; the expansion of education is regarded as the result of a new enlightenment following World War II; the underwriting of especially expensive technology is a pragmatic response to the urgent social need for faster travel, emigration to the moon, bigger explosions, and competition with the Soviet Union.

So to regard matters is to fail to see the nature of modern planning. It is to yield unduly to the desire to avert our eyes from the reality of economic life. The planning functions of the state are not ad hoc or separate developments. They are a closely articulated set of functions which supplement and fill the gaps in the planning of the modern large firm. Together these provide a comprehensive planning apparatus. It decides what people should have and then arranges that they will get it and that they will want it. Not the least of its achievements is in leaving them with the impression that the controlling decisions are all theirs.

The Keynesian regulation of aggregate demand also requires only a word. The need for it follows directly from modern industrial planning. As we have seen, corporations decide authoritatively what they will reserve from earnings for reinvestment and expansion. But in the non-Soviet economies, there is no mechanism that ensures that the amounts so withheld for investment will be matched in the economy as a whole by what is invested. So there must be direct action by the state to equate the two. This it does primarily by manipulating private investment (principally in housing) and public spending and taxation. The need to equate the planned savings and the planned investment of the large corporation is not, of course, the only reason for such action. Savings and investment elsewhere in the economy must also be matched. But savings and investment by the large planning corporations are by far the most important in the total.

The successful regulation of demand requires that the quantitative role of the state in the modern economy be relatively large. That is because demand is regulated primarily by increasing or decreasing the expenditures of the state or decreasing or increasing the taxes it collects. Only when the state is large and its revenues are substantial will these changes be large enough to serve. One effective way of ensuring the requisite scale of state activity is to have it underwrite modern technology, which is admirably expensive. Such is the case with modern weaponry, space exploration, even highway and airport design. Though technology helps destroy the market, it does make possible the planning that replaces the market.

THE next function of the state is to provide the specialized and trained manpower which the industrial system cannot supply to itself. This has led in our time to a very great expansion in education, especially in higher education, as has been true in all of the advanced countries. In 1900, there were 24,000 teachers in colleges and universities in the United States; in 1920, there were 49,000; by 1970, three years hence, there will be 480,000. This is rarely pictured as an aspect of modern economic development; it is the vanity of educators that they consider themselves the moving force in a new enlightenment. But it may be significant that when industry, at a little earlier stage, required mostly unlettered proletarians, that is what the educational system supplied. As it has come to need engineers, sales executives, copywriters, computer programmers, personnel managers, information retrieval specialists, product planners, and executive panjandrums, these are what the educational system has come to provide.

Once the community or nation that wanted more industry gave first thought to its capital supply and how to reassure the bankers on its reliability. Now it gives first thought to its educational system.

We cannot be altogether happy about education that is so motivated. There is danger that it will be excessively vocational and that we shall have a race of men who are strong on telemetry and space communications but who cannot read anything but a blueprint or write anything but a computer program. There is currently some uneasiness about liberal education in the modern industrial society. But so far this has manifested itself only in speeches by university presidents. In this segment of society, unfortunately a solemn speech is regularly considered a substitute for action.

Much the most interesting of the planning functions of the state is the underwriting of expensive technology. Few changes in economic life have ever proceeded with such explosive rapidity. Few have so undermined conventional concepts of public and private enterprise. In 1962, the U.S. government spent an estimated $10.6 billion on research and development. This was more than its total dollar outlay for all purposes, military or civilian, before World War II. But this function also includes the underwriting of markets — the provision of a guaranteed demand for billions of dollars worth of highly technical products, from aircraft to missiles to electronic gear to space vehicles. Nearly all of this expenditure, some 80 to 85 percent, goes to the large corporation, which is to say that it is to the planned sector of the American economy. It also brings the modern large corporation into the most intimate association with the state. In the case of such public agencies as NASA, the Atomic Energy Commission, or the Air Force, and the corporations serving them, it is no longer easy to say where the public sector ends and the private sector begins. Individuals and organizations are intimately associated. The private sector becomes, in effect, an extended arm of the public bureaucracy. However, the banner of private enterprise can be quite aggressively flaunted by the firm that does 75 percent of its business with the government and yearns to do more.

In the past, Keynesians have argued that there is nothing very special about government business. Replying to standard Marxian charges that capitalism depends excessively on armaments, they have pointed out that spending for housing, theaters, automobiles, highways to allow more automobiles to exist, and for radios to supply more automobiles to amuse more people while they are sitting in the resulting traffic jams, and for other of the attributes of gracious living will serve to sustain demand just as well as spending on arms.

This, we now see, is not the whole story. The expenditures I have just mentioned would not serve to underwrite technology. And this underwriting is beyond the reach of private planning. Replacement of military spending, with its emphasis on underwriting advanced technology, must be by other equally technical outlays if it is to serve the same purpose. Otherwise, technical development will have to be curtailed to that level where corporate planning units can underwrite on their own. And this curtailment under present circumstances would be very, very drastic.

This analysis makes a considerable case for the space race. It is not that exploring the moon, Mars, or even Saturn is of high social urgency. Rather, the space race allows for an extensive underwriting of advanced technology. And it does this in a field of activity where spending is large and where, in contrast with weapons and weapons systems, competition with the Soviets is comparatively safe and benign. At the same time, as in the case of competitive athletics, everyone can easily be persuaded that it is absolutely vital to win.

We now see the modern corporation, in the technological aspects of its activities, moving into a very close association with the state. The state is the principal customer for such technology and the underwriter of major risk. In the planning of tasks and missions, the mapping of development work, and the execution of contracts, there is nowadays a daily and intimate association between the bureaucracy and the large so-called private firm. But one thing, it will be said, keeps them apart. The state is in pursuit of broad national goals, whatever these may be. And the private firm seeks to make money — in the more solemn language of economics, to maximize profits. This difference in goals, it will be said, sufficiently differentiates the state from private enterprise.

But here again reality supplies that indispensable thread of consistency. For power, as I showed in the first of these articles, and in detail in the book on which I am drawing, has passed from the owners of the corporation to the managers and scientists and technicians. The latter now exercise largely autonomous power, and not surprisingly, they exercise it in their own interest. And this interest differs from that of the owners. As noted, security of return is more important than the level of total earnings. When earnings fail, the autonomy of the decision-makers is threatened. And growth is more important to managers and technicians than maximum earnings.

But a further and important conclusion follows, for economic security and growth are also prime goals of the modern state. Nothing has been more emphasized in modern economic policy than the prevention of depression or recession. Politicians promise it automatically and without perceptible thought. And no test of social achievement is so completely and totally accepted as the rate of economic growth. It is the common measure of accomplishment of all the economic systems. Transcending political faith, religion, occupation, or all except eccentric philosophical persuasion, it is something on which Americans, Russians, Englishmen, Frenchmen, Germans, Italians, and Yugoslavs, and even Irishmen, all agree.

We have seen that as an aspect of its planning, the modern industrial enterprise accommodates the behavior and beliefs of the individual consumer to its needs. It is reasonable to assume that it has also accommodated our social objectives and associated beliefs to what it needs. In any case, there has been an interaction between state and firm which has brought a unity of goals.

A somber thought will occur to many here. We have seen that the state is necessary for underwriting the technology of modern industrial enterprise. Much of this it does within the framework of military expenditure. In the consumer goods economy, the wants and beliefs of the consumer, including his conviction that happiness is associated all but exclusively with the consumption of goods, are accommodated, in greater or less measure, to producer need. Is this true also of the state? Does it respond in its military procurement to what the supplying firms need to sell — and the technology that they wish to have underwritten? Are images of foreign policy in the planned industrial communities— in the United States, the Soviet Union, Western Europe — shaped by industrial need? Do we have an image of conflict because that serves technological and therewith planning need?

We cannot exclude that possibility; on the contrary, it is most plausible. It is a conclusion that was reached, perhaps a bit more intuitively, by President Eisenhower while he was President of the United States. In his famous valedictory, he warned of the influence on public policy resulting from the “conjunction of an immense military establishment and a large arms industry.” This will not be an agreeable thought for those for whom the mind is an instrument for evading reality. Others will see the possibility of a two-way flow of influence. Presumably it will be true of any planned economy, East or West. The image of the foreign policy affects the demand of the state on industry. But the needs of economic planning expressed in the intimate association between industry and the state will affect the state’s view of military requirements and of foreign policy. It is a matter where we had best be guided by reality.

I will have a further word on this, and on other questions bearing on the future of the system, next month.