Time Will Run Back

by Henry Hazlitt

  One of the first results of the change was a tremendous turnover in managers. Under the communist system, managers were selected for their ideological fervor, for their passion for communism, for their ability to make rousing speeches, for their adroitness in producing excuses for not meeting production quotas, for their docility and subservience, for their meticulous care in making out reports in triplicate or quadruplicate and keeping all paper work neatly in order. But the owner-workers now seemed to care for only one thing. Each group of shareholders wanted a manager who knew how to increase their income and the value of their shares. They threw out every manager who failed—however ingenious his explanation for his failure, or however expert he was in slapping backs and kissing babies—and they chose a manager who they thought knew how to succeed, or who had shown by his record somewhere else that he did know how.

  Another result of the private ownership of productive property was that equality of income soon ceased. In the factories, for example, the managers were often rewarded out of all proportion to the rewards of the average worker. The workers in a plant seemed willing to pay their top manager almost any amount—provided only that he could increase the value of their own shares, or the income from their own shares, by an even greater amount. The better the manager, they found, the greater the overall productivity of the plant; and therefore the greater the income to be divided among all of them.

  But the quickest and most dramatic results of the new reform were on the land. Here there were few problems of common ownership. The collectives were broken up into smaller units. Usually the land was divided up pro rata, and particular parcels of it were assigned to individual families. It was only where this division would have resulted in individual plots of land obviously too small for economical cultivation that several families would agree to work a larger piece of land in common. But in such cases the plot was usually too small anyway to yield a tolerable living for the several families involved, and in the course of time the others would usually sell their share to some one family. A few former members of the collectives went into the business of owning or working tractors, and renting them out by the day to farms too small to afford to keep them all year round.

  The yield per acre of all crops grew amazingly; yet the soil was better conserved than ever. The attitude of the peasants toward their work and toward the land changed completely. They worked as never before. No work seemed like drudgery to them.

  They took a pride in their land and developed a love of it such as even Peter had not dreamed to be possible.

  When he asked one of these new peasant-proprietors about his changed attitude, his explanation was simple: “The more work I and my family put into the farm, the better off we are. Our work is no longer offset by the laziness and carelessness of others. On the other hand, we can no longer sit back and hope that others will make up for what we fail to do. Everything depends on ourselves.”

  Another farmer-owner put it this way: “The greater the crop we raise this year, the better off my family will be. But we also have to think of next year and the year after that, so we can’t take any risk of exhausting the soil. Every improvement I put into the farm, whether into the soil or into the buildings, is mine; I reap the fruits of it. But there is something that to me is more important still. I am building this for my family; I am increasing the security of my family; I will have something fine to turn over to my children after I am gone. I don’t know how I can explain it to you, Your Highness, but since my family has owned this land for itself, and feels secure in its right and title to stay here undisturbed, we feel not only that the farm belongs to us but that we belong to the farm. It is a part of us, and we are a part of it. It works for us, and we work for it. It produces for us, and we produce for it. You may think it is just a thing, but it seems as alive as any of us, and we love it and care for it as if it were a part of ourselves.”

  “The whole thing is just a miracle,” conceded Adams. “If I wanted to coin an aphorism I would say: The magic of private property turns sand into gold.”

  Meanwhile, fascinating developments began to take place in the new markets for raw materials and for production goods. There was now a market for everything that could be exchanged. There was a market and a price for coal, steel and pig iron, for lead, zinc and copper, for rubber, jute and marble, for cattle, hides and leather, for raw cotton, raw wool and flax, for silver, platinum and gold.

  At first the prices of all of these were stated in terms of cigarette packs. But after a few months this system came to seem ridiculous, and broke down. Prices of great quantities of raw materials, and of the precious metals, had to be stated in terms of thousands and thousands of cigarette packs. The demand for cigarette packs as a medium of exchange became far greater than the demand for them for smoking. Cigarette packages began to assume so high a value as a medium of exchange, in fact, that it came to seem criminally wasteful to smoke them—though their use for smoking had been the sole source of their original value.

  So people took to using the rare metals as mediums of exchange and common standards for stating high prices or the prices of large-quantity transactions. In some markets silver would be used for this purpose, in others platinum, in still others gold. But it proved troublesome to be constantly translating these prices into each other, especially as the price of each of the metals was constantly changing in relation to the others.

  Gradually and almost imperceptibly the habit developed of translating all prices into gold for common comparison. Gold became the medium of exchange for all large transactions. Cigarettes were now used as such a medium only in small transactions. In time the value of cigarettes themselves was commonly stated in terms of gold.

  Another curious thing happened. Once gold had established itself as the medium of exchange, it had a higher value in relation to silver and platinum, and to everything else, than it had before.

  “How do you think that happened, chief?” asked Adams.

  “As nearly as I can make out,” said Peter, “the reason is this. The demand for gold as a medium of exchange has now become an additional source of demand above that for ornament, teeth filling, or any of gold’s other original uses.”

  “But why, chief, out of all the commodities, should gold have become the medium of exchange.”

  “Well, it was obviously an enormous convenience that some one thing should eventually become the common medium of exchange. Such a medium, of course, would have to have certain qualities in order to serve satisfactorily. When you start to think of what these qualities ought to be, as I did the other day, you will find that gold combines them better than practically anything else.”

  “What qualities are they?” Adams asked.

  “Well, before anything can become a medium of exchange, it must have a high measure of acceptability for its own sake. Gold has this. It must have a high value with small bulk, so that it can be easily carried in pockets or easily shipped from place to place. Gold, again. It must not be perishable; it must not evaporate like alcohol, rot like eggs or rust like iron. It must, in short, keep permanently. Gold, again. It mustn’t vary in quality, like wheat, eggs, meat or a thousand other things. One part must be as valuable, weight for weight, as any other part, provided it is the same material. Gold, again. It must be easily divisible, so that it can be cut into any desired size without losing value, or pass from hand to hand in any standardized size. Gold, again. It must have stability of value. Gold has this because the current year’s production is always small compared with the accumulated stock. It must be easily recognized for what it is, so that it cannot be easily imitated. Most people can tell real gold instantly, because there is nothing quite like it. It is beautiful to look at; it has an unmistakable ring; it is malleable and impressible, and takes a sharp stamp. And, if you wish, you can always make a final acid test.”

  “Then you don’t think, chief, that the emergence of gold as the medium of exchange was a mere accident?”

  “It looks m
uch more to me, Adams, like the survival of the fittest.”

  When gold first began to emerge as the medium of exchange after Peter’s reform, it was exchanged in small bars weighing a hundred grams each. These were stamped, marked, cut and assayed by people who now made a regular profession of being “goldsmiths.” But soon prices of everything were commonly quoted in terms of grams of gold, or “goldgrams.” People did not actually exchange anything as small as a gram of gold, but gradually the goldsmiths began to stamp small round disks of gold of as small a weight as ten grams. One of these was known as a “ten-gram piece.” These disks came to be called “coins.” After a while, people no longer asked what the value of any other commodity was in terms of gold. The value of any other object was simply stated as its “price” in gold. Later this was simply referred to as its “price.” Most of the time, when talking of the “price” of this or that object, people did not even stop to think that this meant its exchange value in relation to a gram of gold. They began to talk of a “goldgram” as if it were something by itself, apart from a specific weight of gold. Instead of referring to gold as a common medium of exchange, by which all goods were exchanged in an indirect or “triangular” way instead of being bartered directly against each other, people simply referred to the coins and the goldgram as “money.” The “price” of anything meant its price in money.7

  All this came about by such a gradual and apparently spontaneous and automatic process of evolution that few people appreciated its full significance. But Peter realized that a sort of miracle had come about. His two inventions—first, freedom of exchange of consumers* goods, and second, private ownership of the means of production and free exchange of the means of production—had solved the problem of economic calculation! Or rather, they had given rise to a free market system, a free price system. And it was this that had solved the problem of economic calculation.

  Chapter 33

  SUMMING up the sense of the meeting, then,” said Peter, consulting his penciled notes, “it is agreed that we should increase our production of tanks in the coming fiscal year by 20 per cent, our production of military planes by 35 per cent, and our production of transport ships by 50 per cent. Other military production is to continue at approximately the present rate, with the minor changes recommended by the Secretary of Defense. And we have also agreed, overruling the objections of the Secretary of Economics”—he nodded good-naturedly in the direction of Adams—“that the government will carry on this program by placing orders with private industry rather than by building its own plants, on the ground that we can get more efficient and economical production this way. Next, the period of military training is to be extended from eighteen months to two years. Finally, we have agreed that we need urgently to improve our intelligence and counterintelligence service against Bolshekov along the lines recommended in the report we have just heard from the Joint Chiefs of Staff. Any further comments?”

  His glance passed inquiringly to each of the nine faces around the table. There were no comments. The meeting was adjourned.

  In this miraculous Freeworld market system, people knew at last whether and when they were wasting resources in making things that other people did not want, or in making too much of one thing and too little of another. They could tell by a comparison of exchange values, or prices—and by profit and loss. It was the reduction of the value of every commodity and service to a common denominator, to gold, to “money,” to money prices, that for the first time made all this possible.

  A special group grew up, known as “enterprisers.” These consisted of the more adventurous persons who found that they could make large profits if they could devise or think of some object or commodity that would fill some want not already being filled, or if they could make some existing commodity in a more economical or efficient way than it was already being made. They found that whoever could serve the consumers best was most rewarded, and that his reward was in proportion to the degree in which he served the consumers.

  So an enterpriser would borrow money (if he could find enough other people with faith in him), rent a factory, buy or hire machines, and bid against other enterprisers for the services of workers in turning out products.

  An enterpriser was adding to production on net balance by the amount that the value of his input was exceeded by the value of his finished output. His input was measured by its quantity multiplied by the prices or rates he paid for it; his output was measured by its quantity multiplied by the prices for which he could sell it.

  The amount by which his output exceeded his input belonged to him. It was called his “profit.” Sometimes it was very large. Whenever this happened a lot of people contended that the profit was “unfair,” “unreasonable,” or “exorbitant.” But what these same people seldom noticed was the great number of constant, daily failures. More than half of the enterprisers were losing money and not making it. When an enterpriser lost money he was usually through as an enterpriser. He had no funds to start another enterprise; he could seldom get anybody else to lend him any more.

  But while nearly everybody with a smaller income would refer to an unusual profit as exorbitant, unreasonable or unfair, nobody (except the enterpriser directly involved) was ever known to refer to a business loss as exorbitant or unfair. The loss was simply ascribed to his incompetence. But only a comparatively few people seemed to have the consistency or generosity to admire the exceptional competence, ingenuity and adventurousness of the enterprisers who made big profits because they were exceptionally successful in meeting the wants of consumers.

  All this, however, in Peter’s view, was beside the main point. Envy and jealousy, and the tendency of the unsuccessful to attribute all success to favoritism or luck, he decided, were simply a permanent element in human nature. Under the old communist system, he knew, the people who were not members of the Protectorate envied and often hated those who were, but dared not say so. But what fascinated Peter now was the wonderful way in which the market system had solved the problem of economic calculation.

  This, he saw at last, was not only a vitally important economic problem; it was the central problem that an economic system had to solve.

  Neither Peter nor the Freeworld Supreme Economic Council (which he had set up as the equivalent of the old Wonworld Central Planning Board) now had to decide exactly how much ought to be produced of each of hundreds of different commodities. Prices decided. Costs of production decided. The markets decided. In short, the consumers ultimately decided.

  If too many hogs were being raised, their price would fall to a point where it no longer paid to feed them corn; and so fewer hogs would be raised. If too many shirts were being turned out, their price would fall below what it cost to buy the cotton cloth, to rent the factory and machinery and pay the labor that made them. Therefore the least efficient shirtmakers would be forced out of business, and the number of shirts produced would fall. If, on the other hand, there was an exceptionally big profit in raising cotton, more cotton would be planted in the next harvest. This would cause the price of cotton and the profit in raising it to fall back again to a level equivalent to that realized in raising other things. If there was a big profit in making shoes, more shoe factories would be set up, until the relative scarcity of shoes was relieved and their price fell. The cure for a low price was a low price. The cure for a high price was a high price. The cure for an excessive profit was an excessive profit.

  And this was so because of the individual decisions of the enterprisers, each of whom was constantly seeking to stop his losses or to maximize his profits. He would halt or reduce the production of the things on which one lost money and begin or increase the production of the things on which one made money.

  The enterprisers were constantly thinking up new inventions, devices, gadgets or products on which they might make money. The result was that instead of the few hundreds of drab, shabby, monotonous commodities turned out in Wonworld, there were now thousands of different commodities
and services, constantly getting better and more varied.

  And the result of the effort of each enterpriser to maximize his profits led to a constant tendency toward the equalization of profits. This meant, as Peter began to see, that there was a constant tendency toward a proper balance, as measured by consumers’ satisfactions, in the production of these thousands of different commodities. It meant, also, that productive resources could not for a long time be misdirected or wasted in making the wrong products. For when a needless product was made, nobody bought it. The particular enterpriser who turned it out quickly failed. And when too much was made even of a needed product, it did not repay its costs of production, so the volume made would quickly be reduced. This meant that there was a constant tendency for thousands of different goods to be produced just in those proportions in which they gave a uniform and therefore the overall maximum satisfaction of consumer needs. And it meant that there was a constant tendency for productive resources—raw materials, tools and labor—to be allocated among the production of thousands of different things just in those proportions in which they would produce the highest value.

  And this was not all. This solution of the problem of economic calculation not only decided just how much should be produced of each of thousands of different commodities, but (and Peter thought this might be even more important) it also pointed out and measured which were the more economical ways of producing each of these goods. And it virtually forced the adoption of the most economical way of production upon everybody once it had been discovered by anybody.

  One Freeworld enterpriser, for example, adopted a new type of machine and a new factory organization system that made cotton cloth at half the cost that anybody had made it before. The enterprisers already in the business did not want to change. They had their old machines—which still were good and strong and seemed to have a long life before them—and they were used to their old methods. But the enterpriser with the new machine kept increasing his production and underselling his competitors. The producers with the oldest machines and the least efficient organization were forced out of business by the increased supplies of cotton cloth and the lower price. And the other producers eventually had to install the new type of machine in order to stay in business.