Authority Without Responsibility

The FINANCIAL COUNSELOR

by W. W. CUMBERLAND

BASEBALL would be a curious game if it were played under football rules, yet baseball and football have definite merits when each is played according to its proper code. In like manner, there are various systems under which economic affairs can be conducted, and this is not the occasion for attempting to solve the philosophical question of which is best. Our own, we like to believe, is capitalism — the system of individual initiative, which depends upon freedom of personal action in reaching those decisions which govern economic conduct. The hope of some definite, personal advantage furnishes the motivation for such decisions, and we are not likely to understand capitalism if we ignore its presuppositions, of which this is one of the most important.

Logically connected with the concept of personal advantage derived from correct business decisions is another of equal weight and value: that the man, or men, who shall possess the authority to make vital decisions must also accept responsibility for the consequences, and be prepared to absorb the losses which may follow if his, or their, judgment is erroneous. In recent years, however, comparatively few business decisions have been made on this personal and individual basis, which is essential to the proper functioning of a capitalistic economy. Some trade association or Chamber of Commerce or grange or corporate management, frequently without important ownership in an enterprise, has determined the course of its business action.

More anomalous still has been the steadily increasing influence of governmental authorities of various sorts. The United States Department of Commerce has sent us merrily on the path of foreign loans which cannot be repaid, The Department of Agriculture has devised and even financed methods for increasing the production of farm products when they were already overproduced. The Federal Farm Board solemnly counseled farmers against selling wheat at $1.20 a bushel, and in spite of the Board’s optimism the price subsequently fell to 50 cents. The Federal Reserve Board undertakes to determine how much credit should be outstanding, and to some extent how this credit shall be allocated. The Interstate Commerce Commission authorizes railroads to issue securities, and then rebukes them for selling the authorized bonds. The United States Shipping Board toys with a merchant fleet. Now there is clamor for the Federal Government to go into the power business, and into the business of running banks by guaranteeing deposits. More important, public authority has commandeered an increasingly large percentage of the average citizen’s productive energy. In 1910 the average citizen had to work twenly-five days a year to pay his total taxes; at present he has to work about one hundred days out of each year for the support of government of one kind or another.

Is it really surprising that business now finds itself unable to bear this pyramided overhead? Yet most of the proposals for dealing with the breakdown of business involve additional governmental supervision or the actual entrance of the government into business. In either case, almost every specific proposal has sought to give the government further authority without responsibility. Now if business men follow the advice of government agents, and their operations turn out badly, who bears the loss? On the other hand, if government engages in actual business enterprise, and it results in loss rather than profit, the unhappy condition is reflected in increased taxation in capitalistic states and in lowered standards of living in socialistic or communistic states.

A typical example of what happens when authority is divorced from responsibility may be found in the production of wheat, as well as the trading in wheat, during the last two or three years. Instead of calculating the profitableness or unprofitableness of growing wheat at prevailing prices, farmers were assured by the government that ‘something was to be done for wheat.’ That is, the government intervened to brush aside those strictly economic considerations which normally serve to determine the quantity and distribution of wheat culture throughout the world. Of course, the government promptly disavowed all responsibility when American farmers acted upon the assurance that ‘something was to be done for wheat,’ and found themselves increasing production and refusing to sell even while the statistical position of wheat was becoming progressively worse.

Similarly, potential buyers of wheat in the United States no longer calculated acreage, crop conditions, carry-over, general commodity prices, and other data of an economic character, but merely attempted to outguess and anticipate the vagaries of the federal Farm Board. Thus it happened that capitalism ceased to be operative in both the production of wheat and the trading in it.

To complicate matters still further, the government has been particularly active in encouraging indebtedness. Farmers have been assisted to get into debt through such devices as farm loan banks, intermediate credit organizations, and storage of farm products with funds advanced by the Federal Farm Board. A movement is now afoot to assist actual and prospective owners of small homes to go into debt. One of the greatest lessons which the depression should have taught us is that debt of all kinds is exceedingly dangerous, whether it involves the obligations of governments, corporations, or individuals. Curiously enough, both borrower and lender are frequently injured. Fixed charges are a threat in the best of times, and become an impossibility in adversity. Yet the government has lightheartedly taken its stand in favor of more and bigger loans, contracted during a downward trend of commodity prices.

During the ’New Era’ we were informed by high governmental authority that stocks were not selling at inflated prices, that serious depressions were highly improbable, and that financial panics were impossible. All these things had been rationalized. We had learned to control our economic destinies. Now we are informed that commodity prices and stock prices are too low. But who knows? And will the government pay the piper if it again proves to be wrong? If the individual is under the necessity of arriving at his own conclusions, the diversity of opinion is bound to be enormous, resulting usually in stable equilibrium and in a self-correcting situation when instability develops.

When the government began to take charge of commodity prices, the volume of credit, the amount of agricultural production, and even the prices at which stocks should sell, the ’New Fra’ was officially launched — only to be wrecked in 1929. Since that time, although confidence in governmental guidance has proved to have been misplaced, governmental intervention has continued unchecked, and the intervening period has been marked by seven successive collapses of the stock market, the latest, though not necessarily the last, occurring in the spring of 1932.

One of the elementary principles of statistics has to do with the difference between compensatory and cumulative error. The. terms are self-explanatory. An individualistic economy is based upon the principle of compensatory error. Some individuals make right decisions and are rewarded; others make wrong decisions and suffer the losses which follow from their own mistakes. When Federal Farm Boards, Federal Reserve Boards, Interstate Commerce Commissions, copper-export associations, Chadbourne plans, and the like, substitute group authority without responsibility for individual authority with responsibility, the stage is set for the application of cumulative error. Thus far we have not been disappointed; group action has always resulted in cumulative error. Perhaps it is because of the inclination of most people to have their thinking done for them, to seek and heed, without discrimination, the voice of authority, that we insist upon more ’plans,’more ’controls,’more ’stabilization’ — all of which call for more direction by governmental officials in business matters.

When at least one third, and possibly one half, of the current national income is expended at the order of public officials rather than in accordance with the individual decisions of the original recipients of such income, the system cannot be called Capitalism, Neither is it socialism, because the government does not assume financial responsibility for its own activities, but charges all losses to the taxpayers. This, nevertheless, is the system under which we live — a hybrid, a kind of monstrosity, which cannot reasonably be expected to function, Germany affords the best example of the utter futility of attempting to conduct a capitalistic economy under pervasive state control.

As an example of the irresponsibility of government, it is only necessary to cite the fact that public authorities do not content themselves with spending that part of the national income which can be collected in the form of taxes. At present, the Federal Government is spending more than twice its income. States and municipalities spend all they can collect and borrow. In consequence, the entire country is now living, in part, on its capital. No one can tell how long this process can continue, but there is no doubt that it is self-destructive.

Capitalism, socialism, and communism offer advantages and disadvantages as economic systems. No attempt is here made to indicate which of these systems appears to be most desirable. All I have tried to show is that the United States is not now, and has not been for many years, on a capitalistic economy. It is utterly absurd, therefore, to argue from our present predicament that capitalism has demonstrated its failure. Governmental and semipublic entities have pervaded business to such an extent that ultimate economic authority now has to be sought among officials, not among private individuals. At the same time, authority has been separated from the corresponding obligation of responsibility,

I repeat, therefore, that we cannot say that capitalism has failed because of the depression, and for the simple reason that it is no longer in effect in any major country. The only truth which current conditions have demonstrated to us is that confused thought has had its usual effect, and has brought upon us wide and increasing distress.