The Method of Freedom > The Method of Freedom > Free Collectivism
It is often assumed in current discussion that all the nations must make an exclusive choice between the old theoretically neutral state on the one hand and some form of absolute collectivism and a directed economy on the other. The militant partisans have done their best to narrow the choice to these alternatives. Yet there exists a radically different method which is actually in use in most of the free countries. It does not as yet have a spectacular name, a great dialectical apparatus, a magniloquent philosophy, perfervid oratory, or mass emotion. But it is the method of those people who have had the largest experience in the art of self-government and the conduct of modern economic enterprise. That gives the method great authority, and the time has come, I believe, to recognize that there has appeared, principally among the English-speaking peoples, a method of social control which is not laissez faire, which is not Communism, which is not fascism, but the product of their own experience and their own genius.
I shall call it the method of free collectivism. It is collectivist because it acknowledges the obligation of the state for the standard of life and the operation of the economic order as a Whole. It is free because it preserves within very wide limits the liberty of private transactions. Its object is not to direct individual enterprise and choice according to an official plan but to put them and keep them in a working equilibrium. Its method is to redress the balance of private actions by compensating public actions.
The system of free collectivism originates not in military necessity but in an effort to correct the abuses and overcome the disorders of capitalism. In the first instance it takes the form of measures which set limits within which private initiative is confined and fix standards to which it must conform. This part of the system has a long history and is well understood. It is based upon a recognition of the fact that initiative may be evil as well as good, and that it is the duty of the state to encourage initiative when it is socially beneficent and to discourage it when it is not.
Thus it comprises measures to prevent fraud as between buyers and sellers: honest weights and measures, the enforcement of equitable contracts, the suppression of counterfeiting, and the misrepresentation of goods. It comprises measures to equalize the bargaining power of the consumer and of the employee: the regulation of public utilities, factory laws, and minimum wage laws. It comprises measures to break up monopolies, to discourage harmful enterprises, to prevent nuisances, to restrict speculation, to repress a too rampant individualism in the use of property. It comprises measures to insure the weak against the hazards of existence and to restrain the strong from accumulating excessive wealth and power.
The body of laws which regulates enterprise is enormous, and however foolish or unworkable some of these laws may be, no one imagines that all these laws are unnecessary. In fact, there is every reason to think that if a regime of free transactions is to be preserved, even more searching and comprehensive standards will have to be set for it. It is more than likely, for example, that secrecy in corporate accounting will have to be abolished, that all large enterprises will have to submit to publicly instituted systems of bookkeeping, and that their whole financial structure will become as visible as that of a railroad or a municipal corporation. For it is only by making publicly available to everyone the whole position of these enterprises that the relations of capital and labor, of corporation and investor, of industry and consumer can be lifted to a plane where transactions are really free because all the relevant facts are known. To preserve the reality of free contract it will almost surely be necessary to abolish the sham freedom of corporate secrecy.
But all of this does not go to the heart of the matter. It can prevent abuses. It does not reach the vital defect of individualism, which is that the multitude of individual decisions is not sufficiently enlightened to keep the economy as a whole in working order. Regulation is essentially negative. In the main it merely forbids this or that. But it is not possible to prohibit by laws the cumulative errors which produce the cycles of boom and depression. The state cannot make laws against the excessive optimism of prosperity or the panic pessimism of the ensuing crash. Yet it is in this cycle that the supreme danger arises. For the social order has now become so intricate that any serious breakdown in its economy will unloose forces that may destroy it.
Not only is it impossible to control the rhythm of capitalism by regulating laws but the very attempt to do it is as likely as not to accentuate the violence of the maladjustment. The experience of the postwar years has shown with great conclusive-ness that the effort to control depression at some particular point, say, at the price of wheat, or at the price of gold, or at the wage rate in some sheltered industry, or at a threatened bank or railroad--merely makes a part of the economy rigid and forces the rest of it to bend all the more.
The postwar economic cycle demonstrated clearly that individual decisions were not sufficient to create a lasting prosperity and that individuals could not endure the remedy of individual readjustment. The classical theorists overestimated the enlightenment which is based on self-interest and the fortitude based upon self-reliance. The event has shown that the individual judgment upon which they relied exclusively has in the crucial cases meant that the individual followed the crowd. Imitation, the herd instinct, the contagion of numbers, fashions, moods, rather than a truly enlightened self-interest, have tended to govern the economy.
This submerging of individualism in mass behavior is the consequence of the increasing complexity of the economic order. The data for a 'sound’ judgment are not any longer available to most men. For an integral part of every judgment is now a speculation on what other speculators will do. Take, for example, a banker who makes a loan to a reliable individual for a useful project on ample security at existing values. By every conventional rule it is a sound loan. Yet it may be a bad loan for no other reason than that too many bankers have made too many equally sound loans to too many reliable individuals for too many similar projects. The algebraic sum of a great number of reputable transactions may easily prove to be a disaster for all. We have seen this illustrated again and again in recent years. We have seen it in another phase of the cycle, when the individual decision to call a loan and make himself liquid becomes a collective disaster if the whole mass of individuals is stricken with prudence at the same time.
It follows that if individuals are to continue to decide when they will buy and sell, spend and save, borrow and lend, expand and contract their enterprises, some kind of compensatory mechanism to redress their liability to error must be set up by public authority. It has become necessary to create collective power, to mobilize collective resources, and to work out technical procedures by means of which the modern state can balance, equalize, neutralize, offset, correct the private judgments of masses of individuals: This is what I mean by a Compensated Economy and the method of Free Collectivism ....
To anyone steeped in the tradition of laissez faire there may at first appear to be little difference between a directed economy and a compensated economy. Both call for the exercise of vast powers by the state, for continual and deep intervention in the economic order. Both are collectivist in that both rest on a recognition that the standard of life and the management of the economy as a whole are a collective responsibility and not solely an individual one.
Yet between the two conceptions there is a radical difference. Under absolute collectivism, be it of the Fascist or Communist type, the government is in fact the master, the citizen a subject and a servant. Under free collectivism the government in its economic activities is in effect a gigantic public corporation which stands ready to throw its weight into the scales wherever and whenever it is necessary to redress the balance of private transactions. The initiative, throughout the whole realm of production and consumption, excepting only public utilities and public works reserved as instruments of compensatory control, remains in individual hands.
This initiative is subjected not to an official plan and to administrative orders, but to the play of prices representing the judgments and preferences of producers, consumers, and investors. Within extremely wide limits, enterprise is free. Men decide for themselves, guided chiefly by their estimates of the profits they may obtain, what they will produce; guided chiefly by the opportunities available and their own aptitudes, they decide at what they will work; guided by their needs and tastes in relation to their incomes, they decide what they will consume and how much they will save.
These choices are not made for them by officials exercising the power of the state. Thus economic progress is determined by technological advance, by private enterprise, and by what might be described as the perpetual plebiscite of the markets. The object of the state's intervention is not to supplant this system but to preserve it by remedying its abuses and correcting its errors. The intervention takes the form not of commands and prohibitions but of compensatory measures.
The purpose of the intervention is not to impose an official pattern upon all enterprise, but to maintain a working, moving equilibrium in the complex of private transactions. In substance, the state undertakes to counteract the mass errors of the individualist crowd by doing the opposite of what the crowd is doing; it saves when the crowd is spending too much; it borrows when the crowd is saving too much; it economizes when the crowd is extravagant, and it spends when the crowd is afraid to spend; it contracts when the crowd is expansive; it becomes enterprising when the crowd is depressed; it buys in sellers' markets and sells in buyers' markets; it taxes when the crowd is borrowing, and borrows when the crowd is hoarding; it becomes an employer when there is private unemployment, and it shuts down when there is work for all. Its ideal is to prevent excess; its general principle is not to impose a social order conceived by officials but to maintain in a changing order, worked out by the initiative and energy of individuals, a golden mean.
In the practice of statesmanship the compensatory method is, I believe, an epoch-making invention. For generations it has been supposed that an exclusive choice had to be made between collectivism and the freedom of private initiative, that the management of affairs had either to be left to individuals or assumed by the state. Whichever way one looked at these alternatives, the prospect was unsatisfactory. To concentrate initiativein officials was a certain way to kill initiative and liberty and to establish a state which in the ordinary course of events was bound to be despotic and inefficient. On the other hand, to let individualism run loose in a complex social order was to let it run wild and thus to produce disorder and injustice.
This dilemma is being resolved not by the arguments of collectivists and individualists but by the gradual uncovering of a new social principle. It provides both for individual initiative and collective initiative. The one is not the substitute for the other. The two are complementary. It is the method of freedom. The authority of the government is used to assist men in maintaining the security of an ordered life. The state, though it is powerful, is not the master of the people, but remains, as it must where they have liberty, their servant.
