Knowledge that Transforms

BENJAMIN HIGGINS' review of my Full Employment and Free Enterprise 1 in the May I948 issue of this REVIEW shows that the proposals I have made for assuring continuous full employment in the United States are not always understood. This has also been demonstrated from time to time by the remarks of other critics for example, Professors Hansen 2 and Alan R. Sweezy.3 I am frankly mystified by some of the interpretations, and welcome this opportunity to try to clear up the main misunderstandings involved. These misunderstandings, as the following discussion should show, are fundamental. Confusion is multiplied when the reader is given to understand that my thesis -which offers, I believe, a distinctively new combination of elements-is quite familiar; e.g., Higgins says that many [economists] are ready to accept 4 and that these are now old ideas, 5 while Hansen calls the view in favor of underwriting private consumption widely held. 6 May I emphasize that my purpose in this article is not to argue my position but to clarify it by removing misapprehensions about it, so that future arguments about it may be more fruitful. First, some ideas that, with all due respect to my critics, my proposals do not contain: They do not contain the idea that full employment can be assured by underwriting or by maintaining private consumption alone. They do not assume that private consumption can be maintained by the mere act of underwriting it. They do not involve the notion that the maintenance of the right level of private consumption will (a) render private investment perfectly stable, or (b) raise private investment to the point where, averaging high and low years together, all tendency for savings to exceed investment is removed. They are not hostile to public works and services. These points, along with certain related issues, will be examined below in some detail.

The advancing recovery of European production and the apparent termination of the postwar boom in this country invite a new determination, of the objectives and magnitude of our foreign financing. We are rapidly moving into a new phase in which general shortfalls of production, compared with prewar, no longer represent the pressing problems to which our economic assistance must address itself. At least this is the case for the Western part of the world. Instead we are facing again the tensions between population growth and productivity particularly in the field of food in underdeveloped countries, and between the productive capacities of the developed industrial countries and the effective demand for their products. Insufficiency, instability, and unequal distribution of income in the world community threaten to limit and frustrate the postwar recovery.2 A broad and sustained economic expansion process on a world scale seems indicated to gear together existing productive capacities with existing but ineffective demands and to create new productive capacities that may provide more tolerable living standards for the people of the underdeveloped countries. As the leading and most productive nation of the world, the United States carries the major responsibility for the launching and direction of the expansion process. Such a process offers a way to satisfying simultaneously basic economic and political interests at home and abroad, our ability to supply investment and basic consumption goods and the needs for these abroad, our capacity to sustain a sizable export surplus and the need for a sizable import surplus in countries that want to develop their economies without resort to continual inflation, totalitarian politics, or civil war. It is the necessary basis for further progress in international cooperation and in the common management practices economic, political, military that have developed under our leadership in the war and postwar periods. The recovery process of the Western European nations, which has gone rather well so far in the field of production and inflation control particularly in Great Britain is beginnning to be marred by the lack of a longerrun policy of economic expansion. The expectation is spreading abroad that between now and I952 American foreign financing through existing channels will fall off without new channels being opened. The prospect of the termination of ECA without creation of a new and reliable stream of foreign financing adapted to the needs of the time invites retreats to economic isolationism, neglect of a balanced development of dependencies, and a destructive mania of saving dollars by cutting essential imports from America. The prospect discourages coordination of national investment policies and fosters economic warfare about limited markets between nations whose survival depends on persistent efforts to achieve a common management of their economic affairs. While economic cooperation in recovery necessarily must come to an end, uncertainty and confusion about its sequel make it appear that economic cooperation as such on the European continent, across the channel, and across the Atlantic is approaching its end. There arises a great problem of leadership for the United States, to renew the common venture and to define a fresh purpose.3 The

THE allocation of resources in a planned economy is a problem which has engaged the attention of many writers in recent years.2 Theoretical treatment of the question has emphasized mainly the static solution, i.e., the organization of production to maximize the satisfaction of wants, or the output desired by the State, given a fixed volume of resources, labor force, and level of technology. It has generally been held that the rate of capital formation either depended on an arbitrary decision by the planning authorities, or on the time-preferences of the society. Given some rate of capital formation, Western writers have agreed that investment could most effectively be allocated by equalizing the marginal net productivity of capital in all directions.3 Section II of this paper presents an abbreviated translation' of an analysis of this last problem by a Soviet writer, Professor Khachaturov, published in a I946 textbook 5 to be used in technical schools for engineering and operating personnel in railroad transportation. The general approach is ostensibly quite different from that referred to above, and should be of interest as a sample of Soviet economic thought.6 Statements in the text indicate that this approach has actually been used by Soviet planning organizations. The author of the text also proposes certain conceptual innovations. It appears doubtful whether they have been, or will be, accepted in the USSR.7 The following section contains the gist 8 of the argument as presented by Khachaturov. In sections III, IV, and V, below, an attempt is made to relate the Soviet approach to familiar capitalist concepts, analyze the proposals made, and assess their operational feasibility.

IN THE three and a half years since Hiroshima, considerable loose talk about atomic power has circulated among both scientists and laymen. At first people envisioned virtually costless power. Upon more sober reflection they realized that even if the cost per kilowatthour of the atomic fuel were to approach zero other important items in the cost of generating power would be far from zero.' But though this realization has become general, what discussion there has been of the cost of atomic power has proceeded on an elementary and unrefined basis. As yet the estimates which have been made of the costs of generating electricity in atomic stations are highly tentative. All existing nuclear piles have been constructed for non-power purposes, and there is great uncertainty about both capital and operating costs of the pile, chemical and metallurgical plants, and heat exchanger of the future atomic plant. Little if any significance, therefore, should be attached to the numerical estimates of costs of atomic power used in this paper. Our purpose is to discuss the implications of what can now be perceived about the probable characteristics of the costs of atomic power plants and to bring out certain economic relations which will be of importance when, through accumulated experience, nuclear engineers are in a position to make fairly exact cost estimates.

Merton Miller produce some interesting propositions concerning the degree to which cyclical fluctuations may be mitigated through the automatic response of tax revenues to changes in national income.' In the case of the individual income tax, it is possible to go further and derive certain upper bounds to the degree to which the yield of such taxes may be made responsive to income fluctuations, and thus demonstrate even more severe limitations