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Sunday, August 26, 2012

The Conditions Necessary to an Intensive Division of Labor

In order that money may properly fulfill its function of making possible an extended social division of labor it must possess various attributes (which will be considered later in detail), especially uniformity and constancy of value. It is the business of the state to establish a disciplined and stable monetary system so that money will enjoy general confidence and unite the disparate operations of the division of labor in a single payment community. To this is related another condition required for a wide extension of the social division of labor. The great risks implicit in an extreme dependence of all individuals in society upon each other are tolerable in the long run only where an efficiently administered legal system and an unwritten but generally accepted code of minimum moral precepts assure to the participants in the division of labor that they will be able to carry on their activities in an atmosphere of mutual confidence and security. Economic history is a constant illustration of the truth that the intensity of economic activity rises or falls in the degree to which these conditions are fulfilled. Likewise, the spatial extension of economic activity is limited as a rule to the radius within which such conditions, i.e., monetary and legal security, obtain. This is nothing less than the first principle underlying the rise and fall, the expansion and contraction of the economic system itself.
A significant division of labor can develop only in the degree to which the prerequisites of a monetary system, a legal system, and an appropriate moral system are met. History records frequent instances in which these conditions have been maintained for considerable periods within the frontiers of a single state. The intensification of international economic activity, however, has always encountered special difficulties because the creation of an international monetary and legal community has invariably collided with and will in the foreseeable future continue to collide with the unyielding sovereignty of the individual states. This is the chief reason why the progress of the international economy has, even under the most favorable circumstances, lagged behind the development of the several national economies. Because there is no world state, the world economy has lacked a homogeneous monetary system: for such a system depends necessarily upon the existence of a homogeneous international legal order.
It is worthy of note, nonetheless, that the international economy has flourished over the past hundred years in spite of these lacks because substitutes were found for what was lacking. The lack of a uniform international monetary system was offset by the gold standard. Scrupulously observed by the principal nations, it resulted in the whole world becoming a single payment community; it banished distrust in the solidity of the monetary foundations of international trade and international capital movements. The obligations imposed on all the participating countries by the scrupulous observance of the gold standard formed a part of the network of written and unwritten rules which made up for the lack of a single international juridical system. The whole world was encompassed in a system of long term agreements based on a universally recognized international law and upon a high degree of accord in respect to the interpretation of such law and of the legal codes of the individual states. International transactions were conducted in an atmosphere of loyalty and fair play in which the disregard of the obligations imposed by the international legal and moral system was regarded as the act of men without honor, honesty, or scruples.
The actual world crisis is from this point of view instructive in the highest degree. For the very disappearance of the aforementioned conditions has shown how exceptionally important and necessary they are. The nineteenth century’s network of guarantees in respect to security, uniformity, continuity, and fair play, and the adjustment of national policies to the requirements of international order, resulted in an approximate substitute for world government. But all of this was the creation of an epoch, of a state of mind from which the modern world has far removed and from which it in the future may remove still farther.
The foundations of the world economy have been chipped away to the point where the whole structure has become highly unstable. Less and less are nations disturbed by the flaunting of the international proprieties. Almost as a matter of course, governments manipulate their monetary systems for exclusively national ends, block foreign assets, interfere with international payments, practice dumping, expropriate private property, direct the flow of imports and exports now here, now there, at the whim of almost daily changing enmities and friendships, and impose without let or hindrance tariffs, quotas, and prohibitions of all kinds.
The dangerous feature of this process of disintegration is that it is accelerated by its own momentum. In international relations, as elsewhere, “marginal morality” has a tendency to become the dominant morality. If one country can, with impunity, disregard the rights of its neighbors, other countries, unwilling to be dupes, will follow suit. But it is not alone the contagious effects of bad example which foster international disintegration. Every country may legitimately question whether in the light of growing monetary, legal, and moral insecurity it ought not to revise its relations with the world economy. Because there is no world state, the international division of labor, unlike the national division of labor, is a precarious and relatively unstable system. Where a country is significantly involved in the international division of labor, it entrusts a part of its economic life to factors over which it wields only a very slight control and which consequently can cause it disagreeable surprises. In fairness to its own citizens, such a country can adhere to the international division of labor only if the risks implicit in such adherence are reduced to the minimum we have described. During the last hundred years, thanks to the gold standard and to the legal and moral obligations assumed by the gold standard countries, participation in the international division of labor was both possible and profitable. In the changed circumstances of the present, and with the probability of even more radical changes in the future, it has become suddenly obvious that the whole of international trade, with its immense material advantages, depends on conditions which formerly were so taken for granted they were hardly ever mentioned. It is only now, when they have begun to disappear, that the full importance of these conditions is revealed.4
It may be assumed that there are few persons today who take the plight of the world economy lightly and who do not recognize the tragic character of the disintegration of the international division of labor, the underlying cause of which has been the gradual weakening of the extra-economic framework of the international society. The true visage of the world economy is now visible: an economy minus its essential monetary, legal, and moral foundations. A genuine restoration of the world economy will prove impossible so long as these foundations are not reestablished. Till then, we must content ourselves with the patchwork aids and ad hoc institutional arrangements whose services to this date, it is conceded, have been considerable.
A fact which it is necessary to emphasize in this connection is that the shock to the foundations of the world economy has not been of equal intensity throughout the globe. Thus, the greatest damage has been done where Communist collectivism has swallowed significant parts of the former world economy. This loss is due not alone to the irreconcilability of the political and moral beliefs of the Communist and the free world countries, but to the incompatibility of the dominant economic systems in their respective spheres of influence. Even within the non-Communist world there exists a sharp line of demarcation between the developed countries and the “underdeveloped” countries, due primarily to the fact that the latter countries lack the conditions which inspire the trust so necessary to normal international movements of commodities and capital. In spite of all the disorders to which in our time a country such as Belgium was exposed following its liberation of the Congo, we continue to make available to this country, i.e., Belgium, loans at 4½ per cent interest. We do so because it never occurs to us to doubt the Belgians’ word that they will live up to their contracts. But there is no rate of interest under today’s conditions capable of opening the private capital markets of the developed countries to the Congo or to most of the other underdeveloped countries. This is the essence of the much discussed contemporary problem of the “underdeveloped countries.”5
That is the one facet of the situation. The other is that in spite of the defects of the world economy, we can expect some countries which are linked to each other by geographic contiguity and common cultural and political interests and traditions to attain a degree of international ‘‘economic integration” which can hardly be hoped for in the world at large. This is the justification and the explanation for the regional economic consolidations of recent years, among which the Common Market and the European Free Trade Zone, are the most significant;6 these very blocs, however, and their exclusive character, testify to the continuing lack of worldwide coordination.
But the most important and all too frequently ignored international fact of our time is that the unprecedented extension of the division of labor beyond national frontiers over the past one hundred years has been accompanied by an equally unprecedented increase in the world’s population. A severe contraction of the division of labor would mean, therefore, that millions of people who owe their lives to the division of labor would have the door of life, so to speak, shut in their faces, inasmuch as the conditions which made possible their birth, their existence, and their livelihood, would suddenly have vanished. We are thus bound in this case-to employ a much abused term of speech—to an inexorable destiny which no longer permits us the liberty of glorifying a policy of heroic retreat. Given the immense increase in population of the nineteenth and twentieth centuries (the reasons for which we shall consider presently), we have no alternative—unless we would willingly provoke a frightful catastrophe—other than to maintain the economic apparatus which alone has made possible this growth in population, whether or not this apparatus, for one reason or another, is to our liking. We simply cannot turn back the economic clock to 1700, or even to 1800, without thereby reducing the population capacity of the world to the lowest level of those times. To turn back the clock would be tantamount to ordering the destruction of millions of lives.

Economics of the Free Society

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