More or Less Economic Planning? Enduring Arguments from Sweden

Lessons can be culled from the interwar era. After the 1929 outbreak of the Great Depression, demand for economic planning—in contrast to market “anarchy”—advanced in many countries. The 1930s was an era of populism, nationalism, protectionism, government intervention, and attempts to create planned economies. One need only mention five year planning in the Soviet Union, four year plans in Nazi Germany, corporatist planning in fascist Italy and the United States, and the many initiatives in Great Britain.

During the 1920s, the socialist calculation debate unfolded in German on the European continent, triggered by Ludwig von Mises’s (1881-1973) work Gemeinwirtschaft.1 His foremost opponent was the Polish economist Oskar Lange (1904-1965). In the 1930s, the debate expanded into the Anglo-American world, mainly through Friedrich Hayek’s (1899-1992) Collectivist Economic Planning2, which has been labelled “the opening salvo in the English-language calculation debate.”3 Hayek met with opposition from a colleague at the London School of Economics, E. F. M. Durbin (1906-1948), who mobilized a battery of arguments for planning, later collected in Problems of Economic Planning.4 The 1940s battle over economic planning was fierce, fueled by purportedly successful wartime planning, but the basic arguments were chiseled out in the interwar era.

In another country, an intense debate on economic planning played out parallel to, but seemingly not inspired by Mises, Lange, Hayek or Durbin. This country is Sweden. The main adversaries in this debate were four economists, representing different generations: Gustav Cassel (1866-1945) and Eli Heckscher (1879-1952) were classical/market liberals opposed to economic planning. Gunnar Myrdal (1898-1987) and Bertil Ohlin (1899-1979), their two most famous yet wayward pupils, socialist and “social liberal” respectively, advocated planning. The questions of this article are: What were the main arguments of these four? What were their sources of inspiration? How do they compare to Hayek and Durbin? I will be short on references when trying to answer these questions. For details I refer to my recent book on Swedish economists in the 1930s debate on economic planning.5

Main Arguments

In the 1920s and early 1930s, Gustav Cassel and Eli Heckscher were Sweden’s most well-known and influential economists. They were both market liberals and active shapers of public opinion. They mobilized arguments against economic planning in the mid-1920s, when they perceived threats from Swedish Social Democracy, Soviet communism, and Italian fascism. Heckscher visited Russia in 1925 and could observe the chaos there with his own eyes.

Cassel and Heckscher mobilized an impressive number of arguments:

• • The market economy is not anarchic but a form of decentralized planning.
• • No central planner can master the enormous amount of information handled by free price formation (the invisible hand).
• • Politicians are not suited to be economic managers.
• • Bureaucracy is “a brake on the wheel.”
• • Central planners cannot tolerate workers’ free choice of occupation, trade unions, or consumers’ free choice of goods.
• • Planning experiments exhibit planlessness, and governments cannot even manage some of their most basic tasks like taking care of the monetary system.

Heckscher anticipated a major public choice argument: One cannot assign a perfect theoretical state to correct imperfections in a real market. In the real world there are both market and government failures.6 Cassel forwarded a similar idea when he dismissed “the belief in the absolute rationality and effectiveness of state management of trade and industry.”7

A common perception is that Gunnar Myrdal, the famous “social engineer,” alongside the Social Democratic Minister of Finance Ernst Wigforss, was the chief instigator of economic planning ideas in Sweden. However, Bertil Ohlin began his attacks on market liberalism, inspired by the new British Liberals in general and John Maynard Keynes in particular, several years before Myrdal appeared on the planning stage. His message: “A planned organization, guaranteeing rationality and efficiency, instead of the laissez-faire system of the old society, has become the order of the day.”8 Rationality, so-called, was more important than freedom.

In 1930, Heckscher accelerated the debate on economic planning through his attacks on an interventionist measure intended to help farmers, which he branded as “economic planning with no plan, after the pattern familiar in Soviet Russia.”9 The debate culminated in 1934.

Planning was, to quote Myrdal, an idea “which creeps in everywhere” but which was actually a “very undetermined thing.”10 When Myrdal succeeded Cassel as professor of economics at Stockholm University he gave an inaugural lecture in which he dismissed his liberal teachers and their faith in markets as “an outdated utopia nourished by occasional untimely dreamers.”11 Ohlin and Myrdal emphasized that economic conditions had changed, mostly through larger economic units and an engineering mindset, which necessitated a new policy framework and new institutions. The economic crisis had necessitated a host of government interventions—the alternative would have been revolution and dictatorship—and these interventions must be coordinated in a rational and efficient way.

The opponents to planning also expanded their set of arguments:

• • Planners will prioritize producer interests.
• • The government will be overstrained.
• • A planning authority will not be able to react fast enough in the face of changing circumstances.
• • There will perhaps be fewer but much bigger mistakes.
• • Nationalist planning means that every business transaction becomes a political act.
• • The end result will be dictatorship.

Heckscher was reminded of Frankenstein “who created the monster to which he himself fell a victim.”12 During a famous debate at the Swedish Economic Association he taunted his younger colleagues as “apostles of the planned economy” and added: “Their nostrils are filled with the new air to the point where they seem to be in no condition to breathe any other.” Myrdal dissociated himself from the “horrifying depiction” of a “disorganized, planless and forced economy” outlined by Heckscher, and Ohlin could not understand the picture painted “of some sort of mystical, extreme command economy.”13

Advocates and opponents of planning shared some basic understandings. Economic conditions—the size of economic units and the dynamics of the world economy—as well as popular mentality had changed. However, they completely disagreed about how to tackle these changes. The advocates wished for a rational and long-term framework. The opponents wished to retain as much leeway for market forces as possible since they regarded them as best suited to guide the continuous economic transformation.

Both sides acknowledged that, whatever government interventions might be instituted, they must be coordinated. However, advocates wished for more, opponents for less. The advocates wished to solve a range of specific problems. The opponents figured that each intervention would cause another in a cumulative process leading to dictatorship and the end of spiritual freedom, elaborating what was later called the intervention dynamic.

Both sides wished to defend democracy but disagreed on the means. The advocates believed that democracies had to use much of the same means as dictatorships to be able to compete. “It is the Manchester liberal diehards, opposing all state intervention, who prepare the ground for dictatorship and communism,” said Ohlin at a summit for Nordic economists in 1935.14 Cassel argued to the contrary that “the bewildering mass of government interference of a steadily cumulative nature” meant that “Planned Economy will always tend to develop into Dictatorship” and stifle economic progress.15 The opponents were convinced that the foundation of liberal democracies—the market economy—must be protected. Myrdal, however, argued that the perception that economic freedom can be greater or lesser was a “metaphysic apriorism” in the heads of naïve market liberals.16

The advocates of planning perhaps had the upper hand in their claims of being informed about the latest economic conditions, but they hesitated to discuss principles. They wished to discuss reasonable interventions but the coordinating of all the interventions was an aim to be tackled some time in the future. In this attitude, the kinship between socialism and planning can be seen: sharp criticism of current conditions but reluctance to discuss what an alternative model would really entail.
The opponents wished to discuss principles—so old fashioned! They wished to debate what a fully developed command economy would look like and they sometimes used communist, fascist and Nazi examples to substantiate their dystopia.

Ohlin’s Free or Directed Economy (Fri eller dirigerad ekonomi) in 1936 rounded off the debate on planning and laid out a “middle way.” Ohlin had been the leading planning advocate among economists early on, and he had been tough on his mentors Heckscher and Cassel. He had always, unlike Myrdal, drawn a boundary against socialism and proposed some kind of framework planning. Like Keynes, he wished to save essential elements of private enterprise, and as the economy recovered the (classical) liberal traits of his social liberalism grew stronger. Ohlin anticipated the new institutional economics when he explained that institutions make out “the rules of the game” in order to reduce friction (transaction costs).17 Myrdal had expressed similar thoughts in his inaugural lecture.

Sources of inspiration

The Swedish economists seldom referred to any sources of inspiration. This is not very surprising since their arguments were mostly put forward in public debates and newspapers. Ohlin was the exception and his sources were mainly British: Lloyd George’s Liberals, people like Keynes, Arthur Salter, and Basil Blackett. How the others acquired their ideas is more or less obscure. As for Cassel and Myrdal, the mentor and the mentee remained alike in one respect: Each was known for claiming to be the originator of most of his ideas.

One question, which can hardly be answered, is whether the opponents to planning were aware of the contemporaneous socialist calculation debate. In any case, they did not refer to Mises or Hayek. One should bear in mind that Cassel and Heckscher were both older than Mises, and much older than Hayek. Cassel and Heckscher had fought socialism since the turn of the century and probably did not experience any need to import arguments from younger colleagues in other countries. Cassel in particular was notorious for not crediting others. However, in his memoirs most of the people of any importance with whom he had interacted are mentioned.18 Mises and Hayek are not among them. Heckscher exchanged a few letters with Hayek, but only after World War II (concerning the Mont Pelerin Society).

Comparison with Hayek and Durbin

To what extent did the Swedes deliver arguments of enduring relevance? I will limit myself to considering the main arguments distilled from the Swedish debate against the most influential body of arguments against planned economy ever presented, Hayek’s The Road to Serfdom, and to counter-arguments delivered by his critic Durbin.

All the major arguments of the Swedish opponents to planning appear in Hayek’s book. The market economy is not anarchic; no central planner can master the amount of information handled by free price formation; planning authorities are not able to react fast enough in the face of changing circumstances; bureaucracy is “a brake on the wheel”; central planners cannot tolerate workers’ free choice of occupation, trade unions, or consumers’ free choice of goods; planners will prioritize producer interests; one intervention will cause another in a cumulative process leading to dictatorship and the end of spiritual freedom; nationalist planning means that every economic transaction between nations becomes a political act.

Some of the advocates’ arguments can also be compared to Hayek’s positions. Myrdal’s view of planning as “a very undetermined thing” corresponds to Hayek’s statement that the “idea of central economic planning owes its appeal largely to [the] very vagueness of its meaning.” The advocates’ argument that technological change, with ever larger economic units, makes planning inevitable is dismissed by Hayek as one of the “familiar economic fallacies.” The idea that planning arose out of an engineering mentality was not questioned by Hayek, but he figured it was “fostered by the uncritical transfer to the problems of society of habits of thought engendered by the preoccupation with technological problems.”19

Finally, some comparisons with Durbin’s arguments. Ohlin and Myrdal envisioned planning as something undetermined. Durbin states that “Planning does not in the least imply the existence of a Plan.” Ohlin and Myrdal questioned the picture of a mystical, extreme command economy. Durbin in the same way questioned Hayek’s picture of a “regimented and cruel society.” Ohlin and Myrdal did not see planning leading to dictatorship. Neither did Durbin: “We have a long tradition of increasing democracy combined with the growing activity of the State.”20

All in all, it seems that the Swedish economists were at least as forward in producing arguments for and against economic planning as their foreign colleagues. Part of the reason for that forwardness was Sweden’s strong culture, at that time, of frank and open engagement of intellectual adversaries in the main forums of public discourse. In hundreds of articles Cassel and Heckscher debated with Myrdal and Ohlin, each man pushing the others to hone and clarify the arguments for their position.

Footnotes

[1] Mises, Ludwig von, 1922. Gemeinwirtschaft: Untersuchungen über den Sozialismus. Jena: Verlag von Gustav Fischer.

[2] Hayek, Freidrich A. von (ed), 1935/1975. “Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. Clifton: Augustus M. Kelley Publishers.

[3] Caldwell, Bruce, 2005. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek. Chicago & London: The University of Chicago Press, p. 199.

[4] Durbin, E. F. M., 1949. Problems of Economic Planning. London: Routledge & Kegan Paul Limited.

[5] Carlson, Benny, 2018. Swedish Economists in the 1930s Debate on Economic Planning. Cham, Switzerland: Palgrave Macmillan/Springer.

[6] Heckscher, Eli F., 1928. “Den icke-socialistiska framtidsstaten,” Dagens Nyheter, February 17.

[7] Cassel, Gustav, 1933. “Staten och näringslivet,” Sunt Förnuft, 13(December), p. 399.

[8] Ohlin, Bertil, 1927. “Liberalismen vid skiljovägen,” Stockholms-Tidningen, December 27.

[9] Heckscher, Eli F., 1930. “Inmalningstvånget och dess konsekvenser,” Dagens Nyheter, May 28.

[10] Myrdal, Gunnar, 1932. “Socialpolitikens dilemma II,” Spektrum 2(4), p. 30.

[11] Myrdal, Gunnar, 1935. “Installationsföreläsning den 31 mars 1934.” In Samhällskrisen och socialvetenskaperna. Stockholm: Kooperativa förbundets bokförlag, p. 37.

[12] Heckscher, Eli F., 1934. “Planned Economy Past and Present,” Index, IX(5), p. 99.

[13] Nationalekonomiska Föreningen, 1934. “Planhushållning,” November 20, pp. 153, 167, 185.

[14] Forhandlinger ved det tiende nordiske nationaløkonomiske møte i Oslo den 17-19 juni 1935, 1935. Oslo: Grøndahl & Søns Boktryckeri, p. 38.

[15] Cassel, Gustav, 1934. “From Protectionism through Planned Economy to Dictatorship.” International Conciliation. Documents for the year 1934. New York, p. 323, and 1934. “Planned Economy,” American Bankers Association Journal, 26 (July).

[16] Myrdal, “Installationsföreläsning,”, p. 23.

[17] Ohlin, Bertil, 1936. Fri eller dirigerad ekonomi. Stockholm: Studieledningen för Folkpartiets Ungdomsförbund, p. 111.

[18] Cassel, Gustav, 1940-41. I förnuftets tjänst. Vol. 1-2. Stockholm: Natur och Kultur.

[19] Hayek, Friedrich A., 1944. The Road to Serfdom. London: G. Routledge & Sons Ltd, pp. 34, 188, 20.

[20] Durbin, Problems of Economic Planning, pp. 95, 92, 106.