Published more than eight decades ago, Rexford Tugwell’s Industrial Discipline and the Governmental Arts provided an academic defense of broad government management of the U.S. economy. The federal government had intervened in the national economy before, of course, but often under the guise of temporary measures to address national emergencies—for example, during what was then called the Great War. Even New Deal policies—of which Tugwell was an architect—were initially thought by many to be emergency actions. But Tugwell wanted that intervention to be permanent, and so it has become in many fields. It thus seems appropriate today, following another round of economic crisis and permanently expanded government intervention, that we look back on his arguments. After all, they are often the same naive arguments that we hear for expanded intervention today.

Tugwell (1891–1979) was a radical liberal (in the American sense) and a card-carrying member of the establishment. After obtaining a doctorate in economics from the University of Pennsylvania’s Wharton School and spending some 15 years on the economics faculty of Columbia University, he became one of the close advisers to Franklin D. Roosevelt. On June 25, 1934, he made the cover of Time, in the wake of his confirmation as undersecretary of agriculture by a Senate majority of 53 to 24. He left the Roosevelt administration in 1936, worked in business for two years, and then became chairman of the New York City Planning Commission. In 1941, Roosevelt appointed him governor of Puerto Rico. Five years later, Tugwell returned to academic life, notably at the University of Chicago where he was director of the Institute of Planning and, until 1957, a professor of political science. In reality, he was always closer to politics than economics.

The Industial Discipline and the Government Arts betrays the influence that the progressive era, World War I, and the Great Depression had on Tugwell’s economic thinking. What is especially interesting is how little the book makes use of the standard tools in the economist’s toolbox, despite its being written by an economist.

Planning Utopia / The book argues that the historical development of industry had made central planning inevitable. People did not live in Adam Smith’s world anymore, Tugwell claimed, but in a world where mechanization had dramatically increased industrial concentration. The perennial conflict of economic life had turned against workers and consumers, who had become victims of the new business organizations. Consumers were being manipulated by advertisers and workers had fallen into “industrial slavery.”

Instead of nurturing efficiency, Tugwell claimed that competition had become wasteful, neutralizing the efforts of others. Laissez-faire was a failure. In the machine age, “efficiency should infuse the whole industrial process.” Machines, he said, enabled humans to substitute thinking tasks for menial ones. With tests of intelligence and such scientific measures, the best people could fill all the necessary industrial jobs while the government would support the “unfit.”

Only with industrial democracy (the running of firms by their workers and engineers) and rational central planning would society be able to establish efficiency and harvest the full fruits of the machine age, as well as further justice. Like during World War I, Tugwell wrote, “[r]ational planning and control” was to replace “the vagaries of the market.” “A civil service in industry,” he added, “is not unthinkable.”

He conceded that many economists of his time did not see the world the way he did. The reason, he said, was because “they have been lost in a tradition.” In saying that—whether he realized it or not—he was confessing that he was not interested in the analytical tradition of economics.

America needed “the substitution of social for individual interest,” Tugwell claimed. “Men have to think of themselves, more or less, as instruments of a social purpose”:

The individual, to get anywhere himself, must subordinate himself; must sink or swim with others. He must consent to function as part of a greater whole and to have his role defined for him by the exigencies of his group.

To achieve this, an “effective but happy discipline is required.”

According to Tugwell, the public interest dictates that businesses be tightly controlled by government, which includes investment and price controls. Merely a little planning will not do because “controls inserted anywhere in the system have effects, often unforeseen, in many other places.” He thus welcomed the slippery slope of ever-broadening government intervention:

This is one reason why piecemeal regulation tends to widen and why some effort at really national planning becomes a practical issue immediately upon consideration of any planning at all.

He admitted that central planning requires the practical abolition of private property rights in economic life. Echoing the progressives, he lamented that Americans “have an exaggerated fear of invading individual rights.” What people really want is security, he claimed; if America does not embrace central planning, “we are surely committed to revolution.”

What we’ve learned / It is understandable that his apologia of central planning did not foresee the many insights into economics and government that developed later in the 20th century. For instance, Tugwell shows no understanding of political and bureaucratic processes—an understanding that eluded economists until development of Public Choice economics a quarter-century later. He assumed that democracy expresses the public interest. And he harbored a deep faith in technicians and engineers in general, and government bureaucrats in particular.

Tugwell attributed the existence of the firm to technical factors and economies of scale. He believed that the pursuit of efficiency would compel firms to grow ever bigger and thus they were destined to replace the market. It would be a few years before Ronald Coase discovered that the firm exists when the costs of using the market (transaction costs) are too large, and that firms stop expanding when the cost of internal coordination gets too high. Coase showed that the firm does not replace the market, it just creates islands of coordination within the market. Contrary to what Tugwell believed, “bigness” is not necessarily good and, when it is, it does not need to be planned by government.

He also seems not to have appreciated the immense information problems faced by central planners, an issue on which Friedrich Hayek was only then starting to write. Ludwig von Mises, however, had started that discussion. The problem is that the information needed by central planners is dispersed among millions of individual minds. Under market conditions, prices encourage those minds to coordinate in real time, but in a centrally planned economy the calculation of prices and quantities is impossible.

Tugwell mistakenly thought that the planner could know more than the participants in the industries he wanted to plan. He assumed that demand for a good could be forecasted, and that the planners could work out “the setting of a price calculated to bring just enough of it into the market.” He ignored the shortages or surpluses that price controls generate.

What he should have known / But even if we pardon Tugwell for being unaware of the many important insights that were to come in the decades after The Industrial Discipline and the Governmental Arts, the book still ignores much that the economists of his time understood.

For example, Tugwell apparently did not understand the benefits of exchange and did not see the difference between the existence of those benefits and the way they are shared. Three decades earlier, Francis Y. Edgeworth had provided the theory. Each of the parties to an exchange benefits compared to his situation without the exchange; otherwise, at least one of the parties would decline to trade. Through exchange, all parties get on their “contract curve,” as economists say. This process represents cooperation, not conflict, contrary to Tugwell’s vision. In his view, “[t]he ideal picture which we have of a competitive system assumes conflict as the fundamental basis of organization.” The “we” that he describes certainly did not include neoclassical (nor Austrian) economists.

Conflict happens when people are prevented from exchanging or when, once they have completed an exchange, the benefits obtained are redistributed (which the student of economics recognizes as a movement along the contract curve). So the situation is the opposite of what Tugwell saw: exchange is not based on conflict and government intervention on consent; it is the other way around.

Efficiency? / As much as The Industrial Discipline and the Governmental Arts emphasizes efficiency among the main goals of central planning, it does not define what the term means. Tugwell uses the term in a way very different from an economist’s understanding, whether that be Alfred Marshall or Vilfredo Pareto (both of whom had already developed their economic theories by the time Tugwell was writing). For Tugwell, efficiency does not lie in consumers getting what they value most at the lowest possible prices given production costs; it is instead a purely technical, engineering notion, which amounts to producing what the government thinks should be produced at what the engineers and bureaucrats calculate is the lowest cost.

Similarly, nowhere in the book does the author tell us what the public or social interest is, and what tradeoffs it implies between efficiency and other goals. Instead, he writes (bafflingly),

[T]he forcing of efficiency will be an interest which will have equal consideration with such other obvious needs as those of raising wages, protecting farmers’ incomes, and unwastefully exploiting natural resources.

Extensive central planning requires every individual to be controlled in everything defined as economic. Reconciling that with individual liberty is impossible—something Tugwell may have realized, as he provides this rather unsatisfying promissory note:

[S]ome means must be devised, better than we now have, to permit the free functioning of each person within his own sphere; and he must be allowed not only his free activity, but also whatever measure of control over the activities of others is involved in his free functioning.

He wants individuals to be both free and able to prevent others from being free. Those who would impose planning in the name of freedom fall in the trap of destroying liberty in order to protect it.

Perhaps he did not understand incentives (even though, for an economist, that is akin to a physicist ignoring gravity). He does not see the efficiency incentives faced by business owners and managers, while he promotes “the incentive which comes from working for the public.” Nowhere does he seriously try to reconcile “industrial democracy” with central planning. He does not seem to understand the effects of competition. He implicitly assumes increasing returns to scale, while in reality some cost always starts increasing at some point, which is why a single firm does not dominate all markets. He apparently does not realize that all prices cannot remain too high and all wages too low, because wages and prices will adjust so that everything that is produced is consumed. Other examples of rather elementary economic mistakes could be cited.

Methodologically, Tugwell sometimes seems to adhere to historical determinism: “Nothing else could have happened”; the change is “irresistible.” But he is not always consistent. At his Senate confirmation hearing to become assistant secretary of agriculture, he told one senator: “Chance has substituted itself for the anthropomorphic interpretation of history as a casual sequence.” The senator asked what he meant. Time commented about Tugwell, “His vocabulary sometimes exceeds his ability to express himself.” His numerous, undefined, and annoying use of “we” when discussing what he wants betrays a holist conception of society; “as a society we,” he writes. He suggests that businesses “become more like social organisms.”

A Tugwell man / Tugwell defended a naive theory of planning. Fascinated by industrial machines, he envisioned society as a big machine to be tended by planners and engineers. In an article published in the 1932 Papers and Proceedings of the American Economic Review, he described how government would decide whether or not to launch new industries:

New industries will not just happen as the automobile industry did; they will have to be foreseen, to be argued for, to seem probably desirable features of the whole economy before they can be entered upon.

In The Industrial Discipline and the Governmental Arts, he explains that “If democracy will work on the railroads or in telephone systems, it will work in steel mills and glass factories, in making automobiles or in manufacturing hats.” He paints a utopian future:

[I]f the present scale of operations were expanded, if the last vestige of competition were abolished, and if we worked to a plan which encompassed our total resources and required of each industrial group its utmost capacity, we should be able to multiply many times even our present possibilities.

In the foreword of the book, he explained how, when he visited Soviet Russia, “I was made to feel very humble as an American.” Talking with a poor peasant who, with his family, had to work from dawn to dusk, he thought that there was more meaning in their lives than “in a cheap-Jack town” of New England.

Could facts—say, the late 20th century collapse of the Soviet Union—have changed Tugwell’s opinion? It is impossible to know, of course, but his normative values certainly played a major role in his outlooks. He was very dismissive of individual liberty and the rule of law, and only supported federalism because the Constitution would be difficult to change. He admitted that his planning scheme could not be established “so long as certain features of our system remain as they are: private property in productive equipment, voluntary cooperation, competition in business, uncontrolled allocation of capital.”

Tugwell did not get everything wrong. (Who does?) Contra John Maynard Keynes (whose General Theory of Employment, Interest and Money would be published two years after The Industrial Discipline and the Governmental Arts), he entertained a long-term view and did not underestimate the importance of investment. He understood that work is not the goal of economic life and welcomed technological progress. He blamed the labor unions for blocking change. However, he underestimated the insatiability of human wants and his “trend toward the abolition of employment” was properly utopian.

The Industrial Discipline and the Governmental Arts throws some light on a dark corner of the history of political and (if we can call it so) economic thought, where the benefits of exchange do not exist, efficiency can be defined outside of individual preferences, and the omniscient and benevolent state can lead humankind to heaven on earth. The Wharton Alumni Magazine exaggerates when it states that Tugwell left “an indelible mark on America’s domestic and economic policies,” but he certainly had some influence.

At the beginning of his career, John Kenneth Galbraith, a more recent advocate of planning, had a stint at the U.S. Department of Agriculture run by Henry Wallace (the future U.S. vice president under Franklin Roosevelt, before Harry S. Truman) and Tugwell. “I was a Wallace and a Tugwell man,” Galbraith proudly declared in a 2003 interview.

The general current of thought in which Tugwell participated certainly exerted a large influence. As Larry White reminds us in The Clash of Economic Ideas (Cambridge University Press, 2012), we tend to underestimate the economists’ retreat from laissez-faire that started in the late 19th century. Rexford Guy Tugwell was a product of those dark times.