MACHINERY AND INDUSTRIAL DEPRESSION.
Sec. 1. _The external phenomena of Trade Depression._
Sec. 2. _Correctly described as Under-production and
Over-production._
Sec. 3. _Testimony to a general excess of Productive Power over the
requirement for Consumption._
Sec. 4. _The connection of modern Machine-production and Depression
shown by statistics of price._
Sec. 5. _Changing forms in which Over-supply of Capital is embodied._
Sec. 6. _Summary of economic relation of Machinery to Depression._
Sec. 7. _Under-consumption as the root-evil._
Sec. 8. _Economic analysis of "Saving."_
Sec. 9. _Saving requires increased Consumption in the future._
Sec. 10. _Quantitative relation of parts in the organism of Industry._
Sec. 11. _Quantitative relation of Capital and Consumption._
Sec. 12. _Economic limits of Saving for a Community._
Sec. 13. _No limits to the possibility of individual Saving--Clash of
individual and social interests in Saving._
Sec. 14. _Objection that excess in forms of Capital would drive
interest to zero not valid._
Sec. 15. _Excess is in embodiments of Capital, not in real Capital._
Sec. 16. _Uncontrolled Machinery a source of fluctuation._
Sec. 1. The leading symptom of the disease called Depression of Trade is
a general fall of wholesale prices, accompanied by a less than
corresponding fall of retail prices. Whatever may be the ultimate
causes of a trade depression, the direct and immediate cause of every
fall of price must be a failure of demand to keep pace with supply at
the earlier price. So long as those who have goods to sell can sell
all these goods at the price they have been getting, they will not
lower the price. The efficient cause then of any fall of price is an
actual condition of over-supply at earlier prices. A very small
quantity of over-supply will bring down prices in a business, or in a
whole market, provided the competition between the businesses is keen.
Where such a fall of prices quickly stimulates demand so that the
over-supply is carried off and the rate of demand is equated to the
rate of supply at the lower price level, the condition is commonly
described as a "tendency to over-supply." But it is important to bear
in mind that in strictness it was not a "tendency" but an actually
existing quantity of over-supply which brought down the price.
Where any fall of price thus brought about quickly stimulates a
corresponding increase of demand, stability of prices follows, and
there will be a full, healthy production at the lower prices.
The mere fact then that prices are generally lower than they were five
or ten years ago is no evidence of depressed trade. Depressed trade
signifies not merely low prices but relaxed production: more has been
produced than can be sold at the lowest profitable prices, and markets
are congested with stock, but less is being produced than could be
produced with existing means of production. The fact which faces us in
a period of depression is an apparent excess of productive power. If
this excess were of labour alone it might be explained with some
plausibility as due to the displacement of labour by machinery. For it
has been admitted that the first and immediate effect of introducing
labour-saving or labour-aiding machines may be a diminution in the
demand for labour, even when the labour of making and repairing the
machines and of distributing the increased product which finds a sale
is taken into consideration. The simultaneous application of a number
of new forms of machinery attended by other general economies in the
organisation of industry might seem to explain why for a time there
should be a general redundancy of labour in all or most of the chief
industries of a country. Such an over-supply of labour would result
from the accumulated action of "first effects." When the cheapening
influences of machinery had time to exercise their full natural
influence in stimulating consumption the labour temporarily displaced
would be again fully utilised; for the moment, past labour saved and
stored in forms of fixed capital would do a great deal of the work
which would otherwise be done by present living labour. But such an
explanation is wholly negatived by the fact that in a depressed
condition of trade there is an excess of forms of capital as well as
of labour. There exists simultaneously a redundancy of both factors in
production. Labourers are out of work or are in irregular employment,
mills and factories are closed or working short time, the output of
coal and metals is reduced, and yet with this relaxed production the
markets are glutted with unsold goods unable to find purchasers at a
price which will yield a minimum profit to their owners. To this must
be added, in the case of the extractive industries, agriculture,
mining, etc., the exclusion from productive use of land which had
formerly found a profitable employment.
Sec. 2. To this condition of industry the antithetical terms,
over-production and under-production, may be both correctly applied,
according as one regards production as a state or as a process. The
state of trade in a depression is one of over-production--the
industrial body is congested with goods which are not drawn out for
consumption fast enough. This plethora debilitates the industrial
body, its functional activities are weakened. The slackness of trade
thus induced is rightly described as under-production.
It is commonly said by English writers upon economics that the state
of over-production, the redundancy of capital and labour, though found
in one or two or several trades at the same time, cannot be of general
application. If too much capital and labour is engaged in one industry
there is, they argue, too little in another, there cannot be at the
same time a general state of over-production. Now if by general
over-production is meant not that every single industry is supplied
with an excess of capital, but that there exists a net over-supply,
taking into account the plethora in some trades and the deficiency in
others, this assertion of English economists is not in accordance with
ascertained facts or with the authority of economists outside of
England.
Sec. 3. If a depression of trade signified a misapplication of capital
and labour, so that too much was applied in some industries, too
little in others, there would be a rise of prices in as many cases as
there was a fall of prices, and the admitted symptom of depression,
the simultaneous fall of price in all or nearly all the staple
industries, would not occur. The most careful students of the
phenomena of depressed trade agree in describing the condition as one
of general or net excess of the forms of capital. They are also agreed
in regarding the enormous growth of modern machinery as the embodiment
of a general excess of producing power over that required to maintain
current consumption.
Lord Playfair, writing on this subject in 1888, says, "It matters not
whether the countries were devastated by war or remained in the
enjoyment of peace; whether they were isolated by barriers of
Protection or conducted these industries under Free Trade; whether
they abounded in the raw materials of industry or had to import them
from other lands; under all these varying conditions the machine-using
countries of the world have felt the fifteen years of depression in
the same way, though with varying degrees of intensity." His
conclusion is "that the improvements of machinery used in production
have increased the supply of commodities beyond the immediate demands
of the world."[146] In support of this position he adduces the
authority of continental writers such as Dr. A. von Studnitz, Piermez,
Jules Duckerts, Laveleye, Trasenster, Annecke, and Engel. In the
United States, Carroll Wright, David Wells, and Atkinson are foremost
in upholding this to be the explanation of depression of trade. Mr.
Carroll D. Wright, Commissioner of Labour at Washington, is emphatic
in his assertion of the fact. "So far as the factories and the
operatives of the countries concerned are to be taken into
consideration (England, the United States, France, Belgium, Germany),
there does exist a positive and emphatic over-production, and this
over-production could not exist without the introduction of
power-machinery at a rate greater than the consuming power of the
nations involved, and of those dependent upon them, demand; in other
words, the over-production of power-machinery logically results in
the over-production of goods made with the aid of such machinery, and
this represents the condition of those countries depending largely
upon mechanical industries for their prosperity."[147] The Reports of
the English "Commission on the Depression of Trade and Industry" make
similar admissions of an excess of producing power as distinct from a
mere miscalculation in the application of capital and labour. The
Majority Report, defining "over-production" as "the production of
commodities, or even the existence of a capacity for production at a
time when the demand is not sufficiently brisk to maintain a
remunerative price to the producer," affirms "that such an
over-production has been one of the prominent features of the course
of trade during recent years, and that the depression under which we
are now suffering may be partially explained by this fact...."[148]
The Minority Report lays still stronger stress upon "systematic
over-production," alleging "that the demand for commodities does not
increase at the same rate as formerly, and that our capacity for
production is consequently in excess of our home and export demand,
and could, moreover, be considerably increased at short notice by the
fuller employment of labour and appliances now partially idle."[149]
The most abundant information regarding the excess of the machinery of
production in the several branches of industry has been given by Mr.
D.A. Wells, who regards machinery as the direct cause of depressed
trade, operating in three ways--(1) increased capacity of production,
(2) improved methods of distribution, (3) the opening up of new
abundant supplies of raw material. Thus production grows faster than
consumption. "In this way only is it possible to account for the
circumstances that the supply of the great articles and
instrumentalities of the world's use and commerce have increased
during the last twelve or fifteen years in a far greater ratio than
the contemporaneous increase of the world's population or of its
immediate consuming capacity."[150]
The earlier inventions in the textile industries, and the general
application of steam to manufacture and to the transport services,
have played the most dramatic part in the industrial revolution of the
last hundred years. But it should be borne in mind that it is far from
being true that the great forces of invention have spent themselves,
and that we have come to an era of small increments in the growth of
productive power. On the contrary, within this last generation a
number of discoveries have taken place in almost all the chief
industrial arts, in the opening up of new supplies of raw material,
and in the improvement of industrial organisation, which have
registered enormous advances of productive power. In the United
States, where the advance has been most marked, it is estimated that
in the fifteen or twenty years preceding 1886 the gain of machinery,
as measured by "displacement of the muscular labour," amounts to more
than one-third, taking the aggregate of manufactures into account. In
many manufactures the introduction of steam-driven machinery and the
factory system belongs to this generation. The substitution of
machinery for hand labour in boot-making signifies a gain of 80 per
cent. for some classes of goods, 50 per cent. for others. In the silk
manufacture there has been a gain of 50 per cent., in furniture some
30 per cent., while in many minor processes, such as wood-planing, tin
cans, wall-papers, soap, patent leather, etc., the improvement of
mechanical productiveness per labourer is measured as a rise of from
50 to 300 per cent. or more. The gain is, however, by no means
confined to an extension of "power" into processes formerly performed
by human muscle and skill. Still more significant is the increased
mechanical efficiency in the foundational industries. In the
manufacture of agricultural implements the increase is put down at
from 50 to 70 per cent., in the manufacture of machines and machinery
from 25 to 40 per cent., while "in the production of metals and
metallic goods long-established firms testify that machinery has
decreased manual labour 33-1/3 per cent." The increase in the
productive power of cotton mills is far greater than this. From 1870
to 1884 the make of pig-iron rose 131 per cent. in Great Britain and
237 per cent. in the rest of the world.[151] "In building vessels an
approximate idea of the relative labour displacement is given as 4 or
5 to 1--that is, four or five times the amount of labour can be
performed to-day by the use of machinery in a given time that could be
done under old hand methods."[152]
In England the rise in productiveness of machinery is roughly
estimated at 40 per cent. in the period 1850 to 1885, and there is no
reason to suppose this is an excessive estimate. In the shipping
industry, where more exact statistics are available, the advance is
even greater. The diminution of manual labour required to do a given
quantity of work in 1884 as compared with 1870 is put down at no less
than 70 per cent., owing in large measure to the introduction and
increased application of steam-hoisting machines and grain elevators,
and the employment of steam power in steering, raising the sails and
anchors, pumping, and discharging cargoes.[153] In the construction of
ships enormous economies have taken place. A ship which in 1883 cost
L24,000 can now be built for L14,000. In the working of vessels the
economy of fuel, due to the introduction of compound-engines, has been
very large. A ton of wheat can now be hauled by sea at less than a
farthing per mile. Similarly with land haulage the economy of fuel has
made immense reductions in cost. "In an experiment lately made on the
London and North Western Railway, a compound locomotive dragged a ton
of goods for one mile by the combustion of two ounces of coal."[154]
The quickening of voyages by steam motor, and by the abandonment of
the old Cape route in favour of the Suez Canal, enormously facilitated
commerce. The last arrangement is calculated to have practically
destroyed a tonnage of two millions. The still greater facilitation of
intelligence by electricity did away with the vast system of
warehousing required by the conditions of former commerce. These
economies of the foundational transport industries have deeply
affected the whole commerce and manufacture of the country, and have
played no inconsiderable part in bringing about the general fall of
prices by lowering the expenses of production and stimulating an
increased output.
Excessive production of transport-machinery, especially of railways,
has played an important part as an immediate cause of modern trade
depression. The depression beginning in 1873 and culminating in 1878
is described as having its origin "in the excessive lock-up of capital
in the construction of railways, especially in America and Germany,
many of which, when built, had neither population to use them nor
traffic to carry; in the wild speculation that followed the German
assertion of supremacy on the Continent; in the exaggerated armaments,
which withdrew an inordinate amount of labour from productive
industry, and over-weighed the taxpayers of the great European
nations; and in over-production in the principal trades in all
European countries."[155]
Mr. Bowley points out that "after each of the great railway booms of
the century, for instance in England about 1847, in America before
1857 and 1873, in India in 1878, and on the Continent in 1873, the
collapse has been very violent; for the materials are bought at
exaggerated prices; the weekly wage during construction is enormous;
no return is obtained till the whole scheme, whose carrying out
probably lasts many years, is complete."
A great deal of this railway enterprise meant over-production of forms
of transport-capital and a corresponding withholding of current
consumption. In other words, a large part of the "savings" of England,
Germany, America, etc., invested in these new railways, were
sterilised; they were not economically needed to assist in the work of
transport, and many of them remain almost useless, as the quoted value
of the shares testifies. It is not true, as is sometimes suggested,
that after a great effort in setting on foot such gigantic
enterprises, a collapse is economically necessary. If the large
incomes and high wages earned in the period prior to 1873, when
capital and labour found full employment in these great enterprises,
had been fully applied in increased demand for commodities and an
elevated standard of consumption, much of the new machinery of
transport, which long stood useless, would have been required to
assist in forwarding goods to maintain the raised standard of
consumption. This argument, of course, assumes that ignorance or fraud
have not caused a misdirection of investment. There is no evidence to
indicate that the vast sums invested in 1869-72 in railway enterprise
could have found any safer or more remunerative investment. It is the
overflow of "savings," after all capital economically needed to carry
on the work of production to supply steady current wants has been
secured, that flows into the hands of speculative company-promoters.
Such savings are not diverted from safe and useful forms of
investment, they are "savings" which ought never to have been
attempted, for they have no economic justification in the needs of
commerce, as is proved by results.
Sec. 4. The direct causal connection between the increased productive
power of modern machinery and trade depression clearly emerges from a
comparison of the fluctuations in the several departments of industry
in different industrial countries. As modern machinery and modern
methods of commerce are more highly developed and are applied more
generally, trade fluctuations are deeper and more lasting. A
comparison between more backward countries largely engaged in raising
food and raw materials of manufacture for the great manufacturing
countries is sometimes adduced in support of the contention that
highly-evolved industry is steadier. But though Mr. Giffen is
undoubtedly correct in holding that depressions are often worse in
countries producing raw materials than in manufacturing
countries,[156] this is only true of raw-material producing countries
which produce for export, and which are therefore dependent for their
trade upon fluctuations in demand for commodities in distant markets
whose movements they are least able to calculate or control.
Irregularity of climate, disease, and other natural causes must be a
constant source of fluctuation in the productivity of agriculture. But
those non-manufacturing countries which are little dependent upon
commerce with manufacturing nations, and which are chiefly
self-supporting, will of necessity retain a larger variety of
agriculture and of other primitive industries, and will therefore be
less at the mercy of some climatic or other injury than a country more
specialised in some single crop or other industry. The specialisation
impressed upon a backward country by commerce with advanced industrial
countries, confining it to growing cotton or wheat or sheep or wine,
exaggerates the irregularity imposed by nature upon its productivity,
by making it subservient to the fluctuating demands of distant and
wholly incalculable markets. The fluctuations brought about by
irregular consumption and uncontrolled production in highly-evolved
industrial countries are thus reflected with terrible force upon the
more primitively-ordered parts of the industrial world. Thus does the
character of modern machine-industry impress itself on the countries
which feed it with raw materials.
If we turn to investigate the several departments of industry in the
more highly-evolved communities, where statistics yield more accurate
information, we have most distinct evidence that so far as the
world-market is concerned, the fluctuations are far more extreme in
the industries to which machine-production and high organisation have
been applied. An investigation of changes of wholesale prices
indicates that the most rapid and extreme fluctuations are found in
the prices of textile and mineral materials which form the foundation
of our leading manufactures. A comparison of the price changes of food
as a whole, and of corn prices with textiles and minerals, shows that
especially during the last thirty years the fluctuations of the latter
have been much more rapid and pronounced. (See following diagrams.)
[Illustration: COURSE OF AVERAGE PRICES OF GENERAL
COMMODITIES.]
[Illustration: CORN PRICES.]
Sec. 5. It ought to be clearly understood that the real congestion with
which we are concerned, the over-supply, does not chiefly consist of
goods in their raw or finished state passing through the machine on
their way to the consumer. The economic diagnosis is sometimes
confused upon this point, speaking of the increased productive power
of machinery as if it continued to pour forth an unchecked flood of
goods in excess of possible consumption. This shows a deep
misunderstanding of the malady. Only in its early stages does it take
this form. When in any trade the producing power of machinery is in
excess of the demand at a remunerative price, the series of processes
through which the raw material passes on its way to the consumer
soon become congested with an over-supply. This, however, need not be
very large, nor does it long continue to grow. So long as the
production of these excessive wares continues, though we have a
growing glut of them, the worst features of industrial disease do not
appear; profits are low, perhaps business is carried on at a loss, but
factories, workshops, mines, railways, etc., are in active operation;
wages may be reduced, but there is plenty of employment. It is when
this congestion of goods has clogged the wheels of the industrial
machine, retarded the rate of production, when the weaker
manufacturers can no longer get credit at the bank, can no longer meet
their engagements, and collapse, when the stronger firms are forced to
close some of their mills, to shut down the less productive mines, to
work short hours, to economise in every form of labour, that
depression of trade assumes its more enduring and injurious shape.
The condition now is not that of an increasing glut of goods; the
existing glut continues to block the avenues of commerce and to check
further production, but it does not represent the real burden of
over-supply. The true excess now shows itself in the shape of idle
machinery, closed factories, unworked mines, unused ships and railway
trucks. It is the auxiliary capital that represents the bulk of
over-supply, and whose idleness signifies the enforced unemployment of
large masses of labour. It is machinery, made and designed to increase
the flow of productive goods, that has multiplied too fast for the
growth of consumption. This machinery does not continue in full use, a
large proportion of it is not required to assist in producing the
quantity of consumptive goods which can find a market, and must of
necessity stand idle; it represents a quantity of useless forms of
capital, over-supply, and its unused productive power represents an
incomparably larger amount of potential over-supply of goods. Economic
forces are at work preventing the continuation of the use of this
excessive machinery; if it were used in defiance of these forces, if
its owners could afford to keep it working, there would be no market
for the goods it would turn out, and these too would swell the mass of
over-supply.
[Illustration: GENERAL FOOD PRICES.]
[Illustration: MINERAL PRICES.]
Sec. 6. The general relation of modern Machinery to Commercial Depression
is found to be as follows:--Improved machinery of manufacture and
transport enables larger and larger quantities of raw material to pass
more quickly and more cheaply through the several processes of
production. Consumers do not, in fact, increase their consumption as
quickly and to an equal extent. Hence the onward flow of productive
goods is checked in one or more of the manufacturing stages, or in the
hands of the merchant, or even in the retail shop. This congestion of
the channels of production automatically checks production, depriving
of all use a large quantity of the machinery, and a large quantity of
labour. The general fall of money income which has necessarily
followed from a fall of prices, uncompensated by a corresponding
expansion of sales, induces a shrinkage of consumption. Under
depressed trade, while the markets continue to be glutted with unsold
goods, only so much current production is maintained as will
correspond to the shrunk consumption of the depressed community.
Before the turn in the commercial tide, current production even falls
below the level of current consumption, thus allowing for the gradual
passage into consumption of the glut of goods which had congested the
machine. After the congestion which had kept prices low is removed,
prices begin to rise, demand is more active at each point of industry,
and we see the usual symptoms of reviving trade.
[Illustration: TEXTILE PRICES.]
This is an accurate account of the larger phenomena visible in the
commercial world in a period of disturbance. When the disease is at
its worst, the activity of producer and consumer at its lowest, we
have the functional condition of under-production due to the pressure
of a quantity of over-supply, and we have a corresponding state of
under-consumption.
Sec. 7. Machinery thus figures as the efficient cause of industrial
disease, but the real responsibility does not rest on the shoulders of
the inventor of new machinery, or of the manufacturer, but of the
consumer.
The root-evil of depressed trade is under-consumption.[157] If a
quantity of capital and labour is standing idle at the same time, in
all or in the generality of trades, the only possible reason why they
remain unemployed is that there is no present demand for the goods
which by co-operation they are able to produce.
English economists, most of whom, ever since the time of J.B. Say,
have denied the possibility of the condition of general over-supply
which is seen to exist in depressed trade, are contented to assume
that there can be no general over-supply because every one who
produces creates a corresponding power to consume. There cannot, it is
maintained, be too much machinery or too much of any form of capital
provided there exists labour to act with it; if this machinery,
described as excessive, is set working, some one will have the power
to consume whatever is produced, and since we know that human wants
are insatiable, too much cannot be produced. This crude and
superficial treatment, which found wide currency from the pages of
Adam Smith and McCulloch, has been swallowed by later English
economists, unfortunately without inquiring whether it was consistent
with industrial facts. Since all commerce is ultimately resolvable
into exchange of commodities for commodities, it is obvious that every
increase of production signifies a corresponding increase of power to
consume. Since there exists in every society a host of unsatisfied
wants, it is equally certain that there exists a desire to consume
everything that can be produced. But the fallacy involved in the
supposition that over-supply is impossible consists in assuming that
the power to consume and the desire to consume necessarily co-exist in
the same persons.
In the case of a glut of cotton goods due to an increased application
of machinery, the spinners and manufacturers have the power to consume
what is produced, while a mass of starving, ill-clad beings in Russia,
East London--even in Manchester--may have the desire to consume these
goods. But since these latter are not owners of anything which the
spinners and manufacturers wish to consume or to possess, the exchange
of commodities for commodities cannot take place. But, it will be
said, if the Lancashire producers desire to consume anything at all,
those who produce such articles of desire will have the power, and
possibly the desire, to consume more cotton goods, or at any rate the
desire to consume something produced by other people who will have
both power and desire to consume cotton goods. Thus, it will be said,
the roundabout exchange of commodities for commodities must be brought
about. And this answer is valid, on the assumption that the Lancashire
producers desire to consume an equivalent of the goods they produce.
But let us suppose they do not desire to do so. The reply that since
human wants are insatiable every one with power to consume must have
desire to consume, is inadequate. In order to be operative in the
steady maintenance of industry the desire to consume must be a desire
to consume _now_, to consume continuously, and to consume to an extent
corresponding with the power to consume.
Let us take the Lancashire trade as a test case. Evidently, there
could be no superfluous capital and labour in Lancashire trade if the
cotton-spinners, manufacturers and their operatives, increased their
own consumption of cotton goods to correspond with every increase of
output.
But if they do not do this, they can only make good and maintain
their capital and labour in employment by persuading others to
increase their consumption of cotton goods. How can they do this? If,
instead of desiring to consume more cotton goods, the Lancashire
employers and operatives desire to consume, and do actually consume,
more hardware, houses, wine, etc., then the increased consumption of
these things, raising their prices and so stimulating their
production, and distributing a larger purchasing-power among the
capitalists and operatives engaged in producing the said hardware,
houses, wine, etc., will enable the latter to consume more cotton
goods, and if these desire to do so, their effective demand will
maintain the new capital and labour employed in Lancashire trade.
But if, instead of taking this course, the Lancashire capitalists and
operatives want not to consume either cotton or anything else, but
simply to _save_ and put up more mills and prepare more yarn and
cloth, they will soon find they are attempting the impossible. Their
new capital, and the fresh labour conjoined with it, can only be
employed on condition that they or others shall increase their
consumption of cotton goods. They themselves _ex hypothesi_ will not
do so, and if the capitalists and operatives engaged in setting up the
new cotton-mills, etc., will consent to do so, this only postpones the
difficulty, unless we suppose a continuous erection of new mills, and
a continuous application on the part of those who construct these
mills of the whole of their profits and wages in demanding more cotton
goods--a _reductio ad absurdum_. In short, cotton capitalists and
operatives can only effect this saving and provide this increased
employment of capital and labour on condition that either those
engaged in erecting and working the new mills shall spend all their
income in demanding cotton goods, or that other persons shall diminish
the proportion of their incomes which hitherto they have saved, and
shall apply this income in increased demand for cotton goods.
Now if the same motives which induce Lancashire capitalists and
workers to refuse to increase their present consumption _pari passu_
with the rate of production are generally operative, it will appear
that capital and labour lie idle because those who are able to consume
what they could produce are not willing to consume, but desire to
postpone consumption--_i.e._, to save.
Sec. 8. The process of "Saving" has received but scant attention from
economic writers. Jevons appears to have held that superfluous food
and other necessary consumptive goods, in whosoever hands they were,
constituted the only true fund of capital in a community at any given
time. Sidgwick also holds that all "Savings" are in the first instance
"food." That this is not the case will appear from the following
example:--A self-sufficing man produces daily for his daily
consumption a quantity of food, etc., denoted by the figure 10. 5 of
this is necessary and 5 superfluous consumption. This man, working
with primitive tools, discovers an implement which will greatly
facilitate his production, but will cost 4 days' labour to make. Three
alternatives are open to him. He may spend half his working day in
producing the strictly necessary part of his previous consumption, 5,
and devote the other half to making the new implement, which will be
finished in 8 days. Or he may increase the duration of his working day
by one quarter, giving the extra time to the making of his new
implement, which will be finished in 16 days. Or lastly, he may
continue to produce consumptive goods as before, but only consume half
of them, preserving the other half for 8 days, until he has a fund
which will suffice to keep him for 4 continuous days, which he will
devote to making the new implement. If he adopts the first
alternative, he simply changes the character of his production,
producing in part of his working day future goods instead of present
consumptive goods. In the second he creates future goods by extra
labour. In the third case only does the "saving" or new "capital" take
as its first shape food. In the same way a community seeking to
introduce a more "roundabout" method of production requiring new
plant, or seeking to place in the field of industry a new series of
productive processes to satisfy some new want, may achieve their
object by "saving" food, etc., or by changing for awhile the character
of their production, or by extra labour. Thus new capital, whether
from the individual or the community point of view, may take either
"food" or any other material form as its first shape.
Since "savings" need not take the shape of food or any article capable
of immediate consumption, Adam Smith and J.S. Mill are clearly wrong
when they urge in terms almost identical[158] that what is saved is
necessarily consumed, and consumed as quickly as that which is spent.
The antithesis of saving and spending shows these writers, and the
bulk of English economists who follow them, are misled, because they
regard "saving" as doing something with money, and do not sufficiently
go behind the financial aspect of putting money into a bank.
A closer analysis of saving yields the result that, except in one of
the simple cases taken in our example above, where "saving" implied
withholding consumable goods from present consumption, every act of
saving in a complex industrial society signifies making, or causing to
be made, forms of capital which are essentially incapable of present
consumption--_i.e._, future or productive goods.
Each member of an industrial community receives his money income as
the market equivalent of value created in goods or services by the
requisites of production, land, capital, labour which he owns. For
every L1 paid as income an equivalent quantity of material or
non-material wealth has been already created.
Let A be the owner of a requisite of production, receiving L500 a year
as income in weekly payments of L10. Before receiving each L10 he has
caused to come into existence an amount of wealth which, if material
goods, may or may not be still in existence; if services, has already
been consumed. It is evident that A may each week consume L10 worth of
goods and services without affecting the general condition of public
wealth. A, however, determines to consume only L5 worth of goods and
services each week, and puts the other L5 into the bank. Now what
becomes of the L5 worth of goods and services which A might have
consumed, but refused to consume? Do they necessarily continue to
exist so long as A is credited with the money which represents their
"saving"; if so, in what form? In other words, what actually takes
place in the world of commerce when money income is said to be saved,
what other industrial facts stand behind the financial fact of A
depositing part of his income in the bank as "savings"?
To this question several answers are possible.
(1) B, a spendthrift owner of land or capital, wishing to live beyond
his income, may borrow from the bank each L5 which A puts in,
mortgaging his property. In this case B spends what A might have
spent; B's property (former savings perhaps?) falls into A's hands. A
has individually effected a "saving" represented by tangible property,
but as regards the community there is no saving at all, real or
apparent.
(2) C, a fraudulent promoter of companies, may by misrepresentation
get hold of A's saved money, and may spend it for his own enjoyment,
consuming the goods and services which A might have consumed, and
giving to A "paper" stock which figures as A's "savings." Here A has
individually effected no saving.
From the point of view of the community there is no real saving (C has
consumed instead of A), but so long as the "stock" has a market value
there is an apparent saving. To this category belongs the "savings"
effected if A lends his money to a government to be spent on war. From
the standpoint of the community there is no saving (unless the war be
supposed to yield an asset of wealth or security), but A's paper stock
represents his individual saving. A's "saving" is exactly balanced by
the spending of the community in its corporate capacity, A receiving a
mortgage upon the property of the community.[159]
(3) D and E, manufacturers or traders, engaged in producing luxuries
which A used to buy with his L5 before he took to saving, finding
their weekly "takings" diminished and being reduced to financial
straits, borrow A's "savings" in order to continue their business
operations, mortgaging their plant and stock to A. So long as, with
the assistance of A's money, they are enabled to continue producing,
what they produce is over-supply, not needed to supply current
consumption, assuming the relation between spending and saving in the
other members of the community remains unaltered. This over-supply is
the material representative of A's "savings." So far as real capital
is concerned there is no increase by A's act of saving, rather a
decrease, for along with the net reduction in the consumption of
luxuries on the part of the community due to A's action, there must be
a fall in the "value" of the capital engaged in the various processes
of producing luxuries, uncompensated by any other growth of values.
But by A's "saving" new forms of capital exist which bear the
appearance of capital, though in reality they are "over-supply." These
empty forms represent A's saving. Of course A, with full knowledge of
the facts, would only lend to D and E up to the real value of their
mortgaged capital. When this point was reached D and E could get no
further advances, and their stock and plant would pass into A's hands.
From the point of view of the community A's action has resulted in the
creation of a number of material forms of capital which, so long as
the existing relations between the community's production and
consumption continue, stand as over-supply.
(4) A may hand over his weekly L5 to F on security. F by purchase
obtains the goods which A refused to consume, and may use them (or
their equivalent in other material forms) as capital for further
production. If F can with this capital help to produce articles for
which there is an increasing consumption, or articles which evoke and
satisfy some new want, then A's action will have resulted in "saving"
from the point of view of the community--_i.e._, there will be an
increase of real capital; forms of capital which would otherwise have
figured as over-supply have the breath of economic life put into them
by an increase in general consumption. No real difficulty arises from
a doubt whether the goods and services which A renounced were capable
of becoming effective capital. The things he renounced were luxurious
consumptive goods and services. But he could change them into
effective capital in the following way:--Designing henceforth to
consume only half his income, he would deliberately employ half the
requisites of production which furnished his income in putting extra
plant, machinery, etc., into some trade. Whether he does this himself,
or incites F to do it, makes no difference; it will be done. In this
way, by establishing new forms of useful capital, A can make good his
saving, assuming an increase of general consumption. These are the
four possible effects of A's saving from the point of view of the
community--
(1) Nil.
(2) Bogus or "paper" saving.
(3) Over-supply of forms of capital.
(4) Increase of real capital.
It appears then that every act which in a modern industrial society is
"saving," from the standpoint of the community, and not a mere
transfer of "spending" from one person to another, consists in the
production of a form of goods in its nature or position incapable of
present consumption.
This analysis of "saving" convicts J.S. Mill of a double error in
saying, "Everything which is produced is consumed; both what is saved
and what is said to be spent; and the former quite as rapidly as the
latter." In the first place, by showing that "saving," from the point
of view of the community, generally means producing something
incapable of present consumption, it proves that even if what is
"saved" is consumed, it is not consumed as quickly as what is spent.
Mill seemed to think that what was "saved" was necessarily food,
clothing, and so-called finished goods, because "saving" to him was
not a process, but a single negative act of refusing to buy. Because a
man who has "saved" has command of an extra stock of food, etc., which
he may hand over to labourers as real wages, he seems to think that a
community which saves will have its savings in this form. We see this
is not the case. Even where in a primitive society extra food is the
first form savings may take, it belongs to the act of saving that this
food shall not be consumed so soon as it was available for
consumption. In short, Mill's notion was that savings must necessarily
mean a storing up of more food, clothing, etc., which, after all, is
not stored, but is handed over to others to consume. He fails to
perceive that a person who saves from the social as opposed to the
individual point of view necessarily produces something which neither
he nor any one else consumes at once--_i.e._, steam engines, pieces of
leather, shop goods. A "saving" which is merely a transfer of spending
from A to B is obviously no saving from the point of view of the
community to which both A and B belong. If A, who is said to save,
pays wages to B, who makes a machine which would otherwise not have
been made, when this machine is made something is saved, not before.
Though Mill does not seem, in Bk. I. chap, v., to regard increased
plant, machinery, etc., as "savings," but rather as something for
which "savings" may be exchanged,[160] the more usual economic view of
"savings" embodies part of them in plant and raw material, etc., and
considers the working up of these into finished goods as a
"consumption." But though industrial usage speaks of cotton yarn,
etc., being consumed when it is worked up, the same language is not
held regarding machinery, nor would any business man admit that his
"capital" was consumed by the wear and tear of machinery, and was
periodically replaced by "saving." The wearing away of particular
material embodiments of capital is automatically repaired by a process
which is not saving in the industrial or the economic sense. No
manufacturer regards the expenditure on maintenance of existing plant
as "saving"; what he puts into additional plant alone does he reckon
"savings." It would be well for economists to clearly recognise that
this business aspect of capital and saving is also the consistent
scientific aspect. "Saving" will then be seen to apply exclusively to
such increased production of plant and productive goods as will
afterwards yield an increased crop of consumptive goods, provided the
community is willing to consume them. "Saving" is postponed
consumption--_i.e._, the production of "future goods," plant,
machinery, raw materials in their several stages, instead of
commodities suitable for immediate consumption.
Sec. 9. There are, in fact, two distinct motives which induce individuals
to continue to produce, one is the desire to consume, the other the
desire to save--_i.e._, to postpone consumption. It is true that the
latter may be said also to involve a desire to consume the results of
the savings at some indefinitely future time, but the motive of their
production at present is a desire to reduce the quantity of the
present consumption of the community, and to increase the quantity of
postponed consumption.
It is this consideration which gives the answer to the single sentence
of J.S. Mill, which has been sometimes held to offer a complete
refutation of the notion of an existing state of over-supply. "The
error is in not perceiving that, though all who have an equivalent to
give _might_ be fully provided with every conceivable article which
they desire, the fact that they go on adding to the production proves
that this is not actually the case."[161] Here the present desire to
consume either what is produced or its equivalent is assumed to be the
only motive which can lead an individual to produce. The fact that
people go on producing is regarded as proof that they are not "fully
provided with every conceivable article they desire." If this were
true it would be a final and conclusive refutation of the idea of
over-supply. But if saving means postponed consumption, and the desire
to save, as well as the desire to consume, is a _vera causa_ in
production, then the fact of continued production affords no proof
that such production must be required to supply articles which are
desired for consumption. Ultimately a belief that some one will
consent to consume what is produced underlies the continued production
of "a saving person," but, as we shall see presently, the belief of a
competing producer that he can get a market for his goods, even when
justified by events, is no guarantee against excessive production in
the whole trade.
If, then, those who have the power to consume in the present desire to
postpone their consumption they will refuse to demand consumptive
goods, and will instead bring into existence an excess of productive
goods.
Sec. 10. The diagram on next page may serve more clearly to indicate the
quantitative maladjustment of Consuming and Saving which constitutes
under-consumption, and exhibits itself in a plethora of machinery and
productive goods.
[Illustration: MECHANISM OF PRODUCTION.]
A, B, C, D, E represent the several stages through which the raw
material obtained from Nature passes on its way to the position of a
consumer's utility. The five stages represent the five leading
processes in production--the extractive process, transport,
manufacture, wholesale and retail trade. The raw materials extracted
at A, the wheat, skins, iron, timber, cotton, etc., obtained from
various quarters of the globe, are gathered together in large
quantities into places where they undergo various transformations of
shape and character; they are then distributed by wholesale and retail
merchants, who hand them over to persons who consume them as bread,
boots, kettles, chairs, shirts. The extractive, transport,
manufacturing, and merchant stages may of course be subdivided into
many complex processes, as applied to the history of the more
elaborately-produced commodities. But at each point in the process of
production there must stand a quantity of plant and machinery designed
to assist in moving the productive goods a single step further on the
road towards consumption. This fixed capital is denoted by the black
circles placed at the points A, B, C, D, E. But each machine, or
factory building, or warehouse is itself the ultimate product of a
series of steps which constitute a process similar to that denoted by
the main channel of production. Consisting in raw material extracted
from nature, the machinery and plant are built up by a number of
productive stages, which correspond to A, B, C, D, E, into the
completed shapes of fixed capital, adjusted to the positions where
they can give the proper impulse to the main tide of production. Each
productive stage in the production of plant or machinery requires the
presence of other plant and machinery to assist its progress. Each of
these secondary forms of fixed capital situate at _a_, _b_, _c_, _d_,
_e_, has of course a similar history of its own. To represent the full
complexity of the mechanism of industry thus suggested would be
confusing and would serve no purpose here. It is sufficient that we
recognise that at each point A, B, C, D, E, and at each of the points
_a_, _b_, _c_, _d_, _e_, upon the perpendicular lines, stands a
quantity of forms of fixed capital which are gradually worn out in the
work of forwarding quantities of A to B, and quantities of B to C, and
so on. Now if we turn to the point F, where goods pass out of the
productive machine into the hands of consumers, who destroy them by
extracting their "utility or convenience," we shall find in this flow
of goods out of the industrial machine the motive-force and regulator
of the activity of the whole machine.
Let us take an illustration from a single trade, the shoe trade. The
number of boots and shoes purchased by consumers at retail shops and
drawn out from the mechanism at the point F, determines the rate at
which retailers demand and withdraw shoes from wholesale merchants,
assuming for the sake of simplicity that all shopkeepers deal with
manufacturers through the medium of merchant middlemen. If the number
of sales effected in a given time by retailers increases, they
increase their demand from the merchants, if it falls off they lower
their demand. The quantity of goods which retailers will in normal
conditions keep in stock will be regulated by the demand of
consumers.[162] Thus the flow of shoes from D to E, and the quantity
of shoes which at any given time are at the point E, are determined by
the demand of consumers--that is to say, by the quantity or pace of
consumption. If, owing to miscalculation, a larger number of shoes
stands in the retail shops than is required to satisfy current
consumption, or if the flow from D to E is faster than the outflow
from E, this excess ranks as an over-supply of these forms of capital.
Now just as the demand of consumers determines the number of shoes
which stand at E and flow from D to E, so the demand of the retailer
determines the number of shoes which at any time constitutes the stock
of the merchants at D, and the size and number of the orders they give
to the manufacturers at C. Similarly with the earlier processes of
production; the flow of leather from the "tanners" and the quantity of
leather kept in stock are likewise determined by the demand of the
manufacturers; and the transport of hides and bark, and the demand for
these materials of tanning, will be regulated by the demands of the
tanners. So the quantity of stock at each of the points A, B, C, D, E,
and the rate of their progress from one point to the next, are
dependent in each case upon the quantity demanded at the next stage.
Hence it follows that the quantity of productive goods at any time in
stock at each of the points in the production of shoes, and the
quantity of productive work done and employment given at each point,
is determined by the amount of consumption of shoes. If we knew the
number of purchases of shoes made in any community by consumers in a
given time, and also knew the condition of the industrial arts at the
different points of production, we should be able to ascertain exactly
how much stock and how much auxiliary capital was required at each
point in the production of shoes. At any given time the flow of
consumption indicated by F determines the quantity of stock and plant
of every kind economically required at each point A, B, C, D, E. What
applies to the shoe trade applies to trade in general. Given the rate
or quantity of consumption in the community, it is possible to
determine exactly the quantity of stock and plant required under
existing industrial conditions to maintain this outflow of consumptive
goods, and any stock or plant in excess of this amount figures as
waste forms of capital or over-supply. F then is the quantitative
regulator of A, B, C, D, E.[163] Nor is the accuracy of this statement
impaired by the speculative character of modern trade. Speculative
merchants or manufacturers may set up business at D or C and provide
themselves with stock and machinery to start with, but unless they
meet or create a growing demand of consumers their capital is waste,
or else if they succeed in getting trade it is at the expense of other
members of the trade, and their capital is made productive by
negativing the capital of other traders.
Sec. 11. The truth here insisted on, that an exact quantitative relation
exists between the amount of stock and plant, severally and
collectively, required at the different points A, B, C, D, E, and that
the amount economically serviceable at each point is determined by the
quantity of current consumption, would seem self-evident. But though
this has never been explicitly denied, the important results following
from its recognition have been obscured and befogged by several
conceptions and phrases relating to capital which have found
acceptance among English economists.
Chief and foremost among these errors is the framing of a definition
of capital so as to exclude the clear separation of productive goods
and machinery, the economic means, from consumptive goods, the
economic end. So long as a definition of capital is taken which
includes any consumptive goods whatsoever, two results follow. One is
a hopeless confusion in the commercial mind, for in commerce
everything is capital which forms the stock or plant of a commercial
firm, and nothing is capital which does not form part of such stock or
plant. Secondly, to include under capital the food in the possession
of productive labourers or any other consumptive goods is an
abandonment of the idea of consumption as the economic end and a
substitution of production.
If we follow Boehm-Bawerk and the Austrian economists in definitely
refusing to include the consumptive goods of labourers as
capital,[164] we get a conception of capital which is at once in
accordance with the universal conception of commercial men, and which
enables us to realise the vital relation between capital and
consumption. We now see Capital in the form of stock and plant at each
point in the industrial machine deriving its use and value from its
contribution to the end, Consumption, and dependent for its quantity
upon the quantity of Consumption. We have seen that a demand for
commodities is the true and exact determinant of the quantity of
capital at each industrial stage. It is therefore the determinant of
the aggregate of wealth which can function as useful forms of capital
in the industrial community at any given time. The aggregate of plant
and stock which constitute the material forms of capital at the points
A, B, C, D, E must in a properly adjusted state of industry have an
exact quantitative relation to the consumption indicated by F. If F
increases, the quantity of forms of capital at A, B, C, D, E may
severally and collectively increase; if F declines, the useful forms
of capital at each point are diminished. Since we have seen that the
sole object of saving from the social point of view is to place new
forms of capital at one of the points A, B, C, D, E, it is evident
that the amount of useful saving is limited by the rate of
consumption, or financially, by the amount of "spending." Where there
is an improvement in the general productive power of a community, only
a certain proportion of that increased power can be economically
applied to "saving"--_i.e._, to the increase of forms of capital; a
due proportion must go to increased spending and a general rise in
consumption.
Sec. 12. This will hardly be disputed, except by those who still follow
Mill in maintaining that the whole of the current production could be
"saved," with the exception of what was required to support the
efficiency of labour, a doctrine to which even he could only give
passing plausibility by admitting that the increased savings which
resulted from an attempt to do this would take the shape of luxuries
consumed by the said labourers--that is to say, would not be "savings"
at all, but a transfer of "spending" from one class to another.[165]
If capital be confined to commercial capital, and "saving" to the
establishment of the forms of such capital, no one will deny that the
quantity of "saving" which can be effectually done by a community at
any time depends upon the current rate of consumption, or that any
temporary increase of such saving must be justified by a corresponding
future increase in the proportion of spending.[166]
This will be generally admitted. But there are those who will still
object that production just as much limits and determines consumption
as consumption does production, and who appear to hold that any
increase in present saving, and the consequent increase of amount of
plant and stock, has an economic power to force a corresponding rise
of future consumption which shall justify the saving. This they urge
in the teeth of the fact that in a normal state of industry in
machine-using countries there exists more machinery and more labour
than can find employment, and that only for a brief time in each
decennial period can the whole productive power of modern machinery be
fully used, notwithstanding the increasing blood-letting to which
superfluous saving is exposed by the machinations of bogus companies,
in which the "saving" done by the dupes is balanced by the "spending"
of the sharps. Ignoring the fact that the alleged power of increased
saving to stimulate increased consumption is not operative, they still
maintain that there cannot be too much "saving," because the tendency
of modern industry is to make production more and more "roundabout" in
its methods, and thus to provide scope for an ever-increasing quantity
of forms of capital.
Under modern machinery we see a constant increase in the number of
direct and subordinate processes connected with the forwarding of any
class of commodities to its completion. A larger proportion of the
productive labour and capital is employed, not upon the direct
horizontal line, but upon the perpendicular lines which represent the
making of subsidiary machinery. More and more saving may be stored up
in the shape of machines to make machines, and machines to make these
machines, and thus the period at which the "saving" shall fructify in
consumption may be indefinitely extended.
Some of the labour stored and the capital established in the
construction of harbours, the drainage of land, the construction of
scientific instruments, and other works of durable nature and indirect
service, may not be represented in consumptive goods for centuries.
Admitting this, it may be urged, can any limits be set to present
"saving" and its storage in forms of capital, provided those forms be
selected with a due regard to a sufficiently distant future? The answer
is that only under two conditions could an indefinitely large amount of
present "saving" be justified. The first condition is that an unlimited
proportion of this "saving" can be stored in forms which are practically
imperishable; the second condition is that our present foresight shall
enable us to forecast the methods of production and consumption which
shall prevail in the distant future. In fact neither of these conditions
exists. However much present "saving" we stored in the most enduring
forms of capital with which we are acquainted--_e.g._, in the permanent
way of railroads, in docks, in drainage and improvement of land, a large
proportion of this "saving" would be wasted if the consumption it was
destined to subserve was postponed for long.[167] Neither can we predict
with any assurance that the whole value of such "savings" will not have
disappeared before a generation has elapsed by reason of changes in
industrial methods.
The amount of present "saving" which is justified from the point of
view of the community is strictly limited. We cannot forecast the
demand of our twentieth generation of descendants, or the industrial
methods which will then prevail; we do not even know whether there
will be a twentieth generation; there are certain large inevitable
wastes in postponed consumption by reason of the perishability of all
material forms of wealth, or the abstraction of them by others than
those for whose use they were intended. Moreover, we do not believe it
would be good for our descendants to have the enjoyment of excessive
wealth without a corresponding personal effort of producing, nor would
it be good for us to exert effort without some proximate and
corresponding enjoyment. The limits of individual life rightly demand
that a large proportion of individual effort shall fructify in the
individual life.
Thus there are practical limits set upon the quantity of "saving"
which can be usefully effected by extending the interval between
effort and enjoyment. If the right period be exceeded the risk and
waste is too great. The analogy of gardening adduced by Ruskin is a
sound one.[168] By due care and the sacrifice of bud after bud the
gardener may increase the length of the stem and the size of the
flower that may be produced. He may be said to be able to do this
indefinitely, but if he is wise he knows that the increased risks of
such extension, not to mention the sacrifice of earlier units of
satisfaction, impose a reasonable limit upon the procrastination. The
proportion of "saving" which may be and is applied to establish
late-fructifying forms of wealth, differs not only with the different
developments of the industrial arts, but with the foresight and moral
character of the race and generation. As our species of civilisation
advances, and the demand for complex luxuries and the arts of
supplying them advance, a larger amount of "roundabout" production
becomes possible, and as regard for the future generations advances,
more capital will be put into forms which fructify for them. But at
the present in any given community there is a rational and a
necessary limit to the quantity of "saving" which can be applied to
such purposes.
Secondly, we find that in fact the surplus "saving" over and above
what is needed to provide the necessary forms of capital to assist in
satisfying current consumption is not absorbed in making provision for
distant future consumption by more "roundabout methods." Much of it
goes into a mere increase of the number of existing forms of capital
whose _raison d'etre_ lies in the satisfaction of present or
immediately future wants. The multiplication of cotton-spinning-mills,
of paper-mills, of breweries, ironworks, has gone on far faster than
the growth of current consumption. This increase of productive
machinery has not in fact been able to force such an increase of
consumption as gives adequate employment to these new forms of
machinery and to the labour which is at hand to work them.
Sec. 13. It is not therefore correct to say that the rate of production
determines the rate of consumption just as much as the rate of
consumption determines the rate of production. The current productive
power of capital and labour places a maximum limit upon current
consumption, but an increase of productive power exercises no
sufficient force to bring about a corresponding rise in consumption.
Just as in a particular trade--_e.g._, the Lancashire cotton trade, an
excess of "saving" may be applied to the establishment of mills and
machinery which cannot be kept working because there is no market for
their output, so it is with trade in general. It is not true that the
inflation of capital in the Lancashire trade is due to a misdirection
which implies a lack of capital in some other branch of industry. In a
period of depression like the present every other important branch of
industry displays the same symptoms of excessive plant, over-supply of
stock, irregular and deficient employment of labour, though not to the
same extent. Nor is there any _a priori_ reason why there should not
be from time to time such general maladjustment. If ignorance and
miscalculation leads to the investment of too much capital in, say,
the cotton and iron industries, it is not unreasonable to suppose that
in a complex industrial society there should be such general
miscalculation of the right proportion between saving and spending
that too much should be saved at certain periods. That is to say,
turning again to the diagram of industry, just as it is admitted that
miscalculation may induce too much capital to be placed at A or B or
C, and too little at one of the other points of production, disturbing
the harmonious ordering of the parts of capital, so likewise there may
be a maladjustment of the proportion between A, B, C, D, E, the
aggregate of forms of capital, and F, the aggregate of consumption,
between "saving" and "spending." Now if it be admitted that such
maladjustment is possible, the balance can only lean one way. There
cannot be too little saving to furnish current consumption, taking the
industrial community as a whole, for it is impossible to increase the
rate of consumption, F, faster than the increase of the rate of
current production: any increase of the purchase of shop-goods by
raising prices and circulating more money down the paths of production
stimulates and strains the sinews of production, and if the existing
machinery of production is inadequate it supplies a motive-power to
increase "saving." In no case can a community consume faster than it
produces. An individual can do so by living on his capital, a nation
may do so for a time by living upon its capital, giving to other
nations by means of an increased debt a lien upon its future wealth.
But a whole industrial community can never live upon its capital, can
never in the literal sense of the term "spend too much." This
statement requires a single qualification. While a community can never
by "spending" deplete its capital, while it cannot increase its
"spending" without at the same time increasing its real capital,[169]
it will doubtless be profitable to a progressive community to reduce
its consumption for a while below the normal proportion in order to
fully utilise new discoveries in the industrial arts which shall
justify in the future increased consumption.
But with this necessary qualification it is true that a community
cannot exceed in the direction of spending. But the balance may lean
the other way. A community may "save too much," that is to say, it may
establish a larger quantity of productive machinery and goods than is
required to maintain current or prospective consumption. What is to
prevent a community consisting of a vast number of individuals with no
close knowledge of one another's actions, desires, and intentions,
making such a miscalculation as will lead them to place at each of the
points A, B, C, D, E, and in all or most branches of industry, a
larger quantity of forms of capital than are required?
It is said that the harmony which subsists between the social interest
and the self-interest of individuals will prevent this, or, in other
words, that individuals would find that if they attempted to unduly
increase the aggregate of capital beyond what was socially
advantageous in view of the community's consumption, it would not pay
them to do so. Is this true?
An individual working entirely for himself, whose capital lay in his
tools and his raw or unfinished commodities, would never increase the
latter unduly. A socialist community properly managed would never add
to its stock of machinery or increase the quantity of its raw
materials or unfinished goods, so as to leave any machines unused or
half used, or any goods unnecessarily occupying warehouse room and
deteriorating in quality. But when competition of individual interests
comes in there is no such security.
It may pay individuals to build new factories and put in new machinery
where it would not pay the community to do so, were it the sole owner
of the means of production.
The knowledge that enough capital is already invested in an industry
to fully supply all current demands at profitable prices has no power
to deter the investment of fresh capital, provided the new investors
have reason to believe their capital can be made to displace some
existing capital owned by others. If the new-comer can, by superior
business address, by successful advertising, by "sweating" his
employees or otherwise, get hold of a portion of the business hitherto
in the hands of other firms, it will pay him to build new factories
and stock them with the requisite machinery, and to begin the process
of manufacture. There may be in existence already more bicycle works
than are sufficient to supply the consumption of the community. But
if a would-be manufacturer thinks he can withdraw from other makers a
sufficient number of customers, he will set up works, and make new
machines, though his methods of production and the goods he turns out
may be no better than those of other makers. The same holds at every
stage of production. In wholesale or retail distribution the fact that
there are sufficient warehouses and shops in existence to adequately
supply the current demand does not prevent any one from embarking new
savings in more warehouses or shops, provided he believes he is able
to divert into his own firm a sufficient amount of the business
formerly held by others. In a district two grocers' shops may be quite
sufficient to supply the needs of the neighbourhood, and to secure
adequate competition. But if a third man, by an attractive shop-front
or superior skill in the labelling or adulteration of his wares, can
procure for himself an adequate share of the custom, it will pay him
to put the requisite plant and stock into a shop, though the trade on
the one hand and the community on the other is no gainer by his
action.
There is indeed much evidence to show that it may be to the advantage
of individuals to increase the machinery of production, even though
there is no reasonable prospect of this machinery being worked at a
profit. It is the unanimous testimony of business men that the
Lancashire trade has been congested with mills and machinery in this
way. As a result of an excessive desire to postpone consumption there
are considerable sums of money which cannot find a safe remunerative
investment. Here is the material for the company promoter. By means of
the specious falsehoods of prospectuses he draws this money together;
with him work a builder and an architect who desire the contract of
putting up the factory; the various firms interested in manufacturing
and supplying the machinery, the boiler-maker and fitters of various
kinds, the firm of solicitors whose services are requisite to place
the concern upon a sound legal footing, or to establish confidence,
take up shares. It is to the interest of all these and many other
classes of persons to bring into the field of production new forms of
capital, quite independently of the question whether the condition of
a trade or the consumption of the community have any need for them.
Sec. 14. These operations, which imply a conflict between the interests
of individuals and those of the community, pervade all modern
commerce, but are more prevalent in businesses where complex machinery
plays a prominent part, or where specious advertising gives the
outsider a larger chance of successful entry.
In each and all of these cases it is to the interest of the individual
to place new "savings" in new forms of capital in branches of industry
where sufficient capital already exists to assist in supplying the
current demand for consumptive goods. So far is it from being true
that the self-interest of individuals provides an economic check upon
over-supply, that it is possible that at each of the points of
production, A, B, C, D, E, and in all or the majority of industries at
the same time, there should be an excess of forms of capital as
compared with that which would suffice for the output, F. The
automatic growth of bubble companies and every species of rash or
fraudulent investment at times of depressed trade is proof that every
legitimate occupation for capital is closed, and that the current rate
of saving is beyond that which is industrially sound and requisite.
These bubble companies are simply tumours upon the industrial body
attesting the sluggish and unwholesome circulation; they are the
morbid endeavours of "saving" which is socially unnecessary, and ought
never to have taken place, to find investments. When one of these
"bubble" companies collapses it is tacitly assumed by unthinking
people that those who invested their money in it were foolish persons
who might have sought and found some better investment. Yet a little
investigation would have shown that at the time this company arose no
opportunity of safe remunerative investment open to the outside public
existed, every sound form of business being already fully supplied
with capital.
At first sight it might appear that Consols and first-class railway
and other stocks were open, and that the folly of the investors in
bogus companies consisted in not preferring a safe 2-1/2 per cent. to
a risky 5 or 10 per cent. But this argument is once more a return to
the unsound individualistic view. It was doubtless open to any
individual investor of new savings to purchase sound securities at
2-1/2 per cent., but, since the aggregate of such soundly-placed
capital would not be increased, this would simply mean the
displacement of an equal quantity of some one else's capital. A could
not buy Consols unless B sold, therefore the community to which A and
B belong could not invest any fresh savings in Consols. Any widespread
attempt on the part of those who plunged into bogus companies to try
first-class investments would obviously have only had the effect of
further reducing the real interest of these investments far below
2-1/2 per cent. The same effect would obviously follow any effective
legal interference with company-promoting of this order. The fact that
Consols and other first-class investments do not rise greatly at such
times is, however, evidence that the promoters of unsound enterprises
succeed in persuading individual investors that their chance of
success is not less than 2-1/2 per cent. In many instances the
investor may be acting wisely in preferring a smaller chance of much
higher profits, because a secure 2-1/2 per cent. may be quite
inadequate to his needs. For it must be borne in mind that a knowledge
that the new bank or new building society is unnecessary, because
enough banks and building societies already exist, does not make it
impossible or necessarily improbable that the new venture will
succeed.
The objection, then, which takes the form that over-saving cannot
exist, because the worst investments made with open eyes must be
productive of more than that which could be obtained by investing in
Consols, is not a valid one. It would only be valid on the supposition
that capital were absolutely fluid, that the quantity of
soundly-placed investments were indefinitely expansible, and that new
forms of capital had in no case the power to oust or negative the use
of old forms of capital. But this we have seen is not the case. If
there existed absolute fluidity of competition in all forms of
capital, the fact that interest for new investments stood above zero
would be a proof that there was not excess of forms of capital.
Capital appears to have this fluidity when it is regarded from the
abstract financial point of view. A man who has "saved" appears to
hold his "savings" in the form of bank credit, or other money which he
is able to invest in any way he chooses. But, as we have seen, the
real "savings," which represent his productive effort plus his
abstinence, are of necessity embodied in some material forms, and are
therefore devoid of that fluidity which appears to attach to them when
reflected in bank money.
Sec. 15. The evils of trade depression, or excessive growth of the forms
of capital beyond the limits imposed by consumption, are traced in
large measure directly, but also indirectly, to the free play of
individual interests in the development of machine-production. The
essential irregularities of invention, the fluctuations of public
taste, the artificial restrictions of markets, all enable individual
capitalists to gain at the public expense. The added interests of its
individual members do not make the interest of the community. All
these modes of conflict between the individual and the public interest
derive force from the complexity of modern capitalist production.
In fastening upon the uncontrolled growth of machinery the chief
responsibility for that depression of trade which is derived from an
attempt to devote too large a proportion of the productive power of
the community to forms of "saving," two points should be clearly
understood.
In the first place, it is the forms of capital and not real capital
which are produced in excess. If there are 500 spinning-mills in
Lancashire where 300 would suffice, the destruction of 200 mills would
no whit diminish the amount of real capital. If 200 mills were burnt
down, though the individual owners would sustain a loss, that loss,
estimated in money, would be compensated by a money rise in the value
of the other mills. The quantity of real capital in cotton-spinning is
dependent upon the demand for the use of such forms of capital--that
is to say, upon the consumption of cotton goods. If 300 mills are
sufficient to do the work of supplying yarn to meet the demand of all
manufacturers, the value of 500 mills is no greater than of 300;
assuming that the 500 mills equally distributed the trade, it would
simply mean that the real capital was thinly spread over 500 mills,
which could only work a little over half-time without producing a glut
of goods, instead of being concentrated upon 300 mills fully occupied.
Turning once more to the diagram,
[Illustration]
_f_ (the current rate of consumption) determines the quantity of real
productive power of capital that can be effectively employed at each
point, _a_, _b_, _c_, _d_, _e_. The condition of the arts of industry,
including the rates of wages and other conditions of the labour
market, determines how many forms of capital (mills, warehouses,
ironworks, raw material, etc.) at any given time are socially
requisite to embody this capital. But though _f_ has an economic power
to force into existence the requisite minimum of these forms of
capital, it has no power to prevent the pressure of individual
interests from exceeding that minimum and planting at _a_, _b_, _c_,
_d_, _e_ more forms of capital than are required.
Secondly, over-production or a general glut is only an external phase
or symptom of the real malady. The disease is under-consumption or
over-saving. These two imply one another. The real income of a
community in any given year is divisible into two parts, that which is
produced and consumed, that which is produced and not consumed--_i.e._,
is saved. Any disturbance in the due economic proportion of these two
parts means an excess of the one and a defect of the other. All
under-consumption therefore implies a correspondent over-saving. This
over-saving is embodied in an excess of machinery and goods over the
quantity economically required to assist in maintaining current
consumption. It must, however, be remembered that this over-saving is
not measured by the quantity of new mills, machinery, etc., put into
industry. When the mechanism of industry is once thoroughly congested,
over-saving may still continue, but will be represented by a
progressive under-use of existing forms of capital, that unemployment
of forms of capital and labour which makes trade depression.
An increased quantity of saving is requisite to provide for an
expected increase of consumption arising from a growth of population
or from any other cause. Such increased saving is of course not
over-saving. The proportion, as well as the absolute amount of the
community's income which is saved, may at any time be legitimately
increased, provided that at some not distant time an increased
proportion of the then current income be consumed. If in a progressive
community the proportion of "saving" to consumption, in order to
maintain the current standard of living with the economic minimum of
"forms" of capital, be as 2 to 10, the proportion of saving in any
given year may be raised to 3 to 9, in order to provide for a future
condition in which saving shall fall to 1 to 11. Such increased
"saving" will not be over-saving; the forms of capital in which it is
embodied will not compete with previously existing forms so as to
bring down market prices. The efforts which take the form of permanent
improvements of the soil, the erection of fine buildings, docks,
railways, etc., for future use, may provide the opportunity to a
community of increasing the proportion of its savings for a number of
years. But such savings must be followed by an increased future
consumption without a correspondent saving attached to it. The notion
that we can indefinitely continue to increase the proportion of our
savings to our consumption, bounded only by the limit of actual
necessaries of life, is an illusion which places production in the
position of the human goal instead of consumption.
Sec. 16. Machinery has intensified the malady of under-consumption or
over-saving, because it has increased the opportunities of conflict
between the interests of individuals and those of the community. With
the quickening of competition in machine industries the opportunities
to individuals of making good their new "savings" by cancelling the
old "savings" of others continually grow in number, and as an ever
larger proportion of the total industry falls under the dominion of
machinery, more and more of this dislocation is likely to arise; the
struggles of weaker firms with old machinery to hold their own, the
efforts of improved machinery to find a market for its expanded
product, will continue to produce gluts more frequently, and the
subsequent checks to productive activity, the collapse of businesses,
the sudden displacement of large masses of labour, in a word, all the
symptoms of the malady of "depression" will appear with increased
virulence.
It must be clearly recognised that the trouble is due to a genuine
clash of individual interests in a competitive industrial society,
where the frequent, large, and quite incalculable effects of improved
machinery and methods of production give now to this, now to that
group of competitors a temporary advantage in the struggle. It was
formerly believed that this bracing competition, this free clash of
individual interests, was able to strike out harmony, that the steady
and intelligent pursuit by each of his own separate interest formed a
sure basis of industrial order and induced the most effective and
serviceable disposition of the productive powers of a community.
It now appears that this is not the case, and that the failure cannot
in the main be attributed to an imperfect understanding by individuals
of the means by which their several interests may be best subserved,
but is due to the power vested in individuals or groups of individuals
to secure for themselves advantages arising from improved methods of
production without regard for the vested interests of other
individuals or of society as a whole.
APPENDIX I.
ARE GOODS IN THE POSSESSION OF CONSUMERS CAPITAL?
The question whether food, clothing, etc., which are "capital" so long
as they form part of the stock of a shopkeeper, are to be regarded as
ceasing to be capital when they pass into the possession of consumers
has seldom been definitely faced by English economists. Jevons was
perhaps the first to clearly recognise the issues involved. He
writes:--"I feel quite unable to adopt the opinion that the moment
goods pass into the possession of the consumer they cease altogether
to have the attributes of capital. This doctrine descends to us from
the time of Adam Smith, and has generally received the undoubting
assent of his followers. Adam Smith, although he denied the
possessions of a consumer the name of capital, took care to enumerate
them as part of the stock of the community." (_The Theory of Political
Economy_, 2nd edit., p. 280.)
As a historical judgment this is very misleading. Adam Smith, chiefly
impressed by the necessity of separating consumptive goods from goods
used as a means of making an income--_e.g._, commercial capital, quite
logically severed revenue from capital as a distinct species of the
community's stock. His "followers," however, differed very widely, and
usually expressed themselves obscurely. Generally speaking, the
English economists of the first half of this century inclined to the
inclusion of certain consumptive goods in the possession of labourers
under capital. Ricardo, for example, thus expresses himself:--"In
every society the capital which is employed in production is
necessarily of limited durability. The food and clothing consumed by
the labourer, the buildings in which he works, the implements with
which his labour is assisted, are all of a perishable value. There is,
however, a vast difference in the time for which all these different
capitals will endure. A steam engine will last longer than a ship, a
ship than the clothing of the labourer, and the clothing of the
labourer than the food which he consumes." (_Principles of Political
Economy_, 1817, p. 22.) The last sentence is conclusive in its
inclusion under capital of goods in the possession of labourers.
McCulloch again regrets Smith's exclusion of "revenue" from capital,
insisting that "it is enough to entitle an article to be considered
capital that it can directly contribute to the support of man or
assist him in appropriating or producing commodities," and he would
even go so far as to include "a horse yoked to a gentleman's coach,"
on the ground that it was "possessed of the capacity to assist in
production." (_Principles of Political Economy_, Part I., chap. ii. Sec.
3.)
Malthus does not, so far as I can ascertain, face the question. James
Mill alone, among the earlier nineteenth century economists,
definitely excludes labourers' consumptive goods from capital.
(_Principles of Political Economy_, chap. i. Sec. 2.) J.S. Mill is not
equally clear in his judgment. In Bk. I., chap. iv. Sec. 1, food
"destined" for the consumption of productive labourers apparently
ceases to be capital when it is already "appropriated to the
consumption of productive labourers." This position, however, is not
consistent with his later position regarding the unlimited character
of saving, which can only be justified by regarding real wages when
paid as continuing to be capital. Fawcett is vague, but he is disposed
not only to include under capital food which is in the possession of
consumers, but to exclude food which is in the possession of dealers.
"If a man has so much wheat, it is wealth which may at any moment be
employed as capital; but this wheat is not made capital by being
hoarded; it becomes capital when it feeds the labourers, and it cannot
feed the labourers unless it is consumed." (_Manual of Political
Economy_, Bk. I., chap, iv., p. 29.) Among later English writers,
Cairnes, like all holders of the "Wages fund" doctrine, does not
clearly meet the question, "Does the food, etc., forming the real wage
fund which is one part of capital, cease to be capital when it is
actually paid out in wages?" He plays round the question in _Leading
Principles_, Part II., chap. i. Bonamy Price includes consumptive
goods. "It is to be remarked of all this capital, these materials,
implements, and necessaries for the labourers, that they are consumed
and destroyed in the process of creating wealth, some rapidly, some
more slowly. Thus the very purpose of capital is to be consumed and
destroyed; it is procured for that very end." (_Practical Political
Economy_, pp. 103, 104.) Since, he adds a little later, "an article
cannot be declared to be capital or not capital till the purpose it is
applied to is determined," it would appear that flour in the dealer's
hands is not capital, but that it only becomes capital when handed
over to persons who productively consume it. Thorold Rogers appears to
take the same view, holding the food of a country to be part of its
capital irrespective of the consideration in whose hands it is.
(_Political Economy_, p. 61.) Professor Sidgwick appears to regard
"food" consumed by productive labourers as capital. "On this view it
is only so far as the labourer's consumption is distinctly designed to
increase his efficiency that it can properly be regarded as an
investment of capital." (_Principles of Political Economy_, Bk. I.,
chap. v.)
General Walker apparently holds that stored food used to support
productive work is capital in whosoever hands it lies. (_Political
Economy_, 2nd edit., Sec. 87.) He is, however, concerned with
illustrations from primitive society, and possibly might hold the food
ceased to be capital if paid over by one person to another as wages.
Hearn, on the contrary, definitely excludes consumptive goods. "The
bullock, which when living formed part of the capital of the grazier,
and when dead of the butcher, is not capital when the meat reaches the
consumer." (_Plutology_, p. 135.)
Professor Marshall defers to the commercial usage so far as to apply
the term Trade Capital to "those external things which a person uses
in his trade, either holding them to be sold for money, or applying
them to produce things that are to be sold for money." But turning to
the individual, he insists upon speaking of the necessaries he
consumes to enable him to work as "capital." "Some enjoyment is indeed
derived from the consumption of the necessaries of life which are
included under capital; but they are counted as capital because of the
work for the future which they enable people to do, and not on account
of the present pleasure which they afford." (_Principles_, 2nd edit.,
p. 125.)
These instances show that Jevons is wrong in attributing to English
economists a general acceptance of the belief that goods cease to be
capital when they come into the possession of consumers. They also
serve to explain the source of the conflict of judgment and the
confusion of expression. Economists who take it to be the end of
industrial activity to place in the possession of consumers goods
which shall satisfy their desires, regard "capital" as a convenient
term to cover those forms of wealth which are a means to this end, and
are thus logically driven to exclude all consumers' goods from
capital. This view of capital coincides with the ordinary accepted
commercial view which regards capital not from its productivity side
but from its income-yielding side. Those economists, on the other
hand, who actually, though not avowedly, take production to be the end
of industry, regard as "capital" all forms of material wealth which
are means to that end, and therefore include food, etc., productively
consumed by labourers. If work considered as distinct from enjoyment
be regarded as the end, it is reasonable enough that some term should
be used to cover all the forms of material wealth serviceable to that
end. It is, however, unfortunate that the term "capital" should be
twisted from its fairly consistent commercial use to this purpose.
Dr. Keynes,[170] who seems to think the sole difficulty as regards the
definition of capital arises from the difference in the point of view
of the individual and of the community, suggests the use of two terms,
"revenue capital" and "production capital." But these terms are doubly
unsatisfactory. In the first place, the "productive consumption"
economist might fairly claim that as his food, etc., enabled the
workman to obtain his wages or revenue, they belonged to revenue
capital. On the other hand, regarding it as essential to distinct
terminology to sever entirely consumptive goods from productive goods,
I should insist that the "production capital" of the community was
synonymous with its "revenue capital," and that although the
individual view of capital is not always coincident with the
community's view, that difference cannot be expressed by the
distinction of "revenue capital" and "production capital."
Moreover, the consumptive-production economists, to be consistent and
to preserve the continuity of the conception of economic activity,
would do well to abolish labour-power as a separate factor, and to
include the body of the labourer with its store of productive energy
as a species of capital. For it is urged (_e.g._, by Professor
Marshall) that the fact that the food consumed by labourers enables
them to earn an income entitles it to rank as capital. In that case
the "wages" which form that income should rank as interest upon the
capital. Again, there is no reason for breaking the continuity of the
capital at the time when the "food" is actually eaten. The food is not
destroyed, but built up into the frame of the labourer as a fund of
productive energy. If consumptive goods are once admitted as capital,
the labourer's body must be likewise capital yielding interest in the
shape of wages. If the other factor "natural agents" be still retained
(an unnecessary proceeding, since all land, etc., which is
productively serviceable is so by reason of the application of some
element of stored labour, and may therefore be called "capital"),
labour could be resolved into natural agents (the infant body) and
capital (the food, etc., used to strengthen and support the body).
Wages could then be reckoned partly as rent, partly as interest. It is
difficult to understand why "productive-consumption" economists, some
of whom have evidently contemplated the change of terminology, have
refused to take a step which would at any rate have the merit of
imparting consistency to their terminology. It is, of course, true
that no "productive-consumption" economist would straightly admit
production not consumption to be the economic goal, but his
terminology can only approximate to consistency upon this supposition.
Mr. Cannan, in his able exposure of Adam Smith's mixed notions upon
Capital, inclines to an extended use of the term which shall include
"the existing stock of houses, furniture, and clothes" on the ground
that they are "just as much a part of the surplus of production over
consumption, and therefore the result of saving, as the stock of
warehouses, machinery, and provisions."[171] Moreover, whether in
merchants' or consumers' hands they produce a real income, in the
latter case consisting of the comforts and conveniences which attend
their consumption. But if this view be accepted all forms of wealth
must rank as capital; the distinction between those which have been
saved and those which have not loses all meaning; so long as a piece
of wealth which has been made exists, it has been saved, and is an
"investment" which will, at any rate in the satisfaction due to its
consumption, yield a real income. But this extension, though logically
defensible, must be rejected on grounds of convenience. When
economists can be got to recognise the necessity of measuring all
"incomes," as indeed all "outputs," in terms of human satisfaction and
effort, then it may be well to recognise that all forms of wealth
which have figured as producers' capital continue to exist as
consumers' capital, yielding an income of satisfaction until they are
consumed. To place the consumptive-goods on a common level with forms
of productive capital, it would of course be necessary to make the
usual provision against wear and tear and depreciation before
reckoning income. There would be no justification for reckoning the
total use of a coat worn out and not replaced as income from capital.
As matters now stand, the only logically accurate correlation of
economic activities which shall enable us to give a clear and separate
meaning to capital and labour-power involves the distinct recognition
of unproductive consumption--_i.e._, consumption considered as an end
and not as a means to further production of industrial wealth, as the
final object of economic activity. In other words, it is the benefit
or satisfaction arising from the destruction of forms of industrial
wealth that constitutes the economic goal. Life not work, unproductive
not productive consumption, must be regarded as the end. The
consideration that a good and wholesome human life is identified with
work, some of which will be industrial in character, so that many
forms of industrial wealth will be destroyed under conditions which
enable them to render direct service in creating new forms, does not
impair the validity of this conception. The inability of most economic
thinkers to clearly grasp and to impress on others the idea of the
industrial organism as a single "going concern," has arisen chiefly
from the circular reasoning involved in making "production" at once
the means and the end, and the inconsistent definitions required to
support this fallacy.
APPENDIX II.
"OVER-CONSUMPTION" CONSIDERED AS CAUSE OF DEPRESSION.
It is of course quite possible that a temporary over-production in one
or several trades may be explained by a correspondent under-production
in others--that is to say, there may be a misplacement of industrial
enterprise. But this can afford no explanation of the phenomenon
Depression of Trade, which consists in a general or net over-supply of
capital, as evidenced by a general fall of prices.
In like manner it is possible to explain a commercial crisis in a
single country, or part of a commercial community, as the reaction or
collapse following an attempt to increase the quantity of fixed
capital out of proportion to the growth of the current national
income, by a reckless borrowing. This attempt of a single country to
enlarge its business operations beyond the limits of the possible
savings of its own current income, Mr. Bonamy Price and M. Yves Guyot
speak of under the questionable title of Over-consumption. Since they
tender this vice of over-consumption as the true and sufficient
explanation of commercial crises, it is necessary to examine the
position.
Professor Bonamy Price applied the following analysis to the great
crisis in the United States of 1877:--
"We are now in a position to perceive the magnitude of the blunder of
which the American people were guilty in constructing this most
mischievous quantity of fixed capital in the form of railways. They
acted precisely like a landowner who had an estate of L10,000 a year,
and spent L20,000 on drainage. It could not be made out of savings,
for they did not exist, and at the end of the very first year he must
sell a portion of the estate to pay for the cost of his draining. In
other words, his capital, his estate, his means of making income
whereon to live was reduced. The drainage was an excellent operation,
but for him it was ruinous. So it was with America. Few things in the
long run enrich a nation like railways; but so gigantic an
over-consumption, not out of savings, but out of capital, brought her
poverty, commercial depression, and much misery. The new railways have
been reckoned at some 30,000 miles, at an estimated cost of L10,000 a
mile; they destroyed three hundred million of pounds worth, not of
money, but of corn, clothing, coal, iron, and other substances. The
connection between such over-production and commercial depression is
here only too visibly that of parent and child. But the disastrous
consequences were far from ending here. The over-consumption did not
content itself with the wealth used up in working the railways and the
materials of which they were composed. It sent other waves of
destruction rolling over the land. The demand for coal, iron, engines,
and materials kindled prodigious excitement in the factories and the
shops; labourers were called for from every side; wages rose rapidly;
profits shared the upward movement; luxurious spending overflowed;
prices advanced all round; the recklessness of a prosperous time
bubbled over; and this subsidiary over-consumption immensely enlarged
the waste of the national capital set in motion by the expenditure on
the railways themselves. Onward still pressed the gale; foreign
nations were carried away by its force. They poured their goods into
America, so over-powering was the attraction of high prices. They
supplied materials for the railways, and luxuries for their
constructors. Their own prices rose in turn; their business burst into
unwonted activity; profits and wages were enlarged; and the vicious
cycle repeated itself in many countries of Europe. Over-consumption
advanced with greater strides; the tide of prosperity rose ever
higher; and the destruction of wealth marched at greater speed."[172]
Now, in the first place, our analysis of saving and the confinement of
the term consumption to direct embodiments of utility and convenience
forbid us to acknowledge that the action of the United States or the
analogy of the improving landowner is a case of over-consumption at
all. If the landowner borrowed money on his estates in order to live
in luxury for a season beyond his income, or similarly, if a State
raised loans in order to consume powder and shot, the term
over-consumption rightly applies. But where the landowner borrows so
much money to improve his land that he is unable to hold out till the
improvements bear fruit, and must sell his land to pay the interest,
he is not rightly accused of over-consumption. His reduced consumption
later on while practising retrenchment is simply a process of "saving"
which, when complete, is to take the place of an amount of "saving"
previously made by some one else and borrowed by him. What happened
was simply this. A, wishing to drain his land, had not "saved" enough
to do it; B has saved, and A, borrowing his "saving," holds it for a
time in his shape of drainage. If he can continue to pay interest and
gradually "save" to pay off the capital, he will do so; if not, as in
the case supposed, B, the mortgagee, will foreclose and legally enter
upon his savings in the shape of "drainage" which he really owned all
along. But even if A in this case were rightly accused of
over-consumption, this over-consumption must be considered as balanced
by the under-consumption of B, so that as regards the community of
which A and B are both members there is no over-consumption.
Now, precisely the same line of reasoning applies if for the
individual A we take the country of the United States. If it tries to
increase its factories, machinery, etc., in excess of its ability to
pay, it can only do so by borrowing from other countries; and if it
cannot pay the interest on such loans, the "savings," in the shape of
fixed capital which it has endeavoured to secure for itself, remain
the property of the other countries which have effected the real
saving which they embody, assuming them to have a value. If the action
of the United States be called over-consumption, it is balanced by an
under-consumption of England, France, or other countries of the
commercial community. Mr. Price sought to avoid this conclusion by
saying nothing about the individual from whom the landowner or the
country from which the United States borrowed in order to increase the
fixed capital. But as the landowner and the United States, _ex
hypothesi_, did not make their improvements out of their own savings,
they made them out of somebody else's savings, and that conduct which
is styled over-consumption in them is balanced by an equal quantity of
under-consumption in some other party. If thus we look at the
individual landowner or the single country of the United States, we
might say, accepting Price's view of consumption, that he and it were
guilty of over-consumption, and that this was the cause of the
commercial crisis. But since this over-consumption is absolutely
conditioned by a correspondent under-consumption of some other member
of the industrial community, it is not possible to conclude with
Professor Price that over-consumption can even for a time exist in the
community as a whole, or that such a condition can be the explanation
of a crisis commonly felt by all or most of the members of that
community.
What actually happened in the case of United States railways was that
a number of people, either in America or in Europe, under-consumed or
over-saved: their excessive saving could find no better form to take
than American railways, which, _ex hypothesi_, were not wanted for
use. A number of persons who might have made and consumed three
hundred million pounds' worth more of corn, clothing, coals, etc.,
than they actually did consume, refused to do so, and instead of doing
so made a number of railway lines, locomotives, etc., which no one
could consume and which were not wanted to assist production. What
occurred was a waste of saving power through an attempt to make an
excessive number of forms of capital.
Even if, some years later, many of these forms obtained a use and a
value, none the less they represent an excess or waste of "saving" to
an extent measured by the normal rate of interest over that period of
time which elapsed before they fructified into use. In a word, what
had happened was not over-consumption, but under-consumption.
M. Guyot appears to think that in the community as a whole too much
saving can be put into the form of "fixed" capital and too little into
circulating capital, and that such a condition of affairs will bring
depression. "Fixed capital," he says, "cannot be utilised if there is
no available circulating capital. Ships and railways are useless if
there are no commodities for them to convey; a factory cannot be
worked unless there are consumers ready to buy its products. If, then,
circulating capital has been so far exhausted as to take a long time
replacing, fixed capital must meanwhile remain unproductive, and the
crisis is so much the longer and more severe."[173]
To this there are two sufficient answers. The prevalence of low prices
for goods of various kinds as well as for plant in a time of
depression, the general glut of goods which forms one phase of the
depression proves that the crisis does not arise from storing too much
saving in plant and too little in goods. Where there exists
simultaneously a larger quantity of plant, raw material, finished
goods, and labour than the industrial society can find use for, no
assertion of maladjustment, either as between trade and trade, country
and country, fixed and circulating capital, will afford any
explanation. Secondly, M. Guyot gives away his entire position by
admitting "a factory cannot be worked unless there are consumers ready
to buy its products." A "consumer" here can logically only mean one
who buys finished goods for personal use, and if this be generally
applied it amounts to a clear admission that under-consumption is the
reason why there appears to be a glut of capital, fixed or other.
FOOTNOTES:
[146] _Contemporary Review_, March 1888.
[147] _Report on Industrial Depressions_, Washington, 1886.
[148] Report, pars. 61-66.
[149] Report, par. 106.
[150] _Contemporary Review_, July 1887.
[151] _Contemporary Review_, March 1888.
[152] _Report of the Commissioner of Labour_, Washington, 1886, pp. 80
to 88.
[153] D.A. Wells, _Contemporary Review_, August 1887.
[154] Lord Playfair, in the _Contemporary Review_, March 1888, gives a
number of interesting illustrations of recent economies in transport
and manufacture.
[155] _Statist_, 1879, quoted Bowley, _England's Foreign Trade in the
Nineteenth Century_, p. 80.
[156] _Essays in Finance_, vol. i. p. 137, etc.
[157] For the view that over-consumption is cause, see Appendix II.
[158] "What is annually saved is as regularly consumed as what is
annually spent, and nearly in the same time too; but it is consumed by
a different set of people." (_Wealth of Nations_, p. 149_b_,
McCulloch.) "Everything which is produced is consumed; both what is
saved and what is said to be spent, and the former quite as quickly as
the latter." (_Principles of Political Economy_, Book I., chap. v.,
sec. 6.)
[159] An able analysis of the nature of "paper savings" is found in
Mr. J.M. Robertson's _Fallacy of Saving_. (Sonnenschein.)
[160] Chap. v. Sec. 5.
[161] Bk. III., chap. xiv. Sec. 3.
[162] The stock of a small retailer will not, however, in all cases
vary proportionately with the aggregate sales of all classes of goods.
A small shopkeeper, to retain his custom and credit, is often required
to keep a small stock of a large variety of goods not often in
request. If he sells them rather more quickly, he does not necessarily
increase his stock in hand at any particular time.
[163] It likewise determines the quantity of plant and stock at _a_,
_b_, _c_, _d_ down each of the perpendicular lines, for the demand at
each of these points in the production of plant and machinery is
derived from the requirements at the points A, B, C, D, E. The flow of
goods therefore up these channels, though slower in its movement
(since in the main channel only goods flow, while fixed capital is
subject to the slower "wear and tear"), is equally determined by and
derived from the consumption at F. The whole motive-power of the
mechanism is engendered at F, and the flow of money paid over the
retail counter as it passes in a reverse current from F towards A,
supplies the necessary stimulus at each point, driving the goods
another stage in their journey.
[164] Boehm-Bawerk, _Positive Theory of Capital_, p. 67. See Appendix
I. for conflict of opinion among English economists.
[165] _Principles of Political Economy_, Bk. I., chap. v. Sec. 3; see
also Bk. III., chap. xiv. Sec. 3.
[166] It should be noted that an increased amount of consumption in
the future does not necessarily compensate for a disturbance of the
current balance of saving and spending, for an _increased proportion
of future income_ will have to be spent in order to compensate.
[167] It must be borne in mind that many articles of utility and
enjoyment must in their final processes be produced for immediate
consumption. The "saving" of perishable goods is confined to a saving
of the more enduring forms of machinery engaged in their production,
or in some few cases to a storing up of the raw material. So likewise
that large portion of productive work termed "personal services"
cannot be antedated. These limits to the possibility of "saving" are
important. No amount of present sacrifice in the interest of the next
generation could enable them to live a life of luxurious idleness.
[168] Ruskin, _Unto this Last_, p. 145.
[169] This does not necessarily imply a stimulation of new saving. A
fuller vitality given to existing forms of capital will raise the
quantity of real capital as measured in money. Mills and machinery
which have no present or future use, though they embody saving, have
no value and do not increase real capital.
[170] _Scope and Method of Political Economy_, p. 162.
[171] _Production and Consumption_, chap. iv. Sec. 2.
[172] _Contemporary Review_, May 1879.
[173] _Principles of Social Economy_, p. 245. (Sonnenschein.)