The Economics of Unemployment/Chapter 10

The following summary of the argument contained in these chapters may be useful in helping readers to form a clear judgment upon its validity.

The existence of a normal tendency for the rate of industrial production in the world to outrun the rate of consumption of commodities, i.e. the existence of a limited market, is attested by common experience in the business world. This belief is admittedly a chief cause of restriction of output, as practised by workers and by capitalist combinations, and furnishes the chief support of protective tariffs and imperialist policy. This normal failure of consumption to keep pace with actual and potential production is manifestly responsible for the periodic gluts, stoppages, under-production and unemployment, which precede and constitute cyclical depressions. Misapplication of productive power, as between one group of industries and another, one area of industry and another, though responsible for much waste, will be a fairly constant factor in the complex world-economy, and cannot be regarded as a chief cause of the accumulating general gluts which usher in cyclical depressions. Nor is there any reason to suppose that meteorological fluctuations, affecting world-harvests, are competent ​to account for the size and the nature of the phenomena of trade depressions. There is only one sort of maladjustment of economic forces adequate in nature and magnitude to explain the actual phenomena, viz. a normal tendency to apply to the production of capital-goods a proportion of the aggregate productive power that exceeds the proportion needed, in accordance with existing arts of industry, to supply the consumptive-goods which are purchased and consumed. In other words, if there exists a normal tendency to try to save and apply to capital purposes an excessive proportion of the general income, we have a valid explanation of the actual phenomena of fluctuations and depressions.

Now in the wide disparities of income between the rich and poor, and in the large elements of unearned and unneeded income which fall to the former class, we discover the required tendency to chronic over-saving, i.e. the virtually automatic accumulation of income which exceeds the customary or desired expenditure of those whose felt wants are fully satisfied. Under such conditions it is certain that the proportion between spending and saving must get out of gear, and that more production will be applied to producing larger increases of plant, raw materials and other capital goods, than are capable of full and regular use in furnishing consumable goods to consumers.

The economic checks commonly adduced, viz. the falling rate of interest as a check upon excessive saving, and the fall of prices as a stimulation of increased consumption, are both inadequate. Neither operates until the trouble has attained considerable momentum, ​or is effective until great waste and damage have occurred.

For these periodic movements of over-accumulation of capital over-production, congestion of the machinery of industry, stoppages and unemployment, with their slow unloading of excessive stocks, there can be no real remedy except a removal of the surplus elements in large incomes which brought about the disproportion between saving and spending.

The progressive movement in the economic life of the industrial nations is, in effect, though not of clear purpose, largely directed to this end. The absorption of the unearned and unneeded incomes of the rich, partly by the rising wages and standards of living of the workers, partly by the needs of a modern State, tends to bring about that equalisation of incomes which is essential to a natural and right adjustment between the proportions of spending and saving in the aggregate income. This absorption of surplus and the higher rate of consumption it secures do not involve a deficiency of saving or a lack of capital for the enlarged needs of future consumption. The present depressions signify a feeble and wasteful operation of the excessive amount of capital brought into existence. The better distribution of income here envisaged, though involving a reduced proportion of saved income to spent, would not involve a less amount of saving. For the fuller and more regular working of the machinery of industry would produce a real income so much larger than the present that a smaller proportion of saving would yield a quantity of new industrial capital at least as large as hereto-​fore. Nor would the necessary incentives to such saving be lacking in the new order.

If by such improvements in distribution the rates of production and consumption were so well adjusted as to reduce to small dimensions the fluctuations of employment, the largely superstitious influence of confidence and credit in the causation and enlargement of these fluctuations would tend to disappear. For the regularity of actual business operations, thus obtained, would be reflected in a steadiness of prices precluding the swift enlargements and contractions of credit which stimulate and exaggerate our cyclical fluctuations. For if the actual industrial system were kept in regular and full employment by the removal of restrictions in the market, speculation and expansion of credit would be confined to narrow limits. Once remove the opportunities which the conjunction of rising prices and unemployed productive resources afford to business men and financiers of reaping large and quick gains from getting control of large stocks in a rising market, you destroy the demand for inflated credit and the over-confidence engendered in the atmosphere of business speculation.

The roots of irregularity and fluctuation of industry lie in defects of distribution and of demand, not in the miscalculations of business men or the aberrations of the monetary system, which are but exaggerated reflections of the real facts of industry.

Considerations of the enfeebled and confused condition in which the Great War and the Bad Peace have left the industrial, commercial and financial system of the world, impair no whit the validity of ​this analysis or of the remedies which it discloses. The temporary breakdown of production over large areas of Europe and the low consumption in these areas, which are the most serious economic and human aspects of this emergency, have, of course, greatly enlarged, as they have also given special shape to, the general depression. These war wounds to our economic system call for emergency measures. But these measures are of the nature of first aid, and must not be regarded as substitutes for the remedial treatment which deeper diagnosis of the disease demands. If Reconstruction successfully achieved meant setting again on its old legs the economic system of the past, we should continue to stumble at brief intervals into the same ditch and, wading through much dirt, danger and discomfort, emerge again weakened in body and confused in mind to pursue once more the same perilous uncharted journey.

I have here approached the economic problem from the single path of trade depression, and have shown that a solution of the problem can only be found by such economic, social and political reforms as secure a drastic redistribution of the product of industry. If we are to get industrial security, peace and progress, that redistribution must be achieved. If State Socialism, or Guild Socialism, or Consumers' Co-operation, or any form of Communism, can achieve this better distribution, without unduly letting down production, we may look for salvation along any of these paths. But if, as I am disposed to believe, no people is prepared to launch in any wholesale way on any of these revolu-​tions, some mixed policy of national ownership of prime monopolies, control of profits, prices and conditions of employment in other industries where some measure and degree of direct or indirect competition survives, with a limited period of free profitable enterprise as an incentive to new enterprises—the whole of this linked up by a tax system whereby society secures for beneficial public services the idle elements of income which do not nourish or evoke productive effort—this mixed policy adapted to the varying conditions in the world of industry will best achieve the better and more equal distribution and utilisation of income that are required.