The Economics of Unemployment/Chapter 9

In concluding my argument I think it is desirable to give a fuller and more formal reply to two lines of criticism which are likely to block its reception in many minds.

It may be said that this is a most inopportune time to press the claim of a doctrine of under-consumption or over-saving. The present depression and unemployment require and admit no such explanation. They are manifestly due to the destruction of capital resources and of the productive power of labour from the war and the social disorders which ensued in Central Europe, Russia and the near East, the breakdown of the financial system by which commerce between nations, and even within the several countries, is normally conducted, deficiencies in the machinery of transport, protective tariffs, embargoes and other obstacles to trade, the cost and difficulty of getting the fabric of industry from a war-basis on to a peace-basis, political insecurity and related wastes of armaments, high taxation, war debts, reparations, and the aggregate result of all these conditions in paralysing business confidence and the plans and activities ​which require a reliable monetary system. In the presence of these patent sources of depression, it may be said, why summon a large essentially speculative explanation which, even if applicable to ordinary cyclical depressions, cannot here apply?

Indeed, to allude to under-consumption and over-saving as lying at the roots of our present situation may well seem the height of ineptitude. For is it not evident, I shall be told, that over-spending, the extravagance of Governments and private persons, the refusal to recognise that the damage and waste of war could only be repaired by a long spell of low living and hard work, and general thrift, are everywhere the causes of the failure of the world to make a good recovery?

Now that the War and after-war phenomena just cited are proximate causes of depression is incontrovertible. They have given special shape to the cyclical depression otherwise due, and have exaggerated its dimensions. To the under-production and under-consumption of a normal depression they have added an under-production and under-consumption from the broken industries of devastated areas, from the depleted stocks and transport instruments in many undevastated areas and from the loss of customary markets for the goods they were capable of producing. But when it is contended that this trouble was an inevitable economic consequence of the War, the meaning of this term 'inevitable' should be plainly realised. Great wars have commonly been followed by spells of poverty and depression, and shallow criticism contents itself with alleging that the great ​destruction of war can only be paid for in this way.

Now though there is an element of moral or psychological truth in this, it is not, strictly speaking, economically true. This world-war, destructive as it was, did not leave the world, as a whole, seriously diminished in its economic resources. It did not, even in Europe taken as a whole, so seriously reduce our productive resources as to make a long spell of poverty and recoupment inevitable. Almost all the economic cost of the War was defrayed out of the current real income of the world. For the actual destruction of buildings, roads, ships, factories, mines, farms, made a small proportion of the real cost of the War. The rest consisted of quantities of war supplies, including munitions, transport services, food, clothing, etc, representing the current production of the world during the years of war. Even the human cost, in the sense of loss of life and limb, was compensated from the economic standpoint by the normal growth of population in the economic world and, so far as Europe was concerned, in the stoppage of migration to the newer countries. Certain belligerent nations sustained large capital losses, by disposing of foreign investments and incurring foreign debts. But this, of course, meant no diminution of the capital of the industrial world as a whole. Apart from the destruction of the War itself, and some letting down of stocks of raw materials and foodstuffs, quickly recoverable, the productive power of the world was not sensibly diminished by the War, except in the sense that the additions made to the capital fabric and to the ​labour-power were much smaller than they would have been had not four years of war reduced the rate of real saving and of the growth of population.

My point is that the direct economic damages of war did not leave the productive resources of the world so reduced as to render economically necessary the collapse which has taken place. It is true that over large areas of continental Europe supplies of raw materials, foods, fuel, transport and agricultural tools were lacking. But the world-supplies of most of these articles were abundant, and where there was a temporary shortage, as in coal and shipping, it was soon made up by the activity of the post-war period, nearly to the pre-war level.

Had a good peace been made, with a restoration of free commercial intercourse between nations, an emergency scheme of international credit to assist the recovery of the broken nations, a reduction of armaments and a stoppage of inflation, there seems no reason for supposing that the economic ravages of war might not have been speedily repaired, so that the pre-war production might have been resumed or even enlarged. We are only too well acquainted with the coil of political and economic crimes and follies which stopped this recovery. Minor wars, social disorders, blockades, tariffs and embargoes, armaments, reparations, extravagant budgets, inflation, fluctuating exchanges, crushing taxation, low productivity of labour — have all contributed to bring about this unprecedented depression of production and consumption, in which industrial activity is only found in a large enforced sweating system for ​countries with degraded currencies and low exchange whose cheapened exports tend to absorb the restricted world-market.

Now while it would be absurd to press a purely economic interpretation upon this piece of history, converting the fears, hatreds, ambitions and follies that it exhibits into terms of economic greed and error, close observers and analysts of the Peace Treaties and the whole post-war policy generally agree that economic considerations relating to possession of coal and iron, oil, and the control of undeveloped economic resources, and the routes of access to them, were determinant factors in those decisions which have so much aggravated our present troubles. In a word, the badness of the Peace and post-war policy is mainly the badness of an Imperialism whose tap-root lies in a struggle for markets and for the areas of lucrative investment of surplus savings derived from profitable business enterprises in the highly developed industrial countries. The struggle of rival national Imperialisms has assumed an intensity and a variety of directions due to the political collapse of three great Empires and the immense prospects of spoils thus opened up. Not merely a redistribution of the spoils of Africa but a renewal of the far more important competition for the control and development of China occupy the vision of the keen-eyed financiers and business groups who, when they choose, control the foreign policy of every country.

Thus in the last resort international politics is mostly business and is therefore penetrated by the emotions and beliefs of the business world, not taken ​as a whole but ranged in national groups and interests. Now, as we have already seen, the doctrine held in common by individualist free-traders and by socialists, that industry and commerce are, or should be, essentially processes of human co-operation in the benefit of which all must be sharers, is not the operative principle in the actual political economy of nations. In most industrial countries the statesmen correctly embody in their protectionist-imperialist policy the conviction of the great majority of business men that trade is essentially competitive in its international aspect, in the sense that the commercial progress and prosperity of other nations are injurious to our own. This doctrine, driven home, we showed to rest upon a belief, well-founded under existing conditions, that there was not enough market to keep everybody busy all the time. This belief we found inspiring the policy of ca' canny among workers, the organisation of trusts and combines for regulating output among employers, while it is alike the intellectual support of Protectionism in every country and the evident and avowed motive of Modern Imperialism. But the operation of the reparations policy is the most convincing evidence to-day, of the paralysing influence of the limited market. We simply cannot produce because Germany by the lower costs (i.e. sweating) we have forced upon her, occupies too much of this limited market. Our more enlightened financiers, economists, and statemen, are hastily fumbling round for means to expand this market, so as to make it possible for the idle mills, mines and workers to get to work. All the practical schemes turn on the creation of reliable credits, and ​this means either an augmentation of purchasing power which shall give more immediate effective demand for goods to persons who will spend it in buying them. But the aggregate market can only be thus expanded in so far as the credits operate to raise consumption among the low-consuming populations and classes. No one would suggest applying credits to stimulate shipbuilding or the building of woollen mills at the present time. The folly of adding to the unemployed plants in such industries would be too obvious. On the other hand, credits applied to promote the production of ploughs and steam-engines to be exchanged in Roumania, or in more fertile provinces of Russia, for foodstuffs to raise the consumption of starving or underfed peoples in the Volga or other depleted areas, would react in a genuine increase of production, both here in the trades doing this export trade and in the countries which received these ploughs and engines. As regards the emergency provisions for unemployment in this country, it is pretty clear that in a general trade depression it is folly to set men working in their trades. Either they must be set on public works that could not otherwise be undertaken then, or in default of these, they must be provided with food, clothes, etc., or the means to buy them. Either course means a stimulation of effective demand for commodities, and, so far as it goes, reacts in stimulation of production of these articles along the various direct and indirect channels of production in this and other countries. The only cure for under-production is more production; but this cure can only operate on condition that the distribution of the ownership of the increased ​product is such as to evoke increased consumption. All these credit schemes turn in the last resort on this condition.

The special character given to the present cyclical depression by the destructiveness of war must not be allowed to conceal its fundamental economic nature and to furnish support to false remedies. The material destruction of the War was not so great but that it could by this time have been completely repaired, had a good peace been made without delay, accompanied by a vigorous international policy for dealing with the temporary dislocations of trade, transport and finance. The failure to do this is responsible for the special character and intensity of this depression, and has brought the world-economic system into so feeble a functioning as to keep current production so low that the margin of current saving is reduced to a minimum. I wish to make it quite clear that my general charge of oversaving as the root-cause of fluctuations and depressions is quite consistent with the admission that during a deep depression there is under-saving in the sense of a rate and proportion of saving to spending inadequate to the normal needs of a progressive industry. It is often said at such a time as this that there is a shortage of capital. This, however, is not strictly true. Taking the structure of industry as a whole, it is demonstratively false, for almost all forms of capital exist in apparent superabundance. There are, however, now, as at all times, certain new industries or other developmental work which might function if cheap abundant new capital were available. Such capital is not ​available, because current production and therefore current real incomes are so low that saving has shrunk to its lowest proportions. Business profits have in most cases disappeared, taxation presses on all classes, and the great majority of the people have not the economic power, even if they had the will, to effect further economies in their current expenditure.

Unemployment, springing in the last resort from a distribution of purchasing power which gives too much to classes who have their pressing wants already satisfied, can only be remedied by a transfer of some of this purchasing power to the poorer classes who will apply it to satisfy felt wants.

I believe that the special war and post-war policies so frequently adduced to explain how this depression differs wholly from ordinary cyclical depressions can all be shown to bear testimony to this constant defect in our economic system which always works towards gluts and depressions.

An intelligently acting individual in economic isolation, a Crusoe, or a completely inclusive economic society, would maintain a just balance between the amount of energy devoted to the satisfaction of immediate wants and that devoted to preparation for the satisfaction of increasing future wants. But this intelligent economy of spending and saving need not apply to single members of an economic group, or to particular groups within some larger society. Particular members of a self-sufficing group may cut down their current consumption to any dimensions ​consistent with physiological survival, provided that other members of the group will make good their personal economy by consuming more. It is a group balance that must be maintained between production and consumption.

This implies that in an international economic world there is no necessary limit to the current savings of a particular nation. If it saves more than the right proportion imposed by the prevailing condition of the arts of industry, it can make good that excess by enabling some other nations to save less. In other words, it may continue to roll up increasing claims upon other peoples, postponing indefinitely the enlarged consumption which these claims enable it to practise. This is what the great creditor nations of the world have to various extents been doing, ever since industry evolved to the point of producing surpluses beyond those utilisable as capital to supply the rising home consumption. Great Britain was doing this before the War, investing larger proportions of its surplus savings abroad and not even receiving for home consumption the full interest upon past investments. The United States has recently been practising the same economy with concentrated energy. During the War her surplus savings were poured into Europe, enabling the belligerents hugely to expand their 'consumption' while reducing their production. After the War American lending continued on a vast scale, by further advances and reinvestment abroad of most of the interest due. Indeed, the new drive of American business into export trade, coupled with her rigorous Protection, involves the ​assumption of the rôle of creditor on a larger scale than any other country has yet undertaken. The policy of indefinite postponement of satisfactions to which a people is entitled seems absurd, and would be impossible if it represented the conduct of a people as a whole. But if we envisage large amounts of surplus class income, carrying no appreciable satisfaction from current expenditure, and therefore rolling up into automatic savings whose interest is subjected to a similar accumulation, we can understand how this group control of savings and investment may bring about a long continued career of increasing creditorship. One nation may thus be induced and enabled to save an indefinitely large proportion of its income, provided other nations are thereby induced to spend more and save less.

It sometimes appears as if there were no limit to the proportion of the world-income that might be saved except what may be termed the physiological limit of subsistence. For there is, it is contended, no limit to the amount of useful new developmental work that may be set on foot with a view to enlarged production of future commodities. But this is also true of Crusoe. If he is fool enough, he may work so hard in making precarious preparations for the future that he gets no satisfaction out of the present. But as an intelligent man he sets a right limit upon this process of postponing present and more certain to future and less certain satisfaction. And the world as a whole is in the position of Crusoe. As far as it is guided by reasonable self-interest, it will limit the proportion of the saving to its spending, not deferring present satisfaction to an excessive ​extent in order to promote capital undertakings which may never mature in future increase of commodities, or which, if they do, may be rendered futile by a continued refusal to expand consumption fast enough to give full employment to the increase of productive power. Unfortunately there yet exists no organised intelligent will of the world to ensure the operation of this economic policy.

If, however, it be admitted that, while there is a limit to the reasonable rate of saving for investment on the part of the economic world as a whole, no such limit seems to be binding on any particular nation, or other group, there arises the practical consideration whether the provisions against unemployment, by better distribution of the income between capitalists, wage-earners and the State, can be made effective in a world so imperfectly developed for purposes of international control. Such political or economic measures as may be taken for regulating excessive profits, or for diverting them to purposes of public revenue, or for securing a better distribution of the product as between capital and labour, are almost entirely confined to particular national areas.

Now the extension of modern capitalist production to a larger and larger number of nations, all of whom by their improved mechanical resources contribute to the fluctuations and depressions, may appear to render any purely national action almost futile, or even injurious. Suppose, for example, that England alone pursued the policy of correcting her proportion of saving to spending, by diverting to increased wages and increased tax revenue the surplus incomes of ​the rich, so far as it was effective in securing a better application of the national income, it could not sensibly diminish the depressions which are brought upon us by world-gluts and price movements. Though a country tolerably self-sufficing for production and investment might find substantial relief from the liability to trade depressions by a better internal adjustment of production and consumption, this could not be the case for any country largely dependent upon world markets and foreign investments. For a country like Great Britain, accustomed in recent times to invest as much as half its annual savings overseas, no merely national solution is feasible, and the same reasoning applies to most great industrial countries with an ever-increasing pressure. At present the violence and the uncontrolled nature of external movements of commerce and finance are driving most nations to seek the shelter of tariffs, subsidies and other barriers against economic internationalism. But this emergency policy cannot long prevail against the forces which make persistently and ever more powerfully for international co-operation. This signifies that no sound solution can be found for any of the great economic problems affecting standards of production, distribution and consumption, except by a policy which is in effect if not in express contrivance international. Applying this criticism to the large problem here 1set out — the better correlation of rate of production and rate of consumption by means of better distribution of the product — we have to ask how far a tendency towards such improved distribution can be discerned in the world-economy. I have already cited some ​factors in the problem, so far as our national economy is concerned. But it is evident that no confident judgment can be formed upon the wider issue. For there are very few countries in which reliable statistical evidence of the distribution of incomes exists, enabling us to judge whether the surplus income, whose excessive accumulation is the main source of trouble, forms an increasing or a diminishing proportion of income as a whole. To set out upon such an inquiry is no part of my purpose here. But it may not be out of keeping with that purpose to indicate some general considerations bearing on this important matter.

Whether the economic experiences of the war have made for or against the equalisation of incomes and absorption of the surplus, it is not easy to decide. One of its most patent results has been a large increase of the aggregate of the interest charge in most of the belligerent countries. Subscribed in every country mainly from the war profits of the rich, the burden of the new war debts hangs heavy on the industrial peoples of the world. Every further fall of prices, of course, increases the size and the proportion of this addition to the surplus income of the rich. The temporary rise in rate of interest for new capital may not add much to the net income of the capitalist class, implying as it does a less amount of supply of new capital. But the impetus given by war economy to the organisation of businesses into combines, and other non-competent and price-controlling bodies, definitely strengthens their surplus earning power.

On the other hand, as we have seen, certain counter-​acting forces, political and social as well as purely economic, strengthening the position of the workers must be taken into account. In all great industrial countries the numerical strength of trade unionism has been growing. The temporary failure of organised workers to retain, during the present depression, the whole or the bulk of the wage-gains made during the war must not be allowed to obscure the substantial advances made, particularly by the lower grades of workers. Organisation, politics and public sentiment contribute to sustain a definite rise in standard of living for the workers in these countries.

The growing liberty of migration from country to town, from poorer and less developed countries to richer and more developed ones, has been, notwithstanding legal, social and other barriers, continually drawing larger numbers of workers into environments, where higher standards of living have been established and where better organisation of workers for pressing their economic claims and interests is practicable. Even before the War it was generally agreed that part of the rise in prices of important foods and raw materials was to be attributed to the increasing proportion of world-workers found in countries, like the United States, with a high standard of living, and to the successful demand for a rising standard, especially of food, in large sections of the working populations of India, Japan, China and other backward countries entering upon careers of modern industrialism. This progressive migration from areas of lower standards of consumption to areas of higher standards is not in itself conclusive proof of a better general ​adjustment between production and consumption, for the higher consumption thus attained might be accompanied by a more than corresponding rise in production. But there is reasonable ground for holding that the breakdown of long-established habits of low conservative consumption achieved by migration to a new and more progressive environment, together with the greater capacity for collective bargaining and political assistance in securing higher standards, has enabled the working-classes to obtain a larger proportion of the product, the real income of the economic world, than they had heretofore. This tendency is doubtless offset in some measure by increasing opportunities for the temporary exploitation of new immigrants into industrial countries and of backward peoples in their own countries by profiteering capitalism. But since the necessary implication of such exploitation of weaker groups is to stir in them new demands which crave economic satisfaction, it seems likely that the general result is some movement towards equalisation of incomes, in the sense that the surplus available for automatic accumulation forms a smaller proportion of the world income. This, of course, is by no means certain. It might be that the Western civilised Powers would, by separate or conjoint policy, fasten upon the undeveloped countries and their unresisting populations so rigorous an economic domination as would draw from them a surplus real income large enough, not only to buy off by private concessions and public subsidies class discontent within their borders, but to retain upon the wider scale that inequality of income which ​causes periodic congestions of goods with ensuing depressions. If capitalism can keep firm hold of national and international policy, this new phase, in which whole Western nations become parasitic upon the weaker and the backward peoples of Asia and Africa, may be practicable. If, however, this economic imperialism which has made such rapid advances during the past few generations is successfully combated by the extension of a liberal equalitarian and humanitarian policy from the narrower field of national democracy to the relations between advanced and backward peoples, some gradual solution of our problem may be found in a rising standard of world consumption.

There are those who hold that nothing short of international socialism is capable of achieving this result. If so, there seems little prospect of any early escape from or abatement of our economic troubles. If, however, I am right in holding that some movement towards equalisation of incomes is afoot within most of the advanced nations, an increasing proportion of surplus being diverted into wages or intercepted for public services, it seems reasonable to hope and expect that the same conjunction of economic, political and moral forces which has been working for this equalitarianism within each nation may be operative on the wider international scale. The new experiments in constructive internationalism might make very serviceable contributions to this end. A new body, at present feeble but capable of growth and activity, has been provided for that international labour movement which hitherto has been little more than an exuberant aspiration. Intergovernmental ​agreements to promote common standards of work and life for the workers of different nations should help to raise the general standard of distribution within the several nations towards the level of the highest. The regulations laid down in the Covenant of the League of Nations for the economic dealings of its members with the peoples of mandated areas, though at present perhaps little more than the formal tribute which imperialism pays to liberty, attest at least some real advance among the more enlightened classes of the Western nations towards considered regard for the welfare of subject races, and may grow into a genuinely authoritative code of international conduct, if this moral and political enhghtenment prevails over the forces of national selfishness and short-sighted cupidity. I will not prejudge the victory in the struggle between the powers of light and darkness. But if the influences which are able to curb the excesses of capitalist domination within the civilised modern state can be brought into effective bearing on the wider area of internationalism, imposing partly by the moral power of public opinion, partly by intergovernmental action, economic rules for the protection of the interests of weaker peoples and in particular for securing for them an adequate share of the product of their labour, the world market and the world consumption should be able to escape the constriction of the past and to expand with sufficient facility and pace to furnish full and regular employment to the world's productive powers, however fast they may themselves advance with every fresh improvement in the arts of industry.