Chapter VII: Machinery and Industrial Depression (1)

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.)

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.

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.

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.

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.