Chapter VII: Machinery and Industrial Depression (2)

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,

_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.