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.

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.

APPENDIX I.

ARE GOODS IN THE POSSESSION OF CONSUMERS CAPITAL?

The question whether food, clothing, etc., which are "capital" so long as they form part of the stock of a shopkeeper, are to be regarded as ceasing to be capital when they pass into the possession of consumers has seldom been definitely faced by English economists. Jevons was perhaps the first to clearly recognise the issues involved. He writes:—"I feel quite unable to adopt the opinion that the moment goods pass into the possession of the consumer they cease altogether to have the attributes of capital. This doctrine descends to us from the time of Adam Smith, and has generally received the undoubting assent of his followers. Adam Smith, although he denied the possessions of a consumer the name of capital, took care to enumerate them as part of the stock of the community." (The Theory of Political Economy, 2nd edit., p. 280.)

As a historical judgment this is very misleading. Adam Smith, chiefly impressed by the necessity of separating consumptive goods from goods used as a means of making an income—e.g., commercial capital, quite logically severed revenue from capital as a distinct species of the community's stock. His "followers," however, differed very widely, and usually expressed themselves obscurely. Generally speaking, the English economists of the first half of this century inclined to the inclusion of certain consumptive goods in the possession of labourers under capital. Ricardo, for example, thus expresses himself:—"In every society the capital which is employed in production is necessarily of limited durability. The food and clothing consumed by the labourer, the buildings in which he works, the implements with which his labour is assisted, are all of a perishable value. There is, however, a vast difference in the time for which all these different capitals will endure. A steam engine will last longer than a ship, a ship than the clothing of the labourer, and the clothing of the labourer than the food which he consumes." (Principles of Political Economy, 1817, p. 22.) The last sentence is conclusive in its inclusion under capital of goods in the possession of labourers. McCulloch again regrets Smith's exclusion of "revenue" from capital, insisting that "it is enough to entitle an article to be considered capital that it can directly contribute to the support of man or assist him in appropriating or producing commodities," and he would even go so far as to include "a horse yoked to a gentleman's coach," on the ground that it was "possessed of the capacity to assist in production." (Principles of Political Economy, Part I., chap. ii. Sec. 3.)

Malthus does not, so far as I can ascertain, face the question. James Mill alone, among the earlier nineteenth century economists, definitely excludes labourers' consumptive goods from capital. (Principles of Political Economy, chap. i. Sec. 2.) J.S. Mill is not equally clear in his judgment. In Bk. I., chap. iv. Sec. 1, food "destined" for the consumption of productive labourers apparently ceases to be capital when it is already "appropriated to the consumption of productive labourers." This position, however, is not consistent with his later position regarding the unlimited character of saving, which can only be justified by regarding real wages when paid as continuing to be capital. Fawcett is vague, but he is disposed not only to include under capital food which is in the possession of consumers, but to exclude food which is in the possession of dealers. "If a man has so much wheat, it is wealth which may at any moment be employed as capital; but this wheat is not made capital by being hoarded; it becomes capital when it feeds the labourers, and it cannot feed the labourers unless it is consumed." (Manual of Political Economy, Bk. I., chap, iv., p. 29.) Among later English writers, Cairnes, like all holders of the "Wages fund" doctrine, does not clearly meet the question, "Does the food, etc., forming the real wage fund which is one part of capital, cease to be capital when it is actually paid out in wages?" He plays round the question in Leading Principles, Part II., chap. i. Bonamy Price includes consumptive goods. "It is to be remarked of all this capital, these materials, implements, and necessaries for the labourers, that they are consumed and destroyed in the process of creating wealth, some rapidly, some more slowly. Thus the very purpose of capital is to be consumed and destroyed; it is procured for that very end." (Practical Political Economy, pp. 103, 104.) Since, he adds a little later, "an article cannot be declared to be capital or not capital till the purpose it is applied to is determined," it would appear that flour in the dealer's hands is not capital, but that it only becomes capital when handed over to persons who productively consume it. Thorold Rogers appears to take the same view, holding the food of a country to be part of its capital irrespective of the consideration in whose hands it is. (Political Economy, p. 61.) Professor Sidgwick appears to regard "food" consumed by productive labourers as capital. "On this view it is only so far as the labourer's consumption is distinctly designed to increase his efficiency that it can properly be regarded as an investment of capital." (Principles of Political Economy, Bk. I., chap. v.)

General Walker apparently holds that stored food used to support productive work is capital in whosoever hands it lies. (Political Economy, 2nd edit., Sec. 87.) He is, however, concerned with illustrations from primitive society, and possibly might hold the food ceased to be capital if paid over by one person to another as wages.

Hearn, on the contrary, definitely excludes consumptive goods. "The bullock, which when living formed part of the capital of the grazier, and when dead of the butcher, is not capital when the meat reaches the consumer." (Plutology, p. 135.)

Professor Marshall defers to the commercial usage so far as to apply the term Trade Capital to "those external things which a person uses in his trade, either holding them to be sold for money, or applying them to produce things that are to be sold for money." But turning to the individual, he insists upon speaking of the necessaries he consumes to enable him to work as "capital." "Some enjoyment is indeed derived from the consumption of the necessaries of life which are included under capital; but they are counted as capital because of the work for the future which they enable people to do, and not on account of the present pleasure which they afford." (Principles, 2nd edit., p. 125.)

These instances show that Jevons is wrong in attributing to English economists a general acceptance of the belief that goods cease to be capital when they come into the possession of consumers. They also serve to explain the source of the conflict of judgment and the confusion of expression. Economists who take it to be the end of industrial activity to place in the possession of consumers goods which shall satisfy their desires, regard "capital" as a convenient term to cover those forms of wealth which are a means to this end, and are thus logically driven to exclude all consumers' goods from capital. This view of capital coincides with the ordinary accepted commercial view which regards capital not from its productivity side but from its income-yielding side. Those economists, on the other hand, who actually, though not avowedly, take production to be the end of industry, regard as "capital" all forms of material wealth which are means to that end, and therefore include food, etc., productively consumed by labourers. If work considered as distinct from enjoyment be regarded as the end, it is reasonable enough that some term should be used to cover all the forms of material wealth serviceable to that end. It is, however, unfortunate that the term "capital" should be twisted from its fairly consistent commercial use to this purpose.

Dr. Keynes,[170] who seems to think the sole difficulty as regards the definition of capital arises from the difference in the point of view of the individual and of the community, suggests the use of two terms, "revenue capital" and "production capital." But these terms are doubly unsatisfactory. In the first place, the "productive consumption" economist might fairly claim that as his food, etc., enabled the workman to obtain his wages or revenue, they belonged to revenue capital. On the other hand, regarding it as essential to distinct terminology to sever entirely consumptive goods from productive goods, I should insist that the "production capital" of the community was synonymous with its "revenue capital," and that although the individual view of capital is not always coincident with the community's view, that difference cannot be expressed by the distinction of "revenue capital" and "production capital."

Moreover, the consumptive-production economists, to be consistent and to preserve the continuity of the conception of economic activity, would do well to abolish labour-power as a separate factor, and to include the body of the labourer with its store of productive energy as a species of capital. For it is urged (e.g., by Professor Marshall) that the fact that the food consumed by labourers enables them to earn an income entitles it to rank as capital. In that case the "wages" which form that income should rank as interest upon the capital. Again, there is no reason for breaking the continuity of the capital at the time when the "food" is actually eaten. The food is not destroyed, but built up into the frame of the labourer as a fund of productive energy. If consumptive goods are once admitted as capital, the labourer's body must be likewise capital yielding interest in the shape of wages. If the other factor "natural agents" be still retained (an unnecessary proceeding, since all land, etc., which is productively serviceable is so by reason of the application of some element of stored labour, and may therefore be called "capital"), labour could be resolved into natural agents (the infant body) and capital (the food, etc., used to strengthen and support the body). Wages could then be reckoned partly as rent, partly as interest. It is difficult to understand why "productive-consumption" economists, some of whom have evidently contemplated the change of terminology, have refused to take a step which would at any rate have the merit of imparting consistency to their terminology. It is, of course, true that no "productive-consumption" economist would straightly admit production not consumption to be the economic goal, but his terminology can only approximate to consistency upon this supposition.

Mr. Cannan, in his able exposure of Adam Smith's mixed notions upon Capital, inclines to an extended use of the term which shall include "the existing stock of houses, furniture, and clothes" on the ground that they are "just as much a part of the surplus of production over consumption, and therefore the result of saving, as the stock of warehouses, machinery, and provisions."[171] Moreover, whether in merchants' or consumers' hands they produce a real income, in the latter case consisting of the comforts and conveniences which attend their consumption. But if this view be accepted all forms of wealth must rank as capital; the distinction between those which have been saved and those which have not loses all meaning; so long as a piece of wealth which has been made exists, it has been saved, and is an "investment" which will, at any rate in the satisfaction due to its consumption, yield a real income. But this extension, though logically defensible, must be rejected on grounds of convenience. When economists can be got to recognise the necessity of measuring all "incomes," as indeed all "outputs," in terms of human satisfaction and effort, then it may be well to recognise that all forms of wealth which have figured as producers' capital continue to exist as consumers' capital, yielding an income of satisfaction until they are consumed. To place the consumptive-goods on a common level with forms of productive capital, it would of course be necessary to make the usual provision against wear and tear and depreciation before reckoning income. There would be no justification for reckoning the total use of a coat worn out and not replaced as income from capital.

As matters now stand, the only logically accurate correlation of economic activities which shall enable us to give a clear and separate meaning to capital and labour-power involves the distinct recognition of unproductive consumption—i.e., consumption considered as an end and not as a means to further production of industrial wealth, as the final object of economic activity. In other words, it is the benefit or satisfaction arising from the destruction of forms of industrial wealth that constitutes the economic goal. Life not work, unproductive not productive consumption, must be regarded as the end. The consideration that a good and wholesome human life is identified with work, some of which will be industrial in character, so that many forms of industrial wealth will be destroyed under conditions which enable them to render direct service in creating new forms, does not impair the validity of this conception. The inability of most economic thinkers to clearly grasp and to impress on others the idea of the industrial organism as a single "going concern," has arisen chiefly from the circular reasoning involved in making "production" at once the means and the end, and the inconsistent definitions required to support this fallacy.

APPENDIX II.

"OVER-CONSUMPTION" CONSIDERED AS CAUSE OF DEPRESSION.

It is of course quite possible that a temporary over-production in one or several trades may be explained by a correspondent under-production in others—that is to say, there may be a misplacement of industrial enterprise. But this can afford no explanation of the phenomenon Depression of Trade, which consists in a general or net over-supply of capital, as evidenced by a general fall of prices.

In like manner it is possible to explain a commercial crisis in a single country, or part of a commercial community, as the reaction or collapse following an attempt to increase the quantity of fixed capital out of proportion to the growth of the current national income, by a reckless borrowing. This attempt of a single country to enlarge its business operations beyond the limits of the possible savings of its own current income, Mr. Bonamy Price and M. Yves Guyot speak of under the questionable title of Over-consumption. Since they tender this vice of over-consumption as the true and sufficient explanation of commercial crises, it is necessary to examine the position.

Professor Bonamy Price applied the following analysis to the great crisis in the United States of 1877:—

"We are now in a position to perceive the magnitude of the blunder of which the American people were guilty in constructing this most mischievous quantity of fixed capital in the form of railways. They acted precisely like a landowner who had an estate of L10,000 a year, and spent L20,000 on drainage. It could not be made out of savings, for they did not exist, and at the end of the very first year he must sell a portion of the estate to pay for the cost of his draining. In other words, his capital, his estate, his means of making income whereon to live was reduced. The drainage was an excellent operation, but for him it was ruinous. So it was with America. Few things in the long run enrich a nation like railways; but so gigantic an over-consumption, not out of savings, but out of capital, brought her poverty, commercial depression, and much misery. The new railways have been reckoned at some 30,000 miles, at an estimated cost of L10,000 a mile; they destroyed three hundred million of pounds worth, not of money, but of corn, clothing, coal, iron, and other substances. The connection between such over-production and commercial depression is here only too visibly that of parent and child. But the disastrous consequences were far from ending here. The over-consumption did not content itself with the wealth used up in working the railways and the materials of which they were composed. It sent other waves of destruction rolling over the land. The demand for coal, iron, engines, and materials kindled prodigious excitement in the factories and the shops; labourers were called for from every side; wages rose rapidly; profits shared the upward movement; luxurious spending overflowed; prices advanced all round; the recklessness of a prosperous time bubbled over; and this subsidiary over-consumption immensely enlarged the waste of the national capital set in motion by the expenditure on the railways themselves. Onward still pressed the gale; foreign nations were carried away by its force. They poured their goods into America, so over-powering was the attraction of high prices. They supplied materials for the railways, and luxuries for their constructors. Their own prices rose in turn; their business burst into unwonted activity; profits and wages were enlarged; and the vicious cycle repeated itself in many countries of Europe. Over-consumption advanced with greater strides; the tide of prosperity rose ever higher; and the destruction of wealth marched at greater speed."[172]

Now, in the first place, our analysis of saving and the confinement of the term consumption to direct embodiments of utility and convenience forbid us to acknowledge that the action of the United States or the analogy of the improving landowner is a case of over-consumption at all. If the landowner borrowed money on his estates in order to live in luxury for a season beyond his income, or similarly, if a State raised loans in order to consume powder and shot, the term over-consumption rightly applies. But where the landowner borrows so much money to improve his land that he is unable to hold out till the improvements bear fruit, and must sell his land to pay the interest, he is not rightly accused of over-consumption. His reduced consumption later on while practising retrenchment is simply a process of "saving" which, when complete, is to take the place of an amount of "saving" previously made by some one else and borrowed by him. What happened was simply this. A, wishing to drain his land, had not "saved" enough to do it; B has saved, and A, borrowing his "saving," holds it for a time in his shape of drainage. If he can continue to pay interest and gradually "save" to pay off the capital, he will do so; if not, as in the case supposed, B, the mortgagee, will foreclose and legally enter upon his savings in the shape of "drainage" which he really owned all along. But even if A in this case were rightly accused of over-consumption, this over-consumption must be considered as balanced by the under-consumption of B, so that as regards the community of which A and B are both members there is no over-consumption.

Now, precisely the same line of reasoning applies if for the individual A we take the country of the United States. If it tries to increase its factories, machinery, etc., in excess of its ability to pay, it can only do so by borrowing from other countries; and if it cannot pay the interest on such loans, the "savings," in the shape of fixed capital which it has endeavoured to secure for itself, remain the property of the other countries which have effected the real saving which they embody, assuming them to have a value. If the action of the United States be called over-consumption, it is balanced by an under-consumption of England, France, or other countries of the commercial community. Mr. Price sought to avoid this conclusion by saying nothing about the individual from whom the landowner or the country from which the United States borrowed in order to increase the fixed capital. But as the landowner and the United States, ex hypothesi, did not make their improvements out of their own savings, they made them out of somebody else's savings, and that conduct which is styled over-consumption in them is balanced by an equal quantity of under-consumption in some other party. If thus we look at the individual landowner or the single country of the United States, we might say, accepting Price's view of consumption, that he and it were guilty of over-consumption, and that this was the cause of the commercial crisis. But since this over-consumption is absolutely conditioned by a correspondent under-consumption of some other member of the industrial community, it is not possible to conclude with Professor Price that over-consumption can even for a time exist in the community as a whole, or that such a condition can be the explanation of a crisis commonly felt by all or most of the members of that community.

What actually happened in the case of United States railways was that a number of people, either in America or in Europe, under-consumed or over-saved: their excessive saving could find no better form to take than American railways, which, ex hypothesi, were not wanted for use. A number of persons who might have made and consumed three hundred million pounds' worth more of corn, clothing, coals, etc., than they actually did consume, refused to do so, and instead of doing so made a number of railway lines, locomotives, etc., which no one could consume and which were not wanted to assist production. What occurred was a waste of saving power through an attempt to make an excessive number of forms of capital.

Even if, some years later, many of these forms obtained a use and a value, none the less they represent an excess or waste of "saving" to an extent measured by the normal rate of interest over that period of time which elapsed before they fructified into use. In a word, what had happened was not over-consumption, but under-consumption.

M. Guyot appears to think that in the community as a whole too much saving can be put into the form of "fixed" capital and too little into circulating capital, and that such a condition of affairs will bring depression. "Fixed capital," he says, "cannot be utilised if there is no available circulating capital. Ships and railways are useless if there are no commodities for them to convey; a factory cannot be worked unless there are consumers ready to buy its products. If, then, circulating capital has been so far exhausted as to take a long time replacing, fixed capital must meanwhile remain unproductive, and the crisis is so much the longer and more severe."[173]

To this there are two sufficient answers. The prevalence of low prices for goods of various kinds as well as for plant in a time of depression, the general glut of goods which forms one phase of the depression proves that the crisis does not arise from storing too much saving in plant and too little in goods. Where there exists simultaneously a larger quantity of plant, raw material, finished goods, and labour than the industrial society can find use for, no assertion of maladjustment, either as between trade and trade, country and country, fixed and circulating capital, will afford any explanation. Secondly, M. Guyot gives away his entire position by admitting "a factory cannot be worked unless there are consumers ready to buy its products." A "consumer" here can logically only mean one who buys finished goods for personal use, and if this be generally applied it amounts to a clear admission that under-consumption is the reason why there appears to be a glut of capital, fixed or other.

FOOTNOTES:

[146] Contemporary Review, March 1888.

[147] Report on Industrial Depressions, Washington, 1886.

[148] Report, pars. 61-66.

[149] Report, par. 106.

[150] Contemporary Review, July 1887.

[151] Contemporary Review, March 1888.

[152] Report of the Commissioner of Labour, Washington, 1886, pp. 80 to 88.

[153] D.A. Wells, Contemporary Review, August 1887.

[154] Lord Playfair, in the Contemporary Review, March 1888, gives a number of interesting illustrations of recent economies in transport and manufacture.

[155] Statist, 1879, quoted Bowley, England's Foreign Trade in the Nineteenth Century, p. 80.

[156] Essays in Finance, vol. i. p. 137, etc.

[157] For the view that over-consumption is cause, see Appendix II.

[158] "What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people." (Wealth of Nations, p. 149b, McCulloch.) "Everything which is produced is consumed; both what is saved and what is said to be spent, and the former quite as quickly as the latter." (Principles of Political Economy, Book I., chap. v., sec. 6.)

[159] An able analysis of the nature of "paper savings" is found in Mr. J.M. Robertson's Fallacy of Saving. (Sonnenschein.)

[160] Chap. v. Sec. 5.

[161] Bk. III., chap. xiv. Sec. 3.

[162] The stock of a small retailer will not, however, in all cases vary proportionately with the aggregate sales of all classes of goods. A small shopkeeper, to retain his custom and credit, is often required to keep a small stock of a large variety of goods not often in request. If he sells them rather more quickly, he does not necessarily increase his stock in hand at any particular time.

[163] It likewise determines the quantity of plant and stock at a, b, c, d down each of the perpendicular lines, for the demand at each of these points in the production of plant and machinery is derived from the requirements at the points A, B, C, D, E. The flow of goods therefore up these channels, though slower in its movement (since in the main channel only goods flow, while fixed capital is subject to the slower "wear and tear"), is equally determined by and derived from the consumption at F. The whole motive-power of the mechanism is engendered at F, and the flow of money paid over the retail counter as it passes in a reverse current from F towards A, supplies the necessary stimulus at each point, driving the goods another stage in their journey.

[164] Boehm-Bawerk, Positive Theory of Capital, p. 67. See Appendix I. for conflict of opinion among English economists.

[165] Principles of Political Economy, Bk. I., chap. v. Sec. 3; see also Bk. III., chap. xiv. Sec. 3.

[166] It should be noted that an increased amount of consumption in the future does not necessarily compensate for a disturbance of the current balance of saving and spending, for an increased proportion of future income will have to be spent in order to compensate.

[167] It must be borne in mind that many articles of utility and enjoyment must in their final processes be produced for immediate consumption. The "saving" of perishable goods is confined to a saving of the more enduring forms of machinery engaged in their production, or in some few cases to a storing up of the raw material. So likewise that large portion of productive work termed "personal services" cannot be antedated. These limits to the possibility of "saving" are important. No amount of present sacrifice in the interest of the next generation could enable them to live a life of luxurious idleness.

[168] Ruskin, Unto this Last, p. 145.

[169] This does not necessarily imply a stimulation of new saving. A fuller vitality given to existing forms of capital will raise the quantity of real capital as measured in money. Mills and machinery which have no present or future use, though they embody saving, have no value and do not increase real capital.

[170] Scope and Method of Political Economy, p. 162.

[171] Production and Consumption, chap. iv. Sec. 2.

[172] Contemporary Review, May 1879.

[173] Principles of Social Economy, p. 245. (Sonnenschein.)



CHAPTER VIII.

MACHINERY AND DEMAND FOR LABOUR.

Sec. 1. The Influence of Machinery upon the number of Employed, dependent on "elasticity of demand." Sec. 2. Measurement of direct effects on Employment in Staple Manufactures. Sec. 3. Effects of Machinery in other Employments—The Evidence of French Statistics. Sec. 4. Influence of Introduction of Machinery upon Regularity of Employment. Sec. 5. Effects of "Unorganised" Machine-industry upon Regularity. Sec. 6. Different Ways in which modern Industry causes Unemployment. Sec. 7. Summary of General Conclusions.

Sec. 1. In discussing the direct influences of machinery upon the economic position of the labourer we must distinguish its effects upon (1) the number of workers employed; (2) the regularity of employment; (3) the skill, duration, intensity, and other qualities of labour; (4) the remuneration of labour. Though these influences are closely related in complex interaction, it is convenient to give a separate consideration to each.

(1) Effects of Machinery upon the number of Employed.—The motive which induces capitalist employers to introduce into an industry machinery which shall either save labour by doing work which labour did before, or assist labour by making it more efficient, is a desire to reduce the expenses of production. A new machine either displaces an old machine, or it undertakes a process of industry formerly done by hand labour without machinery.

In the former case it has been calculated that the expenses incurred in making, maintaining, and working the new machines so as to produce a given output will be less than the corresponding expenses involved in the use of the old machines. Assuming that the labour of making and working the new machines is paid at no lower rate than the labour it displaces, and that the same proportion of the price of each machine went as wages and as profits, it must follow that the reduction of expenses achieved signifies a net displacement of labour for a given quantity of production. Since the skilled labour of making new machines is likely to be paid higher than that of making more old machines, and the proportion of the price which goes as profit upon a new invention will be higher than in the case of an old one,[174] the actual displacement of labour will commonly be larger than is represented by the difference in money price of the two machines. Moreover, since in the case of an old manufacturing firm the cost of discarding a certain amount of existing machinery must be reckoned in, the substitution of new machinery for old will generally mean a considerable displacement of labour.

Similarly, when a new process is first taken over by machinery the expenses of making and working the machines, as compared with the expenses of turning out a given product by hand labour, will, other things being equal, involve a net diminution of employment. The fact that the new machinery is introduced is a proof that there is a net diminution of employment as regards a given output; for otherwise no economy would be effected.

What then is meant by the statement so generally made, that machinery gives more employment than it takes away—that its wider and ultimate effect is not to diminish the demand for labour?

The usual answer is that the economy effected by labour-saving machinery in the expenses of production will, through competition of producers, be reflected in a lower scale of prices, and this fall of prices will stimulate consumption. Thus, it is urged, the output must be greatly increased. When we add together the labour spent in producing the machinery to assist the enlarged production, the labour spent in maintaining and working the same, and the labour of conveying and distributing the enlarged production, it will be found that more labour is required under the new than under the old conditions of industry. So runs the familiar argument.

The whole argument in favour of the gain which machinery brings to the working classes hinges upon the contention that it increases rather than decreases the amount of employment. Now, though we shall find reason to believe that machinery has not caused any net diminution of employment, there is nothing to support the rough-and-ready rule by which the optimism of English economists argues the case in its application to a single trade.

The following is a fair example of the argument which has passed current, drawn from the pages of a competent economic writer:—

"The first introduction of machinery may indeed displace and diminish for a while the employment of labour, may perchance take labour out of the hands of persons otherwise not able to take another employment, and create the need of another class of labourers altogether; but if it has taken labour from ten persons, it has provided labour for a thousand. How does it work? A yard of calico made by hand costs two shillings, made by machinery it may cost fourpence. At two shillings a yard few buy it; at fourpence a yard, multitudes are glad to avail themselves of it. Cheapness promotes consumption; the article which hitherto was used by the higher classes only is now to be seen in the hand of the labouring classes as well. As the demand increases, so production increases, and to such an extent that, although the number of labourers now employed in the production of calico may be immensely less in proportion to a given quantity of calico, the total number required for the millions of yards now used greatly exceeds the number engaged when the whole work was performed without any aid of machinery."[175]

Now, turning from the consideration of the particular instance, which we shall find reason to believe is peculiarly unfortunate when we deal with the statistics of the cotton industry, it must be observed that economic theory makes dead against this a priori optimism. Ignoring, for the sake of convenience, the not improbable result that an economy of production may, at any rate for a time, swell profits instead of reducing prices, it will be evident that the whole value of the argument turns upon the effect of a fall of price in stimulating increased consumption. Now the problem, how far a given fall in price will force increased consumption, we have found in our discussion of monopoly prices to involve extremely intricate knowledge of the special circumstances of each case, and refined calculations of human motives. Everything depends upon "elasticity of demand," and we are certainly not justified in assuming that in a particular industry a given fall of prices due to machine-production will stimulate so large an increase of consumption that employment will be given to as many, or more persons than were formerly employed. On the contrary, if we apply a similarly graduated fall of prices to two different classes of goods, we shall observe a widely different effect in the stimulation of consumption. A reduction of fifty per cent. in the price of one class of manufactured goods may treble or quadruple the consumption, while the same reduction in another class may increase the consumption by only twenty per cent. In the former case it is probable that the ultimate effect of the machinery which has produced the fall in expenses of production and in prices will be a considerable increase in the aggregate demand for labour, while in the latter case there will be a net displacement. It is therefore impossible to argue a priori that the ultimate effect of a particular introduction of machinery must be an increased demand for labour, and that the labour displaced by the machinery will be directly or indirectly absorbed in forwarding the increased production caused by machinery. It is alleged that the use of steam-hammers has displaced nine of the ten men formerly required, that with modern machinery one man can make as many bottles as six men made formerly, that in the boot and shoe trade one man can do the work five used to do, that "in the manufacture of agricultural implements 600 men now do the work which fifteen or twenty years ago required 2145, thus displacing 1515," and so forth.[176] Now in some of these cases we shall find that the fall of prices following such displacements has led to so large an increase of demand that more persons are directly engaged in these industries than before; in other cases this is not the case.

The following quotation from a speech made at the Industrial Remuneration Conference in 1885 will present the most effective criticism upon Professor Leone Levi's position:—

"In carpet weaving fifty years ago the workman drove the shuttle with the hand, and produced from forty-five to fifty yards per week, for which he was paid from 9d. to 1s. per yard, while at the present day a girl attending a steam loom can produce sixty yards a day, and does not cost her employer 1-1/2d. per yard for her labour. That girl with her loom is now doing the work of eight men. The question is, How are these men employed now? In a clothier's establishment, seeing a girl at work at a sewing machine, he asked the employer how many men's labour that machine saved him. He said it saved him twelve men's labour. Then he asked, 'What would those twelve men be doing now?' 'Oh,' he said, 'they will be much better employed than if they had been with me, perhaps at some new industry.' He asked, 'What new industry?' But the employer could not point out any except photography; at last he said they would probably have found employment in making sewing machines. Shortly afterwards he was asked to visit the American Singer Sewing Machine Factory, near Glasgow. He got this clothier to accompany him, and when going over the works they came upon the very same kind of machines as the clothier had in his establishment. Then he put the question to the manager, 'How long would it take a man to make one of these machines?' He said he could not tell, as no man made a machine; they had a more expeditious way of doing it than that—there would be upwards of thirty men employed in the making of one machine; but he said 'if they were to make this particular kind of machine, they would turn out one for every four and a half days' work of each man in their employment.' Now, there was a machine that with a girl had done the work of twelve men for nearly ten years, and the owner of that machine was under the impression that these twelve men would be employed making another machine, while four and a half days of each of these men was sufficient to make another machine that was capable of displacing other twelve men."