Chapter 20 of 26 · Capitalism: A Treatise on Economics by George Reisman
Chapter 17. Applications of the Invariable-Money/Net-Consumption Analysis
CHAPTER 17
APPLICATIONS OF THE
INVARIABLEMONEY/
NET-CONSUMPTION ANALYSIS
1. The Analytical Framework
In this chapter, I develop, or further elaborate on, a wide variety of major implications and applications of the net-consumption/net-investment theory which could not be presented in the course of expounding the basic theory itself. These concern the effects on the rate of profit (or, in some cases, lack of effect), of capital accumulation, falling prices caused by increased production, technological progress, taxation, government budget deficits, the socalled international balance of trade, and net saving. I also further develop the implications of the theory insofar as they pertain to the socalled average period of production, the relationship between capital intensiveness and technological progress, the doctrine of price premiums in the rate of interest, the process by which real wages are increased, and the theory of saving in general. In connection with the subject of saving, I develop the contrasting significance of net saving under an invariable money and under a money whose quantity increases, and thus show both the relationship between increases in the quantity of money and net saving and that the actual significance of saving lies at the gross level rather than the net level. I also develop the implications of my analysis for the critique of such prominent fallacies respecting saving as the doctrines of underconsumptionism and the alleged lack of profitable investment opportunities.
In order to develop all these implications, it is necessary to return to the assumption of an invariable money, despite the fact that under a commodity-money system the virtually inevitable effect of economic progress is to bring about an increase in the quantity of money and volume of spending. The assumption of an invariable money is necessary in order to understand the separate connections of phenomena to the rate of net consumption and to the rate of increase in the quantity of money—and, of course, to the rate of net investment apart from the increase in the quantity of money. Because it makes it possible to relate phenomena to the separate elements determining the rate of profit, the assumption of an invariable money is essential to the understanding of practically every aspect of the theory of profit and its applications.
For the sake of simplicity, it is also necessary to return to the further assumptions that all capital goods and labor in existence at the beginning of a year are entirely used up in producing the capital goods and consumers’ goods that are available at the start of the following year and that all financial transactions take place on a single day, at the beginning of each year.
Thus, to carry our analysis further, we must turn now to Figure 17–1 “Profits in a Progressing Economy with an Invariable Money.” Figure 17–1 represents exactly the same kind of analysis of assets and spending and revenue as presented in Figure 16–2, but in combination
FFigiguurere 1 167–-22
The Elements Determining the Average Rate of Profit
Year 1
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages: 300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500
Production:
PLUS 1L OF LABOR
AT 300 PRODUCE
50% 50%
Year 2
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages: 300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500 Production: PLUS 1L OF LABOR
AT 300 PRODUCE
50% 50%
Year 3
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages: 300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500 Production: PLUS 1L OF LABOR
AT 300 PRODUCE
50% 50% ...........................................................................................................................................................................................
Year N
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
APPLICATIONS OF INVARIABLEMONEY/NET-CONSUMPTION ANALYSIS 811
Figure 17–1
Profits in a Progressing Economy with an Invariable Money
Year 1
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages :300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500
Production:
PLUS 1L OF LABOR
AT 300 PRODUCE
60% 40%
Year 2
Opening
Assets 1.2K OF CAPITAL GOODS 1,000 Units of .8C OF CONSUMERS’ GOODS of Business: at a Cost Value of 480 Cash to Be Paid Out at a Cost Value of 320
Transactions: Demand for Demand for
Wages :300+Net Cons.: 100
Capital Goods: 600 Consumers’Goods: 400
1.2 K OF CAPITAL GOODS AT Production: 600 PLUS 1L OF LABOR
AT 300 PRODUCE
60% 40%
Year 3
Opening
Assets 1.44K OF CAPITAL GOODS 1,000 Units of .96C OF CONSUMERS’ GOODS of Business: at a Cost Value of 540 Cash to Be Paid Out at a Cost Value of 360
Transactions: Demand for Demand for
Wages :300+Net Cons.: 100
Capital Goods: 600 Consumers’Goods: 400
1.44K OF CAPITAL GOODS AT Production: 600 PLUS 1L OF LABOR
AT 300 PRODUCE
60% 40%
Year 4
Opening
Assets 1.728K OF CAPITAL GOODS 1,000 Units of aa1.152C OF CONSUMERS’aaa of Business: at a Cost Value of 540 Cash to Be Paid Out GOODS at a Cost Value of 360
Transactions: Demand for Demand for
Wages :300+Net Cons.: 100
Capital Goods: 600 Consumers’Goods: 400
812 CAPITALISM with the capital accumulation and rising production depicted back in Figures 14–5 and 15–6. Figure 17–1 is to Figure 16–2, as Figure 14–5 is to Figure 14–4, and as Figure 15–6 is to Figure 15–5. For the reader’s convenience, Figure 16–2 is reproduced preceding and facing Figure 17–1.
Strictly speaking, Figure 17–1 is somewhat more elaborate than Figure 16–2 in that, in addition to showing the course of capital accumulation from Year 2 on, it also depicts the transition from a stationary economy to a progressing economy. Year 1 of Figure 17–1 opens in exactly the same way as do all the years described in Figure 16–2. Even the financial transactions of Year 1 of Figure 17–1 are identical with those of the years described in Figure 16–2. The transition to the conditions of a progressing economy begins to take place only in the production phase of Year 1. Here the 1K of capital goods purchased at the start of the year for 500 units of money, and the 1L of labor purchased for 300 units of money, come to be employed 60 percent in the production of capital goods and only 40 percent in the production of consumers’ goods. In other words, the relative production of capital goods now rises to a level at which capital accumulation and economic progress will take place.
This change in the relative production of capital goods from the conditions of Figure 16–2 is, of course, the result of correctly anticipating the change in the relative demands for capital goods and consumers’ goods which will occur in Year 2 and remain in place thereafter. In Year 2, and every year thereafter, the demand for capital goods will stand at 600 units of money rather than the 500 of Year 1 and all the years of Figure 16–2. By the same token, the demand for consumers’ goods in Year 2, and every year thereafter, will stand at only 400 units of money rather than 500. Thus, exactly as in the earlier analysis of capital accumulation depicted in Figures 14–5 and 15–6, the 60 ⁄ 40 relative production of capital goods takes place in response to the correct anticipation of the relative demands for capital goods and consumers’ goods coming to stand in a 60 ⁄ 40 ratio.
The 60 ⁄ 40 relative production of capital goods is sufficient to achieve capital accumulation because, just as before, it is assumed that for each existing 1K of capital goods employed in conjunction with 1L of labor, it is possible to produce combinations of capital goods and consumers’ goods within the limiting extremes of 2K, 0C and 0K, 2C. 1 Thus, as in Figures 14–5 and 15–6, starting with 1K of capital goods, a 60 ⁄ 40 relative production results in 1.2K of capital goods and .8C of consumers’ goods.
Figure 17–1 provides a direct means of understanding the relationship between the rate of profit in the economic system and all manner of other major economic phenomena. In the space of a single page, it provides an analytical framework representing the essential elements of the productive process under the conditions of economic progress. In so doing, it makes it possible to intellectually grasp their operation and mutual interconnection virtually by a process of direct observation. To know and understand, for example, the relationship between the rate of profit and capital accumulation, or between the rate of profit and falling prices caused by increasing production, such as results from capital accumulation, all one need do is look at Figure 17–1, and then explain what one observes in terms of further information either presented in the figure itself or at least readily suggested by it and derivable from it. In effect, the figure constitutes a virtual laboratory in which one captures the essential pattern of economic progress in a monetary economy in an intellectually manageable size, and is then able to look at it from every possible angle and, as it were, poke and prod it and see exactly how it responds.
Thus, the figure shows that starting in Year 2 capital accumulation takes place at a 20 percent compound-annual rate and that, as a result, starting at the beginning of Year 3, the total supply of goods available for sale in the economic system increases at a 20 percent compound-annual rate. 2 Since the demands for capital goods and consumers’ goods are both assumed to be fixed at 600 and 400 units of money respectively in every year from Year 2 on, the increases in supply that take place in every year starting from Year 3 on imply correspondingly falling prices every year, that is, prices which fall in inverse proportion to the increase in supply, namely, in the ratio of 5:6.
Observe. Even though the figure stops with Year 4, for lack of space for additional years, it should be taken as projecting the continuation of the relationship between Years 3 and 4 into the indefinite future. Thus, year after year, the figure shows both capital accumulation and the implication of falling prices resulting from the increase in production caused by capital accumulation. However, it also clearly implies a definite rate of profit in each of those years, on the basis of the various monetary transactions generating sales revenues, costs, and capital values. The figure thus provides an ideal analytical framework within which to ask and answer the questions: “Does the process of capital accumulation require or cause a falling rate of profit?” and, “Do falling prices caused by increasing production reduce the rate of profit?” The answer to these and other important questions can now be found by a process of simple inspection. 3
APPLICATIONS OF INVARIABLEMONEY/NET-CONSUMPTION ANALYSIS 813
2. Why Capital Accumulation and the Falling
Prices Caused by Increased Production Do Not Imply a Falling Rate of Profit
And just what are the answers to the above two questions concerning whether or not capital accumulation and the falling prices caused by increased production imply a falling rate of profit? On the basis of Figure 17–1, the answers are clearly in the negative. This is because Figure 17–1 shows that in every year, from Year 3 on, while capital goes on accumulating at a rate of 20 percent and prices fall at the inversely proportionate rate of 16 2 ⁄ 3 percent, the rate of profit remains constant at slightly more than 5 percent.
This rate of profit reflects the existence year after year of 1,000 monetary units of sales revenues in the economic system, 900 monetary units of productive expenditure (which is the sum of 600 of demand for capital goods plus 300 of wage payments or demand for labor), and 1,900 of total monetary value of accumulated capital. These data result in an amount of profit of 100—viz., 1,000 of sales revenues minus 900 of costs generated by the previous year’s productive expenditure. When this amount of profit is divided by the 1,900 of capital, the resulting rate of profit is 5.26 percent.
The value of accumulated capital from Year 3 on is the sum of opening inventories of capital goods with a cost value of 540 and consumers’ goods with a cost value of 360, plus 1,000 units of cash to be paid out. The cost values of 540 and 360 for the opening inventories of capital goods and consumers’ goods derive from the preceding year’s productive expenditure of 900 applied 60 percent to the production of capital goods and 40 percent to the production of consumers’ goods. These cost values, when the goods in question are sold for the 600 annual demand for capital goods and the 400 annual demand for consumers’ goods, imply an annual amount of profit of 100 units of money (100 = 600 – 540 + 400 – 360). As I say, the division of this 100 of profit by the 1,900 of monetary value of accumulated capital then gives an average rate of profit of 5.26 percent.
As promised, Figure 17–1 also contains the explanation of why capital accumulation and the falling prices caused by increased production take place without a fall in the rate of profit. The explanation is that the only fall in the rate of profit that is present is a one-time fall, resulting from the fall in the rate of net consumption from an initial level of 200 ⁄ 1,800 in Year 1 to 100 ⁄ 1,900 in Year 2 and thereafter, that is, from 11.11 percent to 5.26 percent. (In Year 2, this fall in the rate of net consumption is accompanied by the existence of 100 of net investment. Thus, the fall in the rate of profit to 5.26 percent does not take place until Year 3, with the disappearance of net investment. 4 )
The one-time fall in the rate of net consumption is the foundation of a permanent rise in the relative production of capital goods to a level sufficient to achieve capital accumulation. Once the initial increase in the supply of capital goods is achieved in Year 2, on the basis of this rise in their relative production, further increases in the supply of capital goods take place on the basis of the increased productive ability bestowed by the existence of a larger supply of capital goods in the current year compared with the year before. Thus a continually growing relative demand for and production of capital goods, and the continually falling rate of net consumption (and thus rate of profit) that would achieve them, are not required for capital accumulation. On the contrary, the larger supply of capital goods in Year 2 than in Year 1 all by itself makes possible a larger supply of capital goods in Year 3 than in Year 2, and the same holds true mutatis mutandis in all subsequent years.
This is because all by itself the larger supply of capital goods in Year 2 than in Year 1 enlarges the total productive power of Year 2 as compared with Year 1. And thus, with the same relatively greater concentration on the production of capital goods, namely, the 60 ⁄ 40 ratio, the greater productive power of Year 2 as compared with Year 1 results in a larger supply of capital goods as well as consumers’ goods becoming available in Year 3 as compared with Year 2. In exactly the same way, the larger supply of capital goods in Year 3 as compared with Year 2 increases the total productive power of Year 3 as compared with Year 2. The result of the application of this larger total productive power in the same higher ratio, namely, 60 ⁄ 40 , results in a correspondingly larger supply of capital goods as well as consumers’ goods in Year 4 as compared with Year 3. And so on, indefinitely, with each year’s larger supply of capital goods as compared with the year before, serving to increase its total productive power as compared with the year before and thus, so long as a sufficiently high relative production of capital goods continues, to further increase the supply of capital goods available in the following year.
As explained in Chapter 14, in order for capital accumulation to continue on the foundation of prior increases in the supply of capital goods, technological progress is necessary. But granted that it is present, capital accumulation continues without any further necessary connection to a fall in the rate of profit. Indeed, Figure 17–1 implies that any further fall in the rate of profit would be the result not of capital accumulation, but of factors working to bring about an acceleration of the rate of capital accumulation—namely, a further fall in the rate of net consumption and corresponding further increase in the relative demand for and production of capital goods.
814 CAPITALISM
For example, an acceleration of capital accumulation would be the result of a further fall in net consumption from 100 to 50, and corresponding further rise in the production of capital goods relative to consumers’ goods to a 65:35 ratio, reflecting a 650-demand for capital goods and a 350-demand for consumers’ goods. In these circumstances, the supply of capital goods and the ability to produce would increase at a 30 percent annual rate instead of a 20 percent annual rate. 5
To be sure, if technological progress does not take place, capital accumulation cannot continue in this way. But no significant capital accumulation could then be accomplished in any case, no matter how much the rate of net consumption and the rate of profit might fall. As we have seen, in the absence of technological progress over the course of the last two centuries, no great increase in the supply of capital goods could have occurred—period. As explained in Chapter 14, an economy whose technological limits are described by sailing ships, oxcarts, and forges is simply incapable of accumulating the kind of capital that can be accumulated only on the basis of railroads and steel mills, and then airplanes and petrochemical plants, and the continuing technological progress that all these goods presuppose. 6
Figure 17–1 makes it possible to understand the error of the economists who believe that capital accumulation implies a falling rate of profit. The error consists, at least in part, of thinking only of what is necessary to bring about the first accumulation of additional capital goods in an economy that up to that point has been stationary, and then failing to consider what the effect will be of the possession of those additional capital goods on the subsequent ability to produce capital goods.
This failure to consider the consequences of the possession of more capital goods on the production of capital goods is the result of the habit of most economists of focusing almost exclusively on the production of consumers’ goods, as though all that were produced were consumers’ goods, and as though capital goods came into existence only by the allegedly very different and unrelated process of saving. 7 As I have previously explained, this very bad habit is a result of all the utterly confused notions about aggregate production and aggregate spending that I refuted in Chapter 15, notions which imply that aggregate production and aggregate spending are essentially coextensive with the production of and demand for consumers’ goods alone. 8 This mistaken constellation of ideas leads most economists to believe in effect that all capital accumulation must take place in the same way as it does in Year 2, that is, on the basis of greater saving in the context of an invariable money and thus on the basis of an increase in the demand for capital goods relative to the demand for consumers’ goods. If that were in fact the only way in which capital accumulation could occur, capital accumulation would imply a falling rate of profit, because then it would almost certainly imply a falling rate of net consumption. 9
That most economists mistakenly believe this is the only way in which capital accumulation occurs is implicit in their assuming that capital accumulation takes place only by virtue of an act of saving in conditions in which all other things are equal. The condition “all other things equal” includes the demand for and supply of money—that is, it necessarily implies the existence of an invariable money. Repeated acts of saving under an invariable money would result in a falling rate of profit. But, as we know, such acts of saving are unnecessary. Each act of saving in such conditions stands in the same relation to capital accumulation as does force to the acceleration of mass in the world of physics. Most economists are unaware of this because they do not carry their analysis to the point of seeing what the effect of the additional capital goods accumulated on the basis of saving is on the further production and supply of capital goods. They do not do this because they do not even stop to realize that capital goods are used to produce capital goods. And they do not do this, in turn, because they are blinded by the mistaken belief that the only goods which are produced are consumers’ goods, whose production allegedly “counts” the total of production, and that it is “double counting” to consider the production of capital goods separately.
Apart from the above constellation of errors, the notion that capital accumulation implies a falling rate of profit is probably the result of nothing more than the fallacy of composition, as described in connection with the discussion of Say’s Law and the consequences of relative overinvestment. 10 Here, the fact that the rate of profit earned in any given industry falls insofar as additional capital investment in it takes place relative to the rest of the economic system, is mistakenly taken as the basis for assuming that additional capital investment in the economic system as a whole reduces the general rate of profit.
The explanation of the ability of prices to fall without the rate of profit being reduced is first of all the fact that what determines the rate of profit under the conditions of an invariable money is the rate of net consumption. So long as the rate of net consumption is the same, then— apart from the temporary role played by net investment— the rate of profit is the same. The fact that production increases and prices fall implies nothing whatever about the rate of profit. In such circumstances, precisely as Figure 17–1 makes it possible to see, an increase in the supply of products is preceded by an equivalent increase
in the supply and or productivity of the factors of production used to produce them. This prior equivalent increase in the supply and or productivity of the factors of production implies an equivalent and prior reduction in the average unit costs of production, with the result that when prices fall because of an increase in production, there is no reduction in the rate of profit.
Thus, for example, the supply of products available for sale at the beginning of Year 4 increases in the ratio of 6 to 5 over the supply available at the beginning of Year 3. That is, in Year 4 it is 1.728K of capital goods versus the 1.44K of capital goods of Year 3, which is an increase of 20 percent, and 1.115C of consumers’ goods versus the .96C of consumers’ goods of Year 3, which is also an increase of 20 percent. Given that the respective demands for capital goods and consumers’ goods remain fixed at 600 and 400 monetary units respectively, the inescapable inference is that prices fall in the inverse proportion of 5 to 6. However, it can be clearly seen in Figure 17–1 that this fall in prices does not represent any fall whatsoever in the rate of profit in Year 4 in comparison with Year 3. The rate of profit in both years is 5.26 percent, reflecting 100 of net consumption, and thus 100 of profit, divided by 1,900 of capital.
What happens, as the necessary accompaniment of the increase in production in conditions of an invariable money and a constant rate of net consumption, is that the 20 percent larger supply of capital goods and consumers’ goods in Year 4 in comparison with Year 3, is the result of a preceding 20 percent larger supply of capital goods in Year 3 in comparison with Year 2, and a preceding 20 percent increase in the productivity of labor. That preceding increase in the supply of capital goods (namely, the 1.44K of capital goods of Year 3 versus the 1.2K of capital goods of Year 2) coming in the face of a fixed 600 monetary units of demand for capital goods, implies a preceding fall—back in Year 3—in the prices of capital goods in the ratio of 5 to 6, the same ratio by which the prices of capital goods and consumers’ goods now fall in Year 4. For the rest, the ability of the same 1L of labor to produce a 20 percent larger supply of goods for sale at the beginning of Year 4 in comparison with the supply available at the beginning of Year 3 implies a 20 percent rise in the average productivity of labor in Year 3 in comparison with Year 2, and thus an inversely proportionate fall in unit labor costs in Year 3 in comparison with Year 2. The reason that unit labor costs fall in this way, is that a rise in the productivity of labor always implies an inversely proportionate fall in the quantity of labor required to produce a unit of product. If the productivity of labor increases by 20 percent—that is, if the same quantity of labor now can produce six-fifths the output as before—the consequence is that the quantity of labor required to produce any given unit of output is now on average only five-sixths as great as before. And thus, as is the case in Figure 17–1, with the same total wages— 300 monetary units—paid to the same total quantity of labor—1L—and thus unchanged average wage rates, unit labor costs fall to five-sixths of their previous level. Unit labor costs, of course, are nothing but the product of wage rates times the required quantity of labor. With average wage rates the same and the required quantity of labor per unit only five-sixths as great, unit labor costs are five-sixths as great.
Thus, the fall in prices in Year 4 is preceded by a fully equivalent fall in average unit costs of production: both costs on account of capital goods—whose prices fall in the same proportion as the prices of the products they help to produce, and fall first—and costs on account of labor—whose productivity rises in proportion to the larger supply of products it helps to produce, and whose cost per unit of product therefore also falls in the same proportion as the selling prices of the products, and falls first.
Despite the fact that average profit per unit also falls— viz., in the same proportion as the price and unit cost— the result is, of course, that the aggregate amount of profit remains the same. This is because the fall in average profit per unit is precisely offset by the increase in production and supply that causes it and that at the same time is in inverse proportion to it. The result of this is that when the reduced average profit per unit is multiplied by the inversely proportionate larger number of units, the aggregate amount of profit is the same.
And so things can continue in Year 5 and all the other subsequent years, which lack of space makes it impossible actually to show in Figure 17–1. In each year, prices, unit costs, and profits per unit all fall in the ratio of 5 to 6, and, because this is the result of production and supply increasing in the ratio of 6 to 5, the respective arithmetical products of these quantities times the quantity of goods produced and sold—namely, aggregate sales revenues, aggregate costs, and aggregate profits—always remain constant.
Indeed, the fixity of aggregate sales revenues and aggregate costs is the starting point of analysis in most of Figure 17–1, and the constancy of aggregate profit is directly derivable from their fixity. (It is, of course, simply the difference between them.) It is their fixity that accounts for the fall in prices, unit costs, and profits per unit always being in inverse proportion to changes in production and supply, so long as their fixity continues.
It is implicit in the preceding discussion, that nothing whatever depends on any constant rate of increase in production being maintained. It will always work out that the fall in cost per unit—both labor cost per unit and
816 CAPITALISM capital-goods cost per unit—will be in proportion to the fall in prices and, of course, will precede the fall in prices inasmuch as the sums giving rise to the costs are expended prior to the receipt of the sales revenues. Thus, if it had happened, for example, that the increase in supply at the beginning of Year 4 in comparison with Year 3 had been only 10 percent instead of 20 percent, that is, that the production of Year 3 had been in the ratio of 11 to 10 to that of Year 2, rather than 6 to 5, then the fall in prices in Year 4 would have been in the ratio of 10 to 11, instead of 5 to 6.
At the same time, in the face of this lesser increase in output relative to the same quantity of labor, the rise in the productivity of labor in Year 3 in comparison with Year 2 would also have been only 10 percent. Thus the fall in unit labor costs would have been in the correspondingly lower ratio of 10 to 11, just as the fall in prices. For now ten-elevenths rather than five-sixths of the previous quantity of labor would have been required to produce any given unit of output, and thus with the same average wage rates (resulting from the constancy of the demand for labor at 300 monetary units and of the supply of labor at 1L), unit labor costs would have been reduced to this, more limited extent.
By the same token, the 20 percent larger supply of capital goods in Year 3 in comparison with Year 2 would have had to be employed with a diminished productivity to result in an increase in output of only 10 percent. The corollary of this diminished productivity of capital goods is a corresponding increase in the quantity of capital goods employed per unit of product. Specifically, if six-fifths the capital goods result in the production of only eleven-tenths the output, it follows both that the output per unit of capital goods has fallen in the ratio of 11 to 12 and that the quantity of capital goods required per unit of output has risen in the inverse ratio of 12 to 11. (A rise in output in the ratio of 11:10, divided by the preceding increase in the supply of capital goods in the ratio of 6:5, implies an output per unit of capital goods of 55:60, which, of course, reduces to 11:12. When the output per unit of capital goods is only eleven-twelfths, twelve-elevenths is the quantity of capital goods required to produce the average unit of output.) Twelve-elevenths the quantity of capital goods per unit of output times five-sixths the prices of capital goods is sixty sixty-sixths, which reduces to ten-elevenths. This is the reduction in the capital-goods cost per unit of output, i.e., the same as the reduction in the price of the product.
In exactly the same way, if the increase in production and supply in Year 4 in comparison with Year 3 had been more than 20 percent, the correspondingly greater fall in prices would have been accompanied by a correspondingly greater productivity of labor and productivity of capital goods, which would have resulted once again in unit costs of production falling to the same extent as selling prices, and falling first.
Thus, the principle here is that the fall in prices and the prior fall in unit costs must always be in the same proportion, when a larger output is sold for a given amount of sales revenues and is produced on the basis of a given outlay of money for factors of production. Selling prices fall because of the division of a constant amount of sales revenues by a larger output. Unit costs fall to precisely the same extent, because of the division of a constant amount of expenditure for factors of production by that same larger output. In terms of Figure 17–1, the relationships are that the price level of any given year equals 1,000 of sales revenues divided by the total output of the year before, which constitutes the supply available for sale at the start of the current year. The unit-cost level of any given year equals 900 of productive expenditure from the year before, divided by that same output. Thus, the more rapidly output increases, the lower becomes the price and unit-cost levels in precisely the same proportion. Aggregate profit meanwhile always remains at 1,000 – 900, that is, at 100, and the average rate of profit at 100 ⁄ 1,900 . 11
In the context of Figure 17–1, of course, the productive expenditure of any year shows up as the next year’s total costs of production. But the equality of productive expenditure and costs of production does not depend on this. As has been shown, under an invariable money, it tends to exist no matter how the productive expenditures of any given year are distributed with respect to production for future years. Productive expenditure and costs always tend toward equality, so long as the quantity of money and volume of spending in the economic system remain the same. 12
Thus, the rate of profit is totally unaffected by the mere rate of increase in physical production and corresponding rate of fall in prices. So long as sales revenues, productive expenditure, and the amount of capital invested stay the same, the amount and rate of profit remain the same, no matter how rapidly production increases and prices fall. For it is then always merely a question of dividing two unequal expenditures or demands—viz., the demand for products, which constitutes sales revenues, and the demand for factors of production, which constitutes productive expenditure and gives rise to equivalent costs—by more rapidly growing denominators. No matter how rapid the growth in these “supply denominators,” so to speak, and no matter how rapid the fall in prices, there is no effect on the amount of profit, which is the difference between the two “demand numerators,” to coin another expression. And so long as the amount of capital invested is the same, there can also be no differ—
ence in the average rate of profit. 13
Once again, in terms of Figure 17–1, the relationships are that the price level of any given year equals 1,000 of sales revenues divided by the total output of the year before—which is the supply of goods available for sale at the start of the current year—while the unit-cost level equals 900 of productive expenditure from the year before, divided by that same total output. The more rapidly output increases, the lower become the price and unit-cost levels in precisely the same proportion, for all that is reflected is the division of 1,000 and 900 by a denominator that is increased in the same proportion in both instances and, indeed, is always exactly the same in both instances. Aggregate profit meanwhile always remains at 1,000 – 900. In sum, where S represents aggregate output (the output of capital goods and consumers’ goods together), the general price level equals 1,000/S, the unit-cost level equals 900/S, and aggregate profit equals 1,000 – 900. The principle, to say it yet again, in somewhat different words, is that profit depends on the difference between the demand numerators, not on the relationship between one of the demand numerators and its supply denominator. That is, profit depends on the difference between the demand for the products of business and the demand for factors of production by business, on sales revenues minus productive expenditure—in a word, on net consumption—not on prices or the change in prices.
Observe that the only fall in the rate of profit implied by Figure 17–1 occurs in Year 3, and that it occurs not as the result of any increase in production and consequent fall in prices, but as the result of the preceding fall in the rate of net consumption and the subsequent elimination of the net investment that took place on the basis of the fall in net consumption. Furthermore, even that one-time fall in the rate of profit, which, it cannot be repeated too often, is in no way caused by the increase in production and fall in prices, would in no way be diminished by any lesser rate of increase in production and fall in prices. If somehow the supply of goods in Year 3 had not increased over the supply in Year 2, prices would not have fallen in Year 3. But the fall in the rate of profit would have been exactly the same. The situation then would merely have been that instead of 1.44K of capital goods and .96C of consumers’ goods having been produced for outlays of 540 and 360 units of money respectively, only 1.2K of capital goods and .8C of consumers’ goods would have been produced for the same outlays. The result would have been exactly the same rise in aggregate costs and fall in the amount and rate of profit but no increase in production or fall in prices, and, of course, no fall in unit costs of production.
Confirmation of Fact That Falling Prices Caused by
Increased Production Do Not Constitute Deflation
The present analysis constitutes a full confirmation of the conclusion reached in Chapter 13 that falling prices caused by increased production do not constitute deflation. 14 Such falling prices do not reduce the average rate of profit. Furthermore, inasmuch as in the nature of the case the average seller must have a supply of goods to sell that is as much enlarged as prices are lower, it follows that there is no greater difficulty entailed in earning any given sum of money at the lower prices that prevail later on than at the higher prices that prevailed earlier. Thus, there is nothing present in falling prices caused by increased production that would make the repayment of debt any more difficult.
The only possible associated element which could temporarily make the repayment of debt more difficult is the fall in the rate of net consumption that results in a corresponding one-time reduction in the rate of profit at the same time that it inaugurates the increase in production and fall in prices. In Figure 17–1, this is the fall in the rate of net consumption that takes place in Year 2 and which lowers the rate of profit in Year 3. If interest rates on loans had not been reduced in anticipation of this fall in the rate of profit, repayment of debt would be rendered more difficult until they were. But, as just shown, even this would not be the result of the increase in production and fall in prices and would not be helped in any way if the increase in production and fall in prices were less or altogether nonexistent. It would be strictly the result of the one-time, delimited fall in the rate of net consumption and thus in the rate of profit.
In fact, however, it is likely that in the period of transition to a lower rate of profit, the rate of interest would fall pretty much in pace with the rate of profit, if not in advance of the fall in the rate of profit. For one thing, in reality the fall in the rate of profit resulting from a fall in the rate of net consumption would not be sudden and precipitous, as it is in Figure 17–1. A more or less extended period of time would exist during which net investment would take place, which would both increase the degree of capital intensiveness in the economic system and to a greater or lesser extent offset the fall in the rate of net consumption. And the fall in the rate of net consumption itself would likely be slow and gradual rather than occur all at once in a single year. Thus the decline in the rate of profit would be gradual. As the rate of profit fell, it would be accompanied by a gradual fall in the rate of interest.
In addition, the very fact that the process is the result of a decline in the rate of net consumption and corresponding rise in saving operates to reduce the rate of interest immediately. This is because the rate of interest
818 CAPITALISM falls as soon as additional savings appear on the loan market in the face of the prevailing initial rate of profit. Because of this, it is probable that the fall in the rate of interest would actually precede the fall in the rate of profit, which, of course, for its part, would be delayed insofar as net investment went on. In addition, the declining rate of interest would give rise to numerous refinancings, thereby tending to reduce the burden of interest payments throughout the economic system. Thus, in the case of a fall in the rate of profit caused by a fall in the rate of net consumption, there would be no sudden plunge in the rate of profit in the face of a large volume of contractually fixed interest rates geared to a substantially higher rate of profit, which is what occurs in a period of deflation or financial contraction.
Indeed, the very fact that a fall in the rate of net consumption entails a rise in saving and productive expenditure, extensive net investment and the formation of new capital giving rise to a higher degree of capital intensiveness, and makes possible a correspondingly greater availability of credit, characterizes it as the very opposite of a period of deflation or financial contraction. In a deflation or financial contraction, productive expenditure falls, net investment becomes negative, capital values decline, and credit becomes largely unobtainable.
Furthermore, looking now at matters over the longer term, once we recall that a by-product of a growing ability to produce is a growing quantity of commodity money, and the effect on the rate of profit of increases in the quantity of money, it becomes obvious that the falling prices resulting from increasing production are almost certain to be accompanied by a positive addition to the rate of profit. They are also almost certain to be accompanied by a growing ability to repay debt, because of the growing volume of sales revenues taken in by the average seller as the result of the increasing quantity of money. 15 It should always be kept in mind that in the context of economic progress under a system of commodity money, the fall in prices is the result of a combination of circumstances in which there is an increase in money and spending, but in which the increase in production and supply outstrips the increase in money and spending.
At the same time, of course, it also becomes obvious that the fall in the rate of profit that is the accompaniment of launching or accelerating the process of capital accumulation by means of a fall in the rate of net consumption, is in part reversed by that same positive addition to the rate of profit that accompanies increasing production and its by-product an increasing quantity of commodity money. This is because the increasing production and its monetary by-product are the result of the capital accumulation launched by the fall in the rate of net consumption.
More on the Relationship Between Technological
Progress and the Rate of Profit
Observe that Figure 17–1 also fully confirms the discussion in Chapter 13 concerning the alleged effects of technological progress on the rate of profit. It makes it possible to see that technological progress does not raise the rate of profit by “increasing the demand for capital,” but rather prevents the fall in prices caused by increasing production from lowering the rate of profit. This is because the actual effect of technological progress is, along with increasing the supply of consumers’ goods, to increase the supply and lower the prices of capital goods and to raise the productivity of labor, both of which, as shown, cause unit costs to fall to the same extent as prices and to do so prior to the fall in prices, so that when prices fall there is no fall in the amount or rate of profit. Indeed, it is only by virtue of increasing the supply of capital goods and/or the productivity of labor that technological progress serves to increase the supply of consumers’ goods. And thus the fall in the prices of consumers’ goods that technological progress is undeniably accountable for is inseparably connected with a preceding fall in the unit costs of production, for which technological progress bears equal responsibility. 16
The only positive connection between technological progress and the rate of profit is by way of the increase in the quantity of commodity money that is the by-product of a growing ability to produce. Insofar as technological progress underlies a growing ability to produce, and thus a growing quantity of commodity money, it is indirectly the source of an addition to the rate of profit, namely, of the monetary component in the rate of profit. Furthermore, insofar as this monetary component is at the same time the net investment component in the rate of profit, technological progress may be said to be the indirect source of net investment and the net investment component in the rate of profit. 17
This last connection is doubly ironic when understood against the backdrop of the prevailing Keynesian fallacies, which regard net investment not only as in no way based on technological progress, but also as requiring technological progress to offset its allegedly negative effects on the rate of profit. The double irony is the fact that the only way in which technological progress does contribute to the rate of profit is precisely in its capacity as the source of net investment, which, far from reducing the rate of profit, represents a major component of the rate of profit. Just as technological progress is not required as an “outlet” for capital goods accumulated merely by means of saving, but is itself the source of capital goods, so in its relation to the increase in the supply of commodity money it is not an outlet for net investment, but is itself the source of net investment. And
this net investment, through the contribution it makes to the rate of profit, can in turn be described as providing its own outlet for profitable investment.
Ricardo’s Insights on Capital Accumulation
The fundamental relationship between technological progress and increases in production, on the one side, and the rate of profit, on the other, is clearly understood by Ricardo, who writes:
The rate of profits is never increased by a better distribution of labour, by the invention of machinery, by the establishment of roads and canals, or by any means of abridging labour either in the manufacture or in the conveyance of goods. These are causes which operate on price, and never fail to be highly beneficial to consumers; since they enable them with the same labour, or with the value of the same labour, to obtain in exchange a greater quantity of the commodity to which the improvement is applied; but they have no effect whatever on profit. 18
Ricardo, of course, writes in the context of an invariable money, which for him signifies the employment of the same total quantity of labor in the economic system, while for us it means the expenditure of the same total amount of money to buy newly produced goods. And, of course, he refers to the general or average rate of profit, not to the particular rates of profit of innovators or of those who must compete against the innovators. As we know, technological progress increases the profits of the innovators and decreases the profits of those against whom the innovators compete. What it does not do is raise the general or average rate of profit—the rate of profit that is earned taking innovators and laggards together—except, of course, to the extent that it results in an increase in the supply of commodity money and thus in the volume of spending in the economic system.
With no less remarkable insight, Ricardo implicitly grasps the role of technological progress in capital accumulation and sees that in the context of an invariable money, capital can be accumulated without continuous acts of saving, that is, without continuous increases in productive expenditure and the demand for capital goods relative to the demand for consumers’ goods. In his chapter “Value and Riches, Their Distinctive Properties,” he declares:
From what has been said, it will be seen that the wealth of a country may be increased in two ways: it may be increased by employing a greater portion of revenue in the maintenance of productive labour, which will not only add to the quantity, but to the value of the mass of commodities;
or it may be increased without employing any additional quantity of labour, by making the same quantity more productive, which will add to the abundance, but not to the value of commodities.
In the first case, a country would not only become rich, but the value of its riches would increase. It would become rich by parsimony—by diminishing its expenditure on objects of luxury and enjoyment, and employing those savings in reproduction.
In the second case, there will not necessarily be either any diminished expenditure on luxuries and enjoyments, or any increased quantity of productive labour employed, but, with the same labour, more would be produced; wealth would increase, but not value. Of these two modes of increasing wealth, the last must be preferred, since it produces the same effect without the privation and diminution of enjoyments which can never fail to accompany the first mode. Capital is that part of the wealth of a country which is employed with a view to future production, and may be increased in the same manner as wealth. An additional capital will be equally efficacious in the production of future wealth, whether it be obtained from improvements in skill and machinery [viz., technological progress and or a larger previous supply of capital goods], or from using more revenue reproductively [viz, saving]; for wealth always depends on the quantity of commodities produced, without any regard to the facility with which the instruments employed in production may have been procured. 19
All one need do to make these passages fully accord with the views I have been propounding is to substitute for the fixity of the quantity of labor as the basis of an invariable money, the fixity of the quantity of money itself and thus of the total volume of spending to buy newly produced goods. Then it is clear that in such a context, saving—viz., a fall in consumption expenditure and rise in productive expenditure—represents an increase in the monetary value of the capital employed in production, and, if productive expenditure remains at the higher level, an increase in the total cost-value of commodities. This is the way capital accumulation begins in Figure 17–1, when net consumption falls from 200 monetary units to 100 and the rise in productive expenditure increases the cost value of output from 800 to 900 monetary units. It is also clear that capital accumulation can take place without further such saving, as the rest of Figure 17–1 shows. Indeed, Ricardo argued that it is even possible for capital accumulation to take place in the face of smaller aggregate value of capital—in the face of a smaller relative production of capital goods. He writes in his chapter “On Wages”:
Or capital may increase without its value increasing, and even while its value is actually diminishing . . . the addition may be made by the aid of machinery, without any increase, and even with an absolute diminution in the proportional quantity of labor required to produce [the goods constituting capital]. The quantity of capital may increase, while neither the whole together, nor any part of it singly, will have a greater value than before, but may actually have a less. 20
Such a situation can be imagined in terms of the
economic system shifting from the conditions of Figure 17–1 to conditions somewhere between those of Figure 17–1 and those of Figure 16–2. In such an intermediate situation, represented, for example, by the demand for capital goods being 550 instead of 600, and total productive expenditure being 850 instead of 900, capital accumulation would continue, though at a less rapid rate than in Figure 17–1. It would be accompanied by a reduction in the total value of accumulated capital and in the total cost value of the output produced. It would also be accompanied by a rise in the amount and rate of profit.
As the next section of this chapter will show, however, there are more or less strict limits to the extent to which capital accumulation is possible in the face of a fall in productive expenditure and the relative demand for capital goods, and thus to the case Ricardo describes. This is because the ability to implement technological advances vitally depends on the relative production of capital goods. 21
The Rate of Profit and the Demand for Money
Preceding discussion has shown repeatedly that as far as the rate of profit is concerned, there is a fundamental distinction between falling prices caused by increasing production and falling prices caused by a falling quantity of money and volume of spending. Essentially, only the latter is associated with a fall in the rate of profit. The former is not. 22
It is also necessary to realize that there is a fundamental distinction with respect to the effect on the demand for money for holding, between a fall in the rate of profit caused by a fall in the quantity of money and volume of spending—i.e., deflation—and a fall in the rate of profit caused by a fall in the rate of net consumption. Only the former operates to raise the demand for money for holding. The latter does not.
There are two reasons for this. First, unlike a fall in the quantity of money and volume of spending, a fall in the rate of net consumption cannot render the rate of profit negative. At most, it can only reduce the rate of profit to a lower positive number. 23 Second, as we have seen, in the nature of the case, a fall in the rate of profit caused by a fall in the rate of net consumption is accompanied by an increase in the supply of savings and thus an increase in the availability of credit. 24 As I showed in Chapter 12, a greater supply of savings and a consequent greater availability of credit operate to reduce the demand for money for holding. It follows that in such an environment, any tendency of a lower rate of return on capital to increase the demand for money for holding, by virtue of reducing the advantages of investing in comparison with holding cash, is necessarily accompanied by offsetting factors that work in the opposite direction. 25
Of course, beyond this, a fall in the rate of net consumption is virtually certain to result in a less than equivalent fall in the rate of profit, because of its indirect effects on the rate of increase in the supply of a commodity money, as we have also seen. 26 Finally, as I will show later in this chapter, the effect of any increase in the demand for money for holding that for any reason might occur is ultimately to raise the rate of net consumption and rate of profit. 27
3. Why Capital Accumulation Does Not Depend on a Continuous Lengthening of the Average Period of Production
The analysis of Figure 17–1 has shown conclusively that neither capital accumulation nor falling prices caused by increased production imply a falling rate of profit or wiping out of profit or are in any way “deflationary.”
Essentially the same analysis demonstrates the error of believing that capital accumulation implies a continuous lengthening of the average period of production or structure of production. Both of these concepts, which mean essentially the same thing, can be expressed in terms of the differing conditions of Figures 16–2 and 17–1.
In Figure 16–2, 50 percent of the capital goods and labor of each year are used in producing consumers’ goods for the following year, and the remaining 50 percent, in producing capital goods for the following year. Inasmuch as the capital goods of the following year are in turn themselves used 50 percent to produce consumers’ goods for the year after that, it follows that of the half of the labor and capital goods used in any given year to produce capital goods for the following year, half of that half, or 25 percent, indirectly serves in the production of consumers’ goods in the year following the following year, that is, in the year after next. The implication of this is that by the end of two years, 75 percent of the capital goods and labor in existence in any year will have ended up directly or indirectly serving in the production of consumers’ goods—50 percent in the production of the consumers’ goods of the following year, and 25 percent in the production of the consumers’ goods of the year after that.
By an extension of the same reasoning, it further follows that by the end of three years, the cumulative proportion of capital goods and labor in existence in any given year that will have ended up directly or indirectly serving in the production of consumers’ goods will be 87.5 percent, and so on. This is because the capital goods in existence in the year after next and which reflect the remaining 25 percent of the labor and capital goods of
Figure 17–2
The Average Period of Production Under a 50% Relative Production of Capital Goods
Year 1
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages: 300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500
Production:
PLUS 1L OF LABOR
AT 300 PRODUCE
50% 50%
Year 2
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages : 300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500 Production: PLUS 1L OF LABOR
AT 300 PRODUCE
50% 50% 25%
25%
Year 3
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages: 300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500 Production: PLUS 1L OF LABOR
AT 300 PRODUCE
12.5% 50% 50% 12.5%
Year 4
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages: 300+Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
two years earlier that has not yet contributed to the production of consumers’ goods, are now used 50 percent in the production of consumers’ goods of three years later. 28
The cumulative increase in the proportion of the capital goods and labor of any given base year that directly or indirectly serves in the production of consumers’ goods is clearly indicated in Figure 17–2, which superimposes on Figure 16–2 the connections between the supply of labor and capital goods in a given base year and the supplies of consumers’ goods and capital goods of various future years. Figure 17–2 takes Year 1 as the base year and shows the extent to which the capital goods and labor of that year not only directly serve in the production of capital goods and consumers’ goods for the following year, but also indirectly serve in the production of capital goods and consumers’ goods that become available at the beginning of Years 3 and 4.
The figure shows 25 percent of the capital goods and labor of Year 1 indirectly serving in the production of the capital goods of Year 3, and 25 percent indirectly serving in the production of the consumers’ goods of Year 3. These percentages reflect the fact that 50 percent of the capital goods and labor of Year 1 are used up in producing the capital goods of Year 2, of which, in turn, 50 percent are used up in producing the capital goods of Year 3, and 50 percent in producing the consumers’ goods of Year 3. (In both cases, 50 percent of 50 percent yields an indirect contribution of 25 percent.) The fact that 25 percent of the capital goods and labor of Year 1 thus indirectly serve in producing the capital goods available at the start of Year 3 and that these capital goods, in their turn, are used up 50 percent in the production of the capital goods that will become available at the start of Year 4 and 50 percent in the production of the consumers’ goods that will become available at the start of Year 4, underlies the further fact that 12.5 percent of the capital goods and labor of Year 1 indirectly serve in producing the capital goods of Year 4 and 12.5 percent indirectly serve in producing the consumers’ goods of Year 4.
In this way, with the passage of years, the cumulative proportion of the capital goods and labor in existence in any base year that directly or indirectly serves in the production of consumers’ goods continually grows, while the proportion continuing to serve indirectly in the production of capital goods and thus of consumers’ goods in the still further future continually declines.
One can express the concept of the average period of production or the length of the structure of production in terms of how many years must elapse before some given percentage of the capital goods and labor in existence in a base year will have ended up directly or indirectly serving in the production of consumers’ goods. If that given percentage is taken as 90 percent, then the length of the average period or structure of production in the conditions of Figure 16–2 is obviously somewhere between three and four years, for in three years 87.5 percent of the capital goods and labor in existence in a base year will have ended up directly or indirectly serving in the production of consumers’ goods, while at the end of four years, the figure will be 93.75 percent—viz., 87.5 percent plus 50 percent of 12.5 percent, which, of course, is 6.25 percent.
Proceeding now in the same way in the conditions of Figure 17–1 (which are reproduced in Figure 17–3), it is clear that here the length of the average period or structure of production is somewhat greater. Figure 17–3 superimposes on Figure 17–1 the connections between the supply of labor and capital goods in a given base year—once again Year 1 has been chosen for this purpose—and various future years. It shows the indirect contribution of the capital goods and labor of Year 1 to the capital goods and consumers’ goods available at the start of Years 3 and 4 in the conditions of the higher relative production of capital goods that prevails in Figure 17–1.
Because 60 percent of the capital goods and labor of Year 1 are used to produce the capital goods of Year 2, 60 percent of which are used up in producing the capital goods of Year 3 and 40 percent of which are used up in producing the consumers’ goods of Year 3, the capital goods and labor of Year 1 indirectly serve 36 percent in the production of the capital goods of Year 3 (.6 x .6) and 24 percent in the production of the consumers’ goods of Year 3 (.4 x .6). Because the capital goods of Year 3 in turn are used up 60 percent in the production of further capital goods and 40 percent in the production of consumers’ goods, the further indirect contribution of the capital goods and labor of Year 1 to the capital goods and consumers’ goods of Year 4 is 21.6 percent (.6 x .36) and 14.4 percent (.4 x 21.6) respectively. For Year 5 (not shown in the figure), their indirect contribution is 60 percent of the 21.6 percent and 40 percent of the 21.6 percent respectively, viz., 12.96 percent and 8.64 percent respectively.
It follows that the cumulative contribution of the capital goods and labor in existence in a base year to the production of consumers’ goods over the following four years, that is, through Year 5, will be the sum of .4 + (.4 x .6) + (.4 x .6 2 ) + (.4 x .6 3 ), that is, 87.04 percent. Thus the length of the average period or structure of production in this case is greater than four years, for obviously more than four years must elapse before 90 percent of the capital goods and labor in existence in a base year end up serving directly or indirectly in the production of consumers’ goods. In the conditions of Figure 16–2, of
Figure 17–3
The Average Period of Production Under a 60% Relative Production of Capital Goods
Year 1
Opening
Assets 1K OF CAPITAL GOODS 1,000 Units of 1C OF CONSUMERS’ GOODS of Business: at a Cost Value of 400 Cash to Be Paid Out at a Cost Value of 400
Transactions: Demand for Demand for
Wages: 300 +Net Cons.: 200
Capital Goods: 500 Consumers’Goods: 500
1 K OF CAPITAL GOODS AT 500
Production:
PLUS 1L OF LABOR
AT 300 PRODUCE
60% 40%
Year 2
Opening
Assets 1.2K OF CAPITAL GOODS 1,000 Units of .8C OF CONSUMERS’ GOODS of Business: at a Cost Value of 480 Cash to Be Paid Out at a Cost Value of 320
Transactions: Demand for Demand for
Wages: 300 +Net Cons.: 100
Capital Goods: 600 Consumers’Goods: 400
1.2 K OF CAPITAL GOODS AT
Production: 600 PLUS 1L OF LABOR
AT 300 PRODUCE
60% 40%
Year 3 36% 24%
Opening
Assets 1.44K OF CAPITAL GOODS 1,000 Units of .96C OF CONSUMERS’ GOODS of Business: at a Cost Value of 540 Cash to Be Paid Out at a Cost Value of 360
Transactions: Demand for Demand for
Wages: 300 +Net Cons.: 100
Capital Goods: 600 Consumers’Goods: 400
1.44K OF CAPITAL GOODS AT
Production: 600 PLUS 1L OF LABOR
AT 300 PRODUCE
60% 40%
21.6% 14.4%
Year 4
Opening
Assets 1.728K OF CAPITAL GOODS 1,000 Units of aa1.152C OF CONSUMERS’aaa of Business: at a Cost Value of 540 Cash to Be Paid Out GOODS at a Cost Value of 360
Transactions: Demand for Demand for
Wages: 300+Net Cons.: 100
Capital Goods: 600 Consumers’Goods: 400
course, the cumulative total of 90 percent was reached in less than four years.
Now what is essential for present purposes is merely to realize that while the length of the average period or structure of production in the conditions of Figure 17–1 is greater than in those of Figure 16–2, once that greater length has been established, capital accumulation thereafter proceeds without any further such lengthening. A further such lengthening of the average period of production would be identical to a further rise in the relative production of capital goods, which, of course, is not necessary to the continuation of capital accumulation, but to its acceleration. 29
The Average Period of Production and the Limits to Technological Progress as a Source of
Capital Accumulation
The concept of the average period of production sheds further light on the necessity of a sufficiently high economic degree of capitalism and degree of capital intensiveness in order for capital accumulation and economic progress to take place. At the same time, it makes clear the limits of technological progress as a source of capital accumulation. The longer is the average period of production, the greater is the foundation on which technological progress can be applied. It can be applied to a correspondingly greater extent in the production of future products requiring temporally more remote applications of existing capital goods and labor and, by the same token, in the production of present products requiring the application of relatively more capital goods and labor existing in past years.
For example, imagine two different economic systems. In one, the average period of production is such that fully 10 percent of the capital goods and labor of any given base year serves in the production of capital goods and consumers’ goods that will become available in five years. In the other, the average period of production is such that less than 1 percent of the capital goods and labor of any given base year serves in the production of capital goods and consumers’ goods that will become available in five years. It is obvious that technological progress that relates to the kinds of capital goods or consumers’ goods specifically requiring productive activity five years in the past will be much more likely to be capable of being implemented in the first economic system than in the second. A concrete example of this might be the construction of such things as factory buildings, bridges, and tunnels with an actual construction time of five years. If hardly any of the capital goods and labor of a given year are devoted to the production of goods that become available five years later, then technological progress in the construction of such things may simply be altogether incapable of application.
Figures 17–2 and 17–3 can be used as illustrations of the differing extents to which the past can serve the present, as well as the present serve the future. In looking backward from any year, the proportions of the labor and capital goods of past years serving the production of any present year taken as a base are greater in Figure 17–3 than in Figure 17–2, and become relatively greater the more remote are the past years. For example, 60% vs. 50% for one year past; 36% vs. 25% for two years past; 21.6% vs. 12.5% for three years past; 12.96% vs. 6.25% for four years past, and so on. It is possible to implement technological advances in the conditions of Figure 17–3 which it is not possible to implement in the conditions of Figure 17–2, because of this greater contribution of the past to the present, and of the present to the future. 30
This discussion, of course, reinforces the conclusions reached earlier about the role of capital intensiveness in determining an economy’s ability to implement technological progress. 31
It should be realized that a more-capital-intensive economic system is at absolutely no disadvantage in comparison with a less-capital-intensive economic system when it comes to implementing technologies requiring less capital intensiveness. The capacity for implementing more-capital-intensive technologies always subsumes the capacity for implementing less-capital-intensive technologies, while the reverse is not the case. It is the same in principle as the fact that a millionaire always has the ability to come down the scale and live like an average person if he wishes, while the average person lacks the ability to go up the scale and live like a millionaire.
For example, an economy that was sufficiently capital intensive to be capable of turning out thirty-year-old scotch for the mass market, would have no difficulty in turning out eight-year-old scotch for whatever part of the market might wish it. However, without greater capital intensiveness in the economic system as a whole, an economy that presently turns out only eight-year-old scotch for the mass market would encounter considerable difficulty in finding the resources to replace the eight-year-old scotch with thirty-year-old scotch.
In the same way that the advantages of living like a millionaire almost always preclude a millionaire’s actually living like an average person, so the advantages of greater capital intensiveness, in terms of higher-quality products and lower-cost methods of production, preclude a more-capital-intensive economic system from actually attempting to revert to the products and methods of production of a less-capital-intensive economic system in any but the most exceptional and isolated cases.
4. Implications for the Doctrine of Price Premiums in the Rate of Interest
Recognition of the fact that falling prices caused by increased production do not reduce the rate of profit necessitates a major modification in the important economic doctrine of “purchasing-power-price premiums” in the loan-market rate of interest. According to this doctrine, the anticipation of rising prices adds a corresponding positive component to the loan market rate of interest, while the anticipation of falling prices adds a corresponding negative component to the loan market rate of interest. 32 When stated in this form, the doctrine leads to the conclusion that rapid increases in production are potentially capable of wiping out the rate of interest altogether. This is because if the rate of interest were initially 4 percent, say, and production increased by more than 4 percent a year—say, by 5 or 6 percent, with the result that prices fell by approximately 5 or 6 percent— then the doctrine would imply the existence of a negative rate of interest and thus the disappearance of any incentive to lend money rather than hold it. This, in turn, would imply the sudden emergence of a major inducement to hold money that was not present before, and thus the onset of a depression. In other words, rapid increases in production are implied to be capable of causing depressions.
On the basis of the preceding discussion, however, it should be clear that there is no basis for the anticipation of falling prices caused by increased production to result in a reduction in the rate of interest. 33 For I have shown that in the context of an invariable money, where falling prices are caused by increases in production and supply, absolutely no fall whatsoever takes place in the rate of profit as the result of the increase in production and fall in prices. Inasmuch as such falling prices do not reduce the rate of profit, they do not reduce the demand for loanable funds; nor, for the same reason, do they serve as an inducement to the shifting of funds from direct investment to the loan market, and thus they do not increase the supply of loanable funds. Since they neither decrease the demand for loanable funds nor increase the supply of loanable funds, they do not result in a lower rate of interest.
As I have shown, it is not falling prices per se that should be associated with a reduction in the rate of profit and interest, but falling prices caused by a reduction in the quantity of money and volume of spending. 34 Even this formulation somewhat misses the mark, because the price changes are altogether nonessential. This is because a reduction in the quantity of money and volume of spending reduces the rate of profit and interest even if at the same time prices stay the same, or actually rise.
(Prices would stay the same or rise if production and supply fell to the same extent or a greater extent as the quantity of money and volume of spending.) Deflationary reductions in the rate of profit and interest are thus not a matter of price changes at all, but strictly of changes in the quantity of money and volume of spending.
Exactly the same principles apply to the rise in the rate of profit and interest associated with rising prices: they are due strictly to the increase in the quantity of money and volume of spending and not at all to the rise in prices per se.
Indeed, I have shown that a rising quantity of money and volume of spending act to raise the rate of profit and interest even when the increase in money and spending is relatively modest and is outstripped by the increase in production and supply, with the result that prices fall. By the same token, a falling quantity of money and volume of spending act to reduce the rate of profit and interest even if accompanied by rising prices caused by a fall in production and supply to an extent greater than the fall in the quantity of money and volume of spending. Just as more production and supply do not lower the rate of profit and interest, irrespective of any fall in prices, so less production and supply do not raise the rate of profit or interest, irrespective of any rise in prices.
As I have shown, changes in the price level are related to changes in the rate of profit and interest merely by a process of association. What underlies the association and actually explains the changes in both the price level and the rate of profit and interest is changes in the quantity of money and volume of spending. As the quantity of money and volume of spending increase, prices and the rate of profit and interest tend to increase together. As the quantity of money and volume of spending decrease, prices and the rate of profit and interest tend to decrease together. The essential underlying causal element that creates the association is the change in the quantity of money and volume of spending.
Now insofar as there are changes in the supply of goods produced and sold that take place in the same direction as the changes in the quantity of money and volume of spending, the changes in the price level that would otherwise be caused by the changes in the quantity of money and volume of spending are offset and may, indeed, actually be overcome. But the changes in the nominal rate of profit and interest caused by the changes in the quantity of money and volume of spending remain. Thus, as I demonstrated earlier in this chapter, falling prices caused by increases in production and supply are actually capable of being accompanied by an increase in the rate of profit and interest. 35 All that is necessary for prices to fall while the rate of profit and interest is increased is that at the same time that production and
supply increase, there is an increase in the quantity of money and volume of spending that is less than the rise in production and supply. In this way, the increase in the quantity of money and volume of spending adds to the rate of profit and interest, but the still greater increase in production and supply overcomes its price-raising effects and succeeds in reducing the price level.
In exactly the same way, rising prices caused by a decrease in production and supply are capable of being accompanied by a decrease in the rate of profit and interest. All that is necessary is that at the same time that the fall in production and supply raises prices, there is a decrease in the quantity of money and volume of spending that is less than the fall in production and supply. In this case, the pricereducing effects of the fall in the quantity of money and volume of spending are more than overcome, with the result that prices rise. But the negative effect of the fall in the quantity of money and volume of spending on the rate of profit and interest remains. Thus, prices rise while the rate of profit and interest is reduced.
The doctrine of the purchasing-power-price premiums is thus substantially mistaken. One should speak instead, of a positive or negative monetary component in the rate of profit and interest, reflecting the change in the quantity of money and volume of spending in the economic system. This would permit recognition of the fact that falling prices caused by increased production not only do not reduce the rate of profit and interest but, under a commodity money, are actually almost always accompanied by a positive addition to the rate of profit and interest resulting from the increased production and supply of the monetary commodity or commodities that takes place as a by-product of the general increase in the ability to produce. It would also greatly encourage recognition of the fact that depressions and all their negative consequences are a strictly monetary phenomenon, proceeding from a monetary system of a kind which makes possible sudden, largescale decreases in the quantity of money and sudden, largescale increases in the demand for money for holding. 36
5. Implications for the Process of Raising Real Wages
Figure 17–1 shows the process by which real wages are increased, namely, through an increase in the supply of capital goods relative to the supply of labor, which is then followed by an increase both in the supply of consumers’ goods relative to the supply of labor and by a further increase in the supply of capital goods relative to the supply of labor. On this basis, in each year in Figure 17–1, from Year 3 on and continuing indefinitely, real wages rise, as a steadily growing supply of consumers’
goods is sold for the same 400 monetary units of consumption expenditure while total wage payments remain at 300 monetary units.
The figure makes plain the role of a lower rate of net consumption in inaugurating the rise in real wages and is fully consistent with, if it does not actually suggest, the role of the competitive quest of businessmen and capitalists for above-average profits in the continuation of technological progress, capital accumulation, and rising real wages. 37 It shows how rising real wages are possible without any continuing fall in the rate of profit, and how, in fact, the buying power of the constant monetary amount of profits is increased at the same rate as the buying power of the constant monetary amount of wages—in other words, how real profits and real wages increase together. It shows how the process of raising real wages always takes place from the side of production and supply and is fundamentally a process that in the absence of increases in the quantity of money and volume of spending would raise real wages exclusively by means of reducing the prices of the goods purchased by wage earners, not by raising money wages. Of course, along with Figure 16–2, it also makes apparent the role of saving and productive expenditure in determining the demand for labor relative to the demand for consumers’ goods. In essence, Figure 17–1 can be taken as a confirmation of the entire productivity theory of wages and its applications, which I presented in Chapter 14. 38
6. How the Taxation of Profits Raises the Rate of Profit
The invariablemoney/net-consumption analysis leads to the conclusion that the taxation of profit results in a substantially equivalent rise in the pretax amount of profit and in a corresponding rise in the pretax rate of profit. 39
The fact that the consumption of businessmen and capitalists is governed primarily by their possession of capital rather than by their earning of income implies that the taxation of profit and interest falls mainly on capital. This is because so long as their capital remains intact, the consumption of businessmen and capitalists is not substantially reduced by the reduction in their disposable income that taxation causes. 40
It is because the taxation of profit and interest falls mainly on capital, that its longrun effect is to raise the rate of profit and interest on a pretax basis. This comes about because, in falling on capital, the taxation of profit and interest reduces productive expenditure. Funds which business firms would have used for the purchase of machinery and materials and the payment of wages are instead diverted to the payment of taxes. The government, or the people to whom the government gives the
tax proceeds, spend the funds. Thus, the aggregate monetary demand for products as such remains the same. What happens is that the demand for machinery and materials by business falls, the demand for consumers’ goods by the employees of business falls (as the result of the fall in the demand for labor by business), but the demand for consumers’ goods by the government or those to whom the government gives the tax money rises by an amount equal to these reductions. However, while aggregate sales revenues thus remain the same, the reduction in productive expenditure brings about an equivalent reduction in the aggregate costs of production that are deducted from sales revenues in computing profits. Thus, aggregate profits increase correspondingly.
The rise in aggregate profits, of course, is only on a pretax basis. What occurs, in effect, is that costs in the form of taxes displace normal business costs in the form of costs on account of machinery, materials, and labor. If the taxes are excluded from costs, as they are in calculating profits on a pretax basis, aggregate profits rise by an equivalent amount. They rise to whatever extent tax costs, which are not counted in the computation of pretax profits, displace ordinary business costs, which are counted in the computation of pretax profits.
The process can be understood by using Figure 17–1 as the framework of analysis. From Year 3 on, the rate of net consumption in Figure 17–1 is implicitly equal to one-twentieth of the sum of the 1,900 of capital plus the annual 100 of profit received by the businessmen and capitalists. (Expressed relative to capital alone, the rate of net consumption is, of course, one-nineteenth.) If in some year subsequent to Year 3, the government imposes a tax of, say, 50 percent on profit income, the effect will be to make the net-consumption rate apply to 1,950 of capital-plus-its-income rather than to 2,000 of capital-plus-its-income. Thus the amount of net consumption will fall merely from 100 to 97.5—that is, to 1 ⁄ 20 x 1,950. As a result, the far greater part of the tax will fall on productive expenditure and capital, which will both decline by 47.5—that is, by the amount of the excess of net consumption of 97.5 over aftertax profits of 50. Productive expenditure and capital will thus fall from 900 and 1,900 respectively to 852.5 and 1,852.5 respectively. 41
Since the drop in productive expenditure will bring about an equivalent drop in aggregate business costs, i.e., to 852.5 from 900, while aggregate sales revenues remain at 1,000, the further effect will be a rise in pretax profits from 100 to 147.5. If the tax rate remains at 50 percent, the process is not yet complete. This is because taxes will now rise from 50 to 73.75 (50 percent of the profit of 147.5). Net consumption will again fall modestly, while productive expenditure and capital bear the brunt of the still higher tax payments. Equilibrium will be reached only when pretax profits are almost doubled and the aftertax portion of profit becomes high enough to cover the whole of the amount of net consumption dictated by the sum of remaining capital plus the aftertax profit.
Indeed, under the present assumptions, a precise equilibrium will be reached in the conditions of Figure 17–1 only when productive expenditure falls to 809.52, and capital to 1,809.52. At that point, a net-consumption rate of one-twentieth applied to capital-plus-the-aftertax-profit (or, equivalently, a rate of net consumption of one-nineteenth applied to capital alone) results in an aftertax profit of 95.24 and a pretax profit of double that amount, or 190.48. This pretax profit of 190.48 is regenerated in every year by the combined operation of 95.24 of net consumption plus the expenditure of tax proceeds of a further 95.24. Net consumption plus the expenditure of the tax proceeds serve to make sales revenues in every year exceed productive expenditure and thus costs other than taxes by 190.48.
These specific figures are arrived at on the basis that capital in Figure 17–1 equals 1,000 monetary units plus productive expenditure, while, at the same time, in a state of equilibrium, productive expenditure equals 1,000 monetary units of sales revenues minus an amount equal to two times aftertax profit (i.e., the sum of net consumption plus tax payments equal to net consumption), with aftertax profit itself equal to one-twentieth of the sum of capital plus aftertax profit. Thus, where K is capital, B is productive expenditure, and p is profit after tax,
(1) K = 1,000 + B,
(2) B = 1,000 – 2p, and
(3) p = (K+p)/20.
The solution for equation (3) is obvious:
(4) 19p = K.
When 19p is substituted for K in (1), and (2) is substituted for B in (1), the result is
(5) 19p = 1,000 + 1,000 – 2p.
Thus,
(6) 21p = 2000, and, therefore,
(7) p = 95.24.
Thus, the effect of the imposition of a 50 percent tax rate on profits is almost equivalent to that of a doubling of the rate of net consumption. In terms of Figures 16–2 and 17–1, it represents driving the economic system back from the progressive conditions of Figure 17–1 toward the stationary conditions of Figure 16–2. In addition, of
828 CAPITALISM course, in real life, the effect would also be to reduce the demand for labor by business relative to the demand for consumers’ goods.
Obviously, at some point, the taxation of profits becomes capable of stopping economic progress altogether and causing economic retrogression. At every step of the way, it is diametrically opposed to the real self-interests of the wage earners, because it operates totally counter to the rise in real wages.
Insofar as the rise in aggregate pretax profits is at the expense specifically of the demand for capital goods, not only profit but also national income rises. Indeed, the present case is very similar to the operation of the socalled balanced-budget multiplier and is a further illustration of the inverse relationship that prevails under an invariable money between aggregate profits and money national income, on the one side, and economic progress and prosperity, on the other. 42
Insofar as the rise in aggregate pretax profits is at the expense specifically of the demand for labor by business, there is no rise in nominal national income as far as it is generated in business firms. There is merely a displacement of wage payments by tax payments, with the government and those to whom it gives money obtaining funds at the expense of the wage earners. Pretax profits rise simply because the tax payments are not deducted from sales revenues in calculating pretax profits while costs on account of labor, of course, are deducted. As in the case of pretax profits rising at the expense of the demand for capital goods, the rise in pretax profits at the expense of the demand for labor is of absolutely no benefit to business firms. It signifies nothing but that they pay taxes instead of wages. Indeed, in real terms there is almost certainly a loss to business firms—and to the general consuming public, as well—just as there is when taxes rise at the expense of the demand for capital goods. The loss in this case comes about insofar as the government uses the tax proceeds to employ labor and to this extent bids labor away from business firms and thus from the production of goods and services serving the general consuming public. 43
The Influence of the Monetary System
It must be pointed out that the rise in aggregate pretax profits does not depend on aggregate costs falling absolutely, as they ultimately would in an economic system with a fixed quantity of money and a fixed aggregate monetary demand. The rise in aggregate pretax profits also occurs insofar as aggregate costs fall in comparison with what they otherwise would have been. In an economic system with an increasing quantity of money and rising aggregate monetary demand, the effect is that the growth in productive expenditure is less than it otherwise would have been and that productive expenditure comes to stand at any given time at a lower level than it otherwise would have achieved, even if it is able to go on rising. The effect of this, in turn, is that aggregate costs come to stand at a lower level than they would otherwise have reached. Thus, aggregate profit and the average rate of profit, on a pretax basis, are correspondingly increased.
The precise effect of the taxation of profit and interest incomes on the pretax rate of profit depends on the type of monetary system a country has. Under an invariable money or under a fiat money, the effect is clearly a rise, in the ways just explained. Indeed, under a fiat money system, it is almost certain that as a result of its negative effects on capital accumulation and economic progress, a rise in the taxation of profit or interest incomes will be followed by a more rapid rate of increase in the quantity of money and thus by a further, corresponding addition to the rate of profit. This is because the government will be tempted to print money all the more rapidly to the degree that a lesser rate of economic progress—let alone economic stagnation or outright economic retrogression— diminishes the real revenues at its disposal while at the same time increasing the demands made upon it by the public.
Under a commodity money system, on the other hand, reduced capital accumulation and the lesser increases in the ability to produce that it causes result in a reduced rate of increase in the quantity of money in a country. If the reduction in capital accumulation is sufficient to render a country’s economic system stationary or, worse still, retrogressive, the country’s quantity of money will be likely actually to fall, owing to its declining economic status relative to other countries and its correspondingly declining share of the world’s supply of commodity money. (If economic retrogression pervades the world as a whole, the quantity of money will decline owing to a decline in the production of precious metals below the point required for maintenance of the money supply.)
Such effects on the money supply result in a diminution of the monetary component in the rate of profit and could even turn the monetary component negative. Thus, under a commodity money, the taxation of profit and interest income need not result in a rise in the general rate of profit in a country, for the reduction in productive expenditure will be followed by reductions in sales revenues, or, at the least, lesser increases in sales revenues.
Because of the intimate connection between the monetary component of the rate of profit and the net investment component, the reduction or elimination of the former means the reduction or elimination of the latter. 44 Thus, what happens in the case of a commodity money
is that the effect of a tax on profit or interest is to consume funds that otherwise would have represented net investment and to more or less abort the process that would have led to continuing nominal and real net investment. As a result, under a commodity money, profits corresponding to the taxes on profits for the most part merely take the place of profits corresponding to the increase in the quantity of money and corresponding net investment, and to that extent do not succeed in actually raising the pretax rate of profit. This, of course, operates to limit the extent of the damage that taxes on profits and interest are capable of doing, insofar as it takes away the possibility of their being applied to profits and interest which they themselves call into being.
The clear implication of this section is that a principal means of bringing down the present, very high rate of profit and interest is to reduce government spending and abolish the taxation of profit and interest, and all other taxation which falls on saving and productive expenditure. Such a policy would raise productive expenditure, and ultimately costs, relative to sales revenues, thereby diminishing the amount of profit and interest income in the economic system on a pretax basis. It would also result in a rise in the amount of capital invested, both absolutely and relative to sales revenues, consumption, and wage payments. It would be the basis of a rise in the demand for capital goods relative to consumers’ goods, a rise in the demand for labor by business relative to the demand for consumers’ goods, and a rise in the degree of capital intensiveness. It would thus be the foundation for an acceleration of capital accumulation and economic progress, not only from a state of less rapid economic progress to more rapid economic progress, but also, and even more importantly, from a state of economic stagnation or retrogression to one of absolute economic progress. A leading feature of this process, of course, would be more rapidly rising real wages or the resumption of rising real wages.
A policy of abolishing taxes on profit and interest, or at least substantial movement in the direction of such a policy, is clearly urgently called for in the present-day United States, which is on the verge of becoming a stagnant or even retrogressing economic system. Yet it is greatly to be feared that the growing ignorance and envy of the present generation of Americans, and of their elected representatives, will prevent these necessary steps and instead carry the American people into growing poverty, and the United States ultimately into the backwaters of history.
The ignorance and envy of today’s Americans are, of course, themselves to an important extent the product of the overthrow of the gold standard. The overthrow of the gold standard served to break the connection between the rate of profit and the rate of economic progress, and to lead people to regard the high profits created by taxation and inflation as though they signified the rapid enrichment of business firms and their owners at the very time that the general public came to grow rich less rapidly or not at all. Thus the implication of the preceding analysis is no less a reinstitution of the gold standard.
7. How Government Budget Deficits Raise the Rate of Profit
The invariablemoney/net-consumption analysis illustrated in Figures 16–2 and 17–1 makes it possible to understand the effects of persistent government budget deficits on the rate of profit.
Insofar as they are not financed by the creation of new and additional money, budget deficits are financed by the sale of securities in exchange for funds that otherwise would have entered mainly into productive expenditure. 45 As a result, just as in the case of taxes falling on productive expenditure, the demand for capital goods is reduced, and the demand for labor by business firms, and thus the demand for consumers’ goods by the employees of business firms, is reduced. These reductions in the demand for capital goods and in the demand for consumers’ goods by the employees of business are, of course, accompanied by an equivalent increase in the demand for consumers’ goods by the government or by those to whom the government gives money. Thus, once again, just as in the case of taxes falling on productive expenditure, aggregate business sales revenues in the economic system are unchanged.
But, just as in the case of such taxes, while aggregate sales revenues are unchanged, the reduction in productive expenditure works to bring about an equivalent reduction in aggregate business costs that are deducted from sales revenues in computing profits. Therefore, the result once again is that the aggregate amount of profit rises correspondingly. The average rate of profit is raised by virtue both of the rise in the aggregate amount of profit and the reduction in the aggregate amount of capital invested. The difference between the effect of budget deficits on the rate of profit, and of taxes that reduce productive expenditure, is that in the case of budget deficits the rise in the rate of profit is a rise in the net, aftertax rate of profit, not merely in the gross, pretax rate of profit. This is because in this case, there is no rise in tax costs in the economic system to offset the fall in ordinary business costs that results from the fall in productive expenditure.
Of course, just as in the case of a fall in productive expenditure caused by taxation, the decline in productive
830 CAPITALISM expenditure caused by budget deficits is inimical to economic progress, and, if carried far enough, must cause economic retrogression. In a word, the effect is once again that of moving from the progressive conditions described in Figure 17–1, in the direction of the stationary conditions described in Figure 16–2. In both cases—that is, taxes or budget deficits coming at the expense of productive expenditure—the rise in the amount and rate of profit signifies merely that in the context of an invariable money, an inverse relationship exists between aggregate profits and national income on the one side, and economic progress and prosperity on the other. 46
Obviously, all that was said in the preceding section about the urgent need to abolish or at least radically reduce the taxation of profit and interest incomes, and all other taxation falling on saving and productive expenditure, applies to government budget deficits.
The Need to Reduce Government Spending
The vital goal of increasing saving and capital formation through balancing the government’s budget and cutting taxes that fall on saving and productive expenditure can be achieved very simply: namely, by slashing government spending. Such a policy would be consistent with reductions both in taxes falling on saving and productive expenditure and in taxes falling on consumption, and at the same time with a balanced government budget and, indeed, with government budget surpluses. Above all, it would be consistent with preserving and enlarging the freedom of the individual to spend his own income and wealth. The failure to reduce government spending, on the other hand, makes the achievement of greater saving and capital formation either altogether impossible or possible only at the price of sacrificing the freedom of the mass of wage and salary earners to dispose of their own incomes.
It should be clear that reducing taxes without reducing government spending cannot promote saving and capital formation, but must undermine them further, even if the funds no longer claimed by taxes are overwhelmingly saved. For in this case, the government must substitute a dollar of borrowing for a dollar of tax revenues. Each dollar borrowed is a dollar less of savings available for the rest of the economic system. Thus even if a dollar less of taxes results in as much as ninety cents of additional saving, there is a significant net reduction in the supply of savings available for the rest of the economic system. In this instance, while ninety cents of additional saving takes place as the result of tax reductions, a full dollar less of savings is available to business and private consumers as the result of the government’s borrowing, and thus there is a net reduction of ten cents of savings available for every dollar of such tax cuts based on increases in the government’s deficit.
Tax cuts to promote saving and capital formation which are financed by deficit increases are thus simply contrary to purpose. The fact that they are contrary to purpose remains if, instead of being financed by borrowing, the resulting deficits are financed by the more rapid creation of money. In this case, all of the destructive effects inflation has on capital formation come into play, which effects I will show in Chapter 19. 47
By the same token, balancing the budget by means of raising taxes is destructive of saving and capital formation to the degree that the additional taxes fall on saving and productive expenditure. Ironically, it is precisely taxes that fall heavily on saving and productive expenditure that today’s advocates of balancing the budget through tax increases favor. The taxes they wish to increase are precisely those which land on corporations and the socalled rich. The only way that these advocates of balanced budgets through tax increases could proceed consistently with the goal of capital formation would be by increasing the taxes of the very people they claim to favor, namely, the poor and the mass of wage and salary earners, who save relatively little. Indeed, the only way that greater saving and capital formation is possible in the absence of decreases in government spending, is by means not only of increasing such taxes to the point of balancing the budget, but also increasing them still further, to compensate for decreases in the kind of taxes that land more heavily on saving and productive expenditure. In essence, if one advocates greater saving and capital formation and yet refuses to support reductions in government spending, one is logically obliged to advocate increasing the taxes of wage and salary earners and of the “poor” in order both to balance the budget and to compensate for reductions in taxes on profits and interest and on the “rich.”
But there is absolutely no reason to advocate such a downright fascistic policy. 48 Instead of sacrificing anyone to anyone, the simple, obvious solution is sharply to reduce the sacrificing that is already going on—namely, sharply to reduce and ultimately altogether eliminate pressure-group plundering and the government spending that finances it at the sacrifice of everyone. 49
The preceding analysis makes clear that an essential flaw of socalled supply-side economics—the policy of the Reagan administration—was its failure to face up to the need to reduce government spending. While the administration’s program of tax reductions—in particular the reduction of the maximum rate of personal income tax on profit and interest income from 70 percent to 28 percent—was courageous and praiseworthy in the extreme, most of the potential benefit of the tax cuts was
lost through the corresponding enlargement of federal budget deficits. Regrettably, the administration and its supporters lacked the further courage required to abolish government spending programs to make those tax cuts possible without deficits.
The Government’s Responsibility for the Emphasis of Today’s Businessmen on ShortTerm Results
Among the virtually endless criticisms of business is one of relatively recent origin, namely, that American businessmen are unduly concerned with short-run results, in contrast to the businessmen of such countries as Japan, who, it is claimed, attach much greater importance to longrun results.
There is an important measure of truth in this accusation. American businessmen of the present generation are much more concerned with shortterm results than the businessmen of such countries as Japan and, indeed, than American businessmen of previous generations. But the reason for this situation is not, as is apparently believed, some intellectual or moral deficiency on the part of contemporary American businessmen. Totally apart from any such deficiency, which the climate of massive government interference and all of its accompanying subsidies, regulations, and associated influence peddling might well in fact foster, there is a profoundly important, objective difference between the economy of the present-day United States and that of contemporary Japan and of the United States of the past—a difference emanating from the same quarter. This is the difference in the magnitude of the government’s assault on saving and productive expenditure and the consequent artificial elevation of the rate of profit and interest.
Because of anticapitalistic tax policies, compounded by major government budget deficits and decades of inflation, American businessmen have been placed in a situation in which they must evaluate all investment projects in the light of the need to earn a pretax rate of return of 12 to 15 percent or more, in order to be competitive. This means that any possible greater earnings that might be achieved in the long run stand at a correspondingly steep discount in comparison with earnings that can be obtained in the short run. In order, for example, for earnings which come in 5 years later to outweigh lesser earnings in the present, those earnings must be greater in a magnitude of 12-to 15-or-more-percent compounded over that 5 year period of delay—i.e., they must be greater by 76 to 101 percent or more (1.12 5 = 1.76, and 1.15 5 = 2.01). In contrast, in contemporary Japan and in the United States of the past, businessmen are or were in a position to evaluate investment projects in the light of the need to earn perhaps merely a 5 or 6 percent rate of return or less. The significance of this is exemplified by the fact that in these conditions, in order for greater earnings 5 years later to outweigh earnings in the current year, they need only be greater by 28 to 34 percent (1.05 5 = 1.28 and 1.06 5 = 1.34). It is certainly much easier to be concerned with the long run under the latter state of affairs than under the former.
The responsibility for today’s inordinate rate of profit and interest in the United States is squarely that of the U.S. government. At a deeper level, it is the responsibility of the pressure groups and the demagogues who are responsible for the government’s pursuit of anticapitalistic policies. Above all, at a deeper level still, it is the responsibility of the last several generations of intellectuals who, corrupted by the philosophy of irrationalism, altruism, and collectivism, have polluted the intellectual environment of the country to the point where there is little or no serious opposition to the activities of the pressure groups and the demagogues. Responsibility does not lie at the end of the line, in the hands of businessmen, who did not create the political-cultural environment in which they now must operate and who do not deserve this further vituperation from the intellectuals at what is in fact a consequence of their—the intellectuals—own, utterly destructive philosophy. It is perfectly consistent, however, that those who destroy, whether through ignorance or viciousness, should blame innocent victims for the consequences of their actions.
8. Profits, the Balance of Trade, and the Need for Laissez Faire in the United States
The previous section has shown that government budget deficits financed by the diversion of savings from productive expenditure to the government’s consumption operate to reduce aggregate business costs to an equivalent extent—while leaving aggregate business sales revenues unchanged—and thus to raise the amount of profit in the economic system to an equivalent extent. So long as the outside world does not view the country concerned as firmly on the road to ruin, the resulting rise in its rate of profit acts as an attraction to foreign investment. This foreign investment alleviates the destructive effect of the budget deficits on domestic capital formation. At the same time, the excess of imports over exports that constitutes the foreign investment, operates to scale back the rise in the amount and rate of profit caused by the budget deficits and to spread that rise over the economic system of the countries that export on net balance to the country with the budget deficits. 50
These results can be made plain by mentally placing Figures 16–2 and 17–1 side by side. Figure 16–2, which should be imagined to be on the right, can be taken as representing the economy of the present-day United
States—with its placement on the right indicating the relative location of the United States on a map of the Pacific rim. Figure 17–1, on the left, can be taken as representing the economy of present-day Japan, and the relative location of that country on a map of the same region. The economy of the United States is characterized by Figure 16–2 because in the United States an annual budget deficit of 100 monetary units is responsible for a reduction of productive expenditure and costs by 100 monetary units in comparison with what they would otherwise have been, while sales revenues remain 1,000 monetary units. Thus, the budget deficit is responsible for productive expenditure and costs being only 800 in the United States, while they are 900 in Japan, and thus for a correspondingly higher amount and rate of profit in the United States than in Japan. At the same time, the budget deficits are responsible for the relative demand for and production of capital goods being less in the United States than in Japan, and thus for the economy of the United States stagnating while that of Japan rapidly progresses. (In reality, of course, other major factors are also at work causing economic stagnation in the United States and economic progress in Japan, but we ignore them for the sake of simplicity.)
Now imagine that in a given year some part of the output of the Japanese economy of Figure 17–1 is loaded onto ships and sent over to the U.S. economy of Figure 16–2. For example, one can imagine that in Year 3, say, 5 percent of the output of the Japanese economy is exported to the United States. (For the sake of simplicity, one can assume that there are no imports into Japan from the United States.)
The effect of this movement of goods is that the supply of goods in Japan in Year 3 is reduced from 1.44K + .96C to 1.368K + .912C, while the supply in the United States is equivalently increased, from 1K + 1C to 1.072K + 1.048C. (These figures reflect the fact that 5 percent of 1.44K is .072K, while 5 percent of .96C is .048C.) What is significant for the rate of profit is that while aggregate sales revenues in both countries remain at 1,000 monetary units each, with each monetary unit in Japan representing so many yen, and each monetary unit in the United States representing so many dollars, the aggregate cost value of the goods remaining for sale in Japan is reduced by 5 percent, while the aggregate cost value of the goods available for sale in the United States is equivalently increased.
Instead of there being 1.44K of capital goods at a cost value of 540, and .96C of consumers’ goods at a cost value of 360, for sale inside Japan for 1,000 of sales revenues, there are now only 1.368K of capital goods at a cost value of 513, and .912C of consumers’ goods at cost value of 342. (These cost values result from the fact that 95 percent of 540 is 513, and 95 percent of 360 is 342.) Thus, in Japan, aggregate costs are reduced by the cost value of the goods exported, namely, by 27 plus 18, and aggregate profits, therefore, are increased equivalently, viz., from 100 to 145.
On the simplifying assumption that the dollar and the yen are freely convertible into one another at the exchange rate of 1 monetary unit for 1 monetary unit, it would follow that aggregate profits in the United States would be reduced from 200 to 155 in Year 3, owing to the sale of 1.072K of capital goods with a cost value of 427, and 1.048C of consumers’ goods with a cost value of 418—that is, reduced by exactly the same amount as aggregate profits in Japan are increased. The principle would be present that the cost value of the goods exported/imported represented an equivalent rise in the aggregate profits of the exporting country and an equivalent fall in the aggregate profits of the importing country. This would be because in the one case—that of the exporting country—the cost value of the goods in question would be subtracted from the costs deducted from the same sales revenues, while in the other—that of the importing country—it would be added to the costs deducted from the same sales revenues.
In reality, foreign investment will not cause an immediate addition to profits in the exporting country, and an immediate reduction in profits in the importing country, equivalent to the cost value of the goods exported/imported. Rather it will cause less net investment in the exporting country and more net investment in the importing country. However, it is still the case that foreign investment does serve to make the costs deducted from sales revenues in the importing country greater, and those in the exporting country less, if not all at once, then over time, and thus the effect is still a rise in the amount and rate of profit in the exporting country and a fall in the amount and rate of profit in the importing country. Sooner or later, the repeated export of goods means a corresponding reduction in aggregate costs and rise in profits in the exporting country, while the repeated import of goods means a corresponding rise in the aggregate costs and fall in the aggregate profits of the importing country.
It should be obvious that the fact that both countries export as well as import does not change anything of significance. The results I have described hinge on net exports/imports.
Thus, the unmistakable conclusion to be drawn is that the American trade imbalance with Japan serves to deflect part of the destructive consequences of American budget deficits to Japan. In effect, it helps to replace some of the productive expenditure lost in this country as the result of government budget deficits, with the benefit of part of Japan’s productive expenditure. In the process, it
diminishes the increase in the rate of profit in the United States that would otherwise result from the American government’s budget deficits and transmits part of the elevated rate of profit of this country to Japan—and, of course, to all other countries that on net balance export to the United States. Thus, it serves to spread over the economic system of all trading nations the fall in productive expenditure and rise in the amount and rate of profit caused by government budget deficits in the United States.
The increase in the pretax rate of profit in the United States (or any other country) caused by the taxation of profits and interest, also serves to attract foreign investment and thus to cause an “unfavorable” balance of trade. This is the case to the extent that foreign suppliers are able to translate the higher pretax rate of profit into a higher aftertax rate of profit. This can occur by such means as foreign investors concealing part of their profits through overstating the cost of supplies they bring in from abroad.
The preceding discussion in this section did not go into the influence of differences in the rate of capital formation on the balance of trade. But it should be recalled from previous chapters that a rate of capital accumulation and economic progress that is below the world average implies that the economy of a country will constitute a declining proportion of the world’s economy as time goes on, while, of course, the reverse is true of an economy with a rate of capital accumulation and economic progress that is above the world average. Of two such opposite economies, the latter will come to possess a growing proportion of the world’s money supply while the former will come to possess a declining proportion of the world’s money supply. 51 This process too entails a socalled favorable balance of trade in the one, and a socalled unfavorable balance of trade in the other, insofar as both countries use the same money and movements in the supply of money between them take place in conjunction with the purchase and sale of commodities. 52
If one recognizes that the fundamental cause of America’s trade imbalance with Japan is the higher rate of profit prevailing in the United States, which the trade imbalance operates to diminish, and the closely related slower rate of capital formation and economic progress in the United States, which the trade imbalance also helps to alleviate, then it follows that what will reduce or even eliminate the trade imbalance is a fall in the rate of profit in the United States, which would be accompanied by a higher rate of domestic capital formation.
If, in addition, one recalls the discussions of the two immediately preceding sections of this chapter, then it becomes clear that what would accomplish a fall in the rate of profit in the United States and a higher rate of capital formation would be precisely the balancing of the U.S. government’s budget and the radical reduction of taxes that fall on saving and capital formation. Better still, it would be the achievement of budget surpluses, accompanied by the total abolition of such taxes, above all, the corporate income tax, the progressive personal income tax, the inheritance tax, and the capital gains tax. The social security system and its diversion of hundreds of billions of dollars of savings into government consumption would also have to be phased out in favor of private saving supporting actual investment. 53 What all this requires, of course, is the abolition of the welfare state and the radical reduction of government spending in the United States.
Unless and until such measures are adopted, the United States as a whole will be in a position analogous to that of an individual capitalist who consumes at a rate above the net-consumption rate and whose relative wealth and income steadily declines in favor of others who consume at a rate below the net-consumption rate. 54 In order for the United States to retain its international position and not ultimately be relegated to the ranks of second-and third-rate nations, it is vital that its net-consumption rate fall to a point at least approximating that of Japan and the other rapidly progressing countries of East Asia. (As used in the present context, the net-consumption rate is to be understood as incorporating all elements that serve to elevate business sales revenues above productive expenditure. This includes all government consumption that is financed by means of funds obtained at the expense of productive expenditure, whether through taxes or through budget deficits. Such consumption takes place at the expense of a diminution of productive expenditure and at the same time maintains business sales revenues, thereby enlarging the magnitude of difference.) Only to the extent that the relative efficiency of the United States in using existing capital goods was greater than that of Japan and the other rapidly progressing economies of East Asia, could it afford to have a higher such net-consumption rate than they. Today, however, the United States probably substantially lags behind Japan and the others on this score too.
But the solution for both aspects of the problem is essentially the same: It is the radical reduction of government intervention in the economic system. 55 It is the coming home of the United States to full-bodied capitalism. It is the establishment of laissez-faire capitalism. 56 If this course is not pursued, then not only will the United States decline relatively, but it may also decline absolutely. The factors working to choke off economic prog—
ress by no means automatically stop at the point of stagnation. They easily go further and result in economic retrogression.
As indicated, the only alternative to laissez-faire capitalism that might be compatible with economic progress for a time is the utterly vicious one of a fascistic-style tax system that would place all or almost all of the enormous tax burden created by the welfare state on the consumption of the ordinary citizens, thereby lifting the burden that now falls on saving and capital accumulation. 57 This burden, of course, would have to be the greater, the more government intervention reduces the efficiency of the economic system in using existing capital goods. For this requires the existence of a greater relative production of capital goods and higher degree of capital intensiveness in order to achieve any given rate of economic progress. Government intervention for the purpose of actually achieving capital accumulation—notably, taxation for that purpose—would mean collecting taxes from the ordinary citizens as a source of capital, which capital would itself be used inefficiently and thus require still more such taxation. Capital accumulation under such conditions would have important features in common with attempted capital accumulation under communism. 58 It is an absurd and vicious method of capital accumulation.
At the very best, the enormous burden of taxation that must fall on the average person under the welfare state, in order for it to have capital accumulation and economic progress, means giving to people the very dubious and largely fictional benefits of the welfare state at the expense of much greater benefits they could have had without the welfare state and with the freedom to spend their own incomes as they wished. As shown throughout this book, people can have incomparably more and better education, medical care, and retirement security without the welfare state than with it, and in a measure that grows progressively greater the longer the period of time in which economic freedom exists rather than a welfare state.
Furthermore, such capital accumulation and economic progress as might be enjoyed under a welfare state are possible only if the welfare state remains stable, in the sense of not continually claiming a greater proportion of people’s incomes, and only if no new government intervention adds further disabilities to the efficiency of production. But if the principle of economic freedom is abandoned and that of government intervention and the welfare state put in its place, it is impossible to assume that such stability would exist. More than likely, growing government intervention and a growing welfare state would deprive the masses of people of most or all of the benefit of the capital accumulation that took place. At the same time, a growing disparity between their relatively stagnant conditions and the improving conditions of a small upper class of businessmen and capitalists and individuals prominent in such fields as the performing arts and professional sports, would fuel growing envy, and thus ultimately lead to the imposition or reimposition of a system of taxation and government finance that was incompatible with economic progress, period. Thus, laissez-faire capitalism—acceptance of the principle of laissez-faire capitalism—is essential to economic progress in the long run. It is the only system in which economic progress is possible without the exploitation of the socalled common man.
9. Implications for the Theory of Saving
Previous discussion in Chapter 16 has shown that in the conditions of an invariable money, net investment tends to disappear, leaving net consumption as the sole determinant of the amount and rate of profit. 59 A corollary of that discussion is that under an invariable money, saving out of money income likewise tends to disappear.
Net Saving and Increases in the Quantity of Money
Under an invariable money, the constancy of the quantity of money and volume of spending implies a constancy of aggregate money income. As we have already seen, it follows that under these conditions, saving out of income not only adds to the amount of accumulated savings and capital, but also signifies a rise in the ratio of accumulated savings and capital to income. 60 Yet as savings and capital accumulate relative to income, the need and desire of people to increase their savings and capital still further relative to their income diminishes, while their desire to consume their income increases. This is because the future is becoming progressively better and better provided for relative to the present by virtue of such saving and capital accumulation. As the desired ratio of provision for the future relative to the present is approached, the growth in the magnitude of accumulated savings and capital relative to income operates to increase the proportion of income that is consumed. 61 This means that at some point under an invariable money, having achieved a sufficient ratio of accumulated savings and capital to income, and thereby having made sufficient provision for the future relative to the present, people stop adding to their savings and capital and consume their full nominal income.
Thus, in an economic system with an invariable money, an equilibrium is ultimately reached, in which saving out of money income and net investment in terms of money both disappear. It is an equilibrium in which the economic system ceases to grow more capital intensive
in the relative-value sense—i.e., in the sense of the ratio of accumulated savings and capital to income—and in which all money income is consumed. 62
Of course, in such an economic system, many individuals go on saving. For example, young people starting out in life must accumulate savings. But their saving is balanced by the dissaving of others, such as old people living in retirement, or people out of work because of illness or accident. In the system as a whole, there is no net saving in terms of money. Capital accumulation and economic progress in such circumstances take place exclusively in the form of falling prices.
The implication of the fact that saving out of money income tends to disappear in the conditions of an invariable money, is that the existence of saving out of money income, as a permanent phenomenon, is the result of the continual increase in the quantity of money. Indeed, the increase in the quantity of money operates continually to raise money incomes and thus to make necessary a continual increase in the absolute magnitude of accumulated savings and capital if any given ratio of accumulated savings and capital to money income in the economic system is to be maintained. Saving out of money income is necessary to provide the required increase in the magnitude of accumulated savings and capital in these circumstances.
For example, if people desire on average to maintain some given ratio of accumulated savings to current income, such as 3:1 or 4:1, and the increase in the quantity of money makes current nominal incomes rise by 2 or 3 percent per year, then it is necessary for total accumulated savings also to increase by 2 or 3 percent a year, or whatever the figure might be, in order to maintain the same ratio of accumulated savings to current income. This in turn implies a definite ratio of nominal net saving to current income. In the present examples, saving as a percentage of nominal net income must range from 6 percent to 12 percent, as the condition of accumulated savings continuing to bear the same ratio to nominal net income. This is because if a magnitude that is 3 times current income is to grow by 2 percent, the amount of its increase is 6 percent of current income. By the same token, if a magnitude that is 4 times current income is to grow by 3 percent, the amount of its increase is 12 percent of current income.
Thus saving as a percentage of current income appears as the product of the rate of increase in the quantity of money—and thus in nominal incomes—times the ratio of accumulated savings to current income that people wish to maintain on average. If there were no increase in the quantity of money and thus no increase in nominal net incomes, there would be no need for an increase in accumulated savings once the desired ratio of accumulated savings to current income was achieved. Given an increase in the quantity of money and nominal net incomes, the need for additional accumulated nominal savings is the greater, the higher is the ratio of accumulated savings relative to current income that people wish to maintain. 63
Failing the increase in accumulated savings in a context in which an increase in the quantity of money and volume of spending continually raise money incomes, the effect would be a progressive fall in the degree of capital intensiveness in the economic system. For example, starting with an aggregate money income of 500, and 1,500 of accumulated capital, and thus a capital-net-output ratio of 3:1, a 2 percent annual increase in money income and no additions to accumulated savings would imply that in 35 years, when money income had doubled, the capital-net-output ratio would be halved. The capital-net-output ratio can be maintained at 3:1, only if over the course of this period of time there is saving out of income sufficient to increase accumulated capital to 3,000. Thus, in the context of an increasing quantity of money and rising volume of spending, continual net saving is necessary not to increase, but to maintain the degree of capital intensiveness.
Why the Actual Significance of Saving
Lies at the Gross Level
The realization that saving out of money income tends to disappear in an economic system with an invariable money makes it possible to understand much more fully than would otherwise be the case precisely what role saving plays in relation to capital formation—viz., to the increase or decrease in the supply of capital goods. The disappearance of saving out of money income in an economy with an invariable money does not mean the disappearance of capital accumulation. The supply of capital goods can go on increasing. In such circumstances the increase in the supply of capital goods results in falling prices of capital goods, just as the increase in the supply of consumers’ goods results in falling prices of consumers’ goods. Each year, in these circumstances, the depreciation quotas recovered from previous investments are able to buy a larger supply of capital goods than the year before. Each year, the funds recovered in the sale of inventories make possible more than the mere replacement of those inventories. In other words, the same productive expenditure for capital goods buys a growing supply of capital goods at falling prices of capital goods. This, of course, is exactly what happens in Figure 17–1, which shows the demand for capital goods constant at 600 monetary units in every year from Year 2 on, while capital accumulation and economic progress continue at a rapid rate.
In such an economic system, the real connection between saving and capital formation becomes clear. The relationship is not one between saving out of money income and capital formation—it is not between net saving and capital formation. Rather it is between gross saving—mainly saving out of business sales revenues— and capital formation. (Gross saving also includes saving out of net income, when such saving exists. However, saving out of sales revenues and gross saving become synonymous in an economy with an invariable money, because of the disappearance of saving out of net income.)
As demonstrated repeatedly in this book, saving out of business sales revenues determines the demand for capital goods relative to the demand for consumers’ goods. It thus determines the relative production of capital goods and in this way the rate of capital accumulation. This vital aspect of saving, namely, determining the relative production of capital goods, is what is clearly revealed under the conditions of an invariable money. As far as saving goes, this aspect is what is decisive in determining the rate of capital accumulation. And while saving out of net income can certainly enter into determining the relative production of capital goods, saving out of sales revenues is capable of discharging that function strictly by itself, when the conditions of an invariable money make it necessary—that is, it does so without the existence of net saving in terms of money income.
Furthermore, as I have repeatedly shown, saving out of sales revenues is also the essential determinant of the demand for labor. The greater is saving out of sales revenues relative to the sales revenues, the higher tends to be both the demand for capital goods and the demand for labor, relative to the demand for consumers’ goods, and thus the higher and more rapidly rising the level of real wages. Saving out of sales revenues, in other words, is the essential determinant of what I have characterized as the economic degree of capitalism. 64 Again, saving out of net income can make a contribution, but the essential aspect of the role of saving is independent of the phenomenon of net saving, which is essentially to say that it is independent of the increase in the quantity of money.
A closely related aspect of the relationship between saving and capital formation that stands clearly revealed in the conditions of an invariable money, is precisely that between the ratio of accumulated savings and capital to such magnitudes as consumption and income, on the one side, and capital formation, on the other. As previously explained, the higher are such ratios, the more capital intensive is the economic system and the greater its ability to implement technological advances, which technological advances result in an increase in the supply not only of consumers’ goods but also of capital goods. 65 Insofar as net saving signifies a rise in these ratios, it again signifies an acceleration in the rate of capital accumulation and economic progress—precisely because of its implication of a greater ability to implement technological advances.
Thus, the true significance of saving that is revealed in the conditions of an invariable money is that gross saving determines the relative production of capital goods along with the demand for labor relative to the demand for consumers’ goods, and in these ways the height and direction of real wages. And, as an accumulated amount relative to current income, savings determine the degree of capital intensiveness of the economic system and thereby the ability to adopt technological advances and achieve capital accumulation and economic progress. The role of net saving, which in the long run reflects nothing more than the continual increase in the quantity of money, is entirely subsidiary.
It should be realized that the appearance of a direct, one-to-one relationship between net saving and capital accumulation, which is created by the increase in the quantity of money, serves both to conceal the role of saving in capital accumulation in one respect, and grossly to exaggerate it in another respect. On the one hand, it conceals the fact that in determining the relative demand for and production of capital goods, gross saving—when accompanied by technological progress—operates as force to acceleration in the accumulation of capital goods. 66 On the other hand, in creating the appearance that for every accumulation of capital, corresponding net saving must occur, it supports the belief that saving by itself is the source of capital accumulation. In this way, it serves to reinforce all the errors stemming from the fallacy that the production of consumers’ goods constitutes production in its entirety and that the causes of capital accumulation have no essential connection with the causes that increase production in general, such as technological progress and economic freedom. 67
Net Saving and the Rate of Profit
In view of the widespread influence of the doctrine that saving (net saving) reduces the rate of profit, it is important to integrate two of the major propositions that have now been established in this chapter or the last one. Namely, that the existence of net saving as a permanent phenomenon is the result of the increase in the quantity of money and volume of spending, and that that same increase in the quantity of money and volume of spending adds a corresponding positive component to the rate of profit. It follows from these propositions that the net saving which takes place as a regular, continuing phe—
nomenon in the economic system is the accompaniment of a rate of profit which is not only not reduced by virtue of its existence, but in fact is elevated by virtue of the same cause that underlies its existence. Thus, insofar as net saving goes on for the most part, it is accompanied by a rate of profit that is higher, not lower, than would exist in its absence. Indeed, precisely the elevated rate of profit is the source of most of the net saving.
10. More on Saving and “Hoarding”: “Hoarding” as a LongRun Cause of a Rise in the Rate of Profit
The fear of saving is perhaps even more widespread than the fear of production. I have already refuted one leading root of this fear, namely, the confusion of an increase in saving with an increase in the demand for money for cash holding. 68 Here it is necessary to add to that critique the observation that to the extent that people do desire to make provision for the future in the form of cash holding rather than in the form of business investment, the longrun effect, contrary to popular belief, is not to reduce, but to increase the rate of profit.
This is because insofar as net consumption takes place in proportion to accumulated savings in the form of cash holdings, a rise in the ratio of cash holdings in the economic system to capital in forms other than cash holdings means a rise in the ratio of net consumption, hence profit, to capital in forms other than cash. For example, if people wished to hold fully half of their accumulated savings in the form of cash and only half in the form of capital invested in assets other than cash, a net-consumption rate of 2 percent would generate an amount of profit equal to 4 percent of the capital invested in assets other than cash. 69 In the most extreme case imaginable, in which all provision for the future took place in the form of cash holding, the rate of profit would be infinite, for there would be a demand for consumers’ goods, hence, the existence of sales revenues, but neither productive expenditure, costs of production, nor capital. The effect on the rate of profit would thus be the same as if people made no provision for the future.
“Cash hoarding” operates to reduce the rate of profit only in the short-run, insofar as it represents an increase in the demand for money for holding above its previous level and thereby brings about a decrease in the volume of spending and sales revenues. Here the result is to reduce net investment and, indeed, even to turn it negative. However, once the demand for money for holding stops increasing and stabilizes at the higher level, and the economic system becomes adjusted to the accompanying lower level of spending—viz., once costs deducted from sales revenues fall to equality with the lower level of productive expenditure—then the effect of the rise in the ratio of net consumption to capital other than cash is felt and the rate of profit rises. In other words, the negative effect of cash hoarding on the rate of profit is purely transitory. The longrun effect is to increase the rate of profit.
Implications for the Critique of Keynesianism
That cash hoarding does serve in the longrun to raise the rate of profit provides an answer to the pretended fear of the Keynesians that in a free economy the rate of profit will be too low to make investment worthwhile and will thus lead to a limitless rise in “liquidity preference”— viz., cash hoarding. 70 The answer is that if the rate of profit ever were too low to make investment worthwhile and thus did result in cash hoarding, the effect of such cash hoarding, as we have just seen, would be to restore the rate of profit to a point high enough to make investment worthwhile.
The point I have just made in criticism of the Keynesians bears a mild resemblance to the socalled Pigou effect propounded by the neo-Keynesians, a resemblance which, frankly, embarrasses me, inasmuch as I consider the “Pigou effect” to be extremely weak as a criticism of Keynes. 71 The similarity is simply that both my criticism and the Pigou effect recognize a connection between consumption and accumulated savings in the form of cash holdings and that the existence of this connection has negative implications for essential doctrines of Keynes. The difference is that while the Pigou effect claims merely that because of this connection, consumption expenditure will not fall in full proportion to a fall in wages and prices and thus that at some point a fall in wages and prices is capable of leading to full employment, my criticism here is that every increase in the relative significance of cash holdings operates directly to raise the rate of profit and thus to eliminate the central stumbling block to full employment claimed by the Keynesians, namely, the allegedly too-low rate of profit. However, as I show in Chapter 18, there are other forces operating far more directly and powerfully to raise the rate of profit when wage rates and prices fall, so that it is not at all necessary that the influence of greater relative cash holdings ever come into play. And in fact it would not, since recovery from a depression and the restoration of the rate of profit that is part of that recovery are accompanied by a reduced demand for money for holding, not an increased demand.
Indeed, contrary to the Keynesians, the truth is that apart from some shortterm, relatively inconsequential funds that might be held as cash rather than lent out, as the result of a lower rate of profit, the rate of profit in a free economy can never be too low to make investment worthwhile, even in the conditions of an invariable money.
This is because in a free economy, the average rate of profit and interest must always be significantly positive, for in such an economy there is no government intervention in money and banking, thus no inflation or credit expansion, and thus no financial contractions or depressions. 72
As we have seen, in the absence of inflation and credit expansion and thus of financial contraction and deflation, a positive rate of profit and interest is guaranteed by virtue of the operation of net consumption and net investment. Even if the saving of wage earners temporarily made net consumption negative, net investment and the consequent accumulation of capital and savings would take place to the point of sufficiently enlarging capital and accumulated savings relative to current income, to render net consumption positive once again. 73 The positive rate of profit that net consumption and net investment guarantee means that investment must be worthwhile. 74 In an economy with a commodity money, which is what any freemarket economy would be, and in which, therefore, the rate of profit contains a significant monetary component, the impossibility of the rate of profit being too low to make investment worthwhile is doubly strong.
11. Critique of the Investment-Opportunity and Underconsumption/Oversaving Doctrines
Following the confusion of saving with cash hoarding, the second and third grounds for the fear of saving can be termed respectively the doctrine of lack of investment opportunity and the doctrine of underconsumption or, equivalently, oversaving. These two doctrines are similar in that both fear saving as bringing about the existence of capital or capital goods without profitable uses for them.
The investment-opportunity doctrine holds that the rate of profit and interest is determined by the supply of and demand for “capital,” which last it understands interchangeably as a sum of monetary value and a supply of physical capital goods. It views net saving as the source of all additional capital and, in the face of a given demand for capital, as driving down the rate of profit, just as a larger supply of any good, in the face of a given demand for it, drives down its price. Specifically, a growing supply of capital is supposed to encroach more and more on the allegedly limited opportunities that exist for the profitable investment of capital. These opportunities allegedly reflect the net physical productivity of capital and become progressively less rewarding as the supply of capital is increased, because of the operation of the law of diminishing returns. 75 The investment-opportunity doctrine regards technological progress as essential for creating new and additional investment opportunities and thereby raising the demand for capital in the face of the increasing supply of capital provided by saving. It fears that in the absence of technological progress or sufficient technological progress, the supply of capital and capital goods will increasingly use up the limited profitable opportunities for investment and thereby drive the rate of profit toward zero. Only technological progress, it maintains, can prevent this from happening and keep up the rate of profit. Technological progress, it holds, is valuable because it creates a new and additional demand for capital to keep pace with the new and additional supply generated by saving, and thus operates to prevent the rate of profit from steadily falling.
The investment-opportunity doctrine obviously derives from the productivity theory of profit and interest, which I refuted in the last chapter. 76 It is utterly confused and mistaken in virtually every respect, not the least of which is its failure to see that the rate of profit is not determined by demand and supply but, above all, by the difference between the demand for products and the demand for factors of production—that is, by net consumption—specifically, by the rate borne by net consumption to the total of capital invested. 77
I have already substantially refuted the investment-opportunity doctrine in my critique of consumptionism, in Chapter 13. 78 Here it is only necessary more or less to summarize that critique and name a few additional points of criticism implied by the further knowledge provided in the intervening pages of this book.
As I have shown, the investment-opportunity doctrine’s fear of an accumulation of capital goods in the face of the absence of technological progress, or of insufficient technological progress, is absurd. Without technological progress, there can be no significant capital accumulation. Moreover, as I showed, the investment-opportunity doctrine is unaware that within the framework of any existing state of technology the need for capital goods always enormously surpasses the supply of capital goods actually available or that can be made available. The need for capital goods encompasses the need for all the capital goods required to make possible the production of the best-known models of all consumers’ goods, including the most expensive and luxurious—to the point of sating the desire for those consumers’ goods. It encompasses the need for all the capital goods required directly or indirectly in the production of any consumers’ good— at any stage, however remote—to make possible its production by means of the most capital-intensive methods of production that are capable of achieving any reduction in cost or improvement in quality whatever. Until that point is reached—which it never will be— capital goods are scarce. The investment-opportunity
doctrine does not see that the real need for technological progress is to provide capital goods, not uses for capital goods—that is, to provide the goods that are physically to be invested, not opportunities for investment.
The doctrine is utterly confused in the role it assigns technological progress, namely, as a source of greater “demand for capital” and thus of a rise in the rate of profit, when in fact technological progress is the source of a greater supply of capital goods and thus of a fall in the prices of capital goods. Along with the fall in the prices of capital goods, as we know, technological progress is the source of a rise in the productivity of labor and thus of a fall in labor costs per unit. As a result of these facts, technological progress is responsible for a reduction in unit costs of production as well as being responsible for falling product prices. 79 As a further result, it is responsible for the falling prices of consumers’ goods that it causes not being the cause of a fall in the rate of profit or of “deflation,” which is the belief of the supporters of the investment-opportunity doctrine—in direct contradiction of their belief that technological progress is the cause of a higher rate of profit by virtue of its alleged contribution to the demand for capital.
As we have seen, technological progress simply has no connection with the average rate of profit in the economic system, apart from the contribution it makes to increasing the supply of commodity money. The rate of profit is governed entirely by the rate of net consumption and the rate of net investment, with the influence of the rate of increase in the quantity of money and volume of spending manifested almost entirely through the rate of net investment.
Ironically, to the extent that technological progress does contribute to raising the average rate of profit— through its effect on the supply of commodity money—it does so precisely in conjunction with its responsibility for the existence of net investment and net saving in terms of money. As already explained, both of these phenomena, insofar as they are permanent, are the result of the increase in the quantity of money and volume of spending. Thus, technological progress, which is supposed to be the source of a greater demand for capital that is allegedly necessary to solve the problem of an increasing supply of capital and capital goods provided by saving, is in fact the source not only of the additional supply of physical capital goods, but also—under a commodity-money system—of the additional savings and capital that are available in monetary terms. And, as we know, these additional savings and capital in monetary terms are accompanied by corresponding additions to the amount and rate of profit, rather than by any necessity of a fall in the rate of profit. The additions to the amount and rate of profit are part of exactly the same process— namely, the effects produced by the increase in the quantity of money and volume of spending—that is responsible for the additional savings and capital in monetary terms. In this process, it is the additional net investment that is caused that provides the additional profitability, not any alleged increase in the “demand for capital” that technological progress is supposed to cause.
The reason the investment-opportunity doctrine is unaware of the profound, ineradicable scarcity of capital goods, is that it mistakenly believes, in essence, that the only use for additional capital goods is in the form of more and better machinery used to produce consumers’ goods. Thus it largely does not understand what can physically be done with an additional supply of capital goods if it becomes available. At the same time, as we know, it believes—in ignorance and contradiction of everything said above—that saving, unaided by technological progress, is potentially capable of providing practically unlimited supplies of additional capital goods. It is on the basis of these beliefs that it comes to the conclusion that a danger exists of technological progress not providing sufficient possibility of using additional capital goods at the very time that saving is generating a flood of capital goods, and thus that there is simply no good use to which the additional capital goods can be put. Given its confusion between increases in the supply of capital goods, which in fact reduce the prices of capital goods and thus help to reduce costs of production, and increases in the supply of “capital,” which allegedly reduce the rate of profit, the consequence of these beliefs is the doctrine of “secular stagnation.” This last, as we have seen, claims that in the absence of sufficient technological progress, saving causes depressions by virtue of bringing about too low a rate of profit to make investment worthwhile. 80
In addition to its ignorance of the vital role of technological progress as a source of capital accumulation, and of the virtually limitless need for additional capital goods within the context of the existing state of technology, the investment-opportunity doctrine, as we know, is totally unaware of the limitations of saving as a source of capital accumulation. It does not realize how limited is saving at all times, because of the operation of time preference. Nor, of course, does it see how limited would be the ability to accumulate capital goods merely on the strength of saving—that is, in the absence of technological progress—even if radically more saving took place relative to income than is ever likely to take place.
The reason for the investment-opportunity doctrine’s enormously exaggerated view of the power of saving, unaided by technological progress, to bring about capital accumulation, is the continuing existence of net saving in terms of money and thus the appearance of a more or
less one-to-one relationship between such nominal net saving and capital accumulation in physical terms. The investment-opportunity doctrine does not see that the continuing existence of nominal net saving, rather than reflecting any direct, one-to-one relationship between saving and capital accumulation, is actually the result of nothing more than the increase in the quantity of money. It does not see that nominal net saving takes place in connection with capital accumulation not as a fundamental cause, but merely as the result of the increase in the quantity of money and volume of spending. These go on as the by-product of the fact that technological progress and a sufficiently high relative demand for capital goods— the actual causes—bring about capital accumulation and increases in production, including the production of the good or goods serving as money. In this connection, the investment-opportunity doctrine does not realize that precisely technological progress is what allows a constant relative demand for capital goods and a constant proportion of gross saving to result in capital accumulation; and a rise in the relative demand for capital goods and the proportion of gross saving, to result in an acceleration of capital accumulation. 81 It is unable to see that net saving in terms of money simply plays no fundamental permanent role in capital accumulation. Considered as a permanent phenomenon, it is, as I say, merely a by-product of the process of capital accumulation and rising production. 82
What the investment-opportunity doctrine does is to confuse the net saving that goes on in the world of an increasing quantity of money with the net saving that goes on in the world of an invariable money. It fails to realize that in the world of an increasing quantity of money, in the very nature of the case, virtually all of the net saving that exists is accompanied by a corresponding elevation of the rate of profit, and, indeed, takes place largely out of that elevated rate of profit. Instead, it proceeds—implicitly—as though the conditions of an economic system with an invariable money obtained, in which case every act of net saving would have to be the result of a fall in the rate of net consumption. If, indeed, those conditions did obtain, the rate of profit would have to fall with every repetition of net saving. But in those conditions, net saving in terms of money would come to an end, and thereafter capital accumulation would proceed without it. It would proceed with a given magnitude of accumulated savings and capital that stood in a sufficiently high, but not continually rising, ratio to consumption.
The investment-opportunity doctrine’s errors on all of these scores are, of course, compounded by its acceptance of the prevailing confusions between the production and purchase of capital goods and the production and purchase of consumers’ goods—namely, the Platonic-Heraclitean view of entities that I have so extensively described and criticized. 83 This last, by obliterating the very existence of the production of capital goods as distinct entities that exist separately from consumers’ goods—especially the production of materials, components, supplies, and all kinds of semimanufactures—underlies the investment-opportunity doctrine’s belief that the only use of capital goods is in the form of machinery to produce consumers’ goods. It leads to its failure to see both the use of capital goods in the production of further capital goods and the extent of the use of capital goods in the production both of capital goods and consumers’ goods.
This brings me to the underconsumption/oversaving doctrine, which is, perhaps, even more crucially dependent on the confusions fostered by the Platonic-Heraclitean view of entities than is the investment-opportunity doctrine. The underconsumption/oversaving doctrine fears a lack of profitable uses for additional capital because it does not understand certain essential monetary aspects of the process of saving and capital formation. In effect, it believes that saving places business in the contradictory position of spending more to produce its products at the very time that its sales receipts are reduced by virtue of the fall in consumer spending that underlies the additional saving.
The fears of the underconsumption/oversaving doctrine can be found in the following passage from J. A. Hobson, a late nineteenth-, early twentiethcentury writer who is quoted with approval on the subject by Keynes:
The object of production is to provide ‘utilities and conveniences’ for consumers, and the process is a continuous one from the first handling of the raw material to the moment when it is finally consumed as a utility or a convenience. The only use of Capital being to aid the production of these utilities and conveniences, the total used will necessarily vary with the total of utilities and conveniences daily or weekly consumed. Now saving, while it increases the existing aggregate of Capital, simultaneously reduces the quantity of utilities and conveniences consumed; any undue exercise of this habit must, therefore, cause an accumulation of Capital in excess of that which is required for use, and this excess will exist in the form of general overproduction. 84
Actually, this passage can be interpreted as representing the fears of both the underconsumption/oversaving doctrine and the investment-opportunity doctrine. Insofar as it can be interpreted as a complaint about an alleged physical problem of how to employ the additional capital goods made possible by additional saving, it represents the fears of the investment-opportunity doctrine. Insofar as it can be interpreted as a complaint about a reduction of consumer spending in the face of an increase in the
spending for factors of production, it represents the fears of the underconsumption/oversaving doctrine.
In connection with the former, it is sufficient to observe here that Hobson is apparently unaware that a reduction in consumption spending and rise in accumulated savings serves to increase the physical volume of consumption in the future, by means of making business more capital intensive, and that the additional capital is useful in any or all of the ways I described in the discussion of the vertical dimension of the scarcity of capital. 85 He appears to believe that when people consume less and save more, they permanently reduce the physical quantity of goods they consume, while having accumulated the capital to produce a larger quantity of consumers’ goods.
However, I believe that Hobson’s real difficulty here is his inability to understand how a smaller volume of consumer spending can support a larger volume of invested capital in terms of monetary value and, above all, a larger volume of spending for capital goods. I believe that it is this which prevents him from seeing how the smaller volume of consumer spending can purchase the growing volume of physical output that results from the greater capital invested. This fear of how a smaller volume of consumer spending can support a larger volume of capital and capital spending is, of course, the essence of the underconsumption/oversaving doctrine, to the detailed critique of which I now turn.
The Basic Error of Underconsumptionism
Underconsumptionism fears saving because it is based on the belief that the aggregate demand for goods as such consists essentially just of the demand for consumers’ goods. This belief, which I thoroughly refuted in Chapter 15, easily leads to the fear that saving places business in a contradictory position, in which it cannot escape from losses. For it then appears that if what is saved is to be invested, i.e., productively expended, that business is placed in the position of having to spend more for the means of producing its products at the very time that it receives less from the sale of its products. Underconsumptionism believes that consumers alone reimburse business for its outlays made in purchasing factors of production and thus that if consumption falls, the sales revenues of business fall equivalently. On this basis, a rise in the demand for capital goods made possible by an equal fall in the demand for consumers’ goods must, according to underconsumptionism, place business in the position of spending a larger sum for the means of producing its products at the very time that it receives a smaller sum in the sale of its products. Indeed, once the expenditure by business for factors of production comes to equal the receipts obtained from the sale of consumers’
goods, then, supposedly, all profit is wiped out. And once the expenditure for factors of production comes actually to exceed the receipts obtained from the sale of consumers’ goods, then, supposedly, losses must result. Only a sufficient demand for consumers’ goods, and corresponding lack of saving, underconsumptionism holds, can ensure the profitability of business.
To illustrate the underconsumptionist doctrine in quantitative terms, if the demand for consumers’ goods is 500 monetary units and the demand for labor, 300 monetary units, as is the case in Figure 16–2, then, according to underconsumptionism, business can be profitable only if the demand for capital goods is less than 200 monetary units. If, for example, the demand for capital goods is 100 monetary units, then, according to underconsumptionism, business can be profitable in the amount of 100 monetary units. For in this case, it would have total costs in the amount of 400 monetary units (300 of cost on account of labor plus 100 of cost on account of capital goods), while its sales revenues were equal to the 500 monetary units of consumption expenditure.
Underconsumptionism regards the actual conditions of Figure 16–2, and, even more, those of Figure 17–1, as placing business in the position of having to incur an aggregate loss. For it believes that with only 500 monetary units of consumption expenditure to generate sales revenues, and a demand for factors of production of 800 monetary units generating costs of production, which is the situation in Figure 16–2, an aggregate loss of 300 must ensue. According to underconsumptionism, the case is even worse in the conditions of Figure 17–1, because there a consumption expenditure of only 400 monetary units is left to cover costs generated by 900 monetary units of productive expenditure (which last, of course, is the sum of the 300 monetary units of demand for labor plus the 600 monetary units of demand for capital goods).
Putting aside the fact that Figure 16–2 is already supposed to imply major losses, the transition from the conditions of Figure 16–2 to those of Figure 17–1 provides exactly the kind of dreaded situation described by Hobson, namely, a diminution in the demand for consumers’ goods and at the very same time an increase in the expenditure for factors of production, which factors of production have no other ultimate purpose but “to provide ‘utilities and conveniences’ for consumers.” By examining this transition, it is possible to understand exactly why it is that the “exercise of this habit [of saving]” does not “cause an accumulation of Capital in excess of that which is required for use”—that it does not in fact result in an aggregate loss. This benevolent outcome is already apparent inasmuch as Figure 17–1 unquestionably shows that the additional saving and productive expenditure are actually accompanied by an aggregate
profit of 100, despite the fact that productive expenditure rises to 900 while the demand for consumers’ goods falls to 400.
The explanation is that the demand for capital goods is a demand for goods. It is fully as much a demand for goods as is the demand for consumers’ goods. Thus business is in no way exclusively dependent on the demand for consumers’ goods for its sales revenues, because the demand for capital goods is in every respect as good a source of sales revenues as is the demand for consumers’ goods. When the demand for capital goods is taken into account in the respective cases of Figures 16–2 and 17–1, it turns out that sales revenues are not merely the respective 500 and 400 of demand for consumers’ goods, but include as well the respective 500 and 600 of demand for capital goods. Sales revenues in both cases are 1,000. As a result, the productive expenditures of Figures 16–2 and 17–1, in the amounts of 800 and 900 respectively, are not deducted merely from the sales revenues constituted by the respective annual consumption expenditures of 500 and 400, but from sales revenues of 1,000.
It must be kept in mind that in each year in Figures 16-2 and 17–1 there is a demand for capital goods as well as consumers’ goods. Thus, when the outlay for factors of production in each year shows up as a cost deducted from the sales revenues of the following year, it is deducted from sales revenues which are constituted not only by the demand for consumers’ goods of the following year but no less by the demand for capital goods which is made in that following year. In the conditions of Figure 16–2, only half of the 800 outlay for factors of production in each year shows up as a cost of producing the consumers’ goods of the following year, for the sales revenues of the following year are only 50 percent constituted by the consumption expenditure of 500. Fully the remaining half of the 800 of productive expenditure shows up as a cost of producing the capital goods of the following year, which also bring in sales revenues 500. The fact that in Figure 16–2 fully as much cost is deductible from receipts from the sale of capital goods as from receipts from the sale of consumers’ goods has been shown from the very first, in the description of each year’s output as “ 1K OF CAPITAL GOODS at a Cost Value of 400” and “ 1C OF CONSUMERS’ GOODS at a Cost Value of 400.” (Italics added.)
In the transition from the conditions of Figure 16–2 to those of Figure 17–1, first 60 percent of the initially prevailing 800 outlay for factors of production comes to be deducted from the 600 of receipts from the sale of capital goods. That is to say, the cost value of the capital goods of Year 2 rises to 480 from the 400 cost value of the capital goods of Year 1. At the same time, only 40 percent of the initially prevailing 800 outlay for factors of production comes to be deducted from the 400 of receipts from the sale of consumers’ goods—viz., the cost value of the consumers’ goods of Year 2 actually declines to 320 from the 400 of Year 1, corresponding to the fall in demand for consumers’ goods from 500 to 400. From Year 3 on, of course, the 100 increase in the demand for capital goods that commenced in Year 2 shows up in the aggregate costs of production. At that point, 60 percent of this 100 addition to the demand for factors of production is deducted from the 600 of receipts from the sale of capital goods while only 40 percent of it is deducted from the 400 of receipts from the sale of consumers’ goods. In other words, the cost of the capital goods produced comes to be 60 percent of the now prevailing 900 of productive expenditure, while the cost of the consumers’ goods produced comes to be 40 percent of the now prevailing 900 of productive expenditure—viz., the respective aggregate costs of capital goods and consumers’ goods come to be 540 and 360. All of this was shown in Figure 17–1.
The principle here is not only that the demand for capital goods is fully as much a demand for goods as is the demand for consumers’ goods, but also that the demand for factors of production is fully as much deductible as cost from receipts from the sale of capital goods as it is from receipts from the sale of consumers’ goods. Factors of production are used to produce capital goods no less than consumers’ goods, and the expenditure for such factors of production is deductible as cost from the receipts from the sale of the capital goods, just as expenditure for factors of production to produce consumers’ goods is deductible as cost from the receipts from the sale of the consumers’ goods.
Further, to the degree that the demand for capital goods rises relative to the demand for consumers’ goods, a correspondingly larger proportion of the factors of production comes to be employed in the production of capital goods relative to the production of consumers’ goods, and thus a correspondingly larger proportion of the demand for factors of production comes to be deductible as cost from receipts from the sale of capital goods rather than from receipts from the sale of consumers’ goods. And to the degree that a larger demand for capital goods represents a larger demand for factors of production in toto—that is, a larger demand for capital goods and producers’ labor taken together—the addition to the demand for factors of production is allocated as additional cost of capital goods and additional cost of consumers’ goods in proportion to the changed relative demands for capital goods and consumers’ goods. What is present is both a shift in the disposition of a given amount of productive expenditure as between the pro—
duction of capital goods and the production of consumers’ goods, and an increase in the overall total amount of productive expenditure. The larger total of productive expenditure shows up as cost of capital goods and consumers’ goods respectively, in proportion to the changed relative demands for capital goods and consumers’ goods.
Thus, as I have said, in Figure 17–1, when the demand for capital goods rises from 500 to 600 and the demand for factors of production in toto, from 800 to 900, while the demand for consumers’ goods falls from 500 to 400, there is both a shift in the disposition of the demand for factors of production from a 50 ⁄ 50 ratio in the production of capital goods and consumers’ goods to a 60 ⁄ 40 ratio, and then, in addition, a rise in the absolute demand for factors of production in the production both of capital goods and consumers’ goods. The transitory result is that in anticipation of the change in relative demands, the demand for factors of production to produce capital goods rises from 400 to 480 (60 percent of 800), while the demand for factors of production to produce consumers’ goods falls from 400 to 320 (40 percent of 800). The permanent result, once the 100 of additional demand for capital goods actually takes place and enlarges the demand for factors of production, is that the demand for factors of production to produce capital goods rises to 540 (60 percent of 900) and the demand for factors of production to produce consumers’ goods rises to 360 (40 percent of 900), reflecting both a continuation of the changed relative allocation of the demand for factors of production and its absolute enlargement.
Understanding this twofold effect of a rise in the demand for capital goods and the overall demand for factors of production accompanying a fall in the demand for consumers’ goods, makes it possible to carry the critique of underconsumptionism further, in the discussions that follow immediately below.
How the Demand for Capital Goods and Labor
Can Radically and Permanently Exceed the
Demand for Consumers’ Goods
In order to place the alleged problem of underconsumption in the clearest possible light, and then show further why, in fact, there is no problem, let us consider a very extreme case. 86 Let us imagine that in the economic system as a whole, total spending for consumers’ goods each year is 200 units of money. At the same time, let us imagine that total spending for capital goods in the economic system each year is the enormously greater sum of 800 units of money, and that the demand for labor is 100 units of money. Thus, we assume that the total demand for factors of production is 900, while the demand for consumers’ goods is only 200. (The 200 of demand for consumers’ goods should be understood as constituted by 100 of consumption on the part of the wage earners employed by business and by 100 of net consumption on the part of businessmen and capitalists.) Given these assumptions, it appears to the underconsumptionists that business is placed in the position of buying its factors of production for 900 units of money each year while having to sell its products—the consumers’ goods—for only 200 units of money each year. It thus appears that business is locked into the position of having to sell its products at an annual aggregate loss of 700 units of money, for it regularly buys for 900, and yet just as regularly sells for only 200.
It should already be obvious that in fact the sales revenues of business available to defray its outlay of 900 for the factors of production are not 200, but 1,000, consisting not only of the following year’s consumption expenditure of 200 but, far more importantly in terms of size, the following year’s 800 of demand for capital goods. In the conditions of this example, only 20 percent of the total aggregate demand for goods is a demand for consumers’ goods, while 80 percent is a demand for capital goods. Thus, only 20 percent of the capital goods and labor of each year are employed in producing consumers’ goods for the following year, while 80 percent are employed in producing capital goods for the following year. Accordingly, of the 900 monetary unit demand for factors of production only 180 (20 percent of 900) are charged against the sale of consumers’ goods, while the remaining 720 (80 percent of 900), are charged against the sale of capital goods.
Indeed, if matters were as the underconsumptionists believe, and the 900 of demand for factors of production were all chargeable against the 200 of receipts from the sale of consumers’ goods, the resulting 700 of loss in the consumers’ goods industries would be accompanied by 800 of profit in the capital goods industries, because they would have sales receipts of 800 and zero costs of production since no productive expenditure would take place in their production. Such a situation is obviously impossible. Any higher rate of profit in the capital goods industries than in the consumers’ goods industries would result in the withdrawal of capital and labor from the latter and their employment in the former. In the circumstances of our example, equalization of the rate of profit in the two sets of industries requires the employment of 80 percent of the factors of production in the production of capital goods and only 20 percent in the production of consumers’ goods. The underconsumptionists simply fail to recognize that the expenditure for capital goods represents sales revenues to the sellers of capital goods. They see the expenditure for capital goods exclusively as showing up as a cost, and because they fail to recognize that receipts from the sale of capital goods are sales
receipts, they see all the cost corresponding to the expenditure for capital goods as a cost exclusively to the consumers’ goods industries. They commit these fallacies because they believe that receipts from the sale of capital goods have no separate existence—that they are somehow counted in receipts from the sale of consumers’ goods and that to acknowledge their separate existence would be to commit the alleged error of “double counting.” 87
Table 17–1 provides an economy-wide income statement in elaboration of this example. In the column headed “Economy as a Whole,” it shows total sales revenues and total costs in the economic system, and then, in the columns headed “Consumers’ Goods” and “Capital Goods,” a breakdown of total sales revenues and total costs into the sales revenues and costs of the consumers’ goods and capital goods industries respectively. In all three columns, total costs are broken down into cost specifically on account of capital goods and cost specifically on account of labor. (Costs in each case, of course, are the reflection of productive expenditures.) In addition, profits are shown, both for the economic system as a whole and separately for the production of consumers’ goods and capital goods respectively.
Table 17–1 shows that of the 800 worth of capital goods annually purchased, only 160 are employed in the production of next year’s 200 worth of consumers’ goods, and 640 are employed in the production of next year’s 800 worth of capital goods. (This is shown in the row labeled “On Account of Capital Goods,” under the heading “Cost.”) The table also shows that of the 100 worth of labor annually purchased, only 20 are employed in the production of next year’s 200 worth consumers’ goods, while 80 are employed in the production of next year’s 800 worth capital goods. (This is shown in the row labeled “On Account of Labor,” under the heading “Cost.”)
Table
Accordingly, in the production of consumers’ goods, where sales revenues are 200 and total costs are 180 (160 + 20), profits are 20. In the production of capital goods, where sales revenues are 800 and total costs are 720 (640 + 80), profits are 80.
A second table, Table 17–2, goes on to describe not only how the outlay for capital goods and labor is allocated between the production of consumers’ goods and capital goods in general, but also how it is allocated within the category of capital goods among the production of capital goods of various specific degrees of remove from the production of consumers’ goods. The first column of the table represents a series of years, starting with Year N and extending on into the indefinite future, ultimately to Year N+n. Each year is assumed to be identical with the following year and with the preceding year, since the table depicts a continuing equilibrium under an invariable money. In the table, the column headed s represents aggregate sales revenues, while the columns headed D C and D K represent the respective demands for consumers’ goods and capital goods, which, taken together, are equal to those sales revenues, and respectively constitute them in the form of receipts specifically from the sale of consumers’ goods or specifically from the sale of capital goods. Thus far, the table does not add anything to what was already shown in Table 17–1.
Proceeding over to the right in the table, D C + D K are shown to equal D C plus a breakdown of D K into a series of subcomponents: D K1 + D K2 + . . . . Implicitly, the last term here should be shown as D Kn , but the table goes only as far as D K4 , for lack of room.
In the table, D K1 represents that part of the expenditure to buy capital goods in any year which is specifically for the purpose of producing the consumers’ goods of the
17–1
Sales Revenues, Costs, and Profits in the Production of Consumers’ Goods and Capital Goods
Economy as a Whole = Sales Receipts: 1,000 = Cost: 900 = ——On Account of Cap—
800 = ____ital Goods:
——On Account of
100 = —— Labor:
Profit: 100 =
Consumers’ Goods + Capital Goods 200 + 800 180 + 720 160 + 640 120 + 680 120 + 680
APPLICATIONS OF INVARIABLEMONEY/NET-CONSUMPTION ANALYSIS 845
Table 17–2
The Demand for Factors of Production at Various Degrees of Remove from the Production of Consumers’ Goods
YEAR s = D C + D K = D C +
N 1,000 = 200 + 800 = 200 +
N+1 1,000 = 200 + 800 = 200 +
N+2 1,000 = 200 + 800 = 200 +
N+3 1,000 = 200 + 800 = 200 +
N+4 1,000 = 200 + 800 = 200 +
… … = … + … = … +
N+n 1,000 = 200 + 800 = 200 +
KEY:
s = Sales revenues.
D C = Demand for consumers’ goods.
D K = Demand for capital goods.
D K1 = Demand for capital goods to produce consumers’ goods.
next year. This sum, as we already know, is 160, on the principle that the proportion of the total expenditure for capital goods which is for the purpose of producing consumers’ goods is in proportion to the portion of total sales receipts which is obtained in the sale of consumers’ goods. Receipts from the sale of consumers’ goods of 200 represent 20 percent of the total sales receipts of 1,000 in every year, and thus 20 percent, or 160, of the 800 of expenditure to buy capital goods in any given year is assumed to be chargeable to the sale of consumers’ goods in the next year.
By the same token, 20 percent of the 100 of total expenditure for labor, namely, 20, is also assumed to be chargeable to the sale of consumers’ goods in the next year, as cost on account of labor. The expenditure for labor in each year is shown directly below the corresponding expenditure for capital goods. Thus, the 20 appears immediately below the 160. Both together represent the cost of producing the 200 worth of consumers’ goods output available in the following year. In each year, a downward and leftward sloping arrow runs from the 160 and 20 of expenditure for factors of production to produce consumers’ goods, to the 200 of sales proD K1 + D K2 + D K3 + D K4 + … 160 + 128 + 102.4 + 81.92 + … 20 16 12.8 10.24
160 + 128 + 102.4 + 81.92 + … 20 16 12.8 10.24
160 + 128 + 102.4 + 81.92 + … 20 16 12.8 10.24
160 + 128 + 102.4 81.92 + …
+
20 16 12.8 10.24
160 + 128 + 102.4 + 81.92 + … 20 16 12.8 10.24
… + … + … + … + …
160 + 128 + 102.4 + 81.92 + … 20 16 12.8 10.24
D K2 = Demand for capital goods to produce the capital goods to produce consumers’ goods .
D K3 = Demand for capital goods to produce the capital goods described under D K2 .
D K4 = Demand for capital goods to produce the capital goods described under D K3.
ceeds brought in by those consumers’ goods in the following year. This 160 worth of capital goods and 20 worth of labor can be described as representing the value of factors of production at one degree of remove from the production of consumers’ goods. In the terminology of Menger and the Austrian school, they are goods and services of the second order. 88
In the table, D K2 represents that part of the outlay for capital goods in any year which is specifically for the purpose of producing those capital goods of the next year which will stand at one degree of remove from the production of consumers’ goods, that is, those capital goods of the next year which will be used to produce consumers’ goods for the year after next. Thus, D K2 is the portion of the outlay for capital goods in any given year that is devoted to the production of capital goods falling specifically under the heading of D K1 in the following year. D K2 and the demand for labor that accompanies it represent the demand for capital goods and labor at two degrees of remove from the production of consumers’ goods.
By way of elaboration, the fact that in each year there is 160 of expenditure for capital goods that is specifically
846 CAPITALISM for the purpose of producing the consumers’ goods of the following year means that in each year there are 160 of receipts specifically from the sale of such capital goods. In each year, therefore, a specific portion of the total outlay for capital goods and labor must be viewed as chargeable against this specific portion of next year’s receipts. In other words, some portion of the outlay for capital goods and labor in any given year is devoted specifically to the production of those capital goods of the next year which in the following year will be devoted to the production of consumers’ goods. Just as D K1 is the specific portion of the outlay for capital goods in any given year that is chargeable to the D C of the following year, so D K2 is the specific portion of the outlay for capital goods of any given year that is chargeable to the D K1 of the following year.
The value of D K2 is taken as 128 because the 160 of demand for capital goods to produce consumers’ goods— viz., D K1 —is 16 percent of the 1,000 aggregate demand for all goods combined. It follows, on the same principle as previously applied, that the portion of the 800 demand for capital goods devoted to producing these particular capital goods is also 16 percent—namely, 128, which last is equal to .16 times 800. In the same way, the value of the labor employed to produce the capital goods of one degree of remove from consumers’ goods is 16, which, of course, is 16 percent of the 100 total demand for labor. Thus, factors of production with a combined value of 144 at two degrees of remove from the production of consumers’ goods produce capital goods of one degree of remove from the production of consumers’ goods, which latter capital goods have a value of 160.
In every year, there is a demand for capital goods and labor of the second degree of remove, side by side with the demand for capital goods and labor of the first degree of remove. In every year, a second downward and leftward sloping arrow runs from the 128 and 16 of expenditure for factors of production of the second degree of remove, to the 160 of sales proceeds brought in, in the following year, by the capital goods of the first degree of remove that they serve to produce.
Carrying the same reasoning a step further, the 128 of demand for capital goods of the second degree of remove constitutes 12.8 percent of the total demand for goods in each year ( 128 ⁄ 1,000 ). Thus 12.8 percent of the demand for capital goods and labor in each year can be assumed to be devoted to the production of capital goods of the second degree of remove in the following year. On this basis, the third component of the demand for capital goods, D K3 , turns out to be 102.4 (viz., .128 times 800). The accompanying demand for labor at this point of three degrees of remove from the production of consumers’ goods is, of course, 12.8, which is 12.8 percent of 100.
Thus, 115.2 is the total demand for factors of production at this, third degree of remove, and it is the cost of producing the 128 worth of capital goods that become available in the following year at the second degree of remove from the production of consumers’ goods.
Finally, the table shows that at four degrees of remove from the production of consumers’ goods, namely, in the column labeled D K4 , 81.92 worth of capital goods and 10.24 worth of labor are employed to produce the 102.4 worth of D K3 capital goods that will become available in the following year at three degrees of remove from the production of consumers’ goods. (These amounts, of course, represent 10.24 percent of the respective 800 and 100 demands for capital goods and labor, which percentage corresponds to the percentage of 1,000 monetary units of total sales revenues that is constituted by the 102.4 monetary units of sales revenues represented by D K3. )
In every year, capital goods and labor of all degrees of remove exist side by side and are used to produce capital goods of one degree of remove less for the following year; or, in the case of capital goods and labor which are themselves merely of one degree of remove, consumers’ goods for the following year. At all degrees of remove in the table, arrows trace the connection to the next, lower degree of remove in the following year and thereby show how the demand for factors of production at any given degree of remove serves to bring in sales revenues greater than itself.
Thus, far from the entire outlay for factors of production being charged against the sale of consumers’ goods, only that portion is charged which corresponds to the fraction of the total demand for goods constituted by the demand for consumers’ goods specifically. Thus, in this case, not the full 900 of demand for factors of production is charged to the production of consumers’ goods, but only 20 percent of that 900. The portion of the outlay for factors of production made by the producers of consumers’ goods which is constituted by their demand for capital goods (160 out of 180) in turn constitutes the sales receipts of the producers of these capital goods. The producers of these capital goods in turn must make outlays for factors of production, and, in the present case, the principal portion of their outlays is for capital goods, and constitutes the sales receipts of further producers of capital goods, and so on. It is only in this manner, by cumulating the demand for capital goods made by producers at different degrees of remove from the production of consumers’ goods, that the outlays for factors of production by business exceed the demand for consumers’ goods.
From a mathematical perspective, the righthand portion of Table 17–2 represents an infinite series that is repeated over and over again in succeeding rows of the table. Starting with the second term of this series in the
APPLICATIONS OF INVARIABLEMONEY/NET-CONSUMPTION ANALYSIS 847 first row, namely, the term under the heading D K1 , and taking each further term to the right representing the outlays for capital goods of progressively greater degrees of remove from the production and sale of consumers’ goods, it is clear that each such term is covered by a larger volume of sales revenues for the corresponding product, which is represented by the term of the series just to the left, one row down. (In the case of the demand for capital goods under the head D K1 , the sales revenues represented by the term to the left one row down are, of course, the demand for consumers’ goods, D C .)
It should be understood that the assumption made in the preceding discussion that the demand for capital goods and labor is always strictly proportional to the sales revenues brought in, and that the two respective demands are always in the same proportion to each other, is not necessary. It has been made for the purpose of simplification. Actually, technical considerations would make the demands for capital goods and labor stand in different proportions both to sales revenues and to each other at different stages of production. Such differences, however, do not affect anything of significance. From the perspective of the present discussion, they are mutually offsetting.
It should also be realized that, beyond a point, production at the higher degrees of remove is physically indistinguishable from production simultaneously going on at lower degrees of remove. For example, it is a matter of such things as the output of steel serving in the construction of steel mills, some portion of whose output serves in the construction of further steel mills, and so on and on, indefinitely. Production at the higher degrees of remove becomes a matter of indefinite duplications of processes of production simultaneously going on at lower degrees of remove. That is, beyond a point, it differs from processes of production simultaneously being carried on at lower degrees of remove only in that its ultimate targets are more remote—for example, the steel mills that will be built from steel produced in steel mills constructed with this year’s steel versus simply the steel mills that will be built with this year’s steel. Thus, a rise in the economic degree of capitalism and in capital intensiveness represents an increase both in the extent to which physically different processes of production requiring the more remote employment of capital goods and labor can be implemented and in the proportions in which physically identical processes of production are devoted to temporally more remote ends.
Consumption as the Purpose of Production and the Progressive Production of Consumers’ Goods Over Time
Ironically, Table 17–2 demonstrates that, if qualified by the word “ultimately,” Hobson was right when he said that the only use of capital is to aid in the production of “‘utilities and conveniences’ for consumers.” His error was in thinking that this was incompatible with the demand for factors of production being greater than the demand for consumers’ goods.
Table 17–2 shows that the entire outlay for factors of production in any year, even though enormously larger than the demand for consumers’ goods (900 vs. 200) ultimately serves entirely in the production of consumers’ goods, and is ultimately chargeable entirely to the sale of consumers’ goods. However, the consumers’ goods in question are certainly not those just of the next year. Rather, they are the consumers’ goods that will come into existence to a progressively greater extent with the passage of time. For example, the D K1 of Year N, and its associated demand for labor, is the only part of the outlay for factors of production in Year N that directly serves in the production of consumers’ goods—specifically, in the production of the consumers’ goods that become available in Year N+1. This outlay is directly chargeable to the sale of consumers’ goods. However, the D K2 of Year N, and its associated demand for labor, indirectly serve in the production of consumers’ goods—the consumers’ goods that will become available in Year N+2. These outlays are indirectly chargeable to the sale of those consumers’ goods, for they serve in the production of the capital goods that become available in Year N+1 and which in turn serve in the production of the consumers’ goods of Year N+2. Arrows trace the path from D K2 and its associated demand for labor in Year N to the sale of consumers’ goods two years later.
In the same way, the D K3 of Year N, and its associated demand for labor, indirectly serve in the production of the consumers’ goods of Year N+3; the D K4 of Year N, and its associated demand for labor, indirectly serve in the production of the consumers’ goods of Year N+4; and, finally, the D Kn of Year N, and its associated demand for labor (neither of which are shown in the table), indirectly serve in the production of the consumers’ goods of Year N+n. Again, arrows trace the paths. All outlays for capital goods and labor are, to repeat, ultimately for the sake of producing consumers’ goods. It is only a question of how far in the future those consumers’ goods lie. 89
Thus, in Table 17–2, the cumulative demand for capital goods that takes place in Year N and that contributes to the production of consumers’ goods within four years from Year N is 160 + 128 + 102.4 + 81.92, or 472.32 out of an eventual total of 800. This is the sum of the demands for capital goods in Year N under the column headings D K1 through D K4 . The cumulative demand for labor that contributes to the production of consumers’ goods within four years from Year N is 20 + 16 + 12.8 + 10.24, or 59.04
848 CAPITALISM out of an eventual total of 100. This is the sum of the associated demands for labor in Year N under the column headings D K1 through D K4 . The combined cumulative demand for capital goods and labor together is thus 531.36 out of an eventual total of 900. If the number of years beyond Year N under consideration were increased from four to eleven, then it would be found that more than 90 percent of the demand for capital goods and labor in Year N would be accounted for as contributing to the production of consumers’ goods. This, indeed, is shown in Table 17–3.
Table 17–3 compresses the format of Table 17–2. It shows one-dimensionally what the former shows two-dimensionally. Thus, it is able to depict the expenditures of a larger number of years in the same space. It shows the contribution of the labor and capital goods of Year N to the production of consumers’ goods through Year N+11, both year by year and cumulatively.
Column one of the table is the series of years N through N+11. Column two lists one through eleven degrees of remove from the production of consumers’ goods, with each degree of remove representing a year of time—the time between Year N and the year shown in column one. The expenditures shown in columns three, four, and five represent the expenditures made in Year N—at the degree of remove shown in column two—on behalf of the production of consumers’ goods that become available in the corresponding year in column one.
Thus, for example, for Year N+5 the table shows that the expenditure for capital goods that is made in Year N on behalf of the consumers’ goods that will become available in Year N+5 is 65.54, while the associated demand for labor is 8.19; the summation of these two figures, shown in the last column, is 73.73. Similarly, for Year N+10 the expenditure for capital goods that is made in Year N on behalf of the consumers’ goods that will become available in Year N+10 is 21.47, while the associated demand for labor is 2.68; the summation of these two figures is 24.15, which, as in the previous case, is shown in the last column. 90
When these expenditures for factors of production on behalf of consumers’ goods that will come into existence over the years N+1 through N+11 are cumulated, it turns out that 91.40 of the 100 total demand for labor serves
Table 17–3
The Demand for Factors of Production in Year N and Its Cumulative Contribution to the Production of Consumers’ Goods in the Future
Future Degree of Demand for Capital Goods Year Remove of in Year N on Behalf of
Year N from Consumers’ Goods of
Future Year Given Future Year N+1 1 160.00 N+2 2 128.00 N+3 3 102.40 N+4 4 81.92 N+5 5 65.54 N+6 6 52.43 N+7 7 41.94 N+8 8 33.55 N+9 9 26.84 N+10 10 21.47 N+11 11 17.18
Cumulative
731.27
Demands:
. . . Eventual . . .
Cumulative
N+n Demands: 800.00
Demand for Labor Total Demand for Factors of in Year N on Behalf of Production in Year N on Consumers’ Goods of Behalf of Consumers’ Goods Given Future Year of Given Future Year 20.00 180.00 16.00 144.00 12.80 115.20 10.24 92.16 8.19 73.73 6.55 58.98 5.24 47.19 4.19 37.75 3.36 30.20 2.68 24.16 2.15 19.33 91.40 822.67
. . . . . . 100.00 900.00
directly or indirectly in the production of consumers’ goods and that 731.27 of the 800 total demand for capital goods serves directly or indirectly in the production of consumers’ goods. Thus, 822.67 of the 900 total demand for factors of production serves directly or indirectly in the production of consumers’ goods that will become available within eleven years. 91 This figure and the two figures from which it is derived all represent something more than 90 percent of the respective total demands for labor, capital goods, and factors of production in general. If the cumulation process were concluded with Year N+10 rather than Year N+11, the accumulated sums would represent something less 90 percent of the respective total demands.
Thus conditions in Tables 17–2 and 17–3 are essentially similar to the conditions previously described in connection with Figures 17–2 and 17–3, where it was found that in both cases 90 percent of the factors of production in existence in a base year contributed to the production of consumers’ goods within some period of years—less than four years in the case of Figure 17–2, and more than four years in the case of Figure 17–3. 92 Table 17–3 confirms that in all cases, irrespective of the demand for capital goods relative to the demand for consumers’ goods, the entire supply of factors of production in existence in any given period of time always ultimately serves to produce consumers’ goods and only consumers’ goods. The effect of a rise in the demand for capital goods relative to the demand for consumers’ goods is merely to increase the time interval which must elapse before any given percentage of the existing supply of factors of production results in the production of consumers’ goods. All that is involved in the present, deliberately extreme case is a substantially longer average period of production. Thus only by Year N+11 will more than 90 percent of the factors of production available in Year N have contributed to the production of consumers’ goods.
What must always be kept in mind, however, is that even though all production is ultimately for the sake of the production of consumers’ goods, the length of the period of time which must elapse before any given percentage of the production of a given base year results in the production of consumers’ goods is of critical importance, insofar as that time span is determined by the extent of concentration on the production of capital goods. In the case of Tables 17–2 and 17–3, as opposed to that of Figure 17–2, four years elapse, and still the fraction of the capital goods and labor of Year N which cumulatively result in the production of consumers’ goods is below 60 percent ( 531.36 ⁄ 900 ). Eleven years must elapse before it exceeds 90 percent. Under different conditions, this figure could be 90 percent (or even more) in just a single year. This last case would be approached if each year the relative magnitudes of D C and D K were the reverse of those in the present example. If D C were 800 and D K were 200, then 80 percent of the capital goods and labor of Year N would have served in the production of consumers’ goods by Year N+1, and a further 16 percent by Year N+2.
Such differences make all the difference in the world. In an economy in which 80 or 90 percent of the capital goods and labor are used up in producing consumers’ goods in just one year, production will be in a radically inferior state in comparison with one in which a decade or more must elapse before such a high percentage is achieved. In the latter economy, the production of each year is devoted heavily to the production of the means of production for the following year and for more remote future years. In the former economy, the production of each year is devoted only minimally to the production of means of production for the following year and more remote future years. Thus, the ability to implement technological advances will be radically different in the two economies, with the economy enjoying the longer average period of production possessing enormous advantages over the one with the shorter average period of production. 93 In its case, the likely outcome will be that its total ability to produce and accumulate capital will rise from year to year, with the result that it will enjoy economic progress and rising prosperity.
In contrast, in the economy with the radically shorter period of production, the result at best must be stagnation at an extremely low level. Indeed, insofar as an economy’s average period of production is first in the process of becoming substantially shorter, the result must be capital decumulation and a falling ability to produce from year to year, in other words, economic retrogression and worsening poverty. This is because an economy suffering a substantial decline in its average period of production will not be able to maintain technologies it has previously implemented insofar as they require the employment of substantial quantities of means of production significantly in advance of the completion either of the ultimate consumers’ goods or, indeed, of the production of the relevant capital goods. Economic retrogression must go on until the methods of production employed require so little in the way of capital goods that the capital goods can all be replaced just by devoting to their production the modest share of the meager output that it is possible to devote to their production in the conditions of the case.
Tables 17–2 and 17–3 show that the entire outlay for factors of production in any given base year can be regarded as covered by receipts from the sale of consumers’ goods, provided only that one looks to the production
850 CAPITALISM of consumers’ goods over an extended enough number of years. Thus, in Table 17–2, the outlays for capital goods and labor under the headings D K1 through D K4 in Year N can be regarded as covered by a total of 800 of receipts from the sale of consumers’ goods—viz., by 200 of receipts from the sale of consumers’ goods in each of the four years N+1 through N+4. By the same token, the outlays for capital goods and labor in Year N that would appear in a table wide enough to contain columns for D K1 through D K11 could be regarded as covered by the 2,200 of receipts from the sale of consumers’ goods brought in over the years N+1 through N+11.
This understanding should not give rise to any new worry that now perhaps business somehow appears inexplicably profitable, with 2,200 of consumer sales receipts covering less than 900 of demand for factors of production. In each year, aggregate profits are no more than 100. In each year, the 200 of receipts from the sale of consumers’ goods covers—accordion-like—the outlays for factors of production made not just in any one prior year, but in a whole series of prior years extending back into the indefinite past. For example, the 200 of receipts from the sale of consumers’ goods in Year N+4 covers far more than the demand for capital goods and labor made just in Year N. It covers successively the 160 of demand for capital goods and 20 of demand for labor made under the heading D K1 in Year N+3, the 128 of demand for capital goods and 16 of demand for labor made under the heading D K2 in Year N+2, and the 102.4 of demand for capital goods and 12.8 of demand for labor made under the heading D K3 in Year N+1, as well the 81.92 of demand for capital goods and 10.24 of demand for labor made under the heading D K4 in Year N. Indeed, the 200 of demand for consumers’ goods made in Year N+4 covers an indefinitely large number of further expenditures for capital goods and labor extending back indefinitely into years prior to Year N.
A relatively small amount of demand for consumers’ goods is able profitably to cover such a large demand for capital goods and labor—a demand much larger than itself—precisely because, as repeatedly shown, the demand for capital goods is subdivided into successive, component parts, each one progressively more remote from the production of consumers’ goods. These parts stand behind one another and can, in effect, be fitted into one another, along with their accompanying demands for labor. That is, each preceding part of the demand for capital goods is smaller than the one it precedes, just as the first and largest component part of the demand for capital goods is smaller than the demand for consumers’ goods, which it precedes. And thus each prior component part is able to represent sales revenues that profitably cover the next, more remote component part along with its accompanying demand for labor.
As illustration, the situation in Tables 17–2 and 17–3 is that 200 of demand for consumers’ goods in any one year covers 900 of demand for factors of production made over an indefinitely large number of prior years. In the first instance, it covers only 160 of demand for capital goods and 20 of demand for labor—viz., the demands for capital goods and labor made at one degree of remove the year before. In the second instance, it covers the 128 of demand for capital goods and 16 of demand for labor that were made at two degrees of remove, two years before. This latter demand for capital goods and labor was directly covered by the 160 of demand for capital goods at one degree of remove. (In effect, the 128 and 16 stand behind the 160, and are covered by it, while the 160 and a further 20 of demand for labor stand behind the 200 of demand for consumers’ goods and are covered by it.) The same process extends backward prior to the 128 and 16, to an indefinite number of still earlier years each of whose demands for capital goods and labor are covered by a demand for capital goods that is one year less removed from the demand for consumers’ goods.
Tables 17–2 and 17–3 depict a kind of lining-up and fitting-in process as it were, by which successive components of the demand for factors of production at further degrees of remove are covered by the demand for capital goods at one degree of remove less, and ultimately by the demand for consumers’ goods. A good analogy is provided by a set of luggage of the type in which all of the pieces can be successively packed into the next-larger piece, with the result that all of them ultimately fit into the single, largest piece. For example, an attaché case fits inside an overnighter, which fits inside a one-suiter, which, in turn, fits inside a two-suiter, which, finally, fits inside a three-suiter. The three-suiter is the counterpart of the demand for consumers’ goods, while the remaining, successively smaller pieces are the counterpart of demands for capital goods at successive degrees of remove. The largest piece, the three-suiter, is large enough to contain all of the smaller pieces, even though the combined volume of the four smaller pieces is substantially greater than the volume of the largest piece. This is exactly how it is when the demand for capital goods, or capital goods plus labor, is greater than the demand for consumers’ goods. As in Table 17–3, the demand for labor and capital goods at the eleventh degree of remove fits into—viz., is profitably covered by—the demand for capital goods at the tenth degree of remove, which, in turn, together with its associated demand for labor, fits into the demand for capital goods at the ninth degree of remove, and so on until the demand for capital goods and labor at the first
degree of remove fits into the demand for consumers’ goods.
The suitcase analogy can shed light on other important aspects of the process. It helps to make clear exactly how it is possible—and, indeed, under the conditions of a fixed quantity of money and total volume of spending, absolutely necessary—that in order for the demand for capital goods to rise, the demand for consumers’ goods must fall. For if there is a fixed total amount of material that is available for the production of all the pieces of luggage in the set, then it is clear that if all of this material were devoted to the production of a single, very large, largest piece, say, to a five-or six-suiter, then absolutely no material would be available for the production of the smaller pieces. In order to have material available for the production of the smaller pieces, it is absolutely essential that the amount of material devoted to the largest piece be strictly limited. We know, of course, that it is limited, and that, nevertheless, there is no problem of its being made too small to contain all the other pieces at the same time, because each of those other pieces successively fits into the next-larger one. In just the same way, with a fixed quantity of money and total volume of spending, in order for there to be a greater demand for capital goods, the demand for consumers’ goods must be correspondingly less. And however great the demand for capital goods may become relative to the demand for consumers’ goods it will all still “fit into” the demand for consumers’ goods because it consists of separate portions which successively “fit into” each other.
The Ratio of Demands Between Stages
The luggage analogy can be carried further. It shows not only that as the size of the largest piece in the set is reduced, material becomes available to enlarge the size of all the remaining pieces, but that the greater total volume of space now represented by the smaller pieces fits into the smaller volume of space now represented by the largest piece, by virtue of a change in the ratio between the size of the succeeding pieces. At the most extreme, the largest piece requires all of the material and has the maximum possible volume, leaving no material and no volume whatever for the smaller pieces. One can think of this case as the five-or six-suiter followed by a second piece zero percent as large. When the size of the largest piece is reduced to that of a three-suiter, the next-largest piece becomes perhaps two-thirds as large (the two-suiter), followed by a third largest piece (the one-suiter) having a size perhaps half as large as the second largest piece, and so on. Thus, as the size of the largest piece is reduced, it becomes capable of containing the growing total volume of space contained in the further pieces by virtue of a rise in the size ratios between the successive pieces.
It is essentially the same when it concerns the demand for consumers’ goods and the demand for capital goods, only more so. The demand for consumers’ goods can fall and the demand for capital goods can rise at the very same time, and yet the demand for capital goods is always profitably covered by the demand for the product, whether further capital goods or consumers’ goods. All that is necessary is a change in the ratio between the demand for the product at each stage and the demand for the capital goods to produce the product. This fact can be highlighted by comparing the present case of a 200 demand for consumers’ goods and 800 demand for capital goods, with the case back in Figure 16–2 of a 500 demand for consumers’ goods and a 500 demand for capital goods.
In the present case, the demand for capital goods at one degree of remove from the demand for consumers’ goods is 160—80 percent of the demand for consumers’ goods. In the conditions of Figure 16–2, the demand for capital goods at one degree of remove from the demand for consumers’ goods is 250—50 percent of the demand for consumers’ goods. It follows that if the economic system made a transition from the conditions of Figure 16–2 to those of the present case, not only would the demand for consumers’ goods fall, but also the demand for capital goods at one degree of remove would fall, because the fall in demand for consumers’ goods would be so very great. But it should be noted that this fall in demand for capital goods at one degree of remove would be much smaller than the fall in demand for consumers’ goods. While the fall in demand for consumers’ goods is 60 percent (500 to 200), the fall in demand for capital goods at one degree of remove is only 36 percent (250 to 160).
And then, which may appear to be astonishing to some people, it turns out that from two degrees of remove on, the demand for capital goods in the present case begins to further and further surpass the demand for capital goods in the conditions of Figure 16–2, despite the fact that the demand for consumers’ goods is so much lower in the present case. For at two degrees of remove, the demand for capital goods in the present case is 128 (80 percent of 80 percent of 200), while the demand for capital goods at this degree of remove in the conditions of Figure 16–2 is only 125 (50 percent of 50 percent of 500). At three degrees of remove, the difference is that between 80 percent to the third power times 200, and 50 percent to the third power times 500—viz., between 102.4 and 62.5—which is a much wider difference in favor of the present case.
Indeed, the difference between the present case and that of Figure 16–2 can be expressed as the difference between two infinite series, the first term of one of which is 200 and the first term of the other of which is 500, and
852 CAPITALISM with each succeeding term being 80 percent of the preceding term in the one case and only 50 percent in the other. When seen in this way, it becomes obvious that very quickly the succeeding terms become relatively larger in the case in which the first term—the demand for consumers’ goods—is smaller, and then widen their lead with each succeeding term. This fact is illustrated in Table 17–4, which compares the demand for capital goods and labor in the present case with that of Figure 16–2 for eleven degrees of remove. The table shows that starting with the sixth degree of remove even the demand for labor in the present case is greater than in the conditions of Figure 16–2, despite the fact that the total demand for labor is only 100 in the present case while it was 300 in the conditions of Figure 16–2.
The general principle can be stated as follows: When the demand for consumers’ goods falls and the demand for capital goods rises, the process represents the transition from an infinite series with a relatively high first term followed by a relatively rapid rate of diminution in the subsequent terms, to a new infinite series with a correspondingly lower first term and a correspondingly diminished rate of diminution in the subsequent terms. When understood in this way, it becomes obvious that in the conditions of an invariable money, in which the sum of all terms combined will always be the same, such as 1,000 monetary units, the sum of all terms beyond the first—viz., the demand for capital goods—is higher, the lower is the first term, which first term, of course, is the demand for consumers’ goods.
It is worth noting a related fact. Namely, that while in the present case something over 90 percent of the total demand for factors of production serves directly or indirectly in the production of consumers’ goods within eleven degrees of remove, the percentage for Figure 16–2 within the same number of degrees of remove is virtually 100 percent. The significance of this is that provision for more remote future periods continues to be substantial in the one case, after it is virtually exhausted in the other.
More on the Average Period of Production
The preceding discussion, particularly the application of infinite series, raises questions concerning the length of the average period of production. The average period of production can be understood, quite correctly, as covering a period of potentially unlimited length. To some very limited extent, the consumers’ goods being produced today owe their existence to capital goods and labor employed at the time of Caesar, indeed, to capital goods and labor employed in the very earliest periods of human history. And to some extent that is also very limited, the capital goods and labor in existence today will contribute to the production of consumers’ goods in the years 5,000, 10,000, and beyond.
This is so because with the exception of the very first consumers’ goods, which were appropriated directly from nature, such as nuts and berries growing wild on trees, all consumers’ goods have been produced with the aid of capital goods. And with the exception of the very first capital goods, which were also appropriated directly from nature, such as rocks and sticks, all capital goods have been and will continue to be themselves produced with the aid of capital goods. Thus, the indirect contribution of capital goods to the production of consumers’ goods spans a period of time that is virtually coextensive with man’s presence on earth and, as far as the future is concerned, a number of degrees of remove that has no fixed limit.
Obviously, the contribution of the past to the present and of the present to the future declines exponentially as one extends the period of time under consideration. And for this very reason, I have followed the procedure of selecting a limit, in the form of how long a period of time must elapse for a given percentage of the means of production in existence in a base period to have directly or indirectly contributed to the production of consumers’ goods. Applying that approach, the length of the average period of production becomes sharply delimited and independent of the absolute length of man’s existence on earth either up to now or at any point in the future. 94
Whether one takes the contribution of 90 percent of the factors of production in existence in a base period or 99 percent of such factors of production, or whatever percentage, the period of time which must elapse before any such percentage contributes to the production of consumers’ goods is strictly delimited, and always remains the same, so long as the relative production of consumers’ goods and capital goods is the same.
The method of measuring the average period of production employed thus far is very easy to apply in the highly simplified conditions which have been assumed, namely, that all capital goods in existence in the beginning of a year are used up in that very same year and that a year is the period of time which elapses in all stages of production. Conditions are far more complex in reality, of course. Thus, an alternative, but still relatively simple method may be appropriate for conceiving the length of the average period of production.
This is the concept of how long a time would have to elapse for the wage payments made in a given period to grow to equality with the prevailing level of spending for consumers’ goods when compounded at the rate of one plus the prevailing rate of profit. To illustrate the concept in the conditions of Figure 16–2, it means the time that must elapse for 300 of wage payments to grow to equality
Table 17–4
Comparison of the Present, Extreme Case With That of Figure 16-2
PRESENT CASE OF
CASE FIGURE 16–2
Degree of Demand for Demand for Total Demand Demand for Demand for Total Demand
Remove of Capital Goods in Labor in Year N for Factors of Capital Goods in Labor in Year N for Factors of Year N from Year N on on Behalf of Production in Year N on on Behalf of Production on Future Year Behalf of Consumers’ Year N on Behalf of Consumers’ Year N on
Consumers’ Goods of Given Behalf of Consumers’ Goods of Given Behalf of
Goods of Given Future Year Consumers’ Goods of Given Future Year Consumers’
Future Year Goods of Given Future Year Goods of Given
Future Year Future Year*
1 160.00 20.00 180.00 250.00 150.00 400.00
2 128.00 16.00 144.00 125.00 75.00 200.00
3 102.40 12.80 115.20 62.50 37.50 100.00
4 81.92 10.24 92.16 31.25 18.75 50.00
5 65.54 8.19 73.73 15.63 9.38 25.00
6 52.43 6.55 58.98 7.81 4.69 12.50
7 41.94 5.24 47.18 3.91 2.34 6.25
8 33.55 4.19 37.74 1.95 1.17 3.13
9 26.84 3.36 30.20 0.98 0.59 1.56
10 21.47 2.68 24.15 0.49 0.29 0.78
11 17.18 2.15 19.33 0.24 0.15 0.39
Cumulative 731.27 91.40 822.67 499.76 299.85 799.61
Demands:
Eventual
Cumulative
Demands: 800.00 100.00 900.00 500.00 300.00 800.00
*Summing the two columns to the left may not equal this column because of rounding.
with 500 of demand for consumers’ goods at one plus the the same as the rate of profit that prevails in the condi-11.11 percent rate of profit that prevails in Figure 16–2. tions described earlier in Figure 17–1.)
In the case considered in Tables 17–2 and 17–3, it means The basis for this method of measurement of the the time that must elapse for 100 of wage payments to average period of production is the fact that the price of grow to equality with 200 of consumer spending at the every product is ultimately equal to a sum of profits and implied rate of profit of 5.26 percent. (This last is the rate wage payments extending into the past, with profits of profit implied by a 100-amount of profit—which is compounding on the wage payments at the prevailing equal to the 100 of net consumption in the case described rate of profit, as the process of production successively by the tables—divided by 1,900 of capital, which latter approaches the present. 95 The lower is the rate of profit equals 900 of productive expenditure plus 1,000 of cash and the greater is the ratio of the demand for consumers’ in the hands of business. Thus, the rate of profit here is goods to the demand for labor, the longer is the average
period of production. The higher is the rate of profit and the smaller is the ratio of the demand for consumers’ goods to the demand for labor, the shorter is the average period of production. In the specific cases of Figure 16–2 and that of Tables 17–2 and 17–3, for example, the average period of production turns out to be 4.89 and 13.5 years respectively, when computed in this way. 96
The reason that the length of time required for the current payment of wages to grow to equality with a sum equal to the prevailing level of demand for consumers’ goods, at the currently prevailing rate of profit, can be taken as the measure of the length of the average period of production is as follows. If an invariable money prevailed for an indefinitely long period of time, along with constancy in the ratios between the demands for capital goods and consumers’ goods and capital goods and labor, today’s demands for consumers’ goods and labor could be taken as representing the demands for consumers’ goods and labor in every future year, and today’s rate of profit could be taken as representing the rate of profit for the indefinite future. Today’s wage payments would then be launched, in effect, toward segments of future demands for consumers’ goods which in toto equalled today’s demand for consumers’ goods, and they would be launched with continuing “velocities,” so to speak, equal to the prevailing rate of profit. The average time required for n segments of this year’s wage payments to grow to equality with n segments of aggregate consumer demand collectively equal to the aggregate consumer demand of this year, at the currently prevailing rate of profit, is approximated by the time required for the sum of all wage payments this year to grow to equality with a sum equal to this year’s consumer demand, at the currently prevailing rate of profit. Thus, to use the case of Table 17–3 as illustration, the average time required for the sum of 20 + 16 + . . . = 100 of wage payments this year to grow at a 5.26 percent rate of profit to equality with 20(1.0526) + 16(1.0526) 2 + . . . = 200, is approximated by the time required for 100 to grow to 200 at a 5.26 percent rate of profit, namely, 13.5 years.
To adapt this technique to the conditions of an increasing quantity of money and volume of spending, it is necessary to estimate the influence of this factor on the prevailing rate of profit and then to subtract the estimated monetary component from the rate of profit before performing the calculation.
A Rise in the Demand for Capital Goods and Fall in the Demand for Consumers’ Goods: The Cross-Hatching of Production
The belief that the demand for consumers’ goods by itself must cover the outlays of business for factors of production is so deep-rooted that still further discussion demonstrating the contrary is called for. Therefore, let us consider a concretized illustration of a drop in consumption. Let us take two industries producing consumers’ goods as representing all industries producing consumers’ goods. The automobile and airconditioning industries will serve. We assume that the consumption of the owners and creditors of the automobile industry manifests itself in a demand for air conditioners, the product which we employ to represent all consumers’ goods which the producers of automobiles might purchase. And we assume that the consumption of the owners and creditors of the airconditioning industry takes the form of a demand for automobiles, the product which we employ to represent all consumers’ goods which the producers of air conditioners might purchase.
Now let us imagine that the businessmen and capitalists of the automobile industry reduce their consumption. Must this adversely affect the producers of air conditioners? Not at all. For the funds which the businessmen and capitalists of the automobile industry previously employed in their own consumption can now be employed in the purchase of products to be employed in their business. Air conditioners can be installed in the automobiles they manufacture, or if not air conditioners themselves, then some other product which can be produced by the airconditioning industry and which is of use in the production of automobiles. Thus, the total sales revenues of the airconditioning industry are unchanged. All that has happened is that now the airconditioning industry concentrates less on the production of consumer air conditioners and devotes more of its resources to the production of something employed in the manufacture of automobiles, such as automobile air conditioners. Thus, there has simply been a shift from consumption expenditure to productive expenditure on the part of the businessmen and capitalists of the automobile industry, and a corresponding shift in the production activities of the producers of air conditioners in response to a change in demand.
If no objection can be made to our treatment thus far, then, certainly, none can be made to the assumption that instead of the consumption of the businessmen and capitalists of the automobile industry falling, while that of the businessmen and capitalists of the airconditioning industry remains unchanged, the reverse occurs. For then it would simply be a matter of the businessmen and capitalists of the airconditioning industry buying fewer pleasure cars and correspondingly more trucks (or cars) to be employed in their business. In this case, the automobile industry would concentrate less on the production of consumers’ goods and more on the production of capital goods. This time, there would be a shift in the demand of the businessmen and capitalists of the air-con—
ditioning industry and a corresponding shift in production on the part of the businessmen and capitalists of the automobile industry. As in the case of the airconditioning industry a moment ago, the total sales revenues of the automobile industry would remain the same.
What is present in both of these cases is the very important physical fact that every capitalist who reduces his consumption and expands his purchases of capital goods thereby benefits his customers to precisely the same degree. This is because the buyers of his products spend no more in the purchase of those products, while more has been spent in their production. The capitalist who so acts passes on to his customers, in the product he sells, the contribution of the factors of production which otherwise would have been employed in producing for his own consumption. This is what happens when the producers of automobiles reduce their consumption. They provide their customers with more and better automobiles, because instead of buying products to be consumed, they now possess the financial means of buying better-quality materials and more and better accessories or components or more and better plant and equipment; and to their increased financial means corresponds the increased physical means of producing these products, owing to the release of factors of production from the production of consumers’ goods. Exactly the same kind of result occurs when the manufacturers of air conditioners reduce their consumption: not only do they then have additional financial means of buying more and better capital goods, but also to their greater financial means correspond the increased physical means of producing those capital goods, owing to the release of factors of production from the production of consumers’ goods.
It is when the consumption of both sets of businessmen and capitalists is assumed to drop simultaneously that difficulties are imagined. Yes, it will be said, the businessmen and capitalists of the automobile industry can reduce their consumption and employ more funds in their business, because the demand for automobiles has not fallen. Alternatively, the businessmen and capitalists of the airconditioning industry can reduce their consumption and employ more funds in their business, because the demand for air conditioners has not fallen. But both together? That, it will be claimed, is impossible, because it means that the demand for the products of the two sets of producers has fallen and they are being asked to spend more at the very time that the revenues they derive from their products are less.
Nevertheless, of course, it is possible. And the revenues they derive are not any less. The automobile industry, instead of producing merely more and better automobiles by virtue of its increased demand for capital goods, now produces more and better automobiles and more and better trucks, or other capital goods. And the airconditioning industry, instead of producing merely more and better consumer air conditioners by virtue of its increased demand for capital goods, now produces both more and better consumer air conditioners and more and better capital goods, such as air conditioners for automobiles and trucks.
Moreover, each industry’s improved production of capital goods then serves the production of the other not only with respect to the other’s production of consumers’ goods, but also with respect to the other’s further production of capital goods. The automobile industry’s improved production of trucks or other capital goods resulting from its increased input of capital goods, serves the airconditioning industry not only in the production of consumer air conditioners, but also in the production of the capital goods produced by the airconditioning industry, thereby making possible still further improvements in the production of both types of products by the airconditioning industry. By the same token, the airconditioning industry’s improved production of capital goods resulting from its increased input of capital goods, serves the automobile industry not only with respect to its output of cars, but also with respect to its output of trucks or other capital goods, thus making possible still further improvements in the automobile industry’s production of capital goods as well as consumers’ goods. The improvements of each in the production of capital goods, in serving to improve the other’s ability to produce not only consumers’ goods but also capital goods, creates the possibility of endless improvement through endless feedback, with the other’s improved production of capital goods serving in the further improvement of one’s own production, including one’s further production of capital goods, and thus in the still further improvement of the other’s capital goods as well as consumers’ goods.
There are three things involved: (1) A shift in the demand of each party from consumers’ goods to capital goods, causing a corresponding shift in the production of the other. (2) An increase in the production of each party resulting from his possession of the additional capital goods produced by the other. (3) A disposition of the enlarged productive ability of each party in favor of capital goods, conforming to the change in demand on the part of the other.
In response to the other’s change in demand, each party shifts from the production of consumers’ goods to the production of capital goods. And as the result of his own change in demand, each party employs more funds— and more real resources—in producing both his consumers’ goods and his capital goods than if the demand of the other party alone had changed. That the demand of the other party has changed results in the fact that one not only employs additional capital, but also employs a
correspondingly larger proportion of one’s additional capital in the production of further capital goods.
What happens as the result of this process is that production becomes cross-hatched, as it were, or more cross-hatched. That is, part of the output, or a greater part of the output, of each of the industries serves as capital goods to the other and enables the other, in turn, all the better to produce not only consumers’ goods but also capital goods and thus to supply it with still more and still better capital goods, as well as its wage earners and businessmen and capitalists with more and better consumers’ goods. The result in our example is that the automobile industry is able to carry on its production both of consumers’ goods and of capital goods with the aid of more of the output of the airconditioning industry, and the airconditioning industry is able to carry on its production both of consumers’ goods and of capital goods with the aid of more of the output of the automobile industry. And the output of each that serves the other benefits from a greater prior contribution of the output of the other.
What is true of this illustration based on two industries is true of the economic system generally. The greater is the demand for capital goods relative to the demand for consumers’ goods in the economic system, the larger is the fraction of the output of the economic system that takes the form of capital goods and the larger is the fraction of the output of the economic system that enters into the production of capital goods. Both capital goods and consumers’ goods have more prior output going into them, as well as more of current output being in the form of capital goods. The consequence of the expanded and improved production of capital goods is the possibility of endless improvement in the further production of capital goods and thus of endless improvement in the production of consumers’ goods.
These results, of course, are fully confirmed by examining the data of Figure 17–1 as the transition is made to a more capital intensive economy, and thereafter. The economic progress of Figure 17–1 results from the relatively greater concentration on the production of capital goods and the employment of more capital goods in the production of further capital goods.
An implication of the preceding discussion is that the perception, over the last several decades, of flimsy and shoddy products—for example, thin walls in newer buildings compared with those constructed before World War II—as a reflection of less going into the products, is correct. Such phenomena are manifestations of a less-capital-intensive economy today in comparison with the past. Less is going into products, not because of any greater personal consumption on the part of businessmen and capitalists, however, but because taxation, budget deficits, and inflation, to finance the consumption of the government, are diverting factors of production from the production of capital goods, which contribute to further production, to the production of consumers’ goods for the government and those to whom the government gives money.
12. More on Why Savings Cannot Outrun the Uses for Savings
In the last chapter, I showed how the process of net investment and capital intensification operate to eliminate any possibility of the persistence of negative net consumption, which might be imagined to stem from saving on the part of wage earners. 97 Here, it is appropriate to bring forward additional considerations in support of the proposition that in the longrun at least net consumption must always be significantly positive and thus that a significantly positive rate of profit must exist even under the conditions of an invariable money.
Capital Intensiveness and Land Values
The disappearance of any negative net consumption on the part of wage earners is absolutely guaranteed by the fact that as the rate of profit on capital approaches zero, the degree of capital intensiveness that becomes economically worthwhile literally approaches infinity. Thus there is room in the economic system for incalculably more savings and capital than wage earners or anyone else can ever accumulate, and thus certainly room for wage earners to accumulate enough savings and capital relative to their incomes to put an end to any negative net consumption on their part.
The degree of capital intensiveness that pays approaches infinity as the rate of profit approaches zero, if for no other reason then because of the effect of a zero rate of profit on the value of land. (In addition, of course there is the fact that in such conditions it would pay to carry the use of capital to the point where absolutely no further reductions in cost of production or improvements in the quality of products could be achieved by the use of more capital, which itself would entail the existence of far more capital than could ever be accumulated. 98 ) At a zero rate of profit, the value of land would literally be infinite. Indeed, the value even of a single parcel of land yielding a permanent net income, such as a single piece of downtown real estate in any major city, would be infinite.
A piece of land that is expected to yield a net income year after year, virtually forever, can be sold at a finite price only because of the existence of a positive rate of profit. Assume, for example, that the use of a piece of
land somewhere is expected to be worth just $1,000 a year, but virtually forever. Even though there is no limit to the total income that this piece of land will eventually yield, it sells at a price that is equivalent to a relatively small number of years’ income—perhaps just 10 years’ income. If the rate of profit is 10 percent, that is exactly the price for which this piece of land will sell. The $1,000 annual income from the land will yield a 10 percent rate of profit only if the price of the land is $10,000 ( $1,000 ⁄ $10,000 = 10 percent). The existence of a 10 percent annual rate of profit thus leads to the $1,000 annual income of the land being capitalized at a purchase price of just 10 years’ income.
But if the rate of profit were 5 percent instead of 10 percent, that same piece of land, yielding $1,000 per year forever, would have a price of $20,000. This is because it takes a $20,000-capitalized value of the land to make the $1,000 annual income from the land yield only a 5 percent rate of profit. If, to go further, the rate of profit were 2 percent instead of 5 percent, the capitalized value of the piece of land would be raised to $50,000, because it takes that much to make a $1,000 annual income yield only a 2 percent rate of profit. It is not difficult to see that in order for a $1,000 annual income from the land to constitute a zero rate of profit, the capitalized value of the parcel of land would have to be infinite. 99
As the rate of profit falls, therefore, the capitalized value of land in the economic system increases in inverse proportion. And this alone has unlimited potential for raising the value of accumulated assets—and thus of accumulated savings and capital—relative to current income and consumption. It helps to explain why the accumulation of savings and capital relative to income and consumption must always stop far short of the point at which their further accumulation would still be useful. In other words, it helps to explain why capital intensiveness is always scarce—why more of it would always be desirable than we can ever actually have. For with the accumulation of the additional savings and capital represented in part by a growing capitalized value of land, people feel free to step up their consumption and, ultimately, not increase the ratio of savings and capital to income and consumption any further.
Because there is always room for additional capital, there is always room for further net investment. But under the conditions of an invariable money, at some point there is no further net investment. As we saw in the last chapter, this is because at that point sufficient net consumption exists to make the rate of profit high enough relative to the marginal productivity of additional capital to make additional net investment no longer worthwhile. 100
The Housing Outlet and Consumer Interest
Saving out of profits and saving out of wages are the only sources of additional capital intensiveness. In both cases, saving is limited by time preference. For wage earners, the ability to earn wages in the future is the main source of provision for the future. Wage earners are motivated to save primarily as the means of providing for periods of inability to earn wages, such as unemployment, illness, accident, and old age. Apart from that, their motivation to save is mainly limited to saving up to buy goods that are too expensive to purchase out of a single pay period, such as appliances, automobiles, and, especially, houses. Most of the savings made by wage earners not only end up ultimately being consumed, as when one dissaves during a period of unemployment or in retirement, or when one buys the consumers’ good one has been saving up for, but, as previously explained, they are probably consumed almost immediately upon being set aside, or at least are matched by current consumption. For they are mainly used to finance consumer loans, such as home mortgages and consumer installment loans, and to the extent that they are not, they are largely or entirely offset by loans for such purposes originating in business firms. 101
This last—the extent to which saving out of wages does not finance consumption—refers to the savings of wage earners who become businessmen, or whose savings are accumulated within business firms, as in the case of many employee pension plans. As I say, from the perspective of the economic system as a whole, such savings are largely or entirely offset by loans for consumer purposes originating in business firms. Moreover, when such savings become substantial, it is often after the workers in question have begun to succeed as businessmen, in which case, from that point on their saving is saving out of profit income. And in the case of all substantial savings that wage earners accumulate within business firms, a major portion originates in the reinvestment of interest or dividends. Thus, here too the saving is largely saving out of profit income.
For these reasons, the extent of any actual negative net consumption emanating from wage earners is almost certainly not very great, if it exists at all.
It is important to realize that all of the savings wage earners would ever be likely to wish to accumulate relative to their incomes could probably easily be absorbed just by housing alone. Even if the average wage earner followed the conservative rule of personal finance of spending no more than a fourth of his income on housing expense, that would probably be sufficient to support an amount of savings invested in housing of five times his annual income. For example, if his income is 100 per year, and he spends 25 on housing, of which 15
represents either the interest he pays on his mortgage or is the equivalent of the profit his landlord earns on him, then at a 3 percent rate of interest or profit, he can have a house or live in an apartment that is worth 500. (If there were sufficient accumulated savings and no increase in the quantity of money or volume of spending, a rate of profit and longterm rate of interest of 3 percent would certainly be achievable.) It follows, moreover, that if the average wage earner accumulates savings of five times his income, those wage earners beginning retirement accumulate savings of ten times their income, balancing the zero accumulated savings of wage earners just starting out. Thus, with far more savings than wage earners are ever likely to seek to accumulate being so easily capable of being employed, there is certainly no problem of the savings of wage earners ever outrunning the uses for such savings just in the field of housing alone. 102
The Automatic Adjustment of the Rate of Saving to the Need for Capital
Not only does saving out of wages constitute no threat of the supply of savings ever outrunning the uses for savings, but also saving out of profits can never constitute such a threat. This is because in an economy with an invariable money, as soon as the need for additional capital intensiveness diminishes, productive expenditures begin showing up more quickly as costs, with the result that net investment diminishes and the rate of profit falls toward the rate of net consumption. Thus, saving out of profits declines precisely as the need for such savings declines. Note: it is not that a fall in the rate of profit here diminishes the incentive to save; the fall in the rate of profit is part of a process which directly diminishes the capacity to save, namely, the excess of profit income over net consumption.
Furthermore, whatever savings businessmen and capitalists might ever wish to make at the expense of a reduction in net consumption can always be easily accommodated. If there were no other way, then simply the use of more expensive materials and the inclusion of more and better components and accessories in the production of products would provide an outlet for such savings and productive expenditure. 103 But, of course, such an outlet for additional saving and productive expenditure would quickly be followed by an equivalent rise in aggregate costs and fall in profits, which would, once again, equivalently diminish the capacity for further net saving out of profits. 104
The essential point here is that in an economy with an invariable money, saving out of profits, which, in fact, is by far the main form of saving in the economic system, only exists insofar as there is a substantial need for additional capital. In the absence of such a need, productive expenditure quickly shows up as cost, with the result that profit income immediately falls to the prevailing level of net consumption and, in so doing, simply eliminates net saving and net investment.
In an economy with an invariable money, savings and capital would be accumulated relative to current income up to a point determined by time preference, and would be accumulated no further unless something occurred to make time preference fall. Capital accumulation in physical terms, of course, would go on if the prevailing degree of time preference were sufficiently low and if technological progress took place.
In view of what we shall learn of his views in the next chapter, it may be surprising that Lord Keynes himself alludes to the true state of affairs concerning the relationship between saving and the need for saving under the conditions of an invariable money, but feels free to disregard it merely because he chooses to refer to it in a way that makes its existence seem like only a remote possibility. He writes: “. . . there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity . . . would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving . . . comes to an end before capital has become sufficiently abundant.” 105
In the peculiar terminology of Keynes, what must be recognized is precisely that—under a system of invariable money—“the individual propensity to consume” is “of such character that net saving . . . comes to an end before capital has become sufficiently abundant.” It does so by virtue of the existence of limitless potential employments for savings and capital in conjunction with the existence of time preference. Under the conditions of an invariable money, long before savings and capital can be accumulated to the point of exhausting the uses for them, which are literally infinite, time preference puts an end to further saving and capital accumulation.
Of course, the conditions of an invariable money do not exist. What exists, even under a 100-percent-reserve gold standard, is an increasing quantity of money. In an economy with an increasing quantity of money and volume of spending, net saving and capital accumulation in monetary terms exist as permanent phenomena. In this context, however, as I showed in the last chapter, they are accompanied by a corresponding positive addition to the rate of profit, mainly in the form of an equivalent rate of net investment. 106 In such an economy, as I have shown, the continuing net saving out of profits takes place out of a rate of profit that is elevated by the same cause that necessitates the continuing net saving and continuing capital accumulation in monetary terms, namely, the increase in the quantity of money and volume of spending itself. 107
As we have seen, this net saving and net investment, which takes place as part of a process that increases capital and nominal income in the same proportion, does not represent any rise in the economic system’s degree of capital intensiveness in the relative-value sense—that is, it does not represent any rise in the ratio of accumulated savings or capital to consumption, wages, or sales revenues. 108 Capital accumulation here goes forward both in real and in monetary terms without capital rising relative to any of these magnitudes.
Thus, for the reasons explained, in no case is the economic system ever threatened with savings outrunning the profitable uses for savings. The saving of wage earners is no problem, and saving out of profits always takes place in intimate connection with the need for such saving, the capacity for such saving being governed precisely by the strength of the need for it, whether that need is a need to increase the degree of capital intensiveness or, in an economy with an increasing quantity of money, a need to maintain an existing degree of capital intensiveness.
These facts should be kept in mind in appraising the doctrines of Lord Keynes, which I set forth in the next chapter.
Notes
1. See above, pp. 623–626.
2. At the start of Year 2, there is no increase in the total supply of goods available for sale. At that point, which represents capital accumulation achieved by a rise in the relative demand for capital goods, the 20 percent increase in the supply of capital goods is made possible by an equivalent reduction in the supply of consumers’ goods.
3. Indeed, we have already applied this procedure in the critique of the productivity and time preference theories of interest in their traditional forms, by means of introducing the assumption of changes in production into the conceptual framework represented by Figure 16–2. See above, pp. 787–794.
4. The same basic facts appeared in Table 16–5, which was used to illustrate the emergence of net investment and its contribution to the amount of aggregate profit. See above, p. 745. 5. This is because the 1L of labor and the existing supply of capital goods in each year would then be employed to produce 1.3K of capital goods and .7C of consumers’ goods to be available at the start of the next year for each 1K of capital goods presently existing. Thus, with 1.3K of capital goods produced for every 1K of capital goods productively consumed, the supply of capital goods and total productive ability would grow in the ratio of 1.3:1. It should be understood that the outputs of 1.3K and .7C for every 1K of capital goods productively consumed are inferred by multiplying .65 x 2K and .35 x 2C. The multi-plicands 2K and 2C, of course, are the outputs of capital goods and consumers’ goods that would result from the employment of 100 percent of the 1L of labor and 100 percent of any existing 1K of capital goods in the production of capital goods or, alternatively, in the production of consumers’ goods. Of course, there are conditions in which the rise in the relative demand for and production of capital goods would be followed by an acceleration in the rate of capital accumulation and economic progress that represented a deceleration in the rate of acceleration. On this point, see above, pp. 628–629.
6. See above, p. 630.
7. For a fuller account of the destructive influence of this view, see above, p. 709.
8. See above, pp. 674–699.
9. A rise in the demand for capital goods relative to the demand for consumers’ goods could take place without a fall in net consumption only by virtue of the demand for capital goods rising at the expense of the demand for labor.
10. See above, p. 573.
11. Essentially the same conclusions, of course, were reached back in Chapter 13. However, there the assumption of vertical integration precluded discussion of the falling prices of capital goods. See above, pp. 569–570.
12. See above, pp. 758–759.
13. A similar formulation appeared back on p. 570. As pointed out in the note before last, however, the assumption of vertical integration that was made at the time, prevented inclusion of capital goods in the analysis.
14. See above, pp. 573–580.
15. On this last point, see above, pp. 575–576.
16. See above, pp. 557–558.
17. The nature of the monetary component in the rate of profit and its relationship to net investment is explained above, on pp. 762–774. See in particular pp. 768–771.
18. David Ricardo, Principles of Political Economy and Taxation, 3d ed. (London, 1821), chap. 7; reprinted as vol. 1 of The Works and Correspondence of David Ricardo, ed. Piero Sraffa (Cambridge: Cambridge University Press, 1962), p. 133. This passage was quoted above, on p. 495, in connection with showing the actual meaning Ricardo attached to “a fall in wages.” Subsequent page references to the Sraffa edition appear in brackets.
19. Ibid., chap. 20 [pp. 278–279]. Inserts added.
20. Ibid., chap. 5 [p. 95].
21. On this point, see below, p. 824. See also above, pp. 631–632.
22. This, of course, is apart from a transition phase, during which a fall in the rate of net consumption occurs as the precondition of increasing the relative demand for capital goods and thus their relative production, and thereby getting the process of increasing production underway. On this subject, be sure to see above, pp. 817–818.
23. This is true irrespective of the extent of saving by wage earners and of the extent to which their saving serves to raise productive expenditure. See above, pp. 750–754 and 759–762. See also above, pp. 778–787, and below, pp. 856–859.
24. Concerning this fact, see above, pp. 817–818.
25. Concerning the effects of a more abundant supply of savings and credit on the demand for money for holding and thus on the velocity of circulation of money, see above, p. 518. 26. See above, pp. 817–818. See also above, pp. 762–767. 27. See below, pp. 837–838.
28. It is implicit in this example that all of the capital goods and labor in existence in any base year are always ultimately, directly or indirectly, devoted to the production of consumers’ goods in their entirety. For application of this fact to the fallacy of underconsumptionism, see below, pp. 847–851.
29. The writings of Murray Rothbard present a clear instance of error on this subject and on the closely related subject of whether or not capital accumulation implies a falling rate of profit. Rothbard simply does not see how previous capital accumulation can serve as the basis for subsequent capital accumulation. Nor does he understand the role in capital accumulation of technological progress and anything else that increases the general ability to produce. Cf. Murray N. Rothbard, Man, Economy, and State, 2 vols. (Princeton, N. J.: D. Van Nostrand, Inc.: 1962), 2:470–496.
30. On the subject of past production serving the present, and present production serving the future, see Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., trans. George D. Huncke and Hans F. Sennholz (South Holland, Ill.: Libertarian Press, 1959), 2:88.
31. See above, pp. 631–632.
32. See Ludwig von Mises, Human Action, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 541–545.
33. It should be recalled that it was also previously established that the anticipation of falling prices caused by increased production does not bring about an increase in the demand for money for holding in order to take advantage of lower prices in the future. Thus it is also not deflationary by that route. See above, pp. 574–576.
34. See above, pp. 813–818 and 574.
35. See above, pp. 817–818.
36. On the implications of these facts for the case for a 100-percent-reserve gold standard or gold-and-silver standard, see below, pp. 954–959.
37. See above, p. 176.
38. Indeed, in my own intellectual development, it was the grasp of the implications present in an intellectual construction essentially similar to Figure 17–1 that led me to the development of the productivity theory of wages and to most of the other major propositions of the second half of this book. 39. It should be kept in mind that profit is taken as gross of interest, and that the analysis applies equally to interest income and the rate of interest.
40. See above, p. 740 and pp. 741–743. See also the quotation from von Mises concerning the effect of eliminating the capitalist’s role as receiver of interest causing its replacement by the capitalist’s role as consumer of capital, above, on p. 302. 41. In support of this pattern of outcome, see above, p. 740. 42. See above, pp. 712–714.
43. In this case, there is a rise in nominal national income to the extent that the economy-wide demand for labor is increased. To this extent, of course, the case at hand is also one demonstrating an inverse relationship between national income and prosperity. See above, pp. 648–650. for a detailed explanation of the negative effects for prosperity.
44. See above, pp. 762–771.
45. To some extent, private consumption expenditure that would have been financed by borrowing, is also reduced, such as home buying and purchases dependent on consumer installment credit. 46. In the case of taxation, of course, the rise in the rate of profit is on a pretax basis, while in the case of budget deficits, it is on an aftertax basis.
47. See below, pp. 930–937.
48. As I have shown, just such a policy has been pursued in Sweden, the model country of today’s “liberals.” See above, p. 310.
49. A program for the abolition of the welfare state and all government interference in the economic system is presented in the concluding chapter of this book.
50. Concerning the fact that foreign investment entails an excess of exports over imports in the country or countries providing the investment and a corresponding excess of imports over exports in the country or countries receiving the investment, see above, pp. 529–531.
51. See above, pp. 531–532.
52. If the two countries use different moneys, then with the same rates of increase in the money supply of the two countries, the foreign exchange value of the currency of the more rapidly progressing country will appreciate relative to that of the less rapidly progressing country. The relative appreciation will be all the greater to the extent that the money supply of the less rapidly progressing country increases at a more rapid rate than that of the more rapidly progressing country.
53. The replacement of social security by private saving would promote investment even though the savings of wage earners are used largely to finance consumption expenditures, such as housing purchases. This is because the availability of these savings to finance such purchases would correspondingly reduce the diversion of savings from business investment that must presently occur in order to finance such purchases. 54. See above, pp. 737–739.
55. See above, pp. 622–639, in particular pp. 634–636.
56. Strictly speaking, it would be the establishment of laissez-faire capitalism for the very first time. For an indication of the significant departures from laissez-faire capitalism even in the nineteenth century, see above, p. 28.
57. See above, pp. 830–831. See also above, pp. 308–310. 58. See above, p. 278. See also above, pp. 639–641.
59. See above, pp. 758–759.
60. For example, see above, ibid.
61. See above, pp. 739–741, 753–754, and 759–762.
62. It should go without saying that if the equilibrium capital-intensiveness in the relative-value sense is sufficiently high, the degree of capital intensiveness in the physical sense of the ratio of capital goods to the supply of labor can go on rising indefinitely, on the basis of technological progress, whose implementation is encouraged by the sufficiently high degree of capital intensiveness in the relative-value sense.
63. Of course, increases in the quantity of money and volume of spending operate to an important extent directly to increase the nominal value of assets, both capital assets and consumer assets, especially in the form of land. These increases must be taken into account in calculating the percentage of income that
APPLICATIONS OF INVARIABLEMONEY/NET-CONSUMPTION ANALYSIS 861 must be saved in order to maintain the ratio of accumulated savings to current income. Their influence is obviously to lessen the percentage of ordinary income—that is, income other than asset gains—that needs to be saved.
64. On the economic degree of capitalism, see above, pp. 632–634.
65. See above, pp. 631–632. See also above, p. 824.
66. The same point applies, of course, to the degree of capital intensiveness in the relative-value sense. It too operates as force to acceleration.
67. On these subjects, see above, p. 709.
68. See above, pp. 691–694.
69. To the extent that the cash holdings were outside of business firms, the rate of profit on the whole of the capital invested in business firms, including the cash holdings of business firms, would be correspondingly increased.
70. On the Keynesian doctrines, see below, pp. 863–894. On the Keynesian doctrine of the too-low rate of profit in particular, see below, pp. 868–876. On the liquidity-preference doctrine in particular, see pp. 885–887. See also pp. 891–892. The last reference explains why I claim that the Keynesians’ fears of too low a rate of profit are pretended.
71. Concerning the “Pigou effect” and its inherent weakness, see below, pp. 865–866.
72. For an account of the government’s role in causing financial contractions and depressions, see above, pp. 513–516 and 519–526. See also below, pp. 938–941.
73. For elaboration of this point, see above, pp. 750–754 and 759–762. See also, below, pp. 856–859.
74. For a critique of Keynesian claims to the contrary, see below, pp. 885–887.
75. For a textbook exposition of the investment-opportunity doctrine, see Paul Samuelson and William Nordhaus, Economics, 13th ed. (New York: McGraw Hill Book Company, 1989), pp. 720–725.
76. See above, pp. 787–792.
77. As I previously pointed out, as far as it corresponds to net investment, the magnitude of profit is in part also attributable to the difference between the supply of products and the supply of factors of production previously purchased. See above, p. 796.
78. See above, pp. 556–558.
79. As we have seen the reduction in unit costs it achieves takes place prior to the fall in selling prices. See above, pp. 807–817. 80. On all of these points, see above, pp. 556–558.
81. The degree of capital intensiveness should, of course, also be included in the list of actual causes of capital accumulation and increases in production. I omit it here, merely for the sake of economy of expression.
82. Strictly speaking, it is a consequence of the by-product, namely, the increase in the quantity of money and volume of spending. Under a system of fiat money, the status of net saving is even less than that. Then it is a consequence not even of a by-product of capital accumulation and rising production but of a mere accompaniment of these phenomena, that is, of the accompaniment constituted by the increase in the quantity of fiat money.
83. On the Platonic-Heraclitean view of entities, see above, pp. 674–689.
84. Quoted in John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1937), p. 367. Along the same lines, see the quotation from Spence by James Mill in James Mill, Commerce Defended (London, 1808), chap. 6; reprinted in Selected Economic Writings of James Mill, ed. Donald Winch (Chicago: University of Chicago Press, 1966), p. 131. See also the underconsumptionist writings of W. T. Foster and W. Catchings: Money, Publications of the Pollak Foundation for Economic Research, no. 2 (Boston and New York: Houghton Mifflin, 1923); Profits, Publications of the Pollak Foundation for Economic Research, no. 8 (Boston and New York: Houghton Mifflin, 1925); Business Without A Buyer, Publications of the Pollak Foundation for Economic Research, no. 10 (Boston and New York: Houghton Mifflin, 1928).
85. See above, pp. 56–58. See also above, pp. 556–557. 86. The pattern of my resolution of the underconsumptionists’ paradox in what follows has been inspired largely by the writings of F. A. Hayek. See in particular his essay “The ‘Paradox’ of Saving” in his book Profits, Interest and Investment (London: Routledge and Kegan Paul, 1950). See also his treatment of the structure of production in Prices and Production, 2d ed. (London: George Routledge, 1935), pp. 29–64. But equal or even greater credit should go to James Mill. See the latter’s Commerce Defended, chap. 6; reprinted in Selected Economic Writings of James Mill, pp. 127–133.
87. Concerning double counting, see above, pp. 674–682. 88. Cf. Carl Menger, Principles of Economics, trans. and ed. by James Dingwall and Bert F. Hoselitz (Glencoe, Ill.: The Free Press, 1950), pp. 55–67.
89. On this point, see Eugen von Böhm-Bawerk, Capital and Interest, 2:77–118, for a discussion of how current production serves the future and is served by the production of the past. 90. In terms of the format of Table 17–2, these expenditures would represent the addition of further columns to the right of those in the present Table 17–2. Thus, there would be a column headed D K5 , just to the right of the present rightmost column, which is headed D K4 . The outlays of 65.54 plus 8.19 would appear in this column and would serve in the production of capital goods that would be sold in the next year, under the column heading D K4 , for 81.92. Five columns further to the right would appear a column headed D K10 . In this column would appear the outlays 21.47 and 2.68, which would serve in the production of capital goods that would be sold in the next year under the column heading D K9 . A series of downward and leftward sloping arrows would connect these outlays with the sale of capital goods five years later, under the column heading D K5 , and, five years after that, with sale of consumers’ goods. 91. It is possible that if he takes the trouble to check all of the arithmetic involved in the construction of Table 17–3, the reader will arrive at slightly different totals as the result of differences in rounding. My procedure has been to calculate the amounts in columns three and four year by year and then to derive from them both their totals and the respective amounts shown in column five.
92. For Figures 17–2 and 17–3, see above, pp. 821 and 823. 93. See above, pp. 824–824.
94. See Böhm-Bawerk, Capital and Interest, 2:79–88, for an alternative approach to the measurement of the average period
of production.
95. On the equality of prices with sums of past wages and profits, see above, p. 201. See also above, pp. 639–641 and 647.
96. Note that in the case of an infinite rate of profit accompanied by an infinite ratio of the demand for consumers’ goods to the demand for labor, namely, the case of Adam Smith’s “early and rude state of society” and Marx’s “C–M–C,” the average period of production is extremely short, despite the fact that it appears to be mathematically undefined in the present discussion. This is because the case contains no demand for capital goods and no accumulated capital. In such conditions, production is of the hand-to-mouth variety.
97. See above, pp. 759–762.
98. For a description of the virtually limitless quantities in which additional capital would be useful in reducing costs and/or improving the quality of products, see above, pp. 56–58. 99. Cf. Ludwig von Mises, Human Action, p. 526.
100. See above, pp. 758–762.
101. See above, p. 735.
102. Of course, it should be recalled that the payment of interest on consumer loans, such as home mortgages, represents a further source of net consumption and thus of aggregate profit and interest. See above, p. 753.
103. Along these lines, see above, pp. 854–856.
104. The use of funds released from net consumption for such purposes, of course, would occur only if there were no greater need for additional capital, such as would require the employment of the funds spared from net consumption in the making of productive expenditures that were more remote from showing up as costs.
105. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936) p. 376. Italics supplied.
106. See above, pp. 762–774, especially p. 768.
107. See above, the preceding note. See also above, pp. 825– 826 and 836– 840.
108. See above, pp. 775–776.
Capitalism: A Treatise on Economics
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