§ 11. OVER-PRODUCTION.

The paradoxical nature of the crisis is characterized by the fact that production is curtailed in every direction, and there is no work anywhere, while so far as the economic position of millions of people is concerned, we could really be doing nothing better than getting every ounce of product out of men and machinery. Curtailment of production follows curtailment, dismissals of workers follow dismissals; machines and rationalization have made production easier all along the line during the previous boom, and have rendered human labour superfluous. In vain do we look round for new and profitable possibilities of production, which might reabsorb the unemployed. What is easier, then, than to assume that the cause of the crisis is general over-production, developed in the preceding boom—in other words, that the total production has outstripped the total consumption, and that the crisis must therefore be overcome by a reduction of production (curtailment of work, suppression of rationalization, and restriction of output). As a matter of fact, this is the most popular crisis theory at all times of crisis, and to it there corresponds the contraction of production which the producers, in the difficult position in which the crisis places them, undertake, or are forced by the government to undertake, all along the line. At such times men’s thoughts and actions are dominated by a “fear to produce.”

It is an indisputable fact that a general slump, which does not permit of the scale of production reached in the boom being maintained, sets in during the crisis, and it is equally indisputable that this general slump is the result of the total demand suddenly falling behind the total supply. But let us make sure what this means and what it does not mean.⁶ Under no circumstances can it mean that the cause of the general slump is to be sought in the fact that production has outstripped consumption and that too many of all goods at once are being produced. Closer consideration shows that there is no logic in such a view, for in relation to what can too many goods be said to be produced? Surely not in relation to wants, i.e., to the willingness-to-consume, for that would completely upset the idea of all economy as an activity concerned with the overcoming of the eternal scarcity of goods, and cannot be seriously considered. The standard of living among the masses, measured by what is considered as necessary to-day among the upper strata of society, is still at such a miserably low level that a hundred times the production hitherto attained would scarcely suffice to bring the well-being of the masses up to the level of the upper classes. Until that is done there is not the slightest sense in disputing that all productive forces at our disposal must be employed in the fight against the scarcity of goods. We are not really at a loss to know what to do with our productive forces as long as we do not live in Lubber-land.

Taking all in all, therefore, we cannot have too many workers, but only too few; we cannot have too many machines or too much rationalization, but only too little. But are the millions of unemployed not a shattering proof of the fact that we have too many workers? The best answer to this question is not long theoretical arguments but the following simile. The struggle against the scarcity of goods which we are condemned to wage for all time, and always with inadequate forces, can be compared to the struggle of the German army against the superior numbers of their opponents during the World War. Every soldier was used in that struggle, and the Germans would have been glad if they had had at their disposal more millions of men, or of tanks to replace soldiers, such as their enemies had. Nevertheless it happened, owing to difficulties of organization which could scarcely be avoided in such a huge and complicated structure as the German army, that from time to time isolated troops were kept out of action, while at other places on the front they were sorely needed. Thus a scarcity of soldiers in general was here accompanied by a superfluity of soldiers at certain isolated places. No one in possession of his senses would have concluded from this that these soldiers who were temporarily kept out of action should have been sent home as superfluous or that the “work” of the army could have been “spread” by lengthening the men’s leave or replacing guns by halberds and pikes. The juxtaposition of too little in general and too much in particular was in this case so obvious that it could not escape even the densest observer. And yet most people find it extraordinarily difficult to believe that in the economic system it is fundamentally the same. This is because money and the division of labour, which characterize the particular method used by our economic system in its fight against the scarcity of goods, have drawn a thick veil over the connexion between the two, the piercing of which requires a special mental effort and, above all, the courage to reduce things to their simplest terms.

An economic crisis (that of to-day like those of the past) can therefore not be interpreted as a general over-production of all goods at once, a surpassing of the possibilities of consumption by the possibilities of production, but only as a lack of proportion between the different lines of production, in short, as a functional disturbance within the highly complicated modern exchange economy. The disparity between the goods at our disposal and our unsatisfied wants is more obvious than ever, but the wheels of the machine which delivers the goods do not fit together properly at times of crisis.

According to the logic of the over-production myth, the total volume of production in question is a more or less fixed quantity, to be shared by the people, with the result that each watches jealously to see that the others do not receive too large portions. A further result is that in international exchange the individual States strive by tariffs or other hindrances to imports, to preserve as large a portion as possible of the limited volume of production for their own national economy. But how is this production quantum to be determined? Apparently by the fact that there is a fixed limit to the purchasing power needed to buy the products. But the incomes with which the goods produced are bought come ultimately from the production itself, and the total sum of the incomes is also determined by the total sum of the production. If we follow out these relationships to their logical conclusion, we find that production is not determined by consumption, but consumption by production. That is to say, there is no limit to profitable production as a whole (i.e., apart from the question of the correct composition of the total production), since the saturation point of human wants is immeasurably far off, but there is, unfortunately, a limit to consumption, which is determined by the utmost we can produce with our limited forces and means. Anything else is absurd: the fear of production is absurd, as is the view that we must constantly be prepared to “spread” the volume of production; and equally absurd is the campaign against all efforts to increase productivity.

The over-production myth often takes the form also of connecting up the level of unemployment with the excess of the number of workers over the total amount of profitable production, and thus of interpreting unemployment as a symptom of over-population. But this idea that the number of unemployed expresses the degree of over-population of a country is equivalent to the erroneous conception that the total sum of the production to be undertaken is a given fixed quantity, which, beyond a definite number of the population, is not sufficient to occupy everyone. This conception is contradicted not only by all the theoretical arguments which have already been levelled against it, but also by the fact that the world crisis of to-day is afflicting rich and poor, thickly populated and thinly populated countries, with equal force. Unemployment in France—which, in the first phase of the world crisis, many believed to be safe from the scourge of unemployment as a country not suffering from over-population—also later reached considerable proportions corresponding to the degree to which France was affected by the world crisis. Finally, if we were to decrease the population of Germany by deporting twenty million people, taking care to leave unchanged the relative numbers of workers in the various branches of economic activity, we should not be one step nearer solving the problem of German unemployment, but we should find new confirmation of our thesis that it is a question of the qualitative factor, of the functioning of the apparatus, and not of the quantitative factor or the size of the economic apparatus.

That all these considerations are old-established propositions of political economy is shown by the following passage from Ricardo’s Principles of Political Economy and Taxation (Chapter XXI)—

Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected. Too much of a particular commodity may be produced, of which there may be such a glut in the market as not to repay the capital expended; but this cannot be the case with respect to all commodities; the demand for corn is limited by the mouths which are to eat it, for shoes and coats by the persons who are to wear them; but though a community or a part of a community may have as much corn, and as many hats and shoes as it is able, or may wish to consume, the same cannot be said of every commodity produced by nature or by art. Some would consume more wine if they had the ability to procure it. Others, having enough of wine, would wish to increase the quantity or to improve the quality of their furniture. Others might wish to ornament the grounds or to enlarge their houses. The wish to do all or some of these is implanted in every man’s breast; nothing is required but the means, and nothing can afford the means but an increase of production. If I had goods and necessaries at my disposal, I should not be long in want of workmen who would put me in possession of some of the objects most useful or most desirable to me.

An indirect disproof of the over-production myth may be given as follows. If it were correct and not merely a myth, we should have to conclude that, during the depression production all along the line must be pushed back to the level of consumption, that is to say, to the market opportunities. And it is just this conclusion that is drawn by every single entrepreneur faced by a glutted market when, in the case that a fall in costs does not take place to the necessary extent, he tries to reach a new equilibrium at a lower level by diminishing his production or by suspending his business altogether. Nobody can reproach him for this since he is compelled to do it by the circumstances. But if everybody acts similarly and has to do so out of individual economic necessity, does this remedy the malady as a whole? Undoubtedly not, so long as the diminution of production in one place does not make room for an extension of production in another. The “fear to produce” may be well founded in the individual case, but, in so far as everybody gives way to it, the effect is senseless because it runs directly counter to the purpose. What in fact happens is that the curtailment of production leads to the further destruction of purchasing power simply by virtue of the interdependence of production and the creation of purchasing power, an interdependence which we must continually stress. So long as no new production starts up, the economic system is caught, via the universal practice of curtailing production, in a cumulative decline in which the original disequilibrium between supply and demand is progressively enhanced on an ever lower level. Consequently general over-production cannot be the cause of the depression since a diminution of production does not only not overcome it but even makes it worse.

It should be beyond all doubt that a general over-production relative to the desire and the capacity to consume is inconceivable. When we consider that purchasing power is created afresh with production, it follows furthermore that it is equally impossible to produce too many of all kinds of goods at once in relation to purchasing power. It is inconceivable that all producers can have produced an excess and that they cannot mutually exchange the surpluses provided that they have adjusted their production correctly to the corresponding demand. Let us assume an isolated economy consisting of two producers, of whom one (A) produces only bread and the other (B) only shoes. The equilibrium of the system depends on whether A and B estimate correctly each other’s demand for bread and shoes respectively. If A, for example, miscalculates in this connexion, then a part of the bread he produces will be unmarketable. The total supply in this miniature economic system exceeds by so much the total demand. Over-production is undoubtedly present, but not in the sense that too much of all imaginable goods has been produced—B in our example would gladly have accepted a roast chicken—but because not the right kind of goods has been produced. But if this is the case, the equilibrium of the economic system can be seriously disturbed and a general glutting of the market occur. The essence of all these considerations is this: A depression is a time of a general glutting of the market, which can be described as the exceeding of total demand by total supply and expresses itself in a general price fall. But this glutting of the market is caused not by a general overproduction (of all conceivable goods) but by a disproportionality disruptive of the equilibrium of the economic system in the composition of total production, in other words a partial over-production, which by reason of the mutual interdependence of all producers finally leads to a glutting of markets, that is, to a lagging of total demand behind total supply extending to all branches of the economy.

This elementary consideration must form the starting point for any adequate theory of cycles and crises. It is the task of this theory to show how a disproportionality destructive of equilibrium comes about. The rejection of the over-production theory does in no way imply that the crisis is unobjectionable. It simply dismisses an impossible explanation. To those who are hit by the depression it may be quite indifferent whether we call it “general over-production” or “general glutting of the market”; it loses none of its gravity thereby. Neither should it be imagined that the partial over-production (disproportionality), which leads eventually to the general glutting of the market, still manifests itself in the crisis in such a way that those who produce too much find their counterpart in those who produce too little. The disproportionality develops in the upward swing of the cycle, but in the depression it is in vain to look round for branches of production where too little is being produced. The foregoing analysis will have made it clear why this is so: the disruption of the equilibrium in the economic system has disturbed the process of exchange all along the line, a disturbance in which the whole of production is involved. The requisite additional production has become a mere latent possibility which only comes to light with the restoration of equilibrium.

All these conclusions are of the utmost practical importance because without them we are absolutely unable to find our way through a mass of complexities. To the alarming question as to what shall ever become of the millions of unemployed and of the unused plant of rationalized producing units when all markets are glutted and every occupation and branch of production is overcrowded, the answer can only be: The market for the products of these at present unused reserves of productive resources will present itself when those who are at present pushed out of the productive process have, by their reabsorption, again become buyers, and that will be the case when the equilibrium of the system has been restored. The unused reserves of productive resources correspond in the same measure to unused reserves of purchasing power—this is the lesson that we have learned from the refutation of the over-production theory.

The restoration of equilibrium creates purchasing power. No discerning person will surely believe that the level of production at which we are now working constitutes the magnitude to which we are condemned in the long run, that the paradox of the parallel existence of highly productive but idle plant and millions of unemployed men willing to work and at the same time hungry for goods will remain permanent, and that the millions which we have spent on the modernization and rationalization of our productive equipment were wasted. In every depression the typical popular feeling is that the depressed state of the economic system has come to stay for all time, just as in the boom it is typical of popular feeling to forget that on the fat years lean ones follow.

But calm consideration should convince even the most resigned pessimists that our permanent economic fate should not be confounded with the passing poverty in which the crisis, to the extent of the decline of production, has plunged us, and that once the “fear to produce” has been overcome by the reattainment of equilibrium it will turn out that we are much richer than we believe to-day when we are deprived of the production of the unemployed and of the idle equipment.

Furthermore, the recognition of the untenability of the overproduction theory does us the inestimable service of guarding us, in times of crisis, against measures which are next to useless even in the most favourable case, and which usually only protract and aggravate the malady, since they hinder the reattainment of equilibrium. All those measures, much discussed in all countries, such as spreading the work, labour service, relief work, the campaign against “double earnings,” and the raising of the school leaving age, must be judged from this angle. All these measures are of a purely symptomatic nature, which may make the effects of the crisis more bearable but may harbour the danger of delaying the recovery from the depression. Their true nature can be realized if we return to the military analogy developed above and recall that it may seem absolutely necessary to “occupy” the soldiers who are temporarily out of action by pots-and-pans inspections and other means specially devised for this purpose, so as to protect them from demoralization. But it has also to be remembered that nobody in the war was struck by the idea that because we were somewhat at a loss to know what to do with a section of our men we should make this “occupation” an end in itself and a permanent institution. On the contrary, everything was done to avoid disturbances in the military organization and to get the troops that were held up back into the fighting lines. Here, just as in the economic sphere, the counsel of reason is the restoration of equilibrium.

We have by now already acquired the first essentials for a critical examination of rationalization, the aversion to which to-day overshoots the mark just as much as did its uncritical exaltation a few years ago. It is easily forgotten that even if the word is new the thing itself is not. It is as old as the history of mankind. Men have always striven to raise the productivity of their labour by means of tools, machinery, and the most efficient organization, because they have never been satisfied with the extent to which they have been supplied with goods. It was in this sense that we declared above that we cannot have too much but always only too little rationalization. This proposition does, however, not exclude, of course, the possibility that the direction, extent, and tempo of rationalization may have been wrongly chosen so as to lead to a disruption of the proportionality in the structure of production. The effect of this in its social application is that the labour displaced in the first instance by the rationalization remains unemployed for a long time. Undoubtedly effects ensue from the rationalization which lead eventually to a reabsorption into the productive process of those rendered unemployed (increased employment in the machine-making industries, cheapening of the products resulting in an increased demand either for these or for other products to which the purchasing power set free by the price reduction, or under a monopolistic price policy the increased purchasing power of the entrepreneur, is applied). But this process of compensation requires time and this all the more the more inelastic the economic system has become through wage rigidities or through the inelasticity of the credit system.¹

So it is that the present ossification of our economic system by all kinds of rigidities has rendered the process of absorbing displaced workers much more difficult. But this ossification is just that development with which most critics of the powers of adaptation of capitalism are heartily in agreement.