§ 12. UNDER-CONSUMPTION.

The discussion of the possibility of a general over-production brought us to the conclusion that we must substitute for the untenable proposition of a general over-production the concept of disproportionality, a concept to which we shall often have to revert. The further question now arises whether the crisis can perhaps be explained by the fact that in the course of the upward swing of the cycle a deficiency of consumers’ purchasing power is somehow introduced, rendering one part of the production unsaleable at prices covering costs. This question has repeatedly been given an affirmative answer especially by the socialists who contend that the unequal distribution of income to the disadvantage of the masses—an, as they believe, inherent failing characteristic of capitalism—is responsible for the deficiency of purchasing power which brings in its train over and over again a breakdown of production (as, for example, Rodbertus, and in a certain sense also Marx and his disciples). While the socialistic type of Under-consumption Theory can be traced back to writers of the first half of the nineteenth century, there has sprung up during the last decades another variety based on alleged defects of the monetary mechanism of our economic system. Though both types have much in common, it seems preferable to keep them separate, and we shall call the first type the Distributional Under-consumption Theory and the second the Monetary Under-consumption Theory The latter will be discussed separately at the end of this section.

So far as under-consumption theories assume the possibility of a general over-production, they do not merit any further discussion here. Moreover, their popular form, which starts from the assumption that the entrepreneur pays the labourers too low wages and brings about thereby a deficiency in the total demand, needs no lengthy disproof. For it is obviously forgotten that to the minus in the purchasing power on the side of the worker there corresponds a plus in the purchasing power on the side of the entrepreneur so that nothing is changed in the total amount of purchasing power. On the same reasoning, a drastic raising of wages in the upward swing of the cycle without an increase of the quantity of money and credit, would likewise only take place at the expense of the non-wage incomes and could therefore not prevent the breakdown. It is another question whether it hastens or retards it.

This same argument proves also the falsity of the widespread purchasing-power theory of wages and national welfare. This theory demands that the purchasing power of the masses should be raised in order to ensure sufficient buying power on the market for the continuous increase in national output made possible by mass-production and machinery and, conversely, that increased purchasing power should provide beforehand the prerequisite for the increase of production, so that the concentration and increase of general demand may increase the general welfare. If we pump purchasing power into the hands of the masses without treading the path to inflation, there must occur a diminution in the incomes of entrepreneurs, so it is only the composition of demand and not its total amount that is changed. As in the over-production case, the question arises here also whether the composition of demand as determined by the distribution of income and its changes, is not an important factor for the explanation of disturbances of economic equilibrium. This is indeed a question worthy of discussion and is the one point which gives scientific rank to the modern varieties of the under-consumption theory.² That the socialists particularly should have seized on it in order to demonstrate the inherent defectiveness of the capitalist economy is all the more understandable inasmuch as here was presented the unique possibility of combining the criticism of the capitalistic organization of production with a still more vehement criticism of the capitalistic organization of distribution. The under-consumption theory is equally fitted to lend support both to a pessimistic prediction of the power of duration of capitalism (as with both Marx and Rosa Luxemburg) and to the recommendation of a change in the distribution of income in favour of the working classes. It is for this reason popular and ineradicable. So much the more seriously should its justification be tested.

Something must be said in passing about the development of the Marxian under-consumption theory by the Neo-Marxists (Rosa Luxemburg, F. Sternberg, &c.). Karl Marx had assumed that, owing to the inherent disharmonies of capitalism (progressive concentration and accumulation of capital by the capitalists and progressive destitution of the proletarian masses), economic crises would become more and more severe in character, leading in the end to the final collapse of capitalism. To the great discomfort of the Marxian theorists, however, the development actually taking place up to the Great War went absolutely contrary to this prophecy, crises and depressions not growing but markedly declining in severity. In order to save the central point of Marxism, i.e., the idea of the self-destruction of capitalism, in the face of this altogether distressing development, Marxists had to discover circumstances to account for the postponement of the day of reckoning. For this purpose, the phenomenon of modern imperialism came in very handy. All one had to do was to assert that the life of moribund capitalism had been prolonged by imperialism easing the pressure of over-accumulation by opening up new markets in the non-capitalistic countries overseas. But this could not go on for ever. The supply of those countries would soon become exhausted, and with decreasing opportunities for expansion, the scramble for colonies, protectorates, and “zones of influence” would involve the capitalistic countries in political conflicts until the capitalistic world would blow up in the smoke of a world war. In this way quite a number of birds were killed with one stone : the philosophy of the doom of capitalism was resurrected, modern imperialism was stigmatized as the inevitable result of capitalism, and, as a final by-product, an explanation for alternating booms and depression was found in the ebb and flow of imperialistic expansion. This whole argument may sound rather captivating, but when we look at it more closely it reveals itself as a rather vulgar kind of faulty reasoning; for, supposing that a problem of capitalistic accumulation really exists, it is not conceivable that imperialistic expansion into the undeveloped regions of the globe can ease the pressure of over-accumulation. To realize this, one has only to examine how the capitalistic countries dispose of their “surplus production” by exporting to undeveloped countries. We have then to contemplate the following possibilities:

1. The additional export may be paid for immediately in cash so that the exporting country comes into possession of more gold or foreign exchange. These may be used : (a) For augmenting the volume of currency, i.e., other things being equal, for inflation. Besides the fact that this—via the production and exportation of goods and the fight for foreign markets—is a rather cumbersome and roundabout way to start inflation, it is difficult to see how the problem of over-accumulation can be solved in this way. On the contrary, inflation is, as we shall see later, sure to lead to a real and not merely imaginary over-accumulation, so that imperialism would be apt to intensify over-accumulation rather than to ease it. (b) To pay for additional imports, with the sole result that home goods are now replaced by foreign goods, without the problem of surplus production being brought any nearer to solution.

2. The additional export may be made on credit. So long as nothing is paid for interest or amortization, the exporting country has, indeed, got rid of the surplus production, but in no other sense than as if it had given it away or destroyed it. If this is the end of the matter, it becomes again legitimate to ask whether such a dangerous and round-about way, with its political entanglements, is necessary in order to get rid of embarrassing goods without anything to show for it. But as soon as payments are being made for interest and amortization, this case differs in no way from the first case where the additional exports were paid for immediately. It has to be remarked, moreover, that if additional exports on credit (foreign investments) really offer a way out of the plight of over-accumulation, there is no reason why the same should not be done, and with less trouble, inside the country.³

We may conclude then, that imperialism offers no solution of the problem of over-accumulation, whatever this may mean. If we should accept for the moment the crude view that increasing productivity leads capitalism into serious trouble, we should expect that imperialism would be apt to accentuate the problem of glutted markets rather than to alleviate it since the intensification of world economy consequent on imperialistic expansion works clearly in the direction of enhancing general economic activity. This conclusion, incidentally, throws some sidelight on the question as to whether the problem of over-accumulation is a real one. For it is a strong presumption against the existence of this problem that up to the Great War capitalism developed on a gigantic scale and without any dramatic disturbances, while the parallel imperialistic policy of the Great Powers was no real remedy for the disease of over-accumulation. So long as no other factors can be pointed out in explanation of the healthy aspect of capitalism before the war, it must be assumed that the disease of over-accumulation—at least as a chronic disease of capitalism—is imaginary rather than real.

Let us take as the central idea of that form of the distributional form of the under-consumption theory which is capable of scientific discussion, the idea that the share of the workers’ income in the total national income is too small and the share of the entrepreneur’s income too large to secure equilibrium in the economic system. Then the objection immediately presents itself that the crisis is preceded not by a slack time but by a boom in which the income of the worker rises along with the total income. In the same vein it must be objected that, contrary to what the under-consumption theory would lead us to expect, it is the consumers’ goods industries which are usually the least and the last affected by the depression, as has been witnessed also during the present depression. This is really fatal to the idea that it is the appearance of a deficiency of consumers’ purchasing power which is the factor bringing the boom to an end.

The under-consumption theory could only satisfy these objections if it were able to show that a dislocation of the income stream causes the upward swing of the cycle as well as bringing about its break-up. Only then would it be an acceptable theory of cycles and crises. Such a demonstration can, however, hardly be carried out on the basis of the under-consumption theory. Even if it were shown that the occurrence during the boom of a worsening of the income distribution to the disadvantage of the masses leads to a forcing upwards of capital accumulation (oversaving), supplied mainly out of the incomes of entrepreneurs, which finally disrupts the economic equilibrium, the question still remains unanswered how the boom is started. The conclusion consequently is, that the under-consumption theory neither grasps nor explains the real problem of economic fluctuations. Nevertheless, we must acknowledge that it has served to contribute to the explanation of the mechanism of the boom. For it cannot be denied that, in the course of the boom, there occurs a dislocation in the structure of prices, incomes, and costs which by reason of the lag of important cost elements behind the rise in selling prices of goods, raises the average profits of entrepreneurs, and so enhances cumulatively the original tendencies to increased activity. Chief among these cost elements, apart from interest, are wages. In so far as this over-expansion in the boom—which represents an over-expansion of real capital—contains within itself the germ of the later breakdown, the dislocation of the price and income streams occurring in the boom is an important link in the explanation of the boom and the crisis. In other words, if the ups and downs of trade cycles are to be explained by an increase of investment—that is, real capital accumulation at the expense of consumption—taking place by fits and starts and therefore associated with shocks, then we must welcome every indication of a circumstance which helps to explain this periodic concentration and acceleration of capital accumulation, and the modern underconsumption theorists supply us with such an indication. There exists in fact a close connexion between the fundamental ideas of the under-consumption theory and the over-capitalization doctrine presently to be described, even though this connexion may be found difficult to acknowledge in face of the unscientific formulation of the popular variety of the under-consumption theory.

The inertness of contractual incomes, which explains the lag during the boom, leads in the depression to the reverse, so that these incomes, and especially wages, tend to follow the fall in commodity prices only very hesitatingly resulting thus in a fall in the average level of business profits. The same factor which intensifies the boom and the crisis, intensifies the depression likewise, but as a rule no mention is made of this by the more tendentious formulations of the under-consumption theory.

It might easily be concluded from our concession to the fundamental ideas of the distributional under-consumption theory that it would be a good trade-cycle policy to push wages up as early and as vigorously as possible in the boom period as a means of avoiding an over-expansion. This conclusion is, however, unjustified since we interpret the change occurring in the distribution of income in the boom not as a cause but only as an intensifying factor accompanying the boom. A forcing up of wages can, therefore, hardly be the appropriate means of combating cyclical fluctuations. The danger is rather that in view of the extraordinary complex nature of the cycle, a forcing up of wages contains within itself a new element of tension expressing itself in an augmentation of unemployment. It is sufficient to point out that a forcing up of wages during the boom gives a dangerous incentive to the overextension of rationalization, as was undoubtedly the case in Germany in recent years. This in part explains also the extraordinary phenomenon that during the last boom in Germany, unemployment stubbornly remained at a high level. Finally, it is to be borne in mind that to a policy of wage-raising in the boom there must correspond a policy of wage-lowering in equal measure in the depression and that the lowering of wages is all the more difficult the more vigorously they have been raised previously. The essential truth in the distributional under-consumption theory does on no account give any clear-cut criterion of a trade-cycle policy for wages.

To complete this section, some special remarks seem necessary about that variety of under-consumption theories which I termed Monetary Under-consumption Theories. As this term indicates, the deficiency of consumers’ demand, which is the gist of every under-consumption theory, is here sought not primarily in the unequal distribution characteristic of capitalism but in the monetary machinery of capitalism. Both types of under-consumption theory work with the idea of a continuous deficiency of consumers’ demand brought about by a defect inherent in the capitalistic mechanism, but while the distributional school stresses the unequal distribution of incomes as the fatal defect, the monetary school emphasizes the defective flow of purchasing power. Accordingly, the remedy prescribed by the first school is a more equal distribution (if possible within the bounds of capitalism), while the remedy prescribed by the second school is—to put it bluntly—inflation. The atmosphere of the first school is provided by socialists or mildly anti-capitalistic reformers, while that of the second school is dominated by monetary schemers without any marked anti-capitalistic ardour.

As an extreme example of the monetary school, most familiar to English readers, we may cite the theories of Major C. H. Douglas—as formulated especially in his books Economic Democracy and The Monopoly of Credit. In the opinion of this author, the economic machinery as constructed to-day produces a deficiency of purchasing power arising from the fact that only a part of the cost incurred in the production of commodities goes to the consumers as income, so that current income is not able to buy current output at cost prices unless the gap is filled up by an additional issue of money. As has been shown by various writers, to which the reader may be referred,⁴ this view reflects a serious misconception of the economic process in general. No “deficiency” of purchasing power can occur as long as the economic system is in a state of equilibrium, but Major Douglas and the numerous other writers advancing similar views fail to show, in more than a vague manner, how equilibrium can be destroyed.

Apart from these more radical heretics, most theories of this monetary school of under-consumption amount more or less patently to the contention, already mentioned in our treatment of the distributional school, that there is a tendency inherent in our economic system towards over-saving. In contrast to the distributional school, the monetary school presents this view in terms not of maldistribution of income but of monetary maladjustment, so that the remedy offered is also a monetary one, i.e., inflation.⁵ It is the process of saving which puzzles these writers. They do not deny that saving is necessary for adding to the productive wealth of society, but since saving means essentially non-consumption, thus creating a deficiency of consumers’ demand it is believed that it tends to defeat its own final purpose, i.e., the better satisfaction of consumers’ wants, and thus to provoke depression—unless the monetary mechanism is so constructed as to take care of this “dilemma of thrift” by providing additional purchasing power. There are many defects in this argument, as has been abundantly shown by a number of critics.⁶ For instance, it is commonly overlooked that new productive investments, made possible by saving, reduce the unit cost of production so that, to this extent, the prices of consumers’ goods can fall without involving producers in serious difficulties. The gravest defect of most of these theories, however, seems to be the confusion of a static with a dynamic point of view. In other words they fail clearly to distinguish between the effects of saving per se and the effects of an increase in the rate of saving. As regards the effects of saving per se, i.e., a uniform or even gradually increasing rate of saving, it must be vigorously denied that it can disrupt economic equilibrium. In this “static” sense there certainly exists no problem of over-saving with reference to a maximum which cannot be exceeded without destroying economic equilibrium. On the other hand, it cannot be denied, however, that a sudden and marked increase of the rate of saving presents a real problem. We shall deal with this in § 14, but it must be said at once that the inflation cure, in which the reasoning of the monetary under-consumption theory invariably culminates, is bound to provoke just that sudden increase in the rate of saving which constitutes a real problem of over-saving. What is meant by this final shot at the under-consumptionists will also be made clear later on.

Summing up the contents of this section, we may conclude that there is a certain truth in the general trend of the under-consumption theory which may make some contribution to a final solution of the problem. This element of truth, however, is buried beneath a heap of very dubious arguments. How unsatisfactory the under-consumption theory is in providing a real solution of the problem might be inferred from the fact that neither of the remedies prescribed—the distributional nor the monetary remedy—promises to be efficacious, and they may be positively pernicious.