CHAPTER VIII.ToC

f(the current rate of consumption) determines the quantity of real productive power of capital that can be effectively employed at each point,a,b,c,d,e. The condition of the arts of industry, including the rates of wages and other conditions of the labour market, determines how many forms of capital (mills, warehouses, ironworks, raw material, etc.) at any given time are socially requisite to embody this capital. But thoughfhas an economic power to force into existence the requisite minimum of these forms of capital, it has no power to prevent the pressure of individual interests from exceeding that minimum and planting ata,b,c,d,emore forms of capital than are required.

Secondly, over-production or a general glut is only an external phase or symptom of the real malady. The disease is under-consumption or over-saving. These two imply one another. The real income of a community in any given year is divisible into two parts, that which is produced and consumed, that which is produced and not consumed—i.e., is saved. Any disturbance in the due economic proportion of these two parts means an excess of the one and a defect of the other. All under-consumption therefore implies a correspondent over-saving. This over-saving is embodied in an excess of machinery and goods over the quantity economically required to assist in maintaining current consumption. It must, however, be remembered that this over-saving is not measured by the quantity of new mills, machinery, etc., put into industry. When the mechanism of industry is once thoroughly congested, over-saving may still continue, but will be represented by a progressive under-use of existing forms of capital, that unemployment of forms of capital and labour which makes trade depression.

An increased quantity of saving is requisite to provide for an expected increase of consumption arising from a growth of population or from any other cause. Such increased saving is of course not over-saving. The proportion, as well as the absolute amount of the community's income which is saved, may at any time be legitimately increased, provided that at some not distant time an increased proportion of the then current income be consumed. If in a progressive community the proportion of "saving" to consumption, in order to maintain the current standard of living with the economic minimum of "forms"of capital, be as 2 to 10, the proportion of saving in any given year may be raised to 3 to 9, in order to provide for a future condition in which saving shall fall to 1 to 11. Such increased "saving" will not be over-saving; the forms of capital in which it is embodied will not compete with previously existing forms so as to bring down market prices. The efforts which take the form of permanent improvements of the soil, the erection of fine buildings, docks, railways, etc., for future use, may provide the opportunity to a community of increasing the proportion of its savings for a number of years. But such savings must be followed by an increased future consumption without a correspondent saving attached to it. The notion that we can indefinitely continue to increase the proportion of our savings to our consumption, bounded only by the limit of actual necessaries of life, is an illusion which places production in the position of the human goal instead of consumption.

§ 16. Machinery has intensified the malady of under-consumption or over-saving, because it has increased the opportunities of conflict between the interests of individuals and those of the community. With the quickening of competition in machine industries the opportunities to individuals of making good their new "savings" by cancelling the old "savings" of others continually grow in number, and as an ever larger proportion of the total industry falls under the dominion of machinery, more and more of this dislocation is likely to arise; the struggles of weaker firms with old machinery to hold their own, the efforts of improved machinery to find a market for its expanded product, will continue to produce gluts more frequently, and the subsequent checks to productive activity, the collapse of businesses, the sudden displacement of large masses of labour, in a word, all the symptoms of the malady of "depression" will appear with increased virulence.

It must be clearly recognised that the trouble is due to a genuine clash of individual interests in a competitive industrial society, where the frequent, large, and quite incalculable effects of improved machinery and methods of production give now to this, now to that group of competitors a temporary advantage in the struggle. It was formerly believed that this bracing competition, this free clash of individual interests, was able to strike out harmony,that the steady and intelligent pursuit by each of his own separate interest formed a sure basis of industrial order and induced the most effective and serviceable disposition of the productive powers of a community.

It now appears that this is not the case, and that the failure cannot in the main be attributed to an imperfect understanding by individuals of the means by which their several interests may be best subserved, but is due to the power vested in individuals or groups of individuals to secure for themselves advantages arising from improved methods of production without regard for the vested interests of other individuals or of society as a whole.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"We are now in a position to perceive the magnitude of the blunder of which the American people were guilty in constructing this most mischievous quantity of fixed capital inthe form of railways. They acted precisely like a landowner who had an estate of £10,000 a year, and spent £20,000 on drainage. It could not be made out of savings, for they did not exist, and at the end of the very first year he must sell a portion of the estate to pay for the cost of his draining. In other words, his capital, his estate, his means of making income whereon to live was reduced. The drainage was an excellent operation, but for him it was ruinous. So it was with America. Few things in the long run enrich a nation like railways; but so gigantic an over-consumption, not out of savings, but out of capital, brought her poverty, commercial depression, and much misery. The new railways have been reckoned at some 30,000 miles, at an estimated cost of £10,000 a mile; they destroyed three hundred million of pounds worth, not of money, but of corn, clothing, coal, iron, and other substances. The connection between such over-production and commercial depression is here only too visibly that of parent and child. But the disastrous consequences were far from ending here. The over-consumption did not content itself with the wealth used up in working the railways and the materials of which they were composed. It sent other waves of destruction rolling over the land. The demand for coal, iron, engines, and materials kindled prodigious excitement in the factories and the shops; labourers were called for from every side; wages rose rapidly; profits shared the upward movement; luxurious spending overflowed; prices advanced all round; the recklessness of a prosperous time bubbled over; and this subsidiary over-consumption immensely enlarged the waste of the national capital set in motion by the expenditure on the railways themselves. Onward still pressed the gale; foreign nations were carried away by its force. They poured their goods into America, so over-powering was the attraction of high prices. They supplied materials for the railways, and luxuries for their constructors. Their own prices rose in turn; their business burst into unwonted activity; profits and wages were enlarged; and the vicious cycle repeated itself in many countries of Europe. Over-consumption advanced with greater strides; the tide of prosperity rose ever higher; and the destruction of wealth marched at greater speed."[172]

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

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

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

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

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

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

[146]Contemporary Review, March 1888.

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

[148]Report, pars. 61-66.

[149]Report, par. 106.

[150]Contemporary Review, July 1887.

[151]Contemporary Review, March 1888.

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

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

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

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

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

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

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

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

[160]Chap. v. § 5.

[161]Bk. III., chap. xiv. § 3.

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

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

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

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

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

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

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

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

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

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

[172]Contemporary Review, May 1879.

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

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

§ 1.The Influence of Machinery upon the number of Employed, dependent on "elasticity of demand."

§ 2.Measurement of direct effects on Employment in Staple Manufactures.

§ 3.Effects of Machinery in other Employments—The Evidence of French Statistics.

§ 4.Influence of Introduction of Machinery upon Regularity of Employment.

§ 5.Effects of "Unorganised" Machine-industry upon Regularity.

§ 6.Different Ways in which modern Industry causes Unemployment.

§ 7.Summary of General Conclusions.

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

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

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

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

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

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

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

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

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

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

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

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

In cases like the above we must, of course, bear in mind that a diminution in employment in the several manufacturing processes directly and indirectly engaged in forwarding an industry, is not of itself conclusive evidence that the machinery has brought about a net displacement of labour. If the output is increased the employment in the extractive, the transport, and the various distributing processes may compensate the reduction in making goods and machinery.

§ 2. The industrial history of a country like England can furnish no sufficient data for a conclusive general judgment of the case. The enormous expansion of production induced by the application of machinery in certain branches of textile industry during the first half of this century indisputably led to an increased demand for English labour in trades directly or indirectly connected with textile production. But, in the first place, this cannot be regarded as a normal result of a fall of prices due to textile machinery, but is largely attributable to an expansion in the area of consumption—the acquisition of vast new markets—in which greater efficiency and cheapness of transport played the most considerable part. Secondly, assuming that the more pressing needs of the vast body of consumers are already satisfied by machine-made textile goods, we are not at liberty to conjecture that any further cheapening of goods, owing to improved machinery, will have a correspondent effect on consumption and the demand for labour. If England had been a self-contained country, manufacturing only for her own market, the result of machinery applied to textile industries would without doubt have been a considerable net displacement of textile labour, making every allowance for growth of population and increased home consumption. The expansion of English production underthe rapid development of machinery in the nineteenth century cannot therefore be taken as a right measure of the normal effects of the application of machinery.

What direct evidence we have of the effect of machinery upon demand for labour is very significant. Mr. Charles Booth, in hisOccupations of the People, presents an analysis of the census returns, showing the proportion of the population engaged in various employments at decennial points from 1841 to 1881. To these may be added such statistics of the 1891 census as the present condition of their presentation allows us to relate to the former censuses.[177]If we turn to manufactures, upon which, together with transport, machinery exercises the most direct influence, we find that the aggregate of manufactures shows a considerable increase in demand for labour up to 1861—that is, in the period when English wares still kept the lead they had obtained in the world market—but that since 1861 there is a positive decline in the proportion of the English population employed in manufactures. The percentages up to 1881 run as follows:—

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