# The Economics of Unemployment/Chapter 5

CHAPTER V
SURPLUS INCOME THE CAUSE OF FLUCTUATIONS
If there are any to whom I appear to be urging on behalf of labour a 'heads I win, tails you lose' policy, by insisting that a removal of the wage-lag is only good in a rising and not in a falling market, my reply is that I am not concerned with the wage-lag, as such, but only with its bearing upon the proportion between wages and profits. If I am right in holding that the under-consumption which visibly cramps the use of the full powers of industry is due in large part to the excessive share of the product which goes normally to 'capital' and the defective share which goes to labour, the removal of the wage-lag is only advantageous in so far as it reduces the aggregate amount of this maldistribution. It is consistent with this purpose to advocate the removal of the wage-lag only when that lag diminishes the share of labour.
But though this policy would, undoubtedly, reduce the cyclical fluctuations, and maintain a higher average as well as a more even state of production and employment, it would not in itself form a sufficient remedy. For the constant tendency towards overproduction, gluts, and stoppages, lies, as we have seen, in the existence of a surplus of unearned and ​excessive incomes, largely unexpended even upon luxurious goods and services, and accumulating in material capital which turns out to be incapable of full regular functioning in order to supply the consumption which this process permits to take place. Now the removal of the wage-lag, though diminishing the surplus, could not absorb it. No wage policy, by itself, could do more than reduce this surplus. It could not remove the differential rents, profits, interests, or other elements of income obtained for the possession of land, capital, or ability endowed with some advantage of nature or position. Nor could labour with any justice or social expediency lay claim to the monopoly-profits of trusts, combines, and other non-competitive businesses, whose control over selling prices enables them to extract excessive incomes. Such elements of surplus, as is widely recognised, form a proper source of public revenue. The removal of the wage-lag in reviving trade with rising prices and profits, therefore, must only be regarded as one contribution towards a solution of our problem. A full theoretical and practical solution can only be found in the conjunction of an adequate system of remuneration of labour with a similarly adequate system of taxation. Removal of the wage-lag will not prevent, though it will retard and diminish, trade depressions and unemployment, if the wage basis itself is a normally deficient provision for remunerating labour. Only where the normal wage basis gives a full wage of efficiency, will the removal of the wage-lag be powerfully effective to check the high profits, excessive credit, over-saving and over​production, which are the forerunners of depression. For a normally full wage of efficiency in a competitive industry will tend to keep down profits also to a subsistence wage for capital, and during a trade revival the increased product would be distributed between the two, more in their capacity of consumers than of producers. That is to say, given a competitive trade, prices would not rise rapidly or greatly, and the larger money incomes received both by employers and employed for the fuller utilisation of their productive powers would be realised in an increased purchasing power over commodities.
In non-competitive or monopolistic trade, so far as it is left in private hands, and in default of public price-control, taxation is, as we perceive, the proper remedy.
The conjunction of these two policies will be efficacious in checking depressions and unemployment in proportion as, by expanding private and public consumption, it furnishes a regular elective demand for the maximum output of the industrial system. This, of course, does not assume a statical condition of industry. As the arts of industry advance, a given quantity of human productive energy is able to turn out an increasing quantity of consumable goods. An increasing population with a rising standard of consumption is able to purchase and consume the increasing output. But the advancing arts of industry require for their effective operation large quantities of new capital. This need involves the continuous sacrifice of a certain amount of immediate consumption in order to supply that capital. But that certain amount ​of saving should be directly proportionate to the rising volume of consumption. Any failure to save as much involves not only less production, but less consumption in the near future. Any attempt to save more than that proportion involves waste of the excess by unemployment, both production and consumption being less than would have been the case had the right proportion of saving to spending been preserved.
An accurate adjustment between production and consumption in a progressive society would not, of course, rule out all trade fluctuations. Considerable failures of world-harvests, affecting important foods and raw materials, might reduce the productivity of industry, by diminishing the supply of these prime products to the manufacturing, transport, and distributive trades, and by lowering the consumption and efficiency of labour. But every rise in the general standard of living, bringing into play more fully the law of substitution, every improvement of communications enlarging the variety of available sources of each supply, every improved provision for the storage and preservation of perishable goods, diminishes the influence upon industry of these natural variations. Though famine in such countries as China and Russia, and the simultaneous failure of the Indian and American cotton crop, might still have some influence in depressing world industry, no considerable depression in the modern world can be attributed to such a cause.
An important contributory cause of some modern depressions has been the excessive application of capital and business enterprise to certain fields of ​fundamental industry. Railway construction with its appendages of docks, harbours, warehouses, etc., has been a notorious example. When an era of industrial prosperity has evoked great confidence in its continuance, and high profits yield a large investment fund available for speculative enterprise, a boom in American and other foreign railways has been organised to take off the capital superfluous for safer home uses. "The most common form for the absorption of capital, as well as the most correct barometer of activity in the United States from 1848 to 1890 was railway building, which in each case reached a maximum some months or years before the occurrence of the crisis or the beginning of the depression."
The statistics of Great Britain's foreign investments bear out this ascription of over-investment in fundamental industries of a speculative order as a precipitating cause of depressions. This misdirection of the enlarged saving-fund of prosperous trade is natural enough. While it lasts, it means a full employment and large development of the fundamental industries in the investing country and others, coal and iron, metals and engineering, which go to furnish the concrete capital for the foreign railroads, etc. When it becomes evident that the process has gone too far, and that many of these roads cannot within any reasonable time be made to pay their way and yield a profit to investors, a financial crisis follows, the flow first of bank credits for immediate financing of the ventures, then of new capital to carry them further, fails, and an era of bankruptcy and reconstruction sets in, ​accompanied by a complete damping down of railway enterprises for several years.
It is natural that investigations into the history of trade fluctuations should fasten attention on these speculative excesses of investment and assign to them the causation of the subsequent depressions. If our analysis be correct, such excesses must occur. A creation of savings obviously superfluous for the formation of capital to supply goods for current home consumption must cause an increasing proportion of new savings to seek investment in undertakings at a distance which do not supply current consumption but fructify for supply of consumptive goods some years hence. It is only when business men and financiers begin to calculate whether the great anticipated increase of future consumption, upon which the investments are based, is likely to come off and reach an adverse judgment, that the folly and futility of the proceeding are unmasked, and the penalty is paid in a sudden slump in the home trades which had been supplying these capital goods for the export trade.
Under a better distribution of income, with a right adjustment between production and consumption, these excessive funds available for speculative investments abroad would not exist. This does not signify that home demands would absorb all savings. That would be a false and ill-directed economy for a progressive nation. But it would preclude these speculative rushes into foreign investment as the only outlet for congested home demands, and it would remove this important factor in the production of financial crises and industrial depressions.
​The upshot of this discussion of the relation between the financial and industrial factors in trade fluctuations and depressions is to reduce the former to an ancillary and supplementary position. The part attributed to the swelling and collapse of credit is both misconceived and overstated. The real importance of the operation of credit as a factor in industrial fluctuations is derived from the maladjustment between production and consumption. For it is the ultimately futile and mischievous endeavour to apply to production an excessive proportion of the income derived from it that stimulates trade to a period of feverish activity followed by a period of depression and collapse. The rapid expansibility of purchasing power through the creation of bank credits serves, as we have seen, to facilitate both the boom and the collapse, and by its reactions upon prices and expectations to carry both processes farther and faster than they could go under a system of cash payments or of properly restricted credit.
It is idle to say that the existing operation of bank credits is essential to the elasticity of trade, when it is demonstrated that excessive credits are instrumental in expansions and subsequent contractions that are wasteful and dangerous in their working. The representation of cyclical fluctuations, as belonging to a necessary and even a beneficent order of nature, is quite the most impudent of all the fatalistic doctrines by which defenders of the present order endeavour to stop the wheels of progress.
*** ​We have seen how the large manufacture of cheap credit during a period of prosperity leads to over- trading, i.e. the production of surplus stocks of goods which turn out to be immediately unsaleable at cost prices and which are only got rid of during a long period of depression and under-production due to their existence. This over-trading, or production of excessive stocks, is promoted by abundant credit, not merely because that credit increases the quantity of purchasing power, so raising prices, but because it is primarily applied to stimulate the production of capital-goods without any corresponding stimulation of consumption. This criticism is not met by urging that the credit enables employers to give fuller employment at rising wage-rates, so increasing the effective demand for consumables by labour. For the credit first operates to throw an increased proportion of the productive power of labour and capital on to the production of non-consumables, raw materials, fuel, etc., the advance of these primary products towards the condition of finished consumable commodities being usually held up by congestion in the mills or warehouses or in the dealers* hands when the boom has reached its height and depression is in sight. For a time free credit does put more money into the workers' pockets. But it does not proportionately raise consumption. For the rising margin of profits on an expanding trade, taken in conjunction with the wage-lag, means a larger share of the expanding income for capital and a smaller for labour. And this means, as we have recognised, a larger proportion of saving to spending, of production to ​consumption, in a word, a quickening of the process of over-production and depression.
Now if the manufacture of credit thus aggravates the maladjustment of production and consumption by raising profits more than wages, it seems to follow that any possible use of credit as a remedy for actual unemployment must turn upon a reversal of this action. If the State is to assist in healing and reducing unemployment by the use of public credit, this credit must be applied to purposes where its expenditure goes as much as possible into wages, as little as possible into profits, rents, interest, or high salaries. It might at first sight seem that this condition would be best fulfilled by a policy of doles to the unemployed. And, indeed, the first effect of treatment by doles, or by contributory funds to which the workers have contributed a smaller proportion than their ordinary wages bear to the rest of the national income, is favourable in that it places a larger share of the total purchasing power in the hands of the working-classes who will apply it in consuming a larger share of the available consumptive goods than they could otherwise. Something would thus be done temporarily towards adjusting the rate of consumption to that of production by letting out more quickly the surplus stocks of finished goods which have been congesting the economic system. But such temporary subsidies to labour cannot make any real contribution towards that permanently right adjustment between production and consumption which would keep both processes functioning at a higher level. The stimulus it can afford to actual current production is slight, and the ​more rapid removal of the congestion, which is its chief result, only prepares the way sooner for another renewal of trade activity along the familiar road towards repletion and depression.
Indeed, it is the most severe criticism of our existing system that it is temporarily advantageous to pay the unemployed to do nothing. On a short view, and ignoring the damaging reactions on economic efficiency and character, it seems usually better to keep the unemployed in idleness rather than to get them to work producing any of the ordinary sorts of goods for the market which is ex hypothesi already over-supplied. The next best thing (or the best, allowing for other circumstances) would be to set them to produce one of two classes of extraordinary goods. The first class consists of useful public works of immediately non-remunerative kinds in the sense that no business firm could at the present time afford to undertake them, and which do not at once facilitate the production of ordinary goods or services. Municipal or State undertakings for some new or improved service performed directly by the public authority, and thus furnishing a minimum of private profit while employing the largest proportion of labour to the capital required, would best meet the requirements of the situation. The erection of electric superstations, or the building of a Channel Tunnel, are examples of such public works. Though both would react in a future increase of general productivity, that reaction would be postponed, the immediate effect being to increase the proportion of purchasing power in the hands of workers who would use ​it in increased effective demand for commodities, thus clearing off any gluts of goods still congesting the industrial system and enabling fresh flows of raw materials to pass into the productive processes. The future increase of general productivity which these public works would yield would, when matured, not contribute to bring about another glut, provided the profits or rents they 5delded were kept in public hands and used for health, education, recreation, and other non-competitive purposes.
Long-term credits, for financing export trade, with countries whose broken productive and financial resources disable them from exercising effective demand for our goods through the usual channels, could also be brought into accord with sound policy. Austria, Poland, Russia, let us say, are in need of steam engines and ploughs to revive their agriculture and transport, but cannot pay for them at present in money or goods. If they were given, on the Ter Meulen or some other plan, credits long enough to enable them to buy these engines and ploughs from us as soon as we could deliver them, but to postpone payment for them in actual goods until their use had time to fructify in exportable grain, timber, sugar, and other goods, the direct effect of this use of credits would be to stimulate employment in our engineering and connected trades, and to alter the proportion of monetary incomes here so as to increase effective demands for commodities in general. The later flow of return-goods into this country would be of a nature not to compete directly with our own product to any appreciable degree, and if postponed, as is likely, until depression ​had passed away, would easily and advantageously be absorbed in the rising markets.
There is, however, one obvious qualification to this economy. Its validity turns upon the proportion of wages to profits in the application of such credits to our industries, whose activity is thus stimulated. If the public credit, thus applied to this stimulation of our export trades were to pass into profits in a proportion equalling or exceeding the normal rate prevailing at such a time, that would imply not only a less immediate absorption of the unemployed but an earlier recurrence of the next period of over-trading and congestion of the markets.
In fine, the ultimate effect of credit, regarded as a means of stimulating trade and employment, will depend upon its influence upon the distribution of the general income. It will be favourable according as it increases the proportion of the general income passing to the wage-earners or to public bodies to be spent in demand for commodities or the financing of non-industrial services.