# The Economics of Unemployment/Chapter 3

CHAPTER III
THE BALANCE OF SPENDING AND SAVING
Under inequality of distribution the surplus of unearned income, involving no personal cost of production to the recipient, and furnishing no personal satisfaction of consumption, accumulates unduly, congests the economic organisation, clogs its ducts, and causes stoppages—those periods of trade depression, under-production and unemployment of capital and labour with which we are too familiar. The prevention of this surplus, by absorption into incomes where it would be more largely spent on consumables, would not only raise the general standard of consumption, but would so stimulate production and so maintain it continuously at its highest level, that the aggregate output both of capital goods and consumable goods would be increased. Out of this enlarged real income, a sufficent aggregate could be saved to provide the constant flow of new capital required by a progressive society, even if a larger proportion of the total income were taken out in the shape of consumable goods.
Yes, it may be said, enough 'could be saved,' but would it? If you equalised incomes, by distributing in higher wages the whole or most of the unearned surplus of the rich, what security is there that your theoretically just and natural balance of spending ​and saving would be operative? The workers would, as you admit, save a smaller proportion of their enlarged income than the well-to-do classes had saved before; might they not be expected, from the very pressure of new-felt wants for satisfaction, to save too little, and so check development of the arts of industry to their own disadvantage later on? Mr. Keynes expresses with great confidence the view that "it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age" (the nineteenth century) "from all others." "Like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect." This capitalist economy, he holds, throve not merely on inequality but upon iniquity. For "the immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the War, could never have come about in a society where wealth was divided equitably." In fact, he contends, this "great benefit" was based upon "a double bluff or deception," the workers being "compelled, persuaded or cajolled" into taking very little of the cake, while the capitalists took the best part of the cake on "the tacit underlying condition that they consumed very little of it in practice." Here, indeed, Adam Smith's mysticism of the "invisible hand," by which individual greed is transmuted into common benefit, is carried a stage farther. For iniquity is made the very foundation-stone of ​prosperity and progress. Distribute wealth equally, or even equitably, you pull down the edifice of modern industry! For the saving under any equitable system of distribution will be inadequate to progress! Is it really true that our industrial welfare is dependent upon inequitable distribution? Is there this fundamental contradiction between economy and morals? Is dishonesty the best policy?
Though Sir W. Beveridge does not go so far as Mr. Keynes in his defence of inequality, he feels the same concern for saving under a more equal distribution. "If incomes were so far equalised that all saving meant sacrifice of a keenly desired present good for a future one, it is extremely likely that no sufficient provision for new capital would be made at all." And he adds, "There is, indeed, no probability of determining a priori how the national income can best be allocated between immediate consumption and investment in the means of future production. In other words, there is no criterion for saying beforehand what is over-saving and what is not." Though this last statement is true, it is not to the point. For though over-saving cannot with certainty be predicted, it can be detected when it has taken place, and its detective is trade depression. As for the fear of undersaving, it may, indeed, seem to be warranted by experience of the use by the manual workers of sudden increase of pay. But such increases coming as windfalls with no security of permanence are necessarily prone to abuse. In every grade of society 'lightly got' is lightly spent. The very ​conservatism of standards of consumption, to which I have alluded, implies time for the wholesome assimilation of an increasing income. Working-class psychology is not opposed to saving from any absolute refusal to recognise and provide against future wants. The proportion of income which they save at present is small for quite intelligible reasons.
(1) Most of it, in many cases all, is required for the maintenance of a conventional standard of living which, though it may contain certain elements of physiological waste, is in the main a standard of economic efficiency.
(2) Most of such saving as they practise is not represented in what is known as productive capital. It is put either into durable commodities, such as houses, furniture, better clothing, and other personal utilities, or else into better education for themselves and their children, travel and recreation and other expenditure which upon the whole makes for higher personal and economic efficiency. In short, a larger proportion of their saving goes into personal as distinct from investment capital, than is the case with the saving of the rich. This application is probably far more productive in the long run than any small additions which these savings might otherwise have made to the volume of invested capital.
(3) Such investments as they make are mostly confined to provision against critical emergencies in the family economy, the cost of burial, sickness, disablement, old age, or unemployment. Even here few workers could by any thrift make a sufficient provision against prolonged disablement, not to speak ​of adequate provision for surviving dependents. Saving, in order to live more expensively later on, or to make a considerable provision for the family after death, which are the chief incentives to the saving of the well-to-do, do not yet belong to working-class economy.
(4) Such saving as they make even for short-range emergencies, much more for distant ones, is costly, not only subjectively, in that it involves a sacrifice of really useful and highly valued present satisfaction. It is also objectively costly in two ways. Such small savings are seldom able to find advantageous investments, their cost of collection and administration in Friendly Societies and similar organisations is very large, so that they may be said to rank very low in the investment market. Still more deterrent against such saving is the high measure of uncertainty in the power to keep up payments of premiums or other contributions. A much larger proportion of the savings of the workers fails to mature in any tangible future advantage to them than is the case with the savings of the more solidly established classes.
But it does not follow from this consideration of the small and precarious savings of the workers under existing conditions that a steady and constant policy of equalisation which enlarged their share of national income would impede the growth of capital by the low rate of saving that it would bring about. For each of these working-class conditions adverse to saving for industrial investment would be modified under an economic order in which the workers' income was at once larger and more secure. Saving for ​investment would then become practicable, profitable, reputable, and desirable for larger and larger sections of the wage earners and would come under the same motivation that has prompted the industrial saving of the middle classes. Able to make sufficient and secure provision for old age, for dividends as a supplement to current earnings, and for the advantageous launching of their children, they would acquire and practise these new habits. Indeed, the steadily growing devotion to various forms of insurance among the British wage earners is already tending in this direction.
At first sight it might seem that this displacement of the easy automatic saving of the rich by the more calculated thrift of the workers would involve a higher social cost in the rate of interest to be paid. But when it is remembered that the supply price of any goods or services is measured by the cost not of the cheapest but of the dearest part of the supply, it will be evident that no rise in rate of interest need occur in consequence of the derivation of a larger share of new capital from working-class savings. For the price paid for savings has always been that needed to evoke not the large saving of the rich but the smaller savings of those who save with greatest sacrifice, the so-called 'marginal saver.' Now as the result of more equal distribution and better security the 'marginal saver' should be quite as well off and more easily induced to save. Therefore, equalisation might tend to lower not to raise the remuneration of saving, i.e. the rate of interest. While, therefore, the process of equalising incomes, by transferring some ​surplus income from the 'capitalist classes' to the workers, would have the effect of reducing the proportion of the aggregate income that was saved, some compensating movement in the stimulation of working-class saving would be set up. If the general effect of such a change were, as I contend might reasonably be expected, to maintain a higher and more continuous use of all factors of production, the smaller proportion saved from the greater product might yield enough new capital to maintain, in conjunction with a more efficient labour factor, even a higher rate of industrial progress than has hitherto been obtained.
But there is no reason for assuming that the process of equalisation of income means the absorption of all rents, monopoly profits, and other 'surplus,' in higher wages.
In every civilised country a growing proportion of this surplus is needed by the State for the efficient performance of an increasing number of public services, and is taken in national and local taxation. This claim of the State to its share in the general income may be justified upon the same grounds upon which the individual bases his claim, viz. that of a serviceable contribution to the production of the income. State work, properly performed, whether it be the primary work of justice and defence, the provision of means of communication, or the constructive social services of health, education, recreation, insurance, and the like, must be regarded as a factor in economic production, entitled to receive, and in fact taking, its necessary costs out of the national income it helps to produce. The notion of taxation as a forcible confiscation, ​justified solely by State necessity, should be replaced by the proper recognition of the State as a direct contributor to production, through the security, communications, health, knowledge and other elements of human efficiency it maintains. The State may also be regarded as the representative of the Community in its claim to the economic rents derived from the natural powers of the soil and the land values due to the growth of a population with ever advancing needs. So far as the 'unearned surplus' is not wanted to evoke and sustain by higher wages the higher efficiency of labour, it forms the proper income which a civilised State requires for the performance of those public services that are not paid by the individual beneficiaries. Such public income, whether applied as capital or extended in furnishing current consumable services, will, if levied in the proper way, reduce the volume of those private incomes which would otherwise pass into over-saving, and, as excessive industrial capital, precipitate another cyclical depression.
The equalisation of incomes, therefore, whether obtained by diverting rents, monopoly profits, and other surplus into wages, or by drawing them into the State coffers to be expended upon social services, so far from injuring the fabric and productivity of industry, as some economists pretend, will react favourably upon industry in two ways.
First, by restoring the economically right adjustment between saving and spending, it will give fuller and more regular use to industrial capital.
Secondly, by raising the real income of the workers ​and improving the public services concerned with their health, education, and other factors of personal efficiency, it will react in increased productivity.
In a word, it converts otherwise waste income into productive energy. This formal argument to prove that surplus unearned income must produce diseases in the economic system, and that the remedy must consist in diverting this surplus into nutriment for productive energy, ought to have been superfluous. But a narrow theory, based upon a false assumption of the economic virtues of unlimited saving, and used as a defence of the privileged classes against the demands of the workers on the one hand, and of the State upon the other, has obtained so strong a hold upon current economic thinking, that this direct and explicit refutation is necessary.
I claim to have established the two following propositions:
(1) That the proper provision against trade depressions and unemployment lies in strengthening the consuming powers of the community, so that effective demand for consumable goods may keep full pace with every increased productivity that arises from improvements in the arts of industry; and (2) that the strengthening of consumption is obtained by a better distribution of the product of industry.
Controversial experience has, however, taught me that it is not enough to establish propositions by constructive argument, so long as certain deep-rooted implications of an opposing theory remain ​unanswered. Now the classical economics which held over-saving, over-production, and a limited market to be mere illusions, relied upon the operation of two automatic checks, (1) Over-saving was impossible, because any tendency to it, leading to undue increase of capital, would straightway be corrected by a falling rate of interest. (2) Over-production was impossible, because any tendency to it would straightway be corrected by a fall of prices stimulating increased consumption. Now it would be possible for me to override these objections by an appeal to admitted facts, urging that, if either of these checks operated with the certainty and accuracy claimed for it, long-lasting depressions with their unemployment would be impossible. But it may be well to indicate more clearly the nature of the ineffectiveness of these checks.
Now, as regards the first check, it may be true that a fall in the price for the use of capital (the rate of interest) does reduce on balance the rate of the supply of new capital. But this check is slow in operating, as a preventive of over-production and gluts, for two reasons. First, the new capital supplied by current-saving is a small fraction of the total capital in productive use, and the efficacy of a falling rate of interest in checking a continuance of its oversupply is proportionately feeble. A striking illustration of this point is furnished by the slowness of the efficacy of the diminished output of the gold-mines, due to reduction in the purchasing power of a gold unit, to bring down the level of gold prices. Where, as with many classes of goods, the whole existent supply ​at any given time has been produced within the current year, a check upon the rate of new supply will be rapidly effective. But when the year's new supply is, say, no more than 5 per cent, of the aggregate supply, a reduction in the rate of new supply will operate very slowly as a check upon excess. Now this is normally the case with the supply of industrial capital. A year's saving furnishes but a small percentage of the total in use, and a check that operates not upon the whole, but only on the new supply, cannot be expected to be a speedy or effective one.
There is a second reason why this check is slow and ineffective. As regards a large proportion of the saving that takes place for investment, the rate of interest is either not a regulative motive at all or is not of any considerable importance. The great bulk of what I call automatic saving will scarcely be affected by a fall in the rate of interest except in so far as this reduces the aggregate unearned incomes. Some sort of conscious thrift, aiming to make a definite provision of income for old age or other future contingency, may even be stimulated, instead of depressed, by a falling rate of interest which demands a larger volume of saving to yield the required income. Some other forms of saving considered in the aggregate—such as national and municipal improvements—are positively stimulated by lower rates of interest at which capital can be borrowed, to be repaid, silently and automatically, by sinking funds. So, likewise, practically the whole of the rapidly increasing accumu​lation of insurance and savings-bank funds is hardly affected at all by the rate of interest. I do not, of course, deny that falling interest will deter the, saving of considerable classes, especially when it is accompanied, as will usually be the case, with falling incomes from declining trade which makes the provision of any surplus over necessary expenditure an act of keener sacrifice. Declining trade, moreover, removes those tempting opportunities for highly profitable investment, which, far more than any consideration of average rate of interest, prompt the saving of ambitious, greedy, and speculative persons.
Hence it must be admitted that falling interest does on the whole cause, or is accompanied by, a reduction in the rate of saving. This reduction of the supply of new capital does tend to restore for a brief period the true equilibrium between spending and saving, production and consumption. But it does so in a very slow and wasteful manner, involving a long period of partial stoppage both of production and consumption. Moreover, as soon as the cycle of production has once more taken a more favourable turn, the normal tendency to try to save, invest, and employ productively as capital, a larger proportion of the general income than can actually function, again sets in, and a short spell of feverish industrial activity once more gives place to a period of depression.
The other check on which the classical economists relied, the effect of falling prices in stimulating demand, is subject to similar disabilities and qualifications. If every fall of prices, directly due to increased production and supply at the former price-level, did immedi​ately and proportionately stimulate effective demand, it seems evident that over-production with subsequent depression would be impossible. Why does not this cure work? Well, in the first place, the discovery that an excessive power of production at the former price level exists may not lead to a cutting of prices, in order to market the larger supply at a lower figure. It may lead, as we have already noted, to a combination of producers to restrict output and hold up the prices. This, of course, involves the refusal to utilise the full available productive power of capital and labour. But it completely invalidates for these industries the operation of our economic check. Since in each advanced industrial country an ever increasing proportion of the industrial capital and labour comes under this combine dispensation, the check of price reduction is largely nullified. It may be noted that the conventional economic doctrine which regarded a fall of prices as an absolute bar upon over-production, congestion, and stoppages, arose in an age of small businesses when the incentives to combined restraint of output and the possibility of achieving it were weaker than is now the case.
Again, a fall of commodity prices at the critical time when full production begins to exhibit itself as over-production, in the sense of inability to market all the product at hitherto prevailing prices, does not tend to stimulate consumption sufficiently to check the fall of prices. If it did, the classical theory would be justified, and a merely nominal fall of prices would serve to stop the tendency towards glut. But the facile operation of this check implies a willingness of ​the consuming public to take full advantage of the falling prices to purchase and consume a larger quantity of goods than before, their incomes remaining at their former level. But this is where the conservatism of consumption operates. Though falling prices will stimulate some increased consumption, this increase will not be large or quick enough to furnish an effective check upon the fall of prices. In other words, when money incomes remain the same, falling prices will stimulate more saving, at a time when more saving is not wanted and so reduce the efficacy of this check on gluts. This imperfect operation of the check of falling prices causes what otherwise might have been a 'tendency to glut' to harden into an actual substantial glut, the condition with which we are familiar at the beginning of a cyclical depression. This glut causes a considerable stoppage of production and unemployment, usually accompanied by a fall of wage rates for those remaining in employment. This shrinkage of employment, whether wages be reduced or not, is reflected in a reduction of the money incomes of producers. This fall of money income, once set in, stops altogether the already defective operation of the falling prices check. For the purchasing power of the family income soon begins to shrink faster than the fall of prices. In fact, it goes so far as to evoke the operation of a real check which eventually, though with great waste and suffering, sets industry once more upon a rising path. For, when the stoppage of industrial activity with its unemployment has gone a certain distance, it comes up against the other side of the conservatism of consumption. The ​shrinking money incomes are almost entirely absorbed in maintaining the customary standard of living, and the surplus of saving almost entirely disappears. So for a considerable time a period of what from the standpoint of normal industry is under-saving ensues. In every period of depression saving is diminished more than spending. This applies not only to the wage earners whose total contribution to the general fund of saving is never very large, but to the propertied and employing classes, whose large automatic savings are to a large extent virtually cancelled by a trade depression.
While, therefore, I do not deny that a lowering of prices eventually helps to bring about an adjustment between supply and demand for commodities and a consequent renewal of industrial activity, I cannot accept Sir W. Beveridge's complacent view of the efficiency of this remedy. "The real standard of consumption," he writes, "is raised by a lowering of money prices. The balance between the demand for commodities and the supply is reached. No doubt the adjustment takes time and may only be accomplished with a certain amount of friction and loss." Now, since this time-lag and the 'friction and loss' involved represent the actual damage of unemployment, I cannot accept the view that falling prices constitute a satisfactory check or remedy, or that its tardy wasteful operation proves that "the right adjustment comes about naturally through economic forces." The occurrence of the trouble testifies to wrongness of adjustment.
​It is the failure of the so-called 'national economic checks' (falling interest and falling prices) that brings into operation the more effective but very costly check of under-production and under-saving. When production is sufficiently slowed down, and fresh saving is sacrificed to current needs of consumption, the congestion due to over-production is gradually carried off, during a prolonged period of under-production lasting until the channels of industry are once more free to receive the products of a new period of industrial activity. There are some evidences that this costly process of liquidation is already approaching completion and that a new wave of industrial activity is rising in the economic world.
* ↑ The Economic Consequences of the War, p. 19.
* ↑ Cf. Unemployment, p. 63.
* ↑ Cassell gives 3 per cent. as the rough rate of economic progress in the half century before the War (The World's Monetary Problems, p. 63).
* ↑ Unemployment, p. 63.