# The Economics of Unemployment/Chapter 2

CHAPTER II
THE FAILURE OF CONSUMPTION
During the war, and for some time after, trade was prosperous and employment full, because there was an assured effective demand for all that could be produced. In other words, consumption kept pace with production, taking off without delay all that was produced. The full pace of this artificially stimulated production could not, indeed, have been maintained indefinitely. But, if this war-economy could have been converted into a peace economy operating at, say, four-fifths the full war pace, the fighters, absorbed into the working classes on a shorter working day, producing the housing, railway developments and other work of capital repair and extension, while public expenditure was maintained on a high-tax basis without further borrowing or inflation, there seems no economic reason (apart from political and social considerations) why effective demand for British products should have failed and depression supervened. The high level of wages and full employment for our workers would have enabled the size of the effective demand to compensate for the slack demand of foreign customers, as during the war itself. This policy could not, indeed, have continued indefinitely for this or any other highly peopled country. ​For a considerable export trade is indispensable for a people who must buy half of their food and much of their materials abroad. But this signifies that a world-depression, or any other world-problem, cannot finally be solved for any single country on its separate national policy. Cyclical depressions are the gravest of international diseases, and demand an agreed diagnosis and a common line of treatment—industrial, commercial and financial.
The general shrinkage of effective demand which constitutes a cyclical depression implies a failure of consumption to keep pace with production in the industrial world taken as a whole. There may be areas, whole countries, where production is active, as during the present depression. But their very activity is aggravating the depression elsewhere.
A period of depression is marked by under-consumption and under-production. But it is not a matter of indifference through which of these two gates of explanation we enter. The business world, employers and workers alike, are, as we have seen, strongly and variously committed to the belief that at any given time there is a limited market, in the sense of an effective demand insufficient to take all the goods they can produce, on terms enabling production to continue. In other words, the limited market signifies a normal tendency for consumption to fall below production. Every one knows that in ordinary times it is easier to buy than to sell, and that more and more economic activity is given to pushing wares and the arts of salesmanship, while an ever-increasing proportion of the ​retail prices paid for most goods is swallowed up in costs of distribution.
But in focussing our attention upon under-consumption, or the chronic failure of consumption to keep pace with production, it is necessary to define our meaning of consumption. The term is applied in the business world not only to the withdrawal of final commodities for purposes of personal consumption, but to the use of raw materials, fuel and other capital goods which are said to be consumed when they are worked up into other products. Although in periods of general depression both sorts of consumption are reduced, the latter sort is not properly regarded as part of the problem of under-consumption. In this analysis we shall confine the terms consumption and under-consumption to the effective demand of final consumers for finished commodities.
For only thus can we challenge sharply and clearly the accepted economic dogma, which renders it impossible to get a comprehension of the real social economic significance of unemployment. The orthodox economist regards all the opinions and practices, to which we have appealed in support of a belief in a limited market, as based on fallacious thinking. He is convinced that general over-production is impossible, though it stares him in the face at the outbreak of each cyclical depression. Under consumption is for him equally absurd. For does not everything that is produced belong to its producers, who must either want to consume it, or to consume something else against which they can exchange it, or to use it for producing more things which they will consume later ​on? The wants of man being expansible without limit, how is it possible that too much can be produced? If he is confronted with the progress of a trade cycle, the full activity in boom years evoking an output which presently becomes so large that it can only be marketed at lower prices—this fall of prices proceeding until a level is reached at which costs of production are no longer covered and surplus stocks of goods are accumulated, which, if thrown upon the market, could only be sold by driving down prices to a still lower level—this economist refuses to recognise this condition as over-production, and confines his attention to the resulting stoppage of industry which he rightly diagnoses as under-production. Now a trade depression manifestly is a state of under-production, but this state is the product of an excessive activity preceding it. Over-production, congestion, stoppage, is the visible order of events. Theoretically, no doubt, it ought not to be possible. Every increase of output ought to find its outlet in consumption without reducing prices below the level at which it pays to produce.
But since it does not work this way, it is well to inquire why it does not. Why does consumption fail to keep pace with increased powers of production? Or, conversely, why do the powers of production increase faster than the rate of consumption?
The answer is found in two related phenomena: first, the conservative character of the arts of consumption, or standards of living, as compared with the modern arts of production; second, the ways in which the current distribution of income confirms this conservatism of consumption.
​In primitive societies the standards or methods of work are almost as conservative as those of consumption. Of civilised societies, and especially of modern industrial nations, this is no longer true. Invention and business initiative, enlisted in the cause of quick profiteering, transforms with great rapidity the arts of industry, raising this productivity by leaps and bounds. Though modern man, in his capacity of consumer, is far more progressive than his ancestors, his power of taking on new economic needs and of raising rapidly the quantity, variety and quality of his consumption, is limited by a narrowness of imagination and a servitude to habit which are far less dominant in production. There is in modern business a strong stimulus to progress in the great gain which comes to the man of inventive and initiative power, while, on the other hand, there is a strong stimulus to the early imitation and adoption of new superior methods by the whole body of members of a trade, who are otherwise outcompeted and ruined by their conservatism. Now a large part of consumption is carried on in the privacy of separate homes, under the bonds of custom, and withdrawn from any strong continual stimulus to imitation and competition; and though changes are quicker and more numerous in those factors of consumption, such as dress, travel and recreation, which are subject to publicity and imitation and carry personal prestige, the capacity of assimilating easily and quickly large new personal expenditure is comparatively rare. Indeed, it is needless to set out in detail the evidence for the comparative conservatism of consumption. For, if everyone was driven by a ​natural impulse to raise his consumption immediately, so as to absorb the whole of any enlargement in the output of industry which came to him as income, there could be no increase in the provision of capital, and all further progress in the arts of production, so far as they demanded capital, would be inhibited.
Indeed, it must be admitted that upon this natural conservatism of present consumption, strengthened and directed by reasonable regard for future consumption, the economic progress of mankind depends. It is this conservatism that is expressed in saving. The real economic function of saving must be clearly kept in mind. It does not consist in not spending, i.e. in putting money income in a bank, or even in making an investment. It consists in paying producers to make more non-consumable goods for use as capital, instead of paying them to make more consumable goods and consuming them. This is the vital distinction between spending and saving, so often obscured by dwelling upon the merely monetary aspect.
Now, if we hold, as seems to be the case, that a depression is due to, or testifies to, the existence of an excess of producing power and a corresponding deficiency of consuming power, we can only mean that somehow or other there has been over-saving or under-spending on the part of industrial society, in the sense that more non-consumable, i.e. capital, goods have been created than have been capable of being properly utilised for the supply of future consumption. This is not a theory or an explanation, but rather a description of the actual facts. At a time of depression large bodies of capital stand idle, ​together with the labour and business ability that could operate them. They simply represent a surplus or excess of former savings, which cannot get used without delay and waste for the productive end for which they were designed.
I am aware that long before this many readers will be bursting with impatience, because they think I am ignoring what seems to them other and truer explanations of depression, resting upon the play of psychological-financial forces. Now, without denying the important part taken by these forces in exaggerating the fluctuations of concrete industry and commerce, I propose to show that they are secondary and not primary causes, and have no initiatory and independent influence. Having this intention, I must first complete the chain of reasoning by which I trace the under-production and under-consumption, which are the chief factors of a depression, to the normal tendency to save a larger proportion of income than can effectively and continuously function as capital.
I have referred to a natural conservatism in the arts of consumption in part explanation of the failure of consumption to keep full pace with the more progressive arts of production. But this natural tendency is strongly reinforced by inequalities in the distribution of income, which place a larger proportion of the aggregate incomes in the possession of comparatively small classes, who, after satisfying all their economic desires, have large surpluses for automatic saving and investment. The great bulk of the saving, normally applied to capital purposes in this and other industrially ​developed countries, belongs to this almost automatic accumulation of the surplus incomes of the well-to-do. I speak of it as 'almost automatic,' meaning that its provision involves no appreciable sacrifice in current satisfaction from consumption on the part of its possessors, and very little thought, excepting as regards its application for investment.
That the large incomes resulting from the inequality of wealth distribution enlarge the volume of savings, available for the increase and improvement of the capital structure of industry, is the accepted view of most economists.
An interesting, though necessarily speculative, estimate of savings in relation to incomes was presented by Mr. Ireson in 1910, to the following effect:
| Families with | Average Income per Family. | Average Spending per Family. |
| Over £5.000 | 12,100 | 7,600 |
| From £700 to £5,000 | 1,054 | 690 |
| From £160 to £700 | 357 | 329 |
| From £52 to £160 | 142 | 138 |
| Under £52 | 40 | 40 |
There is nothing unreasonable in the conclusion, suggested by this table and supported by a priori con​siderations, that any approximation towards equality of incomes would reduce the proportion of income saved to income spent. At a time like the present, when the aggregate amount of saving is greatly reduced, it is natural that qualms should be felt as to the effect of any movements making for a greater equalisation of incomes, and a consequent reduction of the automatic savings from high incomes. Under such circumstances my thesis, that under-consumption due to oversaving arising from maldistribution of income, is the normal cause of cyclical depression, is liable to grave misunderstanding.
I hasten, therefore, to explain that the over-saving of which I speak refers solely to the proportion of saving to spending, and does not imply any fixed limit to the amount that can be serviceably saved. This thesis may be presented in the following form:
Just as waste of productive power admittedly occurs by misapplication of capital, skill, and labour, as between one trade and another, or one area of investment and another (too much applied here, too little there), so income as a whole may be wastefully applied as between purchase of commodities and purchase of new capital goods.
For just as it is clear that waste ensues unless some accurate proportion is kept between the amounts of capital, skill, and labour placed in the several productive processes required for converting raw materials into finished goods, so there is waste if these finished goods are not effectively demanded and consumed as fast as the productive processes enable them to pass into the form of finished goods. In other words, ​consumption is simply the final link in a chain of economic processes, each of which should be kept in accurate proportion to the preceding ones, unless stoppage and waste are to occur. This is quite evident if the series of processes comprising the production, sale and consumption, of any single commodity such as bread, or boots, is taken under survey. Having regard to the current condition of the arts of industry, there will be a just balance both between the productive power applied at the respective stages of production on the one hand, and between the quantity of purchasing power applied to buy the bread or boots, and the quantity applied to maintain and improve the productive processes as a whole, upon the other hand. And what applies to any kind of commodity applies to commodities in general. In the use of the current income there must exist, at any time, an economically right proportion between expenditure in withdrawing commodities from the retail shops for consumption, and expenditure in maintaining and enlarging the plant and materials functioning in each stage of production. Or, putting it otherwise, saving and investment for enlargement of production are only economically valid on condition that the enlarged production is accompanied or soon followed by a proportionately enlarged consumption. In the last resort the rate of saving (in this sense) must bear an accurate proportion to rate of spending. This proportion of saving may be exceeded by any person or group, or even (within limits), any nation, but it must be kept by industrial society as a whole. Any attempt on the part of the whole society to live beyond its income is soon frust​rated, for it is impossible to continue taking out more consumables than are passed through the productive processes. A nation may let down its productive plant, and stocks of materials or semi-manufactured articles, in order to over-consume for a brief spurt, as we did in the emergency of war; but even this national over-consumption was only rendered possible by the belligerent nations drawing upon the surplus accumulations of the neutral world. The world as a whole would be pulled up very soon in any collective refusal of its inhabitants to make the necessary provision for future production.
There might, indeed, be under-saving, in the sense of a refusal to save enough lo realise the enlargements and improvements of the machinery of production that are required to furnish a larger output of commodities for a higher standard or a growing population.
Such a society might be said to over-spend and under-save, though it would not strictly speaking live beyond its income. Such under-saving on the part of society would mean a retardation or even a paralysis of economic progress.
This, indeed, presumably is what our economists consider would be the natural result of a process of equalisation of incomes. As under this condition the proportion of savings to consumption would be reduced, the growth of capital, and therefore the progress of production would be checked. And this seems true on one assumption, viz. that the total income to be spent or saved is not directly affected in its dimensions by the process of 'equalisation.' Suppose, ​however, that this equalisation, with its increased pressure of demand for consumables, kept the machinery of production more fully and more quickly working to supply the increased outflow of consumables, this would constitute an actual increase of real income, by reason of the higher productivity of the capital and labour continuously under full employment. Under such circumstances, although a smaller proportion of the larger income might be saved, and a larger proportion consumed, the actual amount of saving might be as large as or even larger than before, and, being more fully utilised as capital, might maintain as high a rate of economic progress as before.
This is the thesis which I here maintain.
The waste of production actually experienced in our normal operation of industry, by slowing down and stoppages, represents an attempt to save and employ as capital a larger proportion of income than can function in supplying the reduced consumption. This is to be attributed to a maldistribution of income, which upsets the true balance between present and future consumption that would obtain in a well-constituted society.
A self-sustaining individual (were such possible) would balance as exactly as he could present labour against future enjoyment. So would any group whose earnings were strictly proportionate to efforts. Such group-economy would apply a certain proportion of its present toil to making more or better tools, so as to lighten future toil and make it more productive of consumables. But there would be no tendency to sacrifice so large a proportion of possible present ​enjoyment as to provide more tools than were wanted, and more than could possibly be put continuously to full use in the production of future goods. But if in any society you get considerable groups of men whose incomes come to them by others' toil instead of their own, and if these incomes are so large as to afford little or no additional satisfaction by any considerable increase of their expenditure, this natural balancing of present against future enjoyment is upset. It becomes too easy for a rich man, living on unearned income, to cause an excessive proportion of the labour which he commands, but does not himself perform, to be directed to the production of future goods which he, or someone else, may or may not consume. In other words, the 'surplus' nature of much of the income which results from inequality of distribution disturbs the true balance of productive activities, and disturbs it normally in the direction of the postponed consumption of articles which, if consumed now by those into whose hand they would fall, would satisfy no felt want but would spell repletion.
* ↑ Cf. Pigou, Wealth and Welfare, p. 354; Stamp, The Principles of Taxation, p. 164; Keynes, The Economic Consequences of the Peace, p. 19.
* ↑ The People's Progress, p. 146. Mallock, Capital, War and Wages, pp. 34-35, estimates that "at present some three-fourths of these savings — the total being about £15 per head of the occupied population — come from the richer classes, the savings of those per head being about £170, and those of the poorer majority being not so much as £4."