The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1935-02-27
BLAST FALLACY
OF ECONOMICS
IN NEW REPORT
Bookings Experts FIay Old
American Theory in
Study.
BY MAX STERN
Times Special Writer

WASHINGTON. Feb. 27.-Anothel
American economic fallacy has beer
blasted by scholars of the Brook
ings Institution in the third of theil
Falk Foundation studies on the re-
lations between economic progress;
and distribution of income.
This fallacy is that capital-tools
railroads. power houses and other
means of produciton-must be &C
cumulated out of savings and at the
expense of consumers.
The demand for capital goods is
derived from the demand for con-
sumption goods" says the Brookings
report, entitled The Formation of
Capital" Hence, an increase in
savings at the expense Of consump-
tive demand will decrease rather
than increase the output of capital
goods"
History Bears Out Dictum
The Brookings experts find that
If new capital is to be created there
must be an increasing flow of funds
through consumption channels as
well as through savings channels"
History bears out this dictum, they
say.
The fact show incontrovertibly
that new capital is constructed on
an extensive scale when consump-
ton is expanding rather than when
it is contracting" says the report.
Likewise, it was found that there
is no support for the popular theory
that recoveries of the past have
generally been brought about by the
rise of new industries during the
depreSsions.
Actually. it says, the new indus
tries that are popularity supposed to
have pulled the country from de-
pressions-the auto in 1920, for in
stance-developed after expansion
was under way.
Evidence Supports Theory
The available evidence supports
the view that the growth Of capital
IS directly related to the demand for
consumption goods" the study con-
tinues. In the first place changes
in the direction of business activity
in most cases appear to have begun
with factors affecting the consump-
ton side of the economic picture.
In the second place, the growth Of
new capital is adjusted to the rate
of expansion of consumptive de-
mand rather than to the volume of
savings and available for invest
ment."
Before the Civil War, the peoples
savings were needed for capital eX-
pansion. Since then the growth of
well-to-do middle class with
plentiful funds for investment and
the development Of a banking system
capable of supplying expanding
credits for business have upset the
old economy. We now have not only
an abundance of funds for financ-
ing American enterprises but enough
to lend abroad.
Excessive Supply Dangerous 4
Instead of a scarcity of funds for
the need of business enterprise there
ANAAAAo W NC uAA IANCooANE supply VI
available investment money, which
is productive not of new capital
goods, but Of financial maledjust-
ments." the Brookings report con-
cludeS.
The new study, like the two earlier
ones. bears directly on the high
wage claim of labor economists. The
first report showed that America
suffers from under consumption
through maldistribution of the ma
tional income
II found Is million families in
1929 living below a minimum stand
ard income of $1,000 a year. The
second study revealed America trag-
ically failing to live to its pro-
ductive capacity. With its plant
and labor capacity it could produce
twice as much as it is producing
today and 20 per cent more than ii
turned out in 1929.