On Taking the Clock Apart

Our economic mechanism can figuratively be taken apart even as a mischievous child might dismantle the kitchen clock. Also, it can be pictured—each part of it, the mainspring, pendulum, and time-telling hands —in non-technical, readable language. Readers of the common garden variety of economic literature which emanates from academic pens may question these assertions. But the staff of the Brookings Institution has proved my claims. In four succinct volumes these scholars have literally dismantled this economic system and, in one-syllable words, have explained just what makes it tick.

Like their youthful prototype, they were undaunted by the magnitude of the task when, in 1933, they set forth to investigate “whether the existing distribution of income in the United States . . . tends to impede the efficient functioning of the economic system.” Systematically they planned their consideration of each section of the economic machinery. First, in “America’s Capacity to Produce,” they considered whether “actual production even in our most prosperous years utilized our full productive capacity?” With ingenious statistical tools the Brookings scholars delve into this economic mechanism. Their techniques of measurement are realistic, but are inaccurate in two respects. They fail, first, to reckon with the economic fact that if the price of a commodity rises, simultaneously the “capacity to produce” this good increases, as sub-marginal plants are drawn into operation. In the second place, they take insufficient account of the flow of goods through successive stages of the industrial process. Is the capacity to produce shoes large or is it small when tanning plants are able to put out a vast quantity of leather but when, two stages ahead, a deficiency of stitching machinery delimits the output of shoes? The volume of goods that may be drawn upon for the satisfaction of people’s wants is the output of an integrated economic mechanism; it is not, as these investigators assume, the average capacity of independently viewed steps in the process.

Yet their measurements, even though they are inaccurate in detail, are significant in their totality. Even in 1929, they report, when the production of goods and services reached its peak, at least nineteen per cent of our farms, factories, and machinery was not utilized. Then, perhaps just to lend emphasis to this finding, these scholars add that had this productive capacity been employed, goods and services worth $765 at 1929 prices could have been added to the consumer gratifications of every family having an income of $2,500 or less in that year.

The Brookings students deny that we can produce in excess of our needs. They base their denial, in “America’s Capacity to Consume,” on an analysis of the distribution of the total national income and upon a study of how rich families, and poor families as well, spend their incomes for food, clothing, rent, doctors’ bills, yachts, and even savings. Again, they add, somewhat as a mental barb, that if all family incomes were raised to a minimum of $2,500, the total consumption of goods and services would be increased by more than $16,000,000,000. To shorten hours of labor much further or, perforce, to reduce production is simply to do as did Procrustes, the Greek innkeeper, who cut off the legs of his guests when they were too long for his beds. A preferable method, these investigators intimate, is to make the beds longer.

In the third volume of this series, “The Formation of Capital,” Mr. Harold G. Moulton, president of the Brookings Institution, examines the mainspring of the economic mechanism, capital, the persistent flow of which is essential to the maintenance and growth of productive capacity. We save too much. This belief he pronounces to a nation steeped in the philosophy of Benjamin Franklin and his intellectual descendants. But today the need for savings is not so great as in the time of Franklin. Existing capital equipment, the first of these volumes demonstrates, is not even utilized in supplying current consumptive needs. Business men cannot use much additional savings for the creation of more capital. Yet the current distribution of income results in large savings accumulated from the unspent incomes of a few. Savings are not automatically transformed, as classical economists have held, into capital. Savings become capital only when entrepreneurs see the prospect of profit in their use as capital. At other times, Mr. Moulton demonstrates, savings are dissipated in bidding up the prices of securities. More spending is needed in order that business men may employ existing capital equipment profitably, or with the prospect of profit.

In no very different language than many of his lineal economic ancestors, Mr. Moulton concludes, “the primary need at this stage in our economic history is a larger flow of funds through consumption channels rather than more abundant savings.” This conclusion and its premises have evoked widespread debate. Studies of the National Bureau of Economic Research raise some doubts as to the volume of savings which could find no place for investment during the 1920’s. Other students are skeptical of Mr. Moulton’s belief that excess savings were used to bid up stock prices to an artificial and precipitous high. In contrast, I found this volume the best of the series. Mr, Moulton’s emphasis upon consumption as the genesis of economic motive power is, to my mind, well placed. By recognizing the essential import of a continued flow of consuming power, this author opens the door to new fields of economic prescription.

We can readily recognize that the economic mechanism is geared to run at a faster pace. At times it does, but then perversely runs amuck. When we attempt to adjust the delicate, finely attuned machinery by moving the regulator from “F” to “S,” we seem able only to dislocate the operations so that the clock is at no time dependable. Shall we put in a new regulator? “By all means, ‘No’,” Mr. Moulton answers in the fourth volume, “Income and Economic Progress.” “Our problem,” he states, “is to determine whether the flow of the income stream to the various groups in society can be so modified as to expand progressively the effective demand for goods and thus evoke an ever greater volume of production—which would mean a steadily augmenting aggregate income to be divided.” He points out that this end is accomplished by taxes which transfer money from those who are amply supplied to those who possess little. The New Deal attempted to gain this end by the compulsory increase of wages. In both methods, Mr. Moulton finds fault; he has little sympathy with the prescription of conscious governmental action as a substitute for unpredictable, unregulated control by competition and automatic economic forces. Only one method, in his opinion, offers the prospect of a steadily rising standard of living. Here it is! “The broad highway along which economic progress must be sought,” he declares, is the continued automatic reduction of prices resulting from competition among business men. After reviewing the findings mercilessly set forth in the first three volumes of this series, the reader is disappointed in this spineless conclusion. Many students are led to more positive conclusions by these same findings. In short, after naughtily toying with exciting new ways by which the clock might be put together again, Mr. Moulton unimaginatively turns to a manual of directions and puts each part back according to the book. (This book was written by Adam Smith in 1775!) Finally, he predicts that, if we are more careful about how we wind the old timepiece in the future, she’ll probably run better.

There are many who disagree. “Enough of laissez faire,” they say, “let us accept your findings and do something about it” David Cushman Coyle is one who suggests a more positive prescription of economic reform. In “Brass Tacks,” a humble, unpretentious little volume, he recommends that the government insure an amount of spending sufficient to make business prosper. He prophesies a future of inheritance, income, and excess-profits taxes. These taxes will support government spending and simultaneously prevent savings from choking the economic machinery. Government spending will employ people in providing educational, recreational, health, and other services. Likewise, it will provide unemployment and old-age insurance. Government must afford the security that individual savings formerly afforded. His argument is logically and clearly stated.

Take your choice! Are the ills of the economic mechanism to be cured by a greater dose of the soothing oil of laissez faire? Or will they be remedied more effectively by installing a new regulator? In the four volumes of its investigation, the Brookings Institution has more clearly pictured the current problem than many would have believed possible. Together these volumes represent probably the most important contribution to economic analysis in the literature of a decade.