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The Economist Answers

ISSUE:  Autumn 1932


What do you economists have to offer? This question has made many an economist cringe and squirm uncomfortably during the past three years. Be he a guest of the Rotary Club, a member of a Sunday afternoon tea party, or a chance stumbler upon a street corner “bull session,” the barbed arrow unfailingly seeks him out: “What do you economists have to offer?”

Often the question is put with just a little malice and, not infrequently, the answer, if any, is openly gibed. Anticipating this, the economist, too, may justifiably be slightly acid and remark that the question is being put just six years too late. But underneath his discomfort and mild resentment there is deep rejoicing that the public should be goading those who profess to know what our financial and industrial ills signify and demand. For the first time in many years the economist is being forced to talk and the public is being compelled to listen. What a magnificent yeast of progress is this combination of captious attitudes!

But lest there be misunderstanding, let us be sure that we are agreed on the definition of an economist. There are very dependable ways of identifying doctors, lawyers, certified public accountants, preachers, and plumbers. They all have framed licenses in which their respective proficiencies are attested by the State. But no State has yet found economists important enough to license, despite the fact that they are called upon to provide formulas for the maintenance of its existence.

So it happens that a bond salesman honorably ambitious for bigger business, starts a printing press, showers abroad varicolored charts interspersed with columns of figures (seasonal variations allowed for), casts a Merwinian eye into the future, and straightway becomes an economist. Or a grower of wheat, desirous of a bigger net return per bushel and willing to campaign for it, becomes a “big shot” in the farmer’s cooperative, gets appointed on a President’s Commission and, presto, we have a new economist. Or a bank clerk, having worked up in the business, learned the jargon of Wall Street and the ideas of his own board of directors, is delegated to get out a monthly sheet:—economist.

On the other hand, one who has worked for years with the stern discipline that began with the Greek philosophers and carries the imprint of Adam Smith, Ricardo, Mill, and Alfred Marshall, who regards his Ph. D. long ago received as but an early incident in the life of a scholar, who knows the technique of scientific research and has examined objectively every type of economic change, who is familiar with the background of every economic institution and its present functioning, who is affiliated with no interest and attached to no prejudices—he is better known as “college professor.” But he is the economist who must serve the purposes of this article.

Presenting him in this fashion, I do not mean to imply that he is a highly standardized type of expert. He will occasionally vary from his fellows in his ideas of ultimate social objectives. For example, the group as a whole possesses a good sprinkling of socialists. Among the others will be found varying degrees of liberalism. But one will look in vain for conservatives of the traditional type. They simply do not exist. These men deal with a science which is essentially dynamic. Their major function is to recognize and appraise the forces of change and the agencies of resistance. They know from the experience of the past and from the character of the economic forces which now operate that no scale of values is absolute, that no business practice is infallible, that no institution is fixed. Hence they have come to view change as inevitable and to pass judgment upon it objectively.

One further advantage they have—they study events in their relationship to the entire economic scene. The reparations question as they consider it does not involve merely Europe but the whole world. They judge inflation not merely for its domestic consequences, but for its effects internationally. They can see the connection between selling shirts in Singapore and collecting war debts from London, between paying out bonus dollars to “veterans” and accelerating the rat-a-tat of the sheriff’s hammer among the taxpayers, between stock market speculation and the international flow of gold. They know that borrowing should have a definite relationship to income, and that the money supply is properly conditioned upon the production and flow of goods.

In other words, when a particular policy is unsound the economist knows it and can say why. When there is a particular problem to be met, the economist can at least pass judgment upon the proposals of others, if he himself has no solution ready. Usually he is at one with his fellows in meeting immediate situations. There is not a single economist in the world, be he red, pink, or liberal, who did not see long ago the infamy in the economic aspects of the Treaty of Versailles, or who would defend the present tariff policy of the United States, or who would advocate the forced maintenance of the present forms of competition in the coal industry, or who would oppose the public regulation of the employment of women and children in industry, or the standardization of the working week for mass-production activities, or the adoption of workmen’s compensation and old-age insurance. The world still has a long way to go before the differences of opinion among economists as to ultimate objectives would serve as a serious obstacle to perfect cooperation.


So, returning to the question, “What do you economists have to offer?” we must bear in mind that it cannot be properly addressed to a very large group. Those who may rightly be called economists are numbered in the fifties rather than in the hundreds. The answer of this group to the question will probably be given in two ways. The economists will wish first to offer themselves in person, and second to proffer a stock of fundamental ideas applicable to the new economy, which, disembodied from particular individuals and situations, will become a part of the national thinking.

The reason for the first is that problems of a very specific type are always appearing which require specialized technical skill as well as general knowledge of fundamental principles. Banking legislation to meet present needs in banking reform is a case in point. International action relative to the monetization of silver would be another. These and scores of other legislative proposals could not conceivably be handled with intelligence except by a group of highly competent professional economists. But in the United States it is a very rare thing for an economist to be so used. Occasionally he gets in a word at the “hearings” of a legislative committee, and occasionally he is allowed to be a part of the retinue of a “survey” expedition. But he doesn’t get appointed to the Interstate Commerce Commission, or the Federal Trade Commission, or the Tariff Commission, or the Federal Reserve Board (one exception here), or the Cabinet. And if any really important international conference is slated in which we are to participate officially or unofficially, our representation is typically composed of a banker (whose bank has not yet failed), a manufacturer (preferably cast iron pipe or electric switches), and a big navy man. If an economist is taken along he is usually concealed in the baggage and his name carefully deleted from the dispatches. Hence are partly explained the brilliant results of our international negotiations over the past twelve years.

Moreover, the economist does not write lavishly for the daily press, or the popular weeklies, or the hardly popular monthlies. His hand is a bit too heavy, his tone a bit too pedantic. The reader of the Sunday Barber Pole wants his economics peppy, garnished with terse, crispy verbiage and juicy with human interest stuff. If he can have it served from the coat-tails of a politician, so much the better, or from the shirt-front of some maligned foreign country.

But being denied an important role in the direct formulation of national policy does not mean that the economist is shelved. If his political influence is not strong enough to bring him to the council chamber, he has two alternative vantage points which cannot be denied him. These are his class room and his publisher. He will teach the students who will be tomorrow’s leaders, and he will write the books which carry authority. Until about twelve years ago the majority of our colleges either had no courses in economics or else provided instructors in that subject who had no special training. It was not uncommon for the economics to be taught as a side issue by the historian, or the political scientist, or the sociologist, or the moral philosopher, or the theologian. The change from this status has been extremely rapid, so that now the college graduate who has not had some competent instruction in economics is the exception rather than the rule. The consequences in the form of more enlightened economic judgments should be revolutionary within the next decade, not only in legislative halls, but also in the press and in the general body of public opinion.

Thus do we see the economist in the performance of his first function: bringing himself personally into close engagement with the minds of those whom he is teaching and with particular and usually unexpected problems which cannot be solved by routine procedures and mechanisms. With his students and his readers there is every reason to believe that he is now being amazingly successful; with the problems less so, because he has not yet found his way to the firing line.

This function necessarily accompanies and gives life to the second, which is to provide and modify from time to time the body of principles which we come to use subconsciously in our economic thinking. They are the things which eventually we take for granted, which become our intellectual reflexes, our basic assumptions. They determine the character of the national economy, they constitute the basis of our predictions. In the prosecution of national policies they are deviated from only in special contingencies. They give direction to the economic order. Their validity can be tested only by long experience, and in the absence of violent revolution they can be changed only over long periods of time.

But they do change. And they will continue to change so long as populations multiply and migrate, and new resources are discovered and utilized; so long as men contrive new machines, devise new commodities, and precipitate wars. To exercise leadership in keeping our working principles and our philosophy in harmony with the underlying material basis of our economic life is the economists’ final supreme challenge.


So now we come to the very practical question: in this year, 1932, what changes are visible in the material basis of our economic life—its machinery, its methods, its goods, its capital accumulations, its markets, its geography — which warrant a revision of our economic philosophy, and what should be the extent and character of such changes?

The essence of our present economic philosophy is that the means of production should be in the hands of private owners operating under the incentive of profit, that the opportunity for profit in any particular line will always invite competition, that competition among producers and sellers generally will assure to the public a reasonable price. It is presumed that market price will more or less accurately reveal the true relationship between supply and demand and hence serve as a regulator of production, that a low price will curtail production and a high price expand it and so bring about its own correction. It is presumed that the investor in his own interest will apply his savings where they will produce the highest yield, which is also the place where they are most badly needed for the good of all. It is also presumed that the interests of the workers are adequately protected in the long run, since competition among employers will insure that they pay a wage in proportion to the productivity of the worker. If wages should be at a given time too low relative to prices, the resulting excessive profits will encourage the coming in of additional producers or the expansion of additional plants and so serve simultaneously to lower prices and raise wages until the proper relationship is once more gained.

In short, it is a system of free enterprise and free covenants operating on the principle that the profit motive and self-interest automatically assure a proper balance of production and consumption and a proper distribution of incomes. In such a system the major economic function of government is but to maintain the conditions of competition.

Long since, we began to recognize the necessity of making occasional modifications in this system of thought. The railroads provided a type of competition which didn’t work and which eventually had to be regulated. It was seen too that the interests of the community were not best served by having competing telephone systems or competing electric light and gas systems. By the use of such concepts as natural monopoly, legal monopoly, and public utility, we readily classified the type of activity which was properly an exception to the general rule of laissez-faire.

The developments of the past decade have made it obvious that the public utility classification should be broadened still further. Competition of the traditional type has failed tragically in the production of crude petroleum and the mining of bituminous coal. Moreover the conditions under which these two industries function are such that no substantial improvement is possible without lifting the prohibitions against combinations and trade agreements. At this moment the Federal government is prosecuting in the courts the Appalachian Coal Company for alleged violation of the anti-trust acts. This company is the marketing agency for about one hundred and sixty coal companies and is presumably a factor in the regulation of their outputs and the prices which they charge. An arrangement of this sort is absolutely essential in an industry whose thousands of small competitors are producing and selling blindly, if it is to avoid chaos, chronic bankruptcy, and crushing perpetual poverty for its workers. An adverse decision in this case, provided it goes so far as to compel a continuance of the present vicious system of competition in the coal industry, would not only be contrary to sound economics, but also distinctly anti-social in its consequences.

As is well known, crude oil production has become a hideous travesty. It is less a business than a combination of reckless gambling and frightful wastefulness of one of our most valuable natural resources. Both in coal mining and in oil production the government should not only permit but make compulsory the maintenance of effective combinations or trade agreements through which output and price could be regularized under the supervision of some such government agency as the Interstate Commerce Commission or the Federal Trade Commission.

On the other hand, there are industries where the combination movement has gone far beyond the limits of economic reason. Ostensibly the purpose has been to procure the familiar economies of large-scale operation. Actually other motives have prevailed, with results that indicate that the combination movement has become a problem only incidentally involving the question of competition. The holding company type is usually brought into being through a colossal over-issuance of securities, with the dual result of losses to the public and a burden of overhead on the holding company which must be passed on to the various subsidiaries. In addition, the structure is highly complicated, consisting of a veritable entanglement of subsidiaries bearing every conceivable type of relationship to one another. To place responsibility in management, to prevent manipulation of accounts, to have accurate auditing are impossibilities. These unwieldly combinations, far from being examples of efficiency, will show higher costs per dollar of investment and less flexibility to changing economic conditions than the smaller and more compact competitor. The boasted advantages of the super-combination are in most cases a gigantic hoax. The most competent economic studies in this field are without a dissenting voice in this conclusion: Du-rand, Jones, Ripley, Watkins, Seager, and Bonbright.

Thus, while we see as inevitable an extension of the public utility idea in certain places in the interest of regulated monopoly, we must recognize as equally inevitable the continued enforcement in other places of the competitive status, not so much for the advantages of competition per se as for the protection from over-intricacy and over-capitalization of our economic organization.


To the problem of technological change more attention will have to be given in the future. Improvements in machines and methods have of course been frequent since the industrial revolution, but they have been accompanied usually by an equally rapid growth in new opportunities for labor and capital. Until a generation past, the growth of machine technique was paralleled, in the United States at least, by expanding frontiers and migrating populations.

But during the past decade certain new aspects of technological change have developed. The first of these is that the rate of change has materially accelerated. Another is that the growth of new opportunities from the development of new areas has slackened. Thus the absorption of displaced labor can be accomplished only as new industries and services are devised, and even then the requirements of specialized training and aptitudes in particular cases constitute a great obstacle to complete readjustment. Each installation of labor-saving devices means in effect that a smaller number of people are being required to supply the accustomed goods.

It is obvious then that we must utilize the saved time either by distributing it over the entire labor force in the form of shorter hours for everyone, or else develop new industries and occupations, which can absorb the released labor. To the last alternative comparatively little attention has been given. We have been naively taking it for granted that new enterprise will automatically spring up as surplus capital and labor become available. This assumption is of course not true in a country of advanced economic maturity. In the United States, at present, an over-abundance of labor and capital leaves us profoundly puzzled. So far, science has lent itself chiefly as an aid to the production of known goods. The laboratories of school and corporation as well as the bureaus of the government employ the best brains of the country to find out ways of supplying more cheaply the things we already have. What we need to solve the problem of technological adjustment are new uses, new goods, new wants.

The direction of scientific research for commercial purposes should be completely reversed. An excellent precedent has been set by the Cotton Textile Institute, which has directed a large part of the research activity of that industry into the discovery of new uses for cotton. Why should not the government, instead of spending vast sums to coddle industries which are over-coddled, overgrown, and which have become the symbols of satiety, set up a Department of New Industries and New Commodities whose business it would be to experiment with and promote new projects which have a prospect of social usefulness? How much better, for example, it would be economically and socially to spend government funds toward the development of better and cheape: airplanes, or the broadening of the uses of electricity, than to spend it on ditches and post offices.

The problem of technological employment will be met in part, of course, by the gradual adoption of shorter hours. There is no better argument for legislation reducing the length of the working week than to point out the extent to which the productivity of employees has been increased. Obviously society gains nothing from increased productivity if its major consequence is to destroy the pay-rolls and the purchasing power of employees and so make impossible the sale of the goods whose production is on so efficient a basis. The political economy of the future will then be compelled to establish in the everyday thinking of the people, as assumptions to be taken for granted, that technological change demands without equivocation either a compensating change in the form of new industries and commodities or else an enforced reduction in the standard working time. From these two alternatives, or a combination of them, there is no possible escape.


No less imperative than the problem of technological change is the problem of security prices. In the past, price discussion has always concentrated on the causes and effects of commodity price fluctuations. It was taken for granted that security price changes were relatively unimportant except as barometers of business, that small groups of banks and investors were the only elements in the population whose profits and losses were directly affected by them and that these particular groups were well able to take care of themselves.

These assumptions have ceased to be correct. The financial welfare of the entire population is conditioned upon security prices, and security prices are probably the most important factor in determining the course of commodity prices and general business. Within the past decade and a half the rapid growth of corporate enterprise at the expense of partnerships and individual businesses has created a situation where virtually one-half the entire national wealth is represented by stocks and bonds. They have become the reservoir of the country’s savings, the substance of which endowments, trust funds, sinking funds, and corporate surpluses are made. If any form of enterprise wishes to set up reserves, they usually must consist of securities. Moreover, they are the collateral on which the greater part of bank loans are based. Without them the insurance business could scarcely exist, the great universities would languish.

The great rise in security prices from 1922 to 1929 artificially increased the country’s borrowing and purchasing power by fifty billions of dollars, and was unquestionably one of the most powerful of the dynamic influences which brought about the enormous buying of luxuries and building of houses during that period. When the period of speculation had run its course, industry was at once deprived of this great stream of purchasing power to which it had become accustomed. This in itself was sufficient to restrict buying on a large scale, but the continued persistent decline in security prices which followed had the further effect of constituting a drain on the purchasing power which would otherwise have been available for the commodity markets. The paying up of bank loans based on rapidly depreciating collateral was the equivalent of taking money from circulation. The cycle of events may be summarized thus: in a rising market the buying power of the public is supplemented by converting into bank funds the appreciation of security values; in a falling market, the buying power of the public, already diminished by reduced employment, is still further contracted by the process of paying up bank loans and absorbing the losses from depreciated security values.

When the consequences of security fluctuations are so far reaching and powerful, the utter folly of allowing security prices to have so tenuous a basis as a capitalization of current earnings at the current rate of interest, with due allowance for future expectations, becomes at once apparent. The means of correction are easily at hand, partly in the form of a vigorously applied banking policy toward the security markets and partly in the form of restrictions on holding company formations (a most fertile source of new issues). To utilize such means in the interest of greater economic stability will be comparatively easy, once there is general understanding of the economic significance of the security markets.


In one more important respect our economic thinking is destined to undergo a change—as it bears upon our international relations. The fact that we are a creditor nation to the extent of sixteen or eighteen billion dollars means that we must be prepared to accept interest and dividend payments of around a billion a year. Unless we reinvest this huge return annually in foreign countries and so keep on enlarging the cake, we must receive the payments in the form of goods. The logical consequence therefore is a greater volume of imports relative to exports. This can be achieved, however, only by a surrender of our high tariff policy. If we refuse to do this, then we must write off as bad debts most of what the rest of the world owes us, and in the future restrain ourselves from foreign loans and investments. There can be no extension of our international financial interesta without a corresponding extension in our commodity exchanges with other countries. The reparations agreement of Lausanne in which the allies virtually give up their claim to reparations is a belated recognition by Europe of these principles. The United States will do likewise if it is willing to subordinate nationalism to economic sanity.

If it be objected that I have mentioned only incidentally the most glaring weaknesses of the economic order, depressions and unemployment, the reply is that these are but the net consequences of the entire array of maladjustments which confront us. They are not specialized results of specific and immediate causes. Their explanation is to be found in the functioning of the economic system as a whole. If by an improved industrial organization certain sick industries can be made well, as I have indicated, and certain other industries can be protected from the exploitation that attends over-organization, we are striking directly at depression. If we can go further and meet the clean-cut issues presented by technological change, there is an additional huge gain. Adequate defenses against the wholly unnecessary and disastrous fluctuations of security prices, as we have had them in recent years, almost complete the desired buttressing. The one additional requirement to make our national economy depression proof is an intelligent application of the simple and almost obvious principles which apply in international economic relationships.


The carrying out of these prescriptions involves no surrender of the present framework of our social and economic system and does not seriously interfere with any of its fundamental functions. The system as we have it was not created by the economists and they have done but little in directing its activities. Nevertheless it is the established order, and the business of the economist, therefore, is to ascertain its maximum range of flexibility and to advocate those desired adjustments which may be made within that range. If he attempts more than this, he is merely setting up alongside his economic logic a certain social philosophy, the ultimate blending of the two remaining purely a matter of conjecture.

In presenting for the future a political economy which embraces essentially the present organization and does no great violence to present concepts, the desire is not merely to advocate that which is likeliest to succeed. The easiest thing, of course, is to improve on that which we have. But this consideration does not alter the probability that what Jj we have is the best attainable, if intelligence is exercised in | its administration. I have proceeded on this assumption and it is my belief that the economist logically has no other choice.

The only qualification I have made relative to the desirability of the present system in its major outlines is the one , stated above, “if intelligence is exercised in its administration.” This qualification is based on no serious misgivings. Nation-wide instruction in economics in our colleges and universities is still to bear its full fruit. The extraordinary volume of publicity given for the past three or four years to such practical questions as stock market speculation, reparations, farm relief, inter-governmental debts, cannot fail to make the more influential elements of the population conscious of economics. As a result of their respective tragic disillusionments, bankers, investors, farmers, wage earners, manufacturers, and speculators are vastly more studious and receptive to new ideas. The economists, too, having learned more, will be more vocal, more seeking and more sought after.


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