Chapter XII

THE STRATEGY OF PROGRESS

TWO MAJOR PROBLEMS confront every attempt to conceive a strategy of economic progress. One is the logical problem of the meaning of value. The other is the methodological problem posed by the magnitude and complexity of the industrial economy. Both seemed to have been solved at one stroke by the classical formula with an apparent nicety to which that way of thinking owes its charm. For if price is the measure of value, then price equilibrium is the criterion of economic welfare; and if price equilibrium is what obtains in the absence of unnatural restraints, then we are at once provided with a clear definition of the strategic objective. The tactical difficulties involved in the removal of restraints and impediments may still be considerable, but such difficulties are practical and administrative. The supposition is that both of the really formidable intellectual problems have been solved.

It is this supposition which makes students of economics so resistant to criticism of the price theory of value and so reluctant to attempt any other solution of their problems. For even if it be supposed that a solution to the logical problem of the criterion of value can be found in terms of the continuous advancement of the arts and sciences, tools, instruments, and the machine process, the methodological problem still remains. How can such technical advancement be insured and accelerated? How can institutional obstacles be weakened or removed? Not, obviously, by letting things alone! To suppose that in any given area or period technology must inevitably prevail is contrary both to the instrumental logic and to all that we know of history. It depends entirely upon our efforts whether the economic progress already achieved by Western civilization is to be continued and accelerated or whether it is to be extinguished. The question is, what efforts?

In squaring off to face this question we can at least take comfort from the fact that Western civilization still exists. Fortunately our task is not Utopian. For it can be said with- out disparagement of the great literary monuments of the past that they are literary. As such­­as intellectual stimulants­­ they have been among our most precious possessions. But no Utopia has ever been realized, or can ever be, for the obvious reason that a work of art is not the equivalent of reality. No man has ever drawn a complete "blueprint" of a society, or can ever do so, any more than a scientist can draw a complete blueprint of the human body. Even the architect, whose efforts are suggested by the blueprint metaphor, takes for granted most of the materials, tools, and "know­how" by use of which his building is to be constructed. In effect the new building will only reproduce others already in existence with certain specified alternations and, perhaps, improvements. Surgeons do not hesitate to improve the human body, although to do so they must be presented with a living organism, actually existing as a going concern. Society also is a going concern. Even Western civilization, for all the loud knocking and other signs of faulty lubrication, is still going. The problem is not one of conjuring a culture out of nothing. For better or worse we are "stuck with" the existing civilization of the Western world. Our problem is to make it work, better if possible.

The impression is quite general today that Western society is breaking down, or at least threatening to break down, and everyone agrees that it is not working as a sound mechanism should. Furthermore everybody agrees that whatever may be the cause of our present trouble, it is not due to a failure of technology. Some people do blame science and technology for all our troubles, but they fear what they regard as overdevelopment. What they challenge is not the fact of technological development but its meaning. They deplore the "materialism" of the age, as the devotees of ancient sanctities have always done, looking back to some earlier day when (as their kind always think) men lived "simply" and communed with Truth. In short their value judgements derive from the institutional traditions of the past and they abhor technological progress because it has lead the modern world to break with those traditions. Unfortunately, but inevitably, it has not been a clean break. The neo­medievalists think we have too much science and even too much "material" comfort for our spiritual good. We think the trouble lies altogether on the other side. But with regard to the present and prospective vigor of science and technology all agree.

The tenacity of institutional traditions is likewise a generally admitted fact. But it is one thing to reach the logical conclusion that institutional atavisms are the seat of all our trouble and quite another to determine methodologically what to do about it. The immediate and complete abrogation of the institutional structure is both impossible and inconceivable. We may deplore the organization of society along the lines of coercive power with its penumbra of legend and mysticism; but the immediate alternative would be a void. Since it is beyond our powers to conjure a new social order from a void, we have no alternative but to carry on. This means that, it spite of anything we may be able to do within the predictable future, coercion, injustice, inequality, ignorance and superstition will certainly persist. Progress will consist of pushing back their boundaries here and there; and the question is, where? Where and how can the present confusions be most effectively relieved ?

In part "the sickness of acquisitive society" is a police problem. Mr Tawney himself has attributed the disease to the moral deliquescence of the age, but this etiology is extremely dubious. One cannot indict a civilization. What we know of medieval culture­­not the high principles of leading churchmen, which we also could match with the writings of Mr. Tawney and many other high­minded contemporaries, but the actual behavior of ordinary people of high and low degree­­scarcely leads us to believe that sin is a modern invention. Indeed, what makes the iniquity of modern business stand out in bold relief is the comparatively high standard of public administration which modern governments have been able to achieve in contrast to those of medieval times. Furthermore it is doubtful if any general condition can be properly attributed to the moral tone of the community. What then determines that moral tone? If the streets of modern cities are safer than those of medieval towns, that is due in the main to the modern development of street lighting. Crime flourishes in the dark. Any system of general illumination makes crime more difficult and therefore scarcer, and so brings about a general rise in the moral tone of the community. No such change ever originates in moral attitudes nor even in the more conscientious application of the existing machinery of law­enforcement. Even conceived as a police problem what the general delinquency of acquisitive society plainly calls for is the business equivalent of street lighting.

Obviously the need is greatest in the domain of big business. This is true not because one class of business men is more conscienceless than another but because big rascals are by definition more troublesome than little rascals. Students of economics have traditionally conceived this problem in terms of monopoly. They have done so in part because the classical way of thinking has represented competition as natural and wholesome and so has automatically identified unwholesomeness with deviations into monopoly, but also in part because business crimes are committed in the dark. As Adam Smith remarked, business men seldom dine together without entering into criminal conspiracies; but since the privacy of the dinner table is inviolable, "Gary dinners" are exceedingly difficult to proceed against. Even a stenographic report of the conversation may reveal no single word or phrase which can be made to prove criminal intent. Mr. Gary has let drop a few bits of information, and that is all. The real conspiracy is tacit. The only proof is the astonishing coincidence of subsequent price quotations of the several diners. But since no specific act of collusion can be established by such evidence, the charge is necessarily limited to that of monopoly, that is deviation from common competitive practice. Thus monopoly has come to head the calendar of economic crimes and to be the chief concern of many students.

Admitting the importance of the problem, we may still question the strategy and tactics of the attack on monopoly. However probable it may be that firms which have the power to dominate a market will do so and in doing so will commit a great variety of acts which would be judged criminal if they could be proved, courts hesitate to proceed on wholly or largely inferential evidence or to condemn "mere size" on the ground of deviation from a competitive norm which in the circumstances must be wholly or largely theoretical. Mr. Thurman Arnold has demonstrated that much can be accomplished by vigorous enforcement even of the anti­trust laws; but his successes were achieved in considerable part by using the "nuisance value" of threatened prosecution as a club to compel suspected firms to sign consent decrees agreeing to abandon various supposedly criminal practices, and this has already provoked a violent reaction against what is called "governmental blackmail." Apparently the attack on monopoly cannot be made permanently effective.

The plain lesson of this failure seems to be that we need another strategy. As Mr. Arnold himself wrote, before he became assistant attorney general, the condemnation of monopoly is itself part of the folklore of capitalism. The real evil is not size nor even power, unless all power and all bigness are to be condemned­­and society is far from ready to take this stand. The real evil is the whole congeries of common crimes, suspected but unprovable, which big and little business men commit, the swindles and defalcations and embezzlements which Mr. Tawney attributes to the spiritual bankruptcy of capitalism. As our public life reveals, such things are a function of concealment. It is one of the ironies of capitalist culture that the practices which all good citizens condemn in government­­bribery and graft, nepotism, the multiplication of unneeded offices solely in the interest of the incumbents­­ are not merely common but universal in business. The very considerable degree of purification which has been effected in government in spite of continual reinfections from the much larger area in which business standards still prevail is a testimonial not to the superior character of public servants but to the effectiveness of public scrutiny under which, to a steadily increasing degree, the affairs of government are conducted.

In part this is a matter of organizational technique. Business men themselves have been leaders in devising techniques to insure the honesty of their subordinates. It is such things as the cash register and the filing system that make large business organizations possible. What we need, obviously, is a system of cash registers for managing directors of the same sort as they impose on their subordinates. But this raises a larger question, the question of the "inalienable right" to privacy. In spite of the fact that business men deny any such pretensions on the part of their subordinates, not to mention "public servants," they are ferociously indignant at any suggestion that their own much­touted consecration to the service of the public carries any obligation to submit their acts to public scrutiny.

But obviously they have no case. It is ridiculous to suppose that opening the accounts of great corporations to public inspection is a violation of the personal privacy for which men fought. Any free man can still have as much privacy as he likes by the simple expedient of not being a corporation executive, just as any man who objects to having his physical disabilities listed on his driver's license may retain his privacy by the simple expedient of not driving a car. At this point the contrast of the present situation with that of medieval times carries weight, but it is not the weight of other­worldly scruples. The simple intimacy of medieval life meant that in spite of all attempts at "privacy," business was conducted under the direct and knowing gaze of customers and competitors. What is required by the modern world is a system of grade­labeling and public supervision of accounts which will restore the checks and balances which were provided by the common acquaintance of the medieval town.

Business men and their hired spokesmen constantly protest that any procedure of this sort will inevitably impose on them an intolerable burden of "paper work." This is obvious nonsense, as thin as it is disingenuous. A business man who complains that for him to be required to declare on the label that his "Extra­Super­Fine" canned peas are in fact "Government Grade 4" would impose on him a terrible burden of inspection is in effect alleging that he buys his cans from local canners without specifications or inspection. If this is true, he deserves to fail; and if it is not true, his protest is a lie. The supposition that his peas are too subtle to be subjected to simple grading (e.g., of the proportion of peas to water in the can) is similarly disingenuous. This is the protest which is urged with the greatest vehemence against the supervision of accounts. Business accounts, it seems, are tremendously complicated, far too complicated to be submitted to the naive scrutiny of public officials; but they are so, of course, because business men make them so, and business men make them so for this very purpose. It is often said that many large corporations are already "obliged" to keep three distinct sets of books: one for their own cost accounting, one for local property tax authorities with their physical properties valued low, and one for income tax purposes (and rate regulation, if they are subject to it) with their properties valued high. But that sort of thing is precisely what ails the modern world. If all business men could be obliged to tell the simple truth about their investments and their equities and their inter­ company charges for "services" (usually the "service" of relieving a subsidiary of it earnings), the bookkeeping difficulties of the business world might be greatly reduced.

No doubt the task of policing business is one of great magnitude. But it is certainly not impossible. On the contrary, many steps have already been taken in that direction, steps which any student of economics could enumerate. Food and drug regulation broke trail in one direction, and in another railway regulation. As was demonstrated many years ago, it is not impossible to standardize the accounting system of so complex an enterprise as a railroad. What we require is more of the same until the coverage is complete­­not necessarily of regulation but of standardized accounts fully open to public scrutiny as, for example, the accounts of banks are published. Thus all income tax returns should of course be open to inspection and even locally displayed. Arguments to the contrary is in effect disparagement of lighted streets. No honest man can possibly object to walking openly before his neighbors.

The principle reason for our failure to proceed farther in this direction is not the difficulty of the task nor the strength of the opposition but preoccupation with other things. Revolutionaries have been too preoccupied with attacking the foundations of plutocratic power to see what a very great difference full publicity would make in the exercise of that power, and business men have been too busy combatting this attack to see how very greatly their legitimate position would be strengthened by a strategic withdrawal from their present illegitimate and indefensible position. But most of all, preoccupation with the classical way of thinking has confined the whole discussion to the alternatives of monopoly versus competition and bigness versus littleness. Since financial bigness is in large measure (though by no means altogether) a consequence of the steadily increasing technological scale of machine production (including transportation and communication) we have been forced to make terms with it; but even so the terms we have made for the regulation of great financial power have attempted only to simulate competitive conditions. But the evils of bigness have their origins in competitive littleness. As Mr. Tawney rightly insists, the moral decay is general. It can be arrested only by an equally general alteration in the physical habitat of capitalist business. To remove the smoke screen of concealment behind which business is conducted is therefore one of the strategic objectives of a technologically sound program of economic progress.

But it is only one. The larger problem still remains. This is the problem of equilibrium. In some sense or other all social philosophers have realized the strategic importance of maintaining some sort of balance between the various activities and interests of the community. A great deal of present day discussion centers in the disequilibrium which has resulted from rapid technological development of recent decades and even centuries. The common supposition is that institutional development has "lagged" behind the machine process and that our institutions need to be brought "up to date" and the equilibrium of institutions and technology thus re­established. As we have already noted, this view of the matter misconceives the nature of technology and institutions; but the conception of equilibrium is never­ theless sound. Perfection is beyond the power of social theory. The alterations which any single generation can make in the existing social structure must be very slight. This means that their effectiveness will depend on their success in restoring the whole structure to efficient functioning.

Their perception of this truth was the greatest achievement of the founders of the science of political economy. As such it will continue to command respect after all the misconcep­ tions of classical tradition have been clearly recognized and discounted. Because price seemed to provide an intellectual vehicle for understanding the forces at work in modern economic life as well as an effective mechanism for the control of those forces, the vehicle has very largely displaced the "pay load" in the apprehension of economists and the whole problem has been conceived as that of price equilibrium. But the larger realities have never altogether disappeared from view. For the mercantilists no less than Adam Smith, for Professor Pigou no less than Thorstein Veblen, the basic economic problem is that of increasing the "national dividend." All considerations relating to the distribution of the product of industry are of secondary importance; for when the volume of production per head of population is increasing sooner or later every member of the community, even slaves and untouchables will eventually benefit, whereas in a community in which the volume of production per head of population is decreasing the assignment of a larger share of community income to any given individual, group, or class will not save these beneficiaries from sharing the eventual ruin of the whole community. Production and distribution are related. If there were no relationship between these two sets of concerns, economic activities would not constitute an economy but only a patternless heterogeneity of acts and interests. What by contrast does constitute an economy is a continuous relationship between these two sets of concerns so that the volume of the national dividend is indeed conditioned by the fashion in which it is distributed, while at the same time distribution is conditioned by the social pattern of production.

It is the task of the economy to effect two sets of adjustments, one between the rich and the poor, and another between "alternative uses" of the instruments and materials of production; and these two adjustments must be adjusted to each other so as to maximize the national dividend. This is what price equilibrium has been traditionally supposed to achieve. The particular form which this pattern took in the classical theory of the economy was of course dictated by the existing structure of society. The founders of economic science lived in a world in which a very extreme degree of inequality already prevailed. It was also a world in which the national dividend was plainly on the increase. Economists have not been more callous to the cruelties of the prevailing system than most of their contemporaries, but their attention has been quite properly focused on the growth of the national dividend. In early modern times they were also deeply impressed by the change which the form or mechanism of inequality had undergone simultaneously with this sudden growth of the national dividend, the change by which money power had been substituted for feudal rank as the basis of the social system. It was the simultaneity of these changes which gave rise to the belief in a causal relationship between them. This conviction was nourished by the institutional apparatus and ideology of capitalism and so eventuated in the theory that the growth of the national dividend is contingent upon a social structure in which inequality results in saving, saving in the growth of capital, and the growth of capital in the increase of the national dividend; and it was this central idea that economic inequality is a condition by which all members of the community are eventually blessed which inaugurated and still sustains the policy of laissez faire, the fundamental strategy of which is that the existing structure of society must at all costs be let alone.

The chief strength of this policy and of the system of ideas by which it is sustained lies in the dynamic relationship between distribution and production which it presumes to establish and sustain. Price equilibrium is only the outward and visible sign of a real balance of a forces in the economy. Doubt on this point is fatal to the whole theory, and that is why the doubts have been multiplying in recent years even among the faithful are so disconcerting. They have taken many forms, but all have the same consequence. One is that of a reservation with regard to income distribution. It has become increasingly common for economists to insist, with an air of superior sophistication, that price equilibrium effects optimum efficiency in the use of the factors of production only for a given schedule of income distribution. This leaves the way open for the advocacy of a deliberate policy of reducing the extremities of inequality, but in doing so it reduces the whole theory to nonsense. Nowadays some economists even talk of a community's having to choose between a greater degree of distributive justice at the cost of lowered national dividend and a greater national dividend at the cost of a greater degree of distributive injustice. Quite apart from the fact that it seems to imply that slavery is the most efficient, and equality the least efficient, productive arrangement, this formula represents the complete abandonment of the classical theory. This is even more obviously true of "pure" equilibrium theory and the theory of monopolistic competition. To old­fashioned orthodoxy competitive price equilibrium meant _both_ the maximization of satisfaction and the optimum use of the factors of production, not the dubious achievement of one at the expense of the other, and certainly not a mere meaningless balance of prices by which neither maximum satisfaction nor optimum efficiency is guaranteed. The net result of the logical sophistication of contemporary price theory is the complete elimination from its neat array of simultaneous equations of all the larger realities for which price was originally conceived to stand.

Meantime direct scrutiny of those realities has raised a more insistent question. The classical supposition that the growth of the national dividend is enhanced by inequality raises an inescapable issue of fact. The question is what social forces are in fact chiefly responsible for the productive achievements of industrial society. The weakness of the classical theory at this (by its own reckoning) crucial point would be apparent if the issue had not always been obscured by the complex apparatus of price theory. For nothing is more obvious than its total lack of any realistic study of the actual processes of production or analysis of the actual history of industrial society. It has long been notorious that the suppose "factors of production" with which classical economists have been so much concerned from the eighteenth century to the present day are in fact distributive categories the very identity of which emerges from the analysis not of physical production but of the division of money income among its typical recipients. The whole effort of this analysis has been to show _how_ industrial production is "made possible" by the accumulation of capital funds. At no time has economic orthodoxy ever approached the concrete reality of the industrial world with the intent to ascertain without pervious commitment _whether_ such is the case. From the very beginning the representation of the real balance of forces in the modern economy in terms of price equilibrium has owed its amazing plausibility to antecedent conviction with regard to the central issue of fact - the conviction, shared by the whole bourgeois community, that the exercise of financial power _must_ be accompanied by the exercise of creative powers, a state of mind which owes nothing to fact and prevails among us as such beliefs do among all communities as a reflection simply of the acquiescence of the community in the prevailing social structure.

But the exact opposite is not less conceivable. That is, it is conceivable that the productive powers of industrial society have grown not because of the institutions of capitalism but in spite of them; that the chief, and catastrophically serious, obstacle to the full utilization and continued growth of those powers is precisely the distributive system which perennially baulks industrial production by failing to provide the consumer purchasing power which is essential to the absorption of the product of industry; and that the welfare of the whole community­­ the rich no less than the poor­­is contingent upon the successful prosecution of a policy of income redistribution by which this deficiency of consumer purchasing power will be corrected. This policy also, and the system of ideas by which it is sustained, have their origin in the fundamental relationship between distribution and production by which an economy is constituted. No less than the classical theory of capital accumulation and policy of laissez faire, the theory of purchasing power deficiency and the policy of income redistribution center upon the growth of the national dividend to which all distributive arrangements are ancillary.

The question upon which the strategic issue of policy thus turns is whether the national dividend is enhanced or inhibited by inequality. It is with regard to this primary issue of fact that the analysis of the industrial process in terms of the technological and institutional factors which condition it presents the strongest contrast to the classical way of thinking. In attributing the extraordinary growth of the national dividend in recent centuries to the equally extraordinary development of tools and machines and scientific "know­how," this way of thinking establishes the continuity of recent developments with age­old process, a point at which the failure of economic orthodoxy is most striking. Such a way of thinking violates popular belief, but it coincides exactly with the findings of the other sciences. Indeed, the role of science in the transformation of modern life is now quite generally regarded as an established fact, even by people whose economic convictions flatly contradict it. For however plausible the theory may be which attributes the growth of industrial tools to the investment of capital funds, nobody supposes that the intellectual achievements of modern science are attributable to financial benevolence alone. This contradiction has become so obvious in recent years that many economists have felt themselves compelled to take cognizance of it to the extent of declaring that although the development of science and technology must be acknowledged to condition the whole industrial process, it does so in a "non­ economic" way and must therefore be excluded from economic analysis; but such an exclusion in effect brushes aside the basic issue of fact by which the validity of economic analysis must be eventually determined.

That the institutions of modern Western society as well as its technology have prodigiously affected industrial production no one doubts, least of all those who think in terms of technology and institutions. The question is How? It is one thing to recognize the importance of the release of Western society from feudalism, quite another to attribute the growth of the national dividend to the exercise of financial power. After all, capitalism is only one feature of the modern social structure. It may well be that the progress of technology and the consequent growth of the national dividend owe more to political democracy, the separation of church and state, and the deliquescence of class distinctions than to financial overlordship. Insofar as it can be distinguished from the other features of the institutional scheme the latter may be an unqualified nuisance.

Such a nuisance is no less catastrophic for being indirect and unintended. In a society in which power can be achieved by the accumulation and investment of capital funds, it goes without saying that ambitious men will devote themselves to this activity. To suppose that in doing so they are acting with conscious solicitude for the welfare of posterity is so preposterous that no one has ever ventured to assert it, the idea being rather that in seeking their own gain "they are led as if by an invisible hand to promote an end which is no part of their intention." But it is equally fantastic to suppose, as classical theory has done, that a preference of future for present consumption is the guiding motive, a preference which is therefore thought to be expressed in and guided by the interest rate. This idea contains the antecedent assumption that the accumulation and investment of capital funds is the true essence of industrial growth, which is thus supposed to be automatically adjusted to the "needs" of the community by the rise and fall of the interest rate. But the point is one which has always given trouble, since it is obvious that people of modest circumstances who are "saving for a rainy day" will hardly be moved to desist by a fall in the interest rate, while people who are engaged in carving empires for themselves out of the commonweal a per cent or two of interest is of no concern whatever.

Granted the existence of the financial power system, the participants, both large and small, in the struggle for economic power will accumulate all they can. If the funds from which such accumulations are made poured from the heavens in a never­ending stream, this exercise might have no effect on the national dividend. But such is not the case. It is the essence of the case as stated by classical economists themselves that saving is alternative to consumption and chiefly to the consumption of the masses; and since consumption is the sole eventual outlet for the product of industry this means that the inevitable effect of the struggle to accumulate financial power in the constriction of industrial output­­the precise opposite to what has been conventionally supposed.

Here the basic issue of fact is posed again. Is there any evidence of any such constriction? Up to a few years ago the evidence on this point was still obscure, but the past thirteen years have provided as clear a demonstration as the most exacting experimentalist could wish. According to judgements expressed at the time, the functioning of the capitalist economy during the 1920's was as near perfection as it has ever attained. This was, indeed the "New Era" of prosperity. But this era was followed by the greatest depression of modern times in the course of which the following facts emerged with unmistakable clarity. Most conspicuous, perhaps, was unemployment, that is the severance of many millions of families from their sole source of income and the consequent curtailment (virtual cessation) of their consumption. This was accompanied by widespread and very considerable restriction of production, that is, shrinkage of the national dividend, either by outright suspension of production or by the destruction or sequestration of huge segments of the national dividend after it had been produced. Nothing could have been clearer than the fact that the national dividend was suffering not from the inability of the community's industrial plant to maintain output but rather from the inability of the community to absorb that output. To complete the demonstration, it was no less conspicuous that a vast surplus of idle funds existed, funds which had been accumulated and were continuing to accumulate for which no "investment outlets" could be found.

Here was in fact the very condition the impossibility of which has always been a major premise of economy orthodoxy, and the demonstration still continued. Beginning in 1933 a new national administration inaugurated a series of efforts to put consumer purchasing power into circulation, with the result that conditions improved steadily if slowly, leaving the winter of 1932­33 as the trough of the depression. In 1936 these efforts reached their peak and the soldiers' bonus was pyramided on top of them, with the recovery of 1936­37 as the unmistakable consequence. Since the bonus was a single incident, and since the first sign of recovery brought a great outcry for "balancing the budget," as many economists had long ago predicted that it would, this brief respite was followed by a slackening of recovery which was still continuing when the effects of the present war began to be felt.

The fact it is war and not economic "experimentation" which has finally ended the great depression of the 1930's is frequently cited as though to discredit all efforts to stimulate consumption by the expansion of mass consumer purchasing power. But such a reading of the facts overlooks the most conspicuous features of the present situation. War is in effect a public­works program which absorbs immense quantities of materials and puts millions of men directly on the public pay roll thereby increasing consumption not only to the limit of the slack occasioned by depression but far beyond it, with the result that consumer demand far exceeds the current output of industry. No responsible student would argue that the present situation is an economically wholesome one. In the long run consumption by destruction is bound to be suicidal, and a catastrophic price inflation is bound to be the effect of the simultaneous expansion of purchasing power and curtailment of _civilian_ production unless extreme measures­­ price control, rationing, and the recapture of purchasing power­­ are taken to prevent it. But however excessive the answer, it is scarcely possible to doubt, in view of this demonstration, that a depression can be completely obliterated, full employment achieved, and industry exerted to its uttermost limits, by governmental stimulation of consumption.

As many writers have pointed out, none of these facts is new. Every feature of this demonstration has been enacted before, indeed many times before. It is therefore necessary to inquire why such facts have not been perceived before. The first answer to such an inquiry must be that they have been perceived before, both perceived and to a considerable degree understood. The so­called "underconsumption fallacy" has been in circulation at least since the seventeenth century. To scotch it was the object of "Say's law," the dogma that under capitalism there can be no such thing as general overproduction (or underconsumption), a law in which its first great codifier sought to epitomize classical doctrine. This issue was the focal point of a long and lively controversy between Malthus and Ricardo, and it runs through virtually the whole literature of socialism. To be sure, the identification of "the underconsumption fallacy" with what Mr. Keynes has called "the underworld" of economics can scarcely be said to have added to its fame. Discussion of "the flaw in the price system" went under ground with Sismondi and there it remained until the upheaval of the 1930's. Long before this time, as Mr. Keynes admitted handsomely in 1936, a few isolated but able individuals of complete respectability were deeply troubled by their discovery of this fundamental defect in the capitalist system, notably Silvio Gesell, A. F. Mummery, and J. A. Hobson. But their publications were greeted by what can only be called a conspiracy of silence. They were joined in later years, especially during the New Era of the 1920's by other mavericks, such as Martin in England and Foster and Catchings in the United States; and during the 1930's there was of course an eruption of "underconsumptionism." Even then the discussion of the deficiency of purchasing power was clouded by social credit schemes of varying degrees of monetary wildness; but for the first time since Malthus the idea was seriously discussed, in large part under the leadership of Mr. Keynes (now Lord Keynes).

But "the underconsumption fallacy" still remains the orphan child of economics, partly for lack of the parenthood which only a general theory of economic progress could afford, and partly because of the asperity of its foster parents. If capitalism suffers from a fatal defect, it would be greatly to the advantage of the people who have the biggest stake in the present order of things to recognize and remedy that defect. A few have indeed tried to do so. Thus Gesell, Mummery, and Catchings were successful business men. But capitalists generally have not, largely no doubt because they considered the very thought socialistic­­as indeed it was, at least by adoption. Meantime the socialists, who were quite undismayed by the perception of a fatal deficiency in the capitalistic system, were on that account all the more eager to pull the whole thing down. The strategy of reducing the extremes of inequality in the present distribution of income with a view to restoring the balance of the present social order is equally unpalatable to people who regard it as only a prelude to the destruction of that order and to people who regard it as a subterfuge for retaining the capitalist system.

It is to this situation that the unwillingness of the community to face the fact of a strategic deficiency of consumer purchasing power has been chiefly due. The hostility of socialists to "mere amelioration" has contributed to the neglect of underconsumption; but the effective opposition has been that of the respectable nine­tenths of the community, and it has been motivated by fear. Some of these fears are justified, and some are not. Conservative economists do not refute "the underconsumption fallacy," they brush it aside with a single footnote reference; and they do so because they rightly fear that admission even of the possibility of such a thing would endanger the whole structure of their argument. In like manner conservative citizens­­and they are by no means limited to the very rich­­fear to admit that expansion of consumer purchasing power by reduction of accumulation is an economic possibility lest that be a prelude to general confiscation. The rich have good reason to be afraid; and there is also good reason for the widespread aversion to indiscriminate confiscation, but it is not the reason which capitalist orthodoxy has given.

As far back as the record runs, long before the time of the Hebrew prophets, the rich have been the objects of impassioned denunciation. Their position has of course been extremely vulnerable to such attack. Some of the rich have always made hogs of themselves. Some have found no better use for wealth than to flaunt it in the faces of the poor, and "pecuniary cannons of taste," as Veblen called them, have enforced quite unnecessarily invidious distinctions throughout the community. But it is nevertheless true that some people of wealth and many in comfortable circumstances have lived exemplary lives, avoiding ostentation insofar as it was possible for them to do so within the limits of modes of behavior of which they were the victims along with all the rest of the community, and using their wealth to foster beauty and learning. It is not necessary to argue that they have been ideal patrons of science and the arts, or to suppose that it is patronage which makes creative achievement possible. The point is that given a social structure which produces extreme wealth and poverty, a great many people of good fortune have behaved as well as might have been expected under the circumstances. To denounce all the beneficiaries of an admittedly vicious system is to condemn the innocent along with the guilty­­if the corruption of the rich by their riches can be regarded as guilt any more than the corruption of the poor by their poverty.

The injustice of such a condemnation has always been strongly felt by a large part of the community, and it has been accentuated by the extravagance of the claims which represent the whole national dividend as belonging "by right" to the poor. It is one thing to recognize that extremes of wealth and poverty are deplorable and quite another to denounce everybody above the level of the "proletariat" as by that fact alone a scoundrel who is engaged in robbing and otherwise exploiting the unfortunate. For if it is untrue that the rich enjoy their wealth by divine appointment, it is equally untrue that any other section of the community has any a priori warrant to the whole of the national dividend or for that matter any special part of it.

The supposition that a distinction can be drawn between the "productive" and the supposedly "unproductive" members of the community by which the claim of the former can be established and that of the latter nullified is without any merit whatsoever. In recent years that claim has been advanced on the basis of the supposed distinction between income from labor and income from property. This claim is of course a perversion of the classical doctrine of productivity by which the creation of "value" was imputed to the supposed "factors of production." That argument had as its object the validation of the claims of capital, as spokesmen for the "proletariat" have easily established. But in applying the same reasoning to establish the claim of labor to what is supposed to be its exclusive product the advocates of revolution have committed the very error to which they so cogently object when it is committed in the interest of "capital." The supposed distinction between the productive and the unproductive parts of the community is based not on the actualities of the industrial process but on the exigencies of the existing distributive system. Productive labor is identified by receipt of wages, unproductive "idleness" is identified by receipt of income from property or at least in some other manner.

Such a distinction can be made in no other way. Revolutionists have rough and ready tests by which they purport to distinguish friend from foe, for example by examination of their hands. But a surgeon or a composer may have hands as devoid of callouses as those of any millionaire, while a rich yachtsman's hands may be as rough as those of any fisherman. Is the surgeon therefore a drone, and the yachtsman a useful citizen? Housewives receive no wages and are therefore classified by the Bureau of the Census as not "gainfully employed." Are they therefore members of the idle rich class? It may be supposed that allowance can be made for the social connections of these members of the community. But if a rich polo player is idle however assiduous a player he may be, are his hostlers members of the leisure class? What is the difference between shoeing a farmer's horses and shoeing polo ponies? And if a blacksmith passes from one clientele to the other what is his status? If the "hangers­on" are infected with the idleness of their principal, what about the miners and smelters who produce the iron that is used to shoe the polo ponies ?

The truth of the matter is that the national dividend is the product of the community. It is conditioned both positively and negatively by every member of it, and in ways so complex and recondite as to make the attribution of credit and discredit, responsibility and blame, the most difficult of judgements­­ one which is indeed traditionally reserved to God. To make the distribution of income contingent upon such a judgement is to render the whole problem utterly insoluble. Everybody is to some extent aware of this difficulty, however strongly he may feel that his own contribution is undervalued, as the aphorism, which reserves judgement to God plainly indicates; and this is one of the principle reasons why, in spite of all the misery and squalor of inequality, the community continues to look coldly upon proposals for a sweeping redistribution of income.

But none of these issues is germane to the strategy of the industrial economy. If it is true that under capitalism industrial society suffers from a chronic deficiency of mass consumer purchasing power and a corresponding surfeit of funds accumulated for investment, then it seems clear that the object of economic strategy must be a redistribution of income calculated to relieve industrial society from the burden of excess funds and to swell the mass of consumer purchasing power to the point at which it absorbs the whole product of industry under full employment of men and machines. To this strategy it makes no difference what the social sanctions are by virtue of which excessive incomes have come into existence. The danger of overaccumulation is just as great in the case of an income derived from landed estates inherited from the time of William the Conqueror as in that of a like income derived from speculation or from bootlegging. Each gluts the investment market no less than any other, and each represents the same degree of diminution of mass purchasing power.

Nor is there any question of checking the extravagances of the rich. Insofar as the rich spend their incomes they are providing an outlet for industrial production, as economists have known at least since the time of Bernard Mandeville. Some such outlets may seem less praiseworthy than others; but this is true of the poor no less than the rich, and is not at issue in any case. If the industrial system can be made to work, society can easily afford even the wildest extravagances of the rich. As economists have often pointed out with reference to proposals for a division of the good things of life such that everyone may have his "fair share," the rich are by definition not very numerous and a division of their perquisites among the many millions of the poor would still leave each individual share disappointingly meager. The only hope for substantial betterment of the lot of the whole community is by the increase of the national dividend on a scale such as that of the increase which in spite of everything has actually been realized during the past five centuries or even on a far greater scale. It is not the spending of the rich which prevents the realization of such an increase but the accumulation which results from their inability to spend their entire incomes and from their pursuit of power by accumulation and investment.

There remains the objection that the volume of funds which could be diverted from accumulation would be inadequate to create a volume of consumer purchasing power commensurate to the present suppose deficiency. This objection has no basis whatever, for it contravenes two principles on which all economists agree. One is the principle of "the multiplier." If the entire future increase of consumer purchasing power had of necessity to be taken from the present accumulation, the objection would of course be valid. But obviously such is not the case. All economists agree that such adjustments are cumulative. They are so because expansion of consumption brings about expansion of production which in turn means an expansion of employment and so a further expansion of mass purchasing power. So sensitive are the construction, or capital goods, industries to such movements that many students, including Mr. Keynes, look to them as the key to the whole problem. If the interest rate and the prices of capital goods could be brought low enough, so they argue, real investment would increase and the resulting multiplication of the flow of purchasing power would be sufficient to balance the economy. With regard to the multiplication which such expansion effects, they are of course right. The sole defect of their argument is its neglect of the present flow of purchasing power as the vital limiting factor. How cheap must capital be in order to induce a producer to expand who sees no immediate prospect of selling more goods? The economy may create its own market (or maybe made to do so), but no single producer does. What is necessary in order to put Mr. Keynes' multiplier to work is first of all to set in motion an expansion of consumer purchasing power, but once the expanding is under way, the multiplier of course does all the rest.

The supposition that such "pump­priming" involves a sacrifice of capital funds that are essential to real investment is a contradiction of the holiest of the sacred cows of orthodox theory, "Say's law of markets." Economists would have been forced to realize this long ago but for the fact that there is no criterion by which real investment can be distinguished from spurious investment. That is, in the inflation of capital values by virtue of which the investment market absorbs excess funds there is no point at which the funds which arrive early in a rising market and might therefore be judged to have been used for the actual purchase of capital equipment can be distinguished from funds which arrive late and might be judged to have contributed nothing but inflation to the industrial process. Even the time factor is irrelevant, since stock­watering goes on early as well as late in any given period, and in any such period later accumulation would not have been excessive had not the earlier preceded it. Consequently there is no distinct fund or stratum of investment which is clearly chargeable with the economic crime of superfluity. The absence of any such clearly marked distinction must have contributed mightily to the failure of the classical economists to recognize even the possibility of excess accumulation. Certainly it is responsible for the confusion which has attended all recent efforts to determine statistically the amount of real investment for comparison with the total amount of accumulated funds.

This means that the amount of funds to be diverted from accumulation to consumption cannot be determined by any qualitative test. The problem is wholly quantitative. Under conditions of depression the magnitude of excess bank reserves and of sums withdrawn from circulation by outright hoarding might be taken as an index to the magnitude of required transfer, not of those particular funds, but of sums in like amount to be diverted from the accumulating function as a whole. But at other times even this index would be lacking, and it is with such other times that we are most concerned since the whole idea is to prevent anything resembling depression from occurring at any time.

Fortunately the other side of the equation is much less obscure. Output and employment are physical facts, susceptible to physical measurement. The two do not exactly coincide. As a result of technological development, physical output might remain stationary or even show some increase in combination with increasing disemployment of men. Doubtless something of this kind was going on during the twenties, although as the Brookings study of "America's Capacity to Produce" seems to have shown, output was far short of the possible maximum even then. But if disemployment be taken as the basic guide, it would hardly be possible to go wrong. To increase the diversion of funds from accumulation to mass purchasing power proportionately to the increase of disemployment, decreasing the division with the decrease of unemployment would make the punishment precisely fit the crime both qualitatively and quantitatively. The levy would be upon accumulation as such without reference to any other consideration, and it would be directly proportional to the failure of accumulation to achieve in fact the one social consequence by which it is presumed to be justified and necessary.

Do funds exist in sufficient quantity for such an operation? This is one question to which classical price theory provides an answer. For a century and a half it has been a commonplace of economics that the creation of pecuniary values in production cannot be less than the sale value of what it produced. If the total amount of income so created somehow fails to flow into the market, obviously something must have happened to it. Under conditions of depression it may have been destroyed. In that event the re­creation of money­values by deficit financing up to the amount of purchasing power necessary to absorb the product of industry at full employment would only be a salvage of purchasing power already lost by its former owners and so to the whole community. It is this circumstance which has led to the recognition of deficit financing by many respectable economists in recent years as a maneuver calculated to implement Say's law. Indeed there is no good reason why such a program should not take the form of the outright issue of currency in the amount so indicated. Insofar as the deficiency of funds at any give moment were the result of sequestration rather than destruction, such action might be inflationary; but objection on this ground is itself a sufficient answer to the question whether funds exist. Insofar as they do exist, the question is answered. Indeed, at the first sign of an inflationary movement energetic measures to recapture and reactivate sequestered funds might well be undertaken in complete assurance that the funds sought do in fact exist and in a form in which they do nobody­­neither their owners nor the community­­any good whatsoever.

On the basis of our meager experience it would be extremely difficult if not impossible to compute in advance how much income would need to be diverted from accumulation to consumer purchasing power in order to bring about full employment at any given time. But one thing we can know; real investment, whether by private or public agency, would suffer not at all from any such diversion. This is true for a number of reasons. In the first place, as the classical economists have been reiterating, lo, these many years, real investment is consumption. Furthermore, as we know, it is a form of consumption which is self­multiplying, since investment in productive equipment releases purchasing power to those who fabricate that equipment, who in turn become consumers of the products which the whole economy turns out, thereby further stimulating expansion of the productive mechanism. Real investment therefore works with consumer purchasing power to stimulate total production, not against it. It is also very significant that funds available for investment are uniquely elastic. Some economists have even argued that industrial expansion creates its own funds through the action of the banking system with the assistance of national monetary policy. This is true because real industrial expansion creates values, so that the financing is largely a matter of paper transactions, whether the transactions are by public or private agencies. The decisive factor is the expectation of profits, and it is at this point that the importance of consumer purchasing power is most decisive; for profits can be expected only by virtue of a continued flow of purchasing power. The complete mutual contingency of the productive and distributive aspects of the economy is exemplified by the complete mutual contingency of real investment and sustained consumption.

This, after all, is the central fact. In all the foregoing discussion of the obstacles by which, in the apprehension of many people, the strategy of income redistribution appears to be confronted, and in the attempt to understand how such a strategy and the facts which point to it could have been so generally neglected in the past, no mention has been made of the most important cause of this neglect and opposition. For it is negative. The fatal defect of capitalism has not passed altogether unnoticed. But it has been noted by people whose minds were preoccupied with other things. Malthus was in the main a classicist. Sismondi and Marx were revolutionaries. And even Mr. Hobson, the dean of contemporary "underconsumptionists," has never broken with orthodox price­value theory nor with the legendary history by which that theory is sustained. The "underconsumption fallacy" has never in the past appeared to flow directly from any systematic analysis of the industrial economy of which it was the inescapable conclusion­­ from any way of thinking of which income distribution redistribution was the characteristic expression. It has been a biological sport, without proper intellectual parentage and therefore without standing. Even Veblen, whose thinking more than that of any other economist did afford a systematic theoretical foundation for such a strategy, failed to carry through at all from analysis to policy. It was his chief failure, and one that has not yet been rectified.

We have only to contemplate the present scene to realize how serious that failure was. Among the democratic peoples of the world two great crusades are now under way upon which they are in effect staking their hopes of a democratic future: the crusade for peace and the crusade for social security. There is a general feeling that these two movements are related, that world peace is somehow contingent upon world economic order and vice versa, but it is far from clear to the community at large just what this relation is. The real force behind these drives is fear: fear of want and fear of the renewal of total war. In appealing to such fears President Roosevelt has given voice to the common apprehension.

But fear does not solve problems. How is social security to be achieved? Sir William Beveridge and the National Resources Board have devised far­reaching plans for dealing with old age, sickness, unemployment, and kindred evils. As a consequence of the circumstances under which it is undertaken it is inevitable that such an effort should be "first and foremost a plan of how social insurance should be organized," and not a strategy of economic progress. One would never guess, from the Beveridge Report at least, that such an undertaking could be anything but a heavy burden of expense to the community. The whole emphasis of the Beveridge Report is upon the ability of Great Britain to bear so moderate a cost even after the present war, especially since a considerable part of it is to be borne by the wage­earning class itself. As its author remarks:

Want could have been abolished before the present war by a redistribution of income within the wage­earning classes without touching any of the wealthier classes. This is said not to suggest that a redistribution of income should be confined to the wage­ earning classes; still less is it said to suggest that men should be content with avoidance of want, with subsistence incomes. It is said simply as the most convincing demonstration that abolition of want just before this war was easily within the economic resources of the continuity; want was a needless scandal due to not taking the trouble to prevent it.

But how convincing is a demonstration likely to be so long as its tone is one of apology? "Properly designed, controlled and financed," says the famous Report, social insurance "need have no depressing effect on incentive." In short, this great crusade is for as much decency as is compatible with capitalism. But capitalism itself is collapsing, and it is collapsing precisely because of the maldistribution of income for which it is responsible. The great need for such a program of social security is not to correct a public scandal but to restore the balance of the economy. Until this is understood apology and timidity will of course continue to prevail. We will enact enough social security legislation to ease our consciences, but not enough to save the economy, and so we will have more depressions and more war.

For war is the same problem in another guise. All the talk now is concerned with the permanent organization of the United Nations, with the flow of international trade, and with the regulation of traffic on the sea and in the air. Such talk is not "globaloney." World peace, no less than social security, calls for a plan of organization. But here too the atmosphere is negative. World organization, it seems, will require some sacrifice of national self-interest. The argument is that what sacrifices we may have to make are a small price to pay for security from war. One would never guess that in modern times the international trade an foreign policy of each of the leading industrial nations have become, in the words of Mr. Keynes, "a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases," a policy "which, if successful, will merely shift the problem of unemployment to the neighbor which is worsted in the struggle" and is therefore the "predominant" cause of war. This means that the present cycle of wars can be brought to an end only by the correction of the deficiency of consumer purchasing power which forces each industrial nation into this "desperate expedient." Until that is done, treaties can be nothing more than the rules of the game under which (at first) the next war will be fought.

Why does the world so obstinately refuse to see what is so apparent to many observers? These two crusades, against want and against war, in fact are one. Neither can be successful except by achievement of the other, and both together depend upon the correction of the distributive balance of the industrial economy. One set of idealists opposes war; another opposes poverty; and meantime the defect of the present economic system which is the cause of both disorders is recognized as such only by still another set of cranks - scornfully known as "underconsumptionists."

Judged by the present scene, our case is hopeless. But such a judgement would not only ignore the possibility of change; more important, it would overlook the process of development which has led to the present situation. Ideas do not originate in a vacuum. The abhorrence which intelligent people feel toward war in steadily increasing degree is more than a vague, emotional humanitarianism, and so is the abhorrence of poverty. Both express a deep and growing sense of travesty, a sense still largely inarticulate but none the less genuine on that account that poverty and war are not only shameful but quite unnecessary, that it is only our stupidity which permits poverty and war to flourish in the midst of plenty. We have not yet brought these ideas to full articulacy. As yet they seem to lack theoretical foundations such as the classical economists provided for the policy of the laissez faire, and consequently the strategy of income redistribution as yet lacks the force of full conviction. But the facts of which such theory of economic progress would be formulation are there an dare already dimly realized. Sooner or later we shall achieve a theoretical reformulation of the economic life process of which the strategy of income distribution will be the inexorable logical consequence and the prelude to a new age of economic progress.

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Continue on to Chapter 13 of The Theory of Economic Progress