ABSTRACT
Although the major fl uctuations in general productive activity, which constitute what is known as the trade cycle, have been the subject of long and careful observation, and although a great deal of knowledge about these variations is now in black and white, the matter is in some ways obscured by certain notions such as periodicity, and those who demand a complete statement of cause and effect must expect to hear much that is confl icting and much that is vague. As for the less obvious or minor fl uctuations in general productive activity, one does not hear much about them-except from business men-for academical men do not seem to think that there is any special lesson in these minor fl uctuations. Again, on the theory that depressions not merely follow, but are caused by booms, there is a tendency in certain fi nancial as well as academic quarters to look with almost as much disfavour upon the boom parts of these general fl uctuations in productive activity as upon the depression parts. Yet even those who completely accept the theory that booms necessarily cause depressions must admit that the irreconcilable enemy lies in the depressions, and that the most they can accuse the booms of is fostering the enemy. Our inquiry, then, is concerned with the causes of minor and major fl uctuations in general productive activity, and in particular with the causes of the depression parts of these fl uctuations-which we shall call “general trade depression.” We shall fi rst glance at the theories regarding the causes of general trade depression which singly and in combination constitute special features of the ground it is proposed to work through. In one class may be placed the theories which fi nd the causes of general trade depression on the productive side of business, consisting of (1) theories to the effect that, for one reason or another, enough money is not always available for fi nancing production, and (2) theories which attribute decreased production in general to disproportionate production of particular kinds of goods in relation to each other. In another class may be placed the theories which fi nd the causes of general trade depression on the marketing side of business, consisting of (3) theories to the effect that, for one reason or another, the process of production does not distribute enough money to fi nal buyers1 for them to buy the product at prices that cover costs plus profi ts; (4) theories to the effect that the money distributed to fi nal buyers by the process of production is not used by them for taking the right kinds of goods, or enough goods in general, off
the market-namely, (a) some of the said money is used for excessively increasing the quantity of productive equipment and stocks of goods of all kinds, or (b) some of it is entirely withdrawn from circulation; and (5) the theory that general over-production of goods is only possible in relation to the money which fi nal buyers offer in exchange for goods, and that in a barter economy the actual general effective demand, or the actual velocity of fi nal-buying, must always be equal to the actual velocity of production. The following observations must be made on these fi ve kinds of theories: (1) Without attempting to put the case for those who contend that enough money is not always available for fi nancing production, it must be urged that a country may be fairly said to be suffering from a shortage of money for production when, for instance, its position is as follows: It is operating on a strict gold standard, and its bank credit is fully expanded in relation to its gold supplies. It is a debtor country and has to make regular payments to countries abroad. It cannot make the payments in question without decreasing its gold supplies and incidentally its bank credit, because countries abroad refuse to increase the money value of their imports from it, because it cannot decrease its imports from them without suffering from insuffi cient raw materials, and because it cannot borrow the required amount of money abroad.2 At the same time it must be remembered that, even when for any reason there is a decrease in the quantity of money in relation to the quantity of goods and services for sale, there will always be enough money for all productive purposes provided producers and distributors of raw or semi-raw goods are willing promptly to accept proportionately lower money prices, provided workers are willing promptly to accept proportionately lower money wages, and provided buyers are willing promptly to buy at the proportionately lower prices without attempting to squeeze sellers excessively. The trouble is that such amiable and accommodating behaviour on the part of producers, distributors, workers and buyers is not to be expected and is quite impracticable, for more reasons than one. In the case of the richer countries, we know from experience that there is normally no diffi culty for the right kind of business men to arrange for the fi nancing of the right kind of business. Foster and Catchings say that there is never any shortage of money for production;3 which is true of conditions in the United States since the institution of the Federal Reserve System, and also of conditions in England for many years past.4 (2) As regards disproportionate production of particular kinds of goods in relation to each other, it is fairly obvious that a shortage of any particular commodity in general use, whether it (the shortage) is due to human error or design or to elements beyond human control, may cause more or less depression in the particular trades affected, or even more or less general trade depression. For, in the case of a raw material, decreased production must occur in all trades affected by the shortage; and in the case of a commodity in general use, when the shortage causes a rise in the price-level that is resisted by buyers reducing their general purchases, more or less general trade depression will result. It is even more obvious that a glut in the supply of any particular commodity, whatever the cause, will result in more or less depression in the trade or trades engaged in the production of the
commodity in question. At all events, it is beyond controversy that industries in which production has been disprotionately great are, sooner or later and in one way or another, checked until the production of other kinds of goods catches up. Owing to the impossibility of knowing in advance either to what extent harvests are going to be affected by such things as weather conditions and insects, or to what extent fi nal buying is going to be affected by such things as politics and fashions, Disproportionate Production is an evil which one must not expect to banish entirely. But it is an evil which business men, by means of increased equipment and fi nancial facilities for storing stocks of goods, by means of more numerous and wider option markets whereby producers and distributors can freely hedge against price fl uctuations, and by means of efforts to eliminate the wilder kinds of competition, have got well in hand. However, Disproportionate Production is quite frequently put forward by the economist to explain not only depression in particular trades, but also general trade depression; and if recently his pretensions in this respect have been more reasonable, it is only because he has been very busy-perhaps at the instance of the cartelist, eager either to restrict or to “rationalize” production-in the arraignment of certain malefactors,5 to wit, Import and Export Barriers and Restrictions, which amongst their other offences are impediments to the satisfaction of the international desires of the cartelist. Anyhow, one may well be tempted to regard Disproportionate Production as the over-worked general servant of the economist, as well as the friend used by the cartelist to justify cartelization. The fact is that enough distinction is not made between, on the one hand, Disproportionate Production, and, on the other, the far worse evil of maladjustment between the velocity of fi nal-buying and the velocity of production-the evil of maladjustment between aggregate fi nal-buying of all goods and services in general and aggregate production of all goods and services in general-of fi nal buyers as a whole, either pressing to buy goods and services in general faster than producers and workers are willing and able to produce, or refusing to buy goods and services in general as fast as producers and workers are willing and able to produce-of infl ation and all its consequences when fi nal buyers are too active, or defl ation and resistance to lower prices when they are too passive. Although this maladjustment between the velocity of fi nal-buying and the velocity of production may sometimes be started by Disproportionate Production, the two are quite distinct economic occurrences. At all events a sharp distinction is, here, made between them, for, leaving Disproportionate Production to business men and others, we shall concentrate on the said general maladjustment, which-it is here urged-constitutes the primary problem.
