2013년 5월 17일 금요일

[발췌: Hayek's] ‘Paradox’ of Saving (1929[1931])

자료: F. A. Hayek, ‘Paradox’ of Saving (1929 [1931])



※ 발췌(excerpts):


The assertion that saving renders the purchasing power of the consumer insufficient to take up the volume of current production, although made more often by members of the lay publuc than by professional economists, is almost as old as the science of political economy itself. The question of the utility of "unproductive" expenditure was first raised by the mercantilists, who were thinking chiefly of luxury expenditure.

The idea recus in those writings of Lauderadale and Malthus that gave rise to the celebrated ^Théorie des Débouchés^ of James Mill and J.B. Say, and, in spite of many attempts to refute it, it permeates the main doctrines of socialist economics right up to T. Veblen, and Mr. J.A. Hobson.

But while in this way the idea has found a greater popularity in quasi-scientific and propagandist literature than perhaps any other economic doctrine hitherto, fortunately it has not succeeded as yet in depriving saving of its general respectability, and we have yet to learn that any of the numerous monetary measures intended to counteract its supposedly harmful effects have been put inot practice. On the contrary, we have recently witnessed the edifying spectacle of a "World Saving Day," on which central bank governors and ministers of finance vied with each other in attempting to disseminate the virtue of saving as widely as possible throughout their respective nations. And even though there are those who demand an increase in the currency on the grounds that there is an increased tendency to save, it is hard to believe that the presidents of central banks at any rate will prove very ready listners.

This state of affair, however, may yet be endangered by a new theory of underconsumption now current in the United States and in England. Its authors are people who spare neither money nor time in the propagation of their ideas. Their doctrine is no less fallacious than all the previous theories of underconsumption, but it it not impossible that with able exposition and extensive financial backing it may exert a certain influence on policy in Anglo-Saxon countries. For this reason it seems worthwhile subjecting this theory to detailed and exhaustive criticism.



The teachings of Messrs. Foster and Catchings, with which I am primarily concerned in this study, attained their widest circulation in the United States where they have achieved considerable repute not only among members of the public, but also among professional economists. To understand this success it is necessary to know something of the background of the theory and the very able means by which it has been and still is being propagated. Quite apart from its analytical significance, for European observers at any rate, the story has a certain spectacular interest. I propose, therefore, to deal with it at some length.

Let us start with the two authors. The history of their joint careers provides certain points that give a clue to the origin of their teaching. Waddill Catchings was born in the South; he had a successful career as a lawyer and banker, finally reaching a high position in the iron and steel industry. in 1920 he, and a number of fellow-students from Harvard, decided to commemorate a deceased friend. For this purpose they founded the "Pollak Foundation for Economic Research." They appointed as director another Harvard friend, William Trufant Foster, a pedagogue, at one time a college president. The Foundation had an annual income of $25,000 and it soon began to be responsible for the publication of important books on economic subjects, some of them by well-known economists, such as Irving Fisher's ^Making of Index Numbers^ (1922), others by members of the Foundation, such as A.B. Hasting's ^Costs and Profits^ (1923), and, above all, ^Money^ by Messrs. Foster and Catchings themselves. In this latter work, although it is primarily a very able and instructive exposition of the theory of money, the authors laid the basis of their theory of trade depression later to be fully expounded in their work on ^Profits^. In ^Money^, they emphasize especially those parts dealing with the circulation of money and the effects on markets of changes in the rate of flow of money. After describing how circulation starts from the market for consumption goods, from which it passes into the market for production goods, and finally returns to its original source, they discuss the conditions under which this process creates a steady demand for the goods offered for sale, and the factors which influence the circulation of money eithe rby accelerating or retarding it. While, in a barter economy, supply and demand are necessarily identical, the appearance of money is shown to be capable of disturbing this equilirbirum, since it is only possible to maintain production at the existing level if the producers spend money at the same rate as that at which they receive it. Thus the circulation of money between the various stages of the economic process becomes the central problem of all investigation, not only of changes in the value of money, but also of the influences affecting cyclical fluctuations.

Indeed they even go so far as to lay it down that: 

Money spent in the consumption of commodities is the force that moves all the wheels of industry. When this force remains in the right relation to the volume of commodities offered for sale, business proceeds steadily. When money is spent faster than the commodities reach the retail markets, business booms forward. When commodities continue to reach the retail markets faster than money is spent, business slackens. To move commodities year after year without disturbing business, enough money must be spent by consumers, and no more than enough, to match all the commodities, dollar for dollar.[1]

It is this theory which forms the basis of the trade cycle theory, which is set forth in great detail in ^Profits^[2] published three years later. In this voluminous work, with which we shall be concerned in the next sections, Messrs. Foster and Catchings give the most elaborate and careful exposition of their theory. But, despite the clear and entertaining exposition, it failed to secure for the theory the wide circulation desired by its authors. They proceeded, therefore, to restate the main principles in popular language, firs tin their ^Business without a Buyer^,[3] and later in abridged form in an essary in the ^Atlantic Monthly^, which was distributed freely as a print in hundreds of thousands of copies.[4] Most effective, however, in advertising their ideas was the peculiar competition held in connection with the publication of ^Profits^. By offering a prize of $5,000 for the best adverse criticism of the theory contained in this work, the promoters invited the whole world to refute them. But before dealing with the results of this competition it is necessary to consider the general principles of their work.



The theory of crises advanced by Messrs. Foster and Catchings in ^Profits^ is preceded by a detailed explanation of the organization of the present economic structure. This justification of the existing "Money and Profit System," as it is called by the authors, fills about one-half of the volume of four hundred pages. For our purpose, it is sufficient to mention that in this part the function of entrepreneur's profit as a factor determining the direction and extent of production is investigated; but it is worth remarking even at this juncture that the authors succeed in completing this investigation without any point making clear the real function of capital as a factor of production. Our main concern in this article, however is confined to the fifth and last part of ^Profits^ which deals with "Money and Profits in Relation to Consumption," and which, according to the authors themselves, represents a more or less independent object for critical study.[5] It will be necessary in this connection also to refer in some detail to the short essay entitled ^The Dilemma of Thrift^.

The main thesis of the book is stated as follows: "The one thing that is needed above all others to sustain a forward movement of business is enough money in the hands of consumers."[6] Now in the present state of affairs a situation arises from time to time when the buying power in the hands of consumers is insufficient to purchase the whole industrial output at prices that cover costs. The consequent diminution in sales in the market for consumption goods results in unemployment of factories and plant, that is to say, in crises and trade depressions. The question is: where does the deficit in the consumers' income orginate? The earlier exposition in ^Money^ and ^Profits^ affords no explanation of this phenomenon, since it does not take into account the three principle[?principal] factors upon which the velocity of circulation, and therefore the "annual production-consumption equation" depend, i.e., the influence of saving, of profits, and of changes in the volume of currency. Thos most important of these factors is saving, both individual and corporate. To elucidate this point the authors proceed to examine a series of numerical examples and, in the course of this examination, they introduce a number of fictitious assumptions, which, as we shall see later, have an important bearing upon their conclusions. They assume, that by a process of vertical and horizontal integration, the whole industry of the isolated country considered has been united into one single enterprise, payments from which in the form of wages, dividends and salaries form the only source of the community's income. (There are no taxes or government expenditure of any kind.) It is assumed further that the price level, the volume of currency, and the velocity of circulation remain constant, and that wages are received and spent during the same economic period in which the goods are manufactured, while these goods are only sold in the following period, and the profits earned on them are also distributed and spent by the recipients during the same period.[7]

With the aid of numerical examples of this sort, the authors demonstrate that, under these conditions, there can be no difficulty in selling the goods manufactured, either in the case of a constant volume of production or of a rising volume per wage unit, so long as "industry continues to return to consumers in some way all the money that it took from consumers in the sales price of its product, and as long as consumers spend all that they receive."[8] But as soon as the company retains part of the profits in the business, not for the purpose of carrying larger stocks, financing the sale of an increased product, or in ^unsuccessful^ attempts to improve equipmentㅡfor these things are comparatively harmlessㅡbut in order to improve "capital facilities," which puts it in the position to increase the volume of production, this happy state of affairs changes. As soon as the increased volume of products reaches the market, it is inevitable that the means of payment in the hands of consumer should prove insufficient to take up the product at remunerative prices. So long as the process of investment is going on no difficulty arises, since the rise in the total wage bull resulting resulting from the increased number of workmen necessary to carry out the extension equals the loss in the shareholders' income resulting from the reduction in dividends, and thus the relation between the volume of production and the money spent on it remains unaltered. The crisis sets in with the appearance on the market of the surplus output. The money in the hands of the consumer does not increase any further (the sums necessary for the extension of production having already been spent by the wage earners in the previous period to take up the smaller volume) and, since it is assumed that there is no fall in prices, a proportion of the enlarged product must therefore remain unsold.

In ^The Dilemma of Thrift^, Messrs. Foster and Catchings provide the following description of the events leading up to this crisis:[9]

Suppose, however, it [the corporation] uses the remaining one million dollars of profits to build additional cars, in such a way that all this money goes directly or indirectly to consumers. The company has now  disbursed exactly enough money to cover the full sales-price of the cars it has already marketed; but where are the consumers to obtain enough money to buy the additional cars? The corporation has given them nothing with which to buy these cars.
The new cars, therefore, must remain unsold, "unless the deficiency (in consumers' income) is made up from outside sources."[10]


According to Messrs. Foster and Catchings the significant difference between the money spent upon consumptin goods and money invested rests upon the fact that money of the former kind is "used ^first^ to take away consumers' goods, whereas in many cases money invested is used ^first^ to produce more consumers' goods."[11]
Money that is once used to bring about the production of goods is again used to bring about the consumption of goods. In other words, it is used twice in succession to create supply; whereas if the $100,000 in question, instead of having been ^invested^ in the production of additional goods, had been paid out as dividends and ^spent^ by the recipients, the $100,000 would have been used alternately to bring goods to the markets and to take goods off the markets.[12]
Statements of this sort, which are repeatedly used by the authors, have led so acute a thinker as Mr. D.H. Robertson to remark that he could not attach any sense to them whatever.[13] It therefore seems worthwhile attempting to restate this part of the theory in more familiar language. Granting the initial presuppositions of the authors, it is, I think, unassailable. So long as the total disbursements during the course of production are spent on consumption goods, the expense of production are necessarily equal to the proceeds of the sale of the goods purchased. If, however, certain amounts, such as interest earned on capital, or profit, which could be spent on consumption goods without reducing the existing capital stock, are applied to purchasing additional means of production, the sum total spent on production rises without being accompanied by an equivalent increase in the sums available to buy the final product. It is in this "short circuit" in the circulation of money, as Mr. P.W. Martin,[14] whose ideas are closely related to those Messrs. Foster and Catchings, descries it, that we find the alleged cause of the deficiency in the buying power of the consumer.


Now since the results of corporate saving and of individual saving must be alike, since individuals as well as corporations must save if they are to progress, but since, if this theory is correct, they cannot save at present without frustrating to a certain extent the social purpose of saving, the ^Dilemma of Thrift^ is inescapable.
From the standpoint of society, therefore, it is impossible to save intelligently without first solving the problem of adequate consumer income. As it is to-day, certain individuals can save at the expense of other individuals; certain corporations can save at the expense of other corporations; and, from the standpoint of the individual and of the corporation, these savings are real. But society as a whole cannot save anything worth saving at the expense of consumers as a whole, for the capacity of consumers to benefit by what is saved is the sole test of its worth.[15]
After the main thesis of the theory has thus been expounded, the authors drop a number of artificial assumptions and attempt to bring the theory nearer to reality. The first assumption to be abandoned is that of a stable price level (this assumption, by the way, was never consistent with their other assumptions). They then examine the effects of falling prices, which alone make it possible to sell the whole of the enlarged product. But falling prices, they argue, make it impossible for industry to maintain production at the new level. The fall of prices causes profits to disappear, and with profits every incentive to the continuation of production.[16] Moreover, it is argued, it is a matter of experience that falling prices render an extension of production impossible. "If there is any fact concerning which our statistical evidence fully supports our reasoning, it is the fact that falling prices put a damper on productive activity."[17] Only on paper is it possible, in spite of falling prices, to carry out productive extensions by means of falling costs, because only on paper can you regulate the diminution of cost so that even the enlarged product can be sold with sufficient profits. In the existing economic system, with many independent units composing it, such a development is not to be executed. On the contrary, we should rather expect price movements in the wrong direction. A fall in the price of consumption goods, therefore, must always bring about a diminution of production.[18]
Having thus attempted to show that a general fall in prices can never bring about a solution of the problem, the authors next proceed to consider ^changes in the volume of money^. After all that has been said, it is argued, it should be clear that even changes in the volume of money can only solve the problem insofar as they influence the "production-consumption equation."

It is not sufficient for this purpose that the total volume of money be increased. The money must go into circulation in such a way that the flow of new money into the hands of the consumers is equal in value, at the current retail price-level, to the flow of new goods into consumers' markets. The question is not, then, whether currency or bank-credit, or both, should be increased year after year, but in what way the new money should be introduced into the circuit flow."[19]

Now unhappily, under the existing system of money and credit, additional money gets into circulation, not on the side of consumers but on the side of the producers, and thus only aggravates the evil of the discrepancy between producers' disbursements and consumers' money expenditure. Moreover, this system of increasing the money supply through productive credits has the further effect that additions to the money supply take place when they are least necessary. The extension of production that they finance is a response to a lively demand. But when a falling off of consumers' demand is noticeable then credit is restricted and the trouble is aggravated. Thus the modern claim to restrict credit at the first sign of increasing warehouse stocks, and vice versa, is thoroughly pernicious.
In this way ... every advance toward higher standards of living would promptly be checked; for whenever it appeared that consumer income was too small, it would be made smaller still through wage reductions, and under-production would follow promptly.[20]

Nevertheless, it would be easy to arrange an increase in consumers' credit, and it is only in this way that the deficiency in the purchasing power of the consumer, and thus the cause of the depression, can be removed.
Theoretically, then, it is always possible to add to the money circulation in such a way as to benefit the community. ... In any conceivable situation ... an all-wise despot could make a net gain to the community by increasing the volume of money in circulation. ... If any safe and practicable means could be devised, in connection with increased public works and decreased taxes, or in any other connection, of issuing just enough money to consumers to provide for individual savings and to enable them to buy an enlarged output, and business men were confident that issues to consumers would continue at this rate and at no other rate, there would be do drop in the price-level and no reason for curtailing production, but, on the contrary, the most powerful incentive for increasing production.[21]

In ^Profits^, the authors do not go further than to hint at these proposals. After a not very successful attempt at statistical verification they conclude that, under the present order of things, every attempt at increasing production must be checked by the fact that the demand of the consumer cannot keep pace with the supply. To remove the causes of this underconsumption is one of the most promising and most urgent problems for the present generation. "Indeed, it is doubtful whether any other way of helping humanity holds out such large immediate possibilities."[22]

But before such reforms can be achieved, professional economists will have to admit the inadequacy of their present theories. "If the main contentions of ^Money^ and ^Profits^ are sound, much of our traditional economic teaching is unsound, and overlooks some of the fundamentals which must be better understood before it will be possible to solve the economic problem."[23] Conversion of professional economists was therefore the main purpose of the campaign that was launched by offering a prize for the best adverse criticism of ^Profits^.



The result of this competition for the best adverse criticism of their theory was the most remarkable succes achieved by Messrs. Foster and Catchings. The three members of the jury, Professor Wesley C. Mitchell, the late Allyn A. Young, and Mr. Owen D. Young, the President of the General Electric Company, of "Young Plan" fame, had no fewer than 435 essays to examine. In the Introduction to the little volume in which the prize essay and others were published,[24] Messrs. Foster and Catchings relate, with some pride, that at least 50 universities, 42 American States, and 25 foreign countries were represented. Among the authors were at least 40 authors of books on economics, 50 professors of political economy, 60 accounting experts, bankers, editors, statisticians, directors of large companies, etc.ㅡamong them "some of the ablest men in the Federal Reserve System," a functionary of the American Economic Association, a former President of that Society, and "several of the most highly-reputed economists in the British Empire."

But despite this highly respectable mass attack of adverse criticism, Messrs. Foster and Catchings remained convinced that their theory still held it own. Moreover, they were able to quote the opinion of one of the umpires,[25] that notwithstanding all that had been said against it, the substance of the theory remained untouched. This sounds extraordinary. But what is more extraordinary is that a candid perusal of the various criticisms that had been published forces one to admit that it is true. So far, the main theory, and what in my opinion is the fundamental misconception of Messrs. Foster and Catchings, has remain unanswered. The meritorious and readable works that were published in the ^Prize Essays^, equally with criticisms published elsewhere,[26] direct their criticism only against details. They accept the main thesis of Messrs. Foster and Catchings. Only the two essays of Novogilov and Adams, which we shall have occasion to mention later on, touch upon the critical points, and even here they do not make their respective objections the basic part of their criticism, or develop them into an independent refutation.

( ... PDF 171-172 ... )



It is clear that this is the opinion of Messrs. Foster and Catchings, for in the ^Business without a Buyer^, published after the close of the prize competition, they do not make any significant alterations in the exposition of their theory. Fortified by the result of the competition, they then proceeded to develop the practical consequences of their theory. In ^The Road to Plenty^,[29] which embodies the result of these further reflections, they make no attempt to appeal to economists. Despite the extremely favorable reception of their former books, it appears they are far from satisfied with professional economists. Both in the introduction to the ^Prize Essays^ and in ^Business without a Buyer^ they dwelt with some sprightliness on the lack of enlightenment in such circles. Next they turned to the general public and cast their theory in the form of a novel. The book records a conversation in the smoking compartment of a train where the complaints of a warm-hearted friend of humanity cause a genial business man to explain the causes of crises and unemployment according to the theory of authors, and then to defend the latter against the objections of a solicitor and a professor of economics (who, of course, comes out worst). Finally, all those present (including a member of the House of Representatives) are roused to a great pitch of enthusiasm about the concrete proposals based upon it.

These proposals are formulated still more clearly in a further essay, ^Progress and Plenty^,[30] and before proceeding to examine the theory it is worthwhile setting them forth explicitly. ( ... ... ) In ^Progress and Plenty^,[31] Messrs. Foster and Catchings recommend the delegation of the business of collecting data, and their application to the distribution of public works to a separate body, the "Federal Budget Board." Just as the Federal Reserve Board directs a system for financing of production, the Federal Budget Board should direct the financing of consumption and prevent disturbances of the economic system arising from consumption lagging behind produciton.

So far, apart from the demand for a new board, the proposal contains nothing beyond the much-discussed plan for distributing public works in time in such a way as to concentrate all those capable of being postponed to times of depression. But Messrs. Foster and Catchings are not satisfied with this. They realize that such a plan would have undesirable effects if the necessary sums were collected and locked up in the public treasury in times of prosperity and spent in case of need. On the other hand, to raise the money by taxation at the time when it is needed for public works would be still less likely to achieve the desired end. Only an increase in the volume of money for the purpose of consumption can solve the problem:
Progress requires a constant flow of new money to consumers. If, therefore, business indexes show the need for a reinforced consumer demand which cannot be met without additional Government expenditure, the Board should bring about such expenditure, not only out of funds previously accumulated for that purpose, but at times out of loans which involve an expansion of bank credit. ^This feature of the plan is essential^.[32] It follows that the Government should borrow and spend the money whenever the indexes show that the needed flow of money will not come from other sources.[33]

As might be expected, the authors protest[34] that all this is not to be regarded as inflationary. Before its publication they had promised that it should contain "nothing dangerous or even distasteful," and that it would not involve "unlimited issues of fiat money."[35] We shall deal critically, with these proposals in the last section of this article. At present, it need only be remarked that even critics who sympathize with Messrs. Foster and Catchings's theory have been unable to conceal their scruples on this point. Mr. D.H. Robertson[36] remarks very correctly that he has no doubts that
they were born with a double dose of the inflation bacillus in their composition; and though they have done their best to exorcise it with prayer and fastings, so that they are able to look down with detached pity on more gravely affected sufferers, such as Major Douglas, yet at critical moments the bacillus is always apt to take charge of the argument.
( ... ... )

In wider circles, the proposals of Messrs. Foster and Catchings seem to have had an extraordinary effect. President Hoover's pledge to carry out, within practical limits, such a regulation of public works as would alleviate unemployment, has been powerful lever to their argument. In a recent pamphlet[37] they announce that Senator Wagner from New York has already brought a bill before Congress for creating a "Federal Unemployment Stabilization Board" with very similar functions to their "Federal Budget Board." So far it has not been proposed that this board should finance public works with additional bank money, and even Messrs. Foster and Catchings have guarded themselves from demanding the execution of this part of their proposalsㅡeven in connection with the Hoover Plans. Instead they have concentrated on a criticism of the policy of the Federal Reserve Board in raising its discount rate at a time of falling prices and falling employment.[38] It is pressure of this sort that constitutes a danger both in America and elsewhere if such theories gain further popularity. At this point, therefore, we may pass to a criticism of their validity.




It is constantly assumed by Messrs. Foster and Catchings that the investment of savings for the extension of production necessarily increases the total costs of production by the full amount of the invested savings. This follows clearly from their continual emphasis on the "fact" that the value of the increased product is raised by the amount invested, and that therefore it can only be sold profitably for a proportionately higher sum. It is implied by the examples, in which it is always assumed that the increase in the current outlay in wages, etc., exactly corresponds with the sums invested. Now  [:]
  • there is a certain initial obscurity in this assumption, since it is obvious that the costs of the product produced during an economic period cannot rise by the whole of the newly invested sum if this is invested in durable instruments, but only in proportion to the depreciation of the new durable capital goods; a fact that is not made clear in their exposition. 
  • My main objection, however, is not concerned with this circumstanceㅡwhich it is impossible to believe that the authors could entirely overlookㅡbut rather with their assumption that generally, over any length of time, the costs of production can increase by the whole of the newly invested amount. This view, which is based on a complete misunderstanding of the function of capital as a "carrying" agent, assumes that the increased volume of production brought about by the new investments must be undertaken with the same methods as the smaller volume produced before the new movement took place
Such an assumption may be true for a single enterprise, but never for industry as a whole. For in industry as a whole an increase in the available supply of capital always necessitates a ^change^ in the methods of production in the sense of a transition to more capitalistic, more "roundabout," processes.

For in order that there may be an increase in the volume of production without a change in the methods of production, not only the available supply of capital, but also the supply of all other factors of production must be increased in similar proportion. In regard to land, at any rate, this is practically impossible. It is just as inadmissible to assume that the complementary factors that are necessary for the extension of production are previously unemployed and find employment only with the appearance of the new savings.[39]

A correct view of the reactions on production as a whole of the investment of new savings must be envisaged in this way: At first the new savings will serve the purpose of transferring a portion of the original means of production previously employed in producing consumers' goods to the production of new producers' goods. The supply of consumers' goods must, therefore, temporarily fall off as an immediate consequence of the investment of new savings (a circumstance constantly overlooked by Messrs. Foster and Catchings).[40] NO unfavorable effects on the sales of consumption goods follow from this, for the demand for consumption goods and the amount of original means of production employed in producing them decrease in similar proportions. And indeed even Messrs. Foster and Catchings do not make any such assertion. Their difficulties begin only at the moment when the increased volume of consumption goods, brought about by the new investment, comes on to the market.

Now this increase in the volume of consumption goods can only be effected through an increase in the volume of capital employed in production. Such capital, once it has been brought into existence, does not maintain itself automatically. This increase makes it necessary that, henceforward, a greater proportion of the existing means of production should be permanently devoted to the production of capital goods, and a smaller part to finishing consumption goods; and this shift in the immediate utilization of means of production must, under the conditions prevailing in the modern economic system, conform with a change in the relative amount of money expended in the various stages of production. But this question of the relation between the sums of money expended in any period on consumption goods on the one hand and on production goods on the other, brings us to the fundamental flaw in Messrs. Foster and Catchings's theory.




Messrs. Foster and Catchings base the whole of their exposition on an hypothesis of what may be called single-stage production, in which, in a state of equilibrium the money received in every period from the sale of consumption goods must equal the amount of money expended on all kinds of production goods in the same period.[41] Hence they are incapable of conceiving an extension of production save, so to speak, in the "width"ㅡan extension involving the expenditure of the new savings side by side with the sums which were already being spent on the ultimate factors of production, this is to say, the recipients of net income. It is easy to see how they arrive at this position. They assume a single enterprise in which all goods are produced from beginning to end (there will be much to say about this later), and because of this they entirely overlook the phenomenon of changes to more or less capitalistic methods of production.

Let us for the time being avoid this assumption, and instead, consider an economy in which the different stages and branches of production are divided into different independent enterprises. We can return later to the special case of single-enterprise production considered by Messrs. Foster and Catchings. But we will adhere throughout to another assumption that they make: the assumption that the amount of money in circulation remains unchanged. It is especially important to do this because most of the criticisms of the theory that have been made up to the present have sought the solution of the alleged dilemma chiefly in a proportional adjustment of the supply of money to the enlarged volume of production.[42] To me, at any rate, the fundamental error of the theory seems to arise rather in the presentation of the origin of the dilemma, the supply of money remaining unchanged. I shall return to the question of the effects of a change in the supply of money in the last section, in which I deal with Messrs. Foster and Catchings's proposal for positive reform.

What happens, then, under the conditions assumed, when somebody saves a part of his income hitherto devoted to consumption, or when a company does not distribute its profits, and the sums thus saved are reinvested in production? At first, clearly the demand that is directed to means of production increases, and that directed to consumption goods correspondingly decreases. Does that mean that the expenditure on production will now be greater than is justified by the sums of money that will be available for the purchase of consumption goods?


That this need not be the case is surely clear from the most superficial consideration of the moder capitalistic economy. For at every moment of time raw materials semi-finished products, and other means of production are coming into the market, the value of which is several times greater than the value of the consumption goods that are simultaneously offered in the market for consumption goods.[43] It follows that the sum spent on the purchase of means of production of all kinds at any period is several times greater than the sum spent on the purchase of consumption goods at the same time. The fat that the total costs of production are, nevertheless, not greater than the value of the consumption goods produced is explained by the circumstance that every good on its way from raw material to finished product is exchanged against money as many times, on the average, as the amount of money expended on the purchase of means of production at every period exceeds the amount spent on consumption goods. And it is just a lengthening of this average process of production (which, ^on our assumption^, shows itself in an increase of the number of independent stages of production) that makes it possible, when new savings are available, to produce a greater amount of consumption goods from the same amount of original means of production.

The proposition that savings can only bring about an increase in the volume of production by permitting a greater and more productive "roundaboutness" in the methods of production has been demonstrated so fully by the classical analysis of Boehm-Bawerk that it does not require further examination. It is necessary here only to go further into certain monetary aspects of the phenomenon.

The questions that interest us are as follows: how does the increase in the money stream ^available for productive purposes^ following the investment of new savings distribute the additional demand for means of production through the economic system, and under what conditions is this distribution effected in such a way as to achieve the purpose of saving with the smallest possible disturbance. And after what has been said already in this connectin it will be of fundamental importance to distinguish between changes in the demand for original means of production, i.e., labor and land, and changes in the demand for means of production which are themselves products (intermediate products or capital goods.) such as semi-finished goods, machinery, implements, etc. On the other hand it is not important for our present purpose to distinguish between durable and non-durable means of production because it is irrelevant, for instance, that a loom has only to be renewed after eight periods of time, since, in a continuous process of production, this amounts to the same thing as if every eighth loom has to be renewed in every period.

For the sake of simplicity, we may assume that the path from the original means of production to the final product is of equal length for all parts of the total money stream, although, in fact, this differs according to the moment when the particular original means of production are employed  in the different stages of production; so that the assumed uniform length of the roundabout ways of production only corresponds to the ^average^ length of the various processes which lead to the production of a consumption good. The only case in real life strictly corresponding to this assumption would be the production of a good requiring expenditure of labor only at the beginning of the production process, the rest being left to nature; as, for example, in the case of a tree. But even this would only completely conform to our assumption if the saplings changed hands every year, i.e., if one man held one-year saplings, another two-year saplings, and so on. This difficulty only arises because, for purposes of exposition, it is easier to treat the average length of production as if it were uniform for all processes. In the real world, of course, it is the very fact that the period between the expenditure of the original means of production and the completion of the consumers' goods is different for every original means of production used, which makes it necessary that the goods should pass through several hands before they are ready for consumption. We assume, therefore, that, for example, the value of all means of production coming to the market during one period is 8 times as great as the value of consumption goods produced during the same period, and the latter is sold for 1,000 units of money, say pounds sterling. We disregard the differences in value conditioned by interest, that is to say, we make the assumption that interest on capital employed, together with the remuneration of the original means of production, is paid out only in the highest stage of production. The whole process of production and the circulation of money connected with it can then be represented schematically in the following way:

Scheme A

Demand for consumption goods  £
(= products of stage of production No. 1) .... 1,000

Demand for the products of the stages of production:
No. 2 .... 1,000
No. 3 .... 1,000
No. 4 .... 1,000
No. 5 .... 1,000
No. 6 .... 1,000
No. 7 .... 1,000
No. 8 .... 1,000
No. 9 .... 1,000

Total demand for produced means of production: 8×1,000=8,000
Relation of the demand for consumption goods to the demand for produced means of production: 1:8 [44]

Such a table represents at once both the products of the various stages of production coming on to the market ^simultaneously^ with the consumption goods and the ^successive^ intermediary products from which the actual product finally emerges, since, in a stationary economy, these are the same. We exhibit, that is to say, the total supply of goods originating in one branch of production (or, if the scheme is applied to the whole economy, all branches of production), and coming on to the market in one period of time. The sums paid at the 9th stage of production for the original means of production correspond necessarily with the value of the consumption goods, and form the origin of the funds for which the consumption goods are sold.

Let us assume, then, that the owners of the original means of production spend from their total income of £1,000 only £900, and invest in production the remaining £100 thus saved. There is, therefore, £8,100 now available for the purchase of production goods, and the relation between the demand for consumption goods and the demand for production goods changes from 1:8 to 1:9.

In order that the increased sum of money now available for the purchase of means of production should be profitably utilized, the average number of stages of production must increase from 8 to 9; the situation, represented in Scheme A, has therefore to be altered in the following way:

Scheme B
(£100 is saved and invested)

Demand for consumption goods   £
(=products of stage of production No. 1) .... 900

Demand for the products of the stages of production:
No. 2 .... 900
No. 3 .... 900
No. 4 .... 900
No. 5 .... 900
No. 6 .... 900
No. 7 .... 900
No. 8 .... 900
No. 9 .... 900
No. 10 ... 900

Total demand for produced means of production: 9×900=8,100
Relation of the demand for consumption goods to the demand for produced means of production: 1:9.

In this case also, the total sum that is spent in the last stage for the original means of produciton, and which is therefore available as income for the purchase of the product, coincides with the value of the product after the necessary adjustments have taken place. The allocation of the additional means of production has been effected by maintaining the equilibrium between costs of production and the prices of consumption goods in such a way that the money stream has been lengthened and narrowed down correspondingly, i.e., the average number of the successive turnovers during the productive process has risen in the same ratio as the demand for means of producton in relation to the demand for consumption goods has increased. If the supply of money remains unaltered this is necessarily connected with a fall in the prices of the factors of production, the unchanged amount of which (disregarding the increase of capital) has to be exchanged for £900; and a ^still greater fall^ in the prices of consumption goods, the volume of which has increased on account of the utilization of more roundabout methods of production while their total money value has diminished from £1,000 to £900.

This demonstrates at any rate the ^possibility^ that, by an increase in the money stream going to production and a diminution of that going to consumption, production ^can^ still be organized in such a way that the products can be sold at remunerative prices. It remains to show (1) that with an unchanged amount of money, production will be governed by prices so that such an adjustment does take place, (2) that by such an adjustment of production the purpose of saving is achieved in the most favorable way, and (3) that on the other hand every change in the volume of currency, especially every monetary policy aiming at the stability of the prices of consumption goods (or any other prices) renders the adaptation of production to the new supply of saving more difficult and indeed frustrates more or less the end of saving itself.









( ... ... ) Every attempt to prevent the fall of prices by increasing the volume of money will have the effect of increasing production to an extent that it is impossible to maintain, and thus part of the savings will be wasted.


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We have repeatedly had occasion while examining the theory of Messrs. Foster and Catchings to point to the effects that would ensure if the proposal based upon it were put into practice. But it may well be that the contrast between the real effects of such proposals and the expectations based upon them may not yet be sufficiently clear. And as similar demands are continually being brought forward everywhere for all kinds of reasons, it seems worthwhile finally attempting a systematic account of the actual consequences to be expected if they were really carried out.

It has already been explained that Messrs. Foster and Catchings's proposals for reform involve increasing the volume of money, either through consumers' credits or the financing of state expenditure, in order to bring about the sale at unchanged prices of a volume of products enlarged by an increase of saving. The effects of such increases of money spent on consumption can best be demonstrated by contrasting them with the effect of additional productive credits. We shall work under the assumption used in the previous analysis, where the different stages of production are in the hands of different undertakings. The application of this reasoning to that of the completely integrated branch of production should follow more or less of itself.

( ... ... )


It is just because with ^every^ increase in the volume of money, whether it is made available first for consumption or first for production, the relative size of the demand for those means of production that already exists or which has been directly enlarged by an increase in money must eventually contract in relation to the demand for consumption goods, that a more or less severe reaction will follow. This frantic game of now enlarging, now contracting the productive apparatus through increase in the volume of money injected, now on the production, now on the consumption side, is always going on under the present organization of currency. Both effects follow each other uninterruptedly and thus an extension or contraction of the productive purposes is accelerated or retarded. So long as the volume of money in circulation is continually changing, we cannot get rid of industrial fluctuations. In particular, every monetary policy that aims at stabilizing the value of money and involves, therefore, an increase of its supply with every increase of production, must bring about those very fluctuations that it is trying to prevent.

But least of all is it possible to bring about stability by that "financing of consumption" which Messrs. Foster and Catchings recommend, since there would be added to the contraction of the production process which automatically follows from increases of productive credits a still further contraction because of the consumptive credits, and thus crises would be rendred exceptionally severe. Only if administered with extraordinary caution and superhuman ability could it, perhaps, be made to prevent crises: if the artificial increase in the demand for consumption goods brought about by those credits were made exactly to cancel the increase in the demand for means of production brought about by the investment of the current flow of savings, thus preserving constant the proportion between the two, this might happen. ^But such a policy would effectively prevent any increase in capital equipment and completely frustrate any saving whatever.^[68] There can be no question, therefore, that in the long run, even a policy of this sort would bring about grave disturbances and the disorganization of the economic system as a whole. So that, we may say, in conclusion, that the execution of Messrs. Foster and Catchings's proposals would not prevent, but considerabley aggravate, crises; that is, it would punish every attempt at capital creation by loss of a portion of the capital. Carried through to its logical conclusion, it would effectively prevent every real capital accumulation.

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That this unavoidable, and, in my opinion, unquestionable effect has not yet been emphasised in the discussion on Messrs Foster and Catchings is a disturbing indication of the insight into the significance o these problems existing in expert circles. The effect of their teaching on popular opinion is less remarkable when it is considered that proposals of a more or less inflationist tendencyㅡless extreme, perhaps, but in substance exactly similarㅡare put forward today by economists of very high repute.[81] They are the prevalent fashion of contemporary economics. It is hoped that in exhibiting the objections to such proposals this essay will serve a purpose no less important than the refutation of Messrs Foster and Catchings. Against the popular fallacy that a general crisis can be averted by extension of credit, the same arguments are valid as those used in refuting the theories we have been studying. For the same reasons the great expectations attached to a postponement of public works to times of depression seem to me fallacious. In so far as they are financed by additional creditsㅡand only then can they form an additional demandㅡthey must bring about all those evil effects which, as we have seen, arise when money is increased for consumptive purposes. Indeed the whole expediency of such attempts to alleviate unemployment by relief works and so on is in the light of this analysis highly questionable. If an excessive extension of productive equipment has been once begun, and the impossibility of carrying it through has manifested itself in a crisis, the appearance of unemployment and the resulting diminution of the demand for consumption goods may be the only way to set free the means necessary to complete at least a part of the enlarged productive equipment. This can only be mentioned as a possibility. It is by no means asserted as self-evident, nor is any examination of its validity here attempted.

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