America's Great Depression (14 page)

If total payrolls have declined, something else has gone up: the total retained by entrepreneurs, or by investors, for example. In fact, given the total money supply, the total flow of monetary spending
will only decline if the social demand for money has increased.

In other words, if “hoarding” has increased. But an increase in hoarding, in total demand for money, is, as we have seen, no social 14Note that, in Figure 1, the SL SL line stops before reaching the horizontal axis. Actually, the line must stop at the wage yielding the minimum subsistence income. Below that wage rate, no one will work, and therefore, the supply curve of labor will really be horizontal, on the free market, at the minimum subsistence point. Certainly it will not be possible for speculative withholding to reduce wage rates to the subsistence level, for three reasons: (a) this speculative withholding almost always results in
hoarding,
which reduces prices all-round and which will therefore reduce the equilibrium money wage rate without reducing the equilibrium real wage rate—the relevant rate for the subsistence level, (b) entrepreneurs will realize that their speculation has overshot the mark long before the subsistence level is reached; and (c) this is especially true in an advanced capitalist economy, where the rates are far above subsistence.

Keynesian Criticisms of the Theory

51

calamity. In response to the needs and uncertainties of depression, people desire to increase their real cash balances, and they can only do so, with a given amount of total cash, by lowering prices.

Hoarding, therefore, lowers prices all around, but need exert no depressing effect whatever upon business.15 Business, as we have pointed out, depends for its profitability on price
differentials
between factor and selling prices, not upon general price levels.16

Decrease or increase in total monetary spending is, therefore, irrelevant to the general profitability of business.

Finally, there is the Keynesian argument that wage earners consume a greater proportion of their income than landlords or entrepreneurs, and therefore that a decreased total wage bill is a calamity because consumption will decline and savings increase. In the first place, this is not always accurate. It assumes (1) that the laborers are the relatively “poor” and the nonlaborers the relative

“rich,” and (2) that the poor consume a greater proportion of their income than the rich. The first assumption is not necessarily correct. The President of General Motors is, after all, a “laborer,” and so also is Mickey Mantle; on the other hand, there are a great many poor landlords, farmers, and retailers. Manipulating relations between wage earners and others is a very clumsy and ineffective 15On the other hand, wage rates maintained above the free-market level will discourage investment and thereby tend to increase hoarding at the expense of saving–investment. This decline in the investment–consumption ratio aggravates the depression further. Freely declining wage rates would permit investments to return to previous proportions, thus adding another important impetus to recovery. See Frederic Benham,
British Monetary Policy
(London: P.S. King and Son, 1932), p. 77.

16It has often been maintained that a failing price level injures business firms because it aggravates the burden of fixed monetary debt. However, the creditors of a firm are just as much its owners as are the equity shareholders. The equity shareholders have less equity in the business to the extent of its debts. Bond-holders (long-term creditors) are just different types of owners, very much as preferred and common stock holders exercise their ownership rights differently.

Creditors save money and invest it in an enterprise, just as do stockholders.

Therefore, no change in price level by itself helps or hampers a business; creditor–owners and debtor–owners may simply divide their gains (or losses) in different proportions. These are mere intra-owner controversies.

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America’s Great Depression

way of manipulating relations between poor and rich (provided we desire any manipulation at all). The second assumption is often, but not necessarily, true, as we have seen above. As we have also seen, however, the empirical study of Lubell indicates that a
redistribution
of income between rich and poor may not appreciably affect the social consumption–saving proportions. But suppose that all these objections are waved aside for the moment, and we concede for the sake of argument that a fall in total payroll will shift the social proportion against consumption and in favor of saving. What then? But this is precisely an effect that we should highly prize. For, as we have seen, any shift in social time preferences in favor of saving and against consumption will
speed
the advent of recovery, and decrease the need for a lengthy period of depression readjustment. Any such shift from consumption to savings will foster recovery. To the extent that this dreaded fall in consumption
does
result from a cut in wage rates, then, the depression will be cured that much more rapidly.

A final note: The surplus “quantity of labor” caused by artificially high wage rates is a surplus quantity of hours worked. This can mean (1) actual unemployment of workers, and/or (2) reduction in working time for employed workers. If a certain number of labor hours are surplus, workers can be discharged outright, or many more can find their weekly working time reduced and their payroll reduced accordingly. The latter scheme is often advanced during a depression, and is called “spreading the work.” Actually, it simply spreads the unemployment. Instead of most workers being fully employed and others unemployed, all become
underemployed. Universal adoption of this proposal would render artificial wage maintenance absurd, because no one would be really benefitting from the high wage rates. Of what use are continuing high
hourly
wage rates if
weekly
wage rates are lower? The hour-reduction scheme, moreover, perpetuates underemployment. A mass of totally unemployed is liable to press severely on artificial wage rates, and out-compete the employed workers. Securing a greater mass of
under
-employed prevents such pressure—and this, indeed, is one of the main reasons that unions favor the scheme. In many cases, of course, the plea for shorter hours is accompanied by
Keynesian Criticisms of the Theory

53

a call for higher hourly wage rates to “keep weekly take-home pay the same”; this of course is a blatant demand for higher real wage rates, accompanied by reduced production and further unemployment as well.

Reduction of hours to “share the work” will also reduce everyone’s real wage rate and the general standard of living, for production will not only be lower but undoubtedly far less efficient, and workers all less productive. This will further widen the gap between the artificially maintained wage rate and the free-market wage rate, and hence further aggravate the unemployment problem.

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Some Alternative Explanations

of Depression: A Critique

Some economists are prepared to admit that the Austrian theory could “sometimes” account for cyclical booms and depressions, but add that other instances might be explained by different theories. Yet, as we have stated above, we believe this to be an error: we hold that the Austrian analysis is the only one that accounts for business cycles and their familiar phenomena.

Specific crises can, indeed, be precipitated by other government action or intervention in the market. Thus, England suffered a crisis in its cotton textile industry when the American Civil War cut off its supply of raw cotton. A sharp increase in taxation may depress industry and the urge to invest and thereby precipitate a crisis. Or people may suddenly distrust banks and trigger a deflationary run on the banking system. Generally, however, bank runs only occur after a depression has already weakened confidence, and this was certainly true in 1929. These instances, of course, are not
cyclical
events but simple crises without preceding booms. They are always identifiable and create no mysteries about the underlying causes of the crises. When W.R. Scott investigated the business annals of the early modern centuries, he found such contemporary explanations of business crises as the following: famine, plague, seizure of bullion by Charles I, losses in war, bank runs, etc. It is the fact that no such obvious disaster can explain modern depressions that accounts for the search for a deeper causal theory of
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America’s Great Depression

1929 and all other depressions. Among such theories, only Mises’s can pass muster.1

GENERAL OVERPRODUCTION

“Overproduction” is one of the favorite explanations of depressions. It is based on the common-sense observation that the crisis is marked by unsold stocks of goods, excess capacity of plant, and unemployment of labor. Doesn’t this mean that the “capitalist system” produces “too much” in the boom, until finally the giant productive plant outruns itself? Isn’t the depression the period of rest, which permits the swollen industrial apparatus to wait until reduced business activity clears away the excess production and works off its excess inventory?

This explanation, popular or no, is arrant nonsense. Short of the Garden of Eden, there is no such thing as general “overproduction.” As long as any “economic” desires remain unsatisfied, so long will production be needed and demanded. Certainly, this impossible point of universal satiation had not been reached in 1929. But, these theorists may object, “we do not claim that all desires have ceased. They still exist, but the people lack the money to exercise their demands.” But
some
money still exists, even in the steepest deflation. Why can’t this money be used to buy these

“overproduced” goods? There is no reason why prices cannot fall low enough, in a free market, to clear the market and sell all the goods available.2 If businessmen choose to keep prices up, they are simply speculating on an imminent rise in market prices; they are, in short,
voluntarily investing
in inventory. If they wish to sell their

“surplus” stock, they need only cut their prices low enough to sell all of their product.3 But won’t they then suffer losses? Of course, 1See the discussion by Scott in Wesley C. Mitchell,
Business Cycles: The
Problem and its Setting
(New York: National Bureau of Economic Research, 1927), pp. 75ff.

2See C.A. Phillips, T.F. McManus, and R.W. Nelson,
Banking and the Business-Cycle
(New York: Macmillan, 1937), pp. 59–64.

3In the Keynesian theory, “aggregate equilibrium” is reached by two routes: profits and losses, and “unintended” investment or disinvestment in inventory.

Some Alternative Explanations of Depression: A Critique
57

but now the discussion has shifted to a different plane. We find no overproduction, we find now that the
selling prices
of products are
below
their cost of production. But since costs are determined by expected future selling prices, this means that costs were previously
bid too high
by entrepreneurs. The problem, then, is not one of “aggregate demand” or “overproduction,” but one of cost–price differentials. Why did entrepreneurs make the mistake of bidding costs higher than the selling prices turned out to warrant? The Austrian theory explains this cluster of error and the excessive bidding up of costs; the “overproduction” theory does not. In fact, there was overproduction of specific, not general, goods. The malinvestment caused by credit expansion diverted production into lines that turned out to be unprofitable (i.e., where selling prices were lower than costs) and away from lines where it would have been profitable. So there was
over
production of specific goods relative to consumer desires, and
under
production of other specific goods.

UNDERCONSUMPTION

The “underconsumption” theory is extremely popular, but it occupied the “underworld” of economics until rescued, in a sense, by Lord Keynes. It alleges that something happens during the boom—in some versions too much investment and too much production, in others too high a proportion of income going to upper-income groups—which causes consumer demand to be insufficient to buy up the goods produced. Hence, the crisis and depression.

There are many fallacies involved in this theory. In the first place, as long as people exist,
some
level of consumption will persist. Even if people suddenly consume less and hoard instead, they must consume certain minimum amounts. Since hoarding cannot proceed so far as to eliminate consumption altogether, some level of consumption will be maintained, and therefore some monetary flow of consumer demand will persist. There is no reason why, in a free market, the prices of all the various factors of production, as well as But there
is no
unintended investment, since prices could always be cut low enough to sell inventory if so desired.

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the final prices of consumer goods, cannot adapt themselves to this desired level. Any losses, then, will be only temporary in shifting to the new consumption level. If they are anticipated, there need be no losses at all.

Second, it is the entrepreneurs’ business to anticipate consumer demand, and there is no reason why they cannot predict the consumer demand just as they make other predictions, and adjust the production structure to that prediction. The underconsumption theory cannot explain the cluster of errors in the crisis. Those who espouse this theory often maintain that production in the boom outruns consumer demand; but (1) since we are not in Nirvana, there will always be demand for further production, and (2) the unanswered question remains: why were costs bid so high that the product has become unprofitable at current selling prices? The productive machine expands because people want it so, because they desire higher standards of living in the future. It is therefore absurd to maintain that production could outrun consumer demand in general.