Henry Hazlitt has
been interpreting business trends for the American people for the
past 35 years. Starting in the field of economics as a reporter on
the Wall Street Journal, he has served on the financial and
editorial staffs of several of the great
New York
newspapers,
including the Sun, the Herald, and the Times.
In addition, he has been associated with The Nation and
edited American Mercury and the Freeman. Mr. Hazlitt
has traveled extensively in
Europe
and
South America
for on- the-spot studies
of world economic conditions. Since 1946, he has been a contributing
editor to Newsweek magazine, where his weekly column,
"Business Tides," is a regular feature. Born in
Philadelphia
, in 1894, he
attended the College of the City of
New York
and served with Air Service, U. S. Army, in World War
I. He is the author of many books and pamphlets dealing with
economics, among which a r e Will Dollars Save the World? and
The Great Idea. We is also well known as a lecturer and
literally critic.
P R E F A C E
This book is an
analysis of economic fallacies that are at last so prevalent that
they have almost become a new orthodoxy. The one thing that has
prevented this has been their own self-contradictions, which have
scattered those who accept the same premises into a hundred
different "schools," for the simple reason that it is impossible in
matters touching practical life to be consistently wrong. But the
difference between one new school and another is merely that one
group wakes up earlier than another to the absurdities to which its
false premises are driving it, and becomes at that moment
inconsistent by either unwittingly abandoning its false premises or
accepting conclusions from them less disturbing or fantastic than
those that logic would demand.
There is not a major
government in the world at this moment, however, whose economic
policies are not influenced if they are not almost wholly determined
by acceptance of some of these fallacies. Perhaps the shortest and
surest way to an understanding of economics is through a dissection
of such errors, and particularly of the central error from which
they stem. That is the assumption of this volume and of its somewhat
ambitious and belligerent title.
The volume is
therefore primarily one of exposition. It makes no claim to
originality with regard to any of the chief ideas that it expounds.
Rather its effort is to show that many of the ideas which now pass
for brilliant innovations and advances are in fact mere revivals of
ancient errors, and a further proof of the dictum that those who are
ignorant of the past are condemned to repeat it.
The present essay itself is, I suppose, unblushingly
"
classical," "traditional" and
"orthodox": at least these are the epithets with which those whose
sophisms are here subjected to analysis will no doubt attempt to
dismiss it. But the student whose aim is to attain as much truth as
possible will not he frightened by such adjectives. He will not be
forever seeking a revolution, a "fresh start," in economic thought.
His mind will, of course, he as receptive to new ideas as to old
ones; hut he will be content to put aside merely restless or
exhibitionistic straining for novelty and originality. As Morris R.
Cohen has remarked: “The notion that we can dismiss the views of all
previous thinkers surely leaves no basis for the hope that our own
work will prove of any value to others.”
Because this is a work of exposition I have availed my- self freely
and without detailed acknowledgment (except for rare footnotes and
quotations) of the ideas of others. This is inevitable when one
writes in a field in which many of the world's finest minds have
labored. But my indebtedness to at least three writers is of so
specific a nature that I cannot allow it to pass unmentioned. My
greatest debt, with respect to the kind of expository frame- work on
which the present argument is hung, is to Frédéric Bastiat's essay
Cequ'on voit et ce qu'on ne
voit
pas, now nearly a century old.
The present work may, in fact, be regarded as a modernization,
extension and generalization of the approach found in Bastiat's
pamphlet. My second debt is to Philip Wicksteed: in particular the
chapters on wages and the final summary chapter owe
much to his Common
Sense of Political Economy. My third debt is to Ludwig von
Mises. Passing over every- thing that this elementary treatise may
owe to his writings in general, my most specific debt is to his
exposition of the manner in which the process of monetary inflation
is spread.
When analyzing fallacies, I have thought it still
less advisable to mention particular names than in giving credit. To
do so would have required special justice to each writer criticized,
with exact quotations, account taken of the particular emphasis he
places on this point or that, the qualifications he makes, his
personal ambiguities, in- consistencies, and so on. I hope,
therefore, that no one will be too disappointed at the absence of
such names as Karl Marx, Thorstein Veblen, Major Douglas, Lord
Keynes, Professor Alvin Hansen and others in these pages. The object
of this hook is not to expose the special errors of particular
writers, but economic errors in their most frequent, widespread or
influential form. Fallacies, when they have reached the popular
stage, become anonymous anyway. The subtleties or obscurities to be
found in the authors most responsible for propagating them are
washed off. A doctrine becomes simplified; the sophism that may have
been buried in a network of qualifications, ambiguities or
mathematical equations stands clear. I hope I shall not be accused
of injustice on the ground, therefore, that a fashionable doctrine
in the form in which I have presented it is not precisely the
doctrine as it has been formulated by Lord Keynes or some other
special author. It is the beliefs which politically influential
groups hold and which governments act upon that we are interested in
here, not the historical origins of those beliefs.
I hope, finally, that
I shall he forgiven for making such rare reference to statistics in
the following pages. To have tried to present statistical
confirmation, interfering to the effects of tariffs, price-fixing,
inflation, and the controls over such commodities as coal, rubber
and cotton would have swollen this book much beyond the dimensions
contemplated. As a working newspaper man, moreover, I am acutely
aware of how quickly statistics become out-of-date and are
superseded by later figures. Those who are interested in specific
economic problems are advised to read current "realistic"
discussions of them, with statistical documentation: they will not
find it difficult to interpret the statistics correctly in the light
of the basic principles they have learned.
I have tried to write
this hook as simply and with as much freedom from technicalities as
is consistent with reasonable accuracy, so that it can be fully
understood by a reader with no previous acquaintance with economics.
While this hook was composed as a unit, three chapters have already
appeared as separate articles, and I wish to thank The New York
Times, The American Scholar and The New Leader for permission to
reprint material originally published in their pages. I am grateful
to Professor von Mises for reading the manuscript and for helpful
suggestions. Responsibility for the opinions expressed is, of
course, entirely my own.
H.
H.
New York
March 25, 1946
THE LESSON
Top of Page
Chapter One
Economics is haunted
by more fallacies than any other study known to man. This is no
accident. The inherent difficulties of the subject would be great
enough in any case, but they are multiplied a thousand fold by a
factor that is insignificant in, say, physics, mathematics or
medicine-the special pleading of selfish interests. While every
group has certain economic interests identical with those of all
groups, every group has also, as we shall see, interests
antagonistic to those of all other groups. While certain public
policies would in the long run benefit every- body, other policies
would benefit one group only at the expense of all other groups. The
group that would benefit by such policies, having such a direct
interest in them, will argue for them plausibly and persistently. I
t will hire the best buyable minds to devote their whole time to
presenting its case. And it will finally either convince the general
public that its case is sound, or so befuddle it that clear thinking
on the subject becomes next to impossible.
In addition to these
endless pleadings of self-interest, there is a second main factor
that spawns new economic fallacies every day. This is the persistent
tendency of men to see only the immediate effects of a given policy,
or its effects only on a special group, and to neglect to inquire
what the long-run effects of that policy will be not only on that
special group but on all groups. I t is the fallacy of overlooking
secondary consequences.
In this lies almost
the whole difference between good such shallow wisecracks pass as
devastating epigrams and the ripest wisdom.
But the tragedy is
that, on the contrary, we are already suffering the long-run
consequences of the policies of the remote or recent past. Today is
already the tomorrow which the bad economist yesterday urged us to
ignore. The long-run consequences of some economic policies may
become evident in a few months. Others may not become evident for
several years. Still others may not become evident for decades. But
in every case those long-run consequences are contained in the
policy as surely as the hen was in the egg, the flower in the seed.
From this aspect, therefore, the whole of economics can be reduced
to a single lesson, and that lesson can be reduced to a single
sentence. The art of economics consists in looking not merely at the
immediate but at the longer effects of any act or policy; it
consists in tracing the con- sequences of that policy not merely for
one group but for all groups.
Nine-tenths of the
economic fallacies that are working such dreadful harm in the world
today are the result of ignoring this lesson. Those fallacies all
stem from one of two central fallacies, or both: that of looking
only at the immediate consequences of an act or proposal, and that
of looking at the consequences only for a particular group to the
neglect of other groups.
It is true, of course,
that the opposite error is possible. In considering a policy we
ought not to concentrate only on its long-run results to the
community as a whole. This is the error often made by the classical
economists. It resulted in certain callousness toward the fate of
groups that were immediately hurt by policies or developments which
proved to be beneficial on net balance and in the long run.
But comparatively few people today make this error; and those few
consist mainly of professional economists. The most frequent fallacy
by far today, the fallacy that emerges again and again in nearly
every conversation that touches on economic affairs, the error of a
thousand political speeches, the central sophism of the "new"
economics, is to concentrate on the short-run effects of policies on
special groups and to ignore or belittle the long-run effects on the
community as a whole. The "new" economists flatter themselves that
this is a great, almost a revolutionary advance over the methods of
the "classical" or "orthodox" economists, because the former take
into consideration short-run effects which the latter often ignored.
But in themselves ignoring or slighting the l o n g run effects,
they are making the far more serious error. They overlook the woods
in their precise and minute examination of particular trees. Their
methods and conclusions are often profoundly reactionary. They are
some- times surprised to find themselves in accord with seven-
twentieth-century mercantilism. They fall, in fact, into all the
ancient errors (or would, if they were not so inconsistent) that the
classical economists, we had hoped, had once for all got rid of.
It is often sadly
remarked that the bad economists present their errors to the public
better than the good economists present their truths. It is often
complained that demagogues can he more plausible in putting forward
economic nonsense from the platform than the honest men who try to
show what is wrong with it. But the basic reason for this ought not
to be mysterious. The reason is that the demagogues and bad
economists are presenting half-truths. They are speaking only of the
immediate effect of a proposed policy or its effect upon a single
group. As far as they go they may often be right. In these cases the
answer consists in showing that the proposed policy would also have
longer and less desirable effects, or that it could benefit one
group only at the expense of all other groups. The answer consists
in supplementing and correcting the half-truth with the other half.
But to consider all the chief effects of a proposed course on
everybody often requires a long, complicated, and dull chain of
reasoning. Most of the audience finds this chain of reasoning
difficult to follow and soon becomes bored and inattentive. The bad
economists rationalize this intellectual debility and laziness by
assuring the audience that it need not even attempt to follow the
reasoning or judge it on its merits because it is only "classicism"
or "laissez faire" or "capitalist apologetics" or whatever other
term of abuse may happen to strike them as effective.
We have stalled the nature of the lesson, and of the
fallacies that stand in its way, in abstract terms. But t lesson
will not be driven home, and the 'fallacies
w
continue to
go unrecognized, unless both are illustrate by examples. Through
them examples we can move from the most elementary problems in
economics to the most complex and difficult. Through them we can
learn to detect and avoid first the crudest and most palpable
fallacies and finally some of the most sophisticated and elusive. To
that task we shall now proceed.
Top of Page
Part TWO
THE LESSON APPLIED
THE BROKEN WINDOW
Let us begin with the
simplest illustration possible: let us, emulating Bastiat, choose a
broken pane of glass.
A young hoodlum, say,
heaves a brick through the window of a baker's shop. The shopkeeper
runs out furious, but the boy is gone. A crowd gathers, and begins
to stare with quiet satisfaction at the gaping hole in the window
and the shattered glass over the bread and pies. After a while the
crowd feels the need for philosophic reflection. And several of its
members are almost certain to remind each other or the baker that,
after all, the misfortune has its bright side. It will make business
for some glazier. As they begin to think of this they elaborate upon
it. How much does a new plate glass window cost? Fifty dollars? That
will be quite a sum. After all, if windows were never broken, what
would happen to the glass business? Then, of course, the thing is
endless. The glazier will have $50 more to spend with other
merchants, and these in turn will have$50 more to spend with still
other merchants, and so ad infinitum. The smashed window will go on
providing money and employment in ever- widening circles. The
logical conclusion from all this would be, if the crowd drew it,
that the little hoodlum who threw the brick, far from being a public
menace, was a public benefactor.
Now let us take another look. The crowd is at least
right in its first conclusion. This little act of vandalism will in
the first instance mean more business for some glazier. The glazier
will be no unhappy to learn of the incident than an undertaker to
learn of a death. But the shopkeeper will be out $50 that he was
planning to spend for a new suit. Because he has had to replace a
window, he will have to go without the suit (or some equivalent need
or luxury). Instead of having a window and $50 he now has merely a
window. Or, as he was planning to buy the suit that very afternoon,
instead of having both a window and a suit he must be content with
the window and no suit. If we think of him as a part of the
community, the community has lost a new suit that might otherwise
have come into being, and is just that much poorer.
The glazier's gain of business, in short, is merely the tailor's
loss of business. No new "employment" has been added. The people in
the crowd were thinking only of two parties to the transaction, the
baker and the glazier. They had forgotten the potential third party
involved, the tailor. They forgot him precisely because he will not
now enter the scene. They will see the new window in the next day or
two. They will never see the extra suit, precisely because it will
never be made. They see only what is immediately visible to the eye.
Chapter Three
THE BLESSINGS OF DESTRUCTION
So we have finished
with the broken window. An elementary fallacy. Anybody, one would
think, would be able to avoid it after a few moments' thought. Yet
the broken- window fallacy, under a hundred disguises, is the most
persistent in the history of economics. It is more ram- pant now
than at any time in the past. It is solemnly re- affirmed every day
by great captains of industry, by chambers of commerce, by labor
union leaders, by editorial writers and newspaper columnists and
radio commentators, by learned statisticians using the most refined
techniques, by professors of economics in our best universities. In
their various ways they all dilate upon the advantages of
destruction.
Though some of them would disdain to say that there
are net benefits in small acts of destruction, they see al- most
endless benefits in enormous acts of destruction. They tell us how
much better off economically we all are in war than in peace. They
see "miracles of production" which it requires a war to achieve. And
they see a post- war world made certainly prosperous by an enormous
"accumulated" or "backed-up" demand. In
Europe
they joyously count the
houses, the whole cities that have been leveled to the ground and
that "will have to be replaced." In
America
they count the houses that could not be built during the war, the
nylon stockings that could not be supplied, the worn-out automobiles
and tires, the obsolescent radios and refrigerators. They bring
together formidable totals.
It is merely our old friend, the broken-window
fallacy, in new clothing, and grown fat beyond recognition. This
time it is supported by a whole bundle of related fallacies. It
confuses need with demand. The more war destroys, the more it
impoverishes, the greater is the p war need. Indubitably. But need
is not demand. Effective economic demand requires not merely need
but corresponding purchasing power. The needs of
China
too
are incomparably greater than the needs of
America
. But its power,
and therefore the,” new business" that it can stimulate, are
incomparably smaller.
But if we get past
this point, there is a chance for another fallacy, and the
broken-windows usually grab it. They think of "purchasing power"
merely in terms of money. Now money can be run off 'by 'the printing
press. As this is being written, in fact, printing money is the
world's biggest industry-if the products measured in monetary terms.
But the more money is turned out in this way, the more the value of
any given unit of money falls. This falling value can be measured in
rising prices of commodities. But as most people are so firmly in
the habit of thinking of their wealth and income in terms of money,
they consider themselves better off as these monetary totals rise,
in spite of the fact that in terms of things they may have less and
buy less. 'Most of the "good" economic-results which people
attribute to war are really owing to wartime inflation. They could
be produced just as well by an equivalent peacetime inflation. We
shall come back to this money illusion later.
Now there is a
half-truth in the "backed-up" demand fallacy, just as there -was in
the broken-window fallacy. The broken window did make more business
for the glazier. The destruction of war will make more business for
the producers of certain things. The destruction of houses and
cities will make more business for the building and construction
industries. The inability to -produce automobiles, radios, and
refrigerators during the war will bring about a cumulative post-war
demand for those particular products.
To most people this will seem like an increase in
total demand, as it may well be in terms of dollars of lower
purchasing power. But what really takes place is a diversion of
demand to these particular products from others. The people of
Europe
will build more new houses
than otherwise because they must. But when they build more
,
houses they will have just that much
less manpower and productive capacity left over for everything else.
When they buy houses they will have just that much less purchasing
power for everything else. Wherever business is increased in one
direction, it must (except insofar as productive energies may he
generally stimulated by a sense of want and urgency) be
correspondingly reduced in another.
The war, in short, will change the post-war direction
of effort; it will change the balance of industries; it will change
the structure of industry. And this in time will also have its
consequences. There will he another distribution of demand when
accumulated needs for houses and other durable goods have been made
up. Then these temporarily favored industries will, relatively, have
to shrink again, to allow other industries filling other needs to
grow.
It is important to
keep in mind, finally, that there will not merely he a difference in
the pattern of post-war as compared with pre-war demand. Demand will
not merely he diverted from one commodity to another. In most
countries it will shrink in total amount.
This is inevitable
when we consider that demand and supply are merely two sides of the
same coin. They are the same thing looked at from different
directions. Supply creates demand because at bottom it is demand.
The supply of the thing they make is all that people have, in fact,
to offer in exchange for the things they want. In this sense the
farmers' supply of wheat constitutes their demand for automobiles
and other goods. The supply of motor cars constitutes the demand of
the people in the automobile industry for wheat and other goods. All
this is inherent in the modern division of labor and in an exchange
economy.
This fundamental fact,
it is true, is obscured for most people (including some reputedly
brilliant economists) through such complications as wage payments
and the indirect form in which virtually all modern exchanges are
made through the medium of money. John Stuart Mill and other
classical writers, though they sometimes failed to take sufficient
account of the complex consequences resulting from the use of money,
at least saw through the monetary veil to the underlying realities.
To that extent they were in advance of many of their present-day
critics, who are befuddled by money rather than instructed by it.
Mere inflation-that is, the mere issuance of more money, with the
consequence of higher wages and prices-may look like the creation of
more demand. But in terms of the actual production and exchange of
real things it is not. Yet a fall in post-war demand may be
concealed from many people by the illusions caused by higher money
wages that are more than offset by higher prices.
Post-war demand in most countries, to repeat, will
shrink in absolute amount as compared with pre-war demand because
post-war supply will have shrunk. This should be obvious enough in
Germany
and
Japan
, where scores of
great cities were leveled to the ground. The point, in short, is
plain enough when we make the case extreme enough. If England,
instead of being hurt only to the extent she was by her
participation in the war, had had all her great cities destroyed,
all her factories destroyed and almost all her accumulated capital
and consumer goods destroyed, so that her people had been reduced to
the economic level of the Chinese, few people would be talking about
the great accumulated and backed up demand caused by the war. It
would be obvious that buying power had been wiped out to the same
extent that productive power had been wiped out. A runaway monetary
inflation, lifting prices a thousand fold, might none the less make
the "national income" figures in monetary terms higher than before
the war. But those who would be deceived by that into imagining
themselves richer than before the war would be beyond the reach of
rational argument. Yet the same principles apply to a small war
destruction as to an overwhelming one.
There may be, it is true, offsetting factors.
Technological discoveries and advances during the war, for example,
may increase individual or national productivity at this point or
that. The destruction of war will, it is true, divert post-war
demand from some channels into others. And a certain number of
people may continue to be deceived indefinitely regarding their real
economic welfare by rising wages and prices caused by an excess of
printed money. But the belief that a genuine prosperity can be
brought about by a "replacement demand" for things destroyed or not
made during the war is none the less a palpable fallacy.
Top of Page
Chapter
Four
P U B L I C W O R K S M E A N T A X E S
There
is no more persistent and influential faith in the world today than
the faith in government spending. Everywhere government spending is
presented as a panacea for all our economic ills. Is private
industry partially stagnant? We can fix it all by government
spending. Is there unemployment? That is obviously due to
"insufficient private purchasing power." The remedy is just as
obvious. All that is necessary is for the government to spend enough
to make up the "deficiency."
An enormous literature
is based on this fallacy, and, as so often happens with doctrines of
this sort, it has become part of an intricate network of fallacies
that mutually support each other. We cannot explore that whole
network at this point; we shall return to other branches of it
later. But we can examine here the mother fallacy that has given
birth to this progeny, the main stem of the network.
Everything we get,
outside of the free gifts of nature, must in some way be paid for.
The world is full of so- called economists who in turn are full of
schemes for getting something for nothing. They tell us that the
government can spend and spend without taxing a t all; that it can
continue to pile up debt without ever paying it off, because "we owe
it to ourselves." We shall return to such extraordinary doctrines at
a later point. Here I am afraid that we shall have to be dogmatic,
and point out that such pleasant dreams in the past have always been
shattered by national insolvency or a runaway inflation. Here we
shall have to say simply that all government expenditures must
eventually he paid out of the proceeds of taxation; that to put off
the evil day merely increases the problem, and that inflation itself
is merely a form, and a particularly vicious form, of taxation.
Having put aside for
later consideration the network of fallacies which rest on chronic
government borrowing and inflation, we shall take it for granted
throughout the present chapter that either immediately or ultimately
every dollar of government spending must be raised through a dollar
of taxation. Once we look at the matter. In this way, the supposed
miracles of government spending will appear in another light.
A certain amount of public spending is necessary to
perform essential government functions. A certain amount of public
works-of streets and roads and bridges and tunnels, of armories and
navy yards, of buildings to house legislatures, police and fire
departments-is necessary to supply essential public services. With
such public works, necessary for their own sake, and defended on
that ground alone, I am not here concerned. I am here concerned with
public works considered as a means of "pro- viding employment" or of
adding wealth to the community that it would not otherwise have had.
A bridge is built, If it is built to meet an
insistent public demand, if it solves a traffic problem or a
transportation problem otherwise insoluble, if, in short, it is even
more necessary than the things for which the tax- payers would have
spent their money if it had not been taxed away from them, there can
be no objection. But a bridge built primarily "to provide
employment" is a different kind of bridge. When providing employment
be- comes the end, need becomes a subordinate consideration.
"Projects" have to he invented. Instead of thinking only where
bridges must be built, the government spenders begin to ask
themselves where bridges can be built. Can they think of plausible
reasons why an additional bridge should connect
Easton
and Weston?
It soon becomes absolutely essential. Those who doubt the necessity
are dismissed as obstructionists and reactionaries.
Two arguments are put
forward for the bridge, one of which is mainly heard before it is
built, the other of which is mainly heard after it has been
completed. The first argument is that it will provide employment. It
will provide, say, 500 jobs for a year. The implication is that
these are jobs that would not otherwise have come into existence.
This is what is
immediately seen. But if we have trained ourselves to look beyond
immediate to secondary consequences, and beyond those who are
directly benefited by a government project to others who are
indirectly affected, a different picture presents itself. It is true
that a particular group of bridge workers may receive more
employment than otherwise. But the bridge has to be paid for out of
taxes. For every dollar that is spent on the bridge a dollar will be
taken away from taxpayers. If the bridge costs $1,000,000 the
taxpayers will lose $1,000, 000. They will have that much taken away
from them which they would otherwise have spent on the things they
needed most.
Therefore for every
public job created by the bridge project a private job has been
destroyed somewhere else. We can see the men employed on the bridge.
We can watch them at work. The employment argument of the government
spenders becomes vivid, and probably for most people convincing. But
there are other things that we do not see, because, alas, they have
never been permitted to come into existence. They are the jobs
destroyed by the $1,000,000 taken from the taxpayers. All that has
happened, at best, is that there has been a diversion of jobs
because of the project. More bridge builders; fewer automobile
workers, radio technicians, clothing workers, farmers.
But then we come to
the second argument. The bridge exists. It is, let us suppose, a
beautiful and not an ugly bridge. It has come into being through the
magic of government spending. Where would it have been if the
obstructionists and the reactionaries had had their way? There would
have been no bridge. The country would have been just that much
poorer.
Here again the
government spenders have the better of the argument with all those
who cannot see beyond the immediate range of their physical eyes.
They can see the bridge. But if they have taught themselves to look
for indirect as well as direct consequences they can once more see
in the eye of imagination the possibilities that have never been
allowed to come into existence. They can see the inbuilt homes, the
unmade cars and radios, the unmade dresses and coats, perhaps the
unsold and ungrown foodstuffs. To see these uncreated things re-
quires a kind of imagination that not many people have. We can think
of these non-existent objects once, perhaps, hut we cannot keep them
before our minds as we can the bridge that we pass every working
day. What has happened is merely that one thing has been created
instead of others.
The same reasoning
applies, of course, to every other form of public work. It applies
just as well, for example, to the erection with public funds of
housing for people of low incomes. All that happens is that money is
taken away through taxes from families of higher income (and perhaps
a little from families of even lower income) t o force them to
subsidize these selected families with low incomes and enable them
to live in better housing for the same rent or for lower rent than
previously.
I do not intend to
enter here into all the pros and cons of public housing. I am
concerned only to point out the error in two of the arguments most
frequently put forward in favor of public housing. One is the
argument that it "creates employment"; the other that it creates
wealth which would not otherwise have been produced. Both of these
arguments are false, because they overlook what is lost through
taxation. Taxation for public housing destroys as many jobs in other
lines as it creates in housing. It also results in unbuilt private
homes, in un- made washing machines and refrigerators, and in lack
of innumerable other commodities and services.
And none of this is
answered by the sort of reply which points out, for example, that
public housing does not have to be financed by a lump sum capital
appropriation, hut merely by annual rent subsidies. This simply
means that the cost is spread over many years instead of being
concentrated in one. It also means that what is taken from the
taxpayers is spread over many years instead of being concentrated
into one. Such technicalities are irrelevant to the main point.
The great psychological advantage of the public
housing advocates is that men are seen at work on the houses when
they are going up, and the houses are seen when they are finished.
People live in them, and proudly show their friends through the
rooms. The jobs destroyed by the taxes for the housing are not seen,
nor are the goods and services that were never made. It takes a
concentrated effort of thought and a new effort each time the houses
and the happy people in them are seen, to think of the wealth that
was not created instead. Is it surprising that the champions of
public housing should dismiss this, if it is brought to their
attention, as a world of imagination, as the objections of pure
theory, while they point to the public chousing that exists? As a
character in Bernard Shaw's Saint Joan replies when told of the
theory of Pythagoras that the earth is round and revolves around the
sun: "What an utter fool! Couldn't he use his eyes?
We must apply the same
reasoning, once more, to get projects like the Tennessee Valley
Authority. Here, b cause of sheer size, the danger of optical
illusion greater than ever. Here is a mighty dam, a of steel and
concrete, "greater than anything capital could have built," the
fetish of photographers, heaven of socialists, the most often used
miracles of public construction, ownership Here are mighty
generators and power ho whole region lifted to a higher economic
level, attracting factories and industries that could not otherwise
have existed. And it is all presented, in the panegyrics of its
partisans, as a net economic gain without offsets.
We need not go here
into the merits of the TVA or public projects like it. But this time
we need a special effort of the imagination, which few people seem
able to make, to look at the debit side of the ledger. If taxes are
taken from people and corporations, and spent in one particular
section of the country, why should it cause surprise, why should it
be regarded as a miracle, if that section becomes comparatively
richer? Other sections of the country, we should remember, are then
comparatively poorer. The thing so great that "private capital could
not have built it" has in fact been built by private capital -the
capital that was expropriated in taxes (or, if the money was
borrowed, that eventually must be expropriated in taxes). Again we
must make an effort of the imagination to see the private power
plants, the private homes, the typewriters and radios that were
never allowed to come into existence because of the money that was
taken from people all over the country to build the photogenic
Norris Dam.
I have deliberately chosen the most favorable
examples of public spending schemes-that is, those that are most
frequently and fervently urged by the government spenders and most
highly regarded by the public. I have not spoken of the hundreds of
boondoggling projects that are invariably embarked upon the moment
the main object is to "give jobs" and "to put people to work." For
then the usefulness of the project itself, as we have seen,
inevitably becomes a subordinate consideration. Moreover, the more
wasteful the work, the more costly in manpower, the better it
becomes for the purpose of providing more employment. Under such
circumstances it is highly improbable that the projects thought up
by the bureaucrats will provide the same net addition to wealth and
welfare, per dollar expended, as would have been provided by the
taxpayers themselves, if they had been individually permitted to buy
or have made what they themselves wanted, instead of being forced to
surrender part of their earnings to the state.
Top of Page
Chapter Five
T A X E S D I S C O U R A G E P R O D U C T I O N
There is a still further factor which makes it
improbable that the wealth created by government spending will fully
compensate for the wealth destroyed by the taxes imposed to pay for
that spending. It is not a simple question, as so often supposed, of
taking something out of the nation's right-hand pocket to put into
its left-hand
'
pocket. The
government spenders tell us, for example, that if the national
income is $200,000,000,000 (they are always generous in fixing this
figure) then government taxes of $50,000,000,000 a year would mean
that only 25 per cent of the national income was being transferred
from private purposes to public purposes. This is to talk as if the
country were the same sort of unit of pooled resources as a huge
corporation, and as if all that were involved were a mere
bookkeeping transaction. The government spenders forget that they
are taking the money from A in order to pay it to B. Or rather, they
know this very well; but while they dilate upon all the benefits of
the process to B, and all the wonderful things he will have which he
would not have had if the money had not been transferred to him,
they forget the effects of the transaction on A. B is seen; A is
forgotten.
In our modern world
there is never the same percentage of income tax levied on
everybody. The great burden of income taxes is imposed on a minor
percentage of the nation's income; and these income taxes have to be
supplemented by taxes of other kinds. These taxes inevitably affect
the actions and incentives of those from whom they are taken. When a
corporation loses a hundred cents of every dollar it loses, and is
permitted to keep only 60 cents of every dollar it gains, and when
it cannot offset its years of losses against its years of gains, or
cannot do so adequately, its policies are affected. It does not
expand its operations, or it expands only those attended with a
minimum of risk. People who recognize this situation are deterred
from starting new enterprises. Thus old employers do not give more
employment, or not as much more as they might have; and others
decide not to become employers at all. Improved machinery and
better-equipped factories come into existence much more slowly than
they otherwise would. The result in the long run is that consumers
are prevented from getting better and cheaper products, and that
real wages are held down.
There is a similar
effect when personal incomes are taxed 50, 60, 75 and 90 per cent.
People begin to ask themselves why they should work six, eight or
ten months of the entire year for the government, and only six, four
or two months for themselves and their families. If they lose the
whole dollar when they lose, but can keep only a dime of it when
they win, they decide that it is foolish to take risks with their
capital. In addition, the capital available for risk-taking itself
shrinks enormously. It is being taxed away before it can be
accumulated. In brief, capital to provide new private jobs is first
prevented from coming into existence, and the part that does come
into existence is then discouraged from starting new enterprises.
The government spenders create the very problem of unemployment that
they profess to solve.
A
certain amount of
taxes is of course indispensable to carry on essential government
functions. Reasonable taxes for this purpose need not hurt
production much. The kind of government services then supplied in
return, which among other things safeguard production itself, more
than compensate for this. But the larger the percentage of the
national income taken by taxes the greater the deter- rent to
private production and employment. When the total tax burden grows
beyond a bearable size, the problem of devising taxes that will not
discourage and disrupt production becomes insoluble.
Top of Page
Chapter
Six
C R E D I T D I V E R T S P R O D U C T I O N
Government
"encouragement" to business is sometimes as much to be feared as
government hostility. This sup- posed encouragement often takes the
form of a direct grant of government credit or a guarantee of
private loans.
The question of
government credit can often be complicated, because it involves the
possibility of inflation. We shall defer analysis of the effects of
inflation of various kinds until a later chapter. Here, for the sake
of simplicity, we shall assume that the credit we are discussing is
non-inflationary. Inflation, as we shall later see, while it
complicates the analysis, does not at bottom change the consequences
of the policies discussed.
The most frequent
proposal of this sort in Congress is for more credit to farmers. In
the eyes of most Congress- men the farmers simply cannot get enough
credit. The credit supplied by private mortgage companies, insurance
companies or country banks is never "adequate." Congress is always
finding new gaps that are not filled by the existing lending
institutions, no matter how many of these it has itself already
brought into existence. The farmers may have enough long-term credit
or enough short-term credit, but, it turns out, they have not enough
"intermediate" credit; or the interest rate is too high; or the
complaint is that private loans are made only to rich and
well-established farmers. So new lending institutions and new types
of farm loans are piled on top of each other by the legislature.
The faith in all these
policies, it will be found, springs from two acts of
shortsightedness. One is to look at the matter only from the
standpoint of the farmers that borrow. The other is to think only of
the first half of the transaction.
Now all loans, in the
eyes of honest borrowers, must eventually he repaid. All credit is
debt. Proposals for an increased volume of credit, therefore, are
merely another name for proposals for an increased burden of debt.
They would seem considerably less inviting if they were habitually
referred to by the second name instead of by the first.
We need not discuss
here the normal loans that are made to farmers through private
sources. They consist of mortgages; of installment credits for the
purchase of auto- mobiles, refrigerators, radios, tractors and other
farm machinery, and of hank loans made to carry the farmer along
until he is able to harvest and market his crop and get paid for it.
Here we need concern ourselves only with loans to farmers either
made directly by some government bureau or guaranteed by it.
These loans are of two
main types. One is a loan to enable the farmer to hold his crop off
the market. This is an especially harmful type; but it will be more
convenient to consider it later when we come to the question of
government commodity controls. The other is a loan to provide
capital-often to set the farmer up in business by enabling him to
buy the farm itself, or a mule or tractor, or all three.
At first glance the
case for this type of loan may seem a strong one. Here is a poor
family, it will be said, with no means of livelihood. It is cruel
and wasteful to put them on relief. Buy a farm for them; set them up
in business; make productive and self-respecting citizens o them;
let them add to the total national product and pay the loan off out
of what they produce. Or here is a farmer struggling along
with primitive methods of production because he has not the capital
to buy himself a tractor. Lend him the money for one; let him
increase his productivity; he can repay the loan out of the proceeds
of his increased crops. In that way you not only enrich him and put
him on his feet; you enrich the whole community by that much added
output. And the loan, concludes the argument, costs the government
and the taxpayers less than nothing, because it is
"self-liquidating."
Now as a matter of
fact this is what happens every day under the institution of private
credit. If a man wishes to buy a farm, and has, let us say, only
half or a third as much money as the farm costs, a neighbor or a
savings bank will lend him the rest in the form of a mortgage on the
farm. If he wishes to buy a tractor, the tractor company itself, or
a finance company, will allow him to buy it for one-third of the
purchase price with the rest to be paid off in installments out of
earnings that the tractor itself will help to provide.
But there is a
decisive difference between the loans supplied by private lenders
and the loans supplied by a government agency. Each private tender
risks his own funds. (A banker, it is true, risks the funds of
others that have been entrusted to him; but if money is lost he must
either make good out of his own funds or be forced out of business.)
When people risk their own funds they are usually careful in their
investigations to determine the adequacy of the assets pledged and
the business acumen and honesty of the borrower.
If the government
operated by the same strict standards, there would be no good
argument for its entire field at all. Why do precisely what private
agencies al- ready do? But the government almost invariably operates
by different standards. The whole argument for its entering the
lending business, in fact, is that it will make loans to people who
could not get them from private lenders. This is only another way of
saying that the government lenders will take risks with other
people's money (the taxpayers') that private lenders will not take
with their own money. Sometimes, in fact, apologists will freely ac-
knowledge that the percentage of losses will be higher on these
government loans than on private loans. But they contend that this
will be more than offset by the added production brought into
existence by the borrowers who pay back, and even by most of the
borrowers who do not pay back.
This argument will
seem plausible only as long as we concentrate our attention on the
particular borrowers whom the government supplies with funds, and
overlook the people whom its plan deprives of funds. For what is
really being lent is not money, which is merely the medium of
exchange, but capital. (I have already put the reader on notice that
we shall postpone to a later point the complications introduced by
an inflationary expansion of credit.) What is really being lent,
say, is the farm or the tractor itself. Now the number of farms in
existence is limited, and so is the production of tractors
(assuming, especially, that an economic surplus of tractors is not
produced simply at the expense of other things). The farm or tractor
that is lent to A cannot be lent to B. The real question is,
therefore, whether A or B shall get the farm.
This brings us to the
respective merits of A and B, and what each contributes, or is
capable of contributing, to production. A, let us say, is the man
who would get the farm if the government did not intervene. The
local banker or his neighbors know him and know his .record. They
want to find employment for their funds. They know that he is a good
farmer and an honest man who keeps his word. They consider him a
good risk. He has already, perhaps, through industry, frugality and
fore- sight, accumulated enough cash to pay a fourth of the price of
the farm. They lend him the other three-fourths; and he gets the
farm.
There is a strange
idea abroad, held by all monetary cranks, that credit is something a
banker gives to a man. Credit, on the contrary, is something a man
already has. He has it, perhaps, because he already has marketable
assets of a greater cash value than the loan for which he is asking.
Or he has it because his character and past record have earned it.
He brings it into the hank with him. That is why the hanker makes
him the loan. The banker is not giving something for nothing. He
feels assured of repayment. He is merely exchanging a more liquid
form of asset or credit for a less liquid form. Sometimes he makes a
mistake, and then it is not only the banker who suffers, but the
whole community; for values which were supposed to be produced by
the lender are not produced and resources are wasted.
Now it is to A, let us
say, who has credit, that the banker would make his loan. But the
government goes into the lending business in a charitable frame of
mind because, as we saw, it is worried about B. B cannot get a
mortgage or other loans from private lenders because he does not
have credit with them. He has no savings; he has no impressive
record as a good farmer; he is perhaps at the moment on relief. Why
not, say the advocates of government credit, make him a useful and
productive member of society by lending him enough for a farm and a
mule or tractor and setting him up in business?
Perhaps in an
individual case it may work out all right. But it is obvious that in
general the people selected by these government standards will be
poorer risks than the people selected by private standards. More
money will be lost by loans to them. There will be a much higher
percentage of failures among them. They will be less efficient. More
resources will be wasted by them. Yet the recipients of government
credit will get their farms and tractors at the expense of what
otherwise would have been the recipients of private credit. Because
B has a farm, A will be deprived of a farm. A may be squeezed out
either because interest rates have gone up as a result of the
government operations, or because farm prices have been forced up as
a result of them, or because there is no other farm to be had in his
neighborhood. In any case the net result of government credit has
not been to increase the amount of wealth produced by the community
but to reduce it, because the available real capital (consisting of
actual farms, tractors, etc.) has been placed in the hands of the
less efficient borrowers rather than in the hands of the more
efficient and trustworthy.
The case becomes even
clearer if we turn from farming to other forms of business. The
proposal is frequently made that the government ought to assume the
risks that are "too great for private industry." This means that
bureaucrats should he permitted to take risks with the tax- payers'
money that no one is willing to take with his own.
Such a policy would
lead to evils of many different kinds. I t would lead to favoritism:
to the making of loans to friends, or in return for bribes. It would
inevitably lead to scandals. It would lead to recriminations when-
ever the taxpayers' money was thrown away on enterprises that
failed. It would increase the demand for social- ism: for, it would
properly be asked, if the government is going to bear the risks, why
should it not also get the profits? What justification could there
possibly be, in fact, for asking the taxpayers to take the risks
while permitting private capitalists to keep the profits? (This is
precisely, however, as we shall later see, what we already do in the
case of "non-recourse" government loans to farmers.)
But we shall pass over all these evils for the moment, and
concentrate on just one consequence of loans of this type. This is
that they will waste capital and reduce production. They will throw
the available capital into had or at best dubious projects. They
will throw it into the hands of persons who are less competent or
less trust- worthy than those who would otherwise have got it. For
the amount of real capital at any moment (as distinguished from
monetary tokens run off on a printing press) is limited. What is put
into the hands of B cannot be put into the hands of A.
People want to invest
their own capital. But they are cautious. They want to get it back.
Most lenders, there- fore, investigate any proposal carefully before
they risk their own money in it. They weigh the prospect of profits
against the chances of loss. They may sometimes make mistakes. But
for several reasons they are likely to make fewer mistakes than
government lenders. In the first place, the money is either their
own or has been voluntarily entrusted to them. In the case of
government-lending the money is that of other people, and it has
been taken from them, regardless of their personal wish, in taxes.
The private money will be invested only where repayment with
interest or profit is definitely expected. This is a sign that the
persons to whom the money has been lent will be expected to produce
things for the market that people actually want. The government
money, on the other hand, is likely to be lent for some vague
general purpose like "creating employment;" and the more in-
efficient the work-that is, the greater the volume of employment it
requires in relation to the value of product- the more highly
thought of the investment is likely to he.
The private lenders, moreover, are selected by a
cruel market test. If they make had mistakes they lose their money
and have no more money to lend. It is only if they have been
successful in the past that they have more money to lend in the
future. Thus private lenders (except the relatively small proportion
that have got their funds through inheritance) are rigidly selected
by a process of survival of the fittest. The government lenders, on
the other hand, are either those who have passed civil service
examinations, and know how to answer hypothetical questions
hypothetically, or they are those who can give the most plausible
reasons for making loans and the most plausible explanations of why
it wasn't their fault that
the
loans failed. But the net result
remains: private loans will utilize existing resources and capital
far better than government loans. Government loans will waste far
more capital and resources than private loans. Government loans, in
short, as compared with private loans, will reduce production, not
increase it.
The proposal for
government loans to private individuals or projects, in brief, sees
B and forgets A. I t sees the people in whose hands the
capital is put; it forgets those who would otherwise have had it. It
sees the project to which capital is granted; it forgets the
projects from which capital is thereby withheld. It sees the
immediate benefit to one group; it overlooks the losses to other
groups, and the net loss to the community as a whole. It is one more
illustration of the fallacy of seeing only a special interest in the
short run and forgetting the general interest in the long run.
We remarked at the beginning of this chapter
that government "aid" to business is sometimes as much to be feared
as government hostility. This applies as much to government
subsidies as to government loans. The government never lends or
gives anything to business that it does not take away from business.
One often hears New Dealers and other statists boast about the way
government "bailed business out" with the Reconstruction Finance
Corporation, the Home Owners Loan Corporation and other government
agencies in 1932 and later. But the government can give no financial
help to business that it does not first or finally take from
business. The government's funds all come from taxes. Even the much
vaunted "government credit" rests on the assumption that its loans
will ultimately he repaid out of the proceeds of taxes. When the
government makes loans or subsidies to business, what it does is to
tax successful private business in order to support unsuccessful
private business. Under certain emergency circumstances there may be
a plausible argument for this, the merits of which we need not ex-
amine here. But in the long run it does not sound like a paying
proposition from the standpoint of the country as a whole. And
experience has shown that it isn't.
Top of Page
Chapter Seven
T H E C U R S E O F M A C H I N E R Y
Among
the most viable of all economic delusions is the belief that
machines on net balance create unemployment. Destroyed a thousand
times, it has risen a thousand times out of its own ashes as hardy
and vigorous as ever. Whenever there is a long-continued mass
unemployment, machines get the blame anew. This fallacy is still the
basis of many labor union practices. The public tolerates these
practices because it either believes at bottom that the unions are
right, or is too confused to see just why they are wrong.
The belief that
machines cause unemployment, when held with any logical consistency,
leads to preposterous conclusions. Not only must we be causing
unemployment with every technological improvement we make today, but
primitive man must have started causing it with the first efforts he
made to save himself from needless toil and sweat.
To go no further back,
let us turn to Adam Smith's The Wealth of Nations, published in
1776. The first chapter of this remarkable book is called "Of the
Division of Labor," and on the second page of this first chapter the
author tells us that a workman unacquainted with the use of
machinery employed in pin-making "could scarce make one pin a day,
and certainly could not make twenty," b u t that with the use
of this machinery he can make 4,800 pins a day. So already, alas, in
Adam Smith's time, machinery had thrown from 240 to 4,800 pin makers
out of work for every one it kept. In the pin- making industry there
was already, if machines merely throw men out of jobs, 99.98 per
cent unemployment. Could things be blacker?
Things could he blacker, for the Industrial
Revolution was just in its infancy. Let us look at some of the
incidents and aspects of that revolution. Let us see, for ex- ample,
what happened in the stocking industry. New stocking frames as they
were introduced were destroyed by the handicraft workmen (over 1,000
in a single riot), houses were burned, the inventors were threatened
and obliged to fly for their lives, and order was not finally
,
restored until the military had
been called out and the leading rioters had been either transported
or hanged.
Now it is important to
bear in mind that in so far as the rioters were thinking of their
own immediate or even longer futures their opposition to the machine
was rational. For William Felkin, in his History of the Machine.
Wrought Hosiery Manufactures (1867), tells us that the larger part
of the 50,000 English stocking knitters and their families did not
fully emerge from the hunger and misery entailed by the introduction
of the machine for the next forty years. But in so far as the
rioters believed, as most of them undoubtedly did, that the machine
was permanently displacing men, they were mistaken, for before the
end of the nineteenth century the stocking industry was employing at
least a hundred men fur every man it employed at the beginning of
the century.
Arkwright invented his cotton-spinning machinery in
1760. At that time it was estimated that there were in
England
5,200 spinners using spinning wheels, and 2,700 weavers-in all,
7,900 persons engaged in the production of cotton textiles. The
introduction of Arkwright's invention was opposed on the ground that
it threatened the livelihood of the workers, and the opposition had
t o he put down by force. Yet in 1787-twenty-seven years after the
invention appeared-a parliamentary inquiry showed that the number of
persons actually engaged in the spinning and weaving of cotton had
risen from 7,900 to 320,000, an increase of 4,400 per cent.
If
the reader will consult such a book as, Recent Economic Changes,
by David A. Wells, published in 1889, he will find
passages that, except for the dates and absolute amounts involved,
might have been written by our technophobes (if I may coin a needed
word) of today. Let me quote a few:
During the ten years from 1870 to 1880, inclusive, the British
mercantile marine increased its movement, in the matter of foreign
entries and clearances alone, to the extent of 22,000,000 tons . . .
yet the number of men who were employed in effecting this great
movement had decreased in 1880, as compared with 1870, to the extent
of about three thousand (2,990 exactly). What did it? The
introduction of steam-hoisting machines and grain elevators upon the
wharves and docks, the employment of steam power, etc.
In 1873
Bessemer
steel in
England
,
where its price had not been enhanced by protective duties,
commanded $80 per ton; in 1886 it was profitably manufactured and
sold in the same country for less than $20 per ton. Within the same
time the annual production capacity of a Bessemer converter bas been
increased fourfold, with no increase but rather a diminution of the
involved labor.
The power capacity
already being exerted by the steam engines of the world in existence
and working in the year 1887 has been estimated by the Bureau of
Statistics at Berlin as equivalent to that of 200,000,00 horses,
representing approximately 1,000,000,000 men, or at least three
times the working population of the earth.
One would think that
this last figure would have caused Mr. Wells to pause, and wonder
why there was any employment left in the world of 1889 at all; but
he merely concluded, with restrained pessimism, that "under such
circumstances industrial overproduction . . . may become chronic."
In the depression of
1932, the game of blaming unemployment on the machines started all
over again. Within a few months the doctrines of a group calling
themselves the Technocrats had spread through the country like a
forest fire. I shall not weary the reader with a recital of the
fantastic figures put forward by this group or with corrections to
show what the real facts were. It is enough to say that the
Technocrats returned to the error in all its native purity that
machines permanently displace men- except that, in their ignorance,
they presented this error as a new and revolutionary discovery of
their own. It was simply one more illustration of Santayana's
aphorism that those who cannot remember the past are condemned to
repeat it.
The Technocrats were
finally laughed out of existence; hut their doctrine, which preceded
them, lingers on. It is reflected in hundreds of make-work rules and
feather- bed practices by labor unions; and these rules and
practices are tolerated and even approved because of the con- fusion
on this point in the public mind.
Testifying on behalf of the United States Department
of Justice before the Temporary National Economic Committee (better
known as the TNEC) in March. 1941. Corwin Edwards cited innumerable
examples of such practices. The electrical union in
New York City
was charged
with refusal to install electrical equipment made outside of
New York
State
unless the
equipment was disassembled and reassembled at the job site. In
Houston
,
Texas
, master
plumbers and the plumbing union agreed that piping prefabricated for
installation would be in- stalled by the union only if the thread
were cut off one end of the pipe and new thread were cut at the job
site. Various locals of the painters' union imposed restrictions on
the use of spray-guns, restrictions in many cases designed merely to
make work by requiring the slower process of applying paint with a
brush. A local of the teamsters' union required that every truck
entering the
New York
metropolitan
area have a local driver in addition to the driver already employed.
In various cities the electrical union required that if any
temporary light or power was to be used on a construction job there
must be a full-time maintenance electrician, who should not be
permitted to do any electrical construction work. This rule,
according to Mr. Edwards, "often involves the hiring of a man who
spends his day reading or playing solitaire and does nothing except
throw a switch at the beginning and end of the day."
One could go on to
cite such make-work practices in many other fields. In the railroad
industry, the unions insist that firemen be employed on types of
locomotives that do not reed them. In the theaters unions insist on
the use of scene shifters even in plays in which no scenery is used.
The musicians' union requires so-called "stand-in" musicians or even
whole orchestras to be employed in many cases where only phonograph
records are needed.
One might pile up mountains of figures to show how
wrong were the technophobes of the past. But it would do no good
unless we understood clearly why they were wrong. For statistics and
history are useless in economics unless accompanied by a basic
deductive understanding of the facts-which means in this case an
understanding of why the past consequences of the introduction of
machinery and other labor-saving devices had to occur. Otherwise the
technophobes will assert (as they do in fact assert when you point
out to them that the prophecies of their predecessors turned out to
be absurd)
:
"That may have been all very well
in the past; but today conditions are fundamentally different; and
now we simply cannot afford to develop any more labor-saving
machinery." Mrs. Eleanor Roosevelt, indeed, in a syndicated
newspaper column of September 19, 1945
, wrote: "We have reached a point today where labor-saving devices
are good only when they do not throw the worker out of his job."
If it were indeed true that the introduction of
labor- saving machinery is a cause of constantly mounting un-
employment and misery, the logical conclusions to be drawn would be
revolutionary, not only in the technical field but for our whole
concept of civilization. Not on should we have to regard all further
technical progress as a calamity; we should have to regard all past
technical progress with equal horror. Every day each of us in h own
capacity is engaged in trying to reduce the effort requires to
accomplish a given result. Each of us is trying to save his own
labor, to economize the means required achieve his ends. Every
employer, small as well as large seeks constantly to gain his
results more economically and efficiently-that is, by saving labor.
Every intelligent workman tries to cut down the effort necessary to
accomplish his assigned job. The most ambitions of us try tirelessly
to increase the results we can achieve in a given number of hours.
The technophobes, if they were logical and consistent, would have to
dismiss all this progress and ingenuity as not only useless but
vicious. Why should freight he carried from
New York
to
Chicago
by rail-
roads when we could employ enormously more men, for example, to
carry it all on their backs?
Theories as false as
this are never held with logical consistency, but they do great harm
because they are held at all. Let us, therefore, try to see exactly
what happens when technical improvements and labor-saving machinery
are introduced. The details will vary in each in- stance, depending
upon the particular conditions that prevail in a given industry or
period. But we shall assume an example that involves the main
possibilities.
Suppose a clothing
manufacturer learns of a machine that will make men's and women's
overcoats for half as much labor as previously. He installs the
machines and drops half his labor force.
This looks at first
glance like a clear loss of employment. But the machine itself
required labor to make it; so here, as one offset, are jobs that
would not otherwise have existed. The manufacturer, however, would
have adopted the machine only if it had either made better suits for
half as much labor, or had made the same kind of suits at a smaller
cost. If we assume the latter, we cannot assume that the amount of
labor to make the machines was as great in terms of payrolls as the
amount of labor that the clothing manufacturer hopes to save in the
long run by adopting the machine; otherwise there would have been no
economy, and he would not ha adopted it.
So there is still a
net loss of employment to be ac- counted for. But we should at least
keep in mind the real possibility that even the first effect of the
introduction of labor-saving machinery may be to increase employment
on net balance; because it is usually only in the long run that the
clothing manufacturer expects to save money by adopting the machine:
it may take several years for the machine to "pay for itself."
After the machine has
produced economies sufficient to offset its cost, the clothing
manufacturer has more profits than before. (We shall assume that he
merely sells his coats for the same price as his competitors, and
makes no effort to undersell them.) At this point, it may seem,
labor has suffered a net loss of employment, while it is only the
manufacturer, the capitalist, who has gained. But it is precisely
out of these extra profits that the subsequent social gains must
come. The manufacturer must use these extra profits in at least one
of three ways, and possibly he will use part of them in all three:
(1) he will use the extra profits to expand his operations by buying
more machines to make more coats; or (2) he will invest the
extra profits in some other industry; or ( 3 ) he will spend
the extra profits on increasing his own consumption. Whichever of
these three courses he takes, he will in- crease employment.
In other words, the
manufacturer, as a result of hi economies, has profits that he did
not have before. Every dollar of the amount he has saved in direct
wages to former coat makers, he now has to pay out in indirect wage
to the makers of the new machine, or to the workers in another
capital industry, or to the makers of a new house or motor car for
himself, or of jewelry and furs for his wife. In any case (unless he
is a pointless hoarder) he gives indirectly as many jobs as he
ceased to give directly.
But the matter does
not and cannot rest at this stage. If this enterprising manufacturer
effects great economies as compared with his competitors, either he
will begin to expand his operations at their expense, or they will
start buying the machines too. Again more work will be given to the
makers of the machines. But competition and production will then
also begin to force down the price of overcoats. There will no
longer he as great profits for those who adopt the new machines. The
rate of profit of the manufacturers using the new machine will begin
to drop, while the manufacturers who have still not adopted the
machine may now make no profit at all. The savings, in other words,
will begin to he passed along to the buyers of overcoats-to the
consumers.
But as overcoats are
now cheaper, more people will buy them. This means that, though it
takes fewer people to make the same number of overcoats as before,
more overcoats are now being made than before. If the demand for
overcoats is what economists call "elastic" that is, if a fall in
the price of overcoats causes a larger total amount of money to be
spent on overcoats than previously-then more people may be employed
even in making overcoats than before the new labor-saving machine
was introduced. We have already seen how this actually happened
historically with stoc
