Adequate Income for Consumers - The Chief Need
Since the end of all economic activity is consumption, money spent by consumers is the force that keeps the wheels of industry moving. Current consumption is the chief incentive to current production; deficiency of current consumer buying is the chief cause of unemployment. Failure of consumers to buy spring goods checks the production of fall goods, not only because it dispels confidence, but also because it ties up capital. In other words, production looks for its regulator to distribution; and distribution in turn is regulated by the flow of money through consumers' markets. This flow of money, therefore, is the most fundamental of the many factors that have a part in business fluctuations -- chief among the many factors that help or hinder our complex industrial society in its efforts to attain its chief economic aim.
In all this, let us note again, our modern money and profit structure is in marked contrast with our pioneer community. In that simple economy, men never were forced to stop working because they had produced more than they could use up; whereas in our complex economy, millions of men have to stop working every now and then because no way has been found of using up what they have already produced. Formerly, production regulated consumption; now, although consumption is still limited in the long run by production, consumption itself regulates production. In our day, consequently, we can continue to raise the standard of living only so long as increased per capita production induces a flow of money to consumers sufficient to enable them to buy the increased output; sufficient, that is to say, to buy the increased output, without a fall in the price-level. From now on we shall have much to say about adequate consumer purchasing power. Always we shall mean a flow of money sufficient to buy the output of industry at the prevailing general level of prices. We here make that qualification once and for all.
When consumers receive enough money to take away the output at the rate at which it reaches the markets, business proceeds steadily. Then, ordinarily, finished goods are used up as rapidly as they are ready for use, which fact is in itself sufficient to bring about production on an even larger scale.
Under a money and profit economy, therefore, no influences can continue to bring about marked fluctuations in the state of business activity, unless they change the relation of the amount of purchasing power spent in the consumption of commodities to the output of commodities.
The flow of money to consumers depends mainly on productive activity; but productive activity depends mainly on the flow of money to consumers. Where are we to break into this circle in order to find the place where influence should be brought to bear to sustain prosperity? Evidently, wherever we can increase consumer demand; for if we increase productive activity without proportionately increasing the flow of money to consumers, prosperity is short-lived; but if we increase the flow of money to consumers in proportion to increased productive activity, prosperity can continue.
The Mental Attitude of Producers is Secondary
This is contrary to all the theories that ascribe business cycles mainly to states of mind. It is at variance with the widespread belief that if a sufficient number of people talk prosperity with sufficient enthusiasm, they can bring on a commercial revival that will be sustained by its own momentum. This sunshine cure for business anæmia is a quack remedy, because it takes no account of the function of the buyer in stimulating business and the only conditions under which he can continue to buy. Artificial respiration cannot keep the patient alive indefinitely. Neither can a spirit of optimism long create or sell commodities; of itself it cannot operate a blast furnace or take shoes off the retailer's shelves. It must first put enough money into consumers' hands. Indeed, to persuade business to prepare for an effective consumers' demand that is not forthcoming merely makes matters worse.
At certain times, it is true, business is not unlike a machine on a dead center: once started by a push from the outside, it can go on for a while by itself. But it can do so only when something more substantial than the booster's spirit has increased consumers' purchasing power. At best, optimism can do no more than start a forward movement a little earlier than otherwise it would have started. Business cannot run on optimism; reactions soon occur unless expectations are justified by sales. A self-starter may save time in starting an engine, but only a steady supply of gasoline can keep it running. Sunshine campaigns may start business, but only consumers' dollars can sustain it.
It is true that confidence and rising prices and increased purchasing power have intricate causal relations; each sustains the others and is sustained by them. It is easy, however, to overestimate the importance of confidence. Confidence cannot continue to increase the purchasing power of consumers if the gold reserve, or the financial policies of corporations, or any other cause checks the growth of the volume of money in circulation. Indeed, even when the volume of money is expanding, confidence cannot enable consumers to buy an ever-increasing output, when industry fails to disburse money at the same rate. In short, prices and confidence cannot rise far without the support of continued increases in consumers' purchasing power; but continued increases in consumers' purchasing power can continue to lift the levels of prices and confidence.
At times, no doubt, confidence in the business outlook does bring about immediate additions to consumer income. For confidence leads to the expansion of capital equipment and of output, to the accumulation of commodities in all stages of production, and to forward buying and the stocking of shelves, all of which immediately adds to the income of consumers without immediately appearing to result in overproduction. For a while, therefore, business is good; but this kind of prosperity cannot last long because, as we shall see, its own financial processes do not yield consumers enough money to buy the resultant output.
The Mental Attitude of Buyers is Secondary
All this is contrary to the popular view that changes in the mental attitudes of consumers have as much to do with trade recessions as changes in consumers' incomes. The 'buyers' strike' explanation does not explain what we are most eager to understand; namely, why the depression came precisely when it did come. Nor does this theory explain what became of all the money that the outraged buyers are said to have withheld from the market. Are we to suppose that they carried it in their pocketbooks in addition to the usual amounts? Only a small part of the depression could be accounted for in this way. Nor can we accept the theory that the dollars which were refused to merchants were turned over to banks.
No doubt some people with funds at hand refused to buy merely because prices seemed to them too high; but their refusal was a minor factor in the markets, and was insufficient to bring on a depression, as long as consumers' incomes were large enough to take away current production at prevailing prices and there was a widespread belief that prices would be still higher.
It is true that the disposition of people to save would cause a shortage of expenditures in consumer markets, even if the flow of incomes exactly kept pace with the flow of goods. This difficulty we shall consider presently. In our view, however, individual savings are only a minor factor in business recessions. We maintain that the wants of most people grow as rapidly as their incomes, and that most people are disposed to increase their expenditures about as rapidly as their incomes will permit.
In short, the one thing that is needed above all others to sustain a forward movement of business is adequate consumer purchasing power. With our financial world as it is to-day, let it be known that there will be consumers with money to spend for any known and producible goods, at prices sufficiently high to warrant production, and the goods will be produced. Give consumers the money, and organized business will look out for the rest. There will be no shortage of money on the producing side; the credit and investment world is always able and eager to take care of that. A willing buyer does not have to wait long, but a willing seller may have to wait forever.