Corporate Income and The Annual Equation
Let us now, therefore, in our attempt to find out what causes the inadequacy of consumer demand and the resultant decline in business activity, take due account of the fact that every community must save. Concerning that fact, at least, there is no disagreement. From the points of view of the individual and of the corporation, as well as from the point of view of society, savings are absolutely necessary.
The individual must save to provide for sickness, old age, dependents, and unemployment; and the corporation must save, if for no other reason, to protect itself against future losses. Society as a whole must save in order to attain its economic aim; for if a higher standard of living is to be achieved for a given population, or a given standard of living maintained for a larger population, savings must provide increased capital facilities.
Every year, in fact, an important part of the national income is saved. The percentage, however, varies from year to year, and there are also marked fluctuations from year to year in total savings.
Leaving for later consideration, then, the savings which are made by individuals and by the State, we may first consider corporate savings. In any event, there are no devices whereby corporations can get from consumers more money than consumers have. Trusts, trade associations, price agreements, and advertising enable some dealers to obtain larger shares of consumer income than otherwise they would obtain; but such gains are at the expense of other dealers, not at the expense of consumers. It is easy to see that if people had no source of income other than a single Corporation, and no place to trade except the Corporation Store, the Store could not increase its dollar sales unless the Corporation increased its dollar payments to consumers.
If the Corporation failed to do so, any one department of the Store could enlarge its receipts only if the receipts of other departments Were proportionately reduced. In the real world, as well, business as a whole ordinarily does not receive from consumers any more money than it gives them; except in so far as currency is coined or printed, or bank credit is expanded, within the period in question, to provide consumers with money to spend. For the most part, if any one industry succeeds in taking in more than it disburses, it does so at the expense of other industries. Consequently, it is important for us to consider whether corporate savings are made in such a way as to withhold from consumers any of the money which corporations receive from consumers.
That the relation of corporate savings to business depressions can be discovered only by means of patient analysis must be evident to any one who has made even a beginning of trying to understand the two hundred theories, more or less, that have been advanced to account for business cycles. Indeed, on every hand is evidence of the complexity of the subject. It is, in fact, so involved, and the economic world in which we live is so far removed from the primitive community of our pioneer, that most people make no attempt to understand the causes of business depressions -- no attempt to account for the anomaly of concurrent complaints of widespread poverty and general overproduction. To them the whole situation is simply inexplicable. Among those who do try to explain the mystery, many see no reason for being concerned about savings; they do not get far beyond the idea that thrift is a virtue.
Most people, in any event, see no hope of unraveling the complexities by starting out, in the favorite way, with a hypothetical economic world which to them seems ridiculously simple -- a world peopled, for example, by Robinson Crusoe and his man Friday, or by the Children of Israel in the wilderness. Yet it is impossible to reason about anything, except on the basis of assumed conditions. This is as true of physics as it is of economics. It is an error to assume that economics in this respect differs from the so-called 'exact sciences.' All sciences are inexact; the differences are only in degree. Even though some of the natural sciences succeed in isolating the phenomena with which they deal to an extent which is rarely possible in the so-called 'social sciences,' yet in the practical application of the results of laboratory experiments, many allowances have to be made for the possible effects of causes which do not operate in the laboratory. In the construction of a bridge, for example, the engineer, though he is dealing only with inanimate materials, often feels obliged to allow for at least 300 per cent more than the calculated maximum strain, so large is the range of error in his measurements, due in part to unknown variations in the strength of materials, and so numerous are the factors which he does not measure at all.
Since, then, it is impossible to take into account all the fluctuating factors that attend every economic situation, we can arrive at principles only by reasoning from assumptions -- assumptions which we know will not hold true at any given time or place; and since, accordingly, we are obliged to make some assumptions concerning existing conditions, before we begin to trace the flow of money into various kinds of savings and to seek the obstructions in the flow of money to consumers, we may as well begin with assumptions that make the problem relatively uninvolved. This method need not mislead us, if we take pains to distinguish sharply between the simple world of our illustration and the complex world of reality, and if we take care, in drawing conclusions, not to lose sight of our assumptions. With these assumptions and tentative conclusions clearly before us, we can proceed to test our conclusions by seeing what happens when we change our assumptions. Thus, we can begin by assuming, for example, that there are no fluctuations in the price-level or in the volume of money in circulation. Then, one by one, we can introduce the various factors that we have left out of our hypothetical cases. In this way, before we get through, we can take into account all the attributes of the real world that are essential for our purpose.
Business in a Simple Community
Let us, then, starting with a relatively simple community, make the following eight assumptions:
1. A single Corporation produces and sells to consumers for final consumption everything that is sold in the entire community. That is to say, there are no middlemen, no sales of producers' goods, and no foreign trade. In other words, there is complete integration of industry, vertical and horizontal, under one head.
2. This Corporation is the source of all consumers' income, and all the money that the Corporation disburses is paid out as wages, or as wages and dividends. Thus, wages cover all costs of production.
3. The price-level remains unchanged.
4. The total volume of money in circulation remains unchanged.
The velocity of money and the circuit velocity of money remain unchanged.
There are no taxes and no (Government expenditures.
Wages are paid in the unit of time in which the goods are produced; whereas goods are sold and dividends are paid in the succeeding unit of time. (For convenience each unit of time is called a year.)
All wages and dividends are spent for goods in the unit of time in which they are received.
First, we shall consider the problem of adequate consumer demand under these eight assumptions. Then, one by one, we shall discard these assumptions, and see how each change affects the problem.
The Number of Corporations is Immaterial
This hypothetical commercial world, however, may seem to some people so far removed from the real world as to be useless for our purposes, if not misleading. Before taking up other Cases, therefore, it may be well for us to note that our first assumption -- to the effect that all business is carried on by a single Corporation -- though it vastly simplifies the problem of exposition, in no way invalidates the reasoning. There is, in fact, no other way of finding out the net effects of the operations of the several hundred thousand corporations in the United States, except by combining all their individual accounts; and there is no way of completing the picture for the entire world of commerce, without incorporating in our combined account all other monetary transactions. Now that is precisely what we have done, by assuming that all money paid in connection with either the production or consumption of goods passes through the treasury of one Corporation.
Still further to clarify this point, let us make all the above assumptions as before except that, instead of assuming that there is only one Corporation, let us now assume that there are half a million: some making soap, others designing ships; some growing oranges, others erecting billboards; some gathering news, others hauling freight; and so on through a thousand pages of details. Let us now suppose that we take half a million pages in which to present all the individual accounts of all these concerns. But, since total sales must be the sum of all the individual sales, and so with wages, output, receipts, dividends, and all other categories, let us, in order to see the whole picture, go through the half-million balance sheets and collect and classify all the items.
This laborious process brings us at last to the point from which we started, with a statement that represents all business as though it were the province of a single concern. Clearly, then, whatever we find to be true in the case of our single Corporation would be equally true if, keeping the same totals, we distributed the activities among a thousand or any other number of corporations; and whatever we find to be the effect of a given transaction would be the effect even if all our figures in each Case were multiplied by a thousand, or by any other number.