The Economics of Unemployment

Front matter

THE ECONOMICS OF UNEMPLOYMENT

THE ECONOMICS OF UNEMPLOYMENT

byJ. A. HOBSON

Preface

To pursue any close inquiry into the causes of trade depression and its accompanying unemployment at such a time as this will appear to most persons an otiose proceeding. It seems self-evident that a long destructive war, followed by a not less destructive peace, and a failure to repair the machinery of trade and finance, must involve just such a period of low production, poverty and suffering, as the world is now experiencing. This explanation is easy, interesting and convincing. But though it holds some obvious elements of truth, it is not sound. It does not go to the root of the matter. The economic experiences of the war and peace have greatly aggravated the burden of this trade depression, and have imparted some special features to its distribution, but they cannot rightly be held responsible for its causation.

In 1914 all the signs of a cyclical depression were present, a hectic prosperity of trade, with a high level of prices, large profits, and in most countries, especially in Central Europe, a dangerous expansion of credit. Economists predicted an early collapse, financial and industrial. The war stopped this depression, postponing its action for seven years.

How? By an immense and continuous artificial stimulation of consumption. While the producing power of the world was reduced by the withdrawal 6 THE ECONOMICS OF UNEMPLOYMENT

of some twenty million or more men called to arms (compensated but partially by the fuller employment of the remaining civil populations), the destruction and extravagence of war raised the level of consump- tion far above the pre-war level. Even after the war, the high rate of public and private consumption kept in full employment for several years the fighting men as they returned to productive occupations. Then the postponed depression came, with all those special characteristics upon which so many critics wrongly fasten as the sole source of the trouble.

Now the chief economic lesson which the war should teach relates to the power of high consumption to maintain production. This it teaches by an extreme case. The artificially enhanced consumption of these seven years not merely postponed the depression that was due, but kept the available productive powers of capital and labour in every belligerent and neutral country fully and continuously employed. The des- truction and extravagence of war, of course, exceeded the strained productivity of the belligerents, leaving them at its close with reduced capital resources of their own, and heavily in debt to neutrals whose surplus produce they had borrowed to enhance their war-consumption. This excessive rate of consumption could perhaps not have continued indefinitely, even had the neutral world been willing and able to continue handing over their surplus produce in the hope of eventual repayment.

But the war made it evident that the quantity of slack normally present in the operation of the economic system was far greater than had been supposed, and far exceeded the accepted measurements of 'unemployment.' Under the stimulus of high consumption the system showed hitherto undisclosed powers of productivity. War production involved, indeed, an excessive and often injurious strain upon the human factor; and war-consumption is the worst of all consumptions, destroying as it does the potential instruments of future production. But so manifest was the stimulation of production under the spur of extravagent consumption, as to evoke the thought that a higher normal range of consumption than actually prevails might maintain a higher normal level of production, thus averting the waste of cyclical depressions. If, say, consumption could be maintained at three-fourths of the high war standard, and could be applied productively to enhance the future efficiency of the human instrument, instead of being applied destructively, it would seem that trade fluctuations might disappear, by a policy which would not merely avert unemployment (outside the minor requirements of economic elasticity), but would furnish the economic conditions for a continually increasing productivity, with a corresponding rise in the general standards of consumption.

This is the thesis I propose to establish in these chapters. For convenience of readers, I will reduce it to a series of dogmatic propositions.

Full regular employment of the factors of production demands the maintenance of a proper proportion between the production of consumable commodities and that of capital goods, that proportion varying, of course, with changes in methods of production. In other words, there exists at any given time an economically sound ratio between spending and saving. Excessive spending (as in the war) encroaches on saved capital, and impairs future productivity. Excessive saving operates, through deficient demand for commodities, to slacken the sinews of production and produce more capital goods than are able to be put to full productive use.

The current distribution of income throughout the industrial world tends normally to evoke a rate of saving and capital creation that is excessive, in this sense. For whereas, under a fairly equal distribution of income, the average pressure of growing human needs for satisfaction will keep a right adjustment between the immediate satisfaction of spending and the postponed satisfaction of saving, under the present unequal and inequitable distribution no such adjustment is maintained. On the contrary, a large part of the surplus unearned income of the rich is found to be excessive, even for purposes of luxurious and wasteful consumption, and accumulates automatically to form an investment fund of capital which is larger than is required, in order to help maintain the growing volume of consumption in the economic world. This excess in capital formation is attested not only by the cut-throat competition and the organised restriction of output which alternate in modern capitalism, but by the normal under-employment both of capital and labour in the industrial system, as well as by the more signal wastes of cyclical depressions.

If the surplus income of the rich which produces this congestion and these stoppages were absorbed. either by the increasing share of the workers, or by the needs and uses of an enlightened State, or by both, this economic disease would be remedied. A sound distribution, thus attained, would react in fuller, more regular, and more productive activity through-out the economic system, imparting an order and a progress to society not otherwise attainable.

The thesis is no new one. It has a considerable history in the course of modern economic thought. But it has almost always been vitiated by some extremity of statement or by association with attacks upon the virtue of personal thrift. I have here endeavoured to avoid both these mistakes, and to present the theory as an essential factor in the principles of social progress. In particular, I have sought to set the doctrine in its true relation to those mainly or exclusively financial explanations of trade depression which are so prevalent at the present time, and to indicate the true and important ways in which the ill-controlled credit system operates to enhance the fluctuations of trade.

I desire here to express my deep obligation to Mr. Sidney Webb and Mr. R. H. Tawney, who have read these chapters in manuscript and have made many valuable suggestions and corrections.

J. A. HOBSON.

Hampstead July, 1922.

Chapter 1

THE ECONOMICS OF UNEMPLOYMENT

CHAPTER I

A LIMITED MARKET

For some time past the industrial world has presented a strange spectacle of idleness and impotence. Farms, mines, factories and workshops in large numbers stand idle or half working in most countries, while huge stocks of food, fuel, raw materials and finished goods lie rotting in storehouses and docks, waiting for the ships, that are lying up, to carry them to the places where they can be used to feed the idle machinery of production and supply the needs of impoverished and starving populations. All the materials and human instruments of production are present in abundance, nay in excess. But their normal collaboration is impossible, because they cannot market the goods they could produce, so as to cover even the barest costs of the production.

There does not appear to be enough world-market to take all or nearly all that can be produced, if the whole of the available productive power were used. And this applies not to this or that kind of goods but to goods in general. The most striking testi- mony to this paradoxical situation is the general acceptance in this country of the view that, for the present at any rate, there is not enough world market for both Germany and us to buy the numerous manufactured goods we are both equipped to produce.

This conviction is already operating so powerfully upon business men and politicians, irrespective of party attachment, as to induce them to regard the payment of German reparations upon the scale imposed as gravely detrimental to the recovery of British trade. Even free traders, whose policy is rooted in the conviction that too much production is impossible, because all goods produced must exchange against one another and pass into consumption, are found expressing their alarm lest, under the pressure of the reparation demand and the depreciated exchange, Germany should monopolise the market of the world in staple manufactures.

Everywhere we find the confident acceptance of a belief in a limited market, incapable of such expansion as to take off all we can produce. Some, indeed, profess to believe that, by reducing wages and so lowering costs and selling prices, the existing surplus stocks could be marketed and production carried on. But these generally mean that by this economy we could get some of the orders which at present go to Germany, or to Belgium, or some other competitor, thus throwing some of our unemployment on to another country. If they mean more than this, viz. that the practice in this country of a sweating system like that impossed on Germany (by the pursuance of inflation) would enable us, and other industrial countries following our example, to market all we could produce, experience is against them.

There are, I think, very few business men or economists who, when pressed upon the matter, would deny that there was, at the present time, a world-market insufficient to take all that the industrial countries are able to produce, i.e. a limited market. Many, if not most, however, would be disposed to impute this predicament to the political financial consequences of a disastrous war followed by an equally disastrous peace.

Now it is evidently true that these special causes have served to dramatise and to exaggerate the limitation of the market. But it should not be forgotten that these depressions and periods of unemployment are a periodical occurrence in modern industrial life. It may even be said that when the war broke out the signs of an impending depression were already visible on the economic horizon. Postponed by the war and the post-war artificial activity, the cyclical depression gathered extraordinary vigour, and attended by a general breakdown of the monetary processes, has taken a deeper, longer and wider shape than ever before.

But if we are to understand what remedies are practicable for this special and aggravated case of a cyclical depression, we must study more slowly the curious consensus of opinion in support of the doctrine of a limited market current in normal times and intensified by the existing situation. If we turn first to working class opinion, it is because we find there in the doctrine and practice of ca' canny the most naïve testimony to the belief. How far that doctrine is conscious and avowed, and how far the practice is deliberate, are matters of doubt. But that a very widely prevalent sentiment exists in favour of spreading out employment, prompted by the opinion that there is not enough to go all round, and that, if workers put through their jobs as quickly as possible they are likely to have a spell of unemployment, can scarcely be questioned. Whatever importance may be attached to other motives for slow work, the natural reluctance to exert oneself, the fear of a cut in piece-rates, or the objection to high profits based on low costs of production, the dominant motive is the fear of unemployment for oneself and one's mates, involving the conception of a limited market. It may be contended that this conception is fallacious, in that it takes no account of the stimulus which low cost of production and low selling price give to effective demand for the goods and to employment, i.e. that by restricting output and raising prices labour limits its own market. In the long run and for trade in general this may hold, though for a bricklayer in a particular town, or a miner in a particular pit, looking to next week's or next month's livelihood, a different policy may well prevail. But I am not here concerned with the economics or ethics of ca' canny, but only with the general opinion among the workers in all countries that there is, in the actual working of their trade, no security for full continuous employment. I am not alluding to normal leakages between jobs, or to seasonal or fashion fluctuations, or to the misfortunes or mismanagement of businesses leading to shrinkage of employment or to closing down. Behind all these changes and chances of industrial life there lurks the abiding shadow of an unemployment due to the normal over-supply of labour-power beyond the current requirements of the market. Workers observe that, if this full supply is brought into effective use, it leads in a short time to a congestion of the markets, a fall of prices, a stoppage and a long period of underemployment. If, therefore, at any ordinary time the workers in employment were to give out their full productive energy, they would only expedite this process of congestion and depression. This, I think, is the underlying economics of 'ca' canny.'

If this labour-economics stood alone, it might be dismissed as shortsighted partisanship. But put by its side the corresponding doctrine and practice of employers, embodied in the economics of trusts and combinations. What is the directly impelling motive for the formation of most of these capitalist combines? The avoidance of 'cut-throat competition.' And what else is this than a recognition of a tendency of unregulated capitalism in an industry to produce goods faster than the market can and does expand to receive them, at a price adequate to cover costs of production? In other words, combination for restriction of output is the capitalist alternative to over-production, congestion and stoppage. There is sometimes a reluctance among the makers of combines to admit that they are engaged in restricting output to the dimensions of a limited market. They prefer to speak of regulation of production and of selling prices. But it is quite certain that, since the prime motive of their conduct is to avoid the slaughter prices of cut-throat competition, the only way of doing this is to restrict the rate at which goods are put upon the market. For, if the trust or combine produced and supplied as large an aggregate of goods as the competing businesses did previously, they could not maintain selling prices at what they term 'a reasonable level.' If every market could under normal conditions be expected so to expand as to take all the goods that could be supplied, at reasonable prices, the chief plea for the economy of combination—viz. the belief in a limited market—would be invalid. I do not here pronounce upon its validity, but adduce the general testimony of capitalist trustmakers in support of the same opinion that pervades the ranks of the workers. Indeed, I would add, the practice of trusts and combines in 'regulating' i.e. reducing, output is identical in nature with the workers' 'ca' canny.'

It is not necessary to labour at great length the obvious fact that the modern policy and practice of protection draw their most powerful popular support from the belief in a limited market. Though national defence, maintenance of key industries, high wages, security of home markets, taxation of the foreigner, and other advantages are adduced in support of protective tariffs, the determining consideration is usually the belief that the productive power of the industrial world is so much in excess of the world-market that it behoves every nation to make sure at least of its own national market by keeping others out. This may not be the directly actuating motive of protec- tionist industries, consciously concerned to secure the high profits which tariff protection may enable them to take, by charging high prices to home consumers. But the fear, lest they should be unable otherwise to get a market large and reliable enough to take all their output, is an operative motive among most business classes, disposing them to the support of a protective tariff, while it is the main staple in all popular appeals to the electorate. In Great Britain, where the protectionist interests are not strong enough to win by their own weight, the only hope of tariff reformers is to stampede the electorate by fears of unemployment due to failure of a market. During a world depression, with unemployment in most industrial countries, the protectionist's claim that, by keeping out foreign goods, he can shift some of his own country's unemployment on to other countries, is not only plausible, but on a short view valid.

This short-range expediency from the standpoint of immediate employment cannot, indeed, be pressed into a general support for the protectionist position. For, in the modern world, the economic interests of members of different nations are so intricately interwoven that the increased unemployment of another country—e.g. Belgium—must, in the long run, be as injurious to us as unemployment among our own people. For, though not immediately of such serious concern, its injury will come home to us in loss of foreign purchasing power for our goods, as well as in the dearer price we pay at home for the goods we refuse to buy abroad. Protectionism, however, in its most specious form, rests upon the belief, supported by appearances, in a limited market. Under such conditions a tariff is advocated as an instrument for exporting some of our unemployment. During a world depression it will not reduce the world aggregate of unemployment, but will shift some of it from the protected area on to others not so able to protect themselves.

But the largest, most positive and most disconcerting testimony to the belief in a limited market is furnished by imperialism, with its attendant armaments and its recurrent wars. It is needless to press the economic interpretation further than to cite the general admission, that the foreign policy of most great industrial countries has been directed in recent times more and more consciously to the acquisition of profitable foreign markets, and fields of investment and development for their nationals. Though other motives, such as love of power, and prestige of territorial acquisition, have marched with the economic motive, the latter has usually taken the lead and determined the direction and scope of activities. Merchants, financiers and investors have sought every where to engage the diplomatic and armed forces of their country to secure for them foreign markets and fields of investment upon favourable terms, or to safeguard those which they had obtained by their private adventure. This has taken shape chiefly in a political struggle for the acquisition of concessions, spheres of influence, protectorates and colonies, where a lucrative trade can be opened up or where rich natural resources can be developed for the benefit of investors and importers.

This business imperialism has in recent decades assumed the same character of cut-throat competition, which, taking place among the great businesses in a single national or international industry, induced the formation of trusts and combines. Indeed, how literally the term 'cut-throat' applies here can only be understood properly by those who take account of the strictly business meaning of 'the place in the sun,' which Germany desiderated, and the unwillingness of other competing empires to concede any of the more lucrative areas of economic exploitation which they had pre-empted. Most imperialist states have ear-marked their protectorates and colonies as peculiar preserves for their own trades and investors, by fiscal and other legal terms of preference. Even those that have not formally 'tied' their acquisitions have taken other means to assist their own nationals to realise the maxim that 'trade, and investments follow the flag.'

As nation after nation, first in Europe, then in America, and recently in Asia, has entered the era of great capitalist industry, the struggle for markets, concessions and political control of backward countries, with a view to favourable opportunities for home manufacturers, merchants and investors, has acquired a growing intensity in the external policy and international relations of these industrial nations. This cut-throat imperialism rests on the implicit assumption of a limited, and insufficient, foreign market. The export trades in each country fear that, if they trust entirely to the prices and quality of their goods and to the ordinary activity of business agents to sell them, they will be left with an utterly insufficient outlet for their surplus after the domestic market is supplied. Financiers fear that, unless they can get pressure from their foreign offices, with the necessary force in the background, the good opportunities for investment in China or in Asia Minor will pass to other groups, whose governments are more skilful or more pushful in their imperialist policy. It may, of course, be said that the imperialistic competition does not necessarily signify any absolute deficiency of markets or investment opportunities, but merely the superior value of some opportunities over others. If the best opportunities are already occupied, later comers must struggle either to expel the occupants or to seize, for their exclusive use, the next best opportunities; for otherwise they will be left with the inferior markets and areas for development. But this treatment of imperialism, as an international struggle for areas of economic vantage, rests upon a substantial background of belief that there is only a certain amount of foreign market that is worth having, only a certain amount of the backward world at present worth developing. Each nation fears that unless it 'hustles' it will be left with wholly unremunerative propositions at its disposal. The total quantity of export goods available for these backward countries, and the quantity of capital available in normal times for their development, appear to be constantly in excess of the effective demand. Not only the best opportunities but any remunerative opportunity appear to be limited.

Thus we perceive that modern industry testifies, by a quite undesigned coincidence of theories and practices, ca' canny, trusts, protection and imperialism, to the belief in a limited market.

It may be adduced as a summary of the situation that business men have generally accepted as an obvious truth the statement of the late Charles Booth that "our modern system of industry will not work without some unemployed margin, some reserve of labour." The 'function' of this unemployed margin was defined by a Departmental Committee of the Board of Trade, reporting in 1895, in the following terms:

In a period of contraction like the present time are many men who are out of work. They are industrially 'superfluous,' if so short a period as a year be taken as the unit, but over a period of seven years—which for shipbuilding appears to be about the period of the cycle—they are necessary, and were they lifted off the labour market in slack years there would not be enough men to execute the work when trade revived.

It thus appears that periods of contraction, with large bodies of superfluous labour, are not only inevitable but desirable, as providing the necessary elasticity of productive power! I am not here concerned with the accuracy of this judgment. I merely cite it as expressing the accepted view that the productive power of labour exceeds the quantity that is capable of full employment, except for a small proportion of each 'cycle.' I would add that the same judgment applies to the capital engaged in industry, the plant, machinery and other real capital. That, too, must stand idle or half employed during a large part of each cycle. So must the skill, energy, managerial capacity and business enterprise of the captain of industry.

The reason why all these factors of production, the labour, the capital, the business ability, have got to stand idle for so long is that all the goods they could produce could not get sold at any price that would cover cost of production. The fact of these trade fluctuations, with their waste of productive power, is taken so much as a 'natural law' by business men that they seldom pause to question the nature or necessity of the 'law.' But, when pressed upon the matter, they will admit the central truth, that the industrial system contains more productive power than can be used all the time, or, in other words, that the effective demand of purchasers does not keep pace with the expanding power of production.

The amount of productive power that is 'superfluous' is far larger than is indicated by any figures for unemployment. The Board of Trade statistics for this country give an average rate of unemployment amounting to little over 4 per cent. for the trades brought under survey, and varying from somewhat below 2 per cent. in 'boom' years to 10 per cent. and over in depressions. But we have here no even approximate measure of the real waste of productive power. For, quite apart from the fact that unskilled labour, women's labour, and in general casual labour, where the wastes are greatest, do not count in their true proportions in the basis of the official figure, there are two wastes of immense and immeasurable magnitude of which no account is taken. To one I have already made allusion, the waste of capital, skill and labour normally involved in the practice of 'ca'canny' or slowing down of production, due to a fear on the part of employers of glutting the market, on the part of workmen of unemployment. There is no need to accept the fallacious comparisons between the relative productivity of American and British labour based on censuses of production, adduced to prove the double or triple productivity of the American worker in many staple trades. There is, however, a mass of evidence from war-time industry to show how much more could be produced in this country than is produced under normal conditions.

Speeding up, longer hours, and more continuous employment only account in part for this expansion of output during the war. It was compassed in large part by squeezing out of the distributive trades and certain sections of transport the excessive numbers employed in them, and by calling into productive service large numbers of persons otherwise 'unoccupied.' By such means it came to pass that, after upwards of four millions of the pick of our working population had been, taken into the fighting services, and some three millions more drafted into munitions and other war supplies, the national output was large enough to maintain the general body of the population on a distinctly higher level of consumption than before the war. This is not, of course, the whole story. A better, i.e. more equal, class distribution of income and consumption during these years, the rich consuming less (in spite of profiteering) the workers more, together with some letting down of capital, contributed to this result.

The large loans from America, together with the sales of foreign securities held in this country, are not, however, rightly taken to explain our high consumption at a time when so many workers were taken out of production. For our loans to our Allies and Dominions more than offset the advances thus secured from America. Indeed, official computations support the view that the aggregate civilian productivity was not reduced to the extent of more than 10 per cent., after full mobilisation took place. Now, considering the hasty processes of improvisation, the inevitable mistakes in organisation and control, the shortages of certain foods and materials, and all the other difficulties of the war situation, this is a very remarkable result.

After due allowance is made for the excessive pace and hours, and all the other incidents of a forcing process which the extreme emergency evoked, there remains a very striking testimony to the amount of the 'slack' or waste productivity which lay in our industrial system. How was this immense expansion of productive activity evoked? By the knowledge that there was a profitable market for all that was produced, as fast as it could be produced. The demand of the government on behalf of the fighting forces, and the enlarged demand of the fully working and higher-paid civilian population, took out of the productive machine all its practicable output. Even when the war was over, and this artificially inflated governmental demand collapsed, the pent-up demand of the prospering neutral peoples, a by-product of the war-economy, replaced the war demands and kept all our trades in full employment for some two years.

The immediate cause of the collapse which followed is no matter of dispute. It was the failure of effective demand. The withdrawal of governmental purchases and the satisfaction of the pressing neutral demand was not compensated by any sufficient revival of European and other foreign markets. The slackness in the export trades was communicated to other trades, and a general depression set in.

Now in this depression and its accompanying unemployment there are special factors which distinguish it from ordinary cyclical depressions. Always it is the failure of effective demand, or more strictly speaking the expectation of this failure, that slows down the machinery of industry. Though the capital and labour to make goods exist, goods will not be made if there is no belief in their sale at a profitable price. Effective demand consists in the offer of sufficient acceptable money for acts of purchase. Now the failure of effective demand on the part of would-be customers with needs to satisfy may be due, either to their failure to produce and sell their product, or to the unreliable character of the money they possess. Both causes contribute to the failure of effective demand to-day, especially of European demand. Many people who would like to buy our goods are not themselves producing enough goods wherewith to get money to pay for what we have to sell. Most of those who are producing cannot show us that the money which they are earning will purchase the required quantity of our money, when they come to pay for the goods we could supply.