by Mario Fabbri
But can growth have a memory? That is: why does the income progression follow route A rather than route B?
This quirk becomes understandable if, in the vision of growth dependent on the acquisition of new forms of consumption, we include the role that Hayek notes the upper classes play in the growth of consumption.
Let’s return to the metaphor of the group of men advancing over an unknown terrain:
The Great Depression seriously affects the pace of the masses, which is delayed.
The income of the upper classes is hit too, but it is superabundant anyway, and if the masses must lower their standard of living, the rich can pursue their explorations. For example, Howard Hughes can continue to experiment with long range flight.
In other words the vanguard of society has not lost its pace and continues to advance and to open new roads.
So when the situation settles again the masses can make good the delay, embracing the inventions that meantime the rich have fine-tuned.
And then everything resumes its development at the usual rate.
As for economic cycles, our new conception proves much more effective in explaining evidence than the usual attempts because it is based on pertinent sociological considerations, and not on the vacuous mathematical models of ‘development economists’.
1 HAYEK,The Constitution of Liberty, p. 44. And he also challenges, with good reason, the near-Schumpeterian idea that that the upper classes could be replaced, in this role, by an appropriate technical-bureaucratic body, see ibid. pp. 44 ff., 125 ff.
9. Henry Ford’s intuitions
We have seen that when, in the early 19th century, machines began to multiply labour productivity, it became evident to some authors that the capacity to consume had become the critical factor holding back growth.
This explains why the under-consumptionist school of thought emerged at precisely that time, but the intuition of its supporters was also assisted by their social position, because its three principal exponents – Malthus, Lauderdale and Sismondi – were basically members of the aristocracy, the real or ideal heirs to the 18th century nobility who, to enhance its role in society, lifted luxury and spending to the level of prime movers of the economy.
It is no novelty that social position may significantly influence economic and political ideas, and the reader will not be surprised that their theoretical adversaries were the exponents or friends of the capitalist bourgeoisie who supported the spectacular developments of the industrial revolution.
And as not even the socialists, eulogists of workers and work, could have doubts as to the central role of production, it is no surprise that the under-consumptionist line was soon overshadowed.
In this logic it is remarkable that Henry Ford, sidestepping the conditioning that his position as an important industrialist might have entailed, realised clearly that the critical factor for economic development was the public’s ability to consume.
For this he first reduced the workday in his plants to eight hours, and then, in 1926, to general amazement, he introduced the short week of five days for the same wage. He motivated his decision by saying that, working hours had to be reduced in order to leave to people more room to consume. Italics added:
The short week is bound to come, because without it the country will not be able to absorb its production and stay prosperous.
The harder we crowd business for time, the more efficient it becomes. The more well-paid leisure workmen get, the greater become their wants [for consumer goods]. These wants soon become needs. Well-managed companies pay high wages and sell at low prices. Their workers have free time to enjoy life and the financial means to do so.
The industry of this country could not long exist if factories generally went back to the ten-hour day, because people would not have the pleasure, the desire, or the means to consume the goods produced. For example, a worker would have little use for a car if he had to stay at his workplace from sunrise to sunset.
And that would react in countless directions, for the automobile, by enabling people to get about quickly and easily, gives them a chance to find out what is going on in the world, which leads them to a larger life that requires more food, more and better goods, more books, more music, and more of everything.1
But of course ‘serious economists’ were not inclined to reflect on the ideas of someone, no matter how important and famous, who was not an academic and at the time were engaged in inane fantasies about the role of ‘saving’ in economic development.
Notice that Ford underlines too that an essential ingredient for development is workers receiving high wages, to enable them to consume the goods they produce themselves.
But this idea can create confusion or evoke fanciful arguments such as: “To get out of the crisis, all that is needed is to raise wages, because the resulting sales increase will solve any problem!”
It is worth clarifying this matter, as it is quite relevant to our analysis.
1 Interview by Samuel Crowther: Henry Ford: Why I Favor Five Days’ Work with Six Days’ Pay, in World’s Work, Oct. 1926, p. 614.
10. The Sismondi effect
If consumption does not change
and if the same work is done with ten times less labour,
nine-tenths of [working class] income will be subtracted
and all its consumption will decrease equally.
Simonde Sismondi1
As Mummery and Hobson say, the economic growth of a country is usually limited not by the impossibility of producing more, but by society’s reluctance to grow its consumption faster.
But society is not a homogeneous whole, and it may be that a section of it might have the means to boost consumption but does not do so because it is already gratified, while another might like to increase its consumption but does not have the income to do so.
The gratified section is typically the upper class. Among the lower classes, on the other hand, people often complain that they lack the money to purchase what they want.
Often, their aspirations are only daydreams without any real drive to bring about their realisation, but at other times what denies the individual the income to increase his consumption is not lack of commitment but the institutions of society, a term that takes in economic structures, political organisations, widely entrenched ways of doing things…
For example, in the 18th century, it was common for workers to receive more or less the minimum wage needed to survive and raise children. And everyone deemed it normal.2
The idea was in keeping with the widespread opinion, often confirmed by the facts, that if the poor had been paid twice the wage, they would only have worked half as much, so for the sake of national wealth, it was as well that they continued to remain poor.
At the beginning of the 19th century, this logic, that was known as the iron law of wages, remained in full force due to the strong competition for jobs among workers:
Let’s imagine an industrial village, where in working class families the only people working to get a wage are the husbands, who earn a typical wage of 10 pence a week with which they maintain wife and children, who stay home, engaged in domestic tasks and play.
In a more enterprising family the wife finds herself a factory job, and with her wage of 6 pence a week increases the family’s material wellbeing.
All seems simple and logical: the husband and wife both work, and they obtain more income and wellbeing. So free marketers proclaim: “Today even workers can live well, provided two money-earners are in the family and not just one…”
The practice spreads and there are few working class families in which the wife stays home.
But such an increase in the demand for jobs has brought down wages: now men are earning 7 pence a week and women 4, living in poor conditions too, so in fact workers’ standard of living instead of rising has actually fallen.
&
nbsp; Then, some more destitute families discover that they can send their children out to work too, because some factories pay them 1 or 2 pence a week from the age of six…
That is: workers’ wages were inexorably low and their consumption necessarily very limited, with the result that the country remained with fewer goods and smaller factories than it would have been if the workers had been paid more.
It was a sort of own goal by the market economy.
I call it the Sismondi effect3 because, as far as I know, Sismondi was the first to describe it in his complaint, ridiculed by experts, that one cause of the crisis was scarcity of money:
… it is possible that the product may grow and income fall, that shops may fill up and bags4 empty.5
Taken literally, and referring to the overall income of the country’s inhabitants, the idea of money to buy production being lacking is nonsense.6 But the context makes it clear that Sismondi is thinking about workers who want to purchase goods but are unable to.
As we have said, he believed the reason for workers’ salaries being low was advancing mechanisation, which raises production and reduces jobs, and he was worried about both developments.
Instead, Malthus, who on other subjects has ideas similar to Sismondi, favours mechanisation in principle and argues that increasing workers’ wages would damage economic growth:
… a great increase of consumption among the working classes must greatly increase the cost of production, it must lower profits, and diminish or destroy the motive to accumulate before agriculture, manufactures, and commerce have reached any considerable degree of prosperity…7
The future will prove that here he is committing a serious mistake, while his assessment of the deliberately restricted consumption of capitalists being an obstacle to development is correct:
[Capitalists] have certainly the power of consuming their profits… and if they were to consume it… [everything would be fine]. But such consumption is not consistent with the actual habits of the generality of capitalists. The great object of their lives is to save a fortune…8
So, as a contrast to inertia in consumption, Malthus proposes creating an unproductive social class which capitalists delegate to consume in their place, handing over to it the income they are not spending:
…it is absolutely necessary that a country with great powers of production should possess a body of unproductive consumers.9
Malthus was well known and highly respected for his Essay on the Principle of Population, but when the orthodox economists read these surprising ideas, they sensed without hesitation that they were totally absurd.
Ricardo annotating his just published text:
A body of unproductive labourers10 are just as necessary and as useful with a view to [economic development], as a fire, which should consume in the manufacturers’ warehouse the goods which those unproductive labourers would otherwise consume.11
But soon after, apparently following a heated private argument,12 he has a sort of illumination: he discovers a crack in his own conceptions and starts suspecting that fears about the harmful effects for workers of mechanisation are justified.
As a result, in the last edition of his Principles, in 1821, in an extremely rare example of intellectual honesty that created dismay among his disciples,13 he admits that the well-being of the working classes is really threatened:
The class of labourers also, I thought, was equally benefited by the use of machinery, as they would have the means of buying more commodities with the same money wages, and I thought that no reduction of wages would take place… but [now] I am convinced that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers…14
He must have become aware, perhaps in a somewhat confused way, of the existence of the Sismondi effect. So, he concludes by suggesting that the problem could be addressed by transferring income to unproductive workers:
Since workers are interested in the demand for work, they must naturally want the income [of the wealthy classes] to be transferred from spending on luxuries to spending to maintain domestic service.15
But shortly thereafter Ricardo died and his colleagues were careful not to follow up on his last reflections.
Note that the situation would improve in whatever way moneyed consumers were to appear.
In a well-known passage from the General Theory Keynes suggests an anti-crisis recipe which seems paradoxical, but becomes perfectly logical if it is read in the light of these considerations:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.16
The result of this bizarre operation would be to supply income to people lacking it. And this income, spent on purchases, would give breathing space to a manufacturing system which was limited by weak consumption.
1 SISMONDI, Nouveaux principes d’économie politique, p. 255.
2 Cf. Fabbrica delle illusioni, p. 130.
3 Cf. Fabbrica delle illusioni, p. 140
4 SISMONDI, Nouveaux principes d’économie politique, p. 325. I would say that here Sismondi is playing on the double meaning of the French word “bourse” that can mean both purse for money and container for the purchased goods.
5 Ibid, p. 325.
6 The value of goods produced is by definition equal – it therefore cannot be inferior – to the sum of all incomes that their production technically creates: revenues for suppliers, wages for workers, profits for industrialists… It is the empty accounting equivalence which was used to dismantle the naïve under-consumptionist thesis that society as a whole could lack sufficient purchasing power to take up the entire production. But the fact that the unsold goods lying in the warehouses of producers and shopkeepers can be defined in accounting terms as ‘bought by themselves’ certainly does not solve the lack of final buyers.
7 MALTHUS, Principles of Political Economy (I ed.), p. 472.
8 Ibid, p. 465.
9 Ibid, p. 463.
10 Ricardo transforms Malthus’ “unproductive consumers” into “unproductive labourers”.
11 RICARDO, Notes on Malthus, p. 421.
12 Cf. PIERO SRAFFA’S Introduction to RICARDO, Principles of Political Economy, p. lx.
13 For example, poor McCulloch, in his Letter to Ricardo of 5/6/1821 in RICARDO, Works, VIII, pp. 381-382, wrote:
[I congratulate you on the publication of the new edition of his Principles but] I must also say (and I say it with all the bitterness I feel at being in disagreement with a person whom I will always be proud to consider my teacher) that in my modest opinion the chapter on machines in this edition significantly lessens the value of the work. I really did not expect it…
14 RICARDO, Principles, pp. 387-388.
15 Ibid., p. 393.
16 KEYNES, General Theory, p. 129.
11. Further reflections on the Sismondi effect
The Sismondi effect is central to the analysis of the imaginary economy and it is worth studying further to more fully grasp its logic.
But reasoning serenely on these topics can be made more difficult by the intrusive moral suggestion that income should be the reward of a productive contribution.
A very effective, but little used, defence against such conditioning is to push reasoning to its limits to make the logic clearer.
Here, then, is an extreme scenario:
Let’s imagine a society of the future that has no raw material constraints and whose production system is fully automated:
not only can its manufacturing capacity be exploited up to the limit simply by pressing a button, but production capacity itself can also be rapidly increased, again just by pressing a button!
So, as men are not required to make any productive contribution, between production and consumption there is no ‘moral connection’.
Now let us ask ourselves: at what speed could the consumption of this hypothetical society increase?
This question is conceptually intractable for current theories (!), but to answer it we can count on two of the elements we noted earlier: physiological resistances to a change in lifestyle and social constraints on individual behaviours.
But further ‘institutional limits’ – precisely those that can produce a Sismondi effect – might also come into play.
Suppose that in order to obtain consumer goods the members of that society were to utilise income vouchers distributed each month by the State, according to the age-old tradition of 20th century societies.
Then suppose that, operating at full steam, the production system has an output equivalent of 100 million vouchers, and that society as a whole, is ready to consume it all.
But if only 90 million vouchers were to be distributed, society’s consumption would stop at 90 million.
The difference between the 90 million consumed and the 100 that could be produced is the existing Sismondi effect.
And it is obvious that this effect could be eliminated simply by distributing a further 10 million vouchers to those people who would wish to consume more but do not have enough income to acquire them.
Let’s now develop another rather more realistic example:
Imagine a country whose economic system is made up of numerous factories owned by capitalists which produce a quantity of consumer goods and employ vast masses of workers.