The scientific study of economic phenomena began contemporaneously with the emergence of our modern industrial economy, and the subsequent development of economics has paralleled technological improvements in production as well as progress in such auxiliary fields as communications and banking. The economic theory with which we are familiar today is no less an offspring of the Industrial Revolution than is our actual economic system, which, rightly or wrongly, has been dubbed capitalism.
Among the phenomena that economists encountered in carrying on their investigations were monopolies, crises, and unemployment. They consequently took it for granted that these abnormalities are inherent characteristics of the capitalist system, or the economy of free enterprise. It is therefore appropriate to devote some attention to the nature of these three phenomena in order to see whether they are, in fact, compatible with modern capitalism, and whether they are produced by it or by other causes.
The word “monopoly” (from the Greek monos = only, and polein = to sell) means literally “one and only seller.” Exclusive control can be exercised over a work of art, an invention, a whole class of commodities, or the supply of labor in a particular enterprise (as happens when labor unions bar from employment in it, by means of a “closed shop” contract, anyone outside their own ranks). In economics the term “monopoly” is used to denote any situation that interferes with the free play of supply and demand. Generally, however, what one has in mind in using the term is only a monopoly on the side of the suppliers of commodities in the market. One speaks of a tobacco monopoly, a match monopoly, a gasoline monopoly, a meat monopoly, etc., meaning that a person or a group of persons—or the government itself—has complete control over the supply of these commodities or at least a control sufficiently great to enable the monopolist to impose his prices on the public and to regulate consumption accordingly, limiting it to the quantity that he deigns to make available on the market.
Monopoly is as old as history. Already in the most ancient communities we find state monopolies of salt, of precious metals, of perfumes and dyes, and even, during the decline of the Roman Empire, of articles of prime necessity like cloth and cereals.
During the Middle Ages the guilds enjoyed a double monopoly: they controlled production, and they monopolized the labor force in each enterprise. The law granted the masters of the guilds the exclusive right to carry on production, to admit or reject new members, to educate the apprentices, and to train them to become masters. This situation continued into the era of the absolute monarchs, although the latter gradually arrogated to themselves many of the powers previously enjoyed by the guilds and granted licenses for production that enabled the Crown to bring in revenue to the state and, at the same time, to support its favorites at court. One has only to recall the monopolies that Henry II of France granted to his mistress, Diane de Poitiers. Indeed, a good part of the nobility lived off the income from monopolies.
Nor was England free of them. In fact, it was on their account that the Declaration of Independence of the United States proclaimed the principle of freedom of labor, or the right to the “pursuit of happiness.” Similarly, on September 14, 1791, the French Constituent Assembly, after reaffirming the Declaration of the Rights of Man originally formulated during the period from August to October in 1789, declared an end to “nobility, peers, distinctions among the estates of the realm, feudal rights, hereditary judgeships, the sale or inheritance of public offices, privileges and exemptions from the law common to all Frenchmen, wardenships, and guilds of artisans, craftsmen, or members of the same profession.” Later it promulgated the Constitution of 1791, of which Article 16 stated that “every citizen has the right to enjoy in freedom his property and income and the fruit of his labor and industry,” and Article 19 granted every person freedom to “engage in such business or to practice such profession, art, or craft as he shall find profitable.” A regime of economic liberty was established, and monopolies were suppressed. And, to prevent these same citizens from restricting this liberty and obstructing the free play of supply and demand by means of combinations in restraint of trade, the penal codes forbade and still forbid “conspiracies to effect a change in the price of goods.”1
Monopoly, then, is not compatible with our modern economy. Indeed, it is impossible in a system of free enterprise. To be sure, there will always be entrepreneurs who, not content with the profits to be derived from the supply and demand on the market, will band together (however many “antimonopoly laws” there may be on the statute books) to monopolize particular commodities or services in order to obtain exorbitant prices for them. But where there is free enterprise there will not be lacking another group of entrepreneurs, no less powerful than the first, prepared to lure away their customers with lower prices. Free competition will then reassert itself, and the two groups will engage in a “price war” until the prices obtained leave only a normal profit. This is possible, of course, only if neither of the competing groups enjoys an official protection that the other does not have and that renders the protected group superior to its rival in the market. This protection, in the form of licenses authorizing the establishment of particular industries, prohibitively high tariffs on foreign products, tax exemptions, production or export subsidies, etc., may be extended in view of some well- or ill-understood national interest, or because the country is in a state of war, or simply, as in the days of Louis XIV, in order to grant favors to the friends (who sometimes are also the partners) of the authorities. In all countries there are innumerable cases of this kind in which it is not always possible to determine whether the motive is a desire on the part of the government to protect a more or less well-understood national interest or to prepare for war, or whether what is involved is nothing more nor less than official corruption. But it is impossible to find a single example of a monopoly that has ever existed without official protection.
The term “crisis” denotes a maladjustment in economic life that gives rise to a general depression, but one not caused by external circumstances like natural catastrophes, epidemics, wars, or revolutionary inventions or discoveries. A free economy involves a certain automatism, so that any partial disturbance of it is corrected by the action of the forces at work. Thus, if a commodity is produced in excess of the demand for it, its price falls, and production of it is restricted until the demand once again increases and prices normalize themselves. If a commodity is in short supply, its price rises and attracts to the market new producers, who cause the price to fall to a normal level. But there are times when this self-corrective process does not seem to occur, and crises arise. Then economists seek an explanation and a remedy for them. Since the time of Sismondi (1773–1842) crises have been described as periodic infirmities to which a free economy is subject (cyclical crises) and as a result of the “anarchy of production.” Karl Marx held both views at the same time, although it is evident that they are mutually contradictory, since an economy in which there are periodic phenomena that can be calculated and predicted can hardly be characterized as anarchic.
If, as we have said, a crisis is a maladjustment in economic life, there can be many different kinds of crises. Generally, however, when one speaks of a crisis, what is meant is a crisis due to a falling off of sales, a failure of the market to absorb the products that are brought to it. It is not surprising, therefore, that the economists of an earlier age explained this kind of crisis by attributing it to a lack of money. Yet it is obvious that this explanation is not satisfactory. In general, commodities are distributed in accordance with the supply of money available. If this is meager, commodity prices will be low, but no disturbance will be produced in the economy. Commodities will be worth less, but money will be worth more, and consequently everything that is brought to the market will be absorbed. This is the way Adam Smith and Jean-Baptiste Say explain the matter, and no one has succeeded in refuting them.
A variant of this doctrine is that of overproduction. It has been said that the crisis occurs when producers produce beyond the needs of the consumers, so that there is a glut on the market; for the consumers, even though they have the money to buy the commodities offered for sale, simply do not want them. In reply to this contention one need only observe that, up to the present day, there has never been a time when the world has produced enough for everybody. The great economic problem is that of scarcity, which still continues to exist to a frightful extent. Mankind still does not produce enough to provide for even the most pressing necessities. A general overproduction of commodities is a myth, and not an actual fact. At any given time and place there may be a surplus of particular goods, but not of all goods. In such cases the mechanism we have already described comes into play, and normal conditions are restored without any important disturbances in the economy, even though the readjustment may ruin particular producers who have erred in calculating their production or in forecasting market conditions. This is a case of uneven production, which a third theory of the crisis considers as its explanation. But the core of truth in this doctrine—i.e., the occurrence of such local and temporary surpluses in the production of particular commodities—does not explain the crisis as a phenomenon of general economic disturbance.
Rodbertus, Marx, Henry George, and economists of their persuasion, as well as some more recent authors who consider themselves liberals, like Carlos P. Carranza,2 explain the crisis as a result of the concentration of capital. According to them (in spite of some minor variations in their doctrines), the producers accumulate and employ in increasing production the ground rent and the surplus value that they withhold from society or from the worker, thereby reducing the purchasing power of the masses. At the moment when this money is reinvested in the construction of new units of production (factories, workshops, granaries, etc.), wages are distributed to many workers, and there is a boom in the market as more money flows into it although the supply of goods has not yet increased, since the new units in the process of construction are still not producing. By the time they finally do so, there is an abundance of commodities on the market that cannot be absorbed, and a crisis ensues. This explanation is also mythical and erroneous, because it never happens that all producers reap profits, save, and invest at the same time. Even if this were true of each one of them, there would still be lacking the necessary synchronization that would alone explain the general crisis.
Approaching the problem of crises from another point of view, the currency school, which appeared in England in the second half of the nineteenth century, and the Viennese school conceive of the cause in monetary terms. As we have already observed, money, although essentially a medium of exchange, has other functions and effects that give it a life of its own. Any abnormalities arising—or rather, induced—in the value of money convert it from a regulator into a disturber of economic life. In a word, crises arise, not from a lack, but from an excess, of money.
This does not mean that crises are caused by inflation. As we have seen, inflation, when it takes place in the natural course of events, does not disturb the equilibrium of the market. What is economically detrimental is the discrimination that results from an inflationary policy on the part of the government. A distinction therefore has to be made between inflation per se and credit expansion, otherwise known as an easy-money (or cheap-money) policy. Inflation takes place in the natural course of events whenever the supply of money on the market increases more than that of goods. This occurred in Europe when gold was shipped there from the Indies, and in the world in general during the period of the “gold fever” that accompanied the discoveries of new deposits of ore in the United States and South Africa. But when governments resort to the printing press to produce the currency needed to pay for the services and materials of a swelling bureaucracy and more or less spectacular programs of public works, what occurs is both an inflation, because more money enters the market without a corresponding increase in the supply of goods, and, at the same time, an expansion of credit, because the public works stimulate the development and growth, above and beyond the normal needs of the country, of industries engaged in carrying out the government program and unable to subsist without it.
Credit expansion pure and simple takes places when, in an effort to force an increase in the country’s production beyond the normal development of its economic life, a policy is adopted—by the government, of course—of accelerating production, or, as W. A. Lewis3 calls it, mobilizing resources. This policy consists simply in making money available (generally in the form of bank credit at low interest rates) to those who wish to establish or expand branches of production that are considered advantageous to the country. A boom supervenes: factories or farmhouses are built; machinery is manufactured, imported, and set up; a bureaucratic personnel is organized. All this means money passing through many hands and reaching the market to buy consumers’ goods that have not increased to the same extent. The result is that, in accordance with the law of supply and demand, and in spite of the price ceilings imposed by the government, prices rise. With the increase in prices, wages too have to be raised, and there is an illusion of prosperity. But a time comes when the money available for the expansion of production is used up, and the industries thus created have to live on their own resources. Very few can do so. Some industries prove to have been poor investments and go out of business entirely. Others produce goods for which there is no demand, like machinery for still other industries that have not expanded or consumers’ goods that are priced too high to compete with those already on the domestic or foreign market. A crisis results: prices have risen, the value of the monetary unit has depreciated, production useful and necessary to the country has not increased, sales fall off, workers lose their jobs, unemployment is on the rise, and a painful period of readjustment begins. The policy of credit expansion, instead of increasing the wealth of the country, has dissipated a good part of it. One is reminded of the old story of the milkmaid and the pitcher of milk. With the proceeds from the sale of the milk she dreams of buying some sheep; from the sheep she hopes to get enough to purchase a cow; etc., etc. But in the midst of her daydreams the milkmaid stumbles, the pitcher is shattered, and nothing remains but her tears. If one tries to build on illusions, one is sure to suffer disillusionment sooner or later.
We have seen, then, that crises, like monopolies, do not and cannot have any place in an economy of free enterprise. They are not essential elements or necessary effects of it; neither are they defects in it. They are, on the contrary, the consequences of political interference with the free-market economy.
As we shall see, the same holds true for unemployment.
As long as methods of production remained primitive, unemployment was unknown. The wretched poverty that prevailed before the Industrial Revolution was due precisely to the meager productivity of the methods then in use and to the lack of the manpower needed to produce enough to satisfy the necessities of everyone. The introduction of machinery, above all in the English textile and weaving industry, left large numbers of workers jobless. Much more yarn and many more fabrics were produced with one machine and a couple of workers than with many hand looms and large numbers of weavers. This gave rise to several grievous incidents in the textile centers of Europe—notably in Lancashire, England, and the areas of Lyon, the Franco-Belgian frontier, and Catalonia. The workers displaced by the machine rioted and burned—or tried to burn—the factories. But they soon came to realize that mechanization reduced the price of the product and left the consumers with money to buy other commodities that formerly had not been within their reach. Producers expanded their enterprises and hired the hands left idle by the introduction of machinery into the textile industry. On the other hand, mechanization in general created in turn a vast industry devoted to the manufacture of machinery that likewise more than absorbed those unable to find work in the factories.
Between 1848 and 1914, unemployment as a mass phenomenon disturbing the whole economy was unknown. Some industries declined, others prospered, and the workers who were discharged from the former found employment in the latter. Besides, as there was at that time complete freedom of migration and of labor throughout the world, those who were not satisfied with the conditions of employment in one country emigrated to wherever wages were higher, and thus a relative prosperity was in the process of being generally diffused.
With the advent of the First World War, conscription and the demands of war production (arms, munitions, clothing, and food—in Germany, for example, eighty per cent of all the production of food and clothing was for the army) resulted in a great scarcity of labor. Taking advantage of this situation, the trade-unions succeeded in forcing wages upward. When the war came to an end, the labor force increased enormously, for the returning soldiers were added to those who had taken their places during the hostilities and had flocked to the factories from the country or from domestic life (women especially), without any corresponding increase in the demand for goods, since every member of the actively employed working population produces for several members of the general population.
But three other factors played a role in this situation. A great part of the labor force created during the war was fitted to work only in war industries, and these had shut down. On the other hand, wages had gone up, while the normalization of production was causing prices to fall, so that these wages now exceeded the value of what the workers were producing. Industrial equipment had been used up, and there was no capital available to replace it, much less to add to it to give work to the unemployed. After all, the war had been immensely destructive. It had impoverished the world, and there was no other recourse but for everyone to restrict his consumption. For the worker this retrenchment had to consist in contenting himself with a lower wage rate, so that the product of his labor could be offered for sale at prices obtainable in an impoverished market.
But this was contrary to the policy of the trade-unions, and the governments found themselves obliged to resort to unemployment benefits to take care of those who had been thrown out of work. As they lacked the money for this, they had to fabricate or create it: the printing presses were set rolling, and there was money for everybody, but devalued money, because prices rose as fast as the supply of money increased. Those workers who were unwilling to accept a direct cut in their wages had them reduced indirectly in the form of monetary devaluation; but, in addition, the unemployed, who could have increased production by accepting lower wages, did not do so and thereby retarded the return to normalcy. Something similar happened after the Second World War. In England, for example, the Labor Government had to devalue the pound sterling, because high wages raised production costs to the point where it became difficult to export.
From what has been said here, it follows that unemployment is not an essential element of what has been improperly called the capitalistic economy. On the contrary: the natural tendency of such an economic system is toward an increase in production and, concomitantly, in jobs. When a new machine produces more goods with less labor, this does not mean that the supernumerary workers are left idle, for they either remain in the same industry tending new machines or transfer to another in greater need of their labor. The characteristic feature of an economy of free enterprise is that it provides work for everybody who wants it and an ever increasing supply of goods and services. But in order for this to occur, it is necessary that there be no interference with production on the part of either pressure groups or the state. If pressure groups exact wages that render production no longer profitable, or if the state imposes on profits taxes that make it impossible for enterprises to maintain or increase their productive equipment, then a brake is put on production, and job opportunities are correspondingly contracted.
Thus, both the theory of so-called “institutional unemployment” and the theory of the “industrial reserve army” of Marx and Engels are quite untenable. According to the first, capitalism always involves periods of general unemployment, and, according to the second theory, unemployment is chronic. Both theories, as we have seen, contradict the facts and the very essence of an economy of free enterprise. There is no unemployment in normal times, much less during a period of prosperity. There is unemployment when there is a crisis, i.e., when the action of pressure groups renders production unprofitable by raising costs above market prices. There is also unemployment when the fiscal policies of the government prevent the increase in the accumulation of capital goods from keeping pace with and, if possible, surpassing the increase in the population and thereby raising the general standard of living. Another cause of unemployment is nationalism and its corollary, economic protectionism and migration barriers, which place difficulties in the way of the normal world-wide distribution of goods and services.
Even less tenable is the doctrine given currency a few years before the Second World War by the English economist John Maynard Keynes (later Lord Keynes). Paradoxically, this doctrine attained its greatest popularity precisely at the time when, according to the reports of his intimate friends, Lord Keynes himself was beginning to recognize its falsity, and when he was on the point of making a public declaration to that effect; in any case, he died without having done so. According to this doctrine, unemployment is due to saving and is to be combatted by resorting to every means to force those who have money to spend it—as if bringing money to the market had the magic power of raising up new plants and factories. In reality, the only effect of such a policy is to increase the price of goods and, by the same token, to reduce the general standard of living. Where money is really needed is in production for the purchase of more machinery and equipment, the employment of more workers, and the manufacture of more goods for the market with the object of lowering the cost of living. And this is precisely what saving does. He who saves money does not keep it under a mattress, as people did in the mercantilist era, but invests it to produce a profit or to yield interest. Either he puts it into real property or into mortgages, and thereby favors the expansion of housing and the employment of construction workers; or he invests it in equities and buys shares of productive enterprises, which are also thus enabled to expand; or he lends it at interest to entrepreneurs, with the same result for the general well-being. Saving and capital accumulation, then, are the great factors making for an increase in production and a consequent abundance of jobs and a lowering of prices. The liquidation of savings, the spending of money in the market in order to acquire consumption goods, has the opposite effect: the stagnation of production, a rise in prices, a diminution in the purchasing power of the general public, a slump, and, consequently, mass unemployment. The Keynesian formula, therefore, leads to results that are exactly contrary to those it is aimed at attaining.