Schumpeter Joseph - Business Cycles - A Theoretical, Historical and Statistical Analysis of The Capitalist Process

Joseph A.
Schumpeter
[1883-1950] conomiste autrichien classique, pro esseur ! l"#ni$ersit% &e 'ar$ar&, au( tats-#nis, ! partir &e 193), 1883-1950
*1939+
,#S-./SS 0102/S
A 3heoretical, 'istorical an& Statistical Anal4sis o the 0apitalist 5rocess
A6ri&7e&, 8ith an intro&uction, 64 9en&i7s :els
#n &ocument pro&uit en $ersion num%rique par ;i&ier 2A<9A.</, 6%n%$ole, 0he &e pro=ets &ans une entreprise &u secteur automo6ile, :rance 0ourriel> la7ran7e)? ree. r ;ans le ca&re &e> @2es classiques &es sciences sociales@ #ne 6i6liothAque num%rique on&%e et &iri7%e par Jean-Barie 3rem6la4, pro esseur &e sociolo7ie au 0%7ep &e 0hicoutimi Site 8e6> http>CCclassiques.uqac.caC #ne collection &%$elopp%e en colla6oration a$ec la ,i6liothAque 5aul-mile-,oulet &e l"#ni$ersit% &u Du%6ec ! 0hicoutimi Site 8e6> http>CC6i6liotheque.uqac.caC
Joseph Schumpeter, ,usiness 04cles. *1939+
0ette %&ition %lectronique a %t% r%alis%e par ;i&ier 2A<9A.</, 6%n%$ole, 0he &e pro=ets &ans une entreprise &u secteur automo6ile, :rance ! partir &e >
Joseph A. Schumpeter [1883-1950] BUSINESS CYCLES. A 3heoretical, 'istorical an& Statistical Anal4sis o the 0apitalist 5rocess. .e8 1orE 3oronto 2on&on > Bc<ra8-'ill ,ooE 0ompan4, 1939, FG1 pp. A6ri&7e&, 8ith an intro&uction, 64 9en&i7s :els
5olices &e caractAres utilis%e > 5our le te(te> 3imes .e8 9oman, 1F points. 5our les citations > 3imes .e8 9oman, 1) points. 5our les notes &e 6as &e pa7e > 3imes .e8 9oman, 1) points. &ition %lectronique r%alis%e a$ec le traitement &e te(tes Bicroso t Hor& )00F pour Bacintosh. Bise en pa7e sur papier ormat > 2/339/ *#S letter+, 8.5II ( 11II+ &ition num%rique r%alis%e le 1F =uillet )00J ! 0hicoutimi, Kille &e Sa7uena4, pro$ince &e Du%6ec, 0ana&a. :ichier re$u et corri7% le 31 mars )008.
Joseph A. Schumpeter [1883-1950]
BUSINESS CYCLES. A 3heoretical, 'istorical an& Statistical Anal4sis o the 0apitalist 5rocess.
.e8 1orE 3oronto 2on&on > Bc<ra8-'ill ,ooE 0ompan4, 1939, FG1 pp. A6ri&7e&, 8ith an intro&uction, 64 9en&i7s :els
3a6le o 0ontents
-. --. ---. /;-3L9"S -.39L;#03-L. 0hapter -. -.39L;#03L91 0hapter --. /D#-2-,9-#B A.; 3'/ 3'/L9/3-0A2 .L9B L: /0L.LB-0 D#A.3-3-/S A. ,. 0. ;. /. :. <. -K. 3he Beanin7 o a Bo&el 3he :un&amental Duestion 3he Stationar4 :lo8 /quili6rium an& the 3heoretical .orm 0omplications an& 0lari ications -mper ect 0ompetition /quili6rium /conomics an& the Stu&4 o ,usiness :luctuations 3'/ /0L.LB-0 S1S3/B </./9A3/S
0hapter ---. 'LH /KL2#3-L. A. ,. 0. ;. /.
-nternal :actors o 0han7e 3he 3heor4 o -nno$ation 3he /ntrepreneur an& 'is 5ro it 3he 9ole o Bone4 an& ,anEin7 in the 5rocess o /$olution -nterest *Bone4 BarEetM 0apital+
K.
0hapter -K. 3'/ 0L.3L#9S L: /0L.LB-0 /KL2#3-L. A. ,. 0. ;. 3he HorEin7 o the Bo&elM :irst Appro(imation 2ooEin7 at the SEeleton 3he Secon&ar4 Ha$eM Secon& Appro(imation Ban4 Simultaneous 04clesM 3hir& Appro(imation
K-.
0hapter K. 3-B/ S/9-/S A.; 3'/-9 .L9BA2 A. ,. 0. ;. -ntro&uction 3ren& A Sin7le 04clical Bo$ement Ban4 Simultaneous Ha$es
K--.
0hapter K-. '-S3L9-0A2 L#32-./S. -. -.39L;#03-L.M 1J8G-18F) A. 3he :un&amental -mportance o the 'istorical Approach to the 5ro6lems o the 04clical 5rocess o /$olution. ,. Duestions o 5rinciple. NA e8 questions o principle must 6e &ispose& o irst 0. 3he 2on7 Ha$e rom 1J8J to 18F)
K---.
0hapter K--. '-S3L9-0A2 L#32-./S. --. 18F3-1913 A. ,. 0. ;. /. 3he 5erio& 18F3-189J. 3he A7ricultural Situations o the 5erio& 9ailroa&iOation Some :eatures o the ;e$elopment o Banu actures 3he :irst Si(teen 1ears o the 3hir& Pon&ratie *1893-1913+
-Q.
0hapter K---. 1919-19)9 A. ,. 0. ;. /. 5ost8ar /$ents an& 5ost8ar 5ro6lems 0omments on 5ost8ar 5atterns :urther 0omments on 5ost8ar 0on&itions Lutlines o /conomic 'istor4 rom 1919 to 19)9 3he @-n&ustrial 9e$olution@ o the 38enties
Joseph Schumpeter, ,#S-./SS 0102/S *1939+
-. /;-3L9IS -.39L;#03-L.
RENDIGS Fels Vanderbilt University
3a6le o 0ontents
@3he 4oun7er 7eneration o economists shoul& looE upon this 6ooE merel4 as somethin7 to shoot at an& start romNas a moti$ate& pro7ram or urther research.@"NJoseph A. Schumpeter, 5re ace to ,usiness 04cles, 1939 e&ition, p. $. Schumpeter ha& 6a& lucE 8ith ,usiness 04cles. 1 3he most am6itious 8orE o the trilo74 settin7 orth @the Schumpeterian s4stem,@ it has attracte& less attention than his 3heor4 o /conomic ;e$elopment ) or his 0apitalism, Socialism, an& ;emocrac4. 3 -t is true that a re erence to ,usiness 04cles can occasionall4 6e oun& in a ootnote, 6ut the te(t to 8hich the ootnote is appen&e& rarel4 contains
1
3he ull citation is Joseph A. Schumpeter, ,usiness 04cles > A 3heoretical, 'istorical, an& Statistical Anal4sis o the 0apitalist 5rocess, 1st e&ition *.e8 1orE an& 2on&on > Bc<ra8-'ill ,ooE 0ompan4, -nc., 1939R. Schumpeter, an Austrian economist 8ho spent the last ei7hteen 4ears o his li e at 'ar$ar&, 8as 6orn in 1883 an& &ie& in 1950. :or an account o his li e see the @Bemorial@ 64 Arthur Smithies in the American /conomic 9e$ie8, Septem6er 1950, pp. G)8-F5. 3he 3heor4 o /conomic ;e$elopment M an -nquir4 into 5ro its, 0apital, 0re&it, -nterst, an& the ,usiness 04cle, translate& rom the <erman 64 9e&$ers Lpie *0am6ri&7e, Bass. > 'ar$ar& #ni$ersit4 5ress, 193F+. 3& e&ition *.e8 1orE > 'arper S ,rothers 5u6lishers, 1950+.
a &iscriminatin7 &iscussion o its i&eas. 0lemence an& ;oo&4 accor&e& it its proper place in 3he Schumpeterian S4stem, 6ut the4 pre erre& &e en&in7 their ormer teacher a7ainst criticism to pa4in7 him the hi7her compliment o 6uil&in7 on his 8orE. F 3he pu6lication &ate o ,usiness 04cles pro$e& sin7ularl4 un ortunate. 'a& it appeare& three 4ears 6e ore Pe4nes"s <eneral 3heor4 sent economists scurr4in7 o in other &irections instea& o three 4ears" a ter8ar&s, it 8oul& ha$e 7aine& rom the enormous interest e$er4one ha& in 6usiness c4cles in 1933 an& mi7ht ha$e 6een accor&e& a reception secon& onl4 to that later recei$e& 64 the <eneral 3heor4 itsel . 5 -nstea&, it appeare& =ust as the out6reaE o Horl& Har -- raise& economic pro6lems to 8hich Pe4nes"s tools, 6ut not Schumpeter"s, coul& 6e rea&il4 a&apte&. ,ut ,usiness 04cles lost almost as much rom appearin7 si( 4ears too soon as rom appearin7 si( 4ears too late. <i$en a &i erent title, it mi7ht in 19F5 ha$e pro ite& rom the 7ro8in7 interest in economic &e$elopment, or its theme is as much ho8 the present in&ustrial nations &e$elope& as the themes in&icate& 64 its title an& su6title. Bo&ern scholars can har&l4 6e 6lame& i the4 turn or Schumpeter"s i&eas on the su6=ect that currentl4 ascinates them to a 6ooE calle& 3he 3heor4 o /conomic ;e$elopment rather than to a 6ooE calle& ,usiness 04cles. 3he4 mi7ht ha$e &one so e$en i the titles ha& 6een re$erse& M the4 mi7ht 8ell pre er the shorter, more inishe& account to the lon7er, less polishe& one. 3he Ein& o ault that contri6ute& to the success o Pe4nes"s <eneral 3heor4 a&&e& to the ne7lect o Schumpeter"s ,usiness 04cles. ,oth 8oul& ha$e 6een 6etter 6ooEs ha& their authors spent another 4ear impro$in7 them. Hhereas the shortcomin7s o the <eneral 3heor4 stimulate& other economists to la4 6are an& re ine an& appl4 the mo&el hal -conceale& in it, inci&entall4 maEin7 Pe4nesians
F 5
9ichar& K. 0lemence an& :rancis S. ;oo&4, 3he Schumpeterian S4stem *0am6ri&7e, Bass. > A&&ison-Hesle4 5ress, 1950+. John B. Pe4nes, 3he <eneral 3heor4 o /mplo4ment, -nterest, an& Bone4 *.e8 1orE > 'arcourt, ,race an& 0ompan4, 193G+.
o them, the similar nee& to clari 4 an& impro$e an& use the Schumpeterian mo&el repelle& them. 3here are no Schumpeterians. Lne nee& not taEe issue 8ith Schumpeter"s criticism o Barshall or la$ishin7 too much time on the ei7ht e&itions o the 5rinciples to hol& that he himsel ma&e the opposite error. G 3hou7h a quarter o a centur4 has elapse& since the irst e&ition o ,usiness 04cles, the opportunities it opene& up or urther research remain lar7el4 une(ploite&. 3he chie e(ception is Schumpeter"s o8n 0apitalism, Socialism, an& ;emocrac4. Buch has 6een pu6lishe& on inno$ation an& entrepreneurship, usuall4 8ith a no& in Schumpeter"s &irection 6ut no more. /$en a 8orE liEe 1usi A. Sa4i7h"s /ntrepreneurs o 2e6anon, 8hich ostensi6l4 taEes Schumpeter"s concepts as its startin7 point, actuall4 &eals 8ith entrepreneurs as peopleNtheir e&ucation, reli7ion, opinions, e$en the num6er o their chil&renNto the ne7lect o 8hat 8as central to Schumpeter"s anal4sis, inno$atin7 acti$it4 an& its impact. J At the time ,usiness 04cles 8as 8ritten, 8orE on PuOnets c4cles Nthe lon7 s8in7s o i teen to t8ent4 4earsN8as still at an earl4 sta7e. Since then a lar7e amount o statistical an& a small amount o anal4tical 8orE has 7one or8ar&. 3hose 8ho ha$e ma&e the principal e orts to e(plain PuOnets c4cles, Batthe8s an& A6ramo$itO, ha$e not seen it to &ra8 on Schumpeter"s 8orE 6ut ha$e resorte& to an incomplete an& essentiall4 a77re7ati$e tool, the capital-stocE a&=ustment principle. 8 *-t is ironic that a 7eneration o economists that te7ar&s &isa77re7ation as a shinin7 $irtue has un&erestimate& the theor4 o such a staunch opponent o a77re7ation as Schumpeter. -n
G J 8
TAl re& Barshall, 5rinciples o /conomics, 8th e&ition *2on&on > Bacmillan an& 0o., limite&, 19))+. /ntrepreneurs o 2e6anon M 3he 9ole o the ,urineU 2ea&er in a ;e$elopin7 /conom4 *0am6ri&7e, Bass. > 'ar$ar& #ni$ersit4 5ress, 19G)+. 9.0.L. Batthe8s, 3he ,usiness 04cle *0hica7o > #ni$ersit4 o 0hica7o 5ress, 1959+, 0h. 1) M Boses A6ramo$itO, @3he .ature an& Si7ni icance o PuOnets 04cles,@ /conomic ;e$elopment an& 0ultural 0han7e, April 19G1, pp. ))5-F8.
our heart o hearts, 8e pre er the a77re7ates o Pe4nes, 'arro&, ;omar, etc. M &espite Halras"s earlier an& 6etter claim to a 7eneral theor4, 8e permitte& Pe4nes to taEe o$er the term, Schumpeter"s o6=ections not8ithstan&in7. Lur cant a6out &isa77re7ation means onl4 that 8e ha$e 7uilt4 consciences.+ 1et Schumpeter"s concept o recesssion coul& 6e e(cee&in7l4 help ul in interpretin7 the 18J0s, a perio& 8hich raises a pro6lem i7nore& 64 Batthe8s an& A6ramo$itO in the 8orEs cite& in the ootnote a6o$e. 3heir most tellin7 e$i&ence or the e(istence o PuOnets c4cles consists o t8o circumstances, s8in7s in the rate o 7ro8th o real <.5 that a$era7e i teen to t8ent4 4ears, an& the recurrence o &eep &epressions at similar inter$alsN there 8as one in the 18J0s, one in the 1890s, there 8oul& *or mi7ht+ ha$e 6een one in the 1910s 6ut or Horl& Har -, an& there 8as one in the 1930s. -nclu&in7 18J3-J8 in the cate7or4 o &eep &epressions at irst si7ht seems reasona6le enou7h, since it is 7enerall4 consi&ere& not onl4 the lon7est 6ut also one o the 8orst 6usiness contractions on recor&. ,ut A6ramo$itO sho8s a @tentati$e@ peaE in the rate o 7ro8th o real <.5, a ter eliminatin7 the e ects o 6usiness c4cles, 8hich he &ates 18JF.)5.9 3his means that the a$era7e annual rate o 7ro8th 6et8een the complete 6usiness c4cle 8ith peaEs in 18G9 an& 18J3 an& the complete 6usiness c4cle 8ith peaEs in 18J3 an& 188) 8as hi7her than or nei7h6orin7 pairs o c4clesNin act it 8as the hi7hest on recor& or an4 successi$e pairs o c4cles, in spite o the act that the contraction inclu&e& in the 18J3-8) perio& is rate& a &eep &epression, 8hereas the contraction phase o the prece&in7 c4cle 8as $er4 mil&. 3hus the statistical in&in7 a6out the rate o 7ro8th o real <.5 colli&es 8ith the =u&7ment that 18J3-J8 8as a &eep &epression M urthermore, it pla4s ho6 8ith A6ramo$itO"s anal4sis o the 8a4 PuOnets c4cles un ol&, in 8hich &eep &epressions an& trou7hs in 7ro8th rates 7o to7ether. 'o8 can the para&o( o a rapi& rate o 7ro8th in a perio& encompassin7 &eep &epression 6e resol$e& V Schumpeter"s concept o recession coul& illuminate it > pre$ious inno$ation must ha$e ma&e possi6le a 7reat increase in output that impose& har&shipNs4mptoms o &epressionNon all parts o the econom4 una6le to a&apt to the ne8 con&itions. .ot that one can turn
10
to Schumpeter"s o8n account o the 18J0s or a rea&4-ma&e e(planation o the acts Batthe8s an& A6ramo$itO ha$e 8restle& 8ith M it is rather that to&a4"s economists are missin7 an opportunit4 to 6uil& on Schumpeter"s 8orE. 3he importance o a 6ooE is =u&7e& 64 8hat it lea&s to. ,4 this test, it is &ou6t ul i Schumpeter"s ,usiness 04cles 8oul& merit rescue rom the lim6o o @out o print.@ 3he irst reason or the present e&ition lies in the con$iction that it can 4et stimulate si7ni icant research. Hh4 an a6ri&7e& e&ition V Lr&inaril4, - &eplore a6ri&7ements, 6ut in the present case there is e$er4 reason to 6elie$e that a shorter $ersion 8ill pro$e more use ul, especiall4 since the lon7er one 8ill al8a4s 6e a$aila6le in li6raries. /liminatin7 &i7ressions an& the less $alua6le parts o the ori7inal t8o $olumes, 8hich ran to more than a thousan& pa7es, 8ill ena6le the rea&er, hope, to spen& his time more pro ita6l4. 'a$in7 m4sel spent a 7reat &eal o la6or tr4in7 to master the ori7inal e&ition, - ha$e nothin7 6ut s4mpath4 or economists 8ho elt that it 8as not 8orth the e ort -n the 8orE o a6ri&7ement, m4 irst concern has 6een to preser$e a complete statement o the theor4, since less thorou7h accounts are rea&il4 a$aila6le else8here. 3his has meant retainin7 most o 0hapters --, '-, an& -K an& parts o 0hapters - an& K. /$en in 0hapters ----K, ho8e$er, - ha$e not hesitate& to cut ootnotes, para7raphs, an& 8hole pa7es 8here the &iscussion seeme& to 7o prett4 ar a iel&, as 8ell as &eletin7 super luous sentences an& phrases. Althou7h - hope that 8hat remains is some8hat more rea&a6le than the ori7inal, it is still har& 7oin7, an& - 8oul& ha$e liEe& to a&& as an appen&i( a summar4 o Schumpeter"s theor4 that - prepare& or m4 o8n use man4 4ears a7o. ,ut it seeme& 6etter to sa$e the space or Schumpeter"s o8n 8or&s. ,esi&es, an e(cellent summar4 o Schumpeter"s theor4 is alrea&4 a$aila6le in 0lemence an& ;oo&4"s 3he Schumpeterian S4stem. 9
9
Boses A6ramo$itO, Statement in #nite& States 0on7ress, Joint /conomic 0ommittee, /mplo4ment, <ro8th, an& 5rice 2e$els, 'earin7s *8Gth
11
B4 secon& concern 8as to retain a ull account o the interpretation o the c4clical histor4 o one countr4, in pre erence to partial accounts o the three countries that Schumpeter &iscusse& at len7th. 3he nature o the theor4, 8hich inclu&es a Pon&ratie c4cle si(t4 4ears in &uration, calls or a lon7 s8eep o histor4. 3hat the countr4 chosen shoul& 6e the #nite& States rather than /n7lan& or <erman4 re lects more than the national ori7ins o e&itor an& pu6lisher. 3he #nite& States 8as the countr4 Schumpeter &e$ote& most attention to an&, particularl4 in the &iscussion o the 1930s, is the one that 6est illustrates the 8orEin7 o his mo&el. 3he &ecisions to Eeep airl4 complete accounts o the theor4 an& o its application to one countr4 &ictate& omittin7 $irtuall4 all the statistical anal4sis *0hapters K---Q--- an& a lon7 section o 0hapter Q-K o the ori7inal e&ition+. Lne o the re$ie8s that appeare& not lon7 a ter the 1939 e&ition 8as pu6lishe& criticiOe& it or not ha$in7 a ser$icea6le statistical technique. 3he criticism 8as =ust, an& omittin7 the statistical chapters ma4 6e &eeme& no 7reat loss. 5erhaps it 8oul& ha$e 6een &esira6le to ha$e cut them hea$il4, retainin7 the parts most use ul or thro8in7 li7ht on the implications o the theor4, 6ut the a6ri&7e& e&ition is quite lon7 enou7h as it is. - ha$e re7ularl4 &elete& re erences to sources o in ormation. Since Schumpeter"s sources ace no8 o6solescent, i not o6solete, $er4 e8 rea&ers 8oul& 6e intereste& in them. Schumpeter"s st4le ran not onl4 to requent &i7ressions, 8hich ha$e trie& to eliminate, 6ut also to surplus 8or&s, to statin7 8hat is alrea&4 implie&, to 6ur&enin7 the rea&er 8ith phrases that &istract his attention. -n such a sentence as, @-t is surel4 not too much to asE economists to realiOe that 6eha$ior in human societies &i ers rom 6eha$ior in animal societies or in ph4sical s4stems@ *p. 10FG o the
0on7ress, 1st Session+, 5art -- *Hashin7ton > <o$ernment 5rintin7 L ice, 1959+, p. F3F.
1)
1939 e&ition+, - ha$e &elete& the italiciOe& 8or&s 8ithout usin7 &ots to so in&icate. Lccasionall4 it 8as con$enient to alter the punctuation. ha$e 7enerall4 resiste& the temptation to su6stitute a 8or& or t8o o m4 o8n, e$en 8here &oin7 so coul& ha$e sa$e& a 7oo& &eal o space, on 7roun&s that m4 8or&s 8oul& ha$e to 6e in square 6racEets 8hich 8oul& &istract the rea&er M 6ut - ha$e, on rare occasions, taEen the li6ert4 o rearran7in7 Schumpeter"s o8n 8or&s. 3o 7i$e an e(treme e(ample, a passa7e on p. 31 o the irst e&ition rea&s, @He cannot enter here into the epistemolo7ical pro6lem o the relation 6et8een "theor4" an& " acts." ,ut it must 6e emphasiOe& that 8hat 8ill 6e sai& in this chapter an& those ollo8in7 is, in part, nothin7 6ut a 7eneraliOe& ormulation o some o the acts presente& later. 3here ore the term $eri ication &oes not accuratel4 &escri6e that relation.@ Hantin7 to omit the irst sentence, - transpose& a e8 8or&s rom it to the last, 8hich in this e&ition rea&s, @3here ore, the term $eri ication &oes not accuratel4 &escri6e the relation 6et8een "theor4" an& " acts." @ 3here are se$ere limits to 8hat an e&itor ma4 properl4 &o. - 8ish Schumpeter 8ere still ali$e to &o the re8ritin7 the 6ooE cries out or. Since that is not possi6le, Bc<ra8-'ill is to 6e commen&e& or &eci&in7 on its o8n initiati$e to pu6lish an a6ri&7e& e&ition. 9/.;-<S :els - Kan&er6ilt #ni$ersit4 10
10
Lp cit., pp. J-)1.
13
-0hapter -ntro&uctor4
3a6le o 0ontents
Amon7 the actors 8hich &etermine an4 7i$en 6usiness situation there are some 8hich act rom 8ithin an& some 8hich act rom 8ithout the economic sphere. /conomic consi&eration can ull4 account or the ormer onl4 M the latter must 6e accepte& as &ata an& all 8e can &o a6out them in economic anal4sis is to e(plain their e ects on economic li e. 'ence 8e arri$e at the $er4 important concept o actors actin7 rom 8ithout Wlet us call them /(ternal :actors+, 8hich it stan&s to reason 8e must tr4 to a6stract rom 8hen 8orEin7 out an e(planation o the causation o economic luctuations properl4 so calle&, that is, o those economic chan7es 8hich are inherent in the 8orEin7 o the economic or7anism itsel . 11 3he 6est e(amples o 8hat 8e mean 64 an e(ternal actor are o ere& 64 such e$ents as the 7reat 3oE4o earthquaEe, the $irtue o 8hich rom our stan&point consists in the act that no one has thou7ht o attri6utin7 responsi6ilit4 or them to our in&ustrial s4stem.
11
3he e ects o these e(ternal actors 8ill 6e calle& the e(ternal irre7ularities o our material, as &istin7uishe& rom its internal irre7ularities, to 6e &e ine& later
1F
Hhene$er a &istur6ance is the pro&uct o social processes, the &i icult question arises 8hether it is not as much a consequence as a cause o economic e$ents an& situations an& hence 8hether 8e are 8ithin our ri7hts i 8e speaE o it as @actin7 rom 8ithout the economic sphere.@ -n a &eeper sense, the ans8er is un&ou6te&l4 in the ne7ati$e. ,ut or our purpose it is 4et permissi6le to &ra8 a line 6et8een the phenomena &irectl4 inci&ent to the 8orEin7 o the economic s4stem an& the phenomena pro&uce& 64 other social a7encies actin7 on the economic s4stem, ho8e$er o6$iousl4 this action ma4 6e con&itione& 64 economic situations or propelle& 64 economic aim or class interest. -n a sense, there ore, 8e ma4 8ithin the limite& ran7e o our in$esti7ation looE upon 8ars, &an7er o 8ar, re$olutions, an& social unrest as e(ternal actors. 0han7es in the tari polic4 o a countr4 or in its S4stem o ta(ation, measures o social 6etterment, an& 7o$ernment re7ulations o all Ein&s 8e inclu&e in the same class. A ter all, there is pro6a6l4 little that coul& 6e o6=ecte& to in our reco7nition o the act that it 8oul& not help us much, or instance in an anal4sis o the pro6lems o orei7n e(chan7e, to &eal in&iscriminatel4 8ith cases in 8hich e(chan7es are &etermine& 64 commercial actors alone an& cases in 8hich the4 are @pe77e&@ as the :rench e(chan7e 8as &urin7 the 8ar. An& this is all that our &istinction amounts to so ar. ,ut or o6$ious reasons it is less eas4 to carr4 out the &istinction in other cases, an& 7reat careNcarrie& e$en to the e(tent o hairsplittin7Nis require& in or&er to &o =ustice to the en&less $ariet4 o the social patterns 8e encounter. Kariations o crops &ue to natural causes, such as 8eather con&itions or pla7ues, raise a pro6lem onl4 6ecause o the &i icult4 o separatin7 them rom $ariations &ue to other causes. ,ut or this, 8e coul& class them 8ith the e ects o earthquaEes. <ol& &isco$eries also coul& 6e liste& in the same cate7or4 as ar as the4 ma4 6e consi&ere&, rom the stan&point o the 6usiness or7anism, to 6e chance e$ents. ,ut it is a act that $ariations in the total suppl4 o 7ol& o ten come a6out in response to 6usiness situations an& in e(actl4 the same 8a4 as $ariations in the suppl4 o an4 other commo&it4. 3he
15
$ariations in the monetar4 suppl4 o 7ol& are ne$er con&itione& 64 chance &isco$eries alone. 'ence 8e ha$e here a case o mi(e& character not al8a4s eas4 to interpret. 3his, ho8e$er, raises the question o &isco$eries o ne8 countries an& o 8hat is rea&il4 seen to 6e or our purposes similar in character an& e ect, in$entions. ,oth create ne8 possi6ilities an& are no &ou6t amon7 the most important causes o economic an& social chan7e. ,ut are the4 e(ternal actors in our sense V Lur ans8ers 8ill 6est 6e 7i$en 64 8a4 o e(amples. - 8e scrutiniOe the moti$es an& metho&s o 0olum6us"s $enture, 8e in& that it 8oul& 6e 64 no means a6sur& to call it a 6usiness $enture. -n this case it 8oul& 6e =ust as much an element o the 6usiness situation as is an4 other enterprise. ,ut i 8e re use to &o this, the &isco$er4 o America &oes not there64 6ecome an e(ternal actor, or it 8as not &irectl4 rele$ant to the course o the economic process at all. -t acquire& rele$ance onl4 as an& 8hen the ne8 possi6ilities 8ere turne& into commercial an& in&ustrial realit4, an& then the in&i$i&ual acts o realiOation an& not the possi6ilities themsel$es are 8hat concern us. 3hose acts, the ormation o companies or the e(ploitation o the ne8 opportunities, the settin7 o the ne8 countries, the e(ports into an& the imports rom them, are part o the economic process, as the4 are part o economic histor4, an& not outsi&e o it. A7ain, the in$ention o , sa4, the Bont7ol ier 6alloon 8as not an e(ternal actor o the 6usiness situation o its time M it 8as, in&ee&, no actor at all. 3he same is true o all in$entions as such, 8itness the in$entions o the antique 8orl& an& the mi&&le a7es 8hich or centuries aile& to a ect the current o li e. As soon, ho8e$er, as an in$ention is put into 6usiness practice, 8e ha$e a process 8hich arises rom, an& is an element o , the economic li e o its time, an& not somethin7 that acts on it rom 8ithout. -n no case, there ore, is in$ention an e(ternal actor. He sometimes rea& that in the nineteenth centur4 the openin7 up o ne8 countries 8as the 6acE7roun& on 8hich economic e$olution achie$e& 8hat it &i&. -n a sense this statement is true. ,ut i the
1G
in erence is that this circumstance 8as an e(ternal actor, that is, somethin7 &istinct rom that $er4 economic e$olution an& in&epen&entl4 actin7 upon it, then the statement ceases to 6e true > our $ision o the e$olution o capitalism must precisel4 inclu&e the openin7 up o ne8 countries as one o its elements an& as a result o the same process 8hich also pro&uce& all the other economic eatures o that epoch. Amon7 them is the mechaniOation o in&ustr4. A7ain, 8e rea& a statement ma&e 64 a hi7h authorit4 in our iel&, to the e ect that it is not @capitalistic enterprise@ 6ut technolo7ical pro7ress *in$ention, machiner4+ 8hich accounts or the rate o increase in total output &urin7 the nineteenth centur4. L6$iousl4 it is not a matter o in&i erence 8hether 8e accept the theor4 un&erl4in7 that statement, namel4 that the mechaniOation o in&ustr4 8as a phenomenon &istinct rom @capitalistic enterprise@ an& in&epen&entl4 in luencin7 itNa phenomenon 8hich coul& an& 8oul& ha$e come a6out in su6stantiall4 the same 8a4 8hate$er the social or7aniOationNor 8hether 8e hol& as 8e &o *in this respect entirel4 a7reein7 8ith Bar(+ that technolo7ical pro7ress 8as o the $er4 essence o capitalistic enterprise an& hence cannot 6e &i$orce& rom it. He nee& not sta4 to e(plain 8h4, or an4 countr4, 6usiness luctuations in another countr4 shoul& 6e looEe& upon as e(ternal actors. ,ut to treat in this 8a4 $ariations in the num6er an& a7e &istri6ution o populations is less eas4 to =usti 4. Bi7rations in particular are so o6$iousl4 con&itione& 64 6usiness luctuations that no &escription o the mechanism o c4cles can claim to 6e complete 8ithout inclu&in7 them, an& inclu&in7 themNat least some o themN as internal actors. 'o8e$er, as 8e shall not &eal 8ith this 7roup o pro6lems in this $olumeN althou7h the 8riter is ali$e to the seriousness o this 6reach in our 8allNit 8ill 6e con$enient to consi&er mi7ration o$er the rontiers o the territories to 8hich our statistics re er, pro$isionall4, as an e(ternal actor, 8hile mi7ration 8ithin those territories, 8hich it 8oul& 6e impossi6le so to consi&er, 8ill 6e notice& 6ut inci&entall4. 0han7es in num6ers an& a7e
1J
&istri6utions &ue to other causes than mi7ration sometimes are in act e(ternal actors or consequences o e(ternal actors, such as 8ars. 1) :inall4, 8e ha$e ha& e(amples *chan7es in tari polic4, ta(ation, an& so on+ o 8hat 8e ma4 term chan7es in the institutional rame8orE. 3he4 ran7e rom un&amental social reconstruction, such as occurre& in 9ussia a ter 191J, &o8n to chan7es o &etail in social 6eha$ior or ha6its, such as Eeepin7 one"s liqui& resources in the orm o a &eman& &eposit rather than in the orm o cash at home or contractin7 collecti$el4 rather than in&i$i&uall4. -t is entirel4 immaterial 8hether or not such chan7es are em6o&ie& in, or reco7niOe& 64, le7islation. -n an4 case the4 alter the rules o the economic 7ame an& hence the si7ni icance o in&ices an& the s4stematic relations o the elements 8hich orm the economic 8orl&. -n some cases, ho8e$er, the4 so &irectl4 act 64 means o 6usiness 6eha$ior that it ma4 6ecome &i icult to reco7niOe them as e(ternal actors. 0han7e o practice 64 the :e&eral 9eser$e S4stem or 64 an4 0entral ,anE in /urope ma4 6e itsel an act o 6usiness 6eha$ior an& an element o the mechanism o c4cles, as 8ell as an e(ternal actor M an& so ma4 collecti$e measures taEen 64 the 6usiness 8orl& itsel . /$er4 such case must 6e treate& on its merits, an& &ecision ma4 6e &i icult in&ee&. Lur &istinction must 6e Eept in min& e$en in such cases, 6ut it 8orEs 8ith increasin7 &i icult4 the more requent the4 6ecome. 3his is 6ut a consequence o the act that our economic s4stem is not a pure one 6ut in ull transition to8ar& somethin7 else, an&, there ore, not al8a4s &escri6a6le in terms o a lo7icall4 consistent anal4tic mo&el.
1)
9ea&ers 8ill see that our arran7ements a6out the element o population are partl4 moti$ate& 64 actual propositions an& partl4 64 consi&erations o e(positor4 con$enience arisin7 out o the purposes o this 6ooE. -t is not, o course, hel& that those arran7ements 8oul& 6e satis actor4 outsi&e o these purposes or that the su6=ect o population has no claim to other treatment than is 7i$en to it here. HorE &one 64 ;r. A, 2Xsch, ,e$XlEerun7s8ellen un& Hechsella7en, 193G, has e$en shaEen the 8riter"s con$iction, 8hich use& to 6e stron7, that chan7es in population ha$e no place amon7 the causal actors o economic c4cles.
18
.o8, it is o6$ious that the e(ternal actors o economic chan7e arc so numerous an& important that i 8e 6ehel& a complete list o them 8e mi7ht 6e set 8on&erin7 8hether there 8as an4thin7 le t in 6usiness luctuations to 6e accounte& or in other 8a4s. 3his impression is much intensi ie& 64 the act that the impact o e(ternal actors 8oul& o itsel account or 8a$eliEe alternation o states o prosperit4 an& o &epression, 6oth 6ecause some &istur6ances occur at almost re7ular inter$als an& 6ecause most o them in&uce a process o a&aptation in the s4stem 8hich 8ill pro&uce the picture o a 8a$eliEe oscillation in e$er4 in&i$i&ual case. -n act, it 8oul& 6e possi6le to 8rite, 8ithout an4 7larin7 a6sur&it4, a histor4 o 6usiness luctuations e(clusi$el4 in terms o e(ternal actors, an& such a histor4 8oul& pro6a6l4 miss a smaller amount o rele$ant act than one 8hich attempts to &o 8ithout them. 0onsequentl4, a theor4 o 6usiness luctuations to the e ect that the4 are cause& 64 e(ternal actors 8oul& not lacE $eri 4in7 e$i&ence M in&ee&, it mi7ht 6e the irst to su77est itsel to an unpre=u&ice& min&. 3here are instances co$erin7 consi&era6le stretches o our material, in 8hich e ects o e(ternal actors entirel4 o$ersha&o8 e$er4thin7 else, cither in the 6eha$ior o in&i$i&ual elements o 6usiness situations or in the 6eha$ior o 6usiness situations as a 8hole. 3he all o 7reen6acE prices &urin7 the 7reen6acE @&e lation@ a ter 18GG, 8hich e$en the prosperit4 o 18J) 8as po8erless to re$erse *althou7h it &i& arrest it+ is an instance o the irst class. 3he 8hole course o economic e$ents rom 191F to a6out 19)0 ma4 6e cite& as an instance o the secon&. 3here is no per ectl4 satis actor4 reme&4 or this. He shall, in&ee&, e(clu&e rom the acts on 8hich 8e are to 6ase un&amental conclusions, material 8hich is o6$iousl4 $itiate& 64 such thin7s as the Horl& Har, @8il&@ in lations, an& so on. 3his is the reason 8h4 8e shall &eal 8ith post8ar c4cles separatel4 an& tr4, as ar as possi6le, to 8orE out un&amentals rom pre8ar material, althou7h sources o acts an& i7ures lo8 much more reel4 since
19
1919 than the4 &i& 6e ore 191F. He cannot, ho8e$er, 7o $er4 ar in this &irection 8ithout losin7 too much o our material. ,ut the in luence o e(ternal actors is ne$er a6sent. An& ne$er are the4 o such a nature that 8e coul& &ispose o them accor&in7 to the schema o , sa4, a pen&ulum continuall4 e(pose& to numerous small an& in&epen&ent shocEs. 3he po8er o the economic machine is 7reat enou7h to hol& its o8n to an astonishin7 &e7ree, e$en as it sho8s its 8orEin7 in the 8orst material an& the most aultil4 constructe& in&ices. ,ut it ne$er 8orEs entirel4 true to &esi7n, althou7h at some times more so than at others. Se$en conclusions o 7reat, i sinister, importance ollo8 rom this. -n the irst place, it is a6sur& to thinE that 8e can &eri$e the contour lines o our phenomena rom statistical material onl4. All that 8e coul& e$er pro$e rom it is that no re7ular contour lines e(ist. He must put our trust in 6ol& an& unsa e mental e(periments or else 7i$e up all hope. 'ere also 8e striEe one o the un&amental &i iculties a6out economic orecastin7None 8hich 7oes ar to e(plain an& e$en to e(cuse some o the ailures o pre&ictions to come true. At almost an4 point o time statistical contour lines 6ear uncom orta6le resem6lance to the sE4line o a cit4 a ter an earthquaEe. 'ence it is as unreasona6le to e(pect the economist to orecast correctl4 8hat 8ill actuall4 happen as it 8oul& 6e to e(pect a &octor to pro7nosticate 8hen his patient 8ill 6e the $ictim o a railroa& acci&ent an& ho8 this 8ill a ect his state o health. Secon&, it is important to Eeep in min& that 8hat 8e Eno8 rom e(perience is not the 8orEin7 o capitalism as such, 6ut o a &istorte& capitalism 8hich is co$ere& 8ith the scars o past in=uries in licte& on its or7anism. 3his is true not onl4 o the 8a4 in 8hich our 6usiness or7anism unctions 6ut also o its structure. 3he $er4 un&aments o the in&ustrial or7anisms o all nations ha$e 6een politicall4 shape&. /$er48here 8e in& in&ustries 8hich 8oul& not e(ist at all 6ut or protection, su6si&ies, an& other political stimuli, an& others 8hich are o$er7ro8n or other8ise in an unhealth4 state 6ecause o them, such as
)0
the 6eet-su7ar in&ustr4 in /urope an& ship6uil&in7 all o$er the 8orl&. Such in&ustries are assets o &ou6t ul $alue, in an4 case a source o 8eaEness an& o ten the imme&iate cause o 6reaE&o8ns or &epressi$e s4mptoms. 3his t4pe o economic 8aste an& mala&=ustment ma4 8ell 6e more important than an4 other. 3hir&, in some cases 8e ma4 7ather enou7h in ormation a6out the nature, ran7e an& &uration o a 6i7 &istur6ance to Eno8 more or less precisel4 8hich o our i7ures are $itiate& 64 it. 3hen 8e can either &rop these items or tr4 to correct them Nas 8e sometimes &o, or instance, in the case o prices &urin7 an in lation. ,ut 8hether 8e &o this or somethin7 else or nothin7 at all, it is al8a4s o the utmost importance or us to 6e thorou7hl4 masters o the economic histor4 o the time, the countr4 or the in&ustr4, sometimes e$en o the in&i$i&ual irm in question, 6e ore 8e &ra8 an4 in erence at all rom the 6eha$ior o time series. He cannot stress this point su icientl4. <eneral histor4 *social, political, an& cultural+, economic histor4, an& more particularl4 in&ustrial histor4 are not onl4 in&ispensa6le 6ut reall4 the most important contri6utors to the un&erstan&in7 o our pro6lem. All other materials an& metho&s, statistical an& theoretical, are onl4 su6ser$ient to them an& 8orse than useless 8ithout them.
)1
--0hapter -/D#-2-,9-#B A.; 3'/ 3'/L9/3-0A2 .L9B L: /0L.LB-0 D#A.3-3-/S
3a6le o 0ontents
A. The Meaning of a Model. Buch can 6e &one 64 the mere
sur$e4 o those acts 8hich 8e &esi7nate 64 the e(pression 6usiness situation an& 64 the common-sense &iscussion o them. 3o maEe hea&8a4 6e4on& this, it is o6$iousl4 necessar4 to collect more acts an& to in& more ela6orate statistical metho&s. He must 7o as ar as possi6le into the pastN6ecause 8e ha$e no other means o o6ser$in7 a lar7e num6er o units o luctuation Nan& hence historical research must 6e o paramount importance e$en or &ealin7 8ith the most practical o contemporaneous pro6lems. ,ut in an4 such &iscussion o economic act 8e run up a7ainst a 8all 8hich 6locEs the roa& to8ar& precise ans8ers to man4 o our questions. He must no8 tr4, 8ith a $ie8 to acquirin7 a more po8er ul apparatus o anal4sis to re ine upon our common-sense metho&s e(actl4 as 8e must tr4 to increase our stocE o acts an& to impro$e
))
upon our statistical metho&s. 3hat is 8hat 8e propose to &o in this chapter an& the t8o that ollo8. Surel4 this is the most natural thin7 to &o. ,ut since 8ell-Eno8n contro$ersies ha$e arisen a6out it, the ollo8in7 remarEs are su6mitte& in e(planation an& &e ense. 1. - 8e present certain concepts an& propositions at the outset an& in a connecte& ar7ument, this is partl4 a mere matter o e(positor4 con$enience. Lther concepts an& propositions 8ill ollo8 later, as the nee& or them arises. ,ut this metho& o e(position carries the &an7er o a misun&erstan&in7. -t 8ill seem to man4 rea&ers as thou7h the acts intro&uce& later ha& no other role to ill than that o $eri 4in7 a pree(istin7 theor4. Hhat 8ill 6e sai& in this chapter an& those ollo8in7 is, in part, nothin7 6ut 7eneraliOe& ormulation o some o the acts presente& later. 3here ore, the term $eri ication &oes not accuratel4 &escri6e the relation 6et8een @theor4@ an& @ acts.@ A much 8i&er claim than it implies must 6e ma&e an& is here ma&e or the &irect stu&4 o historical an& statistical act. ). Some o our re inements upon common sense are lo7icall4 anterior to the acts 8e 8ish to stu&4 an& must 6e intro&uce& irst, 6ecause our actual &iscussions 8oul& 6e impossi6le 8ithout them. Hhat 8e mean &i ers rom 8hat stu&ents o economic c4cles usuall4 un&erstan& 64 a @theor4.@ Ban4 e$en o those 8ho &o not looE upon theor4 as @6a66le,@ are in the ha6it o i&enti 4in7 it 8ith e(planator4 h4potheses. An& it is recEless or &ilettantist h4pothesis maEin7 8hich is responsi6le or 6oth the &iscre&it into 8hich theor4 has allen an& the contrast 8hich or some stu&ents e(ists 6et8een actual *or @realistic@ or @empirical@+ an& theoretic 8orE. ,ut the ramin7 o h4potheses, althou7h sometimes as necessar4 in our science as it is in all others, is neither the sole nor the main unction o a theor4 in the sense in 8hich it is s4non4mous 8ith @anal4tic apparatus.@ - 8e are to speaE a6out price le$els an& to &e$ise metho&s o measurin7 them, 8e must Eno8 8hat a price le$el is. - 8e are to o6ser$e &eman&, 8e
)3
must ha$e a precise concept o its elasticit4. .o h4potheses enter into such concepts, 8hich simpl4 em6o&4 metho&s o &escription an& measurement, nor into the propositions &e inin7 their relations *socalle& theorems+, an& 4et their ramin7 is the chie tasE o theor4, in economics as else8here. 3his is 8hat 8e mean 64 tools o anal4sis. L6$iousl4, 8e must ha$e them 6e ore 8e taEe hol& o the material 8e 8ish to measure an& to un&erstan&. A set o such anal4tic tools, i rame& to &eal 8ith phenomena 8hich orm a &istinct process, 8e call a mo&el or schema o this process. 3. Some 8orEers in our iel& not onl4 ne7lect the tasE to 8hich 8e are a6out to turn, 6ut taEe pri&e in &oin7 so. 3he4 =usti 4 this 64 the claim that the4 are appl4in7 to social acts the metho&s o the ph4sical sciences. 3he4 entirel4 o$erlooE the role o theor4 in ph4sics, 8hich is precisel4 the Ein& o arsenal o tools 8e ha$e in min&. 'o8e$er ri7ht, there ore, it ma4 sometimes 6e to enter solemn protests a7ainst preconcei$e& i&eas, speculation, an& metaph4sics, no ar7ument o 8ei7ht can 6e 7aine& rom the ph4sical analo74 or the $ie8 that the ri7ht 8a4 to 7o a6out our tasE is to assem6le statistics, to treat them 64 ormal metho&s, an& to present the results as the solution o a pro6lem. 3he illusion un&erl4in7 this $ie8 ma4 6e urther e(pose& 64 an instance o 8hat 8e ma4 term .onsense -n&uction. -n e$er4 crisis or &epression 8e o6ser$e that commo&ities 6ecome unsala6le. - on the stren7th o this 8e sa4, @5eople pro&uce too much, hence the4 are, rom time to time, una6le to sell 8hat the4 pro&uce,@ 8e are sa4in7 somethin7 or 8hich there is reall4 no 8arrant in the actual in&in7 itsel . 1et 8e ha$e to maEe statements o this Ein&. - 8e &o so on the in&in7 alone, 8e are per ormin7 an operation $oi& o sense, althou7h it ma4 6e clothe& in terms that looE e(act. F. Statistical an& historical acts ha$e, on the one han&, much more important roles to pla4 in the 6uil&in7 o our Eno8le&7e o a phenomenon than to $eri 4 a theor4 &ra8n rom other sources. 3he4 in&uce the theoretical 8orE an& &etermine its pattern. ,ut, on the other han&, the4 cannot 6e sai& to ill quite satis actoril4 the unction
)F
that theorists usuall4 assi7n to themNthe unction o $eri ication. :or there is, alon7 8ith .onsense -n&uction, such a thin7 as Spurious Keri ication. Startin7 rom the common-sense impression that the interest rate is an important actor in 6usiness situations, 8e ma4 =ump to the conclusion that it is the causal actor responsi6le or 6ooms an& slumps. -n act, almost al8a4s a lo8 rate o interest prece&es a 6oom an& a hi7h rate o interest a slump. - this 8ere enou7h to esta6lish causal connection, this proposition 8oul& 6e one o the sa est o our science. 1et, it is 8ron7 an& coul& 6e pro$e& to 6e so, e$en i no statistical act e$er contra&icte& it. .or is this all. /$en i the proposition 8ere correct, statistics coul& not pro$e it to 6e so, or it stan&s to reason that the 6eha$ior o our time series coul& also 6e e(plaine& 64 another relation or on 7roun&s per ectl4 ree rom causal implicationN or instance, on the 7roun& that e$er4 6oom must 6e prece&e& 64 a state o thin7s 8hich 8e reco7niOe as 6ein7 the re$erse to @6oomin7,@ that in such non6oomin7 situations there is little &eman& or mone4 an&, there ore, a lo8 rate o interest. 'ence prosperous 6usiness 8oul& al8a4s 6e prece&e& 64 lo8 interest, e$en i this ha& nothin7 to &o 8ith 6rin7in7 it a6out or i it 8ere an o6stacle to it. .o statistical in&in7 can e$er either pro$e or &ispro$e a proposition 8hich 8e ha$e reason to 6elie$e 64 $irtue o simpler an& more un&amental acts. -t cannot pro$e such a proposition, 6ecause one an& the same 6eha$ior o a time series can anal4ticall4 6e accounte& or in an in&e inite num6er o 8a4s. -t cannot &ispro$e the proposition, 6ecause a $er4 real relation ma4 6e so o$erlai& 64 other in luences actin7 on the statistical material un&er stu&4 as to 6ecome entirel4 lost in the numerical picture, 8ithout there64 losin7 its importance or our un&erstan&in7 o the case. -t ollo8s that the claim usuall4 ma&e or statistical in&uction an& $eri ication must 6e quali ie&. Baterial e(pose& to so man4 &istur6ances as ours is, &oes not ul ill the lo7ical requirements o the process o in&uction.
)5
3a6le o 0ontents
B. The Fundamental Que tion. Hhen 8e 6ehol& one o the
amiliar 7raphs o economic time series, 8e un&ou6te&l4 ha$e the impression o an @irre7ular re7ularit4@ o luctuations. Lur irst an& oremost tasE is to measure them an& to &escri6e their mechanism. -t is primaril4 or this purpose that 8e shall no8 tr4 to pro$i&e the anal4tic tools or a schema or mo&el. ,ut our min& 8ill ne$er 6e content 8ith this. 'o8e$er much 8is&om there ma4 6e in the 8arnin7s a7ainst premature questions a6out causes13, the4 8ill al8a4s 6e asEe& until the4 are ans8ere&. Boreo$er, our min& 8ill ne$er 6e at rest until 8e ha$e assem6le& in one mo&el causes, mechanisms, an& e ects, an& can sho8 ho8 it 8orEs. An& in this sense the question o causation is the :un&amental Duestion, althou7h it is neither the onl4 one nor the irst to 6e asEe&. .o8 i 8e &o asE this question quite 7enerall4 a6out all the luctuations, crises, 6ooms, &epressions that ha$e e$er 6een o6ser$e&, the onl4 ans8er is that there is no sin7le cause or prime mo$er 8hich accounts or them. .or is there e$en an4 set o causes 8hich account or all o them equall4 8ell. :or each one is a historic in&i$i&ual an& ne$er liEe an4 other, either in the 8a4 it comes a6out or in the picture it presents. 3o 7et at the causation o each 8e must anal4Oe the acts o each an& its in&i$i&ual 6acE7roun&. An4 ans8er in terms o a sin7le cause is sure to 6e 8ron7.
13
3here is, o course, a stron7 ar7ument a7ainst usin7 that questiona6le term at all. He shall speaE o causes in a common-sense 8a4, 8hich, it is 6elie$e&, is not su6=ect to epistemolo7ical in&ictment. - a &e inition 6e thou7ht &esira6le, 8e ma4 sa4 that 8e mean 64 causes o a phenomenon a set o circumstances 8ithout 8hich it 8oul& not present itsel . He mi7ht &e ine them as @necessar4 an& su icient con&itions,@ 6ut the 7reater precision onl4 opens up ne8 &i iculties.
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,ut an entirel4 &i erent question emer7es 6ehin& this one. - 8e succee& in &escri6in7 the economic s4stem 64 means o a 7eneral schema em6o&4in7 certain properties o it, there is o6$iousl4 much practical utilit4 in asEin7 the question 8hether the s4stem, as thus &epicte&, 8ill 64 its o8n 8orEin7 pro&uce 6ooms or crises or &epressions, an&, i so, un&er 8hat circumstances. Similarl4, there is no sense in looEin7 or a sin7le reason 8h4 men &ie, or there is o6$iousl4 a 7reat $ariet4 o reasons. ,ut there is 6oth sense an& interest in the question 8hether an& 8h4 &eath 8oul& come a6out, in the a6sence o lesions, 64 $irtue o the 8orEin7 o the human or7anism or the cells o 8hich it consists. 3his is the trul4 ascinatin7 pro6lem, althou7h it har&l4 e$er enters into the or&inar4 mental operations o me&ical practice, 8hich arc al8a4s concerne& 8ith one or another o the innumera6le patterns o the actual occurrence o &eath. 'a$in7 ormulate& the question as 8e 8ish it to 6e un&erstoo&, 8e ha$e to a&mit that the ans8er ma4 still 6e ne7ati$e. /(ternal actors certainl4 account or much in economic luctuations, an& the4 mi7ht e$en account or e$er4thin7. 3his 8oul& amount to a theor4 o the c4cle 8hich ma4 6e $er4 simpl4 state& > a crisis or &epression occurs 8hene$er there is an un a$ora6le e$ent o su icient importance. He cannot &ismiss this $ie8 a priori. Boreo$er, it &eri$es some support rom tra&itional economics. Hhere economic li e is not treate& as stationar4, it is, 64 the 6est authorities, treate& as a process o or7anic 7ro8th 8hich simpl4 a&apts itsel to chan7in7 &ata. ,arrin7 the 8a$es 8hich can easil4 6e sho8n to result rom the properties o the a&apti$e mechanism, this &oes not point to an4 internal cause o c4cles. Some ha$e ranEl4 hel& the c4cle to 6e a @sham@ or a ran&om luctuation. 1F
1F
An4 o these $ie8s ma4 6e ri7ht, o course, 8hile it is certain that some supporters o the contrar4 $ie8 are 7uilt4 o ault4 reasonin7 or ha$e other8ise aile& to esta6lish the claim the4 maEe or the c4cle as1F suite a &istinct phenomenon. -n part, also, inal &ecision 8ill simpl4 rest on ertilit4 in results an& satis actor4 it to acts. Just here, ho8e$er, it is important to
)J
.o &ou6t, the testimon4 o acts mi7ht 6e such as to maEe the e(istence or a6sence o a c4clical component inherent in the economic process a practical certaint4. ,ut actuall4 the4 &o not speaE 8ith a certain $oiceNespeciall4 6ecause prima- acie a&equate e(ternal actors are al8a4s 8ith usNan& ho8e$er 8e ma4 treat them 64 ormal metho&s, the4 lea$e the :un&amental Duestion unans8ere&. .othin7 remains, there ore, 6ut to construct a mo&el o the economic process an& to see ho8 it 8orEs in the stu&4 o time series. -t also ollo8s that in &oin7 so 8e cannot taEe or 7rante& that there is a c4clical mo$ement inherent in the economic process, as 8e coul& i this 8ere an in&u6ita6le act o economic e(perience.
3a6le o 0ontents
C. The Stationa!" Flo#. 3he anal4tic treatment o the acts o
autonomous chan7e in a close& &omain 6e7ins con$enientl4 8ith the mo&el o an unchan7in7 economic process 8hich lo8s on at constant rates in time an& merel4 repro&uces itsel . $% L6$iousl4, such a mo&el
emphasiOe that e$en strai7ht ne7ation o the e(istence o the c4cle ma4 mean $er4 &i erent thin7s. Br. 0arl Sn4&er, or e(ample, seems to mean no more than that the importance o the 6usiness c4cle, taEen 64 itsel , has o ten 6een e(a77erate&N8hich is quite true. 5ro essor -r$in7 :isher, in /conometrica, Lcto6er 1933, p. 338, ho8e$er, sa4s that @the motion o the 6usiness c4cle as a sin7le simple sel -7eneratin7 c4cle@ is a m4th. He quite a7ree, as the rea&er 8ill see, that the 6usiness c4cle &oes not consist o a sin7le 8a$eliEe mo$ement an& that it is not @simple.@ -t is $er4 &i icult to sa4 8hether the passa7e quote& means more than that. Lther authors, a7ain, 8hen the4 &en4 the e(istence o the c4cle, mean onl4 to &en4 e(act perio&icit4 in the sense o constanc4 o perio&. -n an4 case, in or&er to &en4 an4thin7 8e ha$e e(pressl4 or 64 implication claime& so ar, it 8oul& 6e necessar4 to &en4 that 6usiness is sometimes 7oo& an& sometimes 6a&. 3he non-pro essional rea&er 8ill in& this section, an& perhaps others, &i icult to a6sor6. An& so it is, althou7h the 8riter has simpli ie& to the point o risEin7 incorrectness o statement. 3he pro essional rea&er, in turn, 8ill taEe o ense at this simpli ication. -n particular, he 8ill in& that some tools use& 64 the 8riter are antiquate& an& that in man4 points recent pro7ress o anal4sis has not 6een su icientl4 taEen into account. 3his 8ill
15
)8
8ill present the un&amental acts an& relations o economic li e in their simplest orm, an& it is har&l4 possi6le to 6rin7 them out satis actoril4 8ithout it. -mplicitl4 an& in a ru&imentar4 orm it has, there ore, al8a4s 6een present in the min&s o a6solutel4 all economists o all schools at all times, althou7h most o them 8ere not a8are o it. Some e$en &ispla4e& hostilit4 to it as soon as it 8as ri7orousl4 &e ine& an& ma&e to stan& out in all the 7auntness o its a6stractions. 3his 8as attempte& 64 the ph4siocrats an& &e initel4 achie$e& 64 2eon Halras. 3he Barshallian structure is 6ase& upon the same conception, 8hich it is important to emphasiOe in $ie8 o the act that Barshall &i& not liEe it an& almost ma&e it &isappear rom the sur ace o his e(position. 3he commonsense o this tool o anal4sis ma4 6e ormulate& as ollo8s > irst, i 8e &eal 8ith, sa4, the or7anism o a &o7, the interpretation o 8hat 8e o6ser$e &i$i&es rea&il4 into t8o 6ranches. He ma4 6e intereste& in the processes o li e 7oin7 on in the &o7, such as the circulation o the 6loo&, its relation to the &i7esti$e mechanism, an& so on. ,ut ho8e$er completel4 8e master all their &etails, an& ho8e$er satis actoril4 8e succee& in linEin7 them up 8ith each other, this 8ill not help us to &escri6e or un&erstan& ho8 such thin7s as &o7s ha$e come to e(ist at all. L6$iousl4, 8e ha$e here a
6e &one in another 6ooE 8hich, in a 8i&er rame, 8ill amon7 other thin7s o$erhaul the purel4 theoretic parts o the present ar7ument. 'ere, no other course seeme& open to the 8riter than the one he has taEen. 3he irst t8o tools 8e ha$e =ust intro&uce&Nthe i&ea o the close& the &omain an& the stationar4 processNalthou7h a6solutel4 necessar4 or strai7ht thinEin7, alrea&4 call or apolo7ies. 3he irst, 8hile une(ceptiona6le in itsel , 6ecomes $er4 &ou6t ul 8hen applie& to countries linEe& to each other an& the rest o the 8orl& 64 a multitu&e o economic relations, o 8hich 8e shall taEe 6ut the most super icial account. 3his is a $er4 serious imper ection, not onl4 6ecause 8e rele7ate to the realm o &istur6in7 actors 8hat is part o the real process o economic chan7e, 6ut also 6ecause the most ur7ent tasE in the iel& o the theor4 o international tra&e is o6$iousl4 its reconstruction rom the stan&point o the theor4 o c4cles. 3he secon& tool meets 8ith o6=ections e$en rom specialists. He 8ant it in or&er to 6rin7 out, 64 contrast, the contours o the phenomena o economic e$olution.
)9
&i erent process 6e ore us, in$ol$in7 &i erent acts an& concepts such as selection or mutation or, 7enerall4, e$olution. -n the case o 6iolo7ical or7anisms no6o&4 taEes o ense at the &istinction. 3here is nothin7 arti icial or unreal a6out it an& it comes naturall4 to us M the acts in&ee& impose it on us. Secon&, our &istinction is 64 no means orei7n to the 8a4s o thinEin7 o practical 6usiness. /$er4 6usinessman realiOes that runnin7 his plant in the customar4 8a4, 7oin7 throu7h all the motions o &ail4 6usiness routine, is one thin7 an& that settin7 up the plant or chan7in7 its setup is another. 'e approaches these tasEs 8ith attitu&es 8hich &i er characteristicall4 rom each other. 3here 8oul& 6e no o6=ect in tr4in7 to use into one schema the thin7s to 6e &one an& the 6eha$ioristic t4pes encountere& in the t8o cases, merel4 6ecause @real li e@ har&l4 e$er presents one o them 8ithout the other, or 6ecause the real 8orl& is al8a4s @&4namic.@ 3he ans8er to an4 un8illin7ness to accept our &istinction on the score o its 6ein7 too theoretical is simpl4 that e$er46o&4 actuall4 8orEs 8ith it, 6oth in practical li e an& in anal4sis, althou7h in a su6conscious an& ine(act 8a4 Nan& that it is =ust as 8ell to put lo7ical &e initeness into this uni$ersal practice. He shall see, moreo$er, that this is one o the most important means o un&erstan&in7 the mechanism o the 6usiness c4cle.
3a6le o 0ontents
&. E'uili(!ium and the Theo!eti)al No!m. :or our present
ar7ument 8e ma4 thus $isualiOe an economic process 8hich merel4 repro&uces itsel at constant rates > a 7i$en population, not chan7in7 in either num6ers or a7e &istri6ution, or7aniOe& or purposes o consumption in househol&s an& or purposes o pro&uction an& tra&e in irms, li$es an& 8orEs in an unchan7in7 ph4sical an& social *institutional+ en$ironment. 3he tastes *8ants+ o househol&s are 7i$en an& &o not chan7e. 3he 8a4s o pro&uction an& usances o commerce are optimal rom the stan&point o the irms" interest an&
30
8ith respect to e(istin7 horiOons an& possi6ilities, hence &o not chan7e either, unless some &atum chan7es or some chance e$ent intru&es upon this 8orl&. 3echnolo7ical &ata ma4 6e e(presse&, or e$er4 irm, 64 a unction 8hich linEs quantities o acts, such as la6or, ser$ices o natural a7ents an& means o pro&uction that are themsel$es pro&uce& *@interme&iate pro&ucts@ > ra8 material, equipment, an& so on+ to the quantit4 o the pro&uct 8hich it is possi6le to pro&uce 64 each o the in inite num6er o 8a4s in 8hich the4 can 6e com6ine& or this pro&ucti$e tasE, technolo7ical practice an& the 8hole en$ironment 6ein7 8hat the4 are. 3his unction, Eno8n as the pro&uction unction, tells us all 8e nee& to Eno8 or purposes o economic anal4sis a6out the technolo7ical processes o pro&uction. 5ro&uction, in the sense rele$ant to economics, is nothin7 6ut com6inin7 quantities o actors, an& it is, or economic purposes, e(hausti$el4 &escri6e& 64 such a com6ination *pro&ucti$e com6ination+. Hhile the pro&uction unction itsel , in the case o a stationar4 econom4, is a &atum an& in$ariant in orm, the actual com6inations o actors, as measure&, or e(ample, 64 coe icients o pro&uction, are amon7 the $aria6les o the pro6lem, an& must 6e &etermine& 64 economic consi&erations. - these coe icients 8ere all i(e&, that is, i in or&er to pro&uce, sa4, a 6ushel o 8heat it 8ere necessar4 to com6ine lan&, la6or, see&, ertiliOers, an& so on, in 7i$en an& unaltera6le proportions, there 8oul& 6e no economic pro6lem o pro&uction 6e4on& &eci&in7 8hether to pro&uce the 6ushel or not. - , ho8e$er, there is some ree&om o choice 6et8een com6inations, 8hich means that it is possi6le to pro&uce the 6ushel o 8heat either 8ith, sa4, a certain quantit4 o lan& an& a certain quantit4 o la6or or 8ith more lan& an& less la6or or less lan& an& more la6or, other actors remainin7 constant, then the economic pro6lem emer7es in the shape o consi&erations a6out costs an& $alues. 3his is 8hat is usuall4 re erre& to as Su6stituta6ilit4 o :actors. -nasmuch as that ree&om o choice is not a6solute an& su6stitution is possi6le onl4 accor&in7 to certain rules an& 8ithin certain limits, the pro&uction unction 8hich em6o&ies these rules an&
31
limits ma4 6e looEe& upon as a con&ition or constraint impose& 64 the technolo7ical horiOon an& the structure o the economic en$ironment on economic &ecision or on the ma(ima o economic a&$anta7e or pro ita6leness 8hich economic &ecision stri$es to attain. So ar as su6stitution is not possi6le at all, anal4tic &i iculties arise 8hich nee& not &etain us here. ,ut another point calls or notice. - all actors 8ere in initel4 &i$isi6le, the pro&uction unction 8oul& 6e continuous an& 8e coul& mo$e a6out on it 64 in initesimal steps. Ban4 actors, ho8e$er, are not in initel4 &i$isi6le 6ut a$aila6le onl4 in such lar7e minimum units NthinE, or e(ample, o a railroa& tracE or e$en a steel plantNthat pro&uct respon&s to a&&ition o a unit not 64 a small $ariation 6ut 64 a =ump, 8hich means that the pro&uction unction is &iscontinuous in such points. Such actors 8e call lump4. .o8 in the presence o a lump4 actor it 8ill $er4 o ten happen that pro&uction 6elo8 a certain quantit4 o output 8ill entirel4 ha$e to &o 8ithout that actor. An instance is the small-scale pro&uction o the artisan t4pe, in 8hich it 8oul& not pa4 to use costl4 machiner4. -n this case, mere increase in output 8ithin the technolo7ical horiOon o the pro&ucers an& alon7 one an& the same pro&uction unction ma4 spell chan7e in 8hat is usuall4 re erre& to 64 the ill-&e ine& term Betho& o 5ro&uction. 3he same e ect ma4 6e 6rou7ht a6out 64 chan7e in the relati$e prices o actors > an increase in 8a7es ma4 in&uce a7riculture to procee& rom intensi$e to e(tensi$e metho&s o culti$ation, or in&ustr4 to replace la6or 64 machiner4 8hich ma4 in$ol$e complete chan7e o technolo7ical processes or principles. 1et 6oth classes o cases ma4 come a6out 8ithin one an& the same pro&uction unction. -n $ie8 o much that is to ollo8, it is to &istin7uish those classes o cases rom othersN8hich coul& also 6e &escri6e& as chan7es in metho& o pro&uction 6ut 8hich &o impl4 chan7es in the pro&uction unction. 3he criterion is 8hether or not the chan7e occurs 8ithin the 7i$en horiOon o 6usinessmen. Lr, to put it in another 8a4, 8hether or not irms 8oul& ha$e rom the outset a&opte& the metho& 8hich the4
3)
actuall4 a&opt 8hen their output has increase& su icientl4, ha& the output 6een at that i7ure rom the outset, or 8hether or not irms 8oul& ha$e a&opte& pro&uction 64, sa4, machiner4 rom the outset, ha& 8a7es also stoo& at their hi7her i7ure rom the outset. -n 7eneral, thou7h not uni$ersall4, this is equi$alent to sa4in7 that 8e mo$e on an in$ariant pro&uction unction as lon7 as $ariations in the quantit4 o pro&uct either can 6e &ecompose& into in initesimal steps or cannot 6e so &ecompose& e(clusi$el4 6ecause o lumpiness in actors. .o other than or&inar4 routine 8orE has to 6e &one in this stationar4 societ4, either 64 8orEmen or mana7ers. ,e4on& this there is, in act, no mana7erial unctionNnothin7 that calls or the special t4pe o acti$it4 8hich 8e associate 8ith the entrepreneur. .othin7 is oreseen 6ut repetition o or&ers an& operations, an& this oresi7ht is i&eall4 6orne out 64 e$ents. 1G 3he pro&ucti$e process is entirel4 @s4nchroniOe&,@ 8hich means that there is no 8aitin7 or the results o pro&uction, all o 8hich present an& replace themsel$es at the moment the4 are 8ante& accor&in7 to a plan to 8hich e$er4thin7 is per ectl4 a&apte&. /$er4thin7 is inance& 64 current receipts. Hhen &ealin7 8ith the pure lo7ic o the process, it is con$enient to e(clu&e sa$in7s Nunless 8e &e ine sa$in7s so as to co$er replacementNsince the man 8ho sa$es o6$iousl4 &oes somethin7 either to chan7e his economic situation or to pro$i&e or a chan7e in it 8hich he oresees M an& these cases $iolate, i 8e taEe the strictest $ie8, the assumptions &e inin7 the stationar4 process. 3he income stream, constant i 8e ne7lect such thin7s as seasonal $ariation, consists o 8a7esNpa4ments or pro&ucti$e an& consumpti$e ser$ices ren&ere& 64 human 6ein7s, mana7ers inclu&e&Nan& rentsNpa4ments or ser$ices o natural
1G
3he rea&er ma4 pause or a moment to re lect on the nature o such statements. -s it not use ul to &istin7uish, or the saEe o clarit4, phenomena 8hich 8oul& present themsel$es un&er such assumptions rom those 8hich are contin7ent upon ailure o a oreseen course o e$ents to come true V An& is the a6o$e statement reall4 quite so unrealistic as it soun&s V Hh4 shoul& the 6usinessman 6e surprise& 8hen his oresi7ht ails, i there 8ere not a 7reat mass o routine thin7s 8hich actuall4 &o con orm to e(pectation V
33
a7ents. 3here ma4 6e monopol4 7ains, 6ut the4 must 6e entirel4 consume& either 64 the monopolists themsel$es or 64 some a7enc4 8hich taEes them a8a4 rom the monopolists, or other8ise the4 8oul& chan7e the stationar4 lo8. As ar as monopol4 7ains are &ue to the peculiar qualit4 o some actor or to a monopolistic or7aniOation o those 8ho o8n the actor, these 7ains 8ill simpl4 appear as 8a7es or rents an& ma4 6e entere& into the appropriate cate7or4. - there are appliances, 8hich are themsel$es pro&ucts 6ut in initel4 &ura6le ones, 8e ma4 also list the return rom them un&er the Barshallian title quasi-rent. ,ut no other cases o quasi-rent 8oul& e(ist in so per ectl4 6alance& a state o thin7s. 9ea&ers 8ho hol& an4 theor4 o interest accor&in7 to 8hich that phenomenon 8oul& 6e present also in a per ectl4 stationar4 state *8hich the 8riter &oes not 6elie$e+ are ree to insert here also interest as a pa4ment or the pro&ucti$e ser$ice 8hich the particular theor4 chosen hol&s to 6e responsi6le or it. Such a process 8oul& turn out, 4ear a ter 4ear, the same Ein&s, qualities, an& quantities o consumers" an& pro&ucers" 7oo&s M e$er4 irm 8oul& emplo4 the same Ein& an& quantities o pro&ucti$e 7oo&s an& ser$ices M inall4, all these 7oo&s 8oul& 6e 6ou7ht an& sol& at the same prices 4ear a ter 4ear. 1et all these prices an& quantities are @$aria6les@ in the sense that the4 are not uniquel4 &etermine& 64 e(tra-economic constraint 6ut ma4, or&inaril4, $ar4 8ithin 8i&e limits impose& 64 the ph4sical an& social en$ironment. - in the stationar4 state the4 &o not $ar4 as the4 coul& 8ithin those limits, this is a purel4 economic act 8hich is to 6e accounte& or 64 purel4 economic reasonin7. He Eno8 rom e(perience 8hat Ein& o relations su6sist 6et8een prices an& quantities, 64 $irtue o 8hich the4 in luence each other. 3his 8e e(press 64 sa4in7 that prices an& quantities o all 7oo&s an& ser$ices are inter&epen&ent an& orm a s4stem. 3he irst an& oremost tasE o economic anal4sis is to e(plore the properties o that s4stem. 3he metho& o &oin7 this is analo7ous to the metho& Eno8n in mechanics as the metho& o $irtual &isplacements. Hhat 8e 8ant to learn 6e ore an4thin7 else is 8hether or not the
3F
relations Eno8n to su6sist 6et8een the elements o the s4stem are, to7ether 8ith the &ata, su icient to &etermine these elements, prices an& quantities, uniquel4. :or our s4stem is lo7icall4 sel containe& onl4 i this is the case > 8e can 6e sure that 8e un&erstan& the nature o economic phenomena onl4 i it is possi6le to &e&uce prices an& quantities rom the &ata 64 means o those relations an& to pro$e that no other set o prices an& ph4sical quantities is compati6le 8ith 6oth the &ata an& the relations. 3he proo that this is so is the ma7na charts o economic theor4 as an autonomous science, assurin7 us that its su6=ect matter is a cosmos an& not a chaos. -t is the rationale o the i&ea o $aria6les that &o not $ar4, the =usti ication o the schema o a stationar4 economic process. 3he $alues o prices an& quantities 8hich are the onl4 ones, the &ata 6ein7 8hat the4 are in each case, to satis 4 those relations, 8e call equili6rium $alues. 3he state o the s4stem 8hich o6tains i all prices an& quantities taEe their equili6rium $alues 8e call the state o equili6rium. 1J Shoul& there 6e more than one set o $alues o $aria6les satis 4in7 these con&itions, 8e speaE o a multiple equili6rium. 3he terms sta6le, neuter *or in&i erent+, an& unsta6le equili6rium are sel -e(planator4. /quili6rium that is unique an& sta6le is, o course, the onl4 per ectl4 satis actor4 case.
1J
:riction ma4 Eeep stationar4 an economic process that is not in equili6rium. 3his case is o consi&era6le importance or an4 stu&4 o 6usiness situations an& their chan7es, particularl4 or a stu&4 o their reactions to an4 impulse to chan7e. -t &i$i&es up into the su6case in 8hich there is no equili6rium position an& the su6case in 8hich the s4stem &ispla4s no ten&enc4 to mo$e to8ar& an equili6rium position, 8hich ma4, ne$ertheless, 6e pro$e& to e(ist. :or the rou7h purposes o our $olume, 8e shall not ha$e to 7o into this matter e(cept inci&entall4. 2et us, ho8e$er, settle on a term 64 8hich to i&enti 4 the case, an& call it inacti$e. Hhene$er it o6tains, 8e &o not @un&erstan&@ the particular prices an& quantities 8hich e(ist, in the sense mentione& a6o$e. 3he4 coul&, so ar as the relations em6o&ie& in our theor4 are concerne&, =ust as 8ell 6e &i erent rom 8hat the4 arc. ,ut in all cases in 8hich there is an economic rationale or unchan7in7 prices an& quantities *to these 8e 8ill hence orth con ine the term stationar4+, this rationale is a or&e& 64 the concept o equili6rium. 'ence, in these cases, stationar4 lo8 an& equili6rium are anal4ticall4 equi$alent an&, &escri6in7 the same mass o acts, ha$e the same empirical 6asis, the statistical part o 8hich consists primaril4 in the 8ell-Eno8n in&in7s a6out the 7reat Sta6ilit4 in time o the pattern o consumption.
35
So ar 8e ha$e 6een usin7 the concept o 7eneral or Halrasian equili6rium. -t implies that e$er4 househol& an& e$er4 irm in the &omain is, taEen 64 itsel , in equili6rium. :or the househol&s, this means that, un&er the e(istin7 circumstances, tastes an& economic horiOon inclu&e&, no househol& eels a6le to impro$e its situation 64 trans errin7 an4 element o its mone4 income rom the commo&it4 on 8hich it is actuall4 spent to an4 other commo&it4. :or the irms this means that, un&er e(istin7 circumstances, technolo7ical an& commercial Eno8le&7e an& economic horiOon inclu&e&, no irm eels a6le to increase its re$enue 64 trans errin7 an4 element o its monetar4 resources *@capital@+ rom the actor it is actuall4 spent on, to an4 other actor. Bore simpl4 an& 4et some8hat more 7enerall4, all househol&s an& all irms must 6elie$e that, un&er the circumstances an& consi&erin7 those elements o their economic situation 8hich it is in their po8er to chan7e, the4 cannot impro$e their position 64 alterin7 their 6eha$iorNthat is to sa4 that their pattern o consumption an& pro&uction is trimme& to per ection. Bathematicall4, o course, this is e(presse& 64 ma(imum an& minimum theorems. 5rices an& quantities must also ul ill the ollo8in7 con&itions i Halrasian equili6rium is to pre$ail. /$er4 househol&"s an& e$er4 irm"s 6u&7et must e(actl4 6alance. All quantities o all commo&ities pro&uce& 64 irms must 6e 6ou7ht 64 househol&s or other irms. All e(istin7 actors must 6e use& as ar as their o8ners 8ish to sec them use& at the prices the4 can 7et, an& no &eman&, e ecti$e at those prices, must 7o unsatis ie&. 3he last con&ition a or&s the 6asis o a ri7orous &e inition o unemplo4ment. 38o more concepts o economic equili6rium 8e shall &esi7nate 64 the terms partial or Barshallian, an& a77re7ati$e equili6rium. 7eneral equili6rium pre$ails, e$er4 irm an& e$er4 in&ustr4 is in&i$i&uall4 in equili6rium M 6ut an in&i$i&ual irm or an in&i$i&ual in&ustr4 ma4 6e in equili6rium 8hile there is no 7eneral equili6rium. An& or some purposes, an in&i$i&ual in&ustr4 ma4 6e sai& to 6e in state o equili6rium 8hile the irms composin7 it are not. 3his concept
3G
is appropriate to the Barshallian t4pe o anal4sis, an& recommen&s itsel or man4 purposes 64 its simplicit4 an& @han&iness.@ ,ut the concept 8hich matters to us an& 8hich is the onl4 strictl4 correct one, is the Halrasian equili6rium. Hhoe$er 8orEs 8ith partial equili6ria soon &isco$ers the necessit4 o an instrument that 8ill ena6le him to han&le processes 7oin7 on in the s4stem as a 8hole 8hich escape his @partial@ tools. 'e is then liEel4 to complement his apparatus 64 a s4stem o relations 6et8een social a77re7atesNsuch as total output, total income, net total o pro itsNan& to reason 011 these, to7ether 8ith elements o outstan&in7 importance or the s4stem as a 8holeNsuch as quantit4 o mone4, rate o interest, an& price le$el. - these elements are so a&=uste& that there is no ten&enc4 to chan7e arisin7 rom their relations to each other, 8e ma4 speaE o a77re7ati$e equili6rium. 3his is the equili6rium concept use&, or e(ample, in Br. Pe4nes" 3reatise on Bone4. -ts use ulness or some purposes 8e &o not &en4. ,ut it is o6$ious that this Ein& o equili6rium is compati6le 8ith most $iolent &isequili6ria in e$er4 other sense. An& these &isequili6ria 8ill assert themsel$es 64 chan7in7 the 7i$en situation, inclu&in7 the a77re7ati$e quantities themsel$es. -t is, there ore, mislea&in7 to reason on a77re7ati$e equili6rium as i it &ispla4e& the actors 8hich initiate chan7e an& as i &istur6ance in the economic s4stem as a 8hole coul& arise onl4 rom those a77re7ates. Such reasonin7 is at the 6ottom o much ault4 anal4sis o 6usiness c4cles. -t Eeeps anal4sis on the sur ace o thin7s an& pre$ents it rom penetratin7 into the in&ustrial processes 6elo8, 8hich are 8hat reall4 matters. -t in$ites a mechanistic an& ormalistic treatment o a e8 isolate& contour lines an& attri6utes to a77re7ates a li e o their o8n an& a causal si7ni icance that the4 &o not posses. - 8e consi&er 8hat those a77re7ates are, 8e un&erstan& imme&iatel4 ho8 eas4 it is, once this startin7 point is chosen, to sli&e o into all the super icialities o monetar4 theories o c4cles. -t shoul&, ho8e$er, 6e notice& that, or a point o equili6rium, one o the relations su6sistin7 6et8een a77re7ati$e quantities ma4 6e e(presse& 64 8hat is Eno8n as the
3J
equation o e(chan7e or e$en in terms o the @quantit4 theor4 o mone4,@ 8hich is ormall4 correct or such points an& onl4 or such points. -n act, it is simpl4 a con&ition o equli6rium. He shall re er to it as the monetar4 li7amen. Another &istinction ma4 6e intro&uce& here 8hich is o special importance in the case o 7eneral equili6rium. - the elements o the economic s4stem e(actl4 satis 4 all the relations, con&itions, or li7amina constituti$e o the s4stem, 8e shall sa4 that the s4stem is in per ect equili6rium. - 8e in& that a s4stem, 8ithout satis 4in7 li7amina e(actl4, is as near to per ect equili6rium as it 8ill 7o, an& that it 8ill not mo$e rom that position unless some e$ent impin7es upon it, 8e shall sa4 that it is in imper ect equili6rium. 18 An equili6rium the imper ection o 8hich consists e(clusi$el4 in the acts that irms use more actors an& Eeep lar7er stocEs an& 6alances than 8oul& 6e the case i the4 8ere or7aniOe& accor&in7 to the hi7hest stan&ar& o e icienc4 possi6le un&er the circumstances an& that there is unemplo4ment o resources rom in&olence o o8ners 8e shall call slopp4. He ha$e not ha& to maEe an4 re erence to time since 8e replace& rates 64 a6solute quantities. ,ut no8 it is con$enient to ollo8 Barshallian tra&ition an& to maEe use o time in or&er to &e ine another t4pe o imper ection o equli6rium. Hhat 8as meant a6o$e 8as the case o a s4stem so circumstance& as ne$er to reach per ect equili6rium. ,ut in other cases 8e in& that, 8hile the s4stem is not
18
3here are, o course, man4 reasons or the pre$alence o such imper ections 6esi&es the un&amental one that no part o the 8orl& o real phenomena e$er li$es up to its conceptual picture. ,ut our &istinction is not inten&e& to e(press the mere act that schemata ne$er it realit4 e(actl4. 3his 8e coul& &ispose o 64 sa4in7 that the theoretical schema o per ect equili6rium is simpl4 our tool 64 8hich to e(press some aspects o 8hat in realit4 is al8a4s 6ut imper ect equili6rium. 3he &istinction is not 6et8een schema an& realit4, 6ut 6et8een t8o schemata &esi7ne& to taEe account o &i erences in actual situations 8hich are not ne7li7i6le 6ut important an& pro&ucti$e o consequences, 8hich &eser$e separate theoretical treatment.
38
constitutionall4 incapa6le o reachin7 per ect equili6rium, chan7in7 con&itions or &istur6in7 e$ents require a&aptations 8hich can 6e ma&e onl4 in time. -n such cases there ma4 6e equili6rium as ar as rapi&l4 chan7in7 elements are concerne& an& &isequili6rium in elements o slo8er a&aptation, such as contracts an& equipment. 3hese @momentar4@ or @pro$isional@ or @short-time@ or @tentati$e@equili6ria ma4 use ull4 6e contraste& 8ith @&e initi$e@ or 8ith @lon7-time@ equili6ria. 3here is some &an7er in associatin7 a certain state o the s4stem 8ith a lapse o time &urin7 8hich chan7es 8ill una$oi&a6l4 occur that 8ill su6stitute a set o prices an& quantities entirel4 &i erent rom the one 8hich 8oul& ha$e satis ie& equili6rium con&itions 6e ore an& to8ar& 8hich the s4stem 8as concei$e& to 6e &ri tin7. Hhat matters here, ho8e$er, is onl4 that Barshallian rea&ers shoul& realiOe that our concept o per ect Halrasian equili6rium is aEin to 8hat Barshallian theor4 means 64 the lon7-time equili6rium, i the con&itions thus &esi7nate& are satis ie& or e$er4 in&i$i&ual element o the economic s4stem. 3he $alues 8hich elements must taEe to satis 4 those con&itions, Barshall"s .ormal Kalues, 8e call their 3heoretical .orms. An& that state o the s4stem in 8hich e$er4 element con orms to its theoretical norm, ho8e$er &istant it ma4 6e rom actual li e, is 8hat ren&ers to the theorist the ser$ice 8hich to the 6usinessman is ren&ere& 64 the i&ea o a normal 6usiness situation. 2o7icall4 puri ie&, the latter concept mer7es into the ormer.
3a6le o 0ontents
E. Com*li)ation and Cla!ifi)ation . ,e ore 7oin7 on, 8e must
pause to 7lance or a moment at our ma7na charta. -s it satis actor4 in e$er4 respect, i.e., has it 6een satis actoril4 pro$e& that or each set o &ata there is a unique set o prices an& ph4sical quantities V .o M nor is, or that matter, the ma7na charta o an4 other science entirel4 satis actor4, or e$er48here a Eeener spirit o criticism an& more
39
po8er ul tools o o6ser$ation an& anal4sis ha$e &estro4e& the primiti$e simplicit4 an& com orta6le &eterminateness o earlier sta7es. -t is, ho8e$er, possi6le to pro$e 6e4on& reasona6le &ou6t an& 8ith 6ut unimportant quali ications that there e(ists a uniquel4 &etermine& equili6rium state o the economic s4stem in the special case o per ect competition. 3his case is &e ine& 64 the con&itions *a+ that no seller or 6u4er is a6le to in luence the price o an4 commo&it4 or actor 64 his o8n action an& that there is no concerte& action, an& *6+ that there is per ect mo6ilit4 o commo&ities an& actors all o$er the economic iel& *i.e., amon7 all possi6le uses+. 2%on Halras has 6uilt the relations su6sistin7 6et8een the elements o the economic s4stem into equations, an& has sho8n that the4 su ice to &etermine unique $alues o $aria6les. 'is proo le t much to 6e &esire& in technique an& &etails," 6ut later anal4sis still retains the principle. 'o8e$er, se$eral comments are calle& or, e$en in the case o per ect equili6rium in per ect competition. 19 1. 3he proo , 8ere it e$en per ectl4 satis actor4 in lo7ic, that, 7i$en certain &ata an& certain relations, there is one an& onl4 one set o $alues o the $aria6les that 8ill satis 4 the latter an&, at the same time, 6e compati6le 8ith the ormer, &oes not impl4 that irms an& househol&s 8ill actuall4 6eha$e in such a 8a4 as to arri$e at that set o $alues or return to such a set 8hen some &istur6ance has &ri$en them rom it. 1et, 8e cannot rest content 8ith a mere e(istence theorem o the ormer sort. Hhat matters to us is precisel4 the presence or a6sence o an actual ten&enc4 in the s4stem to mo$e to8ar& a state o equili6rium > i this concept is to 6e use ul as a tool
19
-t must 6e a&mitte& that, mathematicall4, our proo is e$en no8 imper ect an& 6ecomes con$incin7 onl4 8hen supplemente&, step 64 step, 64 economic consi&erations. "-he ori7inal metho& o countin7 equations, sho8in7 that the4 are linearl4 in&epen&ent an& in the same num6er as the $aria6les is, o course, ina&equate. 0onsi&era6le pro7ress achie$e& mainl4 64 Amoroso an& Hal& has not quite o$ercome the &i icult4. ,ut critics or7et *6esi&es the act that our proo is no 8orse than man4 currentl4 use& in ph4sics+ that the proo &oes not rest on mathematics alone.
F0
o 6usiness-c4cle anal4sis, the economic s4stem must stri$e to reesta6lish equili6rium 8hene$er it has 6een &istur6e&. 3his pro6lem has irst 6een seen 64 Halras, althou7h some critics &o not seem to 6e a8are o the act. 'is solution starts rom the o6ser$ation that &isequili6rium, 8hich means &e$iation o at least one price or quantit4 rom equili6rium $alue, necessaril4 spells pro its or losses to some6o&4 at the spot or spots in 8hich it occurs. An& the ar7ument is that this some6o&4 can, un&er con&itions o per ect competition, 7et out o that loss or ull4 reap that pro it in no other 8a4 than 64 &ecreasin7 or increasin7 the quantit4 o his commo&it4. 3his 8ill &ri$e him to8ar& equili6rium, an& i all irms an& househol&s simultaneousl4 react in the same manner, it 8ill e$entuall4 6rin7 the 8hole s4stem to equili6rium, pro$i&e& that all actions an& reactions are per orme& 8ithin the 6oun&s o amiliar practice that has e$ol$e& rom lon7 e(perience an& requent repetition. 0ommon sense tells us that this mechanism or esta6lishin7 or reesta6lishin7 equili6rium is not a i7ment &e$ise& as an e(ercise in the pure lo7ic o economics 6ut actuall4 operati$e in the realit4 aroun& us. 1et it constitutes 6ut a irst appro(imation 8hich stops ar short o 8hat 8e nee& or an anal4sis o processes in an incessantl4 &istur6e& economic 8orl&, an& lea$es out o account man4 acts that ma4 6e =ust as important as those it inclu&es an& e$en 7o ar to8ar& pro&ucin7 e(actl4 opposite results. ). 2ater on 8e shall o ten meet 8ith patterns o realit4 8hich require quali ication, impro$ement, or e$en a6an&onment o that Halrasian mo&el. 'ere 8e 8ill notice a e8 points that seem particularl4 rele$ant to the question o principle. All, or nearl4 all, o the &i iculties 8e encounter 8ill 6e seen to 6e amena6le to re&uction to the one act that economic 6eha$ior cannot 6e satis actoril4 e(presse& in terms o the $alues 8hich out $aria6les assume at an4 sin7le point o time. :or instance, quantit4 &eman&e& or supplie& at an4 time is not merel4 a unction o the price that pre$ails at the same time, 6ut also o past an& *e(pecte&+ uture $alues o that price > 8e
F1
are, there ore, &ri$en to inclu&e in our unctions $alues o $aria6les 8hich 6elon7 to &i erent points o time. 3heorems 8hich &o this 8e call &4namic. 3he simplest case in point arises rom technolo7ical la7s 8hich 8oul& in themsel$es su ice to account or the act that in practice 8e ne$er o6ser$e an4 6ut those pro$isional or short-time equili6ria mentione& a6o$e. 3here are al8a4s elements in the setup o a irm, as 8ell as in the economic s4stem, 8hich or technolo7ical reasons cannot 6e a&apte& quicEl4, 8hile others can. .o8 the importance o this or our present &iscussion &oes not lie in the o6$ious act that ull or per ect equili6rium, since it taEes so much time to come a6out, ma4 ail to come a6out at all an& that, there ore, ne8 &istur6ances al8a4s impin7e on an imper ectl4 equili6riate& s4stem. :or this act &oes not per se ne7ati$e the e(istence o a ten&enc4 to8ar& per ect equili6rium 8hich 8ill assert itsel in spite o it an& ser$e to e(plain man4 actual processes, e$en i it ne$er reaches its 7oalN8hich is all 8e 8ant. -n or&er to pro&uce ne8 phenomena an& to impair seriousl4 the use ulness o the Halras-Barshall &escription, reaction to the interme&iate situations create& 64 such partial a&aptation 8oul& ha$e to counteract or to re$erse that ten&enc4 an& to lea& a8a4 rom instea& o to8ar& ull equili6rium. 3his is not in 7eneral so > necessit4 or interme&iate a&aptation an& or reaction to measures o interme&iate a&aptation alters the paths the s4stem taEes an& there64 almost una$oi&a6l4 also the particular set o $alues 8hich 8ill e$entuall4 6e reache&, 6ut &oes not in itsel 6ar the 8a4 to some equili6rium. 3echnolo7ical acts 8hich entail this are &ata. 3he per ect equili6rium 8e can still $isualiOe in this case is relati$e to them an& &i erent rom 8hat it 8oul& 6e i the4 8ere &i erent. -n the 7eneral case, ho8e$er, this is all. He shall meet e(ceptions, 6ut the4 must 6e reco7niOe& as such an& treate& on their merits an& 8ith &ue re7ar& to their particular causes.
F)
3. As an instance 8hich enters into the class o la7 e ects an& 8hich 8ill call or attention at later sta7es o our anal4sis, 8e 8ill mention the cases in 8hich pro&ucers" reactions to chan7es in price &o not taEe e ect at all or some timeNsa4, in the case o man4 a7ricultural commo&ities, not until the ne(t har$est an& then all taEe e ect at once. -n such cases suppl4 &oes not 8orE up to equili6rium point 64 small steps an& stop there, 6ut outruns it in one =erE. 5rice then in turn reacts 8ith a correspon&in7 =erE, an& the process repeats itsel in the opposite &irection. -t is theoreticall4 concei$a6le that it 8ill ne$er stop an& that prices an& quantities 8ill, 8ithout an4 ne8 &istur6ance an& un&er con&itions o per ect competition, luctuate in&e initel4 aroun& equili6rium $alues 8ithout e$er hittin7 them. Hhether these luctuations &ispla4 increasin7 or &ecreasin7 or constant amplitu&esN8hether the4 arc e(plosi$e, &ampe& or stationar4 N&epen&s on the constants o the &eman& an& suppl4 unctions. 3his is the 0o68e6 5ro6lem o recent ame, 8hich irst attracte& 8i&esprea& attention in the shape o the so-calle& 'o7 04cle. Just no8 8e 8ill merel4 notice, irst, that it is o6$iousl4 not the la7 alone 8hich pro&uces the phenomenon an&, secon&, that &ampe& luctuations o this sort are, o course, mo$ements to8ar& equili6rium. Stationar4 luctuations 8oul& ha$e to taEe the place o the equili6rium point 6ut 8oul& not other8ise a ect our ar7ument. F. .ot onl4 the la7s en$isa7e& in ), 6ut an4 Ein& o pro$isional equili6ria, ho8e$er con&itione&, ma4 create that &i icult4. #ltimate equili6rium 8ill in 7eneral &epen& on the path 64 8hich it is reache&, i.e., on the 8hole series o transactions that are usuall4 carrie& out at $ar4in7 prices as the situation un ol&s. -n this sense the outcome is in&eterminate. Halras arri$e& at his unique equili6rium 64 startin7 rom apri( cri% par haOar& an& allo8in7 people to sa4 8hat quantities the4 8oul& 6e 8illin7 to &eman& an& to suppl4 at that price 8ithout actuall4 6u4in7 or sellin7 until that initial price isNpar tYtonnementN so a&=uste& as to equate quantit4 supplie& an& quantit4 &eman&e&.
F3
/&7e8orth or the same purpose a&mitte& @recon-tractin7.@ ,ut i the tYtonnement consists in people"s actuall4 6u4in7 an& sellin7 at the initial price, this 8ill a6sor6 part o the suppl4 an& satis 4 part o the &eman& an& the equili6rium price or the rest 8ill 6e &i erent rom 8hat the equili6rium price or the 8hole 8oul& ha$e 6een, 8hich ar7ument can 6e repeate& or an4 su6sequent price that is not 4et an equili6rium price. Some equili6rium, ho8e$er, 8ill 6e reache& > 6arrin7 the case to 6e notice& 6elo8 *G+, reaction to the $arious interme&iate situations that arise is correcti$e an& not &isrupti$e. Boreo$er, e(perience acquire& in &ealin7 8ith other people an& the possi6ilit4 o pro itin7 in each marEet perio& rom the lessons tau7ht 64 the prece&in7 ones, ten& to re&uce the practical importance o the pattern un&er consi&eration an& to maEe results approach those o the Halras-/&7e8orth schema. -t is incessant chan7e in the &ata o the situations, rather than the ina&equac4 o the &ata o an4 7i$en situation, 8hich creates 8hat looEs liEe in&eterminateness o pricin7. He conclu&e, on the one han&, that 8e must taEe account o this pattern 8hen &ealin7 8ith the process o chan7e 8hich it is our tasE to anal4Oe in this 6ooE an& 8hich must 6e e(pecte& to create precisel4 such situations, an&, on the other han&, that it &oes not paral4Oe the ten&enc4 to8ar& equli6rium. 5. As pro$isional equili6ria ma4 result rom causes other than la7s, so la7s ma4 result rom causes other than technolo7ical. :riction is an e(ample. 3he rea&er ma4 thinE o costs inci&ent to chan7e o occupation or to an4 shi t rom the pro&uction o one Ein& or qualit4 o commo&it4 to the pro&uction o another Ein& or qualit4, or to the e(chan7e, 64 means o sellin7 an& 6u4in7, o one asset or another, or o the resistance to chan7e o some prices or o the &i icult4 o a&aptin7 lon7-time contracts or o persua&in7 onesel or other people to act, an& so on. 3he presence o riction, 8ill, o course, al8a4s entail an equili6rium &i erent rom that 8hich 8oul& other8ise 6e reache&, as 8ell as slo8 up pro7ress to8ar& equili6rium. Boreo$er, i &i erent elements or &i erent sectors o the s4stem 8orE 8ith &i erent amounts o riction, lacE o harmon4 8ill ensue, the more
FF
slo8l4 an& the more quicEl4 a&apta6le elements 7ettin7 out o step 8ith each other. 3he same question arises an& the Same ans8er su77ests itsel as in the case o technolo7ical la7s. 3he $er4 e(istence an& len7th o those perio&s o a&=ustment 8hich 8e shall stu&4 later on testi 4 to the importance o the phenomenon. 3he e ect o riction on the pro7ress o the s4stem to8ar& an equili6rium state is not 8holl4 o that ne7ati$e Ein&. -ts presence ma4 stea&4 a&aptation 64 maEin7 it impossi6le to react to e$er4 &istur6ance instantaneousl4 an& to the ull e(tent it ma4 seem to =usti 4 at the moment. Some riction ma4 e$en 6e sai& to 6e necessar4 or the economic s4stem to unction at all > it is in part &ue to riction 8hich slo8s up the a&aptation o suppl4 that the equili6rium point is not much more requentl4 outrun. Just as the ph4sical 8oul& 8oul& 6e an uninha6ita6le chaos i the sli7htest &i erence in temperature su ice& to trans er all heat instantaneousl4 to the re7ion o the minimum, so the economic 8orl& coul& not unction i , or e(ample, the sli7htest $ariation in a rate o e(chan7e su ice& to set all 7ol& lo8in7 at once. G. Ban4 cases o rictional resistance to chan7e arc requentl4 re erre& to as SticEiness or 9i7i&it4. -n $ie8 o the role these terms pla4 in mo&ern &iscussions o economic polic4 an& in ar7uments a6out 6usiness c4cles, it is necessar4 to point out that the4 are nontechnical an& co$er man4 &i erent patterns. An& to the &i icult4 o &e inin7N8o mi7ht acilitate the tasE 64 consi&erin7 9i7i&it4 as the limitin7 case o SticEinessN correspon&s the &i icult4 o measurin7 them. 3here are, o course, num6ers o reasons 8h4 some prices shoul& mo$e more slo8l4 or less stron7l4 than others or all o them more slo8l4 or less stron7l4 than other elements o the s4stem, an& nothin7 can 6e in erre& rom the statistical act alone. 3he latter ma4 e$en mean no more than that &eman& an& cost con&itions are more sta6le in some sectors than in others, or that a price hol&s place 6ehin& others in the time sequence o e$ents. ,ut there is, ne$ertheless, a &istinct 7roup o acts 8hich has some claim to a name
F5
o its o8n, $iO., 8hat 8e mi7ht call 8ill ul sticEiness. - a price 6e @re7ulate&@ either 64 pu6lic authorit4 or 64 the in&i$i&ual or 7roup in control o suppl4, this nee& not impl4 that it 8ill mo$e less o ten or less stron7l4 than it 8oul& i its &etermination 8ere le t to the competiti$e pricin7 process. /$en i it &oes, this ma4 6e &ue to riction onl4, or instance to the riction inci&ent to a pu6lic authorit4"s pro&ucin7 a ne8 &ecision. ,ut it is also possi6le that the polic4 o that pu6lic authorit4 or that pri$ate 7roup is to @sta6iliOe@ the price in question. 3hen 8e ha$e a phenomenon sui 7eneris, to 8hich 8e shall ha$e to return more than once. :or the moment it is enou7h, irst, to point out that our &e inition turns on the comparison o the actual 6eha$ior o a price 8ith 8hat it 8oul& &o un&er per ect competition. Hhile this criterion is e(tremel4 &i icult to han&le, it is not a&mitte& that this constitutes an o6=ection i criteria that arc easier to appl4 lacE either precise meanin7 or rele$ance. Secon&, occurrence o sticEiness or ri7i&it4 in our senseN as &istin7uishe& especiall4 rom the rictional t4peNpresupposes a6sence o per ect competition, althou7h this is not in itsel su icient to pro&uce it. A per ectl4 competiti$e s4stem cannot &ispla4 sticEiness in that sense, ho8e$er slu77ish it ma4 6e to react. - a $alue other than the equili6rium $alue 6e impose& 64 pu6lic authorit4 upon an elementNa price or instanceNo a per ectl4 competiti$e s4stem other8ise in equili6rium, 8e ha$e a particular case o imper ection. 3he s4stem 8ill a&apt itsel to this con&ition 6ut, 8hen it has &one so, 8ill no lon7er ul ill all the other con&itions o per ect equili6rium. Since insertin7 a ne8 con&ition into a &eterminate s4stem spells o$er&cterminateness, some other con&ition has to 6e &roppe&. Hhich one it 8ill 6e is quaestio acti, the in&i$i&ual irm"s choice 6ein7 7ui&e& 64 a principle o minimiOin7 the e ects *in terms o mone4+ o the &istur6ance. - the element 8hich has 6een ma&e ri7i& is the price o an ori7inal or nonpro&uce& actor o pro&uction an& i that price is hi7her than the equili6rium price, the con&ition $iolate& is that o ull emplo4ment o resources. :or per ect
FG
competition this is the onl4 possi6le case o un&eremplo4ment o resources in a per ect equili6rium. L course, since 8e ne$er meet per ect equili6ria in real li e, there 8ill in 7eneral 6e man4 other cases o it e$en 8ithout ri7i&it4 an& e$en 8ithout riction. J. L course 8e &o not attri6ute omniscience to our irms an& househol&s, or an4 theoretical un&erstan&in7 o the processes in 8hich the4 pla4 a part, 6ut simpl4 that amount o in ormation an& un&erstan&in7 8hich the4 actuall4 possess an& 8hich $aries 7reatl4 6et8een &i erent 7roups. -n the case o an un&istur6e& stationar4 process this question is o little moment, e$er4one ha$in7 6een tau7ht 64 e(perience to ollo8 the 6eacon li7hts 8hich are rele$ant to him. Since e$er4 &ecision re ers to the uture, this implies oresi7ht M an& since the ruits o e$er4 e ort mature in the uture, it also implies carin7 or the utureN orethou7ht. 3he Halrasian men, or instance, Eeep their &ura6le instruments an& their stocEs at least intact. -t is, hence, no more =usti ia6le to call the s4stems o Halras an& 5areto timeless than to char7e them 8ith the a6sur&it4 o assumin7 omniscience. 3he particular Ein& an& amount o in ormation, un&erstan&in7, oresi7ht, or orethou7ht is one o the &ata o the pro6lem on a par 8ith the particular tastes or the particular technolo7ical Eno8le&7e o an4 particular people. An& or the static theor4 o the competiti$e case there is no more reason to 6other a6out the ormer than there is to 6other a6out the latter. 3he assumption reall4 ma&e is that people react to e(istin7 prices onl4, an& it is rom this that trou6le arises as soon as 8e start anal4sis rom a state o &isequili6rium or in$esti7ate the e ects o an4 &istur6ance that is more than an isolate& interruption o the or&inar4 routine. -t is then that e(pectation or anticipation enters the picture, to threaten the e(istence o our equili6rium ten&enc4. /(pectation, ho8e$er, in man4 cases materiall4 acilitates 6oth the mo$ement to8ar&, an& the preser$ation o , equili6rium, sometimes to the point o pre$entin7 &isequili6ria that 8oul& 8ithout it arise rom the 8orEin7 o the Halras mo&el. Action upon e(pectations such as
FJ
can plausi6l4 6e attri6ute& to irms 8ill o ten ten& to smooth out thin7s an& to iron out luctuations that 8oul& other8ise occur. 3he e ects o technolo7ical la7s, or instance, 8ill 6e re&uce& i the chan7e has 6een e(pecte&, an& the 'o7 04cle, as ar as it is reall4 &ue to ina6ilit4 to oresee the mass e ect o @impro$i&ent@ reaction to a a$ora6le o&&er-porE ratio, 8oul& entirel4 &isappear i the time ran7e o armers" e(pectations increase&. Speculation o the t4pe &escri6e& 64 classical theor4N6u4in7 in a&$ance o a rise in price that is oreseen, sellin7 in a&$ance o a allN8orEs the same 8a4. -n such cases e(pectations ma4 open up a shortcut to8ar& a &e initi$e *thou7h possi6l4 &i erent+ equili6rium state. ,ut this not al8a4s so. 3he source o trou6le is not a&equatel4 &escri6e& 64 sa4in7 that e(pectations are uncertain or that the4 ha$e to 6e currentl4 re$ise& or that &i erent people orm e(pectations &i erin7 in ran7e an& reasona6leness. #ncertaint4 o the uture course o e$ents 7i$es rise, to 6e sure, to man4 phenomena that are $er4 important or an4 realistic stu&4 o 6usiness c4cles, amon7 them, a7ain, the e(istence o prolon7e& perio&s o a&=ustment. -t is responsi6le or an important t4pe o social losses an& o e(cess capacit4. -t 8ill 6e seen, ho8e$er, that there is no 7reat &i icult4 o principle han&lin7 this element, an& 8e ma4 &ismiss it here. .or nee& 8e eel concern a6out the act that action on certain t4pes o e(pectation ma4 6e &isrupti$e an& help to &ri$e the s4stem a8a4 rom equili6rium. 3hese t4pes, instance& 64 e(pectations 8hich simpl4 pro=ect into the uture the actual rate o chan7e o some quantit4, 8ill, at $arious turns o our 8a4, come in to complete the mechanisms o certain phases o economic luctuations. ,ut althou7h the4 ma4 o ten temporaril4 counteract it, the4 &o not in themsel$es &ispro$e the e(istence o an equili6rium ten&enc4 or the proposition that at times it pre$ails in such a 8a4 as actuall4 to &ra8 the s4stem to8ar& equili6rium. 3he real trou6le to the theorist comes rom the act that intro&ucin7 e(pecte& $alues o his $aria6les chan7es the 8hole character o his
F8
pro6lem an& maEes it technicall4 so &i icult to han&le that he ma4 easil4 in& himsel una6le to pro$e an equili6rium ten&enc4 8hich, ne$ertheless, ma4 e(ist, or e$en the e(istence an& sta6ilit4 o the equili6rium position itsel . 3he nature o our &i icult4 ma4 6e illustrate& as ollo8s. Suppose that the irms o a competiti$e in&ustr4 in the act o &eci&in7 8hat quantities o their pro&uct the4 are to pro&uce taEe account o the past, present, an& e(pecte& uture $alues o an4 economic $aria6les the4 6elie$e to 6e rele$ant, 8ei7htin7 those $alues 64 8ei7hts that in 7eneral rapi&l4 &ecrease to Oero in unction o &istance rom the time o the &ecision. 3hose e(pectations are &ata an& quite ar6itrar4. <i$en the Ein& o people the4 areNtheir &isposition to reactNit is, un&er accepta6le assumptions a6out consistenc4 an& so on, possi6le to speaE o a uniquel4 &etermine& &ecision. Hhen it has taEen e ect, ho8e$er, the in&ustr4 an& the 8hole s4stem ma4, in consequence o it, 6e arther rom settlin7 &o8n to a stationar4 state =ust as 8ell as the4 ma4 6e nearer to it. - , no8, those irms su&&enl4 6e7an to 6eha$e in the Halrasian 8a4, Halrasian equili6rium 8oul& 6e approache& in either case M 6ut since e( h4pothesi the4 &o not &o this 6ut, instea&, re$ise their e(pectations someho8 an& then a7ain 6eha$e accor&in7 to their &isposition to react, the4 ma4 ore$er tra$el a8a4 rom an4 state that in an4 sense coul& 6e &u66e& equili6rium or else, turnin7 to8ar& it, outrun it an& =ump 6acE a7ain until &ooms&a4. ,ut or our practical purposes the pre&icament $anishes as soon as 8e realiOe to 8hat it is &ue > 8e ha$e a&mitte& an4 e(pectations an& 8e ha$e taEen them as 7i$en. As or the irst, 8e ha$e oursel$es to 6lame i 8ith such tremen&ous 7eneralit4 8e &o not 7et an4 results. As or the secon&, 8e ha$e emptie& the schema o e$er4thin7 that matters. -n other 8or&s, i 8e &iscontinue the practice o treatin7 e(pectations as i the4 8ere ultimate &ata, an& treat them as 8hat the4 areN$aria6les 8hich it is our tasE to e(plainNproperl4 linEin7 them 8ith the 6usiness situations that 7i$e rise to them, 8e shall succee& in restrictin7 e(pectations to those 8hich 8e actuall4 o6ser$e an& not onl4 re&uce their in luence to its proper proportions 6ut also
F9
un&erstan& ho8 the course o e$ents mol&s them an& at certain times so turns them as to maEe them 8orE to8ar& equili6rium. :or the moment, ho8e$er, this question must 6e le t open. -n certain cases in 8hich there is no &an7er o am6i7uit4 8e shall speaE o correct an& incorrect e(pectations. ,ut in this ra7ment o a &iscussion it 8as not necessar4 to &ra8 that &istinction, 8hich, 6ecause o the inter&epen&ence 6et8een e(pectations an& outcome, is a &i icult one at 6est M since most o 8hat is rele$ant to us applies equall4 to all e(pectations, 8e nee& not attach an4 7eneral meanin7 to it. -t 8oul& certainl4 not &o to &e ine correctness o e(pectation 64 means o con7ruent e$ent, or 64 means o an assumption that correct e(pectation necessaril4 8orEs to8ar& equili6rium.
3a6le o 0ontents
F. Im*e!fe)t Com*etition. :rom our &iscussion o the case o
per ect competition 8e emer7e 8ith the result that there is a real ten&enc4 to8ar& equili6rium states in a per ectl4 competiti$e 8orl&. Duali ications an& reser$ations &o not materiall4 impair our tool. 3he4 rather impro$e, althou7h the4 also complicate, it 64 suppl4in7 us 8ith a rich menu car& o possi6le cases, the theor4 o 8hich comes in use ull4 at man4 crossroa&s o an4 stu&4 o c4cles. ,ut man4 rea&ers 8ho a&mit this 8ill question 8hether this is still so 8hen 8e lea$e the precincts o the per ectl4 competiti$e case. -t is necessar4 to present at least the sEetch o an ans8er, 8hich ma4 6e omitte& 64 those 8ho eel con$ince& alrea&4. 3he limitin7 case o pure monopol4 is still plain sailin7. - one in&i$i&ual or com6ination o in&i$i&uals controls either the suppl4 o , or the &eman& or, some commo&it4 or ser$ice, 8e 7et a &etermine& price an& a &etermine& output o that commo&it4 or ser$ice. ,ut e$en in this case 8e meet 8ith an element 8hich ten&s to &epri$e that &etcrminateness o the strin7enc4 it has in the per ectl4 competiti$e
50
case. -n per ect competition, the in&i$i&ual irm is not onl4 po8erless to alter marEet price, 6ut also un&er stron7 compulsion to accept it. 3he irm cannot char7e a hi7her price 8ithout losin7 all its 6usiness. -t can, o course, char7e a lo8er price, 6ut 8ill 6e penaliOe& or &oin7 so 64 a loss 8hich, consi&erin7 the a6sence o surpluses, 8ill in the lon7 run threaten its li e. - a monopolist char7es a hi7her or lo8er price than the one that ma(imiOes his 7ain, he 8ill also lose 6ut onl4 in the sense that he 8ill, 8ithin limits, 7ain less than he coul&. 'ence he can, i he shoul& choose, 7o on &oin7 so in&e initel4, an& there ma4 6e reasons or it other than error, in&olence, an& 6ene$olence. 'e ma4 ha$e to consi&er pu6lic opinion, he ma4 8ish to ma(imiOe not imme&iate 7ains 6ut 7ains o$er time an& to @nurse up &eman&.@ 'e ma4 or ma4 not &iscriminate. <enerall4, there are man4 courses o action open to him an& man4 8a4s in 8hich to react to a &istur6ance. /ach o them, ho8e$er, 4iel&s a &eterminate result an& supplies an equili6ratin7 mechanism. As lon7 as each monopol4 position is surroun&e& 64 a su icientl4 6roa& Oone o per ect competition, no ne8 &i icult4 arises a6out &eterminateness, e$en i the s4stem contains a consi&era6le num6er o them. /$er4 monopol4 then presents an isolate& ma(imum pro6lem 8ith respect to 7i$en 6u4ers" &eman& cur$es an& competiti$el4 &etermine& actor prices. ,ut &i iculties &o arise as soon as those monopolies 7et near enou7h to one another in such a 8a4 as to in luence one another"s or6its, or, less i7urati$el4 speaEin7, as to maEe it necessar4 or each monopolist to shape his polic4 8ith re7ar& to the polic4 o one or more o the others. 2et us taEe at once the limitin7 case, that in 8hich e$er4 commo&it4 an& ser$ice, e$er4 pro&uct an& actor, is monopoliOe&. 3he trou6le 8ith this case, Eno8n as #ni$ersal Bonopol4, is not in an4 ina6ilit4 o ours to pro$e the e(istence o a case in 8hich &eterminateness pre$ails 6ut in our ina6ilit4 to pro$e that there is an4 ten&enc4 or realit4 to con orm to it. -n 7eneral such a s4stem 8oul& 6e 8hat 8e ha$e calle& inacti$e. He shall not, ho8e$er, &iscuss this 6ut merel4 notice the three
51
stan&ar& instances o imper ect competition > ,ilateral Bonopol4, Lli7opol4, an& Bonopolistic 0ompetition. 1. He ha$e 6ilateral monopol4 8hen a monopolist aces a sin7le 6u4er *monopsonist+. - e(chan7e 6et8een the t8o is isolate&N6oth in the sense that the4 meet =ust once an& ne$er a7ain, an& in the sense that or the purpose in han& the economic s4stem consists o the t8o onl4Nthere 8ill, o course, 6e limits 6et8een 8hich the e(chan7e ratio must all, 6ut no equili6rium e(ists 8ithin this Oone, one e(chan7e ratio 6ein7 as liEel4 as an4 other. 3his case has some 6earin7s on situations 8hich actuall4 arise in the course o the phases o 6usiness c4cles > momentar4 situations emer7e that are $er4 imper ectl4 un&erstoo& 64 the actors on the 6usiness sta7e an& o ten lea& to erratic actions more or less con ormin7 to that t4pe. Sellin7 an& 6u4in7 a 7oin7 concern ami&st the e(cesses o a $iolent 6oom ma4 ser$e as an e(ample. 3he onl4 thin7 8e can &o, e$en in less e(treme instances, is to replace an equili6rium point 64 an equili6rium Oone. -t shoul& 6e o6ser$e& *sec a6o$e, Sec /, F+ that un&er those con&itions e$en per ect competition 8oul& not 4iel& &eterminate results, particularl4 i parties ha$e no e(perience 8ith each other an& i there are e(perimental transactions at the 6e7innin7 o the marEet. At the other en& o the scale o possi6ilities stan&s the case o a monopolist an& a monopsonist 8ho &eal re7ularl4 8ith each other, Eno8 rom e(perience all a6out each other"s situation an& 8a4s, an& &esire to arri$e at an a7reement 8hich 8ill co$er the 8hole perio& the4 en$isa7e so that there are no e(perimental transactions in luencin7 the terms o later ones. He 8ill also let the ree&om o choice 6e limite& or 6oth parties 64 the relations in 8hich the4 stan& to the rest o the s4stem. Ln these lines 8e construct the ollo8in7 case > a tra&e union so stron7l4 or7aniOe& as to 6e per ectl4 sa e rom the 6reaEin7 a8a4 o mem6ers an& the intrusion into its iel& o outsi&ers, &eals 8ith a monopsonist emplo4er. 3his emplo4er, in turn, is monopolist 8ith respect to his pro&uct, 8hich he sells to a per ectl4 competiti$e cro8& o consumers. All the other actors he 6u4s in competiti$e marEets 8hich he cannot in luence 64 his o8n action, the
5)
in&ustr4 6ein7 too small or that an& also too small to in luence the purchasin7 po8er o the masses 64 the 8a7es it pa4s. .o8 in this particularl4 a$ora6le case 8e ha$e at least a &etermine& &eman& cur$e o the monopsonist emplo4er or the ser$ices o la6or. 3his &eman& cur$e 8ill shi t in the c4cle 6ut is e(actl4 Eno8n not onl4 to the emplo4er 6ut also to, sa4, the secretar4 o the 8orEmen"s union. 3he emplo4er, in turn, Eno8s e(actl4 rom lon7 e(perience 8ith his 8orEmen 8hat the minimum 8a7e rate is that the secretar4 can accept or each total o man-hours. .either 8ants to i7ht, 8hich means that neither uses the threat o 8ith&ra8in7 the 8hole suppl4 o la6or or o emplo4ment. 3he 8hole strate74 o 6oth parties consists in $ar4in7 rate an& quantit4 64 small steps 8ithout tr4in7 to 6lu . #n&er these con&itions there is a &etermine& 8a7e rate 8hich, to7ether 8ith the associate& amount o man-hours, 8ill 6e most a&$anta7eous to the union an& another &etermine& rate 8hich, to7ether 8ith the associate& amount o manhours, 8ill 6e most a&$anta7eous to the emplo4er. ,ut those rates 8ill not, in 7eneral, 6e equal. ,et8een them 8e ha$e a7ain a Oone o in&eterminateness. Althou7h some o the hi7hest authorities in the iel&, particularl4 0ournot an& HicEsell, an& man4 recent 8riters coul& 6e quote& to the contrar4, this is the opinion o the ma=orit4 o stu&ents an& particularl4 o 5ro essor ,o8le4. ,ut it is, o course, true or the 7eneral case onl4 an& in the a6sence o an4 urther in ormation. 3he equili6ratin7 mechanism &oes not 8orE thus in $acuo, 6ut 8ithin the speci ic circumstances o each case. 3here ore, that in&eterminateness &oes not necessaril4 mean that such a s4stem is constitutionall4 incapa6le o equili6rium 6ut onl4 that the case &i$i&es up into su6cases, or each o 8hich the question must 6e put separatel4, as in act it must in the case o strai7ht monopol4 as 8ell. Amon7 these su6cases there are o6$iousl4 man4 &eterminate ones. - , or instance, it is the practice that the union asEs or a rate an& the emplo4er simpl4 replies 64 taEin7 as man4 man-hours as it is most a&$anta7eous or
53
him to taEe at that rate, &eterminate equili6rium 8ill o6$iousl4 6e arri$e& at. Lther su6cases ma4 6e constructe& 8hich are in&eterminate. 5racticall4 more important or our purpose is the act that, 8ithin the process or the anal4sis o 8hich 8e are no8 assem6lin7 the anal4tic tools, situations chan7e so quicEl4 as to maEe the assumption o per ect Eno8le&7e an& in$ariant reaction ina&missi6le. 3he characteristics o those chan7in7 situations ma4, ho8e$er, 7i$e us to some e(tent precisel4 that in ormation 8hich 8e nee& in or&er to re&uce ran7es o in&etenninateness. ,ut temporar4 necessit4, consciousl4 planne& strate74, an& luctuatin7 anticipation o the 7eneral course o e$ents acquire a $er4 much 8i&er scope than 8as assume& in the ore7oin7 anal4sis. He are then le t not onl4 8ith Oones 6ut 8ith shi tin7 Oones. Boreo$er, in man4 cases the &eman& an& suppl4 cur$es are not in&epen&ent o each other. Hhate$er their importance, those su6cases in 8hich 6ilateral monopol4 4iel&s &etermine& equili6rium ma4 6e use& to sho8 that per ect equili6rium ma4, outsi&e o the per ectl4 competiti$e case, 6e compati6le 8ith the e(istence o unemplo4e& resources. :or it is clear that the 6ar7ain most a&$anta7eous to the 8orEman in our e(ample 8ill not, in 7eneral, lea& to the sale o as man4 man-hours per 8orEman as each 8orEman 8oul& in&i$i&uall4 6e 8illin7 to sell at that rate. .o man nee& actuall4 6e out o 8orE, o course, 6ut 8hether some 8ill or not is a secon&ar4 matter to 6e settle& 6et8een the secretar4 an& the emplo4er, so that it is al8a4s possi6le to characteriOe the situation 64 associatin7 8ith it a certain num6er o totall4 unemplo4e& men. -t is, in act, $er4 pro6a6le that the rate 8hich 8ill 4iel& the ma(imum sum total o real 8a7es, the ma(imum 6ein7 relati$e to the $alue put upon leisure an& to len7th o perio& en$isa7e&, 8ill 7enerall4 impl4 some unemplo4ment. /$en i the unemplo4e& ha$e to 6e Eept out o the earnin7s o their comra&es, that 8a7e rate 8ill e( &e initione remain the most a&$anta7eous one. - the unemplo4e& are partl4 or 8holl4 Eept rom other sources, the proposition applies a ortiori, 6ut the con&itions o the ma(imum are altere& there64.
5F
). - suppl4 in a per ect marEet, i.e., in a marEet in 8hich there can, o8in7 to per ect homo7eneit4 o the commo&it4 an& per ect mo6ilit4 an& in&i erence o 6u4ers, 6e onl4 one price, is controlle& 64 irms that are in a position to in luence that price 64 their in&i$i&ual action *oli7opol4 or, i there are 6ut t8o o them, &uopol4+, it is eas4 to see that 8e lose the con&itions 8hich en orce &eterminatcness o 6eha$ior in the per ectl4 competiti$e case as 8ell as those 8hich account or such &e-tcrminateness as there is in the monopol4 case. 3his pattern, impl4in7 as it &oes that all customers 8ill instantl4 trans er their alle7iance rom one irm to another on the sli7htest pro$ocation, is o $er4 little interest to us, 6ecause it is another limitin7 case 8hich in practice must 6e rare, i not alto7ether a6sent. 3he o6$ious thin7 to &o or an4 irm that in&s itsel , potentiall4 or actuall4, in such a situation, is to tr4 to alter it. 3he t4pical courses that arc, in practice, resorte& to in or&er to e ect this, there ore, matter more to us than &oes the pure lo7ic o oli7opol4. 3he4 ma4 6e rou7hl4 7roupe& un&er three hea&in7s. :irst, a irm ma4 attacE to Eill or co8. 3his ma4 result in a monopol4 situationN8hich in most cases 8ill 6e a precarious one requirin7 en&less &e ensi$e mo$esNor in a situation 8hich 7i$es the a77ressor more or less complete control, the unconquere& positions 6ein7 insi7ni icant or su6mittin7 to his lea&ership. Since it is poor metho& to tr4 to co$er a 8i&e $ariet4 o &i erent patterns 64 one term an& one ar7ument, 8e shoul& a$oi& speaEin7 simpl4 o cutthroat competition in all cases o such attacEs > the intrusion o a ne8 an& superior metho& o pro&uction or instance, an e$ent o particular importance to the su6=ect o this 6ooE, i&enti ies a special case 8hich shoul& 6e treate& &i erentl4 an& &istin7uishe& rom the 7enuine case in 8hich there is or ma4 6e @8aste ul@ competition, o$erpro&uction, o$ercapacit4 in a sense to 8hich nothin7 correspon&s in the ormer, althou7h throats are 6ein7 actuall4 cut in 6oth. Hhate$er the nature o the stru77le, 8hile it lasts there cannot 6e an equili6rium, o course. ,ut it 8ill, in 7eneral, lea& to a state 8hich, thou7h perhaps ne$er
55
ul illin7 equili6rium con&itions strictl4 an& thou7h o ten slopp4 or lacEin7 in sta6ilit4, 4et su ices or our purpose. 3his particular t4pe o @equili6rium ten&enc4@ issues in a set o equli6rium or quasiequili6rium $alues &i erent rom that 8hich the s4stem 8oul& other8ise reach. 9are, in&ee&, are the cases in 8hich a campai7n o this Ein& can 6e em6arEe& upon irrespecti$el4 o the 7eneral 6usiness situation > as a rule, the phase o the c4cle 8ill pro$i&e us 8ith &eterminin7 con&itions or the outcome. As common e(perience teaches, e$er4thin7 8ill turn out &i erentl4 accor&in7 as such a stru77le occurs in a phase o e(pansion 8hen &eman& cur$es shi t up8ar&, or in a phase o contraction 8hen &eman& cur$es shi t &o8n8ar&. 34picall4, it occurs in the latter, a act 8hich is o consi&era6le importance to the picture o the mechanism o 6usiness c4cles in a societ4 in 8hich 6i7 units pre$ail. 3he same applies to the secon& course open to irms in oli7opolistic situationsNa7reement. Hhether this 6e secret or Lpen, tacit or e(plicit, complete or restricte& to certain re7ions, pro&ucts, practices *such as cre&it to customers+, 8hether it is aime& an& arri$e& at &irectl4 or a ter stru77le or shares in the tra&e, &oes not a ect the principle. 3he outcome enters in an4 case into the cate7or4 o monopoloi&s. 0reation o e(cess capacit4 as a 8ar reser$e or simpl4 or the saEe o its nuisance $alue is particularl4 characteristic o this case, or 8hich the cartel is as t4pical as is the @trust@ o the irst case. 3he ormer is the most liEel4 outcome 8hene$er, on the one han&, nothin7 can he &one to alter the homo7eneit4 o the pro&uct an&, on the other han&, no irm is, or thinEs it is, stron7 enou7h to $enture on a i7ht to a inish. 3his is also a Ein& o equili6rium ten&enc4, althou7h the resultin7 set o $alues 8ill a7ain 6e &i erent rom an4 o those that 8oul& ollo8 rom an4 other course. 3he quaint metaphor 64 8hich /&7e8orth illustrates the in&eterminateness o oli7opol4 6ut ser$es to sho8 ho8 $er4 liEel4 com6ination or some un&erstan&in7 is > .ansen an& Johansen, the t8o e(plorers 8ho are all that is le t o the personnel o a polar e(pe&ition, 8ishin7 to &ra7 their onl4 sle&7e in &i erent &irections ma4 reasona6l4 6e assume& not to 7o on pullin7
5G
a7ainst each other ore$er. -t also ser$es to sho8 that their inal course 8ill not 6e &etermine& 64 an4 automatic result o mere &ra77in7. ;roppin7 metaphor, 8e must reco7niOe that the monopol4 that emer7es, 8ere it e$en much more complete an& much more &ura6le than as a rule it can 6e e(pecte& to 6e, 8ill 6e a compromise that coul&, rom the stan&point o economic theor4, =ust as 8ell 6e &i erent. 3here is an element in the case, the &istri6ution o the pro it, 8hich is theoreticall4 in&eterminate an& has to 6e settle&, sa4, 64 i(in7 cartel quota, in or&er to suppl4 the missin7 &atum. :or us, ho8e$er, this &oes not matter. As a thir& course, irms ma4 tr4 to &o a8a4 8ith the homo7eneit4 o the pro&uct or rather to increase that lacE o homo7eneit4 8hich alrea&4 e(ists in most cases. 3hou7h this course ma4 also 6e taEen or purposes o attacE, it is primaril4 a measure o &e ense. -t mer7es oli7opol4 into the thir& stan&ar& instance o imper ect competitionN monopolistic competition. 'ence, thou7h 8e nee& not &en4 the occasional occurrence o pure oli7opol4 an& thou7h 8e cannot &en4 its lo7ical possi6ilit4, 8e are certainl4 8ithin our ri7hts in &en4in7 the practical importance o the question o its &eterminateness. 38o thin7s shoul& 6e a&&e&. :irst, an4 in&eterminate situations that mi7ht arise i @pure@ oli7opol4 actuall4 persiste& or some time, must not 6e con use& 8ith that in&eterminateness 8hich o8es its e(istence to incessant $ariation o &ata that con ront a irm in a 8orl& ull o actual an& e(pecte& chan7e an& are imper ectl4 Eno8n or this $er4 reason. 3he latter t4pe o in&eterminateness has nothin7 to &o 8ith the ormer. Secon&, such cases o in&eterminateness o the irst an& 7enuine Ein& 8oul& also su ice to pro&uce e(cess capacit4, quite in&epen&entl4 o the special reasons 8e ha$e a6o$e seen to e(pect it. 3his ollo8s rom the act that irms 8hich in& themsel$es in an in&eterminate situation can ne$er plan e(cept or a ran7e o prices an& outputs. 3. 3he term Bonopolistic 0ompetition 8ill 6e use& to connote pro&uct &i erentiation. /ach irm in an4 sector o the s4stem in 8hich monopolistic competition pre$ails o ers pro&ucts that &i er in some
5J
8a4 rom the pro&ucts o e$er4 other irm in the sector, an& thus supplies a special marEet o its o8n. 3his pro&uct &i erentiation must 6e interprete& 8ith re erence to its rationale, the creation o such a special marEet, hence $er4 6roa&l4 > it comprises not onl4 @real@ 6ut also @putati$e@ &i erences, not onl4 &i erences in the pro&uct itsel , 6ut also &i erences in the ser$ices inci&ent to suppl4in7 it *atmosphere an& location o shops inclu&e&+ an& e$er4 &e$ice that ena6les the 6u4er to associate the thin7 he 6u4s 8ith the name o a particular irm. ;i erences in location an& other actors 8hich 8ill in&uce customers to pre er one irm to another, are o course una$oi&a6le, irrespecti$e o an4 intention to create them. An& there is simpl4 no such thin7 as a homo7eneous motorcar or li$er pill. At irst si7ht it ma4 appear that the case is co$ere& 64 the theor4 o monopol4 an& that the questions o the e(istence o an equili6rium an& o a ten&enc4 to8ar& it are &ispose& o there64. Some authorities, Brs. 9o6inson in particular, seem in act to 6e o this opinion. 3o a certain e(tent the4 are ri7ht. 0reation o a special marEet ma4 6e &escri6e& as a &e$ice to increase the riction that militates a7ainst 6u4ers" trans errin7 their alle7iance rom one irm to another. - this riction 6e stron7 enou7h, it ma4 in the limitin7 case annihilate, in man4 other case materiall4 re&uce, that interrelation o &eman&s or the pro&ucts o in&i$i&ual irms 8hich is responsi6le or the olipololistic &i icult4, an& thus create monopol4 situations or, at all e$ents, situations 8hich are accepta6le appro(imations to strai7ht monopol4. 3he a init4 6ecomes still more marEe& 8hen 8e re lect that there is in real li e har&l4 such a thin7 as a6solute monopol4 an& that at least potential competition is present in most cases. He note, there ore, that one corner o 6usiness realit4 is a&equatel4 taEen care o 64 this theor4. -n 7eneral, ho8e$er, that is not so. 3he $er4 essence o monopolistic competition is in the act that the price at 8hich a quantit4 can 6e sol& at an4 time is a unction o the 6eha$ior 6oth o the irm itsel an& o all the other irms in the iel&. He can 7ain,
58
ho8e$er, in the &irection o competition, some o the 7roun& 8e thus lose in the &irection o monopol4 > since in practice almost e$er4 irm either actuall4 pro&uces, or at $er4 short notice is a6le to pro&uce, an4 o a 8i&e $ariet4 o commo&ities or qualities, some o 8hich are, as a rule, almost per ect su6stitutes or the pro&ucts o its competitors, its price an& quantit4 a&=ustments 8ill not in 7eneral &i er un&amentall4 rom those that it 8oul& ha$e to maEe un&er con&itions o per ect competition. 3hat is to sa4, the &eman& cur$es or the pro&ucts o in&i$i&ual irms 8ill, in 7eneral an& in the lon7 run, &ispla4 a hi7h elasticit4, thou7h not the in inite one o the pure lo7ic o competition. An& this, in turn, 8ill en orce appro(imate realiOation o the results o per ect competition that ollo8 rom itNin particular, &i erences in the prices o &i erent qualities or t4pes 8ill ten& to correspon& to the &i erences in the costs that must 6e incurre& in pro&ucin7 them. Strictl4, this applies onl4 to cases 8hich &i er rom per ect competition in nothin7 else 6ut pro&uct &i erentiation. An e(ception must 6e allo8e& in those cases 8hich 8oul&, in the a6sence o pro&uct &i erentiation, 6e o the t4pe o pure oli7opol4. A certain amount o in&eterminateness lo8s rom this source. Hhere potential competition is no more than a remote possi6ilit4, this e(ception ma4 6e important or the course o e$ents in the particular in&ustr4 M 6ut it is har&l4 e$er important enou7h to inter ere su6stantiall4 8ith the 8orEin7 o the s4stem as a 8hole. 3here are other quali ications. 5ro&uct &i erentiation cannot 6e strictl4 continuous. 5lants an& shops cannot 6e sprea& continuousl4 o$er an area. ,ut all this is not o$er8helmin7l4 interestin7 or important. 38o points remain. 3he one is the 7reat increase in the amount o riction 8hich, as state& a6o$e, monopolistic competition 8ill 6rin7 a6out in the s4stem. -t 8ill also pro&uce a&&itional sloppiness an&, in some sectors, inacti$it4 in our sense an& ri7i&it4. 3ra&itionalistic an& cooperati$e orms o 6eha$ior 8ill o ten lea& to, an& 6e ren orce& 64, all that. He must e(pect our s4stem to unction much less promptl4
59
an& e ecti$el4 than it other8ise 8oul& an& e$er48here points to 6e replace& 64 Oones. Boreo$er, it is not &enie& that in some pro essions an& in man4 6ranches o retail tra&e, the consequences pre&icate& 64 some authorities on monopolistic competition ma4 e$en in the lon7 run pre$ail > i ne8comers locE into the le7al pro ession an& ees are 6ein7 Eept up, all la84ers 8ill 6e un&eremplo4e& an& eel una6le to maEe 8hat the4 consi&er a &ecent li$in7. Actin7 in a 8ell-Eno8n rame o min&, the4 ma4 8ell tr4 to men& the case 64 raisin7 ees. -n&epen&ent ca6men, retailers o milE, an& so on are $er4 liEel4 to 6eha$e =ust liEe that. /(cess capacit4 an& the para&o( o prices risin7 8ith increase o potential suppl4 then ensue. -n interperrin7 the &etails o a situation, all this must 6e taEen into account, o course, as it al8a4s has 6een. -n &oin7 so, 8e must not or7et, ne$ertheless, that this is 6ut one o man4 possi6le orms o 6eha$ior an& that such p4rami&s o prices an& capacities 8ill, as a rule, 6e 6rou7ht &o8n 64 the capitalist machine itsel M into the peace ul pastures o 6acE8ar& retailers the &epartment store an& the mail-or&er house intru&e, an& &isre7ar&in7 this mechanism is, in matters o application to realit4, as serious a mistaEe as reasonin7 on the h4pothesis o per ect competition 8oul& 6e. Secon&, in the short-run situations o an economic 8orl& incessantl4 &istur6e& 64 e(ternal an& internal actors o chan7e, imme&iate reaction is $er4 &i erent in the case o monopolistic competition rom 8hat it 8oul& 6e in the case o per ect competition. 3he possession o a special marEet, ho8e$er precarious, 7i$es scope or short-time strate74, or mo$es an& countermo$es 8hich 8oul& not other8ise e(ist. -n particular, reaction 64 &ecreasin7 output rather than 64 &ecreasin7 prices ma4 su77est itsel as a short-run polic4, an& i an4 7i$en situation is e(pecte& to 6e short-li$e&, construction o a more ela6orate plant than can 6e use& to optimum point o ten 6ecomes a&$anta7eous. /(cess capacit4 results rom this, rather than rom an4 particular properties o normal equili6rium in monopolistic competition that are hel& to account or the phenomenon irrespecti$el4 o actual or e(pecte& chan7e. A7ain, presence o
G0
monopolistic competition not onl4 means a &i erent technique o a&=ustmcnt characteriOe& 64 man4 mo$ements that seem, an& sometimes arc, erratic, 6ut possi6l4 also a &i erent equili6rium, i in&ee& an4 equili6rium 6e e$entuall4 reache&. -t is 8orth noticin7, ho8e$er, that unemplo4ment coul& in this case 6e &ue onl4 to imper ections o equili6rium. Ln the one han&, then, chan7e that comes rom 8ithin the s4stem, as 8ell as chan7e that comes rom 8ithout it, impin7es on situations, in&uces short-time a&aptations an& pro&uces short-time equili6ria, 8hich in man4 cases con orm 8ell to the picture &ra8n 64 the authors o the theor4 o monopolistic competition. Ln the other han&, ne8 irms pro&ucin7 ne8 commo&ities or ol& commo&ities 64 ne8 metho&s 8ill, as a rule, tr4 to 6eha$e accor&in7 to it, or that is the o6$ious metho& o e(ploitin7 to the ull, an& o Eeepin7 ali$e, the temporar4 a&$anta7es the4 en=o4. -t 8ill 6e seen, as our ar7ument un ol&s, ho8 important that is or the su6=ect o this 6ooE. Pno8le&7e o the mechanism o c4clical situations has, in&ee&, 6een impro$e& 64 that theor4.
3a6le o 0ontents
+. E'uili(!ium E)onomi) and the Stud" of Bu ine
Flu)tuation .
-n or&er to sum up part o the ar7ument o this chapter an& to taEe
one urther step, 8e 8ill no8 return to the question > Hhat is the use, or our purpose, o the anal4tic apparatus thus imper ectl4 &escri6e& V :or 6re$it4"s saEe 8e 8ill consi&er the per ectl4 competiti$e case onl4, althou7h there is nothin7 to pre$ent us rom e(ten&in7 the ollo8in7 remarEs to all other cases. He ha$e seen, irst o all, that the theor4 o equili6rium or o the stationar4 lo8, 7i$es us the 6are 6ones o economic lo7ic 8hich, ho8e$er, a6stract or remote rom real li e it ma4 6e, 4et ren&ers in&ispensa6le ser$ice in clearin7 the 7roun& or ri7orous anal4sis. 3he 6est 8a4 to con$ince onesel o the $alue o this ser$ice is to tr4 to &e ine such phenomena as o$erpro&uction,
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e(cess capacit4, unemplo4ment, mala&=ustment. 3hese terms, as commonl4 use&, &o not carr4 an4 precise meanin7 at all, an& the act that the4 &o not, e(plains the inconclusi$cncs o much ar7ument that 7oes un&er those hea&in7s. As soon as 8e tr4 to in& such precise meanin7 or them an& to it them or the tasE o i&enti 4in7 &e inite states o the economic or7anism, the necessit4 o allin7 6acE on equili6rium relations 6ecomes apparent. Althou7h, in the secon& place, e$er4 e$ent impin7es on an economic 8orl& that is alrea&4 &istur6e& an& in &isequili6rium, our un&erstan&in7 o the 8a4 in 8hich the economic or7anism reacts to an4 7i$en ne8 e$ent is una$oi&a6l4 6ase& upon our un&erstan&in7 o those equili6rium relations. 3he time-honore& e(ercises 8hich consist in tr4in7 to &e ine 64 means o a 7enerous allo8ance o ceteris pari6us, the consequences o the imposition o a small ta( on some commo&it4 or o a small increase in the suppl4 o la6or an& so on, are nothin7 6ut a metho& o e(plorin7 the nature an& properties o those equili6rium relations 8hich &etermine ho8 an4 7i$en chan7e in &ata 8ill 6e a6sor6e& 64 the economic s4stem an& 8hat inal results 8ill e$entuall4 emer7e. .o8, 8hat causes luctuations ma4 either 6e in&i$i&ual shocEs 8hich impin7e on the s4stem rom outsi&e, or a &istinct process o chan7e 7enerate& 64 the s4stem itsel , 6ut in 6oth cases the theor4 o equili6rium supplies us 8ith the simplest co&e o rules accor&in7 to 8hich the s4stem 8ill respon&. 3his is 8hat 8e mean 64 sa4in7 that the theor4 o equili6rium is a &escription o an apparatus o response. -t is no more than a irst step to8ar& such a &escription, 6ut e$en so it is =ust as important or the stu&4 o luctuations as is the theor4 o &istur6in7 e$ents or &istur6in7 processes itsel . 3hir&, the concept o a state o equili6rium, althou7h no such state ma4 e$er 6e realiOe&, is use ul an& in&ee& in&ispensa6le or purposes o anal4sis an& &ia7nosis, as a point o re erence. Actual states can con$enientl4 6e &e ine& 64 their &istance rom it. 3he more ri7orous proce&ure o the theorist &oes not &i er un&amentall4 rom a ha6it o
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the la4man"s min&. ;urin7 the 8hole o the post8ar perio&, or instance, in&i$i&uals an& 7roups requentl4 ar7ue& their case in terms o a comparison o a6solute or relati$e quantities o commo&ities an& o a6solute or relati$e prices or incomes 8ith those $alues o the same $aria6les 8hich o6taine& in 1913. L course, there is no 8arrant or &oin7 this. All the &ata o the economic s4stem ha$in7 chan7e&, there is no reason 8h4 prices o a7ricultural commo&ities, or instance, shoul& stan& no8 in the same proportion to other prices as the4 &i& then. ,ut the i&ea 8hich un&erlies that ha6it also len&s itsel to a more a$ora6le interpretation. -t ma4 impl4 reco7nition o the act that there are equili6rium relations 6et8een economic quantities, &eparture rom 8hich creates &i iculties an& untena6le situations, an& comparison 8ith 8hich is the o6$ious metho& to 6e ollo8e& in or&er to estimate the nature an& e(tent o actual &e$iations. - , instea& o comparin7 the actual situation 8ith that equili6rium state 8hich 8oul& correspon& to its &ata, people compare it 8ith a past situation that 8as not an equili6rium state an& 8oul&, e$en i it ha& 6een, no lon7er 6e rele$ant, the4 are simpl4 actin7 on a 6elie that the situation o 1913 8as at an4 rate more normal than an4 later one an& that it is not too ar remo$e& rom us to ser$e as a norm. 3his ma4 6e 8ron7, 6ut the un&erl4in7 principle o comparin7 actual 8ith normal $alues is not in$ali&ate& there64. Lne o the ser$ices 8hich the 6usiness an& political 8orl&s can most =usti ia6l4 e(pect rom the economist consists precisel4 in &e$isin7 more satis actor4 metho&s in or&er to 7i$e e ect to that principle. 'ence, much more interest an& importance than most o us are incline& to a&mit attach to the en&ea$ors o some statisticians an& economists to &istill rom the statistical material o an economic 8orl& 8hich is chronicall4 in a state o &isequili6rium, the time sequence o equili6rium $alues. 5erhaps it is true to sa4 that some such i&ea must 6e present in the 6acE o the min& o an4 statistician 8ho calculates tren&s. 'e ma4 ha$e no other purpose 6ut to eliminate them in or&er to maEe luctuations stan& out more clearl4. ,ut luctuations must 6e luctuations aroun& somethin7 an&, i presse&, he 8oul& pro6a6l4
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&e ine that somethin7 in terms more or less relate& to our equili6rium concept. 3he irst economist to &e$elop the i&ea consciousl4 an& to 7o, at least in conception an& intention, the 8hole 8a4, 8as 'enr4 2. Boore. 3hrou7hout his 8orE, summe& up in his S4nthetic /conomics, runs the principle that tren&s or loci o points, e$er4one o 8hich in&icates the i&eal equili6rium $alue correspon&in7 to the actual $alue taEen 64 each time $aria6le in the same point o time. 3he most important o the uses 8e shall maEe o the concept o equili6rium is, ourth, contin7ent on the e(istence o a ten&enc4 to8ar& equili6rium. He ha$e seen that assertion o it is su6=ect to man4 quali ications an& is not so simple a matter as ol&er 7enerations o theorists ha$e 6elie$e&. Since actors o chan7e actuall4 impin7e on a 8orl& that is &istur6e& alrea&4 an& since, e$en i the4 ha& the opportunit4 o impin7in7 on a 8orl& that 8as in per ect equili6rium pre$iousl4, the processes o response 8oul& in most cases not &irectl4 lea& to equili6rium in a simple 8a4, our 6elie in the e(istence o an equili6rium ten&enc4, 8hich a ter e$er4 e(cursion &ra8s the s4stem 6acE to8ar& a ne8 state o equili6rium, 8ill ha$e to stan& on trial to the last pa7e o this 6ooE, althou7h acts o the most common o6ser$ation support it much more stron7l4 than &oes 7eneral theor4, 8hich quite ri7htl4 en&ea$ors to taEe account o e$en the most reaEish cases. 3he thin7 that matters to us, is ne$ertheless this ten&enc4 consi&ere& as an actual orce, an& not the mere e(istence o i&eal equili6rium points o re erence. He taEe our stan& on the act that the $alues o economic $aria6les luctuate in the course o 6usiness c4cles 6et8een i7ures 8hich rou7hest practical common sense reco7niOes as a6normall4 hi7h an& i7ures 8hich it reco7niOes as a6normall4 lo8 an& that some8here 6et8een these t8o lie $alues or ran7es o $alues 8hich that same common sense 8oul& reco7niOe as normal. He 8ish to &istin7uish &e inite perio&s in 8hich the s4stem em6arEs upon an e(cursion a8a4 rom equili6rium an& equall4 &e inite perio&s in 8hich it &ra8s to8ar& equili6rium. -n or&er to harness our equili6rium concept to this ser$ice, 8hich is un&amental or our anal4tic technique, 8e 8ill not postulate the
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e(istence o states o equili6rium 8here none e(ist, 6ut onl4 8here the s4stem is actuall4 mo$in7 to8ar& one. Hhen, or instance, e(istin7 states are in the act o 6ein7 &istur6e&, sa4, 64 a 8ar inance& 64 7o$ernment iat, or 64 a @mania@ o railroa& 6uil&in7, there is $er4 little sense in speaEin7 o an i&eal equili6rium coe(istin7 8ith all that &isequili6rium. -t seems much more natural to sa4 that 8hile such a actor acts there is no equili6rium at all. Hhen it has cease& to act, an& 8hen 8e o6ser$e that rea&=ustment sets in 8hich 8e interpret as a mo$ement to8ar& equili6rium, then an& onl4 then the i&eal equili6rium 6ecomes the 7oal o an economic process, the nature o 8hich can 6e eluci&ate& 64 re erence to it. 3hen an& onl4 then equili6rium 6ecomes 8hat 8e ha$e calle& it 6e ore, the @theoretical norm@ o the economic $aria6les. 'ence, 8e 8ill, or our purpose, reco7niOe e(istence o equili6ria onl4 at those &iscrete points on the time scale at 8hich the s4stem approaches a state 8hich 8oul&, i reache&, ul ill equili6rium con&itions. An& since the s4stem in practice ne$er actuall4 reaches such a state, 8e shall consi&er, instea& o equili6rium points, ran7es 8ithin 8hich the s4stem as a 8hole is more nearl4 in equili6rium than it is outsi&e o them. 3hose ran7es, 8hich are the operational orm to 8hich 8e shall appl4 properl4 mo&i ie& equili6rium consi&erations, 8e call nei7h6orhoo&s o equili6rium *the term must not 6e un&erstoo& in its mathematical sense+.
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0hapter --'LH 3'/ /0L.LB-0 S1S3/B </./9A3/S /KL2#3-L.
3a6le o 0ontents
A. Inte!nal Fa)to! of Change. He start rom the picture,
sEetche& in the prece&in7 chapter, o an economic process 8hich merel4 repro&uces at constant rates an& is in equili6rium at e$er4 point o time. He recall that there are t8o moti$es or &oin7 so. He 8ish to 7uar& e ecti$el4 a7ainst circular reasonin7, an& to use the relations 8hich linE economic quantities in such a process as an @apparatus o response.@ An& 8e asE the question > Hhat is it that maEes that process chan7e in historic time V Lne reason 8h4 the process chan7e is o6$iousl4 that it is acte& upon 64 8hat 8e ha$e terme& e(ternal actors. 3hese 8e shall no8 e(clu&e rom consi&eration, recallin7 once more, ho8e$er, not onl4 that the4 are al8a4s important an& sometimes &ominant, an& that the response o the s4stem to their impact must al8a4s 6e e(pecte& to account or a 7reat part o the economic chan7es 8e o6ser$e, 6ut also that their occurrence ma4 an& o ten &oes con&ition chan7es o the Ein& 8hich 8e are a6out to consi&er. 3hese t8o thin7s must 6e Eept
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&istinct. ,4 response 8e mean onl4 8hat ma4 6e terme& passi$e a&aptation, i.e., a&aptation 8ithin the un&amental &ata o the s4stem. A&aptation ma4, ho8e$er, consist in alterin7 some o those &ata, an& such creati$e response 6elon7s to the class o internal chan7e. :or e(ample, i 7o$ernment &eman& or an4 7i$en t4pe o 8eapon increases, 6usiness ma4 a&apt itsel accor&in7 to the rules o the 7ame 8hich 8e *$irtuall4+ o6ser$e in the stationar4 process > it ma4 turn out increasin7 quantities o that t4pe o 8eapon at increasin7 costs an& prices, 8hich impulse ma4 in turn propa7ate itsel throu7hout the s4stem accor&in7 to the same rules. ,ut it ma4 also a&apt itsel 64 turnin7 out another t4pe o 8eapon or 64 pro&ucin7 the one &eman&e& 64 a ne8 metho&. 3his 8oul& 6e internal chan7e con&itione& 64 an e(ternal actor. :actors o chan7e internal to the economic s4stem are chan7es in tastes, chan7es in quantit4 *or qualit4+ o actors o pro&uction, chan7es in metho&s o suppl4in7 commo&ities. Lne o the ser$ices that our equili6rium s4stem ren&ers consists precisel4 in assurin7 us that this classi ication o internal actors is lo7icall4 e(hausti$e, or e$er4thin7 else in the s4stem is &e&uci6le rom tastes, quantit4 an& &istri6ution o pro&ucti$e resources, an& pro&uction unctions. *Autonomous monetar4 chan7es ha$e 6een inclu&e& in the class o e(ternal actors.+ He taEe up those three actors in turn. 1. He 8ill, throu7hout, act on the asumption that consumers" initiati$e in chan7in7 their tastesNi.e., in chan7in7 that set o our &ata 8hich 7eneral theor4 comprises in the concepts o @utilit4 unctions@ or @in&i erence $arieties@Nis ne7li7i6le an& that all chan7e in consumers" tates is inci&ent to, an& 6rou7ht a6out 64, pro&ucers" action. 3his requires 6oth =usti ication an& quali ication. 3he act on 8hich 8e stan& is, o course, common Eno8le&7e. 9ailroa&s ha$e not emer7e& 6ecause an4 consumers tooE the initiati$e in &ispla4in7 an e ecti$e &eman& or their ser$ice in pre erence to the ser$ices o mail coaches. .or &i& the consumers &ispla4 an4 such
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initiati$e 8ish to ha$e electric lamps or ra4on stocEin7s, or to tra$el 64 motorcar or airplane, or to listen to ra&ios, or to che8 7um. 3he 7reat ma=orit4 o chan7es in commo&ities consume& has 6een orce& 64 pro&ucers on consumers 8ho, more o ten than not, ha$e resiste& the chan7e an& ha$e ha& to 6e e&ucate& up 64 ela6orate ps4chotechnics o a&$ertisin7. :or our purposes, the case is not impaire& 64 the act that consumers satis action supplies the social meanin7 or all economic acti$it4, or 64 the act that ne8 an& un amiliar commo&ities ha$e ultimatel4 to 6e @taEen up,@ or rati ie&, 64 consumers an& ma4 6e sai& to ha$e 6een pro&uce& 8ith a $ie8 to latent consumers" 8ishes, or on in&ications other than e ecti$e &eman&. As ar as chan7es in taste 7o, this is entirel4 irrele$ant to the mechanics o the processes 8e are to anal4Oe. 3he act that the 8orE o @consumers" research@ is t4picall4 one o criticism o commo&ities, 6ran&s, an& qualities ma4 6e pointe& to in illustration. ,ut ho8e$er completel4 the proposition that chan7es in consumers" tastes are 6rou7ht a6out 64 the action o pro&ucers ma4 all in 8ith the 7eneral opinion on the su6=ect, it is 4et not quite true. -t is eas4 to a&&uce instances o initiati$e chan7e o consumers" tastes an& e$en to 7roup them aroun& amiliar t4pes. 38o o them ma4 6e mentione&. -n e$er4 social circle, 8e o6ser$e lea&ers o ashion, specialists in creatin7 ne8 orms an& ha6its o pri$ate li e. A7ain, there are @mo$ements@ 8hich ma4 po8er ull4 in luence the collection o consumers" 7oo&s that is 6ein7 6ou7ht 64 househol&sNthe temperance mo$ement ma4 ser$e as an e(ample. He hol&, ho8e$er, that this class o acts is not important enou7h to matter an& that its ne7lect 8ill not su6stantiall4 in$ali&ate our picture. Shi ts in &eman& 8hich come a6out in that 8a4 are, 6esi&es, no more than &i erent choices 6et8een e(istin7 commo&ities, an&, i unsupporte& 64 a chan7e in real income 8hich the4 &o not in themsel$es entail, create a situation to 8hich in&ustr4 can an& 8ill passi$el4 a&apt itsel . Hhene$er 8e meet e(ceptions *8ar &eman& 64 7o$ernments seems to 6e the most important o them+ nothin7
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pre$ents us rom &ealin7 8ith such cases on their merits, 6ut 8e &o not inclu&e them in our 7eneral schema. 3his arran7ement rests on se$eral assertions o act an&, o course, stan&s an& alls 8ith them. - an4one shoul& hol& that chan7es in taste &o arise re7ularl4 an& s4stematicall4 rom consumers" initiati$e in the a6o$e sense, in such a 8a4 that this initiati$e constitutes one o the main moti$e po8ers o economic e$olution, he 8oul& lo7icall4 ha$e to &en4 the $ali&it4 o our anal4tic schema. ). -ncrease in pro&ucti$e resources mi7ht at irst si7ht appear to 6e the o6$ious prime mo$er in the process o internal economic chan7e. 5h4sical en$ironment 6ein7 taEen as constant *openin7 up o ne8 countries enters into a &i erent cate7or4+, that increase resol$es itsel into increase o population an& the increase o the stocE o pro&ucers" 7oo&s. .either can, o course, 6e treate& as an in&epen&ent $aria6le M 6oth are at the same time e ects o economic chan7es an& con&itions o other economic chan7es. Lur reason or listin7 $ariations in population amon7 e(ternal actors 8as that there is no unique relation 6et8een them an& $ariations in the lo8 o commo&ities. 'ence, it seeme& con$enient or our purpose to looE upon an increase in population as an en$ironmental chan7e con&itionin7 certain phenomena. Boreo$er, it coul& 6e &emonstrate& 64 amiliar cases *-n&ia an& 0hina+ that mere increase in population &oes not 6rin7 a6out an4 o those phenomena 8hich presuppose either a certain &ensit4 or a certain rate o increase in population e(cept a all in real income per hea&. :inall4, it occurs so continuousl4 as to 6e capa6le o current a6sorption. Short-time $ariations in marria7e rates are o6$iousl4 the re le( o 6usiness luctuations an& &o not cause them. Similar consi&erations appl4 to the increase in the stocE o &ura6le pro&ucers" 7oo&s 8hich 8oul& or&inaril4 ollo8 rom the presence in a societ4 o a positi$e rate o net sa$in7s. He 8ill pro it 64 the occasion in or&er to intro&uce a e8 concepts, con$entions, an& propositions 8hich 8ill 6e o use later on.
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,4 Sa$in7 8e mean the earmarEin7, 64 a househol&, o an element o its current receiptsNas &istin7uishe& rom @capital 7ains@N or the acquisition o titles to income or or the repa4ment o &e6t. - a irm &oes the same thin7 8ith an element o its net receipts rom the sale o pro&ucts an& ser$ices, 8e shall speaE o Accumulation. 3he &istinction 6et8een Sa$in7 an& Accumulation also applies, althou7h it ma4 6e &i icult to carr4 out, in cases in 8hich, as in the case o man4 armers, @ irm@ an& @househol&@ are one. He con ine 6oth concepts to &ecisions a6out monetar4 un&s an& 8e ne7lect, or con$enience"s saEe, an4 similar &ecision that ma4 6e taEen 8ith respect to commo&ities. Sa$in7 an& Accumulation 8ill thus 6e treate& as elements o a monetar4 process > the complementar4 processes in the 8orl& o 7oo&s constitute a &istinct pro6lem. Hhere no con usion is to 6e eare& 8e shall use the 8or& Sa$in7 to co$er also Accumulation. ;issa$in7N8hich inclu&es consumers" spen&in7 o @capital 7ains@N an& ;ecumulation are sel -e(planator4. )0
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:ull =usti ication o the conceptual arran7ement a&opte& cannot 6e 7i$en 8ithout 7oin7 much more thorou7hl4 into the theor4 o mone4 than is possi6le in this 6ooE, an& 8ill, it is hope&, 6e presente& in the8riter"s treatise on mone4. 3hat pro$ision, sa4, or one"s ol& a7e, is Sa$in7 onl4 i the intention is to li$e on the re$enue rom the sum assem6le& or the purpose, an& not i the intention is to spen& that sum as 8ell *so that, i&eall4, there is nothin7 le t on the &4in7 &a4+. soun&s not less stran7e than that it is Sa$in7 i one @earmarEs@ in or&er to purchase a house or the purpose o lettin7 it, 8hile it is not Sa$in7 i the intention is to li$e in the house. Also, it 8ill 6e o6=ecte& that, the &e inin7 criterion 6ein7 an intention, 8e cannot rom o6ser$a6le 6eha$ior Eno8 8hether there is Sa$in7 or somethin7 else until the intention is carrie& into e ect, an& that e$en then 8e coul& not 6e certain 6ecause 8hat 8e see mi7ht still 6e 3emporar4 -n$estment *to 6e &e ine& presentl4 in the te(t+. 3hese an& similar o6=ections $anish, ho8e$er, i the purpose an& the lo7ic o our &e inition are Eept in min&. Sa$in7 in the sense &e ine& is a &istinct phenomenon, pla4in7 a role an& pro&ucin7 e ects &i erent rom those pro&uce& 64 the other actions or &ecisions 8hich it is usual to inclu&e in Sa$in7, an& much con usion can 6e a$erte& 64 &istin7uishin7 them clearl4. 3o some e(tent, the importance o this 8ill 6ecome e$i&ent as 8e 7o on. He inclu&e earmarEin7 o elements o income or the purpose o repa4in7 &e6ts. ,ut this 8ill 6e &ealt 8ith separatel4 an& is not consi&ere& in this section. -n act, it has no place 8ithin our present
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3here ore, Sa$in7 *Accumulation inclu&e&, 8hen require& 64 the conte(t+ &oes not mean > 3he assem6lin7 o a sum earmarEe& or the purpose o 6u4in7 a &ura6le consumers" 7oo&, or o meetin7 an item o e(pen&iture 8hich cannot 6e co$ere& 64 current receipts > @sa$in7@ in or&er to 6u4 a motorcar or non6usiness use or a house to li$e in, or @sa$in7 up@ or holi&a4s is not sa$in7 at all in our sense, 6ut merel4 rearran7in7 consumpti$e e(pen&iture so as to it @lump4@ items. .or &oes an4 mere rearran7ement o the time shape o one"s real income stream necessaril4 in$ol$e sa$in7. .otspen&in7 or &e erment o spen&in7. )1 3he &ecision on 8hich our &e inition turns, ma4, 6ut nee& not, result in the mone4 lea$in7 the sa$er"s account an& e$entuall4 reachin7 some commo&it4-marEet later than it 8oul& ha$e &one i retaine& in the ser$ice o inancin7 consumpti$e e(pen&iture. -t ma4 possi6l4 reach it sooner. -n itsel the &ecision to sa$e is not a &ecision not to spen& or to &e er spen&in7, an& the latter &ecision ma4 equall4 8ell occur 8ith respect to sums 8hich are an& remain earmarEe& or consumpti$e use or, in the case o a irm, or e(pen&iture in the or&inar4 run o 6usiness. Hhether the &ecision not to spen& occurs in these spheres, or in the sphere o sa$in7, it is in an4 case neither sa$in7 nor e(plaina6le 64 sa$in7 as such, 6ut a &istinct phenomenon callin7 or a &istinct e(planation. .or is 'oar&in7 *to 6e &e ine& later+ s4non4mous 8ith sa$in7. 3he carr4in7 into e ect o the &ecision to acquire titles to income 8e shall call -n$estment. -n the case o househol&s 8e shall mainl4
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set o assumptions. 3he o6=ection to the term &e erment is not onl4 that e(pen&iture can 6e &e erre& or man4 reasons 8hich characteristicall4 &i er in nature an& e ect, 6ut that in no case &oes it e(press the social meanin7 o thri t. 3he sa$er himsel &oes not &e er 6ut &e initi$el4 renounces e(pen&iture on consumers" 7oo&s o the sum sa$e&, 8hile the latter ma4 6e spent on consumers" 7oo&s 64 other people 8ithout an4 &ela4.
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thinE o the acquisition o shares an& 6on&s *inclu&in7 mort7a7es an& the liEe+ an& o lan& or 6uil&in7s, i inten&e& or 6usiness purposes. -n the case o irms 8e shall, ho8e$er, inclu&e spen&in7 on all Ein&s o pro&ucers" 7oo&s 6e4on& replace" ment. Such acts o e(pen&iture 8e 8ill &esi7nate 64 the term 9eal -n$estment. Ll&er &octrine has un&ou6te&l4 e(clu&e& a 7reat mass o acts rom its horiOon 64 &espisin7 the monetar4 approach an& 64 linEin7 in$estmentNin particular real in$estment, still more real in$estment in plant an& equipmentNmuch too closel4 to sa$in7. Sa$in7 an& in$estment, as here &e ine&, are o course &istinct e$ents. 3he ormer e(erts in luence o its o8n in&epen&entl4 o in$estment an& the latter can 6e inance&, as 8e shall see, rom sources other than sa$in7. Lne o them shoul& 6e mentione& at once. Suppose that some6o&4 8ho is in the ha6it o 6u4in7 a ne8 motorcar e$er4 i$e 4ears, assem6les the necessar4 sum continuousl4 on his checEin7 account. 3he units o account earmarEe& or that purpose are not 8ith&ra8n rom circulation. 3he4 @circulate@ in the same sense that an4 others &o, onl4 the4 &o so 8ith a lon7er perio& *lo8er @$elocit4,@ to 6e &enne& later+ than others. 3he mo&em mone4 marEet o erin7 the acilit4, our man ma4 &eci&e to 6u4, sa4, treasur4 certi icates as his motorcar un& 7ro8s an& to sell them 8hen the time has arri$e& to 6u4 the car. 'e &oes sa$e. 'is 6eha$ior to8ar& consumption or his intention to spen& on consumers" 7oo&s has not chan7e&. 1et he in$ests. 3he mone4 lea&s a sort o &ou6le e(istence, ser$in7 all the purposes o a cash item earmarEe& or a certain purpose an& at the same time all the purposes o the 6orro8er. He call this 3emporar4 -n$estment, an& 8ill care ull4 6ear in min& its o6$ious peculiarities. Boreo$er, sa$in7, e$en i in$este&, nee& not issue into real in$estment as rea&il4 as the reasonin7 o ol&er authors seems to impl4. .ot onl4 can the sa$er in$est 64 inancin7 other people"s consumption, 6ut his mone4 ma4 ser$e to inance pro&ucers" &e icits or to pa4 &e6ts. /$en i it &oes not, it nee& not 6e applie& in such a 8a4 as to entail increase o the national stocE o &ura6le pro&ucers"
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7oo&s, althou7h it is o6$ious that, in as much as increase& sa$in7 means rates o interest lo8er than an4 other8ise 8oul& 6e, there al8a4s 8ill 6e a ten&enc4 in that &irection. -n a&&ition, the rea&er is 8elcome to insert here a 8hole chapter on the innumera6le inci&ents an& acci&ents, errors, rictions, an& la7s, 64 8hich sa$in7s ma4 6e lost or stoppe& on their 8a4 or mis&irecte& or &issa$e& a7ain an& 8hich 8ill account or imper ect coor&ination 6et8een sa$in7 an& in$estment. ,ut an4 8ant o coor&ination 8hich 8e ma4 o6ser$e is not simpl4 &ue to the a6sence o an equili6ratin7 mechanism M or, thou7h &i erent acts, sa$in7 an& in$estment are inter&epen&ent an& correspecti$e so as to shape each other. Sa$in7 impl4in7 intention to acquire titles to income, the &ecision to sa$e is taEen 8ith re erence to 7i$en or e(pecte& in$estment opportunities an& the prospect o income the4 o er. Boreo$er, it can 6e currentl4 re$ise& as the4 chan7e > the case o sa$ers is not analo7ous to that o anners 8ho ha$e to maEe &ecisions 8hich 8ill taEe e ect 6ut one 4ear later an& then taEe e ect or all o them simultaneousl4. -n the case in 8hich sa$in7 issues in real in$estment, ho8e$er, there is a la7 6et8een &ecision to e ect the latter an& the emer7ence o the correspon&in7 equipment 7oo&s. 3his la7 7i$es room or the or&inar4 chapter o acci&ents to un ol& itsel 6ut not or a special Ein& o mala&=ustment, since the rate o interest is ree to react at once. /$en i sa$in7, sa4, 6ecomes a ha6it an& outruns its rationale, mala&=ustment &oes not necessaril4 ensue 6ecause, 8hether sa$ers sa$e rationall4 or not, their action in an4 case in luences in$estment opportunit4, 8hich in turn ten&s as much to a&apt itsel to the amount an& the rate o sa$in7 as it ten&s to in luence that amount an& rate. L course, there is $er4 little meanin7 in an application o Bar-shallian &eman& an& suppl4 cur$es to this case. 3he4 &o not illustrate 6ut rather o6scure the nature o the relation 6et8een 8in7, in$estment, an& the rate o interest. Since this relation is the net result o the interaction o all the $aria6les o the s4stem, it can 6e e(presse& onl4 in terms o the Halrasian apparatus. :rom the attempt to &o so 64
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means o t8o in&epen&ent sin7le-$alue unctions o the rate o interest nothin7 6ut caricature can result. Actuall4, o course, that equili6ratin7 mechanism $er4 o ten &oes not 8orE. ,ut soun& &ia7nosis cannot 6e e(pecte& rom &en4in7 its e(istence or rom settin7 up such entities as @optimism,@ @pessimism,@ @sa$in7 instinct,@ or rom simpl4 assertin7 that people elect to act in such a 8a4 that mala&=ustment 8ill ensue an& that sa$in7 an& in$estment can each 7o its o8n 8a4 in&e initel4. -n or&er to maEe hea&8a4, 8e must locate the sources o the trou6le. 3he4 8ill 6e oun& in the 6usiness situations inci&ent to the process o economic chan7e 8e are a6out to &escri6e, an& linE up 8ith notspen&in7 an& 8ith $ariations in real in$estment rather than 8ith sa$in7. At the moment, ho8e$er, it is &esira6le, since the 7roun& is so ertile in misconceptions, to maEe quite sure that the sa$in7-in$estment mechanism, as such, &oes not pro&uce an4thin7 that coul& quali 4 or the role o an e(planation o crises or &epressions. ))
))
- 7i$en our &e initions, the rea&er shoul& thinE this o6$ious, so much the 6etter. - he shoul& thinE, in particular, that our ri7orous &istinction 6et8een sa$in7 an& notspen&in7 6e7s the question, this 8oul& precisel4 impl4 7rantin7 the point 8hich the 8riter 8ishes to maEe. 3here are man4 economists, ho8e$er, 8ho &o use the simple sa$in7-in$estment mechanism or the purpose a6o$e allu&e& to, an& it is the4 8hom the rea&er shoul& 6lame or 8hat the 8riter a7rees are $er4 tri$ial consi&erations. -t shoul& 6e o6ser$e& that, 8hile the ar7ument presente& a6o$e runs su6stantiall4 on $er4 amiliar linesNit 8oul& 6e possi6le to quote in support, 6esi&es Halras, Bill, ,oehm-,a8erE, 'a4eE, 'ansen * or the latter"s $ie8s see his criticism o :oster an& 0atchin7s in ,usiness-c4cle 3heor4, or instance, p. 5J+Na7reement ceases 6e4on& it. :or, 6arrin7 man4 in&i$i&ual points 8hich cannot 6e insiste& on since this is no place or a ull &e$elopment o the theor4 o sa$in7, there is a un&amental &i erence 8hich must 6e Eept in $ie8 > all those authors attri6ute to sa$in7 a role 8hich is &enie& to it here. An& all o them looE upon the ar7ument to 6e presente&, or a similar one, as a satis actor4 theor4 o sa$in7, to 8hich not more than a 7eneral pro$iso a6out rictions an& &istur6ances rom outsi&e has to 6e a&&e& in or&er to maEe it applica6le to the e(planation o realit4. 3his is not so, ho8e$er. :or us, the stationar4 assumptions 8e are 7oin7 to maEe ha$e importance onl4 or the purpose o preliminar4 clari ication an& are a&mitte& rom the outset to 4iel& an ina&equate picture 8hich, taEen 64 itsel , coul& onl4 mislea&.
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:or this purpose 8e 8ill en$isa7e a societ4, stationar4 in e$er4 respect e(cept in that it &ispla4s a positi$e rate o sa$in7. 5ro&uction unctions are in$ariant an& e(ternal &istur6ances are a6sent. 3here is a positi$e rate o interest. He e(clu&eN6ut this is onl4 or the saEe o con$enience an& 6re$it4Nall in$estment opportunities e(cept len&in7 to irms *this merel4 e(clu&es consumers" cre&it+ an& assume that sa$in7 is the onl4 source o suppl4 o such monetar4 means as these irms ma4 8ish to ha$e in a&&ition to their current receipts *this assumption e(clu&es cre&it creation > mone4 consists, sa4, o a i(e& num6er o 7ol& coins 8hich must 6e actuall4 han&e& o$er to e ect a transaction+. L6$iousl4, this mo&el 8ill &ispla4 onl4 the e ects o sa$in7 an& in$estment as such. He start rom competiti$e equili6rium, althou7h e(tension to the imper ectl4 competiti$e case 8oul& not present an4 &i iculties. .o8, that equili6rium is incessantl4 &istur6e& 64 the lo8 o ne8 sa$in7s 8hich are 6ein7 o ere& to the irms. - , ho8e$er, the s4stem is a&apte& to the actual rate o sa$in7sNan assumption 8hich is not onl4 reasona6le un&er the circumstances o this mo&el, 6ut also much nearer the truth in realit4 than &e$otees o o$ersa$in7 theories are in the ha6it o a&mittin7N this &istur6ance 8ill 6e currentl4 a6sor6e& M or, as lon7 as sa$in7 7oes on at all, each installment 8ill &epress the rate o interest to the e(tent require& to create its o8n in$estment opportunit4. .o other price, either o consumers" or o pro&ucers" 7oo&s 8ill 6e a ecte& at this sta7e. As to consumers" 7oo&s, the question 8hether sa$in7 in 7eneral re&uces their prices is irrele$ant here, since in an4 case the4 ha$e 6een pro&uce& in quantities, &ecision a6out 8hich alrea&4 tooE account o that rate o sa$in7. As to pro&ucers" 7oo&s, the analo7ous questionN i.e., 8hether in$estment increases their pricesNis irrele$ant or the same reason. An& the ne8 pro&ucers" 7oo&s are sure to in& their 6u4ers 6ecause the pre$ious com6ination o actors o pro&uction is, o8in7 to the all in rate o interest, no lon7er optimal an& the com6ination 8hich is optimal no8 requires an increase in the more &ura6le elements, let us call them machiner4, such as 8ill e(actl4 equal the a&&itional sa$in7s o ere& 6oth in $alue an& in cost,
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8hich is 8hat 8e mean 64 sa$in7 creatin7 its o8n &eman&. -t is rea&il4 seen that, in this case, 8hat a6o$e has 6een &escri6e& as a caricature, 8orEs satis actoril4, 6ecause 8e ha$e 64 our assumptions paral4Oe& e$er4thin7 else that coul& $ar4. 3he result 8oul&, in act, 6e a stea&4 7ro8th o the s4stem"s in&ustrial out it 64 the stea&4 a&&ition to it o ne8 units o plant an& machiner4, 8hich, ho8e$er, must 6e o the same t4pes as those 8hich are alrea&4 in use or 8oul& 6e in use 6ut or lumpiness, in or&er to e(clu&e a ne8 an& &i erent element 8hich 8oul& other8ise intru&e. 3he un&amental meanin7 o sa$in7 an& in$estment, as interprete& 64 classical &octrine, stan&s out clearl4 an& nee& not &etain us. ,ut it is important to notice that since no losses are incurre& 64 pro&ucers o consumers" 7oo&s o8in7 to the ailure o the househol&s to spen& their 8hole income or purposes o consumption, there is no reason or an4 pro&ucer to re use a&&itional @capital@ on the 7roun& that, 6ecause o such losses, he 8ants to contract rather than to e(pan& operations. .or 8ill there he an4 @7lut@ 8hen the pro&ucts o the ne8 machines reach the marEets or the consumers" 7oo&s. 5rices 8ill no8 all 6ut this &oes not spell losses, 6ecause it 8ill necessaril4 6e compensate& or 64 the correspon&in7 all in costs per unit o inishe& pro&uct. 3here ma4 6e &i iculties, o course, such as the impossi6ilit4 o a&=ustin7 ol& loan contracts quicEl4, 6ut the4 6elon7 to the class o rictions. #nless interest alls to OeroNan& then sa$in7 in our sense stops, thou7h, or e(ample, @sa$in7 or the rain4 &a4@ ma4 continueNthis process can 7o on in&e initel4, 8ithout o itsel creatin7 an4 pro6lem, alon7 constant pro&uction unctions. 3he continuit4 o the latter is in this case no more serious a restriction than it is in others. -t is 8orth 8hile noticin7, ho8e$er, that such a&&ition to the stocE o &ura6le pro&ucers" 7oo&s can 6e in=urious to the interests o the 8orEin7 class. Hhether it is or not &epen&s on the elasticit4 o su6stitution 6et8een la6or an& those 7oo&s. ,ut this is not rele$ant to our ar7ument. - , ho8e$er, the s4stem is not a&apte& to the sa$in7 actuall4 &one, anal4sis 6ecomes more complicate&. He 8ill assume that sa$ers
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su&&enl4 an& une(pecte&l4 taEe to sa$in7, sa4, &ou6le the sum per unit o time the4 use& to sa$e. -t shoul& 6e o6ser$e& at once that the $iolent luctuations usuall4 associate& 8ith thri t are $ariations in the rate o spen&in7. )3 Lur pro6lem is, there ore, little more than an e(ercise in pure theor4, or lon7 time chan7es in the rate o sa$in7 come a6out 64 trul4 in initesimal steps, an& althou7h its luctuations in the 6usiness c4cle are consi&era6le, o8in7 to the 7reat $aria6ilit4 o the pro it component, it must 6e 6orne in min& that these are a consequence o the c4clical situations, 8hile here 8e are primaril4 concerne& 8ith the question 8hether sa$in7 8oul& o itsel pro&uce &epressions. Autonomousl4, a6rupt chan7es in the rate o sa$in7 har&l4 e$er occur. At least, the 8riter &oes not Eno8 o an4 instances, outsi&e o the cases o @8il&@ in lation. ,ut assumin7 that such chan7es &o occur, &istur6ance o the sort 8hich al8a4s atten&s su&&en chan7es in the channels o tra&e 8ill in most cases ensue. -ts precise nature, as 8ell as the ultimate outcome, no8 &epen&s on a 7reat man4 $aria6les, an& also on other properties o the process an& o the s4stem, such as the num6er an& sequence o the steps in the sa$in7-in$estment process. He 8ill simpli 4 matters 64 a7ain e(clu&in7 6anE cre&it an& assumin7 that sa$ers o er their a&&itional sa$in7s to irms 8hich, ha$in7 6een in competiti$e equili6riums at the pre$ious point o time, ha$e no use or them at the pre$ious rate o interest an&, at a suita6l4 re&uce& rate, no other use than to a&& ne8 units to their e(istin7 stocE o machiner4.
)3
3his 8ill 6ecome clear later on. Bean8hile, it is use ul to insist a7ain on the consequences, or anal4sis an& polic4, the con usion 6et8een those t8o thin7s, 8hich are &i erent in nature an& in 6eha$ior, must ha$e. Bost o 8hat 8riters 8ho are a6o$e primiti$e error attri6ute to thri t reall4 applies to non-spen&in7Nin particular, most o 8hat is true in the talE a6out @sa$in7 inancin7 the losses 8hich it creates@ an& @sa$in7 helpin7 to &estro4 rather than to increase the stocE o societ4"s real capital.@ 'ence, thou7h it is no &ou6t re7retta6le that it is impossi6le to present a &e inition o sa$in7 8hich 8ill maEe it less re ractor4 to statistical e$aluation, 8e ha$e no choice. Statistical measura6ilit4 is no a&$anta7e i the measura6le thin7 is &e$oi& o meanin7, or carries another meanin7.
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.o8 it is eas4 to construct a case in 8hich the su&&en 8ith&ra8al o the sa$ers" &eman& rom the marEet o the consumers" 7oo&s 8hich the4 use& to 6u4 6e ore their &ecision to &ou6le their rate o sa$in7, causes catastrophe. 3his 8ith&ra8al on the one han& en orces emer7enc4 6orro8in7 64 the irms 8hich pro&uce& those 7oo&s that the4 are no8 una6le to sell an&, on the other han&, &eters all irms rom committin7 themsel$es to ne8 real in$estment. - sa$ers 7o on a ter this, 8e can e$en, 64 properl4 choosin7 sequences, arri$e at the result that all $alues 8ill a ter a time as4mptoticall4 approach Oero. -t is not less eas4 to construct a case in 8hich there 8ill 6e no all at all in prices o consumers" 7oo&s 6ecause, the a&&itional sa$in7s ha$in7 6een o ere& an& accepte& an& 8orE on the ne8 machines ha$in7 starte& 6e ore those prices ha& time to all, &eman& rom the increase incomes in the machine in&ustries steps into the place o the &eman& &iscontinue& 64 sa$ers, so that nothin7 can happen e(cept possi6l4 a shi t 8ithin the sphere o consumers" 7oo&s. 3his case is 6ut a paraphrase, in monetar4 terms, o the i&ea that sa$in7 an& in$estin7 un&amentall4 consist in han&in7 one"s claims to consumers" 7oo& to la6orers an& other suppliers o pro&ucti$e ser$ices in or&er to set them to 8orE on, sa4, interme&iate pro&ucts. -t &oes not maEe an4 &i erence 8hether these ser$ices 8ere pre$iousl4 emplo4e& or not > sa$in7 is not @a6orti$e@ i the4 8ere pre$iousl4 emplo4e&. ,ut then their emplo4ment in the machine in&ustr4 8ill temporaril4 re&uce the suppl4 o consumers" 7oo&s, so that in this case there 8ill 6e a perio& &urin7 8hich sa$in7 an& in$estment pro&uce an increase in their prices. 3he 6est that can 6e sai& or 6oth constructions is that, thou7h the4 are a6sur&l4 o$er&ra8n pictures o possi6le $ariants o an impossi6le case, the4 ne$ertheless ma4 ser$e in the role o ma7ni 4in7 7lasses 8ith 8hich to looE or other8ise in$isi6le traits o realit4. 3he secon& is perhaps more apt to 6rin7 out un&amental truth that is not o6$ious to the la4man, 6ut or our purpose 8e are particularl4 intereste& in the irst. -n itsel it is tri$ial, or all it teaches is that a $iolent chan7e in
J8
the rate o sa$in7 causes trou6le 8hich ma4 7o on intensi 4in7 itsel so that the ne8 rate o sa$in7 an& the ne8 rate o in$estment ma4 &i$er7e or a consi&era6le time. ,ut such a $iolent chan7e, comin7 a6out autonomousl4, 4iel&s the onl4 case in 8hich sa$in7 coul& possi6l4 ha$e an4thin7 to &o 8ith the causation o 6usiness &epressions in the sense that it coul& create them 64 isel . Boreo$er, these chan7es 8oul& ha$e to recur perio&icall4. He no8 return to our ar7ument. He &o not, o course, e(clu&e Sa$in7 an& Accumulation rom the internal actors maEin7 or economic chan7e M or, unliEe $ariations in population, the4 certainl4 are a purel4 economic phenomenon. ,ut 8e &o e(clu&e them rom the un&amental contour lines o our anal4tic mo&el. 3his &ecision ma4 8ell looE stran7e. 3o man4 it ma4 seem to e(clu&e the $er4 essence o the matter. )F A little re lection 8ill, ho8e$er, quicEl4 &ispel that impression. As soon as 8e realiOe the necessit4 o startin7 our anal4sis o economic chan7e rom a stationar4 state in per ect equili6rium, e(clusion o sa$in7s as a ma=or actor in 6rin7in7 a6out that chan7e ollo8s lo7icall4, or 8hate$er the &e inition o sa$in7 the rea&er a&opts, it is clear that most o its sources, as 8ell as most o the moti$es or it, 8oul& 6e a6sent in a stationar4 state. - 8e taEe up an4 o the amiliar attempts at estimatin7 statisticall4 the amount o sa$in7 &one in an4 countr4 at an4 time, 8e see imme&iatel4 that the 6ulE o it, 8hether &one 8ithin the sphere o 6usiness or the sphere o househol&s, lo8s rom re$enues or elements o re$enues 8hich 8oul& not e(ist at all in a stationar4 state, namel4 rom pro its, or rom other incomes create& or s8elle& 64 pre$ious economic chan7e. As to moti$es, it is equall4 o6$ious that most o them arise out o situations inci&ent to economic chan7e. -t &oes not matter no8, 8hether 8e &e ine the stationar4 state so ri7orousl4 as to e(clu&e all sa$in7 or not. Hhat matters is the act that its quantitati$e importance
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3he element o sa$in7 8ill, ho8e$er, 6e reintro&uce& an& the rea&er 8ill then 6e in a position to =u&7e 8hether or not the position assi7ne& to it &oes or &oes not &o =ustice to its actual importance.
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8oul& 6e e(cee&in7l4 small i the economic process in an4 8a4 appro(imate& the equili6rium picture > Sa$in7 8oul& 6e a @tricEle@ an& 64 $irtue o this act alone coul& not 7i$e rise to an4 trou6les. 3his is, in act, the reason 8h4 @primiti$e@ countries in& it so &i icult to inance the 6e7innin7s o capitalist in&ustr4 themsel$es. -t ollo8s that, i 8e inclu&e& sa$in7s as a ma=or actor initiatin7 economic chan7e, 8e 8oul& 6e inclu&in7 in our premises part o 8hat 8e are attemptin7 to e(plain. 'ence, it seems a&$isa6le to construct a mo&el 8hich &oes not contain it amon7 the un&amental constituents. ,4 this 8e ma4 hope to 7et much 6etter insi7ht into the nature an& role o sa$in7 than i , tr4in7 prematurel4 to 6e realistic, 8e carrie& it 8ith us rom the start. 3o sum up, 8e shall &esi7nate 64 the term <ro8th chan7es in population an& in the sum total o sa$in7s plus accumulations correcte& or $ariation in the purchasin7 po8er o the monetar4 unit. 3hat term is to emphasiOe not onl4 that $ariation in 6oth those $aria6les is continuous in the mathematical sense 6ut also that it occurs at a rate 8hich chan7es 6ut slo8l4 an& is per se incapa6le o pro&ucin7 those luctuations in in&ustr4 an& tra&e 8hich interest us here. 3his &oes not mean that it cannot cause an4 luctuations > it o6$iousl4 can. .or &o 8e mean, that this actor o chan7e is irrele$ant to those luctuations 8hich are our su6=ect, or that it is quantitati$el4 insi7ni icant. Hithin i t4 or si(t4, or e$en nine 4earsN8hich, as 8e shall see, are or us important perio&sNthe cumulati$e chan7e &ue to <ro8th 8ill assert itsel in man4 o our i7ures. All it means is that the e ects o <ro8th are capa6le o 6ein7 currentl4 a6sor6e&Nin the sense that an4 &isequili6rium create& 64 e$er4 ne8comer in the la6or marEet or e$er4 &ollar ne8l4 sa$e& in the mone4 marEet coul& un&er or&inar4 circumstances 6e correcte& 8ithout 7i$in7 rise to an4 $isi6le &istur6anceNhence, cannot 64 themsel$es create the alternation o 6ooms an& &epressions 8e o6ser$e. Boreo$er, <ro8th, 6ut especiall4 sa$in7, o8es its actual quantitati$e importance to another actor o chan7e 8ithout 8hich its mo&us operan&i in the capitalist 8orl& cannot 6e un&erstoo&. 3o 6e sure, there is interaction an&
80
inter&epen&ence an& actual results are the pro&uct 6oth o <ro8th an& that other actor. ,ut the mo&us operan&i o the latter &oes account or 6ooms an& &epressions an& can 6e un&erstoo& 8ithout <ro8th, 8hich, there ore, 8e 8ill rele7ate until 8e must call it up a7ain in or&er to complete our sur$e4. 3. ,4 chan7es in the metho&s o suppl4in7 commo&ities 8e mean a ran7e o e$ents much 6roa&er than the phrase co$ers in its literal accepance. He inclu&e the intro&uction o ne8 commo&ities 8hich ma4 e$en ser$e as the stan&ar& case. 3echnolo7ical chan7e in the pro&uction o commo&ities alrea&4 in use, the openin7 up o ne8 marEets or o ne8 sources o suppl4, 3a4lor-iOation o 8orE, impro$e& han&lin7 o material, the settin7 up o ne8 6usiness or7aniOations such as &epartment storesNin short, an4 @&oin7 thin7s &i erentl4@ in the realm o economic li eN all these are instances o 8hat 8e shall re er to 64 the term -nno$ation. -t shoul& 6e notice& at once that that concept is not s4non4mous 8ith @in$ention.@ Hhate$er the latter term ma4 mean, it has 6ut a &istant relation to ours. Boreo$er, it carries mislea&in7 associations. :irst, it su77ests a limitation 8hich is most un ortunate 6ecause it ten&s to $eil the true contours o the phenomenon. -t is entirel4 immaterial 8hether an inno$ation implies scienti ic no$elt4 or not. Althou7h most inno$ations can 6e trace& to some conquest in the realm o either theoretical or practical Eno8le&7e, there are man4 8hich cannot. -nno$ation is possi6le 8ithout an4thin7 8e shoul& i&enti 4 as in$ention an& in$ention &oes not necessaril4 in&uce inno$ation, 6ut pro&uces o itsel no economicall4 re$elant e ect at all. 3he economic phenomena 8hich 8e o6ser$e in the special case in 8hich inno$ation an& in$ention coinci&e &o not &i er rom those 8e o6ser$e in cases in 8hich pree(istin7 Eno8le&7e is ma&e use o . Stressin7 the element o in$ention or &e inin7 inno$ation 64 in$ention 8oul&, there ore, not onl4 mean stressin7 an element 8ithout importance to economic anal4sis, 6ut it 8oul& also narro8 &o8n the rele$ant phenomenon to 8hat reall4 is 6ut a part o it.
81
Secon&, e$en 8here inno$ation consists in 7i$in7 e ect, 64 6usiness action )5, to a particular in$ention 8hich has either emer7e& autonomousl4 or has 6een ma&e speciall4 in response to a 7i$en 6usiness situation,1 the maEin7 o the in$ention an& the carr4in7 out o the correspon&in7 inno$ation are t8o entirel4 &i erent thin7s. 3he4 o ten ha$e 6een per orme& 64 the same person M 6ut this is merel4 a chance coinci&ence 8hich &oes not a ect the $ali&it4 o the &istinction. 5ersonal aptitu&esNprimaril4 intellectual in the case o the in$entor, primaril4 $olitional in the case o the 6usinessman 8ho turns the in$ention into an inno$ationNan& the metho&s 64 8hich the
)5
-n man4 important cases, in$ention an& inno$ation are the result o conscious e orts to cope 8ith a pro6lem in&epen&entl4 presente& 64 an economic situation or certain eatures o it, such as, or e(ample, the shorta7e o tim6er in /n7lan& in the si(teenth, se$enteenth, an& ei7hteenth centuries. Sometimes inno$ation is so con&itione&, 8hereas the correspon&in7 in$ention occurre& in&epen&entl4 o an4 practical nee&. 3his is necessaril4 so 8hene$er inno$ation maEes use o an in$ention or a &isco$er4 &ue to a happ4 acci&ent, 6ut also in other cases. -t mi7ht 6e thou7ht that inno$ation can ne$er 6e an4thin7 else 6ut an e ort to cope 8ith a 7i$en economic situation. -n a sense this is true. :or a 7i$en inno$ation 8ill satis 4 them, an& as a rule the4 can 6e satis ie& in man4 &i erent 8a4s. Bost important o all, the4 ma4 remain unsatis ie& or an in&e inite time, 8hich sho8s that the4 are not in themsel$es su icient to pro&uce an inno$ation. 3he rise o the motorcar in&ustr4 ma4 ser$e as an e(ample. 3he sense in 8hich it ma4 6e true that motorcars emer7e& 8hen con&itions calle& or them is not rele$ant to an economic inquir4. :or an4 @nee&@ or them that ma4 ha$e e(iste& 8as certainl4 su6conscious an& not an element in the then e(istin7 s4stem o economic $alues. 3he @nee&,@ as ar as economicall4 rele$ant, 8as create& 64 the in&ustr4, an& people coul& o6$iousl4 ha$e 7one on 8ithout an4 motorcars. 3here ore, it seems reasona6le, on the one han&, 8hen e$er46o&4 calls or a certain inno$ation an& e$er46o&4 en&ea$ors to e ect it, to reco7niOe this act an&, on the other han&, not to insist on seein7 it 8hen it is not there. 3he pro6lem o &eterminin7 ho8 ar @necessit4 is the mother o in$ention@ is a &i icult one. -ts solution ma4 8ell rea& &i erentl4 or &i erent purposes o anal4sis. He shall ha$e to emphasiOe this more than once. Bean8hile, it shoul& 6e pointe& out that 8e ma4 accept a theor4 o in$ention as presente&, or e(ample, 64 Br. S. 0. <il Zllan in his Sociolo74 o -n$entionNthe present 8riter, as a matter o act, su6stantiall4 &oesNan& 4et a&opt another point o $ie8 or our purposes.
8)
one an& the other 8orE, 6elon7 to &i erent spheres. 3he social process 8hich pro&uces in$entions an& the social process 8hich pro&uces inno$ations &o not stan& in an4 in$ariant relation to each other an& such relation as the4 &ispla4 is much more comple( than appears at irst si7ht. As soon as it is &i$orce& rom in$ention, inno$ation is rea&il4 seen to 6e a &istinct internal actor o chan7e. -t is an internal actor 6ecause the turnin7 o e(istin7 actors o pro&uction to ne8 uses is a purel4 economic process an&, in capitalist societ4, purel4 a matter o 6usiness 6eha$ior. -t is a &istinct internal actor 6ecause it is not implie& in, nor a mere consequence o , an4 other. L course, in realit4, all three actorsNchan7es in tastes, 7ro8th, an& inno$ationN interact an& mutuall4 con&ition each other, an& o6ser$e& historic chan7es are the result o them all. ,ut 8e can satis 4 oursel$es o their lo7ical in&epen&ence 64 $isualiOin7 societies in 8hich internal chan7e is merel4 cause& 64 autonomous chan7e in consumers" tastes or merel4 64 7ro8th or merel4 64 inno$ation. - 8e &o this, 8e imme&iatel4 realiOe that inno$ation is the outstan&in7 act in the economic histor4 o capitalist societ4 or in 8hat is purel4 economic in that histor4, an& also that it is lar7el4 responsi6le or most o 8hat 8e 8oul& at irst si7ht attri6ute to other actors. 3o illustrate this 64 an e(ample > mo&ern economic processes are to a 7reat e(tent contin7ent upon a77lomerations o population in cities an& upon the acilities put at the &isposal o the 6usiness communit4 64 pu6lic action. ,ut these con&itions o urther inno$ations themsel$es are in most cases the results o in&ustrial processes 8hich come 8ithin our concept o inno$ation, an& either &irectl4 pro&uce& or ma&e possi6le 64 them. )G
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3hat proposition has meanin7 onl4 or the purpose o economic anal4sis. -n a 8i&er settin7, it is other social actors 64 8hich, amon7 other thin7s, inno$ation itsel is &etermine& an& 8hich maEe economic as 8ell as 7eneral histor4. -t cannot too o ten 6e repeate& that e$er4 sentence o this 6ooE is to ser$e 6ut a restricte& purpose an& mo$es 8ithin a restricte& horiOon
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3he chan7es in the economic process 6rou7ht a6out 64 inno$ation, to7ether 8ith all their e ects, an& the response to them 64 the economic s4stem, 8e shall &esi7nate 64 the term /conomic /$olution. Althou7h this term is o6=ectiona6le on se$eral counts, it comes nearer to e(pressin7 our meanin7 than &oes an4 other, an& it has the a&$anta7e o a$oi&in7 the associations su77este& 64 the co7nate term 5ro7ress, particularl4 the complacenc4 the latter seems to impl4. 3his terminolo7ical &ecision is 6ut the e(pression o an anal4tic intention, namel4, the intention to maEe the acts o inno$ation the 6asis o our mo&el o the process o economic chan7e. .othin7 6ut success in sho8in7 that the processes inci&ent to inno$ation &o account or the phenomena 8e 8ant to un&erstan& can =usti 4 that intention. ,ut the rea&er is in$ite& to o6ser$e ho8 $er4 natural it is. 3he 8orst that coul& 6e all the anal4tic schema presente& in this 6ooE 8oul& 6e an impression to the e ect that it is in7enious or ar etche&. Surel4, nothin7 can 6e more plain than the proposition that inno$ation, as concei$e& 64 us, is at the center o practicall4 all the phenomena, &i iculties, an& pro6lems o economic li e in capitalist societ4 an& that the4, as 8ell as the e(treme sensiti$eness o capitalism to &istur6ance, 8oul& 6e a6sent i pro&ucti$e resources lo8e& e$er4 4ear throu7h su6stantiall4 the same channels to8ar& su6stantiall4 the same 7oals, or 8ere pre$ente& rom &oin7 so onl4 64 e(ternal in luences. An& ho8e$er &i icult it ma4 turn out to 6e to &e$elop that simple i&ea so as to it it or the tasE o copin7 8ith all the comple( patterns 8ith 8hich it 8ill ha$e to 6e con ronte&, an& ho8e$er completel4 it ma4 lose its simplicit4 on the 8a4 6e ore us, it shoul& ne$er 6e or7otten that at the outset all 8e nee& to sa4 to an4one 8ho &ou6ts is > 2ooE aroun& 4ou [
appropriate to that purpose
8F
3a6le o 0ontents
B. The Theo!" of Inno,ation. He 8ill no8 &e ine inno$ation
more ri7orousl4 64 means o the pro&uction unction pre$iousl4 intro&uce&. 3his unction &escri6es the 8a4 in 8hich quantit4 o pro&uct $aries i quantities o actors $ar4. - , instea& o quantities o actors, 8e $ar4 the orm o the unction, 8e ha$e an inno$ation. ,ut this not onl4 limits us, at irst 6lush at least, to the case in 8hich the inno$ation consists in pro&ucin7 the same Ein& o pro&uct that ha& 6een pro&uce& 6e ore 64 the same Ein& o means o pro&uction that ha& 6een use& 6e ore, 6ut also raises more &elicate questions. 3here ore, 8e 8ill simpl4 &e ine inno$ation as the settin7 up o a ne8 pro&uction unction. 3his co$ers the case o a ne8 commo&it4, as 8ell as those o a ne8 orm o or7aniOation such as a mer7er, o the openin7 up o ne8 marEets, an& so on. 9ecallin7 that pro&uction in the economic sense is nothin7 6ut com6inin7 pro&ucti$e ser$ices, 8e ma4 e(press the same thin7 64 sa4in7 that inno$ation com6ines actors in a ne8 8a4, or that it consists in carr4in7 out .e8 0om6inations, althou7h, taEen literall4, the latter phrases 8oul& also inclu&e 8hat 8e &o not no8 mean to inclu&eN-namel4, those current a&aptations o the coe icients o pro&uction 8hich are part an& parcel o the most or&inar4 run o economic routine 8ithin 7i$en pro&uction unctions. :or cases in 8hich inno$ation is o the technolo7ical Ein& 8e coul& ha$e &e ine& it &irectl4 8ith re erence to the so-calle& la8s o ph4sical returns. ,arrin7 in&i$isi6ilit4 or lumpiness, the ph4sical mar7inal pro&ucti$it4 o e$er4 actor must, in the a6sence o inno$ation, montonicall4 &ecrease. -nno$ation 6reaEs o an4 such @cur$e@ an& replaces it 64 another 8hich, a7ain e(cept or in&i$isi6ilit4, &ispla4s hi7her increments o pro&uct throu7hout )J,
)J
3his &oes not mean that unless there 6e inno$ation e$er4 coe icient o pro&uction necessaril4 increases in unction o output, or that e$er4
85
althou7h, o course, it also &ecreases monotonicall4. Lr i 8e taEe the 9icar&ian la8 o &ecreasin7 returns an& 7eneraliOe it to co$er in&ustr4 as 8ell, 8e can sa4 that inno$ation interrupts its action, 8hich a7ain means that it replaces the la8 that ha& so ar &escri6e& the e ects o a&&itional &oses o resources 64 another one. -n 6oth cases transition is ma&e 64 a =ump rom the ol& to the ne8 cur$e, 8hich no8 applies throu7hout an& not onl4 6e4on& that output 8hich ha& 6een pro&uce& 6e ore 64 the ol& metho&. He can &e ine inno$ation also 8ith re erence to mone4 cost. 3otal costs to in&i$i&ual irms must, in the a6sence o inno$ation an& 8ith constant prices o actors, monotonicall4 increase in unction o their output. Hhene$er a 7i$en quantit4 o output costs less to pro&uce than the same or a smaller quantit4 &i& cost or 8oul& ha$e cost 6e ore, 8e ma4 6e sure, i prices o actors ha$e not allen, that there has 6een inno$ation some8here. )8 -t 8oul& 6e incorrect to sa4 that in this case inno$ation pro&uces allin7 lon7-run mar7inal cost cur$es or maEes,
coe icient o pro&uction is necessaril4 &ecrease& 64 inno$ation. 3his 6ars us rom measurin7 inno$ation 64 the 6eha$ior o these coe icients. Still less a&missi6le is it to tr4 to measure it 64 the chan7e in one o them, or instance man-hours per unit o pro&uct or the reciprocal. 3he &an7er o such mistaEes as that o comparin7, sa4, the hours o 8orE on the arm that 8ent to pro&uce a 6ushel o 8heat in 1J00 an& 1900 an& o o$erlooEin7 that at the ormer &ate much more o the total 8orE that ultimatel4 issues into a 6ushel o 8heat 8as &one on the arm than at the later &ate, is the least o all that 6eset this path. 3he presence o other actors, an& particularl4 o su6stituta6le actors, maEes an4 such measure all 6ut meanin7less. 'o8e$er, inno$ation must certainl4 re&uce some coe icients, an& i 8e are content 8ith 8hat amounts to almost heroic rou7hness, 8e ma4 use pro&uct per man-hour or some purposes as an -n&e( o 9ationaliOation 8ith respect to la6or. -t nee& not necessaril4 ha$e occurre& in the in&ustr4 un&er o6ser$ation, 8hich ma4 onl4 6e appl4in7, or 6ene itin7 rom, an inno$ation that has occurre& in another. Ln the other han&, that criterion ma4 6e e(ten&e& to appl4 to ne8 commo&ities, i 8e compare the re$enue that can 6e &eri$e& rom a certain outla4 in the ne8 line 8ith the re$enue that can he &eri$e& rom the same outla4 in the most a&$anta7eous o the ol& lines. -t shoul& 6e o6ser$e& that, unless 8e 6ar in&i$isi6ilities, the criterion is onl4 su icient, 6ut nee& not hol& or e$er4 quantit4 or output.
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8G
in certain inter$als, mar7inal cost ne7ati$e. Hhat shoul& 6e sai& is that the ol& total or mar7inal cost cur$e is &estro4e& an& a ne8 one put in its place each time there is an inno$ation. - there are in&i$isi6ilities an& the inno$ation 6ecomes possi6le onl4 6e4on& a certain quantit4 o output, 8hile 6elo8 it the ol& metho& remains superior an& 8oul& promptl4 6e resorte& to a7ain, shoul& output all su icientl4, 8e ma4 in&ee& &ra8 one cost cur$e to com6ine costs 8ith the ol& metho& in one inter$al an& costs 8ith the ne8 metho& in another inter$al. ,ut this is possi6le onl4 8hen the ne8 metho& has 6ecome amiliar an& the 8hole s4stem is a&apte& to it, 8hich means that it enters the pro&uction unctionsNi.e., the practical ran7e o choice open to allNan& is no lon7er an inno$ation. - prices o actors are not constant 6ut chan7e in&epen&entl4 o the action o the irm, the e ect on its cost cur$esNtotal, a$era7e, an& mar7inalNis e(actl4 analo7ous to the e ect o inno$ation > the4 6reaE o an& ne8 ones emer7e instea&. -t is eas4 to see that 8e cannot construct a theoretical cost cur$e that 8oul& in one stretch re er to, sa4, a 7i$en 8a7e rate an&, in another stretch, to a &i erent one. 3he analo74 ma4, hence, ser$e to illustrate still more clearl4 the impossi6ilit4 o representin7 mar7inal costs in unction o output as allin7 *8hether continuousl4 or not+ an& total costs as allin7 or risin7 less than the4 other8ise 8oul&, un&er the in luence o successi$e inno$ations. - prices o actors chan7e in unction o the action o the irm it is no lon7er so, an& cost cur$es ha$e to taEe account o such chan7es. ,ut, in 7eneral, prices o actors coul& then, unless there is lumpiness or inno$ation in their pro&uction or suppl4, chan7e onl4 in the same &irection as the quantit4 o the pro&uct, so that 8e nee& not apprehen& that an4 all alon7 cost cur$es arises rom this source. 3his helps to clear up some points a6out the theor4 o cost 8hich are o consi&era6le importance or our su6=ect. :or the saEe o 6re$it4, 8e shall consi&er total cost per unit *a$era7e cost+ onl4 an& &e ine the so-calle& 2a8 o -ncreasin7 0ost *not quite correctl4+ 8ith re erence
8J
to it. -n the lon7 runNthat is to sa4, 8hen o$erhea& ma4 6e treate& as $aria6le in unction o outputNa$era7e cost cur$es can 6e allin7 onl4 6ecause o the presence o lump4 actors, 8hile all other causes that ma4 6rin7 a6out all in a$era7e cost &o not pro&uce all alon7 these cur$es, 6ut a &o8n8ar& shi t o them. 'ence, the4 can ne$er 6e allin7 throu7hout, 6ut onl4 in inter$als the len7th o 8hich is &etermine& 64 the nature o the lump4 actor or actors, an& a ter 8hich the4 must rise a7ain. .o8, &isre7ar&in7 the e ects o lumpiness or smoothin7 them out 64 &ra8in7 a monotonie cur$e throu7h the alternatin7 stretches o risin7 an& allin7 a$era7e costs, 8e shoul&, strictl4 speaEin7, 7et a cur$e 8hich 8oul& or a small in&i$i&ual irm, 6e parallel to the quantit4 a(is, i.e., constant unit costs. A 2a8 o -ncreasin7 0ost comes in, ho8e$er, i 8e a&mit that some actor is in a6solutel4 inelastic suppl4 e$en in the lon7 runNthe actor mana7ement or instance. :or an in&ustr4 or a 6i7 irm 8e ma4, in a&&ition, 7et increasin7 total unit costs i actor prices rise a7ainst it as it increases output. 3his not onl4 &isposes, in the realm o un&amental principles, o the &i iculties that ha$e 6een raise& a6out competiti$e equili6rium un&er con&itions o &ecreasin7 cost, 6ut also ena6les us to taEe care, 64 means o the concept o inno$ation, o a multitu&e o in&ustrial patterns 8hich seem recalcitrant to those principles. -n act, since &ecreasin7 total unit costs are mere interruptions o the un&amental propert4 o an4 7i$en total unit cost cur$e either to rise or to 6e horiOontal, increasin7 an& &ecreasin7 costs are not coor&inate& alternati$es. Lnl4 the ormer is a 7enuine "la8@ M the latter e(presses 6ut a mo&i ication o it 64 an acci&ental technical circumstance, 8hich 8hile it acts 8ill in&ee& pre$ent per ectl4 competiti$e equili6rium rom emer7in7 6ut cannot &o so in&e initel4, 6ecause it must ultimatel4 surren&er. 3here is, hence, no 2a8 o ;ecreasin7 0ost to parallel the 2a8 o -ncreasin7 0ost on equal terms an& there is no 8arrant or the monotonicall4 &escen&in7 cost cur$es that are sometimes &ra8n. At the same time, ho8e$er, 8e reco7niOe irst, that in some cases lump4 actors ma4 6e so 6i7Na railroa& tracE
88
or instanceNthat or a $er4 lon7 time ahea& the 8hole o the use ul ran7e o total unit cost lies 8ithin the allin7 inter$al, an& secon&, that in practicall4 all cases there is an important allin7 inter$al, o8in7 to i(it4 o o$erhea&, on short-run total unit cost cur$es 8ithin 8hich irms ma4 6e mo$in7 or 4ears to7ether. -n cases o @6uil&in7 ahea& o &eman&@ an& 8ith imper ect competition, in particular in the presence o oli7opolistic stru77les, the latter situation 8ill 6e much in e$i&enceN irms ma4 possi6l4 e$en mo$e 8ithin the &escen&in7 inter$al o their mar7inal cost cur$esN an& account or man4 instances o @o$erpro&uction@ an& @o$ercapacit4.@ ,ut 8hat &ominates the picture o capitalistic li e an& is more than an4thin7 else responsi6le or our impression o a pre$alence o &ecreasin7 cost, causin7 &isequili6ria, cutthroat competition an& so on, is inno$ation, the intrusion into the s4stem o ne8 pro&uction unctions 8hich incessantl4 shi t e(istin7 cost cur$es. 3hus, ha$in7 6een le& 64 other reasons to question the $ali&it4 o the anal4sis 8hich rests upon the concept o monotonicall4 &escen&in7 cost cur$es, 8e also see that 8e &o not nee& it, or the concept o cost cur$es that shi t un&er the impact o inno$ation 7i$es us all 8e 8ant in or&er to han&le the mass o acts or the saEe o 8hich those &escen&in7 cost cur$es 8ere &e$ise&. /$en the cases a6o$e allu&e& to, in 8hich &ecreasin7 cost actuall4 &oes not constitute an important element o a 6usiness situationNo those @crampe&@ situations in 8hich e$er46o&4 tries to contract 8hile e$er46o&4 coul& e(pan& sometimes e$en at allin7 prime costs per unitN in& their proper settin7 an& their interpretation 8ithin this anal4sis, 8hich, as pointe& out 6e ore, 7i$es to Short-time Anal4sis an& to the 3heor4 o -mper ect 0ompetition 8hat seems to the 8riter to 6e their true si7ni icance. 3he impression that irms mo$in7 in inter$als o &ecreasin7 costs are o ten in the center o the $icissitu&es o in&ustrial i e is not 8ron7. ,ut this linEs up 8ith inno$ation, 6ecause the irms 8hich, rushin7 &o8n alon7 such inter$als, are upsettin7 e(istin7 in&ustrial structure an& hea&in7 to8ar& monopol4, are in 7eneral precisel4 those 8hich ha$e set up ne8 pro&uction unctions an& 8hich
89
are stru77lin7 to conquer their marEet. - it 8ere not or this, the space that &ecreasin7 costs ill in the economists" thou7ht 8oul& rapi&l4 &8in&le to $er4 mo&est proportions. ,e ore 7oin7 on, it 8ill 6e 8ell to repeat the same ar7ument in terms o the t8o amiliar concepts &ue to Barshall, -nternal an& /(ternal /conomies. As to the ormer, it ma4 seem stran7e to sa4 that economies o scale internal to the in&i$i&ual irm, i the4 are to e(plain the shape o a cost cur$e, necessaril4 re&uce to e ects o lumpiness. 1et it is so, not onl4 in the case e(empli ie& 64 costl4 machiner4, 6ut also in the cases o more rational &i$ision o la6or or, more 7enerall4, 6etter @or7aniOation@ o actors 8hich is hel& to occur 8hen output e(pan&s. :or i , or instance, a small tailor &eci&es to emplo4 a specialist in se8in7 on 6uttons 6ecause, an& onl4 6ecause, his 6usiness e(pan&s, an& i he 8oul& ha$e taEen that &ecision rom the outset ha& his output 6een rom the outset 8hat it no8 is, then the onl4 possi6le reason 8h4 he &i& not taEe that &ecision sooner is that, in his mo&est circumstances, la6or is a lump4 actor. - internal economics are meant to &esi7nate the outstan&in7 in&ustrial act 8e actuall4 thinE o 8hen re errin7 to lar7e-scale in&ustr4, the4 are &ue to inno$ation an& cannot 6e e(presse& as a simple unction o output e$en i the4 shoul& historicall4 6e con&itione& 64 an increase in the latter. -n neither case &oes an4 &i icult4 arise a6out &ecreasin7 costs 6ein7 incompati6le 8ith competiti$e equili6rium or a6out e(plainin7 the &isequili6ria 8e actuall4 o6ser$e. /(ternal economies are re&uctions in unit costs that are &ue to a$ora6le circumstances inci&ent to the 7ro8th o an in&ustr4, nota6l4 to its 7ro8th in a certain localit4. 3he4 are not al8a4s eas4 to &istin7uish rom internal economies an& there are man4 interme&iate cases. 3his, ho8e$er, 8e 8ill &isre7ar&. Buch more important is it that @e(ternal economies must usuall4 taEe their ultimate ori7in in the internal economics o some su6si&iar4 in&ustr4@ *9. :. Pahn, /conomic Journal or Barch 1935, p. 11+. - an in&ustr4 7ro8s, some irm ma4 specialiOe in the pro&uction o machiner4 nee&e& 64 that in&ustr4 an& no other, or some6o&4 ma4 set up a 6roEer"s 6usiness to pro$i&e it 8ith ra8
90
material or start a tra&e =ournal. 0ases o this t4pe arise either rom lumpinessNthe =ournal"s o$erhea&, inclu&in7, sa4, an o8ner-mana7er, requires a minimum o rea&ers an& a&$ertisers in or&er to pa4 or itsel Nor else the4 constitute inno$ations > the =ournal ma4 $er4 8ell 6e one. .either alternati$e puts e(ternal economies on a par 8ith e(ternal &iseconomies or, at all e$ents, their most important instance, 8hich consists in the rise o the price o actors in response to increase in the &eman& or them. .or 8oul& &iscussion o other cases alter the result. 3aEe the instance o the 7ro8th o a suppl4 o 8orEmen speciall4 sEille& in the 8orE o an in&ustr4. 2acE o it is in&ee& one o the ma=or &i iculties 8hich inno$ation requentl4 meets. -t is o$ercome as the in&ustr4 &e$elops an& reaches maturit4, 8hich means that it 6ecomes a&apte& in siOe to its en$ironment. Hhile this process lasts, the in&ustrial as 8ell as the in&i$i&ual cost cur$es are incessantl4 shi tin7 an& no sin7le cost cur$e &escri6in7 this process can ha$e an4 6ut a historical meanin7. Hhen it is o$er, this source o e(ternal economies ceases to lo8. -n act, it 8oul& 6e har& to in& an4 instance o the phenomenon in question e(cept in connection 8ith ne8 in&ustries. 3here ore, no monotonicall4 &eclinin7 cost cur$es can 6e &e&uce& rom e(ternal economies. 3he term is still use ul in or&er to &enote some o the e ects on one in&ustr4 o inno$ations in another, 8hich are, o course, a most important piece o the mechanism o economic e$olution in our sense. ,ut it must not 6e allo8e& to act as a screen to hi&e the inno$ations 6ehin& it, or 6e represente& as a actor &istinct rom them. He return to our ar7ument. -n or&er to 6rin7 out stron7l4 the mo&us operan&i o inno$ation, 8e 8ill no8 promote to the ranE o assumptions a e8 acts o common o6ser$ation 8hich present themsel$es in connection 8ith our anal4sis o costs. :irst, ma=or inno$ations an& also man4 minor ones entail construction o .e8 5lant *an& equipment+Nor the re6uil&in7 o ol& plantNrequirin7 nonne7li7i6le time an& outla4. He shall reason on the assumption that the4 al8a4s &o. - the4 &i& not, a 7reat part o the
91
theoretical schema 8hich 8e are 7oin7 to use 8oul& ha$e to 6e mo&i ie&. ,ut these mo&i ications, 8hile o 7reat theoretical interest, 8oul& 6e practicall4 important onl4 i the inno$ations that can 6e carrie& out instantaneousl4 an& 8ithout apprecia6le e(pense 8ere themsel$es important. /(perience seems to teach, ho8e$er, that as a matter o act the4 are not, that is to sa4, that our assumption ails to con orm to act onl4 in the case o inno$ations 8hich are o such small importance that 8e can sa el4 ne7lect them althou7h 8e must al8a4s 6e prepare& to meet cases 8hich cannot 6e thus &ispose& o . 3here ore, 8e shall impose a restriction on our concept o inno$ation an& hence orth un&erstan& 64 an inno$ation a chan7e in some pro&uction unction 8hich is o the irst an& not o the secon& or a still hi7her or&er o ma7nitu&e. A num6er o propositions 8hich 8ill 6e rea& in this 6ooE are true onl4 o inno$ation in this resstricte& sense. L course the re$erse 8oul& not 6e true > not e$er4 ne8 plant em6o&ies an inno$ation M some are mere a&&itions to the e(istin7 apparatus o an in&ustr4 6earin7 either no relation to inno$ation or no other relation than is implie& in their 6ein7 6uilt in response to an increase in &eman& ultimatel4 tracea6le to the e ects o inno$ations that ha$e occurre& else8here. 3he relati$e importance o these cases $aries, o course, an& is e(tremel4 &i icult to estimate. -n act, 8e meet here one o the most serious statistical &i iculties o our su6=ect. -n a s4stem in 8hich the process o e$olution 7oes on stron7l4, practicall4 all ne8 plant that is 6ein7 constructe& 6e4on& replacement, an& much o 8hat is 6ein7 constructe& 64 8a4 o replacement, either em6o&ies some inno$ation or is a response to situations tracea6le to some inno$ation. Secon&, 8e shall in 7eneral ar7ue as i e$er4 inno$ationNas no8 &e ine&N8ere em6o&ie& in a .e8 :irm oun&e& or the purpose. 3here is o6$iousl4 no lacE o realism a6out this assumption. )9 3he one
)9
-t is most instructi$el4 e(empli ie& 64 5ro essor Bc<re7or"s essa4 on /nterprise an& the 3ra&e 04cle, in /nterprise, 5urpose an& 5ro it, 193F. 'e sho8s $er4 con$incin7l4 that entrepreneurial acti$it4 as re lecte& 64 the
9)
si7ni icant e(ception 8ill, to7ether 8ith the reason or it, 6e notice& un&er the ne(t hea&in7. /$en the re$erse proposition 8oul& 6e much more nearl4 true than it appears to 6e at irst si7ht > Bost ne8 irms are oun&e& 8ith an i&ea an& or a &e inite purpose. 3he li e 7oes out o them 8hen that i&ea or purpose has 6een ul ille& or has 6ecome o6solete or e$en i , 8ithout ha$in7 6ecome o6solete, it has cease& to 6e ne8. 3hat is the un&amental reason 8h4 irms &o not e(ist ore$er. Ban4 o them are, o course, ailures rom the start. 2iEe human 6ein7s, irms are constantl4 6ein7 6orn that cannot li$e. Lthers ma4 meet 8hat is aEin, in the case o men, to &eath rom acci&ent or illness. Still others &ie a @natural@ &eath, as men &ie o ol& a7e. An& the @natural@ cause, in the case o irms, is precisel4 their ina6ilit4 to Eeep up the pace in inno$atin7 8hich the4 themsel$es ha& 6een instrumental in settin7 in the time o their $i7or. .o irm 8hich is merel4 ran on esta6lishe& lines, ho8e$er conscientious the mana7ement o its routine 6usiness ma4 6e, remains in capitalist societ4 a source o pro it, an& the &a4 comes or each 8hen it ceases to pa4 interest an& e$en &epreciation. /$er4one 8ho looEs aroun& Eno8s the t4pe o irm 8e are thinEin7 o Nli$in7 on the name, connections, quasi-rent, an& reser$es acquire& in their 4outh, &ecorousl4 &roppin7 into the 6acE7roun&, lin7erin7 in the atall4 &eepenin7 &usE o respecta6le &eca4. Anal4ticall4, our assumption is a &e$ice to 6rin7 8ithin the reach o theor4 an important eature o capitalist realit4 in 7eneral an& a material element in the causation o economic luctuations. He $isualiOe ne8 pro&uction unctions as intru&in7 into the s4stem throu7h the action o ne8 irms oun&e& or the purpose, 8hile the e(istin7 or @ol&@ irms or a time 8orE on as 6e ore, an& then react a&apti$el4 to the ne8 state o thin7s un&er the pressure o competition rom &o8n8ar& shi tin7 cost cur$es. 3his arran7ement accuratel4 &escri6es the situations an& stru77les that 8e actuall4 o6ser$e in sur$e4in7 capitalist e$olution, an& in particular the nature o its &isequili6ria an& luctuations. -t also &escri6es that process o incessant rise an& &eca4 o irms an& in&ustries 8hich is
ormation o ne8 concerns is the &ecisi$e in luence in startin7 prosperities, less con$incin7l4, that ailures initiate &o8n8ar& mo$ements
93
the centralNthou7h much ne7lecte&N act a6out the capitalist machine. 3hir&, 8e 8ill assume that inno$ations are al8a4s associate& 8ith the rise to lea&ership o .e8 Ben, A7ain, there is no lacE o realism a6out this assumption, 8hich 6ut ormulates a un&amental truth o the sociolo74 o in&ustrial societ4. Keri ications a6oun& an& ma4 6e 7leane& rom an4 te(t6ooE on, sa4, the in&ustrial re$olution, althou7h the ull e(tent an& importance o the act 8ill not 6e realiOe& until 8e Eno8 more than 8e &o at present a6out 8hat ma4 6e terme& the personal histor4 o in&ustr4. 3he main reason or intro&ucin7 this assumption into a purel4 economic ar7ument not primaril4 concerne& 8ith the structure o societ4, is that it pro$i&es the rationale or the prece&in7 assumption. -n act, it e(plains 8h4 ne8 pro&uction unctions &o not t4picall4 7ro8 out o ol& 6usinessesNi a ne8 man taEes hol& o an ol& irm, the4 ma4Nan& hence, 8h4 their insertion procee&s 64 competin7 the ol& ones out o e(istence or 64 en orcin7 the trans ormation o them. Since this is part o our mo&el an& 8ill 6e use& to e(plain eatures characteristic o the process 8hich is the su6=ect o this 6ooE, 8e must notice the case o 6i7, particularl4 o @7iant,@ concerns 8hich o ten are 6ut shells 8ithin 8hich an e$erchan7in7 personnel ma4 7o rom inno$ation to inno$ation. 3he4 are, thus, no e(ceptions to our thir& assumption, 6ut the4 ma4 6e e(ceptions to the secon&, 6ecause 8ith such concerns inno$ation ma4 an&, in act requentl4 &oes, come a6out 8ithin one an& the same irm 8hich coor&inates it 8ith its e(istin7 apparatus, an& there ore nee& not assert itsel in the in&ustr4 64 8a4 o a &istinct process o competition. -n or&er to taEe care o this case, 8hich in uture ma4 stea&il4 7ain in importance, 8e intro&uce the concept 3rusti ie& 0apitalism, in &istinction rom 0ompetiti$e 0apitalism. /conomic e$olution or @pro7ress@ 8oul& &i er su6stantiall4 rom the picture 8e are a6out to &ra8, i that orm o or7aniOation pre$aile& throu7hout the economic or7anism. <iant concerns still ha$e to react to each other"s
9F
inno$ations, o course, 6ut the4 &o so in other an& less pre&icta6le 8a4s than irms 8hich are &rops in a competiti$e sea, an& man4 &etailsNin some points, more than &etailsN8oul& then ha$e to 6e altere& in our mo&el. He ha$e to reco7niOe, in this as in other respects, that 8e are &ealin7 8ith a process su6=ect to institutional chan7e an& there ore must, or e$er4 historical perio&, see 8hether or not our mo&el, ho8e$er aith ull4 copie& rom the histor4 o other perio&s, still its acts. 'o8e$er, the sector o concerns 8hich are @6i7,@ not onl4 in the usual sense o the 8riters 8ho i7ure out 8hat percenta7e o the total national capital o the #nite& States is controlle& 64 the )0 6i77est concerns, 6ut in the sense require& 64 the present ar7ument, is as 4et not 7reat enou7h to &ominate the picture in an4 countr4. /$en in the 8orl& o 7iant irms, ne8 ones arise an& others all into the 6acE7roun&. -nno$ations still emer7e primaril4 8ith the @4oun7@ ones, an& the @ol&@ ones &ispla4 as a rule s4mptoms o 8hat is euphemisticall4 calle& conser$atism. Ln the 8hole, the e(ception seems, there ore, to re&uce to mo&i ications to 6e &ealt 8ith on the merits o each practical case. Lur thir& assumption, then, inserts into our mo&el o economic li e a class o acts o the 6eha$ioristic t4pe. -t helps to localiOe the sources an& e ects o those &o8n8ar& shi ts o cost cur$es 8hich 8e sa8 8ere ina&equatel4 &escri6e& 64 the &e$ice o monotonicall4 &escen&in7 cur$es, an& to &escri6e the 8a4 in 8hich the s4stem reacts to them. -n particular, it e(plains 8h4 inno$ations are not carrie& into e ect simultaneousl4 an& as a matter o course, cither 64 all irms or, i the4 in$ol$e the use o lump4 actors, 64 all irms 6e4on& a certain siOe, in the same manner as all irms 8ill, other thin7s 6ein7 equal, tr4 to emplo4 more la6or i it 6ecomes cheaper. - this 8ere so, all ma=or inno$ations 8oul& still create &isequili6ria. ,ut i action in or&er to carr4 them out 8ere equall4 open to all as soon as the4 6ecame technicall4 an& commerciall4 possi6le, those &isequili6ria 8oul& not 6e &i erent rom those 8hich arise currentl4 rom chan7es in &ata an& are currentl4 a6sor6e& 8ithout $er4 7reat &i iculties an& 8ithout @re$olutions@ or uphea$alsN8hich, in the political sphere also, 8oul&
95
not occur in the 8a4 in 8hich the4 actuall4 &o occur, i all people accepte& ne8 political acts 8ith equal promptitu&e. -nno$ations 8hich ma4 6e thou7ht o as 6ecomin7 @o6=ecti$el4@ possi6le in a continuous stream, 8oul& then in&uce a current an& continuous process o a6sorption, sa$e in e(ceptional cases 8hich shoul& not &ispla4 an4 re7ularit4. 'o8e$er, the &isequili6ria 8hich 8e o6ser$e are o a &i erent nature. 3heir characteristic eature is precisel4 that the4 recur 8ith some re7ularit4 an& that the4 can 6e a6sor6e& onl4 64 means o a &istinct an& pain ul process. 3his is 6ecause onl4 some irms carr4 out inno$ations an& then act alon7 ne8 cost cur$es, 8hile the others cannot an& ha$e merel4 to a&apt themsel$es, in man4 cases 64 &4in7. 3his act, in turn, orces upon us reco7nition o the element ormulate& 64 out thir& assumption. Hhat 8e arc &oin7 amounts to this > 8e &o not attacE tra&itional theor4, Halrasian or Barshaliian, on its o8n 7orun&. -n particular, 8e &o not taEe o ense at its un&amental assumptions a6out 6usiness 6eha$iorNat the picture o prompt reco7nition o the &ata o a situation an& o rational action in response to them. He Eno8, o course, that these assumptions are $er4 ar rom realit4 6ut 8e hol& that the lo7ical schema o that theor4 is 4et ri7ht @in principle@ an& that &e$iations rom it can 6e a&equatel4 taEen care o 64 intro&ucin7 riction, la7s, an& so on, an& that the4 are, in act, 6ein7 taEen care o , 8ith increasin7 success, 64 recent 8orE &e$elopin7 rom the tra&itional 6ases. He also hol&, ho8e$er, that this mo&el co$ers less 7roun& than is commonl4 suppose& an& that the 8hole economic process cannot 6e a&equatel4 &escri6e& 64 it or in terms o *secon&ar4+ &e$iations rom it. 3his is satis actor4 onl4 i the process to 6e anal4Oe& is cither stationar4 or @stea&il4 7ro8in7@ in the sense o our &e inition o the term <ro8th > an4 e(ternal &istur6ances ma4 enter, o course, pro$i&e& a&aptation to them is passi$e. An& this is equi$alent to sa4in7 that the assumption that 6usiness 6eha$ior is i&eall4 rational an& prompt, an& also that in principle it is the same 8ith all irms, 8orEs tolera6l4 8ell onl4 8ithin the precincts o trie& e(perience an& amiliar moti$e. -t 6reaEs &o8n as soon as 8e lea$e
9G
those precincts an& allo8 the 6usiness communit4 un&er stu&4 to 6e ace& 64 ne8 possi6ilities o 6usiness action 8hich are as 4et untrie& an& a6out 8hich the most complete comman& o routine teaches nothin7. 3hose &i erences in the 6eha$ior o &i erent people 8hich 8ithin those precincts account or secon&ar4 phenomena onl4, 6ecome essential in the sense that the4 no8 account or the outstan&in7 eatures o realit4 an& that a picture &ra8n on the HalrasBarshal-lian #nes ceases to 6e trueNe$en in the quali ie& sense in 8hich it is true o stationar4 an& 7ro8in7 processes > it misses those eatures, an& 6ecomes 8ron7 in the en&ea$or to account 64 means o its o8n anal4sis or phenomena 8hich the assumptions o that anal4sis e(clu&e. 3he reasona6le thin7 or us to &o, there ore, sems to 6e to con ine the tra&itional anal4sis to the 7roun& on 8hich 8e in& it use ul, an& to a&opt other assumptionsNthe a6o$e threeN or the purpose o &escri6in7 a class o acts 8hich lies 6e4on& that 7roun&. -n the anal4sis o the process &ominate& 64 these acts tra&itional theor4, o course, still retains its place > it 8ill &escri6e the responses to inno$ation 64 those irms 8hich are not inno$atin7 themsel$es. He ma4 ormulate the same point 64 means o the concept o 'oriOon. 3his 8e &e ine as that ran7e o choice 8ithin 8hich a 6usinessman mo$es reel4 an& 8ithin 8hich his &ecision or a course o action can 6e &escri6e& e(clusi$el4 in terms o pro ita6ilit4 an& oresi7ht. 30 -t &i ers 8i&el4 8ith &i erent t4pes an& in&i$i&uals. ,ut
30
-t 8ill 6e seen that oresi7ht, or anticipation, an& horiOon are not ma&e s4non4mous. A tri$ial e(ample ma4 ser$e to eluci&ate one o the &i erences. 3ire trou6le is no8a&a4s so rare an e$ent that an4 7i$en case cannot 6e sai& to 6e oreseen. ,ut, pro$i&e& a motorist Eno8s per ectl4 8ell ho8 to mana7e the situation i the case arises, it is still 8ithin his horiOon. :oresi7ht is, o course, more &i icult in an en$ironment &istur6e& 64 inno$ation an&, as soon as 8e ha$e in&epen&entl4 e(plaine& the situations, in 8hich it 6ecomes more &i icult rom this cause, 8e are 8ithin our ri7hts i 8e in turn e(plain secon&ar4 eatures 64 lacE o oresi7ht, 8ithout la4in7 oursel$es open to the char7e o thou7htlessl4 appealin7 to a &eus e( machina. ,ut such lacE is not primaril4 linEe& to inno$ation an& emphasiOin7 it 8ith respect to inno$ation 8oul& 6e emphasiOin7 the 8ron7 spot. Also, &i erences in oresi7ht are un&ou6te&l4 the source o man4
9J
8ithin a stationar4 or a 7ro8in7 process, 8e ma4 assume that the mana7ement o each irm comman&s that horiOon 8hich ena6les it to transact its current 6usiness an& to han&le or&inar4 emer7encies. Lutsi&e o such processes ho8e$er, horiOons o &i erent people &i er accor&in7 to the criterion that the horiOons o some are an& the horiOons o others arc not con ine& to the ran7e o possi6ilities trie& out in 6usiness practice. 3his a6ilit4 to &eci&e in a$or o untrie& possi6ilities or to choose not onl4 6et8een trie& 6ut also 6et8een trie& an& untrie& ones, ma4, ho8e$er, 6e &istri6ute& in the population accor&in7 to the <aussianNthou7h more plausi6l4 a sEe8Nla8, an& shoul& not 6e thou7ht o as con ine& to a e8 e(ceptional cases. He neither can nor nee& 7o ull4 into this matter, 6ut 8ill 6e content to point to the common-sense =usti ication o our emphasis on this &i erence in 6eha$ior. /$er4one Eno8s, o course, that to &o somethin7 ne8 is $er4 much more &i icult than to &o somethin7 that 6elon7s to the realm o routine, an& that the t8o tasEs &i er qualitati$el4 an& not onl4 in &e7ree. 3his is &ue to man4 reasons, 8hich 8e ma4 7roup in three classes. :irst, in the case o somethin7 ne8 6ein7 attempte&, the en$ironment resists 8hile it looEs on 8ithN at leastN6ene$olent neutralit4 at repetition o amiliar acts. 9esistance ma4 consist in simple &isappro$alNo machine-ma&e pro&uctsN or instanceN in pre$entionNprohi6ition o the use o ne8 machiner4Nor a77ressionNsmashin7 ne8 machiner4. Secon&, or the repetition o acts o routine the en$ironment o ers the prerequisites, in the case o ne8 thin7s it sometimes lacEs, sometimes re uses, them > len&ers rea&il4 len& or routine purposes M la6or o the ri7ht t4pe is a$aila6le or them in the ri7ht place M customers 6u4 reel4 8hat the4 un&erstan&. 3hir&, most people eel an inhi6ition 8hen the possi6ilit4 o trea&in7 a ne8 path o ers itsel . 3his ma4, in part, ha$e rational oun&ation > it maEes, in act, a 7reat &i erence 8hether the items enterin7 our calculations &eri$e rom acts o &ail4
phenomena rele$ant to the stu&4 o 6usiness c4cles. ,ut &i erences in oresi7ht are not coterminous 8ith &i erences in the a6ilit4 to @8alE alone@ an& to act on 7roun& untrie& 64 e(perience
98
e(perience or entirel4 rom estimation. /$en amiliar &ata $ar4, o course, an& their 6eha$ior ma4 o ten 6e &i icult to oresee, 6ut 8ithin a amiliar rame the a$era7e 6usinessman Eno8s ho8 to mana7e them. - a ne8 rame is to 6e constructe&, the tasE chan7es its character. -n or&er to sec this, 8e nee& onl4 $isualiOe the situation o a man 8ho 8oul&, at the present time, consi&er the possi6ilit4 o settin7 up a ne8 plant or the pro&uction o cheap aeroplanes 8hich 8oul& pa4 onl4 i all people 8ho no8 &ri$e motorcars coul& 6e in&uce& to l4. 3he ma=or elements in such an un&ertaEin7 simpl4 cannot 6e Eno8n. 3he situation is not &i erent in the case o a ne8 per ume. ,ut also, irrational inhi6itions enter. .either error nor risE e(presses a&equatel4 8hat 8e mean. Hhene$er a ne8 pro&uction unction has 6een set up success ull4 an& the tra&e 6ehol&s the ne8 thin7 &one an& its ma=or pro6lems sol$e&, it 6ecomes much easier or other people to &o the same thin7 an& e$en to impro$e upon it. -n act, the4 are &ri$en to cop4in7 it i the4 can, an& some people 8ill &o so orth8ith. -t shoul& 6e o6ser$e& that it 6ecomes easier not onl4 to &o the same thin7, 6ut also to &o similar thin7s in similar linesNeither su6si&iar4 or competiti$e ones N8hile certain inno$ations, such as the steam en7ine, &irectl4 a ect a 8i&e $ariet4 o in&ustries. 3his seems to o er per ectl4 simple an& realistic interpretations o t8o outstan&in7 acts o o6ser$ation > :irst, that inno$ations &o not remain isolate& e$ents, an& are not e$enl4 &istri6ute& in time, 6ut that on the contrar4 the4 ten& to cluster, to come a6out in 6unches, simpl4 6ecause irst some, an& then most, irms ollo8 in the 8aEe o success ul inno$ation M secon&, that inno$ations are not at an4 time &istri6ute& o$er the 8hole economic s4stem at ran&om, 6ut ten& to concentrate in certain sectors an& their surroun&in7s. .either o6ser$ation can 6e ne8 to an4one. 3he point 8e 8ish to maEe is that 6oth ollo8 rom our premises an& in& their place 8ithin our anal4tic schema, instea& o remainin7 outsi&e o it in the class o &e$iations or mo&i 4in7 circumstances. 3he irst puts into its proper li7ht our ormer statement, that &istur6ances o equili6rium arisin7 rom inno$ation cannot 6e currentl4 an& smoothl4 a6sor6e&. -n
99
act, it is no8 eas4 to realiOe that those &istur6ances must necessaril4 6e @6i7,@ in the sense that the4 8ill &isrupt the e(istin7 s4stem an& en orce a &istinct process o a&aptation. 3his is in&epen&ent either o the siOe o the inno$atin7 irm or irms or o the importance o the imme&iate e ects their action 8oul& in itsel entail. Hhat 8e see at irst 7lance ma4 8ell 6e a multitu&e o reactions not easil4 tracea6le to an4 &e inite inno$ation 6ehin& them. ,ut in man4 cases comprisin7 historicall4 important t4pes, in&i$i&ual inno$ations impl4, 64 $irtue o their nature, a @6i7@ step an& a @6i7@ chan7e. A railroa& throu7h ne8 countr4, i.e., countr4 not 4et ser$e& 64 railroa&s, as soon as it 7ets into 8orEin7 or&er upsets all con&itions o location, all cost calculations, all pro&uction unctions 8ithin its ra&ius o in luence an& har&l4 an4 @8a4s o &oin7 thin7s@ 8hich ha$e 6een optimal 6e ore remain so a ter8ar&. 3he case ma4 6e put still more orci6l4 i 8e consi&er the railroa&iOation an& the electri ication o the 8hole 8orl& as sin7le processes. 3here is, ho8e$er, some &an7er in o$erstressin7 such o6$ious instances, 6ecause this ma4 easil4 lea& to the amiliar attitu&e o con inin7 the phenomenon to this class an& o$erlooEin7 it in all othersNhence, to missin7 its true &imensions. 31 3he secon& o6ser$ation, the e(planation o 8hich ollo8s naturall4 rom our 7eneral schema, is no less o6$ious. -n&ustrial chan7e is ne$er harmonious a&$ance 8ith all elements o the s4stem ten&in7 to mo$e in step. At an4 7i$en time, some in&ustries mo$e on, others sta4 6ehin& M an& the &iscrepancies arisin7 rom this are an essential element in the situations that &e$elop. 5ro7ressNin the in&ustrial as 8ell as in an4 other sector o social or cultural li eNnot onl4 procee&s 64 =erEs an& rushes 6ut also 64 one-si&e& rushes pro&ucti$e o
31
As state& 6e ore, this is our un&amental reason or &ou6tin7 the $alue o the concept o 9e$olutionar4 -n$entions *opposite > Binor -n$entions+ i it is to su77est that the4 or their e ects &i er qualitati$el4 rom others. He shall not use the concept o Autonomous -n$entions either, althou7h this seems to carr4 a connotation more rele$ant to our ar7ument. ,ut the concept -n&uce& -nno$ations 8e shall occasionall4 use in or&er to &enote those a&&itional impro$ements 8hich present themsel$es in the process o cop4in7 the irst inno$ators in a iel& an& o a&aptation 64 e(istin7 irms to their &oin7s.
100
consequences other than those 8hich 8oul& ensue in the case o coor&inate& rushes. -n e$er4 span o historic time it is eas4 to locate the i7nition o the process an& to associate it 8ith certain in&ustries an&, 8ithin these in&ustries, 8ith certain irms, rom 8hich the &istur6ances then sprea& o$er the s4stem. 3he acts 8hich our three assumptions are the means o intro&ucin7 into our anal4tic mo&el e(plain not secon&ar4 phenomena onl4 6ut the essential eatures o the process o economic e$olution in our sense o the term. He shall meet 8ith man4 e(amples o this, as in the theor4 o pro it to 6e outline& in the ne(t section. 'ere 8e 8ill notice one onl4, namel4, their 6earin7 upon our 7eneral conception o pro7ress. /$i&entl4, 8e must cease to thinE o it as 64 nature smooth an& harmonious in the sense that rou7h passa7e an& &isharmonies present phenomena orei7n to its mechanism an& require special e(planations 64 acts not em6o&ie& in its pure mo&el. Ln the contrar4, 8e must reco7niOe that e$olution is lopsi&e&, &iscontinuous, &isharmonious 64 natureNthat the &isharmon4 is inherent in the $er4 mo&us operan&i o the actors o pro7ress. Surel4, this is not out o Eeepin7 8ith o6ser$ation > the histor4 o capitalism is stu&&e& 8ith $iolent 6ursts an& catastrophes 8hich &o not accor& 8ell 8ith the alternati$e h4pothesis 8e here8ith &iscar&, an& the rea&er ma4 8ell in& that 8e ha$e taEen unnecessar4 trou6le to come to the conclusion that e$olution is a &istur6ance o e(istin7 structures an& more liEe a series o e(plosions than a 7entle, thou7h incessant, trans ormation.
3a6le o 0ontents
C. The Ent!e*!eneu! and -i .!ofit. :or actions 8hich consist
in carr4in7 out inno$ations 8e reser$e the term /nterprise M the in&i$i&uals 8ho carr4 them out 8e call /ntrepreneurs. 3his terminolo7ical &ecision is 6ase& on a historical act an& a theoretical proposition, namel4, that earnin7 out inno$ations is the onl4 unction 8hich is un&amental in histor4 an& essential in theor4 to the t4pe
101
usuall4 &esi7nate& 64 that term. 3he &istinction 6et8een the entrepreneur an& the mere hea& or mana7er o a irm 8ho runs it on esta6lishe& lines or, as 6oth unctions 8ill o ten coinci&e in one an& the same person, 6et8een the entrepreneurial an& the mana7erial unction, is no more &i icult than the &istinction 6et8een a 8orEman an& a lan&o8ner, 8ho ma4 also happen to orm a composite economic personalit4 calle& a armer. An& surel4 it is 6ut common sense to reco7niOe that the economic unction o &eci&in7 ho8 much 8ool to 6u4 or one"s process o pro&uction an& the unction o intro&ucin7 a ne8 process o pro&uction &o not stan& on the same ootin7, either in practice or lo7ic. 3he outlines o an economic an& sociolo7ical anal4sis o 6oth t4pes an& 6oth unctions ha$e 6een 7i$en else8here. 3) He 8ill 6rie l4 note the points that are most important or our purpose. 1. -t is not al8a4s eas4 to tell 8ho the entrepreneur is in a 7i$en case. 3his is not, ho8e$er, &ue to an4 lacE o precision in our &e inition o the entrepreneurial unction, 6ut simpl4 to the &i icult4 o in&in7 out 8hat person actuall4 ills it. .o6o&4 e$er is an entrepreneur all the time, an& no6o&4 can e$er 6e onl4 an entrepreneur. 3his ollo8s rom the nature o the unction, 8hich must al8a4s 6e com6ine& 8ith, an& lea& to, others. A man 8ho carries out a @ne8 com6ination@ 8ill una$oi&a6l4 ha$e to per orm current nonentrepreneurial 8orE in the course o &oin7 so, an& success ul enterprise in our sense 8ill normall4 lea& to an in&ustrial position 8hich thence orth in$ol$es no other unctions than those o mana7in7 an ol& irm. .e$ertheless, 8e ha$e little &i icult4 in i&enti 4in7 entrepreneurship in the times o competiti$e capitalism. 3he entrepreneur 8ill there 6e oun& amon7 the hea&s o irms, mostl4 amon7 the o8ners. <enerall4, he 8ill 6e the oun&er o a irm an& o an in&ustrial amil4 as 8ell. -n the times o 7iant concerns the
3)
See the 8riter"s 3heor4 o /conomic ;e$elopment, nota6l4 0haps. -- an& -K. 0ompare, also, the historical sEetch in the 8riter"s article #nternehmer in the 'an&8Xrter6uch &er Staats8issenscha ten.
10)
question is o ten as &i icult to ans8er as, in the case o a mo&ern arm4, the question 8ho is the lea&in7 man or 8ho reall4 8on a 7i$en 6attle. 3he lea&in7 man ma4, 6ut nee& not, hol& or acquire the position that is o iciall4 the lea&in7 one. 'e ma4 6e the mana7er or some other salarie& emplo4ee. Sometimes, he is the o8ner o a controllin7 parcel o shares 8ithout appearin7 on the list o responsi6le e(ecuti$es at all. Althou7h compan4 promoters are not as a rule entrepreneurs, a promoter ma4 ill that unction occasionall4 an& then come near to presentin7 the onl4 instance there is o a t4pe 8hich is entrepreneur 64 pro ession an& nothin7 else. ). ,ut it shoul& 6e eas4 to &istin7uish our unction rom those others 8hich, thou7h o ten oun& in com6ination 8ith it, are 4et not essential to it. He ha$e alrea&4 seen that the entrepreneur ma4, 6ut nee& not, 6e the @in$entor@ o the 7oo& or process he intro&uces. Also, the entrepreneur ma4, 6ut nee& not, 6e the person 8ho urnishes the capital. 3his is a $er4 important point. -n the institutional pattern o capitalism there is machiner4, the presence o 8hich orms an essential characteristic o it, 8hich maEes it possi6le or people to unction as entrepreneurs 8ithout ha$in7 pre$iousl4 acquire& the necessar4 means. -t is lea&ership rather than o8nership that matters. 3he ailure to see this an&, as a consequence, to $isualiOe clearl4 entrepreneurial acti$it4 as a &istinct unction sui 7eneris, is the common ault o 6oth the economic an& the sociolo7ical anal4sis o the classics an& o Parl Bar(. -t is partl4 e(plaine& 64 the act that pre$ious o8nership o the requisite pro&ucers" 7oo&s or o assets that ma4 ser$e as collateral, or o mone4, maEes it easier to 6ecome an entrepreneur, an& the a&&itional act that success ul entrepreneurship lea&s to a capitalist position or the entrepreneur an&, normall4, his &escen&ants, so that 8e in& success ul entrepreneurs $er4 soon in possession o a plant an& the other paraphernalia o a 7oin7 concern. 38o consequences ollo8, one o 8hich is o an economic, the other o a sociolo7ical, nature.
103
:irst, risE 6earin7 is no part o the entrepreneurial unction. 33 -t is the capitalist 8ho 6ears the risE. 3he entrepreneur &oes so onl4 to the e(tent to 8hich, 6esi&es 6ein7 an entrepreneur, he is also a capitalist, 6ut qua entrepreneur he loses other people"s mone4. Secon&, entrepreneurs as such &o not orm a social class. Althou7h, in case o success, the4 or their &escen&ants rise into the capitalist class, the4 &o not rom the outset 6elon7 to it or to an4 other &e inite class. As a matter o historical act, entrepreneurs come rom all classes 8hich at the time o their emer7ence happen to e(ist. 3heir 7enealo7ies &ispla4 most $arie& ori7insNthe 8orEin7 class, aristocrac4, the pro essional 7roups, peasants an& anners, an& the artisan class, all ha$e contri6ute& to 8hat is sociolo7icall4 not a uni orm t4pe. 3he a6o$e implies that althou7h entrepreneurs ma4 6e or 6ecome stocEhol&ers in their irms, mere hol&in7 o stocE &oes not, an4 more than 8oul& mere o8nership, maEe an enterpreneur. 3he onl4 realistic &e inition o stocEhol&ers is that the4 are cre&itors *capitalists+ 8ho ore7o part o the le7al protection usuall4 e(ten&e& to cre&itors, in e(chan7e or the ri7ht to participate in pro its. 3. 2et us $isualiOe an entrepreneur 8ho, in a per ect competiti$e societ4, carries out an inno$ation 8hich consists in pro&ucin7 a commo&it4 alrea&4 in common use at a total cost per unit lo8er than that o an4 e(istin7 irm 6ecause his ne8 metho& uses a smaller amount o some or all actors per unit o pro&uct. -n this case, he 8ill 6u4 the pro&ucers" 7oo&s he nee&s at the pre$ailin7 prices 8hich are a&=uste& to the con&itions un&er 8hich @ol&@ irms 8orE, an& he 8ill sell his pro&uct at the pre$ailin7 price a&=uste& to the costs o those @ol&@ irms. -t ollo8s that his receipts 8ill e(cee& his costs. 3he
33
9isE, ne$ertheless, enters into the pattern in 8hich entrepreneurs 8orE. ,ut it &oes so in&irectl4 an& at one remo$e > risEinessNan& e$er4 ne8 thin7 is risE4 in a sense in 8hich no routine action isNmaEes it more &i icult to o6tain the necessar4 capital an& thus orms one o the o6stacles entrepreneurs ha$e to o$ercome an& one o the instances o resistance o the en$ironment 8hich e(plain 8h4 inno$ations are not carrie& out smoothl4 an& as a matter o course.
10F
&i erence 8e shall call /ntrepreneurs" 5ro it, or simpl4 5ro it. -t is the premium put upon success ul inno$ation in capitalist societ4 an& is temporar4 64 nature > it 8ill $anish in the su6sequent process o competition an& a&aptation. 3here is no ten&enc4 to8ar& equiliOation o these temporar4 premia. Althou7h 8e ha$e thus &e&uce& pro it onl4 or one particular case o inno$ation an& onl4 or con&itions o per ect competition, the ar7ument can rea&il4 6e e(ten&e& to co$er all other cases an& con&itions. -n an4 case, it is e$i&ent that, thou7h temporar4, pro it is a net 7ain, i.e, that is not a6sor6e& 64 the $alue o an4 cost actor throu7h a process o -mputation. :or pro its to emer7e, ho8e$er, it is essential that the @suici&al stimulus o pro its@ shoul& not act instantaneousl4. -n the prece&in7 section 8e ha$e seen the reasons 8h4, as a rule, it &ocs not. ,ut cases occasionall4 occur, an& ma4 in the uture 6e e(pecte& to occur more requentl4, in 8hich it &ocs. He then 7et inno$ation 8ithout pro it, or almost 8ithout it, an& thus realiOe the possi6ilit4 o 8hat, anticipatin7 later ar7ument, 8e ma4 term 5ro itless 5rosperities. -n a stationar4 econom4, e$en i &istur6e& 64 action o e(ternal actors, 6oth the entrepreneurial unction an& the entrepreneurial pro it 8oul& 6e a6sent, an& so 8oul& the 6ulE o 8hat is in common parlance &escri6e& as pro its. :or, althou7h there 8oul& 6e rents an& quasi-rents o actors o8ne& 64 irms *also in the case o a mana7erproprietor, his @earnin7s o mana7ement@ or 8a7es, to 8hich 8e ma4 or the saEe o ar7ument a&& $arious interest items+, an& althou7h there ma4 6e monopol4 7ains an& i 8e a&mit e(ternal &istur6ances+ also 8in& alls an& possi6l4 speculati$e 7ains, all these items 8oul&, in the con&itions o a stationar4 or e$en o a 7ro8in7 econom4, sum up to much smaller totals than the4 &o in realit4. -nno$ation is not onl4 the most important imme&iate source o 7ains, 6ut also in&irectl4 pro&uces, throu7h the process it sets 7oin7, most o those situations rom 8hich 8in& all 7ains an& losses arise an& in 8hich speculati$e operations acquire si7ni icant scope.
105
-t ollo8s that the 6ulE o pri$ate ortunes is, in capitalist societ4, &irectl4 or in&irectl4 the result o the process o 8hich inno$ation is the @prime mo$er.@ Speculati$e maneu$ers 8hich are responsi6le or some, are e$i&entl4 inci&ents to the process o economic e$olution in our sense, an& so are lar7el4 the unearne& increments reape& 64 o8ners o natural resourcesN ur6an lan&, or instanceN8hich account or others. Sa$in7, consistentl4 carrie& on throu7h 7enerations, coul& not ha$e 6een nearl4 so success ul as it 8as i there ha& not 6een surpluses, &ue to inno$ation, rom 8hich to sa$e. ,ut the position o the t4pical in&ustrial or commercial or inancial amil4 &irectl4 ori7inates in some act o inno$ation. Hhen their perio& o entrepreneur-ship is past, those amilies li$e, it is true, on quasi-rents, o ten supporte& 64 monopoloi& situations, or, i the4 entirel4 se$er their connection 8ith 6usiness, on interest. ,ut a ne8 pro&uction unction practicall4 al8a4s emer7es i 8e ollo8 up those quasi-rents or monopoloi& 7ains or monetar4 capitals to their sources. L this 8e shall see man4 e(amples in our historical sur$e4, 8hich the 8riter 6elie$es to 6e su icient, in spite o its ra7mentar4 character, to esta6lish the main points o this anal4sis 6e4on& reasona6le &ou6t. F. 5ro it, in our sense, is a unctional return, 6ut it 8oul& not al8a4s 6e sa e to locate the entrepreneurial unction accor&in7 to the criterion o accrual. Hhether it accrues to entrepreneurs or not is a matter o institutional pattern. -t &oes so most completel4 in that orm o or7aniOation 8hich is characteriOe& 64 the pre$alence o the amil4 irm. -t is there that it has most re7ularl4 ser$e& as the economic 6asis o in&ustrial &4nasties, 64 6ein7 rein$este& or simpl4 em6o&ie& in the o8nership o a plant. -n corporate in&ustr4 pro its accrue to the irm as such, an& their &istri6ution ceases to 6e automatic an& 6ecomes a matter o polic4Nsharehol&ers, e(ecuti$es *8hether entrepreneurs or not+, an& emplo4ees recei$in7 in the most $arie& orms *6onuses, tantiAmes, an& so on+ in&eterminate shares in it or contractual equi$alents or shares in it.
10G
Stru77les or a share in pro its are less important or our su6=ect than the stru77les to conser$e the stream o pro it itsel . Secrec4 re7ar&in7 processes, patents, =u&icious &i erentiation o pro&ucts, a&$ertisin7, an& the liEe, occasionall4 also a77ression &irecte& a7ainst actual an& 8oul&-6e competitors, are instances o a amiliar strate74, 8hich in the pu6lic, as 8ell as in the pro essional, min& ha$e &one much to $eil the source an& nature o pro its in our sense, especiall4 6ecause that strate74 ma4 6e resorte& to in other cases as 8ell. 3hese &e$ices are the same as those 8hich pla4 a role in cases o monopolistic competition, an& the act that the4 are met 8ith in our case is precisel4 &ue to the other act that an enterprise in our sense almost necessaril4 in&s itsel in an @imper ect@ situation, e$en i the s4stem 6e other8ise a per ectl4 competiti$e one. 3his is one o the reasons 8h4 8e so persistentl4 stress the relation 6et8een e$olution an& imper ection o competition. 5ro its mi7ht, as ar as this 7oes, 6e also inclu&e& in the cate7or4 o monopoloi& 7ains. 3his, ho8e$er, 8oul& 6lur the speci ic character o our case > not e$er4 7eneraliOation is pro ita6le to the anal4stNan4 more than e$er4 inno$ation is to the inno$ator. .ot onl4 is practicall4 e$er4 enterprise threatene& an& put on the &e ensi$e as soon as it comes into e(istence, 6ut it also threatens the e(istin7 structure o its in&ustr4 or sector almost as una$oi&a6l4 as it creates unemplo4ment some8here or other. An inno$ation sometimes ma4 &o so 64 its mere possi6ilit4 an& e$en 6e ore it is em6o&ie& in an enterprise. 3hat structure resents the threat an& percei$es possi6ilities o &e ense other than a&aptation 64 a competiti$e stru77le 8hich 7enerall4 means &eath or man4 o its units. Situations ensue 8hich pro&uce the para&o( that in&ustr4 sometimes tries to sa6ota7e that @pro7ress,@ 8hich it ine(ora6l4 e$ol$es 64 $irtue o the $er4 la8 o its o8n li e. 3here is no contra&iction in this. Lur 7eneral schema, ho8e$er, &eri$es some support rom the act that it resol$es that para&o( so easil4 an& sho8s us ho8 an& 8h4 in&ustrial @pro7ress@ comes to the ma=orit4 o irms e(istin7 at a 7i$en time as an attacE rom outsi&e. 3aEin7 in&ustr4 as a 8hole, there is al8a4s an
10J
inno$atin7 sphere 8arrin7 8ith an @ol&@ sphere, 8hich sometimes tries to secure prohi6ition o the ne8 8a4s o &oin7 thin7s. 5. -t has 6een state& a6o$e that our assumption a6out .e8 :irms carr4in7 the ne8 thin7s into e ect a7ainst resistin7 strata o ol& irms, 8hich 8as to em6o&4 the characteristicall4 &i erent 6eha$ior in the ace o ne8 possi6ilities, ma4 occasionall4 ail us. :or the past it is o6$iousl4 $er4 realistic. /$en in the present [1939] the 8riter is not a8are o important instances 8hich 8oul& pro$e it to 6e contrar4 to act. ,ut se$eral minor ones he has o6ser$e&. -t is interestin7 to note that such a6sence o riction &oes not al8a4s maEe the path o pro7ress smoother. -n the countr4 Q, or e(ample, all irms e(istin7 in the in&ustr4 1 tooE at e(actl4 the same time, a6out 15 4ears a7o, to pro&ucin7 the article \ accor&in7 to a ne8 an& much cheaper metho&. A &ea&locE ensue&, $er4 quicEl4 reme&ie& 64 an a7reement 8hich &epri$e& that inno$ation o an4 e ect 6e4on& a surplus, unemplo4ment, an& some e(cess capacit4. 3here is some reason to e(pect that such cases 8ill increase in importance > on the one han&, technolo7ical research 6ecomes increasin7l4 mechaniOe& an& or7aniOe& M on the other han&, resistance to ne8 8a4s 8eaEens. An4 technolo7ical impro$ement 8hich is 6ecomin7 @o6=ecti$el4 possi6le,@ ten&s to 6e carrie& into e ect as a matter o course. 3his must a ect the phenomenon 8hich is the su6=ect o this 6ooE. -t must also a ect the importance o the social unction, an& in consequence the economic an& social position, o that stratum o capitalist societ4 8hich e(ists 64 entrepreneurial achie$ement as the Eni7hts o the Bi&&le A7es e(iste& 64 $irtue o a certain technique o 8ar are. Alrea&4, the $olitional aptitu&es that ma&e the success ul entrepreneur o ol& are much less necessar4 an& ha$e much less scope than the4 use& to ha$e. -t is no chance coinci&ence that the epoch in 8hich this &ecrease in importance o the entrepreneurial unction irst aserte& itsel is also the epoch in 8hich the social an& political position o the 6our7eoisie irst 6e7an to &ispla4 o6$ious s4mptoms o 8eaEness an& to 6e attacEe& 8ith success. 'o8e$er, it 8oul& 6e as
108
7reat a mistaEe to o$errate the len7th to 8hich the process has as 4et 7one as it 8oul& 6e to i7nore it. :or our theme, it 8ill 6e seen not to ha$e procee&e& ar enou7h to matter or 7eneral contours, e$en in the the post8ar perio&.
3a6le o 0ontents
&. The /ole of Mone" and Ban0ing in the .!o)e
of E,olution.
3his su6=ect 8ill 6e more ull4 &iscusse& in the historical sur$e4. -n this section 8e 8ill merel4 tr4 to unra$el its lo7ical, as &istin7uishe& rom its historical, roots an& in so &oin7 mo$e on the same le$el o a6straction as 8e &o throu7hout this chapter. 9esults cannot ail to looE e(tremel4 unrealistic an&, in this case more than in others, utterl4 contrar4 to acts. -t is in no case eas4 to &iscern the element o inno$ation un&er the mass o in&uce&, &eri$ati$e, an& a&$entitious phenomena that o$erlies it. ,ut in the sphere o mone4 an& cre&it the la4er is so thicE an& the sur ace so entirel4 at $ariance 8ith the processes 6elo8, that the irst impression o the rea&er ma4 8ell 6e atal. 3he proo o the anal4tic pu&&in7, ho8e$er, is in the eatin7, an& the monetar4 part o our mo&el is nothin7 6ut a &e$ice to 7et hol& o those $er4 acts to 8hich the rea&er ma4 eel incline& to point in re utation. -. He 8ill &iscar&, on the un&erstan&in7 that the4 8ill 6e intro&uce& later, consumers" 6orro8in7, 6oth pu6lic an& pri$ate, on the one han&, an& sa$in7 an& accumulation, on the other. ;iscar&in7 the irst, in a &iscussion o un&amental principle, 8ill presuma6l4 not meet 8ith insupera6le o6=ection. -t is merel4 a measure o simpli ication an& &oes not mean that consumers" 6orro8in7 is hel& to 6e o no importance in the c4clical process. 3he contrar4 is o6$ious > consumers" 6orro8in7 is one o the most conspicuous &an7er points in the secon&ar4 phenomena o prosperit4, an& consumers" &e6ts are amon7 the most conspicuous 8eaE spots in recession an& &epression. ;iscar&in7 the secon& is more than a measure o simpli ication. -t
109
implies the $ie8 that inancin7 inno$ation rom un&s that ha$e 6een sa$e& or accumulate&, presupposes pre$ious pro its, hence pre$ious 8a$es o e$olution, an& there ore has no claim to a place on the 7roun& loor, as it 8ere, o a mo&el that is to &ispla4 lo7ical essentials. 3his ollo8s rom the ar7ument in sec. A o this chapter, an& &oes not impl4 an4thin7 a6out the role 8hich inancin7 o inno$ation 64 sa$in7s pla4s in an4 actual historical situation. -n later &iscussions 8e shall assi7n it all the importance 8e concei$e it to ha$e, an& also &e$elop its mo&us operan&i, althou7h the 8riter thinEs the importance to 6e smaller than, an& the mo&us operan&i &i erent rom, 8hat is is commonl4 6elie$e& to 6e. -n accor&ance 8ith our conception o .e8 Ben settin7 up .e8 :irms, 8e also assume that 8oul&-6e entrepreneurs &o not alrea&4 happen to o8n part or the 8hole o the assem6la7e o pro&ucers" 7oo&s 8hich the4 nee& in or&er to carr4 out their plans, or an4 assets 8hich the4 coul& e(chan7e or 8hat the4 nee&. 3here 8ill al8a4s 6e such cases, althou7h, the4 can 6ecome as requent as 8e Eno8 them to 6e onl4 8hen the e$olutionar4 process is in ull s8in7 an& 8hen it has 6rou7ht into e(istence a machiner4 or sellin7 assets 8hich 8e cannot assume no8. 3F ,ut the4 present no pro6lem 6e4on& those 8hich 8e ha$e &ealt 8ith in the prece&in7 sections. .or &oes a &istinct pro6lem o inancin7 arise 8ith the @ol&@ irms in the stationar4 process rom 8hich 8e start. 3he4 ha$e their plant an& equipment, an& their current e(pen&itureNinclu&in7 repairs an& replacementN can 6e inance& rom current receipts. Assumin7, inall4, that the4 are so inance&, 8e arri$e at the ollo8in7 three propositions, 8hich soun& stran7e 6ut are tautolo7icall4 true or economic 8orl& em6o&4in7 our assumptions > /ntrepreneurs 6orro8 all the @ un&s@ the4 nee& 6oth or creatin7 an& or operatin7 their plantsNi.e., or acquirin7 6oth their i(e& an& their 8orEin7 capital. .o6o&4 else 6orro8s. 3hose @ un&s@ consist in means o pa4ment
3F
3his instance illustrates 8ell one o the source o o6=ections to our mo&el > 8e 6ehol& a hill4 &e$elope& in&ustrial an& inancial s4stem, an& are prone to intro&uce the eatures o the 6uil&in7 into a &iscussion o the sca ol&in7.
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create& a& hoc. ,ut althou7h in themsel$es these propositions are nothin7 6ut pieces o anal4tic sca ol&in7, to 6e remo$e& 8hen the4 ha$e ser$e& their purpose, the lo7ical relation 8hich the4 em6o&4, 6et8een 8hat is calle& @cre&it creation 64 6anEs@ an& inno$ation, 8ill not 6e lost a7ain. 3his relation, 8hich is un&amental to the un&erstan&in7 o the capitalist en7ine, is at the 6ottom o all the pro6lems o mone4 an& cre&it, at least as ar as the4 are not simpl4 pro6lems o pu6lic inance. ). ,e ore 7oin7 on, 8e 8ill tr4 to clari 4 the meanin7 o @cre&it creation@ consi&ere& as the monetar4 complement o inno$ation, 64 a comparison 8ith 8hat 8oul& correspon& to it in a socialist societ4. Since the central authorit4 o the socialist state controls all e(istin7 means o pro&uction, all it has to &o in case it &eci&es to set up ne8 pro&uction unctions is simpl4 to issue or&ers to those in char7e o the pro&ucti$e unctions to 8ith&ra8 part o them rom the emplo4ments in 8hich the4 are en7a7e&, an& to appl4 the quantities so 8ith&ra8n to the ne8 purposes en$isa7e&. He ma4 thinE o a Ein& o <osplan as an illustration. -n capitalist societ4 the means o pro&uction require& must also 6e 8ith&ra8n rom their emplo4mentsNthe case o unemplo4e& resources can easil4 6e taEen into accountNan& &irecte& into the ne8 ones 6ut, 6ein7 pri$atel4 o8ne&, the4 must 6e 6ou7ht in their respecti$e marEets. 3he issue to the entrepreneurs o ne8 means o pa4ments create& a& hoc is, since our entrepreneurs ha$e no means o their o8n an& since there areNso arNno sa$in7s, 8hat correspon&s in capitalist societ4 to the or&er issue& 64 the central 6ureau in the socialist state. -n 6oth cases, the carr4in7 into e ect o an inno$ation in$ol$es, not primaril4 an increase in e(istin7 actors o pro&uction, 6ut the shi tin7 o e(istin7 actors rom ol& to ne8 uses. 35 3here is, ho8e$er,
35
/$en 8ith respect to those quantities o actors 8hich currentl4 acrue, sa4, in an increasin7 population, an& can 6e use& or the ne8 purposes 8ithout ha$in7 pre$iousl4 ser$e& an4 ol& ones, it is more correct to sa4 that the4 are shi te& rom the uses the4 8oul& ha$e ser$e& ha& the ne8 purposes not 6een
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this &i erence 6et8een the t8o metho&s o shi tin7 the actors > in the case o the socialist communit4 the ne8 or&er to those in char7e o the actors cancels the ol& one. - inno$ation 8ere inance& 64 sa$in7s, the capitalist metho& 8oul& 6e analo7ous, or the 8a4 in 8hich sa$in7 an& len&in7 to entrepreneurs e ects a shi tin7 o actors throu7h a shi tin7 o means o pa4ment ma4, in&ee&, 6e liEene& to the cancelin7 o an ol& an& the issuin7 o a ne8 @or&er@ to the o8ners o actors. ,ut i inno$ation is inance& 64 cre&it creation, the shi tin7 o the actors is e ecte& not 64 the 8ith&ra8al o un&sN@cancelin7 the ol& or&er@N rom the ol& irms, 6ut 64 the re&uction o the purchasin7 po8er o e(istin7 un&s 8hich are le t 8ith the ol& irms 8hile ne8l4 create& un&s are put at the &isposal o entrepreneurs > the ne8 @or&er to the actors@ comes, as it 8ere, on top o the ol& one, 8hich is not there64 cancele&. -t 8ill 6e sho8n later ho8 this 8ill a ect prices an& $alues an& pro&uce a strin7 o important consequences 8hich are responsi6le or man4 characteristic eatures o the capitalist process. 3his si&e o cre&it creation ma4 also 6e clari ie& 64 means o the analo74 8ith the issue o 7o$ernment at, althou7h in all other respects the &i erences are much more important than the similarities. .o8, suppose that our socialist communit4 in&s it con$enient to rule that the e(ecuti$e su6mit e$er4 inno$ation it 8ishes to carr4 out to another 6o&4, 8hich passes upon it an& ma4 7rant or 8ithhol& assent -n case it sanctions the plan, it countersi7ns an& issues the or&ers to the actors to orm the ne8 com6ination. 3his is the unction 8hich in capitalist societ4 is ille& 64 6anEs 8hich, in pro$i&in7 entrepreneurs 8ith means to 6u4 actors o pro&uction or their ser$ices, &o somethin7 aEin to issuin7 such or&ers. He no8 intro&uce this ne8 Ein& o irms into our mo&el. 3he4 are nothin7 6ut esta6lishments or the manu acture o means o pa4ment. He
&eci&e& on. than simpl4 to sa4 that the4 7o to the ne8 uses &irectl4. 3he point is o some importance, 6ecause in the tra&itional mo&el it 8as increase in actors, rather than the shittin7 o actors, that 8as ma&e the chie $ehicle o economic pro7ress. ,ut essential phenomena o the c4clical process &epen& on that shi tin7 o actors.
11)
&istin7uish mem6er 6anEs, 8hich Eeep the accounts o , an& manu acture 6alances or, irms an& househol&s, an& 6anEers" 6anEsN 8hich Eeep the accounts o , an& manu acture 6alances or, mem6er 6anEs. :or the saEe o con$enience 8e 8ill assume that 6anEers" 6anEs ha$e no other customers 6ut 6anEs an& that no mem6er 6anE ills 6anEers" 6anEs" unctions, althou7h in &iscussions o actual situations 8e must taEe account o the acts that man4 6anEers" 6anEs also 6anE or irms an& househol&s an& that man4 mem6er 6anEs also 6anE or other mem6er 6anEs > there are cases, the outstan&in7 one 6ein7 that o the 6anEin7 s4stem o the #nite& States until 191F, in 8hich central 6anE unctions are entirel4 &ischar7e& 64 some mem6ers o the s4stem an&, perhaps, some 7o$ernment &epartment, such as the #nite& States 3reasur4. -t is important to 6ear in min& that 8hat &irectl4 matters or 6usinesses is the amount o cre&it creation 64 mem6er 6anEs. 0re&it creation 64 6anEers" 6anEs stan&s at one remo$e rom this an& the t8o are not a&&iti$e. 3. ,4 con inin7 the manu acture o cre&it to 6anEs, 8e are rou7hl4 con ormin7 to act. ,ut this restriction is not necessar4. -n $arious 8a4s, irms ma4 create means o pa4ments themsel$es. A 6ill o e(chan7e or a note is not, in itsel , such a means. Ln the contrar4, it 7enerall4 requires inancin7 an& thus i7ures on the &eman& rather than the suppl4 si&e o the mone4 marEet. - , ho8e$er, it circulates in such a 8a4 as to e ect pa4ments, it 6ecomes an a&&ition to the circulatin7 me&ium. 'istoricall4, this has occurre& repeate&l4. An e(ample is a or&e& 64 the practice 8hich pre$aile& in the 2ancashire cotton in&ustr4 until at least the mi&&le o the nineteenth centur4. Banu acturers an& tra&ers &re8 6ills on each other 8hich, a ter acceptance, 8ere use& or the settlement o &e6ts &ue to other manu acturers an& tra&ers, much as 6anE notes 8oul& 6e. 3his shoul& 6e taEen into account in an4 estimate o the quantit4 o cre&it creation 6ut 8ill here 6e ne7lecte& throu7hout, 6ecause the statistical questions in$ol$e& arc entirel4 6e4on& us.
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<o$ernment iat mi7ht also ser$e the purpose o inancin7 enterprise. 3here ha$e 6een cases in 8hich it &i&. 3he ,raOilian 7o$ernment, or instance, inance& co ee plantations 64 this metho& in the se$enties. Bore requentl4, ho8e$er, this metho& 8as a&$ocate& 8ithout 6ein7 actuall4 resorte& to. :rie&rich 2ist or instanceNpro$in7 there64 ho8 8ell he Ene8 ho8 to 7eneraliOe rom American e(perienceN8ishe& to see railroa& construction *sic [+ inance& in this 8a4. He insiste& a6o$e on the &i eences 6et8een the issue o 7o$ernment iat an& cre&it creation 64 6anEs, not 6ecause o the &i erence 6et8een the creatin7 a7encies 6ut 6ecause o the &i erence in the purposes usuall4 associate& 8ith the t8o, 8hich is 8hat accounts or the &i erence in e ects. :or it must ne$er 6e or7otten that the theor4 o cre&it creation as, or that matter, the theor4 o sa$in7, entirel4 turns on the purpose or 8hich the create&N or sa$e&N means o pa4ment are use& an& on the success 8hich atten&s that purpose. 3he quantit4-theor4 aspect or, as 8e mi7ht also sa4, the a77re7ati$e aspect o the practice is entirel4 secon&ar4. 3he trou6le 8ith John 2a8 8as not that he create& means o pa4ment in $acuo, 6ut that he use& them or purposes 8hich aile& to succee&. 3his 8ill ha$e to 6e emphasiOe& a7ain an& a7ain. He no8 e(clu&e 7o$ernment iat 6ecause o its historical association 8ith consumpti$e e(pen&iture, an& are thus le t 8ith @cre&it creation 64 6anEs.@ Anticipatin7 &iscussion in su6sequent chapters, 8e ma4 at once ree our theor4 o 6anEin7 rom part o its apparent unrealit4. :inancin7 o enterprise has 6een assi7ne& lo7ical priorit4 in the sense that this is the onl4 case in 8hich len&in7 an& the a& hoc creation o means o pa4ment are essential elements o an economic process the mo&el o 8hich 8oul& 6e lo7icall4 incomplete 8ithout them. ,ut the amiliar picture o 6anEin7 6usiness as it is can easil4 6e &e$elope& rom that element. 3he loans to entrepreneurs nee& not 6e repai&, 6ut can 6e, an& o ten are, rene8e& in such a 8a4 as to maEe the correspon&in7 amount o means o pa4ment permanentl4 part o the circulatin7 me&ium. -n the &isequili6ria cause& 64 inno$ation other irms 8ill ha$e to un&ertaEe in$estments 8hich cannot 6e inance&
11F
rom current receipts, an& hence 6ecome 6orro8ers also. Hhene$er the e$olutionar4 process is in ull s8in7, the 6ulE o 6anE cre&it outstan&in7 at an4 time inances 8hat has 6ecome current 6usiness an& has lost its ori7inal contact 8ith inno$ation or 8ith the a&apti$e operations in&uce& 64 inno$ations, althou7h the histor4 o e$er4 loan must lea& 6acE to the one or the other. 3G - , inall4, 8e insert consumers" 6orro8in7 on the one han&, an& sa$in7 on the other, 8e ha$e 6e ore us not onl4 all the elements o 8hich the practice o a 6anE actuall4 consists, 6ut also the e(planation o the act that current, or @re7ular,@ 6usiness has 6een emphasiOe& to the point o 7i$in7 rise to a theor4 o 6anEin7 8hich reco7niOes nothin7 else 6ut the inancin7 o current commo&it4 tra&e an& the len&in7 o surplus un&s to the stocE e(chan7e, an& to a canon o the morals o 6anEin7 64 8hich the unction to 8hich 8e assi7n lo7ical priorit4 is almost e(clu&e& rom the thin7s a 6anEer mi7ht properl4 &o. He shall see, ho8e$er, that this &oes not in$ali&ate our $ie8 an& that cre&it creation or the purpose o inno$ation asserts itsel an& supplies the chie moti$e po8er or the $ariations in cre&it outstan&in7, all the same. 3he latter assertion 8ill ha$e to =usti 4 itsel in our anal4sis o monetar4 time series. ,ut it is necessar4 to a&$ert at once to its 6earin7 on the mo&em contro$ers4Nit is reall4 the mo&ern orm o a $er4 ol& contro$ers4Na6out the commercial $s. the in$estment theor4 o 6anEin7. ,4 commercial, or classical, theor4 8e mean the one allu&e& to in the prece&in7 para7raph. -n$estment theor4 8e call the theor4 8hich &e ines the unction o the 6anEin7 s4stem, not in terms o an4 speci ic t4pe o transaction, 6ut in terms o the amount o &eposits 8hich results rom all the possi6le transactions a 6anE can em6arE upon. 3he torn in$estment theor4 has 6een chosen 6ecause
3G
3he a6o$e proposition 8ill 6e quali ie& later on, 8hen account 8ill 6e taEen o the case o inancin7 6usiness losses. @Bust@ here is no moral imperati$e, 6ut simpl4 in&icates the act that, unless that requirement 6e ul ille&, an important &ement o the capitalist en7ine is put out o operation an& that certain consequences 8ill ollo8 rom this
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in$estment, in the sense o the purchase o assets, 6on&s in particular, is the transaction 8hich 6anEs can most nearl4 e ect on their o8n initiati$e an& in 8hich the4 are less than in an4 other &epen&ent on the initiati$e o their customers. .o8, it is e(tremel4 &i icult to con$e4 a correctl4 6alance& impression o the relati$e merits o these t8o @theories@ an& o the reasons 8h4 8e ha$e to &isa7ree 8ith 6oth. 3his &i icult4 is &ue not onl4 to the act that neither is a scienti ic theor4"N6oth aim at 7i$in7 practical a&$ice a6out ho8 6anEers shoul& 6eha$e or 6e ma&e to 6eha$eN6ut also the act that the propositions hel& 64, or implie& in, 6oth o them are not simpl4 contra&ictor4 or ri7ht or 8ron7 all alon7 the line. 3he commercial theor4 8ith ol&er 8riters o ten has 6een associate& 8ith a &enial o the act o cre&it creation, sometimes e(presse& in the phrase > ,anEers can len& onl4 8hat has 6een entruste& to them 64 &epositors. Apart rom this misconception o 8hat &eposit 6anEin7 means, there is no &e inite error in 8hat it hol&s an& plent4 o 8is&om in 8hat it a&$ocates. -n particular, it shoul& 6e clearl4 realiOe& that no ar7ument ollo8s rom our theor4 a7ainst 6anEs" specialiOin7 in the current 6usiness o &iscountin7 commercial paper or a7ainst the proposition, lai7el4 thou7h not 8holl4 true, that this 6usiness, to7ether 8ith len&in7 surplus un&s on the stocE e(chan7e, 8ill pro&uce that amount o &eposits 8hich 8ill equall4 a$oi& @in lationar4@ an& @&e lationar4@ impulses 6ein7 imparte& to the s4stem. Lur o6=ection to the commercial theor4 rests on its ailure to reach &o8n to the sources o the process o 8hich it &escri6es part o the sur ace, an& to &ia7nose correctl4 the nature o cre&it creation or other purposes than that o inancin7 current commo&it4 tra&e. 3his also o6scures the relation 8hich e$en @classical@ cre&it creation or short-time purposes 6ears to inno$ationN6est e(empli ie& 64 loans to the stocE e(chan7e, 8hich help to carr4 ne8 issuesNan& lea&s to a narro8 $ie8 a6out the unction o inance 6ills an& o cre&its in current account. 3hus the theor4 contri6utes, throu7h the phraseolo74 8hich it has 6een instrumental in creatin7, to 8hat ma4 6e &escri6e& as the mimicr4 o cre&it creation, especiall4 o cre&it creation or the
11G
purpose o inno$ation 8hich ten&s to hi&e 6ehin& cre&it creation or the purposes o current tra&e. -n this respect the in$estment theor4 is superior. ,ut it assi7ns to the @re7ulation o the lo8 o un&s 64 6anEs@ a causal role in the economic process 8hich &oes not 6elon7 to it an&, 64 its insistence on quantit4 o cre&it outstan&in7, entirel4 loses si7ht o the essential element o purpose. -t is important or the unctionin7 o the s4stem that the 6anEer shoul& Eno8, an& 6e a6le to =u&7e, 8hat his cre&it is use& or an& that he shoul& 6e an in&epen&ent a7ent. 3o realiOe this is to un&erstan& 8hat 6anEin7 means. 3o ha$e stresse& it, at least 64 implication, is one o the chie merits o the commercial theor4 o 6anEin7, =ust as it is one o the chie &emerits o the in$estment theor4N8hich is a t4pical outsi&er"s i&ea an& coul& ne$er, liEe its ri$al, ha$e 7ro8n out o practical 6anEin7 e(perienceNto ha$e o$erlooEe& it an& to ha$e ma&e 6anEin7 a mechanical unction 8hich mi7ht =ust as 8ell 6e ille& 64 some 7o$ernment &epartment /$en i he con ines himsel to the most re7ular o commo&it4 6ills an& looEs 8ith a$ersion on an4 paper that &ispla4s a suspiciousl4 roun& i7ure, the 6anEer must not onl4 Eno8 8hat the transaction is 8hich he is asEe& to inance an& ho8 it is liEel4 to turn out, 6ut he must also Eno8 the customer, his 6usiness, an& e$en his pri$ate ha6its, an& 7et, 64 requentl4 @talEin7 thin7s o$er 8ith him,@ a clear picture o his situation. ,ut i 6anEs inance inno$ation, all this 6ecomes immeasura6l4 more important. -t has 6een &enie& that such Eno8le&7e is possi6le. 3he repl4 is that all 6anEs 8ho at all ans8er to t4pe, ha$e it an& act upon it. 3he 7iant 6anEin7 concerns o /n7lan& ha$e their or7ans or su6si&iaries 8hich ena6le them to carr4 on that ol& tra&ition > the necessit4 o looEin7 a ter customers an& constantl4 eelin7 their pulse is one o the reasons or the &i$ision o la6or 6et8een the 6i7 6anEs an& the &iscount houses in the 2on&on mone4 marEet. 'o8e$er, this is not onl4 hi7hl4 sEille& 8orE, pro icienc4 in 8hich cannot 6e acquire& in an4 school e(cept that o e(perience, 6ut also 8orE 8hich requires intellectual an& moral qualities not present in all people 8ho taEe to the 6anEin7 pro ession. 'ence, &e$iations rom the theoretical t4pe must 6e
11J
e(pecte& to 6e much more requent than in those sectors o economic realit4 in 8hich 8e nee& not require more than or&inar4 intellectual an& moral aptitu&es o the @economic man.@ 3his &i icult4 is not peculiar to our mo&el. -t is met 64 an4one 8ho tries to &escri6e the 8a4 in 8hich the capitalist machine is 6ein7 run. Hhate$er our theories, 8e must all Tco7niOe that the lea&in7 unctions are not simple matters 8hich people can 6e e(pecte& to per orm as e ecti$el4 as the4 can 6e e(pecte& to lea$e an emplo4ment that o ers a lo8er or one that o ers a hi7her 8a7e, or to pro&uce 6eans instea& o peas i it pa4s 6etter M 6ut that the4 are &i icult to ul ill, so much so that man4 o those 8ho attempt to ill them are hopelessl4 6elo8 the marE in a sense in 8hich e$en the su6a$era7e 8orEman, cra tsman, anner is not. 3his is, o course, so 8ith entrepreneurs. ,ut in their case 8e taEe account o it 64 reco7niOin7 rom the start that a ma=orit4 o 8oul&-6e entrepreneurs ne$er 7et their pro=ects un&er sail an& that, o those 8ho &o, nine out o ten ail to maEe a success o them. -n the case o 6anEers, ho8e$er, ailure to 6e up to 8hat is a $er4 hi7h marE inter eres 8ith the 8orEin7 o the s4stem as a 8hole. Boreo$er, 6anEers ma4, at some times an& in some countries, ail to 6e up to the marE corporati$el4 > that is to sa4, tra&ition an& stan&ar&s ma4 6e a6sent to such a &e7ree that practicall4 an4one, ho8e$er lacEin7 in aptitu&e an& trainin7, can &ri t into the 6anEin7 6usiness, in& customers, an& &eal 8ith them accor&in7 to his o8n i&eas. -n such countries or times, 8il&cat 6anEin7 &e$elops. 3his in itsel is su icient to turn the histor4 o capitalist e$olution into a histor4 o catastrophes. Lne o the results o our historical sEetch 8ill, in act, 6e that the ailure o the 6anEin7 communit4 to unction in the 8a4 require& 64 the structure o the capitalist machine accounts or most o the e$ents 8hich the ma=orit4 o o6ser$ers 8oul& call @catastrophes.@ Since such ailure primaril4 sho8s in &ealin7 8ith no$el propositionsN8here =u&7ment is most &i icult an& temptation stron7estNan association has &e$elope& 6et8een inancin7 inno$ation an& miscarria7e or miscon&uct 8hich, ho8e$er un&erstan&a6le, &oes not maEe anal4sis an4 easier.
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.ot less important or the unctionin7 o the capitalist machine is it that 6anEs shoul& 6e in&epen&ent a7ents. - the4 are to ul ill the unction 8hich has a6o$e 6een illustrate& 64 the analo74 8ith that socialist 6oar& 8hich e(amines an& passes upon the inno$ations en$isa7e& 64 the e(ecuti$e, the4 must irst 6e in&epen&ent o the entrepreneurs 8hose plans the4 are to sanction or to re use. 3his means, practicall4 speaEin7, that 6anEs an& their o icers mustJ not ha$e an4 staEe in the 7ains o enterprise 6e4on& 8hat is implie& 64 the loan contract 3his in&epen&ence, most nearl4 realiOe& in /n7lish 6anEin7, has al8a4s 6een threatene& 64 attempts o entrepreneurs to 7ain control o$er 6anEs an& 64 attempts o 6anEs or their o icers to 7ain control o$er in&ustr4. ,ut another Ein& o in&epen&ence must 6e a&&e& to the list o requirements > 6anEs must also 6e in&epen&ent o politics. Su6ser$ience to 7o$ernment or to pu6lic opinion 8oul& o6$iousl4 paral4Oe the unction o that socialist 6oar&. -t also paral4Oes a 6anEin7 s4stem. 3his act is so serious 6ecause the 6anEer"s unction is essentiall4 a critical, checEin7, a&monitor4 one. AliEe in this respect to economists, 6anEers are 8orth their salt onl4 i the4 maEe themsel$es thorou7hl4 unpopular 8ith 7o$ernments, politicians, an& the pu6lic. 3his &i& not matter in the times o intact capitalism. -n the times o &eca&ent capitalism this piece o machiner4 is liEel4 to 6e put out o 7ear 64 le7islation. 3he moti$e, as 8ell as the =usti ication, or speaEin7 in such cases o a theoretical t4pe an& a &e$iatin7 realit4 lies in the &ia7nostic $alue o this &istinction, an& 8ill 6e e(empli ie& in our historical sur$e4. F. 3here are man4 8a4s in 8hich 6anEs ma4 manu acture means o pa4ment in ul illment o their promises to len&. Lnl4 t8o o them interest us hereNthe issue o 6anE notes an& the creation o 6alances, mislea&in7l4 calle& &eposits. 3here is no &i erence 6et8een them, e(cept, one o technique *8hich is responsi6le or &i iculties concernin7 the interpretation o statistics+, the note 6ein7 a 6alance em6o&ie& in a per ectl4 ne7otia6le paper an& the 6alance 6ein7 a note
119
8hich is trans era6le 3J, not 6o&il4 6ut 64 checE. Since the ormer has un&er7one, rom the orties o the nineteenth centur4 on, a chan7e in unction 8hich has rapi&l4 &epri$e& it o its role as a $ehicle o in&ustrial an& commercial mem6er-6anE cre&it, 8e 8ill in 7eneral thinE o the latter onl4, e(cept 8hen &iscussin7 patterns in 8hich the 6anE note actuall4 ille& that role. -n a ormal sense, all 6alances arc o course @create&.@ ,ut 8e con ine this term to 6alances the creation o 8hich increases the sum o e(istin7 means o pa4ment. 3hese are not necessaril4 @6orro8e&,@ 6ut ma4 also result rom sales o assets to a 6anE. -n this case the customer acquires an @o8ne&@ 6alance, as he &oes 8hen he &eposits le7al-ten&er mone4 or ne8l4 mine& or importe& monetar4 metalN thus acquirin7 6alances 8hich are o8ne& 6ut not create&Nthe onl4 cases in 8hich the term &eposit *in the sense o &eposition irre7ulare+ is appropriate. - 8e use the 8or& &eposit instea& o the 8or& 6alance, 8e 8ill &istin7uish these cases 64 the term ori7inal &eposits rom create& &eposits. Althou7h these &eposits &o not increase the means o pa4ment, the ne8l4 mine& or importe& monetar4 metal itsel &oes, an& it is 8orth noticin7 that, opportunel4 time&, such a&&itions to the stocE o le7al ten&er ma4 replace cre&it creation that 8oul& other8ise ha$e come a6out. ;epositin7 @ol&@ le7al ten&er 8hich circulate& 6e ore, also increases &eposits, 6ut not the sum o e(istin7 means o pa4ment. ;urin7 the 7ro8th o &eposit 6anEin7, 8hich in America, /n7lan&, an& <erman4 8as su6stantiall4 complete& 6e ore the Horl& Har, le7al-ten&er mone4 8hich ha& pre$iousl4 circulate& outsi&e o the 6anEin7 sphere Eept on streamin7 into 6anEs. As lon7 as this process pla4e& an4 si7ni icant role, there 8as a special tren& in the i7ure o total &eposits, an& a num6er o propositions usuall4 ma&e a6out &eposits require quali ication or countries an& perio&s in 8hich that 8as the case. Bostl4 8e shall consi&er a per ectl4 &e$elope& s4stem o &eposit 6anEin7 in 8hich le7al ten&er, 8hile mo$in7 into
3J
@Bust@ here is no moral imperati$e, 6ut simpl4 in&icates the act that, unless that requirement 6e ul ille&, an important &ement o the capitalist en7ine is put out o operation an& that certain consequences 8ill ollo8 rom this
1)0
an& out o 6anEs, ne$er enters into 6anEs or the irst time unless ne8l4 issue&. ,ut it shoul& 6e 6orne in min& that 64 &oin7 so on principle 8e 8oul& lea$e out o account a act 8hich ma4 6e $er4 important. :or instance, the ans8er to the question ho8 ar the all in 7ol& pro&uction 8hich occurre& a ter 18J3 can ha$e ha& an4 e ect on prices, lar7el4 &epen&s on our estimate o the immi7ration o le7al ten&er into 6anEs 8hich coinci&e& 8ith it. - pa4ments are ma&e out o a @6orro8e&@ 6alance, the pa4ee acquires 8hat or him is an @o8ne&@ &eposit, althou7h or our purpose it is pre era6le to sa4 that the @6orro8e&@ 6alance has 6een simpl4 trans erre& 8ithout losin7 that character. He ma4 &o so 6ecause, in an4 case, the increase in the 6alance o the pa4ee is compensate& 64 the &ecrease in the 6alance o the 6orro8er. Hhere 8e &istin7uish 6et8een time an& &eman& &eposits, trans er rom &eman& to time account, or $ice $ersa, causes uncompensate& $ariation in 6oth, 6ut there is still compensation 8ithin the sum total o all &eposits. - an ori7inal &eposit o @ol&@ le7al ten&er 6e ma&e, there is compensation 8ithin the total amount o means o pa4ment. .o ne8 @spen&in7 po8er@ emer7es. .or &oes an4 @spen&in7 po8er@ $anish i a customer cashes a checE. ,ut there ma4 6e compensation in still another sense. -n the case 8hich is the i&eal one rom the stan&point o the commercial theor4 o 6anEin7, 6alances are, sa4, 64 &iscountin7 commercial 6ills, create& a7ainst commo&itiesNra8 materials, or instanceN8hich ha$e =ust come into e(istence an& are a6out to start on their career throu7h the s4stem. 3hose 6alances are uncompensate& ones in an4 o the a6o$e meanin7s o the term. ,ut the4 ma4 6e sai& to 6e compensate& in the sense that the e ect on prices o the increase in the stream o mone4 is compensate& 64 a simultaneous increase in the stream o 7oo&s, as it also ma4 6e 8hene$er there are un&eremplo4e& resources. 3his proposition is not a6o$e criticism on $arious counts. ,ut it still e(presses a rou7h common-sense truth an& ma4 ser$e to characteriOe the &i erence 6et8een the classic case o cre&it creation an& the cases o cre&it creation or the inancin7 o inno$ation on the one han&, an& cre&it creation or the inancin7 o
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consumption on the other. 3he 6alances create& in the latter cases are not compensate& in an4 sense. ,ut their e ects 8ill 6e more than compensate& in the case i inno$ation 8hen the ne8 pro&ucts are release&. 3heir e ects 8ill ne$er 6e compensate&-Nan& can 6e eliminate& onl4 64 a &istinct an& pain ul operationNm the case o 7o$ernment in lation. :or the purpose o &escri6in7 pre8ar patterns it 8ill 6e con$enient to reason in 7eneral on a $er4 special case, namel4, the case o per ect 7ol& monometallism, an& to treat all other casesN 7ol&-e(chan7e stan&ar&, 6imetallism, 7o$ernment paper mone4, an& so onNas &e$iations rom it. ,ut it shoul& 6e clearl4 un&erstoo& that this is &one or con$enience onl4, an& not 6ecause an4 lo7ical priorit4 is attri6ute& to that case > 8e &o not, o course, mean to hol& that it is essential or le7al-ten&er mone4 to consist o , or to 6e co$ere& 64, 7ol&. Ln this un&erstan&in7 8e 8ill, in 7eneral, assume that there is, in the &omain un&er consi&eration, actual circulation o 7ol& coins an& o 6anE notes o the central as 8ell as o some other 6anEs, that those coins ma4 6e la8 ull4 melte& or e(porte&, that 7ol& is coine& or an4 pri$ate part4 8ithout char7e or loss o interest, that mem6er 6anEs must on &eman& re&eem their &eposits *or notes+ in 7ol& or notes o the 6anEers" 6anE, 8hich acts as clearin7 house or them an& must re&eem its notes in 7ol&. 3he o6li7ation to re&eem 6alances or notes in le7al ten&er or, in act, in an4thin7 8hich e(ists in&epen&entl4 o the action o 6anEs, o6$iousl4 restricts their po8er to create them. -n the s4stem no8 en$isa7e&, in 8hich re&emption must 6e e ecte& in a mone4 that at the same time ser$es in the role o small cash or the current transactions o 6usiness an& pri$ate li e, it means or each in&i$i&ual 6anE, on the one han&, the necessit4 o hol&in7 a stocE o till mone4 8ith 8hich to meet the or&inar4 an& e(traor&inar4 cash requirements o customers, an& on the other han&, the necessit4 o Eeepin7 a&$erse clearin7-house 6alances 8ithin the limits set 64 the practice o the 6anEers" 6anE. :or the 6anEin7 s4stem as a 8hole the limit ma4 6e
1))
&e ine& 64 the necessit4 o Eeepin7 the unit o account at par 8ith the unit o le7al ten&er, i.e., in our case, a certain quantit4 o 7ol&. He nee& not 7o into the $arious attempts 8hich ha$e 6een ma&e to i7ure out, or a 7i$en s4stem, the numerical $alue o that limit M 6ut the ollo8in7 remarEs su77est themsel$es. :irst, re&eema6ilit4 is a restriction on cre&it creation that is not implie& in the other rules o @classical 6anEin7@ an& 8ill, in 7eneral, e(clu&e transactions 8hich, 6ut or consi&eration o re&eema6ilit4, 8oul& 6e sanctione& 64 e$en the most conser$ati$e principles. -t is the sa et4 6raEe 8hich 7ol& monometallism automaticall4 inserts into the en7ine. - , in such a monetar4 s4stem, la8 or usa7e imposes urther restrictions, the4 cannot ha$e an4 other meanin7 e(cept to stren7then that 6raEe an& to maEe sure that it unctions. 3hose attempts to e$aluate the limit o cre&it creation are usuall4 concerne& 8ith the e ects o such le7al restrictions onl4 an& har&l4 e$er posit the un&amental pro6lem. Secon&, it 8oul& 6e &i icult to in&icate, in the a6sence o urther le7al or customar4 rules, the numerical $alue o that limit. 3his $alue &epen&s, or the in&i$i&ual mem6er 6anE, on the Ein& o customers it has an& on the Ein& o 6usiness these customers &o, on the amount o internal compensation 8hich is e ecte& on its 6ooEsN8ith the 7iant concerns o /n7lan& an& <erman4, a $er4 consi&era6le part o the sum total o checEs is &ra8n 64 customers in pa4ment to other customers o the same 6anENon ho8 7reat a risE it is 8illin7 to run, ho8 ar it is 8illin7 to lean on the 6anEers" 6anE, an& on the attitu&e o the latter. 3hir&, the limit is, particularl4 o$er time, e(tremel4 elastic. A 6anE &oes not e(pan& its cre&its sin7lehan&e&. -t &oes so 8hen others &o the same. 'ence, a&$erse clearin7-house 6alances are not so liEel4 to arise as the4 8oul& 6e i the other 6anEs sta4e& 6ehin&. 0ustomers can 6e e&ucate& an& to a certain e(tent e&ucate themsel$es to use less an& less actual cash in their transactions. 3he non6anEin7 sphere o
1)3
circulation ma4 6e conquere&. 3echnique ma4 len& its ai& > 8hene$er arran7ements a6out o$er&ra ts taEe the place o cre&itin7 customers" accounts 8ith the 8hole amount o loans, onl4 the amounts actuall4 &ra8n 8ill contri6ute to the sum total o &eposits. -n <erman4 acceptance cre&it, 8hich &oes not &irectl4 s8ell &eman& lia6ilities, 8as $er4 popular also or purposes other than inancin7 international tra&e. 3he shi tin7 o cash 6et8een 6anEs can 6e re7ulate& so as to maEe it support a hea$ier superstructure o &eposits. 3hus there are man4 &e$ices 64 8hich reser$e requirements mi7ht 6e almost in&e initel4 re&uce&, some o 8hich are operati$e e$en in the case o statutor4 restrictions. :inall4, la8 an& usa7e are themsel$es 6ut mo&es o e(pressionNthou7h possi6l4 $er4 ault4 onesNo the actors 8hich &etermine our limit, an& chan7e in response to chan7e in those actors c ., the successi$e increases o the le7al ma(imum amount o the notes o the ,anque &e :rance, - the4 &o not so chan7e, the4 are e$a&e& M 8itness the &e$elopment o the American trust companies alon7si&e o the 6anEs 8hich 8ere su6=ect to stricter re7ulations. .othin7, there ore, is so liEel4 to 7i$e a 8ron7 impression o the operation o cre&it as taEin7 a mechanistic an& static $ie8 o it an& ne7lectin7 the act that our process, 64 $irtue o its o8n 8orEin7, 8i&ens the limits 8hich, e( $isa o a 7i$en point o time, seem to 6e ri7i& etters. - that act 6e calle& in lation, then in lation has 6een 7oin7 on practicall4 all the time, no8here more than in this countr4, 8hile &e lationar4 in luence ori7inatin7 in the monetar4 s4stemN shorta7e o 7ol& an& the liEeNis a m4th. 3his ma4, accor&in7 to one"s stan&point, 6e $irtue or $ice. -t ma4 also 6e 7oo& in principle an& 8orE out 6a&l4 in practice, or $ice $ersa. -t ma4 6e a reason or or a reason a7ainst monetar4 mana7ement or, in 7eneral, planne& econom4. ,ut it is a act 8hich 8e must ne$er lose si7ht o , i 8e are to un&erstan& capitalist e$olution. 'o8 it has actuall4 8orEe& out 8e shall see in our historical &iscussion. 3o the question ho8 7reat a quantit4 o commo&ities an& ser$ices 8ill 6e 8ith&ra8n *9eal 2e$4+ rom its pre$ious uses 64 a 7i$en
1)F
quantit4 o ne8l4 create& cre&it, there is also no 7eneral ans8er. He must Eno8 the 8hole 6usiness situation on 8hich the creation impin7es, in or&er to rame an e(pectation as to ho8 it 8ill act, in this respect as in others M an& that 6usiness situation 8ill not onl4 &etermine the e ects o an4 7i$en amount o 6alances create& 6ut also that amount itsel . /$en the amount o cre&it creation in terms o mone4 is e(cee&in7l4 &i icult to measure, still more the net amount, i.e., the sum 8hich mem6er 6anEs" cre&it creation a&&s to the sum 8hich 6usiness 8oul& use in the a6sence o such creation. 3he &i icult4 arises not onl4 rom the inter erence o cre&it creation 8ith sa$in7 an& the act that create& 6alances are use& or other purposes 6esi&es pro&ucti$e $entures, 6ut also rom the acts that 8hat cre&it 6usiness actuall4 uses, or 8oul& use, is &i erent rom the amount o acilities put at its &isposal, an& that in the a6sence o cre&it creation not onl4 price le$els 6ut also sectional relations o prices 8oul& 6e &i erent rom 8hat the4 are.
1)5
3a6le o 0ontents
E. Inte!e t 1Mone" Ma!0et 2 Ca*ital3. :rom 8hat has 6een sai&
a6out entrepreneurs" pro its on the one han&, an& the role o mone4 an& cre&it on the other, 8e &eri$e certain propositions on interest as an element o the economic process 8hich 8e are 38 tr4in7 to &escri6e, or o the mo&el 8hich 8e are tr4in7 to construct. Hhiche$er o the man4 e(planations o the phenomenon o interest 8e ma4 hol&, all o us 8ill a7ree to the ollo8in7 &e inition, althou7h some o us ma4 thinE it $er4 super icial > -nterest is a premium on present o$er uture means o pa4ment, or, as 8e 8ill sa4 a potiori, 6alances. -nterest is the price pai& 64 6orro8ers or a social permit to acquire commo&ities an& ser$ices 8ithout ha$in7 pre$iousl4 ul ille& the con&ition 8hich in the institutional pattern o capitalism is normall4 set on the issue o such a social permit, i.e., 8ithout ha$in7 pre$iousl4 contri6ute& other commo&ities an& ser$ices to the social stream. :or a positi$e premium to emer7e, it is necessar4 that at least some people shoul& estimate a present &ollar more hi7hl4 than a uture &ollar. 3his ma4 result rom man4 circumstances. A man ma4 e(pect, or e(ample, 8hile 6ein7 a stu&ent, to ha$e a lar7er income in the uture than he has no8, a 7o$ernment ma4 similarl4 count on an increase in its re$enue, or it ma4 in& itsel in an emer7enc4Nas ma4 an4 pri$ate in&i$i&ual too, o courseNor all o us ma4 s4stematicall4 un&erestimate uture 8ants as compare& 8ith present 8ants o the same ranE. ,usiness 8ill pa4 a positi$e interest i a present sum can
38
3he theor4 o interest presente& in this section has also, liEe the theor4 o cre&it, 6een irst pu6lishe&, in the 8riter"s 3heor4 o /conomic ;e$elopment in 1911. 3he man4 a&$erse criticisms it met ha$e aile& to con$ince him. ,ut since he naturall4 8ishes to minimiOe a$oi&a6le &i erences o opinion, he has en&ea$ore& throu7hout to ormulate the propositions in this 6ooE in such a 8a4 as to maEe them, 8here$er possi6le, accepta6le also to those 8ho &i er rom him in their $ie8s as to their nature o interest. 3his also applies to this section, most o the propositions o 8hich coul& 6e couche& in terms o an4 theor4 o interest.
1)G
6e so use& in commerce an& in&ustr4 as to 4iel& a 7reater sum in uture, Oero interest i the most lucrati$e operation 8ithin the horiOon o 6usinessmen is e(pecte& to 4iel&, all costs counte&, no more than the sum require& to can4 it out, an& ne7ati$e interest i , as is sometimes the case, nothin7 the4 can &o 8ill co$er costs. Surel4 there is nothin7 para&o(ical in that. He ma4 7o one step urther 8ithout touchin7 contro$ersial 7roun&. ,orro8in7 64 consumers, particularl4 7o$ernments, is o itsel su icient to en orce a positi$e rate o interest also or in&ustr4 an& tra&e, an& the 8riter has no 8ish to e(clu&e such cases or to minimiOe the quantitati$e importance o consumers" cre&it. ,ut in the sphere o 6usiness, inno$ation is the pillar o interest, 6oth 6ecause the pro it it 4iel&s to the success ul entrepreneur is the t4pical reason or a rea&iness to pa4 interestN or looEin7 upon present &ollars as a means o 7ettin7 more &ollars in the utureNan& 6ecause, as 8e ha$e seen, 6orro8in7 is, in the situation o an entrepreneur, the t4pical means o 7ettin7 those present &ollars. 3he relation o this to cre&it creation ollo8s rom our pre$ious ar7ument. All the more contro$ersial is the proposition that entrepre neurs" pro its an& relate& 7ains 8hich arise in the &isequili6ria cause& 64 the impact o inno$ation are, as ar as the 6usiness process itsel is concerne& an& apart rom consumers" 6orro8in7, the onl4 source o interest pa4ments an& the onl4 @cause@ o the act that positi$e rates o interest rule in the marEets o capitalist societ4. 3his means that in per ect equili6rium interest 8oul& 6e Oero in the sense that it 8oul& not 6e a necessar4 element o the process o pro&uction an& &istri6ution, or that pure interest ten&s to $anish as the s4stem approaches per ect equili6rium. 5roo o this proposition is $er4 la6orious 39, 6ecause it in$ol$es sho8in7 8h4 all the theories 8hich lea& to a &i erent result are lo7icall4 unsatis actor4. 'appil4, it is not necessar4 to enter upon it, 6ecause 8e shall not ha$e to use that
39
See 3heor4 o /conomic ;e$elopment, 0hap. K.
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proposition e(cept in $er4 e8 instances. All that the 8riter has to asE is that the rea&er assent to the mo&est statement o the prece&in7 para7raph, 8hile reser$in7 his ri7hts as to the nature o interest an& retainin7 some Ein& o rate o interest in his picture o the state o per ect equili6rium. He ma4, then, con ine oursel$es to a e8 remarEs an& pass on. :irst, the thesis that the capitalist class li$es on a return 8hich, e(cept or the inancin7 o con sumption, &eri$es rom inno$ation or processes &irectl4 in&uce& 64 inno$ation, an& 8oul&, hence, &isappear i economic e$olution cease&, is o some importance or 8hat ma4 6e terme& the economic sociolo74 o capitalism. Secon&, althou7h it is possi6le to &en4 that inno$ation is the onl4 @cause@ o interest 8ithin the realm o pro&uction an& commerce, it is not possi6le to &en4 that this @cause@ is su icient to pro&uce it in the a6sence o an4 other, or that a premium on present 6alances ollo8s rom our mo&el o the e$olutionar4 process in a 8a4 8hich is not open to an4 o those lo7ical o6=ections that ha$e 6een raise& a7ainst other theories o interest. Hhoe$er &issents rom the 8riter"s $ie8, 8oul& ha$e still to a&mit that cause into his picture o realit4, an& to e(pect it to assert itsel in the $ariations o the rate o interest. F0 3hir&, althou7h 7o$ernment 6orro8in7, chan7in7 premiums or risE 6earin7, currenc4 trou6les, e(tra-economic pressure, an& $ar4in7 or7aniOation o the marEets or loans cannot ail to &istort the picture, acts are more a$ora6le to that theor4 than theorists ha$e 6een so arNso much so that there is, i 8e accept the or&inar4 rules o scienti ic proce&ure, no reason to use an4 other. 3here is, ho8e$er, one point 8hich presupposes a contro$ersial theorem an& on 8hich it is less eas4 to compromise in such a 8a4 as to maEe it possi6le or the rea&er to accept the main ar7ument. -nterest has 6een &e ine& a6o$e in monetar4 terms, 6ut no8 it is necessar4 to insist that interest actuall4 is, not onl4 on the sur ace 6ut essentiall4, a
F0
'ence, the concession usuall4 ma&e to the 8riter"s theor4 o interest, that entrepreneurs" @&eman& or capital@ is normall4 the most important sin7le actor in tie 6eha$ior o interest, conce&es much more than it is meant to conce&e.
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monetar4 phenomenon an& that 8e lose it i 8e tr4 to pierce that sur ace. -t is a pa4ment or 6alances 8ith 8hich to acquire commo&ities an& ser$ices, not or the commo&ities an& ser$ices themsel$es that ma4 6e 6ou7ht 8ith those 6alances. -t is to this act alone that interest o8es its character as aNpotentiall4Npermanent income, or pro its in our sense are an essentiall4 temporar4 phenomenon an& &o not sta4 permanentl4 8ith an4 process o pro&uction an& tra&e or an4 collection o pro&ucers" 7oo&s W@real capital@+ that ma4 6e em6o&ie& in a irm. ,ut the len&er ma4 still secure a permanent income 64 shi tin7 his mone4 rom opportunit4 to opportunit4 as each o them arises. Some o them are, no &ou6t, $er4 much more &ura6le than others an& there are concerns 8ithin 8hich inno$ation 7oes on or 7enerations. ,esi&es, this necessit4 o shi tin7 &oes not appl4 to len&ers 8ho len& to consumers o in&e inite span o li e, such as 7o$ernments or municipalities. ,ut no 6usiness $enture 4iel&s eternal surpluses, as an4 len&er is 6oun& to in& out to his cost 8ho too con i&entl4 acts upon a 6elie in an4 o those theories o 8hich the a6stinence theor4 is a t4pical e(ample, or simpl4 upon a nai$e con$iction that interest is a price o some pro&ucti$e ser$ice in the same sense in 8hich 8a7es are a price o the ser$ices o la6or. 3he theor4 o interest thus hastil4 sEetche& &oes a8a4 8ith man4 spurious pro6lems 8hich, here as e$er48here else, are the consequence o lo7ical strains in an unsatis actor4 anal4tic structure. -t also allo8s o a much more natural interpretation than can 6e &eri$e& rom others, o the relations interest o6$iousl4 6ean to other monetar4 ma7nitu&es an& o its peculiar sensiti$eness to monetar4 polic4 M an& it seems particularl4 appropriate in a stu&4 o in&ustrial luctuation i 8e looE upon them as &e$iations rom a state o equili6rium. -nterest or, i the rea&er pre er, its &e$iation rom 8hat he 6elie$es 8oul& 6e its equili6rium $alue, then appears, 6ecause o its central position, as a Ein& o coe icient o tension in the s4stem, 8hich more nearl4 than an4 other sin7le i7ure e(presses the &e7ree o &isequili6rium present in the latter.
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3he premium on present, as a7ainst uture, 6alances is settle& 64 6orro8ersNmainl4 7o$ernments an& irmsNan& len&ersN mainl4 6anEs an& their satellitesN8ho to7ether orm 8hat is Eno8n as the Bone4 BarEet. 3here, e$er4 6anE has a sector o its o8n *8hence it ollo8s that 8e ha$e 6e ore us another case o imper ect competition+, consistin7 o its stocE o more or less permanent customers, 8hile transactions that cut across these sectors maEe up the Lpen BarEet ,ehin& this an&, as 8e ha$e seen, at one remo$e rom it, is the 0entral BarEet, consistin7 o the transactions 6et8een the 6anEers" 6anEs an& their 6anEin7 customers, 8hich 6ut in&irectl4 in luence the mone4 marEet proper, e(cept or an4 operations that the ormer ma4 un&ertaEe in the open marEet. .o8, interpretation o mone4-marEet e$ents 64 means o that theor4 o interest una$oi&a6l4 runs on lines 8hich &i er su6stantiall4 rom those o 6oth ol&er an& more recent &octrine. 3he necessit4 o reconcilin7 a nonmonetar4 theor4 8ith o6$ious acts o the sphere o mone4 an& cre&it is, in particular, responsi6le or the i&ea that there are t8o Ein&s i interest rates, a @natural@ or @real@ one 8hich 8oul& also e(ist in a 6arter econom4 an& 8hich represents the essence o the phenomenon, a permanent net return rom ph4sical means o pro&uction, an& a monetar4 one, 8hich un&amentall4 is 6ut the ormer"s re le( in the monetar4 sphere. 3he t8o ma4, ne$ertheless, &i er o course or 6e ma&e to &i er 64 monetar4 polic4 or 64 an e(pansion or contraction o 6anE cre&it, 6ut this constitutes a &istur6ance rom 8hich a &e inite strin7 o consequences, amon7 them the 6usiness c4cle itsel , has 6een &e&uce&. 3he roots o this i&ea reach $er4 ar into the past an& are clearl4 &iscerni6le in the /n7lish monetar4 &iscussions o the ourth an& i th &eca&es o the nineteenth centur4. -ts role in the thou7ht o our o8n time is &ue to the teachin7 o Pnut HicEsell an& to the 8orE o a 6rilliant 7roup o S8e&ish an& Austrian economists. :or us, ho8e$er, there is no such thin7 as a real rate o interest, e(cept in the same sense in 8hich 8e speaE o real 8a7es > translatin7 6oth the interest an& the capital items o an4 loan transaction into real terms 64 means o the e(pecte& $ariation in an
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in&e( o prices, 8e ma4 &eri$e an e(pecte& an&, 64 per ormin7 the same operation e( post, an actual rate o interest in terms o @comman& o$er commo&ities.@ ,ut nominal an& real rates in this sense are onl4 &i erent measurements o the same thin7 or, i 8e pre er to speaE o &i erent thin7s e$en in thise case, it is the monetar4 rate 8hich represents the un&amental phenomenon, an& the real rate 8hich represents the &eri$e& phenomenon. 'ence, the mone4 marEet 8ith all that happens in it acquires or us a much &eeper si7ni icance than can 6e attri6ute& to it rom the stan&point =ust 7lance& at. -t 6ecomes the heart, althou7h it ne$er 6ecomes the 6rain, o the capitalist or7anism. F1 -t is not &i icult to see, ho8e$er, that most o the pro6lems tra&itionall4 &ealt 8ith un&er the hea&in7 o interest 8ill also present themsel$es to our approach, an& that man4 relations 6et8een interest an& other elements o the s4stem 8ill ha$e to 6e ormulate& in a manner not so ar remo$e& rom the usual one as mi7ht 6e e(pecte&. L this 8e can con$ince oursel$es at once. He ha$e =ust &enie& the $er4 e(istence o 8hat has 6een calle& the natural rate o interest an& &o not inten& to put another ima7inar4 entit4 in its place. ,ut it &oes not ollo8 that all the relations must necessaril4 $anish rom our anal4sis 8hich ha$e 6een asserte& to hol& 6et8een it an& the monetar4 rate. :or, as ar as pro its are the 6asic act a6out interest an& 6oth its source an& its @cause,@ the4 8ill, althou7h no permanent
F1
Boreo$er, pro its in our sense &ispla4 no ten&enc4 to8ar& equaliOation. 3his an& the essentiall4 temporar4 character o pro its in our sense shoul& 6e su icient to maEe it quite clear that 6oth our &istinction 6et8een pro it an& interest an& the relation 6et8een them is not i&entical 8ith an ol& &istinction 6et8een normal 6usiness pro its an& contractual interest. 'o8e$er much the 8riter 8elcomes an4thin7 that 8ill linE his teachin7 to ol&er &octrine, he must point out, irst, that normal pro its an& interest are, accor&in7 to this $ie8, still the same thin7N e(actl4 as contractual an& &irectl4 earne& rent o natural a7ents isN 8hich he thinEs erroneous, an&, secon&, that the anal4tic pro6lem 8hich he un&ertooE to sol$e 64 his theor4 o interest 8as precisel4 to sho8 ho8 it is possi6le that a theoreticall4 permanent income lo8s rom essentiall4 transient sources an& that it shoul& not &isappear as a net return throu7h a process o imputation.
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returnsl an& althou7h not 6eha$in7 e(actl4 as that natural rate is suppose& to 6eha$e, pla4 a similar role in our schema, an& those relations 6et8een natural an& monetar4 interest 8ill in man4, althou7h not in all, respects 6e replace& 64 relations 6et8een pro its an& interest not toto coelo &i erent rom them. .or shoul& the act theor4 o capital, 8hich $ie8s it, on the one han&, as an accountin7 concept Nas measurin7 in terms o mone4 the resources entruste& to a irm F)Nan&, on the other han&, as a monetar4 quantit4. -t is 6est to a$oi& alto7ether a term 8hich has 6een the source o so much con usion an& to replace it 64 8hat it means in e$er4 caseN equipment or interme&iate 7oo&s an& so onNan& this 8e shall &o, e(cept in cases in 8hich no misun&erstan&in7 is liEel4 to arise. ,ut those t8o monetar4 concepts open a ser$icea6le &oor 64 8hich to intro&uce the element o mone4 into 7eneral theor4. Lnl4 the secon& is, ho8e$er, rele$ant here. 0apital in this sense is not 7oo&s 6ut 6alances, not a actor o pro&uction 6ut a &istinct a7ent 8hich stan&s 6et8een the entrepreneur an& the actors. -t can 6e create& 64 6anEs 6ecause 6alances can. -ts increase an& &ecrease are not the same as increase an& &ecrease o commo&ities or an4 particular class o commo&ities. -ts marEet is simpl4 the mone4 marEet, an& there is no other capital marEet. .o realistic meanin7 attaches to the statement that, in the latter, @capital@ *] some Ein& or other o pro&ucers" 7oo&s+ is 6ein7 "lent in the orm o mone4.@ ,ut a7ain as in the case o interest the intro&uction into our anal4sis o this concept o capital &oes not &o a8a4 8ith the pro6lems o 8hat is tra&itionall4 re erre& to as real capitalNon the contrar4, the4 reappear thou7h in a ne8 7ar6N an& results arri$e& at 64 means o a monetar4 theor4 o capital not al8a4s in$ali&ate, 6ut in man4 cases onl4 re ormulate, the proposition o @real@ theories o capital. - our un&erstan&in7 o the processes o capitalist societ4 hin7es on realiOin7 the act that monetar4 capital is a
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0apital in this sense inclu&es all &e6ts, 8hether o8e& to a 6anE or to other irms or to 6on&hol&ers. 3his is in accor&ance 8ith the principles o accountin7, accor&in7 to 8hich capital in the usual sense i7ures alon7 8ith all &e6ts on the lia6ilit4 si&e o the 6alance sheet.
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&istinct a7ent, it also hin7es on realiOin7 ho8 it is relate& to the 8orl& o commo&ities.
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K
0hapter -K 3'/ 0L.3L#9S L: /0L.LB-0 /KL2#3-L.
3a6le o 0ontents
A. The 4o!0ing of the Model 2 Fi! t A**!o5imation. -t 8ill 6e
use ul to assem6le the anal4tic tools so ar &escri6e& an& to &ispla4 the resultin7 sEeletonNa sort o chassis o our mo&el. /(perience teaches that there is &an7er in &oin7 this, an& another appeal to the rea&er is in or&er, to reser$e =u&7ment an& to 7rant pro$isionall4 all simpli ications, in particular, the assumption o per ect competition *8ith the possi6le e(ception o isolate& monopol4 positions+ an& o a state o per ect equili6rium rom 8hich to start. 3here is no sa$in7, population is constant, an& e$er4thin7 else is as 8e assume it to 6e in a state that con orms to the i&ea o the 3heoretical .orm. He Eno8 that, in the institutional pattern o capitalist societ4, there 8ill al8a4s 6e possi6ilities o .e8 0om6inations *in the a6sence o all others, there 8oul& 6e those &ue to the stea&4 increase o Eno8le&7e+, an& al8a4s some people a6le an& 8illin7 to carr4 them out M an& 8e Eno8 the reasons 8h4 this is so. 3o repeat a7ain a point 8hich has o ten 6een misun&erstoo&, these people are 64 no means looEe& upon as particularl4 rare 6ir&s. All 8e postulate is that that a6ilit4 is
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&istri6ute& as unequall4 as others are an& all 8e hol& is that this act has an important in luence on the mechanism o economic chan7eNa statement 8hich is no 6ol&er an&, i an4thin7, more realistic than an4 o the set o assumptions amiliar to e$er4 theorist. Boti$ation is supplie& 64 the prospect o pro it in our sense 8hich &oes not, 6e it remem6ere&, presuppose either an actual or an e(pecte& rise in prices an& e(pen&iture. Hhat ollo8s implies, 6esi&es institutional an& technolo7ical assumptions that are essential, others o merel4 e(positor4 si7ni icance. -n or&er to maEe the principle stan& out clearl4, 8e 8ish in particular to assume, in the irst instance, a6sence o certain elements 8hich in realit4 are $er4 importantNnota6l4, errors in &ia7nosis or pro7nosis an& other mistaEes. Some people, then, concei$e an& 8orE out 8ith $ar4in7 promptness plans or inno$ations associate& 8ith $ar4in7 anticipations o pro its, an& set a6out stru77lin7 8ith the o6stacles inci&ent to &oin7 a ne8 an& un amiliar thin7No6stacles 8hich ha$e 6een &iscusse& in the prece&in7 chapter. He looE upon a6ilit4 to taEe the lea& as a part o the entrepreneurial aptitu&e, an& this ena6les us, or our present purpose, to i&enti 4 one man *as 8e coul& i&enti 4 the tallest in&i$i&ual in a population+ 8ho is the irst, or e(ample, to &eci&e on the pro&uction o a ne8 consumers" 7oo&. 3he reason 8h4 he &i& not &o so 6e ore is in &istur6ances 8hich 8e assume to ha$e prece&e& the equili6rium rom 8hich 8e start. 0on ormin7 to pre$ious consi&erations, 8e suppose that he oun&s a ne8 irm, constructs a ne8 plant, an& or&ers ne8 equipment rom e(istin7 irms. 3he requisite un&s he 6orro8s rom a 6anE. Ln the 6alance acquire& 64 so &oin7 he &ra8s, either in or&er to han& the checEs to other people 8ho urnish him 8ith 7oo&s an& ser$ices, or in or&er to 7et currenc4 8ith 8hich to pa4 or these supplies. #n&er our assumptions he 8ith-&ra8s, 64 his 6i&s or pro&ucers" 7oo&s, the quantities o them he nee&s rom the uses 8hich the4 ser$e& 6e ore. 3hen other entrepreneurs ollo8, a ter them still others in increasin7 num6er, in the path o inno$ation, 8hich 6ecomes
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pro7ressi$el4 smoothe& or successors 64 accumulatin7 e(perience an& $anishin7 o6stacles. He Eno8 the reasons 8h4 this is liEel4 to happen in the same iel& or in relate& iel&s > althou7h in some respects a success ul inno$ation 8ill maEe other inno$ations easier to can4 out in an4 iel&, it primaril4 acilitates them in the lines in 8hich it ma4 6e &irectl4 copie& as a 8hole or in part or or 8hich it opens up ne8 opportunities. 0onsequences 6e7in to maEe themsel$es elt all o$er the s4stem in per ectl4 lo7ical concatenation. 3he4 are almost too o6$ious to &escri6e. :irst, our entrepreneurs ma4, un&er the circumstances en$isa7e&, 6e relie& on to spen& their &eposits promptl4, e(ceptin7 a minimum reser$e. - 8e multipl4 the amount o create& 6alances 64 the $elocit4 i7ure that o6taine& in the pre$ious equili6rium, in the truest quantit4-theor4 st4le, 8e shall 7et a air appro(imation to the total 64 8hich the $olume o pa4ments 8ill 6e increase& 64 this Ein& o e(pen&iture alone, since no6o&4 o all those 8ho recei$e pa4ments rom entrepreneurs, has an4 &e6ts to repa4 or an4 moti$e to increase his cash reser$e 6e4on& its pre$ious proportion to his transactions, an& since 8e are consi&erin7 a close& &omain. F3 Secon&, there 6ein7 no unemplo4e& resources to start 8ith, prices o actors o pro&uction 8ill rise, an& so 8ill mone4 incomes an& the rate o interest *or, as the 8riter thinEs it 8oul& 6e more correct to sa4, a positi$e rate o interest 8ill emer7e+. 0osts 8ill rise a7ainst @ol&@ irms as 8ell as a7ainst entrepreneurs. ,ut thir&, their receipts 8ill also rise correspon&in7l4 to the e(pen&itures o entrepreneurs on pro&ucers" 7oo&s, o the 8orEmen an& so on, no8 emplo4e& 64 them at hi7her 8a7es, an& o the recipients o all those increase& pa4ments. 'o8 in&i$i&ual irms or in&ustries or sectors o the in&ustrial or7anism 8ill are in this process &epen&s on the shi ts in &eman& that 8ill occur in consequence. 3here 8ill 6e 6oth 7ains an& losses. -n spite o the losses in some in&ustries, 8hich must 6e e(pecte& to 6e a eature o the situation, all ol& irms taEen to7ether 8ill, o course, sho8 a net surplus. L this 8e can satis 4 oursel$es i , &isre7ar&in7
F3
2ater 8e shall see reason or assumin7 that the e ect 8ill 6e 7reater than state& a6o$e, 6ot no8 8e &o not 8ish to complicate matters.
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e$er4thin7 e(cept the irst t8o stepsN i.e., &is6ursements 64 entrepreneurs an& a7ain the ne(t &is6ursement 64 income recei$ersN 8e assume that la6or is the onl4 actor, 8a7es are the Lnl4 cost. 3hen ol& irms 8ill ha$e to pa4 6ut a part o the increase in the sum total o the incomes that has occurre&, i.e., the increase in the income o those 8orEmen 8hom the4 still retain 8hile the4 8ill, at the secon& turn o the 8heel an& 6e ore the ne8 pro&ucts reach their marEets, recei$e the 8hole o it. 'o8e$er unrealistic, this case 6rin7s out the principle ree rom all complications an& in&epen&ent o an4 reactions o mar7inal cost in ph4sical terms. -n an4 case, this is the process 64 8hich the e ects o the entrepreneurial acti$it4 sprea& o$er the 8hole s4stem, &islocatin7 $alues, &isruptin7 the equili6rium that e(iste& 6e ore. 3he term Hin& all correctl4 e(presses the character o 6oth these 7ains an& losses. :ourth, un&er our assumptions there coul&, in 7eneral, 6e no net increase in total output. L8in7 to the &i iculties inherent in the latter concept, this proposition ma4 =usti ia6l4 6e questione&. Hhat 8e mean is simpl4 that it is impossi6le or all in&ustries to increase their output un&er the circumstances assume&. All those 8ho maEe 7ains 8ill, in&ee&, tr4 to &o so M 6ut i 8e remem6er, on the one han&, that in the prece&in7 per ect equili6rium o per ect competition the4 all pro&uce& their optimum output, utiliOin7 in particular their plants up to the point at 8hich total unit cost 8as a minimum, an&, on the other han&, that quantities o actors o pro&uction pre$iousl4 use& 64 them ha$e 6een 8ith&ra8n, 8e shall conclu&e that i there 8ere onl4 one sin7le consumers" 7oo&, less o it 8oul& 6e pro&uce& no8 than ha& 6een pro&uce& in the prece&in7 state o equili6rium. -nstea&, more pro&ucers" 7oo&s 8ill 6e pro&uce&. 3hese, to7ether 8ith part o the others 8hich use& to 6e pro&uce& or the ol& irms, 8ill 6e taEen 64 our entrepreneurs. - there are man4 consumers" 7oo&s, an& i the pro&uction o some o them increases, then the pro&uction o others must &ecrease in such a 8a4 as to set ree more pro&ucti$e resources than are en7a7e& in 6rin7in7 a6out the e(pansion in the ormer. - 8e inclu&e in total output the interme&iate results o the current 8orE o
13J
6uil&in7 up the ne8 plants, then total output 8oul&, in the sense allu&e& to, 6e constant. - 8e &o not inclu&e them, it 8oul& 6e smaller. 3he output o consumers" 7oo&s 8ill all in an4 case unless there is no perio& o 7estation at all. -t shoul& 6e o6ser$e&, ho8e$er, that &eman& in terms o mone4 or consumers" 7oo&s has not &ecrease&. Ln the contrar4, it has increase&. 3his is all that happens, un&er our present assumptions, until the irst entrepreneur"s plant 7ets into 8orEin7 or&er. 3hen the scene 6e7ins to chan7e. 3he ne8 comom&itiesNlet us sa4, ne8 consumers" 7oo&sN lo8 into the marEet. 3he4 are, since e$er4thin7 turns out accor&in7 to e(pectation, rea&il4 taEen up at e(actl4 those prices at 8hich the entrepreneur e(pecte& to sell them. He 8ill also assume that rom that moment on8ar& the ne8 irm 8ill 7o on pourin7 out an unchan7in7 stream o consumers" 7oo&s 8ithout an4 urther chan7e in its pro&uction unction. A stream o receipts 8ill hence So8 into the entrepreneur"s account, at a rate su icient to repa4, &urin7 the li etime o the plant an& equipment ori7inall4 acquire&, the total &e6t incurre& plus interest, an& to lea$e a pro it or the entrepreneur. 2et us ima7ine a stron7 case an& assume 8hat, o course, happens onl4 in $er4 e(ceptional instances, that at the en& o a perio& not lon7er than the time that elapse& 6et8een the entrepreneur"s irst act o 6orro8in7 an& the completion o his plant, thin7s na$e so 8orEe& out that, the entrepreneur ha$in7 currentl4 ma&e all necessar4 replacements out o receipts an& ha$in7 &ischar7e& all his &e6ts to the 6anE, there64 annihilatin7 all the 6alances ne8l4 create& in his a$or, is le t 8ith plant an& equipment per ectl4 unencum6ere& an& in per ect 8orEin7 or&er, an& also 8ith a surplus 6alance su icient to ser$e him as @8orEin7 capital.@ - the same applies in the case o the other entrepreneurs that ollo8e& in the 8aEe o the irst an& are =ust no8, or ar7ument"s saEe, assume& to ha$e 6een similar pro&i7ies o oresi7ht, then the ollo8in7 situation arises > the ne8 irms, 7ettin7 successi$el4 into 8orEin7 or&er an& thro8in7 their pro&ucts into the marEet o consumers" 7oo&s, increase the total output o consumers" 7oo&s 8hich ha& 6een pre$iousl4 re&uce&. -n a certain sense it ma4 6e
138
hel& that un&er our assumptions output 8ill e$entuall4 6e increase& 64 @more@ than it ha& allen &urin7 the perio& o 7estation. 3hat is to sa4, i 8e compare the elements 8hich constitute total output o consumers" 7oo&s at the point o time 8hen the ne8 irms ha$e all 6e7un to pro&uce, 8ith total output as it 8as in the prece&in7 nei7h6orhoo& o equili6rium, an& i 8e cancel all items 8hich appear in 6oth composites, 8e are le t 8ith a list o plus an& minus items such that, e$aluate& at the prices that rule& in that nei7h6orhoo&, the sum o the ormer 8oul& necessaril4 6e 7reater than the sum o the latter. - there 8ere onl4 one consumers" 7oo&, an& i the inno$ation ha& consiste& in the intro&uction o a no$el metho& o pro&ucin7 it, the ph4sical quantit4 per unit o time o the ne8 total output 8oul& 6e 7reater than that o the ol& one. 3hese ne8 commo&ities intru&e into the economic 8orl& that e(iste& 6e ore at a rate 8hich 8ill, or reasons 7i$en in the prece&in7 chapter, 6e too 7reat or smooth a6sorption. 3he4 intru&e, ne$ertheless, 7ra&uall4 > the irst entrepreneur"s suppl4 8ill not, in 7eneral, cause $isi6le &istur6ance or 6e su icient to alter the comple(ion o the 6usiness situation as a 8hole, althou7h those irms ma4 6e imme&iatel4 a ecte& 8ith the pro&ucts o 8hich the ne8 commo&ities or the commo&ities pro&uce& 64 ne8 metho&s are &irectl4 competiti$e. ,ut, as the process 7athers momentum, these e ects stea&il4 7ain in importance, an& &isequili6rium, en orcin7 a process o a&aptation, 6e7ins to sho8. 3he nature o the e ects on the @ol&@ irms is eas4 to un&erstan&. -t superimposes itsel on the &isequili6rium cause& 64 the settin7 up o the ne8 plant an& equipment an& the e(pen&iture inci&ent thereto. ,ut 8hile the e ects o this 8ere, e$en in those cases in 8hich the4 spelle& net losses, so tene& 64 the lo8 o that e(pen&iture, the ne8 &isequili6rium en orces much more o6$iousl4 &i icult a&apatations. 3he4 procee& not e(clusi$el4 un&er the stimulus o loss. :or some o the @ol&@ irms ne8 opportunities or e(pansion open up > the ne8 metho&s or commo&ities create .e8 /conomic Space. ,ut or others
139
the emer7ence o the ne8 metho&s means economic &eath M or still others, contraction an& &ri tin7 into the 6acE7roun&. :inall4, there are irms an& in&ustries 8hich are orce& to un&er7o a &i icult an& pain ul process o mo&erniOation, rationaliOation an& reconstruction. -t shoul& 6e o6ser$e& that these $ital parts o the mechanism o economic e$olution, 8hich are rea&il4 seen to &ominate man4 6usiness situations an& to pro&uce results o un&amental importance, can ne$er 6e re$eale& statisticall4 64 measurin7 $ariation in an in&e( o pro&uction, or anal4Oe& theoreticall4 in terms o total output. Such an in&e( 8oul& not pro&uce those e ects. -t is &isharmonious or onesi&e& increase an& shi ts 8ithin the a77re7ati$e quantit4 8hich matter. A77re7ati$e anal4sis, here, as else8here, not onl4 &oes not tell the 8hole tale 6ut necessaril4 o6literates the main point o the tale. As lon7, ho8e$er, as ne8 entreprises continue to emer7e an& to pour their stream o e(pen&iture into the s4stem, all those e ects ma4 6e o$ercompensate&. 3he @turn@ nee& not come, i.e., the situation &escri6e& 6e ore nee& not 7i$e 8a4 to the situation 8e are tr4in7 to characteriOe no8, until entrepreneurial acti$it4 slacEens an& e$entuall4 stops. 'ence, it is essential to $isualiOe clearl4 the reasons 8h4 entrepreneurial acti$it4 in act slacEens an& stops at a point 8hich can 6e theoreticall4 &etermine&. -n actual li e so man4 acci&ents an& inci&ents com6ine to pro&uce this result that 8e are ne$er lacEin7 plausi6le reasons 8ith 8hich to e(plain that stoppa7e in an4 7i$en case. ,ut this o6scures the question o principle 8ith 8hich 8e are no8 concerne&N8hether the mechanism &escri6e& 8oul& in the a6sence o such inci&ents an& acci&ents ran on ore$er *on a @prosperit4 plateau@+ or come to a stop rom reasons inherent in it an& 64 $irtue o its o8n e ects an& o the 6usiness situations it creates. :irst, since entrepreneurial acti$it4 characteristicall4 starts o in a &e inite &irection an& &oes not &istri6ute itsel equall4 all o$er the in&ustrial iel&Nsince it aims t4picall4 at pro&uction o a 7i$en commo&it4 or a 7roup o commo&itiesNits possi6ilities are, in e$er4 instance an& in an4 7i$en state o the economic 6o&4, &e initel4 limite&. 3he results o inno$ation act &irectl4 on certain in&i$i&ual
1F0
prices, an& there ore set &e inite limits on urther a&$ance in that &irection or relate& &irections. An(ious as 8e are too =ust no8 to 8orE out onl4 the pure lo7ic o our su6=ect, an& to a$oi& an4thin7 o a consequentia] or inci&ental character, ho8e$er important it ma4 6e in practice, 8e 8ill e$en retain, or the moment, the heroic assumption that not onl4 the ull increase in the ne8 pro&uct, 8hich 8ill 6e 6rou7ht a6out 64 more an& more irms taEin7 up pro&uction, an& the inci&ent all in its price ha$e 6een per ectl4 correctl4 oreseen 64 the irst in the iel&, 6ut also that those 8ho came later also oresa8 correctl4 8hat possi6ilities 8ere le t to them. -t is eas4 to see that a point 8ill 6e reache& at 8hich our ne8 commo&it4 8ill 6e pro-&uce& at minimum unit cost equal to the price at 8hich it 8ill sell. 5ro its 8ill 6e eliminate&, the impulse o inno$ation 8ill, or the time 6ein7, ha$e spent itsel . ,ut secon&, since entrepreneurial acti$it4 upsets the equili6-rium o the s4stem an& since the release o the ne8 pro&ucts 6rin7s &isequili6ration to a hea&, a re$ision o $alues o all the &ements o the s4stem 6ecomes necessar4 an& this, or a perio& o time, means luctuations an& successi$e attempts at a&aptation to chan7in7 temporar4 situations. 3his, in turn, means the impossi6ilit4 o calculatin7 costs an& receipts in a satis actor4 8a4, e$en i necessar4 mar7ins are not alto7ether a6sent 8hile that 7oes on. 'ence, the &i icult4 o plannin7 ne8 thin7s an& the risE o ailure are 7reatl4 increase&. -n or&er to carr4 out M a&&itional inno$ations, it is necessar4 to 8ait until thin7s settle &o8n as it 8as in the 6e7innin7 to 8ait or an equili6rium to 6e esta6lishe& 6e ore em6arEin7 upon the inno$ations the e ects o 8hich 8e are no8 &iscussin7. FF 3here ore,
FF
Althou7h 8e are no8 concentratin7 on the tasE o carpenterin7 our lo7ical schema, it ma4 6e 8ell to point to the @ actual@ =usti ication o this the /n7lish 6oom at the en& o the se$enteenth centur4 &i& not start 6e ore. 1G88, the spurt in economic acti$it4 in the #nite& States at the en& o the si(ties o the nineteenth centur4, not 6e ore the en& o the 0i$il Har. Such e(amples coul&, o course, 6e rea&il4 multiplie&. ,ut i the rea&er a&mit that this is not more than sel -e$i&ent in the case o e(ternal &istur6ance, it ollo8s that it 8ill equall4 hol& true or &istur6ance o relati$e $alues throu7h an4 otherNi.e., internalNcause. 5ro essor Bachlup, in an a&&ress to the 8riter"s class on 6usiness c4cles, seems to ha$e e(presse& the matter elicitousl4 *thou7h rom a some8hat &i erent stan&point+ 64 sa4in7 that
1F1
alon7 8ith ne8 pro&ucts streamin7 into marEets, an& 8ith repa4ments increasin7 in quantitati$e importance, entrepreneurial acti$it4 ten&s to slacEen, until inall4 it ceases entirel4. 38o thin7s call or notice. :irst, the outstan&in7 con&uctor that sprea&s e ects all o$er the s4stem is entrepreneurs" e(pen&iture, an& this e(pen&iture is no8 6ein7 re&uce&. 3his proposition is not quite s4mmetrical to the analo7ous one in the case o the situation characteristic o the perio& o 7estation since there, the element o @cro8&in7 out the ol&@ 6ein7 a6sent, all e ects reache& the s4stem throu7h that one channel. ,ut 8hile mere stoppa7e o a&&itional 6orro8in7 *remem6er that so ar no6o&4 6orro8s 6ut entrepreneurs+ 8oul& 6e su icient un&er the circumstances to 6rin7 &iscom iture to man4 irms an&, in particular, to &epress the price le$el F5, 4et this is not all that happens. 9epa4ment o 6anE loans 64 entrepreneurs, annihilatin7 6alances, comes in to accentuate e ects. 3his process 8e shall &esi7nate 64 the term Auto&e lation. -t occurs 8ithout an4 initiati$e on the part o 6anEs an& 8oul& occur e$en i no6o&4 e$er 8ent 6anErupt or restricte& operations, an& i no 6anE e$er calle& or re use& a loan. He are not concerne& 8ith the questions 8hether a &i erent an& less passi$e reaction o the monetar4 mechanism 8oul& either intensi 4 or so ten the phenomena un&er consi&eration, an& 8hat monetar4 polic4 @shoul&@ 6e ollo8e& un&er the circumstances. All 8e are intereste& in at the moment is that mone4 an& cre&it &o react in a &e inite 8a4, that their 6eha$ior is nothin7 6ut a&aptation to an un&erl4in7 economic process 64 8hich that 6eha$ior, as 8ell as the
entrepreneurial risE o ailure is at a minimum in equili6rium an& slo8l4 rises as prosperit4 &e$elops. /ntrepreneurial acti$it4 stops at a point at 8hich that risE is a ma(imum. -t 8ill 6e seen that such an ar7ument is not, as it at irst si7ht seems, incompati6le 8ith our proposition that risE 6earin7 is no part o the entrepreneurial unction. .o irm coul& ho8e$er, un&er our present assumptions, 6e su6mer7e& merel4 64 a all in price le$el that 8oul& other8ise ha$e sur$i$e&. 3his is a truism consi&erin7 8e no8 assume a6sence o i(e& &e6t-char7es an& o @sticEiness@ in an4 cost elements, 4et 8orth remem6erin7. -t su ices to &ispel some o the errors surroun&in7 that su6=ect.
F5
1F)
6eha$ior o all a77re7ati$e quantities, is e(plaine&, 8hile the re$erse is not true. Secon&, the sum total o the phenomena 8e are sur$e4in7 orms a connecte& 8hole 8hich has a &e inite meanin7 an& ma4 6e sai& to ha$e a &e inite unction. -t constitutes the response 64 the s4stem to the results o entrepreneurial acti$it4Na&aptation to the ne8 thin7s create&, inclu&in7 the elimination o 8hat is incapa6le o a&aptation, resorption o the results o inno$ation into the s4stem, reor7aniOation o economic li e so as to maEe it con orm to the &ata as altere& 64 enterprise, remo&elin7 o the s4stem o $alues, liqui&ation o in&e6te&ness. #n&er our assumptions an& 8ith 6ut minor quali ications, that sequence o phenomena lea&s up to a ne8 nei7h6orhoo& o equili6rium, in 8hich enterprise 8ill start a7ain. 3his ne8 nei7h6orhoo& o equili6rium is characteriOe&, as compare& to the one that prece&e& it, 64 a @7reater@ social pro&uct o a &i erent pattern, ne8 pro&uction unctions, equal sum total o mone4 incomes, a minimum *strictl4 Oero+ rate o interest, Oero pro its, Oero loans, a &i erent s4stem o prices an& a lo8er le$el o prices, the un&amental e(pression o the act that all the lastin7 achie$ements o the particular spurt o inno$ation ha$e 6een han&e& to consumers in the shape o increase& real incomes. 3hus, as soon as the entrepreneurial impulse ceases to act 8hich propelle& it a8a4 rom its pre$ious nei7h6orhoo&, the s4stem em6arEs upon a stru77le to8ar& a ne8 one, un&er the in luence o orces 8hich shoul& no8 6e per ectl4 clear an& 8hich are, 6arrin7 occurrence o e(ternal &istur6ances, to lan& it there e$entuall4. 3he process taEes time an& ma4 &ispla4 oscillations an& relapses. ,ut it is at the 6ottom o all those apparentl4 irre7ular mo$ements &urin7 8hich losses seem to 6e stre8n at ran&om o$er the 8hole o economic li e, an& un&er present assumptions cannot cease until, throu7h ho8e$er man4 rearran7ements that are &isa$o8e& 64 the ne(t &a4, it has accomplishe& the tasE. -t is a lon7 8a4 rom this schema to historical act. -nnumera6le la4ers o secon&ar4, inci&ental, acci&ental, an& @e(ternal@ act an&
1F3
reactions amon7 all o them an& reactions to reactions co$er that sEeleton o economic li e, sometimes so as to hi&e it entirel4. ,ut the 8riter must ha$e 6een sa&l4 lacEin7 in e(positor4 sEill i the rea&er &oes not reco7niOe the common sense an& the realistic counterpart o this theoretical 8orl&, e$er4 element o 8hich linEs up 8ith a act o e$er4&a4 e(perience. He shall re er to this construction as the 5ure Bo&el or the :irst Appro(imation.
3a6le o 0ontents
B. Loo0ing at the S0eleton. Hhen 8e looE at the sEeleton, 8e
6ehol& the picture o a &istinct process in time 8hich &ispla4s unctional relations 6et8een its constituent parts an& is lo7icall4 sel containe&.1 3his process o economic chan7e or e$olution, moreo$er, 7oes on in units separate& rom each other 64 nei7h6orhoo&s o equili6rium. /ach o those units, in turn, consists o t8o &istinct phases, &urin7 the irst o 8hich the s4stem, un&er the impulse o enterpreneurial acti$it4, &ra8s a8a4 rom an equili6rium position, an& &urin7 the secon& o 8hich it &ra8s to8ar& another equili6rium position. /ach o those t8o phases is characteriOe& 64 a &e inite succession o phenomena. 3he rea&er nee& onl4 recall 8hat the4 are in or&er to maEe the &isco$er4 that the4 are precisel4 the phenomenon 8hich he associates 8ith @prosperit4@ an& @recession@ > our mo&el repro&uces, 64 its mere 8orEin7, that $er4 sequence o e$ents 8hich 8e o6ser$e in the course o those luctuations in economic li e 8hich ha$e come to 6e calle& 6usiness c4cles an& 8hich, translate& into the lan7ua7e o &ia7rams, present the picture o an un&ulatin7 or 8a$eliEe mo$ement in a6solute i7ures or rates o chan7e. -t is 8orth 8hile to pause in or&er to comment on this act. FG
FG
-t is, in lo7ic an& &iscar&in7 the in luence o e(ternal actors an& o 7ro8th, as sel contame& as is the stationar4 circuit lo8. 3ime enters, in&ee&, in a &i erent sense, 6ut it is still theoretic time, i.e., a time 8hich ser$es as an
1FF
:irst, it is 64 no means ar etche& or para&o(ical to sa4 that @pro7ress@ unsta6iliOes the economic 8orl&, or that it is 64 $irtue o its mechanism a c4clical process. A theor4 o economic luctuations runnin7 in terms o e(ternal actors plus inno$ations mi7ht 6e consi&ere& sel -e$i&ent an& onl4 another 8a4 o statin7 that there 8oul& 6e no c4cles in an un&istur6e& stationar4, or 7ro8in7, lo8. 3he rea&er shoul& Eeep this in min& in the mi&st o the complications 8hich must ine$ita6l4 ollo8 an& in the ace o the act that theor4 as 8ell as pu6lic opinion ha$e stea& astl4 re use& to taEe that commonsense $ie8 o the matter an& persiste& in tacitl4 assumin7 that @pro7ress@ is one thin7 *an& naturall4 smooth+ 8hile luctuations are another thin7, &i erin7 rom it, perhaps inimical to it. -t is, a ter all, onl4 common sense to realiOe that, 6ut or the act that economic li e is in a process o incessant internal chan7e, the 6usiness c4cle, as 8e Eno8 it, 8oul& not e(ist. 'ence, it is =ust as 8ell to tr4 to linE so o6$iousl4 important an element s4stematicall4 to an4 e(planation o the capitalist econom4 in 7eneral an& o 6usiness c4cles in particular. Lur proo that the e8 un&amental acts so ar inclu&e& in our mo&el su ice to pro&uce a @8a$e@ per$a&in7 economic li e, must in an4 case 6e o &ia7nostic $alue an& she& some li7ht on such luctuations as 8e o6ser$e. Secon&, the act that inno$ation 8oul& su ice to pro&uce alternatin7 prosperities an& &epression &oes not esta6lish, o course, that these c4cles are actuall4 the ones 8hich 8e historicall4 &esi7nate as 6usiness c4cles. /$en i 8e maEe the reser$ation as to e(ternal actors, there ma4 6e other @causes.@ Lur proposition that inno$ation Na7ain, 8hen seen in its true e(tent an& not con ine& to some part or orm o 8hat 8e mean 64 itNis actuall4 the &ominant element 8hich accounts or those historical an& statistical phenomena, is so ar onl4 a 8orEin7 h4pothesis, 8hich 8ill 6e on trial throu7hout this 6ooE.
a(is or a lo7ical *an& not merel4 historical+ sequence o e$ents- 3he rea&er shoul&, ho8e$er, 6ear in min& 8hat has 6een sai& in the prece&in7 chapter a6out the possi6ilit4 o pro itless an& o prosperit4less c4cles.
1F5
Boreo$er, our h4pothesis is not 4et in a shape to ser$e at all an& it remains to 6e seen ho8 much matter unconnecte& 8ith its present content 8ill ha$e to 6e a&&e& to it. ,ut, thir&, startin7 out rom an impression, &ra8n rom economic histor4, that it 8ill in act 8orE 8ell, 8e are encoura7e& not onl4 64 the rou7h a7reement o the s4mptoms 8hich our mo&el pro&uces 8ith the s4mptoms 8hich 8e actuall4 o6ser$e in the course o 6usiness c4cles, 6ut also 64 the ease 8ith 8hich certain elements, so ar 6anishe& rom our picture, it into it an& can 6e 7i$en their &ue 8ithout con&emnin7 us to an4 eclecticism. 3he4 seem, in&ee&, to acquire their true place an& si7ni icance onl4 8ith re erence to it. A e8 e(amples 8ill sho8 this. Bost stu&ents o the 6usiness c4cle ha$e 6een impresse& 64 the lo7ic 8ith 8hich one c4clical situation pro&uces the ne(t. 3his 8as reall4 the &isco$er4 8hich ushere& in the scienti ic stu&ies o the c4clical mechanism an& has more recentl4 6een stresse& 64 5ro essor Hesle4 Bitchell. ,ut i 8e stop there, our situation is o6$iousl4 unsatis actor4, or the process then lacEs the moti$e po8er an& looEs $er4 much a perpetuum mo6ile. 3hat &i icult $anishes an&, in particular, the crucial question o 8hat causes the turn rom prosperit4 into recession in&s a $er4 natural ans8er i 8e accept our schema. He acquire the ri7ht to looE upon recession as the reaction to prosperit4 in the 8a4 irst clearl4 reco7niOe& 64 Ju7lar, 8ithout ha$in7 in turn to e(plain prosperit4 64 prece&in7 recession. FJ
FJ
Hith Ju7lar"s ormula that prosperit4 is the cause unique o &epression practicall4 all @theories@ a7ree. ,ut the sel -7eneratin7 theories also claim that the causation o prosperit4 lies in the con&itions o eas4 mone4, lo8 stocEs, cheap la6or an& ra8 materials oun& in &epression perio&s, an& that prosperit4 is merel4 an out7ro8th o these. 3his line o reasonin7 ma4 perhaps ser$e *althou7h there is some &ou6t a6out that+ in or&er to account or re$i$al up to normal, 6ut o6$iousl4 cannot ser$e 6e4on& that. So ar, 8e ha$e not &ealt 8ith an4 @&epression@ that lea&s 6elo8 normal, an& prosperit4 is there ore seen to 6e e(plaina6le 8ithout it. 3he su6=ect 8ill 6e taEen up later on.
1FG
A7ain, most people 8ill linE up recessions 8ith errors o =u&7ment, e(cesses, an& miscon&uct. 3his is no e(planation at all M or it is not error, etc., as such 6ut onl4 a cluster o errors 8hich coul& possi6l4 account or 8i&esprea& &epressi$e e ects. An4 @theor4@ that rests content 8ith this must assume that people err perio&icall4 in the 8a4 most con$enient to the economist. Lur mo&el, 64 sho8in7 the emer7ence o situations in 8hich it is un&erstan&a6le that mistaEes o all sorts shoul& 6e more requent than usual *i.e., 8hen untrie& thin7s are 6ein7 put into practice an& a&aptation to a state o thin7s 6ecomes necessar4, the contours o 8hich ha$e not 4et appeare&+ &oes a8a4 8ith this an& sho8s the place o the element o error in the $arious phases o the process, 8ithout ha$in7 to intro&uce it as an in&epen&ent, still less as a necessar4, element. Another such &eus e( machina, closel4 relate& to error, is @anticipation.@ -t has 6een pointe& out in the secon& chapter that the intro&uction o this element constitutes a material impro$ement o our technique, 6ut also that e(pectations cannot 6e use& as part o our ultimate &ata in the same 8a4 as taste or to6acco can. #nless 8e Eno8 8h4 people e(pect 8hat the4 e(pect, an4 ar7ument is completel4 $alueless 8hich appeals to them as causae e icientes. Such appeals enter into the class o pseu&o-e(planations. ,ut i 8e un&erstan& in&epen&entl4 ho8 the situations come a6out in 8hich, or e(ample, 8in& all 7ains, risin7 prices, an& so on pro&uce 8a$es o optimism, 8e are ree to ose the act that this optimism 8ill ee& upon itsel an& cr4stalliOe so as to 6ecome an element o the mechanism o c4clical e$ents an& the @cause@ o secon&ar4 phenomena. ,ut there Still remains the question o act, ho8 important, e$en 8ithin their ri7ht ul &omain, 6usinessmen"s optimisms an& pessimisms actuall4 are. 3here is some &an7er in 7eneraliOin7 rom amiliar acts a6out stocE e(chan7e or lan& speculationNo6ser$ation o 8hich, ho8e$er, also clearl4 teaches that its moo&s are not in&e-pen&ent causes 6ut consequential phenomena. -n&ustr4 an& tra&e are much less 7i$en to 6ein7 s8a4e& 64 moo&s. Boreo$er, the 8riter con esses that he
1FJ
sometimes 8on&ers in 8hat 8orl& those theorists li$e 8ho &o not &ou6t or a moment the e icac4 o @&epresse& states o min&@Nto 6e men&e&, as an eminent author seems to thinE, 64 @6all4hoo@Nin accentuatin7 *let alone in&epen&entl4 causin7+ &epressions. 'is e(perience is to the e ect that the a$era7e 6usinessman al8a4s hopes a7ainst hope, al8a4s thinEs he sees reco$er4 @aroun& the corner,@ al8a4s tries to prepare or it, an& that he is orce& 6acE each time 64 har& o6=ecti$e act 8hich as lon7 as possi6le he &o77e&l4 tries to i7nore. 3he histor4 o the recent 8orl& crisis coul& almost 6e 8ritten in terms o ine ectual attempts to stem the ti&e, un&ertaEen in a 6elie , ostere& in this case 64 all the prophets, that 6usiness , 8oul& 6e @hummin7@ in a e8 months. 3his &oes not mean that 6usinessmen are al8a4s optimistic. :ar rom it. Hhat it &oes i.. mean is that 8a$es o 6oth optimism an& pessimism are not the o6$ious realities the4 seem to 6e to o6ser$ers 8ho =u&7e rom manias. Lther e(amples o ho8 much-emphasiOe& acts it into our @schema a6oun&. He ha$e, or instance, nothin7 to o er in &e ense o the so-calle& o$erpro&uction an& un&erconsumption theories. ,ut it is rea&il4 seen ho8 our process ma4 pro&uce situations 8hich, to the untraine& min&, len& color to those primiti$e attempts at e(planation. As re7ar&s the acts that un&erlie the $arious theories 8hich attri6ute 6usiness c4cles to o$erin$estment in &ura6le pro&ucers" 7oo&s or to in$estment in 8ron7 &irections *malin$estment+, it is easil4 seen, irst, that $ariations in real in$estment are, as a matter o act, intimatel4 connecte& 8ith the causation an& the mechanism o c4cles M secon&, that in the course o our process cases o 6oth o$erin$estment an& malin$estment 8ill un&erstan&a6l4 occur M an&, thir&, that in other cases an appearance o o$erin$estment 8ill 6e create&. 3he anal4tic schema presente& in this 6ooE e$i&entl4 &oes not 6elon7 to the amil4 o monetar4 theories o 6usiness c4cles. -t &oes presuppose a certain 6eha$ior o mone4 an& cre&it, man4 eatures o 8hich are essential or it M 6ut i this 8ere enou7h to constitute a monetar4 theor4 o c4cles, there 8oul& 6e no nonmonetar4 ones, since
1F8
e$er4 theor4 &oes this either e(plicitl4 or implicitl4. - 8e 8ish to maEe that &esi7nation &istincti$e, 8e must ollo8 Br. 'a8tre4 an& &e ine a monetar4 theor4 64 the criterion that it looEs upon c4cles as @purel4 monetar4 phenomena@ in the sense that peculiarities o the sphere o mone4 an& cre&it account or their e(istence an& that 6ut or those peculiarities the4 8oul& not e(ist at all. 3he 8riter 6elie$es those theories to 6e 8ron7 an&, in their practical implications, mislea&in7. ,ut all the acts, an& in particular all the relations o monetar4 time series to others, on 8hich those theories &ra8, in& their place an& interpretation in our schema. -t must 6e realiOe&, ho8e$er, that the un&amental lo7ic o the c4clical process o e$olution is entirel4 in&epen&ent o all those accessories 8hich, ho8e$er important the4 ma4 6e, maEe a ter all poor cornerstones. :ourth, there is a point at 8hich the picture o the 8orEin7 o our mo&el presents eatures that seem to &i er rom 8i&el4 accepte&, thou7h not unanimous, opinion. -t &oes not 7i$e to prosperit4 an& recession, relati$el4 to each other, the 8el are connotations 8hich pu6lic opinion attaches to them. 0ommonl4, prosperit4 is associate& 8ith social 8ell-6ein7, an& recession 8ith a allin7 stan&ar& o li e. -n our picture the4 are not, an& there is e$en an implication to the contrar4. 3his is partl4 &ue to certain acts 8hich ha$e not 6een intro&uce& as 4et, an& 8hich to some e(tent =usti 4 popular opinion. ,ut 8e &o not 8ish that eature o our present picture to 6e lost. -t contains an important truth. 5rosperit4 in our sense is, in act, $er4 ar rom 6ein7 s4non4mous 8ith 8el areN8itness, or e(ample, the @hun7r4 orties.@ An& times o prolon7e& @&epression@ are $er4 ar rom 6ein7 s4non4mous 8ith miser4N8itness, or e(ample, the pro7ress in the stan&ar& o li e o the 8orEin7 classes, 18J3-189J. Lur mo&el supplies the e(planation o this, an& 8e shall repeate&l4 ha$e to insist upon it. 3he socialist orm o or7aniOation has the $irtue o 6rin7in7 out the economic nature o thin7s much more clearl4 than capitalism. -n a socialist communit4 it 8oul&, or instance, 6e e$i&ent to e$er4one that
1F9
8hat a nation 7ains rom international tra&e consists o the imports an& that e(ports are 8hat it sacri ices in or&er to secure them. Similarl4, it 8oul& 6e o6$ious that times o inno$ation are times o e ort an& sacri ice, o 8orE or the uture, 8hile the har$est comes a ter. 3his is so also in a capitalist societ4 M an& that the har$est is 7athere& un&er recessi$e s4mptoms an& 8ith more an(iet4 than re=oicin7 is easil4 accounte& or an& &oes not alter the principle. 9ecession, 6esi&es 6ein7 a time o har$estin7 the results o prece&in7 inno$ation, is also a time o har$estin7 its in&irect e ects. 3he ne8 metho&s are 6ein7 copie& an& impro$e& M a&aptation to them or to the impact o the ne8 commo&ities consists in part in @in&uce& in$entions@ M some in&ustries e(pan& into ne8 in$estment opportunities create& 64 the achie$ements o entrepreneurs M others respon& 64 rationaliOation o their technolo7ical an& commercial processes un&er pressure M much &ea& 8oo& &isappears. 3here is, thus, a 7oo& &eal o truth in the popular sa4in7 that @there is more 6rain in 6usiness@ at lar7e &urin7 recession than there is &urin7 prosperit4, an o6ser$ation 8hich is, at the same time, seen not to contra&ict an4 in erence that ma4 6e &ra8n rom our mo&el. :i th, there is nothin7 in the 8orEin7 o our mo&el to point to perio&icit4 in the c4clical process o economic e$olution i that term is taEen to mean a constant perio&. An& there is no rh4thm or c4cle i 8e choose to &e ine either o them 8ith re erence to perio&icit4 in that sense. ,ut 6oth rh4thm an& c4cles are present, in a much more rele$ant sense. :or there is a process 8hich s4stematicall4 pro&uces alternatin7 phases o prosperit4 an& &epression throu7h the 8orEin7 o a &e inite mechanism set into motion 64 a &e inite @ orce@ or @cause.@ All 8e can thus ar sa4 a6out the &uration o the units o that process an& o each o their t8o phases is that it 8ill &epen& on the nature o the particular inno$ations that carr4 a 7i$en c4cle, the actual structure o the in&ustrial or7anism that respon&s to them, an& the inancial con&itions an& ha6its pre$ailin7 in the 6usiness communit4 in each case. ,ut that is enou7h an& it seems entirel4 un=usti ie& to &en4 the e(istence o a phenomenon 6ecause it ails to con orm to certain ar6itrar4 stan&ar&s
150
o re7ularit4. F8 He taEe the opportunit4 o recallin7 the sel e(planator4 concept o -nternal -rre7ularit4Nto contrast 8ith the concept o /(ternal -rre7ularities &ue to action o e(ternal actors. Si(th, rom the stan&point o a77re7ati$e theor4, it is in the nature o a para&o( to sa4 that partial &isequili6riaNinno$ation an& response to inno$ation create in the irst instance nothin7 elseNpro&uce 8hat o6$iousl4 is a 7eneral &isequili6rium in the s4stem as a 8hole. ,ut 8e realiOe no8 in 8hat sense that is so, ho8 it comes a6out, an& ho8 a77re7ati$e quantities are there64 chan7e&. 5erhaps it is onl4 common sense to reco7niOe that, in or&er to pro&uce e ects on a77re7ates, a actor or e$ent nee& not o itsel 6e an a77re7ate or &irectl4 act on an a77re7ate. 9elations 6et8een a77re7ates 6ein7 entirel4 ina&equate to teach us an4thin7 a6out the nature o the processes 8hich shape their $ariations, a77re7ati$e theories o the 6usiness c4cle must 6e ina&equate, too M an& it is not a $ali& o6=ection a7ainst an anal4sis o 6usiness c4cles that it &eals @onl4@ 8ith partial situations. 3his applies, o course, to man4 @theories@ such as, or e(ample, the har$est theor4 > the mere act that it locates causes in one sector o the s4stem onl4, shoul& not 6e recor&e& a7ainst it, 8hate$er its other shortcomin7s ma4 6e. Se$enth, our mo&el an& its 8orEin7 is stron7l4 institutional in character. -t presupposes the presence, not onl4 o the 7eneral eatures o capitalist societ4, 6ut also o se$eral others 8hich 8e hol& to 6e actuall4 $eri ie& 6ut 8hich are not lo7icall4 implie& in the concepts either o economic action or o capitalism. Lur ar7ument rests on historical acts 8hich ma4 turn out to 6elon7 to an epoch that is rapi&l4 passin7. -n this sense the anal4sis presente& has, in act, itsel 6een calle& historical. 3here is no o6=ection to this. An4 application must in each case 8ait upon the proo that the con&itions assume&
F8
5ro essor -r$in7 :isher, or e(ample, ar7ues in his paper in the Journal o the American Statistical Association, 19)3, that plus an& minus &e$iations in time series &o not re$eal characteristic phases an& &o not recur. 3his is true onl4 rom the stan&point o such ar6itrar4 stan&ar&s.
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actuall4 &i& e(ist, or ma4 reasona6l4 6e e(pecte& to ha$e e(iste&, at the time en$isa7e&. He assume not onl4 pri$ate propert4 an& pri$ate initiati$e 6ut a &e inite t4pe o 6oth M not onl4 mone4, 6anEs, an& 6anEin7 cre&it 6ut also a certain attitu&e, moral co&e, 6usiness tra&ition, an& @usa7e@ o the 6anEin7 communit4 M a6o$e all, a spirit o the in&ustrial 6our7eoisie an& a schema o moti$ation 8hich 8ithin the 8orl& o 7iant concernsNthe pattern 8hich 8e ha$e calle& 3rusti ie& 0apitalismNan& 8ithin mo&ern attitu&es o the pu6lic min& is rapi&l4 losin7 6oth its scope an& its meanin7. 3his is 8h4 in our &iscussion o post8ar e$ents 8e shall put the question 8hether an& ho8 tar the process still persists. ,ut the 8riter is quite content to she& li7ht, such as it is, on a piece o economic histor4 an& to lea$e it to the rea&er the &ecision 8hether or not he 8ill consi&er it rele$ant to practical pro6lems or not. 3he &eep-reachin7 question 8hether it is the process o capitalistic e$olution itsel that creates the social situations in 8hich it &ies out 8ill onl4 periphericall4 6e touche& upon.
3a6le o 0ontents
C. The Se)onda!" 4a,e 2 Se)ond A**!o5imation. - inno$ations
are 6ein7 em6o&ie& in ne8 plant an& equipment, a&&itional consumers" spen&in7 8ill result practicall4 as quicEl4 as a&&itional pro&ucers" spen&in7. ,oth to7ether 8ill sprea& rom the points in the s4stem on 8hich the4 irst impin7e, an& create that comple(ion o 6usiness situations 8hich 8e call prosperit4. 38o thin7s are then practicall4 sure to happen. :irst, ol& irms 8ill react to this situation an&, secon&, man4 o them 8ill @speculate@ on this situation. A ne8 actor4 in a $illa7e, or e(ample, means 6etter 6usiness or local 7rocers, 8ho 8ill accor&in7l4 place 6i77er or&ers 8ith 8holesalers, 8ho in turn 8ill &o the same 8ith manu acturers, an& these 8ill e(pan& pro&uction or tr4 to &o so, an& so on. ,ut in &oin7 this man4 people 8ill act on the assumption that the rates o chan7e the4 o6ser$e
15)
8ill continue in&e initel4, an& enter into transactions 8hich 8ill result in losses as soon as acts ail to $eri 4 that assumption. Speculation in the narro8e& sense o the 8or& 8ill taEe the hint an& start on its amiliar course or rather, anticipatin7 all this, sta7e a 6oom e$en 6e ore prosperit4 in 6usiness has ha& time to &e$elop. .e8 6orro8in7 8ill then no lon7er 6e con ine& to entrepreneurs, an& @&eposits@ 8ill 6e create& to inance 7eneral e(pansion, each loan ten&in7 to in&uce another loan, each rise in prices another rise. 'ere those transactions enter into our picture 8hich presuppose an actual or e(pecte& rise in prices in or&er to 6ecome possi6le. F9 Lur anal4sis a&&s nothin7 to this 8ellEno8n piece o mechanism e(cept the i7nition o it an& the means o &istin7uishin7 it rom the more un&amental process 8hich sets it in motion. 3his is 8hat 8e 8ill callNretainin7 a perhaps questiona6le term intro&uce& in the 8riter"s 6ooE o 1911Nthe Secon&ar4 Ha$e, 8hich superimposes its e ects on those o the 5rimar4 Ha$e. 3here is no nee& to emphasiOe ho8 7reat a mass o act no8 enters our picture. -n&ee&, the phenomena o this secon&ar4 8a$e ma4 6e an& 7enerall4 are quantitati$el4 more important than those o the primar4 8a$e. 0o$erin7 as the4 &o a much 8i&er sur ace, the4 are also much easier to o6ser$e M in act the4 are 8hat striEes the e4e irst, 8hile it ma4 6e &i icult, especiall4 i the inno$ations are in&i$i&uall4 small, to in& the torch responsi6le or the con la7ration. 3his is one reason 8h4 the element o inno$ation has 6een so much ne7lecte& 64 the tra&itional anal4sis o the 6usiness c4cle > it hi&es 6ehin&, an& is sometimes entirel4 o$erlai& 64, the phenomena o 8hat appears at irst 7lance to 6e simpl4 a 7eneral prosperit4, 8hich is conspicuous in man4 6ranches an& strata an& apparentl4 unconnecte& 8ith an4 acti$it4 that coul& in an4 8a4 6e calle& inno$atin7, let alone @in$entin7.@ -t seems onl4 natural to thinE that or this 7eneral prosperit4 some equall4 7eneralNe.7., monetar4Ne(planation shoul&
F9
Hhile, as 8e ha$e seen, no such rise is, on principle, necessar4 to call orth inno$ations an& 8hile the4 are M in the 5ure Bo&el, pro ita6le 8ithout it, there ma4 an& 7enerall4 8ill 6e some 8hich sho8 pro it onl4 i risin7 prices are anticipate&. 3hese 6elon7 here an& not to the i7nitin7 mechanism.
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6e oun& an& that 6oth it an& the reaction to it shoul& 6e looEe& upon as meanin7less an& unctionless &istur6ances o economic li e an& o the march o pro7ress. 3he c4clical clusters o errors, e(cesses o optimism an& pessimism an& the liEe are not necessaril4 inherent in the primar4 processN8hich process 8oul& pro&uce ups an& &o8ns an&, 6e it particularl4 remem6ere&, also losses 8ithout an4 errorsN althou7h the4 can 6e a&equatel4 moti$ate& 64 it. ,ut no8 the4 acquire a&&itional importance. 5art o the phenomena o the secon&ar4 8a$e consists, in act, o nothin7 else. Amon7 the lo7icall4 nonessential, 6ut practicall4 most important acts 8e no8 mean to inseert, one, mentione& a6o$e, ma4 &eser$e a urther remarE. He 8ill &iscuss it in terms o 5ro essor -r$in7 :isher"s ;e6t--n lation 3heor4 not o c4cles Nthe e(istence o 8hich he &eniesN6ut o <reat ;epressions. L all the @starters@ o &e6t @the most common appears to 6e ne8 opportunities to in$est at a 6i7 prospecti$e pro it [5ro essor :isher"s italics] as compare& 8ith or&inar4 pro its an& interest, such as throu7h ne8 in$entions, ne8 in&ustries, &e$elopment o ne8 resources, openin7 o ne8 lan&s or ne8 marEets@ *op. cit., p. 3F8+. 3his is so. ,ut i the 6orro8ers are entrepreneurs an& e$er4thin7 is as it 8as assume& to 6e in our 5ure Bo&el, no &ire consequences nee& ollo8 rom this. As ar as that 7oes, 8e ha$e onl4 to a&& a quali ication a6out entrepreneurial miscalculations. Hhene$er loans are use& in 8a4s 8hich 8ill &ecrease costs per unit o pro&uct, the same ma4 appl4 to the 6orro8in7 o nonentrepre-neurs, e$en o ol& irms 8hich 6orro8 in or&er to carr4 out a&aptations that pro$e su icientl4 success ul. 5ro essor :isher, there ore, ri7htl4 emphasiOes o$crin&e6te&ness in&uce&, primaril4, 64 eas4 mone4. ,ut he &oes not &e ine o$erin&e6te&ness. .or is it eas4 to &o so. 3he onl4 8a4 8hich the 8riter can thinE o is precisel4 64 re erence to @pro&ucti$it4.@ An& the processes o the secon&ar4 8a$e, in act, suppl4 us 8ith plent4 o instances o unpro&ucti$e loans. Lnce a prosperit4 has 7ot un&er sail, househol&s 8ill 6orro8 or purposes o consumption, in the e(pectation that actual incomes 8ill permanentl4 6e 8hat the4 are or
15F
that the4 8ill still increase M 6usiness 8ill 6orro8 merel4 to e(pan& on ol& lines, on the e(pectation that this &eman& 8ill persist or still increase M arms 8ill 6e 6ou7ht at prices at 8hich the4 coul& pa4 onl4 i the prices o a7ricultural pro&ucts Eept their le$el or increase&. -n these cases there is no increase in pro&ucti$it4 at all, an& it is this act an& this act alone 8hich is. responsi6le or a all in prices sometimes spellin7 &isaster, e$en 8ithout speculation in the narro8er sense o the 8or&, 8hich ho8e$er ne$er ails to a&& to the structure o &e6t. @/$i&entl4 &e6t an& &e lation 7o ar to8ar& a 7reat mass o phenomena in a $er4 simple lo7ical 8a4@ *p. 3F)+. 3he rea&er 8ill see ho8 eas4 it is to =ump rom this to mislea&in7 conclusions. 3he onl4 conclusion that reall4 ollo8s is that the cre&it machine is so &esi7ne& as to ser$e the impro$ement o the pro&ucti$e apparatus an& to punish an4 other use. 'o8e$er, this turn o phrase must not 6e interprete& to mean that that &esi7n cannot 6e altere&. L course it can an& also the e(istin7 machine can 6e ma&e to 8orE in an4 one o man4 &i erent 8a4s. 5ro essor :isher"s su77estions a6out @re lation@ 64 open-marEet operations &o not no8 concern us. ,ut it shoul& 6e pointe& out that &istinction 6et8een &e6ts accor&in7 to purpose, ho8e$er &i icult to carr4 out, is al8a4s rele$ant to &ia7nosis an& ma4 6e rele$ant to pre$enti$e polic4. 3he 6reaE in secon&ar4 prosperit4 is similarl4 in&uce& 64 the turn o the un&erl4in7 process. 3he latter supplies the onl4 a&equate e(planation o the ormer, 8hich in act constitutes the 7reat cru( o those theories o the c4cle that attempt to &eal 8ith it 64 itsel . 50 An4
50
3hat is the case 8ith most theories. 'ence the em6arrassment $oice& 64 the question > Hh4 shoul& there 6e a 6reaE at allN8hat is it that puts an en& to prosperit4 V 3his is 6ut the natural consequence o the act that 8hat 8e call the phenomena o the secon&ar4 8a$e is all their authors see. 3o all this, ho8e$er, there is a quali ication the importance o 8hich 8ill 6ecome clear later on. Hhat has =ust 6een sai& is true onl4 so lon7 as 8e Eeep to the h4pothesis, presentl4 to 6e &iscar&e&, that the c4clical process o e$olution consists in a succession o units o one sin7le t4pe o 8a$e. As soon as 8e &rop it, a result more hope ul or &ia7nosis, an& perhaps e$en or
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prosperit4, ho8e$er i&eall4 con ine& to essentia] or primar4 processes, in&uces a perio& o liqui&ation 8hich, 6esi&es eliminatin7 irms that ha$e 6ecome o6solete 6e4on& the possi6ilit4 o a&aptation, also in$ol$es a pain ul process o rea&=ustment o prices, quantities, an& $alues as the contours o the ne8 equili6rium s4stem emer7e. ,ut 8hen 8e taEe account o the phenomena 8hich constitute the secon&ar4 8a$e, 8e realiOe at once that there is much more to liqui&ate an& to a&=ust. -n the atmosphere o secon&ar4 prosperit4 there 8ill also &e$elop recEless, rau&ulent, or other8ise unsuccess ul enterprise, 8hich cannot stan& the tests a&ministere& 64 recession. 3he speculati$e position is liEel4 to contain man4 untena6le elements 8hich the sli7htest impairment o the $alues o collateral 8ill 6rin7 &o8n. A consi&era6le part o current an& in$estment operations 8ill sho8 loss as soon as prices all, as the4 8ill 64 $irtue o the primar4 process. 5art o the &e6t structure 8ill crum6le. All this &oes not necessaril4 amount to panic or crisisNneither 8or& is a technical termN6ut it easil4 in&uces panics or crises. - the4 occur, still another situation is create&, than 8oul& other8ise pre$ail, an& a&&itional a&=ustments 6ecome necessar4. ,ut e$en i the4 &o not, 8e rea&il4 see the t8o e ects 8hich &e ine the Kicious Spiral. Ln the one han&, an4 all in $alues 8hich en orces liqui&ation, in&uces quite mechanicall4 another all in $alues. @5rices all 6ecause the4 ha$e allen@ *Barshall+. Beasures o &e ense, e orts ma&e 64 irms or househol&s to repa4 loans, or 64 6anEs to call them in or&er to impro$e liqui&it4, &ri$e &e6tors in the 8ell-Eno8n 8a4 to8ar& the $er4 rocEs 8hich those measures 8ere taEen to a$oi&. :reeOin7 o cre&its, shrinEa7e o &eposits, an& all the rest ollo8 in &ue course. Ln the other han&, not onl4 8e, the o6ser$ers, 6ut also the &ramatis personae realiOe ho8 much there is to liqui&ate, or e$en 7o into h4sterics a6out it. 3hen pessimistic e(pectation ma4 or a time acquire a causal role. ,ut a7ain it is necessar4 to 8arn a7ainst o$ereatin7 its
pro7nosis, presents itsel . 'o8e$er, the act still remains that onl4 historical in$esti7ation can in&icate 8hether in a 7i$en case &epression has actuall4 occurre& or not
15G
importance. 3he simplest appeal to e(perience shoul& 6e su icient to =usti 4 this 8arnin7. .o 7reat crisis has e$er come a6out that 8as not ull4 e(plaina6le 64 the o6=ecti$e acts o the situation. /(pectation not so con&itione& ne$er has pro&uce& more than short-li$e& spurts or 6reaEs. An& this is true not onl4 or 7eneral 6usiness situations 6ut or an4 particular marEet. .o comer e$er succee&e& unless the course o e$ents 7a$e in&epen&ent support. .o amount o optimistic e(pectation coul& ha$e Eept up the price o copper in the t8enties M no amount o pessimistic e(pectation coul& ha$e Eept it &o8n i sources o suppl4 as important as those 8hich 8ere a&&e&, ha& su&&enl4 6een e(hauste&. .o8 that class o acts, 8hene$er it is o su icient quantitati$e si7ni icance, has an important 6earin7 upon our schema. As lon7 as 8e tooE no account o it, 8e ha& onl4 t8o phasesN 5rosperit4 an& 9ecessionNin e$er4 unit o the c4clical process, 6ut no8 8e shall un&erstan& that un&er pressure o the 6reaE&o8n o the secon&ar4 8a$e an& o the 6earish anticipation 8hich 8ill 6e in&uce& 64 it, our process 8ill 7enerall4, althou7h not necessaril4, outrun *as a rule, also miss+ the nei7h6orhoo& o equili6rium to8ar& 8hich it 8as hea&in7 an& enter upon a ne8 phase, a6sent in our irst appro(imation 8hich 8ill 6e characteriOe& 64 A6normal 2iqui&ation, that is to sa4, 64 a &o8n8ar& re$ision o $alues an& a shrinEa7e o operations that re&uce them, o ten quite erraticall4, 6elo8 their equili6rium amounts. Hhile in recession a mechanism is at 8orE to &ra8 the s4stem to8ar& equili6rium, ne8 &isequili6rium &e$elops no8 > the s4stem a7ain &ra8s a8a4 rom a nei7h6orhoo& o equili6rium as it &i& &urin7 prosperit4, 6ut un&er the in luence o a &i erent impulse. :or this phase 8e shall reser$e the term ;epression. ,ut 8hen &epression has run its course, the s4stem starts to eel its 8a4 6acE to a ne8 nei7h6orhoo& o equili6rium. 3his constitutes our ourth phase. He 8ill call it 9eco$er4 or 9e$i$al. /(pansion up to equili6rium amounts then sets in an& 4iel&s temporar4 surplus 7ains or eliminates the losses inci&ent to operation at the trou7h amounts. ,ut e$en apart rom imper ections, this ne8 nei7h6orhoo& 8ill not 6e the same at that
15J
8hich 8oul& ha$e 6een reache& 8ithout a6normal liqui&ation. :or, irst, a6normal liqui&ation &estro4s man4 thin7s 8hich coul& an& 8oul& ha$e sur$i$e& 8ithout it *in particular, it o ten liqui&ates an& 8ee&s out irms 8hich &o not comman& a&equate inancial support, ho8e$er soun& their 6usiness ma4 6e, an& it lea$es unliqui&ate& concerns 8hich &o comman& such support, althou7h the4 ma4 ne$er 6e a6le to pa4 their 8a4+, an& hence pro&uces a partem more or less &i erent rom that 8hich the normal process 8oul& ha$e e$ol$e&. Secon&, &epression an& the return o the s4stem rom the &epressi$e e(cursion taEe time. 3he4 ma4 taEe se$eral 4ears. ;urin7 that time &ata chan7e an& 8hat 8oul& ha$e 6een a nei7h6orhoo& o equili6rium 8hen &epression starte& is no lon7er one 8hen all is o$er. He 8ill re er to prosperit4 an& re$i$al as the positi$e phases o a c4cle, to recession an& &epression as the ne7ati$e phases. -t is le t to the rea&er to 8orE out the picture o &epression an& re$i$al. He con ine oursel$es to the ollo8in7 comments > 1. Hhile recession an&Ni &epression occursNre$i$al are necessar4 parts o the c4clical process o economic e$olution, &epression itsel is not. :rom the 6usiness situations 8hich necessaril4 o6tain in recession, &epression ma4 easil4 &e$elop, 6ut in all its essential aspects the c4clical process 8oul& 6e lo7icall4 complete 8ithout it Hhether it occurs or not is a question o act an& &epen&s on acci&ental circumstances, such as the mentalit4 an& temper o the 6usiness communit4 an& the pu6lic, the pre$alence o 7et-rich-quicE morals, the 8a4-conscientious or other8iseNin 8hich cre&it is han&le& in prosperit4, the a6ilit4 o the pu6lic to orm an opinion a6out the merits o propositions, the &e7ree to 8hich it is 7i$en to 6elie in phrases a6out prosperit4 plateaus an& the 8on&ers o monetar4 mana7ement an& so on. Boreo$er, no theoretical e(pectation can 6e orme& a6out the occurrence an& se$erit4 o &epressions. He ma4, in an 7i$en situation, tr4 to appraise the e(tent o e(istin7 mala&=ustments, o the presence o rau&ulent schemes, @unsoun& cre&it,@ an& so on M 6ut 6e4on& such in&ications it is
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impossi6le to 7o. -n a $er4 &i icult situation, a77ra$ate&, or instance, 64 serious e(ternal e$ents, the 6usiness communit4 ma4 Eeep its ner$es, 8hile it ma4 6ecome ri7htene& on much smaller pro$ocation. A scare or panic ma4 occur almost an48here in the course o a c4cle, althou7h, o course, it is much more liEel4 to occur at certain =unctures than at others. Such a panic ma4 mean $er4 little an& 4et $iolentl4 sen& &o8n $alues an& e$en certain ph4sical quantities. A lesson ollo8s rom this or the anal4sis o time series > He must not trust our 7raphs implicitl4. ,oth peaEs an& trou7hs ma4 easil4 mislea& an& it is har&l4 an e(a77eration to sa4 that, as ar as in ormation a6out un&amental processes 7oes, the4 are precisel4 the most unrelia6le items in an arra4. 51 ). .e(t, 8hat ma4 6e terme& the 5ro6lem o the 9eco$er4 5oint no8 emer7es in its proper settin7. 3he much-&e6ate& questions 8hether or not the s4stem stops o itsel 8hen once it has entere& upon a ne7ati$e phase, an& 8hether it then starts o itsel on a positi$e one, onl4 arise in the case o our-phase c4cles. :or 8e Eno8 8h4 the process o liqui&ation or a6sorption 8hich constitutes recession in a t8o-phase c4cle 8ill, 6arrin7 minor oscillations, &ie out 8hen it has &one its 8orE. He also Eno8 8h4, as lon7 as the capitalist mechanism an& capitalist moti$ation are intact, entrepreneurial acti$it4 8ill then resume 8ithout an4 e(ternal stimulus. So ar, our anal4sis lea&s us to a7ree 8ith those authors 8ho 6elie$e in the e(istence o @recuperati$e orces,@ an& merel4 7i$es more precise meanin7 to this other8ise not $er4 help ul phrase. ,at this is no lon7er so in the case o a our-phase c4cle. ;epression, as 8e ha$e seen, has not simpl4 a &e inite amount o 8orE to &o. Ln the contrar4, it has a 8a4 o ee&in7 upon itsel an& o settin7 into motion a mechanism 8hich, consi&ere& in isolation, coul& in act run on in&e initel4 un&er its o8n steam. He ha$e in&icate& a6o$e 8hat that @$icious spiral@ consists in. Karious mo&els ha$e 6een constructe& in or&er to &ispla4 it ,ut pro$in7 rom the properties o such a mechanism, the elements o 8hich ha$e 6een
51
3o all this, ho8e$er, there a quali ication.... pa7e 1)J
159
taEen out o their settin7 in the economic or7anism, that the process 8ill 7o on intensi 4in7 itsel , &oes not amount to pro$in7 that its real counterpart 8ill actuall4 &o so M else, 8e coul& equall4 8ell ar7ue that, once 8e ha$e a cou7h that irritates our throat an& thus in&uces urther cou7hin7, 8e must 7o on cou7hin7 ore$er. 3he pro6lem is to anal4Oe a comple( sequence o short-time situations in 8hich the acts &escri6e& 64 such theories o the spiral orm onl4 one o man4 components. He 8ill irst &istin7uish 6et8een the course o e$ents in in&ustrial an& commercial 6usiness, on the one han&, an& the course o e$ents in the stocE e(chan7e an& other speculati$e marEets, on the other han&. 3he latter is quite liEel4 to con orm to the spiral pattern. 3ra&itional &octrine relies on three actors o reco$er4 rom a slump. :irst, 6ears 8ill co$er an& thus pro$i&e a parachute. So the4 8ill rom time to time, an& this 8oul& rall4 the marEet i there 8ere no o6=ecti$e reason or relapse. - there is, 6ecause &istress sellin7 7oes on an& prospects are 6lacE, each 6ear attacE 8ill 6e ollo8e& 64 a stron7er one. Boreo$er, ol&er &octrine seems in 7eneral to ha$e e(a77erate& the re7ulati$e an& smoothin7 e ects o speculation, as 8e shall see later on. Secon&, @insi&ers@ 8ill quietl4 6u4. 3his, in act, is almost al8a4s &one to some e(tent 6ut in 7eneral not quantitati$el4 su icient to turn the ti&e. 3hir&, the a$era7e in$estor"s attitu&e 8ill chan7e 6ecause o the increasin7 in&ucement to in$est 8hich allin7 quotations seem to o er. 3his seems to the 8riter to 6e most unrealistic. 3he a$era7e in$estor in such cases thinEs that ;oom is at han& an& the hi7her the returns the less he 6u4s. 3he ar7ument entirel4 o$erlooEs the shi t that occurs in the in$estor"s &eman& cur$e an& assumes that its position is in$ariant to c4clical phases. -t is chan7in7 6usiness prospects, that is to sa4, a act e(ternal to these marEets, 8hich pulls them out o &epression. As or in&ustr4 an& tra&e, the irst step is to sho8 that reco$er4 8ill necessaril4 set in i the &epressi$e process stops *in practice it is su icient that it slacEens percepti6l4+. 3his is eas4. - there is a
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&epression phase, then the trou7h is, as 8e ha$e seen, no lon7er 8hat it 8as in the t8o-phase c4cle, namel4 a state o equili6rium. An& this proposition is in itsel su icient to pro$e the point 8ithout an4 resort to optimistic e(pectations 8hich, ho8e$er, 8ill soon emer7e to help. :or sa4in7 that irms 8ill not act in the 8a4 8hich 8ill lea& to reco$er4 an& e$entuall4 to a nei7h6orhoo& o equili6rium, 8oul& 6e s4non4mous 8ith sa4in7 that the4 8ill &eli6eratel4 ore7o 7ains an& incur losses 8hich it is in their in&i$i&ual po8er to maEe or to a$oi&, an& scrap plant an& equipment 8hich coul& 6e pro ita6l4 use&. -t is sometimes o6=ecte& that crampe& lo8er-le$el equili6ria ma4 arise rom 8hich people 8ill not o themsel$es mo$e. 3his ma4 6e so in in&i$i&ual cases, particularl4 in imper ectl4 competiti$e situations. ,ut the pro6a6ilit4 that this state o thin7s shoul& pre$ail all o$er the s4stem, in all in&ustries an& 8ith all concernsN or that 8oul& 6e necessar4 to =usti 4 the in erenceNis in&istin7uisha6le rom Oero. 3here ore, our pro6lem re&uces to the question 8hether the &epressi$e process &oes stop o itsel short o , theoreticall4, uni$ersal star$ation. 3o this question, ho8e$er, there is no 7eneral ans8er. -t can in&ee& 6e pro$e& that the pressure rom the spiral pro&uces reactions in the s4stem 8hich ten& to stop it. Ln the one han&, there 8ill 6e 8hat 8e ma4 term &i usion or &ilution o e ects. 3he spiral process sets in 64 a num6er o un a$ora6le in&i$i&ual e$ents, such as 6anEruptcies, 6reaEs in in&i$i&ual marEets, shut&o8ns. 3hese in&uce similar e$ents, 6ut it is rea&il4 seen that each o them taEen 64 itsel loses momentum as its e ects sprea&. 3he ailure o a concern ma4 cause the ailures o other concerns, 6ut part o its lia6ilities 8ill 6e to irms 8hich can stan& the loss an& 8hich there ore act as 6u ers. /ach a&&ition to unemplo4ment 8ill cause urther an& urther unemplo4ment 6ut, taEen in&i$i&uall4, at a &ecreasin7 rate. -n&i$i&ual contractions o output 6ree& contraction all aroun&, 6ut the impact o each o them slacEens an& stops a ter ha$in7 7one a certain 8a4. .o &ou6t 8e in$aria6l4 o6ser$e a rapi& &eterioration o the 6usiness situation once the s4stem has em6arEe& upon a cumulati$e &o8n8ar& process. ,ut this &eterioration is not simpl4 &ue to the act that the spiral ee&s
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upon itsel 6ut primaril4 to the other act that it is e& rom outsi&e, i.e.., rom 6reaE&o8ns an& contractions 8hich occur in&epen&entl4 o it. -t 8ill thus 6e seen that increase in total e ects o6ser$e& is per ectl4 compati6le 8ith the proposition that each in&i$i&ual e ect ten&s to peter out, an& that a case or 6elie$in7 that the spiral itsel 8ill peter out ma4 6e ma&e on these lines. Ln the other han&, there is 8hat 8e ma4 term &epression 6usiness. 3his ma4 6e instance& 64 the case o the stoppa7e o a irm 8hich in&uces unemplo4ment that in turn causes the ailure o a 7rocer 8hose customers the unemplo4e& 8orEmen 8ere. 3his 7rocer"s marEet is not completel4 annihilate&, ho8e$er, an& i he &isappears there 8ill 6e some space or other 7rocers to e(pan& into. 3o put the matter 7enerall4, the spiral process is a mo$ement a8a4 rom equili6rium, as 8e see rom the increasin7 &ispersion in prices an& rom the increasin7 &e$iation rom equili6rium relations 6et8een ph4sical quantities. 3his spells not onl4 actual an& potential losses 6ut also actual an& potential 7ains. 'ence it 8ill, ho8e$er 7reat total net losses ma4 6e, not onl4 in&uce contractions 6ut also e(pansions, althou7h these ma4 or the time 6ein7 not sho8 statisticall4. -t has o ten 6een hel& that it is the ensuin7 cheapness o cost actors, la6or, mone4, ra8 materials, 8hich e$entuall4 6reaEs the spiral. 3his ormulation &oes not seem elicitous 6ecause it lea$es out o account the &o8n8ar& shi t o &eman& cur$es 8hich mi7ht preclu&e pro&uction e$en i , sa4, steel an& copper 8ere to 6e ha& or nothin7. ,ut 8hat can 6e sai& is that since &eman& an& cost cur$es &o not shi t uni orml4, opportunities arise or transactions 8hich 8oul& not 6e possi6le other8ise an& 8hich 8ill &o somethin7s to counteract the ra$a7es o the spiral. -t is no &ou6t true that pessimistic e(pectations 8ill pre$ent man4 transactions rom materialiOin7 8hich are pro ita6le on paper. ,ut it is per ectl4 7ratuitous "to postulate that this is the 7eneral case. Hhate$er the 6usinessman"s state o min&, he 8ill taEe current 6usiness that o ers itsel . 3his is in act one o the main &i erences in the unctionin7 o an in&ustrial an& o a speculati$e marEet
1G)
,ut thou7h it ma4 thus 6e sho8n that a restorati$e ten&enc4 8ill &e$elop to 8orE a7ainst the spiral, there is nothin7 to pro$e that it 8ill pre$ail a7ainst it. As lon7 as 8e Eeep our ar7ument per ectl4 7eneral, 8e must reco7niOe the possi6ilit4 o a s4stem so con&itione& an& o a spiral so $iolent that that ten&enc4 ma4 i7ht a losin7 6attle at an4 7i$en moment an& that, theoreticall4, the s4stem ma4 ne$er conquer the 6reathin7 space in 8hich it coul& reco$er o itsel . 3his seems in act to 6e the element o truth in the popular opinion that there must 6e help rom outsi&e o the 6usiness or7anism, rom 7o$ernment action or some a$ora6le chance e$ent, i there is to 6e reco$er4 at all or, at an4 rate, reco$er4 8ithout a prece&in7 perio& o complete &isor7aniOation an& o in&e inite len7th. 3his result calls or a e8 a&&itional remarEs. :irst, the a6o$e anal4sis &oes not maEe spirals i&entical 8ith &epressions. He mi7ht maEe them i&entical 8ith 8hat 8e shall sometimes call ;eep ;epressions. ,ut the &epression phases in our sense 7enerall4 outlast an4 spiral processes 8hich ma4 occur in their course an& are particularl4 liEel4 to occur at their 6e7innin7. -n 7eneral re$i$al is rom a trou7h in 8hich the situation is no lon7er &ominate& 64 a cumulati$e &o8n8ar& process. .e$ertheless, the pro6lem o the spiral is rele$ant to the pro6lem o the reco$er4 point 6ecause, as 8e ha$e seen, re$i$al 8ill ensue 8hen the &epressi$e process stops an& 6ecause the presence o a spiral a or&s the onl4 reason or &ou6tin7 that it &oes stop o itsel . Secon&, the inconclusi$eness o our result is &ue to our 8ish to ace squarel4 a pro6lem o 7eneral theor4. A much stron7er case or 6elie$in7 that, in the a6sence o e(ceptionall4 un a$ora6le e(ternal actors, the s4stem 8ill reco$er @o itsel " un&er almost an4 practicall4 concei$a6le circumstances, can 6e ma&e 64 reil4in7 on restricti$e assumptions ampl4 $eri ie& 64 common sense an& historical act. Lne o these has requentl4 6een e(presse& 64 means o the o6ser$ation
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that total income luctuates less than total output, the item 8a7es plus salaries less than total income, e(pen&iture on consumers" 7oo&s less than 8a7es plus salaries. 3his is 6roa&l4 correct an& partl4 accounte& or 64 our theor4 o &ilution o e ects. ,ut partl4 it also rests on the presence o incomes 8hich are insensiti$e to &epression an& o social strata little a ecte& 64 it, i,e., on acts 8hich are no part o the lo7ic o the capitalist en7ine. -t still remains true that the question 8hether or not a 7i$en reco$er4 8as @natural@ must in e$er4 historical instance 6e ans8ere& ane8. 3hir&, it has 6een repeate&l4 emphasiOe& that &epression, unliEe recession, is a patholo7ical process to 8hich no or7anic unctions can 6e attri6ute&. 3his proposition is in&ee& not quite true. -n our schematic e(position, each phase is cre&ite& 8ith 8hat 8e concei$e to 6e its most characteristic eatures an& this ne$er &oes =ustice to real li e. Ln the one han&, much that coul& li$e accor&in7 to the criterion a or&e& 64 the theor4 o equili6rium, ma4 perish in an other8ise normal recession. Ln the other han&, much that accor&in7 to the same criterion cannot li$e *an& man4 mala&=ustments an& ri7i&ities+ 8ill not 6e eliminate& 64 recession. 'ence much 8orE o reor7aniOation an& a&aptation is also &one in &epression. ,ut su6stantiall4 our proposition hol&s. -t ollo8s that proo , e$en i it 8ere more satis actor4 than it is, that &epression 8ill in& a @natural@ en&, &oes not in itsel constitute an ar7ument or lettin7 thin7s taEe their course or trustin7 to @the restorati$e orces o nature.@ 3he case or 7o$ernment action in &epression remains, in&epen&entl4 o humanitarian consi&erations, incompara6l4 stron7er than it is in recession. 3. -t ollo8s that &i$ision o the units o the c4clical process o e$olution into t8o or our phases is not a matter o &escripti$e con$enience. /ach phase is a &istinct composite phenomenon, not onl4 &istin7uisha6le 64 a characteristic set o eatures, 6ut also e(plaina6le in terms o the &i erent @ orces@ 8hich &ominate it an& pro&uce those eatures. As 8e Eno8, these @ orces@ consist in such
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concretel4 o6ser$a6le phenomena as inno$ation Wentrepreneurs" e(pen&iture+, response o the s4stem to the impact o the pro&ucts o ne8 plant *an& auto&e lation+, the impetus o a6normal liqui&ation Wan& o &epressi$e anticipation arisin7 out o it+ meetin7 8ith equili6rium Wreturn to 8hat no8 are normal quantities an& $alues+. 3he secon& an& ourth phases, recession an& re$i$al, &i er in the nature o the &e$iations the4 liqui&ate or a6sor6 an& in the si7ns o the latter. 3he4 are aliEe in the nature o the mechanism at 8orE 8hich in 6oth cases consists o equili6rium relations 6et8een the elements o the economic s4stem assertin7 themsel$es, 3he irst an& thir& phases, prosperit4 an& &epression, &i er in the nature o the impulse that propels the s4stem an& o the &e$iations 8hich &e$elop. 3he4 are aliEe in that in each case the s4stem &ra8s a8a4 rom eqiiili6rium an& into &isequili6rium. -n a t8o-phase c4clical mo$ement a line throu7h normals 8oul& orm *erratic mo$ements e(cepte&+ a 6oun&ar4 o all the items plotte& on a chart, no points o our material l4in7 a6o$e or none 6elo8 it *accor&in7 to the series plotte&Nprice series 8oul& run a6o$e, unemplo4ment series 6elo8 the 6oun&ar4 line+. 3he line or cur$e throu7h normals in a our-phase c4clical mo$ement, on the other han&, must cut throu7h the 7raphs o series. Since e$er4 c4cle is a historical in&i$i&ual an& not merel4 an ar6itrar4 unit create& 64 the o6ser$er, 8e are not at li6ert4 to count c4cles rom an4 phase 8e please. 3he phenomenon 6ecomes un&erstan&a6le onl4 i 8e start 8ith the nei7h6orhoo& o equili6rium prece&in7 prosperit4 an& en& up 8ith the nei7h6orhoo& ollo8in7 re$i$al. 3he count rom trou7h to trou7h or rom peaE to peaE is, there ore, not onl4 open to the o6=ection alrea&4 mentione&Nthat 6oth trou7hs an& peaEs ma4 pro$e $er4 unrelia6le 6eaconsN6ut it is ne$er theoreticall4 correct. -t ma4 6e con$enient at times, 6ut it is liEel4 to in&uce ault4 anal4sis in se$eral 8a4s, one o 8hich is o particular importance or us. 9e$i$al is the last an& not the irst phase o a c4cle. - 8e count rom trou7hs 8e cut o this phase rom the c4cle to 8hich it 6elon7s
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an& a&& it on to a c4cle to 8hich it &oes not 6elon7. 0ountin7 in this 8a4, 8e lose the un&amental &istinction 6et8een re$i$al an& prosperit4. Althou7h most authors reco7niOe at least a &istinction o &e7ree an& some also one o Ein&, the4 &o not reco7niOe the &i erence in the propellin7 actors. 3he4 see in&ices mo$e up rom the trou7h an& e$entuall4 M on to prosperit4 le$els *8hich are mostl4 onl4 quantitati$el4 &e ine&+, an& the4 conclu&e naturall4 enou7h that the same actors account or the 8hole rise. 'ence, the4 search the processes o re$i$al or @causes@ o the entire rise an& in& nothin7 more than 7ra&ual elimination o the a6normalities then e(istin7Nlo8 stocEs, unuse& plant, unemplo4e& la6or, i&le cre&it acilitiesNan& in particular, the4 in& nothin7 that looEs liEe inno$ation. 3here ore, the4 arri$e at the result that inno$ation has nothin7 to &o 8ith initiatin7 prosperit4, e$en i the4 7lance at this possi6ilit4, 8hich most o them &o not. Such anal4sis easil4 misses the pi$otal point an& &ri ts into perpetuum-mo6tie e(planations, particularl4 o the monetar4 sort. 5) F- Alon7 8ith the phenomena o the secon&ar4 8a$e, 8e 8ill intro&uce a e8 other acts, to complete our Secon& Appro(imation.
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'ere 8e shoul& notice a question 8hich the 8riter has o ten 6een asEe&. 8e a&mit the possi6ilit4 that, un&er the in luence o &epressi$e actors @cr4stalliOin7@ an& 7atherin7 momentum, the s4stem outruns a nei7h6orhoo& o equili6rium on its &o8n8ar& path, 8h4 shoul& it 6e less liEel4 that the up8ar& ten&enc4 in the reco$er4 phase also cr4stalliOe an& 7ather momentum so that the nei7h6orhoo& 6e similarl4 outrun on the up8ar& path V He 6elie$e this to 6e less liEel4, o8in7 to the a6sence o a phenomenon similar to the 6reaE&o8n o the secon&ar4 8a$e. .o correspon&in7 impulse to8ar& optimistic e(cess e(ists in reco$er4. ,ut e$en i that 8ere not so an& speculation &e$elope& merel4 on the stren7th o a$ora6le rates o chan7e so as to li t the s4stem a6o$e equili6rium, relapse to it *perhaps some8hat 6elo8 it 8ith reaction to ollo8+ 8oul&, in the a6sence o stimulus rom inno$ation *or, o course, e(ternal actors+, quicEl4 ollo8. -n other 8or&s, return to equili6rium ma4 in&ee& 6e atten&e& 64 luctuations aroun& equili6rium 6ut the4 8ill soon su6si&e. 3hat t4pe o luctuation 8e shall &iscuss later on.
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:irst, 8e must &rop the assumption, ma&e or con$enience o e(position, that our 8a$e is the irst o its Ein& an& that it not onl4 starts rom a nei7h6orhoo& o equili6riumNthrou7h all quali ications 8e must hol& on to thisN6ut that it is entirel4 una ecte& 64 the results o pre$ious e$olution. 3hat is, 8e must taEe account o the act that each nei7h6orhoo& contains un&i7este& elements o pre$ious prosperities an& &epressions, inno$ations not 4et completel4 8orEe& out, results o ault4 or other8ise imper ect a&aptations, an& so on. 3here is nothin7 in this to in$ali&ate our mo&el. Ln the contrar4, these acts are 6ut a consequence o the process &escri6e& 64 it. ,ut the4 7reatl4 increase the &i iculties o anal4sis an& complicate the patterns o the 6usiness situations 8e ha$e to &eal 8ith. Lne point calls or special notice. 5ro&ucers, 6ecomin7 amiliar 8ith the recurrent shi ts o &eman& in the course o the c4clical phases, learn to pro$i&e or the peaE &eman& o prosperit4. -n&ustries more su6=ect than others to such luctuations * or e(ample, in&ustries pro&ucin7 in&ustrial equipment or materials or it+, 8hich 8e shall call 04clical -n&ustries, are particularl4 liEel4 to &o this. 3he4 8ill set up pro&ucti$e capacit4 8hich is inten&e& to 6e ull4 use& 53 onl4 in times o prosperit4. 3his ten&enc4, 8hich practicall4 al8a4s presupposes imper ect competition, 8ill 6e stren7thene& 64 the act that e$en replacement &eman& is stron7l4 c4clical, sometimes quite irrationall4 so. 9ailroa&s, or instance, coul& 6e e(pecte& to Eno8 that &epression &o not last ore$er, 4et the4 o ten or&er ne8 rails or ne8 rollin7 stocE late in re$i$al or e$en in prosperit4. A num6er o o6$iousl4 important consequences ollo8. Lutput 8ill much more rea&il4 e(pan& in prosperit4 than 8e shoul& e(pect rom the 5ure Bo&el an& costs an& prices 8ill rise less than the4 other8ise 8oul&. Also, a peculiar Ein& o unemplo4ment, aEin to seasonal
53
3hat case must 6e &istin7uishe& rom 6uil&in7 capacit4 @ahea& o &eman&.@ ,ut inasmuch as &oin7 this rests on an e(pectation 8hich, in torn, rests on amiliarit4 8ith the results o e$olution *much more so than o 7ro8th+, this case shoul& also 6e mentione& here. 3his is another reason 8h4 so man4 in&ustries are, e$en in prosperit4, to the "le t o the optimum point.@
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unemplo4ment, ma4 ensue M or in man4 cases the men 8ho are &ismisse& 8hen prosperit4 &eman& ceases 8ill 6e neither a6le nor 8illin7 to 7et other emplo4ment &urin7 8hat the4 Eno8 is 6ut a temporar4 interruption, to 8hich the4 are accustome&, 6ut 8ill simpl4 @han7 aroun&.@ 3his is an important point to remem6er in an4 shorttime theor4 o unemplo4ment. Secon&, 8e must insert 7ro8th. Sa$in7, in particular, 8e cannot lon7er &isre7ar&, 6ecause sources an& moti$es are supplie& 64 our process stron7 enou7h to maEe it quantitati$el4 si7ni icant. -n act, it 8oul& 6e possi6le, once the c4clical process is starte&, to construct a mo&el the inancial 8heels o 8hich 8oul& entirel4 consist o sa$in7, an& 8hich 8oul& unction &i erentl4. 3his 8e shall not &o, since e$en a small amount o cre&it creation su ices to pro&uce the phenomena 8e ha$e 6een &escri6in7. ,ut 8e must insert it in 8hat 8e concei$e to 6e its actual role. -t 8ill 6e con$enient to &e er this until 8e come to the &iscussion o the 6eha$ior o monetar4 time series. :or the moment, it is enou7h to in$ite the rea&er to orm his o8n opinion o ho8 the inancin7 o inno$ation 64 sa$in7, instea& o 64 cre&it creation, 8ill a ect the contours o our 8a$es, particularl4 in price le$els. Ln the other han&, thir&, 8e must recall that cre&it creation sprea&s rom its @lo7ical@ source, inancin7 o inno$ation, throu7hout the s4stem. -t intru&es 64 8a4 o cre&it"s 6ein7 create& or an4 Ein& o e(pansion that cannot 6e inance& 64 e(istin7 un&s an& 64 8a4 o entrepreneurs" not repa4in7 8hat the4 6orro8 8ithin the c4cle an& $er4 o ten ne$er repa4in7 all o it or re6orro8in7 re7ularl4 part o their 8orEin7 capital. Ln the sur ace, there ore, cre&it creation ten&s to lose its relation to inno$ation an& 6ecomes an instrument or inancin7 6usiness in 7eneral, an& its amount 8ill &ispla4 $ariations not e(plaina6le 64 the 5ure Bo&el. :or e(ample, it ma4 increase in reco$er4, 8hen or&inar4 6usiness resumes its proportions. -t 8ill also &ecrease less than the irst appro(imation in&icatesNor not at allNin recession, 6ecause outla4 or the purpose o a&aptation o ol& irms
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an& the e(pansion o some o them into the ne8 economic space create& 64 recent inno$ation 8ill 6e inance& 64 6anE cre&it. :ourth, the e ect o inno$ation in openin7 up ne8 in$estment opportunities to in&ustries 8hich ha$e not themsel$es re orme& their metho& o pro&uction cannot 6e su icientl4 emphasiOe&. -t is not con ine& to the openin7 up o possi6ilities 6est instance& 64 the 6uil&in7 o American transcontinental railroa&s. .e8 economic space is create& also 64 the mere act that a&&itional pro&uction ma4 call orth other pro&uction to pa4 or it > i there are in the close& &omain onl4 t8o in&ustries pro&ucin7 equili6rium amounts, an& i one o them intro&uces an inno$ation ena6lin7 it, or e(ample, to pro&uce a 7reater num6er o units 8ith the same quantit4 o resources, the other in&ustr4 ma4 e(pan& its pro&uction in response. 3hat is 8hat happens e(tensi$el4 in recession an& then a7ain in re$i$al, &epressionN i su icientl4 @panicE4@N requentl4, thou7h not necessaril4, interruptin7 the process. :rom these cases it is necessar4 to &istin7ush another 8hich ma4 pro&uce similar results. Some in&ustries are so sensiti$e to the rate o interest as to shape their course primaril4 8ith re erence to it -n pre8ar <erman4, or instance, apartment-house 6uil&in7 coul& ha$e 6een represente& 8ith satis actor4 appro(imation as a unction o the mort7a7e rate alone. An& somethin7 o the Ein& is su77este& 64 the act that resi&ential 6uil&in7 in the #nite& States prece&es the 'ar$ar& 6arometer"s cur$e , 64 a e8 monthsN"8hich maEes it in the short run rou7hl4 in$erse to the mone4 cur$e 0. 5F 3his is some8hat more si7ni icant than it looEs 6ecause, apart rom the in luence o interest, 8e shoul&, i an4thin7, e(pect a la7. -t 8oul& not, ho8e$er, 6e sa e to trust this relation too much.
5F
[0ur$e ,, representin7 6usiness acti$it4, sho8e& 6anE &e6its o )F1 cities outsi&e ..1.0. 0ur$e 0, representin7 mone4, sho8e& rates on short-tune mone4.N/&.]
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:i th, 8e 8ill repeat not onl4 that the entrepreneurial impulse impin7es upon an imper ectl4 competiti$e 8orl& 6ut also that entrepreneurs an& their satellites almost al8a4s in& themsel$es in imper ectl4 competiti$e short-time situations e$en in an other8ise per ectl4 competiti$e 8orl&. -n act, e$olution in our sense is the most po8er ul in luence in creatin7 such imper ections all aroun&. 'ence 8e no8 &rop the assumption o per ect competition alto7ether, as 8ell as the assumption, ma&e at the threshol& o this chapter, that there is per ect equili6rium at the start. He can assume, instea&, that 6oth competition an& equili6rium are, in&epen&entl4 o the e ects o our process, imper ect rom the start, or e$en that the s4stem is inacti$e in the sense &e ine& in the secon& chapter. He Eno8 8hat consequences this 8ill entail > propositions an& proo s 8ill 6e less strin7ent, Oones o in&eterminateness 8ill emer7e, sequences o e$ents 8ill 6e less prompt, an& 6u ers 8ill 6e inserte& 6et8een the parts o our mechanism so that its 7ears 8ill 6e slo8er to mesh. 3here 8ill 6e more room or in&i$i&ual strate74, mo$es an& counter-mo$es 8hich ma4 impe&e, althou7h the4 ma4 also acilitate, the s4stem"s stru77le to8ar& equili6rium. 3his 8ill certainl4 pro&uce man4 reaEish patterns an& the economist"s en7ine or the pro&uction o para&o(a 8ill 6e 8orEe& up to capacit4. ,ut this is all. An important point to 6ear in min& is the possi6ilit4, or e$en the liEelihoo&, o situations in 8hich in&ustries ma4, e$en in equili6rium, mo$e 8ithin inter$als o &ecreasin7 a$era7e costs. -n act, theoretical e(pectation is, in all phases sa$e prosperit4, or this rather than or the opposite alternati$e, an& it ma4 8ell appl4 also to the 6e7innin7 o the prosperit4 phase. Since it has, 8ith man4 economists, 6ecome a ashion to maEe the presence o unemplo4e& resourceNla6or, in particularNa &atum o the pro6lem o c4cles, to 6ase their theories on it an& to o6=ect to other theories on the 7roun& that the4 ne7lect it an& ail precisel4 6ecause the4 ne7lect it, 8e 8ill state once more 8here 8e stan& concernin7 this matter. -mper ections o 6oth competition an& equili6rium, as 8ell as e(ternal &istur6ances, ma4 account or the presence o unemplo4e& resources in&epen&entl4 o the c4clical process o
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e$olution. He ha$e not intro&uce& this act into our pure mo&el in or&er to relie$e the latter o unessential an& secon&ar4 elements M 6ut it can no8 6e inserte& 8ithout &i icult4 an& 6e taEen account o in an4 7i$en case 8hich presents them. ,esi&es, since our process itsel pro&uces 6oth imper ections o competition an& &isequili6ria 8hich account or un&eremplo4ment that ma4 outlast the c4clical unit 8hich pro&uce& it, 8e inclu&e, 64 reco7niOin7 that e$er4 c4cle is heir to prece&in7 c4cles, also 8hat this source ma4 contri6ute to the total unemplo4ment 8ith 8hich an4 7i$en unit starts. 3his 8oul& ha$e 6een circular reasonin7 in the 5ure Bo&el, 6ut as ar as an4 part o total un&eremplo4ment is &ue to imper ection o competition, ull emplo4ment ceases to 6e a propert4 o equili6rium states an& instea& in&icatesNpara&o(ical thou7h this ma4 soun&N&isequili6rium o a certain t4pe. 3his is important 6ecause it supplies the ans8er to the ar7ument o those economists 8ho looE or equili6rium in the c4clical peaEs. -n an4 case, the presence o unemplo4ment at the 6e7innin7 o prosperit4 nee& not, or those 8ho 8ish to stress it, 6e an o6stacle to acceptin7 our anal4sis. ;i erence o opinion, ho8e$er, amountin7 in important cases to &i erence o &ia7nosis, arises onl4 i it 6e hel& that unemplo4ment o resources is *6arrin7 ri7i&ities+ compati6le 8ith per ect equili6rium in a per ectl4 competiti$e situation.
3a6le o 0ontents
&. Man" Simultaneou C")le 2 Thi!d A**!o5imation. So ar 8e
ha$e implie& that,6arrin7 the e ects o e(ternal &istur6ance, there is in our material a sin7le sequence o c4cles, each o 8hich is o the same t4pe as all its pre&ecessors an& successors. /$er4 in&i$i&ual c4cle has 6een thou7ht o as cripple& or &ra8n out in &uration, accentuate& or re&uce& in amplitu&e 64 its historic settin7 *8ars, 0rops, an& so on+, an& as internall4 irre7ular 6esi&es M ne$ertheless, each 8as on a par 8ith the others. ,ut there is nothin7 in our theoretical schema to 8arrant this. 3here is no reason 8h4 the c4clical
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process o e$olution shoul& 7i$e rise to =ust one 8a$eliEe mo$ement. Ln the contrar4, there are man4 reasons to e(pect that it 8ill set into motion an in&e inite num6er o 8a$eliEe luctuations 8hich 8ill roll on simultaneousl4 an& inter ere 8ith one another in the process. .or &oes the impression 8e &eri$e rom an4 7raph o economic time series len& support to a sin7le-c4cle h4pothesis. Ln the contrar4, the rea&er nee& onl4 inspect an4 o the charts in this 6ooE in or&er to satis 4 himsel that it is much more natural to assume the presence o man4 luctuations, o &i erent span an& intensit4, 8hich seem to 6e superimpose& on each other. -n acceptin7 that in erence rom theor4 an& in reco7niOin7 this act, 8e all in 8ith the 7eneral ten&enc4 in the stu&4 o 6usiness c4cles. Spectacular 6ooms an& spectacular 6reaE&o8ns 8ere 8hat irst attracte& the attention o 6oth economists an& 6usinessmen. 3he pro6lem thus presente& itsel at the outset as the pro6lem o @crises.@ 3hese 8ere primaril4 looEe& upon as in&i$i&ual catastrophes, interruptin7 an e$en lo8 or an e(pansion that &i& not 64 its o8n mechanism pro&uce them. Bost o the ar7uments 8hich e$en to&a4 8e are in the ha6it o listin7 as @theories o the c4cle@ 8ere &e$elope& then, i.e., in the last quarter o the ei7hteenth centur4 an& in, rou7hl4, the irst hal o the nineteenth centur4Nparticularl4, all the monetar4 theories an& the $arious theories o o$erpro&uction, un&erconsumption, an& so on. 3he 7reat a&$ance 6e4on& this $ie8 o the su6=ect came a6out as the result o the e orts o man4 authors, 6ut is primaril4 associate& 8ith the name o 0lement Ju7lar, 8ho 8as the irst to ha$e a clear perception o ho8 theor4, statistics, an& histor4 ou7ht to cooperate in our iel&. 'is 7reat merit is that he pushe& the crisis into the 6acE7roun& an& that he &isco$ere& 6elo8 it another, much more un&amental, phenomenon, the mechanism o alternatin7 prosperities an& liqui&ations, the latter o 8hich, as pointe& out in another place, he interprete& to 6e a reaction o the economic s4stem to the e$ents o the ormer. 'ence orth, althou7h it tooE &eca&es or this ne8 $ie8 to pre$ail, the 8a$e ouste& the crisis rom the role o prota7onist o the pla4. ,ut it 8as the e(ploration an& interpretation o
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the 8a$e to 8hich stu&ents 6ent their ener74 then. :or Ju7lar an& his ollo8ers tooE it or 7rante& that 8hat the4 ha& &isco$ere& 8as a sin7le 8a$e-liEe mo$ement an& 8ere not conscious o the act that 64 assumin7 this the4 8ere reall4 intro&ucin7 a ne8, 6ol&, an& $er4 unrealistic h4pothesis. ,ut this h4pothesis 8orEe& airl4 8ell at irst. Ju7lar"s in&in7s rom his 6anEin7 i7ures, interest rates, an& prices, supporte& as the4 8ere 64 marria7e rates an& other e$i&ence, itte& in satis actoril4 enou7h 8ith the &ates o the 6i7 crises 8hich ha& 6een reco7niOe& 6e ore him. ;i iculties arose, in&ee&, 8ith increasin7 accurac4 o o6ser$ation, an& the 8orEers in the iel&, &epri$e& o the 7ui&ance o the spectacular s4mptoms o crises, an& ace& 8ith a much 7entler s8eep, 6e7an to 8a$er a6out &uration an& phases. ,ut the4 still Eept to the h4pothesis o a sin7le 8a$e, althou7h one 8oul& thinE that reco7nition o the presence o se$eral 8a$es 8oul& ha$e 6een the natural reme&4 or part o the irre7ularities 8hich no8 cro8&e& upon them. 3his attitu&e o min&, assertin7 itsel in a reluctance to &rop a amiliar instrument o anal4sis an& in a &isposition to &en4 the realit4 or e(istence o other 8a$eliEe mo$ements 8hich 6e7an to 6e o ere& or consi&eration, is hi7hl4 interestin7 an& coul& 6e parallele& 64 man4 instances rom other sciences. -t is 64 no means e(tinct e$en no8. 5resuma6l4, it 8oul& 6e more correct to sa4 that the ma=orit4 o stu&ents has not 4et succee&e& in lea$in7 those moorin7s. :or others, ho8e$er, the pro6lem has a7ain chan7e& its comple(ion. -t is no lon7er the pro6lem o the 8a$e. -t is the pro6lem o i&enti 4in7 an&, i possi6le, isolatin7 the man4 8a$es an& o stu&4in7 their inter erence one 8ith each another. 3he present 8riter 8ho, 8hen startin7 8orE on the 6usiness c4cle nearl4 30 4ears a7o, also accepte& the sin7le-c4cle h4pothesis as a matter o course, consi&ers the &e$elopment to 6e a $er4 important pro7ress, 6ut it is one o those pro7resses 8hich at irst create as man4 &i iculties as the4 sol$e. An& he 8oul& not 6e surprise& i in the uture economists 8oul& imitate astronomers in thinEin7 it a matter o sel -respect to ha$e pri$ate perio&icities o their o8n.
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He 8ill notice onl4 those contri6ution to this line o a&$ance 8hich are &irectl4 rele$ant to our o8n 8orE. 3he4 re er to a 8a$eliEe mo$ement $er4 much lon7er an& to another 8a$eliEe mo$ement $er4 much shorter than the one &escri6e& 64 Ju7lar. Summin7 up earlier 8orE o his. 5ro essor A. Spietho sho8e& in his mono7raph on c4cles *Prisen in 'an&8orter6uch &er Staats8issenscha ten, Fth e&., 19)3+ that there are epochs in 8hich prosperities, an& other epochs in 8hich &epressions, are relati$el4 more marEe&, an& these epochs he consi&ere& as 6i77er units 8ithout, ho8e$er, com6inin7 them into c4cles containin7 an up7ra&e an& a &o8n7ra&e an& also 8ithout 7oin7 6e4on& a statement to the e ect that the4 8ere pro6a6l4 &ue to other causes than 8hat he 8as prepare& to call c4cles. Appl4in7 his criterion o iron consumption he oun& that or /n7lan& the perio& rom 18)) to 18F) constitutes such a span o *pre$alence o + &epression *StocEun7pspanm+ an& that or <erman4 the 4ean 18F3 to 18J3 an& 1895 to 1913 maEe up spans o *pre$alence o + prosperit4 *Au sch8un7pspanne+, 8hile rom 18JF to 189F 8e ha$e a span o &epression. -t 8as .. ;. Pon&ratie , ho8e$er, 8ho 6rou7ht the phenomenon ull4 6e ore the scienti ic communit4 an& 8ho s4stematicall4 anal4Oe& all the material a$aila6le to him on the assumption o the presence o a 2on7 Ha$e, characteristic o the capitalist process. 'e &ates the irst lon7 8a$e co$ere& 64 his material rom the en& o the ei7hties or the 6e7innin7 o the nineties o the ei7hteenth centur4 to 18FF-1851 M the secon&, rom 18FF-1851 to 1890-189G M an& the thir&, rom 1890-189G on8ar&. Lther stu&ents also presente& e$i&ence o the presence o mo$ements o a$era7e perio& lon7er than that usuall4 attri6ute& to the Ju7lar c4cle. He 8ill mention 5ro essor S. S. PuOnets *Secular Bo$ements in 5ro&uction an& 5rices, 1930+ an& ;r. 0. A. 9. Har&8ell *An in$esti7ation o /conomic ;ata or Ba=or 04cles, 19)J+, 8ho oun& a$era7e perio&s o rou7hl4 )5 an& 15 4ears, respecti$el4. -n 19)3 5ro essor H. 2. 0rum pu6lishe& the result o a perio&o7ram anal4sis o monthl4 commercial paper rates in .e8 1orE rom 18GG to 19)), clearl4 sho8in7 the presence o a perio& o
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rou7hl4 F0 months in the series anal4Oe&. 3he importance o the contri6ution consists in the act that it esta6lishe&, at least or one series an& 8ithout an4 urther comment, the e(istence o a c4cle 8hich can 6e o6ser$e& in practicall4 all time series an& is reall4 the most $isi6le an& most re7ular o all. Simultaneousl4, Br. Joseph Pitchin, 64 a less ri7orous 6ut more plia6le metho&, sho8e& that c4cle also in 6anE clearin7s an& 8holesale prices, as 8ell as in interest rates, or 6oth <reat ,ritain an& the #nite& States, &urin7 the perio& 1890 to 19)), moreo$er contraste& it 8ith the Ju7lar c4cle an& a lon7er s8in7 8hich can 6e rou7hl4 i&enti ie& 8ith Spietho :"s spans an& 8hich he linEe& up 8ith 7ol& pro&uction. @3he F0-month-c4cle,@ althou7h at irst none too a$ora6l4 recei$e&, has since acquire& citiOenship 8hich, as 8e shall see, cannot reasona6l4 6e questione&. 5ro essor Bitchell"s authorit4 ma4, it seems, 6e appeale& to or quali ie& support, 6ase& upon anal4sis o i$e American s4stematic series Wamon7 them, t8o o clearin7s an& one o &eposits+ or 18J8N 19)3, 8hich 7i$es a mean &uration *o c4cles in 7eneral+ o F).05 months 8ith a stan&ar& &e$iation o 1).3J months, 8hile the me&ian is F0 months. 3he hi7h $alue o the stan&ar& &e$iation must not astonish us. .othin7 more re7ular can 6e e(pecte& in material such as ours is. Assertion or &enial o the coe(istence o se$eral c4clical mo$ements ma4, o course, mean man4 &i erent thin7s, an& &iscussion stan&s to 7ain rom a clear &istinction amon7 them in each case. An author 8ho su6mits in&in7s a6out 8hat he hol&s to 6e a &istinct c4clical mo$ement, ma4 simpl4 claim to ha$e esta6lishe& a statistical act. 'e ma4, ho8e$er, claim less or more. Ln the one han&, he ma4 merel4 hol& that assumin7 the e(istence o se$eral c4cles 8ill pro$e to 6e a use ul &escripti$e &e$ice. Ln the other han&, he ma4 hol& that his c4cles correspon&, each o them, to &i erent economic processes an& linE up 8ith &i erent causes. 3here is such a $ariet4 o possi6le stan&points 6et8een an& aroun& these t8o, that there is har&l4 an4 sense in strai7ht asertion or strai7ht &enial o an46o&4"s c4cles. He return to our ar7ument, in or&er to maEe our o8n stan&point as clear as possi6le.
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:irst, i inno$ations are at the root o c4clical luctuations, these cannot 6e e(pecte& to orm a sin7le 8a$eliEe mo$ement, 6ecause the perio&s o 7estation an& o a6sorption o e ects 64 the economic s4stem 8ill not, in 7eneral, 6e equal or all the inno$ations that are un&ertaEen at an4 time. 3here 8ill 6e inno$ations o relati$el4 lon7 span, an& alon7 8ith them others 8ill 6e un&ertaEen 8hich run their course, on the 6acE o the 8a$e create& 64 the ormer, in shorter perio&s. 3his at once su77ests 6oth multiplicit4 o luctuations an& the Ein& o inter erence 6et8een them 8hich 8e are to e(pect. Hhen a 8a$e o lon7 span is in its prosperit4 phase, it 8ill 6e easier or smaller 8a$esN.8hich, as a rule, 8ill correspon& to less important inno$ationsNto rise, an& as lon7 as the @un&erl4in7@ prosperit4 lasts there 8ill 6e a cushion rea&4 or them 8hile, sa4, in the &epression phase o the un&erl4in7 8a$e it ma4 6e impossi6le or them to rise $isi6l4 at all, althou7h the4 mi7ht still assert themsel$es 64 so tenin7 that &epression throu7h their prosperities an& intensi 4in7 it throu7h their &epressions. 3he impression some o us ha$e that seasonal luctuations are particularl4 stron7 in times o prolon7e& &epression ma4 6e &ue to that. Kariations in e(pen&iture 8ithin each class o c4cle 8ill accentuate or compensate the e ects o $ariations in e(pen&iture occurrin7 in the course o all other contemporaneous c4cles, an& no $ariation 8ill 6e 8hat it 8oul& 6e in the a6sence o the others. 3hese c4cles 8ill &isplace each other"s peaEs an& trou7hs an& 6et8een them pro&uce contour lines that are completel4 un&erstan&a6le 8ithout &ue reco7nition o the phases o the others into 8hich the phase o an4 7i$en c4cle happens to all. ,eha$ior o time series that seems to &isa$o8 e(pectation can o ten 6e e(plaine& in this 8a4. Secon&, a statistical an& historical picture o a mo$ement &ispla4in7 more than one c4cle ma4 result rom the act that successi$e c4clical units are not so in&epen&ent o each other as 8e assume& in constructin7 our mo&el. Hhen some inno$ation has 6een success ull4 carrie& into e ect, the ne(t 8a$e is much more liEel4 to
1JG
start in the same or a nei7h6orin7 iel& than an48here else. Ba=or inno$ations har&l4 e$er emer7e in their inal orm or co$er in one thro8 the 8hole iel& that 8ill ultimatel4 6e their o8n. 3he railroa&iOation, the electri ication, the motoriOation o the 8orl& are instances. Lne railroa& or a e8 lines ma4 6e all, an& more than all, that can 6e success ull4 6uilt in a 7i$en en$ironment at a 7i$en time. 9eaction an& a6sorption ma4 ha$e to ollo8 6e ore a ne8 8a$e o railroa& construction 6ecomes possi6le. 3he motorcar 8oul& ne$er ha$e acquire& its present importance an& 6ecome so potent a re ormer o li e i it ha& remaine& 8hat it 8as thirt4 4ears a7o an& i it ha& aile& to shape the en$ironmental con&itionsNroa&s, amon7 themN or its o8n urther &e$elopment. -n such cases, inno$ation is carrie& out in steps each o 8hich constitutes a c4cle. ,ut these c4cles ma4 &ispla4 a amil4 liEeness an& a relation to one another 8hich ten&s to 8el& them into a hi7her unit that 8ill stan& out as a historical in&i$i&ual. 3he case is entirel4 &i erent rom the pre$ious one. 3here 8e ha& a multiplicit4 o c4cles each o 8hich 8as an in&epen&ent entit4. 'ere 8e ha$e a sequence o c4cles o one t4pe onl4, an& the c4cle o hi7her or&er is 6ut a pro&uct or composite o these an& has no e(istence o its o8n. 3hir&, a sequence o c4cles, 8hether in&epen&ent o one another or not, ma4 6e the result o processes 8hich ha$e also e ects other than those 8hich sho8 in the c4cles themsel$es. 9ailroa&iOation ma4 a7ain ser$e as an e(ample. /(pen&iture on, an& the openin7 o , a ne8 line has some imme&iate e ects on 6usiness in 7eneral, on competin7 means o transport, an& on the relati$e position o centers o pro&uction. -t requires more time to 6rin7 into use the opportunities o pro&uction ne8l4 create& 64 the railroa& an& to annihilate others. An& it taEes still lon7er or population to shi t, ne8 cities to &e$elop, other cities to &eca4, an&, 7enerall4, the ne8 ace o the countr4 to taEe shape that is a&apte& to the en$ironment as altere& 64 the railroa&iOation. Another e(ample is the process Eno8n as the -n&ustrial 9e$olution. -t consiste& o a cluster o c4cles o $arious span that 8ere superimpose& on each other. ,ut these to7ether
1JJ
8rou7ht a un&amental chan7e in the economic an& social structure o societ4 8hich in itsel also ha& some o6$iousl4 c4clical characteristics. -t came a6out in phases in 8hich prices, interest rates, emplo4ment, incomes, cre&it, an& output 6eha$e& much as the4 &i& in the luctuations uni$ersall4 reco7niOe& as c4cles. An& 8e shoul& 6e losin7 an o6$ious opportunit4 o pushin7 our anal4sis &eeper into the material o economic histor4 i 8e re use& to taEe account o this. A7ain, this Ein& o c4cle or this aspect o 8hat it has 6ecome usual to call the 2on7 Ha$e, is completel4 &i erent rom either the irst or the secon& case. -t &i ers rom the latter in that it is a real phenomenon an& not merel4 the statistical e ect o a sequence o real phenomena ha$in7 more in common 8ith one another than 8ith similar phenomena outsi&e the sequence. -t &i ers rom the ormer in that it cannot 6e linEe& to a particular t4pe o inno$ations as a7ainst other t4pes carrie& out &urin7 the same epoch, 6ut is the result o all in&ustrial an& commercial processes o that epoch. He conclu&e, as state& in the irst para7raph o this section, that there is a theoreticall4 in&e inite num6er o luctuations present in our material at an4 time, the 8or& present meanin7 that there are real actors at 8orE to pro&uce them an& not merel4 that the material ma4 6e &ecompose& into them 64 ormal meth-o&s. 3heir &uration $aries 7reatl4N or 8e Eno8 that some o them are associate& 8ith e ects o processes 8hich run their course in a 4ear or t8o, others 8ith e ects 8hich are secular 64 natureN6ut mi7ht in a limitin7 case $ar4 continuousl4. As a matter o act, 8e shall not e(pect this, 6ut rather that perio&s 8ill &ispla4 inite &i erences clusterin7 aroun& certain a$era7es. Some o these perio&s 8ill 6e so close to7ether as to 6e un&is-tin7uisha6le. Lthers 8ill 6e 8i&e apart. .othin7 in this implies a h4pothesis. All it has to &o 8ith h4potheses is that it implies the re usal to accept one, $iO., the sin7lec4cle h4pothesis. .or are 8e 7oin7 to maEe another h4pothesis to taEe the place o the latter. ,ut 8e are 7oin7 to maEe a &ecision. :or our purpose, as or man4 others, it 8oul& 6e hi7hl4 incon$enient to lea$e
1J8
matters at the a6o$e result an& to attempt to 8orE 8ith an in&e inite num6er o c4cles or classes o c4cles. .or is there an4 necessit4 o &oin7 so. -t stan&s to reason that as 8e &ra8 a8a4 rom the sin7lec4cle h4pothesis 8e shall reap the 6ulE o the har$est to 6e hope& or at the irst steps an& that then these returns 8ill 6e rapi&l4 &ecreasin7. 'ence, 8e &eci&e no8 to content oursel$es, or the rou7h purposes o this $olume, 8ith three classes o c4cles, to 8hich 8e shall re er simpl4 as Pon&ratie s, Ju7lars an& Pitchins, 6ecause the a$era7e spans 64 8hich 8e choose to i&enti 4 the in&i$i&uals 6elon7in7 to each o our three classes appro(imatel4 correspon& to the spans o the c4cles @&isco$ere&@ 64 those three in$esti7ators, respecti$el4. Since this arran7ement pla4s a consi&era6le role in the e(position that is to ollo8 an& since an4 misun&erstan&in7s a6out it mi7ht easil4 impair the contri6ution to the stu&4 o 6usiness c4cles 8hich this 6ooE ma4 6e hope& to maEe, it is &esira6le to comment upon it. 1.,4 sa4in7 that in a&optin7 a three-c4cle schema 8e are not maEin7 an4 h4pothesis 8hich is to replace the sin7le-c4cle h4pothesis, 6ut onl4 a &ecision, 8e ha$e 8ai$e& an4 claims or that schema 6e4on& those 8e are a6out to state. 3here are no particular $irtues in the choice ma&e o =ust three classes o c4cles. :i$e 8oul& perhaps 6e 6etter, althou7h, a ter some e(perimentin7, the 8riter came to the conclusion that the impro$ement in the picture 8oul& not 8arrant the increase in cum6ersomeness. -n particular, it cannot 6e emphasiOe& too stron7l4 that the three-c4cle schema &oes not ollo8 rom our mo&elNalthou7h multiplicit4 o c4cles &oesNan& that appro$al o it or o6=ection to it &oes not a&& or &etract rom the $alue or other8ise o our un&amental i&ea, 8hich 8oul& 8orE equall4 8ell or ill 8ith man4 other schemata o this Ein&. - 8e &iscuss the 6eha$ior o time series in terms o Pon&ratie s, Ju7lars, an& Pitchins, this 8ill 6e &one simpl4 6ecause the 8riter has oun& it use ul in his o8n 8orE an& in marshalin7 his acts. So ar, then, the three-c4cle schema ma4 6e looEe& upon as a con$enient &escripti$e &e$ice, an& rea&ers 8ho so 8ish nee& ne$er looE upon it in an4 other li7ht. As ar as this 7oes, it ollo8s that 8e are estoppe& rom callin7 the sin7le-
1J9
c4cle schema 8ron7 > the onl4 reproach 8e can cast upon it is that it is incon$enient. ). ,ut one moti$e o the &ecision ma&e 8as to ha$e as man4 classes or or&ers o c4cles as are necessar4 in or&er to assure us that all o the three reasons or the multiplicit4 o c4cles ha$e the opportunit4 o comin7 into pla4, an& not more. 55 Another 8as to ha$e the amilies o lon7, me&ium, an& short c4cles represente&. An&, inall4, it 8as thou7ht reasona6le to require that each o the c4cles to 6e chosen shoul& ha$e &e inite historical an& statistical meanin7. 3his requirement accounts or the act that our c4cles are precisel4 those @&isco$ere&@ 64 the authors 64 the name o 8hom 8e &esi7nate them, or 8hate$er e(ception ma4 6e taEen to their material an& metho&s an& ho8e$er much room there ma4 6e or &i erence o opinion a6out the &etails o their in&in7s, certain 6roa& acts, o ten o6ser$e& 8ithout an4 intention to &isco$er an4 c4cles, stan& out to 6ear 8itness to the historical an& statistical meanin7 o those three or&ers o c4cles. 'istoricall4, the irst Pon&ratie co$ere& 64 our material means the in&ustrial re$olution, inclu&in7 the protracte& process o its a6sorption. He &ate it rom the ei7hties o the ei7hteenth centur4 to 18F). 3he secon& stretches o$er 8hat has 6een calle& the a7e o steam an& steel. -t runs its course 6et8een 18F) an& 189J. An& the thir&, the Pon&ratie o electricit4, chemistr4, an& motors, 8e &ate rom 1898 on. 3hese &atin7s &o not lacE historical =usti ication. 1et the4 are not onl4 tentati$e, 6ut also 64 nature merel4 appro(imate. A consi&era6le Oone o &ou6t surroun&s most o them, as 8ill 6e seen more clearl4 later on. /ach Ju7lar not onl4 has its @6i7@ crisisN8e &o not attach much importance to thisN6ut also can 6e associate& 8ith &e inite
55
3hree turne& out to 6e the minimum num6er satis 4in7 that requirement M 6ut this &oes not mean that 8e speci icall4 associate each o our c4cles 8ith one o those reasons. -nasmuch as the secon& an& thir& reasons re er to e ects 8hich must taEe a comparati$el4 lon7 time to assert themsel$es, the Pon&ratie 8ill 6ear a particular relation to them. Lther8ise, it is merel4 a chance coinci&ence that, ha$in7 seen three reasons or the multiplicit4 o c4cles, 8e also chose to con ine that multiplicit4 to three or&ers or classes.
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inno$ator4 processes in in&ustr4 an& tra&e. A$era7e &uration is 6et8een nine an& ten 4ears. 'istorical association o that Ein& is most &ou6t ul in the case o the Pitchins, partl4 6ecause the 8riter has not 6een a6le to accomplish the hea$4 tasE o in$esti7atin7 each o them 6ut ha& to 6e content 8ith a sur$e4 o a e8 inter$als. 9esults 8ere not conclusi$e, an& it is e$en necessar4 to lea$e open the possi6ilit4 that Pitchins are merel4 luctuations o the a&apti$e t4pe *sec. /+. 5G Hhether or not the statistical e$i&ence supports the historical to the e(tent necessar4 to maEe our schema a use ul tool o anal4sis, 8ill 6e or the rea&er to =u&7e. All classes or or&ers o c4cles sho8 &i erentl4 in &i erent series an& countries > in some series, such as pi7-iron consumption an& unemplo4ment, Ju7lars sho8 6est M in otherNthe ma=orit4 o the series is amon7 themNthe Pitchins. 3he latter stan& out 6etter, on the 8hole, in America than in /n7lan&, Ju7lars 6etter in
5G
[2ater in li e, Schumpeter entirel4 a6an&one& the i&ea that Pitchins coul& 6e e(plaine& 64 his theor4.N/&.]
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<erman4 than in /n7lan&. 5J All this also &e ines the sense in 8hich 8e claim @real e(istence@ or our three or&ers o c4cles. 3. :rom the reasons 7i$en or e(pectin7 the simultaneous presence o c4cles o &i erent or&er, it ollo8s that or us the pro6lem that arises as soon as 8e reco7niOe the presence o more than one c4clical mo$ement, is a pro6lem o inter erence onl4 an& not N8ith the pro$iso =ust ma&e as re7ar&s the Pinchin c4cleNa pro6lem o &i erent causation. 3he4 are all to 6e e(plaine& in terms o the process o economic e$olution as &escri6e& 64 our mo&el. -nno$ations, their imme&iate an& ulterior e ects an& the response to them 64 the s4stem, are the common @cause@ o them all, althou7h &i erent t4pes o inno$ations an& &i erent Ein&s o e ects ma4 pla4
5J
Ker4 little 8ill 6e sai&, as opportunities arise, a6out those &i erences. 3his maEes it all the more important to emphasiOe here that the4 ma4 in uture pro$e to 6e $er4 help ul clues to a 8i&e $ariet4 o pro6lems. ;i erences in the 6eha$ior o the same *or closel4 relate&+ series in &i erent countries ma4 tell us a 7reat &eal a6out the economic structure o these countries, the peculiarities o their economic en7ines, an& their economic relations to each other. ;i erences in the &e7ree to 8hich &i erent c4cles sho8 in &i erent series are ull o potential in ormation a6out the &etails o the c4clical mechanism an& the character o the &i erent c4cles. -t shoul& 6e a&&e& that, 8hile the act that a 7i$en class o c4cle is a6sent or $er4 8eaEl4 marEe& in an4 sin7le series is, or that reason, al8a4s $er4 interestin7, it must ne$er 6e recor&e& a7ainst the @realit4@ o that class o c4cle. :or instance, Br. ,. <reenstein, in his perio&o7ram stu&4, 8hich ranEs $er4 hi7h on the list o contri6ution o this t4pe *5erio&o7ram Anal4sis 8ith Special Application to ,usiness :ailures in the #nite& States 18GJ-193)N&ata, relati$e num6er o ailures rom ;un"s 9e$ie8N/conometrics or April 1935+ in&s a c4cle o a t4pical &uration o 9.F 4ears, 8hich the present 8riter *6ut the rea&er Eno8s 64 no8 ho8 easil4 satis ie& he is+ consi&ers e(tremel4 satis actor4 an&, in act, 8ishes to list as one o the ma=or statistical testimonials or the Jun7lar c4cle. 3here are also minor peaEs 6ut nothin7 8hate$er to in&icate an4thin7 liEe the Pinchin c4cle. 3his, ho8e$er, is precisel4 8hat 8e shoul& e(pect. :luctuations the &epression phases o 8hich are as short an& 7entle as those o the Pitchins are not liEel4 to &ri$e an4 a6normal num6er o irms into 6anEruptc4 or, more 7enerall4, ailure, 8hile the stron7er s8in7s, &ue to more &eepreachin7 in&ustrial chan7e, o the Ju7lars naturall4 8ill. -n this respect the case is similar to those o unemplo4ment percenta7e or pi7-iron consumption mentione& a6o$e > $ariations o these cannot 6e 7reat in the course o Pitchins.
18)
&i erent roles in each. Hith this quali ication an& also another 8hich 8ill su77est itsel in the ne(t section *presence o luctuations o &i erent t4pes+, it is the same phenomenon an& the same mechanism 8e o6ser$e in all o them. -n particular, 8e ha$e in all cases the same reasons or e(pectin7 t8o or our phases. ;i erence in &uration alone su ices to alter man4 &etails in the pictures presente& 64 c4cles o &i erent or&ers an& in man4 cases e(pectations 8ill ha$e to 6e ormulate& separatel4 or c4cles o &i erent span. ,ut, in principle, our 7eneral propositions appl4 to all o them. :or the anal4sis o 7i$en patterns o realit4 this conception o the process o e$olution pro&ucin7 a multiplicit4 o simultaneous 8a$es is o consi&era6le importance, althou7h it &oes not, o course, touch upon an4 o those phenomena 8hich are pro&uce& 64 e(ternal actors, 6ecause it allo8s us to see the economic process in the li7ht o a sin7le simple principle. 3here ore, it seems to 6e 8orth 8hile to use it as a schema o interpretation an& to it it or this ser$ice 64 in$estin7 it 8ith some a&&itional properties su77este& 64 8hat 8e Eno8 a6out the mechanism o c4cles an& 64 anal4tical con$enience. 9epresentation o 8hat, in realit4, is in&e inite multiplicit4 64 three or&ers o c4cles 8as the un&amental step. He no8 7o on to postulate that each Pon-&ratie shoul& contain an inte7ral num6er o Ju7lars an& each Ju7ular an inte7ral num6er o Pitchins. 3he 8arrant or this is in the nature o the circumstances 8hich 7i$e rise to multiplicit4. 8a$es o inno$ations o shorter span pla4 aroun& a 8a$e o a similar character 6ut o lon7er span, the sequence o the phases o the latter 8ill so &etermine the con&itions un&er 8hich the ormer rise an& 6reaE as to maEe a hi7her unit out o them, e$en i the inno$ations 8hich create them are entirel4 in&epen&ent o the inno$ations 8hich carr4 the lon7er 8a$e. 3here 8ill 6e a relation 6et8een the phases o each o the t8o mo$ements 8hich 8ill ten& to Eeep the shorter ones 8ithin the lon7er span. 3he analo7ous proposition or the secon& an& thir& causes o multiplicit4 is o6$ious. 3he act that the units o a c4clical mo$ement o a certain or&er cannot 6e consi&ere& as in&epen&ent Nan4 more than the in&i$i&ual items in an4 time
183
sequenceNaccounts or man4 &i iculties encountere& in anal4sis 64 means o ormal statistical metho&s. 3he units 8hich all 8ithin a unit o the ne(t hi7her or&er 8ill &ispla4 certain relations to one another 8hich separate them rom others, an& the units o a c4clical mo$ement o a certain or&er 8hich happen to all in the correspon&in7 phases o successi$e units o a c4clical mo$ement o ne(t hi7her or&er 8ill also ha$e some characteristics in common 8hich, in some respects, maEe a &istinct uni$erse o them. Boreo$er it ollo8s that the s8eep o each lon7er 8a$e supplies nei7h6orhoo&s o equili6rium or the 8a$e o the ne(t lo8er or&er. Since shorter 8a$es must in most cases rise rom a situation 8hich is not a nei7h6orhoo& o equili6rium 6ut &istur6e& 64 the e ects o the lon7er 8a$es in pro7ress at this time, 8e must no8 mo&i 4 our pre$ious proposition that the process o inno$ation starts rom such nei7h6orhoo&s onl4, as 8ell as our concept o nei7h6orhoo& o equili6rium itsel . :rom the stan&point o the transactions 8hich carr4 a luctuation o short span, the s8eep o the lon7er 8a$es constitutes the lon7-time con&itions o &oin7 6usiness, althou7h ull equili6rium coul&, e$en theoreticall4, e(ist onl4 in the points in 8hich all c4cles pass their normals. 3his accor&s 8ell 8ith the attitu&e to8ar& economic luctuations o the 6usiness communit4. Hhat the 6usinessman sees, eels a6out, an& taEes account o are the relati$el4 short 8a$es. -n our three-c4cle schema the4 8oul& 6e the Pitchins. Ha$es much lon7er than these he &oes not reco7niOe as such, 6ut onl4 as 7oo& or 6a& times, ne8 eras, an& so on. 'e, there ore, acts as a rule on the con&itions o a phase o lon7er c4cles as i these con&itions 8ere permanent. 3his is o6$iousl4 so in the case o the Pon&ratie . 3he Ju7ular is an interme&iate case. :or e$er4 time series the s8eep o an4 c4cle is the tren& o the c4cles o ne(t lo8er or&er. .o h4pothesis a6out the precise orm o the relation 6et8een c4cles o &i erent or&er is implie& in this. -n particular, their e ects are not simpl4 a&&iti$e, altou7h it ma4 su ice or our rou7h purposes to assume that the4 are lo7arithmicall4 a&&iti$e. /$en so, it is clear that the coinci&ence at an4 time o correspon&in7 phases o all three
18F
c4cles 8ill al8a4s pro&uce phenomena o unusual intensit4, especiall4 i the phases that coinci&e are those o prosperit4 or &epression. 3he three &eepest an& lon7est @&epressions@ 8ithin the epoch co$ere& 64 our matrial N 18)5-1830, 18J3-18J8, an& 19)9193F Nall &ispla4 that characteristic. As the rea&er sees, there is some rational =usti ication or the t8o a&&itional properties o the c4clical mo$ement 8hich 8e ha$e no8 intro&uce&. ,ut there is no rational =usti ication that the 8riter can see or assumin7 that the inte7ral num6er o Pitchins in a Ju7ular or o Ju7lars in a Pon&ratie shoul& al8a4s 6e the same. 1et rom the stu&4 o our time series 8e &eri$e a rou7h impression that this is so. ,arrin7 $er4 e8 cases in 8hich &i iculties arise, it is possi6le to count o , historicall4 as 8ell as statisticall4, si( Ju7lars to a Pon&ratie an& three Pitchins to a Ju7larNnot as an a$era7e 6ut in e$er4 in&i$i&ual case. He shall maEe use o this act in our e(position, 6ut the 8riter is $er4 an(ious to maEe it quite clear, not onl4 that no ma=or result &epen&s on this, 6ut also that no part o his theoretical schema is tie& up 8ith it. 3here is nothin7 in it to 8arrant e(pectation o an4 such re7ularit4. Ln the contrar4, the lo7ical e(pectation rom the un&amental i&ea 8oul& 6e irre7ularit4 M or 8h4 inno$ations 8hich &i er so much in perio& o 7estation an& in the time it taEes to a6sor6 them into the s4stem shoul& al8a4s pro&uce c4cles o respecti$el4 some8hat less than G0 4ears, some8hat less than 10 4ears, an& some8hat less than F0 months, is in&ee& &i icult to see. He state the act o 8hat seems to us consi&era6le re7ularit4 58,
58
L course, it is lar7el4 a matter o opinion-Nor o tests, the $ali&it4 o 8hich is a matter o opinionNho8 ar 8e shoul& reco7niOe that act at all. 'a$in7 ma&e it a6un&antl4 &ear that c4cles are an irre7ular phenomenon pla4in7 in an en$ironment &istur6e& 64 a&&itional irre7ularities, the 8riter 8oul& eel sa e a7ainst an4 misun&erstan&in7 o the meanin7 o his schema it such misun&erstan&in7s ha& not requentl4 arisen. :rom stan&ar&s 8hich are clearl4 inapplica6le to material such as ours, it is, o course, eas4 to ar7ue that no re7ularit4 has 6een pro$e& cither 64 the present or an4 other 8riter an& that, in particular, our three c4cles are not a&equatel4 esta6lishe& 64 the e$i&ence to 6e presente& later. 3here ore, it ma4 not 6e super luous to insist once more on the sense in 8hich 8e are 7oin7 to speaE o , sa4, the
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&e$iations rom 8hich are in e$er4 case easil4 accounte& or 64 e(ternal &istur6ances, 6ecause 8e 6elie$e it to 6e a act 6ut not on account o an4 theoretical preconception in its a$or. - the rea&er accepts that act, he ou7ht to recor& it, not or, 6ut a7ainst the anal4tical schema presente&. - he re uses to accept it, such &isa7reement 8ill not entail an4 consequences 6e4on& complicatin7 &escription. -t shoul& 6e a&&e&, ho8e$er, that our o6ser$ation is in rou7h accor& 8ith man4 8ell-Eno8n estimates o the &uration o c4cles an& looEs as stran7e as it &oes onl4 6ecause 8e com6ine estimates not usuall4 presente& to7ether. /. Lther :luctuations. N L6$iousl4, the 8a$es o 8hich 8e ha$e 6een tr4in7 to &escri6e the mechanism an& the causes are not the onl4 economic luctuations. 3he rea&er nee& onl4 thinE o seasonal luctuations in or&er to satis 4 himsel o this. Statistical an& theoretical anal4sis re$eals the presence in our material o $er4 man4 other 8a$eliEe mo$ements. /(cept or the purposes o the theor4 o static equili6rium, the economic process ou7ht reall4 to 6e thou7ht o as an in initel4 comple( composite o man4 s4nchronous 8a$es o &i erent nature, quite apart rom the class 8hich interests us here. Lne o the most important tasEs o the theor4 o the uture lies in this &irection.
Pitchin. He mean that there are luctuations, shorter than those o the Ju7ular 7roup, 6ut 8hich 8e ne$ertheless 6elie$e to 6e o similar nature an& 8hich 8e thinE to 6e tolera6l4 represente& 64 a t4pical &uration some8hat e(cee&in7 three 4ears. He &o not mean that the4 are e(actl4 F0 monthsN mostl4, the4 are shorter. .or &o 8e 6elie$e that that @some8hat e(cee&in7 three 4ears@ represents a mean or mo&e that meets an4 ormal &ispersion test. 3he 8riter thinEs that an4 such test 8oul& not ha$e ha& much sense. 3hat is 8h4 he le t the &uration so little &eterminate. 'e remem6ers that the most $alue& assistant he e$er ha& once thre8 up his han&s in hol4 horror 8hen he e(presse& himsel satis ie&, in a certain case, 8ith a @perio&icit4@ o F8 months as sho8in7 the presence o the @F0-month c4cle.@ 'e ranEl4 a&mits that this soun&s a6sur&, 6ut 8hat he meant 8as not so at all. 3race o luctuations su6stantiall4 lon7er than 1 an& su6stantiall4 shorter than 9 4ears 8as all he elt =usti ie& in looEin7 or. An& these he al8a4s oun&, thou7h o ten onl4 in rates o chan7e.
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3he 6usiness c4cles 8ith 8hich 8e are concerne& are reall4 not at all 8hat one thinEs o 8hen usin7 the terms Ha$e :luctuation. 3he4 are the result o a process 8hich, in&ee&, pro&uces up8ar& an& &o8n8ar& mo$ements in our 7raphs, hut these mo$ements are not analo7ous to the oscillation o an elastic strin7 or mem6raneN8hich, once set into motion, 8oul&, 6ut or riction, 7o on in&e initel4N6ecause the4 are &ue to the intermittent action o the @ orce@ o inno$ation, 64 8hich the action o the equili6rium @ orce@ is each time 6rou7ht into pla4. ,ut there are other economic luctuations 8hich ans8er more nearl4 to the ph4sical analo74. 1. ,e ore &iscussin7 a e8 o these, ho8e$er, it is necessar4 to point out a7ain that our c4cles are not e$en alone in their o8n class. Ker4 man4 e(ternal actors 8ill act so as to pro&uce a sequence o phenomena 8hich 8ill looE in man4 respects similar to a unit o the c4clical process. - the4 occur o ten enou7h, the 7raphs o the time series o a 8orl& in 8hich the4 are the onl4 ones to act on an other8ise stationar4 process ma4 easil4 present the picture o a 8a$eliEe mo$ement, e$en i there 8ere no oscillation aroun& it. Har inance a or&s an instance. Hhile 8ar &eman& is 6ein7 inance& 64 in lationar4 metho&s, 8e shall o6ser$e man4 o the phenomena 8hich 8e associate 8ith the prosperit4 phases o our c4cles. Hhen the 8ar &eman& ceases an& 6u&7ets are 6alance& a7ain, 8e shall ha$e 6e ore us most o the sur ace phenomena o recession an& &epressionN8ith secon&ar4 8a$es superimpose&Na ter 8hich a perio& 8ill ollo8 8hich shoul& &ispla4 man4 o the characteristics o a c4clical reco$er4. 3he shi ts occurrin7 &urin7 the process in the in&ustrial or7anism, irst rom peace to 8ar pro&uction an& then a7ain rom 8ar to peace pro&uction, 8ill present urther analo7ies. 0auses an& e ects are all &i erent, o course, 6ut there 8ill 6e @8a$es@ ne$ertheless. -n act, man4 authors reason on the c4clical process in a 8a4 8hich 8oul& 6e much more appropriate in the case o such 8ar 8a$es than it is in the case o the ormer. An& no inconsi&era6le part o 8hat to us seems ault4 anal4sis ma4 6e &ue to the analo74 8ith the mo&us operan&i o e(ternal &istur6ance. 3here 8oul&, hence, 6e some point
18J
in 8orEin7 out s4stematicall4 6oth similarities an& &i erences, particularl4 8ith re erence to the 6eha$ior o the monetar4 mechanisms, 6ut 8e cannot sta4 to &o this. Another e(ternal actor 8hich ma4 6e responsi6le or 8a$eliEe 6eha$ior is $ariation in 7ol& pro&uction as ar as &ue to chance or @autonomous@ &isco$er4. Since the theories 8hich use it as a 6asis or the e(planation o shorter c4cles seem no lon7er to ha$e a&herents, the onl4 question is 8hether the lon7 8a$e can 6e e(plaine& 64 them. Such contri6utions to an ans8er as the present 8riter has to o er 8ill 6e oun& in $arious places, especiall4 in the historical chapters. 'ere, risEin7 repetition, 8e 8ill merel4 state irst, that 8e are not ace& 8ith an alternati$e e(planation, acceptance o 8hich 8oul& impl4 a6an&onment o the e(planation presente& in this 6ooE an& $ice $ersa. 3his is o6$ious as re7ar&s $ariations in 7ol& pro&uction that ma4 6e thou7ht o as in&uce& 64 our process, 6ut also true o autonomous &isco$eries. 3he4 simpl4 alter some o the con&itions o entrepreneurial acti$it4 > it 8oul& 6e nothin7 short o a6sur& to sa4 that 0ali ornian an& Australian 7ol& &isco$eries calle& orth railroa& construction, or South A rican 7ol& &isco$eries the @electri ication@ o the economic 8orl&, 6oth o 8hich ha& 6e7un 6e ore, or that these e$ents 8oul& ha$e 6een impossi6le 8ithout them. Secon&, 7ol& &isco$eries act on the s4stem throu7h interest rates an& prices, an& on interest rates 8holl4, on prices mainl4, throu7h the 6anEin7 mechanism. / ects can, hence, ne$er 6e rea& o &irectl4 rom 7ol& pro&uctionNor $ariations in 7ol& m monetar4 use, 8hich is also a unction o other $aria6les than 7ol& pro&uctionN6ut em6o&4 the reaction o 6anEs an& their customers. ,ut, thir&, prices an& $alues 8ill, in the lon7 run, 6e &i erent rom 8hat the4 8oul& 6e i 7ol& pro&uction 8ere su6stantiall4 &i erent rom 8hat it is, pro$i&e& 7ol& pla4s an4 ma=or role in monetar4 s4stems, althou7h not in 7eneral to the e(tent one 8oul& e(pect on quantit4-theor4 7roun&s. Ban4 &etails o the picture o e$ents 8ill 6e tracea6le to its 6eha$ior. An& since @le$els@ an& @tren&s@ o prices an& $alues 8ill also 6e in luence&, 8e ma4 in act speaE o a 8a$e sui 7eneris, &ue to the in luence o 7ol&,
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on 8hich the 8a$es o our process are *thou7h not a&&it-i$el4+ superimpose&. Still more instructi$e is the @har$est c4cle,@ 6ecause it is commonl4 spoEen o as a c4cle an& 6ecause it has 64 some authors 6een ma&e the 6asis o a theor4 o the *me&ium-len7th+ 7eneral 6usiness c4cle *H. St. Je$ons an& '. 2. Boore+. Just ho8 har$ests a ect the 7eneral 6usiness situation, is less simple than 8e mi7ht thinE. -n itsel , the mere act o autonomous $ariation o crops is more rele$ant to 8el are than to prosperit4 or &epression. Hhat matters or the latter is onl4 the in luence on $alues an& incomes 8hich such an e$ent 8ill e(ert. 3here 8ill 6e no 7reat e ect at all i the a6normal har$est sells or the same amount o mone4 as a normal one 8oul&, thou7h there 8ill 6e some &istur6ance unless e$er4 in&i$i&ual househol& an& irm spen&s the same amount on a7rarian pro&ucts 8hich it spent 6e ore. - it sells or more or less, there 8ill 6e a shi t in incomes an& e(pen&itures, hut in an isolate& countr4 prosperit4 or &epression &oes not necessaril4 ollo8. :or the prosperit4 or &epression o the a7rarian sector 8hich &oes ollo8 is compensate& 64 con&itions o opposite comple(ion in other sectors. - that conclusion seems to run counter to all e(perience an& i , in particular, e$er46o&4 in this countr4 use& to e(pect 6etter 6usiness rom a 7oo& har$est, this is primaril4 &ue to the act that, in most cases an& especiall4 i it coinci&e& 8ith poor har$ests in /urope, it meant increase in $alue o e(ports, 8hich &irectl4 acte& on the s4stem as a 8hole. ,ut 8hile chance $ariations in crops 8ill e(ert an in luence on 7eneral 6usiness situations, e$en apart rom their e ects on $alues o e(ports, this in luence mainl4 rests on the reaction o the cre&it structureN meanin7 there64 reaction o 6oth 6orro8ers an& len&ersNan& is neither so &epen&a6le nor so stron7 as is commonl4 6elie$e&. -t ma4 miti7ate or accentuate &epressions or prosperities an& thus o ten help to turn the ti&e. ,ut an4 claim that it e(plains the c4clical character o the economic process is &ispose& o 64 the proo that this process 8oul& &ispla4 c4cles o its o8n, e$en i no e(ternal
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ator e$er acte& upon it. 3he natural thin7 to &o, there ore, is to reco7niOe the recurrent luctuations cause& 64 ortuitious $ariations o crops as a special t4pe o c4cles *Special 04cles+ 8hich 8ill superimpose themsel$esNa7ain, not a&&iti$el4Non the c4cles 8hich are the o6=ect o this stu&4. 3here is no theoretical presumption as to the relati$e importance o these special c4cles. -t $aries o6$iousl4 historicall4 an& 7eo7raphicall4. At some times an& in some countries the4 ma4 &ominate o6ser$e& luctuations. 9ussia to a6out 1900 a or&s an instance, thou7h not a simple one. -t is, o course, a question o act 8hether this is the onl4 instance o a Special 04cle. - 8e ans8er in the a irmati$e, that onl4 means that 8e &o not Eno8 o an4 others. He ha$e seen in the instance o 6uil&in7 that 8hat stron7l4 looEs liEe a $er4 special mo$ement can 4et 6e 6rou7ht 8ithin the schema o c4clical e$ents an& un&erstoo& as a consequence o con&itions 8hich, in turn, can 6e trace& to our process. 3he 8riter has not met 8ith an4 case other than crops as in luence& 64 8eather in 8hich that 8as impossi6le unless, in&ee&, 8e choose to inclu&e 8ars an& autonomous 7ol& &isco$eries. ). He no8 pass on to consi&er luctuations 8hich more nearl4 it the mo&el o elastic *acoustic+ 8a$es. He ha$e =ust ha& another instanceNthe mechanism o inno$ation 6ein7 the outstan&in7 one M N o the act that an all-per$a&in7 c4cle ma4 arise in the s4stem rom a particular or sectional cause, such as the chance $ariation o output in the a7rarian sector. -n or&er to pro&uce 8a$eliEe mo$ements, an impulse or @ orce@ or actor nee& not itsel act intermittentl4 or in a 8a$eliEe ashion. Lne case o this sort 8e can $isualiOe 64 means o the analo74 8ith a $essel into 8hich 8ater lo8s at a per ectl4 stea&4 rate, 6ut 8hich is so constructe& that it releases the 8ater 64 a $al$e each time a certain 8ei7ht has 6een accumulate&. Sa$in7 mi7ht a or& an economic instance, althou7h 8e &o not 6elie$e it 8oul& act in this 8a4 in&epen&entl4 o our process 8hich opens an& shuts the $al$e. :or an illustration o another case 8e 8ill all 6acE on the analo74 8ith the elastic strin7 8hich, in response to a sin7le pull, continues
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e$er a ter to oscillateNin the a6sence o riction. 3his case primaril4 interests us here. ,oth cases, ho8e$er, arise o6$iousl4 rom the properties o the s4stem on 8hich our @somethin7@ acts an& are lar7el4 in&epen&ent o the nature o the latter. /conomic 8a$es o this Ein& constitute a &istinct class. 5ro essor 3in6er7en e$en 7oes so ar as to re7ar& them as the onl4 t4pe o @en&o7enous@ 8a$es an& as the main o6=ect o e(act 6usiness-c4cle anal4sis. 3he reasons 8h4 that t4pe o 8a$e pla4s 6ut a su6or&inate role in this 6ooE, are clear rom the &esi7n o our mo&el. ,ut in stu&4in7 our material 8e must al8a4s looE out or them an& 8e no8 &e ine their relation to our c4cles. He shall re er to them as Ha$es o A&aptation or Lscillations. Settin7 asi&e the nice question 8hether an economic s4stem can, 8ithout an4 particular @ orce@ impin7in7 upon it, 8orE in a 8a$eliEe ashion merel4 64 $irtue o its structure, 8e 8ill ne(t notice the possi6ilit4 su77este& 64 5ro essor /. SlutsE4, that a 7reat num6er o small ran&om shocEs so acts upon a process as to 7i$e it an un&ulator4 character *SlutsE4 e ect+. 3he mo&el &e$ise& in or&er to &ispla4 the phenomenon 8as this > Series consistin7 o purel4 ran&om items, such as the last &i7its o the num6ers &ra8n in 9ussian lotteries, 8ere turne& into series consistin7 o correlate& items 64 the operation o mo$in7 summation o the nth or&er, so that in the latter @each o t8o a&=acent items has one particular cause o its o8n an& n N 1 causes in common 8ith the other.@ An& a stron7l4 c4clical mo$ement re$eale& itsel at once, 8hich, in the case o an un8ei7hte& 10-4ear mo$in7 summation, imitate& the 7raph o ;r. ;oroth4 S. 3homas quarterl4 in&e( o ,ritish ,usiness *tren& eliminate&+ e(cee&in7l4 8ell. He cannot here enter into the economic, statistical an& epistemolo7ical questions raise& 64 this most interestin7 result. 0ommon sense tells us that cumulation o the e ects o small &istur6ances 8ill o ten 6e met 8ith in economic li e, althou7h, o8in7 to the presence o shocE a6sor6ers in the s4stem, this act shoul& not 6e relie& on 8ithout pre$ious e(ploration o the economics o each case. 3he possi6ilit4 o un&ulator4 mo$ements solel4 &ue to this act ma4 6e
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7rante& at once. ,ut the manner in 8hich 5ro essor SlutsE4 posits the pro6lem o application to the economic process su77ests, irst, that he thinEs o it as a possi6le e(planation o the 6usiness c4cles o realit4 an&, secon&, that he attaches some 8ei7ht to the co$ariation o his series 8ith that in&e( o c4cles. -t is, hence, not super luous to remarE, concernin7 the irst point, that a mo&el o the economic process or 8hich such e(planation coul& 6e &e en&e& 8oul& ha$e to 6e entirel4 unrealistic, an&, concernin7 the latter point, that the elimination o tren& 64 least squares or a metho& usin7 similar assumptions 8ill, o course, 7o ar to8ar& maEin7 &e$iations con orm to the SlutsE4 mo&el. /$en i there is no tren& to eliminate, an4 series un&ulatin7 8ith su icient re7ularit4 8ill 6e amena6le to appro(imate repro&uction rom an4 ran&om series, pro$i&e& the perio& 6e suita6l4 chosen. 2et us assume, or ar7ument"s saEe, that all our series mo$e& in re7ular sines. 3hen the proo that these sines ma4 6e pro&uce& 64 cumulation o ran&om causes, ho8e$er interestin7 in itsel , is not onl4 no proo , 6ut e$en no reason to suspect, that the4 are so pro&uce&. /lse all sineliEe processes 8oul& ha$e to 6e. ,ut that proo &i& t8o thin7s or us > irst, it remo$e& the ar7ument that, since our series &ispla4 o6$ious re7ularities, there ore their 6eha$ior cannot result rom the impact o ran&om causes M secon&, it opene& an a$enue to an important part o the economic mechaism, 8hich has since 6een e(plore& 64 9. :risch in a po8er ul piece o 8orE. 59 0umulation o e ects is as o6$ious a realit4 in man4 economic processes as are acceleration, sel -rein orcement, multiplication. All these phenomena 6elon7 to the ol&est stocE in tra&e o the usual t4pe o historical reportin7 on 6ooms an& crisesNin some cases the4 are the 8hole o it 3he reason 8h4 their role in the mechanism o c4cles has not throu7hout our e(position 6een emphasiOe& more stron7l4 is
59
9. :risch, 5ropa7ation an& -mpulse 5ro6lems, /conomic /ssa4s in 'onour o <. 0assel, Sec. 5 > /rratic shocEs as a source o ener74 in maintainin7 oscillations. Althou7h he quotes 6oth HicEsell"s an& SlutsE4"s 8orE as a startin7 point, his ar7ument is reall4 quite a &i erent one. Hitness his concept o 0han7in7 'armonics.
19)
simpl4 that it seeme& to 6e su icientl4 taEen care o in $arious 8a4s, particularl4 64 such concepts as the Secon&ar4 Ha$e an& the Kicious Spiral, 8hich must 6e un&erstoo& to inclu&e them an& to 7i$e them their proper settin7 an& moti$ation. 3hese phenomena can, o course, 6e also pro&uce& 64 the impact o e(ternal actors, chance occurrences amon7 them, an& 8ill, hence, repro&uce part o the c4clial mechanism 8hene$er such actors impin7e on the s4stem. 3here seems, ho8e$er, some &an7er o acceptin7 them as such or an a&equate e(planation o the historical c4cles. -t has 6een remarEe& in the irst chapter that an e(ternal- actor theor4 o 6usiness luctuations 8oul& 64 no means 6e o6$iousl4 a6sur&. 3hese e(ternal actors 8oul& then 8orE throu7h cumulations, accelerations, an& so on, an& there 8oul& 6e no nee& or them to 6e important in or&er to create important ups an& &o8ns. -t is, in particular, possi6le to ar7ue that i some such e$ent has once set into motion a sel -rein orcin7 process o prosperit4, this 8ill 7o on o itsel Neach increase in &eman& or, sa4, consumers" 7oo&s increasin7 the &eman& or equipment 7oo&s, pro&uction o 8hich increases a7ain consumer"s purchasin7 po8er, an& so onNan& there64 create increasin7l4 precarious situations, so that the lon7er it lasts the smaller tie in luence 8ill 6e 8hich is require& to 6rin7 a6out a crash 8hen an equall4 sel -rein orcin7 &epressi$e process 8ill set in. 3he ina&equac4 o such e(planations &oes not rest 8ith the act that in the popular an& semipopular literature on in&i$i&ual crises, in 8hich the4 primaril4 occur, cumulation, acceleration, an& so on are little more than 8or&s loosel4 connecte& 8ith sur ace o6ser$ations lacEin7 in precision. -t is, no &ou6t, possi6le to put up a 6etter sho8in7. A7ainst this 8e ur7e, irst, that in or&er to esta6lish such a theor4 as a un&amental e(planation satis actor4 in lo7ic, it 8oul& 6e necessar4 to sho8 that, 64 means o the elements comprise& un&er the hea&in7 sel -rein orcement, a small &istur6ance coul& create a c4cle rom a strictl4 stationar4 process in 8hich all the stea&4in7 orces an& mechanisms o the s4stem are per ectl4 intact an& the 6urnin7 ci7arette alls upon moist 7rass. :ailure success ull4 to meet this test,
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thro8s the theor4 6acE upon 6i7 &istur6ances, such as 8ars or serious social unrest or su&&en chan7es in monetar4 or commercial polic4, a6out 8hich there cannot 6e an4 &i erence o opinion. 9e usal to meet this test, on the 7roun& that actual states are ne$er stationar4, amounts to e$a&in7 the point at issue G0, Secon&, 8e ur7e a7ain, as 8e &i& 8hen &iscussin7 the Kicious Spiral, that historicall4 there ne$er 8as a case in 8hich an4 8a$e 8oul& ha$e ha& to 6e e(plaine& liEe this. 3he proposition itsel that small &istur6ances ma4 in&uce lar7er one is not entirel4 in$ali&ate& 64 these consi&erations. 3. 3he simplest case o Ha$es o A&aptation or Lscillation ma4 6e illustrate& 64 an4 in&i$i&ual price 8hich happens to 6e out o equili6rium. /$en i no urther &istur6ance occurs, 8e &o not o6ser$e that it at once assumes its equili6rium $alue or that it maEes strai7ht or that $alue an& stops there. As a rule, it 8ill miss it or outrun it an& turn 6acE a7ain. Bost o our series 8ill 6eha$e liEe this. Sometimes there are technical reasons or it. Ln the stocE e(chan7e, or instance, 6ulls an& 6ears 8ill rom time to time consoli&ate their positions an& co$er 6e ore the4 7o on. ,ut this is not necessar4. 3he 7raphs o our 8eeEl4, or e$en monthl4, series re$eal oscillations o this nature 64 the sa8tooth-liEe contour o their lar7er mo$ements. He mi7ht call them 'esitations. - the chan7e to 8hich a series respon&s in this 8a4 has not ori7inate& in it, 6ut in another series 8e speaE o Ki6rations.
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-n one case, such a re usal 8oul& ha$e to e accepte&, althou7h this 8oul& 6ut open the &oor on a lon7 &iscussion o principle. 3he re usal can 6e 6ase& on the &enial o the e(istence o an4 equili6rium ten&enc4 or equili6ratin7 mechanism or conser$ati$e orces in the s4stem, the equations o 8hich 8oul& then ha$e no stationar4 solution at all. 3his 8oul& impl4 a picture o economic realit4 alto7ether &i erent rom the one 8e ha$e 6een tr4in7 to &ra8 throu7hout. Since 6oth, ho8e$er, are nothin7 6ut anal4tic schemata, choice 6et8een them, as ar as not &ue to e(trascienti tc pre erence, 8oul& ha$e to turn on results. -n a s4stem that al8a4s reacts, an& reacts to reaction, e(clusi$el4 64 acceleration until it meets catastrophe or, at the lo8 point, an up8ar& pull, e(planation o luctuations 8oul& in&ee& 6e eas4. -t 8oul&, in act, 6e super luous
19F
'esitations an& $i6rations are part an& parcel o the c4clical mechanism, althou7h in this 6ooE, 8hich cannot a&equatel4 &eal 8ith an4thin7 e(cept principles an& the 6roa&est o contours o acts, the4 8ill not sho8 up as the4 shoul&. ,ut a7ain, the4 are not con ine& to speci icall4 c4clical &istur6ances. An4 &istur6ance, 8hate$er its nature, 8ill pro&uce them. 3he sur ace similarl4 6et8een our c4cles an& other luctuations 8ill 6e intensi ie& there64 an& all the oscillations the4 start 8ill inter ere 8ith each other. 3he same is true o those 8a$es o a&aptation 8hich ma4 result rom the intro&uction o la7s, or la7s an& time &eri$ati$es, or o the in luence o past an& *e(pecte&+ uture $alues o our $aria6les. 0ases in 8hich, sa4, the quantit4 o a commo&it4 Nas, or instance, in the cases 8hich 7i$e rise to the spi&er-8e6 pro6lemNa&apts itsel 8ith a la7 or in 8hich la7s or $elocities o a&aptation &i er in &i erent parts o the s4stem, thus creatin7 interme&iate situations 8hich ma4 6e reacte& to in such a manner that 8a$e-liEe mo$ements 8ill ensue, ha$e 6een met in 0hap. --. 3heir occurrence is per ectl4 eas4 to un&erstan& on o6$ious common-sense consi&erations. 3heir e(act theor4, a most important an& hope ul contri6ution to the 7eneral theor4 o prices, is, 8ith the e(ception o a e8 instances, 6e4on& the scope o this 6ooE- 'o8e$er much li7ht it she&s on &etails o the mechanism 6oth o the c4clical process an& o other &istur6ances, it has to 6e couple& 8ith other propositions in or&er to maEe o it a theor4 o the c4clical process. #nless this 6e &one, that apparatus is compati6le 8ith an4 e(planation an& ren&ers the same Ein& o ser$ice to each. F. A e8 other matters ma4 con$enientl4 6e &ispose& o here. 9eplacement o in&ustrial equipment has 6een linEe& spora&icall4 8ith 6usiness c4cles e$er since Bar("s time, some authors comin7 near to maEin7 it the central element o causation. -nto our anal4sis replacement enters in t8o 8a4s. :irst, c4clical situations are not a matter o in&i erence or the &ecision to replace. 9eplacement 6ecomes necessar4, either 6ecause o 8ear an& tear or 6ecause o o6solescence. L6solete or o6solescent machiner4 is not t4picall4 replace& in properities. He in&, rather, that the intense competition o
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the recession an& &epression perio&s 8ill, 8ith a quali ication or the prostration an& paral4sis o &eep &epression, in 7eneral orce irms to install the ne8est a$aila6le t4pes. 3he re$erse, ho8e$er, hol&s true, i 8e ma4 trust the incomplete in ormation 8e ha$e, or the replacement o machiner4 that is 8earin7 out. 3here is no &ou6t, or instance, that the American an& the /n7lish cotton-te(tile in&ustries rene8 their equipment 8hen 6usiness is 6risE, althou7h there is some &ou6t as to the interpretation o this act 3he li e o a 6uil&in7 or a machine is, o course, not a purel4 technolo7ical, 6ut an economic, $aria6le. ,arrin7 o6solescence, it is rationall4 &etermine& 64 the point o time rom 8hich the unit o pro&uct can 6e pro&uce& more cheapl4 64 installin7 a ne8 machine than 64 Eeepin7 the ol& one, an& there ore a unction o man4 quantities, actual an& e(pecte&, rate o interest inclu&e&. 3hese quantities luctuate c4clicall4 an&, particularl4 i the technolo7ical superiorit4 o a ne8 machine $aries 8ith the &e7ree o utiliOation an& i the price o the machine is in le(i6le, replacement ma4 o ten i7ure out more a&$anta7eousl4 in prosperit4 than in recession. ,ut such consi&erations are har&l4 rele$ant, since in an4 case the li etime o the a$era7e machine is $er4 much lon7er than an4 6ut the lon7est c4cles. Bost o the common te(tile machiner4 remains ull4 e icient or rom 30 to F0 4earsNmules that ha$e 6een 8ell treate&, e$en lon7er than that Such statistics as 8e ha$e &o not, in act, encoura7e a 6elie that either those or other rational consi&erations pla4 a &ominant role in the &ecision to replace, an& in ol&-esta6lishe& in&ustries 8ith a *su6stantiall4+ stationar4 technique, a consi&era6le percenta7e o the machiner4 in use at an4 time is o 7reater a7e than e(perts" stan&ar&s seem to =usti 4. 3hat act is 6e4on& &ou6t, perhaps as the simple consequence o the other act that, 8hen prices all, people are quite nai$el4 an& a-rationall4 &iscoura7e& an& so ha$e to maEe up or &e erre& replacement 8hen thin7s looE 6etter a7ain. 3his is not an important item in the list o secon&ar4 phenomena, 6ut, o course, it presupposes the e(istence o ac4clical mo$ement. .ot e$en the theor4 o the "lo8er turnin7 point@ can sa el4 6e 6ase& upon it M or the situation is in practice ne$er such that it 8oul& at a 7i$en time 6ecome necessar4, un&er penalt4 o 6reaE&o8n, to replace. -t is, as 8e
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ha$e seen 6e ore, onl4 8hen reco$er4 has set in or other reasons that this &eman& or equipment 7oo&s re$i$es. Secon&, there 8ill 6e 7enuine replacement 8a$es i the a7e &istri6ution o an in&ustr4"s equipment clusters aroun& certain $alues. 3his 8ill ha$e to 6e e(plaine& in each in&i$i&ual case an& cannot 6e appeale& to in a6stracto as an in&epen&ent cause o luctuations. ,ut as a rule such reasons are not &i icult to in&. /(ternal actors 8ill o ten suppl4 them. - , or instance, the equipment o a &istrict has 6een &estro4e& 64 an earthquaEe, an& replace& in, sa4, the su6sequent t8o or three 4ears, 8e can, at the e(pense o assumin7 that the li etimes o all elements are actuall4 replace& therea ter, &eri$e 8hat 8ill looE liEe an i&eall4 re7ular 8a$e rollin7 on ore$er. ,ut it is clear ho8 unreasona6le such assumptions 8oul& 6e. ,ul7es o &ecreasin7 amplitu&e 8ill, ho8e$er, in most cases persist, an& in luence the 6eha$ior o our time series, or a 8hile. .o8 our mo&el supplies us 8ith an @en&o7enous@ instance > 8hen inno$ators ha$e ri&&en to success in some 6ranch o in&ustr4 an& the ne8 com6ination is sprea&in7, 8e shall rea&il4 un&erstan& that ne8 machiner4 8ill 6e installe& in this an& in complementar4 6ranches, o ten also in others, o8in7 to the impulse imparte& to 6usiness in 7eneral, at a $elocit4 8hich 8ill in act pro&uce the require& *sEe8-6ell-shape&+ a7e &istri6ution. 3his is part o our mechanism an& contin7ent upon its 8orEin7. ,ut it is no ne8 or in&epen&ent cause o luctuations, least o all o permanent ones > the e ect 8ill, as re7ar&s specialiOe& machiner4, ten& to $anish rom &i usion *&i erent irms replacin7 at &i erent times, some not replacin7 at all+ thou7h successi$e inno$ations in &i erent iel&s 8ill ten& to Eeep it ali$e in the hi7her sta7es o nonspecialiOe& semi inishe& metal pro&ucts. Ha$eliEe 6ul7es in the output o equipment an& construction in&ustries, or use in the e(planation o ups an& &o8ns, ha$e 6een &eri$e& in man4 other 8a4s, one o 8hich shoul& 6e notice&. -n its cru&est orm the ar7ument ma4 6e put liEe this > let us assume, to 6rin7 out the essential point, that an in&ustr4 uses one million units o
19J
a certain strictl4 homo7eneous t4pe o machiner4 8hich 8e 8ill 6aptiOe ho664 horse an& 8hich li$es e(actl4 10 4ears, not more nor less. 3hese ho664 horses ha$e 6een e$enl4 installe&Nat a constant rate o 100,000 ho664 horses a 4earNthe in&ustr4 usin7, an& also the in&ustr4 urnishin7, the ho664 horses has reache& per ect equili6rium N100,000 ho664 horses 6ein7 pro&uce& an& sol& or replacement each 4ear. 3his schema 8oul& not 6e su6stantiall4 a ecte& i 8e assume& urther e(pansion at a constant rate Eno8n to all irms. ,ut instea& 8e assume no8 that @somethin7"" permanentl4 6ut su&&enl4 raises the &eman& or the pro&uct 64 10 per cent. - ho664 horses ha$e 6een pre$iousl4 utiliOe& to optimum point, 10 per cent more o them 8ill 6e &eman&e& no8. 5ro&ucers 8ill, there ore, sell )00,000 ho664 horses, sa4, ne(t 4ear M 6ut a ter that &eman& 8ill a7ain &rop to the 100,000 necessar4 or replacement until the ne8 ones 8ill themsel$es ha$e to 6e replace&, 8hen another 6ul7e 8ill sho8. 3hose pro&ucers are suppose& to ha$e &ou6le& their capacit4, an& the irms in the hi7her sta7es a6o$e the ho664-horse pro&ucers, to ha$e e(pan&e& correspon&in7l4Nthis is the intensi ication or multiplication o e ects Nan& the consequences are o6$ious. .o6o&4, o course, has e$er presente& this ar7ument in so 7rotesque a orm, 6ut reasonin7 not ar remo$e& rom it Eeeps on turnin7 up. -t is, there ore, 8orth 8hile to sta4 in or&er to realiOe the a6sur&it4 o it. ""Somethin7"" is not an a&missi6le cause. - it 6e ma&e more concrete, it 8ill 6e seen that such su&&en =erEs are not liEel4 to occur e(cept in consequence o inno$ation, an& i the increase 6e not su&&en man4 o the consequences 8ill ail to ollo8 or this reason alone. ,ut e$en i &eman& or the pro&uct increase su&&enl4, it &oes not ollo8 that the pro&ucin7 irms 8ill promptl4 &eman& proportionall4 more ho664 horses. -n practice, there 8ill 6e the 6u er o e(cess capacit4. /$en i per ect equili6rium o per ect competition shoul& ha$e pre$aile&, the4 8ill not all act equall4 promptl4 an& in the same 8a4Nsome, or instance, o$er8orEin7 their ho664 horses or usin7 them 6e4on& their usual li etime or the ri7i& li etime is, o course, a most unrealistic assumption+. <rantin7, ho8e$er, that the4
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all or&er 1 per cent more ho664 horses, this 8ill not necessaril4 in&uce the manu acturers o the latter to increase plant capacit4 all at once to the ull amount. 3he4 ma4 equall4 8ell raise their prices or a&& to their un ille& or&ers. L8in7 to the presence o 6u ers at e$er4 step o the process an& also to normal oresi7ht, the impact, instea& o 7atherin7 orce at e$er4 step, 8ill ten& to spen& itsel . - it &oes not, this is no $eri ication o the ar7ument 6ut merel4 a proo that there is another process at 8orE. 3he ne7lect o all equili6ratin7 in luences amounts in this, as it &oes in all similar cases, to theoretical ault. ,ut 8hat shoul& 6e stresse& more than this is the lacE o realism &ispla4e& 64 the ar7ument un&er &iscussion. .o attempt at technical impro$ementN or instance, insertion o a consi&era6le la7 6et8een the e ect o the ne8 e(pen&iture or in$estment 7oo&s on the prices o consumers" 7oo&s an& the e ect o the consequent increase in the suppl4 o in$estment 7oo&sNcan &o a8a4 8ith the act that a picture o 6usiness 6eha$ior is 6ein7 &ra8n, not rom realit4, 6ut rom the nee&s o the theorist. Boreo$er, there is no reason to 6elie$e that an4 such 6ul7es 8oul& 6e su icientl4 s4nchroniOe& to matter. ,ut a7ain it must 6e o6ser$e& that this criticism applies onl4 i that ar7ument is to stan& 64 itsel as a ma=or contri6ution to the e(planation o c4cles. -t is not &enie& that ho664-horse manu acturers, or some o them, ma4 thus oolishl4 6eha$e an& that the4 are most liEel4 to &o so in the atmosphere o prosperit4 8hich, ho8e$er, 8oul& then ha$e to 6e in&epen&entl4 e(plaine&.
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K0hapter K 3-B/ S/9-/S A.; 3'/-9 .L9BA2
3a6le o 0ontents
A6 Int!odu)tion. N -n this chapter 8e 8ill assem6le into one
connecte& ar7ument 8hat or our purpose it seems necessar4 to sa4 on questions o principle concernin7 statistical metho&. 3his is in&ee& 6ut little. G1 .o e(position o technique can 6e attempte& here an& the rea&er un amiliar 8ith usual proce&ure shoul& turn to some treatise on the su6=ect. 3he pro6lem o the elimination o seasone& $ariations remains e(clu&e&. Lur &iscussion thus re&uces to anal4sis o time series 8hich re lect economic 7ro8th an& the c4clical process o e$olution as &istorte& 64 the in luence o e(ternal actors. -n or&er to put into relie the nature o time series an& o the statistical pro6lem the4 present, 8e 8ill &istin7uish three t4pes o $aria6les, 8hich 8e shall call theoretical, random or stochastic, an& historical variables. - 8e ha$e 6e ore us a s4stem, Le., a set o quantities 6et8een 8hich certain relations are Eno8n to e(ist, 8e ma4 in$esti7ate these relations 64 allo8in7 those quantities to $ar4
G1
/$en so, - ha$e cut this chapter hea$il4.N/&.]
)00
@$irtuall4.@ As a result 8e 7et theoretical "la8s@ 8ith 8hich to operate. 3ime, i it enters at all, has no re erence to an4 particular &ate an& ser$es onl4 as one o the coor&inates. 3he theoretical la8, once esta6lishe&, is raise& a6o$e the sphere o the actual in&in7s rom 8hich it 8as 7leane&, 64 the &ecision to rel4 on it until urther notice. L course, e$er4 la8 in this sense is relati$e to the 7eneral properties o the s4stem. A $aria6le thus relate& 64 a "3a8@ to one or more or all $aria6les 8ithin the 7eneral con&itions o a s4stem, 8e call a theoretical variable. An4 quantit4 occurrin7 in a proposition o classical mechanics 8ill illustrate this. An economic instance o such a $aria6le is the quantit4 o a commo&it4 that is e ecti$el4 &eman&e& 8ithin a Halrasian 8orl&. 3he lo7ical counterpart o a theoretical is a stochastic $aria6le. -t is not &e ine& 64 a unctional relation, Eno8n or suppose& to 6e Eno8n, to another $aria6le. Ln the contrar4, the a6sence o an4 such relation is its outstan&in7 characteristic. He &o not @#n&erstan&@ its $ariations in the sense in 8hich 8e @un&erstan&@ the $ariations o a theoretical $aria6le M the4 are mere e(perimental or o6ser$ational acts. -nstea&, 8e note the relati$e requenc4 o the occurrence o &i erent $alues o a quantit4 in the course o e(periments or o6ser$ations carrie& out un&er con&itions un&er 8hich a theoretical $aria6le 8oul& &ispla4 a constant $alue. He ma4 thinE o those e(periments as consistin7 o sets o &ra8in7s rom an urn Eno8n to contain 6lacE an& 8hite 6alls in unchan7in7 proportions, an& 6ase upon them certain measurements an& *8hate$er the lo7ic o this ma4 6e+ mathematical e(pectations, e$er4thin7 in act that centers aroun& the un ortunate term 5ro6a6ilit4 or the less o6=ectiona6le one, 2imitin7 $alue o 9elati$e :requenc4. -t is the prerequisite o all reasonin7 a6out ran&om $aria6les that their $alues, actual an& possi6le, shoul& constitute a universe in the technical sense, an& that 8e are on sa e 7roun& onl4 8hen mo$in7 8ithin the 8alls o this se$erel4 restricti$e con&ition. As soon as 8e step out o the 8orl& o theoritical schemata an& tr4 to linE to actual act an4 o the theoretical relations that hol& 8ithin
)01
them, 8e 7et h46ri& $aria6les 8hich are neither theoretical nor ran&om 6ut 6orro8 characteristics rom 6oth cate7ories. - , in particular, 8e 8ish to &eri$e a orm o some theoretical unction more concrete than that 8hich theor4 supplies Nsa4, o a Barshallian &eman& unctionN8e ace all the &i iculties o &istin7uishin7 6et8een 6oth classes o characteristics an& the &an7er o 6ein7 entirel4 misle& 64 our ina6ilit4 to &o so. ;isre7ar&in7 this, ho8e$er, 8e ma4 illustrate the &i erence 6et8een theoretic an& stochastic $aria6les an& their simultaneous presence in the actual material as ollo8s > suppose 8e Eno8 that a 7i$en set o price-quantit4 &ata represents a Barshallian &eman& cur$e 8hich is i&eall4 in$ariant in the inter$al o time co$ere& 64 those &ata. 3hen, to e$er4 quantit4 8ithin the inter$al correspon&s one sin7le @true@ price 8hich is a theoretical $aria6le. .o8, let the o6ser$ations o the prices 6e su6=ect to small ran&om errors. He shall 7et either se$eral price quotations or each quantit4 or else sin7le quotations 8hich &e$iate to an unEno8n e(tent rom their @true@ $alue. /ach quotation, taEen 64 itsel , is there ore a stochastic $aria6le an& ma4 6e looEe& upon as an o6ser$ation in the technical sense. - there are se$eral prices to one quantit4, the4 are all o6ser$ations o the same thin7, orm *a sample o + a uni$erse, an& ma4 6e sai& to represent ra7ments o a requenc4 &istri6ution. ,ut o6$iousl4 the 8hole set o prices cannot 6e so interprete&. -n the 7raph o all o them the theoretical $ariation asserts itsel . 'o8e$er, since in our case 8e Eno8 that the theoretical la8 is in$ariant 8e ma4 6e a6le to in& it rom the material 64 purel4 statistical metho&s G) M 6ut it is that Eno8le&7e an& not the statistical lo7ic per se that ena6les us to &o so.
G)
Success 8ill in this case &epen& on the "3a8 o the mo$ement@ 6ein7 su icientl4 o6$ious or us to 6e a6le to 6it it 64 the ormula 8e choose. [3he case re&uces] to the schema o shots 6ein7 ire& at a tar7et mo$in7 accor&in7 to an unEno8n la8. - the &eman& cur$e shi ts, then the analo74 8oul& 6e 8ith shots ire& at a tar7et mo$in7 accor&in7 to an unEno8n la8 that chan7es in an unEno8n 8a4.
)0)
A historic $aria6le is, in one sense, precisel4 that Ein& o h46ri&. ,ut it &i ers rom the case =ust &iscusse& 64 the act that its theoretical la8 is in a process o chan7e. He assume or simplicit4"s saEe that the requenc4 &istri6ution a6out each @true@ point remains in$ariant. 2et us start 8ith an econom4 in per ect Halrasian equili6rium an& asten upon the price o an4 commo&it4 the qualit4 o 8hich is to remain strictl4 the same. 3his price is, as e$er4thin7 else, at 3heoretical .ormal *no8 in the sense &e ine& in the secon& chapter+ an& an4 $ariations 8e o6ser$e in quotations 8oul& *unless 8e allo8 small $ariations in quantit4, 8hich 8e &o not =ust no8+ 6e &ue onl4 to errors o o6ser$ation or small chance e$ents 8hich can 6e treate& as i the4 8ere errors o o6ser$ation. 'ence, it 8oul& re$eal nothin7 e(cept a requenc4 &istri6ution. 2et the s4stem em6arE upon a prosperit4 e(cursion un&er entrepreneurial impulse. ,oth price an& quantit4 o our commo&it4 8ill chan7e no8, 6ut the ne8 $alues the4 assume cannot 6e &irectl4 use& or the &eri$ation o its *Barshallian+ &eman& cur$e, 6ecause the4 &o not lie either on the ori7inal or an4 other sin7le &eman& cur$e, 6ut successi$el4 on &i erent onesN8hich it is usual, thou7h not quite correct, to e(press 64 sa4in7 that the &eman& cur$e shi ts. 3he ol& 3heoritical .ormal has 6een &estro4e& 8ithout 6ein7 replace& 64 another. He ma4, in&ee&, ima7ine that e$er4 price-quantit4 pair lies on a temporar4 &eman& cur$e, an& interpret its $alues as the result o t8o components > a mo$ement o , an& a mo$ement alon7, a &eman& cur$e. ,ut, in 7eneral, 8e cannot &istin7uish 6et8een the t8o 8ithout urther in ormation or h4potheses. 3his situation lasts throu7hout the c4cle an& until a ne8 equili6rium is reache&. 3hen 8e shall ha$e a7ain a 3heoretical .ormal as 6e ore, 6ut a &i erent one > price an& quantit4 o our commo&it4 8ill then 6e a&apte& to the con&itions o a ne8 Halrasian 8orl& in 8hich ne8 equili6rium $alues result rom, an& ma4 $ar4 alon7 ne8 &eman&, suppl4, cost unctions, an& so on. 3his propert4 o 6elon7in7 at &i erent times to &i erent s4stems, or o representin7 &i erent 3heoretical .ormals, is the outstan&in7 act a6out historic
)03
$aria6les 8hich &etermines their nature. Amon7 other thin7s, it is that act an& that act alone 8hich 6rin7s in the a(is o historic time an& maEes the actual &ates o those $aria6les or their actual location on that a(is essential to their $er4 meanin7. Hithout it, &ates 8oul& 6e irrele$ant, an& arra4in7 items accor&in7 to their &ates 8oul& 6e nothin7 6ut a $er4 incon$enient an& unenli7htenin7 mo&e o presentation. 'ence 8e ma4, or our purpose, &e ine a historic $aria6le as a $aria6le, the Stochastic .ormal o 8hich chan7es o8in7 to a chan7e o its 3heoretical .orm. G3 A sequence o $alues o such a $aria6le 8e call a time sequence or, sli7htl4 incorrectl4, series. He ma4 no8 also a&opt the usual &e inition, 8hich 8oul& not, taEen 64 itsel , con$e4 our meanin7 > a sequence o $alues o a $aria6le arra4e& accor&in7 to consecuti$e &ates o occurrence. .o8, the onl4 thin7 that is uni$ersall4 true a6out time series is that the4 &o not ul ill pro6a6ilit4 requirements. He ha$e to a&& that, since the e$olutionar4 process re lecte& in e$er4 time series 7oes on in &istinct c4clical units, the in&i$i&ual items 8ithin each unit are not in&epen&ent o each other. .either, strictl4 speaEin7, are the c4cles themsel$es in&epen&ent M 6ut 8e ma4 o$erlooE this in a irst
G3
3he 8riter, ha$in7 6een tol& that the a6o$e is lia6le to 6e misun&erstoo&, 8ishes to a&& an e(planation, thou7h he &oes not himsel see the necessit4 o it. He assume that nothin7 &istur6s the economic process e(cept c4clical e$olution in our sense. He o6ser$e a $aria6le in t8o successi$e states o i&eal Halrasian equili6rium, A an& ,. -ts $alue is constant at equili6rium amount in A an& in ,, thou7h &i erin7 as 6et8een A an& ,. -n 6oth cases 8e are suppose& to 6e a6le to maEe man4 o6ser$ations 8hich are su6=ect to errors o measurement an& orm in 6oth the same requenc4 &istri6ution, sa4 a s4mmetrical one. 3his &istri6ution, o course, coul& chan7e, 6ut is or simplicit4"s saEe assume& not to &o so. ,4 the Statistical .ormal 8hich &oes chan7e 8e, o course, &o not mean the unction &escripti$e o the &istri6ution 6ut the $alues o the $aria6le 8hich in A an& in , 8oul& turn out to 6e the @true@ ones in the sense o the theor4 o errors o o6ser$ation. #n&er our assumptions, these coinci&e 8ith the $alues that are theoreticall4 normal ones, an& the reason 8h4 the4 are &i erent as 6et8een A an& , is that the theoretical or equili6rium $alue o the $aria6le in A has 6een chan7e& into the equili6rium $alue o the same $aria6le in , 64 the process o the e$olution.
)0F
appro(imation an& maEe them our o6ser$ational units. 3his, ho8e$er, re&uces the num6er o our o6ser$ations to a &an7erous &e7ree. 3he act is that onl4 or 8hat 8e ha$e calle& the Pinchins our material co$ers a num6er o units at all su icient or statistical treatment an& the $alue e$en o this is much impaire& 64 the possi6ilit4 o s4stematic chan7e &urin7 all that time. :or most series, a$aila6le Ju7ulars are e8. :or no series are the4 @man4@ in the technical sense > rom 1) to 1F are all 8e ha$e, in the most a$ora6le cases, or pre8ar times. An& o Pon&ratie s 8e ha$e, up to 191F, a little more than )1CF. - , inall4, 8e recall the e(ternal an& internal irre7ularities to 8hich our process is su6=ect, 8e ha$e 6e ore us the nature o the statistical tasE in$ol$e& in 3ime-series Anal4sis. 3hat hea&in7 commonl4 &enotes t8o pro6lems. :irst, the pro6lem o splittin7 up an4 in&i$i&ual time series into the components present in it. As a matter o common sense, 8e looE upon it as a composite 8hich 8e naturall4 8oul& liEe to &ecompose 64 ormal metho&s, i.e., metho&s 8hich in$ol$e as little theor4 as possi6le, 6ecause one o our main o6=ects in &oin7 so is precisel4 to con ront results 8ith theoretical propositions. Secon&, the pro6lem o @correlation@ o &i erent time series 8ith each other. A7ain as a matter o common sense, 8e looE upon each series as one element o 8hat 8e eel to 6e a process, 8hich it is no less natural to tr4 to e(plore 64 puttin7 our time series in such a shape that the4 8ill &ispla4 the relations 6et8een $ariations o economic quantities peculiar to that process. -t is a7ain $er4 un&erstan&a6le that 8e shoul& 8ish these relations to 6e &eri$e& 64 ormal metho&s so as to maEe them as in&epen&ent as possi6le o theories. ,ut as 8e ha$e seen 6e ore rom other stan&points, so 8e see no8 rom the stan&point o statistical theor4 that neither pro6lem is amena6le to solution 64 ormal metho&s or, in&ee&, has an4 sense i state& in terms o ormal metho&s. -t is important or the rea&er to 7rasp clearl4 8hat that means an& 8hat it &oes not mean. L course it is a 8ell-Eno8n proposition that an4 material can 6e split into componentsNsa4 o the sine-cosine t4pe
)05
Nin an in inite num6er o 8a4s an& that e$en i the constants o the unction that is to represent it are su6=ect to restrictions su icient to maEe the pro6lem &eterminate, such as are implie& in the :ourier anal4sis, no amount o closeness o it pro$es in itsel that the in&i$i&ual components ha$e an4 meanin7 in the sense that &istinct phenomena correspon& to them. 3here ore, there is, in a ormal sense an& in the a6sence o urther in ormation, no lo7ical meanin7 to the question 8hat components are @present@ in an4 7i$en material, an& e$en perio&icit4 that seems to stan& out $isuall4, as 8ell as o6$ious a6sence o perio&icit4, ma4 pro$e $er4 mislea&in7. .ot onl4 is it, or e(ample, possi6le to appro(imate, to an4 &esire& &e7ree, a strai7ht line 64 a :ourier series, 6ut a strai7ht line ma4 reall4 6e the resultant o t8o sine mo$ements o equal perio& an& amplitu&e an& opposite phase. ,ut our anal4sis lea&s us much 6e4on& these an& similarl4 amiliar ar7uments. ,4 ormal metho&s 8e un&erstan& here metho&s &eri$in7 rom, an& maEin7 use o , pro6a6ilit4 schemata > an& our point is that these schemata 6ecome, in strict lo7ic, inapplica6le un&er the con&itions 8hich 7i$e rise to time series as &e ine&, an& that application o metho&s 6ase& upon them ma4 hence 7i$e spurious results. He must intro&uce urther in ormation or postulates in or&er to maEe them 8orE at all. ,ut e$en then the4 ma4 8orE aultil4. 'ence, the4 cannot 6e relie& on to &isco$er an& isolate an4 components an& or this reason alone, e$en i there 8ere no others, 8oul& also ail to sol$e the secon& pro6lem o time-series anal4sis. He &o not ho8e$er 7o so ar as to sa4 that the4 must 8orE aultil4 an& can ne$er turn out results that are at least =usti ia6le in the irst appro(imation. 3o clear the 7roun& in or&er to maEe room or =u&icious use o them, at least in some classes o cases, is Ln the contrar4 one o the o6=ects o the a6o$e anal4sis, as it 8as one o the o6=ects o man4 o the arran7ements &eci&e& on in the ourth chapter. He ha$e, or instance, so chosen our three c4cles as to maEe them si7ni icantl4 &i er in perio&. 3his 8ill open the &oor to se$eral metho&s that 8oul& other8ise 6e e(clu&e&. Boreo$er, 8e ha$e stresse& that $irtue o the three-c4cle schema 8hich consists in
)0G
maEin7 it less a6sur& than it other8ise 8oul& 6e to assure appro(imate equalit4 o perio&s or each class o c4cles. 3his &oes not amount to =usti ication, to 6e sure, an& e$en i it &i&, 8oul& not su ice to ren&er application o either :ourier or Schuster anal4sis plain sailin7, 6ut it certainl4 maEes matters easier or 6oth. GF He ha$e also pointe& out, that each o our @hi7her@ c4cles ma4 6e plausi6l4 assume& to span an inte7ral num6er o the ne(t lo8er ones. As the :ourier anal4sis consists o a un&amental term an& its harmonics, this remo$es one o the &i iculties its application encounters. -n a sense, the mere act that our anal4sis o the 6usiness c4cle sho8s essential sameness o the process all alon7, 6oth in nature an& s4mptoms, 7oes some 8a4 to8ar& &iscoura7in7 that e(treme scepticism 8hich, at irst si7ht, mi7ht seem to ollo8 rom the a6o$e consi&erations > to us, there ore, it &oes not seem correct to sa4 that statisticians ha$e, in their time-series anal4ses, 6een completel4 steppin7 on clou&s. 3he un&amental in&ictment, ho8e$er, remains. He ma4 e(press it in a nutshell 64 sa4in7 that statistical metho&s are not 7eneral in the sense in 8hich our lo7ic is an& that, outsi&e o the ran7e o pro6a6ilit4 schemata, the4 must 7ro8 out o the theor4 o the patterns to 8hich the4 are to appl4. :rom Eno8le&7e a6out the phenomena to 6e han&le&, 8hich is o course 6asicall4 empirical 6ut at the same time a
GF
,e it repeate& a7ain > there is no connection 6et8een our theor4 o the c4clical process o e$olution an& that assumption. 'o8e$er, i it 8ere too 8i&e rom the acts, the :ourier metho& 8oul& 6ecome impossi6le, an& so 8oul& the perio&o7ram metho&. 'ence, it is not super luous to emphasiOe that the ar7ument, @it is one o the $er4 characteristics o 6usiness c4cles that their len7th $aries 7reatl4 e$en o$er short perio&s@ *comment 64 ;r. 3intner on a6o$e passa7e+, is not as con$incin7 as it seems, as soon as 8e 7i$e up the sin7le-c4cle h4pothesis. -n this connection arises the question 8hether suita6le re orms in 6oth the practice an& the theor4 o those metho&s mi7ht not impro$e their $alue. Lne e(ample ma4 su ice. He sometimes o6ser$e that 8hile the or&inates o the perio&o7ram no8here reach hei7hts si7ni icant 8ithin the meanin7 o the usual tests, there is a ten&enc4 or relati$el4 hi7h ones to cluster to7ether. 3he 8riter speaEs 8ith &i i&ence on a matter 8hich 6elon7s to the realm o the specialist in statistical metho&. ,ut it seems to him, that these clusters are not 8ithout si7ni icance an& shoul& 6e taEen notice o , in&epen&entl4 o mere hei7ht.
)0J
priori 8ith re erence to each in&i$i&ual tasE in han&, 8e must tr4 to orm an i&ea a6out the properties o statistical contours an& to &e$ise statistical proce&ure appropriate to e(pressin7 those properties. 3his requirement 8e call the 5rinciple o /conomic Beanin7. 3he 8hole o the ar7ument o this 6ooE ma4 6e looEe& upon as an attempt to pro$i&e material 8ith 8hich to satis 4 it.
3a6le o 0ontents
B. T!end. 3he stron7 impression 8hich all 6ut compels us to
&istin7uish tren&s an& c4cles ma4 6e em6o&ie& in quite noncommittal &e initions. He ma4 sa4 that a series &ispla4s a trend i it is possi6le to &i$i&e the 8hole time inter$al co$ere& 64 it into su6inter$als such that the mean $alues o the time inte7rals o$er these su6inter$als are monotonicall4 increasin7 or &ecreasin7 in unction o time, or that the4 &ispla4 recurrence o the same i7ures once onl4. ,4 the term cycle 8e &esi7nate the act, that a 7i$en series correcte& or seasonal &ispla4s recurrence o $alues either in its items or in its irst or hi7her time &eri$ati$es mote than once. -nasmuch as these luctuations &o not occur in&epen&entl4 in in&i$i&ual series 6ut &ispla4 either instantaneous or la77e& association 8ith luctuations in others, 8e ma4 &e ine the concept o c4cle so as to co$er this a&&itional act Series 8hich &o not &ispla4 such c4cles 8e call 0lean 3ren& Series M series 8hich &o not &ispla4 a tren& in the sense &e ine&, 0lean 04clical Series. As these purel4 ormal &e initions &o not in$ol$e an4 restriction as to the len7th o the inter$al to 6e stu&ie&, there are, o course, instances o 6oth. :or those inter$als, ho8e$er, 8hich 8e consi&er in this 6ooE there are noinstances o clean tren& series, an& onl4 t8o ma=or ones o cleanc4clical series > unemplo4ment percenta7e an& interest rate.
C. A Single C")li)al Mo,ement N He return to the principle o
economic meanin7 an& our &e inition o time series. -n or&er to
)08
acilitate e(position, 8e 8ill in this section assume not onl4 that seasonal $ariation an& 7ro8th *in our sense+ re a6sent or ha$e 6een success ull4 eliminate&, 6ut also that the process o economic e$olution em6o&ie& in our mo&el 8orEs in such a 8a4 as to pro&uce one c4clical mo$ement onl4. L course, these assumptions alrea&4 constitute @a&&itional Eno8le&7e.@ He Eno8, urther, the nature o the process that an4 time series ul illin7 those requirements 8oul& re lect /ach item o such a series in&icates, in a 8a4 appropriate to the nature o the element represente& 64 the series, a sta7e in that process 8hich, as 8e Eno8, sometimes propels the s4stem a8a4 rom, an& at other times &ra8s the s4stem to8ar&, a nei7h6orhoo& o equili6rium. -t ollo8s, e$en 8ithout ormal proo , that there must e(ist on the 7raph &iscrete points or, sli7htl4 more realisticall4, &iscrete inter$als in 8hich the series passes throu7h nei7h6orhoo&s o equili6rium or comes, at all e$ents, as near to such nei7h6orhoo&s as it 8ill 7o an& as its inacti$it4, ri7i&it4, or sloppiness allo8s. 3his is a act o un&amental importance or us. -t supplies the linE 6et8een 8hat 8e ha$e calle& the 3heoretical .ormal an& its statistical sha&o8, the Statistical .ormal. 3his term, as 8e shall hence orth use it, has nothin7 to &o 8ith requenc4 &istri6utions. -ts meanin7 is analo7ous to 8hat the 6usiness ser$ices mean 8hen the4 sa4 that 6usiness is a6o$e or 6elo8 normal. -n act, 8hat 8e are tr4in7 to &o is merel4 to o er a more precise &e inition an& a some8hat &i erent interpretation o this $er4 i&ea, so amiliar to 6usiness practice. 3o locate the points on our 7raphs 8hich correspon& to points o equili6rium, or the inter$als on our 7raphs 8hich correspon& to nei7h6orhoo&s o equili6rium, there ore, is rom our stan&point the irst an& oremost tasE o time-series anal4sis. :or the state o the economic s4stem in those nei7h6orhoo&s sums up an& presents, ho8e$er rou7hl4, the net result o the prece&in7 spurts o e$olution as shape& an& a6sor6e& 64 the response o the s4stem. 3he4 marE the path o economic e$olution as step-pin7stones marE the path across a 6rooE. 3he4 are the most rele$ant items o a series most pre7nant 8ith in ormation an& most important as re erence points or the rest. A line
)09
or cur$e throu7h those points, or a 6an& or narro8 Oone throu7h those nei7h6orhoo&s, supplies a tren& that reall4 has economic si7ni icance. He shall use the term primaril4 in this sense. He Eno8 rom the anal4sis in the secon& an& ourth chapters that this tren& &oes not &escri6e a phenomenon &istinct rom the c4cle. Ln the contrar4, since e$olution is essentiall4 a process 8hich mo$es in c4cles, the tren& is nothin7 6ut the result o the c4clical process or a propert4 o it -n or&er to e(press this, 8e 8ill call our tren& the tren& o results or 9esult 3ren&. Boreo$er, 8e also Eno8 that it carries realistic meanin7 onl4 in &iscrete points or inter$als. - 8e connect them 64 strai7ht lines or it a smooth cur$e to them, it must 6e 6orne in min& that the stretches 6et8een the nei7h6orhoo&s are nothin7 6ut a $isual help an& &e$oi& o realistic meanin7. .o acts correspon& to them. 9eal is onl4 the c4cle itsel . Just as statement o the pro6lem 8as possi6le onl4 rom the economics o the case, so metho&s or its solution cannot 6e &eri$e& rom an4thin7 else > the4 are 6ut a translation into statistical tools o such in ormation as 8e ma4 6e a6le to comman&. 'istorical in ormation a6out each in&i$i&ual case is the onl4 means 64 8hich to re&uce to 6eara6le proportions the in luence o e(ternal actors, an& stu&4 an& &iscussion o each situation 8hich seems to ha$e some claim to 6ein7 calle& a nei7h6orhoo& o equili6rium an& una$oi&a6l4 rou7h estimates 8ill 6e the surest 8a4 to relia6le results, at least or some time to come. -t is this metho& on 8hich the 8riter has chie l4 relie& an& it is in or&er to illustrate principles rather than or the saEe o the use 8e maEe in our 8orE on time series that 8e no8 attacE the question o the purel4 statistical proce&ure. -n the case o t8o-phase c4cles solution 8oul& 6e eas4. :irst, 8e shoul& ha$e to esta6lish the act that a 7i$en c4cle &ispla4s t8o phases onl4, an& to maEe sure that the points 6et8een c4cles are reall4 normal an& not reaEishN or there coul& o6$iousl4 6e cases in 8hich some or all s4mptoms outrun equili6rium, 6ut re6oun& so quicEl4 that there is practicall4 no &epression an& consequentl4 no reco$er4. Secon&,
)10
ha$in7 satis ie& oursel$es on those points, all 8e ha$e to &o is to marE the hi7hest or the lo8est points, as the case ma4 6e, accor&in7 to the nature o each series. A smooth cur$e connectin7 those points 8ill then 7i$e the tren&s 8hich in this case &o not 7o throu7h the material 6ut trace lines 6or&erin7 on it in certain places an& &e$iatin7 rom it in others. L course, e(ternal actors must 6e e(pecte& to pro&uce at least &entsN6ut, as a rule, luctuations alsoN8hich 8ill upset the c4clical schema unless historicall4 &ia7nose&. 3hat the4 &e lect the 8hole series or 7oo& must 6e reco7niOe&. Hhat 8e 7et is, hence, ne$er a tren& pro&uce& 64 the c4clical process alone, 6ut 64 the c4clical process as &istorte& 64 e(ternal actors. -n the case o a our-phase c4cle the pro6lem an& the principle o its solution are the same, 6ut practical &i iculties arise. 3he price le$el, or instance, 8oul& in strict theor4 rise 6oth in prosperit4 an& reco$er4 an& all 6oth in recession an& &epression. ,ut e$en i in act it al8a4s 6eha$e& liEe this, the nei7h6orhoo& o equili6rium mi7ht still lie an48here 6et8een the peaEs an& trou7hs an& there is o6$iousl4 no prima- acie 8arrant or assumin7 that it shoul& lie, or e(ample, mi&8a4. 'ence, our onl4 hope o i&enti 4in7 nei7h6orhoo&s rom time series themsel$es re&uces to the possi6ilit4 that their 7raphs &ispla4 some characteristic 6eha$ior in or aroun& those nei7h6orhoo&s. 3his mi7ht, o course, consist simpl4 in their assumin7 a particular numerical $alue, 8hich, ho8e$er, is o6$iousl4 out o the question. ,ut equili6rium positions mi7ht also 6e 6etra4e& 64 more 7eneral properties o the 7raph. 0onsi&eration o this openin7 imposes on us, it is true, a 6i7 toll at the outset. :or unless 8e rest content 8ith a $isual impression, 8e 8ill irst ha$e to per orm a smoothin7 operation in or&er to 7et ri& o oscillations, $i6rations, hesitations, an& also o some o the e ects o some o the e(ternal actors. As soon, ho8e$er, as this toll is pai&, 8e reap all the a&$anta7es inci&ent to 6ein7 a6le to &eal 8ith &i erential properties o the smooth cour$e onl4, i.e., 8ith rates o chan7e at e$er4 point.
)11
3a6le o 0ontents
&. Man" Simultaneou 4a,e . N 3he a6o$e anal4sis onl4 ser$e&
to lea& up to the reall4 rele$ant case o a comple( c4clical mo$ement. He 8ill, or the saEe o simplicit4, let it consist o our Pon&ratie s, =u7lars, an& Pinchins onl4, an& &isre7ar& all the other t4pes o luctuations notice& in sec. / o the prece&in7 chapter. Since 8e ha$e nothin7 to a&& to 8hat 8as pre$iousl4 sai& a6out e ects o e(ternal &istur6ances an& the possi6ilit4 o eliminatin7 them, it 8ill also 6e con$enient to assume their a6sence as 8ell as a6sence o Seasonals an& <ro8th. Althou7h, o course, 8e &o not, as a matter o principle, postulate either internal re7ularit4 or sine orm, there is some use in presentin7 *0hart -+ the 7raph o the sum o three sine cur$es the amplitu&es o 8hich are proportional to their &uration an& *0hart --+ the 7raph o the irst &i erences o the composite cur$e. 3here is, ho8e$er, no tren& > the c4clical mo$ements represente& are, in our terminolo74, @clean.@ ,arrin7 this, 8e ma4 looE upon the charts as an illustration o all the 6ol&est assumptions 8hich it is possi6le, an& to some e(tent permissi6le, to maEe in or&er to simpli 4 &escription an& to construct an i&eal schema 8ith 8hich to compare o6ser$ations. -n particular, all c4cles ha$e our phases o equal len7th, amplitu&es o plus an& minus e(cursions are equal an& constant, perio&s are also constant, an& each o the t8o hi7her c4cles consists o an inte7ral an& constant num6er o units o the ne(t lo8er mo$ement. :or the stran7er to statistical technique the tact alone that e(treme re7ularit4 o 6ut three components ma4 result in so $er4 irre7ular-looEin7 a composite shoul& 6e instructi$e. Ban4 metho&s 8hich 8oul& 6e a$aila6le or the anal4sis o such a composite an& are not, in strict lo7ic, applica6le to the economic time series 8e meet 8ith in practice, ma4 4et pro&uce results 8hich historical anal4sis permits us to accept as appro(imations. 3his act a7ain su77ests that our material satis ies certain con&itions o
)1)
re7ularit4, in particular those require& 64 the :ourier an& the Schuster anal4sis, more nearl4 than 8e shoul& e(pect on theoretical 7roun&s. -t also 7i$es a&&itional importance, or our iel&, to an ele7ant metho& &ue to ;r. .. S. <eor7escu, althou7h it consists in ittin7 sine cur$es accor&in7 to a pro6a6ilit4 testNthe most pro6a6le $alues o the unEno8n perio&s o a Eno8n num6er o sineliEe luctuations 6ein7 oun& un&er the assumption that @errors@ are &istri6ute& accor&in7 to the <aussian la8. G5 An& the same act also len&s some support to quite primiti$e metho&s o procee&in7 64 inspectionNsimpl4 countin7 o 8hat 8e seeNor 64 means o a$era7e perio&s that har&l4 e$er 7et $er4 seriousl4 out o step 8ith o6ser$ations e(cept in cases 8hich 8e ma4 reasona6l4 e(plain on the score o e(ternal &istur6ance. 3he success 8hich Br. Pitchin *04cles an& 3ren&s in /conomic :actors, quote& a6o$e+ un&ou6te&l4 achie$e& simpl4 64 countin7 o his short c4cles, o6ser$in7 that t8o or three o them seem to orm hi7her units an& that there is a sort o 7roun& s8ell 6elo8 6oth, illustrates the point $er4 8ell.
G5
See Aca&%mie &es Sciences, s%ance &u J =uillet, 1930, Sur un pro6lAme &e calcul &es pro6a6ilit%s a$ec application ! la recherche &es p%rio&es inconnues &"un ph%nomAne c4clique. .ote &e B. ..S. <eor7escu, pr%sent% par B. /mile ,orel, 8hich 7i$es the un&amental i&ea.
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K-0hapter K'-S3L9-0A2 L#32-./S.

I. INT/7&UCTI7N 2 $89:6$9;<
3a6le o 0ontents
A6 The Fondamental Im*o!tan)e of the -i to!i)al A**!oa)h to the .!o(lem of the C")li)al .!o)e of E,olution. 3he importance o
such an approach has 6een emphasiOe& rom the outset. Since 8hat 8e ate tr4in7 to un&erstan& is economic chan7e m historic time, there is little e(a77eration in sa4in7 that the ultimate 7oal is simpl4 a reasone& histor4, not o crises onl4, nor o c4cles or 8a$es, 6ut o the economic process in all its aspects an& 6earin7s to 8hich theor4 merel4 supplies some tools an& schemata, an& statistics merel4 part o the material. Lnl4 &etaile& historic Eno8le&7e can &e initi$el4 ans8er most o the questions o in&i$i&ual causation an& mechanism M 8ithout it the stu&4 o time series must remain inconclusi$e, an& theoretical anal4sis empt4. 0ontemporaneous acts or e$en historic acts co$erin7 the last quarter or hal o a centur4 are per ectl4 ina&equate. :or no phenomenon o an essentiall4 historic nature can 6e e(pecte& to re$eal itsel unless it is stu&ie& o$er a lon7 inter$al. An intensi$e stu&4 o the process in the last quarter o the se$enteenth an& in the ei7hteenth centur4 is hence a most ur7ent tasE, or a quantitati$e an& care ull4 &ate& account o a perio& o )50 4ears ma4 6e calle& the minimum o e(istence o the stu&ent o 6usiness c4cles. L course, this is 6ein7
)1G
increasin7l4 realiOe&. 'istories o @crises@ an& &etaile& &escriptions o in&i$i&ual crises ha$e 6een 8ritten rom the 6e7innin7 o the nineteenth centur4. 3hat literature is richer than appears at irst si7ht 6ecause it inclu&es all the &escriptions o particular aspects, as 8ell as those 8ritten rom particular stan&pointsNnota6l4, most o the attempts to anal4Oe the 8orEin7 o the monetar4 mechanism an& o speculation, 8ith 6oth o 8hich the phenomenon o crises has 6een linEe& up rom the irst. ,ut that is not 8hat 8e mean. Since the &e$elopment 7enerate& 64 the economic s4stem is @c4clical@ 64 nature, the tasE to 6e accomplishe& 7ro8s ar 6e4on& mere &escription o spectacular 6reaE&o8ns, on the one han&, an& o the 6eha$ior o a77re7ati$e quantities, on the other, into the ormi&a6le one o &escri6in7 in &etail the in&ustrial processes 6ehin& them. 'istorians o crises primaril4 talE a6out stocE e(chan7e e$ents, 6anEin7, price le$el, ailures, unemplo4ment, total pro&uction, an& so on-Nall o 8hich are rea&il4 reco7niOe& as sur ace phenomena or as compoun&s 8hich sum up un&erl4in7 processes in such a 8a4 as to hi&e their real eatures. 'ence, the $alue o that Ein& o historical 8orE is not onl4 impaire& 64 the act that much o it is not up to minimum requirements o scholarship, 6ut also 64 the still more important act that, e(cept inci&entall4, it &i& not touch upon the essential thin7s at all. 3he same o6=ection applies to more recent attempts, $er4 meritorious in themsel$es, to ollo8 up chan7in7 6usiness situations 4ear 64 4ear so as to suppl4 us 8ith 6usiness annals. Hhat 8e reall4 nee& 8e are more liEel4 to in& in 7eneral economic histories > the4 6rin7 us much nearer to the process 8hich pro&uces the 8a$es 8e o6ser$e in our time series. ,ut much more important are the innumera6le mono7raphs on in&i$i&ual in&ustries. Althou7h not aimin7 at our ran7e o pro6lems an& 8ithhol&in7, almost tantaliOin7l4 sometimes, the in ormation an& the e(act &atin7 require& or our purpose, the4 in&icate ho8 an in&ustr4 arises, ho8 it is a6sor6e& into the economic or7anism, ho8 it a ects that or7anism an& ho8 it is reacte& upon, an& 8hat its c4clical 6eha$ior is. -n act, the4 lar7el4 a7ree in 8hat the4 consi&er rele$ant or interestin7, an& a
)1J
7eneral schema coul& rea&il4 6e sEetche& 8hich 8oul& it the lar7e ma=orit4 o them an& coul& easil4 6e impro$e& upon- 0oor&ination an& s4s-temiOation o this Ein& o 8orE 8oul& 6e e(tremel4 use ul an& is perhaps not too much to hope or. :urthermore, 8e ha$e an increasin7 num6er o mono7raphs on in&i$i&ual concerns an& entrepreneurs, =u6ilee $olumes, 6io7raphies, an& so on 8hich, 8hate$er their shortcomin7s, are a storehouse o rele$ant material. 3he 7ro8in7 interest in the 7enealo74 o nonaristocratic amilies opens up urther possi6ilities. A&&itional ra8 material or the annals o the uture is, o course, in the archi$es o 6anEs an& concerns, tra&e associations, pu6lic &epartments that ha$e to &o 8ith in&ustrial questions, an& also in the in ormation to 6e &eri$e& rom the &ail4 an& 8eeEl4 press an& rom tra&e =ournals. 3he histor4 o technolo74, o tra&e routes, o in&i$i&ual to8ns an& in&ustrial &istricts 7i$es in some instances e$en no8 8hat 8e 8ant. 0ompare& 8ith this $ast pro7ram, the ollo8in7 comments or sEetches, thou7h the result o more la6or than a irst impression 8oul& in&icate, are o course piti ull4 ina&equate. Hhat can 6e presente& are mere illustrations an& in&ications 8hich it is hope& 8ill 7o some 8a4 to8ar& illin7 the 6loo&less theoretical schemata an& statistical countour lines 8ith li$e act an& to8ar& maEin7 our meanin7 clearer an& more $i$i&. ,ut e$en the ur7ent tasE o locatin7 c4cles historicall4 has 6een not more than 6roache&. Boreo$er, no satis actor4 histor4 o capitalism can 6e 8ritten 8ithout taEin7 account o ;utch an& -talian @ori7ins@ an& o the later &e$elopments in :rance. 1et it has not onl4 pro$e& impossi6le to present ;utch, -talian, an& :rench material, 6ut the 8riter has also 6een una6le to 8orE it up or himsel 6e4on& the most common 7eneral treatises an& the most outstan&in7 mono7raphs. :inall4, American, /n7lish, an& <erman economic histor4 has 6een more intensi$el4 anal4Oe& onl4 rom a6out 1J80 on, an& e$en in this restricte& iel& there are man4 lacunae, not onl4 in the ollo8in7 e(position, 6ut also in the Eno8le&7e o its author. ;etails, althou7h the core o the matter is
)18
precisel4 in the &etails, can come in onl4 64 8a4 o e(ample an& in or&er to teach application o our theoretical schema. B. Que tion of .!in)i*le.A fe# 'ue tion of *!in)i*le mu t (e di *o ed of fi! t.
3a6le o 0ontents
1. /(clu&in7 as 8e &o noncapitalist chan7e, 8e ha$e to &e ine that 8or& 8hich 7oo& economists al8a4s tr4 to a$oi& > capitalism is that orm o pri$ate propert4 econom4 in 8hich inno$ations are carrie& out 64 means o 6orro8e& mone4, 8hich in 7eneral, thou7h not 64 lo7ical necessit4, implies cre&it creation. A societ4, the economic li e o 8hich is characteriOe& 64 pri$ate propert4 an& controlle& 64 pri$ate initiati$e, is accor&in7 to this &e inition not necessaril4 capitalist, e$en i there are, or instance, pri$atel4 o8ne& actories, salarie& 8orEers, an& ree e(chan7e o 7oo&s an& ser$ices, either m Ein& or throu7h the me&ium o mone4. 3he entrepreneurial unction itsel is not con ine& to capitalist societ4, since such economic lea&ership as it implies 8oul& 6e present, thou7h in other orms, e$en in a primiti$e tri6e or in a socialist communit4. - 64 this &e inition 8e merel4 meant to e(ercise our lo7ical ri7ht o terminolo7ical ree&om, no more 8oul& ha$e to 6e sai& a6out it. Hith some authors, prominent amon7 8hom is ,oehm-,a8erE, &e inin7 capital, capitalist pro&uction, an& capitalism &oes, in act, not mean more than this. Hith othersNBar( or Som6art ma4 6e quote& as instancesNthe &e initions 8hich the4 7i$e or 8hich can 6e 7leane& rom their te(ts, impl4 a statement o act, namel4, that the &e inin7 characteristic 7i$es the essence o a &e inite historical phenomena. ,ut also &e initions o the latter t4pe ma4 le7itimatel4 &i er accor&in7 to point o $ie8 an& purpose, an& such &i erences nee& not impl4 &i erence o opinion as to the nature o the phenomenon. Lur &e inition 6elon7s to this class. -t un&ou6te&l4 appears stran7e at a
)19
irst rea&in7, 6ut a little re lection 8ill satis 4 the rea&er that most o the eatures 8hich are commonl4 associate& 8ith the concept o capitalism 8oul& 6e a6sent rom the economic an& rom the cultural process o a societ4 8ithout cre&it creation. Lur characteristic is not, ho8e$er, inten&e& to impl4 causal connotation. -t shoul& also 6e o6ser$e& that, liEe most other &e initions o capitalism, ours is institutional. ,ut o course the institutions 8hich, 8ith $er4 rare e(ceptions, 8e treat as &ata throu7hout, are themsel$es the results o an& elements in the process 8e 8ish to stu&4. 3he onl4 thin7 that coul& 6e contro$ersial a6out this is our proposition that the economic process o capitalist societ4 is i&entical 8ith the sequence o e$ents that 7i$es rise to the 6usiness c4cle. 3here ore, 8e shall &ate capitalism as ar 6acE as the element o cre&it creation. An& this, in turn, at least as ar 6acE as ne7otia6le cre&it instruments, the presence o 8hich 7i$es the practical, i not the lo7ical, certaint4 o the presence o cre&it creationNin the same sense as the &isco$er4 o arms in some prehistoric &eposit 7i$es the practical certaint4 o the presence o the practice o i7htin7. ,ut 8e must 7o urther than this to the non-ne7otia6le instrument 8hich prece&es the imper ectl4 ne--7otia6le one, an& to the possi6ilit4 o trans errin7, 64 ho8e$er clums4 a metho&, &eposits lo&7e& 8ith 6anEs. 3his, o course, has not in itsel an4thin7 to &o 8ith cre&it creation M 6ut such in ormation as 8e ha$e stron7l4 su77ests that the practice o cre&it creation is as ol& as &eposit 6anEin7. :or Southern /urope this 8oul& carr4 us to the close o the t8el th an& the 6e7innin7 o the thirteenth centur4. ). :inall4, a point properl4 pertainin7 to the realm o 7eneral metho&olo74 must 6e touche& upon in or&er to eliminate an apparent contra&iction 6et8een our 8a4 o looEin7 at economic or social chan7e an& the principle o historic continuit4 8hich ten&s to assert itsel in historical anal4sis pari passu 8ith increasin7 material an& impro$in7 metho&s o research. Lur theor4 o the mechanism o chan7e stresses &iscontinuit4. -t taEes the $ie8 that e$olution procee&s 64 successi$e re$olutions, or that there are in the process =erEs or =umps 8hich account or man4 o its
))0
eatures. As soon, ho8e$er, as 8e sur$e4 the histor4 o societ4 or o an4 particular sector o social li e, 8e 6ecome a8are o a act 8hich Seems, at irst si7ht, to 6e incompati6le 8ith that $ie8 > e$er4 chan7e seems to consist in the accumulation o man4 small in luences an& e$ents an& comes a6out precisel4 64 steps so small as to maEe an4 e(act &atin7 an& an4 sharp &istinction o epochs almost meanin7less. /$olution o pro&ucti$e technique ma4 ser$e as an e(ample. Hhat 8e &esi7nate as a 6i7 in$ention har&l4 e$er sprin7s out o the current o e$ents as Athene &i& rom the hea& o \eus, an& practicall4 e$er4 e(ception 8e mi7ht thinE o $anishes on closer in$esti7ation. 0ooperation o man4 min&s an& man4 small e(periences actin7 on a 7i$en o6=ecti$e situation an& coor&inate& 64 it slo8l4 e$ol$e 8hat appears as reall4 ne8 onl4 i 8e lea$e out interme&iate steps an& compare t4pes &istant in time or space. 3he &ecisi$e step in 6rin7in7 a6out a ne8 thin7 or ultimate practical success is, in most cases, onl4 the last stra8 an& o ten relati$el4 insi7ni icant in itsel . .ee&less to sa4, this hol&s true also o the process o chan7e in social institutions an& so on. Hhat is technicall4 calle& a re$olution ne$er can 6e un&erstoo& rom itsel , i.e., 8ithout re erence to the &e$elopments that le& up to it M it sums up rather than initiates. .o8, it is important to note that there is no contra&iction 8hate$er 6et8een our theor4 an& a theor4 o histor4 8hich 6ases itsel on these acts. Hhat &i erence there is, is a &i erence o purpose an& metho& onl4. 3his 6ecomes e$i&ent i 8e re lect that an4 7i$en in&ustrial &e$elopment, or instance the electri ication o the househol&, ma4 in$ol$e man4 &iscontinuities inci&ent to the settin7 up o ne8 pro&uction unctions 8hen looEe& at rom the stan&point o in&i$i&ual irms an& 4et appear, 8hen looEe& at rom other stan&points, as a continuous process procee&in7 stea&il4 rom roots centuries 6acE. ,4 one o the man4 rou7hnesses orce& upon us 64 the nature o the tasE 8hich this $olume is to ul ill, 8e ma4 characteriOe this as a &i erence 6et8een microscopic an& macroscopic points o $ie8 > there is as little contra&iction 6et8een them as there is 6et8een callin7 the contour o a orest &iscontinuous or some an& smooth or other purposes.
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3a6le o 0ontents
C. The Long 4a,e f!om $898 to $9;< . N 3hose 4ears co$er 8hat
accor&in7 to our tentati$e schema 8e call a 2on7 04cle or Pon&ratie . He ha$e seen reasons to 6elie$e that this lon7 8a$e 8as not the irst o its Ein&. -t is, ho8e$er, the irst to a&mit o reasona6l4 clear statistical &escription. L8in7 6oth to ina&equate in ormation an& to the presence o serious political &istur6ance *mainl4 the trou6les associate& 8ith the American 9e$olution an& its a termath+ GG, &atin7 is $er4 uncertain at the 6e7innin7. .or is the en& 6e4on& &ou6t. Lur choice rests on a com6ination o statistical an& in&ustrial act, mainl4 a6out the cotton te(tile an& iron tra&es, 8hich urther stu&4 ma4 easil4 &isa$o8. ,ut e8 stu&ents 8ill &en4 the realit4 o the process, usuall4 re erre& M to as the in&ustrial re$olution, 8hich 8e i&enti 4 8ith that Pon&ratie .
GG
As soon as 8e a&mit the $ali&it4, or certain limite& purposes, o an anal4sis 8hich looEs upon economic e$olution as a &istinct process ha$in7 a lo7ic o its o8n 6ut 7oin7 on in a &istur6e& en$ironment, it o6$iousl4 must 6e e(pecte& that c4clical phases 8hich are &ue accor&in7 to that lo7ic or mechanism 8ill o ten ail to sho8, o8in7 to the opposin7 in luence o such e(ternal &istur6ance. .o ar7ument a7ainst c4clical schemata ollo8s rom this an&, in the particular case o this countr4, there 8oul& 6e no point in o6=ectin7 that 8e are allo8in7 our Pon&ratie to @rise,@ in la7rant $iolation o our schema, at a time 8hich is Eno8n to ha$e 6een one o &epression *1J83-1J90+. 3o 6e7in 8ith, the act is not 6e4on& question. Boreo$er, the o6=ection rests upon 8hat 8e Eno8 to be incorrect, an i&enti ication o &epression an& su erin7. Su erin7 there certainl4 8as, 8itness the re6ellion o 1J8G, 6ut this is not conclusi$e e$i&ence a6out 8hat the c4clical phase 8as. :inall4, there 8as the o6$ious an& in&epen&ent actor o ph4sical impo$erishment o8in7 to the 8ar o in&epen&ence an& to the equall4 important e ects o the in lation inci&ent to it. 3he 6anEruptc4 o 1J80, the issue o the @6ills o a ne8 tenor,@ an& the inal liqui&ation o the @continental paper currenc4@ 8ere the lan&marEs on a route that 8ent throu7h ah the $icissitu&es o un6ri&le& in lation. 3his, 64 $irtue o a $icious circle 8hich ou7ht to 6e, 6ut is not, common Eno8le&7e amon7 economists, calle& or e$er ne8 in lation in cure o situations create& 64 antece&ent in lation.
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-. -t is necessar4 M ho8e$er, to 7uar& a7ainst possi6le misun&erstan&in7 64 maEin7 quite clear in 8hat sense 8e accept the term in&ustrial re$olution an& its implications. 3he 8riter a7rees 8ith mo&ern economic historians 8ho ro8n upon it -t is not onl4 outmo&e&, 6ut also mislea&in7, i it is inten&e& to con$e4 either the i&ea that 8hat it &esi7nates 8as a unique e$ent or series o e$ents that create& a ne8 economic an& social or&er, or the i&ea that, unconnecte& 8ith pre$ious &e$elopments, it su&&enl4 6urst upon the 8orl& in the last t8o or three &eca&es o the ei7hteenth centur4. 3u7an-,arano8sE4"s &ictum that @i one 8ishes to re er the in&ustrial re$olution to a &e inite historical epoch it can 6e lo-cTate& more =usti ia6l4 in the secon& quarter o the nineteenth than in the en& o the ei7hteenth centur4@ accor&s 8ith our $ie8 As 8e Eno8, it is in recession, &epression, an& re$i$al that the achie$ements initiate& in the prosperit4 phase mature an& ull4 un ol& themsel$es, thus 6rin7in7 a6out a 7eneral reor7aniOation o in&ustr4 an& commerce, the ull e(ploitation o the opportunities ne8l4 create&, an& the elimination o o6solete an& ina&apta6le elements, 8hich is e(actl4 8hat happene& an& 8hat accounts or 8hat e$er4one a&mits to ha$e 6een a prolon7e&, thou7h o ten interrupte&, @&epression@N rom the .apoleonic Hars into the orties. /(actl4 as the inno$ations 8hich @carrie&@ the in&ustrial ups8in7 o the ei7hties an& nineties o the ei7hteenth centur4 in man4 cases emer7e& much earlierNin a preparator4 state that in some cases amounte& to real, thou7h quantitati$el4 unimportant, successNso the t8enties an& thirties o the nineteenth centur4 alrea&4 &ispla4 the irst successes o the inno$ations 8hich 8ere to @carr4@ the ne(t Pon&ratie . 3he ne(t 6i7 thin7 in particular, railroa&iOation o the 8orl&, then asserte& itsel e$en to the point o pla4in7 a si7ni icant role in the last Ju7lar o the Pon&ratie no8 un&er &iscussion. He o6ser$e the same phenomenon on the &o8n7ra&e an& in the re$i$al o the secon& Pon&ratie 8hen, nota6l4 in the ei7hties, electri ication, the most important inno$ation o the thir&, &e$elope& 6e4on& the e(perimental state. Hh4 this shoul& 6e is so rea&il4 un&erstan&a6le
))3
that 8e mi7ht 6e tempte& to consi&er it, 64 8a4 o 7eneraliOin7 rom our few o6ser$ations, as a normal eature o the e$olutionar4 process, an& to insert it into our mo&el. 3his has not 6een &one 6ecause the intention 8as to Eeep the latter as simple as possi6le, in or&er to qualit4 it or the tasE o con$e4in7 essentials M 6ut there 8oul& ha$e 6een no &i icult4 in maEin7 the insertion. Hhere$er 8e in& the phenomenon, it constitutes an a&&itional linE 6et8een successi$e c4clesNthere is no reason to con ine it to Pon&ratie s. Hhat matters here is that the rea&er shoul& realiOe that it &oes not in$ali&ate our schema. ). -n a&&ition to 6lurrin7 contours at the 6e7innin7 o this perio&, e(ternal actors e(erte& paramount in luence until, rou7hl4, 18)0. 3he rest o the perio& 8as much less &istur6e& > the in luence o e$ents 8as small, or onl4 local or o 6ut minor moment. 3he e ects o the riction 6et8een the #nite& States an& /n7lan& *18)G-1850+, o the 3e(an 8ar 8ith Be(ico, o the American monetar4 an& tari polic4, thou7h important, 8ere ne$er &ominant in the sense o seriousl4 inter erin7 8ith the interpretation o c4clical situations. ,ut the 8orl& 8ars o 1J95 to 1815 o6$iousl4 8ere. .othin7 illustrates 6etter than &oes the i7ure o .apoleon 8hat 8e mean 64 an e(ternal actor. 'o8e$er, that actor 8as so important as to raise the question o principle 8hether 8e are 8ithin our ri7hts i 8e continue to speaE o a &istinct process o economic e$olution sui generis 7oin7 on that 8as merel4 &istur6e& an& &istorte& 64 political e$ents. -n or&er to orm an opinion a6out this it is necessar4 to note irst that the process o in&ustrial inno$ation o6$iousl4 6e7an 6e ore :e6ruar4 1J93, 8hen /n7lan& &eclare& 8ar upon :rance. Boreo$er, 8e can ollo8 it up an& conclu&e rom our Eno8le&7e o its mechanism that it 8oul& ha$e pro&uce& a peaE o prosperit4, an& a ter8ar& recession, 8ithout those political e$ents. 3hat 8hat 8e claim to 6e c4clical luctuations 8ere in a num6er o instances associate& 8ith political e$ents is as true as that there 8ere se$eral other luctuations 8hich are &irectl4 tracea6le to the latter. ,ut 8e
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must 7uar& a7ainst an optical &elusion 8hich o ten arises rom interpretation o the 6eha$ior o time series in terms o spectacular e$ents. Hhere these coinci&e 8ith, or imme&iatel4 prece&e, a 6usiness situation that seems to accor& 8ith them, this is uncriticall4 accepte& as proo o a causal relation. ,ut 8here a political e$ent ails to pro&uce a correspon&in7 e ect on 6usiness, the act is liEel4 to 6e o$erlooEe& > /n7lan&"s international situation in 180G, or instance, 8as an4thin7 6ut com orta6le, 4et the 4ear 8as one o prosperit4. Secon&, 8e 8ill classi 4 e ects rou7hl4 into 8asta7e, &islocation, an& in lation. 5h4sical &estruction an& real cost o armamentsNin the case o <erman4, also o plun&er an& e(actions 6oth in mone4 an& in Ein&N8ere o course consi&era6le, 6ut onl4 locall4 an& temporaril4 8ent to the point o &estro4in7 or paral4Oin7 6usiness processes. -n the case o the #nite& States the in luence o the /uropean e$ents 8as complicate& an& in some respects counteracte& 64 the 8ar, an& 64 con&itions $er7in7 on 8ar, 8ith /n7lan&. /$en so, American shippin7, ship6uil&in7, an& its su6si&iaries reape& consi&era6le 8in& all 7ains rom a6normall4 hi7h rei7ht rates an& a pro ita6le transit tra&e. 3his, o course, helpe& inancin7 an& con&itione& enterprise in other &irections. Su6sequent em6ar7oes, non-intercourse acts, an& the 8ar put an en& to much o this an& account or &epressi$e phenomena 8hich 8oul& not ha$e 6een present to the same &e7ree 8ithout that temporar4 stimulus an& its remo$al. ,ut America, as ar as it 8as not a armin7 nation, 8oul& then ha$e 6een primaril4 a sea arin7 an& tra&in7 nation an an4 case, an& her armin7 interest 8oul& ha$e elt the impulse o /n7lan&"s in&ustrial &e$elopmentN 8hich ma&e her a 8heat-importin7 countr4 in the ei7htiesNe$en 8ithout the o6stacles that impe&e& e(ports rom the continent o /urope. 0on$ersel4, irst the 8ar o in&epen&ence an& then the 8ar o -181) to 181F to7ether 8ith its antece&ents, a ecte& in&ustr4 much as prohi6iti$e tari s 8oul& ha$e &one an& encoura7e& in$estment that
))5
8as 6oun& to 6ecome unremunerati$e as soon as those con&itions 8ere remo$e&. 3he 4ear 1815 6rou7ht a re7ular post8ar spurt an& 181G a no less re7ular post8ar slump, such as 8e al8a4s o6ser$e in such cases. 3ime series an& in&ustrial histor4, o course, re lect 6oth. 3he4 8oul& &o so 8hate$er the un&erl4in7 c4clical phase mi7ht ha$e 6een. ,ut a7ain, this is no reason to &en4 the realit4 o the c4clical component on principle or to assume a priori, as soon as 8e realiOe the presence o non-c4clical components, that the4 8ere the onl4 ones to act. -n our particular case &epth as 8ell as &uration *to 18)1 + o the ensuin7 &epressi$e con&itions coul& har&l4 6e un&erstoo& 8ithout re erence to the location o those 4ears in the Pon&ratie . 3. Althou7h the result o much more comple( social, economic, an& iscal moti$ations, the American tari s o 1J89 an& 181G ma4, rom our stan&point, 6e looEe& upon as attempts to prolon7 the con&itions that pre$aile& &urin7 the prece&in7 8ars an& to preser$e the in&ustrial 8ar structures. Hhate$er their e ects in other respects an& on other interests, this purpose 8as actuall4 ser$e& 64 them as 8as the co7nate purpose o Eeepin7 ali$e structures that o8e& their e(istence to in lation an&, 6arrin7 urther in lation, coul& not ha$e sur$i$e& 8ithout protection. As it 8as, tari s certainl4 so tene& &o8n7ra&es an& accentuate& up7ra&es. 9emo$al, e$en i 7ra&ual, mi7ht e$en ha$e pro&uce& &epressi$e situations, so&&en remo$al panics, that coul& not other8ise 6e e(plaine&. :earNperhaps, e(a77erate& earNo imme&iate consequences paral4Oe& the 6a&l4 or7aniOe& an& 6a&l4 le& interests 8hich 8ere in=ure& 64 that polic4 M an& the $icious circle o protection maEin7 itsel necessar4 an& creatin7 situations that call or more protection, is at the 6ottom o American protectionism to this &a4. ,ut this &oes not mean that chan7es in tari polic4 &ominate the c4clical mo$ement, althou7h the4 po8er ull4 &etermine 8hat the in&ustrial structure 8ill 6e. -t &oes not mean this, as a matter o act, in the American case *e$en 6e4on& our perio&+. An& it &oes not mean this, as a matter o anal4tical principle. -n the ormer respect, 8e 8ill
))G
note that the tari o 1J89 &i& not more than protect a num6er o 8eaE in&ustrial striplin7s. L the acts rom 181G, 8hen protection 7ot reall4 un&er sail, to the @tari o a6ominations@ *18)8+ none turne& an4 ti&e. He 8ill no8 ormulate more 7enerall4 > imposition an& remo$al o tari s chan7es the con&itions 6oth or enterprise an& or current 6usiness. As re7ar&s enterprise, protection 8ill stimulate it in some &irections an& 6ri&le it in others, so that a &istorte& in&ustrial or7anism 8ill 6e the consequence. .et e ects there ma4 6e, althou7h there nee& not, 6ut positi$e ones 8ill al8a4s 6e more $isi6le than the *lar7el4 con=ectural+ ne7ati$e ones. -n no case is it correct to list this in luence amon7 alternati$es to the in luence o the entrepreneurial actor, throu7h 8hich alone it acts as &oes an4 other chan7e in &ata. 3his in part e(plains the in-e ecti$eness o protection in creatin7 6ooms > all it can possi6l4 &o is to a&& one a$orin7 circumstance, 8hile it is per ectl4 consonant 8ith this that the remo$al o protection ma4 pro&uce a lump 64 upsettin7 calculations. -n its role as a con&ition o entrepreneurial acti$it4, imposition o tari s 8ill thus act similarl4 to cheap mone4 polic4 > it creates mar7ins 8hich 8oul& not other8ise e(ist an& there ore calls orth enterprise an& secon&ar4 e(pansion that ma4 6ecome a source o trou6les. 'o8e$er, protection acts not onl4 on enterprise, 6ut also on current 6usiness or 8hat 8e call the 8orl& o ol& irms. As ar as it &oes this, it ma4 &irectl4 chan7e the comple(ion o the economic situation as a 8hole. 'ere it has 8hat ma4 6e terme& a mechanical or automatic e ect, althou7h this e ect is Se$er one 8a4 onl4. F. 3he question remains to 8hat e(tent the e(ternal actors -n lation an& ;e lation shape& e$ents an& 8hether the4 pro$i&e an alternati$e e(planation o the economic histor4 o the time that coul& stan& 64 itsel , there64 pro$in7 the utilit4 o looEin7 or an4 c4cles o autonomous causation, particularl4 or the Pon&ratie . 3he ans8er is comparati$el4 simple i 64 in lation 8e mean merel4 the inancin7 o pu6lic e(pen&iture 64 le7al ten&er or cre&it instruments create& ad hoc, an& i 64 its e ects 8e mean merel4 the impact o the amount
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thus create& times a suita6le coe icient o $elocit4. ,ut such situations are in$aria6l4 complicate& 64 an e(pansion o 6usiness cre&it 8hich superimposes itsel on the &irect e ects an& is $er4 &i icult to &istin7uish rom e(pansion o 6usiness cre&it that &urin7 the same time 8oul& ha$e occurre& in the or&inar4 course o prosperit4 phases. :or America 8e ha$e also at $arious =unctures to taEe account o in lationar4 impulses, 7i$en quite in&epen&entl4 o an4 iscal $icissitu&es an& o ten 8ithout an4 chan7e in the quantit4 an& character o le7al ten&er, 64 so t an& cheap mone4 policies an& recEless 6anEin7,@ 8hich in America 8as ostere& 64 the in lationist temper o the pu6lic min&. 3his <or&ian Enot interpretation has 7ot to ace, ho8e$er con$enient it ma4 6e to slur o$er these &i iculties 64 a77re7ati$e propositions. He shall class 8ith e(ternal actors, not onl4 in lationar4 inancin7 o 7o$ernment e(pen&iture, 6ut also in lationar4 impulses o the last-mentione& t4pe, pro$i&e& the4 procee& rom the political 8orl& [N8hich mainl4, thou7h not e(clusi$el4, means le7islationN8hile @recEless 6anEin7@ 8ill 6e classe& 8ith speculati$e manias, s8in&le, an& the liEe, 64 8hich 8e 8ish to e(press, on the one han&, that it &oes not 6elon7 to those eatures 8ithout 8hich our mo&el 8oul& not 6e lo7icall4 complete an&, on the other han&, that it &oes 6elon7 to those eatures 8hich un&erstan&a6l4 present themsel$es un&er certain en$ironmental circumstances an& in certain sta7es in the career o capitalism. -t is onl4 8ith re7ar& to @recEless 6anEin7@ that the question o in lation arises at all or the #nite& States. ,roa&l4 speaEin7, soun& mone4 polic4 pre$aile& &urin7 the 8hole o this perio&, an& the 0onstitutionN8hich at the time 8as un&erstoo& to ha$e &epri$e& 6oth state le7islatures an& 0on7ress o the po8er o issuin7 not onl4 @6ills o cre&it@ 6ut le7al-ten&er iatNre lects acEno8le&7ment o the lesson tau7ht 64 the 8ar in lation. -t rati ie& the temporar4 &e eat o in lationism an& su6stantiall4 settle& monetar4 matters until the 0i$il Har.
))8
5- -n the #nite& States the pro&uction o a7ricultural ra8 materials in 7eneral ollo8e& rather than prece&e& the &e$elopment o the in&ustries that use them. 3his is especiall4 true o 8ool, 8hich, in spite o man4 e orts 64 manu acturers, o protection, o the impulses 7i$en 64 the /n7lish 8ar an& 64 the 7ro8in7 &eman& or mutton, an& o the intro&uction o the Berino 6ree& *1801+, &e$elope& slo8l4 until, =ust 6e4on& our perio&, it temporaril4 6ecame an article o e(port 0otton continue& to 6e importe& an& also to 6e an article o transit tra&eNnet e(ports 6e7an in 1J9FNuntil a 7ro8in7 in&ustr4 almost impelle& its pro&uction on a lar7er scale. 3he 7reat in$estment in cotton plantin7 in the South 6e7an in the recession o that Pon&ratie > a t4pical e(ample o an in&uce& &e$elopment or o 8hat 8e ha$e calle& e(pansion into ne8 economic space create& 64 pre$ious inno$ation. 2um6erin7 8as, o course, 6asic to the 7eneral 7ro8th o the countr4 rom the start, 6ut not $er4 interestin7 c4clicall4, since so much o it 8as &one or local purposes. 3he 7reat &e$elopment 8as in 8heat 7ro8in7. Stimulate& 64 a6un&ance o cheap cre&it &ue to 8hat has a6o$e 6een re erre& to as @recEless 6anEin7,@ an& 64 orei7n &eman&, it e(perience& a 6oom 1J90-1J95, 8hich to7ether 8ith the &e$elopment o millin7 inci&ent to it 8as one o the most important elements o that Pon&ratie prosperit4. Since that 6oom 8as primaril4, thou7h 64 no means 8holl4Na matter o a6ilit4 to e(port, the set6acE an& America"s share in the ensuin7 a7rarian &epression must 6e interprete& in terms o orei7n con&itions, allin7 prices, an& protection in /n7lan& in particular, the e ects o 8hich 8ere, or the countr4 taEen as a 8hole, alle$iate& 64 the a$ora6l4 &e$elopin7 cotton situation. ,ut another phenomenon calls or attention 8hich pla4s a role in all a7rarian &epressions in this countr4. 3hat is a t4pe o inno$ation 8hich rom the start has 6een peculiar to it an& has remaine& so into the t8enties o this centur4 > inno$ation 8hich creates the con&itions or 6rin7in7 ne8 re7ions into culti$ation. <rain pro&uction shi te& its center rom the .e8 /n7lan& States to Kir7inia an& Bar4lan& alrea&4 in colonial times, an& in our perio& 6e7an to shi t it a7ain to the Lhio
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an& the <reat 2aEes. /ach process o this Ein& spells increase o pro&uction an&, at the same time, prosperit4 in the ne8 an& &epression in the ol& re7ionsNthe latter 8ell illustratin7 that important piece o the c4clical mechanism, the competition 6et8een the ne8 an& the ol& pro&uction unctions. -t shoul& 6e note& in passin7 that this also illustrates the &i icult4 o talEin7 a6out the @lon7-perio& &epressions in the 8orl&"s a7riculture@ as homo7eneous phenomena. G. -n the #nite& States, a7ricultural an& commercial enterprise *the latter also inclu&in7 shippin7+ 8as the chie &eterminant o 6usiness situations throu7hout our perio&. Also, 8e must 6ear in min& that e$olution in our sense in AmericaNan& this hol&s true to this &a4 or in an4 case to the en& o the secon& Pon&ratie N8as supporte& 64 a rate o 7ro8th in our sense 8hich ha& no parallel in either /n7lan& or <erman4. Simple e(pansion alon7 o6$ious lines, e(ploitation o opportunities 8hich, once create&, la4 at han& rea&4 an& ine(hausti6le or a mi7htl4 host o ollo8ers, an& immi7ration o men an& capital in response to those opportunities supplie& a much 7reater part o the propellin7 orces here than an48here else. /ntrepreneurial acti$it4 8as 7enerall4 ace& 8ith a$ora6le chan7es in its &ata. :orei7n e$olution an& 7ro8th, on the 8hole, 8orEe& in the same &irection. 3he e(tension o the 8heat an& cotton areas, nota6l4 a ter 1830, 8as possi6le 8ithout &estro4in7 the con&itions or urther e(tension. 3hese acts are too o6$ious to require proo or illustration, nor is it necessar4 to insist on the consequent &epen&ence o American on /n7lish 6usiness situations. He 8ill notice, ho8e$er, that these con&itions, as soon as the trou6les o the ei7hties o the ei7hteenth centur4 8ere o$er, pro&uce& t8o eatures that 8ere prominent in the 6oom o the nineties as 8ell as in man4 o those that 8ere to ollo8N lan& companies an& the speculation in lan&. A 7reat part o in&ustrial pro&uction 8as carrie& on in the armer"s home or 64 8orEshop cra ts throu7hout our perio&, as it ha& 6een in colonial times, or it 8orEe& un&er con&itions 8hich practicall4 e(empte& it rom the repercussions &escri6e& in our mo&el > a sa8mill
)30
sa8in7 on toll, locate& in an a7rarian nei7h6orhoo&, ma4 pa4 or not, ma4 8orE or not, 6ut it has nothin7 to @compete &o8n,@ nor 8ill its processes react on other in&ustrial or7anisms-Nthe a7rarian milieu acts as a shocE a6sor6er. 'o8 consi&era6le, ne$ertheless, in&ustrial enterprise must alrea&4 ha$e 6een 6e ore the 9e$olution is pro$e& 64 the act that em6ar7oes an& actual 8ar 8ith the mother countr4 cause& so little serious em6arrassment, an& that, in particular, &omestic urnaces an& or7es 8ere quite up to the requirements o cannon castin7 an& o the other Ein&s o &eman& inci&ent to the militar4 operations. Bassachusetts an& 0onnecticut an& the nei7h6orhoo&s o 5hila&elphia an& .e8 1orE 8ere 64 that time in&ustrialiOe& to a consi&era6le e(tent M there ha& 6een occasional e(ports o manu acture& pro&ucts as earl4 as the mi&&le o the se$enteenth centur4, an& in&ustrial to8ns *Hilmin7ton, 2ancaster+ ha& sprun7 up 8hile 8ater-po8er &e$elopments 8ere o quantitati$e importance at least se$eral &%ca&es 6e ore our perio&. :lour millin7, e$en 6e ore the inno$ations associate& 8ith the name o Lli$er /$ans, 8as technolo7icall4 ahea& o the rest o the 8orl&. 3he construction o 7lass 8orEs 64 the Kir7inia 0ompan4 an& then 64 @,aron@ Stie7el can ser$e as t4pical illustrations o our process. 3here 8ere some consi&era6le iron 8orEs. 3e(tile interests ha& risen to political in luence. Ship6uil&in7, liEe other in&ustries, 8as ostere& 64 6ounties. 3he ,ritish colonial enterprises, such as the Kir7inia an& the 5l4mouth companies, ha& rom the irst inclu&e& in&ustrial &e$elopment in their pro7rams. An& the Har o -n&epen&ence, o course, 7a$e a 7reat impulse to most o this. ,ut up to its en& the $iolent luctuations an& the spectacular crises must primaril4 6e &escri6e& in terms o e(ternal actorsNsuch as 8ars, su&&en chan7es in the political &ata, /n7lish con&itions, an& so on, 8hich acte& on the in&ustries throu7h commerceNrather than in terms o the in&ustrial mechanisms itsel . Since e(ternal actors o6$iousl4 &ominate the picture an& are naturall4 stresse& 64 6oth contemporaneous an& historical reports, an attempt to ans8er the question 8hether there
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8ere also 7enuinel4 c4clical luctuations 8oul& in$ol$e an e(tremel4 &i icult piece o anal4sis 8hich the 8riter has 6een una6le to un&ertaEe. ,ut the colonial issues o paper mone4 an& the other in lationist policies o the colonies cannot simpl4 6e put in the same class 8ith /uropean 7o$ernment in lations. -n part at least, the4 stoo& instea& o c4clical e(pansions o 6anE cre&it an&, &irectl4 *64 loans an& su6si&ies+ an& in&irectl4, inance& inno$ations or the inancin7 o 8hich there 8ere no other means. Some o the 6reaE&o8ns 8hich stu&&e& that e(pansion are, hence, more aEin to or&inar4 crises, an& the processes 8ithin 8hich the4 occurre& are possi6l4 more aEin to c4cles in our sense than 8e coul& e$er realiOe i 8e sa8 in those colonial issues nothin7 6ut or&inar4 in lation. 3he use ma&e o that tool 8as o ten so impro$i&ent an& uns4stematic that the usual comments on them ma4 6e ampl4 =usti ie& all the same, 6ut the4 &o not co$er the 8hole o the case. 0ontemporaneous o6ser$ers, as 8ell as some historians, such as 0halmers an& Hee&en, ma4 ha$e put the cart 6e ore the horse, an& presuma6l4 implie& a lot o 8ron7 theor4, 6ut the4 8ere har&l4 8ron7 as to the acts 8hen the4 associate& some in&ustrial &e$elopments, in ship6uil&in7 an& ironmaEin7 in particular, 8ith the paper mone4, althou7h most o them aile& to associate also ensuin7 &epression 8ith it. 3aEin7 account o the pre$iousl4 mentione& &istur6ances o the ei7hties o the ei7hteenth centur4, 64 sa4in7 either that the4 inter ere& 8ith the risin7 ti&e o enterprise so as to 6lot out the s4mptoms 7enerall4 associate& 8ith prosperit4, or that the4 &ela4e& the rise o the ti&e until a6out 1J8G, 8e see the settin7 in o the process that, ostere& 64 lan& 7rants, loans an& su6si&ies, an& other acilities e(ten&e& 64 manu acturers an& 8oul&-6e manu acturers 64 states an& municipalities, 8as e$entuall4 to trans orm American in&ustries in much the same 8a4 as the correspon&in7 process &i& in /n7lan&. A&$ance 8as sprea& o$er a 8i&e $ariet4 o in&ustries an& 8as in ull s8in7 64 the time Ale(an&er 'amilton su6mitte& his amous report. 3he main eature, in in&ustr4 in the strict sense, 8as the intro&uction o po8er machiner4 8hich 6e7an to turn the 8orEshop o the cra t
)3)
t4pe into the actor4. As an e(ample 8e 8ill mention the &e$elopment o the cotton an& 8oolen mills in .e8 /n7lan& an& 5enns4l$aniaN the ,e$erl4 0otton Banu actor4 8as chartere& in 1J89N8hich in the nineties culminate& in the @cotton mania,@ the most striEin7 sin7le phenomenon o 8hat mi7ht 6e 6e terme& the positi$e phase o the American in&ustrial re$olution. 3his 8as, o course, intimatel4 connecte& 8ith 8ater-po8er &e$elopments. 3he 7reat 'amiltonian pro=ect or the e(ploitation o the alls o the 5assaic, 8hich a ter initial $icissitu&es, e$entuall4 create& the in&ustrial center o 5aterson, ma4 ser$e as an e(ample. 3hese 8ater-po8er &e$elopments, to7ether 8ith impro$e& means o communicationN-turnpiEes an& canals, partl4 constructe& 64 pu6lic enterpriseNan& ship6uil&in7, ma&e the 6acE6one o the strictl4 in&ustrial component o 8hat 8e interpret as Pon&ratie prosperit4. Technological inno$ation, let alone @in$ention,@ 8as not in prominence. 3he onl4 one o irst-rate importance 8as the Hhitne4 cotton 7in, thou7h there 8ere man4 minor ones, particularl4 in the iel& o a7ricultural implements. /$en the intro&uction o /n7lish inno$ations 8as at irst 6ut slo8. 3hou7h, or e(ample, =ennies, ArE8ri7ht rames, an& mules all came in a6out 1J90, the4 ma&e $er4 little hea&8a4 6e ore the turn o the centur4. Hhoe$er looEs at quantities onl4 an& ne7lects the &istinction 6et8een initiation an& &e$elopment o results, 8ill 6e incline&, in this case as in that o /n7lan&, to &ate the @re$olution@ rom the irst, the secon&, or e$en the thir& &eca&e o the nineteenth centur4. 3hat time 8as, ho8e$er, clearl4 one o &eri$ati$e &e$elopment o the t4pe 8hich 8e associate 8ith Pon&ratie &o8n7ra&es an& re$i$als. 3he nature o technolo7ical inno$ation, in particular, accor&s 8ith this. Hater-po8er &e$elopment 8ent on alon7 the lines pre$iousl4 chalEe& out, met its 7reat successes, in spite o the primiti$e an& 8aste ul pitch"6acE 8heel, especiall4 Na ter 5atersonNin 2o8ell, 2a8rence, Banchester, 'ol4oEe, 5hila&elphia, an& :all 9i$er, an& remaine& the main source o in&ustrial po8er to the en& o our perio&. 3his, to7ether 8ith 8hat it in&uce&, 8as the 7reat in&ustrial eature in the Ju7ulars a ter 18)0. Steam came in 6ut slo8l4, 6oth 6ecause o the
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a6un&ance o 8ater po8er, an& 6ecause cheap rei7ht rates 8ere, or the 7reater part o the countr4, a prerequisite o its e(ten&e& use. Hithin our perio& it ha& quantitati$e si7ni icance onl4 in the nei7h6orhoo& o cheap coal, the intro&uction o the iron 6oiler not8ithstan&in7. 3he rise o in&ustr4 in the Bi&&le Hest, another eature o this Pon&ratie &o8n7ra&e, is, ho8e$er, 6oun& up 8ith it, an& its use sprea& rom there to the South an& e$en into the heart o the 8aterpo8er re7ions an& to cotton te(tiles */a7le 0otton Bills, 1831+. A ter a6out 1810, L. /$ans" hi7h-pressure en7ines 6e7an to compete 8ith the importe& *lo8-pressure+ Hatt en7ines. ,ut the pro&uction o en7ines or in&ustrial purposes in 0le$elan& an& 5itts6ur7h 8as, as ar as the 8riter Eno8s, small e$en at the en& o the perio&, althou7h it 8as o more importance or steam6oat use. Since smeltin7, the other 7reat source o in&ustrial &eman& or uel, met 8ith a plenti ul suppl4 o charcoal, 8hich &i& not 6e7in to 7i$e out until the irst &eca&e o the nineteenth centur4, coal, thou7h &isco$ere& in colonial times an& e$en, in small quantities, importe& rom /n7lan& 6e ore 1800, 8as o little importance until the thirties. 3hen imports rose, an& the technolo7ical &i iculties 8ere o$ercome 8hich ha& stoo& in the 8a4 o lar7e-scale use o &omestic coal. :. H. <eissen-hainer"s in$ention, i this is the 8or&, the intro&uction o the hot 6last, alrea&4 success ul in /n7lan&, an& coEin7, all contri6ute& to the prosperit4 o the last Ju7lar, althou7h the 7reat &e$elopment came a ter 18F). 3he iron in&ustr4 in 7eneral an& rollin7 in particular ha&, as 8e shoul& e(pect, e(pan&e& in the ups8in7 o the nineties, 6ut the4 out7re8 the small-scale t4pe an& ol& metho&s in the &o8ns8in7. 3he pu&&lin7 process came in 181J, rollin7 mills 6ecame 6i77er *5itts6ur7h+ an& 6e7an to cro8& out or7e hammers. ,ut the pro&uction o cast steel in 0incinnati an& the output o the cruci6lesteel 8orEs in Jerse4 an& 5itts6ur7h, althou7h &atin7 rom the ups8in7 prece&in7 183J, &i& not attain quantitati$e importance 8ithin the perio&. He ha$e here a t4pical instance o an in&ustr4 &ra8n alon7
)3F
64 orei7n inno$ation an& increasin7 home &eman&, e(pan&in7 in response to the 7eneral march o thin7s. ;o8n7ra&e an& re$i$al &e$elopments in the te(tiles, par-, ticularl4 in cotton, 8ere o a &i erent character 6ecause this in&ustr4, 8hich e(pan&e& still more $i7orousl4 @into ne8 economic space@ &urin7 the irst F0 4ears o the nineteenth centur4, ha& create& that space itsel an& &i& not merel4 respon& to the 7ro8th o the en$ironment. -n Bassachusetts alone a6out 90 companies or maEin7 cotton an& 8oolen 7oo&s 8ere incorporate& 6et8een 180J an& 1818 *K. 0larE, Kol. -, p. )GG+ a act 8hich 4et in&icates the rate o e(pansion, 7reatl4 surpasse&, o course, a ter 18)0. A num6er o &omestic impro$ements o the technolo7ical t4pe atten&e& this &o8n7ra&e process. 3he most important 8as :. 0, 2o8ell"s loom *181F+, 8hich almost imme&iatel4 in&uce& a 7reat increase in 8ea$in7 64 po8er, the application to 8oolens succee&in7 in the course o the t8enties. -t 8as prece&e& 64 the in$ention o @picEers@ an& @8illo8s@ *accor&in7 to Br. 0larE, 180J+ an& 8as ollo8e& 64 the <oul&in7 con&enser, 8hich re$olutioniOe& the 8oolen in&ustr4 in the thirties *Pon&ratie re$i$al+, an& a consi&era6le list o minor ne8 &e$ices. Hhat 8e Eno8 o quantities o pro&uct an& prices 6eha$e& accor&in7l4. -n transportation the 7reat thin7 8as the construction o canals. Hithin the last three &eca&es o our perio&, cost o transportation 6et8een the /ast an& the Bi&&le Hest ell spectacularl4 in consequence, 6oth per ton-mile an& 6ecause o the sa$in7 in time an& &istance. 5hila&elphia 6ecame the center o a s4stem o 8ater8a4s. 3he canal 6et8een the 'u&son an& 2aEe 0hamplain 8as opene& in 18)3 M the most important o all, the /rie canal, in 18)5. 3he trul4 re$olutionar4 e ect o this on ph4sical pro&uction, prices, an& locationNan i&eal instance 64 8hich to illustrate the nature an& modus operandi o inno$ation, in particular the 8a4 in 8hich inno$ation pro&uces prosperit4 an& &epressionNis lucEil4 so o6$ious an& its quantitati$e importance so palpa6le, that 8e nee& not sta4 to pro$e it GJ
GJ
3he &e$elopments in the Hest, lar7el4 in&uce& 64 that inno$ation, are 6ut ina&equatel4 characteriOe& 64 the act that 6et8een 18)0 an& 18F0, the
)35
Hhile canal tra ic reache& its peaE a6out the en& o the Pon&ratie *18F0+, railroa&sNthere 8ere a6out 1,500 miles in operation 64 183J an& a6out F,000 64 18F)Ncannot ha$e 6een a ma=or actor in the ups8in7 o the last Ju7lar, e(cept locall4 an& 64 the con-tri6ution o railroa& pro=ects to the speculati$e situation o 183J, 8hen the4 eature& alon7 8ith 6anEs an& lan& companies. ;eman& or rails 6e7an 6e ore 1830, 6ut the steam locomoti$e, tracEs, an& roa&6e&s &i& not 7et into a ser$icea6le shape until, rou7hl4, 1835. 0omparati$e slo8ness o 6e7innin7s is accounte& or also 64 the act that the entrepreneurial tasE o 6reaEin7 &o8n the resistance o the en$ironment pro$e& astonishin7l4 &i icult. -mpe&iments, such as constraint to pa4 tolls to canal companies in cases o competition, local =ealousies o6structin7 necessar4 connections, an& so on, 8ere not o$ercome until much later. 5u6lic enterprise in the iel& 6e7an in 183G an& 183J *-llinois, Bichi7an, -n&iana+. As else8here, the irst railroa&s 8ere local an& sponsore& 64 6usinessmen in important to8ns on the coast or other na$i7a6le 8ater, 8ith a $ie8 to openin7 up the hinterlan&. 3he Boha8E an& 'u&son 8as an Al6an4 enterprise to cut 3ro4 out o the transshipment tra&e 6et8een the /rie 0anal an& the 'u&son. 3he ,altimore an& Lhio 8as ,altimore"s 6i& or interior tra&e, the 0harleston an& 'am6ur7 8as an e ort on the part o 0harleston to &i$ert the tra&e 8hich 8ent &o8n the ri$er rom 'am6ur7 to Sa$annah. 3he @compet-in7-&o8n element@ is thus o6$ious rom the outset, an& e$en a6solute lossesNas &istin7uishe& rom the relati$e losses equal to the net result o 7eneral &e$elopment an& this competitionN must ha$e 6een elt almost imme&iatel4, not onl4 64 canal an& hi7h8a4 companies, 6ut in 7eneral 64 6usiness in to8ns that la77e& 6ehin&. :rei7ht rates ell quicEl4 toNon a rou7h a$era7e Nthree cents per ton-mile 8hich, ho8e$er, 8as still a6out &ou6le the char7e on canals, thou7h onl4 onei th o the cost o transportation on a turnpiEe.
population o Lhio increase& rom 581,)95 to 1,519,F9J M that o -llinois, rom 55,1G) to FJG,18).
)3G
J. -n the #nite& States pro its an& the ad hoc creation o means o pa4ment 8ere o6$iousl4 the main &omestic sources o the @ un&s@ 8hich inance& in&ustrial an& other enterprises. A ter 1J80 soun& mone4 principles pre$aile& as ar as :e&eral polic4 8as concerne&. 9epa4ment o the national &e6t, su6stantiall4 accomplishe& 6et8een 183) an& 1835, 8as in Eeepin7 8ith this, 4et there are se$eral quali ications to 6e ma&e, t8o o 8hich are rele$ant to our su6=ect. At no time, irst, &i& the :e&eral 7o$ernment reall4 support the t8o ,anEs o the #nite& States in such attempts as the4 ma&e to acquire the position o central 6anEs an& to e(ert a restrainin7 in luence on loose or e$en semicriminal practice M in the autumn o 1833 it e$en 8eaEene& the position o the secon& 6anE an& materiall4 helpe& to ur7e on pri$ate 6anEin7 64 8ith&ra8in7 its &eposits rom the ormer an& &istri6utin7 them amon7 the state banksNa measure that 8as partl4 counteracte&, onl4 8hen it ha& taEen ull e ect, 64 the Specie 0ircular *183G+, stoppin7 sales o pu6lic lan& on cre&it an& insistin7 on pa4ment in specie, 8hich, un&er the circumstances, amounte& to an o icial &eclaration to the e ect that the state 6anEs 8ere not to 6e truste&. An& at no time, secon&l4, 8as the :e&eral 7o$ernment a6le to restrain the states rom osterin7 metho&s o 6anEin7 o6$iousl4 at $ariance 8ith the principles o monetar4 polic4 it pro esse&. -n the countr4 at lar7e thou7h 8ith nota6le e(ceptions, the in lationist mentalit4 that ha& &e$elope& in colonial times continue& una6ate&, an& each &epression 6rou7ht its attacE on the monetar4 s4stem 8ith the utmost re7ularit4. 5olitics in some states 8as entirel4 s8a4e& 64 it. :or instance, PentucE4 oun&e& *18)0+ the ,anE o the 0ommon8ealth o PentucE4, in or&er to issue paper-mone4 to the amount o t8o millions to 6e lent on mort7a7es. 5enns4l$ania in 18F0 authoriOe& the 6anEs o the state to issue three millions in notes re&eema6le in state 6on&s. 3he irst 6anE o issue, the ,anE o .orth America, 8as esta6lishe& in 1J8). ;urin7 the irst our 4ears o its e(istence, it con ine& itsel to &iscountin7 or not more than F5 &a4s. Lthers ollo8e& in quicE succession. Accor&in7 to <ou7e there 8ere )1 o them 64 1J95 an&N
)3J
in spite o the crash o 1809N119 64 181). -n 18)9 there 8ere 3)9, 64 183J the num6er ha& increase& to J88, a peaE o 901 8as reache& in 18F0. 3he4 lent on promissor4 notes secure& 64 collateral or en&orsement, o ten on mort7a7e, Eeepin7 $er4 scant4 reser$es an& not carin7 too much a6out such &etails as the pa4in7 in o capital or re&emption, in spite o the acts that there 8as no central 6anE to all 6acE upon an& that supportin7 relations 6et8een 6anEs &e$elope& 6ut slo8l4 a ter 18)0. 3he passionate in lationism o the pu6lic min& protecte& them, althou7h 8e also rea& o complaints a6out the @&elu7e o paper mone4.@ -n some communities the attempt to present notes or pa4ment in$ol$e& the &an7er o seiOure o the notes or arrest or e$en &an7er to li e an& lim6. Althou7h it is the notes a6out 8hich 8e rea& the picturesque stories, checEin7 &eposits 8ere also $er4 reel4 create&. 3he rule o len&in7 short an& acquirin7 quicE assets 6roEe &o8n rom the irstNalthou7h there 8ere 6anEs an& 6anEers 8ho Eept to it throu7hout M &e$iatin7 practice 8ent to $er4 &i erent len7ths in &i erent parts o the countr4Nan& 8as soon challen7e& on principle 64 the copious 8ritin7s o $aliant pamphleteers. 3he notes o man4 6anEs &epreciate& seriousl4 6et8een 181F an& 181J, suspensions o specie pa4ments *181F an& 183J, in particular+, an& ailures 8ere o requent occurrence. He hear o in&ustrial concerns appl4in7 or po8er to orm 6anEs in or&er to inance themsel$es 64 note issues an& some Bi&8estern states 7a$e railroa& companies such po8ers or this $er4 purpose. 3his &etail is si7ni icant. -t pro$i&es a clue to the interpretation 6oth o that practice an& o the in lationist mentalit4 o that time 8hich ma&e such practice possi6le in communities that 8ere in other respects supernormall4 strict a6out moral stan&ar&s. .either o them can 6e &ispose& o 64 an e(pression o moral &isappro$al. .or &oes it help us to criticiOe them rom the stan&point o the classical theor4 o 6anEin7. Hhate$er our opinion mi7ht 6e i 8e place& oursel$es on other possi6le stan&points, ho8e$er stron7l4 8e ma4 eel it our &ut4 to con&emn 6oth the miscon&uct in$ol$e& an& the pu6lic opinion that not onl4 con&one& 6ut ostere& it, the act still remains that 8e ha$e
)38
6e ore us the clearest historical instance 64 8hich to illustrate the unction o cre&it creation. -t 8as the inancin7 o inno$ation 64 cre&it creationNthe onl4 metho& a$aila6le, as 8e ha$e seen in the course o our theoretical ar7ument, in the a6sence o su icient results o pre$ious e$olutionN8hich is at the 6ottom o that @recEless 6anEin7.@ 3his un&ou6te&l4 she&s a &i erent li7ht upon it. 3hose 6anEs ille& their unction sometimes &ishonestl4 an& e$en criminall4, 6ut the4 ille& a unction 8hich can 6e &istin7uishe& rom their &ishonest4 or criminalit4. Soun& mone4 men o all times, hence, thre8 an& still thro8 a8a4 the 6a64 8ith the 6ath 64 con&emnin7 the principles o that practice, ho8e$er un&erstan&a6le their clamor or policin7 an& controllin7 the practice itsel ma4 ha$e 6een. 3he people elt this. So &i& some o the a&$ocates o in lation, thou7h the4 8ere una6le to ormulate their case correctl4. 3hat this is so, 8e can also see rom the lon7-run 6eha$ior o the le$el o &omestic prices. -t is not as 8e 8oul& e(pect it to 6e i there reall4 ha& 6een @paper in lation@ sans phrase. Ln the contrar4, it is &istinctl4 as 8e 8oul& e(pect it to 6e rom the normal 8orEin7 o our mo&elNnamel4 up in the Pon&ratie prosperit4, an& &o8n a ter8ar&. -ncrease o output e$entuall4 o$ertooE the e ects o 6anE e(pansion each time an& e(erte& its &o8n8ar& pull on the price le$el e(actl4 as it shoul& accor&in7 to the modus operandi o our mechanism o inno$ation. 3here is no such &i erence 6et8een the 6eha$ior o the American an& the ,ritish price in&ices as 8e 8oul& assure&l4 in& i our &ia7nosis 8ere seriousl4 at ault. 3his &oes not co$er the case, ho8e$er. -n 181) an& 1813, then a7ain rom 183F to 183G, 8e in& spectacular rises 8hich are contrar4 to e(pectation. 3he irst is accounte& or 64 the /n7lish 8ar. 3he secon& is &ue to 8hat, e$en rom our stan&point o6$iousl4 8as e(cess, i.e., more than the usual Ju7lar e(pansion, that time 8hich ma&e such practice possi6le in communities that 8ere in other respects supernormall4 strict a6out moral stan&ar&s. .either o them can 6e &ispose& o 64 an e(pression o moral &isappro$al. .or &oes it
)39
help us to criticiOe them rom the stan&point o the classical theor4 o 6anEin7. Hhate$er our opinion mi7ht 6e i 8e place& oursel$es on other possi6le stan&points, ho8e$er stron7l4 8e ma4 eel it our &ut4 to con&emn 6oth the miscon&uct in$ol$e& an& the pu6lic opinion that not onl4 con&one& 6ut ostere& it, the act still remains that 8e ha$e 6e ore us the clearest historical instance 64 8hich to illustrate the unction o cre&it creation. -t 8as the inancin7 o inno$ation 64 cre&it creationNthe onl4 metho& a$aila6le, as 8e ha$e seen in the course o our theoretical ar7ument, in the a6sence o su icient results o pre$ious e$olutionN8hich is at the 6ottom o that @recEless 6anEin7.@ 3his un&ou6te&l4 she&s a &i erent li7ht upon it. 3hose 6anEs ille& their unction sometimes &ishonestl4 an& e$en criminall4, 6ut the4 ille& a unction 8hich can 6e &istin7uishe& rom their &ishonest4 or criminalit4. Soun& mone4 men o all times, hence, thre8 an& still thro8 a8a4 the 6a64 8ith the 6ath 64 con&emnin7 the principles o that practice, ho8e$er un&erstan&a6le their clamor or policin7 an& controllin7 the practice itsel ma4 ha$e 6een. 3he people elt this. So &i& some o the a&$ocates o in lation, thou7h the4 8ere una6le to ormulate their case correctl4. 3hat this is so, 8e can also see rom the lon7-run 6eha$ior o the le$el o &omestic prices. -t is not as 8e 8oul& e(pect it to 6e i there reall4 ha& 6een @paper in lation@ sans phrase. Ln the contrar4, it is &istinctl4 as 8e 8oul& e(pect it to 6e rom the normal 8orEin7 o our mo&elNnamel4 up in the Pon&ratie prosperit4, an& &o8n a ter8ar&. -ncrease o output e$entuall4 o$ertooE the e ects o 6anE e(pansion each time an& e(erte& its &o8n8ar& pull on the price le$el e(actl4 as it shoul& accor&in7 to the modus operandi o our mechanism o inno$ation. 3here is no such &i erence 6et8een the 6eha$ior o the American an& the ,ritish price in&ices as 8e 8oul& assure&l4 in& i our &ia7nosis 8ere seriousl4 at ault. 3his &oes not co$er the case, ho8e$er. -n 181) an& 1813, then a7ain rom 183F to 183G, 8e in& spectacular rises 8hich are contrar4 to e(pectation. 3he irst is accounte& or 64 the /n7lish 8ar. 3he
)F0
secon& is &ue to 8hat, e$en rom our stan&point o6$iousl4 8as e(cess, i.e., more than the usual Ju7lar e(pansion. JacEsonian policies Nthe hostilit4 to central 6anEin7 or, in act, an4 control o cre&it creationNma4 6e hel& responsi6le or its $iolence, as 8ell as or the $iolence o the su6sequent all. 3he case pro$i&es interestin7 material or stu&4 8ith re erence to contemporaneous pro6lems. Boreo$er, 8e &o not, o course, &en4 the presence, &urin7 practicall4 the 8hole o the perio&, o @recEless 6anEin7.@ 3here can 6e no &ou6t, not onl4 that unsoun& an& rau&ulent schemes 8ere rea&il4 inance& in man4 instances, 6ut also that cre&it 8as reel4 e(ten&e& or other purposes than inno$ation, most o 8hich 8oul& onl4 pa4 at risin7 or at least, constant prices. 3he Secon&ar4 Ha$e loome& lar7e in e$er4 Ju7lar an& man4 secon&ar4 mala&=ustments 8ere the consequence, requirin7 a&&itional processes o liqui&ation an& accentuatin7 those $iolent crashes 8hich 8oul& ha$e 6een much mil&er 8ithout them, althou7h the $icissitu&es inci&ent to economic &e$elopment, 8ithin a 4oun7 countr4 o such possi6ilities, coul& not ha$e 6een a$oi&e& entirel4 64 e$en the most conser$ati$e 6eha$ior o 6anEs. 8. :inall4, 8e 8ill tr4 to locate the Ju7ulars. 3he Pitchins are, as has 6een pointe& out 6e ore, in an4 case 6e4on& the reach o the historical in ormation at the 8riter"s comman& an& can, there ore, 6e esta6lishe& rom time series onl4, althou7h some support can 6e an& has 6een &eri$e& rom annals o the 7eneral 6usiness situation. ,ut as re7ar&s the irst Pon&ratie , at all e$ents until a6out 18)0, that in ormation is not e$en quite a&equate or the Ju7ulars. 3he rea&er shoul& recall, moreo$er, 8hat has 6een sai& in the ourth chapter a6out the meanin7 o our &atin7 an& the una$oi&a6le rou7hness o it. -t is or him to =u&7e ho8 ar 8hat ollo8s su ices to maEe a common-sense case. As re7ar&s &atin7, 8e meet, o course, the &i icult4, alrea&4 encountere&, a6out the 6e7innin7 o the Pon&ratie . 3he 8a$e o cotton an& 8ater po8er, o 8heat 7ro8in7, an& o a e8 minor inno$ations is o6$ious. -n the earl4 nineties it 8as certainl4 runnin7
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stron7l4. ,ut ho8 ar 6acE 8e are to 7o an& ho8 8e are to appraise the relati$e importance o the $arious un a$ora6le e(ternal actors that acte& on the in&ustrial processNsuch as Sha4"s 9e6ellionNthe 8riter eels una6le to sa4. .or &o our &i iculties stop there. He are a6le to ollo8, rom 1J88 to 1J89, the risin7 ti&e until the last quarter o 1J9G. 3ill then there 8ere onl4 the inancial trou6les o 1J9), 8hich &i& not amount to much. 5rosperous con&itions continue& to pre$ail in the South a ter 1J9G, 6ut in .e8 /n7lan& prepon&eratin7l4 un a$ora6le situations ollo8e& until a rall4 in 180F. 3his maEes a picture o one 6i7 t8o-phase c4cle 8ith smaller luctuations o an erratic character in its secon& hal . ,ut all it reall4 sho8s is that a77re7ati$e contour lines an& the comple(ion o 7eneral 6usiness situations are unsa e 7ui&es to the &eeper thin7s in the economic process. 3he reason or that impression is not ar to seeE. 3he American 7eneral 6usiness situation 8as at the time lar7el4 a unction o /uropean 8ar &eman&. :armers, merchants, an& shipo8ners 8ere &epen&ent on it. -n 1J9J an& 1J98 tra&in7 8as imperille& 64 pri$ateerin7 an& the countr4 8as on the $er7e o a 8ar 8ith :rance. 3his passe& an& tra&e reco$ere&, 6ut the peace o Amiens meant nothin7 less than a catastrophe, sen&in7 &o8n prices, in&ucin7 ailures an& i&le tonna7e. All this impin7e& on the rest o the or7anism throu7h a hi7hl4 precarious 6anEin7 situation. 3he same actors acte& the other 8a4 a7ain in 1805 an& 180G, 6ut the Je ersonian em6ar7o *;ecem6er 180J to Barch 1809+ e(erte&, o course, a stron7l4 &epressi$e e ect. :e6ruar4 1811 6rou7ht the .onintercourse Act to li e a7ain, then came the 8ar 8ith /n7lan& an& the &ama7e it &i& to tra&e an& shippin7, an& the stimulus it 7a$e to &omestic manu actures, ollo8e& 64 the re$erse state o a airs *enhance& 64 /uropean crop ailures+ in an& a ter 1815, until the crisis 8hich 6roEe out in the last quarter o 1818 liqui&ate&, or America, the a6normalities o the .apoleonic time. ,ut, once more, that an or7anism li$es in a storm4 en$ironment 8hich tosses it an& alternatel4 6ene its an& in=ures it &oes not pro$e that it has no li e o its o8n. 'o8 stron7 that li e 8as, sho8s on occasion, or instance in 1J93,
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8hich 8as a 4ear o prosperous 6usiness, althou7h tra&in7 an& shippin7 interests 8ere a ecte& consi&era6l4 64 the e$ents in /n7lan&, or in the prosperous con&itions that pre$aile& in the South 8hile the tra&in7 an& inancial centers su ere&. -n the situations o 1J95, 180J, an& 181F, ho8e$er much colore& the4 8ere 64 the in luence o orei7n situations, the speci icall4 American component ma4 4et 6e reco7niOe& an& linEe& to in&ustrial processes an&, as their complement, 6anEin7 &e$elopments. Since, ho8e$er, the question coul& in an4 case onl4 6e 8hether or not there 8ere traces o the en&o7enous rh4thm o economic li e, 8e nee& not insist. 3he tentati$e &atin7 is > 1J8J-1J9F, 1J95-180F, 1805-1813, 181F-18)). 3here is no &ou6t a6out the perio& 8hich, in case 8e accept this, 8oul& ha$e to 6e calle& the i th Ju7lar > 18)3-1831. .or is there an4 &ou6t a6out the realit4 o that unit in the e$olutionar4 process 8hich ran its course in the thirties an& earl4 orties > 183)-18F), as the 8riter thinEs. ,ut it &ispla4s man4 irre7ularities.
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K--0hapter K-'-S3L9-0A2 L#32-./S.

II. $9;=6$9$=
3a6le o 0ontents
A. The .e!iod $9;=6$998. 3his perio& co$ers the secon& o our
2on7 Ha$es. 3here is some &i erence o opinion amon7 those stu&ents o the 6usiness c4cle 8ho use that concept at all, as to 8hether the orties are to 6e inclu&e& 8ith the irst or the secon&, 8hile some historians &ate the 6e7innin7s o 8hat the4 eel to ha$e 6een another economic re$olution, rom earlier &e$elopments. 3he important thin7 is that no6o&4 &ou6ts the realit4 o that re$olution 8hich in nature an& importance is per ectl4 compara6le to the one that occurre& in the last t8o &eca&es o the ei7hteenth centur4, an& that no6o&4 coul& ail to associate it 8ith 8hat 8e call the railroa&iOation o the 8orl&, 8hich o6$iousl4 8as its outstan&in7 eature. 3he latter statement particularl4 applies to this countr4, the Hestern an& Bi&&le Hestern parts o 8hich 8ere, economicall4 speaEin7, create& 64 the railroa&. .or nee& 8e sta4 to sho8 more ull4 than 8e &i& in the course o un ol&in7 our theoretical schema, ho8 railroa& construction pro&uces 6oth prosperities an& recessionsN8ith the latter, situations 8hich easil4 sli&e o into &epressionsNan&, in particular, simultaneous c4cles o &i erent span. :or railroa&iOation is our
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stan&ar& e(ample 64 8hich to illustrate the 8orEin7 o our mo&el. 3he comparati$el4 lon7 perio&s o 7estation, 6oth o the in&i$i&ual lineN each is an inno$ation 8ithin our meanin7 o the termNan& o the sectional or national s4stemN8hich, as such, constitute inno$ations o a hi7her or&erNthe quantitati$e importance o the e(pen&iture in$ol$e&, the consequent &islocation o all the &ata o economic li e, the ne8 in$estment opportunities an& the ne8 possi6ilities that are create& or urther inno$ation, an& the *c4clical+ &istur6ances in turn cause& 64 these, com6ine to maEe the essential eatures o our e$olutionar4 process more o6$ious in this than the4 are in an4 other case. Bore easil4 than in an4 other can the usual o6=ections to our anal4sis 6e silence& 64 a simple re erence to o6$ious acts. 1. Hhile railroa& &e$elopments in the orties are our chie reason or &atin7 the 6e7innin7 o the secon& Pon&ratie as 8e &o, it is not, o course, implie& that railroa&s 8ere o no c4clical importance a ter 189J, 8hich 8oul&, or this countr4 at least, 6e as untrue as it 8oul& 6e to assert that the c4clical role o cotton te(tiles cease& in 18F). -nno$ations 8hich @carr4@ a Pon&ratie , continue to contri6ute to the ne(t, =ust as 8e ha$e alrea&4 seen that the4 &e$elopNas &i&, or instance, railroa&s themsel$es or at least one o the @7reat thin7s@ o the thir& Pon&ratie , electricit4N rom 6e7innin7s in the &o8n7ra&e an& re$i$al o the prece&in7 one. 1et there is little &i erence o opinion a6out &atin7 the en& o the secon& Pon&ratie . Hhat &i erence there is turns on months or, at most, a 4ear. 3his comparati$e a7reement is, o course, &ue to the stron7 testimon4 o a77re7ati$e an& s4stematic series an& to the unmistaEa6le comple(ion o 6usiness, 8hich at that time emer7e& rom 8hat has come &o8n to posterit4 as the <reat ;epression. ,ut it can also 6e =usti ie& rom the nature o the 6usiness processes 6ehin& those series. 3he properties o the social pattern as re$eale&, or e(ample, 64 the orei7n, social, an& inancial policies o the 7reat nations, also len& support to the $ie8 that 189J ma4 6e taEen to marE the en& o an era an& the 6e7innin7 o another. Althou7h the 8hole process 8e are
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anal4Oin7 in this 6ooE is essentiall4 the process o capitalist e$olutionN economic e$olution as con&itionin7, an& 6ein7 con&itione& 64, the institutional pattern o 6our7eois societ4N4et the secon& Pon&ratie has a special claim to the epitheton bourgeois. ,4 this 8e mean that the interests an& attitu&es o the in&ustrial an& commercial classes controlle& policies an& all mani estations o culture in a sense in 8hich this cannot 6e asserte& or an4 prece&in7 or an4 su6sequent perio&. ). 3he rule o the bourgeoisie an& o 6our7eois rationalism e(ten&e&, as coul& easil4 6e sho8n, to the reli7ions, the arts, the sciences, the st4le o li e, to e$er4thin7 social in act, 8ith the sin7le e(ception o the 0atholic 0hurch, 8hich hence 6ecame an o6=ect o a$ersion an& o temporaril4 success ul attacE. All that matters or our purpose, ho8e$er, is the act that the 6our7eois 8orl& 6eha$e& politicall4 in such a 8a4 as to minimiOe e(ternal &istur6ance o our process. Hhat institutional chan7e o the Ein& rele$ant to our su6=ect there 8as, 7re8 much more clearl4 out o the imme&iate economic situations than such chan7es &i& at an4 other time. As or the #nite& States, the ree tra&e that reall4 mattere& 8as the ree tra&e 8ithin the countr4. 0ompare& 8ith thisNan& the economic histor4 o the Bi&&le Hest an& Hest is no &ou6t the 7reatest historical e(ample o ree-tra&e achie$ementNthe re7ulation o orei7n commerce, $er4 important &urin7 the irst Pon&ratie , stea&il4 &ecline& in economic, althou7h onl4 temporaril4 in political, importance. -n spite, ho8e$er, o that act an& o the in luence o the South, protection 8as retaine& throu7hout. :iscal consi&erations ha& their part in &eterminin7 the increases o 18F) an& the re&uctions o 185J, 6ut the lon7-li$e& HalEer Act o 18FG, 8hich ma4 6e taEen to represent 8hat to Americans seems to 6e mo&erate protection, still Eept all the more si7ni icant items at )5 or 30 per cent a& $alorem. A ter the 0i$il Har, &uties on 8ool an& 8oolens a7ain mo$e& into the center o the political 7ame a6out the tari *18GJ+. 3he la8 o 18J) an& the 7eneral re$ision o 1883 6rou7ht small re&uctions, 6ut the
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BcPinle4 tari o 1890 7rati ie& manu acturers *8orste& manu acturers, in particular+, 8hile 7i$in7 to the armers a ull measure o protection to 8ool, the onl4 thin7 protectionists ha& to o er to them. 3he Hilson Act a6olishe& the tari on 8ool an& re&uce& the &uties on 8oolens on the a$era7e rom 91 to F9 per cent, onl4 to pro$oEe the $iolent reaction em6o&ie& in the ;in7le4 tari , 8hich, un ortunatel4 or the stan&in7 o ree tra&e in the pu6lic e4e, happene& to come at the threshol& o the thir& Pon&ratie , as the re&uctions o 18J) an& 1883 ha& come at the threshol& o crises. G8 As ar as the 8riter is a6le to see, this polic4 ma4 ha$e alle$iate& temporar4 &i iculties or some in&ustriesN8hile chan7es such as that 6rou7ht a6out 64 the Hilson Act certainl4 create& some &istur6anceN 6ut on the 8hole it har&l4 in luence& the march o thin7s su6stantiall4. -t ne$er 8as a ma=or actor in c4clical turnin7 points an& still less turne& &epressions into prosperities or $ice $ersa. -ts pro$a6le in luence on tren&s is con ine& to a small num6er o in&ustries, an& there is somethin7 curiousl4 unreal a6out the place it hel& in part4 politics an& in the thou7ht an& talE o a lar7e sector o the communit4. -n the sphere o 6anEin7, the outstan&in7 institutional chan7e 8as the creation o the .ational ,anEin7 S4stem. 38o &e$elopments 8hich almost amounte& to institutional chan7es shoul& 6e notice&, ho8e$er. Lne 8as the rise o the .e8 1orE 6anEin7 center to somethin7 liEe the position o a central 6anE. 3he other 8as the 7ra&ual re orm o 6anEin7 practice, in some states -N or instance in 2ouisiana *18F)+Nen orce& 64 la8, in others, liEe Bassachusetts, 64 the 6anEin7 communit4 itsel . -n .e8 1orE the sa et4 un& an& 6on& securit4 s4stems 8ere impro$e& M in South 0arolina an& some Bi&&le Hestern states serious 6anEin7 also pre$aile&, althou7h @6o7us@ an& @mushroom@ 6anEs, the notes o 8hich 8ere &ealt in at &iscounts up to
G8
3hese are 7oo& instances 64 8hich to illustrate the &an7ers o ar7uin7 64 coinci&ences, in particular in e(plainin7 6usiness situations 64 e(ternal actors. 3he4 are so $alua6le 6ecause it is plain that those measures cannot 6e hel& to ha$e pro&uce& the c4clical phases that happene& to ollo8 upon them. 3his shoul& maEe us care ul in other cases also.
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90 per cent, 8ere still requent in the Hest an& the South. 3he .ational ,anEin7 Act &i& much, &irectl4 an& in&irectl4, to impro$e matters urther an&, until the set6acE cause& 64 the earl4 practices o trust companies, pro7ress in that &irection 8as all 6ut un6roEen. -t is neither possi6le nor necessar4 to &iscuss the &etails o the iscal polic4 o our perio&, 6ut it is necessar4 to a&$ert to its spirit. -n the #nite& States, the tari as a rule tooE care o :e&eral e(pen&iture an& e$en 4iel&e& surpluses so lar7e as to 6e almost em6arrassin7, e(cept &urin7 the 0i$il Har an& some 4ears a ter it. -n /n7lan& the income ta( reappeare& or 7oo&, 6ut throu7hout the perio& 6eha$e& 8ith the restraint o a ne8comer not quite certain o his ri7ht to a place. -n <erman4 the same hol&s true or the $arious state income ta(es 8hich 8ere intro&uce& or re orme& an& amon7 8hich Biquel"s 5russian income an& propert4 ta( *1891+ 8as the supreme achie$ement. 3he 8riter has 6een tol&, thou7h he has not 6een a6le to $eri 4 it, that Biquel 6elie$e& an income ta( 8hich in the hi7hest 6racEets as4mptoticall4 approaches 5 per cent to 6e &an7erousl4 hi7h. 3he practice o <erman municipalities o le$4in7 an a&&itional percenta7e or their o8n purposes, 8hich 8as soon to maEe e$en that income ta( a serious 6ur&en, &i& not &e$elop 8ithin our perio&. All this, o course, implies acceptance o the 6our7eois schema o thin7s economic. .o 7roup that ha& an4 political si7ni icance &ou6te& an4one"s ri7ht to his pri$ate income or inheritance. -ncome 8as earne& primaril4 or pri$ate purposes an& the state an& other pu6lic 6o&ies 8ere to taEe a8a4 as little as the4 coul&. 3a(es 8ere a necessar4 e$il, to 6e con ine& to amounts an& to 6e lai& on in 8a4s that 8oul& as little as possi6le inter ere 8ith the &isposal o returns as it 8oul& ha$e 6een in their a6sence. 9etrenchment or, at all e$ents, econom4 8as meritorious in the mana7ement o pu6lic a airs M sa$in7 or accumulation, in the mana7ement o pri$ate a airs. Supporte& an& controlle& 64 the appro$al o the political po8ers, the 6our7eois 8orEe& an& sa$e&N8ithin a irm rame8orE inclu&in7 a sa e an& soun& monetar4 s4stemN or an in&e inite amil4 uture, an& in$aria6l4 tooE as lon7 a $ie8 as he coul& a or& to taEe.
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3. 3he 6our7eois Pon&ratie spans a lon7 list o 8ars, orei7n entan7lements, re$olutions. G9 Space or6i&s e(planation o 8h4 the4 seem to the 8riter to ha$e 6een, e$en in a &eeper sense than that 8hich is implie& in the narro8 purposes o this 6ooE, actors e(ternal to that social pattern. He 8ill con ine oursel$es to &iscussin7 the importance o a e8 instances, or t4pes o instances, or the 8orEin7 o the mechanism o economic e$olution. 3here is, irst, the 7roup o 8hat, rom our stan&point at least, 8e ma4 &esi7nate as minor ones, such as the $arious rictions that arose 6et8een this countr4 an& /n7lan&. Some o these the 6usiness communit4 ri7htl4 re use& to taEe co7niOance o M others cause& small ripples. /$en &istur6ances in$ol$in7 militar4 operations come 8ithin this cate7or4, such as the 8ar 6et8een the #nite& States an& Be(ico 8hich, throu7h the pa4ments o the latter to the ormer, e(erte& some in luence, thou7h onl4 on short-run mone4-marEet situations, or some time a ter its close. 3he &etaile& stu&4 o time series has, o course, to taEe account o this t4pe o &istur6ance, 6ut it is sa e to sa4 that no ma=or e ects are o$erlooEe& 64 ne7lectin7 them here. Binor also, or this countr4 Ni 8e e(cept e ects on immi7rationN8as the repercussion rom the continental re$olutions o 18F8, the trou6les in 9ussian 5olan&, an& e$en rom most other /uropean e$ents, ho8e$er momentous the4 8ere in themsel$es. 3his countr4 8as not, to 6e sure, a 8orl& su icient unto itsel M 6ut the nature o those e$ents 8as such as not to inter ere materiall4 either 8ith a7ricultural e(ports or 8ith capital imports. F. ,4 ar the 7reatest an& most interestin7 @e(ternal &istur6ance@ o the perio& 8as the American 0i$il Har. ,arrin7 the ph4sical in=uries to the pro&ucti$e apparatus o the countr4, 8hich *a7ain illustratin7 the &i erence 6et8een miser4 an& &epression, or 8el are an&
G9
3he 6eha$ior o 7ol&Nthe 0ali ornia an& Australian &isco$eries certainl4 8ere e(ternal actors since, primaril4 at least, the4 8ere &ue to chanceN8ill 6e more con$enientl4 consi&ere& at other turns o our 8a4.
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prosperit4+ ha& $er4 little c4clical importance J0 *8hat c4clical importance the4 ha& 8as in the prosperit4 &irection, or reconstruction supplie& the 6asis or a post8ar 6oom+, its e ects 6ear a striEin7 resem6lance to the e ects on this countr4 o the irst Horl& Har o this centur4. He ha$e an un&erstan&a6le inancial an& commercial earthquaEe at the 6e7innin7, an& strin7enc4 an& sta7nation lastin7 almost to the en& o the irst 4ear o hostilities. 3hen, helpe& 64 a 7oo& crop, a t4pical 8ar 6oom &e$elope& in response to 7o$ernment &eman& supporte& 64 the issue o the 7reen6acEs. 3he con lictin7 orces o the post8ar 6oom an& o post8ar liqui&ation impin7e& on a risin7 c4clical *Ju7lar+ ti&e 8hich in this case it is $er4-eas4 to &istin7uish rom the e ects o the e(ternal actor, 6ecause it 8as so clearl4 6ase& on a &e$elopment that ha& nothin7 to &o 8ith the 8arN railroa& construction. Bost o the e ects an& a ter-e ects o the 8ar 8ere &ro8ne& in the rise an& 6reaE o that 8a$e, an& althou7h some o the luctuations in the last si(ties ha$e to 6e attri6ute& to them, neither the c4clical rh4thms nor tren& results 8ere a ecte& enou7h to 6ecome unreco7niOa6le. /$en the &i iculties in 18GG an& 18GJ 8ere not &ue to post8ar a&=ustments alone. ,ut the question still remains 8hat importance 8e are to attach to the monetar4 element &urin7 the se$enteen 4ears o the 7reen6acE stan&ar&. -t is a matter o &e inition 8hether 8e can speaE o &e lation at all. -n our sense there 8as none, or there 8as neither net contraction o the $olume o the circulatin7 me&ia nor an4 pressure on the mone4 marEet, such 8e mi7ht e(pect 8oul& atten& a polic4 o raisin7 e(chan7es to 7ol& parit4. A sector o pu6lic opinion 8as in a$or o 6oth, an& Secretar4 'u7h Bc0ulloch"s report o ;ecem6er 18G5 actuall4 en$isa7e& 6oth. 2ooEin7 upon 7reen6acEs an& compoun&interest notes in the most ortho&o( li7ht, he propose& to un& them 64
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5h4sical &estruction o plant an& stocE 8as quicEl4 repaire&N J. Stuart Bill commente& on thisNas it al8a4s 8ill 6e so lon7 as the capitalist en7ine is intact. Hhat matters economicall4 in such cases is impairment o the capitalist moti$e po8er an& mechanism, rather than ph4sical loss. An& that moti$e po8er an& mechanism ha& in this case not su ere& at all.
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means o 6on& issues an& in act set a6out retirin7 them out o surplus re$enue. 3his polic4 at irst met 8ith an astonishin7 amount o appro$al, 6oth rom the 5resi&ent an& rom 0on7ress. ,ut it 8as presentl4 cur6e& 64 the act o April 1), 18GG. 9etirement actuall4 a ecte& 8as quite small an& more than compensate& 64 the e(pan&in7 circulation o the national 6anEs" notes. 3he Secretar4 8as pro6a6l4 ri7ht 8hen, se$eral 4ears later, he state& that 6ut or the 3reasur4"s monthl4 statements no6o&4 8oul& ha$e Eno8n that there 8as an4 retirement at all. Hhat e$entuall4 happene& 8as 8hat his successor an& 0on7ress pro esse& to aim atNthe economic or7anism 8as allo8e& to 7ro8 into its monetar4 coat. 5ressure on the mone4 marEet 8as also a$oi&e& throu7h $arious a$ora6le circumstances. .o 7reat e orts, such as mi7ht ha$e cripple& 6usiness success, 8ere nee&e& to restore the :e&eral 6u&7et to or&er. Ln the contrar4, it 8as possi6le to 6e7in re&ucin7 the :e&eral &e6t rom its 18G5 peaE o ),GJ5 million &ollars. 3he situation o 6anEs 8as urther ease& 64 the emi7ration o American 6on&s to /urope, 8hich set in almost imme&iatel4, an& 64 other orei7n cre&its 8hich 6ecame a$aila6le to American 6usiness M 6ut it 8as stron7 rom the 6e7innin7, -n 18GG national 6anEs hel& le7al-ten&er reser$es to the amount o )11 millons a7ainst &eposits o 539 millions. 3his is 6ut one s4mptom o a act that is most important or the &ia7nosis o the in lation as it stoo& at the en& o the 8ar. -t ha& not taEen ull e ect, i.e., it ha& ne$er 7one 6e4on& that sta7e in 8hich part o the s8elle& receipts arc 6ein7 use& or increasin7 cash an& pa4in7 o &e6ts Nit ha& ne$er 6ecome @8il&.@ 5art o the rise in prices in 18GF 8as not the mechanical e ect o the quantit4 o 7reen6acEs 6ut 8as &ue to the impe&iments to pro&uction an& tra&e an& to speculati$e anticipation, an& the 8hole o the all to the en& o 18G5 *a all o , rou7hl4, )) per cent o the le$el o Septem6er 18GF+ 8as simpl4 the re$ersal o this, an a&=ustment to the actual amount o iat, not the consequence o an4 strin7enc4 or pull at the monetar4 rein.
)51
Ln the 8hole, in&ustr4 emer7e& rom the perio& o hostilities in a liqui& state, thou7h not so much so as it &i& in 1918. ,anEs, 6ein7 still more liqui&, soon 6e7an to e(pan& cre&it in the risin7 8a$e o prosperit4. 2oans an& &iscounts o national 6anEs increase& rom 500 to 900 millions rom 18GG to the en& o 18J), 8hile loans o the .e8 1orE 0it4 clearin7 house 6anEs mo$e& aroun& a airl4 e$en le$el till the en& o 18G9. 3his is not contra&iction. Boreo$er, the monetar4 element o6$iousl4 &i& not &epress output 8hich, on the contrar4, ma&e ne8 recor&s throu7hout the perio& to the 9esumption ActN e(cept in 18J1, 18JF, an& 18JGNan& increase& 64 50 per cent per capita, in spite o the hu7e 8a$e o post8ar immi7ration. -t &i& not pre$ent increase o mone4 8a7e rates to 18J), nor &ecrease in rates o interest, nor e$en la( ha6its o len&in7 an& speculati$e e(cesses. As ar as it has an4thin7 to &o 8ith ,lacE :ri&a4 an& the crisis o 18J3, it 8as not throu7h strin7enc4 6ut throu7h its opposite. 3he in erence seems to 6e una$oi&a6le that sta6iliOation o the &ollar at the peaE o the 7ol& premiumor, in act, an4 &e$aluation, 8oul& ha$e en orce& continuance o in lation, still more e(cesses, an& a still more se$ere crisis. 3his is not to &en4 that the all in 7reen6acE pricesNrapi& to 18J1Nspelle& har&ship or lar7e sectors o the communit4, the a7ricultural sector in particularN8heat ell to nearl4 hal the 18GG price 64 18J0, cotton to less than hal 8ithin a 4earNnor that, althou7h the monetar4 actor e$i&entl4 accounts or onl4 a minor part o this &e$aluation an& continuin7 in lation 8oul& ha$e 6rou7ht temporar4 relie to those sectors. :inall4, the importance or our un&erstan&in7 the nature o the c4clical process o e$olution, o this case o prosperities accompanie& 64 prices that 8ere not onl4 allin7 *18GG-1880, at an a$era7e rate o a6out F per cent per 4ear+ 6ut also e(pecte& to all, cannot 6e too stron7l4 presse& upon the rea&er"s attention. 5. A ter 18J8 pro7ress to8ar& ull rati ication o the 7ol& stan&ar&, 8hich e$entuall4 came in 1900 *<ol& Stan&ar& Act o Barch 1F+, nee& not ha$e 6een &i icult. - , ne$ertheless, it pro$e& to 6e so, this 8as not &ue to an4 hitches in the 8orEin7 o the monetar4 or the
)5)
economic s4stem, 6ut to the temporar4 success o the sil$er interests. 3his @e(ternal actor@ rom 18JG to 189G repeate&l4 threatene& to 6locE the roa& an& a&$ersel4 in luence& 6usiness situations mainl4 in t8o 8a4s. :irst, 6oth American an& /uropean 6usiness opinion, seein7 some an& anticipatin7 urther success o sil$er politicians, trie& to prepare or possi6ilities an& respon&e& in a 8a4 8hich shoul& 6e hi7hl4 instructi$e or an4 min& at all open to actual e$i&ence a6out the economic importance o sa e an& sta6le currenc4 con&itions. Secon&, the mechanical e ect, as &istin7uishe& rom the e ect on anticipations, o the sil$er actuall4 6ou7ht 8as to =eopar&iOe the 7ol& position o the countr4, 8hich 6ut or this 8oul& ha$e 6een $er4 a$ora6le throu7hout. :or instance, rom 1891 to 1893 there 8as an e(port o 7ol& to the amount o ^155,000,000 or 8hich neither the unsatis actor4 crops an& prices o 189) an& 1893 nor an4 other element in the situation 8ill ull4 account. 3he 3reasur4, then the onl4 7uar&ian o the national 7ol& reser$e, ha&, or 6oth reasons, to ace a tasE that at some =unctures *188F 8as the irst+ looEe& hopeless. 3he currenc4 actor 8as a ma=or source o 8eaEness &urin7 the $icissitu&es o 1893 an& 8as primaril4 responsi6le or 8hat pro$e& a speci icall4 American catastrophe, not other8ise ull4 moti$ate&, in 189G. ,ut 8hile sil$er thus un&ou6te&l4 in luence& c4clical situations, it &i& not &o so in the manner 8e shoul& e(pect rom a perusal o the ,lan& *18J8+ an& Sherman *1890+ acts. 3he pro$isions o the ormer 8ere in themsel$es quite su icient to impart an @in lationar4@ impulse to the s4stem. 1et the price le$el continue& to &ecline rom 18GG on, as mentione& a6o$e, e$en more than in /n7lan&. 3he e(planation lies in the polic4 o the 3reasur4. 3he passin7 o that 6ill reall4 meant a &ra8n 6attle > the soun& mone4 ront ha& ha& to 7i$e 8a4, 6ut it stucE to the 7uns o the 7ol& stan&ar&. -n mo$in7, as it 8ere, on the resultant o these t8o component orces, the 3reasur4, 8hile o6e4in7 the letter o the la8, 6u4in7 sil$er in the amount require& an& &oin7 somethin7 to8ar& puttin7 it into circulation, at the same time &i& its 6est to pre$ent it rom taEin7 e ect. 3he issue o small 7reen6acEs, or instance, 8as &iscontinue& in 1885.
)53
Some 7ol& in the .e8 1orE associate& 6anEs 8as, at the same time, replace& 64 sil$er. ,esi&es, sil$er 8as allo8e& to accumulate in the 3reasur4"s $aults an& there64 8as @steriliOe&.@ 3his polic4 meant sailin7 close to the 8in&, 6ut it succee&e& 6ecause o se$eral a$ora6le circumstances. As has alrea&4 6een pointe& out, 6arrin7 the e ects o the sil$er e(periment, the 7ol& position o the countr4 8as a$ora6le, in some 4ears that mi7ht ha$e 6een critical e(ceptionall4 so. Boreo$er, the all in interest rates in&uce& an increase in #nite& States 6on& prices, 8hich 6acEe& the notes o national 6anEs. 3he $alue o the ri7ht to issue notes 6ein7 &ecrease& there64, the amount o national 6anE notes outstan&in7 shranE 64 a6out )00 millions &urin7 the ei7htiesNa process 8hich 8as, o course, quicEene& 64 the 3reasur4"s polic4 o &e6t re&emption. :inall4, the surpluses 8hich ma&e that polic4 possi6le also acilitate& accumulation o i&le sil$er. Hhate$er ma4 6e thou7ht o the spen&in7 o 500 million &ollars or so on the purpose set 64 the ,lan& act, e ects on prices an& on the rh4thm an& the tren&s o the c4clical process must ha$e 6een small, i not alto7ether a6sent. 3he same, or almost the same, is true o the Sherman Act, 8hich much more o6$iousl4 su77ests a compromise 6et8een the necessit4 o satis 4in7 the sil$er interests an& the 8ish to Eeep the 7ol& stan&ar&. -t is particularl4 si7ni icant that the monthl4 amount o sil$er to 6e 6ou7ht *F,500,000+ ounces+ 8as to 6e pai& or in @treasur4 notes@ 8hich 8ere le7al ten&er in e$er4 respect 6ut re&eema6le in gold or sil$er, as the secretar4 mi7ht see it. 3actics $eil intentions. ,ut acts seem to 8arrant the interpretation that the lea&ers o the 7ol& part4, ace& 8ith an attacE 8hich 8as irresisti6le 6ecause some o them nee&e& the support o the sil$er part4 in or&er to 7rati 4 their o8n protectionist &esires, &eci&e& to reculer pour mieux sauter on the stren7th o t8o o6ser$ations an& a hope. 3he o6ser$ations rom recent e(perience 8ere, irst, that the 3reasur4 coul& stan& a lot o strain an&, secon&, that sil$er coul& 6e turne& into re&eema6le iatN8hich is the 8a4 that in act, thou7h not in la8, it ha& 6een 8orEe& un&er the
)5F
,lan& ActNan& thus pre$ente&, or a time at least, rom s8ampin7 the monetar4 s4stem. 3he hope, accor&in7 to this interpretation, 8as that tactical an& economic situations 8oul& sooner or later arise in 8hich the &ra7on mi7ht 6e Eille&. 3he4 ha& not lon7 to 8ait. /i7hteen hun&re& ninet4-three came an& 6rou7ht repeal.
3a6le o 0ontents
irst appro(imation, the stor4 o the 8a4 in 8hich ci$iliOe& humanit4 7ot an& ou7ht cheap 6rea& is, or our perio&, the stor4 o American railroa&s an& American machiner4 *to8ar& the en& o the perio&, &r4 armin7 must 6e a&&e&+. He 8ill at once notice some points 8hich in part account or peculiarities in the modus operandi o these t8o inno$ations. :irst, the polic4 o lan& settlement entere& upon a ter the 0i$il Har 7reatl4 helpe& to propel the process an& stan&s in a relation o interaction 8ith railroa& 6uil&in7. -t increase& an& it &irecte& to8ar& the lan& a stream o immi7rants 8hich, 6ut or it, 8oul& ha$e lo8e& in more slo8l4. 3his quali ies the s8eepin7 statement =ust ma&e > neither immi7ration nor lan& polic4 comes entirel4 8ithin our schema, 6ut neither o them is in&epen&ent o the process it &escri6es. Secon&, those t8o inno$ations &i& not arise in the a7ricultural sphere. 3ransportation ser$ice 8as 8holl4, a7ricultural machiner4 mainl4, the pro&uct o in&ustrial initiati$e. 3his entaile& an important consequence, particularl4 o6$ious in the case o transportation. 34picall4, a railroa& opene& a re7ion, 6uilt ele$ators, prepare& man4 thin7s or the 8oul&-6e armer, sometimes e$en urnishe& instructions a6out pro&ucts an& metho&s. An4 han&4 couple coul& 7o out to the Bi&&le Hest or the :ar Hest an& Eno8 e(actl4 8hat to &o an& ho8 to &o it. 3here ore, the a7ricultural e ects o each railroa& asserte& themsel$es 8ith a rapi&it4 8hich 8oul& ha$e 6een alto7ether
B. The Ag!i)ultu!al Situation
of the .e!iod. N -n a
)55
impossi6le in the case o a 7enuinel4 a7rarian inno$ation, an& this ten&e& to shorten perio&s o a7rarian prosperit4 in our sense. J1 :or America, ho8e$er, the consequences 8ere, thir&, miti7ate& N &urin7 64 ar the 7reater part o the perio& e$en re$erse&N64 the act that 8heat an& cotton pro&uction ace& a 8orl&-&eman& sche&ule that, in real terms, shi te& up8ar& all the time. - that pro&uction ha& 6een monopoliOe& instea& o 6ein7 per ectl4 competiti$e, it mi7ht still ha$e 6een &urin7 that Pon&ratie the 6est lon7-run polic4 to e(ten& acrea7e an& to pro&uce simpl4 as much as possi6le. :or the time 6ein7, an& 6e ore competin7 sources o suppl4 8ere opene& *Ar7entina in particular+, pro7ress in shippin7 an& all in ocean rei7ht rates 8orEe& in the same &irection. ,ut, ourth, those consequences 8ere intensi ie& 64 the act that in a7riculture the @ol& irms@ in our sense arc-not eliminate& so quicEl4 as in in&ustr4 6ut 7o on pro&ucin7 much lon7er. 3his is the phenomenon 8hich, i there 8ere not o6=ections to usin7 a term 8hich is associate& 8ith so much ault4 reasonin7, 8e shoul& call a7rarian o$erpro&uction. Althou7h the ol&, on 8hich those inno$ations 8oul&, i our process ha& 6een allo8e& ree s8a4, ha$e passe& sentence o economic &eath, 8as mainl4 locate& in /urope, some e ects o this t4pe sho8 also in the .ortheast o this countr4. ,ut &air4in7, $e7eta6le 7ro8in7, an& so on then, 6e ore the time o mo&ern re ri7eration an& cannin7, a or&e& much more compensation than the4 &o to&a4, an& .e8 /n7lan& annin7 8as a6le to contract 64 the comparati$el4 painless metho& o the armers, 8ithout ceasin7 to 6e armers, mo$in7 to the Hest at the e(pense o a6an&onin7 in$estment. -n or&er to 6rin7 out a $er4 simple 6ut also $er4 important point, 8e 8ill, or the ar7ument o this para7raph, assume that there are not
J1
3he case 8as not one o inno$ation 8ithout pro its *compare the thir& chapter+ or o c4cles 8ithout prosperit4 phase *compare the ourth chapter+. ,ut 6oth pro its an& prosperities in our sense sho8e& rather in the railroa& an& in the in&ustrial than in the armin7 6usiness. Hhat armers earne& *in 7oo& times+ 8as o the nature o e(ceptionall4 hi7h 8a7es.
)5G
an4 chance $ariations in crops or an4 e ects on 4iel& per acre o inno$ations 8hich are assume& to act on costs an& acrea7e onl4Nso that the latter remains constant rom 4ear to 4ear. 3hen 8e can sa4 that or American a7riculture, taEen as a 8hole, $ariations in earnin7s an& $ariations in prices o pro&ucts 8ere in&ee& $er4 &i erent thin7s an& that, in particular, allin7 prices 8ere per ectl4 compati6le 8ith risin7 earnin7sNto some e(tent e$en the con&itions or increase in earnin7s rom sales to /urope. ,ut it is also true that or consi&era6le sectors, an& or man4 in&i$i&ual cases in all sectors, mone4 earnin7s 8ere, un&er our assumptions, simpl4 proportional to prices. 3hese sectors an& in&i$i&uals 8ere 6oun& to su er rom an4 all o prices 6elo8 the le$el to 8hich their locations an& metho&s 8ere a&apte&. Such a all must occur 64 the 8orEin7 o our process an& is, in act, an essential part o the mechanism 8hich sprea&s the ruits o pro7ress an& re&istri6utes pro&ucti$e resources in accor&ance 8ith the requirements o the ne8 situation. -t 8oul& ha$e occurre& e$en i there ha& 6een no other inno$ations > a7rarian &e$elopments alone 8oul& ha$e 6een su icient to &epress the 7eneral price level, 6ut all other inno$ations 8orEe& in the same &irection. .o8, 6ecause o the a$ora6le shi t in /uropean as 8ell as American &eman&, an& 6ecause o those other inno$ations, a7rarian prices &i& not su6stantiall4 &ecline, &urin7 our perio&, relati$el4 to other prices. /$en those armers 8hose earnin7s 8ere proportional to prices o pro&ucts su ere& onl4 to the e(tent to 8hich the prices o 8hat the4 6ou7ht 8ere retail prices 8hich &i& not all as much as the 8holesale prices the4 7ot, an& to the e(tent to 8hich protection pre$ente& nona7rarian prices rom reactin7 as the4 8oul& ha$e &one 8ithout it. -t 8as &e6ts, particularl4 &e6ts incurre& or the acquisition o the hol&in7, 8hich 7a$e to the all in the price le$el its sinister connotation. 3his 8oul& ha$e 6een so in the a6sence o an4 speculation in arm lan& an& e$en i no6o&4 ha& e$er 6ou7ht a arm in erroneous anticipation o risin7 pro&uct prices. ,ut 6oth these actors a&&e& &arE hues to the picture. 3his seems to &o =ustice, an& at the same time to assi7n limits, to the $ie8 8hich linEs a7rarian prosperit4
)5J
an& &istress simpl4 8ith prices. Accor&in7 to Technical Bulletin )88, #.S. ;epartment o A7riculture *;. 2. HicEens+, )J.8 per cent o all arms operate& 64 o8ners 8ere mort7a7e& in 1890, to 35.5 per cent o their $alueN i7ures 8hich, 8hile sho8in7 the seriousness o the situation, also sho8 that at least three-quarters o all arms * or amon7 the mort7a7e& ones there must ha$e 6een some that carrie& the 6ur&en 8ithout &istress+ cannot ha$e 6een $itall4 a ecte&. 3here 8ere other &e6ts 6esi&es the mort7a7es, o course, or 8hich the 8riter has not 6een a6le to maEe an4 relia6le estimate M 6ut these 8ere mostl4 shortterm 6anE &e6ts an& all, in all normal cases, amena6le to current a&=ustment. 3his anal4sis supplies the theor4 o 8hat is 7enerall4 Eno8n as the a7ricultural &epression o the last quarter o the nineteenth centur4, 8hich 6ears, mainl4 6ecause it occurre& in a6out the same se7ment o the Pon&ratie , so unmistaEa6le a amil4 liEeness to the a7ricultural &epression o the post-.apoleonic perio&. :or America, it shoul& 6e &ate& 188) to 1890, or in 1891 the acrea7e har$este& a7ain starts e(pan&in7, an& 18JJ to 1881 8ere 4ears o either 7oo& har$ests or 7oo& prices or 6oth, the 6umper 4ear, 18J9 *rich crop plus hi7h prices o8in7 to ailures in /urope+ an& 1881, the 4ear o ma(imum price o 8heat *119.) cents per 6ushel, ;ecem6er arm price+ 6ein7 amon7 them. 3he rea&er 8ill o6ser$e that the monetar4 actor has not so ar 6een assi7ne& an4 in&epen&ent *causal+ role, our anal4sis ha$in7 6een e(clusi$el4 in terms o the process &escri6e& 64 our mo&el. -t is, in&ee&, 6elie$e& that this e(planation accounts or the essentials o the case. ,ut 64 itsel it is, ne$ertheless, ina&equate or the perio& 18F818G9. 0ali ornian an& Australian 7ol& 8as, o course, a actor in the e(pansion an& in the 6eha$ior o prices &urin7 that time. 3he rise in prices to 18GG an& the inci&ent speculation in arm lan& in&uce& an a7rarian post8ar crisis 8hich, ho8e$er, laste& three 4ears onl4. ,ut a ter that our process is su6=ect to much less &istur6ance an& is much more nearl4 a&equate to e(plain the course o thin7s. :rom 18GG to
)58
1880, the acrea7e har$este& increase& rom 15.F to o$er 38 millions. 3his is quite enou7h to 6ear out the $ie8 taEen. J) 3he lon7-run ten&enc4 o prices accor&s per ectl4 thou7h short time peaEs an& trou7hs occur irre7ularl4 in response to $ariations in American an& /uropean har$ests. 5rices o arm pro&ucts in 7eneral rose airl4 stea&il4 rom 18F3 to 185J Na rise 8hich almost e(actl4 co$ers the prosperit4 phase o the secon& Pon&ratie Nan& then ell, as a7ain the4 shoul& ha$e &one accor&in7 to our schema, to a le$el in 18G1 *J5, on a 1910-191F 6asis+, some8hat a6o$e the le$el the4 a7ain leache& at the time 8hen the e ects o the 0i$il Har &istur6ance 8ere su6stantiall4 &i7este& *18J8 > J)+. 3he4 continue& their &o8n8ar& course, as 8e shoul& e(pect, to 189G *5G+. 3he minimum in ;ecem6er arm price o 8heat *F8.9 cents+ occurs in 189F *cotton 8as near its
J)
/(ception to the a6o$e anal4sis 8ill 6e taEen, not onl4 64 those economists 8ho maEe a7rarian prosperities an& &epressions *these terms &o not no8 carr4 the technical meanin7 assi7ne& to them in this 6ooE+ 8holl4 a matter o the 6eha$ior o mone4, 6ut also 64 some 8ho &o not. 3he latter ma4 hol& that 64 our ne7lect o the &ecrease in 7ol& pro&uction in the se$enties an& ei7hties, 8e maEe oursel$es 7uilt4 o a onc-si&e&ness similar to that o the purel4 monetar4 e(planations. 3his is not so. 3he 7ol& actor is not ne7lecte& 6ut, thou7h onl4 implicitl4, ull4 taEen account o . -t is not mentione& e(plicitl4, e(cept or the i ties an& si(ties, 6ecause it 8as onl4 then that it pla4e& an autonomous role. .or &o 8e &en4 that the monetar4 actor coul& ha$e 6eha$e&, or ha$e 6een ma&e to 6eha$e, in such a 8a4 as to a$oi& that all in price le$el. An4 e ecti$e in lation 8oul& ha$e &one that an& 6rou7ht relie to &e6tors, a7rarian an& other. Hhat is o6=ecte& to, in an4 &ia7nosis o the a7rarian &epression 8hich maEes 7ol& pro&uction the central act a6out it, is that not onl4 &oes it looE merel4 at the a7rarian pro6lem, ailin7 to see it as an element o the process o economic e$olution, 6ut also that it looEs e$en at the a7rarian pro6lem onl4 rom the stan&point o a sin7le sur ace act. An& 8hat is o6=ecte& to in the moti$ation o an4 polic4 6ase& on that &ia7nosis, is that it not onl4 looEs at the a7rarian pro6lem e(clusi$el4 rom the stan&point o the interest o the a7ricultural pro&ucer, 6ut e$en ne7lects all the real pro6lems o that pro&ucer. 3o a$oi& misun&erstan&in7s, the 8riter 8ishes to sa4 8hat ma4 6e 7leane& also rom other remarEs in this 6ooENthat he is not out o s4mpath4 8ith measures in support o a health4 class o 6ona i&e armers, an& &ocs not thinE it ou7ht to 6e allo8e& to perish. ,ut there are 8a4s o helpin7 them 8ithout inter erin7 8ith the e icienc4 o the capitalist machine an& 8ithout pro&ucin7 consequences other than those that such a polic4 is inten&e& to ser$e.
)59
minimum in the same 4ear+ an& in 10 4ears, &urin7 the perio& rom the 0i$il Har to 189J, it 8as 6elo8 J5 cents. L these, nine 4ears 8ere 6et8een 188F an& 189J, the all a ter 1891 6ein7 a7ain associate& 8ith increase o acrea7e.
3a6le o 0ontents
C. /ail!oadi>ation. N Hhile or this countr4 railroa&iOation 8as
o6$iousl4 the @6i7 thin7@ or @6acE6one@ o the 6our7eois Pon&ratie , it reall4 7ot un&er 8a4, i 8e =u&7e 64 milea7e a&&e&, in 18F9, i.e., a6out si( 4ears later than in /n7lan&. 3he, rou7hl4, 1J)0 miles a&&e& in 18F0, 18F1, an& 18F) aile& to pro&uce an4 o the s4mptoms o prosperit4 an& 8ere, moreo$er, the lea$in7s o the 6oom o the thirties rather than the irst installment o ne8 &e$elopments. 3he .e8 /n7lan& railroa& 6oom 8hich contri6ute& so much to ,oston"s prominence at that time 6e7an in 18FJ, 6ut meant little until 18F9. ,4 not &atin7 accor&in7l4N6ut the rea&er is 8elcome to &o so M it &ocs not maEe an4 &i erence to the anal4tic schema presente&N8e are actin7 on the theor4 that the irre7ular t8in peaE in the thirties upset the course o e$ents 8hich 8oul& other8ise ha$e 6een more liEe that in /n7lan& or <erman4 an& that 8e are 6ut @reconstructin7 the temple in ruins@ i 8e &ate as 8e &o. 3he ruins in question or, 8ithout metaphor, the in&ications that 7ui&e us, are the time series > receipts rom lan& sales 6e7an to increase in 18F), &eposits an& stocE prices soare& in 18F3, 8hen also prices starte& to rise. 2iqui&ation o the e(cesses associate& 8ith 8il&cat 6anEin7 stunte& the 6e7innin7s o the prosperit4 phase o the ne8 Pon&ratie , an& this accounts or the mil&ness o the set6acE at the en& o 18FJ. Se$eral 7oo& crops, /n7lish ree tra&e, an& the 0ali ornian 6oom helpe& to shorten the ensuin7 &epression, 8hich co$ers not quite a 4ear *18F8+ an& to accentuate re$i$al, 8hich also ma&e up or 8hat the stunte& prosperit4 ha& aile& to 6rin7 a6out. 3ransition to the prosperit4 o 8hat, then, has to 6e counte& as the secon& Ju7lar 8as e ecte& in an atmosphere
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o 6oom, unusual e(pansion o cre&it an& speculation, particularl4 in lan& an& railroa& stocE, to all o 8hich 0ali omian 7ol& *since 1850+ an& the a$ora6le &e$elopment o orei7n tra&e lent their ai&. 3he 8arrant or speaEin7 o a ne8 =u7lar, althou7h the cur$e o ne8 *less a6an&one&+ milea7e &ispla4s nothin7 6ut a &ip in the 4ear rom 8hich 8e &ate it *185)+, is in the shi t o 6uil&in7 acti$it4 rom .e8 /n7lan& to the 0entral Atlantic an& the Bi&&le Hestern states, 8hich clearl4 meant a &istinct ne8 step 8ithin the Pon&ratie process > this statement shoul& 6e compare& 8ith the &iscussion on possi6le relations 6et8een lon7er an& shorter c4cles in the ourth chapter. 3he reason 8h4 8e &o not attach more 8ei7ht to the set6acE 8hich occurre& as earl4 as autumn 1853 an& laste& throu7h 185F an& almost to the en& o 1855 is that it seems to ha$e 6een entirel4 &ue to speculati$e e(cessesNin part, no &ou6t, ostere& 64 the ne8 7ol&N an& to their repercussion on railroa& construction. 3here ore, 8e &ate prosperit4 plus recession o that Ju7lar rom the 6e7innin7 o 185) to the secon& hal o 185G. :inall4, the reason 8h4 8e &o not attri6ute to 7ol& an4thin7 6e4on& e(cesses an& reaction to e(cesses *an& such &istur6ances as the ailure o the rates o interest to rise promptl4 an& @ti7ht@ situations consequent upon this+ is that the railroa& construction 8as clearl4 un&er sail 6e ore the 0ali ornian 7ol& 6e7an to act, an& that, looEin7 at the &ata o the situation, 8e &o not see an4 =usti ication or hol&in7 that that process 8oul&, 6arrin7 those e(cesses, not ha$e run its course or pro&uce& its e ects 8ithout it. 5art o the rise in price le$el 8e &o attri6ute to it. 3he quantitati$e a&equac4 o e(pen&iture on railroa& construction is 6e4on& &ou6t > the tracEa7e operate& reache& a6out 30,000 miles 64 18G0, an& the capital &e6t o railroa&s alone then 8as a6out 900 million &ollars M or actual cost o construction, there is no relia6le estimate, 6ut it certainl4 e(cee&e& that sum, o 8hich a6out threequarters 8ere spent in that &eca&e. ,e4on& &ou6t, too, is the trul4 re$olutionar4 e ect o the milea7e opene&. :rei7ht rates ell &rasticall4 an& 64 185F a$era7e& 6et8een t8o an& three cents per tonmile. 3he entrepreneurial unction consiste&, in this case, not so much
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in $isualiOin7 possi6ilitiesNe$er4one sa8 them an& speculate& on themNor in the solution o technolo7ical pro6lemsNthe locomoti$e unctione& su icientl4 8ell 64 that time an& 8as thence orth impro$e& almost automaticall4 64 a series o t4picall4 @in&uce&@ in$entions, an& no ma=or pro6lems impe&e& the 6uil&in7 o the lines Nas in the lea&ership o 7roups, in success ull4 &ealin7 8ith politicians an& local interests, in the solution o pro6lems o mana7ement an& o &e$elopment in the re7ions the roa&s opene& up. -t 8as @7ettin7 thin7s &one@ an& nothin7 else, a $ariet4 o pure entrepreneurship strippe& o all accessories. ,ut this entre-preneurship 8as o ten split 6et8een se$eral in&i$i&uals an& is not al8a4s eas4 to attri6ute to an4 sin7le one. ). As re7ar&s inancin7, 8e must &istin7uish the tasE o , creatin7 the con&itions o pro ita6leness o the enterprise rom the tasE o pro$i&in7 the mone4 or construction. 3hat the irst shoul& ha$e 6een a &istinct tasE is &ue to the act that the Bi&&le Hestern an& Hestern pro=ects coul& not 6e e(pecte& to pa4 or themsel$es 8ithin a perio& such as most in$estors care to en$isa7e. Ban4 o them meant 6uil&in7 ahea& o &eman& in the 6ol&est acceptance o the phrase an& e$er4one un&erstoo& them to mean that. Lperatin7 &e icits or a perio& 8hich it 8as impossi6le to estimate 8ith an4 accurac4 8ere part o the &ata o the pro6lem. -n a sense, an4 construction un&er such circumstances implies @o$er&oin7 it.@ ,ut this concept is har&l4 applica6le to a situation in 8hich, 8ithout pro&ucin7 some o the e ects o o$er&oin7, the thin7 coul& not ha$e 6een &one at all. #n&er &i erent en$ironmental con&itions an& 8ith a political structure &i erent rom 8hat it 8as, those circumstances mi7ht ha$e constitute& a stron7 case or railroa&iOation"s 6ein7 planne& an& e(ecute& 64 the national 7o$ernment, as it 8as in 9ussia 64 the imperial 6ureaucrac4. State enterprise 8as, in act, prominent in the earl4 sta7es o American railroa& &e$elopment M 6ut 64 that time it ha& aile&. Since man4 pro=ects that 8ere o6$iousl4 sociall4 pro&ucti$e *in 5ro essor 5i7ou"s sense+ 8ere not at that time pa4in7 propositions,
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a&&itional sources o re$enue, or contri6utions to the costs, ha& to 6e oun&. Hhere it pro$e& possi6le to secure su6si&ies or loans amountin7 to su6si&ies, this at the same time helpe& to sol$e the pro6lem o inancin7 construction. ,ut the solution presentl4 hit upon in the case o the -llinois 0entral 9ailroa&, the &onation o lan& 64 0on7ress *1850 M the imme&iate 7rantees 8ere the states o -llinois, Bississippi, an& Ala6ama+ &i& not. 5re$ious pro its or &omestic sa$in7s 6ein7 ina&equate, railroa& construction 8as, there ore, mainl4 inance& 64 cre&it creation. :rom the stan&point o the #nite& States, orei7n 6u4in7 o American railroa& 6on&s amounte& to thisNe$en i the 6on&s 8ere pai& or out o , sa4, /n7lish sa$in7sNas &i& /uropean cre&its e(ten&e& in anticipation o 6on& issues or simpl4 as o$er&ra ts. :orei7n in$estin7 8as at times hea$4. Accor&in7 to the estimate 7i$en in Sumner"s 'istor4 o the American 0urrenc4, /n7lish in$estments in this countr4 *not onl4 in railroa&s+ amounte& to a6out F00 million &ollars 6e ore 185J. L$er&ra ts *thou7h mainl4 or 8hat purporte& to 6e @re7ular@ commercial cre&it+ 8ere 7rante&, in man4 cases, 8ith almost un6elie$a6le ree&om an& carelessness. ;omestic cre&it creation 8as e$en more reel4 resorte& to. He &o not Eno8 its amount, 6ut 8e can, in most cases, trace it in one or more o the ollo8in7 orms > &irect len&in7 64 6anEs to companies a7ainst their notes or on 6on&s to 6e sol& later to the pu6lic M inancin7 the su6scriptions o the promotin7 7roups or o the pu6lic *in 8hich case 8e must also taEe account o the act that a customer ma4 6orro8 or other purposes 6ecause 64 su6scri6in7 he 6in&s means 8hich 8oul& other8ise ser$e these+ M an& inancin7 speculationNthere is a si7ni icant coinci&ence 6et8een the increase o railroa& stocE prices an& o &eposits in 185). 3he act that cre&it, create& ad hoc 64 6oth the pree(istin7 6anEs an& the man4 ne8 ones that emer7e&, to a lar7e e(tent inance& railroa& an& other inno$ation, has o ten 6een emphasiOe& an& ne$er 6een conteste&. He ma4 illustrate, ho8e$er, 64 one instance, the case o the -llinois 0entral 9ailroa&.
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3he 6urst o speculation 8hich occurre& in the Bi&&le Hest in the t8enties an& thirties an& le& up to the peaE in lan& sales in the mi&&le o the latter &eca&e, ha& reall4 no other 6asis than e$er46o&4"s con$iction o the imminence o 7reat &e$elopments. Hhat these &e$elopments 8ere to 6e an& 8hich part o the re7ion 8oul& lea& in them 8as in this case entirel4 in&e inite, no particular localit4 hol&in7 an4 particular a&$anta7es. 5re erential positions ha& to 6e create& lar7el4 64 political action, an& an anarchic stru77le ensue& 6et8een local communities, each controlle& 64 its o8n 7roup o speculatorsN railroa& an& canal pro=ects, 8hich or the moment 8ere mostl4 6u66les, 6ein7 the chie 6ones o contention. Bo$es an& countermo$es in this stru77le constitute& state politics an& &ominate& the state le7islature o -llinois, 8hich un&er the circumstances 8as the onl4 possi6le source o po8ers an& means. 5lans o a central railroa&, 8hich came to nothin7, emer7e& in 1818 an& 1835. 3he -nternal -mpro$ement ,ill, passe& in 183J, pro$i&e& a little o$er 10 millions or the carr4in7 out o $arious railroa& an& 8ater8a4s pro=ects, one o 8hich ma4 6e looEe& upon as a secon& attempt to &o 8hat e$entuall4 8as &one 64 the -llinois 0entral 9ailroa& 0ompan4. 3his time a 6e7innin7 8as ma&e, 6ut it soon en&e& in collapse an& &iscre&it. Another attempt to maEe hea&8a4 8as ma&e in 18F3, 8hen a charter 8as 7rante& or the <reat Hestern 9ailroa& 0ompan4, 8hich a ter ailure 8as rene8e& in 18F9. Soon a ter this, ho8e$er, the campai7n in Hashin7ton, irst or a ri7ht o preemption o lan&, an& a ter that or a strai7ht lan& 7rant, met 8ith success an& the -llinois 0entral 9ailroa& 0ompan4 8as chartere& an& or7aniOe& in 1851. 3here is no nee& or an4 comment on the nature o the procee&in7s 8hich thus inau7urate& the coloniOation o a 7reat part o the countr4, or or e(planation o 8hat the entrepreneurial unction so ar consiste& in. 3he inancial 7roup 8hich e$entuall4 oun& themsel$es in control o the enterprise *the same 8hich ha& 6ou7ht the Bichi7an 0entral in 18FG+ 8ere 8ell connecte& an& 64 no means lacEin7 in seriousness. 3heir metho&s an& attitu&es 8ere ull4 up to the stan&ar& o their time in such matters. 3he charter, 8hich amon7 other thin7s pro$i&e& that
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J per cent o the 7ross income 8as to 7o to the state, cannot 6e sai& to ha$e aile& to taEe account o pu6lic interest. ,ut the act ha& to 6e ace& that there simpl4 8ere no means a$aila6le at all commensurate 8ith 6uil&in7 costs, 8hich 8ere 6u&7ete& at 1G-1C) millions. Ln the stocE, 8hich at irst the 7roup ha& thou7ht o Eeepin7 to themsel$es, the4 looEe& $er4 much in the li7ht o 8hat in :rench inance is terme& parts de fondateurs or, to use an American e(pression, o $el$et. 3he4 8ere 6usinessmen 8ho ha& their means an& more than their means en7a7e& in other $entures, an& their 6eha$ior 6ut too 8ell illustrates our theor4 o the lo7ical primac4 o create& cre&it in the inancin7 o inno$ation. 3he4 &i&, ho8e$er, pa4 in an assessment o )0 per cent on the irst million o stocE, an& 6oth the &irectors an& their 6usiness connections tooE ) millions o 6on&s, to 6e pai& or 64 installments. 3he4 thus pro$e& that the4 meant 6usiness, 6ut it is not un air to suspect that the mone4 the4 actuall4 pai& 8as 6orro8e& rom 6anEs. 3his 8as the 8ar chest 8ith 8hich the4 em6arEe& upon sur$e4in7. 3he4 also in&uce& the Bichi7an 0entral, 8hich the4 controlle&, to enter into an a7reement to carr4, in consi&eration o certain concessions, another ) millions o 6on&s o the -llinois 0entral. 3he un&amental i&ea, ho8e$er, 8as rom the 6e7innin7 to sell, or 6orro8 upon, mort7a7e 6on&s secure& on the lan& 7rant an& the ri7ht o 8a4 plus impro$ements. 3his metho& then 8as a reco7niOe& one an& or a time 6ecame still more soNin other cases e(istin7 contracts o a none(istin7 enterprise 8ere use& as securit4Nan& it 8as ar rom 6ein7 &isappro$e& o , so lon7 as it &i& not coinci&e 8ith rau&ulent representations. 3he4 o ere& these 6on&s in /n7lan& an&, in spite o the re usal o the 9othschil&s an& the ,arin7s, succee&e& in ormin7 a s4n&icate. 3he means so pro$i&e& ran out 64 1855, 8hen the promoters ha& to taEe a&&itional 6on&s. :urther calls on the stocEhol&ers an& 6oro8in7 on short-term notes 6ecame necessar4 6e ore the 8orE 8as complete& in 185G. /m6arrassments 8ere not en&e& there64, an& in 185J catastrophe 8asNe$en apart rom &ama7in7 re$elationsNperilousl4 near, 6ut the compan4, un&er the a6le mana7ement o an e(traor&inar4 man, stoo& its 7roun& an&, 8ith sales o lan& &e$elopin7 stea&il4, consoli&ate& its position. 3he e ect
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o the line on the &e$elopmentNor, rather, the economic creationNo its territor4 an& the 8hole countr4 nee&s no emphasis. 3. Lur anal4sis contains all the elements necessar4 or a &ia7nosis o the crisis o 185J. -t 8ill 6e con$enient, ho8e$er, to a&& a e8 minor points an& to roun& o the picture, in or&er to sho8 once more ho8 8hat 8e consi&er the un&amental mechanism o luctuations com6ines 8ith acci&ents an& inci&ents not inherent to its lo7ic. 3o 6e7in 8ith, the crisis 8as an international one, commercial an& inancial relations 6et8een our countries *an& others+ 6ein7 stron7 enou7h to s4nchroniOe e$ents remarEa6l4 an& to pla4 a lar7e role in shapin7 the sur ace. ,ut it is nonetheless a act that un&amental e(planation coul& run or each countr4 in terms o its o8n &e$elopment. Secon&, the crisis coinci&es 8ith, or rather la7s 6ehin&, the upper turnin7 point o that Pon&ratie . All statistical in&ications com6ine to support this in&in7, 8hich is all the more remarEa6le 6ecause 7ol& pro&uction coul& ha$e 6een e(pecte& to inter ere 8ith their 6eha$ior. -t actuall4 &i& to some e(tent, 6ut not enou7h to alter the un&amental contour. 3his happene& later, 8hen the 0i$il Har an& other e(ternal actors maEe it possi6le to speaE or /urope o a @risin7 tren&@ in prices up to 18J3. ,ut in the #nite& States 8holesale prices reco$ere& onl4 mo&eratel4 in 1859 rom the sharp all in the prece&in7 4ear an& then continue& to all until the irst quarter o 18G1. Althou7h 7ol& thus aile& to Eeep up the price le$el, it ha&, as state& 6e ore, un&ou6te&l4 a share in 6rin7in7 a6out the prece&in7 rise. 3his in luence 8as e(erte& partl4 throu7h the e(pen&iture o 7ol& miners an& partl4 throu7h the a&&itional acilities or cre&it creation it pro$i&e&. ,ut throu7h the 8hole o the ups8in7 8e o6ser$e recurrent situations o strin7enc4, 8hich is e(actl4 8hat 8e shoul& e(pect. 3he case sho8s $er4 8ell ho8 eas4 mone4, &ue to the action o e(ternal actors, 8ill on a risin7 ti&e o 6usiness al8a4s pro&uce strin7enc4 an&, hence, is the most ine ecti$e o means to pre$ent recessions. 3hir&, the increase in 7ol& pro&uction an& 8hat, 8ithout e(plainin7 a7ain, 8e term reckless banking actuall4 &o account or man4 sur ace
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phenomena. -n particular these actors account or the sharp an& short panic that ollo8e& upon the ailure o the Lhio 2i e an& 3rust 0ompan4 on Au7. )5, 185J, a ter 8hich 150 6anEs aile& up to Lct. 1J > there 8as a spectacular run on Lct. 13. -t is onl4 natural that pu6lic attention concentrate& on this, an& that man4 8riters at that time an& later simpl4 ormulate& the popular theor4 that the 8hole catastrophe 8as &ue to the shortsi7hte&ness o 6anEs 8hich calle& in loans in a panicE4 8a4. Althou7h neither this contraction nor the prece&in7 @recElessness@ pro$i&e un&amental e(planations, 6oth pla4e& a $er4 real role in the @a6normal liqui&ation@ that ensue&, an& our theor4 neither requires nor =usti ies an4 attempt to &iscount their importance. ;i erence o opinion arises onl4 i it 6e hel& that either the cre&it e(pansion or the cre&it contraction 8as the essence o the matter, an& that 8ithout either o the t8o e$er4thin7 8oul& ha$e 6een 8ell. ,ut 8e ma4 7o some 8a4 8ith those more care ul anal4sts o that situation 8ho pointe& to a num6er o au(iliar4 actors 8hich intensi ie& the 6oom an& the remo$al o 8hich intensi ie& the &epression. Lne o these actorsNthe speculation in lan&N8ent to len7ths entirel4 out o proportion 8ith 8hat 8oul& ha$e 6een a normal inci&ent o the contemporaneous &e$elopment an& must hence 6e classe& as a separate actor requirin7 in turn special sociolo7ical e(planation. StocE e(chan7e speculation pla4e& a smaller role. 9ailroa& stocEs reache& their peaE to8ar& the en& o 185) an& then ell sharpl4 to the en& o 185F in the course o 8hat in Septem6er o that 4ear amounte& to a inancial panic an& entaile& a consi&era6le num6er o ailures. 3he air 6ein7 thus cleare&, no speculati$e crash occurre& a ter8ar& an& the a6rupt all in the crisis o 185J 7a$e 8a4 to partial reco$er4 8ithin the 4ear. Another actor 8as o course the import o capital, o 8hich the un a$ora6le 6alance in commo&it4 tra&e 6et8een 1850 an& 185J 8as a s4mptom. 3his certainl4 contri6ute& to maEin7 the situation more sensiti$e than it other8ise 8oul& ha$e 6een. 3he $er4 7oo& 8heat an& cotton crops o 1855, 8hich 8ere sol& at a$ora6le prices, also 7a$e an impetus to all sorts o acti$ities 8hich then a&&e& to the &i iculties o liqui&ation. L other causes contri6utin7 to the slump there is a lon7 list.
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:ourth an& inall4, ho8e$er, there cannot 6e an4 &ou6t in this case o the realit4 o the un&amental e(planation rom our schema. 9ailroa& construction 8as the main 6ut not the onl4 actor that carrie& that 8a$e o e$olution. 3aEen to7ether, the inno$ation o the perio& an& the a&aptations the4 en orce& e(plain primaril4 the turn o the Pon&ratie . A7ain, as in earlier cases, it is not claime& that the4 e(plain the crisis also, e(cept in the sense that the4 maEe it un&erstan&a6le that speculati$e urors 6roEe out an& that error an& miscon&uct accumulate& > the4 thus urnish a reason 8h4 the situation 6ecame so sensiti$e as to 6e easil4 turne& into a crisis 64 un a$ora6le e$ents or 64 trou6les arisin7 out o those 8eaE spots. 3he actual picture o the crisis coul& ne$er 6e un&erstoo& rom inno$ations alone Ban4 thin7s in that ups8in7Nrailroa& construction in particularN 8ere &one un&er the in luence o arti icial stimuli, 64 8hich 8e mean that a num6er o them 8oul& not ha$e 6een un&ertaEen at all or 8oul& not ha$e 6een un&ertaEen =ust then an& on such a scale 8ithout encoura7ement rom the political an& the inancial sphere. .o critique is implie& 64 this. Ln the contrar4 8e ha$e sai& 6e ore that the term overdoing must 6e applie& 8ith caution. ,ut this accounts o course or some o the &i iculties o the ensuin7 situation an& also or the presence o a 'a4eE e ect > in a $er4 o6$ious sense the perio& o pro&uction 8as len7thene& 6e4on& 8hat the economic or7anism coul& stan& or the moment. F. At the time o the crisis the Ju7lar turne& into &epression. 3here 8ere man4 ailures in 1858, prices ell sharpl4, an& construction &ecrease& urtherNe(ports an& imports nearl4 6alance& or the fiscal year. -n spite o eas4 mone4, 7oo& crops in the South * i$e successi$e supernormal cotton crops, in 1859 also couple& 8ith hi7h prices+, an& all-aroun& acti$it4, the 7eneral atmosphere, as recor&e& 64 the press o that time, 8as an4thin7 6ut cheer ul until into 18G0 M 6ut re$i$al asserte& itsel , 6elo8 this sur ace, rom the 6e7innin7 o 1859. 3he act that this re$i$al &i ere& so much rom its pre&ecessor *1850, 1851+ 8e attri6ute primaril4 to the un&erl4in7 Pon&ratie 8hich ha&
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64 then complete& its prosperit4, an& entere& upon its recession. 3his recession un&erla4 the shorter ups an& &o8ns o those 4ears an& sha&e& o into the 0i$il Har, the approach o 8hich intensi ie&, althou7h it &i& not alto7ether create, the trou6les o -8G0. J3 3he 8ar &ominate& the thir& Ju7lar *18G1-18G9 M &ia7nosis o 18G1 is &ou6t ul o8in7 to political e$ents+ an& o course inter ere& 6oth 8ith the 6eha$ior o our series an& the processes 6ehin& them, &isplacin7
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-n 1859 imports a7ain approache& the 185J le$elN or the secon& hal o the iscal 4ear the4 8ere e$en consi&era6l4 hi7herNan& there 8as a $i7orous e(pansion o 6anE loans, 8ith specie in 6anEs &eclinin7, that le& to strin7enc4 in the all. Boreo$er, ne8 6anEs 8ere oun&e& an& capital o 6anEs 8as increase& in the Hest *8hich until 18G0 su ere& rom 6a& crops an& lo8 prices o 6rea&stu s+. 3hese Hestern 6anEs, mostl4 mo&ele& a ter the .e8 1orE :ree ,anEin7 S4stem, 6ut 8ith much less soun& an& sta6le securities to 6acE their issues an& 8ith arran7ements a6out re&emption amountin7 to e$asion, rapi&l4 6ecame a source o 8eaEness o the situation, althou7h the 6anEs in the South, particularl4 in 2ouisiana, an&, to a lesser e(tent, those o .e8 1orE an& .e8 /n7lan& 8ere still in a stron7 position. 3he Hestern recor& crop o 18G0 an& other a$ora6le circumstances mi7ht ha$e a$aile& to pre$ent trou6le, 6ut or the political situation. -ts seriousness 8as irst realiOe& in the South, the 6anEs o .e8 Lrleans 6e7innin7 to restrict an& to looE asEance at .orthern paper in Au7ust. 3his a ecte& .e8 1orE 6anEs, 8hile in the Hest man4 6anEs 7ot into trou6le throu7h the &ecline in the 6on&s o Southern states that orme& a 7reat part o the 6asis o their note issue. 3here 8as a premonitor4 panic in the .e8 1orE StocE /(chan7e in Lcto6er, in spite o eas4 mone4. A ter the presi&ential election on .o$. G panic an& &isor7aniOation sprea& throu7h all sectors o the countr4"s economic s4stem, o no 7reater in&ustrial si7ni icance, ho8e$er, than the panic o 191F. 3he one point callin7 or notice is the no$el metho& 8hich 8as resorte& to in or&er to han&le the situation an& 8hich constitutes a more important step in the &e$elopment o 6anEin7 than man4 a re orm act. 3he 50 .e8 1orE 6anEs 8hich orme& the 0learin7 'ouse Association &eci&e& on corporati$e action, in or&er to e(ten& cre&it instea& o restrictin7 it, 64 means o practicall4 poolin7 their cash reser$es an& creatin7 clearin7house certi icates a7ainst &eposit o a&equate securit4 inclu&in7 recei$a6les, to 6e accepte& in settlement o claims 6et8een themsel$es. Lnl4 one 6anE hel& aloo . Success 8as complete an& almost imme&iate. ,oston ollo8e& 8ith similar results M in other parts o the countr4 6anEs ha& to suspen&. ,oth the &e$ice an& its success arc hi7hl4 instructi$e. 3he latter, ne$er a7ain quite repeate&, althou7h this 6it o central 6anE polic4 thence orth 6ecame part o the househol& reme&ies in such situations, 8as precisel4 &ue to the act that there 8as not much 8ron7 8ith either the in&ustrial or the 6anEin7
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peaEs an& &e errin7 steps in in&ustrial &e$elopment, thus cro8&in7 them into the 4ears imme&iatel4 prece&in7 18J). .e8 tracEa7e *minus a6an&onments+ in 18G9 6e7an its unprece&ente& increase, 8hich reache& a peaE in 18J1. 3he success o the irst transcontinental route, 8hich ha& 6een pushe& as a 8ar measure to linE 0ali ornia to the .orth, le& the 8a4 an& in&icate& 8hat 8as to 6e the particular eature o this 6oom. He ha$e a7ain the same pattern o entrepreneurial acti$it4 an& inancin7 > promoters securin7 options o ri7ht o 8a4, ha$in7 the compan4 chartere& an& en&o8e& 8ith lan& 7rants, sellin7 the options to it an& taEin7 securities in pa4ment, inall4 placin7 the 6on&sNthe stocE 6ein7 commonl4 treate& as a 6onusNin or&er to pro$i&e the means or construction, an& 6u4in7 equipment on installments throu7h equipment trust certi icates. -n case o success, issue o urther securities 8oul& then 6ecome possi6le to consoli&ate the situation. :ailin7 this, there 8as reconstruction. -n almost e$er$ ma=or instance, promoters mi7ht ha$e pla7iariOe& the ;uEe o Hellin7ton"s *alle7e&+ sa4in7 at Haterloo, @,l_cher or the ni7ht.@ 3he ,l_cher in our case 8as primaril4 /n7lish *an& other /uropean+ capital, 8hich tooE the responsi6ilit4 or a 7reat part o the ) 6illions 8hich are sai& to ha$e 6een e(pen&e& on American railroa&s rom 18GJ to 18J3. A $er4 e icient machiner4 or pressin7 /uropean capital into the ser$ice ha& 64 that time replace& the in&i$i&ual e orts o earl4 times. 38o thin7s are per ectl4 clear. :irst, that &e$elopment 8hich quantitati$l4 outstrippe& the one o the orties an& i ties as it 8as outstrippe& 64 the &e$elopment in the ei7hties *the all-time peaE in miles a&&e& comes in 188J+ 8as a t4pical &o8n7ra&e &e$elopment 8ithin the meanin7 o our mo&el. -t 8as a Ju7lar prosperit4 superimpose& on a Pon&ratie recession JF, a ne8 step in 8hat no
situation an& that &istur6ance 64 an e(ternal actor 8as all that ha& to 6e ace&. [5resuma6l4 a slip. ,elo8 Schumpeter &ates the 6e7innin7 o Pon&ratie depression in 18J0, the same &ate he 7i$es or the 6e7innin7 o the Ju7lar
JF
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lon7er 8as un&amentall4 ne8, 6ut a process o carr4in7 out 8hat ha& pre$iousl4 6een initiate&. 9ailroa& construction 8as no8 s8immin7 8ith the stream in a sense in 8hich it ha& not 6een 6e ore. Hhat 8as to 6e &one, ho8 it ha& to 6e &one, 8as chalEe& out, an& all the characteristics o in&uce& or completin7 &e$elopment 8ere present. 3his le t plent4 o pro6lems or the in&i$i&ual case, 6ut the4 8ere comparati$el4 eas4 to sol$e, urther case& 64 the 7ro8th o the en$ironment, an& o the t4pe 8hich is characteristic o @e(ploitin7 in$estment opportunit4@ an& @pushin7 into ne8 economic space.@ Boreo$er, the 7eneral eatures o the perio& support this interpretation. 3here 8as a 7reat 6uil&in7 6oom. 3he 8ell-6ein7 o all classes in the 4ears 18G9 to 18J3 o 8hich 8e rea& *an& 8hich 8e are a6le to $eri 4 as ar as our in ormation 7oes+Nthe act in particular that 8a7es rose an& 8holesale prices ell 8hile the ormer ha& risen less than 8holesale prices in the earl4 i tiesNis o6$iousl4 &ue to the e(pansion o pro&uction 8hich our schema lea&s us to e(pect in e$er4 Pon&ratie recession. J5 ,ut it is not less clear, in the secon& place, that that metho& o inancin7 8hich so 8ell illustrates our theor4, 8as han&le& 8ith such carelessness as to maEe it an a&&itional cause o the situation o 18J3. -t not onl4 in&uce& 6ut reall4 also presuppose& a6normal speculati$e acti$it4 an& coul& not 8ithout it ha$e 7one to an4thin7 liEe the len7th it &i&. 3he phenomena o the Secon&ar4 Ha$e 8ere &e$elope& to an unusual &e7ree there64, an& errors an& cases o miscon&uct 6ecame possi6le 8hich our mo&el &oes not account or per se. 3he <ol& 0orner, ,lacE :ri&a$, 6anE ailures, campai7ns 6et8een stocE e(chan7e operators, an& other purel4 inancial inci&ents 8ere s4mptoms o this, an& it 6ecomes un&erstan&a6le that e$en as re7ar&s the railroa& 6usiness these thin7s 8ere more o6$iousl4 in e$i&ence than the un&erl4in7 process an& that it seeme& as i construction ha& 6een 6rou7ht to a stop an& the success o e(istin7 lines ha& 6een =eopar&iOe& 64 them rather than 64 an4 @lo7ic o e$olution.@ ,ut e$en
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prosperit4.N/&.] [3he same mistaEe pointe& out in the pre$ious ootnote.N/&.]
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so, no6o&4 can &en4 that railroa& construction ha& temporaril4 e(hauste& possi6ilitiesNa ormulation 8hich is more correct than the more common phrase o thin7s ha$in7 6een o$er&oneNan& it shoul& 6e eas4 to see that this, to7ether 8ith the &islocatin7 consequences imme&iate an& ulterior, or the economic s4stem, o ne8 construction 8as 8hat create& the situation in 8hich the Secon&ar4 Ha$e 6roEe, an& 8ith it untena6le cre&it situations an& speculati$e 6u66les all o$er the iel& o in&ustr4 an& commerce. Althou7h the a6normal liqui&ation 8hich has come &o8n to posterit4 as the crisis o 18J3 clearl4 irst 6roEe out a6roa& *in Kienna+, an& the American sca ol&in7 recei$e& its irst &ecisi$e shocE on the 8ire o orei7n cre&it, our &ia7nosis seems to stan&. -t is not astonishin7 that the impact 8as primaril4 on the ne8, instea& o on those elements that pro7ress ha& ma&e o6solete. :or, as 8as pointe& out in our theoretical chapter, this 8ill al8a4s happen i the ne8 thin7s stan& on a slen&er an& the ol& thin7s on a sa e inancial 6asis. 3hus, the role pla4e& in the &rama 64 the .orthern 5aci ic ailure &oes not an4 more contra&ict e(pectation rom our mo&el than &oes the act that, in 7eneral, &an7er si7nals irst 6ecame $isi6le in the railroa& iel&. 9ailroa& stocEs reache& their peaE in 18G9, i.e., in the re$i$al o the prece&in7 Ju7lar, 8ere no more than stea&4 in the 6oom o 18J1, an& &ecline& in 18J) 8hile in&ustrial stocEs rose. 3i7htness o mone4, smallness o 6anE reser$es, a premonitor4 panic on the stocE e(chan7e in Lcto6er 18J1, all linE up 8ith railroa& inance, as &o the slacEenin7 in increase o e(ports an& the sharp rise o imports that occurre& in 18J). Lnce the panic ha& 6roEen out in the all o 18J3N up till then 7eneral 6usiness Eept up 8ellNthe t4pical sequence o e$ents ollo8e&. Speculation in lan& an& stocEs collapse&, prices ell, e(ports increase&, imports &ecrease&, irms o all t4pes aile& in lar7e num6ers, the stocE e(chan7e ha& to 6e close&, 6anEs suspen&e& pa4ment, unemplo4ment 6ecame serious almost imme&iatel4. He shall not repeat 8hat has 6een sai& in the &iscussion o the crisis o 185J. 3he act is si7ni icant, ho8e$er, that, as ar as mechanisms 7o, there 8oul& ha$e to 6e repetition.
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,ut this time the 6reaE&o8n 8as much more serious an& a prolon7e& &epression ollo8e&. -t is haOar&ous to rel4 on statistical e$i&ence or an appraisal o relati$e se$erities o crises, 6ecause equal reactions o i&entical s4mptoms ma4 mean $er4 &i erent thin7s at &i erent times, an& presence or a6sence o others ma4 6e acci&ental or &ue to &i erence in the han&lin7 o the situations. As ar as mere i7ures 7o, ho8e$er, some aspects, at an4 rate, o the &epression 8ere quite as &arE in 18J3 to 18JJ as the4 8ere in 19)9 to 1933. ;ata a6out unemplo4ment, or instance, are, it is true, entirel4 untrust8orth4 an& incompara6le. ,ut i 8e coul& 6elie$e in the i7ure, mentione& 64 some authors, o 3 millions o @tramps@ *in the 8inter o 18J3 to 18JF+ then this, consi&erin7 the smaller quantitati$e importance o the in&ustrial sector an& the a6sence at that time o an4 ten&enc4 to e(a77eration, 8oul& in&icate that relati$e unemplo4ment 8as actuall4 8orse than it 8as &urin7 the recent 8orl& crisis. 5rices ell less sharpl4 than the4 &i& in an& a ter 1930. ,ut this is 6ecause their &o8n8ar& mo$ement rom the 0i$il Har peaE ha& not, e(cept in 18J), 6een pre$iousl4 checEe&. 3he &ecline 8as more 7entle then 6ecause it 8as more e$en, 6ut it 8as not smaller i 8e consi&er, as 8e must, ultimate results an& not onl4 8hat happene& in the crisis proper. 3he political complement also 8as similar, 7ran7er mo$ement, a7itation or in lation, striEes an& riots 6ein7, i 8e taEe account o &i erences in social an& political structure an& attitu&e, more than air counterparts o correspon&in7 phenomena in the recent instance, althou7h in the 6our7eois Pon&ratie the4 8ere han&le& in a &i erent 8a4. 5. Accor&in7 to contemporaneous report, 18JF to *the irst hal o + 18J8 8ere 4ears o almost unrelie$e& 7loom. ,ut a&=ustment an& the elimination o untena6le positions 8ent on stea&il4, an& the path 8as cleare& or reco$er4. 3he process is 8ell re lecte& in the i7ures o railroa& construction. -t touche& lo8 point as earl4 as 18J5 an& su ere& another set6acE in 18JJ, 6ut there 8as si7ni icant increase in 18JG, 6oth in ne8 tracEa7e an& in locomoti$es 6uilt, in the mi&st o a
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rene8e& out6reaE o ailures an& a 7reat all o railroa& stocE prices. 3hus the ti&e 6e7an to turn 6e ore either people"s @&epresse& state o min&@ ha& chan7e& or the 6etter or sur ace mechanisms ha& cease& to 8orE in the &o8n8ar& &irection, also 6e ore the re$i$al on the stocE e(chan7e *18JJ+. -t 8as the impro$ement in the objective elements of the situation 8hich turne& 6oth the ps4chic states *e(pectations+ an& the mechanisms *cumulation o &epressi$e e ects an& that sort o thin7+, an& not $ice $ersa. .or 8as it e(ternal circumstances 8hich stoppe& the &o8n8ar& course. 0rops 8ere 7oo& in 18J8, 6ut prices o 8heat an& cotton 8ere lo8 an& impro$ement in an4 case set in 6e ore 7oo& crops 6ecame a certaint4. The system recovered of its own and this in the face of steadily declining general prices. He &ate the ourth Ju7lar 18J0-18J9. .o8 the ei7hth &eca&e o the nineteenth centur4 lies, accor&in7 to our schema, entirel4 8ithin the &epression phase o the secon& Pon&ratie , 8hich turne& rom recession into &epression a6out 18J0. JG A 8hole Ju7lar as 8ell as the prosperit4 an& recession o another 8hich 6e7an 8ith 1880, there ore, complete& their course on 8hat statisticians 8oul& call a &o8n8ar& tren&. An& this is our e(planation o the se$erit4 o the crisis, the &epth o the su6sequent &epressionN 8hich is, in all respects, as striEin7l4 similar to the one o 18)G to 1830 an& the one o 19)9 to 1933 as 8ere the prosperities that prece&e& themNan& the act that 7loom an& &i iculties persiste& ar into reco$er4. All three cases 8ere characteriOe& 64 the act that the shorter 8a$e ha& to su6si&e to 8hat 8as a allin7 le$el 8hile, in other cases that &i& not lea& to such 6reaE&o8n or prolon7e& &epression, it ha& onl4 to su6si&e to a risin7 le$el.
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3his turn occurre&, there ore, 6e ore the last 6oom 8hich prece&e& the 7reat crisis. Hithout un&ul4 stressin7 the re7ularities 8hich orm the 6asis o our schema, 8e shoul& recall that this is per ectl4 in accor&ance 8ith it, since it maEes the 6e7innin7 o a Pon&ratie &epression coinci&e 8ith a Ju7lar prosperit4. 3he reasons 8h4 an @a6out@ shoul& 6e inserte& are, on the one han&, that the 7entle s8eep o the Pon&ratie &ispla4s 6roa& hei7hts an& &epth an& not an4 peaEs or trou7hs, so that precise location is al8a4s &i icult, an&, on the other han&, that a tere ects o the 0i$il Har must 6e taEen into account.
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-n the case un&er &iscussion, no6o&4 can &ou6t the realit4 o the particular process that constitute& the Ju7lar in the course o 8hich the crisis occurre&. .or is it ar etche& to sa4 that the lar7er processN mainl4 associate& 8ith railroa& constructionN 8ithin 8hich the e$ents o 18J0 to 18J3 constitute a step, ha& so re$olutioniOe& the economic s4stem that liqui&ation, a6sorption, a&aptationNall o 8hat these terms mean can 6e clearl4 o6ser$e&N8as an unusuall4 lon7 an& pain ul a air. - o6=ection to the three-c4cle schema 6e insupera6le, 8e &o not insist on it. 3he acts remain, 8hate$er the merits or &emerits o the schema 64 8hich 8e present them. ,ut 8hat it is necessar4 to insist on is, irst, that in the other t8o cases 8hich are in an analo7ous position on the t8o other Pon&ratie s an& stan& in appro(imatel4 the same time relation to prece&in7 in&ustrial re$olutions, 8e also in& similarl4 se$ere an& prolon7e& &epressions an&, secon&, that 8e &o not in& such &epressions in an4 other case. As soon as paral4sis &ue to the shocE 8as o$er, e(pansion o ph4sical pro&uction resume& 8ithin the ondratieff depression, as 8e shoul& e(pect. 9ailroa& construction, 7oin7 on to 6e the carrier o the c4clical mo$ement, soare& rom 18J8, to a peaE in ne8 tracEa7e in 188) an& * rom the all to 1885+ to the all-time peaE o 188J *nearl4 13,000 miles+. 3his almost 7i$es, i the la7 is taEen into account, the histor4 o the c4clical luctuations o that perio&. ,ut this &oes not mean no8, as it &i& 6e ore, that the relation o railroa& construction an& 7eneral 6usiness 8as primaril4 one o cause an& e ect. Ln the contrar4, the more an inno$ation 6ecomes esta6lishe&, the more it loses the character o an inno$ation an& the more it 6e7ins to ollo8 impulses, instea& o 7i$in7 them. ,esi&es, Pon&ratie &o8n7ra&es an& re$i$als precisel4 &ispla4 a 8i&e $ariet4 o in&uce& or completin7 inno$ations 8hich &e$elop an& carr4 to their limit possi6ilities opene& up 6e ore, o 8hich railroa& 6uil&in7 8as 6ut the most important. Accor&in7l4, railroa& construction, increasin7l4 settlin7 into a pre&etermine& rame8orE an& e(ploitin7 pree(istin7 in$estment opportunities, 6ecame &urin7 the perio& un&er &iscussion much more
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*thou7h not 4et entirel4+ a unction o railroa& 6usiness an&, hence, o the rest o the 6usiness or7anism than it ha& 6een 6e ore, an& the relation 6ecame su6stantiall4 one o mutual &epen&ence. 'o8e$er, the railroa& in&ustr4 ha& not so8n its 8il& oats as 4et, either as re7ar&s 6ol&ness o a&$ance or as re7ar&s inancial metho&s. 3ra ic an& earnin7s ha& re$i$e& 64 18J8 *18JJ marEs the lo8 point in the latter+, 8hich 8e consi&er as the last 4ear o the reco$er4 phase o the ourth Ju7lar. 3hen the4 stron7l4 increase&, 8ith 7eneral 6usiness, to 1881, 8hen the lo8 o ne8 capital into railroa&s reache& the peaE correspon&in7 to the peaE in miles a&&e& that occurre& one 4ear later. -n$estment continue&, thou7h at a &ecreasin7 rate, until 1883, 8hen it e(perience& a checE, 8ith the Ju7lar turnin7 into its recession *188)+, ollo8e& 64 a &epression in the or&inar4 course. ,ut althou7h the a6o$e sho8s that 8e maEe as ull allo8ance or the in luence o 6usiness on railroa&s as 8e &o or the in luence o railroa& construction on 6usiness, railroa&s still set the pace. -t 8oul& not 6e correct, in particular, to emphasiOe the part pla4e& 64 the crops o 18J8, 18J9, an& 1880 to the point o maEin7 them the main actor in railroa& construction. 3he4 constitute& a a$orin7 circumstance. ,ut arm pro&ucts a ter all ma&e up less than )0 per cent o total tonna7e haule&, an& a$era7e ran7e o $ariation 8as rou7hl4 5 per cent. He ma4 &ate Ju7lar &epression rom the en& o 1883. -t laste& throu7h 188F an& 1885 an& is marEe& 64 a crisis in the ormer 4ear, panic on the stocE e(chan7e, strain in the mone4 marEet necessitatin7 issue o clearin7house certicates, ailures o 6anEs an& stocE e(chan7e irms, unemplo4ment, an& so on. Accor&in7 to the schema the Pon&ratie 8oul& ha$e 6een &ue to em6arE upon re$i$al in that 4ear, an& this accounts or the urther act that neither se$erit4 nor &uration o that &epression 8ere at all compara6le to the se$erit4 an& &uration o the e$ents o 18J3 to 18JJ. Lne point calls or attention, ho8e$er. -n e(poun&in7 the 8orEin7 o our mo&el 8e ha$e lai& stress on the all in the price o ne8 pro&ucts, 8hich is a ma=or piece o the mechanism that con$e4s the results o pro7ress to the masses. He also
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sa8 that this all, thou7h as a matter o 7eneral theor4 it shoul& primaril4 a ect competin7 in&ustries as 8ell as ol& irms in the same in&ustr4, 8ill also react on the inno$atin7 in&ustr4 itsel , especiall4 i it stan&s inanciall4 on slipper4 7roun& an& i urther steps in the path o e$olution 6e7in to compete 8ith the creations o earlier steps. 3he histor4 o railroa&s a or&s a 7oo& illustration or this. :rei7ht rates 6e7an o course to all at a $er4 earl4 sta7e, 6ut the4 still a$era7e& a6out ) 1C! cents in 18G8. 3hen the4 ell sharpl4, thou7h at a &ecreasin7 rate, to 18JF, 8hen the4 a$era7e& 1.8 cents, an& still more sharpl4 &urin7 that &epression. 3he4 increase& sli7htl4 in 18J8, 6ut reache& the one-cent le$el in 1885. .o8 this process 8as per ectl4 normal, 6ut it upset man4 a inancial structure in the railroa& 6usiness. An& 6ecause o the imper ections o competition in this in&ustr4, it &i& its 8orE 64 8a4 o spectacular stru77les 6et8een controllin7 7roups, 8hich e(ercise& the pu6lic min& an& set e$er46o&4 talEin7 a6out rei7ht 8ars, cutthroat competition, &iscrimination, an& the e$ils o unre7ulate& enterprise, to the e(clusion o 8hat the thin7 reall4 meant. As a matter o act, it pa$e& the 8a4 to consoli&ation, e icient a&ministration, an& soun& inance, thus usherin7 in the last step o America"s railroa&iOation. -t tooE another Ju7lar, ho8e$er, to accomplish this *1889 to 189J+, the last one to 6e &ominate& 64 the railroa& in&ustr4, althou7h the &a4s o ne8 companies ha& passe&. Some o its eatures ha$e 6een an& 8ill 6e &iscusse& in their $arious places, 8hen also certain &i iculties o &atin7 an& interpretation 8ill 6e mentione&. :or the moment it is su icient to note that the crisis o 1893 has in a sense more claim to 6e calle& a crisis o railroa&s than has an4 other. Hhile the prece&in7 crises o that Pon&ratie 8ere railroa& prices primaril4 in the sense that rail-roa&iOation pla4e& the lea&in7 role in the process o economic e$olution 8hich pro&uce& the situations that &e$elope& into crises, an& railroa&s 8ere 6ut secon&aril4 a ecte&, the case o 1893 8as primaril4 a crisis o the roa&s themsel$esNrou7hl4 onequarter o 8hich *measure& 64 capital+ 8ent into the recei$er"s han&s.
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/arnin7s ell o in 189F, 8hen or the secon& time in the histor4 o American railroa&s there 8as an a6solute &ecrease in tra ic, an& construction &ispla4e& the lo8est i7ure since 1851. ;uration o that &epressionNa6normal or a Ju7lar in a Pon&ratie re$i$alNan& irre7ularit4 o ensuin7 luctuations, thou7h also con&itione& 64 e(ternal actors, are su6stantiall4 accounte& or 64 the e ects o that house cleanin7 in 8hat ha& then 6ecome an @ol&,@ an& a ter the Horl& Har 8as to 6ecome a &eclinin7, in&ustr4. A inal 6oom in construction an& ne8 or7aniOation 8as still to ollo8 an& to contri6ute to the prosperit4 o the ne(t Pon&ratie Nas the lea&in7 inno$ations o e$er4 Pon&ratie seem to &oN8hich carrie& milea7e to a6out )50,000 64 1910. A ter that 4ear, net construction rapi&l4 &ecrease& to Oero an& 6elo8.
3a6le o 0ontents
&. Some Featu!e of the &e,elo*ment of Manufa)tu!e . N :or the
#nite& States, a histor4 o the c4clical process coul&, in the perio& o the secon& Pon&ratie , 6e 8ritten almost e(clusi$el4 in terms o railroa& &e$elopment. -nsertin7 immi7ration o capital an& menNa6out 1F millions immi7rate&, rom the en& o the 0i$il Har to 1900N har$ests, an& the 0i$il Har, 8e 8oul& 7et practicall4 all the luctuations an& tren&s there are. ,4 189J, @net capital@ o the railroa&s stoo& at ^9,1G8,0J),000 *a little o$er ^50,000 per mile in operation+. /$er4thin7 else turne& on the roa&s an& 8as either create& or con&itione& 64 them, an& lar7e-scale inancin7 oun& its main o6=ect in them. ,ut 8e must not e(a77erate. 3he railroa&s &i& not teach Americans capitalist metho&s an& attitu&es. 3hese, as 8ell as lar7e-scale in&ustrial enterprise, e(iste& 6e ore. .or 8ere the in&ustrial processes o the perio& mere a&aptations to, or e(ploitations o , the con&itions create& 64 the roa&s. Scarcit4 o la6or an& 8ealth o natural resources presente& pro6lems an& con&itione& achie$ements o their o8n. 3heseNe icient la6or sa$in7 machiner4, in particularN
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6ecame characteristic o American inno$ation, 8hich no lon7er internationall4 la77e& 6ut increasin7l4 6e7an to lea& &urin7 that Pon&ratie . -n that en$ironment 8hich containe& no lar7e, antiquate& structures it is not eas4 to in& &eca4in7 in&ustries. Hhalin7, 8hich stea&il4 &ecline& *8ith one short interruption+ a ter the si(ties, is, ho8e$er, one. -t a or&s a 7oo& e(ample o the mechanism that &ra8s resources to8ar& ne8 7oals. Shippin7 in 7eneral re lects, apart rom coastal, ri$er, an& laEe shippin7, the same ten&enc4. ;urin7 the irst t8o Ju7ulars, in the &a4s o the clippers an& also &urin7 the i ties, the American merchant marine ha& almost &e ie& competition in the Atlantic tra&e. ,ut it lost much o its 7roun& &urin7 an& a ter the 0i$il Har, in spite o man4 attempts an& in spite o su6si&ies. 3his 8as not &ue to an4 shortcomin7s in ship6uil&in7, 8hich 8as more pro7ressi$e than the /n7lish an& repeate&l4 compete& success ull4 e$en as to price. America simpl4 turne& a8a4 rom the sea. He 8ill merel4 note that in the construction o the 8oo&en sailin7 $essel America 8as supreme, an& that this 8as a eature o the prosperities o the orties an& i ties. 3he iron steamer, also the iron sailin7 ship, 8as 6ein7 success ull4 6uilt in the prosperit4 o the ourth Ju7lar *John 9oach an& Son, 0ramp an& Sons+, an& ship6uil&in7 8as conspicuous 64 prece&ence in the processes that starte& the i thNin act it 8as acti$e alrea&4 in 18JJ. -n the i th an& si(th, the all-steel ship esta6lishe& itsel an& the triple-e(pansion en7ine put in its appearance. 0olliers, tanEers, 7reatl4 impro$e& coastal an& ri$er steamers, a ter 1890 6attleships, also continue& to 7i$e emplo4ment, an& in 1891 one o the 7reatest 4ar&s o the 8orl& starte& launchin7 *.e8port .e8s Ship4ar& an& ;r4&ocE 0o.+. 0oal minin7, thou7h perhaps to a 7reater &e7ree the o6=ect o acti$e enterprise than it 8as in /n7lan&, 8as more pushe& alon7 than pushin7. ;e$elopments o ne8 &istricts, a$ailin7 themsel$es either o e(istin7 or ad hoc create& ne8 transport acilities, constitute in the American case &e inite inno$ations an& contri6ute to &e inite
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prosperities. :or anthracite this 8as true 6e ore our perio&Nan outstan&in7 instance 6ein7 the 2ehi7h 0oal an& .a$i7ation 0ompan4 N6ituminous coal irst eature& in the orties, &urin7 8hich steam 6e7an to push out 8ater po8erNa process more characteristic o that Ju7lar than railroa&s 8ere. 0oEin7 &i& not pla4 an4 role an& 8as &one in $er4 primiti$e 8a4s until the prosperit4 that prece&e& 18J3. 3hen it &e$elope& in the 0onnells$ille iel&, pro&ucin7 mainl4 or the 5itts6ur7h &istrict. 5ro&uction sprea& an& 8ent on 7ro8in7 &urin7 the &epression an& ma&e a 6i7 stri&e in the prosperit4 o the penultimate Ju7lar. 3he census o 1890 enumerates 13 &istricts. ,ut to the en& o that Pon&ratie *an& 6e4on&+ the 8aste ul 6eehi$e e$en pre$aile&. 3he use o petroleum or other purposes than li7htin7 is, liEe electricit4, a @carr4in7@ inno$ation o the ne(t Pon&ratie , an& 8as in the incu6atin7 sta7e &urin7 the secon&. @-n 18J8 a $aporiOin7 &e$ice or 6urnin7 a resi&uum o petroleum an& coal tar in con=unction 8ith superheate& steam 8as teste& at the ,rooEl4n .a$4 1ar&. .earl4 nine 4ears later, an oil-6urnin7 locomoti$e... 8as reporte& to represent the irst practical application o this uel to lan& transportation. 3he ollo8in7 4ear oil 8as use& at the plant o the .orth 0hica7o 9ollin7 Bill 0ompan4. JJ All sorts o applications 8ere e(perimente& 8ith an& 64-pro&ucts 7aine& rapi&l4 in importance *7asoline, lu6ricants+ M 6ut none o them 8as a ma=or eature o entrepreneurial acti$it4 &urin7 that perio&. 5etroleum or li7htin7 purposes 8as one o the 7reat inno$ationsN a .e8 0ommo&it4 in our senseNo the secon& Pon&ratie , an& all the eatures o an inno$ation o this t4pe stan& out $er4 8ell. -t ha& 6een use& occasionall4 6e ore, 6ut 8ells 8ere irst &rille& in 1859 *&rillin7 an& pipe lines 8ere the t8o 7reat inno$ations o the perio&+. -n the $er4 limite& iel& it entere&, it irst compete& out Eerosene *ma&e rom shale an& coal+ as 8ell as other illuminants * or e(ample, 8hale oil+. 2ater it ha& to meet 7as an& electricit4, 8hich e$entuall4
JJ
K. S. 0larE, 'istor4 o Banu actures in the #nite& States, $ol. --, 5- 51J.
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compete& it out in turn. Duantities, prices, pro its 6eha$e& in the process as 8e shoul& e(pect. 3he irst 8a$e o this inno$ation starts in Nan& helpe& startin7, o courseNthe prosperit4 o the thir& Ju7lar. As a result, there 8ere 19F re ineries 64 18G5, mostl4 in Lhio *the 6i77est enterprise 6ein7 that o 9ocEe eller, An&re8s, an& :la7ler+, 5enns4l$ania an& .e8 1orE. 3he e(pansion thus in&uce& 8ent on in the Ju7lar &o8n7ra&e an& re$i$al, po8er ull4 propelle& 64 the &isco$eries in 0ali ornia, the price o re ine& an& still more o cru&e petroleum allin7 accor&in7l4. 5ipe lines an& tanE cars also emer7e& at that time an& consumers" resistance 8as spee&il4 o$ercome. 3he re7ular situation o the Ju7lar &o8n7ra&e le& to the or7aniOation o the 0ontinental -mpro$ement 0ompan4 *18G8+, 8hich &e$elope& into the South -mpro$ement 0ompan4 *18J)+. 3he i th Ju7lar then 6rou7ht the completion o the or7aniOational inno$ation that 8as to set the outstan&in7 e(ample or other in&ustries J8, the Stan&ar& Lil. -t remaine& a @trust@ or a &eca&e onl4, an& in&epen&ent re ineries continue& to e(ist. ,ut the i&eas o the centraliOe& mana7ement o an in&ustr4, o runnin7 it as a unit accor&in7 to a plan, an& o acquirin7 control o some o its con&itionin7 actorsNrailroa&s, in particularN persiste&. <as 8as also a ma=or element in the entrepreneurial acti$it4 that carrie& the secon& Pon&ratie Nthou7h it ha& a much more important pre$ious histor4 than ha& petroleumNan& similarl4 complete& its career su6stantiall4 8ithin the perio&. -n /n7lan& 7as is reporte& to ha$e 6een irst use& or li7htin7 a house as earl4 as 1J9). ,oulton an& Hatts" installation at Soho *180F+ ma&e it 8i&el4 Eno8n. 2on&on 6e7an usin7 it in 180J, an& most o the lar7er cities ollo8e& suit in
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-n 188F it 8as ollo8e&, thou7h on a much lo8er le$el o e icienc4, in the cottonsee& oil in&ustr4 *American 0otton Lil 3rust+, 8hich ne$er reall4 conquere&. -n 188J the Southern 0otton Lil 0ompan4 8as oun&e&, a man4-plant concern 8hich 8as to pla4 a 7reat role in the in&ustr4. 3he cotton-oil case is particularl4 interestin7 6ecause o the complications an& chan7es in the competiti$e position o the pro&uct. 04clicall4, it 8as important throu7hout the last three Ju7ulars. -ts inno$atin7 sta7e 8as in the late si(ties an& earl4 se$enties.
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181G-1819. -n this countr4 ,altimore a&opte& it irst, in 181G, .e8 1orE in 18)3, ,oston in 18)8 M an& there 8ere man4 other installations pre$ious to the crisis o 183J. ,ut it 8as in the orties that the irst 7reat 8a$e set in. 3he process laste& into the se$entiesN the 8est8ar& e(pansion o the countr4 continuin7 to suppl4 ne8 o6=ects, thou7h in the /ast it 8as su6stantiall4 complete& 64 the en& o the irst Ju7lar, 8hen coal 7as also 6e7an to supplant 7as rom rosin an& 8hale oil. Bunicipal initiati$e an& re7ulation, naturall4 much concerne& 8ith this commo&it4, accounts or the &e$iations o in$estment rom the c4clical schema. 5rices 8ere still hi7h or the pri$ate househol&, partl4 6ecause o the &iscrimination in a$or o the pu6lic consumer *the cit4 rate in ,altimore 8as, or instance in 18F8 ^1 per 1,000 cu6ic eet, as compare& 8ith ^F or pri$ate consumers+. 3he 7reat &i icult4 8hich hampere& enterprise at the 6e7innin7, the lacE o an a&equate meter, 8as &e initel4 o$ercome in 18F3. #ntil 18J), 7as 8as &istille& rom coalNa process that 8as to re7ain importance 8hen marEets ha& 6een oun& or the 64-pro&uctsN6ut in that 4ear 8ater 7as 8as patente&. 3his inno$ation, althou7h intro&uce& in 5hila&elphia the 4ear a ter, entere& upon its career in the ei7hties. 0ar6urette& 8ater 7as 8as success ul in 8ar&in7 o the attacE threatenin7 rom Eerosene, an& the Hels6ach mantle *prece&e& 64 the ,un-sen 6urner, 1855, an& the 2un7ren mantle, 1881+, in &e errin7 &e eat 64 electricit4 or a6out a &eca&e. -n the i th Ju7lar, also, 7as 6e7an to in$a&e other uses 6esi&es li7htin7. 3here 8as a consi&era6le &e$elopment o 7as motors, 7as sto$es appeare& in 18J9, circulatin7tanE 8ater heaters in 1883 *the impro$e& 9uu& heater came in 189J+. Another competitor arose, ho8e$erNnatural 7as, 8hich ha& 6een use& or li7htin7 6e ore our perio& *:re&onia, .e8 1orE, 18)1+ an& ha& conquere& consi&era6le 7roun& in this capacit4. -t ha& sometimes a price a&$anta7e o$er manu acture& 7as an& al8a4s other a&$anta7es 8hich ma&e it pre era6le or in&ustrial use. 3his 6e7an in the 6oilin7 o salt 6rine in Hest Kir7inia *18F1+, 6ut the irst important case 8as its use in 5enns4l$ania iron 8orEs in 18J3. 3he irst pipe line o an4 len7th 8as opene& in 18J5. 3he 6i7 8a$e o this inno$ation 8as an
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important element o the penultimate Ju7lar an& culminate& in a 6oom in 188G. -ts importance rom our stan&point consists in the act that it shi te& in&ustrial location, ne8l4 creatin7 se$eral centers, an& po8er ull4 a ecte& the coal situation in 5enns4l$ania, Lhio, -n&iana, an& Pansas. ,ut pro&uction o the 8ells o that &istrict then rapi&l4 &ecline&. He 8ill a&& here that the 7reat increase in the use o natural 7as a6out 1908 accounts or the 6reaE in the cur$e o sales o manu acture& 7as that occurre& at that time. 3echnolo7icall4, iron-ore minin7 8as a simple a air. -t 8as the o6=ect o entrepreneurial acti$it4 in t8o 8a4s. :irst, there 8as the tasE o e(plorin7 an& &e$elopin7 a &istrict 6e ore minin7 operations coul& 6e starte&. .orthern Binnesota *188F+ ma4 ser$e as an e(ample. 3ransport questions an& ne8 commercial com6inations atten&e& the &e$elopment o the 2aEe Superior &istricts > the Barquette ran7e in the secon& Ju7lar, the Benominee mines in the ourth, the <o7e6ic mines in the i th *1885+ Nthe Besa6i mines 6elon7 to the ne(t perio&. Secon&, there 8ere or7aniOational inno$ations in the ei7hties an& earl4 nineties, some horiOontal com6inations, 8hich or the 7reater part aile&Nthe 2aEe Superior 0onsoli&ate& iron mines, 1893, ho8e$er, 8as also a horiOontal com6ination, althou7h it o8ne& its ships an& linEe& up 8ith the railroa& interests o its sharehol&ersNan& the $ertical ones 8hich arose rom the intrusion o the steel concerns. 3he competin7-&o8n process 8as, to a 7reat e(tent, 7eo7raphical. He ha$e seen that this 8as so in man4 other cases an& that it e(plains certain eatures o American c4cles an& certain local result tren&s > it is essential to notice that this rise an& &ecline o in&ustrial centers is part o our c4clical mechanism. 3he case in han& presents one o the most amiliar instances. Bi7ration o the iron in&ustr4 rom .e8 /n7lan&, .e8 1orE, .e8 Jerse4, an& 5enns4l$ania *8hich as late as 1880 pro&uce& nearl4 hal o the F million tons o iron then put out+ to the 0entral Hestern states an& to the South 8as in part con&itione& 64 ore an& coal &e$elopments. Lutput o the 2aEe Superior &istrict increase& rou7hl4 rom 1 to 9 million tons 6et8een 18J0 an& 1890. 3o7ether 8ith the ores o Ala6ama an& 3ennessee, the 0hamplain
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ores an& imports, it 6rou7ht price &o8n to rou7hl4 one-thir& &urin7 that time. 3his rapi& shi t o the centers o iron pro&uction 8as one o the reasons 8h4 rom the time o the 0i$il Har there 8as, e$en in prosperit4, so lar7e a percenta7e o i&le urnaces, 8hich is thus seen to ha$e nothin7 to &o 8ith an4 inherent ten&enc4 to o$erpro&uction or o$ercapacit4. 3he urnaces in the &istricts that 8ere 6ein7 compete& &o8n simpl4 &i& not &isappear at once. ,ut there 8as also rapi& technolo7ical o6solescence &urin7 the last three Ju7ulars > up to 1850, 8hen the &rop 6ottom came in to acilitate the han&lin7 o the cupola urnace, there ha& 6een har&l4 an4 chan7e since colonal times. 0harcoal urnaces ha& to 7o, thou7h the4 &i& so slo8l4. 0oEe an& 6ituminous coal urnaces a&opte& the same impro$ements that 8ere 6ein7 intro&uce& in /uropeNthe intro&uction o the uel-sa$in7 re7enerati$e sto$e 8as one o the most important o themNan& 7re8 in siOe an& e icienc4. 3his is the reason or the ailure o attempts ma&e a ter 18J3 to limit output 64 a7reement > the up-to-&ate irms 8ere per ectl4 a6le to pro&uce at a price 8hich ell, 8ith luctuations, rom 18J) to 189J. 3he 7reat stri&e in a6solute quantities 8as a eature o the penultimate Ju7lar. -t 6ecomes still more impressi$e i 8e consi&er that 64 then the iron-sa$in7 e ect o the use o steel ha& alrea&4 asserte& itsel . -n spite o the act that the un&amental principle o the ,essemer process 8as in&epen&entl4 &isco$ere& in this countr4 *H. Pell4, 1851+, intro&uction o this process 8as one o the achie$ements o the prosperit4 8hich prece&e& 18J3. Lnl4 ei7ht irms ha& a&opte& it 64 18J5, thou7h a e8 other ,essemer plantsN runnin7 into the &epression 8ith their perio& o 7estationN8ere then 6ein7 6uilt. Lther no$elties came at the same time, 6ut the open-hearth process 8as not amon7 them. -t 8as still an inno$ation in the last Ju7lar, 8hen the 'omestea& 8orEs tooE it up *1888+. 3he same applies to the 3homas<ilchrist process, althou7h the license or America ha& 6een 6ou7ht in
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1881 64 the ,essemer Steel 0ompan4 J9, Allo4s *chrome an& nicEel steel+ put in an appearance in the se$enties an& ei7hties, 6ut more e ecti$el4 in the last Ju7lar, in 8hich also the 'ar$e4 armor-plate process 8as &e$elope& in 8orEs 6uilt or the purpose. Steel castin7 8as then 7reatl4 impro$e&. Scrap 8as comin7 8i&el4 into use as a ra8 material o the steel in&ustr4. Lr7aniOational inno$ation ma4 6e instance& 64 the t8o outstan&in7 cases. 3he irst ,essemer plant in 5itts6ur7h 8as the /&7ar 3homson Steel 0ompan4, in the oun&ation o 8hich the ironmanu acturin7 irm o 0arne7ie ,rothers tooE a lea&in7 interest. 3his 8as the irst o a series o conquests *'omestea&, #nion Bills, ;uquesne+ 8hich in 1891 culminate& in the oun&ation o 0arne7ie Steel. An equall4 comprehensi$e structure o the $ertical-com6ination t4pe ha& 64 then 6een erecte& in the -llinois Steel *1889 or 1891, since it 7re8 to ull siOe in the later 4ear+. 3he 0olora&o :uel an& Steel &ates rom the same epoch. 0onsumption o iron an& steel reache& a c4clical ma(imum in 1890. 3hen a &ecline set in 8hich e$entuall4 issue& into the crisis o 1893, in 8hich 3) ailures occurre& to the en& o June, amon7 them the ailures o concerns so consi&era6le as the 5hila&elphia an& 9ea&in7 0oal an& -ron an& the 5enns4l$ania Steel. -n itsel , this &oes not sho8 more a6out the nature o that crisis than &o the railroa& ailures M 6ut taEen to7ether 8ith 8hat has 6een sai& 6e ore, it seems to =usti 4 the &ia7nosis that that crisis 8as the @a6normal liqui&ation@ o positions 8hich ha& 6ecome ina&apta6le in the course o an e$olution that primaril4 centere& in iron an& steel.
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3he picture o the c4clical rh4thm o inno$ation coul&, o course, 6e much impro$e& i space allo8e& 7oin7 a&equatel4 into the histor4 o iron an& steel pro&uction. :or instance, pu&&lin7 8as, till the en& o the se$enties, competin7 8ith the ,essemer process. ;urin7 the ourth Ju7lar, its position 8as stren7thene& 64 t8o in$entions 8hich &eser$e notice. 3he /llershausen process an& ;anE"s pu&&lin7 mill *John :itO, 185J+ sprea& &urin7 the si(ties, its superiorit4 o$er the /n7lish t8o-hi7h mill mainl4 restin7 on American la6or con&itions. - here 8ere hal a &oOen other impro$ements in rollin7 a6out the same time.
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3ools, mechanical o6=ects o use, an& machiner4 are amon7 the thin7s 8hich it is $er4 &i icult to quanti 4 an& the importance o 8hich 8oul& not 6e a&equatel4 ren&ere& 64 quantit4 e$en i 8e coul& quanti 4 them. 3he importance or the c4clical process an& or the resultin7 tren&s o that 6ol& ori7inalit4 8hich characteriOes American achie$ement in this iel& an& to 8hich /uropean in&ustr4 o8es so much, is o6$ious 6ut har& to ollo8 up in &etail, 6ecause it co$ers a 8i&e sur ace an& 6ecause it consiste& much more in &e$ices to maEe thin7s 8orE economicall4 an& e icientl4, than in spectacular @in$ention.@ /(port statistics re$eal, 64 the si(ties, ho8 $er4 8i&e that sur ace 8as an& ho8 ar it e(ten&e& 6e4on& 8hat ha& 6ecome American specialties, such as se8in7 machines an& a7ricultural implements. 2ocomoti$es an& @unspeci ie& machines an& other iron an& steel pro&ucts,@ taEen to7ether, 8ere more important than either. A e8 instances must su ice. 3hou7h @quantit4@ came in the &o8n7ra&e, oun&ations 8ere lai& an& lea&in7 inno$ations intro&uce& in the up7ra&e o that Pon&ratie . 04rus Bc0ormicE"s in$ention is usuall4 &ate& 183F, 6ut he himsel tells us that his reaper 7ot into reall4 8orEa6le shape 64 18F5. -nno$ationNthe @carr4in7 into e ect@N8as an element o the secon& Ju7lar. -n&uce& impro$ement an& &i usion contri6ute& to all the other Ju7ulars up to the or7aniOational inno$ation 8hich occurre& in the last * oun&ation o the American 'ar$ester, 1890+. Lther steps in the mechaniOation o a7riculture coul& rea&il4 6e inserte&. Still more than in other cases, the act o Nan& the reason orNpro7ress 7oin7 on in c4clical =erEs is e$i&ent. 3he se8in7 machine *in$ention 64 /. 'o8e in 18FG+, pro&uce& in its practical orm 64 the Sin7er concern in 1850, also 8as one o the inno$ations o the secon& Ju7lar, an& ha& alrea&4 6ecome an international success in the thir&. /(cept or its application to 6ootmaEin7, its e ects on the s4stem 8ere &i erent rom those o the ma=orit4, an& similar to those o a minorit4, o inno$ations. Since it can 6e use& 64 the in&i$i&ual 8orEer, it &i& not in itsel in&uce the
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re7ular competin7-&o8n process, thou7h it 8rou7ht a re$olution in e icienc4. SpecialiOe& orms o it, acilitatin7 increase& &i$ision o la6or, &i&, ho8e$er. He ma4 procee& to notice some o the in&ustries o metal consumers" 7oo&s in 8hich inno$ation consiste& in success ul stan&ar&iOation, specialiOation, an& mass pro&uctionNlocEs *.e8 'a$en+, clocEs an& 8atches *also 0onnecticut, an& Haltham, the &ollar 8atch competin7 success ull4 all o$er the 8orl&+, an& small arms * or e(ample, 0olt+ 8ere all in their inno$atin7 sta7es either in the irst or in the secon& Ju7lar an& 6ecame esta6lishe& in the ne(t one. 3he pioneer concern in the iel& o 8atches, the American Hatch 0ompan4, stru77le& 8ith the pro6lems o mechanical 8atchmaEin7 in the i tiesN185J oun& it insol$entN6ut 8as hi7hl4 success ul in the si(ties, 8hen the host 6e7an to ollo8 *.e8 1orE Hatch, .ational Hatch, in the ne(t Ju7lar > -llinois Hatch, 9ocE or& Hatch, to mention a e8+. 34pe8riters reache& the manu acturin7 sta7e a6out 18J3. .o notice 8as taEen o them in the census o 1880, 6ut there 8ere thirt4 actories in 1890. Hoo&8orEin7 an& metal8orEin7 machiner4 *circular sa8, re$ol$in7-&isE cuttin7 machine+, ,lanshar&"s cop4in7 lathe, Sellers" planin7 an& 6lot-scre8in7 machines, the millin7 machine an& the turnin7 tool, 8oo& scre8s, precision 7au7es, nuts an& 6olts, the &r4cla4 6ricEmaEin7 machine, ,laEe"s machine or stone 6reaEin7, the continuous- ee&in7 printin7 press, the t4pesettin7 machine *8orEin7 in&i erentl4 in the si(ties+, 7reat impro$ement in 6oiler maEin7, the 0orliss en7ine, later the 5orter-Allen en7ine or electric &4namosNall that this me&le4 stan&s or ha&, 8ith e8 e(ceptions, its initial stru77les an& successes in the Ju7ulars o the Pon&ratie ups8in7 an& its &i usion in the Pon&ratie &o8ns8in7 an& re$i$al, as 8e shoul& e(pect. Duantitati$e importance in the c4clical mechanism is certain, an& in the cases, requent in .e8 /n7lan&, in 8hich this t4pe o in&ustr4 orme& the core o in&ustrial a77lomerations, e$en o6$ious. 2ar7e concerns emer7e& *A(e an& /&7e 3ool, 1889 M .ational Sa8, 1893+. 3he principle 8as the same in all cases. -t consiste&, e$en, in appl4in7 la6or- an& po8er-sa$in7 &e$ices to the pro&uction o la6or- an&
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po8er-sa$in7 &e$ices themsel$es. /$er4thin7 8as su6or&inate& to cheapness. Hhere 8oo& 8as cheaper, it 8as use&. 5aintin7 8as pre erre& to polishin7. /n7lishmen calle& these machines lims4. ,ut stan&ar&iOe& mass pro&uction 8as the result. Ker4 e8 6ranches remaine& una ecte&. He 8ill choose the 6oot an& shoe in&ustr4 as an e(ample or the re$olutions 8hich machiner4 8rou7ht in consumers" 7oo&s in&ustries &urin7 the secon& Pon&ratie . .o machines 8ere use& in the American shoe in&ustr4 6e ore our perio&, thou7h in some to8ns a airl4 a&$ance& &i$ision o la6or ha& turne& to 7oo& account the ample sources o the ra8 material an& the &e$elope& practice o tannin7. Hoo&en pe7s or astenin7 soles 8ere use&, ho8e$er, rom 1880, an& in 18)0, a pe7-cuttin7 machine 8as intro&uce&. 3he rollin7 machine or har&enin7 sole leather, 90 times as ast as hammerin7 64 han&, came in 18F5, an& the 'o8e se8in7 machine as such meant a step in the mechaniOation o the in&ustr4, since cloth uppers 8ere much use& or 8omen"s shoes as late as the ei7hties. -ts a&aptation to upper leather se8in7 *1851+ is sai& to ha$e qua&ruple& the output per man. 3he same 4ear 6rou7ht the machine that pe77e& aroun& a sole in one minute. A num6er o other inno$ations 8ere intro&uce& in the course o su6sequent Ju7ulars, in act a6out F,000 patents 8ere taEen out 6et8een 1850 an& the en& o our perio&. 3he most important 8as the BcPa4 se8in7 machine *1858 M practical success in 18G0+, 8hich is still use& on t8o-thir&s o the total output o shoes, an& on nearl4 all 8omen"s shoes. 3his inno$ation then in&uce& the @a$alanche@ in the Pon&ratie &o8n7ra&eNa trul4 t4pical case in this as in another respect, or the nature o entrepreneur"s pro its is 8ell 6rou7ht out 64 the practice, then esta6lishe&, not to sell shoe machiner4 6ut to lease it. ,4 1895 there 8ere F,000 BcPa4 machines in use, turnin7 out a6out 1)0 millions o pairs. 3he4 ha& 6een impro$e& in 18GJ an& are sai& to ha$e re&uce& costs o se8in7 on soles rom J5 to 3 cents a pair. 3he <oo&4ear 8elt-se8in7 machine *in$ente& in 18G)+, 8hich
)88
6ecame practical in 18JJ, 8as 5F times as ast as 8elt se8in7 64 a8l an& nee&le. ,ut its success 8as a matter o the last Ju7lar, an& 8ithin our perio& it &i& not 7et 6e4on& )5 millions o pairs *1895+. 3he 0a6le scre8 6ottomin7 machine or hea$4 shoes *18G9+, the heel6uil&in7 machine *18J0 M 64 1889 there 8ere )00 esta6lishments in this countr4 pro&ucin7 heels onl4+, the stan&ar& scre8 6ottomin7 machine *18J5+, 8hich is still use&, su6stantiall4 complete the stor4 or our perio&. He 8ill, ho8e$er, a&& that the success o the lastin7 machine, the eature in shoemaEin7 o the irst Ju7lar o the thir& Pon&ratie *in 7eneral use 64 1900, thou7h patente& in 188)+ increase& output per 8orEman t8el$e times at least. 3he net all in monetar4 la6or cost 8hich that list o inno$ations 6rou7ht a6out rom 1850 to 1900, 8as rom ^F08 per hun&re& pairs to ^35. 3here 8as no urther re&uction a ter 1900. 'orsepo8er installe& increase& rom a6out 3,000 in 18G9 to a6out 50,000 in 1899. ,ut the num6er o 8a7e earners emplo4e& increase& stea&il4 until 19)3. 3he c4clical 6eha$ior an& the resultin7 tren&s in the ma=or te(tile in&ustries is not, as in /n7lan&, completel4 &escri6e& 64 the schema o an esta6lishe& in&ustr4 that e(pan&s 8ith the en$ironment, inno$atin7 mo&eratel4 in the process. ,ut some o its traits are present 80 in the cases o cotton an& 8ool, the ormer o 8hich 8as, o course, also propelle& 64 the &e$elopment in the pro&uction o its ra8 material. Horste&, thou7h e(perimente& 8ith in the thirties 64 the 2o8ell 0ompan4, 8as practicall4 a ne8 in&ustr4. .ot much success atten&e& its 6e7innin7 in the irst Ju7lar, 6ut it 7ot into its stri&e as one
80
3he rea&er 8ill, it is hope&, e(cuse the pe&antr4 an& o6ser$e a7ain > -t is al8a4s possi6le an& per ectl4 soun& anal4sis to e(plain the e(pansion o an in&ustr4 64 an appeal to <ro8th in our sense, in this case also to such e(ternal actors as immi7ration o men an& capital. -t is also permissi6le, in &ealin7 8ith an4 sin7le in&ustr4, to inclu&e 8ithin the phrase, e(pansion o en$ironment, inno$ation outsi&e o that in&ustr4, althou7h this phrase then &oes not an4 lon7er connote a sin7le &istinct process. ,ut it is not permissi6le to taEe e(pansion o en$ironment in the latter sense as a ull e(planation o the &e$elopment o an4 in&i$i&ual in&ustr4 as ar as this &e$elopment implies chan7es in pro&uction unctions else8here.
)89
o the ma=or inno$ations o the secon&. 0om6in7 8as then &one 64 han&. 3he com6in7 machine, althou7h in$ente&, 8as not 4et a success. A ter the 0i$il Har the 2ister com6 came in, an& e$en in the ei7hties this machine 8as lar7el4 importe&. /(pansion o the 8orste& in&ustr4 8as a eature o the last three Ju7ulars o that Pon&ratie . As re7ar&s cotton, the impulse o inno$ation cameNapart rom mi7ration to the South, 8hich irst 6ecame important in the ei7htiesN rom machiner4. -n this respect the case 8oul& 6e analo7ous to that o the shoe in&ustr4, 8ere it not or the act that te(tile men ha& a much lar7er share in the e$olution o their machiner4 than ha& the shoe manu acturers. 3he4 &ispla4e& much more initiati$e in or&erin7 it an& the4 tooE a han& in pro&ucin7 it, althou7h the pro&uction o te(tilemill machiner4 as a &istinct in&ustr4 &ates rom the 6e7innin7 o the centur4. -n Horcester, 5aterson, 2a8rence, :all 9i$er, an& 5hila&elphia this specialt4, an& all the specialties 8ithin this specialt4, ha& risen to consi&era6le importance in the &o8n7ra&e an& re$i$al o the prece&in7 Pon&ratie . 3his simpl4 continue& on an increasin7 scale in the orties an& a ter8ar&. 3echnolo7ical &e$elopment in the cotton in&ustr4 itsel lies 6et8een the t8o 7reat speci icall4 American inno$ations, the intro&uction o rin7 spinnin7 *in$ente& in 18)8 or 1831+, 8hich sprea& in the perio&, an& the .orthrop 6atter4 loom *success ul in 189F+ 8hich properl4 6elon7s to the thir& Pon&ratie . 3he ei7hties 8ere the time 8hen :all 9i$er lourishe&, althou7h it lost its iron in&ustr4. Ban4 interestin7 inci&ents, or e(ample stru77les 6et8een &i erent metho&s o pro&uction, shoul&, i space permitte&, 6e notice& in that process o e(pansion. ,ut it 8ent on almost uninterrupte&l4 an& there 8as no $ision a6out it o possi6ilities &i erin7 in Ein& rom 8hat, at e$er4 step, actuall4 8as. -n this sense the 7reat thin7s ha& 64 then 6een &one. 3here is, hence, much less reason or us to sta4 8ith the case than there 8oul& 6e or the purpose o 7eneral economic histor4. -n$estment &oes, as a matter o act, cluster in prosperities an& contri6utes to them, 6ut the4 are in this perio&, rom the stan&point o this in&ustr4, in&epen&entl4 7i$en
)90
@con=unctures@ 8ith 8hich it s8ims 6ut 8hich it &oes not initiate 64 its o8n operations. -n the &o8ns8in7 an& re$i$al o the Pon&ratie came the 7reat e(pansion o output, an& in the &epressions, particularl4 those o the mi&&le se$enties an& the mi&&le ei7hties, there 8ere losses, ailures, shut&o8ns, complaints a6out o$erpro&uction. 3hese spells o 6a& 6usiness 8ith $er4 &i erent se$erit4, not onl4 on &i erent &istrictsN the astonishin7l4 7reat &i erence in 8a7es, ta(es, costs o po8er an& ra8 materials mi7ht account or thatN 6ut also on &i erent irms. -n 1883 or instance, 8hen @o$erpro&uction@ 6e7an to sho8 itsel , some irms 8ere losin7 an& restrictin7, others pa4in7 hi7h &i$i&en&s an& 8orEin7 o$ertime *the 4oun7 8orste& in&ustr4 8as 6oomin7+. :rom this 8e ma4 in er that in spite o the stan&ar&iOation o millsN8hich also 8as one o the ma=or no$elties o the perio&Nthere 8as a 7oo& &eal o &i erence in the pro&uction unctions *inclu&in7 commercial com6inations+ o in&i$i&ual irms, 8hich 8as &ue to inconspicuous inno$ations o the t4pe that a Pon&ratie &o8n7ra&e is apt to in&uce. -n consequence, costs pro6a6l4 &i ere& 8i&el4 an& a competin7&o8n process 8as runnin7 stron7l4. - this 6e true, it 8oul& ollo8 that there 8as nothin7 in the 7eneral outcr4 a6out o$erpro&uctionN those cr4in7 out, simpl4, 8ho 8ere not a6le to Eeep the pace an& 8hose concerns 8ere 6ein7 ma&e o6soleteNalthou7h the sur ace presente& a picture almost i&eall4 con ormin7 to the conceptions o the theor4 o o$erpro&uction. 3he 8oolen in&ustr4 su ere& rom the price o its ra8 material, an& althou7h consumption o 8ool nearl4 &ou6le& rom 18J0 to 1890, there 8ere e8 ma=or ne8 &e$elopments. 3he <oul&in7 con&enser *18)G+ ha& come 6e ore M the 0rompton mule 8as applie& to the pro&uction o cashmeres an& 8oolens rom the 6e7innin7 o our perio& M in 18F1 a ne8 loom or carpet 8ea$in7 8as in$ente& */. ,i7elo8+, 8hich, impro$e& an& &e$elope& in $arious &irections, practicall4 starte& an important carpet in&ustr4 that, a ter its inno$atin7 sta7es in the i ties, e(pan&e& throu7hout the perio& M an
)91
in$ention or car& cleanin7 8as ma&e in 1853 M the se$enties sa8 the transition rom the spinnin7 =acE to the mule. Sho&&4, cotton mi(tures, pro7ress in &4ein7, an&, o course, the 7reat inno$ation o rea&4-ma&e clothin7 *$ictorious in the ourth Ju7lar+Nall lent their help. 3he in&ustr4 elt crises, particularl4 some o them, such as the one o 185J, $er4 acutel4Nmore acutel4 than the 8riter is a6le to e(plain. ,eha$ior in the Pon&ratie &o8n7ra&e an& re$i$al as compare& 8ith the 6eha$ior in the Pon&ratie prosperit4 is accor&in7 to e(pectation. -n the last three Ju7ulars, 6ut particularl4 in the last one, pro&uction o ertiliOers *phosphates+ ma&e consi&era6le stri&es. 3he &o77e& sur$i$al o the use o charcoal in the pro&uction o iron le& to the &istillin7 o the tim6er an& to the pro&uction o acetates as a 64pro&uctNan inno$ation o the penultimate Ju7lar, as 8as the pro&uction o so&a 64 the Sol$a4 process. Banu acture o sulphuric aci& on a lar7e scale 6e7ins 8ith the thir&. 3he stories o the American su7ar re inin7 in&ustr4, 8hich, or the time 6ein7, culminate& *188J+ in a com6ination that controlle& 90 per cent o the pro&uction, an& o the American 3o6acco 0ompan4 *1890+, hi7hl4 interestin7 thou7h the4 are cannot 6e &ealt 8ith here. .or can &e$elopments in the in&ustries o 7lass *tanE urnaces 8ere an inno$ation o the last Ju7lar+, cement *5ortlan& cementNinno$atin7 sta7e in the i th an& si(th Ju7lar+, paper *ne8 uses > paper collars, paper car8heels M ne8 processes > mechanical an& sulphite pulp, success ul in the ei7hties+, an& ru66er *ru66er 6oots, ru66er reclaimin7 M su6stantial consoli&ation in #.S. 9u66er 0ompan4 an& Bechanical 9u66er 0ompan4, 6oth 189)+. ,ut 8e cannot pass o$er the 6e7innin7s o the electrical in&ustr4. ,oth names an& in$estments are too 6i7 or that. Since, ho8e$er, the ormer are so amiliar, 8e can con ine oursel$es to noticin7, in passin7, the t4pe o entrepreneur to 8hich the4 6elon7 an& o 8hich the4 are amon7 the 6est instances. Since the irst Borse patent 8as taEen out in 18F0 an& tele7raph #nes e(ten&e& as ar as 5itts6ur7h in 18FJ, the commercial histor4 o electricit4 actuall4 &ates rom the
)9)
6e7innin7 o that Pon&ratie . 3elephones 6e7an their career in 18JJ, 8hen A. <. ,ell loate& a compan4 or the e(ploitation o his patent, a&optin7 the polic4, similar to that o the BcPa4 shoe machiner4 concern, o leasin7 the instruments. 5ercenta7e increase o telephones connecte& 8as $er4 rapi& in the prosperit4 o the penultimate Ju7lar, then slacEene& in 1895. -n 189J o$er 500,000 8ere installe& *as compare& 8ith )0,)00,000 in 1930+. An electrical equipment in&ustr4 Nmotors, electric 8irin7, an& so on M not e(clusi$el4 tele7raph an& telephone appliancesNpro&uce& $alues o ).J millions in 18J9 an& 9).F in 1899 *not inclu&in7 machiner4 an& supplies ma&e in esta6lishments 6elon7in7 to other in&ustries+. -n the latter 4ear, Eilo8att-hours pro&uce& 8ere a little o$er 3 6illions M in 19G0, 9G 6illions. /lectric current or li7ht an& po8er &ates reall4 rom 189), 8hen /&ison"s h4&roelectric station in Appleton, His., his thermoelectric station in .e8 1orE, an& the one in 0hica7o 8ent into operation. ,4 then, the /&ison /lectric 2i7ht 0ompan4 *18J8+ an& the American /lectrical 0ompan4 *later, the 3homson-'ouston 0ompan4 M /. 3homson in 188G patente& electric 8el&in7+ 8ere alrea&4 in e(istence M an& electric li7ht, accor&in7 to the principle o 0. S. ,rush, ha& 6een installe& in a e8 cotton mills an& in San :rancisco. 3he arc lamp an& /&ison"s incan&escent lamp then compete& 8ith each other. -n 188G H. Stanle4 constructe& the irst station usin7 alternatin7 current. 5ro6lems o transmission 8ere 6ein7 sol$e&. -n manu acture, electric po8er 8as comin7 into use, especiall4 in cotton mills, rom 188). 3his esta6lishe& all the un&aments o the technique, 6ore &o8n resistance, an& prepare& the 7reat &e$elopment that 8as to ollo8 an& to turn re$i$al into a Pon&ratie prosperit4. ,ut quantitati$el4 it &i& not si7ni 4. Lnl4 traction &i&. A ter a num6er o more or less e(perimental $entures, an electric tram ser$ice 8as installe& at 9ichmon& in 188J M then this inno$ation sprea&
)93
rapi&l4. -n Bassachusetts, or instance, 1,F00 miles o o$erhea& trolle4 street rail8a4s 8ere constructe& rom 1890 to 189J.81 .ot onl4 the technolo7ical 6ut also the inancial an& or7aniOational 6ases 8ere lai& &urin7 the last t8o Ju7ulars. 3he /&ison /lectric 2i7ht an& the /&ison <eneral /lectric *1889+ 8ere success ul an& ha& a num6er o su6si&iaries, some o them a6roa&. 3hen there 8ere the Hestin7house an& the 3homson-'ouston concerns. Hhen the latter coalesce& 8ith the /&ison <eneral /lectrical *<eneral /lectric, 189), capital 50 million &ollars+, 8hich 64 that time, at Schenecta&4 an& else8here, emplo4e& o$er G,000 han&s, a concern emer7e& that controlle& practicall4 all the more important patents, supplie& 1,)JJ stations an& F35 traction companies operatin7 nearl4 5,000 milesNin itsel a po8er ul en7ine o economic re$olution. Since 8e sEetche& the course o the Ju7ulars 8hen &escri6in7 railroa& &e$elopments, an& since 8e ha$e so rame& the a6o$e comments on American in&ustrial histor4 as to maEe it eas4 or the rea&er to insert inno$ations in their proper places, 8e nee& not no8 a&& a &etaile& sur$e4 6ut onl4 a 6al& calen&ar. Hith the quali ication mentione&, 8e taEe 18F3 as the irst 4ear o the irst Ju7lar, its prosperit4 lastin7 until the mi&&le o 18F5, its recession until the en& o 18FJ, its &epression co$erin7 18F8, an& its re$i$al, 18F9, 1850, an& 1851. 3he prosperit4 an& recession phases o the secon& *185) to 18G0+ ran rom the 6e7innin7 o 185) to the mi&&le o 185G *irre7ularities maEin7 it &i icult to &istin7uish 6et8een them+ M &epression laste& to the en& o 1858 M an& 1859 an& 18G0 maEe up the reco$er4 phase. 3he rise o the thir& Ju7lar is 6lurre& 64, an& uncertain 6ecause o , political e$ents, an& so is its course. He simpl4
81
3rams in 7eneral 8ere su6stantiall4 an achie$ement o the secon& Pon&ratie Nthe 6us 8as one o the &o8n7ra&e o the irst Pon-&ratie . -n 5hila&elphia, or instance, the ol&est companies recei$e& their charters in 185J an& there 8as an out6urst o promotions a ter 1858. horses an& mules 8ere use& until 1885, then the un&er7roun& ca6le. :rom 1893 on, trams 8ere electri ie&. -n inancin7, hol&in7 companies 6e7an to pla4 a role &urin7 the ourth Ju7lar.
)9F
count it rom 18G1 to 18G9, on the stren7th o the aspects o the perio& 18GJ to 18G9, 8hich seems to con orm to our i&ea o a re$i$al as mo&i ie& 64 those e(ternal actors. 3he prosperit4 phase o the ourth Ju7lar *18J0 to the mi&&le o 18J9+ co$ers 18J0, 18J1, an& the irst hal o 18J) M the recession phase, the secon& hal o 18J) an& 18J3 M the ne(t three 4ears orm the &epression M an& 18JJ, 18J8, an& the irst hal o 18J9, the reco$er4 phase, the 6e7innin7 o 8hich 8as still un&er the clou&s o the prece&in7 storm. 3he i th Ju7lar co$ers the perio& rom the mi&&le o 18J9 to the en& o 1888. -t prosperit4 laste& to the mi&&le o 1881 M recession, rom the mi&&le o 1881 to the en& o 1883 M &epression co$ere& 188F an& the 7reater part o 1885 an& 8as ollo8e& 64 more than three 4ears o reco$er4. 3he si(th Ju7lar *1889 to 189J+ illustrates our proposition a6out the irre7ularit4 o panics or crises. 3he course o thin7s in the last quarter o 1890 an& the irst hal o 1891 interrupte& an& &istorte& 8hat, ne$ertheless, 8e consi&er as the prosperit4 phase o that Ju7lar. 3he rest o 1891, 189), an& the irst hal o 1893 maEe up the recession M the secon& hal o 1893, 189F, an& the irst hal o 1895, &epression. 9e$i$al then set inN an& s4mptoms sha&e& o , 64 the en& o 189J, into a ne8 prosperit4N 6ut 189G interrupte& its course, thou7h in a 8a4 8hich can 6e satis actoril4 accounte& or.
3a6le o 0ontents
E. The Fi! t Si5teen Yea! of the Thi!d ?ond!atieff 1 $99=6$9$=3 .
N 3he si(teen 4ears prece&in7 the irst Horl& Har co$er a little more than the prosperit4 phase o the Pon&ratie , the 8hole o its irst an& a6out hal o its secon& Ju7lar. An application o our schema 8hich in$ol$es, as it must in this case, speaEin7 o a 2on7 Ha$e that is still incomplete, 8ill no &ou6t seem haOar&ous, to sa4 the least. 3he uture course o e$ents ma4 entirel4 ail to =usti 4 the h4pothesis that this implies. ,ut e$i&ence ten&in7 to =usti 4 it 8ill presentl4 6e su6mitte&, an& 8e shall also ha$e the opportunit4 to test it 64 con rontin7 the
)95
e(pectations that ollo8 rom it 8ith post8ar acts. :or the moment, it is su icient to a7ree that a si7ni icant @6reaE in tren&s@ occurre& a6out 189JN e8 people 8ill &en4 that M there is e$en not much &ou6t to clou& the e(act &ateNan& to state our thesis that 8hat cause& it 8as once more an economic re$olution, analo7ous in e$er4 respect to the @in&ustrial re$olution@ o te(t6ooE ame an& to the other re$olution, 8hich 8as 8rou7ht 64 railroa&s, steel, an& steam. ,4 speaEin7 o still another economic re$olution 8e are not &epartin7 rom pre$alent opinionNhar&l4 e$en 64 maEin7 it the 6asis o our anal4sis o the c4cles 8hich occurre& &urin7 the perio&N or the .e8 -n&ustrial 9e$olution has 6ecome a $er4 common phrase 64 no8. A7ain 8e o6ser$e the ten&enc4, notice& in the case o the irst Pon&ratie , to appl4 that phrase to the &o8n7ra&eN8hich in this case, since the 8ar &ominate& all thin7s 8hile it laste&, practicall4 means the post8ar perio&Nrather than to the span 8hich is the su6=ect o this section. 3o &o this ri7ht an& 8ron7 in the same sense in 8hich it 8as ri7ht an& 8ron7 in the other case, an& not onl4 &oes not contra&ict our $ie8, 6ut in one $ital point actuall4 len&s support to it > or the reason 8h4 more o @re$olution@ is oun& in the &o8n7ra&e than the4 &o in prosperit4, e(actl4 as the4 shoul& accor&in7 to our mo&el. -n the same sense in 8hich it is possi6le to associate the secon& Pon&ratie 8ith railroa&s, an& 8ith the same quali ications, the thir& can 6e associate& 8ith electricit4. -n or&er to see this statement in its true li7ht, it is necessar4 to o6ser$e, irst, that it re ers to i7nition onl4 an& &oes not impl4 that all economic chan7es o our perio& are &ue to electricit4N7ro8th an& the phenomena o the Secon&ar4 Ha$e 8oul& in an4 case ha$e to 6e a&&e& M secon&, that quantitati$el4 $er4 important &e$elop ments 8ere either simple continuations, or continuations in&uce& 64 the impact o the ne8 thin7s, o the inno$ations that carrie& the secon& Pon&ratie M thir&, that electricit4 8as not the onl4 ne8 thin7 an& that se$eral others o irst importance 8ere as in&epen&ent o it as the ne8 shoe machiner4 8as o railroa&s M inall4, that electricit4, thou7h an inno$ation in our senseNthe same sense in 8hich railroa&s 8ere inno$ations in the secon& Pon&ratie in
)9G
spite o the railroa& 6oom o the thirtiesN4et has ha& a pre$ious in&ustrial histor4 7oin7 6acE to the orties, 8hile its histor4 as an in$ention 7oes 6acE to Kolta at least. -t seems i&le to asE 8hether the importance o electricit4 8as 7reater or smaller than that o steam. -t has certainl4 create& ne8 in&ustries an& commo&ities, ne8 attitu&es, ne8 orms o social action an& reaction. -t has upset pre$ious in&ustrial locations 64 practicall4 eliminatin7 the element o po8er rom the list o &eterminin7 actors. -t has chan7e& the relati$e economic positions o nations, an& the con&itions o orei7n tra&e. Lnl4 a small raction o this, ho8e$er, asserte& itsel in the si(teen 4ears un&er &iscussion, althou7h all the un&amental conquests an& e(tensi$e in$estments 8ere then ma&e, an& all the 6ases 8ere lai&. .ot 6e ore 1908 &i& installations o po8er, e$en in this countr4, spell the $ictor4 o electricit4. -mme&iate cost a&$anta7e 8as at irst small, in man4 cases ne7ati$eNas it 8as, or e(ample, in the case o the allsteel shipNan& reciprocatin7 an& similar steam en7ines Eept o ten more than their o8n, a most interestin7 case, in its comple(it4, o reaction to inno$ation. /$en in li7htin7, electricit4 8as e(pensi$e, an& the &i icult4 arisin7 rom the necessit4 o suppl4in7 current or &isproportionatel4 7reat peaE loa&s, hence at a lo8 percenta7e o a$era7e utiliOation, 8as o$ercome 6ut slo8l4. 1. :or 8ant o a more a&equate la6el, 8e 8ill speaE o the .eomercantilist Pon&ratie . :e8 8ill &en4 that the social atmosphere characteristicall4 chan7e& a6out the late nineties, thou7h not e$er4one 8ho reco7niOes that chan7e 8ill 6e rea&4 to 7rant the claims 8e maEe or the @s4m6olic@ 4ear 189J, an& most people 8ill also a7ree 8ith the proposition that those chan7es 8ere o t8o Ein&sNthe one represente& 64 such s4mptoms as the recru&escence o protection an& the increase in e(pen&iture on armaments, the other 64 such s4mptoms as the ne8 spirit in iscal an& social le7islation, the risin7 ti&e o political ra&icalism an& socialism, the 7ro8th an& chan7in7 attitu&es o tra&e unionism, an& so on. -n America *;in7le4 tari , 189J+ protectionism meant little more than another $ictor4 o a ten&enc4 that ha& 6een present rom the irst M in /n7lan&, no more than a slo8 chan7e o
)9J
pu6lic opinion on the su6=ect o ree tra&e. -n <erman4 the social insurance item rose to 1.1 6illion marEs in 1913, 8hile in America there 8as little o this 6e4on& social le7islation in some states *Hisconsin+ an& a 7eneral hostilit4 to @6i7 6usiness,@ satis ie& or the time 6ein7 8ith prosecutions un&er the Sherman Act an& re7ulation o utilities. Hhate$er 8e ma4 thinE o the importance o imme&iate economic e ects, looEin7 6acE to&a4, it is impossi6le to mistaEe the si7ni icance o these s4mptoms o a chan7in7 attitu&e to8ar& capitalism. 3he &eepest pro6lem o the economic sociolo74 o our epoch is 8hether those ten&encies 7re8 out o the $er4 lo7ic o capitalist e$olution, or 8ere &istortions o it tracea6le to e(tra-capitalist in luences. 3hose ten&encies, 8hate$er their nature, sources, an& relation to each other, har&l4 asserte& themsel$es stron7l4 enou7h in pre8ar America to ha$e to 6e liste& amon7 the main actors that shape& American economic histor4. 3he 0u6an 8arNan& 8hat /uropeans lo$e& to call American -mperialism, in 7eneralN con&itione& not unimportant inno$ations, 6ut it is here assume& to ha$e ha& no 7reat in luence in &istortin7 an4 c4cles. ).American a7riculture has to 6e liste& amon7 the in&ustries 8hich a&&e& important &e$elopments on the lines chalEe& out 64 the inno$ations o the secon& Pon&ratie . Since some o the pro6lems o the a7ricultural &epression o the thir& 8ill ha$e to 6e taEen up in the chapters on the post8ar perio&, 8e 8ill here merel4 recall the a7ricultural conquest o the :ar Hest, complete& 64 the en& o the centur4, impro$ement o a7ricultural machiner4 *6i7 threshers an& com6ines or instance+, increase& use o 7as en7inesNli7ht tractors came into use in the irst &eca&e o the centur4 M 3,000 8ere sol& in 191FNthe 6e7innin7 use o electric po8erNtotal horsepo8er emplo4e& rose 64 3) per cent rom 1899 to 1909Nan& rapi&l4 increasin7 consumption o ertiliOers * rom un&er ) million tons at the 6e7innin7 o the perio& to o$er J millions in 191F+. All o this increase& 8heat acrea7e 64 a6out one-thir& as 6et8een the a$era7e o
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the last &eca&e o the secon& an& the a$era7e o the irst &eca&e o the thir& Pon&ratie , an& also 4iel& per acre. 0otton increase& its acrea7e still more an& similarl4 &ispla4e& increase in 4iel& per acre. 3.3he last installment o railroa& construction, a t4pical instance o completin7 &e$elopment on esta6lishe& 6ases an& in part merel4 the re le( o the sharp rise in net earnin7s 8hich set in &urin7 189J an& continue& until 1911 *8ith peaEs in 190F, 190J, an& 1910+, contri6ute& su6stantiall4 to the prosperit4 phase in this countr4. A6out J0,000 miles 8ere a&&e& an& @net capital@ increase& rom a little o$er 9 6illions in 189J to 15-1C3 6illions in 1913. 3here is thus reason to speaE o another railroa& 6oomNsecon&ar4 phenomena thou7h it 8as, in spite o its quantitati$e importanceNan& to remin& the rea&er o the meanin7 o this 8a4 o ittin7 thin7s to7ether. -7nition an& quantitati$e importance &o not necessaril4 7o to7ether. Duantitati$el4 or statisticall4, the processes o e$er4 c4cle are al8a4s contri6ute& to 64 the completion an& the 8orEin7 o the inheritance o prece&in7 e$olution, e$en as the4 han& o$er their o8n contri6ution to the ne(t c4cles. 3he @in&uce&@ or @completin7@ character o railroa& achie$ement &urin7 that time sho8s not onl4 in constructionNin the commercial nature o the ne8 tracEa7e an& the act that it 8as lar7el4 6uilt in response to e(istin7 &eman& 8ithin an e(istin7 rame8orEN6ut also, an& still 6etter, in other elements. 3he 7reat clearin7 o the 7roun& that the crisis o 1893 an& its a termath ha& e ecte&, 6rou7ht control o$er man4 roa&s into ne8 han&s. .e8 t4pes o men tooE hol& o them, $er4 &i erent rom the t4pe o earlier railroa& entrepreneurs. Some o them 8ere not entrepreneurs at all, 6ut simpl4 e icient a&ministrators. Accor&in7 to Br. '. Jerome"s in&e( @pro&uct" per man-hour in steam railroa& operation rose rom 10F *6ase, 1890+ to 138.9 &urin7 the perio& 1895 to 1910. 3he ne8 a&ministrations impro$e& tracEs an& roa&6e&s, raise& horsepo8er installe& *6et8een 1899 an& 1909+ rom rou7hl4 )1 millions to rou7hl4 F5 millions, accepte& impro$ements in sa et4 &e$ices, 6e7an to accept automatic train control an& mechanical
)99
stoEers, ne8 t4pes o locomoti$es an& cars, an& thus e$ol$e& the railroa& ser$ice that since has come to 6e looEe& upon as a matter o course, thou7h man4 o these thin7sNthe electric an& the oil-6urnin7 locomoti$e, in particularN&i& not sprea& until the post8ar &o8n7ra&e. As ar as the ne8 men 8ere not a&ministrators, the4 8ere or7aniOers an& inanciers. -n 6oth these respects, 1893 ha& in&ee& le t man4 pro6lems. 3he situation ma4 e$en 6e sai& to ha$e set a &e inite tasE to 8hich the inancial 7roups that ha& carrie& out the liqui&ation an& reconstruction, an& the e(ecuti$es the4 ha& put into po8er or accepte&, no8 applie& themsel$es. 3his tasE 8as one o consoli&ation in a $er4 comprehensi$e sense o this 8or& an& it implie& consoli&ation in the particular sense o com6ination, amal7amation, an& mer7er. Hhat the pu6lic an& the political 8orl& sa8 an& elt a6out 8as, on the one han&, the creation o ne8 economic positions in$este& 64 the ima7ination o the man in the street 8ith a po8er that 8as 6oth immense an& sinister an&, on the other han&, the spectacle o inancial maneu$ers an& o the stru77les 6et8een inancial 7roups that o ere& as much oo& or the pre$alent propensit4 to 7am6le as or moral in&i7nation. Since it is these aspects 8hich still &ominate the economic historio7raph4 also o the in&ustrial @mer7er 6oom,@ it is necessar4 to point out that or us the latter means somethin7 8hich the pu6lic min& either &i& not realiOe at all or entirel4 aile& to linE up 8ith those inancial operations > ne8 pro&uction unctions, reor7aniOation o lar7e sectors o the s4stem, increase o pro&ucti$e e icienc4 all roun&. Ber7ers must, there ore, 6e liste& amon7 the inno$ations that carrie& that prosperit4. F. L course, consoli&ation 8as not a ne8 phenomenon. 9ailroa& s4stems, in particular, ha& 6een 6uilt up 6e ore, an& in&ustrial com6ination ha& 6e7un in the si(ties an& 6een a eature o the late ei7hties. .e8, ho8e$er, 8ere the scale, some o the metho&s, an&, to a certain e(tent, the meanin7. -n all cases, 8hate$er the le7al 7ar6, those mer7ers meant ne8 units o control, ne8 principles o
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mana7ement, ne8 possi6ilities o in&ustrial research, an&, at least e$entuall4, ne8 t4pes o plant an& equipmentNalso, ne8 locationsN inten&e& to achie$e, o ten 6uilt to e(cee&, the a6solute optimum o Eno8n, i untrie&, technolo74. 3he pro&ucti$e capacit4 that 8as thus create& an& coul& not ha$e 6een create& 8ithout them ranEs hi7h on the list o the actors that e(plain the torrent o pro&ucts that 6roEe orth in the post8ar part o the &o8n7ra&e. -t is hence not correct to call those com6inations monopolies simpl4, 8ithout a&&in7 that the4 8ere monopolies o a special Ein&, $er4 &i erent in theor4 an& practice rom the 7enuine case. Hhat such com6inations, pro$i&e& the4 7o ar enou7h, mi7ht mean or the mechanism o the 6usiness c4cle has 6een pointe& out, un&er the hea&in7 o trusti ie& capitalism, in the thir& chapter. As a matter o act, ho8e$er, the course o e$ents in the perio& un&er &iscussion an& its statistical picture har&l4 6ear out the e(pectation that the c4clical mo$ement 8oul& 6e su6stantiall4 altere& 64 their policies. 3his statement requires the ollo8in7 quali ications, 8hich &o not, ho8e$er, in$ali&ate it > in&i$i&ual prices 8ere requentl4 &e lecte& *those o steel rails, or instance+ rom the course the4 8oul& other8ise ha$e taEen, thou7h this &i& not amount to more than 8hat com6inations ha& &one at all times M the com6inations requentl4 inclu&e& irms 8hich other8ise 8oul& presentl4 ha$e 6een compete& out o e(istence, an& thus ma4 6e sai& to ha$e pro$i&e& a metho& or the elimination o the o6solescent elements o the s4stem that o6$iate& the &eath stru77le 64 anticipatin7 its results. Lnce orme&, the 7iants in some cases threatene& the li e o outsi&ersN6oth ne8 an& ol&Nalso in other 8a4s than 64 their technolo7ical commercial superiorit4. 8)
8)
3hat superiorit4 has o ten 6een &enie&. -t is, o course, true that mere siOe is not necessaril4 an a&$anta7e an& ma4 8ell 6e a &isa&$anta7e. Ju&7ment must turn on the merits o each case. ,ut statistical e$i&ence to the e ect that smaller concerns o ten &o 6etter than the 7iants shoul& not 6e uncriticall4 accepte&. 3he smaller concerns ma4 no8 o ten 6e in the position o the ne8, an& the 7iants in the position o the ol& irms in our mo&el. -t is hel& a6o$e that the 6i7 concerns *there ma4 6e e(ceptions, o course+ implie& technolo7ical an& or7aniOational impro$ement 8hen the4 8ere oun&e&. -t is not hel& that the4 retaine& their a&$anta7es until the present &a4. Lur theor4 8oul& in act lea& us
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;i iculties arise in some cases in settlin7 8ho the entrepreneur 8as. -n the t8o outstan&in7 instances in the railroa& iel&, all the criteria 8ere present in the t8o lea&in7 men *'arriman an& 'ill+. Lne o them 8as as much an or7aniOer an& re ormer o a&ministrati$e routine as he 8as a stocE e(chan7e lea&er. ,ut this com6ination o aptitu&es onl4 ser$es to sho8 ho8 rare, 8ith this Ein& o inno$ation, must 6e the cases in 8hich one man can 6e sai& to ha$e 6een @the@ entrepreneur. 3he in&ustrial unction 8hich amal7amations ul ille& 8as in most cases entirel4 &i$orce& rom the tasE o 6rin7in7 them a6out. 1et that tra$elin7 salesman 8ho turne& into a promoter o com6inations 8as no mere inancial pe&&ler, thou7h he pro6a6l4 un&erstoo& little an& care& less a6out an4thin7 e(cept a pro ita6le &eal in in&ustrial properties. -n some cases, 6anEers pla4e& a lea&in7 role, althou7h one must 6e care ul not to o$errate the initiatin7 importance o an a7ent 8hom ne7otiations place in the limeli7ht. 3he Bercantile Barine, 8hich, amon7 the transactions o irst importance, came nearest to 6ein7 a 6anEers" $enture, 8as no success. 3he steel com6ine 8as almost e(clusi$el4 &etermine& 64 the &ominatin7 position o the 0arne7ie concern an& practicall4 &ictate& 64 its hea&. 3he a$era7e 6anEer"s contri6ution 8as a su6or&inate one an& consiste& mainl4 in or7ettin7 8hat 6anEs e(ist or in capitalist societ4. 3he mo$ement starte& in 1898, imme&iatel4 a ter reco$er4 rom the trou6les o 189G. 3he 4ear 1899 sa8 it in ull s8in7, especiall4 in iron an& steel. 3he 6i7 e$ents came in the irst 4ears o the centur4 M then 190J calle& a temporar4 halt. 3he polic4 o the #nion 5aci ic ma4 ser$e as an e(ample rom the railroa& iel&, 8hich 8ill at the same time contri6ute to the un&erstan&in7 o the crisis o 190J. L6$iousl4 it 8as no mere attempt to secure a monopol4 position as suchN8hich, as must ha$e 6een clear to an4one, coul& ne$er ha$e 6een e(ploite& in the sense o the classical theor4 o monopol4 priceN or simpl4 inancial pirac4, 6ut an attempt to 6uil& a s4stem so
to e(pect the contrar4.
30)
circumstance& as to realiOe ma(imum econom4, an& to maEe it 4iel& surpluses through this increase in efficiency. 3he 8a4 8as oun& 6arre& at the $er4 6e7innin7 > the most important linE in that s4stem, the 0hica7o, ,urlin7ton, an& Duinc4, ha& 6een conquere& 64 the .orthern 5aci ic an& the <reat .orthern. ,4 this transaction the @collateral trust 6on&@ came into prominence. 3he 6u4ers o the stocE o the 0hica7o, ,urlin7ton, an& Duinc4 han&e& it to the .orthern 5aci ic an& the <reat .orthern at a price almost 50 per cent a6o$e 8hat it ha& sol& or 6e ore the 6u4in7 6e7an, an& this price 8as pai& in 6on&s that 8ere issue& 64 these t8o companies an& then 7ra&uall4 sol& to the pu6lic. Hhen the #nion 5aci ic interests sa8 the roa& 6locEe&, the4 trie& to unseat the 6locEa&ers 64 acquirin7 a controllin7 parcel o the .orthern 5aci ic itsel . Hhat striEes the o6ser$er is not this mo$e as such, 6ut the a6solute &isre7ar& o costs an& consequences that characteriOe& its e(ecution. 3he #nion 5aci ic troops 8ere set to storm the concrete trenches o the Bor7an position, per ectl4 imper$ious to rontal attacE. /uropeans helpe&, a7ainst their 8ill, 64 sellin7 short 8hen the attacEe& stocE soare&, an& 64 len&in7, thou7h /n7lish 6anEs trie& to &iscoura7e this 8hene$er the purpose 8as &etecte& or suspecte&. 3he .orthern 5aci ic 0orner o 1901 en&e& in a &ra8 rom 8hich an un&erstan&in7 emer7e& *.orthern Securities 0ompan4, to 6e presentl4 prosecute& un&er the Sherman Act+, 6ut the harm &one to the inancial structure an& to the international position o American currenc4 an& cre&it accounts or a sequence o e$ents that laste& throu7h 1903 *@rich men"s panic@+ an& 8as serious enou7h to a ect some8hat, thou7h not to the e(tent one mi7ht ha$e e(pecte&, the in&ustrial processes 6elo8 that sur ace. He note t8o thin7s. :irst, inno$ation in the ormati$e sta7es o trusti ie& capitalism 8ill re7ularl4 pro&uce such e$ents o8in7 to the act that lar7e-scale inancial operations o a t4pe entirel4 lacEin7 in the mechanism o inno$ation in competiti$e capitalism are in this case necessar4 or the entrepreneur to 7et his han& on the 8heel. -t 8oul& al8a4s &o that e$en in later sta7es, i there 8ere not the alternati$e metho& o the rise o ne8 men to lea&in7 positions 8ithin the 7iant concerns, once these are orme&. Secon&, the maneu$res an& e(cesses
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o those as o earlier times, an& hence the crisis that ensue&, are not simpl4 accounte& or 64 the act that in one 8a4 or another the4 ser$e&, or 8ere in&uce& 64, the purposes o lar7e-scale inno$ation. 0rises, 6e it repeate&, are historic in&i$i&uals, into the maEin7 o 8hich enter man4 peculiarities o in&i$i&uals an& en$ironments, 6esi&es e(ternal actors. Lur mo&el e(plains the un&erl4in7 process an& e$en, in most cases, appro(imatel4 the location in time o the turnin7 points, an& the modus operandi o the eatures peculiar to each situation. ,ut these remain &istinct acts an& e(ert &istinct consequences, all the same. -n the case in han&, a less speculati$emin&e& pu6lic, a 6anEin7 s4stem o irmer tra&ition, entrepreneurs less 6ent on imme&iate inancial success an& less ree rom inhi6itions 8oul& o course ha$e ma&e a 7reat &i erence to the 6eha$ior o our time series an& 8oul& ha$e ease& the &i icult4 8e ha$e in &atin7 Ju7ulars in that perio&. Another aspect is 6est &ispla4e& 64 the ne(t step in the #nion 5aci ic"s inancial career. A ter the &issolution o the .orthern Securities 0ompan4, it ha& no interest in hol&in7 the parcel o .orthern 5aci ic an& <reat .orthern stocEs 8hich ha& come to it in the liqui&ation, an& it 6e7an to sell out, acquirin7, up to the mi&&le o 190G, a6out 5G millions in cash an& on call. 3his sum 8as o6$iousl4 assem6le& 64 8a4 o preparin7 a ne8 campai7n in the iel&s, this time, o the .e8 1orE 0entral, the Santa :e, an& the ,altimore an& Lhio. -n this campai7n, 8hat 8e ma4 term seriousness of purpose is, at last rom the stan&point o the #nion 5aci ic itsel , $er4 much less o6$ious than is the &eli6erate osterin7 in 190G o a speculati$e craOe that ha& alrea&4 set in. He note irst, the spen&in7 o the #nion 5aci ic"s un&s or this campai7n an& the strainin7 o its cre&it to the e(tent o J5 millions 6orro8e& on notes M secon&, the act that 6anEs o ere& less than no resistance to this 6orro8in7 an& not much resistance to speculators" 6orro8in7 in 7eneral M thir&, that, /uropean capital 6ein7 &ra8n to this countr4 64 hi7h rates an& prospects o speculati$e 7ain, an a&&itional relation 6et8een the American an& the /uropean shortmone4 marEets, normall4 inoperati$e at that time, 8as set up 8hich
30F
8as 6oun& to act as an i&eal con&uctor o repercussions. 3he importance o such thin7s is clear an& so is the consequence that or us ollo8s or the &ia7nosis o 190J. 5. -n&ustrial mer7ers &ispla4e& similar phenomena an& call or 6ut little a&&itional comment. 3he theor4 o their inancial construction ma4, in case inno$ation consists simpl4 in the cheapenin7 o the costs per unit o a pro&uct alrea&4 in use, ormulate& liEe this. /ntrepreneurs" pro its ma4 6e e(presse& as the &i erence 6et8een the present $alue o a set o actors o pro&uction, e$aluate& 8ith re7ar& to the net returns the4 are e(pecte& to 4iel& i use& 8ithin a 7i$en ne8 pro&uction unction, an& the present $alue o the same set, e$aluate& on the 6asis o the net returns the4 are e(pecte& to 4iel& 8ithin their ol& one. -n the limitin7 case o per ect competition an& per ect a6sence o riction the4 can 6e 6ou7ht at prices correspon&in7 to the latter 8hile, until competition steps in to reesta6lish normal relations o $aluesNin accor&ance 8ith the theor4 o imputationN the pro&ucts o the ne8 com6ination that is 6ein7 en$isa7e& 8oul& also sell at their ol& prices, hence, at more than cost. Suppose that the actors require& or a ne8 com6ination consist o the plants o a num6er o in&epen&ent 7oin7 concerns an& that these concerns can 6e acquire& at prices correspon&in7 to the con&itions pre$ailin7 in the prece&in7 nei7h6orhoo& o equili6rium. 3hen 8e 7et estimate& entrepreneurial pro its 64 &e&uctin7 these $alues rom those hi7her ones 8hich the plants are e(pecte& to realiOe 8ithin the ne8 com6ination. - 8e urther assume that in pa4ment o the ormer, 6on&s *or pre erre& shares, or 6on&s 8ith common shares thro8n in as a 6onus, to suppl4 the moti$e or sellin7 out+ are issue& to $en&ors an& that pro it e(pectations are em6o&ie& in common shares, 8e ha$e the rationale o a metho& 8hich in itsel 6ut e(presses the economic lo7ic o the situation. -ts peculiarit4 so ar consists onl4 in the acilit4 it a or&s or cashin7 unrealiOe& pro its 8hich ma4 ne$er 6e actuall4 earne& an& 8hich, e$en i the4 e$entuall4 are, e(ert, 64 6ein7 cashe& in a&$ance, an in luence on the monetar4 part o the mechanism entirel4 &i erent rom that 8hich pro its e(ert in the or&inar4 case. -n
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particular the4 must 6e inance&, unless that common stocE is hel& in&e initel4 64 the oun&in7 7roup an& its associates. 3his ma4 or instance 6e &one 64 the sa$in7s o the pu6lic or 64 cre&it create& in or&er to ena6le the pu6lic to 6u4. Attention is calle& especiall4 to the e ects that, thus applie&, sa$in7 8ill ha$e on pro&ucin7 e(cesses in consumption as ar as those none(istent 6ut realiOe& pro its are spent on consumers" 7oo&s. As ar as the4 are not, these sa$in7s pro6a6l4 ul ill their normal social unction o impro$in7 the pro&ucti$e apparatus, althou7h, even if everything had always been done with ideal correctness, the pri$ate interest o those sa$ers 8ho 6ou7ht common stocE 8oul&, in man4 cases, ha$e 6een 6etter ser$e& 64 a 7ame o poEer. Apart rom such sales to the pu6lic o the securities create&, mer7ers as suchNas &istin7uishe& rom their in&ustrial pro7ramsN&i& not require an4 un&s. 3his is one reason 8h4 it is i&le to speculate a6out 8here the @hu7e sums@ came rom that i7ure& in those capital transactions. Alrea&4 or 1899, or instance, stocEs an& 6on&s alone o ne8 in&ustrial com6inations that 8ere @a6sor6e& 64 in$estors@ are sai& to ha$e amounte& to nearl4 3.G 6illion &ollars, three-quarters o 8hich 8as common stocE. 3his &oes not mean, o course, that e(istin7 un&s, let alone sa$in7s, 8ere actuall4 spent on those stocEs an& 6on&s to an4thin7 liEe that amount. Some $en&ors Eept their 6on&s, an& some @entrepreneurs@ their stocE. .or 8as there ne8 in$estment i , instea& o Eeepin7 them, the4 sol& in or&er to 6u4 other securities 8ith the procee&s, or this 8as equi$alent to an e(chan7e o securities. An& e$en as ar as the4 simpl4 sol& or @mone4, i.e., a7ainst e(istin7 or ad hoc create& &eposits, that mone4 8as, o course, not 6oun& or a6sor6e& 64 the transaction. An4 sums thus 8ith&ra8n rom their channels 8ere spee&il4 returne& to them a7ain. As ar as that 7oes, it 8as not the suppl4 o @capital@ that 8as e(hauste& in 190J, 6ut the suppl4 o oll4. 3hat interpretati$e schema is, o course, entirel4 in&epen&ent rom actual inancial practice. 3he $ast scope or irresponsi6ilit4 an& miscon&uct 8hich is inherent in that metho& an& immeasura6l4 increase& 64 the act that the e$olution o an en$ironment"s s4stem o moral i&eas an& le7al sa e7uar&s ten&s to
30G
la7 6ehin& its economic e$olution, is mainl4 rele$ant or the e(planation o the &etails o particular situations 8hich so easil4 $eil the un&amental acts un&er a sur ace o @shorta7e o cre&it,@ @lacE o con i&ence,@ @hoar&in7,@ or @shorta7e o reser$es.@ 0om6inations o all t4pes emer7e& all o$er the in&ustrial iel& 6ut 8e 8ill con ine oursel$es, or the purpose o illustration, to one instance onl4None 8hich presents the essential eatures 8ith unusual clearnessNthe #nite& States Steel 0orporation *1901+. 3he inancial constructionN the orm 8as simpl4 that o a hol&in7 compan4N8as practicall4 &etermine& 64 the 0arne7ie 0ompan4 8hich in the Ju7lar recession o 1900 8as tacticall4 in a still more a&$anta7eous position than it ha& 6een 6e ore an& not onl4 impre7na6le to attacE, 6ut also per ectl4 rea&4 to attacE, itsel Nsuch an attacE 8as actuall4 e(pecte& an&, in act, announce& in the shape o an e(tensi$e pro7ram o ne8 construction. -n or&er to appl4 our schema to the case, 8e must reco7niOe that the chie $en&or com6ine& the role 8hich it assi7ns to $en&ors, 8ith the unction o the entrepreneur 8ho creates the uture possi6ilities so that securities trans erre& to him 8oul& represent 6oth the $alue o his plant as it 8as, irrespecti$e o an& pre$ious to the ne8 com6ination an& the a&&itional $alue o capitaliOe& e(pecte& pro its. 3o a minor &e7ree this applie& also to other $en&ors 8ho, in act, 8ere less a$ora6l4 treate&. So ar, &e$iation rom our schema can onl4 ha$e resulte& rom the possi6ilit4 that i(e& interest 6on&s o the ne8 corporation orme&, 8ithin the @pa4ments@ to $en&ors, a lar7er part than the4 shoul& ha$e accor&in7 to the relation 6et8een pree(istin7 an& e(pecte& $alues. 3his is all 8e 8oul& ha$e to sa4, ha& the $en&ors Eept their common stocE. ,ut it 8as clear rom the outset that this 8as precisel4 8hat the4Nor most o themN &i& not 8ish to &o. -n or&er to 7rati 4 them, a s4n&icate 8as orme& an& a marEet 8as create& 64 metho&s o hi7h-pressure salesmanhsip that inclu&e& @matchin7 or&ers@ an& the liEe. 3his seems to ha$e 6een more than @cashin7 unrealiOe& pro its.@ 3he urther career o the #nite& States Steel 0orporation is, o8in7 to its central position in the t4picall4 c4clical in&ustr4 an& to the
30J
accurac4 o the in ormation it puts at the &isposal o the pu6lic, a su6=ect o comman&in7 interest. Lnl4 one remarE is necessar4 here, ho8e$er. 3he 301 millions o 6on&s 8ere, o course, a hea$4 6ur&en, 6ut the 1,018 millions o capital stocE 8ere no 6ur&en at all. - our &ia7nosis o the economic nature o this stocE *or a 7reat part o it+ 6e true, a6sence or smallness o &i$i&en&s 8oul& not 6e a si7n o 6a& inancial health M an& their 7ra&ual &8in&lin7 an& inal &isappearance is 8hat 8oul& ha$e to 6e e(pecte& rom the stan&point o our theor4. As a matter o act, so ar the4 ha$e not &8in&le& to Oero. ,ut 8e also o6ser$e that the concerns" real earnin7 po8er o$er timeNi.e., earnin7 po8er in&epen&ent o short-time luctuations an& o the e ects o the rise in the level o prices an& o such e$ents as the Horl& HarN8as Eept onl4 64 incessant @plou7hin7 6acE@ o surpluses an& 64 a sequence o inno$ations, mostl4 minor ones. 3he case is thus seen not to contra&ict, 6ut on the contrar4 to illustrate, our thesis that no structure o real capital is e$er the source o permanent net returns, althou7h this proposition is, in strict theor4, true in the case o per ect competition onl4. G. He return to 8hat, in the sense &e ine& in the intro&uction to this section, is the 6acE6one o the purel4 in&ustrial process o this Pon&ratie . 3he sta7e ha$in7 6een set 6e ore, 6oth technolo7icall4 an& economicall4, the electric &e$elopments that 8e o6ser$e in the later nineties, sprea&in7 their e ects o$er the in&ustrial iel&, 8oul& in themsel$es ha$e 6een su icient to pro&uce 8hat 8e call a Pon&ratie prosperit4 an& to impress a &ominant contour line on the successi$e 6usiness situations o that time, althou7h in&epen&ent inno$ations in some sectors, completin7 &e$elopments in other sectors, 7ro8th, e(ternal actors are =ust as important or the anal4sis o actual lon7run results an& more important or the anal4sis o short-run situations. 3o sa$e space, 8e 8ill ne7lect the pro7ress o the tele7raph, the telephone *num6ers o telephones installe& in 189J, 515,)00 M in 191F, =ust o$er 10 millions+ an& o electric li7htin7 *arc lamp, incan&escent lamp, metallic ilaments+, the t8o last o 8hich practicall4 e(haust 8hat a&$ance there 8as &urin7 the prosperit4 phase to8ar& the
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electri ication o the househol&, 8hich 6ecame so important a &o8n7ra&e &e$elopment. 3he essential thin7 8as the pro&uction o electric po8er > 3,150 million Eilo8att-hours in 1899 an& 19,G5) million Eilo8att-hours in 191F, no 4ear sho8in7 &ecrease an& onl4 1908 the same i7ure as the prece&in7 4ear. Soon a ter the turn o the centur4 lon7-&istance transmission, the triphase current, the sprea& o the steam tur6ine, impro$ement o h4&roelectric motors, construction o h4&roelectric an& thermoelectric plants o e$er-increasin7 capacities, an& the $ictor4 o the 6i7 po8er stations o$er the plants o in&i$i&ual in&ustrial consumers 6ecame the lea&in7 eatures o the perio&, 8hich also persiste&, on the much lar7er scale characteristic o Pon&ratie recessions an& &epressions, in the post8ar epoch. As mentione& 6e ore, h4&roelectric enterprise ha& starte& on a lar7e scale in 1895, 8hen the plant at .ia7ara :alls 8ent into operation. -t supplie& in&ustrial po8er rom the irst an& in 1900 em6arEe& upon a still more am6itious pro7ram. -n .e8 /n7lan& *'ol4oEe Hater 5o8er 0ompan4+, on the Bississippi *PeoEuE+, in Bontana *<reat :alls+, on the St. Bar4"s 9i$er *0onsoli&ate& 2aEe Superior 0ompan4+, on the 5aci ic 0oast, in the South *man4 local companies M Southern 5o8er 0ompan4, 190G, the irst one o importance 6e4on& its nei7h6orhoo& M Ala6ama 5o8er 0ompan4 M the plant o the Aluminum 0ompan4 in 3ennessee M then an interestin7 &e$elopment o transmission lines that le& to a cooperation 6et8een se$eral s4stems in the Southern Appalachian re7ion, 6u4in7 current rom each other an& helpin7 each other in cases o 6reaE&o8n an& so on+, the oun&ations 8ere lai&, &urin7 the irst t8o Ju7ulars o the thir& Pon&ratie o the electric s4stem o the countr4, as the oun&ations o its railroa& s4stem ha& 6een lai& &urin7 the irst three Ju7ulars o the secon& Pon&ratie . Lnl4 in e(ceptional cases &i& lar7e-scale electrical enterprise procee& rom the in&ustrial consumer, the outstan&in7 instance 6ein7 the Aluminum 0ompan4"s $enture. .e8 in&ustrial enterprise procee&e& rom electrical enterprise also onl4 e(ceptionall4, the
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outstan&in7 case 6ein7 that o the 0onsoli&ate& 2aEe Superior 0ompan4, 8hich set out to create a 8hole in&ustrial &istrict 64 taEin7 up pulp an& suphi&e pro&uction, copper re inin7, an& steelmaEin7. 0omment that 8oul& 8ell illustrate some properties o our mo&el is in$ite& 64 the plan an& its e(ecution. 3he ormer 8as per ectl4 soun& an& the latter per ectl4 competent rom a technolo7ical stan&point. 3he 8ater po8er, the ores, the tim6er, 8ere all there an& their role 8ithin a comprehensi$e scheme 8as eas4 to $isualiOe. ,ut this is not enou7h. Lne essential peculiarit4 o the 8orEin7 o the capitalist s4stem is that it imposes sequences an& rules o timin7. -ts e ecti$eness lar7el4 rests on this an& on the promptness 8ith 8hich it punishes in rin7ement o those sequences an& rules. :or success in capitalist societ4 it is not su icient to 6e ri7ht in abstracto " one must 6e ri7ht at 7i$en &ates. 3he 7eneral rule 8as that in&ustries e(pan&e& on the ne8 suppl4 o po8er. 0otton te(tile an& paper mills, the metallur7ical an& the chemical in&ustries installe& electricit4. Some iron-8orEs, ho8e$er, use& their urnace 7as or thermoelectric purposes. A most important &e$elopment ensue& in steel. 3his mo$ement 8as 8ell un&er 8a4 6e ore the irst Ju7lar ha& run its course, 6ut assume& much lar7er &imensions later on as the price o current ell. 3he superiorit4 o ne8 o$er ol& plant 8as consi&era6l4 increase& 6ecause in man4 casesN that o cotton mills, or instance &i erent t4pes o actor4 6uil&in7s 8ere necessar4 in or&er to taEe ull a&$anta7e o the installation o electric po8er. /lectrical equipment 8as pro&uce& 64 the <eneral /lectric an& the Hestin7house concerns an& also 64 man4 other irms, some &atin7 rom the ei7hties *as, or instance, the /lectric Stora7e ,atter4 0ompan4+. Some o the most important ones 8ere hi7hl4 specialiOe& */lectric ,oat 0ompan4, .ational 0ar6on 0ompan4+. /lectric &4namos 7aine& 7roun& airl4 rapi&l4 M the 8ater tur6ine less so. ,oth the <eneral /lectric an& the Hestin7house e(porte& success ull4 an& also starte& enterprise a6roa& *,ritish Hestin7house in 1899+. ,ut total a&&e& $alue un&er the census hea&in7 o /lectrical Bachiner4 an& Apparatus 8as onl4 a6out 180 millions in 191F. A
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7reat eature o the irst Ju7lar 8ere electric trams, o 8hich a6out )5,000 miles 8ere 6uilt up to 190J. 3he competition o the motorcar an& the motor6us then steppe& in to &im prospects. 3hou7h ma(imum tracEa7e 8as not reache& until 191J, the4 8ere no lon7er o c4clical importance a ter that 4ear M 6ut until 190J the4 8ere in the ore7roun& o speculati$e interest an& railroa&s 8ere so concerne& a6out the &an7er to their local tra ic that one 7reat s4stem impaire& its inancial position in the attempt to 6u4 up lines in its territor4. 3he equipment o the 2on&on #n&er7roun& 9ail8a4 8as supplie& 64 American irms *189J+. :inall4, it shoul& not 6e or7otten that in 191F there 8ere still a6o$e F0 irms i7htin7 the losin7 i7ht o the electric automo6ile. 3he 8riter ranEl4 &espairs o his a6ilit4 to 7i$e, 8ithin the space at his comman&, an4thin7 liEe an a&equate picture, 6oth o the rami ications o the trans ormin7 in luence o electricit4 an& o the other inno$ations 8hichNin&epen&entl4 o it or in&uce& 64 itN 7roupe& themsel$es aroun& it an&, to7ether 8ith it, set a pace to output o pro&ucers" 7oo&s that, in spite o @responsi$e@ e(tension o capacities, repeate&l4 resulte& in steel an& e$en coal @ amines@ or con&itions approachin7 serious shorta7e. 83 3hese con&itions 8ere particularl4 remarEa6le in the case o coal, 6ecause h4&roelectricit4 itsel an& man4 other inno$ations 8ere o6$iousl4 so uel-sa$in7 that somethin7 liEe technolo7ical unemplo4ment o coal *8hich &i& come
83
3his strain on a pro&ucti$e apparatus, that at the same time 8as 6ein7 e(pan&e& at an unprece&ente& rate re lects, o course, the e$er in&uce& 64 the procee&in7s in the sphere o inance an& speculation an& 8as, in this sense, a har6in7er o uture &i iculties. ,ut it &oes not seem correct to ar7ue that the mere act o ull *or more than 8hat shoul& 6e calle& ull, that is, optimal+ emplo4ment o resources 8oul& su ice to 6rin7 a6out the upper turnin7 point. -ncrease o ph4sical output is not necessar4 to prosperit4. :or its s4mptoms to persist, it is su icient that people try to increase output. -n act, i it cannot or the time 6ein7 6e increase&, this 8oul& onl4 accentuate those s4mptoms, an& an4 rise in cost 8oul& al8a4s 6e at least compensate& or 64 an increase o prices o pro&ucts, until ne8 pro&ucts emer7e. 3hat such perio&s o superheate& atmosphere put also a strain on the moral an& social rame8orE o societ4 an& are pro&ucti$e o serious pro6lems is per ectl4 true, 6ut that is another matter.
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a6out in the &o8n7ra&e+ coul& reasona6l4 ha$e 6een e(pecte& > consumption o coal in the /&ison 0hica7o 8orEs, or instance, 8as G.9 poun&s per Eilo8att-hour in 1900, an& ).8J poun&s in 1913. He must con ine oursel$es to a e8 &esultor4 remarEs. J. :irst, steam en7ineerin7 reacte& to electricit4 in t8o 8a4s, 64 the impro$ement o competin7 en7inesNo the compoun& *reciprocatin7+ en7ine an& o hi7h-pressure 6oilers *superheatin7+ an& 64 o erin7 the completin7 steam en7ine tur6ine *tur6o7enerator+. Ln 6oth lines it 8oul& 6e possi6le to arra4, in &escen&in7 or&er o importance, a $ast amount o ne8 in&ustrial acti$it4. 3he rea&er recalls that the entrepreneurial role an& the chan7e in pro&uction unctions that &e ines our concept o inno$ation, are 6oth capa6le o man4 7ra&ations. 3he4 inclu&e /&ison an& 0arne7ie achie$ements, 6ut also achie$ements that ma4 6e e(empli ie& 64 a man 8ho irst carries out the i&ea o lettin7 cars on the &ri$e-4oursel s4stem. An& those 8ho ollo8 the pioneers are still entrepreneurs, thou7h to a &e7ree that continuousl4 &ecreases to Oero. 3he &oin7s o all o them must 6e $isualiOe& i a correct i&ea is to 6e orme& a6out the nature, role, an& quantitati$e importance o inno$ation. .onelectric en7ineerin7 enterprise in the epoch o electricit4 ills &ensel4 the 8hole scale, 6ut cro8&s particularl4 in the mi&&le ran7e. All t4pes o toolmaEin7 8ere, or instance, in a process o trans ormation in 8hich irms pro&ucin7 specialties rose an& ell quicEl4. L lar7e-scale enterprise in this iel& an& o this Ein&, the t8o plants o the American ,ri&7e 0ompan4 *190)+ ma4 6e mentione&, 6ut the 8hole hu7e &e$elopment in steel shapes, thou7h mostl4 un&er the control o the steel concerns *the ,ethlehem, or e(ample, 6ou7ht '. <re4"s patents o the steel section, 8hich 8as so 7reat an impro$ement in the rollin7 o 6i7 6eams or structural purposes+, reall4 6elon7s here. 9ailroa& locomoti$es an& rollin7 stocE, 6ic4cles, a7ricultural machiner4, ships, all ha& their minor inno$ations &irectl4 in&uce& or in&irectl4 con&itione& *$ia creation o ne8 &eman&+ 64 the @carr4in7@ ones. He procee&, ho8e$er, to the secon& 7reat inno$ation o this Pon&ratie .
31)
3he automo6ile in&ustr4 a or&s a 7oo& e(ample o a purel4 entrepreneurial achie$ement turnin7 to ne8 uses not onl4 e(istin7 resources 6ut also e(istin7 technolo74, vi#., the 2enoir-Ltto internal com6ustion en7ine, the principle o interchan7ea6le parts, the possi6ilities o ere& 64 steel &e$elopments an& mo&ern machine tools. Amon7 mo&ern in&ustries it also 8as, in its 6e7innin7s, almost in a class 64 itsel 8ith respect to inancial metho&s. -ts o8n pro&ucti$e process consiste& in assem6lin7 interme&iate 7oo&s 8hich it 8as possi6le to 6u4 on cre&it *on G0 to 90 &a4s" open account, or instance+, so that the resultin7 pro&uct, sol& or cash, coul& &irectl4 pa4 or itsel . 2ater on, the retailer, or institutions that inance& him, came in to 6ri&7e the 7ap 64 remittin7 not onl4 in a&$ance o his sale to the consumer, 6ut also o &eli$er4 to him. 3hus, the manu acturer nee& not 6orro8 at all rom 6anEs an& ma4 still in&uce e(pansion o &eposits to an e(tent amountin7 to in lation. .o 6etter instance coul& 6e oun& to sho8 ho8 cre&it creation or the purpose o inno$ation can hi&e. 3his in&ustr4, thou7h not a starter 4et one o the most important carriers o this Pon&ratie , re$eale& its ull meanin7 or the economic process an& or ci$iliOationNit has altere& the st4le o li e an& the outlooE on li e pro6a6l4 more than an4 prophet e$er &i&Nin the &o8n7ra&e span a ter the 8ar, e(actl4 as cotton te(tiles asserte& themsel$es ull4 in the &o8n7ra&e o their Pon&ratie . -n the prosperit4 it &i& not 7et so ar. 3he pro6lems o assem6lin7 8ere sol$e& in <erman4 an& :rance. <. ;aimler an& P. ,enO pro&uce& $ehicles in the ei7hties M /l8oo& 'a4nes, 0. an& :. ;ur4ea, 9. /. Ll&s, 64 1893 M A. Hinton, in 189F. 'al a &oOen small companies, 8ith a quantitati$e importance practicall4 equal to Oero, 8ere oun&e& in the ne(t si( 4ears 64 these men *;ur4ea Botor Ha7on 0ompan4, Hinton Botor 0ompan4, 189J+ > 9e7istration in this countr4 totale& 8,G)F in 1899, an& in 1900 the Ll&s Botor HorEs o ;etroit starte& 8hat to them seeme& mass pro&uction, reachin7 the i7ure o F,000 in 1903. :or&, some8hat hampere& in the nineties 64 a stru77le 8ith the Sel&en patent, reache& incorporation sta7e in 1903 *^100,000 capital, ^)8,000 pai& up+.
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Bortalit4 amon7 pioneers 8as as hi7h as in such a case 8e 8oul& naturall4 e(pect. Hith the *temporaril4+ success ul ones, pro its pai& or e(pansion. Alon7 8ith the 7asoline car came the 7asoline mo8er. 3he irst 6us routes an& sta7e lines 8ere esta6lishe& a6out 1905. ,et8een 190) an& 190J, 3)) companies starte& operations. -n the latter 4ear, 8,F)3 cars 8ere sol& or a6out 5-1C) million &ollars, o 8hich 1 million 8as pro it. 3he 4ear 1908 closes the irst sta7e. -n that 4ear inno$ation turne& a7ainst itsel . 3he 7reat ne8-thin7 appeare& in the shape o the li7ht an& cheap our-c4lin&er :or& car or the masses, 8hich &ro$e rom the iel& man4 o 8hat 64 then 8ere ol& irms in our sense. 3hat the increase& mortalit4Nthe mo&al irm oun&e& in 190) laste& until 1910, an& the mo&al irm oun&e& in 1908, alsoN8as mainl4 amon7 irms un&er our 4ears o a7e, &oes not contra&ict this statement, 6ecause in a perio& o such rapi& chan7e a 7reat man4 ne8 oun&ations 8ill start on a plan that has alrea&4 6ecome o6solete, althou7h the ailure o others 8as no &ou6t &ue to unsuccess ul inno$ations o their o8n. <eneral Botors, oun&e& in 1908 *;urant+, pro$i&e& the irst occasion or 6anEers to enter the iel& *1910+, 8hich until then ha& 6een entirel4 outsi&e their sphere o in luence an& su6stantiall4 remaine& so to the 8ar. 9atio o net pro it to net 8orth, thou7h &eclinin7, remaine& on a le$el a6out t8ice as hi7h as in the post8ar perio& an& equal to si( or se$en times the @normal rate o interest.@ 8F 5rices, also &eclinin7, mo$e& on a le$el
8F
3hat su ices to 7i$e an i&ea, althou7h 6oth the meanin7 o normal rate o interest in this connection an& comparison 8ith it o net 8orth are not ree rom &ou6t as to si7ni icance. -t shoul& 6e o6ser$e& that these hi7h, in one case at least spectacular, pro itsNthe4 8ere pro its in the ull sense o our &e inition o the concept an& a $er4 7oo& instance 64 8hich to illustrate itN 8ere earne&, &espite the act that the perio& o 7estation o the automo6ile plant o the time 8as quite short, so that there har&l4 8as a span &urin7 8hich spen&in7 on plant coul& ha$e e(erte& in luence un&istur6e& 64 the impact o a&&itional pro&ucts, 8hile in all other respects entr4 into the in&ustr4 8as per ectl4 unimpe&e&. 3he case thus ser$es to sho8 that neither prolon7e& 7estation nor 6ars to entr4 are so essential or the emer7ence o pro it as mi7ht 6e thou7htNalthou7h in man4 cases 6oth &o pla4 a role, it also ser$es to sho8 8hat it is that pre$ents competition rom steppin7 in promptl4 an& e ecti$el4 an& ho8 realistic the un&amental &istinction is 6et8een the 6eha$ior o the mere economic man an& the entrepreneur.
31F
still urther a6o$e that o the t8enties, 8hich loose statement applies e$en i no account 6e taEen o the &i erence in qualit4, 8hich &e ies comparison, an& o the chan7e in the price le$el. 5ro&uct per manhour, 8hate$er it ma4 mean in such a case, rose *lo7arithmicall4+ more sharpl4 6et8een 1909 an& 191F than e$er 6e ore or a ter. ;esi7ns 6ecame more sta6le, parts more stan&ar&iOe&, a ter 191)Nthe 4ear that closes the heroic a7e o the in&ustr4. -n 191F, 338 irms pro&uce& a total o 5J3,11F cars, to 8hich :or& contri6ute& almost one-hal . 3he importance o the in&ustr4 an& o its &eman& or the pro&ucts o other in&ustries 8as, there ore, per ectl4 a&equate to @i7nite@ the secon& Ju7lar, althou7h, e$en in 191F, $alue a&&e& 8as onl4 )10.G millions. Su6si&iaries &e$elope& quicEl4. -n 191F, 9J1 irms e(iste& pro&ucin7 6o&ies an& parts, an& motors in use& ne8 li e into the ru66er in&ustr4. Also in this countr4, there ha& 6een a consi&era6le amount o enterprise in the iel& o ru66er clothin7 a6rics in the thirties o the nineteenth centur4, 6ut it en&e& in ailure an& &isappeare& in the crisis o 183J to 1839. KulcaniOation accounts or a ne8 start that 8as a minor eature o the irst Ju7lar o the secon& Pon&ratie * rom 18F), on+. 3he ne(t e$ent, ollo8in7 upon a lon7 perio& o quiet an& rather passi$e e(pansion, 8as the mer7er that com6ine& 10 concerns into the #nite& States 9u66er 0ompan4 *incorporate& in 189)+, 8hich conquere& more an& more 7roun& in the Pon&ratie prosperit4 un&er &iscussion *later on it also acquire& plantations o its o8n +. 3his in&ustr4 elt the impulse o the ne8 &eman& rom the motorcar
/nticement or entr4 8as not 8antin7. .or 8as there an4 riction to hol& 6acE 8oul&-6e competitors or an4 lacE o promptness amon7 them. 3here 8as nothin7 6ut the &i icult4 o &oin7 a ne8 thin7 an& maEin7 a success o it. 0ompetitors cro8&e& alon7 an&, in an in&ustr4 requirin7 6ut little capital, not onl4 ho$ere& aroun&, 6ut actuall4 entere& the iel&. Lnl4, most o them aile& to pro&uce a car that 8oul& sell at a price co$erin7 cost, there 6ein7 a6solutel4 no other reason or this than the one em6o&ie in our theor4 o entrepreneurial acti$it4. 0oinci&ence o hi7h mortalit4 an& hi7h pro its i&eall4 e(presses this situation.
315
inno$ation soon a ter 1908, 8hen pro&uction o tires, tu6es an& other accessories 6e7an to count in pro&uction pro7rams. 85 3he oil in&ustr4 also 6ecame almost a su6si&iar4 to the 7asoline en7ine. -n 1899, onl4 1).8 per cent o cru&e oil on stills 8ent to the pro&uction o 7asoline, Eerosene still a6sor6in7 5J.J per cent M 6ut in our perio& the ormer an& the use o oil or uelin7 purposes in 7eneral aproache& their post8ar importance. :rom the stan&point o the in&ustr4, this 8as 6ut a a$ora6le e(ternal act, 8ithout 8hich &eca4 8oul& ha$e 6een una$oi&a6le, an& the consi&era6le &e$elopment &urin7 the perio&N $alue a&&e& in petroleum re inin7 increase& rom a6out )1 to a6out J1 millions 6et8een 1899 an& 191F, an& output o cru&e petroleum rom a6out G0 million to nearl4 )50 million 6arrels 6et8een 189J an& 1913N8as primaril4 a case o @6ein7 &ra8n alon7@ or o passi$e a&aptation. 3he rise 8hich occurre& in prices 6ears 8itness to that. 8G 5ipe lines, tanE ships, tanE cars 8ere no lon7er no$elties. 3here 8as pro7ress in the metho&s o prospectin7, in &rillin7 to 7reater &epthsNthe rotar4 &rill came a ter the 8arNan& in rational treatment o oil iel&s 64 7as an& 8ater pressure. 9e inin7 8as still &one in @sEimmin7@ an& in complete strai7ht-run plants, an& 7asoline 4iel& rom cru&e 8as still onl4 18.G per cent in 191FNthe cracEin7 process 8as to increase it an& h4&ro7enation to raise it to 100 per cent in post8ar times. 5ro its 8ere hi7h all the time an& partl4 inance& ne8 in$estment, particularl4 8ithin the Stan&ar& Lil concern. -ts &issolution 64 =u&icial &ecree in 1911 &i& not, 8ithin our
85
8G
3he thir& ne8 in&ustr4, ra4on, met &urin7 the perio& un&er &iscussion 8ith so little success in this countr4Nthe companies that 8ere oun&e& rom 189J to 1911 8ere unquali ie& ailures an& the American Kiscose, oun&e& in 1911, 8as a orei7n-o8ne& enterpriseNthat 8e nee& not mention it at all. As re7ar&s prices o cru&e oil, this 8as in spite o the act that pro&uction 8as hi7hl4 competiti$eNin act, $arious circumstances, natural an& le7al, com6ine& to maEe it almost per ectl4 so an& to orce e$er46o&4 to pro&uce 8hat he coul&. 3he Stan&ar& Lil concern ne$er controlle& more than 33.5 per cent o output *1898+, an& mostl4 much less *in 190J, or instance, 11 per cent+. -ts position reste& entirel4 on the pipe lines an& on re ineries. 3hat is 8h4 pipe-line companies 8ere su6=ecte& to the o6li7ations o common carriers in 190G.
31G
perio&, a ect the &i$ision o la6or 6et8een the constituent companies, althou7h it &i& so later. 8J Amon7 ol& in&ustries, 7lass pro&uction 8as thorou7hl4 re$olutioniOe& 64 inno$ations that 8ere almost entirel4 in&epen&ent o an4thin7 that happene& else8here. #p to 1898, slo8 intro&uction o tanE urnaces ha& 6een practicall4 the onl4 chan7e that ha& come to the 6ottle-7lass 6lo8er"s ol& tra&e or &eca&es, an& this ha& le t his unction untouche&. -n 1898 came the semiautomatic machine, 8hich, thou7h it eliminate& 6lo8ers, still require& sEille& la6or M an& in 1905, the completel4 automatic *L8ens+ machine. A later &e$elopment starte& in 191J *@ ee& an& lo8@ machine+. Almost simultaneousl4 the 8in&o8-7lass pro&uction 8as mechaniOe& *c4lin&er machine, J. '. 2u66ers, 1903, intro&uce& a6out 1905+. A7ain a later &e$elopment, the steel process *0ol6urn, :ourcault+, shoul& 6e mentione& here. A minor inno$ation 8as mi7ration * rom 5itts6ur7h to -n&iana an& Lhio+, mainl4 moti$ate& 64 the &esire to use natural 7as. Hhile $alue a&&e& *in the 7roup o stone, cla4, an& 7lass pro&ucts+ increase& 6et8een 1899 an& 191F 64 )0F per cent, emplo4ment ell stron7l4 an& permanently. :or instance, emplo4ment in the 6ottle *an& =ar+ in&ustr4 8as, a ter a spectacular increase o ph4sical output, e$en in 19)5 onl4 three-quarters o 8hat it-ha& 6een in 1899. -n other respects the case 8as normal. He in& quite as much increase in ph4sical output an& quite as much all in price as 8e ha$e a ri7ht to e(pect. 3his is interestin7, 6ecause the in&ustr4 8as 64 no means untouche& 64 the mer7er mo$ement or 64 the ten&enc4 to8ar& 7iant concerns irrespecti$e o mer7ers. 3he American Hin&o8 <lass 0ompan4, 8hich controlle& nearl4 three- ourths o the capacit4, 8as
8J
As mentione& in the prece&in7 section, pro&uction o natural 7as starte& in the mi&&le nineties on the increase that 8as to carr4 consumption, mainl4 or in&ustrial purposes, to 1,918 6illions o cu6ic eet. -n 1900 it 8as 509 6illions. A num6er o inno$ations in the in&ustr4 maEe it necessar4 to inclu&e it in the list o those that contri6ute& to the thir& Pon&ratie , particularl4 to its secon& an& to post8ar Ju7ulars.
31J
incorporate& in 1899. 3he irst thin7 it &i&, ho8e$er, 8as re&uce prices &rasticall4. .o &ou6t this mo$e 8as not onl4 interprete& 64 o6ser$ers, 6ut e$en moti$ate& 64 the e(ecuti$e, as an attacE on actual an& potential competitors, inten&e& to cut throats an& to esta6lish a monopol4. ,ut the point is that e$en i such monopol4 position ha& 6een attaine&, i.e., i the result ha& reall4 6een to lea$e 6ut a sin7le seller in the in&ustr4, that seller coul& ne$er ha$e 6eha$e& accor&in7 to the theoretical schema o monopol4 8ithout losin7 that position. 3he implications o this resol$e the para&o( o mo&ern in&ustr4, 8hich, 8hile stru77lin7 or monopoloi& control, 4et surpasses all historical recor&s in e icienc4 as measure& 64 ph4sical output, as 8ell as the other para&o( that, monopolistic ten&encies not8ithstan&in7, our schema its statistical act not less 8ell in the perio& o @6i7 6usiness@ than it &i& in more competiti$e times. Lther 6ranches o the 7lass in&ustr4 also &ispla4 instances o the ten&enc4 to8ar& the 6i7 concern *5itts6ur7h 5late <lass, 1895 M .ational <lass *ta6le8are+, 1899+. He pass 64 paper. 3here 8as little chan7e in pro&uction unctions Nthou7h much e(pansion o outputNe(cept 8hat is implie& in the use o h4&roelectric po8er an& in some interestin7 amal7amations *such as the -nternational 5aper 0ompan4 in 1898 or the American Hritin7 5aper 0ompan4 in 1899+. He also pass 64 printin7. 'oe"s re$ol$in7-c4lin&er press ha& 8on out 64 the si(ties M it 8as &e$elope& later on M color printin7 an& t4po7raph4 came in the ei7hties an& nineties, as &i& the Ber7enthaler linot4pe an& the 2anston monot4pe an& automatic t4pe castin7, 6ut the a&$ance 6e4on& that 6elon7s to the &o8n7ra&e o the thir& Pon&ratie . :inall4, 8e pass 64 the &e$elopments in the chemical in&ustr4 > pro7ress in the pro&uction o hea$4 chemicals, use o electricit4, mer7ers. He must, ho8e$er, maEe a remarE on cement, &e$elopments in 8hich in&uce& enthusiasts to speaE o a cement a7e. As a matter o act, the increase in output is as striEin7 as the all in price that accompanie& it, in spite o the protecti$e &ut4, the a6sence o per ect competition, the $iolent 6ooms &urin7 8hich it occurre&, an& the act that o8in7 to the contemporaneous inno$ations in 6uil&in7 *steel-concrete+ the &eman&
318
cur$e or its pro&uct shi te& up8ar& still more than it 8oul& ha$e &one un&er the mere in luence o 7eneral con&itions o prosperit4. 3he rise o the in&ustr4 &ates, as 8as mentione& in the prece&in7 section, rom the i th an& si(th Ju7ulars o the secon& Pon&ratie an& &e$elopment simpl4 continue& &urin7 the perio& un&er re$ie8. 3he irst stri&e ha& 6een ma&e in the mi&&le ei7hties, 8hen the price o 5ortlan& cement starte& on its &o8n8ar& course in response to a all in costs an& output 6e7an to increase. A6out ).J million 6arrels 8ere pro&uce& an& the actor4 price 8as ^1.G1 in 189J. Lutput 8as o$er 88 millions, an& price 8as ^0.93 in 191FNstill lo8er, in act, i impro$ement o qualit4 is taEen into account. A6sence o &istress in the in&ustr4 su77ests that mone4 costs per unit must ha$e allen, an& allen airl4 7enerall4 or the lar7e ma=orit4 o irms, to somethin7 liEe the <erman le$el. An inno$ation o the last Ju7lar o the prece&in7 Pon&ratie , the rotar4 EilnN8hich conquere&, an& increase& in siOe, as soon as it 6ecame more economical throu7h the use o po8&ere& coalNan& more po8er ul 7rin&in7 machiner4 must 6e responsi6le. 0ompetition 64 natural an& sla7 cement ma4 ha$e ha& somethin7 to &o 8ith the promptness 8ith 8hich the 6ene it 8as han&e& o$er to the consumer. Ban4 ne8 irmsN6ut no 7iantsNemer7e&, an& 8e can repeate&l4 ollo8 up pro7ress rom hi7her prices, 8hich threatene& the manu acturers" mar7ins, to lo8er prices a e8 4ears later, 8hich &i& not. 'o8 remarEa6le that is an& ho8 closel4 it 8as associate& 8ith the con&itions characteristic o a ne8 an& inno$atin7 in&ustr4 8e can see rom a comparison 8ith the cotton in&ustr4. 3his also e(pan&e&, cotton consumption rou7hl4 &ou6lin7 in the perio&. .or 8as inno$ation a6sent. 3he .orthrop-;raper loom came into its o8n in this perio& an& the 0rompton *1905+ an& Pno8les *1910+ looms 8ere then ne8. 9in7 spin&les 8ere impro$e& 8ith consi&era6le success as to the re&uction o cost an&, as mentione& 6e ore, electricit4 lent its ai&. 1et the price o print cloth rose rom 1900 to an& a6o$e the le$el o the secon& hal o the ei7hties > the character o the ol& esta6lishe& in&ustr4 that is &ra8n alon7 64 the en$ironment asserte& itsel . 3here
319
8ere some amal7amationsN.e8 /n7lan& 0otton 1arn 0ompan4 M American 3hrea& 0ompan4 M also an attempt to orm a cartel > :all 9i$er 5rintcloth pool, 1898 to 1901. 3he eature in 8oolen te(tiles 8as the lar7e 8orste& millNthe car&e&-8ool in&ustr4 &ecline& e$en a6solutel4N6ut, partl4 6ecause o the hi7h price o the ra8 material, there 8ere no &e$elopments that nee& &etain us. SilE ma&e consi&era6le hea&8a4, lar7el4 64 inno$ations 8hich, in part at least, o$ercame the &i iculties inci&ent to the American la6or situation M 6ut this 8as onl4 continuation o 8hat ha& 6een achie$e& 6e ore. L course, all the in&ustrial processes o the time re lect themsel$es in the &e$elopment o iron an& steel. ,ut the4 8ere to a much lesser &e7ree initiate& 64 it than the processes o , sa4, the ei7hties. He ha$e alrea&4 notice& the relation o 7i$e an& taEe 6et8een electricit4 an& steel an& the role o the latter in the mer7er mo$ement an& 8e 8ill 6ut a&& a e8 outstan&in7 acts. -n minin7, the ol& iron-ore &istricts &ecline& an& the 2aEe Superior ores &ominate& the marEet. 3he inno$ation 8as the &e$elopment o the Besa6i ran7e a ter the technolo7ical an& transportation pro6lems inci&ent to the qualit4 an& the location o that ore ha& 6een success ull4 o$ercome. Also the perio& sa8 the rise an& &eca4 o the ten&enc4 to8ar& complete $ertical inte7rationNalthou7h inte7ration to the e(tent o com6inin7 minin7, railroa&s, &ocEs, an& leets pro$e& success ul an& ma4 6e consi&ere& responsi6le or part o the 7reat increase in pro&ucti$e e icienc4 that occurre&Nan& se$eral attempts at reor7aniOation o the tra&e. 3he reall4 &ecisi$e all in the prices o ores occurre&, ho8e$er, 6e ore our perio&. 5rices o pi7 iron rose $er4 consi&era6l4 an& the in erence that there 8as no 7reat re orm in its pro&uction unction is 6orne out 64 the histor4 o the in&ustr4, 8hich, as ar as &irect use o iron is concerne& *8rou7ht iron+, naturall4 &ecline&. Lutput o pi7 iron rose in the Pon&ratie ups8in7, 6ut not much more, e$en in the hi7h ti&e o prosperit4, than it &i& in the ei7hties. 3his is &ue, o course, to the act that the same quantit4 8ent so much urther than 6e ore. All the si7ni icant pro7ress 8as in steel. 3he open-hearth process, the use o scrap, 6asic steel, an& allo4s are
3)0
the main hea&in7s. 3he irst three can har&l4 6e calle& no$elties. Boreo$er, in the case o the open-hearth process, it 8as lar7el4 consumers" &eman&, particularl4 rom pro&ucers an& users o structural material, that 7a$e it the $ictor4 o$er the ,essemer process. .e8 plantsNthe <ar4 plant, or instanceNhence a&opte& it as a matter o course, althou7h, or man4 in&i$i&ual pro&ucers, it still in$ol$e& inno$ation to &ismantle their ,essemer plant an& to thro8 in their ortunes 8ith the *6asic+ open-hearth process. -t shoul& 6e o6ser$e& in passin7 that the open-hearth process, 8orEin7 8ith scrap, 7a$e a ne8 stimulus to the smaller concern, 6ecause the economies o lar7e-scale pro&uction 8ere much less than in the ,essemer plant. Allo4s, 8hich 8ere to 7ain 7reat importance, 8ere practicall4 ne8. 3he4 ha& score& their irst successes in the ei7hties, especiall4 or or7in7s *cranEsha ts or the ,oston /le$ate&, or instance, or the mo$in7 parts o the pumps o the 0alumet an& 'ecla mines+. 3he important &e$elopment, ho8e$er, 8ith 8hich the ,ethlehem steel 8as particularl4 associate&, came in our perio&. 'i7hspee& cuttin7 steel or the machine shop an& $arious other specialties, or motorcars, railroa&s, oil &rills, an& so on, 8ere 6e7innin7 to pla4 a role. Still, ho8e$er important these &e$elopments an& ho8e$er 7reat their quantitati$e contri6ution to the Pon&ratie , it 8as, ne$ertheless, one more case o the 7reat thin7s ha$in7 6een &one. 3he quantit4 o cru&e steel consume& increase& ull4 as much as 8e shoul& e(pect it to &o in a Pon&ratie prosperit4, 6ut the 6eha$ior o prices clearl4 &oes not place steel pro&uction in the $an o inno$ation. -n the case o specialties this 6eha$ior ma4 enter into the class o prices o 6ran&e& articles an& also $eil an actual all per e icienc4 unit. -n other cases, or e(ample the stan&ar& one o the price o rails, 8hich stoo& at )8 rom 190) to 1915, it ma4 6e &ue to another t4pe o monopoloi& situations, althou7h rails ha& &ispla4e& a ten-tenc4 to rise 6e ore 1901. -n other cases there 8as competition enou7h to en orce a all i con&itions o pro&uction ha& 8arrante& it. 1et none ensue&, e(cept such as 8oul& occur in the course o Ju7lar situations.
3)1
0opper minin7 illustrates $er4 8ell some o the 8a4s o inno$ation. -ts American histor4 6e7ins in Bichi7an *Pe8eena8 peninsula, 185F+. Lutput increase& rapi&l4Nthere 8as plent4 o &eman& in the i ties rom the 6rass an& copper 8orEs in 0onnecticut *Eitchen utensils M 6rass an& copper tu6in7 M 6oth not important inno$ations+, rom pro&ucers o oil lamps an& 6urners, ship6uil&ers, an& so on. ,4 the si(ties, a consi&era6le in&ustr4 ha& &e$elope&, 8hich pro ite& 7reatl4 rom the 8ar, an& the pro&ucts o 8hich 6e7an to compete 8ith ironN as iron, a centur4 6e ore, ha& almost cro8&e& out copper in /urope. 5ro essor 3aussi7 is presuma6l4 ri7ht in his opinion that it o8e& 6ut little to the special 6ill o 18G9, 8hich 7a$e it a&&itional protection. 3he 0alumet an& 'ecla mines 7ot into their stri&e in that 4ear an& i7ure& in the su6sequent 6oom. 3he annual a$era7e price o copper in 18J) almost reache& the annual a$era7e o 18GF, an& then ell, 8ith sharpl4 marEe& Ju7lar luctuations, to 189F. 3his all, 8hich 8as 7reater than that o the price le$el, 8as as much &ue to inno$ations o the &o8n7ra&e t4pe *po8er &rills, hi7h-po8er e(plosi$es, all sorts o mechaniOations+ that re&uce& costs so as to en orce a polic4 o @nursin7 &eman&@ in or&er to e(ten& ol& an& create ne8 uses, as it 8as to ne8 competition rom the AriOona an& Bontana mines that 8ere &isco$ere& in the se$enties. Lutput o the Bontana mines *,utte, $ein oresN e(pensi$e to 8in 6ut o hi7h copper contentNthe 6asis o the position o the Anacon&a concern+ outstrippe& that o the Bichi7an mines in 188J. 3hese ne8 sources o suppl4 8ere one o the 64pro&ucts o railroa& &e$elopments, 6oth in the sense that the railroa&s in&uce& their &isco$er4 an& in the sense that the4 ma&e e(ploitation possi6le, since there 8as no uel or smeltin7 an& re inin7 in their nei7h6orhoo&. 3he 7reat increase in output &urin7 our perio&, at the $er4 6e7innin7 o 8hich there 8as a copper 6oom culminate& in 1899 an& 8as ollo8e& 64 another rom 190F to 190G, 8as in&uce&, ho8e$er, 64 the &e$elopments o the electric in&ustr4 an&, later on, o the motorcar in&ustr4. Alrea&4 in the ei7hties the inno$ation o har& &ra8in7 o copper 8ire ha& esta6lishe& that contact 8hich then
3))
6ecame the &ominant actor in the &eman& or copper. At the same time electricit4 ha& contri6ute& the ne8 metho& o re inin7 8hich in the course o the nineties re&uce& costs to a6out hal . .e8 &isco$eries *porph4r4 ores+ in #tah, .e$a&a, .e8 Be(ico, AlasEa *1900 to 1911+, the 7reat e(pansion in AriOona 8hich 6e7an in the mi&&le nineties, an& $arious impro$ements in minin7 metho&s complete the list o inno$ations. -nterpretation in the li7ht o our mo&el is o6$ious M the competiti$e stru77les 8ith iron * or e(ample, earl4 tele7raph 8ires 8ere ma&e o iron+ an& aluminum are particularl4 interestin7. 3he oun&ation in 1899, an& the success rom 1899 to 1901 an& a7ain rom 1905 to 190J o a hol&in7 concern primaril4 aimin7 at control o prices 8ith a $ie8 to creatin7 short-run monopol4 situations *Amal7amate& 0opper+ &eser$es notice precisel4 6ecause it a or&s one o those rare instances to 8hich the or&inar4 theor4 o monopol4 appro(imatel4 applies. -t also illustrates the con&itions, the limitations, an& the essentiall4 temporar4 character o all such cases an& the &i erence 6et8een them an& the or&inar4 in&ustrial com6ines. 3he onl4 other su6=ect 8e can a or& to touch is aluminum. ,oth its commerciall4 success ul metho&s o pro&uction are 6ranches o electrical metallur74 *the 6rothers 0o8les M '%roult-'ull+. 3heir in$ention in the ei7hties le& to quicE e(pansion in the last Ju7lar o the secon& Pon&ratie , an& prices ell to one &ollar per poun& 64 a6out 1890. 3he t8o irms in control o the in&ustr4 *3he 5itts6ur7h 9e&uction, later American Aluminum 0ompan4 an& the 0o8les /lectric Smeltin7 0ompan4, 0le$elan&+ a or& as instructi$e a case stu&4 as the sin7le seller o later &ate &oes un&er similar con&itions. 5rices continue& to all an& in the mi&&le nineties ha& reache& the le$el at 8hich mass pro&uction or structural purposes 6ecame possi6le. 3he use or railroa&s, motorcars, an& electrical appliances, in the oo& in&ustries, in chemistr4, an& so on, 6e7ins in our perio&. 8. As usual, 8e cannot hope to e(plain e$er4 in&i$i&ual spurt an& 6reaE&o8n 64 the actors 8hich enter into our mo&el. All the latter can &o or us, is to &escri6e the in&ustrial processes that un&erlie such
3)3
spurts an& 6reaE&o8ns an& create con&itions that a$or their occurrence. /nou7h acts ha$e 6een presente& to =usti 4 the statement that those 1G 4ears 8ere a perio& o rapi& in&ustrial e$olution, taperin7 o at the en&, &ispla4in7 all those characteristics that 8e impl4 8hen speaEin7 o a Pon&ratie prosperit4, an& centerin7 in the electrical inno$ation 8ith all that 8as in&uce& 64 it. 3his Pon&ratie prosperit4 naturall4 &i$i&es upN8ithin the &e$elopments associate& 8ith electricit4, 8hich 8ent on 8ith har&l4 an4 6reaENinto t8o perio&s each characteriOe& 64 in&ustrial processes o its o8n, the irst primaril4 64 mer7ers, the secon& primarl4 64 the automo6ile in&ustr4, thou7h 6oth 8ere also in luence& 64 other items, amon7 them some that 8ere merel4 @completin7.@ 3he processes o the secon& perio& are &iscerni6le 64 190J, 6ut &o not &ominate the economic situation 6e ore 1909, thou7h the processes o the irst perio& ha& clearl4 come to a pro$isional stop 6e ore. He ha$e 6e ore us a complete an& an incomplete Ju7lar, the en& o the latter 6ein7 su6mer7e& in the e ects o the 8ar. ,ut, 8orse than usual, the picture o 7eneral 6usiness situations &urin7 se$eral 4ears completel4 ails to 6ear out the e(pectations 8hich, on the e$i&ence rom in&ustrial histor4, 8e shoul& orm as to their comple(ion, so much so as to maEe the &atin7 o c4clical phases uncertain. 3he nature o the &i icult4 is 8ell 6rou7ht out 64 the 6eha$ior o time series. Ln the one han&, prices, output, pi7-iron consumption, clearin7s, an& so on re lect $er4 8ell the 7eneral eatures o a Pon&ratie prosperit4 an& also the &i$ision into t8o su6perio&s. - 8e eliminate tren&s, the Pon&ratie e ect is lost, 6ut that &i$ision stan&s out quite stron7l4 > t8o sequences o 8ell-marEe& Pinchins are separate& 64 an a6rupt trou7h in 190J-1908. Ln the other han&, this trou7h is irre7ular rom the stan&point o our schema, as 8ell as rom the stan&point o in&ustrial histor4. :or 190J 8e shoul& ha$e e(pecte& the situation 8hich 8e &o not in& 6e ore the secon& hal o 1909. 'ence our schema &oes not e(plain that crisisN not, at all e$ents, or the precise &ate at 8hich it occurre& an& at 8hich either continue& re$i$al or prosperit4 ou7ht to ha$e comman&e& the scene.
3)F
3he 8riter 8ishe& to put the case thus stron7l4 in or&er to ena6le his rea&ers to recor& it a7ainst the three-c4cle schema. 'e &oes not &o so himsel , ho8e$er, 6ecause those irre7ularities seem to him a&equatel4 accounte& or 64 a actor 8hich in the prece&in7 historical report has repeate&l4 6een stresse&, vi#., the course o e$ents in the inancial sphere, 8hich in the perio& un&er &iscussion acquire& an a6normal importance. He ha$e seen that one class o the inno$ations that carrie& that Pon&ratie prosperit4 an& in particular its irst Ju7lar Nmer7ersNten&e& more than others to in&uce &istur6ances o a purel4 inancial nature. He ha$e also seen that the 6anEin7 s4stem aile& to unction accor&in7 to &esi7n. 3he practices o the trust companies in act re$i$e&, in a mo&erniOe& orm, the 8il&cat 6anEin7 o the thirties o the nineteenth centur4. ,ut recElessness in the han&lin7 o the most &i icult part o a 6anE"s 6usinessNthat part 8hich has to &o 8ith the inancin7 o inno$ation an& o speculati$e transactions inci&ent to inno$ationN8as not con ine& to them. /$en the national 6anEs maneu$ere& themsel$es into positions o strain, almost rom the start, an& 8ere repeate&l4 una6le to respon& to current requirements, 6ecause the4 ha& lent on ne8 securities that s4n&icates 8ere una6le to place. ,oth at the time an& later, responsi6ilit4 or this state o thin7s 8as attri6ute& to the a6sence o a central institution an& to the le7al rame8orE 8ithin 8hich the 6anEin7 s4stem ha& to 8orE, reser$e requirements in particular. 3his, ho8e$er, 8as puttin7 the cart 6e ore the horse. -t is true that a&equate machiner4 &i& not e(ist or the han&lin7 o a crisis a ter the e$ent. ,ut this has nothin7 to &o 8ith the 8a4 in 8hich the con&itions o strain arose. Ln the contrar4, the strain restrained 8hat other8ise 8oul& ha$e 7one on entirel4 un6ri&le&. - an4 lesson can 6e &ra8n at all rom the e(perience o those &a4s, it is e(actl4 opposite to the one that recommen&e& itsel 6oth to the 6anEin7 communit4 an& to the pu6lic min&. ,lamin7 the 6raEe or the results o recEless &ri$in7 is, ho8e$er, part o the political ps4cholo74 o c4cles.
3)5
3his actor &i& more than &istur6 the sur ace. -t is un&erstan&a6le that, in an atmosphere in 8hich e$er4one li$e& on, an& 8orEe& 8ith, 8hat as 4et 8ere uture possi6ilities, the in&ustrial process also shoul& 6e pro oun&l4 a ecte&. 9emem6erin7 this, 8e shall no8 $enture upon an interpretation o e$ents 4ear 64 4ear. /i7hteen ninet4-ei7ht maEes a $er4 normal irst 4ear o a Pon&ratie prosperit4. ,ut a si7ni icant reaction to a pace, particularl4 in the inancial sphere, 8hich 8as clearl4 a6normal an& $er4 stron7l4 &ispla4e& the eatures that 8e su6sume un&er the hea&in7 Secon&ar4 Ha$e, occurre& as earl4 as :e6ruar4 1899, an& liqui&ation, not quite con ine& to the inancial sphere, laste& to the en& o Ba4 *&eath o :lo8er, Ba4 1)+. Another set6acE came in ;ecem6erNcall mone4 at 18G per cent on the ei7hteenth o that month actuall4 ha& a so6erin7 e ect or a 4ear, althou7h cause& 64 /n7lish trou6les M it thre8 much li7ht on the situationN6ut in&ustr4 &i& not slacEen until the mi&&le o 1900. 3his completes the prosperit4 o the irst Ju7lar, the recession o 8hich shoul&, accor&in7 to our schema, &ispla4 much the same s4mptoms, 6ecause o the location o that Ju7lar in the Pon&ra-tie . So it &ocs throu7h 190), 8itness the @steel amine.@ 3he 8heat har$ests o 1901 an& 190) 8ere a$ora6le e(ternal actors. ,ut the 8a4 8as stu&&e& 8ith inancial $icissitu&es o 8hich that out6reaE o speculati$e renO4 centerin7 in the .orthern 5aci ic corner an& the reaction thereto 8ere the most important. 'o8e$er, 8hile upsettin7 the international mone4 marEet an& the normal unctionin7 o the &omestic 6anEin7 s4stem, the4 &i& not 6lot out the in&ustrial rh4thm. Hhat can 6e interprete& as a re7ular Ju7lar &epression, miti7ate& 64 the un&erl4in7 Pon&ra-tie s8ell, set in at the 6e7inin7 o 1903 an& laste& till nearl4 the en& o 190F, the so-calle& @rich men"s panic@ 6ein7 its complement in the inancial sphere. 9eco$er4 ollo8e&, an& un&er the circumstances there is no reason to 8on&er at its $iolence, 8hich ma4 6e hel& to account or a short reaction. 3he latter or the reco$er4 rom it 8oul& then complete that Ju7lar"s thir& Pitchin. 3his carries us to a6out the mi&&le o 190G.
3)G
3hen ollo8e& in&ee& a stron7 ups8in7 in the secon& hal o 190G, sustaine& thou7h on a stationar4 le$el until the autumn 190J M 6ut it &oes not linE up 8ith an4 ne8 processes in in&ustr4 an& su&&enl4 7a$e 8a4 to 8hat looEs liEe &eep &epression or the rest o the 4ear, ollo8e& 64 an onl4 less su&&en reco$er4 in 1908. 3he 4ear 1909 &ispla4s all the eatures o a re7ular prosperit4 mil&er in character than that o the irst Ju7lar, 8hich 8e shoul& e(pect rom its location in the Pon&ratie , althou7h 8e shoul& not ha$e e(pecte&, an& must trace to a tere ects o prece&in7 irre7ularities, the earl4 relapse in 1910 an& 1911. 191) 8as a 4ear o 7oo& 6usiness an& is true to orm, an& in 1913 an& 191F the s4stem 8as sli&in7 into 8hat 6ears interpretation as a re7ular Ju7lar &epression. Althou7h not 8holl4, irre7ularit4 is, there ore, mainl4 con ine& to 190J an& 1980, i.e., to the crisis o 190J an& its a termath. 3his crisis is an intermeOOo, 8hich alls outsi&e o our schema. Lnce 8e accept that e(planation o it 8hich is o ere& here, it 6ecomes as un&erstan&a6le that the settin7 in o the in&ustrial processes that carrie& the secon& Ju7lar shoul& ha$e 6een &e erre& 64 it, as the same e ect 8oul& ha$e 6een un&erstan&a6le i , instea& o the crisis, a natural catastrophe or a social &istur6ance o su icient ma7nitu&e ha& occurre&. :or the crisis 8oul&, not less than e$ents o the latter t4pe, inter ere 8ith entrepreneurial acti$it4 64 &estro4in7 the nei7h6orhou& o equili6rium rom 8hich alone it starts. Also, it 8oul& ollo8 that 8e shoul& not accept at ace $alue 8hat looEs liEe an o$er7ro8n PitchinNe(ten&in7, i 8e count rom trou7h to trou7h, rom 190F to 1908N6ut rather allo8 the &ent in 190G to split it so that the irst Ju7lar en&s in *the mi&&le o + that 4ear. He 8ill not 7o into the &etails o the crisis o 190J or into the technique 64 8hich that crisis 8as han&le&. ,ut, since our &ia7nosis attri6utes its $iolence an& its location in time entirel4 to the &oin7s in the inancial sector, 6oth &e ense an& e(planation seem to 6e calle& or. As to the irst, a sur$e4 o e$ents since 1898, the elements o 8hich ha$e 6een presente& a6o$e, clearl4 4iel&s supportin7 e$i&ence. -n particular, it shoul& 6e o6ser$e& that the manner in 8hich the inancial en7ine 8as rom the start han&le& 64 the 7roups an& in&i$i&uals at or
3)J
near the steerin7 8heel, 8hile per ectl4 a&equate to pro&uce 6reaE&o8ns, at the same time pro&uce&, or those 7roups an& in&i$i&uals, results 8hich o ere& ample enticement to repeat a6uses on an e$er-enlar7in7 scale. 3hat a ma=or 6reaE&o8n, 8hen it e$entuall4 occurre&, &i& not remain con ine& to the stocE e(chan7e an& to the 6anEs, 6ut also paral4Oe& the economic process, is not surprisin7. ,ut the short &uration o this @&epression,@ as 8ell as the act that it 8as not nearl4 so &eep as 8e mi7ht in er rom in&ices that hea$il4 8ei7ht the output in the most a ecte& sectors, an& as 8e mi7ht e(pect rom the $iolence o the inancial catastrophe, len& support to our $ie8 that it 8as not a &epression in our sense at all. .or can it 6e ur7e&, as an ar7ument a7ainst the a6o$e anal4sis, that the crisis 8as international. :or <erman4 an& a e8 other countries, such as /74pt, a $er4 similar state o thin7s can 6e sho8n to ha$e e(iste& an& to ha$e pro&uce& lar7el4 autonomousl4, similar results, s4nchroniOation o 8hich is easil4 accounte& or 64 e(istin7 inancial relations. As re7ar&s the rest o the 8orl&, 8hich 8as much less a ecte&, these relationsNan& in ection 64 the speculati$e e(cesses in AmericaNare su icient to account or such crises as occurre&. -n act, orei7n capital pla4e& a consi&era6le role in the American stocE e(chan7e an& mone4 marEet at the critical time. - , then, this &ia7nosis seem accepta6le, it ollo8s that, 6arrin7 those sur ace phenomena that characteriOe an4 crisis, there is no analo74 6et8een 190J an& either 18J3 or 19)9. 3his is in&ee& o6$ious rom the character an& &uration o the &epressions that ensue& in the t8o latter cases. 3here is more similarit4 6et8een 190J an& 185J. He shoul& not attach much importance to such &etails as that each o these cases centere& aroun& a conspicuous ailure *in 190J that o the PnicEer6ocEer 3rust on Lct. ))+. ,ut it is more rele$ant that 6oth occurre& in the irst hal o the Pon&ratie . 3he rea&er shoul& o6ser$e ho8 man4 o the actual acts o 6oth cases are co$ere& 64 this ormula, an& ho8 8ell the similarities 6et8een them an& the &i erences 6et8een these t8o an& other cases are e(presse& 64 it. 3he analo74 shoul& not, ho8-$er, 6e presse& too ar. 3he location o 6oth
3)8
crises in their Pon-&ratie s is not e(actl4 the same. 3hat in 185J occurre& at a later sta7e an& hence it can, to a much 7reater e(tent, 6e e(plaine& 64 the un&erl4in7 phase o the e$olutionar4 process. ,ut the e$er- or7otten lesson a6out 8hat causes such spectacular 6reaE&o8ns o the capitalist en7ine an& ho8 the4 coul& 6e pre$ente& or miti7ate& is the same in 6oth, an& in act all, cases. /(planation is &ue 6ecause our &ia7nosis e(plains the occurrence o the crisis o 190J 64 a &istur6ance o the normal 8orEin7 o the c4clical process o e$olution, 8hich 8as not attri6uta6le to an e(ternal actor 6ut to the s4stematic a6use o the inancial apparatus. SpeaEin7 o a &istur6ance o the capitalist process 64 a actor that arises out o that process itsel o6$iousl4 raises a metho&olo7ical question. An4 economic or social s4stem has its lo7ic an& the stan&ar&s inherent to that lo7ic. / ects &ue to action con ormin7 to this lo7ic an& those stan&ar&s are one thin7, e ects o &e$iations rom them another thin7. -n matters o human 6eha$ior, 6oth con ormin7 an& &e$iatin7 action must 6e separatel4 taEen into account, or 6oth are equall4 real. 3his shoul& also e(plain 8h4 8e can speaE o a6use as &istin7uishe& rom use o institutions 8ithout there64 committin7 oursel$es to a moralN or an4 otherN$alue =u&7ment. 3he ormer term is inten&e& merel4 to in&icate the act that the 6eha$ior &e$iates rom stan&ar&s 8hich ollo8 rom the structure o an economic s4stem. 3he onl4 question that matters is 8hether or not that &istinction is supporte& 64 the acts an& in turn ser$es to eluci&ate them. - this 6e ans8ere& in the a irmati$e, @ ault4@ han&lin7 o institutions ma4 in&uce 6reaE&o8ns e(actl4 as an e(ternal actor, an& &istur6ance o this nature can autonomousl4 arise in the inancial as in an4 other sphere o economic acti$it4.
3)9
-Q
0hapter K--1919-19)9
3a6le o 0ontents
A. .o t#a! E,ent and .o t#a! .!o(lem . N 3he ormi&a6le tasE
o interpretin7, economicall4 an& sociolo7icall4, our o8n time cannot 6e attacEe& in this 6ooE. Hhate$er o this the rea&er ma4 in& in the ollo8in7 pa7es, is inci&ental to an ar7ument the $er4 restricte& purpose o 8hich shoul& 6e 6orne in min& throu7hout. 3hat purpose is to ans8er the question ho8 ar the c4clical process o capitalist e$olution, as anal4Oe& or the 130 4ears that prece&e& the Horl& Har `, can 6e pro$e& to ha$e persiste& in the post8ar perio&, an& to see ho8 our mo&el 8orEs un&er the con&itions an& 8ith the richer material o that perio&. 3he contri6ution to8ar& an un&erstan&in7 o the post8ar-8orl& 8hich an in$esti7ation o this Ein& can 6e e(pecte& to maEe ma4 pro$e 8orse than $alueless, i its character, metho&olo7ical 6acE7roun&, an& anal4tic intention are allo8e& to &rop out o si7ht. Hhere$er it seeme& possi6le, an attempt has 6een ma&e to sa$e space an& to rel4 on the act that current economic e$ents are, an& ha$e 6een since the 8ar, $er4 much more e icientl4
`
Author re ers to Horl& Har -, throu7hout, as Horl& Har.
330
reporte& than 6e ore, an& on the hope that 7eneral contour lines are, there ore, amiliar to the rea&er. He e(clu&e the 4ears 191F to 1918 on the 7roun& that those 4ears 8ere &ominatee& 64 @e(ternal actors@ to an e(tent that maEes their i7ures $alueless or our purpose. 3hat is, in&ee&, not quite true. 3he rh4thm o economic li e clearl4 persiste& in the #nite& States, an& some aspects o 8ar e$ents are not 8ithout rele$ance or the stu&4 o 6usiness c4cles. -n particular, 8ar e(pen&iture a or&s as 7oo& e(perimental e$i&ence as 8e can e$er hope to 7et a6out the nature an& consequences o a 6oom 8hich has nothin7 to &o 8ith inno$ation an& is 6rou7ht a6out 64 e(pan&in7 cre&it an& stimulatin7 consumption alone. 3he act that e(pen&iture 8as not &irecte& into channels 8hich 8oul& commen& themsel$es to a&$ocates o such a polic4 is entirel4irrele$ant, or all that matters is that &epressions 8ere actuall4 impen&in7 or in pro7ress in 191F an& that pu6lic e(pen&iture turne& them into prosperit4 irst an& create& untena6le situations a ter8ar&. ,ut althou7h the case almost i&eall4 complements an& illustrates part o the ar7ument o this 6ooE, 8e 8ill ollo8 the practice o the ma=orit4 o stu&ents an& eliminate those $iolent @irre7ularities@ 64 lea$in7 out the i7ures o those 4ears. /(ternal actors in our sense continue& to pla4 a supernormall4 important rale throu7hout the post8ar perio&. 3hat our secon& component o economic chan7e, the c4clical process o e$olution, 8as still present an& asserte& itsel in the same manner as 6e ore is not so o6$ious. L8in7 to the historic character o our su6=ect Nor the act that it is @institutionall4 con&itione&@Nthis question 8oul& arise in an4 case, e$en i there ha& 6een no 8ar > 8hene$er 8e 8ish to appl4 our anal4sis to an a&&itional span o time, 8e must al8a4s asE 8hether our process still persists. 3he metho& o &eri$in7 an ans8er is to locate the post8ar perio& in our c4clical schema, to ormulate the e(pectations 8hich ollo8 rom that, an& to see ho8 ar the4 a7ree 8ith o6ser$e& act. Accor&in7 to that schema the post8ar time up to the 8orl& crisis co$ers parts o the recession an& &epression phases o
331
our thir& Pon&ratie 8hich un&erlie t8o incomplete Ju7lars. luctuations 6eha$e as the4 &i& 6e ore the 8ar, those Ju7lars 8oul& 6e the thir& an& ourth o that Pon&ratie . 3he thir& 8oul& complete the recession, the ourth 8oul& entirel4 lie on *6ut not complete+ the &epression phase o the latter. He ou7ht to 6e a6le, inall4, to &iscern the Pitchin 8a$e superimpose& on those t8o. The time series picture of all this must then link up with thehistorical facts of the industrial process behind it. /(pectations are per ectl4 &e inite an& 8ill 6e ormulate& as our picture un ol&s.
3a6le o 0ontents
B. Comment on .o t#a! .atte!n . N .o8 8e 8ill &rop, i onl4
or a e8 para7raphs, the practice, impose& upon us 64 the nature o our tasE, o treatin7 the institutional rame8orE o societ4, the attitu&es o in&i$i&uals an& 7roups, an& the policies resultin7 rom a 7i$en social pattern as &ata o our economic process, an& chan7es in these &ata as e(ternal actors. He 8ill 7lance at the social process as a 8hole an& in so &oin7 a&opt the con$enient, thou7h possi6l4 ina&equate, h4pothesis o Bar(ism, accor&in7 to 8hich social, cultural, political situations an& the spirit in 8hich an& the measures 64 8hich the4 arc met, &eri$e rom the 8orEin7 o that capitalist machine. Lur c4clical schema len&s itsel to this $ie8, not onl4 6ecause o the len7th o its lon7est 8a$e, 8hich 6rin7s lon7-run social chan7es 8ithin the reach o 6usiness-c4cle anal4sis, 6ut also 6ecause it stresses that Ein& o economic chan7e that is particularl4 liEel4 to 6reaE up e(istin7 patterns an& to create ne8 ones, there64 6reaEin7 up ol& an& creatin7 ne8 positions o po8er, ci$iliOations, $aluations, 6elie s, an& policies 8hich rom this stan&point are, there ore, no lon7er @e(ternal.@ 3he stan&ar& illustration is a or&e& 64 those inno$ations 8hich &ro$e the artisan"s shop into mo&est reser$ations an&, to7ether 8ith the artisan"s shop, also the artisan"s 8orl&. <atherin7 up the threa&s that lie all o$er our e&i ice 8e mi7ht thus tr4
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to un&erstan& the social con i7uration o the post8ar perio& rom the economic process 8e ha$e anal4Oe&. ,ut 8e shoul& in& the tasE more &i icult than the analo7ous one in the cases o the irst an& secon& Pon&ratie s. 3here the social process an& its cultural an& political complements 8ere not &i icult to interpret in the sense o the 8orEin7 h4pothesis 8hich or the moment 8e ha$e a&opte&. All that 8as not co$ere& 64 it 8e coul& com orta6l4 sto8 a8a4 as ata$isms. 3his is not so in the case o the .eomercantilist Pon&ratie . - the rea&er re ers to 0hap. K--, Sec. /, he 8ill in& that 8e ha& to reco7niOe, 6esi&es phenomena that in&icate& consistent &e$elopment o pre$ious ten&encies, the presence o other phenomena that &i& not seem to it into the same current 6ut rather to i7ht a7ainst it > the4 looEe& liEe a re$olt a7ainst the rational or rationalistic ci$iliOation o that epoch. L course, it is eas4 to la6el them, too, as ata$isms. 3his soun&s con$incin7 in some cases, or instance, in the case o the <erman le7islation or the protection o the artisan class. 'ere 8e see a &4in7 stratum tr4in7 to &e en& its crum6lin7 6asis 64 political means. -t is not so con$incin7 in others, an& an4 open min& must a&mit the possi6ilit4 that a mo$ement o such 6rea&th an& &epth ma4 ha$e 6een more than an ata$ism or the last car& o a &eca4in7 class. 3he act that the 8riter ha& no 6etter name to o er or it than $eomercantilism su icientl4 sho8s that so ar he has not succee&e& in interpretin7 it to his o8n satis action. :or that term, at 6est, 7ets hol& o one o man4 aspects an& is as ina&equate as .ationalism or Anti-rationalism 8oul& 6e. .o8 that ten&enc4 or attitu&e &i& not perish. Ln the contrar4, it &e$elope& &urin7 the post8ar perio& an& in &e$elopin7 re$eale& itsel more ull4 in the 0orporati$e or 3otalitarian or :ascist State an& also 6ecame i&eolo7icall4 articulate. 'o8e$er much the 8arNan& the circumstances o the @'a$e-not nations@Nma4 ha$e ha& to &o 8ith concrete orms, mechanisms, timin7s, an& sur ace e$ents, that &eparture rom the roa& that lea&s rom capitalism to ortho&o( socialism is not @&ue@ to it, an& the 7eneral &ri t o this pa7e mi7ht ha$e 6een the same ha& it ne$er occurre&. 3he ans8er to the question
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ho8 this &e$elopment ma4 6e e(pecte& to a ect our c4clical process &epen&s on the Ein& o plannin7 that a ascist 7o$ernment un&ertaEes > 7i$en su icient po8er an& insi7ht in a central authorit4, inno$ation ma4 o course 6e planne& or in such a 8a4 as to minimiOe &istur6ance. 1. - this component o post8ar histor4 can 6e trace& to pre8ar sources, e$er4thin7 can. :or the onl4 other componentNthe @socialist@ oneNis per ectl4 en regie rom the stan&point o our 8orEin7 h4pothesis an& ma4 rea&il4 6e &escri6e& in terms o the rationaliOin7, le$elin7, mechaniOin7, an& &emocratiOin7 e ects o capitalist e$olution. 3his is too o6$ious to &etain us, an& onl4 a e8 points o particular rele$ance to our su6=ect nee& ela6oration. :irst, the rise o the la6or interest to a position o political po8er an& sometimes o responsi6ilit4, 8hich is 6ut the most conspicuous o the s4mptoms o a pro oun& chan7e in social structures, is clearl4 a pro&uct o capitalism in our sense o the term, 8hich create& a political 8orl& an& political attitu&es un&amentall4 incompati6le 8ith itsel e$en 8here, as in the #nite& States, the la6or interest 8as *8ithin our perio&+ not politicall4&ominant. 3he ha6it o the ol&ashione& li6eralNin the /uropean sense o the 8or&No 6lamin7 @politics@ or almost e$er4thin7 he consi&ers less than satis actor4 in the capitalist 8orl& is, as ar as this 7oes, in act open to the o6=ection that in 6lamin7 @politics@ he is 6lamin7 a pro&uct an& an essential element o the s4stem he appro$es. 3aEin7 the social s4stem o capitalism as a 8hole, it is meanin7less to sa4 that itNor an4 element o it, e.g., the 7ol& stan&ar&Nis checEmate& 64 @politics.@ Hhat ou7ht to 6e sai&Non this le$el o anal4sisNis that it checEmates itsel . Secon&, it is 8orth mentionin7 that capitalism, also 64 its o8n 8orEin7, e$ol$es a phenomenon the importance o 8hich 8as not oreseen 64 Bar( > the clerical class. 3he 7ro8th o the la6orin7 stratum proper, relati$el4 to the increase o 7ain ull4 occupie& persons, cease& in the irst &eca&e o this centur4, 6ut the relati$e 7ro8th o the salarie& emplo4ee *rou7hl4 equal to @8hite collar@+ then
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6ecame spectacularN or o6$ious reasons o capitalist technique. 3he interests o this classNthe @lo7ic o its situation@Nan& its attitu&es &i erin7 consi&era6l4 rom the interests an& attitu&es o @8orEmen,@ 8e ha$e here a actor to the po8er o 8hich much o the politics an& policies o post8ar times ma4 6e trace&, particularl4 in <erman4. 3his .e8 Bi&&le 0lass, as it has 6een calle&, orms in some countries an& comes near to ormin7 in others, to7ether 8ith armers *peasants+ an& small 6usinessmen *mainl4 retailers+, a ma=orit4 o the population, 8hich, thou7h split into 8i&el4 &i erin7 sections, 4et eels an& acts uni orml4 in man4 cases M an& that in un&amental attitu&e it is as hostile to the interests o the 6i77er an& 6i7 6our7eoisie as is the 8orEin7 class in the narro8er sense o the term, thou7h also hostile to the interests o the latter. -t is in the li7ht o these acts an& not in the li7ht o the simple 6ut entirel4 unrealistic contrast 6et8een propert4 o8ners an& proletarians that post8ar patterns must 6e un&erstoo&. 3hir&, capitalist e$olution not onl4 upsets social structures titu&e it is as hostile to the interests o the 6i77er an& 6i7 6our-8hich protecte& the capitalist interests, 64 pro7ressi$el4 eliminatin7 precapitalist strata rom politics an& pu6lic a&ministration an& 64 creatin7 ne8 positions o political po8er, 6ut also un&ermines the attitu&es, moti$ations, an& 6elie s o the capitalist stratum itsel . /$en i an in&ustrial amil4 happens to o8n a 7i$en concern, 8holl4 or nearl4 so, an& i its mem6ers actuall4 mana7e it, the4 &o not un&er mo&ern con&itions looE upon it in the 8a4 in&ustrial amilies use& to &o in the past. 3heir attitu&e is more &istant, less personal, more rationaliOe&. ,ut the lea&in7 men o the 7iant concerns as a rule ill a specialiOe& unction in a spirit 8hich resem6les that o the emplo4ee properl4 so calle&, an& ten& to &istin7uish 6et8een their success an& that o the concern, let alone that o the sharehol&ers. Boreo$er, the loosenin7 o the amil4 tieNa t4pical eature o the culture o capitalismNremo$es or 8eaEens 8hat, no &ou6t, 8as the center o the moti$ation o the 6usinessman o ol&. :inall4, the top 7roupNsa4, F0,000 men an& their amilies in this countr4 an& =ust a6out as man4 in <erman4Na6sor6s, su6consciousl4 an& 64 no in inite num6er o channels, $ie8s, ha6its, $aluations cultural 8orl&sNthat are not its o8n. @0apitalists@ cease to
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6elie$e in the stan&ar&s an& moral schemata o their o8n class. 3he4 a&opt, or conni$e at, man4 thin7s 8hich their pre&ecessors 8oul& ha$e consi&ere& not onl4 in=urious to their interests 6ut &ishonora6le > in sur$e4in7 mo&ern economic act, one cannot 6ut 6e strucE 64 the &isco$er4 o ho8 much o the t4pical 6eha$ior o the 6our7eoisie o the nineteenth centur4 8as e(tra-cconomicall4 con&itione&. All this, o course, linEs up, in a 8a4 that har&l4 requires e(planation, 8ith the &ecrease in the importance o the entrepreneurial unction notice& in 0hap. -ll an& 0hap. -K. :ourth, 6oth the rise to po8er o strata untin7e& 64 6our7eois attitu&es an& the act that these attitu&es lose their hol& on the 6our7eois stratum itsel , 8hich to an increasin7 e(tent allo8s itsel to 6e e&ucate& 64 its ne8 masters an& the intellectual e(ponents o these masters com6ine to pro&uce the antisa$in7 attitu&e o our epoch so clearl4 $oice& in its popular, as 8ell as scienti ic, literature on economic theor4 an& polic4. Sa$in7 8ith a $ie8 to pro$i&in7 re$enue or an in&e inite amil4 uture 8as part not onl4 o the economic 6ut also o the moral scheme o li e o the t4pical 6our7eois. 3he attempt to pro$e that such thri t is harm ul to the interest o the masses al8a4s has 6een a ma=or element in anticapitalist ar7uments, 8hich 8ithout it 8oul& 6e open to a &an7erousl4 o6$ious repl4. Attempts to pro$e that it is also harm ul to the capitalist interest itsel ha$e ne$er 6een 8antin7. ,ut in our time the lesson is 6ein7 learne& an& 6e7innin7 to moti$ate pu6lic polic4. Hhate$er its merits or &emerits, its success must be un&erstoo& as part o a 7eneral short-run attitu&e o mo&ern man to8ar& economic pro6lems an& situations, 8hich ollo8s rom the chan7es in social structure. All this spells a pro oun& chan7e in the en$ironment 8ithin 8hich the capitalist en7ine 8orEs. ). ,ut reco7niOin7 thus ull4 the relation 8hich e(ists 6et8een capitalist e$olution an& its social an& sociops4cholo7ical complement, no more &e6ars us rom reco7niOin7 the e(istence o &istin7uisha6le spheres o social acti$it4 6et8een 8hich in a 7i$en case 7i$en e ects ma4 6e apportione&, than reco7nition o uni$ersal inter&epen&ence o prices &e6ars us rom &istin7uishin7 them an& rom tracin7 7i$en
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e ects to the 6eha$ior o , sa4, one o them. Boreo$er, e$er4 such sphere, ho8e$er much the pro&uct o one comprehensi$e process acquires, 8hen once orme&, a li e an& mechanism o its o8n that en=o4s man4 &e7rees o ree&om. 3his is enou7h to =usti 4 our 7oin7 on to 8orE 8ith the concept o /(ternal :actors. -n particular, it is clear that 8e cannot rom a stu&4 o economic con&itions alone &etermine 8hat 8ill happen in the political sphere. Ln the contrar4, 8e must &eal 8ith all the acts o each sphere as 8e in& themN 8hich precisel4 means that the4 are e(ternal actors or one another. :or instance, it is not enou7h to Eno8 thatNpossi6l4N /n7lan&"s economic con&itions an& interests to some e(tent e(plain her 7eneral attitu&e to the #nite& States &urin7 the 0i$il Har. 3his 8ill not e(plain 8h4 she came 8ithin an ace o , 4et re raine& rom, inter erin7 64 orce o arms. /$en the necessit4 o taEin7 account o the personal element cannot 6e &enie&. 'ence, purel4 economic &ia7nosis o the t4pe or 8hich political action is merel4 a @&istur6in7 actor@ is not necessaril4 &e$oi& o meanin7. -n this sense the Horl& Har is or us an e(ternal actor. :rom the acts the a6o$e remarEs 8ere inten&e& to co$er, it seems to ollo8 that it &i& not @create@ an4 o the un&amental social eatures o the post8ar 8arl&, althou7h it accentuate& some an& ma4 ha$e anticipate& others. 3he ph4sical &estructionNinclu&in7 the e(pen&iture o pro&ucti$e ener74 on that tremen&ous @e(cess in consumption@Nan& the loss o li e in the most acti$e a7e 7roups 8ere ma&e up quicEl4, the ormer 8ith a promptness 8hich in another social atmosphere 8oul& ha$e 6een a&mire& as a mar$el o in&ustrial e icienc4. All this re&uces or our purpose to t8o statements > irst, that ph4sical &estruction, rein orce& 64 the accumulation o omitte& replacements an& in$estments, 6ecame the source o a reconstruction &eman&, 8hich accentuate& the prosperities an& re$i$als that occurre& up to, rou7hl4, the mi&&le t8enties M secon&, that the shi t rom 8ar to peace con&itions in$ol$e& rearran7ements that almost 8holl4 account or the short @=olt@ in 1918 an& partl4 or the crisis o 19)1, 8hich 8as,
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ho8e$er, in step 8ith the or&inar4 run o c4cles an& 8as onl4 intensi ie& 64 this actor. 3. 3he 8ar un&ou6te&l4 precipitate& &e$elopment 8hich it is reasona6le to assume 8oul& ha$e come a6out 8ithout it, 6ut 8oul& ha$e come a6out more slo8l4 an& in &i erent orms. -t is in connection 8ith these &e$elopments that orei7n policies an& the pro6lems o international economic relations in 7eneral must 6e seen. 3heir histor4 naturall4 &i$i&es up into three perio&s > the perio& o continuin7 economicNin some points e$en e(tra-economicN8ar are, rom the armistice to 19)F *2on&on con erence M ;a8es plan+ M the perio& &urin7 8hich the arran7ements arri$e& at 8ere 8i&el4 6elie$e& in an& acte& upon, an& 8hich laste& rom the ;a8es plan to rou7hl4 the en& o 19)J M an& the perio& o increasin7 riction, en&in7 in the mi&st o the 8orl& crisis in the 'oo$er moratorium an&, later on, in the liqui&ation, via facti, o the reparations an& inter-Allie& &e6ts. Since the irst perio& coinci&es 8ith <erman post8ar in lation, 8hich 8e e(clu&e, all that nee& 6e sai& a6out it is that American 6usiness situations 8ere or the time 6ein7 little an&, i an4thin7, a$ora6l4 a ecte& 64 the course o international e$ents. As re7ar&s the secon& perio&, our statement that the arran7ements arri$e& at 8ere acte& upon requires quali ication. 3he 8orl& ne$er squarel4 ace& their un&amental consequences, the una$oi&a6le <erman e(ports in particular, 6ut poure& American an& other cre&its on all the unsol$e& pro6lems an& plastere& 7ol& currenciesNmost curious ata$isms thou7h the4 8ere, in a 8orl& other8ise resol$e& not to pla4 the capitalist 7ameNon essentiall4 untena6le situations. Since it is impossi6le to enter upon these matters an& since the salient acts ma4 6e assume& to 6e amiliar, 8e can or our purpose compress the comments that 8oul& 6e necessar4 into the statement that this @e(port o American capital@ &i& not act as 8e 8oul& e(pect capital e(port to act un&er more normal con&itions, 6ut that or the time 6ein7 it lar7el4 counteracte& the &istur6ance that 8oul& other8ise ha$e ensue& rom international political pa4ments. Boreo$er, 8hile it relie$e&
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strin7encies in man4 countries, it &i& not create correspon&in7 ones in the len&in7 countr4, 6ecause America still remaine& a cre&itor on current account, e$en apart rom the short 6alances 8hich or amiliar reasons continue& to lo8 to8ar& her. 3his e(plains the astonishin7 act that those @political trans ers@ 8ill not pla4 an4 7reat role in our anal4sis o the processes o that perio&. 3his e$en applies to the thir& perio&, almost until the out6reaE o the 8orl& crisis 8hen, thou7h partl4 or political reasons, short 6alances tooE ri7ht. ,ut the un&amental acts o the situation, accentuate& as 8ell as e(presse& 64 protectionist ten&encies an& the passin7 o the 2ocarno atmosphere, ha& 6e7un to assert themsel$es 6e ore that. - those temporar4 solutions o the international inancial pro6lems create& 64 the 8ar pro$e& ina&equate, an& i their economic consequences, inclu&in7 their Nsecon&ar4Nshare in the causation o the 8orl& crisis, turne& out as the4 &i&, this 8as onl4 6ecause o the political en$ironment 8ithin 8hich the4 ha& to 8orE, i.e., our assertion o their ina&equac4 must 6e un&erstoo& to 6e relati$e to the social situation pre$iousl4 7lance& at. 3he4 8ere 6anEers" solutions, 8hich the nations concerne& 8ere un8illin7 to accept an& 8hich the4 &e eate& 64 re usin7 to allo8 the mechanisms to 8orE on the unctionin7 o 8hich the authors o those solutions relie&. 2ooEe& at as 6usiness propositions, the4 8oul& not, in a peace ul 8orl& acceptin7 6our7eois stan&ar&s, ha$e 6een o6$iousl4 a6sur&, an& it 8oul& not in such a 8orl& ha$e 6een unreasona6le to e(pect that the4 8oul& 8orE out in the en&. 3he 8ell-meant proposals o all those international con erences that met to &iscuss the 7ra&ual remo$al o tra&e 6arriers looE to us liEe stran7e anachronisms an& certainl4 8ere as utile as proposals or &isarmament must 6e in a 8orl& in 8hich e$er4 nation that counts is 6ent on armament. ,ut the4 8ere per ectl4 soun& economics. /$en the 7ol& currencies 8ere such ailures onl4 6ecause tra&e 6arriers, iscal policies, social an& militar4 e(pen&iture, an& insistence on hi7her mone4 8a7es &i& not allo8 them to unction an& 6ecause in that hostile en$ironment short capital 8as rushin7 a6out liEe a hunte& hare. <i$en all these acts, it 8as an& is in&ee& little short o ri&iculous to trust to the reme&ial orces o laisser faire. ,ut since the4 &o not, an4 more than the 8ar itsel an&
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Kersailles, uniquel4 ollo8 rom the lo7ic o our e$olutionar4 process, it is not to the interest o clear thinEin7 to speaE o an4 inherent ten&enc4 o capitalism to run into such &ea&locEs. F. Since the role 8hich post8ar protectionism pla4e& in the &e$elopments o the t8enties an& in the causation o the 8orl& crisis has 6een so completel4 o$erlooEe& 64 some stu&ents o the 6usiness c4cle an& so o6$iousl4 e(a77erate& 64 others, it 8ill 6e con$enient to state e(plicitl4 the $ie8 a&opte& or the purposes o our anal4sisN 8hich, it shoul& 6e 6orne in min&, e(clu&es the 8i&e aspects o the matter, such as the relation o protectionist polic4 to human 8el are an& to peace. -n the irst 4ears a ter the 8ar, &uties, prohi6itions, quotas, an& other 8eapons rom the arsenal o protectionism 8ere, o course, elements o the 7eneral scheme o continuin7 economic 8ar. ,ut the4 8ere also somethin7 else. A&aptation o in&ustr4 an& tra&e to the ne8 con&itions a6o$e re erre& to, permanent an& transient, 8as at 6est a &i icult tasE, in$ol$in7 in man4 cases a6rupt &islocations. 3his 6ecomes o6$ious i 8e 7lance at the post8ar i7ures 6oth o commo&ities pro&uce& an& o commo&ities internationall4 e(chan7e& -n some o these cases, protecti$e tari s or e$en prohi6itions 8ere, i not the onl4 means, 4et the most o6$ious means o a$ertin7 sectional catastrophes, rom 8hich cumulati$e processes *spirals+ mi7ht easil4 ha$e ensue&. #nequal &epreciation o currencies, o course, 7reatl4 a&&e& to this class o &i iculties. Ban4 measures, such as the BcPenna &uties an& e$en the :or&ne4-Bc0um6er Act, must, in part at least, 6e interprete& in this li7ht an& on 6alance pro6a6l4 miti7ate& man4 more &i iculties than the4 create&. At the other en& o our perio&, imme&iatel4 6e ore an& &urin7 the 8orl& crisis, a similar ar7ument applies, especiall4 a ter the ne8l4 esta6lishe& currencies ha& 6e7un to 7i$e 8a4, althou7h 8ith lesser orce an& althou7h a panicE4 polic4 o protection an& @incapsulation@ then 8ent to o6$iousl4 irrational len7ths. -n the 4ears rom, rou7hl4, 19)F to, rou7hl4, 19)8 some steps to8ar& reer tra&e 8ere actuall4 ma&e, some countries remo$in7
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certain 6arriers an& the tari s o others 6ein7 automaticall4 lo8ere&, in cases o speci ic &uties, 64 &epreciation not al8a4s compensate& or 64 a 7ol& clause. 'o8e$er, it is un&erstan&a6le that not more 8as accomplishe& > &islocations an& untena6le 8ar 7ro8ths continue& to e(ist M unequal &epreciation o currencies 8as replace& 64 unequal sta6iliOation, 8hich in some cases o$er$alue& an& in others un&er$alue& the le7al ten&er unit M political pa4ments, especiall4 6ut not onl4 in the1 case o <erman4, pro$i&e& a moti$e or aimin7 at an acti$e 6alance o tra&e entirel4 =usti ia6le e$en rom a ree-tra&e stan&point. 3here 8as, in&ee&, @nationalism.@ -ts outstan&in7 mani estations are to 6e oun& in the policies o the ma=orit4 o the ne8l4 create& small states that trie& to oster in&ustrial &e$elopment at an4 price. ,ut that 7reat mo$ement o 8hich 8e primaril4 thinE 8hen speaEin7 o mo&ern nationalism, an& 8hich has 6een reco7niOe& a6o$e as allie& to one o the 7reat components o the social atmosphere o to&a4, has reall4 little to &o 8ith the commercial polic4 o the 7reat nationsNan& the small ones o ol& stan&in7N&urin7 those 4ears. 3hat polic4 8as &ominate& 64 current $icissitu&es particularl4 in /n7lan&, America an&Nuntil the .ational Socialist part4 rose to po8erNin <erman4. 3his countr4"s amous @re usal to accept its cre&itor position@ still remains. -n that phrase there is, no &ou6t, some element o truth. ,ut since, as pointe& out a6o$e, American capital e(port to /uropeNit reache& a6out 5 6illion &ollars 64 the en& o our perio&N more than su ice& to ser$ice her claims, the consequences or the time 6ein7 8ere merel4 to quicEen reconstruction in /urope. -t 8as not this mechanism that pro&uce& the 8orl& crisis, 6ut the 8orl& crisis that cause& its 6reaE&o8n. 3hen, o course, the situation thus create& 6ecame a ma=or actor in the ensuin7 &epression. ,ut e$en then it is not eas4 to see ho8, ha& a re&uction o import &uties 6een passe& instea& o the 'a8le4-Smoot Act, this coul& ha$e impro$e& short-run con&itions in /urope 8ithout a77ra$atin7 them in America. Hhate$er the merits o ree-tra&e sermons, the4 can onl4 appl4 either to the course o action that mi7ht ha$e 6een ollo8e& ha& the crisis not occurre&, or else to the course o action that mi7ht ha$e 6een ollo8e& a ter it ha& passe&. Hith this 8e are not concerne&. :or our purpose it
3F1
su ices to conclu&e that protectionism as such pla4e& 6ut a minor role in the c4clical process o the post8ar epoch, an& to cast a 7lance at this countr4"s international 6alance o 19)8, since that is the last complete 4ear o the @prosperit4 plateau.@ 0ommo&it4 e(ports to /urope 8ere then ^),3F),000,000 M imports o commo&ities an& ser$ices rom /urope plus remittances o immi7rants an& tourists" e(pen&iture, $er4 rou7hl4 ) 6illions. 3he resultin7 net cre&it o 6et8een 300 an& F00 millions has to 6e increase& 64 pa4ments recei$e& on 8ar &e6t accountN)00 millionsN an& net receipts rom interest an& &i$i&en&s *V+. 3his maEes a6out G00 millions, 8hich must ha$e 6een mainl4 @pai&@ rom a&&itional cre&its, since the total o monetar4 7ol& in the #nite& States ha& allen 6oth in 19)J an& 19)8. -t is true that the immi7ration o short un&s, then approachin7 their 19)9 peaE, complicate& the situation. ,ut, 8ith &ue respect or the e(cellent moti$es 6ehin& man4 o the e(a77erations o 8hich economists o all countries 8ere 7uilt4 in the matter o American polic4N/urope"s 8illin7ness to lecture 8as more o6$ious than her 8illin7ness to pa4Nit is presuma6l4 sa e to sa4 that a sum o that or&er o ma7nitu&e coul& not, 8ithout a crisis, itsel cause& 64 other actors, ha$e create& an unmana7ea6le pro6lem. -n the or&inar4 course o thin7s, a&=ustments o the commo&it4 6alance amountin7 to a sum o the or&er o 300 millions 8oul& ha$e 6een possi6le, e$en in a protectionist 8orl& > e(ports alone coul& ha$e 6een 7ra&uall4 re&uce& to that e(tent 8ithout serious repercussions on the American situation, 8hile rein$estment coul& ha$e a6sor6e& the rest. A7ain, it 8as the crisis that pre$ente& such a&=ustments, an& su&&enl4 ma&e an insolu6le pro6lem o 8hat other8ise 8as not onl4 not 6e4on&, 6ut on the 8a4 to, a solution 8hich, thou7h in the uture it mi7ht ha$e entailed, &i& not then presuppose ree tra&e.
3F)
C. Fu!the! Comment on .o t#a! Condition .
3a6le o 0ontents
1. Bore nearl4 than an4 other countr4, the #nite& States &ispla4e&, an& su6stantiall4 retaine& until the 8orl& crisis, a rame o min& appropriate to the tasE o runnin7 the capitalist machine, e$en to the e(tent o re&ucin7 8hat 8as almost uni$ersall4 &isappro$e& o as an @un-American ra&icalism@ to still smaller importance than it ha& ha& 6e ore the 8ar. Such &e$iations as occurre& rom those principles o action that are associate& 8ith the lo7ic o the capitalist process 8ere &ue, rather than to the intrusion o i&eas hostile to that lo7ic, to the ailure to a&apt ol& i&eas to the ne8 situation, as e(empli ie& 64 so much as there 8as in the @re usal to accept the implications o this countr4"s ne8 cre&itor position@ =ust &iscusse&. ,ut apart rom this an& possi6l4 monetar4 policies an& the rate o municipal e(pen&iture, there 8ere no lesions in licte& on the s4stem 64 action rom the political sphere. Ln the contrar4, 8hile the nation 8as 6en&in7 its ener7ies to the t4pe o tasEs characteristic o a Pon&ratie &o8n7ra&e, the e&eral 7o$ernment 8as pursuin7 a iscal polic4 eminentl4 @soun&@ in the ol& sense. -t re&uce& ta(ation, 7oin7 a consi&era6le 8a4 6e4on& merel4 eliminatin7 the e(cess pro its ta( M it re&uce& the e&eral &e6t an& e$en set a6out to e ect some retrenchements. #p to an income o ^100,000, the income ta( 8as ar 6elo8 the /uropean le$el. :e&eral e(pen&iture, 8hich in 191)-1913 ha& 6een J)F.5 millions, mo$e&, it is true, on a le$el o a6out 3.J 6illions rom 19)5-19)G to 19)9-1930 *inclu&in7 &e6t re&emptions out o current re$enue to the a$era7e amount o o$er 1C) 6illion a 4ear+. ,ut un&er 7eneral con&itions so e(ceptionall4 a$ora6le this 8as not a $er4 serious matter. 2ocal 3otal <ross /(pen&iture increase& rom F,593 millions in 19)3 to G,J)0 millions in 19)9 M State 3otal
3F3
<ross /(pen&iture, rom 1,)08 to 1,9F3 millions. ,ut 6oth states an& local authorities raise&, partl4 rom a lacE o consitutional po8ers, partl4 rom choice, the mone4 the4 spent in 8a4s 8hich &i& not su6stantiall4 in=ure the economic machine. Boreo$er, the 7o$ernment promptl4 a6olishe& most o the 8artime controls, re7ulations, an& or7aniOations M re raine& rom measures in$ol$in7 questions o social an& economic structure at home M an& success ull4 Eept out o entan7lements a6roa&, there64 creatin7 the atmosphere con7enial to pri$ate 6usiness an& re&ucin7 the importance to the American citiOen o the stru77les, su erin7s, an& uphea$als in other parts o the 8orl& to the or&er o importance o a oot6all match. /conomists 8ho are passionatel4 &etermine& not to a&mit that policies ans8erin7 to their social an& moral $ision, particularl4 iscal policies o anticapital-ist ten&enc4, can possi6l4 inter ere 8ith the 8orEin7 o the economic s4stem, 8ill no &ou6t hol& that there 8as mere chance coinci&ence 6et8een that sociopolitical pattern an& the economic results achie$e& in this countr4 &urin7 the t8enties, an& 6et8een the &i erent setup an& the &i erent results in /n7lan& or <erman4. -n the ul illment o our hum6le tasE o interpretin7 a 7i$en course o historical e$ents an& the 6eha$ior o 7i$en time series, 8e cannot, ho8e$er, ne7lect the possi6le in erence to the contrar4. He speaE o possi6le in erence onl4, 6ecause in this point our ar7ument transcen&s e(act proo , as an4 ar7ument a6out or7anic processes occasionall4 must, an& 6ecause so man4 impon&era6le elements enter 8hich must 6e a matter o personal =u&7ment an& *historical an& personal+ e(perience. ). ,ut the main points at issue 8ith re erence to e ects o ta(ation as suchNi.e., as &istin7uishe& rom those e ects 8hich a s4stem o ta(ation ma4 ha$e i it is or is elt to 6e an element o a 7eneral atmosphere o hostilit4 to capitalist successNma4 con$enientl4 6e mentione& here once or all. 3here is *comparati$e+ a7reement a6out the e ects o in&irect ta(es, such as speci ic ta(es on the quantit4 pro&uce& or sol& o a commo&it4. 3his a7reement 8e o8e to a airl4
3FF
8ell ela6orate& theor4 8hich, thou7h antiquate&, is still 8i&el4 accepte& 64 economists an& has recentl4 6een some8hat impro$e& 64 6orro8in7s rom the theories o imper ect competition, o e(pectation, an& so on. -ts assumptions, ho8e$er, limit its results to the case o small ta(es an&Cor o in&i$i&ual commo&ities o small importance. 3he technical reason or this has an important counterpart in real li e > 8here$er ta(es are so small as to 6e amena6le to anal4tical treatment 64 the calculus, the4 are also too small to a ect the un&amental contours o economic 6eha$ior as re lecte& in the 6u&7ets o irms an& househol&s an&, hence, to inter ere si7ni icantl4 8ith economic processes in 7eneral an& the c4clical process o e$olution an& its permanent results in particular. 3his proposition ma4 6e 7eneraliOe& to co$er an4 small ta(, no matter 8hether sectional, such as a ta( on 6eer or on house room, or 7eneral, such as a turno$er or an income ta(, an& e(ten&e& in most cases to an4 ta( that is small in a practicalNthou7h looseN sense an& not onl4 in the sense o the calculus. Bost ta(es 8hich are not small in that 8i&er sense, on the one han& cannot 6e han&le& 64 that metho&N urther repercussions, more un&amental chan7es in the economic s4stem, reactions rom an& throu7h the sphere o mone4 an& cre&it must 6e then taEen into accountNan& on the other han&, &o inter ere 8ith the results o 6usiness processes, or e(ample, 8ith the stea&4 rise in the stan&ar& o li$in7 o the masses as far as it is due to the working of the capitalist machine. 3his, ho8e$er, marEs the point at 8hich &isa7reement 6e7ins. 3he iscal pro6lem o our time &oes not primaril4 consist in the amount o re$enue require& 64 the mo&ern state, 6ut in the act that, o8in7 to the moral $aluations pre$ailin7, that amount must also 6e raise& 64 hea$4 ta(es an&, moreo$er, 64 hea$4 ta(es rame& not onl4 8ithout a $ie8 to minimum &istur6ance 6ut re7ar&less o &istur6ance, in some cases e$en 8ith a $ie8 to ma(imiOin7 it. An& the &isa7reement that is rele$ant to our purpose concerns either the realit4 o the e ects allu&e& to in the last sentence o the prece&in7 para7raph or their importance or the &e$elopment o total output. He 8ill con ine oursel$es to the case 8hich is most important in this connection an&
3F5
consi&er a hi7h an& hi7hl4 pro7ressi$e income ta(N64 8hich, to i( i&eas, 8e 8ill mean an income ta( 8hich, or a si7ni icant num6er o ta(pa4ers in the hi7her an& hi7hest 6racEets, surpasses )5 per centN that so &e ines income as to inclu&e sa$in7s an& is rein orce& 64 a si7ni icant corporation an& a hi7h or hi7hl4 pro7ressi$e inheritance ta(. :irst, there arc 8hat 8e ma4 term mechanical e ects, o 8hich the most important is the e ect on the sum total o pri$ate sa$in7s an& accumulations. 3a(es such as those 8e ha$e in min& ma4 en orce &issa$in7 an& e$en &i$estment, 6ut 8ill in 7eneral 6e partl4 pai& rom re$enue that, in turn, 8oul& other8ise 6e partl4 sa$e&. An o6$ious ar7ument rom 7eneral principles 4iel&s the result that, as a rule, this a7ain 8ill 6e partl4 ma&e up or 64 a&&itional sa$in7 64 the same people or 64 those 8ho are the ultimate recipients o the sums le$ie&. ,ut the net e ect o hi7h ta(es on the hi7her incomes 8ill 6e a &ecrease o the national total o sa$in7s as compare& 8ith 8hat it other8ise 8oul& 6e. As ar as this 7oes, there ore, our opinion on ho8 such ta(es 8ill a ect @pro7ress@ an& @in&ustrial e icienc4@ &epen&s on 8here 8e stan& in the contro$ers4 a6out the importance an& the modus operandi o pri$ate sa$in7, 8hich ha$e 6een ull4 &iscusse& 6e ore. 88 Secon&, there are the nonmechanical e ects, i.e., the e ects throu7h moti$es an& attitu&es. An4 ta( on net earnin7s 8ill ten& to shi t the 6alance o choice 6et8een @to &o or not to &o@ a 7i$en thin7. - a prospecti$e net 7ain o a million is =ust su icient to o$er-6alance risEs an& other &isutilities, then that prospecti$e million minus a ta( 8ill not 6e so, an& this is as true o a sin7le transaction as it is o series o transactions an& o the e(pansion o an ol& or the oun&ation o a ne8 irm. ,usiness mana7ement an& enterprise, 6ein7 un&ertaEen 8ithin an institutional rame8orE o aims, am6itions, an& social $alues ashione& to its lo7ic, 8ill or its maintenance &epen&, at least in the lon7 run, on the actual &eli$er4, in case o success, o the priOes 8hich
88
,ut it shoul& 6e o6ser$e& that man4 ar7uments turn, not on sa$in7 in our sense, 6ut on un&erspen&in7. 3a(es on i&le un&s ma4 ha$e some stimulatin7 shortrun e ects i concei$e& as temporar4 measures.
3FG
that scheme o li e hol&s out, an&, there ore, ta(es 6e4on& a percenta7e that 7reatl4 $aries as to time an& place 89 must 6lunt the pro it moti$e an&, especiall4, the moti$e t4pical o 6oth eu&al an& 6our7eois societ4, that o oun&in7 a amil4 position. As to the pro it moti$e in 7eneral, it must 6e 6orne in min& that a polic4 o ta(in7 a8a4 7ains e$i&entl4 a6o$e 8hat 8oul& 6e necessar4 to call orth the e orts o their individual recipients an& o ta(in7 6ut mo&eratel4 8hat the communit4 consi&ers @a&equate@ returns, i it is not to a ect the total amount o e ort, 8oul& reall4 ha$e to 6e accompanie& 64 an increase in the sum total o mana7erial an& entrepreneurial income, 6ecause the presence o conspicuousl4 hi7h an& e$en antastic in&i$i&ual priOes is, as e$er4one Eno8s, much more stimulatin7 than the same sum 8oul& 6e i more equall4 &istri6ute& amon7 6usinessmen. As to that special orm o the pro it moti$e 8hich is em6o&ie& in the term family position, an& is lar7el4 eliminate& 64 inheritance ta(es o the mo&ern t4pe, it is as reasona6le to hope that hi7h inheritance ta(es, 6ein7 ta(es on @static@ 8ealth, 8ill not a ect in&ustrial @pro7ress,@ i.e., the creation o ne8 8ealth, as it 8oul& 6e to hope that a prohi6iti$e railroa& are 8ill not a ect tra ic i passen7ers 6e allo8e& to 6oar& the trains ree o char7e an& the are 6e collecte& rom them a ter the4 ha$e taEen their seats.
89
Bo&erate ta(ation, i.e., ta(ation 8hich, 8hile maEin7 it more &i icult, 4et &oes not maEe it too har& to attain a 7i$en economic position, ma4 e$en act as a stimulus. ,ut ho8e$er &i icult it ma4 6e to &etermine the inter$al or 8hich that is so, it is per ectl4 clear that since the 8ar ta(ation in the hi7her 6racEets 7oes much 6e4on& it.N'i7h ta(ation, or e(ample in a national emer7enc4, as lon7 as it is consi&ere& to 6e temporar4, ma4 ha$e no e ect on moti$e or e$en an e ect that is stimulatin7. Hhat ta(ation is @hi7h@ an& 8hat @mo&erate@ also &epen&s on the pre$ailin7 mar7ins o pro its. American ta(ation e$en rom 19)F to 1931 mi7ht ha$e 6een hi7h in our sense 6ut or the ease 8ith 8hich the 6usinessman ro&e to success. :inall4, much &epen&s on the reaction o the monetar4 s4stem, or e(ample, on 8hether or not ta(pa4ers are 8illin7 an& a6le to 6orro8 the amounts the4 ha$e to pa4.
3FJ
3a6le o 0ontents
&. 7utline of E)onomi) -i to!" f!om $9$9 to $9<9. A $er4
rou7h sEetch 8ill 6e su icient to con$ince the rea&er that all the ma=or eatures o economic li e &urin7 that perio& in act con orm closel4 to our i&ea o a Pon&ratie &o8n7ra&e an& that none o them i7hts a7ainst the h4pothesis 8hich this turn o phrase implies. 1. He 6e7in 8ith the a7rarian sphere. ,oth prece&in7 Pon&ratie s &ispla4e& 8ithin their ne7ati$e phases prolon7e& a7rarian &epressions. -n causation an& s4mptoms the4 &i ere& su icientl4, as 6et8een each other an& in each case as 6et8een countries, to cast &ou6t on an4 $er4 6roa& 7eneraliOation a6out them, particularl4 8ith respect to the @necessit4@ or @normalit4@ o their occurrence. 0ertain properties o Pon&ratie &o8n7ra&es, ho8e$er, ten& to pro&uce &epressi$e con&itions in the a7rarian 8orl& as a 8hole, an& a7ricultural inno$ations, i an4, ten& to pro&uce in sectors o that 8orl& &epressi$e con&itions that ma4 6e important enou7h to create a picture o 7eneral a7rarian &epression. L6$iousl4, this is 8hat 8e in& in the post8ar perio& an& 8hat pro$i&es the irst appro(imation into 8hich it is eas4 to it all the other actors o a7rarian situations. ,ut the latter arc, ne$ertheless, important an& shoul& not 6e ne7lecte& merel4 or the saEe o one- actor theories an& one-reme&4 therapeutics. 5rimaril4, the all in a7rarian prices 8as a all not in relati$e 6ut in a6solute price, i.e., an element o the all in the 7eneral price le$el. Such a all is part o the mechanism o c4clical &o8n7ra&esNo Pon&ratie &o8n7ra&es, in particular. -t 8oul& not, in itsel , su ice to pro&uce an a7ricultural crisis, althou7h it ma4 a&$ersel4 a ect the 8el are o the a7rarian communit4 i the arm prices o pro&ucts all more than the retail prices o the inishe& pro&ucts 8hich it 6u4s. @0risis@ ma4 ensue, ho8e$er, i the all o the price le$el impin7es on
3F8
a &e6t situation that has &e$elope& rom 6orro8in7 either or unpro&ucti$e purposesNsuch as the acquisition o lan&Nor or insu icientl4 pro&ucti$e onesNsuch as mere e(pansion. ,ut in the #nite& States an& /n7lan& a7riculture ha& to ace, as it ha& a ter the .apoleonic 8ars an&, in this countr4, the 0i$il Har, not that Ein& o all in price le$el 8hich is a normal element o the economic process in Pon&ratie recessions an& &epressions, 6ut the much more $iolent reaction o prices to the rise &urin7 the Horl& Har. Boreo$er, a7riculture ha& 6een an inno$atin7 in&ustr4, or rather an in&ustr4 that ha& inno$ations orce& upon it 8hich ori7inate& else8here, such as the internal-com6ustion en7ine, speci icall4 a7ricultural machiner4, electric po8er an& appliances, ne8 ertiliOers. As 8e shoul& e(pect, these inno$ations ull4 conquere& an& came to ruition in the &o8n7ra&e, an& the4, as 8ell as the locational shi ts, 8hich constitute the most important o a7riculture"s o8n inno$ations, sectionall4 re&uce& costs to a le$el on 8hich lar7e sectors 8ere una6le to compete > the oo& pro6lem o humanit4 8as, as ar as the economic process 8as concerne&, in&ee& &e initi$el4 sol$e&, 6ut at the e(pense o the a7ricultural interest. 0ompetition 64 other countries, &e$elopment o 8hich 8as accelerate& 64 the 8ar, har$ests, con&itions o &eman&, international 6arriers, an& other actors ha$e to 6e inserte&, ho8e$er, to complete the picture as it un ol&e& itsel rom 4ear to 4ear. -n the #nite& States the ,ureau o A7ricultural /conomics in&e( o prices recei$e& or arm pro&ucts rose rom 1915 to 1919 64 109 per cent, 8hile the in&e( o commo&ities 6ou7ht 64 armers rose, until 19)0, 64 9F per cent. 3he 4ear 19)0 6rou7ht a mo&erate all an& 19)1 a all to 11G per cent o the pre8ar i7ure, rom 8hich the in&e( o arm prices reco$ere& quicEl4, to reach a peaE o 1FJ per cent in 19)5. 3hen it luctuate& on a mo&eratel4 allin7 @tren&@ up to the e$e o the 8orl& crisis. 3his &e$elopment must 6e correlate& 8ith the &e$elopment o the a7ricultural &e6t. /$en in the pre8ar 4ears total arm mort7a7es 8ere consi&era6leN3.3 6illions in 1910. 3he4 rose to )3J per cent o that sum 64 19)0, quite enou7h to pro&uce man4 untena6le situations, e$en i 8e taEe into account the act that incomes
3F9
ha& risen more than arm prices, an& a ter8ar& ell less than the4 &i&. ,ut to 19)5 there 8as a urther increase to a6out 9.3G 6illions, the peaE that occurre& in 19)8 6ein7 6ut insi7ni icantl4 hi7herN9.FG. .o8, some part o this loa& pro6a6l4 8as the result o un&in7 shorttime &e6ts 8hich ha& 6ecome irEsome, an& a 7reater part, the result o e(pansion an& o the mechaniOation to 6e mentione& presentl4. ,ut the correlation o the t8o perio&s o increase 8ith risin7 lan& $alues is o6$ious, an& the in erence is una$oi&a6le that much o this increase in &e6t came rom purchases o lan& 8ith a $ie8 to reapin7 not har$ests 6ut increments o $alue. So ar, then, 8e conclu&e > there 8as a short an& sharp crisis in a7riculture in 19)0-19)1, 8hich 8as part o the 7eneral post8ar slump, thou7h accentuate& or a7riculture throu7h the 6ur&en o partl4 unpro&ucti$e &e6t. -n the 4ears to 19)G there 8as, ho8e$er unsatis actor4 the situation ma4 ha$e 6een rom other stan&points than ours, no 7eneral a7rarian &epression at all. A ter 19)G an& to the threshol& o the 8orl& crisis, the a7rarian situation 6ecame increasin7l4 unsatis actor4, 6ut the onl4 general cause o this 8as, a7ain, the pressure o unpro&ucti$e &e6t. ,ut this &ia7nosis misses, 6esi&es man4 minor points, a ma=or one, vi#., the in luence o the inno$ations mentione& 6e ore. Some o them, liEe the pro7ress in the culti$ation o citrus ruit an& $e7eta6les or in re ri7eration an& cannin7, &i& not spell competition o some sectors or pro&ucts 8ith others, an& 6rou7ht a net a&&ition to the total o a7ricultural incomes. 3o a lesser e(tent this is true also o poultr4 an& cattle an& o &air4in7. Lthers, liEe some electrical appliances, e$en helpe& sectors that 8ere 6ein7 put out o e(istence 64 competition, especiall4 those 8hose main &i icult4 8as &ear la6or. ,ut most o the impro$ements in the metho&s o a7riculture, 8hile instrumental in 6rin7in7 orth a7riculture"s share in that risin7 ti&e o consumers" 7oo&s 8hich, accor&in7 to our schema, is a eature o Pon&ratie &o8n7ra&es, an& e$en pro&ucin7 a7ricultural prosperit4 in 8i&e sectors o the countr4 90, ten&e& to push certain re7ions 6elo8 the
90
3hat prosperit4 8as. ho8e$er, less accentuate& than mi7ht ha$e 6een e(pecte&, not onl4 6ecause pro its ha& to 6e share& 8ith the in&ustries that
350
mar7in o pro ita6le pro&uction. 3his, o course, is 8holl4 true o the pro&ucti$e success achie$e& on reclaime&, &raine&, irri7ate& lan&s an& o the process 64 8hich lar7e areas ha$e 6een taEen into intensi$e culti$ation o crops an& into horticulture that pre$iousl4 ser$e& purposes o @e(tensi$e@ armin7. ,ut it is partl4 true also o the trucE, the tractor, most o the machiner4 ne8l4 intro&uce& into 7rain armin7, an& to some e(tent o the use o electrical po8er. Bost o them increase the optimum siOe o the armin7 unit, some o them can 6e use& to ull a&$anta7e onl4 un&er the particular con&itions o the <reat 5lains. :rom 19)0 to 1930 the num6er o motor trucEs increase& rom 139,000 to 900,000 an& the num6er o tractors rom )FG,000 to 9)0,000. 3he latter in$ites the com6ination o operations that 8ere pre$iousl4 quite &istinct, plou7hin7 an& the preparation o the see&6e&, or instance, an& thus stea&il4 lea&s to e$er-increasin7 mechaniOation. 3he use o the com6ine har$ester, 8hich ha& irst 6een a success in 0ali ornia, sprea& an& 4earl4 sales increase& nearl4 se$en ol& in the same perio&. 0otton- an& corn-har$estin7 implements must 6e a&&e&, 6ut no urther e(amples are necessar4 in or&er to esta6lish our point. .othin7 o all this 8as un&amentall4 ne8 M all o it is t4picall4 @in&uce& &e$elopment@ o the Ein& 8hich on pre$ious occasions 8e oun& to 6e characteristic o Pon&ratie &o8n7ra&es. Lur ol& ormula, ;epression spotte& 64 5rosperit4, its the case as it &i& the others. /mi7ration rom a7riculture to in&ustr4 8as rom the stan&point o the lo7ic o the capitalist mechanism, a per ectl4 normal phenomenon o a&aptation. Lther aspects o the same eatures an& some a&&itional eatures o the post8ar a7rarian situation 8ill come into $ie8 i 8e 7lance or a moment at cotton an& 8heat in particular. /$er since the 6e7innin7 o the nineties the price o cotton mo$e& airl4 8ell 8ith an4 all8ere responsi6le or the inno$ations, 6ut also 6ecause o the per ectl4 competiti$e character o a7riculture, 8hich respon&e& 3o the lo8erin7 costs 64 a prompt re&uction o the prices o pro&ucts. 3his is 8hat, to7ether 8ith the act that the un&ersol& units &i& not promptl4 &isappear, create& that impression 8hich is sometimes con$e4e& 64 the phase @a7ricultural o$erpro&uction.@
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commo&it4 in&e(, &omestic consumption o cottonNalso rou7hl4N 8ith an4 in&e( o in&ustrial pro&uction. 3his on the 8hole remaine& so in our perio&, the chie e(ception 6ein7 the rapi& reco$er4 o cotton consumption in 19)1, ri7ht rom the 6e7innin7 o the 4ear. Duantit4 e(porte& 8as 6elo8 the a$era7e o the last pre8ar 4ears in 19)) to 19)F, 6ut rou7hl4 on the same le$el, or some8hat a6o$e, in 19)F to 19)9, $alue risin7 sharpl4 rom 19)1 to 19)5 an& rece&in7 a ter8ar&. 9a4on 8as onl4 one o the competin7 commo&ities that must ha$e e(erte& some in luenceN8ith increasin7 8ealth, the competition o 8ool increases in man4 linesN6ut o8in7 to the emer7ence o ne8 uses, such competition 8as o 6ut minor importance M the stan&ar& i6er 8as still to come. 3here 8as the mi7ration to lan&s ma&e a$aila6le 64 ne8 metho&s o culti$ation, especiall4 to 3e(as an& LElahoma, partl4 &ue to the tractor an& the mechanical picEer *complemente& 64 a correspon&in7 inno$ation in 7innin7+, 8ith a consequent competiti$e annihilation o much o the Southeastern cotton armin7. -n all this our process sho8s to per ection, an& the process o la6or 6ein7 &ra8n a8a4 rom an @ol&@ stratum *to8ar& the .ortheastern in&ustr4+ is particularl4 in e$i&ence. :armers" price o the stan&ar& qualit4 rose rom a6out 1)-1C) cents to a6out )8-1C) cents &urin7 the 8ar *the latter i7ure 6ein7 o .o$em6er 1918+, 8hich 8as per ectl4 normal an& neither =usti ie& nor actuall4 in&uce& increase in acrea7e. Acrea7e har$este& actuall4 ell rom its 191FN1915 peaE. 3he ra$a7es o the 6oll 8ee$il in 19)1, 19)), an& 19)3, ho8e$er, raise& it to 3) cents to8ar& the en& o the latter 4ear, an& this presuma6l4 propelle& the e(pansion in the Hest, 8hich in spite o a6an&onmentsNnot all &ue to the 6oll 8ee$ilNha& set in 6e ore an& carrie& total acrea7e in this countr4 rom the )9.J million acres in 19)1 to a6out F5.8 in 19)G. Acrea7e outsi&e the #nite& States at the same time increase& rom a6out )8.5 to o$er F) million acres, not onl4, o course, in response to that price, 6ut in consequence o the en&ea$or ma&e in man4 countries to &e$elop cotton 7ro8in7, 8hich &ate ar 6acE into pre8ar times an& 8ere in&irectl4 ostere& 64 the tari polic4 o the #nite& States. 3hus
35)
there &e$elope& slo8l4, 6eneath the sur ace o current luctuations, an untena6le situation 8hich 8as 6oun& to curtail the role o American cotton in the 8orl& an& to e(plo&e in a ma=or &epression. 3he presence o o$erpro&uction in the proper sense o the term is, in this special case, as un&enia6le as the rationale o the ar7ument or planne& retreat. 0ottonsee& oil an& its resi&ues cannot 6e &ealt 8ith here, 6ut their possi6ilities in the iel&s o human an& animal oo& an& o chemical pro&ucts, althou7h $er4 consi&era6le, 8oul& not un&amentall4 alter the picture. 3he post8ar 8heat situation presents un&amentall4 the same eatures, 4et &i ers in important respects. ,e ore the 8ar, #nite& States pro&uction ha& in&ee& met increasin7 competition in the 8orl&"s marEet 6ut e ects 8ere al8a4s compensate& 64 a$ora6le shi ts in &eman&. A ter the 8ar, this 8as no lon7er so. Althou7h population increase& stron7l4, consumption per hea& &i& not. Ln the contrar4 the latter &ecrease& consi&era6l4 in response to chan7in7 tastes an& ha6its, thou7h the increase in the ormer 8as su icient to increase total consumption, 8hich at the en& o our perio& 8as a6out 15 per cent a6o$e the a$era7e o the last i$e pre8ar 4ears. :orei7n &eman& rapi&l4 ell rom its 8ar peaE a ter the cessation o American 8ar an& emer7enc4 cre&its, 6oth orei7n competition an& protection accountin7 or the sharpl4 allin7 @tren&@ an&, rom 19)G on, the uninterrupte& all in quantit4 e(porte&. Horl& pro&uction, e(clu&in7 9ussia an& 0hina, a ter ha$in7 &ecrease& rom 1915 to 191J, increase& to 19)8 64 more than one-thir& an& then mo$e& a6out a le$el appro(imatel4 )0 per cent a6o$e the last pre8ar 4ears. /uropean pro&uction alone, inclu&in7 9ussian e(ports, more than reco$ere& in stron7l4 in$erse co$ariation 8ith #nite& States e(ports. -nterpretation o these acts must, moreo$er, taEe into account the $er4 lo8 elasticit4 o &omestic &eman&. Some economists hol& that pro&uction a&apte& itsel to the ne8 con&itions an& point to the sharp &ecrease in acrea7e har$este& per hea& o population that occurre& rom 1919 to 19)5. 5ro&uction ha&, ho8e$er, e(pan&e& consi&era6l4 rom 1915 to 1919 an& thou7h contraction ollo8e& airl4 promptl4 upon the all in
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prices, persistin7 e(cess capacit4 an& that inelasticit4 o &omestic &eman& 8oul& ne$ertheless account or stron7 e ects o the all in e(ports an& o the $ariations in har$ests. -t &oes not ollo8 that, 6ecause the price o 8heat mo$e& $er4 much as an4 all-commo&it4 in&e(, con&itions peculiar to the 8heat-7ro8in7 in&ustr4 ha& nothin7 to &o 8ith it. ,ut the central act 8as the technolo7ical re$olution. 3he a$era7e 4earl4 pro&uct &urin7 our &eca&e o rou7hl4 850 million 6ushels o 8heat ma4 not looE ormi&a6le in itsel . ,ut it 8as not the result o harmonious e(pansion in all parts o the countr4, 8hich it 8oul& ha$e 6een possi6le to restrict a7ain at proportionate an& mo&erate sacri ice or e$er4 7ro8er o 8heat or 8hich, in act, 8oul& ha$e restricte& itsel 8ithout catastrophe in the course o a e8 4ears o &epression. -t 8as the net result o spectacular e(pansion in some re7ions an& pain ul elimination in others. /(pansion 8as 7eneral up to 1919, e$en the /ast an& South respon&in7 to 8ar prices. ,ut the reall4 si7ni icant increase in acrea7e 8as not. 3hat 8as con ine& to Bontana, Pansas, .e6rasEa, 3e(as, an& a e8 other states an&, o6$iousl4, 8as not &ue simpl4 to 8ar con&itions. Similarl4, &ecrease in 8heat acrea7e rom 1919 to 19)5 8as 7eneral 6ut also unequal, har&l4 an4 &ecrease occurrin7 in Bontana, or e(ample. 3he su6sequent e(pansion to 19)9 coinci&e& 8ith restriction in the South an& /ast, 8here acrea7e &ecrease& 64 a6out one- i th or the &eca&e. ;ia7nosis o this course o e$ents is o6$ious. /(pansion 8as in the <reat 5lains, 8here the mechaniOe& arm, the tractor an& the com6ine thresher in particular, can 6e 8orEe& to ull a&$anta7e an& 4iel& accepta6le returns at a price o G0 cents per 6ushel or less. 0ontraction 8as en orce& 8here those inno$ations 8ere not pro ita6le an& a price o one &ollar per 6ushel co$ers cost onl4 on the 6etter soils. He reco7niOe all the eatures em6o&ie& in our mo&el an& especiall4 the @competin7-&o8n process,@ passin7 sentence o economic &eath on perhaps hal o all 8heat armers. 3his component o the post8ar situation, in act, ori7inate&, as it shoul&, in the prece&in7 Pon&ratie prosperit4. 3he 7reat percent increase in Bontana, Pansas, .e6rasEa, an& 3e(as 8as rom
35F
1900 to 1915. He ma4 e$en 7o so ar as to sa4 that this is 8hat can 6e attri6ute& to inno$ation per se, 8hile the urther rise to 1919N rou7hl4, 10 million acres in the <reat 5lainsN8as a 8ar e ect. -nno$ation 8oul& ha$e sprea& an& taEen ull e ect in the &o8n7ra&e, as it al8a4s &ocs. A &epressi$e situation 8oul& ha$e ensue& in an4 case. ,ut 8ar prices an& reaction to them accentuate& it, 8hich is all that prices or monetar4 actors ha$e ha& to &o 8ith it. ). .e(t, the post8ar 6uil&in7 6ooms call or comment. L their quantitati$e importance in the economic processes o the perio& it is $er4 &i icult to 7i$e an e(act i&ea, 6ut $er4 eas4 to 7i$e one that is appro(imate. - , or e(ample, 8e accept the statement containe& in the 19)9 0ensus o 0onstruction, that 6uil&in7 8ill on the a$era7e *&irectl4+ 7i$e a 4ear"s ull emplo4ment to one man or rou7hl4 each 55,800 spent, an& i 8e taEe into account the emplo4ment create& 64 the pro&uction an& transportation o 6uil&in7 material an& in other su6si&iar4 in&ustries an&, 64 8a4 o secon&ar4 e ects, in all in&ustries, 8e cannot &ou6t that construction 8as the chie contri6utor 91 to the post8ar 6usiness $olume in this countr4. 3his is no more une(pecte& than the post8ar a7rarian &epression. ,uil&in7 6ooms, in particular 6ooms in resi&ential, pu6lic, an& pu6lic utilit4 construction, occurre& in the &o8n7ra&es o 6oth prece&in7 Pon&ratie sN or instance, in /n7lan& in the t8enties o the nineteenth centur4, in all three countries 6e ore 18J3, in the #nite& States rom 18J8 to 189F. All o them, 8ith one e(ception, 8ere stron7er than an4 that occurre& &urin7 Pon&ratie prosperities. .or is this a mere matter o histor4. 3aEin7, or 6re$it4"s saEe, &8ellin7-house 6uil&in7 onl4, 8e nee& 6ut list the actors that 8oul&
91
As 8ill presentl4 6ecome clear, this &oes not mean that there 8as a one-8a4 relation 6et8een 6uil&in7 an& the rest o the economic or7anism, or that the prosperities o the perio& ori7inate& in the 6uil&in7 tra&e. .o mere appeal to the quantitati$e importance o construction 8ithin the total o s4stem e(pen&iture 8oul& ha$e an4 e(planator4 $alue. -n most cases it is o6$ious that construction rather respon&e& to than create& con&itions a$ora6le to its e(pansion. 3he latter 8as the case onl4 inso ar as there 8as inno$ation in the 6uil&in7 in&ustr4 itsel .
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pro&uce supernormal acti$it4, in or&er to see that the 7eneral con&itions pre$ailin7 in Pon&ratie &o8n7ra&es an& re$i$alsNmore precisel4, in the prosperit4 phases o the shorter c4cles 8hich run their course 8ithin Pon&ratie &o8n7ra&es an& re$i$alsNare more a$ora6le to the occurrence o 6uil&in7 6ooms than are the 7eneral con&itions pre$ailin7 in prosperities. :allin7 rate o interest is one o them. 'i7h rate o increase in real incomes is another > rom risin7 or constant mone4 incomes o the mi&&le an& lo8er classes, accompanie& 64 allin7 cost o li$in7, ne8 &eman& or 6etter housin7 8ill naturall4 ollo8. -nno$ation in the 6uil&in7 in&ustr4 or its su6si&iaries 8ill 8orE in the same &irection 6ecause, liEe other inno$ations, it is liEel4 to sprea& in recession. 3he rise in rents that occurs &urin7 Pon-&ratie prosperities supplies, 6arrin7 a su6sequent all in mone4 incomesN8hich, as 8e ha$e seen, is not liEel4 to occur Nan a&&itional stimulus. :inall4, in&ustrial e$olution in 7eneral means in&ustrial mi7ration an&, moreo$er, mi7ration rom the countr4si&e to the cities, 6oth o 8hich create ne8 &eman& or construction that is e$entuall4 pro$i&e& or &urin7 recession. L course there 8ere, 6esi&es, other actors, unconnecte& 8ith the eatures o the Pon&ratie Z phase 8hich happene& to pre$ail. 3he omissions o the 8ar perio&, 6oth as to replacement an& as to normal increment, constitute the most important o them. -n the #nite& States the 8ar &i& not inter ere 8ith either resi&ential or other construction to an4thin7 liEe the same e(tent as in /n7lan& or <erman4, 6ut such in&ications as 8e ha$e lea$e no &ou6t a6out the act that it 8as at an a6normall4 lo8 le$el in 191J an& 1918. At least in most parts o the countr4, a shortli$e& 6oom set in at the en& o 1918, &urin7 8hich 6uil&in7 costs rose sharpl4N64 )5 per cent or more. 3his 8as ollo8e& 64 a &rastic all 6oth in 6uil&in7 acti$it4 an& costs, an& rom the 6e7innin7 o the ourth quarter o 19)3 the post8ar 6oom in resi&ential 6uil&in7 &e initel4 7ot un&er sail. 3here 8as a set6acE in the secon& an& thir& quarters o 19)F M then a peaE 8as reache& in 19)5, &escent rom 8hich laste& to a6out Ba4 19)J M another peaE occurre& in April 19)8. A ter that 8e ha$e &ecline, 8hich
35G
thou7h at $ar4in7 ratesNin 1930 there 8as some retar&ationN continue& to :e6ruar4 1933, 8ith 19)9 an& 1931 &ispla4in7 the sharpest alls. -n apartment-house an& hotel construction the ma(imum occurs in 19)G, 6ut the i7ure or 19)5 comes near it an& those or 19)J an& 19)8 are not much 6elo8 it. /(pen&iture on ne8, non arm, resi&ential 6uil&in7, inclu&in7 hotels an& clu6s, is estimate& at 3F 6illion &ollars or the &eca&e. ;ia7nosis o that 6oom, 8hich 8as entirel4 inance& rom pri$ate sources, presents no &i iculties. At the 6e7innin7 o the perio& there 8as &amme&-up &eman&. 5opulation, in spite o the -mmi7ration 9estriction Act o Ba4 19)1, increase& rom 19)0 to 19)9 64 15 millions, the lar7est a6solute amount o increase per 4ear in the histor4 o the countr4. 3here 8as also consi&era6le internal mi7ration. 9eal income per hea&, risin7 stron7l4 in all 6racEets, ma&e that &eman& e ecti$e an& a&&e& ne8 sources. 3he motor 8as the onl4 other @e(pensi$e@ one o the items to8ar& 8hich the surplus turne&. :rom 191G to 19)0 rents ha& risen on a national a$era7e 64 almost t8o-thir&s. 3he4 ell 6ut insi7ni icantl4, e$en in the crisis o 19)1. 5rimaril4 the 6oom 8as a response to these con&itions. ,uil&in7 costs rose s8i tl4 in 19)3 an& a ter 19)F remaine& airl4 sta6le on a some8hat lo8er le$el. -nterest on ur6an mort7a7es 8as, thou7h allin7, not particularl4 cheap as compare& 8ith other lon7-term rates, e(cept 8here 6uil&in7 8as inance& 64 6on& issues. ,ut un&er the circumstances o that perio& an& in the 7lo8 o its uncritical optimism neither costs nor interest char7es mattere& much. -t seeme& more important to 7et quicEl4 the home one 8ante&Nor the sE4scraper the prospecti$e rents o 8hich in an4 case compare& a$ora6l4 8ith the rate on mort7a7e 6on&sNthan to 6other 8hether it 8oul& cost a e8 thousan& &ollarsNor in the case o the sE4scraper, a million or soN more or less, pro$i&e& mone4 8as rea&il4 orthcomin7 at those rates. An& it 8as. :irst mort7a7es on ur6an real estate represent, on the one han&, not all the loans that 8ere ma&e a$aila6le or 6uil&in7 an&, on the other han&, also inance& not onl4 other t4pes o 6uil&in7 6ut other thin7s than 6uil&in7. ,ut it is still permissi6le to point to the act that
35J
the4 increase& rom, rou7hl4, 13 6illions in 19)) to, rou7hl4, )J in 19)9, 6uil&in7 an& loan associations contri6utin7 a6out J.8, commercial 6anEs a6out 5.), mutual sa$in7 6anEs 5.1, li e insurance companies F.8, an& mort7a7e 6on&s more than F. 3his increase is out o all proportion, not onl4 8ith the increase in 8hat can in an4 reasona6le sense 6e calle& sa$in7s, 6ut also 8ith the e(pansion o 6anE cre&it in other lines o 6usiness, an& illustrates 8ell ho8 a cheap mone4 polic4 ma4 a ect other sectors than those in 8hich it is conspicuousl4 success ul in 6rin7in7 &o8n rates. - such a sector &ispla4 a $er4 elastic &eman& or the un&s 8hich that polic4 8ill &ri$e to8ar& it, interest in it nee& all 6ut little or not at all in or&er to pro&uce all the consequences that 8e usuall4 associate 8ith @too-lo8@ mone4 rates. -nno$ation lent its ai&. 3he steel-sEeleton structure, ma&e cheaper 64 stea&il4 increasin7 use o rein orce& concrete an& 8orEa6le 64 the electric ele$ator, ha& create& ne8 possi6ilities e$er since the nineties, an& these possi6ilities ha& 6ecome a eature o the Pon&ratie ups8in7. -n the &o8n7ra&e a ter the 8ar this inno$ation, impro$e& 64 se$eral minor an& @in&uce&@ ones, propelle& 64 chan7es in the ha6its o li e that ma&e the apartment increasin7l4 &esira6le to the American 6our7eois amil4 an& 64 the plethora o cre&it, sprea& an& conquere&, much liEe motorcars or ra4on an& e(actl4 liEe those inno$ations that carrie& the prosperities, an& sprea& in the &o8n7ra&es, o prece&in7 Pon&ratie . Similarl4, pre a6rication, primaril4 ma&e possi6le 64 the use o the ne8 materials 6ut also applie& to stone an& lum6er, e(ten&e& its &omain ar 6e4on& the sE4scraper. /(ca$ation o 6asements 64 means o po8er sho$els impro$e& 64 the caterpillar trea& an& 6elt an& 6ucEet con$e4ors, the use o po8er hoists, o po8er concrete an& mortar mi(ers, an& o pneumatic ri$etin7 machines, rapi&l4 6ecame a matter o course or contractors in all lines o 6uil&in7N t4pical &o8n7ra&e &e$elopments, all o them. 3heir ull e ect Nthe mass pro&uction o the per ectl4 stan&ar&iOe& an& mechaniOe& cheap houseNis still to come, ho8e$er. ;urin7 our
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perio& the or&inar4 amil4 house 8as in the main still 6ein7 6uilt in su6stantiall4 ol&- ashione& 8a4s 64 small an& ine icient irms. ,ut the conclusion that this essentiall4 consequential &e$elopment Nin response to the omissions o the 8ar perio& an& increase& real purchasin7 po8er o all classes, on the one han&, an& in response to pre$ious inno$ation, on the otherNissue& in o$er6uil&in7, o8in7 to the a&&itional stimulus imparte& 64 the monetar4 actor, must not 6e accepte& hastil4, ho8e$er plausi6le it ma4 seem. Some t4pes o response to those con&itions, especiall4 the ones that 8ere linEe& to speculati$e real estate operations, 8ere clearl4 o the 6u66le class. 3he Biami case ma4 ser$e as an e(ample. .or can there 6e an4 &ou6t a6out the merits o the inancial metho&s that 8ere also use& in less @speculati$e@ casesN.e8 1orE sE4scrapers or instance Nan& in particular a6out the inancial qualit4 o the mort7a7e 6on&s, 8hich increase& rom G8) millions in 19)) to F,1G9 millions in 19)9, an& 8hich 8ere rea&il4 lent a7ainst 64 6anEs. :inall4, e$er4thin7 8as &one to maEe it eas4 or e$er4one to run into &e6t, or the purpose o 6uil&in7 a home as or an4 other purpose. -t is eas4 to un&erstan& that such a structure 8oul& 7i$e 8a4, not onl4 un&er the impact o a serious crisis, 6ut e$en in consequence o a mere ailure o ros4 e(pectations a6out thin7s in 7eneral to come true. -n other 8or&s, 8e shall rea&il4 un&erstan& 8h4 the loa& o &e6t thus li7hthearte&l4 incurre& 64 people 8ho oresa8 nothin7 6ut 6ooms shoul& 6ecome a serious matter 8hene$er incomes ell, an& that construction 8oul& then contri6ute, &irectl4 an& throu7h the e ects on the cre&it structure o impaire& $alues o real estate, as much to a &epression as it ha& contri6ute& to the prece&in7 6ooms. .othin7 is so liEel4 to pro&uce cumulati$e &epressi$e processes as such commitments o a $ast num6er o househol&s to an o$erhea& inance& to a 7reat e(tent 64 commercial 6anEs. ,ut this &oes not quite amount to sa4in7 that there 8as o$er6uil&in7 in the sense that the amount o construction 8as 7reater than it 8as possi6le to a6sor6 8ithout losses un&er the con&itions then pre$ailin7, an& that this e(cess 8as an in&epen&ent cause o the 7reat &epression.
359
9ents ell rom 19)F on, 6ut onl4 mo&eratel4. Kacancies increase&, 6ut not more than 8as to 6e e(pecte& in a perio& o rapi& o6solescence o e(istin7 house propert4. 3he 6i7, ol&, u7l4, an& incon$enient house soon 6ecame &i icult to sell, 6ecause o chan7es in tastesNsome o them attri6uta6le to the automo6ileNan& 6ecause o the increasin7 8a7es an& &ecreasin7 e icienc4 o ser$ants. ,ut there is no reason to 6elie$e that the spurt o 19)5 coul& not ha$e settle& &o8n into an appropriate a$era7e acti$it4 an& that e$en the results o speculati$e e(cesses coul& not ha$e 6een liqui&ate& 8ithout an4 $iolent crisis in 6uil&in7, let alone in 7eneral 6usiness. As a matter o act, this 8as accomplishe& to a certain e(tent. - 8e accept the i7ures o the .ational ,ureau o /conomic 9esearch, 8e arri$e at the conclusion that our 4ears o such a&=ustmentN inclu&in7 local crisesNactuall4 ollo8e& upon that 6oom 8ithout much 7eneral &istur6ance 6ein7 create&. -n the inal result, e(pansion in this line 8as not so o6$iousl4 7reater than it 8as in other lines o consumption that e(planation o su6sequent $icissitu&es coul& simpl4 6e 7i$en in terms o @mal-in$estment.@ An& incomes ha& irst to all 6ecause o a 7eneral crisis, or the special crisis o 6uil&in7 an& o real estate to come a6out. 3his anal4sis re ers to resi&ential 6uil&in7 onl4. 9esults are not, ho8e$er, su6stantiall4 chan7e& 64 inclu&in7 other t4pes. Lne o them, commercial 6uil&in7, is perhaps still more than apartment houses an& hotels e(pose& to the suspicion o speculati$e o$er&oin7. 0ontracts a8ar&e& increase& stea&il4 to a peaE in 19)J an& another almost as hi7h in 19)9, an& summe& up or 19)) to 19)9 to nearl4 G.J 6illions, the rate o increase o$er the perio& 6ein7 su6stantiall4 in e(cess o that o resi&ential 6uil&in7. -n&ustrial 6uil&in7 increase& at a still 7reater rate Ncontracts a8ar&e& sum up to a6out F.8 6illionN6ut there is $er4 little reason to suspect an4 e(cess o$er the requirements o the 7eneral march o thin7s. #nliEe the other items, 6ut also con ormin7 to e(pectation, this mo$e& 8ell in the Pitchins an& sho8e& equall4 8ell the s8eep o the t8o incomplete Ju7lars. :inall4,
3G0
more than one-thir& o the 7ran& total o contracts a8ar&e&Nnearl4 F9 6illions accor&in7 to the ;o&7e i7ures, 8hich certainl4 un&erstate Ncomes un&er the hea&in7 o 5u6lic, -nstitutional, an& #tilit4 construction. 5art o this is re lecte& 64 the increase in municipal 6on&e& &e6ts. Alone e&eral e(pen&iture on ne8 construction, repairs, an& alterations amounte&, rom 19)0 to 19)9, accor&in7 to the :e&eral /mplo4ment Sta6iliOation ,oar&, to a6out ).5 6illions, the tren& 6ein7 up8ar& all the time an& 19)9 &ispla4in7 the hi7hest i7ure *308 millions+Na act 8orth mentionin7 in $ie8 o the pre$alent talE a6out insu icient spen&in7. Accor&in7 to the same source, the i7ures o 8hich are a7ain incompara6le 8ith those use& a6o$e, the e(pen&iture o railroa&sNsteam an& electricNan& po8er an& telephone companies on construction an& maintenance mo$e&, rom 19)3 to 19)9, e(tremel4 stea&il4 on a sli7htl4 risin7 le$el, summin7 up to )0.F 6illions. ,ut these sums 8ere e(pen&e& in 8a4s that 8oul& not pro&uce an4 material e ect on the economic process 6e4on& 8hat is implie& in the e(pen&iture itsel .
3a6le o 0ontents
E. The @Indu t!ial /e,olution@ of the T#entie . 3hese processes
8ere so entirel4 normal in the sense o con ormin7 to e(pectation rom our mo&el an& so o6$iousl4 repeate& the histor4 o prece&in7 Pon&ratie &o8n7ra&es that no 8ar e ects or other &istur6ances a$aile& to o6literate the act, an& that recallin7 a e8 amiliar eatures su ices to esta6lish it. :irst, we should not expect to find fundamentally new things, 6ut rather in&uce& an& completin7 &e$elopment on lines chalEe& out 6e ore an& atten&e& 64 stron7 increase in quantities, marEe& impro$ement in qualities, @rationaliOation@ all aroun&, an in&e inite num6er o in&i$i&uall4 small inno$ations pro&ucin7 a 8i&e $ariet4 o ne8 specialties, the phenomena 8hich 8e ha$e calle& conquest o
3G1
ne8 economic space. 3his is 8hat 8e in&. 3he electrical, chemical, an& automo6ile in&ustries, 8hich to7ether 8ith their su6si&iaries an& all that &irectl4 an& in&irectl4 hin7es upon themNthe motorcar, or instance, is responsi6le or a 7reat part o the total o post8ar construction > roa&s, 7ara7es, 7asoline stations, su6ur6an resi&encesN account or 90 per cent o the post8ar chan7es in the in&ustrial or7anism an& or most o the increase in real income. 3he4 realiOe& the possi6ilities create& in the Pon&ratie prosperit4, continue& to push ahea& rom the 6ases lai& 6e ore, an& by so doing shaped things into a ondratieff recession. %! So &i& not onl4 those su6si&iaries, such as oil an& ru66er, 6ut also the minor, thou7h still important, no$elties, such as steel allo4s, aluminum, ra4on, lar7e-scale retailin7, an& the or7aniOational an& inancial complementNpersistence o the mer7er mo$ement, po8er inance an& so on. 3here 8ere e(ceptions, as there 8ere in the t8o pre$ious Pon&ratie &o8n7ra&es, 6ut none o them 8as quantitati$el4 si7ni icant. 3he most important one 8as air transport on a commercial scale, 8hich ma4 6ear comparison 8ith the role o railroa&s in the thirties an& o electricit4 in the ei7hties o the nineteenth centur4. Secon&, 8e in& all the 7eneral eatures 8hich anal4sis an& historical o6ser$ation ha$e tau7ht us to associate 8ith Pon&ratie &o8n7ra&es. 3his 8ill 6ecome clear 6e4on& &ou6t in our &iscussion o time series 8hich is to ollo8, 6ut it shoul& 6e clear in&epen&entl4 o it, that those eatures can 6e accounte& or in terms o the s4stem"s a6sorption o an& reaction to the ne8 quantities an& ne8 metho&s. He in& pre$alence o unemplo4ment that 8as 6asicall4 @technolo7ical.@ 3here 8as, thou7h also accentuate& 64 other circumstances, that e(cess capacit4 8hich is insepara6le rom the process o rapi& reor7aniOation o the in&ustrial apparatus an& coexists with &vigorous expansion of output. He o6ser$e that &esperate stru77le o irms or outlets an& a7ainst competition an& the sa7in7 o prices inci&ent to the
9)
[#n&er the &atin7 7i$en 6elo8, Pon&ratie recession 7a$e 8a4 to Pon&ratie &epression in the all o 19)5, almost the mi&&le o the perio& un&er &iscussion.N/&.]
3G)
insertion o ne8 quantities an& capacities, 8hich un&erstan&a6l4 creates the picture o apparentl4 permanent @o$erpro&uction@ or @o$erin$estment@ an& the characteristic outcr4 a6out people"s ina&equate po8er or 8illin7ness to spen&. An&, masEe& an& retar&e& 64 resistance to a&=ustments, the competin7-&o8n process is clearl4 reco7niOa6le 6oth 8ithin the relati$el4 ne8 an& as 6et8een ne8 an& ol& in&ustries, railroa&s an& coal 6ein7 conspicuous instances o the latter. All o 8hich accounts or much o the social an& 6usiness atmosphere o the perio&, inclu&in7 its economic slo7ans. -n the #nite& States con ormit4 to e(pectation &urin7 that perio& is so o6$ious as to maEe it almost super luous to pro$e it, a act the $alue o 8hich is enhance& 64 the relati$el4 small importance o e(ternal &istur6ances in our sense. 3hat the e$ents in"the iel&s o electricit4, motorcars, an& chemistr4 &o not constitute un&amentall4 ne8 6ut in&uce& an& completin7 &e$elopments, 8hich procee&e& rom 6ases lai& in the t8o pre8ar &eca&es, nee&s a&&itional emphasis as little as &oes the act that it 8as those &e$elopments that @carrie&@ the economic processes o the perio&. He ma4, ho8e$er, note the su6stanti$e no$elt4 o a$iation as a commercial successN19)5 ma4 ser$e as a &ateN8hich 8as perhaps the most important e(ception. 3his in&ustr4 &e$elope& on its o8n an& not, as mi7ht ha$e 6een e(pecte& rom stan&points other than ours, as an appen&a7e to an ol&er, sa4 the automo6ile, in&ustr4 in spite o the similarit4 its pro6lems 6ear to those o the latter. /(actl4 as the telephone in&ustr4 8as not 6uilt up 64 the tele7raph in&ustr4 an& has sho8n no ten&enc4 to 6e &ominate& 64 it, an& as the rise o the automo6ile in&ustr4 o8e& 6ut little to the carria7e an& 6ic4cle in&ustries or as the mo$in7 picture in&ustr4, 8hich 8e mi7ht also list amon7 the 7enuine inno$ations o the perio&, &i& its o8n pioneerin7 an& 8as not the 8orE, technicall4, inanciall4, or commerciall4, o the theater interests, so a$iation supplies another instance in $eri ication o the h4pothesis o .e8 :irms an& .e8 Ben *0hap. -ll+ arisin7 in&epen&entl4 o the Ll& :irms an& la4in7 themsel$es alon7si&e o them. 3he same o ten hol&s true o ne8 specialties 8ithin each 7reat line o a&$ance, as 8ithin the
3G3
iel& o electrical in&ustries, partl4 at least, in the cases o the ra&io an& o the re ri7erator. 1. 5o8er pro&uction increase& rom 38.9 6illion Eilo8att-hours in 1919 to o$er 9J in 19)9, onl4 19)1 marEin7 a relapse o a6out 8 per cent. 9ou7hl4 95 per cent o this 8as pro&uce& 64 pri$atel4 inance& enterprise an& o$er hal o it 64 the <eneral /lectric, -nstill, Boran, Bellon, ,4lles64 an& ;ohert4 7roups an& a &oOen corporations =ointl4 controlle& 64 these. Althou7h the more remote e ects o this &e$elopment on in&ustrial acti$it4 in 7eneral 8ere much more important actors in the c4clical $ariations o the perio& than the imme&iate e ects o the in$estment in po8er plant, transmission lines, an& &istri6ution, 4et rom 191J to 19)J 6alance-sheet $alues o po8er plants increase& rom a6out 3 to a6out 9.F 6illions an& more than 1.5 6illions o electrical stocE an& 6on&s 8as issue& in the 4earl4 a$era7e 6et8een 19)F an& 1930Nthe ma(imum o ),150 millions occurre& in 19)JNo 8hich perhaps somethin7 less than t8o-thir&s 8as spent on ne8 construction an& e(tension. <ross earnin7s o the electric li7ht an& po8er in&ustr4 reache& ).1 6illion &ollars 64 19)9, 8hen househol& consumption 8as responsi6le or G0F millions, in&ustrial an& commercial or a6out 1.) 6illion, street li7htin7 an& traction or the rest. 5rices &i ere& 8i&el4, not onl4 locall4 6ut also as 6et8een customers > in 19)9 the leather in&ustr4, or instance, pai& ^)8 or 1,000 Eilo8att-hours an& the chemical in&ustr4 5.9, 1).J &ollars 6ein7 the a$era7e or that 4ear as 7i$en 64 the census. -n the a$era7e, ho8e$er, the4 ell. 3he national a$era7e price o current use& in househol&s is a no less &ou6t ul matter. 3he semio icial i7ures are per Eilo8att-hour > 1G.) cents aroun& the turn o the centur4, a6out 9 cents or 191), rou7hl4 J.5 at the 6e7innin7 o our perio&, &urin7 8hich it slo8l4 6ut stea&il4 ell to G.3 in 19)9, or a6out 3.8 cents in terms o the pre8ar purchasin7 po8er o the 8a7e earners" &ollar. 3his 6eha$ior o prices is accounte& or, on the one han&, not onl4 64 the actual or potential competition o in&ustrialNas &istin7uishe& rom
3GF
@pu6lic@Nstations, 6ut also 64 @commo&it4 competition@N7as, nonelectrical motorsNan& the necessit4 o 6uil&in7 up ne8 &eman& > the electri ication o the househol& an& o the arm in particular 8as to a lar7e e(tent a question o price. Ln the other han&, the 7ro8th o units o control an& the esta6lishment o local an& sectional monopolies acilitate& &iscrimination an& 8ent ar to8ar& eliminatin7 price competition 6et8een those units, 8hile their stru77les 8ere trans erre& to the inancial sphere. 3hat e(plains 8h4 the 8ei7hte& a$era7e o prices &i& not, within our period, all correspon&in7l4 to the increase in e icienc4 o pro&uction, an& this a7ain 8as 8h4 most operatin7 companies 8ere in a position to impro$e their inancial status consi&era6l4 an& to 8eather the su6sequent storm comparati$el4 8ell. 3he com-petin7-&o8n process an& its contri6ution to the 7eneral picture o the perio&, 6ut especiall4 to the su6sequent <reat ;epression, tooE un&er the circumstances a orm 8hich 8as in man4 respects peculiar. -t asserte& itsel mainl4 throu7h shi ts in in&ustrial locationNelectrical &e$elopment materiall4 helpin7, or instance, in the in&ustrialiOation o the SouthNan& much less &irectl4 as, or instance, in the e ect on coal. 3echnolo7ical a&$ance 8as much on the same lines as in /urope. Hater-po8er &e$elopment pla4e&, o course, a 7reat role > rom 19)F to 19)8 it pro7resse& at a 7reater rate than the capacit4 o steam plants, reachin7 an output o )9 6illion Eilo8att-hours 64 1930 thou7h at the en& o the perio& steam 6e7an to 7ain 7roun& relati$el4. 3he use o uel oil an& 7as 8as an American peculiarit4. Lther8ise 8e o6ser$e the 7eneral ten&encies to8ar& lar7er capacit4 o stationsNthe num6er o plants ell 64 one-thir& 6et8een 19)) an& 19)9Nan& superpo8er Oones. Since in e(ten&in7 electrical enterprise to orei7n countries capital counts or almost e$er4thin7, the success o American 7roups, especiall4 in South America, is eas4 to un&erstan&. A6out one 6illion 8ent to South America, /urope, Asia, an& into 8hat presentl4 turne& out to 6e so man4 traps.
3G5
0onsi&erin7 the technolo7ical nature o much that 8as &one, mer7ers, partl4 also aimin7 at the control o 7as concerns, 8ere the una$oi&a6le concomitant o this &e$elopment. 3he inancial instrument o the hol&in7 compan4 l4in7 rea&4 at han& e(perience& a ne8 $o7ue o unprece&ente& &imensions. 5o8er inance &e initi$el4 passe& out o the han&s o the manu acturin7 in&ustr4 an& coor&ination resulte& rom a stru77le 8ithin the po8er-pro&ucin7 sphere, in 8hich the 7roups mentione& a6o$e emer7e& or conquere&. Since this stru77le in$ol$e& competiti$e 6i&&in7 or strate7ic positions, such 7eo7raphical an& commercial rationaliOation as 8as achie$e& 8as accompanie& 64 the 7ro8th o a hu7e structure o &e6t an& share capital, 8hich 8as out o proportion 8ith the e ects o that rationaliOation, an& not onl4 pro$i&e& oo& or purel4 inancial maneu$ers an& speculati$e e(cesses o a t4pe su77esti$e o the railroa& a7e, 6ut also =eopar&iOe& the 6anEin7 s4stem, since po8er securities loome& lar7e in its collateral an& since man4 lea&in7 6anEs, amon7 them the .ational 0it4, the 0hase .ational, the ,anEers" 3rust, the <uarant4 3rust, associate& their ortunes &irectl4 8ith po8er enterprise an& in act unctione& in some cases as the a7ents o ultimate centraliOation. Hithout 7oin7 urther into this 8ell-Eno8n matter, 8e 8ill note that the 7reat 6oom in po8er inance Nan& real in$estmentN6elon7s to the secon& hal o our &eca&e. -t 8as a eature o the ourth Ju7lar an& clearl4 6asic to its prosperit4 phase. -n act, 6uil&in7 construction, po8er &e$elopmentNto7ether 8ith &e$elopments in other 6ranches o the utilit4 iel& 8hich also it into our 7eneral i&ea o the processes o a Pon&ratie &o8n7ra&e 93N 8oul& in themsel$es su ice to account or the 6eha$ior o a77re7ati$e time series &urin7 the perio&.
93
#tilit4 &e$elopments orm part o the picture 8hich 8e e(pect a Pon&ratie &o8n7ra&e to re$eal, 6ecause the4 are to a lar7e e(tent a unction o real income an& its rates o chan7e. Accor&in7l4, 8e in& e(pansionNin&uce& e(pansion Nin the utilit4 iel& in the t8o last &eca&es o the irst Pon&ratie as 8ell as in the &o8n7ra&e o the secon& *ei7hties an& earl4 nineties+. He in& the same phenomenon in the present instance.
3GG
3he ma=or instances o the propellin7 an& &islocatin7 e ects o po8er &e$elopments are o6$ious, an& &escription o the sum total o all the minor ones is impossi6le 8ithin this sEetch. ,ut it shoul& 6e emphasiOe& in $ie8 o popular &ir7es a6out lacE o in$estment opportunit4 that the 8orE o electri icationNas much o it e$en as is technolo7icall4 an& commerciall4 possi6le at the moment or in imme&iate prospectNis not nearl4 complete&. 3here is enou7h in$estment opportunit4 rom this source alone or man4 a c4cle to come. /$en in&ustr4 is as 4et 6ut imper ectl4 electri ie&Nperhaps to somethin7 liEe J5 per centNan& so are househol&s, 8hile 6ut a 6e7innin7 has 6een ma&e in the electri ication o arms an& o transportation. Lnl4 the telephone an& electric li7htin7 can reasona6l4 6e sai& to ha$e e(hauste&, ex visu o present technolo74, the 6ulE o their possi6ilities, althou7h the automatic telephoneNinstallation 8as Oero in 189) an& onl4 1.J per cent o the total o telephones installe& in 1919, 6ut nearl4 3) per cent in 1930N8hich must 6e liste& amon7 the inno$ations o the perio& un&er &iscussion, a or&s a 7oo& illustration or the act that e$en per ect saturation o e(istin7 &eman& nee& not call a halt o @pro7ress.@ 5ro&uction o electrical equipment ha&, e$er since 1915, increase& at a 7reater rate than pro&uction o po8er an& continue& to &o so until 19)9. -ts $alue 8as a6out 1 6illion &ollars in 1919an& nearl4 ).5 6illions in 19)9. /(amples o ne8 in&ustriesN an& the @&i$ersi 4in7@ e ect o po8er pro&uctionNa6oun&. 3he spectacular e(pansion o the ra&io an& the re ri7erator in&ustries &ates rom 19)G. 3he quarter o a million socEet ra&ios then in use increase& to o$er J millions, the 315,000 re ri7erators to 1,G80,000 in 19)9. 9F 3hou7h t4pical instances o &o8n7ra&e &e$elopments, these 8ere practicall4 ne8 in&ustries 8ith
9F
:i7ures o the /&ison -nstitute. 3he num6er o socEet ra&ios continue& to increase throu7hout the &epression to nearl4 )0 millions in 1935, an e(ample or those initial spurts 8hich are imper$ious to &epressions. As the rea&er 8ill remem6er, such 6eha$ior is, i an4thin7, normal rom the stan&point o our anal4sis, thou7h in practice it is not the 7eneral rule. Similarl4, the num6er o re ri7erators in occupie& homes Eept on increasin7 8ithout a 6reaE an& reache& the i7ure o J.)5 millions in 1935.
3GJ
histories o their o8n. ,ut the4 8ere not so in&epen&ent o the ol&er concerns in the in&ustr4 o electric manu acture as, sa4, a$iation is o the automo6ile in&ustr4. <enerall4 speaEin7, these ol&er concerns maintaine& their position 8ell, an& pro$e& in this as in other countries success ul shells o incessant inno$ation, especiall4 in the hea$4current iel& *<eneral /lectric, Hestin7house+. ;ollar $olume o output in electric manu acturin7 increase& a6out se$en ol& 6et8een 191F an& 19)9, an& a6out )G times rom 1899, the census 4ear nearest to the 6e7innin7 o the Pon&ratie , to 19)9. ). 3he automo6ile in&ustr4 le& in e$er4 ups8in7 an& out o e$er4 &o8ns8in7 throu7hout the perio& an& continue& in the Pon&ratie recession to quali 4 as 8ell or the role o stan&ar& e(ample or the processes em6o&ie& in our mo&el as it ha& &one in the ups8in7. /mplo4ment in motor-$ehicle actories, not inclu&in7 pro&uction o parts, tires, an& 6o&ies, increase& rom a6out )53,000 in 19)) to F)J,500 in 19)9, the correspon&in7 8a7e 6ill rom a6out 39G to a6out JJ5.5 million &ollars. 5assen7er-car re7istration as o ;ec. 31 increase& 8ithout an4 6reaE rom the 6e7innin7 o the series *1895 >F+ to 19)9 *)3,1)1,589+, thou7h o course at a &ecreasin7 percenta7e rate, &epressions a ectin7 the latter onl4. /$en in the 8orl& crisis an& in the 4ear o minimum re7istration *1933+ the total automo6ile retail an& ser$ice 6usiness, inclu&in7 accessories, illin7 stations, 7ara7es, an& also retail sales 64 8holesalers, i7ures out at ^F,831,800,000. L$er 1.1 million persons 8ere en7a7e& in &istri6utton an& ser$icin7, amon7 them J5G,000 emplo4ees *part-time inclu&e&+, recei$in7 8a7es an& salaries amountin7 to 801 millions. Duantitati$e e(pansion an& qualitati$e impro$ement, allin7 costs, prices, an& rates o pro it are o6$iousl4 the e(pecte& as 8ell as the actual characteristics o this in&ustr4"s histor4 &urin7 our &eca&e. 'o8e$er, since there is no satis actor4 8a4 o measurin7 qualitati$e impro$ement, an& since there 8as an almost uninterrupte& shi t rom lar7er, hea$ier, an& &earer to smaller, li7hter, an& cheaper cars e$en quantitati$e e(pansion 6ecomes elusi$e, 8hile in&ices o quote& prices, 8hich shoul& moreo$er 6e correcte& or $ariations in the allo8ances ma&e or ol&
3G8
cars @tra&e& in@ an& or other orms o re6ates, cannot in&icate more than a ten&enc4 8hich, o course, the4 un&erstate. :rom 191G on, pro its o in&i$i&ual irms not onl4 ell 6ut also 6ecame more nearl4 equal. 3he in&ustr4 &i& not simpl4 e(pan& in unction o the increase in real income 6ut helpe& to 6rin7 it a6out. 3he ormer ne(us, ho8e$er, stea&il4 7aine& in importance at the e(pense o the latter, as ha& 6een the case 8ith cotton a ter the .apoleonic 8ars an& 8ith railroa&s rom the ei7hties on. -nno$ations, increasin7 in num6er 8hile in&i$i&uall4 &ecreasin7 in importance, are t4picall4 o the &o8n7ra&e t4pe. :rom 191) on, &esi7ns 6ecame more sta6le. 0onsi&era6le pro7ress in the stan&ar&iOation o parts an& in the rationaliOation o assem6lin7 re&uce& costs as &i& pro7ress in su6si&iar4 in&ustriesNtires, nitrocellulose lacquers an& ast-&r4in7 sol$ents, an& so on. /quall4 important or more so 8ere the chan7es in or7aniOation an& inancin7 that 8ere in part in&uce& 64 the stru77le or sur$i$al 8ithin the in&ustr4, in 8hich incessant inno$atin7 an& e(pan&in7 into the lo8price marEet 8as a matter o li e an& &eath. 0ompetin7-&o8n 8ent on at a rapi& rate. 3he rise in price le$el a ter 191G helpe& to Eeep ailures an& e(its at a lo8 an& &ecreasin7 i7ure, an& e$en the set6acE o 1918, 8hen 6oth pro&uction an& 8holesale $alue ell a6solutel4 or the irst time, cost e8 li$es. ,ut a ter 19)1, 8hen pro&uction an& 8holesale $alue a7ain ell a6solutel4, e(itsNnot necessaril4 ailuresN increase& sharpl4 in the midst of spectacular expansion o the in&ustr4 as a 8hole, reachin7 )1 per cent in 19)F. -n 19)3 an& 19)F no less than )9 irms 8ent out o 6usiness, 1J o them 8ar an& post8ar oun&ations. L the 101 plantsNmaEers, not concernsN8hose annual pro&uction o passen7er cars 8as 5,000 or less in 19)0 onl4 11 sur$i$e& in 1930 M o the )3 8hose annual pro&uction 8as rom 5,000 to )5,000, also 11 M 8hile 8e still in& all o the 10 8hich pro&uce& o$er )5,000 in 19)0. ,4 1918, J0 per cent o all automo6iles pro&uce& in this countr4 an& 0ana&a came rom the three lar7est pro&ucers, 64 19)1 80 per cent, an& 64 1935 nearl4 90 per cent.
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0onsi&erin7 that the car o the masses 6ecame a realit4, 8hile the in&ustr4, 8hich ha& al8a4s 6een monopolisticall4 competiti$e, &e$elope& a t4picall4 oli7opolistic situation, 8e cannot help 6ein7 pain ull4 a8are once more o the some8hat less than realistic character o the 7eneral conclusions arri$e& at 64 the lea&in7 theorists o monopolistic competition. -n act, it shoul& 6e o6$ious that the 6eha$ior o the motorcar in&ustr4 &urin7 our &eca&e coul& 6e &escri6e& much more con$incin7l4 in terms o per ect competition 8orEin7 un&er the con&itions o a ne8 in&ustr4 in the course o 6ein7 a6sor6e& 64 or inserte& into the economic s4stem. -n the course o this &e$elopment, e$er since a6out 191G, metho&s o inancin7 chan7e& si7ni icantl4. @Lutsi&e capital@ 6e7an to pla4 a 7reater role. He nee&, ho8e$er, onl4 mention the &irect contact esta6lishe& 64 <eneral Botors 8ith the open marEet an& its polic4N ollo8e& 64 the other concernsNo inancin7 the consumer. .e$ertheless, o8ne& capital accumulate& rom pro its an& retailers" an& urnishers" cre&it remaine& the in&ustr4"s most important sources o means, an& this accounts or much 8hich striEes the o6ser$er as particularl4 @soun&@ a6out it. .et tan7i6le assets o motor-$ehicle manu acturin7 plants reache& their ma(imum o a6out ).1 6illion &ollars in 19)G an& then stea&il4 ell, thou7h up to the crisis 6ut slo8l4. 'o8e$er unrelia6le an4 in erence rom this ma4 6e, it seems clear that, 6arrin7 the :or& plant, the 7reat 8a$e o in$estment 6elon7s to the thir& an& not to the ourth Ju7lar. -n or&er to pro$e 8ith quantitati$e precision ho8 much o the processes o the perio& an& o the 6eha$ior o a77re7ates can 6e e(plaine& 64 the motorcar &e$elopments alone, it 8oul& 6e necessar4 to 7o ull4 into 8hat the4 meant or the steel, copper, an& equipment in&ustries an& so on. He 8ill, ho8e$er, con ine oursel$es to one remarE on the petroleum an& another on the ru66er in&ustr4. -nno$ations that ha$e alrea&4 6een mentione& *0hap. K--+ an& the &isco$er4 an& &e$elopment o ne8 oil iel&s account or the all in 7asoline prices *e(clu&in7 ta(+ rom ^0.)F11 per 7allon in 1919 to ^0.155J in 19)9 an&N7asoline consumption &i& not all until 193)N ^0.11J8 in 1931, 8hich sho8s that the petroleum in&ustr4 8as not
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passi$el4 &ra8n alon7 64 the 7ro8th o &eman&. 1et it comes su icientl4 near to this pattern to quali 4 as an instance. 3his is particularl4 e$i&ent at the 6e7innin7 o the perio&. -n 19)0 prices o oil an& 7asoline rose consi&era6l4 *peaE o the perio&+, so much so as to thro8 them out o line 8ith those o competin7 uels an& as to restrict the use o uel oil 64 railroa&sNthe <reat .orthern, or instance, con$erte& J0 locomoti$es into coal 6urners. 3his ollo8e& upon the &ou6lin7 o automo6ile pro&uction in 19)0 as compare& 8ith 1918, 8ith 8hich the 7asoline pro&uction 8as then una6le to Eeep pace. An oil 6oom starte& accor&in7l4, 8hich almost coinci&e& 8ith &eep &epression in other lines. -ssues o oil securities 8ere at a peaE earl4 in 19)0 an& a7ain to8ar& the en& o the 4ear an& at the 6e7innin7 o 19)1. -t is 8orth 8hile to mention that the onl4 cities in the countr4 8hich e(perience& 7reater 6uil&in7 acti$it4 in .o$em6er 19)0 than in .o$em6er 1919 8ere 2os An7eles, ,altimore, an& .e8 Lrleans, an& that the 0ali ornian cities all sho8e& lar7e 7ains in their clearin7 i7ures 8hile these &ecline& in the rest o the countr4. At the 6e7innin7 o 19)1 there 8as a lar7e oil mer7er *,ams&all 0orporation+. :urther &e$elopments ollo8e& an& cru&e prices reacte& promptl4, Bi&8estern prices, or instance, allin7 to ^1 a 6arrel in the summer o 19)1, as compare& 8ith ^3 in Januar4. 3he ru66er in&ustr4 8as, o course, also @&ra8n alon7.@ ,ut its o8n inno$ations 8ere much more in e$i&ence. As 8e ha$e seen else8here, 6e7innin7s &ate ar 6acE or at an4 rate to the Pon&ratie prosperit4 *reclaimin7, e.g., 1899, acceleration o the $ulcaniOin7 process 190G M 6ut commercial success o s4nthetic ru66er came a ter our perio&+, the use o $arious pi7ments in or&er to increase the &ura6ilit4 o ru66er compoun&s *191G+ 6ein7 the onl4 @in$enti$e@ inno$ation o the t8enties. -t 8as a7ain the @sprea&in7@ 64 means o &isco$erin7 ne8 an& &e$elopin7 ol& in&ustrial uses or ru66er * loorin7, ru66er cushions, ru66er linin7s, mountin7s, 6umpers, an& so on+ 8hich 8as a eature o the perio& un&er &iscussion. -n the iel& o the most important article the 7reat ne8 thin7Nthou7h also in$ente& lon7 a7o *9. H. 3hompson, patente& 18F5+N8as, o course, the pneumatic tire *191G+, 8hich ollo8e& upon the success o the cor& an& ma4 6e sai& to ha$e imparte&
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imme&iatel4 a si7ni icant impulse to lon7-&istance trucEin7. At the same time the comercial opportunit4 or lo8-pressure tires or passen7er cars mani este& itsel in the ha6it o man4 motorists to un&erin late their tires or the saEe o com ort. ,4 19)3, )1 companies, amon7 them practicall4 all the lea&ers o the tra&e, 8ere maEin7 such tires, e(perimentall4 or commerciall4, an& se$eral automo6ile manu acturers ha& a&opte& them as part o the re7ular equipment o their cars, 8hile others liste& them as optional. A @re$olution@ in tire maEin7, the more important 6ecause it in$ol$e& consi&era6le ne8 in$estment, announce& itsel . 3here 8as still resistance to o$ercome. ,ut impro$ement an& stan&ar&iOationN as to rim requirementsNcarrie& the inno$ation su&&enl4 to &e initi$e success a6out 19)5, a ter one o the tire companies ha& taEen the 6ol& step to 6rin7 out 6alloon tires or all stan&ar& rims an& thus to maEe a 6i& or imme&iate replacement o practicall4 all tires in use. 3he aspect o the marEet chan7e& 8ithin a e8 months, an& the @host@ ollo8e& the inno$ator promptl4. 3here is no nee& o 7oin7 into the illustrati$e $irtues o the case or the quantitati$e importance o it or the ourth Ju7lar. Hith quicE chan7es in pro&uction unctions, the competin7-&o8n process asserte& itsel stron7l4. He shall interpret in this sense the s4mptoms o o$erin$estment an& o$erpro&uction, o6ser$a6le alrea&4 in 19)3 an& a7ain a ter 19)G, an& e(pect a contri6ution to the picture o the su6sequent crisis rom this in&ustr4. 3. 3he hea$4 chemical in&ustr4 ha& &e$elope& 8ell 6e ore the 8ar, 6ut enterprise in the or7anic 6ranch 8as entirel4 con&itione& 64 the seiOure o <erman patents an& later on 64 protection. 5rices o chemicals, 8hich accor&in7 to the ,. 2. S. in&e( *19)G ] 100+ 8ere at 89.F in 1913 an& 8hich ha&, o8in7 to the practical cessation o <erman imports, soare& to 19J 64 191G, testi ie& to the $i7or o entrepreneurial response to those ne8 con&itions 64 allin7 to 9J.) in 19)). ,oth the coal-tar 7roup in all its sta7es, particularl4 in the pro&uction o &4es, an& the aliphatic 7roup score& a series o successes that e(ten&e& o$er the 8hole o our perio& an& throu7hout the su6sequent &epression an& amounte& to the creation o ne8
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in&ustries. -n$estment, emplo4ment, 8a7e 6ill, pro its, an& &ollar $olume o salesNa6out )-1CF 6illions to8ar&s the en& o our &eca&eN increase& to a peaE in 19)9 or the chemical in&ustr4 as a 8hole. Sales in the non-coal-tar 7roup continue& to increase 8ithout 6reaE a ter8ar&. Be&icinals, sol$ents, per umes, anti reeOes, car6on tetrachlori&e, acetic anh4&ri&e, camphor, resins, nitrates *s4nthetic io&ine an& s4nthetic ru66er came earl4 in the thirties+ ma4 ser$e as e(amples. Anal4sis o the in&i$i&ual cases 8oul& sho8 little more than so man4 instances o the 8a4 in 8hich inno$ation 8orEs. 3hree points onl4 call or a&&itional comment. :irst, or the same reasons as else8here concentration o control an& research an& coor&ination o specialiOe& lar7e-scale plants 8ere in e$i&ence in this in&ustr4. 3he ;upont concern, liEe the J. <. :ar6en, e(pan&e& ar 6e4on& the chemical iel&. 3he other 7iant, the Allie& 0hemical an& ;4e 0orporation, 8as the result o a mer7er in 19)0 o i$e 6i7 concerns 8hich to a lar7e e(tent complemente& each other. Secon&, ne8 6ranches o in&ustr4 emer7e& aroun& 8hat ma4 6e calle& the pro&uction o chemical un&amentals. A host o small an& me&iumsiOe& irms tooE up the pro&uction o a trul4 unsur$e4a6le $ariet4 o &ru7s, cosmetic articles, an& so on. 3he results, as &istin7uishe& rom the ormal properties, o monopolisticall4 competiti$e situations are much more in e$i&ence in this 7roup an& 8ithin its arm4 o retailers an& a&$ertisers than amon7 the e8 6i7 pro&ucers o the 6asic stu s. :or us it is important to note the quantitati$e importance o this tra&e an& to account or its spectacular e(pansion > the unri$ale& opportunit4 8hich it e(ploite& 8as one o the consequences o the increase in the real income o the masses 8hich le t e$en the lo8est income 7roups 8ith a surplus that 8as not a priori allocate& to speci ic purposes 6ut rea&4 to 7o 8here$er a&$ertisements 6ecEone&. 3he phenomenon thus its 8ell into our i&eas a6out &o8n7ra&e &e$elopments. 3hir&, the chemical in&ustr4 &ispla4s the *secon&ar4+ competin7-&o8n process 8ithin the inno$atin7 line much less than, sa4 the automo6ile in&ustr4 M 6ut it &ispla4s the *primar4+ competition, i.e., the competition 8ith other commo&ities or ol&er metho&s o pro&ucin7 the same commo&ities much more than almost
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an4 6ranch o economic acti$it4. -n some cases its inno$ations act throu7h other spheres o pro&uction, a7riculture or instance. -n others the4 act &irectl4 an& then 8ith a promptness to the consequences o 8hich the social a6ric o capitalism ma4 8ell pro$e unequal some &a4. 0hemistr4 pro$i&es not onl4 accepta6le an& cheap su6stitutes or thin7s that are the 6asis o much emplo4ment an& in$estment, 6ut quite o ten e(actl4 the same thin7s N requentl4 in a 6etter, especiall4 more uni orm an& more relia6le qualit4, as or instance in the case o $arnishes an& &4es N8hich ha& 6een pro&uce& 64 nonchemical metho&s 6e ore. -t &oes so almost al8a4s at a cost 8hich e$entuall4, thou7h not as a rule imme&iatel4, alls ar 6elo8 the le$el attaina6le 64 the latter. -n such cases lar7e sectors o the economic or7anism ma4 ha$e to 7o out o operation at $er4 short notice. - the consequences ha$e so ar not ma&e themsel$es more stron7l4 elt in our three countries, this is 6ecause the4 mostl4 impin7e& on other, on 0hile or instance or -n&ia Nor in the case o ma&&er, on the countries rom Southern :rance to Asia BinorNor Sicil4 *citric aci&, 19)J+ or pro futuro on the ru66erpro&ucin7 countries. 3he #nite& States, /n7lan&, an& <erman4 8ere, &urin7 the perio& un&er sur$e4, not much a ecte& in this respect, an& 8hate$er e ect there 8as 8as rather a$ora6le. ,ut more serious &islocations ma4 arise rom such &e$elopments some o 8hich are o6$iousl4 imminent. 3he term re$olution acquires in this connection a particular ominous meanin7. ;epressi$e in luences ma4 emanate rom this line o a&$ance 64 comparison 8ith 8hich an4thin7 that can 6e e ecte& 64 action on monetar4 a77re7ates, central 6anE action inclu&e&, is o ne7li7i6le importance. 3he ra4on in&ustr4, o course, o8e& much to the tari , an& its 7reat concerns o8e& much to their control o patents. ,ut in all other respects the case is striEin7l4 analo7ous to that o the automo6ile in&ustr4. He ha$e a sharp competiti$e stru77le at the 6e7innin7 o the perio&, partl4 &ue to the numerous shortli$e& oun&ations a ter the 8ar, rom 8hich, as has 6een state& else8here, emer7e& three concerns 8hich accounte& or a6out 90 per cent o the pro&uction o the countr4. -n this oli7opolistic
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setup the 7reat e(pansion o consumption tooE place 8hich 8as 6ut little a ecte& 64 the 8orl& crisis. Hholesale prices *150 &enier, A 7ra&e, .e8 1orE+ ell rom the 1918 peaE to a6out the pre8ar le$el *191F, ^1.9G per poun&+ in 19)5, an& 8ere at ^1.)5 64 19)9. 5ro its per poun& o pro&uct stea&il4 &ecline&, althou7h in the case o the American Kiscose, 8hich remaine& the lea&in7 pro&ucer throu7hout, the4 8ere still 58 cents in 19)8. Lther te(tiles, thou7h not 8ithout some propellin7 in luencesN hi7her cotton consumption per spin&le, pro&uction o cor&, arti icial leather, 6roa&cloth shirtin7, anc4 8oolens an& so onN 6eha$e& liEe the ol& in&ustries the4 8ere. Duantitati$e e(pansion an& qualitati$e impro$ement 8ere consi&era6le, an& there 8as much rationaliOation in &etails. 3his &oes not alter the un&amental traits o the picture, 8hich are re lecte& in the 6eha$ior o prices. 0ontinuin7 locational shi ts cause& as much sectional &epression as sectional prosperit4. 3he ;epartment o 2a6or"s com6ine& in&e( o emplo4ment Eept stea&4 throu7hout the &eca&e, 6ut ne$ertheless marEs stron7l4 the ups8in7 that set in &urin7 the secon& hal o 19)5. F. As ar as chan7es in pro&uction unctions 7o, the iron an& steel in&ustr4 shoul& reall4 6e &ealt 8ithNas shoul& metallur74 in 7eneral Nin connection 8ith chemistr4 an& electricit4. -t su ices to mention the career o li7ht allo4s, the irst sta7e o 8hich 8as run &urin7 our &eca&e, especiall4 rom 19)5. 3here 8ere also technolo7ical an& or7aniOational chan7es o other t4pes, such as continuous rollin7 or the cro8&in7 out o the merchant urnace, an& o course man4 impro$ements o the rationaliOation Ein& in in&i$i&ual lines or concerns. -ncreasin7 use o scrap in the steelmaEin7 as 8ell as in the copper, aluminum, an& other in&ustries &eser$es particular emphasis. 95 SpeaEin7 6roa&l4, ho8e$er, the steel in&ustr4 su ere& in
95
3his material-sa$in7 practice, a t4pical &o8n7ra&e &e$elopment an& responsi6le or the increasin7 &i$er7ence 6et8een pi7-iron an& steel outputs, o course, e(erts a &epressin7 in luence on the pro&uction o a num6er o important ra8 materials also outsi&e the metal iel&, an& constitutes in each case a &istinct inno$ation as 8ell as a &istinct in&ustrial pro6lem. 3he prices
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&epressionN especiall4 in 19)0 an& 19)1Nan& prospere& in 6ooms Nthe peaEs in pi7-iron output occur in 19)3, 19)5, an& 19)9Nin consequence o the 7eneral 6usiness situations, rather than in consequence o its o8n enterprise. 3he 6eha$ior o its prices accor&s 8ith this impression. Steel consumption increase& stron7l4, ho8e$er, in spite o all the steel-sa$in7 rationaliOations, 8hich 8ere more than o set 64 the conquest o ne8 usesNsteel increasin7l4 6ecame a consumers" 7oo&Nan& 7eneral e(pansion. 5er hea& o population it 8as, at the en& o our perio&, se$en times as 7reat as it ha& 6een in 1900. .othin7 un&amentall4 ne8 happene& in the aluminum an& copper in&ustries. He ha$e, ho8e$er, alrea&4 o6ser$e& in an earlier place that the ormer &ispla4e& 7reat initiati$e in &isco$erin7 an& conquerin7 ne8 7roun&. -ts quantitati$e e(pansionN&omestic primar4 pro&uction more than &ou6le& 6et8een 1915 an& 19)9, 8hile &omestic consumption increase& more than three ol&, secon&ar4 pro&uction accountin7 or the 7reater part o the &i erenceN8as one o the ma=or in&ustrial eatures o the perio&, another 7oo& instance o a &o8n7ra&e &e$elopment. 5rice 6eha$ior 8as in accor&ance 8ith this an& characteristcall4 &i erent rom that o inishe& steel. 3he a6sence, comparati$el4 speaEin7, o luctuations aroun& the un&amental contour a or&s an interestin7 e(ample o 8hat @control@ 64 one irm reall4 means un&er con&itions o rapi& 7ro8th an& o commo&it4 competition. 3he &omestic price o ne8 aluminum in7ot 99 per cent pure reache& its 8ar ma(imum 64 191G an& its pre8ar le$el or, correcte& 64 the ,.2.S. in&e( o 8holesale prices, a i7ure nearl4 30 per cent 6elo8 it, 64 19)). -t then slo8l4 rose to 19)5, a ter8ar& ell some8hat, an& 8as maintaine& at )3.3 cents throu7h 193F. 3hus it aile& to all in 1930, 8hen it 8oul& ha$e &one so un&er competiti$e con&itions. ,ut the pro its ma&e are not in themsel$es su icient to
o scrap are more sensiti$e to the course o c4clical phases than an$ other commo&it4 prices an&, as has 6een pointe& out 64 the ,erlin -nstitute *e.7., in 19)G+, the relation 6et8een scrap- an& pi7-iron prices is a 7oo& in&e(, e$en orecaster, o 6usiness situations.
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pro$e that in the lon7 run prices 8ere, 7i$en the protection, su6stantiall4 a6o$e that le$el at 8hich the4 8oul& ha$e mo$e& ha& competiti$e con&itions pre$aile& rom the outset, pro$i&e& 8e inclu&e in the latter the &e7ree o pro&ucti$e e icienc4 compati6le 8ith the competiti$e scale o in&i$i&ual irms. .or &oes it ollo8 that, i all or most in&ustries ha& 6een or7aniOe& in the same manner, the4 8oul& ha$e still oun& it to their interest to a&opt the same polic4 o price sta6ilit4. 3he 8ar or o6$ious reasons 6rou7ht a lar7e e(pansion in the consumption o copper, to 8hich the ne8 mines an& minin7 metho&s *see 0hap. K--+ 8ere, ho8e$er, ull4 equal, so much so that alrea&4 in 191J e orts 8ere ma&e to i( prices. 3he4 8ere ollo8e& 64 others throu7hout the t8enties, 8hich in act succee&e& in Eeepin7 prices airl4 sta6le at a6out pre8ar le$el *1) to 15 cents+ rom 19)1 to 19)8. At the same time costs 8ere 6ein7 incessantl4 re&uce& 64 urther &e$elopment o lar7e-scale minin7 metho&s an& 64 ne8 processes o smeltin7 an& re inin7 as 8ell as 64 the &isco$er4 o 6etter &eposits. 3here 8ere also important horiOontal com6inationsNamon7 minin7 companies, smelters an& re iners, an& copper- an& 6rass-pro&ucin7 concernsNan& $ertical ones. 3hus an untena6le situation &e$elope&N in&icate& 64 the act that pro&uction Eept persistentl4 a6o$e consumption, stocEs 6ein7 8ell a6o$e pre8ar le$el throu7houtNun&er 8hat or a &eca&e seeme& a prosperous sur ace > one o the 8eaE spots that 8ere to contri6ute their share to the processes o the 8orl& crisis. Secon&ar4 copperNin 19)9, pro&uction o secon&ar4 copper rom scrap 8as F0 per cent o smelter"s pro&uction o ne8 copper rom &omestic oreNan& the output o lo8-cost mines in 0ana&a, Patan7a, an& .orthern 9ho&esia &i& the rest. 3he ormation o an international e(port cartel un&er the He66-5omerenc Act *0opper /(porters, -nc., Lcto6er 19)G, 8hich @controlle&@ 90 per cent o the 8orl&"s pro&uction+ onl4 &e erre& the catastrophe. He ha$e here an e(tremel4 interestin7 case o an other8ise per ectl4 un ettere& process o capitalist inno$ation, 8hich 8as
3JJ
inter ere& 8ith onl4 64 capitalist interests themsel$es an& 64 these a7ain onl4 throu7h an attempt to put out o operation a sin7le element o the mechanism, vi#., the e ect o @pro7ress@ on price. -t is 8orth 8hile to consi&er 8hat the course o e$ents mi7ht ha$e 6een 8ithout such an attempt. 5rices 8oul& certainl4 ha$e allen an& it ma4 8ell 6e that especiall4 in the short run this 8oul& not ha$e increase& consumption apprecia6l4. ,ut this is not the point. Bines an& re ineries 8hich actuall4 8ere Eept ali$e 8oul& ha$e 6een eliminate& in an4 case, thou7h o course more o them i &eman& 8as reall4 inelastic in the rele$ant ran7e than i it 8as not. An& this 8oul& ha$e irst eliminate& 8asteN or it is social 8aste to 8orE a mine or re iner4 8hich can 6e 8orEe& onl4 at an @arti icial price@Nan& secon& helpe& to tone &o8n the prosperities o the t8enties, to sprea& the 8orE o rea&=ustment an& pro tanto to miti7ate the su6sequent crisis. - all this 6e possi6le or more than the s4stem can stan&, pu6lic re7ulation or o8nership is, un&er such con&itions in act the onl4 alternati$e to $iolent 6reaE&o8ns, thou7h not necessaril4 a reme&4 or this t4pe o economic 8aste. 5. Hhile it is 6elie$e& that the a6o$e e(position su ices or our purposes it must once more 6e emphasiOe& ho8 $er4 incomplete it is. -t e$en lea$es out some ma=or elementsNnatural-7as-pipe lines *19)J+ ha$e, or instance, not e$en 6een mentione&N an& practicall4 all those minor ones 9G the sum total o 8hich is particularl4 important in the &o8n7ra&e o a Pon&ratie . Pno8le&7e o the ull e(tent o the re$olution 8hich that perio& 8itnesse& 6oth in the metho&s o pro&uction an& commerce an& in the structure o the 6u&7ets o househol&s, an& an a&equate anal4sis, in the li7ht o it, 6oth o the
9G
A ma=or mo$ement, 8hich ho8e$er resol$es itsel into an almost in inite num6er o small ones, is 8hat ma4 6e calle& 3a4loriOation. -ts sprea& &urin7 our perio& is a t4pical consequence o the stru77le or sur$i$al ami&st the rea&=ustments o &o8n7ra&es. 3he pressure o this countr4"s 8a7e le$el a&&in7 momentum, this t4pe o rationaliOation o e$er4 =o6 8as in man4 cases more e ecti$e in re&ucin7 costs per unit o pro&uct than un&amental inno$ations coul& ha$e 6eenNan& in all cases hi7hl4 si7ni icant rom our stan&point. -t is a special case o a class o 8hich the e orts to utiliOe scrap an& 8aste are another.
3J8
perio& itsel an& o its a termath, 8oul& presuppose $er4 man4 case stu&ies 6e4on& those 8e at present ha$e. .e$ertheless, the main eatures stan& out unmistaEa6l4 an& can 6e urther illustrate& 64 a e8 acts rom the A6stract o the 0ensus o 1930. 3his census lists 103 in&ustries each o 8hich ha& in 19)9 a Kalue A&&e& o o$er 50 million &ollars an& also 8as in&epen&entl4 liste& in 1919. Ln the a$era7e *un8ei7hte&+ Kalue A&&e& increase& 6et8een these t8o 4ears 64 )9 an& the ratio 6et8een Kalue A&&e& an& 5a4 9oll 64 1G per cent. :irst, ho8e$er, 8e are intereste& in those in&ustries 8hich, 8hile pro&ucin7 a Kalue A&&e& o o$er 50 million &ollars in 19)9, &o not in&epen&entl4 occur in 1919, since this in itsel pro$es a $er4 rapi& rate o 7ro8th. 3here are 1G o them > 6e$era7es, oo& preparations, milliner4, motion pictures *e(clu&in7 pro=ection in theaters+, paper, pulp, ra4on, re ri7erators, ru66er tires an& inner tu6es, other ru66er 7oo&s *e(clu&in7 6oots+, an& t4pe8riters 6ein7 the most si7ni icant ones. ,esi&es repeatin7 cases 8hich 8e Eno8 alrea&4, this list a&&s a e8 ne8 elements to our picture. L particular si7ni icance is the su77estion, 8hich un&erlines one eature o that phase o the lon7 c4cle, o in&ustries 8hich e(pan&e& simpl4 in response to the increase o consumers" real purchasin7 po8er an& 8ithout an4 particularl4 stron7 impulse o their o8n. 3his su77estion 7ro8s stron7er still i , secon&, 8e 7lance at those amon7 the 103 in&ustries that &ispla4 an increase in Kalue A&&e& o , sa4, more than 100 per cent. ,esi&es aircra t an& parts, 8hich hea&s the list *510 per cent+, electrical machiner4 an& supplies, aluminum manu acture, motor $ehicle 6o&ies an& parts, 8hich 8e 8oul& e(pect to in&, 8e also meet per umes an& cosmetics, si7ns an& a&$ertisin7 no$elties, concrete pro&ucts, la$orin7 e(tracts an& sirups, photoen7ra$in7 not &one in printin7 esta6lishments, house- urnishin7 7oo&s, ice cream, printin7 an& pu6lishin7 *ne8spaper an& perio&ical+. 5atent me&icines, soap, ci7ars an& ci7arettes, cereal preparations, 6aEer4 pro&ucts, 8hile not reachin7 the 100 per cent line, 4et increase& their Kalue A&&e& 64 much more than the a$era7e i7ure so
3J9
as to rein orce the e$i&ence. 3hir&, 8e 8ill note some o those in&ustries the Kalue A&&e& o 8hich &ecrease& 64 more than 10 per cent > ship6uil&in7, locomoti$es *not ma&e in railroa& repair shops+ rail8a4 cars, pianos, phono7raphs, leather, 6eet su7ar *Kalue A&&e& o the cane-su7ar in&ustr4 remaine& at the 1919 i7ure+, cotton, 8oolen an& 8orste& 7oo&s, lour. He cannot e(pect si7ni icant correlation 6et8een per cent increase in Kalue A&&e& an& per cent increase in the ratio o Kalue A&&e& to 5a4 9oll. Also, some ne8 or relati$el4 ne8 in&ustries, such as motor 6o&ies or aluminum manu actures, un&erstan&a6l4 sho8 $er4 little si7ns o the e ects o la6or-sa$in7 &e$ices on that ratio, althou7h, o course, others, such as motorcars or aircra t, ranE hi7h, an& some o the ol& an& conspicuousl4 noninno$atin7 ones, such as houseurnishin7 7oo&s *1 per cent &ecrease+, ranE lo8 in this respect. -t is, ho8e$er, instructi$e to o6ser$eNan& tells a 7reat &eal a6out the 7eneral character o the in&ustrial processes o that timeNho8 much la6or-sa$in7 rationaliOation 8ent on outsi&e o the 7reat lines o inno$ation. 3hus the ratio 6et8een Kalue A&&e& an& 5a4 9oll increase& 64 1)0 per cent 8ith ci7ars an& ci7arettes, 85 per cent 8ith soap an& 8ith coEe *e(clu&in7 7ashouse coEe+, J1 per cent 8ith cereal preparations, G1 per cent 8ith manu acture& 7as, 5) per cent 8ith cutler4 an& e&7e tools, 5) per cent 8ith ice cream. /$en or tin cans that i7ure is still 33 M or patent me&icines, &ru77ists" preparations, co ee roastin7 an& 7rin&in7 3) M cane-su7ar re inin7 )8 M meat pacEin7 *8holesale+ )G M 6utter )G M cement an& concrete pro&ucts )) M per umes an& 8omen"s clothin7 1J. Lnl4 in a minorit4 o casesN printin7 8oul& 6e oneN8as this &ue to su6stanti$e no$elties that 8e ha$e simpl4 6een una6le to mention. -n the main it 8as the result o that s4stematic e ort to i7ht, un&er the pressure o a price le$el that ten&e& to all, each cost item 64 e(plorin7 e$er4 &etail o the pro&ucti$e an& the commercial process an& 64 appl4in7 an& &e$elopin7 techniques the un&amentals o 8hich 8ere ull4 esta6lishe& 6e ore the 8ar, 6ut 8hich in man4 cases in$ol$e& not onl4
380
technolo7ical impro$ement in e(istin7 plant 6ut also the erection o ne8, hi7hl4 mechaniOe& plant. G. As pointe& out else8here, it 8oul& or this countr4 6e possi6le to carr4 our count o Ju7lars an& Pitchins throu7h the 8ar, 8hich ne$er succee&e& in 6lottin7 them out completel4. ,ut 8e 8ill not 7o 6e4on& sa4in7 that the en& o 191G an& the 6e7innin7 o 191J mi7ht, 6ut or the 8ar, ha$e 8itnesse& 8hat 8oul& ha$e 6een the 6e7innin7 o the prosperit4 phase o the thir& Ju7lar o this Pon&ratie , an& that in this case the crisis o 19)1 8oul& ha$e occurre& e(actl4 8hen our schema 8oul& ha$e le& us to e(pect it, i.e., 8hen that Ju7lar turne& rom recession into &epression. /$en i 8e 8ishe& to press thisN 8hich 8e &o notN it 8oul& lea$e us all the ree&om in the 8orl& to taEe into account the e ects o 8ar &eman& an& 8ar inance, o the shocE imparte& to the 8ar structure 64 the armisticeN i.e., the our months o "&ullness or 8a$erin7 rather than collapse 8hich ollo8e& upon itNo orei7n an& &omestic post8ar &eman& pro&ucin7 the 6oom o 1919 an&, inall4, o all that partial liqui&ation o 6oth 8ar an& post8ar situations contri6ute& to the slump o 19)0-19)1. -t is necessar4 to a&& 6ut t8o comments. :irst, ho8e$er clear it is that that slump 8as primaril4 a process o liqui&ation o 8ar e ects an& a reaction to the 6oom o 1919N8hich in turn ha& little i an4thin7 to &o 8ith inno$ationN4et the presence, an& 6usinessmen"s a8areness o the presence, o an in&ustrial situation 8hich 8as ne8 in the sense that the consequences o pre8ar inno$ations ha& pro oun&l4 altere& the cost structure ha& much to &o 8ith the se$ere restriction in output o manu actures 8hich irst 6e7an in Januar4 an& a7ain, a ter a re6oun&, in Barch 19)0, in the ace o the acts that retail sales ha& throu7hout 1919 increase& at a 7reater rate than ha& pro&uction, that the e(port tra&e as 4et sho8e& no si7ns o slacEeniin7, that prices continued to rise. ,anEs, moreo$er, 8ere, 64 the in lu( o *7ol& imports in 19)1 amounte& to nearl4 J50 millions+ an& 64 the re&uction o 7o$ernment &e6t 64 a6out 1.) 6illion &ollars 6et8een June 30, 1919 an& June 30, 19)0, ena6le& to increase
381
their loans 64 a6out 1.5 6illion &ollars &urin7 the same time. All this puts some o the most popular theories out o court in this case. He ha$e once more an instance o @6usiness &e latin7 itsel @ 8ithout an4 serious outsi&e pressure, an& 8e see a7ain that this coul& ha$e 6een pre$ente& onl4 64 continuin7 7o$ernment e(pen&iture at the 8ar le$el or a le$el still hi7her. 3he question 8h4 6usiness &e late& itsel cannot 6e 7i$en, e$en in this case, 8ithout re erence to our mechanism. Secon&, the reaction 8as sharp an& unimpe&e& an&, 6ecause it 8as sharp an& unimpe&e&, relati$el4 short. 5rices an& 8a7es 8ere allo8e& to &rop &rasticall4, liqui&ation o commo&it4 stocEs an& &e6ts procee&e& rapi&l4, elimination o irmsNo$er 8 per cent o the manu acturin7 irms 8hich 8ere in 6usineses in 1919 ha& &isappeare& 64 19)1N8as prompt, mone4 rates ell, cre&it 8as rea&il4 a$aila6le, an& the situation 6e7an to sta6iliOe itsel in April 19)1, the te(tile an& clothin7 in&ustries, 8hich ha& e(pan&e& irst in 1919 an& allen irst in 19)0, 6ein7 amon7 the irst to re$i$e. 3he resultin7 price relations &i ere& 7reatl4 rom those o 1913 an& strucE man4 o6ser$ers as entirel4 a6normal. ,ut the chan7e 8as lar7el4, thou7h not 8holl4, one o a&aptation to ne8 con&itions. 3hou7h impro$ement slacEene& in Lcto6er an& man4 si7ns o continuin7 liqui&ationNe.7., urther re&uction in 8a7esNoutlaste& the summer o 19)), @&eep &epression@ 8as o$er 64 ;ecem6er 19)1. -n April 19)) the automo6ile an& tire in&ustries e(perience& shorta7e o la6or, 8hile stocE issues ha& alrea&4 re$i$e& in Januar4 > it 8as then that the 6oom in pu6lic utilit4 stocEs 6e7an. 5rices o steel, tires, 7lass, an& oil rose in the all, 8hile those o 7asoline, automo6ilesNthe price o tractors ha& 6een re&uce& 6e ore 64 action o the :or& concernN cement an& oo&s ell. -n ;ecem6er 19)) the oil in&ustr4 8as 6reaEin7 all pre$ious recor&s in output. 3he act that such shoul& ha$e 6een the situation onl4 one 4ear a ter a ma=or crisis an& in the presence o man4 &epressi$e s4mptoms is ull o potential lessons 8hich are as o6$ious as the4 are useless. 3he case also sho8s 6etter than an4
38)
theor4 coul& ho8 the s4stem pulls out o trou7hs un&er its o8n steam an& ho8 it succee&s in &oin7 so 8hile price le$el is still allin7. Lur &ia7nosis then is simple > a6normall4 short &epression phase o the Ju7lar, lastin7 rom the all o 19)0 to Jul4 o 19)), o8in7 to a6normall4 e ecti$e liqui&ation. Alternati$el4, 8e coul& e(press the same acts 64 sa4in7 that the &epression phase laste& to the en& o 19)) 6ut that its 8orE ha& so e ecti$el4 6een &one 64 Ba4 19)1 that, the 7roun& 6ein7 cleare&, the prosperit4 phase o the thir& Pitchin, 8hich, as 8e Eno8, still 6elon7s to the &epression phase o its Ju7lar, ha& unusual opportunities o assertin7 itsel . -n an4 case this Pitchin stan&s out unmistaEa6l4, an& there is no reason 8h4 8e shoul& not so call an un&ou6te&l4 short c4cle 8hich is uni$ersall4 reco7niOe&N e$en i &i erentl4 &ate& 64 stu&ents 8ho count rom trou7h to trou7h N an& 8hich completel4 ans8ers e(pectation rom our schema 6oth as to ormal characteristics an& as to in&ustrial meanin7. Ln the other t8o Pitchins 8hich 8ithin that Ju7lar ou7ht to ha$e prece&e& this one, 8e 8ill not insist, althou7h it 8oul& not 6e &i icult to esta6lish them statisticall4. Hhat ollo8e&, rom either the mi&&le or the en& o 19)) on, $er4 much looEs liEe a normal Ju7lar reco$er4, 8hich laste& to the autumn o 19)5. Lur schema 8oul& lea& is to e(pect that it containe& a set6acE o8in7 to the Pitchin &epression 8hich it tells us shoul& ha$e occurre&. -t &i& occur. A ter it ha& run its course, reco$er4 resume& an& rom Au7ust 19)5 on 6oth Pitchin an& Ju7lar 8ere sha&in7 o into the prosperit4 phases o 8hat then 8oul& 6e the ourth Ju7lar an& its irst Pitchin. A e8 a&&itional acts ma4 6e use ul. -n the irst quarter o 19)3 the ups8in7 reache& its peaE. #nemplo4ment 8as at lo8 e66 in :e6ruar4. Bost prices, especiall4 those o metals an& 6uil&in7 materials, ten&e& up8ar& M a recor& 4ear or construction 8as correctl4 oreseen. SteelN19 ne8 steel urnaces 8ere 6uilt in 19)3N coal, an& cotton te(tiles e(pan&e&. :our ne8 po8er stations 8ere announce& or construction. 9ailroa&s @came into their o8n a7ain@ an& 7a$e or&ers. /$er4thin7 e(cept a7riculture an& ship-6uil&in7
383
6oome&. Ha7e rates rose stron7l4. April sa8 recor& i7ures 6ut also a 6reaE in the stocE marEet. Si7ns o slacEenin7 acti$it4 6e7an to sho8 64 Au7ust, attri6ute& as usual to e(ternal actors, an& 64 ;ecem6er e(pectations 8ere not $er4 optimistic. 3he4 8ere 6orne out 64 the state o thin7s &urin7 the sprin7 an& summer o 19)F. Bore important than the uncertainties inci&ent to the presi&ential campai7n 8ere theN un&erstan&a6leNreactions in the automo6ile an& oil in&ustries. Steel consumption, railroa& tra ic, emplo4ment, an& prices ell. .othin7 $er4 serious happene&, ho8e$er M ailures o commercial irms 8ere 6ut insi7ni icantl4 a6o$e the 19)3 i7ure M resi&ential 6uil&in7 Eept up 8ell, an& so &i& po8er pro&uction, the ra&io in&ustr4, an& other lines. 3he irst t8o months o 19)5 8ere &isappointin7N8ith emplo4ment in most in&ustries 6elo8 8hat it ha& 6een a 4ear 6e oreNan& a collapse o the stocE marEet ollo8e& in Barch. ;urin7 the secon& quarter 6usiness 8as &escri6e& as stea&4 6ut @spott4.@ .e8 inancin7 an& other in&ications o imminent prosperit4 asserte& themsel$es un&er this sur ace, ho8e$er, an&, 8ith the help o impro$ement in the a7rarian sphere an& lar7el4 spec-ulati$e lan& 6oom, the all 8ore on ami&st recor& in$estment, 6anE-clearin7 an& construction i7ures, risin7 mone4 rates an& steel prices, stocE marEet e(cesses, ailures at recor& lo8. 3he e(planation o all thisNthe @i7nition@N8ill 6e oun& on re errin7 to the a6o$e sur$e4 o the un&amental in&ustrial processes o the perio&. 3he4 clearl4 chan7e &urin7 those months o8in7 to the in luence o se$eral ne8 impulsesN8hile others, such as resi&ential 6uil&in7, lost orceNan&, 64 con ormin7 e(actl4 to 8hat 8e mean 64 a Ju7lar prosperit4, =usti 4 our &atin7. So much is pro$a6le an& in&ee& o6$ious. ,ut 8e 8ill or a moment trust our schema to the point o a6sur&it4 an& tr4 to @pre&ict@ the su6sequent 6usiness situations on the assumptions, irst, that the ourth Ju7lar starte& 8ith the ourth quarter o 19)5Nalthou7h no such e(actness is possi6le in historical anal4sis Nsecon&, that its &uration 8as to 6e e(actl4 9-1C) 4earsN rou7hl4 the a$era7e &uration o pre8ar Ju7larsNan& the &uration o its Pitchins e(actl4 38 months M thir&, that all the Ju7lar an& Pitchin phases 8ere
38F
o e(actl4 equal len7th. 3his a6sur& e(periment 4iel&s the ollo8in7 results > the Ju7lar &epresison lastin7 into :e6ruar4 19)8 shoul& 6e interrupte& 64 a Pitchin &epression rom Ba4 19)J to the mi&&le o :e6ruar4 19)8 M an& the reco$er4 o this PitchinNto the en& o .o$em6er 19)8N an& the prosperit4Nto the mi&&le o Septem6er 19)9Nan& the recession o the secon& Pitchin shoul& then run their course 8ithin the Ju7lar recession en&in7 8ith June 1930. At that &ate 6oth the Ju7lar an& the Pitchin shoul& enter upon their &epression phases on a Pon&ratie that ha& alrea&4 entere& upon its o8n 9J, so that the con i7uration o 18J3 8oul& 6e repeate&. 3he rea&er 8ill realiOe that no $alue attaches to, an& no si7ni icance is claime& or, the e(act &ates. ,ut he 8ill also realiOe that the a6sur&it4 stops at the assumptions 8hich are responsi6le or the e(act &ates. Strippe& o this un8arrante& e(actitu&e an& con ine& to essentials, the @pre&ictions@ o the schema are not a6sur& 6ut on the contrar4 tell se$eral important truthsNan& not a sin7le untruth. -t shoul& 6e a&&e& that the comparati$e se$erit4 o the set6acE in 19)J, 8hich 8as to occur an& &i& in act occur 8ithin the prosperit4 phrase o the Ju7lar, &oes not in itsel run counter to e(pectation > the &epression o a Pitchin, locate& as that one 8as a ter the en& o the Pon&ratie recession, shoul& 6e 8ell marEe&. 98 Ln the other han& i the 6oom o 19)8N 19)9 8as more $iolent than our schema lea&s us to e(pect, 8hich in e(planation
9J
98
-t 8ill 6e remem6ere& that accor&in7 to our schema Pon&ratie &epressions 6e7in 8ith Ju7lar prosperties. 3he &epression phase o the current Pon&ratie 8oul&, hence, &ate rom the all o 19)5. 5ro essor Bitchell &ates one o his c4cles rom 19)J. Since the 8riter naturall4 8ishes to &i er as little as possi6le rom so outstan&in7 an authorit4, he 6e7s to emphasiOe that no &i erence in &ia7nosis o situations is implie& in such &atin7, 6ecause it is simpl4 the consequence o 5ro essor Bitchell"s principles to count rom trou7h to trou7h an& to reco7niOe 6ut a sin7le t4pe o c4cles. 3he particular pattern un&er &iscussion seems 8ell quali ie& or su77estin7 that some important elements o realit4 are 6ein7 misse& i 8e put trou7hs such as occurre& in 19)F an& 19)J on the same le$el 8ith trou7hs such as occurre&, sa4, in 1908 an& 19)1, an& these a7ain on the same le$el 8ith the trou7hs o 18J5 an& 193), an& that the &istinction o c4cles o &i erent t4pe seems the natural 8a4 o reco7niOin7 these $er4 real &i erences.
385
has 6ut a Pichin reco$er4 an& a Pitchin prosperit4 to o er. 3his ma4, ho8e$er, 6e accounte& or 64 certain autonomous monetar4 actors an& the in luence o the speculati$e mania, o 8hich the irst &o not orm part o our mo&el an& the secon&Nalso present in 18J)-18J3N is al8a4s an irre7ular actor. 3he stocE marEet su ere& collapse in :e6ruar4 19)G. ,ut this is merel4 a normal inci&ent o a Ju7lar prosperit4 out7ro8in7 its initial sta7e. A no less re7ular phenomenon 8as, on a Pon&ratie &epression, the ten&enc4 o prices to sa7. - 6usiness con&itions 6e7an to &ispla4 si7ns o @rela(ation@ alrea&4 64 April, 8hen automo6ile concerns &i& not &o so 8ell as the4 ha& a 4ear 6e ore an& the cotton, silE, su7ar, an& other in&ustries hea&e& to8ar& curtailment, an& i in Ba4 there 8as also a &ecline in steel pro&uction, this is su icientl4 accounte& or 64 pre$ious speculati$e e(cesses, in particular 64 the passin7 o the real estate 6oom. 3he stocE e(chan7e reco$ere& 64 June, an& almost e$er4hin7 8as a7ain at prosperit4 le$els 64 Au7ust, motorcars an& te(tiles inclu&e&, urniture en=o4in7 recor& pro its. Lil &e$elopments in 0ali ornia, in .orth 3e(as, an& on the <ul 0oast &i& not entail an4 lar7e increase in stocEs. ,4 Lcto6er, ho8e$er, the 19)J set6acE came &e initel4 in si7ht. 3he stocE marEet &iscounte& it, 6anE &e6its 8ere runnin7 rom 5 to 9 per cent 6elo8 the i7ures o the prece&in7 4ear, &eman& or steel &roppe& until operations 8ere at G5 per cent capacit4. :ailures increase&. 0ar loa&in7s also 8ere at the en& o 8hat ne$ertheless 8as a recor& 4ear at a lo8er i7ure than the4 ha& 6een in 19)5. Some an(iet4 8as elt a6out installment sales. 3he a7rarian situation ha& also 6ecome more un a$ora6le. #ntil Ba4 19)J, ho8e$er, 7eneral 6usiness Eept on a hi7h le$el in spite o all that an& e$en impro$e&, se$eral ne8 thin7sNthe 0he$rolet an& :ri7i&aire successes, motion pictures, the .orth 0arolina po8er plant, a num6er o smaller e$entsNsuppl4in7 impulse. -n April 6usiness 8as prosperous. ,ut then a &e inite &ecline set inN8hich 8e ma4 i&enti 4 as a Pitchin &epressionN intensi ie& 64 8i&esprea& reco7nition o unsoun& practice in man4 iel&s, 8ith retail an&
38G
8holesale tra&e at a lo8er le$el, man4 ailures, an& cautious reser$e in lar7e-scale 6usiness. ,uil&in7, the con&ition o 8hich 8as complicate& 64 the liqui&ation o the :lori&a 6oom, 8as a particular 8eaE spot. 3he all in automo6ile pro&uction 8as, o course, &ue to the reconstruction o the :or& plant. 99 3he Bississippi loo&, 8hile it also e(plains some thin7s a6out the 6eha$ior o ph4sical in&ices, has in other respects to 6e liste& as an impetus. 3here 8as no slump. <oo& 6usiness in the cotton, ra4on, an& shoe in&ustries an& a continuin7 stream o ne8 thin7sN;iesel-en7ine& locomoti$es, 7as-pipe lines, the re ri7erator mer7er, &e$elopment o the Pra t paper in&ustr4 in the South, ra&iosN8ere eatures throu7hout. ,4 ;ecem6er impro$ement 8as almost 7eneral, althou7h emplo4ment in 6uil&in7 8as still 1) per cent 6elo8 that o a 4ear 6e ore. 9ailroa& earnin7s, steel pro&uction, an& 7asoline marEets impro$e& in Januar4 19)8, an& the @6anEers" loans 6oom@ in the stocE marEet 8as 7ettin7 un&er sail 8ith automo6ile, copper, an& ru66er stocEs lea&in7. ,ut the 7eneral 6usiness situation 6eha$e& until Barch in a manner 8hich is in our terminolo74 not 6a&l4 ren&ere& 64 the phase @con&itions o Pitchin &epression relie$e& 64 a Ju7lar prosperit4.@ -n April, ho8e$er, steel 8as at recor& rates. So 8as tire pro&uction an& 64 June e$er4thin7N 6uil&in7, the automo6ile *contraseasonall4+ an& the oil in&ustr4 inclu&e&. S4mptoms o @hi7h@ prosperit4 then 8ent on intensi 4in7 themsel$es until Lcto6er, 8hen mail-or&er sales 6roEe all recor&s. 0onstruction o ne8 plant, ne8 inancin7NtaEin7 a&$anta7e o the stocE-marEet 6oomN&i$i&en&s, mone4 rates, an& so on 8ere all in Eeepin7 8ith the rest o the picture. 3here 8ere t8o apparentl4 &iscor&ant elements, ho8e$er. :irst, unemplo4ment increase&. Secon&, commo&it4 marEets thou7h 6ou4ant 8ere not real4 sellers" marEets > the almost &esperate e orts ma&e 64 the sales or7aniOations o 6i7 an& small concerns an& the act that such increase in prices as
99
,ut the 8riter ails to un&erstan& ho8 some o6ser$ers coul& ha$e attri6ute& the 19)J &epression 8holl4 to that act.
38J
ocurre& 8as insi7ni icant, 8hile man4 important prices ha& to 6e re&uce&, in&icate a certain strain in the s4stem. .o8 i the rea&er 8ill remem6er the 8riter"s $arious attempts to con$e4 his i&ea o a Ju7lar recession, he 8ill appreciate the 8arrant or e(pressin7 that state o thin7s 64 sa4in7 that it 8as e(actl4 8hat 8e shoul& e(pect rom a Ju7lar recession on a Pon-&ratie &epression couple& 8ith the t8o positi$e phasesNstrictl4, accor&in7 to our e(perimental schema, the reco$er4 phase onl4 No a unit o the short c4cle > 7oo& an& e(pan&in7 6usiness accompanie& 64 increasin7 unemplo4ment an& 64 that strain 8hich is the consequence o the @a$alanche o 7oo&s@ smashin7 its 8a4 throu7h the resistin7 rame8orE o the e(istin7 in&ustrial structureNthis is precisel4 the picture 8hich 8oul& reuslt rom that particular =uncture. As state& 6e ore, ho8e$er, there is no &ou6t that the &e$elopments 6et8een April 19)8 an& Au7ust 19)9 a&&e& to the situation man4 o the untena6le elements 8hich su6sequentl4 ser$e& to intensi 4 the crisis. Lcto6er 19)8 6rou7ht the irst s4mptom o slacEenin7 acti$it4, 8hich 8as, ho8e$er, to &isappear temporaril4 64 Januar4 19)9 > 8ith the e(ception o :or&, all automo6ile pro&ucers then &ecrease& their purchases o steel. -n .o$em6er total 6uil&in7 ell o more than seasonall4. ,ut 6arrin7 6uil&in7 an& pro&uction o 6uil&in7 materials, 8hich continue& to &ecline, most lines o in&ustrial an& commercial acti$it4 surpasse& 19)8 output i7ures &urin7 the irst si( months o 19)9 at allin7 prices 6ut hi7h pro its. Also plant construction an& inancin7 seeme& to ha$e taEen out a ne8 lease on li e. Duite a list o ne8 thin7s *at least o the @in&uce&@ t4pe+ 8ere 6ein7 inau7urate& in June, 8hen pi7-iron pro&uction reache& a ma(imum. Boreo$er, the aircra t, ra&io re ri7erator in&ustries prospere&. So &i& automo6iles, tires, machine tools an& other implements, har&8are, cotton, silE, ra4on, an& ci7arette pro&uction. 3he Pettleman 'ills oil iel& 8as &isco$ere&. Bail-or&er sales 8ere runnin7 ar a6o$e the 19)8 le$el. ;epartment-store sales reache& a peaE in Septem6er. /(tra &i$i&en&s 8ere pai& in the last 8eeE o Au7ust 64 oil, chain-store, mail-or&er,
388
steel, an& lour concerns. 3he a7ricultural situation 6ecame a matter o serious concern. 3he #nite& States 3reasur4 8as pa4in7 5-1C8 per cent in June M e&eral reser$e re&iscount rates rose to G per cent 64 Au7ust. Althou7h there is a $ali& o6=ection to an4 such statement, 8e ma4 taEe April to marE the peaE o that *Pitchin+ prosperit4. ,ut e$en the ina&equate &escription presente& is su icient to sho8 that, 8hate$er ma4 ha$e 6een 8ron7 in the inancial sector, the 7reat &i$isions o in&ustr4 an& commerce either e(pan&e& or contracte&Nsteel, motorcars, 6uil&in7Nin a per ectl4 or&erl4 &a4 &urin7 the su6sequent months throu7h Septem6er. -t is, there ore, un&esira6le that 8hen the stocE marEetNnot alto7ether une(pecte&l4Ncollapse&, this &i& not cause paral4sis or e$en particularl4 stron7 pessimism in the 6usiness 8orl&. Hhat imme&iatel4 happene& 8as in act not much more than 8as oreseen, vi#., a &rastic re&uction in the &eman& or @lu(uries,@ o 8hich speculati$e 7ains in stocEs ha& 6een a most important ee&er. 3he repercussions o this 8ere e(pecte& to in&uce an& &i& in&uce contraction all aroun&, 6ut 8ith mone4 rates ailin7 to rise to panic i7uresNas compare& 8ith their reaction in pre8ar crisesN impro$ement 8as con i&entl4 pre&icte& or the irst hal o 1930. Amon7 characteristic reactions o @6i7@ 6usiness 8e ma4 note that :or& announce& a su6stantial re&uction in prices, that #nite& States Steel an& American 0an &eclare& e(tra &i$i&en&s, an& that pre$ailin7 opinion 8as stron7l4 a7ainst a &ecrease in 8a7es. 3he 8ith&ra8al o orei7n un&s, the a7rarian situation, an& such liqui&ations o concerns as occurre& 8ere Nquite correctl4Nnot consi&ere& &ecisi$e. -t is o the utmost importance to realiOe this > 7i$en the actual acts 8hich it 8as then possi6le or either 6usinessmen or economists to o6ser$e, those &ia7nosesNor e$en the pro7nosis that, 8ith the e(istin7 structure o &e6t, those acts plus a &rastic all in price le$el 8oul& cause ma=or trou6le 6ut that nothin7 else 8oul&N8ere not simpl4 8ron7. Hhat no6o&4 sa8, thou7h some people ma4 ha$e elt it, 8as that those un&amental &ata rom 8hich &ia7noses an& pro7noses 8ere ma&e, 8ere themsel$es in a state o lu( an& that the4 8oul& 6e s8ampe& 64 the torrents o a process o rea&=ustment
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correspon&in7 in ma7nitu&e to the e(tent o the in&ustrial re$olution o the prece&in7 30 4ears. 5eople, or the most part, stoo& their 7roun& irml4. ,ut that 7roun& itsel 8as a6out to 7i$e 8a4. Fin du te5te

Schumpeter Joseph - Business Cycles - A Theoretical, Historical and Statistical Analysis of The Capitalist Process

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Schumpeter Joseph - Business Cycles - A Theoretical, Historical and Statistical Analysis of The Capitalist Process

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Joseph A.

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph A. Schumpeter [1883-1950]

Joseph Schumpeter, ,usiness 04cles. *1939+

0hapter ---. 'LH /KL2#3-L. A. ,. 0. ;. /.

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,#S-./SS 0102/S *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Lp cit., pp. J-)1.

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,#S-./SS 0102/S *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,#S-./SS 0102/S *1939+

--0hapter -/D#-2-,9-#B A.; 3'/ 3'/L9/3-0A2 .L9B L: /0L.LB-0 D#A.3-3-/S

A. The Meaning of a Model. Buch can 6e &one 64 the mere

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

B. The Fundamental Que tion. Hhen 8e 6ehol& one o the

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

C. The Stationa!" Flo#. 3he anal4tic treatment o the acts o

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

&. E'uili(!ium and the Theo!eti)al No!m. :or our present

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

E. Com*li)ation and Cla!ifi)ation . ,e ore 7oin7 on, 8e must

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

Joseph Schumpeter, ,usiness 04cles. *1939+

F. Im*e!fe)t Com*etition. :rom our &iscussion o the case o

Joseph Schumpeter, ,usiness 04cles. *1939+

F. Ime!fe)t Cometition. :rom our &iscussion o the case o