Unemployment
THE doctrine that high wages are one of the principal condi- tions of general prosperity was loudly proclaimed a few years ago by Messrs. Foster and Catchings. This theory was widely accepted in the United States as one of the discoveries of the
new economic era," and formed the basis of a high wages policy on the part of many leading American employers. Faith in the virtue of high wages persisted even after the slump of 1929, and it is only this year that public opinion in America has been converted to the idea that, in the face of falling prices and persistent depression, wages reductions are necessary. Mr. Noel Reilly's attempt at this moment to spread the doctrine of high wages in this country is therefore espe- cially interesting. It must be emphasized at once that the abandonment of the high wages policy in America does not necessarily mean that, as a policy, it has failed. It may be, as Mr. Reilly himself implies, that when the whole of industry and agriculture, and not merely certain highly paid trades, are considered, wages in the U.S.A. were not high enough.
The doctrine of high wages is, logically speaking, one form of the well-known under-consumption theory. According to this theory economic progress is hampered by recurrent gluts of commodities which cannot be consumed because those who would consume them if they could do not possess sufficient purchasing power to buy them. For this reason, though human wants are almost insatiable, modern production outruns the consuming power of the community.
In the form in which it is stated by Mr. J. A. Hobson, the under-consumption theory postulates that the present distribution of income, leaving aside the ethical question of the rights of property, leads in practice to a too great proportion of saving to current consumption. A transfer of income from the rich, who save " automatically " and without any effort of abstinence, to the poor, who would spend on current con- sumption, would reduce the proportion of saving. This would prevent that over-expansion of productive power by ill-con- sidered investment in capital equipment which is characteristic of boom periods, while the increased purchasing power of the poorer classes would help to prevent that piling up of surplus etocks which now brings about depressions. Mr. Hobson holds t hat while industrial fluctuation would thus be diminished, the amount of saving might well, in a more regularly productive community, be increased. Likeivise the share of the richer classes in the national income, while reduced in relation to that of the poorer classes, might in actual amount be increased. This theoretical proposition can hardly be denied, though it does not tell us how to determine the exact proportion of saving which is desirable at any given time ; nor is it necessarily true for all countries and periods.
It must be remembered that the correct proportion of saving to current consumption may be radically altered by technical inventions which increase the productivity of capital and labour. This is what seems to have occurred since the Great War. At a time when the " industrial re- volu- tion " was proceeding at a pace perhaps as fast as ever before, there can be no doubt, when one reviews the world to-day, that investment in productive equipment proceeded too rapidly for consumers' purchasink power to buy the products of that equipment. As a result, we now have large uncon: stinted stoats of products and a great amount of productive plant under- or un-employed, and it is dear also that in the
present situation, what is needed is not more saving but more spending. Doubtless there are particular categories of capital equipment which are insufficient even to-day, but these consist very largely in improvements in the labour force —that kind of " investment," such as better housing, educa- tion and medical service, which would lead to a more efficient body of workers ; but this investment can only be brought about, in a non-slave economy, by State action, or by raising wages and so enabling the workers to invest, as it were, in themselves.
Mr. HobSon advocates both these methods of redistributing income as between savers and spenders—between the rich and the poor. Recognizing that Great Britain is exposed in both her home and export to the competition of low wages abroad, and recognizing also the possibility of a " flight of capital " if in this country alone the State attempted a further redistribution of income by taxation, he puts his faith in a gradual acceptance of his arguments throughout the world.
Mr. Reilly's suggestions are more concrete and his analysis of the under-consumption problem less general and complete than Mr. Hobson's. Mr. Reilly is a practical man, appalled as too few professional economists seem to be by the con- cu :rence of widespread poverty, and of the idleness of the labour and machinery which if set to work could relieve it. His reasoning seems sometimes to suffer from an insufficient mastery of economic principles, but his book is none the less full of suggestive ideas. His practical experience has convinced him of the high relative importance, in the retail price of commodities, of the overhead costs of manufacture and distribution, and of the economy which could be effected if these overhead costs could be spread over a large number of units of product. He attempts to show, by hypothetical costings how a considerable increase in the general level of wages would lead, by increasing the purchasing power of the home market and so reducing overhead costs per unit, to little or no increase in prices. A large part of his argument is devoted to the problem of setting our existing plant to work at full capacity. When this had been done, a further increase in wages would only be justifiable in so far as unit costs could be still further reduced by the economies of mass production and mass distribution. Wages depend upon productivity, but full employment and mass production would increase productivity.
Mr. Reilly also recognizes the danger of a high wage policy in this country alone, but is not prepared to wait upon inter- national economic sanity. He proposes national insulation by a system of tariffs and export bounties designed to aid the British manufacturer in both the home and the export markets. He claims that his solution of our difficulties is the only alternative to communism, and indeed it seems inevitable that a way out will be sought along the lines of an increasingly regulated economy. Many economists urge us to return to laissez-faire by abolishing the restrictions and monopolies which exist to-day, but they are setting their face against the current stream of tendency, and a reaction to economic individualism is not to be expected in this century. The practical problem to-day is to choose the kind of regulated economy which seems, economically, socially and politically, the most desirable. Shall we, as Mr. Reilly suggests, attempt to patch up the present system by minimum
wage regulations, tariffs, export bounties and the like, or shall we, as others are more and more urging, adopt a con- sciously planned national economy founded not upon the class war, but upon the community of interests of all classes, and, as far as other countries will agree to make it possible, of all nations ? We shall probably be forced ultimately to adopt the latter alternative, because in the long run it will be the more effective.
FREDERICK BROWN.
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