Nevertheless, it must be admitted that this plan also is not free from disadvantages and difficulties. Some difficulties of interpretation would remain. The selection of the ratio in which wages should be changed with reference to the course of price changes would be wholly a matter of judgment. For due to the changes in the expenses of production and to the changes in the volume of production, it will always be impossible to reason concerning profits merely from the facts of price change. And secondly, since all prices do not change equally, even if wages are increased in accordance with the changes in the index number of all prices, these wage increases might cause price changes in certain directions.
Weighing all the difficulties, it may be that the best method that can be devised would be something in the way of a compromise between the two methods that have been discussed. That is, wage adjustment to a rising price (and to a falling price level—if such adjustment is contemplated) level could be made on the basis of the change in the price index number of all the important commodities produced within the country; but in the making of the index number, the prices of food, rent, and clothing could be given a heavy weight (50 per cent., for example) of the total. Such a compromise would tend to assure, on the one hand, that the wage change did express in a considerable measure the change in the cost of living. And, on the other hand, it would tend to keep wage changes in closer accord with the changes in the total value product of industry than any method based solely on a measurement of the change in the cost of living.
In conclusion, however, it may be remarked that when the prices of the essentials of economic existence are increasing very rapidly, there is no way, under our wage system, by which the welfare of the lowest industrial classes can be effectively protected merely by wage adjustment. When supplies are short, if their distribution is left to the free play of the market, the poorest classes must come off badly.
3. There remain for consideration those questions of wage adjustment which are presented by downward price movements. They are two in number. Firstly, is there any reason why wages should be reduced during a period of declining prices? Secondly, if they should be reduced, on what basis should the reductions be arranged?
In reference to the first question, three different types of situations may be distinguished on the basis of the analysis of the effects of price declines given in the preceding chapter. The first type is that in which the decline in prices is due to some such cause as the progress of invention or the development of the means of transport. In this case the fall of prices is brought about by an increase in the quantity of goods produced, and there is no reason why wages should be decreased. Indeed, there may even be occasion for an increase.
The second case is that in which the decline in prices marks a period of reaction from a previous period of price increase and a tendency to limit production costs and to proceed cautiously, but is not accompanied by much forced liquidation and is not the result of any urgent necessity to reduce bank credit. In short, when the business conditions accompanying the price decline do not warrant apprehensions of a crisis, serious as they may be temporarily. Price declines of this sort may be considerable in extent; they will be gradual rather than violent. They are apt to be characterized by less dispersion than those which are precipitated by crises. In this case also there would seem to be no good reason why wages should be reduced. A decline of prices would be desirable, it is true. The industrial position would be improved thereby and industrial activity would be put upon a sound financial basis. Some contraction of credit is to be desired if, as is assumed in this case, the period of decline was preceded by one of considerable price increase and credit expansion. But these results may be obtained without any reduction in wage rates. The cost of labor will fall without any reduction in wage rates, as the amount of overtime work is lessened, as employment is concentrated upon the more efficient workers, and as workmen put more energy into their jobs in order to hold them. Such times as these usually lead, furthermore, to the introduction of new or forgotten economies, and to improvements in the method of production. Thus it can be concluded in this case that whatever reduction of the price level is required to restore industry to a sound financial basis can be accomplished without reducing wage rates.
The third case is that in which the decline in prices is abrupt—at the beginning at all events—and is precipitated by much forced liquidation of a character disastrous to the enterprises forced to undertake it. In short, when it is brought about by an industrial crisis or when an industrial crisis is actively threatened. In this case the decline is usually preceded by a period of rapidly rising prices which brings about an over-extension of credit and puts heavy pressure upon the banking system. Maladjustments in industry manifest themselves and fear comes to govern all production. The price decline in different industries is apt to vary greatly in extent.
In this case, as in the second, the process of price decline—the state of severe depression—tends to set in motion certain forces which work for recovery. The owners and directors of industry seek for economies. They strive to get greater output from the workers, and generally succeed since a job is more precious. Prime as well as supplementary costs are cut down. And yet if there has been great expansion of credit; if the banking system as a whole shows a very low reserve, and some banks suspend specie payment, a reduction in the wage level is necessarily essential to industrial recovery. This may be so especially, if buying is at a halt. The wage reduction should follow the price reduction. There would appear to be no compelling reason for the wage reduction to be in the same ratio as the price decline, since it is probable that the wage increases will have lagged behind prices in the preceding period. The conditions making the case should be clearly present; competition or control must be active, in order to insure that the reduction of wages really does assist price reduction. These important details will be considered at another point.[66]
Against such a policy of wage reduction some arguments of weight can be brought forward. It may be said that all other branches of outlay will be subjected to a more severe overhauling when there can be no resort to wage reduction. It may also be argued out that the maintenance of wage levels would confer such indirect assistance to recovery as might come from the lessening of the fear that a future fall in wages will make present production unprofitable. The factor of industrial unrest and discontent is apt to be less menacing. Lastly, it may be said that wage reductions might be reflected in the efficiency of the least favorably placed groups of workers.[67]
These objections should be overridden only if it is believed that a decline in the price level greater than that which could be secured without wage reduction must precede industrial recovery. Or that such a decline would, at all events, greatly facilitate the recovery. It must be believed that at the level of prices existing at the outset of the crises, or at a position somewhat but not markedly under that level, the margin of safety in the financial system by virtue of which modern industry is carried on, is too small—the ease with which the unfavorable turn of affairs could produce another crisis too great. Or that consumers will not resume buying until prices drop greatly. Under which circumstances the policy of wage reduction would be as much to the benefit of the wage earners as to the rest of the community.