This analysis of "saving" convicts J.S. Mill of a double error in saying, "Everything which is produced is consumed; both what is saved and what is said to be spent; and the former quite as rapidly as the latter." In the first place, by showing that "saving," from the point of view of the community, generally means producing something incapable of present consumption, it proves that even if what is "saved" is consumed, it is not consumed as quickly as what is spent. Mill seemed to think that what was "saved" was necessarily food, clothing, and so-called finished goods, because "saving" to him was not a process, but a single negative act of refusing to buy. Because a man who has "saved" has command of an extra stock of food, etc., which he may hand over to labourers as real wages, he seems to think that a community which saves will have its savings in this form. We see this is not the case. Even where in a primitive society extra food is the first form savings may take, it belongs to the act of saving that this food shall not be consumed so soon as it was available for consumption. In short, Mill's notion was that savings must necessarily mean a storing up of more food, clothing, etc., which, after all, is not stored, but is handed over to others to consume. He fails to perceive that a person who saves from the social as opposed to the individual point of view necessarily produces something which neither he nor any one else consumes at once—i.e., steam engines, pieces of leather, shop goods. A "saving" which is merely a transfer of spending from A to B is obviously no saving from the point of view of the community to which both A and B belong. If A, who is said to save, pays wages to B, who makes a machine which would otherwise not have been made, when this machine is made something is saved, not before.
Though Mill does not seem, in Bk. I. chap, v., to regard increased plant, machinery, etc., as "savings," but rather as something for which "savings" may be exchanged,[160] the more usual economic view of "savings" embodies part of them in plant and raw material, etc., and considers the working up of these into finished goods as a "consumption." But though industrial usage speaks of cotton yarn, etc., being consumed when it is worked up, the same language is not held regarding machinery, nor would any business man admit that his "capital" was consumed by the wear and tear of machinery, and was periodically replaced by "saving." The wearing away of particular material embodiments of capital is automatically repaired by a process which is not saving in the industrial or the economic sense. No manufacturer regards the expenditure on maintenance of existing plant as "saving"; what he puts into additional plant alone does he reckon "savings." It would be well for economists to clearly recognise that this business aspect of capital and saving is also the consistent scientific aspect. "Saving" will then be seen to apply exclusively to such increased production of plant and productive goods as will afterwards yield an increased crop of consumptive goods, provided the community is willing to consume them. "Saving" is postponed consumption—i.e., the production of "future goods," plant, machinery, raw materials in their several stages, instead of commodities suitable for immediate consumption.
§ 9. There are, in fact, two distinct motives which induce individuals to continue to produce, one is the desire to consume, the other the desire to save—i.e., to postpone consumption. It is true that the latter may be said also to involve a desire to consume the results of the savings at some indefinitely future time, but the motive of their production at present is a desire to reduce the quantity of the present consumption of the community, and to increase the quantity of postponed consumption.
It is this consideration which gives the answer to the single sentence of J.S. Mill, which has been sometimes held to offer a complete refutation of the notion of an existing state of over-supply. "The error is in not perceiving that, though all who have an equivalent to give might be fully provided with every conceivable article which they desire, the fact that they go on adding to the production proves that this is not actually the case."[161] Here the present desire to consume either what is produced or its equivalent is assumed to be the only motive which can lead an individual to produce. The fact that people go on producing is regarded as proof that they are not "fully provided with every conceivable article they desire." If this were true it would be a final and conclusive refutation of the idea of over-supply. But if saving means postponed consumption, and the desire to save, as well as the desire to consume, is a vera causa in production, then the fact of continued production affords no proof that such production must be required to supply articles which are desired for consumption. Ultimately a belief that some one will consent to consume what is produced underlies the continued production of "a saving person," but, as we shall see presently, the belief of a competing producer that he can get a market for his goods, even when justified by events, is no guarantee against excessive production in the whole trade.
If, then, those who have the power to consume in the present desire to postpone their consumption they will refuse to demand consumptive goods, and will instead bring into existence an excess of productive goods.
§ 10. The diagram on next page may serve more clearly to indicate the quantitative maladjustment of Consuming and Saving which constitutes under-consumption, and exhibits itself in a plethora of machinery and productive goods.
MECHANISM OF PRODUCTION.
A, B, C, D, E represent the several stages through which the raw material obtained from Nature passes on its way to the position of a consumer's utility. The five stages represent the five leading processes in production—the extractive process, transport, manufacture, wholesale and retail trade. The raw materials extracted at A, the wheat, skins, iron, timber, cotton, etc., obtained from various quarters of the globe, are gathered together in large quantities into places where they undergo various transformations of shape and character; they are then distributed by wholesale and retail merchants, who hand them over to persons who consume them as bread, boots, kettles, chairs, shirts. The extractive, transport, manufacturing, and merchant stages may of course be subdivided into many complex processes, as applied to the history of the more elaborately-produced commodities. But at each point in the process of production there must stand a quantity of plant and machinery designed to assist in moving the productive goods a single step further on the road towards consumption. This fixed capital is denoted by the black circles placed at the points A, B, C, D, E. But each machine, or factory building, or warehouse is itself the ultimate product of a series of steps which constitute a process similar to that denoted by the main channel of production. Consisting in raw material extracted from nature, the machinery and plant are built up by a number of productive stages, which correspond to A, B, C, D, E, into the completed shapes of fixed capital, adjusted to the positions where they can give the proper impulse to the main tide of production. Each productive stage in the production of plant or machinery requires the presence of other plant and machinery to assist its progress. Each of these secondary forms of fixed capital situate at a, b, c, d, e, has of course a similar history of its own. To represent the full complexity of the mechanism of industry thus suggested would be confusing and would serve no purpose here. It is sufficient that we recognise that at each point A, B, C, D, E, and at each of the points a, b, c, d, e, upon the perpendicular lines, stands a quantity of forms of fixed capital which are gradually worn out in the work of forwarding quantities of A to B, and quantities of B to C, and so on. Now if we turn to the point F, where goods pass out of the productive machine into the hands of consumers, who destroy them by extracting their "utility or convenience," we shall find in this flow of goods out of the industrial machine the motive-force and regulator of the activity of the whole machine.
Let us take an illustration from a single trade, the shoe trade. The number of boots and shoes purchased by consumers at retail shops and drawn out from the mechanism at the point F, determines the rate at which retailers demand and withdraw shoes from wholesale merchants, assuming for the sake of simplicity that all shopkeepers deal with manufacturers through the medium of merchant middlemen. If the number of sales effected in a given time by retailers increases, they increase their demand from the merchants, if it falls off they lower their demand. The quantity of goods which retailers will in normal conditions keep in stock will be regulated by the demand of consumers.[162] Thus the flow of shoes from D to E, and the quantity of shoes which at any given time are at the point E, are determined by the demand of consumers—that is to say, by the quantity or pace of consumption. If, owing to miscalculation, a larger number of shoes stands in the retail shops than is required to satisfy current consumption, or if the flow from D to E is faster than the outflow from E, this excess ranks as an over-supply of these forms of capital. Now just as the demand of consumers determines the number of shoes which stand at E and flow from D to E, so the demand of the retailer determines the number of shoes which at any time constitutes the stock of the merchants at D, and the size and number of the orders they give to the manufacturers at C. Similarly with the earlier processes of production; the flow of leather from the "tanners" and the quantity of leather kept in stock are likewise determined by the demand of the manufacturers; and the transport of hides and bark, and the demand for these materials of tanning, will be regulated by the demands of the tanners. So the quantity of stock at each of the points A, B, C, D, E, and the rate of their progress from one point to the next, are dependent in each case upon the quantity demanded at the next stage. Hence it follows that the quantity of productive goods at any time in stock at each of the points in the production of shoes, and the quantity of productive work done and employment given at each point, is determined by the amount of consumption of shoes. If we knew the number of purchases of shoes made in any community by consumers in a given time, and also knew the condition of the industrial arts at the different points of production, we should be able to ascertain exactly how much stock and how much auxiliary capital was required at each point in the production of shoes. At any given time the flow of consumption indicated by F determines the quantity of stock and plant of every kind economically required at each point A, B, C, D, E. What applies to the shoe trade applies to trade in general. Given the rate or quantity of consumption in the community, it is possible to determine exactly the quantity of stock and plant required under existing industrial conditions to maintain this outflow of consumptive goods, and any stock or plant in excess of this amount figures as waste forms of capital or over-supply. F then is the quantitative regulator of A, B, C, D, E.[163] Nor is the accuracy of this statement impaired by the speculative character of modern trade. Speculative merchants or manufacturers may set up business at D or C and provide themselves with stock and machinery to start with, but unless they meet or create a growing demand of consumers their capital is waste, or else if they succeed in getting trade it is at the expense of other members of the trade, and their capital is made productive by negativing the capital of other traders.