The Evolution of Modern Capitalism: A Study of Machine Production

by J. A. Hobson

§ 13. It is not therefore correct to say that the rate of production determines the rate of consumption just as much as the rate of consumption determines the rate of production. The current productive power of capital and labour places a maximum limit upon current consumption, but an increase of productive power exercises no sufficient force to bring about a corresponding rise in consumption. Just as in a particular trade—e.g., the Lancashire cotton trade, an excess of "saving" may be applied to the establishment of mills and machinery which cannot be kept working because there is no market for their output, so it is with trade in general. It is not true that the inflation of capital in the Lancashire trade is due to a misdirection which implies a lack of capital in some other branch of industry. In a period of depression like the present every other important branch of industry displays the same symptoms of excessive plant, over-supply of stock, irregular and deficient employment of labour, though not to the same extent. Nor is there any à priori reason why there should not be from time to time such general maladjustment. If ignorance and miscalculation leads to the investment of too much capital in, say, the cotton and iron industries, it is not unreasonable to suppose that in a complex industrial society there should be such general miscalculation of the right proportion between saving and spending that too much should be saved at certain periods. That is to say, turning again to the diagram of industry, just as it is admitted that miscalculation may induce too much capital to be placed at A or B or C, and too little at one of the other points of production, disturbing the harmonious ordering of the parts of capital, so likewise there may be a maladjustment of the proportion between A, B, C, D, E, the aggregate of forms of capital, and F, the aggregate of consumption, between "saving" and "spending." Now if it be admitted that such maladjustment is possible, the balance can only lean one way. There cannot be too little saving to furnish current consumption, taking the industrial community as a whole, for it is impossible to increase the rate of consumption, F, faster than the increase of the rate of current production: any increase of the purchase of shop-goods by raising prices and circulating more money down the paths of production stimulates and strains the sinews of production, and if the existing machinery of production is inadequate it supplies a motive-power to increase "saving." In no case can a community consume faster than it produces. An individual can do so by living on his capital, a nation may do so for a time by living upon its capital, giving to other nations by means of an increased debt a lien upon its future wealth. But a whole industrial community can never live upon its capital, can never in the literal sense of the term "spend too much." This statement requires a single qualification. While a community can never by "spending" deplete its capital, while it cannot increase its "spending" without at the same time increasing its real capital,[169] it will doubtless be profitable to a progressive community to reduce its consumption for a while below the normal proportion in order to fully utilise new discoveries in the industrial arts which shall justify in the future increased consumption.

But with this necessary qualification it is true that a community cannot exceed in the direction of spending. But the balance may lean the other way. A community may "save too much," that is to say, it may establish a larger quantity of productive machinery and goods than is required to maintain current or prospective consumption. What is to prevent a community consisting of a vast number of individuals with no close knowledge of one another's actions, desires, and intentions, making such a miscalculation as will lead them to place at each of the points A, B, C, D, E, and in all or most branches of industry, a larger quantity of forms of capital than are required?

It is said that the harmony which subsists between the social interest and the self-interest of individuals will prevent this, or, in other words, that individuals would find that if they attempted to unduly increase the aggregate of capital beyond what was socially advantageous in view of the community's consumption, it would not pay them to do so. Is this true?

An individual working entirely for himself, whose capital lay in his tools and his raw or unfinished commodities, would never increase the latter unduly. A socialist community properly managed would never add to its stock of machinery or increase the quantity of its raw materials or unfinished goods, so as to leave any machines unused or half used, or any goods unnecessarily occupying warehouse room and deteriorating in quality. But when competition of individual interests comes in there is no such security.

It may pay individuals to build new factories and put in new machinery where it would not pay the community to do so, were it the sole owner of the means of production.

The knowledge that enough capital is already invested in an industry to fully supply all current demands at profitable prices has no power to deter the investment of fresh capital, provided the new investors have reason to believe their capital can be made to displace some existing capital owned by others. If the new-comer can, by superior business address, by successful advertising, by "sweating" his employees or otherwise, get hold of a portion of the business hitherto in the hands of other firms, it will pay him to build new factories and stock them with the requisite machinery, and to begin the process of manufacture. There may be in existence already more bicycle works than are sufficient to supply the consumption of the community. But if a would-be manufacturer thinks he can withdraw from other makers a sufficient number of customers, he will set up works, and make new machines, though his methods of production and the goods he turns out may be no better than those of other makers. The same holds at every stage of production. In wholesale or retail distribution the fact that there are sufficient warehouses and shops in existence to adequately supply the current demand does not prevent any one from embarking new savings in more warehouses or shops, provided he believes he is able to divert into his own firm a sufficient amount of the business formerly held by others. In a district two grocers' shops may be quite sufficient to supply the needs of the neighbourhood, and to secure adequate competition. But if a third man, by an attractive shop-front or superior skill in the labelling or adulteration of his wares, can procure for himself an adequate share of the custom, it will pay him to put the requisite plant and stock into a shop, though the trade on the one hand and the community on the other is no gainer by his action.

There is indeed much evidence to show that it may be to the advantage of individuals to increase the machinery of production, even though there is no reasonable prospect of this machinery being worked at a profit. It is the unanimous testimony of business men that the Lancashire trade has been congested with mills and machinery in this way. As a result of an excessive desire to postpone consumption there are considerable sums of money which cannot find a safe remunerative investment. Here is the material for the company promoter. By means of the specious falsehoods of prospectuses he draws this money together; with him work a builder and an architect who desire the contract of putting up the factory; the various firms interested in manufacturing and supplying the machinery, the boiler-maker and fitters of various kinds, the firm of solicitors whose services are requisite to place the concern upon a sound legal footing, or to establish confidence, take up shares. It is to the interest of all these and many other classes of persons to bring into the field of production new forms of capital, quite independently of the question whether the condition of a trade or the consumption of the community have any need for them.

§ 14. These operations, which imply a conflict between the interests of individuals and those of the community, pervade all modern commerce, but are more prevalent in businesses where complex machinery plays a prominent part, or where specious advertising gives the outsider a larger chance of successful entry.

In each and all of these cases it is to the interest of the individual to place new "savings" in new forms of capital in branches of industry where sufficient capital already exists to assist in supplying the current demand for consumptive goods. So far is it from being true that the self-interest of individuals provides an economic check upon over-supply, that it is possible that at each of the points of production, A, B, C, D, E, and in all or the majority of industries at the same time, there should be an excess of forms of capital as compared with that which would suffice for the output, F. The automatic growth of bubble companies and every species of rash or fraudulent investment at times of depressed trade is proof that every legitimate occupation for capital is closed, and that the current rate of saving is beyond that which is industrially sound and requisite. These bubble companies are simply tumours upon the industrial body attesting the sluggish and unwholesome circulation; they are the morbid endeavours of "saving" which is socially unnecessary, and ought never to have taken place, to find investments. When one of these "bubble" companies collapses it is tacitly assumed by unthinking people that those who invested their money in it were foolish persons who might have sought and found some better investment. Yet a little investigation would have shown that at the time this company arose no opportunity of safe remunerative investment open to the outside public existed, every sound form of business being already fully supplied with capital.

At first sight it might appear that Consols and first-class railway and other stocks were open, and that the folly of the investors in bogus companies consisted in not preferring a safe 2-1/2 per cent. to a risky 5 or 10 per cent. But this argument is once more a return to the unsound individualistic view. It was doubtless open to any individual investor of new savings to purchase sound securities at 2-1/2 per cent., but, since the aggregate of such soundly-placed capital would not be increased, this would simply mean the displacement of an equal quantity of some one else's capital. A could not buy Consols unless B sold, therefore the community to which A and B belong could not invest any fresh savings in Consols. Any widespread attempt on the part of those who plunged into bogus companies to try first-class investments would obviously have only had the effect of further reducing the real interest of these investments far below 2-1/2 per cent. The same effect would obviously follow any effective legal interference with company-promoting of this order. The fact that Consols and other first-class investments do not rise greatly at such times is, however, evidence that the promoters of unsound enterprises succeed in persuading individual investors that their chance of success is not less than 2-1/2 per cent. In many instances the investor may be acting wisely in preferring a smaller chance of much higher profits, because a secure 2-1/2 per cent. may be quite inadequate to his needs. For it must be borne in mind that a knowledge that the new bank or new building society is unnecessary, because enough banks and building societies already exist, does not make it impossible or necessarily improbable that the new venture will succeed.