Current Economic Affairs/Chapter 1
CURRENT ECONOMIC AFFAIRS
CHAPTER I
PRACTICAL ECONOMICS OF THE PRESENT
DAY[1]
When I was a boy, political economy was taught in the old fashioned New England high school that I attended. I still possess my text-book, an abridgment of one of the old classics, and I referred to it a few days ago. It began with the definition that “political economy is the science which investigates the nature of wealth, and the laws which govern its production, exchange and distribution.” That definition of 50 years ago strikes me still as being a good one.
In college I sat under Francis A. Walker, the greatest of American economists. I still have his old text-book, which begins with substantially the same definition as Fawcett, but adds that “political economy has to do with no other subject, whatever, than wealth.”
As so developed economics was a dry study which captivated but few. It was characterized as the dismal science. It seemed to lead nowhither. This was perhaps due to the inadequacy of the data available to economists. Consequently, their discussions and deductions were founded largely on conjecture and assumptions. Naturally this resulted in differences in the formulation of doctrines. There were controversies respecting the nature and influences of money, over the derivation of wages, over the principles of laissez faire (letting things take their own course) over the Malthusian doctrine, and so forth. Amid all this there was one great basic law universally recognized, namely the law of supply and demand, which ranks with the law of gravitation and the law of the conservation of energy among the great fundamental laws of nature. The law of supply and demand is the one thing in economics upon which we may fix our eyes as upon the lode star.
In the course of time we have fallen out of agreement with Walker’s doctrine that political economy has to do with no other subject than wealth. Although it is indeed the science of the production and distribution of wealth we can see that many things pertain to that subject and that economics links hands closely with engineering, biology, and psychology. It is probably the recognition of this that caused the study and exposition of economics to acquire such a strong sociological note 20 or 30 years ago and produced an immense volume of literature that is even more conjectural and controversial than the classicism of the middle of the 19th century.
During the last decade economics took another turn, this time in the direction of quantitative studies. The economist then began to grasp hands with the statistician. The economist began to be a statistician and the statistician began to be an economist. The war gave a great impetus to this. We learned then acutely and fully the need for quantitative information, we acquired increased facilities for getting it and we became accustomed to think internationally and in terms of billions of dollars. We began to grope for the outlines of the big national and international pictures. For the first time in its history economics began to be a human science.
Under the classicists economics was dry and bloodless; it was indeed a dismal science. Under the sociologists it was unconvincing; there was always doubt whether the academic writers from jerkwater colleges knew what they were talking about. When we began to talk about facts and their bearings upon immediate affairs, when we began to connect with economic laws things that directly concern us, the intelligent public commenced to sit up and take notice. Cassel, who is one of the outstanding figures among the European economists at the present time, has said that we ought to scrap the most of our old economic literature and begin all over again on the basis of facts. I think that this is going too far, but nevertheless there is much truth in the underlying idea.
The interest in quantitative economics rests upon the thought that this knowledge is teaching us how to conduct our national affairs just as the well-managed family directs itself, just as the corporation controls its business. The affairs of the nation are the aggregate of the affairs of about 27½ million families and they are about 10,000 times greater in magnitude than those of a 30-million dollar corporation. We have been conducting national affairs heretofore without much fundamental knowledge, which is very much the same as if a corporation tried to run itself without a balance sheet and a statement of income and outgo. This has led to terrific mistakes in national policies since the war. Among these was the fixing of the indemnity upon Germany without any rational consideration of the amount of Germany’s wealth and earning capacity. Another mistake that is being made from the absence of knowledge is that which is going on now in the United States on the basis of the preposterous idea that this country grew rich out of the war and that a relatively small class of the people profited especially.
We must find it easy to forgive such mistakes when we consider that they are made in ignorance and that it has been only within a few years that anybody has undertaken to make estimates of national wealth and income. Recognition of the merit of such studies is still confined to relatively few people. It has not yet begun to permeate among the great body of the public. It is not enough merely to make these studies. It is important that they be made in a way to command general acceptance as being of indisputable nature, and having arrived so far it is next in importance to broadcast them so that they will be generally known. Finally, the facts must be properly interpreted.
My friend, Dr. B. M. Anderson, Jr., economist of the Chase Bank in New York, was the first to undertake an annual estimation of the national income of the United States, which he did during a series of years in articles published in the Annalist. As we look back in the light of superior knowledge we find that Anderson’s estimates up to 1916 were superb. In 1916 he went astray owing to the disturbance of his method by the chaotic economic conditions that began to develop strongly during that year. I made subsequently an estimate for 1916 by a totally different method, which was eventually proved by others to be correct. What Anderson and myself were doing, however, carried no weight, not even among economists and engineers, outside of the very small circle who knew us personally. Even among economists, bankers and business men, if they paid any attention to our work, the idea was probably that we were merely guessing and that our guesses were no better than those of anybody else. I introduce these personal references to illustrate the importance of organized study as a preliminary to general acceptance. It remained for the National Bureau of Economic Research to take up this study and produce authoritative results. The National Bureau is now better known as the reporter of the national income than it is by its corporate title. It reviewed the national income for a period of 10 years backward. It substantially confirmed Anderson’s estimates for the years previous to 1916 and checked with mine for 1916, but whereas Anderson and I were unheard voices in the wilderness the Bureau could speak with the authority of collective investigation. The Bureau was able to speak with unusual authority, owing to its unique organization, which requires the findings of its research staff to be reviewed and approved by a large board of directors, comprising all colors of economic thought. Thus, its income studies were approved and accepted by the representatives of such widely different viewpoints as those of the nominees of the American Engineering Council, the American Bankers Association and the American Federation of Labor. As a member of this board I am able to say moreover that its examinations are in no wise perfunctory and I know that the research staff has a very wholesome respect for the board of directors.
I have personally made studies of the wealth of the United States, and I believe that outside of the census reports on this subject I am the first economist to undertake this work, anyhow with great detail and with critical analysis. My approach to the subject was wholly from the engineering standpoint. My presentation was not only a challenge of the accuracy of the census estimates for previous years, but also a representation that the national wealth can not be reasonably estimated by census methods, either past or present, or probably of the future. Dr. W. I. King subsequently made estimates on this subject which were published in the Journal of the American Statistical Association for September, 1922, and which differ from mine. This is a good illustration of how such a subject needs to be threshed out. It will be taken up by the National Bureau some day and eventually we shall have its quasi-judicial pronouncement.
In the meanwhile, however, we may assume that we now have at least an approximate idea of the national wealth, and a positive idea respecting the national income. These are naturally the fundamental things in any consideration of our national affairs. They are of the nature of a corporation balance sheet and income statement. The possession of knowledge of these subjects has already been of inestimable benefit, and in two main ways, as I shall proceed to point out.
In the first place, the possession of knowledge of the amount of the national income has given us a yard-stick with which to make many comparisons that previously were impossible. Now that we are able to make such comparisons we are getting many salutary shocks. For example, we are shocked to discover that our present cost of government is somewhere between one-eighth and one-sixth of our total income, and this discovery is focusing public attention upon the importance of economy in public expenditures.
But it is our present knowledge of the amount of the national income and the division thereof between the wage earners on the one hand and property and management on the other hand that bas been of the greatest importance. It is true that we previously possessed knowledge on this subject that was convincing to the engineering mind. Mallock bad shown us that in the economic history of Great Britain the benefits of invention and managerial organization had mainly accrued to the masses of the people. Bowley had shown that in Great Britain the major part of the current income accrued to the wage earners. I had shown the same thing with respect to the United States in my study for 1916, proving conclusively to any scientific mind that about 75 per cent of the American income, other than agricultural, went to the wage earners. Here was another case of economic prophets to whom no special attention was paid. Such as might have been given to us was passed away with the explanation that we were the partisan exponents of capitalism. The prevalent idea expressed among professional representatives of labor was that labor received a mere dole out of what it produced, 25 or 30 per cent, and that it ought to get a fairer share. Pink socialists, members of the Fabian Society, and philanthropologists generally supported this contention.
Then came along the National Bureau of Economic Research, organized as an impartial fact-finder, and with respect to the United States substantially confirmed the findings in my study for 1916. This put this matter outside of the bounds of dispute.
Now let us think of the supreme importance of this establishment. Consider what it has done, and this is a perfect illustration of the reaction of quantitative studies upon the whole field of economics. It has felled the whole Marxian philosophy. It has confirmed in the main the economic doctrine of the residual claimancy of labor as expounded by Jevons and Walker. It has dispelled all fallacies about a wages fund and has affirmed the theory that labor gets what it produces, and that by no possibility can it get any more than it produces. It has exploded the recent contention for a living wage, so called, and the arbitrary guarantee to people of a desired scale of living. On this subject, we have literally backed the labor leaders off the boards. W. Jett Lauck, one of the leading economic exponents of the labor organizations in a recent public communication practically admitted this, receding to the ground that the principle of the guaranteed living wage should be upheld only with respect to a part of the workers, which he explained would not cost very much and therefore would be practicable. Listen to what he says, which was as follows:
“Although the last census reported some 41,000,000 persons in gainful occupations, only about 17,500,000 were adult male workers to whom the living wage principle would apply.”
Can you conceive of anything more raw, more brutal and more cruel than this idea of giving to less than half of the workers of the country all that they want and letting the majority go hang? I think that when we have driven the labor leaders to this point and have got the news of it across to the public we shall have accomplished a great deal.
Our present organization of life is so complex that the most of the people are unable to think in anything but terms of money, having no conception of the fact that money is nothing but a counter and that what really matters is the goods that we need. The farmer who is supporting himself out of the land and does not raise enough bushels of potatoes, wheat and corn to feed the hungry mouths for which he is responsible is under no illusion that the rest of the community ought to make good his deficiency out of its produce. Yet it is just that which town labor is demanding, and it has so arranged things that to more or less extent it is exacting its demands. Carry this thing to its logical conclusion, the youth starting out at $15 per week may marry and expect the community to make up for the rest of his living costs. The whole conception is absurd.
I am going to digress here in order to point out what seems to me to be a great danger in our present enthusiasm for quantitative economics. We have been captivated by the idea and we are seeing in it the possibilities of not only managing our national affairs in a better way but also the possibility of bringing about increased equilibrium in industry, which is plainly a desirable thing to accomplish. The danger in this is that we shall try to do too much and may act upon incomplete information. I see in this the great hazard of what the Department of Commerce is trying to do, although I fully agree that its motives are most commendable. However, we have lately seen it in an imbroglio over the matter of sugar statistics and we have sometimes seen the Department of Agriculture in trouble over its crop statistics. Now, with a rather extensive experience as a statistician, let me say that I view the mere statistics of commodity production and stocks in first hands as being of very superficial character, and I consider superficial statistics to be about as safe as gunpowder in a room where a lot of boys are smoking cigarettes. I know a house in the metal business that is longer trained in the use of statistics than any other, and I have had in mind the words of directors of that house, dating back many years, that when statistical indications and experienced sentiment are in conflict sentiment is the only safe horse to back. This might look like a repudiation of the value of statistical information, but it is not so as I shall immediately show you. We have had during the last few months a series of brilliant zinc statistics, yet the price for spelter has steadily slumped in the face of them. The reason for this is that discerning minds have been able to look through the statistics, which are but superficial, and see underlying conditions that are to the contrary; wherefore there has been a bearish sentiment in spite of bullish indications and the seeming paradox of statistics and sentiment in conflict. But if we had complete statistics there would be found without any doubt to be no conflict whatsoever. I hope I have made my point for I am going to try to develop some important ideas from this thought.
On the face of the great mass of statistical data that I consider to be superficial we are being told that the United States at the present time is in a condition of great prosperity. The president of a large corporation, a thoughtful and intelligent man, asked me a few days ago if I did not agree with that conclusion. I replied “No.” Tasked him if he thought that the farmers were prosperous and he answered “No.” I asked him if he thought that the white-collar classes were prosperous and he answered “No.” I asked him how then could it be pronounced that the country is extraordinarily prosperous if classes comprising about 50 per cent of its population are admittedly not so.
I do not think that we are having any such thing as prosperity in the United States at the present time. If for “prosperity” you substitute the term “activity” I will assent to the declaration that we have been having a great deal of activity. Now, we might conceivably institute a great building of pyramids as they used to do in Egypt, and we should have great activity in the production of stone and cement; also in metals if we saw fit to use them for ornamentation; and in many quarries and factories for the production of these things and on the railways for transporting them. We should have great activity in such circumstances and should get poorer in the process. We cannot reasonably hold that the process of getting poor has any connection with prosperity.
I have rather a clear idea that something of this sort is going on in our country at the present time. I conceive that we are building too many automobiles instead of developing our railways; that we are building garages instead of houses. To make an economic expression we are creating too much of consumption goods and not enough of capital goods; and we are letting our existing capital goods wear out.
When leading exponents of commerce and industry exhibit misconceptions on this subject, sincere without any doubt but based on superficial data, they do an immense amount of harm. It is they whom I blame most, rather than the labor leaders whom we view as creating all kinds of trouble for us. If financiers and captains of industry, who are supposed to know about such things, tell the people that we are in a state of great prosperity why should not the workman get all of it that he can? What does he know about such things as economic unbalance? I am convinced that our affairs are not going to be put in order until something like the old economic balance is restored, but we are going to have a mighty hard time in bringing this about so long as our own colleagues are betraying us out of their ignorance.
It seems to me strange that any intelligent person, much less than being a victim of happy fallacies, can fail to be impressed by the horror and cruelty of the present situation. Town labor is simply sweating and eating up agricultural labor. Among town labor there are some classes that are eating up other classes. The white-collar classes are the great victims, but many of the humbler workers with their hands, such as many in your own factories, many charwomen, etc., are also the victims of the aristocrats of labor who have been having their own way. It is only common sense to understand that when bricklayers, carpenters, and plasterers get fantastic wages the cost of building houses is increased and consequently the rental of houses. If the building mechanics by reason of their princely rewards do not work so hard as formerly, and this is but human nature, with the result of fewer houses, the situation is aggravated. This reacts upon such people as are working in your factories, indeed more so upon them than upon anybody else. The building mechanics are not skinning the rich to any great extent. The rich after all are relatively few in number and do not need many houses. It is the poor who mainly suffer. When they get this into their heads they will begin to see that federated labor unions are not all that they have been cracked up to be. Their policy is not one for all and all for one, but rather is it all for a few and the devil take the rest. The farmers also will begin to see that alliance with labor, which labor is so keen about effecting, is about as preposterous as a marriage between a lamb and a wolf. The farmers’ animosity has been directed against Wall Street, but if the farmers could get the dust out of their eyes they would ally themselves with Wall Street rather than with organized labor.
I have brought out these points so often that my hearers may well be wearied by my repetitions, but it is by iteration and reiteration that we fix ideas in the minds of people. I am going to quote on this subject some fresher and more graphic words than mine. Frank Mann, Tenement House Commissioner of New York, declared a few days ago that there is no immediate prospect of low rents for the average wage earner. Despite the building of 167,375 new apartments in New York during the last three years, under the stimulus of tax exemption, the city gained but 13,182 in its housing capacity, 154,000 having become obsolete and having been razed in the meanwhile. Even the bonus of tax exemption has been absorbed by building labor, which in complete analysis now constitutes 85 to 87 per cent of the cost of building. Mr. Mann proceeds as follows:
Thus a condition has arisen whereby some classes of wage earners are surely reaping the profits of tax exemption, while the rising cost of living, due to this increase in the cost of materials and labor, is just as surely causing other classes of wage earners untold hardships and rendering them more and more apprehensive of the future. The “white-collar” element of our wage earners was never, relatively, so poorly paid. A silent and bloodless revolution is taking place in this country, the consequences of which appear to accrue to one class of labor, to the disadvantage and discouragement of another class. The benefits derived by mechanics and laboring men in the building trades, through higher wages, must be paid by wage earners in other industries by higher rents and higher costs of living generally because of the high cost of building construction.
Consider, now, if you please that the City of New York has about 5 per cent of the total population of the United States and that its total number of dwellings is about 1,000,000 out of the 20,000,000 in the country other than those on farms. A fairly large statistical sample, is it not? Municipal transportation in New York is strained to the breaking point. The whole system of railway traffic in the country is on the verge of cracking. During recent years the railway companies have been spending only four or five hundred million dollars per annum on their plant. They need to spend a billion dollars per annum in terms of 1913 dollars for mere maintenance. Considering these conditions is not the chatter about unparalleled national prosperity idle and ill-conceived?
How is the inevitable economic readjustment going to come about? Frankly, I do not know. Four years ago I thought it was going to come about through common-sense, through patriotic and intelligent leadership. Up to a year ago I thought that things were working in that way, although temporizing factors had come into evidence. From far back I had foreseen 1922 as a year of great labor troubles. I expected that they would end by putting us well ahead in our necessary readjustment. As you know, they did not work out in that way. We have got to have them agam. Whether this will be in 1924 or 1925 I do not venture to predict. I foresee however that we must have adversity in order to bring about correction, and instead of deploring it we ought rather to welcome it, hoping of course that it will be slow and grinding, giving everybody a chance to adjust himself, rather than being acute.
We must pray for disinterested and intelligent leadership. We must learn to become acquainted with the facts and then to face them. The inspiration is not going to come out of the masses. It must come from the intelligent few. The psychologists have proved to us beyond peradventure that the great mass of our people are of insufficient intelligence to enable them to appreciate economic problems. The psychologists have proved to us moreover that the masses can never be raised by education or otherwise to such degree. The biologists have shown us that ideas of the beneficent influence of good environment are fallacious and that heredity is determinative. Indignant philanthropologists have risen in anger against this as being a repudiation of the principles of democracy. They do not know what they are talking about with respect to this any more than they usually do with respect to anything else. Instead of being undemocratic the differentiation of opportunity and rights is a necessary corollary of the truly democratic ideal. The biologists have shown us that very many of the recent sociological ideas have been opposed to the working of the great natural law of the survival of the fittest. These thoughts exemplify the ways economists lock hands with psychologists and biologists.
I scarcely need to tell engineers about their own connection. If it had not been for engineers we should have a scale of living at the present time no better than that of the Chinese. The English-speaking people would be no further ahead than they were during the reigns of the first two Georges. The whole hope of the future depends more than anything else upon what we engineers are going to do. It devolves upon us therefore to have a clear vision of economic principles and we must show that we are sound in order to get the public to listen to us while we accept the responsibilities that are put upon our shoulders.
- ↑ An address to the Bridgeport Engineers’ Club, at Bridgeport, Conn., May 16, 1923.