Sunday, December 7, 2008

Thoughts from the Great Depression

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

(Eccles, Marriner S. 1951. Beckoning Frontiers: Public and Personal Recollections (New York: Alfred A. Knopf): p. 76

Eccles ran the Fed under Roosevelt

Some people who contributed to creating the preconditions for the Depression developed understood that their greatest contribution would be to get out of the way.

In December 1932, Calvin Coolidge spent an afternoon in idle talk with an old friend. "We are in a new era to which I do not belong," he finally said, "and it would not be possible for me to adjust myself to it. These new ideas call from new men to develop them. That task is not for me who believe in the only kind of government that I know anything about". In another three weeks, Coolidge was dead.

Schlesinger, Arthur. 1957. The Crisis of the Old Order, 1919-33 (Boston: Houghton, Mifflin): p. 457, internally citing Stoddard, Henry Luther. 1938. It Costs to be President (New York: Harper & Brothers): p. 146.


Myrtle Blackwood said...

"...As mass production has to be accompanied by mass consumption..."

This is the machine society that a handful of people in business tried to create. However there are the inherent contradictions:

(i) mass production only results in certain types of goods and services (the profitable type).

(ii) many mass produced goods are inferior to the home-made/community version. (organic vegetables, home-made cooking, care of children the infirm and the aged, clean forms of transport such as walking and bicycling, land stewardship and agriculture/forestry in general, fishing, teaching, creative arts, medicine...)

(iii) those individuals and families that engage in productive lifestyles fare much much better than the corporations' ideal passive consumer.

(iv) mass production is the biggest mass consumer of resources on the planet. (and it can't be sustained).

TheTrucker said...

Good grief.... The economies of scale cannot be denied and the objective of all economics is the reduction of labor necessary to consumption.

We merely have a problem of distribution. And we have not found that middle ground where the lust for profits that is driven by the ego can be harnessed for the greater good.

That happy median can probably be found only in Social Democracy. But like anarchy it is not a rigid definition. The compartments and the boundaries seem to move around.

The environment must be preserved no matter what we do, but how do we do it. How do we control the beast of government and have that beast control the ego of those that will destroy everything to gain an advantage over their fellows?

My suggestion : and proper education is the only defense.

Myrtle Blackwood said...

"The economies of scale cannot be denied ...We merely have a problem with distribution...The environment must be preserved..."

Once the biosphere in which we survive is valued appropriately then the 'economies of scale' in many modern industries may very well disappear into so much hot air (in these days of climate change).

Agriculture and forestry are both likely candidates.

Anonymous said...

With economy of scale you get a reduction in marginal cost and a reduction in marginal utility. Which is more important?

Probably one of the biggest things that helps marginal cost outweigh marginal utility is large houses. The bigger the house you can afford to live in, the more room you have to fill it up with mass-produced junk.

J Thomas

Eleanor said...

So, Henry Ford and Walter Reuther are walking through the River Rouge Plant. It must be Hank the Deuce, because the original Henry Ford would not take a walk with Walter Reuther.

In any case, Ford waves at the gigantic assembly line and says, "Someday this will all be done by robots."

Reuther says, "Who's going to buy the cars, Henry?"

Eleanor said...

This is not an argument for cars or consumerism. It's a fable about capitalism and the way it works or doesn't work.

Myrtle Blackwood said...

"With economy of scale you get a reduction in marginal cost and a reduction in marginal utility. Which is more important?

With economy of scale you get a reduction in marginal cost of production of the 'megatechnic' unit. This benefit may be enjoyed solely by the producer. For in a world of concentrated economic power the benefits of cheaper production may not be passed on to the consumer.

With many (perhaps most) 'economies of scale' you get a reduction in the marginal utility of air, water, forests, soil, community etc. Factors completely outside of the simplistic economic model presented by conventional (acceptable?) economists.

Michael Perelman said...

Eleanor's Reuther story comes closest to Eccles' insight.

Brenda's preference for hand production is spot on for some things, but I don't think that I could respond as easily on a laptop that some craft worker made.

Kevin Carson said...

First. The Trucker: "The economies of scale" involved in the kind of Sloanist industry Chandler described are one of those things everybody knows that just ain't so. There is a large and significant body of empirical work by Walter Adams, F.M. Scherer, Barry Stein, et al, showing that internal economies of scale (in terms of unit cost of production) level off at a comparatively low level of output, and even below that level are more than offset by the diseconomies of large-scale production. For the majority of goods we consume, the most efficient approach is using small-scale electrically powered machinery to produce for the local market. Ralph Borsodi demonstrated that, in many cases, the use of such machinery in home production (home weaving and sewing, horticulture and canning, even making furniture in a home wood shop) was cheaper overall than buying store goods. And the integration of such machinery into craft production is the basis of the business model followed in industrial districts like Emilia-Romagna.

Kevin Carson said...

Second. Michael: The phenomenon of overproduction is very real, but it's so severe that solutions like social democracy (including the New Deal variant) pale in comparison to the problem. As Ralph Borsodi described it, Sloanism requires a system of push production, producing stuff to maximize utilization of capacity without regard to demand, producing for inventory on GAAP principles, producing for recall, etc., that amount to making water run uphill.

It's unlikely that any program of aggregate demand management or redistribution of purchasing power could have solved the crisis of overaccumulation and overproduction, had not the great powers solved it (for the U.S. at least) by blowing up most of the plant and equipment in the world outside the U.S. When that capital equipment was rebuilt around 1970 or so, the problem came back to bite us in the ass.

Not too long ago, overbuilt U.S. industry could barely dispose of its product at full capacity even when people maxed out their credit cards and tapped into home equity to replace everything they owned every five years. And we'll never see that level of demand again. All that excess industrial capacity is going to rust, and no doubt about it. What we'll see, if we come out the other side of these terminal crises with anything resembling a humanly livable economy, is 1) a relocalized manufacturing economy on the Emilia-Romagna model, and 2) an order of magnitude expansion of production in the informal and household economies, using spare capacity on household capital equipment people already own.

Michael Perelman said...

I happen to like Borsodi. I keep a copy of one of his books in my office, but economies of scale are real. A hand-crafted car would require an enormous amount of labor. In electronics, economies of scale are even greater.
I would like to see things produced with an appropriate scale.

Kevin Carson said...

I agree economies of scale exist, and they top out at higher levels for some things than others.

Of course, some goods like the conventional heavy engine block car require an artificially capital-intensive form of production because they're designed as answers to stupid questions. In an economy with walkable communities linked by light rail, there wouldn't be any market for those things (at least not as a necessity). Some private automobiles would be needed by people who fell within the cracks (e.g., market gardeners and others in low-density places on the outskirts of town, who needed transportation into and out of town). But a utility vehicle with a comparatively light engine would probably be sufficient for that. For that matter, as I recall that even IC vehicles were produced in a Model-T factory that would have cost a few hundred thousand $$ in today's money.

And some other capital-intensive forms of production, likewise, produce goods that it's hard to make a case for. E.g. the large cargo and passenger jet, which never would have existed if the heavy bomber program hadn't help pay for the machine tools. It's genuinely necessary functions which remained after relocalization of the economy could be absorbed by trains, airships, ocean liners and teleconferencing.

The single biggest bottlneck I can think of, in economy of scale terms, is microprocessors (which require facilities costing close to a billion $$). Hopefully local recycling will reduce the need for new ones (as with minimills recycling scrap steel), even as the cost of production falls.

Kevin Carson said...

BTW, I just realized my remarks on industrial capacity were recycled from a previous comment thread. My apologies--this has been a hobby horse of mine lately.

TheTrucker said...

Anonymous said:

"With economy of scale you get a reduction in marginal cost and a reduction in marginal utility."


I do not see the NECESSARY and ATTENDANT "reduction in marginal utility". Perhaps you someone amplify.

IMHO any reduction in utility is simply a failure to properly distribute the gains that arise from the reduction of the costs.

Kevin Carson said...

Trucker: Proper distribution is an awfully big question.

I assume you're calling for some kind of (at least) partial distribution of the social product in accordance with need. At least this fits in with your mention of social democracy, would increase the marginal utility of additional production, and partially correct for maldistribution of purchasing power.

But IMO that's backward. The reason for the boom-bust cycle and the divorce of production from consumption in the first place is privilege (i.e., the divorce of effort from reward). The state makes capital and land artificially scarce and inflates the return on them, while forcing labor to sell itself in a buyer's market. This means that a major part of labor's product is diverted to classes that will just pile it up and reinvest it, while labor has to produce in excess of its own desired level of consumption.

Eliminate privilege so that labor receives its full product, put labor in control of the production process so it can control its hours of work, and the root cause of overproduction is eliminated. Of course in that case, an economy of worker co-ops might well take Sandwichman's approach: eliminate planned obsolescence and all the other forms of waste production that amount to digging holes and filling them back in again, reduce the production stream and scale down plant and equipment accordingly, and cut back to a sixteen hour week.

Anonymous said...

"With economy of scale you get a reduction in marginal cost and a reduction in marginal utility."

I do not see the NECESSARY and ATTENDANT "reduction in marginal utility".

It isn't necessary, any more than it's necessary that people won't on average win lots of money in casinos. It's just the way to bet.

If you hand-craft tinker-toy pieces one at a time it will be expensive. You get some economy of scale with mass production, up to a point. At some point the economy of scale drops off -- you might have a smart machine that turns one entire tree into lego parts at one time, but it likely won't be a big improvement to have a bigger machine that does the same thing for ten separate trees at a time.

Meanwhile consider the utility. One tinker-toy stick isn't enough to play with, though you can drill holes in various things and insert it and maybe find lots of uses for it. A whole gameful of pieces lets you play tinkertoy. A big tinkertoy game is somewhat better than a small one, but at some point it's big enough. When everybody in the world has a big enough tinker toy game, then the value of more tinkertoys to play with is low. But you can make kitchen cabinets and wardrobes and computer cases out of tinker toys. You can make darts and knife handles out of tinkertoys. You can use them for kindling to light fires in your fireplace. Still, at some point the marginal value of more tinkertoys gets lower. You'd do better with something else instead.

It doesn't have to work that way. But it does. Utility is high for custom items that precisely fit special needs. Then it goes lower as the numbers increase and they get used for needs that fit less well. Then it goes up again as something becomes a standard part that designers can depend on. And it gets lower as it fills its niche and designs get warped to fit it because it's available.

J Thomas

TheTrucker said...

Kevin Carson said ----------------

Proper distribution is an awfully big question.

I assume you're calling for some kind of (at least) partial distribution of the social product in accordance with need. At least this fits in with your mention of social democracy, would increase the marginal utility of additional production, and partially correct for maldistribution of purchasing power.

It is incorrect to assume that I would ever suggest a distribution of anything based on need. The only "rightful" distribution of what you call the "social product" (which I guess is a presumed "unearned increment") is an egalitarian distribution within a sovereignty. And, again, the "utility" being distributed must be unearned.

If one assumes that government serves all the people equally then highly progressive income taxes will have done a makeshift and currently (in the United States) woefully inadequate job regarding this proper distribution. So long as all the social needs (medical care, pensions, etc) are not met by government then this method of capture and distribution would remain inadequate.

Yet it is the purpose of Social democracy to define and refine the correct distribution. It is an attempt to draw the lines that tell us what is simply awarded or taken in the name of privilege and to distribute it equally.

The geoist attempts to make the case that any award to natural resource ownership (e.g. land) in excess of the costs of assuring exclusive access to such natural resource is a taking by or an award to privilege. And all costs associated with the enforcement of said exclusive use must be born by the supposed owners or users. The bottom line being that all natural resource rent belongs to the voting age and politically active society - equally. And this is so because any "social product" or "economic rent" derived from a natural resource is absolutely unearned. The supposed "owner" can be comatose and the rent still exists.

That is not true of _real_ capital because _real_ capital is the product of human investment , i.e. human labor. And such facilities deteriorate and must be maintained. Yet the point concerning all enforcement costs born by the owner still remain.

We do not properly distribute economic rent. We do not actually understand economic rent. And if we did and were politically conscious enough to distribute it equally then the return to scale would not result in malapportionment of utility. Wages would rise because people would have their basic needs fulfilled with much less effort on their part. (the much sorter work week). Those who want to work more and get more lip gloss could certainly do so.

Kevin Carson said...

Thanks for clarifying, Trucker. But as I understand it, the view of the proper approach to distribution in the mainstream SocDem tradition is considerably different from your geoist approach. Anyway, the variant of geoism I'm familiar with (geolibertarianism) is certainly a refreshing approach. Replacing the welfare state with a basic income or CD, and the regulatory state with Pigovian taxation, would be an enormous improvement. One objection I have is that so much economic rent is the result of active state intervention in the market, it would be better to eliminate it from the other end (causation) rather than redistribute it after the fact.

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