Saturday, July 26, 2014

John Maurice Clark on Window Breaking

From The Costs of the World War to the American People, 1931:
We come next to the question whether disasters which consume or destroy wealth can be, after all, advantageous to the social economy because the demand they create is "good for business" and leads to increased production and circulation of wealth. Traditional economics says: "No. The breaking of windows, for example, can never be anything but destruction of wealth; it cannot be metamorphosed into the creation of wealth, no matter how far its effects may be traced as they ramify through the economic system." It is admitted that breaking windows may help glaziers for the moment, but only at the expense of other producers; those who would otherwise have received the money the glaziers got for replacing the panes, and in exchange would have satisfied some additional want beyond the need for windows that will keep the weather out. That extra satisfaction is lost when the pane is broken. And for the rest, glaziers work more and receive more, while others work less and receive less.  
This view is certainly sound, on traditional economic assumptions; but is it all sufficient and equally applicable to all cases? The experience of the War seems to afford ground for giving the question some fresh examination. The crux of the question lies here: is the effective demand for other things, and the consequent production of other things, necessarily cut down by exactly the amount that is spent on replacing the broken panes? Or, to put it the other way around, if the panes had not been broken, would other things have been demanded, produced, and consumed to an exactly equal amount?  
As a matter of long-run adjustment, the establishment of a permanent habit of breaking some thousands or millions of panes every year might be expected to have substantially this effect. But we are not dealing with the long run results of permanent habits, but with single events which break into the customary spending and producing habits of the people; and we must examine the case at issue on that basis. Such evidence as the war experience offers is suggestive, but not by itself conclusive. For the record of a complex historical episode seldom carries within itself the proof of the precise effect of each one of a multitude of collaborating causes.  
America prospered in the period of neutrality, when it was in the position of the glaziers in our illustration. Prosperity in such a situation proves nothing that is not admitted at the start. But the suggestive thing about this prosperity is the fact that we prospered by making goods without getting paid for them. The glazier who lets his customer's bill run may be doing well by himself, if the customer is "good pay" in the end, but we should hardly expect him to live high in the meantime from his work for that particular customer. From the fact that we improved our living moderately as well as expanded our glassworks very substantially over and above the credits we were accumulating for unbalanced exports, one may conclude that the actual situation contains elements which the simplified illustration does not indicate.  
The general nature of these elements of productive expansion has already been indicated: namely, the new demand not balanced by an equal falling off in other demands, the additional derived demand for capital equipment, the increase in employment and volume of work done, and the further resultant demand for goods by more prosperous workers and other participants in the earnings of industry. The net increase in aggregate money demand was seen to be made readily possible by the elasticity of the credit system, the stimulus to production intensified by the well-known effects of rising prices, and the increased money demand, representing an increase in the world's economic necessities, was enabled to take effect as an increased total of "effective demand" for actual goods by reason of the elasticity of our productive powers, which were then, as at most times, working short of full capacity.  
It may be remarked in passing that the "elasticity of the credit system" is no matter of inscrutable necromancy conjuring something from nothing, magical as its effects may appear. Banks can multiply purchasing power because depositors are willing to accept the position of lenders without interest. Depositors do this to the extent of most of their reserves for current spendings, in exchange for the privilege of calling these deposits at any moment by the process of drawing a check. This is a painless and largely unconscious form of lending, involving no increase of abstinence. Expansion of deposits through expansion of loans finds its main base (aside from adequate cash reserves) in a quasi-automatic increase in this painless and unconscious furnishing of credit.  
Turning to the experience of our actual participation in the War, the evidence it affords on the question at issue is less conclusive in one way than the experience of neutrality, and stronger in another. It is less conclusive in that consumption of wealth did not actually increase; and it is stronger in that whatever compensating effects were secured, were secured in the face of the fact that it was now our own windows that were being broken, as well as those of our European neighbors; so that we were no longer in the position of glaziers who might expect to profit for quite obvious reasons.  
The work and materials absorbed by our window-smashings were clearly not a net subtraction from our previous or our normal activities but involved an increase in the gross total. Production increased to a limit apparently set largely by congestion of rail facilities under an abnormal concentration of traffic at the Atlantic seaboard, rather than by any more general and abstract law of economic equilibrium. Economic effort, it must be noted, increased more than results; since war production was abnormally wasteful and lavishly expensive.  
Other nations fared far worse, in this respect, than the United States. In France, for instance, the calling of the army to the colors resulted in throwing a still larger army of unemployed on the streets: a condition which was only very gradually remedied. Instead of calling the existing unemployed into the workshops to take the places of those who had gone to the front, many shops were closed because the employer had gone to the front, and his employees not liable to service were left to find new work if possible. Thus French production fell off on account of this element of disorganization, as well as on account of the more obvious and unavoidable fact that the first invasion had snatched from her an area in which a large section of her heavy industries and mines was located. In this case the smashing of windows was emphatically not "good for business."  
Further evidence might be sought in the general testimony of studies of the business cycle, to the effect that reviving demand acts cumulatively, at least within fairly liberal limits. This does not prove that an economic disaster brings an increase in effective demand for goods; but it indicates that such an increase is not impossible.  
To sum up: the effect seems to depend on the character and extent of the disaster, on the attitude with which it is met, and on the state of the credit system and of business activity in general. A disaster which does not cripple the machinery of production, of an extent which spurs people to increased efforts rather than reducing them to helpless despair, coupled with a credit system and an industrial system each of which has some unused capacity for expansion-these conditions enable a disaster to be self-repairing in part at least, through stimulus to productive activity.  
One of the penalties of increasing economic power is the need to find new forms of consumption in which to embody it. This process is tentative, risky, and wasteful. We are limited in our imagination as consumers as to the best ways to use increasing spending power: still more as producers in devising economically practicable goods which will capture the consumers' unformulated buying potentialities. Nowadays producers must, perforce, try to meet the consumers' latent desires more than halfway-to form them, indeed, in ways capable of successful and profitable gratification. But this attempt is inherently uncertain. And there is, as a consequence perhaps in part of this uncertainty and of these limits on our economic imagination, a tendency to waste capital in unimaginative duplication of existing types of facilities, to produce familiar goods. This being the case, production by these facilities is limited by the limited demand for these familiar things; the more nearly unlimited potential demand for new goods being no help to those who have not diagnosed the potentialities aright. In such a situation, anything which increases the need for familiar types of goods may be a blessed relief from the very perplexities of progress, enabling industry to go ahead with certainty and confidence rather than undertaking the more difficult task of diagnosing the consumers' unknown potentialities and devising or selecting goods to call them forth. With a known wastage to make good, industry can count on what it has to do and on the necessary instruments; and it may move forward far more rapidly and easily in repairing the known wastage than if it were doing pioneering work in developing new and untested demands. Will the new demands therefore remain just so much longer undeveloped and unsatisfied? Perhaps that question may remain for omniscience to answer. 

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