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By George P. Brockway, originally published April 6, 1992

1992-4-6 Where Schumpeter Went Astray Title

 

 

 

 

 

 

 

 

 

 

 

I N PREPARATION for my previous column I reread the passages I had underlined long ago in Joseph A. Schumpeter‘s Capitalism, Socialism and Democracy, a book whose first edition was published in 1942. The second edition appeared five years later, and the third in 1950. My copy is from the 22nd printing of the paperback edition. All that adds up to sales in six figures.

It is a curious book. Its display of scholarshiplis casual and impressive. It contains less economics than history and what the Europeans call sociology (a more humane discipline than ours). Its style is informal, worldly-wise, and generally good natured, though a bitterness lurks behind several references to John Maynard Keynes and comes forward harshly in criticism of Schumpeter’s Harvard colleague, Alvin H. Hansen, who is often meant but never named. (Hansen was a leading expositor of Keynes in America, and many now say he got it all wrong, but his possible mistakes about Keynes are not what bother Schumpeter.)

I don’t propose to review either the work or the author’s academic in-fighting. The book does, however, advance three propositions on which I would like to hang a tale or two. Number one comes at the opening of Part II: “Can capitalism survive? No, I do not think it can.” Number two is at the opening of Part III: “Can socialism work? Of course it can.” These propositions don’t look particularly plausible today, and they are not helped by Schumpeter’s reiterated disclaimer that he is not talking about the then-immediate future, but about a 50-year trend that has now run. The third Schumpeter proposition is never explicitly stated but is a two-part assumption, or definition, that underlies his whole argument. The first part of the assumption is that economics, and capitalism in particular, is about the production of physical things. The second part is that physical things are produced most abundantly when entrepreneurs are allowed or encouraged to compensate themselves at the rates roughly prevailing before the First World War. Taking account also of Schumpeter’s notions about the family, it might not be too extreme to say that the world he celebrates, and whose passing he foresees, is the world of Thomas Mann‘s Buddenbrooks.

That world has indeed passed; yet capitalism is today the survivor in its struggle with socialism. It has not, to be sure, survived unchanged. It used to be said that America’s Norman Thomas brand of socialism never came close to succeeding at the polls because the Democrats, and sometimes the Republicans, stole its best ideas. (Thomas himself once told me he thought many thousands of his votes simply weren’t counted.) But that’s not what I have in mind.

I refer instead to a change in the meaning of private property, surely a central concept in capitalism and in economics generally. In the United States the change as a matter of law was accomplished when the minority in an 1872 Supreme Court case became the majority in another case some 18 years later, or just over a century ago.

The first instance was the Slaughter House Cases, in which the minority argued that the State of Louisiana had deprived New Orleans butchers of their property without due process of law by requiring them to use a subsidized slaughter house at high fixed fees. The majority upheld the state, relying on the common-law definition of property as physical things held exclusively for one’s own use. Since the butchers still had their shops and hooks and cleavers, they were not deprived of their property, even though the high fees made pursuit of their calling impracticable. The minority contended that property necessarily included its exchange-value, or the right to use it for economic gain. Their definition of property began to appear in other state and Federal courts, and finally prevailed in the first Minnesota Rate Case of 1890.

The story is elegantly told in John R. CommonsThe Legal Foundations of Capitalism, a truly great book I’ve had occasion to mention several times in the past. As Commons points out, there is nothing in the common law or in the Constitution to support the new view. But Adam Smith could be cited on the primacy of labor and on the distinction between use-value and exchange-value; and The Wealth of Nations already had an odor of sanctity about it. More important, business practice was coming to depend almost exclusively on exchange-value. Property was no longer a datum – merely a thing. It became an idea – what you could do with it to make money.

This fundamental shift in the meaning of property was a historical turning in the development of modern capitalism – and Schumpeter missed it, or missed most of it. For when property became an idea production, too, became an idea. What distinguishes an idea is criticism. In fact, an idea demands criticism, for one idea thus leads to another. A mere thing, in contrast, is like Popeye: It is what it is. The point here is that a hundred years ago the meaning of property in the United States changed to embrace exchange-value, and that correspondingly not only the economic meaning of production changed but the function of entrepreneurship as well.

Schumpeter’s entrepreneur became obsolete, as he himself saw to some extent. “The entrepreneurial function,” he wrote, “does not essentially consist in inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done.” Increasingly, Schumpeter continued, “Technological progress is … becoming the business of trained specialists who turn out what is needed and make it work in predictable ways …. Bureau and committee work tends to replace individual action.”

That is true enough. What Schumpeter does not see, however, is that a collegial enterprise can be a far more fulfilling place to work and a far more responsible producer for the common weal than anything built around his quasi-military entrepreneur. It ain’t necessarily so, but it can be so.

The second Schumpeter assumption concerns the distribution of wealth and income, or who gets what and why. The last chapter of his book is an address he delivered to the American Economic Association 10 days before his death on January 8, 1950. In it he said, “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; or that the youngster may choose whether he wants to work in a factory or on a farm; or that plant managers have some voice in deciding what and how to produce: It means a scheme of values, an attitude toward life, a civilization – the civilization of inequality and of the family fortune.” Well, he doesn’t mince words, does he?

Three years earlier, in the second edition of his book, Schumpeter made a forecast of the likely state of the economy in 1950. As was only prudent, he protected his forecast with many provisos, the chief of which were that 1950 would be a peak year in the business cycle, and that New Deal (by then, Fair Deal) interference with business (especially price controls and labor legislation) could be curtailed. As it turned out, the second proviso was satisfied, but not the first; and he was right on the mark with one of his predictions, but far off the mark with two others.

The accurate forecast was more demographics than economics: He expected the 1950 labor force to be “something like 61 million,” and the currently accepted figure is 60.8 million. But concerning that force (and now we’re back in economics), he wrote, “I do not see that the number of statistically unemployed men and women can possibly be, in that year, below five or six million ….” Relying on similar statistics, we find the actual unemployment total to have been 3.3 million. Schumpeter went on to say, “On an average of good and bad years (statistical) unemployment should be higher than 5 or 6 million- 7 to 8 perhaps.” In fact, we didn’t hit 8 million until 30 years later, in 1981, when the labor force was over 110 million, though we grazed it in 1975, when the labor force was 95 million.

Schumpeter’s forecast of the GNP was way off in the other direction: $200 billion in 1928 dollars, as opposed to the actual $153 billion. One would, of course, expect lower unemployment to result in higher GNP, but we have a contrary picture. Can we account for the contrariness?

THE KEY IS the distribution of income. Schumpeter points out that, after a disgraceful period ending around the middle of the 19th century, the condition of the masses steadily improved. After all, capitalism is a mass-production system, while elite families’ consumption goods are custom made. “The capitalist achievement,” he writes, “does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.” The problem, though, is that the proportionate shares of the national income remained essentially the same – as Schumpeter insisted they ought to.

Capitalist industry is far more productive and efficient than Schumpeter gave it credit for. Whether run by swashbuckling entrepreneurs or by committees of colorless technicians, industry can turn out the stuff. The question is, Who will buy?

Certainly his 7 or 8 million unemployed (then about a fifth of all wage earners) on the dole wouldn’t be much of a market. Nor would the next three quintiles, whose income would be low because (according to the theory) their contribution would be low. The contribution of the entrepreneurs would be very great, but their numbers would be very small and, besides, they would not be substantial consumers of mass-produced goods. That leaves those just below the elite-say about a fifth of the population-as the only full-scale market for all of industry.

When you take Schumpeter’s figures apart and scrutinize them, you can see why his projected GNP was so far off. The stuff wasn’t turned out because there weren’t enough buyers with enough money. The actual unemployment figures were much better than his estimates, but the distribution of income was not much better, and it is not much better today.

In the world of economic models, it doesn’t matter whether the supply side or the demand side stimulates the economy. But in the real world of existing industry capable of high production, effectual demand (Adam Smith’s phrase) is primary. Schumpeter’s vision of a prosperous world led by entrepreneurial families never came to pass, because too many had little or no share in the prosperity. There was no justice in the shares, and no good economics, either.

 The New Leader

By George P. Brockway, originally published March 13, 1992

1992-3-9 The Key to Consumption Title

 

 

 

 

 

 

 

 

LAST TIME I reported why our present economic muddle should be called a “contained depression.” The term is the coinage of S Jay Levy and David A. Levy of the Jerome Levy Economics Institute of Bard College. It distinguishes our present situation from the five or six recessions we’ve had since World War I, and also from the Great Depression of the 1930s.

The earliest recessions were temporary gluts of unsold consumer goods-relatively easy to slip into and correspondingly easy to recover from. Hence President Bush‘s long mad posture of “What? Me worry? Hence the frigid, almost insolent objections of Chairman Michael J. Boskin of the Council of Economic Advisers to extensions of jobless benefits. Hence the plaintive repetitions of Chairman Alan Greenspan of the Federal Reserve Board that the present recession will be short and shallow, and that recovery will start about six months from the date on which he happens to be speaking.

As the thing drags on, I’m reminded of the Elaine May- Mike Nichols skit in which a patient complains that she has been sick for a couple of weeks with what was diagnosed as 24-hour flu. “Well,” responds the doctor after carefully thinking the matter through, “this may be something of longer duration.”

Indeed it may. What we are now trapped in is not a consumption goods glut but a capital goods glut. We have too many factories, too many warehouses, too many office buildings, too many shopping malls, too many retail chains, too many too expensive apartments, too many too expensive vacation resorts, and especially too many banks and insurance companies and pension funds with too much of the foregoing as collateral for loans.

This sort of glut is not easily worked off in the modern world. Regardless of what the Cassandras say, we’re marvelously productive. If you want more steel, we certainly can turn it out for you. Or more automobiles, refrigerators, escalators, computers. Or more houses and highways. Or more cough medicines and handkerchiefs. Or more magazines and books. Or, when the President’s four new pair wear out, more sweat socks.

We are not oversupplied with any of these things – well, not with many of them. Our inventories are mean and lean and all that, but there’s no danger of serious shortages of anything for very long. What we are oversupplied with is the capacity to make more of almost anything. We have factories and machinery and office equipment and distribution systems and office managers and workers and know-how aplenty. No problem with any of that, except that we have too much and, like the sorcerer’s apprentice, the manic capacity to make more.

An inventory glut can be handled by shutting down the factories for a few weeks or months. But what can be done with a capital goods glut? There are two principal solutions: (1) We can let the unneeded capacity stand idle until it rusts out, or enough currently used capacity wears out, to bring our capacity to produce down to the level of our capacity to consume. Or (2) We can bring our capacity to consume up to the level of our capacity to produce.

The first solution, in its more benign form, is what Joseph Schumpeter called creative destruction. Schumpeter saw the economy driven by a succession of new industries, whose birth and growth led to the destruction of large existing industries. The most familiar example is the automobile industry, with its subsidiary industries of steel, glass and so on, and its ancillary industries of highway construction, petroleum and parking facilities. The new industry gradually overwhelmed industries built on the power of horses.

That did not happen all at once. As late as the 1920s, many cities still had horse-drawn fire engines whose pumps were powered by dramatic coal-fired steam engines. As late as the outbreak of World War II, the Boston Globe discovered to its surprised delight that it had not gotten around to completely dismantling its capability to deliver newspapers by horse-drawn wagon. A few carriage makers were able to convert to the production of automobile bodies. Many livery stables became garages. But manufacturers of buggy whips provided a metaphor for progress and quietly went out of business.

As Schumpeter pointed out, the new industries were bigger and in most ways better than the ones they destroyed. Or as folk wisdom has it, you can’t make an omelet without cracking eggs. The trouble now is that there’s no great new omelet industry on the horizon. The computer industry, which many expected to save us, is itself stumbling[1].

In fact, our situation is dauntingly similar to that of 1930. The unneeded or unwanted capacity is not limited to a single doomed industry. It is universal. Its destruction – if it occurred-would not be creative. It would be merelv destruction: wasted money, wasted resources, blighted hopes. And perhaps most important of all: wasted time. Once again Bessie in Clifford Odets’ Awake and Sing! would be speaking a bitter truth: “On the calendar it’s a different place, but here without a dollar you don’t look the world in the eye. Talk from now to next year – this is life in America.”

It would take a long time for the bright new assets to rust out or the good old assets to wear out. It would take a long time for banks and insurance companies and pension funds to become solid again. It would not be a pleasant time. For millions of citizens it would be a hopeless time, made more bleak by the deterioration of their surroundings both social and physical.

It took World War II, with its enormous stimulation of governmental and then personal demand, to pull us out of the Great Depression. The New Deal had moved painfully slowly, hamstrung by a coalition of Northern Republicans and Southern Democrats, and hampered by its own emotional commitment to classical economics. (A “responsible” effort to reduce the minuscule deficit in 1937 caused an instant recession.) Yet the New Deal was open, eager, hopeful, vigorous, experimental, caring. New Dealers didn’t have to make speeches about how they cared; they showed it. In their place we have Boskin, Brady and Darman and their trickle-down schemes.

So much for the first solution to our troubles. It is no solution at all.

The second solution (bringing our capacity to consume up to the level of our capacity to produce) would seem, on its face, to be easy as pie. Consuming is what we’re supposed to do best. Shopping malls are where we shine. But all the wise men kept telling us not to consume-until Bush bought those socks. Unfortunately, now that they are telling us consuming has become patriotic, we either haven’t any spare money or are afraid we soon won’t have any spare money.

The problem is, the wrong people have what spending money there is. Worse than that, practically nobody in public life says it is the wrong people who have money to spend – except Senator Tom Harkin, and look what happened to him in the Democratic Presidential primaries.

Somehow it has become conventional to believe that the distribution of wealth or income is not the issue. Or that redistribution is not practicable. Or that it wouldn’t make any difference, anyhow.

LET ME INTERPOSE a little story. The other evening I was a dinner guest at the home of some liberal friends. There were eight of us around the table, and none of us was afraid of what the President calls “the ‘L’ word.” We are liberals, possibly even knee-jerk liberals, and proud of it. After all, some injustices are so flagrant, and some events so sudden, that decent people must respond to them semi-automatically. A liberal response is surely more honorable than a reactionary withdrawal.

Anyway, there we were, and we got talking about the very subject of this article. You will not be surprised to learn that I argued in favor of restoring steep progressivity to the income tax. And I was not surprised to be told that Robin Hood was a seductive medieval myth, that taking from the rich and giving to the poor would simply make everyone poor because the rich are so few and the poor are so many, and that soaking the rich would not much improve revenues because tax avoidance would then increase.

We have all heard that line of talk before, very likely first meeting up with it at our father’s knee, if not at our mother’s. The line may actually have been true back then (though I doubt it), but it’s certainly not true today. The average of all family incomes in the United States is somewhere between $70,000 and $80,000.  It’s difficult to be more precise, because it’s hard to agree on exactly what a family is. In any case, it’s obvious that the Robin Hood myth is not impossible today.

I don’t suppose that anyone advocates perfect equality. (Even Engels called equality “a one-sided French idea which was justified as a stage of development in its own time and place but which now should be overcome.”) Nevertheless, it is important to understand that the present distribution of income is not an aspect of the universe that we, like Margaret Fuller, had better accept. It is not the unalterable consequence of some mathematical or psychological or perhaps theological law.

A second point must be made: Any attempt to change the distribution of income will certainly give some people, including those whom Shaw’s Mr. Doolittle called the undeserving poor, some money for nothing. I’ll let you compile your own list of why something for nothing is bad-psychologically, socially, ethically-and I’ll even grant the validity of most of your reasons. But then I’ll ask you to compile a list of the Astors and Morgans and Fords and so on who got something for nothing. A wit on the New York Times a couple of years ago noted that most of the richest people in America got their money the good old fashioned way-they inherited it. Something for nothing is, Nelson Rockefeller might have said, in the mainstream of Republican thinking.

Once we have mastered the message of the two preceding paragraphs, we have earned the right to consider ways of building demand worthy of our productive capacity. We all know the most obvious ways: First, massive public works, massive support for education, comprehensive national health care insurance.

Second, an almost vertically progressive inheritance tax, a steeply progressive income tax, probably a negative income tax at the bottom, and possibly an income limitation tax at the top.

We don’t have to do it all at once. But unless we get started soon, it will be a long time before happy days are here again.

 The New Leader

[1] Ed:  OK, so even this author gets it wrong from time to time….

By George P. Brockway, originally published January 13, 1992

1992-1-13 Mister Bush Meet Mister Hoover Title

 

 

 

 

 

 

 

 

 

 

Mister Herbert Hoover
Says that now’s the time to buy;
So let’s have another cup o’ coffee
And let’s have another piece o’pie

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THE ABOVE text for today’s lesson was composed (words and music) by that universal philosopher of the American way of life, Irving Berlin. The song was the high point (or perhaps more accurately, the sardonic point) of Face the Music, a Broadway hit of 1932- just 15 presidential terms ago.

It all came back to me as I gazed in wonder at the TV coverage of President Bush‘s Thanksgiving demonstration of the propensity to consume, during which he showed how to buy four pair of sweat socks for $8.00.  I suppose the President’s handlers meant the sweat socks worn by some working stiffs inside metal-toed boots and by all preppies while jogging or playing racquet ball-to remind us that the President is a regular guy as well as a consumer doing his part to get the economy going again. But it reminded those who didn’t laugh at the spectacle that Mr. George Bush’s economic policies have a lot in common with Mr. Herbert Hoovers. That is to say, he has practically no policies at all.

Not only are President Hoover’s and President Bush’s policies similar, but so are their depressions (and ours). For what we are now mired in is something quite different from the half dozen or so recessions we have gone through since World War II.

Economists persist in calling our present experience a recession, and they are puzzled by its failure to perform like the others. Even the fact that business is bad puzzles them, because the “indicators” they take seriously have not been ominous. Their biggest worry has been that inventories might get out of hand. “The current downturn is expected to be short and shallow,” wrote the Council of Economic Advisers a year ago.

“Most firms have kept inventories low relative to sales, reducing the need for a sharp cut in production to work off excess inventories. Such inventory corrections accounted for much of the decline in output in earlier postwar recessions.”

The smallest mom-and-pop novelty store today boasts a computer at the cash register that scans bar codes, not simply to generate sales slips but also to indicate when and how much to reorder. At the other end of the spectrum, most manufacturers have long since learned how to order “just in time. Inventories have been lean and clean for several years now; yet the downturn came, and it refuses to go away.

S. Jay Levy and David A. Levy, respectively chairman and vice chairman of the Jerome Levy Economics Institute of Bard College, have a simple yet comprehensive explanation: This downturn is not a recession at all, it is a depression.  To be sure, it is a new sort of depression. They call it a “contained depression. Because Mr. Bush’s depression is “contained,” it is not likely to be so deep as Mr. Hoover’s, but it may well last as long, or even longer.

To the Levy’s, a depression is not, as it is in ordinary speech, merely a very severe recession. They agree with the majority of other economists that a recession is essentially an inventory glut, which comes about in a quasi-natural fashion in the modern economy. In the ancient and medieval worlds, most nonagricultural goods were made to order. If you wanted a pair of boots, you didn’t go to a store

And buy them off a shelf, the way Oliver North picked up revolutions. You went to a cordwainer, who would run up a pair to fit your last. In such a system there might be a glut of agricultural produce (though there seldom was), but manufactured goods were never oversupplied.

In addition, of course, few economies of scale were available; production was slow, expensive and weak. In the modern world, where most production is for sale, not for use, economies of scale are everywhere, and output is exponentially increased, as Adam Smith showed with the manufacture of pins.

But time is necessarily introduced between the start of production of goods for sale and the purchase and use of those goods by the eventual consumer. In that time, many things can go wrong (and some can go surprisingly well), because the future is unknowable.

Among the things that can go wrong is an inventory glut. This starts slowly, as optimistic producers expand output to take advantage of economies of scale. Stepped-up orders gradually push manufacturers to capacity, heighten competition for time on the machines, and result in ever larger orders (see “What Happened to Jimmy Carter,” NL, November 27, 1989, for the way  this “defensive buying” works). The increases in plant utilization naturally require increases in employment. Newly employed workers have new money to spend and encourage greater production.

At this point, manufacturers are likely to seize the opportunity to raise prices, thus depressing demand. Banks will see inflation and raise the interest rate, thus intensifying the inflation, further depressing demand, and perhaps throwing he cycle into reverse. Even without inflation an inventory glut will develop, for our irrational income distribution and usurious interest rates guarantee that workers cannot earn enough to buy what they produce.

Manufacturers participate in the buildup in self-defense as well as in search of profit. Those that don’t participate find themselves squeezed out by their more aggressive competitors. In any case, the buildup is necessarily blind and eventually overleaps itself, whereupon it recedes by stumbling down the up staircase.

According to the Levy’s, a depression, like a recession, is cyclical, and proceeds in a similar manner. It is a capital goods glut, however, rather than an inventory glut. Since capital goods typically are expensive and take a long time to produce, more money is tied up in them, and the tie up lasts longer. The Levy’s argue that what we have now is a depression. Factories, warehouses, office buildings, stores, motels, apartment buildings – all are overbuilt. The banks and insurance companies and pension funds that financed the construction are in trouble – unless they have already failed.

NOW, FASHIONABLE commentators say our problem is that we no longer compete successfully in the world market, partly because our interest rates are too high (they still are), and partly because, all of a sudden, our educational system has fallen apart. Michael Boskin, chairman of the President’s Council of Economic Advisers, testified the other day that we spend more on elementary and secondary education than any other industrialized country, except maybe Switzerland, and that our kids still perform toward the bottom. That sounds enough like the state of our medical services to be true; but if true, it is clear that we will not be able to correct the situation in the present century. In the unlikely case that Mr. Bush’s scheme of making schools compete for students were to be immediately successful, it would take 12 years for the full effects to be realized and then there would still be the problem of the colleges and graduate schools.

1992-1-13 Mister Bush Meet Mister Hoover Herbert Hoover

I’m not opposed to doing something about education (though I am opposed to Mr. Bush’s scheme), but it won’t make us internationally competitive overnight. As I have said before (“The Productivity Scam,” NL, May 28, 1984), I don’t take seriously the underlying notion of productivity. More to the point, the United States of America is not the only nation that is smothered in overcapacity. Every industrialized and partially industrialized country in the world is, too. Plants everywhere are standing idle because plants everywhere are capable of choking us to death with steel, automobiles, TVs, cameras, toaster ovens, and sweat socks. Indeed, they are already choking us with them.

This worldwide overcapacity means that there is no quick solution to our depression. Nevertheless, our depression will, as the Levy’s put it, be contained. In the United States, banks fail and will fail, but there will be no runs on them, as there were in the Great Depression, because the Federal Deposit Insurance Corporation exists. Businesses as remarkable as Pan Am will fail, but there will be no panic selling of assets, because big government will, budget agreement or no, prevent a free fall.

In Mr. Hoover’s day, the government accounted for less than 3 per cent of GNP; in Mr. Bush’s, it accounts for almost 25 per cent. Mr. Bush thinks his 25 per cent too much (as Mr. Hoover thought his 3 per cent), but it is our true safety net. With that high percentage of GNP assured, plus its multiplier effect on the rest of the economy, we will not drop to the lowest depths.

On the other hand, we may be truly depressed for years or decades to come. The glut of capital goods that caused the Great Depression was not absorbed until World War II. There is no reason to expect our present glut to be more tractable. The American oversupply is probably greater now than it was then, and the worldwide oversupply is certainly greater.

Yet I detect a glimmer of hope. Today the richest 1percent of American families have as much income as the poorest 40 per cent. That’s outrageous. But in 1929, on the eve of the Great Depression, the richest 0.1 per cent had as much as the bottom 41 percent. We are, in a manner of speaking, 10 times better off now. The way to put the oversupply of capital goods to use is to draw the bottom two-fifths of us into full participation in the economy. That will not be easy, especially since we have, for the past 15 years, been going hell-bent in the opposite direction. The tentative appeals to “fairness” that the Congressional Democrats made in the budget debate are only a faint promise of a beginning, as are some proposals now coming before the Joint Committee on Taxation. Yet all are opposed by Mr. Bush and his men.

In another column I’ll try to suggest some specific things to do about our predicament. In the meantime, be sure you have plenty of sweat socks.

 The New Leader

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