Deceptively Obvious Economics

By George P. Brockway, originally published November 4, 1996

1996-11-4 Deceptively Simple Economics Title

I WANT TO tell you about a new book you probably will not quickly hear about elsewhere. It is not the sort of book most newspapers or magazines notice, because it is a serious work on economics and full of unfamiliar ideas. Nor is it the sort of book professional economics journals review, because it is not narrowly technical and the author is not a professional economist.

The title is Leakage: The Bleeding of the American Economy (368 pp., $39.95). The author is Treval C. Powers. The publisher is Benchmark Press.

Leakage is an extraordinary achievement- a careful, probing, empirical analysis of the American macro-economy and, a fortiori, any free-market economy in the modem world. It is relevant for economic theory and turns a strong light on many dark and murky notions that are today taught in the colleges. It is also relevant for policy and hence for politics.

Powers’ argument is deceptively obvious. What he calls the Composite Producer, or the producing economy considered as a whole, pays people money for the use of their labor and their capital and their land to produce goods and services; there is, ultimately, no other source for money income. The Composite Consumer, or all the people considered as a whole, uses the money (wages, rent, interest, profit) to buy what has been produced; there is no other way the economy can recoup the costs of the goods and services that have been produced.

So far, one might think this is merely another form of Say’s law that production creates its own demand, or of its contemporary version, the supply-side delusion. But the conclusions of Say and Powers are almost diametrically contrary to each other. Say wrote: “It is the aim of good government to stimulate production and of bad government to encourage consumption.” In contrast, Powers writes: “Receipt of income from the nation [i.e., the producing economy] entails a responsibility for the spending of that income. Failure to spend income for goods and services must be seen as a transgression against the weakest and most vulnerable families of the nation.”

Powers notes that the Composite Consumer doesn’t spend all of its income, with the result that the Producer increases prices and reduces expenditures for labor and capital use. Production necessarily drops below the optimum. A freefall, however, does not ensue, because the Composite Producer is continually introducing efficiencies in production processes and creating new products.

Studying a run of the Statistical Abstract of the United States, Powers finds that in the American economy, in good years and bad, the annual cost of producing and maintaining capital goods and services is a quasi-constant, never varying much from 20 per cent of the total cost of production. This quasi-constant and several others, Powers observes, will require further analysis (one of Leakages virtues is that it opens avenues for further research), for substantial reform of the economy is likely to depend on their interrelationships and on the internal organization of at least some of them.

Given present circumstances, it seems evident that aggregate investment will not be increased without increasing aggregate consumption. Thus, the supply side cry of both classical and neo classical economics; that we must curtail consumption in order to save, and that we must save in order to invest, is hopelessly wrongheaded.

Flying in the face of ascetic moralizers since the beginning of time, Powers shows that saving, or non-consuming, not only fails to boost production but actually lessens it. He writes, “When the demand for consumer goods and services is reduced, so also is the demand for capital expenditures. They are not independent variables.”

Saving-both personal saving and undistributed corporate profits-is the main example of what Powers calls “alpha leakage.” A certain amount of alpha leakage, mainly cash balances for routine transactions or as bank reserves, is unavoidable and fairly constant. Ordinary savings by some people for retirement, education and emergencies do not upset the economy, because they are roughly balanced by other people spending previous savings for the same purposes.

The rest is a consequence of maldistribution of income, whereby some people receive more money as wages or capital income from the production of goods and services than they know how to spend on them. So long as domestic (not foreign) goods and services are involved, sumptuous or extravagant expenditures are not economic leakage, but of course they may be deplored on other grounds.

In this connection, Powers makes another observation that flies in the face of conventional wisdom: Because government does not save, but spends its entire income on goods and services, taxation “cannot be a source of leakage and reduction of output.” Aggregate demand (and hence production) is increased by taxation of income that would otherwise have leaked from the economy, whereas taxation of personal or corporate income that would have been spent on goods and services has no effect on aggregate demand, though it certainly affects individual demand.

There is another type of leakage-Powers calls it “rho leakage”-that consists of money lost or denied the economy by constrictive policies of the banking system (in recent decades the Federal Reserve’s misconceived specialty), by bank failures and business bankruptcies, and by stock market crashes. (I’d add bull markets as well as bear markets; see Taking Stock of the Stock Markets,”NL, July 11, 1988.) Rho leakage is much more volatile than alpha leakage.

ANALYZING published government statistics, Powers is able to estimate what the American rate of growth might have been if there had been no leakage, what it actually was at any point since 1900, and over five year periods dating back to the end of the Civil War. You will note that Powers is concerned with the rate of growth, as befits a dynamic economy, whereas conventional economics is generally satisfied with statistics of absolute growth. Because the rate of growth is at issue, Powers gives us a whiff of elementary calculus. At this point some may want to follow the advice of the famous footnote in The General Theory where Keynes writes, “Those who (rightly) dislike algebra [and calculus] will lose little by omitting [this] section of this chapter.” In any event, Powers performs the necessary operations for us and gives the results in 48 useful tables and 32 clear, elegant graphs available nowhere else and alone worth more than the cost of the book. In this space it is possible to suggest only a few of his conclusions:

  • “Virtually every transient feature of economic behavior is a consequence of decisions and actions of persons in control of public economic policy.”
  • “Irregularities of performance are related to maldistribution of income.”
  • “Because they believe that the progress of the GNP over a period of several years reveals the growth capacity of the nation, economists generally underestimate the actual capacity.”
  • “Monetary restraint had no remedial effect on inflation; on the contrary, it always raised the price level.”
  • “Growth never required a relative increase of investment.”
  • “There is no connection between employment and monetary stability”
  • Deficit spending without appropriate taxation is “a way of transferring income from the general population to the wealthiest minority of it.”

The book’s final chapter is an analysis of inflation similar to that of the late Sidney Weintraub, a frequent contributor to these pages. Despite intense union activity during most of this century, the wage share of business income has not substantially changed. The reason is that struck corporations seldom give raises unless they can also raise prices. It is noticeable that the general price level increases most in years of heavy strike activity. Powers’ solution, that strikes be forbidden except for a share of dividends, is probably unconstitutional.

I must confess that Leakage has a special fascination for me because its author took up economics after retiring from an internationally recognized career as a research chemist, while I took up economics as I approached retirement from a background in literature and philosophy and a career as an executive of a small independent corporation largely concerned with the liberal arts. Despite our widely disparate backgrounds and habits of thought, we reached essentially identical positions on point after point. That these positions are, more often than not, identical to those previously taken by Keynes (whose background and habits of thought were certainly different from either of ours) is, at least for me, an additional reason for taking this original book very seriously indeed.

Leakage will prove valuable to anyone actively concerned with economics, politics or recent American history. Highly recommended, as you may have gathered.

The New Leader

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