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Fluctuations in Economic Processes

( Originally Published Early 1900's )

IF the population of the country were nearly invariable ; if each individual of that population ate the same quantity of each kind of food year after year ; if he wore the same kind and number of clothes; if there were no change of fashions in life ; if no improvements were made in the mode of supplying wants, then there would be no great fluctuations in business. Every producer would know beforehand how much of his product would be demanded by the community, and at what price; he could make his calculations and employ his la-borers accordingly, and those embarrassments which so trouble the whole business community would be nearly unknown. As a matter of fact, however, modern improvements in organizing the productive capacities of society have introduced fluctuations in nearly every department of trade. What was fashion-able last year in ladies' wear is not fashionable this year; and what is now fashionable may not be wanted hereafter. Thus manufacturers and dealers are in a state of uncertainty as to what product they should make in order to meet the future demand, and have to run the risk of losing money by making what they cannot sell, or of failing to gain a profit by not making what is wanted. If every producer could make one thing as easily as another, and if the machinery constructed for one purpose could be applied to another, the drawbacks arising from this cause would not be serious. But neither the machinery nor the operatives of _a great factory can suddenly change their work without loss. The greater part of the machinery of almost any great factory would be nearly worthless for any other purpose. Yet, since the demand does change from time to time, it is essential that, so far as possible, many agencies employed in production shall admit of being adapted to a new employment. We have to consider how this adaptation is effected, and at what disadvantages. We begin with changes in the pursuits of men.

Changes in the Direction of Labor. It is sometimes assumed that there is no power of adaptation among men, and that they are as incapable of turning to new employments as the machinery in the factory is of being turned to new uses. Of course this is a subject on which we can lay down no universal propositions, because the case differs with different men and with different employments. The inhabitants of some countries have much more versatility than those of others. Americans are supposed to possess this quality in a high degree, and are, among all people, those who are best able to change their occupation in obedience to a change of demand. The watchmakers of Switzerland and the spinners of Manchester approach the other extreme, in being able to do little but what they have been taught to do. Again, adaptability varies with the nature of the employment. As a general rule education increases this quality, while a lifetime of training in a specialty diminishes it. A professor of one science can commonly teach another, and a merchant who is successful in one kind of trade can generally change to another. On the other hand, the cases in which mechanics can change their occupation without disadvantage, though not rare, are exceptional, and more exceptional as the occupation is specialized.

We have now to show that although men may not be able to change indifferently from one occupation to another, yet, indirectly, industry may be diverted from one occupation to another without serious disadvantage. We may place the question in the following shape : From the fact that a shoemaker cannot make clothes does it follow that, in case fewer shoes and more clothes should be required, the producers of shoes and clothes cannot adapt their production to the new state of things? The answer is, it does not so follow. Productive industry may be changed from one channel to another without individual men changing their occupation directly from one to the other. The change may be effected in two ways, which we shall illustrate by showing how a. certain amount of industry could be changed from the occupation of making shoes to that of making clothes.

It must first be remembered that, from various causes, men are continually leaving each occupation and new ones are taking their places. They are leaving in consequence of death, of old age, of inability from various causes, as well as from change of occupation. If no new hands should engage in the work of making shoes during the next ten years, it is highly probable that the number of persons engaged in the occupation would be reduced to one half through the causes just cited. This may even be an under-estimate; it is not unlikely that from ten to twenty per cent leave the occupation every year. Now, there are few if any commodities the want of which by the community can fall off permanently in a more rapid ratio than this. Hence diminished demand for any one commodity may be completely responded to by no new producer undertaking the work of producing that commodity.

Conversely, it is readily seen that an increase in the production of clothes can be brought about by a corresponding increase in the number of young men and women who learn to make clothes. Thus we have industry changed from shoemaking to clothes-making, not by individuals passing from one occupation to the other, but simply by having those young men who would have joined the ranks of shoemakers change their purpose and join the ranks of tailors.

The other method of making the transfer is also an indirect one. Let there be an increased demand for clothes and a diminished demand for shoes. It will be found that a certain number of persons now engaged in miscellaneous occupations can forsake those occupations and become tailors. Perhaps they were once tailors. Let the occupations they leave be A, B, and C. Then we shall have occupations A, B, and C requiring additional laborers to fill the vacancies thus arising. Some of these vacant places may be filled by the shoemakers. If the shoemakers themselves cannot fill them, other people can do so whose places the shoemakers can take. There may be a chain of any length, occupation Z being sup-plied from occupation Y, occupation Y from occupation X, and so on, until we find one which is supplied by the unemployed shoemakers. Now since in all these operations the number of people engaged in these intermediate occupations has remained unchanged, while there has been an increase of tailors and a diminution of shoemakers, the result is the same as if a certain number of shoemakers had changed their occupation to that of making clothes. We may therefore assume that it is possible for industry to change from one occupation to another in response to the fluctuations of demand, and that this will result in the same way as if every producer could change from one occupation to another at pleasure.

Competing and Non-competing Groups. Are we to assume that there is no limit to the changes which may thus be made in the industry of a country? Can every occupation be indirectly recruited from the ranks of those engaged in any and every other occupation? It is evident that we cannot answer this question absolutely in the affirmative. It is certain that an increased demand for college professors and railway. directors cannot, even indirectly, be immediately responded to from the ranks of day-laborers. On the other hand, it is equally difficult to lay down an absolute line and say that no person from below this line can step above it. We must admit that an increased demand for college professors could be partly met by promoting teachers of high-schools ; the places of the latter could be filled by teachers now of a lower order, and these places again might be filled by men in various ranks of life who possess the art of teaching; their places by men of a lower order, and so on ; so that it is difficult to say just where the limit would be found.

If, however, we go in the opposite direction, we shall find limits which, though not absolute, cannot be far overstepped. As a general rule it will be impossible for the class of unskilled laborers to engage in any occupation requiring skill, how great soever may be the demand. The very fact that they are unskilled laborers shows that they do not possess the qualities necessary to fill higher places. The latter command higher wages ; and the fact that they are unable to command these wages shows that the defect is inherent in their constitution, and cannot be overcome, how great soever the inducement offered. They can change from one unskilled occupation to another : ploughing, tending horses and cattle, digging streets, planting, driving carts, and carrying hods are all open to them. In fact, it might be considered that the range of their possible occupations is wider than in the case of any other class, since there is no limit to the number of little things which a community would like to have done to promote its pleasure. Every owner of an acre lot would like to see it cultivated and planted with flowers; improved streets are needed in every city; with every increase of population more labor must be devoted to cultivating the ground. The result is that the demand for unskilled labor, although in one sense not large, yet in another sense is unlimited; and it is not an exaggeration to say that the unskilled laborer has more employments open to him in his grade than any other member of the community.

Skilled labor may be defined as that which requires a longer or shorter course of training in the use of the eye and the hand, but which does not require any training of the intellect. Since intellectual labor is generally more agreeable and better paid than skilled manual labor, it may be generally assumed that those who engage in the latter are incapable of the former. Yet the line is not at all impassable. The most we can say is that only a small minority can pass it. Moreover, skilled laborers are those who find it most difficult to pass from one occupation within their plane to another. The case of vacancies in the ranks of tailors being filled from the class of shoemakers is an extreme one. It is much easier for either the day-laborer or an educated man to pass from one occupation to another than it is for a skilled laborer to do so.

The class of intellectual laborers, or those engaged in occupations requiring a high degree of education, can' generally change their occupation upon their own plane without difficulty. But even here all occupations are not open to all educated men. An increased demand for eminent lawyers, skilful surgeons, and eloquent preachers cannot be responded to by any great increase in the number of those who can perform such functions. The response comes in the shape of increased prices for their services.

There is a grade which may be economically considered as yet higher, with which no competition from the lower grades is possible. It is that of the great organizers and administrators who manage the business affairs of the country. An increased demand for railway presidents can with difficulty be met. The number of people who can successfully carry on the operations of a great factory is very small. Correct judgment of demand or supply in the market cannot be bought for money. No amount of training can make a great novelist without natural qualities to begin with.

The idea of dividing the industrial population into non-competing groups was first worked out by Mr. Cairnes. He supposed a division into four groups instead of three as is sup-posed above. "First, at the bottom of the scale there would be the large group of unskilled or nearly unskilled laborers, comprising agricultural laborers, laborers engaged in miscellaneous occupations in towns, or acting in attendance on skilled labor. Secondly, there would be the artisan group, comprising skilled laborers of the secondary order—carpenters, joiners, smiths, masons, shoemakers, tailors, hatters, etc., with whom might be included the very large class of small retail dealers. whose means and position place them within the reach of the same industrial opportunities as the class of artisans. The third layer would contain producers and dealers of a higher order, whose work would demand qualifications only obtainable by persons of substantial means and fair ,educational opportunities —for example, civil and mechanical engineers, chemists, opticians, watchmakers, and others of the same industrial grade, in which might also find a place the superior class of retail trades-men; while above these there would be a fourth, comprising persons still more favorably circumstanced, whose ample means would give them a still wider choice. This last group would contain members of the learned professions, as well as persons engaged in the various careers of science and art, and in the higher branches of mercantile business."

It is not possible, however, to assign any definite. number to these groups; indeed the term group is used to facilitate the thought rather than to express the fact. The difference between men is one of degree and not of kind, the main fact being that each employment is open only to a limited class, and that the higher the employment the more limited is the class which can engage in it.

The conclusions hereafter to be drawn from this grouping of men are of the utmost importance in estimating the effect of changes in production upon the welfare of the different classes of society. All such changes are productive of increased demand for some kinds of services and diminished demand for other kinds. If these variations of demand can be met by corresponding changes of occupation, either directly or indirectly, in the ways pointed out, the equilibrium will be kept up. If they cannot be so met, there will be a disturbance of the equilibrium, to be re-stored only by a different scale of relative wages; one class commanding more, and another less, after the change. To foresee the effect of these changes we must refer principally to the past to see what their effect actually has been. In special cases, however, the principles above laid down will generally enable us to reach a fairly definite conclusion.

Transformability of Capital. Capital admits of being changed from one form to another, as labor admits of being employed; in one direction or another. The transformation cannot be made so speedily as the transfer of labor; but, if we take time enough, there is no limit to its extent, as there is in the case of labor, A cotton factory can be changed into an iron ship with more economy than a hod-carrier can be turned into a lawyer. it is true that the transformation of capital necessarily involves a change in the direction of labor, but this change is mostly from one employment to another of the same order, and can be effected in the way just pointed out.

When we speak of such a transformation as that of a factory into a ship, we of course use the word in a different sense from that employed when we speak of transforming wool into cloth. To effect the transformation it is not necessary that any portion of the factory should be used in the ship; the result is brought about through changing the direction of labor from the work of keeping up the factory to the work of building the ship. The possibility of this being done without a total loss of all the value invested in the factory arises from the fact that the latter is continually wearing out, or, as already shown (14), capital, like every other kind of wealth, is undergoing a constant -process of consumption. The consumption of wealth which is capital differs from that of wealth which is not capital, or unproductive consumption, in this: that the value consumed is, in the case of productive consumption, reproduced under a new form and in increased amount, while in unproductive consumption we have nothing to show for the thing consumed except the benefits rendered to the consumer. Since the value remains unconsumed however the capital may be transformed, it has the permanence of an invested fund. Thus, a man who has saved a sum of money may have it today in the form of wool, to-morrow in the form of cloth, and the day after, through selling the cloth and buying boots, he: may have it in the form of boots. His fund will have remained unaltered, notwithstanding the variety of forms which the wealth represented by it has undergone.

Fixed capital is being consumed, as well as circulating capital. The rates of consumption are, however, very different in different cases. Great public buildings may last for centuries. A canal, if kept in repair, will last as long as the geological conditions of the country through which it passes remain unaltered. The buildings of a factory will probably be nearly worn out in the course of one generation, and its machinery in a few years. Thus, in order to keep up the fixed value of all the cotton factories of a state, it is necessary to continually spend labor in repairing all of them, and in rebuilding those which get worn out.

Suppose, now, that the business of manufacturing cotton be-comes unremunerative, while that of trade with foreign countries becomes remunerative. Since trading requires ships, the prosecution of this remunerative business will require the building of ships. Let us imagine that ten manufacturers have each been devoting $5000 per annum to repairing and keeping up the machinery and buildings of their factories, and that without such repairs the machinery would be worn out in ten years. They may then say : "It is no longer profitable to spend money in keeping up our machinery and our buildings ; we had better devote the sum which we have been spending in this way to the building of ships." If ships costing $50,000 each were the most profitable, the manufacturers could, with the money thus withdrawn, build one ship a year. This would require a diversion of labor from the work of repairing factories and machinery to that of ship-building. These two kinds of labor being of the same order, the change could be effected without any great economic disadvantage. The result would be that at the end of ten years the value of the factories would all have disappeared, and in its place would have appeared ten ships. During the whole process of change we conceive that the capital of the manufacturers remains unaltered, the diminution of one kind keeping pace with the increase of the other kind, but the practical result would be that their factories would have been transformed into ships.

This particular example of transformation is perhaps the most difficult and troublesome, and we have selected it as an extreme case. The proposition we wish to enforce is that capital may change its form to correspond to any change in the direction of industry, provided due time be given to effect the transformation. In ordinary cases the transformation can be effected simply by no new capital being invested in the less profitable enterprises. In a growing country new factories are constantly being built and new enterprises undertaken. If any manufacture, that of cotton, for example, becomes unprofitable, it is certain that by erecting no new buildings or machinery for this manufacture, the proportionate amount of capital invested in it will diminish through the new investments of capital being diverted to other enterprises.

Inequalities in Economic Processes. The inequalities described in the preceding section are those which arise from changes in the demand for products, some being in demand at one time, and others at another time. But there are also fluctuations which do not arise from this cause alone, but which are unavoidable under almost any circumstances. To understand them, let us begin by imagining all the operations of production, exchange, and consumption to be going on with perfect regularity. We have first to show that under fixed conditions, that is to say, on condition that the quantity of every commodity produced and consumed remains unchanged, the transaction of a certain fixed amount of business is then necessary. If we trace the processes of manufacture, we shall find that the number of exchanges which have to be made are dependent upon the circumstances of the case; that to increase them will cause unnecessary waste, and that they cannot be diminished without the efficiency of the processes being impaired.

Take for example our old case of the coat. The farmer who shears his sheep has very little knowledge of the location of the various factories for making wool into cloth. He cannot, therefore, sell directly to the manufacturers without running the risk of failure in finding the best market. Quite possibly he does not even know how or where he ought to send his wool. He therefore sells to some jobber whose business it is to know where wool is demanded and at what price. This is the first necessary exchange. If this jobber is himself acquainted with the wants of all the factories, or if the managers of the latter know where to find him, he will sell to them, making another exchange. It may, however, happen that a second exchange or even a third is necessary. There may be one dealer between the jobbers in the great central markets and the farmer, and there may be another between the jobbers and the manufacturer. Whether there shall or shall not be such "middlemen" is a matter depending upon the knowledge of the course of trade possessed by the various parties concerned, especially by the manufacturer and the farmer. This knowledge is one of the conditions which we suppose to remain unaltered, and thus the number of exchanges necessary for the most advantageous transfer of the wool from the farmer to the manufacturer are fixed.

When the manufacturer makes the wool into cloth he finds it more convenient to sell to cloth dealers than to the tailors who make it into cloth. One reason of this is that each tailor wants a great many kinds of cloth, coming from numerous manufacturers, while the products of each factory have to be divided among innumerable tailors. If then every tailor had to get each kind of cloth directly from the factory where it was produced, there would be a very troublesome number of transactions. So wholesale jobbing houses are established to purchase various kinds of cloth and sell it to tailors and other manufacturers of clothing. Quite possibly great manufacturers of clothing may find it to their interest to buy directly from the factory. Whether this be so depends upon their knowledge and upon the conveniences of business, and not upon the state of trade.

What is true of the making of wool into a coat is true of everything we wear or use about our houses. So as long as our means and our wants remain unchanged the population at large requires annually a certain definite number of suits of clothes, a certain number of houses, a certain number of loaves of bread, a certain quantity of beef and pork, and a certain supply of furniture. If every one supplied himself with these commodities at a uniform rate, or even if the rate were uniform for the general average of the community, then there would be no disturbance in the course of trade. The quantity of goods of every kind which every dealer could sell would be nearly the same month after month and year after year. Demand would change only with new sources of supply or new uses for commodities.

But the more rapidly society progresses the less is any such uniformity possible. The disturbances come from both ends of the line: from the consumer and from the producer. Some cause may lead a large body of the community to economize in the use of clothing. Then there will be a stagnation in all the operations of making and selling clothing, or of doing anything which is necessary for that purpose. When the occasion for such economy arises it is generally practised upon all articles of current consumption. When this is the case business generally is said to be dull. If some cheap substitute for a commodity be found by producers, then all business which consists in exchanging that commodity will be dull. Competitors capable of producing cheaper goods engage in production and lead to the old producers being no longer able to find a market without lowering their prices. They are perhaps driven out of business, and thus another perturbation occurs through trade having to find new persons for its managers. The conception which has now to be formed is this:

Firstly, we are to imagine a regular stream of commodities going through the various processes of production and consumption. The stream of wool passes from the prairies over certain railways, through certain warehouses and factories, and terminates in the form of clothing. The stream of logs is flowing from our northern forest down the Mississippi and other rivers, through saw-mills, over railways, and into our houses. A stream of cotton is passing from various points in the Southern States, flowing into ships and there dividing, one portion crossing the Atlantic and another portion finding its way to New England factories. A stream of wheat has its origin at various points in a large extent of country, flows over certain railways and into certain cities, passing into flouring-mills, flows from them over other railways into bakers' shops and into our houses, where it ends in bread. Streams of pork are going over nearly the same routes. A stream of hides is flowing out of Texas towards our Northern States.

Secondly, we can imagine a regular and normal state of things so that all the streams would flow out at a constant and uniform rate. Then the exchanges which they imply would be definite in number, and would be invariable except as population, production, and consumption increased at their regular rate.

Thirdly, as a matter of fact they do not flow at a regular rate, but rather in a series of waves. Of course an annual wave in most original productions of the soil is unavoidable, since we have a wheat-crop and a wool-crop but once a year, and each at a particular season. But these annual waves are soon smoothed off. Other waves rise from changes in the foreign demand. All these fluctuations are a necessary incident of economic operations, and do not imply anything abnormal in the conduct of society.

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