Chapter II:
Can We Return to the Pre-War Bases?
The Social Mechanics of an Expansion Era
THE only conclusive test of the workability of a social system must be that of survival. But if one is to help choose the successor system and to shape transitional developments, one must recognize the beginning of the end long before the end is a demonstrable fact. Whatever may be said in derogation of the accuracy of Marx’s predictions of the doom of capitalism, it must now be admitted that those predictions were a useful formula in preparing hard-minded Marxists like Lenin and his best associates for effective action in such a social crisis as that through which Russia went in 1917.
On the other hand, it now seems evident that the best liberal teaching of two centuries had not so prepared Kerensky and scores of other liberal leaders of the post-war era. Mussolini was well prepared for social crisis by a mental formation in the thought of philosophers like Nietzsche, Sorel, Marx, and Pareto, none of whom could claim Mussolini as a disciple and no two of whom were at all alike in their philosophies except, possibly, as to a general rejection of the assumptions of liberal philosophies. And so it may be said that while one can never prove in advance of the event the final collapse of a given social order, one does get a splendid preparation for the event, whenever it occurs, if one has previously formulated a clear hypothesis of trends which always move in that direction long before the event takes place.
The case for the unworkability of the liberal capitalist system can be built squarely and securely on any honest attempt to answer certain questions which I shall try to state and discuss in this and the next five chapters. The first question, or group of questions, and the subject of this chapter, is: Can we return to the pre-War formula of settling new territory with a million European immigrants a year, preempting vast natural resources for the sale of which there is an assured world market, and capturing new foreign markets for a steadily expanding output of manufactured goods?
That, in the thesis of this book, is the only sound or workable liberal capitalism, and that, it is held, can be workable only during the comparatively limited period of a century or so, while the settling, grabbing and conquest of new resources and markets are possible. A second question is: Can we, in lieu of being able to finance expansion of the pre-War type, resume the — roughly — 1915-1929 formula of financing consumption-consumption of munitions to kill people, or consumption of innocent and desirable things, like better homes and automobiles for people who have not enough money to pay for such things under the system when soundly run? In the thesis of this book, financing consumption of things by states, cities or individuals for which they haven’t the money to pay, although it produces a happy state of affairs while it lasts, cannot be a workable formula for liberal capitalism.
A third question is: Can we go on under some depression formula (Great Britain has been on one since the War) of supporting from a fourth to a third of our working population in unproductive and discontented idleness, and thereby preventing a financial and social crash, by means of huge yearly governmental deficits or by means of sufficiently heavy taxation to avoid the deficits? (Great Britain reduced her deficit by repudiating her obligations on her sterling debt and by defaulting on her obligations to our Government.) A fourth question is: Can we effect a sound world economic reorganization so as to put the old system in a better position for a fresh start, assuming satisfactory operating conditions are attainable? That is to say, more concretely, Can we reduce debts to manageable proportions without causing too much of an upset through the results for the creditors? Can we restore comparative freedom of international trade and investment, restore confidence in future credit contracts by currency stabilization on a permanently sound basis, and liberate such things as prices, wages, supply and demand from disturbing political interferences, which are destructive of sound capitalism, without being constructive of a workable socialism?
The question whether we can go back to the i9th century or pre-War formula, of expanding population and exploitation of new territory and markets, is obviously answerable only in the negative. Developing the answer must be largely a matter of explaining the laws of population growth, for capitalism is as population grows.
With a rapidly expanding population, serious political obstruction of capitalist ways, or attempts at maintenance of wages above a given minimum at which production is profitable, cannot prove effective. The rapidly expanding labor supply flouts all such attempts. The fact that real wages rose during a period of large labor supply and comparatively little political interference, though there was some unimportant labor union interference with wages, is easily explainable by the accompanying facts that, during the same period, the supply of good land and natural resources for exploitation, as well as the efficiency of the techniques of production, were increasing more rapidly than the supply of labor. Briefly, then, the supplies of labor and natural and technical resources for capitalistic exploitation were increasing at a rate to make capitalism workable, which is to say, profitable; and the supply of natural resources and productive techniques were becoming available fast enough to insure steady improvement in the lot of labor. The capitalist thrived and the worker was content not to interfere seriously or politically with the system.
What has made capitalism a workable system has never been stability or slow growth. Capitalism has worked only to the extent that it has been able to grow in geometrical progression or at compound interest. The possibility of compounding the return on the total investment is necessary in order to keep up continuous reinvestment in capital goods. Continuous reinvestment in new capital goods is necessary, in turn, in order to keep up employment if certain receivers of income receive more than enough for their current consumption. Every intelligent exponent of the present system, whether a practical business man or a professional economist, has only to offer, as the way out of the depression, a revival of new capital investment. There are wide differences of opinion as to what are the best policies for inducing an increase in new capital investment but never as to the necessity for such investment.
It is not recognized that in the present depression we may be facing the challenge of a physical or mathematical law which, at last, is becoming operative in respect of the growth of capitalism. The ideas that, according to mathematical and physical laws, every quantity which grows by geometrical progression or at compound interest must in a comparatively short time reach the top of its growth curve, and that the total volume of capital invested for a return is a quantity which has to grow at compound interest if the capitalist system is to work, have simply not been tolerated in any respectable body of theory or teaching about our present social order. For over a century of rationalizing capitalism, these simple and obvious ideas have been rigorously excluded from every important body of social doctrine except, of course, that of Marxian communism. Even the harshest critics of modern capitalism have never for a moment questioned its ability to go on growing indefinitely in geometrical progression. During the past six years of the depression, even, it is little less than surprising that reforming liberals of the Nation and New Republic types, or avowed socialists of the Norman Thomas type, have continued to assume that recovery from depression is well nigh automatic and virtually inevitable. Now, the laws of mathematics and physics as to every compound interest growth curve flattening out and turning downwards at some point, do not indicate that this particular depression must be the last in the history of modern capitalism. But these laws do prove that there must be a last depression, and that its coming cannot be a matter either of millenniums or centuries. With this fundamental proposition established as a basis for discussion, instead of the classical assumption that, as human wants are insatiable and as physical resources for their satisfaction are far from being fully used, capitalistic investment the world over can continue indefinitely to compound as it has done for a century or so, it becomes a relatively easy matter to deduce from many of the signs of the times that the culminating point in the growth curve of capitalistic investment has been, or is now being, passed. The simplest and most obvious fact indicating this deduction is that of the failure of vast accumulations of current savings, or of immense credit potentialities of our banking systems, to make new investments.
The point of this chapter is that liberal capitalism, involving among other things, as it does, a quantity of profit yielding investments, furnishes no exception to the mathematical laws of growth. Liberal capitalism has not the quality of being able to go on growing as nothing else on this planet can go on growing. If any one is inclined to question that liberal capitalism was ever supposed to be an exception to this rule, let him but read either the dry-as-dust economic texts or the bigger and better business propaganda of any period during the past hundred years. This contrary-to-fact assumption of the possibility of indefinite growth for capitalism was never expounded with more confidence, absurdity, or scholarship than during the five years just preceding 1929, all of which merely proves that the social sciences are merely the sciences of propaganda, and operation of the existing system, and never sciences of detached observation and description of the existing system.
Mathematicians and natural scientists have understood the laws of growth for generations. It is taking the world crisis, and Lenin, Mussolini, and Hitler to teach the social scientists of liberalism that this old law of growth applies to accumulations of income producing investment as well as to everything else that grows in quantity. It is the same law that explains why the descendants of two flies, two guinea pigs, two fish, or bacteria spores, do not and cannot cover the face of the earth in six months or some brief period of time, according to the initial rate of reproduction. If one cent had been put on compound interest, annually at one percent by a Garden of Eden Investment Trust 6000 years ago, the present fund would be large enough to make every one of the two billion inhabitants of the globe worth about a half a quadrillion dollars. The total wealth of the globe probably does not exceed two trillion dollars, as values are now computed.
Two rather simple series of events prevent the multiplication of any biological species in geometrical progression or at a compound interest rate: The first of these events is the failure to find enough food (in the case of reproductive capital the failure to find profitable markets). The rapidly multiplying creatures soon begin to eat each other, die of starvation, or get eaten by other creatures who find themselves up against the same survival difficulty. The second of these events is autointoxication. As the members of the rapidly multiplying colony attain a certain density of population, the poisons which their life processes generate kill off multitudes of them.
The laws of growth can be found in any number of works on natural science, an excellent discussion of the subject being contained in Raymond Pearl’s recent Biology of Population Growth. He points out that the laws of growth can be expressed in recondite statements or in mathematical shorthand. They amount to saying about this, Growth occurs in cycles. Within one and the same cycle, and in a spatially limited area or universe, growth in the first half of the cycle starts slowly by the absolute increment per unit of time, and increases steadily until the mid point of the cycle is reached. After that point, the increment per unit of time becomes steadily smaller until the end of the cycle.
It is self-evident that this generation is living in a period which marks the turning point in the curve of population growth of the capitalistic nations. The significance of this fact for the capitalistic system is, of course, the central idea of the present chapter.
It is seldom that people stop to think, in discussing the workability of the present system, that in the hundred and fifty odd years of the system’s modern operation, or since 1780, the population of this country has grown fifty fold, or from 2,200,000 in 1780 to 123,000,000 in 1930. The populations of the preeminently capitalistic countries show a similarly geometric progression in population growth, Britain and Germany for instances. All that is needed to give a clear and quick view of the significant population trends for the United States since 1780 is a glance at the curves of total population and percentage of yearly increase in population, respectively. Such a tableau may be found on Page 2 of Recent Social Trends, in the article on the Population of the Nation
by Warren S. Thompson and P.K. Whelpton. The population curve, after over a century of rise, is beginning to flatten out in the 20th century, and the percentage of increase has been steadily going down since the 1830’s. During the sixteen decades from 1710 to 1860, the average increase per decade was 34 percent. In the period 1860-1910 it averaged 23 percent per decade. In the two decades 1910 to 1930 it has dropped to 15 percent per decade. By the end of the decade 1930-1940, it will have dropped to 8 percent per decade.
Writing on The Population Question Restated,
Mr. Roberts, in the New Statesman of June 16, 1934 says At the present time every four female children born in England and Wales leave on the average but three female descendants. In other words, if the present birth rates continues, the number of potential mothers will diminish by one-quarter in every generation. Assuming no further fall in the birth rate, Dr. Charles says that, once a stable age composition has been reached, the population of England and Wales will in Zoo years have fallen from 35,000,000 to 6,000,000 (where it was in 1830). Should the net reproduction rate fall to two-thirds of its present figure, our total population would in 300 years drop to 45,000.
Kuczynski, an American authority on population, points out in The Balance of Births and Deaths that According to the fertility and mortality in western and northern Europe in 1926, one hundred mothers gave birth to ninety mothers only. With the fertility of 1926 the population is bound to die out unless mortality of potential mothers decreases beyond reasonable expectation.
He predicts that population will reach its maximum in France in 1937, in Germany in 1946, in the British Isles in-1942, in the
United States, a maximum of 142 million by 1960. Russia is the one large country in Europe with a rapidly increasing population. There, 100 mothers are giving birth to 165 potential future mothers.
These population figures show that even if we had not stopped three-fourths of the pre-War yearly immigration by new restrictive legislation just after the War, the time would soon have come-it is here now-when our annual quota of immigrants must be reduced to a small fraction of what it was before the War. Actually, during the past three years we have been losing more people by emigration than we have been gaining by immigration. The chief reason, of course, for the end of our population growth by immigration, even assuming no restrictive legislation in this country, is that the European countries, with the exception of Russia, no longer have a rate of population increase which affords them an export surplus.
Capitalism, as a working system, requires opportunities for profit-making. Profit-making requires the use of factors of labor and natural resources in a situation of rapidly expanding demand for their products. A growing supply of workers is not the only essential for capitalist prosperity, but it is one of the absolutely indispensable essentials. It would be difficult, for instance, to measure how much capitalistic prosperity in this country for a hundred and fifty years has owed to rising land values produced by nothing so much as rapid population growth. Many a unit of a basic industry, like farming, railroading, merchandising or amusement, has been operated inefficiently and at a loss but shown a net profit over a number of years, due solely to the sale of real estate that had doubled and trebled in value while in use. To restore this element of capitalist prosperity, rising land values, we must reverse the present trend in population increase. And none of the would-be saviors of liberal capitalism are even suggesting such a remedy. On the contrary, most of them support the demands of labor for immigration restriction and the demands of many for birth control.
The pre-War pattern of capitalism called not only for plenty of cheap labor to exploit, but also for plenty of cheap and good land, and plenty of rich but cheap natural resources to preempt and exploit. It was the cheap labor that made the resources valuable, and the cheap resources that made the cheap labor valuable. And it was an unusual combination of circumstances which made a market for the products of these combined factors of production. It should be obvious that the happy combination of factors making for an increasing volume of production and of market demand for the product could not be indefinitely maintained. The iron laws governing the phenomena of compound interest will not allow such geometrical progression to infinity.
Indeed, a stable market, or even a market whose demand increases by arithmetical progression or at a simple interest rate, would not make capitalism workable, for such a market would not provide the necessary incentives for the investment of the surplus. No; the market demand required for the healthy working of capitalism must expand at the same rate of compound interest as savings, which rate, even if it were only one percent, would turn one cent into two billion times a trillion dollars in 6ooo years and would turn the present capital of the world into some equally fantastic quantity in fifty years. Modern capitalism does not mean merely ownership of the instruments of production or private management of production. It means that ownership may take as large a cut as it can get, and that it may or may not reinvest its surplus as the prospects of profits are thought to indicate.
The feudal lord of the manor was quite as much a property owner as the millionaire under modern capitalism. He had property rights in the tools of production, and often directed some of the processes of production. But, unlike the man of property under modern capitalism, he could never make a decision in respect of his property rights one of the results of which would be widespread unemployment and destitution, for, as a practical matter, he could not expel the serf from the land or deny him the use of the land and some elementary capital for the production of food, shelter and clothing.
Modern capitalism is the first important system of property rights to allow property owners to make decisions which result in large scale unemployment. The much vaunted freedom of modern capitalism is largely a matter of the freedom of property owners from social responsibility for the consequences of their economic choices. It is a matter of the freedom of property owners not to invest their savings if the profit incentive is not considered sufficient. To say that it is also a matter of the freedom of the worker to abstain from work is to utter a shallow mockery of human necessity. The rich man is, in a practical sense, free to withhold his savings from investment. The poor man is never free in any but a legal and absurd sense to withhold his labor from the highest bidder, however low the bid, if, as the principles of sound capitalism require, so to withhold his labor is to starve. At the present time, one of the fundamental rules of sound capitalism is being violated by the payment of the dole, which prevents a man from starving and thus enables him to withhold his labor from the highest bidder if the bid is not materially higher than the amount obtainable from the dole.
Of course, the chief assumptions on which liberalism, in contradistinction from feudalism, has accorded the prevailing measure of economic freedom to capital and labor are that the profit incentive will always suffice to insure a full and voluntary use of savings and available credit in new work-making investments or enterprises, and that hunger will always insure the acceptance by labor of the highest bidder for labor. Both of these assumptions are knocked into a cocked hat by present facts. The latest figures on unemployment and the hoarding of bank credit and private savings suffice to prove that the profit incentive is not forcing idle funds and credit into new investment. And an almost universal dole is preventing the hunger incentive from driving the unemployed to accept the market wage which might be as low as, or lower than, the dole. The point of this reference to the difference between feudalism and capitalism is not to argue any proposition as to the relative merits of the two systems and certainly not to plead for a return to feudalism. The point merely is that property rights are not synonymous with modern capitalism, or that a regime respecting private property rights can also impose social responsibilities and discipline on property owners which our good liberal system and American Constitution expressly exempt property owners from bearing. The point may also be put in this way: Whereas modern liberal capitalism requires a market expanding in geometrical progression for its successful operation, other systems maintaining property rights did not require any such rate of market expansion.
If modern capitalism simply meant private ownership and management of the factors of production with a view to yielding owners and managers a return for ownership and management (such return to be fully consumed by the recipients, put into necessary capital replacements and even into some expansion of production as well as use property in arithmetical progression or at simple interest, without any considerable compounding of profits) there is no iron mathematical law which would doom it to collapse in some comparatively brief period of feverish operation. That sort of system of private ownership and management could be made stable and workable, given good national planning and good government. And that sort of system fascism envisages. But that sort of system is not capitalism, nor is it workable within the framework of the present system. If profit-yielding investments cannot be piled up in a compound interest or geometrical progression ratio, capitalism does not work. It will, of course, be asked by many, Why not?
The constant cry of the liberal reformers is for a readjustment or revamping of the present system to get rid of some of its contradictions or mechanical defects. Why these readjustments cannot be made within the framework of the system is really one of the larger themes of this book, and cannot be covered fully in any one chapter. Suffice it to say at this point that the fundamental reason why a stable system of private ownership and management cannot be operated under the present system is that any stable system would have to include a large measure of state planning and state imposition of many features of the unique national economic plan, all of which the State is now, by Constitutional inhibitions and a lack of necessary mechanisms, prevented from realizing. In short, no return to the 19th century pattern of expansion is possible today. Possibly, a thousand or more years hence, after the world’s population shall have been reduced from two billion to a few score million, and after the Americas shall have been returned to a mere handful of nomadic aborigines, a new liberal, capitalistic culture may arise from the ruins of decadent planned economies and flourish while the new continents are being settled, and while population is being increased several thousand percent in the course of a few brief decades. The break needed for a revival of liberal capitalism is the starting point of 1775 or even 1840. For a cycle of expansion, or growth in geometrical progression, nothing matters so much as the starting point, whether it is a case of multiplying flies or productive capitalistic plants. You can start a rapid growth cycle quite easily with two flies-but not with several quadrillion. You can start a rapid growth cycle with several million dollars seeking profitable investment but not with several hundred billion. Most of the pleas by liberal economists and sound business men for a revival of capital investment, and most of the recommendations as to the ideal conditions to provide for such a revival, entirely ignore all this. The starting point for the expansion cycle is the thing.
That, briefly stated, is the dilemma of modern capitalism in 1935 as it faces a world of closing markets and the inevitable corollaries of rising fascism and communism. Since 1914, broadly speaking, the two prevailing formulas for the operation of the system have been the financing on credit of consumptive expenditures and/or the financing of pure depression relief, equally on credit. In the United States financing consumption on credit with great accompanying prosperity, was the formula from 1914 to 1930, except for a minor set back in 1920. And financing on credit relief for banks, railroads, farmers and the unemployed has been the formula from 1930 to date. The questions whether we can resume the consumption credit financing of the boom days or go on with the relief financing of the New Deal, will be discussed in succeeding chapters.