You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

Are Depressions Avoidable?

The Question which everyone is now asking is one which has puzzled the world’s most eminent economists for decades. It is impossible to discuss it briefly without seeming dogmatic or oversimple. To muster the adequate authority, to make the necessary elaborations and qualifications and to marshal the necessary statistics, would be a task for a research staff scouring an encyclopedic literature and pounding batteries of computing machines for years. If we have an excuse for discussing a problem in which the work of scholars is so far inadequate, it may be that we possess the valor of ignorance, and that it will require a high degree of valor to take the action which may lead to a solution.

The classical economists, who elaborated the theory of laissez faire, assumed that the normal condition of business was one of wholesome balance. They paid little attention to industrial depressions, since these were thought of as abnormal or unexpected disturbances arising from some deplorable interference with the normal conditions. But contemporary economists, who have made a more realistic analysis of our economic institutions, have discovered that industrial depressions are characteristic of the business order. They are not abnormal or unexpected, but recur with distressing emphasis. They arose with the form of society which developed the technique of money and banking, and in which private enterprise carries on the work of production and exchange. They become progressively more severe with the growth of this order, at least up to a certain point. There is a theory that as the business order matures and settles down, depressions tend to become less violent, but this theory may have to be modified in view, of the world’s experience since 1929.

A great many leading politicians, business men and bankers talk as if they knew nothing about the matter except the point of view of the classicists. They never seem to expect depressions before they arrive. When a depression comes, they talk volubly about a return to normal. They assume that the depression was caused by some interference with the ordinary processes of business, and that continual prosperity can be assured in the future by preventing such interferences. This point of view is unscientific and futile.

Of a piece with the modern scientific conception of depressions is the view that depression does not stand by itself in the course of events, but is one phase of a continuous sequence, which includes revival, boom and recession. Each of these phases contains the seeds of its successor. Boom leads to recession, recession to depression, depression to revival and revival to boom. This round of phases is called the business cycle. If anything is normal to the business order, it is not a condition of balance or equilibrium, but a condition of disequilibrium, in which we are always about to fall off the tightrope in one direction or another. If we want to abolish depressions, we shall at the same time have to abolish booms, recessions and revivals. The inevitable conclusion from this view is that emergency action, undertaken during a depression and forgotten later, however necessary it may be to relieve misery, is merely locking the garage after the car is stolen, as far as any permanent effect is concerned.

Some continuous policy or group of policies is called for. We must not take the idea of the business cycle too literally. It does not mean that every period of depression is just like every other such period and will last exactly the same length of time. It does not mean that we can predict when the next depression will come. The oscillation of business conditions is irregular, not periodic and predictable like the phases of the moon. Nor does this theory mean that nothing else can affect business except the cyclical forces. We can have depressions like that of 1924, which are identified by statistical charts but which occur in the course of a long period generally thought of as prosperous. Or we can have revivals and peaks in the statistical charts which occur during long periods generally characterized by hard times, like those of the seventies or nineties of the past century. It is by no means certain that the forces behind these longer periods of prosperity or depression are cyclical, that they oscillate in any particular order at all.

It is natural to suppose that if we are to eliminate the business cycle and stabilize industry, we must first discover the cause of the oscillation. When we turn to the economists for enlightenment on this subject, we are confronted with a bewildering array of theories. Thinker after thinker, some of them careful scholars, many more of them mere quacks, have advanced opinions about the matter. There are hundreds of these theories, differing from each other in greater or less degree. They may be classified, as Wesley Mitchell has classified them, in three main groups. Some students have found the cause in a region beyond human control. Among these are Jevons, who supposed that variations in business arise from variations in crop yields, which in turn arise from rhythms in solar radiation, Henry L. Moore, who links the rhythms of solar radiation to changes in the phases of the planet Venus, and Ellsworth Huntington, who begins with the sun and ends with changes in human health and attitudes. Others attribute business changes to a rhythm in the emotional states of business men, as does Pigou. The third and largest group finds the causes of the cycle in the operation of economic institutions. In this group are those who talk about overproduction or underconsumption, or the effect of gold, credit and banking policy, or the consequence of savings, like William T. Foster, or inequality in the distribution of income, like Karl Marx or John A. Hobson.

Though, like every other student of the subject, I have my own opinion as to which of these theories contain the largest elements of truth, it would be absurd to pretend that I, or anyone else, had picked a way through all the doctrine and put it together in a final form which was adequately supported by analysis of reliable statistics. Nobody really knows the truth of the matter, in the sense in which scientists know the laws of physics which enable them to build bridges or predict solar eclipses. We are nearer the truth than we were ten years ago, but the various theories remain hypotheses, many of which cannot be tested by objective evidence, some of which are mutually contradictory, some of which may be good accounts of one aspect of a cycle or of one cycle, but not of all, and some of which are merely different ways of describing the same phenomena.

Must we, therefore, fall back on a counsel of despair, and say that nothing can be done until the economists have spent another decade or another century in research and discussion? That would be true if our first supposition were correct, that is, that the cycle has a cause, which must be discovered before a remedy can be prescribed, just as we had to discover the germ which causes diphtheria before we could develop an antitoxin to prevent it. I am going to set forth, however, something which may sound paradoxical, but which I am confident the weight of economic authority will ultimately support. I am going to assert that the business cycle has no cause. And I am going to defend the proposition that our task is not to find a single cause and eliminate it, but to pursue a purpose which is both more simple in conception and more ambitious to execute—that is, to make economic affairs behave in a rational and desirable way.

What can be meant by the proposition that the business cycle has no cause? Let us illustrate by analogy. We say that diphtheria has a cause, since it is a disease of the human body, produced by a specific organism. Normally, the human body exists without diphtheria. The changes which diphtheria makes in it are due to a single variation from normal—the presence of an identifiable germ. Remove the variation, that is, the germ, and you cure the disease. That is what a cause is—a variation occurring independently of other circumstances, the presence of which will bring a definite type of change and the absence of which will prevent the change. But suppose someone were to ask you to assign the cause for the beating of the heart. Is it the arrangement and the energy of its muscles? Is it the control exercised by the nervous system? Is it the way in which the blood circulates? No one of these answers would do. Scientifically speaking, the beating of the heart is not something which has a cause, but the way in which the heart behaves in a living body. The heart is part of a complex, the interrelations of which are necessary for its functioning. No more definite cause can be assigned for its action than the presence of the organism of which it is a part, or of life in this organism.

Now, the business cycle is one of the ways in which the business order naturally behaves; it is not a disease or abnormality caused by the presence of a single hostile germ. You can describe this behavior in hundreds of different aspects; you can elaborate in endless detail the relationship between fluctuations in employment and changes in production, prices, incomes, credit, savings, investment, etc., etc. But you cannot say that any single one of these relationships is the cause of unemployment. The trouble with even the most persuasive theories hitherto set forth concerning the cause of business cycles is that each of them concentrates on one of these aspects or relationships to the exclusion of most of the others. The consequence is that each of the remedies proposed is inadequate to deal with the total situation. Some of the remedies are pure quack medicines, others may do good—though we have little means as yet of knowing how much good.

In one important respect, however, the analogy between the business order and the human body is a most imperfect one. This very imperfection gives a clue to the solution we are seeking. The human body is a high type of organism, with a natural equilibrium in its processes. But the business order is scarcely an organism at all; at best it is a low type of organism, a complex characterized in large degree by disorder and lack of balance. Its action is anarchistically determined by the choices of hundreds of thousands of theoretically independent cells. Each person or business concern decides how much to spend and how much to save. Each decides what to buy and what to do with the saving. Production, investment, credit, prices, wage payments and all the rest are the result of countless choices in countless places. Each choice is, to be sure, largely determined by the conditions produced by all the other choices, but few of them are made on the basis of adequate information and foresight, and almost none of them depends on a plan or policy related to the common interest. If we are to think of the business order as a body, we must think of it as a body without a brain. We have magnificent muscles in our great industrial plants, efficient arteries in our railroads and highways, sensitive nerves in our lines of communication. But we have only a trace of gray matter in our economic cranium. If our economic leg muscles decide to run after a butterfly and our arm muscles are intent on picking wild flowers at the very time when our stomach is crying for bread and butter, we ought not to be surprised by the resulting hunger. We should not be so surprised if we had a brain.

Economists can point out dozens of examples of such crazy behavior in the business order. We speculate by buying securities for the rise, borrowing money to do so at a higher rate of interest than the securities yield or can reasonably be expected ever to yield. We float bond and stock issues to furnish capital for industries which are already overexpanded in relation to any predictable demand for their products; we lend money to foreign governments which are clearly on the high road to bankruptcy. We increase protective tariffs against imports, while striving to enlarge exports and at the same time collect reparations and war debts. We enhance the ability to produce goods per man hour of labor by an average of at least 3 or 4 percent a year, and expect these goods to be consumed by wage earners, the purchasing power of whose wages advances on an average of not more than 1 or 2 percent a year, and by farmers whose purchasing power actually declines. We invest in new capital goods without saving to pay for the investment, or save without investing in new means of production. Great corporations, whose surplus profits are so large that they cannot profitably employ them in increasing their production of goods, lend these funds to enable persons to speculate in the stocks of these same corporations, on the assumption that their markets for goods are unlimited. Why are all these things, and hundreds of others like them, done? Not because the obviously crazy results are sought by the individuals who do them. Only because each individual, acting in his own immediate interest, either does not foresee or has no reason to care greatly about what the total result will be.

The major task of our civilization is to create a brain and a coordinating nervous system for our economy. It is to organize our great economic organs. The need of doing so has, indeed, been seen for so long by a few, and is now being declared by so many, that to say this is almost trite. The difficulty is not so much to appreciate the need as to know just how it can be met. If we are ever able to relate our economic activities to a policy carried out through careful planning and expertly devised control, a policy whose purpose is to produce the greatest possible amount of wealth, satisfaction and leisure for everyone, at the least possible sacrifice, we shall no longer have the business order as we know it. We shall have achieved a higher type of economic organism, one with a brain and nervous system, one which does have a natural equilibrium. The business cycle will have disappeared with the old business order, or will have become only barely traceable. We may utilize a large number of the devices hitherto recommended by the various theorists; we shall undoubtedly discard some of them. We shall have abolished unemployment by a process of envelopment. I do not believe there is anyother way to abolish it.

This article originally ran in the February 11, 1931, issue of the magazine.