The Fallacy of Restricted Output

Dominion, Volume 24, Issue 50, 22 November 1930, Page 19

The Fallacy of Restricted Output

< 4 ECENTLY, various restriction schemes have come into being I in a number of primary industries, of which wheat, tea, tin, copper, and oil are the most important,” says the “Westminster Jt Al Bank’Review.” “In every instance, two factors have weighed considerably in inducing those interested to adopt a concerted p o[icy —the faU in prices, and the rise in visible stocks. “From facts elucidated it can scarcely be said to afford impressive testimony to the virtue of output restriction as a cure for industrial ills. In few cases can a definite success be claimed to be due to restriction and restriction alone. In a large number of cases the verdict, at best, is ‘not proven’; in others the policy, from the very fact of its abandonment before achieving its main purpose, may be written down a failure. It would appear that the most favourable setting for an output regulation scheme is an industry in which production is concentrated geographically within a certain area, or in a small number of areas in close proximity to each other and having the same conditions as regards ownership, labour, internal legislation, etc. The larger the number of independent producers, the greater the difficulty of imposing restriction without governmental aid. The latter may, however, be regarded by many producers as a curse rather than a blessin;-. since it makes for rigidity in the administration of a scheme, cuts off the retreat available to dissatisfied producers under a voluntary’ plan (who, having given a scheme a trial, can always back out if they so desire), and tends to produce semi-diplomatic complications with other governments. There are, Indeed, many producers who, faced with the alternative of depressed conditions or government intervention, make no secret of their preference for the former. “There are further disadvantages inherent in the conception. Restriction adds appreciably to costs, since the burden of overhead charges per unit always varies inversely with the volume of output., It bears most hardly on the most efficient producers, who are frequently, in effect, called upon to cut their profits while their less efficient colleagues (whose costs are on a higher scale) are cutting their losses. If it fails, a period of chaos is likely to ensue when prices are frantically reduced in a genera sauve qui peut- . , • “If it is successful in raising prices at all considerably, it brings in numerous competitors, who make handsome profits by selling just under the restriction price while the scheme lasts, and remain a thorn in the flesh when the scheme is terminated. Restriction, by its very nature, is a temporary policy. The longer it lasts the stronger are the forces tending to draw producers apart. Its comparatively speedy success or its failure may be equally strong arguments for its early demise. Economic Disadvantages Even More Striking. "The preceding observations relate to what may be termed the ‘tactics’ of restriction. Its economic disadvantages are even more striking. Broadly speaking, it is in the general interest that the maximum of wealth should be produced in order that the standard of living of the worlds, inhabitants may be as high as possible. The world rightly recognises as Its benefactors those who make two blades of grass grow where one grew, and not those who produce an opposite result. “If, through some temporary maladjustment, the circulation of the world’s wealth (i.e., of its useful goods and services) is impeded at any point, the remedy is not to restrict the production of wealth, temporarily

or permanently, but to remove the cause of hindrance to its flow. If all producers were to agree, as from a given moment, to restrict their output by 50 per cent., the world’s wealth would be seriously diminished, and everyone would suffer.

“A single industry which introduces a restriction scheme acts, openly or implicitly, on the assumption that all other industries will maintain their output, so that the remainder of the world can be, in effect, held to ransom for one particular commodity. The larger the number of industries practising restriction, therefore, the less their chances of success!

Over-Production that is Really Under-Consumption. ' “Further, the negative results achieved by many measures of organised restriction, applied during an emergency, reflect their inability to stimulate consumption. In the majority of cases, what is described as ‘over-production’ might more justly be termed ‘under-consumption.’ This observation applies particularly to the present depression which has been marked by a slowing down in the pace of manufacturing activity throughout the world. “Restriction, in short, is a policy, which many industrialists practise, from time to time, but few defend. Its application in the sphere of labour is frequently criticised on the ground that it increases cost to an extent which industry, in a competitive world, can scarcely afford. As a producers’ policy, its effect on costs, though less evident on a casual glance, is no less considerable. That many industries which have been afflicted by this year’s depression will eventually recover is a foregone conclusion. “Their revival, however, is likely to be based on increased demand from consumers. When this occurs, many industries may find that an output which appears excessive under present conditions is appreciably less than is called for under a regime of expanding world consumption. In these circumstances, the continued operation of restriction schemes after the conditions which called them into being have passed away, may involve a ‘squeeze,’ with undesirable consequences from every point of view. “A speedy recovery from the present depressed level of prices would be welcomed in numerous instances, but a sharp upward twist would involve the risk of a boom which, however pleasing it might appear to producers on a short-sighted view, would bring in new producers, and prepare the way for future depression more severe than that of to-day. Restriction Not a Cure. “The arguments adduced can lead to but one conclusion —that restriction in itself cannot be regarded as affording a satisfactory cure for economic depression. In a large number of instances, however, the effort to arrive at a basis for concerted action, in the face of adversity, has brought many formerly hostile producers round a common council table.' The emphasis thus placed on common interests may bear fruit.

“For these reasons, conservative observers, while not prepared to accept all the contentions of those responsible for initiating schemes of output restriction, will trust that the organisations created to secure this end will remain in being to secure other and more enduring objects. Many fields await development, by co-operative effort in every industry, the results of whose exploitation cannot fail to be beneficial to producers and consumers alike.” ’ . ’