CHEAP DEMAND AND DEAR SUPPLY

Evening Post, Volume CIII, Issue 53, 4 March 1922, Page 4

CHEAP DEMAND AND DEAR SUPPLY

Professor Pigou, in an article in the Contemporary Keview on unemployment, argues that inhere"ntly there is, in the destruction caused by* war, no cause of unemployment, but rather a reason for employment. . The destructive effects of war " cause poverty; they do not cause unemployment." He adds: .

When a primitive man's shelter .is burnt down and half his stores destroyed, the natural sequence is that he does more work than before, and not less. In liko manner, the natural sequel to a devastating war is that the peoples of the world do more work, and not less. If they choose not to do more work, they can only conserve their leisure at the expense of haying less real income to consume. This is the ultimate social consequence of a great war — a consequence that does not involve unemployment. ,

Destruction causeß demand, and the demand becomes bo abnormal and feverish that those who supply it—capitalists in the first place, employees in the second—exact steadily increasing remuneration, which is reflected in steadily increasing prices, until the prices cut their own throat. Even a clamant demand may fail to persist against excessive prices fixed by those persons (of any class) who take undue advantage of that demand. When the prices become uneconomic—and they do so the moment that public confidence in their economic reasonableness, having regard to (the future, is destroyed —the demand, even though unsatisfied, is liable to stop. Consider, for instance, (1) the clamant demand for houses; (2) the recent excessive cost of house-build-ing; (3) public non-confidence (well justified) in the ability of these expensively-built houses to command, in a few years' time, any price comparable with their capital cost. No wonder, then, that the house-hunger intensifies wiijle the supplying of houses dwindles. There is a transition period during which houses remain' dear because everyone believes that they are going to bo cheap; and in the . meanwhile investment in building is paralysed because a still unsatisfied demand has corrupted its suppliers.

To go back to war-effects: The destruction of war created a real demand, and' that real demand would be a. cause of employment, not of unemployment,' had it not, by its intensity, dislocated supply, lifting suppliers oir to a too high basis of advantage. Professor Pigou observes:

The slump is abnormally intense because the boom it follows was abnormally intense. Men's minds had swung towards business optimism with exiraordirinvy violence; the sequel is a reaction of like degree. In short, confidence

has been shattered, and confidence is the mainspring of industrial activity.

Professor Pigou puts the weak point in a sentence when he says that " many failed to realise that a real demand is constituted, not by needs only, but by needst combined with power to buy." Add to the theory of minimum cost of production, the fact of a breakdown in the customer's purchasing power, and what else can happen save unemployment among those whose business it is to supply the needy person who can no longer pay? Looking only at the needs and not at the purchasing power, intending dealers, operating in the post-war boom, " placed orders and made purchases with reckless improvidence," and with this result:

The banks, since the export of. gold was banned, were no longer forced to protect the specie reserve by their own prudence, and were anxious not to embarrass the efforts of their Governments to raise or renew loans. Consequently they delayed to apply to a too exuberant industry the well-tried brake of heightened money rates. Masses of goods of all sorts wore piled up in anticipation of high-priced demands, and it seemed that an era of fabulous prosperity had dawned. This state of things 'could not continue indefinitely. The gains that raising general prices bring to .business men are obtained by the secret mulcting of those persons who depend upon fixed money incomes. .This course of gain is not ,-inexhaustible; for, if price* rise far enough, the real value of previously existing fixed incomes will practically disappear. ■ r ■

That they did not disappear is due to the fact that hundreds of thousands of consumers, ' whose fixed incomes or wages were threatened by this avalanche of prices, allowed it to fall flat by withdrawing from underneath, and by voluntarily or involuntarily doing without the over-priced products of fatted suppliers. " The boom broke; orders ceased abruptly; holders of large stocks were forced to realise at a logs; prices, after a Blow start on the downward path, tumbled headlong."

A capitalist whose cost of production is above the ■ purchasing capacity of his customers seeks remedy along the line of less labour (which spells unemployment) or less payment to labour. Less payment to labour may take the form of paying workers a lower time-rate, or of employing them on shorter time. Union opposition to less payment makes for unemployment. On the other hand, greater efficiency of labour—resulting in cheaper cost of production being compatible with higher rate of pay—makes for employment. In this latter connection, we admit that there may be a temporary exception in cases where, fqr the time being, products slow of sale, are.on hand. But, in the general rule, cheaper cost of production will mean, in the final analysis, greater employment; because it will bridge the gap be r tween,the .supplier and those customers whose purchasing power has fallen far below the boom level of prices. Admitting that it is just that profit as well as wage must contribute towards the cheapening of production, workers will not serve that principle by restricting output—a policy that increases the opportunity of cornering stocks and of manipulating prices, and which plays into the hands of the "profiteer." Except, perhaps,.in some negligible cases affected by temporary circumstances, the interest of the worker, as well as of the consumer, is reduced cost of production, and bigger business at reduced prices. , ;