THE COLLECTED WORKS OF THORSTEIN VEBLEN: Business Theories, Economic Articles & Essays. Thorstein Veblen
the case of the workmen also, as well as in that of the business men, the distress which dull times brings is in some part a spiritual, emotional matter.
To the rest of the community, those classes that are outside of business enterprise and outside of the industrial occupations proper, that is to say, those (non-industrial) classes who live on a fixed salary or similar fixed income, dull times are a thinly disguised blessing. They suffer in their affections from the reflected emotional detriment of the business community, but they gain in their ease of livelihood and in their savings by all the difference between the price scale of brisk and of dull times. To these classes an era of prosperity brings substantially nothing but detriment.
Depression is primarily a malady of the affections of the business men. That is the seat of the difficulty. The stagnation of industry and the hardships suffered by the workmen and other classes are of the nature of symptoms and secondary effects. Any proposed remedy, therefore, must be of such a nature as to reach this emotional seat of the trouble and restore the balance between the nominal value of the business capital engaged and the earnings of the business; that is to say, a remedy, to be efficacious, must restore profits to a "reasonable" rate; which means, practically, that prices must be brought to the level on which the accepted capitalization has been made. Such a remedy, to offset the disastrous cheapening of products through mechanical improvements, has been found in business coalitions and working arrangements of one kind and another, looking to the "regulation" of prices and output. Latterly this remedy is becoming familiar to the business community as well as to students of the business situation, and its tangible, direct, and unequivocal efficiency in correcting this main infirmity of modern business is well recognized. So much so, indeed, that its urgent advisability has been formulated in the maxim that "Where combination is possible competition is impossible." What is required is a business coalition on such a scale as to regulate the output and eliminate competitive sales and competitive investment within a field large enough to make up a self-balanced, passably independent industrial system, - such a coalition of business enterprises as is loosely called a "trust."
Such a business coalition, if it is comprehensive and closely controlled, can adjust the output of goods and services to the market with some nicety, and can maintaIn the balance of the ruling prices, or the price scale agreed upon, with such effect that the received capitalization need not become obsolete even in the face of very radical improvements in the processes of industry. Its effect, in the case of ideal success, is to neutralize the cheapening of goods and services effected by current industrial progress. It offsets industrial improvements in so far as these improvements affect the cost of goods more than they affect the value of the money metals. It might seem at first sight that by thIs inhibitory effect of the trust the entire advantage derivable from industrial improvements within the scope of the trust should inure to the gaIn of the business men in the combination, but such does not appear to be the practical outcome. The practical outcome appears more nearly to be that material advantage inures to no one from industrial improvements under the control of the trust, in so far as the trust successfully carries its point. This feature of trust management will be taken up again in a different connection.
In addition to its prime purpose of checking the decline of earnings on past investments, such a business coalition is also enabled to distribute any unavoidable effect of the progressively reduced cost of production of the productive goods employed, somewhat equably over the entire field of industry comprised in the coalition, and so obviate the pressure of this untoward industrial progress falling with exceptional severity at any given point. Economies effected are at the same time made to accrue to the collective business organization, showing themselves in the way of increased dividends and increased effective (market) capitalization of the coalition's property, instead of being dissipated in competitive selling, and so going to the body of consumers or to the industrial system at large.
To return to a point temporarily set aside above. By supposition, in what has just been said, anything like a speculative inflation has been excluded from the discussion of business depression; and necessarily so, since the two do not come at the same time. But at one point the two show a feature in common. Under both of these two widely different conditions of the business situation there is a discrepancy between the accepted capitalization and the actual earning-capacity. But the two differ even at this point in that, in the case of inflation, the discrepancy is not felt until the climax, when a widespread realization of the discrepancy brings on an abrupt readjustment, in the crisis which follows inflation; whereas in a period of depression the sense of this discrepancy and the protest against it is the most striking circumstance of the case. The discrepancy between capitalization and earning-capacity in a period of speculative movement comes of an inflation of capitalization; whereas in time of depression the discrepancy is due to a shrinkage of earning-capacity, - both capitalization and earning-capacity being, of course, counted in terms of money values. A speculative movement offsets or checks the trend to depression whenever it occurs; and for some appreciable time past, such speculative movements appear to have been the only force which has from time to time broken the otherwise uninterrupted course of business depression. Under the regime of a perfected machine industry and a perfect business organization, with active competition throughout, it is at least probable that depression would not be seriously interrupted by any other cause.
But it has been a point of economic dogma in modern times - not to call it a point of theory, since it is not held on reasoned grounds - that depression and inflation, followed by crisis, succeed one another with a rough periodicity, interminably and in the nature of the case. The periodicity (with an interval of some ten to twelve years from phase to phase) has not been established with any cogent show of evidence, except for the period from 1816 to 1873; and even within that period the evidence has not been convincing to all students of these phenomena. A tentative explanation of the periodicity, such as there may have been within that period, as well as of its absence before and after the period in question, may be offered on the basis of the views here set forth. keeping in mind the point that the disturbance, both in the case of inflation and in that of depression, is a discrepancy between capitalization and earning-capacity, and also the manner in which this discrepancy arises, it may be said that prior to the earlier date mentioned the modern industrial system was not such a comprehensive and articulate process that a disturbance in one part or one member of the system need be transmitted forthwith through the channels of business to all the rest. A speculative movement need not spread forthwith throughout the industrial system. The great episodes of speculation and collapse that occurred during earlier modern times were not of the nature of speculative inflation affecting the entire business community occupied with industry. They are rather of the nature of commercial speculation verging on gambling. So also, the crises of that earlier time, when they were not collapses of gambling ventures, were commonly produced by some great disaster which brought an absolute material loss upon the community, such as crop failures, invasions, or heavy war expenditures. On the other hand, as regards periods of depression prior to the early years of the nineteenth century, they were also rare if not unknown, except when due to failure of resources or the burdens of government. The conditions out of which depression could come, as a persistent disturbance of business through a divergence between the capitalization and the earning-capacity of investments, were not had. The developed machine system was absent, and without this the cost of production of productive goods could not be progressively lowered at a rate large enough to set up and maintain a persistent divergence between capitalization and earning-capacity in industrial enterprises.
At some uncertain point in the first half of the nineteenth century the system of machine industry, and the business system based upon it, attained such a breadth and consistency that business disturbances of appreciable magnitude in any part would affect values throughout the system. It had then grown so large and was so closely articulated a structure that the relations of its members to one another and to the system as a whole were of greater moment for the fortunes of these members and for the orderly process of the whole than were the relations of the members to industrial factors lying outside the system of the machine industry and the business community. Hence industrial crises in the proper sense of the word seem well at home in this period. They spread with great force and facility whenever they came; and they had the true character of business crises, in that they ran with great severity without involving an appreciable aggregate loss of material wealth, except in terms of price. They commonly