The Formation of Capital
by
[Brookings Institution, $2.50]
IN the last roundup, more economists will find themselves damned because of having laid down hypotheses, and then forthwith having written and talked themselves and others into accepting them as facts, than on account of any other of their professional sins. But if this fate ever overtakes Harold G. Moulton it will not be because he wrote The Formation of Capital. In this book, the third of the Brookings Institution’s series dealing with the Distribution of Wealth and Income in Relation to Economic Progress, the author has unlimbered his heavy artillery against an assumption as old as economic science itself. The traditional assumption attacked is that ‘the amount of capital goods that will be created depends merely upon the proportion of national money income that is set aside in the form of savings.’ In other words, the less corn meal citizens eat, the more they sell and the more money they save, the more corn mills the country will have to grind its meal.
The author challenges the accepted theory that money saved is a command to go forth and produce more capital goods. He holds rather that it is a potential command to do so; the command itself is contingent upon greater consumption. The only effective way to get more corn mills is to eat more corn meal. The only effective way to get more capital goods is to use up more of what they turn out. The fact is that in the past the increase in the creation of capital goods has taken place when consumers were calling for more goods, not when they were saving more money.
In the very early stages of our economic order when Adam delved and Eve span, every fly-power of energy they could spare from pulling weeds and direct toward perfecting the family hoe increased their capital goods and raised their standard of living. Never was more energy saved ami freed than could advantageously be absorbed in needed capital creation. Thus it was for a long time during the earlier stages of capitalism under a money régime. This is no longer true.
In the United States of late, say since the Civil War, we have taken our monetary machinery off its old bushings and mounted it upon new hearings, and made other improvements. This improved credit blower can ‘make’ more money and bank currency, and pile up more money savings, than our farms, factories, and other long-time capital equipment can absorb in expansion, because as yet no permanent way has evolved, or been devised, to finance the increased throw-off of the increased capital instruments. For this we still have to rely on suicidal price cuts, which play the devil with such equilibrium as may have been achieved temporarily. When savings become redundant we begin to toy with speculation in money. We ought instead to take a vacation, eat up and use up the plethora of goods and services; take a vacation when we can, rather than have one forced on us when we don’t want it. Tims we should effect the real cure, which the author assures us is a larger flow of funds through consumptive channels rather than more abundant money savings.
We are .promised further light inIncome and Economic Progress, to appear early next summer. In the meantime the reviewer sets up this target and invites all who will to shoot iit it: Society will dip easily into this requisite balance between saving and consuming when every mother’s son ol us sets his savings to producing what he as an individual saves for. Then mighty little money saved against, sickness will have to be used in ways to make the saver sick.
HOWARD DOUGLAS DOZIER