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merely enable the consumers to use their time more advan-
tageously to themselves, may be open to question ; but the
ultimate economic effects are much the same in either case.

Need of expertness in buying supplies. Not the least among
the advantages of a minute division of labor is the fact that
each individual can avoid the necessity of being expert in many
things, and therefore has time to become a specialist in one
thing. One of the advantages of the standardization of com-
modities is that the average consumer can avoid the necessity
of being an expert judge of the many articles which he has to
purchase. He may therefore utilize his time and mental energy
in his own special field of work. There is, to be sure, some-
thing attractive in the custom of the well-to-do burgher going to
market and selecting with the eye of a connoisseur the various
articles needed by his household, but it is wasteful of time and
mental energy. When he or his housekeeper is able to order
by telephone, without any inspection whatever, and still get
what he wants, more time is left for other things.

This will help to explain two very distinct tendencies in
present-day retail-marketing methods. The first is to put up more
and more articles in standardized packages. The second is
to place more and more dependence upon the retailer, who, in
many cases, is coming to regard his customers as clients, to whom
he is bound to give his own expert service. Both tendencies
are designed to save the consumer the trouble of becoming an
expert buyer and to leave him more time for other things.
Neither tendency has as yet reduced the cost of getting prod-
ucts from producer to consumer. If the consumer utilizes the
time saved in marketing by doing work which earns him a larger
income with which to purchase goods, it perhaps does him as
much good as it would if these tendencies merely reduced the
price of commodities.


Marketing by telephone an American habit. Marketing by
telephone is peculiarly an American habit. This may in part
explain, and in part be explained by, the fact that two thirds of
all the telephones in the world are in the United States and
three fourths of them are in the United States and Canada.
This habit makes it more and more difficult for the householder
to inspect her purchases. She is therefore more and more
driven to one of the alternatives mentioned above. She must
order well-known brands, which are put up in standardized
packages, trade-marked, and sold on grade or reputation, or else
she must rely on her grocer or her marketman very much as
she does on her physician, her lawyer, or her financial adviser.
The quality of dependableness becomes, therefore, more and
more important in the grocer and the marketman. Such
qualities have to be paid for. Thus the householder saves
time, but pays for the privilege.

If she buys standardized goods in standardized packages,
she will usually pay from 50 to 100 per cent more than she
would if she bought in bulk and did her own inspecting and
selecting. If she relies, as a client, upon the honesty and ex-
pertness of her grocer and her marketman, she must pay for
that. Honest and capable experts do not have to live on small
incomes anywhere ; and when they go into the business of
selling produce, they will charge for their services.

Standardization should take place early in the marketing
process. One reason why these tendencies merely save the
time of the consumer, instead of reducing the cost of getting
the products to him, is that the standardization takes place only
in the last stage of the process ; that is, just before the com-
modities reach the consumer. In order to reduce materially
the spread between the price which the producer gets and that
which the consumer pays, standardization must take place early
in the process. This will enable the standardized article to go
through the channels of trade at a lower cost. If it has to be
inspected every time it changes hands, the process is expensive,


and someone must pay the cost. Some products apparently
cannot be standardized, so there must always be a wide spread
between the producers' and the consumers' prices.

A good illustration of the effect of standardizing a product
early in the process of getting it from the producer to the con-
sumer is found in the marketing of certain kinds of Western
fruit. They are graded and standardized as soon as they leave
the orchards. All subsequent inspection is therefore unneces-
sary, and the cost of getting them to the consumer is reduced
practically to the physical cost of haulage and handling. This
has notably reduced the spread between the two prices. Many
other commodities, such as wheat, cotton, pig iron, and coal, are
sold largely on grade rather than on inspection. In these cases
the government has had very little to do with the standardiza-
tion. Two recent acts of Congress, however, have brought the
government definitely into this field as the fixer of standards
of quality. These are the Cotton Futures Act and the Grain
Standards Act. Both give the Secretary of Agriculture power
to establish grades and to enforce their use in the regular chan-
nels of trade. A number of states also have passed grading
laws of various kinds. Four New England states have passed
a uniform apple-grading law, defining the contents of a stand-
ard barrel, describing the various grades of apples, and impos-
ing penalties upon all departures from the standard prescribed.

Such legislative acts cannot be called in any true sense inter-
ferences with trade. They are designed to increase the freedom
with which commodities may circulate. They are somewhat
analogous to the work of the traffic policeman on a crowded
corner. He may exercise authority and interfere occasionally
with an individual's movements, but the result of his so-called
interference is greater freedom of traffic. 1

Brands and trade-marks. Brands, trade-marks, and other
selling devices of this general description would be useless or

1 Compare the article by the author, on " Standardization in Marketing," in
The Quarterly Journal of Economics, Vol. XXXI, No. 2, pp. 341-344.


impossible without some kind of standardization in production
or grading of products. Where these services are properly
used, they are an aid to the buyer as well as to the seller.
They help him to know what he is getting and enable even
the inexpert buyer to buy safely.

Advertising and salesmanship. From the point of view of
the seller of any commodity there is not much doubt as to the
efficacy of advertising and expert salesmanship. Serious doubts
have been expressed, however, as to the social advantage of
what may be called high-pressure selling. Why, we are asked,
should we be subjected to all the arts of the expert salesman
and advertiser, who are doing their utmost to persuade us to
spend our money for things which we do not need ? On the
other hand, it is replied, why should not every art of persua-
sion known to the expert be brought to bear upon men to lead
them to do what they ought to do ? This is what evangelism,
moral leadership, and all sound instruction amounts to. If we
are to allow freedom in the exercise of the arts of persuasion
at all, it will be difficult to draw the line. Who shall act as our
censor and permit one man and forbid another to persuade
people to do what he wants them to do ?

Except in extreme cases this argument is unanswerable. In
the case of immoral acts, or any act which the moral sense of
the community condemns, it is obviously as immoral to per-
suade people to commit those acts as it is to commit them.
If there is anything which men clearly ought not to buy, it is
equally clear that men ought not to advertise it or try to sell
it. But the difficulty, except in extreme cases, is to decide
just what things it is proper, and what it is improper, to buy.

It is quite clear, however, aside from all questions of legal
conduct, that much of our advertising is a waste of human
energy. Sometimes it is a service to a consumer to apprise
him of the fact that he can buy something which he has long
wanted, and to tell him where it can be had. In most cases,
however, advertising serves no such purpose. One does not


need an advertisement to apprise him of the fact that soap can
be purchased. The only purpose served, in all such cases, is
to persuade people to buy one brand rather than another. Our
helplessness in such a situation is revealed to us when we con-
sider that it would take a great deal of campaigning, accom-
panied by advertising and high-pressure persuasion, to work up
a public sentiment hostile to advertising. We might easily waste
more energy in this campaign than is now wasted in advertising.

Political campaigning. Socialists are in the habit of pointing
to the wastefulness of advertising as one of the costs of com-
petition. They do not point out, however, that a political cam-
paign is just as wasteful as a selling campaign. The candidate
for office advertises his candidacy and uses high-pressure per-
suasion to get people to vote for him. Since the extension of
government power and authority would multiply government
offices, it would necessarily multiply the number of campaigners
and greatly increase the waste of time and energy used up in
political campaigns. Every campaigner, even he who is cam-
paigning for socialism, is doing much the same kind of work
as is done by the expert advertiser. He is using high-pressure
persuasion to get men to do things which they would other-
wise not do.

It looks as though we should have to regard persuasion in all
its aspects, except persuasion to do that which is morally con-
demned, as a necessary cost of freedom. A despot could sup-
press all persuasion, in politics as well as in salesmanship, but
a free people can scarcely get along without it. Freedom is in
some respects costly, but it is worth all it costs.



Financial crises. One of the most important and most
puzzling of all modern economic questions is that of the fre-
quent recurrence of financial crises and general industrial de-
pressions. A financial crisis is an occasion when the money
market becomes suddenly demoralized, confidence disappears,
and credit shrinks. Everyone to whom money is owed wants
it at once, but no one wants to let go of any money in his
possession, for fear that he may not be able to get any more.
Besides, there does not seem to be money enough to pay off
existing debts.

In the chapter on Banking it was pointed out that a large
part of the business of the world was done on credit, without
the actual handling of money. If you will imagine a group of
men doing business with one another, where each one trusts
every other, you will see that a large amount of business can be
done with a ridiculously small amount of money. Many trans-
actions will be carried on by means of promises to pay money
instead of with the money itself. Many of these promises will
be balanced against one another and canceled without the use
of any money. In other cases the money will be used merely
to pay the balances. But if something should happen to destroy
confidence, so that no one would accept promises, but everyone
demanded real money, there might not be money enough to
go around and make the necessary payments. In that case
business would have to slow down, and only as much business
could be done as could be done with the small amount of
money available. If, in addition to this, everyone held on to
all the money he could lay hands on, for fear that he might



not be able to get any more, even the limited amount of
money in circulation would move slowly, and business would
have to slow down correspondingly. A swift dollar may pass
from hand to hand many times in a day, and in this case
it will do a large amount of business ; but a slow dollar
passes from hand to hand only a few times a day, and does
a small amount of business.

Industrial depressions. An industrial depression is usually
more deep-seated than a financial crisis and usually lasts for a
longer time. It is a general stagnation of production because
of an inability to get satisfactory prices for products. Various
explanations, some intelligent and some absurd, have been
offered. Overproduction is one of the most common and least
intelligent. There may be such a thing as disproportionate
production, but such a thing as general overproduction is a
physical impossibility. The production and supplying of one
thing is a demand for something else ; the more production,
the more demand ; but if some things are produced and offered
for sale, and there is no demand for them, it means either
that those few things are overproduced or that the other things
which might be exchanged for them are underproduced.

The overproduction theory. One phase of the overproduc-
tion theory of industrial depression is that wages are so low
that the laborer is not able to buy his own products. It is
argued that this results in an overproduction and glut on the
market. There are many excellent reasons why wages should
be higher than they are, but this is not one of them. So far
as its effect on the general purchasing power of the community
is concerned, it makes no difference whether wages are high
and rents, interests, and profits are low, or whether wages are
low and rents, interests, and profits are high. If the laborer
gets a small share of the production of a given industry, and
the managers, landowners, and capitalists get a large share,
these have a large purchasing power and the laborer a small
purchasing power. The value of the whole product of every



industry goes to these various classes, and they have it all to
spend. If one class possesses a large share, and another class
a small share, the total amount to be spent for other commodi-
ties is not affected by that distribution. If the laborers get
absolutely the whole product of an industry, there would be no
more to spend on other products than if the laborers got one
half the product and the other participants got the other half.
This, let it be repeated, has nothing to do with other and
excellent reasons why wages should be high.

The periodicity theory. A certain periodicity has been
observed in the recurrence of crises and depressions. It is not
always easy to determine just the interval that elapses between
depressions. Sometimes they come approximately twenty years
apart, but they have a disconcerting habit of coming at unex-
pected times. In his book on " Economic Crises " Jones gives
the following table : 1













I8 55


I8 S7


I8 S7
























1 837-39



In the nineteenth century it will be noticed that there were
severe crises in 1818, 1837, 1857, with lesser crises in 1825 and
1847. The severe crises seemed to come every twenty years

1 Edward D. Jones, Economic Crises. The Macmillan Company, New
York, 1900.


for almost half a century. Again there were severe crises in
1873 and 1893, with a less severe one in 1884. Another one
occurred in 1907.

Various attempts have been made to explain this apparent
periodicity. The late William Stanley Jevons developed an
interesting theory of the coordination between sun-spot cycles
and industrial depressions. The sun-spot cycles, he argued,
had a profound effect on the weather, rainfall, etc., and these
in turn affected the agricultural basis of the world's wealth.
This theory, however, had not been taken seriously by the
economists until it was recently revived by the interesting
observations of Professor Ellsworth Huntington. It is true
he has not developed the theory at great length as applied to
economic crises, but he has presented strong evidence in favor
of the doctrine that solar disturbances profoundly affect climatic
conditions and rainfall, and these in turn have produced great
historical and economic disturbances. 1

The overspeculation theory. There is a persistent belief
among all students of the question that overspeculation has
something to do with depressions. When a fever of specula-
tion takes possession of a community, the prices paid for the
articles in which people are speculating do not bear any logical
relation to the real values. The speculator will pay any price
for anything, provided he thinks he can sell it later at a still
higher price. When prices are tending rapidly upward, he may
rely on the mere momentum to carry them higher. There is
only one possible outcome of this tendency ; that is, a rapid fall
in the prices of the commodities in which men are speculating.

Even though the speculation takes place in a single article,
it may produce a profound economic disturbance. The money
that is absorbed in the speculative purchasing of the article in
question is necessarily withdrawn from other kinds of business.

1 Ellsworth Huntington, " Climatic Changes and Agricultural Exhaustion
as Elements in the Fall of Rome," Quarterly Journal of Economics, February,
1917. See also "The Pulse of Asia," Houghton Mifflin Company, Boston, 1907.


This in itself produces some disturbance. When a fall in
prices begins, a general bankruptcy among the speculators takes
place. When a number of men become bankrupt and are
unable to pay their obligations, a process begins which may be
compared to knocking over one brick in a row of bricks stand-
ing close together. The falling of one brick knocks over the
one next to it, and so on until the whole row falls. Accordingly,
if one individual who owes money to another fails to pay his
debt, the latter, not being able to collect his money, fails to pay
his obligations to a third, and so on ; one after another fails,
and the bankruptcy spreads throughout the community in a
sort of wave motion. A depression always follows speculation
of any kind, whether it be a real-estate boom or a boom in
short-horn cattle, or Belgian hares, or French bulldogs. This
has led to the sage remark that " the echo of a departed
boom is the saddest sound in nature."

The real-estate boom. The wave of speculation in land
which is known as a real-estate boom is one of the most inter-
esting and instructive of all subjects of economic study. No
one has ever been able to explain just how it starts ; but after
it has started, it is not so difficult to understand. Something
happens, let us say, to produce a very rapid rise in the price
of city lots. Men double and quadruple their money in a short
time by merely buying and selling again at a higher price.
This sets them and others crazy. Everyone wants to buy lots
for the purpose of selling again. The first effect of this is to
greatly increase the number of buyers, and the effect of this is
to send the prices still higher. These buyers, as a consequence,
also make money rapidly. This attracts still other buyers, some
of them coming from long distances to share in the harvest.
So long as buyers are increasing faster than sellers, prices con-
tinue to go up ; but when the buyers become less numerous than
the sellers, which must inevitably happen, prices begin to fall.
Suddenly everyone becomes a seller and there are no buyers at
all. Stagnation, depression, bankruptcy, and general ruin ensue.


The recovery is very slow. The men who are left with land
on their hands are not fitted to use it. They did not want it
for use ; they only wanted it to sell. This means an inefficient
use of the land. Besides, even those owners who are fitted to
put the land to an economic use are handicapped because they
put too much money into the land and have too little with
which to develop or use it. Those who were lucky enough to
sell out in good time are very careful not to let go of their
money or to invest it in productive industry. Years usually
elapse before the city recovers from the disaster.

Speculation in farm land, in railroads, in mining, as well as
in Belgian hares, tulips, and short-horn cattle, has produced
a number of historic depressions of this kind.

The overinvestment theory. There are, however, even more
fundamental and far-reaching reasons than these for a certain
tendency to overinvestment in certain special lines of industry.
Overinvestment may produce very much the same results as
overspeculation, though they are not likely to be so acute or
so sudden in their appearance.

Overinvestment in the railroads of the Far West is supposed
to have had something to do with the panic of 1857. The rail-
roads were built, the capital was sunk, and then it began . to
appear that it would be some years before there would be busi-
ness enough to put the railroads on a paying basis. Meanwhile
all that capital had been diverted from other industries, which
suffered in consequence. In many cases, however, the shares of
the new railroad enterprise had been bought on credit. As soon
as it appeared that dividends were ijot to be speedily forth-
coming, the value of the shares fell rapidly, and those who
had invested on credit in many cases suffered bankruptcy.

There is something also in the very nature of modern indus-
try which seems to render it highly sensitive. The countries
which show the largest amount of enterprise and the adventur-
ing spirit not only expand most rapidly but also, at the same
time, seem to have the largest number of industrial depressions.


The tendency to rush headlong into new enterprises is doubt-
less an important factor in national expansion, but it also pro-
duces a severe reaction when this headlong spirit rushes too
far in a given direction.

The following is from an article by the author : 1

One characteristic of a modern industrial community is the proportion
which producers' goods hold to the total wealth. This means that a large
part of the wealth is in forms which have no utility in themselves, but
which derive their utility from the goods which they help to produce. A
satisfactory explanation of industrial depression must, in the opinion of the
present writer, be sought in the laws of value which govern investment in
this class of goods, rather than in the examination of the conditions of the
money market, or conditions of organized credit.


Let us begin by noticing a few elementary facts. Every farmer knows
that a horse which will not earn more than his feed, or a piece of land which
will not produce more than it costs to cultivate it, is of no value. Likewise
every business man knows that an establishment that cannot be made to
pay more than running expenses is worth nothing except as old iron. This
is equivalent to saying that the value of such an establishment or indeed
of any productive agent is determined not by the total value of its
product, but by the excess of that total value over and above the run-
ning expenses. When the running expenses are high and the output large,
so that the earnings depend upon small profits and large sales, a very
slight rise in the value of the product may double or more than double the
value of the establishment, provided, of course, that the rise in value is
believed to be permanent. Let us suppose that a certain shoe factory can
be made to turn out 100,000 pairs of shoes in a year at a uniform cost of
$2 a pair. If these shoes cannot be sold at more than $2 a pair, the plant
is worthless; but if they can be sold at $2.25 a pair, the earnings of the
plant will be $25,000, which, capitalized at 5 per cent, will make it worth
$500,000. If, however, the price of shoes should rise to $2.50, the earn-
ings of the plant would be double ; and if this rise in value were believed
to be permanent, the value of the plant would double. Thus an increase
of only one ninth in the value of the product would double the value of

1 " A Suggestion fora Theory of Industrial Depressions," Quarterly Journal
of Economics, May, 1903, p. 497.

Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 27 of 48)