Income and Economic Progress

by Harold G.

Moulton and Associates

[Brookings Institution, $2.00]

THIS is the last in a group of four studies analyzing the distribution of wealth and income in the United States in relation to economic progress. In the first of these studies it was concluded that plant and labor capacity under prevailing techniques and schemes of industrial management showed an unutilized capacity capable of bringing the incomes of all the lower classes well above the $2000 per family level. Subsequent, study indicated that the proceeds of the nation’s productive efforts were going in disproportionate and increasing measure to a small percentage of the population; and in this, the final Study, the claim is made that the basic defect in our economic system is the maldistribution of income.

It is interesting to note that the authors find that fluctuations in the Construction of capital goods have usually followed, rather than preceded, fluctuations in the output of consumption goods. It is on this assumption that the Roosevelt Administration has been acting, in conflict with those critics who are of the opinion that no substantial improvement can occur until the construction of capital goods has been increased.

The authors are of the opinion that the present economic system fails to bring to market ‘a purchasing power adequate to call forth the full use of our productive capacity.’ They discuss the various measures which have been advocated, and in some instances adopted, by which a curtailment of production has been sought as a solution of our difficulties. After discussing the thirty-hour work week, and commenting upon the undesirability of this, the authors add that those who advocate such means of expanding purchasing power as bonuses for soldiers and pensions for the aged assume ‘that the increased flow of money income will give the masses proportionally high standards of living.’ In this view only one side of the economic picture is kept in mind.

‘What is seen is an increasing flow of money income through trade channels, constituting a market demand for new production. What is overlooked is that the flow of goods coming from industrial establishments to meet this enlarged monetary demand is a reduced flow — reduced by the very measure which leads to the increase of monetary income.’ Just how the payment of the soldiers bonus would reduce the flow of goods coming from industrial establishments is not made clear, and indeed no connection is indicated between the two.

The problem of wealth equalization is also studied, and the conclusion reached that ‘the very process of pooling the national wealth would inevitably involve complete socialization of productive operations. . . . Merely to indicate the character of the issues involved in sharing the wealth is to reveal its impracticability.’ There is much to be said against the practicability of sharing wealth, but the methods used here to show its undesirability cannot be regarded as entirely satisfactory.

The authors discuss the possibility of redistributing existing income rather than wealth, and point out that if the entire national income from productive operations were divided equally among the population it would yield the equivalent of approximately $2500 per family. ‘This figure represents the maximum level of satisfactions that might be enjoyed if the income were divided on the basis of absolute equality,’ they state. No mention is made, however, of whether both the money income and real income would not be increased considerably if those people who did not have this amount were able to command goods with the redistributed funds, instead of having them lie idle because those wealthy enough to have large surpluses were not making use of the excess. The authors intimate that much of this surplus was utilized for the artificial bidding up of prices of domestic properties, notably corporate securities.

If the distribution of income resulting from the nation’s productive activities lies at the root of our difficulties, can taxation have a salutary effect? The study considers this, but, surprisingly, reviews ‘the situation in a normal year like 1929.’ This is perhaps the first time that 1929 has been considered a ‘normal year.‘

Should money wages be raised in order to improve conditions? The authors point out that the NRA was based on the theory that, while price advances are expected to lag behind wage increases, profits would be enlarged because of the increasing volume of business, but they show the difficulties and indeed the obstacles which this theory encountered when the NRA was actually in practice. Nevertheless, in another part of the study, a statement is found to the effect that ‘added volume of business ordinarily pays heavily.’ This apparently is accepted as a correct view in one part of the study, despite the fact that in the discussion of the.NRA the authors themselves point out that it did not work successfully.

It is claimed that it would be preferable to decrease prices as technological improvements take place, rather than to increase wages. While it is true that a slowly falling price level has some advantages, nevertheless labor would probably be very restive under such a system. Average money wages would have to remain stationary and the reward of labor would come in the form of lower commodity prices. Psychologically, this would probably be less acceptable to labor than a constant price level, accompanied by rising wages. Steadily rising wages (though they would really be worth no more than stationary wages), coupled with a declining cost of living, would offer in practice a greater incentive to labor.

The general conclusion reached, then, is that the profit system, an institution of private capital, has been subject to serious abuse, especially by those who seek to maintain prices and not to give others, in the form of reduced prices, the benefits of technological improvements. The authors believe that the declining price theory offers a solution; although this theory has been sharply attacked by others. The authors admit, too, that other problems require serious study; for example, the role played by commercial banking in our economic system. Unless this is done it is hardly possible in this day of credit economy to regard any study of existing conditions as complete.