Aftalion And Schumpeter

Aftalion And Schumpeter

It is true enough that all the writers dealing with crises admit that credit plays some part in starting them. Is it not an ascertained fact that credit restrictions are generally at the bottom of the first failures that announce the coming storm? Yet most economists refuse to see in the expansion or restriction of credit the true cause of the crisis, as Hawtrey does. They seek it in the divergent and ill-synchronized movements of production, saving, or consumption, and the monetary aspect of the cycle is, in their eyes, only secondary.

It is in the rhythm of production as determined by its technical condi­tions that Aftalion finds the source of cyclic crises. For Hawtrey the fluctuations of demand, reflections or fluctuations of income, determine the rhythm of production. Aftalion, on the contrary, regards the demand for products and services as progressing continuously, whereas the supply of goods proceeds by fits and starts, because of the time needed to set up the plant and machinery from which will emerge the new products and services offered for consumption. So the fall in prices comes not from an insufficiency of purchasing power but from the saturation of the wants of the public, or, in the words of the author, speaking the language of the Austrian school, from the reduction of the final utility of commodities that have become super­abundant.

Aftalion has provided this thesis with a copious and new documenta­tion in which the principal industries and their behaviour before and during crises are studied with extreme care. His work, which appeared on the eve of the First World War and is based on experience of the crises of 1900 and 1907, is an example of a close combination of theoretical analysis and the most minute statistical observation. Its conclusions may be summarized as follows.

At the beginning of a period of expansion the industries making instruments of production are stimulated, because the machinery, tools, and raw materials that they provide are indispensable to all other industries. They are therefore led to make plans for extending their production. But time is needed to put these plans into operation. The construction of new factories, the increased extraction of iron ore, coal, and copper need preparation and the bringing together of many factors. Results appear only after a period of gestation which varies in different industries. Once the preparations are complete and the new manufacture is begun, a fairly long time is still needed before its effects make themselves felt on the commodity market. During this waiting period the supply of consumption goods grows but slowly. When, at length, the equipment so long in course of preparation is fully working, the sudden increase in the production of all consumable things soon meets with resistance on the part of buyers. Wants either change their direction or are sufficiently satisfied, so that demand slackens or hesitates. The new abundance of manufactured goods can then be disposed of only on condition of being offered at a lower price. That is the moment when the crisis breaks out. The fall that begins at one point extends gradually to other parts of the economic system. Faced by this hesitation on the part of the public, the makers of finished products restrict their demands for machinery, and the crisis suddenly starts—beginning in the machine-making industries. Hence there is greater distress in the industries making production goods than in those making consumption goods. The whole process is summed up by Aftalion in the following vivid simile, which we quote in full.

If we poke the fire because a room is not warm enough we have to wait until the required temperature is reached. If the cold con­tinues and the thermometer still records it we shall be inclined, if we have not learnt by experience, to put more coal on. We should do this even if the quantity of coal accumulated in the grate was already enough, when it had all caught fire, to throw out an unbear­able heat. By letting ourselves be guided by the sensation of cold at the time, and by the present reading of the thermometer, we should fatally overheat the room. And this is the kind of mistake that the capitalist technique leads to. Since production requires a previous manufacture of fixed capital, so long as this manufacture is not accomplished the shortage of finished goods induces a belief in the possibility of preparing for new increases in production. The entre­preneur can only see that wants are actually unsatisfied, as shown by the high prices; he cannot know that their virtual satisfaction is excessive.

In short, at any given moment there is over-production of certain consumption goods. It is not that incomes are insufficient to buy them, but that the satisfaction they yield has diminished: the ' final utility' of the goods supplied to the public has decreased. Once the process has started in one branch it extends to the rest. The crisis is not general but generalized, but it gradually embraces the entire economic system. It cannot be disputed that Aftalion has noted a fact of far-reaching importance that actually characterizes the existing technique of production. It is certain that crises have nowadays a tendency to break out first, and then to grow more acute, in the machine-making industries—industries that in our day have become of prime impor­tance. It is certain also that the forecasting of demand in these industries is subject to more mistakes than in others. The very abundance of capital that they require for their extension puts them in a particularly difficult position when the demand for their products stops, and when their productive capacity is no longer entirely employed.

It is not even necessary to introduce the notion of final utility in order to express Aftalion's theory in a way that satisfies the mind. It is enough to conceive that, for one reason or another, the demand for some product does not come up to the estimated supply, either because this estimate was excessive or because meanwhile the desires of the public have changed. In this case some businesses find themselves deprived of their markets, their profits disappear, their workers are unemployed, and their debts remain unpaid. If the entire economy is now in a period of tension, if the banks begin to find their credit margin too much reduced, or if a saturation of markets is already apparent in some industries, then bankruptcy or stoppage of work in the businesses in question may spread quickly and widely. Diffi­culties that in normal circumstances would have no repercussions on other businesses, or which would have been quickly compensated by their prosperous position, will, on the hypothesis we are considering, give a shock to neighbouring industries and may start a series of repercussions that will constitute a crisis. We shall see in sec. vi the importance attached by many writers, who incorporate Aftalion's ideas in their own theories, to this background, as it were, on which there appear incidents capable of starting a general depression, like microbes causing an infectious disease.

But one point still remains obscure: how are we to account for the simultaneous extension of the machinery of production in a large number of industries at once? Aftalion says that the development of one industry brings with it that of many others, and that thus the increase of equipment at one point of the economic field is generally accompanied by a corresponding increase at another point. This 'solidarity' of industries accounts for the circumstance in question. It appeals on the one hand to the law of substitution—"the prosperity or misfortune of one industry tends to spread to industries able to meet the same needs"—and on the other hand to the growth of incomes, "which leads to an extension of the demand for all products."2 It is at this very point that Schumpeter introduces his examination of the problem of crises in his brilliant Theory of Economic Development, the first German edition of which appeared shortly before Aftalion's book, and the two later ones after the First World War.

Schumpeter belongs to the school of Walras. He came into promin­ence by an earlier book, where he showed himself the convinced and suggestive interpreter of the fundamental ideas of the Mathematical schools of France, Italy, and England. In his second book he supple­ments the ' static' views of these schools by a purely dynamic study, and, quite naturally, he takes as the centre of this dynamic system the activity of the entrepreneur in the modern world. According to him the social function of the entrepreneur is not only to introduce something new into economic development, to invent, to discover, and to diversify products, but also to spread new methods of organization and manufacture, and to adopt and popularize the inventions of others. He does not confine himself to the efficient management of the existing economic system according to the traditional rules, but at each moment, by his initiative and bold faith in the future, he ' threatens' the habits and customs and therefore the sources of profit of his more conservative competitors. He is continually renewing the sources of profit—to the detriment of those already in existence— and thus, owing to this perpetual breeding of new incomes, he feeds the interest of the capitalist, who in a stationary economy would lose, he believes, the reason for his existence and even come to nothing.

But why is not this development continuous? That is what Schumpeter considers the fundamental question raised by the phenomenon of the cycle. Why does economic development proceed by fits and starts? Why is not the influence of the entrepreneurs introduced regularly, year by year or month by month, into the stream of economic life? This is obviously the same question as was asked by Aftalion. Here is Schumpeter's answer. In the modern world entrepreneurs do not arise singly and sporadically but in swarms or 'troops' (scharenweise). "The arrival of one or several entrepreneurs facilitates the arrival of others, and they of others, who in turn cause the arrival of yet new and ever more numerous entrepreneurs". For the single entre­preneur is faced at the beginning by innumerable obstacles, and if he eventually breaks through them it is by dint of struggle and energy.

But when one or several of them have at length succeeded, then the difficulties grow less. The first originator is followed by others who are encouraged by his success. Their success in turn encourages the intervention of other captains of industry until the innovation becomes normal and enters into the current life, and its reproduc­tion becomes a matter of imitation alone (pp. 339-340). In fact what the observation of facts reveals is that every period of expansion begins in one or a few branches (such as transport, electrical in­dustries, chemistry) and is characterized by innovations introduced in these branches. But their originators remove the obstacles not only in the branches of production where they arose, but also, ipso facto, in other branches. . . . This applies, for instance, to the open­ing of foreign markets. In this way the originators of new methods extend their influence far beyond their immediate sphere of action. The economic system is led with increasing swiftness and complete­ness into a process of reorganization which is the very essence of the period of expansion.

The depression appears as the inevitable consequence of this period of expansion. If the influence of the entrepreneurs were continuous and permanent, the absorption of their innovations by the economic system would also go on continuously. But these innovations arise by fits and starts, so that their absorption is effected in the same manner.

"This process of massive absorption is the very essence of the periodic depressions" (p. 342). It may be defined as "the struggle of the economic system to reach a new state of equilibrium adapted to the new circumstances created by the changes brought about by the period of expansion". The new products, in fact, do not appear until a few years after their manufacture has been put in hand. These surplus products, "which more than compensate for the increase of purchasing power" issue on to the market en masse. The interval between the start of their production and their arrival on the market in bulk determines the duration of the period of expansion. "It is, then, the massive supply of new products that causes the fall in prices and may lead to a crisis" (p. 345). Here Schumpeter's views coincide with those of Aftalion, to whom, moreover, he expressly refers in the last edition of his book. But Aftalion tries to find a special explanation for the suddenness of the fall in prices, whereas Schumpeter thinks it obvious that this results automatically from the increased production, which, as he says without emphasizing it, in the sentence we have just underlined, "more than compensates for the increase of purchasing power."

Instead of reasoning as Aftalion does, in general terms of produc­tion, income, and price, Schumpeter describes the same process in terms of personality, energy, and initiative. He depicts the cycle as a function of the men who are its agents, and not of the general economic elements which determine its mode of operation. But, though his exposition gains in vividness in this way, it does not alter the funda­mental notion, for the explanation of crises by the bulk appearance of entrepreneurs is hardly distinguishable from the bulk appearance of products suggested by Aftalion.

In conclusion, there is one remark of Schumpeter's that is worth remembering. Speaking of the post-war crises, he considers that in interpreting them phenomena connected with the war itself have been too often neglected. For him, as for Nogaro, the crisis of 1930 was largely an inevitable repercussion of the war.