New Conception Of Crises

New Conception Of Crises:

Haberler, Fisher, Wesley Mitchell And Divisia

The contradictory views of economists as to the causes of crises and the remedies to be adopted have not added to the prestige of political economy among the general public. Some lay the blame on excessive saving, some on its insufficiency. For some the crisis arises from an unsellable surplus of consumable commodities; others think that these same commodities are insufficient at the moment when the crisis begins. There are some who propose to raise the discount rate when the crisis approaches, while. others would lower it. Some consider savings to be more plentiful when the depression is drawing to an end, others when the boom is at its height. Some demand a lowering of wages; others think that the object should be to stabilize them. How is it possible for statesmen responsible for taking decision to find their way among conceptions and suggestions as varied as the economists whom they consult?

In addition to this there are the mistaken forecasts that well-known specialists have permitted themselves to make. In the United States such obviously competent and undoubtedly honest men as Irving Fisher and G. E. Persons have more than once announced the end of a crisis just when it was beginning to grow worse. Is it surprising that the public should feel and express scepticism about so many theories and forecasts when they are falsified by facts? To them political economy was certainly only "a poor little conjectural science," as Renan said of history. "Economics," said the philosopher Alain in 1934 "is still living in the age of the magicians whose magic book was solemnly read while things went on as best they could." Would it not be better, then, to appeal to common sense or follow the inspira­tion of daily necessity, than to trust such doubtful theories? The same scepticism has been felt by many economists, and has shown itself in a new attitude towards such a complex phenomenon as a crisis.

To begin with, are there actually general crises that recur at regular intervals? Is not this an illusion? Is there not rather in our economies a constant tendency, when a boom occurs in one part, for it to develop to a maximum? Success in one branch of industry encourages others, the banks increase their grants of credit, prices rise, and with them rises the confidence of other producers, and so on and so on. This general optimism then tends to exploit to the limit the possibilities of credit. It encourages savers to hand over their savings to the indus­trialists, which on the one hand increases indebtedness and on the other hand encourages less prudent or less competent entrepreneurs to launch out into new ventures. And at the same time the exploitation of sources of raw materials and the employment of labour are pushed to their extreme limits. In a word, the whole economic system is in a condition of combined prosperity and fragility. The slightest imprudence may then lead to a failure, or several failures, in one industry. Delay in the repayment of one debt may endanger one business, and by its repercussions a series of others. Some external event, such as a political crisis or the closing of a market, may have the same effect. Then credit, already extended to the utmost, becomes no longer so easily obtainable. The collapse of one bank may affect others by causing uneasiness to depositors, and the raising of the rate of discount may be enough to deprive other firms of their expected profits. To put it shortly, all the incidents inherent in normal economic life and easily remediable in ordinary circumstances may become fatal to the economy in the prevailing state of tension. In the same way an accident or strain, over which the human organism would easily triumph when healthy, may bring on a serious illness when it is already overworked. It is then the condition of the background or theatre of operations that must be considered as the cause.

This fragility of the economic system may be confined to a single country or may occur at the same time in several countries, but it must exist at a certain moment in every period of prosperity. This is the moment when the entire range of economic resources, including credit, has been made use of to the highest point, when many businesses have contracted debts, and when, therefore, the stoppage of payment by a single debtor puts all the rest in a difficult position, and, finally, when the quality of the new entrepreneurs has deteriorated and indi­vidual errors of judgment grow more numerous. The elasticity of the economy, if the term may be used, has diminished, and before making a new advance it has to store up a fresh supply.
What we call a crisis merely expresses in this case the impossibility of an economy to progress indefinitely to the same rhythm, from the very fact that the volume of productive forces, labour, and credit is limited. There is no 'cycle' in the strict sense, no regular periodicity, for crises can be separated by different intervals and arise from circum­stances of the greatest variety. They result simply from a kind of breathlessness in the economic system, in consequence of the inevitable tendency of economic activity to quicken its pace when it is successful, so that it must needs stop to take breath. But these stoppages make little interruption in the general line of progress. Thus Carl Snyder was able to show that crises marked on a secular curve of production appear as insignificant breaks in the upward curve.

Such is the conception arrived at by some of the economists who have given the most careful study to the subject of crises. It is the one that Haberler offers us as the conclusion of his noteworthy investiga­tion of the different theories of crises, supported by an extremely pene­trating analysis. The breakdown of a particular industry, he says, may very well cause at least a temporary breakdown in total demand below the level at which it would otherwise have stood. Whether or not this will start a process of contraction depends first on the scale of the trouble and then on the general situation. If a general expansion is taking place and has not yet lost its impetus, then the trouble may be got over, if it is not too great. But if the process of expansion has already lost its impetus, the economic system will be vulnerable and may easily be precipitated into a general process of contraction.

This is the conviction also of Irving Fisher. " The old and apparently still persistent notion of the business cycle," he says, as a single, simple, self-generating cycle (analogous to that of a pendulum swinging under influence of the single force of gravity) and as actually realized historically in regularly recurring crises, is .a myth. Instead of one force there are many forces. Specifically, instead of one cycle, there are many co-existing cycles, constantly aggravating or neutralizing each other, as well as co-existing with many non-cyclical forces. In other words, while a cycle, conceived as a fact, or historical event, is non-existent, there are always in­numerable cycles, long and short, big and little, conceived as tendencies (as well as numerous non-cyclical tendencies), any histori­cal event being the resultant of all the tendencies then at work. Any one cycle, however perfect and like a sine curve it may tend to be, is sure to be interfered with by other tendencies.

Fisher compares a crisis to what happens when a ship capsizes which in ordinary circumstances is always near to stable equilibrium, but which, after heeling over beyond a certain angle, loses its tendency to return to equilibrium and tends instead to depart from it.

In France similar ideas have been expressed by Divisia. It is apparently the view also of an American writer whose name is asso­ciated with every investigation of these ' cycles' for the last twenty-five years, and who has brought to their study not only infinite patience in detailed research but an exceptional perspicacity and flair in econo­mic matters—Wesley Mitchell. In his view there is nothing patho­logical or mysterious in the process of expansion when an economy is progressing, for each step forward in one branch of activity promotes the progress of others. But how are all these advances to be kept in line with each other? There will inevitably be errors of adaptation in one branch or another, and at the point of tension reached by the different series a single error is enough to have repercussions on all the others.

Presented in this form the theory of crises has many advantages. To begin with, it avoids all recourse, as Mitchell says, to mysterious explanations. There is no one cause of crises, but a group of phenomena which by their juxtaposition and superposition result in a crisis. We shall not place the blame specially on under-consumption or credit expansion or saving, but shall examine how consumption, production, credit, and saving in certain conditions eventually set up tensions which may be transformed by an accident or an incident into ruptures.

For instance, the old and too long undecided controversy between the notions of a general and a generalized crisis disappears. No one to-day—or hardly anyone—believes in the general crisis. Every one agrees in recognizing that at a given moment a cumulative process begins, either of a rise or a fall in prices. Its starting-point may vary greatly in different crises. The real problem lies in finding in what way it spreads gradually through the national and international economy until it gives the impression of a general crisis. J. B. Say's old formula that he thought would banish the crisis bogy, "products are bought with products," still remains true as a generalization, but has no longer any but the most distant connexion with the phenomenon under discussion.

If we adopt the view described above we shall understand, too, why crises are either strengthened or mitigated by such external circumstances as the increased or reduced exploitation of gold-mines, or one of those drastic price readjustments that take place after a long war, during which goods have become scarce while monetary supplies have increased. We can understand also why there are so many circumstances that provoke a crisis or start a new boom after a depression. As it is a matter of a certain state of the economic system, this can be modified for the better or for the worse by any circumstance whatever that serves to increase profits or to reduce them, as the case may be. So also no one will expect the duration of these cycles to be uniform. Sometimes they are close together, sometimes far apart, precisely because they do not originate in any one definite cause so that the rhythm of their development can be determined in advance. In conclusion, this conception opens up a vast field of work in the historical and statistical observation of crises. The economist is undoubtedly free to make the most varied assumptions as to the relative importance of the essential factors that cause them, but his first task is to follow the fluctuations of the different elements—price, rate of interest, production of the principal kinds of goods, saving, and so forth—which taken altogether will at a given moment start the crisis. It is on the observation of these different 'series' that the explanation of each particular crisis will depend. A study will be made on the one hand of the order in which the highest points of each series follow each other, and on the other hand of the tensions that appear between one series and another. Many interesting hypotheses have already been suggested. It has been thought, for instance, that there is a regular order of succession between these highest points, that, say, the fall in stock-exchange securities precedes the fall in the other elements. But there does not seem to be any absolute regularity there. In the matter of tensions, certain characteristic phenomena have been observed, such as the divergence between the discount rate and the interest rate, the former generally exceeding the latter on the eve of a crisis, and falling below it when the crisis has begun.

However, if there is approximate agreement as to the cumulative processes of boom and depression, it is the critical points that particu­larly attract the attention of observers and investigators. What are the incidents that start a boom or a crisis, and what is the situation of the economic system at the moment when this happens?

If we succeeded in answering this double question from observation, we should have a means of revealing the approach of the crisis and perhaps of foreseeing it. This would be the most satisfactory confirma­tion of the investigations that are being carried on in so many different directions. But the real difficulty lies in joining together the whole of the elements that play their part in starting or prolonging a crisis. This is an extremely hard task. The points of tension are so numerous, sometimes so distant from each other—even geographi­cally—that it is difficult for a single observer to have the whole of them under his notice. It might have been thought in the United States, for instance, that the crisis of 1929 was almost overcome when a great storm was brewing in Central Europe that was to cause wide­spread bankruptcies in Austria and Germany and make the crisis leap over to England and the United States without anyone seeing the storm-clouds piling up.

And so, little by little, a conception has emerged that has already invalidated more than one ancient controversy. The new method, instead of imagining what might be the mechanism of crises, seeks to observe what they have actually been. Not that this observation—which began long ago—is sufficient by itself to explain them, but the perfect­ing of this method is the essential condition for foreseeing them and dealing with them, and already it has produced results that are far from negligible.

The two volumes of the Dutch economist Tinbergen entitled Verification statistique des theories des cycles e'conomiques, published in 1939 by the League of Nations as a supplement to Haberler's report, are typical of the kind of investigation that can be used for this purpose.1 Making use of the statistical method of multiple correlation the author seeks to discover what influence has been exerted in the United States during a certain number of years on the other elements of the system by the factors regarded as ' causes' by the principal crisis theories. He obtains as many equations as variables calling for explanation, and is then in a position to see whether the sum total of the influences thus discovered can result in a 'cycle.' As a matter of fact, however, the positive conclusions he reaches are a little deceptive. Such a method is obviously one of the most complicated to handle. It assumes an abundance of statistical information which in many cases is still lack­ing. It also involves the preliminary construction of a system of 'norms' of progress for the elements of an economic system, enabling us to realize at each moment the divergences from this norm of such and such an element in the system. It presupposes the assistance of regular economic laboratories like those that have now been set up in most countries, which have already done much, if not in foreseeing crises, at least in discovering important relations between the different factors in operation. Despite all obstacles it is evidently in this direc­tion that the explanation of crises stands most chance of making progress.