Spiethoff And Cassel

Spiethoff And Cassel

Aftalion explains crises by the rhythm and technical conditions of the creation of capital. But does not capital itself imply a preceding condition—the formation of savings? Should not the explanation of crises be looked for beyond these technical conditions, and even in the rhythm of the formation of savings itself? This idea has attracted many economists, and lies at the root of several recent explanations of crises. It has, therefore, brought into the foreground the whole problem of saving, its mechanism and its effects, and has given rise to a most instructive controversy. Spiethoff in Germany, Gassel in Sweden, Ansiaux in Belgium, and, earlier than these, the Russian writer Tugan-Baranowski have all adopted this conception, though with slight variations. But the author whose exposition has aroused most interest is the German Spiethoff, who made himself the protagonist of the notion after the crisis of 1899 which was felt more severely in Germany than elsewhere. Of course, neither these authors nor those mentioned earlier make any claim to having isolated a single circum­stance as the cause of crises. They too take account of fluctuations of credit (credit is the indispensable instrument of expansion, says Spiethoff), or of the time taken to set on foot new production in­dustries, thus incorporating Aftalion's2 conception in their own, or, finally, of the influence exerted by a rise or fall in the discount rate. But all these circumstances they regard as secondary, or, if you prefer it, auxiliary, as compared with the one essential circumstance—first the abundance and then the scarcity of creative saving during the phases of depression and expansion.

They start from the fact (which is true of modern industrial countries) that price fluctuations are particularly prominent in the group of businesses making 'production goods.' During the first half of the nineteenth century crises might arise from overproduction of consumption goods, but nowadays, when machinery and building, along with the extraction of mineral raw materials, are the principal domain of industry, it is in this branch of production that impulses begin. "A boom generally starts," says Spiethoff, "in the group of firms making production goods. ... In a capitalist age it is difficult to imagine it starting in the group that makes consumption goods and reaching its highest point in these industries" (p. 71). This is also Cassel's opinion: only crises in the past, he says, could arise from overproduction of consumable products. So on this point these writers are already diverging from the theses of Aftalion and Schumpeter.

Now, if the firms making production goods are to extend and develop, they need savings. We use that word, although Spiethoff, like most German authors, prefers the word 'capital'—which we, like Walras, reserve for the actual goods procured by saving. The distinc­tion between saving and capital, peculiar to the French and Italian terminology, is indispensable, if we are to get this set of ideas quite clear.

"Savings accumulate," says Spiethoff, "during periods of depres­sion" (in der Stockung staut sich das Kapital) (p. 70). This process has been compared by a Russian author, Tugan-Baranowski, to the accumulation of steam in a steam-engine until its pressure overcomes the resistance of the piston.1 This accumulation of savings during the depression would bring about a reduction in the rate of interest, an indispensable condition—though not (he adds) a sufficient one— of the subsequent boom. If this boom is to come, there must at the same time be new markets or new technical discoveries that provide an opportunity for the boldest of the entrepreneurs to make new profits. It is nowadays in the realm of such industries as mining, railways, electrical or siderurgical industries that these conditions are to be met with. And when once they are combined the accumulated savings are immediately attracted to businesses in this group, spreading thence into other industries, on account of the incomes created by their operation. Then the boom continues, spreading from one in­dustry to another, increasing incomes and consumption, and stimu­lating alike the construction of fixed capital, electric-power stations, and means of transport—all enterprises which call for considerable capital outlay, although they provide directly consumable services.

The origin of a boom is to be found, therefore, in accumulated savings, and it is the inadequacy of these very savings that is destined to end it. The crisis breaks out not because the consumption of consumers' goods is reduced, but because the savings that are indispensable to the creation either of the machinery or of the fixed property and plant are not available. All such goods are different from others in that "their construction or purchase is not made out of income in the strict sense, but out of capitalized income or acquired capital" (Erwerbskapital, p. 75), and it is the lack of this acquired capital—or, as we should say, savings—that puts an end to the extension of the industries that make it. Their originators may see their initial fore­casts completely falsified by a reduction in the saving on which they had counted, and this gives rise to a disequilibrium that provokes the crisis (p. 76). As for consumption goods, there is never any lack of the purchasing power needed to absorb them. "A limit to their market is still very far from being reached" when the crisis starts (p. 78), so it cannot be explained by any superabundance of these goods. The opposition between Spiethoff's theory and Aftalion's could not be more clearly marked.

It is obvious at once that there are two points in which the theory just described is open to criticism. To begin with, is it true that during a depression savings accumulate without being used? Profits, and therefore savings, undoubtedly diminish during this period, but none the less these savings do find employment, as Aftalion has rightly emphasized. Among other things, they are used for buying up businesses that have run into debt during the preceding period, and have been liquidated. They are used also to repay loans from the banks. Consequently the new savings are for a certain time entirely absorbed in replacing old savings that have been destroyed, and they do not become available for new businesses until they have facilitated this indispensable liquidation, which is generally accompanied by a fall in the rate of interest as well as in the price of services and raw materials. During this period, then, there is a combination of conditions all tending to reduce costs and adjust them to the diminished incomes, and thus making recovery easier as soon as new opportunities of expansion present themselves to the businesses, which, moreover, will need nominally less savings than in the period of maximum expansion.

The conception of a scarcity of savings in the boom period is no less open to criticism. In such a period incomes increase, and so there is a similar increase in the amount of savings. Again, savings— notwithstanding the term 'capitalized income' that Spiethoff applies to them—are simply a part of income, in the same way as money used in the purchase of consumption goods. So we have to explain why these savings in a boom period are suddenly unable to absorb the increased amount of products of the firms that make machinery. Who buys this machinery if it is not the firms that make consumption goods? Why should these firms find themselves powerless to buy it, if the demand for goods for direct consumption goes on without diffi­culty, or even increases, as Spiethoff says it does? It must then be supposed that the consumption industries foresee, for some reason or other, that there is no longer any chance of increasing their existing plant because the demand for their products if going to diminish. Or are we to assume that the prices of consumption goods rise so fast during the boom period that they absorb an increasing proportion of income and do not leave enough to be saved? But this would imply that these goods are in great demand, which should cause those who make them to employ their profits in ordering new machinery—i.e., to provide the savings which, as we are rightly told, are lacking. To these questions Spiethoff gives no answer.

Cassel and Ansiaux are more explicit. Ansiaux thinks it is the excessive number of new business firms and the anxiety caused by growing speculation that make the savers more reluctant. The inade­quacy of savings would in this case be only apparent; it would be an impression, whereas the real fact would be the excessive appeals for savings, and their surprise at meeting with no response. This im­pression of insufficiency arises from the successive creations and extensions of firms of every kind—genuine and otherwise—that characterize the period of excitement which is the last phase of the boom. The insufficiency is relative, if you like, but it is none the less felt, and especially in the sense that it is often not the most extravagant projects that are dropped. Consequently the financing of genuine business becomes difficult, and sometimes even impossible.

Cassel has also felt the need to explain the initial abundance and then the relative scarcity of savings at the beginning and end of a period of expansion. But he does not resort to the idea of an 'accumu­lation' of capital during the depression, the working of which it is almost impossible to conceive. He confines himself to showing that the creation of savings is not equal at the beginning of a boom and at the end. This is what he writes in his book, the last part of which is concerned with crises:
As entrepreneurs are compelled to save by economic necessity, the savings made out of the profits of business should represent a larger proportion than those made out of other incomes. Consequently the formation of savings by society should be relatively greater in periods favourable to the entrepreneur's profits. That period is precisely the initial period of a boom. We can therefore conclude that there are relatively more savings at the beginning of this boom. But as soon as wages and prices begin to rise there probably occurs a relative reduction in the formation of savings in proportion to the sum total of all incomes. For the working-classes certainly consume by far the greatest part of their incomes, especially when the prices of all provisions are rising. At the same time the entrepreneur''s income begins to fall by reason of that very rise in wages, or at all events its rate of increase becomes lower. Thus an important source of savings loses its force, and the peak of the boom period will be marked by a relative scarcity in the supply of savings.

The author agrees with SpiethofF in thinking that in a period of high prosperity of the modern type there is no over­production and no over-estimation of the demand of the consumer . . . but there is over-estimation of the supply of savings, that is to say of the amount of savings prepared to absorb the concrete capital that is made. What is over-estimated is the capacity of capitalists to put savings in sufficient quantity at the disposal of producers

The caution used by Gassel in these passages is noteworthy. The process he describes is in his view "probable," not certain. It is a plausible hypothesis, not a fact founded on experiment. The increases and decreases in savings are relative, whereas it is absolute figures that matter here. We shall see shortly that Keynes's description of the formation of savings during a crisis is exactly opposite to Gassel's.

These contradictions and uncertainties among writers who find the origin of crises in the rhythm of saving show the need for a pre­liminary theory of the mechanism of saving itself. What is the effect of its formation on the demand and supply of goods? Is it the same for consumption goods as for production goods? At what moment are savings most plentiful, either relatively or absolutely? Is it at the beginning or the end of a crisis? And what influence can it have on the phenomenon of unemployment? All these questions have arisen in connexion with the theory of crises, and have occupied an important place in the work of economists in the period after the First World War. It has become clear that the word 'saving' is one of those that every one thinks he understands, while it really includes very different meanings. Hence the need to clear up these meanings, and the controversies that have arisen on this subject. We must now give an account of these con­troversies. But first it will be as well to examine the views of the Swedish economist Knut Wicksell, whose name is constantly mentioned by economists of the first two decades of the twentieth century. By fix­ing his attention on the dynamic phenomena of the economic system instead of on the static phenomena which had been the chief concern of the 'theorists of equilibrium, he was led to think out methods of working which in his view made it possible to explain crises as well as general price movements. The influence of his ideas is to be seen in almost all the discussions aroused between the two World Wars by the violent fluctuations to which the world economy has been subjected, and, in particular, the discussions by economists concerning saving and invest­ment. They deserve special examination.