Prices and Production

APPENDIX TO LECTURE 3

A Note on the History of the Doctrines Developed in the Preceding Lecture

The central idea of the theory of the trade cycle which has been expounded in the preceding lecture is by no means new. That industrial fluctuations consist essentially in alternating expansions and contractions of the structure of capital equipment has often been emphasized. At one time, at the beginning of the second half of the last century, such theories even enjoyed considerable vogue and the financial journalists of those days frequently used a terminology which, intelligently interpreted, seems to imply essentially the same argument as that used here. The creation of “fictitious capital,” it was said, leads to the conversion of too much circulating into fixed capital which ultimately brings about a scarcity of disposable or floating capital which makes it impossible to continue or to complete the new undertakings and so causes the collapse. The reason why these theories did not prove more fruitful seems to have been that the concepts employed, particularly the concepts of the different kinds of capital, were too uncertain in their meaning to give a clear idea of what was really meant. But even if for this reason their popularity in the ‘sixties and ‘seventies was of a transient nature, they are of considerable interest as an expression of a fairly long and continuous strand of thought which occasionally came very near to modern ideas and in some instances leads very directly to some of the best known theories of today.

I have made no special study of the development of these doctrines (which they would well deserve), and I can therefore do no more than give a brief sketch of the main lines of development as I see them. It seems that all these doctrines trace back to Ricardo’s doctrine of the conversion of circulating into fixed capital, developed in the chapter “On Machinery” in the third edition of his Principles. A relatively early attempt to apply these ideas to the explanation of crises was made in 1839 by the American Condy Raguet.64 But the author who mainly developed and widely popularized it was James Wilson, the first editor of The Economist.65 It seems to be from him that a host of English and French writers adopted it. In England it was particularly the group of economists connected with the Manchester Statistical Society who took up the idea. Mr. T.S. Ashton in his recent Centenary History of this Society66 quotes several extremely interesting extracts from lectures given to this society by T.H. Williams in 1857 and John Mills in 1867 which show clearly the great importance which they all attached to the “excessive conversions of floating into fixed capital”; and he particularly draws attention to a significant passage in W.S. Jevons’s early tract on the Serious Fall in the Value of Gold, published in 1863 soon after he came to Manchester, where he says that the remote cause of the commercial tides “seems to lie in the varying proportions which the capital devoted to permanent and remote investment bears to that which is but temporarily invested soon to reproduce itself.”67 From the author who later on was to be the first to provide the basis for that modern theory of capital which now enables us to give more definite meaning to these ideas, this statement is of special interest and makes one wonder whether it may not be due to his early preoccupation with the problem of the trade cycle that he was led to a correct appreciation of the role the time element played in connection with capital.

A little later Bonamy Price developed these ideas in considerable detail68 and from him they were taken over in France, where other authors like J.G. Courcelle-Seneuil and V. Bonnet69 had been working on similar lines, by Yves Guyot, who not inappropriately summarized this theory by saying the “Commercial and financial crises are produced, not by over-production, but by over-consumption.”70

In the German literature similar ideas were introduced mainly by the writings of Karl Marx. It is on Marx that M. v. Tougan-Baranovsky’s work is based which in turn provided the starting point for the later work of Professor Spiethoff and Professor Cassel. The extent to which the theory developed in these lectures corresponds with that of the two last-named authors, particularly with that of Professor Spiethoff, need hardly be emphasized.

Another contemporary author who is evidently indebted to the same strand of thought and whose views on these problems are even more closely related to those taken in these lectures, but with whose work on this point I have unfortunately only became acquainted since he has collected his earlier scattered articles in book form, is Professor C. Bresciani-Turroni. His monumental study of the German inflation (Le Vicende del Marco Tedesco ) appears to me to be one of the most important contributions to the study of money which have appeared in recent years. Particularly the chapters on the influence of inflation on production and on the scarcity of capital after the stabilization (chapters 5 and 10, an abridged German version of the latter appeared in the Wirtschaftstheorie der Gegenwart, ed. by H. Mayer, vol. 2 ) seem to me of extraordinary interest and to contain a wealth of concrete illustrations of these difficult theoretical questions which is not to be found elsewhere. Few other foreign books on economic problems would equally deserve being made available in an English translation.

In view of the importance which so many theories of the trade cycle attach to the interrelationships between the different forms of “capital” one might expect that investigations in this field should have received considerable help from the theory of capital. That this has hitherto been the case only to a very limited degree is mainly due to the rather unsatisfactory state of this theory which was mainly concerned with barren terminological debates or the question whether capital was to be regarded as a separate factor of production and how this factor was to be defined, instead of making its main task the general question of the way in which production was carried on. It would not be surprising if it would ultimately be that theory of the trade cycle, which consciously utilizes the results of the only satisfactory theory of capital which we yet possess, that of Böhm-Bawerk, which should prove to be successful. It must be admitted, however, that, so far, the further elaboration of the ideas of Böhm-Bawerk, apart from two notable exceptions, have not helped us much further with the problems of the trade cycle. The two exceptions are Knut Wicksell and his pupil, Professor G. Akerman. Particularly the difficult but important investigations in the Realkapital und Kapitalzins of the latter author (two parts, 1923 and 1924), which I did not yet know at the time when I wrote these lectures, seems to me to deserve particular attention as one of the few attempts to clear up the difficult problems which arise out of the existence of very durable capital goods. It seems, however, not improbable that in the future the relationship between the theory of capital and the theory of the trade cycle may be reversed and that the former will be benefited by the progress of the latter. Only by studying the changes of the capitalistic structure of production will we learn to understand the factors which govern it, and it seems that the trade cycle is the most important manifestation of these changes. It is therefore not surprising that the study of the problems of the trade cycle should lead to the study of the theory of capital. As has been suggested before, this may have been the case with Jevons, and more recently it has certainly been true of Professor Spiethoff (cf. already his “Vorbemerkungen zu einer Theorie der Überproduktion,” Schmollers Jahrbuch 26 [1902], particularly p. 299 and his essay on “Die Lehre vom Kapital” in Die Entwicklung der Deutschen Volkswirtschaft im 19. Jahrhundert 1 [1908]).