Most American economists—60 per cent, if we are to believe a recent Business Week survey—think that a serious economic collapse will take place within the next five years, and a large proportion of these believe the collapse unavoidable.

Virtually all statistical data agree that the trend is toward lower production and higher unemployment. They show declining purchasing power, rising living costs, decreased savings, and intensified monopoly controls; they show increases in corporate profits while wages are going down. The tremendous expansion in plant facilities which occurred last year appears to have spent its force; inventories are rapidly being sold; government spending is under curtailment; and construction, the one industry that everyone agrees can support prosperity, is almost non-existent. These are the omens that presage the coming storm.

Not entirely blind to these signs, businessmen in their public pronouncements defy reality with a kind of forced optimism. Typical of this attitude were the prognoses offered by several business counselors at the annual conference of the American Economic Association, in January 1947. Ragnar D. Naess, senior partner in the Wall Street firm of Naess and Cummings, read a paper on “The Outlook for Incomes and Spending” (Papers and Proceedings of the American Economic Association, May 1947). On the one hand, Mr. Naess stated that every economic indicator reads prosperity; on the other hand, he conceded that there was widespread apprehension concerning the level of national income and economic activity in the immediate future. He argued that the intense demand on the part of industry for new plant and equipment, a demand reflected by a 75 per cent increase over 1941 in expenditures for producers’ durable equipment, provided the necessary leverage for prosperity. Yet he admitted that “. . . it is doubtful that the current rate will increase to any degree. Orders in this broad field of activity are no longer increasing and, if anything, are showing a declining tendency.”

Neither foreign trade nor inventory accumulation promised much in the way of economic stimulus; political barriers interfered with the first, and current inventory increases were due largely to inflated prices. While it is true that inventory increases create purchasing power—since they mean more employment and income without a corresponding increase in available consumer goods on the market—it is obvious that they can only be a temporary and artificial spur.

It is this problem of purchasing power that is central to the entire question of boom or bust. Mr. Naess acknowledged that, at prevailing prices, there still remained a sizable deficiency in individual income as measured against consumer-goods industries current output. In fact, this deficiency was great enough to engender a glut in many consumer-goods markets. Businessmen had recognized this disparity by marking down the prices of many of the so-called soft goods. Said Mr. Naess: “It is clear that the present trends cannot last long before a more general downward movement will occur. It is unlikely that income payments to individuals will increase enough to enable the market to absorb the increasing flow of consumer goods at present prices, even with a larger than normal rate of spending out of income, somewhat lower personal income taxes, and a continuation of the rising scale of the use of consumer credit.”

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There is no question that we do possess the technical means and the physical ability to assure a plenitude of goods for all, according to the Twentieth Century Fund’s impressive and encyclopedic study, America’s Needs and Resources (1947). On the assumption that our economic system can function at high levels, J. Frederic Dewhurst, the Fund’s economist and director of this survey, predicts that the American people will have more goods and services in the future than were available during the best war years. The output of American industry in 1944, he shows, was twenty-seven times greater than in 1850, when a labor force one-eighth the present size worked seventy hours a week, and has increased the income of each individual more than fourfold. If this growth continues, the Fund concludes, we should be able to increase the nation’s output to 177 billion dollars in 1950 and 202 billion in 1960.

What will such a national output mean for the American standard of living? More food, both inside and outside the home; more clothes and shoes; more homes; more toilet preparations. Furniture, floor coverings, and household appliances will increase in importance for the average home. More will be spent for automobiles and plane travel, and foreign travel will go up by almost 400 per cent. More money will be spent for the services of physicians and dentists, and on drugs. People will attend the motion picture theater and spectator sports in greater numbers—but the relative importance of expenditures for museums, libraries, and religious bodies, according to the Fund’s report, will decline.

The ability to produce this vast quantity of goods—a quantity which would exceed what we had in 1940 by nearly 40 per cent—would be based upon a level of employment and a volume of production far greater than pre-war levels. Clearly, this sanguine picture can become a reality only if the American factory is permitted to fulfill its promise—a promise that, viewing past progress, technology is eager and ready to realize. As Dr. Dewhurst remarks: “Over the past century we have achieved a fabulous increase in output per man-hour, not by working harder or more skillfully, but by constantly devising new and better machinery to augment human effort by the use of vast amounts of inanimate energy.”

Nor does Dr. Dewhurst believe that increased technical improvements will create serious job difficulties for the workingman of the next generation. He concedes that personal tragedies engendered by changes in productive techniques may remain with us. But over the years, technological changes have given us more jobs, more goods, and more leisure.

The Fund’s optimism, however, is tempered by the fact that even these glowing estimates of the 1950 and 1960 patterns of production, distribution, and demand will not meet the needs of the American people. To furnish everyone what sociologists and nutrition experts consider a minimum standard of health and decency would require an output of 200 billion dollars in 1950 and 210 billion dollars in 1960, and the Fund’s elaborate estimates indicate that we will fall short by about 11 per cent in 1950 and by 7 per cent in 1960. To quote Dr. Dewhurst once again: “. . . there will still be many families in 1950 without enough income o live at a ‘minimum level of health and decency.’ Although a much smaller proportion of the 1950 consumers will be at the lowest income levels than even in prosperous 1941, about 7 per cent of the nearly 35.4 million families of two or more persons, and 24 per cent of the 12.5 million single individuals, will receive less than 500 dollars cash income.”

As a basis for their roseate estimates, however, Dr. Dewhurst and his associates have adopted a number of simplifying premises. They assume that economic life between 1950 and 1960 will be “stabilized at a high level,” that a continuously and steadily increasing amount of goods necessary for comfortable living will actually be produced by our industrial plant, and that the American people will have the purchasing power to buy these goods. All these premises are extremely vulnerable.

The premise, for instance, of a higher level of consumer spending involves the assumption that income distribution in 1950 and 1960 will be altered in favor of the low income groups. Recent statistics on income payments to individuals reveal that wage and salary earners received three billion dollars less in the first quarter of 1947 as compared with the same period in 1945, while profits, interest, rent, and dividends increased eleven and a half billion dollars. This situation certainly does not favor consumer spending, and if it should continue for the next few years, the prospect of a high-consumption economy would be nullified. Nor is one justified in asserting that wartime savings will provide the required fillip for continuous spending. While it is true that the American public saved about 28 per cent of its income during the past few years, price ceilings no longer exist and high wartime wages are now a happy legend. In the last quarter of 1946 less than 10 per cent of income was being saved. Furthermore, as the Fund’s study readily admits, the bulk of wartime savings was concentrated in the middle and upper income groups and is currently being used for purchases of luxury items: automobiles, high-priced radios, and travel. The really significant areas for spending—housing, machinery, and equipment—show no marked signs of activity.

These facts suggest that the kind of straight line projection of America’s economic future offered by the Twentieth Century Fund does not furnish a realistic basis for prediction. It fails to take into account the intransigence of economic relations, an intransigence which makes it unlikely that capitalism will undergo drastic modification. Yet, without such modification, as many economists have pointed out, the stream of purchasing power will not flow to those who need it most and can use it best.

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Dr. Dewhurst and his associates also assume that spending for producers durable goods—what the economists call real investment—will continue at approximately the same rate as it has in the past. That this is but another case of wishful thinking may be seen from an analysis presented by C. Reinhold Noyes, president of the National Bureau of Economic Research, in his article “Prospects for Economic Growth” (American Economic Review, March 1947).

Available estimates show that the ratio of spending for machinery, equipment, and construction—capital goods—to gross national expenditure ranged in former years from 14 to 19 per cent. The Twentieth Century Fund study assumes that this ratio will be about 16 per cent in 1950 and 1960, thereby continuing the kind of economic progress witnessed before World War I. Dr. Noyes, however, analyzing actual trends, says: “It appears that for the first time in our recent history and perhaps for the first time in our entire history, the process of growth in reproducible wealth [capital goods] has practically ceased for an entire decade.”

According to accepted statistical standards, expenditures on capital goods is the best index of growth. Yet from 1931 to 1945, Dr. Noyes shows, the consumption of capital goods exceeded capital creation by 9.5.billion dollars—despite a marked upsurge in capital creation in the later years. In other words, we have been using up our capital at a faster rate than we have been replacing it. Whatever capital formation (the economists’ technical term for additions to capital goods) did take place assumed the most ephemeral forms—inventory increases and claims on foreign debtors.

Upon closer examination of the evidence, Dr. Noyes discovers that this tendency was more apparent in the private than in the public sector of the economy. “Since 1930 the private economy in the aggregate has not only failed to create any new net real capital; it has not even maintained its net capital intact. . . . In fact we have been to some extent living on our fat. There can also be no question but that the private economy will continue to stand still unless the process of its own net capital formation is resumed.”

The obvious consequence of this startling transformation would be a relative decline in living standards. This has indeed taken place. Dr. Noyes shows that the improvement in standards of living that occurred between 1929 and 1941 was less than half the improvement in the decade before 1929. Furthermore, these improvements were expressed largely as purchases of soft goods and perishables—again a type of investment which is soon dissipated. Spending for the more durable forms of commodities, such as residential housing, contracted.

Dr. Noyes argues that this lack of investment is attributable to discouragingly high taxes and to the unwillingness of investors to place their funds with private industry. People with savings, we are told, prefer not to become partners in industrial enterprise; they fear to undertake the risk of new economic adventures and would rather hold their money in safer forms, notably government bonds. Whatever the motives of the “average” investor, there is no gainsaying the fact that capitalism seems to be losing its attractiveness, even as a cash proposition. And if capitalism can no longer draw sustenance from those presumably most interested in its ultimate success, then it certainly does not augur well for its continued economic health.

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Not all economists are willing to concede that capitalism has lost its vigor. Sumner H. Slichter, Professor at Harvard University, suggests (“Eight Errors in Our Economic Thinking,” New York Times Magazine, August 10, 1947) that we have been unduly influenced by the unfortunate experience of the 1930’s, and consequently fail to understand the dynamic potentialities of the American economy and its capacity to raise up new enterprises and new industries. National income in 1960, he estimates, should reach 237 billion dollars—a figure considerably higher than the Twentieth Century Fund estimate. The basis for this sanguine outlook is a continued increase of three per cent a year in output per man hour.

Growth of this kind can be achieved, says Professor Slichter, because of the competitive drive inherent in our economy. Competition continually forces the three million business enterprises in our country to search for new methods in making and marketing goods, requiring new plans and equipment. In fact, says Professor Slichter, we are now actually suffering from a deficiency in capital equipment of about forty billion dollars. This demands more and more saving by the American people. The belief that we should be less thrifty is an egregious error, he says, for only by saving can we accumulate the funds necessary for so huge an expansion.

But while it may be true that we need more savings to obtain more plant, how certain are we that even existing equipment will continue to function at high levels? And if the need for savings is really so great, how can Professor Slichter explain the propensity for present-day savings to be invested in government bonds rather than new plant? This question poses a serious dilemma. While continuous utilization of capitalism’s industrial apparatus demands a steady flow of income, the savings economists deem necessary for plant expansion reduce the spending needed to take the products of existing factories. The problem for capitalism is essentially one of balanced savings and spending; it is a fundamental one and Professor Slichter does not face it.

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The thesis that capitalism periodically falters because it fails to generate the requisite purchasing power to absorb goods as they pile off the belt-line has been re-stated by Fritz Sternberg in his book, The Coming Crisis (New York, John Day, 1947). While Dr. Sternberg frequently encumbers his analysis with circum-location and neo-Marxist interpretation, he does succeed in showing that our economy has not yet solved the basic problem of consumer buying power, despite its present volume.

The capitalist process demands a continuous expansion of productive facilities, which can be sustained only if there is a commensurate expansion of consumer purchasing power. Yet this is precisely what capitalism has been unable to do. This dilemma has been solved in the past, according to Dr. Sternberg, by the discovery and exploitation of new markets—usually overseas. Capitalism moved into new continents. The profits gained there enabled home-country industrialists to placate their own working class; all groups in the advanced nations benefited from a prosperity founded on the exploitation of colonial natives. But this solution, says Sternberg, can no longer be used. When the First World War broke out in 1914, there were few new areas available.

The lack of additional markets prevented the leading nations from digging themselves out of the economic morass of the 1930’s. By that time, the old type of commercial imperialism was dead. Soviet Russia eliminated a large part of the globe from possible capitalist cultivation; America preferred to isolate itself behind a high tariff wall rather than experiment with a revival of foreign trade; Central Europe was absorbed into the Lebensraum of a revived German imperialism; and Eastern Asia became the exclusive domain of an industrialized feudal Japan. Capitalism consequently had to fall back upon internal markets. As of 1939 this effort had not yet succeeded; production was still low and it was not until the gears of a huge war machine began to grind that employment and incomes increased. The industrial nations entered the Second World War, says Dr. Sternberg, with the 1929 crisis still unresolved.

Most economists concede that the United States represents the largest and most important single factor in future world prosperity. If we can maintain a high degree of economic stability, and if we are willing to help other nations restore their industrial apparatus, then the world can draw a deep breath of hope. Dr. Sternberg would not disagree with this view. But he does not believe that the capitalist modus operandi will permit this to come about. It may be that American productive ability is great—greater today than at any time before the war—yet we have not solved the problem, any more than other nations have, of smoothly distributing an enormous quantity of goods.

Sternberg contends that there are no new markets available to this country. American foreign trade, which is responsible for about 10 per cent of the national income, is too small to offer much promise, and its potentialities are limited by the weakness in purchasing power abroad. He does not think, as do the Keynesians, that it is possible to establish workable controls to guarantee an adequate total of domestic purchasing power. Neither will continued investment in the capital goods industries solve the problem of generating purchasing power, since such investment can be of no help if it is not accompanied by a like expansion in consumer spending ability.

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Dr. Sternberg’s analysis, then, attributes decline to the operations of internal elements. It asserts that the capitalist engine falters because of an inherent inability to keep the fuel—i.e., purchasing power—circulating properly. Other economists, however, deny that capitalism suffers from a faulty structure. There is really nothing wrong with the engine, they say; it is, rather, that the driver has abandoned his control. An outstanding representative of this school of thinking is Professor Joseph A. Schumpeter of Harvard University, who in his recently revised Capitalism, Socialism, and Democracy (New York, Harper, 1947) has set forth this attitude with remarkable ingenuity and considerable charm. (Professor Schumpeter also discusses Marxism and socialist politics, but we shall be concerned here solely with his diagnosis of capitalism.)

Professor Schumpeter seeks to prove that the “. . . actual and prospective performance of the capitalist system is such as to negative the idea of its breaking down under the weight of economic failure, but that its very success undermines the social institutions which protect it, and ‘inevitably’ creates conditions in which it will not be able to live and which strongly point to socialism as its heir apparent.”

The first part of this thesis is based on the ostensibly proven ability of capitalism to produce increasingly greater quantities of commodities. Professor Schumpeter contends that the primary criterion of economic performance is output, and that capitalism, especially in the United States, has unquestionably measured up well on this index. From 1870 to 1930, he argues, America’s average annual rate of increase in production was 3.7 per cent. If this tempo could be continued for another fifty years, there would be no question about the abolition of poverty; the average income per person would be twice the 1928 level and, together with the greater leisure and better quality of goods that would ensue, the standard of living would be irreproachable.

Capitalism, says Professor Schumpeter, has successfully raised living standards for the great mass of people because it continually introduces new methods of production, new commodities, new forms of industrial organization, new trade routes and markets. These innovations create an avalanche of goods for consumers which enlarge the stream of income. It is true that such innovations may also cause economic disturbance, but one may attribute to these sudden drastic changes virtually all the benefits gained through our economic order. Granted that the innovators, who seize opportunities and introduce new techniques and new goods, do so for the sake of profitable advantage; yet, though their behavior may mean a painful distortion of previous economic arrangements, in the long run it results in social gain. “The [capitalist] social arrangement is, or at all events was, singularly effective. In part it appeals to, and in part it creates, a schema of motives that is unsurpassed in simplicity and force.”

The kind of capitalism we have, asserts Professor Schumpeter, does not interfere with the continued increase of production. Capitalism can never be stationary, for the changes that take place within it destroy the old-forms and create new ones. This process is essentially one of “creative destruction” and within this framework large scale industry, erroneously criticized by some economists as monopolistic, has a specific function to perform. The practices of big business—including rigid prices, limited output, and patent controls—have in actuality kept the capitalist ship on a fairly even keel. Thus, it is asserted, monopolistic practices serve as a desirable counter-wheel to innovation.

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Professor Schumpeter’s ingenious defense of capitalism implies, too, a denial of the Keynesian proposition that investment opportunities are now lacking. During the 1930’s Lord Keynes argued that what we were witnessing was not a mere depression and a slow recovery, but symptoms of a permanent loss of business vitality that would continue and degenerate into lasting economic senility. Followers of Keynes, such as Schumpeter’s colleague Alvin Hansen, point to the declining rate of population growth, the passing of the frontier, and the existence of a huge volume of unused savings as evidence of economic petrifaction. But, says Professor Schumpeter, it is gratuitous to assume that the absence of available new lands or the slower rate of population growth means a lower level of production. One ought to “. . . put some trust in the ability of the capitalist engine to find or create ever new opportunities, since it is geared to this very purpose. . . .” Beyond this admirable declaration of faith, however, Professor Schumpeter offers no effective rebuttal to those who see our economic ills as basic to the present system.

If we are to look for capitalism’s breakdown, says Professor Schumpeter, we shall discover its roots not in the realm of economics, but in the habits of thought which comprise its cultural superstructure. Capitalist thought, he says, is eminently rational and logical; the very nature of economic calculation impels the businessman to employ clear thinking.¹ Capitalism is also anti-heroic, fundamentally pacifist, and apt to insist on the application of private morals to international relations. Moreover, it provided the social arena for a new bourgeoisie which produced, on the basis of a strong, powerful, and Puritanical individualism “. . . not only the modern mechanized plant and the volume of the output that pours forth from it, not only modern technology and economic organization, but all the features and achievements of modern civilization. . . .”

Yet this superb engine is falling apart, Schumpeter declares. Capitalism in its early stages was essentially an adventure. The individual businessman may have undertaken risks for the anticipated return, but he was also motivated by the implicit challenge to his industrial and commercial ability. Today, progress has been mechanized, as is evidenced by the research programs of most large corporations, and the function of the entrepreneur—to alter old patterns of production by utilizing untried possibilities—has atrophied. Innovation, which “. . .is primarily responsible for the recurrent ‘prosperities’ that revolutionize the economic organism and the recurrent ‘recessions’ that are due to the disequilibrating impact of the new products or methods . . .,” is being reduced to mere routine. The romance of earlier commercial adventures is wearing away, bureau and committee work now replaces individual action. All this, the inevitable outcome of the capitalist process, tends to make progress automatic and to convert the bourgeoisie into a superfluous class. As Professor Schumpeter remarks, “. . . the very success of capitalist enterprise paradoxically tends to impair the prestige or social weight of the class primarily associated with it. . . . The giant unit of control tends to oust the bourgeoisie from the function to which it owed social weight.”

This process of social displacement eliminates the small trader and producer; private property and freedom of contract become archaic legal instruments; millions of shareholders with intangible rights to corporate income and assets take the place of active participants in the capitalist process; and the economic order no longer evokes the loyalty and emotional response required to sustain it. Thus, the people begin to turn away from capitalism, in spite of its effectiveness as a producing system.

The great mass of people, however, are themselves incapable of giving expression to their loss of faith. Their disappointments and dissatisfactions must be given voice by those alienated intellectuals who have acquired a vested interest in unrest. Most intellectuals—defined by Schumpeter as those who possess the power of the spoken and written word—sooner or later become detached from the economic order. They discover that they have been overproduced, as it were, and that consequently their financial remuneration is small or nothing at all. They resent a capitalism which gives them no social status, no role to perform, and they are ultimately driven to stimulating, verbalizing, and organizing discontent.

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It might almost appear that Professor Schumpeter agrees with Marx: capitalism continually generates inner contradictions. It creates a social atmosphere that “. . .grows more and more hostile to capitalist interests, eventually so much so as to refuse on principle to take account of the requirements of the capitalist engine and to become a serious impediment of its functioning.” But capitalism as an economic machine can operate well, insists Professor Schumpeter. The explanation of periodic fluctuations—which are signs of virility—is to be sought in the behavior of capitalistic innovations. The explanation of its final collapse is in the destructive actions of non-economic-minded individuals.

The manifestations of decomposition are also non-economic; they are reflected in the disintegration of the bourgeois family and the obsolescence of the home. Children are no longer economic assets but have become a burden, and hospitality shifts from the household to the restaurant and the club. The effect of this social transformation is to reduce the desire for incomes beyond a certain level. The businessman’s horizon shrinks to encompass only his own lifetime; he no longer cares to accumulate a fortune for the sake of his descendants. These are anti-saving concepts; they create a system of values that are no longer geared to the classical capitalist ethic. All this is accepted as a matter of course, according to Professor Schumpeter. The bourgeoisie does not resist these changes, for it no longer can resist. And “. . . the only explanation for the meekness we observe is that the bourgeois order no longer makes any sense to the bourgeoisie itself and that, when all is said and nothing is done, it does not really care.”

Capitalism, to Professor Schumpeter, is essentially an economic mechanism for producing goods. His selection of descriptive nouns—engine and machine—as well as his emphasis on the sole criterion of increasing productivity is indicative of his view. While he does admit that distribution of the output amongst the mass of the people is an important aspect of the problem, he will not concede, as do many other economists, that it is the central question in modern capitalism. Consequently, he sees capitalism as a productive device, never as a distributive mechanism. This permits him to assign the cause of capitalist decline to factors which are not part of the system itself—to the perversity of human beings who fail to realize that capitalism enjoins the individual to a life of severe and unremitting accumulation (and therefore production) of wealth.

But to ignore the problem of distribution and purchasing power in this way is to dodge the task of developing an adequate explanation of capitalist decline. For it is the periodic accumulation of vast quantities of goods that is the most exasperating feature of that decline. That, essentially, is a matter of distorted distribution of income and requires more attention than Professor Schumpeter has given to it. Similarly, it is questionable if production is the only criterion for measuring the supposed success of capitalism. Even if we were to admit—in the face of the analysis of falling accumulation presented by Dr. Noyes—that our present economic arrangements permit a continuous increase in output, the crucial problem is not the amount of commodities made available, but the manner in which they are distributed. It is income distribution and purchasing power which moves goods, rather than technical innovations. It is the inability of large numbers of consumers to purchase the goods produced which creates the periodic drag on the capitalist machine. It is, in the final analysis, an internal distortion, rather than ignorance or malice, that underlies economic collapse.

There was a time when capitalism was the great producing mechanism that Professor Schumpeter still thinks it to be. The early merchant-capitalist burst the barriers of feudal restrictions with a flood of commodities. In our time, as Thorstein Veblen has shown, the mechanism has become concerned primarily with the manipulation of money values, not with the creation of goods; with finance, not with production. And if money values can be increased by curtailing production, as is so often the case, then so much the better. Throughout large sections of the business community there seeps the fear—the dread—of uninhibited production.

Nor has Schumpeter been very fortunate in his choice of scapegoat. To assert that intellectuals harbor the desire to destroy capitalism is certainly extravagant. There are as many persons with the power of the written and spoken word who will defend capitalism as there are who will attack it. There are as many who have a vested interest in order as there are who seek to encourage unrest. There are as many who believe they have discovered roots in capitalist soil as there are who feel alienated from it. It is not the intellectual who destroys capitalism. Wherever capitalism falters, staggers, goes under, the case-history shows that it has usually cut the ground from under its own feet.

The unanswered question remains: How in our society can we maintain and increase purchasing power to the degree needed to keep the production machinery in high gear and avoid a breakdown?

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¹ On the other hand George Katona has explored the irrational basis of capitalist calculation in his “Psychological Analysis of Business Decisions and Expectations” (American Economic Review, March 1945). See my discussion in COMMENTARY, November 1946.

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