http://www.forbes.com/markets/equities/
An economic system does not have to be
expansive—that is, constantly increasing its production of
wealth—and it might well be possible for people to be completely
happy in a non-expansive economic system if they were accustomed to
it. In the twentieth century, however, the people of our culture
have been living under expansive conditions for generations.
Their minds are
psychologically adjusted to expansion, and they feel deeply
frustrated unless they are better off each year than they were the
preceding year. The economic system itself has become
organized for expansion, and if it does not expand it tends to
collapse.
The basic reason for this maladjustment is that investment has
become an essential part of the system, and if investment falls off, consumers
have insufficient incomes to buy the consumers' goods which
are being produced in another part of the system because part of
the flow of purchasing power created by the production of goods was
diverted from purchasing the goods it had produced into savings,
and all the goods produced could not be sold until those savings
came back into the market by being invested.
In the system as a whole, everyone sought to improve his own
position in the short run, but this jeopardized the functioning of
the system in the long run. The contrast here is not merely between
the individual and the system, but also between the long run and
the short run.
The factors necessary to achieve economic progress are
supplementary to the factors necessary for production. Production
requires the organization of knowledge, time, energy, materials,
land, labor, and so on.
Economic progress
requires three additional factors. These are: innovation, savings,
and investment.
Unless a society is organized to provide these three, it will
not expand economically.
"Innovation" means devising new and better ways of performing
the tasks of production; "saving" means refraining from consumption
of resources so that they can be mobilized for different purposes;
and "investment" means the mobilization of resources into the new,
better ways of production.
The absence of the
third factor (investment) is the most frequent cause of a failure
of economic progress. It may be absent even when both of the
other factors are working well. In such a case, the savings
accumulated are not applied to inventions but are spent on
consumption, on ostentatious social prestige, on war, on religion,
on other nonproductive purposes, or even left unspent.
Economic progress has always involved shifts in productive
resources from old methods to new ones. Such shifts, however
beneficial to certain groups and however welcome to people as a
whole, were bound to be resisted and resented by other groups who
had vested interests in the old ways of doing things and in the old
ways of utilizing resources.
In a progressive period, these vested interests are unable to
defend their vested interests to the point of preventing progress;
but, obviously, if the groups in a society who control the savings
which are necessary for progress are the same vested interests who
benefit by the existing way of doing things, they are in a position
to defend these vested interests and prevent progress merely by
preventing the use of surpluses to finance new inventions. Such a
situation is bound to give rise to an economic crisis.
From one narrow point of view, the twentieth century's economic
crisis was a situation of this type. To understand how such a
situation could arise, we must examine the development in the chief
capitalist countries and discover the causes of the crisis...
The purchasing power available in the community is equal to
income minus savings. If there are any savings, the available
purchasing power will be less than the aggregate prices being asked
for the products for sale and by the amount of the savings.
Thus, all the goods
and services produced cannot be sold as long as savings are held
back. In order for all the goods to be sold, it is necessary
for the savings to reappear in the market as purchasing power.
The usual way in which
this is done is by investment. When savings are invested,
they are expended into the community and appear as purchasing
power. Since the capital good made by the process of investment is
not offered for sale to the community, the expenditures made by its
creation appear completely as purchasing power.
Thus, the disequilibrium between purchasing power and prices in
which was created by the act of saving is restored completely by
the act of investment, and all the goods can be sold at the prices
asked.
But whenever investment is less than savings, the available
supply of purchasing power is inadequate by the same amount to buy
the goods being offered. This margin by which purchasing power is
inadequate because of an excess of savings over investment may be
called the "deflationary gap."
This '"deflationary gap" is the key to the twentieth century
economic crisis and one of the three central cores of the whole
tragedy of the century...
The deflationary gap arising from a failure of investment to
reach the level of savings can he closed either by lowering the
supply of goods to the level of the available purchasing power or
by raising the supply of purchasing power to a level able to absorb
the existing supply of goods, or by a combination of both.
The first solution will give a stabilized economy on a low level
of economic activity; the second will give a stabilized economy on
a high level of economic activity.
Left to itself, the economic system under modern conditions
would adopt the former procedure.
This would work roughly as follows: The existence of the
deflationary gap (that is, available purchasing power less than
aggregate prices of available goods and services) will result in
falling prices, declining economic activity, and rising
unemployment.
All this will result in a fall in national income, and this in
turn will result in an even more rapid decline in the volume of
savings. This decline continues until the volume of savings reaches
the level of investment, at which point the fall is arrested and
the economy becomes stabilized at a low level...
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