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CONSUMER buying power, in the meaning here applied to the phrase, is expenditure for consumption goods.
First of all, it is expenditure. It is not income. Secondly, it is expenditure of money for merchandise which is almost in its entirety purchased from retailers.
Finally, it is expenditure for consumption goods which are physically removed from the total stock of goods in the market, and which are from an economic standpoint to all intents and purposes destroyed--literally consumed.
Groceries, for instance, are consumption goods which are entirely destroyed by consumers shortly after they are purchased.
Furniture, on the other hand, though it is not destroyed so quickly, still begins to disintegrate the moment it is purchased by the consumer. It disappears by a process of attrition, rather than by a process of mastication.
Even homes--which may be repaired indefinitely by the home owners--are in this sense consumption goods because they are removed from the realty market, and an equivalent amount of lumber, cement, bricks which went into their building is removed from the total stock of the building materials in that market.
Let me repeat that consumer buying power is not expenditure for capital goods. Capital goods are means and not ends. Looms are bought and mills erected, not because the cotton mills are an objective in themselves, but because they are the means with which manufacturers are enabled to weave cotton goods. If consumers buy cotton goods in sufficient quantity to make investments in cotton mills profitable, purchase of spinning frames, looms, and other necessary machinery by enterprising business men follows sooner or later. If consumers refused to buy cotton goods, artists alone would buy looms and only fools would continue to erect cotton mills.
It is the expenditures of the consumers of the nation for consumption goods that conditions and determines the extent to which it is profitable to build factories and erect machinery in them.
Let the consumers go on a "strike," as they did in 1920, and cease to buy consumption goods and though the farmers continue to produce agricultural products, the factories continue to produce machinery and consumption goods, the builder to build houses, the stream of prosperity will dry up at the source. Very soon the houses, the merchandise, the machinery, the crops become "drugs on the market." Stocks of merchandise accumulate in the hands of distributors, orders cease to come to the mills and factories, prices break, and investment in new factories, new mills, and new machinery ceases.
The buyers' strike in 1920 was a dramatic demonstration of the supreme importance of the particular kind of buying power to which I am directing attention--expenditure for consumption. That consumers in city after city should suddenly curtail their buying of almost every line of merchandise--that they should wear overalls as a protest against the high price of clothing--that they should organize protest parades--these things are events which make themselves visible and audible even to the most unimaginative business man. But they are more than mere events. They are portents, the significance of which ought to be understood and appraised by the far-sighted businessman.
How many businessmen really appreciate the fact that the buyers' strike of 1920 has not yet ceased? That consumers are still striking, not deliberately as they did then, but involuntarily, unconsciously? That while they are buying day after day, they are not buying the normal production of our farms and factories?
So far as prosperity is concerned, it makes little difference whether the consumer fails to buy because he deliberately refuses to buy, or because he is unable to buy. In 1920 consumers refused to buy. But, excepting for comparatively short periods of extremely good times, consumers are always unable to buy all that farmers and factories can produce.
The perfect operation of our present system of production and distribution requires a volume of buying by consumers sufficient to absorb the production of the normal capacity of our industries at prices which include a normal profit. (Since the question of profit has been elevated to a new importance by the publication of "Profits" by the Pollock Foundation, it is desirable to define what is meant by the term normal profit. Normal profit is the amount which has to be added to cost to cover the risks and losses caused by "Acts of God" and the losses inevitable in adjusting production to consumption by changeable human beings. In a perfect competitive economy, the total of normal profits would exactly balance the total of these normal losses. What are generally called profits tend to accumulate and form surpluses in the hands of the richer classes because we have no perfect competitive economy--because special privileges of various kinds, licenses, patents, franchises, trade-marks, and above all our present system of land tenure, make monopoly profits instead of normal profits much more widespread than is generally recognized.)
When consumer buying absorbs all that we normally produce, the products of our factories are sold in sufficient volume to keep wage earners fully employed; the demand for foodstuffs and other agricultural products enables farmers to sell their crops at prices which enable them to buy what they need; our industrial machinery operates at a capacity which pays dividends upon the capital invested in it; in short, the economic machinery of modern civilization operates, not as it usually does, but as it always should.
If consumer buying fails to absorb the normal productive capacity of the nation, then a part of our productive machinery is idle, a part of our capital is idle, and industry has to earn a return upon the entire investment in it from the sale of only a part of what it can produce. Competition between industry and industry, and manufacturer and manufacturer, is abnormally intense. Under such conditions--conditions which prevail at all times except during the peak of a period of prosperity--it is easy to understand why manufacturers turn to high pressure marketing in an effort to create a market for their products.
Since the buying power of the consumers of the nation in what are called "normal" times is insufficient to absorb all that our factories can produce, increased consumer buying power is of supreme importance to economic well being.
Why is it that consumer buying power--expenditures for consumption--does not absorb all that the nation can produce? The advocates of the theory that consumers must be persuaded to consume would answer this question by saying that consumers do not absorb the capacity of our industries because they do not desire the products. A little consideration of the matter will, however, force us to the conclusion that this is not so and that the real reason consumers do not absorb the capacity of our industries is because they can not buy all that they desire.
Consumer buying power can not absorb all that the nation can produce because, (1) prices of merchandise are too high, (2) incomes are insufficient, and (3) too much of the nation's income is saved. Let me say it in bold letters--it is not because they do not desire to consume all that can be produced.
l. The consumer may desire to eat meat three times a day; he may desire to wear silk shirts and ride around in a Rolls Royce automobile, but if the prices of these things are too high, he will not be able to buy them and satisfy his desires. Let them come down in price--and as rapidly as they do, the capacity of the consumer market to absorb all that the manufacturers of them can produce will be demonstrated.
2. Or, let the consumer's earnings be increased. His buying power increases precisely in the same manner as if prices were lowered. He eats more and better food, wears more expensive clothes, buys better furniture, drives a better automobile.
3. What the consumer saves out of his income sets a final limit upon his buying power. The part of his earnings which he does not spend for consumption goods may be placed in a stocking and hidden in a hole in the wall, or be deposited in a savings bank, or invested in stocks and bonds. So far as the market for consumption is concerned, investing his savings sets just as great a limitation upon consumer buying power as does burying his savings in the ground.
The strength of the average consumer's instinct to save, it is obvious, determines his willingness to spend. But the strength of this instinct is in inverse proportion to the strength of his desire to consume. Here he is vulnerable to attack. His "will to save" is elastic. If only the efforts made be persuasive enough, the producers may induce him to reduce his "savings" margin.
To the extent to which his savings are reduced, buying power is temporarily increased.
But no intelligent person will urge that prosperity be increased temporarily by wiping out the average consumer's instinct to accumulate savings. A hectic prosperity might, indeed, be created by persuading those who have not gratified all their desires to transfer their savings and investments into consumption purchases, but it would be short lived indeed.
Unless all consumer incomes are guaranteed against the vicissitudes of time--unless unemployment, ill-health, and death are abolished--assaults upon the consumers' savings instinct are vicious and dangerous.
But even if it were possible by high pressure advertising and selling to completely destroy the consumers' instinct to save, it would not increase buying power sufficiently to absorb the capacity for production of our factories.
The greater part of the savings out of the nation's income are accumulated by a limited group of consumers who have not the physical capacity to consume much more than they now do. We may expose them to every form of advertising and selling, but nothing can make them eat and drink and clothe and amuse themselves beyond the physical limitations which nature imposes upon the human animal. Long after they are consuming to the limit of human capacity, their income continues to pile up, and they have to invest it--and add to our facilities for production.
The excess income of the richer one-third of the population and the insufficient income of the poorer two-thirds of the population thus not only result in underconsumption of goods, but in an apparent overproduction of facilities for production.
Under our present economic system, income which is not used for consumption is used mainly for investment. Even if the recipients of unconsumable incomes do not personally invest their surplus in stocks and bonds, but leave it on deposit in their banks, it nevertheless swells the funds available for industrial expansion. The fact that the richer one-third of the population enjoys an income greatly in excess of its ability to buy for consumption, results in an abnormal swelling of funds for speculation and investment in new facilities for production.
To maintain a state of prosperity it is absolutely essential that there be a normal relationship between the rate of saving and the rate of expenditure for consumption. So long as this relationship is normal, it is possible to pay dividends upon the total investments of the country and to keep our extremely complicated industrial machinery in normal operation. Whenever the ratio of all savings to all consumption is greater than normal, it is obvious that the capacity for production is being increased at the very time when consumption is being decreased.
Existing practice as to the disbursements of their income by the people can be stated in the form of an economic law:
1. The smaller the income the greater the ratio of disbursements for consumption and the smaller the ratio of savings or disbursements for investments.
2. The greater the income, the smaller the ratio of disbursements for consumption and the greater the ratio of savings or disbursements for investments.
The ratio of investment in new facilities for production to expenditure for consumption goods is a factor contributing to the alternate rise and fall in the business cycle, the importance of which is not recognized. Speculation intensifies the movement, but it does not cause it. If the ratio of savings to consumption were normal and uniform, charts of the state of business would represent straight lines rising with the increase in population and the development of new inventions.
Instead, the tendency for expenditure for capital goods to increase and the expenditure for consumption to proportionately decrease upsets the balance. During the ascending phase of the business cycle, profits are large and investments are consequently attractive. Larger and larger proportions of the total income thus tend to be diverted to saving, while the proportion available to purchase the ever increasing volume of production becomes relatively smaller and smaller. There finally comes a time when profits, even in spite of rising prices, cannot be realized because a sufficient volume of goods is not being consumed. Then stocks begin to accumulate, production is checked, incomes fall, consumption expenditures decrease, speculations and investment stop, and prices fall during the descending phase of the cycle until bankruptcies and cheap "distress" merchandise enable consumption once again to consume in a. normal relationship to capacities for production.