Rationalisation and Unemployment (Routledge Revivals)

An Economic Dilemma

J. A. Hobson

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136599675
• Edition: 1
• Topic: Economics
• Subtopic: Labour Economics
• Index: Economics

First published in 1930, John Hobson's study deals with the economic dilemmas generated in the early twentieth century by the advent of mass production. Namely the over-production and surfeit of goods and the resultant failure of the expansion of markets leading to record levels of mass unemployment.

Seeking a solution to this dilemma, Hobson analyses all aspects of the problem: income, uses of the surplus, underconsumption, markets and distribution, and internationalism. The study also explores theories concerning economies of rationalisation, both in terms of productivity and consumption.

CHAPTER IV

RATIONALISATION AND PRODUCTIVITY

§ Our argument thus far has established two propositions. First, there exists a general tendency in the economic system for the productive capacity to outrun the expansion of markets. Secondly, this is attributable to a distribution of money-income which upsets the true balance between saving and spending, productivity and markets. It is now desirable to relate this argument to the processes included under the term ‘Rationalisation’, to which many business men, politicians, and economists are looking as a remedy for our present economic troubles. Improved plant and mechanical power, accelerated labour, better organisation of business personnel, and better marketing arrangements are the main factors in rationalisation. A single business in an industry of competing businesses, pursuing such a policy, may effect considerable economies that lead to a reduction in costs of production per unit of its output. If its output was no larger than before, this would mean a reduction in the number of employees. Labour would be ‘saved’. But, since a business employing this policy would be able to undersell other competing businesses which carried on in the older wasteful ways, it might take a large enough share of the market to enable it to expand its output sufficiently to employ as many workers as before, or even to increase the number. The displacement of workers would then be thrown upon the other businesses whose markets it had taken. There would probably be some enlargement of total supply and some fall in selling price resulting from this policy. But if a similar rationalisation were not undertaken by the other competing businesses, an expansion of the rationalised business, perhaps accompanied by an absorption of some of the competitors and a suppression of others, would almost necessarily occur. In this way rationalisation usually extends to all or most of the strong businesses in a trade. Indeed, its full economies can only be realised when it signifies organisation of a whole industry for pursuing a common policy in methods of production and marketing. Though early experiments in such an organisation may leave much independence to individual businesses in production and finance, confining their federal policy to agreements upon output and selling prices, the normal development is towards the closer union of a cartel. Now, while there are many differences in the structure and working of cartels, their normal method is the regulation of the total supply in a national or a world-market so as to secure a profitable price, buying up or putting out of business firms with inferior equipment, management, or position, imposing specialisation of productive processes, with organised bulk buying of materials, power, and labour.

Now the first effect of this process carried on in a whole industry is generally understood to be a reduction in the number of workers, i.e. unemployment. Less labour is put into each unit of the product. More use of automatic machinery, higher standardisation, less waste in buying and selling, imply a reduction in employment, especially of the skilled and higher-paid workers. Wages seem hit in three ways: by a reduced number of wage-earners, by a reduced proportion of skilled and relatively highly-paid workers, and by wage-cuts pressed on Trade Unions when weakened by unemployment.

But these bad reactions upon wages and employment are based upon the assumption that the business organisers of this policy will adopt a selling price that will require them to restrict production so as to secure the full gains of their economy in high profits on a limited sale. This, however, is not the necessary effect of a rationalising policy. The large increase of productive power, in the form of capital and better organisation, which attends a successful rationalisation would not be utilised in most industries without an actual enlargement of the product, and this enlargement can only be sold by lowering prices so as to enlarge the market. This will not apply equally to all cases. Where rationalisation involves no considerable capital expenditure in new plant or other technical improvements, but consists chiefly in economies of a monopolised market, and where, as in the case of some prime requisites of life or trade, the elasticity of demand is low, it may pay a cartel or other combine severely to restrict output and even to raise prices.¹ But more usually mass-production under a cartel policy will find it profitable to increase production by some reduction of selling prices, earning a larger aggregate profit out of a somewhat reduced profit per item of the larger output. In so far as this policy is pursued, the reduction of employment and of the wage-bill will evidently be less than where a more rigorous reduction of output is imposed. Indeed, when the elasticity of demand is great, the whole of the workers who would have been displaced under the former market conditions may be retained, and an addition may be made to the total volume of employment in the trade.

But even where some net reduction of employment and of wages occurs within the rationalised trade, it may be compensated by considerations affecting other workers. When heavy expenditure is incurred in replacement of obsolete or inferior plant a stimulus will be given to employment and wages in metals, machine-making, mining, and other fundamental industries which, though temporary in each case of rationalisation, may count considerably when a more enlightened scrapping policy (on the American scale) comes to be adopted.

Further, when rationalisation is followed by a planned reduction of selling prices to satisfy an expanding market, the real wage throughout the whole consuming community is raised by the fall in price of an item in its standard of living. Even if the product is not itself a final consumable article, but a semi-manufactured article that is utilised in other trades, the lowering of costs of production in these other trades will normally be followed by a reduction of prices in some markets for consumable goods, so raising the purchasing power of a given income. When the product of a rationalised trade is thus sold at a lower price, either that lower price greatly stimulates effective demand (in which case employment and wages in the particular industry may be as high as, or even higher than, before) or else the lower price paid for what is bought may leave a larger quantity of purchasing power available for more demand in other markets, stimulating employment and wages in these.

§ In a word, when considering the effects of rationalisation, we must not confine our attention to the immediate results and the rationalised industry, but to the further effects upon volume of employment and of real wages in the industrial community as a whole. Regarding, as we must, rationalisation as the most recent and progressive type of Capitalism, does its advance in the industrial world, though primarily motived by the pursuit of profits, involve an increase of the rates of real wages and of employment in the rationalised industries and in the economic system as a whole, and in the proportion of the aggregate product which comes directly and indirectly to the wage-earners?

The full validity of rationalisation as a policy for maximising production and raising the general standard of consumption depends upon an adequate expansion of markets. Does this take place? The evidence of the last few years, especially in the United States, where the rationalising process has gone farthest and fastest, does not support a favourable answer to this question. The following table, relating Volumes of Employment, Pay Roll and Production, is based upon Bureau of Labour Statistics in the United States :—

Date	Employment	Pay Roll	Production
1919 .. ..	100	100	100
1920 .. ..	103	124	104
1921 .. ..	82	24	80
1922 .. ..	90	89	104
1923 .. ..	104	113	120
1924 .. ..	95	104	117
1925 .. ..	95	107	125
1926 .. ..	96	109	129
1927 .. ..	92	105	126
1928 .. ..	89	103	132

Another Table on Recent Economic Changes in the U.S. Report of the President’s Conference on Unemployment corroborates this tendency. Between 1922 and 1927 the average earnings of factory workers increased at a rate of 2·4 per cent. a year, while output per man employed increased by 3·5 per cent. a year: the profits of industrial corporations during this period increased at a rate of 9 per cent. a year. To this it must be added that the total number of workers in these industries showed a reduction of nearly 10 per cent. The Report of the Committee made the following comment upon the causes of this development: “Acceleration rather than structural change is the key to an understanding of our recent economic developments. Gradually the fact emerged in the course of this Survey that the distinctive character of the years from 1922 to 1929 owes less to fundamental change than to intensified activity.” There is, we are told, no noticeable trend towards production on a larger scale. But Mr. P. W. Martin, of the International Labour Office, comments upon the American figures in the following terms:—

“On the other hand, while there has been no extraordinary increase in the average number of wage-earners per establishment, the average horse-power has increased from 126·2 in 1914 to 203·4 in 1927. This increase in the amount of power used, with a concomitant growth in machinery, accounts, no doubt, for much of the increase in productive efficiency. But while it is true that an increased use of power and an increased use of machinery arc major factors in the increased productivity, they are by no means the only factors. On every hand there have been developments in the general technique of production. Machines are made to run faster. One man is in charge of more machines. There has been a greater mechanisation of the human factor itself; the principle of division of labour has been carried to a point where it might more properly be termed the principle of the subdivision of labour; and to an increased extent skilled work is done by an unskilled or semi-skilled man using a skilled machine.” ¹

§ There are at present no comparable statistics available from Germany and England representing the whole body of manufacturing employment. In certain particular industries, e.g. the boot and shoe trade in this country, the statistics appear to show that in 1924 a smaller number of operatives working a forty-hour week produced a larger number of boots than a greater number of operatives in 1907 working at least fifty hours a week. But no valid conclusions as to the general effect of rationalisation upon employment or wages can be based upon the statistics of a single trade or a single group of trades. For there are trades where labour-saving devices do not produce any considerable expansion of market. Boots seem to be such a trade. Though retail prices show less increase than the average retail price for commodities as compared with the pre-War level, no large expansion of the home market has occurred. Rubber soles are perhaps largely responsible for this. But the export market shows a large actual shrinkage in volume of exports since the War, though the latest figures show some recovery. Here is a case where a net displacement of labour may be attributed to improved machinery and organisation. But, taken by itself, it cannot be regarded as indicative of a reduction in the general volume of employment. For apart from some increase of employment that may have taken place in the shoe-machinery manufacturing and the rubber trade, the reduced proportion of national expenditure on shoes (if it has occurred) will signify some increased expenditure on other articles and increased employment in the trades which have not been taking on labour-saving methods.

It is these indirect effects of labour-saving in particular businesses or trades that preclude us from measuring the general effects upon volume of employment. The broader basis of the American statistics, supported as it is by evidence from other great productive industries such as agriculture and mining, does, however, go far to warrant the conviction that rationalisation is not able to get full play for its economies because of the failure of an adequate expansion of home or foreign markets. Though we have not the same amount of statistical support for the effects of labour-saving rationalisation in Germany¹ and England and other highly industrialised countries, the large and persistent body of unemployment is a powerful prima facie testimony to a similar failure of expansion of markets, or, put otherwise, a failure of the application of enough purchasing power to buy the larger output which the ‘rationalised’ processes could supply. The amazing exhibition of a world economic system which is continually tending to produce too much wheat, wool, cotton, leather, coal, steel, shipping, and the manufactured goods into which these materials and services enter, is testimony to the fundamental irrationality in the economy of rationalisation itself. Everywhere, in most trades, extractive, manufacturing, transport, commercial, so much technical and organising power exists that a large and growing proportion is devoted to producing the bad sort of leisure termed unemployment. Yet, as we have shown, the economic wants of man are illimitable. There are would-be consumers for all the wheat, wool, cotton, steel, and other goods that cannot under existing circumstances get produced. There is not any lack of purchasing power or money to buy these goods. Is there any other possible explanation of this irrationality except a maldistribution of income (purchasing power), which puts a disproportionate amount in the hands of those who desire to buy capital goods (to invest) and are unable to achieve their desire because the final commodities which these capital goods are intended to supply cannot secure a full reliable market owing to the too small share of the total income vested in the would-be consumer?

§ The attention given to the post-War dislocation of finance, industry, and commerce and consequent changes in the relative volume and the direction of national markets, does not touch the heart of the problem. Rationalisation is driving home the truth that our malady is one of distribution of income. For it is clear that rationalisation itself is an aggravation of that malady. The increased productivity it exhibits is not merely a ‘saving of labour’ in the several industries. It is a reduction of the part which labour plays as a productive agent in respect of the output and an increase of the parts played by capital and organising ability. This means that the distribution of the product tends to give a larger share as payment to capital and ability, a smaller to labour. If, as is sometimes the case, rationalisation is accompanied by a rise of wage-rates in respec...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Preface
• Contents
• I. INCOME, MONETARY AND REAL
• II. USES OF THE SURPLUS
• III. UNDERCONSUMPTION
• IV. RATIONALISATION AND PRODUCTIVITY
• V. RATIONALISATION AND CONSUMPTION
• VI. MARKETS AND DISTRIBUTION OF THE PRODUCT
• VII. SOCIAL SERVICES AND WORKERS' INCOMES
• VIII. VITAL INCOME
• IX. ECONOMIC INTERNATIONALISM