Business & Economics Collection: Thorstein Veblen Edition (30+ Works in One Volume). Thorstein Veblen

held by the body of business men, - what it practically means, why the dogma is held, and what is its effect on the course of business enterprise.

      "Overproduction," or "underconsumption," as it is met with in the views of business men, is neither a vacant dogma nor a shifty apology wherewith to cover their own delinquencies, but a very concretely real state of affairs. It is a state of affairs that prevails when business is persistently dull; and the concept covered by the term comprises the sufficient cause of the dulness, in the apprehension of the business community, even though they may not always speak of the difficulty by that name. It may be worth while, even at the risk of tedium, to point out that this concept of "overproduction" applies, not to the material, mechanical bearing of the situation, but to its pecuniary bearing. The notion is never seriously entertained that there is or may be an embarrassing excess of goods, or of the appliances for their production, above what would be of some human use if the business situation permitted them to be turned to use.

      (1) The supply of consumable goods is, practically, never greater than the community's capacity for consuming them. An embarrassing excess in any line is practically a remote contingency at the most.¹²⁴ There are many eloquent passages in the economic manuals which may be called in witness of this truism, where much pains is taken to show that human wants are, in the nature of the case, indefinitely extensible. Nothing stands in the way, we are told, but "difficulty of attainment" of the goods with which to satisfy these wants. (2) In times of depression, or "hard times," there is, under the modern industrial system at least, no overproduction in the sense of a production so large as to overtax the working capacity of the industrial appliances and processes employed, nor so large, even, as to overtax the normal powers of the force of workmen or require them to work overtime and holidays. Quite the contrary. That sort of thing happens only in brisk times, when there is no overproduction. Seriously to recite such platitudes as these may seem like a trifling with the patience of the printer, or it may be taken for a light-headed excess of "wissenschaftlicher Methode"; but these two formulations appear to cover all the conceivable ways in which overproduction may occur, so long as the term is construed from the point of view of the mechanical facts of the case. Seen from this side a period of depression is a period of underproduction; mills tun on half time or none, and the supply of goods that finds its way into the hands of consumers is sensibly scant for the demands of comfort.

      The difficulty is, of course, a pecuniary one, and the phrase is used by business men in that pecuniary sense in which it has an immediate bearing on business. "Excessive competition" is an alternative phrase. There is an excess of goods, or of the means of producing them, above what is expedient on pecuniary grounds, - above what there is an effective demand for at prices that will repay the cost of production of the goods and leave something appreciable over as a profit. It is a question of prices and earnings. The difficulty is that not enough of a product can be disposed of at fair prices to warrant the running of the mills at their full capacity, or running them at a rate near enough to their capacity to yield a fair profit. Or, to turn the proposition about, as business men are in the habit of doing, there is more of an output offered than will be carried off at a fair price, such a price as will afford fair or ordinary profits on the investment and the running expenses. There is too large a productive capacity; there are, too many competitive producers and too much industrial apparatus to supply the market at reasonable prices. The matter reduces itself to a question of fair prices and ordinary profits.¹²⁵

      If there is a large volume of outstanding credit obligations, that will complicate the situation. There is always a considerable amount of interest bearing securities outstanding, and the claims of these securities have to be satisfied before dividends can be paid on stock, or before profits accrue to industrial ventures which have issued the Securities. These fixed charges, together with others of a like kind, narrow the margin from which profits are derived and increase the handicap which a season of dull times brings to the business men in charge of industry. At the same time fixed charges preclude shutting down, except at a sure and considerable loss. The business men involved are constrained to go on, and in the absence of wide combinations in industry they are constrained to go on at such competitive prices as to preclude reasonable profits.

      The question of fair prices and reasonable profits has some reference to current rates of interest. A "fair" rate of profits is such a rate as bears a reasonable relation to the current rate of interest, although this relation of profits to interest rates does not appear to be a strict one. Still, there undoubtedly is some reference to the current rate of interest as a sort of zero line to which profits should not decline. New investments are made on the basis of current rates of interest and with a view to securing the differential gain promised by the excess of prospective profits over interest rates.

      In a period of depression the aggregate industrial equipment is, notoriously, not running at its full capacity; there are many idle and half-idle plants and many idle workmen. The concerns in question find themselves unable to do a full run of business at reasonable profits. Still, unless the depression is of exceptionally short duration, there is always some new investment going on. More or less of new capital continues to find its way into industrial business in competition with the concerns that are already in the field.¹²⁶ In case of a protracted depression the aggregate of new investments so made may, in the course of years, amount to a very considerable addition to the industrial outfit, and the production of the new establishments may very appreciably increase the aggregate output. Indeed, the output of the new establishments is a notable factor in swelling the supply and keeping down prices. But the new investments made during the depression are profitable, at least at the start. Or even if this should be questioned when stated in this broad way, it will at least hold true that they are commonly entered upon with a well-advised expectation of their being profitable if the situation does not materially change between the time when the new venture was entered upon and the time when the new equipment has got under way. If the interval between the inception of the new enterprise and its completion is a long one, the situation may so change in the meantime as to leave it unprofitable even if it has been conservatively planned. There are also, of course, fraudulent enterprises which are not expected by their promoters to pay a profit on the investment; and there are probably, also, always some ventures entered upon during dull times with a view to being beforehand in preparation for better times. But after all has been said in qualification of the main proposition, it remains true that some new investment is going on with a well-advised expectation of reasonable profits on the basis of current costs, prices, and rates of interest.¹²⁷ The rate of interest in times of depression may be unsatisfactory to lenders; it may be discouraging by comparison with the customary range of interest rates during better times. Still, the obstacle to business is not to be sought in an effectual discouragement of lenders, for in point of fact money is readily to be had on good security during any protracted depression.¹²⁸

      There is also the fact that investment is continually going on, which argues that the difficulty is neither that capital cannot be found for investment, nor that investment has no prospect of reasonable profits. Practically, no exceptional amount of fluent funds is withheld from the market, - except in time of panic, which is another matter. It may be added that the rate of interest need not be notably low in time of depression, just as, on the other hand, a period of business exaltation is not uniformly accompanied by a notably high rate of interest.

      But a low or declining rate of interest is effective in the way of depressing the business situation, even though a depression may go on without it. The line of its bearing upon business depression, or at least one line, is as follows: Established business concerns (particularly corporations) engaged in industry have some appreciable fixed (interest) charges to meet - on leases, mortgages, and interest-bearing securities (preferred stock and bonds). These outstanding obligations and securities may have been negotiated, "floated," at an earlier period of higher interest rates and higher profits, or they may have been carried over through a period of higher interest rates. In the former case these interest charges are excessively high as compared with the present capitalized value of the property on which they rest, computing the capitalization on the basis of the present cost of replacing this property and the present interest charge which this cost of replacement would bear. In the latter case the original capitalization of the corresponding items of property will have undergone a practical (effective) recapitalization at a lower figure to