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Bonus Material for Chapter 20
John maurice Clark
John Maurice Clark (1884-1963), the son of John Bates Clark, was educated at Amherst College and Columbia University and ultimately occupied the position of professor of economics at Columbia from which his father had retired. In 1952, Clark followed Wesley C. Mitchell as the second recipient of the Walker Medal, awarded at intervals of at least five years by the American Economic Association to the most distinguished living American economist.
His intellectual heritage came from many people, including his father, Veblen, Hobson, and Pigou. Clark started with static theory, the point at which his father had left off, and became a leading exponent or realistic, dynamic economics. He worked toward a fusion of neoclassical and institutional economics and was an important precursor of the Keynesian system. He was one of several leading economists who developed the idea of countercyclical fiscal policy before Keynes wrote his General Theory.
Theory of Business Cycles
In 1917, Clark published his famous article on the “acceleration principle.” The idea that he developed at this early date became one of the foundations of modern business cycle theory. He argued that fluctuations in the output and prices of capital goods are much greater than those for the consumer goods they produce. Even if the demand for consumer goods continues to grow, a change in the rate of growth will be transmitted back with intensified force or acceleration to the capital-goods sector. Here is the example Clark used to illustrate this principle.
Suppose a certain industry produces a consumer good, and its annual output is designated by the index number 100. A certain amount of fixed capital (buildings and machinery) is required to produce that output, and we shall designate that by 100. To maintain and replace that amount of fixed capital, Clark assumed that we need 5 goods produced each year. Under stable conditions, therefore, the consumer-good industry produces 100 and the capital-good industry produces 5.
Now assume that there is a 10 percent increase in the demand for the consumer good. The fixed capital will also have to go from 100 to 110. (He excluded such possibilities as working the existing plants overtime.) The industry producing the capital good will have to expand from 5 to 15. A 10 percent increase (100 to 110) in the demand for the final product generated a 200 percent increase (5 to 15) in the demand for the capital used in producing that product. This is the principle of acceleration.
Assume, said Clark, that this rate of increase of 10 percent of the original demand continues for 5 years. By then the demand for the consumer good is 150 per year. The fixed capital required to produce that output will also be 150. The 5 percent for maintenance and replacement will be 7.5 per year. The annual growth of the consumer-good industry will require new capital of 10 per year; therefore the output of the capital-good industry expands to 17.5.
Now suppose that at the end of 5 years the growth in the demand for the consumer good ceases, and the demand remains stationary at 150. The industry producing fixed capital has to produce 7.5 for maintenance and replacement. As it has been producing 17.5, four-sevenths of its capacity must remain idle. A cessation of growth in the demand for the final good thus led to a sharp decline in the demand for the capital good.
This is a serious condition for any industry in the real world. It might well be serious enough to produce a panic if any considerable number of industries were in the same condition at the same time. And yet something like it is a normal effect, an inevitable effect, of changes in consumers’ demands in a highly capitalistic industrial system.
Thus the law of demand for intermediate products states that the demand depends, not only on the demand for the final product, but on the manner in which that demand is fluctuating.[1]
Social Control
In 1923, Clark published a classic titled Studies in the Economics of Overhead Costs. Three years later he published the first edition of his Social Control of Business. The National Bureau of Economic Research issued his Strategic Factors in Business Cycles in 1934.
Clark defined social control as any instance when the “individual is forced or persuaded to act in the interest of any group of which he is a member rather than in his own personal interest.” The necessity for social control was woven into his “social economics,” which sought to interpret and improve the functioning of a pluralistic economy embracing coexistence among government enterprises, government-controlled industries, large private corporate enterprises, and small-scale businesses.
Clark held that businessmen are generally responsible individuals, but unless they seek to serve their own interests in the narrowest sense, competition will drive them to the wall. Even if nineteen businessmen want to follow ethical practices and fair dealing, they may be prevented from doing so by a twentieth competitor who is unscrupulous. Therefore Clark’s system of social economics requires social control to serve the general welfare. As early as 1916 he wrote:
By comparison with the scope of responsibility as it has been conceived and presented here the laissez-faire economics may well be characterized as the economics of irresponsibility, and the business system of free contract is also a system of irresponsibility when judged by the same standard. Of static theory we must simply say that while it does not deny social responsibilities it does to a large extent ignore them….
Meanwhile the demand for control has grown with amazing speed, and in every direction experiments are being tried. This should properly be regarded as a recognition of special kinds of responsibility which the business economics leaves out of account and which the machinery of free contract furnishes no way of bringing home to the proper persons. But instead, this regulation is looked on by too many as a phase of the old irresponsible struggle, merely translated from the field of business into the field of politics. It is under suspicion as being mere irresponsible class legislation, and unfortunately the suspicion has some justification.
Hence, employers often feel either contemptuous or deeply injured when laws begin to interfere with customary business practices, and when investigating committees ask prying questions that imply a demand for a righteousness that shall exceed the righteousness of the scribes and Pharisees. Businessmen with this point of view oppose the growth of public control with resistance that is now adroit and now stubborn but nearly always powerful. The economics of control is at was with the economics of irresponsibility….
To the extent that each of us is a factor in economic evolution, be it only that his presence adds one member to the population, he shares in all the increasing difficulties which economic evolution brings with it. He cannot do anything so far-reaching as building a house without affecting other people’s property interests for better or for worse. Unless he affects them for the better he is pretty sure to affect them for the worse. And unless he leaves society stronger in its power to master the manifold troubles of modern industry he will leave it relatively weaker by just so much as those troubles have grown in size and complexity. Modern industry gives a new meaning to the text, “He that is not with me is against me,” and is constantly showing new ways in which, whether we like it or not, we are our brothers’ keepers.[2]
Clark contrasted the social and individual points of view by showing that what is a variable cost for the firm is an overhead cost for society. Labor is the outstanding example. An employer can lay off workers and thereby save a large part of the production costs, while reducing the output. Yet workers have to be fed, housed, and clothed even during bad times; their costs of maintenance cannot be avoided when they are unemployed.
For the nation as a whole, its labor power is a fixed asset and any failure to utilize it is just as definite a loss as failure to utilize a mechanical plant. It pays, socially, to utilize labor so long as it produces anything toward its own necessary upkeep, which must be met somehow in the long run. Thus social cost-accounting shows a gain from employing labor in a slack season, even if the product will not pay regular day wages to the laborers: social accounting shows a gain where private accounting would show a loss.[3]
If wages could be converted into an overhead cost for the employer, said Clark, production would become more regularized. A guaranteed annual wage might accomplish this.
Raw materials, like labor, are a variable cost for the purchasers but an overhead cost for their original producers and therefore for society as a whole. Producers of raw materials invest funds in their enterprises and must themselves be maintained through good and bad times. The cattle raiser, for example, must pay interest on his mortgage; meet his property-tax payments; allow for maintenance and depreciation on his buildings; machinery, and livestock; and maintain himself and his family. These are all overhead costs, yet the cost of living cattle becomes a variable cost to the packinghouse that buys them. This shifting of costs distorts economic calculations in deciding whether or not it is economically worthwhile to produce goods. Every producer has an incentive to maintain production, but the strength of his incentive is measured by his own overhead costs, not by the total overhead costs involved in the whole process.
Clark felt that no single measure, agency, or group can be held responsible for the whole task of seeking solutions to our economic problems. We require a coordinated effort by many agencies, including government, banking, insurance, industry, and labor. The individual firm should plan steadier production, producing goods for inventory in slow times, in order to help fill the depression hollow of the business-cycle curve. The peak of the curve could be lopped off by requiring the employer to bear some responsibility for the overhead cost of temporary labor he might hire; this would encourage him to handle his peak demand with his normal labor supply if possible, instead of adding temporary help. In addition, broad social and government programs, including public works, should be used to promote stability.
In his book, Economic Institutions and Human Welfare, Clark conceded that in spite of the many social controls that have been enacted, “the existing system is far from perfect on the score of efficiency.” Yet collectivism, he said, does not offer the complete answer. Though collectivist dictatorship of the Russian type can be ruthlessly efficient, it may sacrifice the higher and more creative forms of efficiency. Democratic collectivism would also sacrifice efficiency and technical progress, perhaps as much as or more than our present system. Worst of all, even democratic collectivism would reduce personal liberty, because a central administrative authority would have ultimate power over the livelihood of every citizen. Our present system creates difficulties for radical nonconformists, but the problem would become more serious if there were in effect only one employer. On the other hand, said Clark, this argument against collectivism should not be taken as a brief for preserving the existing system.
Existing systems are not preserved unchanged, no matter what we decide about them. They change of themselves, if they are not altered by outside forces; and our present system is not exempt from this law. No single form of existing business liberty is sacred. But this argument is a brief for continuing to struggle onward with a system embodying the principle of liberty, economic as well as personal, in spite of the difficulties. This does not offer a quick cure of basic evils. It offers rather a prospect of generations of effort, with patience, persistence, and tolerance, to strike a sane balance between liberty and control, and to reduce our worst evils to tolerable proportions by a process of adjustment, using voluntary means to the utmost of their capacity, the whole being subject to free discussion, not directed by arbitrary fiat and suppression of dissent.
It is conceivable that at some point in such a process we might achieve enough co-ordination to reduce unemployment to minor proportions and to maintain stability in other respects without making everyone an employee of the state. At that point it would make little difference whether we called the system “socialistic” or not. “Socialism” of such a sort, reached by such a process, could still leave room for true personal liberty: it could still be democratic. But this can only be attained by a process that does not go too fast for business to adjust itself without catastrophic breakdown or violent revolution. If such a process is to continue, we must avoid committing ourselves to the experiment that would mean the end of free experimentation.[4]
As a social philosopher, Clark was willing to consider and express value judgments, provocative, as this attitude may have been. Opinions about how to promote humanity’s well being have been expressed freely by economists from before Adam Smith’s time to the present day. Those economists who insist on an austere and Olympian disassociation from social objectives in effect endorse the status quo. One cannot write tax laws or pass on school budgets without some concept of the social welfare and how to promote it. Nor can a person readily separate scientific economic analysis from the value judgments on what is good and bad, better and worse. The economist who spells out predilections and preferences can be just as rigorously scientific as the economist who eschews ideas about maximizing welfare. Clark, like Hobson and Pigou, was willing to consider social policy that aimed at maximizing welfare.
Selected Readings
Clark, J. Maurice. Alternative to Serfdom. New York: Knopf, 1948.
_____.Economic Institutions and Human Welfare. New York: Knopf, 1957.
_____.Preface to Social Economics. New York: Farrar and Rinehart, 1936.
_____.Social Control of Business, 2d ed. New York: McGraw-Hill, 1939. [Originally published in 1926.]
_____.Studies in the Economics of Overhead Costs. Chicago: University of Chicago Press, 1923.
[1] John M. Clark, “Business Acceleration and the Law of Demand,” The Journal of Political Economy, Vol. XXV, No. 3 (March 1917), 217-35. Reprinted in The American Economic Association, Readings in Business Cycle Theory. Philadelphia: Blakiston, 1944, 240.
[2] J. Maurice Clark, “The Changing Basis of Economic Responsibility,” Journal of Political Economy, Vol. xxiv, No. 3 (March 1916), 218, 219, 224.
[3] J. Maurice Clark, Studies in the Economics of Overhead Costs (Chicago, 1923), 350.
[4] J. Maurice Clark, Economic Institutions and Human Welfare (New York, 1957), 100-01.