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"pursue this policy constantly and without moderation. they might ruin many of those in the trade, themselves perhaps among the number; and in that case a revival of demand would find very little response in supply, and would raise violently the prices of the goods produced by the trade." 1 Further, as I have argued elsewhere, such a policy may be disadvantageous to output in other trades, since if the demand for the product becomes inelastic (as it may, for instance, in such circumstances for machinery or for railway transport) the incentive to output in other trades is reduced. Restriction of output is the remedy now normally proposed and frequently adopted in such circumstances, and is in harmony with the general presumption (§ 6) that price should be made to cover full costs; but it does not follow that, if we confine our view to temporary results, there are not other better ways of dealing with the situation. Discrimination may be practised (as in the dumping policy of cartells), or a State subsidy may be given (as in effect proposed recently by the Industrial Group of Members of Parliament, and to some extent already done under the Trade Facilities Act), or, perhaps better still, the State might assist in storing the results of continued output clear of the market until demand revives once more. I am far from denying that such devices have their place in dealing with emergencies; and I concede, therefore, that in such cases it may be right to push production in these industries beyond what is at the moment the "economic point (in my sense of receipts covering costs). But I suggest that this is a wholly different matter from a permanent policy of subsidisation; and I would urge further that in all such emergency measures the urgency of the immediate necessity must be weighed against the danger of encouraging over-investment in these industries in the future, by relieving them from the responsibility for the consequences of any excesses in investment policy in which they may choose to indulge.


§ 13. Have I fulfilled either of my remoter hopes? I, by attempting a further analysis of the boxes, contributed at all either towards making them easier to fill, or towards making any good use of them when filled? As to the latter, at all events, I fear that I have been destructive rather than helpful; for if I am right, the uses that can be made of them are more modest, even in theory, than has been claimed. But I have, to console

1 Marshall, Principles, p. 375.

2 A Study of Industrial Fluctuation, pp. 203–205.
3 See A Study of Industrial Fluctuation, p. 251.

me, Professor Pigou's contention, and Dr. Clapham's admission, that even negative conclusions may be of use.1

And yet at the end I am a little despondent. Clad in the cuirass of the calculus, the vizard of unverified probability, and greaves of the second order of smalls, perhaps the giant is still unscathed and derisory. But will he at least for he is a gentle giant-deign to pick up David's pebbles and fling them back at him? For David is humble at heart, and would like to sing new songs to his sheep if only he really understood the tunes. And further, being of a mischievous disposition, he would rather enjoy telling the chieftains that the stern science of economics, who has so often enjoined the contrary, now actually urges them to supply many things to the people-Ford chariots perhaps, perhaps even copies of the Psalms-at almost nominal prices.


The Editors have invited comment from me upon Mr. Robertson's article. As I have rewritten and altered my discussion of these matters in the new edition of The Economics of Welfare, which is appearing shortly, it would be wasted labour to debate the old version in detail. I will, therefore, content myself with the following brief reply. Mr. Robertson must forgive me if, in the course of it, I do not speak of myself by somebody else's name or in the third person singular.

(1) The question whether the apparatus of curves presented in my book is or is not useful depends on the tastes of the user. The discussions in which I employed it could have been conducted to the same result by means of the differential calculus, or of either of Dr. Marshall's two systems of curves, or, if one were clever enough, by the light of nature, with no apparatus at all. I have no particular affection for the duplex curve apparatus. For mathematicians it is unnecessary, and to persons innocent of mathematics it appears to be unintelligible. In my new edition, therefore, I am dispensing with it.

(2) In his discussion of increasing returns Mr. Robertson does not seem to have understood the nature of the issues involved. My conclusions, which he considers new and revolutionary, are identical with those established thirty years ago by Dr. Marshall (cf. Principles of Economics, Book V. ch. xiii.). The suggestion that they imply a policy of subsidising nationalised enterprises "to the extent of the whole burden of the fixed

1 ECONOMIC JOURNAL, 1922, pp. 462, 561.

original plant," is, of course, a grotesque misunderstanding. It is arrived at, so far as I can see, partly by confusing longand short-period conditions and partly by applying to production generally propositions that are only applicable to quantities of production less than the quantity which the minimum practicable plant could provide. Mr. Robertson is also in error in suggesting that I deny the existence of internal economies. It is fair to admit that some bad phrasing in the text-not the appendix-of my book lends colour to this suggestion. As, however, it is obvious that no economist, who is not imbecile, could deny the existence of internal economies, it would have been flattering in Mr. Robertson to look for some other explanation of the language used.

(3) Professor Allyn Young's criticism of my analysis of diminishing returns, which Mr. Robertson has transcribed, is, in my present judgment, substantially valid as regards longperiod problems, and the reply which I made to it in The Economics of Welfare is not adequate. In view of that criticism important modifications in my analysis are necessary, and are made in the forthcoming new edition.

To which Mr. Robertson rejoins:


(1) My quarrel is not with Professor Pigou's geometrical methods (like many non-mathematicians I find diagrams peculiarly helpful), but with the processes of thought which they enshrine and the conclusions which they are used to establish.

(2) On increasing return, Professor Pigou states that I am confused I can only regret that he has not thought it worth while to clear up the confusion. He replies to my reductio ad absurdum (§ 6) by stating that he is not so silly as to believe the absurdum.

I did look for some explanation, other than a neglect of internal economies, for the language used on pp. 189-192 of The Economics of Welfare, and could find none. I hope other readers have been more fortunate.

(3) I attempted to criticise in detail the reply given by Professor Pigou in his second book to Professor Allyn Young's criticism of his first book. I do not think this process is quite correctly described as "transcribing " Professor Allyn Young's original criticism. But I am glad that Professor Pigou has come independently to the conclusion that his reply was inadequate.




ECONOMIC Conditions during the war and for two years after were highly favourable to business enterprise and rapid development. Here, as elsewhere, the war, with its great demand for raw materials and the inflationist financial methods that accompanied it, produced an era of almost unprecedented prosperity. Prices rose rapidly and in 1920 were nearly 140 per cent. higher than they were in 1913; industrial stocks were buoyant; profits and dividends were high; exports steadily increased, and for some years greatly exceeded imports (the excess for the year 1919-20 being the record figure of £50,849,217); bank deposits expanded, and credits were always available at a rate of interest relatively low compared with the rise in prices. On every side there were abundant evidences of prosperity. It was also a period of industrial expansion. Secondary production benefited most by the artificial conditions, and the number of hands employed in factories increased by 22 per cent. between 1916 and 1920. Prices for minerals and primary products, as will be shown later, increased greatly, and the Government made satisfactory arrangements for financing production in these fields. War loans were over-subscribed, thanks to the banks and the very favourable conditions on which loans were offered; and the State Governments maintained extensive public works whilst extending their activities in social and educational spheres. Post-war expenditure on repatriation, war-service homes, land settlement, etc., added to the activity of business and made possible many lucrative contracts. The disbursement of soldiers' gratuities was another and special local factor, increasing the spending power of the people; often, it must be admitted, upon goods which in no way increased the real wealth of the country.

This expenditure of public money is very pertinent to our problem. While the total expenditure of the State Governments from revenue increased by 79 per cent. from 1914 to 1921 as against a rise in prices of 90 per cent. in the same period, State expenditure from loan money was prodigal during the war.

The State debts increased from 317.6 millions sterling in 1914 to 458.5 millions in 1921, and the interest burden from 11.5 millions to 18.7 millions. There were many cogent reasons why the States should reduce their loan expenditure, but the State Governments did not apparently consider it politically expedient to reduce their public works even though the Commonwealth Government was frequently on the market for large sums for war purposes. This is perhaps inevitable in the existing financial arrangements between State and Federal authority in the Commonwealth. Nevertheless the actions of the States certainly aggravated the boom.


But it is in Commonwealth finance that the most pronounced increases occurred and the heavy spending of loan money most evident. Expenditure from revenue increased from £16,878,328 in 1913-14 to a maximum of £65,106,949 in 1921-2. Of the latter figure £31,337,164 represented expenditure incurred through the war, interest on debt, pensions, repatriation. The Commonwealth debt at July 1, 1923, was £410,996,316, of which £362,692,574 represents war debt, and the remainder loans raised for public works. Elsewhere I have shown that the war was financed mainly by loans, taxation being used merely to meet the annual debt charges, pensions, etc. as they were incurred.2 As a result a heavy annual "war" charge persists long after the cessation of war activities. In 1922-3 these war charges amounted to 47 per cent. of total expenditure. Taking the whole period up to June 20, 1924 (figures for 1923-4 are the Treasurer's estimates), the total war expenditure exclusive of War Gratuities will be £543,462,487, of which £193,879,513 only is to be met from revenue. Even after the Armistice there were heavy borrowings for war purposes, such as repatriation and soldier settlement. These amounted to £131,727,977 for the years 1918-19 to 1920-21. In the following two years an addition of £9,339,671 was made, and the year 1923-4 will witness a further addition of £7,105,750 on this account. Naturally the expenditure of these loans stimulated the demand for many commodities which were ordinarily purchased out of the incomes of the people. In so far as they did this they increased the production of "consumption "goods and diverted energy into relatively unproductive channels. Part of this expenditure was upon repatriation, war service homes, soldier settlement, etc., and will be to a large

1 Budget Papers, 1923-4, p. 123.

* ECONOMIC JOURNAL, December 1921, pp. 492-4.

No. 133.-VOL. XXXIV.


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