no time exceeded the output of the 1917 year. Much speculative opinion. has been offered as to whether war advances or retards the processes of production. A negative answer to the query is obvious from the indexes of physical production. Even the boom of 1919, built upon post-war abnormalities, did not rest upon a material increase in production. It rested upon inflation and speculation, but not upon an extraordinary output of physical goods and services. The indexes for 1923 and 1924, on the other hand, indicate that with the return of normal peace time conditions, production resumes its normal upward trend. Peace promotes, war obstructs, the normal growth of productive capacity.

* W. W. Stewart, American Economic Review, Volume II, 1921, p. 68. Includes farm materials, forest products, mining products, manufacture and transportation.

Edmund E. Day, Review of Economic Statistics, 1921, p. 20, and July, 1924, p. 201. Includes agriculture, mining and manufacture. Indexes readjusted to 1899 base as 100. Indexes for series since 1920 obtained by adding Federal Reserve Board index of production of basic materials to the indexes for the earlier period.

Indexes of Major Branches of Production.-The various branches of production do not increase with even pace. Marked differences in rates of increase appear between agriculture, forestry, mining, manufacture, transportation, and other types of industry. The following indexes provide a comparison in rates of growth between agriculture, mining, manufacture and transportation:

Agriculture has increased about 50 per cent in output during the quarter century. This rate of increase is much less than the rate for

any of the other three major branches of production. But although agriculture has lagged behind other industries, it has just about kept pace with the growth of population. On the average, over this entire period, both population and farm production increased about 2 per cent per annum. Moreover, the increase of agricultural output is much less influenced by the ups and downs of the business cycle than are the other branches of production. For instance, both 1908 and 1914 were depression years for mining, manufacture, and transportation, but they were boom years in farm production. Unlike other industries, agriculture is primarily dependent upon weather and climatic conditions, and is only secondarily influenced by the business cycle.

* Edmund E. Day, Review of Economic Statistics, 1921, p. 20; and 1925, p. 215. Revenue ton-miles of freight, computed from Annual Reports of Interstate Commerce Commission.

Mining has increased output more rapidly than either agriculture or manufacture. The increase of more than 200 per cent amounts to an average increase over the 25 years of more than 8 per cent per annum.

Mining output has run far ahead of population growth. The short time fluctuations in mining production reflect clearly the slump and boom of the business cycle.

The growth of manufactures is midway between agriculture and mining. The average increase over the period was about 6 per cent per annum. Manufacture increased considerably faster than population. The short time fluctuations are more direct reflections of the business cycle than those of any other branch of production. The manufacturing cycle is at the heart of the business cycle. This is highly important, because the product of the factories is a recapitulation of the product of other major industries. The great bulk of the products of farm and of mine pass through the hands of the manufacturers before they are ready for human use. Nearly all raw materials are fed into the factories, and nearly all finished products come from the factories. Consequently, manufacture offers a comprehensive picture of changes in all other lines of production. The record of growth of manufacture is an evidence of persistent increase in the means of material well being of the nation.

The growth of transportation is greater than that of agriculture or manufacture, and about the same as that of mining. The average increase over the period was above 8 per cent per annum. The meaning of this growth is that each unit of goods produced is being moved about more and more from place to place. Place utilities constitute an increasing proportion of the total utilities created by production. The task of moving goods tends to increase considerably faster than the task of making goods. More and more production consists of carrying commodities great distances. The transportation cost per unit of product thereby tends to become relatively greater year by year.

Production in all lines is capable of being maintained at maximum capacity only when a suitable economic balance exists. The experience of the past indicates that the mere automatic working of laws of competition or of supply and demand is not sufficient to maintain this balance. Every few years production becomes unbalanced. Too much of certain goods has been produced; too little of certain other goods has been produced. These maladjustments in production are a fundamental factor in determining whether the country enjoys prosperity or suffers depression. The unbalancing of production recurs time after time. It is primarily a problem of the business cycle, and receives detailed consideration in a later chapter on that subject. In the broadest sense, the balance of production involves every phase and process of economic life, and the problem therefore permeates all parts of the science of economics.

The Net Value Product. When raw cotton goes into a textile factory, it has a certain value. When it emerges in the form of cloth,

1 While stressing quantity of production at this point, the writer does not wish to seem to neglect quality of product or human consequences of production. Quantity alone obviously is insufficient if the other aspects are lacking.

it has a materially enhanced value. The difference between the value of the product before and after manufacture is the value added to the goods by that particular industrial process. The same principle may be applied to all forms of industry. The net value product of any industry is the market value added by that industry to the materials, supplies or services which it obtains from outside sources. The excess of the value of the output over that of the materials used in production is the value added by the industrial establishment in question. If a concern can take raw materials worth only $1,000,000 and convert them into finished products worth $2,000,000 the value added is $1,000,000. This value added is paid out to employees as wages, to land owners as rent, to bankers and investors as interest, to stockholders as dividends, and any remainder is put back into the business. This definition of value product necessarily oversimplifies the matter somewhat. The calculation involves complicated statistical and accounting methods, but after all this technical computation is completed, the result represents the simplified definition of value product as given here. The following table shows the relative importance of the main lines of industry in the total national production. Their relative importance is determined by the net value product added by each line of production.

PERCENTAGES OF THE NATIONAL INCOME PRODUCED BY VARIOUS INDUSTRIES, AVERAGE FROM 1909 TO 1918 *

National Bureau of Economic Research, Income in the United States, Volume I, p. 23; and Volume II, pp. 244-245.

The equity of the different shares is not here in question. The basis for this distribution of the national income is discussed in later chapters dealing with the shares in distribution, including profit, rent, wages, and interest.

These estimates show manufacture to be the most important single branch of industry, with nearly 3 of the total value product to its credit. Agriculture is second in importance, with more than 1% of the total. Transport shows a value product about 1/2 as large as agriculture, or less than 110 of the total value product. Merchandising is the largest single item included in the classification "all other industries,' and is about equal in importance to transport. Mining, banking and government are relatively low in value product. Government has increased its importance in recent years, and now yields upwards of 12

of the total value product. Mineral production is about 30 of the total and banking about 50 of the total. The three largest branches of production from this standpoint are agriculture, manufacture, and transport. These three combined give more than half of the national income. The net value product of different industries is a useful indication of their relative importance, and of their relative contributions to the total national income. It helps in ascertaining whether production is out of balance in any direction and in measuring the cause of maladjustment.

Net value product is also a useful method of measuring the year to year fluctuation in a given branch of production. The following table shows the movements in volume of manufacture since 1899.

United States Census of Manufactures, 1921 and 1923.

† Adjusted by the all commodities index of prices, as computed by the United States Bureau of Labor Statistics.

A comparison of the period from 1914 to 1923 shows a striking difference between the money value of product and the physical quantity of product. It also shows the year 1923 to be the high point in manufacturing achievement in the history of the country.

The Size of the National Income. The aggregate national income is taken to consist of the commodities and services produced by the people of the country or obtained from abroad for their use, with the omission of goods for which no price is commonly paid, for example the services of housewives. In order to express the national income as an absolute sum, it is necessary to reduce all goods and services to their dollar values. The national income stated in dollars is a pecuniary concept. Behind the dollars are the goods and services which they represent.

In estimating national income in dollars, distinction has to be made between dollars of steady value and dollars of changing value. When prices of all kinds of articles increase, and the average price level rises, the value of everything in dollars is increased. But it does not necessarily follow that physical wealth has increased accordingly. For in