BOOMS AND DEPRESSIONS

Sun (Auckland), Volume IV, Issue 992, 7 June 1930, Page 15

BOOMS AND DEPRESSIONS

THEIR cyclical nature DISCUSSED theories and logic If the average mati were asked lor tis opinion concerning the way out c f Australia's trade and financial depression, he would probably say that a good season or two in the primary rural industries would bring things back to their old condition of prosperity. But there is more in it than that (writes “J.M.P.” in the Melbourne •‘Age”). It is an interesting fact that booms and depressions occur in almost a regular periodicity, so that one good season certainly cannot give complete relief —at least if any value can be attached to the investigations and theories of trained economists. Pessimists, however, should remember the words of the famous Peter Doody: "Every cloud is silver lined,” or to put the sentiment more appositely: “There is a crest following every trough.” It is a fashion just now for public men to make optimistic statements, but if their opinion were backed by sound economic reasoning, something

would be done to restore public confidence, every ready to follow a lead. It must be admitted that one of the difficulties which beset those who suggest remedies for these disastrous fluctuations is the lack of unanimity among economists themselves as to the actual causes. Each theory put forward may have an element of trutlr in it, and, though the several sponsors believe that theirs is the correct theory, it i 3 probable that a depression is brought about not by a single cause, but by the cumulative effect of many.

Let us examine some of these theories, remembering, of course, that the phrase “business conditions” is a rather complex concept, covering such subjects as price levels, money markets, optimism, pessimism, and so on. The sources of data concerning the cycles are threefold. Firstly, economic history helps us, particularly over a long period, for most histories contain an account of noticeable fluctuations from the normal—for example, the conditions which led to the repeal of the “corn taws” in England in the forties of last century. Secondly, business anuals, trade journals, and. to mention no others. Government gazettes give lots of information as to recent and contemporary conditions. Thirdly, statistics, though Quite a recent science, give an accurate trend, and if we focus our attention on any one business phenomenon and trace its course over the years of graph drawn therefrom, will ilustrate very clearly the cyclical nature of recurring booms and depressions.

This periodicity has been studied carefully by many investigators, and the sum of their work is that fluctuations occur in fairly regular cycles, though the curves representing them are not always of equal phase and height. An American economist, Mitchell, has examined annals in the United States for a period of 127 years, and in that time has marked 32 cycles of an average duration of fo; r years. His figures for England and Australia are respectively five ar, three-quarters and six years. If we relate the latter to unemployment figures in Australia, taking the greatest curve, or lowest period of depression, we find that unemployment was at its worst in 1907, 1913, 1920, 1923 and 1927. Thus the figures correspond rather well to Mitchell’s investigations.

Periods of prosperity appear to be longer than periods of depression. Mitchell finds that for every year of depression there are in Canada 1.86 years of prosperity, United States 7.72, England 1.71, and Australia 1.C9 years. In addition to the trough and crest of the curve of fluctuations many economists mark out well-defined periods of recession and revival. One very important fact concerning the cycles is that there is a tendency to a world economy, a disposition for each phase to spread from one country to another. This fact is borne out vepr well by the depressions now existing in England, United States and Australia.

Some of the theories as to the causes of cycles of booms and depression may seem at first sight to be rather fantastic, but there is in them at least an attempt to relate cause and effect by logical reasoning. For example, Jevens, an English economist of standing, believed that sun spots had much to do with cycles. Sun spots, which occur in cycles, affect weather conditions, and therelore primary production, with ultimate fluctuations in the raw materials available for manufactures. It is obvious that variations in primary production are a cause of booms and depressions. This is particularly so in Australia, where a poor wool clip or ''neat harvest has an immediate influence upon our national prosperity. But this is, after all, only a partial explanation.

Another theory is that of Huntingdon, who believed that health conditions affected the cycles in that a high ■ is 1 ra te would have a depressing lufluenee upon business men, a difficult thing to trace. Among Socialists a favourite theory th t °* ovei '-Pi'oduction, implying that there is an expansion of business oeyond reasonable limits. One can iardly imagine a community which not be one means or another be muuced to consume a little more. nerefore it would be better to define r' e^'pro^uc ti° n as an inability to liquidate accumulated stock. This as in the related overcapitalisation theory, undoubtedly bas strong influence, more particularly lo industrial countries as Eugana and America. Indeed, much of ue depression existing in the latter ountry is ascribed to mass production r un riot.

Hobson’s theory of over-saving conies next. Wealthy men accumulate savings which they lend to business People. In times of depression this und increases more rapidly than the nvested capital, since the owners of tue savings are chary about making ••vestments. Money becomes cheaper, ana an expansion takes place at a •uglier rate than savings, which then Become scarce, thus precipitating a crisis. This is hardly a direct cause of depressions, but it may tend to aggra°ne already in existence. That every new process or invention disturbs the course of industry is the contention of Scumbert. This may apP’y to a limited degree, but it can scarcely cause the periodicity of the cycles. Hawtrv and others say that whole problem is one of the value

of money, and that banking policy is closely related. In view of this opinion the proposal to establish a central rseerve Dank is interesting, in that one of its functions is to sway the policy of trading banks. In times of depression, according to the ideal, money should be made available, and in boom times it should be restricted, so tending to lessen the fluctuations by putting stability into industry. In practice this is not done; hence it may be. argued that a reserve bank could do much to alleviate the stress of depressions. The theory which has the widest acceptance among economists is one which works through the relation between producer and consumer. The decision as to what shall be produced rests xVith the business man of entrepreneur, who buys from the producer or manufacturer and sells to the consumer. Ultimately, of course, the latter exercises the decision, but through the medium of advertising or other means of swaying business, the middleman can influence consumption. In practice it is the business of the middleman to make decisions, which are based on estimates of profitability of further enterprise, and on the advisability of retrenchment. A comprehensive set of factors is embraced in this theory, in which changes in cost and receipts are involved. If costs rise the margin of profit expected is less, and vice versa. Fluctuations in costs may be affected by changes in personnel, capital, efficiency in labour, mobility of labour, and elasticity of wages. In the lastnamed the consideration should be as to how far wages can be lowered to meet falling profits. Costs of raw material relate this theory to the productivity theories, and are probably among the most important of the factors. Quantities bought by the consumer affect changes in the receipts, and changes in fashion, discovery of substitutes, tariff alterations, and preferential buying, as of Empire or foreign goods, affect these quantities. In recent years a very important factor has obtruded itself, that of instalment buying, an dit has been said that no single factor has had so much influence upon the occurrence of booms and depressions. Consumers do a large amount of instalment buying and create a boom, but if the thing is overdone inevitable failure to meet instalments due follows, with consequent depression. Perhaps this is most noticeable in the motor-car industry. Our Australian depression can he attributed to a number of these factors, and to one not yet mentioned. We are different from most other countries, in that our borrowings abroad complicate our economic position. For many years we have indulged in an orgy of borrowing. We have spent more than we have earned, and that inevitably means serious dislocation in industry, both primary and secondary. We are hardly sufficiently industrialised to feel the effect of over-production, but on account of a fall in receipts for our primary production money to buy our manufactures is scarce, with a resultant decline in receipts in industry. Longperiod strikes, as in the coal industry, inevitably lead to a reduction in buying, while inelasticity in wages keep costs up while receipts are falling. Instalment buying and time-payment have probably had a small influence on the situation.

It is not easy to suggest remedies for the equalisation of the cycles. Improved seasons for primary producers will do more good than anything else, but an important psychological aspect may be referred to. Business men undoubtedly make errors of judgment. They may wish to expand when others realise that costs are about to rise and retrenchment is necessary. Business men are liable to become self-centred, and fail to realise the influence upon their businesses that fluctuations elsewhere may have. During boom periods new and inexpert, firms appear, and flourish for a day, but with depression they disappear, and so create unrest among more stable enterprises. Much could be done by means of accurate information gives to business men generally, and this is being done to some degree in the United States and England, where forecasting stations have been established. Banking policy could also do much to equalise fluctuations, and preserve the small industries which fail when periods of recessions begin. Thus one of the worst features of depressions, unemployment, would be limited. Australia, too, has a remedy—not likely to be adopted—in its loan policy, in xvhich most of the money borrowed is spent in public works. During boom periods, borrowing should be restricted, and when a depression sets in with its inevitable unemployment, work could be provided by increased borrowing.