Equilibrium Models in Economics

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Equilibrium Models in Economics
 Equilibrium Models
in Economics
Purposes and Critical Limitations
xwx
Lawrence A. Boland, frsc

1
 1
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Library of Congress Cataloging-in-Publication Data

Names: Boland, Lawrence A., author.
Title: Equilibrium models in economics : purposes and critical limitations /
Lawrence A. Boland. Description: New York : Oxford University Press, 2017. |
Includes bibliographical references and indexes.
Identifiers: LCCN 2016026800| ISBN 9780190274320 (hardcover) |
ISBN 9780190274337 (paperback) Subjects: LCSH: Equilibrium (Economics) |
Econometric models. Classification: LCC HB145 .B65 2016 | DDC 339.5—dc23
LC record available at https://lccn.loc.gov/2016026800

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In memory of my former student and long-​time friend: the
late Dr. Stanley Wong
 CON T E N T S

Preface   xiii
Acknowledgements   xvii

Prologue: Problems with modelling equilibrium attainment    1

P.1. A general economic equilibrium as a necessary social
optimum   4
P.2. Maximization is the only behavioural assumption in neoclassical
equilibrium models    8
P.3. On the road to Dynamic Stochastic General Equilibrium
models    9
P.4. Outline of this book    10

PART ONE: The purpose and problems for equilibrium models

1. Equilibrium models and explanation    13
1.1. Equilibrium and explanation: Elementary considerations    14
1.1.1. Marshall’s two ‘Principles’ of explanation    15
1.1.2. Long-​run vs. short-​run equilibria and the role of time    16
1.1.3. Comparative statics analysis as thought experiment    17
1.2. Equilibrium implies recognition of disequilibrium
dynamics   18
1.3. Equilibrium and necessary knowledge    20
1.4. Marshallian textbook explanations vs. modern economic model
building   23
2. Equilibrium attainment vs. equilibrium necessities    25
2.1. Price adjustment in a formal model    26
2.2. Equilibrium attainment as an explicit process    29
2.3. Equilibrium vs. imperfect competition    32
3. Does general equilibrium attainment imply universal maximization?    35
3.1. The equilibrium actually reached by an ignorant
monopolist   36
3.2. An equilibrium state as a sub-​optimum    43

( vii )
 ( viii )  Contents

4. Time and knowledge matters for general equilibrium attainment    47

4.1. Knowledge and learning in economic models    48
4.2. Richardson on completing an equilibrium model    49
4.2.1. The informational requirements for a perfectly competitive
equilibrium   49
4.2.2. The consequences of reaching a general equilibrium    50
4.2.3. Considering the disequilibrium before reaching the
equilibrium   52
4.2.4. The availability of needed information in a competitive general
equilibrium model    53
5. Equilibrium concepts and critiques: Two cultures    57
5.1. Two cultures    59
5.2. Equilibrium concepts involving time, dynamics and
process   62
5.3. Equilibrium concerns of the formal model builders    63
5.3.1. Existence    64
5.3.2. Uniqueness    65
5.3.3. Stability    65
5.4. Concerns, beyond realism, of the critics of formal equilibrium
models   66
5.4.1. Knowledge and information    66
5.4.2. Expectations    66
5.4.3. Uncertainty    67
5.4.4. Increasing returns to scale    67
5.4.5. Operational?    68
5.5. Exogenous vs. endogenous variables in equilibrium models: Cause
vs. effect?    70
5.5.1. Causality among economists    70
5.5.2. Causality and economic model builders    71
5.5.3. Can economists so easily avoid causality?    74

PART TWO: The limits of equilibrium models

6. Recognizing knowledge and learning in equilibrium
models   79
6.1. Modern attempts to include knowledge and learning    80
6.2. Recognizing knowledge in equilibrium models    81
6.3. Towards including realistic learning in economic equilibrium
models   84
6.3.1. Does learning matter in the model?    84
6.3.2. What role do probabilities play in the model’s decision maker’s
learning process?    85
6.3.3. Does the equilibrium model involve agents’ making decision
errors?   86
 Contents  ( ix )

6.4. The problem of maintaining methodological individualism in

equilibrium models    90
6.5. The problem of the compatibility of general equilibrium and
psychologism   93
6.5.1. Multiple equilibria?    95
6.5.2. Psychologism    97

7. Limits of equilibrium methodology: An educational dialogue    99

7.1. A dialogue in an Economics 101 class    100
7.2. The stability in an equilibrium model must be
endogenous   105

8. Equilibrium models vs. realistic understanding    107

8.1. Equilibrium attainment and knowledge sufficiency    108
8.2. Equilibrium models and the ignorant consumer    112
8.3. The market’s equilibrium price: Learning vs. knowing    115

9. Macroeconomic equilibrium model building and the stability

problem   117
9.1. Rational expectations and macroeconomic equilibrium
models   118
9.1.1. Rational expectations in a microeconomic context    120
9.1.2. The Rational Expectations Hypothesis in macroeconomic
equilibrium models    122
9.1.3. The Rational Expectations Hypothesis and various ideas about
learning in macroeconomics    123
9.2. Stochasticism and macroeconomic equilibrium models    125
9.2.1. Rational expectations vs. bounded rationality    125
9.2.2. Rational expectations and Bayesian learning    126
9.2.3. Rational expectations and econometric learning    128
9.3. Instrumentalism and the use of stochasticism in equilibrium
models   129

10. Equilibrium models intended to overcome limits    131

10.1. The alleged limits of general equilibrium models    133
10.1.1. Dynamics vs. time    135
10.1.2. A list of other short-​comings of the Arrow-​Debreu general
equilibrium   137
10.2. The current attempts to overcome the limits of general
equilibrium models    140
10.2.1. DSGE models to the rescue?    141
10.2.2. Recent unrealistic efforts in formal equilibrium model
building to address limitations    143
10.3. Three empirical alternatives to Walrasian general equilibrium
models   144
 ( x )  Contents

11. Equilibrium models vs. evolutionary economic models    147

11.1. Darwin and evolutionary economics    150
11.2. Non-​Darwinian theoretical evolutionary economic
models   153
11.3. Alternative views of evolutionary economic models    155
11.4. Going beyond the evolutionary theory of the individual    157
12. Equilibrium models vs. complexity economics    159
12.1. Complexity economics    159
12.2. Technology, increasing returns and evolution    162
12.3. Diversity, learning, path dependency and evolution    163
12.4. Learning and ‘inductive reasoning’ in Santa Fe: A critique    163

PART THREE: Avenues for overcoming the limits of equilibrium

models: Some methodological considerations
13. Building models of price dynamics    173
13.1. The analytical problem of price adjustment as presented by Arrow
in 1959    175
13.2. Closure of the formal equilibrium model    176
13.3. Toward closure through posited ignorance    180
13.4. Exogenous convergence to equilibrium with forced
learning   182
13.5. Endogenous convergence to equilibrium with autonomous
learning   185
14. Building models of non-​clearing markets    189
14.1. Unintentional disequilibria    190
14.2. Endogenously deliberate disequilibria: Keynes-​Hicks generalized
liquidity   193
14.2.1. A macroeconomics textbook’s simple Keynesian
macroeconomics equilibrium model    195
14.2.2. Choosing not to consume in simple Keynesian
macroeconomics equilibrium models    196
14.3. Deliberate disequilibria vs. methodological
individualism   202
15. Building models of learning and the equilibrium process    205
15.1. Learning vs. knowledge in equilibrium models    208
15.2. Learning and methodological individualism    209
15.3. Learning without psychologism or any quantity-​based theory
of knowledge and learning    212
15.4. Equilibrium stability and active learning    217
15.5. Are macrofoundations needed for equilibrium
microeconomics?   221
 Contents  ( xi )

15.6. Conjectural knowledge and endogenous expectations    222

15.7. Generalized methodological individualism    223

Epilogue: Prospects for changing equilibrium model building practice in

economics   229
E.1. Behavioural and experimental economics and equilibrium
models   229
E.2. Behavioural and evolutionary economics as alternatives to
equilibrium models    230
E.3. Complexity economics and equilibrium models    231
E.4. Teaching with evolutionary or complexity economics    232
E.5. The issue of learning must be dealt with    233

Bibliography   237
Names Index    249
Subject Index    253
 PR E FAC E

In the mid-​1960s I did my graduate work in a federally financed program that

was created to promote and develop what was then high-​tech mathematical
model building. The main textbooks I used included the large 1958 book, Linear
Programming and Economic Analysis, by Robert Dorfman, Paul Samuelson and
Robert Solow and the small 1957 book, Three Essays on the State of Economic
Science, by Tjalling Koopmans. Except for a few elective courses and a couple
of history of economic thought classes, all of the required courses involved
mathematical model building or analysis. The extent of the federal financing
was significant since each year of the program provided a generous tax-​free
three-​year fellowship to three new students and it provided a salary for one
professor. I say generous because when I took my first job, I had to take a
pay cut.
In retrospect, it seems that all of the models we were learning about were
equilibrium models –​usually Walrasian general equilibrium models. And as
such we were learning about existence and uniqueness proofs, stability analy-
sis, and similar issues. We were never required to actually read Léon Walras’
1874 famous book, Éléments d’économie politique pure, ou théorie de la richesse
sociale; all we were told about Walras was that he engaged in general equilib-
rium model building. I say ‘we were told’ to indicate also that we knew noth-
ing of its history. Our two history of thought classes were devoted mostly
to learning about economics literature of the eighteenth and nineteenth cen-
turies with little if any mention of Walras. Based on the discussions in the
theory classes, and without giving it much thought, I came away with the false
impression that Walrasian general equilibrium model building was central to
the study of economics from the beginning of the twentieth century.
I raise these strange observations to emphasize a point which Roy Weintraub
raised in a 2005 article about the concept of an equilibrium and about the
criticisms of equilibrium model building. As I will discuss in Chapter 5, Roy’s
point is a very important point but those of us in the graduate program in
which I was involved would not have understood what Roy was talking about.
The point Roy was making was that there are two very different perspectives
about equilibrium and equilibrium models –​which I will call two cultures in

( xiii )
 ( xiv )  Preface

economics. One includes those who learned about the concept of equilibrium
before, let us say, 1950, and the other includes those like me and my fellow
high-​tech PhD students in the 1960s. For us, equilibrium was a property of a
mathematical model and we had only a vague idea that it was also supposed to
be something about the real world we could see out our windows. For the pre-​
1950 culture –​which was dominated by Marshallian economics –​equilibrium
was thought to be a claim about what we eventually would or should see in the
real world. And the difficulty with all this is that these two cultures both talk
about or criticize theoretical states of equilibrium but they are not really talk-
ing about the same thing. One of my tasks in this book is to sort these things
out so that we can all benefit from each others’ criticism.
In my 2014 book on economic model building, I addressed a different
schism, the one between today’s model builders and those of us who learned
decades ago about model building as I did when I was a graduate student. In
that book I explained that models and theories were seen as two different
things –​specifically, we thought that the purpose for a mathematical model
was to represent some given economic theory and thereby possibly provide
some logical rigour to the theory. When I began working on that book I talked
about model building with my colleagues, some young and some old. What
I quickly learned was that the young colleagues did not see models as I did.
For them the idea of a model was interchangeable with the idea of a theory.
By means of a short survey I determined that roughly the year 1980 divided
the younger view from my older view. My 2014 book was directed at trying
to bridge these two cultures concerning what constitutes a model in econom-
ics. Interestingly, for that schism between the older and younger views of the
relationship between theories and models, I was a member of the older side.
But in the present book, which will be addressing the schism that Roy identi-
fied concerning the concept of an equilibrium, thanks to my training in the
high-​tech graduate program, I became a trained member of the younger side
of Roy’s schism.
Ironically, despite the best efforts of my graduate instructors, once I began
teaching the ubiquitous Economics 101 class I realized how useless my gradu-
ate training was when it came to understanding the real world so that I could
teach about it. Early on I deviated from my training and began teaching my stu-
dents about equilibrium as something about the real world much like the older
side of Roy’s schism did. In the process I discovered Joan Robinson and read
many of her criticisms of the work of the newer side of Roy’s schism. When
I later got to teach the fourth-​year advanced microeconomics theory seminar
I started looking at some interesting articles that were about how the concept
of an equilibrium was problematic in economic explanations. As it turned out,
these critical articles were all addressing problems with formal equilibrium
models. Moreover, thanks to many of my critical students I learned a lot about
economics and economic model building by later teaching an advanced micro
 Preface  ( xv )

theory seminar and then even more when I began teaching a graduate micro
class. I think what I learned in those classes I should have learned in graduate
school. As a result, I have decided that this book will be about what I learned
with my students about equilibrium concepts and equilibrium models.
This book will be addressing recognized problems with equilibrium models
particularly from the perspective of standard economics textbooks that use
equilibrium models as a basis for explaining prices or forming economic poli-
cies and especially in teaching beginning students the virtues of the competi-
tive market. Of particular concern will be how economics textbooks almost
always fail to recognize any problems with equilibrium models even though
these problems fundamentally distort realistic economic explanations. So, as I
go along and whenever possible, I will try to point out ideas and criticisms that
are relevant today but have their origin in the ideas published by economic
model builders decades ago. While my main interest is in what we teach stu-
dents, eventually what will be considered here might also enable us to explain
why most governments’ policy makers are failing to provide effective help
dealing with real world economies. After all, most governmental economic
policy makers likely were once students in an Economics 101 class.
In 1986 I published a methodology book that was also about what I learned
teaching both advanced and graduate microeconomics theory classes. That
book proposed to offer a new methodological perspective for addressing some
fundamental problems with common microeconomic models. Unfortunately,
almost all of the problems I discussed there still seem to persist in microeco-
nomic model building today, particularly with those that rely on using the
analytical properties of equilibrium states. While in this book I will be drop-
ping most of the methodological concerns of that book, I will be returning
to many of the theoretical problems I discussed then, but this time by focus-
ing instead on recognized problems involved in building equilibrium models.
While methodology will play a much lesser role than it did in the 1986 book, it
will be addressed briefly in Chapter 6 and a bit more in Part III, where I discuss
how common methodological presumptions constrain any attempts to solve
the problems I discussed in Parts I and II.
I have written this book for readers interested in learning about the main
tool economists use to help understand the economy. Such readers include
undergraduate and graduate students, of course. But I also hope readers who
may not have taken the proverbial Economics 101 –​or, if they did, do not re-
member much from that class –​will still find this book useful. For these read-
ers I will occasionally add footnotes to help with the usual economists’ jargon
that one would have learned in that class. And most important, it is this group
of readers in which we will find people employed as governmental advisors
and policy makers –​in particular, people who should be asking economists
about the assumptions that were used to reach the advice they are giving advi-
sors and policy makers.
 AC K N O W L E D G E M E N T S

I have received a considerable amount of help in the form of criticisms of early

versions of chapters for this book. For this help I wish to thank my former
students Senyo Adjibolosoo and David Hammes as well as colleagues Brian
Krauth, John Knowles, Ken Kasa and Luba Peterson and friends Pedro Garcia
Duarte and Mark Donnelly. Also, I thank Duncan Foley for helping me with
Chapter 12 and Kenneth Arrow and George Richardson for answering my
questions about their articles discussed in Part I.
Also note that I have made use of parts of several chapters from my 1986
Methodology for a New Microeconomics: The Critical Foundations that was pub-
lished by Allen and Unwin. None of those chapters are reproduced here as in
each case the material I have used has been heavily revised as well as updated.
Any reader interested in that 1986 book can now obtain a 2014 Routledge
Revivals edition published by Taylor and Francis publisher.

( xvii )
Equilibrium Models in Economics
 Prologue
Problems with modelling equilibrium attainment

T he idea of a state of equilibrium pervades economics research. For a defi-

nition of an equilibrium one can easily find one with a Google search and
see something like this found in the 2016 edition of The American Heritage
Dictionary of the English Language: ‘e·qui·lib·ri·um: A condition in which all
acting influences are canceled by others, resulting in a stable, balanced, or un-
changing system’. If one also looked for how a well-​known economist might
view the notion of an equilibrium in economics, no better example to be found
would be the view of Frank Hahn: ‘Whenever economics is used or thought
about, equilibrium is a central organising idea. Chancellors devise budgets to
establish some desirable equilibrium and alter exchange rates to correct “fun-
damental disequilibria” ’ [1973, p. 1].
Critical analysis of equilibrium models is not a new topic. Of particular in-
terest for any consideration of claimed limits to equilibrium-​based explana-
tions are three separate and different challenges presented in, ironically, the
same year –​namely 1959. These challenges focused on equilibrium models
of the market that were very common in economics texts then and are still
common today, particularly in undergraduate textbooks. One of the three
1959 articles was by Kenneth Arrow who simply pointed out that in the usual
equilibrium market model (such as that illustrated in Figure P.1) it is not enough
to explain a market equilibrium price (Pe) as the one at an intersection between
the demand curve and the supply curve. He insisted that one must also explain
in the model why that equilibrium price would be achieved. As will be explained
in Chapter 2, the problem is that even to discuss a market-​determined equilib-
rium price one needs to recognize that a stable arrangement of the market’s

(1)
 ( 2 )   Equilibrium Models in Economics

Price
S

Pe

Qe Quantity

Figure P.1. Simple market equilibrium

demand and supply curves is required within one’s model. But, as Arrow also
recognized, a stable arrangement is not enough because with the usual text-
book models we are never told how any market participant, say the supplier,
knows the market’s demand curve or at least knows when to lower the price
and by how much. Similarly, how does the demander know when to bid up
the price or know by how much? Textbooks just rely on some vague form of
allowance of a sufficient amount of time but never say how much time this
would take. As to how the price was determined within the model, Arrow sug-
gested one possible solution for this problem of adequate explanation was to
recognize that the usual textbook discussion of an imperfect competitor does
involve at least a supplier setting the price1 –​but, of course, this would require
recognizing the supplier’s knowledge, and learning or at least identifying the
available information needed to make such a decision.
Ironically, in 1959 Robert Clower published an equilibrium model about
a different problem but one that in effect directly addressed Arrow’s sugges-
tion.2 Clower’s model was of an ‘ignorant’ monopolist for which allowance is
made for the obvious fact that the monopolist could not possibly know the
whole market demand curve it faces but instead would have to make assump-
tions about it. For Clower, the ignorant monopolist would at least have to

1. For those unfamiliar with economics jargon, perfect competition refers to a type
of market in which no individual has a significant role or effect on the determination of
the equilibrium price and imperfect competition means that individuals can affect the
price. Textbooks distinguish between these two types of competition by claiming that
perfect competition will exist whenever there are too many participants for any one to
have an effect and competition is imperfect whenever the number or buyers or sellers
is small enough that every participant can have an effect because any change in their
behaviour affects either the market’s demand or the market’s supply. This distinction
plays a big role in textbooks’ definition of markets and market behaviour.
2. I say ‘ironically’ because I asked Arrow (in January 2014) if he was aware of
Clower’s article in 1959 and he said he was not.
 P r ol o g u e    ( 3 )

make assumptions about the shape and position of the market’s demand
curve. Based on those assumptions, Clower’s monopolist would send a chosen
supply quantity (presumed to be a profit-​maximizing quantity) to the market
and wait to see what market-​clearing price is obtained.3 If the assumptions
about the nature of the demand curve are true –​such that the implied mar-
ginal4 revenue for the supplied quantity would be equal to the marginal cost
for that quantity –​there would be no problem.5 But there is no reason to think
the monopolistic supplier has the required knowledge to assure that the as-
sumptions made about the market’s demand curve are true. As will be ex-
plained in Chapter 3, the result is a model in which an apparent equilibrium
price may be reached but it is one at which the monopolist is not actually
maximizing profit even though the monopolist is erroneously thinking it is.
And again ironically in 1959, George Richardson presented a model of the
competitive market where it would seem that the only way to guarantee the
attainment of a market’s equilibrium price is to introduce some form of col-
lusion.6 As will be explained in Chapter 4, if Richardson is right, then this
necessity would obviously fundamentally challenge what is commonly taught
in ‘Economics 101’ class.7
Richardson recognized that Friedrich Hayek in a 1937 article had already
raised concerns about the knowledge requirements for the achievement of a
market’s equilibrium. It turns out this was preceded by a 1933 lecture in which
Hayek suggested there was an even more fundamental problem concerning
the information available to an investor.8 Hayek was concerned that it is too

3. For those readers who have never taken an economics class or do not remember
much from of what they heard in their economics class, maximizing profit just means
maximizing sales revenue net of production costs.
4. For those not remembering economics jargon, the word ‘marginal’ is just jargon
for the following idea. If one is deciding about increasing the amount to produce of
some commodity, marginal refers to the consequences of an increase of one unit of
that commodity. In the case of revenue, it is how much more revenue is obtained if one
sells one more unit of the commodity in question. Marginal cost would then similarly
be about the change in total production cost if one more unit is produced.
5. Again, for those not remembering their economics jargon, this equality is just
a matter of whether profit (sales revenue net of production costs) is maximized. For
it to be at maximum, calculus textbooks tell us there must be an equality of marginal
revenue and marginal cost. If they are not equal, then a gain in net revenue is possible
by producing either more or less depending on whether the difference between them
is positive or negative.
6. I also asked Arrow if he was aware of Richardson’s article when he wrote his
own article and again he said he was not. So then I asked Richardson (through his son
Graham) if he was aware of either of the articles by Arrow or Clower and he said he
was not.
7. This is the jargon name given to the usual beginning economic principles class
offered in university and college programs.
8. Hayek delivered this lecture on December 7, 1933, in the Sozialökonomisk Samfund
in Copenhagen and which was first published (in German) in the Nationalökonomisk
 ( 4 )   Equilibrium Models in Economics

easy for governments, through a policy (perhaps by manipulating the interest

rate in the money market), to actually give false information unintentionally
to investors in the current capital equipment market and thereby cause dis-
equilibria in future product markets. While Hayek may have raised the issue as
a criticism of government intervention when facing the problems of the Great
Depression in the 1930s, the issue he raised does recognize the limitation of
models of the market that do not recognize how decision-​makers in the model
know what they need to know to assure the achievement of equilibria when
investment decisions are involved. This is particularly the problem when a
firm is placing an order for capital equipment which of necessity takes time
to produce. Perhaps by the time the equipment is delivered to the firm the
market does not resemble one that the investor might believe would be there
as suggested by what the change in government policy promised.9

P.1. A GENERAL ECONOMIC EQUILIBRIUM

AS A NECESSARY SOCIAL OPTIMUM

In the Richard T. Ely Lecture to the American Economics Association’s 1994

conference, Arrow [1994, p. 4] told us about what he called the prototypical
economic model:

The prototypical economic model … is general competitive equilibrium.

Individuals and firms take prices as given. Individuals choose consumption de-
mands and offers of labor and other assets, subject to a condition that receipts
cover expenditures. Firms choose inputs and outputs subject to the condition
that the outputs be producible given the inputs. How they make these choices
depends on many factors: tastes, attitudes toward risk, expectations of the
future. But, it is held, these factors are individual.

As Adam Smith’s eighteenth-​century view of the world would have us be-

lieve, we should never depend on authorities such as the Church or the state
since the ‘best of all possible worlds’ will be achieved when everyone is inde-
pendently and autonomously pursuing self-​interest and nobody is inhibited
in that pursuit except by the limits imposed by Nature. With this in mind,
let us examine the world where everything about the economy is a matter

Tidsskrift, vol. 73, no. 3, 1935, and later (in French) in the Revue de Science Economique,
Liège, October 1935.
9. Perhaps it should be noted that the going interest rate in a state of long-​run or
general equilibrium is sometimes seen to indicate the equilibrium growth rate of the
economy –​see John von Neuman [1937/​45].
 P r ol o g u e    ( 5 )

of individual choice except natural givens. Of particular interest, we need

to know why economists would ever claim that it is the ‘best of all possi-
ble worlds’. The world they are talking about is one in which: (1) everyone is
free to enter or exit from any market (there are no non-​natural constraints),
(2) there is a market for everything in the production process (which implies
the supply of all inputs are to some degree variable) and (3) when an equilib-
rium is reached, all participants are independent and autonomous optimizers
(maximizers or minimizers) which means every participant in any market
must be individually optimizing and thus simultaneously every market must
be in equilibrium –​in other words, this means for the economy as a whole
there must be a general equilibrium. If anyone were not optimizing, then,
necessarily, that individual has an incentive to change his or her behaviour
(i.e., his or her demand or supply of some good or service).10 For this world,
any general equilibrium is therefore a social optimum since everyone is indi-
vidually optimizing.
Before going much further talking about equilibrium models –​and for the
benefit of any readers who do not remember their Economics 101 class11 –​ let
me briefly and carefully review what students would usually learn in begin-
ning textbooks. To do this –​and for those remembering their Economics 101,
so we are all on the same page –​let us examine a very simple elementary gen-
eral equilibrium model of a very small economy.
A keystone idea of any equilibrium model that might be used to explain an
economy is the distinction between those variables represented in the model
which the model is designed to explain, and those variables in the model that
are not to be explained within or by the model but are still claimed to be rel-
evant nevertheless. Most economics textbooks discuss this distinction and
call the variables to be explained ‘endogenous’ variables and those relevant
but not to be explained are called ‘exogenous’ variables.12 For this small el-
ementary model, let us consider a simple textbook’s world consisting of just
two commodities (X and Y), two inputs used in the production of those com-
modities (L and K),13 and two individuals (A and B). The equilibrium model of

10. Usually, textbooks will say reaching an equilibrium state means reaching a
state in which variables such as prices or demand and supply quantities are no longer
changing.
11. Or who may not have benefited from taking such a class.
12. Here I am talking about variables. There are other possible ingredients which
are called parameters or coefficients that are the resulting properties of how a model
builder chooses to represent the behavioural equations in the model. Let me leave
them alone for now as here I will focus only on observable variables recognized within
the model. Parameters and coefficients are not usually observable.
13. For those who have never taken Economics 101, L represents labour and K
represents physical capital like machines.
 ( 6 )   Equilibrium Models in Economics

any such small economic system claims to describe the determination of the
following endogenous variables:14

Prices: PX, PY, PL, PK

Quantities: X, Y (total demands and supplies of
the commodities)
XA, YA, XB, YB (individual consumer demands)
LX, LY, KX, KY (individual producer demands
for inputs)
L A, LB, KA, KB (individual supplies made
available)
Industry sizes: NX, NY (the number of respective firms)
Incomes: IA, IB
Utility levels:15 UA, UB
Transformation rates: MRS (marginal rate of substitution
between X and Y)16
MRTS (marginal rate of technical
substitution between L and K)17

Note that none of these are necessarily exogenous variables.18

For those readers unfamiliar with economists’ jargon, when textbooks say
‘determine’ they usually mean ‘explain’ in the sense that for the given values
or states of the exogenous variables and the model’s behavioural assumptions

14. The subscripts indicate to whom or what the variable refers to.
15. For those unfamiliar with today’s textbooks, ‘utility’ is often referred to as a
measure of a consumer’s satisfaction –​and as such being ‘more’ or ‘less’. But this un-
fortunately suggests that we can measure our utility or assign any level with a cardinal
number (e.g., 22 ‘utils’ vs. 20 ‘utils’) as one would assign ‘degrees’ to a temperature.
But, the terms ‘more’ and ‘less’ only refer to a relative measurement and nothing
more –​no cardinal number intended. And for this reason, textbooks that wish to make
clear that they are not referring to maximizing cardinal utility usually refer to someone
maximizing satisfaction –​as if satisfaction could not be assigned a cardinal number.
All that is intended is that it is still an exact level of satisfaction being sensed by the
individual even though he or she cannot put a number on it –​and for that reason it
is just a matter of more or less. Most importantly, textbooks always presume that all
individuals simply know when they are better off.
16. Technically, textbooks at this point ignore the matter of not being able to
assign cardinal numbers and thereby let marginal rates of substitution refer to ratios
of respective ‘marginal utilities’ (the ratios of the additional ‘amounts’ of utility or
satisfaction from consuming one more unit of each of the two goods being consumed).
17. This is the name given to the ratio of ‘marginal productivities’ (the ratio that
the additional amounts of the output would change from using one more unit of each
of the two inputs). The problem of measurability is obviously not an issue here.
18. It should be allowed that when textbooks distinguish between short-​run and
long-​run equilibria, they might treat an endogenous variable whose equilibrium value
is determined only in a long-​run equilibrium model as a static ‘given’ in the determina-
tion of the short-​run equilibrium. Typically, the available amount of physical capital
 P r ol o g u e    ( 7 )

relating all the variables and givens, one can show that each of the above 26
variables have particular values (and this is usually accomplished by solving
for the values of the set of the endogenous variables using a model consisting
of a system of ‘simultaneous’ equations with which the endogenous and exog-
enous variables are represented).
If the world implied by the model is in a state of general equilibrium, how
could anyone claim that it is not an optimum world, that is, claim that it is not
a ‘best of all possible worlds’ since it is also assumed that in the model everyone
is personally maximizing? If we were to claim that it is not, then we would be
saying that we know better than the market participants themselves –​that
is, we would have to claim that at least one individual is not maximizing even
though he or she may think otherwise. Unless we have access to some extra
variables which are not already recognized and represented in this model’s
general equilibrium world, there is no way for us to know more than any in-
dividual participant. And such extra variables cannot be among the endog-
enous variables since the latter are already determined by the interaction of
all of the model’s individuals. Thus, the extra variables must be exogenous. If
we were participants in the market, we would be in a position to gain by our
privileged access. Such a potential gain would mean that the model’s market
was not actually in a state of equilibrium. Even if one has to be outside the
world created by the model to be able to claim that a given general equilibrium
is not an optimum, the given equilibrium may still be the best of all ‘possible’
worlds –​that is, the equilibrium may be possible for the model’s individuals
acting without outside help.
The question of the social optimality in any given model of general equi-
librium also connects the optimum for the model’s whole economy with the
numerous personal optima of all of the model’s independent and autono-
mous individuals separately. For example, if all of the model’s individuals are
maximizing, the (linear) sum of their maxima is itself a maximum. Whenever
each individual is at a point for which being at any other point means non-​
optimality, the aggregate of all individuals’ choices will also be an optimum.19
In this case, a general equilibrium in this model’s world is a social welfare
optimum, in the sense that should any individual deviate from his or her
personal optimum, the aggregate welfare will be reduced. And again, for us
to say that it is not the ‘global’ optimum requires us to have an outside per-
spective that is precluded by definition of the model’s world of autonomous
individuals.
All this is quite consistent with the idea of a market equilibrium pre-
sented in textbooks, such as the equilibrium illustrated in Figure P.1. In the

is such a variable because it is usually assumed that such capital takes more time to
produce than those variables being explained in the short-​run model.
19. See Koopmans [1957, pp. 50–​1].
 ( 8 )   Equilibrium Models in Economics

textbooks’ so-​called neoclassical theory of prices,20 the demand curve (D) is

the locus of all price and demand quantity points for which at each point every
demander would be maximizing his or her utility. Similarly, the supply curve
(S) is the locus of all price and supply quantity points for which at each point
the profit of each and every supplier is being maximized. When the price is the
one at which the market clears (i.e., when demand equals supply), the price
is also the one at which each individual (by maximizing) is choosing the cor-
rect quantity to demand or to supply. At market-​clearing prices, the market’s
aggregate supply and aggregate demand are also equal, even though no indi-
vidual has to calculate or even be aware of such aggregates.

P.2. MAXIMIZATION IS THE ONLY BEHAVIOURAL

ASSUMPTION IN NEOCLASSICAL EQUILIBRIUM MODELS

It is important to recognize –​although rarely it is recognized –​that the only

behavioural assumption in neoclassical equilibrium models (including the
simple equilibrium model above) is that every individual recognized in the
model is a maximizer –​maximizing utility or satisfaction in the case of
the demanders of consumption goods and profit in the case of the producers
who supply them. By saying it is the only behavioural assumption, I am par-
ticularly saying that the common additional textbooks’ assumption of a state
of equilibrium is redundant at best, misleading at worse. Adding an assump-
tion of a state of equilibrium is misleading to the extent that its inclusion
falsely suggests that such an assumption is necessary. The redundancy by now
should be apparent. If everyone is maximizing as usually assumed, then there
is no behavioural reason for anyone to change their choices concerning endog-
enous variables (such as the quantity demanded or supplied) until there is a
change in one or more exogenous givens. And obviously, the prime attribute
of any state of equilibrium is the absence of change.
It is also important to keep in mind that this singular behavioural assump-
tion is also double edged. It can be used to explain the absence of change and
it can be used to explain the reason for change. Specifically, being in a position
where an individual is not maximizing is the primary reason for that individual
to change his or her choice. Whenever there is excess demand –​that is, whenever
the demand for a good exceeds what is being supplied in the market –​some de-
manders are not able to maximize their utility because their utility-​maximizing
demand quantity is not available. As will be discussed in Chapter 2, any failure
to maximize plays a significant role in explaining the equilibrium process.

20. This is just the usual name given by historians of economic thought to what is
taught in Economics 101. Classical economics usually refers to late eighteenth century
economics and neoclassical to the economics developed in the late nineteenth century.
Both include what I identified with the three ideas (1) to (3) at the top of this section.
Another random document with
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The Project Gutenberg eBook of Ending the
depression through planned obsolescence
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and most other parts of the world at no cost and with almost no
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Title: Ending the depression through planned obsolescence

Author: Bernard London

Release date: November 1, 2023 [eBook #72003]

Language: English

Original publication: New York: self-published, 1932

Credits: Bob Taylor, Tim Lindell and the Online Distributed

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*** START OF THE PROJECT GUTENBERG EBOOK ENDING THE

DEPRESSION THROUGH PLANNED OBSOLESCENCE ***
Ending the Depression
through
Planned Obsolescence

BY
Bernard London
Ending the Depression
through
Planned Obsolescence
BY
Bernard London

21 EAST FORTIETH STREET

NEW YORK, N. Y.
COPYRIGHT, 1932, BY BERNARD LONDON
 Ending the Depression
Through Planned Obsolescence
By Bernard London

F RANK A. VANDERLIP, former President of the National City

Bank, of New York, characterized this as a stupid depression. He
emphasized the fact that millions were suffering amidst glutted
markets and surpluses.
The new paradox of plenty constitutes a challenge to revolutionize
our economic thinking. Classical economics was predicated on the
belief that nature was niggardly and that the human race was
constantly confronted by the spectre of shortages. The economist
Malthus writing in 1798 warned that the race would be impoverished
by an increase in population which he predicted would greatly
exceed gains in the production of foodstuffs.
However, modern technology and the whole adventure of applying
creative science to business have so tremendously increased the
productivity of our factories and our fields that the essential
economic problem has become one of organizing buyers rather than
of stimulating producers. The essential and bitter irony of the present
depression lies in the fact that millions of persons are deprived of a
satisfactory standard of living at a time when the granaries and
warehouses of the world are overstuffed with surplus supplies, which
have so broken the price level as to make new production
unattractive and unprofitable.
Primarily, this country and other countries are suffering from
disturbed human relationships.
Factories, warehouses, and fields are still intact and are ready to
produce in unlimited quantities, but the urge to go ahead has been
paralyzed by a decline in buying power. The existing troubles are
man-made, and the remedies must be man-conceived and man-
executed.
In the present inadequate economic organization of society, far too
much is staked on the unpredictable whims and caprices of the
consumer. Changing habits of consumption have destroyed property
values and opportunities for employment. The welfare of society has
been left to pure chance and accident.
In a word, people generally, in a frightened and hysterical mood,
are using everything that they own longer than was their custom
before the depression. In the earlier period of prosperity, the
American people did not wait until the last possible bit of use had
been extracted from every commodity. They replaced old articles
with new for reasons of fashion and up-to-dateness. They gave up
old homes and old automobiles long before they were worn out,
merely because they were obsolete. All business, transportation, and
labor had adjusted themselves to the prevailing habits of the
American people. Perhaps, prior to the panic, people were too
extravagant; if so, they have now gone to the other extreme and
have become retrenchment-mad.
People everywhere are today disobeying the law of obsolescence.
They are using their old cars, their old tires, their old radios and their
old clothing much longer than statisticians had expected on the basis
of earlier experience.
The question before the American people is whether they want to
risk their future on such continued planless, haphazard, fickle
attitudes of owners of ships and shoes and sealing wax.
What the people can afford is very different at a time when the
majority are gainfully employed than it is in a period when perhaps
ten million are without gainful employment. The job of modern
management is to balance production with consumption—to enable
one large group, like the factory workers in the cities, to exchange
the products of their hours of labor for the output of farmers. The
prevailing defeatist assumption that depression and unemployment
must continue because we have too much of everything, is the
counsel of despair.
 Society is suffering untold loss in foregoing the workpower of ten
million human beings. The present deadlock is the inevitable result
of traveling along blind alleys. Chaos must unavoidably flow from an
unplanned economic existence.
In the future, we must not only plan what we shall do, but we
should also apply management and planning to undoing the obsolete
jobs of the past. This thought constitutes the essence of my plan for
ending the depression and for restoring affluence and a better
standard of living to the average man.
My proposal would put the entire country on the road to recovery,
and eventually restore normal employment conditions and sound
prosperity. My suggested remedy would provide a permanent source
of income for the Federal Government and would relieve it for all
time of the difficulties of balancing its budget.
Briefly stated, the essence of my plan for accomplishing these
much-to-be-desired ends is to chart the obsolescence of capital and
consumption goods at the time of their production.
I would have the Government assign a lease of life to shoes and
homes and machines, to all products of manufacture, mining and
agriculture, when they are first created, and they would be sold and
used with the term of their existence definitely known by the
consumer. After the allotted time had expired, these things would be
legally “dead” and would be controlled by the duly appointed
governmental agency and destroyed if there is widespread
unemployment. New products would constantly be pouring forth from
the factories and marketplaces, to take the place of the obsolete,
and the wheels of industry would be kept going and employment
regularized and assured for the masses.
I am not advocating the total destruction of anything, with the
exception of such things as are outworn and useless. To start
business going and employ people in the manufacture of things, it
would be necessary to destroy such things in the beginning—but for
the first time only. After the first sweeping up process necessary to
clean away obsolete products in use today, the system would work
smoothly in the future, without loss or harm to anybody. Wouldn’t it
be profitable to spend a sum of—say—two billion dollars to buy up,
immediately, obsolete and useless buildings, machinery, automobiles
and other outworn junk, and in their place create from twenty to thirty
billion dollars worth of work in the construction field and in the
factory? Such a process would put the entire country on the road to
recovery and eventually would restore normal employment and
business prosperity.
An equally important advantage of a system of planned
obsolescence would be its function in providing a new reservoir from
which to draw income for the operation of the Government. The
actual mechanism involved would be briefly something like this:
The people would turn in their used and obsolete goods to certain
governmental agencies, situated at strategic locations for the
convenience of the public. The individual surrendering, for example,
a set of old dining room furniture, would receive from the Comptroller
or Inspector of such a Station or Bureau, a receipt indicating the
nature of the goods turned in, the date, and the possible value of the
furniture (which is to be paid to him in the future by the Government).
This receipt would be stamped in a receipt book with a number,
which the individual would have received when he first brought in an
obsolete article to be destroyed. Receipts so issued would be
partially equivalent to money in the purchase of new goods by the
individual, in that they would be acceptable to the Government in
payment of the sales tax which would be levied as part of my plan.
For example, a consumer purchasing a $100 radio, on which the
sales tax is 10 per cent or $10, the purchaser would pay cash for the
radio, but could offer $10 worth of receipts for obsolete merchandise
turned in, in payment of the sales tax. The merchant or manufacturer
would have to accept these receipts for this purpose, and would turn
them back to the Government in payment of the sales tax, which
must be borne ultimately by the consumer in any event.
Under this system, the purchaser would feel he had been paid for
the used-up article which he turned in to the Government, yet the
Government would not have had to pay a cent of cash for the goods
so surrendered. As a result of the process, nevertheless, the wheels
of industry would be greased, and factories would be kept busy
supplying new goods, while employment would be maintained at a
higher level.
I maintain that taxes should be levied on the people who are
retarding progress and preventing business from functioning
normally, rather than as at present on those who are cooperating
and promoting progress. Therefore I propose that when a person
continues to possess and use old clothing, automobiles and
buildings, after they have passed their obsolescence date, as
determined at the time they were created, he should be taxed for
such continued use of what is legally “dead.” He could not deny that
he does not possess such goods, as he might hide his income to
avoid paying an income tax, because they are material things, with
their date of manufacture known. Today we penalize by taxation
persons who spend their money to purchase commodities, which are
necessary in order to create business. Would it not be far more
desirable to tax instead the man who is hoarding his money and
keeping old and useless things? We should tax the man who holds
old things for a longer time than originally allotted.
Under the present estate and inheritance tax system, the State
has to wait an indefinite period, and allow the owner of a building or
commodity to keep on earning and adding more to his fortune until
he dies, before it can collect its inheritance tax. With obsolescence of
merchandise computed in advance, the Government will collect
when the article dies, instead of when its owner dies.
Moreover, the present method of collecting revenue under the
income tax is speculative and uncertain, because the profits of
industry and business, upon which the income tax is based, are
subject to vast fluctuations.
If the plan I propose is adopted, there will be a source of
permanent income to the State from goods and merchandise in
existence, and which are bound to continue to exist. Through a
process of checking control of what the manufacturer sells to the
dealer, and through reports by retailers of what they sell to the
consumers, the Government will know by the end of the year just
what income it will be sure of getting, and this amount it will be paid
irrespective of whether people are making big profits or not.
My plan would rectify the fundamental inequalities of our present
economic system, in which we follow a hit-or-miss method, one
getting much more than he needs or can use, and another less or
nothing. We should learn to use our material resources so that all
can partake of them, yet so that none will be any poorer or worse off
than today.
In our present haphazard organization, the product of the worker’s
toil continues to benefit and produce income for its owner long after
the one whose sweat created it has spent and exhausted the
meagre compensation he received for his labor.
The worker’s wages are exhausted in a week or a month in the
purchase of food, clothing and shelter. He has for himself little that is
permanent to show for his hours of toil, whereas the owner of the
building or machine which the worker’s labor helped to construct has
a unit of capital goods which will last for years or even decades. The
man who performed the work received as compensation only
enough to purchase comfort and sustenance for a short time, and he
must continue to labor if he wishes to go on living. The product of the
worker’s hand, however, is a semi-permanent thing and produces
income for its owner for an indefinite period of years. In the end, not
only is the original cost of production repaid and interest yield on the
investment, but far more besides. This very lasting quality of the
product of the worker’s toil results to his disadvantage, for a time
comes such as we are passing through today, when there is an
excess of capital goods and the worker is told: “We have enough
production of wealth; we are going to use up what we have and need
no more for the present. You laborer, go and find work elsewhere.
We do not need you now.”
And so the worker, whose sweat wrought this vast store of
material goods, suffers from poverty and want, while the country is
glutted with everything. My plan would correct this obviously
inequitable situation by arbitrarily limiting the return to capital, to a
stipulated period of years, after which the benefits would revert to the
people.
The situation in which the country now finds itself, in which there is
poverty amidst plenty, is well illustrated by the analogy of a great
giant standing in a pool of fresh water up to his lips, yet crying out
that he is thirsty because he is paralyzed and cannot stoop to drink.
His muscles must be enabled to relax, for him to bend down in order
that he may quench his thirst. So, too, the paralysis which prevents
our economic society from consuming the abundant supplies of raw
materials and manufactured commodities which glut our markets
must be cured before normal conditions can be restored.
Furniture and clothing and other commodities should have a span
of life, just as humans have. When used for their allotted time, they
should be retired, and replaced by fresh merchandise. It should be
the duty of the State as the regulator of business to see that the
system functions smoothly, deciding matters for capital and labor
and seeing that everybody is sufficiently employed. The Government
will have the power to extend the life of articles for a year or two
(upon agreed terms), if they are still useable after their allotted time
has expired and if employment can be maintained at a high peak
without their replacement.
If a machine has been functioning steadily for five years or so, it
can fairly be considered dead—dead to the one who paid his money
for it—because he has had all the use of it during those five years
and it will have paid for its life by its earnings in the five-year period.
Then it should go to the workmen, through the State; its life can be
prolonged if the factories are already busy and there are no
unemployed. But if by its replacement idle workers can be given jobs
and closed factories reopened, then this machine should be
destroyed and new (and probably improved) apparatus produced in
its place.
The original span of life of a commodity would be determined by
competent engineers, economists and mathematicians, specialists in
their fields, on behalf of the Government.
 In the course of 30 years under this arrangement, most
construction and production would undergo a fundamental change
for the better, as old, dilapidated and obsolete buildings and
machines disappeared and new ones appeared in their place.
During this period some manufactured commodities would have
been destroyed and replaced 15 times, others 10 times, still others 5
times, etc., depending on the span of life allotted to each, in order for
it to earn sufficient for its purpose before it dies. We must work on
the principle of nature, which creates and destroys, and carries the
process of elimination and replacement through the ages. There
would be no overproduction, were this method adopted, for
production and consumption would be regularized and adjusted to
each other, and it would no longer be necessary to send our surplus
goods to find outlet in foreign markets. We would not then, as we do
today, have to sell these goods on credit and later have to beg for
our money, which in the long run foreign nations do not want to
repay anyway.
In the description of things under the present organization of
society, we continually make use of a system of weights and
measures. Thus, a commodity is evaluated in terms of size—shape,
weight, value, etc. The weights and measures we use are
standardized and regulated by the Government so that they may not
be violated. But, though we may not realize it, this system is
incomplete because in the description of things it omits consideration
of two elements which are equal in importance to those in everyday
use in determining real values. These are life and time, life with
respect to the commodity produced, and time, the period it should
last.
If we add the elements of life and time to our measurement of
what we produce, and say that the life of this automobile shall be not
more than 5 years, or the life of this building shall last not more than
25 years, then, with the addition of our customary measurement of
these commodities, we will have a really complete description of
them right from the beginning. And, when capital purchases the
automobile or the building, it will be doing so only for that limited
period of years, after which the remaining value left in the product
will revert to labor, which produced it in the first place, and which
thus will receive its rightful share in the end, even if it did not do so in
the beginning.
Miracles do not happen. They must be planned in order to occur.
Similarly in this time of economic crisis, we must work out our own
salvation.
If we can afford to sink ships, that cost millions of dollars to
construct, merely for the purpose of giving target practice to the
gunner, then surely we can afford to destroy other obsolete and
useless products in order to give work to millions and pull the country
out of the dire catastrophe in which it is now wallowing.
At the present time our country has plenty of everything, yet
people are in want because of a breakdown in distribution, an
inadequate division of the fruits of labor. Worn-out automobiles,
radios and hundreds of other items, which would long ago have been
discarded and replaced in more normal times, are being made to last
another season or two or three, because the public is afraid or has
not the funds to buy now. The Government should be enabled to
advance a sum of money to certain Trust Agencies to purchase part
of these obsolete buildings and machines and clothing. They should
be thrown into a junk pile, and money lent toward creating new
buildings, machines and commodities.
The State can lend money for the erection of new buildings at an
interest rate of no more than 2½ or 3 per cent. Suppose, though, that
new builders or owners of the buildings pay 5 or 5½ per cent
interest. Two and a half per cent of this would go to the Government
as interest and 2½ or 3 per cent for amortization or to a sinking fund,
out of which to pay back for the construction of the building within 25
or 30 years, computed on a basis of compound interest. At that time,
the building can be destroyed and a new one erected, with resultant
stimulus to employment. The original building in the intervening
years would have served its purpose and fairly repaid its owner.
Capital should be willing to invest its wealth on a 2½ or 3 per cent
interest basis under such circumstances, because the investment
will be safe, steady and permanent. In the present economic chaos,
investments at great interest rates are in jeopardy and, while at
present lenders are getting large returns for their money, their capital
is in constant danger of being wiped out altogether.
The tax-collecting machinery at present used by the Government
could readily be converted into the media for carrying into operation
the system here proposed. It could be used with the same force and
effect, and new laws passed concerning everything produced, just as
our present excise and tariff laws cover in their fixing of rates
thousands of individual items and categories. Such a means of
solving our economic problem could be brought into operation
quickly and in a few months the machinery of administration
perfected so that thousands of people could be put back to work
within a comparatively short time.
If this plan were in operation, speculators would not acquire
fortunes simply by manipulating and creating false values or
synthetic wealth. If it were decreed that the life of wheat were to be
no more than two years, for example, no man would buy the grain
solely for speculation, thus creating an artificial market and holding a
club over the farmer’s head, as today. He would not dare because he
would know that he would have to pay the Government a tax on the
wheat after it had lived its legal life and this would make it
unprofitable or at least highly dangerous to buy speculatively and
hold for the future.
The widespread suffering from unemployment and want in this
country today is a symptom of a fundamental maladjustment—a
sickness, if you like, in our body economic. Almost every sickness
can be cured, provided we get the right doctor to diagnose the case
and prescribe the proper medicine, but the patient must take the
medicine in order to get well. My plan is in essence a prescription for
the relief and cure of the ailments from which our economic
organization is today suffering.
Of course, the inauguration of such a system of planned
obsolescence will be opposed by many merely because it is new, for
it is hard for us to abandon our old notions and adjust ourselves to a
new way of thinking. Unlike most changes for the good of the
masses, however, this scheme need not involve much hardship,
strife or suffering. That is not necessary. With a reasonable amount
of common sense used, the plan ought gradually to work smoothly
without much loss to anybody. In war-time we conscript the flower of
our country’s manhood, and send them to the front to fight and often
be destroyed. If such drastic procedure is deemed wise and
necessary in the crisis of war, would it not be far more logical and
profitable in our present emergency to conscript the dead things—
material, not human—such as obsolete buildings, machinery and
outmoded commodities, and send them to the front to be destroyed
in the war against depression, thus saving the country from
economic chaos by providing work?
It is far cheaper to destroy useless and obsolete goods now, and
perhaps some of our synthetic wealth as well, than to risk destroying
far more priceless assets, such as human life, and undermining the
health and confidence of the people, by continuing to fight the
depression with our old, slow and costly methods.
Even in the present organization of our economic society, we
recognize in many instances the necessity of destroying some of our
wealth in order to increase it. For example, coal is wealth, but it is
burned up and destroyed daily in locomotives, furnaces and other
devices in order to create power to drive machinery and manufacture
goods. Similarly, oil is wealth, but to serve its purpose it must be
used and consumed in the engines of automobiles and the whirring
wheels of factories. Grain is wealth, but we destroy it by feeding it to
cattle, by consuming it ourselves, and by scattering it on the ground
as seed to produce more grain. It is by this process that people live,
function and create material goods.
Wealth may be compared to our language. Although we use our
language every day, it does not get used up. On the contrary, new
words and idioms are constantly being added to the national
vocabulary, and the language increases in usefulness the more it is
spoken, instead of deteriorating.
In olden times, only a few chosen ones, such as kings and priests
and nobles, could read and write. The rest of the people were kept in
ignorance and poverty. Today, with our standardized and simplified
grammar and our mass education, the benefits of literacy are
available to everybody, to rich and poor alike.
Such a condition should exist also with respect to the enjoyment of
wealth. A minimum standard should be created for everyone, and
rich and poor, old and young should participate in its benefits, and
profit from its use and management.
Our economic society has advanced little from Medieval times in
the distribution of our wealth. We still continue on the basis of our old
theories and notions that only the chosen ones should enjoy it.
There is as much wealth in existence as there is time, but people
do not visualize it. Wealth, like food, must be digested for human
beings to be able to live, function and create—in other words, to
produce more wealth. If we want to acquire new wealth, the supply
lines must be drained so that fresh commodities can come in. If there
are stale goods left in the lines, the fresh supply must force them out.
The cause of our present stagnation is that the supply line or
arteries furnishing the needs of the country are clogged with
obsolete, outworn and outmoded machinery, buildings and
commodities of all kinds. These are obstructing the avenues of
commerce and industry and are preventing new products from
coming through. There is little demand for new goods when people
make their old and worn-out things do, by keeping them longer than
they should.
We need to apply better managerial foresight to public affairs. I
contend that any business or corporation, public or private, which
operates and expects to get an income of several billions of dollars a
year from its operations, deserves much attention, and requires
thoughtful planning, in order to perfect the machinery of its
organization. The aim should be to make it function smoothly in
order to satisfy the self-supporting multitudes, by providing them with
regular employment at a living wage which will assure the American
standard of living.
 Such a socially responsible system, which is anxious for the well-
being of all of its citizens, is on a vastly sounder and more
permanent basis than one which allows business merely to take out
profits without improving the organization with new methods and
without renewing the equipment.
I maintain that with wealth should go responsibility. Too many
nowadays regard wealth as a license to freedom and immunity from
obligation to the people. Such irresponsible possessors of wealth are
shirkers, who tend to make all of us poorer.
Summarizing the benefits which would accrue to this nation and to
the world at large if my plan were adopted and put into effect, it
would:
1. Bring order out of the chaos now disrupting the whole
economic and social organization.
2. Organize and regularize opportunities for
employment.
3. Obviate the tremendous social waste of making no
use of the workpower of millions of men and women (who
are compelled to stay idle). In this connection, it is
significant to note that “the cost of the present depression
will very probably exceed 50 billions of dollars” (a
staggering amount), according to Malcolm C. Rorty,
business executive and statistician, writing in a recent
issue of the Harvard Business Review.
4. My plan would take Government finances out of their
present speculative status and would put Government
income on a more stable basis, by receiving annually at
least between 25 and 50 per cent of the net income of all
the buildings, machinery and other commodities which
have been declared obsolete after their allotted time, and
nevertheless allowed to function longer in the event there
is ample employment.