It is familiar to most of our readers that Dr. Ryan is director of the Social Action Department of the National Catholic Welfare Conference and professor of industrial ethics at the Catholic University of America. He is, in other words, one of the experts and leaders in giving direction to the Catholic Church’s influence on living conditions in America. His considered opinion on most pressing economic problems of the day is interesting for the sound analysis and clear counsels it expresses and for its demonstration of the Church’s beneficent alertness for the welfare of all men. —The Editors 

High wages mean a level of remuneration which is above the existing average. If the general average is somewhere around twelve hundred dollars per year, then high wages mean something more than that amount. High wages are demanded by justice for three reasons. First, in order to provide the equivalent of a decent livelihood for all those who are now living below that level. If the average remuneration of unskilled laborers is about one thousand dollars a year, it should be raised to at least fifteen hundred dollars in order to provide means of bringing up a family according to a minimum standard of decency and comfort. In the second place, something more than a mere living wage is due in justice to all those workers who possess unusual skill, undergo unusual risks, perform exceptionally disagreeable tasks or turn out more than the average amount of product. Finally, all workers should receive something more than living wages if the industries are capable of producing sufficient goods. In our own country this condition is already realized. 

A few weeks ago Mr. Lamont, the Secretary of Commerce, declared that during the existing depression employers had, in the main, refrained from reducing wages. In so far as this is true, it represents a new departure. In previous periods of hard times, employers generally endeavored to reduce wages and prices in order to increase the demand for goods and thus bring about a return of prosperity. At present, no important employer publicly assents to the theory which underlay this practice. Almost all business men now admit that wages must be kept high in order to preserve the effective demand of the community. This is the correct theory. Since wages constitute only a part of the cost of production, a decrease of, say, 25 percent will not economically justify an equal reduction in prices. Hence the workers will not be able to buy as much as they could have bought had both wages and prices remained high. Nor will the deficiency in working-class demand be made up through increased purchases by the other classes. Owing to their more ample incomes and purchasing power, the latter do not desire additional goods as strongly as the former. Moreover, the policy of reducing prices through reduced wages involved a violation of distributive justice, inasmuch as it gives to the other classes the benefit of price reductions which are brought about at the expense of the workers alone. 

The theory of high wages as a preventive of unemployment and depression is in obvious contradiction to the classical economic assumption that general overproduction is impossible. “A supply of goods is always a demand for goods,” is the convenient formulation of the ancient and antiquated assumption. Its falsity is easily illustrated by the present condition of the market for automobiles. The manufacturers thereof possess a very large potential demand for other goods. It is not an actual demand for finished goods, since they already possess these in abundance. Nor is it an actual demand for capital goods; for additional quantities of these cannot be profitably operated. There is no remunerative demand for the products of new automobile factories, textile mills, railroads, chain stores, banks or any other instruments of production. If additional plants were built they could not be operated at a profit. Their products could not be sold at remunerative prices. The manufacturers of all other excess products (which means today all the staple products) are in precisely the same position. They do not wish to exchange their surplus for consumption goods because they already possess sufficient of these, nor for capital goods because they realize that they could not operate the latter profitably. Hence their surplus supply of goods is not an actual demand for other goods. 

In the face of this obvious fact, it is astonishing to find so progressive an economist as Professor Paul H. Douglas giving utterance to the antiquated fallacy that it makes no difference how purchasing power is distributed, that a surplus in the hands of the rich will constitute a demand for new capital goods, which means a demand for labor to produce such goods. All purchasing power, he contends in effect, is “either spent on commodities or it is invested,” In the latter case, “it goes toward the creation of capital goods, which again leads to more employment” (“Machinery and Unemployment,” in Current History, October, 1930). To be sure, if the surplus products of existing industries were always immediately exchanged for new capital goods, unemployment might be reduced to negligible proportions. But the possessors of the surplus are not so foolish as to go on creating new factories, railroads, etc., for whose products they foresee no remunerative demand. The statement that purchasing power is all either exchanged for commodities or expended in the production of new capital is true only in prosperous times. In times of depression the surplus purchasing power either lies idle or is invested in already existing forms of capital. And the purchasing power transferred through the latter sort of transactions does not provide as large a demand for finished goods as would exist if those who obtain it were still receiving their former wages or other regular amounts of income. 

A fresh refutation of the assumption that we are combating has been formulated by Professor Henry Pratt Fairchild, in the Virginia Quarterly Review, January, 1931. He shifts the emphasis from the goods which provide potential demand to the kinds of persons who own these goods, in a mechanized system which has concentrated purchasing power “in the hands of those who are owners of businesses.” The substance of his argument is as follows: 

Granting that the same amount of product is turned out after an extensive process of mechanization as before, but that the purchasing power is now concentrated in a smaller and wealthier section of the population, will the total demand for goods be as great as before? 

If one of the other basic assumptions of traditional economics were true, the answer would be, yes. This is the assumption that human desires are infinite, and it is fundamentally false. (No animosity, please understand, against conventional economists. But they have a heavy responsibility for the present situation, and must be prepared to face the music.) Looking into the infinite future, it might be possible to say that human desires are infinite. But at any given time, with respect to the types of goods that actually exist at that time, they are strictly limited. Any intelligent person can demonstrate this to himself. Let him imagine himself endowed with infinite purchasing power, and then let him ask himself how many grand pianos he would wish, or how many mansions, or how many steam yachts, automobiles or airplanes. He would realize that his desires for any and all of these things are strictly limited. Then let him descend to more prosaic matters, and ask himself how many suits of clothes, or pairs of shoes, or pounds of beefsteak, or theatre tickets, or golf balls he would buy in a year. By a simple process of self-examination it becomes clear that the total potential demand of any individual for all the types of material things that exist at any given time is a definitely limited quantity… . 

The general principle that emerges from this analysis is: The smaller the number of individuals in whose hands a given amount of income is concentrated, the smaller will be the effective demand for consumable goods represented by that income. If another reductio ad absurdum is needed to make this clear, it can be furnished by imagining that the total year’s product of the economic plant of the United States were equally divided between two owners. To what extent would “goods exchange for goods”? 

This is the fatal quality of mechanization under private ownership. It tends to concentrate purchasing power more and more in the hands of those who already have an excess above their personal demands, and to remove it from those whose desires are far in excess of their purchasing power. The profit motive drives owners to divert income from the very channels which make profits possible. Business owners can be counted on to buy part of each other’s product, but they will not buy it all, and the richer individually the owners are, the smaller the proportion of the product that will be bought. 

Instead of buying end products with all his income, the large income receiver invests a large portion of it. But investing simply means creating more machines, and a more capacious productive plant, thereby enlarging the volume of goods to be produced, while decreasing the proportionate demand for them. 

It must be kept in mind, however, that overproduction in the United States is, in the main, potential rather than actual; that is, we have an excessive capacity for production in all our large industries. Goods are not manufactured and stored up in wasteful abundance. Moreover, the excess capacity is, for the most part, relative; that is to say, it is a capacity to produce more goods than can now be sold, instead of more than could be sold if certain classes in the community had the money to buy all that they desire. Therefore the real cause of the depression is not so much overproduction, as underconsumption. In order to keep our industries going, it is necessary that the consuming power of those who would like to buy more should be increased. These are mainly the wage-earning classes. Occasionally, indeed, one still hears the objection that higher wages would be offset by higher prices, and that the last state of the wage earners would be at least as bad as the first. Even if we assume that all the increases in wages would be reflected in higher prices, the evil result just mentioned would not follow. Part of the higher prices would be paid by others than the wage earners and the others would continue to buy almost as much as before, because of their ample purchasing power. The general fact of the situation is that our industries can produce sufficient necessaries and comforts to provide more than a decent livelihood for all our people, and in addition are capable of turning out a vast amount of luxuries. The question before us is one of distribution. In the existing system distribution is effected through wages and prices. 

In order to bring about a more general distribution of goods, we must have a wider distribution of purchasing power. If this redistribution of purchasing power cannot be effected in the present industrial system, then the system is vitally defective and the sooner we realize it the better. The coexistence of the ability to produce more goods than the people need and the inability of millions to obtain the necessaries of life, constitutes a challenge to industrial leadership which cannot safely be ignored. 

Although Mr. Lamont is right in asserting that employers have done much more to keep up wages during the present depression than in any former like emergency, the October Bulletin of the Bureau of Labor Statistics, “Trend of Employment and Labor Turnover,” tells us that while the level of employment in manufacturing industries in October, 1930, was 20 percent below the level of October, 1929, the pay roll totals were 28.9 percent lower. This excess of nearly 9 percent in the wage decline over the decline in employment shows that a great many employers have reduced wage rates. Not all of them were compelled to adopt this course. Some of them could have kept their pay roll at the former level and still obtained fair profits and a fair rate of interest on their investment. Others could have done so, had they been willing to accept a lower rate of interest or no interest at all. In these circumstances they ought to have kept up wages even at the expense of dividends, at least as regards those employees who could not have suffered a reduction without falling below the level of decent living. In other words, the moral claim to interest or dividends is inferior to the moral claim to living wages. Had this principle been accepted and carried out by all the employers of the country, pay roll totals in the manufacturing industries would not have fallen 29 percent between October, 1929, and October, 1930; the demand for goods would now be considerably greater than it is and the number of unemployed considerably less. This is what employers could do toward maintaining high wages. 

Labor unions are undoubtedly one of the most powerful factors, if not the most powerful, in securing high levels of wages. This result is due not only to their specific action on behalf of their members, but also to their insistent preaching of the doctrine that industrial prosperity depends primarily on the possession of high purchasing power by the workers. The great limitation to the effectiveness of the unions with regard to high wages is, of course, the fact that they include only a small minority of the workers. 

Probably the most rapidly effective means of securing and maintaining high wage rates would be a shorter working day, or a shorter working week, or both. Reduction of working time would create a larger demand for labor and automatically bring about higher rates of remuneration. The objection that no advantage can be obtained through a reduction of the per capita production of the workers is based upon a fallacy. It assumes that an enlarged share of a smaller total product could not amount to an absolute increase over their present share of a greater total product. We cannot too often repeat that the problem before us is not one of production, but of distribution. If a shorter work day implies an undesirable waste of machinery through idleness, the easily available remedy is to operate the plants in two shifts per day. This would also be the natural recourse in any industry that could not turn out sufficient goods in the reduced working time to supply all the demand. 

Finally, we must notice the objection that the lessened amount of products which might result from the shorter working time would be an obstacle to progress. It all depends on what we mean by progress. Just why a people should spend its time in turning out and consuming a hundred kinds of luxuries which minister only to material wants, instead of obtaining leisure for the enjoyment of the higher goods of life is not easily perceptible. After all, neither production nor consumption is an end in itself. The former is only a means to the latter and the latter is beneficial only in so far as it is exercised upon goods which promote genuine human welfare.