[The history of human society sufficiently shows] that an efficient taste for luxuries and conveniences, that is, such a taste as will properly stimulate industry, instead of being ready to appear at the moment it is required, is a plant of slow growth…5 and that it is a most important error to take for granted, that mankind will produce and consume all that they have the power to produce and consume…6

  But nearly all other economists were euphoric about the impressive advances of the manufacturing system and championed its unconditional expansion: it was their absolute conviction that the human desire to consume is insatiable and so any increase in production – unless ‘wrongly aimed at unwanted goods’ – could always be profitably sold to the public.

  Ricardo against Malthus:

  We all like to buy and consume, the difficulty is in the production.7

  Now, the idea that production is the crucial problem has been correct in many historical situations and in La rovina delle nazioni [The downfall of nations] I examine five such occurrences: from the fall of the Roman Empire to the economic crisis in 17th century Italy.

  But not all situations are the same: for example, the great German sociologist Max Weber, in contrast with orthodox economists, writes, with some overstatement:

  Man does not ‘naturally’ wish to earn more and more money, but simply to live, to live as he is accustomed to live, and to earn what is necessary to that end.8

  All things considered, the most balanced formulation, also quoted by Keynes in the General Theory, comes from the two under-consumptionists Mummery and Hobson:

  … in the normal state of modern industrial Communities, consumption limits production and not production consumption.9

  1 Data source: Louis Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth, 2017 – www.measuringworth.org/usgdp/ Time-frame: 1841-2016; regression quality: R2 = 0,98 and F = 9541 for 174 degrees of freedom.

  2 It must be stressed that this linearity depends on how correctly deflation has been calculated by the specialists, in other words, on the fact that this income in deflated dollars accurately reflects the levels and movements of consumption as affected by the inertia and psycho-sociological resistances that we will speak about later.

  3 A first visible sign of the sunset of the old ‘colonial climate’ is perhaps the election to the Presidency, in 1828, of Andrew Jackson, a man of the frontier, instead of the usual member of the traditional upper classes.

  4 This is tantamount to saying that there is no difference if Mr. Smith spends $100 on tobacco, a hoe, a picture or twenty shares in ACME Ltd. In other words, we do not ask ourselves whether he wants a hoe because he is a farmer, that is for an economic goal, or to cultivate his garden which he loves to look after himself, as classical economists would do, because they consider it essential to ascertain whether the intention behind the purchase is ‘economic’ or not. So they distinguish between an antiques dealer who buys a picture at an auction to sell it on, making an investment, and a private individual who purchases it at the same auction to hang on a wall in his home, triggering a mere act of consumption. They say that the picture purchased by the dealer is part of his ‘capital’, and the one bought by the private individual is not, unless he at some point decides to sell it. And since selling it is a typical option in the mind of real estate owners, they say that real estate is always capital. It is a nice case of hair splitting. To lovers of the history of ideas I can say that this use of the term consumption does have a precedent in the ‘naïve’ terminology of Pierre Le Pesant de Boisguilbert (1646-1714).

  5 In this quotation, as in others, ‘…’ indicates the omission of part of the original text. It seemed to me less heavy than ‘[…]’.

  6 MALTHUS, Principles of Political Economy (1820), p. 359.

  7 RICARDO, Notes on Malthus, p. 240.

  8 WEBER, Die protestantische Ethik und der Geist des Kapitalismus, p. 47.

  9 MUMMERY, Physiology of Industry, p. vi, cit. in KEYNES, General Theory, p. 368.

  2. Economic cycles and post-war periods

  The fact that orthodox economists did not clearly understand the new situation created by the industrial revolution is proved by their inability to find an explanation for the recurring commercial crises which, in their ruinous sales collapses, seemed to justify Malthus’ thesis.

  In the 19th century economic crises occurred with amazing regularity; one per decade. From a study of the end of the century: 1818, 1825, 1836, 1847, 1857, 1864, 1873, 1882, 1890.1

  At a certain point it was suggested that they could be linked to the 11-year sunspot cycle, but the explanation did not hold water, like so many other theories produced in more than a century of futile brainstorming.

  And yet, as early as 1837, it was observed that these crises were part of cycles which followed a precise logic:

  We find [the state of the economy] subject to various conditions which are periodically returning; it revolves apparently in an established cycle. First we find it in a state of quiescence, next improvement, growing, confidence, prosperity, excitement, overtrading, convulsion, pressure, stagnation, distress, ending again in quiescence.2

  This print was produced in 1859,3 after two more cycles that faithfully followed that sequence:4

  Today there continue to be discussions about economic crises, but no longer about the economic cycle, because the neat regularity of the 19th century has disappeared, helping economists to forget about what they are unable to explain.

  Until, in the second part of the 20th century, the phenomenon to some extent faded away, reflections on it were numerous but inconclusive.

  For example, in 1927:

  As knowledge of business cycles grows, more effort is required to master it… Early writers upon “commercial crises” could assume that they and their readers were familiar with the phenomena to be explained… [But nowadays] elaborate preparations have become necessary, not because the direct attacks upon the problems proved futile, but because they won so many and such different results. Every investigator of the cause of commercial crises seemed to make out a case for the hypothesis he favoured.5

  And in 1958:

  The old-fashioned pastime of making business-cycle theories is once more in style. But the theories produced in recent years differ in a fundamental way from their predecessors…6

  These are two fine examples of the art with which ‘experts’ hide their failure to understand questions within their field of competence…

  But, how can it be possible for such a widespread, repetitive phenomenon not to have a rather simple explanation?

  And in fact, from the under-consumptionist perspective, it is easy to explain both the origin of the crises and – even more significantly – the reason why they occur so regularly.

  As early as 1819, in the post-Napoleonic crisis that followed the sudden fall in the demand for military supplies, the Swiss historian and under-consumptionist Simonde de Sismondi, declared it was caused by a surplus of production with respect to consumption.

  He was worried by the spread of machinery which increased production too much, at the same time reducing workers’ wages and consumption:

  … Entrepreneurs adjusting their production not to the needs of society, which they should be taking care of, but on the basis of their capital, thus making more products than can be consumed… When consumption is limited and cannot grow… the invention of a machine that replaces many men with an inanimate force is a disaster, because the inventor rather than use it to make life better for his workmen, uses it to kill the workmen of his rival.7

  It is the same syndrome that in future will lead States to sign international agreements to prevent too many too efficient (!) steel plants being built8 and to penalise or destroy ‘excess’ agricultural production.

  So Sismondi, who like Keynes had centralist procli
vities, 120 years earlier suggests that, in order to prevent a crisis, it is up to the State to “cool down the economy”:

  There are cases where, by moderating the pace of the economic system and arresting unordered growth, [the government] would render a great service to society.9

  But the most persuasive element in favour of under-consumptionist conceptions is that by taking into account the speed limit on the rise in consumption, we find a simple explanation for the regularity of these cycles which remained mysterious for so long. From La fabbrica delle illusioni:

  [In economic cycles] only two players take the stage: consumption, limited by socio-cultural factors, which can only grow [say…] at a rate of 2% per year, and production which, limited only by technological and organisational constraints, can increase much faster… But the efforts of production cannot succeed because they come up against the insurmountable barrier of the capacity to consume: one, two, three, more times …10

  This also suggests that the subsequent mitigation of the phenomenon is due to the transition from the vehement productive accelerations of the first industrial revolution, to the present day when the fact that the industrial sector is an ever-smaller fraction of the economic system carries more weight than anti-cyclical interventions by the State and central banks.

  And the nature of the financial crises that broke out at the end of each cycle also becomes obvious. On the way out, the upper classes, less and less inclined to spend their growing incomes on further consumption, channel them into financial investments. And this causes the prices of securities to rise, creating a bubble whose explosion officially closes the cycle.

  But orthodox economists were certainly not about to repudiate their own ideas to espouse those of a historian like Sismondi, who offered vivid descriptions of economic crises but then included “shortage of money” among their causes, like any clueless shopkeeper might.

  And their successors clung on to the idea that “the difficulty is in the production”, and to production and consumption they added, as an essential determinant of economic growth, investment, which is the increase in capital, so confusing a picture that was otherwise simple and straightforward.

  Economists have in fact today remained bound to the idea that the esoteric capital of the entire country is a scarce and precious resource.

  But this conception does not derive from analysing evidence: it became popular as propaganda among the 19th century bourgeoisie who, in order to justify the income they received as interest or profit and defend it from socialist attacks, proclaimed that “they had made sacrifices” in order to save and supply the country with indispensable productive capital.

  This was presumed to set ‘capitalists’ on the same moral high ground as workers and farm-hands, who are suppliers of simple labour.

  But the facts are much better explained if we consider the increase in capital, i.e. investment, to be not a cause but an effect of society’s inclination, generated by other factors, to increase production and consumption.

  This is perfectly visible in post-war periods of exceptionally easy and fast development.

  In 1834 the non-conformist economist John Rae:

  When… the great destroyer War holds his course through a country, and clearing wide his path with fire and sword, leaves property and life a wreck behind him, we see not that the traces of his wrath are long perpetuated; in the midst of the ruins of what were, lie the germs of what are to be, and seizing on the element of existence that lie waste around, they expand with a vigour proportioned to the magnitude of the void that has been made for them, and speedily replenish it. Like the track of the whirlwind through the forest, the present desolation is quickly covered up and obliterated by the freshness of the new growth, to which that very desolation gives light, and air, and the means of existence.11

  Rae inspired John Stuart Mill who, although leader of the ‘classical school’, mixes orthodox and heretical ideas in his writings and here, in 1848, contradicts the official thesis to explain the great difficulty of making capital grow:

  Why countries recover quickly from a state of devastation – [The] perpetual consumption and reproduction of capital affords the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance in a short time of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it, and yet in a few years after, everything is much as it was before…12

  From our perspective, the explanation is again quite simple: as society was accustomed to a given standard of living, production meets strong demand and until old levels are restored can therefore grow again, at the highest speed technically possible.

  If instead of a country big enough to allow confusion, we were to observe a small village destroyed and rebuilt by its inhabitants, we could have no doubt about the moral factors that induce people to “make everything as it was before”.

  Giving impetus to these reconstructions is thus the force of the motivation which drives people on to spare no effort to return the standard of living to its previous level and, in some cases we will discuss below, to actually raise it.

  This was clearly visible in immediate post-war Italy, when the partly destroyed manufacturing facilities and towns had to be rebuilt.

  As a consequence, at such times all economic indices are positive: rapid growth, low unemployment, high profits…

  But, obviously, when recovery is complete they deteriorate.

  From this it is logical to deduce that their previous high values were the effects of society’s struggle to get back on its feet, and not the causes of its economic growth.

  But this inclination to grow that emerges so clearly in post-war reconstructions is missing from the range of concepts economists use to explain economic development, replaced by lacklustre stand-ins like ‘investment’, unjustifiably promoted to the status of invaluable motor of development.

  And yet, investment behaves in a strangely unpredictable way, and this should have suggested a healthy distrust of such a simplistic conception.

  The English economist John Hicks:

  Investment ([Keynes] was never tired of insisting) is a flighty bird, which needs to be controlled, but if we can find a way of regulating it, through the rate of interest or otherwise, the rest of the economy will look after itself.13

  Keynes and Hicks should have realised that this ‘flightiness’ signals that factors lying beyond their field of vision are relevant to economic development and investment: in post-war periods, for example, the motivation to restore the previous situation.

  And these unseen factors inevitably procure errors and surprises to those who fail to take them into account.

  And, in fact, neither by manoeuvring the interest rate nor by trying to control investment has anybody ever been able to bring growth back to those solidly exciting rates that post-war ‘economic miracles’ have proved to be technically possible.

  Economists like to think that the present economic situation contains within it everything necessary for predicting the future economic situation. And this is a serious mistake:

  1 HYNDMAN, Commercial Crises of the Nineteenth Century, initial TOC.

  2 [OVERSTONE], Reflections Suggested by a Perusal of Mr. J. Horsley Palmer’s Pamphlet, p. 31.

  3 Cf. HOUSTON, From Dickens to Dracula, p. xii.

  4 From O’BRIEN, The Correspondence of Lord Overstone, vol. I, before p. 64.

  5 MITCHELL, Business Cycles, p. 1.

  6 DUESENBERRY, Business Cycles and Economic Growth, p. 1.

  7 SISMONDI, Noveaux principes d’économie politique, pp. 242, 258.

  8 On these topics avoided by free-marketeers see PERELMAN, Railroading Economics.


  9 Ibid., p. 294.

  10 From Fabbrica delle illusioni, p. 236, cf. p. 234 ff. for a more detailed analysis of this issue.

  11 RAE, Statement of Some New Principles, p. 31.

  12 MILL, John Stuart, Principles of Political Economy, p. 74.

  13 HICKS, The Crisis in Keynesian Economics, p. 10.

  3. Economic development and social constraints

  In The Rise and Decline of Nations, the American economist-sociologist Mancur Olson develops some interesting considerations on post-war economic growth rates.

  He observes that, after World War II, the losing countries – Germany, Italy, Japan, France – grew faster than the victors United States and Great Britain:1

  The evidence that has been presented [might] provoke some readers to [conjecture] that a country ought to seek a revolution or even provoke a war in which it would be defeated.2

  Given the almost exclusive attention economists pay to the production side, Olson looks there for an explanation and notes that in the production sector a network of understandings and established ways of interacting among people groups tends to consolidate over time.

  This network slows down growth but is largely wiped out by a defeat in war:

  [My] theory predicts that the longer an area has had stable freedom of organization the more growth-retarding organizations it will accumulate… except when defeat in war and the instability… destroyed such organizations.

  Increasing complexity of understandings implies… that employers dealing with trade unions would sometimes want to move to new locations… because they would not there be hindered by a heritage of complex and out-of-date understandings.3

  Olson points to real factors whose effects are important but does not take into account the most relevant one, namely consumption dynamics.