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The Council
of Economic



Additional copies of this report are for sale by the Superintendent of Documents,
U. S. Government Printing Office, Washington 25, D. C.
Price of single copy 15 cents


Letter of Transmittal

Washington, D. CDecember

13, 1947.

The President.
SIR : The Council of Economic Advisers herewith submits its Second
Annual Report in accordance with the requirements of Congress as set
forth in the Employment Act of 1946.








Relations with Other Government Agencies
Relations with non-Government Agencies




What Would "Maximum" Production Be?
Foresighted Development of Resources Is Necessary to
Maximum Production
High Production Demands Adequate Capital
How Can the Adequacy of Capital Be Judged?
The Labor Aspect of Maximum Production
Management and the Profit Motive Affect the Level and
Continuity of Production
Maximum Production Must Be Properly Balanced
To Achieve Its Maximum, Production Must Anticipate
Consumer Responses
Private Production, Public Demand, and the Role of Government






S I N C E the Council of Economic Advisers is set up as a small study and
advisory staff within the Executive Office of the President and is not
charged with administrative duties, little is called for by way of an operative or "housekeeping" report. In our first annual report to the President we explained briefly our initial organization and working arrangements. Further developments down to the end of our first full year of
operation are described in the first section of this report. Section II
resumes the discussion of the economic philosophy of the Employment
Act of 1946, which was begun in the Council's first annual report.

I. Progress of the Council's
Organization and Work Program
At the time of its first annual report in December 1946, the Council
of Economic Advisers had been able to assemble only a skeleton staff of
seven full-time and four part-time economists and statisticians. With
their help we undertook our statutory assignment "to assist and advise the
President in the preparation of the Economic Report" which he presented
to the 80th Congress when it convened in January 1947. The incomplete
state of our organization at that time was due in part to a desire to gain
greater familiarity with the precise character of our staff requirements
before committing ourselves to a particular range and grouping of specialized jobs. In part it was due to the slowness with which appointees
wrhom we desired to employ could be released from responsible posts in
which they were already established.
Even in the new year, as we organized for the next annual objective
of the President's Economic Report to be presented in January 1948,
the process of appointment has been slow. The staff included only 5
senior economists full time, and 5 part time, 3 junior economists and
statisticians, and 12 secretaries and clerical and administrative assistants
on April 24 when we presented our budget justification to the Appropriations Committee of the House. That was a total force—from chairman
of the Council to messenger—of 28 persons on full time and 5 part-time
employees. The total salaries of the latter were equivalent to the pay
of one additional full-time worker.
Under section 4 (f) of the Employment Act, salaries of Council members and employees on its staff are limited to a total sum not to exceed


$345,000 for each fiscal year, and in our first annual report we referred
to this as "a limitation which the Council considers very salutary and
hopes to see maintained in future." In our estimate for the new fiscal
year as submitted to the Appropriations Committee of the House, we
indicated a hope of completing our staff by the end of June 1947 on a
basis of 48 staff employees with aggregate salaries for a full year of
$273,000. We proposed to continue on that basis without further extension throughout the fiscal year 1948. In practice, however, the care
with which we have proceeded in making staff selections has kept us still
below that number.
This organization plan and budget provides for 10 areas of work covering the following fields: labor force and labor relations; plant
capacity, investment, and management; agriculture and food; flow of
income, goods, and services; price relations and price policies: international economic relations; development of human and material resources; construction and public works; veterans, social security, and
welfare; and taxation, debt management, and banking.
Each area is to have a top staff specialist at the "Professional-8" grade.
Eight of these posts are now filled and one appointment is pending. To
assist this top staff group, we have appointed nine economic and statistical workers, four at the P-6 grade, three at P-5, and two at P-4. In
the clerical and administrative ranks we have one at CAF-15, one at
CAF-10, and 18 others distributed over grades CAF-4 to 8. Two
messengers complete the Council's total personnel of 42.

The Seventy-ninth Congress had made a total appropriation of
$275,000, including salaries, equipment cost, and operating expenses
for the part year fiscal 1947 (the Council was not sworn in until August 9,
1946). Owing to the deliberation and frugality with which we had
proceeded in perfecting appointments and making expenditures during
our first year, we indicated in our budget statement of March 1947 that
we were quite sure of returning an unexpended balance of at least $77,000
from our first year's appropriation. In fact, we did return over $90,000
on June 30.
The Independent Offices Appropriation Bill, passed by the House
on July 30, 1947, reduced the Council's total budget from the $400,000
we requested to $350,000. With this sum available, we hope to be
able to maintain an average of 45 persons all told during the current
fiscal year. We shall have $32,000 available for travel of Council members, staff, and consultants whom we need to bring to Washington, and
for printing, supplies, communications, and contract services. We have
made a budget request for $400,000 for the fiscal year 1949.



Our first report explained that the Council does not do original fact
gathering or technical processing or initial interpretation of these data.
We draw upon the rich stores of such material developed in the extensive statistical and economic agencies in many divisions of the Government. In selecting and combining factual material and analyses
and streamlining them for the President's use in shaping a coordinated
national program, we have had the hearty cooperation of all Government agencies. By participating in, and at proper times promoting,
interagency professional conferences, we believe our Council can help
toward deeper understanding of the practical operating problems of
our dynamic economic life and better agreement as to effective ways of
dealing with them. The structure and functioning of our Nation, considered as an infinitely complex but integrated economic organism, has
been given all too little study on the scientific plane, detached from
partisan or group interest.
At the top policy-making level, too, in the various Government departments and independent agencies, the Council desires and needs to have
a cordial and frank exchange of views. Only so shall our conclusions
reflect clear and intimate understanding of the special problems of concern to agriculture, commerce, labor, and finance. And only so shall
the conclusions of the agency heads as to how the proper economic
interests of the respective groups are to be adequately and permanently advanced be based on a sound understanding of interrelations
of special industries or factors in the total economy.
The establishing of this sort of relationship in the coordination of
national economic policy has been auspiciously begun through informal
consultation between the Council and Cabinet Members, the Director
of the Budget, and other agency heads. In more formal fashion, it has
been achieved through periodic attendance of Council members at Cabinet meetings to participate in round-table discussion of materials and
conclusions being offered for the President's use.

A somewhat parallel procedure is followed as to private agencies or
organizations in the field of business, labor, agriculture, and organized
consumer groups. Many of them have research departments or other
systematic means of gathering and analyzing statistical, accounting, or
technical data which are pertinent to our studies. Our staff, by
acquainting themselves currently with this material and the interpretations being placed upon it by the respective corporations, unions, or
associations secure useful checks upon data and analyses derived from
governmental sources.



Here, too, when it comes to the matter of final evaluation at the policyrecommending level, the Council members themselves seek a frank exchange of views with the official heads of nongovernmental agencies.
One of the principal means being developed for this purpose is a series
of consultative meetings held around the Council's conference table,
to which we invite the heads of the principal business organizations,
major unions and their federations, national farm organizations, consumer bodies and representatives of State and local governments. These
meetings have been friendly and stimulating—we hope to both parties.
A type of relationship with outside agencies which we believe will
prove particularly fruitful in the work of the Council covers special
research on problems arising in connection with the Council's reports.
While, as indicated above, we utilize to the fullest extent possible, the
results of investigations already made or in process by Government agencies or outside organizations, there are times when we find it necessary
to broaden the inquiry, push it a little deeper at some point, or give
it a somewhat new direction in the light of the policies enunciated in the
Employment Act. We believe that maximum results from a minimum
expenditure will be secured in such instances if we make research contracts with existing research agencies or university groups who are
specially qualified to develop the particular line of inquiry which
we wish to see pushed further than the resources of our limited staff
permit. We believe that such relations also will improve the understanding of the work of the Council on the part of academic and commercial organizations over the country and tie our work more closely to
the thinking of persons outside the Government. To this end, we have
included an item of $40,000 in the budget for the next fiscal year, and a
number of such contract research needs are now being examined. The
various relationships of the Council are shown in the chart on page 5.

The Employment Act requires that "the President shall transmit
to the Congress at the beginning of each regular session" an annual
economic report which will review the economic state of the Nation and
present his economic program for the ensuing year. He "may transmit
from time to time to the Congress reports supplementary to the
Economic Report." In the light of popular interest in, and discussion
of, the first annual Economic Report of the President presented
on January 8, 1947, it seemed advisable to the President and the Council
to present a midyear report reviewing developments of the first half year
and highlighting the major problems by which the country would be
confronted during the remainder of the year. The Council therefore
prepared detailed analytical and statistical materials for the President's


use in this connection, and on July 21 he presented a midyear report to
the Congress comparable in general content to his report of January 8,
but not embodying specific recommendations for Congressional action.
In addition to assisting and advising the President in the preparation
of this midyear report, the Council submitted a brief memorandum at
the end of the first quarter and again at the end of the third quarter in
the nature of a progress report and appraisal of short-run trends and
immediate problems. At the request of the President, the Council met
with the Cabinet just after the submission of each of its quarterly reports
to the President and discussed these issues with the Cabinet members and
a few invited agency heads.








On June 22, the President designated the Council of Economic
Advisers as one of three agencies to make a comprehensive study
of American proposals for foreign aid, particularly as embodied in the
Marshall Plan. The Council was asked to present an analysis of the
impact on our economy of such a program following an interdepartmental study of American resources conducted under the direction of
the Secretary of the Interior and preliminary to a report recommending


the amount and character of aid which we could "wisely and safely"
grant. This latter report was to be prepared by a committee of nineteen distinguished citizens under the direction of the Secretary of
Pursuant to this instruction from the President, the Council submitted on October 28 an 80-page mimeographed report (together with
32 pages of statistical appendices). Besides this formal report, the
Council had from the beginning collaborated with the interdepartmental committee under the Secretary of the Interior and the citizens'
committee under the Secretary of Commerce so that all three reports
should be coordinated as perfectly as possible. We also loaned one
member of our staff to the staff of the citizens' committee for a period
of 3 months.
In addition to the report on the foreign aid program, which was
completed during this year, the Council has been working on a report
of Federal grants-in-aid which was assigned to us in the first Economic
Report of the President and on a study of guaranteed wage proposals.
The latter subject had been investigated at considerable length by the
Advisory Board of the Office of War Mobilization and Reconversion
and a preliminary report prepared for it was referred to us by the
President when the Advisory Board was dissolved last spring. Completion of our report on this subject was delayed by the need to turn
aside to make the foreign aid study, but the report will be presented as
early as possible in 1948.
The Employment Act states: "The Council shall make an annual
report to the President in December of each year," but is silent as to its
scope or character. It is our belief that something more than a routine
recital of the year's work, such as is given above, might be expected in
our annual reports. We have been charged with the responsibility of
exploring the practical meaning, under progressively unfolding circumstances, of a broad national economic policy as declared in the Employment Act and the techniques by which that policy may most surely and
fully be carried out. This challenges us and our staff, indeed economists
generally, to rethink our principles and their application to the purposes
declared in the act. No" less does it challenge business executives, union
officials, and agricultural leaders to reexamine their operative policies
and practices and the premises on which they rest.
By consultation with all these groups and through studies within the
Council we hope gradually to develop clearer understanding of the basic
problems of how a modern industrial society can keep its complicated
machinery of production, distribution, and consumption going steadily
and efficiently. The progress of our thinking on these issues will be
shown in successive reports of the Council to the President.


II. The Meaning of Maximum Production and Means of Attaining It
"Full employment" and means of assuring it were the ideas animating
the movement that eventually bore fruit in the passage of the Employment Act of 1946. But since employment was not desired as an end
in itself but rather as a means, "purchasing power" was early linked
with employment as a major objective of the bill. Then, as congressional study and debate gave deeper insight into the meaning of true
national prosperity, the term "maximum production" was written into
the declaration of objectives before the present law was passed.
It is perhaps not too much to say that this belatedly added phrase is
the one that should be kept foremost in our analysis of conditions and
trends and in our efforts toward betterment. For clearly, maximum
employment may be achieved in a rich economy or in a poor economy,
in a static economy or in a dynamic and growing economy. It is only
by maximum production that an economic system can translate its resources and skills into the highest standards of living attainable at any
particular stage of technological development. The inadequacy of the
goal of mere number of jobs—whether we call it full or maximum
employment—has been demonstrated during the first year of operation of
the Employment Act. For we were astonished to find, after the country
had reached the idealized figure of 60 million jobs, that the volume of
production still was disappointing. And with production shortages, we
also found that abundant monetary purchasing power confronted us
with inflationary dangers rather than calling forth adequate production.
In its first annual report the Council undertook a preliminary exploration of the general concept of sustained employment and the two
ideas, "maximum employment" and "maximum purchasing power,"
regarded by many as the key phrases in the law under which we
operate. In this second report, we pass on to a brief consideration of
what "maximum production" implies and what would be entailed in
reaching a state of maximum production and also of maintaining it—
not a single spurt, but a well-sustained level of achievement.

Certain critics of the high employment philosophy were fond of
pointing out that countries having low levels of production are typically
the countries of full employment—everyone slaving away with feeble
tools to eke out a meager living. They probably did not quite want
to go so far as to say that the coming of capitalistic production makes
it necessary that many people be unemployed because our machines
are so powerful that there are not enough jobs for all. Some of the


captious ones among them burlesqued the full employment phrase as
meaning a return to long hours of toil, use of the physically unfit, and
coercion of the unwilling.
In the final drafting of the Employment Act, the Congress met this
imaginary difficulty by avoiding any reference to job guarantees (much
less any possibility of coercion) and defining the goal as "useful employment opportunities, including self-employment, for those able, willing,
and seeking to work." This of course left the whole question of the
length of the work week open. We shall undoubtedly hear much more
of that issue in future years as workers and employers bargain over the
question of how many hours at the bench or beyond the portal are best
fitted to the conditions of a highly industrialized society. We shall ourselves say something about it in a later part of this report.
The very use of the phrase "industrialized society" points up the fact
that the whole question of how much a man needs to work or wants to
work, or how fully a nation shall draw upon the manpower of its children, its women, and its old people admits of no absolute answer. It is
highly relative to the habits and ideals of consumption which are entertained, and the productivity or efficiency of labor during the time that it
is being applied. Thus, when the Employment Act sets up an objective
of maximum production, it is not reasonable to interpret that phrase as
meaning the very largest total mass of goods and services that could be
turned out for consumption during a given year. It must in all reason
mean that volume of production which the people of a country when
given opportunity to apply their labor whenever they see fit and under
efficient conditions of employment, will want to turn out before they
prefer to turn their time to the enjoyment of leisure.
It is evident too that this practical interpretation of the phrase "maximum production" implies also that the scale of production at a given
time shall be adjusted to a reasonably long-time perspective. This
means sensible conservation of natural resources, timely enlargement
and modernization of capital equipment, prudent provision for training
of future workers, and the research and experimental work necessary for
the systematic improvement of technology. What this means in simplest
terms is that, in thinking of what maximum production requires within
the meaning of the Employment Act of 1946, we must center attention
first on the wise development and use of our natural resources and the
proper provision of capital goods and capital funds.

At the beginning of the production process are the basic physical
resources provided by nature but administered by man. The soils,
forests, grazing lands, and water must be conserved and developed if high

production is to be permanently maintained. The minerals, which are
irreplaceable resources, must be used vigorously but wisely. In this matter the long view must be taken to insure that the flow of benefits from
resources will remain steady during the years ahead. The future should
be discounted, but at a socially sound rate, with both existing and prospective factors carefully weighed and with due regard to needs and costs.
The conservation and development of natural resources are not the
exclusive concern of any one person, group, or agency. The hill farmer
who moves his cornfield down into the valley, the pulp and paper company that restocks a cut-over area according to sound principles of forest
management, the mining company that takes the long view in developing
as much as possible of its ore reserves rather than skimming off the richest
part only, the government that builds a multiple-purpose dam to provide the benefits of irrigation, flood control, navigation, and better
recreation—all these, and many others may contribute. The primary
need is for a true coordination of the efforts of all.
During the war, because of overwhelming need for military production, and since the war, because of the industrial reconversion requirements, both private and public programs of basic resources development
and conservation have largely lapsed. The few exceptions relate to the
search for and development of strategic minerals. To an alarming degree we have been living, and fighting, off our capital—of forests, soils,
ground water, and minerals. We must now resume large-scale efforts
on behalf of our national estate. Otherwise, the foundation of our expanding and highly productive economy will crumble and bring down
the structure of production and consumption that rests upon it.

Every literate citizen knows that productivity in our modern industrial
and scientific age depends on the supply of capital or working equipment quite as much as it does on labor effort and availability of natural
resources. In fact, many of the natural resources most important to our
lives today do not lie within the reach of man's hands at all; they are
available only to his machines and to the delicate appliances of discovery.
Thus, as a people, we must find ways of keeping up our research laboratories and educational plant; our mining and our manufacturing machinery; our trading and communications equipment; our forests,
orchards, and breeding herds; and our agricultural implements and
structures, if that amount of work that we regard as satisfactory fullness
of employment is to yield us the largest practicable product for consumption.
Indeed, since even our amusements are to a great extent mechanized,
we need to accumulate and maintain a considerable capital stock of
"playthings"—ranging from the syndicated movie chain, the commercial bowling alley, or amusement park down to the individual's fishing


tackle and golf clubs—if we are to get the fullest consumer satisfaction
also out of our leisure hours. Present standards for our "content of living" require a considerable paraphernalia for play; we are not content
merely to loaf.
The problem with which this Nation must be concerned if we are to
have sustained employment and a maximum flow of national product
over an indefinitely long future is how to strike the best working balance
between (a) that amount of current consumption which will maintain
the working population in a state of physical health and mental satisfaction, including a sense of confidence in sustained well-being, (b) the wise
conservation and development of natural resources, and (c) the technological progress and the amount of capital formation which will stabilize
like conditions for the future. While this may imply a conflict of aims
in the short-run action of individuals, there is no contradiction in the longrun over-all picture. It is not a case of trying to eat our cake and keep it
too. Rather it is one of being provident enough to know how to eat
enough of the current harvest to keep up the strength and zest of the
people while at the same time keeping a large enough supply of seed to
assure a somewhat larger planting next year. But it does not mean
grinding toil and meager living for the family so that "Pa can raise more
corn to feed more hogs to buy more land to raise more corn to feed more
hogs" ad infinitum.
Even widespread recognition of the principle that large supplies of
capital are needed for maximum production of consumer satisfaction in
an era of modern science and engineering is not enough. We are still
far from being in full mastery of the day-to-day practices that need to
govern the related processes of consumption and capital formation.
Some are too impulsive and self-indulgent to follow a good practice. If
society relied on them, we would have but scanty equipment. Others
are so obsessed by the thrill of technical efficiency or so moved by the
personal acquisitive urge that, when in a position of control, they force
a socially poor practice on themselves and others. They would cause
capital formation to outrun current enjoyment. Men would be serving
the machine instead of being served.

Since even wise and well-intentioned men often find themselves in
doubt or disagreement as to just when our capital provision is in fact
"adequate," we may well ask if there are no clear criteria to follow.
The engineer is likely to set a very high mark because he thinks in
terms of technical performance. As soon as a new process or an improved machine is available, he is eager to see it universally adopted and
promptly installed.


The business manager likewise is disposed to be capital-hungry. His
attitude, however, is more complex. He feels that additional or different equipment will enable him to reduce costs and to produce a
product of better quality and greater consumer appeal—toward the
end of better profits. But when these profits are received, there is still
the question of their distribution to meet consumer satisfactions as
against their reapplication to further capital use. The crucial question
is whether the interplay of these forces strikes the best working balance
between immediate enjoyment of goods and services, and the technological progress and amount of capital formation which will provide
greatest enjoyments in the long run.
Viewed in long-term perspective, the central problem does not seem
to be so much one of providing business managers with enough funds
to assure adequate capital provision for sustaining maximum production
as it is one of assuring willingness or determination to sustain maximum
production even when the financial requisites are abundantly available.
Aside from certain temporary shortages of materials, the main obstacle
is the concern-well-founded or ill-founded—on the part of business
managers that the maximum development of capacity and production
will lead at some time in the foreseeable future to "overexpansion" or
"overproduction" with consequent business losses of a serious or even
catastrophic character. The task before us, therefore, is to probe the
genuineness of this concern, and, in so far as it is founded in reality,
to indicate the ways for removing its causes.
It is sometimes asserted that we cannot have too much capital formation, because every added unit of equipment magnifies the productive
power of human labor. It is no doubt true that a bold and ingenious
people cannot set any limit to the amount of capital that they will ultimately need. But if their dreams are wisely blended with hard economic
sense, they will be careful to adjust the current rate of capital formation
to the rate of consumption that will keep capital plant utilized at the highest practicable capacity with the greatest practicable steadiness. It is not
much to the credit of our business genius or our economic understanding
that, after accumulating the capital needed to erect factories, office buildings, power and transportation facilities, we have used them to only 80
or 60, or even 40 percent of capacity a few years later.
Some of these maladjustments have, of course, been the obviously distorted growth induced by pressures of war. Such are the excessive facilities for shell making and loading, for ship building, and for assembling
airplanes and rolling aluminum sheet left us by the Second World War.
Sometimes the local overinvestment has been due to the excesses of a competitive drive, as in the building of the Western Pacific Railway across
the Great Desert within a stone's throw of the Union Pacific or the
multiplication of swank hotels in many a resort town.



Local maladjustments of this sort are often corrected by reorganization and scaling down of capital structures, possibly joined with a tightening of operating and sales management. The need for such adjustments is merely a challenge to individual enterprises and not of national
concern when they occur sporadically over a period of time. But
when plant building outruns market building on a somewhat general
scale, inability to move the expanded product promptly into consumption results in inventory accumulations and tentative cut-backs of production, which become cumulative as payrolls shrink and wage earners'
apprehensions rise. When the banks become fearful and begin crowding for prompt liquidation of indebtedness and curtailment in extensions,
the course of spiralling recession soon gets under way.
But this description of cyclical depression does not mean that the process is inevitable. Nor does it mean that the term "boom" is synonymous with a period of maximum production. It merely means that in
the past we have allowed maximum production, which is a desirable
thing, to be accompanied by other phenomena which were neither desirable nor necessary. The truth is that, barring honest and pardonable
errors of judgment as to the direction or proportioning of investment and
a certain amount of unscrupulous promotion, capital formation even in
our most exuberant boom times has not really been too much for actual
consumer desires which should be satisfied in a rich economy. Instead,
there have been enlargements of industrial and commercial capacity
at costs which were disproportionate to returns which the operators were
able to realize through the disposition of output within the purchasing
power of the total market with existing income patterns.
This situation has not represented true overproduction, measured either
by the wants of consumers or the opportunities of technology. The
"overproduction" has been purely relative to the web of cost-price-spending-investment relations which were set up. In short, maximum production requires not only that we provide the best possible equipment for
workers' use, but also that we keep our ability to absorb the enlarging flow
of product in step with the rate of capacity enlargement. This in turn
depends upon our sagacity in seeking and our promptness in making the
appropriate price and income adjustments. For with these adjustments,
the demand of our people can keep pace with maximum supply.

In our opening section, it was said that maximum production is the
result of full opportunity for labor, applied under conditions making
for high efficiency. With a given condition of natural resources, maximum production would require a large and high-quality plant and
equipment to give greatest efficiency to the efforts of labor. We left the
question of size of the labor force and quality of its performance largely


in abeyance, merely starting from the objective stated in the Employment Act, "useful employment opportunities for those able, willing, and
seeking to work.5'
Working people, however, have very definite ideas as to the conditions
under which they will work or the kind of "opportunity" they will seek.
Those ideas and the labor practices that follow from them importantly
affect the "maximum" to which production will attain even if adequate
working plant is available.
The first of these issues concerns who shall work. In evolving our
ideas as to what maximum of production we consider desirable, employees, employers, and public sentiment have progressively curtailed
the labor force by restricting child labor and by better provisions for
the retirement of the aged. On the other hand, we have expanded
the labor force by systematically developing opportunities for the efficient use of women's labor and through the better utilization of the
physically handicapped.
Along with better physical and intellectual development up to the
time of entering employment there has gone better training and supervision on the job and much better understanding of proper selection
and placement. There has also been greater attention to safety, proper
lighting, comfortable working conditions, and general morale. The
basic conditions for labor productivity have been greatly enhanced.
With the further progress of mechanization and the development of
automatic processes likewise, demands on physical fitness have become
less exacting. The "deadline of 40", characteristic of the early machine
age, has largely disappeared or been moved up. Workers can continue
without undue decline in productivity under modern working conditions to much greater ages and enjoy the security of much better financial provision after retirement.
The average productivity of an hour's work has tended to be enhanced also by the shortening of the working day or week, thus permitting men to work at top efficiency during the time they are actually
employed. As to continuity of work, there has been, in recent years, a
considerable demand for guarantees, or at least effectuation, of yearround employment. In addition, workers have been demonstrating
an increasing disinclination to accept triple or even double shift operations. This is significant in that it raises the amount of capital necessary to bring plant and equipment to the adequate level.
Industrial accounting and medical science have both made immense
contributions in recent decades toward the evaluation of what kind of
working conditions will add most to maximum production in the short
run and in the long run. We are now far from the time when the
suggestion that a 40-hour week would be more "efficient" than a
60-hour week would have been looked upon as radical nonsense. Management, labor, and the public are in a constant process of arriving at


more general agreement on this subject. They are also in agreement
that "efficiency" measured by dollars and cents is not the only test.
Regardless of dollars and cents, were the choice between wearing out
machines before their time and wearing out men before their time,
the former alternative would be desirable.
Looking to the future, the questions calling for decisions will be more
in the nature of balance between more goods and more leisure. Our
economic system cannot overlook the relevance of whether work becomes
more pleasant or more monotonous, more stimulating or more deadening
in its impact upon the worker. No purely economic scales can be devised for the weighing of these competing values. All that economists
can say is that the smooth resolution of these issues, without generating
undue strife and friction which would retard our economic growth, depends upon increasing practical application of the principle that neither
management nor labor has an undivided prerogative. Since both are
affected by these decisions, both should share in their making.
All in all, it would seem that the general atmosphere of economic
thinking within which the purposes of the Employment Act of 1946 are
to be sought would for the present be that of a pattern of 8-hour day,
5-day week, and a 2-week, paid vacation. In other words, the working
population would in fact be seeking the maximum production that could
be obtained with 2,000 hours of work in a well-equipped and wellmanaged plant or office under skillful management.
But the economist has the duty to point out that a shortening of working time or a decision not to put forward the maximum of human effort
for each hour worked should result only from a conscious election between the competing social values that we have discussed, and should not
result from subscription to the economic fallacy that less output per
person is an appropriate safeguard against "overproduction" and consequent unemployment.
This brings us to the issue of intentional restrictions of output, either
by organized groups or through the informal practices of individuals.
Here is a problem with which we shall have to wrestle seriously in trying
to work out a sensible and satisfying interpretation of maximum production in its labor aspects. Insofar as these rules or practices are a defense
against physically harmful "racing" or improper "stretch-outs" of factory assignments, the curtailment of production that may result is not
incompatible with the idea of practical maximum production as we conceive it. But where they represent reaction to a fear that there is not
or will not be enough work to go around, they are inconsistent with the
very concept of enlarged production and real purchasing power embodied in the Employment Act.
But the statement that an undesirable condition exists does not in itself
reveal the precise nature of the remedy. There can be no gainsaying


the fact that workers, as well as business managers, regard the business
cycle with its severe ups and downs as a genuine part of their actual known
experience. It is not enough to tell them that something is not going to
happen again which they have all seen happen before—and some of
them more than once—with shattering effects upon themselves and their
families. While legislation of an essentially prohibitive or negative character may help to extirpate such practices as may clearly be defined as
malpractices even in a given economic environment, efforts along this
line run the risk of failing to see the forest for the trees. The more significant problem is to develop the psychological security which can flow
only from a growing conviction that maximum production, employment,
and purchasing power can and will be maintained.
This cannot be done with pretty words; it requires the formulation of
concrete programs which the masses of people can see and feel. And
since self-respecting, educated people will retain a healthy scepticism
for plans handed down to them from above, it means that their participation in the formulation and application of these programs are the terms
of their acceptance or acquiescence. Pride in the job needs to be extended
into pride and confidence in the economic system of which the job is a
part. The logical necessity for this lifting of sights is inescapable.
In situations more specific and isolated than the general problem, there
are certain groups of workers who may find themselves confronted
with unemployment or with a search for a lesser job at lower pay through
technological change. This may lead them toward resistance to laborsaving innovations as an act of self-preservation. It is not a sufficient
answer to these workers to say that, if they succeed in their efforts toward
self-preservation, society as a whole may lose more than it gains in the
long run or even in the short run. We value the individual as well as
the group. It follows that the burdens or set-backs necessary to progress
should not fall with undue weight upon a relatively small number of
people. The first step toward breaking down the resistance to technological change, therefore, should be toward convincing those who, in
resisting, are making a mistake even from the viewpoint of their own personal interests. Or, if the facts do not justify that conclusion, they should
have feasible alternative methods of maintaining their standards of living.
In an economy committed realistically to the maintenance of maximum
employment opportunities, this problem would shrink to easily manageable proportions. Even in such an economy, its complete solution will
require effective programs of job placement, retraining, retirement, and
adequate social insurance.
In essence, cooperative efforts of labor and management to reduce or
remove restrictive practices are inseparably connected with their joint
and several contributions toward maintaining an economy of maximum
employment, production, and purchasing power.



We have spoken in earlier sections of this report about the role of the
employer or of private business as supplier of capital with which labor
may be efficiently employed. Something more needs now to be said as
to the role of business management in determining not merely the size
of the capital plant but also the fullness and continuity with which it is
used, once it has been provided.
It is common to refer to our free enterprise system as operating in
response to the profit motive. Often this explanation is applied indiscriminately to the whole process of saving, investment, and utilization.
In fact, however, there are three kinds of motivation that need to be
distinguished within this general area. We shall need to understand
them better and direct them more wisely if business management is to
bring about maximum production in a free society. They may be
called the provident motive, the profit motive, and the protective motive.
To some extent the process of saving takes place in response to the
profit motive. This was particularly true in the pioneer days of modern
industrialism when capital was so scarce in proportion to expanding
opportunity that returns were high, whereas the average income of the
people was still so moderate that saving involved real sacrifice. But
even then, and still more today, the desire for profit is subordinate to the
wish to secure future satisfactions by deferring present consumption.
The self-respecting and responsible individual in civilized society
divides his concern quite fairly between the moment's satisfaction and
provision for later years. Saving something for the future provides for
the growing needs of his family and for his own old age or earlier misfortune. Even without prospect of profit, this kind of saving could go on
extensively in a free-enterprise society in which the general level of income
among large numbers of the people is high enough so that there is a fair
margin above the provision of mere day-to-day necessities. Certainly
we know that the flow of funds into savings banks, insurance companies,
and Government savings bonds does not cease just because their yield
Business management also operates in response to the provident motive,
and corporate earnings in large volume are plowed back into business
by managers who feel that technological progress must be maintained
and the company enlarged to provide for the needs of a growing population or that the company may maintain its place in the industry even if
little or no added profit results. In effect, management thus does saving
for the stockholder.
To draw capital into new lines of production, particularly for small
innovating companies, management, however, has to rely largely on the
profit motive and encouragement of the spirit of venturing enterprise.


Hence the assurance of especially favorable conditions for profit making
to small business and new enterprises must be a matter of deep concern
in our endeavor to bring about an economy of maximum production.
The more conservative students of the problem propose relief from taxation. The bolder spirits flirt with ideas of relaxing credit rules so that
institutional lenders can employ their funds as venture capital, or even
with the idea that we may need a whole set of new financial institutions,
with or without Government financial support, spread over the country
for the special purpose of providing small and growing businesses with
equity capital and a variety of managerial services. Because of the large
size to which these trustees of provident savings have grown, they can
operate under the law of averages, which reduces their actual risks to a
low ratio. They can also employ technical and administrative staffs of
such competence that their selection of clients constitutes a highly skillful
service in allocation of capital to the most productive uses. Finally, there
is the suggestion that government make nonrecourse loans or underwrite
the newcomer's market. If such an undertaking could be efficiently
organized, it would spread risk over a still wider area and lessen its local
The issue takes on great importance because of an increasing indication
that the growth of very large corporate units enables them to operate on a
profits basis which is unfavorable to a rate of entry and survival of new
ventures needed for the healthy growth of new jobs and the maintenance
of maximum production. In other words, the profit motive has in somewhat alarming ways given way to the protective motive.
"Self-preservation is the first law of nature" and business managements
are expected to use every legitimate device to protect the companies over
which they preside. But the evolution of our industrial society has
brought about conditions in which the attempt to protect the individual
company and its shareholders results in widespread disaster to other companies and prolonged depression of the economy as a whole. This is so
contrary to the purposes of the Employment Act that it must become a
matter of continuing concern to the Council of Economic Advisers.
The operation of the protective motive produces restrictionism from
the side of management which is far-reaching as an impediment to maximum production over the long run. It means that management
develops systems of cost accounting, of reserve accumulation, of margin
setting, and of pricing that result in cessation of production and withdrawal from the market as the basic means of weathering economic
storms. There is no occasion to recite the familiar sequence by which
curtailment by one company reduces the income of workers on its pay
roll and so starts and accelerates the disastrous spiral of recession. It is
important that we enlarge the present state of our knowledge so as to
permit the outlining of business practices through which this recurring
danger to our economy can be met.


But it is proper and necessary to close this discussion by pointing out
that the protective motive as practiced in recent decades creates a perennial threat to the maintenance of high production. We are approaching day by day the testing time when we shall see whether or not voices
of reason in the ranks of management will enable them to avoid a
stampede into a disorganized scramble for individual safety, each company for itself "and the devil take the hindmost.55 It will test our economy also to see whether, where individual stabilizing actions reach their
limit, we can use Government as a coordinating means toward achieving
these ends. If the swings from expansion to contraction of private business which we have had in the past were to continue, offsetting operations would be too big to be left to "compensatory5' Government policies.
Economic stabilization can be achieved within our private enterprise
system only if management accepts the responsibility for a more stable
practice in planning its investment and operative programs.
Hence, if we are to achieve a more continuous utilization of the
Nation's resources, material and human, than the disorderly operations
of the past through a series of booms and collapses, management must
accept the attainability of the purposes of the Employment Act. There
must be a belief on the part both of labor (as was said in the section on
labor's part in the achievement of maximum stabilized production) and
of management that those purposes represent a goal attainable by a
nation of economically intelligent and well-intentioned citizens. In the
working out of such a belief in practice, labor and management must in
cooperation reform their operative practices and their methods of dealing
with each other.
Future work of the Council of Economic Advisers will be directed to
the exploration of these possibilities. In the closing section of this report,
however, we outline briefly the form in which we believe the issue will
present itself in the near future.

Thus far we have been talking of maximum production in the general terms of a total quantity. Nothing has been said as to: Production
of what? In fact, however, the make-up of the output is a very important matter.
This would not be the case in a primitive society, where wants were
few and consumption but little varied. To maximize their production,
the men of a primitive culture would simply produce as much as possible
of a few simple food, clothing, and housing necessities.
But in a rich industrial nation such as ours, we have gone far beyond
this simple condition of filling the belly and covering the back. Our
enlarged productive powers permit us to supply a great number of cultivated wants which have grown with the years. At every step in our


advance from the primitive to highly productive scientific and capitalistic
society, additional types of production have given refinements of service
to our eating, style and beauty to our clothing, great advance in convenience, safety, and attractiveness to our living quarters, better care of our
bodies and our minds.
But these ampler and finer products, while in some degree reaching
most groups in the population, have in large measure gone to the relatively few who by wealth or position could claim the cream of our productive operations. Large numbers of the people have gone on subsisting
on skim milk. Even in times of business depression, those at the very top
have been able to maintain their standard of living unimpaired out of
their accumulations of wealth or because their sheltered incomes were
continued even during periods of widespread unemployment. The bottom quarter or third, on the other hand, have not risen to satisfactory
standards even during periods of highly productive activity. And it is
they, of course, who have dropped to the lowest level of consumption during periods of arrested production. We have still not really studied and
aggressively dealt with the question of what a rich country can afford
to do when it keeps steadily at work.
In progressive and democratic countries like the United States,
growth in productive power has been accompanied by—and in fact has
been largely dependent on—the passing on of more goods to more people.
This has been achieved through a double process of enlarging mass incomes and lowering prices of mass-produced goods. The challenge
that is presented to us now is to recognize the full measure of our productivity, which was seen only in rather distorted terms during the war
and was sadly obscured during the depression that preceded. It we are
to achieve and stabilize maximum production according to any reasonable interpretation of America's capacity to produce, we must in future
have much higher consumption in all the lower and middle ranks. The
small number of the well-to-do will not be able to absorb the possible
output of consumers' goods. Nor can they go on indefinitely accumulating ownership of the surplus above their consumption needs and investing it in ever-enlarging plant for future expansion of goods for some
restricted part of the population. The enlarging production of an industrially efficient nation must go increasingly to filling in the consumption
deficiencies of the erstwhile poor. Their labor has in fact become highly
productive under the well-equipped and efficiently organized economic
system of today, and if this great productivity is not reflected in their
patterns of consumption, the system itself will become clogged and fail
to maintain maximum productivity.
It is no answer to say that this increased productivity of the rank and
file worker should not be used to raise his real income because he has
done nothing to bring about this greater productivity; it has been contributed by the injection of more and more capital. Two points may be


made in response to that assertion. First, the point of equity is not impressive if we recall that the accumulations of capital over the years
have in fact involved deprivations of the rank-and-file worker. His children may now with reason expect to benefit from the fruitfulness derived
from that contribution. But second, and most important, is the strictly
operational point that whether or not the worker is entitled in any
abstract sense to the enlarged product, the system cannot go on progressing or even functioning efficiently unless its expanding product goes to all
potential consumers. In a rich nation, the gap between the actual consumer satisfactions at the top and the bottom is bound to narrow. Real
wages rise, whereas the rate of return on capital would normally fall in
response to competitive forces as its ratio to the number of workers rises.

Maximum production, like maximum employment, is a complex
term. Just as the effort to define maximum employment must strike a
balance of individuals' preferences between work and leisure, so maximum production must strike a balance of preferences between the public's desire for one type of goods and its desire for another type of goods.
In the final analysis, whether we increase the supply of houses more
rapidly or more slowly than we increase the supply of marginal house
furnishings such as radios and television sets, is or should be a matter of
consumer needs and preferences. Even with abundant purchasing
power, the execution of a bold design for maximum production depends
upon getting as much insight as possible into consumers' real desires
and relative preferences, since these determine the willingness of buyers
to release their dollars on the market—and to go on working to get more
dollars. This tells the producers where to go forward and where to hold
It is not enough to say that our private enterprise system will be so
aware of consumer desires that it will automatically build up the appropriate productive facilities, confident that a remunerative market will
be forthcoming, and that this in turn will enable producers to supply
the employment opportunities out of which the necessary consumer incomes will be generated. To an extent this is true, but we cannot afford
to assume that it will be so completely true that we shall move from the
high activity of the present period on to a sustained level of production
in which our resources are adequately employed year in and year out.
In recent years, there is evidence that due to the "roundabout" methods of production, requiring heavy investment in capital equipment to
produce goods for markets remote in time and space, serious imbalance
of supply and demand often results. In other words, the so-called free
market is neither as responsive nor as dependable a guide to production
as it was in a simpler economy.


Practical businessmen and analytical economists have never been
quite able to decide on the true relationship of production and consumption. Which came first—the hen or the egg? Naturally, we must produce before we can consume. But it is the urge to consume that sets us
at work producing. With the growth of large, complex, and roundabout processes of industrial production, the consumer certainly does
become a less direct personal determinant than he was under simple conditions when the hunter went out to kill the meat for his dinner and
provide the skins and furs for his clothing. The producer undertakes
provision of what experience or analysis leads him to believe he can
persuade the consumer to buy; he speculates as to the demand and assumes the risk of an uncertain market. Then the worker seeks a place
to sell his labor to get the dollars to buy what he wants or can be sold.
The enterprising producer both stimulates and guides consumers.
In facing the question what kinds of product in what relative amounts
might be forthcoming from a state of maximum production, careful consideration must be given to how consumers have responded to the past
conditions of growing productivity and how they might respond to the
possibilities of still larger production in future. Even for those who
have been in the better-supplied groups in past years, there have been
curious gaps and irregular areas of expansion, reflecting the popular
response to enlarging, but not unlimited, opportunities.
Notable has been the strong emphasis placed on having personal transportation facilities. The ownership of a horse and buggy never fired the
ambition and modified the expenditure pattern of American families in
general, as has the automobile. In fact, the cost of a car—a pretty
luxurious car—rapidly came to absorb so much of the income of the
wage earners and farm families that standards of domestic housing,
comparatively considered, tended to lag.
To some extent, likewise, and among certain groups of consumers,
pleasing and relatively expensive items of clothing were likely to outrank
the older standard requirements of food as well as housing. America
became a strikingly well-dressed country, but many a working girl sacrificed proper diet to having nylon stockings or a fur coat. At the same
time, there have been competing urges. Pride in having good looking
teeth, the need for preserving eyesight for exacting factory and office
jobs, and the growing knowledge of nutritional principles have tended
to protect standards of health against encroachments by less essential
types of expenditure and have made workers anxious to get additional
income for the satisfaction of these wants, thus in turn increasing the
market demand for production of these types of goods.
We are still in a somewhat abnormal, certainly unstabilized, type of
production activity, in which we are making up the deficiencies in durable goods, particularly consumer durables, which had accumulated during the war period and the preceding depression. Present production


likewise is going into military preparedness and foreign aid to an extent
which would not be found in a true peacetime economy. We might
continue maximum employment and high production on these somewhat
artificial props through 1948 or even longer. But it would be improvident for us to fail during this interval to consider soberly and to provide
prudently for the pattern of reciprocally balanced consumption and
production which could reasonably be expected to become established
thereafter and which could be maintained on a stable basis.
How many automobiles can we really live with, and how much rebuilding of streets and highways will that number call for? How much
personal transportation by air will be given preference by the rising
generation to other kinds of satisfaction? Will the total package of
market goods and services of a maximum production economy require
more pounds of steel per capita or will soft goods or even intellectual and
artistic pursuits play a larger part?
This sort of economic exploration is being done by individuals, industries, and public agencies, each according to its lights. One of the most
comprehensive areas of such study and planning is probably that in the
agricultural field. Individual producers are adjusting herds, planting
orchards, erecting buildings, and preparing for future operations in accordance with their individual judgments as to what sort of an agricultural market may be expected in the years ahead. Their decisions and
commitments are entirely within their own hands, but they have the benefit of broad professional analyses and general advisory guidance from a
widespread system of agricultural extension and experiment station agencies. All this local study and preparation in turn is loosely coordinated
into a national system through the consultative arrangements of the
Department of Agriculture, pointed up in a series of annual (and some
special) "outlook" conferences.
In general, we must be asking ourselves, has agriculture become overexpanded in responding to the demands of war and of European reconstruction? If so, how much and in what directions? Many people are
apprehensive of an era of agricultural "surplus" after Europe's farms
have got back into their stride and world-wide transportation has been
fully restored. On the other hand, the war and postwar years have given
us a new and larger realization of the enormous amount of farm product
that a fully employed and well-paid industrial population will demand.
Beef steaks are habit forming, and butter and fluid milk claimed many
addicts among men and women in the army and navy or among civilian
workers tasting new food satisfactions on a riveter's pay. It seems much
more likely that a maximum production economy would build up a
flow of industrial goods and varied services ample to trade on a satisfactory basis for the whole product of a farm plant and personnel of its
present size than that agriculture would need reduction. If the equilibrium of maximum production is found by the expansion of nonfarm


goods and services rather than by cut-backs of agriculture, we shall see
a great tide of better furniture, household appliances, telephones and
electric lights, farm machinery, automobiles, and amusement facilities
moving out into the barer rural communities. This should be a field of
vigorous study and promotion by industrial and commercial concerns as
the holiday of their present seller's market draws to a close.
One of the most intensive areas of consumer analysis and production
planning is that of our telephone system, where scientific studies of
future demand are continuously under way and as these are in turn coordinated and to some extent implemented by the national staffing and
financing of the American Telephone and Telegraph Company. Likewise, power utilities—local and regional—are making extensive studies
and preparations for meeting prospective needs. Their task is somewhat simplified by the fact that demands for their services are relatively
stabilized because of the day-to-day necessity for using water, light, and
heat, and the fact that, once a given type of installation has been made,
there is little flexibility in substituting another type of service.
As we move into the industrial area, we see in progress the same sort of
attempts to gauge the volume of production which would be called for
under hypothetical conditions in the future. We find a considerable
range between items like food, which have a relatively stable demand
even in times of depression, and luxury and postponable items which may
fall off sharply if unemployment becomes extensive. Here is the crux
of our problem of maximum production. The economy will be largely
stabilized if these industries adjust their capacities skillfully and promptly
to the reasonable possibilities of a sustained maintenance load, as the
distortions of the present situation are overcome.
Here, for example, the automobile industry is now confronted with the
task of working down the backlog of war-deferred demand. This involves a problem of reconciling the rate at which this demand should be
satisfied with the claims of other industries (and the foreign aid program) for resources during a period of relative shortages. But even
more importantly, from the long-range viewpoint of sustained maximum
production, it involves the question of whether the automobile industry
should try to work down the backlog at the most rapid rate that it possibly
can, or whether such a procedure would "saturate" the market within a
few years and lead to a sharp and serious contraction of a key industry.
Insofar as an industry of this type now produces below its maximum
potential in response to a sound analysis that this is required for stable
and healthy growth, assuming that the economy as a whole will continue
to enjoy stable and healthy growth, such a procedure is entirely justifiable
and presents challenging problems of market analysis. But insofar as
any industry restricts its current output or its plant expansion, not because
of a fair appraisal of its role in a future economy operating at maximum
levels, but rather because it assumes that our economy in the future must


again undergo "seven lean years55 even as in the past, the pursuit of such
an economic philosophy by any of our vital industries would help to
engineer the very downswing of the business cycle against which it seeks
to "insure55 itself.
The first prerequisite for maintaining continuous high levels of economic activity is that our business leadership accept this as an attainable
and necessary objective, and act wisely and vigorously within the framework of such an assumption. This involves not only decisions within individual industries, but also an appreciation of relationships among industries. Rates of steel production and highway building, for example,
would obviously need to have a harmonious relationship to the scale of
stabilized production in the automotive and the steel-using industries.
Residential construction in the current scene affords an example of a
different type of problem in the process of sustaining maximum production and the maximum purchasing power that must go with it. While
we are now producing housing at an extremely high rate, measured by
any prewar standards, this production, as in previous periods of a homebuilding "boom,55 is concentrated almost entirely on meeting the needs
or desires of those in the upper income brackets. To the inadequate
extent that current home building is also serving families of lower income,
it is doing so at a relationship between the cost to them and their incomes
which is piling up economic problems for them in the future, and which
does not augur well for sustained high levels of housing production when
the thin luxury market is saturated and when the biting edge is taken
off the current shortages.
Housing affords perhaps the best illustration of the need for much
keener market analysis, and for a much more realistic pricing, so that
maximum production may be sustained. Estimates of the peoples5 housing needs, including the rural areas, range up to a million and a half or
even more units per year on an average over the next 10 years. We
unquestionably have the productive capacity to meet these needs; the
problem is to develop the economic arrangements which will release this
productive capacity in full.
Similarly, we need now to resume the forward march of our system
of universal education, arrested or indeed set back so severely during
the war and depression years. We have the resources also to bring to
large fruition the plans of health care, the correction of physical defects,
and the attainment of modern standards of nutrition which have now
been so amply demonstrated on the "pilot plant'5 level. It is high time
to put these welfare goods into mass production.

The Employment Act of 1946 in its declaration of policy explicitly embodies the proposition that the system of free competitive enterprise in


which we live is to be maintained. This intention is implicit in the
whole structure of the act and was emphasized throughout its legislative
history. The Council reaffirmed and expounded this philosophy in its
first annual report and has emphasized it at many points in this report.
But the Employment Act does not limit its purposes or our responsibilities to the carrying out of this intention. The declaration of policy in
the Employment Act likewise affirms—
the continuing policy and responsibility of the Federal Government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy * * * to coordinate and utilize all its plans^ functions,
and resources, for the purpose of creating and maintaining * * * conditions
under which there will be afforded useful employment opportunities, including selfemployment, for those able, willing, and seeking to work, and to promote maximum
employment, production, and purchasing power.

This statement per se does not involve precommitment to an expanding
role for government at the expense of voluntary initiative. But it does
involve frank recognition that the government accepts a complementary
role in areas where, or in times when, private enterprise fails to provide
adequate productive use of the Nation's resources.
From our economic analysis of sustained maximum production, we
have concluded that we have reached a state of the industrial arts where
the full utilization of our resources makes possible and will call for the
increasing enjoyment of satisfactions that go beyond merely "keeping
body and soul together." The expectation that keeping our resources
vigorously and steadily in use would give us not merely more adequate
food, clothing, and shelter for the lower ranks of workers, but also reveal
much reserve productivity to raise the level of health care and culture
activities for all but the present top income layers, who are already well
supplied, raises the question of how far private enterprise will cultivate
the total field and particularly this latter area.
The United States has never barred private enterprise from running
private schools, from law and medicine to dancing and modeling. We
have never, except in time of war scarcity, deterred private promoters
from developing any legitimate amusement enterprise. Nor have we
barred private physicians, dentists, or oculists from developing the private
practice of their profession, provided they met suitable standards of
competence formulated by their own craft. On the other hand, in none
of these areas has the public enterprise of local community, state agency,
or the Federal Government hesitated to step in to organize facilities
through which any one of these services would be rendered the public
more amply than unorganized individuals or organized firms had been
able or interested to supply them.
The point of our question, therefore, becomes this: Will private physicians and non-governmental hospitals, will schools and training agencies
outside the public system, and will commercial ventures in music, art,


drama, radio, and recreation attract a sufficiently rapidly expanding
personnel and provide sufficiently enlarged facilities so that the satisfaction of wants in these areas, superimposed on those which have been more
exclusively the area of industrial and commercial activity, bring the level
of total activity in the economy up to an acceptable total of maximum
production? If not, is it reasonable to expect that we shall channel
more of our resources and derive more of our satisfaction through Government agencies in these areas? We must then find ways of developing
them no less prudently and operating them on the average as efficiendy
as the much larger area which we may hope will continue to be organized
and operated through the agencies of the private market.
Transportation is another area in which a substantial measure of governmental participation has become traditional. The history of our
improvements in transportation strikingly proves the case that certain
public activities, far from competing with private business, are indispensable to its operations and give mighty impetus to its progress.
Notable at the present time is the strong and legitimate desire to have
both local and central governments move to establish municipal airports
and an over-all system of regulation of air traffic. Actual transportation
service by air is left to private enterprise, and popular sentiment has called
for Government patronage and several forms of financial aid so that the
service might be developed more amply and rapidly than it could be
through sole reliance on the commercial rates which the traveling and
shipping public could or would pay.
Similarly, both manufacturers of highway machinery and roadbuilding
supplies on the one side and bus and truck companies and farmers and
tourists on the other have been ardent proponents of the hard roads program. While both the building and the using of the roads remain in
the realm of private enterprise, the economic leadership in developing
these enlarged areas is the connecting link for which public action provides the most adequate agency.
Perhaps the most important of the new frontiers of private institutions in step with complementary Government action is the field of urban
redevelopment. Many of our cities and towns are outmoded in whole
or in part. There have been telling dramatizations of the social consequences of this. But we are only beginning to probe the depths of the
economic consequences, such as the effects upon property values, local
tax structures, and institutional investments. Yet there is an almost
universal realization that no single investor or group of investors can bear
the cost of writing off this obsolescence at a sufficiently rapid rate. Some
writing off does take place, it is true, through reorganization, recapitalization, and shifts in ownership. But adjustments of this kind are inadequate from the viewpoint of increasing our national wealth or releasing truly productive energies.


The application of some Government resources at all levels to the preparatory stages of urban redevelopment would have an extraordinary
leverage effect upon opportunities for the private employment of men,
money, and materials. Just as the hard surface road accelerated the
automobile industry, and the automobile industry in turn touched so
many points in our growth after the First World War, so an appropriate
exercise of public initiative in urban redevelopment could serve to touch
off varied economic developments of almost incalculable proportions.
In our first report, we indicated profound scepticism as to the theory
that government spending should or could effectively be used to make
up for huge deficiencies in employment and production caused by periodic
break-downs of the economic system. This did not mean rejection of the
sound principle that public works should be accelerated or retarded somewhat to counterbalance the mild fluctuations in the operations of business
which will occur periodically despite our best efforts. But it did mean
that we consider the primary purpose of public works to be the provision
of services that cannot otherwise be supplied. The offsetting of fluctuations in the business system, which is a secondary purpose, can be achieved
only if these fluctuations are held to manageable proportions. We emphasize again that government economic activities should be carefully
designed to add to the resourcefulness, the productivity, and the growth
of our business system as a whole instead of being regarded mainly as a
device for applying poultices to that system when it becomes infected.
Other economic policies of government, such as taxation, regulation,
and international trade policies should be conducted in a manner which,
consistent with the attainment of other national objectives, shapes these
policies to the promotion of health and growth in our business life. No
principle is more firmly embedded in the Employment Act. No one—
"conservative" or "liberal," businessman, worker, or farmer—quarrels
with the urgent need for this enlarged perspective within which the
evaluation of governmental policies should take place. Depending on
circumstances, this may mean more government or less government.
But in any event, it will mean better government, more economical
government in the true sense of that much abused word.
To conclude this discussion of the bases of maximum production, the
whole congeries of mixed private and governmental efforts will not add
up to continuous maximum production unless our business system itself
functions increasingly well. This better functioning toward maximum
production, and the more adequate consumption that goes with it,
depends on the maintenance of certain balances to which we have allotted
most of our discussion in this report. These include the balance between
capital growth and consumer consumption of goods and services; the
balance between work and leisure; the balance between output and
absorption, or between supply and demand, which can be achieved only
through ever-improving management of the wage-price-profit structure


by those who shape it; and the balance which depends upon economically
efficient distribution of national income not only between producers and
consumers, or between employers and workers, but also between industry
and agriculture and among the various sections of the country.
Although those who operate our business system will continue voluntarily to make the decisions that add up to or subtract from the various
essential economic balances, it does not follow that any individual or
group alone can acquire the perspective and sweep of view over the whole
economy which would enable them to synchronize and coordinate their
efforts with those of others. The Congress clearly recognized this in
requiring that the President in his annual Economic Report to the
Congress should state "needed levels" of employment, production, and
purchasing power. In discharging this responsibility, the Chief Executive exercises some leadership, but these needed levels cannot be dissected .and defined and amplified without consultation and advice from
businessmen, workers, farmers, and consumers. This is necesary not
only to decide what the Government should or should not do, but also
to make available working forums in which these groups may meet
together and come to better accords as to what they themselves can and
should do.
In the pursuit of its clearly defined responsibilities under the Employment Act, the Council fully recognizes that the tasks of economic analysis
which it is called upon to perform require more study, more exchange of
views, and further improvements in the tools of economic and of political
science. We anticipate that in succeeding reports we may bring more
exact measurements and refined judgments to bear upon the key issues
that we have here disclosed.

III. Maximum Production Would
Involve Real Price Competition
Our review of the meaning of maximum production and means of
attaining it has touched on the parts played by natural resources,
created capital, labor effort, and managerial direction. It has emphasized the basic role of private enterprise and the complementary role of
government action. In accord with the national purposes declared in
the Employment Act, we have stressed the objective of continuous and
well-balanced use of the Nation's productive resources as against shortlived booms of unbalanced overexpansion and overcapitalization, with
neglect of prudent measures of conservation, these booms being followed
by wasteful periods of unemployment, plant idleness, and demoralizing
liquidation of property.


If this general analysis is projected against the concrete conditions
which have unfolded during 1947, it should give us some sobering reflections. Have we used the time and opportunities available to us
since VJ-day to organize our economic life skillfully and effectively for
sustained maximum production and peacetime prosperity? Or can we
discharge ourselves of responsibility in the matter, assured that the productivity of our resources, spontaneously—even if tardily—expressing
itself in a flow of goods, will automatically solve our economic problems?
In closing this report, we wish to focus attention on a broad issue,
already touched on from particular angles, which we believe may have
to be faced more definitely before the end of 1948. Or if not then,
sooner or later in the not distant future. This issue may be put pointedly
in the form of a question: Will our present economic problems—inflation, high cost of living, threatened recession, and all the rest—be solved
merely by "production, more production, and still more production?"
Or may full production, in catching up with market demand, force disastrous price breaks, result in production cut-backs and thus prove to be
its own undoing?
In the midst of a period of postwar shortages and strong domestic and
foreign demand, it is but natural that both consumers and businessmen
should look to the acceleration of production as the panacea by which
all their ills would be cured. Consumers have felt the inconvenience
of not being able to find the goods they want even though they had
dollars with which to buy them. They have also felt the pressure of
mounting prices as a result of buyer competition for scarce goods. They
clamor for all possible expansion of production as a means of relief from
these conditions. Businessmen, on their part, have been glad to make
the most of the scarcity argument to absolve themselves of responsibility
for high prices and to hold out hope that fuller production will automatically remedy the situation.
Prominent leaders in business and public life have proposed that the
standard work week be lengthened from 40 hours to 44 or even 48.
This done, they say shortages would rapidly be brought to an end, prices
would come down, and all would be well. This proposal, however,
leaves several unanswered questions.
It is evident that we cannot all work longer hours and thereby end
present shortages. There are many industries that are on a continuous
process basis, and hours cannot be added to their working day. In some
industries, too, the problem is shortage of materials; lengthening the
hours of work would not produce more final output but simply aggravate
the amount of unproductive time which already shows such an adverse
effect on productivity rates. And farmers' output is not determined to
any significant extent by standard hours, but basically by weather conditions.


Even in those manufacturing lines where materials are adequate and
weather impediments not the significant factor, it is not clear that merely
stepping up the amount of labor effort would meet the real economic
problems which confront us. There is a dilemma presented by the
assertion, frequently made, that stepping up production will bring prices
down to the proper point and the assertion, often made by the same
people, that prices must be where they are because of the level of costs
or that any wage advance since VJ-day not matched by like increase in
labor productivity has been a maladjustment or inflationary factor.
If the producers who clamor for a longer work week have in mind
primarily relief from payment of wage premiums for overtime work and
a resultant lower average labor cost which would be reflected in lower
selling prices, this could do something to check inflationary forces. But
this would be true only so long as that saving is reflected in a checking
of price increases or their lowering rather than giving employers or
dividend receivers more buying power to bid up other prices.
Producers have been saying that they must move up their prices in
order to keep up with costs and survive. If then the coming of larger
production will make further rise impossible and force sharp reductions,
will this be effected without checking of the level of productive activity?
Or will the protective motive result in production cut-backs and cumulative recession? If producers must move up their prices in order to survive,
how are they to go on producing in volume after prices fall in response
to refilled pipe lines, unstopped bottlenecks, and a generally improved
state of productivity?
Near-maximum production exists today by virtue of a whole group of
rather abnormal circumstances. With special export demand, the more
or less temporary crop shortages, the incompleted catching up on war
and prewar depression interruptions of replacement in durable goods,
and the continuance of postwar military preparedness, we are by no
means in a stable equilibrium of a high production economy.
This means clearly that in the broader and longer-run sense, accelerated production or enlarging the flow of current product will not alone
solve the problem of how to maintain a maximum level of production.
It will simply advance the time when we shall have to face the problem
of what price, income, and property value adjustments have to be made
to strike an internally consistent or stable equilibrium. It seems clear that
in reaching this equilibrium many industrial prices must come down at
least in relation to other prices. Many rates of profit must subside while
reasonable profitability is established in other areas. Gross imbalances in
the wage structure must be rectified by some drawing together of those
now at opposite extremes of the wage scale. Better balances of income
among sections, groups, and individuals must be attained.


What relationships are needed in a given instance cannot be told by
formula or foretold in advance of the evolving situation. But the attitude which should prevail is clear. In any composite of salutary policies,
none is so significant as the achievement and maintenance of real price
competition, which means the lowest price consistent with a fair return
in a stable economy rather than the highest price that the traffic will
bear in an unstable economy. Maintenance of a state of maximum
production, once it has been reached, is absolutely inconsistent with the
use of monopolistic control to exact for any organization or unit a more
favorable distributive position than would be meted out to it by a system
of completely fluid competition,, This is recognized in the policy declaration of the Employment Act for "free competitive enterprise." The
extent to which this policy is effectuated will be the supreme test of our
business system.


O. S . G O V E R N M E N T P R I N T I N G O F F I C E : 1 9 4 7




Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102