"Enough to buy back the product"

Functional prices are those that encourages the largest volume of production and the largest volume of sales. Functional wages are those that tend to bring about the highest volume of employment and the largest real payrolls.

Everyone's income is his purchasing power for buying what others have to sell. Every increase in hourly wages is an increase in costs of production. Besides, if wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates.


The national product is neither created nor bought by manufacturing labor alone. It is bought by everyone who contributes toward making the product.

The best wage rates for labor are the wage rates that permit full production, full employment and largest sustained payrolls. The best profits are the one that can encourage most people to become employers or to provide more employment than before.

The function of profits
Corporate profits average less than 6 percent of the national income.Some eminent economists believe that after a long period of time no net profit at all may be left over, and that there may even be a net loss. This is not at all because entrepreneurs are intentional philanthropists, but because their optimism and self-confidence too often lead them into ventures that do not succeed. In any period in which there has been net capital accumulation, however, the presumption is strong that there must also have been overall net profits from previous investment. 


(1) profits guide and channel the factors of production so as to allocate / apportion the relative output of commodities in accordance with demand.
(2) put constant and unremitting pressure on the head of every competitive business to introduce further economics and efficiencies.
What to produce  and   how to produce


The assault on saving
Saving is only another form of spending.
Consumer spend less currently (1)partly because they fear they may lose their jobs and they wish to make sure that their power to consume will be extended over a longer period if they do lose their jobs. (2)Expectation of future price.

Unsettlement will be caused in the capital goods industries by a sudden and substantial decrease in savings. If money that is previously used to invest in the capital goods is now shifted into consumer goods, it will increase the price of goods(decrease of purchasing power) and unemployment in the long run (less capital goods)

Similarly, if a huge amount of money used to invest in the consumer goods is now used in the capital goods, the price of goods will decrease and there will be fewer suppliers. (No incentive to produce)

The fetish of full employment

The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor.  Translated into national terms, this means that our real objective is to maximize productions.

Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself.

The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.

Disbandiing troops and bureaucrats

It's true that, when millions of men are suddenly released, it may require time for private industry to reabsorb them. But the fears of unemployment arise because people look at only one side of the process.

The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians.

If excessive bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken form them for the support of the bureaucrats. The officeholders must now seek private jobs or set up private business and the added purchasing power of the taxpayers will encourage this.

Spread-the-work schemes

A fallacy: a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates jobs. There is just a fixed amount of work to be done in the world. If we cannot add to this work by thinking up more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible.

Analysis of arbitrary subdivision of labor
The householder who is forced to employ two men to do the work of one has, it is true, given employment to one extra man. But he has just that much less money left over to spend on something that would employ somebody else. By doing that, the labor market is not better off but the householder is worse off because he has to spend extra money on one stuff but has to sacrifice something else he treasures.

Analysis of the proposal of shortening the working week by law
(1)A reduction in the standard working week from 40 to 30 without any change within the hourly rate of pay.

There will be no increase in production because there is no net increase in man-hours. The workers previously employed is subsidizing the workers previously unemployed. 

(2)A reduction in the working week from 40 to 30 hours, hut with a sufficient increase in hourly wage rates to maintain the same weekly pay for the individual workers already employed.
The consequence is to raise the cost of production. The least efficient firms will be thrown out of the market, least efficient workers will lose the job; the rise of cost and decrease of supply makes the price rise

The curse of machinary

A fallacy: Machine creates unemployment
Generalization: Technology creates unemployment

Santayana's aphorism: Those who cannot remember the past are condemned to repeat it. If it were indeed true that the introduction of labor saving machinery is a cause of constantly mounting unemployment and misery, we should dismiss all the technological improvement since primitive time periods. People's effort to reduce the ratio of labor and production should be condemned rather than eulogized.

The machine itself needs construction and repair.
The manufacturer has excessive profit to use.
Competition will make the cost of a product lower.
If the good is elastic, it will attract more people to buy.
People spend less money on certain product----the increase of purchasing power.
Technology shifts the composition of jobs in the short run; it may cause panic in the short time period,but in the mean time it releases people to pursue more opportunities of job and creates new kinds of jobs. So in the long run it will make everybody better off.

Credit diverts production

The congress want to give more credit to farmers, who cannot have enough "intermediate" credit; or the interest is too high; or the complaint is that private loans are made only to rich and well-established farmers.
But this kind of action stems form two acts of shortsightedness. (1)It only looks at the matter from the standpoint of the farmers that borrow. (2)It only thinks of the first of the transaction.
All credit is debt.
Analysis of the government loan to provide capital to farmers, which enables the farmers to buy a farm, produce food, pay off his loan by what he produce, and thus make contribution to the society.

There is a decisive difference between the loans supplied by the private lenders and the loans supplied by the government.


When people risk their own funds to invest something, they have to find the best one who can contribute and pay back their money. But government lenders will take risk with other people's money that private lenders will not take with their own money. What's lent is not money, but capital. When a capital is lent to A, for example, it cannot be lent to B. (Scarcity is everywhere.)


Credit, is something that a person already has. The bank gives you loan because it's confident that you can pay back the money. In general the people selected by the government is less likely to pay back than those selected by the private lenders. When government give a farm to A, a candidate who is more capable and has more credit B will be deprived of the chance to produce more. What's seen is that A is producing, what's not seen is what B could have produce.(more efficient)


Government loan may lead to favoritism: to the making of friends or someone who makes a bribe. It will also lead to the decrease of production and the increase of waste. The private money will be invested only where repayment with interest or profit is definitely expected. Besides, private lenders have more information and knowledge in who to lend because they have the comparative advantage of doing that after the cruel market test while government lacks that kind of knowledge.

When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business. Under certain emergency circumstances there may be a plausible argument for this, the merit of which we need not examine here. But in the long run it does not sound like a pay proposition from the standpoint of the country as a whole.

Taxes discourage production

In our modern world there is never the same percentage of taxation of income levied on every person. The taxes inevitably affect the incentive of people who are forced to pay the tax.

For example, if a company has to pay a large amount of money to government for tax while has to bear potential losses in investments, people may be deterred to start a new enterprise or the corporations may only invest in the area that is least risky. There may be fewer employers. Producers are not incentivized to make more productions or try to explore, which is risky. In the long run, customers cannot get better or cheaper goods, and the purchasing power will decrease.

Similarly, if a person's income is largely deprived of to pay the tax, employees may be discouraged. Besides, people are not incentivized to make relatively risky investments. The capital for risk-taking investments shrinks because it's taxed before it creates new capital. Capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. So don't tax too much!!!

Public works mean taxes

Everything we get, outside of the free gift of nature, must in some way be paid for.

Taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes, in unmade washing machines and fridges, and in lack of innumerable other commodities and services.

The blessings of destruction

Need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. The inability to produce automobiles, radios, and refrigerators during the war did bring about a cumulative postwar demand for those particular products. But wherever business was increased in one direction, it was correspondingly reduced another.

The war changed the postwar direction of effort; it changed the balance of industries; it changed the structure of industry.

NO man burns down his own house on the theory that the need to rebuild it will stimulate his energies.

Many of the most frequent fallacies in economics reasoning come form the propensity to think in terms of an abstraction and to forget and ignore the individuals who make it up and give it meaning.

Supply creates demand because at bottom it is demand.

There is an optimum rate of replacement of equipment and machine, a best time for replacement. It is never an advantage to have one's plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence.

The destruction of anything of real value is always a net loss.