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The American economy is the organized activity through which the 130 million people in this country obtain their daily living. Farmers raising food and fiber, miners extracting ore and coal, industrial workers fabricating raw materials into finished products, wholesale and retail distributors making goods available to consumers, and a host of workers performing the other countless tasks required by modern living, all of these are combined in a huge and highly complex producing organization which constitutes the national economy. Through this complex organization the Nation's resources of manpower and materials are used to satisfy human wants.

The Complexity of Economic Organization

The complexity of this organization is apparent when a single activity such as the provisioning of New York City is examined. It is estimated that in the metropolitan area of New York there is seldom more than 60 days food supply on hand.' The meeting of this most basic need of the community requires a tremendously complex organization of farms and farmers, dealers and shippers, truckers and railroads, warehousemen and distributors, telegraph operators and traffic officers, financial institutions and inspection bureaus. To feed New York's 8 million people there is required an organization of manpower and material resources so complex as to be hard to visualize, yet running so smoothly that one is seldom conscious of its complexity or of the fact that it constitutes a single organization of activity, however independent the separate elements in that organization may appear to be. Occasionally a flood, storm or financial panic, or a social or technical break-down in a basic service disrupts this organization and its complexity becomes apparent as mayor or governor or private citizen attempts to readjust the organization of resources to meet the new conditions.

Similarly, for the Nation as a whole, the manpower and material resources are organized in a highly complex, highly interrelated manner. New Yorkers make clothing worn in Dakota; the Dakota wheat farmer supplies California with the materials for bread; transient labor in California picks oranges eaten in Texas; a Texan drills for oil which will operate automobiles in Maine; and a Maine farmer raises potatoes which feed men in New York. It is through such interrelated activity in many areas and many industries that the American community obtains its livelihood.

1 See appendix 18, p. 370.

This highly complex organization, built up over a long period of years with constant readjustment to meet new conditions, is altogether too complex for any individual or small group to grasp in all its ramifications and in every detail. Yet it ties together, into an integral whole, individuals and corporations and governments, each of which performs functions that are necessary if the resources of the Nation are to yield a satisfying standard of living to the national household of 130 million people.

Failure to Use Resources Effectively

It is inevitable that such a complex organization of human activity should fail to function perfectly. Resources are wasted or used ineffectively as parts of the organization get out of adjustment with each other, or as the organization fails to adjust to new conditions; as individuals fail to find, or are prevented from finding, the most useful field of activity; as material resources are unused, or as their effective use is impeded by human barriers; and as the most effective technology is not used or its use is prevented.

The waste of natural resources through misuse, or ruthless exploitation, is thoroughly familiar. The cutting of forests in a manner which delays or prevents reforestation, the farming of lands by methods which mine the soil of its fertility and encourage soil erosion, the extraction of petroleum by methods which blow into the air billions of cubic feet of natural gas daily,2 these are specific resource wastes to which attention has already turned and which reflect inadequacies in our organization of resources.

Equally important, but less often thought of as a waste of resources, is the idleness of men and machines that could be productively employed. The power of individuals to produce is a resource like unharnessed water power. It is gone if it is not employed. It cannot be stored. If 10 million men are able and willing to work, but are forced to be idle for a year by lack of jobs, the community has wasted the valuable resources of manpower. And because of idleness, the individuals are likely to suffer a loss of skill and a breakdown of morale. The Nation is poorer both by the goods that could have been produced and by the frustration and loss of morale of the unemployed individual.

Idle machinery may also involve a waste of resources. When machinery is idle and accumulating rust or losing

See Report of National Resources Board, December 1, 1934, p. 406.

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usefulness through becoming obsolete, when idle men are available to operate it and when its product would be useful to the community, its idleness is likely to constitute ineffective use of resources.3 Digging a large building foundation with pick and hand shovel and leaving an available steam shovel idle may not be as wasteful of resources as keeping both men and shovel idle, but it nevertheless involves waste. Waste is also involved when obsolete equipment uses more manpower and materials in doing a particular job than would be

Standby equipment may, of course, be idle without involving waste of resources. Also, it should be noted that if a machine will be as much reduced in usefulness at the end of a year (or any period of time) regardless of whether it is used or left idle, a year's use of the machine is wasted by keeping it idle. Only where the machine will lose usefulness less rapidly by being idle than by being used is the waste from idleness likely to be less than the full use of the machinery. Likewise, when the machine will lose usefulness more rapidly if kept idle than if used, the waste through idleness may be more than the full current use of the machine. It should also be noted that an idle machine may not involve a waste of resources even when idle men are available to operate it and its product would be useful, if a superior machine is also idle or if a sufficiently superior machine could be built.

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The waste of resources from these three sources, ruthless exploitation, idleness of men and machinery, and failure to use the most effective known technology, all combine to give a tremendous total of wasted resources. How great this waste is it is impossible to estimate, but some suggestion of its magnitude can be given by estimating a single item: the depression loss in income through idleness of men and machines during the last 8 years. Chart I shows the estimated real income of the United States from 1920 to 1937, stated in 1929 dollars. The dashed line gives a crude estimate of what the real income would have been in the years after 1929 if there had been no depression following that year and economic activity had expanded to absorb the increased labor force which became available. This line is obtained by drawing a smooth curve between the point on the chart representing the average real income from 1923 to 1929 and the point representing the estimated real income which would have been produced in 1938 if all but 2 millions of the available labor force had been employed. The shaded area indicates the discrepancy between the national income actually produced from 1929 to 1937, and the income which would have been produced if production had continued to increase at a rate sufficient to absorb the increase in the total labor force. While no calculation can give a precise figure for the depression loss in income due to the idleness of men and machines, the figures do suggest that this loss through nonproduction was in the magnitude of 200 billion dollars worth of goods and services. Most of this represents sheer waste, though to some extent it reflects a smaller depletion of natural resources.

The significance of this figure of 200 billion dollars is hard to grasp, but some idea can be obtained by considering what 200 billion dollars would mean in terms of concrete goods. If all the idle men and machines could have been employed in making houses,

Based on an estimate made in Patterns of Resource Use, National Resources Committee, 1938. See appendix 18, p. 371.

The annual rate of growth in potential national income indicated above is approximately 3 percent a year, whereas the rate maintained fairly uniformly from 1880 to 1930, as shown in chapter V, chart I, was approximately 3.5 percent a year. The latter figure is consistent with the rates found in other studies. E. E. Day and W. P. Persons estimated the annual rate of growth in total national production from 1870 to 1930 at 3.7 percent. G. F. Warren and F. A. Pearson estimated the same annual rate of growth for the same period. Arthur F. Burns, furthermore, finds no evidence of a significant retardation in the rate of growth from 1870 to 1930. (See A. F. Burns, Production Trends in the United States Since 1870, N. Y., pp. 263, 280). This makes 3 percent per year since 1930 reasonably conservative.

the extra income would have been enough to provide a new $6,000 house for every family in the country. If instead, the lost income had been used to build railroads, the entire railroad system of the country could have been scrapped and rebuilt at least five times over. Of such is the magnitude of the depression loss in income through failure to use available resources. It meant a lower standard of living for practically every group in the community.

Even in the nondepression years there was extensive idleness of men and machines which could have been used had there been adequate organization. The Brookings Institution has estimated that in the peak year 1929 both production and national income could have been increased 19 percent by merely putting to work the men and machines that were idle in that year even without the introduction of improved techniques. of production. While it is not possible to establish such a figure with perfect accuracy, its magnitude suggests a very real waste of resources.

waste.

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Wastes through the failure to use the best techniques of production and through faulty exploitation of natural resources likewise contribute their quota to the total Few have attempted to make estimates in this highly uncertain field, but there can be little question of the magnitude of resource waste through using less than the best techniques and through faulty use of natural resources.

The Impact of Waste

The full meaning of this failure to use resources effectively can only be realized by considering its impact upon individuals. Practically every individual in the community suffers as a result of these wastes. When the national income is 60 billion instead of 90 billion dollars, the worker suffers a lower income through unemployment or partial employment or through wage rates lower than resources make possible; the farmer receives a lower income because of a reduced home market; the return on capital is reduced as a result of the partial use of equipment and the resulting increase in unit costs. For each group in the community this waste of resources means a lower standard of living than would clearly be possible.

Even more basically significant is the individual frustration resulting from the inability to find an effective use for one's skills. Without the satisfaction of useful activity, without the sense of security in a job well done, most men lose some of their self-reliance and some of their ability to be productive.

Moreover, as people become increasingly aware of the discrepancy between rich resources and poor results in living and as the ineffectiveness in the organi

America's Capacity to Produce, Brookings Institution, p. 422.

zation of resources becomes more clear, a sense of social frustration must develop and be reflected in justified social unrest and unavoidable friction. Individual frustration builds into social frustration. And social frustration is quite as likely to work itself out in socially destructive as in socially constructive ways.

The Opportunity

At the same time this waste of resources presents a tremendous opportunity. Such resources hold the promise of a much higher standard of living than is now being obtained and present a challenge to this country, as a national household, to work out their effective use. It is a surprising comment on a Nation that prides itself on its skill in organization, in administration, and in management that such tremendous waste of resources can occur. The abundance of natural resources and the continental pioneering that has been necessary for their development may in part account. for the past waste. With the continent spanned, the frontier shifts from the bringing of new resources into control to the more effective use of the resources already controlled. Here is the great challenge of today.

How long this opportunity will be open to the American democracy involves a serious question. The opportunity for a higher standard of living is so great, the social frustration from the failure to obtain it is so real, that other means will undoubtedly be sought if a democratic solution is not worked out. The time for finding such a solution is not unlimited.

Stating the Problem

This problem, the basic problem facing economic statesmanship today, can be stated as follows: How can we get effective use of our resources, yet, at the same time preserve the underlying values in our tradition of liberty and democracy? How can we employ our unemployed, how can we use our plant and equipment to the full, how can we take advantage of the best modern technology, yet in all this make the individual the source of value and individual fulfillment in society the basic objective? How can we obtain effective organization of resources yet at the same time retain the maximum freedom of individual action? This is a problem so large that no solution is likely to be arrived at except over a period of years and through the efforts of many people.

Nature of this Report

This report attempts to delineate the essential structural characteristics of the American economy. Its aim is to clarify the problem of achieving effective use of resources, not to offer any solution. It seeks to provide a background for attempts at solution and to call

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