EQUILIBRIA CAN KILL YOU!

The purchasing power available in the community is equal to income minus savings. If there are any savings, the available purchasing power will be less than the aggregate prices being asked for the products for sale and by the amount of the savings. Therefore all the goods and services produced can't be sold as long as savings are held back. In order for all the goods to be sold, it's necessary for the savings to reappear in the market as purchasing power. The usual way this is done is by investment. When savings are invested, they are expended into the community and appear as purchasing power. Since the producer's good made by the investment is not put on the market, the expenditures made by its creation appear as purchasing power. As a result the disequilibrium between purchasing power and prices created by the act of saving is restored completely by the act of investment, and all the goods can be sold at the prices asked. But whenever investment is less than savings, the available amount of purchasing power is insufficient by the same amount to buy the goods being offered for sale. This margin of insufficiency can be called the deflationary gap. This deflationary gap is the key to the 20th century epochal crisis.

The deflationary gap arising from a failure of investment to reach the level of savings can be closed by lowering the supply of goods to the level of the available purchasing power or by raising the amount of purchasing power to a level that will absorb the existing supply of goods, or by a combination of both.

The first solution will give a stabilized economy on a low level of economic activity; the second will give a stabilized economy on a high level of economic activity. Left to itself, the economic system will adopt the former. This works roughly as follows: the existence of the deflationary gap will result in falling prices, declining economic activity, and rising unemployment. All this will result in a fall in national income, and this in turn will reult in an even more rapid decline in the level of savings. This decline continues until the level of savings reaches the level of investment, at which point the fall is stopped and the economy becomes stabilized at a low level.

Historically this didn't happen because it wasn't allowed to by any industrial country during the Great Depression of 1929-1934 because the disparity in the distribution of the national income was so great that a significant percentage of the population would have been driven to zero incomes and absolute want before the savings of the richer percentage of the population fell to the level of investment. Moreover, as the depression worsened, the level of investment declined even faster than the level of savings. There can be little doubt that under such conditions the masses would have been driven to revolution before "automatic economic factors" kicked in to stabilize the economy. And the stabilization, if reached, would have been on a level so low that a significant percentage of the population would have been in absolute want. Because of this, in every industrialized country, governments took steps to stop the course of the depression before their citizens were driven by desperation to overthrow them.