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Essentials of Economic Theory - As Applied to Modern Problems of Industry and Public Policy
by John Bates Clark
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An improvement that should reduce the cost of converting leather into shoes would, by the sale of the shoes, call for more leather, more cattle, more appliances, more tanning, and larger buildings for shoe factories, furnished with more shoemaking machinery and greater motive power, even though the particular machines which were improved by the invention had become so much more efficient that no more of them were needed. This depends on the extent to which a certain reduction of cost of a product enlarges the market for it.

Principles Governing the Enlargement of the Effectual Demand for One Commodity.—In determining how much a reduction of the price of a single article will at once enlarge the market for it, there are two things to be considered, namely, the elasticity of the want itself to which the article caters, and the extent to which an article catering to a particular want may be substituted for other articles designed to satisfy the same one. The desire for jewels and other articles of personal adornment is very expansive, and a fall in the price of any one article of this kind causes a relatively large increase in the consumption of it. Since the want to which a costly ornament caters is thus elastic, the cheapening of all articles that cater to this want would enlarge the consumption of all of them. The cheapening of a particular one of these articles, if there were in the market many others of the same general kind, would cause that one to be extensively used in preference to the others. By an enlargement of the total amount of decorative articles used and by a relative favoring of a particular one of them at the cost of others, the sale of that one would be doubly increased. Cheaper diamonds might mean an increased use of them without any large reduction in the use of other gems; but if many other gems happened to be available for the purposes subserved by the diamonds the use of these others would be curtailed and that of diamonds would be disproportionately increased.

The Value of Goods as affected by the Existence of Castes.—One of the reasons why the market for jewels is thus elastic is the fact that they serve as badges of caste, as only something of large cost can do. If, therefore, all gems were to become much cheaper, two things would happen: (1) relatively poor people would buy some of them—partly in lieu of imitations and of cheaper real jewels; and (2) rich people would have to buy more and costlier ones than were formerly needed, in order to retain their positions in the social gradations. This principle affects the consumption of a wide range of articles, the possession of which seems, outwardly at least, to stamp the owners as belonging in a certain stratum of society. It increases the demand for fine clothing, furnishings, and equipage, multiplies social functions, and induces participation in all manner of costly diversions. The elasticity of the market for luxurious goods is, in general, greatly increased by the action of this motive. The cheapening of them causes them to be consumed by the lower classes and renders the use of greater quantities or higher qualities of them a social necessity for the higher classes.[1]

[1] It is also true that an entire variety of gems or other things of this genus might, by mere cheapness, be branded as too common to be used by the very wealthy, except for new and inferior modes of adornment.

We shall soon see that a reduction in the cost of any one article usually causes the use of it to trench on that of all manner of things which are on the margin of consumption and are not similarly cheapened.

Changes of Cost of Different Goods Never Uniform.—The cost of all articles is never reduced at the same time, and it is impossible that all of them should remain in the same order of desirability in the estimation of purchasers. Many things, however, are often cheapened at the same time, though in different degrees. Whatever furnishes a very common raw material at a lower cost than has prevailed, as did the invention of the Bessemer process of steel making, makes everything into which that material enters cheaper. By reducing the cost of railroads and engines, cars and steamships, the Bessemer process indirectly lowered the prices of goods that have to be carried, which means practically everything. A cheap motive power acts in the same way and lowers the costs of producing an unlimited number of goods. Even in the case of such general improvements as this the reductions of price are not uniform. Some goods are affected more than others. Cheap steel lessens the cost of bridges more than it does that of dwelling houses, and in the case of many improvements the effect is confined to a limited class of products, if not to a single one.

How the Disturbing Effect of a Single Improvement is Limited.—In the case of consumers' goods improvements are going on so nearly incessantly and at so many points that the effect is much the same as if every invention cheapened most of them at once. Harmful disturbances are reduced to minute dimensions by the multiplying of the changes, each of which, if it occurred alone, would produce a hurtful effect. Many inventions cancel one another's unfavorable effects in a way that we shall later examine. What we now have to do is to isolate a single productive change and see whether there are forces working to reduce its own independent power to create incidental disturbance. What limits the power of a single new and economical process to eject laborers from their accustomed places of employment? This question cannot here be answered in detail, but a brief statement will cover the general principles involved. Obviously the displacement varies inversely with the extent to which increased cheapness enlarges the consumption of the article affected. If by making one thousand men produce as much of the commodity as two thousand formerly produced, you so reduce costs as to double the consumption of the article, you keep all the men who formerly made it in their accustomed places of employment. The elasticity of the want itself to which the article caters is one of the two elements that determine the increase in the consumption of it; but when this increase is due to an extensive substitution of this article for others in the purchasing lists of the consuming public, the result is greatly to reduce the displacement of labor which the new and economical method of production entails. Such substitutions are very general and are a large factor in rescuing men from the hardship of being forced out of the employments they are used to.

On what an Enlarging Market for Tools and Raw Materials Depends.—The market for raw materials and tools depends on that for consumers' goods in their completed state. If A, the raw material, enters only into A''', it can be sold in increasing quantities only as A''' is thus sold. The chief fact about tools and materials is that they may contribute to a large number of completed goods, and the significance of this fact we shall soon see. The ultimate power to find a market for all products of the lower subgroups depends on finding one for the products of the uppermost ones—the A''', B''', and C''' of our table. The laws which govern the market for finished goods of declining cost have first to be studied.

The Effect of Substituting one Consumers' Good for Others.—Reducing the cost of everything would cause an absolute increase in the consumption of everything; but reducing the cost of a single thing always causes, as we have seen, a relative increase in the consumption of that one product. While the demand for other articles may not grow absolutely less, it becomes relatively less because of the comparative cheapness of the one product.[2]

[2] It is worth noticing (1) that uniformly reducing the cost of everything would cause comparative changes in consumption. Anything which should take away a quarter of the cost of every article in the entire list of social products would increase the consumption of some articles more than it would increase that of others. There is an extremely theoretical case in which there might even be a lessening of the effectual demand for a few things because a uniform reduction of twenty-five per cent would cause other things to be extensively substituted for them. This thinkable possibility is not practically important.

A detailed study would show (2) that a reduction in the cost of any single article in the entire list of social products causes an increase in the consumption of commodities in general. As an isolated man who has had to work hard for mere food and content himself with a few comforts and no luxuries will indulge in luxuries when food production becomes much easier, so society as an organic whole will increase its indulgences all along the line whenever the work of getting any one thing is reduced and some working time is thus liberated.

A substitution of one article for another in the lists of goods used by the public is a universal phenomenon attending an improvement which affects the production of one article only. When the cost of A''' causes it to stand just outside of the purchase limit of a large class of persons, a moderate reduction in the cost of it will make it a more desirable subject of purchase than the articles which have stood just within that limit, and it will be bought instead of one or more of these things. The securing of new customers for a finished product by means of a fall in the price of it is largely brought about by such substitutions. When the new article is added to a consumer's list, the one which has stood as his marginal or least desirable purchase is taken off from it. It is the relative desirability of buying one or the other of these articles that influences a buyer in his decision between them, and that cannot fail to be changed by anything that lowers the cost of one, leaving that of the other unchanged.

If the cost of a unit of each of ten articles be represented by the lines falling from the letters A, B, C, etc., to the base of the figure, a considerable fall in the cost of A would put it below the cost of each of the other articles represented. If in the case of a large class of persons who did not formerly buy any of the A it is as desirable as any of these goods, it will take its place as the most desirable subject of purchase instead of the least desirable.

Those whose available means enabled them to acquire all the articles from J to B inclusive, but did not suffice for A, will now take the A and omit the B. Those whose acquisitions stopped with C will substitute A for that article, and in general every buyer of any of these things who has not heretofore acquired A will now put this in the place of the one which it was least worth while to acquire.



Substitutions caused by a Cheapening of one Utility in an Article which is a Composite of Several.—When different goods cost unlike amounts but are objects of equally strong desires, only one of them is a marginal purchase, and the others afford a personal gain to the consumer which is not offset by a cost. We have seen that this rule applies to the different utilities in a single good. In the case of every article several grades of which are sold, there is one component element or one utility which is worth to the buyer exactly what it costs, while the others afford a consumers' surplus. If the letters in the diagram represent, not whole articles, but utilities in articles, as discussed in Chapter VI, it will accurately express the essential facts. In such cases, which are very numerous, it is only necessary to reduce the price of the one utility which is now just worth its cost in order to induce more consumers to buy the grade containing this utility, instead of a lower grade of the same thing. In doing this, they forego the purchase of something else altogether, or content themselves with a lower grade of that other commodity. If jeweled watch cases should become cheaper, some persons would substitute them for plain cases and would forego buying, say, pictures which were just within their purchase limit, or would content themselves with cheaper pictures. This taking of one thing within the margin of consumption and discarding others is far less frequently done than is the taking of a lower grade of one kind of goods for the sake of securing a higher grade of another.

Why Substitutions reduce the Displacements of Labor.—The question will, indeed, arise why the burden caused by the change may not be merely transferred to men in industries the products of which are displaced by the substitution. Something of this kind would occur if, in consequence of the cheapening of one article, any one other were generally discarded. The important fact is that it is not any one thing, but a wide range of things which are consumed in smaller quantities in consequence of the change; and the effect on the makers of any one of them is small. If a thousand men begin to buy the A''' of the table we have frequently used, some of them will forego B''', some C''', and so on through the list; and the market for no one of these things will be much affected. Moreover, the nearly universal fact is that a man who begins to buy one article that he never before used will save the price of it by contenting himself with a slightly cheaper quality of a number of others. He will give up a dozen utilities in as many entire commodities in order to be able to buy the one entire commodity that he adds to his purchasing list. The reduction of demand is so extensively subdivided that it causes relatively few displacements of labor.

Substitution a Prominent Cause of Varying Sales of Goods.—Substitution is, then, the general rule whenever the cheapening of a commodity wins new purchasers of it. This practice is not indeed universal in the case of those who formerly consumed these goods. Former purchasers of an article which has become cheaper may make no change except to buy more of it or a better quality of it for the same amount which they have been accustomed to spend for the inferior quality. They are not then obliged to economize in any other direction, and the change does not trench on their consumption of other goods. On the other hand, it is sometimes the case that they continue to use the original amount of the article that has become cheaper and use the liberated means of purchase—the "money," as it would ordinarily be termed—in buying other goods. The cheapening of A''' thus even enlarges the demand for B''', C''', etc. There are thus two cases in which a reduction in the cost of one thing would not decrease the use of other things.

Substitution More General in the Case of New Consumers.—The substitution of a cheapened article for others is the dominant fact in the case of new consumers of such an article, while an increased consumption of other things sometimes occurs in the case of old consumers. This does not have as large commercial effects as the other change. If we produce cheaper shoes, we make it easier to acquire good ones, and those who formerly contented themselves with an inferior kind take a better one. That means that they add to their purchase lists the higher utility which is present in the one grade and absent in the other. They buy a new element in goods rather than more of those goods, and while they may not always change their consumption of articles of other kinds they more frequently do so. Those who begin to use something which formerly they went without altogether usually give up the use of some good or some quality in it, or get on with a smaller quantity of it in order to make the new indulgence practicable. The man who, when bicycles became cheap, bought the first one he ever owned probably gave up some other gratification.

How the Sale of Goods which wear out in the Using increases as the Price Falls.—When goods deteriorate as they grow older, users have to buy new ones often if they are not willing to use those which are worn out and inferior. If we want always to wear clothes of good quality, we refrain from wearing a suit too long. We discard many things when they have somewhat deteriorated, and this forces us to buy, in a term of years, a larger number of them than we should otherwise do. We discard carpets and upholstery early when they are so cheap that we can afford to do so. We thus improve our goods qualitatively by adding to them quantitatively.

Substitutions a Protection for Labor against Undue Displacements.—Now, not only are the substitutions we have cited of commercial importance, but they act in the direction of retaining labor in a group where "labor saving" has been effected. They help to prevent this process from being equivalent to labor expelling in so far as either a general group or a subgroup is concerned, since they increase the social demand for the products of the group in question and cause a relative diminution of the demand for other things. Quite evidently there is, for these reasons, the more need for labor within this group and less need of it elsewhere. Cheap shoes may thus never mean fewer shoemakers and cheap watches may not ever mean fewer watchmakers.

Substitutions of One Capital Good for Others.—It is not merely in the realm of consumption that the demand for a particular good may increase greatly in consequence of cheapness. The same thing happens in the realm of production, but here the substitution of one thing for others is an even more prominent cause of the increased use of the particular commodity. Aluminum and copper are rivals as carriers of electrical power, with the advantage at present somewhat in favor of copper. As soon as the cost of making aluminum shall be reduced by a moderate fraction it will become the cheaper material for such uses and, unless there is a fall in the price of copper, will thrust itself into use for trolley wires and other conductors of electricity. The possession of an enormous market by the one or the other material depends on their relative costs, and these may easily so change as to transfer most of the demand from the one material to the other. A further fall in the cost of aluminum would make it available for sheathing the hulls of ships and would bring it into general use for many household implements, while a sufficient fall would make it a leading building material and give it a limitless market for the framing and finishing of substantial structures. In these various uses it would substitute itself, not only for copper, but for steel, stone, wood and other materials, and the change would be extensive enough to give it an enormous market without requiring a correspondingly great reduction in its cost. Lowering the cost of aluminum by a third might, by merely making it the favorite carrier of electricity, multiply the present use of it by ten, and lowering it by two thirds might multiply the present use of it by a hundred. If this should take place, saving labor would be anything rather than expelling it from its position in the aluminum-making group. When less labor came to be needed for making a ton of the metal, more labor would be used in the industry that makes it.

So long as the substitution caused by the cheapening of aluminum affected copper only it might be a serious matter for the producers of copper; but when it came to replacing in some degree steel, stone, brick, wood, and other materials, the effect would be so diffused and subdivided as to create small disturbances in any one of these industries.

Effects of Reduced Cost of Materials which already enter into Many Finished Products.—In the case of aluminum the prospect of a greatly increased market brings with it the probability that it may come to be a component element of products into which it does not at present to a great extent enter. Such things as steel, stone, and wood already constitute important components of more articles than can be counted, and there is no great prospect that they will enter into a much greater variety of products. In the case of these materials there is a prospect that cheapness will show itself in reduced costs of the finished goods that are made of them, and that these finished goods will be used in greater quantities without substituting themselves for other things in so drastic a way as that which we have described in the case of aluminum. A reduction in the cost of steel would indeed bring about a substitution of that material for others at every point where the steel and something else are now on a plane in desirability. The type of building that now is made with plain brick walls and wooden floors, because that cheap mode of building enables it to earn a slightly larger interest on its cost, would often be made with a steel frame and concrete floors. At every such marginal point steel would gain somewhat on its rivals in the extent to which it would be used; but in addition to this enlargement of the market for it by substitution, one might count on an increase in the use of it because of an increase in the use of very many things that are already made of it. Some of these cater to highly elastic wants, and persons who use a quantity of them may be induced to use more without discarding anything else. Such an absolute enlargement of consumption is highly probable in the case of any material that enters into a vast number of products, and this, together with the enlargements that come by substitution, may suffice to create a great demand for the raw material and call for as much labor in the subgroup that makes it as was used before the improvement was made. In the case of the raw materials of industry the resources for gaining an increased market by substitution are:—

(1) The substitution of the material for others in uses different from those in which it is now employed;

(2) The substitution of it for other materials in the marginal parts of its present field, where it is already nearly as available as other things;

(3) The substitution of the finished consumers' goods made of it for other consumers' goods.

In addition to all these there is the direct increase in the use of finished goods wholly or partly made of the material by persons who do not, for this reason, discard any other goods.

This statement places the different influences in the order of their relative efficiency in the majority of cases in which they act.

Effects of cheapening Tools of Industry.—What is true of a raw material which enters into many completed products is true of the tools of industry which are used for many purposes. A turning lathe, a planing machine, or a circular saw helps to make a large number of products, and the assertions we have made concerning steel, stone, or wood apply to it. As it becomes cheaper it gains an enlargement of its market by a combination of the four influences just enumerated. It is brought into new uses, is employed more in its present marginal uses, and is required in greater quantity because its products are substituted for other things and are also required in greater amounts independently of these substitutions.

Cheap Motive Forces.—Motive power is so nearly universal in its applications that developing a cheap source of it is much like improving the method of producing everything and securing a universal increase of products. We shall see why such a general enlargement of the output of all the shops creates no displacements of labor which entail hardships. If the power is used more in the upper subgroups than in the lower ones,—if it is more frequently available for fashioning raw materials than for producing them through agriculture or mining,—the development of it checks in some degree the drift of labor from the lower subgroups toward the upper ones, which has been referred to in an earlier chapter.

Utilizing the power of Niagara, that of Alpine torrents and other unused streams, that of the waves of the sea, and that which has long slumbered in the culm heaps of coal mines, will give increased facility for producing nearly everything; and though the amount of the enlargement of output will vary in different cases and some effect on the movements of labor will be produced, few serious hardships will result, and a majority of the persons who will suffer from these changes at all will get an offsetting benefit from the enlarging productiveness of industry.



CHAPTER XVII

FURTHER INFLUENCES WHICH REDUCE THE HARDSHIPS ENTAILED BY DYNAMIC CHANGES

In the absence of an unusually great increase in the consumption of an article the improvement which reduces the cost of it tends to displace labor. The first thing that will occur to any one who looks for influences which mitigate this evil is the fact that economical changes are going on at nearly all points in the system, and that this cancels out most of the displacing influence. If something sends men from the group A to groups B and C, while something else sends them from the group B to groups A and C, and still another influence impels men from C to A and B, there is likely to be very little actual moving. A question will in such a case arise as to whether the three movements may not expel labor from all the groups and remand them to a state of idleness. History is clear in the answer it gives to this question; such a result has not occurred, and at the end of a century of brilliant mechanical progress the amount of enforced idleness is not greater than it was at the outset. It remains to show that economic law precludes a universal displacement and insures laborers for all time against being at the mercy of an industrial system which has nowhere any need of their services. Productive devices widely introduced mean great and general gains and comparatively little cost. They mean what on their face they ought to mean, more comforts and less toil for everybody. Before studying this influence—the reciprocal action of improvements scattered through the general economic system—we have to determine the action of one or two other influences which also lessen the disturbances which progress causes.

One can see that the quick adoption of an economical device in every shop of a subgroup, at a time when all other industries are in a stationary state, would usually expel some labor from that one. If consumers should, on a large scale, substitute the product of this subgroup for that of others, it might save the situation; but the general fact is that the consumption of the cheapened product must increase in a ratio that is greater than the ratio representing the saving of labor used in making it, in order to prevent displacement of labor. If we get on with two thirds of the labor which the making of the commodity out of raw materials formerly required, we do not save two thirds of the total expense of making the finished article; and yet to retain all the labor that is now in the business we must sell one and a half times the former number of the goods produced.[1]

[1] The mathematical problem stands thus: If all the subgroups of the A series have the same amounts of labor and a machine enables a half of the force now in A'' to do all that is required in transmuting the usual supply of A' into the usual amount of A'', then some of the labor in A'' would in most cases betake itself to entirely different industries. The superfluous labor at A'' would amount to an eighth of all the labor required for the complete creation of A'''. If wages constituted the only cost which the entrepreneur must defray, the price of A''' would be reduced to seven eighths of the former price, and this might, in the case of some goods, enlarge the demand to eight sevenths of its former amount and so keep all the labor in the general group. Since there are outlays to be met besides wages, this reducing of wages by an eighth would not usually reduce total cost by more than about a twelfth, and even if price quickly went down to eleven twelfths of its former amount, it would be too much to expect that the consumption of the A''' should increase by a seventh, except in cases in which this amount of reduction of price caused A''' to take the place of B''', C''', etc., in the purchase lists of many consumers. The enlargement of consumption would have to take place in a ratio greater than that which represents the saving in cost. Costing eleven twelfths as much as before, the article must sell eight sevenths as freely—which is possible only when it thrusts itself extensively into the place of other consumers' goods. Even then some labor would have to move from A'' to other subgroups of the series. One half of the amount of labor formerly at A'' does the whole work formerly done there, and to keep it all at work at that point would require that the output from the whole group be doubled. Saving one twelfth in cost could not well insure selling double the amount of goods. In this view improvements would have a threatening look, though their ultimate effect would still appear as beneficial as ever, were it not for the fact that the disturbances that result from them are made to be relatively small by the influences we are studying.

Counteracting Influences.—The importance of a gradual introduction of an improvement rather than a rapid one lies in the fact that it permits these influences to do their work and often to render the actual moving of laborers even from their subgroup unnecessary. Time is the salvation of the laborer menaced by an impending displacement from his field. When we see what is the grand resultant of all the dynamic influences we are studying, we shall see how this neutralizing and canceling of the labor-expelling force takes place. But for them one isolated change would tend to expel labor from its subgroup and would nearly always send it away from the point within an establishment where the new device is introduced. It usually attracts labor to this establishment and away from the inefficient or marginal ones. A gradual adoption of the improvement allows time not only for a general increase in the size and the wealth of the community, but for other influences which act more quickly and in practice make it nearly always unnecessary to reduce the total amount of labor in an industry which produces an article in permanent demand. Statistics may be confidently appealed to in support of this general statement.

The Dynamic Law of Price and its Effects.—We briefly noted in passing that the price of a product the making of which is subject to repeated improvements naturally tends toward the cost of it in the establishment having the latest method and the greatest facilities for production. The natural price at any time is the cost of that part of the supply which is created at the greatest advantage, and not the cost of the part produced at the greatest disadvantage, as an old formula expressed it. It is the mill that makes the goods most cheaply which is enlarging its product and bringing the price down toward its level of cost; as soon as other establishments get possession of the improvement they help forward the process, and as they get still better appliances they help in carrying the price to still newer and lower standards.

The Cause of the Coincidence of Maximum Cost and Price.—At any one moment, it is true, there are ill-located, ill-equipped, or ill-managed mills that are making nothing and are likely soon to be abandoned. They are the marginal mills we have spoken of, and the goods that they make cost all that purchasers will give for them. This insures a coincidence of the price of the goods with the cost of making them in such a mill, but this is merely an incident in the process of eliminating the inefficient establishments from the field. In the mill which happens at this date to be the one about to be crowded out the cost of the goods equals the selling price of them and will exceed it as soon as the price goes to a lower point. This cost happens transiently to coincide with the price, but does not regulate it. It is the outlay that the best mill incurs that does that, since it sets the standard toward which the price is made to tend.[2]

[2] IMPROVEMENTS AND PRICES UNDER COMPETITION

The figure represents a subgroup in which five producers, a, b, c, d, and e, are operating. Later, a new establishment f, is introduced. The upper dark line represents the price of a unit of the product, and the lower dark line the cost of making a unit in the establishment which is for the time the most efficient.

The dotted lines represent the respective costs of production in the different mills, ranging from a, the most efficient, to e, which can barely hold its own. What the figure represents as happening is as follows:—

b first makes an improvement which lowers his cost of production, as shown by the descending dotted line. This enables him to increase his output, and so has its effect on the price, which descends. Now, producer e was already selling goods at cost, but he is not at once driven out of the business. Instead, even though he cannot earn full interest on the original cost of his fixed establishment, he will continue to run as long as he can make his plant earn anything at all. The result is a virtual reduction of the capitalized value of the plant (the interest on which is an item of cost), and this is what is represented by the descent of the dotted line which represents e's cost of production. The situation is now represented by the series of points,—b', a', c', etc., representing at their second stage the differing levels of cost in the case of different producers.



The next thing that happens is an improvement made by a, causing his cost of production to fall below that of b. The resulting fall in price now finally drives e out of business; he can no longer earn anything at all on his fixed plant. We may assume that producers a, b, and c, who have been making profits, have enlarged their productive capacity enough to supply the market fully without e's contribution. d is now in the same position in which e was at the preceding stage,—earning nothing on his fixed establishment and barely induced to remain in the business.

The next occurrence represented is the opening of a new, large, and very efficient mill by f. The effect is like that of improvements, but more violent. The fall in price drives both d and c out of business. b is now on the margin, but saves himself from loss by a second improvement, which makes him again the most efficient producer. And so the process goes on ad infinitum.

This figure illustrates the fact that, while at any time the price of a good roughly equals the cost of it to the least efficient producers, still this cost does not govern the price. The ruling factor is the cost in the most efficient mill, toward which the price tends; and all that the cost in the least efficient mill determines is how long that mill shall continue running.

In order that the claim here made—that price equals cost in the establishment which is about to be crowded out of the field—may hold good it is necessary to define terms with some care. In a typical case an employer who is destined soon to close out his business has, perhaps, an antiquated mill, which itself pays nothing, but enables its owner to use circulating capital and labor in a way that affords interest on that capital and wages for the labor. No interest on the cost of the antiquated mill is chargeable to the business unless the site and the building can be sold for a new purpose. If they have completely lost all productive power, they are not, as we use terms, capital goods at all; and in that case the only interest which the entrepreneur should reckon as a cost is that which accrues on other capital used in connection with the worthless mill. If the site and the building have some value for another purpose, and if the machinery has some value as junk, then whatever the owner can get by disposing of the plant constitutes a sum the interest on which constitutes a cost of producing goods in this mill. It is a sum which the plant owner foregoes as long as he refrains from selling the plant. He can afford to use it in production as long as the price of the product covers the cost as thus defined, but must stop when it ceases to do so.

The Importance of Delay in the Closing of Marginal Establishments.—Now, this process looks as if, by the closing of mills that are distanced in the race of improvement, labor must be forced out of the subgroup. So it would be if the reducing of the price to its new static level were an instantaneous operation and the inferior mills were, in the same instantaneous fashion, compelled to close their doors. These, however, are gradual operations, and before they can possibly produce their full effects, influences will have been set working which will counteract the expelling tendency. We have cited as such an influence the general growth of society in numbers, wealth, and consuming power, making it possible for a group, when an economical change has taken place, to produce and sell more goods than before and to keep its accustomed force of labor in order to do so. There are certain more specific influences which have a similar effect and render it as unnecessary as it is useless to attempt to resist the course of improvement.

Centralization of Business an Effect of Progress.—From the facts here cited it appears that conservatism of the kind that resists all changes condemns an entrepreneur to destruction. He must keep in a moving procession in order to survive. As the essential thing which is changing is the price-making cost of goods, the entrepreneur must see to it that in his establishment cost declines. While this does not necessarily mean that every such establishment needs forever to grow larger, since there are local conditions in which relatively small shops may be economical enough to survive, yet those which cater to the general market and directly encounter the competition of the great producing establishments must, as a general rule, have the advantages of great size in their favor, or sooner or later be crowded out of the field. Many of the smaller ones fall by the wayside, and the business they have done passes to their already large rivals. Wherein the advantages of the great shop lie and how one that is of less than a maximum size may survive in spite of them, are points for later consideration.

How Displaced Labor is Replaced.—When men are actually forced to leave an industry,—say the subgroup A',—they find themselves, in the search for employment, in the same position as a body of newly arrived immigrants in quest of work. Men of either class must offer themselves at a rate that will induce employers to take them. If much new capital has lately been created, it is naturally possible for the men to get employment without having to overcome serious friction or to reduce their demands in the way of pay. In the absence of such additions to the capital, they might possibly have to offer some inducement to employers, in order to overcome their reluctance to make changes in their shops. We shall see in due time, however, that where improvements are well distributed through the industrial society and have their natural effect, they tend to increase the general demand for labor at the original rate of pay.

Effects of a Series of Improvements confined to One Industry contrasted with those of Improvements diffused through the Groups.—A continuous series of radical improvements, all originating at one point, would tend of themselves to cause a series of expulsions of labor from that point, and the mere increase of population and wealth might not so fully counteract this tendency as to prevent a positive exodus of labor from the occupation affected. A merely relative reduction of labor in this occupation would not cause much hardship, since it would only mean that other industries were attracting the greater number of young laborers entering the field and gradually getting a larger and larger part of the whole working population. If men actually in A' can stay there, no one is injured; but too great a concentration of improvements at this point might drive some of them away. Such concentration is the opposite of the general rule. Improvements do not confine themselves to one point or to a few points, but originate at very many, and this fact neutralizes their labor-expelling tendency and might reduce it practically to nil. If labor could be made more efficient in every group of the whole system, the result would be to increase the quantity of every kind of goods. Making more of one's own product is acquiring power to buy more of the products of others; and enlarging the general output of goods tends thus to increase the demand for all kinds of goods as well as the supply. If you make clothes and I provide food, and we exchange products, but do not satisfy each other's wants to the point of repletion, it is well for both of us that you should become able to make more clothes and I to furnish more food. We can then go on with our original occupations and both live better. In this there is involved no displacement of labor at all; and neither would there need to be any disturbance caused by multiplying in well-adjusted proportions the output of each group and subgroup in the system of industry. Where formerly a unit of A''' was exchanged for one of B''' or C''', there are now two units of A''' given for two of either B''' or C''', and every one has more things to consume than he formerly had.[3]

[3] It will be seen that the maintenance of the present exchange ratios between A''', B''', C''', etc., when costs of all of them are reducing, would require that these costs be reduced in exactly the same degree in each case, and that the quantities sold at the new cost prices should be increased in unequal degrees, so as to bring the different prices to cost levels. The demand for one article is more elastic than is the demand for another. A slight increase in the supply of A''' may cause a large reduction of the selling price, while it may require a great addition to the supply of B''' to produce this effect. There must, therefore, be some changes in the relative quantities of labor in the different subgroups, even though there has been an equal amount of "labor saving" or cost reducing in all of them. This change is so slight in amount as compared with what would be caused by improvements confined to one subgroup, that it is effected with relatively little hardship and mainly by disposing the constant inflow of new labor at the points where it is needed.

Labor attracted toward a Subgroup as a Result of Improvements which are made Elsewhere.—The fact that the demand of consumers for different goods is not uniformly elastic has to be taken into account. There are two distinct kinds of movements in the group system, brought about by improvements in method. Each improvement in and of itself has, as a rule, a labor-expelling effect, but this effect is partly neutralized by general growth in consumption and still more by improvements occurring elsewhere. Labor that is thrown out of the A group would naturally go to group B, C, etc.; but if, as we have just seen, similar influences tend to expel labor from the B group and the C group, the labor may, for the most part, stay where it is, with the result that more of A''', B''', and C''' is offered to consumers. The increased output of one group is itself a means of retaining labor in other groups, even though, thanks to mere methods, that involves making more of every other kind of commodity.

The Supply of One Kind of Goods Equivalent to a Demand for Others.—There should be no difficulty in interpreting, in this connection, the traditional statement that "the supply of one kind of goods constitutes a demand for another." An increment of A''' and one of B''' coming into existence together supply wants common to their two sets of producers and both groups can gain by exchanging such portions of their respective products as they do not retain for their own use. If A''' and B''' were the only consumers' goods used, a part of the excess of each would be distributed among the members of the group producing it, and the remainder would be given in exchange for some of the other kind of goods, also for distribution among the members of the first-named group. This is what actually happens when a multitude of articles for consumption are produced in increasing quantities.

Effect of an Increase of Individual Incomes on the Character of Goods Consumed.—Such an increase of the productive power of a group means, of course, an increase of individual incomes, and it causes men, as we have seen, to consume better things rather than more of them. There is a certain merely quantitative enlargement of every one's consumption of goods of a given kind, every one using more of A''' than he used before; but the greatest change shows itself in the quality of what he uses. Every man buys and consumes better articles of the A''' kind, as well as of other kinds. His food, his clothing, etc., are all prepared in a more elaborate way, and he has more of what we call form utility which results from the fashioning of things, and relatively less of the elementary utility which inheres in the raw material. There is somewhat more of raw material and very much more form utility in the goods he demands for personal consumption. This requires that labor should move upward in the group system, and that more of it than before should betake itself to those subgroups where the fashioning of the raw material is done and where the finishing touches are applied to goods. The effect of the constant improvement of all processes of production, therefore, so far as the effect on labor is concerned, is akin to the effect of an addition to capital, in that it moves labor upward in the subgroup series. It puts more labor into mills and shops which make articles of comfort and luxury.

The Nature of the Movements actually caused by Improvements.—This upward movement cannot go on as smoothly and with as little disturbance as that which is caused by the increase of capital. Whenever a greater gain is made at one point than is made at another, an influence is set working which, of itself, tends to send labor from the one point to the other. The slowness with which the change of method proceeds affords the time that is necessary for the protection of labor in the first-named group, since little movement takes place before the effects of improvements made in the second group begin to be felt. If in 1906 an improvement is made which, in the course of five years, would cause some labor to move from the subgroup A''' to the subgroup B''', and in 1907 a corresponding improvement is made in the latter industry, the equilibrium is restored before enough disturbance has taken place to require any absolute reduction of labor in A'''. The facts are (1) that new laborers as they enter the field are drawn more to the upper subgroups than to the lower ones,—to the A''' and the B''' rather than to the A and the B of the two series,—and that in moving upward they are drawn at first more strongly toward B''' and later more strongly toward A'''. This is the nearly constant fact in industry and is the grand resultant of all the forces we have described—an upward flow that is continuous but does not follow strictly vertical lines. As young men—the sons of workers in A, B, C, and D, who might otherwise have remained in their fathers' occupation—move to the subgroups that stand higher in the several series, they first go in larger number toward B''' than toward A''', and later in larger number toward A'''. There is a wavy movement toward the right and then toward the left in the steady flow of labor from the groups that create the raw material to those that impart to these materials the form utilities which they need to fit them for service. An actual lessening of the number of workers in an entire group in consequence of an improvement in the method of production is practically unknown, and even a positive lessening of the number in a subgroup is exceedingly rare.

Apparent Exceptions to the Rule.—Exceptions to this rule which are rather apparent than real will occur to every one. The discovery of a great supply of mineral oil put an end to the use of whale oil for illuminating purposes, though it allowed the whale fishery to survive on a reduced scale and produce oil for other purposes, in so far as the rawest material, the whales themselves, were not exterminated. The exhaustion of a supply of raw material was here a dominant fact, and the effects it produced may be again expected when mineral oil shall, in turn, become scarce. Men will move out of the subgroup producing the crude oil, as nature forces them to do so, but their movement cannot be referred merely to improvement in the mode of extracting the oil or transporting and refining it. The fact which illustrates the rule we have stated is that while mineral oil drove whale oil out of the field as an illuminant, this did not reduce the number of men in the general group which produces illuminating oil. More men were set working in the oil fields than ceased working on the whaling ships. A new raw material was used in creating a similar finished product, and as the general industry which made this product grew larger rather than smaller, the total demand for labor in oil production was not lessened. This does not prove that old sailors did not suffer from the change. Young sailors could go to the oil fields or elsewhere, but men who were not adaptable could not do so, and the hardship thus entailed is not to be overlooked. We are, however, forming a judgment of movements which pervade a vast industrial system, and we need most to know what is their grand resultant. If that were a general displacement of labor, causing increasing idleness and suffering, the system that involved this result would stand condemned. The general resultant is the opposite of this.

A Drift of Labor toward Certain General Groups.—We have just noticed that movements of labor in the group system, caused by improvements in method, consist mainly in an upward flow of labor, accompanied by irregular lateral movements, the labor drifting to the right or the left as it is more strongly attracted now to one point and now to another on the same horizontal plane. The general mass of it swerves now to the right and now to the left in its general ascending course, though none may be actually expelled. This description of the drift of labor is too general even to describe all the permanent currents. Some entire groups produce only or chiefly luxurious goods, and to those there is the same drift of labor as there is to the upper subgroups of the general series. If there be a group of D's making an article which only the well-to-do can afford to use, it will swell in size and in the volume of its output from the same causes—improved methods and general enrichment—which cause A''', B''', and C''' to outgrow A, B, and C.

Displacements of Mature Laborers naturally tending to Diminish.—When an improvement is made in one of the upper subgroups while the general flow of labor is toward these groups, the effect is not usually to lessen the absolute number of workers in the upper subgroup where the improvement has been made, but merely to prevent it from getting a pro rata share of the labor that is moving upward toward this tier of subgroups from the lower ones. The change in the apportionment of the social laboring force between the upper subgroups and the lower ones is made gradually, without violent transfers of particular men from point to point, and merely by directing to the upper subgroups a disproportionate number of young workers who are selecting their fields of employment. In general, labor moves from point to point in the system without requiring many particular laborers to do so. As actual loss of places by persons of mature age is the chief evil connected with changes in methods of production, it is a most welcome fact that the influence which we are studying tends naturally to reduce the extent of it.

The Discarding of Aged Laborers mainly caused by a Further Influence.—Quite apart from a demand for less labor at a particular point in the system, there may occur a discharging of men merely because of age and a substituting of younger men. In establishments where the pace is a rapid one men have thus to give place to young successors at an earlier age than the one at which men give place in other employments. The effect of some machinery is to improve the chances of old men, while that of other machinery is to reduce them. A lightening of toil and a shortening of the working day preserve men's powers and enable them to retain employment longer.

The Natural Tendency perverted by Monopoly.—When hardships come on a large scale in consequence of a discharging of workers, they are chiefly due to an abnormal influence which now shows itself in ugly and disquieting ways throughout the industrial system, that, namely, of monopoly. Reducing forces for the sake of curtailing production and raising prices is what does the mischief. This influence undoes at many points the beneficent effects of free competition and causes grave hardships to particular workers while affording no compensating gain to the consuming public. It portends evil for society as a whole as well as for the working classes, on which its hand may be heavily laid. In a perfectly natural system, in which competition would do all that pure theory at the outset of this study has assumed that it will do, the evil entailed by local improvements would be relatively small and the diffused benefits enormous. In proportion as the movement approaches steadiness and as gains are made, not by radical changes, now here, now there, and now elsewhere, with long intervals between them, but by smaller economies made nearly everywhere and in very quick succession, the cause of the hardship is reduced. There is less of violent expulsion of labor from its fields and more of a gradual drifting of labor rather than particular laborers from the subgroups that create elementary products to those which fashion them into fine and costly shapes. There is small hardship in the natural selection by new laborers of the employments where they are most needed, and there is often little in a transfer of a person who has tended a machine of one kind to a machine of a different kind. Instances there still are of manual skill brought to naught by the invention of a mechanical automaton that does the work more rapidly and accurately than the hand of man can do it; and the worker who possesses this skill must usually, in such cases, content himself with an employment where his more general aptitudes may stand him in good stead and insure him at least an average rate of pay. The special aptitude which he had for performing one operation counts for nothing; and this happens when men who have worked in one department of a mill have to accept work in other departments of the same mill or in other employments.

A Workman's Specific Loss as compared with his Share of a Social Gain.—The test question in cases like these is whether the man is helped or harmed by the general effect of improvements, including not only the one which has caused him to change his occupation, but all others which have taken place since he began working. To this question there can be but one answer: in the course of a lifetime the balance is in favor of progress even in the case of the average victim of the movement, and it is overwhelmingly so in the case of others. What a man sacrifices when he is transferred from one machine to another is usually more than offset in a term of years by what he gains in consequence of the general increase in the producing power of labor. At the time of the displacement he suffers, but by its constant increase in wealth and productivity society more than atones for the injury. The goods that emerge from the mills are multiplied; the share falling to labor, as that share is determined by the test of final productivity, grows steadily larger; and the men who have never served a long apprenticeship at anything, but have learned their present trades quickly and can learn new ones as quickly, are producing and getting far more than they could possibly get under a regime of skilled manual labor or of inferior machinery, and far more also than their successors will get hereafter if, by any calamity, mechanical inventions shall cease to be introduced and other product multipliers shall be barred from the field. The hope of working humanity lies mainly in the continuance of the changes which give it a forever enlarging command over nature. Some classes might live comfortably without this, but for the worker it affords the main ground of hope for increasing comfort and a coming time of general abundance.



CHAPTER XVIII

CAPITAL AS AFFECTED BY CHANGES OF METHOD

Labor Saving and Capital Concentrating.—There is a common impression that whatever saves labor usually requires an increase of capital in the industry where the economy is secured, and this impression is justified by the experience of the century following the invention of the steam engine and the early textile machinery. Hand spinning and weaving require small amounts of fixed capital, while the mills in which spinning and weaving are done by steam or water power require a great deal. Fortunately in any long period this capital comes as abundantly as it is needed from the profits of the very business that calls for it and does not reduce the capital of other industries. The profit of one year furnishes the new instruments required in the next; but the immediate effect of substituting a costly machine for hand labor is to concentrate capital, or to call it from places to which it would otherwise go.

The Liberation of Capital by Invention.—For a long period it was the general rule that a mechanical invention at first called capital to the point at which it was applied, although it afterward created new capital and sent it away to make more than good the draft it originally made. This rule is no longer universally applicable. When an invention cheapens capital goods, it liberates capital. It is clear that a hundred and twenty-five years ago there was small chance that an invention would liberate very much capital by reducing the cost of making tools, buildings, rails, machinery, etc., since there were so few of them to cheapen. Now that machines are at hand in myriad forms the chance is large that an invention will substitute for many of them others of less costly construction. It will in these cases cause less capital to be required per machine than was formerly needed.

Simplifying the Forms of Machinery and Cheapening the Materials of It.—The history of invention shows that the early machines sometimes took cumbersome and expensive forms, for which simple and cheaper forms were later substituted. Much simplifying of mechanical appliances is all the while going on, and this, of course, liberates some capital. Making instruments of any kind out of cheaper materials has the same effect that anything has which reduces the cost of constructing the instruments. Bessemer steel has made rails, bridges, ships, buildings, steam boilers, and a vast number of mechanical tools and appliances less costly than they were, and so has liberated some of the capital which such things formerly embodied. After one of the machines of the costlier type has earned the fund on which its owner relies for replacing it as it is worn out, it appears that a part of this fund will suffice for procuring a perfectly good substitute for it, and the remainder may be used for procuring other appliances of production.

A''' B''' C''' H''' A'' B'' C'' H'' A' B' C' H' A B C H

Cheapening the Process of Making Instruments.—If we recur to the table which represents the groups of the industrial system, we shall see that improvements of method in the general group H-H''' have the effect of liberating capital in the other groups and subgroups. H''' is the comprehensive symbol that represents active instruments of all kinds. It is engines and boilers, looms and spindles, lathes and planers, rails, cars, bridges, tunnels, canals, ships, buildings, and all the myriad instruments which actively aid man in making the things he wants for consumption. New methods at H-H''' make the supply of all these things cheaper, which means that the labor and capital of the group H-H''' which would have been required for replacing the instruments used in the other groups will more than suffice for that purpose, and a part of their time may be given to making machinery, etc., not formerly used. This amounts to liberating a part of the fixed capital in the three groups producing A''', B''', and C''', although the free capital that is thus gained may in part be used in furnishing additional appliances for use in these same groups.

Local Concentration of Capital which causes a General Liberation of It.—In such a case the new method used at H''' may, at its introduction, require more capital than was formerly used at that point in the system. Building Bessemer converters was a costly operation, though the output of cheap steel afterward saved far more capital than the converters required. The power canals of Niagara cost something, but the products created by means of them are cheapening many tools of industry; and like effects follow most applications of electricity for utilizing waterfalls and carrying to great distances the power which they generate. They follow on a considerable scale as the culm of coal mines is economically burned and made to generate steam and drive dynamos. All cheapening of transportation, besides making consumers' goods cheaper, has the same effect on producers' goods, and by this means liberates capital. It causes a single productive appliance to cost less than it otherwise would cost and renders available for other purposes a part of the outlay that was formerly required for replacing it at the end of its industrial career.

Effect of Speeding Machinery.—Increasing the speed of a machine is a capital-liberating operation, since it enables a certain number of machines to do the work of a larger number. Running spindles and looms rapidly, while it requires fewer laborers for a given amount of product, requires fewer spindles and looms also.

Cases in which Liberated Capital remains partly in the Same Industry in which it has been Used.—A distinction has carefully to be made between causing less capital to be used per unit of physical product, and causing less to be used in a particular occupation without regard to the amount of the product. If we cheapen the operation of cloth making, we shall increase the consumption of cloth, and in this way we may draw new capital into this business, even though we can build and equip a mill of a given capacity more cheaply than before. In this case we have liberated capital in this business and at once reemployed it at the same point. If we use as many looms as before, the more rapid running calls for more spindles to furnish yarn, and the new spindles require larger engines and boilers, or more water wheels, wheel pits, and reservoirs, to furnish power. Enlarging a business in this way usually calls for an enlarged general capital in the industry, though it calls for less capital for a given output; and the striking fact is that this effect may be realized by means of devices which actually save capital at particular points in the industry. If, after power looms were introduced, some inventive genius had made them cost only a quarter as much as on their first introduction they had cost, the profits of the business would have been increased and, in time, far more capital in the shape of spinning machinery, engines, etc., would have been required than had formerly been used in those forms. With general growth of population and wealth the increased consumption of cloth calls, in the end, for more capital in the form of the looms themselves.

General Consumption as affected by a Specific Increase of Productive Power.—Consumption in the generic—the use of consumers' goods of every kind—grows as the power to make the good increases; but a point that is of great importance is that any specific increase of productive power brings about a general increase of consumption. It brings about a greater all-round creating and using of commodity. If we can hereafter make the A''' of our table with the expenditure of half as much labor and capital as we have heretofore used in creating it, the liberated agents of production become available for making whatever is most needed, and they will, in fact, be used for increasing the supply of all three types of consumers' goods represented in the table. They will give us more of A''', B''', and C''' in quantities adjusted by the laws of value. The outcome of this is that an economy in making A''' actually gives us more of A''', B''', and C'''. We become larger consumers of everything because of the cheapening of anything which enters into our list of articles for personal use. This presents a further aspect of the process of moving labor and capital from group to group, in which the possibility of hardship for particular persons inheres. The conclusion to which a fair weighing of the effects of mechanical progress has already led us is that there are very few, even of the workers who suffer displacements of this kind, who do not during their lives gain far more than they lose by general progress; and the effects of cheapening capital goods at one point, and so liberating capital for use at other points, increases this beneficent effect. The special costs of making the new kinds of machinery have been large in the earlier stages of the process, but have afterward grown smaller; and as machinery has come into general use the liberating of capital by the cheapening of the machines has become a more and more important factor. Some of the capital liberated at A goes to assist labor in furnishing the additional amount of B''' and C''' which enlarged consumption requires.

Hardships entailed on Capitalists by Progress.—As the old handicrafts have now been largely supplanted by machinery, and the hardship that continuing progress entails on laborers is greatly reduced, there is involved in progress a new burden which falls altogether on the capitalist employer. The machine itself is often a hopeless specialist. It can do one minute thing and that only, and when a new and better device appears for doing that one thing, the machine has to go, and not to some new employment, but to the junk heap. There is thus taking place a considerable waste of capital in consequence of mechanical and other progress. As there have come into use marine boilers made of steel and capable of standing a very high pressure, the low-pressure boilers of former days have become useless. With the advent of triple expansion cylinders, twin screws, and better and larger hulls, ships of the old type lost their value; and similar things are occurring in every line of production. A new mill is built and equipped with the best machinery known at the date of its building; but before a year has gone by all the machines in one department are so antiquated that it is best to throw them out. Indeed, a quick throwing away of instruments which have barely begun to do their work is often a secret of the success of an enterprising manager; but it entails a destruction of capital. What is easily to be seen is (1) that a single change of that kind makes an immediate draft on the general fund of available social capital; and (2) that this draft, as a rule, is soon repaid with increase. Machinery that is nearly new is thrown away when it appears that another kind soon will earn enough to make good the waste thus entailed, and the paradox is in the fact that the entrepreneur who quickly destroys capital really saves it, while he who, by using the old appliances, tries to hold on to the capital loses it, since he sacrifices profits from which more would have come. Running his antiquated engine, the unenterprising man has to content himself with small returns and, in the meanwhile, sees his actual productive fund dwindling by the deterioration of the old equipment.

The Offset for Capital destroyed by Changes of Method.—What has happened in such a case to the enterprising man is a loss of personal capital. What he has just paid for the supplanted instruments has gone for nothing. His financial status is improved rather than injured because of the prospective profits which the new appliances will earn. What has happened to the man who keeps the old machinery is a partial or total loss of whatever he has lately put into it, not offset by such profits. By keeping his capital goods he is losing his capital without having his rival's assured prospect of regaining it. Whether the gains made by those who promptly discard antiquated appliances offset the wastes suffered by those who hold on to them too long, is a question that requires more space than can here be allotted to it; but the following facts determine the answer:—

(1) Instruments naturally at any one date are of an average age equal to about half their working duration.

(2) Discarding all of one kind at any one date would involve drawing on the fund of social capital for about one half of the amount needed to replace these instruments.

(3) Very few are at once discarded on the invention of the improved types.

(4) Nothing but a fall in the price of the product created by the aid of these old machines can prevent them from earning the remainder of the fund required for replacing them. If they do this, they prevent any positive destruction of capital which many inventions cause.

(5) When only one entrepreneur introduces the new appliance, his production is usually increased, but not to an extent that causes a quick fall in price. This affords to the users of old appliances whose plants are not already at the final point of inefficiency a chance to continue accumulating the fund for replacement. The profits of the user of the better appliance are meanwhile accruing.

(6) When all entrepreneurs introduce the new appliance at once they do so—provided that their act is intelligent—because the saving effected in the cost of production makes the change advantageous in spite of the waste entailed. They expect an all-round net profit during the period before the price of the product falls to its new level, and they expect that this will give them more than is required for interest, cost of future replacement of the superior instruments, and the deficit in the accounts caused by the early discarding of the superseded appliances.

(7) Without treating this prospective profit inhering in the new appliance as capital, we must regard it as affording an assurance that new capital will soon appear. There are great gains to be made by using the new appliances, and some of these will add themselves to the permanent fund of productive wealth.

(8) The cost of the new appliances may be defrayed by their owner's earlier accumulations or by loans. In either case they come out of a social fund that is created mainly by the appliances which in a preceding period have yielded special gains. The machine of to-day is paid for from the available surplus created by the machine of an earlier day, and a series of inventions enlarges the social fund of capital in spite of all wastes by which it is attended.



The effect that a series of improvements has on the amount of social capital, if we measure the fund solely on the basis of the cost of the capital goods which embody it, may be represented thus:—The horizontal line measures time and is graduated in years from one to ten. The distance of the point above this base represents the amount of capital as estimated in units of cost, in the possession of the society at the time a particular improvement is made, and would remain unchanged if society were static. The level of the line AB represents what, under such a condition, would be the capital of a decade. The curved line AB', dipping below AB and then rising above it, expresses the fact that a single important improvement first trenches on the amount of capital in use, and soon makes good the deduction and makes a positive addition. It raises the sum total of capital to the level of the latter part of the line AB'. The curved line A'B'', first falling below A'B' and then rising above it, expresses the fact that a second improvement, made a year or two after the first one, makes a reduction of the amount of capital as determined by the first improvement, and later adds more than enough to make good this reduction. A third improvement, at the end of two or three further years, has the effect expressed by the line A''B'''; that is, it first reduces the fund below the level at which at that time it would otherwise have stood,—but by no means to the level at which it stood when the series of improvements began,—and later carries it above the line expressing the highest level it would, without this improvement, have attained. In so far as these three improvements affect the level of the social capital for the ten-year period, it stands at the level indicated by the line AA'A''B''', and no later improvement, even at the time of its introduction, does more than to make a small reduction of the increment of capital accruing from the products of the earlier improvements. A series of economical changes means a perpetual increase of the social capital as well as a perpetual improvement in the mode of applying labor. The increments of capital due to the earlier changes are far more than is required by the introduction of any later one.

The Impossibility of Reducing Capital by too Rapid Progress.—There is a theoretical question whether this series might be too rapid to permit this result. If the interval were a month instead of several years, and if the amount of capital put into the new appliances were the same that, in the figure, they are represented as requiring, the effect would be to make twelve deductions from the amount of the social capital in the course of a year, which would carry it some distance below its original level, while in this one year there would have been no time for the profits to accrue in order to restore and add to the fund. In the next year and the following ones this would follow, and the effect, in the course of ten years, would be to carry the social capital to a still higher level than the one it reaches in consequence of the slower succession of economical changes. Increasing the rapidity of productive inventions only multiplies the additions made to the social capital.

We may summarize the chief facts concerning technical progress as follows:—

(1) Progress may throw particular men out of their present employment, but cannot destroy the social demand for their labor. Somewhere in society there is a place for them.

(2) If improvements were long confined to one subgroup, they might send labor into other subgroups and even into other general groups. Occurring as they do at nearly all parts of the system, they very seldom require an absolute diminution of the amount of labor in a subgroup, and practically never cause such a reduction in a general group.

(3) The gradual introduction of an improvement is important, since it affords time for an increase in the social demand for the product which is thus cheapened and for introducing at many other points improvements which neutralize, in a large degree, the labor-expelling effect of the first improvement.

(4) Technical gains are the largest source of additions to the total amount of the social capital. The constant influx of new capital facilitates the placing of laborers at the points where they are needed.

(5) The fact that elementary utilities which are produced by agriculture cater to a less elastic demand than do the form utilities which are the product of manufacturing occupations, has caused labor to move slowly from the lowest subgroups of the various series to the upper ones, as the productive power of labor in agriculture has increased.

(6) This movement is so gradual that it can be accomplished almost entirely by devoting to the industries constituting the upper subgroups an enlarged share of new laborers as they enter the field in quest of employment. Young men drift from the farm to the village and the city.

(7) In addition to the upward flow of labor in the series of subgroups there are some lateral movements, or transfers from group to group, to be taken into account. The fact that improvements are widely diffused and that there is a succession of them at each point makes it possible to make these lateral movements of labor in the same way in which the movement within the groups is accomplished; namely, by putting the new men who are entering the field of employment in the places where they are most needed.

(8) These facts do not always prevent particular men from losing the special benefit that skilled handicrafts have insured to them, since a machine, to the running of which they are compelled to betake themselves, may often be as well tended by persons who have never learned such a handicraft.

(9) The loss thus entailed on craftsmen was very large during the original process of supplanting hand labor by machinery, but bids fair to be relatively small hereafter, since fewer men go through long and costly apprenticeships, and since the operator of one machine can usually learn to operate another with little waste of time.

(10) Such injuries as particular men now suffer from the introduction of economical devices are, as a rule, more than atoned for even to these men by the greater productivity of social labor, as it is applied in new ways, and by the greater abundance of social capital. These gains are the result of improvements made in the earlier periods, and they benefit every one who labors.

(11) The new capital created by productive inventions is an essential cause of the continuing gain of the working class.

(12) While most inventions at first draw capital from the social fund to the point where they are applied, many of them soon liberate capital by cheapening particular appliances of production, and nearly all of them, by means of the profits they insure, ultimately add to the social capital.

The Vital Importance of Continued Improvement.—Intelligent study will make it clear to every one that any assertion that machinery is the enemy of labor is not merely erroneous, it is a contradiction of the most striking and important fact connected with general progress. The gains of labor during the past century, which have been partly due to the occupation of areas of new land, have been largely due to the mechanical inventions and technical discoveries which have put the forces of nature so largely at man's disposal. These forces have worked for all society, indeed, but they have worked largely for the men who labor, whether in the factory, in the shop, on the railroad, or on the farm. Their effects are all-pervasive, since they signify an increase in the productive power of that final unit of social labor on which wages generally depend. General riches have been and must continue to be generally beneficent. As an isolated man working, Crusoe-like, for himself alone, gains by every technical discovery he can make and by everything he can add to his stock of productive appliances, so society, the great and isolated organism which is the tenant of our planet, reaps a benefit by every improvement it can make, and the forces of distribution see to it that this benefit is carried through and through the system and made to improve the condition of the most humble members. Since the great areas of new land are no longer available as a future resource, the hope of labor during the coming centuries, under any form of industrial organization, whether it be competitive or socialistic, rests on the prospect of continued technical gains,—an unending succession of calls on the exhaustless serving power of nature.

The Effect of Changes in the Relative Amounts of Labor and Capital.—The law of wages, as stated in an early chapter of this work, makes it evident that an increase of population, while the social fund of capital remains the same, would reduce the product of marginal labor and therefore the rate of wages. In every establishment into which more workmen should come, while its capital remained the same in amount, the power of an individual worker to produce goods would be lessened. Moreover, any influx of laborers into the society as a whole would be attended by a diffusion of them among all the groups and subgroups, so that the power of an individual laborer to create any kind of goods would be reduced. This means that labor has lost some of its power to create commodity, which is the concrete name for general wealth, and its wages fall accordingly.

An influx of capital without any change in the number of laborers would have the opposite effect. It would add to the productive power of marginal labor. As the new capital should diffuse itself through the producing organism it would enlarge the product of workers everywhere. The wages of labor depend in part on a numerical ratio between units of capital and units of labor, as they cooeperate in production; and the change in the ratio which enlarging capital causes improves the condition of the working people. The capital also diffuses itself throughout the system, every subgroup gets a share of it, and labor everywhere responds to this influence and produces more than before. In a change in this ratio—in a gain of per capita wealth in productive forms—lies one influence which has a great power over human destiny and is one main cause of weal or woe for coming generations. Method as it improves is related in two ways to this critical change in the ratio of capital to population. It is a prominent cause of the increase of capital. What men make by juggling with values and putting taxes on other men adds nothing to the aggregate wealth; but what they make by improved methods of production causes a net addition to it. The improvement in method also directly reenforces the influence of enlarging capital, by infusing productivity into labor and increasing its returns.

The Resultant of the Five Dynamic Changes acting Together.—So long as the increase of capital more than offsets the increase of population, the ultimate result of all five of the general changes which characterize a dynamic state is to increase the well-being of laborers. The movement of labor from point to point in the system of industrial groups is a necessary means of securing the largest gain for society as a whole and of diffusing the benefit among all members. It is wage earners who are most numerous and most needy, and the greatest benefit which can be credited to any economic influence is that which takes the shape of a rise in wages. Moreover, an upward trend in the rate of pay is of far greater importance than the level of the rate at any one time. A system that should afford high present wages would stand condemned if it precluded all chance of higher ones hereafter; while a system that should begin with a low rate and afford a guaranty that it should grow higher each year to the end of time would have the most important merit which any system could possess. The outlook it would afford for humanity would far outweigh a measure of hardship imposed on the present generation. A present purgatory with dynamic capabilities must in the end excel any earthly paradise which is held fast in a stationary state.

We may represent the resultant of the actual growth of population and of capital by the following figure:—



Measuring time by decades along the horizontal base line and the rate of wages at the beginning of a century by the line AB, we represent the increase in the pay of labor which would be brought about by an increase of capital not counteracted by any other influence by the dotted line BC, and the reduction which would be caused by an increase of population by the dotted line BE. The line BD describes the resultant effect of these two changes acting together, on the supposition that during the latter part of the century the growth of population is somewhat retarded and that the increase of capital is the predominating influence.

We may further represent the change in the rate of wages which is caused by improvements in method and organization by lines rising above the one which expresses the trend of wages as it is affected only by an increase of capital and of population.



AF measures time as before and AB the rate of pay at the beginning of the century. The dotted line BE represents the rise in wages due to the increase of capital, as it more than counteracts the growth of population. The rise of the line BD above BC represents the additional increase in wages which is brought about by improvements of method, and finally, the rise of BC above BD expresses the further addition to the pay of labor which comes by reason of improved organization. The uppermost line BC describes the resultant of all the dynamic changes on the supposition that they act in a natural way.

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