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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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It will be seen that BC at first rises above BD rapidly and later runs nearly parallel with it. This expresses the fact that while gains insured by organization may continue for a long period, the amount of them does not greatly increase after a fairly efficient type of organization has been secured. On the other hand, the fact that BD rises above BE by a wider and wider interval expresses the fact that gains which come from technical improvements may increase for an indefinitely long time.

The Rate of Interest contrasted with the Absolute Amount of it; this Amount Increasing.—The changes which make wages rise cause interest to fall and there would seem to be a partial offset for the general gain; but the chief cause of a declining rate of interest is an increase of the total amount of capital. The size of the income which comes to the capitalists as a class from their entire invested wealth grows larger wherever the amount of the fund increases more rapidly than the rate of interest falls. A million dollars yielding four per cent gives a larger income than a half million yielding five or six. It is a condition such as this which we have described in outline, and it enables the holders of investments to receive a constantly increasing total return, although the percentage yielded by a given amount invested grows continually smaller.

The Conditions of Increasing Future Well-being.—The realization of this resultant of all dynamic forces requires that the rate of growth of population should be subject to a natural check, that the increase of capital should not be unduly retarded, that technical improvements should go on, and that the organization which is effected should be of the kind which makes for efficiency but not for monopoly. Competition must be kept alive. In altered ways, indeed, the essential power of it must forever dominate the industrial system, as it will do if the state shall do its duty and not otherwise. A dynamic society requires a dynamic government whose enlarging functions are shaped by economic conditions.



CHAPTER XIX

THE LAW OF POPULATION

Since the optimistic conclusion reached in the preceding chapter is contingent on an increase of wealth which is not neutralized by an increase of population, it remains to be seen whether the population tends to grow at a rate that gives reason to fear such a neutralizing. Does progress in method and in wealth tend to stimulate that enlarging of the number of working people which, in so far as they are concerned, would bring progress to an end? Is the dynamic movement self-retarding and will it necessarily halt? The answer to this question depends, in part, on the law of population.

The Malthusian Law.—We need first to know whether the growth of population is subject to a law, and if so, whether this law insures the maintenance of the present rate of increase or a retarding of it. The law of population formulated by Malthus at the beginning of the last century is the single extensive and important contribution to economic dynamics made by the early economists. It was based more upon statistics and less on a priori reasoning than were most of the classical doctrines. Even now the statement as made by Malthus requires in form no extensive supplementing, and yet the change which is required is sufficient to reverse completely the original conclusion of the teaching. Malthusianism constituted the especially "dismal" element in the early political economy, and yet, as stated by its author, it revealed the possibility of a comfortable future for the working class. One might look with cheerfulness on every threatening influence it described if he could be sure that the so-called "standard of living" on which everything depends would rise. The difficulty lay in the fact that the teaching afforded no evidence that it would thus rise. The common impression of readers was that it was destined to remain stationary and that too at a low level. The workmen of Malthus's time were not accustomed to getting much more than the barest subsistence, and not many economists expected that they would get much more, even though the world generally should make gains.

The Popular Inference from the Malthusian Law.—If we state the conclusion which most people drew from the Malthusian law in its simple and dismal form it is this: Whenever wages rise, population quickly increases, and this increase carries the rate of pay down to its former level. The earnings of labor depend upon the number of laborers; a lessening of the number of workers raises their earnings and an increase depresses them; and therefore, if every rise in pay brings about a quick increase of population, labor can never hold its gains; every rise is the cause of a subsequent fall.

Malthus's Qualification of his Statement.—As we have said, Malthus so qualified his statement that he did not positively assert that this would describe the experience of the future; the fall in pay that should follow the increase of numbers might not always be as great as the original rise, and when a later rise should occur the fall following it might be less than this second rise. In some way workers might insist upon a higher standard of living after each one of their periodical gains.

Why this Qualification is not Sufficient.—The mere fact that the standard of living may conceivably rise does not do much to render the outlook cheerful, unless we can find some good ground for supposing that it will rise and that economic causes will make it do so. We should not depend too much on the slow changes that education may effect, or base our law on anything that presupposes an improvement in human nature. We need to see that in a purely economic way progress makes further progress easier and surer and that the gains of the working class are not self-annihilating but self-perpetuating. We may venture the assertion that such is the fact: that when workers make a gain in their rate of pay they are, as a rule, likely to make a further gain rather than loss. While there must be minor fluctuations of wages, the natural and probable effect of economic law is to make the general rate tend steadily upward, and nothing can stop the rise but perversion of the system. Monopoly may do it, or bad government, or extensive wars, or anarchy growing out of a struggle of classes; but every one of these things, not excepting monopoly, would naturally be temporary, and even in spite of them, the upward trend in the earning power of labor should assert itself. Instead of being hopelessly sunk by a weight that it cannot throw off, the labor of the future bids fair to be buoyed up by an influence that is irrepressible.

Refutations of Malthusianism.—The Malthusian law of population has been so frequently "refuted" as to prove its vitality. It is in the main as firmly impressed in the belief of scientific men as it ever was, and some of the arguments which have been relied upon to overthrow it require only to be stated in order to be discarded. One of these is the claim that the statement of the law is untrue because, during the century in which the American continent, Australia, parts of Africa, and great areas elsewhere were in process of occupation, mankind has not actually pressed on the limits of subsistence. No intelligent view regards that fact as constituting anything but an illustration of the Malthusian law. A vast addition to the available land of the world would, of course, defer the time of land crowding and the disastrous results which were expected from it, but with the steady growth of population the stay of the evil influence would be only temporary.

An Objection based on a Higher Standard of Living.—The second objection is also an illustration rather than a refutation of the Malthusian doctrine; it asserts that the standard of living is now higher than it was, and the population does not increase fast enough to force workers to lower it. Malthus's entire conclusion hung upon an if. The rate of pay conformed to a standard, and if that standard were low, wages would be so; while if it were higher, wages would be higher also.

The Real Issue concerning the Doctrine of Population.—There is a real incompleteness in all such statements. Does the standard of living itself tend to rise with the rise of wages and to remain above its former level? When men make gains can they hold them, or, at any rate, some part of them, or must they fall back to the level at which they started? And this amounts to asking whether, after a rise in pay, there is time enough before a fall might otherwise be expected to allow the force of habit to operate, to accustom the men to a better mode of living and forestall the conduct that would bring them down to their old position. The standard of living, of course, will affect wages only by controlling the number of laborers, and the discouragement due to Malthusianism lies in the fact that it seems to say that the number of workers is foreordained to increase so quickly, after a rise in wages, as to bring them to their old level. Whether it does or does not do this is a question of fact, and the answer is a very clear one. The higher standards actually have come from the higher pay, and they have had time to establish themselves. Subsistence wages have given place to wages that provided comforts, and these again to rates that provided greater comforts and modest luxuries; and the progress has continued so long that, if habit has any power whatever, there is afforded even by the Malthusian law itself a guarantee that earnings will not fall to their former level nor nearly to it.

A Radical Change in Theory.—Progress is self-perpetuating. Instead of insuring a retrogression, it causes further progress. The man who has advanced from the position in which he earned a bare subsistence to one in which he earns comforts is, for that very reason, likely to advance farther and to obtain the modest luxuries which appear on a well-paid workman's budget. "To him that hath shall be given," and that by the direct action of economic law. This is a radical departure from the Malthusian conclusion.

Three Possible Conditions for the Wage-earning Class.—Workers are in one of three possible conditions:—

(1) They may have a fixed standard and a very low one. Whenever they get more than this standard requires, they may marry early, rear large families, and see their children sink to their own original condition.

(2) They may have a fixed standard, but a higher one. They may be unwilling to marry early on the least they can possibly live on, but may do so as soon as their pay affords a modicum of comfort.

(3) They may have a progressive standard. There may be something dynamic in their psychology, and it may become a mental necessity for them to live better and better with advancing years, and to place their children in a higher status than they themselves ever obtained.

A Historical Fact.—The manner in which Malthus was actually interpreted was as much due to the condition of workers in his day as to anything which he himself said. It was small comfort to know that, under the law of population, wages might conceivably become higher and remain so because of a higher standard of living, provided the higher standard was never attained. Facts for a long time were discouraging. In due time they changed for the better. The opening of vast areas of new land made its influence felt. It raised the pay of labor faster than the growth of population was able to bring it down. This had the effect of establishing, not only a higher standard, but a rising standard, and as one generation succeeded another it became habituated to a better mode of living than had been possible before. It was the sheer force of the new land supplemented by new capital and new methods of industry that accomplished this. It pushed wages upward, in spite of everything that would in itself have pulled them down.

A Retarded Growth of Population.—If Malthusianism, as most people understood it, were true, population should increase most rapidly during this period of great prosperity, and should do its best to neutralize the effect of new lands, new capital, and new methods. In some places the increase has been abnormally rapid, and in a local way this has had its effect; but if we include in our view the whole of what we have defined as civilized industrial society, the rate of growth has not become more rapid, but has rather become slower during this period. In one prosperous country, namely, France, population has become practically stationary. Even in America, a country formerly of most rapid growth, the increase, apart from immigration, has been much slower than it was during the first half of the nineteenth century. The growth of population, then, may proceed more slowly or come to a halt, even while wealth and earning powers are increasing. If this is so, a further accumulation of capital and further improvements in method will not have to struggle against the effects of more rapidly growing numbers, and their effects will become more marked as the decades pass. There will be a weaker and weaker influence against these forces which fructify labor and they will go on indefinitely, endowing working humanity with more and more productive power and with greater accumulations of positive wealth. Home owning, savings bank deposits, invested capital, and comfortable living may be more and more common among men who depend for their income mainly upon the labor of their hands. Is this more than a possibility? Is there an economic law that in any way guarantees it? Can we even say that general wealth will, without much doubt, redound to the permanent well-being of the working class, and that the more there is of this prosperity, the less there is of danger that they will throw it away by any conduct of their own? The answer to these questions is to be found in a third historical fact.

The Birth Rate Small among the Upper Classes in Society.—In most countries it is the well-to-do classes that have small families and the poor that have large ones. It is from the interpretation of this fact that we can derive a most important modification of the Malthusian law. It is the voluntary conduct of different classes which determines whether the birth rate shall be large or small; and the fact is that in the case of the rich it is small, in the case of the poor it is comparatively large, while in the case of a certain middle class, composed of small employers, salaried men, professional men, and a multitude of highly paid workers, it is neither very large nor very small, but moderate. In a general way the birth rate varies inversely as the earning power of the classes in the case, though the amounts of the variations do not correspond to each other with any arithmetical exactness. If one class earns half as much per capita as another, it does not follow that the families belonging to this class will have twice as many children. They do, on the average, have more children. There is, then, at least an encouraging probability that promoting many men from the third class to the middle class would cause them to conform to the habit of the class they joined. This class is at present largely composed of persons who have risen from the lowest of the classes, and any future change by which the third class becomes smaller and the second larger would doubtless retard the average birth rate of the whole society.

Motives for the Conduct of the Different Classes.—History and present fact are again enlightening in that they reveal the chief motive that determines the rapidity of the increase of the population. When children become self-supporting from an early age, the burden resting on the father when he has a comparatively small number of them is as large as it ever will be. If they can earn all they cost when they reach the age of ten, the maintenance of the children will cost as much when the oldest child has reached that age as it will cost at any later time. Even though one were added to the family every year or two, one would graduate from the position of dependence every year or two, and the number constantly on the father's hands for support would probably not exceed five or six, however large the total number might become. The large number of children in families of early New England and the large number of them in French Canadian families at a recent date were due to the fact that land was abundant, expenses were small, and a boy of ten years working on the land could put into the family store as much as his maintenance took out of it. The food problem was not grave in those primitive places and times, and neither were the problems of clothing, housing, and educating. It is in this last item that the key to a change of the condition lay, for the time came when more educating was required, when the burden of maintaining children continued longer, and a condition of self-support was reached at no such early date as it had been in rural colonies.

The Effect of Endowing Children with Education and with Property.—When children need to be thoroughly educated, the burden of maintaining a family of course increases. An unduly large family means the lowering of the present standard of living for all and a lowering of the future standard for the children. With most workmen it is not possible either to endow many children with property or to educate them in an elaborate way. The fear, therefore, of losing present comforts for the family as a whole and the fear of losing caste by seeing the family drop, at a later date, into a lower social class, are arguments against large families.

Why Economic Progress perpetuates Itself.—The economic motive which causes progress to perpetuate itself and to bring about more and more progress is the determined resistence to a fall from a social status. The family must not lose caste. It must not sacrifice any of the absolute comforts to which it is accustomed, particularly when so doing entails a degradation. Such is human nature that the unwillingness to give up something to which one is accustomed is a far stronger spur to action than the ambition to get something to which one is not accustomed; and a social rank once attained is not surrendered without a struggle. A tenacious maintenance of status is the motive which figures most prominently in controlling the growth of population and the increase of capital. The rich maintain the status of the family by means of invested wealth, the poor do it by education, and members of the middle class do it by a combination of the two.

Status maintained by Education.—In case of wage earners the need of educating children and the advantages that flow from it overbalance the need of bequeathing to them property; and yet the need of bequeathing property of some kind is a powerful motive also. It is important to enable them to procure the tools of some handicraft, or to secure themselves against dangers from sickness or accident. Moreover, it is not altogether technical education which counts in this way. Culture in itself is a means, not only of direct enjoyment, but of maintaining a social rank. The well-informed person accomplishes directly what a well-to-do person accomplishes indirectly, in that he gets direct pleasures from life which other people cannot get, and he enjoys consideration of others and has influence with them as an uninformed person cannot. The need, therefore, of educating children for the sake of making them good producers and the need of doing it for the purpose of making them good consumers and of enabling them to make the most of what they produce works against too rapid an increase of numbers.

The Effect of Factory Legislation.—These motives are powerfully strengthened when they are reenforced by public opinion and positive law. The ambition of workers to secure laws which will forbid the employment of children under the age of sixteen is, in this view, a reasonable wish and one that if carried out would tend to promote the welfare of future generations. It is doubtless true that this is not the sole motive, and some weight must be accorded to the desire to reduce the amount of available labor, and to protect adults who tend machines from the competition of children who could do it as well or better. There is, however, an undefined feeling in the laborers' minds that when children all work from an early age the wages of the whole family somehow become low, and that it takes all of them to do for the family what the parents might do under a different condition. The Malthusian law shows how, in the long run, this is brought about. The increased strength of the demand for factory laws and compulsory education is a positive proof of the growth of the motives which put a check on population.

Absolute Status and Relative Status both Involved.—The absolute comfort a family may enjoy and its social position are both at stake, and we need not trouble ourselves by asking whether the comparative motive—the need of keeping pace with others in the march of improvement—will cease to act if a whole community advances together. We saw at the outset that this motive acts powerfully on a superior class, which has before its eyes a lower class into whose rank some of its members may possibly drop. The lowest class must always be present, however a community may advance, and a well-to-do worker will always dread falling into it. If it should grow smaller and smaller in number, and if the second of the three classes we are speaking of should grow larger, the dread of falling from the one to the other would not disappear. The relative status—that which appeals to caste feeling and the desire for the consideration of others—would continue to be influential, as well as the desire for positive comforts; and the motive that depends on comparisons might even be at its strongest when the lowest class should so dwindle that few would be left in it except cripples, the aged, or the feeble-minded. An efficient worker would struggle harder to keep his family out of such a class than to keep it out of one which would have upon it only the ordinary stigma of poverty.

Checks more Effective as Wealth Increases.—It is clear that the dominant motives which restrain the growth of population act more powerfully on the well-to-do classes than on the poor. The need of invested wealth, the need of education, the determination to adhere to a social standard of comfort and to avoid losing caste, are stronger in the members of the higher classes than in those of the lower ones, and become more dominant in the community as more and more of its members belong to the upper and the middle classes.

Immediate Causes of a Slow Increase of Population.—The economic motive for a slow growth of population can produce its effect only as it leads to some line of conduct which insures that result. Means must be adopted for attaining the end desired, and when one looks at some of the means which are actually resorted to, he is apt to get the impression that an indispensable economic result is in some danger of being attained by an intolerable moral delinquency. Must the society of the future purchase its comforts at the cost of its character? Clearly not if the must in the case is interpreted literally. A low birth rate may be secured, not at the cost of virtue, but by a self-discipline that is quite in harmony with virtue and is certain to give to it a virile character which it loses when men put little restraint on their impulses. Late marriages for men stand as the legitimate effect of the desire to sustain a high standard of living and to transmit it to descendants; and late marriages for women stand first among the normal causes of a retarded growth of population. Moreover, the same moral strength which induces men to defer marriage dictates a considerate and prudent conduct after it, and prevents unduly large families without entailing the moral injury which reckless conduct involves. On the other hand, there may be an indefinite postponement of marriage by classes that lack moral stamina and readily lapse into vice. There are vicious measures, not here to be named in detail, which keep down the number of births or increase the number of deaths, mostly prenatal, though the infanticide of earlier times is not extinct. By strength and also by weakness, by virtue and also by vice, is the economic mandate which limits the rate of growth of population carried out. A limit of growth must be imposed if mankind is to make the most of itself or of the resources of its environment. There is no great doubt that it will be so imposed, and the great issue is between the two ways of doing it; namely, that which brutalizes men and depraves them morally and physically, and that which places them on a high moral level.

Moral Losses attending Civilization.—There is little doubt that vice has made gains which reduce in a disastrous way the otherwise favorable results of increasing wealth. The "hastening ills" that are said to attend accumulating wealth and decaying manhood have come in a disquieting degree and forced us to qualify the happy conclusions to which a study of purely economic tendencies leads. The evil is not confined to the realm of family relations, but pervades politics, "high finance," and a large part of the domain of social pleasures. The richer world is the more sybaritic—self-indulgent and intolerant of many moral restraints; and if one expects to preserve an unquestioning trust in the future, he must find a way in which the economic gains which he hopes for can be made without a casting away of the moral standards which are indispensable. The greatest possible achievement in this direction would be an abandonment of vicious restraints on population and a general increase of the forethought and the self-command which even now constitute the principal reliance for holding the birth rate within prudent limits.

The Working of Malthusianism in Short Periods as Contrasted with an Opposite Tendency in Long Ones.—There is little doubt that by a long course of technical improvement, increasing capital, and rising wages, the laboring class of the more prosperous countries have become accustomed to a standard of living that is generally well sustained and in most of these countries tends to rise. There is also little uncertainty that a retarded growth of population has contributed somewhat to this result. One of the facts which Malthus observed is consistent with this general tendency. Even though the trend of the line which represents the standard of living be steadily upward, the rise of actual wages may proceed unevenly, by quick forward movements and pauses or halts, as the general state of business is flourishing or depressed. In "booming" times wages rise and in hard times they fall, though the upward movements are greater than the downward ones and the total result is a gain.

Now, such a quick rise in wages is followed by an increase in the number of marriages and a quick fall is followed by a reduction of the number. The birth rate is somewhat higher in the good times than it is in the bad times. Young men who have a standard of income which they need to attain before taking on themselves the care of wife and children find themselves suddenly in the receipt of such an income and marry accordingly. There is not time for the standard itself materially to change before this quick increase of marriages takes place, and the general result of this uneven advance of the general prosperity may be expressed by the following figure:—



The line AC measures time in decades and indicates, by the figures ranging from 1 to 10, the passing of a century. AB represents the rate of wages which, on the average, are needed for maintaining the standard of living at the beginning of the century; and CD measures the amount that is necessary at the end. The dotted line which crosses and recrosses the line BD describes the actual pay of labor, ranging now above the standard rate and now below it. Whenever wages rise above the standard, the birth rate is somewhat quickened, and whenever they fall below it, it is retarded; but the increase in the rate does not suffice to bring the pay actually down to its former level. The descent of the dotted line is not equal to the rise, and through the century the earnings of labor fluctuate about a standard which grows continually higher.

The pessimistic conclusion afforded by the Malthusian law in its untenable form requires (1) that the standard of living should be stationary and low, and (2) that wages should fluctuate about this low standard. In this view the facts would be described by the following figure:—



AC measures a century, as before, by decades, and the height of BD above BC measures the standard of living prevailing through this time. The dotted line crossing and recrossing BD expresses the fact that wages sometimes rise above the fixed standard and are quickly carried to it and then below it by a rapid increase in the number of the laborers.

Members of the Upper Classes not Secure against the Action of the Malthusian Law if a Great Lower Class is Subject to It.—It is clear that if the workers are to be protected from the depressing effect which follows a too rapid increase of population, the Malthusian law in its drastic form must not operate in the case of the lowest of the three classes, so long as that is a numerous class. A restrained growth in the case of the upper two classes would not suffice to protect them if the lowest class greatly outnumbered them, and if it also showed a rapid increase in number whenever the pay of its members rose. The young workers belonging to this class would find their way in sufficient numbers into the second class to reduce the wages of its members to a level that would approximate the standard of the lowest class. Under proper conditions this does not happen; for the drastic action of the Malthusian law does not take place in the case of the third class as a whole, but only in the case of a small stratum within it.

Countries similarly exposed to Dangers from Other Countries.—Something of this kind is true of a number of countries which are in close communication with each other. If a rise of pay gave a great impetus to growth of population in Europe, and if this carried the pay down to its original level or a lower one, emigration would be quickened; and although the natural growth in America might be slower, the American worker might not be adequately protected. The influx of foreigners might more than offset the slowness of the natural growth of population in America itself. The most important illustration of this principle is afforded by the new connection which America is forming with the Asiatic nations across the Pacific.



CHAPTER XX

THE LAW OF ACCUMULATION OF CAPITAL

Adam Smith and many others have noticed that the growth of capital varies with the intelligence and the foresight of a population. It should therefore increase in rapidity as intelligence increases. A high valuation of the future is a mark of intelligence, and there is no reason why an entirely rational being should value a benefit accruing to himself in the future any less than he does a benefit accruing at once. Perfectly rational estimates of present and future, if there are no influences affecting the choice except these mere differences in time, mean that the two stand at par. It was once supposed that the disposition to save from one's present income varies directly as the rate of interest of the capital which is thus accrued, and in the main this is still regarded as a nearly self-evident proposition. Abstinence imposes a present cost on anybody that practices it. Whosoever saves a dollar misses the gratification which that dollar might bring. He may regard that sacrifice as fixed. It causes him to go without his marginal gratification, whatever that may be. If interest for a year amounts to twenty-five cents, the man has at the end of the year one dollar and twenty-five cents, with which to do whatever he may choose. He may spend it, if he will, and get all the gratification that a dollar and a quarter can bring. If interest stands at five per cent per annum, his abstinence will bring him only one dollar and five cents a year, and that, or whatever he can get by means of it, is a smaller benefit than the one he could get for one dollar and a quarter. If it is barely worth while to go without something now in order to have a dollar and five cents in the future, it is more than worth while to do it in order to have a dollar and a quarter at the same future date. If a man is induced to save only a dollar, for the sake of having a dollar and five cents at the end of the year, why should he not save two dollars, in order to have two dollars and a half at that time? Why should not the amount of his present privation increase, when the surplus of benefit he can gain by it at a future date grows greater? Such is the reasoning, and it seems entirely plausible, if we assume that what the man loses is the gratification he might have by spending his dollar, and that what he gains is the benefit of spending it and its accumulation of interest at the end of the year. The assumption is that the man proposes at a certain future date to spend the principal or the capital which he acquires by saving in the present, together with whatever it may have earned as interest; that he measures the personal benefit which he can get by this spending, and finds the larger benefit better worth a fixed sacrifice in the present than a small one.

The Actual Purpose of Abstinence.—Most capital is saved with no expectation of ever spending the principal. The motive is a perpetual income, which the capital will earn. What the man appraises in his own mind is not the personal benefit he can get by spending a dollar and five cents at the end of the year; it is the benefit that will come from spending five cents at the end of the first year, another five cents at the end of a second, and a more or less similar amount at the end of every year that shall follow. It is a perpetual income, and as the man's life is limited, the greater part of it must accrue to others than himself. The satisfaction which he will get from it near the close of his own life comes altogether from the prospect of passing the principal unimpaired to others and in assuring to them and to their successors the perpetual income which the foundation yields.

Even on this basis it might be supposed that a large perpetual income would offer a greater inducement to save than a small one, and therefore that the amount of saving would be greater when the rate of interest was higher. This would be true if the importance of the perpetual income could be estimated in this simple way by the mere amount of it.

Conditions affecting the Importance of a Future Income.—The importance of a future income may be large because of the prospective helplessness or poverty of the one who expects to enjoy it. A workman may save at a great present cost to himself in order to provide for old age or sickness, in which case the income from the savings, and often the savings themselves, would be the means of averting a great calamity. To make one's self secure against privation in the future is worth more than to add to one's comforts in the present. If a certain minimum amount were needed to avert starvation at the end of a man's life, he should secure that amount at all hazards, however much that may trench on his present comforts. Now, as the amount which he can have at the end of his life depends largely on the rate of interest which his savings will earn, during such time as they may remain in a productive shape, it will take more positive abstinence on his part to keep himself from starvation when the rate of interest is low than it will when the rate is high. If there were no interest at all, he would have to put by from his income his entire old-age fund. If the rate were a hundred per cent per annum, taking a very small part of the fund out of the income of his active years would suffice, since the fund itself would earn the remainder. Is the income which is provided for the future to be treated as a variable amount in addition to some other income, or is it to be regarded as a fixed amount, which is needed for some definite purpose? On the answer to this question depends the entire issue as to whether a low rate of interest or a high one affords the larger incentive for saving.

Future Incomes More or Less Fixed usually Needed.—Recent writers have called attention to the fact that in many cases saving has the providing of a definite future income in view. The owner of a landed estate, who intends to leave it to a son, may try to provide from his rents an endowment which will save from want or from an unhappy approach to want his daughters and his younger sons. He might accomplish this, indeed, without any present saving by putting rent charges or mortgages upon his land, but that would trench on the income which his heir can derive from it. It would reduce the establishment which the heir can maintain and cause him to fall out of the class to which his father has belonged. Rather than do this, the present owner will usually reduce the present standard of living of the entire family and try to make sure that its future standard shall not fall below the one thus established. It seems better to maintain the somewhat lower standard through a series of generations than to make the present mode of living more luxurious at the cost of unclassing one's self and one's heirs at a later date.

This Fact heretofore Underestimated.—To the writers who have cited this familiar fact it appears to require merely a partial amendment of the general proposition that a high rate of interest insures more saving than a low one, and the inference which one naturally draws from this supposed fact is that growing wealth, as is still supposed, reduces the incentive for the accumulation of more wealth. Such an accumulation is an essential part of general progress and is practically necessary for sustaining the rate of wages. Here, then, if this supposition is true, we might see an important influence tending to bring progress to a standstill. Great wealth as the result of progress, a reduced motive for acquiring still further wealth, a retarding of progress—such would be the sequence. Dynamics would thus be, in a very important respect, self-retarding if not self-halting.

Future Standards of Living the Important Element.—The actual fact, as we may venture to affirm, is that the standards of living which need to be maintained in the future are the all-important element in the case. To the laboring man it is necessary to avoid starvation or the workhouse; to the well-paid artisan it seems necessary to do this and to make for his children a provision which will keep them in the same class with himself. To the capitalist who by successful business has raised himself above the artisan class it seems necessary to keep his children above the rank from which he has lifted the family; and the same principle applies to all the wealthier classes. The tenacity with which a man holds to a station in life outweighs his desire to add to his own present luxuries, and his ambition to keep his children in a certain station far outweighs his desire to add to their present luxuries.

The Importance of Future Standards not affected by the Fact that Men differ in Altruism.—This does not at all raise the question how many people care as much for their children as they do for themselves. That is not the principle at issue. In so far as men do care for their children the end they seek for them is to enable them to avoid what seems like a disaster, rather than to make positive gains in the way of comfortable living. Even in the case of those who have little altruism, such provision as they make for descendants is inspired by the desire to keep them within a certain class more than by any computation of how many comforts or luxuries a surplus income of any amount might give them. Whatever provision for children a selfish or dull person makes is dictated by the same motive that incites him to make provision for his own future, and in both cases it is chiefly the maintenance of a standard that he usually has in mind.

The Principle not invalidated by the Fact that Forethought is often Weak.—All the motives for saving may be unduly weak. The man may care far less for the future than he should do, and may make an unreasonably small provision for it. Incapacity to estimate the importance of this provision, as well as the degree of selfishness which excludes the exercise of self-denial for the benefit of others, are not the only reasons for this disregard of the future. There is an optimism which is natural; and a religious faith which bids one not to take unduly anxious thought for the morrow may occasionally be carried to the harmful length of justifying a neglect of coming years and their needs. An intelligent trust in Providence, however, incites a man to do his own full duty, and it is the better men who do the most to avert future evils from their families. The principle that we are maintaining applies as completely in the cases of those who make small provision for the future as it does in any others. In the majority of cases whatever they do save is set aside chiefly for the maintenance of some standard of living by those who get the benefit of it; and to maintain any standard whatever, whether high or low, requires a larger fortune when interest is low than it does when interest is high.

Forethought limited in the Length of Time it Covers.—There is little danger that we make any mistake in ascribing to the dread of falling below a standard of living more influence on the accumulation of capital than any other motive exerts. This will be clearer if we look at the actual manner in which present and future are estimated and compared. The fact is not that most people care unduly little for all future benefits as compared with present ones, as it is that they throw off responsibility for all the future beyond a limited period. The perspective does not reduce the size of remote objects unduly as often as it cuts off the view of them altogether. In looking through coming years a man is subject to a certain economic myopia. One might compare what he sees with what a man sees in a foggy atmosphere, if it were not for the fact that the view of comparatively near objects is clear. It is as though a circle of fog surrounded him and cut off somewhat abruptly the view of everything that was far away. For a short distance the man sees everything with comparative clearness, but the limitless spaces that lie beyond he sees not at all. We have seen that the amount of abstinence he will practice now for the sake of what he or others will gain later varies as he is rational or foolish, unselfish or selfish, and it is also true that the length of his outlook into the future varies in the same way. There are all gradations of far-sightedness among those who create capital; but even comparatively near-sighted ones usually provide for the maintenance of some standard or other during the period that falls within their range of vision, and this requires that they should save more when interest is low than they do when interest is high.

Marginal Capitalists.—In this connection, however, it is to be noted that economic myopia may go to the extreme length of making men nearly indifferent to all future standards. In this case they constitute an exception to the general rule, since whatever they save, if they save at all, is likely to be more when interest is high than when it is low. They are marginal capitalists, who are not influenced by any benefits except immediate ones and only inquire how much an investment will, from the day when it is made, add to their own incomes. The higher rate is then the greater lure. Moreover, other capitalists, who are influenced mainly by regard for future standards of living, are somewhat affected by the immediate benefit which marginal savers have exclusively in view. To the extent that they are so, the higher the rate of their immediate returns, the more strongly are they impelled to "abstain" and accumulate. The essential fact is that marginal capitalists are few numerically, and their savings count for little as they enter into the general fund, and that most capitalists, including nearly all who save great amounts, do it chiefly from a desire to maintain themselves and their descendants on an established level of living. In the main the social motives for saving are those we have described.

Enjoyment largely Teleological.—There is a special reason why a rational man, if offered an enjoyment now or later, at his option, is quite likely to take it later. Enjoyment is mainly teleological. It consists in a conscious approach to a desirable end. The knowledge that one's efforts to attain a desired goal are successful and that the good thing is really coming, sheds a light on the present. Indeed, it is anticipation and memory which prolong any enjoyment, and of these anticipation is the more effective. The knowledge that one is at a certain time to sail for a foreign tour confers before the sailing an enjoyment which is often more than a foretaste. It often rivals the pleasure that is consciously taken in the trip itself. A man may be happy for years in the prospect of a business success or a prospect of election to a public office, and many years of hard labor in scientific investigation may be illuminated by the expectation of the ultimate discovery and its consequences. There is a good reason why even an average man, as well as a wise one, will wish to distribute his expenditures over the different periods of his life, and to give a preference to the future whenever that is necessary in order to enable him to hold through his earlier years the comfortable assurance that his later ones are well provided for.



If the line AB represents by its distance above CD a fixed standard of living during a period of ten years, the highly rational man will prefer to take something from the enjoyments of the first five and bestow them on the second five. The consciousness of improvement, of the fact that every year will bring a new enjoyment never before experienced, makes the whole life brighter than it could be with any other disposition of the available means of pleasure. The man's standard of living during the whole ten-year period will be represented by the rising dotted line EF.

The Effect of Robbing the Future.—If a man pursued the opposite course, of taking something from the future to add to the desirableness of the present, thus establishing a falling standard of living, he would have to relinquish every year something to which he was accustomed, which would cause him a keen pain. The very excessive gains of the present would thus become sources of unhappiness at a later period, while the anticipation of the later unhappinesses would throw a shadow over the present. The men who in spite of all this live recklessly and waste their present substance do so, not so much because they undervalue so much of the future as falls within their purview, as because they are so extremely short-sighted that over nearly all of the future they have practically no vision at all.

The Actual Conduct of a very Reasonable Man.—The real fact in the case of a reasonable man is represented by the following figure:—



Line EF measures fifty years and line FG another fifty. The heavy line AB, rising toward the right, represents the rising standard of living which the man's reason makes him maintain during the period over which his vision is clear, while the dotted line BC represents the standard for which, in an imperfect way, he makes provision during the next fifty years. Over later periods his vision does not extend at all. It loses clearness after the point B is passed, and in the same proportion it loses influence over the man's conduct. He therefore reconciles himself to whatever standard may prevail, even though it were a stationary one during the latter part of the time. Very seldom, however, would the man consciously lower the standard even during this later period.

The Effect of Limited Vision on the Valuation of a Perpetual Income.—This failure of vision, or economic myopia, accounts for the fact that the infinite series of payments of interest that a sum of invested capital will earn do not overbalance, in the man's estimate, the principal which he must refrain from spending in order to get them. If interest is at five per cent, abstaining from using a hundred dollars for present pleasure will put into the man's hands, in twenty years, a sum equal to the principal, in twenty years more another like sum, and so on ad infinitum. The man who considers whether he shall save a hundred dollars or spend it might be said to be comparing the importance of a hundred present dollars with that of an infinite number of future ones. In his consciousness the number is not infinite, because his vision does not extend over much of the future. The fact of most importance, as determining whether low interest causes small savings, is that in weighing the importance of the dollars which will be used during the period over which his vision ranges the average man is influenced by a desire to maintain some standard of living, which involves the more saving, the lower the rate of interest.

The Action of the Motive for Saving on Minds of Varying Degrees of Reasonableness.—Not only the man who looks a little way forward, but the man so constituted that he can content himself with a falling standard, is impelled to save more if interest is low than he is if interest is high, so long as he deems it necessary to maintain any standard at all; but much importance still attaches to the question whether the standard which the man hopes to maintain is a rising, a stationary, or a falling one. The average man, indeed, does hope to maintain at least a stationary standard during so much of the future as he cares much about. This mode of distributing pleasures appears in matters both small and great. In taking a walk for pleasure one is more likely to go up a rising grade first and descend afterward than he is to go down at first and afterward bear the fatigue of climbing. While there may be those who would rather play in the forenoon and work in the afternoon, when the choice is presented at the beginning of the day, there are certainly more among the classes that society depends on for capital who would put the work in the forenoon and the pleasure in the afternoon or evening. If a man were taking a canoeing trip on a swiftly flowing stream, he would paddle his boat up the stream and then come down with the current, rather than let it float down with the current and then paddle it back. If it be thought that this is true of only a specially rational mind, one may say that the capitalist class represents men who in this respect are more than ordinarily rational. They are generous, foresighted, and in their relation to descendants affectionate. The men who really do the saving for society have more to make them think and act in the intelligent way we have described than do ordinary men. The miser, the paragon of abstinence, can hardly be said to be the man who thinks too much of future enjoyments, for he contemplates no such enjoyments that call for spending money, for he never means to spend it. He is an abnormal type and fortunately a rare one. With him there is a standard of possessions to be maintained, rather than one of enjoyments, and it is always a rising standard, since he cares for nothing so much as to see his possessions increasing. To make them increase at any given rate when the direct earnings of capital are small requires severer abstinence than it would if the capital yielded a larger return.

The Effect of an Increase in the Number of Persons who seek to maintain a Rising Standard of Living.—While it is true that even the half-evolved intellects that care little for coming years do, if they care for them at all, find themselves impelled to save more capital when interest is small than they do when it is large; it is also true that minds of a high order save more than minds of a low one. In order to live during one's latter years just out of danger of the workhouse, one does not need to trench deeply on the comforts and pleasures which he is able to enjoy during the greater part of his life; but if he is determined to live to the end of his days as well as he has done at any time and to help his children to do the same, he must practice a severer self-denial and accumulate a larger fund. Still sharper becomes the abstinence and still greater the accumulated fund where men provide for a future mode of living that shall surpass the present one. The importance of this fact lies in this: the condition which brings with it a low rate of interest does so because of the great number of men who do thus value a future standard of living that shall be at least stationary if not positively rising. The growing size of the social capital implies a more general appreciation of the importance of future well-being. Because men's economic psychology has become what it is and because it is still changing for the better there is a second reason for expecting that the accumulation of capital will not hereafter be retarded. We make here no extravagant claim as to the number of persons in a community who take the more rational views as to present and future. The number of each class is what it is; but facts show that the maintenance of some standard is the most efficient motive for saving in the case of each one of them, and that low interest therefore calls for large accumulations. They do show that the number who take the more rational views is a growing class, that they accumulate more than other classes, and that every addition to their relative number makes for more rapid accumulation within the society of which they are members. Two decisive reasons, then, exist for thinking that the growth of capital will never end or check further growth. There are still further facts, however, which have a bearing on this problem.

The Importance of the Character of the Increases which are the Largest Sources of Accumulation.—If one has a doubt whether the large sums which enter into the capital which is steadily accumulating are saved under the influence of a desire to maintain a standard, this doubt will be removed by a consideration of the source from which great accumulations come. They come most largely from the net profits of the entrepreneur. Next to that they come from the earnings of what must be classed as labor, though much of it is labor of a special and very superior sort. The salary which the head of a corporation receives, the fees that its lawyers get, the fees that come to eminent surgeons or engineers, are all payments for labor; and these, taken together with the earnings of well-paid artisans, successful farmers, and very many others, constitute the second contribution to accumulating capital. Savings from simple interest itself constitute the third contribution.[1]

[1] Gains which come from holding land which rises in value more rapidly than the interest on the price of it accumulates, is to be rated as part of net entrepreneur's profits.

Now, of these sources of income, net profits and the wages of superior labor are transient, and the profits are particularly so. The man whose mill earns fifty per cent in a particular year would be foolish in the last degree if he used all that as income. That would mean brief and riotous enjoyment, followed by a most painful fall from the standard so established. He will naturally spend some part of the phenomenal dividend and lay aside enough of it to afford a guarantee that his future income will not fall below the present one. The man who during the best years of his working life enjoys a salary or professional fees amounting to a hundred thousand dollars a year would be almost equally foolish if he were to spend it all as he earns it, leaving his family unprovided for and his own later years exposed to the pains of sharp retrenchment. Transient incomes suggest to every one who has any degree of reason the need of establishing and maintaining some future standard of living, and of investing enough to accomplish this. This is more true, of course, when the rate of interest is low.

The Importance of the Need of Enlarging a Business.—There is a special reason why legitimate business profits are morally certain to be to a large extent laid aside for investment. The man would say that he "needs them in his business." They come at a time when there is an inducement to enlarge the scale of his profitable operations. The man who is getting a dividend of fifty per cent per annum must make hay while the sun shines, and he can do it by doubling the capacity of his mill. What he makes and what he can borrow he uses for an increase of his output, which it is important to secure during the profitable time. All this means a quick increase of the total capital in existence.

The profits of a monopoly are not transient, but are likely to be both long-continued and large, and it might seem that they would constitute a larger source of addition to capital than those profits which come from technical improvement. There are several reasons why this is not the fact. In the first place, what we are discussing is the addition that profits make to the total capital of society, rather than to the capital of any one person or corporation. The monopoly makes its gains by taking something from the pockets of the general public, and in so far it reduces the power of the general public to save.

It might be alleged, however, that since a monopoly reduces wages and interest, adds to profits, and creates enormous incomes for a few persons, it really diverts income from a myriad of persons who would save very little of it, and puts it into the pockets of a few persons who are likely to save a great deal of it. This might conceivably add to the capital of society were it not for the fact that the more secure and regular gains of monopolies are made the basis of large capitalization. A company that earns twenty-five per cent of its real capital per annum may have its stock diluted with four parts of water and pay only five per cent in dividends on its capitalization. This looks like interest and is apt to be treated as such by those who receive it. It is, therefore, not a more favorable income from which to make accumulations of capital than is the interest on real capital. The sudden gains which promoters and manipulators of consolidated companies make are, indeed, transient gains and may be largely added to capital. The introduction of a regime of monopoly may insure a period of much saving by the class that profits by it; but the later career of the monopoly is unfavorable to the growth of capital.

The Special Effect of a Prospective Fall in the Rate of Interest.—If interest which continues steadily at a low rate affords an especially strong incentive for saving, it follows that a falling rate, one that begins low and steadily becomes lower, affords a still stronger one. The average rate during the years of the future for which a prudent man makes provision is made, of course, lower than it would be if the rate were stationary. This influence is probably not as effective as it would be if the remote future were included in the view of those who are securing capital. On account of the near-sightedness to which attention has been called, a rate of interest that begins at four per cent and falls very slowly to three and a half presents to those who have this defective vision the same incentive to saving as one that begins at four per cent and remains steadily at that figure. What is true, however, is that a falling rate is to be expected, that this fact acts as a stimulus for saving in the case of the more far-sighted classes, and that the number of persons in these classes is increasing.

In so far as the increase of capital is concerned society is secure against the danger of reaching a stationary state. Progress in wealth will not build a barrier against itself by stinting the resources on which hereafter labor must rely. When we examine the sources from which capital mainly comes, we shall further test the probability that the instrumentalities which add productive power to human effort will increase through the longest period that science needs to take account of.[2]

[2] For a somewhat similar view of the effect of a fall of interest on the accumulation of capital, see Webb's "Industrial Democracy," Vol. II, pp. 610-632.



CHAPTER XXI

CONDITIONS INSURING PROGRESS IN METHOD AND ORGANIZATION

The Possibility of a Law of Technical Progress.—It might seem that inventions were not subject to any influence that can be described under the head of a law. Genius certainly follows its own devices, and inventive power that has in it any touch of genius may be supposed to do the same. It is, however, a fact of experience that some circumstances favor and increase the actual exercise of this faculty, while other influences deter it. Moreover, what is important is not merely the making of inventions, but the introduction of such of them as are valuable into the productive operations of the world. Some influences favor this and others oppose it, and it is entirely possible to recognize the conditions in which economies of production rapidly take place in the actual industry of different countries.

Technical progress has been particularly rapid in the United States, though in this respect Germany has in recent years been a strong rival, and ever since the introduction of steam engines and textile machinery, England has continued to make a brilliant record. France, Belgium, and a number of other countries of Europe have developed an industry that is in a high degree dynamic, and Japan is now in the lists and giving promise of holding her own against the best of her competitors. The question arises whether it is something in the people, or something in their natural and commercial environment, which makes differences between their several rates of progress.

Inventive Abilities widely Diffused.—In so far as originating important changes is concerned, mental alertness and scientific training without doubt have a large effect. Some races have by nature more of the inventive quality than others, but within the circle of nations that we include in our purview no one has any approach to a monopoly of this quality. Any people that can make discoveries in physical science can make practical inventions, and will certainly do so if they are under a large incentive to do it. Moreover, alertness in discovering and duplicating the inventions of others is as important in actual business as originating new devices. At present it is a known fact that the Germans not only invent machinery, but quickly learn to make and to use machinery that originates elsewhere and demonstrates its value in reducing the cost of the production; and the remote Japanese have not only surpassed all others in the quick adoption of economic methods that have originated in Western countries, but have put their own touch upon them and revealed the existence of an inventive faculty that is likely to make them worthy rivals of Occidental races.

The Importance of Inducements to make and use Inventions.—Granted a wide diffusion of inventive ability, the actual amount of really useful inventing that is done must depend on the inducement that is offered. Will an economical device bring an adequate return to the man who discovers it and to the man who introduces it into productive operations? If it will, we may expect that a brilliant succession of such devices will come into use, and that the power of mankind to bend the elements of nature to its service will rapidly increase.

The Usefulness of a Temporary Monopoly of a New Device for Production.—If an invention became public property the moment that it was made, there would be small profit accruing to any one from the use of it and smaller ones from making it. Why should one entrepreneur incur the cost and the risk of experimenting with a new machine if another can look on, ascertain whether the device works well or not, and duplicate it if it is successful? Under such conditions the man who watches others, avoids their losses, and shares their gains is the one who makes money; and the system which gave a man no control over the use of his inventions would result in a rivalry in waiting for others rather than an effort to distance others in originating improvements. This fact affords a justification for one variety of monopoly. The inventor in any civilized state is given an exclusive right to make and sell an economical appliance for a term of years that is long enough to pay him for perfecting it and to pay others for introducing it. Patents stimulate improvement, and the general practice of the nations indicates their recognition of this fact. They all give to the inventor a temporary monopoly of the new appliance he devises, but this monopoly differs from others in this essential fact: the man is allowed to have an exclusive control of something which otherwise might not and often would not have come into existence at all. If it would not,—if the patented article is something which society without a patent system would not have secured at all,—the inventor's monopoly hurts nobody. It is as though in some magical way he had caused springs of water to flow in the desert or loam to cover barren mountains or fertile islands to rise from the bottom of the sea. His gains consist in something which no one loses, even while he enjoys them, and at the expiration of his patent they are diffused freely throughout society.

Possible Abuses of the Patent System.—It is of course true that a patent may often be granted for something that would have been invented in any case, and patents which are granted are sometimes made too broad, and so cover a large number of appliances for accomplishing the same thing. In these cases the public is somewhat the loser; but for the reasons about to be given this loss is far more than offset by the gain which the system of patents brings with it.

The gains of the inventor cannot extend much beyond the period covered by his patent, unless some further and less legitimate monopoly arises. If the use of an important machine builds up a great corporation which afterward, by virtue of its size, is able to club off competitors that would like to enter its field, the public pays more than it should for what it gets; and yet even in these cases it almost never pays more than it gets. The benefit it derives is simply less cheap than it ought to be. Much of the power of the telephone monopoly has been extended beyond the duration of its most important patent, and that patent was in its day broader than it should have been; and yet there never was a time when the use of the telephone in facilitating business, and in saving time and trouble in a myriad of ways, did not far outweigh the total cost which the users of telephones incurred. As we shall soon see, important inventions invariably confer some benefit on the public at the start. The owner of the new device must find a market for his products, and must offer them on terms which will make it for the interest of the public to use them largely.

The Effect of Competition in Causing Improvements to Multiply.—Competition insures a large number of inventors and offers to each of them a large inducement to use his gifts and opportunities. A great corporation may employ salaried inventors and, because of its great capital and large income, it may experiment with inventions with far less risk to itself than an inventor usually takes. When large corporations compete actively with one another, the employment of salaried inventors is very profitable to them; and improvements in production go on more rapidly than they are likely to do after these firms consolidate with each other and cease to feel the spur which the danger of being distanced in a race affords. It is a fact of observation, and not merely an inference, that monopolies are not as enterprising as competing companies.

Effects of Monopoly on the Spirit of Enterprise.—In monopolies, theoretically, there is the same inducement to adopt inventions as in the case of competing firms, excepting always the motive of self-preservation. The monopoly can make money by improvements as competing firms would do. A perfectly intelligent monopoly, with disinterested management, would adopt an improvement offered to it as promptly as any competing firm, if the sole motive were profit. There is no reason why an intelligent monopoly should hold on to antiquated machinery, when modern machinery would enable it to stand the cost of introduction and make a net improvement besides. A competing producer gains an advantage over his rivals by discarding old machinery and adopting new at exactly the right time, neither too late nor too early. The true point of abandonment of the old machine, as we have already seen, is reached when the labor and capital that now work in connection with it can make a shade more by casting it off and making a combination of a better kind; and this rule applies to monopolies as well as to competitors. At just the point where a competitor can gain an advantage over rivals by modernizing his appliances, the monopoly can make money by doing so.

An important fact is that the monopoly has as a motive the making of profits for its stockholders. Not only is that a less powerful motive than self-preservation, but it appeals largely to persons who are not themselves in control of the business. Absentee ownership is the chief disability of the monopoly. Managers may have other interests than those of large dividend making, and in such cases a monopoly is apt to wait too long before changing its appliances. It needs to be in no hurry to buy a new invention, and it can make delay and tire out a patentee, in order to make good terms with him; and this practice affords little encouragement to the independent inventor. On the whole, a genuine and perfectly secure monopoly would mean a certain degree of stagnation where progress until now has been rapid.

Why the Public depends on Competition for Securing its Share of Benefit from Improvements.—Another question is whether the two systems, that of competition, on the one hand, and monopoly, on the other, confer equal benefits on the public by virtue of the improvements they make. Competition does this with the greatest rapidity. As we have seen, it transforms the net profits due to economies into increments of gain for capitalists and laborers throughout all society. The wages of to-day are chiefly the transformed profits of yesterday and of an indefinite series of earlier yesterdays. The man who is now making the profits is increasing his output, supplanting less efficient rivals, and giving consumers the benefit of his newly attained efficiency in the shape of lower prices of goods. In practice rivals take turns in leading the procession; now one has the most economical method, now another, and again another; and the great residual claimant, the public, very shortly gathers all gains into its capacious pouch and keeps them forever.

Would a secure monopoly do something like this? Far from it. It would be governed at every step by the rule of maximum net profits for itself. Its output would not be carried beyond the point at which the fall in price begins really to be costly. The lowering of the price enlarges the market for the monopoly's product and up to a certain point increases its net gains. Beyond that point it lessens them.



Now, even the interest of the monopoly itself would lead it to give the public some benefit from every economy that it makes. This is because the amount of output that will yield a maximum of profit at a certain cost of production is not the same that will yield the maximum of net profit when the cost is lower. Every fall in cost makes it for the interest of the monopoly to enlarge its output somewhat, but by no means as much as competing producers would enlarge theirs. It will always hold the price well above the level of cost. In the accompanying figure distance along the line AK represents the amount of goods produced, while vertical distance above the line measures costs of production, as well as selling prices, and the descending curve FJ represents the fall of prices which takes place as the output of the goods is increased. Now, when the cost of production stands at the level of the line CI, the amount of output that will yield the largest amount of net profit is the amount represented by the length of the line AM. That amount of product can be sold at the price represented by the line MG. The gross return from the sale will be expressed by the area of the rectangle AEGM, and the area CEGN, which falls above the line of cost, CI, is net profits. They are larger than they would be if the line MG were moved either to the right or to the left, i.e., if the amount of production were made either larger or smaller. Now, if the cost of production falls to the level of the line BJ, it will be best to increase the output from AM to AL. The whole return will then be represented by the rectangle ADHL, and the area BDHO represents profits, with the cost at the new and lower level. These are somewhat larger than they would be if the output continued to be only the amount AM. Under free competition the price would fall to the line BJ, the net profits would disappear, and the public would have the full benefit of the improvement in production.

The Purpose of the System of Patents.—Patents are a legal device for promoting improvements, and they accomplish this by invoking the principle of monopoly which in itself is hostile to improvement. They do not as a rule create the exclusive privilege of producing a kind of consumers' goods, but they give to their holders exclusive use of some instrumentality or some process of making them. The patentee is not the only one who can reach a goal,—the production of a certain article,—but he is the only one who can reach it by a particular path. A patented machine for welting shoes stops no one from making shoes, but it forces every one who would make them, except the patentee or his assigns, to resort to a less economical process.

Patents Limited in Duration indispensable as Dynamic Agents.—If an inventor had no such protection, the advantage he could derive would be practically nil, and there would be no incentive whatever for making ventures except the pleasure of achievement or the honor that might accrue from it. In the case of poor inventors this would be cold comfort in view of the time and outlay which most inventions require. Not only on a priori grounds, but on grounds of actual experience and universal practice, we may say that patents are an indispensable part of a dynamic system of industry. It is also important that the monopoly of method which the patent gives should be of limited duration. If the method is a good one and the profit from using it is large, the seventeen years during which in our own country a patent may run affords, not only an adequate reward for the inventor, but an incentive to a myriad of other inventors to emulate him and try to duplicate his success. Ingenious brains, which are everywhere at work, usually prevent the owners of a particular patent from keeping any decisive advantage over competitors during the whole period of seventeen years. Long before the expiration of that time some device of a different sort may enable a rival to create the same product with more than equal economy, and the leadership in production then passes to this rival, to remain with him till a still further device effects a still larger economy and carries the leadership elsewhere. That alternation in leadership which we have described and illustrated takes place largely in consequence of our system of patents; and yet every particular patent affords a quasi-monopoly to its holder. The endless succession of them insures a wide diffusion of advantages. At the expiration of each patent, even if it has not been supplanted by a later and more valuable one, the public gets the benefit of the full economy it insures, and wherever an unexpired patent is supplanted by a new one, the public gets this benefit much earlier. Cost of production tends rapidly downward, and the public is the permanent beneficiary.

Patents as a Means of Curtailing Monopolies.—While a patent may sometimes sustain a powerful monopoly it may also afford the best means of breaking one up. Often have small producers, by the use of patented machinery, trenched steadily on the business of great combinations, till they themselves became great producers, secure in the possession of a large field and abundant profit. Moreover, in the case of a patent which builds up a monopoly and continues for the full seventeen years of its duration unsupplanted by any rival device, the public is likely to get more benefit than the patentee, or even the company which uses his invention. In widening the market for its product the company must constantly cater to new circles of marginal consumers, and must give to all but the marginal ones an increasing benefit that is in excess of what it costs them. Probably few patents have been issued in America which illustrate the unfavorable features of the system more completely than did the Bell telephone patent, which gave to a single company during a long period a monopoly of the telephone business; and yet there are few men of affairs who do not perceive that, in the saving of time which the telephone effected and in the acceleration of business which it caused, they gained from the outset more than they lost in the shape of high fees. Something of the same kind is true of the users of domestic telephones; for though they may cost more than they should, they do their share toward placing those who use them on a higher level of comfort.

The Law of Survival of Efficient Organization.—In broad outlines we have depicted the conditions which favor technical progress. There is a law of survival which, when competition rules, eliminates poor methods and introduces better ones in endless succession. Under a regime of secure monopoly this law of survival scarcely operates, though desire for gain causes a progress which is less rapid and sure. The same may be said of changes in organization, in so far as that means a cooerdinating of the labor and the capital within an establishment. When the manager of a mill so marshals his forces as to get a much larger product per man and per dollar of invested capital than a rival can do, he has that rival at his mercy and can absorb his business and drive him from the field. In order to survive, any producer must keep pace with the aggressive and growing ones among his rivals in the march of improvement, whether it comes by improved tools of trade or improved generalship in the handling of men and tools. Quite as remorseless as the law of survival of good technical methods is the law of survival of efficient organization, and so long as the organization is limited to the forces under the control of single and competing entrepreneurs, what we have said about the advance in methods applies to it. It is a beneficent process for society, though its future scope is more restricted than is that of technical improvement, since the marshaling of forces in an establishment may be carried so near to perfection that there is a limit on further gains. Moreover organization, in the end, ceases to confine itself to the working forces of single entrepreneurs, but often continues till it brings rival producers into a union.

The Extension of Organization to Entire Subgroups.—Both of these modes of progress cause establishments to grow larger, and the ultimate effect of this is to give over the market for goods of any one kind to a few establishments which are enormously large and on something like a uniform plane of efficiency. Then the organizing tendency takes a baleful cast as the creator of "trusts" and the extinguisher of rivalries that have insured progress.

When monster-like corporations once start a competitive strife with each other, it is very fierce and very costly for themselves; and this affords an inducement for taking that final step in organization which brings competition to an end. That is organization of a different kind, and the effects of it are very unlike those of the cooerdinating process which goes on within the several establishments. In this, its final stage, the organizing tendency brings a whole subgroup into union, and undoes much of the good it accomplished in its earlier stage, when it was perfecting the individual establishments within the subgroup. While the earlier process makes the supply of goods of a certain kind larger and cheaper, the final one makes it smaller and dearer; and while the earlier process scatters benefits among consumers, the final one imposes a tax on consumers in the shape of higher prices for merchandise. Yet the union that is formed between the shops is, in a way, the natural sequel to the preliminary organization which took place within them and helped to make them few and large. Trusts are a product of economic dynamics, and we shall study them in due time. The organization we have here in view is the earlier one which takes place within the several establishments. It obeys a law of survival in which competition is the impelling force, though it leads to a condition in which an effort is made to bring competition to an end. This earlier organization is most beneficent in its general and permanent effects; and what has been said of the results of progress in the technique of production may, with a change of terms, be said again of progress in the art of cooerdinating the agents employed. It is a source of temporary gain for entrepreneurs and of permanent gains for laborers and capitalists. It adds to the grand total of the social product and leaves this to be distributed in accordance with the principle which, in the absence of untoward influences, would treat the producers fairly—that which tends to give to each producer a share more or less equivalent to his contribution. In its nature and in its results it is the opposite of that other type of organization which seeks to bring competitive rivalry to an end, and in so far as it succeeds divorces men's contributions to the social product from the shares that they draw from it.



CHAPTER XXII

INFLUENCES WHICH PERVERT THE FORCES OF PROGRESS

Thus far we have been dealing with what we have called natural forces. The phenomena which we have studied have not been caused by any conscious and purposeful action of the people as a whole. They have not been brought about by the power of governments nor by anything which savors of what is called collectivism. Individuals have done what they would, seeking to promote their own interests under conditions of great freedom, and the effect has been a system of social industry which is highly productive, progressive, and generally honest. Production has constantly increased, and the product has been shared under the influence of a law which, if freedom were quite complete and competition perfect, would give to each producer what he contributes to the aggregate output of the great social workshop. We have claimed that, in the world as it is, influenced by a great number of disturbing forces, these fundamental laws still act and tend to bring about the condition of productiveness, progress, and honesty which is their natural result. If the actual condition falls short of this, the fact is mainly due to curtailments of freedom and interferences with the competition which is the result of freedom.

Influences which retard Static Adjustments.—Throughout the study we have paid due attention to those ordinary elements of "economic friction" which all theoretical writers have recognized and which practical writers have put quite in the foreground; and we have discovered that, while they are influences to be taken account of in any statement of principles, they in no wise invalidate principles themselves. For the most part they are influences which retard those movements which bring about static adjustments. An invention cheapens the production of some article and at once the natural or static standard of its price falls; but the actual price goes down more slowly, and in the interim the producer who has the efficient method gathers in the fruit of it as a profit. The retarding influence is a fact that should be as fully recognized in a statement of the law of profit as any other. The existence of it is an element in the theory of entrepreneur's profit. Improvements which reduce the cost of goods enhance the product of labor, and this sets a higher standard for wages than the one that has thus far ruled; but a delay occurs before the pay of workmen rises to the new standard. Adjustments have to be made which require time, and these are as obviously elements that must be incorporated into an economic theory as any with which it has to deal.

Influences which resist Dynamic Movements.—If there is anything which, without impairing the motive powers of economic progress, puts an obstacle in the way of the movement, it has to be treated like one of these elements of friction to which we have just referred. In our discussion of the growth of population, the increase of wealth, the improvement of method, etc., we have paid attention to resisting forces as well as others, and have tried to determine what is the resultant of all of them. The forces of resistance have their place in a statement of dynamic laws.

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