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Title: Essentials of Economic Theory - As Applied to Modern Problems of Industry and Public Policy
Author: Clark, John Bates, 1847-1938
Language: English
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                           JOHN BATES CLARK


                     "THE PHILOSOPHY OF WEALTH,"
                   "THE PROBLEM OF MONOPOLY," ETC.

                               New York
                        THE MACMILLAN COMPANY

                        _All rights reserved_

                           COPYRIGHT, 1907,
                      BY THE MACMILLAN COMPANY.

    Set up and electrotyped. Published October, 1907. Reprinted
    July, 1909; July, 1915.


In a work on the "Distribution of Wealth," which was published in
1899, I expressed an intention of offering later to my readers a
volume on "Economic Dynamics, or The Laws of Industrial Progress."
Though eight years have since passed, that purpose is still
unexecuted, and it has become apparent that any adequate treatment of
Economic Dynamics will require more than one volume of the size of the
present one. In the meanwhile it is possible to offer a brief and
provisional statement of the more general laws of progress.

Industrial society is going through an evolution which is transforming
its structure and all its activities. Four general changes are going
on within the producing organization, and the resultant of them, under
favorable conditions, should be an enrichment in which all classes
would share. Population is increasing, capital is accumulating,
technical methods are improving, and the organization of productive
establishments is perfecting itself; while over against these changes
in industry is an evolution in the wants of the individual consumer,
whom industry has to serve. The nature, the causes, and the effects of
these changes are among the subjects treated in this volume.

The Political Economy of the century following the publication of the
"Wealth of Nations" dealt more with static problems than with dynamic
ones. It sought to obtain laws which fixed the "natural" prices of
goods and those which, in a like way, governed the natural wages of
labor and the interest on capital. This term _natural_ as thus used,
was equivalent to static. If the laws of value, wages, and interest
had at this time been correctly stated, they would have furnished
standards to which, in the absence of all change and disturbance,
actual values, wages, and interest would ultimately have conformed.
The economic theory of this time succeeded in formulating, correctly
or otherwise, principles of economic statics and a fragment or two of
a science of economic dynamics, although the distinction between the
two divisions of the science was not clearly before the writers' eyes.
The law of population contained in the work of Malthus is the only
systematic statement then made of a general law of economic change.
Though histories of wages, prices, etc., furnished some material for a
science of Economic Dynamics, none of them attained the dignity of a
presentation of law or merited a place in Economic Theory. Students of
Political Economy were at that date scarcely awakened to the
perception of laws of dynamics, and still less were they conscious of
the need of a systematic statement of them. A modest beginning in the
way of formulating such laws the present work endeavors to make.

The first fact which becomes apparent when economic progress is
studied, is that static laws have a general application and are as
efficient in a society which is undergoing rapid transformation as in
one that is altogether changeless. Water in a tranquil pool is
affected by static forces. Let a quantity of other water rush in and
there are superinduced on these forces others which are highly
dynamic. The original forces are as strongly operative as ever, and if
the inflow were to stop, would again reduce the surface to a level.
The laws of hydrostatics affect the waters in the rapids of Niagara as
truly as they do those in a tranquil pool; but in the rapids a further
set of forces is also operative. In the work referred to, issued in
1899, an effort was made to isolate the phenomena of Economic Statics
and to attain the laws which govern them. Necessarily this study made
a certain impression of unreality, since it put out of sight changes
which are actually going on and are the conspicuous fact of modern
life. It assumed the conditions of a world without any such movement
and endeavored to formulate laws which, in such a condition, would fix
standards of value, wages, interest, etc. It put actual changes out of
sight, intentionally and heroically, but with a full recognition of
the fact that they are actually taking place and must in due time be
introduced and studied. We live in what is _par excellence_ an age of
progress, and it is in part for the sake of perceiving the laws of
progress that we first disentangle from them the laws of rest and make
a separate study of these. The world from which change is excluded is
unreal, but the _static laws_ which can be most clearly discerned by
mentally creating such a world have reality. Every day's transactions
are governed by them as truly as a physical element like water in
active movement is affected by forces which, if they acted alone,
would bring it to a state of permanent rest. The first purpose,
therefore, of the present work is to show the presence and dominance
in the real world of the forces described in the earlier work. It
brings static laws into view and endeavors to show how they act at
any one particular stage of industrial evolution. Even while changes
are examined, the fact is perceived that there are steadily at work
forces which, if changes should cease, would make society conform to a
certain imaginary static model and makes wages and interest also
conform to static standards.

Another purpose of the work is to examine seriatim the effects of
different changes, to gauge the probability of their continuance, and
to determine the resultant of all of them acting together. It is
important to know under what conditions changes proceed at a normal
rate, and when the standard of wages rises as it naturally should. As
the actual rate of wages pursues its rising standard, but lags
somewhat behind it, it is necessary to know what determines the
interval between the two, and when the interval is normal. What is
called "economic friction" is the cause of this interval and is an
element that is amenable to law.

There is to be studied, not only the friction which obstructs the
action of natural forces, but positive perversions of the forces
themselves. Of these the chief is monopoly; and its influence, its
growth, the sources of its power, and its prospect of continuance have
to be determined. The actual tendencies of the economic system are
against it, and so--if we except a few monopolies created for special
ends--are both the spirit and the letter of the civil law. In a
country in which law held complete sway, all objectionable monopolies
would be held in repression. In order to see how much economic forces
can be made to do in this direction, the present work discusses
railroads and their charges, and some of the practices of great
industrial corporations, and tries to determine what type of measures
a government should take in dealing with these powerful agents. In
connection with monopoly and with the conditions of economic progress
a study is made of trade unions, strikes, boycotts, and the
arbitration of disputes between employers and employed, and also of
the policy of the state in connection with them, and with money and
protective duties.

It is my belief that students should become acquainted with the laws
of Economic Dynamics, and that they can approach the study of them
advantageously only after a study of Economic Statics. The present
work is in a form which, as is hoped, will make it available for use
in class rooms, not as a substitute for elementary text-books, but as
supplementary to them. It omits a large part of what such books
contain, presents what they do not contain, and tries to be of service
to those who wish for more than a single introductory volume can

An essential part of the theory of wages here stated was presented in
a paper read before the American Economic Association, in December,
1888, and published in a monograph of the American Economic
Association in March, 1889; and other parts of this theory were issued
at intervals following that date. The theory of value was published in
the _New Englander_ for July, 1881. I had not then chanced to see the
early statements of the principle of marginal appraisal contained in
the works of Von Thünen and Jevons, and did not consciously borrow
anything from their writings, but I gladly render to them the credit
that is their due. I do not fear that I shall be supposed to have
borrowed other parts of the general theory here offered. The theory
of capital here stated was first presented in a monograph of the
American Economic Association for May, 1888, and the discussion of
money of which the present work gives a summary, in articles in the
_Political Science Quarterly_ for September, 1895, and for June and
September, 1896. The discussion of the relation of protective duties
to monopoly appeared in the same quarterly for September, 1904.

The author should, perhaps, apologize for the fewness of the citations
from other works which this volume contains. The richness of the
recent literature of Economic Theory, especially in America, would
have made it necessary to use much space if the resemblances and the
contrasts presented by points in this volume, and corresponding points
in other volumes, had been noted.

Worthy of special attention, if citations had been given, would have
been the writings of Professors Irving Fisher, Simon N. Patten, and
Frank A. Fetter of this country, and Professor Friedrich von Wieser of
Prague, who have worked in various parts of the same field in which
the studies here offered belong, and also those of Minister Eugen von
Böhm-Bawerk of Vienna, who has treated some of the same themes in a
strongly contrasted way. If merited attention were paid to the works
of Hadley, Taussig, Carver, Seligman, Giddings, Seager, Walker, and a
host of eminent foreign scholars, a large part of the space in the
book would have to be thus preëmpted.

I desire most gratefully to acknowledge the assistance which in the
preparation of this book I have received from my colleague, Professor
H. L. Moore of Columbia University, from my son, Mr. John Maurice
Clark, Fellow in Economics in Columbia University, and from my former
colleague, Professor A. S. Johnson of the University of Nebraska.
Besides reading the manuscript and offering valuable suggestions,
Professor Johnson has kindly taken upon himself the reading of the

                                                JOHN BATES CLARK.


  CHAPTER                                                         PAGE
        I. WEALTH AND ITS ORIGIN                                     1
       II. VARIETIES OF ECONOMIC GOODS                              20
      III. THE MEASURE OF CONSUMERS' WEALTH                         39
       IV. THE SOCIALIZATION OF INDUSTRY                            59
      VII. NORMAL VALUE                                            114
     VIII. WAGES                                                   127
       IX. THE LAW OF INTEREST                                     146
        X. RENT                                                    159
       XI. LAND AND ARTIFICIAL INSTRUMENTS                         174
      XII. ECONOMIC DYNAMICS                                       195
     XIII. THE LIMITS OF AN ECONOMIC SOCIETY                       210
           ECONOMIC SOCIETY                                        229
           BY DYNAMIC CHANGES                                      282
      XIX. THE LAW OF POPULATION                                   321
       XX. THE LAW OF ACCUMULATION OF CAPITAL                      339
           ORGANIZATION                                            358
           PROBLEM                                                 416
      XXV. ORGANIZATION OF LABOR                                   451
   XXVIII. PROTECTION AND MONOPOLY                                 517
     XXIX. LEADING FACTS CONCERNING MONEY                          538
      XXX. SUMMARY OF CONCLUSIONS                                  555
     INDEX                                                         563




The creation and the use of wealth are everywhere governed by natural
laws, and these, as discovered and stated, constitute the science of
Economics. Some of them come into operation only when men live in more
or less civilized societies and work in an organized way, while others
are operative wherever men work at all. Every man who lives must have
something that can be called wealth, and, unless it is given to him,
he must do something in order to get it. A solitary hunter, living in
a cave, eating the flesh of animals and clothing himself in their
skins, would create wealth and use it; but he would not take part in a
social kind of industry. What he does could not be described as a bit
of "social," "national," or "political" economy. Yet the gaining of
his living would be an economic operation and would involve a creating
and using of wealth. A statement of the laws governing the processes
by which such a man makes the earth yield to him means of support and
comfort would constitute a Science of the Economy of Isolated Life,
which is a part of the general Science of Economics.

_Primitive Capital._--If an isolated man hunts with good implements,
he gets more game than he would have done if he had not used some of
his time in making such implements. It pays such a man to interrupt
his hunting long enough to make a spear or a bow and arrows. This
amounts to saying that it is an advantage to him to become, in a
simple way, a capitalist as well as a laborer; for the primitive
implements of the chase are forms of _productive_ wealth, or capital.
Moreover, if he possesses foresight, he will keep enough food within
reach to tide him over periods when game is not to be had, and such a
store is another form of capital.

_The Field of General Economics._--The economy of a man who works only
for himself is subject to laws that are based on his own nature and
the character of his material environment. Because he is what he is
and because nature is what it is there is a certain way in which he
must proceed, if he will live at all, and there are certain conditions
which must exist, if he is to live well. The inherent productive power
of labor and of capital is of vital concern to him, since he is both a
laborer and a capitalist; but he is in no way interested in what we
commonly call the relations of labor and capital, since that
expression always suggests the dealings of one class of men, who
labor, with another class, who own or control productive wealth. The
study of such relations takes us at once into the domain of _Social_
Economy; but we can study certain universal laws of wealth without at
all entering that domain. When we speak of the power that resides in a
bow and arrow, we refer to a truth of _General_ Economics and one
which illustrates the inherent power of capital, though we may be far
from thinking of lenders and borrowers in a modern "money market" or
of dealings of any one class of men with any other.

_The Field of Social Economics._--The moment that we begin to examine
economic relations that different classes of men sustain to each
other, we enter the realm of _Social_ Economics; and we do this
whenever we study modern business dealings. Even our hunter would take
part in a social economy if he began to sell some of his game; and
from that time on his income would depend, not wholly on his relation
to material nature, but partly on his relation to other men. A good
market for his game would come to be of the greatest importance to
him; and a market for anything implies a social method of securing

_Fundamental Facts Common to Primitive Life and Social Life._--The
relations which men sustain to each other in civilized industry are
thrown into the foreground in the science of Social or "Political"
Economy.[1] It is an organized system of industry in which we are
engaged, and it is that which we care most to understand. Until
recently we have had a far less satisfactory understanding of the
social element in industry--that is, of the relations that men who are
producing wealth sustain to each other--than we have had of such
general facts as a primitive producer needs to know. We have had, for
example, much information concerning the materials which the earth
contains and the way to make them useful. We have had a practical
knowledge of what wealth is and of the mode of creating it, and we
have been able to identify it as we have seen it either in the raw or
the finished state. We have known what labor is, how it proceeds and
what helps it needs to enable it to make clothing, to prepare food,
etc. We have not known as much about the way in which the modern
market for such products is regulated, and how a modern tailor or
baker shares gains with the man who employs him and provides him with
materials and tools, and the main purpose of studying Economics is to
get an understanding of such social facts; but this cannot be done
without first bringing before the mind the more general facts
concerning the inherent nature of wealth itself and of the activities
that are always necessary--in uncivilized life as well as in
civilized--for creating and using it.

    [1] Past usage renders the somewhat misleading term
    _Political Economy_ more available than the more accurately
    descriptive term _Social Economics_, as the title of the
    science which treats of the creation and use of wealth by an
    organized society. Either title implies the existence of such
    an organization, but the word _political_ calls attention to
    the fact that it is under a government. The fact that, in a
    study of wealth, is most important is that the exchanges of
    products which spontaneously take place create an industrial
    society whose activities, going on as they do under a
    government, constitute the subject of the studies which are
    properly indicated by the traditional term, Political
    Economy. Government as such is not the subject of those

_General Facts First in the Natural Order of Study._--The primitive
and general facts concerning industry, which, in a broad sense, is the
creating of wealth, need to be known before the social facts can
profitably be studied; and a statement of the principles of Political
Economy should therefore begin by presenting a body of truth which is
independent of politics and sociology and so general that it is
illustrated even in that simplest of all conditions, in which no
market exists and every man makes by his own labor all the goods that
he uses. The wealth of a Crusoe, that of a solitary Esquimau, and that
of a pygmy in equatorial Africa have laws as well as that of a
European or American employer or bondholder. The qualities in matter
which make a share of it important for promoting the welfare of its
possessor can be detected in the simplest commodities that are
anywhere used. All kinds of industrial products have a common origin.
Labor and capital act together in making a birch canoe as truly as
they do in producing a transatlantic liner; and the productive power
of each of these two agents is everywhere governed by certain general
laws. Before ascertaining what is true of wealth when capital has
become complex and when laborers have become specialists, each
producing one particular part of one product and securing many
finished goods in exchange for it, it is well to state some facts
relating to wealth which are so general that they appear in all stages
of civilization.

_The Nature of Wealth._--The old English word _weal_ describes a
condition of life. It is the state of being "well off," or of having
one's wants amply supplied. Well-being in a broad sense of the term
may depend largely on a man's state of health, his temperament, his
conscience, or his relation to his friends; but the weal that is so
secured is not described as a state of wealth. That depends on the
possession of useful and material things, and the rich man has more of
them than other men. The term _wealth_, which originally signified the
state of being rich, afterwards came to be applied to the things which
make a man rich, and it is thus that the term is used in the science
of Economics.

_What Things constitute Wealth._--It is clear that useful things, like
air, which are at hand in unlimited quantity, do not make any one
rich in this comparative sense, for they benefit all alike; and, in so
far as they are concerned, all men are on the same level of welfare.
Moreover, since they are so abundant as to shower benefits everywhere
in profusion, the quantity of them that a man has at his disposal may
be lost or thrown away with entire impunity. He would only have to
help himself again from the abounding supply which nature thrusts on
him in order to be as well off as he was before. A bucketful of water
on the shore of Lake Superior is of no importance to the man who has
it. If it were spilled on the sand, the man would have only to dip up
another bucketful, with an expenditure of effort that would be too
small to take account of. If, however, fresh water were scarce, every
bucketful would have its importance, and the loss of that quantity
would make a distinct impression on the man's well-being. Whenever
each particular part of the supply has this power to make a possessor
better off than he would be without it, the substance is a form of
wealth. The quality of being _specifically_ important is, therefore,
the essential attribute of all the concrete forms of wealth. Sand by
the seashore does not have any specific importance, since it is so
abundant that the gain or loss of a wheelbarrow load would not make a
man better off or worse off; but a pile of sand by the side of an
unfinished building has this quality. There every barrow load is of
consequence, for the available quantity is so small that diminutions
reduce and additions increase the wealth of the possessor. Sand on the
shore has the inherent power to help make mortar, and water in Lake
Superior has the power to quench thirst, but neither of them has the
attribute which would make it a form of wealth, namely, specific
importance. Particular parts of the supply may be lost with impunity.

_Varieties of Utility._--We have used the term _importance_, rather
than usefulness or utility, to describe the quality which, if it
exists in every particular bit of a substance, makes it all a form of
wealth. With due care we may use the term _utility_. In a way even a
cup of water dipped by a fisherman from the lake is useful, for it
renders a service. Though the man might lose it and be no poorer, he
cannot say that the thing has no utility of any kind. He can say that
it has no importance. What it has we may call _absolute_ utility, or
the power to do for a man something which he wishes to have done. When
the fisherman is thirsty the water will do him good. It has an
absolute service-rendering power; and yet this cupful makes the owner
no better off than he would be without it, since the service which it
is capable of rendering would be rendered whether the man had it or
not. Absolute utility in an article is the power to render any service
whatever, regardless of the question whether it would be rendered
equally well if the article were absent. If conditions were such that
the man would have to go thirsty in case he spilled his cupful of
water, then this little supply would have what we may term _effective_
utility, and this means that the presence of the particular bit is a
positive element in conducing to the man's welfare. Usable things have
absolute utility even when they are superabundant, but they have
effective utility only when the quantity of them is so limited that
every particular bit of it is of some importance. Absolute utility
and limitation of supply insure to them this quality; and this
principle holds true in the economy of the most primitive state as
well as in that of a civilized one.

_The Origin of Wealth._--Some of the things that have this kind[2] of
utility have been given to man by nature. She has furnished some
materials that are useful and has not furnished them in quantities
sufficient to prevent them from being _specifically_ important. On
account of the comparatively niggardly way in which she has doled them
out to man, every bit of the supply has a power to benefit him; and if
he gains some portions, he goes upward in the scale of well-being, and
if he loses some, he goes downward. Wild fruits and fruit trees come
in this category; and a savage who should build his hut in a small
grove of banana trees, if he could keep other people out of it, would
be, by so much, better off than they. The grove and its fruits would
constitute their owner's wealth.

    [2] The term _final_ utility is used with much the same
    significance as specific importance. It is the utility of the
    last and least important part of the supply, and the use of
    the term requires us to think of the supply as offered to
    users unit by unit till the whole amount is in their hands.
    The first unit, when it stands alone, is more important than
    any later one will be. The second is of less consequence, and
    the last is the least important of all. When, however, all
    have been supplied and are together available for use, one is
    as important as another. Each one has an effective utility
    which is measured by the service rendered by the last one.
    The term _specific_ indicates that we measure the importance
    of the supply of an article not in its entirety, but bit by
    bit, while the term _effective_ is the antithesis of
    _absolute_ and means that each bit of the supply not only
    renders an absolute service, but renders one which would not
    be gratuitously rendered by some other part of the supply in
    case this portion were removed or destroyed. We do not here
    think of the supply as built up from nothing to its present
    size bit by bit, but look at it as it stands and measure the
    importance of any particular quantity. When we speak of final
    utility, we think of a series of "increments" supplied one
    after another, and in this case the successive increments
    become less and less important, since, after some have been
    supplied, the want of the kind of good that they represent is
    less keenly felt. The conception of the series of units is
    merely a means of isolating one unit from a total number and
    obtaining a mental measurement of its importance which
    corresponds with the effective importance of any unit in the
    entire quantity.

_Land an Original Form of Wealth._--Land is the original gift of
nature to humanity, and wherever there are people enough to make the
possession of a particular piece of it important, it becomes a form of
wealth. It can be valueless only when population is very sparse; and
then an increase in the number of people dwelling on it gives to it
early the attribute of specific importance. The land that is
accessible to a growing population cannot long be superabundant.

_Forms of Wealth produced by Labor._--Few useful goods are presented
to man by nature in a finished state, and it is therefore necessary
for man to exert himself in order to get the goods that he needs in
the condition in which he can use them. He must make raw substances
more useful than they naturally are, and as he does this the things
become partly products of his labor. Of course the supply of them is
limited, since labor is so.

_Labor a Wealth Creator._--Labor is a wealth-creating effort, and
there is no labor that is successful in attaining its purpose that
does not help to bring into a serviceable condition something that can
be identified as an economic good or a form of wealth. Some effort,
indeed, fails in what it attempts to do and therefore produces
nothing. We may build a machine that will not work, or make a product
that no one wants; but labor that attains a rational purpose is always
economically productive.

_Protective Labor and the Attribute it imparts to Useful
Matter._--Labor may be classed according to the particular result that
it accomplishes. In saying that the banana grove in our illustration
is wealth to the savage who resides in it, we had to insert the
proviso that he is able to keep other persons out of it. Exclusive
possession or ownership is necessary in order that things may continue
to be effectively useful to any particular person or persons. If they
are superabundant, as we have seen, no part of the supply is
important; but it is also true that if they are scarce and a man is
not able to keep any of them, they will not serve him. In order that
an economic good may be effective, it must be appropriable, and where
claimants are numerous and lawless it may take much of the owner's
time and effort to keep the article in his possession. The savage must
personally protect his goods, and to some extent the civilized man
must do so; for however well policed a city may be, it will not
do to leave purses or portable goods by the wayside. Protective
labor is necessary in all stages of social advancement. In civilized
life, indeed, we delegate much of it to a special class of
persons,--policemen, judges, lawyers, and legislators,--and this is
the most fundamental division of labor that civilization entails; but
the work has to be done in any stage of social evolution. Crusoe's
goods would have been worth nothing to him if he could not have kept
them from the savages who, in time, appeared on his island; and they
would have been worth little if he had been forced to spend most of
his time in guarding them.

Appropriability is, therefore, a further essential attribute of the
things which can make particular men richer by reason of their
presence. When such things are actually brought into ownership, their
utilities become available, as they would not otherwise be. Effort
expended in protecting property is wealth-creating, since it causes
those service-rendering powers which otherwise would be only potential
in goods to become active. In other words, it gives to things which
are otherwise in a condition to be effectively useful a further
quality which they require in order that they may actually promote an
owner's well-being.

_Industrial Labor._--Industrial labor is the antithesis of protective
labor, and it invariably changes the qualities of material objects in
such a way as to make them useful; that is to say, it directly creates
utilities.[3] These utilities are of different kinds, and the labor
may be classified according to the kind it creates.

    [3] The term _create_ is here used in a somewhat loose
    sense and does not imply that the man originates matter or
    even that he always transforms it without calling in, as an
    aid, the forces of nature. The farmer must depend on vital
    forces in soil and air in order to raise a crop. What he and
    other laborers do is to cause the product in some way to come
    into existence, and he and they may in this sense be said to
    create the products which would not appear without them.

_Elementary Utility._--An elementary utility is created when a
substance is either dug out of the ground, as is done in mining, or
when it is secured through the vital forces of the earth, as is done
in agriculture. Hunting, fishing, and stock raising should be classed
with agriculture, since they use the resources of animate nature to
secure for mankind new raw products on which labor will confer further
useful qualities. This utility has to be created by men in every stage
of industrial development, from that of a tropical savage to that of
men in the most advanced civilization.[4]

    [4] The distinction between elementary utility and others
    does not need to be applied with the utmost strictness, for
    mining creates form utility by breaking up masses of ore, and
    place utility by making them accessible. Agriculture shapes
    its products and moves them to places of storage. It is
    convenient in practice to adhere to the more general
    classification suggested in the text.

_Form Utility._--A form utility is created when a raw material is
fashioned into a new shape, subdivided, or combined with other
materials, as is done in manufacturing and, in a certain way, in
commerce. Buying goods in bulk and selling them in small quantities is
the creating of form utilities and makes an addition to total wealth.
Oil in small cans is worth far more for consumption than it would be
if each consumer were forced to buy a tankful. Sugar is worth more to
a consumer when it is doled out to him in paper sacks than it would be
if it were to be had only in hogsheads. Merchants are not mere
exchangers, for they make positive additions to the utility of goods.
In primitive life no such class exists; and yet form utilities of
every kind are created, since men make for themselves the goods that
they use and adapt them in shape and in quantity to their current

_Place Utility._--Carrying things to places where they become more
useful creates place utilities. In primitive life men do their own
carrying; but in civilized states the common carrier does most of it,
and so imparts place utility to matter on the most extensive scale.
All useful transportation creates this quality, which is a general
attribute of wealth; and the operation of so moving matter as to
create place utility is one of the general functions of labor.[5]

    [5] In a way all kinds of production may be analyzed into the
    moving of matter. In cutting up raw materials a manufacturer
    moves waste portions away from those that are to be utilized,
    while combining materials, of course, moves them toward each
    other. Neither of these operations creates place utility.
    This quality consists in a relation, not between some
    materials and others, but between goods and the persons who
    are to use them. Bringing things to us from a distance
    changes their local relation to us, and in this is the
    essence of place utility, and every article that we use must
    have acquired this quality. The service-rendering power which
    it possesses is only potential until it reaches a place where
    the power can be exercised.

_Time Utility._--There is, moreover, a kind of utility which depends
on the existence of a good at the time when it is needed. Ice in the
warm season, a plow in the spring or the fall, a pleasure boat in
summer, and anything which, by the aid of capital, is presented to a
user when he needs it, illustrate this quality. We may call it time
utility, and creating it is a function of capital. We shall see how
capital assists in the production of the other utilities; but the
creation of time utility it accomplishes without assistance.

_Executive and Directive Labor._--Labor involves the whole man,
physical, mental, and moral. No labor is so simple that it is not
better done when intelligence is used in the performance of it. The
savage's hut, his canoe, his bows and arrows, etc., vary in their
efficiency and value, not merely according to the time and muscular
effort spent in making them, but also according to the efficiency of
the thought by which those efforts are guided. There is here the germ
of the difference between the executive labor of the modern employee
and the directive labor of the manager. Yet no manager directs in more
than a general way the muscular movements of his subordinates, and
their own intelligence must still be trusted to do much of the
directing. The mental labor that guides and controls the physical is
universal in industry, but becomes more and more a distinct and
dominant factor as civilization increases.

_Fidelity as affecting the Productivity of Labor._--The fact that all
workmen are largely their own directors brings fidelity into the
foreground as an element in determining men's earning power; but this
element counts for much more in the civilized state than it does in
the primitive one, for here fidelity in directive laborers of the
highest type is most important and difficult to secure. One of the
greatest problems of modern business is how to make directors and
executive officers of corporations faithful to the stockholders who
employ them. In the primitive state these problems do not arise. When
a man is working for himself, mere interest largely takes the place of
fidelity. If to-day any one secures a good house of his own to live
in, it is because he employs contractors, overseers, and artisans all
of whom are, in the main, faithful to his interests and see that the
work of building is properly done. A savage looks after his own
interests as his personal work proceeds; and yet even in his case
there is the germ of that enthronement of character in the supreme
place which is the prominent feature of highly organized industry. In
building a hut to shelter his family, a savage puts into his work
conscience and affection as well as muscular effort; and when the
mother of the family does this work, the altruistic element in it is
still more conspicuous. As society becomes highly organized the
importance of the moral element in all labor increases till the
further progress, or even the existence, of the social order may be
said to depend on it. In the world of business there is now distrust
and turmoil, and revolutions are feared, because of the unfaithfulness
of a class of men to trusts committed to them.[6]

    [6] On the ground of convenience, we may classify labor as
    physical or mental, according as the work of muscle or of
    brain is especially prominent. Digging a ditch requires more
    than an average amount of strength and not even an average
    amount of intelligence, and it is, therefore, physical labor
    rather than mental; while writing a brief or arguing a case
    in court requires much power of thought and only a small
    amount of muscular strength, and is typically mental labor.
    Managing an estate for an absent owner is more largely a
    moral function, since the value of the service depends
    chiefly on the fidelity of the man who renders it; but
    physical and intellectual labor are also involved. These
    three types of personal effort are exerted wherever wealth is

_The Requisites of Production._--If we start with nothing but the
earth in its natural state, inhabited by empty-handed men, and seek to
know what is necessary in order that some wealth may be created, we
find that nothing is absolutely necessary except labor. By working for
a few minutes it is possible to get something that will minister
directly to wants. Yet if men begin operations in a state of such
poverty that they have only their bare hands to apply to the elements
about them, they do not commonly get the usable goods immediately. If
a savage wants fish and makes the rudest net with which to catch them,
he makes what is a _capital good_. This is wanted only for the sake of
the consumers' wealth which it will help to produce. The end in view
has all the while been fish; but the man works first on an instrument
for catching them. He makes the net by mere labor, but he catches the
fish by means of labor and the net. Without such instruments to aid in
production a dense population could not live at all, and a very sparse
one could live only in a meager and precarious way. If the instruments
are artificially made, or if they are furnished by nature in limited
amounts, they are forms of wealth, or goods; but as their function is
not to minister directly to consumers' wants, but to help in making
things which do this, we distinguish them by the name "producers'
goods" or "capital goods." In contrast with them those commodities
which directly minister to wants may be called "consumers' goods."

_The Production of Intermediate Goods._--All economic goods are means
to an end. Wealth is always mediate. It is usually a connecting link
between man's labor and the satisfaction of his wants. Man, the
worker, first spends himself on nature, and then nature in turn spends
itself on him. In production nature is the recipient, but in
consumption the recipient is man. This is saying that man serves
himself by means of some element in nature which, under his
manipulation, becomes a form of wealth. He thrusts a bit of natural
matter between himself as a producer and himself as a consumer. All
kinds of wealth, then, stand in an intermediate position between
original labor and the gratification that ultimately results from it.
Some goods, however, are means in the special sense of standing
between labor and other goods. Instruments help to make consumers'
goods and these add to man's pleasure. Using a tool is not generally
agreeable. The tool stands not only between the effort and the
gratification that will ultimately follow, but between the effort and
the further material good that will directly produce gratification.
The hatchet intervenes between the labor that makes it and the
firewood it will cut, while the wood acts directly on the man and
keeps him warm. Capital goods are in this special sense mediate. They
are not wanted for their own sake, but for the sake of something else
that is directly useful.[7]

    [7] For an elaboration of the conception of mediate goods the
    reader is referred to Von Böhm-Bawerk's work on "Positive
    Theory of Capital" and to John Rae's work on "The
    Sociological Theory of Capital."

_All Labor immediately Productive of Wealth._--When a savage abandons
the plan of fishing from the shore and gives his labor for a fortnight
to making a canoe with which to fish more effectively, he interposes
an interval of time between his labor and its ultimate fruits, the
consumers' goods. There is no such interval between the labor and the
kind of wealth that it first creates, namely, the canoe. This
immediate product of labor is itself a form of wealth and at once
rewards the laborer, since it is what he needs, though he does not
need it for consumption. Industry always pays as it goes and tolerates
no hiatus between labor and wealth in some form.

_Organized Industry immediately Productive of Consumers' Goods._--If
one man were keeping the stock of canoes of a few fishermen in repair
and taking as his pay a share of each day's catch, he would not have
to wait for his food any longer than the fishermen themselves. This
mode of conducting the industry, however, involves organization. If
each fisherman had to make his first canoe, it would be necessary for
him to wait for fish; but as soon as a stock of canoes has been
obtained and a special set of men assigned to the work of keeping this
stock intact in number and quality, that necessity entirely ceases.
Five men may do nothing but fish while a sixth keeps their stock of
canoes intact by repairing old ones left on the shore and making new
ones to replace such as are beyond repairing. Fishing and boat
building may go on simultaneously, and all the men may go share and
share in each day's catch.[8] This is a type of what goes on in modern
industry, where a complex stock of capital goods always exists and is
kept intact by the action of a class of persons who share the returns
that come from using the stock. None of these persons has to wait for
food, although some of them devote themselves exclusively to the
production of tools. This fact shows that the necessity for waiting,
as well as working, wherever instruments are in the process of
manufacture, is not among the universal phenomena of economics, and
that it is not present in that organized industry which we chiefly
study. Such a permanent stock of capital goods as the fishing
community of our illustration possesses would enable it to get its
food, the fish, day by day, by working in different ways and using the
permanent stock. If we call this permanent supply of canoes, etc.,
_capital_, it is, _in a causal way_, mediate wealth, though it is not
so in point of time. Some labor is spent each day on it, and itself
creates each day some consumers' wealth. These two operations go on
simultaneously, and the men who work to maintain the stock and those
who use it get their returns together. In very primitive life the work
spent on capital goods and that spent on consumers' goods are not
always synchronous, but organization and the acquiring of a permanent
fund of capital make them so. Work to-day and you eat to-day food that
is a consequence of the working. In point of time the canoe makers are
fed as promptly as the fishermen, and this fact is duplicated in every
part of the industrial system. We shall later see more fully what this
signifies, but it is clear that any study of this phenomenon--the
synchronizing of labor and its reward--takes us out of the field of
Universal Economics, since it does not appear in the industry of
primitive beginnings, but is the fruit of organization.[9]

    [8] One man might be employed in guarding canoes and fish
    against theft, which is doing protective rather than
    industrial labor; and economic forces would tend to give him
    a share as large as each of the others receives, provided, of
    course, that the men are of equal capacity as workers.

    [9] The conception of capital goods as always putting
    enjoyments into the future has crept into economic science
    because in certain illustrations taken from primitive life
    they seem to have that effect. We shall see that they do not
    have it at all in _static_ social industry, and that they
    have it only in a limited way in _dynamic_ social industry,
    or that which is carried on by a society undergoing organic



_Passive Capital Goods._--Labor spends itself on materials, and these,
in their rawest state, are furnished by nature herself. They "ripen"
as the work goes on. Every touch that is put on them imparts to them
more of the utility which is the essence of wealth. They are
technically "goods," or concrete forms of wealth, from the moment when
they begin to acquire this utility, though for a time they are in an
unfinished state. The function of materials, raw or partly finished,
in the physical operation of industry is a passive one, since they
receive utility and do not impart it. The iron is passive under the
blows of the blacksmith's hammer; leather is passive under the action
of the shoemaker's sewing machine; a log is passive under the action
of the lumberman's saw, etc. The materials which are thus receiving
utilities under the producers' manipulations constitute a distinct
variety of capital goods, while the implements which help to impart
the utilities constitute another variety, and both kinds are present
in all stages of industrial evolution. Savages use raw materials and
tools for fashioning them.

_Active Capital Goods._--The hammer which fashions the iron, the awl
which pierces the leather, and the saw that cuts the log into boards
have an active function to perform. They do not receive utilities,
but impart them. They manipulate other things and are not themselves
manipulated; and except as unavoidable wear and tear injure or destroy
them, they are not themselves at all changed by the processes in which
they take part. They are the workman's active assistants in the
attacks that he makes on the resisting elements of nature. Passive
instruments, then, and active ones--things which receive utility, as
industry goes on, and those which impart utility--constitute the two
generic kinds of capital goods. What is commonly called "circulating
capital" is a permanent stock of passive capital goods; and, in like
manner, what is usually known as "fixed capital" is such a stock of
capital goods of the active kind. The materials and the unfinished
goods that are scattered through a modern mill and receiving utility
are what the manufacturer would at this moment identify if he were
asked to point out the things in which he has circulating capital
invested; while the mill, the machinery, the land, etc., which are
imparting utility, are what he can point to as now constituting his
fixed capital. At a later time there will be other goods of both kinds
in his possession, and these will at that time embody the two kinds of
capital. While a primitive man would have little occasion to use the
term _capital goods_, he would possess both varieties of the goods
which the term denotes.

_Varieties of Active Capital Goods._--Mere hand tools act as armatures
attached to the person of the worker, and they enable him effectively
to attack resisting substances. The hammer fortifies the blacksmith's
hand against the injuries it would suffer if he delivered blows with
his fist, and it multiplies the efficiency of the blows. Machines,
however, substitute themselves for the person of the worker and carry
the tool through its movements. A steam hammer, so called, is an
engine that gets power from a boiler and wields an armature, which is
the real hammer, much as a smith would do it, though with far greater
force and effect. Machines do rapidly and accurately what a manual
laborer would, without them, have to do slowly and imperfectly, by
carrying the armature in his own hand and moving it by his own
muscular strength. Tools and machines impart "form utility" to
materials. Vehicles which carry goods impart "place utility" to them
by putting them where they are more useful than they would be
elsewhere. Buildings protect goods and workers alike, and enable the
operation of transforming them to go on successfully. They also make
it possible to store goods at a time when they are not needed and take
them out for use when they are needed. In doing this, buildings help
to impart "time utility" to the merchandise that is put into them by
keeping them intact till the time comes when they will be useful.
Tools, machines, reservoirs of water, canals, roadways, buildings, and
even land itself are active capital goods, and are, for that reason,
component elements of that part of the permanent productive fund which
is known as fixed capital. They aid workers in their efforts to bring
materials into usable shapes, and this is as true of the hole in the
earth in which a savage stores provisions as it is of a fireproof
warehouse in a modern city.

_Materials which are at first Passive and later pass into the Active
State._--The hammer itself has to be made out of raw material, and,
while it is in the making, the material that enters into it is as
passive as anything else. While the ore is smelting and while the
steel is forging, the future hammer is in a preliminary stage of its
existence and is discharging a passive function. When it is completely
finished, its period of activity begins, and from this time on it
helps to manipulate other things. The materials which enter into
consumers' goods go through no such transition. The leather remains
passive till, in the form of a pair of shoes, it clothes its user's
feet; and at this point it ceases to be a capital good at all. The
steel of the hammer is first a passive good and later an active one.

_The Use of Capital Goods Universal._--There is no doubt that capital
goods are used in the most primitive industry. Implements existed in
times too remote for tracing; and even if they had not been used, raw
material would have been indispensable. People living in an economic
stage so ultraprimitive as to use no mediate goods whatever could
sustain life only by plucking wild fruit or gathering fish or other
food stuff by hand, and so long as they could do this their industry
might conceivably consist in getting consumers' goods by labor only.
The rudest pick, shovel, or ax and the simplest hunting implement are
early types of what, in "capitalistic production," is represented by
mills with their intricate machines, ships, railroads, and the like.
Primitive industry has capital but is not highly capitalistic, since
labor and a little capital in simple forms are all that it requires.
These primitive capital goods are still essential.

_Capital._--It might seem that we have already described the nature of
capital, but we have not. We have described the kinds of goods of
which it consists. A sharp distinction is to be drawn between two ways
of treating capital goods, and only one of these ways affords a
treatment of capital properly so called. To attain that concept we
must think of goods as in some way constituting a stock which abides
as long as the business continues. And yet the things themselves
separately considered do not abide. Goods are perishable things; no
one lasts forever, and some last only a very short time. Raw materials
best serve their purpose when they are quickly transformed into usable
goods and taken out of the category of productive instruments. Tools
may last longer, but they ultimately wear out and have to be replaced.

_How Capital Goods Originate and Perish._--If you watch a particular
mediate good of the passive kind, say wood in a growing tree, you see
it beginning its career as an absolutely raw material, and then under
the hand of labor, aided by tools, receiving utility till it takes its
final form in some article for a consumer's use, say a dining table.
Little labor is applied to it during the first stage of the process,
that in which the tree is guarded and allowed to grow to a size that
fits it for conversion into lumber; but the cutting, carrying, sawing,
and fashioning are done by labor and tools, and under their
manipulations the wood "ripens" in the economic sense--that is, it
becomes quite fit for consumption. It is ready to serve a consumer as
a table, and, when this service begins, the wood that up to this point
has been a passive capital good, constantly receiving utilities, will
cease to be a capital good at all and begin slowly to wear out in the
service of its owner.[1]

    [1] In the economic sense consumption is the utilization
    rather than the destruction of the thing consumed, though
    many things go rapidly to destruction in the process. Food is
    destroyed in the moment of using; clothing perishes more
    slowly by use, and furniture and dwellings more slowly still.
    Some things that go gradually to destruction during the
    process of utilization do not perish the more rapidly because
    of it. A vase, a statue, or a picture is consumed, in the
    economic sense, by a person's act of looking at it and
    getting pleasure from it; but this does not hasten its
    deterioration except as keeping such an ornament where it can
    be seen exposes it to deterioration or accident. Climbing a
    hill to get a view "consumes" the hill in a true sense, and
    looking from the summit over a wide stretch of picturesque
    country even consumes--that is, utilizes--the landscape; and
    certainly this act does not injure the thing utilized. The
    general fact, however, that goods for final use are, as a
    rule, injured or destroyed either by the act of consumption
    or by the exposures that are incidental to it, justifies the
    use of this term to express the receiving of a service from
    the usable article. It is a process in which the commodity
    acts on men's sensibilities and, as a general rule, exhausts
    itself while so doing. It is worth remembering that this
    exhaustion of the good is not the essential part of
    consumption. On the man's side that consists in deriving
    benefits from the good, while on the side of the good itself
    it consists in conferring benefit on the man--in doing him
    good and not in doing itself harm.

_The Transition of Goods from one State to Another._--The beginning of
its service in the purchaser's dining room takes the wood of the table
out of the category of producers' goods; but there is some raw
material that is never destined to emerge from that category and enter
another. Its last state of existence as a good will be that in which
it is embodied, not in an article for consumers' use, but in an active
tool. Our tree might have furnished some of its wood for a
wheelbarrow, and if so, that part of it would have been a capital good
until it ceased to be an economic good at all. If we watch it as it
grows toward its economic maturity, we see it sawed, planed, and
otherwise fashioned under the laborer's hand, and maintaining during
all this time its passive attitude, just as does the wood that is
destined to constitute a table. When the wheelbarrow is completed, it
does not, like the table, begin to minister directly to consumers'
wants, but begins actively to aid some laborer in a further productive
operation. It carries mortar to the wall of an unfinished building and
is thus taken out of the list of passive goods--recipients of
utility--and is ranged with other active tools which impart utility.
The same thing is true of the steel that is destined to compose the
head of a modern woodman's ax or the stone that is in process of
fashioning into the rude hatchet of some primitive savage. As raw or
partly wrought material it is a passive capital good; later it becomes
an instrument of the active sort.

_The Ultimate Perishability of all Kinds of Goods artificially
Made._--In the end both kinds of material will cease to be capital
goods. The raw stuff that goes into food, clothing, furnishings, or
the like will become consumers' goods, while the raw material of tools
will, in its final form, the tools themselves, have one more lease of
life as capital goods. In the end, however, as wheelbarrows, axes,
hatchets, and the whole long list of active implements are used up,
they cease to be capital goods because they cease to be economic goods
at all. They are as truly ordained to be ultimately used up as are
food and clothing, and this is true of the most durable things that
are artificially made. Walls, roadways, bridges, and buildings slowly
deteriorate till the time comes when for productive purposes their
room is worth more than their company.

_Why the Perishability of Capital Goods does not put Capital out of
Existence._--Perishability is the most striking trait of capital
goods. Each particular one comes and goes, but there is always a stock
of them on hand; for when one is on the point of going, another is
ready to take its place and keep up the succession. New tools replace
old tools; new materials replace those that are finished and
withdrawn, and so it comes about that a stock of such things abides
forever. Not one of the individual instruments is permanent, for each
one only does its part in keeping up an endless procession. It is the
procession that is always there--a moving series of individual goods,
not one of which has more than a transient economic career. Each one
helps to keep up the supply of permanent capital just as each man,
taking his turn in an endless succession of laborers, serves during
his brief life to keep up the permanent force of laboring humanity.
Men come and go, but "labor"--a mass of working humanity--abides; and
so capital goods come and go, but a stock of them abides, kept up by
perpetual replacement. We may trace the career of any single
instrument from a beginning to an end; but we may, on the other hand,
cease to look at any instruments that we single out and identify and
look rather at the procession of them; and if we do this, we look at a
body which never wastes away, though the things that compose it are,
separately considered, forever wasting.

There are many kinds of transient things which, by the same process of
renewal, constitute permanent entities. Composing a human body at this
moment are certain tissues that can be separately identified; and if
we watch any one of them, we shall see it going in a short time to
destruction. Yet the body lasts while life continues. Indeed, the
evidence of the life itself is the discarding and replacing of the
tissues. A living body is a durable thing, though the particular
tissues that at any one time compose it are not so. In a like way
drops of water make a river, and this is a permanent thing, however
rapidly its composition changes. The waterfall that drives the
machinery of a mill is permanent, though no particular particle of
water remains in it for more than a moment. Society is permanent,
though the men who compose it are short-lived. In an exactly similar
way a body of capital goods is maintained as a perpetual
instrumentality of production. _This is capital properly so called._
It is, as it were, a quasi-living body, perpetuated by the constant
replacement of the component parts, which are destroyed as its normal
activities go on.

_The Difference between Capital Goods and Capital Summarized._--The
distinction between capital goods, on the one hand, and capital, on
the other, is, then, like that between particular tissues and a living
body, or like that between particular particles of water in the river
and the river that flows forever. We can single out and watch certain
drops of the water as they flow from a spring, and we can trace them
through their brief careers, and say truly that the river is composed
of fickle and transient stuff; but we cannot say that the river is
transient. That is perpetuated by the renewing of the supply of water
as the original drops disappear. We can mentally watch a particular
man, as he enters the social force of workmen, labors for a time, and
drops out of the line, and can see that society is composed of
transient material; but society itself is an abiding thing. So we can
study a particular bit of ore or wool or leather or a particular
hammer or spindle or sewing machine, and in those cases we shall be
studying capital goods and finding how perishable they are; but we
shall also see that a stock of them always abides as the capital of
economic society. We can cease to look at individual things and study
the permanent fund of productive wealth, which is made up of goods
like ore, wool, leather, hammers, spindles, and sewing machines. The
identity of the things which make up this stock is forever changing.
The same list of things we shall never find in the stock on any two
dates, but a supply of similar things forever abides. _Capital is this
permanent fund of productive goods, the identity of whose component
elements is forever changing. Capital goods are the shifting component
parts of this permanent aggregate._ They are the particular
instruments that, each during its own brief economic lifetime, take
their places in the endless procession of things which in its entirety
is an abiding productive agent--the co-worker of labor and its
perpetual assistant in creating consumers' wealth.

_The Business Man's View of Capital._--It is as such an abiding entity
that a business man regards capital. He describes it nearly always as
a sum of money. Thus the capital of a manufacturer is "a million
dollars" because a stock of instruments worth that amount is kept
intact in his possession. It is not allowed to waste away, however
much the constituent parts of it may shift. The waste and renewal
which business entails leave the equivalent of the million dollars
always on hand, though never in the literal shape of money. A stock of
shifting goods always worth a million dollars is, by a figure of
speech, described as a million dollars "invested in the goods."[2]

    [2] We here put out of sight all questions connected with the
    changing purchasing power of money. This is, in ordinary
    times, the business man's habit. He considers his capital
    intact if the number of dollars invested originally in his
    business still appears on his inventory as representing the
    net surplus of his assets over his liabilities. If a currency
    were undergoing rapid inflation, a fixed amount of invested
    money would represent a shrinking stock of capital goods.
    This stock would last always, but would grow smaller by a
    true standard of measurement. All that we are at present
    interested in knowing is that practical usage treats capital
    as a permanent fund of productive wealth, and most
    conveniently describes it as a fixed amount of money
    "invested" in goods of a productive kind. What is thought of
    as "money" abides. Of course the practical man does not
    regard it as actually composed of currency.

_The Chief Attribute of Capital._--A chief attribute of capital,
properly so called, is permanence. If a man's productive fund does not
last, he is impoverished. The farmer keeps on hand a more or less
constant supply of the implements he has to use. He takes a part of
the proceeds of the sale of his crops, puts it into the shape of
implements and materials, and in this way keeps an amount of them on
hand as the auxiliary capital of agriculture. Particular goods are not
constant, but the sum of money or quantum of wealth "invested" in the
moving procession of them is so. At any one instant the capital is
composed of particular instruments which can be sought out and
identified, but at no two instants are the goods the same.

_The Reasons for describing Capital as a Sum of Money._--This fact
explains the general practice of describing capital in terms of money.
The manufacturer just referred to will speak of his capital as "a
million dollars" and consider that sum as a "permanent investment"
because he knows that while the goods that now represent that value
will soon pass from him, the "dollars"--that is, the value which is
equivalent to the dollars--will abide. There is, moreover, no failure
on his part to discriminate between his capital and literal money, for
he knows in what his productive fund consists, and is fully aware that
only the minutest part of it is in the shape of actual currency.

Instruments of production compose the fund, but the dollars serve to
describe it. They indicate the amount and the abiding quality of it,
since they describe what he has invested or embodied in the shifting
things and can, by a fair sale, get out of them.

_Why Abstract Terms are used in popularly describing Capital._--In
certain connections money is, in unintelligent thinking, confused with
real capital in ways that we should guard against. In avoiding such
errors we need to be even more careful that we do not miss the truth
that is at the basis of the common mode of describing capital. A
permanent fund that is spoken of as a million dollars invested in a
business does not suggest to any one a literal pile of a million
silver or paper dollars or of a hundred thousand gold eagles. It
suggests what is actually in the business, a procession of things each
of which comes into the man's possession and then leaves him, and
helps him to keep the constant stock of goods that at any time is a
potential million of dollars. A permanent body of any kind, if it is
made up of shifting tissues, is commonly described by the use of an
abstract term. A waterfall, made as it is of rapidly changing drops of
water, is spoken of as a "water power," since the power is the abiding
thing. An endless series of living human beings is described as
"humanity," since that remains through all personal changes. An
endless series of workingmen is described as "labor," and we study the
"wages of labor," the "relations of labor to capital," etc., because
these are permanent relations. Men come and go, but labor continues
and is the source of a permanent income. It is actually the fact that
in speaking of the "labor problem" or the "relation of capital and
labor" we usually think of "labor in the abstract," as we might term
it; but this is very far from implying that we consider a series of
generations of actual workingmen as an abstraction. We may, using
terms in a like way, speak of the problem of interest as concerning
"capital in the abstract"; but this is far from meaning that we
consider an endless series of material instruments of industry an
abstraction. We describe these real things by the use of an abstract
term, just as we describe a thousand other realities. A "fund," a
"value," a "permanent quantum of wealth," is capital; but with the
abstract notion the mind always merges the thought of the concrete
entity. It is the tools of industry that, in their endless march,
come into and go out of the industrial field that we think of even
when we use the abstract term. This term, however, saves us from the
danger of thinking merely of particular tools that we can identify and
trace to their final destruction when we form the concept of capital.

_The Importance of discriminating between the Concept of Capital Goods
and that of Capital._--Very great is the importance of keeping sharply
distinct the two concepts of productive wealth of which one is
described by the term _capital goods_ and the other by the term
_capital_. In the one case we think of a particular thing which we
identify, keep in mind, and watch as it goes through its
transformations, does its final work, and perishes. The brilliant
studies of Professor Böhm-Bawerk are based on the idea that such a
tracing of the biography of a particular instrument is the true way to
solve the problem of interest. Yet the very term _interest_ itself
suggests the existence of what we have defined as permanent
capital--an abiding fund or sum of wealth that every year yields as an
income a certain percentage of itself. The "hundred dollars" yields
five dollars; that is, the fund yields a twentieth of the amount
which, amid all the changes of its constituent parts, it continues to
embody. It is true, indeed, that a study of _all_ capital goods which
have existed or will exist, with due attention to their relations to
each other, would reveal the fact that they maintain such an endless
procession as has been here described, and it would thus bring before
the mind such a concept of capital as the business man has and
describes by the monetary form of expression. By making a synthetic
study of capital goods in general, and not separate studies of
particular goods as they come and go, we can obtain a grand resultant
of the action of all of them, which is nothing less than permanent
capital doing its continuous work. Such a comprehensive study of
capital goods, if it is carried far enough, becomes a study of the
abiding entity, capital. Allowing ourselves, however, to put the
abiding entity out of sight and merely to trace the origin, growth,
and productive action of separate instruments of production would be
disastrous. The undying body in which the particular things are
tissues absolutely needs to come into view. The very mention of a
problem of interest--of the percentage of itself that a fund of a
given amount can annually earn--puts before us at once the permanent
entity, capital, and the problems relating to it.[3]

    [3] Consumers' goods may be regarded in the two distinct
    ways in which it is necessary to regard capital goods. We may
    look at particular articles for consumption, as they begin
    their careers by ministering to their owners' needs, and
    follow them as they wear out and finally perish. This gives a
    conception of them which is analogous to the conception of
    capital goods rather than to that of capital. On the other
    hand, we may look at the permanent stock of usable articles,
    which is maintained by the constant coming of new ones to
    replace those which are worn out, and in this way we get a
    conception of _permanent consumers' wealth_. The flow of
    finished goods from the shops to the users offsetting the
    concurrent destruction of such articles in the users' hands,
    has the effect of maintaining a permanent fund of consumers'
    wealth consisting of perishable goods the identity of which
    is always changing; and this fund is analogous to permanent
    capital as we have defined it. Professor C. A. Tuttle has
    advocated the use of the generic term _wealth_ to denote the
    two continuing funds which we have here termed, on the one
    hand, capital, and, on the other hand, the permanent stock of
    consumers' wealth. We have preferred to use the term _wealth_
    in a sense that is generic enough to include both capital and
    capital goods, and both the permanent stock of consumers'
    goods and the particular articles that, in turn, compose it.
    Wealth consists of effectively useful concrete things
    regarded either as particular articles that can be identified
    and watched till they perish in the using, or as an abiding
    stock of articles of this genus, each one of which has in
    itself only a transient existence. See an article on "The
    Wealth Concept," by Professor Charles A. Tuttle, in the
    _Annals of the American Academy of Political and Social
    Science_, for April, 1891, and other articles by the same

_Labor as a Permanent Entity._--The term _labor_ is sometimes used to
describe a permanent aggregation of laborers no one of whom lives and
works through more than a brief period. Labor is thus analogous to
capital and laborers to capital goods. A permanent working force is
composed of perishable beings as a permanent producing fund is
composed of perishable goods. Both are commonly described by the use
of abstract terms, but both are in reality concrete things; and
actually to reduce either to a mere abstraction would be to put a
material entity out of existence. We instinctively speak of a value--a
given number of dollars--in describing a man's capital, but it is
dollars "invested in" productive instruments; and we instinctively
speak of labor when we mean an abiding force of workingmen. Neither
capital nor labor is like an immaterial soul that can live apart from
its body. Each consists of a permanent body with a shifting
composition. A permanent sum, on the one hand, a permanent amount of
working energy, on the other, are always present, but they are in
goods and men respectively. Each may well be described by the use of
an abstract term, and in practical life it commonly is so; but it is a
concrete reality.

_Peculiarity of Land as a Capital Good._--One reservation needs
to be made when we call capital goods perishable. If we include
land under this term, we must make it an exception to the rule
of destructibility. It is the only thing that does not go out of
existence in the using. It is not a produced good at all and does not
stand, like other goods, in an intermediate position between labor and
the gratification that labor is intended to produce. Work did not
create it and using will not end it. It will be called, in our study,
a capital good, for it is a form of wealth which produces other
wealth. It enters into the permanent productive fund that society is

_Differences between Land and Other Capital Goods Important in
Economic Dynamics._--It is in a later part of the study which deals
with economic changes--the part which we shall call Economic
Dynamics--that the differences between land and artificially made
goods become prominent, and these differences will receive due
emphasis in their proper place. In studying the law which would govern
economic society if no essential economic changes were taking
place,--in reducing society, as it were, to a static state,--we find
that there is a certain set of characteristics which land shares with
those capital goods which are the products of human industry. In
static studies it is best to group the productive instruments which
men make with the one unmade good which nature furnishes and to
recognize that together they embody the permanent fund of productive

    [4] What is commonly termed land contains elements which
    perish in the using. Such are deposits of coal, ores, or oil,
    and those ingredients of loam which are exhausted by tillage.
    Such elements of the soil are not land in the economic sense.
    How they should be regarded will be shown in a later chapter.

_Mobility an Attribute of Capital._--Even in a static society capital
would be permanent, while particular capital goods would be
perishable. In dynamic studies another quality of capital, as
distinguished from capital goods, comes into the foreground, namely,
mobility. It is the power to move without loss from one industry to
another. Goods cannot be thus moved with any freedom. A loom cannot be
taken out of a woolen mill and made to do duty in a carpenter's shop,
nor can a circular saw be made available in weaving. When the loom
wears out and needs replacement, it is in the owner's power to procure
either another loom or a circular saw, and if he chooses the latter
alternative, he causes capital to move into the woodworking business.
A whaling ship would not be useful as a cotton mill; but much capital
that was once invested in the whale fishery of New England has since
found its way into manufacturing. The transfer can often be made
without waste. If the earnings of an instrument have sufficed to
replace it with another that is like it, they may suffice for
producing an instrument that is unlike it. Waste, if it occurs,
results from a failure of the original instrument to earn the fund for
replacement. Capital which thus abides but passes from one employment
to another is a body the identity and the character of whose component
parts change. The transfer of capital from one industry to another is
a dynamic phenomenon which is later to be considered. What is here
important is the fact that it is in the main accomplished without
entailing transfers of capital goods. An instrument wears itself out
in one industry, and instead of being succeeded by a like instrument
in the same industry, it is succeeded by one of a different kind which
is used in a different branch of production. Goods have not moved from
one branch to another, but capital has done so.

_How Capital itself may be Destroyed._--When we speak of capital as
permanent, we mean that using does not destroy it as it destroys the
tissues of which it is composed. Fires, earthquakes, and business
disasters put parts of it out of existence and affect the volume of
the fund as a whole; but production itself leaves it intact. It is
this very production which destroys capital goods and makes it
necessary to replace them.



In all stages of social development the economic motives that actuate
men remain essentially the same. All men seek to get as much net
service from material wealth as they can. The more wealth they have,
other things remaining the same, the better off they are, and the more
personal sacrifice they are compelled to undergo in the securing of
the wealth, the worse off they are. Some of the benefit received is
neutralized by the sacrifice incurred; but there is a net surplus of
gains not thus canceled by sacrifices, and the generic motive which
may properly be called economic is the desire to make this surplus
large. Except in a perfectly isolated individual life, there is
opportunity for ethical motives to affect men's economic actions.
Altruism has a place in any _social_ system of economics, and so have
the sense of justice and the positive compulsion of the law. Altruism
does its largest work in causing men to give away wealth after they
have acquired it, but conscience and the law powerfully affect their
actions in acquiring it. These are forces of which Social Economics
has to take account; but the more egoistic motive, desire to secure
the largest net benefit from the wealth-creating process, is one of
the premises of any economic science. This involves a general pursuit
of wealth; but men seek the wealth for a certain personal effect
which comes from the use of it, and they measure it, when attained, by
means of this subjective effect.

_How Specific Utilities are Measured._--As the essential quality of
wealth is specific effective utility, we measure wealth by estimating
the amount of this quality, and it is always a consumer who must make
the measurement. He must discover the importance to himself of a small
quantity of a particular commodity. The hunter must find out how much
worse off he would be if he were to lose a small part of his supply of
game and endure some hunger as a consequence. In doing this he gets
the measure of the effective utility of any like quantity of game,
since any one specific part of his supply is as important as any other
and no more so. The estimate of the importance of such a supply of
food material has to be made in this specific way, by taking the
amount on hand piece by piece, and not by gauging the importance of
the whole of it at once.

_Value the Measure of Specific Effective Utility._--If any consumer
will estimate the importance to himself of a single unit of goods of a
certain kind, and multiply the measure so gained by the number of
units he is appraising, he will make a measurement of the value of the
total amount.

_Values not based on the Importance of the Total Supply of Goods._--It
is essential that the consumer, in determining the value of a kind of
goods, should not estimate the importance of the supply in its
entirety, since that would give an exaggerated measure. Measurements
of value are always made specifically, and single units of the supply
of goods are appraised apart from the remainder. The total utility of
atmospheric air is infinite, since the loss of the whole of it would
mean the total destruction of animal life; but the specific utility
and the value of air is _nil_, since no one limited part of the supply
has any practical importance. A roomful of it might be destroyed with
impunity. So the cereal crops of the world, taken as a whole, have
almost infinite importance, since their destruction would result in
universal famine; but each bushel of grain has an importance that is
relatively small. The loss of it would impose no serious hardship upon
the average consumer, since he could easily replace it. The value of
the crop is determined by the importance of one bushel taken
separately and by the number of the bushels. If we estimate the
importance of one unit of the supply of anything, express the result
of the estimate in a number, and then multiply this by the number of
units in the supply, we express the _value_ of this total amount. The
_total utility_ of it, on the other hand, is measured by the benefit
which we get from the supply in its entirety, or by the difference
between the state we are in when we have it all and that to which we
should be reduced if we lost it all and were unable to replace it. To
measure any such total utility we contrast, in imagination, our
condition with the full supply on hand and a condition of total and
hopeless privation, in so far as these goods and similar ones are

_This Method of measuring Wealth Universal._--These principles apply
as well to the economy of a solitary islander of the Crusoe type as
they do to that of a civilized society. A Crusoe does not need to
measure values for purposes of exchange, but he has other reasons for
measuring them. It is for his interest to use his own labor
economically, and to that end he should not put too much of it into
one occupation and too little into another. When, by reason of a large
store of wheat on hand, the specific importance of it is small,--or,
if we use a common expression, when the utility of the "final
increment" of it, which a man might secure by making an addition to
his supply, is small,--he should divert his labor to raising goats or
building huts, where the utility of the increment of product to be
gained is, for the time, greater. The solitary man thus well
illustrates the act of the society which, in its own peculiar way,
sends labor from one department of industry where the "final utility"
of its product is small to another where it is larger. It is all done
by measuring the specific importance of goods.[1]

    [1] For extended discussions of the relations of utility and
    value the reader is referred to the works of Jevons, Menger,
    Von Wieser, Von Böhm-Bawerk, and Walras. A study of
    "effective" utility and its relations to value, by the writer
    of the present treatise, is contained in the _New Englander_
    for July, 1881.

_The Utility of Producers' Goods._--Consumers' goods have a direct
utility, which is a power immediately to serve a consumer. Instruments
of production, on the other hand, have indirect utility, since all
that they are good for is to help produce things that render the
immediate service. They have _productivity_, and this has to be
measured in determining their value. What we need to know about hoes
and shovels, hammers and anvils, spindles and looms, etc., is how much
power they have to create the goods that we want for consumption. Here
again the measurement has to be made in the specific way. The capital
goods have to be taken unit by unit if their value for productive
purposes is to be rightly gauged. A part of a supply of potatoes is
traceable to the hoes that dig them; but in valuing the hoes we do not
try to find out how much worse off we should be if we had no hoes at
all. We endeavor simply to ascertain how badly the loss of one hoe
would affect us or how much good the restoration of it would do us.
This truth, like the foregoing ones, has a universal application in
economics; for primitive men as well as civilized ones must estimate
the specific productivity of the tools that they use, and make hoes,
shovels, or axes according as the procuring of a single tool of one
kind becomes more important than procuring one of another kind.
Indeed, the measuring of the utility has to be done, as we shall soon
see, in a way that is even more specific than this; for the man has to
determine not only how many hoes he will make, but how good he shall
make them. The quality of each tool has to be determined in a manner
that we must hereafter examine with care. The earning power of capital
is, as we shall later see, governed by a specific power of
productivity which resides in capital goods.

_Cost and Utility._--A ripe consumers' good, in exhausting itself on
man, benefits him; but during the period in which it is being prepared
for use, when it is receiving utilities at the hands of successive
producers, it has an opposite relation to the men who handle it. In
making the material useful a man confines and tires himself. He is
willing to do it if the reward that he expects will more than pay for
the sacrifice, but not otherwise. Moreover, this sacrifice itself has
to be estimated specifically in a way that is akin to the method of
measuring utilities which determines the values of goods. It is
necessary for a man to gauge the sacrifice which is entailed on him,
not by his labor as a whole, but by a specific part of it. He finds
himself in the evening feeling the fatigue and the sense of
confinement which the day of labor has imposed and asks himself how
much it would burden him to work a little longer. If what he can get
by this means pays for the extra sacrifice involved in thus getting
it, he will work for the few minutes, but otherwise he will not. His
objection to a few minutes of additional work measures what we may
call the specific disutility of labor; and men, whether they be
primitive or civilized, are forever making such measurements. They
consider how much it will cost them to add slightly to the length of
their working day or how much it will benefit them to shorten it. In
this way they measure the _specific disutility_ of labor rather than
the _total disutility_ of it, since they do not gauge the relief that
it would afford to cease working altogether.

_The Increasing Cost of Successive Periods of Labor._--It is easy to
work when one is not tired, and the first hour or two of labor may
even afford a pleasure that largely offsets the burden that it
entails; but it is hard to work when one is tired and painfully
conscious of the confinement of the shop. Adding anything to the
length of a working day imposes on a man the necessity of working at
the time when the burden is greatest; and shortening his day, for a
like reason, relieves him of some of his most costly toil.

_The Natural Length of the Working Day._--Any laborer, as his work
goes on, hour after hour, is certain to reach a point at which it is
unprofitable to go farther. However greatly he may need more goods, he
will not need them as much as he needs rest and change. It may be that
he has worked twelve hours, and that, by working longer, he can
improve his wardrobe, his food, or his furnishings; but if he has a
tolerable supply of such things, he will hardly choose to add to it by
staying in the shop when his strength has been exhausted and he is
eager to reach his home.

_Specific Cost at its Maximum a Measure of Specific Utility._--Two
very important principles are at work whenever a man is performing
labor in order to create wealth. The more consumers' wealth he gets,
the less important to him are the successive units of it, and the more
do these successive units cost him. The tenth hour of labor adds to
his supply of food, but this addition is not as important as the
supplies that were already on hand. If we divide the supply into
tenths and let the man produce a tenth in each successive hour, the
first tenth, which rescues him from starvation, is the most important,
while the last tenth, which comes nearest to glutting his appetite, is
least important. This last increment, however, is produced by the
greatest sacrifice, for it is gained by making the working day ten
hours long instead of nine.


Let the hours of the working day be counted along the line _AD_, and
let us suppose that a man gets unit after unit of consumers' wealth,
as he works hour after hour, and the units grow less and less
important. The first and most important we may measure by the vertical
line _AB_. The second is worth less, the third still less, and the
last one is worth only the amount _CD_. This means that the successive
units of what we may call general commodity for personal use have
declined in utility along the curve _BC_. On the other hand, as the
man's labor has been prolonged, it has grown more and more wearying
and irksome. The sacrifice that it involved at first was almost
nothing, but the sacrifice of the succeeding hours has increased
until, in the last hour, it amounts to the quantity expressed by
_CD_.[2] As the man has continued to work, the onerousness of working
has increased along the ascending line _AC_ until the point has been
reached where it is so great that it is barely compensated by the
fruits of the labor. The man will then work no longer. If he were to
do so, his sacrifice would become still larger and his reward still
less. Up to this point it is profitable to work, for every hour of
labor has brought him something so useful that it has more than paid
for whatever sacrifice he has made in order to get it. Beyond this
point this is not the case. The line _CD_ represents the cost of labor
at its maximum, and it is this which acts as a measure of effective
utility and value.

    [2] If we should try to describe all the possibilities in the
    case, we should take account of the fact that a man may get a
    positive pleasure from his first hour or two of labor and
    construct a figure thus to express this fact:--


    _AC_ is the curve representing the sacrifice entailed by
    successive hours of labor.


    In like manner we should have to recognize the fact that the
    utility of some kinds of goods may not reach a maximum with
    the first increment, and should construct a utility curve to
    express this fact. _BC_ here represents the increase and the
    following decrease in the specific utility of the supply of
    an article of this kind.

_The Coincident Measure of Cost and Utility._--It now appears that the
line _CD_ signifies two different things. It measures the utility of
the last unit of the man's consumers' wealth, and it also measures the
sacrifice that he has incurred in order to get it. These are opposing
influences, but are equally strong. The one, of itself, makes man
better off, while the other, of itself alone, makes him worse off. At
the last instant of the working day they neutralize each other, though
in all the earlier periods the utility secured is greater than the
sacrifice incurred and the net gain thus secured has kept the man

_The Point at which Utility and Disutility are mutually
Neutralizing._--At a certain test point, then, production acts on man
in such a way as exactly to offset the effect experienced from the
consuming of the product. Man, as a consumer, has to measure a
beneficial effect on himself, and, as a producer, he has to measure an
unpleasant effect. He finds how much he is benefited by the last unit
of wealth which he gets for personal use, and also how much he is
burdened by the last bit of labor that he performs. If this sacrifice
just offsets the benefit derived from the final consumption, it is the
best unit for measuring all kinds of utilities. A man secures by means
of this final and most costly labor a variety of things, for if he
works up to this point every day in the year, he will have at his
disposal, say, a hundred hours of labor in excess of what he would
have had if he had worked a third of an hour less each day. The
product of this extra labor will be taken in the shape of goods that
are also extra, or additional to whatever he would otherwise have
secured. They will represent special comforts and luxuries of many
kinds. The values of these goods may be measured and compared by means
of the quantity of labor that the man has thought it worth while to
perform in order to get them. If he values one of them highly enough
to think it worth while to work for an extra period of twenty minutes
at the end of a day in order to get it, it may be said to have one
unit of value; and if he is anxious enough to get something else by
doing this on two successive days, this second article may be said to
have two units of value. The savage who, by working for an extra hour,
makes some improvement in his canoe, and by doing the same thing on
another day makes some improvement in his food, establishes thereby
the fact that he values these two additional bits of consumers' wealth
equally. If he uses ten hours of the same costly kind of labor in
making an addition to his hut, he proves that he values that gain ten
times as highly as he does either of the others. Establishing values
by means of such final costs is a process that goes on in every stage
of social evolution.

_Unlike Results of Creating Wealth and Using it Summarized._--Wealth,
then, affects a man as a consumer in one way and the same man as a
producer in an opposite way. In the one case the effects are
favorable, and in the other they are unfavorable. At a certain test
point the two effects may be equally strong as motives to action, and
so may be said to be equivalent. The man is impelled to work by his
desire for a final unit of wealth, and he is deterred from it by his
aversion for the final unit of labor which he will have to incur if he
secures the benefit. If he performs the labor and gets the benefit, he
neither gains nor loses as the net result of this particular part of
his labor, though from all other parts of his labor he gets a net
surplus of benefit. It is natural to measure all such economic gains
in terms of sacrifices incurred at the test point where these are
greatest. This is the labor one would have to incur in order to add
the means of gratification to his previous supply of consumers' goods.

_Minimum Gains offset Maximum Pains._--Running through and through the
economic process are these two different measuring operations. Man is
forever estimating the amount of harm that wealth does him when he is
in the act of producing it, and the amount of good it does him when he
consumes it; and there is always to be found a point where the two
amounts are equal. It is the point at which gains are smallest and
sacrifices greatest. It is at this point that men measure values in
primitive life and in civilized life. How in the intricate life of a
modern society the measuring is done we shall in due time see; for the
present it is enough that we perceive the universality of the law
according to which value is best measured by the disutility of the
labor which is most costly to the worker. Organized societies do
something which is tantamount to this. It is as though the whole
social organism were an individual counting the sacrifices of his most
costly labor and getting therefrom a unit for comparing the effective
utilities of different goods.

_How Primitive Man tests Value._--It is a mistake to suppose that what
is essential in value depends on the existence of an actual market in
which things are exchanged for each other. In a market, it is true,
values are established and their amounts are expressed in ways that
cannot be adopted in primitive life. When we buy a thing, we help to
fix the value of it and of other things which are like it. The mere
ratios in which things exchange for each other in a market are,
however, by no means the essence of value itself. That is something
deeper and is one of the universal phenomena of wealth. Value, as we
have said, is the measure of the effective utility of things, a kind
of measure that every one is frequently compelled to employ, whether
he is making goods for himself or buying them from others. A producer
who has the option of making different things for himself needs to
know what variety of goods can be increased in supply with the
greatest advantage to himself as a consumer. Adding to the supply of
any one of them is getting a "final" or "marginal" unit of consumers'
wealth. It is something that is needed less than the things that were
already on hand. Without making such a comparison of the importance of
marginal units of different commodities he cannot use his resources in
the way that will do him the most good.[3]

    [3] [Illustration]

    The terms _marginal_ and _final_ mean essentially the same
    thing, but the modes of conceiving it differ. When utilities
    are thought of as supplied one after another, the last is the
    least important. We may represent a man's enlarging
    gratifications, not by such a mere series of quantitative
    increments, but by an enlarging area. We may draw a series of
    concentric circles, beginning with the smallest, and let this
    central area inclose the most necessary forms of consumers'
    wealth. When we draw a second and larger circle, we inclose
    between it and the first one a zone which includes those
    forms which come next in importance. By continuing to draw
    circles we reach an outermost one which bounds a zone in
    which are included the least important of the consumer's
    acquisitions. These are the things which he gets with his
    costliest increment of labor, and the things which lie beyond
    the circle last drawn would not pay for the sacrifice which
    acquiring them would cost. In the accompanying figure the
    fifth zone includes these "marginal" forms of wealth.

_How Isolated Men measure Final Utility._--If a cave dweller possesses
a store of one hundred measures of nuts, he measures the final utility
and the value of this store in the manner which we have described. If
he were to be deprived of the whole stock, he might starve, but this
fact does not afford the basis of the value which he puts on the nuts.
He measures the importance of this consumers' wealth specifically. He
tests the effect of losing one measure and no more, and finds that he
could lose the single measure without suffering greatly. The
difference between having an appetite fully satiated and having it
very nearly so is not serious.


Let _AD_ represent the savage's total supply of food. _AB_ will
represent the utility of the first unit; _CD_ of the hundredth. If we
supply the food unit by unit, the utility of the successive increments
will decline along the curve _BC_. When the man has a hundred units of
food, no one unit of it is worth any more than the last one, since if
any one were taken away, the last one could be put in the place of it.

The _total absolute utility_ of the food is measured by the area
_ABCD_, but the total _value_ will be represented by the rectangle
_ADCE_. The area _EBC_ measures the surplus of utility contained in
the earlier units in the series.

_The Motive for measuring Values in Primitive Life._--Even the cave
dweller would have to measure values, and would thus have to apply the
principle of final utility, because he would need to spend his limited
productive energies in the way that would do him the most good. When
he is nearly satiated with food, he needs other things more than he
does food stuffs. If he has secured so much of one product that any
additional amount that he may get by an hour's labor would be of less
use to him than what he could get of some other product by the same
amount of labor, it is important for him to change his occupation and
produce that thing of which an additional unit--which will perhaps be
the final unit of this more desirable article--has the higher degree
of usefulness.

_Final Utility and Labor Cost._--On the supposition that a small store
of roots and nuts were incapable of being replaced by any amount of
effort and that no other food were to be had, the utility of it would
be indefinitely great, since the man's life would depend on this one
increment of food alone. A man would value that life-sustaining good
for what it would do for him and without any reference to the amount
of work he had performed in order to get it, or to the amount he would
have to perform in order to get another store like it. On the
supposition that by labor the man could replace this essential supply,
the effective utility of it would be gauged by the sacrifice he would
have to make in order to replace it. The effective utility of any unit
of a good that an hour's labor will produce can never be more than
enough to offset the disutility of a marginal or final hour of labor;
and thus even a single unit of replaceable food stuff, even when it
stands alone and constitutes the whole supply, is valued according to
the cost of getting another one like it. A man will prize it according
to his dread of the sacrifice involved in getting the duplicate. If he
gets this by adding an hour of labor to his day's work, this fact is
an evidence that the importance of the original supply of the food is
measured and expressed by this personal cost of replacement; and as
any similar quantity in a large supply of food can be duplicated by
the same amount of labor, it appears that, by a standard based on
cost, the _effective_ utilities of all units are equal, that of each
one is measured by the "disutility" of an hour's labor and that of the
whole supply is this amount multiplied by the number of units that
this supply contains.[4]

    [4] [Illustration]

    Although we may use the terms _final utility_ and _effective
    utility_ in a way that makes them nearly interchangeable, it
    is clear that the qualities for which the two terms stand are
    by no means identical, and that effective utility must be
    studied in any complete analysis of value. In distinguishing
    final utility we assume that the units of the supply of goods
    of a particular kind are furnished one by one, and we measure
    the absolute utility of each unit. The line _AB_ measures the
    _absolute_ utility of the first unit supplied. This
    measurement does not take any account of the cost of
    replacing this unit, for it does not recognize the
    possibility of replacing it. What is estimated is the
    absolute importance of the service which this first unit of
    the article renders, on the supposition that, if this first
    increment of the supply were wanting, the service would not
    be rendered at all. It is, in like manner, the absolute
    utility of the successive increments supplied which declines
    along the curve _BC_. _DC_ measures the _absolute_ utility of
    the final increment, and the area _ABCD_ the total absolute
    utility of the supply. If the goods can be reproduced by
    labor, the total effective utility is less, since it is
    measured, as we have seen, by the amount of sacrifice which
    the replacing of one lost unit would entail multiplied by the
    number of units in the supply. It is the amount expressed by
    the area _AECD_ which is the amount of the value of the
    goods, since measure of effective utility and value are the
    same, both in the case of a single unit and in that of a
    total supply.

    We have discovered two reasons why the effective utility of
    any one of the earlier units is equal to the absolute utility
    of the final one. The first reason is that, if any one of
    them were lost, the final one would be put in the place of it
    and the consumer would suffer no loss except what would be
    entailed by going without the last unit. The second reason is
    that if the consumer should lose any one of the earlier
    units, he could replace it by the same amount of labor that
    would replace the final one. We have seen that the line _DC_
    of the figure expresses not only the absolute utility of the
    final unit of goods, but the disutility of the labor of
    reproducing it or of reproducing any other unit. The cost of
    replacing the whole supply is expressed by the area _AECD_,
    on the supposition that the units are replaced, one at a
    time, by means of labor performed at the end of several
    working days when the sacrifice is greatest. Total value is
    thus quantitatively equivalent to total _effective sacrifice
    of replacement_, as well as to total effective utility. If,
    by adding a brief period to the length of one working day, a
    man can make good the loss of one unit of the goods, by
    adding the same period to the length of a number of working
    days, he can make good the loss of the total supply. For
    simplicity we assume that the man's physical condition
    remains unchanged, and that an extra hour of labor at the end
    of any one day costs him as much as it would at the end of
    any other.

_How Primitive Man measures the Productivity of Labor and
Capital._--There is a truth relating to producers' wealth that
resembles the truth that we have just stated with regard to consumers'
wealth. The more consumers' goods of one kind a man has, the less is
the value that any one of them has to him. The more producers' goods
of a given kind a man has, the less is the efficiency that any
particular one of them possesses as an aid to labor. The last bit of
bread serves the man himself in a less important way than does the
first, inasmuch as it gratifies a want that is less intense; and the
last implement of a given kind--the last hatchet or spade or
arrow--helps him less in his productive operations than did the first
one. On the one hand, we have the law of the diminishing utility of
successive units of consumers' goods, and on the other hand, we have a
parallel law of the diminishing productivity of successive increments
of producers' goods.

_The Necessity for measuring the Productive Powers of Capital Goods
even in Primitive Life._--Now, it is necessary for every producer,
though living in the simplest possible manner, to measure in some way
the efficiency of the last unit of each kind of productive instrument
that he uses. He has, let us say, a certain number of hatchets and of
arrows, and he can produce one hatchet with the same amount of labor
that would produce an arrow. Now, if a hatchet will do more good than
an arrow, he will direct his energies to the making of the hatchet. It
is important that any producer should bring the final units of the
different parts of his equipment to a certain uniformity of producing
power. He must not go on adding to the stock of implement No. 1 when
implement No. 2, which could be had by the same expenditure of labor,
would do more good; nor must he add to the stock of either of these
after he has acquired such a supply of them that the first unit of
implement No. 3 would be of greater importance. Measuring the
efficiency of producers' goods is necessary in the case of every one
who creates wealth at all, and such measurements reveal the fact that
the more producers' goods of one kind a man has, the less is the
productive power that resides in one of them.[5]

    [5] The law of diminishing returns of successive units of
    _capital goods_ is based on the same principle as the law of
    diminishing returns of _capital_, but it is not identical
    with it. We shall see, in due time, how a permanent fund of
    producers' wealth actually grows and why each new unit, as it
    adds itself to the fund, creates a smaller income than did
    its predecessor.

_The Foregoing Truths Universal._--All the general facts which have
been thus far stated hold true wherever wealth is produced. They do
not presuppose the facts of a division of labor and a system of
exchanges, and they do not even require that there should be any
social organization. Men in the most primitive tribes and even men
living in Crusoe-like isolation would create wealth by labor aided by
capital. The essence of that wealth would be effective utility, and
the measure of this, which is value, would be made in the specific way
that we have described. The varieties of capital, the distinction
between capital and capital goods, and the law of diminishing
productivity of such goods would appear in the most primitive
economics as well as in the most advanced. These are by no means all
of the facts and principles which are thus of universal application.
They are merely a few of the more important and may serve as a
foundation or a "Grundlegung," for further study. If we should extend
our list of general and basic truths, it would quickly appear that the
incomes that have been treated as rent and the various surplus gains
which are analogous to rent are universal economic phenomena which it
would be not illogical to discuss in the preliminary part of this
treatise. What has been stated, however, concerning the laws of
diminishing productivity of successive units of producers' wealth,
concerning the diminishing utility of successive units of consumers'
wealth, and also concerning the increasing burdensomeness of
continuous hours of labor, presents the essential principles on which
all rents and quasi-rents rest. It is best to study the applications
of these principles as they are made in a civilized state.

_Universal Economic Truths independent of the Special Facts of
Sociology._--This first division of economic science borrows none of
its premises from sociology, for the truths which compose it would
abide if there were no society in existence. Basic facts it takes from
Physics, Biology, Psychology, Chemistry, etc. Facts concerning man,
nature, and the relation between them are material for it, but
relations between man and man come into view only in the later
divisions. There, indeed, they do come into the very foreground with
results which immeasurably enrich the science. What we may call the
socialization of the economic process we shall have next before us,
and we shall find it full of critical problems involving the future
well-being of humanity. Industry is carried on by a social organism in
which men are atomic parts and to which nature has given a
constitution with laws of action and development. We have first to
study the nature of this industrial organism and the mode in which it
would act if it were not subject to any constitutional change; and
later we must study it in its process of growth. The economic action
of a society which is undergoing no organic changes is the subject of
Social Economic Statics, while such changes with their causes and
effects constitute the subject of the science of Social Economic



We have now before us a few principles of so general a kind that they
apply to the economy of the most primitive state as well as to that of
the most advanced. It is not necessary that men should live in any
particular relation to each other, in order that, in creating and
consuming wealth, they should exemplify these principles. They would
do this even though they never came into touch with each other, but
lived, as best they could, each man on his solitary farm. Laws of this
general kind result from man's relation to nature, and not at all from
the relation of different men to each other. Let a man keep wholly
aloof from other men, apply his labor directly to nature, and he can
produce wealth of the various kinds that we have described. He can
secure food, clothing, and other things for his own use, and he can
make tools to help him in securing them. He will appraise the
consumers' goods according to the law of what has been called _final
utility_ or, in another view, effective specific utility, and he will
also test the comparative usefulness of his various tools by an appeal
to the law of final or specific productivity.

_Social Economy the Chief Subject of Study._--We care most to know how
an organized society produces and uses its wealth, and in making this
inquiry we encounter at once phenomena that are not universal. The
civilized society creates its wealth coöperatively, by the joint
action of its various members; that is, it proceeds by means of a
division of labor and an exchanging of products. Moreover, it has, in
some way, to share the sum total of its gains among its various
members. It has to apportion labor among different occupations for the
sake of collective production, which is a grand synthetic operation
whereby each man puts something into a common total which is the
income of all society. It has, further, to divide the grand total into
shares for its different members--an analytical operation in which
each man takes something out of the aggregate for his personal use.
This is distribution in the narrower sense of that term--the
apportionment among the members of a civilized society of the fruits
of production. In the wider sense the term also includes the
apportionment of the sacrifices incurred in the joint production.
Distribution, as thus defined, is the element that appears in economic
life in consequence of social organization. This is a secondary
element, indeed; for man, nature and their relations and interactions
are the primary facts, and the relations of men to each other come
logically after these. Social organization, however, is so
transforming in its effects as to reduce to small proportions the
amount of attention it is worth our while to devote to the economy of
the primitive types of life. It is necessary to make some study of
that economy, for it is thus that we place before ourselves the fact
that there are universal economic laws and perceive distinctly the
nature of some of the more important of them.

_Facts Peculiar to Socialized Industry._--The term _Political Economy_
denotes a science of industry[1] as thus socialized, for it is a
science of the wealth which is produced in an organized way by the
people of a more or less civilized state. The general truths which we
have thus far stated apply to such an economy, indeed, but they also
apply to the wealth-creating and wealth-consuming processes of
uncivilized peoples, and even of isolated individuals who have no
dealings with each other. They are truths of Economics in the
unrestricted sense, and we have now to study the special truths of
_Political_ Economy. When production goes on by division of labor, as
when one man works at one occupation and another at another, phenomena
appear that do not appear in more primitive life; and still others
appear when, within each occupation, there is a division of functions
between the laborer and the capitalist, as is the case whenever one
set of men furnish tools of production and another set do the work.
The special laws of this highly developed economic system require far
more extended study than do those more general laws which are common
to it and simpler systems. We now continue to recognize the universal
and basic truths which have been stated in the foregoing chapters and
proceed to the study of the special principles which apply only to
organized economic life.

    [1] We use this term in a broad sense, including agriculture
    and commerce as well as manufacturing.

_Specialized Production the Means of Diversified Consumption._--As the
kinds of goods that we individually make become fewer, the things
which we get and use become more numerous and varied--such is the law
of economic specialization. Society as a whole produces an infinite
variety of things, and the individual member of it secures for himself
goods of very many kinds. The typical modern worker is, in his
production, a very narrow specialist, but in his consumption he is far
less a specialist than was the rude hunter who was able to enjoy only
the few goods which he himself produced. The modern worker's tastes
are omnivorous, for he has developed an immense variety of wants and,
through social organization, he has acquired the means of satisfying
many of them.

_The Position of Individuals in the Producing Organism._--When we say
that production has been socialized, we mean something very
far-reaching. We mean that an organization has grown up in which men
are members or parts of members, and that this great organization has
undertaken to do the productive work for all the individuals that
compose it. For the first time we now recognize a sociological fact
among the premises of economic science. When men, whose predecessors
may have lived in isolated families or in a society organized for
defense or for the mere pleasures of association, now develop a truly
economic society, the individual depends on other individuals as well
as on nature for the supply of his wants. Economic independence gives
way to interdependence, because the fortune of each man is largely
dependent, not merely on his own efforts, but on the relations which
he sustains to other men. Simple laws of nature still largely control
his income, but social laws also have a certain control over it.

_Exchanges in their Primitive Stage._--The exchanging of products is,
of course, the process with which the organization begins, and this
process is introduced by easy and natural stages. The man who at first
makes everything for himself develops a particular aptitude for making
some one thing; and, though he may still continue to make most things
for himself, he finds it advantageous to barter off a part of the
supply of the one article for the making of which he is especially
well fitted. He seeks out a neighbor whose special aptitude lies in a
different direction and who has a surplus of some other article. It
may be that one is a successful fisherman and the other is, by
preference, a maker of clothing, and that they can get a mutual
benefit by an exchange of food for raiment.[2]

    [2] If we were giving a history of the division of labor, we
    should have to record the effects of differences of climate
    and of agricultural and mineral resources in occasioning, at
    an early period, a territorial division of labor. We are here
    describing the division of labor which occurs within a
    society and in consequence of what may be called social
    economic causes.

_The Intermediate Type of Exchanges and the Final One._--In the next
stage a man becomes wholly a specialist, making one kind of product
only and bartering it away for others. It might seem, at the first
glance, that differentiation has now done its full work; but it is
very far from having done so. Making one complete good for consumption
is still a complex operation, which can advantageously be subdivided
in such a way that one man produces a raw material while another works
it up into a useful shape. A gain may be made by a further division of
the manufacturing process, whereby the first worker makes only the
rawest material, another fashions it somewhat, a third carries the
process farther, and a fourth or a still later one completes it. In
modern industry the material must often pass through very many hands
before it is ready to be made over to the consumer. Each man in the
series puts a touch on it and passes it on to his successor.


A´´´ is an article of consumers' wealth and A is the rawest material
that enters into it. A´ is this material somewhat transformed; A´´ is
the same material after it has received the second transformation and
needs only a final touch to convert it into A´´´, in which state it
will be ready for the consumer's use. We have here a symbol of what is
actually taking place in the industry of the world. Cattle are grazing
on western ranches; hides are tanning in the woods of Pennsylvania;
leather is going through the many changes that fashion it into shoes
in the mills of Brockton; shoes are arranged on the shelves of
retailers in New York in readiness for the people who are to wear
them. These are stages in the making of a single product, and a
thousand different products are coming into existence in a like way.

_A Representation of the Groups, or Specific Industries, which compose
Economic Society._--If we put beside the series of A's a series of B's
and one of C's, we have a much simplified representation of what is
actually taking place. There are, in reality, a myriad of different
things which almost every consumer uses, and every one of them is made
by a series of productive operations like the one we have described.

The very fact that there are so many of them that it is hopeless to
try to represent them all in the table makes it desirable to
illustrate the principle by tabulating only a few and to assume that
these few are all that there are. For the purposes that we have in
mind it is entirely safe to suppose that a series of A's, one of B's,
and one of C's represent all the consumers' goods that society uses.
What we wish to ascertain is how the different series work together to
furnish an income for each member of society.

_The Organization Spontaneous._--Laborers can go where they will, and
yet they are in some way brought into an orderly relation to each
other, being placed in certain proportions in different industries.
Capitalists also are free to invest their funds as they will, and yet
there is a certain amount that is naturally devoted to each branch of
business. How this apportionment takes place we can most readily
ascertain by creating such an imaginary and very much simplified
society as this table furnishes.

  A´´´    B´´´    C´´´
  A´´     B´´     C´´
  A´      B´      C´
  A       B       C

The series of A's, which we have already studied, represents one kind
of raw material ripening into a finished product. B represents a
second kind of raw material, which, like the A, is produced by its own
set of workers and is then passed on to a second, who transform it
into B´--a partly finished product. These then pass it on, as the
corresponding set of men passed on the A´. They hand it over to a set
of workmen who change it into B´´, a nearly completed product, and
these hand it over to men at B´´´, who, by giving the final
fashioning, bring it into the form of a finished consumers' good. The
C's represent another general group of workers who transform the raw
material, C, into the finished product, C´´´.

_Industrial Groups and Subgroups._--Each of these more general bodies
of workmen and employers, such as the entire series of A's, we may
call an industrial group, and the divisions within each of them, such
as A´ or A´´, we may term subgroups. The product of a group is a
complete article, while that of a subgroup is not a complete article
nor any part of an article that can be taken bodily from it. Yet it is
a distinguishable element in the article. The product of the shoe
factory is certainly not complete shoes, for the owners of the factory
buy leather which has already passed through the hands of tanners; and
the tanners themselves bought it in the shape of raw hides, which were
furnished by still earlier producers. What the shoe factory has done
is to impart a new utility to dressed leather by transforming it into
shoes. It would be impossible ever to get that utility out again, or
to point to any one part of the shoe as the only part that contains
it. What the factory has really made is therefore a utility--a
distinguishable quality which pervades a concrete thing. It makes the
difference between the leather and the shoes. What the tanner has
created is, in like manner, another utility, which makes the
difference between raw hides and leather. Groups, then, in their
entirety produce whole articles for direct use, while subgroups
produce distinguishable utilities which are embodied in such articles.
The sum total of all the different utilities constitutes the article.
It is a complex of useful qualities held together by the fact that
they are attached to the same original matter.

_Proportionate Production._--All the subgroups working together in an
orderly way not only produce the consumers' wealth that society needs,
but produce the different kinds of consumers' goods in nicely adjusted
proportions. Unless the general order of the group system is
disturbed, there is a normal amount of A´´´ put on the market and also
normal amounts of B´´´ and C´´´. This result is attained by influences
that run through the productive organism and bring about an adjustment
of the comparative amounts of labor in the different occupations. If
competition worked quite freely, this adjustment would be so nice that
no military apportionment of forces among different brigades,
regiments, etc., made consciously and by the most intelligent
commanding officer, could surpass the perfection of it. There would be
also an equally fine adjustment of the comparative amounts of capital
devoted to different industries. In the actual productive organism
each man goes where he will--capitalist, laborer, and employer of
capital and labor alike. Each man acts in this respect as though there
were no such thing as coercion, and as though he might, with unchecked
freedom, do solely what is good in his own sight. By reason of the
fact that all are seeking to produce what they can in order that they
may get what they can, there comes into operation an organic law which
brings the groups and subgroups into a delicate balance, in point of
size and output, whereby the grand total of force that society
commands is prevented from making too much of one product and too
little of another, and is made to do its utmost in getting a large sum
total of wealth for the benefit of its various members.

_What the "Division of Labor" Involves._--This is the real
signification of what it has been common to call the division of
labor. It is the socialization of labor, or the gathering of isolated
laborers into a great organism that, entirely without coercion,
determines in some way what each one shall do, and not only makes the
product of the whole a myriadfold greater than without any
organization it could be, but causes this product to take certain
well-adjusted shapes which, as we shall later see, serve consumers
better than they could be served by products in misadjusted

_Capital as well as Labor Apportioned._--As we have said, there is a
corresponding division of capital or an assignment of different parts
of the total fund to different employments; and this is made in the
same way as is the division of labor and results in an equally nice
adjustment. Each bit of capital, like each workman, becomes, as it
were, a specialist. It may take the shape of an instrument which is
capable of performing only its one service, like the loom, which is
capable of doing nothing except weaving; but even if the tool is
somewhat adaptable, like a hammer which can be used in several trades,
it is, as it were, stationed in one trade and held, by economic
influences, at that one point in the system. The house carpenter keeps
his hammer though the cabinet maker could use it. Each bit of capital
helps to create a particular utility, and the number of units of the
fund that each subgroup contains is, as we shall see, so arranged as
to enable the fund as a whole to do its utmost for the general good.
It is all without the use of force, since each bit of capital does
what its owner pleases to have it do.

_A Government Presupposed._--Of course there must be a government over
it all. Such a method of producing wealth could never continue unless
property were secure and unless it were made so without much effort on
the part of its owners. A blacksmith who should have at one moment to
use his hammer as a tool and at another to wield it as a weapon of
defense could make but poor headway, and a society in which such a
state of things existed in various trades would be too anarchic to
permit the elaborate division of trades which is the key to success in
industry. The most noticeable fact about organized production is that
man is forever letting go the thing he has made or helped to make and
allowing it to pass out of sight and reach without losing or greatly
imperiling his title to the amount of wealth it represents. He casts
his bread on the waters, but they bring him a return for it. Under
these circumstances it is impossible for him to protect his product as
the savage protects his tools, his clothing, and his hut. What a
modern worker makes passes into the hands of other men and gets
completely out of the maker's direct personal control. If he wanted it
again, he could never find it; and if he could find it, it would be in
a new shape and other men would have claims upon it. The man who has
sold some hides that in the end have become shoes can hardly identify
his product on the shelves of retail shoe dealers all over the
country, or perhaps all over the world. If by a miracle he could find
the particular bits of leather that in their raw stage he himself has
furnished, they would be in new and far more valuable forms than they
were when he had possession of them. The shoes contain utilities
which the man who furnished the hides cannot claim to have created.
They have been changed and improved by elements contributed by many
other persons, such as manufacturers, carriers, merchants, etc., and
he could never carry away the concrete thing that he himself produced
without carrying with it other men's property.

_The Surrendering of Goods and the Retention of Values Features of
Social Industry._--Socialization of industry means, then, that
individuals forego all effort to retain their own concrete products,
but that they retain certain parts of the value of the products to
which they have made contributions. The value of A´´´ when it is sold
is claimed by men at A´´´, A´´, A´, and A according to some principle.
The values of B´´´ and C´´´ can be followed until they reach the
pockets of the men who have contributed their several shares to the
making of these things. All this requires a government and a
well-developed system of laws and courts for the protection of
property, including the protection of it in the form of a claim to a
value that is embodied in things which have gone beyond the maker's
reach. Property here takes a refined form which requires that the man
should forego all desire to keep the literal thing he has made and
should make it his aim to retain the value of it in some other form.
It is a comparatively simple matter to guard a concrete article which
a man has in his possession, though even that requires some energy on
the part of the police force and is never quite perfectly
accomplished; but it is a far more difficult matter to enforce a claim
that a man has against other men, in consequence of some utility that
has been created by him but has gone away from him and mingled with
utilities created by many other persons in a product that the man will
never see. It is the problem of guaranteeing to the shoemaker the due
return for the stitches he has put into shoes when the shoes
themselves have gone to buyers and wearers in every quarter of the
land and many quarters of the globe.

_Groups under a Socialistic State._--In _political_ economy as
distinct from _general_ economy we take one premise from sociology and
another from politics. We assume that society exists and that it has
taken on a political character, by establishing laws with courts to
interpret them and officials to enforce them. We do not, however,
assume that the direction of industrial affairs is in the hands of
such officials. In the main industry is organized in a spontaneous
way. Men choose such occupations as they like, and when there are too
many of them in one group and too few in another, the rewards
naturally increase in the group where a larger force is needed, and
this lures men in that direction.

In a socialistic society such adjustments would be made under the
direction of the state. Officials would have to decide when more
workers are needed in the A series and less in the B series and would
have to use either inducements or some kind of compulsion in order to
move them from the one group to the other. What we actually have to
deal with is a society that shapes itself by the free acts of
individuals, and we have to see how, in this way, it organizes itself
for production and divides among different claimants the product that,
by the joint action of all of them, it creates.

_Gains from the Organization of Industry._--The advantages of the
division of labor consist in an increase in the quantity of products
and in an improvement in their quality, and the quantitative gain is
almost beyond computing. The advantage appears mainly in the middle
and upper subgroups of the series, which transform the materials,
rather than in the lower subgroups, which produce them; and yet there
is a gain everywhere from such organization. A man produces far more
when he performs the same operation many times than when he goes
through a whole series of unlike operations. Moreover, he can perform
the single operation far more accurately and can thus attain a more
perfect result. He can learn his minute trade more easily than he
could a complex one. Where unusual strength or skill is required, the
work may be given to persons who have the requisite quality so that a
good product can be insured, and none of the labor of these superior
workers will need to be wasted on work which inferior labor can
perfectly well perform.

_Improvement in the Forms of Capital._--The greatest of all the
advantages that come from this division and subdivision of
wealth-creating processes comes in the way of applying machinery. A
machine is a hopeless specialist and can, as a rule, put only a single
minute touch on the material submitted to it; and the introduction of
machines differentiates capital in a way that is parallel to the
minute subdivision of labor. If the machine is to work at all
economically, it must put its touch quickly on one after another of a
series of articles, as they are submitted to it in uninterrupted
succession. If only one kind of machine were employed in the making of
shoes--if, for instance, the sewing of the uppers to the soles were
done on sewing machines, even though all the rest were done by
hand--it would be natural and almost necessary to have one class of
workers to prepare the uppers, another to prepare the soles, and a
third to sew them together by aid of the machine. When the several
stages of the process are thus given over to different classes of
workers, the situation is ripe for the application of more machines,
and inventors readily devise apparatus that will perform one or
another minute part of the manufacturing process. In the end most
branches of manufacture take such shapes that the raw material is
intrusted to a series of machines and passes from one to another by a
nearly continuous movement, till it emerges from the hands of these
automata as complete as any manipulation can make it and ready for the
merchants who will convey it to their customers.

_Economy of Capital._--There is an economy of capital involved in the
fact that instruments can be used thus continuously. A worker does not
have to have several sets of tools, many of which would be idle the
greater part of the time, as would be the case if the man performed
several unlike operations; but the greatest economy comes from the
energy, rapidity, and accuracy with which the new instruments act. The
tools are far more efficient than they could be if human muscles
furnished the power and eyes and nerves supplied the deftness and
accuracy that the making of the goods requires. Automata which men set
working excel hand tools with men wielding them by a greater ratio
than can be calculated.



The essential fact about production, as it is carried on by all
society, is that it is a synthetic operation, by which a grand total
is made up by the contributions of different industries. There is a
corresponding fact about the production which is carried on within a
particular line of business, or, as we should express it, within a
particular subgroup; for within the subgroup there are laborers, on
the one hand, and capitalists, on the other, helping each other to
make a joint product. In our table A´´´, B´´´, and C´´´ are the goods
of which the social income is composed. Subgroups, such as A, A´,
etc., help to make this grand total of finished goods; but in A, A´,
and all the other subdivisions there are laborers and capitalists
working together. Farming, mining, cotton spinning, shoemaking,
building, and a myriad of other occupations all work together to
create an aggregate of goods which constitute the social income. In
each of these branches of business there are men and working
appliances contributing each a part to the quota that this branch

_Distribution as an Analysis._--The essential fact about distribution
is that it is an analysis. It reverses the synthetic operation step by
step, resolving the grand total produced by society into shares
corresponding with the amounts contributed by the specific industries,
such as mining, cotton spinning, shoemaking, etc. The men who own and
work the mines do not keep the ore they secure, nor do they wish to
keep it. The ore goes into a stock of goods for the general use of
society, and it constitutes a definite addition to the value of that
stock. As ore it is transmuted into a myriad of forms, merged with
other materials and lost; but the amount that it adds to the total
product of society is definite. It is a certain definable quantity of
wealth, and that quantity of wealth the producers of the ore should
get for themselves. Distribution further resolves the share of each
particular industry into final portions for the use of the laborers
and capitalists in that industry; and these correspond with the
amounts which these laborers and capitalists contribute. The result of
distribution is to fix the rate of wages, the rate of interest, and
the amount of the profits of employers, if such profits exist; and the
general thesis which is here advanced and remains to be proved is
that, if society were without changes and disturbances, if competition
were absolutely free, and if labor and capital were so mobile that the
slightest inducement would cause them to pass from one branch of
business to another,[1] there would be no true profits[2] in any
business, and labor and capital would create and get the whole social
income. Moreover, each laborer and each capitalist would get the
amount of his personal contribution to this sum total. Amid all the
complications of society the modern worker would be in a position akin
to that of the solitary hunter in a primitive forest--his income would
be essentially of his own making and would include all that he makes.
He would not, like the primitive man, get the literal things that he
fashions, but he would get the _amount of wealth_ that he creates--the
value of the literal products which take shape under his hand.

    [1] It will be seen that we here assume for the process known
    as competition a degree of perfection which it does not
    attain in actual life. This process would be absolutely free
    if labor could and would instantly abandon one industry and
    enter another whenever it appeared that it could create an
    increased product by so doing, and if capital also moved with
    the same promptness on the smallest inducement. In actual
    life there is friction to be overcome in the making of such
    transfers, and this constitutes one of the subjects of the
    theory of Economic Dynamics and will in later chapters be
    fully considered.

    Whenever either labor or capital thus moves to a new place in
    the group system, it becomes an active competitor of the
    labor or capital that was already there. We need a
    definition of the competing process. In the case of producing
    agents it consists in a rivalry in selling. The laborer who
    moves from A´ of the table that, in the preceding chapter,
    has been used to represent organized industry to B´, offers
    for sale, as some would say, his service, or more accurately,
    the product which his labor can create. The purchasers are
    the employers in the subgroup B´, and in order to induce them
    to accept the new labor it is necessary to offer it at a rate
    of pay which will make it worth their while to take it. If
    the workers already in this division of the field are getting
    just what they are worth, a larger force cannot be employed
    at the same rate of wages, because, for a reason that will
    later appear, the new labor cannot offer for sale as large a
    product as an equal amount of the labor that is already
    there. If the transfer to B´ were made, the new labor would
    have to accept lower pay than the old has been getting, and
    the old labor would be forced to accept a cut in its rate of
    pay or be supplanted by the new. A rate sufficiently low
    would insure the employment of all. If the labor formerly in
    this subgroup has been getting less than it is worth, there
    will ensue a competition among employers who desire to
    realize, each for himself, the margin of profit which can be
    made by getting additional labor, and this will either raise
    the pay of the men already in this subgroup or call new men
    into it, or do both. In any case it will, in the absence of
    all trace of monopoly on the side of the employers, end by
    giving to the men what they are worth. It is, in fact, such a
    bidding for new labor by employers in any branch of business
    that moves labor from point to point in the industrial
    system. The _entrepreneur_ is the agent in the case, profits
    are the lure, and competition--rivalry in buying--is the
    means; and competition is, as we use terms, absolutely free
    whenever it is certain that the smallest margin of net profit
    will set it working and draw labor or capital to the
    profit-yielding point.

    There is competition among the _entrepreneurs_ at A´´´ in
    selling this finished product to the consuming public, and
    among different purchasers in buying it. Whenever the price
    of A´´´ is so high that the whole output of it cannot be
    sold, each vender tries to supplant others and insure a sale
    of his own product rather than that of any one else.
    Competition here is overt and active. When all can be sold at
    the current price, finding a market for one vender's supply
    does not require that he win away another's customers, and
    although the different sellers continue to be rivals and each
    would welcome an increase of patronage made at others' cost,
    no one is forced to underbid others in order to continue to
    sell his accustomed output. Competition is here quiescent,
    since actual underbidding and the luring away of rivals'
    customers do not take place. When _entrepreneurs_ who are not
    now in the subgroup A´´´ are ready to enter it and to become
    rivals of those already there whenever any profit is to be
    had by such a course, their competition is not actual but
    potential; and yet it is a real influence and serves to deter
    producers already in the field from establishing such a price
    for their product that the possible competitors will become
    real and active ones. These three influences may conceivably
    act without obstruction or may be hindered and deprived of
    much of their power. In actual life they are subjected to
    hindrances, and whether they shall hereafter insure a certain
    approximation to the general state which a perfectly free
    competition would insure or whether the economic condition of
    the world shall be permitted to drift far from that normal
    state, depends on the success which governments will have in
    reducing or removing the hindrances.

    [2] In this treatise the term _profits_ will be used to
    designate the net increase which may remain in employers'
    hands after paying the wages of labor of every kind and
    interest on all capital used. The term _gross profits_
    describes a sum made up of this net profit and interest on
    the capital.

_Standards of Wages and Interest._--This accurate correspondence
between men's incomes and their contributions to the general earnings
of society would exist only in the absence of certain changes and
disturbances which it will be our aim, in the latter part of this
work, to study. These changes give to society the quality that we
shall term _dynamic_, and we shall examine them at length. What can,
however, be asserted in advance is that the rates of wages and
interest which would prevail if the changes and disturbances were
entirely absent constitute standards toward which, in spite of all the
changes that are going on, actual wages and interest are continually
tending. How nearly in practice the earnings of labor and capital
approximate the ideal rates which perfect competition would establish
is a question which it is not necessary at this point to raise. We
have to define the standard rates and show that fundamental forces
impel the actual rates toward them. The waters of a pond have an ideal
level toward which they tend under the action of gravity; and though a
gale were to force them to one end of the pond and cause the surface
there to stand much higher than the surface at the other end, the
standard level would be unaffected and the steady force of gravity
would all the while be drawing the actual surface toward it. In our
study of Economic Dynamics we shall encounter influences which act
like the gale in the illustration, but at present we are studying what
is more akin to gravity--a fundamental and steady force drawing wages
and interest toward certain definable levels. In our present study of
Economic Statics we must seek to discover how these standards are
fixed, in the midst of the overturnings which industrial society

  A´´´   B´´´   C´´´   H´´´
  A´´    B´´    C´´    H´´
  A´     B´     C´     H´
  A      B      C      H

We have already represented, in a highly simplified form, the
synthesis by which the goods which make up the income of society are
produced. A, B, and C represent different raw materials, and they are
changed by a series of transmutations into A´´´, B´´´, and C´´´, which
stand for all the consumers' goods that the society uses. They
represent food, clothing, furnishings, vehicles, and countless means
of comfort and pleasure.

_The Making of Active Instruments of Production._--It is necessary
always to have and use a stock of tools, machines, buildings, and
other active instruments of production; and as these wear out in the
using, it is necessary that there should be persons who occupy
themselves in keeping the stock replenished. Under a system of
division of labor there would be special industries devoted to the
making of new appliances of production to take the place of those
which are worn out and discarded, and also to make repairs on those
which are still in use. For illustration, we may let the symbol H´´´
represent all active capital goods that the society uses, the various
raw materials which enter into such active goods being represented by
H and the partly made instruments by H´ and H´´. If the stock of
appliances is not growing larger, just enough of the articles H´´´ are
made to replace the discarded ones. No producer gets new machinery,
but every one keeps his stock intact.

_The Simplified Representation Correct in Principle._--We have now a
very simple representation of what actually goes on under the name of
the division of labor, and yet the representation is in essential
points accurate. In reality a very detailed and minute division and
subdivision of industries takes place and the varieties of goods
produced are innumerable. Society, as a whole, is making the most
highly composite product that can be conceived; namely, consumers'
wealth in its countless forms. Each of the grand divisions of
society--the general groups that we have represented by the series of
A's or of B's--makes a complete article; but even that is in its own
way far more composite than the symbol indicates, for it is apt to
contain several kinds of raw material and to be made up of a large
number of distinct utilities, each of which has its own set of
producers. This complexity of the process of production does not
change the principle of distribution, by which the product is
virtually analyzed into its component elements and the value of each
element is assigned to those who create it. This principle can be
clearly represented by assuming that each subgroup has one distinct
utility to create and that it takes only four of these to make an
A´´´, a B´´´ or a C´´´.

_A Synthesis within Each Subgroup._--There is within each subgroup a
synthesis going on, and this also may be complex. Labor and capital
dig ore from the ground--an unusually simple process; and yet there
are several distinct operations to be performed before the ore is
ready for smelting. When it comes to fashioning the metal into useful
shapes, the operations become very numerous and require many
subordinate trades even for the making of one product. How many
mechanical operations go to the making of a bicycle, an automobile, or
a steam yacht? Too many to be represented in any table, but not
enough to change at all the principle according to which those who
help to make one of these composite products are paid according to
their contributions to it. We may consider that all the work that is
done in one kind of mill creates one utility. Though there are many
subtrades in making a shoe and many more in making a watch, we may
proceed as though there were only one transformation of the raw
material required in each case. We may let the division between the
contiguous subgroups be made commercially rather than merely
mechanically, and regard the establishments that buy material and sell
it in a more highly wrought condition as moving it forward by one
stage on the road to completion, however many changes they may have
made in it in the different departments of their several mills. The
difference between shoes, on the one hand, and the leather and
findings of which they are made, on the other, thus passes for one
utility. A manufacturer of shoes puts his leather and findings through
many operations before he has shoes for sale; but it is convenient to
call all that the manufacturer imparts to these raw elements before he
makes them over in their new form to the merchant, one subproduct.

_Further Complexities which may be Disregarded._--One man may be in
several of the general groups. It is possible, for example, that he
may furnish raw materials which enter into more than one finished
article. Iron is so extensively used that it goes into more products
than can easily be counted. The man who digs iron ore contributes to
the making of bridges, rails, locomotives, buildings, machines, ships,
and tools in indefinite number and variety. The price of each of the
articles into which any of this material goes contains in itself the
price of that part of the raw material which goes into it. There is
steel in a ship, and the maker of that part of the output of raw steel
which goes into a ship gets his pay from the price of the vessel; and
so with the crude metal which goes into a bridge, a building, an
engine, etc. What the producer of a material gets from each source
tends, under perfectly free competition, to equal in amount what he
contributes toward the value of the corresponding article. In terms of
our table a miner may furnish ore from which iron is taken for the
making of both A´´´ and B´´´; and if so, when the distributive process
analyzes these products into their elements, the value of what he has
in each case contributed will fall to him. He will be paid according
to the help he has afforded in the making of the A´´´ and the B´´´,
and this fact does not change in principle the manner in which the
income of society is divided. If the man helped to make only one
thing, he would get a part of the price of that one thing; but if he
helps to make several, he will get a part of the price of each of
them. Each group has one grand function to perform, such as the making
of an A´´´, and if the man helps in more than one, and is paid
accordingly, his total pay is according to the amount he produces in
all the different functions he performs, and the principle of
distribution works as perfectly as it would if the man were confined
to the single subgroup A. For simplicity we assume that he is so.

_The Functions of Capitalist, Laborer, and Entrepreneur often
performed by One Person._--One person may perform several functions,
not only by contributing to the products of several groups, but by
contributing in more than one way to the product of one subgroup. He
may, for example, both labor and furnish capital, and he may, further,
perform a special coördinating function which is not labor, in the
technical sense, and scarcely involves any continuous personal
activity at all, but is essential for rendering labor and capital
productive. What this function is we shall presently see. We shall
term it the function of the _entrepreneur_, using this term in an
unusually strict way. We shall keep this function quite distinct from
the work of the superintendent or manager of a business.

_How Much the Term "Labor" Covers._--We include under the term _labor_
all effort expended in a routine way in carrying on business. The
overseers in the shops, the bookkeepers, clerks, secretaries,
treasurers, agents, and, in short, all who perform any of the labor of
management for which they get or can get salaries are laborers in the
comprehensive sense in which we use the word. It comes about that the
employer usually labors; for he does the highest and most responsible
work in his own mill or shop. It is not, however, in his capacity as
_entrepreneur_, or "_undertaker_," that he labors; for, as the
_entrepreneur_, properly speaking, he employs and pays for all the
work that receives a stipend. He may employ himself, indeed, and set
aside a stated sum to pay his own salary; but this means that in his
capacity as _entrepreneur_ he needs a good manager and hires himself
to act in that capacity. Scrupulous fidelity is the most important
quality that a manager can possess, and the employer can always trust
himself to possess it so long as it is his own interests that he

_Entrepreneur and Capitalist._--In the same way we include in the
capital of an establishment whatever invested funds the employer
himself supplies, as well as what he hires from others. Here again a
man is likely to serve in more than one capacity, for as an
_entrepreneur_ he hires capital and as a capitalist he lets it out for
hire, so that in the one capacity he hires capital from himself acting
in the other capacity. The man "puts money" into his own business and
gets interest for the use of it.

_The Different Functions of the Same Man distinguished in
Business._--This distinction between the different functions that one
person may perform is not a mere refinement of theory, but is
something that is recognized in business and has great practical
importance. In a corporation officials who are also stockholders
receive salaries that are usually reckoned on the basis of the amount
that they could get in the market if they were to enter the employment
of other corporations and do the same kind of work they are now doing.
Favoritism may give them considerably more than this amount, but even
then this amount is the basis of the calculation which fixes their
stipend. If they are paid more than their work is worth to their own
corporations, what they get is something besides wages or any other
normal and legitimate income. If they accept for their time less than
they are worth, they make a donation to the corporation. Neither
filching something for nothing out of the returns of the corporation,
nor giving it a gratuity, is to be here assumed as existent, since we
are not dealing with the phenomena of quasi-plunder or eccentric
benevolence. The character of wages of management, as the reward for a
high grade of labor, is recognized in business life, and the salary
of the manager, whether he is a stockholder or not, is usually
expressed in a definite sum of money and is gauged, crudely or
accurately, according to his value as a servant of the company.

_Dividends often Composite._--In like manner it is important in the
bookkeeping of a company to ascertain how much of the return to the
stockholders is merely interest on the capital they have themselves
invested and how much is true profit, or the net gain which is over
and above interest. In business life a distinction is pretty clearly
maintained between the three kinds of income that have been described;
namely, the reward of labor in all its forms, the reward of capital,
going to whoever furnishes it, and the reward of a coördinating
function, or the function of hiring both labor and capital and getting
whatever their joint product is worth above the cost of the elements
which enter into it. This essentially commercial margin of returns
from production above all costs of production is profits in the strict
sense and would be nonexistent in an absolutely static industry. It
comes into existence in consequence of the changes with which social
Economic Dynamics deals.

_Three Incomes entirely Distinct._--Wages, interest, and profits,
then, are the three incomes that we shall distinguish. We shall keep
profits completely separated from the wages of any kind of labor and
from the interest on any kind of capital. This income falls to the
_entrepreneur_, otherwise called the undertaker, or the employer and
coördinator of labor and capital, and it comes only when the product
of the operations carried on in his establishment exceeds all wages
and all interest that he has to pay.

_How a Man could be an Entrepreneur Only._--If a man should hire all
the capital that he needs in a business and also all the labor,
including the labor of every man in the office force, and reside
thereafter in a distant country, holding no consultations with his
managers, whatever income he might get would be purely an
_entrepreneur's_ profit. It would not be interest--for that amount
would have to be paid to the men who had loaned the capital--and it
would not be wages--for they would have to be made over to the men
actually doing the work. The absent _entrepreneur_ would be, in the
eye of the law, the purchaser of all the elements which go into the
product, since all the purchases are made in his name. The managers
are only his agents, and when they buy raw materials or supplies for
the mill, they buy them for him and by his authority, and he is under
the obligation to pay for them. Moreover paying wages is, in reality,
buying the share which labor contributes to the product of the mill.
The workmen have a natural right to the value which their work, _of
itself and aside from the aid furnished by others_, imparts to the
material that is put into their hands, and when they sell their labor,
they are really selling their part of the product of the mill. In like
manner paying interest is buying the share which capital contributes
to the product. The owners of the capital have an original right to
what the machines, the tools, the buildings, the land, and the raw
materials, of themselves _and apart from other contributions_, put
into the joint product. In reality they sell this share for a
consideration in the form of interest. In a static state labor and
capital together create the whole product of the mill; wages and
interest are the prices that they get for their several
contributions, and the _entrepreneur_ pays these purchase prices and
by virtue of this becomes the owner of the whole product. Having the
product, he sells it in the market for what he can get. If this were
more than the cost to him of all the elements that have gone into it,
he would have a net profit remaining. It would be a remainder accruing
to the owner and seller of the product after the costs of getting a
title to it have been defrayed. Whether the absent _entrepreneur_ of
our illustration gets anything from his business or not depends on the
question whether such a remainder of returns above costs is afforded.

_Profits Nil in a Static Society._--We shall see that if labor and
capital can move about in the system of groups so freely that each
agent is as productive in one place as it is in another, there will be
no product anywhere in excess of wages and interest. Labor and capital
then create and claim for themselves the whole output of their
industries. When the _entrepreneur_ has given them their shares, by
paying wages and interest, and has paid for raw materials, he has
nothing left. In actual business competition is often sharp enough to
prevent men from getting more than interest on their capital and a
fair return for the labor they spend in directing their business; and
pure theory here assumes that competition is always and everywhere
sharp enough to do this. It is ideally efficient. Labor and capital
are ideally mobile and ready to flow at once to the points where any
net profits can be made. Such a condition implies that society is in a
_static_ state, and we shall see what this condition is. It implies an
absence of organic change in society. The great collective producer
does not alter either its form or its mode of producing wealth.
Industry goes on, indeed, but it goes on in a changeless way.
Reserving the full description of this state for a later chapter, we
note here that the adjustment which would theoretically bring a
society to such a state would preclude all gains for its

    [3] The preceding paragraphs may seem to show that if an
    _entrepreneur_ ever gets an income, he does it by wresting
    from labor and capital a part of their products. We shall see
    that in _dynamic industry_ there is a normal way in which he
    may get an income without taking anything from the incomes
    that labor and capital would get if he did not perform his
    part. His return may come from the result of an enabling act
    which he performs, whereby both the labor and the capital of
    a particular subgroup become more productive than other labor
    and capital are and more so than they would be if the
    _entrepreneur's_ enabling act were not performed.

_The Merging of Functions Desirable._--The uniting in one person of
the functions of capitalist, laborer, and _entrepreneur_ contributed
much to the productivity of the small-shop system of former days. The
man who had a few thousand dollars invested in a little shop and
employed a few men to assist him got three different kinds of income,
and the sum of the three was larger than anything he could have
secured if he had been only a laborer or only a small capitalist and
_entrepreneur_. He worked harder and more intelligently than a hired
superintendent would have done; he was led to be cautious because his
own capital was risked in his business, and yet he was spurred to
enterprise by the fact that when, by virtue of the influences which we
call _dynamic_, profits were made, he got them. Even in the largest
corporations the same conditions contribute to success, and it is best
that managers should be owners of some part of the capital which they
handle and receivers of some portion of the profits which they try to
secure for their companies. Where competition is sharp, companies
directed by their owners may supplant those of which the direction is
given over to hired managers. The growth of corporations does,
however, tend to put salaried men more and more into controlling
positions and to reduce the power of the body of stockholders, who
perform a joint function as capitalists and _entrepreneurs_. In itself
this tends to reduce profits and detracts from the advantages which
the incorporation of a business offers.

_Distribution primarily Functional rather than Personal._--Where men
get incomes that are composed of wages, interest, and profits,
economic science should, in the first instance, tell us how the rates
of wages and interest and the amount of profits are determined. A
study of the static laws of distribution concerns itself with the
reward of labor as such, and the reward of capital as such, while
a study of dynamics takes account of pure profits. When we know
what the rates of wages and interest are, we can tell what any
capitalist-manager should have by knowing how much capital he
furnishes and how much and how well he works as a manager. If the
business is yielding a net profit, over and above the interest on its
capital, we can tell what part of this net income any one stockholder
will get--in the form of a rate of dividends in excess of the rate of
interest--if we know how much of the common stock of the company he
owns. His personal income depends on the incomes attaching to the
functions he performs. The science of distribution should tell us
primarily, not what any man personally gets as a total income and how
well off he is as compared with other men, but in what way the wages
of his labor, the interest on his capital, and the return for the
_entrepreneur's_ function are fixed. In technical terms this is saying
that distribution is primarily _functional_ and not personal. Certain
forces assign certain rewards to different functions which are
involved in the creating of wealth, and the science of distribution
tells us how these forces work--tells us, in short, how wages,
interest, and true profits are, in and of themselves, determined. If
any man works and gets wages, that part of his income will be
determined by the wages law. If he furnishes capital, a second part of
his income will be determined by the interest law. If he also
coördinates labor and capital, whatever he may thus gain is determined
by the law of profit. Economic science has to ascertain and state what
these three laws are, though in its static division it has only to
account for two of them.

_Costs as well as Gains Apportioned._--The term _distribution_, as
commonly used, denotes a division of the gains of industry; but as we
have said, there are sacrifices which have to be borne in getting the
gains, and these also have to be shared. Wealth benefits men in the
using, but puts burdens upon them in the making; and when all society
does the making, it has to apportion, in some way, not only the
benefits but the burdens. We shall take account of these sacrifices
because of the relation that they bear to the gains. They act as an
ultimate check on production. Men would go on producing indefinitely
if the operation cost them nothing, since it would always be agreeable
to have a further income; but they necessarily encounter pains and
sacrifices that, sooner, or later, bring the enlargement of their
incomes to an end. Much that is of importance occurs at that critical
point where the sacrifices of production put an end to the extension
of it. It is the positive fruits of production that we have first to
consider; and what in this connection we wish first to know is how
wages and interest are determined when industry is carried on in a
social way and under a system of competition. We shall find that these
incomes are always tending toward standards which they would reach if
society were in the state which we have described as static. How they
are forced away from their standards by the changes and disturbances
of actual life, and how the standards themselves change with social
development, will be the subject of the latter part of this treatise.



Functional distribution controls personal incomes since each man who
gets, in a normal way, any income at all performs one or more
productive functions, and his total income is the sum of the returns
for these several functions. Moreover under such a condition of
ideally perfect competition as we have assumed each of these functions
is rewarded according to the product that it creates; and each man
accordingly is paid an amount that equals the total product which he
personally creates. Men's products, even in the disturbed conditions
of actual life, set the _standards_ to which their returns tend to
conform, though they vary from them in ways that we shall not fail to

_Group Distribution._--The grand total of the social income has to go
through a preliminary division before it is shared by laborers,
capitalists, and _entrepreneurs_. In each industry the pay of all
these functionaries comes from the selling price of the commercial
article that they coöperate in making. The price of shoes pays all
shoemakers, whether what they contribute to the manufacturing is
labor, capital, or mere coördination; and it also pays ranchmen and
tanners for what they contribute in the shape of leather, raw and
dressed. If the price of shoes should rise, there would be a larger
income for the group whose activities create them. So if woolen
clothing were to become dearer, there would be more money for the
group that makes it, and this would include those who raise sheep and
those who convert wool into cloth, as well as the garment makers
themselves. The question, what members of a group would get the
benefit of a rise in the price of its product, is one that must be
discussed in connection with economic dynamics, and we shall find,
when we reach this part of the subject, that it is _entrepreneurs'_
gains which come largely from sources like this. We have already seen
that, in a static condition and with prices, wages, and interest
immovably held at rates to which perfectly free competition would
bring them, _entrepreneurs_ as such would get _nil_, and the whole
price of every article would be distributed among the laborers and the
capitalists who make it. The proof of this will appear when we have
examined the process by which the values of goods are adjusted, and
this will help to prepare the way for a study of the sources of net
profits, which are an all-important feature of actual business.
Society is honest or dishonest according as this _entrepreneurs'_
income is gained in one way or in another; and it is not too much to
say that before the court of last resort, the body of the people, no
system of business will be allowed permanently to stand unless the
basic principle of it tends to eliminate dishonest profits. A chief
purpose of static studies is to afford a means of testing the
legitimacy of the incomes that come to _entrepreneurs_.

_Market Price._--The old phrase _supply and demand_ describes the
process by which the market price of anything is determined. The total
mercantile stock of goods of a particular kind at any one time on hand
is, of course, an exact quantity, and the law of "market value," when
these words are used in a restricted and technical sense, determines
the price at which this predetermined amount can be sold.

_How a Normal Supply is Determined._--This present stock, however, was
brought into existence by producers who looked forward to the time
when they could probably sell it at a certain price; and the higher
this anticipated return for the article, the more of it they were
induced to make. The price, which to-day depends on the quantity on
hand, acted in advance as a lure to bring that quantity into
existence, and among the different articles which men can produce,
they are forever singling out for increased production those things
which offer the strongest lures--that is, the things that sell for the
largest amounts as compared with the cost of making them. The ultimate
tendency of all this is a certain adjustment of the relative supplies
of different commodities. It is that adjustment which brings all
prices to a level determined by cost.

_Natural Value._--This tendency toward cost prices--those which
afford to the producers wages for all their labor but no true
_entrepreneurs'_ profit--establishes a further law, that of "natural
value," and this it is that fixes the standard to which, in the long
run, market values, as adjusted by supply and demand, tend to conform.
A market value is natural or unnatural according as it does or does
not conform to a certain standard, and this ultimate standard itself
is the cost of producing the several kinds of goods. What the term
_cost_ in this connection really means we must later see; but for the
present we may take the common and practical view that it is the
amount of money that an _entrepreneur_ must pay out in order to bring
the article into existence. If there were very little wheat in the
granaries of the world, demand acting on this limited supply would
determine the selling price of it, and this price would be high as
compared with the cost of raising this grain. It would also be higher
than the selling prices of other things which are produced by the same
expenditure of labor and capital that has to be made in raising the
wheat. The market price would, for the time being, be unnatural and
would in due time be brought down; but this would have to be done by
the raising of more wheat. In other words, though the selling price of
a small supply of wheat may be _normal for that amount_, the amount
supplied is itself abnormally small, and in view of that fact the
resulting price is too high to be allowed to continue. As a permanent
price it would not be natural. The quantity supplied tends to increase
till the market price conforms to the cost of raising the wheat. We
have to see, first, how demand fixes the price of a definite amount of
anything which is offered for sale and, later, how the quantity
offered is controlled.

_How Prices are Determined._--It is certain that if, in a given
market, we increase the quantity of goods that are to be sold, we
lower the price,[1] while, if we diminish the quantity, we raise the
price. That is the commercial fact and it furnishes a beginning for a
theory of value.

    [1] The term _market_, as used in this discussion, means a
    local area within which goods of given kinds are bought and
    sold; and for different purposes we may make the area small
    or large. For some purposes it is necessary to take a "world
    market" into consideration, while for others it is desirable
    to include only that part of the world within which
    competition is very active and within which also goods and
    persons move freely and cheaply from place to place. A single
    country like the United States affords a market large enough
    to illustrate the laws of value, though one must always keep
    in view the relation of this circumscribed area to its
    environment. How local areas may, in a scientific way, be
    delimited and isolated for purposes of study will appear in a
    later chapter.

Let us suppose that we have a fixed quantity of goods on hand, that
all must be sold, and that no one knows at the outset what price they
will bring. There might conceivably go on an inverted kind of
auctioning process, in which the sellers at the outset would ask a
high rate, sell a few of their goods, and then gradually reduce the
price till the last article should be sold. At each reduction of the
price the "effectual demand," so-called, would increase. This means
that the people who want the article are actually willing to take and
pay for larger quantities the lower the price falls. Mere desire does
not influence the market, but an "effectual demand" means a desire and
a tender of the money that is asked for the goods. It is, in short, an
actual purchase and the amount of it becomes larger as the price goes
down. People who did not buy the article before now add it to the list
of goods that they take for use, and the people who were already
taking a certain quantity of it now take more.

_Equation of Supply and Effective Demand._--If this effective demand,
or amount of goods actually bought and paid for, becomes steadily
larger the lower the price becomes, it is clear that, however large
the total supply may be, it can all be sold by making the price low
enough. It was once thought that this is all we need to know of prices
current or market values. At some selling rate or other the quantity
actually offered will come to equal the quantity that is actually
bought. This is the equation of demand and supply. The quantity
offered is here supposed to be fixed and to include all of the
article that is in dealers' hands and that has to be sold; and the
price, starting at a high rate, is supposed to go down till the sale
of the entire quantity is effected.

_Varying Demand and Price._--The facts that have just been stated
account only in a partial way for the adjustment of market price. One
who wishes to trace phenomena to their causes cannot help asking why
demand and supply insure the selling of a given amount of goods at one
rate rather than at another. If apples are offering at two dollars a
barrel, why is it that, in a particular local market, one thousand
barrels and no more can, at that rate, be sold? We can readily see
that at one dollar a barrel more could be sold than at two, and that
at three less would be sold. But why is it that, at two dollars, the
definite number of one thousand barrels is the amount that is taken
and paid for? Why is the equation of demand and supply established at
exactly that price?

_Demand and Final Utility._--We come nearer to the cause that acts in
adjusting the price of apples when we say that they sell at two
dollars a barrel because that sum expresses their "final utility."
This means that, if such an auctioning process as we have described
were resorted to, the last barrel of apples which would be sold would
have to the buyer an amount of utility just equal to that of the final
unit of any other article that could have been had for the same money.
The auctioning, however, would cause different barrels of apples to
sell at different prices, whereas there is something in the working of
competition which causes all of them to sell at the same price. It is
necessary to see, first, how the price of the "final" one is adjusted
and, secondly, how that fixes the price of all the others.

_The Law of Diminishing Utility._--We revert here to one of those
general laws of economics that we have already stated and see it
acting under the conditions of distinctly social life. Goods of a
given kind have less and less utility, per unit, the more the user has
of them. If you offer him apples in increased quantity, he will value
the first part of the supply highly, but will attach less value to the
later parts. When the desire for this fruit is fairly well satisfied,
he will find other articles of more importance. At the price of two
dollars a barrel it is just worth his while to buy a final barrel of
them. That quantity, as added to his winter's supply, will give him
two dollars' worth of benefit. This means that it will do him as much
good as anything else which he can get for the same amount of money.

_The Equalization of Final Utilities._--Two dollars spent in adding to
his previous stock of other things will do the man in the illustration
the same amount of good that he can get from a final barrel of apples,
and no more. In the case of goods which are all alike and of which
consumers are always glad to use an additional amount, prices tend to
adjust themselves in such a way that a final unit of any one which the
consumer buys with a dollar is worth just as much to him as a final
unit of any other article he buys with that amount. The last dollar
paid for apples is as remunerative, in the way of pleasure and benefit
secured, as is the last dollar used to improve his wardrobe, to add
something to his stock of furniture, to buy tickets to the theater,
etc. Apples have, as it were, to compete with clothing, furniture, and
amusements for the consumer's favor, and if the vender charges more
for them than do the venders of other things having the same power to
give pleasure, some of the apples will remain unsold; for though
customers will always give as much as they would have to pay for other
things of equal final utility, they will not give more.

_The Prices of All Increments of Supply Equal._--A consumer always
gets a net surplus of benefit from the early increments of the goods
he consumes. If the last barrel of apples is worth two dollars,--or,
what is the same thing, if the last barrel has in it an amount of
utility equal to the final utility of other things that two dollars
will buy,--the first barrel has a larger utility; and yet it costs no
more than the last one. The sellers of apples, if they expect to
dispose of all that they have, must at the outset fix the price at
such a point that the very last increment of the supply will
successfully compete with other articles for the favor of purchasers.
Competition forces them to sell the whole amount so cheaply that the
least important part of it may be as important to the purchaser of
that part as the corresponding and least important part of the supply
of other things. Nothing but a monopoly of the entire available stock
would enable them to carry out the auctioning plan and offer the stock
piecemeal, so as to get a higher price for the parts offered early.
Even then buyers who should perceive the fact that a large part of the
stock remained in reserve and that it must ultimately be sold would be
able, by delaying their purchases, to get the benefit of a later and
lower rate, so that the monopoly itself would be only partially
successful in its policy. In the absence of a monopoly venders are
compelled to sell all articles of one kind and quality at one price.
The man who should fix a higher price on his portion of the supply
would be passed by in favor of other sellers who were disposing of
their final increments, and his business would quietly drift away from
him. _There cannot be two prices for one commodity in the same market_
at the same time. This fact is fundamental. Even the monopoly is able
to get different prices for different parts of its output only by
offering them at different times; and competing producers cannot do
this. They are forced to keep the price of all they offer at a level
that expresses its final utility.

_The Law of Value affected by the Difficulty of using Two Similar
Goods at Once._--There are two imperfections in the common statement
of this law of final utility which need to be removed in order that
the theory of value, which is based on the law, may be true and
useful. The first lies in the assumption that people buy completed
articles, such as coats, tables, vehicles, watches, etc., in regular
series of units, adding to their stock coat after coat, watch after
watch, etc., all just alike, till the utility of the last one becomes
so small that it is better to buy other things. On this supposition
the price of the whole supply of any such thing corresponds with the
utility of the last one in the consumer's series. This fairly well
describes the case of commodities like apples, of which men consume
now more and now less per day or per week and are always glad to
increase the amount they use. Of most kinds of consumers' goods a
person wants at one time one unit and no more, and a second unit, if
he has to use it himself within the same time in which he uses the
first, would be an incumbrance. Its utility would be a negative
quantity. Two quite similar coats would never be bought by the same
person if he had only his own needs in view and must use both coats
through the same period. The first unit of his supply is, for this
period, also the last.

_The Law of Value affected by the Fact that the Final Unit of a Good
is usually a Complex of Unlike Utilities._--The second imperfection
consists in the assumption that in measuring the utility of such a
unit the consumer estimates the importance to himself of the article
taken in its entirety. In the case of the apples of our illustration
the difficulty is not obvious. A man, as we have just noticed, may
increase or diminish his consumption of this fruit; the first few
apples that he uses will give him more pleasure than a second similar
quantity, and the price of apples in the market may actually depend on
the utility of the final peck of apples that each of the customers
consumes in a season. In other words, there is, in this instance, a
probability that the goods, although supplied at once, may be
appraised as if they were offered in a regular series and that the law
of final utility, in its common and simple form of statement, may in
this particular apply to the case. The second difficulty, however,
remains, and even in the case of such goods as apples renders the
common statement somewhat inaccurate, while in the case of most kinds
of consumers' goods the inaccuracy is glaring. If the price of fine
watches corresponded with the utility of the last one that a consumer
uses, it would be many times greater than it is. Rather than go
without watches altogether many a man would pay one thousand dollars
for one for which he actually gives a hundred; and, moreover, this
watch may be the "final" one in his case. The utility of the last
overcoat that a man uses in the winter may be such that, if he could
have it on no other condition, he would readily give five hundred
dollars for it instead of fifty.

_How Unlike Services may be rendered by One Good at the Same
Time._--What people want of any useful thing is an effect in
themselves,--a pleasure or a benefit which they expect to get,--and
apart from this subjective result they would not want the thing at
all. The power to confer a particular benefit is a utility. Men buy
goods solely for their utilities, and they measure these
service-rendering powers in the things offered to them and pay for
them accordingly. Now, it happens that articles often combine in
themselves a considerable number of different utilities, or
service-rendering powers, and that in buying an article the man pays
for them all. It is as though four or five different servants, each
having his own specialty, were to offer themselves for hire and invite
an employer to consider what each one could do for him. In buying an
article which will serve him in several ways, a man appraises all the
unlike services that the article will render. He secures several
services at once, as he would do if he hired, in a body, several
actual servants. The same thing would happen if, instead of hiring
human servants with different aptitudes, one should buy different
commodities each of which is, in reality, an inanimate servant, able,
in its own way, to do something useful or agreeable for the purchaser.
We could bunch a lot of these goods and buy them collectively. Venders
of the goods could tie them together in bundles and offer them thus
for sale. If the different goods were also sold separately in the
market, they would command in the bundles the same prices that they
would command when sold each by itself, and a bundle would bring the
sum of the several prices of its component articles. _In just this way
in which an aggregate of different goods would get its valuation does
any one article which is made up of different utilities get its
rating. The utilities are appraised separately._ In buying an article
which is a composite of different utilities, we virtually employ a
company of servants who have different specialties and insist on being
hired all together or not at all.

_How the Normal Price of a Bundle of Unlike Goods would be Fixed._--We
have now to see how the action of the market analyzes an article and
puts a price on the several utilities which compose it. The market
does this in exactly the same way in which it would appraise a bundle
of dissimilar articles which had to be sold separately, and we will
therefore trace the operation by which a package containing the
commodities A, B, C, and D would get its value in an actual market.

_How the Normal Price of a Single Good in a Bundle of Unlike Goods
would be Fixed._--Let us see how a bundle made up of commodities A, B,
C, and D would get its value in the market. We will suppose that these
articles are here named in the order of their importance, and that A
has the highest utility, since it renders the most important service,
and that D has the least. It may be that the article A has a utility
rated at one hundred dollars in a particular man's esteem. He would
give one hundred dollars for it rather than do without it altogether.
The service, then, that one article of this kind can render is
expressed by the sum one hundred dollars. Article B taken separately
may be worth fifty dollars, since it may render such services that the
man would give fifty dollars rather than be without it. A third
article, C, may in the same way be valued at twenty dollars and a
fourth at ten. Now, if a man has to buy the whole bundle, must he pay
one hundred dollars plus fifty plus twenty plus ten, or one hundred
and eighty for the whole? This does not by any means follow. The first
article may be sold separately at a price far below one hundred
dollars. There may be so large a supply of it that, in order to find a
market for it all, the makers must take ten dollars for it. This fixes
the market price of that amount of this commodity at ten dollars. If
we now glance beyond the question of the "market price" of the goods
and consider their more permanent or "normal price," the inquiry
requires us to do more than ascertain why a definite quantity of the
goods offered at a certain time sells for a certain amount. An appeal
to the law of final utility answers that question. To know, however,
why the permanent price is what it is, we have to know what fixes the
permanent supply, and we discover that the cost of making the goods is
here a dominant influence. For the present we assume that this cost
does not change, since such changes are a subject for the dynamic
studies which will come later. The present fact is that production has
been carried to such a point that no more of these goods can be sold
at the cost price, and there the enlargement of the output has
stopped; the supply has at some time in the past reached this normal
point and now remains there. Ten dollars represents the final utility
of the article, and this sum is what it costs to make it. If it could
be sold for any more than that, competition would bring new producers
into this business and would impel those already in it to enlarge
their production till the price would stand at the normal or cost
level of ten dollars.

_The Consumers' Surplus._--In every such case there are men who would
give much more for the article rather than be without it, and we have
supposed that some one would pay a hundred dollars for this commodity
if he could not otherwise obtain it. Ninety dollars, then, measures
what we may call his _consumers' surplus_, or the clear benefit he
gets from buying at its market price an article that is worth to him
so much more. This comes about by the fact that the makers of article
A, in order to sell the amount of goods that competition has impelled
them to make, must accept the offers of persons who can consistently
give only ten dollars for it. These are relatively poor persons, and
as the sum of ten dollars expended on other articles would benefit
them as much as ten dollars spent on this one, it is a "final"
purchase, or a final increment of their consumers' wealth. In order to
get it they sacrifice, in some other form, a benefit as great as the
one they get from acquiring this commodity and receive, therefore, no
consumers' surplus from it. These are the men whose demand helps to
fix the price of the article A, and the willingness of other persons
to give more does not make it bring any more. The rich men, who stand
ready to pay a hundred dollars, if necessary, are gainers by letting
poorer men fix this price. It is by catching the patronage of these
poorer men that the makers can dispose of their large output, and in
doing this they have to bring the price down to ten dollars.

_The Function of a Special Class of Marginal Purchasers of Each
Article._--In like manner there is a class of "marginal purchasers" of
the article B, or the persons who pay for it so much that they get no
net benefit or consumers' surplus from the purchase. If they did not
buy this article, they could get something else that would do them as
much good for the same outlay. It costs, let us say, only ten dollars
in the making, and enough of these articles are made and offered for
sale at that price to supply all customers who are attracted by the
offer. The men who would pay more for it do not count. Each of the
other articles in the bundle, when it is offered separately and at the
cost price which competition establishes, represents a final utility
to some one class of purchasers. Competition has made the whole supply
so large that, in order to dispose of it, venders must attract the
particular class who will take it at the ten-dollar rate. This class
is in the strategic position of market-price makers for this one
thing. They are the last class to whom the producers can afford to
cater. If each of the five articles in the bundle costs the makers ten
dollars, and if so many of each are made that they just supply the
needs of the classes that will buy them at ten dollars apiece, the
price of all five, when sold separately, will be fifty dollars. Most
of the purchasers of each article would give more than ten for it if
they had to, but some would not do so, and the producers cater to the
needs of these marginal persons.

_How the Prices of the Goods are fixed when they are sold in Various
Combinations._--How do these articles get their valuation when they
are tied in bundles containing all five of them and the bundles are
sold unbroken? In essentially the same way as when sold separately.
Article A, we will suppose, is one of the necessaries of life and is
to be had by itself in the market. Article B represents a comfort, and
C and D are luxuries. The bundles are so made that A and B are often
sold together; as are also A, B, and C; and A, B, C, and D. A
purchaser may have at his option the first only, the first and the
second combined, the first three, or all four. Article A, when it
stands alone, can be had at the natural or cost price and in quantity
sufficient to supply the wants of all classes of buyers from the
highest down to the class which will take it at ten dollars--the cost
of making it--but at no higher price. Any one can have the A either
alone or tied to other articles at this price. One who buys A and B in
combination will pay for article A only the same price that it
commands when sold separately; and since he buys B, the utility of
which is less than that of A, at ten dollars, it is clear that he gets
A for less than it is worth to him, but the ten dollars may be all he
would give for the B. This man is not the marginal purchaser of A, for
in buying it he realizes a consumers' surplus; but for the article B,
which is tied to it, he may pay all that it is worth to him. For that
he is a marginal purchaser, and as such he gets no consumers' surplus
out of it. What he pays for B will just suffice to buy something else
which is equally important to him. The price of this bundle of two
articles is ultimately determined by the cost of the two components,
which is twenty dollars, and enough of each component is made and
offered in the market to supply the wants of a class of persons who
will barely decide to take it at the cost rate. The class that
hesitates at taking A will not consider B, but the class that
hesitates at taking B gets a clear benefit from buying A at the price
that expresses the utility of A to a poorer class of persons.

_How Different Classes of Purchasers coöperate in this Price
Making._--The rule of one price for one article of course holds, and
the man who would have a clear and decisive motive for buying the A
for more than ten dollars, if he had to do so, gets the benefit of two
facts: first, that it costs only that amount in the producing, and
secondly, that competition makes the supply of it so large that it is
brought within the reach of those persons who value it at only ten
dollars. It takes two different classes of purchasers to fix the price
of this package of two articles, and their ratings fix it at twenty
dollars. Exactly the same influences regulate the price of the bundle
which includes A, B, and C. Men who buy C can afford to have a luxury,
and therefore, if they had had to do so, would have given more than
they do give for the articles of necessity and comfort. If the price
of A and B were higher than it is, they would still buy these two
things, but they would not raise their bids for C, since for this they
are marginal purchasers. This commodity is therefore sold at the price
that will just induce this class of persons to add it to their list of
consumers' goods. There is a further class in whose list of purchases
D is marginal, while A, B, and C yield a consumers' surplus in the
form of an uncompensated personal benefit.

_Different Utilities in an Article appraised as are Different Goods in
a Package._--It is an actual fact that most commodities are like these
packages of unlike articles. They are bundles of unlike utilities,
and the market actually finds a way to analyze composite things and
put a separate price on each utility. It may seem very theoretical to
say that a concrete thing, like a watch, a coat, a dining table, or a
roast fowl, is made up of such abstract things as utilities and that
each of these has its separate price; yet such is actually the fact,
and if goods were not valued in the market in this way, the prices of
all articles of comfort and luxury would be very much higher than they

A man pays seventy-five dollars for an overcoat, but if he could not
get the service that the coat as a whole renders without paying five
hundred dollars for it, he would pay it; for otherwise he could hardly
get through a winter. No man who buys an overcoat worth seventy-five
dollars would refuse to pay more if that were the necessary condition
of having an overcoat at all. The garment as a whole is far from being
a "marginal utility" to any one; and yet there is something in it that
is so. This element is like the article D in the fourth bundle
referred to in our illustration. There is a particular utility in the
composite good for which the man pays all that it is worth to him; and
he would go without that utility if the seller charged more than he
does. The most important service that the coat renders is that of
keeping the man warm; but a very cheap garment would render that
service, and six dollars will buy such a garment. The man does not
need to pay more than six dollars for that one service. The supply of
cheap coats is such that the final one must be offered for six dollars
in order to induce certain poor purchasers to buy it, and that,
moreover, is all that it costs to make it. No one, therefore, is
obliged to pay more than six dollars for something that will keep him
warm, however much such a service may be worth to him. Coats of
another grade have a second utility combined with this one, since they
are made of better cloth and are more comely in appearance. Utilities
of an æsthetic kind are combined with the crude qualities represented
by the cheapest coats. The supply of coats of this grade is such that
they must be offered for twenty dollars in order to induce some one to
take the final or marginal one. What does this mean? It means that
this purchaser will pay fourteen dollars and no more in order to have
the second utility, consisting in comeliness, added to the first
utility, capacity to keep him warm. This man would give more than
twenty dollars rather than go uncloaked; for it is plain that, if he
will pay fourteen dollars for comeliness, he will give more than six
for warmth. Probably he would pay one hundred dollars for the article
if he had to, and in getting it for twenty he gets a large consumers'
surplus. This is because he secures the first utility (1) for less
than it is worth to him, (2) for just what it costs in the making, and
(3) for just what it is worth to the poorer purchasers. He is willing
to pay only fourteen dollars for the comeliness, which is the second
utility that the garment contains, and he is therefore a marginal
purchaser of this second utility. It costs only the sum of fourteen
dollars to add the second utility to the first, and enough coats of
the second grade are made to catch the patronage of the class of
buyers who will give so much and no more for it. They are the persons
whose demand figures in adjusting the market price of this second
utility. Competing producers of coats cause the supply of those of the
second grade to be so large that they could not all be sold unless the
second utility were offered for fourteen dollars. This makes the price
of the entire coat twenty dollars as the result of catering in a
detailed way to the demand of two different classes of buyers.

In exactly the same way the price of the third grade is fixed at forty
dollars and that of the still higher grade at seventy-five. In the
third grade there is a utility which it costs twenty dollars to add to
those possessed by garments of the second grade, and this is added to
enough of them to supply all persons who will pay twenty dollars or
more for it. These coats are made of more highly finished goods and
have better linings, and this gives them the third utility which the
market appraises at its cost, which is twenty dollars. The men who buy
the forty dollar coats get a surplus of benefit in securing the first
two of the utilities that are embodied in them, since for these they
pay less than they would pay if they had to; but they get no surplus
over the cost of the third utility. It is to secure their custom that
the vender must sell it for twenty dollars. In a like manner a coat of
the next grade, which is a more fashionable garment, sells for
seventy-five dollars because it has a fourth utility which costs
another sum of thirty-five dollars and, to the marginal buyers, is
worth that amount. These men get a surplus from buying the first three
utilities at what they cost their producers and what they are worth to
poorer purchasers. It appears, then, that a seventy-five dollar coat
is a bundle of distinct elements, or utilities, each of which has its
separate cost and is sold at that cost price to a particular marginal
class of purchasers. Each element is valued exactly as if it were in
itself a complete article tied in this case to others, but also
offered separately in the market. Persons of one class are final
purchasers of the first utility when it is offered at its cost, six
dollars. Another class, in a like manner, helps to set the price of
the second utility at fourteen, and still other classes figure in the
adjustment of the prices of the third and fourth utilities. These cost
the manufacturers twenty dollars and thirty-five dollars respectively,
and competition insures the making of enough of them to catch the
patronage of those who will pay just these amounts. Members of one
class act as marginal purchasers in price making in the case of one
utility only. The concurrent action of all of them results in setting
the price of the best coat at eighty dollars. It is a very practical
fact that the rates at which all fine articles sell in the market are
fixed in this way. Such articles contain utilities unlike each other.
They have power to render services of varying degrees of importance,
and each of the several services gets its normal valuation when
producers make enough to supply the want of a particular group of
persons to whom it is a marginal service and who are willing to pay
only what it costs. They would go without that one service if they had
to pay more for it.

_This Method of Valuation Applicable to All Commodities of High
Grade._--Illustrations of this principle might be multiplied
indefinitely. A fine watch tells the time of day, but something that
would do that could be had for a dollar, and that is all that this
fundamental element in the fine watch sells for. It takes a series of
purchasers bidding on the higher utilities of the fine watch to make
it sell for five hundred dollars. The man who buys such a watch would
give, perhaps, ten thousand for it rather than be without a watch
altogether, but he is saved from the necessity of doing so by the fact
that poorer customers have done the appraising in the case of all the
more fundamental qualities which the watch possesses. So long as an
Ingersoll "dollar watch" will tell the time of day, no one will pay
more than a dollar for exactly that same service rendered by any watch
whatever; and the same thing is true of other services. Social in a
very concrete and literal sense is the operation of fixing prices.
Only the simplest and cheapest things that are sold in the market at
all bring just what they are worth to the buyers, and all articles of
higher grade offer to all who buy them a surplus of service not offset
by what is paid for them. If we rule out the cheapest and poorest
grades of articles, we find all others affording a "consumers'

    [2] It will be seen that to a man who buys the seventy-five
    dollar coat that article in its entirety is the final one of
    its kind which he will buy. He does not want a second coat
    exactly like the first. The same thing is true of the man who
    buys the five hundred dollar watch, since he does not think
    of buying more than one. In each case the first unit of the
    article bought is the last one, and it contains utilities
    which are worth more than they cost. It contains one utility
    only which is marginal in the true sense of affording no
    surplus of gain above cost. This utility stands on the
    boundary line where consumers' surpluses stop.



_Natural Supply._--We have attained a law of market value, which
determines the price at which a given amount of any commodity will
sell, and have taken a quick glance at the influence which fixes the
amount that is offered and thus furnishes a natural standard to which
the market value tends to conform. At any one moment the amount which
is supplied is an exact quantity, and if it all has to be sold, it
will bring a price which is fixed by the final utility of that amount
of the commodity. If the quantity offered for sale should become
greater or less, the final utility and the price would change. Final
utility controls the immediate selling price, and if that is above the
cost of production, a margin of gain is afforded which appeals to
producers, sets competition working, and brings the quantity made up
to the full amount which can be sold at cost. The amount of the supply
itself is therefore not a matter of chance or caprice. It is natural
that a certain quantity of each article should be supplied, and that
the price should hover about the level which the final utility of that
quantity of the good fixes. "Natural" or "normal" price is, in this
view, the market price of a natural quantity.

_Cost as a Standard of Normal Price._--It is commonly and correctly
stated that the normal price of anything is that which just covers the
cost of producing it. Cost in this case is the total amount of money
that the _entrepreneur_ pays out in order to bring the commodity into
existence. He buys raw materials and pays for all the labor and
capital that transform them into a new and saleable shape. If he can
make a net profit, he does so; but competition tends to adjust the
quantity produced and the consequent price in such a way that he can
make no net profit. What he gets for the article will then reimburse
him for his total outlay, but it will do no more. Since the quantity
produced is normal when it brings the market price to this level of
cost, it appears that the cost is the ultimate standard in the case.
The quantity supplied varies till it causes the market price just to
cover the cost; and so long as the quantity supplied is thus natural,
other influences remaining the same, the price is so. This states the
cost of production in terms of money paid by an _entrepreneur_ and the
returns from the operation as money received by him; but there is a
more philosophical way of conceiving the law of cost, and to this we
shall soon recur.

_Elements of Cost._--Whatever the _entrepreneur_ has to pay for in the
production of an article is of course an element in its monetary cost
to him. If he does not begin the making of it by drawing his raw
materials from what nature freely furnishes, he must pay some one for
the raw material. He must also pay for the labor, and this is
equivalent to buying the fraction of the article that is produced by
labor; for the laborer, as we have seen, is the producer of a certain
fractional share of the article and the natural owner of that share,
and when he agrees to let his labor for hire, what he really does is
to sell out his individual interest in the forthcoming product of the
industry in which he is about to engage. When a workman in a shoe
factory agrees to work for two dollars and a half a day, he really
contracts to sell every day for that amount a certain quantity of
shoes. The leather is one element which enters into the finished
shoes, and therefore the entire shoe is not really made in the
factory; but of the part which is there made, namely, the utility that
results from transforming the leather into shoes, one part is made by
labor and another by capital. The _entrepreneur_ has to buy both of
these if he is to acquire a valid title to the product and have a
right to sell it. These costs are therefore "purchase money" paid for
undivided shares of goods.

_Labor of Management._--It usually happens that an _entrepreneur_, or
employer of labor and capital, performs some labor himself; and we
have already noted the reason for this in the fact that the kind of
labor that he performs is so important that the fate of the business
often depends on it. He may manage the business so well as to make it
succeed or so ill as to make it fail. He pays himself for this labor
when he draws a salary for his services. As an _entrepreneur_ he
treats his own labor as he does that of any one else and buys the
fraction of the product of his business that his own labor of
management has created. In this he illustrates the general law that
all payments of wages are payments of the purchase of a certain
quantity of product. Though the owner's own contribution to the
product is not always mentioned in terms in the accounting, that is
what his salary is paid for, though it is spoken of as a payment for
his "time," or his labor.

_The Capitalist as the Vender of a Share in a Product._--Capital, as
we have seen, also contributes a definite share toward the total
amount of every product in the making of which it coöperates. Labor
does not do all the transforming of leather into shoes which is done
in the factory, since machines, fuel, etc., help; and we shall later
find that there is a way of determining how much of the product the
help so given creates. It adds a certain amount to what labor can
claim as its own special product, and the man who owns the capital
becomes the lawful claimant for this additional share. When he agrees
to let his capital work for an employer, he virtually sells to the
employer the undivided share of the product--shoes or what not--that
the capital really creates. The furnisher of productive instruments,
like the furnisher of labor, is a vender, and the _entrepreneur_ is a

_Entrepreneur and Capitalist._--As was stated in an earlier chapter,
an actual employer nearly always furnishes some of the capital that he
uses. If he did not do so, he would have difficulty in borrowing more,
since banks or other lenders do not loan to empty-handed men. It is
clear that what the employer gets in return for such capital as he may
put into the business is in reality a payment for a contribution which
that particular part of the capital makes to the product. Since each
bit of capital in an establishment contributes something toward the
creating of the product, the employer's own capital has the same right
to the value of its contributary share as has the capital of any one
else. What the employer-capitalist gets for capital the employer,
pure and simple, pays. As the furnisher of instruments the man is a
vender of the product of these instruments, while as an _entrepreneur_
proper he is the buyer. He must purchase the product of his own
capital just as he purchased the product of his own labor. In paying,
therefore, wages for all labor, including what he performs himself,
interest on all capital, including his own, and the price of raw
materials, he gets something which, if competition does a perfect
work, he has to sell for what he gives for it. The shoes, when he
sells them, tend, under active competition, to yield only what has
been paid for them in the making and, in a perfectly static state,
would actually yield no net profit. All the _entrepreneur's_ costs,
therefore, resolve themselves into purchase money paid, his receipts
are money accruing from sales; and under ideally free competition the
two sums total are equal.

_The Entrepreneur's Proper Function not Labor of Management._--In some
theoretical discussions the management of a business figures as the
principal function of the _entrepreneur_, and all or nearly all of the
reward that comes to him is represented as coming in the shape of a
reward for a responsible kind of labor that calls great abilities into
requisition. But it is very clear that, whether he personally performs
any labor or not, the employer has a distinctly mercantile function to
perform; and this in itself is totally unlike the work of overseeing
the mill, the shop, or the salesroom. He acquires a title to the whole
product by paying for the contributions which labor and producers of
raw material separately make toward it, and then parts with the
product; and if he gets any more than he has paid out, he makes a
profit. When industry is in what we have termed a dynamic state, such
a difference between the value of the product and the cost of the
elements that go into it is continually appearing, and that, too,
largely in consequence of causes over which, as a mere manager, the
employer has no control. A profit so gained cannot be wages of
management. It is a purely commercial gain, or a difference between
what is paid for something and what is received for it.

_Mercantile Profit._--It is best, therefore, to distinguish in some
perfectly clear way between that function of the _entrepreneur_, which
consists in buying and selling, and any work that he may find it best
to do in the way of superintending the business. At the cost of using
the term _entrepreneur_ in a stricter sense than the one customarily
attached to it, we will make this word describe the purely mercantile
functionary who pays for the elements of a product and then sells the
product. The reason for the very division between gains from this
source and gains from management we shall soon appreciate, for we
shall see that competition tends to reduce one of these incomes to
nothing, but tends to perpetuate the other and to make the amount of
it conform to a positive standard. The _entrepreneur_, as we shall use
the term, is neither the manager nor the capitalist, and when we have
occasion to speak of either of these functionaries, we shall call him
by his own distinctive name; though we know perfectly well that, in
actual business, it is desirable and often quite essential that the
same one who acts as an _entrepreneur_ should also put into the
business some labor as well as some capital. A man who performs two
unlike functions, buying and selling, on the one hand, and managing
the business, on the other, serves in two capacities that are clearly
distinguished from each other; while if he furnishes any of the
capital, he adds to these a third capacity entitling him to the value
of the product of his capital. As a manager he directly aids in
producing goods, and he gets pay for so doing from his other self, the
_entrepreneur_, who acquires the title to the goods; as a capitalist
he has another legitimate claim upon himself as _entrepreneur_.

_These Distinctions recognized in Practical Accounting._--That this is
no bit of mere theoretical subtlety is proved by the fact that the
bookkeeping of nearly all establishments distinguishes between these
two incomes by actually putting an appraisal on the work the employer
does and paying a salary for it. A man may be a large owner of stock
in a corporation and yet receive a salary that is fixed by an estimate
of what an equally useful man could be hired for. If personal
influence secures more for him than this, the excess is taken from the
pockets of the stockholders, and the amount of it is accounted for in
a way that does not fall within the scope of pure economic law.

_How "Natural" Prices exclude Entrepreneur's Profits._--The old and
correct view is that the tendency of competition is to make things
sell for enough to cover all costs, as we have defined them, and no
more. Under a different phraseology this is what Ricardo and others
have rightly claimed. They were unconsciously explaining what would
happen in a static state, for if society were actually in this state,
the goods that come out of the factory would be worth just enough to
reimburse the owner for all the outlays that can be called costs. If
they sell for more than this, there is to be had from the business an
income that costs nothing. It is a net profit above all claims based
on personal labor or on the aid furnished by capital, and it furnishes
an incentive for enlarging the business, and labor and capital are
therefore drawn into it. _Entrepreneurs_ bring them and for a time
make a profit by this means; but as their presence increases the
output of goods that are here made, it brings down the price till
there is no inducement to move any more labor and capital in this

_The Significance of a Natural Adjustment of Different
Industries._--The "natural" state of general industry is that in which
each particular branch of it is in the no-profit state. It is as
though laborers and capitalists in a shoe factory took all the shoes
that it turns out, sold them in a market, paid for the raw material
out of the proceeds, and kept the remainder, dividing it between
themselves in proportions which corresponded with the amounts they had
severally contributed toward the making of this product; and as though
the laborers in cotton mills and iron foundries received the goods
there made and dealt with them in a like manner. It is as though in
every branch of business the whole product were turned over in kind to
the furnishers of labor and capital.

_The Entrepreneur a Passive Functionary under Static
Conditions._--Purely passive is the function of the _entrepreneur_
under static conditions. In so far as any effect on his income is
concerned he might as well reside in a foreign land as in the one
where his business is located, provided always that the management
were unaffected. When the same man is both _entrepreneur_ and manager,
the absence of the first of these functionaries would mean the absence
also of the second, and that would cause trouble; but the purely
mercantile operation of getting a title to a product and then
surrendering it can be carried on as well in one place as in another.
The _entrepreneur_ in his capacity of buyer and seller does not even
do the work which purchases and sales involve. That is commonly done
by agents. Some of it, of course, may be done by the responsible
manager himself, and if that person is also the _entrepreneur_, it
follows that he does a part of the commercial labor of his business.
In this, however, he goes beyond his function as _entrepreneur_. In
that capacity he does, as we have said, no labor of any kind. Sales
and purchases are made in his name, but he does none of the work that
leads up to them.[1]

    [1] The holders of common stock in a corporation are always
    _entrepreneurs_, and they are also capitalists if the stock
    represents any real capital actually paid in. If the bonds
    and the preferred stock represent all the real capital that
    there is, any dividends that may be paid on the common stock
    are a pure _entrepreneur's_ profit. If, on the other hand,
    the stock all represents money actually put into the
    business, the dividends on it contain an element of net
    profit if they exceed simple interest on the capital and
    insurance against the risks that are not guarded against by
    actual insurance policies. If the rate of simple interest is
    four per cent, and the value of the unavoidable risk is one
    per cent, then a dividend of six per cent contains a pure
    _entrepreneur's_ profit of one per cent. In dynamic
    conditions such a return is often to be expected, and we
    shall soon study the conditions that afford it.

    In the present study we do not need to consider risks,
    inasmuch as the greater part of them arise from dynamic
    causes; that is, from the changes and disturbances to which
    the business world is subject. An invention promises greatly
    to cheapen the production of some article and, for a time, to
    insure large returns for the men who first utilize it. A
    capitalist may be willing to take a risk for the sake of
    sharing this gain; but in time both the risk and the gain
    will vanish. The capacity of the new appliances will have to
    be tested, a market for their output found, etc. A small
    remainder of risk is still entailed upon the capitalist if he
    leaves his money in this business. The death of the managing
    partner, the defaulting of payments for goods sold, the
    chances of unwise or dishonest conduct on the part of clerks
    or overseers, always impend over a business, but these
    dangers are at a minimum when the man who is at the head of
    the force of managers has capital of his own in the business.
    Risks are at a static level only when they are thus reduced;
    and for our present purpose it is best to consider that
    competition has eliminated the establishments where any
    recklessness has been shown in the management, and that the
    unavoidable remainder of risk resolves itself, nearly enough
    for practical purposes, into a _deduction from the product_
    which the surviving establishments turn out in a long period
    of time. A small percentage of their annual gains, set aside
    for meeting unavoidable losses, will make good these losses
    as they occur and leave the businesses in a condition in
    which they can yield as a steady return to owners of stock,
    to lenders of further capital, and to laborers all of their
    real product.

_How the Entrepreneur contributes to Production under Dynamic
Conditions._--In a dynamic state the _entrepreneur_ emerges from this
passive position. He makes the supreme decisions which now and again
lead to changes in the business. "Shall we adopt this new machine?"
"Shall we make this new product?" "Shall we enter this new market?"
are questions which are referred to him, and on the decisions he
reaches depends the prospects of profit for the business. This
activity is not ordinary labor, but in a true sense it is a productive
activity, since it results in placing labor and capital where they can
produce more than they have done and more than they could do were it
not for the enabling act of the _entrepreneur_ which places them on a
vantage ground of superiority. This subject will be discussed in a
later chapter and in connection with other phases of economic

_Values at a Static Level only when Entrepreneurs' Gains are
Nil._--Any net profit on an _entrepreneur's_ part means that his
product is selling for more than the elements of it have cost him. But
this is a condition which, if labor and capital are as mobile as the
static hypothesis requires that they should be, will cause this
_entrepreneur_ and others to move labor and capital into his industry,
thus increasing its output and lowering the selling price of its
product. If there is no such action going on, it shows that the
_entrepreneurs_ have no incentive for taking it.

_Values at a Static Level only when the Gains of Labor in the
Different Industries are Equalized._--If labor is creating more in one
subgroup than in others, as it often is in a dynamic condition, that
fact means that some _entrepreneurs_ are making a profit, and,
according to the principle stated in the preceding paragraph, this
means that values are not at their static or "natural" level. If,
owing to new methods or to some other cause, a given amount of
labor[2] in the subgroup that produced the A´´´ of our table creates
an amount of that product which sells for more than the B´´´ or the
C´´´ which labor of like quantity makes, then the manufacturers of
A´´´ would obviously get a margin of profit. They would not be obliged
to pay for labor any more than the market rate, and that, as we shall
see, cannot exceed what labor produces in the groups B´´´ and C´´´. In
A´´´ the labor creates more and the employer pockets the difference.
In saying this we assume one fact which we undertake later to prove;
namely, that there is a definite amount of each product which can be
attributed to labor alone as its producer. Capital and labor work
together, but each is, in effect, the creator of a certain fraction of
their joint product.

    [2] In measuring labor we, of course, take account of the
    quality of the men who perform it, and the work of a skillful
    man is counted as more units of labor than that of an
    unskillful one.

_Values Static only when the Gains of Capital in Different Industries
are Equalized._--If capital is creating more in one industry than in
another, there is a margin of profit for the _entrepreneurs_ in the
exceptionally productive industry. They pay as interest on the capital
they use only the market rate, which is what equal amounts of capital
can produce and get elsewhere. If they produce more in the one group,
the _entrepreneurs_ there can pocket the excess as they did in the
case of the product of labor. We assume that there is everywhere a
definite product that can be attributed to capital alone.

_Values Normal when Moneys paid out by Entrepreneurs equal Moneys
Received._--In the preceding paragraphs we have spoken of exchange
values as being static under certain conditions, but we might have
expressed the essential fact by saying that prices are static under
these conditions since the money a product brings is a true
expression of its value. If A´´´ sells for as many dollars as does
B´´´, the two things exchange for each other. In like manner the
product of labor and that of capital may be expressed in terms of
money, since the quantities of goods which they respectively make sell
for certain sums. Wages and interest are nearly always conceived in
terms of money. The commercial mode of computing costs of production
and returns from production is to translate them into moneys paid by
_entrepreneurs_ and moneys received.

_Costs of Production as related to Static Incomes._--What to an
_entrepreneur_ are costs are to workmen and capitalists incomes. The
one pays out wages and interest, and the others get them; and these
two sums are normal when together they equal the prices received for
goods produced. The _entrepreneur_ is the universal paymaster, and in
a static condition all incomes come from his hand.



_The Equilibrium of Industrial Groups._--The different industrial
groups are in equilibrium when they attract labor and capital equally,
and that occurs when these agents produce as much per unit employed in
one group as in another. Such equalized productivity is the bottom
fact of a static condition, and equalized pay follows from it. Wages
and interest tend to be uniform in all the groups. Efficient labor, of
course, gets in any employment more than inefficient; but labor of a
given grade gets in all the groups that make up industrial society a
uniform rate of pay, and nothing is to be gained by any capitalist or
by any laborer by moving from one employment to another. They all
therefore stay where they are, not because they cannot move freely if
they wish to do so, but because no inducement to move is offered to
them. This is a condition of perfect mobility without motion--of atoms
ready to move at a touch without the touch that would move them. The
paradox indeed holds that it is the ideally perfect mobility which has
existed in the past which positively excludes motion in the present.
At some time in the past labor and capital have gone from group to
group till they have brought about an adjustment in which they have no
incentive for moving farther. The surface of a pool of water is kept
tranquil, not because the water is not perfectly fluid, but because,
in spite of the fact that it can flow with entire freedom in any
direction if it is impelled more in that direction than in any other,
each particle of it is impelled equally in all directions. It is the
perfect equilibrium that keeps the particles from changing their
places, and fluidity has caused the equilibrium. In like manner when
labor and capital can create and get just as much in one place as in
another, they are attracted as strongly in one direction as in another
and therefore do not move. A young man of average capacity, who is
deliberating upon the choice of an occupation, will find that he can
do as well in a cotton mill as he can in a shoe factory, a machine
shop, a lumber mill, a flouring mill, or any other industrial
establishment requiring his particular grade of capacity. This is the
picture of a perfectly static industrial condition. Economic science
has to account for values, wages, and interest as they would be in
such a condition, however impossible it is that society should ever
reach exactly such a state. The values, wages, and interest in a real
market are forever tending toward the rates that would be established
if the static condition were realized.

_The Sign of a Static State._--The sign of the existence of a static
condition is, therefore, that labor and capital, though they are
perfectly free to move from one employment to another and would
actually do so on the slightest inducement, still do not move. They
stay where they are because they cannot find places where they can
produce the slightest amount in excess of what they now produce, and
no employer will anywhere offer any excess above the prevailing rate
of pay.

_Profits and the Movements they induce the Sign of a Dynamic
State._--_Entrepreneur's_ profits, when they exist, mean that this
equilibrium is disturbed, and when it is so, mobility of labor and
capital affords the guaranty that a new equilibrium will be
established if no further disturbances follow. As we have said,
profits attract labor and capital, increase the output of those goods
which yield the profit, and reduce the prices of them to the no-profit
level. Workmen and capitalists then get from the _entrepreneur_ as
wages and interest all that he gets from the public as the price of
his goods, except what he pays for raw materials.[1] In other words,
the employer sells his goods at cost.

    [1] The _entrepreneur_ of A´ of our table must buy the A in
    order to impart to it that utility which is his own
    particular contribution. He pays as wages and interest all
    that he gets for this contribution. The true product of the
    _entrepreneur_ is not the entire price of the A´, but is the
    difference between that and the price of the A. The entire
    amount received for the A´ resolves itself into wages,
    interest, and cost of A; but as a rule the price of A
    resolves itself practically into wages and interest only, and
    when it does so, all that is paid for the A´ ultimately takes
    these forms. The same is then true of the finished product
    A´´´. The entire price of it is ultimately resolvable into
    wages and interest; and in speaking of the product of an
    entire group we do not need to make any reservation for raw

    The case in which this statement requires qualification is
    that in which the material in its rawest state still has
    value, as is the case with ore and mineral oil contained in
    the earth but not a true part of land in the economic sense,
    since they are exhausted in the using. The price of a product
    into which these elements enter includes something that
    represents the value which they have _in situ_ and before any
    labor has been expended on them. It is true even in these
    cases that the value of the product is measured in terms of
    wages and interest, provided that the exhaustible elements
    such as ore, oil, etc., are capable of being replenished, or
    provided that an effective substitute for them is in process
    of production by means of labor and capital. The natural raw
    material is then worth what the artificial substitute costs
    in terms of capital and labor, and the finished product which
    contains some of the natural material sells for the amount
    which the finished product costs, which is made altogether by
    labor and capital applied to valueless elements in nature.

_How Costs are Determined._--The early studies of "natural" values, or
values which conform to costs of production, were unconscious and
imperfect attempts to attain the laws of value in a static state. In
such a state costs resolve themselves into wages and interest, and the
conception of such a static state is therefore not complete unless we
know how wages and interest themselves are determined. What we have
already said implies that they fluctuate about certain standards, just
as do the prices of goods, and that they would remain at these
standards if society were reduced to a static condition.

_Significance of Static Law in a Dynamic State._--An actual society is
undergoing constant disturbances. It is very far from being static;
and yet values of goods, on the one hand, and the earnings of labor
and capital, on the other, hover within a certain distance of the
standards which would be realized if the society became static. In
spite of active dynamic movements the general returns of labor and
capital can never range so far from these theoretical amounts that the
distance from them cannot in some way be measured and accounted for.
The sea, when gales are blowing and tides are rising and falling, is
anything but a static object, and yet it keeps a general level in
spite of storms and tides, and the surface of it as a whole is
surprisingly near to the ideal mathematical surface that would be
presented if all disturbances were to cease. In like manner there are
certain influences that are disturbing the economic equilibrium just
as storms and tidal waves disturb the equilibrium of the sea. We
cannot actually stop these influences any more than we can stay the
winds and the lunar attraction; but we can create an imaginary static
state for scientific purposes, just as a physicist by a process of
calculation can create a hypothetical static condition of the sea and
discover the level from which heights and depths should be measured.
No more than the economist can he actually bring the subject he is
dealing with to a motionless condition. The economic ocean will defy
any modern Canute who may try to stop its movements; but it is
necessary to know what shape and level it would take if this were

_Influences that disturb the Static Equilibrium._--The influences that
disturb the economic equilibrium are, in general, five. The population
of the world increases, and this is one influence which prevents
values, wages, and interest from subsiding to perfectly "natural"
standards. Capital is increasing, and this influence also acts as a
disturbing factor. The methods of producing things change, and the
changes have a very powerful effect in preventing the attainment of a
static equilibrium. New modes of organizing different industries are
coming into vogue, and this causes a further disturbance of the
economic adjustment. The wants of men are by no means fixed; they
change, multiply, and act on the economic condition of society in a
way that affects the static adjustment. Even physical nature undergoes
change, and the perishable part of the earth does so in a disquieting
way. We are using up much of our natural inheritance. As the effect of
this appears chiefly in forcing us to change our processes of
production, we shall, for convenience, limit our study to the five
changes here enumerated.

_Movement Inevitable in the Dynamic State._--These influences reveal
their presence by making labor and capital more productive in some
places than they are in others, and by causing them ever and anon to
move from places of less productiveness to places where gains are
greater. As we have said, this moving of labor and capital to and fro
is, like currents in the sea, a sign of a dynamic condition. As in the
static state these agents would not thus move, however fluid and
mobile they might be, so in a dynamic state they are bound to move,
because their earning powers do not remain long exactly equal in any
two employments, and they go now hither and now yon, as, in the
changeful system, openings for increased gains present themselves. If
commodities were everywhere selling at cost prices and if wages and
interest were everywhere normal and uniform, labor and capital would
not move to and fro, and this would be a proof that dynamic influences
were absent.

_How an Imaginary Static Society is Created._--If we wish to discover
to what standard the values of goods, on the one hand, and the rewards
of labor and capital, on the other, continually tend to conform, we
must create an imaginary society in which population neither increases
nor diminishes, in which capital is fixed in amount, in which the
method of making goods does not change, in which the mode of
organizing industry continues without alteration, and in which the
wants of consumers never vary in number, in kind, or in intensity.

_Costs of Production in a Static State._--We have said that in such a
static state the prices of different products are just high enough to
cover the wages and interest which are generally paid. There are
uniform or all-around rates of pay for labor and for capital, and
every man who hires workmen or gets loans from a bank has to pay them.
In the real world, full as it is of disturbances, and given over as it
is to forces of change and progress, we find that values, wages, and
interest are in general surprisingly near to these standards. In a
particular business products may for a time sell for enough to afford
a large surplus above prevailing wages and interest, and business as a
whole may, for a time, yield some such surplus; but in the absence of
monopolistic privileges no one business yields a large surplus for a
long time, and still less does business as a whole do so, though
profits may always be found somewhere within the system.

_The Final Productivity of Labor._--If we assume that the capital of
society is a fixed amount, we may perform an imaginary experiment
which will show how much labor really produces. We may set men at
work, a few at a time, until they are all employed, and we may measure
the product of each of the detachments. We should make the different
sections of the working force as similar to each other as it is
possible to make them and call each section a unit of labor. If there
were ten such divisions and if the quantity of capital were sufficient
to equip them all on the scale on which laborers are at present
actually equipped, it is clear that this amount of capital, when it
was lavished on one single section, must have supplied it with
instruments of production in nearly inconceivable profusion. What we
should to-day regard as a fair complement of capital for a thousand
men would nearly glut the wants of a hundred, and yet it is thinkable
that it should take such forms that they would be able to use it.

_Productivity of the First Unit of Labor._--We will set at work one
section which we have called one unit of labor and will put into the
hands of its members the whole capital which is designed ultimately to
equip the ten sections. It is very clear that the forms that this
capital will take cannot be the same that it will have to take when
the entire working force is using it. Indeed, we shall have to tax our
ingenuity to devise ways in which one unit of labor can utilize the
capital that will ultimately be used by ten. The tools and machines
will have to be few in number but very costly and perfect. We shall
have to resort to every device that will make a machine nearly
automatic and cause it to exact very little attention from the person
who tends it. The buildings will have to be of the most substantial
and durable kind. We shall have to spend money without stint wherever
the spending of it will make labor more productive than it would
otherwise be. If we do this, however, the product of the labor and its
equipment will be a very large one. The industry will succeed in
turning out indefinitely more goods than a modern industry actually
does, and the reason for it will be that the workmen have capital
placed in their hands in unparalleled profusion.

_The Product of the Second Unit of Labor._--We will now introduce a
second unit of labor, by doubling the number of workers, without
changing the amount of the capital. We must, of course, change the
forms of the capital, or it cannot be advantageously used by the
larger working force. The buildings will have to be larger, and if
they are to be erected with about the same amount of capital as was
formerly used, they must be built in a cheaper way. Tools of every
sort must be more numerous, and this larger number of tools, if it is
to represent the same investment of capital that the former number
embodied, must also be simpler and cheaper. The whole equipment of
_capital goods_ will have to undergo a complete transmutation; but the
essential thing is that the amount of the capital should not be

_A Provisional Mode of Measuring Capital._--In measuring the amount of
the capital we are obliged to use a unit of cost, and in the
illustration we have assumed that the cost can be measured in dollars.
The productive fund consisted at the outset of a certain number of
dollars invested in productive operations. This is only a provisional
mode of measuring it. The money spent really represents sacrifice
incurred, and we shall find that the only kind of sacrifice that is
available for measuring the cost of goods of any kind is that which is
incurred by labor. Ultimate measurements of wealth in all its forms
have to be made in terms of labor. Such measurements have presented
difficulties, and the attempt to make them has led to serious
fallacies. We shall see, in due time, how these fallacies can be

_The Law of Diminishing Productivity._--Under these conditions the
second unit of labor will add something to the amount that was
produced by the first unit, but it will not cause the product to
become double what it was. It could not do that unless the capital
also were doubled. Each unit of labor is now coöperating with one half
of the original capital, and the total product is less than it would
have been if the new labor, on entering the field, had brought with it
as full an equipment of productive instruments as was possessed by
the labor that preceded it. Adding to the industry a second unit of
labor without adding anything to the capital makes the total product
somewhat larger, but falls short of doubling it. If we credit to this
second unit of labor what it adds to the product that was created
before it came into the field, we shall find that it is a certain
positive amount, but obviously less than the total product which was
realized by the first unit _and all the capital_. It is even less than
a half of the product of the two units using all the capital. Perhaps
the first unit of labor, when it used all the capital, created ten
units of product; while the two units of labor, using this same
original amount of capital, produce sixteen units of product. The
clear addition to the original product which is caused by the added
labor of the second squad of workmen is only six units, while a half
of the total product after the addition to the labor has been made is
eight. This figure represents the amount we may attribute to one unit
of labor and a half of the total capital, while six represent what is
_causally_ due to one unit of bare labor only. With all the capital
and one unit of labor we get ten units of product, while the addition
of one unit of bare labor brings the total amount up to sixteen. Six
units find the cause of their existence in the presence of the second
unit of labor, and the second unit therefore shows, as compared with
the first, a diminished productivity.

_Product of the Third Unit of Labor._--We will now introduce a third
unit of labor, leaving the amount of capital still unchanged, but
again altering the forms of it so as to adapt them to the needs of a
still larger working force. We will make the buildings larger and
therefore, of necessity, cheaper in their forms and materials. We will
make the tools and machines more numerous and simple, and will do
everything that is necessary in order to make the fixed amount of
capital--the fund amounting to a given number of "dollars"--embody
itself in the number and the kinds of capital goods that are requisite
in order to supply three times the original number of workmen. The
third unit of labor now adds something to the product realized by the
first two, but the addition is smaller than it was in the case of the
second unit.

_Products of a Series of Units of Labor._--If we continue this process
till we have ten units of labor, employing the same amount of capital
as was formerly used by one, we shall find that each unit as it begins
to work adds less to the previous product than did the unit which
preceded it, and that the tenth unit adds the least of all.

Care must be taken not to confound the addition that is made to the
product in consequence of the additional working force with the amount
which, after the enlargement of the force, is created by the last unit
of labor _and its pro rata share of the capital_. When the tenth unit
of labor is working, it is using a tenth of the capital and the two
together create a tenth of the product. This is more than the amount
which is _added_ to the product by the advent of the tenth unit of
labor. That addition is merely the difference between the product of
all the capital and nine units of labor and that of all the capital
and ten units of labor. This extra product can be attributed entirely
to the increment of labor.

It is also carefully to be noted that when the units are all working
together, their products are equal and the particular one which
happened to arrive last is not less productive than the others. Each
one of them is _now_ less productive than each one of the force of
nine _was under the earlier conditions_. In like manner each unit of
the nine is less productive than was, in the still earlier period,
each unit of the force of eight. At any one period, all units produce
the same amount. At any one period, then, what any one unit of labor
produces by the aid of its _pro rata_ share of the capital is a larger
amount than what each can be regarded as producing by itself. Though
one of ten units creates, with the aid of a tenth of the capital, a
tenth of the product, of itself it creates less; for we can only
regard as its own product what it adds to the product that was
creating before it arrived on the scene. It is the bare product of a
unit of labor alone that we are seeking to distinguish from other
elements in the general output of the industry, and that consists in
the difference between what nine units of labor and all the capital
can produce, and what ten units of labor and all the capital can

We will consider the amount of capital fixed and let the amount of
labor increase along the line _AE_, and we will let the product of
successive units of labor be measured by the vertical distance from
the points on the line _AE_ to the descending curve _CD_. _AC_ is the
product of the first unit of labor. The product of later units is
measured by lines to the right of _AC_ and parallel with it, which
grow shorter as the number of units increases. _ED_ is the product of
the last unit. In each case we impute to an increment of labor
whatever amount of product its presence adds to that which was created

_Summary of Essential Facts._--The facts that are to be remembered
then are: first, that the capital remains fixed in amount, though the
forms of it change as the number of units of labor increases;
secondly, that that which we call the product of a unit of labor is
what that unit, coming into the field without any capital, can add to
the product of the labor and capital that were there before; and
thirdly, that this specific product of labor grows smaller as the
amount of labor grows larger, rendering the product of the last unit
the smallest of all. When the tenth and last unit is working, each one
of the nine earlier units is, of itself, producing no more than does
the final one, though it formerly produced more because of the larger
quota of capital with which it was formerly supplied.


_The Test of Final Productivity._--There are now at work ten units of
capital and ten of labor, and we cannot go through the process of
building up the working force from the beginning. How, then, do we
measure the true product of a single unit of labor? By withdrawing
that unit, letting the industry go on by the aid of all the capital
and one unit of labor the less. Whatever one of the ten units of labor
we take away we leave only nine working. If the forms of the capital
change so as to allow the nine units to use it advantageously, the
product will not be reduced to nine tenths of its former size, but it
will still be reduced; and the amount of the diminution measures the
amount of product that can be attributed to one unit of bare labor. Or
we may add a certain number of workmen to a social force already at
work, making no change in the amount of the capital,--though changing
its forms,--and see how much additional product we get. That also is a
test of final productivity. It gives the same measurement as does the
experiment of taking away the little detachment of men and seeing how
much the product shrinks. By either process we measure an amount that
is attributable altogether to bare labor and not to capital.

The whole area _BCD_ in the diagram is an amount of product that is
attributable to capital and not to labor. It represents the total
surplus produced by labor and capital over the amount that can be
traced to the labor alone. The product of all the capital and all the
labor minus ten times the product of a single unit of labor is the
amount that is attributable to the productive fund only.

The area _ABDE_ represents this amount. The last unit of labor creates
the amount _DE_ and the number of units is represented by the amount
_AE_. All of them are now equally productive and what all create, as
apart from what capital creates, is the amount _ABDE_.

_Only the Final Part of this Mode of gathering a Working Force
practically resorted To._--The process of building up the working
force from a single unit is imaginary. In practical life we see the
process only in its final stage. _Entrepreneurs_ do continually have
to test the effect of making their working forces a little larger or a
little smaller, and in so doing they test the final productivity of
labor; and this is all that is necessary. Tracing the process of
building up the force of labor unit by unit reveals a law which is
important, namely, that of the diminishing productivity of single
units of labor as the number of units increases. If we crowd the world
full of people but do not proportionately multiply working appliances
of every kind, we shall make labor poorer.

_Why a Detachment of Laborers rather than One Man is treated as a Unit
of Labor._--In making up the force of workers we might have treated
each individual as a unit; but we have preferred to call a detachment
a unit in order that the symmetry of the force might be preserved.
Even though we were studying only a single mill it would have its
departments, and it would be desirable that, when we enlarge the force
of men, we should be able without difficulty to give to each part of
the mill its fair share of the new laborers. If it were a shoe
factory, we should need to add lasters, welters, sewers of uppers,
etc., in a certain proportionate way, in order that one part of the
mill might not get ahead of another and pile up unfinished products
faster than they could be taken and completed.

In the last analysis the law applies to the industry of all society.
The final unit in the case consists of shoemakers, cotton spinners,
builders, foundrymen, miners, cultivators, etc., and of men of all
subtrades included in the general callings. As the composite
detachments come into the field, they apportion themselves among all
the occupations that are represented, and that too in nicely adjusted
proportions. We shall see in due time how this adjustment of the
several shares of the social force of laborers is practically made.

_The Law of Final Productivity Applicable to the Labor of
Society._--The law of final productivity applies to every mill, shop,
or mine separately considered. If its capital remains fixed in amount,
units of labor produce less and less as they become more numerous. The
product of any unit at any one time may be measured by taking it away
and seeing how much the output of the establishment is reduced. The
law, however, applies to all the mills, shops, mines, etc., considered
as a social complex of working establishments. As the working society
grows larger without growing richer in the aggregate, the power of
labor to produce goods of all kinds grows less. At any one time this
producing power is measured by taking away from every working
establishment a number of its operatives and ascertaining how much
less is produced after the withdrawal. Such a test on the social scale
is never made consciously. Each employer can test in an approximate
way the effect of reducing his own force, and the effect of gradually
enlarging it, and there are influences at work which result in
enlarging one industry when others are enlarged and in causing the
final productivity of labor to be uniform in all. A shoe manufacturer
can tell, in a general way, how much an extra man or two will be worth
to him. It is possible to ascertain by experience about what number of
shoes that additional labor will, in a year, add to the output of the
shoe factory or the number of tons of steel it will add to the present
annual output of a furnace. When these products vary in the case of
different shops, the men are called to the points where the apparent
additions are largest, and the constant tendency is toward a level of
productive power. The building up of an imaginary force from the
beginning presents, in a clear and emphatic way, the fact that the
specific productivity of labor grows less as, other things remaining
the same, workers become more numerous. We should know on _a priori_
grounds that this must be the fact; but we can verify it by
observation and statistical inquiry. Where men are numerous and land
and tools are scarce, labor is comparatively unproductive; and it is
highly productive where land and tools are plentiful. There is no
doubt that crowding the world full of people, without providing the
world with capital in a proportionate way, would impoverish everybody
whose income depends on labor.

_The Law of Wages._--Even though labor creates the amount _ABDE_, it
is not yet perfectly clear that it will be able to get that amount.
For aught we now know the _entrepreneur_ may keep some of it, and for
aught we know he may keep some of the quantity _BCD_ which is
distinctly the product of capital. Let us see whether he can in
reality withhold any part of _ABDE_, which is the product of labor.


_Wages under Perfect Competition._--In the static state that we have
assumed, competition works without let or hindrance. It does not work
thus in the actual world, and we shall in due time take account of the
obstacles it encounters; but what we are now studying is the standards
to which such competition as there is--and it is in reality very
active--is tending to make wages conform. We want to know what would
happen in case this competition encountered no hindrance at all. This
would require that a workman should be able to set employers bidding
against each other for his services just as actively as an employer
can make laborers bid against each other in selling their services. If
this were the case, every unit of labor could get what it produces, no
more and no less. Even a single man, offering himself to one employer
after another, would virtually carry in his hands a potential product
for sale. His coming to any man's mill would mean more goods turned
out in a year by the mill; and if one employer would not pay him for
them at their market value, another one would. The final unit of
social labor can get, under perfectly free competition, the value of
whatever things that labor, considered apart from capital, brings into
existence. Moreover, each unit of labor by itself alone now produces,
as we have seen, the same amount of commodity as the final unit, and
can get the price of it. Now that they are all working together each
one of them can place itself in the position of the final unit by
leaving its present employment and offering its services elsewhere.

_Wages regarded as Prices of Fractional Products adjusted by Perfect
Competition._--Under the hypothesis of perfect competition, as the
term has been used in our discussion, the venders of goods can get
their market values. These values are fixed by the final utility law.
Free competition means, then, not only that any average laborer who
offers himself for hire virtually carries in his hands a potential but
definite product for sale, but that he may confidently offer it at the
price that is fixed by its final utility. Like other venders, the
laborer can get the true value of his product and he can get no more.
In an ideally perfect society organized on the competitive plan a man
would be as dependent on his own productive power as he would be if he
were alone in a wilderness. His pay would be his product; but that
would be indefinitely larger than it could be in a wilderness or in
any primitive state. The capital of other men and the organization
that they maintain enable a worker to create and get far more than he
could if he lived alone, even though, like Crusoe, he were monarch of
his whole environment. It would be a losing bargain for the worker to
surrender the product of mere labor in a state of civilization in
exchange for what both labor and capital create in a state of



The product of the final unit of labor--an amount which in practice is
measured without any tracing of the previous growth of the working
force--sets the standard of the rate of wages. We have now to see that
the rate of interest has a similar basis; and yet it is worth while to
build up, wholly in imagination, a fund of capital, just as we have
made up the force of laborers, increment by increment. This will have
the incidental effect of illustrating another way in which wages may
be determined.

_Interest as a Residual Amount._--The area _BCD_ in our former figure
represents the difference between the total product of an industry and
the wages paid to laborers. If there is no net profit accruing to the
_entrepreneur_, this area must represent interest. It is what is left
for the capitalist on the supposition that he and the laborer together
get all that there is. If the goods sell for what they cost, this must
be the fact, and the amount represented by _BCD_ has thus to go to
capital, since, by a rule of exclusion, it cannot go to the
_entrepreneur_ nor to the laborer. The mill and its contents earn for
their operator nothing but simple interest on the money they have
cost. Paying the laborers discharges the first claim on the product,
and there then remains only enough of the product to pay the remaining
claim, that of capital.

The question still remains to be answered, how the capitalist, if he
is a different person from the _entrepreneur_, or operator of the
mill, can make this functionary pay over to him all that he has in his
hands after paying the wages of labor.

_The Importance of the Residuum._--The above reasoning does not
satisfactorily show what influence the capitalist can use to make the
_entrepreneur_ pay over to him the entire amount of the residuum. It
shows that after paying wages the _entrepreneur_ will have a certain
amount left, but it is not thus far clear how the capitalist can get
it from him. The fact that the laborers get only the amount
represented by _ABDE_ and that the whole amount is _ACDE_ does,
however, at least show that the _entrepreneur_ has the amount _BCD_
left in his hands, and that he is _able_ to pay this amount to the
capitalist if by any appeal to competition the capitalist is able to
make him do it.

_Interest not determined Residually._--The fact is that the interest
on capital is fixed exactly as are the wages of labor.

We will let another figure represent the entire product of the same
amount of labor and the same amount of capital that were represented
in the former case. We will assume that there is at the outset a
complete force of laborers, and that no men are added to it or taken
from it; but we will gradually introduce units of capital instead of
units of labor as in the former case. The amount of capital is now
represented by the line _A´E´_ and the product of the first unit of it
by the line _A´C´_. The product of the successive units declines along
the curve _C´D´_. The final unit of capital then brings into existence
the amount of wealth represented by _E´D´_. As every other unit now
produces the same amount, the capital as a whole creates the quantity
represented by _A´B´D´E´_ and every unit of it makes its own separate
contribution to that amount. In this we have simply applied to capital
and its earnings the principle we formerly applied to labor and its


_General Form of the Law of Final Productivity._--This principle is
the law of final productivity, one of those universal principles which
govern economic life in all its stages of evolution. Either one of the
two agents of industry, used in increasing quantities in connection
with a fixed amount of the other agent, is subject to a law of
diminishing returns. The final unit of the increasing agent produces
less than did the earlier units in the series. This does not mean that
at any one time one unit produces less than another, for at any one
time all are equally productive. It means that the tenth unit produces
less than the ninth did _when there were only nine in use_, and that
the ninth unit formerly produced less than the eighth did in that
still earlier stage of the process _in which there were only eight in
use, etc._ If the productive wealth of the United States were only
five hundred dollars per capita instead of more than twice that
amount, interest would be higher than it is, because the productive
power of every dollar's worth of capital would be more than the
productive power of each dollar's worth is now; and, on the other
hand, if we continue to pile up fortunes, great and small, till there
are in the country two thousand dollars for every man, woman, and
child of the population, interest will fall, because the productive
power of a dollar's worth will become less than it now is.

_How Competition fixes Interest._--We can now see how it is that the
capitalist can make the _entrepreneur_ pay over to him the amount left
in his hands after paying wages. Every unit of capital that any one
offers for hire has a productive power. It can call into existence a
certain amount of goods. The offer of it to any _entrepreneur_ is
virtually an offer of a fresh supply of the kinds of goods which he is
making for sale. Loaning ten thousand dollars to a woolen manufacturer
is really selling him the amount of cloth that ten thousand dollars
put into his equipment will bring into existence. Loaning a hundred
thousand dollars to the manufacturer of steel, so as to enable him in
some way to perfect his equipment, is virtually selling him the number
of additional tons of steel, ingots, or rails that he can make by
virtue of this accession to his plant.

_The Significance of Free Competition._--Now, the tender of capital
may be made to any _entrepreneur_ in a particular industry, and the
existence of free competition between these _entrepreneurs_ implies
that a lender of capital can get from one or another of them the whole
value of the product that this capital is able to create. A unit of
capital in the steel business can produce _n_ tons of steel in a year,
and if one employer will not pay the price of _n_ tons for the loan of
it, another will. This, indeed, implies an absolutely free
competition; but that is the condition of the problem we have first to
solve. When we know what ideally active competition will do, we can
measure the effects of the obstructions that, in practice, competition
actually encounters.

_Competition for Capital among Different Industries._--The capitalist
can invoke the aid of competition outside of the limits of one
particular business. He may offer his loan to steel makers, to woolen
manufacturers, cotton spinners, silk weavers, shoemakers, etc. Within
each one of these industries perfect competition between the different
employers will give him the value of the product which, in that
business, his capital is able to create. If, however, what in this way
he offers to men in one occupation is worth more than what he offers
to men in another line,--if capital is worth more to steel makers than
it is to cotton spinners,--he will find a market for his capital in
the former industry; and this process of seeking out the employment in
which capital is the more productive and there bestowing the loans of
capital, will go on until every such local excess of productive power
is removed and capital can produce as much wealth in one business as
it can in another. Everywhere capital will then be both producing and
receiving the same amount, and general interest will everywhere be
determined by the final productivity principle acting all through the
business world.

_When Interest as Directly Determined equals Interest as Residually
Measured._--The area _BCD_ of the first figure measures what the
_entrepreneur_ has left after paying wages. This amount and no more he
can pay as interest, and he will pay it if he has to. The area
_A´B´D´E´_ of the second figure represents what he must pay as
interest; and we can now see that, if competition is perfectly free,
this amount equals the amount _BCD_ of the first figure. If, after
paying wages, there is any more left in the _entrepreneur's_ hands
than competition compels him to pay out as interest, he is realizing a
net profit; he is selling his goods for more than they cost him, and
this, as we saw at the outset, is a condition that under perfect
competition cannot continue. The natural price of goods is the cost
price. If the market price of anything is in excess of cost,
_entrepreneurs_ receive a profit, and in order to do more business and
make a larger aggregate of such profit they bring new labor and
capital into their industry. The increased output lowers prices, and
the excess of gain is thus taken from the _entrepreneur_. If _BCD_ is
smaller than _A´B´D´E´_, the _entrepreneur_ incurs a loss and will
curtail his business and let some labor and capital go where they can
produce more.

Taking this remainder of income from the _entrepreneur_ by means of an
addition to the output of goods and a reduction of the price of them
does not annihilate the income, but bestows it on other recipients;
for the reduction in price which destroys an employer's profit can
come only in a way that benefits consumers. It means that enlarged
production of which we have just spoken, which scatters more goods
throughout the community and insures an addition to the real incomes
of both laborers and permanent investors.

_Effect of Perfect Mobility of Labor and Capital._--Perfect mobility
of labor and capital insures that the residuum in the _entrepreneur's_
hands after wages are paid shall all be made over to the capitalist.
We encounter here again the static law that, with competition working
without let or hindrance, the _entrepreneur_ as such can keep nothing
for himself; though if he is also a worker he will get wages, and if
he is also a capitalist he will get interest. His business will pay
wages on all kinds of labor, including that of management, and
interest on all capital, including his own. A net gain above all this
it will not afford, and whatever the _entrepreneur_ has left after
paying wages he will have to use in paying interest, and _vice versa_.
Laborers and owners of capital have, as it were, to take each others'
leavings. Such is the situation in an ideally static condition, though
we shall see how it is changed in actual and progressive society.

The area _BCD_ of the first figure is, under static conditions,
exactly equal to the area _A´B´D´E´_ of the second figure, because
_ACDE_ represents the whole product, _BCD_ in the first figure
represents all that is left of it after wages, measured by _ABDE_, are
paid; and we know by evidence both theoretical and practical that the
capitalist, whose share is directly expressed by _A´B´D´E´_ of the
second figure, can claim and get the whole of this amount.

_Wages as a Residuum._--It is clear that the same reasoning applies to
wages. In the second figure they are represented as a residuum. The
area _B´C´D´_ represents what the _entrepreneur_ has left after paying
interest, and nobody can get this amount but the wage earner. The
reason, however, why the wage earner can get it is that free
competition will give him the amount _ABDE_ of the first figure, and
this, under perfectly static conditions, must equal _B´C´D´_ of the
second. Under perfect competition the _entrepreneur_ cannot have any
of the amount _B´C´D´_ left in his hands after meeting the claims that
the wage earner makes on him. On the other hand, he must have enough
left to pay interest, since otherwise he would be incurring a loss,
and that could not fail to force him and others who are in the same
situation to contract their operations or go out of business. If the
output of goods is reduced, either by the retirement of some employers
or the curtailment of product by all, the price of what continues to
be sold will be raised to the point at which wages and interest can be

_Wages and Interest both adjusted at Social Margins of
Production._--It is to be noted that wages and interest are fixed at
the social margin of production, which means that they equal what
labor and capital respectively can produce by adding themselves to the
forces already at work in the general field of employment. In making
the supposition that, owing to some disturbing fact, a particular
_entrepreneur_ has not enough after paying wages to pay interest, we
assume that the rate of interest is fixed, in this way, in the general
field and not merely in his establishment.

If _B´C´D´_ were larger than _ABDE_, the _entrepreneur_ would be
selling goods for more than cost and realizing a net profit, which he
cannot do in a static state; but a pure profit is not only possible
but actual in a dynamic state.

In actual business total returns represented by _ACDE_ amount to more
than the sum represented by _ABDE_ (wages) plus _A´B´D´E´_ (interest).
There are conditions that in practical life are continually bringing
this to pass in different lines of business, though not in all of them
at once. The real world is dynamic and therefore the true net profit,
or the share of the _entrepreneur_ in the strict sense of the term, is
a positive quantity. This income is always determined residually. It
is a remainder and nothing else. It is what is left when wages and
interest are paid out of the general product. To the _entrepreneur_
comes the price of the products that an industry creates. Out of this
he pays wages and interest, and very often he has something remaining.
There is no way of determining this profit except as a remainder. The
return from the sale of the product is a positive amount fixed by the
final utility principle. Wages and interest are positive amounts, and
each of them is fixed by the final productivity principle. The
difference between the first amount and the sum of the two others is
profit, and it is never determined in any other way than by
subtracting outgoes from a gross income. It is the only share in
distribution that is so determined. _Entrepreneur's_ profits and
residual income are synonymous terms. In the static state no such
residual income exists, but from a dynamic society it is never absent.
Every _entrepreneur_ makes some profits or losses, and in society as a
whole the profits greatly predominate.

_Summary of Facts concerning a Static Adjustment of Wages._--We know
then that in any industry wages and interest absorb the whole product,
because any deviation from that rule in a particular group is
corrected in the way above mentioned. Moreover, general wages and
interest, as determined by the law of final productivity, must equal
those incomes when they are determined residually. The area of the
rectangular portion of one of the foregoing figures must equal the
area of the three-sided part of the other. The question arises why
all _entrepreneurs_ might not get a uniform profit at once. This would
not lure any labor or capital from one group or subgroup to another.
If, after paying wages and interest at market rates, the
_entrepreneurs_ in each industry have anything left, the entire labor
and capital are producing more than they get and there is an
inducement to managers and capitalists to withdraw from their present
employers and become _entrepreneurs_ on their own account. Such an
_entrepreneur_ entering the field, drawing marginal labor and capital
away from the _entrepreneurs_ who are already there and combining them
in a new establishment, can make them produce more than he will have
to pay them and pocket the difference. If such a condition were
realized, there would be a gain in starting new enterprises, since
luring away marginal agents and combining them in new establishments
would always be profitable. When we introduce into the problem dynamic
elements we shall see that centralization, which makes shops larger
instead of smaller, makes industries more productive, and that what
happens when net profits appear is more often the enlarging of one
establishment than the creation of new ones. _Entrepreneurs_ in the
large establishments can afford to resist the effort made by others to
lure away any of the labor or capital which they are employing, and
they will do this for the sake of retaining their profits. They can do
it by bidding against each other, in case any of them are making
additions to their mills or shops, and also by bidding against
any new employers who may appear. Perfect competition requires
that this bidding for labor and capital shall continue up to the
profit-annihilating point. Here, as elsewhere in the purely static
part of the discussion, we have to make assumptions that are
rigorously theoretical and put out of view in a remorseless way
disturbing elements which appear in real life. The static state
requires that all _entrepreneurs_ who survive the sharp tests of
competition should have equally productive establishments, which means
that they should all be able to get the same amount of product from a
given amount of labor and capital. The actual fact is that differences
of productive power still survive. There are some small establishments
which, within the little spheres in which they act, are as productive
as large ones; but there are also some which are struggling hopelessly
against large rivals in the general market and are destined erelong to
give up the contest. In other words, the centralizing and leveling
effects of competition are approximated but never completely realized
in actual life.

A fact that it is well to note is that the test of final productivity
is inaccurately made when unduly large amounts of labor and capital
are made the basis of the measurement. Take away, for instance, a
quarter of the working force, estimate the reduction of the product
which this withdrawal occasions, and attribute this loss entirely to
the labor which has been taken away, and you estimate it too highly.
With so large a section of the labor withdrawn the capital would work
at a disadvantage, and a part of the reduction of the product would be
due to this fact. If we should take away all the labor, the capital
would be completely paralyzed, and the product would become _nil_. It
would obviously be inaccurate to say that the whole product is
attributable to the labor, on the ground that withdrawing the labor
annihilates it all. With any large part of the labor treated as a
single unit, the loss of product occasioned by a withdrawal of such a
unit is more than can be accurately imputed to it as its specific
product. The smaller the increments or units are made, the less
important is this element of inaccuracy, and it becomes a wholly
negligible quantity when they become very small. A study of the forms
of the productivity curves will show that if we take as the increment
of labor used in making the test only a tenth of the whole force, we
exaggerate the product imputable to it by a very minute fraction, say
by less than a one-hundredth part; and if we take a hundredth of the
labor as a final unit, we exaggerate the product that is solely
attributable to it by an amount so minute that it is of no consequence
in practice or in any theory that tries to be applicable to practice.

A question may be raised as to whether we are correct in saying that
the _entrepreneur's_ profit is residual, in view of the fact that the
entire product of a business is at the mercy of the management, so
that a bad manager may reduce it or a good one may increase it. It may
be further claimed that that part of the management of a business
which consists in making the most far-reaching decisions cannot safely
be intrusted to a salaried superintendent or other paid official and
must get its returns, if at all, in the form of profits. Even in this
case the gains are secured by making the gross return, which is the
minuend in the case, large, leaving the two subtrahends, wages and
interest, unchanged, and thus creating a remainder or residuum. We
shall later see to what extent _entrepreneurs_ do in fact create the
profits that come to them.

The complete static conception of society requires that no
_entrepreneur_ should be left in the field who cannot continue
indefinitely to hold his own against the competition of his rivals,
and this requires essential equality of productive power on the part
of all of them. It is not necessary, however, that all should operate
upon an equal scale of magnitude, for an interesting feature of modern
life is the need of many small productive establishments that cater to
local demands and to wants which, without being local, call for only a
few articles of a kind. Repairs, small orders, and peculiar orders are
executed more cheaply in small establishments, and they survive under
the very rule of essential equality of productive power which static
conditions require. For catering to the general market and producing
staple goods the large establishment has a decisive advantage, and
this insures the centralization which is the marked feature of recent
industrial life.



_The Term "Rent" as Historically Used._--The word _rent_ has a
striking history. The science of political economy first took shape in
a country in which direct employers of labor were not, as a rule, the
owners of much land. Farmers, merchants, and many manufacturers hired
land and furnished only the auxiliary capital which was necessary in
order to utilize it. In a practical way the earnings of land were thus
separated from those of capital in other forms, since they went to a
different class of persons; and in the thought of the people the
charges made for the use of mere ground came to constitute a unique
kind of income. If, during the last century, the land in England had
been a highly mercantile commodity, and if it had been the common
practice of _entrepreneurs_ not to hire it but to buy and own it, as
they bought and owned all other industrial instruments, there is
little probability that land would have been considered, either in
practical thought or in science, as a thing to be as broadly
distinguished as it has been from all other capital goods. A business
man would have measured his permanent fund of capital in pounds
sterling and would have included in the amount whatever he had
invested in land. As in America any representation of the capital of a
corporation includes the sums invested in every productive way, and
this includes the value of all land that the company holds, so in
England, under a similar system of conducting business, any statement
of the amount of a particular business capital would have included the
whole of the productive wealth embarked in the enterprise; and in any
statement of the forms of it there would have appeared, besides a list
of all tools, buildings, unfinished goods, and the like, a schedule of
the prices of land that the company owned and used. In "putting
capital into his business" a man might buy land, in "withdrawing his
capital" he might sell it; and the land in the interim would be the
obvious embodiment of this part of his fund. The fact, then, that land
was owned by one class of persons and let to another for hire, and
that the lessees were the _entrepreneurs_ or users of it, caused
practical thought and speech to put land in a class by itself.

_The Origin of the Theory of Rent._--Scientific thought powerfully
strengthened this tendency. At a very early date a formula was
attained for measuring the rent of land, while no satisfactory formula
was, then or for a long time afterward, discovered for measuring the
amount of interest. Men contented themselves with saying that the rate
of interest depends on demand and supply. In the case of the rent of
land the same thing might have been said, but here such a statement
was not mentally satisfying, and investigators tried to ascertain why
demand and supply so act as to fix the income that land yields at a
certain definable amount.

_The Traditional Formula for Rent._--The formula which has long been
accepted as measuring the rent of a piece of land, though it bears the
name of Ricardo, grew into shape under the hands of several earlier
writers. In its best form of statement this principle asserts that
"the rent of a piece of land is the product that can be realized by
applying labor and capital to it, minus the product that can be
realized by applying the same amount of labor and capital to land of
the poorest grade that is in cultivation at all." The quantity of the
poorest land must be left indefinite, and all that the given amount of
labor and capital can economically utilize must be left at their
disposal. It would not do to say that the rent of _an acre_ of good
land equals its product less that of _an acre_ of the poorest land in
cultivation tilled with the same expenditure of labor and capital. If
we should select a bit of wheat land in England tilled at a large
outlay in the way of work, fertilizers, drains, etc., and try the
experiment of putting the same amount of labor and capital on a piece
of equal size in the remotest part of Canada, we should find that, so
far from securing wheat enough to pay the bills that we should incur
in the way of wages and interest, we should not have enough to help us
greatly in the defraying of these costs, and the cultivation of this
piece of land would be a losing venture. Instead of being no-rent
land, yielding merely wages and interest for the labor and capital
used in connection with it, it would be minus-rent land, deducting
something from the earnings which the agents combined with it might
elsewhere secure. In order to utilize such land at all, one must till
it in what is termed an extensive rather than an intensive way,
putting a small amount rather than a large amount of work and
expenditure on it. By tilling ten acres of a remote and sterile farm
with as much labor and other outlay as a very good acre of land in
England receives, one can perhaps get enough to pay the required wages
and interest. In general no-rent land is commonly utilized in an
extensive way and very good land in an intensive way; and in stating
the old formula for rent we need to be careful to make it mean that
the rent of the good piece is its total product less the product that
can be had by taking from the good piece the labor and capital it now
absorbs and setting them at work on a piece of the poorest land which
is enough larger than the good one to enable us to secure a crop which
will be worth just the amount of wages and interest we must pay. The
larger size of the poor piece of land is an essential condition.

_Real Significance of Rent Formula._--It will be seen that this
formula amounts to saying that the rent of land is what the land
itself adds to the marginal product of labor and capital. Put a
certain amount of labor and capital on a piece of land of good
quality, and you get a certain amount of product. Withdraw the land
from the combination, and you force the labor and capital to become
marginal increments of these agents. They must go elsewhere and get
what they can. One alternative that is open to them is that of seeking
out land of a grade so poor that it has not been previously utilized
and doing what they can to get a product out of it. Whatever they can
make such land yield is, in an economic sense, wholly their own
product. There is an indefinite quantity of this kind of land to be
had, and wherever labor and capital utilize any part of it, they can
have all that they produce. Now if we subtract what they there create
from what was created when they were working on the good land, we have
the rent of that land.

_Rent as a Product Imputable to Land._--The difference between what
the labor and capital produce at the margin of cultivation of land
and what they can produce on good land, or land that lies within the
margin, is clearly attributable to the qualities of the land itself.
Given _X_ units of labor and _Y_ units of capital, combine with them
no land except such as is too poor to have been previously utilized,
and you get a certain product. It is the product of the labor and
capital using something which is free to any one. Now put a piece of
good land into the combination; to the _X_ units of labor and _Y_
units of capital add a piece of productive land and see what you can
create. We do this by taking these units of labor and capital away
from the worthless marginal land and setting them to tilling that
which is of the better quality. The product is of course larger than
they got before, and the difference measures what the land itself adds
to the output of the other agents in the combination. The true
conception of rent is that of the specific addition which land makes
to the product of other agents used in connection with it. There are
various ways of measuring this addition, but the method just used will
at least show that the presence of the good land is the cause of the
excess of product which given amounts of labor and capital secure over
what they could create on land of the poorest quality.

_Rent as a Differential Product._--In the early statements of the rent
law it was not said that the rent of a piece of land is the product
specifically attributable to it. If it had been, the chances are large
that a much broader and more scientific use of the rent formula would
have resulted. The law of rent, as it was actually stated, made it
consist of a differential amount. It was what a given amount of labor
and capital would produce under one set of conditions minus what they
would produce under another. Since it is the presence or the absence
of the productive land which makes the only difference between the two
conditions, rent, even as it is thus defined, is really the amount of
product specifically attributable to the land. It is what is created
when the land is used in excess of what would be created if it were
not used and if the coöperating agents did the best they could without
it. We may use, as the most general formula for the rent of land, the
contribution which land itself makes to the product of social

If we use the same method in measuring the rent of land which we used
in measuring the wages of labor and the returns of capital, we shall
represent the rent of a given piece of land as the sum of a series of
differential amounts. In the accompanying figure the vertical belts
bounded by lines rising from the letters _A_, _B_, _C_, etc.,
represent the products realized by applying successive increments of
labor and capital to a given piece of land; and the horizontal lines
running toward the left from _A´_, _B´_, _C´_, etc., separate the
wages and interest from the amounts that are successively added to
rent. When one composite unit of labor and capital is working, its
product and its pay is measured by the belt between the line _AA´_ and
the line _NN´_. A second composite unit produces the amount
represented by the area between _AA´_ and _BB´_, and that is the
amount which each unit separately considered will produce and get as
its pay. This leaves the area between the horizontal line running from
_B´_ and the section of the descending curve as the rent of the land.
A third unit of labor and capital produces what is represented by the
area between _BB´_ and _CC´_, and this becomes the standard of pay for
all units, leaving the enlarged area above the horizontal line at _C´_
as rent. In the end there are ten units of labor and capital. Their
total earnings are expressed by the area of the rectangle below the
horizontal line running from _J´_, and the sum of all the areas above
that line is rent.


_The Intensive Margin of Cultivation._--The extensive margin of
cultivation is the land that is adjacent to an imaginary boundary line
separating the grades of land that are good enough to be used from
those that are too poor to be used. There is, however, what may be
called the intensive margin of cultivation. A given bit of land is
said to be cultivated more and more intensively when more and more
labor and capital are used on it. Land is subject to what is called
the law of diminishing returns.

_Law of Diminishing Returns._--The more labor and capital you employ
on a given piece of land, the less you will get as a product for each
unit of these agents. What the last unit of labor adds to the
antecedent output is less than was added by any of the other units,
and the same is true of the last unit of capital. As we continue the
process of enlarging the working force and adding to the working
appliances, we reach a point at which it is better to cease putting
new men with their equipment at work on this piece of land and to set
them working on a bit of land so poor that it was not formerly
utilized at all. We may assume here that what a man needs, in the way
of auxiliary capital, goes with him, whether he joins a force that is
working on good land or migrates to a less productive region. He will
go if it will pay him to do it. In this way we make a sort of dual
unit of labor and capital and apply a series of such units to land.

_Ground Capital and Auxiliary Capital Distinguished._--Land itself is
a component part of the permanent fund of productive wealth to which
we have given the generic name _capital_. It differs from other
capital goods in that it does not wear out and require renewing.
Working appliances, however, as they wear out and are replaced,
constitute a permanent fund of auxiliary capital, and we shall apply
this term to the abiding stock of such instruments except in
connections in which the adjective is not needed, because it is clear
that the land, or ground capital, cannot be referred to. In dynamic
studies the distinction between land and auxiliary capital becomes
very important.

_How the Intensive Margin locates the Extensive One._--The labor and
the auxiliary capital that betake themselves to new land of the
inferior quality represent an overflow from the better land. As long
as men can do as well by staying where they are as they can by
migrating to new regions, where inferior lands are to be had, they
will stay; but when they incur a loss by staying, they move. What a
laborer can create by securing the use of an equipment and adding
himself to the force that is at work on some good farm, can be
approximately estimated; and if there is somewhere a piece of land not
thus far used to which he can remove, and if, by going to work upon
it, he can create any more than he created while working on the older
farm and taking his products as his pay, he will till that poor piece.
But neither he nor any one else will till a piece that is still less
productive. If any one were to set himself working on land of still
poorer quality, he would lose and not gain by the change, since there
he would produce even less than he can when he is the last man set
working on the good piece.

_To what Extent the Movement of Labor and that of Capital are
Interdependent._--The early statements of the law of rent did not
usually define the intensive margin of cultivation in connection with
labor and capital separately, but spoke of these two agents as
employed together upon land in quantities increasing up to a limit
beyond which both labor and capital would best be employed elsewhere.
The supposition that labor and capital go thus together from one grade
of land to another is only approximately accurate. If we consider one
man and five hundred dollars' worth of productive wealth as a dual
unit of labor and capital, and add such units, one after another, to
the forces at work on a tract of good land, we shall reach a point at
which it will not be profitable to increase the amount of one of the
agents, while it will still be profitable to increase the amount of
the other. It will perhaps not pay to use any more capital, but it may
still pay to add to the number of workers. On land that is tilled
more and more intensively, labor and capital are not tied together in
fixed proportions in such a way that, when there is more of one of
them used, there is _proportionately_ more of the other. Moreover,
when a unit of one of them abandons a piece of land and goes
elsewhere, there is no probability that exactly one unit of the other
will do the same. There is, indeed, no such thing as a dual unit of
labor and capital that can be thought of as moving to and fro among
different employments till it finds the point at which, as a dual
unit, it can create its largest product. These two agents so locate
themselves that a final unit of each one, separately considered,
produces as much where it is as it can produce anywhere else.

It is, however, to be noted that the amount of labor that can
profitably be employed on a piece of land grows larger the more
capital there is employed in connection with it. An acre of land and a
thousand dollars' worth of auxiliary funds can enable more men to get
good returns than can an acre combined with a fund of five hundred
dollars. Conversely, the more men there are working on the area, the
more auxiliary capital it pays to use there. If there are five men
working on a small field it may be that a thousand dollars may be well
invested in aiding them, while with only one man it would not pay to
use so large an amount. The capital and the labor, as it were, attract
each other. Additional capital attracts further labor, and _vice
versa_, till a condition is reached in which neither of them
can so well be used on that particular piece of land as it can
elsewhere. Each one has then been used on this area up to its own
intensive-marginal limit. So also when one of these agents betakes
itself to marginal land, it attracts the other agent thither. When
there are ten men on the poorest piece of land in a locality, it is
possible to make a considerable amount of capital at that point pay
the return generally prevailing, whereas only a small amount would pay
it if there were only five men working. With a thousand dollars
invested on that land more laborers will be lured thither by the
prospect of fair returns than would be lured thither if there were
only half as much capital. The general apportionment of both agents
tends to be such that a unit of either is as well off on one piece of
land as on another, and each is as well off at the extensive margin of
cultivation of land as it is on the intensive margin.

_Labor and Capital combined in Varying Amounts._--The amount of
capital that is combined with a unit of labor is not often the same on
good land as it is on poor. The proportions in which labor and capital
will be combined on the marginal field will be almost certain to vary
from those in which they were combined in the better field from which
they came. It may be that they leave industries in which an average
man uses an equipment worth a thousand dollars. When they reach the
margin of cultivation, capital may be so scarce that the thousand
dollars will not stay in the hands of the one man but will divide
itself among several.

_The General Law of the Extension of the Margin of
Cultivation._--Sometimes, when labor moves to new land that is now at
the margin, it takes its new equipment with it; but such land is not
always tilled by independent settlers. Employing farmers may set men
working on it and pay them all that they produce; and the farmers may
furnish the men with capital of their own or borrow capital for them
to use. In either case a static condition requires the equalizing of
the productivity of labor at the intensive margin with that of labor
at the extensive margin; and it requires a similar leveling of the
productivity of capital at the two margins. When this leveling has
taken place in both cases, the all-around marginal product of labor
fixes the rate of wages, and that of capital fixes the rate of
interest. What a man creates on the good land and with the adequate
capital, or on poor land with proportionate capital,--in any
occupation on land of either grade,--determines the pay that he and
other men can get. It constitutes in itself the wages of labor. In so
far as the overflow of labor and capital into any one limited region
of marginal land is concerned, the full statement is this: that the
margin of utilization of land will be extended to the point at which a
unit of labor, _using as much of the marginal land as it is economical
to use, and such amount of auxiliary capital as is economical to
combine with this unit of labor and the land it occupies, will create
a product equal to the wages of the unit of labor as they are
determined by the product it created when it was employed on the good
land and in connection with the full equipment of auxiliary capital_.

_The Rent of a Fund of Capital._--We saw that one unit of labor
employed in connection with a given amount of capital produces more
than does a second; that the second produces more than the third; and
that, if we continue to supply units one at a time, the last unit in
the series produces the least of all. Wages are fixed by the amount
that one unit of labor produces when the working force is complete,
and that is what is contributed to the general product by the unit of
labor which comes last in the imaginary series by which the force is
built up. Owing to the more favorable conditions under which, in their
time, the earlier units worked, they were able to produce surpluses
above the amount produced by the last one. When they entered the field
they were supplied with excessive amounts of capital. The first one
had the whole fund coöperating with it, till it had to share it with
the second; and after that each had a half of it till they had to
share evenly with a third, etc. We have seen that all the surpluses
appearing in connection with the earlier units are attributable in
reality to capital. The area _BCD_ (page 139) represents the amount by
which the presence of an excess of capital increases the products
attributable to the earlier units of labor. It represents the sum of
all the differences between the products of the earlier units and the
product of that final one which in the end sets the standard of
productivity of labor. It might be called the rent of the fund of
capital. It is composed of a sum of differences exactly like those
which constitute the rent of a piece of land.

_The Rent of a Permanent Force of Labor._--In the figure on page 148,
the working force was supposed to be fixed in amount, the capital
increasing by increments, or as some earlier economists would have
said, by "doses" along the line _A´E´_. The last unit of capital
produces the amount _D´E´_, and all the capital produces _A´B´D´E´_,
while products of the earlier units of capital, as they come
successively into the field and are used by an excessively large labor
force, are represented by the area _B´C´D´_. Here this area represents
what may be called the rent of the force of labor, since it is a sum
of surpluses that, again, are entirely akin to those that constitute
the rent of a piece of land.

_A Question of Nomenclature._--It may be an open question, as a matter
of mere nomenclature, whether these surpluses which are thus traceable
to a permanent fund of capital, on the one hand, and to a permanent
force of labor, on the other, can with advantage be called rents. In
this treatise we do not think it best to employ that nomenclature.
What is not uncertain is that these gains are measurable by the same
formula that measures the rent of a piece of land. If the essential
thing about rent were that it is a material product and consists of a
sum of differential quantities, these incomes certainly would be
rents. Popular thought, however, attaches another meaning to this
term, and we therefore limit ourselves to saying that these
differential incomes or surpluses may be determined in amount by the
principle of rent. They can be described and measured exactly as the
Ricardians described the income of landlords.[1]

    [1] The term _rent_ has even been applied to surpluses of a
    psychological kind. Certain gains that men get consist purely
    in pleasures or in reduced pains or sacrifices, and a few
    writers have applied to such subjective gains the term
    _rent_. If a man buys a barrel of flour for five dollars and
    gets out of it a service that is a hundred times as great as
    he could get from some other article which he buys for the
    same amount, this surplus of pleasure may be called, by a
    figure of speech, "consumers' rent"; and if the essence of
    rent were the fact that it can be made to take the form of a
    surplus or difference, the name would be well chosen, though
    there is danger that by this use of the term science may
    divorce itself from practical thought and life. If we take
    all the barrels of flour that a man uses in ten years, there
    is one which is marginal, because it is worth to the man only
    enough to offset the sacrifice he incurs in getting it. All
    the others are worth more. We can arrange them in a scale in
    the order of their importance, the most necessary one coming
    first and the least important one last; and we can compare
    the service which each one renders with that rendered by the
    last, and measure the surplus of good which each one does to
    the user. There is here in operation a law of diminishing
    subjective returns. Early units consumed afford more pleasure
    than do later ones. There results a series of surplus gains,
    and the sum of all these surpluses makes a total of net
    benefit,--is a gain that is not offset by a compensatory
    sacrifice. The last barrel of flour on the list is worth just
    what it costs, and all the others are worth more. They give
    the consumer a surplus of satisfaction for which he pays
    nothing. The sum of the excesses of service rendered by all
    the earlier barrels constitutes what has been called the
    consumers' rent, realized in this case from the entire supply
    of flour used by the man. In the manner in which it is
    conceived and measured this gain has a kinship to genuine

    This surplus is an effect on a man himself. It is not
    anything outward or tangible. It exists only in the man's
    sensations, and is as far as possible from being a concrete
    income in material form traceable to some particular agent.
    It can be measured and described in ways that are quite akin
    to the manner in which the product of land is measured and
    described. Each consists of the sum of a series of surpluses
    or differential amounts, and each, moreover, represents a
    gain which is not offset by any corresponding subjective
    cost. The rent of land must be paid by an _entrepreneur_ and
    is a cost in the same sense in which wages and interest are
    so; but the owner of the land did not create it by personal
    effort or sacrifice.

    Analogies between the product of land, or rent, and the
    special gains of consumers from the more important parts of
    their consumption do exist, but they are overbalanced by
    essential differences; and it is better to use the term
    _rent_ only in describing the specific contribution to the
    material product of industry which a concrete and material
    agent makes.



One may hire many things besides land and pay what is commonly called
rent for them. No one would think of calling by any other term the
amount paid for the use of a building, a room in a building, or the
furniture in the room. All these things yield rent to their owners;
and if the intuitions which govern the common use of terms are to be
trusted, the income derived from such things and that derived from
land have some essential qualities in common. Every such income is
paid for the use of some concrete instrument, and is measured, not by
a percentage on the value of the instrument, but by a lump sum--a
certain number of dollars per month or per year.

_The Mode of Calculating the Rent of Concrete Instruments._--Now the
rent of such instruments of production, whether artificial or not, can
be measured in exactly the same way in which the rent of land is
measured. We saw that there are two margins of utilization of land, an
extensive and an intensive one, and that the product of labor and
capital at either of these margins may be used as a basis for
computing the surpluses which constitute the rent of the land. The
landlord gets from a good field what it produces minus what the labor
and capital that are used on this field would produce if they were
used on the poorest land in cultivation; or, what is the same thing,
he gets from the field what it produces minus what this labor and
capital would produce if they were set working somewhere on the
intensive margin of cultivation. Take the men out of this field, add
them in small detachments to the men who are already cultivating other
fields, in order that such fields may be tilled a little more
intensively, and measure the product which the laborers create when
they are so placed. Withdraw also the capital from the field, add it,
in small amounts, to the capital that is working elsewhere, and
measure its specific product. The sum of these two specific products
is the same amount that is arrived at by using the former standard.
This labor and capital, formerly used on the good field, scattered as
they now are among the users of other good land, will create the same
amount that they would have created if they had been employed on the
poorest land in cultivation. This amount is, as it were, what they
produce by their own unaided power; and whatever is produced in excess
of this amount when a good field comes to their assistance is the rent
of that field, for it is the contribution which the field makes to the
joint production. Total product of land, labor and auxiliary capital
minus the product created by the labor and auxiliary capital when
these agents are put in marginal positions equals the rent of the

_The Rent of an Instrument measured from the Intensive Margin._--We
can measure the product of any instrument in this way. If it is a
ship, it takes labor to sail it and requires a considerable amount of
auxiliary capital. We must fill the bunkers with coal, stock the
steward's department with provisions, furnish and light the staterooms
and the saloons, and provide cordage and a wide variety of other ship
stores. All this labor and all this capital we could take out of the
ship and use elsewhere. We could convert them into marginal labor and
capital. We could divide them among the owners of other ships where
they would be used in a way that would make these other ships somewhat
more efficient and cause each of them to earn a little more than it
now earns. Whatever the labor and capital could, in this way, produce
furnishes the basis for computing the rent of the ship. Subtract it
from the total joint product of labor, capital, and ship, and you have
what the vessel separately earns.

_The Mode of Testing the Productive Power of a Ship._--Put the labor
and capital into the ship and set it doing its proper work of carrying
freight and passengers, and you cause a certain product to be created.
The steamship company gets an aggregate amount for the service it
renders by means of the labor, the auxiliary capital, and the ship. A
certain smaller amount would be realized if the labor and the
auxiliary capital were taken out of the ship, distributed, and used in
the way we have just described. The difference between the two amounts
is the rent of the ship, or its particular contribution to the general
product. This gives us a formula for computing the rent, not only of
land, but of buildings, tools, machines, vehicles, and every other
concrete instrument of production. The formula, indeed, is so general
that it enables us to compute the earnings of any agent whatsoever.
_The rent of any such agent is what it adds to the marginal product of
labor and capital used in connection with it._

_No-rent Instruments._--The majority of instruments that are in use
add something to the marginal product of the labor and capital used in
connection with them. Some add more and some add less, according to
their several qualities. As a rule, any tool of trade produces most
when it is new and less and less as it grows older. In the end it is
discarded because it has so deteriorated that it no longer adds
anything to the marginal product of the labor and capital that are
used in connection with it. A wagon has become so rickety that it no
longer pays to furnish a horse, a harness, and a driver for it. The
capital and labor that these represent would earn as much if they were
detached from the old vehicle and added to the equipment of some
person who has a stock of good ones. The rent of this old wagon is
nothing. As in the case of the poorest land in cultivation, it is a
matter of indifference whether certain amounts of labor and capital
are used in connection with it, or whether they are withdrawn and
employed elsewhere. This poor vehicle, like the poor land, may be used
without positive loss; but if it is so used, nobody gets any income
from it. It has no power to enter in a really productive way into
combination with labor and capital, for it cannot so combine with them
as to add anything to those marginal products which the labor and
capital could create if they remained detached from it.

_The Universality of the Test of Rent._--This test, whether an
instrument can or cannot add something to the marginal product of
labor and capital, may be universally used. It may be applied to
everything that is made as an aid to labor. There are no-rent
buildings, locomotives, cars, tracks, ships, wagons, furnaces,
engines, boilers, and, in short, instruments of every description that
figure in production. Combine any one of them with labor and capital
and see what you get out of the combination; then take the labor and
capital away and see what they will produce as marginal labor and
capital; and the difference between the two amounts, whatever it is,
is the rent of the instrument. If the difference is _nil_, the
instrument is at the point of being abandoned.[1]

    [1] Whether such an instrument should or should not be
    called a capital good is a question of mere nomenclature; but
    in this treatise we consider that every part of what we term
    capital produces an income, and therefore a no-rent
    instrument is not a capital-constituting good--otherwise
    termed a capital good.

_True Capital rather than Capital Goods moved in Making such Tests of
Productivity._--In applying these tests with scientific accuracy we
should take away the true _capital_ used in connection with a
rent-paying instrument and use it as marginal capital elsewhere,
rather than take away the particular concrete thing in which that
capital is now embodied. In the case of the ship the accurate test is
made, not by taking stores, etc., bodily out of it and putting them
into other ships, but by letting the stores first earn what they can
where they are, converting the earnings into money, and, when the
stores are completely used up, spending the money to procure marginal
additions to the outfit provided for the other ships.

_One Difference between Land and Artificial Capital Goods._--In the
case of land a particular area is marginal or no-rent land, and, in a
static state, it remains so. Any particular ship, wagon, engine, or
other made tool begins its career as a rent payer and ends it as a
no-rent instrument. If we watch the whole social stock of instruments
of production, we shall see the no-rent points not fixed in location,
but shifting from place to place. Now this machine, now another, and
now still another reaches the unproductive state and is supplanted by
instruments of similar kind that are new and efficient.

_Original Elements in the Soil._--The real difference between the rent
of a piece of land and that of a building, machine, vehicle, or any
similar instrument arises from the fact that the land is not going to
destruction and the artificial instrument is. There are elements in
what is commonly called land that wear out as do the tools that are
used in tilling it, but these elements are not land in the economic
sense. Land, as Ricardo long ago said, consists in the "original and
indestructible powers of the soil." He singles out certain constituent
elements of every farm, forest, building site, or other piece of what
is called land in ordinary usage, and gives to this new concept the
name _land_ in an economic sense. These so-called "powers" are
original elements because man does not make them; they are provided
altogether by nature, and the only way in which man may be said to
impart any productive power to them is by putting them into
combinations in which they can produce. When men settle upon what has
been vacant land, they bring the land into combination with labor, and
when they break up the land for tillage and put buildings on it, they
combine it with artificial capital. By means of these combinations
land acquires productive power; but physically considered, it is
altogether a natural product.

_Indestructible Elements in the Soil._--Land in the economic sense is
indestructible because the natural effect of use is not to destroy it.
This does not mean that it is not physically possible to destroy land
to the extent of making it forever impracticable to use it in the ways
in which land is commonly utilized. Nature may do this by sinking it
beneath the ocean, and man can, if he will, do something akin to this;
but he does not naturally destroy what is truly land in the using. It
is impossible to use a plow, a spade, or a reaping machine without
injuring it and, in the end, wearing it out. It is also impossible to
draw the nutritive constituents out of the superficial loam and
convert them into crops without exhausting the supply of these sources
of fertility and so spoiling that which is commonly called the land,
though it is not so in the economic sense. What is really land in this
sense is not affected. Nitrates and phosphoric acid that lie in the
topmost stratum of the soil are among the destructible instruments of
agriculture. The supply of them has to be renewed, if cultivation is
continued, and they are therefore in the class with the plows, spades,
and reaping machines which also wear out. But whatever there is in the
soil that suffers no deterioration from any amount of use is the land
with which political economy has to deal.

_The Gross and the Net Rent of Land Identical._--As land does not wear
out and require renewal, all that it adds to the products of the labor
and capital that are used in connection with it may be taken by the
landlord as an income without reducing the amount of his property.
Whatever land produces at all is a net addition to the general income
of society.

_Net Rent of Artificial Instruments Smaller than Gross Rent._--It is
not safe, on the other hand, for the owner of buildings, tools, or
live stock to take for his own consumption all that these produce. If
he were to use up their gross produce as he gets it, he would find, in
due time, that a considerable part of his property had vanished. Such
instruments wear out and become worthless, and if no part of what they
produce is set aside as a sinking fund with which to purchase other
instruments to take their places, one whole genus of capital must go
altogether out of existence.

_Artificial Instruments Self-replacing._--What actually happens is
that these instruments create enough wealth to pay for their own
successors, and that, too, besides paying a net return, which,
regarded in one way, is interest. If you compute the whole product of
one of these instruments by the Ricardian formula which we have
examined, the amount of it will be whatever the instrument, during its
entire career, adds to the product of the labor and of the capital
that are used in connection with it; and that includes the fund for
renewal that has just been described, the amount, namely, which the
owners must set aside for repairing the instrument and finally
purchasing another. As the instrument itself provides this sinking
fund, it may be said to create, in an indirect way, its own successor.
The ship earns, over and above the net income which is interest on its
cost, enough to keep itself seaworthy so long as it sails and, in the
end, to build another ship. The locomotive, the furnace, the loom, the
sewing machine, the printing press, etc., all pay for and thus
indirectly produce their own successors.

_The Net Rent of a Permanent Series of Similar Instruments._--The
first charge on the product of any instrument of this kind is the
amount necessary for replenishing the waste of it and for providing a
successor when this original instrument shall have been wholly worn
out. In like manner, the first charge on the successor is providing a
similar fund, and so on indefinitely. A part of the productive power
of every one in an endless series of similar instruments is devoted to
this type of reproduction. The series maintains itself and yields an
income besides; and that remainder of its gross rent which is left
after waste of tissue is repaired is available as a net income for the
owner. This net remainder constitutes an interest on the owner's
capital. He possesses a permanent fund of productive wealth embodied
in the endless series of these perishable instruments, and _the series
taken as a self-perpetuating whole_ yields nothing but this interest.
Each instrument, separately considered, yields interest and a sinking
fund; but the sinking fund is not available as an income, since it
must take shape as another instrument which serves to keep the series
intact. What the first instrument creates in addition to the sinking
fund is its contribution to interest, and what each instrument creates
above what is required for virtual self-perpetuation is also interest.

_Interest and Net Rent Identical._--We may therefore reduce interest
to the form of a net rent by calculating the gross rent afforded by
each instrument in such a series and by ascertaining how much of this
merely repairs waste and how much is true income. As interest is
usually expressed in the form of a percentage, we may reduce the net
rent to this form by comparing it with the cost of the first
instrument, which is the amount originally invested. The series of
instruments will yield a net return every year. We can compute the
gross return of each instrument according to the Ricardian formula for
measuring the product of the land. It will diminish from year to year
and will ultimately vanish. We can add the several annual gross
earnings of the instrument during its economic lifetime in the form of
an absolute sum, which is the total rent of the instrument. From this
we can deduct the cost of replacing this worn-out capital good, and
the remainder will be the net rent of the instrument. We can, in a
like way, get the net rent of all the following instruments in the
series for a long period, add these net rents together, and get the
true net earnings of the series for the time covered by the
calculation. If this chances to be ten years we may compare a tenth of
this total, or the earnings of the series for one average year, with
the cost of the first instrument,--which is the capitalist's original
investment,--and we shall thus get the fraction which represents the
annual rate of interest on that investment. Perhaps in an average year
the series has earned, above what is required to repair waste, five
hundredths of what the first instrument cost. That is, then, the rate
of interest that the series as a whole, or the permanent capital, is
yielding. The whole procession of instruments in which permanent
capital is invested creates every year this fraction of its own value,
over and above the sum that is needed to offset the wear and tear of
an average year's use.[2]

    [2] If the fund for replacing a costly capital good, such as
    a ship or a building, were allowed to accumulate for a term
    of years before being spent, the parts of it remaining on
    hand for some time would earn interest for their owner, and
    in his bookkeeping this would figure as reducing the amount
    he must save from the product of the ship or the building in
    order to replace it. This does not affect the general law of
    self-replacement, for the ship or building really produces
    what results from this compounding.

_General Interest as Rent._--If you compute the net income of all
tools, machines, and other like things in the world, add the amounts,
and get the grand total of them all, you have the entire income from
this part of the capital of the world in the form of net rent. If then
you compute the value of all this class of instruments and see how
large a part of this value the net rent is, you translate this total
rent into the form of interest, and therefore net rent and interest
are the same income regarded in two different ways.[3]

    [3] In computing both of these values for comparison one
    should use a labor-cost standard, and we shall later see
    under what limitations such a standard may legitimately be

_Stocks of Made Instruments graded in Quality as is Land._--It is
necessary to notice the fact that the permanent series of tools,
buildings, and other active capital goods shows forever the same
gradations of quality that are found in the case of land. There are
always to be found some instruments which are producing a large
amount--that is, they are adding a large amount to the product of the
labor and the further capital that are combined with them in
production. A given amount of labor and capital creates much more
wealth when working with a machine of the highest class than it would
if distributed in marginal positions; and this is equivalent to saying
that such an instrument is itself highly productive. Other instruments
are to be found which are creating less, and there is never wanting a
grade of no-rent instruments which are adding nothing to the marginal
product of the other agents. It would be as well for the labor that
used them if it should drop them and add itself to the force which is
working with good instruments. Any one manufactured instrument begins
its career as a maximum-rent instrument and ends it as a no-rent one.
The ship is at its best when it starts on its first voyage, and the
mill is at its best in the first year of its running. Each instrument
goes gradually downward in the scale till it reaches a stage in which
it really produces nothing, since it adds nothing to what would be
produced without it. The _permanent series_ of instruments never thus
deteriorates. All the depreciation of particular things is made good
by the repairing and the replenishing which go on. In the series as a
whole there are forever present grade number one, grade number two,
grade number three, etc., exactly as in the case of land. If we wish,
we can reckon the income that is to be gotten from each part of the
series according to the old-time formula that is familiarly used in
the case of land, "What labor and capital create by the use of this
piece of ground in excess of what they would create if they were
applied to the poorest land in use." For a grade of land read a grade
of the self-perpetuating series of artificial instruments, and it will
appear that each grade above the poorest yields, with the labor and
capital that are combined with it, a surplus above what this labor and
this capital could create if they were combined with the poorest grade
in the permanent series.

_Different Modes of Destroying and Replenishing Stocks of Capital
Goods of the Two General Classes._--The process of keeping up a stock
of tools of trade is unlike the process of keeping intact a stock of
materials and unfinished goods, because the modes in which the two
kinds of capital goods deteriorate and perish are unlike.

In the case of the raw materials that gradually ripen into articles
for consumption and which we have called passive capital goods, the
waste of tissues that takes place is quite unlike that which takes
place in the case of active capital goods, the tools and implements
that are used in the process. The raw material acquires value through
the whole process, and in the end it gives itself, with all its
acquired value, into the hands of the consumer. In a static state such
goods embody the whole income of society, including the products of
all labor and of all capital.


The series of _A_'s represents the process of creating consumers'
goods from the rawest material. The _A´´´_ as taken away for
consumption represents, as it were, the wasting tissue of passive
capital goods; and it contains in itself the wages of all the labor in
this series of subgroups, the interest on all the capital there used,
and, in addition to these, the sinking fund that is necessary in order
to keep the active capital intact. Some of the articles of the kind
_A´´´_ will have to be given over to the men who keep the tools,
buildings, etc., in repair and replace them when they are worn out.
The whole force of the industry of this group expends itself simply in
making good the loss that the withdrawal of the _A´´´_ for use
occasions. It does, in short, nothing but replace the perpetually
wasting tissue of the _A_'s. All industry, except that of the makers
of active instruments, may be considered in the light of an operation,
the aim of which is to keep the stock of passive capital goods
intact, or, what is the same thing, to keep the fund of circulating
capital undiminished. Whoever puts anything into this fund enables it
to overflow and to furnish an income without suffering any diminution.
The sole purpose of such capital is to overflow, that is, to suffer,
at one and the same time, a loss and a replenishment which neutralizes
the loss. It exists for nothing else except to ripen into consumers'
wealth. Nevertheless, though the ripened _A_'s are perpetually
consumed, the _series_ of _A_'s is abiding capital, is entitled to its
share of interest, and is certain to get it. A part of the perpetual
flow of _A´´´_'s is this interest. As the whole income of the society
consists in _A´´´_'s, a certain number of the _A´´´_'s that are
withdrawn for consumption go to capitalists as interest on the
permanent fund which is kept in existence in the form of _A_, _A´_,
_A´´_, and _A´´´_. A certain other part of the outflow of _A´´´_'s
goes also to capitalists as interest on that other permanent fund
which is maintained in the form of tools, machines, and buildings,
such as must everywhere be used in the series. A third part of the
flow of _A´´´_'s is wages of labor in this group; and a final portion
is what we have called the sinking fund, the amount that is given over
as an income to the producers in another group, not here represented,
who keep the stock of buildings, tools, etc., intact. These four
withdrawals of income constitute the process by which the stock of
passive goods is depleted, and the grand resultant of all industry is
to atone for that depletion.

_Labor and the Obtaining of its Product, in Static Industry,
Synchronous._--One function of the permanent series of _A_'s is to
enable labor everywhere to get its virtual product without waiting,
and that too in the form in which it needs it for use. The labor that
converts _A´´_ into _A´´´_ supplies the waste of tissue that takes
place at that end of the line by withdrawal of an _A´´´_. The labor
that turns _A´_ into _A´´_ replaces the waste that takes place at that
point when an earlier _A´´_ becomes an _A´´´_. The labor at _A´_
replaces the waste at that point, and that at _A_ replaces the waste
at still another point. They are all at work keeping the stock of
_A_'s unimpaired, and one of them does as much toward keeping up the
perpetual flow of _A´´´_'s as any other.

If we pump water in at one end of a full reservoir, we instantly cause
it to overflow at the other end; and every worker in such a series as
we have described may be thought of as putting something into the
permanent reservoir of capital and so causing a corresponding
overflow. He gets his reward day by day as the work proceeds. Wherever
a laborer may be in such a series, his work creates a ripened product
as it goes on. He has not to wait for it. His work and its fruit are

_Differences between Land and Made Instruments Apparent in Dynamic
Conditions._--A point that has great theoretical interest is the
nature of the difference between land and other productive
instruments. In a static society the difference would be comparatively
unimportant, but it is brought into prominence by the changes which
constitute a dynamic state. The static hypothesis requires that
capital should not increase or diminish in quantity, and that it
should not change its forms. The equipment of every mill and of every
ship is kept unimpaired but not enlarged or improved. There is a fixed
number of spindles in the cotton mill, of lathes in the machine shop,
of sewing machines in the shoe factory, etc., and this fact removes
the most striking difference which, in a dynamic society, actually
distinguishes land from other things.

Land, in the economic sense, does not increase in quantity, however
changeful and progressive a society may be. The chief distinguishing
mark of land--that of being fixed in amount--separates it from other
things only in a dynamic state and because of the action of the forces
which produce organic changes. These are subjects to be studied in the
dynamic division of economic theory.

_A Distinguishing Mark of Land which appears in a Static State of
Industry._--In a static state there remains this difference between a
piece of ground and a building, a tool, or any other instrument: the
ground is not artificially made and does not perish in the using;
while the building or the tool or other appliance is so made and does
so perish. It must in wearing itself out create in the indirect way
which we have described its own successor. The engine must, by a part
of its product, pay the men who will make another engine and so
perpetuate the series of engines. This makes it necessary for the
owner of the engine to save some of its gross rent to pay for
depreciation and renewal, while he can safely use the whole rent of

_This Mark of Distinction not Applicable when Land is contrasted with
a Permanent Stock of Capital Goods._--If we look, not at one
particular instrument, but at an entire series of them,--if we take
into view, not only the engine which is now driving the mill, but also
the one that will succeed it, and again the one which will succeed
that second engine, and so on forever,--this difference between land
and the artificial instrumentality vanishes. _The series of engines,
like land itself, yields only a net rent._ The remainder of its gross
product is not a true rent at all, since any one of the engines
creating it has to consume it on itself and cannot give it to the
owner as an income. This remainder pays certain men for keeping the
series of engines intact, and what is given to them as pay for their
services cannot accrue to any one as an income from the series of
instruments so maintained. It is the earnings of the corps of
maintenance created by their own labor and capital. What the series of
engines yields over and above what it expends in maintaining itself it
gives to its owners as an income. This is their net return and they
can use it without trenching on their property. The analogy between
the returns from land and those from a self-perpetuating series of
made capital goods is in this particular complete.

_The Source of the Fund for Repairs and Renewals._--The fund for
repairs and renewals must, of course, like the net income itself, be
furnished by instruments that are above the no-rent grade. A machine
will naturally be used as long as it pays anything whatever, and
during the latter part of its career it usually produces less than
mere interest on its cost. So long as the labor and the auxiliary
capital that are combined with the instrument produce by its aid any
more than they would produce if they were withdrawn from it and added,
as marginal increments, to the labor and capital that are working in
connection with good instruments, they will continue to use the
machine and they will abandon it only when it ceases to pay anything
whatever. Out of the total amount it produces before reaching this
point of abandonment comes the amount that is needed as an offset for
the cost of providing a new machine.

_Incorrectness of a Common Statement concerning Rent and Price._--This
brings into view a striking fallacy of what has been current economic
theory. It has been customary to claim that the rent of land "is not
an element in price," although the interest on capital is such an
element. The rent of land is the net product of land; and if interest
be kept distinct from it, this income is the net product of a
permanent stock of capital goods. The relations of these two component
parts of the constant output of goods to the prices of the goods are

_Proof of the Incorrectness of the Current Statement concerning Rent
and Price._--The vague form of the current statement concerning rent
and price is responsible for much confusion of thought on that
subject. What the statement would mean is that the price of wheat is
not affected by the great contributions to the supply of it which good
lands are making. These contributions are the rent in its original
form. The rent of wheat land is wheat, that of cotton land is cotton,
that of mill sites is manufactured goods, etc. That money is used in
payments made to landlords changes nothing that is essential. To say
that such contributions to the supply of particular commodities are
not an element in determining the prices of them, would be as
unreasonable as to make the same assertion concerning other parts of
the supply. Quite as logically might it be asserted that other
components in the supply do not affect prices--that the amount of
wheat which is attributable to harvesting machinery or the amount of
calico which is imputable to looms has no influence in the market
values of these articles.

_Why the Produce due to Good Land prevents Prices from greatly
Rising._--If the use of good wheat land were merely discontinued, the
supply of wheat would of course be not only lessened, but reduced
almost to nothing, and a famine price would at once result. If, now,
an attempt were made to make good the shortage of the supply of this
cereal by tilling lands which are now at the margin of cultivation, it
would at once appear that not enough of such land exists to enable us
to accomplish the purpose, and it would be necessary to push the
margin outward and till poorer and poorer soils, at a greatly
enlarging cost. We should grub out worse thickets, drain worse swamps,
terrace more discouraging hillsides, irrigate more remote and barren
deserts, etc. All this would mean a greater cost of production of
wheat and a higher price for it in the market.

It would also mean another thing. The extending of the margin of
cultivation which makes it include poorer grades of land causes that
part of the area now tilled which does not command any rent to yield
one. After the margin should have been greatly extended and finally
located in a region where getting anything out of the soil would
require a struggle, it would appear that all of the lands newly
annexed to the cultivated area except the last and poorest would
command a rent. All but those on the new margin would add a definite
quota to the supply of wheat, and this contribution would be their
rent. Entering into the supply, it would of course count in the
adjustment of price.

_What can reasonably be conceded concerning Rent and Price._--There is
another possible meaning of the phrase "Rent is not an element in
price"; and, whether it was clearly in the minds of those early
economists who made the assertion or not, it is what their argument
proves. The _payment_ of rent by tenants to landlords has no effect on
the market value of the produce. "Food would not become cheaper," says
Professor Fawcett, "even if land were made rent free." There would be
the same need of food stuffs as before, and the tillage of lands would
be pushed to the present margin, where the yield is smallest. The
cost, in labor and capital, of that marginal part of the supply of
food which has come from these poorest lands would continue to be what
it has been heretofore. The farmers would, of course, get from the
good lands the same surplus that they get at present; but the fact
that land had been made rent free would enable them to keep it. This
surplus is, of course, rent, and transferring it from landlords to
tenants does not affect prices. So much of the doctrine formerly
current is true; and it would have forestalled much confused thought
as well as much controversy if the statement concerning rent and price
had made it clear that any rent in its original form is an element in
the supply of produce, and the existence of it helps to determine
prices, while the payments made by tenants to landlords do not affect
them. If these payments should cease and the tenants should retain the
rent, prices would continue to be what they now are.[4]

    [4] The claim that rent is not an element in price making
    might be made in the case of artificial instruments of
    production as reasonably as it can be made in the case of
    land. If it means that the _existence_ of the rent has no
    effect on price, it is wholly incorrect in both cases. The
    statement may be so changed as to tell what is true
    concerning the rent of land, and it will then also tell the
    truth about the product of the artificial instruments, which
    is interest in its original form. These statements may be
    made in parallel columns, and one will be as true as the
    other and no truer.

    A needed part of the supply      A needed part of the supply
    of wheat is grown on marginal    of woolen cloth is woven on
    land.                            marginal looms.

    The price of the wheat must      The price of the cloth must
    pay for the labor and capital    pay for the labor and capital
    used on this land.               that, in the woolen
                                     manufacture, are combined
                                     with these looms.

    The price of wheat raised on     The price of cloth woven
    good land is the same as that    on good looms is the same as
    of wheat raised on the marginal  that of equally good cloth
    zone, and it affords a surplus   woven on marginal ones, and
    above wages and interest paid    it affords a net surplus above
    by farmers for labor and         the cost of maintaining the
    capital used in the tilling      stock of looms and the
    of the good land.                wages and interest paid by
                                     manufacturers for further
                                     capital used in connection
                                     with the good looms.

    The existence of this surplus    The existence of this surplus
    in its original form, that       in its original form, that
    of wheat, affects the supply     of cloth, affects the supply
    and the price of that product.   and the price of this product.

    The fact that farmers pay        The fact that _entrepreneurs_
    landlords for this surplus       pay capitalists for this
    has no effect on the price       surplus has no effect on the
    of wheat.                        price of cloth.

    The more important facts concerning rent have reference to
    the original form of it, namely, a product in kind. Whatever
    constitutes a part of the supply of anything affects the
    price of it. The surplus afforded by good looms is an element
    in the supply of cloth, and that afforded by good land is an
    element in the supply of wheat. They make these two supplies
    larger than they would otherwise be, and of course they are
    of cardinal importance in determining price. The rent of
    anything is an element in the supply of some kind of goods,
    and the annihilation of it would reduce the supply and raise
    the price of product in which, in its first estate, it



_The Efficiency of Static Forces in Dynamic Societies._--The static
state which has thus far been kept in view is a hypothetical one, for
there is no actual society which is not changing its form and the
character of its activities. Five organic changes, which we shall soon
study, are going on in every economic society; and yet the striking
fact is that, in spite of this, a civilized society usually has, at
each particular date, a shape that conforms in some degree to the one
which, under the conditions existing at that date, the static forces
acting alone would give to it. It is even true that, as long as
competition is free, the most active societies conform most closely to
their static models. If we could check the five radical changes that
are going on in a society that is very full of energy,--if, as it
were, we could stop such an organism midway in its career of rapid
growth and let it lapse into a stationary condition,--the shape that
it would take would be not radically unlike the one which it had when
we interposed the check on its progress. Taking on the theoretically
static form would not strikingly alter its actual shape. The actual
form of a highly dynamic society hovers relatively near to its static
model though it never conforms to it. In the case of sluggish
societies this would not be true; for if in one of them we stopped the
forces of growth and waited long enough to let the static influences
produce their full effects, the shape to which they would bring the
organism would be very different from the one which it actually had
when its slow progress was brought to a stop. Most efficient in the
most changeful societies are forces which, if they were acting by
themselves alone, would produce a changeless state. The reasons for
this will later appear.

_Differences between Static Forms of Society at Different Dates._--A
highly dynamic condition, then, is one in which the economic organism
changes rapidly and yet, at any time in the course of its changes, is
relatively near to a certain static model. It is clear, therefore,
that it cannot, at different periods, conform even approximately to
one single model. If the forces of change which in 1800 were impelling
the industrial society of America to a forward movement had been
suppressed, and if competition had been ideally free and active, that
society would before long have settled into the shape then required by
the forces which, in the preceding chapters, we have described. Some
labor would have moved from certain occupations to others and gained
by the change; and this movement of labor would have ended by making
the productive power and the pay of a unit of this agent uniform in
all the different subgroups of the system. Capital would have so
apportioned itself as to level out inequalities in its earning power.
The profits of _entrepreneurs_ would have been equalized by becoming
in all cases _nil_, and the best available methods of production would
everywhere be found surviving and bestowing their entire fruits on
laborers and capitalists. All this is involved in saying that the
static model, the form of which was determined by the conditions of
1800, would have been realized. This would have been brought about by
suppressing at that date the forces which cause organic change and by
giving to competition a perfectly unobstructed field. If we had done
this in 1900, instead of at the earlier date, economic society would,
in a like way, have conformed to the shape required by the conditions
of 1900; and this would have been very different from the shape which
the static forces would have given to society a century earlier. There
is an ideal static shape for every period, and no two of these static
shapes are alike.

_Differences between the Actual Shape of Society and the Static One at
Any One Time._--The actual shape of society at any one time is not the
static model of that time; but it tends to conform to it, and in a
very dynamic society is more nearly like it than it would be in one in
which the forces of change are less active. With all the transforming
influences to which American industrial society is subject, it to-day
conforms more closely to a normal form than do the more conservative
societies of Europe and far more closely than do the sluggish
societies of Asia. A viscous liquid in a vessel may show a surface
that is far from level; but a highly fluid substance will come nearly
to a level, even though we shake the vessel containing it vigorously
enough to create waves on the surface and currents throughout the
whole mass. This is a fair representation of a society in a highly
dynamic condition. Its very activities tend to bring it nearer to its
static model than it would be if its constituent materials were not
fluid and if it were never agitated. The static shape itself, though
it is never completely copied in the actual shape of society, is for
scientific purposes a reality. There are powerful influences tending
to force the industrial organization at every point to conform to it.
The level of the sea is a reality, though the motion of the waters
never subsides sufficiently to make their surface accurately conform
to it. As vigorously agitated, the water shows a surface that is
nearer to the ideal level than would an ocean of mud, tar, or other
sluggishly flowing stuff. The winds throw up waves a few feet high,
but the fluidity keeps the general surface surprisingly level; and so
civilized society, made as it is of fluid material kept in vigorous
agitation, finds, as it were, its level easily. If in any year we
could and should stop the dynamic disturbances, the economic society
would assume the static shape which the conditions of that year called
for as readily as the sea would find its normal level if winds and
tides should completely cease. Static influences that draw society
forever toward its natural form are always fundamental, and progress
has no tendency to suppress them.

_Competition a Cause of Rapid Changes in the Standard Shape of Society
and of a Quick Conformity of the Actual Shape to the Standard
One._--The competition which is active enough to change the standard
shape of society rapidly--that, for example, which spurs on mechanical
invention and causes a large profit to be realized in a particular
subgroup--has also the effect of calling labor and capital quickly to
the point at which the profit appears, and, in the absence of any
monopoly, reduces this profit to _nil_ and restores, in so far as this
cause of disturbance goes, the equilibrium of the groups. Under the
influence of active competition a particular group frequently
undergoes quick changes which call for more labor and capital, but it
gets them quickly; and, as has just been said, the standard shape of
a society which is in this highly fluid condition does not differ so
much from the actual shape as does that of a society the movements of
which are sluggish. The standard shape is like the hare that moves
quickly and irregularly; while the actual shape is like the pursuing
hound, which moves equally quickly, follows closely all turns of the
course, and, if the game were to stop moving, would in short order
close on it.

_The Equalization of the Productive Power of Labor and of Capital in
the Different Subgroups._--We have seen that in a static state labor
and capital do not move from subgroup to subgroup in the system, and
that this absence of flow in a fluid body is not brought about by
monopoly or by any approach to it. That, indeed, would obstruct
transfers of the producing agents from point to point; but monopoly is
a thing most rigorously excluded by the static hypothesis. At every
point we have assumed that the power to move is absolute, while only
the motive is lacking. The equalization of the productive power of
labor in the various subgroups precludes the migration of labor, and a
like equalization precludes a migration of capital.

_Equalization of Productive Powers within the Subgroups._--Not merely
must each unit of labor or of capital be able to create as much wealth
in one subgroup as in another, but within the subgroup--the specific
industry--each unit must be able to create as much under one employer
within the industry as under another. The different _entrepreneurs_
must compete with each other on terms of equality, and no one of them
must be able to wrest from a rival any part of the rival's patronage.
So long as one competitor has an advantage over another in his mode
of creating a product, there is no equilibrium within the subgroup.
The more efficient user of labor and capital is able to draw away
labor and capital from the less efficient one, and the self-seeking
impulse which is at the basis of competition impels him to do it. The
producer who works at the greater advantage is foreordained to
underbid and supplant the one who works under more unfavorable
conditions. That a static state may exist and that the movements of
labor and capital from point to point may be precluded, every
competitor within a subgroup must be able to keep his business intact,
hold his customers, and retain in his employment all the labor and the
capital that he has.

_Equality of Size of Productive Establishments not Necessary._--Size
is, as we shall see, an element of efficiency, and the great
establishment often sells goods for less than it would cost a small
one to make them. The small manufacturer often finds that he would
best become a mere merchant, buying some of the products of the great
mill and selling them to his customers, rather than continue making
similar goods. In the general market an approach to equality of size
is usually necessary in order that competitors may be on even terms.
This does not preclude the survival of many small establishments. The
local retailers have an advantage over great department stores in the
filling of small orders. When one has to buy what costs a dollar it
does not pay to spend a dime in car-fares, and waste a dollar's worth
of time in order to secure the thing for ninety cents. Weariness to
customers is here the element that gives to the small producer his
advantage and enables him to keep that part of the business which
comes in the form of many small orders; but small producers often have
other advantages than those which depend on location. In a shop which
is more like that of a craftsman of three centuries ago than it is
like the great furniture factory, a cabinetmaker can make a single
chair of a special pattern more cheaply than the great manufacturer
can afford to do it. The great shop requires that there should be many
articles of a kind turned out by its elaborate machines in order that
the owner should get the benefit of their rapid and unerring action.
There will long be at work hand presses much like those used by
Benjamin Franklin, besides the complicated automata which do the bulk
of our printing, because for printing a dozen copies of anything the
lever press is the cheaper. There will be shoemakers who not only mend
shoes but occasionally make them for customers who want other than
standard kinds; and local tailors are sure to survive. Only in the
general market and in the making of standard goods is size essential
to success.

_A Considerable Number of Competitors Assumed._--The most striking
phenomenon of our time is the consolidation of independent
establishments by the forming of what are usually called trusts; and
this and all the approaches to it are precluded by the static
hypothesis. There is a question whether, after competition has reduced
the establishments in one subgroup to a half dozen or less, they would
not, even without forming a trust, act as a quasi-monopoly. This
question we have at the proper point fully to discuss, but here it is
necessary to assume that nothing which creates even a quasi-monopoly
exists. We shall find that competition usually would, in fact,
survive and be extremely effective among as few as five or six
competitors, till they formed some sort of union with each other. To
avoid all uncertainty we assume that in the static state in which
values, wages, and interest are natural and in which each subgroup has
its perfectly normal share of labor and capital, there are competitors
enough in each occupation to preclude all question as to the
continuance of an active rivalry.

_Static Values and Prices._--The equilibrium referred to requires that
all values should stand at their static levels, which means that the
prices of goods should be the "cost prices" of the older economists.
The _entrepreneur_ should make no net profit on the goods he is
producing. The wages of labor must be productivity wages, since each
man must get the amount of wealth that he brings into existence.
Interest on capital needs, in like manner, to be productivity
interest, and each unit of capital must get the amount it creates.
Moreover, the prices of goods, as expressed in money, must be accurate
representations of the comparative values of goods. All these features
mark the static state; but the most obvious mark of distinction is the
absence of movement from group to group. We shall see that values are
ultimately measured in marginal labor, and as the value of money is
measured in the same way, it follows that the price of each article,
as expressed in money, is in a static state a correct expression of
the comparative amount of labor that will make it. And the entire
relation of commodities to each other and to labor can be expressed by
the medium of currency. If a unit of labor produces gold enough to
make an eagle, and if any commodity sells for ten dollars, it will be
safe to infer that it is also produced by one unit of labor. If one
commodity sells for ten dollars and another for five dollars, the
former is the product of twice as many units of marginal labor as is
the latter. This remains true only while currency continues to be in
its normal state and all other static adjustments continue complete.

_Influences that disturb the Static Equilibrium._--It might seem that
the influences that disturb such a static equilibrium are too numerous
to be described; and yet these changes may be classed under five
general types:--

1. _Growth of Population._--The supply of labor is increasing, and
this fact of itself calls for continual readjustment of the group

2. _Increase of Capital._--The amount of capital is increasing, and
this change also disturbs the static equilibrium and calls for a
rearrangement. As far as wages and interest are concerned, the effect
of this latter change is the opposite of that which follows an
increase in the amount of labor. When people become more numerous,
other things remaining equal, their individual earning capacity
becomes smaller. The increase of capital reduces the earning power of
each unit of the supply of it and depresses the rate of interest; but
it raises the rate of wages, for it causes labor itself to act more

It is to be noted, indeed, that when new laborers enter society they
become consumers as well as producers, and this affects the utility
and the value of goods. When more people use a given amount of
consumers' wealth, values, measured in ultimate units of utility or
disutility, rise. An increase of capital does not directly neutralize
this effect, since it does not change the number of consumers; but it
multiplies commodities and brings down their utilities and their
values. The rise of "subjective" values which follows an influx of
laborers is an indication of diminished wealth per capita, and the
reduction of values which follows an influx of capital is a sign of
increased wealth per capita.

3. _Changes of Method._--Changes take place in the methods of
production. New processes are devised, improved machines are invented,
cheap motive powers are utilized, and cheap and available raw
materials are discovered, and these changes continually disturb the
static state. There are certain to be improvements on the older
methods of production, for a law of the survival of the fittest
insures this.

Under competition the process that, with a given amount of labor and
capital, turns out a larger product inevitably displaces one that
turns out less. The employer who is using the better method undersells
those who use inferior ones, and forces them either to improve their
own methods or to go out of business. Working humanity as a whole is
therefore making a constant gain in producing power, as man's
appliances equip him more and more effectively for his conflict with
nature and enable him to subjugate it more rapidly and thoroughly. It
would seem that they ought to have only good effects on wages, and in
the long run they invariably do have such effects. In the absence of
improvements there would be little hope for the future of wage
earners. The immediate effects of improvements upon individual
workers, as we shall see, are not always unqualifiedly good, but the
essential effect is the general and permanent one, and the character
of this has been attested by past experience too fully to be in
doubt. In improvements in production lies the hope of laboring
humanity. Nearly the whole earning power of the labor of the present
day is the result of improvements that have taken place in the past,
though these gains have not been secured without causing local and
temporary hardships. If in the future the wages of labor are doubled
or quadrupled, as the result of a series of improvements beginning now
and extending to a remote period, this progress cannot be secured for
nothing. The costs will be less than those attending improvements of
the past, but they will be real. The most important fact is that they
tend to become fewer and smaller and that the gains immeasurably
exceed them.

4. _Changes in Organization._--There are changes in the mode of
organizing the establishments in which commodities are produced, and
so far as these occur under a régime of active competition, they also
are improvements and give added power of production. The mills and
shops become larger and relatively fewer. There is a great
centralizing movement going on, since the large shop undersells and
suppresses the smaller one, and combinations unite many great shops
under one management. The effect of this, when it takes place in a
perfectly normal way, is akin to that of improvements of method. It
benefits society as a whole somewhat at the cost of individual members
of the body, and it causes wages to rise by adding continually to the
wealth-creating power of the men who earn them. We shall see that when
consolidations repress competition their effect is far from being thus
wholly beneficial, and that not only are particular persons injured by
them, but the community as a whole has a serious bill of charges to
bring against them. The securing of the gains that come by
consolidation without such evils is an end the realization of which
will tax the statesmanship of the future.

5. _Changes in Consumers' Wants._--The wants of consumers are
changing. They are growing more numerous as well as more refined and
intellectual. This expansion of desires follows the general increase
of productive power, since every one already wants some things that he
cannot procure, and all society has a fringe of ungratified wants just
beyond the limit of actual gratification. Even if all these wants that
are now near the point of actual satisfaction were to be satisfied,
the desires would at once project themselves farther. The mere
increase in earning power without any special education enlarges the
want scale, but intellectual and moral growth coöperates with it in
that direction and calls latent wants into an active state. More and
more eagerly do men seek things for which the desire was formerly
dormant. Changes of this kind affect values, cause labor and capital
to move from group to group, and thus cause society as a whole to
produce less of some things and more of others. They sometimes cause
wholly new groups to appear, and draw workers and equipment from the
old ones.


_Advantage of Diversity of Wants._--One very marked effect of the
diversification of wants is to increase the aggregate utility of a
mass of commodity produced with a given expenditure of labor. Measure
the whole wealth available for consumption on the basis of the labor
that it takes to create it, and it will appear that it has more
utility and is worth more to society in consequence of this evolution
that is going on in the nature of the individual consumer. A given
amount of labor benefits most the men whose wants are of the most
varied character. If _A_, _B_, and _C_ are three commodities, and if
their several utilities decline, as successive units of them are given
to a consumer, along the curves descending from the letters _A_, _B_,
and _C_ of the diagram, it is clear that the man whose consumption is
confined to the commodity A gets less benefit from three units of
wealth than does the man who consumes _A_, _B_, and _C_. The utility
of the first unit of _A_ is measured by the vertical line from _A_ to
the line _DE_, that of the second by the line from _A´_ to _DE_, and
that of the third by the line from _A´´_ to _DE_. The utility of the
first unit of _B_ is measured by the distance from _B_ to the line
_DE_ and exceeds that of the second unit of _A_ by the difference
between the lengths of those lines. In like manner the utility of _C_
exceeds that of the third unit of _A_ by the difference between the
length of the line descending from C and that of the one descending
from _A´´_. The declining utility of the income of the man who
satisfies three wants is represented by the slowly descending curve
_ABC_, while the diminishing utility of the income of the man who
satisfies only one want declines along the sharply descending curve
_A_, _A´_, _A´´_.[1]

    [1] For studies of the effect of diversified wants, see S. N.
    Patten, "Consumption of Wealth." It will be seen that account
    must be taken first of the natural expansion of the want
    which comes from an increase of productive power, and second
    of the changes in the quality of the wants to be gratified,
    which sometimes go ahead of any change in the productive
    system and call for new kinds of commodities.

_Changes in Static Standards._--The grand resultant of all the changes
that are going on in the more highly civilized countries is a
continual rise, not only in actual wages but in the theoretical
standard of wages. The static or "natural" rate of pay for labor
to-day is higher than it was fifty years ago and lower than it will
naturally be fifty years hence. Removing all disturbing influences and
letting society settle to-day into a perfectly static condition would
reveal the theoretical standard of present wages. Doing the same thing
after a lapse of fifty years would show what would then be the natural
or standard rate; and this would be higher than the present one. Not
only would the actual pay of labor have risen, but the standard to
which it tends to conform would have become higher after every
interval. The actual rate of wages at any one time varies from the
standard; but as both rise from decade to decade, the actual rate
hovers all the while within a certain distance of the standard one.

_Effects on Values._--In the same way the values of goods measured in
labor will in general be declining values. At no one time will actual
market prices accurately express the amounts of marginal labor that
are required for producing different articles, but they will
approximately express this. Articles will sell in the market for about
enough to pay for the labor that, when used as marginal labor,
suffices to produce them; and as this amount of labor put into a given
article grows less and less, the prices of the goods will actually pay
for fewer and fewer days' labor.

The standard price of anything will be the amount of money that is
needed to pay for the labor of making it, provided always that we are
careful to use only empty-handed labor in applying the test and that
we put that labor in the marginal position, as described in Chapters
IV and V, and so disentangle the product that is attributable to it
from that which is imputable to capital. If wages, as paid in money,
remain stationary, normal prices will decline and actual prices will
hover about them in their downward course, so that goods will actually
buy smaller and smaller amounts of labor, or, what is the same thing,
labor will secure as its pay more and more goods.[2]

    [2] In measuring the cost of goods in labor, in Chapters IV
    and V, we disentangled from the amount of goods which is the
    joint product of labor and capital, the part which is
    attributable to labor only. The mode of doing this is there
    more fully stated. The old and crude method of using a labor
    standard of value--which assumes that the product of a unit
    of labor _aided by capital_ will always buy the product of
    another unit of labor _aided by capital_--we must take _all
    pains_ to avoid.

    In connection with the cost in labor of different articles
    it is to be remembered that in agriculture the effect of
    improvements of method may not always suffice to counteract
    the working of the so-called law of diminishing returns,
    which insures, with agricultural science in a given state of
    advancement, smaller products per capita when there are more
    men on a given area. That this influence should preponderate
    over that of improved processes requires that population
    should increase with a degree of rapidity which may or may
    not be maintained.



When we try to establish a standard to which wages generally tend to
conform, the question arises how much of the earth we have in view. Is
there a rate at which the pay of labor in Europe, Asia, Africa,
Australia, and America tends to settle and remain? Is there a common
rate of interest that is normal in all these grand divisions, and are
there also general standards of value for goods which govern their
prices in all the markets of the world? If there are no such standards
having universal validity, are there any that are valid within single
geographical divisions? On what principle can we divide the earth into
sections for economic purposes? These are some of the questions which
must be answered if a theory of distribution is to have any
definiteness of meaning, and they arise whenever we try to establish a
static standard of any kind. If we talk about natural wages, we must
know in how much of the world they are natural. The questions become
even more urgent when we try to solve dynamic problems. We shall have
to determine the effects of an influx of labor into the economic
society we are studying; but does this mean an increase of population
in the world as a whole? Does an influx of capital have a similar
comprehensive meaning, and does an improvement in the method of
producing some commodity mean a change in the mode of making it in
every part of the world where it is produced at all? We need to know
how extensive the society is whose activities we are examining.

_Characteristics of an Economic Society._--We have said that there are
natural rates of wages, etc., within some area, which we have regarded
as containing an economic society, and we have treated this social
organism much as though it were as isolated and self-contained as
would be an inaccessible island with its population. It has one
general market where values are fixed. A farmer within the area
covered by our studies produces wheat for the whole society, and in
one way or another, every person within the area is a bidder for it. A
shoemaker makes shoes and a weaver makes cloth to offer to everybody.
Each part of the organism ministers to the whole and is ministered to
by the whole. Competition is ideally free and in a sense is universal.
The general system of groups made up of the A's, the B's, the C's, and
the H's of our table illustrates the manner in which this complete and
self-contained society is organized. In the static state there is one
standard of wages for all these groups and their subdivisions and one
equally general standard of interest. The price of a commodity,
barring some allowance for cost of carrying it, is uniform everywhere.
A reduced price for _A´´´M_ in any part of the area where this society
dwells would set men bidding for it from every quarter of that area
and would thus bring the local prices to uniformity. So a high rate of
pay for labor in one part would at once lure men from every other part
and reduce the high pay to the standard generally prevailing. The
picture is that of a social body having a large geographical extension
and yet intensely sensitive at every point to economic influences.
Prices, wages, and interest everywhere respond at once to an influence
that originates in any part of the extended area. In technical terms
this means that there is perfect mobility of labor and capital within
the group system represented by the table, and that this involves
equally perfect mobility as between parts of the area that the groups
inhabit. Men move from one section of the country to another in
response to an economic inducement as readily as they do from the
group _A_ to the group _B_.

_Barriers which divide the World into Economic Sections._--Now it is
clear that in the actual world changing one's place of abode is
difficult, and even sending capital from place to place is somewhat
so. Inequalities of earning power are not leveled out by a quick
migration of laborers from China to Europe or to America. In their
methods of production the different regions are not brought to a
uniformity, for there is machine labor here and hand labor there; and
it is vain to expect that machines will quickly become universal and
that the practical arts in America, Africa, and Asia will be rendered
uniform by such a quick adoption of the most efficient processes as
economic law, in the absence of friction, requires.

_Boundaries of the Society which is here Studied._--If we take the
world as a whole into the circle covered by our studies, we find that
labor, compared with other economic elements, decidedly lacks fluidity
and does not easily move. So far from being like water, which flows
readily and finds its level quickly, it is more like tar or other
viscous stuff, which flows slowly and is long in leveling out local
irregularities in its surface. In the world as a whole there are
regions crowded with people and other regions nearly unpeopled, and
long will it be before some of these differences will be much reduced.
Many centuries, indeed, must pass before they are entirely removed.
If, however, we take the most active part of the world,--western
Europe, most of North America, Japan, and the more fully settled parts
of Australia,--labor will show a degree of mobility that makes it more
like the water of the illustration, and capital within this active
center of industrial operations will be more fluid still. Prices here
tend toward certain general standards, and processes of production and
methods of organizing the forces which do the producing work tend
strongly toward uniformity. The best processes and the best forms of
organization tend generally to survive. There are imperative reasons
for studying the economy of this highly civilized region, the center
of the economic activities of the world, apart from that of the more
undeveloped regions.[1]

    [1] This is far from implying that economic laws do not work
    in the excluded outer area or that no effects are produced
    within the central area by causes that originate in the outer
    zone. How these things take place we shall later see.

_The Need of a Rule by which a Part of the World may be Treated as an
Economic Society._--This involves finding a way by which we can treat
a limited part of the world much as though it were, for our purposes,
the whole of it. In essential ways the economic center that we have
described does act somewhat as if it were an organism complete in
itself. We must draw a boundary line about the area of active
movement, of lively interchanges, and of general sensitiveness to
economic influences, thus separating it from the broader zone of
sluggish movement of capital and population, of slow response to
economic stimuli, and of generally backward conditions.

_Freedom of Movement as a Test._--In Europe, America, and the other
advanced regions goods are carried from place to place so easily and
quickly that there is a tendency toward uniform prices; and such local
differences of price as exist in the case of any commodity do not much
exceed the cost of getting it carried from one place to another,
though in the cost of moving it there must often be reckoned the toll
which a government takes at the customhouse. Capital moves freely, and
there is a certain approach to a general level of interest, though
here also local differences of course survive. The obstacle to the
moving of capital from one place to another, if the owner does not go
with it, is occasioned mainly by the risk it encounters and by a
virtual bill for insurance. With allowance for this cost, rates of
interest in the region we have described tend toward a general level.
Though labor migrates more slowly than capital, it moves far more
rapidly within the economic center than in the outer zones. Processes
of production are not brought to a complete uniformity within the
center, but they tend powerfully toward it; for while obstructions
exist, they surely and not always slowly yield. With due regard for
such differences of method as those existing between the European
ways of making products and the American ways, we may say that the
tendency toward the general survival of the best methods is too strong
to allow any important differences to be permanent. Everywhere, in
short, within the central area there is a strong tendency to conform
to economic standards in the matter of prices, wages, interest,
industrial processes, and forms of economic organization. The
standards are what we have defined as the static ones. If we should
stop progress and all disturbing influences and wait long enough, we
should see values, wages, interest, etc., take a static level
throughout the vast area. This, however, would require that migrations
should go on till all inducement to move from place to place should
have ceased to exist. Population would then have distributed itself
over the land in the most advantageous way, and no body of people
would be better off than any other by reason of the location of their
abode. A long period would be needed to bring about this adjustment
even within the circumscribed area where influences that make for
change are very active and where obstacles are far smaller than they
are in the uncivilized regions.

_Essential Density of Population._--A perfectly static state requires,
not a perfectly equal distribution of population, but such a
distribution that there is no reason for further migrating. The power
of the soil to feed its inhabitants varies with its fertility. Where
the land is highly productive a dense population may live easily;
whereas on a sterile soil even a sparse population may find natural
resources too meager, and men may move to places which are more
thickly peopled and yet may gain by the change. Moreover, such
occupations as manufacturing and commerce require, of course, a far
larger population on a given area than does any form of agriculture.
Some regions are so undesirable as dwelling places that it takes an
exceptional economic reward to induce men to live there. The static
state is one in which, all these things being considered, there is no
reason for changing the place of one's abode. This implies more nearly
equal density per unit of natural resources than equal density per
unit of mere area. Inequality of advantage due to location is what is
leveled out, and doing this does not require nor permit that
population should everywhere be equally dense per square mile or per

_Effect of Differences of Occupation._--Regions given over to
agriculture naturally sustain more people than those devoted to
grazing, and those which are devoted to manufacturing sustain more
than either. In countries in which, as in Great Britain, manufacturing
is so disproportionately developed that products must be largely
exported, while food must be largely imported, given areas sustain
more inhabitants than they do in any agricultural or grazing region
and more than they do in any region where grazing and tillage, on the
one hand, and manufacturing, on the other, are well balanced. In mills
and shops auxiliary capital so abounds as to take the place of the
abundant land that is available in the other cases for making labor
fruitful, and in villages and cities labor does not overtax the
resources of the soil any more than it does on farms. It has area
enough to live and to work on and tools and materials enough to work
with. In a generally crowded country, the resort to commerce and
manufacturing relieves the pressure on the land, cities abound, and an
abundance of capital averts the danger of a disastrous overcrowding.

_An approximately Static Distribution of Population._--The
apportionment of population among the different sections of a country
may be nearly normal, while migration may still go on from that
country as a whole to remote parts of the general area which we
include in our present study. There may be small reason for moving
from one part of Germany to another and large reason for going from
Germany to America. This larger movement occupies a long time, while
certain other adjustments may be made more quickly. Within Germany and
within the United States labor may be well apportioned among the
different occupations. There may be in each country about the right
comparative numbers of cotton spinners, iron workers, gardeners, wheat
raisers, etc.; or in other words, the distribution of labor among the
industrial groups may be approximately normal both within the one
country and within the other. It may further be true that the division
of occupations between the two countries in their entirety is about
what, in the conditions now prevailing, economic law calls for. There
are certain industries which now have their habitats in Germany and
certain others that have their habitats in the United States, and this
arrangement is partly due to the comparative density of the two
populations. Because there are so many persons per square mile of land
in Germany there is there a certain preponderance of manufacturing,
and there are in America less manufacturing and relatively more
agriculture. In that remote time when the relative density of the two
populations shall become static, America will have reason to increase
the comparative amount of the manufacturing and thus put herself in
this particular more nearly on a plane with Germany. This occupation
has its normal abode in regions of comparatively dense population, and
a gain in comparative density means an increase in the amount of
productive energy devoted to it. The place for the mill is where the
land is crowded, and the better place for the work of tillage is where
it is not so.[2]

    [2] It will appear that manufacturing reacts on the density
    of population, first, by retarding emigration from the
    thickly populated country as a whole; and secondly, by
    causing local movements within the country, whereby cities
    and villages grow, and relieve what would otherwise be an
    excess of labor in agricultural regions.

_How an Unnatural Distribution of Population may be Treated._--So long
as the slow movement of population from country to country remains
incomplete, the ultimate division of occupations between the countries
can never be completely static. It is therefore with a division that
is only approximately static that we have first to deal, and this is
realized _when in view of the comparative density of population in the
different regions which now exists_ occupations are naturally

The base line _AD_ of this figure stands for the part of the world in
which economic law works rapidly and encounters comparatively few
obstructions; and the extension of the line represents the lands
outside of this region in which the laws are sluggish in their action.
It is as though this base line were a section of a vast surface
including both civilized and primitive states. _AB_ represents the
smallest population per unit of land of a given quality within the
central area, and _DC_ represents the largest, while the ascending
line _BC_ shows the gradations of essential density in the peopling of
different parts of it. At the point A the pressure of the population
on the resources of the soil is least, while at the point _D_ it is at
its greatest. At the point _A_ a man can get much out of the soil as
the return for his own bare labor, while at _D_ he can get
comparatively little; and at intervening points on the base a man gets
more than he does at _D_ and less than he does at _A_. His gains
measured in bushels of wheat, etc., vary inversely as the density of
the population and so decrease from the left of the figure toward the
right till the point _D_ is reached. The occupations of the different
localities are determined by these facts.


_How Occupations vary with Differences of Land Crowding._--Crowding
the arable land causes labor to flow naturally to manufacturing
occupations, since in these it is not so greatly handicapped in
comparison with the labor of more sparsely peopled regions. In a
cotton mill in Manchester a man may contribute as many yards per day
toward the product of the mill as he would in a mill in Fall River;
but on an English farm one man's labor does not create as much
produce as it does on an American farm. The large amount of available
land per man in America has a great effect on the amount that a man
can produce by tilling it, but it has very little effect on the amount
of the cotton goods that his presence and labor in the mill insure. In
raising crops, therefore, the Englishman is at a more serious
disadvantage in comparison with the American. The fact is expressed in
a practical way by saying that the English labor is cheaper and is
therefore more available for making things that are exported to the
distant markets of the world than is labor of the same kind in
America; but the reason for this cheapness is primarily the land
crowding, which reduces the productive power of a final unit of labor
in the former country. Because the man cannot get for himself many
bushels of wheat per annum by working on land he can afford to work in
a mill at a rate corresponding with the value of the produce he could
secure as a cultivator.[3]

    [3] In this connection see the discussion of the principles
    of international trade in J. S. Mill's "Principles of
    Political Economy," Book III, Chapter XVI.

_General Differences between the Condition of Densely Peopled Regions
and that of Sparsely Peopled Ones._--In a very general way it may be
said that the comparative amount of manufacturing should naturally
vary directly with density of population, and that the comparative
amount of agriculture should vary inversely to it. In computing
density due regard must, as has been indicated, be paid to the quality
of the land as well as the area, since a number of inhabitants which
would unduly congest a sterile agricultural region can be well
maintained on a fertile one. In the accompanying figure the line _AD_
inclosed by the vertical lines represents the part of the earth which
we have called central, and the left side of it is the part of this
area which has the sparsest population, while the right side is that
which has the densest. The rising line _BC_ represents the varying
density of the population in different parts of the broad area we
regard as general economic society, the dotted line _EF_ may be taken
as expressing the increase in the part of the labor and capital of the
country devoted to manufacturing as population becomes denser, _AE_
measures the proportionate number of persons engaged in manufacturing
in the region of sparsest population, and _DF_ measures the
comparative number in the region most densely peopled.


_AG_ and _DH_ represent the numbers engaged in agriculture in the two
regions, and the descent of the line _GH_ represents the predominance
of agriculture in the sparsely populated part and the subordination of
it in the part that is densely populated. If we assume that capital in
the different types of employment varies as does labor, the descent of
this line toward the right means a decline in the fraction of the
whole force of labor and of the whole fund of capital devoted to
cultivating the soil; while the upward trend of _EF_ means the
enlarging proportion of labor and capital devoted to manufacturing as
we pass from a region of sparse population to regions more and more
crowded. The wavy character of the two dotted lines is designed to
express the fact that local conditions other than mere density of
population favor the one type of occupation rather than the other; and
moreover, nothing in the figure is intended to mean that the increase
in manufacturing and the comparative decrease in tillage from the left
of the diagram to the right are in any exact numerical proportion to
the increase in the density of population. The figure as a whole
rudely represents the fact that an approximation to the static
distribution of population insures an approximation to a static
apportionment of occupations within the described area and indicates
the general nature of that apportionment.

_How Cost of Production and Cost of Acquisition are Equalized._--The
costs of moving goods from place to place--including in these costs
commercial charges and duties imposed by governments--are the cause of
most of the manufacturing that is done in the region represented by
the left side of the diagram, except the production of such articles
for immediate or local consumption as are necessarily made at or near
the places where they are used.[4] Tailoring, blacksmithing,
carpentering, general repairing, etc., would always be done in that
region, but many kinds of staple goods capable of being transported
would, in the absence of duties on imports, be made chiefly in the
region of dense population and cheap labor.

    [4] There can be no large area from which manufacturing is
    excluded. The rural hamlet has its blacksmith, wheelwright,
    and carpenter, its sawmills and gristmills; and manufacturers
    of sashes, doors, furniture, and many implements abound where
    agriculture is the general industry. Special advantages for
    production insure the introduction of other industries, and
    the advantages of being near to customers is enough to
    maintain many of them. Repairing must, of course, be done
    everywhere, and in making some articles for local use it is
    best that the artisan should be where the customer can always
    reach him. A large cost of transportation favors local
    industries, a high degree of productivity in agriculture has
    an unfavorable influence, and a protective tariff on
    manufactures reduces the returns from agriculture and favors
    manufacturing industry.

The general rule for determining whether a branch of manufacturing can
survive in the area of abundant land and well-paid labor is as
follows: it can do so if the cost of making the article which this
branch of business is devoted to producing is as low as the cost of
acquiring it by exchange. The cost may in both cases be reduced to
bare labor and the rule will then stand thus: if ten days' labor will
make the article and if nine will make something that can be exchanged
for it--_i.e._ if all the costs of the exchange can be covered and the
thing can be brought from abroad for a total expenditure of nine days'
labor instead of ten--the manufacturing of that article will not
survive. In a region of abundant land and well-paid labor it is
chiefly the tolls which governments exact which make it as costly an
operation to get the manufactured products by producing other things
to barter for them as it is to make them directly. Density of
population, overworking of land, meagerness of returns to agricultural
labor--these are the conditions that primarily fix the habitat of most
kinds of manufacturing. In the case of particular products these
influences may be overcome by the presence in limited parts of the
sparsely settled area of exceptional natural advantages for
production. Natural gas, special ores, particular kinds of lumber,
etc., may draw some branches of manufacturing to the region of fertile
land and high wages; but as the comparison which we are making is the
most general one which it is possible to make we are safe in our
assertion that, in the main, manufacturing processes tend, in the
absence of exceptional influences, to concentrate themselves in the
region of dense population and of meager earning power of labor.

_The Approximate Static Adjustment of Prices._--In the main, and with
tariffs as they are, the price of raw products is somewhat lower at
the left of the figure, while that of highly wrought merchandise is
markedly lower at the right of it; and with the comparative density of
population as it is and with no change of commercial policy on the
part of governments, this condition may be expected to continue. It is
an approximately static adjustment of prices. Purchasing manufactured
goods in Europe will long be profitable if they can be passed duty
free through the customhouse, while food will be somewhat cheaper in


_Static Wages and Interest._--As has been said, the wages of labor are
comparatively low at the right and high at the left of the figure,
while interest varies in the two regions in the same way. It is lower
in the crowded area. This is not because of the presence of many men,
for this influence alone would tend to sustain the productive power of
capital and the consequent rate of interest, and in fact the interest
on capital in Europe would be lower than it is if the population
there were sparser. The rate which prevails is fixed by the productive
power of a very large fund of artificial capital utilized by a large
population meagerly supplied with land. This last item is decisive in
the case and is a primary cause of low interest. The full statement of
these facts, made in graphic form, shows an ascending line of density
of population, as we proceed from left to right, an ascending line of
price for raw produce, a descending line of price for highly wrought
merchandise, and descending lines for wages and interest. All these
lines represent the facts in a broadly general way. They deal with
averages and not with particular rates. The labor whose earning power
descends along the line numbered 5 is of many kinds, and the produce
of which the average values vary along the lines numbered 2 and 4 is
of many varieties. The rate of ascent or descent of the lines has no
especial quantitative significance, and it is therefore not implied in
the figure that wages decline more rapidly than the other factors.
Moreover, it is such large areas as those of England, Germany, France,
or the Mississippi Valley, including both cities and rural lands,
that we have in mind when we speak of the density of population as
ascending along the line numbered 1. Anywhere we expect to find cities
containing more persons to the acre than rural districts. The purpose
of the figure is to enable us to take in at a glance five different
adjustments that in the main are to be regarded as approximately
static within the great region described as the economic center of the

    [5] The law of the distribution of occupations over the
    area represented by the diagram would, if it were more
    fully developed, present an amplification of the law of
    International Trade stated in Mill's "Political Economy,"
    according to which countries naturally produce, not only
    the things for the making of which they have the greatest
    absolute advantage, but those for which they have the
    greatest relative advantage.


_Slow Change of the Foregoing Adjustments._--The line which represents
the comparative density of population is of course slowly changing
position as migration goes on from the older centers of population to
more newly occupied regions. If the present distribution of population
be represented by the line numbered 1, the distribution a hundred
years hence may be represented by the dotted line numbered 2, and that
which will exist after five hundred years shall have passed may be
represented by the dotted line numbered 3. Even within the economic
center the comparative density of population in different divisions is
therefore not to be treated as strictly permanent, and it is not to be
treated as in any sense permanent when we are forecasting effects that
will be realized several centuries hence. For a problem involving a
score or two of years the general conditions we have described may be
treated as, in the main, abiding.[6]

    [6] The reason for confining attention to the central zone is
    partly, as we have stated, because here only do we get a
    quick response to an economic influence. Overproduction of
    any article quickly lowers the value of it throughout the
    area, and a mass of unemployed laborers affects wages
    throughout the area more speedily than it does in the great
    environing zone.

    This, however, is only one reason for this limitation of the
    scope of our immediate study. A serious fact is that, if we
    include the entire world, we cannot establish, in the way we
    have proposed, the natural standards toward which values,
    wages, and interest are tending. It will be recalled that in
    the static division of this treatise we have attained a
    "natural" standard of wages by assuming that all dynamic
    changes were to cease and that labor and capital were to move
    to and fro in the system of industrial groups till each of
    these agents produced as much in one subgroup as in another.
    A computation of this kind might, within a limited area, be
    made periodically, say once in ten years, and if this were
    done it would give a series of static standards of wages. Now
    these standards become higher as time advances. The static
    rate of pay for labor is, as a rule, higher at any one date
    than was the standard for a date ten years earlier, and lower
    than will be that for a date ten years later. The normal rate
    of pay about which actual wages fluctuate is a rising one.

    Now, if we introduce in imagination an absolutely static
    state for the world at large, we shall have to assume that
    growth of the general population and increase of the
    aggregate capital both cease, and that inventions and new
    coördinations are no longer made. We must then wait long
    enough to allow static distribution of industries to be made
    over the whole world and to let each industry find its
    absolute habitat. This would involve causing methods of
    producing any commodity to be unified the world over. Hand
    labor in the Orient would have to give way to machine
    production, as it has done in Western lands. For a strictly
    static adjustment indeed even the density of population in
    the different sections would have to be brought to a virtual
    equality. While this nearly interminable process was going
    on, it would be needful that such dynamic changes as
    inventions and discoveries bring in their train should be
    absolutely precluded. Stop making new kinds of machinery and
    wait for centuries to allow a static adjustment to be made
    over the whole earth--such would be the order.

    Now, such a test as this would show falling wages in the more
    favored parts of the earth, whereas the facts show rising
    wages. The influx of population from the East, unrelieved by
    a corresponding influx of new capital and by more fruitful
    methods of production, would cause the earnings of an
    American laborer to fall, and we should, on the basis of such
    a test, conclude that his wages in the long run are destined
    to become lower in consequence of the movement of the vast
    populations that now congest great Asiatic countries. We
    should have vitiated the problem by holding the growth of
    capital and the progress of invention in abeyance. This may
    be done within a limited area without giving a false result,
    because there adjustments are more rapid, and waiting for
    them does not involve the long-continued paralysis of the
    powers that make for greater wealth for laboring humanity.
    Apply the test of the static state to the economic center,
    and it will give a generally true result; but it will give a
    false one if it be applied to the world as a whole. The
    merely static adjustment of the world would take more
    centuries than we care to reckon, and no truth that we are
    seeking is revealed by assuming that for such a period the
    forces of progress are brought to a standstill.



_How the General Unification of Methods of Production Calls at First
for an Increased Exportation of Capital from the Central Area and
Checks the Immigration of Laborers._--A study of the causes of the
interchanges which take place between the economic center and its
environment shows that the movement of goods, the diffusion of modern
methods of making goods, and the movements of capital and labor across
the border of the economic society we are studying are interdependent.
Opening a field for a profitable export trade increases the
productivity of labor at home and tends to attract immigration. On the
other hand, establishing in the outer zone a market for the products
of the center prepares the way for introducing modern manufactures
into the more densely peopled parts of the outer area. The company
that sells cotton goods to the Chinese or the Hindoos will find that
there is more to be made by utilizing the cheap labor of those peoples
for making the goods by efficient machinery. Commerce tends to diffuse
a knowledge of the most economical processes of manufacturing, and
this interposes a certain stay on migrations of labor toward the
center. It will in time help to retain Chinamen in China and Hindoos
in India. It does, however, cause a movement of capital from the
center outward, followed in time by a creation of wealth in the outer
zone for proprietors residing within the center. The Englishman draws
dividends from investments in many lands not within the field covered
by the present studies. In so far as he reinvests them, as capital, in
those lands, they supply a need that, without them, would have to be
supplied by a new exportation of capital from the home country, and
they therefore tend to check such exportation. In so far as the
dividends are brought home they directly neutralize a certain amount
of exportation of capital.

_Effects experienced within Economic Society from Interchanges with
the Environing Area._--The introduction of improved methods of
production within the central area usually calls for an expenditure of
capital there, and this is largely furnished from the net profits from
previous economies in production, and will, in its turn, furnish net
profits that will convert themselves into the capital needed for
applying future inventions. The study of the causes of an increase of
capital, as well as of each of the generic changes that are going on
within the center we defer for later chapters; but at present we need
to know that the changes going on within what we define as economic
society are affected by the intercourse which that society maintains
with its environment. Immigration across the outer boundary of the
general division enhances the rapidity of growth of the population
within it, while emigration reduces it. Exporting capital in itself
reduces the rate of accumulation at home, and importing increases it.
Introducing into foreign regions economical methods in use at home,
modifies the trade which goes on between the great areas, and there
is a perpetual rivalry between the direct and the indirect process of
obtaining goods at home. When a unit of labor can directly make more
of _A´´´_ than it can procure by making _A_ and exchanging it abroad
for _A´´´_, the manufacture of _A´´´_ is legitimate and profitable,
but when the unit of labor can procure more of _A´´´_ by the indirect
process in which an exchange with a foreign region intervenes, static
law requires that this indirect process be resorted to. We should make
_A_ and buy _A´´´_ in order to get the most of the latter commodity.
This is the essence of the time-honored argument for freedom of trade,
but the conclusion to which it leads is modified by a consideration of
further dynamic influences which will, in due time, be presented.

_How we may get Valid Results by Studying only a Part of the
World._--It is entirely possible to study by themselves the activities
of such a part of the world, and we will therefore draw a line of
demarcation about the countries which constitute the economic center
of it, and thus include an area within which economic causes produce
speedy effects. Each part of this area quickly responds to influences
that originate in any other part. If the steel mills in America make
radical improvements in their machinery, this change should, in the
absence of a strong monopoly, affect the price of rails in England,
Germany, etc. Within the central region wages and interest tend toward
uniformity, though, as we have seen, they do not attain it. Across the
boundary which separates this center from the outer zone, economic
influences act in a more feeble way and are unable to bring rates of
wages and interest even to an approximate equality. Western Europe,
America, and whatever regions are in very close connection with them,
we treat as a society, with the remainder of the world as its
environment. This center trades with the environing region, sends some
capital and labor thither, and draws some of each thence to the home
countries. Willingly or otherwise, it instructs the people of the
outer region in modern methods of industry, and thus causes what we
may regard as a slow annexation of a part of the outer zone to the
economic center and a modification of the character of industries at
home and abroad. The principal movement of labor is in an inward
direction, and from our point of view it is immigration not into one
country merely but into all economic society. The predominant movement
of capital has been outward.

_Mode of Studying Interchanges between Center and Environing
Zone._--All these movements have to be recognized in a study of the
economic life of the central society. How, for example, is commerce
with undeveloped regions to be regarded if we have the center only in
view? It is simply one of two possible ways of getting goods. The
people of the center can make a commodity that they use, or they can
make something to send into the outlying countries in exchange for it.
In the latter case they acquire it indirectly rather than directly,
but they acquire it by their own industry in the one case as well as
in the other.

_Natural Selection of Modes of procuring Usable Goods._--Under natural
influences, as we have said, men select the most economical way to get
what they use, or--what is the same thing--they select the mode of
utilizing their own labor and capital that will give them the largest
return in goods. There is competition between different methods of
directly making goods, and the best method survives. The man with a
good machine undersells the man with a poor one; this latter producer
must improve his equipment, or fail, and appliances thus tend toward a
maximum of efficiency. In like manner there is competition between the
direct and the indirect mode of obtaining goods. The man who, by using
a certain amount of labor for a week in making steel for exportation,
can obtain in exchange fifteen yards of silk, can undersell and drive
from the field the man who, by using the same amount of labor for a
week in silk making, can produce ten yards of silk. The importer
naturally supplants the manufacturer when, by bartering with
foreigners the product of a given amount of labor, he can get from
them more than can be produced at home by the same amount of labor.
The manufacturers naturally survive when direct production gives the
larger returns. In our studies of the economy of the society that is
most advanced and central, we may treat whatever is imported as, in an
indirect way, produced. In a sense the activities of that society are
nearly self-contained since, by the direct or the indirect method, the
people produce within their own boundaries the most of what they
consume. In doing so they naturally use with a maximum of economy the
forces at their command, and resort to traffic when that is

_Mode of Treating the Exportation of Capital._--Capital is moving
across the boundary mainly in an outward direction. This fact,
standing alone, would be equivalent to a mere retarding of the rate of
increase of capital within the economic center; but the exported
capital, as it is used outside of the exporting society, produces an
income for owners living within it. The income comes in kind, since it
takes the form of goods which are an addition to those imported in the
course of ordinary exchanges. This tribute paid to capitalists within
the industrial center comes chiefly in the form of consumers' goods,
the receiving of which does not entail the producing of something to
send away in exchange for them. The material agent which creates the
imported goods remains outside of the society, and sends its product
into the society with no offset. The fact of such an income coming
from beyond the pale of an economic society has compelled us to
qualify the statement that the economy of the society is
self-contained, for there is a small part of its income which is not
created within its borders. This comes about by the exportation of
capital and the importation of some of its products.

_Effects of Drawing Interest from Investments beyond the Social
Boundary._--Not all of these are consumers' goods. Some capital goods
are imported and, moreover, many consumers' goods are passed over to
the group called _HH´´´_ in our table,--the one that makes active
instruments of production,--and in this indirect way the earnings of
capital invested abroad add to the amount of capital at home. In the
long run the exportation of funds for permanent investment may, by its
other and more indirect effects, increase the supply of them at home.
The literal fact in each year is that what is exported is itself a
reduction of the amount that would otherwise be added to the home
supply, but that the income accruing from what has been exported in
earlier years makes an addition to what is in this year accumulated at
home. Primarily, the exportation of capital is to be treated as
causing a modification of the rate of accumulation of capital and, in
a long term of years, an increase of the rate.

_Movements of Labor._--Laborers cross the boundary in both directions,
but inducements favor the inward movement. In the absence of positive
obstacles the denser populations of Asia could overflow into America
with a startling rapidity. Such a movement, on whatever scale it
occurs, is to be treated as causing an acceleration of the rate of
increase of the population within the center. Whatever results arise
from growth of population within are emphasized by immigration.

_The Assimilation of Economic Methods and Forms of
Organization._--People without the center are borrowing from it the
newer and more efficient methods of production. Already Asiatics are
making some things by machinery, and when they shall do it more
generally there will take place changes that will be very
revolutionary in their own economic life and will react on the life of
the center itself. Learning to use a thousand and one machines will
rend China and disturb Europe and America. In general, better
appliances and a more efficient organization will make it possible for
Asia to create for herself, and ultimately export much that she now
imports, and this will react on the character of the industries of
America and Europe. We shall somewhat modify our industries in order
to get the benefit of new openings for commerce, and some of the
things which we now directly produce we may find it more profitable to
get by exchange, which is indirect production. On the other hand, some
foreign products which we now get with great economy of labor,
because the goods we exchange for them are scarce and dear in the
countries that receive them, we shall get on less favorable terms,
because the goods we now send to the foreign lands will have become
there more abundant and cheap. In general, we must regard the opening
of a profitable avenue for trade as we should the invention of a new
machine, the discovery of a better electrical transmitter, or the
utilizing of a cheaper motive power. It gives us more goods as the
fruit of a given expenditure of labor and capital and affords a profit
which, as we shall see, comes first to _entrepreneurs_ and later to
laborers and capitalists within the pale. Ultimately, those living
beyond the pale will get a share of this gain.

_Summary of Facts concerning the Economic Center._--We may, then,
regard a certain limited part of the world as a society in itself. It
is modified by its environment, but, in an important sense, it has a
self-contained life. The economic changes which go on within it can be
grouped under the five generic heads: increase in the amount of labor,
increase in the quantity of capital, improvement of method,
improvement in organization, and changes in the wants of the
individual consumers.

_The Geographical Boundaries of Society not Fixed._--The boundaries of
this central area are not fixed. As relations between the center and
the part of the outer zone which is nearest to it become more and more
intimate, the adjacent region takes on the character of the center. It
is, in an economic way, assimilated to it; and in this way the center
may be regarded as annexing to itself belt after belt of the
environing world. Ultimately it will doubtless annex the whole of it;
and for this reason, even though we confine our studies to the
center, we shall establish a system of economic laws which will apply,
in the end, to all the world. This indeed is not the only way in which
the economic life of the outer area comes into the economist's
purview, for he can study it for itself. This zone has its peculiar
life, which is a distant reflection of the life of the center. It is a
type of economic activity in which all the primary forces work, but in
which friction abounds and adjustments are made with extreme slowness.
For the present, what interests us is the life of the center itself,
and in studying this we take account of the influence of the
environment. The effects of these influences are first seen in changes
in the rate at which the five general dynamic movements go on within
the center. The grand resultant is more rapid progress within the

_What is involved in a Full Study of the Relative Density of
Populations._--A full treatment of the subject of the comparative
density of population in different places would include an extended
study of the kinds of industry which find their natural homes in
densely peopled countries and of those which flourish in sparsely
peopled ones, and a much more detailed tracing than it is possible
here to undertake of those changes in the character of industries
everywhere which result from a leveling out of differences in
population. Clearly, if all America were to become as crowded with
inhabitants as are Holland and Belgium we should develop industries of
a different type from those that we now have, and the change would be
in the direction of producing relatively more form utilities and
relatively less of the elementary utilities. Labor and capital would
move from the subgroups which in our table we have called _A_, _B_,
and _C_ toward _A´´´_, _B´´´_, and _C´´´_. We should spend more of our
energy in making finished goods and less in getting raw materials. I
shall note in a very general way the changes in social industry caused
by increase of population without looking forward to that remote time
when the density of population shall be equalized.

_Why an Approximately Static Adjustment of Industries within the
Central Area permits Unequal Density of Population in Different Parts
of It._--We exclude from view the ultimate static adjustment of the
whole world, and content ourselves with an approximate adjustment
within society as we have defined it. Even within this limit there are
inequalities in the density of population which it would require a
very long time to remove, and a perfectly static state cannot be
reached till they are leveled out. The selection of industries in
Texas and in Belgium cannot be, in the ultimate sense, natural till
population in these two regions is so adjusted that there is no longer
an economic motive for migrating from the one to the other. If, in
order to determine what an absolutely static condition for the central
society would be, we were to apply the rule of imagining all new
dynamic influences precluded and of allowing time enough to elapse to
bring about a normal apportionment of population within that limited
area, we should encounter a measure of the same difficulty which
confronted us when we proposed to attain a similar static state for
the entire world, though the trouble would be less serious in degree.
In waiting long enough for population to distribute itself naturally,
we cut off influences that, within that period, will affect
production and distribution far more than the change in population
will affect them. In so far as Texas or any newly occupied region is
concerned, the changes thus precluded are those which would have
tended to reverse the effect of the redistribution of population.
Migrations from Belgium to Texas, if extensive and long continued,
would reduce the productive power of labor in Texas; while the dynamic
changes which will actually go on within any such period will increase
the productive power of that labor, and it is not certain whether the
one or the other influence will predominate. For the United States as
a whole it is probable that progress in the useful arts will more than
offset the influx of new laborers and give to wages a rising trend.
If, however, we establish the natural standard of wages by cutting off
such progress and letting the influx of labor continue, the test would
give a standard lower than the present one,--a false, as well as a
discouraging result. The resultant of all the changes we are about to
study will probably give to the future pay of labor in America a
rising trend.

_How Industries adapt themselves to Unequal Density of
Population._--In view of this fact it is necessary to recognize a
proximate rather than an ultimate static state as that toward which
the adjustments now going on are immediately tending. We will treat
the unequal density of population within our economic society as
something which will last, not forever, but so long that it will not
be removed or appreciably affected within the period required for the
other adjustments that we are studying. Given a population that is
dense in Belgium and sparse in Texas, and competition will cause the
industries to take on the types which they would have and retain if
that difference in density were destined to be permanent. The type
toward which the economic life of both regions is tending is thus a
proximate rather than an ultimate one. Each region will, in the near
future, be of the type toward which influences which do not involve an
equalization of population are impelling it. We get the true direction
of the change that is going on in the earning power of labor and in
the shape of the industrial organism in both regions by recognizing
the fact that the differences in the density of their populations will
continue through the period which we are considering.


If the line _BC_ represents the productive power of a unit of labor in
a region which is sparsely peopled, and the line _B´C´_ represents the
productive power of a unit of labor in a densely peopled region, we
may assume that _AC_ and _A´C´_, which are equal to each other,
represent the product of a unit in either locality when, general
progress being precluded, the difference in the density of population
should have been leveled out. Move people at once and in a wholesale
manner till there is nothing to be gained by further moving them,--let
pressure of population on the land be fully equalized,--and you may be
supposed to create a condition of uniform productive power for
laborers of a given grade in the entire region. The horizontal line
_AA´_, which is everywhere the same distance above the line _CC´_,
represents the universal level of the productivity of labor in such a
theoretical condition. The line _BB´_ represents the actual and
different levels of the natural earnings of labor in the different
regions. Assuming that all other static adjustments are made, but that
the equalization of population has not taken place, labor will earn
the amount _BC_ in one place and the amount _B´C´_ in another.
Somewhere it will earn an amount represented by the vertical line
descending from _D_ and somewhere that expressed by the line
descending from _F_, while there will be places where the earnings of
labor are measured by the line descending from _E_, which is the
amount that labor would everywhere create and get if the population
could be quickly made normal in all regions. The standard of wages for
the whole of the great region, largely European and American, which
constitutes the economic center of the world, shows varying levels in
different countries and parts of countries, and the actual rates in
every place fluctuate about this proximately normal standard for that
place, the standard rate in one locality being higher than that of

The line _A´B´_ exceeds in length the line _AB_, and this expresses
the fact that equalizing the pressure of population on the land in
different regions adds more to the productivity of labor in the region
now crowded than it deducts from that of labor in regions now sparsely
peopled. The overcrowding does greater and greater harm the further it
is carried, and therefore taking away a surplus of people from a
region which has suffered greatly from overcrowding affords a relief
which more than offsets what is lost in other places by a moderate
increase of population. Moreover, the fact has to be recognized that
at present there are ten square miles of sparse population for one
that is very densely peopled, and reducing all to an equality would
add only slightly to the number of inhabitants of the regions that now
contain few of them.[1]

    [1] Exceptional local conditions may make an influx of
    population for a time a cause of greater productivity rather
    than of less. The general and permanent effects are
    otherwise, and it is on these that the present argument


If the line _BB´_ represents the unequal level of _natural_ wages in
different localities, on the assumption that populations remain
unequal, the undulating curve _DD´_ which crosses and recrosses the
line _BB´_ represents actual local rates fluctuating about the
standard ones.

_How a Static Adjustment for the World is a Dynamic Influence within
a Limited Part of It._--Commodities are, by traffic, crossing the
social boundary in both directions, and with the goods there go and
come influences that affect the economic life of the central society.
Methods and modes of organizing business are taught by each region to
the other, though most of the teaching is done by the people of the
center and most of the learning by those of the environment. All this
affects the center and falls within our study. It has dynamic effects
within the center, though it is only a part of a static adjustment for
the world as a whole. If the grand bank of Newfoundland were to
subside to the level of the middle of the Atlantic, there would be a
great rush of water toward the place that the banks now occupy, but
this would be only what is required in bringing the general level of
the sea to an equilibrium. It would be essentially a static
phenomenon, but for the region of the banks it would be dynamic in the
highest degree. A rush of population from China to America would be a
change tending to establish an equilibrium of population in the world,
but it would be a startling bit of dynamics for America. Teaching the
Chinese all the mechanical arts that we know would be creating an
equilibrium of another sort, in which methods would be similar in the
two countries; but for China itself this acquiring of practical arts
would be dynamics acting on a vast scale. What is a static adjustment
for the world is a dynamic change for parts of the world, and all such
changes that can occur within the area of economic society proper and
within the period we can wisely include in our study we need to take
into account. Changes in population, wealth, method, and organization
must be studied, however they may originate.



_Perpetual Change of the Social Structure._--We confine ourselves to
that economic society _par excellence_ which we have called the
industrial center of the world. In this region economic influences are
forever changing the very structure of the society itself. They move
labor from place to place in the system and they transfer capital to
and fro in the same way. If we think of our table of groups and
subgroups as representing the whole of this great industrial world, we
must think of labor and capital as in a perpetual flow from subgroup
to subgroup, making some industries larger and others smaller by
reason of every such movement. The great force of labor and the fund
of capital are like restless seas whose currents carry the water
composing them now hither and now yon as the direction and force of
the moving influences change.

_Movements of Labor within the Group System caused by Increasing
Population._--If the population were to increase while the amount of
capital and the mode of using it remained the same, the effect would
be a downward movement of both labor and capital in the series of
subgroups by which we represent industrial society. Labor and capital
would tend to desert the subgroups _A´´´_, _B´´´_, and _C´´´_ in our
table and to move to _A_, _B_, and _C_:--

  _A´´´_    _B´´´_    _C´´´_
  _A´´_     _B´´_     _C´´_
  _A´_      _B´_      _C´_
  _A_       _B_       _C_

_Causes of Downward Flow of Labor in the Group System._--A larger
population means, of course, not merely an increase in the amount of
labor performed, but also an increase in the number of consumers. It
means more mouths to feed and more bodies to clothe. It entails also,
according to principles that we have already studied, a lower earning
power and a lower rate of pay for labor. This means that simple food,
cheap clothing, inexpensive houses, furnishings, etc., constitute a
larger element in the consumers' wealth of society than they have
heretofore done. Society uses fewer luxuries and more necessaries, and
the necessaries of life are products in which raw materials
predominate and costly form utilities are wanting. This makes a
heavier draft upon the land than does the production of highly wrought
articles of the same value.

Luxurious articles are fashioned with a great amount of artisan's or
artist's labor and a relatively small amount of the labor of
cultivators and miners. The subgroups _A_, _B_, and _C_ are the ones
that furnish the rawest materials, and it is they, therefore, that
receive the largest portions of the new labor that enters the field.

_How Economic Friction works to the Disadvantage of
Immigrants._--Unless capital grows more rapidly than population, there
is a certain friction to be overcome in obtaining places for new
laborers. If they come largely as immigrants, they are crowded at the
points of disembarkation and are then scattered over a large
territory. They may have to gain employment by offering to
_entrepreneurs_ some inducement to take them. If capital has not
increased, and the _entrepreneurs_ are in no special need of new men,
they will take them only at a rate of pay which is low enough to
afford of itself a slight margin of profit. If the capital has already
grown larger and the new men are needed, the situation favors them,
and their pay is likely to be as high as it was before, or higher.

_The Effect of Increasing Capital._--The growth of capital has an
opposite effect. It means a lower rate of interest, though it means
more interest in the aggregate, since it insures a larger fund on
which the interest is received. The rate does not decline as rapidly
as the amount of the fund increases, and this insures a larger gross
income from the fund; and it also insures larger individual incomes
for many persons. There is, then, a large number of people who are in
a position to make their consumption more luxurious, and this causes
an upward movement of labor and capital in the group system. More
workers will be needed in the subgroups _A´´´_, _B´´´_, and _C´´´_,
where raw materials receive the finishing touches, and also in the
other subgroups above the lowest tier. It is to these subgroups that a
large portion of the new capital itself will come, and the labor will
come with it. Larger incomes, more luxury, more labor spent in
elaborating goods as compared with that required for procuring crude
materials,--such is the order.

_Effect of an Increase of Both Labor and Capital._--It is clear that a
certain increase of capital might practically neutralize the increase
of population, in so far as the movements thus far considered are
concerned, and a greater increase of capital would reverse the
original downward movement caused by the increase of labor and result
in a permanent upward movement toward the subgroups _A´´´_, _B´´´_,
and _C´´´_. In this case the men occupy themselves more and more in
making the higher form utilities. They make finer clothing, costlier
furniture, etc., and the new production requires proportionately less
raw material than did the old. This is the supposition which
corresponds to the actual facts. Capital is increasing faster than
labor, and consumption is growing relatively more luxurious;
dwellings, furnishings, equipage, clothing, and food are improving in
quality more than they are increasing in quantity. Goods of high cost
are predominating more and more, and the subgroups that produce them
are getting larger shares of both labor and capital. Population drifts
locally toward centers of manufacturing and commerce. It moves toward
cities and villages in order to get into the subgroups which have
there their principal abodes. The growth of cities is the visible sign
of an upward movement of labor in the subgroup series.

_A Change in the Relative Size of General Groups._--If all the steady
movements of labor and capital were stated, it would appear that a
relative increase in the amount of labor, as compared with the amount
of capital, would enlarge the three general groups, _AA´´´_, _BB´´´_,
and _CC´´´_, and reduce the comparative size of the general group
_HH´´´_, which maintains the fund of capital by making good the waste
of active instruments. Gain in capital estimated per capita would
cause relatively more of the labor and more of the fund of capital to
betake itself to the group _HH´´´_. The movement toward the upper
subgroups which is actually going on is attended by a drift toward
this general group. An increase of luxurious consumption and an
enlargement of the permanent stock of capital goods go together.

_Regularity and Slowness of Movements caused by Changes in the Amounts
of Labor and Capital._--The important fact about the movements thus
far traced is that they are steady and slow. They do not often call
for taking out of one part of the system mature men who have been
trained to work there. They are movements of _labor_ which do not, in
the main, involve any considerable moving of _laborers_ from group to
group. The sons of the men in the subgroup A do not all succeed to
their fathers' occupations, but many of them enter _A´_, _A´´_, and
_A´´´_, so that labor moves from the lowest subgroup to higher ones.
Such a transfer of labor entails few hardships for any one, and in
general it is to be said that all the movements of labor and capital
which are occasioned by quantitative changes in the supply of these
agents are of this comparatively painless and frictionless kind. About
changes caused by new methods of production there is a different story
to tell. The transformation of the world does not go on without some
disquieting results, however inspiring is the remote outlook which
they afford. The irregularity of the general movement, the fact that
it goes by forward impulses followed by partial halts, is a further
serious fact. Hard times present their grave problems, and we need to
know whether it is necessary that dynamics--the natural and forward
movement of the industrial system--should produce them. This problem
is for later consideration.

_Movements caused by Changes in the Processes of
Production._--Mechanical inventions are typical movers of labor and
capital--constant disturbers of what would otherwise be a
comparatively tranquil state. Dynamos for generating electricity and
devices for conducting it to great distances from its sources have
done much to rearrange the society of a score of years ago, as
economical steam engines had done at an earlier date. Every device
that "saves labor" calls for a _rearrangement of labor_ in the system
of organized industry.

In a perfectly static condition there would be, as we have seen, a
standard shape for all society, which means a normal apportionment of
labor and capital among the producing groups and subgroups and also
among the local divisions of the general area. The elements would
subside to a state of equilibrium and become motionless, as water
finds its level and becomes still in a sheltered pool. The body of
fluid takes its standard shape and retains it, so long as no
disturbing force appears. Now, society would have such a standard
shape and would require, in the absence of dynamic changes, a
relatively short time in order to conform more or less closely to it,
if it were not for the unnatural apportionment of population in
different parts of the area that the society inhabits and the
obstacles which wholesale migrations encounter. For the solution of
problems of the present and the near future we must accept as a
standard the quasi-static adjustment of the population and the
consequent quasi-static selection of industries in the different local
divisions of the broad area--the arrangement that we have described as
locating an excess of manufacturing in the more densely peopled areas
and an excess of agriculture in the more sparsely settled ones. With
this qualification it may be said that there is a standard
apportionment of labor and capital among the producing groups, and
that these agents gravitate powerfully and even rapidly toward it. If
there were a certain amount of labor and capital at _A_, a certain
amount at _B_, and so throughout the system, this standard shape would
be attained, and the elements would not move, except as a very slow
movement would be caused by changes in the comparative density of
population of different regions.[1] This standard shape would long
remain nearly fixed if it were not for the appearance of the dynamic
influences which are so active within the area we are studying.

    [1] It is obvious that capital as well as population is
    distributed with uneven density over the territory occupied
    by society; but the movement of capital is less obstructed
    than that of a great body of people, and moreover it is
    chiefly the fact that the people are not dispersed over the
    area in a natural way which creates the chief obstacle to the
    moving of capital. It goes easily when it accompanies a
    migration of laborers.

_Alternations in the Direction of Movements caused by Improved
Methods._--In a dynamic state this standard shape itself--the
approximately static one--is forever changing. At one time, for
example, conditions exist which call for a certain amount of labor at
_A_, another amount at _B_, etc. A little later these respective
quantities at _A_, _B_, etc., are no longer the natural or standard
quantities; for something has occurred that calls for less labor at
_A_, more at _B_, etc. If _A_ represents wheat farming, the amount of
labor that it required when grain was gathered with sickles is more
than is necessary when it is gathered with self-binding reapers,
always provided that there has been no increase in population, which
would require an increase in the food supply. The society therefore
will not be in what has now become its standard shape till men have
been moved from the wheat-raising subgroup to others.

If the invention of the reaper were not followed by any others and if
no other disturbing changes took place, labor would move from the one
group, distribute itself among others, and bring the system to a new
equilibrium; but it has not time to do this. It begins to move in the
way that the new condition occasioned by the introduction of the
reaping machine impels it to move; but before the transfer is at all
complete there is a new invention somewhere else in the system that
starts a movement in some other direction. Before the labor from _A_
is duly distributed in _B_, _C_, etc., there is an invention in _B_
which starts some of it toward other points.

_Why Movements are Perpetual as well as Changeful._--Such improvements
are perpetual, and the dynamic society is not for an instant at rest.
If the disturbing causes would cease, the elements of the social body
would find their abiding place; and the important fact is that at any
one instant there is such a resting place for each laborer and each
bit of capital in the whole system. As we have seen, the men and the
productive funds would go to these points but for the fact that before
they have time to reach them new disturbances occur that call them in
new directions. Again and again the same thing occurs, and there is no
opportunity for placing labor and capital at exactly the points to
which recent changes call them before still further improvements begin
to call them elsewhere.

_Why Technical Changes are more disturbing than a General Influx or
Efflux of Population._--When the moving of labor is gradual, it is
effected, not so much by transferring particular men from one
occupation to another, as by diverting the young men who are about
entering the field of employment to the places where labor is most
needed. When the son of a shoemaker, instead of learning his father's
trade, becomes a carpenter, no _laborer_ has abandoned an accustomed
occupation and betaken himself to another; but _labor_ has gone from
the shoemaking trade to that of carpentering. A man often stays where
he is to the end of his life, although during that life labor has
moved freely out of his occupation to others. If we represent the
facts by a diagram, they will stand thus:--

   A     B     C     D

  50    40    70   100   Natural and actual apportionment of labor
                         in 1850.

  45    35>-->90    90   Natural apportionment after change of
   ----------^  ^----    method in 1850.

  47    38    80    95   Apportionment in 1855 when the movement
                         initiated in 1850 is partially completed.

  52    41<---65   102   Natural apportionment in 1855, with
   ^----------  ----^    movements then initiated.

_A_, _B_, _C_, and _D_ represent different occupations or subgroups in
the table we have before used. At one date a static adjustment called
for fifty units of labor at _A_, forty at _B_, seventy at _C_, and one
hundred at _D_. A half decade later, after improvements had taken
place at _A_, _B_, and _D_, static forces, if they were allowed to
have their full effect, would leave only forty-five men at _A_, and
thirty-five at _B_, but they would place ninety at _C_ and at _D_.
The first movements that would tend to bring this about are in the
direction indicated by the dotted lines. The transfers are made, not
by forcing men from _A_, _B_, and _D_ to _C_, but chiefly by diverting
to _C_ young laborers who would otherwise have gone to _A_, _B_, and
_D_ to replace men who are leaving in these groups.

Now, before the transfers are completed something happens that calls
for a different movement. Let us say that only three units of labor
have as yet gone from _A_ to _C_ instead of five, leaving forty-seven
at _A_; only two have gone from _B_, leaving thirty-eight; and only
five have gone from _D_, leaving ninety-five at that point. Eighty
would then be at _C_, and the static adjustment would not have been
perfectly attained. It is at this point that a new change of
conditions occurs, which calls for fifty-two units at _A_, forty-one
at _B_, sixty-five at _C_, and a hundred and two at _D_. _C_ now
contributes something to _A_ and _B_, but it gives more to _D_; and
the fluctuations go on forever. Particular men may, more often than
otherwise, stay in their places, since the incoming stream of new
labor, by going where it is needed, may suffice to make the
adjustments, in so far as they are gradually made; but labor, in the
sense of the quantum of energy embodied in a succession of generations
of men, is never at rest. It is a veritable Wandering Jew for
restlessness and in a perpetual quest of places where it can remain.
Moreover, there are to be taken into account changes so sudden that
they thrust particular workers from one group to another.

_A Perpetual Effort to conform to a Standard Shape which is itself
Changing._--We think, then, of society as striving toward an endless
series of ideal shapes, never reaching any one of them and never
holding for any length of time any one actual shape. One movement is
not completed before another begins, and at no one time is the labor
apportioned among the groups exactly in the proportions that static
law calls for. Men are vitally interested to know what they have to
hope for or to fear from this perpetual necessity that some labor
should move from point to point.

_Questions concerning the Effects of these Transformations._--These
changes of shape involve costs as well as benefits. The gains are
permanent and the costs are transient, but are not for that reason
unimportant. They may fall on persons who do not get the full measure
of the offsetting gains. What we wish to know about any economic
change is how it will affect humanity, and especially working
humanity. Will it make laboring men better off or worse off? If it
benefits them in the end, will it impose on them an immediate
hardship? Will it even make certain ones pay heavily for a gain that
is shared by all classes? Are there some who are thus the especial
martyrs of progress, suffering for the general good?

_Natural Transformations of Society increase its Productive
Power._--There is no doubt that the changes of shape through which the
social organism is going cause it to grow in strength and efficiency.
More and more power to produce is coming, as we have seen, in
consequence of these transmutations. They always involve shifting
_labor_ about within the organization and often involve shifting
laborers, taking some of them out of the subgroups in which they are
now working and putting them into others, something that cannot be
done without cost.

_Immediate Effects of Labor Saving._--Inventing a machine that can do
the work of twenty men will cause some of the twenty to be discharged.
They feel the burden of finding new places, and if they are skilled
workmen and their trade is no longer worth practicing, they lose all
the advantage they have enjoyed from special skill in their
occupations. Do they themselves get any adequate offset for this, or
does society as a whole divide the benefit in such a way that those
who pay nearly the whole cost get only their minute part of the gain?
Is there unfair dealing inherent in progress in the economic arts, and
must we justify the movement only on the ground of utility, though
knowing that a moralist would condemn it? These are some of the
general questions that are to be decided by a study of this phase of
economic dynamics. We need to know both what the movement will in the
end do for humanity and what it will at once do for particular
workmen.[2] In addition to ascertaining what the ultimate results of
the movement will be, we need to trace, with as much accuracy as is
possible, the effects of the disturbances that are involved in
generally beneficent changes.

    [2] Our study may lead to a moral verdict without being
    itself an ethical study; we limit the inquiry to questions of
    fact, but perceive that some of the facts are of such a kind
    that they must lead a reader to condemn or approve the social
    economic system.



_Displacement of Labor and Capital by Inventions._--Inventions are
"labor-saving." Employers are engaged in a race with each other in
reducing the outlays involved in producing goods, and a common way of
doing this is to devise machinery that will do what laborers have
heretofore done. The same thing is accomplished by developing cheap
sources of motive power or introducing new commodities which are good
substitutes for dearer ones. Mechanical automata have at a thousand
points taken labor out of human hands; electricity, which is
"harnessing Niagara," may at some time harness waves and winds and
make them turn the literal wheels of mechanical progress. Such things,
by causing a given amount of labor to produce a larger amount of
consumers' wealth, are product multipliers; but this is the same thing
as saying that they yield a given product at the cost of less labor,
and as we more commonly see their effect in this light, we call them
labor savers.

_Why Labor Saving is not always and everywhere Welcomed._--To an
offhand view it would seem that product multiplying is the greatest
blessing that, in an economic way, can come to humanity; and if
general and permanent effects be considered, it is so. The solitary
hunter who has to catch and club his game would get unqualified
benefit from the possession of a bow and arrows; the fisherman would
get the same benefit from a canoe, the cultivator of the soil from a
spade, etc. Society in its entirety is an isolated being and derives
similar gains from engines, looms, furnaces, steamships, railroads,
telegraphs, etc. Yet there are persons within the great social
organism to whom the benefit _from one special improvement_ may be
small and the cost great. There are none who are not better off
because of _all improvements_ past and present.

_The General Demand for Labor not Lessened._--It is a matter of common
experience that new machines are labor displacers. At its introduction
an economical device often forces some men to seek new occupations,
but it never reduces the general demand for labor. As progress closes
one field of employment it opens others, and it has come about that
after a century and a quarter of brilliant invention and of rapid and
general substitution of machine work for hand work, there is no larger
proportion of the laboring population in idleness now than there was
at the beginning of the period.

_A Voluntary Reduction of Toil Desirable and Probable._--A full study
of the effects of technical progress will show that there is never a
reduction of the general field for employment in consequence of it.
There is an increase of pay, and this causes a certain unwillingness
to work for as many hours as men formerly worked; and there is also a
change in the nature of the operations that labor performs, which
tends in the direction of more comfort and less painful toil. For the
famous statement of J. S. Mill that "It is questionable if all the
mechanical inventions yet made have lightened the day's toil of any
human being" we may safely substitute, "It is the natural tendency of
useful inventions to lighten the toil of workers and to give them,
withal, a greater reward for their work." Mechanical progress is the
largest single ground for hope for the future of laboring humanity,
and by its effects, direct and indirect, it has already insured a
great alleviation of toil, with an increase in its rewards. It has
helped to counteract the world crowding that for a century has gone on
and the diminishing returns from agriculture which the crowding
entails. Inventions may make disturbances, and their better effects
may be temporarily and locally counteracted; but a society where
competition rules is sure to secure the benefits in the end and does,
in fact, secure them in greater and greater measure as the years go
by. Such are some of the theses which research will justify.

_Facts concerning Disturbances incidental to Progress._--We have first
to take account of the disturbances. They are prominent in economic
discussion and constitute the subject of one of the grave indictments
brought against the system of competitive industry. They have actually
caused great hardships in the past, as skilled handicraftsmen have
seen machines come into use which, for rapidity and accuracy of work,
excel the best results that long apprenticeships formerly gave. Now
that machinery has possession of most of the field, there is no longer
the former opportunity for displacing hand workers; but the remainder
of hardships incidental to progress is not to be overlooked. This part
of the dynamic movement involves present local sacrifices for the sake
of future general gains. Here, therefore, there are developed
antagonisms of interest which may hinder progress and, if they were
extensive enough, might conceivably throw a doubt over the future of
the working class. While there is no great disposition to question the
ultimate benefit which mechanical progress insures, there is some
uncertainty as to the process by which this benefit is extended to
workers and there is a struggle to avoid the immediate cost. There is,
in some quarters, a disposition to rate the cost so highly as to draw
the inference that we need to adopt a socialistic plan of living for
the sake of enabling workers to avoid the hardships and secure the
benefits of "labor saving." It will appear, however, if we grasp the
essential facts of what we may call the dynamics of method, that the
tendency of it is to reduce the burdens which progress entails, and to
diffuse a large share of the benefits of it among the working class.
It will further appear that the socialistic plan of organizing
industry would at least throw a doubt over the progress itself.
Nothing, on the whole, puts the future of industry conducted on the
competitive plan in a more optimistic light than the fact of the
progress in productive methods which it insures. It is the strongest
guaranty of a "good time coming," in which all humanity will rejoice
when it comes and should rejoice by anticipation.

_The Law that insures the Survival of Beneficial Processes Only._--It
is self-evident that wherever there is a saving of labor needed to
make a given amount and kind of product, there is an increase in the
possible product that is created by the aid of a given amount of
labor. If workers themselves get a share of the gains, this fact will
show itself through that beneficent shortening of the working day to
which we have alluded. The men will be unwilling to stand the
weariness and the confinement of working through too many hours and
will be inclined to take more holidays and vacations; all of which,
when it comes about in a natural way, is an indication that the
industrial organism as a whole has put its hand on a new and powerful
lever and is enriching its members by means of it. It does, however,
have to change the character of its work, and this means that some
labor has to be transferred from one subgroup to another. The laborer
displaced by an invention at a particular point continues to be wanted
somewhere. When he and others have found their new employments, the
good result appears,--the increase and improvement of goods
produced,--and society as a whole then gets the benefit which would
come to an isolated worker who, without remitting his labor, finds his
appliances growing better and the fruits of his labor growing larger.
The collective body gets a greater income than before, and the workers
share in the gain.

_Importance of the New Forms which the Social Income Takes._--This
increasing income takes the form in which society now requires it, and
it is this which brings about the readjustment of labor--or the
changes in the amounts of labor used in particular subgroups--which
have caused hardship in the past.

_Nature of the Incidental Evils to be Dreaded._--The problem we have
to face is a danger that labor may be displaced either (1) from the
particular point within a productive establishment at which it is now
working, or (2) from the productive establishment as a whole, or (3)
from a subgroup, or (4) from the general group of which the subgroup
is a part. Out of industrial society in its entirety it cannot thus be
forced. There is a case in which the men whose crafts are supplanted
by machines may all stay where they are and operate the machines; but
that involves forcing other men to change their occupations. There are
more cases in which these men may stay in the mill or shop that
employs them, but not in the same department of it. There are still
more cases in which they may stay in their original subgroups, and in
a majority of cases they may stay in their general groups. In every
instance there are places for them in the working society.

_Local Expulsions of Labor._--When a single employer who is one of
many competitors in an industry adopts an important labor-saving
device, it may be possible for him to keep all his men employed and to
let the improvement show itself wholly as a means of increasing the
output. He may secure a machine which will do what twenty men formerly
did. If it were possible to cut the uppers of a dozen shoes by the
quick stroke of a single die, the machine that carried this armature
would do the work of perhaps twelve knives handled by that number of
skillful workmen. If the original number of men were retained in the
cutting department, and if each of them were furnished with the new
appliance, it would mean that twelve times as many uppers would be cut
as were cut before the change was made. There would, of course, be no
use in trying to do so much cutting of uppers for shoes, without doing
twelve times as much sewing, welting, making soles and heels, etc.,
and to secure all this at once would require a twelve-fold enlargement
of the manufacturer's plant. This is too much to secure at once. The
manufacturer might perhaps double the output of his mill and nearly
double the number of his employees, but that would require only two
of the twelve cutters he formerly had. The new workers would be in
parts of the mill other than the one where the great saving of labor
was effected. Ten men would be removed from the cutting department,
and the two left there would cut, by the aid of the new machines,
twice as many uppers as the whole number cut before, and that would
require the furnishing of a double number of all other parts of the
shoes and a double working force to make them. The ten men liberated
from the cutting department would be available for this purpose, and
new ones would be brought in and set sewing, pegging, lasting,
welting, etc. Within a single establishment, therefore, a radical
saving of labor at one point usually involves some shifting of labor
from that point to others, though it may increase the total number
employed in the establishment which secures the economical device.

_The Effect on a Subgroup of an Improvement by One Entrepreneur._--If
an employer who has this experience is one of a hundred in the
shoemaking industry and the only one who secures the cutting machine,
the market will receive as large an increase of the product as would
be involved by multiplying the output of his mill by two, without
requiring that the price should be more than slightly reduced. An
improvement which is monopolized for a time by a single _entrepreneur_
seldom renders it necessary to reduce the aggregate of the labor in
his employment. Far more often it makes it for his interest to
increase the number and to put new labor in every part of the plant
where no improvement in method has been made. It is often the fact,
however, that labor has to abandon other establishments in this
subgroup, and enough of it may do so to cause the amount in the
entire subgroup to become somewhat smaller by reason of an
improvement. In the case of a single employer there is a bare
possibility that no one should be moved, in consequence of an
economical invention, even from one part of the mill to another. The
manufacturer of our illustration might even keep his twelve cutters at
work after the introduction of the machines referred to and do twelve
times as much cutting, provided that he could quickly increase his
output of finished shoes to twelvefold its former amount. There are
practical reasons why he could almost never do this; but if he
actually did it, he might, by some reduction in the price of shoes,
find a market for this increased product. If the reduction of price
were great, some competitors would probably go at once out of the
business; but it is never the policy of a successful producer to make
unnecessary haste in reducing prices, and, as a rule, the reduction is
gradual. The increase of product from the very efficient mill must
cause a certain reduction in the rate at which it sells its goods, and
this is apt to force manufacturers who are particularly ill equipped
and cannot keep pace with the rate of improvement which their
enterprising competitor establishes to go out of business. They thus
relieve the market of so much of the product as they have contributed
and make a place for the increased output of the newly equipped mill.
In such a case the total output from the subgroup is not very greatly
increased, and the price of the product does not need to be greatly

_Standard Prices fixed by Cost in the most Economical
Establishment._--It is a vitally important fact, as we shall soon
see, that the price of an article is, in a dynamic society, always
tending toward the cost of making it, not in the most inefficient
establishment, where it is produced "at the greatest disadvantage,"
but in the most efficient one of all. The ultimate effect of any great
improvement is naturally to close the shops of _all employers who do
not adopt it or get an equivalent advantage of some kind_. Ultimately
the whole subgroup will be in the state of efficiency it would have
reached if the improvement had been adopted by every _entrepreneur_ on
its first appearance.

_The Effect of an Improvement in Production which is quickly adopted
by a Whole Subgroup._--When an improvement is immediately adopted, not
by one employer merely, but by all employers in a subgroup, it is
likely to cause a quicker displacement of labor from the subgroup as a
whole. A very economical machine introduced by its inventor or
manufacturer and quickly adopted by all employers at _A´´_ would
nearly always force a certain number of laborers to leave that
industry and find employment elsewhere, if it were not for one
commercial fact, namely, the reduction in the price of the product and
the consequent enlargement of the demand for it.

_How Labor may be displaced from a General Group._--The amount of _A´_
that can be created depends on the amount of _A_ that can be furnished
as material to be transformed into _A´_, and also on the amount of
_A´_ that will be taken for conversion into _A´´_. This again depends
on the amount of _A´´_ that will be accepted by employers at _A´´´_
and sold in this last form to the consuming public. If the market for
_A´´´_ cannot be much increased by a moderate reduction of the price
of it, some labor may have to go into the group of _B_'s or _C_'s; and
in any case there must be new labor in _A_, _A´´_, and _A´´´_ if the
product of _A´_ is increased. We can now measure the difference
between the effect of the adoption of an improvement first by one
employer and much later by others, and that of the quick adoption of
it by all. In this latter case there is not much delay in increasing
the output of the goods, and the market for them does not have time to
grow larger because of the growth in the numbers and the wealth of the
community. Unless the present market will take an enlarged quantity of
the finished goods without requiring that the price should go below
the new cost of making them, some labor will have to leave the general

_How Patents may Cause an Increased Displacement of Laborers._--What
we often see is the nearly simultaneous adoption of a labor-saving
device by all leading employers in one industry. Something like this
takes place when the makers of a valuable machine retain the patent on
it in their own hands, and press the sale of it on all the producers
who have use for it. In this case, however, the makers usually put the
price of the machine at a figure that, while it affords an inducement
to buy it, does not reduce the cost of the goods that it helps to make
enough to cause a great increase in the demand for them. The owners of
the patent on the new appliance charge for it "what the traffic will
bear"; and until the patent runs out, the users of the machine have to
sell their goods almost at as high prices as before. If the machine
enables one man to do the work of a dozen, eleven men must find other
things to do. They could find them in their own industry if the
product of it were enlarged in consequence of the use of the machine;
but if the high price of the patented machine prevents this, they must
go elsewhere. When the patent runs out, there is likely to be a
considerable enlargement of the industry, and how important this fact
is we shall soon see.

_How Improvements which call Labor to a Particular Establishment may
displace Labor from a Group._--Another typical case is afforded when
some one employer has for a time the exclusive use of a labor-saving
device, and pushes his production to the utmost in order to get the
full benefit from it. Here are seen the more characteristic effects of
such an improvement. It _draws labor to_ the employer who for the time
being monopolizes the new instrument of production, but it _turns
labor from_ the subgroup of which this employer is a member. He
enlarges his output and in time this reduces the price of the product.
In the field there are marginal mills, or those so antiquated, ill
situated, or badly run that, with their product selling at the former
price, they could barely hold their own; and now that the price is
reduced, they lose money by running. They have to cease operating, and
this makes practicable a further enlargement of the product of the
efficient mill. Much labor goes thither, but some part of that which
leaves the abandoned mills betakes itself to other subgroups. Not
often, indeed, does it have to go to other general groups. The cheap
transformation of the material _A_ into _A´_ enlarges the market for
_A´_ and calls for more labor at _A_, and it involves more at _A´´_
and _A´´´_. If the change of method had been gradual, the growth of
the social demand for _A´´´_ would probably have precluded the need of
sending any labor out of the entire group of _A_'s. Even a rapid
change often sends labor out of one subgroup into other subgroups of
that series rather than into other general groups.

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

_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

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


_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

_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

_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

_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

(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.



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

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


    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

_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 régime 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.



_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

_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

  _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

_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 reëmployed 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

(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

(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

(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

(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

(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 coöperate 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
reënforces 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.

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



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

_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

_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 reënforced 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


_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

_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.



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

_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_

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

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 régime 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

_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

    [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.



_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

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

_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
régime 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 coördinating 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 coördinating
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 coördinating 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.



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.

_An Influence that perverts the Forces of Progress._--We have to deal,
not only with such retarding influences, but with a positive
perversion of the force that makes for progress. Everywhere we have
perceived that competition--the healthful rivalry in serving the
public--is essential in order that the best methods and the most
effective organization should be selected for survival, and that
industry should show a perpetual increase in productive power. In our
study of the question whether improved method and improved
organization tend to promote or to check further improvement, we have
found that these beneficent changes are naturally self-perpetuating,
so long as the universal spring of progress, competition, continues. A
proviso has perforce been inserted into our optimistic forecast as to
the economic future of the world--if nothing suppresses competition,
progress will continue forever.

_Monopoly and Economic Progress._--The very antithesis of competition
is monopoly, and it is this which, according to the common view, has
already seated itself in the places of greatest economic power.
"Competition is excellent, but dead," said a socialist in a recent
discussion; and the statement expresses what many believe. There is in
many quarters an impression that monopoly will dominate the economic
life of the twentieth century as competition has dominated that of the
nineteenth. If the impression is true, farewell to the progress which
in the past century has been so rapid and inspiring. The dazzling
visions of the future which technical gains have excited must be
changed to an anticipation as dismal as anything ever suggested by the
Political Economy of the classical days--that of a power of repression
checking the upward movement of humanity and in the end forcing it
downward. No description could exaggerate the evil which is in store
for a society given hopelessly over to a régime of private monopoly.
Under this comprehensive name we shall group the most important of the
agencies which not merely resist, but positively vitiate, the action
of natural economic law. Monopoly checks progress in production and
infuses into distribution an element of robbery. It perverts the
forces which tend to secure to individuals all that they produce. It
makes prices and wages abnormal and distorts the form of the
industrial mechanism. In the study of this perverting influence we
shall include an inquiry as to the means of removing it and restoring
industry to its normal condition. We shall find that this can be
done--that competition can be liberated, though the liberation can be
accomplished only by difficult action on the part of the state.

_The comparatively Narrow Field of Present Action by the
State._--Economic theory has always recognized the existence and the
restraining action of the civil law, which has prohibited many things
which the selfishness of individuals would have prompted them to do.
Certain officers of the state constitute, as we saw in an early
chapter, one generic class of laborers, one of whose functions it is
to retain in a state of appropriation things on which other men have
conferred utility--that is, to protect property, and so to coöperate
in the creation of wealth. In a few directions they render services
which private employers might render in a less effective way. The
state, through its special servants, educates children and youth,
guards the public health, encourages inventions, stimulates certain
kinds of production, collects statistics, carries letters and parcels,
provides currency, improves rivers and harbors, preserves forests,
constructs reservoirs for irrigation, and digs canals and tunnels for
transportation. In these ways and in others it enters the field of
positive production; but in the main it leaves that field to be
occupied by private employers of labor and capital. Business is still
individualistic, since those who initiate enterprises and control them
are either natural persons or those artificial and legal persons, the

_The Growing Field of Action by Corporations._--Until recently there
has been comparatively little production in the hands of corporations
great enough to be exempt from the same economic laws which apply to a
blacksmith, a carpenter, or a tailor. Individual enterprise and
generally free competition have prevailed. The state has not checked
them and the great aggregations of capital to which we give the name
"trusts" have not, in this earlier period, been present in force
enough to check them. The field for business enterprise has been open
to individuals, partnerships, and corporations; they have entered it
fearlessly, and a free-for-all competition has resulted. This free
action is in process of being repressed by chartered bodies of
capitalists, the great corporations, whom the law still treats
somewhat as though in its collective entirety each one were an
individual. They are building up a semi-public power--a quasi-state
within the general state--and besides vitiating the action of economic
laws, are perverting governments. They trench on the freedom on which
economic laws are postulated and on civic freedom also.

_How Corporations pervert the Action of Economic Laws._--Whatever
interferes with individual enterprise interferes with the action of
the laws of value, wages, and interest, and distorts the very
structure of society. Prices do not conform to the standards of cost,
wages do not conform to the standard of final productivity of labor,
and interest does not conform to the marginal product of capital. The
system of industrial groups and subgroups is thrown out of balance by
putting too much labor and capital at certain points and too little at
others. Profits become, not altogether a temporary premium for
improvement,--the reward for giving to humanity a dynamic
impulse,--but partly the spoils of men whose influence is hostile to
progress. Under a régime of trusts the outlook for the future of labor
is clouded, since the rate of technical progress is not what it would
be under the spontaneous action of many competitors. The gain in
productive power which the strenuous race for perfection insures is
retarded, and may conceivably be brought to a standstill, by the
advent of corporations largely exempt from such competition. There is
threatened a blight on the future of labor, since the standard of
wages, set by the productivity of labor, does not rise as it should,
and the actual rate of wages lags behind the standard by an
unnaturally long interval. There is too much difference between what
labor produces and what it ought to produce, and there is an
abnormally great difference between what it actually produces and what
it gets.

_The Fields for Monopolies of Different Kinds._--Monopoly is thus a
general perverter of the industrial system; but there are two kinds of
monopoly, of which only one stands condemned upon its face as the
enemy of humanity. For a state monopoly there is always something to
be said. Even socialism--the ownership of all capital, and the
management of all industry by governments--is making in these days a
plea for itself that wins many adherents, and the demand that a few
particular industries be socialized appeals to many more. The
municipal ownership of lighting plants, street railways and the like,
and the ownership of railroads, telegraph lines, and some mines by the
state are insistently demanded and may possibly be secured. We can
fairly assume that, within the period of time that falls within the
purview of this work, general socialism will not be introduced. In a
few limited fields the people may accept governmental monopolies, but
private monopolies are the thing we have chiefly to deal with; and it
is to them, if they remain unchecked, that we shall have to attribute
a disastrous change in that generally honest and progressive system of
industry which has evolved under the spur of private enterprise.

_Two Modes of Approaching a Monopolistic Condition._--The approach to
monopoly may be extensive or intensive. A fairly complete monopoly may
be established in some part of the industrial field, and the area of
its operations may then be extended. Smelters of iron and steel,
after attaining an exclusive possession of their original fields of
production, may become carriers, producers of ore, makers of wire,
plate, and structural steel, and builders of ships, bridges, etc.

On the other hand, a great corporation may have, at the outset, but
little monopolistic power, and it may then acquire more and more of it
within the original field of its operations. It may at first make
competition difficult and crush a few of its rivals, and then, as its
power increases, it may make competition nearly impossible in the
greater part of its field and drive away nearly all the rivals who
remain. It is necessary to form a more accurate idea than the one
which is commonly prevalent of what actual monopolies are, of what
they really do, of what they would do if they were quite free to work
their will, and of what they will do, on the other hand, if they are
effectively controlled by the sovereign state. Regulation of
monopolies we must have; that is not a debatable question. The
sovereignty of the state will be preserved in industry and elsewhere,
and it is perfectly safe to assert that only by new and untried modes
of asserting that sovereignty can industry hereafter be in any sense
natural, rewarding labor as it should, insuring progress, and holding
before the eyes of all classes the prospect of a bright and assured
future. We are dependent on action by the state for results and
prospects which we formerly secured without it; but though we are
forced to ride roughshod over _laissez-faire_ theories, we do so in
order to gain the end which those theories had in view, namely, a
system actuated by the vivifying power of competition, with all that
that signifies of present and future good.

_The Nature of a True Monopoly._--The exclusive privilege of making
and selling a product is a monopoly in its completest form. This
means, not only that there is only one establishment which is actually
creating the product, but there is only one which is able to do so.
This one can produce as much or as little as it pleases, and it can
raise the price of what it sells without having in view any other
consideration than its own interest.

_The Possibility of the Form of Monopoly without the Power of It._--A
business, however, may have the form of a monopoly, but not its
genuine power. It may consolidate into one great corporation all the
producers of an article who send their goods into a general market,
and if no rivals of this corporation then appear, the public is forced
to buy from it whatever it needs of the particular kind of goods which
it makes. Consumers of _A´´´_ of our table may find that they can get
none of it except from a single company. Yet the price may conceivably
be a normal one. It may stand not much above the cost of production to
the monopoly itself. If it does so, it is because a higher price would
invite competition. The great company prefers to sell all the goods
that are required at a moderate price rather than to invite rivals
into its territory. This is a monopoly in form but not in fact, for it
is shorn of its injurious power; and the thing that holds it firmly in
check is _potential competition_. The fact that a rival _can_ appear
and _will_ appear if the price goes above the reasonable level at
which it stands, induces the corporation to produce goods enough to
keep the price at that level. Under such a nearly ideal condition the
public would get the full benefit of the economy which very large
production gives, notwithstanding that no actual competition would go
on. Prices would still hover near the low level of cost. The most
economical state conceivable is one in which, in many lines of
business, a single great corporation should produce all the goods and
sell them at a price so slightly above their cost as to afford no
incentive to any other producer to come into the field. Since the
first trusts were formed the efficiency of potential competition has
been so constantly displayed that there is no danger that this
regulator of prices will ever be disregarded. Trusts have learned by
experience that too great an increase in the prices of their products
"builds mills." It causes new producers who were only potentially in
the field actually to come into it and to begin to make goods. To
forestall this, the trusts have learned to pursue a more conservative
policy and to content themselves with smaller additions to the prices
of their wares. If it were not for this regulative work of the
potential competitor, we should have a régime of monopoly with its
unendurable evils; and if, on the other hand, the regulator were as
efficient as it should be, we should have a natural system in which
complete freedom would rule. The limitless difference between these
conditions measures the importance of potential competition.[1]

    [1] For an early statement of this principle the reader is
    referred to the chapter on "The Persistence of Competition,"
    by Professor F. H. Giddings, in a work entitled "The Modern
    Distributive Process," written jointly by Professor Giddings
    and the present writer. This chapter first appeared as an
    article in the _Political Science Quarterly_ for 1887.

_Cost of Production in Independent Mills a Standard of Price._--A
consolidated company will ultimately have a real but small advantage
over a rival in the cost of producing and selling its goods; but at
present the advantage is often with the rival. His plant is often
superior to many of those operated by the trust. When the combination
brings its mills to a maximum of efficiency and then reaps _the
further advantage which consolidation itself insures_, it will be able
to make a small profit while selling goods at what they cost in the
mills of its rival. This cost which a potential competitor will incur
if he actually comes into the field sets the natural standard of price
in the new régime of seeming monopoly; and it will be seen that if
this natural price really ruled, the monopoly would have only a formal
existence. It would be shorn of its power to tax the public.

_Partial Monopolies now Common._--What we have is neither the complete
monopoly nor the merely formal one, but one that has power enough to
work injury and to be a menace to industry and politics. If it long
perverts industry, it will be because it perverts politics--because it
baffles the people in their effort to make and enforce laws which
would keep the power of competition alive. In terms of our table the
subgroups are coming to resemble single overgrown corporations. Each
of them, where this movement is in progress, is tending toward a state
where it will have a single _entrepreneur_--one of those overgrown
corporations which resemble monopolies and are commonly termed so.

Complete monopolies, as we have said, they are not; and yet, on the
other hand, they are by no means without monopolistic power. They are
held somewhat in check by the potential competition we have referred
to, but the check works imperfectly. At some points it restrains the
corporations quite closely and gives an approach to the ideal results,
in which the consolidation is very productive but not at all
oppressive; while elsewhere the check has very little power,
oppression prevails, and if anything holds the exactions of the
corporation within bounds, it is a respect for the ultimate power of
the government and an inkling of what the people may do if they are
provoked to drastic action.

_Two Policies open to the State._--The alternatives which are open to
us are, in this view, reduced to two. Consolidation itself is
inevitable. If, in any great department of production, it creates a
true monopoly which cannot be otherwise controlled, the demand that
the business be taken over by the government and worked for the
benefit of the public will become irresistible. If it does not become
a true monopoly, the business may remain in private hands. Inevitable
consolidation with a choice between governmental production and
private production is offered to us. We are at liberty to select the
latter only if potential competition shall be made to be a
satisfactory regulator of the action of the great corporations.

_The Future Dependent on Keeping the Field open for
Competitors._--Potential competition, on which, as it would seem, most
of what is good in the present economic system depends, has also the
fate of the future in its hands. Existing evils will decrease or
increase according as this regulator shall work well or ill. Yet it is
equally true that the government has the future in its hands, for the
potential competition will be weak if the government shall do nothing
to strengthen it. It is, indeed, working now, and has been working
during the score of years in which great trusts have grown up; but the
effects of its work have been unequal in different cases, and it is
safe to say that, in the field as a whole, its efficiency has, of
late, somewhat declined. With a further decline, if it shall come,
prices will further rise, wages will fall, and progress will be
retarded. The natural character of the dynamic movement is at stake
and the continuance of so much of it as now survives and the
restoration of what has been lost depend on state action.

_The Impossibility of a Laissez-faire Policy._--Great indeed is the
contrast between the present condition and one in which the government
had little to do but to let industry alone. Letting free competitors
alone was once desirable, but leaving monopolies quite to themselves
is not to be thought of. It would, indeed, lead straight to socialism,
under which the government would lay hands on business in so radical a
way as to remove the private _entrepreneurs_ altogether. If we should
try to do nothing and persist too long in the attempt, we might find
ourselves, in the end, forced to do everything. What is of the utmost
importance is the kind of new work the government is called on to do.
It is chiefly the work of a sovereign and not that of a producer. It
is the work of a law-giving power, which declares what may and what
may not be done in the field of business enterprise. It is also the
work of a law-enforcing power, which makes sure that its decrees are
something more than pious wishes or assertions of what is abstractly
right. All of this is in harmony with the old conception of the state
as the protector of property and the preserver of freedom. The
people's interests, which the monopoly threatens, have to be guarded.
The right of every private competitor of a trust to enter a field of
business and to call on the law for protection whenever he is in
danger of being unfairly clubbed out of it, is what the state has to
preserve. It is only protecting property in more subtle and difficult
ways than those in which the state has always protected it. The
official who restrains the plundering monopoly, preserves honest
wealth, and keeps open the field for independent enterprise does on a
grand scale something that is akin to the work of the watchman who
patrols the street to preserve order and arrest burglars.

_A Possible Field for Production by the State._--There is a
possibility that in a few lines of production the American government
may so far follow the route marked out by European states as to own
plants and even operate them, and may do so _in the interest of
general competition_. It may construct a few canals, with the special
view to controlling charges made by railroads. It may own coal mines
and either operate them or control the mode of operating them, for the
purpose of curbing the exactions of monopolistic owners and securing a
continuous supply of fuel. It may even own some railroads for the sake
of making its control of freight charges more complete. Such actions
as these may be slightly anomalous, since they break away from the
policy of always regulating and never owning; nevertheless, they are a
part of a general policy of regulation and a means of escape from a
policy of ownership. The selling of coal by the state may help to keep
independent manufacturing alive, and carrying by the state may do so
in a more marked way. If so, these measures have a generally
anti-socialistic effect, since they obstruct that growth of private
monopoly which is the leading cause of the growth of socialism.

_Evils within the Modern Corporation._--The great corporation brings
with it some internal evils which might exist even if it never
obtained a monopoly of its field. In this class are the injuries done
by officers of the corporation to the owners of it, the stockholders.
A typical plundering director has even more to answer for by reason of
what he does to his own shareholders than because of what he and the
corporation may succeed in doing to the public. In the actual amount
of evil done, the robbing of shareholders is less important than the
taxing of consumers and the depressing of wages, which occur when the
effort to establish a monopoly is successful; but in the amount of
iniquity and essential meanness which it implies on the part of those
who practice it, it takes the first rank, and its effect in perverting
the economic system cannot be overlooked. The director who buys
property to unload upon his own corporation at a great advance on its
cost, or who alternately depresses the business of his corporation and
then restores it, in order that he may profit by the fall and the rise
of the stock, not only does that which ought to confine his future
labors to such as he could perform in a penitentiary, but does much
to vitiate the action of the economic law which, if it worked in
perfection, would give to the private capitalist a return conformable
to the marginal product of the capital he owns. A sound industry
requires that the state should protect property where this duty is now
grossly neglected.

If more publicity will help to do this,--if lighting street lamps on a
moral slum will end some of the more despicable acts committed by men
who hold other men's property in trust,--sound economics will depend
in part on this measure, but it depends in part on more positive ones.

The investment of capital is discouraged and an important part of the
dynamic movement is hindered wherever shareholders are made insecure;
and therefore the entire relation of directors to those whose property
they hold in trust needs to be supervised with far more strictness
than has ever been attempted under American law. When invested capital
shall be quite out of the range of buccaneers' actions, it will
produce more, increase more rapidly, and the better do its part toward
maintaining the wages of labor.

_Perversions of the Economic System by the Action of Promoters._--The
state will be carrying out its established policy if it shall
effectively control the action of promoters in their relation to
prospective investors. The man who is invited to become a stockholder
has a right to know the facts on which the value of the property
offered to him depends. How many plants does the consolidated
corporation own? How much did they cost? What is their present state
of efficiency? What have been their earnings during recent years?
Concerning these things and others which go to make up a correct
estimate of the value of what the promoter is selling, the purchaser
needs full and trustworthy information, and an obvious function of the
law is to see that he gets it. That such action would guard investors'
personal rights is, of course, a reason for taking it; but the reason
that here appeals to us is the fact that it would remove a second
perversion of the economic system, accelerate the increase of capital,
and help in securing a distribution of wealth which would be more
nearly in accordance with natural law.

_Perversions of the System caused by the Action of Corporations in
their Entirety._--More directly within the domain of pure economics is
the relation between the typical great corporation and the majority of
the public which is wholly outside of it. In the common mind this
relation also often appears as that of plunderers and plundered, and
what it often has actually been, is a relation between corporations
which have exacted a certain tribute and a body of consumers which has
had to pay the tribute. Bound up with this general relation between
the manufacturing corporation and the consuming public is one between
it and producers of raw material which it buys and with laborers whom
it hires. In this last relation what is endangered is the normal rate
of pay, present and future. The type of measure which protects
consumers protects the other parties who are affected by the great
corporation's policy. Workers are safe and producers of raw materials
are measurably so if the power of competition in the making and
selling of the goods is kept alive. If we prevent the trust from
taking tribute from the purchasing public, we shall by the same means
prevent it from oppressing laborers and farmers.

_Why the Business of a Monopoly should never be regarded as a Private
Interest._--The people are already putting behind them and ought to
put completely out of sight and mind the idea that the business of a
monopoly is a private enterprise which its officers have a right to
manage as they please. A corporation becomes a public functionary from
the time when it puts so many of its rivals out of the field that the
people are dependent on it. As well might the waiter who brings food
to the table claim that the act is purely his own affair and that the
customers and the manager have no right of interference, however well
or ill the customers may be served, as a combination of packers might
claim that any important detail of their business concerns them only.
The illustration is a weak one; for in the case of a trust which
controls a product that is needed by the public, it is the full
majesty of the people as a whole which is in danger of being set at
naught. Such a company is a public servant in all essential
particulars, and although it is allowed to retain a certain autonomy
in the exercise of its function, that autonomy does not go to the
length of liberty to wrong the public or any part of it. The
preservation of a sound industrial system requires that governments
shall forestall injuries which the interests of the monopolistic
corporation impels it to inflict. No discontinuance of essential
services, no stinting of them, and no demand for extortionate returns
for them can be tolerated without a perversion of the economic system.
The natural laws we have presented will work imperfectly if, for
example, the danger of a coal famine shall forever impend over the
public or if this fuel shall be held at an extortionate price.
Workmen, indeed, have a larger stake than have others in the
maintenance of a fair field for competing producers and an open market
for labor, but other classes feel the vitiating of the industrial
system which occurs when the fair field and the open market are

_Why the Motive which once favored Non-interference in Industry by the
State now favors Interference._--We have said that what is needed is
vigorous action by the state in keeping alive the force on which the
adherents of a _laissez-faire_ policy rested their hope of justice and
prosperity. These fruits of a natural development have always depended
on competition, and they still depend on it, though its power will
have to be exerted in a new way. This requires a special action by the
state; but in taking such action the government is conforming its
policy to the essential part of the _laissez-faire_ doctrine. It lays
hands on industry to-day for the very reason which yesterday compelled
it to keep them off--the necessity of preserving a beneficent rivalry
in the domain of production.

_America the Birthplace of Consolidated Corporations._--Consolidations
of the kind that require vigorous treatment by the state have their
special home in America. They have taken on a number of forms, but are
coming more and more into the most efficient form they have ever
assumed, that of the corporation. The holding company is the successor
of the former trust. The method of union by which stockholders in
several corporations surrendered their certificates of stock to a body
of trustees and received in return for them what were called trust
certificates, has been abandoned, and the readiness with which this
has been done has been due to the fact that there are better modes of
accomplishing the purpose in view. A new corporation can be formed,
and, thanks to those small states which thrive by issuing letters of
marque, it can be endowed with very extensive powers. It can, of
course, buy or lease mills, furnaces, etc., but what it can most
easily do is to own a controlling portion of the common stock of the
companies which own the plants. The holding company has a sinister
perfection in its mode of giving to a minority of capital the control
over a majority. It is possible that the actual capital of the
original corporation may be mainly a borrowed fund and may be
represented by an issue of bonds, while the stockholders may have
contributed little to the cost of their plants and their working
capital; and yet this common stock may confer on its owners the
control of the entire business. The corporation that buys a bare
majority of this common stock may have an absolute power over the
producing plants and their operations. If the holding company should
secure much of its own capital by an issue of bonds, the amount which
its own stockholders would have to contribute would be only a minute
fraction of the capital placed in their hands, and yet it might insure
to them the control of a domain that is nothing less than an
industrial empire, if indeed they are not themselves obliged to
surrender the government of it to an innermost circle composed of

_Earlier Forms of Union._--There are forms of union which are less
complete than this and have been widely adopted. There was the
original compact among rival producers to maintain fixed prices for
their goods. It was a promise which every party in the transaction was
bound in honor to keep, but impelled by interest to break; and it was
morally certain to be broken. There was this same contract to maintain
prices strengthened by a corresponding contract to hold the output of
every plant within definite limits. If this second promise were kept,
the first would be so, since the motive for cutting the price agreed
upon was always the securing of large sales, and this was impossible
without a correspondingly large production; but security was needed
for the fulfillment of the second promise. This security was in due
time afforded, and there was perfected a form of union which was a
favorite one, since it did not merge and extinguish the original
corporations, but allowed them to conduct their business as before,
though with a restricted output and with prices dictated by the
combinations. As a rule each of the companies paid a fine into the
treasury of the pool if it produced more than the amount allotted to
it, and received a bonus or subsidy if it produced less. This form has
more of kinship with the _Kartel_ of Germany than the other American
forms, and it might have continued to prevail in our country if the
law had treated it with toleration. It leaves the power of competition
less impaired than does the consolidated corporation, of which the
laws are more tolerant. By repressing those unions which can be easily
defined and treated as monopolies we have called into being others
which are far more monopolistic and dangerous. The economic
principles on which the regulation of all such consolidations rests
apply especially to the closer unions which take the corporate shape.
To the extent that other forms of union have any monopolistic power
the same principles apply also to them; but we shall see why it is
that the pools which the law forbids have little of this power and the
corporations have much of it.

_The Condition which precludes True Monopoly._--A monopoly grows up
when a company keeps such perfect guard over its economic field that
new rivals cannot enter without exposing themselves to peril. As we
have seen, it is not always necessary that the rival company should be
formed. It is enough that it should be able to be formed and to enter
the field with safety. In that case it will actually appear if an
inducement is offered. Such an inducement is always afforded when the
trust puts an unnaturally high price on its product--a price above
that standard set by the cost of production which would rule in a
normal market.

_Specific Means of Repressing Competition._--In practice a condition
is created in which the new competitors are reluctant to appear; for
the consolidated company has dangerous weapons with which it can
assail them. It can often secure specially low rates for the
transportation of its products, and this is sometimes enough to make
the competitor's prospect hopeless. Further, the "trust"--with or
without the aid offered by the special and low freight charges--can
enter the particular corner of the field where a small rival is
operating, sell goods for less than they cost, and drive off the
rival, while maintaining itself by the high prices it exacts
everywhere else. Again, it may reduce the price of one variety of
goods, which a particular competitor is making, and crush him, while
it makes a profit on all other varieties of goods. Still again, it may
resort to the "factor's agreement," by refusing to sell at the usual
wholesalers' rate any of its own products to a merchant who handles
products of its rivals. If some of its goods are of a kind that the
merchant must have, this measure brings him to terms, causes him to
refuse to handle independent products, and makes it difficult for the
rival producer to reach the public with his tender of goods. The trust
can organize special corporations for making war on competitors while
itself evading responsibility. A bogus company which, in an aggravated
case, is a rogue's alias for a parent corporation, may be formed for
the purpose of more safely doing various kinds of predatory work.

_The Economic Necessity of Doing what is legally Difficult._--From the
point of view of an economic theorist it is enough to show that the
practices which cut off the potential competitor from a safe entrance
into the field of production so pervert the economic system as to hold
in abeyance its most fundamental force, that of competition. They
vitiate the action of every law which depends on competition. Value,
wages, interest, profits, and the very structure of society feel the
perverting effect of this repression of the force that under normal
conditions serves to adjust them. From a practical point of view it is
enough to show that the existence of such practices--if the monopolies
that grow out of them shall continue and increase--present to the
people the alternative of accepting an economic state which is
unendurable, or accomplishing, in a legal way, what many already
pronounce impossible. For the purpose of this treatise it suffices to
point to the fact that few attempts worth mentioning have been made to
suppress any of these practices except the first--that of favoritism
in connection with freight charges--and that in the case of this
practice only a beginning of serious effort has been made. While there
is some excuse for abandoning a purpose when long and determined
effort to execute it has failed, there is no possible excuse for
concluding, _in advance of such effort_, that a systematic policy
which gives a promise of saving us from an intolerable outcome is
impracticable. All the props of monopoly should be taken away and not
one merely, and before this shall be tried radical measures will not
be in order. Socialism will not be fairly before the people's
parliament till it shall come as the only escape from a condition of
private monopoly. What economic law clearly shows is that monopoly
will not come if the practices on which it depends shall be
suppressed, and the people may be trusted to determine whether the
suppression is or is not possible. That they may decide this question
the issue that depends on it must be brought before them; and all that
falls within the sphere of the economist is the stating of the effects
of monopoly, the causes of its existence, and the public action that
if taken will remove these causes. The preservation of a normal system
of industry and a normal division of its products requires the
suppression of all those practices of great corporations on which
their monopolistic power depends.



Of all the various clubs used by trusts for attacking rivals and
driving them from the field, the first in order is the one which
depends on getting special rates for transportation. Railroads develop
monopolies within their own sphere and also contribute greatly to the
development of monopolies elsewhere. The second fact is the more
important, but both require attention. By reason of its special
connection with producers' monopolies does the function of the common
carrier have much to do in deciding the question whether an economic
revolution is or is not impending. It is safe to say that it is
imminent as a possibility and will become probable if the favoritism
shown by carriers to great shippers is not effectually repressed.

_How the Consolidation of Railroads makes the Repression of Favoritism
Easy._--It is also safe to say that such repression will be easy if
the consolidation of railroads themselves shall actually go to the
utmost possible length. With all lines under one central control and
earnings entirely pooled, there would be no motive for granting
special favors to any shipper except as it might come through a
corrupt relation between the shipper and some officials of the
railroads. To the carrying corporation the giving of a rebate would
merely mean a surrendering of some possible profits. With railroads
consolidated the threat of the great shipper to divert his freight
from one line to another would lose all its effectiveness, and the
interests of the stockholders in the general carrying company would
demand high rates from all. The law forbidding rebates and all other
forms of favoritism would assist the railroad company in carrying out
its own policy, and would be obeyed with the readiness with which an
order to pocket an increased gain is naturally complied with.

_A Danger which becomes greater as Discriminations become
Fewer._--This reveals the fact that the consolidation which makes the
suppressing of discriminations easy will make an all-round advance of
rates possible, in so far as merely economic influences are concerned.
Nothing but the power of the state itself can prevent this; and while
the consolidation that would be perfect enough to stop discriminations
has not yet taken place, enough of consolidation has been secured to
cause some advance in the general scale of freight charges and to
threaten much more. It already rests with the government to avert this
second evil. Monopolies extending throughout the field of production
would mean a demand for socialism which could hardly be resisted; and
even a few monopolies in industry assisted by a great one in
transportation would mean much the same thing.

_General Economic Principles governing Transportation._--With a view
to determining the bearing which transportation has on the problem of
economic freedom, and thus on the prospect of avoiding the alternative
of state socialism, we need to state the essential principles in the
theory of railway transportation.

The fact that makes a vast amount of carrying necessary is that
agriculture is subject to a law of diminishing returns, while
manufacture obeys an opposite law. In tilling the soil labor and
capital yield less and less as more and more of them are used in a
given area; and therefore both of these agents need to extend
themselves widely over the land in order to use it economically. In
the production of staple crops which can be freely carried across sea
and continent, the natural tendency is to scatter a rural population
with some approach to evenness over all the land available for such
crops. Market gardening requires less land per man and the areas
devoted to it are much more densely peopled; but even within this
department of agriculture the law holds true that too much labor and
capital must not be bestowed upon an acre of ground. In a general way
agriculture diffuses population, while manufacturing concentrates it.
This latter work is done most economically in great establishments.

_The Law of Diminishing Returns from Land not restricted to that used
in Agriculture._--It is commonly said that manufacturing is unlike
agriculture in that it is subject to a law of increasing returns; but
this statement is true only when its terms are carefully interpreted.
The diminishing returns from agriculture and the increasing returns
from manufacturing are not two opposite effects from the same cause.
There is, indeed, a logical anomaly in contrasting them with each
other. In agriculture we get smaller and smaller results per unit of
labor and capital when we overwork a piece of ground of a given size
by putting more and more labor and capital on it. The trouble here is
that land, on the one hand, and labor and capital, on the other, are
not combined in advantageous proportions; and exactly the same effect
is produced by the same cause in manufacturing. One can overtax a mill
site by confining larger and larger amounts of capital within a given
area. If the site is so small that the building has to be carried far
into the air and supplied with walls strong enough to resist the jar
of machinery on many floors, manufacturing becomes a far less
economical operation than it would be if the site were larger and the
mill lower. The gain from centralizing the manufacturing process comes
in part from the increased size of the particular establishments; but
that requires that every part of the plants, land included, should be
increased. As the whole of an establishment becomes larger its product
becomes cheaper; but, in the enlargement, there should be no undue
stinting in the amount of land used. In both agriculture and
manufacturing, then, there is a loss of productive power when areas of
land are disproportionately small, as compared with amounts of labor
and artificial capital; but in the realm of manufacturing large
establishments under single _entrepreneurs combining the agents of
production in the right proportion increase the productive power of
men and instruments_ as they do not in agriculture. Great farms show
no such economy as great mills.

_Basis of the Law of Increasing Returns in Manufacturing._--There
would be some increase of returns in manufacturing from making the
establishments large even if the work were done by hand; but by far
the greater part of the advantage is due to machinery. The invention
of the steam engine was the beginning of it, and that of textile
machinery afforded a quick continuation of the revolutionary change.
In nearly all lines of production, outside of agriculture, machinery
is far too elaborate to be used in household industry. One may say
that the transformation of the world into one enormous farm dotted
over with great workshops, with all the social and political changes
which that involves, was brewing in the tea-kettle which the boy Watt
is said to have watched, as the lid was raised by puffs of steam and
the possibility of a steam engine suggested itself. The mechanical
force of steam began at once to centralize manufacturing. That made
increased transporting necessary, and it was not long before the same
element, steam, provided the means of this extensive transportation.
It is necessary, of course, to carry the products of the farm to the
mill, and also to carry manufactured goods back to the farm; and
neither of these things would have been required on any large scale
under a system of household industry. The economy which leads to this
lies altogether in the greater cheapness of the manufacturing. The
difference between the cost of fashioning materials in the home and
that of doing it in the mill is so large that it would have brought
about the building of mills and the creation of manufacturing centers,
with the carrying which it involves, if neither railroads nor
steamboats had come into being. The growth of factory villages had
made some headway at a time when no elaborate machinery existed; but
if that condition had continued, manufacturing centers would have
been smaller, more numerous, and more scattered than they have been.
It is the cheapness of carrying by railroads and steamships which has
made it possible to get the fullest benefit from the so-called law of
increasing returns in manufacturing.

_Mining as related to Transportation._--Mining is a process which has
to be local, because ores and coal are furnished by nature in a local
way; and one might mention this as a second cause of extensive
transportation. A great part of the carrying so occasioned depends,
indeed, on the growth of the manufacturing centers, since mills and
furnaces need great quantities of fuel. A means of heating private
dwellings, of cooking food, etc., might conceivably be supplied in a
local way, by the growth of forests; but the fuel needed for the
centers of manufacturing and commerce has to come from distant points.
The law of increasing returns in manufacturing, then, and natural
location of mines are the most generic causes of transportation. The
system which has resulted gives to everybody more and better food, as
well as more and better goods of every kind, than he could possibly
have had if the primitive system of local manufacturing had continued.
The cheapness with which form utility is created in the mill and place
utility on the railroad are the two causes which are at work.

_The Rivalry between Producers of Form Utility and Producers of Form
and Place Utilities._--In the technical language of economics, there
has been a contest in efficiency between that creating of form utility
which is done when goods are made in households or in small villages,
and that joint process of creating form and place utility which
consists in making goods at central points and carrying them to the
widely scattered homes of consumers. The latter process, involving as
it does the necessity of creating two utilities instead of one, is now
by far the cheaper.

_The Ultimate Limit of Charges for Transportation._--Charges for
transportation have as one extreme limit the difference between the
cost of making goods at one point and the cost of making them at
another. This rule is applicable, of course, only to those numerous
cases in which it is physically possible to create the goods at both
points. If they can be made at point A for ten dollars, by using five
days' labor, and at point B for twenty dollars, by using ten days'
labor, ten dollars would furnish the extreme limit of a possible
charge for carrying them from A to B. In a certain number of cases the
actual charge approximates this extreme limit. With a mill in A,
working with much economy, and a number of household workshops in B
producing with less economy, the product of the large mill may invade
the territory supplied by the little workshops, and the carrier may
receive in return for transportation about as much as the difference
between the two costs of production. With a great mill at A and a
small one at B, the same thing may happen.

                            |   COMPETITIVE
                            |   CARRYING BY
                            |     HIGHWAY

_Narrower Limits usually Applicable._--In by far the larger number of
cases such a difference between costs is more than the carrier can
get. Usually there is some alternative mode of procuring goods at B
which does not involve actually making them on the spot at a serious
disadvantage. It may be possible to convey them to B from a third
locality, C, where they are made in an advantageous way. If this
carrying is done by some process in which competition rules,--if, for
instance, C is not far from B, so that goods can be carried thither by
drays,--the cost of making the goods in C plus the natural or
competitive cost of conveying them to B will together make up the
natural cost of procuring them in this latter locality. The difference
between that and the cost of making them in the great center which we
have called A will constitute the limit of the freight charge from
that city to B; and even though between these two points the carrier
has a monopoly of the traffic, he can get no more.[1]

    [1] For a case in which a railroad can get the entire
    difference between the cost of goods at the point from which
    it carries them and their cost at the place of delivery, but
    voluntarily refrains from doing so, see the note at the end
    of this chapter.

_Other Applications of the Same Rule._--This rule applies even where
goods made in C have to be carried great distances, provided the
carrying is done in some competitive way, at a low rate based on cost.
Consumers in B may have the option of bringing the goods by water,
along the coast or across an ocean, at a rate that makes the cost of
procuring them at B not much above the cost of making them at A. If
so, this small difference of costs represents all that any carrier can
get for moving them from A to B, and though this carrying may be done
by a railroad which has a monopoly of its route, its service will
command no higher rate than the one which is thus naturally set for
it. The rate is governed by costs, though not by costs incurred by the
railroad. Whenever competition rules, the returns for any productive
function tend to conform to costs, and we here suppose that it does so
rule (1) in the making of goods at A, and (2) in the procuring of the
goods by some alternative method at B. The difference between these
costs sets the maximum limit of the freight charge between A and B,
and this may exceed the cost of this service and leave a profit for
the carrier who uses this route.

_Freight Charges and Value._--The return for a productive operation
of any kind whatsoever is directly based on the value which it imparts
to something; and in the case of carrying, the value is measured by
the amount of "place utility" which the carrying creates. This is
merely one application of a universal law. What the goods are worth
where they are consumed, less what they are worth where they are made,
equals what can be had for moving them from the one point to the
other. Freight charges are gauged by the principle of "value of
service," but so also are the charges for making the goods. When
things are produced and used at the same place, the producer's returns
equal the value of his product, and this is fixed by the principle of
final utility. It is, however, a truism of economics that this value
itself tends under competition to conform to the cost of creating it.
In our illustration the manufacturing returns are fixed by the value
of service and also by the cost of service, and so are the returns for
transporting the goods from C to B; but the returns for carrying them
from A to B, where monopoly prevails, are not governed by the cost of
service but by costs elsewhere incurred.

_Freight Charges and Cost._--The law of costs as well as the law of
value holds good, in general, in connection with transportation.
Competition in this department tends to bring values created to a
certain equality per unit of cost and to reward the labor and capital
which are used in carrying as well as they are rewarded elsewhere, and
not better. If our table of industrial groups were elaborated, there
would be between A and A´, as well as between A´ and A´´, and between
adjacent subgroups throughout the chart, a symbol which should
represent the work done by the carrier; and the fact would appear
that naturally this work is neither favored nor injured in the
apportionment of rewards. Free competition, if it existed in
perfection everywhere, would be a perfectly undiscriminating
distributor of earnings, and would apportion all returns according
to costs.


_Variations of Freight Charges from Static Standards._--Place values
are not an exception to the general rule of value; and yet freight
charges actually remain at a greater distance from the standards
furnished by the direct costs of carrying than do the returns for
other services from corresponding standards. There is an approach to
monopoly in this department, and, when direct competition exists, it
is a more imperfect process here than it is elsewhere. Moreover, the
costs which here figure as an element in the adjustment of freight
charges are of a peculiar kind, which, although not unknown in other
departments of production, have nowhere else so great influence and
importance. The study of railroads and their charges is baffling, not
because the economic forces do not here work at all, but because here
they encounter a resistance which is exceptionally strong and
persistent. The quasi-monopoly which elsewhere continues only briefly
lasts long in this department of production; but it is subject to the
same principles which everywhere rule.

_The Modes of Approaching the Study of Freight Charges._--In studying
freight charges we may, if we choose, start with the intricate tariffs
of railroads, as they now stand, and try to find some principle which,
if applied, would bring order out of the mass of capricious and
inconsistent rates. Such a rule will ultimately be needed, but it can
best be obtained by examining at the outset the transportation which
is done by simple means and under active competition. It will be found
(1) that basic principles apply to all transportation whether it be by
railroad or by simpler means; (2) that in the early development of
every system of common carrying the action of these principles is
disturbed; (3) that in the case of the more primitive systems the
disturbances are soon overcome, but that they continue longer and
produce far greater effects in the case of railroads; (4) that one
important influence of this kind tends naturally to disappear, while
another continues and calls for regulation by the state; and (5) that
this regulation needs to be based on natural tendencies and to conform
to the laws which, when competition rules, govern the returns of all
classes of producers.

_A Typical Instance of Partial Monopoly in Transportation._--We may
now trace the development out of a purely competitive condition of a
simple instance of what is usually termed monopoly, though in a
rigorous use of terms it can hardly be so called. It is a monopoly the
power of which is limited. So long as goods made at A are carried to B
by some primitive method which insures the presence of competing
carriers, the returns for carrying will tend only to cover costs. By
a normal adjustment the price of the goods at A only repays the costs
of making them, and if these and the carrying charge amount to less
than the costs of making the goods at C and transporting them to B,
none of them will come to B in this latter way. Makers at A and
carriers on the route from there to B will possess the market, and the
place value which the goods acquire when taken to B will be fixed
directly by the costs of carrying.

It is when there is no effective competition on the route between A
and B, while there is free competition in making the goods both at A
and at C, and also in carrying them from C to B, that a typical case
of a partial monopoly is presented.

                                   |   COMPETITIVE
                                   |     CARRYING

The price of the goods at A is a definite amount fixed by competition
between producers, and the price at B is also a definite amount fixed
by competition between different makers at C and between different
carriers between C and B. The difference between these amounts sets
the limit of the charge for carrying from A to B; but in that
operation there is, for a brief period, no effective competition. For
simplicity let us say that this carrying is at first done by a single
wagon owned by its driver, and that his charge for the service he
renders nearly equals the difference between the cost of making the
goods at A and that of obtaining them at B from some alternative
source. This lone and honest driver is thus illustrating the practice
of the modern railroad, in that he is "charging what the traffic will
bear." The goods he transports have one natural value at A and
another at B. These two values are determined separately and in ways
that are quite independent of the carrier and his policy. When he
begins to do his work, he charges an amount which about equals the
difference between the two values.

_The Impossibility of Long-continued Profits in the Case of Primitive
Carriers._--With the growth of traffic direct competition will soon
appear. A second wagon will be put on the route and then more, and the
strife for freight will bring down the charges to the level of cost.
For a brief season a favored drayman was able to get nearly the entire
difference between the value of the goods at the point where they are
made and their value at the point where they are used, _as these two
values were determined by independent causes with which he had nothing
to do_. Now, he and his rivals can, indeed, get the difference between
the value of the goods at the one point and their value at the other;
but this difference is now directly determined by the carrying charge.
That charge, again, is determined by the cost of rendering the
service. There was a brief interval when the value of the service and
the cost of it were different amounts; but now they coincide. We shall
see that the essential difference between carrying by primitive means
and carrying by railroad is in the fact that in the latter case the
period when value and cost are different is greatly prolonged.

_The Appearance of a More Efficient Competitor._--With the growth of
traffic a sailing vessel comes into use on a route connecting A with
B, and the cost of thus conveying goods is less than that of conveying
them over the roadway. The charge made by the sailing vessel is lower
than that made by the teamsters, and the goods are thus delivered at B
cheaply enough both to attract to the water route all carrying from A
and to put an end to all carrying from C. The former carriers between
B and C lose their business, and the makers at C lose some part of
theirs, in the same way that any producer loses the traffic when he is
underbid by rivals. The public is the gainer to the extent of the
reduction which takes place in the cost of the goods as delivered to
consumers in the market at B; nevertheless, the situation still
involves a limited monopoly. The sailing vessel now has no effective
rival, and can charge "what the traffic will bear," and that is very
nearly the cost of conveying the goods by wagons. The advent of the
vessel has benefited the public; yet it is regarded as constituting a
new monopoly, and the benefit which the public gets is less than it
will get when a really effective competitor of the sailing craft makes
its appearance.

                                  .   ABANDONED
                                  |     ROUTE
  A - - - - - - - - - - - - - - ->B
   \       ABANDONED ROUTE       /
    \                           /
     \____                     /
          \___      __________/

_A Principle governing Charges by Unequal Competitors._--The principle
which, in this instance, governs the freight charges is one which is
active in all departments of production. We have seen that a maker of
goods who has just acquired a monopoly of a superior method may, for a
time, charge what the goods cost as made by inferior processes. If the
manufacturer has some patented machinery which effects a great
economy, he is not at once obliged to govern his prices by what the
goods cost in his own mill, but may charge about what they would cost
if they were made by the inferior machinery which he formerly used.
This is what they still cost in the mills of certain rivals, and it
thus appears that competition of a sort fixes his price for the goods
he creates, but it is the competition of less capable producers and
fails to benefit the public as the rivalry of equals would do. If
there is evil in such a monopoly as this, it is not because the public
is injured by the advent of the cheaper method. The improvement
usually begins to confer benefit on consumers at the moment of its
arrival, through the effort of the efficient producer to secure
traffic. It causes the prices to go down, though the fall is at first
only a slight one, and the consumer's case against the monopoly of
method is on the ground of his failure to receive a further benefit.
He will get that further benefit whenever a producer who can compete
on even terms with the one who now commands the field shall make his

_Unequal Competition Typical of Carriers._--Our recent illustration
represents a similar condition in carrying. The public gets a slight
gain from the advent of a sailing vessel; but it fails to get the
further benefit that the advent of a second vessel will ultimately
bring. For a time the freight charge stands nearly at what teamsters
have charged. For cheaper rates the public must wait for the advent of
another vessel.

_The Cause of the Partial Monopoly in Carrying._--There is nothing to
prevent a second schooner from being put on this route, if the returns
to be expected should warrant it. At the outset the new vessel would
get only about a half of the amount of traffic enjoyed by the first,
and the rates would probably be reduced by the competition between the
two. Until the returns of the first vessel become large it has no
rivalry to fear, but it is clear that its monopoly is held by a very
precarious tenure. It is not likely long to enjoy the benefit of any
charges which yield much profit. The growth of traffic will in due
time bring the competing vessel, and the rule of returns that only
cover costs will again assert itself. The owner of the first sailing
craft has been able for a time to charge "the value of the service" he
has rendered, as that value was determined independently of his own
action; but now this value itself depends on his action and that of
rival carriers using the same route, and it adjusts itself at the
level of cost.

_The Effect of partly Unused Vessels for Carrying._--The case
illustrates another principle which is equally general. The
_entrepreneur_ whose capacity for producing is only partially utilized
may often take some orders at less than it costs to fill them, as cost
is usually understood, and he will still be the gainer. In
manufacturing as well as in carrying there are "fixed charges"; there
are costs which stand at a definite amount which is independent of the
volume of traffic, while other costs increase as the volume grows.
These are the "variable costs," and they have to be further
classified, since some of them do not increase as rapidly as the
business grows, while others increase with the same rapidity as does
the business. The makers of sewing machines, typewriters, reapers, and
mowers, and indeed machinery generally, can usually increase their
product without correspondingly increasing their outlay. They can make
goods and sell them in a foreign market at rates which would injure
and might even ruin them if they were applied to the sales made in
their own country. This fact is most obvious when the manufacturer's
machinery is not all kept running or when it all runs only a part of
the time. Increasing the output is then a particularly cheap
operation. When a carrier's facilities are partially unused--when a
ship carries a cargo in one direction and returns in ballast, or when
it sails on both trips with its hold only half full--it is ready to
carry additional goods at a low rate provided that this policy will
not demoralize its existing business. In our illustration we have
assumed that some merchandise is made at A and consumed at B, but it
may well be that goods of some sort are produced at B and consumed at
A. There may be stone quarries at B and there may be need of stone for
paving or building at A, and the vessel may carry a return cargo of
this kind at any rate which does not greatly exceed the mere cost of
loading and unloading it and be better off for so doing. If the entire
difference between the cost of the stone at B and the cost of
producing it at A from some other source is a very slight one, the
amount of it still represents all that the ship can get for carrying
the stone. The utmost that the traffic will bear is this difference in
costs; and yet the business will be accepted, for the return exceeds
the merely variable costs which it entails. The fixed charges, the
interest on the cost of the vessel, and the outlay for maintaining it
do not need to be paid in any part from the returns of this extra
business. They are already provided for.

If instead of returning from B with a hold quite empty, the vessel
made both voyages with a hold only half full, the result would be
similar. It would then be in a position to make a low bid for further
freight in both directions. If this entails no cutting of the rates
for carrying the original goods, the vessel can take further goods
with advantage at any rate above the merely variable costs.

_Production which is Advantageous though it does not repay all
Costs._--There are two general conditions under which it is
advantageous, both in making goods and in carrying them, to extend
production, though the further returns which are in this way gained do
not cover all costs. First, the producer must have an unused capacity
for making or carrying goods. In such a case it is possible to make or
carry an _increment_ of goods without entailing on himself an
increment of cost that is proportionate to the amount carried. In his
bookkeeping his original business is charged with costs amounting to a
certain sum per unit of goods produced or carried. His further
business is charged with a smaller outlay per unit.

Secondly, it must be possible to demand separate and independent
returns for the different increments of goods, so that cutting the
rate charged for one part of the traffic does not entail cutting the
rate charged for the other. In the case of a manufacturer this is
secured, either by carrying some goods to a remote and entirely
independent market, or by producing some new kind of goods the low
price of which will have no effect on the sales or the prices of the
other kinds. In the case of the carrier it is accomplished in a
variety of similar ways. He can take return cargoes at a low rate. If
he stops at different ports along his route he can charge less for
goods landed at certain ports than for those landed at others. He can
classify his freight and carry some of it at a rate at which he could
not afford to carry the whole. With the growth of traffic, however,
this condition tends to disappear. Its existence requires that the
carrier should have facilities only partially used. As the ship
acquires fuller and fuller cargoes, it ceases to be advantageous to
fill the hold with goods which pay lower rates than others; just as a
mill, which may have run for a time partly on goods that yield a large
return and partly on those which yield a small one, gradually discards
the making of the cheaper goods as the demand for the dearer kind
increases. The vessel which can get full cargoes of profitable
merchandise will cease to devote any space to what is less profitable.
In the end the ship in our illustration will be transporting in both
directions all the first-class freight it can take, and will accept
neither the stone nor the merchandise consigned to ports to which it
can be carried only at the cheap rates.

_Result of Effective Competition throughout the Carrier's Route._--The
condition just described--that of full cargoes of profitable
goods--inevitably attracts a rival vessel, and the ordinary effects of
competition then begin to show themselves. The vessels pursue the same
route, cater to the same traffic, and if they try to get business from
each other, bring down their charges. The warfare may even bring them
to reduce the rates to the level at which only variable costs are
covered--a policy that, if persisted in, would bankrupt them both; and
here, as well as in the case of railroads, there is a powerful motive
for combining and ending the war. It usually causes a merely tacit
agreement to "live and let live"--a concurrent refraining from the
fatal extreme of competition. The reductions, as made, have to be
general and to apply to all parts of the traffic, and unless each part
of the freight carried earns a _pro rata_ share of the fixed charges
incurred in the business, the traffic is carried at a loss. On the
supposition which we have made--that the special and comparatively
unprofitable increment of carrying was discontinued as soon as the
first vessel could use its entire cargo space in transporting goods of
a high class--the arrival of the second vessel may cause the less
profitable carrying to be resumed, since there will not be enough of
the better sort to afford two full cargoes. Moreover, a normal kind of
competition will stop short of the warfare which drives both rivals
into bankruptcy, and will leave the rates at a level at which the
receipts of each carrier cover all his outlays.[2]

    [2] A full discussion of the limits of freight charges would
    take account of the fact that "what the traffic will bear" is
    an elastic amount. An infant industry will bear less than a
    mature one; and moreover, a rate that it will bear without
    being taxed out of existence may be sufficient to stunt its
    growth. A railroad may be interested in hastening its growth.
    When goods have one cost at A and another at B, a railroad
    company may carry them from the one point to the other for
    less than the difference between the costs because it wishes
    the industry at A to grow and furnish freight. Farmers who
    are introducing a new crop in a section of country remote
    from a market may be encouraged by a rate for carrying which
    leaves them a margin of profit. It is when a branch of
    production has more nearly reached its natural dimensions
    that the charge for carrying its product tends to approach
    its highest limit.



_Simple Cases of Charging "What the Traffic will Bear."_--The value of
a study of primitive carriers and their policy lies in the fact that
it illustrates principles which apply to transportation by a
complicated system of railroads, although in this latter case they are
not easily discerned. Imperfect competition is what exists in the
department of carrying. So long as a railroad is without any rival it
may, in some cases, charge for moving goods from one point to another
about as much as the cost of making them at the latter point exceeds
the cost at the former. This is the simplest case of charging what the
traffic will bear. Or, again, the situation may be dominated by
producers at a third point who can make goods and get them carried to
the place we may term the market for less than the cost of making them
directly in this latter place. In such a case the road may demand
nearly the amount by which the cost of making the goods at an
accessible third point and moving them to the one which is their
market exceeds the cost of making them in the place first named; and
this is a slightly less simple case of charging what the traffic will
bear. It is appropriating the difference between two natural values
neither of which the railroad itself fixes.

_Charges based on Various Kinds of Cost._--The charges of the
railroad may be limited by the competition of inferior carriers who
use its own route, such as teamsters whose wagons use a public highway
running parallel to its own track. Here charges are based on costs,
but not on those which the railroad incurs. They are the costs which
the teamsters incur; and if the railroad has much business, its own
costs are less and it makes a profit. The charges may be based on
costs incurred by more economical carriers, like owners of ships, and
in such a case the rate which the railroad can get may be less than
its own costs, if these are figured in the simple way of dividing a
total outlay by a total number of units of freight transported. The
rate is based on the shipowners' costs, and these are so low as to
bankrupt the railroad if it should reduce all its charges to such a
level. It reduces them thus only on the particular route where
competition by water is encountered, and keeps them elsewhere at the
higher level. In the case of shipments by rail over such routes "what
the traffic will bear" is determined by the low charges established by
the ships; and this means that it is determined by a certain definite
cost of carrying goods between the very points which the railroad

_The Exceptional Importance of Fixed Charges in the Case of
Railroads._--The railroad, in the case just noticed, carries its rates
below costs, as these are computed in a simple way, but keeps the
lowest of them somewhat above the variable costs which we have
defined; and there appears the important fact that the fixed costs
incurred by the railroad form an unprecedentedly large part of its
total expenses. The interest on the outlay it makes for roadbed,
track, bridges, tunnels, terminals, etc., is something for which
there is no fair parallel in the case of wagons or ships. This is the
first unique fact concerning railroads and their policy; and the
second is that they continue very long in that intermediate state
which we have illustrated by the ship which had only a partial cargo
and was impelled to take some traffic at a special and low rate. For
many years the railroad only partially utilizes its plant; and so long
as that is the case its natural policy is one of drastic
discrimination between different portions of its business. A third
great point of difference between the railroad and other carriers
appears if, while its capacity is still only partially utilized, it
encounters the direct rivalry of other railroads that are eager for
business; competition then takes a shape which impels the participants
irresistibly into some kind of combination. The union may be tacit or
formal, and it may depend on personal relations or on some merging of
corporations; but toward something that will make the rival lines act
concurrently and with mutual toleration the situation impels them with
unique force.

The general features of railroad rates, then, are--

(1) Some charges based on the difference between the natural value of
merchandise at the point of origin and its value at the point of
delivery, as this latter value is determined by causes independent of
the rates charged for transportation between the two points;

(2) The adjustment of other charges according to costs incurred by
independent carriers operating between the same points;

(3) The exceptional importance of the railroad's "fixed costs" and the
drastically discriminating rates to which this leads;

(4) The irresistible motive for combination where direct competition
appears between railroads connecting the same points.

We speak of the condition of railroads as an intermediate state
because it is one out of which a natural development takes other
carriers when their capacity for service is fully utilized. The same
cause--a complete utilization of the plants--would have a like effect
in the case of railroads; but the cause is so slow in coming into full
operation that few persons think of it as affecting the problem at
all. The problem of freight charges on railroads is usually regarded
as if the intermediate state were destined to be perpetual. It is,
however, entirely true that a full utilization of the plants of
railroads would tend to take them out of this state. If the increase
of business came after a combination had been effected, it would tend
to put a stop to the sharp discriminations to which the eager quest
for traffic has led. Different shippers could more easily secure
equally favorable treatment. Freight of a low grade would be less
desired, since the space it would require might otherwise be available
for business of a more profitable kind, and the rates on such freight
would rise. The increased traffic would make it possible to earn large
dividends without increasing charges on the lower grades of freight,
and while greatly reducing the charges on the higher grades; but no
economic force would be available for securing this adjustment. The
state, by positive regulation, might secure it and might bring the
earnings and the charges of the railroads more or less nearly to the
normal standards which prevail where competition rules; but if
competition were here to begin, it would result quite otherwise. It
would restore the old condition of partially utilized cars, track,
etc., and cause a new strife for traffic, which would cause some
freight to be taken at very low rates, but would lead to inevitable
consolidation and higher charges.

In general industry competition tends so to adjust prices as to yield
interest on capital, wages for all varieties of labor, including labor
of management, and nothing more, and this is the outcome elsewhere
demanded by a growth of business coupled with a theoretically normal
and perfect action of competition; but the peculiarities of
competition between railways do not bring about the evolution which
would give this result. Combination is effected long before the
returns from the total traffic are made normal and before the returns
from different parts of it are brought into their legitimate relation
to each other. After the union of rival companies, railroads continue
to be in that intermediate state in which the effect of an unused
capacity for carrying has its natural effect in charges which
discriminate widely between different localities and between different
kinds of freight. The railroad traffic does, indeed, begin to follow
the course which we have illustrated in the case of transportation by
water. It takes a few steps in that direction, but further progress is
then stopped by combinations.

The fundamental laws of economics still apply. The static standard of
freight charges exists, and one can form some idea of what actual
charges would be if the forces which elsewhere tend to bring prices to
their theoretical standards could here operate unhindered. The
hindrances, however, are such as definitely to preclude such a result.
The rates do not become in a true sense normal. Even under such
active competition as at times exists they do not become so, while
without competition they never tend to become so. It would, however,
be a gross mistake to assume that static standards have no application
whatever to railway transportation. The whole subject is most easily
understood when those standards are first defined and the baffling
influences which prevent actual rates from conforming to them are then
separately studied. There are influences which bring the various
charges of railroads within a certain definable distance of normal

                                  .   ABANDONED
                                  |     ROUTE
              RAILROAD            v
   \                             /
    \                           /
     \____                     /
          \___      __________/
             WATER ROUTE

The situation of railroads we take as we find it--one of complete
consolidation in case of many roads, and of harmonious action, or
quasi-consolidation, in the case of others. In general their charges
are fixed by the place value they create, as that value is established
by influences other than the charges themselves. It might seem that
the charge for carrying fixes the place value. Whatever a railroad
demands for carrying goods from A to B measures the enhanced value
which they get in the moving; but if they would have possessed at B
the same value that they now have, even though the railroad had not
existed at all, it is evident that it is this value minus the value of
the goods at A which fixes the charges for carrying, rather than that
these charges fix the place value. We have seen in very simple and
general cases how this principle works, and have now very briefly to
trace the working of it in the case of a system of railroads. The
special method of reckoning costs to which we have referred is an
important element in the process.

_"Costing" comparatively Simple in the Bookkeeping of Competing
Producers._--In the study of ordinary industries we have encountered
conditions which render the bookkeeping of a producer simple and cause
him to charge all his costs, in a _pro rata_ fashion, to his entire
product. If his goods and those of his rivals are of one kind and are
sold in a single market, a cut in the price of any one portion of the
product involves a corresponding cut on the entire output. It is not
possible to single out any particular increment for a reduction of
price and leave the rate unchanged on the remainder. Where products
are of different kinds it is possible to make a classification of them
so as to get a large profit on some, a small one on others, and none
at all on still others. When competition has not done its full work,
something of this kind happens in many departments of business. A
condition of unequal gain from different portions of an output lingers
long after some effects of competition have been realized. In the end,
however, it must yield if competition itself does its complete work,
and whenever we adhere heroically to the hypothesis of the static
state, we preclude this inequality of charges. Rivals who contend with
each other for profitable business bring the prices of the goods which
afford the most gain to such a level that a mill which makes this type
of goods will pay no more in proportion to its capital than one which
makes other types. The total cost of production, fixed and variable
alike, would at that time, as we have seen, be barely covered, and
might correctly be apportioned in a _pro rata_ manner among all parts
of the product.

_The Effect of Increasing Business on Comparative
Charges._--Competition of this perfect kind does not exist in
manufacturing and is far from existing in the department of carrying,
and it is important to know whether with growing business and greatly
tempered rivalry there is any tendency toward the equalization of
charges and the simplifying of the mode of reckoning costs. When a
mill has more orders than it can fill, those it wishes to be rid of
are the ones which yield the smallest profit. They encumber the mill
and prevent the filling of more profitable orders; and the natural
mode of reducing the amount of this undesirable part of the output is
to raise the charges on it. This comes about without much aid from
competition, for when all producers find their capacity overtaxed,
they have no motive for contending sharply for business. Underbidding
has for its purpose attracting business from rivals and is an
irrational operation when all have orders enough and to spare.
Competition is largely in abeyance when the business any one can have
is overabundant.

_These Principles Applicable to Carrying._--What we here assert
concerning goods manufactured by independent mills would be true of
goods carried by independent vessels, if they plied between the same
two ports with no intermediate stops. If their capacity should at any
time be overtaxed, they would not reduce the charges on higher grades,
but they would raise them on the lower grades, and the classification
of freight would lose some of its significance. The lowering of the
charges on the high grades of freight would come when the profits of
the business should attract new carriers, who would naturally seek for
the traffic that paid the best, till all kinds paid about alike. The
mode of reckoning costs might then become simple--a _pro rata_
division of total outlays among all parts of the business.

_The Condition of Uniform Costing never realized upon Railroads._--Not
a single one of the essential conditions of equalized charges and
uniform costing is now realized upon railroads, and there is only one
of them that is approximated. Separate markets for different parts of
the traffic are provided by the nature of the business. Every point to
which goods are conveyed furnishes such a distinct market, and the
service of carrying goods to it is paid for by a distinct set of
customers. It follows, therefore, that some rates can be cut without
affecting others, and they regularly are so. The second condition,
that of bringing the carrying capacity of railroads into the fullest
possible use, is attainable, but it is very remote. At times there is
a congestion of freight and, in general, the capacity of existing
plants is more nearly used than it heretofore has been; but by an
addition to the rolling stock they could carry more than they do and
the additional traffic would cost far less than the portion already
carried. Moreover, with no addition to the rolling stock, very
considerable enlargements of traffic could at many points be made.
Thirdly, competition between railroads is not at present effective
enough to bring about a reduction of the higher charges and make
returns and costs simple. Combination takes place long before the
discriminating charges are abandoned. Low-grade freight continues to
be carried side by side with the high-grade which pays better. Charges
to terminal points continue to be low, while charges to intermediate
points are high. In a sense one may say that a tendency to discontinue
these practices exists, but it is a tendency that is so effectually
resisted that its natural results are only in small part realized. If
a dam is built across a reservoir, holding the waters on one side ten
feet above those on the other, one may say that the waters have a
tendency to reach a uniform level, since the power of gravity is
exercised in that direction; but the dam baffles the tendency. And so
in railroad operations something interferes which checks the force of
competition or removes it altogether, long before the discriminations
in freight charges are removed or very much reduced.

_An Intermediate State made relatively Permanent._--As we have said,
the condition of traffic on railroads is analogous to what in the case
of manufacturers and primitive carriers would be regarded as a
transitional state soon to be left behind; but in the case of
railroads it is relatively permanent. It is the condition in which
certain natural economic forces are working vigorously, and, if they
were not counteracted by other forces, would end by making natural
adjustments and establishing normal rates for the carrier as well as
the manufacturer. In this intermediate state the natural forces are
counteracted and the adjustments are never made, and what we have to
study is the degree in which they are approximated.

                                   |   HIGHWAY

_A Simple Case of Special Costing Applied to Certain Traffic._--We
will suppose A and B are connected by a railroad, while C and B are
connected by a highway over which transportation proceeds by the
primitive means of horses and wagons. It is like one of the cases we
have already stated, with the exception of the fact that the carrier
over the longer route is a railroad. The limit of what the railroad
can get is the natural difference between the cost of making the goods
at A and the combined costs of making them at C and carrying them to
B. This definitely limits the railroad charges. Whatever difference of
cost there is the railroad can get if it chooses, and barring any
deduction it may make in order to induce production at A and make
traffic for itself, it will get it. The rate which is fixed for the
railroad may be sufficient to cover the total costs chargeable to this
portion of its traffic on the simple and _pro rata_ plan of costing,
or on the other hand, it may cover only a portion of the fixed costs
or no portion at all. This means that the standard which is set by the
differing values of the goods at A and at B may or may not yield a
profit to the railroad. If it is so slight as not to cover even the
variable costs of carrying the goods, the railroad will not carry
them, and the supply will be allowed to come from C rather than from
A. If it covers more than these variable costs, the road will accept
and carry the goods. If the traffic affords any appreciable margin
above the variable costs, it will be the policy of the railroad to
make its charges low enough to attract the traffic, and this will
slightly reduce the place value of the goods at B and bring it below
the cost of procuring them from C. The railroad will thus secure the
whole traffic to the exclusion of that which came from C. If the costs
of making the goods at A and C are alike, then the charge for carrying
from A to B will be just enough below the total costs of carrying in
wagons from C to B to stop the carrying over this shorter route and
appropriate the whole business; but this charge may not cover total
costs of carrying from A. It may yield only a slight margin above the
variable costs attaching to this part of the railroad's business. It
thus appears that this carrier can with advantage accept the freight
at a rate that by a perfectly normal bookkeeping is below cost, while
the teamsters on the road from C cannot do this.

                                   |   RAILROAD

_A Second Case in which Carrying is done for Any Amount above Variable
Cost._--Let us now suppose there is a railroad from C to B as well
as one from A to B. There is now competition between makers at A
and carriers from A to B, on the one hand, and makers at C and
carriers from C to B, on the other hand; and whichever of these
quasi-partnerships delivers the goods at B at the cheaper rate gets
the whole traffic. By the terms of our supposition the makers in both
places are offering goods at cost, and any cutting of rates that is
to be done must be done by the carriers. To reduce the prices of the
goods at the mills in either locality would put some of them out of
business. We will assume that there is no consolidation and no other
means of concurrent action between the railroads, and that the whole
traffic will thus go to the route over which the lower rates are made.
For simplicity we will still adhere to the supposition of equal costs
for manufacturing and of unequal costs for carrying. As the charge for
carrying goes down, one or the other of the railroads will reach the
point where the variable costs of this traffic are barely covered,
while on the other line they are more than covered. Where rivalry is
not tempered in any way whatever, the charge made by competing roads
falls to a level at which returns only cover the variable costs
incurred by one of the competitors, though it may return somewhat more
in the case of the other.

_How Fixed Costs are Met._--This implies, indeed, that the fixed
charges of both roads must somehow be met by the returns from other
traffic; and this supposition is in accordance with the facts. A
freight war may temporarily carry rates to a level where some traffic
does not cover variable costs and where total traffic falls short of
covering total costs. Such a situation cannot long continue, and the
natural adjustment, under active competition, is one at which rates on
the traffic for which the two lines are contending are just below the
variable costs incurred by one line but above those incurred by the
other. There is nothing to prevent the stronger railroad from thus
reducing its rates, attracting to itself the whole of the traffic,
and putting an end to the rivalry of the other line. This would mean
bankruptcy for that line unless it had other sources of income.

_The Effects of Bankruptcy on Costs._--Bankruptcy means a scaling down
of the fixed charges of the railroad to such a point that the total
traffic can meet them; but it does not enable the company to reacquire
business that will not yield enough to cover variable costs. Adhering
to the supposition that there is no mutual understanding, no pool, and
no other approach to consolidation between the rival lines, we may
safely say that the general rule which elsewhere governs rates holds
true here. Two roads actively competing for identically the same
traffic tend to bring charges to a level at which the variable charges
entailed by this traffic on the one route are not quite met and the
traffic passes to the other line.[1]

    [1] If we wish to vary our supposition that the cost of
    making the goods at A and at C is the same, we have a
    modification of the case we have stated. If it is much
    cheaper to make them at A, the railroad that carries these
    goods from there to B may charge more for carrying than does
    the one that delivers the goods made at C. It is possible
    that the difference between the costs of making at the
    different points may tell decisively in favor of the longer
    route, and it may be the railroad from C to B that first
    reaches, in its charges, the level of variable costs and
    sees its traffic handed over to its rival.

                                  |   RAILROAD
              RAILROAD            |
   \                             /
    \                           /
     \____                     /
          \___      __________/
             WATER ROUTE

_A Principle governing Competition between Railroads and Carriers by
Sea._--In a third case there may be between A and B a railroad and a
water route also, while between C and B there is a railroad only. On
the supposition we have made,--that competition between carriers by
water has done its full work,--the charge for carrying anything by
water from A to B must be sufficient to cover a _pro rata_ part of the
total costs. That may be sufficient to cover the merely variable costs
entailed on the railroad, or it may not. If it does not, the railroad
will not take any portion of the business except what it may take by
reason of the greater speed with which it can transport the goods. If,
however, the total costs of carrying by water exceed by a tolerable
margin the merely variable costs of carrying by land, the railroad
will be able to take the traffic. If this traffic goes to the water
route, the charge made by the railroad from C to B is adjusted by a
simple rule. This railroad can get the natural difference between the
cost of the goods at C and the cost of similar ones made at A and
carried by water to B. If the railroad gets the traffic between A and
B, and the water route is abandoned, the case becomes the same as that
which we have already considered,--the transporting is done at a rate
which prevents one of the lines from covering its merely variable
costs and secures all the traffic for the other line. The carrying
from A to B goes by land or by water according as the variable costs,
in the one case, or the _pro rata_ share of total costs, in the other,
are the less; and nothing can be carried from C to B unless it can be
delivered at B at a price as low as that of goods made at A and
transported at the rate just described. If the costs of making at A
and C are equal and there are the three carriers seeking traffic, as
assumed, the result naturally is to give all the business to the one
who will bid the lowest for it. Either railroad will bid as low as the
variable costs which the traffic occasions; while the owners of ships
will bid no lower than the rate which covers costs of both kinds.[2]

    [2] If carriers by water are in that intermediate state in
    which their capacity is only partially used, they also may
    offer to take some traffic for an amount which only covers
    variable costs; but this condition does not naturally become
    in their case semipermanent, as it does in the case of

                RAILROAD   _____
        __________________/     \
       /                         \_
    __/                            \___
  A __                               __ B
      \                             /
       \                           /
        \____                     /

_The Case of Railroads having Common Terminal Points._--In the fourth
case there are, besides the other carriers, two railroads between A
and B which compete for the traffic at these terminal points, but not
at intermediate ones. Their facilities for through traffic are alike.
The local traffic on the different lines is unlike, since it is
affected by the character of the regions through which the railroads
pass; but the charges made for local traffic are governed by the
comparatively simple principles which we first stated. In contending
for freight to way stations we may say that the railroad has to
compete with wagons upon the highway, but with nothing more efficient.
The charges for local freight may therefore be extremely high, while,
if the railroads are really competing as vigorously as pure theory
requires, and if the normal results of competition are completely
realized, the rate which can be maintained between A and B for any
articles carried will be no higher than those which cover the variable
costs entailed on the route which is the less economical of the two.
The line to which this test assigns the traffic between A and B must
then stand the further tests we have described--those involved in
contending for business with carriers using respectively the water
route and the railroad from C to B.

_A Condition leading to a Reduction of Fixed Costs._--It is safe to
assume that one of the two railroads from A to B has more local
traffic than the other. It may be that even with this advantage its
total returns of all kinds may fall short of covering its total
outlays. In that case the total returns of any less favorable route
must fall still further short of the amount necessary for covering all
outlays; and if we adhere to the assumption that neither consolidation
nor anything resembling it takes place, we have a case in which both
railroads must undergo reorganization. The fixed charges of the better
route must be scaled down and the creditors of this railroad must
accept the loss, while on the other route the fixed charges must be
reduced still more and the creditors must suffer a larger loss. It
goes without saying that the prospect of such a calamity means
consolidation. It is evident what alternative competitors face in
cases in which heroic competition goes on to the bitter end. As a rule
this is an unrealized alternative. The mere prospect of the calamity
connected with it is bad enough to put an end to the independent
action of the different railroads. With the facilities for combination
which now exist a far smaller inducement suffices to bring this about.

  A ___________________________________ B

_The Case of Railroads whose Entire Routes are Parallel._--We have to
consider only one more typical case in order to have before us a
sufficient number to establish the general principles which govern the
charges for the carrying of freight by railroads. Variations
innumerable might be stated; and, indeed, the experience of the
railroad system of this country affords the variations and reveals the
results which follow from the conditions they create. The railroads
may be strictly parallel lines, pursuing the same route and competing
for local traffic as well as for through traffic. If the case we
lately examined insures consolidation,--and indeed all of the cases we
have stated impel the companies powerfully toward it,--this last case
makes assurance doubly sure. Strictly parallel railroads competing for
traffic over their entire routes and neither uniting nor showing any
of the approaches to union would be an impossibility. Persistent
competition would then mean reducing all charges to the level fixed by
variable costs, which would leave no revenue whatever to cover fixed
costs, and would send the companies into a bankruptcy from which even
reorganizations could not relieve them, since they could not
annihilate all the fixed costs.

_A Case of Arrested Development._--It is clear that, in the entire
policy of railroads, the fact that their capacity has never been fully
used plays a highly important part. It makes the distinction between
fixed costs and variable ones a leading element in the adjustment of
charges. With the capacity of railroads completely used, as is that of
a ship which carries a full cargo at every voyage, the distinction
would lose most of its importance. More business would then require an
addition to every part of the plant and would thus entail new fixed
costs which would have to be charged against the new business. As the
traffic of any railroad grows toward its maximum, the cost which each
separate addition to it entails grows larger and larger. When cars are
few and are only half filled, an increment of traffic entails a very
small increment of expense. When the cars are filled and new freight
requires the purchase of more of them, the cost of this addition to
the traffic becomes greater. When further additions to the freight
carried require additions to trackage, yard room, storage room, etc.,
they cost far more than the earlier additions; and new increments of
freight come, in the end, to cost very nearly as much per unit as the
general body of the previous traffic when all outlays were charged
against it. The railroad approaches the condition of the full ships
referred to, in which further cargoes require further ships, with all
the outlays which this implies. The distinction between different
kinds of costing is gradually obliterated, and railroads steadily draw
nearer to that ultimate state which other carriers more quickly
approach, in which each part of the freight carried must bear its
share of the total costs entailed. Long before that state is reached,
however, combination ensues, and the movement of freight charges
toward their static standard is arrested.

                                  |   HIGHWAY
              RAILROAD            |
   \                             /
    \                           /
     \____                     /
          \___      __________/
             WATER ROUTE

_The Standard of Freight Charges under a Régime of Monopoly._--A
consolidation so complete that it would merge all rival lines under a
single board of control and pool all their earnings would restore the
early condition described in connection with one of our
illustrations--that of the single railroad between A and B, having
only sailing vessels and wagons as rivals. It is able to charge what
the traffic will bear in a simple and literal sense. The consolidated
lines can, if they choose, get for each bit of carrying the difference
between the value of goods at the point where they are taken and their
value at the point where they are delivered. These values are
approximately what they would be if no railroad existed. The carrying
done by the railroad itself does not enter into the making of them.
The natural value of a commodity at A is what it costs to make it
there, and the value at B is either the cost of making it at B, or
that of making it at C and carrying it in wagons to B, or that of
making it at A and carrying it by water to B. In any case there is a
natural and simple process of fixing the costs both at A and at B, and
the difference between them is the limit up to which the railroad can
push its charges if it will. Where the business which furnishes the
freight is not fully developed, the railroad may moderate its charges
for the sake of letting it grow larger. The hope of increased traffic
in the future may cause a reduction of demands in the present. We
shall see what other influences may keep the charges below their
possible level; but the natural difference between two local values of
goods is the basis of the charge for carrying them from one point to
the other. Consolidated lines, if they had as perfect a monopoly of
carrying by railroad as has the single line in our illustration, would
base their charges on this simple principle, though for a number of
reasons they might not take all that the principle would allow.

_How Imperfect Consolidation Works._--Imperfect consolidation, when it
follows a period of sharp competition, has to deal with obstacles
which prevent a complete carrying out of this policy. Many rates have
become far lower than the rule of monopoly would make them, and there
are difficulties in the way of raising them. A weak combination of
parallel lines may keep its charges within bounds, partly from a fear
that larger ones may afford too great an incentive to secret rate
cutting and may so break up the union, and partly from a respect for
what the people may do if the exactions of the railroads become too
great. The more complete forms of consolidation have not the former of
these dangers to fear; and if, without being restrained by the state,
their charges continue moderate, it is mainly due to the fact that
other lines less firmly consolidated are unable safely to make a
radical advance of rates, and that this often prevents such a course
in the case of lines which would otherwise be able to take it.

_Limits on the Charges of a System of strongly Consolidated
Lines._--This means that where a great system of railroads occupying
the whole of a vast territory is so firmly consolidated as to have a
complete monopoly of carrying by rail within the area, it is still
affected in indirect ways by the possible rivalry of lines altogether
outside of its territory. An excessive charge on freight from Chicago
to New York might induce carrying by rail from Chicago to Norfolk and
thence by water to New York. It might cause grain, flour, etc., to be
shipped to Europe from Southern ports rather than from those on the
Atlantic coast. These cases and others do not fall under principles
essentially different from those already stated, but they call for the
application of the same principles in complex conditions which our
study is too brief to cover. There is a supposable case in which
nearly all that could be secured by any railroad connecting Chicago
with the Atlantic coast, even though every line in the territory
between them were the property of one corporation, would be the
variable cost of carrying goods over a line running to a port on the
Gulf of Mexico. Reflection will easily show how the principles already
stated apply to this case and others.

_Effects of a General and Strong Consolidation._--With all the lines
in this country and Canada in a strong consolidation, the advance of
rates to, or well toward, the limit set by the principle of natural
place value created would inevitably come unless the power of the
state should in some way prevent it. The railroads would be able to
get the difference between the cost of goods at A, in the illustrative
case, and the cost of making or procuring them at B without using the
connecting line of railroad. When the appeal to the state is only
imminent,--when the power of the government is not yet exercised, but
impends over every railroad that establishes unreasonable
charges,--the rates may be held in a fair degree of restraint. A
wholesome respect for the _possibilities_ of lawmaking here takes the
place of actual statutes. A respect for the law appears in advance of
its enactment and may amount to submitting rates in an imperfect and
irregular way to the approval of the state. This effect, when it is
realized, is to be credited in part to laws which will never be
enacted. The merely potential law--that which the people will probably
demand if they are greatly provoked, but not otherwise--may be a
stronger deterrent than the prospect of more moderate legislation. In
general a considerable part of the economic lawmaking of the future
will undoubtedly be called out by demands for action that is too
violent to be taken except under great provocation. The dread of the
extreme penalty insures a cautious policy in increasing charges which
have been established under a transient régime of competition. Partial
monopolies adhering to rates many of which were established under the
pressure of competition--such are the railroad systems of America. The
existing condition shows some of the effects of competition which has
ceased and of legislation which has not taken place. As the
combinations shall become greater and stronger, the situation
everywhere will become more and more akin to that which existed in a
local way when a single line of railroad had no effective competition,
and the charges which the traffic would bear were fixed in the way we
have described and absorbed the place value which the carrying
created. It is a method which exposes the public to an extortion
which, though not unlimited, is unendurably great. Consolidation,
therefore, means the control of rates by the state; but it is
essential that this control be exercised with due regard for the
economic principles which rule in this department of industry. Thus
only can there be secured the results of a natural system unperverted
by monopoly.

The principles which a study of simple cases suffices to establish are
as follows:--

1. Freight charges are essentially a variety of price. They express
the exchange value of place utility.

2. The static standards or norms toward which these prices tend are
fixed in the same way as are other static standards of value,--by a
rule of cost,--though in the case of railroads the working of this
rule is exceptional.

3. When carrying is done by simple means and by competing carriers,
the ultimate basis of charges is the cost of the carrying; and this is
estimated in the simple way in which, under perfectly free
competition, the cost of making commodities is estimated. The total
outlay is charged against the total product.

4. A single railroad between one point and another, when it is not
affected by the rivalry of any other railroad, can get for its service
the difference between the cost of goods at the place where they are
made and the cost at the point of delivery, on the supposition that
they would either be made at this point or carried thither by more
primitive means. Under such a partial monopoly the costs incurred by
the railroad itself do not directly set the standard of its charges,
but other costs do so.

5. In this case the so-called variable costs incurred by the railroad
furnish a minimum limit below which its charges cannot go, but to
which they tend to go in the case of traffic which cannot otherwise be

6. This place value which the railroad can confer on the goods is
small (1) when the cost of making the goods at their place of
departure is not much less than that of making them at their place of
destination, or (2) when it is not much less than the cost of
obtaining them from a third point, or (3) when it is possible to carry
them from the place of their origin to their destination by water or
by any other cheap means of transportation.

7. Variable costs are positive additions to the total outlays
previously incurred by a railroad, and they result from adding a
definite amount to its previous traffic. They are less than
proportionate parts of total costs, including interest, some part of
operating expenses, cost of maintenance of roadway, etc.

8. The comparative smallness of the variable costs is chiefly due to
the fact that the carrying capacity of railroads is only partially
used. These costs become relatively larger as traffic increases, and
would practically coincide with proportionate shares of total costs if
the traffic should reach its absolute maximum.

9. If the place value above defined is large enough to cover the
variable costs attaching to certain traffic and afford any surplus
whatever, the railroad usually takes this traffic.

10. On the business which it gets the charges vary widely and, as it
appears, capriciously, but they are at bottom governed by the economic
principle stated--that of place value as established in ways in which
the charges of the railroad itself do not figure.

11. Competing railroads tend to bring rates downward toward a minimum
which is fixed by the merely variable costs of the carrying as done
by one or more of the railroads themselves.

12. The competition between railroads is arrested while they are not
using their full capacity, while the merely variable costs of an
increment of traffic are still abnormally low, and while many rates
are so.

13. Railroads which compete for freight between terminal points are
strongly impelled toward consolidation; and those which compete along
their entire lines are forced to resort to it.

14. Consolidation in its more imperfect forms tends to establish rates
that are abnormally high, but this tendency is somewhat checked by the
danger that the combination may be broken by a desire to foster
business in a section of country and by the indirect influence of
lines outside of the territory controlled by the consolidated roads.

15. In its stronger and more extended forms consolidation leaves the
people with no adequate safeguard against extortionate charges except
as this is furnished by the intervention of the state; and this needs
to be effected with an intelligent regard for the natural forces which
are at work amid the seemingly capricious irregularities in the
present system of charges.

_The Aim of Regulation by the State._--An aim of a government, in all
of its economic policy, is to insure the best use of the national
resources, and this can often be done by keeping alive free
competition. Where the rivalry of producers is active, a law of
survival guarantees that the more economical method of producing an
article shall displace the inferior one. When the choice lies between
using a quantity of free and disposable labor in making goods in a
certain market and using it in making them elsewhere and carrying
them to the market, the alternative which gives society the most that
it can get by any use of its productive resources is the one that is
spontaneously selected.

_How an Extortionate Local Charge may sometimes be reduced without
Injury to a Railroad._--A low charge for freight carried from A to B
coupled with an extortionate one from A´ to B might preclude making
the goods at A´, though they can be made there at excellent advantage
and the interests of society will soon require that they be so. This
situation can exist only so long as traffic is slight between A and A´
and greater between A´ and B. The growth of traffic over the former
section of the route will make it desirable for the railroad to raise
its rate over that portion. If, under compulsion or otherwise, it
reduces the rate from A´ to B sufficiently to permit the production of
the goods at A´, it will gain a profitable traffic between A´ and B at
the cost of giving up a relatively unprofitable one between A and B.


_Variable Costs a Proper Basis for Some Charges._--It makes for
general economy to pay respect to the distinction between fixed and
variable costs and let much freight be carried for anything it will
yield above the variable ones. If ten units of labor are required for
making an article at B and only five at A, and if a railroad between
these points, whose capacity is not fully utilized, can carry the
article from A to B with an expenditure of two additional units of
labor, then society can best get the goods for use at B by spending
these seven units in the making and carrying. It would take ten units
to make them at B, and to society itself there is a saving of three
units from making them at A and carrying them at a special rate to B.
Till the railroad is more fully used for other purposes this source of
economy will continue. Though the rates charged for this freight would
bankrupt the railroad if they were applied to its entire traffic, it
is best for the railroad to take this special bit of carrying at any
rate exceeding the wages of the two units of labor; and for the time
being this is the best way to use some of the social resources, since
it gives at the point of delivery and use more goods for a given
outlay than could have been had in any other way.

_Why Consumers may suffer while Particular Producers may be
Favored._--It will be seen that this principle affords an inducement
for making a special classification of certain goods and carrying them
for less than merchandise of a generally similar kind is carried for.
It is a policy of "making traffic" which costs little and is worth
more than it costs both to the carrier and to society. This incentive
for reducing charges does not operate as strongly in the case of goods
carried to consumers who are forced to live on the route. They are
held there by the general causes mentioned at the beginning of the
preceding chapter, and must pay the tax which the railroad imposes on
them. The only limit on this tax is the possibility of otherwise
procuring the goods or of moving out of the territory. The ultimate
possibility that population may not grow under a régime of extortion
and that both freight traffic and passenger traffic may be held within
small limits imposes some check on the railroad's exactions. The
company may find it worth while to foster to some extent the growth of
population; and to favor producers of certain goods in order to
induce them to locate their establishments on its line, and the result
of this may be good for society; but there is no way of securing a
general good from the heavy tax on the rest of the traffic unless this
has been necessary to insure the existence of the railroad itself. In
that case there may be a temporary necessity for it, which will
disappear as traffic grows.

_The Policy of the State in Dealing with Low Charges based on Variable
Costs._--The interest of railroads which have a monopoly of their
routes is to advance the rates on through traffic. We have noticed a
possible case in which some equalization of charges by occasional
reductions of local rates takes place. An increase of charges over
long routes not made necessary by any pressure of business which
overtaxes the railroad's carrying power would of course be injurious.
Moreover, carrying full loads does not constitute such an overtaxing
as calls for the higher rates. There are times when present supplies
of cars and engines may not be able to move more freight than they do;
but in that case more of them are called for. Only when the point is
reached at which providing for this through traffic in addition to the
local freight entails additions to the permanent plant and involves
costs that exceed the return from the through business, is it
justifiable, in the interest of social efficiency, to advance such
charges. In preventing such an advance under other conditions a
government helps to secure an approach to a natural economy and a
maximum of production.

_When, in the Interest of General Productivity, a Reduction of Local
Charges is called for._--We saw that carriers of a primitive kind
competing with each other would put every charge, local or otherwise,
on a basis of its proportionate share of total costs. The traffic as
a whole would return enough to cover all the outlays, and each part of
it would yield its share. This is the ideal of effectiveness for
railroads, as well as for ships and wagons. The attainment of the
ideal without a regulation of charges by the state is never to be
expected. One feature of this normal condition is that, where no
special improvements have recently been made, total returns should
just equal total costs, in the sense in which terms are used in static
theory--that sense in which all interest charges and all expenses of
management figure among the costs. No net profit for the
_entrepreneur_, but full interest for the capitalist and full wages
for all varieties of labor, is the rule that gives the static measure
of normal returns. If a state shall slowly reduce the charges for
local freight, while holding unchanged those for through traffic,--all
the while allowing the total returns of the railroads to cover what we
have defined as total costs,--it will do all it can toward securing an
approximation to the condition which affords the largest product of
social industry. It will help to make the resources of the people do
their utmost in yielding an income. Total returns covering all costs,
a reduction of those charges on local traffic which have prevented
industries from springing up at intermediate points between favored
centers, a gradual increase of local production without any positive
repression of production elsewhere--such are some features of the
general change which the future should bring and which only the power
of the state can make it bring.

_How the State may secure what Competition secures in Other
Fields._--In general industry the rivalry of entrepreneurs carries
prices to a level fixed by costs, but in transportation the rivalry
has so largely disappeared as to prevent such an outcome. The state
cannot restore much of the vanished rivalry and would cause an
unnatural condition if it did so. We have seen toward what an abnormal
level of costs a sharp "freight war" carries rates. What the state can
do is something which an instinctive judgment of the people is
impelling it to do; namely, to adjust rates directly and bring them
gradually toward the standard to which competition, if it were working
as it elsewhere works, would automatically bring them, namely, that at
which wages and interest are fully covered. A surplus above these
outlays could always be temporarily secured wherever a special economy
had been effected, and the source of legitimate profit would be open
to carriers as it is to producers generally. How much should be
reckoned as interest depends on the question how the capital itself is
estimated, and here again the instinct of the people has been correct.
It will not accept as a measure of true capital the market value of
all the stocks and bonds the railroad has issued. The quotations of
the market make the total values of the stocks and bonds equal a
capitalization of its total earnings, and these may include a profit
due to monopoly. If a state were to figure the capital in this way,
and then so adjust rates as to allow ordinary interest on the sum thus
computed, it would merely leave total returns as they are. It might
change comparative charges, but not the sum total of all of them.

_How Capital should be Estimated._--In that static condition in which,
as we have shown, capital is as productive in one subgroup as in
another, the capital is first measured by the cost of the goods that,
in the inception of the industry, embody it, and in static studies
this cost is regarded as constant. Returns from different outlays are
equalized, and a dollar invested in one kind of business then yields
as much in a year as a dollar in any other. In a dynamic state the
cost standard still prevails, and as the tools of production become
cheaper, in terms of labor, it takes more of them to represent the
same amount of capital that was originally invested. What it would at
any time cost to duplicate every item in the equipment of a business
measures the capital it uses. Nothing but a failure of competition in
the case of railroads prevents the application of this standard to
them. Monopoly makes earnings more or less independent of sums
invested and causes purchasers to buy stock at rates that are
independent of costs of plant and equipment and are fixed by earnings

_The Process of Estimating Capital on the Basis of Cost._--If we
undertake here to do by public authority what competition elsewhere
tends to do, we shall have to restore the standard based, not on the
original cost of the railroad's substantial property, but on the cost
of getting another that would be equal to it in working efficiency.
The plant is worth what it would naturally cost to duplicate it; and
an average rate of interest on that sum is the natural return from it.
There are ethical claims which are entitled to respect and which
preclude any sudden reduction of the value of a railroad's properties;
and, moreover, the end in view can be attained in a way that will not
necessarily take anything from the absolute amount which they are now
worth. If the amount of dividends remains fixed, the increase in the
actual value of the plant itself will bring these dividends into the
proper ratio to it. The land that the companies use is becoming more
valuable. Measured by what it would cost to duplicate it, it
represents a larger and larger amount on the companies' inventories.
If the equipment also is enlarged as traffic grows, the entire sum on
which interest and dividends are computed becomes continually larger.
If the interest and dividends earned by the plants now in existence
remain fixed in absolute amount, they will become a smaller and
smaller percentage of the real capital of the companies. Merely
letting railroads earn the amount that they do at present would bring
the net incomes after some years to the same rate--the same percentage
of invested capital--that the income from other capital represents.
New plants and enlargements of old ones should be allowed to earn
enough to furnish an incentive for providing them as fast as the needs
of the public require it.

_How Insuring a Fixed Amount of Total Earnings would affect the Rates
charged for Freight._--It goes without saying that the general
increase of traffic, while the freight charges remain the same,
increases the net earnings of the carrying companies. Therefore the
policy of keeping the net earnings at a fixed total amount would mean
a reduction of rates for freight and passenger service. We do not here
raise the question how much reduction will be required for the purpose
in view--that of transferring to the people at large whatever now
constitutes a genuine monopoly profit. In the case of some lines there
is, it is safe to say, no such profit, and it will be impossible to
tell how much of it elsewhere exists till some careful appraisal of
plants and equipments, on the basis of the cost of duplicating them,
shall have been made. What we need to know is that, by the aid of such
an appraisal, the state can, if it will, secure in the department of
carrying the result which is automatically secured elsewhere, namely,
the prevalence of charges which afford normal returns on invested
capital as well as wages for every kind of labor.

_Elements of the Problem not included in a merely Economic Study._--It
will not fail to occur to any reader that in making the present study
of railroads a very general and purely economic one we leave out of
account some facts of great importance. We take no account of
corruption within the corporations which do the carrying, nor of
corruption in the relation between them and the officials of the
state. Stockholders within the corporation are likely to have their
interests betrayed by those who are appointed to take charge of them,
and citizens of the state are likely to have their greater interests
betrayed, in a like manner, by their appointed custodians. We cannot
here discuss the various plans by which directors plunder their own
corporations, nor the ways in which public officials betray the
people. All of these abuses are disturbing influences in the economic
system; and all of them interfere with the adjustment which gives the
highest productive efficiency, and contribute a full share toward
putting the social order in danger. All are, however, so obviously
criminal, if they are judged by the spirit of the law,--not to say by
the letter of it,--that it is better to leave the discussion of the
mode of suppressing them to legal and political science.

_A Practical Mode of Insuring an Approach to Normal Rates for
Transportation._--When competition rules, it enlarges the supply of a
dear article till the price of it is normal, and it increases the
capital in a profitable business till its earnings become so. In the
case of railroads this does not automatically take place, but the
result of it all--adequate service and normal charges for it--can be
directly secured by the state. Charges that have been made reasonable
by competition may be left as they are, and those that are
disproportionately high may be gradually lowered. The growth of
traffic may be trusted to keep the total earnings of the companies'
present plants at the amount at which they now stand, in spite of
these reductions of rates; and enlargements of the plants may be
permitted to earn further sums which will attract capital and keep the
service abreast of the public need. All this will require expert skill
of a very high order. For the purpose of the present work it is enough
to say that such a course as this is the only one which will insure in
transportation the results which competition elsewhere yields. It will
secure both rates and service which the civil law calls "reasonable"
and economic law calls "natural."



What an economist wishes first to know concerning the organization of
labor is whether it is a natural phenomenon which should be welcomed
and left to itself. Does it help to establish wages on the basis of
the productivity of labor, and does it do it without much reducing
that productivity? We shall find that it works both well and ill in
these particulars and needs close study and careful regulation.

What laborers themselves ask concerning the organization of men of
their class is simply what power it has to raise their own wages; and
we shall shortly find that it has a certain power when it does not
invoke the principle of monopoly and a much larger power when it does
so. We shall find that the benefit from mere organization may be
extended to the great majority of laborers, while that which depends
on monopoly is confined to relatively few and involves an injury to
the remainder.

_The Static Standard of Wages of Unorganized Labor._--In that static
state toward which society is always tending, and in which the normal
standard of wages is completely realized, men are supposed to get all
that they produce. The law of marginal productivity of labor works, as
it were, _in vacuo_, and gives an ideally perfect result. Every unit
of labor receives what a marginal unit produces.

_Actual Pay of Unorganized Labor._--A static assumption excludes
enforced idleness on the part of able-bodied men. The changes which
throw such men out of employment are not taking place, and there is no
reserve of efficient but idle labor. In the actual state, which is
highly dynamic, such a supply of unemployed labor is always at hand,
and it is neither possible nor normal that it should be altogether
absent. The well-being of workers requires that progress should go on,
and it cannot do so without causing some temporary displacements of
laborers. Though no individual were long out of employment,--though a
particular man were in this condition only briefly and during the
period occupied by a transit from one occupation to another,--there
would always be in the general market some unemployed men. If we throw
out of account those who are idle because of personal disabilities, it
will remain true that really efficient men can nearly always be had,
if only a few are at one time needed. The presence of even a few men
able to do good work and not able to get employment is often
sufficient to make individual bargaining work unfairly to the laborer.
When the employing of one man is in question, the employer has other
alternatives, and the man may not have them. The employer may much
more readily set men bidding against each other for a vacant place
than any of the men can set employers bidding against each other for
an idle man. This strategic inequality between the parties in the wage
contract becomes greater as the supply of unemployed men becomes
larger. At some times and places it may force the pay of many workmen
downward toward a minimum set by what the unemployed will consent to

_The Effect of Local Organization._--Organization means collective
bargaining and tends to equalize the strategic positions of men and
employers. Where an entire force of workers must be dealt with at a
time, the employer has not the alternative ready to his hand which he
would have if he had only to employ a single one. If his employees
strike, he cannot at once secure another force large and efficient
enough to meet his needs. If his men allow their places one by one to
be filled, the strike will be disastrous to them, indeed, but it will
also be a misfortune for the employer. His new force will be inferior
to his old one, first, because many of the new men will be personally
inferior to the old ones, and secondly, because as a body they lack
effective training and will not work together as efficiently as did
the old force. He can afford to pay for the disciplined workers the
amount that the new force will produce with two plus marks
attached--one representing the superior personal quality of the former
employees and the other representing the value of discipline. In other
words, he can afford to make two distinct additions to the amount that
unemployed men are worth to him in order to retain his old employees.
This is on the supposition that it is possible to gather from the
force of idle men enough to operate a single establishment. Without
organization and by means of individual bargaining, wages are drawn
downward toward the level set by what idle men will accept, which may
be less than they will produce after they receive employment and will
surely be less than they will produce after they have developed their
full efficiency. With organization which is local only, and with
collective bargaining that goes only to the extent of adjusting the
pay of men in one establishment, this pay comes nearer to the standard
set by the productivity of labor than it would if bargains were
individually made. The employer balances in his mind the value of a
new and raw force and the value of a selected and disciplined force,
measures the difference between these values, and will often pay a
rate that is between the two amounts and under average conditions is
likely to approach the larger of them.

_Wages as adjusted by a General Organization of Labor in a
Subgroup._--Where organization goes to the length of uniting all the
employees in a particular industry or subgroup, the situation is
unlike the foregoing in an important particular. No quick filling of
the places which the men may vacate with altogether new workers is
possible. The employers are not so situated that they can compare the
old force with a new one, measure the difference in their values, and
govern their conduct accordingly. The training of an entirely new
force is indeed a remote possibility, if the business can wait for it,
but it can seldom do this; and a strike that runs through a subgroup
presents to employers the alternative of winning the workers by
concessions or allowing their business to stop. If it stops, it
becomes a question of endurance between the employer and the
employees, in which the employer has the advantage so long as the
public does not interfere. We shall recur to this condition when we
study the effectiveness of strikes and boycotts under various
conditions. Under all three of the conditions we have just described,
the static standard of wages--the final productivity of social
labor--still exists; and the actual pay of labor tends toward it, but
differs from it by varying amounts, according as labor is unorganized,
locally organized, or organized throughout a subgroup. In the first
case the worker may get materially less than the standard amount; in
the second case he may get something closely approaching it; and in
the third case, for reasons to which we shall later give attention, he
may be able to get the full amount and somewhat more. A particular
employment which is strongly organized and which makes the utmost use
of its organization is often able to carry the pay of its employees to
a level that is distinctly above that set by the productive power of
_marginal social_ labor. Nevertheless, the amount of this overplus
which the favored worker gets is limited, and the standard fixed by
marginal productivity is one on which the pay of these workers and of
all others depends, though it may not coincide with it.

_The Power of a Universal Organization of Labor._--In the days when
the wages fund theory held sway it was believed that organization
could not materially advance the interests of labor as a whole, since
it could not add anything to the fund which was destined in any case
to be divided among the laborers. Now that another theory of wages is
generally held, it is still clear that what organization can do for
the entire working class is limited. By no possibility can it insure a
rate of pay that will permanently exceed the product of labor, since
employers would then be interested in reducing the number of their
workmen and so raising their product _per capita_ to the level of
their pay. This would result in a large force of idle laborers, whose
competition would have its depressing effect on the labor market. Up
to the natural limit set by the specific product of labor a universal
organization might successfully carry its demands. Moreover, this
result would require no use of force--no "slugging" of non-unionists,
since there would be none to be slugged. The mere fact of a universal
organization maintaining discipline and preventing breaks within its
own ranks would suffice for the end in view--the maintenance of pay
that should conform to its natural standard. The supposition of a
universal organization of labor has at present only a theoretical
interest. What society has to deal with is an organization that
includes a small minority of workers and is composed of separate
unions which are endeavoring each to promote the interests of the men
of its own craft. It is a type of organization which, instead of
uniting all workers, makes the sharpest division between those in the
unions and those outside of them, and creates a lesser opposition
between the different unions themselves.

_Organized Labor and Monopoly._--Actual trade unions do not always
rely upon mere collective bargaining. They sometimes aim to secure a
partial monopoly of their fields of labor; and as it is impossible to
do this if unemployed men or men from other fields of employment are
free to enter their territory, they must be kept out of it. They can
only be kept out by some use of force, and coercion applied by the
workers in a well-paid field to the men who seek to enter it during a
strike is a part of the strategy of trade unions.

_The Ground on which the Use of Force is Justified._--Organized
laborers claim a right of tenure of their positions; they claim to own
them much as a man, by right of prior occupation, owns a homestead.
They claim the same right to repel intruders from their field of
employment that a man has to drive interlopers from his grounds. "Thou
shalt not take another man's job" is a recognized commandment on which
they claim the right to act.

_The Mode of Justifying the Use of the Force in Guarding Vacated
Positions._--Coercion is a comprehensive term and does not always
involve personal assault. What it inflicts on the recalcitrant may
range all the way from social opprobrium and boycotting to literal
striking, maiming, or killing. In every case it involves some injury
and is contrary to the spirit of the law, unless the right of tenure
can be fully established. If the employer has no right to turn off his
men and take new ones, and if the new ones have no right to come at
his invitation, there is a rude analogy between the effort of the
non-union men to get the places and an effort to get away a man's
farm. It is a matter of course that the employer may rightfully
discharge men who prove worthless and fail to render the service which
is contracted for. The question is whether he has the right to dismiss
them when they will render the service only on what seem to him
exorbitant terms. On this point the verdict of his own reason is
extremely clear. To offer to render the service only on exorbitant
terms has the same effect as to offer an inferior service on the
original terms, and the right of tenure which the workingmen claim, if
it exists at all, is contingent on the rendering of effective service
on reasonable terms. On the supposition that they have owned their
places at all they seem to their employer to have forfeited them when
they have insisted on too high wages. On this point, however, the
men's reason may give an opposite verdict, though it is based on the
same principle. To them the terms they insist on may appear
reasonable, and they then think that, because they are so, their
ownership of their positions is valid and that other claimants are
usurpers. Both parties in the dispute base their contentions on the
supposed reasonableness of the terms they demand.

_The Necessity for Knowing what Terms are Reasonable._--A momentous
question both for society and for the working people is whether there
is any way of ascertaining what terms are reasonable and securing
conformity to them. What we shall find is that it is possible to keep
in view the natural standard of wages, as in an early chapter we have
defined it, and that it is possible, in the midst of the struggle of
massed capital with massed labor, to secure a certain degree of
conformity to this standard. It is possible so to shape the system
that a wide difference between actual pay and standard pay will not
exist, and that wages will everywhere tend toward their natural
levels, as they did under that earlier régime before either the
capital or the labor of a subgroup acted collectively.

_The Attitude of the Community toward Striking Laborers._--So long as
a local community sympathizes with the worker's dread of competition
and tolerates his claim of ownership of his position, it does not
utterly condemn and repress every use of force in asserting his
claim. The local public is partly composed of friends or neighbors of
the striking worker and is reluctant to interfere with the worker's
effort to defend what he considers his property--that is, his right of
employment in a business to which he is accustomed. The community
sympathizes with his fear of the hardship which may result when
employers freely utilize idle labor as a means of defeating strikes.
On the other hand, even a local community realizes that much
toleration of force means anarchy. If the violence is not resisted or
repressed, the strikers acquire a monopoly that is not dependent on
the justice of their claims. The whole question of reasonableness in
the terms demanded is forcibly set aside, and the pay that is
established becomes, not whatever a calm verdict of disinterested
persons would approve, but what workers by brute force can get. Even a
local public is unwilling to see the social order completely subverted
and mob rule substituted, and it usually interferes when violence goes
to that length; but in its unwillingness completely to repress
disorder, on the one hand, or to leave it wholly unopposed, on the
other, a local government pursues a wavering policy, now repressing
anarchy and again leaving it to gather headway. It seldom affords full
protection to the non-union men who work during a strike. Moreover, it
is the habit of state governments not to interfere with local affairs
until the public peace is endangered, and therefore not until the
coercion of free laborers has gone to great lengths. The federal
government only intervenes in great emergencies. Non-union men working
during a strike are left largely in the hands of the local community,
which often tolerates enough of violence to give to strikers a
measure of monopolistic power. The wavering policy of the local
community in regard to preserving the peace expresses a corresponding
mental wavering. The public obeys no clear principle of action in this
connection and merely allows some "slugging" when it sympathizes with
strikers, but not, as a rule, when it does not. We have to see whether
this rule has in it any germ of a legitimate policy.

_The Sole Mode of Escape._--The sympathy in the case depends, as we
have seen, on the off-hand impression of the people as to the
reasonableness of the strikers' demands; and for such an impression
there may or may not be an adequate ground. It is evident that no
authoritative verdict has in these cases been pronounced. The only
escape from the intolerable situation which is thus created is by
testing the equity of the laborer's demands and adjudicating his claim
to a tenure of his position. The possible method of doing this we will
presently examine. It is clear in advance that what is to be done is
to determine what pay is reasonable. The worker cannot rightfully
retain the ownership of his job if he does not work properly; and he
cannot so retain it if he works properly and claims exorbitant pay.
Fair dealing between employer and employed must be attained if his
tenure is even tacitly recognized. The worker who accepts a rate of
pay that is pronounced reasonable may safely be confirmed in his place
and protected from any persecution on the part of his employers. The
worker who refuses a rate which some competent authority has
pronounced reasonable thereby forfeits his right of tenure in a
definitive way. His place is clearly the property of whoever will take
it, and the state is bound so completely to preserve order as to make
a new worker perfectly secure from injury. This means that it must do
intelligently and thoroughly what a local community weakly tries to do
when it lets strikers guard their positions if it sympathizes with
their cause, and represses such attempts when it does not. The
sympathy needs to be crystallized into a clear verdict as to the
rightfulness or wrongfulness of the rate of pay demanded, and the
local toleration of violence in cases where the men's demands appear
just needs to become an open and frank assertion of their right to
employment on the terms demanded; while the tardy repression of the
violence in cases in which the demands seem unjust needs to become a
prompt and complete repression of it.

_The Preservation of the Mobility of Labor Indispensable._--Any use of
force, anything, however slight, that deprives labor of its mobility,
destroys the condition on which the law of wages is predicated. A
perfectly free flow of labor from point to point in the industrial
system is essential to a static state, and to any approximate
conformity of actual wages to the static standard in a dynamic state.
The plan which divides labor into sections and arrays one part of the
force against another makes realization of natural wages impossible.
While all differences of pay which correspond to differences of
productive power are normal, those which are based on a monopolizing
of fields of labor by some and the exclusion of others are abnormal.
They cause the rich fields to be surrounded by impassable walls and
force the bulk of the population to work on the outer and poorer

_The Wide Range of Difference between the Pay of Different Classes of
Laborers under Trade Unions._--The possible range of the rise of pay
which monopoly may insure for certain laborers is far greater than
that which any action can secure for labor as a whole. Mere collective
bargaining makes some difference, indeed, but where there is no
attempt to exclude from a favored field workers of the poorly paid
class, the range of difference is not great. To double the pay of
laborers of every class would require more than the entire income of
society, and yet it is possible for a few workers to make as large a
gain as this. Some organizations without monopoly may keep the actual
pay of labor somewhat near to its theoretical standard. With monopoly
they may carry it far above the standard set by the marginal
productivity of social labor.

_The Differing Efficiency of Organization as used against Different
Classes of Employers._--When employers are acting independently, a
trade union which deals with them one at a time may very easily bring
the pay of its members up to a certain average standard. A strike
against a single producer may be very disastrous for him, since it may
cause him to lose his customers. If the general state of business is
good, he will pay all that he can rather than see business drift away
from him, but what he can pay is somewhat strictly limited. He cannot
safely give more than what is given by most of his competitors.
Organization in such a case is a good equalizer of pay, and as its
power is used against different employers successively, it suffices to
raise general pay toward or to a standard set by the productivity of
the labor. Moreover, as a rule, it can accomplish this without any
appeal to violence. A modest and reasonable demand enforced by a
wholly peaceable strike is likely to be conceded.

_The Power of a Strike against All Entrepreneurs in a Subgroup._--A
strike against employers in an entire subgroup may gain more for the
workmen, but the more ambitious effort encounters stronger resistance.
The employers, we assume, are competing still and have not the power
which a monopoly would give them to raise the prices of their
products. Nevertheless, they can concede somewhat more when they act
together than one of them could concede separately. A concurrent
raising of prices is entirely possible without any positive
combination of the producers who follow such a course. Moreover, the
strike itself, if it continues for any length of time, creates a
scarcity of the products and a rise of prices. Though the employers in
the end may concede what their workers demand, or some part of it, the
settlement may not cost them anything, since the advance in prices may
enable them to take all that they give their men out of the pockets of
the public. The strike by a trade union against competing employers
has as one ground of early success the employers' distrust of each
other. The danger is that as soon as prices become at all firm, one or
another of the employers may quickly make terms with his men in order
to seize the opportunity for new business. For this very reason,
however, the range of possible gains from a strike running through a
whole subgroup is smaller than it would be if the employers were
organized, so that all of them could safely wait for a larger rise of
prices before making terms with their men. The possible increase of
pay without a combination on the employers' side is distinctly larger
than any which a strike against a single employer can usually secure.

_The Power of a Strike against a Union of Employers._--Still keeping
the supposition that there is no coercion invoked and that strikes are
quite orderly, we find that they may gain more when employers are
consolidated than when they are not so, but that they are likely to
encounter still greater resistance. The demand--"Pay us more and
charge it to the public"--may be conceded, and probably will be so if
the employers dread the hostility of their own men and the action of
the state in enforcing a resumption of business. If they have no such
dread, their power to resist a strike is much greater by reason of
consolidation. They can safely hold out long if the public will let
them do it. No one of them is in any danger of seeing others take his
customers. Their hold upon their constituency is secure, and their
power to tax the constituency and make it pay for whatever a strike
may cost is very great. A strike under such circumstances may win much
for the men or it may win nothing whatever, and the difference between
these results is mainly determined by the attitude of the people. If
the government will hold its hands and let the producers work their
will, they may (1) allow the strike to run for a time, concede
something to their men, and raise prices enough to recoup themselves
with a surplus; or else (2) they may let the strike run longer, till
the men are tired out, take them back without concessions, and still
put the same tax on the public as in the other case.

_Effectiveness of Coercion as used against Non-union Men._--As a
peaceful strike has different possibilities according as it is used
against a single producer, a body of competing producers, or a
consolidation of producers, so coercion employed against independent
workers has correspondingly different effects in the three cases. When
it is used in the case of a strike of the first class, it enables the
men to carry their point more quickly, but does not materially
increase the amount they can gain. If the independent producer is
unable to run his mill till he makes terms with his original workers,
he will be in greater haste to make terms, but the amount he can yield
is limited almost as closely as before by the prevailing rate of pay.

In the case of a strike of the second class which runs through a
subgroup in which producers are still without union, coercion adds
greatly to what the men may gain. It may fix and enforce a rate of pay
which all employers must give, and circumstances will compel them to
charge it to the public in whole or in part. The marginal producers
who have no net profits must charge the whole advance to the public or
go out of business, and the result may be that some of them may go
out. The advance in the rate of pay conceded by others may come partly
out of their own profits and partly out of consumers' pockets.

With employers in a great consolidation the possible advance of wages
is at its maximum. The employers are in a position to charge to the
public all that they give to the men, and more. If the state allows
them to do it, they may thrive by repeated strikes. Whether their men
thrive or not depends on their power to bar other labor from their
field and to live without work long enough to induce their employers
to yield.

The effect of coercion on the wages of non-union laborers means a
lowering of their pay. It confines them to the less productive field
which is open to them.

  1. _______  Wages of union labor which monopolizes its field
              and deals with competing employers.

  2. _________________  Wages obtainable by union without monopoly
                        approximating the natural rate.

  3. -----------------  Level of pay with no unions in the field.

  4.         _________  Wages of non-union labor excluded from
                        the more productive fields.

  5. _________________  Base from which wages are measured.

The height of lines 1, 2, 3, and 4, above the base line 5, measures
wages, and the length of the lines rudely indicates the numbers of
workmen in different classes. The dotted lines above and below line 1
represent what union labor which maintains by force a monopoly of its
field may be able to get from employers who are in a combination. It
may be more than competing employers would give or it may be less.

For men in strong unions who have _carte blanche_ to defend their
fields, the policy of leaving other labor to its fate is
overwhelmingly the more profitable. With a choice between gaining a
hundred per cent in wages for ourselves or ten per cent for working
humanity, self-interest speaks decisively in favor of the former

In connection with the actual dealings of workmen with their employers
the following are the principal facts:--

1. When labor makes its bargain with employers without organization on
its own side, the parties in the transaction are not on equal terms
and wages are unduly depressed. The individual laborer offers what he
is forced to sell, and the employer is not forced to buy. Delay may
mean privation for the one party and no great inconvenience or loss
for the other. If there are within reach a body of necessitous men out
of employment and available for filling the positions for which
individual laborers are applying, the applicants are at a fatal

2. Collective bargaining is a partial remedy for this disability and
brings the pay of labor closer to its normal standard than, under
individual bargaining, it could possibly be, but does not, of itself,
enable one class of laborers to raise themselves to a position which
is very much above that of a majority of the others. It gives to no
class of workers any monopoly of their field or any power to tax the
public or oppress men who are unorganized. It is a normal and
democratic measure.

3. Many actual trade unions do not depend upon mere collective
bargaining, but aim to secure a special gain through a partial
monopoly of their several fields of labor. Their policy is exclusive
in that it tries to limit the number of men who are admitted to the
unions and to prevent non-union men from working at the craft.

4. In the establishing of such control of fields of labor some force
is employed in order to bar from the fields men who would gladly enter
them. "Slugging" is a frequent part of the strategy used when strikes
are pending, and this elastic term covers a wide range of deterrent
arguments. Whatever goes beyond a verbal demand or insult to the man
or his family and involves any use of physical force is included in
the meaning of the term, and the action ranges from small injuries to
the clubbings which maim and kill. Moreover, social ostracism is to
be rated as tantamount to force as a means of preventing a free
movement of labor.

5. When the resort to force is defended, it is on the ground that the
organized laborers have a right of tenure of their positions and that
they may vacate them and still hold them as quasi-property. One man
should not "take another man's job" even after the other man has left
it. Acting on this claim, union laborers treat men who attempt to
occupy the vacated places much as a man would treat intruders on his
land or in his house. It is, as is claimed, a case in which a man must
be his own policeman and protect his property.

6. The public sympathizes with the worker's dread of the competition
which he encounters when unemployed men are gathered from near and far
and set working in strikers' positions. It even tolerates, in a way,
his claim of quasi-ownership of his position, and though it condemns
the violence with which he enforces the claim, it does not summarily
repress the violence. It is without a well-defined policy and often
weakly permits disorders to grow into anarchy which only troops can
quell. Local governments are often reluctant to lay vigorous hands on
"sluggers," even when to do so would forestall the necessity for
severer measures. This is due to an instinctive feeling that hardship
and injustice may result from allowing employers to utilize a reserve
of idle labor as a means of depressing their employees' wages and
defeating strikes.

7. It is realized, on the other hand, that giving to violence a free
rein means an amount of anarchy which no state can tolerate, that
non-union laborers have, under the law, a claim to protection, and
that allowing strikers to drive them from the field is permitting a
monopoly to be established by crime.

8. The reluctance promptly to repress violence, on the one hand, or to
leave it unopposed, on the other, expresses a mental wavering, since
the state perceives and follows no clear principle in this connection.
It has neither defined the nature and extent of laborers' rights nor
provided for any orderly process for securing them.

9. The only escape from this situation is by arbitration. It is
necessary to adjudicate the laborer's demand for wages and to legalize
his tenure of place on condition that he shall accept a just rate of
pay. The state is bound to ascertain and declare what rate is just, to
confirm the workers in their positions when they accept it, and to
cause them to forfeit their right of tenure if they refuse it. If the
workers thus forfeit their claim, their positions are clearly open to
whoever will take them, and the state is bound to protect the men who
do this. Such appears to be the present situation, and an essential
feature of it is the need of ascertaining on what principle a court of
arbitration should proceed in determining what rate of pay is just.



The state needs an authoritative mode of determining what rate of pay
is "reasonable." This duty is often imposed on boards of arbitration,
for whose guidance no definite principle of justice has as yet been
prescribed. Such a board has to depend on its own intuitions. It
approaches its difficult work, having no legal rule for reaching a
decision, and yet compelled, if possible, to reach one which will
actually settle the dispute referred to it and enable production to go
on. It must try, in the verdict it pronounces, to satisfy its own
sense of equity. What such a tribunal has, in most cases, actually
done has been to make compromises, and this has measurably
accomplished both of these ends. A verdict that "splits the
difference" between the men's demand and their employers' is most
likely to cause work to be resumed; and on the ground that each party
is probably claiming too much, and that justice lies between the
claims, it insures a rude approach to fairness. This action has caused
unfavorable criticism of the whole system of arbitration, on the
ground that it abandons the effort to reach absolute justice and tries
chiefly to end the quarrel on any terms, and also that by giving
strikers a part of what they demand, it encourages them to strike
again and secure more. We have to see whether a court can do better
than this and whether such a crude procedure has tended at all toward
putting wages on a normal basis.

_Why a Court cannot reduce Wages in Favored Fields to the Rate
prevailing at the Margin of Employment._--A tribunal of arbitration,
which has to deal with consolidated capital and organized labor, acts
in a field where both profits and wages are higher than they are in
most departments of industry. Should a court then take as its standard
of just wages what unorganized labor gets when it works for
independent employers? That would usually level the pay of the class
of laborers it is dealing with to the standard set by a much more
poorly paid class.

Should the court, on the other hand, take as the just rate the one
that generally prevails where employers are organized in trusts and
workmen in exclusive unions? That would be legalizing the result of
monopoly. The court, in such a case, knows that the profits of the
business are increased by the employers' monopoly and wages by the
workmen's; and yet it will not pull down the rate of pay to the level
prevailing where no combinations exist. On the other hand, to legalize
any high rate of wages, which is made possible only by a double
monopoly, would seem to be equally unjust.

_The Power of Monopolistic Trade Unions under Different
Conditions._--Arbitrators have to deal with trade unions which appeal
to some kind of force in defending their right of possession of a
field of labor. They make their own demands, strike, and compel rivals
to stay out of the positions they vacate. When this policy is
tolerated, they secure an exceptionally high rate of pay.

We may represent the product of labor and its pay in the different
occupations by the accompanying diagram.


The heavy line _AA´_ represents, by its height at different points
above the base line _EE´_, the product that is specifically imputable
to labor in different employments. The part of the figure where the
line is far above _EE´_ represents the condition where, on the
employers' side, monopolies are established; while on the right of the
figure, where the line has descended and is slowly approaching the
base, the condition is represented in which employers are competing
with each other, and many of them are selling their products at prices
that only cover the cost of creating them. A unit of labor working for
a monopoly creates as large a physical product as it does elsewhere.
It turns out as many tons of steel or cases of cloth, etc., as though
no monopoly existed, and the price of the goods is high because less
labor is employed than would be employed under competition and fewer
goods are produced. The actual product of the unit of labor, as
measured in dollars, is enhanced by the employers' monopoly. _BB´_
represents, by its varying distance above _EE´_, what organized labor
can get under the different conditions. On the left it forces the
trusts to share gains with it, and gets a high rate of pay; while on
the right, where employers are not in combination and there are no
such great gains to draw on, it gets less, although at the extreme
right it gets all that it produces. _DD´_ represents what unorganized
labor can get under the different conditions, and it is usually
somewhat more where trusts employ it than it is elsewhere. The dotted
line _CC´_ represents the product of labor as it would be if it were
equalized in the different fields.

_The Parties interested in a Dispute in which Both Labor and Capital
are Organized._--We can best deal with the problem of the adjustment
of wages by arbitration if we approach it in a region where
organization is strong, both on the side of labor and on that of
capital, and disturbances of the natural system are greatest. The
struggle that here goes on is, in a way, triangular. Organized labor
contends against its own employers, on the one hand, and against
unorganized labor, on the other; and the part which develops the
greatest bitterness of feeling and the most violence is the strife
between labor and labor--between the trade unionists who strike and
the men who attempt to occupy their positions. The union is more
tolerant of the employer's action in driving a hard bargain than it is
of the "scab's" action in "taking another man's job."

_The Public a Fourth Party in the Case._--The three parties just
named--employers, organized employees, and applicants for places--are
not the only parties whom the dispute affects. The public has a vital
relation to it, and in a true sense its interest and rights are
supreme. The public has a right to demand that production should not
be interrupted, and that the supply of necessary articles should not
be cut off; and it is in line with this demand that arbitrators seek
first for an award that the contending parties will be willing to

_Two Issues needing Settlement._--In the immediate contest over the
adjustment of pay, the three parties first named are the ones
primarily involved. In discharging its duty as the preserver of
justice, the court finds two issues which need to be settled rightly.
The dispute between _entrepreneurs_ and workmen must be rightly
adjusted, and the issue between the workmen and other labor must be
so. The power of the state cannot properly be used (1) to force from
employers more than they can afford to give, or (2) to exclude from
any field of employment free laborers who are able and willing to do
the required work. Arbitrators make their awards with an eye to
conditions within the business and to the state of the labor market.
Instinctively an arbitrator, in trying to satisfy his sense of
justice, thinks first of the amount that the business yields. The men
must not take the whole income from the business, leaving to the
_entrepreneur_ nothing wherewith to meet the claim for interest.
Without doing this, however, they may ask for much more than other
laborers will accept, and the question arises whether this should be
conceded to them. In merely putting the relation of workmen to
employers on a proper footing, the tribunal may leave the relation of
the strikers to other workmen as unsatisfactory as it has been. It
appears that the tribunal of arbitration cannot by one act settle the
two issues that are presented to it. If it gives to the men what seems
like a fair share of the product of the business which employs them,
it gives more than most workers get and more than the law of final
productivity of labor would afford. Yet without a ruthless cutting
down of the pay of favored laborers it cannot apply the standard of
final social productivity of labor. If it applies this standard and
cuts down the men's actual pay, they will refuse to abide by the
decision; and if it tries to obtain a power of compulsion and make the
men accept its decisions, they will try--probably successfully--to
defeat the attempt. A system of compulsory arbitration that should go
to the length of forcibly equalizing the wages paid to men of like
ability in different occupations, would not be tolerated in a
democratic community.

_The Difficulty of Applying the Test of Final Productivity._--The law
of final productivity works most efficiently when it works
automatically, as it does when competing employers make the best
bargains they can with locally organized laborers. The results, then,
approach the theoretical standard, though they do not entirely
coincide with it. The law, however, cannot be rigorously applied by a
tribunal which is fixing a rate of pay by its own conscious act. How
can the judges directly ascertain how much a final increment of social
labor produces?

Employers, indeed, do make such tests. An estimate of how much a few
additional laborers would add to the product of a business often has,
in some way, to be made, and employers manage to make it; but
subsequent experience is necessary for verifying their judgment. A
rule of pay, governed by marginal productivity, results from the
action spontaneously taken by a myriad of employers, who enlarge their
working forces when they find that they gain thereby, and reduce them
when they lose. Of course no court could do anything of this kind. No
department of industry will turn itself into a laboratory for testing
the productive power of labor. It is clear that the procedure must be
much simpler and cruder; and a vital question is whether a board of
arbitration, proceeding as it must do, is under any influence that
impels it to render decisions which, in any degree, conform to the
theoretical standard of pay. Does the economic law of wages operate at
all when civil law steps in to the extent of creating any tribunal of
arbitration? We shall see.

_The Necessity for Some Standard on which Arbitrators may base
Awards._--When a board of arbitration tries to do anything more than
to end a quarrel, it must seek for some principle of justice. If it is
dealing with a favored class of laborers, it finds two extreme limits
between which its awards must fall, namely (1) the product which the
business yields in excess of simple interest on the capital, and (2)
the wages that unorganized laborers may offer to accept. It is
possible that the workmen may demand the former amount and the
employers may offer the latter; and if so, compromising is a
rule-of-thumb mode of doing justice. In the case of a strong union and
a highly profitable business the employers may offer more than the
minimum amount, and the award that is a compromise between the terms
of the contending parties will then be well above that which is a fair
mean between the possible extremes; yet it does not appear that it
really conforms to any ethical principle.

_Average Wages as a Standard._--Another possible basis of an award is
the average rate of wages prevailing; but it has no claim as a
standard of exact justice and is very far from being workable. Wages
vary from a very high rate to a very low one; and the highest rate is
that which prevails where a trade union which is strong enough to keep
men out of its field of employment deals with a trust which is strong
enough to keep rival producers out of its field of business. Under
such conditions shall a court average this rate and a very low one,
and reason that a mean thus arrived at is a legitimate standard of pay
or one that would be realized if no monopolies existed? There is no
evidence that this is the accurate fact, and there is every evidence
that a verdict attained in this way would be rejected. It would cut
down the pay that the favored workers have been getting, not to
mention denying them the increase they are striking for. On the other
hand, the lowest rates prevail where no permanent organizations exist;
and if a strike should arise here, should the tribunal take an average
rate of pay as its standard? That would greatly increase the rate that
prevails in the region where it is acting, and would give the men more
than most of their employers could afford. It would discard the
necessary rule of keeping within the limit of what an industry can pay
without seeing many of its shops and mills closed. Yet a court which
refused to raise the pay of the lowest class at all would seem to
accept the bad results of monopoly; for it would ratify the hard
arrangements which workers who are excluded from the better fields are
forced to accept.

_A Court of Arbitration not the Agency for Rectifying General Evils
due to Monopoly._--It will be seen that the difficulty we discover in
the way of a wholly satisfactory action by the court is caused by a
tacit demand that it shall undo the results of monopoly itself. We
instinctively say to ourselves that the court must insist on doing
ultimate justice, and that all rates perverted by monopoly are unjust.
The arbitrators should pull down the high rates, raise the low ones,
and create such an approach to uniformity as would be realized if
labor were as perfectly mobile as a static assumption requires. To do
this would give some laborers much less than their employers can
afford to pay and less than they often do pay; while it would be
giving to others more than their employers can pay without bankrupting
themselves. If such levelling is to be done, it must be done by some
other agency than a board of arbitration.

_The Attitude of the Public toward a Strike by Employees of a
Monopoly._--If we turn from a formal tribunal to the court of public
opinion, we find a like state of affairs. There is no danger whatever
that the public will justify cutting down the wages now received by
men in the employment of a monopoly to a much lower level. That in
itself would not right the wrongs of the poorly paid workers or those
of the public itself. The employer would go on getting high prices for
his products and would pocket the new gain which the reduction of
wages gave him. If a great corporation is now taxing the public, even
those who suffer would rather see the proceeds of the grab shared with
the men than see it all held by the employing corporation. It is,
indeed, true that if a tribunal were to give the men an _increased_
share of what the monopoly is getting, the employing company would try
to recoup itself from the public by raising prices still higher; and,
if it were to give a reduced share, the company might enlarge its
business and make its prices a shade lower. Giving to the men a share
of the grab made by their employer does indirectly cause a certain
increase of the injury done to others, and withdrawing a share might
slightly lessen the injury. The public would rather see the higher
wages paid, and take some chance of this minor and indirect injury,
than see the employing company pocket all that it exacts from the

_Monopoly Prices as affected by an Increase of Wages._--Arbitration
often authorizes a rate of pay based on the profits of an employers'
monopoly; and yet a tribunal of this kind must not, and will not, make
itself the accomplice of any monopoly by making its position more
secure. The policy of every public institution must, and will, be
designed to help make an end of every such outlaw that now has a
foothold in the field of business. Yet any plan which would force a
monopolistic employer to give to his men an increased share of the
"grab" which he makes from the pockets of consumers tends to increase
the amount of the grab if the employer is entirely secure in his
position. A monopoly that is thus safe from interference tries to put
the price of each of its products at the point where the largest net
revenue is afforded. If distance along the line _AG_ measures the
supply of a commodity and vertical distance from it measures price,
_DF_ will be the price curve of a commodity, as it is offered in
increasing amounts. _AD_ will be the price when one unit is offered,
and _GF_ will be the price when the full amount represented by the
line _AG_ is produced. The price will then stand at the cost of
producing the article. When a monopoly is firmly established, it will
seek to get the largest net profit that can be had, and a consistent
execution of the plan would reduce the output from the amount measured
by _AG_ to that measured by _AH_. The price would then become _HE_
and the net profit the amount of the area _EB_. If wages are so raised
that the cost becomes _G´F´_, the net profit becomes _EB´_. This
profit can be increased by further reducing the product to the amount
_AH´_, putting the price at _H´E´_, and the net profit _E´B´_, which
is larger than _EB´_. If an independent producer can employ non-union
labor and create the goods at the cost _GF_, and market them without
reducing the price much below the level indicated by _H´E´_, he can
make on each unit of product a profit nearly equal to _I´E´_. This
fact makes the monopoly cautious about raising its price to the level
_H´E´_. A tribunal of arbitration may somewhat raise wages without
fearing such an increase of prices. By a crude and instinctive
judgment the court will hit upon some level of wages which falls well
within the limit of what the monopoly can pay and is above the amount
which marginal social labor gets.


_The Probable Result of a Strike as a Standard for an Award._--Let us
see what would happen if a board of arbitration should abandon all
effort to level out the general inequalities in wages, and try chiefly
to end quarrels and avert long-continued strikes. With this in view it
might aim to give the men whatever they would be likely to gain by
means of the strike. In a true sense this mode of procedure is more
nearly scientific than either of the others. Any tribunal of voluntary
arbitration will aim to content both parties sufficiently to prevent
an interruption of business. The men may consent to take somewhat less
than they hope to get by a successful strike; and the employers may be
willing to pay somewhat more than they would at the end of a
successful lockout. The probable outcome of the struggle may be
differently estimated by the contending parties, and if so, an actual
struggle will end by making employers pay more and the workmen take
less than they had severally expected to do. If this amount can be
awarded at the outset and the struggle precluded, all parties will be
gainers by the continuance of business, unless the employers desire a
strike for the sake of making their products scarce and dear.

_When the Probable Results of a Strike afford an Unfair Standard of
Wages._--Where monopolies exist and trade unions rely on violence in
carrying their point, it would not be fair to establish a permanent
rule of wages based on the amounts that strikes so conducted secure.
Such strikes depend for success on the violent exclusion of non-union
men; and actually to give permanence to rates so gained would be to
fasten on the majority of workers the disabilities under which they
now labor, and to perpetuate the gains of a twofold monopoly. On the
other hand, if the court should make its award conform to the probable
result of a strike which should be general in the trade, but should
not resort to any violence, the procedure would be natural and would
base itself, in an unconscious way, on the true standard of wages.
Such a general strike, by its mere magnitude, would preclude the
possibility of any immediate filling of the vacated places by men at
the time out of employment; and yet the fact that non-union men were
not forcibly kept out of the trade would be an all-important feature
of the situation. If, when no strikes were pending, men could gain
admission to this field, there would be no true monopoly on the men's
side. The rule of giving, by arbitration, what a strike would secure
would remove the chance of cutting down the rate to that which
prevails in the more ill-paid employments, and would insure to the men
the rate that marginal workers in actual employment get plus the two
additional amounts spoken of at the beginning of the preceding
chapter. The marginal product of labor plus an amount for personal
superiority plus an amount for good organization would be the standard
to which wages in favored employments would conform; and it is as
nearly normal as any practicable standard would be. A free application
of it would reduce the wages of unions that thrive by the use of force
and would be opposed by such unions. If it were adopted, there is a
prospect that the awards would be rejected by the men until hard
experience should teach them to relinquish gains secured by violence.
Yet a tribunal that should adopt this standard would allow workmen to
retain every advantage that organization can afford without a
violation of the criminal law. Its guide in making awards would be the
pay which the best unions lawfully get in trades akin to the one in
whose case they were acting.

In dealing with a union which is not a true monopoly and does not
depend on force, arbitrators may safely award what an actual strike
would probably secure, and the simple plan of compromising gives an
approximation to this amount. What the men will accept and the
employers will give is about what a strike would extort. Where a
monopoly of the field of labor exists and force is used to protect
it, a compromise which anticipates the probable result of a strike
concedes what could not otherwise be lawfully secured, and we have to
see whether this is a plan that a board of arbitration can properly

_Arbitration as affected by Employers' Monopolies._--We confine our
attention, for the present, to arbitration that has no power of
coercion behind it. A board may be formed which is compelled by
statute to investigate quarrels and announce fair terms of settlement,
but the contending parties may be allowed to do as they please about
accepting the awards. The most difficult case with which such a
tribunal would have to deal is that in which the employer has a
monopoly of a department of production, and a trade union has an
exclusive possession of its field of labor. The mere removal of the
employer's monopoly would so greatly simplify the situation as to
leave no ground for serious difficulty. With that out of the
way,--with potential competition doing the perfect work that under
good laws and good policing it ought to do,--the pay of laborers in
other employments would be somewhat higher, and extortionate profits
would be altogether absent. Profits based on special economy would
exist, as they should, but those which are filched unjustly from any
one's pocket would not exist. There would be likely to be, in most of
the subgroups, independent employers efficient enough to hold their
positions, but without any means of getting abnormal gains. These
would be marginal employers in their several subgroups, and their
returns would range about that static level at which the wages of
labor and the interest on capital would absorb them all. An award
based on what such employers could pay would express what other
employers would naturally pay, and it would be all that the subgroup
as a whole could concede without ruining some of its members, but it
would allow others to make something by special economies in
production. Productivity profits they would get and no others, and
these it is in every way expedient that they should be allowed to
enjoy. Suppressing employers' monopolies would remove much of the
difficulty connected with arbitration, and putting an end to violence
on the men's part would remove almost all the remainder.

With monopolies in the field it is quite otherwise. Their gains are
not of the kind that it is for the interest of the public to let them
keep. The public claims these sums on grounds of equity and
expediency. It is a perverted distribution that gives them to their
present recipients; and this fact threatens to involve more and more
the processes of production themselves. Centralization, without
monopoly, increases the product of industry; but the monopolistic
feature that often attends it partially paralyzes the producing
forces, and must be gotten rid of before there can be a normal income
to divide and a normal way of dividing it. _The court of arbitration
itself cannot get rid of it_, and it would do harm if it should try to
do so. Drastically to cut down wages that have been raised by the
power of monopoly would injure some workmen without materially helping
others, and it would benefit chiefly the monopolistic employers. Such
a policy would bring the entire system of arbitration to an end; for
it is partly a fear that arbitration would not leave to favorably
situated unions as much as they can now get by strikes and boycotts
that prevents the system from coming into vogue. The state can end
the monopoly, but it must do it by other measures than installing
courts of arbitration. In the interim--long or short, as the case may
be--before these measures will have their effect, it is necessary to
proceed on a plan of securing by awards something like what would
result from actual trials of strength. The effects of adjudication
will not, in this interim, be ideal, but it is necessary to accept
this fact and struggle the harder to obtain conditions that will
improve them.

_Abnormal Conditions which Arbitrators must Accept._--Crude force of
one sort or another would sometimes give to organized labor twice or
thrice as much as free labor can earn at the social margin of
production, and the public approaches the problem of adjustment while
this condition exists. It may be that a trust has crushed competition,
made large gains for itself, and made it possible to pay employees at
a high rate; while, on the other hand, a trade union has made itself
strong, put pressure on the employers, excluded free laborers, and
secured a share of the monopolistic spoils. Arbitrators, then,
whenever a strike is pending, may divide the spoils as a strike would
do, between masters and men. This will leave a few workers in
possession of a rich field and many hungry ones outside of it; and we
have asserted that the board should confirm the workmen's tenure of
place on the sole condition that they accept a rate of pay which it
shall authorize. In this case the arbitrators authorize a high rate,
while needy men stand ready to take a lower one. They confirm wages
based on the profits of monopoly, but look to the state as the power
which will get them out of their anomalous position, by making an end
of monopoly.

_Why Sharing a "Grab" already made is not an Aggravation of the
Evil._--While plunder is to be had, it is at least by one point fairer
that workers should have a share of it than that employers should have
it all. We have said that the court of arbitration finds two issues
needing settlement, namely, the relation of employers and employed
within the business, and that of laborers outside of this department
of industry to those within it. Only one of these issues is it capable
of settling, and it is by a true instinct and not merely from
expediency that arbitrators permit workmen to share in some degree the
gains of the monopoly that employs them. This is legitimate, however,
only on the condition that, by further measures, the gains of monopoly
be reduced.

_How Arbitration will be facilitated by the Suppression of
Monopolies._--In studying monopolies we discovered that the prices of
their goods do not entirely part company with their natural standards,
even when governments do not at all interfere with them. Potential
competition keeps these prices from rising above the standard of cost
by more than a certain margin. We shall see that if governments do
nothing in the way of controlling the contests over wages, the rates
that these yield will not be wholly unnatural. They will be held
within a certain distance from the standards. If too high wages are
exacted, the barriers will be broken down and competing laborers will
come into the favored fields. The potential competition of idle men
hangs as a menace over the heads of the too exacting trade unionists,
and enforces a measure of prudence in the wages demanded. If the
unions ask too much and strike in order to get it, the competition
which is now latent will become active, other men will take the
vacated places, and the struggle of force will begin. Slugging may
ensue and may go to the limit of a weak government's toleration. The
more complete is the exclusion of free labor, the higher is the rate
which organized labor secures; but this rate always falls within a
certain distance of the normal one, as that is fixed by the final
productivity of social labor. Even the pay secured by violent strikes
is, as we have already shown, _governed by_ the law of final
productivity, though it does not _coincide with_ that rate. Actual pay
and standard pay are like a vessel and a tug attached to each other by
a hawser, which allows one to drift far from the other but does not
let them part company. In the long run the tug takes the tow with it.
Even the wages which a trust gives to a fighting union--wages paid by
a monopoly to a monopoly--are governed by the law of final
productivity, since there is a limit on what the trust can extort from
the public, and there is a limit on what the union can extort from the
trust. Potential competition, by limiting both the producing
corporation and the trade union, vindicates the natural law of wages,
though its results are made inexact by monopoly.

_How Potential Competition affects Organized Labor._--We have seen
that potential competition keeps within limits the prices of goods
made by trusts. If they become too high, new mills are built. In a
like way potential competition puts a check on the wages a strong
union can secure; for if these are too far above the level of
non-union men's pay, such men will find their way into the business.
Open shops will be established, either by the present employers or by
new ones. There will be much to be gained by an independent shop
manned by non-union labor, and the danger of this makes a trade union
more conservative than it would otherwise be. The chief potentiality
in the case is that of the new and independent shop, and if the way is
open for this to appear, the range of difference between the pay of
favored laborers and that of others is greatly reduced. The trade
union may be able to carry its point and keep free labor from its
field, so long as it has only its own employers to deal with; but if
new employers will appear whenever there is an inducement to do so,
the case is quite otherwise. The new mills make the greater gains if
they are manned by non-union men.

With the field open for all producers, the danger of free shops with
free men will impend always over the union that demands too much for
its members. This is now true even where consolidated companies exist,
and it would be doubly true if there were no such companies. The
rivalries which would then appear would keep wages, as well as prices,
near to their natural standards.

In the absence of monopolies on the part of employers, and of
"slugging" on the part of workmen, arbitrators may accept as standards
what the actual dealings of employers and employed yield. In most
cases they will ratify no wrong by doing so. The court may act as it
now does and announce a rate based on a mere compromise or on the
probable result of a strike. If the men accept the award, let them
keep their places; but if not, let the positions be open to whoever
will take them, and let the state repress every form of violence that
would interfere with their doing so. The sentiment of even a local
community will sustain such a maintenance of order.

_The Case of Trades not affected by the Potential Competition of
Non-union Men with New Employers._--Building trades are peculiarly
situated in that their products have to be made in the locality where
they will stay, and no competition from labor living at a distance is
to be feared. If the local unions can protect their field by force,
they can establish a high rate of pay, even though the employers have
no unions. Arbitration that merely gives what a strike will yield will
here deviate greatly from the natural standard of wages.

Labor in mining is somewhat similarly situated, and so is labor in
transportation. In these, and in some other fields, new men do not
weaken the position of strikers unless they are brought to the places
where the strikers have been working; and that exposes them to
assault. It is in the making of portable goods for a general market
that the new and independent shop manned by non-union laborers is an
important factor.

It is easy to answer the question whether, in such fields, the board
of arbitration should confirm the workmen's tenure of place while his
pay is sustained by force. All slugging is inherently criminal and
should be always and everywhere repressed. In the cases that we first
examined, a safe course would be to hold it in repression, announce a
rate of pay based on what a strike would then yield, and trust to
other measures for destroying monopoly on the capitalist's side. The
chief danger of violence begins when the men reject the award and
others take their places, and at this point the fact of arbitration
will make the duty of the state easier though hardly clearer.

The case of such trades as building and mining differs from the
others only in the fact that there is not present the check that is
elsewhere afforded by the danger of new mills, and the pay secured by
crude force is high. To announce a rate based on the result of a
strike, _if slugging is to be permitted during the strike_, is to
accept, for the moment, what violence will secure; and nothing will
remove this feature of the adjudication but a manful assertion of
sovereignty by the state and a complete ending of the tolerance now
accorded to anarchy. By no means, however, does this deprive union men
of the advantage that organization gives them. They may be secured in
the possession of every advantage which collective bargaining, without
violence, can secure. Great numbers enlisted in a union will give to
it a prospect of success in enforcing any reasonable demand. Voluntary
arbitration, that aims to preclude a strike, will have to respect this
fact of organization and give the men about what a legitimate strike
would yield. As a rule, this will result in compromises of opposing
claims, and if violence is not in sight as a resource, the compromises
will fall near to the natural standard of wages.

_Why Conciliation is preferred to Arbitration._--Both among organized
laborers and corporate employers there is a dread of state action for
the positive adjustment of wages. There is a preference for
conciliation over any kind of arbitration, and there is a preference
for voluntary arbitration over that which has any trace of authority
behind it. For tribunals which have full coercive power, most
employers and strongly organized laborers have an insurmountable
repugnance. If such tribunals were introduced, it would be against
their strongest opposition, which is saying that a measure designed
to secure industrial peace would have to be put into operation while
the parties directly interested in it opposed it with might and main.

The reasons for this attitude are not difficult to discover.
Conciliation aims solely to secure internal peace in a department of
industry. To avert strikes or reduce their duration is all that it can
do and all that the parties directly interested wish to have it do.
From the point of view of employers and employed in a highly
profitable industry, the averting of strikes is enough to aim at, and
even the public sometimes accepts this easy-going view and thinks that
everything desirable is gained merely by averting strife or ending it
when it occurs. Uninterrupted production--the saving of the great
wastes that strikes entail--does, indeed, promote the public welfare.
When conciliation does this, it indirectly does something for the
public. The essential thing about conciliation, then, is that it does
not consciously try to do anything but to make the two parties in the
dispute over wages contented enough to go on producing. A board which
aims only to do this is careful not to introduce any one who
represents an outside interest. The procedure must be kept "within the
family." As is often said, "those who understand the business" must
settle disputes within it. What is really desired is that only those
who are _interested in_ the business should have anything to say about
it, and there is a dread of giving representation, either to the
general public or to independent labor. Moreover, when the defects of
conciliation are spoken of, what is mentioned is the uncertainty as to
its working, the probability that in many cases it will not bring the
disputants to an agreement and cause production to go on. There is no
dread of the rates of pay that it yields. There is practically no
dread on any one's part of what happens when employers and employed
are contented because they jointly thrive at the expense of the
public. Rather than have production stopped, the public is often
willing to let a dispute be settled on almost any terms, though the
result may be to let some men thrive at the expense of consumers and
of other laborers. There is a monopolistic grab the sharing of which
makes both parties better off than are men of their class elsewhere.
Singular as it may seem, even this attitude of the public is
justifiable. It is entirely right not only to welcome conciliation
where it can be made to work, but to try it as often as possible
before resorting to arbitration.

_Rates resulting from Conciliation not Unlike those resulting from
Strikes._--The results of collective bargaining, with conciliation in
cases of dispute, come within a certain distance of those which would
be gained by a perfectly natural adjustment of wages. All that we have
said about the relation of wages adjusted by strikes to their natural
standards applies here; potential competition generally keeps the
actual rate within a certain distance of the natural one, though a
monopoly may make the distance unduly great. If potential competition
works feebly on the employers' side,--if independent producers are
slow to appear even when the price of a product is very high,--there
is a large profit in the industry for some one; and if potential
competition works feebly on the side of labor,--if workmen can safely
strike with little fear that independent laborers will dare to take
their places,--the men can secure a fair-sized share of this profit.
A strong trade union working for a strong monopoly gets wages that
exceed the standard rate by the largest obtainable margin; and yet, as
we have said, even this excess has limits, and adjusting disputes by
conciliation does not alter those limits. The rates agreed upon are
still governed by the standard rate to the same extent as under the
régime of strikes. The strike and the lockout become potential, but
they impend as possibilities and do their work. The board of
conciliation knows that they will occur unless their probable results
are anticipated and forestalled by the decision. The board cannot do
otherwise, therefore, than to restrict the actual strikes. Wages then
become the natural rate with a plus mark, and may be said to be
adjusted in a way that at the bottom is natural, though it works under
vitiating influences.

_Why Voluntary Arbitration does more than Conciliation._--Voluntary
arbitration is an advance over mere conciliation in point of
effectiveness. It departs somewhat from the plan of confining the
action to the family, since it introduces some other parties as
arbitrators and thus invites some recognition of outside interests.
Nevertheless its actual working involves little change in principle,
and its results do not greatly vary from those attained by
conciliation. When we speak of arbitration as voluntary, what we
usually mean is that acceptance of the award is in no way enforced.
Either party may accept it or refuse it, but it may be that both
parties acting together cannot prevent the investigation; and the
economic law of wages acts best when this is the case. How such
voluntary arbitration is provided for,--whether it is established by
free contract between employers and employed, or by statute,--is not
in this connection of importance. The one thing that is important is
that no compulsion is applied to either party to force him to accept
the award.

_A Moral Compulsion due to Voluntary Arbitration._--A certain moral
force is, indeed, necessarily behind the award of such a tribunal. It
informs the public what fair-minded men regard as a reasonable
adjustment of the dispute, and forces any one who refuses to accept
such a decision to go on record as claiming more than is presumably
just. This tends to alienate public sympathy, and to forfeit the aid
which sympathy insures. Moreover, where voluntary arbitration is
established by a contract between parties,--where, for example,
masters and men agree that during a term of years disputes that cannot
otherwise be settled shall be referred to a tribunal constituted in
some prescribed way,--the decision of the tribunal is made by the
contract to be especially binding.

_Why Mere Compromises lead to Fair Results._--A merely compromising
policy, such as the one which has often been sharply criticised,
involves an approximation to what strikes would yield; and this, as we
have seen, gives results which, in a rude way, are controlled by
economic law. A fact of the greatest importance is that the awards
made by boards of arbitration with merely voluntary power are not
compromises between mere demands of the two parties; they are between
_genuine ultimata_. When the court is called in, the employer has
offered a rate of pay and stands ready to close his mill if it is not
accepted; and the men have offered to take a certain rate and are
ready to strike if the rate is not given. The essential fact in the
case is that neither of these rates usually varies by more than a
certain amount from the natural level of wages. There is every
difference between a demand put forward for strategic purposes and a
real ultimatum. If workmen knew that a court would simply make an even
division between their own demand and their employer's offer, then men
who were getting two dollars a day might ask for four in the hope that
the arbitrators might give them three. Even if no such expectations
were entertained, it is certain that both parties would exaggerate
their claims; workers would demand more and employers offer less than
they expected in the end to agree upon. When, however, the demands are
not made in this way for the sake of impressing the tribunal, but are
known to be genuine ultimata, the case is quite different. The workers
will actually go on a strike if their demands are not conceded, and
they will certainly have to do this if they make their figures
extravagant. The employer will close his mill if his offer is not
accepted, and he will have to do it if his offer is absurdly low. Very
much is involved in the fact that an actual severing of the relation
between employers and employed impends over them as a possibility.

_The Chief Advantage of Arbitration over Conciliation._--We are now in
a position to measure the real difference between conciliation and
voluntary arbitration. If a strike comes after nothing has been tried
except conciliation, there is often nothing to prevent the strikers
from resorting to all the devices which are available for guarding
their tenure of place--in other words, for keeping "scabs" out of the
field. The local community is in its usual position of uncertainty as
to the equities of the case, and is likely to show its usual
hesitancy in giving to the new laborers the complete protection which
the laws enjoin. There is the customary dread of the effect of letting
a strike-breaking force have full sway and the opportunity for
disciplining the former workmen into submission. The chance that the
resulting rate of pay may be too low to do justice to the laborers
remains before the eyes of the local community, and has the effect to
which we have earlier called attention--that of taking much of the
vigor out of the official arm when violence occurs.

How is it when a tribunal of arbitration has studied the case and
announced a decision? Though the workmen may be as free to strike as
ever, such an action would put them at a fatal disadvantage. The
arbitration has given to the public a basis for a judgment as to the
equities of the dispute. If the tribunal is one which commands
respect, a refusal to abide by its decision puts the men _prima facie_
in the wrong. If they strike now, they reject a rate which is
authoritatively pronounced just. Even this they have the privilege of
doing if they so desire; but if they go farther and forcibly prevent
other men from accepting the equitable rate and doing the work, they
forfeit their right of tenure; and it would be a strangely constituted
public which, under such circumstances, would let them use fists,
missiles, or clubs in defending it.

There may be an agreement between employers and employed to submit to
impartial arbitration such disputes as are not otherwise settled; and
when this has been actually done and a decision has been reached, it
is made by the contract to be too binding to be lightly disregarded.
If it is still disregarded and if violence is resorted to, the
forfeiture of public sympathy is so complete that there is little
danger that violence will be winked at. The action of such a tribunal
may be nearly as effective as that of one which has full coercive

_Why Compulsory Arbitration is less Certain to give a Just
Award._--Arbitration by a court that has full compulsion behind it
does not theoretically need to satisfy the contending parties. If it
can fine or otherwise coerce the party that refuses to accept its
mandate, and thus insure a forced compliance with its orders, it is
conceivable that it might announce rates of pay entirely at variance
with prevailing ones. It might announce arbitrary rates or make a bold
effort to discover and introduce those which should coincide with the
ultimate natural standards--which would mean a relentless reducing of
some rates and a raising of others. In a democratic country, however,
such a court would have to satisfy the contestants and the public or
forfeit its existence, and the only mode of insuring its continuance
would be a more conservative policy and a respecting of the _status
quo_. It might appeal to the probable result of violent contests
somewhat less than a purely voluntary tribunal might do, since it
might venture to give offense to employers or to workmen, and trust to
the support of the general public; but in the main it would have to
let the existing rates of wages continue with no radical change. Even
though it were able by some statistical test to discover the natural
rates of wages, it could not be bold enough rigorously to apply them
without forfeiting its existence. Under any system, then, whether it
be crude contention, conciliation, voluntary arbitration, or
compulsory arbitration, the rates fixed by the present half-savage
process would be allowed to rule till the process itself should be
freed from the perversion that monopoly causes. Inequalities of pay
would be tempered in different degrees by the various tribunals, but
the existing rates in each employment would continue to furnish a
basis of adjustment.

_The Most Available Plan of Arbitration._--Since there is little
prospect that compulsory arbitration will give rates of wages which
will differ materially from those secured by arbitration of the
voluntary sort, the latter kind has the preference, so long as it is
able actually to prevent the strikes and lockouts which, at present,
are so wasteful and disorganizing. To accomplish this, there is
available a kind of arbitration which is voluntary, but has behind it
enough authority to make actual strikes very rare. By this plan the
state recognizes for an interim the laborers' tenure of place, on
condition that they continue working during the time occupied by the
adjustment. If they stop working before a decision is announced, they
forfeit their tenure of positions. When the tribunal announces a
decision as to the terms on which labor shall go on, the force already
working has the option of retaining the positions or abandoning them;
but if they elect to leave them, it must be with the understanding
that their departure is definitive and their right to tenure
surrendered. The state then uses its utmost power in protecting men
who may occupy the vacated places. The mere prospect of this outcome
will be enough, and the shifting of the force will not have actually
to be made, since the right of tenure is too valuable to be forfeited.
The system requires that prompt action be had whenever a strike or a
lockout is impending, but it enforces decisions only by imposing on
workmen who choose to be recalcitrant the penalty of forfeiting the
right of ownership of positions, the claim to which they esteem so
highly that they are ready literally to fight in defense of it.

_A Mode of Dealing with Rebellious Employers._--An employer might
refuse to accept the result of an arbitration. In view of the strong
pressure that public opinion would exert after the decision should
have been rendered, frequent refusals are not probable. If, however,
the employer should reject an award, the logic of the case would
require that he lose his tenure of place as the men do for a like
offense; and the only way to accomplish this is to throw him out of
his business connections. The tenure which an _entrepreneur_ most
values consists in his relation to his customers; and if the state
should see to it that the goods he makes could always be had from some
other source, the _entrepreneur_ would be unlikely to close his mills.
How the state shall keep the sources of supply open will become an
important question if it shall appear that producers do defy the
public opinion and reject the court's awards.[1]

    [1] If the employer were a corporation possessing a monopoly
    of its department of production, it would be difficult
    quickly to open such new sources of supply as would be
    requisite; but a temporary reduction of import duties would
    often go far in this direction. And a measure which would
    insure the running of the plant under a temporary
    receivership would, of course, do it.

_The Practical Working of the Arbitration Proposed._--Let us see how
such a system of arbitration as is here described would work in the
case in which, as we have supposed, a strong trade union is dealing
with a monopolistic employer. At the outset all violence on the men's
side is ruled out. No assaulting, maiming, or killing of so-called
"scabs" is tolerated, and, moreover, the first temptation to this is
removed by the act of the state in recognizing for an interval the
men's tenure of place. There are no strike breakers to be attacked.
While proceedings of arbitration are pending, the obnoxious class is
out of sight, and all the places are transiently reserved for their
original holders. The court has submitted to it two possible rates of
pay, one demanded by the men and the other offered by the employers.
It may confirm either of these rates or any rate that is intermediate
between them, and it is likely to pursue the latter course. In any
case, it announces a rate, the one which to it appears to be fair and
is more likely to be so than the one claimed by either of the parties.
"This is a just rate," declares the tribunal to the men; "you may take
it or leave it, but if you leave it a certain thing will
happen,--workmen who refuse it will forfeit all claim upon their
positions." Workmen will not often refuse the award, and the pressure
of public opinion makes it improbable that the employer will do so.
Coupled with arbitration and an essential part of the system is a
policy which shall remove the danger of monopoly. In its perfectly
secure form monopoly as yet scarcely exists, but what does exist is a
great number of partial monopolies able to handle competitors roughly
and extort profits from the people. Directly connected with the
adjustment of wages is the disarming of such monopolies. The
preventing of strikes may often be accomplished without this, but the
insuring of just wages requires it. With a solution of the problem of
monopoly in view, all other needs of the situation might well be met
by arbitration without compulsory power.

We may now tabulate our conclusions.

1. In the making of the wages contract the individual laborer is at a
disadvantage. He has something which he must sell and which his
employer is not obliged to take, since he can reject single men with

2. A period of idleness may increase this disability to any extent.
The vender of anything which must be sold at once is like a starving
man pawning his coat--he must take whatever is offered.

3. Collective bargaining enables men to withhold, for a time,
something which is of importance to an employer. He cannot let them
all go with impunity.

4. A strike is a contest of endurance; and if it continues until the
men are exhausted, they are collectively in the position of the hungry
individual seller, who is at the buyer's mercy. The wages they then
take may be far below the natural standard.

5. If their places are filled at once by men who are already thus
necessitous, the resulting rate may be equally below the natural

6. The power of the union often depends on its use of force in keeping
the needy out of its field.

7. The rate of pay gained where compulsion is freely and successfully
practiced is above the normal rate.

8. Conciliation does little in the way of changing the results which
are realized without it, but it lessens the frequency of strikes.

9. Arbitration by a court, which must make a decision but cannot
enforce it--by a court which confirms the workmen's tenure of place
while action is pending and declares it forfeited if the men reject
its decree,--such arbitration would secure a closer conformity to the
normal standard of wages than any other action. It would establish
rates which give the workmen the benefit of every legitimate advantage
from collective bargaining.

10. Arbitration by a court which is compelled to act, and can enforce
its decision, may deviate in a particular case from the rate of pay
which strikes would yield; but if the deviation is frequent and great,
it will induce a rebellion against the system of compulsory
arbitration. The rate under this system cannot differ greatly from the
result secured with no arbitration at all. The chief value of all the
foregoing modes of settling disputes lies in their prevention of
costly interruptions of business. They may reduce the number of
strikes and prevent much waste and suffering.

11. A mode of procedure which aims chiefly to end strikes usually
depends on making compromises between opposing claims. This secures an
approach to a reasonable adjustment, as between employers and
employed, but does not affect the differences between the wages of
different classes of laborers.

12. In order that any mode of adjusting wages may give fair
comparative rates, monopolies must be repressed; and this can only be
accomplished by measures which are independent of tribunals of



When free from the taint of monopoly, trade unions, as has been shown,
help rather than hinder the natural forces of distribution. Collective
bargaining is normal, but barring men from a field of employment is
not so. Connected with this undemocratic policy are certain practices
which aim to benefit some laborers at the cost of others, and thus
tend to pervert the distributive process.

_Restrictions on the Number of Members in a Trade Union._--If a trade
union were altogether a private organization, it might properly
control the number of its own members. Before it is formed all members
of the craft it represents are, of course, non-union workers, and the
aim of the founders is to "unionize the trade"--that is, to enlist, in
the membership of the body, as large a proportion as is possible of
the men already working in the subgroup which the union represents.
From that time on it can fix its own standard of admission, and allow
its membership to increase slowly or rapidly as its interests may seem
to dictate.

_How a too Narrow Policy defeats its Own End._--Very narrow
restrictions, while they keep men out of the union, attract them to
the trade itself. An extreme scarcity of union labor and the high pay
it signifies causes the establishment of new mills or shops run
altogether by non-union men. If these mills and shops are successful,
the union may later admit their employees to membership; and a series
of successful efforts to produce goods by the aid of unorganized labor
thus interferes with the exclusive policy of unions. The number of
their members grows in spite of efforts to the contrary.

_Free Admission to a Trade Equivalent to Free Admission to a
Union._--We may recognize as one of the principles in the case that
free admission to the craft itself involves free admission to the
union. When once men are successfully practicing the trade, the union
is eager to include them, though it enlarges its own membership by the

_How a Government might prevent a Monopoly of Labor._--It is entirely
possible that a government might require trade unions to incorporate
themselves, and might include in the charter a clause requiring the
free admission of qualified members, subject only to such dues as the
reasonable needs of the union might require. That is not an immediate
probability, but the end in view can be attained by making membership
in the trade itself practically free--which means protecting from
violence the men who practice it without joining the union. This is
not difficult where a mill in an isolated place is run altogether by
independent labor, and it is natural that the unions should endeavor,
in other ways than the crudely illegal ones, to prevent the successful
running of such mills. If they run with success, their employees will
have to be attracted into the unions. A measure designed to impede the
running of non-union mills is the boycott. It is a measure which does
not involve force and which is yet of not a little value to workers.

_The Nature and Varieties of the Boycott._--A boycott is a concurrent
refusal to use or handle certain articles. In its original or negative
form, the boycott enjoins upon workers that they shall let certain
specified articles alone. If they are completed goods, they must not
buy them for consumption; and if they are raw materials, or goods in
the making, they must not do any work upon them or upon any product
into which they enter. They may thus boycott the mantels of a dwelling
house and refuse to put them in position, or, in case they have been
put in position by other workmen, they may, as an extreme measure,
refuse to do further work on the house until they are taken out. A
producers' boycott, such as this, falls in quite a different category
from the direct consumers' boycott, or the refusal to use a completed
article. When a raw material is put under the ban, workers strike if
an employer insists on using it. If the cause of the boycott is some
disagreement between the maker of the raw material and his workmen,
the measure amounts to the threat of a sympathetic strike in aid of
the aggrieved workers. If the cause is the fact that the materials
were made in a non-union shop, the men who thus made them have no
grievance, but the union in the trade to which these men belong has
one. It consists in the mere fact that the non-union men are working
at the trade at all and that their employer is finding a market for
their product. Workers in other trades are called on to aid this union
by a sympathetic strike, either threatened or actually put into
effect. Such a boycott as this may therefore be described as amounting
to a potential or actual sympathetic strike somewhat strategically
planned. If the strike actually comes, it may assist the men in whose
cause it is undertaken; and the principles which govern such a
boycott are those which govern strikes of the sympathetic kind.

_Direct Consumers' Boycotts economically Legitimate._--The other type
of boycott is a concurrent refusal to buy and use certain consumers'
goods. Legally it has been treated as a conspiracy to injure a
business, but the prohibition has lost its effectiveness, as legal
requirements generally do when they are not in harmony with economic
principles. Of late there has been little disposition to enforce the
law against boycotting, and none whatever to enforce the law when the
boycott carries its point by taking a positive instead of a negative
form. The trade-label movement enjoins on men to bestow their
patronage altogether on employers included within a certain list, and
this involves withdrawing it from others; but the terms of the actual
agreement between the workers involve the direct bestowing of a
benefit and only inferentially the inflicting of an injury. The men do
not, in terms, conspire to injure a particular person's business, but
do band themselves together to help certain other persons' business.
Economic theory has little use for this technical distinction. It is
favorable rather than otherwise to every sort of direct consumers'
boycott, and is particularly favorable to the trade-label movement.
This movement may powerfully assist workers in obtaining normal rates
of pay, and it will not help them to get much more.

_The Ground of the Legitimacy of the Boycott._--An individual has a
right to bestow his patronage where he pleases, and it is essential to
the action of economic law that he should freely use this right. The
whole fabric of economic society, the action of demand and supply,
the laws of price, wages, etc., rest on this basis. Modern conditions
require that large bodies of individuals should be able concurrently
to exercise a similar right,--that organized labor should bestow its
collective patronage where it wishes. This can be done, of course,
only by controlling individual members, for the trade union does not
buy consumers' goods collectively. If it can thus control its members,
it can use in promoting its cause the extensive patronage at its

_Unfavorable Features of the Indirect Boycott._--The boycott we have
thus far had in view is a direct confining of union laborers'
patronage to union-made goods. Why this is a thing to be encouraged we
shall presently see. What we have said in favor of it does not apply
to boycotting merchants on all their traffic because they deal in
certain goods. If a brand of soap is proscribed, the workers are
justified in concurrently refusing to use that variety; but it is not
equally legitimate to prevent a merchant, whose function it is to
serve the public, from selling this soap to the customers who want it.
To refuse to buy anything whatsoever from a merchant because he keeps
in his stock a prohibited article, and sells it to a different set of
customers, is interfering, in an unwarranted way, with the freedom of
the merchant and of the other customers. Indirect consumers' boycotts
have little to commend them, but those of the direct kind have very

_The Merits of the Trade-label Movement._--This appears most clearly
in connection with the trade-label movement. As a result of this
movement union laborers will, as is hoped, buy only union-made goods.
The existence of such a movement in itself implies that there are
goods of the same sort to be had which are not made by union labor.
The shop that is run by the aid of independent labor is the cause of
the existence of the union label. If all the labor in a group were
organized, the label would have no significance. At present the trade
unions offer to an employer a certain amount of patronage as a return
for limiting himself to union men, and so long as the cost of making
his goods is not much increased, the inducement may be sufficient to
make him do it.

_The Movement as affected by Extravagant Demands on
Employers._--Unduly high wages mean, of course, unduly high prices.
Without here taking account of the "ca'-canny" policy, which aims to
make labor inefficient, extravagant wages for efficient labor increase
the cost of goods. This opens the way, as we have seen, for the free
shop and the labor which is willing to sell its product at a cheaper
rate. If union labor then firmly resolves to buy only the goods with
the label, it proposes a heroic measure of self-taxation.

_Trade Labels and the Quality of Goods._--The experience of the
trade-label movement thus far has been, that in some instances the
label vouches for prices which are high, if quality be considered, or
for a quality which is poor if the prices are the current ones.
Instead of telling the purchaser that the shoes, hats, cigars, etc.,
which bear the label are surely the best that can be had for the
money, the labels are more apt to tell him that the goods are poorer
than others which can be had. In some instances this is not the case,
and the union-made articles are as good and as cheap as others. When
the label stands for a high price or a poor quality, the union fails
to control its members and especially its members' wives. Having the
meager pay of a week to invest, the wife needs to use it where it will
do the most for the family. There is so strong an inducement to buy
goods which are really cheap and good that the trade-label movement
fails whenever loyalty to it means very much of self-taxation.

_The Object Lesson of the Consumers' Boycott._--Organized labor gives
itself a costly and impressive object lesson when it tries to force
all men of its class to buy the dearer of two similar articles. What
this shows is that the demands of unions must be limited, and that for
the highest success they must be so limited that there shall be no
decisive advantage given to an employer who has a non-union shop. A
marked difference in costs of production will cause the free shop to
grow and the union shop to shrink. A certain moderate difference in
wages there may be, provided always that the union labor is highly
efficient; but more than such a difference there cannot safely be. If
the trade-label movement should be generally successful, that fact
would prove that the demands of trade unions were kept within
reasonable limits.

_The Policy of Restricting the Product of Labor._--It is a part of the
policy of trade unions to limit the intensity of labor. The term
"ca'-canny" means working at an easy-going pace, which is one of the
methods adopted in order to make work for an excessive number of men.
For some of this the motive is to avoid an undue strain on the
workers. If the employer selects "pacemakers," who have exceptional
ability and endurance, and tries to bring other laborers to their
standard, then the rule of the trade union, which forbids doing more
than a certain amount of work in a day, becomes a remedy for a real
evil--the excessive nervous wear of too strenuous labor. This,
however, by no means proves that the policy as carried out is a good
one. Beyond the relief that comes when undue speeding of machinery and
driving of workers is repressed, it will be impossible to prove that
in the long run there is any good whatsoever in it, and the evil in it
is obvious and deplorable.

_"Making Work" as related to Technical Progress._--The policy reverses
the effects of progress. That which has caused the return to labor to
grow steadily larger is labor saving or product multiplying, and labor
making and product reducing are the antithesis of this. Enlarging the
product of labor has caused the standard of pay to go steadily upward
and the actual rate to follow it; and the prospect of a future and
perpetual rise in the laborers' standard of living depends almost
entirely on a continuance of this product-multiplying process. A
single man maintaining himself in isolation would gain by everything
that made his efforts fruitful, and society, as a whole, is like such
an isolated man. It gains by means of every effective tool that is
devised and by every bit of added efficiency in the hands that wield

_Reversing the Effect of Progress._--It follows that undoing such an
improvement and going back to earlier and less productive methods
would reverse the effect of the improvement, which is higher pay for
all; it is restoring the condition in which the product of labor and
its pay were lower. The "ca'-canny" policy--the arbitrary limiting of
what a man is allowed to do--has this effect. It aims to secure a
reduction of output, not by enforcing the use of inferior tools, but
by enforcing the inferior use of the customary tools. The effect, in
the long run, is, and must be, to take something out of the laborers'

_The Effect of the Work-making Policy under a Régime of Strong Trade
Unions._--It is, of course, only a strong trade union that can enforce
such a policy as this. Making one's own work worth but little offers a
large inducement to an employer to hire some one else if he can.
Within limits, the powerful union may prevent him from doing this, and
if for the time being society is patient and tolerant of anarchy,--if
it allows men who are willing to work well in a given field to be
forcibly excluded from it by men who are determined to work ill,--the
policy may be carried to disastrous lengths.

_How Static Law thwarts the Work-making Policy._--Even strong unions,
as we have seen, succeed in maintaining only a limited difference of
pay between their trade and others. The effort to maintain an
excessive premium on labor of any kind defeats itself by inducing free
labor to break over the barrier that is erected against it. The same
thing happens when we reduce the productive power of organized labor.
If, at a time when the premium that union labor bears above the
non-union kind is at a maximum, the policy of restricting products is
introduced, it so increases the inducement to depend on an independent
working force that there is no resisting it. The palisade which union
labor has built about its field gives way, and other labor comes
freely in. If the ca'-canny policy makes it necessary to pay ten men
for doing five men's work, the union itself will have to give place to
the independent men. No single good word can be said for the ultimate
effect of the policy as carried beyond the moderate limit required by
hygiene. Up to the point at which it will avert undue pressure upon
workers, stop disastrous driving and the early disabling of men, the
effect is so good as amply to justify the reduction of product and pay
which the policy occasions. Beyond that there is nothing whatever to
be said for it, and if it shall become a general and settled policy of
trade unions, it will be a clog upon progress and mean a permanent
loss for every class of laborers.

Notwithstanding all this, it must be true that some motive which can
appeal to reasonable beings impels workers to this policy. No plan of
action, as general as this, can be sustained unless some one, at least
transiently, gains by it. Workers have a tremendous stake in the
success of any plan of action they adopt, and they have every motive
for coming to a right conclusion concerning it. They are in the way of
getting object lessons from every mistaken policy, as its pernicious
effects become apparent, even though some local and transient good
effects also become evident. It is not difficult to see what it has
been that has appealed to so many laborers and induced them
voluntarily to reduce the value of their labor.

_A Common Argument against Product Restricting._--What is commonly
said of the policy is that it is based on the idea that there is a
definite amount of work of each kind to be done, and that if a man
does half as much as he could do, twice as many men will be employed
to do the whole amount. Nobody who thinks at all actually believes
that the amount of work of a given kind is fixed, no matter how much
is charged for it. If workers on buildings charged from five to ten
dollars a day, there would be fewer houses erected than would be
erected if they charged three dollars; and the same thing is true
everywhere. The amount of labor to be done in any field of employment
varies constantly with changes of cost, and making labor more costly
in a particular department reduces the amount of its product that can
be sold.

A trade union often finds that there are too many workers in its field
to be constantly employed at the rate of pay it establishes. The
result is partially idle labor; the men work intermittently, and
though the high wages they get for a part of their time may compensate
them for idle days or weeks, the idleness which is the effect of the
oversupply is inevitable.

A given number of workers in the group which makes A´´´ when the wages
are three dollars a day becomes an excessive number when the wages are
five, and even if the high wages do not attract men from without and
make the absolute number of workers greater than before, employment is
not constant. The ca'-canny policy is a transient remedy for this. It
is an effort to avoid the necessity for partial idleness and for the
transferring of laborers to other occupations. All the labor may, for
a time, remain in its present field if it will afflict itself with a
partial paralysis. For a while the demand for the product of the labor
will be sufficient to give more constant employment. Time is required
for the full effect of the product-limiting policy to show itself in a
falling off of the consumption of the goods whose cost is thus
increased. When it comes the evil effect of the policy will appear. If
a union were strong enough to keep a monopoly of its field, in spite
of the greater efficiency of laborers that are free to work in a
normal way, it would be strong enough to maintain much higher pay for
its own members if it limited the number of them and encouraged them
to work efficiently. The strongest conceivable union must lose by
substituting the plan of paralyzing labor for that of restricting the
number of laborers. The union may choose to take the benefit of its
monopolistic power by keeping an unnecessarily large number of men in
constant employment, rather than by getting high wages for efficient
work; but in that case any union but one the strength of which is
maintained in some unnatural way is likely to come to grief by the
great preference it creates for non-union labor. The independent shop
will get the better men at the lower rate of wages, and its products
will occupy the market. The popularity of the plan of work making is
the effect of looking for benefits which are transient rather than
permanent. If it were carried in many trades as far as it already is
in some, it would probably neutralize, even for those who resort to
it, much of the benefit of organization, and work still greater injury
to others.[1]

    [1] It will be seen that whether the policy is successful in
    giving employment to the partially idle or fails to do so
    depends on the amount of reduction in the sale of the goods
    which the increased cost of making them entails; and if the
    market is highly sensitive to increased cost, the policy may
    fail in securing even a transient increase of employment.

_The Eight-hour Movement as a Work-making Policy._--The effort to
reduce the hours of labor to eight per day has in it so much that is
altogether beneficent that it is not to be put in the same category
with the ca'-canny plan of working. And yet one leading argument in
favor of this reducing of the number of hours of work is identical
with that by which a reduction of the amount accomplished in an hour
is defended. The purpose is to make work and secure the employment of
more workers. What has been said of the other mode of work making
applies here. Reducing the length of the working day cuts down the
product that workers create and the amount that they get. In the main
the loss of product is probably offset by the gain in rest and
enjoyment; but the loss of product, taken by itself alone, is an evil,
and nothing can make it otherwise. If the hours were further reduced,
the loss would be more apparent and the gain from rest and leisure
would be less.

_One Sound Argument in Favor of the Greater Productivity of the
Eight-hour Day._--There is one reason why the eight-hour day may in a
series of generations prove more permanently productive than a longer
one. It may preserve the laborers' physical vigor and enable them to
keep their employment to a later period in life. The dead line of
sixty might be obliterated.

If what we wanted were to get the utmost we could out of a man in a
single day, we should do it by making him work for twenty-four hours;
after that, for another twenty-four hours, he would be worth very
little. If we expected to make him work for a week, we should probably
shorten the day to eighteen hours. If we expected to employ him for a
month and then to throw him aside, we might possibly get a maximum
product by making him work fourteen hours. If we wanted him for a year
only, possibly a day of twelve hours would insure the utmost he could
do. In a decade he could do more in a ten-hour day, and in a working
lifetime he could probably do more in eight. Forty or fifty years of
continuous work would tell less on his powers and on the amount and
quality of his product.

_The Connection between the Restriction of Products and the
Trade-label Movement._--Very important is the bearing of these facts
concerning the restriction of laborers' products and the trade-label
movement. If that movement should become more general and effective,
it would bring home to all who should take part in it the effects of
the labor-paralyzing policy. The faithful trade unionist would find
himself paying a full share of the bill which that policy entails on
the public. Ordinary customers can avoid the product whose cost is
enhanced by the trade-union rules; but the unionist must take it and
must make himself and his class the chief subjects of the tax which
enhanced prices impose. It may well be that the pernicious quality of
the general work-making policy will become so evident in any case that
it will be abandoned; and this would be made sure by a rule that
should actually make union labor the chief purchaser of union goods.
Ca'-canny would then mean self-taxation on a scale that no arguments
could make popular.



The more serious perversions of the economic system which we have
encountered have all been traceable to some working of the principle
of monopoly, and it is important to know whether any established
policy of governments lends force to this evil influence. Import
duties were established in America for the purpose of protecting
industries as such, and a vital question now is whether they have now
begun to protect monopolies within the industries.

_A Supposed Conflict between Theory and Practice._--There was a time
when theorists and practical men seemed to be in hopeless disagreement
concerning the entire subject of protection. In the view of the
practical man an economist was a person who, in his study, had reached
certain conclusions which were equally unanswerable in themselves and
irreconcilable with the facts. The expression most commonly heard in
this connection was that "theory and practice do not agree." The
doctrinarians were, in those days, unusually harmonious among
themselves, for there were comparatively few who made a vigorous
defense of protection on grounds of economic principle. The practical
world was less harmonious, since the views of different parts of it
were colored by differing interests; but the fact that science did not
fall into self-contradiction was encouraging. It was possible for the
uncompromising free-trader to think and to say that fundamental
principles were all on his side, and that the protectionist had
nothing in his favor except transient disturbances that interfered
with the perfect working of the principles.

_Static Theory in Favor of Free Trade._--Now, the business world
conceded too much to the free-trader when it said that he had theory
altogether in his favor. What he could truthfully claim, and what the
world could safely admit, was that he had static theory in his favor.
Static theory deals with a world which is free, not only from friction
and disturbance, but also from those elements of change and progress
which are the marked features of actual life. Stop all the changes
that are taking place in the industrial life of the world; put an end
to inventions and improvements in business organization; let there be
no moving of population to and fro, and no increase of the aggregate
population of the world; further, let there be no addition to the
wealth of the world and no change in its forms,--and you will have the
static state described in the early part of this treatise. Men would
go on making things to the end of time, using identically the same
methods that are now in vogue and getting identically the same
results, and in such an imaginary world there would be no possibility
of answering the contention of the general body of economists of a
generation ago. Free trade would be the only rational policy, and it
could be defended upon the simple ground on which division of labor in
the case of individuals is defended. One man has an aptitude for
making shoes, another for making watches, another for painting
pictures, and so on; and each one of them can gain far more by
devoting himself to his specialty and bartering off the product of it
than he can by trying to make everything for himself. Nations have
their special aptitudes and should follow them, and make all they can
out of them; and the nation which has special facilities for producing
cotton, or wheat, or petroleum, or gold and silver bullion should
devote itself to its specialties, barter off the results, and get all
manner of goods in return.

_Wastes from Protection reduced by the Fact of Diversified
Resources._--It is true, indeed, that a great nation like our own
makes a much better jack-of-all-trades than an individual can make. It
is far more probable that the nation as a whole can produce without
much waste all the things it wants to use than that any individual can
do so. If we have all climates from the tropical to the arctic, all
soils, and a full list of mineral deposits, why should it pay us to
confine ourselves to the making of only a few things in order to
barter them off for others? Why should we not, with our wide range of
resources, make everything?

Undoubtedly we can make almost everything if we insist upon doing it;
but there are still some things that other countries can make and sell
to us on such terms that we can do better by buying them than by
producing them ourselves. We can raise tea in the United States, but
it pays us better to make something else and barter it off for tea. A
day's labor spent in raising cotton to send away in exchange gives us
more tea than a day's labor spent in producing the latter article
directly. In a static condition we should have found in what fields it
is most profitable to employ our energies. We should be directly
making things that it would pay us best to make, and we should be
indirectly making the other things; that is, we should be producing
articles to send off in exchange for those other things. Wherever an
indirect way of acquiring a thing had proved most profitable, we
should have adopted that method, and we should always adhere to it.
Anything that forced us to make directly something which we could
secure in greater abundance by bestowing the labor that would make it
on making something else, would turn our energies in a comparatively
unproductive direction. It would inflict on us a waste and a loss--and
there are such wastes and losses inherent in the operation of the
principle of protection, and there is no contending against the
argument that demonstrates their existence. Protection and a certain
distortion of the productive system, a certain misdirection of energy,
are synonymous.

_The Argument for Protection Dynamic._--Now an intelligent argument in
favor of protection begins at this point. It accepts the whole static
argument in favor of free trade, and its own assertion begins with a
"nevertheless." It claims that in spite of what is thus conceded,
protection is justifiable, since, in the end, it will pay,
notwithstanding the wastes that attend it. The argument for protection
is entirely a dynamic one. It is based on the fact of progress and
admits that it could make no case for itself under the conditions of a
static state. If every country had certain special facilities for
producing particular things, and if its state in this respect were
destined to remain forever unchanged, it could, to the end of time,
make itself richer by depending for many things on its neighbors than
it could by depending for those things immediately on itself. The fact
is, however, that a nation like our own abounds in undeveloped and
even unknown resources which, when brought to the light, may take
precedence of many of those which are known and utilized. If our
country from end to end were like Cape Nome, and as rich in gold as
the richest part of that remote region, and if it were certain that
the deposits of gold would never be exhausted and would employ the
whole energy of our people, it is clear that we should have one staple
occupation and should depend upon the rest of the world for almost
every sort of portable commodity. We should be stopped from
manufacturing by the great productivity of labor in placer mining. So
long as men could make ten dollars a day by washing out gold from the
sands, there would be no use in setting them at work making two
dollars a day as weavers or shoemakers or what not. By buying our
cloth with gold dust we could get far more of it than we could if we
took the men out of the mine and set them to making the stuff itself.
But--and here is the proviso that makes the supposition correspond
with the fact--if, besides the placers, we had deep mines of other
metals than gold, if we had oil and lumber and loam of every variety,
and if we had people with undeveloped mechanical aptitudes, it might
be that we should do well to develop these latent energies even in a
wasteful way. The condition that would fully establish the similarity
between the supposed case and the actual one is that the placer
deposits should be, as placers are, sure to be exhausted by continued
working, and that producing other things than gold should tend to
become, with time, a more and more fruitful process. We can justify
the attitude of the country that taxes itself at an early date for the
sake of testing and developing the latent aptitudes of its land and
its people. At the outset it will thereby sustain a loss, because at
the outset it can gain more goods by the indirect method of exchange
than it can by production; but there may easily come a time when it
can gain more by the direct method. If we learn to make things more
economically than we could originally make them, if we hit upon cheap
sources of motive power and of raw material, and especially if we
devise machinery that works rapidly and accurately and greatly
multiplies the product of a man's working day, we shall reach a
condition in which, instead of a loss incidental to the early years of
manufacturing, we shall have an increasing gain that will continue to
the end of time. It may be, further, that without protection and the
burdensome tax which it did undoubtedly impose upon us, we should have
had to wait far too long for this gain to accrue and should have
sacrificed the benefits that come from a long interval of diversified
and fruitful industry.

In short, the static argument for free trade is unanswerable and the
dynamic argument for protection, when intelligently stated, is equally
so. The two arguments do not meet and refute each other, but are
mutually consistent. It is possible to ridicule the argument for
protection under the name of the "infant industry" argument, and it is
possible for the policy it upholds to continue long after this
argument has ceased to be valid. The overgrown infant will have
sacrificed his claim for coddling, but that will not prove that there
was never a time when he needed it.

_The Policy demanded in View of Facts Static and Dynamic._--Now, there
is an argument for tariff reduction which accepts both the static
argument for free trade and the dynamic argument for protection. In
fact, it bases itself on the protectionist's modern and intelligent
claim. To advance in any form the infant industry argument is to admit
that the policy advocated is temporary. Protective duties are, in
fact, self-testing. They reveal in their very working whether they
were originally justifiable or not. The ground on which they were
imposed is that they would develop latent resources--that they would
enable labor to produce as much by making a class of articles formerly
produced in foreign countries as it could produce by engaging in
industries already established and exchanging their products for the
former articles. If that time should come, the industry that had to
grow up originally under the protection of a duty would become so
fruitful that it could dispense with the duty. Taxes of this kind tend
to become inoperative, provided always that the latent resources for
economical production really exist.

Some years ago a man who had retired from the business of making spool
silk remarked that, in his judgment, a duty of three per cent on
imported silk of this kind would enable the American mills to hold
full possession of their own market. The difference between what it
cost the foreigner to make the silk and what it cost the American to
make it was, as he thought, not over three per cent. If he was right
in his estimate, almost all of the actual duty might have been
abolished without crushing the American manufacturer. Americans had
developed a sufficient aptitude for making spool silk to be able to
get nearly as much of it by turning their labor in that direction as
they could by turning their labor in any other direction and
exchanging the product for foreign silk. We must originally have lost
much by forcing ourselves directly to make the silk, for, at the
outset, we could not make it as economically as we could make an
article which we could exchange for it. At the time of which we are
speaking we could make it with almost no waste, and the case
illustrates a general fact with regard to duties upon articles in the
making of which we are originally at a disadvantage but are afterward
at no disadvantage at all. When our original disadvantage has been
quite overcome, the duty becomes inoperative. Whether we keep it or
throw it off will make no difference to the American manufacturer or
to the American consumer--_provided always that competition is free
and active_. If it is not so, there is a very different story to tell.

_Importance of Changes in the Relative Productivity of Different
Industries._--Instead of getting from the soil gold dust to barter for
merchandise, we have been getting a product that is not so greatly
unlike it. For grains of gold read kernels of wheat, and the statement
will tell what a large portion of our country has produced and
exported. The productivity of wheat raising has made it uneconomical,
in certain extensive regions, to engage in other occupations; but as
the fertility of the wheat lands has declined, and as the productive
power of labor in other directions has increased, we have reached a
point at which it is just as natural to make things for which we
formerly bartered wheat as it is to produce the grain itself. The
decline in the fertility of agricultural lands and the increase in the
productive power of labor devoted to making steel appear to have made
the manufacturer of the latter article as independent as is the raiser
of cereals. Originally it was necessary to protect iron and steel
industries from competition in order to secure the establishment of
them at an early day. Now it is apparently not necessary to continue
the protection. Labor in making steel will give us as many tons of it
in a year as the same labor would give us if spent in the raising of
wheat to be exchanged for foreign steel. The duty on steel, if this is
the case, has become inoperative, in the sense that it no longer acts
to save from destruction the steel-making industry. It is perniciously
operative in another direction, for it is an essential protector of a
quasi-monopoly in the industry; and this illustrates what often
happens in cases in which the infant industry argument proves to be
well grounded. The argument predicts for the newly established
industry a great future development and a time of ultimate
independence. Protection undertakes to nurse it through its period of
helplessness and dependence into a time when it can stand on its own
feet and maintain itself against rivals. If that period comes,--and
the history of the United States shows that in many cases it has
come,--you can throw off the entire duty, if you will, and, unless the
price of the article has been artificially sustained by something
besides the duty, our manufacturers will not lose possession of their

An essential condition of realizing the happy predictions of the
protectionists is that competition among American producers should be
unimpeded. If that were so, goods would, as they said, be sold, in the
end, at prices fixed by the costs of production, including the normal
rate of interest on the capital employed. Manufacturers may originally
get large profits, as an offset for such risks as they take in doing
pioneer work; but afterward they will get interest on their capital
and a good personal return for directing their business, but nothing
more. If they sell goods at prices which yield only such returns as
this, they will, when the industry is on its feet, sell them as
cheaply as the foreigner would do. The high duty, if it still
continues, may make it doubly difficult for the foreigner to come into
our market; but with goods selling at natural cost or cost prices he
would not come into it in any case, and the duty might be abolished
with entire impunity.

There are, indeed, some questions which arise as to occasional
unloading of extensive stocks in foreign markets, and protection has
been called for to prevent the foreigner from making America his
"dumping ground." This process works in both ways: the American can
dump his surplus products into foreign territory as well as the
foreigner can into American territory. Not much attention need be paid
to this particular phase of the subject. Conservatism will probably
suffice, for a long time, to retain in force a somewhat higher duty
than is called for on general grounds. In the main the fact is as
stated: if the protected infant has the capacity for growth that was
attributed to him when the course of nursing, coddling, training, and
patient waiting was entered upon, he will announce that fact after a
term of years by showing his inherent strength and proving that these
fostering practices are no longer necessary. They are then needed only
to aid a _monopolistic power within the industry_.

_The Protection of Industries distinguished from the Protection of
Monopolies._--It appears, then, that duties have two distinct
functions. One is to protect from foreign competition an industry as
such--to shield every producer, whether he is working independently or
in a pool or trust. The other function is to protect a trust in the
industry--to enable a great combination working within the limits of
the United States to keep that great field to itself and still charge
abnormally high prices for its products. In fact, a distinguishable
part of a duty usually performs the former of these functions, and
another distinguishable part performs the latter. If the natural price
of an article is based on the cost of making it in the United States,
and if that is twenty per cent higher than the cost in a foreign
country, a duty of twenty per cent will place the American product and
the foreign product on an equality. The American maker will not be
driven from his market until he begins to charge an abnormally high
price. If he does that, the foreigner will come in. Suppose, then,
that the duty is forty per cent. Twenty per cent may be needed to
enable the American manufacturer to hold his own as against the
foreigner. Provided he exacts from consumers of his goods only the
natural returns which business yields, year in and year out, he can
sell all that his mills produce with no danger that the foreigner will
supplant him. The other twenty per cent of duty enables him to add a
monopolistic profit to his prices. He can raise them by about that
amount above what is natural before the foreigner will begin to make
him trouble.

We have seen what ways the trust has of stifling competition within
the limits of our own country. There are the favors which it is able
to get from the railroads, and there is the practice of selling its
goods in some one locality at a cut-throat rate whenever a competitor
appears in that locality. There is the so-called factors' agreement,
which often forces merchants to buy goods of a certain class
exclusively from the trust. By these means and others the trust makes
it perilous to build a mill for the purpose of competing with it. If,
indeed, it makes its prices very high, some bold adventurer will build
such a mill and take the chances that this entails; but if the trust
stops short of offering such a tempting lure in the way of high
prices, it can keep the field to itself. If the extra duty of twenty
per cent--the unnecessary portion of the whole duty of forty per
cent--did not exist, nothing of this sort would be possible. The trust
would have to sell at a normal price in order to keep out the
foreigner, and so would its independent competitor. Both the
combination and its rivals could make their goods and sell them in
security. The industry, as such, is protected by the duty of twenty
per cent, and it is the additional duty which is the protector of
monopoly--the enabling cause of the grab which the trust can make from
the pockets of the consuming public.

In practice one would not try to make the figures quite as exact as is
implied in the statement that just twenty per cent of duty is needed
to protect the industry as such from the foreigner, and that just
another twenty per cent acts as a maker of a monopolistic price. It
would be impracticable to fix the duty in such a way as exactly to
meet the need of protection. Owing to fluctuations in values, the duty
might be made slightly higher than is necessary under normal
conditions. All these things would have to be considered by a
competent tariff commission. The figures we here use are illustrative
only; but the principle is as clear as anything in economics.
Protecting an industry, as such, is one thing; it means that Americans
shall be enabled to hold possession of their market, provided they
charge prices for their goods which yield a fair profit only.
Protecting a monopoly in the industry is another thing; it means that
foreign competition is to be cut off even when the American producer
charges unnatural prices. It means that the trust shall be enabled to
sell a portion of its goods abroad at one price and the remainder at
home at a much higher price. It means that the trust is to be shielded
from all competition, except that which may come from audacious rivals
at home who are willing to brave the perils of entering the American
field provided that the prices which here rule afford profit enough to
justify the risk.

_A Limit beyond which a Duty becomes a Supporter of Monopolies._--This
line of cleavage runs through the greater part of the duties which
this country now imposes on foreign articles; and the fact reveals the
scientific rule for tariff reduction. Up to a certain point, according
to the traditional American view, the duty may do good. It may be
protecting an industry that is not quite an infant and yet has not
grown to its full stature nor attained to its full competing power.
Whatever may be claimed as to what ought to be done with this portion
of the duty, there is no doubt what will be done; it will be retained,
and the American people will wait with such patience as they may for
the coming of the time when the industry will be independent of all
such aid. Beyond this point a protective duty becomes a trust builder
_par excellence_.

_Most Duties Compounds of Good and Evil._--There are some industries
which are fully matured. The duties which were imposed to shield them
during their infancy are no longer necessary for that purpose. The
amount of protection that in these cases is necessary to keep the
American market for the American product is _nil_. The sole effect of
duties on the products of such industries is to encourage monopoly. At
the other extreme there are a few industries which have not gravitated
into the control of monopolies and which need much of the protection
that they have in order to hold their present fields. If they really
are infants and not dwarfs,--if they have the capacity to grow to full
stature and independence,--the policy of the people will undoubtedly
be to let them keep, for a considerable time, all the protection that
they now enjoy. The number of such industries as this is comparatively
small. In the case of the great majority of our duties there is one
part that protects the industry as such and another part that protects
the monopoly within it. Throw off the whole duty, and you expose the
independent rivals of the trust, as well as the trust itself, to a
foreign competition which they are hardly able to bear; but if you
throw off a part of the duty,--the part which serves to create the
monopoly,--you do not destroy and probably do not hurt the independent
producer. His position now is abnormal and perilous. He may be
continuing solely by grace of a power that could crush him any day if
it would, and its power to crush him is due to the great gains which
its position as a monopoly affords. When it wishes to crush a local
rival, it can enter his territory and, within that area, sell goods
for less than it costs to make them; and, while pursuing this
cut-throat policy, it can still make money, because it is getting high
prices in the other parts of its extensive territory. With no such
great general returns to draw on as a war fund, the trust would have
to compete with its rivals on terms which would be at least more
nearly even than they now are. It would still have weapons which it
could employ against competitors, and its capacity for fighting
unfairly would not be exhausted. Without further action on the part of
lawmakers the position of a small rival of a trust might be
unnaturally dangerous; but an essential point is that one means which
the trust adopts in order to crush him depends on the existence of
great profits in most of its territory; and these would not exist if
it were not for the unnecessary and abnormal part of the duty.

The trust wants its duty, and it wants the whole of it. It is the
perennial defender of the policy which is termed "standing pat." It
values the monopoly-making part according to the measure of the
profits which that part brings into its coffers. The trust is
powerful, as we do not need to be told, and it will find ways of
thwarting tariff reduction as it does other anti-trust legislation.
Drastic laws forced through legislatures or Congress during
ebullitions of popular wrath--laws which demand so much in the way of
trust breaking that they will never be enforced and never ought to
be--have not, thus far, been prevented. Such "bulls against the comet"
have been issued frequently enough, but serious legislation, based on
sound principles, will encounter graver difficulties. There are
difficulties before our people even where they see clearly what they
want and are trying to get it; but where they do not see what they
want, the case is hopeless. The trust-making part of protective duties
has an effect about which there is no uncertainty, and if the American
people discover this fact, they will not have reached their goal, but
the laborious route that leads to it will at least lie distinctly
before them.

_The Policy demanded in the Interest of Progress._--The general facts
which have here been cited call for the abolition of a certain part of
the existing duties and the retention of another part, and they make
the division between the two parts clear at least in principle. We
want to keep one part of a duty whenever it protects an industry which
is not yet mature but is on its way toward maturity. We want the
industry because it is progressive in its wealth-creating power and
will, one day, make an important addition to our national income.
It is a dynamic agent--a factor in the progress we are making toward
the unrealized goal of universal comfort. We do not want the other
part of the duty, first, because we do not want monopoly. Any feature
of our industrial system which is convicted of being simply a
monopoly-building element is condemned by that fact to extinction, if
the power of the people suffices to destroy it. Does this mean that
the consolidations themselves are thus condemned? Do we not want great
corporations with vast capitals? Assuredly we want them, for the sake
of their economy and of their capacity for greater economy. With the
element of monopoly taken out of them, they will become dynamic agents
and contributors to general progress. The part of the protective
tariff which we need to get rid of is the part that helps decisively
to put the element of monopoly into them; and in that connection the
worst charge that has to be brought against this part of the duties
remains to be stated.

_Protection and Progress._--Monopoly acts squarely against the
continuance of that very progress which the tariff was designed to
create. The entire defense of protection has rested on the dynamic
argument, and the sole justification of the tax which protection
originally imposed is the fact that it has given us industries which
have, in themselves, the power to become more and more productive. It
would be hard to deny that much of this increase in productive power,
which the originators of the protective system anticipated, has been
practically realized. The manufactures which have been carried through
a period of weakness have actually developed competing strength. We
have acquired the power to make things far more cheaply than any one
could formerly make them, and the cheapening process still goes on.
Our manufacturing centers are alive with machinery, much of which is
of our own devising. Thanks to the progressive character of these
industries, the waste which attended the introduction of them has been
largely atoned for. On dynamic grounds, and solely on those grounds,
has the policy of protection fairly well vindicated itself. And now we
have come to the point where that saving element in the protective
system is in danger of vanishing. Indeed, the excessive part of the
protective tariff now acts positively to check the progress that it
once initiated, for monopoly is hostile to that progress. The whole
force of the argument based on mechanical invention and the
development of latent aptitudes in our people now holds as against the
monopoly-building part of the tariff. Keep that portion of a duty
which is not needed to save an independent producer from foreign
competition, which is needed only to enable the trust to charge an
abnormal price and still keep the foreigner out of our markets, and
you build up a monopoly which is unfavorable to continued improvement
in the productive arts.

Competition is the assured guarantee of all such progress. It causes
a race of improvement in which eager rivals strive with each other to
see who can get the best result from a day's labor. It puts the
producer where he must be enterprising or drop out of the race. He
must invent machines and processes, or adopt them as others discover
them. He must organize, explore markets, and study consumers' wants.
He must keep abreast of a rapidly moving procession if he expects to
continue long to be a producer at all.

_The Effect on Progress of Consolidation without Monopoly._--Does a
monopoly live under any such forward pressure? Certainly not. It may
make some improvements, for it can gain wealth by so doing; but it is
not forced to make them or perish. Here we encounter a wide
distinction that is in danger of being overlooked. A vast corporation
that is not a true monopoly may be eminently progressive. If it still
has to fear rivals, actual or potential, it is under the same kind of
pressure that acts upon the independent producer--pressure to
economize labor. It may be able to make even greater progress than a
smaller corporation could make, for it may be able to hire ingenious
men to devise new appliances, and it may be able to test them without
greatly trenching on its income by such experiments. When it gets a
successful machine, it may introduce it at once into many mills.
Consolidation without monopoly is favorable to progress. With the
element of monopoly infused into it, a great consolidation frees
itself from the necessity for progress, and both experience and _a
priori_ reasoning are against the conclusion that, under such a
régime, actual progress will be rapid. The secure monopoly may
stagnate with impunity, and the reason why many corporations which
have looked like monopolies have not actually stagnated is that their
positions have not been thus secure. They have had some actual rivals
and many potential ones. The part of the protective system which tends
to make them more secure in their monopolistic position strikes at the
most vital part of the industrial system, the progress within it, the
element which adds daily to man's power to create wealth and enables
the world to sustain an increasing population in an increasing degree
of comfort. True monopoly means stagnation, oppression, and what has
been called a new feudalism, while consolidation without monopoly
means progress, freedom, and a constant approach to industrial
democracy. One of the essential means of securing this latter result
is the retention of so much protection as is needed to keep American
ingenuity and organizing power alive and active, while abolishing that
excess of it which fosters monopoly and does away with the necessity
for exercising these traits. There will be disagreement as to the
point at which the dividing line should, in particular cases, be
drawn; a protected interest will claim a duty of fifty per cent where
twenty would amply suffice and where every excess above this would be
pernicious. There should, however, be no serious disagreement as to
what we want--progress and the repression of monopoly which bars
progress; and there should be little disagreement as to the principle
to be followed in making a protective system contribute to these ends.
It must assuredly not bar out the foreigner when the American trust
has put its prices at an extortionate level and is using its power to
crush all rivalry at home. The good effect and the evil effect of an
excessive duty are quite distinct in principle, and the task that is
before us is to make them so in practice. It is to abolish the
monopoly-building part of the protective system.

The whole question of the relation of the tariff to monopoly presents
debatable points, some of which cannot here be discussed. It is by no
means claimed that an unnaturally high tariff is the sole means of
sustaining monopolies, or that the reduction of it would leave nothing
more to be done. A great corporation, as has already been said,
possesses special means of waging a predatory war against local
rivals, and its monopolistic power depends on these as well as on the
tariff. With the foreigner forced off the field the trust can use with
terrible effect these means of attack on local rivals. It is true, as
we have seen, that its monopolistic power might be greatly reduced,
without touching the tariff, by taking from it its command of freight
rates and thus destroying its power to undersell rivals by means of
the special rebates which it now receives; and its power for evil
might be reduced still more by taking from it its privilege of cutting
prices on its own goods in one locality while charging elsewhere the
high prices which the exclusion of the foreigner enables it to get.
Regulating trusts by these means only and without any change in the
protective system would require, on the part of the people, a long and
hard struggle. It would require heroic persistence in a course of
difficult administration. Success will come more quickly and easily
if, while keeping a normal amount of protection, we abolish the
abnormal part of it. The other measures for controlling trusts
harmonize with this one and will work more effectively if they are
used in combination with it. Together with this one they remove a
barrier against progress and set in action a force that promotes it.

Without going into any intricacies one can see that, with the tariff
at a normal level, the success of the trust in making money will
depend on its efficiency as a producer; and the same will be true of
its independent rivals. Again and again it will then happen that new
rivals will appear, whose mills are far more efficient than many which
the trust operates. They may even be more efficient than the best of
the mills of the great combination. American producers and foreigners
will be in eager rivalry with each other in seeking out means of
reducing costs or--what is the same thing--increasing the product of a
day's labor. Under the conditions here supposed, the trust will not be
able to exterminate a really efficient competitor, and it will feel
the stimulus of his rivalry in a way that will force it to be alert
and enterprising in seeking and using new devices for economical
production. The trust and its American competitor will alike feel the
stimulus of the foreigner's efforts to surpass them both in methods of
efficient production; and the outcome of it all will be a greater
degree of progress--a more dynamic industrial world--than there is any
hope of realizing while foreigners are excluded from our markets even
when prices are there extortionate. Prices will be extortionate so
long as the trusts are checked only by local rivals and are allowed to
club these rivals into submissiveness. Keeping the foreigner away by
competing fairly with him is what we should desire; but barring him
forcibly out, even when prices mount to extravagant levels, helps to
fasten on this country the various evils which are included under the
ill-omened term _monopoly_; and among the worst of these evils are a
weakening of dynamic energy and a reduction of progress.



_Dynamic Qualities of Money._--The question concerning money which,
for the purposes of the present treatise, it is most important to
answer is whether general prosperity can be increased or impaired by
manipulating the volume of it. Is money a dynamic agent, and can it be
so regulated as to induce economic progress? These questions require
careful answers.

_Accepted Facts concerning Money._--We may accept without argument
the conclusion that both theory and experience have reached concerning
the superiority of gold and silver over other materials of which
a currency can be made. They possess the universally recognized
utility which makes them everywhere in demand. They have the
"imperishability," the "portability," and the "divisibility" which are
needed, and when made into coins, they have the "cognizability" by
which they can, more readily than many other things, be identified and
distinguished from cheap imitations. There remain to be settled the
questions whether an expanding volume of currency is necessary for
prosperity, and whether the expansion can better be secured by using
two metals than it can by using one.

_Effects of Free Coinage._--It is evident that when a government coins
without charge all the gold and silver that are brought to it for that
purpose, either metal will be worth about as much in the form of
bullion as it is in the form of coin. If, for uses in the arts, an
ounce of gold is worth more than the number of dollars that can be
made of it, the coining of this metal will temporarily cease and some
coins already made will be melted. Moreover, where both of the
precious metals are used as money, neither of them can long be worth
in a coin much more than is the bullion contained in the less valuable
of the two. If a gold dollar will buy more silver than is needed to
make a silver dollar, because of the higher value of the bullion in
the former coin, silver will be bought and taken to the mint for
coinage, while gold dollars will be melted. The gold will go farther
in the way of paying debts when it is in this way exchanged for silver

_The Effects of Inflation of Currency on Prices._--We are citing a
further accepted fact when we say that, other things being equal,
enlarging the volume of currency in use raises the prices of goods. By
what particular mechanism this is brought about we do not here
inquire. Not everything that is claimed under the head of a "quantity
theory of money" is generally believed, but there will be little
disposition anywhere to deny that, if no other dynamic movement should
take place, adding fifty per cent to the volume of metallic money in
circulation would make prices higher than they were before the

_Rising Prices and Business Profits._--If we assert, further, that
permanently rising prices mean prosperity,--profits for the
_entrepreneur_ and a brisk demand for labor and capital,--we assert
what, in the practical world, is too generally accepted. Sound theory
and current belief are at variance on this point, and the current
opinion appears at first glance to have the facts on its side. Periods
of rising prices have actually been periods of prosperity. It is
considered hard for either a merchant or a manufacturer "to do
business on a falling market," and easy to make money on a rising one.
This impression is entirely correct in so far as it concerns those
fluctuations of price which occur suddenly and continue only briefly.
What it is of great importance to know is whether a steady rise of
prices which should continue permanently would mean permanent profits
for the _entrepreneur_; and it can be asserted without hesitation that
it would not do so if the final productivity theory of interest is
sound, that is, if capital commands in the market a rate of interest
which corresponds to the amount that the marginal increment of it will
actually produce.

_The Rate of Expansion of Currency distinguished from the Absolute
Amount of Increase._--The extent to which any currency is capable of
raising prices by a continued expansion depends, not on the absolute
amount of that expansion, but on the percentage of enlargement that
takes place within a given time. Moreover, a given percentage of
increase _per annum_ may be maintained as well by one metal as by two.
If the gold and the silver money of the world were each increased by
one per cent a year, prices would have the same trend under a currency
made of one metal as under a currency made of both. If, on the other
hand, all the currencies were based on gold only, a change to a
bimetallic system would at once make a single great enlargement of the
volume of money; but after this the rate of enlargement would be no
greater than it was under the single standard. _In the transition_
from a gold to a bimetallic currency, we should get rapidly rising
prices; after the change had been completed, we should have a currency
expanding as before at the one per cent rate. If the volume of
business were to increase at the rate of two per cent a year, while
other influences affecting prices were to remain unchanged, the
currency would not expand as rapidly as the demand for it, and prices
would not only fall, but would fall at the same rate as if only one
metal had been used. Use ten metals instead of two,--make coins of
tin, platinum, copper, nickel, etc.,--and if the grand composite still
insures the one per cent rate of general increase of metallic money,
prices will vary as they would have varied with a currency of gold
alone. Wholly transitional, under such circumstances, is the rise in
prices secured by the adoption of bimetallism. It is gained by adding
to the stock of gold now used for ultimate payments an existing stock
of silver.

_Why Metallic Currency of Any Kind gains, in the Long Run, in
Purchasing Power._--In the long run, almost any metallic coin of a
fixed weight will gain in its purchasing power. Silver would do this
as well as gold; and so would a composite coinage made of ten metals.
The law of diminishing returns applies to mining as well as to
agriculture. The more silver you want, the deeper you must dig for it,
and the more refractory ores you must smelt. The transmuting of a raw
metal into finished articles becomes a cheaper and cheaper process;
but the extracting of the metal itself becomes dearer. A larger and
larger fraction of the labor that is spent in making wares of silver,
of gold, of copper, or of tin must be spent in getting the crude
material out of the earth. There are improvements in mining, as there
are in other industries, and there are large improvements in smelting;
but in spite of this the continual working of more difficult mines and
of more difficult ores makes the getting of the crude material, in
the long run, relatively costly. Since a coin consists chiefly of raw
metal, we may therefore count on having before us a régime of falling
prices, whatever metallic currency we adopt. The rate of the fall and
the degree of steadiness in it will be greater with some metals than
with others. The variations in the value of gold are, on the whole,
comparatively steady. This metal fluctuates in amount and in cost, but
the changes are less sudden than in the case of most others.

_The Steadiness of the Change in the Purchasing Power of Money the
Important Fact._--A second fact to be noted is that the best currency
is one the purchasing power of which shall change, if at all, at a
comparatively uniform rate. This fact is of paramount consequence, and
the verification of it will repay any amount of study. It is not the
rapidity with which gold gains in purchasing power, but the steadiness
of the gain from year to year that determines whether it is the best
money that can be had by the business world. A _change in the rate_ of
increase in the purchasing power of the coinage metal has a really
disturbing effect; a steady and calculable appreciation does not.
There exists in some acute minds what I venture to call a delusion
about the effect on business classes of an advance in the purchasing
power of gold that proceeds for a long time at a uniform rate.
Conceding the prospect of a decided gain in the value of this metal,
we may deny absolutely that, if _it is steady_, it plays into the
hands of creditors, burdens the _entrepreneur_, blights enterprise, or
has any of the effects that certain men whom we are bound to respect
have claimed for it. Irregular changes of value would, indeed, produce
these results. Let gold gain three per cent in value this year, one
per cent next year, and four per cent in the year following, and
injurious things will happen; but let it gain even as much as three
per cent each year for a century, and at the test points in business
life there will ensue the essential effects that would have followed
if it had not gained at all.

This means that with a steadily appreciating currency the things will
happen that make for prosperity. The debtor will get justice,
enterprise will be safe, and wages will gain while industry gains. The
_entrepreneur_, in whose behalf bad counsel has lately been given,
will best do his strategic work, not with that currency which varies
in value the least, but with that which varies most uniformly. If it
appears that gold is likely to appreciate more than silver, and to
appreciate more steadily, it is decidedly the better metal. It is not
inflation on which the _entrepreneur_ permanently thrives, nor is it
contraction through which, in the long run, he suffers; it is changes
in the rate of inflation or of contraction that produce marked and
damaging effects at the critical points of business life.

_Loan Interest as related to the Increase of Real Capital._--How does
a slow and steady appreciation of any metallic currency affect the
relations of business classes? Does it rob borrowers and enrich
lenders? Does it favor the consumers by giving falling prices, and
hurt producers in the same degree? Does it tax enterprise and paralyze
the nerves of business? The answer is an emphatic _No_. Steadiness in
the rate of appreciation of money is the salvation of business. Not by
one iota can such a slow and steady movement, in itself alone, rob the
borrowing class. This is a sweeping claim; let us examine it.

It has been shown that true interest is governed by the marginal
productivity of capital. As the utility of the final increment of a
commodity fixes the price that a seller can get for his whole supply,
so the productive power of the final unit of capital expresses what
the owner of capital can get by lending his entire supply. This
earning capacity expresses itself in a percentage of the capital
itself. If the final unit can create a twentieth of itself in a year,
any unit can get for its owner about that amount.

In assuming that capital earns a twentieth of itself in a year, we may
use a commodity standard of measurement. A grocer's capital of twenty
barrels of sugar may become twenty-one barrels, and his flour and his
tea increase in a like proportion. In the simplest illustration that
could be given of a capital earning five per cent a year, we should
assume that each kind of productive instrument in a man's possession
increases in quantity, during the year, by that amount. If he be a
manufacturer, his mill becomes a hundred and five feet long, instead
of a hundred feet. It contains twenty-one sets of woolen machinery,
instead of twenty. The flow of water that furnishes power becomes by
five per cent more copious; and the stock of goods, raw, unfinished,
and finished, becomes larger by the same amount.

Of course, such a symmetrical enlargement of all kinds of goods could
never actually take place, for some things increase in quantity more
than others. The illustration shows, however, what fixes the rate of
interest: it is the self-increasing power of a miscellany of real
capital. If the mill, the machinery, the stock, grow in quantity at
the five per cent rate, that is the natural rate of interest on loans
of real capital. The lender gives to the borrower twenty units of
"commodity" and gets back twenty-one. If marginal social capital,
consisting of commodity and measured in some way in units of kind, has
the power to add to itself in a year one unit for every twenty,
lenders will claim about that amount, and borrowers will pay it.

_How the Increase of a Miscellany of Goods has to be Computed._--How
does the real earning capacity of capital in concrete forms reveal
itself? How does the grocer know that he can make five per cent with
the final unit of capital that he borrows? Not by the fact that each
lot of twenty barrels of sugar gains one barrel, that each lot of
twenty pounds of tea gains one pound, and so on. If there were to be
such a symmetrical all-around increase in the commodities in the man's
possession, his shelves, counters, bins, tanks, would have to enlarge
themselves in the same ratio. In the case of a manufacturer the mill
would have to elongate itself by one foot for every twenty, as in the
foregoing illustration, and the machinery and all the stock would have
to grow in the same proportion. The land and the water power would
have to enlarge themselves by the same constant fraction.

Of course, such a thing does not take place. The general amount of
capital goods of every kind enlarges; but the enlargement is in
practice computed in monetary value, and in no other way. The whole
outfit becomes worth more than it was. The increase in monetary value
gauges the claims of the capitalist. If the stock of goods has grown
generally larger, and if prices have fallen, the claim of the
capitalist will fall short of equaling the actual increase of the

The increase in goods of different kinds is, of course, unsymmetrical.
If the man is a manufacturer, his mill and his water power have
probably not increased. He may have some more machinery, and he has
more raw materials and more goods, finished or unfinished, than he had
when he took his last inventory. If he has not more goods of these
kinds, he has something that represents them; and the effect on his
fortunes is as if the mill had stretched itself, and as if the
machines and other capital had multiplied, all in the same ratio.

The man figures his gains in real wealth by the use of money. At the
end of the year he makes a list of all his goods, attaches prices to
them, and sees what the value of the stock has become by the year's
business. He compares the total value in money of the goods on hand in
January, 1907, with that of the stock of January, 1906. If he has
bought and sold for cash only, and if during the year he has drawn for
his maintenance only what he has earned by labor, the excess of value
on hand at the beginning of the year 1907 informs him what his capital
has earned during the preceding twelve months.

_The Effect of Changes of Price on the Claims of Capitalists._--If
prices have remained stable, the earnings of the capital as expressed
in money will accurately correspond with the earnings as computed in
commodity. It is as if the five per cent increase of the sugar and the
flour of our first illustration, or of the mill and the machinery of
the second, had taken place. It could then, by a sale, be converted
into a five per cent increase in money. By selling the stock at its
market value the merchant could realize five per cent more than the
original stock cost him.

If money has gained one per cent in its purchasing power, or if prices
at the end of the year are by so much lower, the inventory will show,
in terms of money, only a four per cent gain. Now, the real increase
of concrete capital is still five per cent, and that, by the law of
interest, is what the capitalist can claim in commodities. This claim
is met by an actual payment in money of four per cent. Give to the
capitalist, in January, 1896, a dollar and four cents for every dollar
he has loaned in January, 1895, and you enable him to command a
hundred and five units of commodity for every one hundred that he
commanded at the earlier date.[1] You give him by a reduced monetary
payment what is equivalent to the real increase of capital.

    [1] There is a slight compounding here to be taken into
    account. If commodity has gained five per cent, while prices
    have lost one per cent, the capital as measured in money has
    increased by three and ninety-five one-hundredths per cent
    instead of exactly four.

_Practical Differences between Real Interest and the Increase of Real
Capital._--It is the increase of capital in kind that fixes the rate
of loan interest. Care must be taken not to claim for this part of the
adjustment any unerring accuracy; for the marginal productivity law
does not work without friction. With real capital creating five and a
half per cent, the lender might get only five. When, however, the play
of forces that fixes real interest has had its way and has determined
that, in commodity, capital shall secure for its owners five per cent
a year, that amount is unerringly conveyed to them by the monetary
payments that follow. If, by paying four per cent as interest, the
merchant, in the illustrative case, makes over to the lender of
capital that part of the increase of goods that by the law of interest
falls to him, four per cent is the rate that the loan in money will
bring. This is on the supposition that the change in the purchasing
power of money is perfectly steady. If it is unsteady, effects will
follow that are of much consequence.

Changes in the purchasing power of a currency produce an effect on the
rate of interest on loans of "money." If, with a currency of perfectly
stable value, the interest on loans is five per cent, corresponding to
the earnings of real capital, then a gain in the purchasing power of
the currency of one per cent a year has the effect of reducing nominal
interest practically to four per cent. The debtor then really pays and
the creditor really gets the same percentage as before of the actual
capital loaned. The borrower, the _entrepreneur_ in the case, finds at
the end of the year that he has more commodities by five
one-hundredths than he had. He must pay the equivalent of this to the
lender. With money of stable purchasing power it takes five new
dollars for every hundred to do it; but with money that gains in its
power to buy goods at the rate of one per cent a year it takes only
four. The rate of interest on loans is, in the long run, reduced by an
amount that accurately corresponds with the appreciation of the
monetary metal _wherever the appreciation is steady_. This law works
with a precision that is unusual in the case of economic laws. Loan
interest varies more or less from the marginal earnings of capital;
but interest as paid in money accurately expresses interest as
determined in kind by the play of economic forces.

_Conscious Forecasts not necessary for Insuring the Adjustment of Loan
Interest to Changing Prices._--It is possible that, where this subject
has been considered, the impression may prevail that this reduction
in the nominal rate of interest is the result of foresight on the part
of borrower and lender. According to that view, both parties look
forward to the time when the loan will be paid. The borrower sees
that, although by means of his business he may have at the end of a
year five per cent more of commodity in his possession, prices will
probably have fallen so as to enable him to realize in money only four
per cent. On the other hand, the creditor will see that with four per
cent more in money he can, if he will, buy with his principal and
interest five per cent more than he virtually loaned in commodity. He
is satisfied with this increase; and, moreover, he is forced to adopt
it, since the natural increase of real capital will not enable a
borrower to pay more. The _entrepreneur_ will stop borrowing if more
is demanded. The whole adjustment is supposed to rest on a forecast
made by the contracting parties and a speculative calculation as to
the trend of prices. Now, while men do indeed consider the future, the
adjustment that is actually made does not call for foresight. No
conscious forward glance is necessarily involved therein. It is made
by a process that works more unerringly than any joint calculation
about the coming conditions could possibly do.

The interest on a loan that is to run through a period in the near
future is based on the rate that capital is now producing. The
evidence as to what that rate is must be furnished by the experience
of the immediate past. It takes much experience, of course, accurately
to determine how much the marginal unit of capital for the year 1895
has been worth to the men who have used it. This, however, has to be
ascertained as best it can. It takes strategy on the part of both
borrowers and lenders to make the loan rate correspond to the marginal
earnings. Here there is a chance for economic friction and for
variations from the theoretical standard, and the loan rate will
sometimes exceed it; but in the long run the deviations will offset
each other. In any case, the experience of 1906 fixes, with or without
variations, the loan rate for 1907.

The earnings revealed by the experience of 1906 may be theoretically
computed either in money or in commodity. Let us say they have been
five per cent in real wealth, but by reason of the fall in prices they
have been only four per cent in money. That, then, is the rate for a
loan that is to run through 1907. If prices continue to fall at the
rate now prevailing, the loan rate in money will correspond to the
marginal earnings of capital for the latter year as accurately as it
does for the former year. Bargain-making strategy, the "higgling of
the market," may yield an imperfect result, and the lender of real or
commodity capital may or may not get the exact real earnings of
marginal capital of the same kind. _In translating the earnings of
real capital for the earlier or test year into terms of money, the
appreciation of the coins has unerringly entered as an element._ If
the same rate of appreciation is continued through the following year,
no deviation of the loan rate from the earnings of capital can result
from this cause. Whatever deviation there is results from the other
causes just noted.

In commercial terms a man borrows "money," and, by using it in his
business, produces "money." He does this, however, by converting the
currency into merchandise, and then reconverting this into currency.
He gives to the lender approximately what the "marginal" part of the
loan produces. If this adjustment is inexact, the lender will get less
or more than the actual earnings of such capital. With money gaining
in its purchasing power at a uniform rate, the adjustment is as exact
as it would have been with money of stable value. The appreciation
works unerringly in translating earnings measured in goods into
smaller earnings measured in money. The loan rate approximates the

_Effects of Changes in the Rate of Appreciation._--What happens if the
rate of appreciation changes? What if gold gains two per cent in
value, instead of one, during the second of the periods? The
capitalist will then clearly be a gainer, and the _entrepreneur_ will
be a loser. Getting five per cent in commodity as before, the business
man, by reason of falling prices, will realize only about three per
cent in money. His contract, based on the experience of an earlier
year, makes him pay four per cent, and he loses one. Every
acceleration of the rate of increase in the purchasing power of money
plays into the hands of lenders. Every retarding of that rate plays
into the hands of borrowers. If in 1907 the _entrepreneur_ gets a
three per cent rate on what he borrows, as based on the experience of
1906, and if the fall in prices is reduced during that later year to
one per cent, the borrower will make a clear gain of one per cent; and
this will recoup him for his loss in the earlier period. Moreover,
after a long period of steady prices, the beginnings of a downward
trend do not instantly affect the loan rate of interest. A period must
elapse sufficient to establish the fact of this downward trend, and to
enable the struggles of lenders and borrowers to overcome habit in
fixing a new rate that will correspond to the new earning power of
monetary capital. These facts explain what at times looks like a
failure of the loan market fully to take account of the fall of prices
during a given interval. What that market really does is to base the
interest paid in one interval on the business experience of another.

_Opposite Reasons for Favoring Gold as a Basis of Currency._--What,
then, is our practical conclusion? Gold has surprised the world by its
increase and by the rise in prices by which this change has been
attended. The interest on loans has risen as the conditions required
that it should do; but the rise in interest has lagged somewhat behind
the rise in prices. The enlarged output of the precious metal has been
comparatively sudden, and it has been this fact which has played into
the hands of _entrepreneurs_ and, for a brief interval, entailed some
loss on lenders. When the adjustment of loan interest to the rising
prices shall be fully made, neither of these parties will gain at the
other's expense so long as the rise shall continue at the prevalent
rate; but if the rise should cease as quickly as it began, it would be
_entrepreneurs_ who would lose and lenders who would gain. Loans
running at rates fixed when prices were rising would be paid by an
amount of money which would buy more commodity than the business would
afford. With a reduction of the output of gold there will come a
demand for some measure of inflation in order that rising prices may
forever continue. Adding silver to the currency would, as we have
seen, accomplish this purpose only temporarily. In the long run this
metal is bound to appreciate like gold. Using paper money would have a
temporary effect and would be a more dangerous measure. Waiting for a
short time for a new adjustment of loan interest to the trend of
prices would be the only rational course. Will the further fall of
prices rob the _entrepreneurs_? They must pay only the rate of
interest that capital earns. If that is five per cent, five they must
pay, so long as prices are stable. With prices falling by one per cent
a year, they will have to pay only four. Will the fall check business
and make men afraid to buy stocks of goods? They can carry stocks as
cheaply with a four per cent rate of interest and declining prices as
they can with a five per cent rate and stable prices. Will it blight
enterprise by making men afraid to build mills, railroads, etc.? Here
again the loan rate of interest comes to the rescue of the projectors.
If they can float their bonds and notes at a lower rate, they can
build with impunity.

Steadiness is the vital quality in currency. Let its purchasing power
be either unchanging or steadily changing in either direction, and
justice will be done and business will thrive. If a metal fluctuates
greatly in its rate of increase in value, it is a poor coinage metal,
even though the average rate of gain be slow; if it gains slowly and
steadily, it is almost an ideally good one.

What would be the effect of any practical measure of inflation? If we
use as money available for all debts the present stock of silver in
the world, we make one large addition to the volume of money now
available. We start an inflation that cannot continue by the use of
silver alone. In the hope of perpetuating the rise in prices we may
follow the silver with paper. By the action of the principle that we
have stated we shall thus make the interest on loans higher, and
every man who buys a farm or a house while the inflation continues
will pay a high rate of interest on an enlarged purchase price. When
we are forced to stop the paper issues, as in the end we must be, the
price of the land, etc., will fall, and the rate of interest on new
loans will fall also. The price of all produce will go down, and the
purchasers of property will struggle again, as in the years following
the Civil War men had to struggle, with a fixed debt, a fixed rate of
interest, and falling prices. The early _post bellum_ days will be
reproduced. Entering on a policy of inflation would therefore be
inviting men again to suffer what those suffered whose hard experience
is so frequently depicted in Populistic literature. Conceding all that
is claimed as to the evil that comes from buying or mortgaging real
property while the volume of money is increasing and paying the debt
so incurred while that volume is relatively contracting, one must see
that a policy of inflation would end by inflicting exactly that evil
on new victims, unless a method can be invented by which the inflation
can continue forever. Far better will it be to endure the transient
evil which a slow change in the supply of gold will bring. Retaining
gold through all its minor variations will mean all the prosperity and
all the justice that any monetary system can insure. If we shall ever
abandon this metal, experience will make us wise enough to return to
it; but we shall have paid a high price for the wisdom.



Perpetual change is the conspicuous fact of modern life. So
revolutionary are the alterations which a few decades make in the
industrial world as to raise the question whether there are economic
laws which retain their validity for any length of time. If there are
not, we have one economic science now, and shall have a different one
ten years hence and a widely dissimilar one a century later. Of
Descriptive Economics this is true, since it changes with the world it
describes; but it is not true of Economic Theory. There are certain
principles which are equally valid in all times and places. They were
true in the beginnings of industry, are true now, and will remain so
as long as men shall create and use wealth. They are not made
antiquated either by technical progress or by social evolution. We
have at the outset stated some of these truths. They have reference to
man, to his natural environment, and to the interactions of the two,
and they do not depend on the relations of man to man. We have also
stated other economic truths which apply only to man in a social
state. They are not universal, but are so general that they are
exemplified in the economic life of every society, from the most
primitive to the most highly civilized. They are the principles of
Social Economic Statics, and in order to have them distinctly before
us we have created in imagination a society which is changeless in
size, in form, and in mode of economic action. In such a condition
the wages of labor would remain fixed, as would also the interest on
capital. Wages and interest would absorb the whole product of social
industry; for the static condition, as we have thus created it,
excludes profits of the _entrepreneur_. In broad outline this
describes the condition toward which certain economic forces are
continually impelling the actual world.

There is at each period a standard shape and mode of action to which
static laws acting by themselves would bring economic society. This
social norm, however, is not the same at any two periods. The static
laws remain unchanged, but they act in changing conditions, and if
they were left alone and undisturbed, would give one result in 1907
and another in 2007. The changes which a century will bring should
make society larger and richer, the mode of production more effective,
and the returns for all classes greater. The laws which set the
standard of wages and interest will remain the same, but if the
tendencies now at work have their natural effect, all these incomes
will be larger. It is as though great quantities of water were rushing
into a lake and causing disturbances and upheavals of the surface. If
the inflow should now stop, the surface would subside to a general
level. If the inflow should recommence, go on for a hundred years, and
then stop, the surface would again subside to a level, but it would be
higher than the former one. Yet _the laws of equilibrium which
produced the first static level would be identically the same as those
which produced the second_. Social Economic Statics is a body of
principles which act in every stage of civilization and draw society
at every separate period toward a static norm, though they do not at
any two periods draw it toward the same norm. They make actual society
hover forever about a changing standard shape.

The laws which govern progress--which cause the social norm to take a
different character from decade to decade, and cause actual society to
hover near it in its changes--are the subject of Social Economic
Dynamics. We have made a study of the more general economic changes
which affect the social structure, and they stand in this order:--

(1) Increase of population, involving increase in the supply of labor.
(2) Increase in the stock of productive wealth.
(3) Improvements in method.
(4) Improvements in organization.

All these things affect the productive power of society, and
correlated with them and standing over against them is a fifth type of
change, which affects consumers' wants and determines how productive
power shall be used.

We have examined each single change by itself and have then endeavored
to combine them and get the grand resultant of all. Beginning with the
increase of population, we have traced its effects on wages, on
interest, and on the values of goods. We have made a similar study of
the growth of capital, the progress of technical method, and the
organization of industry.

The variation of economic society from its static standard offers a
problem for solution, and in this connection the type of change in
which the most serious evils inhere is that which discards old
technical methods and ushers in new ones. The question whether these
evils are destined to increase or to diminish we have answered
conditionally on the basis of past experience and present tendencies.
If competition continues and labor retains its mobility, the evils
will naturally grow less. The grand resultant of all the forces of
progress is an upward movement in the standard of economic life
gained, not without cost, but at a diminishing cost.

A vital question is that of the continuance of the movements now in
progress. Do any of them tend to bring themselves to a halt? Is any
change on which we rely for the hopeful outlook we have taken
self-terminating? We have found that the growth of population tends to
go on more slowly as the world becomes crowded, while the motives for
an increase of productive wealth grow stronger rather than weaker.
Technical progress gives no hint of coming to an end, and improvements
in organization may go on indefinitely, though they will naturally go
on more slowly as the modes of marshaling the agents of production are
brought nearer to perfection. Knowledge of the causes of economic
change is at best incomplete, and enlarging it by the statistical
method of study will be a chief work for the economists of the future.
Analytical study points distinctly to a coming time of increased
comfort for working humanity. Progress gives no sign of being
self-terminating, so long as the force which has been the mainspring
of it, namely, competition, shall continue to act.

The suspicious element in the general dynamic movement is progress in
organization. That which we have primarily studied is the marshaling
of forces for mere production--the creation of efficient mills, shops,
railroads, etc. This, however, carries with it a tendency to create
large mills, shops, and railroad systems, and, in the end, to combine
those which begin as rivals in a consolidation in which their rivalry
with each other ceases. This means a danger of monopoly, and is the
gravest menace which hangs over the future of economic society.

If anything should definitely end competition, it would check
invention, pervert distribution, and lead to evils from which only
state socialism would offer a way of escape. Monopoly is not a mere
bit of friction which interferes with the perfect working of economic
laws. It is a definite perversion of the laws themselves. It is one
thing to obstruct a force and another to supplant it and introduce a
different one; and that is what monopoly would do. We have inquired
whether it is necessary to let monopoly have its way, and have been
able to answer the question with a decided _No_. It grows up in
consequence of certain practices which an efficient government can
stop. Favoritism in the charges for carrying goods is one of these
practices. Railroads have become both monopolies and builders of other
monopolies. Certain principles, which we have briefly outlined, govern
their policy, and the natural outcome of their working is
consolidation. This creates the necessity for a type of public action
which is new in America--the regulation of freight charges.

Akin to this is the necessity for keeping alive competition in the
field of general industry by an effective prohibition of various
measures by which the great corporations are able to destroy it. The
dynamic element in economic life depends on competition, which at
important points is vanishing, but can, by the power of the state, be
restored and preserved, in a new form, indeed, but in all needed
vigor. With that accomplished we can enjoy the full productive effect
of consolidation without sacrificing the progress which the older type
of industry insured.

The organization of labor, its motives, its measures, and its
tendencies,--including a tendency toward monopoly,--we have examined.
Through all the wastes and disturbances which the struggle over wages
occasions we have discovered a certain action of natural economic law,
and have seen what type of measures, on the part of the state, will
remove impediments in the way of that law and enable it to act in
greater perfection.

Connected with the dynamic movement on which the future of society
depends are the policies of the government in connection with currency
and with protective duties. Here, less action, rather than more, is
demanded on the part of the state. While no renewal of a
_laissez-faire_ policy is possible, a reduction of the duties which
now play into the hands of monopoly is distinctly called for. In
connection with currency a greater trust in nature and a smaller
reliance on governments will give the best results.

Our studies have included, not the activities of the whole world,
but those of that central part of it which is highly sensitive to
economic influences. The whole producing mechanism here responds
comparatively quickly to any force which makes for change. This
society _par excellence_ is extending its boundaries and annexing
successive belts of outlying territory; and as this shall go on, it
must bring the world as a whole more and more nearly into the shape of
a single economic organism. The relations of the central society to
the unannexed zones are attaining transcendent importance, and a
fuller treatment of Economic Dynamics than is possible within the
limits of the present work would give much space to such subjects as
the transformation of Asia and the resulting changes in the economic
life of Europe and America. Here again the conscious action of the
people determines the economic outcome. In the main we can still leave
the natural forces of industry to work automatically; but we have
passed the point where we can safely leave to self-regulation the
charges of the common carrier, the conduct of monopolistic
corporations, or certain parts of the policy of organized labor.
Foreign relations are, of course, a subject for public control, and
they are coming to affect in a most intimate way our own economic
life. Everywhere our future is put into our own hands and will develop
the better the more we know of economic laws and the more energy we
show in applying them. The surrendering of industries generally to the
state may be avoided, and the essential features of the system of
business which evolution has created may be preserved; but to keep
this system free from unendurable evils will require, on the part of
the people, a rare combination of intelligence and determination. It
will require a public policy that shall neither be hampered by
prejudice nor incited by ebullitions of popular feeling, but shall be
guided through a course of difficult action by a knowledge of economic


  Abstinence, 339 _et seq._

  Accumulation, the law of, Ch. XX.

  Altruism, 39.

  Arbitration, 469, Ch. XXVI;
    as affected by monopoly, 483 _et seq._;
    compulsory, 489-490, 497-498, 502;
    voluntary, 493 _et seq._

  Birth rate, as affected by economic conditions, 328 _et seq._

  Böhm-Bawerk, 17 note, 33.

  Boycott, Ch. XXVII.

  Ca'-canny, 509 _et seq._

  Capital, 19, 24-26, 31-33;
    as affected by improvements in method, Ch. XVIII;
    as originating in profits, 230, 301;
    contrasted with capital goods, 28-34;
    exportation of, 230-235;
    ground and auxiliary, 166;
    mobility of, 37-38, 127-128, 151-152;
    primitive, 1-2;
    rent of, 170-171;
    sources of, 353 _et seq._;
    waste of, 307 _et seq._

  Capital, accumulation of, Ch. XX;
    as affected by monopoly, 355-357;
    as affected by standards of living, 342 _et seq._

  Capital, effects of increase of, 203-204;
    economic structure of society, 246-248;
    on interest, 319-320;
    on wages, 316 _et seq._

  Capital goods, 16, 17, 19 note;
    active, 20 _et seq._;
    active and passive, 186-187;
    contrasted with capital, 28-34;
    passive, 20 _et seq._

  Capitalist, 84-85, 117.

  Capitalization of railways, proper basis of, 445-449.

  Caste, effect on increase of population, 332;
    effect on values, 268.

  Centralization of production, 200-201, 289.

  Collective bargaining, 467 _et seq._

  Combination, railway, 419 _et seq._, 433 _et seq._

  Commerce, effect on diffusion of methods, 229;
    effect on emigration and immigration, 229-230.

  Competition, 67, 75-77, note; 143-150, 198 _et seq._;
    effect on inventions, 362 _et seq._;
    effect on labor organizations, 488-490;
    in transportation, 406, 419-420, 428 _et seq._;
    relation to progress, 533-534.

  Competition of markets, effect on railway charges, 403 _et seq._

  Competition, potential, as a regulator of monopolies, 380 _et seq._

  Conciliation, 490 _et seq._

  Consolidation, 382-383, 390 _et seq._, 534 _et seq._, 558-559;
    effect on strikes, 464 _et seq._;
    of railways, 396-397, 419 _et seq._

  Consumers' goods, 25-26, 34.

  Consumers' rent, 172 note, 173.

  Consumers' surplus, 105.

  Consumption, 24-25, note;
    as affected by improvements in methods, 273-274;
    by increased productive power, 305-306;
    by increase of individual incomes, 292;
    diversification of, 62-63, 206-207.

  Corporations, 376 _et seq._

  Cost, 130;
    contrasted with utility, 43-44;
    elements of, 115-116;
    fixed and variable, 412 _et seq._;
    in static state, 132-133;
    law of increasing, 44-47;
    lowest, as determinant of standard price, 263-264;
    measurement of, 47-49, 209;
    relation to final utility, 53-54;
    relation to incomes, 126;
    relation to price, 114-115;
    specific, 45.

  Demand and supply, 93-94, 96.

  Demand, reciprocal, 292.

  Demand, relation to final utility, 97.

  Diminishing productivity, 148-149;
    of labor, 134 _et seq._

  Diminishing returns, 56;
    in agriculture, 165-166, 398 _et seq._;
    in manufactures, 398-399.

  Diminishing utility, law of, 98.

  Distribution, 60;
    contrasted with production, Ch. V;
    functional and personal, 89-91;
    group, 92-93.

  Division of labor, 61 _et seq._

  "Dumping," 526.

  Dynamic influences, 130-132, 195 _et seq._

  Dynamics, Ch. XII.

  Economics, 1 _et seq._, 61.

  Education, effect on increase of population, 330-331.

  Effective utility, 8 note, 54 note.

  Eight-hour movement, 514-516.

  _Entrepreneur_, 83 _et seq._; 117 _et seq._; 153 _et seq._;
    in dynamic state, 123-124;
    in static state, 121-122.

  Exchange, 63-64.

  Factory legislation, effect on increase of population, 331-332.

  Final productivity, 139 _et seq._, 156-157.

  Final utility, 8 note, 51 note, 54 note, 98-99;
    relation to cost, 53-54;
    relation to demand, 97.

  Free coinage, 538-539.

  Free trade, arguments for, 231, 518-519.

  Friction, economic, 373.

  Future, undervaluation of, 345 _et seq._

  Giddings, F. H., 381.

  Government ownership, 378, 383-385.

  Groups, economic, 64 _et seq._

  Immigrants, disadvantages of, 245 _et seq._

  Improvements in methods, 204, 212;
    as source of new capital, 230;
    effect on capital, Ch. XVIII;
    effect on labor, 312 _et seq._;
    effect on quality of goods, 273-274;
    in backward regions, 235-236.

  Increasing returns, 398-401.

  Inflation, effects of, 539 _et seq._

  Interest, 85, Ch. IX;
    as affected by changes in the value of money, 543 _et seq._;
    as affected by increase of capital, 319-320;
    rate of, effect on the accumulation of capital, 339 _et seq._;
    real and loan, 547 _et seq._;
    relation to rent, 182-184;
    static, 224-225.

  Inventions, 204, Chs. XVI, XVII;
    as affected by competition, 362 _et seq._;
    as affected by monopoly, 362 _et seq._;
    conditions giving rise to, Ch. XXI;
    effect on capital, Ch. XVIII;
    on economic structure of society, 249 _et seq._;
    on labor, 254-255;
    effects of a series of, 290 _et seq._

  Kartel, 392.

  Labor, 35;
    as a measure of cost, 209;
    as affected by improvements in method, 312 _et seq._;
    classification of, 13-15;
    definition of, 9-10, 82-85;
    diminishing productivity of, 134 _et seq._;
    division of, 61 _et seq._;
    managerial, 116-117;
    mobility of, 127-128, 133-134;
    monopoly, 471 _et seq._, 504;
    productivity of, 17-18, 133 _et seq._;
    protective, 10-11;
    rent of, 171-172.

  Labor organization, Ch. XXV.

  Labor-saving devices, Chs. XVI, XVII;
    effect on economic
    structure of society, 249 _et seq._;
    effect on labor, 254-255.

  _Laissez-faire_, 384-385, 390.

  Land, 9, 36-37, Ch. XI;
    contrasted with artificial capital goods, 178-179, 188-190.

  Machinery, 72-73.

  Malthus, 321 _et seq._

  Margin of cultivation, 165 _et seq._

  Marginal utility, 51 note.

  Market, 95 note.

  Market price, 93-94.

  Mill, J. S., 220 note, 257.

  Money, 29-30; Ch. XXIX.

  Monopoly, 201, 559-560;
    as affected by patents, 367-368;
    as limiting employment, 297-298;
    effect on accumulation, 355-357;
    on inventions, 362-363;
    on progress, Ch. XXII;
    on standard of living, 323;
    government ownership of, 378, 383-385;
    in transportation, 435 _et seq._;
    inventor's, 360 _et seq._;
    labor, 456, 462, 467, 471 _et seq._, 504;
    nature of, 380;
    public character of, 389;
    relation to arbitration, 483 _et seq._;
    relation to protection, 525 _et seq._;
    relation to railway discrimination, 396-397;
    restricted by potential competition, 380 _et seq._

  Monopoly price, as affected by increase of wages, 479-480.

  Organization of industry, 205, 318-319, 368 _et seq._

  Organization of labor, Ch. XXV.

  Paper Money, 552-554.

  Patents, 265-266;
    abuse of, 361;
    as a means of curbing monopolies, 367-368;
    justification, 360-361.

  Patten, S. N., 207 note.

  Political Economy, 3 note, 61.

  Pool, 392.

  Population, as affected by factory legislation, 331;
    as affected by increase of wealth, 333;
    as affected by rise of wages, 335 _et seq._;
    distribution of, 215 _et seq._;
    effect of increase of, 203, 244 _et seq._, 315 _et seq._;
    law of, Ch. XIX.

  Population, density of, 215-216;
    effect on industry, 237 _et seq._;
    effect on wages, 241-243.

  Population, increase of, as affected by caste, 332;
    by education, 330-331;
    by standard of living, 324 _et seq._

  Price, 97;
    as affected by inflation, 539 _et seq._;
    determination of, 93-96;
    equalization of, 98-100;
    market, 93-94;
    monopoly, 479-480;
    normal, 114, 120-121;
    of complex goods, 100 _et seq._;
    relation to cost, 114;
    standard, determined by lowest cost, 263-264, 285-288;
    static, 202-203, 224.

  Production, contrasted with distribution, Ch. V;
    requisites of, 15-16.

  Productivity, 42-43;
    as basis for arbitration awards, 475 _et seq._;
    final, 139 _et seq._, 148-149, 157;
    measurement of, 55-60.

  Profit, 77 note, 85 _et seq._, 119-122 note, 129 note, 373;
    as affected by inflation, 539 _et seq._;
    as source of capital, 301, 354-355;
    in static state, 87.

  Protection, Ch. XXVIII, 560;
    argument for, 520 _et seq._;
    relation to monopoly, 525 _et seq._

  Rae, John, 17 note.

  Railway capitalization, proper basis of, 446-450.

  Railway charges, Ch. XXIV;
    as affected by competition of markets, 403 _et seq._;
    limits of, 403 _et seq._;
    state regulation of, 439 _et seq._

  Railway consolidation, 396-397, 419 _et seq._

  Railway discriminations, as creating monopolies, 393-394, 396,
            420 _et seq._

  Rent, Ch. X;
    as differential product, 163-165;
    as product of land, 162-163;
    consumers', 172-173 note;
    gross and net, 180-183;
    of capital, 170-171;
    of concrete instruments, 174-177;
    of labor, 171-172;
    relation to interest, 182-184;
    relation to price, 191-194;
    traditional formula, 160-162;
    universality of principle, 177-178.

  Ricardo, 121, 160, 179.

  Risk, 122, 123 note, 214.

  Social Economics, 3 note, 61.

  Socialism, 378, 384-386, 395, 397.

  Socialistic state, group organization in, 71.

  Specific utility, 8 note.

  Standard of living, 322 et seq., 342 _et seq._

  Static state, 132-133.

  Strike, sympathetic, 505.

  Strikes, effectiveness under varying conditions, 462 _et seq._

  Substitution, 267 _et seq._

  Supply and demand, 93-97.

  Supply, normal, 114.

  Surplus, consumers', 105.

  Tariff, relation to trusts, 528 _et seq._

  Trade union, power of, under varying conditions, 462 _et seq._;
    restriction of membership, 503-504;
    restriction of output, 509 _et seq._

  Transportation, Chs. XXIII, XXIV;
    as affected by diminishing returns in agriculture, 398 _et seq._;
    monopoly in, 435 _et seq._

  Trusts, 201, 369-371, 391-392;
    as affected by railway discriminations, 393-394;
    methods of stifling competition, 394-395, 527-528;
    relation to tariff, 528 _et seq._

  Tuttle, C. A., 34 note.

  Union label, 506 _et seq._

  Utility, absolute, 54 note;
    contrasted with cost, 43-44;
    diminishing, 98;
    effective, 54 note;
    elementary, 11-12;
    final, 51 note, 54 note, 97-98;
    form, 12;
    marginal, 51 note;
    measurement of, 40 _et seq._;
    of producers' goods, 42-43;
    place, 12-13;
    varieties of, 7-8.

  Value, 40-42, 99-101;
    affected by caste, 268;
    in primitive conditions, 50-51;
    natural, 94-95;
    normal, Ch. VII;
    of complex goods, 100 _et seq._;
    static, 124-125, 202-203.

  Value of service principle, 405 _et seq._

  Violence in labor disputes, 457 _et seq._

  Wages, Ch. VIII, 85, 86;
    as affected by improved methods, 299-300;
    as affected by improved organization of industry, 318-319;
    as affected by increase of capital, 316 _et seq._;
    as affected by inferior bargaining power of labor, 452;
    as affected by organization of labor, Ch. XXV;
    increase of, effect on monopoly price, 479-480;
    law of, 143 _et seq._;
    rise of, effect on monopoly, 335 _et seq._;
    static, 224-225.

  "Waiting," 187-188.

  Wants, changes in, 206;
    elasticity of, relation to improvements in methods, 267 _et seq._

  Wealth, 5-9;
    increase of, effect on population, 333.

  Webb, Sidney & Beatrice, 357.

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