The Principles of Economics, with Applications to Practical Problems

by Frank A. Fetter

RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS OF CAPITAL

§ I. HOW VARIOUS FORMS OF CAPITAL MAY BE INCREASED

The older and the modern way of viewing wealth

1. Men seek to increase income by increasing capital. Men may strive to increase their rents without expressing the rent-bearer in terms of capital. Peasant owners and small proprietors, toiling fondly on their little estates, seeking steadily a larger crop, a larger income, accomplish wonders in bringing waste land to a high state of cultivation. Working on the soil that is at once their livelihood and their home, they do not consciously reckon the value of the labor they are putting upon it. No money can buy that which to them is beyond price. But, in our money economy, efforts are largely directed toward the increase of the capital sum. Investment takes the form of putting in a sum of money in the hope of getting an income bearing a certain relation to it. The first thought is of the value of the wealth invested, which has been carefully measured and expressed in dollars and cents. Wealth looked at in the older way was valued for what it did immediately for its owner, for its concrete fruits; looked at in the modern way, it is valued as a marketable income-bearer readily convertible into a multitude of other forms. Thus investments come to be thought of in terms of general purchasing power, from which it is expected to realize an income of a given percentage.

Free goods of unlimited supply

Beginning of scarcity of common materials

2. There are some classes of goods that can be increased without any noticeable increase in difficulty. The extremest examples are undiminished goods such as air, sea-water, the water of large rivers. These are free goods because, however much is used, the supply is immediately renewed. But they are undiminished only in a relative sense and in reference to present need. The water in the Western rivers long flowed on, undiminished by the uses made of it. But progressing civilization required more water for cities, for mining, and for irrigation, and now states and corporations are going to law over these formerly undiminished free goods. Some kinds of goods are produced from such very common materials that it might seem possible, by the substitution of agents, to produce an unlimited supply. How can bricks be limited in number, being made as they are from one of the commonest materials on the earth's surface? But the largest clay banks are limited in size; a large proportion of the places where bricks are needed are not near a supply of clay of good quality; and after a brick-yard has been used for a time there is increasing difficulty in getting out the material. While, therefore, bricks are scarce and hard to get from the outset in some places, the scarcity grows more marked in many places at first well supplied. If materials are scarce in any degree, their continued use for one purpose increases their scarcity in all other uses. Economic goods are goods having value; value implies scarcity, and an increasing demand means inevitably a higher value at some point. This is true of clay, stone, water, and the commonest kinds of labor.

No scarce goods can be indefinitely increased

It has long been customary for economists to talk of economic goods that could be increased indefinitely (meaning infinitely or, in any event, without any limit ever appreciable to man) without any increase in the cost or scarcity. This class of goods was considered to be very large. There is no such class of economic goods; it is evidently impossible that there should be. If they are already "scarce," increasing demand must make them scarcer. There are, however, some goods that practically can be increased with so little difficulty that their limitation is not of great social importance. Progress, population, prosperity, are not primarily conditioned on their amount; limitation will be felt far earlier elsewhere. They are at one end of the scale; they are the relatively increasable goods.

The products of land are increased at a given time and place at increasing cost

3. There is a large class of goods whose increase is seen to be gained with increasing difficulty. This is seen most clearly in the diminishing returns from land. In the attempt to get some food-products in greater quantity from a given area at a given time, increasing difficulty is met with at once. This attempt continued for a series of years results in historical diminishing returns, as was strikingly illustrated in English experience during the Napoleonic wars, when wheat rose in value because of the greater difficulty of producing the larger supply needed. Some replenishing agents will restore themselves if given time; the forest will grow up if left untouched by man; the field will recover its fertile quality if allowed to lie fallow. But this self-replenishing of agents is a slow process, and time is costly. Man therefore tries in other ways to force more uses out of goods, until checked by the increasing difficulty. The goods subject to "the law of increasing cost," as it was called formerly, were considered to be a peculiar class comprising only a small portion of wealth. But it can now be seen that the law may apply ultimately, though in differing degrees, to every kind of economic goods. Indeed, the principle just discussed is no more than one phase of the law of economic diminishing returns, which has a universal application to the realm of values.

Agents most nearly fixed in amount are somewhat increasable

4. There is a class of goods, natural agents and stores of materials which appears to be relatively fixed in quantity or which is increasable only with much difficulty. The first part of this proposition expresses mildly the thought that long obtained among economists: it was said that the supply of certain things was absolutely fixed, the chief of these being land used for agriculture. The idea as held by Malthus and Ricardo was modified by John Stuart Mill in somewhat inconsistent ways. Land, it was said, is a thing which "man cannot make," therefore its supply is fixed. The second part of the opening proposition expresses the view here held: the supply of no important class of goods is absolutely fixed, in any reasonable sense. Most, if not all, belong to the class that is increasable, although it may be with much difficulty. Even when the exact thing cannot be duplicated, as a bust by an ancient sculptor or an autograph of a dead author, many substitutes serving the same or closely related wants, affect and limit the demand, and thus increase the supply. Men cannot, it is true, increase the stores of copper in the earth, but they devise new processes to extract it from ores before worthless, and invent methods of procuring aluminium, which yields some of the same utilities as copper. Even the supply of land, as is shown elsewhere, is constantly changing. Thus all kinds of wealth can be increased in some degree; many kinds in the course of time are very greatly increased with little or no direct effort, but the supply of all alike can be secured in larger amount at any given moment only at the cost of increasing difficulty.

§ II. SOCIAL SIGNIFICANCE OF THESE DIFFERENCES

Physical amount vs. economic supply

1. Not the fixity of the physical amount of agents, but the economic supply is significant. There is danger of confusion between these two ideas. The statement that "land" cannot be created and that therefore "the supply is fixed" involves a fallacy. The word supply means the amount that is available at the moment or during the period spoken of. The land in Greenland is not, and probably never can be, a part of the supply of land in England. The land in America for centuries was not, but now has become, for some purposes, a part of the supply in the same market as the land of England. The question of importance in economic discussion is not whether the physical material can be brought into existence, but whether the economic "supply" can be increased. The existence of coal-mines in Venus or Mars is of no economic importance to us, but coal-mines on the earth, yet undiscovered, present a potential supply that at any moment may be realized.

Discovery enlarges the supply of natural resources

2. Discovery of new lands and of new natural deposits continually enlarges the economic supply of the agents most nearly fixed in physical amount. This proposition states a historical fact. Any explanation of the economic occurrences of the last five centuries or of the immediate future, that ignores this fact of the increasing supply of many kinds of land and natural resources in the markets of the civilized world, must lead to false conclusions. The rate of this movement has been more rapid in the past century than theretofore, and perhaps more rapid than it will be henceforward; but that this development will continue in large measure and for a long period, is not open to question. Undeveloped areas will be opened to the world, and new geologic realms will be explored. Yet the notion criticized above is found in all the older text-books. The idea arose in England in the first quarter of the nineteenth century when land and food were rapidly rising in price, and it has vitiated a large part of both the economic theory and the practical conclusions on this subject.

The effective supply grows by invention

3. Invention, including new modes of transportation and new processes, increases the economic supply of most scarce goods and provides substitutes for the others. Some inventions increase economic supply by making available the uses in goods that were before unavailable. Subsoil ploughing annexes to agricultural land new layers of soil that are just as important as new acres added to the surface. If land could be used three times as deep, it would be as good for many purposes as if it were of three times the extent. New trade routes and new means of transportation add to the supplies available in the older countries as effectively as if their areas were increased. The building of railroads in western America had an effect on English rents identical in nature with that which would have been produced had an equal area of somewhat less fertile land touching England, risen out of the ocean. Every country in Europe has repeatedly felt the shock of these great economic changes which have compelled the recapitalization on a lower plane, of nearly all kinds of their landed wealth. Where the same agents have not been multiplied, substitutes have been found that are just as effective in meeting the economic need. It is the result, the gratification, that man seeks: any particular good is but the means to an end.

Production of land by physical change

4. Increasing wealth and new labor make possible the increase of the agents that appear most nearly fixed in supply. When the need arises men turn to new enterprises. The reclaiming of land in Holland is a striking but far from isolated example. Among the larger undertakings of this kind are the draining of the Haarlem Lake in 1840-58, by which 40,000 acres of rich land were made available, and the draining of the Zuyder Zee, which is adding 1,300,000 acres. Though there have been many minor undertakings of the kind, the area reclaimed is relatively small compared with the whole area of the land in the world used for agricultural purposes. There are still great areas of fens, swamps, and marshlands, such as those on the Jersey coast in this country, which with moderate effort could be reclaimed. While the possibility must be recognized, the increase of the area of available agricultural land by means of such physical changes is relatively small.

And by the work of pioneers

The work of the pioneer, as a producer of a supply of land, is, however, of the greatest importance. The pioneer annexes new areas to the economic world and to the market in which he has lived. This is recognized of late by writers that perhaps do not fully mark its significance to economic theory. The work of the explorer and prospector is that of a producer of mineral resources, and daily market quotations reflect the changes in "the supply" of these natural stores.

Successive utilization of various grades of agents

5. Limitation of the supply appears first in the better qualities, and efforts to increase wealth are then directed to making available the poorer grades. Great quantities of the poorer grades of wealth, even of those things that are relatively fixed in supply, lie unused. Great areas on the edge of civilization still await the pioneer, the prospector, and the miner. Here is a source of wealth and a field for enterprise. The growth of society may cause some of the poorer agents in time to become the best. When men crossed the ocean to settle on Manhattan Island, it was a wilderness; but the growth of commerce has caused the land in New York city to become more valuable than that in London. Changes are still in progress, for of late the smaller ports to the south have increased their trade at a more rapid pace than New York has.

Goods ranged on a scale of increasableness

The difference in increasableness of the various forms of wealth is of importance in considering various social questions such as the effects of an increase of population, and the kinds of taxation most equitable and most favorable to the progress of society. Account must be taken of the fact that the number of bricks can be increased more easily than the amount of land; but there must not be overlooked the possibility of increase in any of these forms of wealth, nor the limits to the increase of any one of them. When one wishes to save or increase wealth, he turns to these great unappropriated fields, unused things or things imperfectly used, and tries to convert them into effective agents. The different forms of wealth may be ranged on a scale according to the ease with which they can be increased by effort. They may therefore be classed as relatively fixed and relatively increasable. Some natural resources belong at one end, and some at the other end of this scale. No hard and fast line divides the different kinds of goods, but the difference in degree of increasableness is a fact of great social importance, affecting the direction in which industry can and must progress.

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