Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

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 changed.

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 avoided.

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.