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

by John Bates Clark

EFFECTS OF DYNAMIC INFLUENCES WITHIN THE LIMITED ECONOMIC SOCIETY

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 profitable.

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.