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

by John Bates Clark

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 center.

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 another.

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]

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.