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

by John Bates Clark

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 tend.[2]

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 consideration.

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]

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.