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

by John Bates Clark

of the industrial system, we shall see that improvements of method in the general group H-H´´´ have the effect of liberating capital in the other groups and subgroups. H´´´ is the comprehensive symbol that represents active instruments of all kinds. It is engines and boilers, looms and spindles, lathes and planers, rails, cars, bridges, tunnels, canals, ships, buildings, and all the myriad instruments which actively aid man in making the things he wants for consumption. New methods at H-H´´´ make the supply of all these things cheaper, which means that the labor and capital of the group H-H´´´ which would have been required for replacing the instruments used in the other groups will more than suffice for that purpose, and a part of their time may be given to making machinery, etc., not formerly used. This amounts to liberating a part of the fixed capital in the three groups producing A´´´, B´´´, and C´´´, although the free capital that is thus gained may in part be used in furnishing additional appliances for use in these same groups.

Local Concentration of Capital which causes a General Liberation of It.—In such a case the new method used at H´´´ may, at its introduction, require more capital than was formerly used at that point in the system. Building Bessemer converters was a costly operation, though the output of cheap steel afterward saved far more capital than the converters required. The power canals of Niagara cost something, but the products created by means of them are cheapening many tools of industry; and like effects follow most applications of electricity for utilizing waterfalls and carrying to great distances the power which they generate. They follow on a considerable scale as the culm of coal mines is economically burned and made to generate steam and drive dynamos. All cheapening of transportation, besides making consumers' goods cheaper, has the same effect on producers' goods, and by this means liberates capital. It causes a single productive appliance to cost less than it otherwise would cost and renders available for other purposes a part of the outlay that was formerly required for replacing it at the end of its industrial career.

Effect of Speeding Machinery.—Increasing the speed of a machine is a capital-liberating operation, since it enables a certain number of machines to do the work of a larger number. Running spindles and looms rapidly, while it requires fewer laborers for a given amount of product, requires fewer spindles and looms also.

Cases in which Liberated Capital remains partly in the Same Industry in which it has been Used.—A distinction has carefully to be made between causing less capital to be used per unit of physical product, and causing less to be used in a particular occupation without regard to the amount of the product. If we cheapen the operation of cloth making, we shall increase the consumption of cloth, and in this way we may draw new capital into this business, even though we can build and equip a mill of a given capacity more cheaply than before. In this case we have liberated capital in this business and at once reëmployed it at the same point. If we use as many looms as before, the more rapid running calls for more spindles to furnish yarn, and the new spindles require larger engines and boilers, or more water wheels, wheel pits, and reservoirs, to furnish power. Enlarging a business in this way usually calls for an enlarged general capital in the industry, though it calls for less capital for a given output; and the striking fact is that this effect may be realized by means of devices which actually save capital at particular points in the industry. If, after power looms were introduced, some inventive genius had made them cost only a quarter as much as on their first introduction they had cost, the profits of the business would have been increased and, in time, far more capital in the shape of spinning machinery, engines, etc., would have been required than had formerly been used in those forms. With general growth of population and wealth the increased consumption of cloth calls, in the end, for more capital in the form of the looms themselves.

General Consumption as affected by a Specific Increase of Productive Power.—Consumption in the generic—the use of consumers' goods of every kind—grows as the power to make the good increases; but a point that is of great importance is that any specific increase of productive power brings about a general increase of consumption. It brings about a greater all-round creating and using of commodity. If we can hereafter make the A´´´ of our table with the expenditure of half as much labor and capital as we have heretofore used in creating it, the liberated agents of production become available for making whatever is most needed, and they will, in fact, be used for increasing the supply of all three types of consumers' goods represented in the table. They will give us more of A´´´, B´´´, and C´´´ in quantities adjusted by the laws of value. The outcome of this is that an economy in making A´´´ actually gives us more of A´´´, B´´´, and C´´´. We become larger consumers of everything because of the cheapening of anything which enters into our list of articles for personal use. This presents a further aspect of the process of moving labor and capital from group to group, in which the possibility of hardship for particular persons inheres. The conclusion to which a fair weighing of the effects of mechanical progress has already led us is that there are very few, even of the workers who suffer displacements of this kind, who do not during their lives gain far more than they lose by general progress; and the effects of cheapening capital goods at one point, and so liberating capital for use at other points, increases this beneficent effect. The special costs of making the new kinds of machinery have been large in the earlier stages of the process, but have afterward grown smaller; and as machinery has come into general use the liberating of capital by the cheapening of the machines has become a more and more important factor. Some of the capital liberated at A goes to assist labor in furnishing the additional amount of B´´´ and C´´´ which enlarged consumption requires.

Hardships entailed on Capitalists by Progress.—As the old handicrafts have now been largely supplanted by machinery, and the hardship that continuing progress entails on laborers is greatly reduced, there is involved in progress a new burden which falls altogether on the capitalist employer. The machine itself is often a hopeless specialist. It can do one minute thing and that only, and when a new and better device appears for doing that one thing, the machine has to go, and not to some new employment, but to the junk heap. There is thus taking place a considerable waste of capital in consequence of mechanical and other progress. As there have come into use marine boilers made of steel and capable of standing a very high pressure, the low-pressure boilers of former days have become useless. With the advent of triple expansion cylinders, twin screws, and better and larger hulls, ships of the old type lost their value; and similar things are occurring in every line of production. A new mill is built and equipped with the best machinery known at the date of its building; but before a year has gone by all the machines in one department are so antiquated that it is best to throw them out. Indeed, a quick throwing away of instruments which have barely begun to do their work is often a secret of the success of an enterprising manager; but it entails a destruction of capital. What is easily to be seen is (1) that a single change of that kind makes an immediate draft on the general fund of available social capital; and (2) that this draft, as a rule, is soon repaid with increase. Machinery that is nearly new is thrown away when it appears that another kind soon will earn enough to make good the waste thus entailed, and the paradox is in the fact that the entrepreneur who quickly destroys capital really saves it, while he who, by using the old appliances, tries to hold on to the capital loses it, since he sacrifices profits from which more would have come. Running his antiquated engine, the unenterprising man has to content himself with small returns and, in the meanwhile, sees his actual productive fund dwindling by the deterioration of the old equipment.

The Offset for Capital destroyed by Changes of Method.—What has happened in such a case to the enterprising man is a loss of personal capital. What he has just paid for the supplanted instruments has gone for nothing. His financial status is improved rather than injured because of the prospective profits which the new appliances will earn. What has happened to the man who keeps the old machinery is a partial or total loss of whatever he has lately put into it, not offset by such profits. By keeping his capital goods he is losing his capital without having his rival's assured prospect of regaining it. Whether the gains made by those who promptly discard antiquated appliances offset the wastes suffered by those who hold on to them too long, is a question that requires more space than can here be allotted to it; but the following facts determine the answer:—

(1) Instruments naturally at any one date are of an average age equal to about half their working duration.

(2) Discarding all of one kind at any one date would involve drawing on the fund of social capital for about one half of the amount needed to replace these instruments.

(3) Very few are at once discarded on the invention of the improved types.