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

by John Bates Clark

(4) Nothing but a fall in the price of the product created by the aid of these old machines can prevent them from earning the remainder of the fund required for replacing them. If they do this, they prevent any positive destruction of capital which many inventions cause.

(5) When only one entrepreneur introduces the new appliance, his production is usually increased, but not to an extent that causes a quick fall in price. This affords to the users of old appliances whose plants are not already at the final point of inefficiency a chance to continue accumulating the fund for replacement. The profits of the user of the better appliance are meanwhile accruing.

(6) When all entrepreneurs introduce the new appliance at once they do so—provided that their act is intelligent—because the saving effected in the cost of production makes the change advantageous in spite of the waste entailed. They expect an all-round net profit during the period before the price of the product falls to its new level, and they expect that this will give them more than is required for interest, cost of future replacement of the superior instruments, and the deficit in the accounts caused by the early discarding of the superseded appliances.

(7) Without treating this prospective profit inhering in the new appliance as capital, we must regard it as affording an assurance that new capital will soon appear. There are great gains to be made by using the new appliances, and some of these will add themselves to the permanent fund of productive wealth.

(8) The cost of the new appliances may be defrayed by their owner's earlier accumulations or by loans. In either case they come out of a social fund that is created mainly by the appliances which in a preceding period have yielded special gains. The machine of to-day is paid for from the available surplus created by the machine of an earlier day, and a series of inventions enlarges the social fund of capital in spite of all wastes by which it is attended.

The effect that a series of improvements has on the amount of social capital, if we measure the fund solely on the basis of the cost of the capital goods which embody it, may be represented thus:—The horizontal line measures time and is graduated in years from one to ten. The distance of the point above this base represents the amount of capital as estimated in units of cost, in the possession of the society at the time a particular improvement is made, and would remain unchanged if society were static. The level of the line AB represents what, under such a condition, would be the capital of a decade. The curved line AB´, dipping below AB and then rising above it, expresses the fact that a single important improvement first trenches on the amount of capital in use, and soon makes good the deduction and makes a positive addition. It raises the sum total of capital to the level of the latter part of the line AB´. The curved line A´B´´, first falling below A´B´ and then rising above it, expresses the fact that a second improvement, made a year or two after the first one, makes a reduction of the amount of capital as determined by the first improvement, and later adds more than enough to make good this reduction. A third improvement, at the end of two or three further years, has the effect expressed by the line A´´B´´´; that is, it first reduces the fund below the level at which at that time it would otherwise have stood,—but by no means to the level at which it stood when the series of improvements began,—and later carries it above the line expressing the highest level it would, without this improvement, have attained. In so far as these three improvements affect the level of the social capital for the ten-year period, it stands at the level indicated by the line AA´A´´B´´´, and no later improvement, even at the time of its introduction, does more than to make a small reduction of the increment of capital accruing from the products of the earlier improvements. A series of economical changes means a perpetual increase of the social capital as well as a perpetual improvement in the mode of applying labor. The increments of capital due to the earlier changes are far more than is required by the introduction of any later one.

The Impossibility of Reducing Capital by too Rapid Progress.—There is a theoretical question whether this series might be too rapid to permit this result. If the interval were a month instead of several years, and if the amount of capital put into the new appliances were the same that, in the figure, they are represented as requiring, the effect would be to make twelve deductions from the amount of the social capital in the course of a year, which would carry it some distance below its original level, while in this one year there would have been no time for the profits to accrue in order to restore and add to the fund. In the next year and the following ones this would follow, and the effect, in the course of ten years, would be to carry the social capital to a still higher level than the one it reaches in consequence of the slower succession of economical changes. Increasing the rapidity of productive inventions only multiplies the additions made to the social capital.

We may summarize the chief facts concerning technical progress as follows:—

(1) Progress may throw particular men out of their present employment, but cannot destroy the social demand for their labor. Somewhere in society there is a place for them.