ESSENTIALS OF ECONOMIC THEORY

AS APPLIED TO MODERN PROBLEMS
OF INDUSTRY AND PUBLIC POLICY

BY

JOHN BATES CLARK

PROFESSOR OF POLITICAL ECONOMY IN COLUMBIA UNIVERSITY
AUTHOR OF "THE DISTRIBUTION OF WEALTH," "THE PHILOSOPHY OF WEALTH," "THE PROBLEM OF MONOPOLY," ETC.

New York
THE MACMILLAN COMPANY
1915

All rights reserved

Copyright, 1907,
By THE MACMILLAN COMPANY.

Set up and electrotyped. Published October, 1907. Reprinted July, 1909; July, 1915.

PREFACE

In a work on the "Distribution of Wealth," which was published in 1899, I expressed an intention of offering later to my readers a volume on "Economic Dynamics, or The Laws of Industrial Progress." Though eight years have since passed, that purpose is still unexecuted, and it has become apparent that any adequate treatment of Economic Dynamics will require more than one volume of the size of the present one. In the meanwhile it is possible to offer a brief and provisional statement of the more general laws of progress.

Industrial society is going through an evolution which is transforming its structure and all its activities. Four general changes are going on within the producing organization, and the resultant of them, under favorable conditions, should be an enrichment in which all classes would share. Population is increasing, capital is accumulating, technical methods are improving, and the organization of productive establishments is perfecting itself; while over against these changes in industry is an evolution in the wants of the individual consumer, whom industry has to serve. The nature, the causes, and the effects of these changes are among the subjects treated in this volume.

The Political Economy of the century following the publication of the "Wealth of Nations" dealt more with static problems than with dynamic ones. It sought to obtain laws which fixed the "natural" prices of goods and those which, in a like way, governed the natural wages of labor and the interest on capital. This term natural as thus used, was equivalent to static. If the laws of value, wages, and interest had at this time been correctly stated, they would have furnished standards to which, in the absence of all change and disturbance, actual values, wages, and interest would ultimately have conformed. The economic theory of this time succeeded in formulating, correctly or otherwise, principles of economic statics and a fragment or two of a science of economic dynamics, although the distinction between the two divisions of the science was not clearly before the writers' eyes. The law of population contained in the work of Malthus is the only systematic statement then made of a general law of economic change. Though histories of wages, prices, etc., furnished some material for a science of Economic Dynamics, none of them attained the dignity of a presentation of law or merited a place in Economic Theory. Students of Political Economy were at that date scarcely awakened to the perception of laws of dynamics, and still less were they conscious of the need of a systematic statement of them. A modest beginning in the way of formulating such laws the present work endeavors to make.

The first fact which becomes apparent when economic progress is studied, is that static laws have a general application and are as efficient in a society which is undergoing rapid transformation as in one that is altogether changeless. Water in a tranquil pool is affected by static forces. Let a quantity of other water rush in and there are superinduced on these forces others which are highly dynamic. The original forces are as strongly operative as ever, and if the inflow were to stop, would again reduce the surface to a level. The laws of hydrostatics affect the waters in the rapids of Niagara as truly as they do those in a tranquil pool; but in the rapids a further set of forces is also operative. In the work referred to, issued in 1899, an effort was made to isolate the phenomena of Economic Statics and to attain the laws which govern them. Necessarily this study made a certain impression of unreality, since it put out of sight changes which are actually going on and are the conspicuous fact of modern life. It assumed the conditions of a world without any such movement and endeavored to formulate laws which, in such a condition, would fix standards of value, wages, interest, etc. It put actual changes out of sight, intentionally and heroically, but with a full recognition of the fact that they are actually taking place and must in due time be introduced and studied. We live in what is par excellence an age of progress, and it is in part for the sake of perceiving the laws of progress that we first disentangle from them the laws of rest and make a separate study of these. The world from which change is excluded is unreal, but the static laws which can be most clearly discerned by mentally creating such a world have reality. Every day's transactions are governed by them as truly as a physical element like water in active movement is affected by forces which, if they acted alone, would bring it to a state of permanent rest. The first purpose, therefore, of the present work is to show the presence and dominance in the real world of the forces described in the earlier work. It brings static laws into view and endeavors to show how they act at any one particular stage of industrial evolution. Even while changes are examined, the fact is perceived that there are steadily at work forces which, if changes should cease, would make society conform to a certain imaginary static model and makes wages and interest also conform to static standards.

Another purpose of the work is to examine seriatim the effects of different changes, to gauge the probability of their continuance, and to determine the resultant of all of them acting together. It is important to know under what conditions changes proceed at a normal rate, and when the standard of wages rises as it naturally should. As the actual rate of wages pursues its rising standard, but lags somewhat behind it, it is necessary to know what determines the interval between the two, and when the interval is normal. What is called "economic friction" is the cause of this interval and is an element that is amenable to law.

There is to be studied, not only the friction which obstructs the action of natural forces, but positive perversions of the forces themselves. Of these the chief is monopoly; and its influence, its growth, the sources of its power, and its prospect of continuance have to be determined. The actual tendencies of the economic system are against it, and so—if we except a few monopolies created for special ends—are both the spirit and the letter of the civil law. In a country in which law held complete sway, all objectionable monopolies would be held in repression. In order to see how much economic forces can be made to do in this direction, the present work discusses railroads and their charges, and some of the practices of great industrial corporations, and tries to determine what type of measures a government should take in dealing with these powerful agents. In connection with monopoly and with the conditions of economic progress a study is made of trade unions, strikes, boycotts, and the arbitration of disputes between employers and employed, and also of the policy of the state in connection with them, and with money and protective duties.

It is my belief that students should become acquainted with the laws of Economic Dynamics, and that they can approach the study of them advantageously only after a study of Economic Statics. The present work is in a form which, as is hoped, will make it available for use in class rooms, not as a substitute for elementary text-books, but as supplementary to them. It omits a large part of what such books contain, presents what they do not contain, and tries to be of service to those who wish for more than a single introductory volume can offer.

An essential part of the theory of wages here stated was presented in a paper read before the American Economic Association, in December, 1888, and published in a monograph of the American Economic Association in March, 1889; and other parts of this theory were issued at intervals following that date. The theory of value was published in the New Englander for July, 1881. I had not then chanced to see the early statements of the principle of marginal appraisal contained in the works of Von Thünen and Jevons, and did not consciously borrow anything from their writings, but I gladly render to them the credit that is their due. I do not fear that I shall be supposed to have borrowed other parts of the general theory here offered. The theory of capital here stated was first presented in a monograph of the American Economic Association for May, 1888, and the discussion of money of which the present work gives a summary, in articles in the Political Science Quarterly for September, 1895, and for June and September, 1896. The discussion of the relation of protective duties to monopoly appeared in the same quarterly for September, 1904.

The author should, perhaps, apologize for the fewness of the citations from other works which this volume contains. The richness of the recent literature of Economic Theory, especially in America, would have made it necessary to use much space if the resemblances and the contrasts presented by points in this volume, and corresponding points in other volumes, had been noted.

Worthy of special attention, if citations had been given, would have been the writings of Professors Irving Fisher, Simon N. Patten, and Frank A. Fetter of this country, and Professor Friedrich von Wieser of Prague, who have worked in various parts of the same field in which the studies here offered belong, and also those of Minister Eugen von Böhm-Bawerk of Vienna, who has treated some of the same themes in a strongly contrasted way. If merited attention were paid to the works of Hadley, Taussig, Carver, Seligman, Giddings, Seager, Walker, and a host of eminent foreign scholars, a large part of the space in the book would have to be thus preëmpted.

I desire most gratefully to acknowledge the assistance which in the preparation of this book I have received from my colleague, Professor H. L. Moore of Columbia University, from my son, Mr. John Maurice Clark, Fellow in Economics in Columbia University, and from my former colleague, Professor A. S. Johnson of the University of Nebraska. Besides reading the manuscript and offering valuable suggestions, Professor Johnson has kindly taken upon himself the reading of the proof.

JOHN BATES CLARK.

CONTENTS

ESSENTIALS OF ECONOMIC THEORY

ESSENTIALS OF ECONOMIC THEORY

CHAPTER I

WEALTH AND ITS ORIGIN

The creation and the use of wealth are everywhere governed by natural laws, and these, as discovered and stated, constitute the science of Economics. Some of them come into operation only when men live in more or less civilized societies and work in an organized way, while others are operative wherever men work at all. Every man who lives must have something that can be called wealth, and, unless it is given to him, he must do something in order to get it. A solitary hunter, living in a cave, eating the flesh of animals and clothing himself in their skins, would create wealth and use it; but he would not take part in a social kind of industry. What he does could not be described as a bit of "social," "national," or "political" economy. Yet the gaining of his living would be an economic operation and would involve a creating and using of wealth. A statement of the laws governing the processes by which such a man makes the earth yield to him means of support and comfort would constitute a Science of the Economy of Isolated Life, which is a part of the general Science of Economics.

Primitive Capital.—If an isolated man hunts with good implements, he gets more game than he would have done if he had not used some of his time in making such implements. It pays such a man to interrupt his hunting long enough to make a spear or a bow and arrows. This amounts to saying that it is an advantage to him to become, in a simple way, a capitalist as well as a laborer; for the primitive implements of the chase are forms of productive wealth, or capital. Moreover, if he possesses foresight, he will keep enough food within reach to tide him over periods when game is not to be had, and such a store is another form of capital.

The Field of General Economics.—The economy of a man who works only for himself is subject to laws that are based on his own nature and the character of his material environment. Because he is what he is and because nature is what it is there is a certain way in which he must proceed, if he will live at all, and there are certain conditions which must exist, if he is to live well. The inherent productive power of labor and of capital is of vital concern to him, since he is both a laborer and a capitalist; but he is in no way interested in what we commonly call the relations of labor and capital, since that expression always suggests the dealings of one class of men, who labor, with another class, who own or control productive wealth. The study of such relations takes us at once into the domain of Social Economy; but we can study certain universal laws of wealth without at all entering that domain. When we speak of the power that resides in a bow and arrow, we refer to a truth of General Economics and one which illustrates the inherent power of capital, though we may be far from thinking of lenders and borrowers in a modern "money market" or of dealings of any one class of men with any other.

The Field of Social Economics.—The moment that we begin to examine economic relations that different classes of men sustain to each other, we enter the realm of Social Economics; and we do this whenever we study modern business dealings. Even our hunter would take part in a social economy if he began to sell some of his game; and from that time on his income would depend, not wholly on his relation to material nature, but partly on his relation to other men. A good market for his game would come to be of the greatest importance to him; and a market for anything implies a social method of securing wealth.

Fundamental Facts Common to Primitive Life and Social Life.—The relations which men sustain to each other in civilized industry are thrown into the foreground in the science of Social or "Political" Economy.[1] It is an organized system of industry in which we are engaged, and it is that which we care most to understand. Until recently we have had a far less satisfactory understanding of the social element in industry—that is, of the relations that men who are producing wealth sustain to each other—than we have had of such general facts as a primitive producer needs to know. We have had, for example, much information concerning the materials which the earth contains and the way to make them useful. We have had a practical knowledge of what wealth is and of the mode of creating it, and we have been able to identify it as we have seen it either in the raw or the finished state. We have known what labor is, how it proceeds and what helps it needs to enable it to make clothing, to prepare food, etc. We have not known as much about the way in which the modern market for such products is regulated, and how a modern tailor or baker shares gains with the man who employs him and provides him with materials and tools, and the main purpose of studying Economics is to get an understanding of such social facts; but this cannot be done without first bringing before the mind the more general facts concerning the inherent nature of wealth itself and of the activities that are always necessary—in uncivilized life as well as in civilized—for creating and using it.

General Facts First in the Natural Order of Study.—The primitive and general facts concerning industry, which, in a broad sense, is the creating of wealth, need to be known before the social facts can profitably be studied; and a statement of the principles of Political Economy should therefore begin by presenting a body of truth which is independent of politics and sociology and so general that it is illustrated even in that simplest of all conditions, in which no market exists and every man makes by his own labor all the goods that he uses. The wealth of a Crusoe, that of a solitary Esquimau, and that of a pygmy in equatorial Africa have laws as well as that of a European or American employer or bondholder. The qualities in matter which make a share of it important for promoting the welfare of its possessor can be detected in the simplest commodities that are anywhere used. All kinds of industrial products have a common origin. Labor and capital act together in making a birch canoe as truly as they do in producing a transatlantic liner; and the productive power of each of these two agents is everywhere governed by certain general laws. Before ascertaining what is true of wealth when capital has become complex and when laborers have become specialists, each producing one particular part of one product and securing many finished goods in exchange for it, it is well to state some facts relating to wealth which are so general that they appear in all stages of civilization.

The Nature of Wealth.—The old English word weal describes a condition of life. It is the state of being "well off," or of having one's wants amply supplied. Well-being in a broad sense of the term may depend largely on a man's state of health, his temperament, his conscience, or his relation to his friends; but the weal that is so secured is not described as a state of wealth. That depends on the possession of useful and material things, and the rich man has more of them than other men. The term wealth, which originally signified the state of being rich, afterwards came to be applied to the things which make a man rich, and it is thus that the term is used in the science of Economics.

What Things constitute Wealth.—It is clear that useful things, like air, which are at hand in unlimited quantity, do not make any one rich in this comparative sense, for they benefit all alike; and, in so far as they are concerned, all men are on the same level of welfare. Moreover, since they are so abundant as to shower benefits everywhere in profusion, the quantity of them that a man has at his disposal may be lost or thrown away with entire impunity. He would only have to help himself again from the abounding supply which nature thrusts on him in order to be as well off as he was before. A bucketful of water on the shore of Lake Superior is of no importance to the man who has it. If it were spilled on the sand, the man would have only to dip up another bucketful, with an expenditure of effort that would be too small to take account of. If, however, fresh water were scarce, every bucketful would have its importance, and the loss of that quantity would make a distinct impression on the man's well-being. Whenever each particular part of the supply has this power to make a possessor better off than he would be without it, the substance is a form of wealth. The quality of being specifically important is, therefore, the essential attribute of all the concrete forms of wealth. Sand by the seashore does not have any specific importance, since it is so abundant that the gain or loss of a wheelbarrow load would not make a man better off or worse off; but a pile of sand by the side of an unfinished building has this quality. There every barrow load is of consequence, for the available quantity is so small that diminutions reduce and additions increase the wealth of the possessor. Sand on the shore has the inherent power to help make mortar, and water in Lake Superior has the power to quench thirst, but neither of them has the attribute which would make it a form of wealth, namely, specific importance. Particular parts of the supply may be lost with impunity.

Varieties of Utility.—We have used the term importance, rather than usefulness or utility, to describe the quality which, if it exists in every particular bit of a substance, makes it all a form of wealth. With due care we may use the term utility. In a way even a cup of water dipped by a fisherman from the lake is useful, for it renders a service. Though the man might lose it and be no poorer, he cannot say that the thing has no utility of any kind. He can say that it has no importance. What it has we may call absolute utility, or the power to do for a man something which he wishes to have done. When the fisherman is thirsty the water will do him good. It has an absolute service-rendering power; and yet this cupful makes the owner no better off than he would be without it, since the service which it is capable of rendering would be rendered whether the man had it or not. Absolute utility in an article is the power to render any service whatever, regardless of the question whether it would be rendered equally well if the article were absent. If conditions were such that the man would have to go thirsty in case he spilled his cupful of water, then this little supply would have what we may term effective utility, and this means that the presence of the particular bit is a positive element in conducing to the man's welfare. Usable things have absolute utility even when they are superabundant, but they have effective utility only when the quantity of them is so limited that every particular bit of it is of some importance. Absolute utility and limitation of supply insure to them this quality; and this principle holds true in the economy of the most primitive state as well as in that of a civilized one.

The Origin of Wealth.—Some of the things that have this kind[2] of utility have been given to man by nature. She has furnished some materials that are useful and has not furnished them in quantities sufficient to prevent them from being specifically important. On account of the comparatively niggardly way in which she has doled them out to man, every bit of the supply has a power to benefit him; and if he gains some portions, he goes upward in the scale of well-being, and if he loses some, he goes downward. Wild fruits and fruit trees come in this category; and a savage who should build his hut in a small grove of banana trees, if he could keep other people out of it, would be, by so much, better off than they. The grove and its fruits would constitute their owner's wealth.

Land an Original Form of Wealth.—Land is the original gift of nature to humanity, and wherever there are people enough to make the possession of a particular piece of it important, it becomes a form of wealth. It can be valueless only when population is very sparse; and then an increase in the number of people dwelling on it gives to it early the attribute of specific importance. The land that is accessible to a growing population cannot long be superabundant.

Forms of Wealth produced by Labor.—Few useful goods are presented to man by nature in a finished state, and it is therefore necessary for man to exert himself in order to get the goods that he needs in the condition in which he can use them. He must make raw substances more useful than they naturally are, and as he does this the things become partly products of his labor. Of course the supply of them is limited, since labor is so.

Labor a Wealth Creator.—Labor is a wealth-creating effort, and there is no labor that is successful in attaining its purpose that does not help to bring into a serviceable condition something that can be identified as an economic good or a form of wealth. Some effort, indeed, fails in what it attempts to do and therefore produces nothing. We may build a machine that will not work, or make a product that no one wants; but labor that attains a rational purpose is always economically productive.

Protective Labor and the Attribute it imparts to Useful Matter.—Labor may be classed according to the particular result that it accomplishes. In saying that the banana grove in our illustration is wealth to the savage who resides in it, we had to insert the proviso that he is able to keep other persons out of it. Exclusive possession or ownership is necessary in order that things may continue to be effectively useful to any particular person or persons. If they are superabundant, as we have seen, no part of the supply is important; but it is also true that if they are scarce and a man is not able to keep any of them, they will not serve him. In order that an economic good may be effective, it must be appropriable, and where claimants are numerous and lawless it may take much of the owner's time and effort to keep the article in his possession. The savage must personally protect his goods, and to some extent the civilized man must do so; for however well policed a city may be, it will not do to leave purses or portable goods by the wayside. Protective labor is necessary in all stages of social advancement. In civilized life, indeed, we delegate much of it to a special class of persons,—policemen, judges, lawyers, and legislators,—and this is the most fundamental division of labor that civilization entails; but the work has to be done in any stage of social evolution. Crusoe's goods would have been worth nothing to him if he could not have kept them from the savages who, in time, appeared on his island; and they would have been worth little if he had been forced to spend most of his time in guarding them.

Appropriability is, therefore, a further essential attribute of the things which can make particular men richer by reason of their presence. When such things are actually brought into ownership, their utilities become available, as they would not otherwise be. Effort expended in protecting property is wealth-creating, since it causes those service-rendering powers which otherwise would be only potential in goods to become active. In other words, it gives to things which are otherwise in a condition to be effectively useful a further quality which they require in order that they may actually promote an owner's well-being.

Industrial Labor.—Industrial labor is the antithesis of protective labor, and it invariably changes the qualities of material objects in such a way as to make them useful; that is to say, it directly creates utilities.[3] These utilities are of different kinds, and the labor may be classified according to the kind it creates.

Elementary Utility.—An elementary utility is created when a substance is either dug out of the ground, as is done in mining, or when it is secured through the vital forces of the earth, as is done in agriculture. Hunting, fishing, and stock raising should be classed with agriculture, since they use the resources of animate nature to secure for mankind new raw products on which labor will confer further useful qualities. This utility has to be created by men in every stage of industrial development, from that of a tropical savage to that of men in the most advanced civilization.[4]

Form Utility.—A form utility is created when a raw material is fashioned into a new shape, subdivided, or combined with other materials, as is done in manufacturing and, in a certain way, in commerce. Buying goods in bulk and selling them in small quantities is the creating of form utilities and makes an addition to total wealth. Oil in small cans is worth far more for consumption than it would be if each consumer were forced to buy a tankful. Sugar is worth more to a consumer when it is doled out to him in paper sacks than it would be if it were to be had only in hogsheads. Merchants are not mere exchangers, for they make positive additions to the utility of goods. In primitive life no such class exists; and yet form utilities of every kind are created, since men make for themselves the goods that they use and adapt them in shape and in quantity to their current needs.

Place Utility.—Carrying things to places where they become more useful creates place utilities. In primitive life men do their own carrying; but in civilized states the common carrier does most of it, and so imparts place utility to matter on the most extensive scale. All useful transportation creates this quality, which is a general attribute of wealth; and the operation of so moving matter as to create place utility is one of the general functions of labor.[5]

Time Utility.—There is, moreover, a kind of utility which depends on the existence of a good at the time when it is needed. Ice in the warm season, a plow in the spring or the fall, a pleasure boat in summer, and anything which, by the aid of capital, is presented to a user when he needs it, illustrate this quality. We may call it time utility, and creating it is a function of capital. We shall see how capital assists in the production of the other utilities; but the creation of time utility it accomplishes without assistance.

Executive and Directive Labor.—Labor involves the whole man, physical, mental, and moral. No labor is so simple that it is not better done when intelligence is used in the performance of it. The savage's hut, his canoe, his bows and arrows, etc., vary in their efficiency and value, not merely according to the time and muscular effort spent in making them, but also according to the efficiency of the thought by which those efforts are guided. There is here the germ of the difference between the executive labor of the modern employee and the directive labor of the manager. Yet no manager directs in more than a general way the muscular movements of his subordinates, and their own intelligence must still be trusted to do much of the directing. The mental labor that guides and controls the physical is universal in industry, but becomes more and more a distinct and dominant factor as civilization increases.

Fidelity as affecting the Productivity of Labor.—The fact that all workmen are largely their own directors brings fidelity into the foreground as an element in determining men's earning power; but this element counts for much more in the civilized state than it does in the primitive one, for here fidelity in directive laborers of the highest type is most important and difficult to secure. One of the greatest problems of modern business is how to make directors and executive officers of corporations faithful to the stockholders who employ them. In the primitive state these problems do not arise. When a man is working for himself, mere interest largely takes the place of fidelity. If to-day any one secures a good house of his own to live in, it is because he employs contractors, overseers, and artisans all of whom are, in the main, faithful to his interests and see that the work of building is properly done. A savage looks after his own interests as his personal work proceeds; and yet even in his case there is the germ of that enthronement of character in the supreme place which is the prominent feature of highly organized industry. In building a hut to shelter his family, a savage puts into his work conscience and affection as well as muscular effort; and when the mother of the family does this work, the altruistic element in it is still more conspicuous. As society becomes highly organized the importance of the moral element in all labor increases till the further progress, or even the existence, of the social order may be said to depend on it. In the world of business there is now distrust and turmoil, and revolutions are feared, because of the unfaithfulness of a class of men to trusts committed to them.[6]

The Requisites of Production.—If we start with nothing but the earth in its natural state, inhabited by empty-handed men, and seek to know what is necessary in order that some wealth may be created, we find that nothing is absolutely necessary except labor. By working for a few minutes it is possible to get something that will minister directly to wants. Yet if men begin operations in a state of such poverty that they have only their bare hands to apply to the elements about them, they do not commonly get the usable goods immediately. If a savage wants fish and makes the rudest net with which to catch them, he makes what is a capital good. This is wanted only for the sake of the consumers' wealth which it will help to produce. The end in view has all the while been fish; but the man works first on an instrument for catching them. He makes the net by mere labor, but he catches the fish by means of labor and the net. Without such instruments to aid in production a dense population could not live at all, and a very sparse one could live only in a meager and precarious way. If the instruments are artificially made, or if they are furnished by nature in limited amounts, they are forms of wealth, or goods; but as their function is not to minister directly to consumers' wants, but to help in making things which do this, we distinguish them by the name "producers' goods" or "capital goods." In contrast with them those commodities which directly minister to wants may be called "consumers' goods."

The Production of Intermediate Goods.—All economic goods are means to an end. Wealth is always mediate. It is usually a connecting link between man's labor and the satisfaction of his wants. Man, the worker, first spends himself on nature, and then nature in turn spends itself on him. In production nature is the recipient, but in consumption the recipient is man. This is saying that man serves himself by means of some element in nature which, under his manipulation, becomes a form of wealth. He thrusts a bit of natural matter between himself as a producer and himself as a consumer. All kinds of wealth, then, stand in an intermediate position between original labor and the gratification that ultimately results from it. Some goods, however, are means in the special sense of standing between labor and other goods. Instruments help to make consumers' goods and these add to man's pleasure. Using a tool is not generally agreeable. The tool stands not only between the effort and the gratification that will ultimately follow, but between the effort and the further material good that will directly produce gratification. The hatchet intervenes between the labor that makes it and the firewood it will cut, while the wood acts directly on the man and keeps him warm. Capital goods are in this special sense mediate. They are not wanted for their own sake, but for the sake of something else that is directly useful.[7]

All Labor immediately Productive of Wealth.—When a savage abandons the plan of fishing from the shore and gives his labor for a fortnight to making a canoe with which to fish more effectively, he interposes an interval of time between his labor and its ultimate fruits, the consumers' goods. There is no such interval between the labor and the kind of wealth that it first creates, namely, the canoe. This immediate product of labor is itself a form of wealth and at once rewards the laborer, since it is what he needs, though he does not need it for consumption. Industry always pays as it goes and tolerates no hiatus between labor and wealth in some form.

Organized Industry immediately Productive of Consumers' Goods.—If one man were keeping the stock of canoes of a few fishermen in repair and taking as his pay a share of each day's catch, he would not have to wait for his food any longer than the fishermen themselves. This mode of conducting the industry, however, involves organization. If each fisherman had to make his first canoe, it would be necessary for him to wait for fish; but as soon as a stock of canoes has been obtained and a special set of men assigned to the work of keeping this stock intact in number and quality, that necessity entirely ceases. Five men may do nothing but fish while a sixth keeps their stock of canoes intact by repairing old ones left on the shore and making new ones to replace such as are beyond repairing. Fishing and boat building may go on simultaneously, and all the men may go share and share in each day's catch.[8] This is a type of what goes on in modern industry, where a complex stock of capital goods always exists and is kept intact by the action of a class of persons who share the returns that come from using the stock. None of these persons has to wait for food, although some of them devote themselves exclusively to the production of tools. This fact shows that the necessity for waiting, as well as working, wherever instruments are in the process of manufacture, is not among the universal phenomena of economics, and that it is not present in that organized industry which we chiefly study. Such a permanent stock of capital goods as the fishing community of our illustration possesses would enable it to get its food, the fish, day by day, by working in different ways and using the permanent stock. If we call this permanent supply of canoes, etc., capital, it is, in a causal way, mediate wealth, though it is not so in point of time. Some labor is spent each day on it, and itself creates each day some consumers' wealth. These two operations go on simultaneously, and the men who work to maintain the stock and those who use it get their returns together. In very primitive life the work spent on capital goods and that spent on consumers' goods are not always synchronous, but organization and the acquiring of a permanent fund of capital make them so. Work to-day and you eat to-day food that is a consequence of the working. In point of time the canoe makers are fed as promptly as the fishermen, and this fact is duplicated in every part of the industrial system. We shall later see more fully what this signifies, but it is clear that any study of this phenomenon—the synchronizing of labor and its reward—takes us out of the field of Universal Economics, since it does not appear in the industry of primitive beginnings, but is the fruit of organization.[9]

FOOTNOTES

[1] Past usage renders the somewhat misleading term Political Economy more available than the more accurately descriptive term Social Economics, as the title of the science which treats of the creation and use of wealth by an organized society. Either title implies the existence of such an organization, but the word political calls attention to the fact that it is under a government. The fact that, in a study of wealth, is most important is that the exchanges of products which spontaneously take place create an industrial society whose activities, going on as they do under a government, constitute the subject of the studies which are properly indicated by the traditional term, Political Economy. Government as such is not the subject of those studies.

[2] The term final utility is used with much the same significance as specific importance. It is the utility of the last and least important part of the supply, and the use of the term requires us to think of the supply as offered to users unit by unit till the whole amount is in their hands. The first unit, when it stands alone, is more important than any later one will be. The second is of less consequence, and the last is the least important of all. When, however, all have been supplied and are together available for use, one is as important as another. Each one has an effective utility which is measured by the service rendered by the last one. The term specific indicates that we measure the importance of the supply of an article not in its entirety, but bit by bit, while the term effective is the antithesis of absolute and means that each bit of the supply not only renders an absolute service, but renders one which would not be gratuitously rendered by some other part of the supply in case this portion were removed or destroyed. We do not here think of the supply as built up from nothing to its present size bit by bit, but look at it as it stands and measure the importance of any particular quantity. When we speak of final utility, we think of a series of "increments" supplied one after another, and in this case the successive increments become less and less important, since, after some have been supplied, the want of the kind of good that they represent is less keenly felt. The conception of the series of units is merely a means of isolating one unit from a total number and obtaining a mental measurement of its importance which corresponds with the effective importance of any unit in the entire quantity.

[3] The term create is here used in a somewhat loose sense and does not imply that the man originates matter or even that he always transforms it without calling in, as an aid, the forces of nature. The farmer must depend on vital forces in soil and air in order to raise a crop. What he and other laborers do is to cause the product in some way to come into existence, and he and they may in this sense be said to create the products which would not appear without them.

[4] The distinction between elementary utility and others does not need to be applied with the utmost strictness, for mining creates form utility by breaking up masses of ore, and place utility by making them accessible. Agriculture shapes its products and moves them to places of storage. It is convenient in practice to adhere to the more general classification suggested in the text.

[5] In a way all kinds of production may be analyzed into the moving of matter. In cutting up raw materials a manufacturer moves waste portions away from those that are to be utilized, while combining materials, of course, moves them toward each other. Neither of these operations creates place utility. This quality consists in a relation, not between some materials and others, but between goods and the persons who are to use them. Bringing things to us from a distance changes their local relation to us, and in this is the essence of place utility, and every article that we use must have acquired this quality. The service-rendering power which it possesses is only potential until it reaches a place where the power can be exercised.

[6] On the ground of convenience, we may classify labor as physical or mental, according as the work of muscle or of brain is especially prominent. Digging a ditch requires more than an average amount of strength and not even an average amount of intelligence, and it is, therefore, physical labor rather than mental; while writing a brief or arguing a case in court requires much power of thought and only a small amount of muscular strength, and is typically mental labor. Managing an estate for an absent owner is more largely a moral function, since the value of the service depends chiefly on the fidelity of the man who renders it; but physical and intellectual labor are also involved. These three types of personal effort are exerted wherever wealth is created.

[7] For an elaboration of the conception of mediate goods the reader is referred to Von Böhm-Bawerk's work on "Positive Theory of Capital" and to John Rae's work on "The Sociological Theory of Capital."

[8] One man might be employed in guarding canoes and fish against theft, which is doing protective rather than industrial labor; and economic forces would tend to give him a share as large as each of the others receives, provided, of course, that the men are of equal capacity as workers.

[9] The conception of capital goods as always putting enjoyments into the future has crept into economic science because in certain illustrations taken from primitive life they seem to have that effect. We shall see that they do not have it at all in static social industry, and that they have it only in a limited way in dynamic social industry, or that which is carried on by a society undergoing organic change.

CHAPTER II

VARIETIES OF ECONOMIC GOODS

Passive Capital Goods.—Labor spends itself on materials, and these, in their rawest state, are furnished by nature herself. They "ripen" as the work goes on. Every touch that is put on them imparts to them more of the utility which is the essence of wealth. They are technically "goods," or concrete forms of wealth, from the moment when they begin to acquire this utility, though for a time they are in an unfinished state. The function of materials, raw or partly finished, in the physical operation of industry is a passive one, since they receive utility and do not impart it. The iron is passive under the blows of the blacksmith's hammer; leather is passive under the action of the shoemaker's sewing machine; a log is passive under the action of the lumberman's saw, etc. The materials which are thus receiving utilities under the producers' manipulations constitute a distinct variety of capital goods, while the implements which help to impart the utilities constitute another variety, and both kinds are present in all stages of industrial evolution. Savages use raw materials and tools for fashioning them.

Active Capital Goods.—The hammer which fashions the iron, the awl which pierces the leather, and the saw that cuts the log into boards have an active function to perform. They do not receive utilities, but impart them. They manipulate other things and are not themselves manipulated; and except as unavoidable wear and tear injure or destroy them, they are not themselves at all changed by the processes in which they take part. They are the workman's active assistants in the attacks that he makes on the resisting elements of nature. Passive instruments, then, and active ones—things which receive utility, as industry goes on, and those which impart utility—constitute the two generic kinds of capital goods. What is commonly called "circulating capital" is a permanent stock of passive capital goods; and, in like manner, what is usually known as "fixed capital" is such a stock of capital goods of the active kind. The materials and the unfinished goods that are scattered through a modern mill and receiving utility are what the manufacturer would at this moment identify if he were asked to point out the things in which he has circulating capital invested; while the mill, the machinery, the land, etc., which are imparting utility, are what he can point to as now constituting his fixed capital. At a later time there will be other goods of both kinds in his possession, and these will at that time embody the two kinds of capital. While a primitive man would have little occasion to use the term capital goods, he would possess both varieties of the goods which the term denotes.

Varieties of Active Capital Goods.—Mere hand tools act as armatures attached to the person of the worker, and they enable him effectively to attack resisting substances. The hammer fortifies the blacksmith's hand against the injuries it would suffer if he delivered blows with his fist, and it multiplies the efficiency of the blows. Machines, however, substitute themselves for the person of the worker and carry the tool through its movements. A steam hammer, so called, is an engine that gets power from a boiler and wields an armature, which is the real hammer, much as a smith would do it, though with far greater force and effect. Machines do rapidly and accurately what a manual laborer would, without them, have to do slowly and imperfectly, by carrying the armature in his own hand and moving it by his own muscular strength. Tools and machines impart "form utility" to materials. Vehicles which carry goods impart "place utility" to them by putting them where they are more useful than they would be elsewhere. Buildings protect goods and workers alike, and enable the operation of transforming them to go on successfully. They also make it possible to store goods at a time when they are not needed and take them out for use when they are needed. In doing this, buildings help to impart "time utility" to the merchandise that is put into them by keeping them intact till the time comes when they will be useful. Tools, machines, reservoirs of water, canals, roadways, buildings, and even land itself are active capital goods, and are, for that reason, component elements of that part of the permanent productive fund which is known as fixed capital. They aid workers in their efforts to bring materials into usable shapes, and this is as true of the hole in the earth in which a savage stores provisions as it is of a fireproof warehouse in a modern city.

Materials which are at first Passive and later pass into the Active State.—The hammer itself has to be made out of raw material, and, while it is in the making, the material that enters into it is as passive as anything else. While the ore is smelting and while the steel is forging, the future hammer is in a preliminary stage of its existence and is discharging a passive function. When it is completely finished, its period of activity begins, and from this time on it helps to manipulate other things. The materials which enter into consumers' goods go through no such transition. The leather remains passive till, in the form of a pair of shoes, it clothes its user's feet; and at this point it ceases to be a capital good at all. The steel of the hammer is first a passive good and later an active one.

The Use of Capital Goods Universal.—There is no doubt that capital goods are used in the most primitive industry. Implements existed in times too remote for tracing; and even if they had not been used, raw material would have been indispensable. People living in an economic stage so ultraprimitive as to use no mediate goods whatever could sustain life only by plucking wild fruit or gathering fish or other food stuff by hand, and so long as they could do this their industry might conceivably consist in getting consumers' goods by labor only. The rudest pick, shovel, or ax and the simplest hunting implement are early types of what, in "capitalistic production," is represented by mills with their intricate machines, ships, railroads, and the like. Primitive industry has capital but is not highly capitalistic, since labor and a little capital in simple forms are all that it requires. These primitive capital goods are still essential.

Capital.—It might seem that we have already described the nature of capital, but we have not. We have described the kinds of goods of which it consists. A sharp distinction is to be drawn between two ways of treating capital goods, and only one of these ways affords a treatment of capital properly so called. To attain that concept we must think of goods as in some way constituting a stock which abides as long as the business continues. And yet the things themselves separately considered do not abide. Goods are perishable things; no one lasts forever, and some last only a very short time. Raw materials best serve their purpose when they are quickly transformed into usable goods and taken out of the category of productive instruments. Tools may last longer, but they ultimately wear out and have to be replaced.

How Capital Goods Originate and Perish.—If you watch a particular mediate good of the passive kind, say wood in a growing tree, you see it beginning its career as an absolutely raw material, and then under the hand of labor, aided by tools, receiving utility till it takes its final form in some article for a consumer's use, say a dining table. Little labor is applied to it during the first stage of the process, that in which the tree is guarded and allowed to grow to a size that fits it for conversion into lumber; but the cutting, carrying, sawing, and fashioning are done by labor and tools, and under their manipulations the wood "ripens" in the economic sense—that is, it becomes quite fit for consumption. It is ready to serve a consumer as a table, and, when this service begins, the wood that up to this point has been a passive capital good, constantly receiving utilities, will cease to be a capital good at all and begin slowly to wear out in the service of its owner.[1]

The Transition of Goods from one State to Another.—The beginning of its service in the purchaser's dining room takes the wood of the table out of the category of producers' goods; but there is some raw material that is never destined to emerge from that category and enter another. Its last state of existence as a good will be that in which it is embodied, not in an article for consumers' use, but in an active tool. Our tree might have furnished some of its wood for a wheelbarrow, and if so, that part of it would have been a capital good until it ceased to be an economic good at all. If we watch it as it grows toward its economic maturity, we see it sawed, planed, and otherwise fashioned under the laborer's hand, and maintaining during all this time its passive attitude, just as does the wood that is destined to constitute a table. When the wheelbarrow is completed, it does not, like the table, begin to minister directly to consumers' wants, but begins actively to aid some laborer in a further productive operation. It carries mortar to the wall of an unfinished building and is thus taken out of the list of passive goods—recipients of utility—and is ranged with other active tools which impart utility. The same thing is true of the steel that is destined to compose the head of a modern woodman's ax or the stone that is in process of fashioning into the rude hatchet of some primitive savage. As raw or partly wrought material it is a passive capital good; later it becomes an instrument of the active sort.

The Ultimate Perishability of all Kinds of Goods artificially Made.—In the end both kinds of material will cease to be capital goods. The raw stuff that goes into food, clothing, furnishings, or the like will become consumers' goods, while the raw material of tools will, in its final form, the tools themselves, have one more lease of life as capital goods. In the end, however, as wheelbarrows, axes, hatchets, and the whole long list of active implements are used up, they cease to be capital goods because they cease to be economic goods at all. They are as truly ordained to be ultimately used up as are food and clothing, and this is true of the most durable things that are artificially made. Walls, roadways, bridges, and buildings slowly deteriorate till the time comes when for productive purposes their room is worth more than their company.

Why the Perishability of Capital Goods does not put Capital out of Existence.—Perishability is the most striking trait of capital goods. Each particular one comes and goes, but there is always a stock of them on hand; for when one is on the point of going, another is ready to take its place and keep up the succession. New tools replace old tools; new materials replace those that are finished and withdrawn, and so it comes about that a stock of such things abides forever. Not one of the individual instruments is permanent, for each one only does its part in keeping up an endless procession. It is the procession that is always there—a moving series of individual goods, not one of which has more than a transient economic career. Each one helps to keep up the supply of permanent capital just as each man, taking his turn in an endless succession of laborers, serves during his brief life to keep up the permanent force of laboring humanity. Men come and go, but "labor"—a mass of working humanity—abides; and so capital goods come and go, but a stock of them abides, kept up by perpetual replacement. We may trace the career of any single instrument from a beginning to an end; but we may, on the other hand, cease to look at any instruments that we single out and identify and look rather at the procession of them; and if we do this, we look at a body which never wastes away, though the things that compose it are, separately considered, forever wasting.

There are many kinds of transient things which, by the same process of renewal, constitute permanent entities. Composing a human body at this moment are certain tissues that can be separately identified; and if we watch any one of them, we shall see it going in a short time to destruction. Yet the body lasts while life continues. Indeed, the evidence of the life itself is the discarding and replacing of the tissues. A living body is a durable thing, though the particular tissues that at any one time compose it are not so. In a like way drops of water make a river, and this is a permanent thing, however rapidly its composition changes. The waterfall that drives the machinery of a mill is permanent, though no particular particle of water remains in it for more than a moment. Society is permanent, though the men who compose it are short-lived. In an exactly similar way a body of capital goods is maintained as a perpetual instrumentality of production. This is capital properly so called. It is, as it were, a quasi-living body, perpetuated by the constant replacement of the component parts, which are destroyed as its normal activities go on.

The Difference between Capital Goods and Capital Summarized.—The distinction between capital goods, on the one hand, and capital, on the other, is, then, like that between particular tissues and a living body, or like that between particular particles of water in the river and the river that flows forever. We can single out and watch certain drops of the water as they flow from a spring, and we can trace them through their brief careers, and say truly that the river is composed of fickle and transient stuff; but we cannot say that the river is transient. That is perpetuated by the renewing of the supply of water as the original drops disappear. We can mentally watch a particular man, as he enters the social force of workmen, labors for a time, and drops out of the line, and can see that society is composed of transient material; but society itself is an abiding thing. So we can study a particular bit of ore or wool or leather or a particular hammer or spindle or sewing machine, and in those cases we shall be studying capital goods and finding how perishable they are; but we shall also see that a stock of them always abides as the capital of economic society. We can cease to look at individual things and study the permanent fund of productive wealth, which is made up of goods like ore, wool, leather, hammers, spindles, and sewing machines. The identity of the things which make up this stock is forever changing. The same list of things we shall never find in the stock on any two dates, but a supply of similar things forever abides. Capital is this permanent fund of productive goods, the identity of whose component elements is forever changing. Capital goods are the shifting component parts of this permanent aggregate. They are the particular instruments that, each during its own brief economic lifetime, take their places in the endless procession of things which in its entirety is an abiding productive agent—the co-worker of labor and its perpetual assistant in creating consumers' wealth.

The Business Man's View of Capital.—It is as such an abiding entity that a business man regards capital. He describes it nearly always as a sum of money. Thus the capital of a manufacturer is "a million dollars" because a stock of instruments worth that amount is kept intact in his possession. It is not allowed to waste away, however much the constituent parts of it may shift. The waste and renewal which business entails leave the equivalent of the million dollars always on hand, though never in the literal shape of money. A stock of shifting goods always worth a million dollars is, by a figure of speech, described as a million dollars "invested in the goods."[2]

The Chief Attribute of Capital.—A chief attribute of capital, properly so called, is permanence. If a man's productive fund does not last, he is impoverished. The farmer keeps on hand a more or less constant supply of the implements he has to use. He takes a part of the proceeds of the sale of his crops, puts it into the shape of implements and materials, and in this way keeps an amount of them on hand as the auxiliary capital of agriculture. Particular goods are not constant, but the sum of money or quantum of wealth "invested" in the moving procession of them is so. At any one instant the capital is composed of particular instruments which can be sought out and identified, but at no two instants are the goods the same.

The Reasons for describing Capital as a Sum of Money.—This fact explains the general practice of describing capital in terms of money. The manufacturer just referred to will speak of his capital as "a million dollars" and consider that sum as a "permanent investment" because he knows that while the goods that now represent that value will soon pass from him, the "dollars"—that is, the value which is equivalent to the dollars—will abide. There is, moreover, no failure on his part to discriminate between his capital and literal money, for he knows in what his productive fund consists, and is fully aware that only the minutest part of it is in the shape of actual currency.

Instruments of production compose the fund, but the dollars serve to describe it. They indicate the amount and the abiding quality of it, since they describe what he has invested or embodied in the shifting things and can, by a fair sale, get out of them.

Why Abstract Terms are used in popularly describing Capital.—In certain connections money is, in unintelligent thinking, confused with real capital in ways that we should guard against. In avoiding such errors we need to be even more careful that we do not miss the truth that is at the basis of the common mode of describing capital. A permanent fund that is spoken of as a million dollars invested in a business does not suggest to any one a literal pile of a million silver or paper dollars or of a hundred thousand gold eagles. It suggests what is actually in the business, a procession of things each of which comes into the man's possession and then leaves him, and helps him to keep the constant stock of goods that at any time is a potential million of dollars. A permanent body of any kind, if it is made up of shifting tissues, is commonly described by the use of an abstract term. A waterfall, made as it is of rapidly changing drops of water, is spoken of as a "water power," since the power is the abiding thing. An endless series of living human beings is described as "humanity," since that remains through all personal changes. An endless series of workingmen is described as "labor," and we study the "wages of labor," the "relations of labor to capital," etc., because these are permanent relations. Men come and go, but labor continues and is the source of a permanent income. It is actually the fact that in speaking of the "labor problem" or the "relation of capital and labor" we usually think of "labor in the abstract," as we might term it; but this is very far from implying that we consider a series of generations of actual workingmen as an abstraction. We may, using terms in a like way, speak of the problem of interest as concerning "capital in the abstract"; but this is far from meaning that we consider an endless series of material instruments of industry an abstraction. We describe these real things by the use of an abstract term, just as we describe a thousand other realities. A "fund," a "value," a "permanent quantum of wealth," is capital; but with the abstract notion the mind always merges the thought of the concrete entity. It is the tools of industry that, in their endless march, come into and go out of the industrial field that we think of even when we use the abstract term. This term, however, saves us from the danger of thinking merely of particular tools that we can identify and trace to their final destruction when we form the concept of capital.

The Importance of discriminating between the Concept of Capital Goods and that of Capital.—Very great is the importance of keeping sharply distinct the two concepts of productive wealth of which one is described by the term capital goods and the other by the term capital. In the one case we think of a particular thing which we identify, keep in mind, and watch as it goes through its transformations, does its final work, and perishes. The brilliant studies of Professor Böhm-Bawerk are based on the idea that such a tracing of the biography of a particular instrument is the true way to solve the problem of interest. Yet the very term interest itself suggests the existence of what we have defined as permanent capital—an abiding fund or sum of wealth that every year yields as an income a certain percentage of itself. The "hundred dollars" yields five dollars; that is, the fund yields a twentieth of the amount which, amid all the changes of its constituent parts, it continues to embody. It is true, indeed, that a study of all capital goods which have existed or will exist, with due attention to their relations to each other, would reveal the fact that they maintain such an endless procession as has been here described, and it would thus bring before the mind such a concept of capital as the business man has and describes by the monetary form of expression. By making a synthetic study of capital goods in general, and not separate studies of particular goods as they come and go, we can obtain a grand resultant of the action of all of them, which is nothing less than permanent capital doing its continuous work. Such a comprehensive study of capital goods, if it is carried far enough, becomes a study of the abiding entity, capital. Allowing ourselves, however, to put the abiding entity out of sight and merely to trace the origin, growth, and productive action of separate instruments of production would be disastrous. The undying body in which the particular things are tissues absolutely needs to come into view. The very mention of a problem of interest—of the percentage of itself that a fund of a given amount can annually earn—puts before us at once the permanent entity, capital, and the problems relating to it.[3]

Labor as a Permanent Entity.—The term labor is sometimes used to describe a permanent aggregation of laborers no one of whom lives and works through more than a brief period. Labor is thus analogous to capital and laborers to capital goods. A permanent working force is composed of perishable beings as a permanent producing fund is composed of perishable goods. Both are commonly described by the use of abstract terms, but both are in reality concrete things; and actually to reduce either to a mere abstraction would be to put a material entity out of existence. We instinctively speak of a value—a given number of dollars—in describing a man's capital, but it is dollars "invested in" productive instruments; and we instinctively speak of labor when we mean an abiding force of workingmen. Neither capital nor labor is like an immaterial soul that can live apart from its body. Each consists of a permanent body with a shifting composition. A permanent sum, on the one hand, a permanent amount of working energy, on the other, are always present, but they are in goods and men respectively. Each may well be described by the use of an abstract term, and in practical life it commonly is so; but it is a concrete reality.

Peculiarity of Land as a Capital Good.—One reservation needs to be made when we call capital goods perishable. If we include land under this term, we must make it an exception to the rule of destructibility. It is the only thing that does not go out of existence in the using. It is not a produced good at all and does not stand, like other goods, in an intermediate position between labor and the gratification that labor is intended to produce. Work did not create it and using will not end it. It will be called, in our study, a capital good, for it is a form of wealth which produces other wealth. It enters into the permanent productive fund that society is using.

Differences between Land and Other Capital Goods Important in Economic Dynamics.—It is in a later part of the study which deals with economic changes—the part which we shall call Economic Dynamics—that the differences between land and artificially made goods become prominent, and these differences will receive due emphasis in their proper place. In studying the law which would govern economic society if no essential economic changes were taking place,—in reducing society, as it were, to a static state,—we find that there is a certain set of characteristics which land shares with those capital goods which are the products of human industry. In static studies it is best to group the productive instruments which men make with the one unmade good which nature furnishes and to recognize that together they embody the permanent fund of productive wealth.[4]

Mobility an Attribute of Capital.—Even in a static society capital would be permanent, while particular capital goods would be perishable. In dynamic studies another quality of capital, as distinguished from capital goods, comes into the foreground, namely, mobility. It is the power to move without loss from one industry to another. Goods cannot be thus moved with any freedom. A loom cannot be taken out of a woolen mill and made to do duty in a carpenter's shop, nor can a circular saw be made available in weaving. When the loom wears out and needs replacement, it is in the owner's power to procure either another loom or a circular saw, and if he chooses the latter alternative, he causes capital to move into the woodworking business. A whaling ship would not be useful as a cotton mill; but much capital that was once invested in the whale fishery of New England has since found its way into manufacturing. The transfer can often be made without waste. If the earnings of an instrument have sufficed to replace it with another that is like it, they may suffice for producing an instrument that is unlike it. Waste, if it occurs, results from a failure of the original instrument to earn the fund for replacement. Capital which thus abides but passes from one employment to another is a body the identity and the character of whose component parts change. The transfer of capital from one industry to another is a dynamic phenomenon which is later to be considered. What is here important is the fact that it is in the main accomplished without entailing transfers of capital goods. An instrument wears itself out in one industry, and instead of being succeeded by a like instrument in the same industry, it is succeeded by one of a different kind which is used in a different branch of production. Goods have not moved from one branch to another, but capital has done so.

How Capital itself may be Destroyed.—When we speak of capital as permanent, we mean that using does not destroy it as it destroys the tissues of which it is composed. Fires, earthquakes, and business disasters put parts of it out of existence and affect the volume of the fund as a whole; but production itself leaves it intact. It is this very production which destroys capital goods and makes it necessary to replace them.

FOOTNOTES

[1] In the economic sense consumption is the utilization rather than the destruction of the thing consumed, though many things go rapidly to destruction in the process. Food is destroyed in the moment of using; clothing perishes more slowly by use, and furniture and dwellings more slowly still. Some things that go gradually to destruction during the process of utilization do not perish the more rapidly because of it. A vase, a statue, or a picture is consumed, in the economic sense, by a person's act of looking at it and getting pleasure from it; but this does not hasten its deterioration except as keeping such an ornament where it can be seen exposes it to deterioration or accident. Climbing a hill to get a view "consumes" the hill in a true sense, and looking from the summit over a wide stretch of picturesque country even consumes—that is, utilizes—the landscape; and certainly this act does not injure the thing utilized. The general fact, however, that goods for final use are, as a rule, injured or destroyed either by the act of consumption or by the exposures that are incidental to it, justifies the use of this term to express the receiving of a service from the usable article. It is a process in which the commodity acts on men's sensibilities and, as a general rule, exhausts itself while so doing. It is worth remembering that this exhaustion of the good is not the essential part of consumption. On the man's side that consists in deriving benefits from the good, while on the side of the good itself it consists in conferring benefit on the man—in doing him good and not in doing itself harm.

[2] We here put out of sight all questions connected with the changing purchasing power of money. This is, in ordinary times, the business man's habit. He considers his capital intact if the number of dollars invested originally in his business still appears on his inventory as representing the net surplus of his assets over his liabilities. If a currency were undergoing rapid inflation, a fixed amount of invested money would represent a shrinking stock of capital goods. This stock would last always, but would grow smaller by a true standard of measurement. All that we are at present interested in knowing is that practical usage treats capital as a permanent fund of productive wealth, and most conveniently describes it as a fixed amount of money "invested" in goods of a productive kind. What is thought of as "money" abides. Of course the practical man does not regard it as actually composed of currency.

[3] Consumers' goods may be regarded in the two distinct ways in which it is necessary to regard capital goods. We may look at particular articles for consumption, as they begin their careers by ministering to their owners' needs, and follow them as they wear out and finally perish. This gives a conception of them which is analogous to the conception of capital goods rather than to that of capital. On the other hand, we may look at the permanent stock of usable articles, which is maintained by the constant coming of new ones to replace those which are worn out, and in this way we get a conception of permanent consumers' wealth. The flow of finished goods from the shops to the users offsetting the concurrent destruction of such articles in the users' hands, has the effect of maintaining a permanent fund of consumers' wealth consisting of perishable goods the identity of which is always changing; and this fund is analogous to permanent capital as we have defined it. Professor C. A. Tuttle has advocated the use of the generic term wealth to denote the two continuing funds which we have here termed, on the one hand, capital, and, on the other hand, the permanent stock of consumers' wealth. We have preferred to use the term wealth in a sense that is generic enough to include both capital and capital goods, and both the permanent stock of consumers' goods and the particular articles that, in turn, compose it. Wealth consists of effectively useful concrete things regarded either as particular articles that can be identified and watched till they perish in the using, or as an abiding stock of articles of this genus, each one of which has in itself only a transient existence. See an article on "The Wealth Concept," by Professor Charles A. Tuttle, in the Annals of the American Academy of Political and Social Science, for April, 1891, and other articles by the same author.

[4] What is commonly termed land contains elements which perish in the using. Such are deposits of coal, ores, or oil, and those ingredients of loam which are exhausted by tillage. Such elements of the soil are not land in the economic sense. How they should be regarded will be shown in a later chapter.

CHAPTER III

THE MEASURE OF CONSUMERS' WEALTH

In all stages of social development the economic motives that actuate men remain essentially the same. All men seek to get as much net service from material wealth as they can. The more wealth they have, other things remaining the same, the better off they are, and the more personal sacrifice they are compelled to undergo in the securing of the wealth, the worse off they are. Some of the benefit received is neutralized by the sacrifice incurred; but there is a net surplus of gains not thus canceled by sacrifices, and the generic motive which may properly be called economic is the desire to make this surplus large. Except in a perfectly isolated individual life, there is opportunity for ethical motives to affect men's economic actions. Altruism has a place in any social system of economics, and so have the sense of justice and the positive compulsion of the law. Altruism does its largest work in causing men to give away wealth after they have acquired it, but conscience and the law powerfully affect their actions in acquiring it. These are forces of which Social Economics has to take account; but the more egoistic motive, desire to secure the largest net benefit from the wealth-creating process, is one of the premises of any economic science. This involves a general pursuit of wealth; but men seek the wealth for a certain personal effect which comes from the use of it, and they measure it, when attained, by means of this subjective effect.

How Specific Utilities are Measured.—As the essential quality of wealth is specific effective utility, we measure wealth by estimating the amount of this quality, and it is always a consumer who must make the measurement. He must discover the importance to himself of a small quantity of a particular commodity. The hunter must find out how much worse off he would be if he were to lose a small part of his supply of game and endure some hunger as a consequence. In doing this he gets the measure of the effective utility of any like quantity of game, since any one specific part of his supply is as important as any other and no more so. The estimate of the importance of such a supply of food material has to be made in this specific way, by taking the amount on hand piece by piece, and not by gauging the importance of the whole of it at once.

Value the Measure of Specific Effective Utility.—If any consumer will estimate the importance to himself of a single unit of goods of a certain kind, and multiply the measure so gained by the number of units he is appraising, he will make a measurement of the value of the total amount.

Values not based on the Importance of the Total Supply of Goods.—It is essential that the consumer, in determining the value of a kind of goods, should not estimate the importance of the supply in its entirety, since that would give an exaggerated measure. Measurements of value are always made specifically, and single units of the supply of goods are appraised apart from the remainder. The total utility of atmospheric air is infinite, since the loss of the whole of it would mean the total destruction of animal life; but the specific utility and the value of air is nil, since no one limited part of the supply has any practical importance. A roomful of it might be destroyed with impunity. So the cereal crops of the world, taken as a whole, have almost infinite importance, since their destruction would result in universal famine; but each bushel of grain has an importance that is relatively small. The loss of it would impose no serious hardship upon the average consumer, since he could easily replace it. The value of the crop is determined by the importance of one bushel taken separately and by the number of the bushels. If we estimate the importance of one unit of the supply of anything, express the result of the estimate in a number, and then multiply this by the number of units in the supply, we express the value of this total amount. The total utility of it, on the other hand, is measured by the benefit which we get from the supply in its entirety, or by the difference between the state we are in when we have it all and that to which we should be reduced if we lost it all and were unable to replace it. To measure any such total utility we contrast, in imagination, our condition with the full supply on hand and a condition of total and hopeless privation, in so far as these goods and similar ones are concerned.

This Method of measuring Wealth Universal.—These principles apply as well to the economy of a solitary islander of the Crusoe type as they do to that of a civilized society. A Crusoe does not need to measure values for purposes of exchange, but he has other reasons for measuring them. It is for his interest to use his own labor economically, and to that end he should not put too much of it into one occupation and too little into another. When, by reason of a large store of wheat on hand, the specific importance of it is small,—or, if we use a common expression, when the utility of the "final increment" of it, which a man might secure by making an addition to his supply, is small,—he should divert his labor to raising goats or building huts, where the utility of the increment of product to be gained is, for the time, greater. The solitary man thus well illustrates the act of the society which, in its own peculiar way, sends labor from one department of industry where the "final utility" of its product is small to another where it is larger. It is all done by measuring the specific importance of goods.[1]

The Utility of Producers' Goods.—Consumers' goods have a direct utility, which is a power immediately to serve a consumer. Instruments of production, on the other hand, have indirect utility, since all that they are good for is to help produce things that render the immediate service. They have productivity, and this has to be measured in determining their value. What we need to know about hoes and shovels, hammers and anvils, spindles and looms, etc., is how much power they have to create the goods that we want for consumption. Here again the measurement has to be made in the specific way. The capital goods have to be taken unit by unit if their value for productive purposes is to be rightly gauged. A part of a supply of potatoes is traceable to the hoes that dig them; but in valuing the hoes we do not try to find out how much worse off we should be if we had no hoes at all. We endeavor simply to ascertain how badly the loss of one hoe would affect us or how much good the restoration of it would do us. This truth, like the foregoing ones, has a universal application in economics; for primitive men as well as civilized ones must estimate the specific productivity of the tools that they use, and make hoes, shovels, or axes according as the procuring of a single tool of one kind becomes more important than procuring one of another kind. Indeed, the measuring of the utility has to be done, as we shall soon see, in a way that is even more specific than this; for the man has to determine not only how many hoes he will make, but how good he shall make them. The quality of each tool has to be determined in a manner that we must hereafter examine with care. The earning power of capital is, as we shall later see, governed by a specific power of productivity which resides in capital goods.

Cost and Utility.—A ripe consumers' good, in exhausting itself on man, benefits him; but during the period in which it is being prepared for use, when it is receiving utilities at the hands of successive producers, it has an opposite relation to the men who handle it. In making the material useful a man confines and tires himself. He is willing to do it if the reward that he expects will more than pay for the sacrifice, but not otherwise. Moreover, this sacrifice itself has to be estimated specifically in a way that is akin to the method of measuring utilities which determines the values of goods. It is necessary for a man to gauge the sacrifice which is entailed on him, not by his labor as a whole, but by a specific part of it. He finds himself in the evening feeling the fatigue and the sense of confinement which the day of labor has imposed and asks himself how much it would burden him to work a little longer. If what he can get by this means pays for the extra sacrifice involved in thus getting it, he will work for the few minutes, but otherwise he will not. His objection to a few minutes of additional work measures what we may call the specific disutility of labor; and men, whether they be primitive or civilized, are forever making such measurements. They consider how much it will cost them to add slightly to the length of their working day or how much it will benefit them to shorten it. In this way they measure the specific disutility of labor rather than the total disutility of it, since they do not gauge the relief that it would afford to cease working altogether.

The Increasing Cost of Successive Periods of Labor.—It is easy to work when one is not tired, and the first hour or two of labor may even afford a pleasure that largely offsets the burden that it entails; but it is hard to work when one is tired and painfully conscious of the confinement of the shop. Adding anything to the length of a working day imposes on a man the necessity of working at the time when the burden is greatest; and shortening his day, for a like reason, relieves him of some of his most costly toil.

The Natural Length of the Working Day.—Any laborer, as his work goes on, hour after hour, is certain to reach a point at which it is unprofitable to go farther. However greatly he may need more goods, he will not need them as much as he needs rest and change. It may be that he has worked twelve hours, and that, by working longer, he can improve his wardrobe, his food, or his furnishings; but if he has a tolerable supply of such things, he will hardly choose to add to it by staying in the shop when his strength has been exhausted and he is eager to reach his home.

Specific Cost at its Maximum a Measure of Specific Utility.—Two very important principles are at work whenever a man is performing labor in order to create wealth. The more consumers' wealth he gets, the less important to him are the successive units of it, and the more do these successive units cost him. The tenth hour of labor adds to his supply of food, but this addition is not as important as the supplies that were already on hand. If we divide the supply into tenths and let the man produce a tenth in each successive hour, the first tenth, which rescues him from starvation, is the most important, while the last tenth, which comes nearest to glutting his appetite, is least important. This last increment, however, is produced by the greatest sacrifice, for it is gained by making the working day ten hours long instead of nine.

Let the hours of the working day be counted along the line AD, and let us suppose that a man gets unit after unit of consumers' wealth, as he works hour after hour, and the units grow less and less important. The first and most important we may measure by the vertical line AB. The second is worth less, the third still less, and the last one is worth only the amount CD. This means that the successive units of what we may call general commodity for personal use have declined in utility along the curve BC. On the other hand, as the man's labor has been prolonged, it has grown more and more wearying and irksome. The sacrifice that it involved at first was almost nothing, but the sacrifice of the succeeding hours has increased until, in the last hour, it amounts to the quantity expressed by CD.[2] As the man has continued to work, the onerousness of working has increased along the ascending line AC until the point has been reached where it is so great that it is barely compensated by the fruits of the labor. The man will then work no longer. If he were to do so, his sacrifice would become still larger and his reward still less. Up to this point it is profitable to work, for every hour of labor has brought him something so useful that it has more than paid for whatever sacrifice he has made in order to get it. Beyond this point this is not the case. The line CD represents the cost of labor at its maximum, and it is this which acts as a measure of effective utility and value.

The Coincident Measure of Cost and Utility.—It now appears that the line CD signifies two different things. It measures the utility of the last unit of the man's consumers' wealth, and it also measures the sacrifice that he has incurred in order to get it. These are opposing influences, but are equally strong. The one, of itself, makes man better off, while the other, of itself alone, makes him worse off. At the last instant of the working day they neutralize each other, though in all the earlier periods the utility secured is greater than the sacrifice incurred and the net gain thus secured has kept the man working.

The Point at which Utility and Disutility are mutually Neutralizing.—At a certain test point, then, production acts on man in such a way as exactly to offset the effect experienced from the consuming of the product. Man, as a consumer, has to measure a beneficial effect on himself, and, as a producer, he has to measure an unpleasant effect. He finds how much he is benefited by the last unit of wealth which he gets for personal use, and also how much he is burdened by the last bit of labor that he performs. If this sacrifice just offsets the benefit derived from the final consumption, it is the best unit for measuring all kinds of utilities. A man secures by means of this final and most costly labor a variety of things, for if he works up to this point every day in the year, he will have at his disposal, say, a hundred hours of labor in excess of what he would have had if he had worked a third of an hour less each day. The product of this extra labor will be taken in the shape of goods that are also extra, or additional to whatever he would otherwise have secured. They will represent special comforts and luxuries of many kinds. The values of these goods may be measured and compared by means of the quantity of labor that the man has thought it worth while to perform in order to get them. If he values one of them highly enough to think it worth while to work for an extra period of twenty minutes at the end of a day in order to get it, it may be said to have one unit of value; and if he is anxious enough to get something else by doing this on two successive days, this second article may be said to have two units of value. The savage who, by working for an extra hour, makes some improvement in his canoe, and by doing the same thing on another day makes some improvement in his food, establishes thereby the fact that he values these two additional bits of consumers' wealth equally. If he uses ten hours of the same costly kind of labor in making an addition to his hut, he proves that he values that gain ten times as highly as he does either of the others. Establishing values by means of such final costs is a process that goes on in every stage of social evolution.

Unlike Results of Creating Wealth and Using it Summarized.—Wealth, then, affects a man as a consumer in one way and the same man as a producer in an opposite way. In the one case the effects are favorable, and in the other they are unfavorable. At a certain test point the two effects may be equally strong as motives to action, and so may be said to be equivalent. The man is impelled to work by his desire for a final unit of wealth, and he is deterred from it by his aversion for the final unit of labor which he will have to incur if he secures the benefit. If he performs the labor and gets the benefit, he neither gains nor loses as the net result of this particular part of his labor, though from all other parts of his labor he gets a net surplus of benefit. It is natural to measure all such economic gains in terms of sacrifices incurred at the test point where these are greatest. This is the labor one would have to incur in order to add the means of gratification to his previous supply of consumers' goods.

Minimum Gains offset Maximum Pains.—Running through and through the economic process are these two different measuring operations. Man is forever estimating the amount of harm that wealth does him when he is in the act of producing it, and the amount of good it does him when he consumes it; and there is always to be found a point where the two amounts are equal. It is the point at which gains are smallest and sacrifices greatest. It is at this point that men measure values in primitive life and in civilized life. How in the intricate life of a modern society the measuring is done we shall in due time see; for the present it is enough that we perceive the universality of the law according to which value is best measured by the disutility of the labor which is most costly to the worker. Organized societies do something which is tantamount to this. It is as though the whole social organism were an individual counting the sacrifices of his most costly labor and getting therefrom a unit for comparing the effective utilities of different goods.

How Primitive Man tests Value.—It is a mistake to suppose that what is essential in value depends on the existence of an actual market in which things are exchanged for each other. In a market, it is true, values are established and their amounts are expressed in ways that cannot be adopted in primitive life. When we buy a thing, we help to fix the value of it and of other things which are like it. The mere ratios in which things exchange for each other in a market are, however, by no means the essence of value itself. That is something deeper and is one of the universal phenomena of wealth. Value, as we have said, is the measure of the effective utility of things, a kind of measure that every one is frequently compelled to employ, whether he is making goods for himself or buying them from others. A producer who has the option of making different things for himself needs to know what variety of goods can be increased in supply with the greatest advantage to himself as a consumer. Adding to the supply of any one of them is getting a "final" or "marginal" unit of consumers' wealth. It is something that is needed less than the things that were already on hand. Without making such a comparison of the importance of marginal units of different commodities he cannot use his resources in the way that will do him the most good.[3]

How Isolated Men measure Final Utility.—If a cave dweller possesses a store of one hundred measures of nuts, he measures the final utility and the value of this store in the manner which we have described. If he were to be deprived of the whole stock, he might starve, but this fact does not afford the basis of the value which he puts on the nuts. He measures the importance of this consumers' wealth specifically. He tests the effect of losing one measure and no more, and finds that he could lose the single measure without suffering greatly. The difference between having an appetite fully satiated and having it very nearly so is not serious.

Let AD represent the savage's total supply of food. AB will represent the utility of the first unit; CD of the hundredth. If we supply the food unit by unit, the utility of the successive increments will decline along the curve BC. When the man has a hundred units of food, no one unit of it is worth any more than the last one, since if any one were taken away, the last one could be put in the place of it.

The total absolute utility of the food is measured by the area ABCD, but the total value will be represented by the rectangle ADCE. The area EBC measures the surplus of utility contained in the earlier units in the series.

The Motive for measuring Values in Primitive Life.—Even the cave dweller would have to measure values, and would thus have to apply the principle of final utility, because he would need to spend his limited productive energies in the way that would do him the most good. When he is nearly satiated with food, he needs other things more than he does food stuffs. If he has secured so much of one product that any additional amount that he may get by an hour's labor would be of less use to him than what he could get of some other product by the same amount of labor, it is important for him to change his occupation and produce that thing of which an additional unit—which will perhaps be the final unit of this more desirable article—has the higher degree of usefulness.

Final Utility and Labor Cost.—On the supposition that a small store of roots and nuts were incapable of being replaced by any amount of effort and that no other food were to be had, the utility of it would be indefinitely great, since the man's life would depend on this one increment of food alone. A man would value that life-sustaining good for what it would do for him and without any reference to the amount of work he had performed in order to get it, or to the amount he would have to perform in order to get another store like it. On the supposition that by labor the man could replace this essential supply, the effective utility of it would be gauged by the sacrifice he would have to make in order to replace it. The effective utility of any unit of a good that an hour's labor will produce can never be more than enough to offset the disutility of a marginal or final hour of labor; and thus even a single unit of replaceable food stuff, even when it stands alone and constitutes the whole supply, is valued according to the cost of getting another one like it. A man will prize it according to his dread of the sacrifice involved in getting the duplicate. If he gets this by adding an hour of labor to his day's work, this fact is an evidence that the importance of the original supply of the food is measured and expressed by this personal cost of replacement; and as any similar quantity in a large supply of food can be duplicated by the same amount of labor, it appears that, by a standard based on cost, the effective utilities of all units are equal, that of each one is measured by the "disutility" of an hour's labor and that of the whole supply is this amount multiplied by the number of units that this supply contains.[4]

How Primitive Man measures the Productivity of Labor and Capital.—There is a truth relating to producers' wealth that resembles the truth that we have just stated with regard to consumers' wealth. The more consumers' goods of one kind a man has, the less is the value that any one of them has to him. The more producers' goods of a given kind a man has, the less is the efficiency that any particular one of them possesses as an aid to labor. The last bit of bread serves the man himself in a less important way than does the first, inasmuch as it gratifies a want that is less intense; and the last implement of a given kind—the last hatchet or spade or arrow—helps him less in his productive operations than did the first one. On the one hand, we have the law of the diminishing utility of successive units of consumers' goods, and on the other hand, we have a parallel law of the diminishing productivity of successive increments of producers' goods.

The Necessity for measuring the Productive Powers of Capital Goods even in Primitive Life.—Now, it is necessary for every producer, though living in the simplest possible manner, to measure in some way the efficiency of the last unit of each kind of productive instrument that he uses. He has, let us say, a certain number of hatchets and of arrows, and he can produce one hatchet with the same amount of labor that would produce an arrow. Now, if a hatchet will do more good than an arrow, he will direct his energies to the making of the hatchet. It is important that any producer should bring the final units of the different parts of his equipment to a certain uniformity of producing power. He must not go on adding to the stock of implement No. 1 when implement No. 2, which could be had by the same expenditure of labor, would do more good; nor must he add to the stock of either of these after he has acquired such a supply of them that the first unit of implement No. 3 would be of greater importance. Measuring the efficiency of producers' goods is necessary in the case of every one who creates wealth at all, and such measurements reveal the fact that the more producers' goods of one kind a man has, the less is the productive power that resides in one of them.[5]

The Foregoing Truths Universal.—All the general facts which have been thus far stated hold true wherever wealth is produced. They do not presuppose the facts of a division of labor and a system of exchanges, and they do not even require that there should be any social organization. Men in the most primitive tribes and even men living in Crusoe-like isolation would create wealth by labor aided by capital. The essence of that wealth would be effective utility, and the measure of this, which is value, would be made in the specific way that we have described. The varieties of capital, the distinction between capital and capital goods, and the law of diminishing productivity of such goods would appear in the most primitive economics as well as in the most advanced. These are by no means all of the facts and principles which are thus of universal application. They are merely a few of the more important and may serve as a foundation or a "Grundlegung," for further study. If we should extend our list of general and basic truths, it would quickly appear that the incomes that have been treated as rent and the various surplus gains which are analogous to rent are universal economic phenomena which it would be not illogical to discuss in the preliminary part of this treatise. What has been stated, however, concerning the laws of diminishing productivity of successive units of producers' wealth, concerning the diminishing utility of successive units of consumers' wealth, and also concerning the increasing burdensomeness of continuous hours of labor, presents the essential principles on which all rents and quasi-rents rest. It is best to study the applications of these principles as they are made in a civilized state.

Universal Economic Truths independent of the Special Facts of Sociology.—This first division of economic science borrows none of its premises from sociology, for the truths which compose it would abide if there were no society in existence. Basic facts it takes from Physics, Biology, Psychology, Chemistry, etc. Facts concerning man, nature, and the relation between them are material for it, but relations between man and man come into view only in the later divisions. There, indeed, they do come into the very foreground with results which immeasurably enrich the science. What we may call the socialization of the economic process we shall have next before us, and we shall find it full of critical problems involving the future well-being of humanity. Industry is carried on by a social organism in which men are atomic parts and to which nature has given a constitution with laws of action and development. We have first to study the nature of this industrial organism and the mode in which it would act if it were not subject to any constitutional change; and later we must study it in its process of growth. The economic action of a society which is undergoing no organic changes is the subject of Social Economic Statics, while such changes with their causes and effects constitute the subject of the science of Social Economic Dynamics.

FOOTNOTES

[1] For extended discussions of the relations of utility and value the reader is referred to the works of Jevons, Menger, Von Wieser, Von Böhm-Bawerk, and Walras. A study of "effective" utility and its relations to value, by the writer of the present treatise, is contained in the New Englander for July, 1881.

[2] If we should try to describe all the possibilities in the case, we should take account of the fact that a man may get a positive pleasure from his first hour or two of labor and construct a figure thus to express this fact:—

AC is the curve representing the sacrifice entailed by successive hours of labor.

In like manner we should have to recognize the fact that the utility of some kinds of goods may not reach a maximum with the first increment, and should construct a utility curve to express this fact. BC here represents the increase and the following decrease in the specific utility of the supply of an article of this kind.

[3] The terms marginal and final mean essentially the same thing, but the modes of conceiving it differ. When utilities are thought of as supplied one after another, the last is the least important. We may represent a man's enlarging gratifications, not by such a mere series of quantitative increments, but by an enlarging area. We may draw a series of concentric circles, beginning with the smallest, and let this central area inclose the most necessary forms of consumers' wealth. When we draw a second and larger circle, we inclose between it and the first one a zone which includes those forms which come next in importance. By continuing to draw circles we reach an outermost one which bounds a zone in which are included the least important of the consumer's acquisitions. These are the things which he gets with his costliest increment of labor, and the things which lie beyond the circle last drawn would not pay for the sacrifice which acquiring them would cost. In the accompanying figure the fifth zone includes these "marginal" forms of wealth.

[4] Although we may use the terms final utility and effective utility in a way that makes them nearly interchangeable, it is clear that the qualities for which the two terms stand are by no means identical, and that effective utility must be studied in any complete analysis of value. In distinguishing final utility we assume that the units of the supply of goods of a particular kind are furnished one by one, and we measure the absolute utility of each unit. The line AB measures the absolute utility of the first unit supplied. This measurement does not take any account of the cost of replacing this unit, for it does not recognize the possibility of replacing it. What is estimated is the absolute importance of the service which this first unit of the article renders, on the supposition that, if this first increment of the supply were wanting, the service would not be rendered at all. It is, in like manner, the absolute utility of the successive increments supplied which declines along the curve BC. DC measures the absolute utility of the final increment, and the area ABCD the total absolute utility of the supply. If the goods can be reproduced by labor, the total effective utility is less, since it is measured, as we have seen, by the amount of sacrifice which the replacing of one lost unit would entail multiplied by the number of units in the supply. It is the amount expressed by the area AECD which is the amount of the value of the goods, since measure of effective utility and value are the same, both in the case of a single unit and in that of a total supply.

We have discovered two reasons why the effective utility of any one of the earlier units is equal to the absolute utility of the final one. The first reason is that, if any one of them were lost, the final one would be put in the place of it and the consumer would suffer no loss except what would be entailed by going without the last unit. The second reason is that if the consumer should lose any one of the earlier units, he could replace it by the same amount of labor that would replace the final one. We have seen that the line DC of the figure expresses not only the absolute utility of the final unit of goods, but the disutility of the labor of reproducing it or of reproducing any other unit. The cost of replacing the whole supply is expressed by the area AECD, on the supposition that the units are replaced, one at a time, by means of labor performed at the end of several working days when the sacrifice is greatest. Total value is thus quantitatively equivalent to total effective sacrifice of replacement, as well as to total effective utility. If, by adding a brief period to the length of one working day, a man can make good the loss of one unit of the goods, by adding the same period to the length of a number of working days, he can make good the loss of the total supply. For simplicity we assume that the man's physical condition remains unchanged, and that an extra hour of labor at the end of any one day costs him as much as it would at the end of any other.

[5] The law of diminishing returns of successive units of capital goods is based on the same principle as the law of diminishing returns of capital, but it is not identical with it. We shall see, in due time, how a permanent fund of producers' wealth actually grows and why each new unit, as it adds itself to the fund, creates a smaller income than did its predecessor.

CHAPTER IV

THE SOCIALIZATION OF INDUSTRY

We have now before us a few principles of so general a kind that they apply to the economy of the most primitive state as well as to that of the most advanced. It is not necessary that men should live in any particular relation to each other, in order that, in creating and consuming wealth, they should exemplify these principles. They would do this even though they never came into touch with each other, but lived, as best they could, each man on his solitary farm. Laws of this general kind result from man's relation to nature, and not at all from the relation of different men to each other. Let a man keep wholly aloof from other men, apply his labor directly to nature, and he can produce wealth of the various kinds that we have described. He can secure food, clothing, and other things for his own use, and he can make tools to help him in securing them. He will appraise the consumers' goods according to the law of what has been called final utility or, in another view, effective specific utility, and he will also test the comparative usefulness of his various tools by an appeal to the law of final or specific productivity.

Social Economy the Chief Subject of Study.—We care most to know how an organized society produces and uses its wealth, and in making this inquiry we encounter at once phenomena that are not universal. The civilized society creates its wealth coöperatively, by the joint action of its various members; that is, it proceeds by means of a division of labor and an exchanging of products. Moreover, it has, in some way, to share the sum total of its gains among its various members. It has to apportion labor among different occupations for the sake of collective production, which is a grand synthetic operation whereby each man puts something into a common total which is the income of all society. It has, further, to divide the grand total into shares for its different members—an analytical operation in which each man takes something out of the aggregate for his personal use. This is distribution in the narrower sense of that term—the apportionment among the members of a civilized society of the fruits of production. In the wider sense the term also includes the apportionment of the sacrifices incurred in the joint production. Distribution, as thus defined, is the element that appears in economic life in consequence of social organization. This is a secondary element, indeed; for man, nature and their relations and interactions are the primary facts, and the relations of men to each other come logically after these. Social organization, however, is so transforming in its effects as to reduce to small proportions the amount of attention it is worth our while to devote to the economy of the primitive types of life. It is necessary to make some study of that economy, for it is thus that we place before ourselves the fact that there are universal economic laws and perceive distinctly the nature of some of the more important of them.

Facts Peculiar to Socialized Industry.—The term Political Economy denotes a science of industry[1] as thus socialized, for it is a science of the wealth which is produced in an organized way by the people of a more or less civilized state. The general truths which we have thus far stated apply to such an economy, indeed, but they also apply to the wealth-creating and wealth-consuming processes of uncivilized peoples, and even of isolated individuals who have no dealings with each other. They are truths of Economics in the unrestricted sense, and we have now to study the special truths of Political Economy. When production goes on by division of labor, as when one man works at one occupation and another at another, phenomena appear that do not appear in more primitive life; and still others appear when, within each occupation, there is a division of functions between the laborer and the capitalist, as is the case whenever one set of men furnish tools of production and another set do the work. The special laws of this highly developed economic system require far more extended study than do those more general laws which are common to it and simpler systems. We now continue to recognize the universal and basic truths which have been stated in the foregoing chapters and proceed to the study of the special principles which apply only to organized economic life.

Specialized Production the Means of Diversified Consumption.—As the kinds of goods that we individually make become fewer, the things which we get and use become more numerous and varied—such is the law of economic specialization. Society as a whole produces an infinite variety of things, and the individual member of it secures for himself goods of very many kinds. The typical modern worker is, in his production, a very narrow specialist, but in his consumption he is far less a specialist than was the rude hunter who was able to enjoy only the few goods which he himself produced. The modern worker's tastes are omnivorous, for he has developed an immense variety of wants and, through social organization, he has acquired the means of satisfying many of them.

The Position of Individuals in the Producing Organism.—When we say that production has been socialized, we mean something very far-reaching. We mean that an organization has grown up in which men are members or parts of members, and that this great organization has undertaken to do the productive work for all the individuals that compose it. For the first time we now recognize a sociological fact among the premises of economic science. When men, whose predecessors may have lived in isolated families or in a society organized for defense or for the mere pleasures of association, now develop a truly economic society, the individual depends on other individuals as well as on nature for the supply of his wants. Economic independence gives way to interdependence, because the fortune of each man is largely dependent, not merely on his own efforts, but on the relations which he sustains to other men. Simple laws of nature still largely control his income, but social laws also have a certain control over it.

Exchanges in their Primitive Stage.—The exchanging of products is, of course, the process with which the organization begins, and this process is introduced by easy and natural stages. The man who at first makes everything for himself develops a particular aptitude for making some one thing; and, though he may still continue to make most things for himself, he finds it advantageous to barter off a part of the supply of the one article for the making of which he is especially well fitted. He seeks out a neighbor whose special aptitude lies in a different direction and who has a surplus of some other article. It may be that one is a successful fisherman and the other is, by preference, a maker of clothing, and that they can get a mutual benefit by an exchange of food for raiment.[2]

The Intermediate Type of Exchanges and the Final One.—In the next stage a man becomes wholly a specialist, making one kind of product only and bartering it away for others. It might seem, at the first glance, that differentiation has now done its full work; but it is very far from having done so. Making one complete good for consumptionis still a complex operation, which can advantageously be subdivided in such a way that one man produces a raw material while another works it up into a useful shape. A gain may be made by a further division of the manufacturing process, whereby the first worker makes only the rawest material, another fashions it somewhat, a third carries the process farther, and a fourth or a still later one completes it. In modern industry the material must often pass through very many hands before it is ready to be made over to the consumer. Each man in the series puts a touch on it and passes it on to his successor.

A´´´ is an article of consumers' wealth and A is the rawest material that enters into it. A´ is this material somewhat transformed; A´´ is the same material after it has received the second transformation and needs only a final touch to convert it into A´´´, in which state it will be ready for the consumer's use. We have here a symbol of what is actually taking place in the industry of the world. Cattle are grazing on western ranches; hides are tanning in the woods of Pennsylvania; leather is going through the many changes that fashion it into shoes in the mills of Brockton; shoes are arranged on the shelves of retailers in New York in readiness for the people who are to wear them. These are stages in the making of a single product, and a thousand different products are coming into existence in a like way.

A Representation of the Groups, or Specific Industries, which compose Economic Society.—If we put beside the series of A's a series of B's and one of C's, we have a much simplified representation of what is actually taking place. There are, in reality, a myriad of different things which almost every consumer uses, and every one of them is made by a series of productive operations like the one we have described. The very fact that there are so many of them that it is hopeless to try to represent them all in the table makes it desirable to illustrate the principle by tabulating only a few and to assume that these few are all that there are. For the purposes that we have in mind it is entirely safe to suppose that a series of A's, one of B's, and one of C's represent all the consumers' goods that society uses. What we wish to ascertain is how the different series work together to furnish an income for each member of society.

The Organization Spontaneous.—Laborers can go where they will, and yet they are in some way brought into an orderly relation to each other, being placed in certain proportions in different industries. Capitalists also are free to invest their funds as they will, and yet there is a certain amount that is naturally devoted to each branch of business. How this apportionment takes place we can most readily ascertain by creating such an imaginary and very much simplified society as this table furnishes.

The series of A's, which we have already studied, represents one kind of raw material ripening into a finished product. B represents a second kind of raw material, which, like the A, is produced by its own set of workers and is then passed on to a second, who transform it into B´—a partly finished product. These then pass it on, as the corresponding set of men passed on the A´. They hand it over to a set of workmen who change it into B´´, a nearly completed product, and these hand it over to men at B´´´, who, by giving the final fashioning, bring it into the form of a finished consumers' good. The C's represent another general group of workers who transform the raw material, C, into the finished product, C´´´.

Industrial Groups and Subgroups.—Each of these more general bodies of workmen and employers, such as the entire series of A's, we may call an industrial group, and the divisions within each of them, such as A´ or A´´, we may term subgroups. The product of a group is a complete article, while that of a subgroup is not a complete article nor any part of an article that can be taken bodily from it. Yet it is a distinguishable element in the article. The product of the shoe factory is certainly not complete shoes, for the owners of the factory buy leather which has already passed through the hands of tanners; and the tanners themselves bought it in the shape of raw hides, which were furnished by still earlier producers. What the shoe factory has done is to impart a new utility to dressed leather by transforming it into shoes. It would be impossible ever to get that utility out again, or to point to any one part of the shoe as the only part that contains it. What the factory has really made is therefore a utility—a distinguishable quality which pervades a concrete thing. It makes the difference between the leather and the shoes. What the tanner has created is, in like manner, another utility, which makes the difference between raw hides and leather. Groups, then, in their entirety produce whole articles for direct use, while subgroups produce distinguishable utilities which are embodied in such articles. The sum total of all the different utilities constitutes the article. It is a complex of useful qualities held together by the fact that they are attached to the same original matter.

Proportionate Production.—All the subgroups working together in an orderly way not only produce the consumers' wealth that society needs, but produce the different kinds of consumers' goods in nicely adjusted proportions. Unless the general order of the group system is disturbed, there is a normal amount of A´´´ put on the market and also normal amounts of B´´´ and C´´´. This result is attained by influences that run through the productive organism and bring about an adjustment of the comparative amounts of labor in the different occupations. If competition worked quite freely, this adjustment would be so nice that no military apportionment of forces among different brigades, regiments, etc., made consciously and by the most intelligent commanding officer, could surpass the perfection of it. There would be also an equally fine adjustment of the comparative amounts of capital devoted to different industries. In the actual productive organism each man goes where he will—capitalist, laborer, and employer of capital and labor alike. Each man acts in this respect as though there were no such thing as coercion, and as though he might, with unchecked freedom, do solely what is good in his own sight. By reason of the fact that all are seeking to produce what they can in order that they may get what they can, there comes into operation an organic law which brings the groups and subgroups into a delicate balance, in point of size and output, whereby the grand total of force that society commands is prevented from making too much of one product and too little of another, and is made to do its utmost in getting a large sum total of wealth for the benefit of its various members.

What the "Division of Labor" Involves.—This is the real signification of what it has been common to call the division of labor. It is the socialization of labor, or the gathering of isolated laborers into a great organism that, entirely without coercion, determines in some way what each one shall do, and not only makes the product of the whole a myriadfold greater than without any organization it could be, but causes this product to take certain well-adjusted shapes which, as we shall later see, serve consumers better than they could be served by products in misadjusted proportions.

Capital as well as Labor Apportioned.—As we have said, there is a corresponding division of capital or an assignment of different parts of the total fund to different employments; and this is made in the same way as is the division of labor and results in an equally nice adjustment. Each bit of capital, like each workman, becomes, as it were, a specialist. It may take the shape of an instrument which is capable of performing only its one service, like the loom, which is capable of doing nothing except weaving; but even if the tool is somewhat adaptable, like a hammer which can be used in several trades, it is, as it were, stationed in one trade and held, by economic influences, at that one point in the system. The house carpenter keeps his hammer though the cabinet maker could use it. Each bit of capital helps to create a particular utility, and the number of units of the fund that each subgroup contains is, as we shall see, so arranged as to enable the fund as a whole to do its utmost for the general good. It is all without the use of force, since each bit of capital does what its owner pleases to have it do.

A Government Presupposed.—Of course there must be a government over it all. Such a method of producing wealth could never continue unless property were secure and unless it were made so without much effort on the part of its owners. A blacksmith who should have at one moment to use his hammer as a tool and at another to wield it as a weapon of defense could make but poor headway, and a society in which such a state of things existed in various trades would be too anarchic to permit the elaborate division of trades which is the key to success in industry. The most noticeable fact about organized production is that man is forever letting go the thing he has made or helped to make and allowing it to pass out of sight and reach without losing or greatly imperiling his title to the amount of wealth it represents. He casts his bread on the waters, but they bring him a return for it. Under these circumstances it is impossible for him to protect his product as the savage protects his tools, his clothing, and his hut. What a modern worker makes passes into the hands of other men and gets completely out of the maker's direct personal control. If he wanted it again, he could never find it; and if he could find it, it would be in a new shape and other men would have claims upon it. The man who has sold some hides that in the end have become shoes can hardly identify his product on the shelves of retail shoe dealers all over the country, or perhaps all over the world. If by a miracle he could find the particular bits of leather that in their raw stage he himself has furnished, they would be in new and far more valuable forms than they were when he had possession of them. The shoes contain utilities which the man who furnished the hides cannot claim to have created. They have been changed and improved by elements contributed by many other persons, such as manufacturers, carriers, merchants, etc., and he could never carry away the concrete thing that he himself produced without carrying with it other men's property.

The Surrendering of Goods and the Retention of Values Features of Social Industry.—Socialization of industry means, then, that individuals forego all effort to retain their own concrete products, but that they retain certain parts of the value of the products to which they have made contributions. The value of A´´´ when it is sold is claimed by men at A´´´, A´´, A´, and A according to some principle. The values of B´´´ and C´´´ can be followed until they reach the pockets of the men who have contributed their several shares to the making of these things. All this requires a government and a well-developed system of laws and courts for the protection of property, including the protection of it in the form of a claim to a value that is embodied in things which have gone beyond the maker's reach. Property here takes a refined form which requires that the man should forego all desire to keep the literal thing he has made and should make it his aim to retain the value of it in some other form. It is a comparatively simple matter to guard a concrete article which a man has in his possession, though even that requires some energy on the part of the police force and is never quite perfectly accomplished; but it is a far more difficult matter to enforce a claim that a man has against other men, in consequence of some utility that has been created by him but has gone away from him and mingled with utilities created by many other persons in a product that the man will never see. It is the problem of guaranteeing to the shoemaker the due return for the stitches he has put into shoes when the shoes themselves have gone to buyers and wearers in every quarter of the land and many quarters of the globe.

Groups under a Socialistic State.—In political economy as distinct from general economy we take one premise from sociology and another from politics. We assume that society exists and that it has taken on a political character, by establishing laws with courts to interpret them and officials to enforce them. We do not, however, assume that the direction of industrial affairs is in the hands of such officials. In the main industry is organized in a spontaneous way. Men choose such occupations as they like, and when there are too many of them in one group and too few in another, the rewards naturally increase in the group where a larger force is needed, and this lures men in that direction.

In a socialistic society such adjustments would be made under the direction of the state. Officials would have to decide when more workers are needed in the A series and less in the B series and would have to use either inducements or some kind of compulsion in order to move them from the one group to the other. What we actually have to deal with is a society that shapes itself by the free acts of individuals, and we have to see how, in this way, it organizes itself for production and divides among different claimants the product that, by the joint action of all of them, it creates.

Gains from the Organization of Industry.—The advantages of the division of labor consist in an increase in the quantity of products and in an improvement in their quality, and the quantitative gain is almost beyond computing. The advantage appears mainly in the middle and upper subgroups of the series, which transform the materials, rather than in the lower subgroups, which produce them; and yet there is a gain everywhere from such organization. A man produces far more when he performs the same operation many times than when he goes through a whole series of unlike operations. Moreover, he can perform the single operation far more accurately and can thus attain a more perfect result. He can learn his minute trade more easily than he could a complex one. Where unusual strength or skill is required, the work may be given to persons who have the requisite quality so that a good product can be insured, and none of the labor of these superior workers will need to be wasted on work which inferior labor can perfectly well perform.

Improvement in the Forms of Capital.—The greatest of all the advantages that come from this division and subdivision of wealth-creating processes comes in the way of applying machinery. A machine is a hopeless specialist and can, as a rule, put only a single minute touch on the material submitted to it; and the introduction of machines differentiates capital in a way that is parallel to the minute subdivision of labor. If the machine is to work at all economically, it must put its touch quickly on one after another of a series of articles, as they are submitted to it in uninterrupted succession. If only one kind of machine were employed in the making of shoes—if, for instance, the sewing of the uppers to the soles were done on sewing machines, even though all the rest were done by hand—it would be natural and almost necessary to have one class of workers to prepare the uppers, another to prepare the soles, and a third to sew them together by aid of the machine. When the several stages of the process are thus given over to different classes of workers, the situation is ripe for the application of more machines, and inventors readily devise apparatus that will perform one or another minute part of the manufacturing process. In the end most branches of manufacture take such shapes that the raw material is intrusted to a series of machines and passes from one to another by a nearly continuous movement, till it emerges from the hands of these automata as complete as any manipulation can make it and ready for the merchants who will convey it to their customers.

Economy of Capital.—There is an economy of capital involved in the fact that instruments can be used thus continuously. A worker does not have to have several sets of tools, many of which would be idle the greater part of the time, as would be the case if the man performed several unlike operations; but the greatest economy comes from the energy, rapidity, and accuracy with which the new instruments act. The tools are far more efficient than they could be if human muscles furnished the power and eyes and nerves supplied the deftness and accuracy that the making of the goods requires. Automata which men set working excel hand tools with men wielding them by a greater ratio than can be calculated.

FOOTNOTES

[1] We use this term in a broad sense, including agriculture and commerce as well as manufacturing.

[2] If we were giving a history of the division of labor, we should have to record the effects of differences of climate and of agricultural and mineral resources in occasioning, at an early period, a territorial division of labor. We are here describing the division of labor which occurs within a society and in consequence of what may be called social economic causes.

CHAPTER V

PRODUCTION A SYNTHESIS; DISTRIBUTION AN ANALYSIS

The essential fact about production, as it is carried on by all society, is that it is a synthetic operation, by which a grand total is made up by the contributions of different industries. There is a corresponding fact about the production which is carried on within a particular line of business, or, as we should express it, within a particular subgroup; for within the subgroup there are laborers, on the one hand, and capitalists, on the other, helping each other to make a joint product. In our table A´´´, B´´´, and C´´´ are the goods of which the social income is composed. Subgroups, such as A, A´, etc., help to make this grand total of finished goods; but in A, A´, and all the other subdivisions there are laborers and capitalists working together. Farming, mining, cotton spinning, shoemaking, building, and a myriad of other occupations all work together to create an aggregate of goods which constitute the social income. In each of these branches of business there are men and working appliances contributing each a part to the quota that this branch furnishes.

Distribution as an Analysis.—The essential fact about distribution is that it is an analysis. It reverses the synthetic operation step by step, resolving the grand total produced by society into shares corresponding with the amounts contributed by the specific industries, such as mining, cotton spinning, shoemaking, etc. The men who own and work the mines do not keep the ore they secure, nor do they wish to keep it. The ore goes into a stock of goods for the general use of society, and it constitutes a definite addition to the value of that stock. As ore it is transmuted into a myriad of forms, merged with other materials and lost; but the amount that it adds to the total product of society is definite. It is a certain definable quantity of wealth, and that quantity of wealth the producers of the ore should get for themselves. Distribution further resolves the share of each particular industry into final portions for the use of the laborers and capitalists in that industry; and these correspond with the amounts which these laborers and capitalists contribute. The result of distribution is to fix the rate of wages, the rate of interest, and the amount of the profits of employers, if such profits exist; and the general thesis which is here advanced and remains to be proved is that, if society were without changes and disturbances, if competition were absolutely free, and if labor and capital were so mobile that the slightest inducement would cause them to pass from one branch of business to another,[1] there would be no true profits[2] in any business, and labor and capital would create and get the whole social income. Moreover, each laborer and each capitalist would get the amount of his personal contribution to this sum total. Amid all the complications of society the modern worker would be in a position akin to that of the solitary hunter in a primitive forest—his income would be essentially of his own making and would include all that he makes. He would not, like the primitive man, get the literal things that he fashions, but he would get the amount of wealth that he creates—the value of the literal products which take shape under his hand.

Standards of Wages and Interest.—This accurate correspondence between men's incomes and their contributions to the general earnings of society would exist only in the absence of certain changes and disturbances which it will be our aim, in the latter part of this work, to study. These changes give to society the quality that we shall term dynamic, and we shall examine them at length. What can, however, be asserted in advance is that the rates of wages and interest which would prevail if the changes and disturbances were entirely absent constitute standards toward which, in spite of all the changes that are going on, actual wages and interest are continually tending. How nearly in practice the earnings of labor and capital approximate the ideal rates which perfect competition would establish is a question which it is not necessary at this point to raise. We have to define the standard rates and show that fundamental forces impel the actual rates toward them. The waters of a pond have an ideal level toward which they tend under the action of gravity; and though a gale were to force them to one end of the pond and cause the surface there to stand much higher than the surface at the other end, the standard level would be unaffected and the steady force of gravity would all the while be drawing the actual surface toward it. In our study of Economic Dynamics we shall encounter influences which act like the gale in the illustration, but at present we are studying what is more akin to gravity—a fundamental and steady force drawing wages and interest toward certain definable levels. In our present study of Economic Statics we must seek to discover how these standards are fixed, in the midst of the overturnings which industrial society undergoes.

We have already represented, in a highly simplified form, the synthesis by which the goods which make up the income of society are produced. A, B, and C represent different raw materials, and they are changed by a series of transmutations into A´´´, B´´´, and C´´´, which stand for all the consumers' goods that the society uses. They represent food, clothing, furnishings, vehicles, and countless means of comfort and pleasure.

The Making of Active Instruments of Production.—It is necessary always to have and use a stock of tools, machines, buildings, and other active instruments of production; and as these wear out in the using, it is necessary that there should be persons who occupy themselves in keeping the stock replenished. Under a system of division of labor there would be special industries devoted to the making of new appliances of production to take the place of those which are worn out and discarded, and also to make repairs on those which are still in use. For illustration, we may let the symbol H´´´ represent all active capital goods that the society uses, the various raw materials which enter into such active goods being represented by H and the partly made instruments by H´ and H´´. If the stock of appliances is not growing larger, just enough of the articles H´´´ are made to replace the discarded ones. No producer gets new machinery, but every one keeps his stock intact.

The Simplified Representation Correct in Principle.—We have now a very simple representation of what actually goes on under the name of the division of labor, and yet the representation is in essential points accurate. In reality a very detailed and minute division and subdivision of industries takes place and the varieties of goods produced are innumerable. Society, as a whole, is making the most highly composite product that can be conceived; namely, consumers' wealth in its countless forms. Each of the grand divisions of society—the general groups that we have represented by the series of A's or of B's—makes a complete article; but even that is in its own way far more composite than the symbol indicates, for it is apt to contain several kinds of raw material and to be made up of a large number of distinct utilities, each of which has its own set of producers. This complexity of the process of production does not change the principle of distribution, by which the product is virtually analyzed into its component elements and the value of each element is assigned to those who create it. This principle can be clearly represented by assuming that each subgroup has one distinct utility to create and that it takes only four of these to make an A´´´, a B´´´ or a C´´´.

A Synthesis within Each Subgroup.—There is within each subgroup a synthesis going on, and this also may be complex. Labor and capital dig ore from the ground—an unusually simple process; and yet there are several distinct operations to be performed before the ore is ready for smelting. When it comes to fashioning the metal into useful shapes, the operations become very numerous and require many subordinate trades even for the making of one product. How many mechanical operations go to the making of a bicycle, an automobile, or a steam yacht? Too many to be represented in any table, but not enough to change at all the principle according to which those who help to make one of these composite products are paid according to their contributions to it. We may consider that all the work that is done in one kind of mill creates one utility. Though there are many subtrades in making a shoe and many more in making a watch, we may proceed as though there were only one transformation of the raw material required in each case. We may let the division between the contiguous subgroups be made commercially rather than merely mechanically, and regard the establishments that buy material and sell it in a more highly wrought condition as moving it forward by one stage on the road to completion, however many changes they may have made in it in the different departments of their several mills. The difference between shoes, on the one hand, and the leather and findings of which they are made, on the other, thus passes for one utility. A manufacturer of shoes puts his leather and findings through many operations before he has shoes for sale; but it is convenient to call all that the manufacturer imparts to these raw elements before he makes them over in their new form to the merchant, one subproduct.

Further Complexities which may be Disregarded.—One man may be in several of the general groups. It is possible, for example, that he may furnish raw materials which enter into more than one finished article. Iron is so extensively used that it goes into more products than can easily be counted. The man who digs iron ore contributes to the making of bridges, rails, locomotives, buildings, machines, ships, and tools in indefinite number and variety. The price of each of the articles into which any of this material goes contains in itself the price of that part of the raw material which goes into it. There is steel in a ship, and the maker of that part of the output of raw steel which goes into a ship gets his pay from the price of the vessel; and so with the crude metal which goes into a bridge, a building, an engine, etc. What the producer of a material gets from each source tends, under perfectly free competition, to equal in amount what he contributes toward the value of the corresponding article. In terms of our table a miner may furnish ore from which iron is taken for the making of both A´´´ and B´´´; and if so, when the distributive process analyzes these products into their elements, the value of what he has in each case contributed will fall to him. He will be paid according to the help he has afforded in the making of the A´´´ and the B´´´, and this fact does not change in principle the manner in which the income of society is divided. If the man helped to make only one thing, he would get a part of the price of that one thing; but if he helps to make several, he will get a part of the price of each of them. Each group has one grand function to perform, such as the making of an A´´´, and if the man helps in more than one, and is paid accordingly, his total pay is according to the amount he produces in all the different functions he performs, and the principle of distribution works as perfectly as it would if the man were confined to the single subgroup A. For simplicity we assume that he is so.

The Functions of Capitalist, Laborer, and Entrepreneur often performed by One Person.—One person may perform several functions, not only by contributing to the products of several groups, but by contributing in more than one way to the product of one subgroup. He may, for example, both labor and furnish capital, and he may, further, perform a special coördinating function which is not labor, in the technical sense, and scarcely involves any continuous personal activity at all, but is essential for rendering labor and capital productive. What this function is we shall presently see. We shall term it the function of the entrepreneur, using this term in an unusually strict way. We shall keep this function quite distinct from the work of the superintendent or manager of a business.

How Much the Term "Labor" Covers.—We include under the term labor all effort expended in a routine way in carrying on business. The overseers in the shops, the bookkeepers, clerks, secretaries, treasurers, agents, and, in short, all who perform any of the labor of management for which they get or can get salaries are laborers in the comprehensive sense in which we use the word. It comes about that the employer usually labors; for he does the highest and most responsible work in his own mill or shop. It is not, however, in his capacity as entrepreneur, or "undertaker," that he labors; for, as the entrepreneur, properly speaking, he employs and pays for all the work that receives a stipend. He may employ himself, indeed, and set aside a stated sum to pay his own salary; but this means that in his capacity as entrepreneur he needs a good manager and hires himself to act in that capacity. Scrupulous fidelity is the most important quality that a manager can possess, and the employer can always trust himself to possess it so long as it is his own interests that he controls.

Entrepreneur and Capitalist.—In the same way we include in the capital of an establishment whatever invested funds the employer himself supplies, as well as what he hires from others. Here again a man is likely to serve in more than one capacity, for as an entrepreneur he hires capital and as a capitalist he lets it out for hire, so that in the one capacity he hires capital from himself acting in the other capacity. The man "puts money" into his own business and gets interest for the use of it.

The Different Functions of the Same Man distinguished in Business.—This distinction between the different functions that one person may perform is not a mere refinement of theory, but is something that is recognized in business and has great practical importance. In a corporation officials who are also stockholders receive salaries that are usually reckoned on the basis of the amount that they could get in the market if they were to enter the employment of other corporations and do the same kind of work they are now doing. Favoritism may give them considerably more than this amount, but even then this amount is the basis of the calculation which fixes their stipend. If they are paid more than their work is worth to their own corporations, what they get is something besides wages or any other normal and legitimate income. If they accept for their time less than they are worth, they make a donation to the corporation. Neither filching something for nothing out of the returns of the corporation, nor giving it a gratuity, is to be here assumed as existent, since we are not dealing with the phenomena of quasi-plunder or eccentric benevolence. The character of wages of management, as the reward for a high grade of labor, is recognized in business life, and the salary of the manager, whether he is a stockholder or not, is usually expressed in a definite sum of money and is gauged, crudely or accurately, according to his value as a servant of the company.

Dividends often Composite.—In like manner it is important in the bookkeeping of a company to ascertain how much of the return to the stockholders is merely interest on the capital they have themselves invested and how much is true profit, or the net gain which is over and above interest. In business life a distinction is pretty clearly maintained between the three kinds of income that have been described; namely, the reward of labor in all its forms, the reward of capital, going to whoever furnishes it, and the reward of a coördinating function, or the function of hiring both labor and capital and getting whatever their joint product is worth above the cost of the elements which enter into it. This essentially commercial margin of returns from production above all costs of production is profits in the strict sense and would be nonexistent in an absolutely static industry. It comes into existence in consequence of the changes with which social Economic Dynamics deals.

Three Incomes entirely Distinct.—Wages, interest, and profits, then, are the three incomes that we shall distinguish. We shall keep profits completely separated from the wages of any kind of labor and from the interest on any kind of capital. This income falls to the entrepreneur, otherwise called the undertaker, or the employer and coördinator of labor and capital, and it comes only when the product of the operations carried on in his establishment exceeds all wages and all interest that he has to pay.

How a Man could be an Entrepreneur Only.—If a man should hire all the capital that he needs in a business and also all the labor, including the labor of every man in the office force, and reside thereafter in a distant country, holding no consultations with his managers, whatever income he might get would be purely an entrepreneur's profit. It would not be interest—for that amount would have to be paid to the men who had loaned the capital—and it would not be wages—for they would have to be made over to the men actually doing the work. The absent entrepreneur would be, in the eye of the law, the purchaser of all the elements which go into the product, since all the purchases are made in his name. The managers are only his agents, and when they buy raw materials or supplies for the mill, they buy them for him and by his authority, and he is under the obligation to pay for them. Moreover paying wages is, in reality, buying the share which labor contributes to the product of the mill. The workmen have a natural right to the value which their work, of itself and aside from the aid furnished by others, imparts to the material that is put into their hands, and when they sell their labor, they are really selling their part of the product of the mill. In like manner paying interest is buying the share which capital contributes to the product. The owners of the capital have an original right to what the machines, the tools, the buildings, the land, and the raw materials, of themselves and apart from other contributions, put into the joint product. In reality they sell this share for a consideration in the form of interest. In a static state labor and capital together create the whole product of the mill; wages and interest are the prices that they get for their several contributions, and the entrepreneur pays these purchase prices and by virtue of this becomes the owner of the whole product. Having the product, he sells it in the market for what he can get. If this were more than the cost to him of all the elements that have gone into it, he would have a net profit remaining. It would be a remainder accruing to the owner and seller of the product after the costs of getting a title to it have been defrayed. Whether the absent entrepreneur of our illustration gets anything from his business or not depends on the question whether such a remainder of returns above costs is afforded.

Profits Nil in a Static Society.—We shall see that if labor and capital can move about in the system of groups so freely that each agent is as productive in one place as it is in another, there will be no product anywhere in excess of wages and interest. Labor and capital then create and claim for themselves the whole output of their industries. When the entrepreneur has given them their shares, by paying wages and interest, and has paid for raw materials, he has nothing left. In actual business competition is often sharp enough to prevent men from getting more than interest on their capital and a fair return for the labor they spend in directing their business; and pure theory here assumes that competition is always and everywhere sharp enough to do this. It is ideally efficient. Labor and capital are ideally mobile and ready to flow at once to the points where any net profits can be made. Such a condition implies that society is in a static state, and we shall see what this condition is. It implies an absence of organic change in society. The great collective producer does not alter either its form or its mode of producing wealth. Industry goes on, indeed, but it goes on in a changeless way. Reserving the full description of this state for a later chapter, we note here that the adjustment which would theoretically bring a society to such a state would preclude all gains for its entrepreneurs.[3]

The Merging of Functions Desirable.—The uniting in one person of the functions of capitalist, laborer, and entrepreneur contributed much to the productivity of the small-shop system of former days. The man who had a few thousand dollars invested in a little shop and employed a few men to assist him got three different kinds of income, and the sum of the three was larger than anything he could have secured if he had been only a laborer or only a small capitalist and entrepreneur. He worked harder and more intelligently than a hired superintendent would have done; he was led to be cautious because his own capital was risked in his business, and yet he was spurred to enterprise by the fact that when, by virtue of the influences which we call dynamic, profits were made, he got them. Even in the largest corporations the same conditions contribute to success, and it is best that managers should be owners of some part of the capital which they handle and receivers of some portion of the profits which they try to secure for their companies. Where competition is sharp, companies directed by their owners may supplant those of which the direction is given over to hired managers. The growth of corporations does, however, tend to put salaried men more and more into controlling positions and to reduce the power of the body of stockholders, who perform a joint function as capitalists and entrepreneurs. In itself this tends to reduce profits and detracts from the advantages which the incorporation of a business offers.

Distribution primarily Functional rather than Personal.—Where men get incomes that are composed of wages, interest, and profits, economic science should, in the first instance, tell us how the rates of wages and interest and the amount of profits are determined. A study of the static laws of distribution concerns itself with the reward of labor as such, and the reward of capital as such, while a study of dynamics takes account of pure profits. When we know what the rates of wages and interest are, we can tell what any capitalist-manager should have by knowing how much capital he furnishes and how much and how well he works as a manager. If the business is yielding a net profit, over and above the interest on its capital, we can tell what part of this net income any one stockholder will get—in the form of a rate of dividends in excess of the rate of interest—if we know how much of the common stock of the company he owns. His personal income depends on the incomes attaching to the functions he performs. The science of distribution should tell us primarily, not what any man personally gets as a total income and how well off he is as compared with other men, but in what way the wages of his labor, the interest on his capital, and the return for the entrepreneur's function are fixed. In technical terms this is saying that distribution is primarily functional and not personal. Certain forces assign certain rewards to different functions which are involved in the creating of wealth, and the science of distribution tells us how these forces work—tells us, in short, how wages, interest, and true profits are, in and of themselves, determined. If any man works and gets wages, that part of his income will be determined by the wages law. If he furnishes capital, a second part of his income will be determined by the interest law. If he also coördinates labor and capital, whatever he may thus gain is determined by the law of profit. Economic science has to ascertain and state what these three laws are, though in its static division it has only to account for two of them.

Costs as well as Gains Apportioned.—The term distribution, as commonly used, denotes a division of the gains of industry; but as we have said, there are sacrifices which have to be borne in getting the gains, and these also have to be shared. Wealth benefits men in the using, but puts burdens upon them in the making; and when all society does the making, it has to apportion, in some way, not only the benefits but the burdens. We shall take account of these sacrifices because of the relation that they bear to the gains. They act as an ultimate check on production. Men would go on producing indefinitely if the operation cost them nothing, since it would always be agreeable to have a further income; but they necessarily encounter pains and sacrifices that, sooner, or later, bring the enlargement of their incomes to an end. Much that is of importance occurs at that critical point where the sacrifices of production put an end to the extension of it. It is the positive fruits of production that we have first to consider; and what in this connection we wish first to know is how wages and interest are determined when industry is carried on in a social way and under a system of competition. We shall find that these incomes are always tending toward standards which they would reach if society were in the state which we have described as static. How they are forced away from their standards by the changes and disturbances of actual life, and how the standards themselves change with social development, will be the subject of the latter part of this treatise.

FOOTNOTES

[1] It will be seen that we here assume for the process known as competition a degree of perfection which it does not attain in actual life. This process would be absolutely free if labor could and would instantly abandon one industry and enter another whenever it appeared that it could create an increased product by so doing, and if capital also moved with the same promptness on the smallest inducement. In actual life there is friction to be overcome in the making of such transfers, and this constitutes one of the subjects of the theory of Economic Dynamics and will in later chapters be fully considered.

Whenever either labor or capital thus moves to a new place in the group system, it becomes an active competitor of the labor or capital that was already there. We need a definition of the competing process. In the case of producing agents it consists in a rivalry in selling. The laborer who moves from A´ of the table that, in the preceding chapter, has been used to represent organized industry to B´, offers for sale, as some would say, his service, or more accurately, the product which his labor can create. The purchasers are the employers in the subgroup B´, and in order to induce them to accept the new labor it is necessary to offer it at a rate of pay which will make it worth their while to take it. If the workers already in this division of the field are getting just what they are worth, a larger force cannot be employed at the same rate of wages, because, for a reason that will later appear, the new labor cannot offer for sale as large a product as an equal amount of the labor that is already there. If the transfer to B´ were made, the new labor would have to accept lower pay than the old has been getting, and the old labor would be forced to accept a cut in its rate of pay or be supplanted by the new. A rate sufficiently low would insure the employment of all. If the labor formerly in this subgroup has been getting less than it is worth, there will ensue a competition among employers who desire to realize, each for himself, the margin of profit which can be made by getting additional labor, and this will either raise the pay of the men already in this subgroup or call new men into it, or do both. In any case it will, in the absence of all trace of monopoly on the side of the employers, end by giving to the men what they are worth. It is, in fact, such a bidding for new labor by employers in any branch of business that moves labor from point to point in the industrial system. The entrepreneur is the agent in the case, profits are the lure, and competition—rivalry in buying—is the means; and competition is, as we use terms, absolutely free whenever it is certain that the smallest margin of net profit will set it working and draw labor or capital to the profit-yielding point.

There is competition among the entrepreneurs at A´´´ in selling this finished product to the consuming public, and among different purchasers in buying it. Whenever the price of A´´´ is so high that the whole output of it cannot be sold, each vender tries to supplant others and insure a sale of his own product rather than that of any one else. Competition here is overt and active. When all can be sold at the current price, finding a market for one vender's supply does not require that he win away another's customers, and although the different sellers continue to be rivals and each would welcome an increase of patronage made at others' cost, no one is forced to underbid others in order to continue to sell his accustomed output. Competition is here quiescent, since actual underbidding and the luring away of rivals' customers do not take place. When entrepreneurs who are not now in the subgroup A´´´ are ready to enter it and to become rivals of those already there whenever any profit is to be had by such a course, their competition is not actual but potential; and yet it is a real influence and serves to deter producers already in the field from establishing such a price for their product that the possible competitors will become real and active ones. These three influences may conceivably act without obstruction or may be hindered and deprived of much of their power. In actual life they are subjected to hindrances, and whether they shall hereafter insure a certain approximation to the general state which a perfectly free competition would insure or whether the economic condition of the world shall be permitted to drift far from that normal state, depends on the success which governments will have in reducing or removing the hindrances.

[2] In this treatise the term profits will be used to designate the net increase which may remain in employers' hands after paying the wages of labor of every kind and interest on all capital used. The term gross profits describes a sum made up of this net profit and interest on the capital.

[3] The preceding paragraphs may seem to show that if an entrepreneur ever gets an income, he does it by wresting from labor and capital a part of their products. We shall see that in dynamic industry there is a normal way in which he may get an income without taking anything from the incomes that labor and capital would get if he did not perform his part. His return may come from the result of an enabling act which he performs, whereby both the labor and the capital of a particular subgroup become more productive than other labor and capital are and more so than they would be if the entrepreneur's enabling act were not performed.

CHAPTER VI

VALUE AND ITS RELATION TO DIFFERENT INCOMES

Functional distribution controls personal incomes since each man who gets, in a normal way, any income at all performs one or more productive functions, and his total income is the sum of the returns for these several functions. Moreover under such a condition of ideally perfect competition as we have assumed each of these functions is rewarded according to the product that it creates; and each man accordingly is paid an amount that equals the total product which he personally creates. Men's products, even in the disturbed conditions of actual life, set the standards to which their returns tend to conform, though they vary from them in ways that we shall not fail to notice.

Group Distribution.—The grand total of the social income has to go through a preliminary division before it is shared by laborers, capitalists, and entrepreneurs. In each industry the pay of all these functionaries comes from the selling price of the commercial article that they coöperate in making. The price of shoes pays all shoemakers, whether what they contribute to the manufacturing is labor, capital, or mere coördination; and it also pays ranchmen and tanners for what they contribute in the shape of leather, raw and dressed. If the price of shoes should rise, there would be a larger income for the group whose activities create them. So if woolen clothing were to become dearer, there would be more money for the group that makes it, and this would include those who raise sheep and those who convert wool into cloth, as well as the garment makers themselves. The question, what members of a group would get the benefit of a rise in the price of its product, is one that must be discussed in connection with economic dynamics, and we shall find, when we reach this part of the subject, that it is entrepreneurs' gains which come largely from sources like this. We have already seen that, in a static condition and with prices, wages, and interest immovably held at rates to which perfectly free competition would bring them, entrepreneurs as such would get nil, and the whole price of every article would be distributed among the laborers and the capitalists who make it. The proof of this will appear when we have examined the process by which the values of goods are adjusted, and this will help to prepare the way for a study of the sources of net profits, which are an all-important feature of actual business. Society is honest or dishonest according as this entrepreneurs' income is gained in one way or in another; and it is not too much to say that before the court of last resort, the body of the people, no system of business will be allowed permanently to stand unless the basic principle of it tends to eliminate dishonest profits. A chief purpose of static studies is to afford a means of testing the legitimacy of the incomes that come to entrepreneurs.

Market Price.—The old phrase supply and demand describes the process by which the market price of anything is determined. The total mercantile stock of goods of a particular kind at any one time on hand is, of course, an exact quantity, and the law of "market value," when these words are used in a restricted and technical sense, determines the price at which this predetermined amount can be sold.

How a Normal Supply is Determined.—This present stock, however, was brought into existence by producers who looked forward to the time when they could probably sell it at a certain price; and the higher this anticipated return for the article, the more of it they were induced to make. The price, which to-day depends on the quantity on hand, acted in advance as a lure to bring that quantity into existence, and among the different articles which men can produce, they are forever singling out for increased production those things which offer the strongest lures—that is, the things that sell for the largest amounts as compared with the cost of making them. The ultimate tendency of all this is a certain adjustment of the relative supplies of different commodities. It is that adjustment which brings all prices to a level determined by cost.

Natural Value.—This tendency toward cost prices—those which afford to the producers wages for all their labor but no true entrepreneurs' profit—establishes a further law, that of "natural value," and this it is that fixes the standard to which, in the long run, market values, as adjusted by supply and demand, tend to conform. A market value is natural or unnatural according as it does or does not conform to a certain standard, and this ultimate standard itself is the cost of producing the several kinds of goods. What the term cost in this connection really means we must later see; but for the present we may take the common and practical view that it is the amount of money that an entrepreneur must pay out in order to bring the article into existence. If there were very little wheat in the granaries of the world, demand acting on this limited supply would determine the selling price of it, and this price would be high as compared with the cost of raising this grain. It would also be higher than the selling prices of other things which are produced by the same expenditure of labor and capital that has to be made in raising the wheat. The market price would, for the time being, be unnatural and would in due time be brought down; but this would have to be done by the raising of more wheat. In other words, though the selling price of a small supply of wheat may be normal for that amount, the amount supplied is itself abnormally small, and in view of that fact the resulting price is too high to be allowed to continue. As a permanent price it would not be natural. The quantity supplied tends to increase till the market price conforms to the cost of raising the wheat. We have to see, first, how demand fixes the price of a definite amount of anything which is offered for sale and, later, how the quantity offered is controlled.

How Prices are Determined.—It is certain that if, in a given market, we increase the quantity of goods that are to be sold, we lower the price,[1] while, if we diminish the quantity, we raise the price. That is the commercial fact and it furnishes a beginning for a theory of value.

Let us suppose that we have a fixed quantity of goods on hand, that all must be sold, and that no one knows at the outset what price they will bring. There might conceivably go on an inverted kind of auctioning process, in which the sellers at the outset would ask a high rate, sell a few of their goods, and then gradually reduce the price till the last article should be sold. At each reduction of the price the "effectual demand," so-called, would increase. This means that the people who want the article are actually willing to take and pay for larger quantities the lower the price falls. Mere desire does not influence the market, but an "effectual demand" means a desire and a tender of the money that is asked for the goods. It is, in short, an actual purchase and the amount of it becomes larger as the price goes down. People who did not buy the article before now add it to the list of goods that they take for use, and the people who were already taking a certain quantity of it now take more.

Equation of Supply and Effective Demand.—If this effective demand, or amount of goods actually bought and paid for, becomes steadily larger the lower the price becomes, it is clear that, however large the total supply may be, it can all be sold by making the price low enough. It was once thought that this is all we need to know of prices current or market values. At some selling rate or other the quantity actually offered will come to equal the quantity that is actually bought. This is the equation of demand and supply. The quantity offered is here supposed to be fixed and to include all of the article that is in dealers' hands and that has to be sold; and the price, starting at a high rate, is supposed to go down till the sale of the entire quantity is effected.

Varying Demand and Price.—The facts that have just been stated account only in a partial way for the adjustment of market price. One who wishes to trace phenomena to their causes cannot help asking why demand and supply insure the selling of a given amount of goods at one rate rather than at another. If apples are offering at two dollars a barrel, why is it that, in a particular local market, one thousand barrels and no more can, at that rate, be sold? We can readily see that at one dollar a barrel more could be sold than at two, and that at three less would be sold. But why is it that, at two dollars, the definite number of one thousand barrels is the amount that is taken and paid for? Why is the equation of demand and supply established at exactly that price?

Demand and Final Utility.—We come nearer to the cause that acts in adjusting the price of apples when we say that they sell at two dollars a barrel because that sum expresses their "final utility." This means that, if such an auctioning process as we have described were resorted to, the last barrel of apples which would be sold would have to the buyer an amount of utility just equal to that of the final unit of any other article that could have been had for the same money. The auctioning, however, would cause different barrels of apples to sell at different prices, whereas there is something in the working of competition which causes all of them to sell at the same price. It is necessary to see, first, how the price of the "final" one is adjusted and, secondly, how that fixes the price of all the others.

The Law of Diminishing Utility.—We revert here to one of those general laws of economics that we have already stated and see it acting under the conditions of distinctly social life. Goods of a given kind have less and less utility, per unit, the more the user has of them. If you offer him apples in increased quantity, he will value the first part of the supply highly, but will attach less value to the later parts. When the desire for this fruit is fairly well satisfied, he will find other articles of more importance. At the price of two dollars a barrel it is just worth his while to buy a final barrel of them. That quantity, as added to his winter's supply, will give him two dollars' worth of benefit. This means that it will do him as much good as anything else which he can get for the same amount of money.

The Equalization of Final Utilities.—Two dollars spent in adding to his previous stock of other things will do the man in the illustration the same amount of good that he can get from a final barrel of apples, and no more. In the case of goods which are all alike and of which consumers are always glad to use an additional amount, prices tend to adjust themselves in such a way that a final unit of any one which the consumer buys with a dollar is worth just as much to him as a final unit of any other article he buys with that amount. The last dollar paid for apples is as remunerative, in the way of pleasure and benefit secured, as is the last dollar used to improve his wardrobe, to add something to his stock of furniture, to buy tickets to the theater, etc. Apples have, as it were, to compete with clothing, furniture, and amusements for the consumer's favor, and if the vender charges more for them than do the venders of other things having the same power to give pleasure, some of the apples will remain unsold; for though customers will always give as much as they would have to pay for other things of equal final utility, they will not give more.

The Prices of All Increments of Supply Equal.—A consumer always gets a net surplus of benefit from the early increments of the goods he consumes. If the last barrel of apples is worth two dollars,—or, what is the same thing, if the last barrel has in it an amount of utility equal to the final utility of other things that two dollars will buy,—the first barrel has a larger utility; and yet it costs no more than the last one. The sellers of apples, if they expect to dispose of all that they have, must at the outset fix the price at such a point that the very last increment of the supply will successfully compete with other articles for the favor of purchasers. Competition forces them to sell the whole amount so cheaply that the least important part of it may be as important to the purchaser of that part as the corresponding and least important part of the supply of other things. Nothing but a monopoly of the entire available stock would enable them to carry out the auctioning plan and offer the stock piecemeal, so as to get a higher price for the parts offered early. Even then buyers who should perceive the fact that a large part of the stock remained in reserve and that it must ultimately be sold would be able, by delaying their purchases, to get the benefit of a later and lower rate, so that the monopoly itself would be only partially successful in its policy. In the absence of a monopoly venders are compelled to sell all articles of one kind and quality at one price. The man who should fix a higher price on his portion of the supply would be passed by in favor of other sellers who were disposing of their final increments, and his business would quietly drift away from him. There cannot be two prices for one commodity in the same market at the same time. This fact is fundamental. Even the monopoly is able to get different prices for different parts of its output only by offering them at different times; and competing producers cannot do this. They are forced to keep the price of all they offer at a level that expresses its final utility.

The Law of Value affected by the Difficulty of using Two Similar Goods at Once.—There are two imperfections in the common statement of this law of final utility which need to be removed in order that the theory of value, which is based on the law, may be true and useful. The first lies in the assumption that people buy completed articles, such as coats, tables, vehicles, watches, etc., in regular series of units, adding to their stock coat after coat, watch after watch, etc., all just alike, till the utility of the last one becomes so small that it is better to buy other things. On this supposition the price of the whole supply of any such thing corresponds with the utility of the last one in the consumer's series. This fairly well describes the case of commodities like apples, of which men consume now more and now less per day or per week and are always glad to increase the amount they use. Of most kinds of consumers' goods a person wants at one time one unit and no more, and a second unit, if he has to use it himself within the same time in which he uses the first, would be an incumbrance. Its utility would be a negative quantity. Two quite similar coats would never be bought by the same person if he had only his own needs in view and must use both coats through the same period. The first unit of his supply is, for this period, also the last.

The Law of Value affected by the Fact that the Final Unit of a Good is usually a Complex of Unlike Utilities.—The second imperfection consists in the assumption that in measuring the utility of such a unit the consumer estimates the importance to himself of the article taken in its entirety. In the case of the apples of our illustration the difficulty is not obvious. A man, as we have just noticed, may increase or diminish his consumption of this fruit; the first few apples that he uses will give him more pleasure than a second similar quantity, and the price of apples in the market may actually depend on the utility of the final peck of apples that each of the customers consumes in a season. In other words, there is, in this instance, a probability that the goods, although supplied at once, may be appraised as if they were offered in a regular series and that the law of final utility, in its common and simple form of statement, may in this particular apply to the case. The second difficulty, however, remains, and even in the case of such goods as apples renders the common statement somewhat inaccurate, while in the case of most kinds of consumers' goods the inaccuracy is glaring. If the price of fine watches corresponded with the utility of the last one that a consumer uses, it would be many times greater than it is. Rather than go without watches altogether many a man would pay one thousand dollars for one for which he actually gives a hundred; and, moreover, this watch may be the "final" one in his case. The utility of the last overcoat that a man uses in the winter may be such that, if he could have it on no other condition, he would readily give five hundred dollars for it instead of fifty.

How Unlike Services may be rendered by One Good at the Same Time.—What people want of any useful thing is an effect in themselves,—a pleasure or a benefit which they expect to get,—and apart from this subjective result they would not want the thing at all. The power to confer a particular benefit is a utility. Men buy goods solely for their utilities, and they measure these service-rendering powers in the things offered to them and pay for them accordingly. Now, it happens that articles often combine in themselves a considerable number of different utilities, or service-rendering powers, and that in buying an article the man pays for them all. It is as though four or five different servants, each having his own specialty, were to offer themselves for hire and invite an employer to consider what each one could do for him. In buying an article which will serve him in several ways, a man appraises all the unlike services that the article will render. He secures several services at once, as he would do if he hired, in a body, several actual servants. The same thing would happen if, instead of hiring human servants with different aptitudes, one should buy different commodities each of which is, in reality, an inanimate servant, able, in its own way, to do something useful or agreeable for the purchaser. We could bunch a lot of these goods and buy them collectively. Venders of the goods could tie them together in bundles and offer them thus for sale. If the different goods were also sold separately in the market, they would command in the bundles the same prices that they would command when sold each by itself, and a bundle would bring the sum of the several prices of its component articles. In just this way in which an aggregate of different goods would get its valuation does any one article which is made up of different utilities get its rating. The utilities are appraised separately. In buying an article which is a composite of different utilities, we virtually employ a company of servants who have different specialties and insist on being hired all together or not at all.

How the Normal Price of a Bundle of Unlike Goods would be Fixed.—We have now to see how the action of the market analyzes an article and puts a price on the several utilities which compose it. The market does this in exactly the same way in which it would appraise a bundle of dissimilar articles which had to be sold separately, and we will therefore trace the operation by which a package containing the commodities A, B, C, and D would get its value in an actual market.

How the Normal Price of a Single Good in a Bundle of Unlike Goods would be Fixed.—Let us see how a bundle made up of commodities A, B, C, and D would get its value in the market. We will suppose that these articles are here named in the order of their importance, and that A has the highest utility, since it renders the most important service, and that D has the least. It may be that the article A has a utility rated at one hundred dollars in a particular man's esteem. He would give one hundred dollars for it rather than do without it altogether. The service, then, that one article of this kind can render is expressed by the sum one hundred dollars. Article B taken separately may be worth fifty dollars, since it may render such services that the man would give fifty dollars rather than be without it. A third article, C, may in the same way be valued at twenty dollars and a fourth at ten. Now, if a man has to buy the whole bundle, must he pay one hundred dollars plus fifty plus twenty plus ten, or one hundred and eighty for the whole? This does not by any means follow. The first article may be sold separately at a price far below one hundred dollars. There may be so large a supply of it that, in order to find a market for it all, the makers must take ten dollars for it. This fixes the market price of that amount of this commodity at ten dollars. If we now glance beyond the question of the "market price" of the goods and consider their more permanent or "normal price," the inquiry requires us to do more than ascertain why a definite quantity of the goods offered at a certain time sells for a certain amount. An appeal to the law of final utility answers that question. To know, however, why the permanent price is what it is, we have to know what fixes the permanent supply, and we discover that the cost of making the goods is here a dominant influence. For the present we assume that this cost does not change, since such changes are a subject for the dynamic studies which will come later. The present fact is that production has been carried to such a point that no more of these goods can be sold at the cost price, and there the enlargement of the output has stopped; the supply has at some time in the past reached this normal point and now remains there. Ten dollars represents the final utility of the article, and this sum is what it costs to make it. If it could be sold for any more than that, competition would bring new producers into this business and would impel those already in it to enlarge their production till the price would stand at the normal or cost level of ten dollars.

The Consumers' Surplus.—In every such case there are men who would give much more for the article rather than be without it, and we have supposed that some one would pay a hundred dollars for this commodity if he could not otherwise obtain it. Ninety dollars, then, measures what we may call his consumers' surplus, or the clear benefit he gets from buying at its market price an article that is worth to him so much more. This comes about by the fact that the makers of article A, in order to sell the amount of goods that competition has impelled them to make, must accept the offers of persons who can consistently give only ten dollars for it. These are relatively poor persons, and as the sum of ten dollars expended on other articles would benefit them as much as ten dollars spent on this one, it is a "final" purchase, or a final increment of their consumers' wealth. In order to get it they sacrifice, in some other form, a benefit as great as the one they get from acquiring this commodity and receive, therefore, no consumers' surplus from it. These are the men whose demand helps to fix the price of the article A, and the willingness of other persons to give more does not make it bring any more. The rich men, who stand ready to pay a hundred dollars, if necessary, are gainers by letting poorer men fix this price. It is by catching the patronage of these poorer men that the makers can dispose of their large output, and in doing this they have to bring the price down to ten dollars.

The Function of a Special Class of Marginal Purchasers of Each Article.—In like manner there is a class of "marginal purchasers" of the article B, or the persons who pay for it so much that they get no net benefit or consumers' surplus from the purchase. If they did not buy this article, they could get something else that would do them as much good for the same outlay. It costs, let us say, only ten dollars in the making, and enough of these articles are made and offered for sale at that price to supply all customers who are attracted by the offer. The men who would pay more for it do not count. Each of the other articles in the bundle, when it is offered separately and at the cost price which competition establishes, represents a final utility to some one class of purchasers. Competition has made the whole supply so large that, in order to dispose of it, venders must attract the particular class who will take it at the ten-dollar rate. This class is in the strategic position of market-price makers for this one thing. They are the last class to whom the producers can afford to cater. If each of the five articles in the bundle costs the makers ten dollars, and if so many of each are made that they just supply the needs of the classes that will buy them at ten dollars apiece, the price of all five, when sold separately, will be fifty dollars. Most of the purchasers of each article would give more than ten for it if they had to, but some would not do so, and the producers cater to the needs of these marginal persons.

How the Prices of the Goods are fixed when they are sold in Various Combinations.—How do these articles get their valuation when they are tied in bundles containing all five of them and the bundles are sold unbroken? In essentially the same way as when sold separately. Article A, we will suppose, is one of the necessaries of life and is to be had by itself in the market. Article B represents a comfort, and C and D are luxuries. The bundles are so made that A and B are often sold together; as are also A, B, and C; and A, B, C, and D. A purchaser may have at his option the first only, the first and the second combined, the first three, or all four. Article A, when it stands alone, can be had at the natural or cost price and in quantity sufficient to supply the wants of all classes of buyers from the highest down to the class which will take it at ten dollars—the cost of making it—but at no higher price. Any one can have the A either alone or tied to other articles at this price. One who buys A and B in combination will pay for article A only the same price that it commands when sold separately; and since he buys B, the utility of which is less than that of A, at ten dollars, it is clear that he gets A for less than it is worth to him, but the ten dollars may be all he would give for the B. This man is not the marginal purchaser of A, for in buying it he realizes a consumers' surplus; but for the article B, which is tied to it, he may pay all that it is worth to him. For that he is a marginal purchaser, and as such he gets no consumers' surplus out of it. What he pays for B will just suffice to buy something else which is equally important to him. The price of this bundle of two articles is ultimately determined by the cost of the two components, which is twenty dollars, and enough of each component is made and offered in the market to supply the wants of a class of persons who will barely decide to take it at the cost rate. The class that hesitates at taking A will not consider B, but the class that hesitates at taking B gets a clear benefit from buying A at the price that expresses the utility of A to a poorer class of persons.

How Different Classes of Purchasers coöperate in this Price Making.—The rule of one price for one article of course holds, and the man who would have a clear and decisive motive for buying the A for more than ten dollars, if he had to do so, gets the benefit of two facts: first, that it costs only that amount in the producing, and secondly, that competition makes the supply of it so large that it is brought within the reach of those persons who value it at only ten dollars. It takes two different classes of purchasers to fix the price of this package of two articles, and their ratings fix it at twenty dollars. Exactly the same influences regulate the price of the bundle which includes A, B, and C. Men who buy C can afford to have a luxury, and therefore, if they had had to do so, would have given more than they do give for the articles of necessity and comfort. If the price of A and B were higher than it is, they would still buy these two things, but they would not raise their bids for C, since for this they are marginal purchasers. This commodity is therefore sold at the price that will just induce this class of persons to add it to their list of consumers' goods. There is a further class in whose list of purchases D is marginal, while A, B, and C yield a consumers' surplus in the form of an uncompensated personal benefit.

Different Utilities in an Article appraised as are Different Goods in a Package.—It is an actual fact that most commodities are like these packages of unlike articles. They are bundles of unlike utilities, and the market actually finds a way to analyze composite things and put a separate price on each utility. It may seem very theoretical to say that a concrete thing, like a watch, a coat, a dining table, or a roast fowl, is made up of such abstract things as utilities and that each of these has its separate price; yet such is actually the fact, and if goods were not valued in the market in this way, the prices of all articles of comfort and luxury would be very much higher than they are.

A man pays seventy-five dollars for an overcoat, but if he could not get the service that the coat as a whole renders without paying five hundred dollars for it, he would pay it; for otherwise he could hardly get through a winter. No man who buys an overcoat worth seventy-five dollars would refuse to pay more if that were the necessary condition of having an overcoat at all. The garment as a whole is far from being a "marginal utility" to any one; and yet there is something in it that is so. This element is like the article D in the fourth bundle referred to in our illustration. There is a particular utility in the composite good for which the man pays all that it is worth to him; and he would go without that utility if the seller charged more than he does. The most important service that the coat renders is that of keeping the man warm; but a very cheap garment would render that service, and six dollars will buy such a garment. The man does not need to pay more than six dollars for that one service. The supply of cheap coats is such that the final one must be offered for six dollars in order to induce certain poor purchasers to buy it, and that, moreover, is all that it costs to make it. No one, therefore, is obliged to pay more than six dollars for something that will keep him warm, however much such a service may be worth to him. Coats of another grade have a second utility combined with this one, since they are made of better cloth and are more comely in appearance. Utilities of an æsthetic kind are combined with the crude qualities represented by the cheapest coats. The supply of coats of this grade is such that they must be offered for twenty dollars in order to induce some one to take the final or marginal one. What does this mean? It means that this purchaser will pay fourteen dollars and no more in order to have the second utility, consisting in comeliness, added to the first utility, capacity to keep him warm. This man would give more than twenty dollars rather than go uncloaked; for it is plain that, if he will pay fourteen dollars for comeliness, he will give more than six for warmth. Probably he would pay one hundred dollars for the article if he had to, and in getting it for twenty he gets a large consumers' surplus. This is because he secures the first utility (1) for less than it is worth to him, (2) for just what it costs in the making, and (3) for just what it is worth to the poorer purchasers. He is willing to pay only fourteen dollars for the comeliness, which is the second utility that the garment contains, and he is therefore a marginal purchaser of this second utility. It costs only the sum of fourteen dollars to add the second utility to the first, and enough coats of the second grade are made to catch the patronage of the class of buyers who will give so much and no more for it. They are the persons whose demand figures in adjusting the market price of this second utility. Competing producers of coats cause the supply of those of the second grade to be so large that they could not all be sold unless the second utility were offered for fourteen dollars. This makes the price of the entire coat twenty dollars as the result of catering in a detailed way to the demand of two different classes of buyers.

In exactly the same way the price of the third grade is fixed at forty dollars and that of the still higher grade at seventy-five. In the third grade there is a utility which it costs twenty dollars to add to those possessed by garments of the second grade, and this is added to enough of them to supply all persons who will pay twenty dollars or more for it. These coats are made of more highly finished goods and have better linings, and this gives them the third utility which the market appraises at its cost, which is twenty dollars. The men who buy the forty dollar coats get a surplus of benefit in securing the first two of the utilities that are embodied in them, since for these they pay less than they would pay if they had to; but they get no surplus over the cost of the third utility. It is to secure their custom that the vender must sell it for twenty dollars. In a like manner a coat of the next grade, which is a more fashionable garment, sells for seventy-five dollars because it has a fourth utility which costs another sum of thirty-five dollars and, to the marginal buyers, is worth that amount. These men get a surplus from buying the first three utilities at what they cost their producers and what they are worth to poorer purchasers. It appears, then, that a seventy-five dollar coat is a bundle of distinct elements, or utilities, each of which has its separate cost and is sold at that cost price to a particular marginal class of purchasers. Each element is valued exactly as if it were in itself a complete article tied in this case to others, but also offered separately in the market. Persons of one class are final purchasers of the first utility when it is offered at its cost, six dollars. Another class, in a like manner, helps to set the price of the second utility at fourteen, and still other classes figure in the adjustment of the prices of the third and fourth utilities. These cost the manufacturers twenty dollars and thirty-five dollars respectively, and competition insures the making of enough of them to catch the patronage of those who will pay just these amounts. Members of one class act as marginal purchasers in price making in the case of one utility only. The concurrent action of all of them results in setting the price of the best coat at eighty dollars. It is a very practical fact that the rates at which all fine articles sell in the market are fixed in this way. Such articles contain utilities unlike each other. They have power to render services of varying degrees of importance, and each of the several services gets its normal valuation when producers make enough to supply the want of a particular group of persons to whom it is a marginal service and who are willing to pay only what it costs. They would go without that one service if they had to pay more for it.

This Method of Valuation Applicable to All Commodities of High Grade.—Illustrations of this principle might be multiplied indefinitely. A fine watch tells the time of day, but something that would do that could be had for a dollar, and that is all that this fundamental element in the fine watch sells for. It takes a series of purchasers bidding on the higher utilities of the fine watch to make it sell for five hundred dollars. The man who buys such a watch would give, perhaps, ten thousand for it rather than be without a watch altogether, but he is saved from the necessity of doing so by the fact that poorer customers have done the appraising in the case of all the more fundamental qualities which the watch possesses. So long as an Ingersoll "dollar watch" will tell the time of day, no one will pay more than a dollar for exactly that same service rendered by any watch whatever; and the same thing is true of other services. Social in a very concrete and literal sense is the operation of fixing prices. Only the simplest and cheapest things that are sold in the market at all bring just what they are worth to the buyers, and all articles of higher grade offer to all who buy them a surplus of service not offset by what is paid for them. If we rule out the cheapest and poorest grades of articles, we find all others affording a "consumers' surplus."[2]

FOOTNOTES

[1] The term market, as used in this discussion, means a local area within which goods of given kinds are bought and sold; and for different purposes we may make the area small or large. For some purposes it is necessary to take a "world market" into consideration, while for others it is desirable to include only that part of the world within which competition is very active and within which also goods and persons move freely and cheaply from place to place. A single country like the United States affords a market large enough to illustrate the laws of value, though one must always keep in view the relation of this circumscribed area to its environment. How local areas may, in a scientific way, be delimited and isolated for purposes of study will appear in a later chapter.

[2] It will be seen that to a man who buys the seventy-five dollar coat that article in its entirety is the final one of its kind which he will buy. He does not want a second coat exactly like the first. The same thing is true of the man who buys the five hundred dollar watch, since he does not think of buying more than one. In each case the first unit of the article bought is the last one, and it contains utilities which are worth more than they cost. It contains one utility only which is marginal in the true sense of affording no surplus of gain above cost. This utility stands on the boundary line where consumers' surpluses stop.

CHAPTER VII

NORMAL VALUE

Natural Supply.—We have attained a law of market value, which determines the price at which a given amount of any commodity will sell, and have taken a quick glance at the influence which fixes the amount that is offered and thus furnishes a natural standard to which the market value tends to conform. At any one moment the amount which is supplied is an exact quantity, and if it all has to be sold, it will bring a price which is fixed by the final utility of that amount of the commodity. If the quantity offered for sale should become greater or less, the final utility and the price would change. Final utility controls the immediate selling price, and if that is above the cost of production, a margin of gain is afforded which appeals to producers, sets competition working, and brings the quantity made up to the full amount which can be sold at cost. The amount of the supply itself is therefore not a matter of chance or caprice. It is natural that a certain quantity of each article should be supplied, and that the price should hover about the level which the final utility of that quantity of the good fixes. "Natural" or "normal" price is, in this view, the market price of a natural quantity.

Cost as a Standard of Normal Price.—It is commonly and correctly stated that the normal price of anything is that which just covers the cost of producing it. Cost in this case is the total amount of money that the entrepreneur pays out in order to bring the commodity into existence. He buys raw materials and pays for all the labor and capital that transform them into a new and saleable shape. If he can make a net profit, he does so; but competition tends to adjust the quantity produced and the consequent price in such a way that he can make no net profit. What he gets for the article will then reimburse him for his total outlay, but it will do no more. Since the quantity produced is normal when it brings the market price to this level of cost, it appears that the cost is the ultimate standard in the case. The quantity supplied varies till it causes the market price just to cover the cost; and so long as the quantity supplied is thus natural, other influences remaining the same, the price is so. This states the cost of production in terms of money paid by an entrepreneur and the returns from the operation as money received by him; but there is a more philosophical way of conceiving the law of cost, and to this we shall soon recur.

Elements of Cost.—Whatever the entrepreneur has to pay for in the production of an article is of course an element in its monetary cost to him. If he does not begin the making of it by drawing his raw materials from what nature freely furnishes, he must pay some one for the raw material. He must also pay for the labor, and this is equivalent to buying the fraction of the article that is produced by labor; for the laborer, as we have seen, is the producer of a certain fractional share of the article and the natural owner of that share, and when he agrees to let his labor for hire, what he really does is to sell out his individual interest in the forthcoming product of the industry in which he is about to engage. When a workman in a shoe factory agrees to work for two dollars and a half a day, he really contracts to sell every day for that amount a certain quantity of shoes. The leather is one element which enters into the finished shoes, and therefore the entire shoe is not really made in the factory; but of the part which is there made, namely, the utility that results from transforming the leather into shoes, one part is made by labor and another by capital. The entrepreneur has to buy both of these if he is to acquire a valid title to the product and have a right to sell it. These costs are therefore "purchase money" paid for undivided shares of goods.

Labor of Management.—It usually happens that an entrepreneur, or employer of labor and capital, performs some labor himself; and we have already noted the reason for this in the fact that the kind of labor that he performs is so important that the fate of the business often depends on it. He may manage the business so well as to make it succeed or so ill as to make it fail. He pays himself for this labor when he draws a salary for his services. As an entrepreneur he treats his own labor as he does that of any one else and buys the fraction of the product of his business that his own labor of management has created. In this he illustrates the general law that all payments of wages are payments of the purchase of a certain quantity of product. Though the owner's own contribution to the product is not always mentioned in terms in the accounting, that is what his salary is paid for, though it is spoken of as a payment for his "time," or his labor.

The Capitalist as the Vender of a Share in a Product.—Capital, as we have seen, also contributes a definite share toward the total amount of every product in the making of which it coöperates. Labor does not do all the transforming of leather into shoes which is done in the factory, since machines, fuel, etc., help; and we shall later find that there is a way of determining how much of the product the help so given creates. It adds a certain amount to what labor can claim as its own special product, and the man who owns the capital becomes the lawful claimant for this additional share. When he agrees to let his capital work for an employer, he virtually sells to the employer the undivided share of the product—shoes or what not—that the capital really creates. The furnisher of productive instruments, like the furnisher of labor, is a vender, and the entrepreneur is a buyer.

Entrepreneur and Capitalist.—As was stated in an earlier chapter, an actual employer nearly always furnishes some of the capital that he uses. If he did not do so, he would have difficulty in borrowing more, since banks or other lenders do not loan to empty-handed men. It is clear that what the employer gets in return for such capital as he may put into the business is in reality a payment for a contribution which that particular part of the capital makes to the product. Since each bit of capital in an establishment contributes something toward the creating of the product, the employer's own capital has the same right to the value of its contributary share as has the capital of any one else. What the employer-capitalist gets for capital the employer, pure and simple, pays. As the furnisher of instruments the man is a vender of the product of these instruments, while as an entrepreneur proper he is the buyer. He must purchase the product of his own capital just as he purchased the product of his own labor. In paying, therefore, wages for all labor, including what he performs himself, interest on all capital, including his own, and the price of raw materials, he gets something which, if competition does a perfect work, he has to sell for what he gives for it. The shoes, when he sells them, tend, under active competition, to yield only what has been paid for them in the making and, in a perfectly static state, would actually yield no net profit. All the entrepreneur's costs, therefore, resolve themselves into purchase money paid, his receipts are money accruing from sales; and under ideally free competition the two sums total are equal.

The Entrepreneur's Proper Function not Labor of Management.—In some theoretical discussions the management of a business figures as the principal function of the entrepreneur, and all or nearly all of the reward that comes to him is represented as coming in the shape of a reward for a responsible kind of labor that calls great abilities into requisition. But it is very clear that, whether he personally performs any labor or not, the employer has a distinctly mercantile function to perform; and this in itself is totally unlike the work of overseeing the mill, the shop, or the salesroom. He acquires a title to the whole product by paying for the contributions which labor and producers of raw material separately make toward it, and then parts with the product; and if he gets any more than he has paid out, he makes a profit. When industry is in what we have termed a dynamic state, such a difference between the value of the product and the cost of the elements that go into it is continually appearing, and that, too, largely in consequence of causes over which, as a mere manager, the employer has no control. A profit so gained cannot be wages of management. It is a purely commercial gain, or a difference between what is paid for something and what is received for it.

Mercantile Profit.—It is best, therefore, to distinguish in some perfectly clear way between that function of the entrepreneur, which consists in buying and selling, and any work that he may find it best to do in the way of superintending the business. At the cost of using the term entrepreneur in a stricter sense than the one customarily attached to it, we will make this word describe the purely mercantile functionary who pays for the elements of a product and then sells the product. The reason for the very division between gains from this source and gains from management we shall soon appreciate, for we shall see that competition tends to reduce one of these incomes to nothing, but tends to perpetuate the other and to make the amount of it conform to a positive standard. The entrepreneur, as we shall use the term, is neither the manager nor the capitalist, and when we have occasion to speak of either of these functionaries, we shall call him by his own distinctive name; though we know perfectly well that, in actual business, it is desirable and often quite essential that the same one who acts as an entrepreneur should also put into the business some labor as well as some capital. A man who performs two unlike functions, buying and selling, on the one hand, and managing the business, on the other, serves in two capacities that are clearly distinguished from each other; while if he furnishes any of the capital, he adds to these a third capacity entitling him to the value of the product of his capital. As a manager he directly aids in producing goods, and he gets pay for so doing from his other self, the entrepreneur, who acquires the title to the goods; as a capitalist he has another legitimate claim upon himself as entrepreneur.

These Distinctions recognized in Practical Accounting.—That this is no bit of mere theoretical subtlety is proved by the fact that the bookkeeping of nearly all establishments distinguishes between these two incomes by actually putting an appraisal on the work the employer does and paying a salary for it. A man may be a large owner of stock in a corporation and yet receive a salary that is fixed by an estimate of what an equally useful man could be hired for. If personal influence secures more for him than this, the excess is taken from the pockets of the stockholders, and the amount of it is accounted for in a way that does not fall within the scope of pure economic law.

How "Natural" Prices exclude Entrepreneur's Profits.—The old and correct view is that the tendency of competition is to make things sell for enough to cover all costs, as we have defined them, and no more. Under a different phraseology this is what Ricardo and others have rightly claimed. They were unconsciously explaining what would happen in a static state, for if society were actually in this state, the goods that come out of the factory would be worth just enough to reimburse the owner for all the outlays that can be called costs. If they sell for more than this, there is to be had from the business an income that costs nothing. It is a net profit above all claims based on personal labor or on the aid furnished by capital, and it furnishes an incentive for enlarging the business, and labor and capital are therefore drawn into it. Entrepreneurs bring them and for a time make a profit by this means; but as their presence increases the output of goods that are here made, it brings down the price till there is no inducement to move any more labor and capital in this direction.

The Significance of a Natural Adjustment of Different Industries.—The "natural" state of general industry is that in which each particular branch of it is in the no-profit state. It is as though laborers and capitalists in a shoe factory took all the shoes that it turns out, sold them in a market, paid for the raw material out of the proceeds, and kept the remainder, dividing it between themselves in proportions which corresponded with the amounts they had severally contributed toward the making of this product; and as though the laborers in cotton mills and iron foundries received the goods there made and dealt with them in a like manner. It is as though in every branch of business the whole product were turned over in kind to the furnishers of labor and capital.

The Entrepreneur a Passive Functionary under Static Conditions.—Purely passive is the function of the entrepreneur under static conditions. In so far as any effect on his income is concerned he might as well reside in a foreign land as in the one where his business is located, provided always that the management were unaffected. When the same man is both entrepreneur and manager, the absence of the first of these functionaries would mean the absence also of the second, and that would cause trouble; but the purely mercantile operation of getting a title to a product and then surrendering it can be carried on as well in one place as in another. The entrepreneur in his capacity of buyer and seller does not even do the work which purchases and sales involve. That is commonly done by agents. Some of it, of course, may be done by the responsible manager himself, and if that person is also the entrepreneur, it follows that he does a part of the commercial labor of his business. In this, however, he goes beyond his function as entrepreneur. In that capacity he does, as we have said, no labor of any kind. Sales and purchases are made in his name, but he does none of the work that leads up to them.[1]

How the Entrepreneur contributes to Production under Dynamic Conditions.—In a dynamic state the entrepreneur emerges from this passive position. He makes the supreme decisions which now and again lead to changes in the business. "Shall we adopt this new machine?" "Shall we make this new product?" "Shall we enter this new market?" are questions which are referred to him, and on the decisions he reaches depends the prospects of profit for the business. This activity is not ordinary labor, but in a true sense it is a productive activity, since it results in placing labor and capital where they can produce more than they have done and more than they could do were it not for the enabling act of the entrepreneur which places them on a vantage ground of superiority. This subject will be discussed in a later chapter and in connection with other phases of economic dynamics.

Values at a Static Level only when Entrepreneurs' Gains are Nil.—Any net profit on an entrepreneur's part means that his product is selling for more than the elements of it have cost him. But this is a condition which, if labor and capital are as mobile as the static hypothesis requires that they should be, will cause this entrepreneur and others to move labor and capital into his industry, thus increasing its output and lowering the selling price of its product. If there is no such action going on, it shows that the entrepreneurs have no incentive for taking it.

Values at a Static Level only when the Gains of Labor in the Different Industries are Equalized.—If labor is creating more in one subgroup than in others, as it often is in a dynamic condition, that fact means that some entrepreneurs are making a profit, and, according to the principle stated in the preceding paragraph, this means that values are not at their static or "natural" level. If, owing to new methods or to some other cause, a given amount of labor[2] in the subgroup that produced the A´´´ of our table creates an amount of that product which sells for more than the B´´´ or the C´´´ which labor of like quantity makes, then the manufacturers of A´´´ would obviously get a margin of profit. They would not be obliged to pay for labor any more than the market rate, and that, as we shall see, cannot exceed what labor produces in the groups B´´´ and C´´´. In A´´´ the labor creates more and the employer pockets the difference. In saying this we assume one fact which we undertake later to prove; namely, that there is a definite amount of each product which can be attributed to labor alone as its producer. Capital and labor work together, but each is, in effect, the creator of a certain fraction of their joint product.

Values Static only when the Gains of Capital in Different Industries are Equalized.—If capital is creating more in one industry than in another, there is a margin of profit for the entrepreneurs in the exceptionally productive industry. They pay as interest on the capital they use only the market rate, which is what equal amounts of capital can produce and get elsewhere. If they produce more in the one group, the entrepreneurs there can pocket the excess as they did in the case of the product of labor. We assume that there is everywhere a definite product that can be attributed to capital alone.

Values Normal when Moneys paid out by Entrepreneurs equal Moneys Received.—In the preceding paragraphs we have spoken of exchange values as being static under certain conditions, but we might have expressed the essential fact by saying that prices are static under these conditions since the money a product brings is a true expression of its value. If A´´´ sells for as many dollars as does B´´´, the two things exchange for each other. In like manner the product of labor and that of capital may be expressed in terms of money, since the quantities of goods which they respectively make sell for certain sums. Wages and interest are nearly always conceived in terms of money. The commercial mode of computing costs of production and returns from production is to translate them into moneys paid by entrepreneurs and moneys received.

Costs of Production as related to Static Incomes.—What to an entrepreneur are costs are to workmen and capitalists incomes. The one pays out wages and interest, and the others get them; and these two sums are normal when together they equal the prices received for goods produced. The entrepreneur is the universal paymaster, and in a static condition all incomes come from his hand.

FOOTNOTES

[1] The holders of common stock in a corporation are always entrepreneurs, and they are also capitalists if the stock represents any real capital actually paid in. If the bonds and the preferred stock represent all the real capital that there is, any dividends that may be paid on the common stock are a pure entrepreneur's profit. If, on the other hand, the stock all represents money actually put into the business, the dividends on it contain an element of net profit if they exceed simple interest on the capital and insurance against the risks that are not guarded against by actual insurance policies. If the rate of simple interest is four per cent, and the value of the unavoidable risk is one per cent, then a dividend of six per cent contains a pure entrepreneur's profit of one per cent. In dynamic conditions such a return is often to be expected, and we shall soon study the conditions that afford it.

In the present study we do not need to consider risks, inasmuch as the greater part of them arise from dynamic causes; that is, from the changes and disturbances to which the business world is subject. An invention promises greatly to cheapen the production of some article and, for a time, to insure large returns for the men who first utilize it. A capitalist may be willing to take a risk for the sake of sharing this gain; but in time both the risk and the gain will vanish. The capacity of the new appliances will have to be tested, a market for their output found, etc. A small remainder of risk is still entailed upon the capitalist if he leaves his money in this business. The death of the managing partner, the defaulting of payments for goods sold, the chances of unwise or dishonest conduct on the part of clerks or overseers, always impend over a business, but these dangers are at a minimum when the man who is at the head of the force of managers has capital of his own in the business. Risks are at a static level only when they are thus reduced; and for our present purpose it is best to consider that competition has eliminated the establishments where any recklessness has been shown in the management, and that the unavoidable remainder of risk resolves itself, nearly enough for practical purposes, into a deduction from the product which the surviving establishments turn out in a long period of time. A small percentage of their annual gains, set aside for meeting unavoidable losses, will make good these losses as they occur and leave the businesses in a condition in which they can yield as a steady return to owners of stock, to lenders of further capital, and to laborers all of their real product.

[2] In measuring labor we, of course, take account of the quality of the men who perform it, and the work of a skillful man is counted as more units of labor than that of an unskillful one.

CHAPTER VIII

WAGES

The Equilibrium of Industrial Groups.—The different industrial groups are in equilibrium when they attract labor and capital equally, and that occurs when these agents produce as much per unit employed in one group as in another. Such equalized productivity is the bottom fact of a static condition, and equalized pay follows from it. Wages and interest tend to be uniform in all the groups. Efficient labor, of course, gets in any employment more than inefficient; but labor of a given grade gets in all the groups that make up industrial society a uniform rate of pay, and nothing is to be gained by any capitalist or by any laborer by moving from one employment to another. They all therefore stay where they are, not because they cannot move freely if they wish to do so, but because no inducement to move is offered to them. This is a condition of perfect mobility without motion—of atoms ready to move at a touch without the touch that would move them. The paradox indeed holds that it is the ideally perfect mobility which has existed in the past which positively excludes motion in the present. At some time in the past labor and capital have gone from group to group till they have brought about an adjustment in which they have no incentive for moving farther. The surface of a pool of water is kept tranquil, not because the water is not perfectly fluid, but because, in spite of the fact that it can flow with entire freedom in any direction if it is impelled more in that direction than in any other, each particle of it is impelled equally in all directions. It is the perfect equilibrium that keeps the particles from changing their places, and fluidity has caused the equilibrium. In like manner when labor and capital can create and get just as much in one place as in another, they are attracted as strongly in one direction as in another and therefore do not move. A young man of average capacity, who is deliberating upon the choice of an occupation, will find that he can do as well in a cotton mill as he can in a shoe factory, a machine shop, a lumber mill, a flouring mill, or any other industrial establishment requiring his particular grade of capacity. This is the picture of a perfectly static industrial condition. Economic science has to account for values, wages, and interest as they would be in such a condition, however impossible it is that society should ever reach exactly such a state. The values, wages, and interest in a real market are forever tending toward the rates that would be established if the static condition were realized.

The Sign of a Static State.—The sign of the existence of a static condition is, therefore, that labor and capital, though they are perfectly free to move from one employment to another and would actually do so on the slightest inducement, still do not move. They stay where they are because they cannot find places where they can produce the slightest amount in excess of what they now produce, and no employer will anywhere offer any excess above the prevailing rate of pay.

Profits and the Movements they induce the Sign of a Dynamic State.—Entrepreneur's profits, when they exist, mean that this equilibrium is disturbed, and when it is so, mobility of labor and capital affords the guaranty that a new equilibrium will be established if no further disturbances follow. As we have said, profits attract labor and capital, increase the output of those goods which yield the profit, and reduce the prices of them to the no-profit level. Workmen and capitalists then get from the entrepreneur as wages and interest all that he gets from the public as the price of his goods, except what he pays for raw materials.[1] In other words, the employer sells his goods at cost.

How Costs are Determined.—The early studies of "natural" values, or values which conform to costs of production, were unconscious and imperfect attempts to attain the laws of value in a static state. In such a state costs resolve themselves into wages and interest, and the conception of such a static state is therefore not complete unless we know how wages and interest themselves are determined. What we have already said implies that they fluctuate about certain standards, just as do the prices of goods, and that they would remain at these standards if society were reduced to a static condition.

Significance of Static Law in a Dynamic State.—An actual society is undergoing constant disturbances. It is very far from being static; and yet values of goods, on the one hand, and the earnings of labor and capital, on the other, hover within a certain distance of the standards which would be realized if the society became static. In spite of active dynamic movements the general returns of labor and capital can never range so far from these theoretical amounts that the distance from them cannot in some way be measured and accounted for. The sea, when gales are blowing and tides are rising and falling, is anything but a static object, and yet it keeps a general level in spite of storms and tides, and the surface of it as a whole is surprisingly near to the ideal mathematical surface that would be presented if all disturbances were to cease. In like manner there are certain influences that are disturbing the economic equilibrium just as storms and tidal waves disturb the equilibrium of the sea. We cannot actually stop these influences any more than we can stay the winds and the lunar attraction; but we can create an imaginary static state for scientific purposes, just as a physicist by a process of calculation can create a hypothetical static condition of the sea and discover the level from which heights and depths should be measured. No more than the economist can he actually bring the subject he is dealing with to a motionless condition. The economic ocean will defy any modern Canute who may try to stop its movements; but it is necessary to know what shape and level it would take if this were done.

Influences that disturb the Static Equilibrium.—The influences that disturb the economic equilibrium are, in general, five. The population of the world increases, and this is one influence which prevents values, wages, and interest from subsiding to perfectly "natural" standards. Capital is increasing, and this influence also acts as a disturbing factor. The methods of producing things change, and the changes have a very powerful effect in preventing the attainment of a static equilibrium. New modes of organizing different industries are coming into vogue, and this causes a further disturbance of the economic adjustment. The wants of men are by no means fixed; they change, multiply, and act on the economic condition of society in a way that affects the static adjustment. Even physical nature undergoes change, and the perishable part of the earth does so in a disquieting way. We are using up much of our natural inheritance. As the effect of this appears chiefly in forcing us to change our processes of production, we shall, for convenience, limit our study to the five changes here enumerated.

Movement Inevitable in the Dynamic State.—These influences reveal their presence by making labor and capital more productive in some places than they are in others, and by causing them ever and anon to move from places of less productiveness to places where gains are greater. As we have said, this moving of labor and capital to and fro is, like currents in the sea, a sign of a dynamic condition. As in the static state these agents would not thus move, however fluid and mobile they might be, so in a dynamic state they are bound to move, because their earning powers do not remain long exactly equal in any two employments, and they go now hither and now yon, as, in the changeful system, openings for increased gains present themselves. If commodities were everywhere selling at cost prices and if wages and interest were everywhere normal and uniform, labor and capital would not move to and fro, and this would be a proof that dynamic influences were absent.

How an Imaginary Static Society is Created.—If we wish to discover to what standard the values of goods, on the one hand, and the rewards of labor and capital, on the other, continually tend to conform, we must create an imaginary society in which population neither increases nor diminishes, in which capital is fixed in amount, in which the method of making goods does not change, in which the mode of organizing industry continues without alteration, and in which the wants of consumers never vary in number, in kind, or in intensity.

Costs of Production in a Static State.—We have said that in such a static state the prices of different products are just high enough to cover the wages and interest which are generally paid. There are uniform or all-around rates of pay for labor and for capital, and every man who hires workmen or gets loans from a bank has to pay them. In the real world, full as it is of disturbances, and given over as it is to forces of change and progress, we find that values, wages, and interest are in general surprisingly near to these standards. In a particular business products may for a time sell for enough to afford a large surplus above prevailing wages and interest, and business as a whole may, for a time, yield some such surplus; but in the absence of monopolistic privileges no one business yields a large surplus for a long time, and still less does business as a whole do so, though profits may always be found somewhere within the system.

The Final Productivity of Labor.—If we assume that the capital of society is a fixed amount, we may perform an imaginary experiment which will show how much labor really produces. We may set men at work, a few at a time, until they are all employed, and we may measure the product of each of the detachments. We should make the different sections of the working force as similar to each other as it is possible to make them and call each section a unit of labor. If there were ten such divisions and if the quantity of capital were sufficient to equip them all on the scale on which laborers are at present actually equipped, it is clear that this amount of capital, when it was lavished on one single section, must have supplied it with instruments of production in nearly inconceivable profusion. What we should to-day regard as a fair complement of capital for a thousand men would nearly glut the wants of a hundred, and yet it is thinkable that it should take such forms that they would be able to use it.

Productivity of the First Unit of Labor.—We will set at work one section which we have called one unit of labor and will put into the hands of its members the whole capital which is designed ultimately to equip the ten sections. It is very clear that the forms that this capital will take cannot be the same that it will have to take when the entire working force is using it. Indeed, we shall have to tax our ingenuity to devise ways in which one unit of labor can utilize the capital that will ultimately be used by ten. The tools and machines will have to be few in number but very costly and perfect. We shall have to resort to every device that will make a machine nearly automatic and cause it to exact very little attention from the person who tends it. The buildings will have to be of the most substantial and durable kind. We shall have to spend money without stint wherever the spending of it will make labor more productive than it would otherwise be. If we do this, however, the product of the labor and its equipment will be a very large one. The industry will succeed in turning out indefinitely more goods than a modern industry actually does, and the reason for it will be that the workmen have capital placed in their hands in unparalleled profusion.

The Product of the Second Unit of Labor.—We will now introduce a second unit of labor, by doubling the number of workers, without changing the amount of the capital. We must, of course, change the forms of the capital, or it cannot be advantageously used by the larger working force. The buildings will have to be larger, and if they are to be erected with about the same amount of capital as was formerly used, they must be built in a cheaper way. Tools of every sort must be more numerous, and this larger number of tools, if it is to represent the same investment of capital that the former number embodied, must also be simpler and cheaper. The whole equipment of capital goods will have to undergo a complete transmutation; but the essential thing is that the amount of the capital should not be changed.

A Provisional Mode of Measuring Capital.—In measuring the amount of the capital we are obliged to use a unit of cost, and in the illustration we have assumed that the cost can be measured in dollars. The productive fund consisted at the outset of a certain number of dollars invested in productive operations. This is only a provisional mode of measuring it. The money spent really represents sacrifice incurred, and we shall find that the only kind of sacrifice that is available for measuring the cost of goods of any kind is that which is incurred by labor. Ultimate measurements of wealth in all its forms have to be made in terms of labor. Such measurements have presented difficulties, and the attempt to make them has led to serious fallacies. We shall see, in due time, how these fallacies can be avoided.

The Law of Diminishing Productivity.—Under these conditions the second unit of labor will add something to the amount that was produced by the first unit, but it will not cause the product to become double what it was. It could not do that unless the capital also were doubled. Each unit of labor is now coöperating with one half of the original capital, and the total product is less than it would have been if the new labor, on entering the field, had brought with it as full an equipment of productive instruments as was possessed by the labor that preceded it. Adding to the industry a second unit of labor without adding anything to the capital makes the total product somewhat larger, but falls short of doubling it. If we credit to this second unit of labor what it adds to the product that was created before it came into the field, we shall find that it is a certain positive amount, but obviously less than the total product which was realized by the first unit and all the capital. It is even less than a half of the product of the two units using all the capital. Perhaps the first unit of labor, when it used all the capital, created ten units of product; while the two units of labor, using this same original amount of capital, produce sixteen units of product. The clear addition to the original product which is caused by the added labor of the second squad of workmen is only six units, while a half of the total product after the addition to the labor has been made is eight. This figure represents the amount we may attribute to one unit of labor and a half of the total capital, while six represent what is causally due to one unit of bare labor only. With all the capital and one unit of labor we get ten units of product, while the addition of one unit of bare labor brings the total amount up to sixteen. Six units find the cause of their existence in the presence of the second unit of labor, and the second unit therefore shows, as compared with the first, a diminished productivity.

Product of the Third Unit of Labor.—We will now introduce a third unit of labor, leaving the amount of capital still unchanged, but again altering the forms of it so as to adapt them to the needs of a still larger working force. We will make the buildings larger and therefore, of necessity, cheaper in their forms and materials. We will make the tools and machines more numerous and simple, and will do everything that is necessary in order to make the fixed amount of capital—the fund amounting to a given number of "dollars"—embody itself in the number and the kinds of capital goods that are requisite in order to supply three times the original number of workmen. The third unit of labor now adds something to the product realized by the first two, but the addition is smaller than it was in the case of the second unit.

Products of a Series of Units of Labor.—If we continue this process till we have ten units of labor, employing the same amount of capital as was formerly used by one, we shall find that each unit as it begins to work adds less to the previous product than did the unit which preceded it, and that the tenth unit adds the least of all.

Care must be taken not to confound the addition that is made to the product in consequence of the additional working force with the amount which, after the enlargement of the force, is created by the last unit of labor and its pro rata share of the capital. When the tenth unit of labor is working, it is using a tenth of the capital and the two together create a tenth of the product. This is more than the amount which is added to the product by the advent of the tenth unit of labor. That addition is merely the difference between the product of all the capital and nine units of labor and that of all the capital and ten units of labor. This extra product can be attributed entirely to the increment of labor.

It is also carefully to be noted that when the units are all working together, their products are equal and the particular one which happened to arrive last is not less productive than the others. Each one of them is now less productive than each one of the force of nine was under the earlier conditions. In like manner each unit of the nine is less productive than was, in the still earlier period, each unit of the force of eight. At any one period, all units produce the same amount. At any one period, then, what any one unit of labor produces by the aid of its pro rata share of the capital is a larger amount than what each can be regarded as producing by itself. Though one of ten units creates, with the aid of a tenth of the capital, a tenth of the product, of itself it creates less; for we can only regard as its own product what it adds to the product that was creating before it arrived on the scene. It is the bare product of a unit of labor alone that we are seeking to distinguish from other elements in the general output of the industry, and that consists in the difference between what nine units of labor and all the capital can produce, and what ten units of labor and all the capital can produce.

We will consider the amount of capital fixed and let the amount of labor increase along the line AE, and we will let the product of successive units of labor be measured by the vertical distance from the points on the line AE to the descending curve CD. AC is the product of the first unit of labor. The product of later units is measured by lines to the right of AC and parallel with it, which grow shorter as the number of units increases. ED is the product of the last unit. In each case we impute to an increment of labor whatever amount of product its presence adds to that which was created before.

Summary of Essential Facts.—The facts that are to be remembered then are: first, that the capital remains fixed in amount, though the forms of it change as the number of units of labor increases; secondly, that that which we call the product of a unit of labor is what that unit, coming into the field without any capital, can add to the product of the labor and capital that were there before; and thirdly, that this specific product of labor grows smaller as the amount of labor grows larger, rendering the product of the last unit the smallest of all. When the tenth and last unit is working, each one of the nine earlier units is, of itself, producing no more than does the final one, though it formerly produced more because of the larger quota of capital with which it was formerly supplied.

The Test of Final Productivity.—There are now at work ten units of capital and ten of labor, and we cannot go through the process of building up the working force from the beginning. How, then, do we measure the true product of a single unit of labor? By withdrawing that unit, letting the industry go on by the aid of all the capital and one unit of labor the less. Whatever one of the ten units of labor we take away we leave only nine working. If the forms of the capital change so as to allow the nine units to use it advantageously, the product will not be reduced to nine tenths of its former size, but it will still be reduced; and the amount of the diminution measures the amount of product that can be attributed to one unit of bare labor. Or we may add a certain number of workmen to a social force already at work, making no change in the amount of the capital,—though changing its forms,—and see how much additional product we get. That also is a test of final productivity. It gives the same measurement as does the experiment of taking away the little detachment of men and seeing how much the product shrinks. By either process we measure an amount that is attributable altogether to bare labor and not to capital.

The whole area BCD in the diagram is an amount of product that is attributable to capital and not to labor. It represents the total surplus produced by labor and capital over the amount that can be traced to the labor alone. The product of all the capital and all the labor minus ten times the product of a single unit of labor is the amount that is attributable to the productive fund only.

The area ABDE represents this amount. The last unit of labor creates the amount DE and the number of units is represented by the amount AE. All of them are now equally productive and what all create, as apart from what capital creates, is the amount ABDE.

Only the Final Part of this Mode of gathering a Working Force practically resorted To.—The process of building up the working force from a single unit is imaginary. In practical life we see the process only in its final stage. Entrepreneurs do continually have to test the effect of making their working forces a little larger or a little smaller, and in so doing they test the final productivity of labor; and this is all that is necessary. Tracing the process of building up the force of labor unit by unit reveals a law which is important, namely, that of the diminishing productivity of single units of labor as the number of units increases. If we crowd the world full of people but do not proportionately multiply working appliances of every kind, we shall make labor poorer.