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Title: Essentials of Economic Theory

Author: John Bates Clark

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Language: English

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*** START OF THE PROJECT GUTENBERG EBOOK ESSENTIALS OF ECONOMIC
THEORY ***

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
CHAPTER PAGE
I. Wealth and its Origin 1
II. Varieties of Economic Goods 20
III. The Measure of Consumers' Wealth 39
IV. The Socialization of Industry 59
V. Production a Synthesis; Distribution an Analysis 74
VI. Value and its Relation to Different Incomes 92
VII. Normal Value 114
VIII. Wages 127
IX. The Law of Interest 146
X. Rent 159
XI. Land and Artificial Instruments 174
XII. Economic Dynamics 195
XIII. The Limits of an Economic Society 210
XIV.Effects of Dynamic Influences within the Limited Economic Society 229
XV. Perpetual Change of the Social Structure 244
XVI.Effect of Improvements in Methods of Production 256
Further Influences which reduce the Hardships entailed by Dynamic
XVII. 282
Changes
XVIII. Capital as affected by Changes of Method 301
XIX.The Law of Population 321
XX. The Law of Accumulation of Capital 339
XXI.Conditions insuring Progress in Method and Organization 358
XXII. Influences which pervert the Forces of Progress 372
XXIII. General Economic Laws affecting Transportation 396
XXIV. The Foregoing Principles applied to the Railroad Problem 416
XXV. Organization of Labor 451
XXVI. The Basis of Wages as fixed by Arbitration 470
XXVII. Boycotts and the Limiting of Products 503
XXVIII. Protection and Monopoly 517
XXIX. Leading Facts concerning Money 538
XXX. Summary of Conclusions 555
INDEX 563

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´´´
A´´
A´
A

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.

A´´´ B´´´ C´´´
A´´ B´´ C´´
A´ B´ C´
A B C

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.

A´´´ B´´´ C´´´ H´´´
A´´ B´´ C´´ H´´
A´ B´ C´ H´
A B C H

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.
Why a Detachment of Laborers rather than One Man is treated as a Unit of
Labor.—In making up the force of workers we might have treated each
individual as a unit; but we have preferred to call a detachment a unit in
order that the symmetry of the force might be preserved. Even though we
were studying only a single mill it would have its departments, and it would
be desirable that, when we enlarge the force of men, we should be able
without difficulty to give to each part of the mill its fair share of the new
laborers. If it were a shoe factory, we should need to add lasters, welters,
sewers of uppers, etc., in a certain proportionate way, in order that one part
of the mill might not get ahead of another and pile up unfinished products
faster than they could be taken and completed.
In the last analysis the law applies to the industry of all society. The final
unit in the case consists of shoemakers, cotton spinners, builders,
foundrymen, miners, cultivators, etc., and of men of all subtrades included
in the general callings. As the composite detachments come into the field,
they apportion themselves among all the occupations that are represented,
and that too in nicely adjusted proportions. We shall see in due time how

this adjustment of the several shares of the social force of laborers is
practically made.
The Law of Final Productivity Applicable to the Labor of Society.—The law
of final productivity applies to every mill, shop, or mine separately
considered. If its capital remains fixed in amount, units of labor produce
less and less as they become more numerous. The product of any unit at any
one time may be measured by taking it away and seeing how much the
output of the establishment is reduced. The law, however, applies to all the
mills, shops, mines, etc., considered as a social complex of working
establishments. As the working society grows larger without growing richer
in the aggregate, the power of labor to produce goods of all kinds grows
less. At any one time this producing power is measured by taking away
from every working establishment a number of its operatives and
ascertaining how much less is produced after the withdrawal. Such a test on
the social scale is never made consciously. Each employer can test in an
approximate way the effect of reducing his own force, and the effect of
gradually enlarging it, and there are influences at work which result in
enlarging one industry when others are enlarged and in causing the final
productivity of labor to be uniform in all. A shoe manufacturer can tell, in a
general way, how much an extra man or two will be worth to him. It is
possible to ascertain by experience about what number of shoes that
additional labor will, in a year, add to the output of the shoe factory or the
number of tons of steel it will add to the present annual output of a furnace.
When these products vary in the case of different shops, the men are called
to the points where the apparent additions are largest, and the constant
tendency is toward a level of productive power. The building up of an
imaginary force from the beginning presents, in a clear and emphatic way,
the fact that the specific productivity of labor grows less as, other things
remaining the same, workers become more numerous. We should know on
a priori grounds that this must be the fact; but we can verify it by
observation and statistical inquiry. Where men are numerous and land and
tools are scarce, labor is comparatively unproductive; and it is highly
productive where land and tools are plentiful. There is no doubt that
crowding the world full of people, without providing the world with capital
in a proportionate way, would impoverish everybody whose income
depends on labor.

The Law of Wages.—Even
though labor creates the
amount ABDE, it is not yet
perfectly clear that it will be
able to get that amount. For
aught we now know the
entrepreneur may keep some
of it, and for aught we know
he may keep some of the
quantity BCD which is
distinctly the product of
capital. Let us see whether he
can in reality withhold any
part of ABDE, which is the
product of labor.
Wages under Perfect
Competition.—In the static
state that we have assumed,
competition works without let
or hindrance. It does not work thus in the actual world, and we shall in due
time take account of the obstacles it encounters; but what we are now
studying is the standards to which such competition as there is—and it is in
reality very active—is tending to make wages conform. We want to know
what would happen in case this competition encountered no hindrance at
all. This would require that a workman should be able to set employers
bidding against each other for his services just as actively as an employer
can make laborers bid against each other in selling their services. If this
were the case, every unit of labor could get what it produces, no more and
no less. Even a single man, offering himself to one employer after another,
would virtually carry in his hands a potential product for sale. His coming
to any man's mill would mean more goods turned out in a year by the mill;
and if one employer would not pay him for them at their market value,
another one would. The final unit of social labor can get, under perfectly
free competition, the value of whatever things that labor, considered apart
from capital, brings into existence. Moreover, each unit of labor by itself
alone now produces, as we have seen, the same amount of commodity as

the final unit, and can get the price of it. Now that they are all working
together each one of them can place itself in the position of the final unit by
leaving its present employment and offering its services elsewhere.
Wages regarded as Prices of Fractional Products adjusted by Perfect
Competition.—Under the hypothesis of perfect competition, as the term has
been used in our discussion, the venders of goods can get their market
values. These values are fixed by the final utility law. Free competition
means, then, not only that any average laborer who offers himself for hire
virtually carries in his hands a potential but definite product for sale, but
that he may confidently offer it at the price that is fixed by its final utility.
Like other venders, the laborer can get the true value of his product and he
can get no more. In an ideally perfect society organized on the competitive
plan a man would be as dependent on his own productive power as he
would be if he were alone in a wilderness. His pay would be his product;
but that would be indefinitely larger than it could be in a wilderness or in
any primitive state. The capital of other men and the organization that they
maintain enable a worker to create and get far more than he could if he
lived alone, even though, like Crusoe, he were monarch of his whole
environment. It would be a losing bargain for the worker to surrender the
product of mere labor in a state of civilization in exchange for what both
labor and capital create in a state of savagery.

FOOTNOTES

[1] The entrepreneur of A´ of our table must buy the A in order to impart to it
that utility which is his own particular contribution. He pays as wages and
interest all that he gets for this contribution. The true product of the entrepreneur
is not the entire price of the A´, but is the difference between that and the price
of the A. The entire amount received for the A´ resolves itself into wages,
interest, and cost of A; but as a rule the price of A resolves itself practically into
wages and interest only, and when it does so, all that is paid for the A´ ultimately
takes these forms. The same is then true of the finished product A´´´. The entire
price of it is ultimately resolvable into wages and interest; and in speaking of the
product of an entire group we do not need to make any reservation for raw
materials.
The case in which this statement requires qualification is that in which the
material in its rawest state still has value, as is the case with ore and mineral oil
contained in the earth but not a true part of land in the economic sense, since
they are exhausted in the using. The price of a product into which these elements

enter includes something that represents the value which they have in situ and
before any labor has been expended on them. It is true even in these cases that
the value of the product is measured in terms of wages and interest, provided
that the exhaustible elements such as ore, oil, etc., are capable of being
replenished, or provided that an effective substitute for them is in process of
production by means of labor and capital. The natural raw material is then worth
what the artificial substitute costs in terms of capital and labor, and the finished
product which contains some of the natural material sells for the amount which
the finished product costs, which is made altogether by labor and capital applied
to valueless elements in nature.

CHAPTER IX
THE LAW OF INTEREST

The product of the final unit of labor—an amount which in practice is
measured without any tracing of the previous growth of the working force
—sets the standard of the rate of wages. We have now to see that the rate of
interest has a similar basis; and yet it is worth while to build up, wholly in
imagination, a fund of capital, just as we have made up the force of
laborers, increment by increment. This will have the incidental effect of
illustrating another way in which wages may be determined.
Interest as a Residual Amount.—The area BCD in our former figure
represents the difference between the total product of an industry and the
wages paid to laborers. If there is no net profit accruing to the entrepreneur,
this area must represent interest. It is what is left for the capitalist on the
supposition that he and the laborer together get all that there is. If the goods
sell for what they cost, this must be the fact, and the amount represented by
BCD has thus to go to capital, since, by a rule of exclusion, it cannot go to
the entrepreneur nor to the laborer. The mill and its contents earn for their
operator nothing but simple interest on the money they have cost. Paying
the laborers discharges the first claim on the product, and there then
remains only enough of the product to pay the remaining claim, that of
capital.
The question still remains to be answered, how the capitalist, if he is a
different person from the entrepreneur, or operator of the mill, can make
this functionary pay over to him all that he has in his hands after paying the
wages of labor.
The Importance of the Residuum.—The above reasoning does not
satisfactorily show what influence the capitalist can use to make the
entrepreneur pay over to him the entire amount of the residuum. It shows
that after paying wages the entrepreneur will have a certain amount left, but
it is not thus far clear how the capitalist can get it from him. The fact that

the laborers get only the amount represented by ABDE and that the whole
amount is ACDE does, however, at least show that the entrepreneur has the
amount BCD left in his hands, and that he is able to pay this amount to the
capitalist if by any appeal to competition the capitalist is able to make him
do it.
Interest not determined Residually.—The fact is that the interest on capital
is fixed exactly as are the wages of labor.
We will let
another figure
represent the
entire product
of the same
amount of labor
and the same
amount of
capital that
were
represented in
the former case.
We will assume
that there is at
the outset a
complete force
of laborers, and
that no men are
added to it or
taken from it;
but we will
gradually
introduce units of capital instead of units of labor as in the former case. The
amount of capital is now represented by the line A´E´ and the product of the
first unit of it by the line A´C´. The product of the successive units declines
along the curve C´D´. The final unit of capital then brings into existence the
amount of wealth represented by E´D´. As every other unit now produces
the same amount, the capital as a whole creates the quantity represented by
A´B´D´E´ and every unit of it makes its own separate contribution to that

amount. In this we have simply applied to capital and its earnings the
principle we formerly applied to labor and its earnings.
General Form of the Law of Final Productivity.—This principle is the law
of final productivity, one of those universal principles which govern
economic life in all its stages of evolution. Either one of the two agents of
industry, used in increasing quantities in connection with a fixed amount of
the other agent, is subject to a law of diminishing returns. The final unit of
the increasing agent produces less than did the earlier units in the series.
This does not mean that at any one time one unit produces less than another,
for at any one time all are equally productive. It means that the tenth unit
produces less than the ninth did when there were only nine in use, and that
the ninth unit formerly produced less than the eighth did in that still earlier
stage of the process in which there were only eight in use, etc. If the
productive wealth of the United States were only five hundred dollars per
capita instead of more than twice that amount, interest would be higher than
it is, because the productive power of every dollar's worth of capital would
be more than the productive power of each dollar's worth is now; and, on
the other hand, if we continue to pile up fortunes, great and small, till there
are in the country two thousand dollars for every man, woman, and child of
the population, interest will fall, because the productive power of a dollar's
worth will become less than it now is.
How Competition fixes Interest.—We can now see how it is that the
capitalist can make the entrepreneur pay over to him the amount left in his
hands after paying wages. Every unit of capital that any one offers for hire
has a productive power. It can call into existence a certain amount of goods.
The offer of it to any entrepreneur is virtually an offer of a fresh supply of
the kinds of goods which he is making for sale. Loaning ten thousand
dollars to a woolen manufacturer is really selling him the amount of cloth
that ten thousand dollars put into his equipment will bring into existence.
Loaning a hundred thousand dollars to the manufacturer of steel, so as to
enable him in some way to perfect his equipment, is virtually selling him
the number of additional tons of steel, ingots, or rails that he can make by
virtue of this accession to his plant.
The Significance of Free Competition.—Now, the tender of capital may be
made to any entrepreneur in a particular industry, and the existence of free

competition between these entrepreneurs implies that a lender of capital can
get from one or another of them the whole value of the product that this
capital is able to create. A unit of capital in the steel business can produce n
tons of steel in a year, and if one employer will not pay the price of n tons
for the loan of it, another will. This, indeed, implies an absolutely free
competition; but that is the condition of the problem we have first to solve.
When we know what ideally active competition will do, we can measure the
effects of the obstructions that, in practice, competition actually encounters.
Competition for Capital among Different Industries.—The capitalist can
invoke the aid of competition outside of the limits of one particular
business. He may offer his loan to steel makers, to woolen manufacturers,
cotton spinners, silk weavers, shoemakers, etc. Within each one of these
industries perfect competition between the different employers will give
him the value of the product which, in that business, his capital is able to
create. If, however, what in this way he offers to men in one occupation is
worth more than what he offers to men in another line,—if capital is worth
more to steel makers than it is to cotton spinners,—he will find a market for
his capital in the former industry; and this process of seeking out the
employment in which capital is the more productive and there bestowing
the loans of capital, will go on until every such local excess of productive
power is removed and capital can produce as much wealth in one business
as it can in another. Everywhere capital will then be both producing and
receiving the same amount, and general interest will everywhere be
determined by the final productivity principle acting all through the
business world.
When Interest as Directly Determined equals Interest as Residually
Measured.—The area BCD of the first figure measures what the
entrepreneur has left after paying wages. This amount and no more he can
pay as interest, and he will pay it if he has to. The area A´B´D´E´ of the
second figure represents what he must pay as interest; and we can now see
that, if competition is perfectly free, this amount equals the amount BCD of
the first figure. If, after paying wages, there is any more left in the
entrepreneur's hands than competition compels him to pay out as interest,
he is realizing a net profit; he is selling his goods for more than they cost
him, and this, as we saw at the outset, is a condition that under perfect
competition cannot continue. The natural price of goods is the cost price. If

the market price of anything is in excess of cost, entrepreneurs receive a
profit, and in order to do more business and make a larger aggregate of such
profit they bring new labor and capital into their industry. The increased
output lowers prices, and the excess of gain is thus taken from the
entrepreneur. If BCD is smaller than A´B´D´E´, the entrepreneur incurs a
loss and will curtail his business and let some labor and capital go where
they can produce more.
Taking this remainder of income from the entrepreneur by means of an
addition to the output of goods and a reduction of the price of them does not
annihilate the income, but bestows it on other recipients; for the reduction
in price which destroys an employer's profit can come only in a way that
benefits consumers. It means that enlarged production of which we have
just spoken, which scatters more goods throughout the community and
insures an addition to the real incomes of both laborers and permanent
investors.
Effect of Perfect Mobility of Labor and Capital.—Perfect mobility of labor
and capital insures that the residuum in the entrepreneur's hands after
wages are paid shall all be made over to the capitalist. We encounter here
again the static law that, with competition working without let or hindrance,
the entrepreneur as such can keep nothing for himself; though if he is also a
worker he will get wages, and if he is also a capitalist he will get interest.
His business will pay wages on all kinds of labor, including that of
management, and interest on all capital, including his own. A net gain above
all this it will not afford, and whatever the entrepreneur has left after paying
wages he will have to use in paying interest, and vice versa. Laborers and
owners of capital have, as it were, to take each others' leavings. Such is the
situation in an ideally static condition, though we shall see how it is
changed in actual and progressive society.
The area BCD of the first figure is, under static conditions, exactly equal to
the area A´B´D´E´ of the second figure, because ACDE represents the whole
product, BCD in the first figure represents all that is left of it after wages,
measured by ABDE, are paid; and we know by evidence both theoretical
and practical that the capitalist, whose share is directly expressed by A´B´D
´E´ of the second figure, can claim and get the whole of this amount.

Wages as a Residuum.—It is clear that the same reasoning applies to wages.
In the second figure they are represented as a residuum. The area B´C´D´
represents what the entrepreneur has left after paying interest, and nobody
can get this amount but the wage earner. The reason, however, why the
wage earner can get it is that free competition will give him the amount
ABDE of the first figure, and this, under perfectly static conditions, must
equal B´C´D´ of the second. Under perfect competition the entrepreneur
cannot have any of the amount B´C´D´ left in his hands after meeting the
claims that the wage earner makes on him. On the other hand, he must have
enough left to pay interest, since otherwise he would be incurring a loss,
and that could not fail to force him and others who are in the same situation
to contract their operations or go out of business. If the output of goods is
reduced, either by the retirement of some employers or the curtailment of
product by all, the price of what continues to be sold will be raised to the
point at which wages and interest can be paid.
Wages and Interest both adjusted at Social Margins of Production.—It is to
be noted that wages and interest are fixed at the social margin of
production, which means that they equal what labor and capital respectively
can produce by adding themselves to the forces already at work in the
general field of employment. In making the supposition that, owing to some
disturbing fact, a particular entrepreneur has not enough after paying wages
to pay interest, we assume that the rate of interest is fixed, in this way, in
the general field and not merely in his establishment.
If B´C´D´ were larger than ABDE, the entrepreneur would be selling goods
for more than cost and realizing a net profit, which he cannot do in a static
state; but a pure profit is not only possible but actual in a dynamic state.
In actual business total returns represented by ACDE amount to more than
the sum represented by ABDE (wages) plus A´B´D´E´ (interest). There are
conditions that in practical life are continually bringing this to pass in
different lines of business, though not in all of them at once. The real world
is dynamic and therefore the true net profit, or the share of the entrepreneur
in the strict sense of the term, is a positive quantity. This income is always
determined residually. It is a remainder and nothing else. It is what is left
when wages and interest are paid out of the general product. To the
entrepreneur comes the price of the products that an industry creates. Out of

this he pays wages and interest, and very often he has something remaining.
There is no way of determining this profit except as a remainder. The return
from the sale of the product is a positive amount fixed by the final utility
principle. Wages and interest are positive amounts, and each of them is
fixed by the final productivity principle. The difference between the first
amount and the sum of the two others is profit, and it is never determined in
any other way than by subtracting outgoes from a gross income. It is the
only share in distribution that is so determined. Entrepreneur's profits and
residual income are synonymous terms. In the static state no such residual
income exists, but from a dynamic society it is never absent. Every
entrepreneur makes some profits or losses, and in society as a whole the
profits greatly predominate.
Summary of Facts concerning a Static Adjustment of Wages.—We know
then that in any industry wages and interest absorb the whole product,
because any deviation from that rule in a particular group is corrected in the
way above mentioned. Moreover, general wages and interest, as determined
by the law of final productivity, must equal those incomes when they are
determined residually. The area of the rectangular portion of one of the
foregoing figures must equal the area of the three-sided part of the other.
The question arises why all entrepreneurs might not get a uniform profit at
once. This would not lure any labor or capital from one group or subgroup
to another. If, after paying wages and interest at market rates, the
entrepreneurs in each industry have anything left, the entire labor and
capital are producing more than they get and there is an inducement to
managers and capitalists to withdraw from their present employers and
become entrepreneurs on their own account. Such an entrepreneur entering
the field, drawing marginal labor and capital away from the entrepreneurs
who are already there and combining them in a new establishment, can
make them produce more than he will have to pay them and pocket the
difference. If such a condition were realized, there would be a gain in
starting new enterprises, since luring away marginal agents and combining
them in new establishments would always be profitable. When we introduce
into the problem dynamic elements we shall see that centralization, which
makes shops larger instead of smaller, makes industries more productive,
and that what happens when net profits appear is more often the enlarging
of one establishment than the creation of new ones. Entrepreneurs in the

large establishments can afford to resist the effort made by others to lure
away any of the labor or capital which they are employing, and they will do
this for the sake of retaining their profits. They can do it by bidding against
each other, in case any of them are making additions to their mills or shops,
and also by bidding against any new employers who may appear. Perfect
competition requires that this bidding for labor and capital shall continue up
to the profit-annihilating point. Here, as elsewhere in the purely static part
of the discussion, we have to make assumptions that are rigorously
theoretical and put out of view in a remorseless way disturbing elements
which appear in real life. The static state requires that all entrepreneurs who
survive the sharp tests of competition should have equally productive
establishments, which means that they should all be able to get the same
amount of product from a given amount of labor and capital. The actual fact
is that differences of productive power still survive. There are some small
establishments which, within the little spheres in which they act, are as
productive as large ones; but there are also some which are struggling
hopelessly against large rivals in the general market and are destined
erelong to give up the contest. In other words, the centralizing and leveling
effects of competition are approximated but never completely realized in
actual life.
A fact that it is well to note is that the test of final productivity is
inaccurately made when unduly large amounts of labor and capital are made
the basis of the measurement. Take away, for instance, a quarter of the
working force, estimate the reduction of the product which this withdrawal
occasions, and attribute this loss entirely to the labor which has been taken
away, and you estimate it too highly. With so large a section of the labor
withdrawn the capital would work at a disadvantage, and a part of the
reduction of the product would be due to this fact. If we should take away
all the labor, the capital would be completely paralyzed, and the product
would become nil. It would obviously be inaccurate to say that the whole
product is attributable to the labor, on the ground that withdrawing the labor
annihilates it all. With any large part of the labor treated as a single unit, the
loss of product occasioned by a withdrawal of such a unit is more than can
be accurately imputed to it as its specific product. The smaller the
increments or units are made, the less important is this element of
inaccuracy, and it becomes a wholly negligible quantity when they become

very small. A study of the forms of the productivity curves will show that if
we take as the increment of labor used in making the test only a tenth of the
whole force, we exaggerate the product imputable to it by a very minute
fraction, say by less than a one-hundredth part; and if we take a hundredth
of the labor as a final unit, we exaggerate the product that is solely
attributable to it by an amount so minute that it is of no consequence in
practice or in any theory that tries to be applicable to practice.
A question may be raised as to whether we are correct in saying that the
entrepreneur's profit is residual, in view of the fact that the entire product of
a business is at the mercy of the management, so that a bad manager may
reduce it or a good one may increase it. It may be further claimed that that
part of the management of a business which consists in making the most
far-reaching decisions cannot safely be intrusted to a salaried
superintendent or other paid official and must get its returns, if at all, in the
form of profits. Even in this case the gains are secured by making the gross
return, which is the minuend in the case, large, leaving the two subtrahends,
wages and interest, unchanged, and thus creating a remainder or residuum.
We shall later see to what extent entrepreneurs do in fact create the profits
that come to them.
The complete static conception of society requires that no entrepreneur
should be left in the field who cannot continue indefinitely to hold his own
against the competition of his rivals, and this requires essential equality of
productive power on the part of all of them. It is not necessary, however,
that all should operate upon an equal scale of magnitude, for an interesting
feature of modern life is the need of many small productive establishments
that cater to local demands and to wants which, without being local, call for
only a few articles of a kind. Repairs, small orders, and peculiar orders are
executed more cheaply in small establishments, and they survive under the
very rule of essential equality of productive power which static conditions
require. For catering to the general market and producing staple goods the
large establishment has a decisive advantage, and this insures the
centralization which is the marked feature of recent industrial life.

CHAPTER X
RENT

The Term "Rent" as Historically Used.—The word rent has a striking
history. The science of political economy first took shape in a country in
which direct employers of labor were not, as a rule, the owners of much
land. Farmers, merchants, and many manufacturers hired land and furnished
only the auxiliary capital which was necessary in order to utilize it. In a
practical way the earnings of land were thus separated from those of capital
in other forms, since they went to a different class of persons; and in the
thought of the people the charges made for the use of mere ground came to
constitute a unique kind of income. If, during the last century, the land in
England had been a highly mercantile commodity, and if it had been the
common practice of entrepreneurs not to hire it but to buy and own it, as
they bought and owned all other industrial instruments, there is little
probability that land would have been considered, either in practical thought
or in science, as a thing to be as broadly distinguished as it has been from
all other capital goods. A business man would have measured his permanent
fund of capital in pounds sterling and would have included in the amount
whatever he had invested in land. As in America any representation of the
capital of a corporation includes the sums invested in every productive way,
and this includes the value of all land that the company holds, so in
England, under a similar system of conducting business, any statement of
the amount of a particular business capital would have included the whole
of the productive wealth embarked in the enterprise; and in any statement of
the forms of it there would have appeared, besides a list of all tools,
buildings, unfinished goods, and the like, a schedule of the prices of land
that the company owned and used. In "putting capital into his business" a
man might buy land, in "withdrawing his capital" he might sell it; and the
land in the interim would be the obvious embodiment of this part of his
fund. The fact, then, that land was owned by one class of persons and let to
another for hire, and that the lessees were the entrepreneurs or users of it,
caused practical thought and speech to put land in a class by itself.

The Origin of the Theory of Rent.—Scientific thought powerfully
strengthened this tendency. At a very early date a formula was attained for
measuring the rent of land, while no satisfactory formula was, then or for a
long time afterward, discovered for measuring the amount of interest. Men
contented themselves with saying that the rate of interest depends on
demand and supply. In the case of the rent of land the same thing might
have been said, but here such a statement was not mentally satisfying, and
investigators tried to ascertain why demand and supply so act as to fix the
income that land yields at a certain definable amount.
The Traditional Formula for Rent.—The formula which has long been
accepted as measuring the rent of a piece of land, though it bears the name
of Ricardo, grew into shape under the hands of several earlier writers. In its
best form of statement this principle asserts that "the rent of a piece of land
is the product that can be realized by applying labor and capital to it, minus
the product that can be realized by applying the same amount of labor and
capital to land of the poorest grade that is in cultivation at all." The quantity
of the poorest land must be left indefinite, and all that the given amount of
labor and capital can economically utilize must be left at their disposal. It
would not do to say that the rent of an acre of good land equals its product
less that of an acre of the poorest land in cultivation tilled with the same
expenditure of labor and capital. If we should select a bit of wheat land in
England tilled at a large outlay in the way of work, fertilizers, drains, etc.,
and try the experiment of putting the same amount of labor and capital on a
piece of equal size in the remotest part of Canada, we should find that, so
far from securing wheat enough to pay the bills that we should incur in the
way of wages and interest, we should not have enough to help us greatly in
the defraying of these costs, and the cultivation of this piece of land would
be a losing venture. Instead of being no-rent land, yielding merely wages
and interest for the labor and capital used in connection with it, it would be
minus-rent land, deducting something from the earnings which the agents
combined with it might elsewhere secure. In order to utilize such land at all,
one must till it in what is termed an extensive rather than an intensive way,
putting a small amount rather than a large amount of work and expenditure
on it. By tilling ten acres of a remote and sterile farm with as much labor
and other outlay as a very good acre of land in England receives, one can
perhaps get enough to pay the required wages and interest. In general no-

rent land is commonly utilized in an extensive way and very good land in
an intensive way; and in stating the old formula for rent we need to be
careful to make it mean that the rent of the good piece is its total product
less the product that can be had by taking from the good piece the labor and
capital it now absorbs and setting them at work on a piece of the poorest
land which is enough larger than the good one to enable us to secure a crop
which will be worth just the amount of wages and interest we must pay. The
larger size of the poor piece of land is an essential condition.
Real Significance of Rent Formula.—It will be seen that this formula
amounts to saying that the rent of land is what the land itself adds to the
marginal product of labor and capital. Put a certain amount of labor and
capital on a piece of land of good quality, and you get a certain amount of
product. Withdraw the land from the combination, and you force the labor
and capital to become marginal increments of these agents. They must go
elsewhere and get what they can. One alternative that is open to them is that
of seeking out land of a grade so poor that it has not been previously
utilized and doing what they can to get a product out of it. Whatever they
can make such land yield is, in an economic sense, wholly their own
product. There is an indefinite quantity of this kind of land to be had, and
wherever labor and capital utilize any part of it, they can have all that they
produce. Now if we subtract what they there create from what was created
when they were working on the good land, we have the rent of that land.
Rent as a Product Imputable to Land.—The difference between what the
labor and capital produce at the margin of cultivation of land and what they
can produce on good land, or land that lies within the margin, is clearly
attributable to the qualities of the land itself. Given X units of labor and Y
units of capital, combine with them no land except such as is too poor to
have been previously utilized, and you get a certain product. It is the
product of the labor and capital using something which is free to any one.
Now put a piece of good land into the combination; to the X units of labor
and Y units of capital add a piece of productive land and see what you can
create. We do this by taking these units of labor and capital away from the
worthless marginal land and setting them to tilling that which is of the
better quality. The product is of course larger than they got before, and the
difference measures what the land itself adds to the output of the other
agents in the combination. The true conception of rent is that of the specific

addition which land makes to the product of other agents used in connection
with it. There are various ways of measuring this addition, but the method
just used will at least show that the presence of the good land is the cause of
the excess of product which given amounts of labor and capital secure over
what they could create on land of the poorest quality.
Rent as a Differential Product.—In the early statements of the rent law it
was not said that the rent of a piece of land is the product specifically
attributable to it. If it had been, the chances are large that a much broader
and more scientific use of the rent formula would have resulted. The law of
rent, as it was actually stated, made it consist of a differential amount. It
was what a given amount of labor and capital would produce under one set
of conditions minus what they would produce under another. Since it is the
presence or the absence of the productive land which makes the only
difference between the two conditions, rent, even as it is thus defined, is
really the amount of product specifically attributable to the land. It is what
is created when the land is used in excess of what would be created if it
were not used and if the coöperating agents did the best they could without
it. We may use, as the most general formula for the rent of land, the
contribution which land itself makes to the product of social industry.
If we use the same method in measuring the rent of land which we used in
measuring the wages of labor and the returns of capital, we shall represent
the rent of a given piece of land as the sum of a series of differential
amounts. In the accompanying figure the vertical belts bounded by lines
rising from the letters A, B, C, etc., represent the products realized by
applying successive increments of labor and capital to a given piece of land;
and the horizontal lines running toward the left from A´, B´, C´, etc.,
separate the wages and interest from the amounts that are successively
added to rent. When one composite unit of labor and capital is working, its
product and its pay is measured by the belt between the line AA´ and the
line NN´. A second composite unit produces the amount represented by the
area between AA´ and BB´, and that is the amount which each unit
separately considered will produce and get as its pay. This leaves the area
between the horizontal line running from B´ and the section of the
descending curve as the rent of the land. A third unit of labor and capital
produces what is represented by the area between BB´ and CC´, and this
becomes the standard of pay for all units, leaving the enlarged area above

the horizontal line at C´ as rent. In the end there are ten units of labor and
capital. Their total earnings are expressed by the area of the rectangle below
the horizontal line running from J´, and the sum of all the areas above that
line is rent.

The Intensive Margin
of Cultivation.—The
extensive margin of
cultivation is the land
that is adjacent to an
imaginary boundary
line separating the
grades of land that are
good enough to be used
from those that are too
poor to be used. There
is, however, what may
be called the intensive
margin of cultivation.
A given bit of land is
said to be cultivated more and more intensively when more and more labor
and capital are used on it. Land is subject to what is called the law of
diminishing returns.
Law of Diminishing Returns.—The more labor and capital you employ on a
given piece of land, the less you will get as a product for each unit of these
agents. What the last unit of labor adds to the antecedent output is less than
was added by any of the other units, and the same is true of the last unit of
capital. As we continue the process of enlarging the working force and
adding to the working appliances, we reach a point at which it is better to
cease putting new men with their equipment at work on this piece of land
and to set them working on a bit of land so poor that it was not formerly
utilized at all. We may assume here that what a man needs, in the way of
auxiliary capital, goes with him, whether he joins a force that is working on
good land or migrates to a less productive region. He will go if it will pay
him to do it. In this way we make a sort of dual unit of labor and capital and
apply a series of such units to land.
Ground Capital and Auxiliary Capital Distinguished.—Land itself is a
component part of the permanent fund of productive wealth to which we
have given the generic name capital. It differs from other capital goods in
that it does not wear out and require renewing. Working appliances,

however, as they wear out and are replaced, constitute a permanent fund of
auxiliary capital, and we shall apply this term to the abiding stock of such
instruments except in connections in which the adjective is not needed,
because it is clear that the land, or ground capital, cannot be referred to. In
dynamic studies the distinction between land and auxiliary capital becomes
very important.
How the Intensive Margin locates the Extensive One.—The labor and the
auxiliary capital that betake themselves to new land of the inferior quality
represent an overflow from the better land. As long as men can do as well
by staying where they are as they can by migrating to new regions, where
inferior lands are to be had, they will stay; but when they incur a loss by
staying, they move. What a laborer can create by securing the use of an
equipment and adding himself to the force that is at work on some good
farm, can be approximately estimated; and if there is somewhere a piece of
land not thus far used to which he can remove, and if, by going to work
upon it, he can create any more than he created while working on the older
farm and taking his products as his pay, he will till that poor piece. But
neither he nor any one else will till a piece that is still less productive. If any
one were to set himself working on land of still poorer quality, he would
lose and not gain by the change, since there he would produce even less
than he can when he is the last man set working on the good piece.
To what Extent the Movement of Labor and that of Capital are
Interdependent.—The early statements of the law of rent did not usually
define the intensive margin of cultivation in connection with labor and
capital separately, but spoke of these two agents as employed together upon
land in quantities increasing up to a limit beyond which both labor and
capital would best be employed elsewhere. The supposition that labor and
capital go thus together from one grade of land to another is only
approximately accurate. If we consider one man and five hundred dollars'
worth of productive wealth as a dual unit of labor and capital, and add such
units, one after another, to the forces at work on a tract of good land, we
shall reach a point at which it will not be profitable to increase the amount
of one of the agents, while it will still be profitable to increase the amount
of the other. It will perhaps not pay to use any more capital, but it may still
pay to add to the number of workers. On land that is tilled more and more
intensively, labor and capital are not tied together in fixed proportions in

such a way that, when there is more of one of them used, there is
proportionately more of the other. Moreover, when a unit of one of them
abandons a piece of land and goes elsewhere, there is no probability that
exactly one unit of the other will do the same. There is, indeed, no such
thing as a dual unit of labor and capital that can be thought of as moving to
and fro among different employments till it finds the point at which, as a
dual unit, it can create its largest product. These two agents so locate
themselves that a final unit of each one, separately considered, produces as
much where it is as it can produce anywhere else.
It is, however, to be noted that the amount of labor that can profitably be
employed on a piece of land grows larger the more capital there is
employed in connection with it. An acre of land and a thousand dollars'
worth of auxiliary funds can enable more men to get good returns than can
an acre combined with a fund of five hundred dollars. Conversely, the more
men there are working on the area, the more auxiliary capital it pays to use
there. If there are five men working on a small field it may be that a
thousand dollars may be well invested in aiding them, while with only one
man it would not pay to use so large an amount. The capital and the labor,
as it were, attract each other. Additional capital attracts further labor, and
vice versa, till a condition is reached in which neither of them can so well
be used on that particular piece of land as it can elsewhere. Each one has
then been used on this area up to its own intensive-marginal limit. So also
when one of these agents betakes itself to marginal land, it attracts the other
agent thither. When there are ten men on the poorest piece of land in a
locality, it is possible to make a considerable amount of capital at that point
pay the return generally prevailing, whereas only a small amount would pay
it if there were only five men working. With a thousand dollars invested on
that land more laborers will be lured thither by the prospect of fair returns
than would be lured thither if there were only half as much capital. The
general apportionment of both agents tends to be such that a unit of either is
as well off on one piece of land as on another, and each is as well off at the
extensive margin of cultivation of land as it is on the intensive margin.
Labor and Capital combined in Varying Amounts.—The amount of capital
that is combined with a unit of labor is not often the same on good land as it
is on poor. The proportions in which labor and capital will be combined on
the marginal field will be almost certain to vary from those in which they

were combined in the better field from which they came. It may be that they
leave industries in which an average man uses an equipment worth a
thousand dollars. When they reach the margin of cultivation, capital may be
so scarce that the thousand dollars will not stay in the hands of the one man
but will divide itself among several.
The General Law of the Extension of the Margin of Cultivation.—
Sometimes, when labor moves to new land that is now at the margin, it
takes its new equipment with it; but such land is not always tilled by
independent settlers. Employing farmers may set men working on it and
pay them all that they produce; and the farmers may furnish the men with
capital of their own or borrow capital for them to use. In either case a static
condition requires the equalizing of the productivity of labor at the intensive
margin with that of labor at the extensive margin; and it requires a similar
leveling of the productivity of capital at the two margins. When this
leveling has taken place in both cases, the all-around marginal product of
labor fixes the rate of wages, and that of capital fixes the rate of interest.
What a man creates on the good land and with the adequate capital, or on
poor land with proportionate capital,—in any occupation on land of either
grade,—determines the pay that he and other men can get. It constitutes in
itself the wages of labor. In so far as the overflow of labor and capital into
any one limited region of marginal land is concerned, the full statement is
this: that the margin of utilization of land will be extended to the point at
which a unit of labor, using as much of the marginal land as it is
economical to use, and such amount of auxiliary capital as is economical to
combine with this unit of labor and the land it occupies, will create a
product equal to the wages of the unit of labor as they are determined by
the product it created when it was employed on the good land and in
connection with the full equipment of auxiliary capital.
The Rent of a Fund of Capital.—We saw that one unit of labor employed in
connection with a given amount of capital produces more than does a
second; that the second produces more than the third; and that, if we
continue to supply units one at a time, the last unit in the series produces the
least of all. Wages are fixed by the amount that one unit of labor produces
when the working force is complete, and that is what is contributed to the
general product by the unit of labor which comes last in the imaginary
series by which the force is built up. Owing to the more favorable

conditions under which, in their time, the earlier units worked, they were
able to produce surpluses above the amount produced by the last one. When
they entered the field they were supplied with excessive amounts of capital.
The first one had the whole fund coöperating with it, till it had to share it
with the second; and after that each had a half of it till they had to share
evenly with a third, etc. We have seen that all the surpluses appearing in
connection with the earlier units are attributable in reality to capital. The
area BCD (page 139) represents the amount by which the presence of an
excess of capital increases the products attributable to the earlier units of
labor. It represents the sum of all the differences between the products of
the earlier units and the product of that final one which in the end sets the
standard of productivity of labor. It might be called the rent of the fund of
capital. It is composed of a sum of differences exactly like those which
constitute the rent of a piece of land.
The Rent of a Permanent Force of Labor.—In the figure on page 148, the
working force was supposed to be fixed in amount, the capital increasing by
increments, or as some earlier economists would have said, by "doses"
along the line A´E´. The last unit of capital produces the amount D´E´, and
all the capital produces A´B´D´E´, while products of the earlier units of
capital, as they come successively into the field and are used by an
excessively large labor force, are represented by the area B´C´D´. Here this
area represents what may be called the rent of the force of labor, since it is a
sum of surpluses that, again, are entirely akin to those that constitute the
rent of a piece of land.
A Question of Nomenclature.—It may be an open question, as a matter of
mere nomenclature, whether these surpluses which are thus traceable to a
permanent fund of capital, on the one hand, and to a permanent force of
labor, on the other, can with advantage be called rents. In this treatise we do
not think it best to employ that nomenclature. What is not uncertain is that
these gains are measurable by the same formula that measures the rent of a
piece of land. If the essential thing about rent were that it is a material
product and consists of a sum of differential quantities, these incomes
certainly would be rents. Popular thought, however, attaches another
meaning to this term, and we therefore limit ourselves to saying that these
differential incomes or surpluses may be determined in amount by the

principle of rent. They can be described and measured exactly as the
Ricardians described the income of landlords.[1]

FOOTNOTES

[1] The term rent has even been applied to surpluses of a psychological kind.
Certain gains that men get consist purely in pleasures or in reduced pains or
sacrifices, and a few writers have applied to such subjective gains the term rent.
If a man buys a barrel of flour for five dollars and gets out of it a service that is a
hundred times as great as he could get from some other article which he buys for
the same amount, this surplus of pleasure may be called, by a figure of speech,
"consumers' rent"; and if the essence of rent were the fact that it can be made to
take the form of a surplus or difference, the name would be well chosen, though
there is danger that by this use of the term science may divorce itself from
practical thought and life. If we take all the barrels of flour that a man uses in ten
years, there is one which is marginal, because it is worth to the man only enough
to offset the sacrifice he incurs in getting it. All the others are worth more. We
can arrange them in a scale in the order of their importance, the most necessary
one coming first and the least important one last; and we can compare the
service which each one renders with that rendered by the last, and measure the
surplus of good which each one does to the user. There is here in operation a law
of diminishing subjective returns. Early units consumed afford more pleasure
than do later ones. There results a series of surplus gains, and the sum of all
these surpluses makes a total of net benefit,—is a gain that is not offset by a
compensatory sacrifice. The last barrel of flour on the list is worth just what it
costs, and all the others are worth more. They give the consumer a surplus of
satisfaction for which he pays nothing. The sum of the excesses of service
rendered by all the earlier barrels constitutes what has been called the
consumers' rent, realized in this case from the entire supply of flour used by the
man. In the manner in which it is conceived and measured this gain has a kinship
to genuine rent.
This surplus is an effect on a man himself. It is not anything outward or tangible.
It exists only in the man's sensations, and is as far as possible from being a
concrete income in material form traceable to some particular agent. It can be
measured and described in ways that are quite akin to the manner in which the
product of land is measured and described. Each consists of the sum of a series
of surpluses or differential amounts, and each, moreover, represents a gain which
is not offset by any corresponding subjective cost. The rent of land must be paid
by an entrepreneur and is a cost in the same sense in which wages and interest
are so; but the owner of the land did not create it by personal effort or sacrifice.
Analogies between the product of land, or rent, and the special gains of
consumers from the more important parts of their consumption do exist, but they
are overbalanced by essential differences; and it is better to use the term rent
only in describing the specific contribution to the material product of industry
which a concrete and material agent makes.

CHAPTER XI
LAND AND ARTIFICIAL INSTRUMENTS

One may hire many things besides land and pay what is commonly called
rent for them. No one would think of calling by any other term the amount
paid for the use of a building, a room in a building, or the furniture in the
room. All these things yield rent to their owners; and if the intuitions which
govern the common use of terms are to be trusted, the income derived from
such things and that derived from land have some essential qualities in
common. Every such income is paid for the use of some concrete
instrument, and is measured, not by a percentage on the value of the
instrument, but by a lump sum—a certain number of dollars per month or
per year.
The Mode of Calculating the Rent of Concrete Instruments.—Now the rent
of such instruments of production, whether artificial or not, can be
measured in exactly the same way in which the rent of land is measured. We
saw that there are two margins of utilization of land, an extensive and an
intensive one, and that the product of labor and capital at either of these
margins may be used as a basis for computing the surpluses which
constitute the rent of the land. The landlord gets from a good field what it
produces minus what the labor and capital that are used on this field would
produce if they were used on the poorest land in cultivation; or, what is the
same thing, he gets from the field what it produces minus what this labor
and capital would produce if they were set working somewhere on the
intensive margin of cultivation. Take the men out of this field, add them in
small detachments to the men who are already cultivating other fields, in
order that such fields may be tilled a little more intensively, and measure
the product which the laborers create when they are so placed. Withdraw
also the capital from the field, add it, in small amounts, to the capital that is
working elsewhere, and measure its specific product. The sum of these two
specific products is the same amount that is arrived at by using the former
standard. This labor and capital, formerly used on the good field, scattered
as they now are among the users of other good land, will create the same

amount that they would have created if they had been employed on the
poorest land in cultivation. This amount is, as it were, what they produce by
their own unaided power; and whatever is produced in excess of this
amount when a good field comes to their assistance is the rent of that field,
for it is the contribution which the field makes to the joint production. Total
product of land, labor and auxiliary capital minus the product created by the
labor and auxiliary capital when these agents are put in marginal positions
equals the rent of the land.
The Rent of an Instrument measured from the Intensive Margin.—We can
measure the product of any instrument in this way. If it is a ship, it takes
labor to sail it and requires a considerable amount of auxiliary capital. We
must fill the bunkers with coal, stock the steward's department with
provisions, furnish and light the staterooms and the saloons, and provide
cordage and a wide variety of other ship stores. All this labor and all this
capital we could take out of the ship and use elsewhere. We could convert
them into marginal labor and capital. We could divide them among the
owners of other ships where they would be used in a way that would make
these other ships somewhat more efficient and cause each of them to earn a
little more than it now earns. Whatever the labor and capital could, in this
way, produce furnishes the basis for computing the rent of the ship. Subtract
it from the total joint product of labor, capital, and ship, and you have what
the vessel separately earns.
The Mode of Testing the Productive Power of a Ship.—Put the labor and
capital into the ship and set it doing its proper work of carrying freight and
passengers, and you cause a certain product to be created. The steamship
company gets an aggregate amount for the service it renders by means of
the labor, the auxiliary capital, and the ship. A certain smaller amount would
be realized if the labor and the auxiliary capital were taken out of the ship,
distributed, and used in the way we have just described. The difference
between the two amounts is the rent of the ship, or its particular
contribution to the general product. This gives us a formula for computing
the rent, not only of land, but of buildings, tools, machines, vehicles, and
every other concrete instrument of production. The formula, indeed, is so
general that it enables us to compute the earnings of any agent whatsoever.
The rent of any such agent is what it adds to the marginal product of labor
and capital used in connection with it.

No-rent Instruments.—The majority of instruments that are in use add
something to the marginal product of the labor and capital used in
connection with them. Some add more and some add less, according to their
several qualities. As a rule, any tool of trade produces most when it is new
and less and less as it grows older. In the end it is discarded because it has
so deteriorated that it no longer adds anything to the marginal product of the
labor and capital that are used in connection with it. A wagon has become
so rickety that it no longer pays to furnish a horse, a harness, and a driver
for it. The capital and labor that these represent would earn as much if they
were detached from the old vehicle and added to the equipment of some
person who has a stock of good ones. The rent of this old wagon is nothing.
As in the case of the poorest land in cultivation, it is a matter of indifference
whether certain amounts of labor and capital are used in connection with it,
or whether they are withdrawn and employed elsewhere. This poor vehicle,
like the poor land, may be used without positive loss; but if it is so used,
nobody gets any income from it. It has no power to enter in a really
productive way into combination with labor and capital, for it cannot so
combine with them as to add anything to those marginal products which the
labor and capital could create if they remained detached from it.
The Universality of the Test of Rent.—This test, whether an instrument can
or cannot add something to the marginal product of labor and capital, may
be universally used. It may be applied to everything that is made as an aid
to labor. There are no-rent buildings, locomotives, cars, tracks, ships,
wagons, furnaces, engines, boilers, and, in short, instruments of every
description that figure in production. Combine any one of them with labor
and capital and see what you get out of the combination; then take the labor
and capital away and see what they will produce as marginal labor and
capital; and the difference between the two amounts, whatever it is, is the
rent of the instrument. If the difference is nil, the instrument is at the point
of being abandoned.[1]
True Capital rather than Capital Goods moved in Making such Tests of
Productivity.—In applying these tests with scientific accuracy we should
take away the true capital used in connection with a rent-paying instrument
and use it as marginal capital elsewhere, rather than take away the particular
concrete thing in which that capital is now embodied. In the case of the ship
the accurate test is made, not by taking stores, etc., bodily out of it and

putting them into other ships, but by letting the stores first earn what they
can where they are, converting the earnings into money, and, when the
stores are completely used up, spending the money to procure marginal
additions to the outfit provided for the other ships.
One Difference between Land and Artificial Capital Goods.—In the case of
land a particular area is marginal or no-rent land, and, in a static state, it
remains so. Any particular ship, wagon, engine, or other made tool begins
its career as a rent payer and ends it as a no-rent instrument. If we watch the
whole social stock of instruments of production, we shall see the no-rent
points not fixed in location, but shifting from place to place. Now this
machine, now another, and now still another reaches the unproductive state
and is supplanted by instruments of similar kind that are new and efficient.
Original Elements in the Soil.—The real difference between the rent of a
piece of land and that of a building, machine, vehicle, or any similar
instrument arises from the fact that the land is not going to destruction and
the artificial instrument is. There are elements in what is commonly called
land that wear out as do the tools that are used in tilling it, but these
elements are not land in the economic sense. Land, as Ricardo long ago
said, consists in the "original and indestructible powers of the soil." He
singles out certain constituent elements of every farm, forest, building site,
or other piece of what is called land in ordinary usage, and gives to this new
concept the name land in an economic sense. These so-called "powers" are
original elements because man does not make them; they are provided
altogether by nature, and the only way in which man may be said to impart
any productive power to them is by putting them into combinations in
which they can produce. When men settle upon what has been vacant land,
they bring the land into combination with labor, and when they break up the
land for tillage and put buildings on it, they combine it with artificial
capital. By means of these combinations land acquires productive power;
but physically considered, it is altogether a natural product.
Indestructible Elements in the Soil.—Land in the economic sense is
indestructible because the natural effect of use is not to destroy it. This does
not mean that it is not physically possible to destroy land to the extent of
making it forever impracticable to use it in the ways in which land is
commonly utilized. Nature may do this by sinking it beneath the ocean, and

man can, if he will, do something akin to this; but he does not naturally
destroy what is truly land in the using. It is impossible to use a plow, a
spade, or a reaping machine without injuring it and, in the end, wearing it
out. It is also impossible to draw the nutritive constituents out of the
superficial loam and convert them into crops without exhausting the supply
of these sources of fertility and so spoiling that which is commonly called
the land, though it is not so in the economic sense. What is really land in
this sense is not affected. Nitrates and phosphoric acid that lie in the
topmost stratum of the soil are among the destructible instruments of
agriculture. The supply of them has to be renewed, if cultivation is
continued, and they are therefore in the class with the plows, spades, and
reaping machines which also wear out. But whatever there is in the soil that
suffers no deterioration from any amount of use is the land with which
political economy has to deal.
The Gross and the Net Rent of Land Identical.—As land does not wear out
and require renewal, all that it adds to the products of the labor and capital
that are used in connection with it may be taken by the landlord as an
income without reducing the amount of his property. Whatever land
produces at all is a net addition to the general income of society.
Net Rent of Artificial Instruments Smaller than Gross Rent.—It is not safe,
on the other hand, for the owner of buildings, tools, or live stock to take for
his own consumption all that these produce. If he were to use up their gross
produce as he gets it, he would find, in due time, that a considerable part of
his property had vanished. Such instruments wear out and become
worthless, and if no part of what they produce is set aside as a sinking fund
with which to purchase other instruments to take their places, one whole
genus of capital must go altogether out of existence.
Artificial Instruments Self-replacing.—What actually happens is that these
instruments create enough wealth to pay for their own successors, and that,
too, besides paying a net return, which, regarded in one way, is interest. If
you compute the whole product of one of these instruments by the
Ricardian formula which we have examined, the amount of it will be
whatever the instrument, during its entire career, adds to the product of the
labor and of the capital that are used in connection with it; and that includes
the fund for renewal that has just been described, the amount, namely,

which the owners must set aside for repairing the instrument and finally
purchasing another. As the instrument itself provides this sinking fund, it
may be said to create, in an indirect way, its own successor. The ship earns,
over and above the net income which is interest on its cost, enough to keep
itself seaworthy so long as it sails and, in the end, to build another ship. The
locomotive, the furnace, the loom, the sewing machine, the printing press,
etc., all pay for and thus indirectly produce their own successors.
The Net Rent of a Permanent Series of Similar Instruments.—The first
charge on the product of any instrument of this kind is the amount
necessary for replenishing the waste of it and for providing a successor
when this original instrument shall have been wholly worn out. In like
manner, the first charge on the successor is providing a similar fund, and so
on indefinitely. A part of the productive power of every one in an endless
series of similar instruments is devoted to this type of reproduction. The
series maintains itself and yields an income besides; and that remainder of
its gross rent which is left after waste of tissue is repaired is available as a
net income for the owner. This net remainder constitutes an interest on the
owner's capital. He possesses a permanent fund of productive wealth
embodied in the endless series of these perishable instruments, and the
series taken as a self-perpetuating whole yields nothing but this interest.
Each instrument, separately considered, yields interest and a sinking fund;
but the sinking fund is not available as an income, since it must take shape
as another instrument which serves to keep the series intact. What the first
instrument creates in addition to the sinking fund is its contribution to
interest, and what each instrument creates above what is required for virtual
self-perpetuation is also interest.
Interest and Net Rent Identical.—We may therefore reduce interest to the
form of a net rent by calculating the gross rent afforded by each instrument
in such a series and by ascertaining how much of this merely repairs waste
and how much is true income. As interest is usually expressed in the form
of a percentage, we may reduce the net rent to this form by comparing it
with the cost of the first instrument, which is the amount originally
invested. The series of instruments will yield a net return every year. We
can compute the gross return of each instrument according to the Ricardian
formula for measuring the product of the land. It will diminish from year to
year and will ultimately vanish. We can add the several annual gross

earnings of the instrument during its economic lifetime in the form of an
absolute sum, which is the total rent of the instrument. From this we can
deduct the cost of replacing this worn-out capital good, and the remainder
will be the net rent of the instrument. We can, in a like way, get the net rent
of all the following instruments in the series for a long period, add these net
rents together, and get the true net earnings of the series for the time
covered by the calculation. If this chances to be ten years we may compare
a tenth of this total, or the earnings of the series for one average year, with
the cost of the first instrument,—which is the capitalist's original
investment,—and we shall thus get the fraction which represents the annual
rate of interest on that investment. Perhaps in an average year the series has
earned, above what is required to repair waste, five hundredths of what the
first instrument cost. That is, then, the rate of interest that the series as a
whole, or the permanent capital, is yielding. The whole procession of
instruments in which permanent capital is invested creates every year this
fraction of its own value, over and above the sum that is needed to offset the
wear and tear of an average year's use.[2]
General Interest as Rent.—If you compute the net income of all tools,
machines, and other like things in the world, add the amounts, and get the
grand total of them all, you have the entire income from this part of the
capital of the world in the form of net rent. If then you compute the value of
all this class of instruments and see how large a part of this value the net
rent is, you translate this total rent into the form of interest, and therefore
net rent and interest are the same income regarded in two different ways.[3]
Stocks of Made Instruments graded in Quality as is Land.—It is necessary
to notice the fact that the permanent series of tools, buildings, and other
active capital goods shows forever the same gradations of quality that are
found in the case of land. There are always to be found some instruments
which are producing a large amount—that is, they are adding a large
amount to the product of the labor and the further capital that are combined
with them in production. A given amount of labor and capital creates much
more wealth when working with a machine of the highest class than it
would if distributed in marginal positions; and this is equivalent to saying
that such an instrument is itself highly productive. Other instruments are to
be found which are creating less, and there is never wanting a grade of no-
rent instruments which are adding nothing to the marginal product of the

other agents. It would be as well for the labor that used them if it should
drop them and add itself to the force which is working with good
instruments. Any one manufactured instrument begins its career as a
maximum-rent instrument and ends it as a no-rent one. The ship is at its
best when it starts on its first voyage, and the mill is at its best in the first
year of its running. Each instrument goes gradually downward in the scale
till it reaches a stage in which it really produces nothing, since it adds
nothing to what would be produced without it. The permanent series of
instruments never thus deteriorates. All the depreciation of particular things
is made good by the repairing and the replenishing which go on. In the
series as a whole there are forever present grade number one, grade number
two, grade number three, etc., exactly as in the case of land. If we wish, we
can reckon the income that is to be gotten from each part of the series
according to the old-time formula that is familiarly used in the case of land,
"What labor and capital create by the use of this piece of ground in excess
of what they would create if they were applied to the poorest land in use."
For a grade of land read a grade of the self-perpetuating series of artificial
instruments, and it will appear that each grade above the poorest yields,
with the labor and capital that are combined with it, a surplus above what
this labor and this capital could create if they were combined with the
poorest grade in the permanent series.
Different Modes of Destroying and Replenishing Stocks of Capital Goods of
the Two General Classes.—The process of keeping up a stock of tools of
trade is unlike the process of keeping intact a stock of materials and
unfinished goods, because the modes in which the two kinds of capital
goods deteriorate and perish are unlike.
In the case of the raw materials that gradually ripen into articles for
consumption and which we have called passive capital goods, the waste of
tissues that takes place is quite unlike that which takes place in the case of
active capital goods, the tools and implements that are used in the process.
The raw material acquires value through the whole process, and in the end
it gives itself, with all its acquired value, into the hands of the consumer. In
a static state such goods embody the whole income of society, including the
products of all labor and of all capital.

The series of A's represents the process of creating consumers'
A´´´ goods from the rawest material. The A´´´ as taken away for
A´´ consumption represents, as it were, the wasting tissue of passive
A´ capital goods; and it contains in itself the wages of all the labor
A
in this series of subgroups, the interest on all the capital there
used, and, in addition to these, the sinking fund that is necessary
in order to keep the active capital intact. Some of the articles of the kind A
´´´ will have to be given over to the men who keep the tools, buildings, etc.,
in repair and replace them when they are worn out. The whole force of the
industry of this group expends itself simply in making good the loss that the
withdrawal of the A´´´ for use occasions. It does, in short, nothing but
replace the perpetually wasting tissue of the A's. All industry, except that of
the makers of active instruments, may be considered in the light of an
operation, the aim of which is to keep the stock of passive capital goods
intact, or, what is the same thing, to keep the fund of circulating capital
undiminished. Whoever puts anything into this fund enables it to overflow
and to furnish an income without suffering any diminution. The sole
purpose of such capital is to overflow, that is, to suffer, at one and the same
time, a loss and a replenishment which neutralizes the loss. It exists for
nothing else except to ripen into consumers' wealth. Nevertheless, though
the ripened A's are perpetually consumed, the series of A's is abiding
capital, is entitled to its share of interest, and is certain to get it. A part of
the perpetual flow of A´´´'s is this interest. As the whole income of the
society consists in A´´´'s, a certain number of the A´´´'s that are withdrawn
for consumption go to capitalists as interest on the permanent fund which is
kept in existence in the form of A, A´, A´´, and A´´´. A certain other part of
the outflow of A´´´'s goes also to capitalists as interest on that other
permanent fund which is maintained in the form of tools, machines, and
buildings, such as must everywhere be used in the series. A third part of the
flow of A´´´'s is wages of labor in this group; and a final portion is what we
have called the sinking fund, the amount that is given over as an income to
the producers in another group, not here represented, who keep the stock of
buildings, tools, etc., intact. These four withdrawals of income constitute
the process by which the stock of passive goods is depleted, and the grand
resultant of all industry is to atone for that depletion.

Labor and the Obtaining of its Product, in Static Industry, Synchronous.—
One function of the permanent series of A's is to enable labor everywhere to
get its virtual product without waiting, and that too in the form in which it
needs it for use. The labor that converts A´´ into A´´´ supplies the waste of
tissue that takes place at that end of the line by withdrawal of an A´´´. The
labor that turns A´ into A´´ replaces the waste that takes place at that point
when an earlier A´´ becomes an A´´´. The labor at A´ replaces the waste at
that point, and that at A replaces the waste at still another point. They are all
at work keeping the stock of A's unimpaired, and one of them does as much
toward keeping up the perpetual flow of A´´´'s as any other.
If we pump water in at one end of a full reservoir, we instantly cause it to
overflow at the other end; and every worker in such a series as we have
described may be thought of as putting something into the permanent
reservoir of capital and so causing a corresponding overflow. He gets his
reward day by day as the work proceeds. Wherever a laborer may be in
such a series, his work creates a ripened product as it goes on. He has not to
wait for it. His work and its fruit are synchronous.
Differences between Land and Made Instruments Apparent in Dynamic
Conditions.—A point that has great theoretical interest is the nature of the
difference between land and other productive instruments. In a static society
the difference would be comparatively unimportant, but it is brought into
prominence by the changes which constitute a dynamic state. The static
hypothesis requires that capital should not increase or diminish in quantity,
and that it should not change its forms. The equipment of every mill and of
every ship is kept unimpaired but not enlarged or improved. There is a fixed
number of spindles in the cotton mill, of lathes in the machine shop, of
sewing machines in the shoe factory, etc., and this fact removes the most
striking difference which, in a dynamic society, actually distinguishes land
from other things.
Land, in the economic sense, does not increase in quantity, however
changeful and progressive a society may be. The chief distinguishing mark
of land—that of being fixed in amount—separates it from other things only
in a dynamic state and because of the action of the forces which produce
organic changes. These are subjects to be studied in the dynamic division of
economic theory.

A Distinguishing Mark of Land which appears in a Static State of Industry.
—In a static state there remains this difference between a piece of ground
and a building, a tool, or any other instrument: the ground is not artificially
made and does not perish in the using; while the building or the tool or
other appliance is so made and does so perish. It must in wearing itself out
create in the indirect way which we have described its own successor. The
engine must, by a part of its product, pay the men who will make another
engine and so perpetuate the series of engines. This makes it necessary for
the owner of the engine to save some of its gross rent to pay for
depreciation and renewal, while he can safely use the whole rent of land.
This Mark of Distinction not Applicable when Land is contrasted with a
Permanent Stock of Capital Goods.—If we look, not at one particular
instrument, but at an entire series of them,—if we take into view, not only
the engine which is now driving the mill, but also the one that will succeed
it, and again the one which will succeed that second engine, and so on
forever,—this difference between land and the artificial instrumentality
vanishes. The series of engines, like land itself, yields only a net rent. The
remainder of its gross product is not a true rent at all, since any one of the
engines creating it has to consume it on itself and cannot give it to the
owner as an income. This remainder pays certain men for keeping the series
of engines intact, and what is given to them as pay for their services cannot
accrue to any one as an income from the series of instruments so
maintained. It is the earnings of the corps of maintenance created by their
own labor and capital. What the series of engines yields over and above
what it expends in maintaining itself it gives to its owners as an income.
This is their net return and they can use it without trenching on their
property. The analogy between the returns from land and those from a self-
perpetuating series of made capital goods is in this particular complete.
The Source of the Fund for Repairs and Renewals.—The fund for repairs
and renewals must, of course, like the net income itself, be furnished by
instruments that are above the no-rent grade. A machine will naturally be
used as long as it pays anything whatever, and during the latter part of its
career it usually produces less than mere interest on its cost. So long as the
labor and the auxiliary capital that are combined with the instrument
produce by its aid any more than they would produce if they were
withdrawn from it and added, as marginal increments, to the labor and

capital that are working in connection with good instruments, they will
continue to use the machine and they will abandon it only when it ceases to
pay anything whatever. Out of the total amount it produces before reaching
this point of abandonment comes the amount that is needed as an offset for
the cost of providing a new machine.
Incorrectness of a Common Statement concerning Rent and Price.—This
brings into view a striking fallacy of what has been current economic
theory. It has been customary to claim that the rent of land "is not an
element in price," although the interest on capital is such an element. The
rent of land is the net product of land; and if interest be kept distinct from it,
this income is the net product of a permanent stock of capital goods. The
relations of these two component parts of the constant output of goods to
the prices of the goods are identical.
Proof of the Incorrectness of the Current Statement concerning Rent and
Price.—The vague form of the current statement concerning rent and price
is responsible for much confusion of thought on that subject. What the
statement would mean is that the price of wheat is not affected by the great
contributions to the supply of it which good lands are making. These
contributions are the rent in its original form. The rent of wheat land is
wheat, that of cotton land is cotton, that of mill sites is manufactured goods,
etc. That money is used in payments made to landlords changes nothing that
is essential. To say that such contributions to the supply of particular
commodities are not an element in determining the prices of them, would be
as unreasonable as to make the same assertion concerning other parts of the
supply. Quite as logically might it be asserted that other components in the
supply do not affect prices—that the amount of wheat which is attributable
to harvesting machinery or the amount of calico which is imputable to
looms has no influence in the market values of these articles.
Why the Produce due to Good Land prevents Prices from greatly Rising.—
If the use of good wheat land were merely discontinued, the supply of
wheat would of course be not only lessened, but reduced almost to nothing,
and a famine price would at once result. If, now, an attempt were made to
make good the shortage of the supply of this cereal by tilling lands which
are now at the margin of cultivation, it would at once appear that not
enough of such land exists to enable us to accomplish the purpose, and it

would be necessary to push the margin outward and till poorer and poorer
soils, at a greatly enlarging cost. We should grub out worse thickets, drain
worse swamps, terrace more discouraging hillsides, irrigate more remote
and barren deserts, etc. All this would mean a greater cost of production of
wheat and a higher price for it in the market.
It would also mean another thing. The extending of the margin of
cultivation which makes it include poorer grades of land causes that part of
the area now tilled which does not command any rent to yield one. After the
margin should have been greatly extended and finally located in a region
where getting anything out of the soil would require a struggle, it would
appear that all of the lands newly annexed to the cultivated area except the
last and poorest would command a rent. All but those on the new margin
would add a definite quota to the supply of wheat, and this contribution
would be their rent. Entering into the supply, it would of course count in the
adjustment of price.
What can reasonably be conceded concerning Rent and Price.—There is
another possible meaning of the phrase "Rent is not an element in price";
and, whether it was clearly in the minds of those early economists who
made the assertion or not, it is what their argument proves. The payment of
rent by tenants to landlords has no effect on the market value of the
produce. "Food would not become cheaper," says Professor Fawcett, "even
if land were made rent free." There would be the same need of food stuffs
as before, and the tillage of lands would be pushed to the present margin,
where the yield is smallest. The cost, in labor and capital, of that marginal
part of the supply of food which has come from these poorest lands would
continue to be what it has been heretofore. The farmers would, of course,
get from the good lands the same surplus that they get at present; but the
fact that land had been made rent free would enable them to keep it. This
surplus is, of course, rent, and transferring it from landlords to tenants does
not affect prices. So much of the doctrine formerly current is true; and it
would have forestalled much confused thought as well as much controversy
if the statement concerning rent and price had made it clear that any rent in
its original form is an element in the supply of produce, and the existence of
it helps to determine prices, while the payments made by tenants to
landlords do not affect them. If these payments should cease and the tenants
should retain the rent, prices would continue to be what they now are.[4]

FOOTNOTES

[1] Whether such an instrument should or should not be called a capital good is a
question of mere nomenclature; but in this treatise we consider that every part of
what we term capital produces an income, and therefore a no-rent instrument is
not a capital-constituting good—otherwise termed a capital good.
[2] If the fund for replacing a costly capital good, such as a ship or a building,
were allowed to accumulate for a term of years before being spent, the parts of it
remaining on hand for some time would earn interest for their owner, and in his
bookkeeping this would figure as reducing the amount he must save from the
product of the ship or the building in order to replace it. This does not affect the
general law of self-replacement, for the ship or building really produces what
results from this compounding.
[3] In computing both of these values for comparison one should use a labor-cost
standard, and we shall later see under what limitations such a standard may
legitimately be used.
[4] The claim that rent is not an element in price making might be made in the
case of artificial instruments of production as reasonably as it can be made in the
case of land. If it means that the existence of the rent has no effect on price, it is
wholly incorrect in both cases. The statement may be so changed as to tell what
is true concerning the rent of land, and it will then also tell the truth about the
product of the artificial instruments, which is interest in its original form. These
statements may be made in parallel columns, and one will be as true as the other
and no truer.

A needed part of the supply of wheat is A needed part of the supply of woolen
grown on marginal land. cloth is woven on marginal looms.
The price of the cloth must pay for the
The price of the wheat must pay for labor and capital that, in the woolen
the labor and capital used on this land. manufacture, are combined with these
looms.
The price of cloth woven on good
The price of wheat raised on good land looms is the same as that of equally
is the same as that of wheat raised on good cloth woven on marginal ones,
the marginal zone, and it affords a and it affords a net surplus above the
surplus above wages and interest paid cost of maintaining the stock of looms
by farmers for labor and capital used in and the wages and interest paid by
the tilling of the good land. manufacturers for further capital used
in connection with the good looms.
The existence of this surplus in its The existence of this surplus in its
original form, that of wheat, affects the original form, that of cloth, affects the
supply and the price of that product. supply and the price of this product.
The fact that farmers pay landlords for The fact that entrepreneurs pay
this surplus has no effect on the price capitalists for this surplus has no effect
of wheat. on the price of cloth.

The more important facts concerning rent have reference to the original form of
it, namely, a product in kind. Whatever constitutes a part of the supply of
anything affects the price of it. The surplus afforded by good looms is an
element in the supply of cloth, and that afforded by good land is an element in
the supply of wheat. They make these two supplies larger than they would
otherwise be, and of course they are of cardinal importance in determining price.
The rent of anything is an element in the supply of some kind of goods, and the
annihilation of it would reduce the supply and raise the price of product in
which, in its first estate, it consists.

CHAPTER XII
ECONOMIC DYNAMICS

The Efficiency of Static Forces in Dynamic Societies.—The static state
which has thus far been kept in view is a hypothetical one, for there is no
actual society which is not changing its form and the character of its
activities. Five organic changes, which we shall soon study, are going on in
every economic society; and yet the striking fact is that, in spite of this, a
civilized society usually has, at each particular date, a shape that conforms
in some degree to the one which, under the conditions existing at that date,
the static forces acting alone would give to it. It is even true that, as long as
competition is free, the most active societies conform most closely to their
static models. If we could check the five radical changes that are going on
in a society that is very full of energy,—if, as it were, we could stop such an
organism midway in its career of rapid growth and let it lapse into a
stationary condition,—the shape that it would take would be not radically
unlike the one which it had when we interposed the check on its progress.
Taking on the theoretically static form would not strikingly alter its actual
shape. The actual form of a highly dynamic society hovers relatively near to
its static model though it never conforms to it. In the case of sluggish
societies this would not be true; for if in one of them we stopped the forces
of growth and waited long enough to let the static influences produce their
full effects, the shape to which they would bring the organism would be
very different from the one which it actually had when its slow progress
was brought to a stop. Most efficient in the most changeful societies are
forces which, if they were acting by themselves alone, would produce a
changeless state. The reasons for this will later appear.
Differences between Static Forms of Society at Different Dates.—A highly
dynamic condition, then, is one in which the economic organism changes
rapidly and yet, at any time in the course of its changes, is relatively near to
a certain static model. It is clear, therefore, that it cannot, at different
periods, conform even approximately to one single model. If the forces of
change which in 1800 were impelling the industrial society of America to a

forward movement had been suppressed, and if competition had been
ideally free and active, that society would before long have settled into the
shape then required by the forces which, in the preceding chapters, we have
described. Some labor would have moved from certain occupations to
others and gained by the change; and this movement of labor would have
ended by making the productive power and the pay of a unit of this agent
uniform in all the different subgroups of the system. Capital would have so
apportioned itself as to level out inequalities in its earning power. The
profits of entrepreneurs would have been equalized by becoming in all
cases nil, and the best available methods of production would everywhere
be found surviving and bestowing their entire fruits on laborers and
capitalists. All this is involved in saying that the static model, the form of
which was determined by the conditions of 1800, would have been realized.
This would have been brought about by suppressing at that date the forces
which cause organic change and by giving to competition a perfectly
unobstructed field. If we had done this in 1900, instead of at the earlier date,
economic society would, in a like way, have conformed to the shape
required by the conditions of 1900; and this would have been very different
from the shape which the static forces would have given to society a
century earlier. There is an ideal static shape for every period, and no two of
these static shapes are alike.
Differences between the Actual Shape of Society and the Static One at Any
One Time.—The actual shape of society at any one time is not the static
model of that time; but it tends to conform to it, and in a very dynamic
society is more nearly like it than it would be in one in which the forces of
change are less active. With all the transforming influences to which
American industrial society is subject, it to-day conforms more closely to a
normal form than do the more conservative societies of Europe and far
more closely than do the sluggish societies of Asia. A viscous liquid in a
vessel may show a surface that is far from level; but a highly fluid
substance will come nearly to a level, even though we shake the vessel
containing it vigorously enough to create waves on the surface and currents
throughout the whole mass. This is a fair representation of a society in a
highly dynamic condition. Its very activities tend to bring it nearer to its
static model than it would be if its constituent materials were not fluid and
if it were never agitated. The static shape itself, though it is never

completely copied in the actual shape of society, is for scientific purposes a
reality. There are powerful influences tending to force the industrial
organization at every point to conform to it. The level of the sea is a reality,
though the motion of the waters never subsides sufficiently to make their
surface accurately conform to it. As vigorously agitated, the water shows a
surface that is nearer to the ideal level than would an ocean of mud, tar, or
other sluggishly flowing stuff. The winds throw up waves a few feet high,
but the fluidity keeps the general surface surprisingly level; and so civilized
society, made as it is of fluid material kept in vigorous agitation, finds, as it
were, its level easily. If in any year we could and should stop the dynamic
disturbances, the economic society would assume the static shape which the
conditions of that year called for as readily as the sea would find its normal
level if winds and tides should completely cease. Static influences that draw
society forever toward its natural form are always fundamental, and
progress has no tendency to suppress them.
Competition a Cause of Rapid Changes in the Standard Shape of Society
and of a Quick Conformity of the Actual Shape to the Standard One.—The
competition which is active enough to change the standard shape of society
rapidly—that, for example, which spurs on mechanical invention and
causes a large profit to be realized in a particular subgroup—has also the
effect of calling labor and capital quickly to the point at which the profit
appears, and, in the absence of any monopoly, reduces this profit to nil and
restores, in so far as this cause of disturbance goes, the equilibrium of the
groups. Under the influence of active competition a particular group
frequently undergoes quick changes which call for more labor and capital,
but it gets them quickly; and, as has just been said, the standard shape of a
society which is in this highly fluid condition does not differ so much from
the actual shape as does that of a society the movements of which are
sluggish. The standard shape is like the hare that moves quickly and
irregularly; while the actual shape is like the pursuing hound, which moves
equally quickly, follows closely all turns of the course, and, if the game
were to stop moving, would in short order close on it.
The Equalization of the Productive Power of Labor and of Capital in the
Different Subgroups.—We have seen that in a static state labor and capital
do not move from subgroup to subgroup in the system, and that this absence
of flow in a fluid body is not brought about by monopoly or by any

approach to it. That, indeed, would obstruct transfers of the producing
agents from point to point; but monopoly is a thing most rigorously
excluded by the static hypothesis. At every point we have assumed that the
power to move is absolute, while only the motive is lacking. The
equalization of the productive power of labor in the various subgroups
precludes the migration of labor, and a like equalization precludes a
migration of capital.
Equalization of Productive Powers within the Subgroups.—Not merely
must each unit of labor or of capital be able to create as much wealth in one
subgroup as in another, but within the subgroup—the specific industry—
each unit must be able to create as much under one employer within the
industry as under another. The different entrepreneurs must compete with
each other on terms of equality, and no one of them must be able to wrest
from a rival any part of the rival's patronage. So long as one competitor has
an advantage over another in his mode of creating a product, there is no
equilibrium within the subgroup. The more efficient user of labor and
capital is able to draw away labor and capital from the less efficient one,
and the self-seeking impulse which is at the basis of competition impels
him to do it. The producer who works at the greater advantage is
foreordained to underbid and supplant the one who works under more
unfavorable conditions. That a static state may exist and that the movements
of labor and capital from point to point may be precluded, every competitor
within a subgroup must be able to keep his business intact, hold his
customers, and retain in his employment all the labor and the capital that he
has.
Equality of Size of Productive Establishments not Necessary.—Size is, as
we shall see, an element of efficiency, and the great establishment often
sells goods for less than it would cost a small one to make them. The small
manufacturer often finds that he would best become a mere merchant,
buying some of the products of the great mill and selling them to his
customers, rather than continue making similar goods. In the general market
an approach to equality of size is usually necessary in order that
competitors may be on even terms. This does not preclude the survival of
many small establishments. The local retailers have an advantage over great
department stores in the filling of small orders. When one has to buy what
costs a dollar it does not pay to spend a dime in car-fares, and waste a

dollar's worth of time in order to secure the thing for ninety cents.
Weariness to customers is here the element that gives to the small producer
his advantage and enables him to keep that part of the business which
comes in the form of many small orders; but small producers often have
other advantages than those which depend on location. In a shop which is
more like that of a craftsman of three centuries ago than it is like the great
furniture factory, a cabinetmaker can make a single chair of a special
pattern more cheaply than the great manufacturer can afford to do it. The
great shop requires that there should be many articles of a kind turned out
by its elaborate machines in order that the owner should get the benefit of
their rapid and unerring action. There will long be at work hand presses
much like those used by Benjamin Franklin, besides the complicated
automata which do the bulk of our printing, because for printing a dozen
copies of anything the lever press is the cheaper. There will be shoemakers
who not only mend shoes but occasionally make them for customers who
want other than standard kinds; and local tailors are sure to survive. Only in
the general market and in the making of standard goods is size essential to
success.
A Considerable Number of Competitors Assumed.—The most striking
phenomenon of our time is the consolidation of independent establishments
by the forming of what are usually called trusts; and this and all the
approaches to it are precluded by the static hypothesis. There is a question
whether, after competition has reduced the establishments in one subgroup
to a half dozen or less, they would not, even without forming a trust, act as
a quasi-monopoly. This question we have at the proper point fully to
discuss, but here it is necessary to assume that nothing which creates even a
quasi-monopoly exists. We shall find that competition usually would, in
fact, survive and be extremely effective among as few as five or six
competitors, till they formed some sort of union with each other. To avoid
all uncertainty we assume that in the static state in which values, wages, and
interest are natural and in which each subgroup has its perfectly normal
share of labor and capital, there are competitors enough in each occupation
to preclude all question as to the continuance of an active rivalry.
Static Values and Prices.—The equilibrium referred to requires that all
values should stand at their static levels, which means that the prices of
goods should be the "cost prices" of the older economists. The entrepreneur

should make no net profit on the goods he is producing. The wages of labor
must be productivity wages, since each man must get the amount of wealth
that he brings into existence. Interest on capital needs, in like manner, to be
productivity interest, and each unit of capital must get the amount it creates.
Moreover, the prices of goods, as expressed in money, must be accurate
representations of the comparative values of goods. All these features mark
the static state; but the most obvious mark of distinction is the absence of
movement from group to group. We shall see that values are ultimately
measured in marginal labor, and as the value of money is measured in the
same way, it follows that the price of each article, as expressed in money, is
in a static state a correct expression of the comparative amount of labor that
will make it. And the entire relation of commodities to each other and to
labor can be expressed by the medium of currency. If a unit of labor
produces gold enough to make an eagle, and if any commodity sells for ten
dollars, it will be safe to infer that it is also produced by one unit of labor. If
one commodity sells for ten dollars and another for five dollars, the former
is the product of twice as many units of marginal labor as is the latter. This
remains true only while currency continues to be in its normal state and all
other static adjustments continue complete.
Influences that disturb the Static Equilibrium.—It might seem that the
influences that disturb such a static equilibrium are too numerous to be
described; and yet these changes may be classed under five general types:—
1. Growth of Population.—The supply of labor is increasing, and this fact
of itself calls for continual readjustment of the group system.
2. Increase of Capital.—The amount of capital is increasing, and this
change also disturbs the static equilibrium and calls for a rearrangement. As
far as wages and interest are concerned, the effect of this latter change is the
opposite of that which follows an increase in the amount of labor. When
people become more numerous, other things remaining equal, their
individual earning capacity becomes smaller. The increase of capital
reduces the earning power of each unit of the supply of it and depresses the
rate of interest; but it raises the rate of wages, for it causes labor itself to act
more efficiently.

It is to be noted, indeed, that when new laborers enter society they become
consumers as well as producers, and this affects the utility and the value of
goods. When more people use a given amount of consumers' wealth, values,
measured in ultimate units of utility or disutility, rise. An increase of capital
does not directly neutralize this effect, since it does not change the number
of consumers; but it multiplies commodities and brings down their utilities
and their values. The rise of "subjective" values which follows an influx of
laborers is an indication of diminished wealth per capita, and the reduction
of values which follows an influx of capital is a sign of increased wealth per
capita.
3. Changes of Method.—Changes take place in the methods of production.
New processes are devised, improved machines are invented, cheap motive
powers are utilized, and cheap and available raw materials are discovered,
and these changes continually disturb the static state. There are certain to be
improvements on the older methods of production, for a law of the survival
of the fittest insures this.
Under competition the process that, with a given amount of labor and
capital, turns out a larger product inevitably displaces one that turns out
less. The employer who is using the better method undersells those who use
inferior ones, and forces them either to improve their own methods or to go
out of business. Working humanity as a whole is therefore making a
constant gain in producing power, as man's appliances equip him more and
more effectively for his conflict with nature and enable him to subjugate it
more rapidly and thoroughly. It would seem that they ought to have only
good effects on wages, and in the long run they invariably do have such
effects. In the absence of improvements there would be little hope for the
future of wage earners. The immediate effects of improvements upon
individual workers, as we shall see, are not always unqualifiedly good, but
the essential effect is the general and permanent one, and the character of
this has been attested by past experience too fully to be in doubt. In
improvements in production lies the hope of laboring humanity. Nearly the
whole earning power of the labor of the present day is the result of
improvements that have taken place in the past, though these gains have not
been secured without causing local and temporary hardships. If in the future
the wages of labor are doubled or quadrupled, as the result of a series of
improvements beginning now and extending to a remote period, this

progress cannot be secured for nothing. The costs will be less than those
attending improvements of the past, but they will be real. The most
important fact is that they tend to become fewer and smaller and that the
gains immeasurably exceed them.
4. Changes in Organization.—There are changes in the mode of organizing
the establishments in which commodities are produced, and so far as these
occur under a régime of active competition, they also are improvements and
give added power of production. The mills and shops become larger and
relatively fewer. There is a great centralizing movement going on, since the
large shop undersells and suppresses the smaller one, and combinations
unite many great shops under one management. The effect of this, when it
takes place in a perfectly normal way, is akin to that of improvements of
method. It benefits society as a whole somewhat at the cost of individual
members of the body, and it causes wages to rise by adding continually to
the wealth-creating power of the men who earn them. We shall see that
when consolidations repress competition their effect is far from being thus
wholly beneficial, and that not only are particular persons injured by them,
but the community as a whole has a serious bill of charges to bring against
them. The securing of the gains that come by consolidation without such
evils is an end the realization of which will tax the statesmanship of the
future.
5. Changes in Consumers' Wants.—The wants of consumers are changing.
They are growing more numerous as well as more refined and intellectual.
This expansion of desires follows the general increase of productive power,
since every one already wants some things that he cannot procure, and all
society has a fringe of ungratified wants just beyond the limit of actual
gratification. Even if all these wants that are now near the point of actual
satisfaction were to be satisfied, the desires would at once project
themselves farther. The mere increase in earning power without any special
education enlarges the want scale, but intellectual and moral growth
coöperates with it in that direction and calls latent wants into an active state.
More and more eagerly do men seek things for which the desire was
formerly dormant. Changes of this kind affect values, cause labor and
capital to move from group to group, and thus cause society as a whole to
produce less of some things and more of others. They sometimes cause

wholly new groups to appear, and draw workers and equipment from the
old ones.
Advantage of Diversity
of Wants.—One very
marked effect of the
diversification of wants
is to increase the
aggregate utility of a
mass of commodity
produced with a given
expenditure of labor.
Measure the whole
wealth available for
consumption on the basis of the labor that it takes to create it, and it will
appear that it has more utility and is worth more to society in consequence
of this evolution that is going on in the nature of the individual consumer. A
given amount of labor benefits most the men whose wants are of the most
varied character. If A, B, and C are three commodities, and if their several
utilities decline, as successive units of them are given to a consumer, along
the curves descending from the letters A, B, and C of the diagram, it is clear
that the man whose consumption is confined to the commodity A gets less
benefit from three units of wealth than does the man who consumes A, B,
and C. The utility of the first unit of A is measured by the vertical line from
A to the line DE, that of the second by the line from A´ to DE, and that of
the third by the line from A´´ to DE. The utility of the first unit of B is
measured by the distance from B to the line DE and exceeds that of the
second unit of A by the difference between the lengths of those lines. In like
manner the utility of C exceeds that of the third unit of A by the difference
between the length of the line descending from C and that of the one
descending from A´´. The declining utility of the income of the man who
satisfies three wants is represented by the slowly descending curve ABC,
while the diminishing utility of the income of the man who satisfies only
one want declines along the sharply descending curve A, A´, A´´.[1]
Changes in Static Standards.—The grand resultant of all the changes that
are going on in the more highly civilized countries is a continual rise, not
only in actual wages but in the theoretical standard of wages. The static or

"natural" rate of pay for labor to-day is higher than it was fifty years ago
and lower than it will naturally be fifty years hence. Removing all
disturbing influences and letting society settle to-day into a perfectly static
condition would reveal the theoretical standard of present wages. Doing the
same thing after a lapse of fifty years would show what would then be the
natural or standard rate; and this would be higher than the present one. Not
only would the actual pay of labor have risen, but the standard to which it
tends to conform would have become higher after every interval. The actual
rate of wages at any one time varies from the standard; but as both rise from
decade to decade, the actual rate hovers all the while within a certain
distance of the standard one.
Effects on Values.—In the same way the values of goods measured in labor
will in general be declining values. At no one time will actual market prices
accurately express the amounts of marginal labor that are required for
producing different articles, but they will approximately express this.
Articles will sell in the market for about enough to pay for the labor that,
when used as marginal labor, suffices to produce them; and as this amount
of labor put into a given article grows less and less, the prices of the goods
will actually pay for fewer and fewer days' labor. The standard price of
anything will be the amount of money that is needed to pay for the labor of
making it, provided always that we are careful to use only empty-handed
labor in applying the test and that we put that labor in the marginal position,
as described in Chapters IV and V, and so disentangle the product that is
attributable to it from that which is imputable to capital. If wages, as paid in
money, remain stationary, normal prices will decline and actual prices will
hover about them in their downward course, so that goods will actually buy
smaller and smaller amounts of labor, or, what is the same thing, labor will
secure as its pay more and more goods.[2]

FOOTNOTES

[1] For studies of the effect of diversified wants, see S. N. Patten, "Consumption
of Wealth." It will be seen that account must be taken first of the natural
expansion of the want which comes from an increase of productive power, and
second of the changes in the quality of the wants to be gratified, which
sometimes go ahead of any change in the productive system and call for new
kinds of commodities.

[2] In measuring the cost of goods in labor, in Chapters IV and V, we
disentangled from the amount of goods which is the joint product of labor and
capital, the part which is attributable to labor only. The mode of doing this is
there more fully stated. The old and crude method of using a labor standard of
value—which assumes that the product of a unit of labor aided by capital will
always buy the product of another unit of labor aided by capital—we must take
all pains to avoid.
In connection with the cost in labor of different articles it is to be remembered
that in agriculture the effect of improvements of method may not always suffice
to counteract the working of the so-called law of diminishing returns, which
insures, with agricultural science in a given state of advancement, smaller
products per capita when there are more men on a given area. That this influence
should preponderate over that of improved processes requires that population
should increase with a degree of rapidity which may or may not be maintained.

CHAPTER XIII
THE LIMITS OF AN ECONOMIC SOCIETY

When we try to establish a standard to which wages generally tend to
conform, the question arises how much of the earth we have in view. Is
there a rate at which the pay of labor in Europe, Asia, Africa, Australia, and
America tends to settle and remain? Is there a common rate of interest that
is normal in all these grand divisions, and are there also general standards
of value for goods which govern their prices in all the markets of the world?
If there are no such standards having universal validity, are there any that
are valid within single geographical divisions? On what principle can we
divide the earth into sections for economic purposes? These are some of the
questions which must be answered if a theory of distribution is to have any
definiteness of meaning, and they arise whenever we try to establish a static
standard of any kind. If we talk about natural wages, we must know in how
much of the world they are natural. The questions become even more urgent
when we try to solve dynamic problems. We shall have to determine the
effects of an influx of labor into the economic society we are studying; but
does this mean an increase of population in the world as a whole? Does an
influx of capital have a similar comprehensive meaning, and does an
improvement in the method of producing some commodity mean a change
in the mode of making it in every part of the world where it is produced at
all? We need to know how extensive the society is whose activities we are
examining.
Characteristics of an Economic Society.—We have said that there are
natural rates of wages, etc., within some area, which we have regarded as
containing an economic society, and we have treated this social organism
much as though it were as isolated and self-contained as would be an
inaccessible island with its population. It has one general market where
values are fixed. A farmer within the area covered by our studies produces
wheat for the whole society, and in one way or another, every person within
the area is a bidder for it. A shoemaker makes shoes and a weaver makes
cloth to offer to everybody. Each part of the organism ministers to the

whole and is ministered to by the whole. Competition is ideally free and in
a sense is universal. The general system of groups made up of the A's, the
B's, the C's, and the H's of our table illustrates the manner in which this
complete and self-contained society is organized. In the static state there is
one standard of wages for all these groups and their subdivisions and one
equally general standard of interest. The price of a commodity, barring
some allowance for cost of carrying it, is uniform everywhere. A reduced
price for A´´´M in any part of the area where this society dwells would set
men bidding for it from every quarter of that area and would thus bring the
local prices to uniformity. So a high rate of pay for labor in one part would
at once lure men from every other part and reduce the high pay to the
standard generally prevailing. The picture is that of a social body having a
large geographical extension and yet intensely sensitive at every point to
economic influences. Prices, wages, and interest everywhere respond at
once to an influence that originates in any part of the extended area. In
technical terms this means that there is perfect mobility of labor and capital
within the group system represented by the table, and that this involves
equally perfect mobility as between parts of the area that the groups inhabit.
Men move from one section of the country to another in response to an
economic inducement as readily as they do from the group A to the group B.
Barriers which divide the World into Economic Sections.—Now it is clear
that in the actual world changing one's place of abode is difficult, and even
sending capital from place to place is somewhat so. Inequalities of earning
power are not leveled out by a quick migration of laborers from China to
Europe or to America. In their methods of production the different regions
are not brought to a uniformity, for there is machine labor here and hand
labor there; and it is vain to expect that machines will quickly become
universal and that the practical arts in America, Africa, and Asia will be
rendered uniform by such a quick adoption of the most efficient processes
as economic law, in the absence of friction, requires.
Boundaries of the Society which is here Studied.—If we take the world as a
whole into the circle covered by our studies, we find that labor, compared
with other economic elements, decidedly lacks fluidity and does not easily
move. So far from being like water, which flows readily and finds its level
quickly, it is more like tar or other viscous stuff, which flows slowly and is
long in leveling out local irregularities in its surface. In the world as a

whole there are regions crowded with people and other regions nearly
unpeopled, and long will it be before some of these differences will be
much reduced. Many centuries, indeed, must pass before they are entirely
removed. If, however, we take the most active part of the world,—western
Europe, most of North America, Japan, and the more fully settled parts of
Australia,—labor will show a degree of mobility that makes it more like the
water of the illustration, and capital within this active center of industrial
operations will be more fluid still. Prices here tend toward certain general
standards, and processes of production and methods of organizing the
forces which do the producing work tend strongly toward uniformity. The
best processes and the best forms of organization tend generally to survive.
There are imperative reasons for studying the economy of this highly
civilized region, the center of the economic activities of the world, apart
from that of the more undeveloped regions.[1]
The Need of a Rule by which a Part of the World may be Treated as an
Economic Society.—This involves finding a way by which we can treat a
limited part of the world much as though it were, for our purposes, the
whole of it. In essential ways the economic center that we have described
does act somewhat as if it were an organism complete in itself. We must
draw a boundary line about the area of active movement, of lively
interchanges, and of general sensitiveness to economic influences, thus
separating it from the broader zone of sluggish movement of capital and
population, of slow response to economic stimuli, and of generally
backward conditions.
Freedom of Movement as a Test.—In Europe, America, and the other
advanced regions goods are carried from place to place so easily and
quickly that there is a tendency toward uniform prices; and such local
differences of price as exist in the case of any commodity do not much
exceed the cost of getting it carried from one place to another, though in the
cost of moving it there must often be reckoned the toll which a government
takes at the customhouse. Capital moves freely, and there is a certain
approach to a general level of interest, though here also local differences of
course survive. The obstacle to the moving of capital from one place to
another, if the owner does not go with it, is occasioned mainly by the risk it
encounters and by a virtual bill for insurance. With allowance for this cost,
rates of interest in the region we have described tend toward a general level.

Though labor migrates more slowly than capital, it moves far more rapidly
within the economic center than in the outer zones. Processes of production
are not brought to a complete uniformity within the center, but they tend
powerfully toward it; for while obstructions exist, they surely and not
always slowly yield. With due regard for such differences of method as
those existing between the European ways of making products and the
American ways, we may say that the tendency toward the general survival
of the best methods is too strong to allow any important differences to be
permanent. Everywhere, in short, within the central area there is a strong
tendency to conform to economic standards in the matter of prices, wages,
interest, industrial processes, and forms of economic organization. The
standards are what we have defined as the static ones. If we should stop
progress and all disturbing influences and wait long enough, we should see
values, wages, interest, etc., take a static level throughout the vast area.
This, however, would require that migrations should go on till all
inducement to move from place to place should have ceased to exist.
Population would then have distributed itself over the land in the most
advantageous way, and no body of people would be better off than any
other by reason of the location of their abode. A long period would be
needed to bring about this adjustment even within the circumscribed area
where influences that make for change are very active and where obstacles
are far smaller than they are in the uncivilized regions.
Essential Density of Population.—A perfectly static state requires, not a
perfectly equal distribution of population, but such a distribution that there
is no reason for further migrating. The power of the soil to feed its
inhabitants varies with its fertility. Where the land is highly productive a
dense population may live easily; whereas on a sterile soil even a sparse
population may find natural resources too meager, and men may move to
places which are more thickly peopled and yet may gain by the change.
Moreover, such occupations as manufacturing and commerce require, of
course, a far larger population on a given area than does any form of
agriculture. Some regions are so undesirable as dwelling places that it takes
an exceptional economic reward to induce men to live there. The static state
is one in which, all these things being considered, there is no reason for
changing the place of one's abode. This implies more nearly equal density
per unit of natural resources than equal density per unit of mere area.

Inequality of advantage due to location is what is leveled out, and doing this
does not require nor permit that population should everywhere be equally
dense per square mile or per acre.
Effect of Differences of Occupation.—Regions given over to agriculture
naturally sustain more people than those devoted to grazing, and those
which are devoted to manufacturing sustain more than either. In countries in
which, as in Great Britain, manufacturing is so disproportionately
developed that products must be largely exported, while food must be
largely imported, given areas sustain more inhabitants than they do in any
agricultural or grazing region and more than they do in any region where
grazing and tillage, on the one hand, and manufacturing, on the other, are
well balanced. In mills and shops auxiliary capital so abounds as to take the
place of the abundant land that is available in the other cases for making
labor fruitful, and in villages and cities labor does not overtax the resources
of the soil any more than it does on farms. It has area enough to live and to
work on and tools and materials enough to work with. In a generally
crowded country, the resort to commerce and manufacturing relieves the
pressure on the land, cities abound, and an abundance of capital averts the
danger of a disastrous overcrowding.
An approximately Static Distribution of Population.—The apportionment of
population among the different sections of a country may be nearly normal,
while migration may still go on from that country as a whole to remote
parts of the general area which we include in our present study. There may
be small reason for moving from one part of Germany to another and large
reason for going from Germany to America. This larger movement occupies
a long time, while certain other adjustments may be made more quickly.
Within Germany and within the United States labor may be well
apportioned among the different occupations. There may be in each country
about the right comparative numbers of cotton spinners, iron workers,
gardeners, wheat raisers, etc.; or in other words, the distribution of labor
among the industrial groups may be approximately normal both within the
one country and within the other. It may further be true that the division of
occupations between the two countries in their entirety is about what, in the
conditions now prevailing, economic law calls for. There are certain
industries which now have their habitats in Germany and certain others that
have their habitats in the United States, and this arrangement is partly due

to the comparative density of the two populations. Because there are so
many persons per square mile of land in Germany there is there a certain
preponderance of manufacturing, and there are in America less
manufacturing and relatively more agriculture. In that remote time when the
relative density of the two populations shall become static, America will
have reason to increase the comparative amount of the manufacturing and
thus put herself in this particular more nearly on a plane with Germany.
This occupation has its normal abode in regions of comparatively dense
population, and a gain in comparative density means an increase in the
amount of productive energy devoted to it. The place for the mill is where
the land is crowded, and the better place for the work of tillage is where it is
not so.[2]
How an Unnatural Distribution of Population may be Treated.—So long as
the slow movement of population from country to country remains
incomplete, the ultimate division of occupations between the countries can
never be completely static. It is therefore with a division that is only
approximately static that we have first to deal, and this is realized when in
view of the comparative density of population in the different regions which
now exists occupations are naturally apportioned.

The base line AD of this figure stands for the part of the world in which
economic law works rapidly and encounters comparatively few
obstructions; and the extension of the line represents the lands outside of

this region in which the laws are sluggish in their action. It is as though this
base line were a section of a vast surface including both civilized and
primitive states. AB represents the smallest population per unit of land of a
given quality within the central area, and DC represents the largest, while
the ascending line BC shows the gradations of essential density in the
peopling of different parts of it. At the point A the pressure of the
population on the resources of the soil is least, while at the point D it is at
its greatest. At the point A a man can get much out of the soil as the return
for his own bare labor, while at D he can get comparatively little; and at
intervening points on the base a man gets more than he does at D and less
than he does at A. His gains measured in bushels of wheat, etc., vary
inversely as the density of the population and so decrease from the left of
the figure toward the right till the point D is reached. The occupations of the
different localities are determined by these facts.
How Occupations vary with Differences of Land Crowding.—Crowding the
arable land causes labor to flow naturally to manufacturing occupations,
since in these it is not so greatly handicapped in comparison with the labor
of more sparsely peopled regions. In a cotton mill in Manchester a man may
contribute as many yards per day toward the product of the mill as he would
in a mill in Fall River; but on an English farm one man's labor does not
create as much produce as it does on an American farm. The large amount
of available land per man in America has a great effect on the amount that a
man can produce by tilling it, but it has very little effect on the amount of
the cotton goods that his presence and labor in the mill insure. In raising
crops, therefore, the Englishman is at a more serious disadvantage in
comparison with the American. The fact is expressed in a practical way by
saying that the English labor is cheaper and is therefore more available for
making things that are exported to the distant markets of the world than is
labor of the same kind in America; but the reason for this cheapness is
primarily the land crowding, which reduces the productive power of a final
unit of labor in the former country. Because the man cannot get for himself
many bushels of wheat per annum by working on land he can afford to
work in a mill at a rate corresponding with the value of the produce he
could secure as a cultivator.[3]
General Differences between the Condition of Densely Peopled Regions
and that of Sparsely Peopled Ones.—In a very general way it may be said

that the
comparative
amount of
manufacturing
should naturally
vary directly
with density of
population, and
that the
comparative
amount of
agriculture
should vary
inversely to it.
In computing
density due
regard must, as
has been
indicated, be paid to the quality of the land as well as the area, since a
number of inhabitants which would unduly congest a sterile agricultural
region can be well maintained on a fertile one. In the accompanying figure
the line AD inclosed by the vertical lines represents the part of the earth
which we have called central, and the left side of it is the part of this area
which has the sparsest population, while the right side is that which has the
densest. The rising line BC represents the varying density of the population
in different parts of the broad area we regard as general economic society,
the dotted line EF may be taken as expressing the increase in the part of the
labor and capital of the country devoted to manufacturing as population
becomes denser, AE measures the proportionate number of persons engaged
in manufacturing in the region of sparsest population, and DF measures the
comparative number in the region most densely peopled.
AG and DH represent the numbers engaged in agriculture in the two
regions, and the descent of the line GH represents the predominance of
agriculture in the sparsely populated part and the subordination of it in the
part that is densely populated. If we assume that capital in the different
types of employment varies as does labor, the descent of this line toward the

right means a decline in the fraction of the whole force of labor and of the
whole fund of capital devoted to cultivating the soil; while the upward trend
of EF means the enlarging proportion of labor and capital devoted to
manufacturing as we pass from a region of sparse population to regions
more and more crowded. The wavy character of the two dotted lines is
designed to express the fact that local conditions other than mere density of
population favor the one type of occupation rather than the other; and
moreover, nothing in the figure is intended to mean that the increase in
manufacturing and the comparative decrease in tillage from the left of the
diagram to the right are in any exact numerical proportion to the increase in
the density of population. The figure as a whole rudely represents the fact
that an approximation to the static distribution of population insures an
approximation to a static apportionment of occupations within the described
area and indicates the general nature of that apportionment.
How Cost of Production and Cost of Acquisition are Equalized.—The costs
of moving goods from place to place—including in these costs commercial
charges and duties imposed by governments—are the cause of most of the
manufacturing that is done in the region represented by the left side of the
diagram, except the production of such articles for immediate or local
consumption as are necessarily made at or near the places where they are
used.[4] Tailoring, blacksmithing, carpentering, general repairing, etc.,
would always be done in that region, but many kinds of staple goods
capable of being transported would, in the absence of duties on imports, be
made chiefly in the region of dense population and cheap labor.
The general rule for determining whether a branch of manufacturing can
survive in the area of abundant land and well-paid labor is as follows: it can
do so if the cost of making the article which this branch of business is
devoted to producing is as low as the cost of acquiring it by exchange. The
cost may in both cases be reduced to bare labor and the rule will then stand
thus: if ten days' labor will make the article and if nine will make something
that can be exchanged for it—i.e. if all the costs of the exchange can be
covered and the thing can be brought from abroad for a total expenditure of
nine days' labor instead of ten—the manufacturing of that article will not
survive. In a region of abundant land and well-paid labor it is chiefly the
tolls which governments exact which make it as costly an operation to get
the manufactured products by producing other things to barter for them as it

is to make them directly. Density of population, overworking of land,
meagerness of returns to agricultural labor—these are the conditions that
primarily fix the habitat of most kinds of manufacturing. In the case of
particular products these influences may be overcome by the presence in
limited parts of the sparsely settled area of exceptional natural advantages
for production. Natural gas, special ores, particular kinds of lumber, etc.,
may draw some branches of manufacturing to the region of fertile land and
high wages; but as the comparison which we are making is the most general
one which it is possible to make we are safe in our assertion that, in the
main, manufacturing processes tend, in the absence of exceptional
influences, to concentrate themselves in the region of dense population and
of meager earning power of labor.
The Approximate Static Adjustment of Prices.—In the main, and with tariffs
as they are, the price of raw products is somewhat lower at the left of the
figure, while that of highly wrought merchandise is markedly lower at the
right of it; and with the comparative density of population as it is and with
no change of commercial policy on the part of governments, this condition
may be expected to continue. It is an approximately static adjustment of
prices. Purchasing manufactured goods in Europe will long be profitable if
they can be passed duty free through the customhouse, while food will be
somewhat cheaper in America.

Static Wages and Interest.—As has been said, the wages of labor are
comparatively low at the right and high at the left of the figure, while
interest varies in the two regions in the same way. It is lower in the crowded
area. This is not because of the presence of many men, for this influence
alone would tend to sustain the productive power of capital and the
consequent rate of interest, and in fact the interest on capital in Europe
would be lower than it is if the population there were sparser. The rate
which prevails is fixed by the productive power of a very large fund of
artificial capital utilized by a large population meagerly supplied with land.
This last item is decisive in the case and is a primary cause of low interest.
The full statement of these facts, made in graphic form, shows an ascending
line of density of population, as we proceed from left to right, an ascending
line of price for raw produce, a descending line of price for highly wrought
merchandise, and descending lines for wages and interest. All these lines
represent the facts in a broadly general way. They deal with averages and
not with particular rates. The labor whose earning power descends along the
line numbered 5 is of many kinds, and the produce of which the average
values vary along the lines numbered 2 and 4 is of many varieties. The rate
of ascent or descent of the lines has no especial quantitative significance,

and it is therefore not implied in the figure that wages decline more rapidly
than the other factors. Moreover, it is such large areas as those of England,
Germany, France, or the Mississippi Valley, including both cities and rural
lands, that we have in mind when we speak of the density of population as
ascending along the line numbered 1. Anywhere we expect to find cities
containing more persons to the acre than rural districts. The purpose of the
figure is to enable us to take in at a glance five different adjustments that in
the main are to be regarded as approximately static within the great region
described as the economic center of the world.[5]
Slow Change of
the Foregoing
Adjustments.—
The line which
represents the
comparative
density of
population is of
course slowly
changing
position as
migration goes
on from the
older centers of
population to
more newly occupied regions. If the present distribution of population be
represented by the line numbered 1, the distribution a hundred years hence
may be represented by the dotted line numbered 2, and that which will exist
after five hundred years shall have passed may be represented by the dotted
line numbered 3. Even within the economic center the comparative density
of population in different divisions is therefore not to be treated as strictly
permanent, and it is not to be treated as in any sense permanent when we
are forecasting effects that will be realized several centuries hence. For a
problem involving a score or two of years the general conditions we have
described may be treated as, in the main, abiding.[6]

FOOTNOTES

[1] This is far from implying that economic laws do not work in the excluded
outer area or that no effects are produced within the central area by causes that
originate in the outer zone. How these things take place we shall later see.
[2] It will appear that manufacturing reacts on the density of population, first, by
retarding emigration from the thickly populated country as a whole; and
secondly, by causing local movements within the country, whereby cities and
villages grow, and relieve what would otherwise be an excess of labor in
agricultural regions.
[3] In this connection see the discussion of the principles of international trade in
J. S. Mill's "Principles of Political Economy," Book III, Chapter XVI.
[4] There can be no large area from which manufacturing is excluded. The rural
hamlet has its blacksmith, wheelwright, and carpenter, its sawmills and
gristmills; and manufacturers of sashes, doors, furniture, and many implements
abound where agriculture is the general industry. Special advantages for
production insure the introduction of other industries, and the advantages of
being near to customers is enough to maintain many of them. Repairing must, of
course, be done everywhere, and in making some articles for local use it is best
that the artisan should be where the customer can always reach him. A large cost
of transportation favors local industries, a high degree of productivity in
agriculture has an unfavorable influence, and a protective tariff on manufactures
reduces the returns from agriculture and favors manufacturing industry.
[5] The law of the distribution of occupations over the area represented by the
diagram would, if it were more fully developed, present an amplification of the
law of International Trade stated in Mill's "Political Economy," according to
which countries naturally produce, not only the things for the making of which
they have the greatest absolute advantage, but those for which they have the
greatest relative advantage.
[6] The reason for confining attention to the central zone is partly, as we have
stated, because here only do we get a quick response to an economic influence.
Overproduction of any article quickly lowers the value of it throughout the area,
and a mass of unemployed laborers affects wages throughout the area more
speedily than it does in the great environing zone.
This, however, is only one reason for this limitation of the scope of our
immediate study. A serious fact is that, if we include the entire world, we cannot
establish, in the way we have proposed, the natural standards toward which
values, wages, and interest are tending. It will be recalled that in the static
division of this treatise we have attained a "natural" standard of wages by
assuming that all dynamic changes were to cease and that labor and capital were
to move to and fro in the system of industrial groups till each of these agents
produced as much in one subgroup as in another. A computation of this kind
might, within a limited area, be made periodically, say once in ten years, and if
this were done it would give a series of static standards of wages. Now these

standards become higher as time advances. The static rate of pay for labor is, as
a rule, higher at any one date than was the standard for a date ten years earlier,
and lower than will be that for a date ten years later. The normal rate of pay
about which actual wages fluctuate is a rising one.
Now, if we introduce in imagination an absolutely static state for the world at
large, we shall have to assume that growth of the general population and
increase of the aggregate capital both cease, and that inventions and new
coördinations are no longer made. We must then wait long enough to allow static
distribution of industries to be made over the whole world and to let each
industry find its absolute habitat. This would involve causing methods of
producing any commodity to be unified the world over. Hand labor in the Orient
would have to give way to machine production, as it has done in Western lands.
For a strictly static adjustment indeed even the density of population in the
different sections would have to be brought to a virtual equality. While this
nearly interminable process was going on, it would be needful that such dynamic
changes as inventions and discoveries bring in their train should be absolutely
precluded. Stop making new kinds of machinery and wait for centuries to allow
a static adjustment to be made over the whole earth—such would be the order.
Now, such a test as this would show falling wages in the more favored parts of
the earth, whereas the facts show rising wages. The influx of population from the
East, unrelieved by a corresponding influx of new capital and by more fruitful
methods of production, would cause the earnings of an American laborer to fall,
and we should, on the basis of such a test, conclude that his wages in the long
run are destined to become lower in consequence of the movement of the vast
populations that now congest great Asiatic countries. We should have vitiated the
problem by holding the growth of capital and the progress of invention in
abeyance. This may be done within a limited area without giving a false result,
because there adjustments are more rapid, and waiting for them does not involve
the long-continued paralysis of the powers that make for greater wealth for
laboring humanity. Apply the test of the static state to the economic center, and it
will give a generally true result; but it will give a false one if it be applied to the
world as a whole. The merely static adjustment of the world would take more
centuries than we care to reckon, and no truth that we are seeking is revealed by
assuming that for such a period the forces of progress are brought to a standstill.

CHAPTER XIV
EFFECTS OF DYNAMIC INFLUENCES WITHIN THE
LIMITED ECONOMIC SOCIETY

How the General Unification of Methods of Production Calls at First for an
Increased Exportation of Capital from the Central Area and Checks the
Immigration of Laborers.—A study of the causes of the interchanges which
take place between the economic center and its environment shows that the
movement of goods, the diffusion of modern methods of making goods, and
the movements of capital and labor across the border of the economic
society we are studying are interdependent. Opening a field for a profitable
export trade increases the productivity of labor at home and tends to attract
immigration. On the other hand, establishing in the outer zone a market for
the products of the center prepares the way for introducing modern
manufactures into the more densely peopled parts of the outer area. The
company that sells cotton goods to the Chinese or the Hindoos will find that
there is more to be made by utilizing the cheap labor of those peoples for
making the goods by efficient machinery. Commerce tends to diffuse a
knowledge of the most economical processes of manufacturing, and this
interposes a certain stay on migrations of labor toward the center. It will in
time help to retain Chinamen in China and Hindoos in India. It does,
however, cause a movement of capital from the center outward, followed in
time by a creation of wealth in the outer zone for proprietors residing within
the center. The Englishman draws dividends from investments in many
lands not within the field covered by the present studies. In so far as he
reinvests them, as capital, in those lands, they supply a need that, without
them, would have to be supplied by a new exportation of capital from the
home country, and they therefore tend to check such exportation. In so far
as the dividends are brought home they directly neutralize a certain amount
of exportation of capital.
Effects experienced within Economic Society from Interchanges with the
Environing Area.—The introduction of improved methods of production

within the central area usually calls for an expenditure of capital there, and
this is largely furnished from the net profits from previous economies in
production, and will, in its turn, furnish net profits that will convert
themselves into the capital needed for applying future inventions. The study
of the causes of an increase of capital, as well as of each of the generic
changes that are going on within the center we defer for later chapters; but
at present we need to know that the changes going on within what we
define as economic society are affected by the intercourse which that
society maintains with its environment. Immigration across the outer
boundary of the general division enhances the rapidity of growth of the
population within it, while emigration reduces it. Exporting capital in itself
reduces the rate of accumulation at home, and importing increases it.
Introducing into foreign regions economical methods in use at home,
modifies the trade which goes on between the great areas, and there is a
perpetual rivalry between the direct and the indirect process of obtaining
goods at home. When a unit of labor can directly make more of A´´´ than it
can procure by making A and exchanging it abroad for A´´´, the
manufacture of A´´´ is legitimate and profitable, but when the unit of labor
can procure more of A´´´ by the indirect process in which an exchange with
a foreign region intervenes, static law requires that this indirect process be
resorted to. We should make A and buy A´´´ in order to get the most of the
latter commodity. This is the essence of the time-honored argument for
freedom of trade, but the conclusion to which it leads is modified by a
consideration of further dynamic influences which will, in due time, be
presented.
How we may get Valid Results by Studying only a Part of the World.—It is
entirely possible to study by themselves the activities of such a part of the
world, and we will therefore draw a line of demarcation about the countries
which constitute the economic center of it, and thus include an area within
which economic causes produce speedy effects. Each part of this area
quickly responds to influences that originate in any other part. If the steel
mills in America make radical improvements in their machinery, this
change should, in the absence of a strong monopoly, affect the price of rails
in England, Germany, etc. Within the central region wages and interest tend
toward uniformity, though, as we have seen, they do not attain it. Across the
boundary which separates this center from the outer zone, economic

influences act in a more feeble way and are unable to bring rates of wages
and interest even to an approximate equality. Western Europe, America, and
whatever regions are in very close connection with them, we treat as a
society, with the remainder of the world as its environment. This center
trades with the environing region, sends some capital and labor thither, and
draws some of each thence to the home countries. Willingly or otherwise, it
instructs the people of the outer region in modern methods of industry, and
thus causes what we may regard as a slow annexation of a part of the outer
zone to the economic center and a modification of the character of
industries at home and abroad. The principal movement of labor is in an
inward direction, and from our point of view it is immigration not into one
country merely but into all economic society. The predominant movement
of capital has been outward.
Mode of Studying Interchanges between Center and Environing Zone.—All
these movements have to be recognized in a study of the economic life of
the central society. How, for example, is commerce with undeveloped
regions to be regarded if we have the center only in view? It is simply one
of two possible ways of getting goods. The people of the center can make a
commodity that they use, or they can make something to send into the
outlying countries in exchange for it. In the latter case they acquire it
indirectly rather than directly, but they acquire it by their own industry in
the one case as well as in the other.
Natural Selection of Modes of procuring Usable Goods.—Under natural
influences, as we have said, men select the most economical way to get
what they use, or—what is the same thing—they select the mode of
utilizing their own labor and capital that will give them the largest return in
goods. There is competition between different methods of directly making
goods, and the best method survives. The man with a good machine
undersells the man with a poor one; this latter producer must improve his
equipment, or fail, and appliances thus tend toward a maximum of
efficiency. In like manner there is competition between the direct and the
indirect mode of obtaining goods. The man who, by using a certain amount
of labor for a week in making steel for exportation, can obtain in exchange
fifteen yards of silk, can undersell and drive from the field the man who, by
using the same amount of labor for a week in silk making, can produce ten
yards of silk. The importer naturally supplants the manufacturer when, by

bartering with foreigners the product of a given amount of labor, he can get
from them more than can be produced at home by the same amount of
labor. The manufacturers naturally survive when direct production gives the
larger returns. In our studies of the economy of the society that is most
advanced and central, we may treat whatever is imported as, in an indirect
way, produced. In a sense the activities of that society are nearly self-
contained since, by the direct or the indirect method, the people produce
within their own boundaries the most of what they consume. In doing so
they naturally use with a maximum of economy the forces at their
command, and resort to traffic when that is profitable.
Mode of Treating the Exportation of Capital.—Capital is moving across the
boundary mainly in an outward direction. This fact, standing alone, would
be equivalent to a mere retarding of the rate of increase of capital within the
economic center; but the exported capital, as it is used outside of the
exporting society, produces an income for owners living within it. The
income comes in kind, since it takes the form of goods which are an
addition to those imported in the course of ordinary exchanges. This tribute
paid to capitalists within the industrial center comes chiefly in the form of
consumers' goods, the receiving of which does not entail the producing of
something to send away in exchange for them. The material agent which
creates the imported goods remains outside of the society, and sends its
product into the society with no offset. The fact of such an income coming
from beyond the pale of an economic society has compelled us to qualify
the statement that the economy of the society is self-contained, for there is a
small part of its income which is not created within its borders. This comes
about by the exportation of capital and the importation of some of its
products.
Effects of Drawing Interest from Investments beyond the Social Boundary.
—Not all of these are consumers' goods. Some capital goods are imported
and, moreover, many consumers' goods are passed over to the group called
HH´´´ in our table,—the one that makes active instruments of production,—
and in this indirect way the earnings of capital invested abroad add to the
amount of capital at home. In the long run the exportation of funds for
permanent investment may, by its other and more indirect effects, increase
the supply of them at home. The literal fact in each year is that what is
exported is itself a reduction of the amount that would otherwise be added

to the home supply, but that the income accruing from what has been
exported in earlier years makes an addition to what is in this year
accumulated at home. Primarily, the exportation of capital is to be treated as
causing a modification of the rate of accumulation of capital and, in a long
term of years, an increase of the rate.
Movements of Labor.—Laborers cross the boundary in both directions, but
inducements favor the inward movement. In the absence of positive
obstacles the denser populations of Asia could overflow into America with a
startling rapidity. Such a movement, on whatever scale it occurs, is to be
treated as causing an acceleration of the rate of increase of the population
within the center. Whatever results arise from growth of population within
are emphasized by immigration.
The Assimilation of Economic Methods and Forms of Organization.—
People without the center are borrowing from it the newer and more
efficient methods of production. Already Asiatics are making some things
by machinery, and when they shall do it more generally there will take place
changes that will be very revolutionary in their own economic life and will
react on the life of the center itself. Learning to use a thousand and one
machines will rend China and disturb Europe and America. In general,
better appliances and a more efficient organization will make it possible for
Asia to create for herself, and ultimately export much that she now imports,
and this will react on the character of the industries of America and Europe.
We shall somewhat modify our industries in order to get the benefit of new
openings for commerce, and some of the things which we now directly
produce we may find it more profitable to get by exchange, which is
indirect production. On the other hand, some foreign products which we
now get with great economy of labor, because the goods we exchange for
them are scarce and dear in the countries that receive them, we shall get on
less favorable terms, because the goods we now send to the foreign lands
will have become there more abundant and cheap. In general, we must
regard the opening of a profitable avenue for trade as we should the
invention of a new machine, the discovery of a better electrical transmitter,
or the utilizing of a cheaper motive power. It gives us more goods as the
fruit of a given expenditure of labor and capital and affords a profit which,
as we shall see, comes first to entrepreneurs and later to laborers and

capitalists within the pale. Ultimately, those living beyond the pale will get
a share of this gain.
Summary of Facts concerning the Economic Center.—We may, then, regard
a certain limited part of the world as a society in itself. It is modified by its
environment, but, in an important sense, it has a self-contained life. The
economic changes which go on within it can be grouped under the five
generic heads: increase in the amount of labor, increase in the quantity of
capital, improvement of method, improvement in organization, and changes
in the wants of the individual consumers.
The Geographical Boundaries of Society not Fixed.—The boundaries of
this central area are not fixed. As relations between the center and the part
of the outer zone which is nearest to it become more and more intimate, the
adjacent region takes on the character of the center. It is, in an economic
way, assimilated to it; and in this way the center may be regarded as
annexing to itself belt after belt of the environing world. Ultimately it will
doubtless annex the whole of it; and for this reason, even though we confine
our studies to the center, we shall establish a system of economic laws
which will apply, in the end, to all the world. This indeed is not the only
way in which the economic life of the outer area comes into the economist's
purview, for he can study it for itself. This zone has its peculiar life, which
is a distant reflection of the life of the center. It is a type of economic
activity in which all the primary forces work, but in which friction abounds
and adjustments are made with extreme slowness. For the present, what
interests us is the life of the center itself, and in studying this we take
account of the influence of the environment. The effects of these influences
are first seen in changes in the rate at which the five general dynamic
movements go on within the center. The grand resultant is more rapid
progress within the center.
What is involved in a Full Study of the Relative Density of Populations.—A
full treatment of the subject of the comparative density of population in
different places would include an extended study of the kinds of industry
which find their natural homes in densely peopled countries and of those
which flourish in sparsely peopled ones, and a much more detailed tracing
than it is possible here to undertake of those changes in the character of
industries everywhere which result from a leveling out of differences in

population. Clearly, if all America were to become as crowded with
inhabitants as are Holland and Belgium we should develop industries of a
different type from those that we now have, and the change would be in the
direction of producing relatively more form utilities and relatively less of
the elementary utilities. Labor and capital would move from the subgroups
which in our table we have called A, B, and C toward A´´´, B´´´, and C´´´.
We should spend more of our energy in making finished goods and less in
getting raw materials. I shall note in a very general way the changes in
social industry caused by increase of population without looking forward to
that remote time when the density of population shall be equalized.
Why an Approximately Static Adjustment of Industries within the Central
Area permits Unequal Density of Population in Different Parts of It.—We
exclude from view the ultimate static adjustment of the whole world, and
content ourselves with an approximate adjustment within society as we
have defined it. Even within this limit there are inequalities in the density of
population which it would require a very long time to remove, and a
perfectly static state cannot be reached till they are leveled out. The
selection of industries in Texas and in Belgium cannot be, in the ultimate
sense, natural till population in these two regions is so adjusted that there is
no longer an economic motive for migrating from the one to the other. If, in
order to determine what an absolutely static condition for the central society
would be, we were to apply the rule of imagining all new dynamic
influences precluded and of allowing time enough to elapse to bring about a
normal apportionment of population within that limited area, we should
encounter a measure of the same difficulty which confronted us when we
proposed to attain a similar static state for the entire world, though the
trouble would be less serious in degree. In waiting long enough for
population to distribute itself naturally, we cut off influences that, within
that period, will affect production and distribution far more than the change
in population will affect them. In so far as Texas or any newly occupied
region is concerned, the changes thus precluded are those which would
have tended to reverse the effect of the redistribution of population.
Migrations from Belgium to Texas, if extensive and long continued, would
reduce the productive power of labor in Texas; while the dynamic changes
which will actually go on within any such period will increase the
productive power of that labor, and it is not certain whether the one or the

other influence will predominate. For the United States as a whole it is
probable that progress in the useful arts will more than offset the influx of
new laborers and give to wages a rising trend. If, however, we establish the
natural standard of wages by cutting off such progress and letting the influx
of labor continue, the test would give a standard lower than the present one,
—a false, as well as a discouraging result. The resultant of all the changes
we are about to study will probably give to the future pay of labor in
America a rising trend.
How Industries adapt themselves to Unequal Density of Population.—In
view of this fact it is necessary to recognize a proximate rather than an
ultimate static state as that toward which the adjustments now going on are
immediately tending. We will treat the unequal density of population within
our economic society as something which will last, not forever, but so long
that it will not be removed or appreciably affected within the period
required for the other adjustments that we are studying. Given a population
that is dense in Belgium and sparse in Texas, and competition will cause the
industries to take on the types which they would have and retain if that
difference in density were destined to be permanent. The type toward which
the economic life of both regions is tending is thus a proximate rather than
an ultimate one. Each region will, in the near future, be of the type toward
which influences which do not involve an equalization of population are
impelling it. We get the true direction of the change that is going on in the
earning power of labor and in the shape of the industrial organism in both
regions by recognizing the fact that the differences in the density of their
populations will continue through the period which we are considering.

If the line BC represents the
productive power of a unit of
labor in a region which is sparsely
peopled, and the line B´C´
represents the productive power
of a unit of labor in a densely
peopled region, we may assume
that AC and A´C´, which are equal
to each other, represent the
product of a unit in either locality
when, general progress being
precluded, the difference in the
density of population should have
been leveled out. Move people at
once and in a wholesale manner till there is nothing to be gained by further moving them,—
let pressure of population on the land be fully equalized,—and you may be supposed to create
a condition of uniform productive power for laborers of a given grade in the entire region. The
horizontal line AA´, which is everywhere the same distance above the line CC´, represents the
universal level of the productivity of labor in such a theoretical condition. The line BB´
represents the actual and different levels of the natural earnings of labor in the different
regions. Assuming that all other static adjustments are made, but that the equalization of
population has not taken place, labor will earn the amount BC in one place and the amount B
´C´ in another. Somewhere it will earn an amount represented by the vertical line descending
from D and somewhere that expressed by the line descending from F, while there will be
places where the earnings of labor are measured by the line descending from E, which is the
amount that labor would everywhere create and get if the population could be quickly made
normal in all regions. The standard of wages for the whole of the great region, largely
European and American, which constitutes the economic center of the world, shows varying
levels in different countries and parts of countries, and the actual rates in every place fluctuate
about this proximately normal standard for that place, the standard rate in one locality being
higher than that of another.
The line A´B´ exceeds in length the line AB, and this expresses the fact that equalizing the
pressure of population on the land in different regions adds more to the productivity of labor
in the region now crowded than it deducts from that of labor in regions now sparsely peopled.
The overcrowding does greater and greater harm the further it is carried, and therefore taking
away a surplus of people from a region which has suffered greatly from overcrowding affords
a relief which more than offsets what is lost in other places by a moderate increase of
population. Moreover, the fact has to be recognized that at present there are ten square miles
of sparse population for one that is very densely peopled, and reducing all to an equality
would add only slightly to the number of inhabitants of the regions that now contain few of
them.[1]
If the line BB´ represents the unequal level of natural wages in different localities, on the
assumption that populations remain unequal, the undulating curve DD´ which crosses and
recrosses the line BB´ represents actual local rates fluctuating about the standard ones.

How a Static Adjustment for the
World is a Dynamic Influence
within a Limited Part of It.—
Commodities are, by traffic,
crossing the social boundary in
both directions, and with the
goods there go and come
influences that affect the
economic life of the central
society. Methods and modes of
organizing business are taught by
each region to the other, though
most of the teaching is done by
the people of the center and most
of the learning by those of the
environment. All this affects the center and falls within our study. It has dynamic effects
within the center, though it is only a part of a static adjustment for the world as a whole. If the
grand bank of Newfoundland were to subside to the level of the middle of the Atlantic, there
would be a great rush of water toward the place that the banks now occupy, but this would be
only what is required in bringing the general level of the sea to an equilibrium. It would be
essentially a static phenomenon, but for the region of the banks it would be dynamic in the
highest degree. A rush of population from China to America would be a change tending to
establish an equilibrium of population in the world, but it would be a startling bit of dynamics
for America. Teaching the Chinese all the mechanical arts that we know would be creating an
equilibrium of another sort, in which methods would be similar in the two countries; but for
China itself this acquiring of practical arts would be dynamics acting on a vast scale. What is
a static adjustment for the world is a dynamic change for parts of the world, and all such
changes that can occur within the area of economic society proper and within the period we
can wisely include in our study we need to take into account. Changes in population, wealth,
method, and organization must be studied, however they may originate.

FOOTNOTES

[1] Exceptional local conditions may make an influx of population for a time a cause of greater
productivity rather than of less. The general and permanent effects are otherwise, and it is on these
that the present argument rests.

CHAPTER XV
PERPETUAL CHANGE OF THE SOCIAL STRUCTURE

Perpetual Change of the Social Structure.—We confine ourselves to that economic society
par excellence which we have called the industrial center of the world. In this region
economic influences are forever changing the very structure of the society itself. They move
labor from place to place in the system and they transfer capital to and fro in the same way. If
we think of our table of groups and subgroups as representing the whole of this great
industrial world, we must think of labor and capital as in a perpetual flow from subgroup to
subgroup, making some industries larger and others smaller by reason of every such
movement. The great force of labor and the fund of capital are like restless seas whose
currents carry the water composing them now hither and now yon as the direction and force of
the moving influences change.
Movements of Labor within the Group System caused by Increasing Population.—If the
population were to increase while the amount of capital and the mode of using it remained the
same, the effect would be a downward movement of both labor and capital in the series of
subgroups by which we represent industrial society. Labor and capital would tend to desert
the subgroups A´´´, B´´´, and C´´´ in our table and to move to A, B, and C:—

A´´´ B´´´ C´´´
A´´ B´´ C´´
A´ B´ C´
A B C

Causes of Downward Flow of Labor in the Group System.—A larger population means, of
course, not merely an increase in the amount of labor performed, but also an increase in the
number of consumers. It means more mouths to feed and more bodies to clothe. It entails also,
according to principles that we have already studied, a lower earning power and a lower rate
of pay for labor. This means that simple food, cheap clothing, inexpensive houses,
furnishings, etc., constitute a larger element in the consumers' wealth of society than they
have heretofore done. Society uses fewer luxuries and more necessaries, and the necessaries
of life are products in which raw materials predominate and costly form utilities are wanting.
This makes a heavier draft upon the land than does the production of highly wrought articles
of the same value.
Luxurious articles are fashioned with a great amount of artisan's or artist's labor and a
relatively small amount of the labor of cultivators and miners. The subgroups A, B, and C are
the ones that furnish the rawest materials, and it is they, therefore, that receive the largest
portions of the new labor that enters the field.
How Economic Friction works to the Disadvantage of Immigrants.—Unless capital grows
more rapidly than population, there is a certain friction to be overcome in obtaining places for

new laborers. If they come largely as immigrants, they are crowded at the points of
disembarkation and are then scattered over a large territory. They may have to gain
employment by offering to entrepreneurs some inducement to take them. If capital has not
increased, and the entrepreneurs are in no special need of new men, they will take them only
at a rate of pay which is low enough to afford of itself a slight margin of profit. If the capital
has already grown larger and the new men are needed, the situation favors them, and their pay
is likely to be as high as it was before, or higher.
The Effect of Increasing Capital.—The growth of capital has an opposite effect. It means a
lower rate of interest, though it means more interest in the aggregate, since it insures a larger
fund on which the interest is received. The rate does not decline as rapidly as the amount of
the fund increases, and this insures a larger gross income from the fund; and it also insures
larger individual incomes for many persons. There is, then, a large number of people who are
in a position to make their consumption more luxurious, and this causes an upward movement
of labor and capital in the group system. More workers will be needed in the subgroups A´´´,
B´´´, and C´´´, where raw materials receive the finishing touches, and also in the other
subgroups above the lowest tier. It is to these subgroups that a large portion of the new capital
itself will come, and the labor will come with it. Larger incomes, more luxury, more labor
spent in elaborating goods as compared with that required for procuring crude materials,—
such is the order.
Effect of an Increase of Both Labor and Capital.—It is clear that a certain increase of capital
might practically neutralize the increase of population, in so far as the movements thus far
considered are concerned, and a greater increase of capital would reverse the original
downward movement caused by the increase of labor and result in a permanent upward
movement toward the subgroups A´´´, B´´´, and C´´´. In this case the men occupy themselves
more and more in making the higher form utilities. They make finer clothing, costlier
furniture, etc., and the new production requires proportionately less raw material than did the
old. This is the supposition which corresponds to the actual facts. Capital is increasing faster
than labor, and consumption is growing relatively more luxurious; dwellings, furnishings,
equipage, clothing, and food are improving in quality more than they are increasing in
quantity. Goods of high cost are predominating more and more, and the subgroups that
produce them are getting larger shares of both labor and capital. Population drifts locally
toward centers of manufacturing and commerce. It moves toward cities and villages in order
to get into the subgroups which have there their principal abodes. The growth of cities is the
visible sign of an upward movement of labor in the subgroup series.
A Change in the Relative Size of General Groups.—If all the steady movements of labor and
capital were stated, it would appear that a relative increase in the amount of labor, as
compared with the amount of capital, would enlarge the three general groups, AA´´´, BB´´´,
and CC´´´, and reduce the comparative size of the general group HH´´´, which maintains the
fund of capital by making good the waste of active instruments. Gain in capital estimated per
capita would cause relatively more of the labor and more of the fund of capital to betake itself
to the group HH´´´. The movement toward the upper subgroups which is actually going on is
attended by a drift toward this general group. An increase of luxurious consumption and an
enlargement of the permanent stock of capital goods go together.

Regularity and Slowness of Movements caused by Changes in the Amounts of Labor and
Capital.—The important fact about the movements thus far traced is that they are steady and
slow. They do not often call for taking out of one part of the system mature men who have
been trained to work there. They are movements of labor which do not, in the main, involve
any considerable moving of laborers from group to group. The sons of the men in the
subgroup A do not all succeed to their fathers' occupations, but many of them enter A´, A´´,
and A´´´, so that labor moves from the lowest subgroup to higher ones. Such a transfer of
labor entails few hardships for any one, and in general it is to be said that all the movements
of labor and capital which are occasioned by quantitative changes in the supply of these
agents are of this comparatively painless and frictionless kind. About changes caused by new
methods of production there is a different story to tell. The transformation of the world does
not go on without some disquieting results, however inspiring is the remote outlook which
they afford. The irregularity of the general movement, the fact that it goes by forward
impulses followed by partial halts, is a further serious fact. Hard times present their grave
problems, and we need to know whether it is necessary that dynamics—the natural and
forward movement of the industrial system—should produce them. This problem is for later
consideration.
Movements caused by Changes in the Processes of Production.—Mechanical inventions are
typical movers of labor and capital—constant disturbers of what would otherwise be a
comparatively tranquil state. Dynamos for generating electricity and devices for conducting it
to great distances from its sources have done much to rearrange the society of a score of years
ago, as economical steam engines had done at an earlier date. Every device that "saves labor"
calls for a rearrangement of labor in the system of organized industry.
In a perfectly static condition there would be, as we have seen, a standard shape for all
society, which means a normal apportionment of labor and capital among the producing
groups and subgroups and also among the local divisions of the general area. The elements
would subside to a state of equilibrium and become motionless, as water finds its level and
becomes still in a sheltered pool. The body of fluid takes its standard shape and retains it, so
long as no disturbing force appears. Now, society would have such a standard shape and
would require, in the absence of dynamic changes, a relatively short time in order to conform
more or less closely to it, if it were not for the unnatural apportionment of population in
different parts of the area that the society inhabits and the obstacles which wholesale
migrations encounter. For the solution of problems of the present and the near future we must
accept as a standard the quasi-static adjustment of the population and the consequent quasi-
static selection of industries in the different local divisions of the broad area—the
arrangement that we have described as locating an excess of manufacturing in the more
densely peopled areas and an excess of agriculture in the more sparsely settled ones. With this
qualification it may be said that there is a standard apportionment of labor and capital among
the producing groups, and that these agents gravitate powerfully and even rapidly toward it. If
there were a certain amount of labor and capital at A, a certain amount at B, and so throughout
the system, this standard shape would be attained, and the elements would not move, except
as a very slow movement would be caused by changes in the comparative density of
population of different regions.[1] This standard shape would long remain nearly fixed if it

were not for the appearance of the dynamic influences which are so active within the area we
are studying.
Alternations in the Direction of Movements caused by Improved Methods.—In a dynamic
state this standard shape itself—the approximately static one—is forever changing. At one
time, for example, conditions exist which call for a certain amount of labor at A, another
amount at B, etc. A little later these respective quantities at A, B, etc., are no longer the natural
or standard quantities; for something has occurred that calls for less labor at A, more at B, etc.
If A represents wheat farming, the amount of labor that it required when grain was gathered
with sickles is more than is necessary when it is gathered with self-binding reapers, always
provided that there has been no increase in population, which would require an increase in the
food supply. The society therefore will not be in what has now become its standard shape till
men have been moved from the wheat-raising subgroup to others.
If the invention of the reaper were not followed by any others and if no other disturbing
changes took place, labor would move from the one group, distribute itself among others, and
bring the system to a new equilibrium; but it has not time to do this. It begins to move in the
way that the new condition occasioned by the introduction of the reaping machine impels it to
move; but before the transfer is at all complete there is a new invention somewhere else in the
system that starts a movement in some other direction. Before the labor from A is duly
distributed in B, C, etc., there is an invention in B which starts some of it toward other points.
Why Movements are Perpetual as well as Changeful.—Such improvements are perpetual, and
the dynamic society is not for an instant at rest. If the disturbing causes would cease, the
elements of the social body would find their abiding place; and the important fact is that at
any one instant there is such a resting place for each laborer and each bit of capital in the
whole system. As we have seen, the men and the productive funds would go to these points
but for the fact that before they have time to reach them new disturbances occur that call them
in new directions. Again and again the same thing occurs, and there is no opportunity for
placing labor and capital at exactly the points to which recent changes call them before still
further improvements begin to call them elsewhere.
Why Technical Changes are more disturbing than a General Influx or Efflux of Population.—
When the moving of labor is gradual, it is effected, not so much by transferring particular men
from one occupation to another, as by diverting the young men who are about entering the
field of employment to the places where labor is most needed. When the son of a shoemaker,
instead of learning his father's trade, becomes a carpenter, no laborer has abandoned an
accustomed occupation and betaken himself to another; but labor has gone from the
shoemaking trade to that of carpentering. A man often stays where he is to the end of his life,
although during that life labor has moved freely out of his occupation to others. If we
represent the facts by a diagram, they will stand thus:—

A, B, C, and D represent different occupations or subgroups in the table we have before used.
At one date a static adjustment called for fifty units of labor at A, forty at B, seventy at C, and
one hundred at D. A half decade later, after improvements had taken place at A, B, and D,
static forces, if they were allowed to have their full effect, would leave only forty-five men at
A, and thirty-five at B, but they would place ninety at C and at D. The first movements that
would tend to bring this about are in the direction indicated by the dotted lines. The transfers
are made, not by forcing men from A, B, and D to C, but chiefly by diverting to C young
laborers who would otherwise have gone to A, B, and D to replace men who are leaving in
these groups.
Now, before the transfers are completed something happens that calls for a different
movement. Let us say that only three units of labor have as yet gone from A to C instead of
five, leaving forty-seven at A; only two have gone from B, leaving thirty-eight; and only five
have gone from D, leaving ninety-five at that point. Eighty would then be at C, and the static
adjustment would not have been perfectly attained. It is at this point that a new change of
conditions occurs, which calls for fifty-two units at A, forty-one at B, sixty-five at C, and a
hundred and two at D. C now contributes something to A and B, but it gives more to D; and
the fluctuations go on forever. Particular men may, more often than otherwise, stay in their
places, since the incoming stream of new labor, by going where it is needed, may suffice to
make the adjustments, in so far as they are gradually made; but labor, in the sense of the
quantum of energy embodied in a succession of generations of men, is never at rest. It is a
veritable Wandering Jew for restlessness and in a perpetual quest of places where it can
remain. Moreover, there are to be taken into account changes so sudden that they thrust
particular workers from one group to another.
A Perpetual Effort to conform to a Standard Shape which is itself Changing.—We think, then,
of society as striving toward an endless series of ideal shapes, never reaching any one of them
and never holding for any length of time any one actual shape. One movement is not
completed before another begins, and at no one time is the labor apportioned among the
groups exactly in the proportions that static law calls for. Men are vitally interested to know

what they have to hope for or to fear from this perpetual necessity that some labor should
move from point to point.
Questions concerning the Effects of these Transformations.—These changes of shape involve
costs as well as benefits. The gains are permanent and the costs are transient, but are not for
that reason unimportant. They may fall on persons who do not get the full measure of the
offsetting gains. What we wish to know about any economic change is how it will affect
humanity, and especially working humanity. Will it make laboring men better off or worse
off? If it benefits them in the end, will it impose on them an immediate hardship? Will it even
make certain ones pay heavily for a gain that is shared by all classes? Are there some who are
thus the especial martyrs of progress, suffering for the general good?
Natural Transformations of Society increase its Productive Power.—There is no doubt that the
changes of shape through which the social organism is going cause it to grow in strength and
efficiency. More and more power to produce is coming, as we have seen, in consequence of
these transmutations. They always involve shifting labor about within the organization and
often involve shifting laborers, taking some of them out of the subgroups in which they are
now working and putting them into others, something that cannot be done without cost.
Immediate Effects of Labor Saving.—Inventing a machine that can do the work of twenty men
will cause some of the twenty to be discharged. They feel the burden of finding new places,
and if they are skilled workmen and their trade is no longer worth practicing, they lose all the
advantage they have enjoyed from special skill in their occupations. Do they themselves get
any adequate offset for this, or does society as a whole divide the benefit in such a way that
those who pay nearly the whole cost get only their minute part of the gain? Is there unfair
dealing inherent in progress in the economic arts, and must we justify the movement only on
the ground of utility, though knowing that a moralist would condemn it? These are some of
the general questions that are to be decided by a study of this phase of economic dynamics.
We need to know both what the movement will in the end do for humanity and what it will at
once do for particular workmen.[2] In addition to ascertaining what the ultimate results of the
movement will be, we need to trace, with as much accuracy as is possible, the effects of the
disturbances that are involved in generally beneficent changes.

FOOTNOTES

[1] It is obvious that capital as well as population is distributed with uneven density over the
territory occupied by society; but the movement of capital is less obstructed than that of a great
body of people, and moreover it is chiefly the fact that the people are not dispersed over the area in
a natural way which creates the chief obstacle to the moving of capital. It goes easily when it
accompanies a migration of laborers.
[2] Our study may lead to a moral verdict without being itself an ethical study; we limit the inquiry
to questions of fact, but perceive that some of the facts are of such a kind that they must lead a
reader to condemn or approve the social economic system.

CHAPTER XVI
EFFECT OF IMPROVEMENTS IN METHODS OF PRODUCTION

Displacement of Labor and Capital by Inventions.—Inventions are "labor-saving." Employers
are engaged in a race with each other in reducing the outlays involved in producing goods,
and a common way of doing this is to devise machinery that will do what laborers have
heretofore done. The same thing is accomplished by developing cheap sources of motive
power or introducing new commodities which are good substitutes for dearer ones.
Mechanical automata have at a thousand points taken labor out of human hands; electricity,
which is "harnessing Niagara," may at some time harness waves and winds and make them
turn the literal wheels of mechanical progress. Such things, by causing a given amount of
labor to produce a larger amount of consumers' wealth, are product multipliers; but this is the
same thing as saying that they yield a given product at the cost of less labor, and as we more
commonly see their effect in this light, we call them labor savers.
Why Labor Saving is not always and everywhere Welcomed.—To an offhand view it would
seem that product multiplying is the greatest blessing that, in an economic way, can come to
humanity; and if general and permanent effects be considered, it is so. The solitary hunter
who has to catch and club his game would get unqualified benefit from the possession of a
bow and arrows; the fisherman would get the same benefit from a canoe, the cultivator of the
soil from a spade, etc. Society in its entirety is an isolated being and derives similar gains
from engines, looms, furnaces, steamships, railroads, telegraphs, etc. Yet there are persons
within the great social organism to whom the benefit from one special improvement may be
small and the cost great. There are none who are not better off because of all improvements
past and present.
The General Demand for Labor not Lessened.—It is a matter of common experience that new
machines are labor displacers. At its introduction an economical device often forces some
men to seek new occupations, but it never reduces the general demand for labor. As progress
closes one field of employment it opens others, and it has come about that after a century and
a quarter of brilliant invention and of rapid and general substitution of machine work for hand
work, there is no larger proportion of the laboring population in idleness now than there was
at the beginning of the period.
A Voluntary Reduction of Toil Desirable and Probable.—A full study of the effects of
technical progress will show that there is never a reduction of the general field for
employment in consequence of it. There is an increase of pay, and this causes a certain
unwillingness to work for as many hours as men formerly worked; and there is also a change
in the nature of the operations that labor performs, which tends in the direction of more
comfort and less painful toil. For the famous statement of J. S. Mill that "It is questionable if
all the mechanical inventions yet made have lightened the day's toil of any human being" we
may safely substitute, "It is the natural tendency of useful inventions to lighten the toil of
workers and to give them, withal, a greater reward for their work." Mechanical progress is the

largest single ground for hope for the future of laboring humanity, and by its effects, direct
and indirect, it has already insured a great alleviation of toil, with an increase in its rewards. It
has helped to counteract the world crowding that for a century has gone on and the
diminishing returns from agriculture which the crowding entails. Inventions may make
disturbances, and their better effects may be temporarily and locally counteracted; but a
society where competition rules is sure to secure the benefits in the end and does, in fact,
secure them in greater and greater measure as the years go by. Such are some of the theses
which research will justify.
Facts concerning Disturbances incidental to Progress.—We have first to take account of the
disturbances. They are prominent in economic discussion and constitute the subject of one of
the grave indictments brought against the system of competitive industry. They have actually
caused great hardships in the past, as skilled handicraftsmen have seen machines come into
use which, for rapidity and accuracy of work, excel the best results that long apprenticeships
formerly gave. Now that machinery has possession of most of the field, there is no longer the
former opportunity for displacing hand workers; but the remainder of hardships incidental to
progress is not to be overlooked. This part of the dynamic movement involves present local
sacrifices for the sake of future general gains. Here, therefore, there are developed
antagonisms of interest which may hinder progress and, if they were extensive enough, might
conceivably throw a doubt over the future of the working class. While there is no great
disposition to question the ultimate benefit which mechanical progress insures, there is some
uncertainty as to the process by which this benefit is extended to workers and there is a
struggle to avoid the immediate cost. There is, in some quarters, a disposition to rate the cost
so highly as to draw the inference that we need to adopt a socialistic plan of living for the
sake of enabling workers to avoid the hardships and secure the benefits of "labor saving." It
will appear, however, if we grasp the essential facts of what we may call the dynamics of
method, that the tendency of it is to reduce the burdens which progress entails, and to diffuse
a large share of the benefits of it among the working class. It will further appear that the
socialistic plan of organizing industry would at least throw a doubt over the progress itself.
Nothing, on the whole, puts the future of industry conducted on the competitive plan in a
more optimistic light than the fact of the progress in productive methods which it insures. It is
the strongest guaranty of a "good time coming," in which all humanity will rejoice when it
comes and should rejoice by anticipation.
The Law that insures the Survival of Beneficial Processes Only.—It is self-evident that
wherever there is a saving of labor needed to make a given amount and kind of product, there
is an increase in the possible product that is created by the aid of a given amount of labor. If
workers themselves get a share of the gains, this fact will show itself through that beneficent
shortening of the working day to which we have alluded. The men will be unwilling to stand
the weariness and the confinement of working through too many hours and will be inclined to
take more holidays and vacations; all of which, when it comes about in a natural way, is an
indication that the industrial organism as a whole has put its hand on a new and powerful
lever and is enriching its members by means of it. It does, however, have to change the
character of its work, and this means that some labor has to be transferred from one subgroup
to another. The laborer displaced by an invention at a particular point continues to be wanted
somewhere. When he and others have found their new employments, the good result appears,
—the increase and improvement of goods produced,—and society as a whole then gets the

benefit which would come to an isolated worker who, without remitting his labor, finds his
appliances growing better and the fruits of his labor growing larger. The collective body gets a
greater income than before, and the workers share in the gain.
Importance of the New Forms which the Social Income Takes.—This increasing income takes
the form in which society now requires it, and it is this which brings about the readjustment of
labor—or the changes in the amounts of labor used in particular subgroups—which have
caused hardship in the past.
Nature of the Incidental Evils to be Dreaded.—The problem we have to face is a danger that
labor may be displaced either (1) from the particular point within a productive establishment
at which it is now working, or (2) from the productive establishment as a whole, or (3) from a
subgroup, or (4) from the general group of which the subgroup is a part. Out of industrial
society in its entirety it cannot thus be forced. There is a case in which the men whose crafts
are supplanted by machines may all stay where they are and operate the machines; but that
involves forcing other men to change their occupations. There are more cases in which these
men may stay in the mill or shop that employs them, but not in the same department of it.
There are still more cases in which they may stay in their original subgroups, and in a
majority of cases they may stay in their general groups. In every instance there are places for
them in the working society.
Local Expulsions of Labor.—When a single employer who is one of many competitors in an
industry adopts an important labor-saving device, it may be possible for him to keep all his
men employed and to let the improvement show itself wholly as a means of increasing the
output. He may secure a machine which will do what twenty men formerly did. If it were
possible to cut the uppers of a dozen shoes by the quick stroke of a single die, the machine
that carried this armature would do the work of perhaps twelve knives handled by that number
of skillful workmen. If the original number of men were retained in the cutting department,
and if each of them were furnished with the new appliance, it would mean that twelve times
as many uppers would be cut as were cut before the change was made. There would, of
course, be no use in trying to do so much cutting of uppers for shoes, without doing twelve
times as much sewing, welting, making soles and heels, etc., and to secure all this at once
would require a twelve-fold enlargement of the manufacturer's plant. This is too much to
secure at once. The manufacturer might perhaps double the output of his mill and nearly
double the number of his employees, but that would require only two of the twelve cutters he
formerly had. The new workers would be in parts of the mill other than the one where the
great saving of labor was effected. Ten men would be removed from the cutting department,
and the two left there would cut, by the aid of the new machines, twice as many uppers as the
whole number cut before, and that would require the furnishing of a double number of all
other parts of the shoes and a double working force to make them. The ten men liberated from
the cutting department would be available for this purpose, and new ones would be brought in
and set sewing, pegging, lasting, welting, etc. Within a single establishment, therefore, a
radical saving of labor at one point usually involves some shifting of labor from that point to
others, though it may increase the total number employed in the establishment which secures
the economical device.

The Effect on a Subgroup of an Improvement by One Entrepreneur.—If an employer who has
this experience is one of a hundred in the shoemaking industry and the only one who secures
the cutting machine, the market will receive as large an increase of the product as would be
involved by multiplying the output of his mill by two, without requiring that the price should
be more than slightly reduced. An improvement which is monopolized for a time by a single
entrepreneur seldom renders it necessary to reduce the aggregate of the labor in his
employment. Far more often it makes it for his interest to increase the number and to put new
labor in every part of the plant where no improvement in method has been made. It is often
the fact, however, that labor has to abandon other establishments in this subgroup, and enough
of it may do so to cause the amount in the entire subgroup to become somewhat smaller by
reason of an improvement. In the case of a single employer there is a bare possibility that no
one should be moved, in consequence of an economical invention, even from one part of the
mill to another. The manufacturer of our illustration might even keep his twelve cutters at
work after the introduction of the machines referred to and do twelve times as much cutting,
provided that he could quickly increase his output of finished shoes to twelvefold its former
amount. There are practical reasons why he could almost never do this; but if he actually did
it, he might, by some reduction in the price of shoes, find a market for this increased product.
If the reduction of price were great, some competitors would probably go at once out of the
business; but it is never the policy of a successful producer to make unnecessary haste in
reducing prices, and, as a rule, the reduction is gradual. The increase of product from the very
efficient mill must cause a certain reduction in the rate at which it sells its goods, and this is
apt to force manufacturers who are particularly ill equipped and cannot keep pace with the
rate of improvement which their enterprising competitor establishes to go out of business.
They thus relieve the market of so much of the product as they have contributed and make a
place for the increased output of the newly equipped mill. In such a case the total output from
the subgroup is not very greatly increased, and the price of the product does not need to be
greatly reduced.
Standard Prices fixed by Cost in the most Economical Establishment.—It is a vitally
important fact, as we shall soon see, that the price of an article is, in a dynamic society,
always tending toward the cost of making it, not in the most inefficient establishment, where
it is produced "at the greatest disadvantage," but in the most efficient one of all. The ultimate
effect of any great improvement is naturally to close the shops of all employers who do not
adopt it or get an equivalent advantage of some kind. Ultimately the whole subgroup will be
in the state of efficiency it would have reached if the improvement had been adopted by every
entrepreneur on its first appearance.
The Effect of an Improvement in Production which is quickly adopted by a Whole Subgroup.
—When an improvement is immediately adopted, not by one employer merely, but by all
employers in a subgroup, it is likely to cause a quicker displacement of labor from the
subgroup as a whole. A very economical machine introduced by its inventor or manufacturer
and quickly adopted by all employers at A´´ would nearly always force a certain number of
laborers to leave that industry and find employment elsewhere, if it were not for one
commercial fact, namely, the reduction in the price of the product and the consequent
enlargement of the demand for it.

How Labor may be displaced from a General Group.—The amount of A´ that can be created
depends on the amount of A that can be furnished as material to be transformed into A´, and
also on the amount of A´ that will be taken for conversion into A´´. This again depends on the
amount of A´´ that will be accepted by employers at A´´´ and sold in this last form to the
consuming public. If the market for A´´´ cannot be much increased by a moderate reduction of
the price of it, some labor may have to go into the group of B's or C's; and in any case there
must be new labor in A, A´´, and A´´´ if the product of A´ is increased. We can now measure
the difference between the effect of the adoption of an improvement first by one employer and
much later by others, and that of the quick adoption of it by all. In this latter case there is not
much delay in increasing the output of the goods, and the market for them does not have time
to grow larger because of the growth in the numbers and the wealth of the community. Unless
the present market will take an enlarged quantity of the finished goods without requiring that
the price should go below the new cost of making them, some labor will have to leave the
general group.
How Patents may Cause an Increased Displacement of Laborers.—What we often see is the
nearly simultaneous adoption of a labor-saving device by all leading employers in one
industry. Something like this takes place when the makers of a valuable machine retain the
patent on it in their own hands, and press the sale of it on all the producers who have use for
it. In this case, however, the makers usually put the price of the machine at a figure that, while
it affords an inducement to buy it, does not reduce the cost of the goods that it helps to make
enough to cause a great increase in the demand for them. The owners of the patent on the new
appliance charge for it "what the traffic will bear"; and until the patent runs out, the users of
the machine have to sell their goods almost at as high prices as before. If the machine enables
one man to do the work of a dozen, eleven men must find other things to do. They could find
them in their own industry if the product of it were enlarged in consequence of the use of the
machine; but if the high price of the patented machine prevents this, they must go elsewhere.
When the patent runs out, there is likely to be a considerable enlargement of the industry, and
how important this fact is we shall soon see.
How Improvements which call Labor to a Particular Establishment may displace Labor from
a Group.—Another typical case is afforded when some one employer has for a time the
exclusive use of a labor-saving device, and pushes his production to the utmost in order to get
the full benefit from it. Here are seen the more characteristic effects of such an improvement.
It draws labor to the employer who for the time being monopolizes the new instrument of
production, but it turns labor from the subgroup of which this employer is a member. He
enlarges his output and in time this reduces the price of the product. In the field there are
marginal mills, or those so antiquated, ill situated, or badly run that, with their product selling
at the former price, they could barely hold their own; and now that the price is reduced, they
lose money by running. They have to cease operating, and this makes practicable a further
enlargement of the product of the efficient mill. Much labor goes thither, but some part of that
which leaves the abandoned mills betakes itself to other subgroups. Not often, indeed, does it
have to go to other general groups. The cheap transformation of the material A into A´
enlarges the market for A´ and calls for more labor at A, and it involves more at A´´ and A´´´.
If the change of method had been gradual, the growth of the social demand for A´´´ would
probably have precluded the need of sending any labor out of the entire group of A's. Even a

rapid change often sends labor out of one subgroup into other subgroups of that series rather
than into other general groups.
An improvement that should reduce the cost of converting leather into shoes would, by the
sale of the shoes, call for more leather, more cattle, more appliances, more tanning, and larger
buildings for shoe factories, furnished with more shoemaking machinery and greater motive
power, even though the particular machines which were improved by the invention had
become so much more efficient that no more of them were needed. This depends on the extent
to which a certain reduction of cost of a product enlarges the market for it.
Principles Governing the Enlargement of the Effectual Demand for One Commodity.—In
determining how much a reduction of the price of a single article will at once enlarge the
market for it, there are two things to be considered, namely, the elasticity of the want itself to
which the article caters, and the extent to which an article catering to a particular want may be
substituted for other articles designed to satisfy the same one. The desire for jewels and other
articles of personal adornment is very expansive, and a fall in the price of any one article of
this kind causes a relatively large increase in the consumption of it. Since the want to which a
costly ornament caters is thus elastic, the cheapening of all articles that cater to this want
would enlarge the consumption of all of them. The cheapening of a particular one of these
articles, if there were in the market many others of the same general kind, would cause that
one to be extensively used in preference to the others. By an enlargement of the total amount
of decorative articles used and by a relative favoring of a particular one of them at the cost of
others, the sale of that one would be doubly increased. Cheaper diamonds might mean an
increased use of them without any large reduction in the use of other gems; but if many other
gems happened to be available for the purposes subserved by the diamonds the use of these
others would be curtailed and that of diamonds would be disproportionately increased.
The Value of Goods as affected by the Existence of Castes.—One of the reasons why the
market for jewels is thus elastic is the fact that they serve as badges of caste, as only
something of large cost can do. If, therefore, all gems were to become much cheaper, two
things would happen: (1) relatively poor people would buy some of them—partly in lieu of
imitations and of cheaper real jewels; and (2) rich people would have to buy more and costlier
ones than were formerly needed, in order to retain their positions in the social gradations. This
principle affects the consumption of a wide range of articles, the possession of which seems,
outwardly at least, to stamp the owners as belonging in a certain stratum of society. It
increases the demand for fine clothing, furnishings, and equipage, multiplies social functions,
and induces participation in all manner of costly diversions. The elasticity of the market for
luxurious goods is, in general, greatly increased by the action of this motive. The cheapening
of them causes them to be consumed by the lower classes and renders the use of greater
quantities or higher qualities of them a social necessity for the higher classes.[1]
We shall soon see that a reduction in the cost of any one article usually causes the use of it to
trench on that of all manner of things which are on the margin of consumption and are not
similarly cheapened.
Changes of Cost of Different Goods Never Uniform.—The cost of all articles is never reduced
at the same time, and it is impossible that all of them should remain in the same order of

desirability in the estimation of purchasers. Many things, however, are often cheapened at the
same time, though in different degrees. Whatever furnishes a very common raw material at a
lower cost than has prevailed, as did the invention of the Bessemer process of steel making,
makes everything into which that material enters cheaper. By reducing the cost of railroads
and engines, cars and steamships, the Bessemer process indirectly lowered the prices of goods
that have to be carried, which means practically everything. A cheap motive power acts in the
same way and lowers the costs of producing an unlimited number of goods. Even in the case
of such general improvements as this the reductions of price are not uniform. Some goods are
affected more than others. Cheap steel lessens the cost of bridges more than it does that of
dwelling houses, and in the case of many improvements the effect is confined to a limited
class of products, if not to a single one.
How the Disturbing Effect of a Single Improvement is Limited.—In the case of consumers'
goods improvements are going on so nearly incessantly and at so many points that the effect
is much the same as if every invention cheapened most of them at once. Harmful disturbances
are reduced to minute dimensions by the multiplying of the changes, each of which, if it
occurred alone, would produce a hurtful effect. Many inventions cancel one another's
unfavorable effects in a way that we shall later examine. What we now have to do is to isolate
a single productive change and see whether there are forces working to reduce its own
independent power to create incidental disturbance. What limits the power of a single new and
economical process to eject laborers from their accustomed places of employment? This
question cannot here be answered in detail, but a brief statement will cover the general
principles involved. Obviously the displacement varies inversely with the extent to which
increased cheapness enlarges the consumption of the article affected. If by making one
thousand men produce as much of the commodity as two thousand formerly produced, you so
reduce costs as to double the consumption of the article, you keep all the men who formerly
made it in their accustomed places of employment. The elasticity of the want itself to which
the article caters is one of the two elements that determine the increase in the consumption of
it; but when this increase is due to an extensive substitution of this article for others in the
purchasing lists of the consuming public, the result is greatly to reduce the displacement of
labor which the new and economical method of production entails. Such substitutions are very
general and are a large factor in rescuing men from the hardship of being forced out of the
employments they are used to.
On what an Enlarging Market for Tools and Raw Materials Depends.—The market for raw
materials and tools depends on that for consumers' goods in their completed state. If A, the
raw material, enters only into A´´´, it can be sold in increasing quantities only as A´´´ is thus
sold. The chief fact about tools and materials is that they may contribute to a large number of
completed goods, and the significance of this fact we shall soon see. The ultimate power to
find a market for all products of the lower subgroups depends on finding one for the products
of the uppermost ones—the A´´´, B´´´, and C´´´ of our table. The laws which govern the
market for finished goods of declining cost have first to be studied.
The Effect of Substituting one Consumers' Good for Others.—Reducing the cost of everything
would cause an absolute increase in the consumption of everything; but reducing the cost of a
single thing always causes, as we have seen, a relative increase in the consumption of that one
product. While the demand for other articles may not grow absolutely less, it becomes

relatively less because of the comparative cheapness of the one product.[2] A substitution of
one article for another in the lists of goods used by the public is a universal phenomenon
attending an improvement which affects the production of one article only. When the cost of A
´´´ causes it to stand just outside of the purchase limit of a large class of persons, a moderate
reduction in the cost of it will make it a more desirable subject of purchase than the articles
which have stood just within that limit, and it will be bought instead of one or more of these
things. The securing of new customers for a finished product by means of a fall in the price of
it is largely brought about by such substitutions. When the new article is added to a
consumer's list, the one which has stood as his marginal or least desirable purchase is taken
off from it. It is the relative desirability of buying one or the other of these articles that
influences a buyer in his decision between them, and that cannot fail to be changed by
anything that lowers the cost of one, leaving that of the other unchanged.
If the cost of a unit of each of ten articles be represented by the lines falling from the letters A,
B, C, etc., to the base of the figure, a considerable fall in the cost of A would put it below the
cost of each of the other articles represented. If in the case of a large class of persons who did
not formerly buy any of the A it is as desirable as any of these goods, it will take its place as
the most desirable subject of purchase instead of the least desirable. Those whose available
means enabled them to acquire all the articles from J to B inclusive, but did not suffice for A,
will now take the A and omit the B. Those whose acquisitions stopped with C will substitute A
for that article, and in general every buyer of any of these things who has not heretofore
acquired A will now put this in the place of the one which it was least worth while to acquire.

Substitutions caused by a Cheapening of one Utility in an Article which is a Composite of
Several.—When different goods cost unlike amounts but are objects of equally strong desires,
only one of them is a marginal purchase, and the others afford a personal gain to the consumer
which is not offset by a cost. We have seen that this rule applies to the different utilities in a
single good. In the case of every article several grades of which are sold, there is one
component element or one utility which is worth to the buyer exactly what it costs, while the
others afford a consumers' surplus. If the letters in the diagram represent, not whole articles,
but utilities in articles, as discussed in Chapter VI, it will accurately express the essential
facts. In such cases, which are very numerous, it is only necessary to reduce the price of the

one utility which is now just worth its cost in order to induce more consumers to buy the
grade containing this utility, instead of a lower grade of the same thing. In doing this, they
forego the purchase of something else altogether, or content themselves with a lower grade of
that other commodity. If jeweled watch cases should become cheaper, some persons would
substitute them for plain cases and would forego buying, say, pictures which were just within
their purchase limit, or would content themselves with cheaper pictures. This taking of one
thing within the margin of consumption and discarding others is far less frequently done than
is the taking of a lower grade of one kind of goods for the sake of securing a higher grade of
another.
Why Substitutions reduce the Displacements of Labor.—The question will, indeed, arise why
the burden caused by the change may not be merely transferred to men in industries the
products of which are displaced by the substitution. Something of this kind would occur if, in
consequence of the cheapening of one article, any one other were generally discarded. The
important fact is that it is not any one thing, but a wide range of things which are consumed in
smaller quantities in consequence of the change; and the effect on the makers of any one of
them is small. If a thousand men begin to buy the A´´´ of the table we have frequently used,
some of them will forego B´´´, some C´´´, and so on through the list; and the market for no
one of these things will be much affected. Moreover, the nearly universal fact is that a man
who begins to buy one article that he never before used will save the price of it by contenting
himself with a slightly cheaper quality of a number of others. He will give up a dozen utilities
in as many entire commodities in order to be able to buy the one entire commodity that he
adds to his purchasing list. The reduction of demand is so extensively subdivided that it
causes relatively few displacements of labor.
Substitution a Prominent Cause of Varying Sales of Goods.—Substitution is, then, the general
rule whenever the cheapening of a commodity wins new purchasers of it. This practice is not
indeed universal in the case of those who formerly consumed these goods. Former purchasers
of an article which has become cheaper may make no change except to buy more of it or a
better quality of it for the same amount which they have been accustomed to spend for the
inferior quality. They are not then obliged to economize in any other direction, and the change
does not trench on their consumption of other goods. On the other hand, it is sometimes the
case that they continue to use the original amount of the article that has become cheaper and
use the liberated means of purchase—the "money," as it would ordinarily be termed—in
buying other goods. The cheapening of A´´´ thus even enlarges the demand for B´´´, C´´´, etc.
There are thus two cases in which a reduction in the cost of one thing would not decrease the
use of other things.
Substitution More General in the Case of New Consumers.—The substitution of a cheapened
article for others is the dominant fact in the case of new consumers of such an article, while
an increased consumption of other things sometimes occurs in the case of old consumers. This
does not have as large commercial effects as the other change. If we produce cheaper shoes,
we make it easier to acquire good ones, and those who formerly contented themselves with an
inferior kind take a better one. That means that they add to their purchase lists the higher
utility which is present in the one grade and absent in the other. They buy a new element in
goods rather than more of those goods, and while they may not always change their
consumption of articles of other kinds they more frequently do so. Those who begin to use

something which formerly they went without altogether usually give up the use of some good
or some quality in it, or get on with a smaller quantity of it in order to make the new
indulgence practicable. The man who, when bicycles became cheap, bought the first one he
ever owned probably gave up some other gratification.
How the Sale of Goods which wear out in the Using increases as the Price Falls.—When
goods deteriorate as they grow older, users have to buy new ones often if they are not willing
to use those which are worn out and inferior. If we want always to wear clothes of good
quality, we refrain from wearing a suit too long. We discard many things when they have
somewhat deteriorated, and this forces us to buy, in a term of years, a larger number of them
than we should otherwise do. We discard carpets and upholstery early when they are so cheap
that we can afford to do so. We thus improve our goods qualitatively by adding to them
quantitatively.
Substitutions a Protection for Labor against Undue Displacements.—Now, not only are the
substitutions we have cited of commercial importance, but they act in the direction of
retaining labor in a group where "labor saving" has been effected. They help to prevent this
process from being equivalent to labor expelling in so far as either a general group or a
subgroup is concerned, since they increase the social demand for the products of the group in
question and cause a relative diminution of the demand for other things. Quite evidently there
is, for these reasons, the more need for labor within this group and less need of it elsewhere.
Cheap shoes may thus never mean fewer shoemakers and cheap watches may not ever mean
fewer watchmakers.
Substitutions of One Capital Good for Others.—It is not merely in the realm of consumption
that the demand for a particular good may increase greatly in consequence of cheapness. The
same thing happens in the realm of production, but here the substitution of one thing for
others is an even more prominent cause of the increased use of the particular commodity.
Aluminum and copper are rivals as carriers of electrical power, with the advantage at present
somewhat in favor of copper. As soon as the cost of making aluminum shall be reduced by a
moderate fraction it will become the cheaper material for such uses and, unless there is a fall
in the price of copper, will thrust itself into use for trolley wires and other conductors of
electricity. The possession of an enormous market by the one or the other material depends on
their relative costs, and these may easily so change as to transfer most of the demand from the
one material to the other. A further fall in the cost of aluminum would make it available for
sheathing the hulls of ships and would bring it into general use for many household
implements, while a sufficient fall would make it a leading building material and give it a
limitless market for the framing and finishing of substantial structures. In these various uses it
would substitute itself, not only for copper, but for steel, stone, wood and other materials, and
the change would be extensive enough to give it an enormous market without requiring a
correspondingly great reduction in its cost. Lowering the cost of aluminum by a third might,
by merely making it the favorite carrier of electricity, multiply the present use of it by ten, and
lowering it by two thirds might multiply the present use of it by a hundred. If this should take
place, saving labor would be anything rather than expelling it from its position in the
aluminum-making group. When less labor came to be needed for making a ton of the metal,
more labor would be used in the industry that makes it.

So long as the substitution caused by the cheapening of aluminum affected copper only it
might be a serious matter for the producers of copper; but when it came to replacing in some
degree steel, stone, brick, wood, and other materials, the effect would be so diffused and
subdivided as to create small disturbances in any one of these industries.
Effects of Reduced Cost of Materials which already enter into Many Finished Products.—In
the case of aluminum the prospect of a greatly increased market brings with it the probability
that it may come to be a component element of products into which it does not at present to a
great extent enter. Such things as steel, stone, and wood already constitute important
components of more articles than can be counted, and there is no great prospect that they will
enter into a much greater variety of products. In the case of these materials there is a prospect
that cheapness will show itself in reduced costs of the finished goods that are made of them,
and that these finished goods will be used in greater quantities without substituting
themselves for other things in so drastic a way as that which we have described in the case of
aluminum. A reduction in the cost of steel would indeed bring about a substitution of that
material for others at every point where the steel and something else are now on a plane in
desirability. The type of building that now is made with plain brick walls and wooden floors,
because that cheap mode of building enables it to earn a slightly larger interest on its cost,
would often be made with a steel frame and concrete floors. At every such marginal point
steel would gain somewhat on its rivals in the extent to which it would be used; but in
addition to this enlargement of the market for it by substitution, one might count on an
increase in the use of it because of an increase in the use of very many things that are already
made of it. Some of these cater to highly elastic wants, and persons who use a quantity of
them may be induced to use more without discarding anything else. Such an absolute
enlargement of consumption is highly probable in the case of any material that enters into a
vast number of products, and this, together with the enlargements that come by substitution,
may suffice to create a great demand for the raw material and call for as much labor in the
subgroup that makes it as was used before the improvement was made. In the case of the raw
materials of industry the resources for gaining an increased market by substitution are:—
(1) The substitution of the material for others in uses different from those in which it is now
employed;
(2) The substitution of it for other materials in the marginal parts of its present field, where it
is already nearly as available as other things;
(3) The substitution of the finished consumers' goods made of it for other consumers' goods.
In addition to all these there is the direct increase in the use of finished goods wholly or partly
made of the material by persons who do not, for this reason, discard any other goods.
This statement places the different influences in the order of their relative efficiency in the
majority of cases in which they act.
Effects of cheapening Tools of Industry.—What is true of a raw material which enters into
many completed products is true of the tools of industry which are used for many purposes. A
turning lathe, a planing machine, or a circular saw helps to make a large number of products,
and the assertions we have made concerning steel, stone, or wood apply to it. As it becomes

cheaper it gains an enlargement of its market by a combination of the four influences just
enumerated. It is brought into new uses, is employed more in its present marginal uses, and is
required in greater quantity because its products are substituted for other things and are also
required in greater amounts independently of these substitutions.
Cheap Motive Forces.—Motive power is so nearly universal in its applications that
developing a cheap source of it is much like improving the method of producing everything
and securing a universal increase of products. We shall see why such a general enlargement of
the output of all the shops creates no displacements of labor which entail hardships. If the
power is used more in the upper subgroups than in the lower ones,—if it is more frequently
available for fashioning raw materials than for producing them through agriculture or mining,
—the development of it checks in some degree the drift of labor from the lower subgroups
toward the upper ones, which has been referred to in an earlier chapter.
Utilizing the power of Niagara, that of Alpine torrents and other unused streams, that of the
waves of the sea, and that which has long slumbered in the culm heaps of coal mines, will
give increased facility for producing nearly everything; and though the amount of the
enlargement of output will vary in different cases and some effect on the movements of labor
will be produced, few serious hardships will result, and a majority of the persons who will
suffer from these changes at all will get an offsetting benefit from the enlarging
productiveness of industry.

FOOTNOTES

[1] It is also true that an entire variety of gems or other things of this genus might, by mere
cheapness, be branded as too common to be used by the very wealthy, except for new and inferior
modes of adornment.
[2] It is worth noticing (1) that uniformly reducing the cost of everything would cause comparative
changes in consumption. Anything which should take away a quarter of the cost of every article in
the entire list of social products would increase the consumption of some articles more than it would
increase that of others. There is an extremely theoretical case in which there might even be a
lessening of the effectual demand for a few things because a uniform reduction of twenty-five per
cent would cause other things to be extensively substituted for them. This thinkable possibility is
not practically important.
A detailed study would show (2) that a reduction in the cost of any single article in the entire list of
social products causes an increase in the consumption of commodities in general. As an isolated
man who has had to work hard for mere food and content himself with a few comforts and no
luxuries will indulge in luxuries when food production becomes much easier, so society as an
organic whole will increase its indulgences all along the line whenever the work of getting any one
thing is reduced and some working time is thus liberated.

CHAPTER XVII
FURTHER INFLUENCES WHICH REDUCE THE HARDSHIPS
ENTAILED BY DYNAMIC CHANGES

In the absence of an unusually great increase in the consumption of an article the
improvement which reduces the cost of it tends to displace labor. The first thing that will
occur to any one who looks for influences which mitigate this evil is the fact that economical
changes are going on at nearly all points in the system, and that this cancels out most of the
displacing influence. If something sends men from the group A to groups B and C, while
something else sends them from the group B to groups A and C, and still another influence
impels men from C to A and B, there is likely to be very little actual moving. A question will
in such a case arise as to whether the three movements may not expel labor from all the
groups and remand them to a state of idleness. History is clear in the answer it gives to this
question; such a result has not occurred, and at the end of a century of brilliant mechanical
progress the amount of enforced idleness is not greater than it was at the outset. It remains to
show that economic law precludes a universal displacement and insures laborers for all time
against being at the mercy of an industrial system which has nowhere any need of their
services. Productive devices widely introduced mean great and general gains and
comparatively little cost. They mean what on their face they ought to mean, more comforts
and less toil for everybody. Before studying this influence—the reciprocal action of
improvements scattered through the general economic system—we have to determine the
action of one or two other influences which also lessen the disturbances which progress
causes.
One can see that the quick adoption of an economical device in every shop of a subgroup, at a
time when all other industries are in a stationary state, would usually expel some labor from
that one. If consumers should, on a large scale, substitute the product of this subgroup for that
of others, it might save the situation; but the general fact is that the consumption of the
cheapened product must increase in a ratio that is greater than the ratio representing the
saving of labor used in making it, in order to prevent displacement of labor. If we get on with
two thirds of the labor which the making of the commodity out of raw materials formerly
required, we do not save two thirds of the total expense of making the finished article; and yet
to retain all the labor that is now in the business we must sell one and a half times the former
number of the goods produced.[1]
Counteracting Influences.—The importance of a gradual introduction of an improvement
rather than a rapid one lies in the fact that it permits these influences to do their work and
often to render the actual moving of laborers even from their subgroup unnecessary. Time is
the salvation of the laborer menaced by an impending displacement from his field. When we
see what is the grand resultant of all the dynamic influences we are studying, we shall see
how this neutralizing and canceling of the labor-expelling force takes place. But for them one
isolated change would tend to expel labor from its subgroup and would nearly always send it

away from the point within an establishment where the new device is introduced. It usually
attracts labor to this establishment and away from the inefficient or marginal ones. A gradual
adoption of the improvement allows time not only for a general increase in the size and the
wealth of the community, but for other influences which act more quickly and in practice
make it nearly always unnecessary to reduce the total amount of labor in an industry which
produces an article in permanent demand. Statistics may be confidently appealed to in support
of this general statement.
The Dynamic Law of Price and its Effects.—We briefly noted in passing that the price of a
product the making of which is subject to repeated improvements naturally tends toward the
cost of it in the establishment having the latest method and the greatest facilities for
production. The natural price at any time is the cost of that part of the supply which is created
at the greatest advantage, and not the cost of the part produced at the greatest disadvantage, as
an old formula expressed it. It is the mill that makes the goods most cheaply which is
enlarging its product and bringing the price down toward its level of cost; as soon as other
establishments get possession of the improvement they help forward the process, and as they
get still better appliances they help in carrying the price to still newer and lower standards.
The Cause of the Coincidence of Maximum Cost and Price.—At any one moment, it is true,
there are ill-located, ill-equipped, or ill-managed mills that are making nothing and are likely
soon to be abandoned. They are the marginal mills we have spoken of, and the goods that they
make cost all that purchasers will give for them. This insures a coincidence of the price of the
goods with the cost of making them in such a mill, but this is merely an incident in the
process of eliminating the inefficient establishments from the field. In the mill which happens
at this date to be the one about to be crowded out the cost of the goods equals the selling price
of them and will exceed it as soon as the price goes to a lower point. This cost happens
transiently to coincide with the price, but does not regulate it. It is the outlay that the best mill
incurs that does that, since it sets the standard toward which the price is made to tend.[2]
The Importance of Delay in the Closing of Marginal Establishments.—Now, this process
looks as if, by the closing of mills that are distanced in the race of improvement, labor must
be forced out of the subgroup. So it would be if the reducing of the price to its new static level
were an instantaneous operation and the inferior mills were, in the same instantaneous
fashion, compelled to close their doors. These, however, are gradual operations, and before
they can possibly produce their full effects, influences will have been set working which will
counteract the expelling tendency. We have cited as such an influence the general growth of
society in numbers, wealth, and consuming power, making it possible for a group, when an
economical change has taken place, to produce and sell more goods than before and to keep
its accustomed force of labor in order to do so. There are certain more specific influences
which have a similar effect and render it as unnecessary as it is useless to attempt to resist the
course of improvement.
Centralization of Business an Effect of Progress.—From the facts here cited it appears that
conservatism of the kind that resists all changes condemns an entrepreneur to destruction. He
must keep in a moving procession in order to survive. As the essential thing which is
changing is the price-making cost of goods, the entrepreneur must see to it that in his
establishment cost declines. While this does not necessarily mean that every such

establishment needs forever to grow larger, since there are local conditions in which relatively
small shops may be economical enough to survive, yet those which cater to the general
market and directly encounter the competition of the great producing establishments must, as
a general rule, have the advantages of great size in their favor, or sooner or later be crowded
out of the field. Many of the smaller ones fall by the wayside, and the business they have done
passes to their already large rivals. Wherein the advantages of the great shop lie and how one
that is of less than a maximum size may survive in spite of them, are points for later
consideration.
How Displaced Labor is Replaced.—When men are actually forced to leave an industry,—say
the subgroup A´,—they find themselves, in the search for employment, in the same position as
a body of newly arrived immigrants in quest of work. Men of either class must offer
themselves at a rate that will induce employers to take them. If much new capital has lately
been created, it is naturally possible for the men to get employment without having to
overcome serious friction or to reduce their demands in the way of pay. In the absence of such
additions to the capital, they might possibly have to offer some inducement to employers, in
order to overcome their reluctance to make changes in their shops. We shall see in due time,
however, that where improvements are well distributed through the industrial society and
have their natural effect, they tend to increase the general demand for labor at the original rate
of pay.
Effects of a Series of Improvements confined to One Industry contrasted with those of
Improvements diffused through the Groups.—A continuous series of radical improvements, all
originating at one point, would tend of themselves to cause a series of expulsions of labor
from that point, and the mere increase of population and wealth might not so fully counteract
this tendency as to prevent a positive exodus of labor from the occupation affected. A merely
relative reduction of labor in this occupation would not cause much hardship, since it would
only mean that other industries were attracting the greater number of young laborers entering
the field and gradually getting a larger and larger part of the whole working population. If
men actually in A´ can stay there, no one is injured; but too great a concentration of
improvements at this point might drive some of them away. Such concentration is the
opposite of the general rule. Improvements do not confine themselves to one point or to a few
points, but originate at very many, and this fact neutralizes their labor-expelling tendency and
might reduce it practically to nil. If labor could be made more efficient in every group of the
whole system, the result would be to increase the quantity of every kind of goods. Making
more of one's own product is acquiring power to buy more of the products of others; and
enlarging the general output of goods tends thus to increase the demand for all kinds of goods
as well as the supply. If you make clothes and I provide food, and we exchange products, but
do not satisfy each other's wants to the point of repletion, it is well for both of us that you
should become able to make more clothes and I to furnish more food. We can then go on with
our original occupations and both live better. In this there is involved no displacement of labor
at all; and neither would there need to be any disturbance caused by multiplying in well-
adjusted proportions the output of each group and subgroup in the system of industry. Where
formerly a unit of A´´´ was exchanged for one of B´´´ or C´´´, there are now two units of A´´´
given for two of either B´´´ or C´´´, and every one has more things to consume than he
formerly had.[3]

Labor attracted toward a Subgroup as a Result of Improvements which are made Elsewhere.
—The fact that the demand of consumers for different goods is not uniformly elastic has to be
taken into account. There are two distinct kinds of movements in the group system, brought
about by improvements in method. Each improvement in and of itself has, as a rule, a labor-
expelling effect, but this effect is partly neutralized by general growth in consumption and
still more by improvements occurring elsewhere. Labor that is thrown out of the A group
would naturally go to group B, C, etc.; but if, as we have just seen, similar influences tend to
expel labor from the B group and the C group, the labor may, for the most part, stay where it
is, with the result that more of A´´´, B´´´, and C´´´ is offered to consumers. The increased
output of one group is itself a means of retaining labor in other groups, even though, thanks
to mere methods, that involves making more of every other kind of commodity.
The Supply of One Kind of Goods Equivalent to a Demand for Others.—There should be no
difficulty in interpreting, in this connection, the traditional statement that "the supply of one
kind of goods constitutes a demand for another." An increment of A´´´ and one of B´´´ coming
into existence together supply wants common to their two sets of producers and both groups
can gain by exchanging such portions of their respective products as they do not retain for
their own use. If A´´´ and B´´´ were the only consumers' goods used, a part of the excess of
each would be distributed among the members of the group producing it, and the remainder
would be given in exchange for some of the other kind of goods, also for distribution among
the members of the first-named group. This is what actually happens when a multitude of
articles for consumption are produced in increasing quantities.
Effect of an Increase of Individual Incomes on the Character of Goods Consumed.—Such an
increase of the productive power of a group means, of course, an increase of individual
incomes, and it causes men, as we have seen, to consume better things rather than more of
them. There is a certain merely quantitative enlargement of every one's consumption of goods
of a given kind, every one using more of A´´´ than he used before; but the greatest change
shows itself in the quality of what he uses. Every man buys and consumes better articles of
the A´´´ kind, as well as of other kinds. His food, his clothing, etc., are all prepared in a more
elaborate way, and he has more of what we call form utility which results from the fashioning
of things, and relatively less of the elementary utility which inheres in the raw material. There
is somewhat more of raw material and very much more form utility in the goods he demands
for personal consumption. This requires that labor should move upward in the group system,
and that more of it than before should betake itself to those subgroups where the fashioning of
the raw material is done and where the finishing touches are applied to goods. The effect of
the constant improvement of all processes of production, therefore, so far as the effect on
labor is concerned, is akin to the effect of an addition to capital, in that it moves labor upward
in the subgroup series. It puts more labor into mills and shops which make articles of comfort
and luxury.
The Nature of the Movements actually caused by Improvements.—This upward movement
cannot go on as smoothly and with as little disturbance as that which is caused by the increase
of capital. Whenever a greater gain is made at one point than is made at another, an influence
is set working which, of itself, tends to send labor from the one point to the other. The
slowness with which the change of method proceeds affords the time that is necessary for the
protection of labor in the first-named group, since little movement takes place before the

effects of improvements made in the second group begin to be felt. If in 1906 an improvement
is made which, in the course of five years, would cause some labor to move from the
subgroup A´´´ to the subgroup B´´´, and in 1907 a corresponding improvement is made in the
latter industry, the equilibrium is restored before enough disturbance has taken place to
require any absolute reduction of labor in A´´´. The facts are (1) that new laborers as they
enter the field are drawn more to the upper subgroups than to the lower ones,—to the A´´´ and
the B´´´ rather than to the A and the B of the two series,—and that in moving upward they are
drawn at first more strongly toward B´´´ and later more strongly toward A´´´. This is the
nearly constant fact in industry and is the grand resultant of all the forces we have described
—an upward flow that is continuous but does not follow strictly vertical lines. As young men
—the sons of workers in A, B, C, and D, who might otherwise have remained in their fathers'
occupation—move to the subgroups that stand higher in the several series, they first go in
larger number toward B´´´ than toward A´´´, and later in larger number toward A´´´. There is a
wavy movement toward the right and then toward the left in the steady flow of labor from the
groups that create the raw material to those that impart to these materials the form utilities
which they need to fit them for service. An actual lessening of the number of workers in an
entire group in consequence of an improvement in the method of production is practically
unknown, and even a positive lessening of the number in a subgroup is exceedingly rare.
Apparent Exceptions to the Rule.—Exceptions to this rule which are rather apparent than real
will occur to every one. The discovery of a great supply of mineral oil put an end to the use of
whale oil for illuminating purposes, though it allowed the whale fishery to survive on a
reduced scale and produce oil for other purposes, in so far as the rawest material, the whales
themselves, were not exterminated. The exhaustion of a supply of raw material was here a
dominant fact, and the effects it produced may be again expected when mineral oil shall, in
turn, become scarce. Men will move out of the subgroup producing the crude oil, as nature
forces them to do so, but their movement cannot be referred merely to improvement in the
mode of extracting the oil or transporting and refining it. The fact which illustrates the rule we
have stated is that while mineral oil drove whale oil out of the field as an illuminant, this did
not reduce the number of men in the general group which produces illuminating oil. More
men were set working in the oil fields than ceased working on the whaling ships. A new raw
material was used in creating a similar finished product, and as the general industry which
made this product grew larger rather than smaller, the total demand for labor in oil production
was not lessened. This does not prove that old sailors did not suffer from the change. Young
sailors could go to the oil fields or elsewhere, but men who were not adaptable could not do
so, and the hardship thus entailed is not to be overlooked. We are, however, forming a
judgment of movements which pervade a vast industrial system, and we need most to know
what is their grand resultant. If that were a general displacement of labor, causing increasing
idleness and suffering, the system that involved this result would stand condemned. The
general resultant is the opposite of this.
A Drift of Labor toward Certain General Groups.—We have just noticed that movements of
labor in the group system, caused by improvements in method, consist mainly in an upward
flow of labor, accompanied by irregular lateral movements, the labor drifting to the right or
the left as it is more strongly attracted now to one point and now to another on the same
horizontal plane. The general mass of it swerves now to the right and now to the left in its
general ascending course, though none may be actually expelled. This description of the drift

of labor is too general even to describe all the permanent currents. Some entire groups
produce only or chiefly luxurious goods, and to those there is the same drift of labor as there
is to the upper subgroups of the general series. If there be a group of D's making an article
which only the well-to-do can afford to use, it will swell in size and in the volume of its
output from the same causes—improved methods and general enrichment—which cause A´´´,
B´´´, and C´´´ to outgrow A, B, and C.
Displacements of Mature Laborers naturally tending to Diminish.—When an improvement is
made in one of the upper subgroups while the general flow of labor is toward these groups,
the effect is not usually to lessen the absolute number of workers in the upper subgroup where
the improvement has been made, but merely to prevent it from getting a pro rata share of the
labor that is moving upward toward this tier of subgroups from the lower ones. The change in
the apportionment of the social laboring force between the upper subgroups and the lower
ones is made gradually, without violent transfers of particular men from point to point, and
merely by directing to the upper subgroups a disproportionate number of young workers who
are selecting their fields of employment. In general, labor moves from point to point in the
system without requiring many particular laborers to do so. As actual loss of places by
persons of mature age is the chief evil connected with changes in methods of production, it is
a most welcome fact that the influence which we are studying tends naturally to reduce the
extent of it.
The Discarding of Aged Laborers mainly caused by a Further Influence.—Quite apart from a
demand for less labor at a particular point in the system, there may occur a discharging of
men merely because of age and a substituting of younger men. In establishments where the
pace is a rapid one men have thus to give place to young successors at an earlier age than the
one at which men give place in other employments. The effect of some machinery is to
improve the chances of old men, while that of other machinery is to reduce them. A lightening
of toil and a shortening of the working day preserve men's powers and enable them to retain
employment longer.
The Natural Tendency perverted by Monopoly.—When hardships come on a large scale in
consequence of a discharging of workers, they are chiefly due to an abnormal influence which
now shows itself in ugly and disquieting ways throughout the industrial system, that, namely,
of monopoly. Reducing forces for the sake of curtailing production and raising prices is what
does the mischief. This influence undoes at many points the beneficent effects of free
competition and causes grave hardships to particular workers while affording no
compensating gain to the consuming public. It portends evil for society as a whole as well as
for the working classes, on which its hand may be heavily laid. In a perfectly natural system,
in which competition would do all that pure theory at the outset of this study has assumed that
it will do, the evil entailed by local improvements would be relatively small and the diffused
benefits enormous. In proportion as the movement approaches steadiness and as gains are
made, not by radical changes, now here, now there, and now elsewhere, with long intervals
between them, but by smaller economies made nearly everywhere and in very quick
succession, the cause of the hardship is reduced. There is less of violent expulsion of labor
from its fields and more of a gradual drifting of labor rather than particular laborers from the
subgroups that create elementary products to those which fashion them into fine and costly
shapes. There is small hardship in the natural selection by new laborers of the employments

where they are most needed, and there is often little in a transfer of a person who has tended a
machine of one kind to a machine of a different kind. Instances there still are of manual skill
brought to naught by the invention of a mechanical automaton that does the work more
rapidly and accurately than the hand of man can do it; and the worker who possesses this skill
must usually, in such cases, content himself with an employment where his more general
aptitudes may stand him in good stead and insure him at least an average rate of pay. The
special aptitude which he had for performing one operation counts for nothing; and this
happens when men who have worked in one department of a mill have to accept work in other
departments of the same mill or in other employments.
A Workman's Specific Loss as compared with his Share of a Social Gain.—The test question
in cases like these is whether the man is helped or harmed by the general effect of
improvements, including not only the one which has caused him to change his occupation, but
all others which have taken place since he began working. To this question there can be but
one answer: in the course of a lifetime the balance is in favor of progress even in the case of
the average victim of the movement, and it is overwhelmingly so in the case of others. What a
man sacrifices when he is transferred from one machine to another is usually more than offset
in a term of years by what he gains in consequence of the general increase in the producing
power of labor. At the time of the displacement he suffers, but by its constant increase in
wealth and productivity society more than atones for the injury. The goods that emerge from
the mills are multiplied; the share falling to labor, as that share is determined by the test of
final productivity, grows steadily larger; and the men who have never served a long
apprenticeship at anything, but have learned their present trades quickly and can learn new
ones as quickly, are producing and getting far more than they could possibly get under a
régime of skilled manual labor or of inferior machinery, and far more also than their
successors will get hereafter if, by any calamity, mechanical inventions shall cease to be
introduced and other product multipliers shall be barred from the field. The hope of working
humanity lies mainly in the continuance of the changes which give it a forever enlarging
command over nature. Some classes might live comfortably without this, but for the worker it
affords the main ground of hope for increasing comfort and a coming time of general
abundance.

FOOTNOTES

[1] The mathematical problem stands thus: If all the subgroups of the A series have the same
amounts of labor and a machine enables a half of the force now in A´´ to do all that is required in
transmuting the usual supply of A´ into the usual amount of A´´, then some of the labor in A´´ would
in most cases betake itself to entirely different industries. The superfluous labor at A´´ would
amount to an eighth of all the labor required for the complete creation of A´´´. If wages constituted
the only cost which the entrepreneur must defray, the price of A´´´ would be reduced to seven
eighths of the former price, and this might, in the case of some goods, enlarge the demand to eight
sevenths of its former amount and so keep all the labor in the general group. Since there are outlays
to be met besides wages, this reducing of wages by an eighth would not usually reduce total cost by
more than about a twelfth, and even if price quickly went down to eleven twelfths of its former
amount, it would be too much to expect that the consumption of the A´´´ should increase by a
seventh, except in cases in which this amount of reduction of price caused A´´´ to take the place of
B´´´, C´´´, etc., in the purchase lists of many consumers. The enlargement of consumption would
have to take place in a ratio greater than that which represents the saving in cost. Costing eleven
twelfths as much as before, the article must sell eight sevenths as freely—which is possible only

when it thrusts itself extensively into the place of other consumers' goods. Even then some labor
would have to move from A´´ to other subgroups of the series. One half of the amount of labor
formerly at A´´ does the whole work formerly done there, and to keep it all at work at that point
would require that the output from the whole group be doubled. Saving one twelfth in cost could not
well insure selling double the amount of goods. In this view improvements would have a
threatening look, though their ultimate effect would still appear as beneficial as ever, were it not for
the fact that the disturbances that result from them are made to be relatively small by the influences
we are studying.
[2]
Improvements and Prices under Competition
The figure represents a subgroup in which five producers, a, b, c, d, and e, are operating. Later, a
new establishment f, is introduced. The upper dark line represents the price of a unit of the product,
and the lower dark line the cost of making a unit in the establishment which is for the time the most
efficient.
The dotted lines represent the respective costs of production in the different mills, ranging from a,
the most efficient, to e, which can barely hold its own. What the figure represents as happening is as
follows:—
b first makes an improvement which lowers his cost of production, as shown by the descending
dotted line. This enables him to increase his output, and so has its effect on the price, which
descends. Now, producer e was already selling goods at cost, but he is not at once driven out of the
business. Instead, even though he cannot earn full interest on the original cost of his fixed
establishment, he will continue to run as long as he can make his plant earn anything at all. The
result is a virtual reduction of the capitalized value of the plant (the interest on which is an item of
cost), and this is what is represented by the descent of the dotted line which represents e's cost of
production. The situation is now represented by the series of points,—b´, a´, c´, etc., representing at
their second stage the differing levels of cost in the case of different producers.

The next thing that happens is an improvement made by a, causing his cost of production to fall
below that of b. The resulting fall in price now finally drives e out of business; he can no longer
earn anything at all on his fixed plant. We may assume that producers a, b, and c, who have been
making profits, have enlarged their productive capacity enough to supply the market fully without
e's contribution. d is now in the same position in which e was at the preceding stage,—earning
nothing on his fixed establishment and barely induced to remain in the business.

The next occurrence represented is the opening of a new, large, and very efficient mill by f. The
effect is like that of improvements, but more violent. The fall in price drives both d and c out of
business. b is now on the margin, but saves himself from loss by a second improvement, which
makes him again the most efficient producer. And so the process goes on ad infinitum.
This figure illustrates the fact that, while at any time the price of a good roughly equals the cost of it
to the least efficient producers, still this cost does not govern the price. The ruling factor is the cost
in the most efficient mill, toward which the price tends; and all that the cost in the least efficient
mill determines is how long that mill shall continue running.
In order that the claim here made—that price equals cost in the establishment which is about to be
crowded out of the field—may hold good it is necessary to define terms with some care. In a typical
case an employer who is destined soon to close out his business has, perhaps, an antiquated mill,
which itself pays nothing, but enables its owner to use circulating capital and labor in a way that
affords interest on that capital and wages for the labor. No interest on the cost of the antiquated mill
is chargeable to the business unless the site and the building can be sold for a new purpose. If they
have completely lost all productive power, they are not, as we use terms, capital goods at all; and in
that case the only interest which the entrepreneur should reckon as a cost is that which accrues on
other capital used in connection with the worthless mill. If the site and the building have some value
for another purpose, and if the machinery has some value as junk, then whatever the owner can get
by disposing of the plant constitutes a sum the interest on which constitutes a cost of producing
goods in this mill. It is a sum which the plant owner foregoes as long as he refrains from selling the
plant. He can afford to use it in production as long as the price of the product covers the cost as thus
defined, but must stop when it ceases to do so.
[3] It will be seen that the maintenance of the present exchange ratios between A´´´, B´´´, C´´´, etc.,
when costs of all of them are reducing, would require that these costs be reduced in exactly the
same degree in each case, and that the quantities sold at the new cost prices should be increased in
unequal degrees, so as to bring the different prices to cost levels. The demand for one article is more
elastic than is the demand for another. A slight increase in the supply of A´´´ may cause a large
reduction of the selling price, while it may require a great addition to the supply of B´´´ to produce
this effect. There must, therefore, be some changes in the relative quantities of labor in the different
subgroups, even though there has been an equal amount of "labor saving" or cost reducing in all of
them. This change is so slight in amount as compared with what would be caused by improvements
confined to one subgroup, that it is effected with relatively little hardship and mainly by disposing
the constant inflow of new labor at the points where it is needed.

CHAPTER XVIII
CAPITAL AS AFFECTED BY CHANGES OF METHOD

Labor Saving and Capital Concentrating.—There is a common impression that whatever
saves labor usually requires an increase of capital in the industry where the economy is
secured, and this impression is justified by the experience of the century following the
invention of the steam engine and the early textile machinery. Hand spinning and weaving
require small amounts of fixed capital, while the mills in which spinning and weaving are
done by steam or water power require a great deal. Fortunately in any long period this capital
comes as abundantly as it is needed from the profits of the very business that calls for it and
does not reduce the capital of other industries. The profit of one year furnishes the new
instruments required in the next; but the immediate effect of substituting a costly machine for
hand labor is to concentrate capital, or to call it from places to which it would otherwise go.
The Liberation of Capital by Invention.—For a long period it was the general rule that a
mechanical invention at first called capital to the point at which it was applied, although it
afterward created new capital and sent it away to make more than good the draft it originally
made. This rule is no longer universally applicable. When an invention cheapens capital
goods, it liberates capital. It is clear that a hundred and twenty-five years ago there was small
chance that an invention would liberate very much capital by reducing the cost of making
tools, buildings, rails, machinery, etc., since there were so few of them to cheapen. Now that
machines are at hand in myriad forms the chance is large that an invention will substitute for
many of them others of less costly construction. It will in these cases cause less capital to be
required per machine than was formerly needed.
Simplifying the Forms of Machinery and Cheapening the Materials of It.—The history of
invention shows that the early machines sometimes took cumbersome and expensive forms,
for which simple and cheaper forms were later substituted. Much simplifying of mechanical
appliances is all the while going on, and this, of course, liberates some capital. Making
instruments of any kind out of cheaper materials has the same effect that anything has which
reduces the cost of constructing the instruments. Bessemer steel has made rails, bridges, ships,
buildings, steam boilers, and a vast number of mechanical tools and appliances less costly
than they were, and so has liberated some of the capital which such things formerly
embodied. After one of the machines of the costlier type has earned the fund on which its
owner relies for replacing it as it is worn out, it appears that a part of this fund will suffice for
procuring a perfectly good substitute for it, and the remainder may be used for procuring other
appliances of production.
Cheapening the Process of Making Instruments.—If we recur to the table which represents
the groups

A´´´ B´´´ C´´´ H´´´
A´´ B´´ C´´ H´´

A´ B´ C´ H´
A B C H

of the industrial system, we shall see that improvements of method in the general group H-H
´´´ have the effect of liberating capital in the other groups and subgroups. H´´´ is the
comprehensive symbol that represents active instruments of all kinds. It is engines and
boilers, looms and spindles, lathes and planers, rails, cars, bridges, tunnels, canals, ships,
buildings, and all the myriad instruments which actively aid man in making the things he
wants for consumption. New methods at H-H´´´ make the supply of all these things cheaper,
which means that the labor and capital of the group H-H´´´ which would have been required
for replacing the instruments used in the other groups will more than suffice for that purpose,
and a part of their time may be given to making machinery, etc., not formerly used. This
amounts to liberating a part of the fixed capital in the three groups producing A´´´, B´´´, and C
´´´, although the free capital that is thus gained may in part be used in furnishing additional
appliances for use in these same groups.
Local Concentration of Capital which causes a General Liberation of It.—In such a case the
new method used at H´´´ may, at its introduction, require more capital than was formerly used
at that point in the system. Building Bessemer converters was a costly operation, though the
output of cheap steel afterward saved far more capital than the converters required. The power
canals of Niagara cost something, but the products created by means of them are cheapening
many tools of industry; and like effects follow most applications of electricity for utilizing
waterfalls and carrying to great distances the power which they generate. They follow on a
considerable scale as the culm of coal mines is economically burned and made to generate
steam and drive dynamos. All cheapening of transportation, besides making consumers' goods
cheaper, has the same effect on producers' goods, and by this means liberates capital. It causes
a single productive appliance to cost less than it otherwise would cost and renders available
for other purposes a part of the outlay that was formerly required for replacing it at the end of
its industrial career.
Effect of Speeding Machinery.—Increasing the speed of a machine is a capital-liberating
operation, since it enables a certain number of machines to do the work of a larger number.
Running spindles and looms rapidly, while it requires fewer laborers for a given amount of
product, requires fewer spindles and looms also.
Cases in which Liberated Capital remains partly in the Same Industry in which it has been
Used.—A distinction has carefully to be made between causing less capital to be used per unit
of physical product, and causing less to be used in a particular occupation without regard to
the amount of the product. If we cheapen the operation of cloth making, we shall increase the
consumption of cloth, and in this way we may draw new capital into this business, even
though we can build and equip a mill of a given capacity more cheaply than before. In this
case we have liberated capital in this business and at once reëmployed it at the same point. If
we use as many looms as before, the more rapid running calls for more spindles to furnish
yarn, and the new spindles require larger engines and boilers, or more water wheels, wheel
pits, and reservoirs, to furnish power. Enlarging a business in this way usually calls for an
enlarged general capital in the industry, though it calls for less capital for a given output; and
the striking fact is that this effect may be realized by means of devices which actually save

capital at particular points in the industry. If, after power looms were introduced, some
inventive genius had made them cost only a quarter as much as on their first introduction they
had cost, the profits of the business would have been increased and, in time, far more capital
in the shape of spinning machinery, engines, etc., would have been required than had formerly
been used in those forms. With general growth of population and wealth the increased
consumption of cloth calls, in the end, for more capital in the form of the looms themselves.
General Consumption as affected by a Specific Increase of Productive Power.—Consumption
in the generic—the use of consumers' goods of every kind—grows as the power to make the
good increases; but a point that is of great importance is that any specific increase of
productive power brings about a general increase of consumption. It brings about a greater
all-round creating and using of commodity. If we can hereafter make the A´´´ of our table with
the expenditure of half as much labor and capital as we have heretofore used in creating it, the
liberated agents of production become available for making whatever is most needed, and
they will, in fact, be used for increasing the supply of all three types of consumers' goods
represented in the table. They will give us more of A´´´, B´´´, and C´´´ in quantities adjusted
by the laws of value. The outcome of this is that an economy in making A´´´ actually gives us
more of A´´´, B´´´, and C´´´. We become larger consumers of everything because of the
cheapening of anything which enters into our list of articles for personal use. This presents a
further aspect of the process of moving labor and capital from group to group, in which the
possibility of hardship for particular persons inheres. The conclusion to which a fair weighing
of the effects of mechanical progress has already led us is that there are very few, even of the
workers who suffer displacements of this kind, who do not during their lives gain far more
than they lose by general progress; and the effects of cheapening capital goods at one point,
and so liberating capital for use at other points, increases this beneficent effect. The special
costs of making the new kinds of machinery have been large in the earlier stages of the
process, but have afterward grown smaller; and as machinery has come into general use the
liberating of capital by the cheapening of the machines has become a more and more
important factor. Some of the capital liberated at A goes to assist labor in furnishing the
additional amount of B´´´ and C´´´ which enlarged consumption requires.
Hardships entailed on Capitalists by Progress.—As the old handicrafts have now been largely
supplanted by machinery, and the hardship that continuing progress entails on laborers is
greatly reduced, there is involved in progress a new burden which falls altogether on the
capitalist employer. The machine itself is often a hopeless specialist. It can do one minute
thing and that only, and when a new and better device appears for doing that one thing, the
machine has to go, and not to some new employment, but to the junk heap. There is thus
taking place a considerable waste of capital in consequence of mechanical and other progress.
As there have come into use marine boilers made of steel and capable of standing a very high
pressure, the low-pressure boilers of former days have become useless. With the advent of
triple expansion cylinders, twin screws, and better and larger hulls, ships of the old type lost
their value; and similar things are occurring in every line of production. A new mill is built
and equipped with the best machinery known at the date of its building; but before a year has
gone by all the machines in one department are so antiquated that it is best to throw them out.
Indeed, a quick throwing away of instruments which have barely begun to do their work is
often a secret of the success of an enterprising manager; but it entails a destruction of capital.
What is easily to be seen is (1) that a single change of that kind makes an immediate draft on

the general fund of available social capital; and (2) that this draft, as a rule, is soon repaid
with increase. Machinery that is nearly new is thrown away when it appears that another kind
soon will earn enough to make good the waste thus entailed, and the paradox is in the fact that
the entrepreneur who quickly destroys capital really saves it, while he who, by using the old
appliances, tries to hold on to the capital loses it, since he sacrifices profits from which more
would have come. Running his antiquated engine, the unenterprising man has to content
himself with small returns and, in the meanwhile, sees his actual productive fund dwindling
by the deterioration of the old equipment.
The Offset for Capital destroyed by Changes of Method.—What has happened in such a case
to the enterprising man is a loss of personal capital. What he has just paid for the supplanted
instruments has gone for nothing. His financial status is improved rather than injured because
of the prospective profits which the new appliances will earn. What has happened to the man
who keeps the old machinery is a partial or total loss of whatever he has lately put into it, not
offset by such profits. By keeping his capital goods he is losing his capital without having his
rival's assured prospect of regaining it. Whether the gains made by those who promptly
discard antiquated appliances offset the wastes suffered by those who hold on to them too
long, is a question that requires more space than can here be allotted to it; but the following
facts determine the answer:—
(1) Instruments naturally at any one date are of an average age equal to about half their
working duration.
(2) Discarding all of one kind at any one date would involve drawing on the fund of social
capital for about one half of the amount needed to replace these instruments.
(3) Very few are at once discarded on the invention of the improved types.
(4) Nothing but a fall in the price of the product created by the aid of these old machines can
prevent them from earning the remainder of the fund required for replacing them. If they do
this, they prevent any positive destruction of capital which many inventions cause.
(5) When only one entrepreneur introduces the new appliance, his production is usually
increased, but not to an extent that causes a quick fall in price. This affords to the users of old
appliances whose plants are not already at the final point of inefficiency a chance to continue
accumulating the fund for replacement. The profits of the user of the better appliance are
meanwhile accruing.
(6) When all entrepreneurs introduce the new appliance at once they do so—provided that
their act is intelligent—because the saving effected in the cost of production makes the
change advantageous in spite of the waste entailed. They expect an all-round net profit during
the period before the price of the product falls to its new level, and they expect that this will
give them more than is required for interest, cost of future replacement of the superior
instruments, and the deficit in the accounts caused by the early discarding of the superseded
appliances.
(7) Without treating this prospective profit inhering in the new appliance as capital, we must
regard it as affording an assurance that new capital will soon appear. There are great gains to

be made by using the new appliances, and some of these will add themselves to the permanent
fund of productive wealth.
(8) The cost of the new appliances may be defrayed by their owner's earlier accumulations or
by loans. In either case they come out of a social fund that is created mainly by the appliances
which in a preceding period have yielded special gains. The machine of to-day is paid for
from the available surplus created by the machine of an earlier day, and a series of inventions
enlarges the social fund of capital in spite of all wastes by which it is attended.
The effect that a series of
improvements has on the amount
of social capital, if we measure
the fund solely on the basis of the
cost of the capital goods which
embody it, may be represented
thus:—The horizontal line
measures time and is graduated in
years from one to ten. The
distance of the point above this base represents the amount of capital as estimated in units of
cost, in the possession of the society at the time a particular improvement is made, and would
remain unchanged if society were static. The level of the line AB represents what, under such
a condition, would be the capital of a decade. The curved line AB´, dipping below AB and
then rising above it, expresses the fact that a single important improvement first trenches on
the amount of capital in use, and soon makes good the deduction and makes a positive
addition. It raises the sum total of capital to the level of the latter part of the line AB´. The
curved line A´B´´, first falling below A´B´ and then rising above it, expresses the fact that a
second improvement, made a year or two after the first one, makes a reduction of the amount
of capital as determined by the first improvement, and later adds more than enough to make
good this reduction. A third improvement, at the end of two or three further years, has the
effect expressed by the line A´´B´´´; that is, it first reduces the fund below the level at which at
that time it would otherwise have stood,—but by no means to the level at which it stood when
the series of improvements began,—and later carries it above the line expressing the highest
level it would, without this improvement, have attained. In so far as these three improvements
affect the level of the social capital for the ten-year period, it stands at the level indicated by
the line AA´A´´B´´´, and no later improvement, even at the time of its introduction, does more
than to make a small reduction of the increment of capital accruing from the products of the
earlier improvements. A series of economical changes means a perpetual increase of the social
capital as well as a perpetual improvement in the mode of applying labor. The increments of
capital due to the earlier changes are far more than is required by the introduction of any later
one.
The Impossibility of Reducing Capital by too Rapid Progress.—There is a theoretical question
whether this series might be too rapid to permit this result. If the interval were a month
instead of several years, and if the amount of capital put into the new appliances were the
same that, in the figure, they are represented as requiring, the effect would be to make twelve
deductions from the amount of the social capital in the course of a year, which would carry it
some distance below its original level, while in this one year there would have been no time

for the profits to accrue in order to restore and add to the fund. In the next year and the
following ones this would follow, and the effect, in the course of ten years, would be to carry
the social capital to a still higher level than the one it reaches in consequence of the slower
succession of economical changes. Increasing the rapidity of productive inventions only
multiplies the additions made to the social capital.
We may summarize the chief facts concerning technical progress as follows:—
(1) Progress may throw particular men out of their present employment, but cannot destroy
the social demand for their labor. Somewhere in society there is a place for them.
(2) If improvements were long confined to one subgroup, they might send labor into other
subgroups and even into other general groups. Occurring as they do at nearly all parts of the
system, they very seldom require an absolute diminution of the amount of labor in a
subgroup, and practically never cause such a reduction in a general group.
(3) The gradual introduction of an improvement is important, since it affords time for an
increase in the social demand for the product which is thus cheapened and for introducing at
many other points improvements which neutralize, in a large degree, the labor-expelling effect
of the first improvement.
(4) Technical gains are the largest source of additions to the total amount of the social capital.
The constant influx of new capital facilitates the placing of laborers at the points where they
are needed.
(5) The fact that elementary utilities which are produced by agriculture cater to a less elastic
demand than do the form utilities which are the product of manufacturing occupations, has
caused labor to move slowly from the lowest subgroups of the various series to the upper
ones, as the productive power of labor in agriculture has increased.
(6) This movement is so gradual that it can be accomplished almost entirely by devoting to
the industries constituting the upper subgroups an enlarged share of new laborers as they enter
the field in quest of employment. Young men drift from the farm to the village and the city.
(7) In addition to the upward flow of labor in the series of subgroups there are some lateral
movements, or transfers from group to group, to be taken into account. The fact that
improvements are widely diffused and that there is a succession of them at each point makes
it possible to make these lateral movements of labor in the same way in which the movement
within the groups is accomplished; namely, by putting the new men who are entering the field
of employment in the places where they are most needed.
(8) These facts do not always prevent particular men from losing the special benefit that
skilled handicrafts have insured to them, since a machine, to the running of which they are
compelled to betake themselves, may often be as well tended by persons who have never
learned such a handicraft.
(9) The loss thus entailed on craftsmen was very large during the original process of
supplanting hand labor by machinery, but bids fair to be relatively small hereafter, since fewer

men go through long and costly apprenticeships, and since the operator of one machine can
usually learn to operate another with little waste of time.
(10) Such injuries as particular men now suffer from the introduction of economical devices
are, as a rule, more than atoned for even to these men by the greater productivity of social
labor, as it is applied in new ways, and by the greater abundance of social capital. These gains
are the result of improvements made in the earlier periods, and they benefit every one who
labors.
(11) The new capital created by productive inventions is an essential cause of the continuing
gain of the working class.
(12) While most inventions at first draw capital from the social fund to the point where they
are applied, many of them soon liberate capital by cheapening particular appliances of
production, and nearly all of them, by means of the profits they insure, ultimately add to the
social capital.
The Vital Importance of Continued Improvement.—Intelligent study will make it clear to
every one that any assertion that machinery is the enemy of labor is not merely erroneous, it is
a contradiction of the most striking and important fact connected with general progress. The
gains of labor during the past century, which have been partly due to the occupation of areas
of new land, have been largely due to the mechanical inventions and technical discoveries
which have put the forces of nature so largely at man's disposal. These forces have worked for
all society, indeed, but they have worked largely for the men who labor, whether in the
factory, in the shop, on the railroad, or on the farm. Their effects are all-pervasive, since they
signify an increase in the productive power of that final unit of social labor on which wages
generally depend. General riches have been and must continue to be generally beneficent. As
an isolated man working, Crusoe-like, for himself alone, gains by every technical discovery
he can make and by everything he can add to his stock of productive appliances, so society,
the great and isolated organism which is the tenant of our planet, reaps a benefit by every
improvement it can make, and the forces of distribution see to it that this benefit is carried
through and through the system and made to improve the condition of the most humble
members. Since the great areas of new land are no longer available as a future resource, the
hope of labor during the coming centuries, under any form of industrial organization, whether
it be competitive or socialistic, rests on the prospect of continued technical gains,—an
unending succession of calls on the exhaustless serving power of nature.
The Effect of Changes in the Relative Amounts of Labor and Capital.—The law of wages, as
stated in an early chapter of this work, makes it evident that an increase of population, while
the social fund of capital remains the same, would reduce the product of marginal labor and
therefore the rate of wages. In every establishment into which more workmen should come,
while its capital remained the same in amount, the power of an individual worker to produce
goods would be lessened. Moreover, any influx of laborers into the society as a whole would
be attended by a diffusion of them among all the groups and subgroups, so that the power of
an individual laborer to create any kind of goods would be reduced. This means that labor has
lost some of its power to create commodity, which is the concrete name for general wealth,
and its wages fall accordingly.

An influx of capital without any change in the number of laborers would have the opposite
effect. It would add to the productive power of marginal labor. As the new capital should
diffuse itself through the producing organism it would enlarge the product of workers
everywhere. The wages of labor depend in part on a numerical ratio between units of capital
and units of labor, as they coöperate in production; and the change in the ratio which
enlarging capital causes improves the condition of the working people. The capital also
diffuses itself throughout the system, every subgroup gets a share of it, and labor everywhere
responds to this influence and produces more than before. In a change in this ratio—in a gain
of per capita wealth in productive forms—lies one influence which has a great power over
human destiny and is one main cause of weal or woe for coming generations. Method as it
improves is related in two ways to this critical change in the ratio of capital to population. It is
a prominent cause of the increase of capital. What men make by juggling with values and
putting taxes on other men adds nothing to the aggregate wealth; but what they make by
improved methods of production causes a net addition to it. The improvement in method also
directly reënforces the influence of enlarging capital, by infusing productivity into labor and
increasing its returns.
The Resultant of the Five Dynamic Changes acting Together.—So long as the increase of
capital more than offsets the increase of population, the ultimate result of all five of the
general changes which characterize a dynamic state is to increase the well-being of laborers.
The movement of labor from point to point in the system of industrial groups is a necessary
means of securing the largest gain for society as a whole and of diffusing the benefit among
all members. It is wage earners who are most numerous and most needy, and the greatest
benefit which can be credited to any economic influence is that which takes the shape of a rise
in wages. Moreover, an upward trend in the rate of pay is of far greater importance than the
level of the rate at any one time. A system that should afford high present wages would stand
condemned if it precluded all chance of higher ones hereafter; while a system that should
begin with a low rate and afford a guaranty that it should grow higher each year to the end of
time would have the most important merit which any system could possess. The outlook it
would afford for humanity would far outweigh a measure of hardship imposed on the present
generation. A present purgatory with dynamic capabilities must in the end excel any earthly
paradise which is held fast in a stationary state.
We may represent the resultant of the actual growth of population and of capital by the
following figure:—

Measuring time by decades along the horizontal base line and the rate of wages at the
beginning of a century by the line AB, we represent the increase in the pay of labor
which would be brought about by an increase of capital not counteracted by any other
influence by the dotted line BC, and the reduction which would be caused by an
increase of population by the dotted line BE. The line BD describes the resultant effect
of these two changes acting together, on the supposition that during the latter part of
the century the growth of population is somewhat retarded and that the increase of
capital is the predominating influence.
We may further represent the change in the rate of wages which is caused by
improvements in method and organization by lines rising above the one which
expresses the trend of wages as it is affected only by an increase of capital and of
population.
AF measures time as
before and AB the rate of
pay at the beginning of
the century. The dotted
line BE represents the rise
in wages due to the
increase of capital, as it
more than counteracts the
growth of population. The
rise of the line BD above
BC represents the
additional increase in
wages which is brought
about by improvements of
method, and finally, the

rise of BC above BD expresses the further addition to the pay of labor which comes by
reason of improved organization. The uppermost line BC describes the resultant of all
the dynamic changes on the supposition that they act in a natural way.
It will be seen that BC at first rises above BD rapidly and later runs nearly parallel
with it. This expresses the fact that while gains insured by organization may continue
for a long period, the amount of them does not greatly increase after a fairly efficient
type of organization has been secured. On the other hand, the fact that BD rises above
BE by a wider and wider interval expresses the fact that gains which come from
technical improvements may increase for an indefinitely long time.
The Rate of Interest contrasted with the Absolute Amount of it; this Amount
Increasing.—The changes which make wages rise cause interest to fall and there
would seem to be a partial offset for the general gain; but the chief cause of a
declining rate of interest is an increase of the total amount of capital. The size of the
income which comes to the capitalists as a class from their entire invested wealth
grows larger wherever the amount of the fund increases more rapidly than the rate of
interest falls. A million dollars yielding four per cent gives a larger income than a half
million yielding five or six. It is a condition such as this which we have described in
outline, and it enables the holders of investments to receive a constantly increasing
total return, although the percentage yielded by a given amount invested grows
continually smaller.
The Conditions of Increasing Future Well-being.—The realization of this resultant of
all dynamic forces requires that the rate of growth of population should be subject to a
natural check, that the increase of capital should not be unduly retarded, that technical
improvements should go on, and that the organization which is effected should be of
the kind which makes for efficiency but not for monopoly. Competition must be kept
alive. In altered ways, indeed, the essential power of it must forever dominate the
industrial system, as it will do if the state shall do its duty and not otherwise. A
dynamic society requires a dynamic government whose enlarging functions are
shaped by economic conditions.

CHAPTER XIX
THE LAW OF POPULATION

Since the optimistic conclusion reached in the preceding chapter is contingent on an
increase of wealth which is not neutralized by an increase of population, it remains to
be seen whether the population tends to grow at a rate that gives reason to fear such a
neutralizing. Does progress in method and in wealth tend to stimulate that enlarging of
the number of working people which, in so far as they are concerned, would bring
progress to an end? Is the dynamic movement self-retarding and will it necessarily
halt? The answer to this question depends, in part, on the law of population.
The Malthusian Law.—We need first to know whether the growth of population is
subject to a law, and if so, whether this law insures the maintenance of the present rate
of increase or a retarding of it. The law of population formulated by Malthus at the
beginning of the last century is the single extensive and important contribution to
economic dynamics made by the early economists. It was based more upon statistics
and less on a priori reasoning than were most of the classical doctrines. Even now the
statement as made by Malthus requires in form no extensive supplementing, and yet
the change which is required is sufficient to reverse completely the original
conclusion of the teaching. Malthusianism constituted the especially "dismal" element
in the early political economy, and yet, as stated by its author, it revealed the
possibility of a comfortable future for the working class. One might look with
cheerfulness on every threatening influence it described if he could be sure that the so-
called "standard of living" on which everything depends would rise. The difficulty lay
in the fact that the teaching afforded no evidence that it would thus rise. The common
impression of readers was that it was destined to remain stationary and that too at a
low level. The workmen of Malthus's time were not accustomed to getting much more
than the barest subsistence, and not many economists expected that they would get
much more, even though the world generally should make gains.
The Popular Inference from the Malthusian Law.—If we state the conclusion which
most people drew from the Malthusian law in its simple and dismal form it is this:
Whenever wages rise, population quickly increases, and this increase carries the rate
of pay down to its former level. The earnings of labor depend upon the number of
laborers; a lessening of the number of workers raises their earnings and an increase
depresses them; and therefore, if every rise in pay brings about a quick increase of
population, labor can never hold its gains; every rise is the cause of a subsequent fall.

Malthus's Qualification of his Statement.—As we have said, Malthus so qualified his
statement that he did not positively assert that this would describe the experience of
the future; the fall in pay that should follow the increase of numbers might not always
be as great as the original rise, and when a later rise should occur the fall following it
might be less than this second rise. In some way workers might insist upon a higher
standard of living after each one of their periodical gains.
Why this Qualification is not Sufficient.—The mere fact that the standard of living
may conceivably rise does not do much to render the outlook cheerful, unless we can
find some good ground for supposing that it will rise and that economic causes will
make it do so. We should not depend too much on the slow changes that education
may effect, or base our law on anything that presupposes an improvement in human
nature. We need to see that in a purely economic way progress makes further progress
easier and surer and that the gains of the working class are not self-annihilating but
self-perpetuating. We may venture the assertion that such is the fact: that when
workers make a gain in their rate of pay they are, as a rule, likely to make a further
gain rather than loss. While there must be minor fluctuations of wages, the natural and
probable effect of economic law is to make the general rate tend steadily upward, and
nothing can stop the rise but perversion of the system. Monopoly may do it, or bad
government, or extensive wars, or anarchy growing out of a struggle of classes; but
every one of these things, not excepting monopoly, would naturally be temporary, and
even in spite of them, the upward trend in the earning power of labor should assert
itself. Instead of being hopelessly sunk by a weight that it cannot throw off, the labor
of the future bids fair to be buoyed up by an influence that is irrepressible.
Refutations of Malthusianism.—The Malthusian law of population has been so
frequently "refuted" as to prove its vitality. It is in the main as firmly impressed in the
belief of scientific men as it ever was, and some of the arguments which have been
relied upon to overthrow it require only to be stated in order to be discarded. One of
these is the claim that the statement of the law is untrue because, during the century in
which the American continent, Australia, parts of Africa, and great areas elsewhere
were in process of occupation, mankind has not actually pressed on the limits of
subsistence. No intelligent view regards that fact as constituting anything but an
illustration of the Malthusian law. A vast addition to the available land of the world
would, of course, defer the time of land crowding and the disastrous results which
were expected from it, but with the steady growth of population the stay of the evil
influence would be only temporary.
An Objection based on a Higher Standard of Living.—The second objection is also an
illustration rather than a refutation of the Malthusian doctrine; it asserts that the
standard of living is now higher than it was, and the population does not increase fast
enough to force workers to lower it. Malthus's entire conclusion hung upon an if. The

rate of pay conformed to a standard, and if that standard were low, wages would be so;
while if it were higher, wages would be higher also.
The Real Issue concerning the Doctrine of Population.—There is a real
incompleteness in all such statements. Does the standard of living itself tend to rise
with the rise of wages and to remain above its former level? When men make gains
can they hold them, or, at any rate, some part of them, or must they fall back to the
level at which they started? And this amounts to asking whether, after a rise in pay,
there is time enough before a fall might otherwise be expected to allow the force of
habit to operate, to accustom the men to a better mode of living and forestall the
conduct that would bring them down to their old position. The standard of living, of
course, will affect wages only by controlling the number of laborers, and the
discouragement due to Malthusianism lies in the fact that it seems to say that the
number of workers is foreordained to increase so quickly, after a rise in wages, as to
bring them to their old level. Whether it does or does not do this is a question of fact,
and the answer is a very clear one. The higher standards actually have come from the
higher pay, and they have had time to establish themselves. Subsistence wages have
given place to wages that provided comforts, and these again to rates that provided
greater comforts and modest luxuries; and the progress has continued so long that, if
habit has any power whatever, there is afforded even by the Malthusian law itself a
guarantee that earnings will not fall to their former level nor nearly to it.
A Radical Change in Theory.—Progress is self-perpetuating. Instead of insuring a
retrogression, it causes further progress. The man who has advanced from the position
in which he earned a bare subsistence to one in which he earns comforts is, for that
very reason, likely to advance farther and to obtain the modest luxuries which appear
on a well-paid workman's budget. "To him that hath shall be given," and that by the
direct action of economic law. This is a radical departure from the Malthusian
conclusion.
Three Possible Conditions for the Wage-earning Class.—Workers are in one of three
possible conditions:—
(1) They may have a fixed standard and a very low one. Whenever they get more than
this standard requires, they may marry early, rear large families, and see their children
sink to their own original condition.
(2) They may have a fixed standard, but a higher one. They may be unwilling to marry
early on the least they can possibly live on, but may do so as soon as their pay affords
a modicum of comfort.
(3) They may have a progressive standard. There may be something dynamic in their
psychology, and it may become a mental necessity for them to live better and better

with advancing years, and to place their children in a higher status than they
themselves ever obtained.
A Historical Fact.—The manner in which Malthus was actually interpreted was as
much due to the condition of workers in his day as to anything which he himself said.
It was small comfort to know that, under the law of population, wages might
conceivably become higher and remain so because of a higher standard of living,
provided the higher standard was never attained. Facts for a long time were
discouraging. In due time they changed for the better. The opening of vast areas of
new land made its influence felt. It raised the pay of labor faster than the growth of
population was able to bring it down. This had the effect of establishing, not only a
higher standard, but a rising standard, and as one generation succeeded another it
became habituated to a better mode of living than had been possible before. It was the
sheer force of the new land supplemented by new capital and new methods of industry
that accomplished this. It pushed wages upward, in spite of everything that would in
itself have pulled them down.
A Retarded Growth of Population.—If Malthusianism, as most people understood it,
were true, population should increase most rapidly during this period of great
prosperity, and should do its best to neutralize the effect of new lands, new capital,
and new methods. In some places the increase has been abnormally rapid, and in a
local way this has had its effect; but if we include in our view the whole of what we
have defined as civilized industrial society, the rate of growth has not become more
rapid, but has rather become slower during this period. In one prosperous country,
namely, France, population has become practically stationary. Even in America, a
country formerly of most rapid growth, the increase, apart from immigration, has been
much slower than it was during the first half of the nineteenth century. The growth of
population, then, may proceed more slowly or come to a halt, even while wealth and
earning powers are increasing. If this is so, a further accumulation of capital and
further improvements in method will not have to struggle against the effects of more
rapidly growing numbers, and their effects will become more marked as the decades
pass. There will be a weaker and weaker influence against these forces which fructify
labor and they will go on indefinitely, endowing working humanity with more and
more productive power and with greater accumulations of positive wealth. Home
owning, savings bank deposits, invested capital, and comfortable living may be more
and more common among men who depend for their income mainly upon the labor of
their hands. Is this more than a possibility? Is there an economic law that in any way
guarantees it? Can we even say that general wealth will, without much doubt, redound
to the permanent well-being of the working class, and that the more there is of this
prosperity, the less there is of danger that they will throw it away by any conduct of
their own? The answer to these questions is to be found in a third historical fact.

The Birth Rate Small among the Upper Classes in Society.—In most countries it is the
well-to-do classes that have small families and the poor that have large ones. It is from
the interpretation of this fact that we can derive a most important modification of the
Malthusian law. It is the voluntary conduct of different classes which determines
whether the birth rate shall be large or small; and the fact is that in the case of the rich
it is small, in the case of the poor it is comparatively large, while in the case of a
certain middle class, composed of small employers, salaried men, professional men,
and a multitude of highly paid workers, it is neither very large nor very small, but
moderate. In a general way the birth rate varies inversely as the earning power of the
classes in the case, though the amounts of the variations do not correspond to each
other with any arithmetical exactness. If one class earns half as much per capita as
another, it does not follow that the families belonging to this class will have twice as
many children. They do, on the average, have more children. There is, then, at least an
encouraging probability that promoting many men from the third class to the middle
class would cause them to conform to the habit of the class they joined. This class is at
present largely composed of persons who have risen from the lowest of the classes,
and any future change by which the third class becomes smaller and the second larger
would doubtless retard the average birth rate of the whole society.
Motives for the Conduct of the Different Classes.—History and present fact are again
enlightening in that they reveal the chief motive that determines the rapidity of the
increase of the population. When children become self-supporting from an early age,
the burden resting on the father when he has a comparatively small number of them is
as large as it ever will be. If they can earn all they cost when they reach the age of ten,
the maintenance of the children will cost as much when the oldest child has reached
that age as it will cost at any later time. Even though one were added to the family
every year or two, one would graduate from the position of dependence every year or
two, and the number constantly on the father's hands for support would probably not
exceed five or six, however large the total number might become. The large number of
children in families of early New England and the large number of them in French
Canadian families at a recent date were due to the fact that land was abundant,
expenses were small, and a boy of ten years working on the land could put into the
family store as much as his maintenance took out of it. The food problem was not
grave in those primitive places and times, and neither were the problems of clothing,
housing, and educating. It is in this last item that the key to a change of the condition
lay, for the time came when more educating was required, when the burden of
maintaining children continued longer, and a condition of self-support was reached at
no such early date as it had been in rural colonies.
The Effect of Endowing Children with Education and with Property.—When children
need to be thoroughly educated, the burden of maintaining a family of course
increases. An unduly large family means the lowering of the present standard of living
for all and a lowering of the future standard for the children. With most workmen it is

not possible either to endow many children with property or to educate them in an
elaborate way. The fear, therefore, of losing present comforts for the family as a whole
and the fear of losing caste by seeing the family drop, at a later date, into a lower
social class, are arguments against large families.
Why Economic Progress perpetuates Itself.—The economic motive which causes
progress to perpetuate itself and to bring about more and more progress is the
determined resistence to a fall from a social status. The family must not lose caste. It
must not sacrifice any of the absolute comforts to which it is accustomed, particularly
when so doing entails a degradation. Such is human nature that the unwillingness to
give up something to which one is accustomed is a far stronger spur to action than the
ambition to get something to which one is not accustomed; and a social rank once
attained is not surrendered without a struggle. A tenacious maintenance of status is the
motive which figures most prominently in controlling the growth of population and
the increase of capital. The rich maintain the status of the family by means of invested
wealth, the poor do it by education, and members of the middle class do it by a
combination of the two.
Status maintained by Education.—In case of wage earners the need of educating
children and the advantages that flow from it overbalance the need of bequeathing to
them property; and yet the need of bequeathing property of some kind is a powerful
motive also. It is important to enable them to procure the tools of some handicraft, or
to secure themselves against dangers from sickness or accident. Moreover, it is not
altogether technical education which counts in this way. Culture in itself is a means,
not only of direct enjoyment, but of maintaining a social rank. The well-informed
person accomplishes directly what a well-to-do person accomplishes indirectly, in that
he gets direct pleasures from life which other people cannot get, and he enjoys
consideration of others and has influence with them as an uninformed person cannot.
The need, therefore, of educating children for the sake of making them good
producers and the need of doing it for the purpose of making them good consumers
and of enabling them to make the most of what they produce works against too rapid
an increase of numbers.
The Effect of Factory Legislation.—These motives are powerfully strengthened when
they are reënforced by public opinion and positive law. The ambition of workers to
secure laws which will forbid the employment of children under the age of sixteen is,
in this view, a reasonable wish and one that if carried out would tend to promote the
welfare of future generations. It is doubtless true that this is not the sole motive, and
some weight must be accorded to the desire to reduce the amount of available labor,
and to protect adults who tend machines from the competition of children who could
do it as well or better. There is, however, an undefined feeling in the laborers' minds
that when children all work from an early age the wages of the whole family somehow
become low, and that it takes all of them to do for the family what the parents might

do under a different condition. The Malthusian law shows how, in the long run, this is
brought about. The increased strength of the demand for factory laws and compulsory
education is a positive proof of the growth of the motives which put a check on
population.
Absolute Status and Relative Status both Involved.—The absolute comfort a family
may enjoy and its social position are both at stake, and we need not trouble ourselves
by asking whether the comparative motive—the need of keeping pace with others in
the march of improvement—will cease to act if a whole community advances
together. We saw at the outset that this motive acts powerfully on a superior class,
which has before its eyes a lower class into whose rank some of its members may
possibly drop. The lowest class must always be present, however a community may
advance, and a well-to-do worker will always dread falling into it. If it should grow
smaller and smaller in number, and if the second of the three classes we are speaking
of should grow larger, the dread of falling from the one to the other would not
disappear. The relative status—that which appeals to caste feeling and the desire for
the consideration of others—would continue to be influential, as well as the desire for
positive comforts; and the motive that depends on comparisons might even be at its
strongest when the lowest class should so dwindle that few would be left in it except
cripples, the aged, or the feeble-minded. An efficient worker would struggle harder to
keep his family out of such a class than to keep it out of one which would have upon it
only the ordinary stigma of poverty.
Checks more Effective as Wealth Increases.—It is clear that the dominant motives
which restrain the growth of population act more powerfully on the well-to-do classes
than on the poor. The need of invested wealth, the need of education, the
determination to adhere to a social standard of comfort and to avoid losing caste, are
stronger in the members of the higher classes than in those of the lower ones, and
become more dominant in the community as more and more of its members belong to
the upper and the middle classes.
Immediate Causes of a Slow Increase of Population.—The economic motive for a
slow growth of population can produce its effect only as it leads to some line of
conduct which insures that result. Means must be adopted for attaining the end
desired, and when one looks at some of the means which are actually resorted to, he is
apt to get the impression that an indispensable economic result is in some danger of
being attained by an intolerable moral delinquency. Must the society of the future
purchase its comforts at the cost of its character? Clearly not if the must in the case is
interpreted literally. A low birth rate may be secured, not at the cost of virtue, but by a
self-discipline that is quite in harmony with virtue and is certain to give to it a virile
character which it loses when men put little restraint on their impulses. Late marriages
for men stand as the legitimate effect of the desire to sustain a high standard of living
and to transmit it to descendants; and late marriages for women stand first among the