The Economics of Welfare

Pigou, Arthur C.
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First Pub. Date
London: Macmillan and Co.
Pub. Date
4th edition.
61 of 73

Part IV, Chapter IV


§ 1. WE have thus seen that in existing conditions causes acting through the supply of capital in general and also causes acting through the supply of labour in general operate harmoniously. They either increase both the national dividend and the real earnings of labour, or they decrease both of them. A more complicated problem has to be faced when the initiating cause is an invention or improvement in processes or methods. All developments of this kind, since they enable something to be produced which was not being produced at all before, or enable something which was being produced before to be produced more easily, must increase the national dividend. Unless at the same time they indirectly alter distribution adversely to labour, they must also increase the real income which falls to labour. Hence, of any invention considered in the abstract, there is an initial presumption that its effects will be harmonious, in the sense that it will benefit labour as well as increase the national dividend. But it is possible that a given invention may change the parts played by capital and labour in production in such a way as to make labour less valuable relatively to capital than it was before; and, if this happens, the absolute share received by labour may be diminished. Our problem is to determine in what, if any, conditions this result will come about. It is interesting to observe that exactly the same analysis is appropriate when the initiating cause is, not an invention in the ordinary sense, but a development which enables a country to obtain some commodity more cheaply than before by making something else with which to purchase it from elsewhere, instead of making the commodity itself. Here too more of what people want is made available; and here too the proportionate parts played by labour and capital in production may be changed.


§ 2. The popular solution of our problem is very simple. It is thought that workpeople will be injured if an invention causes less labour to be employed in the industry to which it refers, and benefited if it causes more labour to be employed there. Such a view leads at once to optimism. Mr. Hobson has, indeed, shown that inventions do not always cause more labour to be employed in the industry where they are introduced: "The introduction of spinning and weaving machinery into Lancashire and Yorkshire afforded a considerable increase of employment, and a number of successive inventions and improvements during the second and third quarters of the last century had a similar result, but later increments of machinery have not been attended by similar results; on the contrary, there has been a decline in the number of persons employed in some of the staple textile processes. The introduction of typesetting machines into printing works has been followed by a large increase of employment; the introduction of clicking machinery into the shoe trade has been followed by a net reduction of employment."*33 A broader illustration of a diminution of employment in a particular sphere, in consequence of an invention in that sphere, may be found in agriculture: for it is well known that agricultural machines have displaced a substantial number of agricultural labourers. An occasional failure of this kind is fully admitted by all. Still, in the main, inventions are believed by those who have studied the matter to increase, and not to diminish, employment at the point at which they act. Thus M. Levasseur writes: "The common opinion is that 'the machine drives out the workman' and robs a part of the working-classes of work. It is certainly true that a shop furnished with powerful machinery yields in a given time a greater product, with the help of a much smaller number of employees, than a shop where the same goods are made by hand. It is this that one perceives in the first instance. What one only perceives later, by dint of study, is that the goods made economically by machinery, being sold, in general, at a lower price, often find such a number of new purchasers that the increased production, thus made necessary, provides employment for a greater number of workpeople than were employed before the machinery was introduced."*34 Again, the Poor Law Commissioners are gratified to find among manufacturers a remarkable consensus of opinion concerning the effects of improvements in machinery. They believe that such improvements "do temporarily reduce the demand for labour within the department where such changes occur; that the displacement does not, as a rule, reduce the labour employed in each producing unit, the workers dispensed with being readily absorbed within the same business—particularly in shipbuilding, where changes are slowly introduced and affect only a few men at a time—and that the final result is that more labour is required instead of less."*35 Now, I am not concerned to deny the empirical part of these conclusions. I do not dispute the Poor Law Commissioners' assertion that the conditions necessary to secure that increased employment in any sphere will ultimately result from an invention in that sphere are, as a matter of practice, usually fulfilled. I do dispute, however, the very widespread opinion that these facts are directly relevant to the question whether inventions and improvements are beneficial allies or injurious foes to the fortunes of labour, and so of the poor as a whole. To elucidate that issue a different and more far-reaching analysis is necessary.


§ 3. Every invention or improvement either facilitates the manufacture of some commodity or service that is already being produced, or makes possible the manufacture of some new commodity or service. It is certain, therefore, to lead to a cheapening and an increased consumption of the commodity affected by it. With the differently made and enlarged output, a different amount of labour, and also a different amount of capital (or waiting), will be employed in the industry and in the subsidiary industries engaged in making machinery for it. Let us suppose that workpeople purchase absolutely none of the product which the invention has cheapened. Then the effect of the invention upon their real income depends upon its effect on the marginal net product of things for which labour is responsible in other industries; for, when equilibrium is established, it will get, in the industry where the invention has taken place, the same real wage as it gets in these industries. For the present purpose we may reasonably leave out of account factors of production other than labour and capital. It will then follow that, if, as a result of the invention, the quantity of labour in industries other than the improved industry and its subsidiaries is diminished in a larger ratio, or increased in a smaller ratio, than the quantity of capital, the marginal net product of labour in terms of the things workpeople buy—and, therefore, the aggregate real income of workpeople—must be increased. In the converse event this aggregate real income must be diminished. If the two ratios of change are equal, it must be left unaltered. Inventions which have these several effects I shall call, respectively, capital-saving inventions, labour-saving inventions and neutral inventions. It will, of course, be observed that this use of terms is different from the common use, according to which every invention that enables a given amount of product to be got with the help of less labour is labour-saving.


§ 4. It is easy to apply this analysis to practice, provided we have to do with an industry in which (and also in its subsidiaries) the proportion of the country's total labour employed is equal to the proportion of its total capital. In this class of industry anything which changes in one direction the ratio between the labour and capital employed there must change in the opposite direction the ratio outside. Hence, on my definition, an invention or improvement which reduces the ratio of capital to labour in the industry where it applies will be capital-saving, one which increases it, labour-saving, and one which leaves it unchanged, neutral. In these conditions, therefore, we are able with fair confidence to distinguish in the concrete the several classes of inventions. Thus, assuming the above conditions to prevail, the introduction of two-shift or three-shift systems, making possible the more continuous working of machinery, must be a capital-saving invention. For, if, instead of only 12 hours being worked in each 24-hour period, the whole 24 hours are worked, a staff of 100 men, 50 working by day and 50 by night, will only require half as much machinery to produce a given output as they would need if the whole 100 worked by day only. Of course, the machinery will wear out more quickly when it is worked for a longer time per day. But for many kinds of machinery the working life is—on account of obsolescence—much shorter than the physical life. Consequently, though the substitution of two twelve-hour shifts for one twelve-hour shift would not reduce the capital required for a given scale of production by as much as a half, it would, in general, reduce it a good deal. In whatever way, therefore, the absolute quantity of output is changed, the ratio of capital to labour employed must be diminished. The same result holds good of developments that enable the manufacturers, wholesalers or retailers, who deal in any commodity, to conduct their business equally efficiently with a smaller amount of capital locked up in the form of stocks. For, here again, whatever happens to absolute amounts, the ratio of capital to labour employed must be diminished. This point is of some importance in view of the economy in the matter of stock-holding, which, as will be shown in Appendix I., modern improvements in communication have made practicable. Among developments more ordinarily named inventions, we might, still assuming the industries to which they apply to have previously employed capital and labour in normal proportions, count as capital-saving such things as Marconi's invention of wireless telegraphy, by which the need for cables is removed. Probably, however, the majority of inventions in the narrower sense would have to be reckoned as "labour-saving," because, as Dr. Cassell has observed, "almost all the efforts of inventors are directed towards finding durable instruments to do work which has hitherto been done by hand."*36 These results, it must be remembered, are not necessarily valid, unless, before the invention, the industry (and its subsidiaries), in which the invention is made, was employing labour and capital in the same proportion as the general average of all industries. If it was employing an abnormally large proportion of labour or of capital, an invention, which changed the ratio in it in any direction, might change the ratio in other industries in the same, and not in the opposite, direction. Suppose, for example, that in a particular industry 3000 units of labour and 1000 units of capital are being employed, and in the rest of industry one million units of each. In consequence of an invention in this particular industry only 2000 units of labour and 500 units of capital come to be needed there. The ratio of labour to capital there is, therefore, increased from 3 to 1 to 4 to 1. At the same time in the rest of industry it is increased from 1 to 1 to 1,001,000 to 1,000,500. It is thus evident that a knowledge of the effect on the ratio in the improved industry would not by itself enable us to determine whether the invention is labour-saving or capital-saving or neutral. But, plainly, we have no ground for supposing that labour-saving inventions in my sense are impossible. If they take place in the conditions contemplated up to this point of our analysis, disharmony must result. The national dividend will be increased, but the real earnings of labour will be lessened.


§ 5. The conditions so far contemplated are not, however, in conformity with the facts. It has been assumed that workpeople purchase absolutely none of the commodity or service which the invention or improvement has cheapened. Obviously this assumption is highly unfavourable to the prospect of their obtaining an increased real income. When conditions are such that, even on this assumption, they would gain, in so far as in fact they do purchase the commodity they will gain still more; and, when conditions are such that, on this assumption, they would lose, nevertheless in real life they may gain. In short, the more important is the part played by the commodity to which the invention refers in the consumption of poor people, the more likely it is that the net effect of the invention will be advantageous to them.


In the light of this result it is a very significant fact that the things principally purchased by the working-classes are relatively crude things, which can be readily made on a large scale by machinery, while the things principally purchased by the well-to-do are of higher quality, and, therefore, involve a larger use of human labour. Marshall writes: "Probably about twice as much horse-power is used in providing for each pound's worth of expenditure on commodities by the poor as by the rich." But it is just in things of this kind that the readiest opportunities are found for mechanical inventions and improvements, and in which, as a matter of fact, these are most extensively made. No doubt, the consumption of the poor embraces a much larger proportion of house-room and food than the consumption of the rich, and both building labour and agricultural labour are relatively little aided by those mechanical instruments, in respect of which technical improvements and devices of organisation have the widest scope. This qualification is especially applicable to the very poor. "The fall of prices does not benefit the various grades of wage-earners in direct ratio to their wages. Rent and certain other necessary elements of expenditure, such as fuel, which have risen in amount for the large majority of workers, play a relatively larger part in the budget of the lower grades of workers, reducing to that extent their gain from the general fall of prices. The poorest classes, whose retail purchases are made in very small quantities, also gain least from the lower prices of other commodities than housing and fuel."*37 But these qualifications leave the main result untouched. On the whole, the poor spend a larger proportion of their income than other classes on things the manufacture of which specially lends itself to inventions. Thus Leroy-Beaulieu notes: "The man of fashion, who is fitted for his clothes by a tailor, gains nothing from the great reduction of prices which shops selling clothes ready-made offer to the less comfortable section of the population."*38 He contrasts with these things "all those objects, which the mass of the people have hitherto done without, but which have now come into general use, and which contribute either to better hygiene or to increased decency and dignity in the homes of the workpeople. Stockings, handkerchlefs, more varied and more suitable garments, curtains for the windows, carpets on the floors, a less exiguous array of furniture, these things constitute democratic luxury, the fruit of the development of mankind's powers of production."*39 Nor is this all. It has to be added, as Marshall has strongly urged, that the staple articles of food mainly consumed by the poor are, so far as this country is concerned, largely brought from abroad, and that one of the most marked features of recent times has been the development of improvements in the machinery of transport, and the consequent heavy fall in transport charges. To this may be added the important improvement in the machinery for retailing goods to poor persons, which has been realised by co-operative stores, and the consequent heavy fall in the cost of the service of retailing.


Of course the historical fact that recent inventions have largely affected commodities, which enter directly or indirectly into the consumption of the working-classes, is not a proof that further inventions will be predominantly of a like kind. It is, however, open to us to urge that this historical fact is conformable to a priori expectation, because, not only are the openings for profit, and, therefore, the stimulus to invention, exceptionally great among "mass-goods" of wide consumption, but also, as Marshall has pointed out, and as the history of the motor car, culminating in the petrol-driven lorry and motor omnibus, illustrates, even those improvements, which were originally designed exclusively for the luxuries of the rich, are apt soon to spread themselves to the comforts of other classes.*40 These considerations lead to the conclusion that it is less likely than the argument of the preceding section alone would suggest that any given invention will injure the real income of labour.


§ 6. Yet another qualification must be added to the analysis of §§ 3-4. That analysis tacitly assumed that the invention, whose consequences were examined, had no effect on the quantity of new waiting, or capital, which people are prepared annually to create. This assumption, however, is not warranted. Certain sorts of invention, by giving a new field for "spending," may cause rich people to save less and so to provide less new capital to help labour in production. The invention of luxurious motor cars for private travel, by inducing people to spend more of their income on petrol, chauffeurs' wages and so on,*41 has probably had this effect, and the impending invention of comfortable private air cars probably will have it. Nor is the effect necessarily confined to inventions which create opportunities for new forms of consumption. It may also follow from those that cheapen consumption goods which are already known, provided that they are of highly elastic demand. People who could have saved and created capital may be tempted to spend instead. On the other hand, inventions that cheapen things for which the demand is highly inelastic, by enabling people to get what they want at less cost, will leave them a greater margin out of which to make savings, and so will indirectly increase the annual creation of new capital. Whether the tendency thus set up by inventions is towards a decrease or towards an increase in the annual addition that is made to capital, it is cumulative, in the sense that in each successive year that year's check to the flow of new capital is added to the total check imposed on the stock of all capital. For this reason it is more important than it might be thought to be at first sight. When the indirect effect of an invention is to diminish savings, it may injure labour even though it is capital-saving; and, when the indirect effect is to increase savings, it may benefit labour even though it is both labour-saving and also concerned with some product which does not enter at all into workpeople's consumption. There is reason to believe that hitherto the general body of inventions has had the effect of increasing, and not of diminishing, the opportunity and the will to accumulate new capital.


§ 7. From these various considerations it is plain that no rigid and exact conclusions can be drawn. The general impression created by our study is that, though inventions and improvements injurious to the real income of the working-classes may occur, they will not occur often. The great majority of inventions and improvements will increase the real income of labour as well as the aggregate national dividend. Disharmony, as a result of inventions, is a possible, but a decidedly improbable, contingency. Nobody would seriously propose to interfere with, or to obstruct, inventions in order to provide a safeguard against it.

Notes for this chapter

Hobson, The Industrial System, p. 281.
Salariat et salaires, p. 421.
Report, p. 344.
Nature and Necessity of Interest, p. 112.
Report of the Royal Commission on the Poor Laws, p. 309.
La Répartition des richesses, p. 37.
La Répartition des richesses, p. 440.
Cf. Principles of Economics, p. 541.
This statement is not incompatible with the facts (1) that the resources devoted to making the motor car itself are turned into "capital" uses, and (2) that the existence of a private motor car of given value may tend to push up wages (by drawing people into service with it away from other employment) as much as the existence of a machine employed in industry.

Part IV, Chapter V

End of Notes

61 of 73

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