The Distribution of Wealth: A Theory of Wages, Interest and Profits
By John Bates Clark
This 1908 edition is the third reprinting of Clark’s path-breaking, yet widely under-read, 1899 textbook, in which he developed marginal productivity theory and used it to explore the way income is distributed between wages, interest, and rents in a market economy. In this book Clark made the theory of marginal productivity clear enough that we take it for granted today. Yet, even today, the power of his methodical development of what seems obvious at first glance clarifies and demolishes inaccurate theories that linger on. His work remains illuminating because of its classic explanations of the mobility of capital via its recreation while it wears out, the difference between static and dynamic models, the equivalence of rent and interest, the inability of entrepreneurs to “exploit” (meaning, underpay) labor (or capital) in a competitive market economy, the flaws of widely-quoted existing theories such as the labor theory of value and the irrelevance of rent on land, and, in a
famous footnote, why von Thünen’s concept of final productivity didn’t go far enough.The work is reproduced here in full with the exception of Clark’s textbook-style marginal notes and his “chapter overviews” in the Table of Contents.Lauren Landsburg
Editor, Library of Economics and Liberty
First Pub. Date
New York: The Macmillan Company
The text of this edition is in the public domain. Picture of John Bates Clark courtesy of The Warren J. Samuels Portrait Collection at Duke University.
- Chapter II, The Place of Distribution Within the Traditional Divisions of Economics
- Chapter III, The Place of Distribution Within the Natural Divisions of Economics
- Chapter IV, The Basis of Distribution in Universal Economic Laws
- Chapter V, Actual Distribution the Result of Social Organization
- Chapter VI, Effects of Social Progress
- Chapter VII, Wages in a Static State the Specific Product of Labor
- Chapter VIII, How the Specific Product of Labor may be distinguished
- Chapter IX, Capital and Capital-Goods contrasted
- Chapter X, Kinds of Capital and of Capital-Goods
- Chapter XI, The Productivity of Social Labor Dependent on its Quantitative Relation to Capital
- Chapter XII, Final Productivity the Regulator of Both Wages and Interest
- Chapter XIII, The Products of Labor and Capital, as measured by the Formula of Rent
- Chapter XIV, The Earnings of Industrial Groups
- Chapter XV, The Marginal Efficiency of Consumers' Wealth the Basis of Group Distribution
- Chapter XVI, How the Marginal Efficiency of Consumers' Wealth is measured
- Chapter XVII, How the Efficiency of Final Increments of Producers' Wealth is tested
- Chapter XVIII, The Growth of Capital by Qualitative Increments
- Chapter XIX, The Mode of Apportioning Labor and Capital among the Industrial Groups
- Chapter XX, Production and Consumption synchronized by rightly Apportioned Capital
- Chapter XXI, The Theory of Economic Causation
- Chapter XXII, The Law of Economic Causation applied to the Products of Concrete Instruments
- Chapter XXIII, The Relation of All Rents to Value and thus to Group Distribution
- Chapter XXIV, The Unit for measuring Industrial Agents and their Products
- Chapter XXV, Static Standards in a Dynamic Society
- Chapter XXVI, Proximate Static Standards
How the Efficiency of Final Increments of Producers’ Wealth is tested
We are now ready to apply to the fixing of wages and interest the principle which we may term that of analytical valuation. Everywhere does the market have a marvellous power of resolving concrete things into their elements, and of measuring separately the efficiency of each element. Consumers’ wealth and producers’ wealth alike it treats in this way. If we are to understand its procedure in fixing prices, we must seek out and identify not, as a rule, certain whole commodities, but certain elements in commodities; and so, if we are to understand the adjusting of interest, we must find in instruments of production, in a like way, certain elements that are in a strategic position and control the gains of all capital.
The earning power of capital is fixed by the productivity of the final increment of it; and this final increment of capital does not, as a rule, consist of instruments of production in their entirety. It consists of
elements in such instruments. Just as we add to our consumers’ wealth by procuring for personal use better articles than those which we have been using, so we add to our producers’ wealth by procuring better instruments of production. When, for a machine that has worn itself out, we substitute one that is by a single point more efficient and more costly, we are adding a final increment to our capital. It is final increments of capital, as such, the productive power of which fixes the rate of interest. As
entrepreneurs, we must pay for any capital that we hire what a final increment of it will produce; and that is what we and others can get, as a net addition to our products, by making our buildings by one degree larger or more substantial, our machines by one degree more rapid or more nearly automatic, our engines or our water-wheels by one degree more powerful, our raw materials by one grade finer, etc.
We have seen that in a limited number of cases final increments of consumers’ wealth consist of goods in their entirety. When, for example, we procure the plainest and cheapest article of its kind that is anywhere made, as an addition to our stock of goods for personal use, the whole article is a part of our final unit of consumers’ wealth. In such a case, the article, as a whole, helps to set the standard price for all goods of exactly that kind. Nobody gives for a duplicate of this final article in our supply of consumers’ goods more than we give for this one. So there are cases in which entire instruments of production are final increments of producers’ wealth; and in these cases what these instruments produce, in their entirety, helps to set the standard of interest. If there is a hammer, a shovel or a cart, so poor and cheap that one of a lower grade cannot anywhere be found, then we add a final increment to our capital, whenever we procure one of these instruments.
These cases, however, play only a small part in the general adjustment of interest; for the enriching of the industrial world shows itself by a steady upward trend in the grade of its capital-goods. Better things of every kind come to constitute the world’s working equipment: buildings are taller, ships are faster, engines are more economical, railroads are straighter and more nearly level, locomotives are more powerful, trains are longer, etc. It is what we gain, in the form of more products, by making these perfecting changes that determines what we can afford to pay for the last capital that we hire. Society as a whole pays for all its capital what these
last productive elements in goods are worth to it.
This truth is not affected by the fact that, as the wealth of society increases, capital-goods become more numerous, as well as better. It is true, indeed, that we are building more engines, at the same time that we are building better ones; but the new ones are mainly of a grade so high that, in their entirety, they cannot be treated as final increments of producers’ wealth. Here, for instance, is a new locomotive. It has not been secured by the railroad that owns it to take the place of one worn out, but is an additional engine, made necessary by an enlarged traffic. Is it a final increment of capital? Not unless that engine would be dispensed with, in case any reduction of the capital of the road were necessary. The actual fact is that the quality of the new engine is determined by that of the roadbed, the rails, the bridges, the cars, etc., with which it is used; for it would be uneconomical to combine one poor engine with an equipment of good cars, good rails, etc. This complementarity of producers’ goods must always be considered; since a poor machine introduced into an equipment of good ones has the effect of taking something from the productive power of the other parts of the equipment. The good cars, etc., cannot develop their full wealth-creating power, if they have to coöperate with a poor engine. With a given number of cars, there needs to be a proportionate number of engines; and for the best results the entire equipment of cars, engines, track, freight houses, etc., is maintained at a uniform standard of quality. In a commercial form of statement, therefore, the “money” which is spent in bringing the equipment to the point of perfection that it has reached represents the final increment of capital “invested” in the railroad.
In a more scientific view, money is a means of moving real capital from hand to hand, and there must somewhere exist capital-goods that embody capital. The cars, engines, tracks, buildings, etc., are these goods. They embody the whole capital of the railroad; but when we try to find and identify the part of it that is “final” and interest-determining, we cannot single out such parts of the equipment as particular cars, engines, etc. We must try to find what is the final productive element in the whole equipment, and in each of the instruments that constitute it. What outlay would the company forego if, in the building and equipping of a railroad, it found that its real capital—its concrete and material outfit of instruments for carrying passengers and merchandise—must be made smaller than its original plans had called for? If it proceeded in a natural way, it would slightly reduce in quality nearly everything in its proposed outfit. It would forego putting the final perfecting touches to cars, engines, roadbed, buildings, etc. It might relinquish a few instruments altogether, but these would be things of the poorest and cheapest kinds.
There are, of course, facts to be considered which, in a practical case, would modify this policy. If the railroad in the illustration were a connecting link in a great system, it would have to carry the cars of other railroads, and it would have to make its gauge broad enough, its rails heavy enough and its bridges strong enough to do this. This case, however, confirms, instead of contradicting, the general fact which we are stating—namely, that it is uneconomical to reduce, in a disproportionate way, one part of the equipment of an industry. The small road is, in this case, not a complete industrial plant. The larger system, of which it is an integral part, is the complete industrial establishment that has to be considered. If the great system, as a whole, were to reduce its capital, and if it had the power to reduce it by cheapening things as well as by reducing the number of them, it would prefer to make the equipment of every part of the entire system poorer, and so preserve the coöperating power of all the constituent parts, rather than to leave most of the system untouched and take out parts of the equipment of some railroad that is only one link in the system. It must be remembered that we are seeking to identify the final increment of the capital of a complete industrial establishment; and, in the case of a railroad system, that is not the fraction of the great plant that happens to belong to one small corporation. The system must be considered in its entirety.
Moreover, if, when the road was about to be built, the owners found themselves able to use a larger capital than they had expected to use, would they lay the same track and procure the same rolling stock that they had planned, with some extra cars or engines? Would they build depots of this form and quality that the first projects called for, merely adding a building or two to the list? It is clear that, in adding a few things outright to their equipment, they would improve many things—that they would add everywhere what we have called productive elements.
The final increment of the capital of this railroad corporation is, in reality, a difference between two kinds of plants for carrying goods and passengers. One of these is the railroad as it stands, with all its equipment brought up to the highest pitch of perfection that is possible with the present resources. The other is the road built and equipped as it would have been if the resources had been by one degree less. A difference in all-around quality between an actual and a possible railroad—is, in reality, the final increment of capital now used by the actual corporation. The product of that last unit of capital is the difference between what the road actually earns and what it would have earned if it had been made by one degree poorer.
It is clear that this final increment of the capital of this industry is not one that can be physically taken out of it, as it could be if it consisted of a few locomotives or a few cars that could be sold to another company.
*31 It is in the plant to remain. It runs through the whole tissue of the complex instrumentality that engineers, trainmen, superintendents, et,., make use of in the carrying of goods and persons. If we wished to make a good test of the productive power of this particular bit of capital, we should have to invoke a magic that would at once shrink the whole plant into inferiority.
In a long period we might make such a practical test. We might let the plant deteriorate, letting the engines become worn and weak, the passenger cars shabby, the buildings dilapidated, etc. If, in the interim, the other circumstances that affect the productive power of a railroad remained absolutely unchanged, we might compare the earning power of the plant before it had deteriorated with its earning power afterward. Two difficulties are, however, encountered in the making of such a test. First, the other circumstances that affect the productive power of capital do not remain unchanged. Secondly, the qualities that wear and tear take out of instruments of production are not the same qualities that would have been left out of them if, in making them, it had been decided to “invest less capital in them”—that is, to make them by one degree less costly and efficient. No one is ever willing to waste a part of his fortune by making in cold blood such a laboratory experiment for testing the productivity of capital; yet actual experience enables employers to form such judgments as to the productive powers of final units of capital.
Could not an
entrepreneur, however, test the productive power of his final increment of capital, as embodied chiefly in the final qualitative element in his working equipment, by reducing the quality of one thing at a time? Here, let us suppose, are two machines side by side, and alike except in the extent to which they have suffered the effects of wear: one is new and perfect, and the other is old and worn. Cannot the owner form a true conclusion as to the difference in their productive powers? Here, again, are two machines, both new, of which one is costlier and better than the other. Cannot the
entrepreneur tell how much one exceeds the other in its earning capacity? If he can make such a test as this at all, why cannot he make it in connection with all parts of his equipment? He can take his plant and outfit by sections, and find, in the case of each section of it, how much he would gain by making it better or how much he would lose by making it worse.
The difficulty to be encountered in making such an experiment consists in the deranging effect that a reduction of the quality of a single instrument may have on the general plant. This effect could, however, be made small, by taking great care in making the change. Moreover, in making experiments of this kind, an owner could avoid all the more serious deranging effects that would follow if he took bodily from the equipment some instrument that is needed to make the whole an efficient complement of capital goods. He does not even need to let the machine that he is testing wear out to such an extent as greatly to mar the efficiency of anything else. If the test is to be made by buying and using a machine of an inferior grade, the owner does not need to make it so greatly inferior that the other machinery will not work well in connection with it. Little by little, a man could undoubtedly test in this way the productive power of the first increment of his capital. Though his calculations would be difficult and liable to error, he could form some opinion of the difference between the earning power of a part of his capital, as it is embodied in one set of instruments, and the earning power that it would have if it were by one point better or by one point worse.
Some such tests are, beyond doubt, constantly making. Men must form business judgments as to the exact grades of instruments of every kind that will “pay the best” in their several places. As the equipment of a mill and the mill itself wear out, the owner has constantly to decide what grade of instruments he shall procure to replace the discarded parts of his outfit. He must know—approximately, at least—how large is the difference in productive power between a tool of one grade and a tool that is above it or below it in the scale of quality. This is a part, and a vitally necessary part, of the complicated process by which society puts its productive fund into the most judicious shapes. Conscious mental estimates are constantly being made of the productive power of such final increments of capital. It is not, however, this conscious measuring which makes it certain that the instruments which are either too cheap or too costly will be discarded, and that those of the right kind will be retained.
Competition makes the test in another and an inexorable way. It causes establishments that are so equipped as to get out of their capital the utmost service that it is capable of yielding to survive, and incapable ones to fail. If, in a certain mill, every machine, every tool and every other working appliance is so judiciously selected that the final productive element in each yields, as net income (let us say) five per cent of its cost, and if that is the prevalent rate of interest on loans, the owner of this mill is, in so far, in a condition to stand competition. The rate of interest on capital that he borrows will, moreover, be five per cent, if that is what the final increment of capital in properly equipped establishments generally yields. This is saying that a man’s outfit of capital-goods must be so selected and so combined that the final productive element in each part of it shall yield the same rate of interest that is yielded by the final element in the outfit of capital-goods used by competitors. Competition acts as a leveller, by reducing the earning power of the final increments of different men’s capital to equality. This it does by putting out of the field the competitor whose last increment of capital—consisting in the final productive element in his various capital-goods—creates less than the standard amount of product. With the final unit of capital generally earning five per cent, interest is at that rate. With interest at five per cent, the borrower whose last unit of capital earns only four must take each year the one per cent that is needed to make up the deficit out of his capital. This is a procedure that cannot be long continued; for the man most change the forms of his capital and bring the fund up to the prevalent standard in its earning power, or he must go to the wall.
We are here making assertions that will bear a more extended examination than it has thus far been possible to make. We affirm that interest is fixed by the earning power of the final increment of social capital; that that increment consists mainly of qualities of instruments of production, rather than of instruments in their entirety; that competition acts as a leveller, causing the earning power of such final productive elements in capital-goods to tend toward a certain normal level; and that any kind of instruments in which this element earns less than the standard amount must be thrown out of use.
In the interpretation of these statements there are cautions to be observed; and one of them connects itself with the assertion that, as capital increases, the new parts of the fund embody themselves in new qualities imparted to goods. It is here assumed that labor remains unchanged in amount, and that it is a
per capita enlargement of capital which forces
entrepreneurs to procure better and better working instruments. Indeed, with workmen doubled in number and with capital doubled in amount, there would not need to be the qualitative improvement of the capital-goods of which we have spoken. If we could give to the new men exactly the same outfit of working appliances that the former workers possessed, the capital would be doubled in a more or less natural way. There would, it is true, be a difficulty in doing this, owing to the relation of land to other capital-goods. We could duplicate every part of the outfit except the land; and, because we could not duplicate the land, we should still be obliged, in enlarging the capital, to make changes in the quality of the goods that embody it. What we desire now to make clear is, that our assertions concerning the natural way in which capital increases have reference to an increase that is not accompanied by a parallel enlargement of the working population. With ten units of capital in the hands of ten men, that fund is in certain concrete shapes; while with twenty units of it in the hands of ten men, it takes different shapes. The improvements in the instruments, much more than such increase in the number of them as may also take place, embody and measure the new capital. The final increment of capital is mainly, though not wholly, qualitative.
If this is so, it is clear how far from being true is the conception of capital as existing, in bodily shape,—a stack of concrete instruments,—in the midst of competing
entrepreneurs, and as ready in that shape to be drawn to this one or to that one, according as the one or the other offers the most for it. Capital is, in just this way, the subject of competition; but capital-goods are not. The capital that is competed for does not consist in instruments—concrete, visible, movable and ready for any one of a dozen different uses: there is no stock of capital-goods that has such adaptability that all
entrepreneurs are anxious to get shares of it. Yet there is a universal competition for capital, and the effect of it is to fix the rate of interest. Any
entrepreneur in the entire system of social industry is a possible demander for any capital existing in the system. If he can make more with it than the present holder of it can make, his natural course is to bid higher for it than the present holder will bid and thus to secure it. No
capital, as such, is fastened to one user or to one place in the system. Yet the goods that embody the capital are as fettered in their movements as the capital itself is free. A’s tools are often useless to B. If we were to take one of them bodily out of A’s shop and put it into B’s, we should render to B no service. We should injure A’s operation, and benefit no one else. A furnace is valuable to a smelter, but not to a cotton spinner; a ship is useful to a carrier, but not to a miner, etc. There is, in short, only a very limited competition for
capital-goods between employers in different kinds of business.
If tools of trade are not very mobilem what is to be said about productive elements in the tools? Can we take out of the smelter’s blast-furnace the last of the qualities that give it efficiency, and impart this quality to the spinner’s mules? Can we speak the magical word that will reduce the quality of the furnace and improve that of the mules? This is exactly what would need to be done if the smelter were to surrender the final increment of his capital and the spinner were to get it.
Here it seems expedient to enumerate some of the facts that are to be reconciled with each other if a final-productivity theory of interest is valid:—
(1) Interest generally conforms to the earnings of the final increment of social capital.
(2) This increment consists mainly of qualities in instruments of production, rather than of instruments in their entirety.
(3) Instruments are limited in the range of their productive action, and are often useless in any kinds of business other than those for which they were designed.
(4) Qualities in instruments are, of course, not literally transferable to other instruments.
(5) The final increment of the capital of each kind of business consists in an element that is literally tied to that business.
(6) Capital is absolutely mobile: it can go anywhere. It can leave any business and betake itself to any other; and it is therefore the object of a competition that is universal. Any single unit of capital is desirable for use in any productive process that is going on; and it is by the general competition for it that the rate of interest is fixed.
We have said, moreover, that the capital which is the object of this universal competition does not exist, antecedently to the bidding for it, in any bodily shape in which the men can see it and carry it to their several shops. There is nowhere a central heap or stock of instruments of production waiting to render service to some one. Such stocks of merchandise as those which are in shops are already in use, doing their productive work. There is no accumulation of food, clothing, houses and other subsistence goods, waiting to be doled out to laborers, in order that the laborers may make capital goods and so, virtually but not literally, transmute the subsistence goods into capital-goods. We have noted the several reasons why this entire feed-and-work theory of the origin of capital is untenable, and we have seen that the chief of them is the fact that there is no stock of subsistence goods anywhere accumulated and capable of being used in that way.
*32 Competition for capital is, therefore, not a competition for capital-goods that already exist.
The most comprehensive of the paradoxes concerning capital and interest is, that the competition for capital, which is constant and universal, is an all-around struggle to get concrete things that
are about to be. The capital of society has no existence till it is in the shapes in which
entrepreneurs use it. Till it is raw materials and tools for the manufacturer, merchandise for the retailer, vehicles for the carrier, etc., capital has no existence at all. Of the hundred billion dollars’ worth of capital-goods in the United States practically all will be in use as instruments fitted for certain purposes and actually doing the things for which they are fitted.
entrepreneur bids in the market for an extra unit of capital, he is asking for something the presence of which in his business means a readjustment of his plant. He is virtually saying: “I offer five per cent a year for a certain amount of productive wealth that cannot come to me, except as I change the shape of the plant I am using. I must make that plant better; and the improvement that I propose to make in it will constitute the new unit of my working capital. Moreover, whoever surrenders to me a unit of capital must do it by a similar change. He must make his business equipment worse.”
Bidding for capital, then, is bidding for something which does not antecedently exist and which, when it exists, will consist mainly in a change of quality of working equipments. When we offer interest for capital,
*33 we virtually ask for the power to transmute our shops and tools. This transmutation is possible, because the things that are about to be, and for which we are bidding when we offer to borrow “money” for the enlarging of our business, are wanted for the replacing of things that are about to cease to be. In the place of a tool that is worn out and on the point of being discarded, we may put a new one of superior quality. In this condition lies the possibility of adding a new
capital element to our plant, without adding a new tool in its entirety. When we tender interest for the loan of new capital, we offer something for the power to substitute new tools containing a certain complement of capital elements for old ones containing fewer of such elements. Machines of grade number one are in demand at many points, because machines of grade number two are about to be discarded; and new productive powers are thus everywhere adding themselves to the social stock of capital-goods.
Not one of the employers who is making such a change as this is making it for the sake of applying a scientific test to a final increment of capital and of registering the rate of its productivity; yet, as the many changes are actually made, the test is applied, and the rate of productivity of final units of capital is registered. What the man finds he has gained, when he has infused a new capital element into his plant, becomes a guide for himself, at least, in bidding for further capital, since it tells him how much he can pay for it. Similar experiences tell other employers what they can afford to offer; and, when new capital is to be had, the men whose experiences reveal the fact that new capital elements will yield large returns will bid for and get the new capital, rather than any employers whose tests have proved that new capital elements are worth less to them. All such tests take time, but social evolution has time enough at its disposal. Slowly, but surely, it comes to be known what value elements are worth the most to each employer, and also what employers can, on the basis of the amounts that the best capital elements will in their hands earn, overbid others in the competition for loans and thus get such new capital as may be offering. Slowly and surely, the whole capital of society disposes itself in the way in which it can produce the most. It leaves the men in whose hands it creates the smaller products and goes to those who can make it create the larger ones; and in a perfect static adjustment it would attain a state of
locally equalized productivity, as well as one of
maximum total productivity.
There is, as we have seen, a zone of indifference for labor. There is a limited marginal region, within which a few men may be taken out of one employment and put into another, with no appreciable change in the character of the capital that is, in either case, used. This fact has much importance in the practical adjustment of wages. There is, in connection with capital also, a fact that is rudely parallel to this. A few instruments are usable is different industries. We may take a hammer from one shop and put it into another; and we may do the same in the case of a number of things, without causing a change in the nature of the work that is done or in the character of the remaining equipment. There is, then, something resembling a zone of indifference for capital.
These zones, however, are not the whole marginal fields in which wages and interest are adjusted. Those fields are much larger. Wages tend to conform to the product that an additional unit of labor can create anywhere in the industrial system, provided the
entrepreneurs will make an advantageous place for it, by changing the shapes of their plants and equipments. Interest tends to conform to the product that an extra unit of capital can nearly everywhere create, by embodying itself in an advantageous change in the outfit of capital-goods. When these more general dispositions of capital have been made, the product of capital on the zone of indifference becomes an available indicator of its productive power in the more general marginal field.
From the first, we have remembered that capital is material. It exists only in goods that can be seen, touched and handled; and yet it now appears that final increments of capital cannot be thus manipulated. We cannot, in any literal and physical way, take out of a machine such a final capital element as we have just defined, leaving the rest of the machine intact. There is no mechanical process that can take out of a tool of the first grade that which makes it better than one of the second grade and even preserve for use the element that is thus withdrawn. Increments of capital may be arranged in an imaginary series, in the of order of their productive efficiency, so that the final unit is the least efficient one; but it is utterly impossible to take the working plant of any employer and separate it bodily into such increments. Assorting the different machines into classes would not do this, and taking them to pieces certainly would not do it. If we let them all wear out and then replace them with inferior appliances, using what is saved by the buying of inferior tools in improving the quality of some other general plant, we indirectly separate the final increment of the capital from the other increments; yet, when the process is completed, we still have that increment inseparably tied to others in a new combination. All the increments, taken together, constitute a stock of capital-goods, or appliances of trade, that can be handled bodily; but increments of capital, separately viewed, are abstractions, for they are mainly nothing but qualities of material things. We are, in fact, in a realm of such abstractions, when we reason about the productivity of successive “doses” of capital applied to a farm, a mine or a manufacturing plant. By reducing capital, for purposes of study, to a series of increments, we are able to analyze a concrete thing into qualities; but, while these together may constitute the thing, separately they have only an ideal existence.
It is, therefore, blended increments of capital that are embodied in capital-goods; and the phrase “literally separated increments of capital” would involve a contradiction, for any literal separation mould mean the ruining of the capital-goods and the annihilation of the capital.
*34 Increments of
capital-goods may, how ever, exist separately. Having built one ship, we can build another and another, till we have a fleet; but each ship will span the whole range of our increments of capital, if these be arranged in the order of their productive power, and will contain some part of every increment of our capital, from the first to the last. We can, of course, move the ships literally and bodily; but we cannot move the final increment of the capital, in the economic sense, from group to group, except by the method of gradually replacing the ships of the fleet with poorer ones and raising the grade of capital-goods elsewhere.
In spite of all this, it is possible—and, indeed, absolutely necessary—to measure the productive power of the final increments of true capital. The
entrepreneur who cannot successfully do this will be eliminated from business. In the hypothesis of a static state, in which competition works with ideal perfection, the whole field is possessed by men who have made the tests successfully and have so developed the power to use the agents of production with the maximum of efficiency.
In saying that competition tests the productivity of final capital elements, by driving out of business the men in whose plants these elements earn less than a normal amount, we do not deny that the survivors, who fix the rate of interest, must have ways of ascertaining what the final capital elements in their own plants earn for them. By comparisons of various kinds they manage to ascertain what those elements produce, and this knowledge is the basis of the offers that they earn make for loans.
first increments of capital. It is the later increments that cannot be separated from combinations.