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
Static Standards in a Dynamic Society
If this study were to be absolutely restricted to the field of social economic statics, as sharply defined, it should stop at this point; for in going farther it enters on the field of economic dynamics. We have seen that the second natural division of political economy which is devoted to social economic statics includes phenomena that are due to exchanges—to the fact that society acts as an organism in producing wealth. That division, however, includes nothing that is due to continuing evolution in the organism. When we state those facts concerning distribution which are due merely to the organized method of creating wealth, we have told all that we can, while keeping strictly within the limits of this part of the science; for we have presented in their entirety the static laws of distribution, as they would act in the absence of organic change and of the friction and the disturbance that it causes.
We now have before us a picture of a static industrial world—not a dead world, but one filled with living and acting men. It produces and consumes wealth; but the kinds of wealth that it creates and uses, and the quantities that it creates of all the various kinds, remain unchanged. Its methods and its tools are unvarying, and there is no change in the amount or in the character of the labor and the capital that do the producing work. This society acts and lives, but does so in a changeless manner. It is divided, for productive purposes, into groups and sub-groups, and there is no change in the size of any of them. This absence of any flow of labor or of capital from one group to another is the sure outward sign of the static condition.
Values are here “natural” in the Ricardian sense, for everything sells at its “cost of production” and no
entrepreneur makes a profit. The cost of producing a given thing is uniform in all the different establishments that make it. Wages and interest also are natural, in the same sense; for workmen everywhere get what their work alone produces and capitalists get what capital alone produces. Moreover, the product of labor per unit is uniform throughout the whole system of groups and sub-groups, so that a man can gain nothing by passing from one group to another. The productive power of capital is also everywhere the same. Isolate the static forces—shield society absolutely from the influence of change and disturbance—and it takes this shape.
This picture is, of course, completely imaginary. A static society is an impossible one; for the forces that bring men together in the social state have in themselves the power to make society change its form and its mode of action. In reality, the social structure grows and improves daily, and will do so to the end of time; and it is this growth that makes the social condition tolerable and opens before it inspiring possibilities.
Five general changes are, as we said at the outset, continually going on: population is increasing, capital is increasing, industrial methods are changing, the modes of organizing labor and capital for productive purposes are changing, human wants are multiplying and refining. Every one of these changes, moreover, results from a perfectly normal cause, and it is wholly in accordance with nature that they should all go on together. A changeless society would, in this view, be unnatural; for it would bear little resemblance to the society that nature really calls for.
Values also are forever altering, and the alterations are in accordance with normal tendencies. Similarly, the rate of wages is rising and the rate of interest is falling, and these changes are natural. Profits in a particular sub-group, or in a particular establishment within a sub-group, are continually appearing and then slowly vanishing; and this appearance and disappearance of profits is entirely in accordance with forces of nature. Everything that is keeping society out of that condition which we have described as static is natural, in a broad sense, since it is in harmony with sociological laws and results from a influences that are inherent in men and in their environment. Yet we have called static standards of value, wages and interest, in a certain narrower sense, natural standards; and we have been right in so doing.
The description of the purely static state, in fact, deals with realities. It is imaginary only by its omissions; for it presents an essential part of the forces that act in the real, dynamic world. The influences that bring about the group adjustment that we have just described, and all that it involves, are not imaginary: they are as real as anything on earth. They are always acting in the midst of the most violent disturbances that dynamic forces produce. As an illustration we have used the sea. A static ocean is imaginary, for there never was such a thing; but there has never been a moment in the history of the stormiest seas, when the dominant forces that controlled them were not those which, if left entirely alone, would reduce their waters to a static condition. Gravity, fluidity, pressure, and nothing else, would have the effect of making the sea level and motionless. With all the movements that winds and tides produce, these influences are still the dominant ones. The ocean does not leave its bed, and the depth of it does not greatly change. The surface, considering its size, shows only trifling irregularities. If we take only a bird’s eye view of the ocean, we are tempted to say that a static philosophy of it is sufficient and that we may treat waves and currents as minor aberrations due to “disturbing influences.”
Such a physical science would, however, never serve its purpose. Changes must be accounted for, even though a body may keep a form that approximates the static one. A social science that should not deal with evolution would likewise be entirely unsatisfying, since change and movement are in the highest degree important. The forces of change, however, can never be understood without first having a knowledge of the forces of rest. Without a knowledge of the action of fluidity and pressure, one could never comprehend the effect of wind upon the ocean; and without a knowledge of the shape to which competition alone would reduce society one could never understand the action of the changes that we have termed dynamic.
The static state which has here been pictured is the one toward which society is at every instant tending, under the influence of competition. The static system of groups and sub-groups should, then, be thought of as an ideal arrangement, projecting itself through the disturbed and changing group system of actual society just as the imaginary level surface of the sea projects itself through the waves. We need, above all things, to see the static society as it is. It is not a monstrosity unconnected with the real world: it is a shape and a mode of action that the real world carries within it. That we may grasp the essential reality of it, we must describe, at least in outline, the movements that are going on and show how static forces are related to them; for, unless it be seen that these forces are really working, we shall encounter the accusation that our whole science is a sublimation of theory. What we have to see is how static laws operate in a dynamic state. How do the standards of value, wages and interest—which, in the Ricardian sense, are natural—make themselves effective, in the midst of such violent movements as are going on? This we must know, if we are to understand the importance of static theory.
Every one of the five dynamic changes above specified disturbs the static adjustment of society: after any one of them, static law sets itself at work to produce a new adjustment. In actual life it cannot complete this rearranging work before a new disturbance occurs; and so the actual state of society is always somewhat different from the state to which static forces alone are tending to bring it. An endless series of changes of a single kind would cause value, wages and interest forever to differ from static values, wages and interest. What the world actually experiences, however, is a perpetual series of each one of the five typical changes, going on together: population is continually increasing, capital is growing, methods of production are perpetually improving, a great centralization of industry is going on, and wants are forever increasing in number and variety.
By the aid of static theory, we can begin to make dynamic studies; and the first step is to examine each one of these changes separately, in order to see, first, how it causes actual values, wages and interest to differ from static standards and, secondly, how it causes the standards themselves to change. It remains for dynamic theory to show what happens when all these changes go on together. To this end we must ascertain what is the grand resultant of five different types of social change, all of which are continually in progress. Obviously, from all these changes two general results must follow: first, values, wages and interest will differ from the static standards; secondly, the static standards themselves will always be changing. The ultimate fruit of a dynamic theory is an ability to account for the direction and the rate of these changes.
Our study, therefore, should reveal—in no detail, indeed, but in the most general way—what is the effect of each of the five changes that have been called dynamic. It should show how each of them, separately considered, takes society out of the static condition, and what kind of changes it produces; and it should also show, in the same brief way, how these five changes affect society, when they are all in progress together. In fact, they largely neutralize one another, so far as group arrangements are concerned, and cause the actual form of society to hover much nearer to the theoretical static form than would be possible if these influences worked separately. Values, wages, interest and profits are much nearer to what they would be under the influence of competition alone than it would be possible to have them if there were fewer disturbing forces working.
Variations from the static standards are not the only things to be accounted for. They are a part of what economic dynamics has to investigate but they are a relatively small part. The whole science of economic friction, which accounts for the variations of actual values, wages and interest from certain natural standards, is a smaller science than that which accounts for changes in the standards themselves. Every one of the great dynamic changes alters those static values and changes those static rates of wages and interest toward which actual rates are tending. The kind of dynamic change that is most useful for the illustration of this point is brought about by an improvement in the methods of production. Thus, an invention makes it possible to produce something more cheaply. It first gives a profit to
entrepreneurs and then, in the way that we have described, adds something to wages and interest. This is equivalent to a creation of new wealth. It has made a definite addition to the income of society, and from the moment when the improved method has been put into operation the static standard of wages has been higher. The rate toward which the pay of labor is now tending is not what it was before the invention was applied, but it is a new and higher rate. Wages now tend to equal what labor can now produce, and this is more than it could formerly produce. When the full fruits of this invention shall have diffused themselves throughout society, the earnings of labor will equal the new standard rate.
Let another invention be made that also effects an economy in production. It also creates a profit; and this profit, like the first, is an elusive sum, which
entrepreneurs grasp but cannot hold. This sum, like the former one, slips in time through their fingers and bestows itself on all members of society. At the moment when the second invention is applied, then, there is a new and still higher standard established for actual wages; and they will pursue that standard till they reach it, though before they do so a still remoter and higher standard will be before them.
If improvements in production occurred only at intervals long enough to allow a complete diffusion of the fruits of one improvement before another one should be made, the results would be simple. At a given time, one static standard for wages would be established; and, by the influence of competition, the actual pay of labor would be made to conform to it. Then another, and a higher, static standard would be established; and during the following interval wages would slowly be brought up to that level. Then a still higher standard would result from some further invention, and actual wages would pursue and overtake that one. There would, in short, be a succession of static standards for wages, each of which would be somewhat higher than the former one; and the actual rate would move upward, overtaking first one of the standards, then another, and then another. At distant intervals, but only temporarily, would the actual and the static rate coincide.
If, instead of occurring at intervals considerably separated, the improvements in industrial methods were continually taking place,—if one followed another so closely that, when the second occurred, the fruits of the first were only beginning to make their impression on the earnings of labor,—then, as a result, we should have the standard of wages moving continuously upward and actual wages steadily pursuing the standard rate in its upward movement, but always remaining by a certain interval behind it.
This process represents the actual condition of industry. Improvements are, in fact, occurring so rapidly as to tread upon one another’s heels. They take place in all the different groups and sub-groups of which society is composed, and every one of them does its minute part toward pushing upward the standard of pay for all labor. Obediently to the laws of competition, the actual rate of pay responds to the influence of the improvement and moves in pursuit of the rising standard. But it never reaches that standard: at no one instant of time is the pay of labor what it will be, when the full effects of improvements that have recently been made shall have taken their final shape, as an addition to the earnings of laborers and capitalists. In every single instant there is a static standard—and this is the point that is now of importance for us—which is defined by the principles that we have described. Select that society which is fullest of life and of economic disturbances, the most enterprising of societies, and you will find that it is subjected to the most revolutionary changes. On any particular day we can say that static law governs that society, establishing for workers a rate of pay that is higher than the actual rate; though, after an interval that dynamic principles can account for, the actual rate will reach it. The society is thus dominated by static law; for the standard of pay for labor at this moment is what the actual pay would be, if we were to stop all dynamic changes and let the fruits of the changes that have thus far been made convert themselves into additions to wages and interest. Dynamic science studies the variation of the present actual rates from the static standards and the interval that it will take to make them coincide with those present normal rates. It studies the velocity of the upward moving standard of wages and that of the pursuing rate of actual wages, as well as the rapidity of the downward moving normal rate of interest and that of the pursuing actual rate.
We have frequently used the sea as an illustration of the static and the dynamic aspects of industrial life, and it will again serve our purpose here. There is, then, an ideal surface of the ocean, perfectly level, which projects itself through the actual waves. Stop the winds, letting the waves subside and the troughs between them become filled, and the sea will take an actual surface that will conform to this imaginary one. This is like what would happen, if the dynamic movements of society were to stop and allow competition to do its work, in diffusing profits and making earnings normal. If, however, there were at work some force that continually raised the static surface of the water, so that a calm occurring to-morrow would bring the water to a level that would be higher than that which would result from a calm to-day, the case would resemble that of the world of industry.
The improvements that are going on make additions to the whole income of the world. They disturb existing static adjustments, indeed, and in this respect they act like winds that toss up waves; but they do more than this, for they raise the entire height of the future sea, waves and all. For this also we can present a marine illustration. Pile somewhere on the surface of the sea a mountain of water and then let it subside, sending its great waves in rings that widen till they reach the outermost parts of the ocean. This makes disturbances, of course, for it takes the surface of the water out of that level and motionless state in which static law may be supposed to have left it; but it adds new water to the ocean and, when the surface shall again be quiet, it will be somewhat higher than it was before. Such a single mountain of water, piled somewhere upon the smooth sea, illustrates what happens, whenever a single improvement in production is so made that static law is left alone to dispose of the fruits of it. The addition to the wealth of society is like the addition to the waters of the sea, for the improvement has made the real earnings of men vary from the theoretical rate and has raised that theoretical rate itself. Such waves, piled upon the ocean at such intervals that each one would subside before its successor appeared, would act like those improvements which come at considerable intervals. Each wave would disturb the existing surface of the sea and make the new surface higher than was the former one.
Now, let the mountains of new water come in such quick succession that, just as one is beginning to subside, another makes its appearance. Let them be scattered all over the ocean, so that the ring-like waves, as they move outward, intersect one another in every direction. At every instant the waters are trying to conform to some static level, but at no two successive moments are they trying to conform to the same level; for they are pursuing an ideal and level surface that is continuously rising. Now we have the figure of what is occurring in society—the figure that describes the movement of wages, which move ever upward, hovering always about a static standard but never for two successive moments about the same standard.
These changes themselves and their effects are all subjects for economic dynamics. Static science recognizes one natural standard of wages for one time; but static laws, pure and simple, as they work in an actual and dynamic society, never give the same rate at different dates, but rather an endless succession of static rates. Dynamic forces create conditions in which there must be one static rate of pay to-day, a higher one to-morrow, and a third and still higher one the day following. This is the fundamental fact about the action of static law in the world as it is.
Dynamic science deals with profits in their original state, as normally created by improvements in industry, in the proceeds of which the
entrepreneurs have a share; while static science deals with them in their later and permanent state, as they are transmuted into increments of wages and interest. How some employer is now getting rich, dynamic science can tell us; but how it is that wage-earners are getting benefits from improvements of an earlier day, static science tells us. Profits, it is important to note, are larger when they become additions to wages and interest than they were when they existed in their initial shape, as
entrepreneurs’ gains. When they slip out of the employer’s hands, they grow. In the diffusing they become greater in the aggregate. The competitive law that gives them over in the end to laborers and capitalists thus gives more to these classes than it takes away from
entrepreneurs. The whole output of industry is at its maximum when the agents, labor and capital, are apportioned among the groups in a perfectly normal way; and that is when they have moved to the groups where profits have existed, till these gains have vanished and wages and interest have absorbed the whole social income.
The interval between actual wages and the static standard is the result of friction; for, if competition worked without let or hindrance, pure business profit would be annihilated as fast as it could be created—
entrepreneurs, as such, could never get and keep any income. The annihilation would consist in converting profit into another type of income and making it larger in the operation of conversion. Dynamic theory has to account for the whole of that friction on which
entrepreneurs’ shares depend; while static law determines what wages will be, when the friction shall have been completely overcome, and what they would be at this instant, if friction were immediately to vanish.
Dynamic theory reveals a causal connection between the interval of which we have been speaking and the rate at which wages are increasing. Were it not for that interval,
entrepreneurs, as such, would get nothing, however much they might add to the world’s productive power. They would have no incentive in self-interest to make any improvements, and it is clear that additions which are difficult and costly would be in danger of not being made. Profit is the lure that insures improvement, and improvement is the source of permanent additions to wages. To secure progress, this lure must be sufficient to make men overcome obstructions and take risks. The difference between the actual pay of labor and the rate toward which, at a particular date, it tends, measures the incentive that is offered to the men who make progress possible. Because to-day laborers are not getting the fruit of the improvement that was made yesterday, employers can make something; and because they can make something transiently for themselves, they make permanent additions to wages.
Dynamic theory has to show how great is the interval that insures the maximum rate of progress—how much
entrepreneurs need, in the way of profit, in order to make them do all that they can do to keep wages moving upward. This subject is intricate, as are all subjects in dynamics; but very simple is that static theory which shows that, however great may be the profits, wage-earners will in the end get the lion’s share. The vast sums that to-day are accruing to the rich, who do the marshalling of the industrial line, are bound, under static law, to add themselves with an increase to wages and interest. They add themselves, moreover, chiefly to wages. By the time that they have done this, indeed, gains from new sources will be accruing to the captains of industry, so that there will always be profits. But this gain will not long be obtained from any one source; for, if we can identify the profits of to-day, we shall have something that static law will claim as its own and will by to-morrow, as it were, make over mainly to laborers and to the owners of the tools of work. Dynamic forces, then, account to-day for the existence of an income that static forces will begin to dispose of to-morrow.
The velocity with which all standards move is a subject for the latter part of the theory of distribution. Velocities, directions of movement, obstructions, intervals—with these dynamics must deal, and with none of them has static theory, as such, anything to do. It does deal, however, with near goals. It tells what the rate of wages would shortly be, if evolution were to cease. Static forces, then, are of vital importance in the midst of all manner of social changes. For study here we have singled out one alone of the typical dynamic changes—that, namely, which takes place in methods of production; and we have examined the effect of it on one of the shares in distribution, namely, wages. But each one of the other four dynamic changes similarly transforms society and changes values, wages and interest.
It is clear that static law is entirely operative under dynamic conditions. Not one jot nor one tittle is taken from its full efficiency by inventions, by new organizations, by growth of population, etc. Let there be, for example, an increase of population. It is impossible that this increase shall occur in such a way that every group and every sub-group will naturally and without any further adjustment have its normal share of new laborers. The increase of the working population is likely to be in some degree localized. One geographical locality will have more of it than another has; and in the geographical locality where the population is densest it is impossible that all the different sub-groups in the industrial system shall be equally well represented. If the newcomers drift to a section where (say) textile manufacturing is a specialty, these industries will get more than their share of the new labor.
Under these circumstances, a diffusion of the local excess of population will take place. As all industry uses land, such a local excess of inhabitants may be treated as an overcrowding of land, even though the occupations that flourish in the more densely populated region are not mainly agricultural. One of the permanent static laws which we have presented in the foregoing chapters now calls for what we have treated as a reapportionment of land among the sub-groups. Literally, it results in a certain dispersion of labor and capital over the large area that is at their disposal. Rent is at its maximum, as we have seen, only when land is in a certain combination with labor and with capital; and each section of the land must have a certain normal share of each of the other productive agents combined with it. But this condition is impossible, where an undue proportion of the population originally locates itself in some one place. Static law must, then, make a local diffusion of the excess. An influence that will cause the overplus of population to move is the tendency that it has to diffuse itself among different groups and sub-groups; for in the crowded neighborhood these are unevenly represented, and to reach them in natural proportions the labor must migrate. There is a definite number of men who are, as it were, due to the shoe-making trade, and a certain other number who are due to iron smelting, etc. Every occupation, under static law, has its claim on a certain definite proportion of the new laborers who are coming on the scene, and it will get them by such a diffusion. The mere crowding of land itself is a further influence that acts in the same way.
If the influx of population occurred all at once and then stopped, there would be a time when values, wages and interest would all be unnatural, in the sense of deviating from static standards. Then they would slowly approach those standards and would ultimately reach them. So long as an undue proportion of population is in any one sub-group, values cannot be natural in the static sense. Moreover, while the groups are out of balance, the whole amount of wealth produced is somewhat less than it normally should be, and neither wages nor interest is at the static maximum. The influence, then, that apportions the new working force among the different sub-groups readjusts values by raising some and lowering others. In the second place, it steadily raises both wages and interest, by causing both labor and capital to produce in the aggregate more than they did before.
A second increase of population, also more or less localized, would cause another disturbance and another re-adjustment like that we have just described; and a long series of such enlargements of population would, so far as this one influence goes, cause values, wages and interest first to deviate from the static standards, then slowly to conform to them and then to deviate from them again.
When the growth of population is not intermittent, but continuous, the effect is to cause a perpetual deviation from the normal standards. Some groups and sub-groups are, so to say, the receiving ground for the new laborers and pass them on to the other sub-groups in which they are to stay permanently. The receiving ground is necessarily overcrowded; and, though there may come a time when it parts with laborers as rapidly as it gets them, something of the effect of the original overcrowding continues forever. This single dynamic influence, increase of population, causes the values of things produced by the groups and sub-groups to which the labor comes earliest to be unduly low—meaning by “unduly” that they are lower than the rates at which a static adjustment would fix them. It also causes the values of other things to be, in the same special sense, unduly high.
What we have said about the increase of labor is equally true of the increase of capital. We could, indeed, substitute the term “capital” for “labor” in the entire foregoing statement and so make it describe what occurs by reason of the fact that the fund of productive wealth is enlarging. The influx of capital must, in the same way, be at first somewhat localized. It is not possible that it should originally appear in each of the different sub-groups or in each of the localities in exactly the proportion in which static law will finally place it, and for this reason capital must move. There must be the recombination of land and of auxiliary capital that the law of rent requires; and until static law has in these ways asserted itself values will not be natural. In the interim, the sub-groups that are the receiving grounds for the new capital will turn out an excess of products, receiving lower prices for them.
An intermittent growth of capital might cause values to be abnormal, then normal and then abnormal again; but a continuous growth of capital will keep values in some small degree perpetually abnormal, in the special and narrow sense of the term, for it will cause them always to differ from the static standards. In the finer and truer sense, it is natural that they should thus differ from these standards; since it is entirely in accordance with nature that capital should steadily increase and that the increase of it should be in a measure localized. The values which in a dynamic society are in accordance with nature—and thus, in the higher sense of the term, natural—are the values that deviate from the static standard by a natural interval. The localized increase of capital, like that of labor, keeps general wages and interest by a real, though slight, interval below the static standards. The lower actual rates are in a true sense natural, if the distance between them and the standard rates is a normal one.
Let us now apply these principles to the third dynamic change which we have noticed—that resulting from inventions or improvements in method. The effect of this change on value is much less steady than is that of an increase of population or of capital. Inventions appear now here, now there and now elsewhere. They lower the price first of one thing and then of another; and, from the moment when the labor-saving machine begins to work in producing a particular article, there is a new static standard of value for that article and for all others. When the machine shall have produced its full effects, more of the goods produced by it will be constantly offered for sale and the price of them will be lower. From the outset this lower price is the static or, in the narrow sense, the natural price. At first the actual price is higher than this, but it tends gradually to conform to it.
If inventions were confined to one group and if they occurred intermittently, the standard value of the product of that group would first go down with a sudden drop, then it would remain stationary awhile and then, as the result of the next improvement, it would drop again. If the standard continued stationary long enough, actual value might fall to the static level and remain there for a while. Static value dropping and coming to a halt, actual value gradually falling but at intervals overtaking the descending standard—such is the condition of an industry in which inventions are made, as it were, by fits and starts.
If improvements go on continuously in one industry and in no others, the actual value of the goods there produced is always pursuing a standard of value that is steadily descending. Both values are falling, but there is an interval between them; and, if the interval is a normal one, the actual value may be said to be natural in the true sense of being in conformity with nature. The dynamic standard of value is a moving one; and actual value is as natural law would have it, when it moves in the same direction and remains at the proper interval behind this standard value. Whenever the value of only one thing thus descends, that of every other thing rises. The products of the groups in which there are no labor-saving inventions are, so far as this influence goes, always rising in value; and, moreover, they are always pursuing a rising standard that keeps ahead of them. If the improvements are altogether localized in A”’ of our tabular group system, then the values of B”’, C”’ and D”’ are not at any one moment as high as they will be when the output of A”’ shall become larger. Static law requires that the output of A”’ shall thus become larger. An uninterrupted succession of labor-saving inventions in the sub-group A”’ causes the actual value of A”’ to pursue a descending standard, but never to overtake it, and it causes the values of B”’, C”’ and D”’ to pursue ascending standards, but never to overtake them.
The creation of a new want also has a very disturbing effect in the group systems, if it requires an absolutely new product to gratify it. It then calls for the creation of a new producing group and the attraction of labor and capital from old groups. As a rule, however, the changes in the wants of the consuming public call for qualitative changes in products that are already made, rather than for wholly new products. Every such change, too, has its own effect on value, wages and interest. A new want calls for a new static adjustment of all values, and with that there is required a new adjustment of wages and of interest. A continuous series of new wants brings about a continuous change in the standards of value, wages and interest; and the actual market is in perpetual agitation, due to its perpetual effort to conform to the shifting demands. As a rule, the new want somewhat lowers the values of products that satisfy old wants.
Dynamic influences largely neutralize each other, so far as apportionment of labor and capital in different parts of the group system is concerned; and a fundamental fact about them is that, coming together as they do, they actually keep values, wages and interest comparatively near to their static standards. They cause a perpetual shifting of value, a continuous rise of wages and a continuous fall in the rate of interest; and they cause the actual pay for labor and for capital to differ from theoretical static rates far less than they would if the dynamic influences were less active and numerous. We are confronted, therefore, by the striking fact that, for the accuracy of its working in a world of reality, static law is dependent on dynamic influences. If a fluid, for example, is viscous, the surface of it does not readily subside to a perfectly level plane, but it does so far more readily if it is agitated at many points at once. Again, a measure of wheat may have an irregular surface while the measure rests on the floor, but it will take a level surface if you shake it. Similarly, static law has to encounter friction, which makes actual values, wages and interest slow in conforming to theoretical standards; but agitation helps to overcome the friction. The standards themselves change the less, because different dynamic movements neutralize each other.
If the increase of labor were localized and if it were confined to a place in which only the group A in our table were represented, it would have very disturbing effects and would keep values, wages and interest far removed from static standards. But this increase in the working population takes place, in fact, in B, C, D, etc., and in all the sub-groups within each of them. Comparatively little relocating of labor is therefore required: it is relatively easy for the new men to put themselves where pure static law would place them. If population were increasing in this general and diffused way and if capital were not increasing, there would be a steady fall of general wages and a steady rise of interest; but, in fact, capital also is growing in amount. It is even growing more rapidly in quantity than is population, and the growth of it neutralizes the depressing influence on wages that increase of population by itself would have. There is, indeed, an actual disturbance of wages and interest caused by the excess of the new capital in amount, as compared with the new labor; for it is only by reason of the fact that one of these economic agents increases faster than the other that distribution is affected. The disturbance that is due to the difference between the two rates of growth is far less than would be the disturbance occasioned by an increase in the amount of one of the agents alone.
If improvements in production were confined to a single group or sub-group, they would have very disruptive effects; but they occur in all the sub-groups of the system, and with some approach to continuity. If the constant multiplying of the output of A”’ stood alone, it would call for a perpetual fall of the relative value of it, as well as for constant readjustment of wages and interest. But, as improvements occur also in the B, C, and D groups, the adjustments of value that have to be made are relatively small. While the rate of wages rises more rapidly when improvements are numerous, the pay of laborers conforms much more closely to the static standard where improvements are numerous and well diffused than it would if the improvements were localized. Clearly, where the output of A”’, B”’, C”’ and H”’ were all growing larger together, there would be less necessity that men and capital should go from one group to another than there would be if the output of one were increasing, while that of the others remained fixed. Widely diffused improvements, then, help to keep society near to the shape that static law calls for.
The same generalization is true of the changes that take place in consumption. If new wants are numerous and of many kinds, they shift labor far less violently from group to group, and disturb values far less, than would the appearance of a single new want. If society should begin to produce and to use only one entirely new commodity, the fact would call for a quick moving of capital and labor from point to point; but, since there is, in fact, a constant refining of wants and a corresponding constant improvement in the quality of products, the shifting that is called for is far less violent. Labor and capital can remain in the mills that now employ them, but they must produce higher and higher grades of goods.
It is the growth of new wants that in this way neutralizes the effect of all the product-multiplying influences that go on. A glut of consumers’ goods would come forthwith, if expanding desires did not make a new market for the output of the mills. The want of commodities which are unlike any that have formerly been produced does at times make its appearance; but the demand for improvements and refinements in the qualities of goods that are already consumed is the constant fact, and this opens a very general market. Nearly everything that a man uses can be improved in quality; and, as a rule, the improved articles can be made by the same men who now produce them. It follows, therefore, that, with more and more refined wants developing, productive energy sets itself at work throughout the great system and enlarges the output of every group, by making goods finer rather than more numerous. This causes no disastrous transfers of labor and capital from one part of the system to another and it produces no general glut.
The multiplying and the refining of wants—or, in other words, the dynamics of consumption—furnish the elastic market that is needed. If this movement merely keeps pace with the dynamics of production, grave evils are averted and, in the main, the economic world goes on peacefully in the way of larger and larger production. As the dynamic movements are not entirely steady, symmetrical and mutually compensatory, there are some irregular transfers of labor and capital from group to group; yet, on the other hand, there are noticeable some comparatively steady currents of labor and capital. These agents are regularly flowing in certain directions. Thus, increase of population, in itself, would cause labor and capital to flow steadily downward in the sub-group system. Under its influence alone, man and equipment would have to increase in a disproportionate way in the agricultural sub-groups and in the mining sub-groups, both of which produce what we have defined as elementary utilities. The increase of population would call for more food and more raw material, and the effort to get these things out of the earth would reveal the action of the law of diminishing returns. It would take a larger and larger fraction of the population to feed the whole of it. Wages, as we know, would have to fall; and this means that laborers would be forced to take their pay in the shape of cheaper and coarser goods. Form utilities would have to be leas amply represented in the general product of industry, and elementary utilities would predominate in the consumption of the world. Moreover, as it is the lowest sub-groups that create these elementary utilities, labor and capital would move thither.
The increase of the amount of social capital, however, neutralizes this effect. Though it reduces the
rate of interest, it enlarges the
gross amount of it and thus increases the incomes of the members of that class whose consumption has already reached the level of comfort and luxury. This, of itself, calls for more form utility; for it induces a refining and improving of products to a greater extent than it causes the multiplying of them. Moreover, the increase of capital raises the rate of wages, and this means qualitative improvements in the goods that workmen consume. As the upper sub-groups create form utilities, the growth of capital, considered apart from other influences, moves labor and capital from the sub-groups that are at the bottom of the series to those which are higher.
Improvement in method, or the gaining of new productive power by the industrial world, if it acted merely as a labor-saving influence, would cause labor and capital to move downward in the series of sub-groups, from A”’ toward A, from B”’ toward B, etc. This, however, is because the field for such improvements is rather in the upper sub-groups than in the lower ones. Agricultural machinery was, for a time, invented and applied very rapidly; but, unless chemistry shall come in some striking way to the aid of agriculture, it will probably be other parts of the field that will, in the long run, show the greatest improvements. If no other effect is to be expected from a machine than that less labor will be used in the industry that adopts it, then the progress of invention will, of course, cause labor to mass itself in those industries in which labor saving takes place the more slowly and on the smaller scale.
The full effect of such an influence as that of mechanical improvements may be described as follows: We may first assume that there is no new product created and no multiplying of former products. The output of A”’, B”’, C”’, etc., are to remain as they are, however rapidly invention proceeds. Improvements in machines and methods now occur, but they mass themselves in the upper sub-groups of the different series. If all the labor that was formerly in A”’, A”, B”’, B”, etc., remains there, it can be employed for only a short period in each day. In that case its earnings will be small. But the earnings of laborers in A will be much larger, and competition will transfer a portion of the labor from A”’ and A” to A. This will bring the productive power of labor in the upper sub-groups and that of labor in the lower sub-groups to an equality, and the ultimate effect of all this will be that the working day will be shortened in every industry.
Now let the improvement in method act, not as a labor saver, but as a product multiplier, and the effect is the reverse of this. The labor in A”’ and A” may, for the most part, remain there and give rein to its new productive power. Enlarged production, however, means raising the qualitative grades of goods more than it multiplies them in number. Less productive energy is required at A, where raw materials are created, and more at A’, A” and A”’, where the fashioning of the materials is done. There is, in short, a relatively smaller amount of elementary utility represented in the consumption of the world, and there is a comparatively larger amount of form utility.
A certain amount of improvement in method does, in fact, take place in the lowest sub-groups, where the crudest materials are produced; and it has the effect of moving labor upward in the series to the sub-groups that produce finer utilities. This happens because of the comparatively rigid and inelastic character of the demand for these crude products and the highly elastic character of the demand for form utilities. Our more luxurious living shows itself in the care with which we fashion things, and not in the mere multiplying of the number of them, with the result that our consumption of raw materials does not increase as rapidly as our consumption of wealth in its finer forms. On the whole, therefore, the flow of labor and capital is continually upward in the sub-group series; for it can find outlets for its new power only in this way.
Organization has in these respects the same effect as improvement in method. As a practical fact, it takes place in the upper sub-groups, rather than in the lowest ones. It is not in farming that the great consolidations are going on. If organization acted merely as a labor saver, and not as a product multiplier, it would cause labor and capital to mass themselves in mining and agriculture; for men who were thrown out of employment in mills would be forced to betake themselves largely to farming and kindred occupations. Acting as it does, however, and multiplying products, it compels the making of finer grades of them and moves the productive agents forever upward in the series.
In discussing the effect of the two great product-multiplying influences, industrial method and organization, we have tacitly introduced the fifth and last of the dynamic influences that we are considering—namely, the multiplying of wants. It is because the want of form utilities is indefinitely expansive, while that of elementary utilities is relatively inexpansive, that we have, as the resultant of all changes, the steady upward movement of labor and of capital in the sub-group series. Moreover, some general groups create products which, with all the qualitative refinements that can be imparted to them, satisfy less elastic demands than do some other products. With the steady upward flow of labor and of capital in the sub-group series, there is also a flow from those groups which cater to less elastic demands toward those which cater to more elastic ones.
These steady and stream-like movements would not, of themselves, have disturbing and disruptive effects; and they would not impose any hardship on labor or cause any waste of capital. It is the irregular movements that do this. The labor saving that is effected at some single point in the system changes the location of labor. Inventions are not made and applied simultaneously in A”’, B”’, C”’, etc.; but, unless they are, there must be movements of labor from one of the sub-groups to others and back again. On the whole, an efficient machine is to some extent a labor expeller. If it is introduced at A”’, it will cause an enlarged output of the product, A”’; but the amount of this increased output that the market will take will not be enough to keep all of the original laborers at work there. It will, however, create a new demand for them elsewhere; so that machinery can never be rightly treated as a labor expeller, if the whole field of industry is kept in view. The invention that is made and applied at A”’ does not displace labor from the entire upper range of sub-groups. In A”’, B”’ and C”’, taken together, there is probably as much labor as ever; but the machine at A”’ creates a need of comparatively more men at B”’ and C”’ and of comparatively fewer at A”’. When, in turn, an invention is made at B”’, the movement will be away from that point to A”’ and C”’. In irregular ways, therefore, must labor move to and fro within the range of sub-groups that are on the same horizontal level. While the general and slow current of labor is upward within the whole group system, there are irregular and sudden movements to the right and the left of each range of coördinate sub-groups; and it is these that cause hardship for laborers.
It is only in the most hasty and the most general way that we can now speak of these dynamic movements. They form a part of the subject of the concluding division of economic theory. There are, indeed, in progress some movements of capital that we cannot even notice. We must, however, give attention to two essential facts: (1) There is a steady upward movement of labor and capital in the group series; and (2) there are irregular and disturbing movements taking place within each range of coördinate sub-groups.
It would appear, if we were to go one step farther into the dynamic part of our study, that, so far as improvements are well diffused within a range of sub-groups, they neutralize each other’s disturbing effects. Whenever inventions at A”’, B”’ and C”’ come nearly together, they remove the necessity for transferring much labor to new positions. It would also appear that the steady upward flow of labor reduces the violence of the horizontal movements that have to take place. As new labor is always entering the uppermost range of sub-groups, it may be that no men will have to leave A”’ and go to B”’, even though a new machine is introduced at A”’. The enlarging of the force at B”’ may be effected by turning to that point some of the labor that is flowing upward from the lower sub-groups.
Still further, it would appear, if we were to continue this study, that movements of capital take much of the violence away from the movements of labor that are entailed by inventions. Not toward greater and greater hardships for the working class, but toward smaller hardships and larger gains is the world tending, as the result of economic dynamics.
All this would become clear, if it were possible to pursue the study into the dynamic region. We have now before us, however, the problem of defining static standards of value, wages and interest, in a state in which all five of the grand dynamic movements are going on together. At each instant there is a certain definite adjustment of labor and of capital in the sub-group system that static forces, of themselves, would make. Static law calls for a certain exact amount of labor and a certain amount of capital at A’, B”, C”, etc., respectively. This static adjustment, if it could be made in a moment, would insure at once the amount of output of each kind of goods that is “natural” under the conditions that exist at this moment; and it would thus make the values of all products natural. Likewise, it would insure natural wages, or the rates of pay that would everywhere conform to the product of labor. It would adjust interest on the same plan, making it everywhere coincide with the product of capital. It would reduce pure profits everywhere to zero. These things would entire if, at any one moment, dynamic changes and all friction were to cease.
This is, of course, a recapitulation. We have already had the picture of the perfect static adjustment before us; but we have not had before us the fact that some static adjustments require much time, while others require only a little, and that there are a number of different standards which figure in the natural adjustment of wages and of interest. Within a single year the pay of labor may gravitate rapidly toward a certain standard, while that standard may for a decade, or even a century, slowly gravitate toward a remoter standard.
The moving of labor and capital to the sub-groups in which static forces would put them involves some local migration of workingmen and even of capitalists. A certain number of them may have to change their residences, and this is something that encounters friction and requires time. The assimilation of methods may, however, go on more rapidly. It may be that, when one
entrepreneur has hit upon a new and successful way of producing something, his competitors can get possession of it within a few years; although, by reason of patents, they may not do this for a longer period. In general, however, transfers of labor from place to place go on comparatively slowly and those of capital go on more rapidly; while the abandoning of poor methods of production and the placing of all competitors in one business on a plane of high efficiency is sometimes a quick process and sometimes a slow one.
One way of defining the static standard toward which, at each moment, a dynamic society is tending, is to suppose that all dynamic influences should cease at once, while static laws continue to operate for an indefinite time. On this plan, we should have to wait, before realizing the static condition, long enough to allow the slowest adjustments that are in progress to be carried through quite to completion. If it takes fifty years to locate labor geographically in the way that static law calls for, even though it requires only five years to unify the methods of production that are in vogue, we must wait fifty years for the complete realization of the static state. We should thus bring the development of new methods of production to a standstill now, instead of forty-five years hence. If we stopped all dynamic changes in the year 1900 and waited until 1950 for population to locate itself in a natural way, the methods of production in the sub-group that we took for illustration would be brought to uniformity in 1905 and these processes would then continue in use without further modification for forty-five years longer.
This is one scientific way of defining the state toward which at this moment society is tending under the influence of static forces and of no others. It would be reached, if we were to paralyze the dynamic forces all at once and wait long enough for the slowest static adjustments to be made.
*59 The state toward which society is now tending, at the outset of the long period, is one that cannot be completely reached until the slowest adjustment that static law calls for has had time to complete itself. In our illustration, that adjustment is the movement of population; and, as this movement requires fifty years, natural values, natural wages and natural interest are not realized within less than that long period. They will come when population is rightly distributed, and not earlier.
Under the influence of static forces, and of these only, society is actually tending toward this remote adjustment; and, if all friction could be removed, it would at once attain it. Friction, however, has this effect; it allows quick-acting dynamic movements to occur over and over again, within the long period that is required for a slow acting static adjustment. In the fifty years that may be needed to move a mass of population from the densely peopled East to the sparsely settled West, hundreds of machines may be invented and values may in each case be adjusted at the level that each machine at once requires. We must, therefore, recognize standards of value, etc., that differ from the ultimate standards.
static forces only on society, as it was in 1900. It would be, in part, the result of certain dynamic forces acting for forty-five years.