Real Significance of Rent Formula.—It will be seen that this formula amounts to saying that the rent of land is what the land itself adds to the marginal product of labor and capital. Put a certain amount of labor and capital on a piece of land of good quality, and you get a certain amount of product. Withdraw the land from the combination, and you force the labor and capital to become marginal increments of these agents. They must go elsewhere and get what they can. One alternative that is open to them is that of seeking out land of a grade so poor that it has not been previously utilized and doing what they can to get a product out of it. Whatever they can make such land yield is, in an economic sense, wholly their own product. There is an indefinite quantity of this kind of land to be had, and wherever labor and capital utilize any part of it, they can have all that they produce. Now if we subtract what they there create from what was created when they were working on the good land, we have the rent of that land.

Rent as a Product Imputable to Land.—The difference between what the labor and capital produce at the margin of cultivation of land and what they can produce on good land, or land that lies within the margin, is clearly attributable to the qualities of the land itself. Given X units of labor and Y units of capital, combine with them no land except such as is too poor to have been previously utilized, and you get a certain product. It is the product of the labor and capital using something which is free to any one. Now put a piece of good land into the combination; to the X units of labor and Y units of capital add a piece of productive land and see what you can create. We do this by taking these units of labor and capital away from the worthless marginal land and setting them to tilling that which is of the better quality. The product is of course larger than they got before, and the difference measures what the land itself adds to the output of the other agents in the combination. The true conception of rent is that of the specific addition which land makes to the product of other agents used in connection with it. There are various ways of measuring this addition, but the method just used will at least show that the presence of the good land is the cause of the excess of product which given amounts of labor and capital secure over what they could create on land of the poorest quality.

Rent as a Differential Product.—In the early statements of the rent law it was not said that the rent of a piece of land is the product specifically attributable to it. If it had been, the chances are large that a much broader and more scientific use of the rent formula would have resulted. The law of rent, as it was actually stated, made it consist of a differential amount. It was what a given amount of labor and capital would produce under one set of conditions minus what they would produce under another. Since it is the presence or the absence of the productive land which makes the only difference between the two conditions, rent, even as it is thus defined, is really the amount of product specifically attributable to the land. It is what is created when the land is used in excess of what would be created if it were not used and if the cooeperating agents did the best they could without it. We may use, as the most general formula for the rent of land, the contribution which land itself makes to the product of social industry.

If we use the same method in measuring the rent of land which we used in measuring the wages of labor and the returns of capital, we shall represent the rent of a given piece of land as the sum of a series of differential amounts. In the accompanying figure the vertical belts bounded by lines rising from the letters A, B, C, etc., represent the products realized by applying successive increments of labor and capital to a given piece of land; and the horizontal lines running toward the left from A', B', C', etc., separate the wages and interest from the amounts that are successively added to rent. When one composite unit of labor and capital is working, its product and its pay is measured by the belt between the line AA' and the line NN'. A second composite unit produces the amount represented by the area between AA' and BB', and that is the amount which each unit separately considered will produce and get as its pay. This leaves the area between the horizontal line running from B' and the section of the descending curve as the rent of the land. A third unit of labor and capital produces what is represented by the area between BB' and CC', and this becomes the standard of pay for all units, leaving the enlarged area above the horizontal line at C' as rent. In the end there are ten units of labor and capital. Their total earnings are expressed by the area of the rectangle below the horizontal line running from J', and the sum of all the areas above that line is rent.



The Intensive Margin of Cultivation.—The extensive margin of cultivation is the land that is adjacent to an imaginary boundary line separating the grades of land that are good enough to be used from those that are too poor to be used. There is, however, what may be called the intensive margin of cultivation. A given bit of land is said to be cultivated more and more intensively when more and more labor and capital are used on it. Land is subject to what is called the law of diminishing returns.

Law of Diminishing Returns.—The more labor and capital you employ on a given piece of land, the less you will get as a product for each unit of these agents. What the last unit of labor adds to the antecedent output is less than was added by any of the other units, and the same is true of the last unit of capital. As we continue the process of enlarging the working force and adding to the working appliances, we reach a point at which it is better to cease putting new men with their equipment at work on this piece of land and to set them working on a bit of land so poor that it was not formerly utilized at all. We may assume here that what a man needs, in the way of auxiliary capital, goes with him, whether he joins a force that is working on good land or migrates to a less productive region. He will go if it will pay him to do it. In this way we make a sort of dual unit of labor and capital and apply a series of such units to land.

Ground Capital and Auxiliary Capital Distinguished.—Land itself is a component part of the permanent fund of productive wealth to which we have given the generic name capital. It differs from other capital goods in that it does not wear out and require renewing. Working appliances, however, as they wear out and are replaced, constitute a permanent fund of auxiliary capital, and we shall apply this term to the abiding stock of such instruments except in connections in which the adjective is not needed, because it is clear that the land, or ground capital, cannot be referred to. In dynamic studies the distinction between land and auxiliary capital becomes very important.

How the Intensive Margin locates the Extensive One.—The labor and the auxiliary capital that betake themselves to new land of the inferior quality represent an overflow from the better land. As long as men can do as well by staying where they are as they can by migrating to new regions, where inferior lands are to be had, they will stay; but when they incur a loss by staying, they move. What a laborer can create by securing the use of an equipment and adding himself to the force that is at work on some good farm, can be approximately estimated; and if there is somewhere a piece of land not thus far used to which he can remove, and if, by going to work upon it, he can create any more than he created while working on the older farm and taking his products as his pay, he will till that poor piece. But neither he nor any one else will till a piece that is still less productive. If any one were to set himself working on land of still poorer quality, he would lose and not gain by the change, since there he would produce even less than he can when he is the last man set working on the good piece.

To what Extent the Movement of Labor and that of Capital are Interdependent.—The early statements of the law of rent did not usually define the intensive margin of cultivation in connection with labor and capital separately, but spoke of these two agents as employed together upon land in quantities increasing up to a limit beyond which both labor and capital would best be employed elsewhere. The supposition that labor and capital go thus together from one grade of land to another is only approximately accurate. If we consider one man and five hundred dollars' worth of productive wealth as a dual unit of labor and capital, and add such units, one after another, to the forces at work on a tract of good land, we shall reach a point at which it will not be profitable to increase the amount of one of the agents, while it will still be profitable to increase the amount of the other. It will perhaps not pay to use any more capital, but it may still pay to add to the number of workers. On land that is tilled more and more intensively, labor and capital are not tied together in fixed proportions in such a way that, when there is more of one of them used, there is proportionately more of the other. Moreover, when a unit of one of them abandons a piece of land and goes elsewhere, there is no probability that exactly one unit of the other will do the same. There is, indeed, no such thing as a dual unit of labor and capital that can be thought of as moving to and fro among different employments till it finds the point at which, as a dual unit, it can create its largest product. These two agents so locate themselves that a final unit of each one, separately considered, produces as much where it is as it can produce anywhere else.

It is, however, to be noted that the amount of labor that can profitably be employed on a piece of land grows larger the more capital there is employed in connection with it. An acre of land and a thousand dollars' worth of auxiliary funds can enable more men to get good returns than can an acre combined with a fund of five hundred dollars. Conversely, the more men there are working on the area, the more auxiliary capital it pays to use there. If there are five men working on a small field it may be that a thousand dollars may be well invested in aiding them, while with only one man it would not pay to use so large an amount. The capital and the labor, as it were, attract each other. Additional capital attracts further labor, and vice versa, till a condition is reached in which neither of them can so well be used on that particular piece of land as it can elsewhere. Each one has then been used on this area up to its own intensive-marginal limit. So also when one of these agents betakes itself to marginal land, it attracts the other agent thither. When there are ten men on the poorest piece of land in a locality, it is possible to make a considerable amount of capital at that point pay the return generally prevailing, whereas only a small amount would pay it if there were only five men working. With a thousand dollars invested on that land more laborers will be lured thither by the prospect of fair returns than would be lured thither if there were only half as much capital. The general apportionment of both agents tends to be such that a unit of either is as well off on one piece of land as on another, and each is as well off at the extensive margin of cultivation of land as it is on the intensive margin.

Labor and Capital combined in Varying Amounts.—The amount of capital that is combined with a unit of labor is not often the same on good land as it is on poor. The proportions in which labor and capital will be combined on the marginal field will be almost certain to vary from those in which they were combined in the better field from which they came. It may be that they leave industries in which an average man uses an equipment worth a thousand dollars. When they reach the margin of cultivation, capital may be so scarce that the thousand dollars will not stay in the hands of the one man but will divide itself among several.

The General Law of the Extension of the Margin of Cultivation.—Sometimes, when labor moves to new land that is now at the margin, it takes its new equipment with it; but such land is not always tilled by independent settlers. Employing farmers may set men working on it and pay them all that they produce; and the farmers may furnish the men with capital of their own or borrow capital for them to use. In either case a static condition requires the equalizing of the productivity of labor at the intensive margin with that of labor at the extensive margin; and it requires a similar leveling of the productivity of capital at the two margins. When this leveling has taken place in both cases, the all-around marginal product of labor fixes the rate of wages, and that of capital fixes the rate of interest. What a man creates on the good land and with the adequate capital, or on poor land with proportionate capital,—in any occupation on land of either grade,—determines the pay that he and other men can get. It constitutes in itself the wages of labor. In so far as the overflow of labor and capital into any one limited region of marginal land is concerned, the full statement is this: that the margin of utilization of land will be extended to the point at which a unit of labor, using as much of the marginal land as it is economical to use, and such amount of auxiliary capital as is economical to combine with this unit of labor and the land it occupies, will create a product equal to the wages of the unit of labor as they are determined by the product it created when it was employed on the good land and in connection with the full equipment of auxiliary capital.

The Rent of a Fund of Capital.—We saw that one unit of labor employed in connection with a given amount of capital produces more than does a second; that the second produces more than the third; and that, if we continue to supply units one at a time, the last unit in the series produces the least of all. Wages are fixed by the amount that one unit of labor produces when the working force is complete, and that is what is contributed to the general product by the unit of labor which comes last in the imaginary series by which the force is built up. Owing to the more favorable conditions under which, in their time, the earlier units worked, they were able to produce surpluses above the amount produced by the last one. When they entered the field they were supplied with excessive amounts of capital. The first one had the whole fund cooeperating with it, till it had to share it with the second; and after that each had a half of it till they had to share evenly with a third, etc. We have seen that all the surpluses appearing in connection with the earlier units are attributable in reality to capital. The area BCD (page 139) represents the amount by which the presence of an excess of capital increases the products attributable to the earlier units of labor. It represents the sum of all the differences between the products of the earlier units and the product of that final one which in the end sets the standard of productivity of labor. It might be called the rent of the fund of capital. It is composed of a sum of differences exactly like those which constitute the rent of a piece of land.

The Rent of a Permanent Force of Labor.—In the figure on page 148, the working force was supposed to be fixed in amount, the capital increasing by increments, or as some earlier economists would have said, by "doses" along the line A'E'. The last unit of capital produces the amount D'E', and all the capital produces A'B'D'E', while products of the earlier units of capital, as they come successively into the field and are used by an excessively large labor force, are represented by the area B'C'D'. Here this area represents what may be called the rent of the force of labor, since it is a sum of surpluses that, again, are entirely akin to those that constitute the rent of a piece of land.

A Question of Nomenclature.—It may be an open question, as a matter of mere nomenclature, whether these surpluses which are thus traceable to a permanent fund of capital, on the one hand, and to a permanent force of labor, on the other, can with advantage be called rents. In this treatise we do not think it best to employ that nomenclature. What is not uncertain is that these gains are measurable by the same formula that measures the rent of a piece of land. If the essential thing about rent were that it is a material product and consists of a sum of differential quantities, these incomes certainly would be rents. Popular thought, however, attaches another meaning to this term, and we therefore limit ourselves to saying that these differential incomes or surpluses may be determined in amount by the principle of rent. They can be described and measured exactly as the Ricardians described the income of landlords.[1]

[1] The term rent has even been applied to surpluses of a psychological kind. Certain gains that men get consist purely in pleasures or in reduced pains or sacrifices, and a few writers have applied to such subjective gains the term rent. If a man buys a barrel of flour for five dollars and gets out of it a service that is a hundred times as great as he could get from some other article which he buys for the same amount, this surplus of pleasure may be called, by a figure of speech, "consumers' rent"; and if the essence of rent were the fact that it can be made to take the form of a surplus or difference, the name would be well chosen, though there is danger that by this use of the term science may divorce itself from practical thought and life. If we take all the barrels of flour that a man uses in ten years, there is one which is marginal, because it is worth to the man only enough to offset the sacrifice he incurs in getting it. All the others are worth more. We can arrange them in a scale in the order of their importance, the most necessary one coming first and the least important one last; and we can compare the service which each one renders with that rendered by the last, and measure the surplus of good which each one does to the user. There is here in operation a law of diminishing subjective returns. Early units consumed afford more pleasure than do later ones. There results a series of surplus gains, and the sum of all these surpluses makes a total of net benefit,—is a gain that is not offset by a compensatory sacrifice. The last barrel of flour on the list is worth just what it costs, and all the others are worth more. They give the consumer a surplus of satisfaction for which he pays nothing. The sum of the excesses of service rendered by all the earlier barrels constitutes what has been called the consumers' rent, realized in this case from the entire supply of flour used by the man. In the manner in which it is conceived and measured this gain has a kinship to genuine rent.

This surplus is an effect on a man himself. It is not anything outward or tangible. It exists only in the man's sensations, and is as far as possible from being a concrete income in material form traceable to some particular agent. It can be measured and described in ways that are quite akin to the manner in which the product of land is measured and described. Each consists of the sum of a series of surpluses or differential amounts, and each, moreover, represents a gain which is not offset by any corresponding subjective cost. The rent of land must be paid by an entrepreneur and is a cost in the same sense in which wages and interest are so; but the owner of the land did not create it by personal effort or sacrifice.

Analogies between the product of land, or rent, and the special gains of consumers from the more important parts of their consumption do exist, but they are overbalanced by essential differences; and it is better to use the term rent only in describing the specific contribution to the material product of industry which a concrete and material agent makes.



CHAPTER XI

LAND AND ARTIFICIAL INSTRUMENTS

One may hire many things besides land and pay what is commonly called rent for them. No one would think of calling by any other term the amount paid for the use of a building, a room in a building, or the furniture in the room. All these things yield rent to their owners; and if the intuitions which govern the common use of terms are to be trusted, the income derived from such things and that derived from land have some essential qualities in common. Every such income is paid for the use of some concrete instrument, and is measured, not by a percentage on the value of the instrument, but by a lump sum—a certain number of dollars per month or per year.

The Mode of Calculating the Rent of Concrete Instruments.—Now the rent of such instruments of production, whether artificial or not, can be measured in exactly the same way in which the rent of land is measured. We saw that there are two margins of utilization of land, an extensive and an intensive one, and that the product of labor and capital at either of these margins may be used as a basis for computing the surpluses which constitute the rent of the land. The landlord gets from a good field what it produces minus what the labor and capital that are used on this field would produce if they were used on the poorest land in cultivation; or, what is the same thing, he gets from the field what it produces minus what this labor and capital would produce if they were set working somewhere on the intensive margin of cultivation. Take the men out of this field, add them in small detachments to the men who are already cultivating other fields, in order that such fields may be tilled a little more intensively, and measure the product which the laborers create when they are so placed. Withdraw also the capital from the field, add it, in small amounts, to the capital that is working elsewhere, and measure its specific product. The sum of these two specific products is the same amount that is arrived at by using the former standard. This labor and capital, formerly used on the good field, scattered as they now are among the users of other good land, will create the same amount that they would have created if they had been employed on the poorest land in cultivation. This amount is, as it were, what they produce by their own unaided power; and whatever is produced in excess of this amount when a good field comes to their assistance is the rent of that field, for it is the contribution which the field makes to the joint production. Total product of land, labor and auxiliary capital minus the product created by the labor and auxiliary capital when these agents are put in marginal positions equals the rent of the land.

The Rent of an Instrument measured from the Intensive Margin.—We can measure the product of any instrument in this way. If it is a ship, it takes labor to sail it and requires a considerable amount of auxiliary capital. We must fill the bunkers with coal, stock the steward's department with provisions, furnish and light the staterooms and the saloons, and provide cordage and a wide variety of other ship stores. All this labor and all this capital we could take out of the ship and use elsewhere. We could convert them into marginal labor and capital. We could divide them among the owners of other ships where they would be used in a way that would make these other ships somewhat more efficient and cause each of them to earn a little more than it now earns. Whatever the labor and capital could, in this way, produce furnishes the basis for computing the rent of the ship. Subtract it from the total joint product of labor, capital, and ship, and you have what the vessel separately earns.

The Mode of Testing the Productive Power of a Ship.—Put the labor and capital into the ship and set it doing its proper work of carrying freight and passengers, and you cause a certain product to be created. The steamship company gets an aggregate amount for the service it renders by means of the labor, the auxiliary capital, and the ship. A certain smaller amount would be realized if the labor and the auxiliary capital were taken out of the ship, distributed, and used in the way we have just described. The difference between the two amounts is the rent of the ship, or its particular contribution to the general product. This gives us a formula for computing the rent, not only of land, but of buildings, tools, machines, vehicles, and every other concrete instrument of production. The formula, indeed, is so general that it enables us to compute the earnings of any agent whatsoever. The rent of any such agent is what it adds to the marginal product of labor and capital used in connection with it.

No-rent Instruments.—The majority of instruments that are in use add something to the marginal product of the labor and capital used in connection with them. Some add more and some add less, according to their several qualities. As a rule, any tool of trade produces most when it is new and less and less as it grows older. In the end it is discarded because it has so deteriorated that it no longer adds anything to the marginal product of the labor and capital that are used in connection with it. A wagon has become so rickety that it no longer pays to furnish a horse, a harness, and a driver for it. The capital and labor that these represent would earn as much if they were detached from the old vehicle and added to the equipment of some person who has a stock of good ones. The rent of this old wagon is nothing. As in the case of the poorest land in cultivation, it is a matter of indifference whether certain amounts of labor and capital are used in connection with it, or whether they are withdrawn and employed elsewhere. This poor vehicle, like the poor land, may be used without positive loss; but if it is so used, nobody gets any income from it. It has no power to enter in a really productive way into combination with labor and capital, for it cannot so combine with them as to add anything to those marginal products which the labor and capital could create if they remained detached from it.

The Universality of the Test of Rent.—This test, whether an instrument can or cannot add something to the marginal product of labor and capital, may be universally used. It may be applied to everything that is made as an aid to labor. There are no-rent buildings, locomotives, cars, tracks, ships, wagons, furnaces, engines, boilers, and, in short, instruments of every description that figure in production. Combine any one of them with labor and capital and see what you get out of the combination; then take the labor and capital away and see what they will produce as marginal labor and capital; and the difference between the two amounts, whatever it is, is the rent of the instrument. If the difference is nil, the instrument is at the point of being abandoned.[1]

[1] Whether such an instrument should or should not be called a capital good is a question of mere nomenclature; but in this treatise we consider that every part of what we term capital produces an income, and therefore a no-rent instrument is not a capital-constituting good—otherwise termed a capital good.

True Capital rather than Capital Goods moved in Making such Tests of Productivity.—In applying these tests with scientific accuracy we should take away the true capital used in connection with a rent-paying instrument and use it as marginal capital elsewhere, rather than take away the particular concrete thing in which that capital is now embodied. In the case of the ship the accurate test is made, not by taking stores, etc., bodily out of it and putting them into other ships, but by letting the stores first earn what they can where they are, converting the earnings into money, and, when the stores are completely used up, spending the money to procure marginal additions to the outfit provided for the other ships.

One Difference between Land and Artificial Capital Goods.—In the case of land a particular area is marginal or no-rent land, and, in a static state, it remains so. Any particular ship, wagon, engine, or other made tool begins its career as a rent payer and ends it as a no-rent instrument. If we watch the whole social stock of instruments of production, we shall see the no-rent points not fixed in location, but shifting from place to place. Now this machine, now another, and now still another reaches the unproductive state and is supplanted by instruments of similar kind that are new and efficient.

Original Elements in the Soil.—The real difference between the rent of a piece of land and that of a building, machine, vehicle, or any similar instrument arises from the fact that the land is not going to destruction and the artificial instrument is. There are elements in what is commonly called land that wear out as do the tools that are used in tilling it, but these elements are not land in the economic sense. Land, as Ricardo long ago said, consists in the "original and indestructible powers of the soil." He singles out certain constituent elements of every farm, forest, building site, or other piece of what is called land in ordinary usage, and gives to this new concept the name land in an economic sense. These so-called "powers" are original elements because man does not make them; they are provided altogether by nature, and the only way in which man may be said to impart any productive power to them is by putting them into combinations in which they can produce. When men settle upon what has been vacant land, they bring the land into combination with labor, and when they break up the land for tillage and put buildings on it, they combine it with artificial capital. By means of these combinations land acquires productive power; but physically considered, it is altogether a natural product.

Indestructible Elements in the Soil.—Land in the economic sense is indestructible because the natural effect of use is not to destroy it. This does not mean that it is not physically possible to destroy land to the extent of making it forever impracticable to use it in the ways in which land is commonly utilized. Nature may do this by sinking it beneath the ocean, and man can, if he will, do something akin to this; but he does not naturally destroy what is truly land in the using. It is impossible to use a plow, a spade, or a reaping machine without injuring it and, in the end, wearing it out. It is also impossible to draw the nutritive constituents out of the superficial loam and convert them into crops without exhausting the supply of these sources of fertility and so spoiling that which is commonly called the land, though it is not so in the economic sense. What is really land in this sense is not affected. Nitrates and phosphoric acid that lie in the topmost stratum of the soil are among the destructible instruments of agriculture. The supply of them has to be renewed, if cultivation is continued, and they are therefore in the class with the plows, spades, and reaping machines which also wear out. But whatever there is in the soil that suffers no deterioration from any amount of use is the land with which political economy has to deal.

The Gross and the Net Rent of Land Identical.—As land does not wear out and require renewal, all that it adds to the products of the labor and capital that are used in connection with it may be taken by the landlord as an income without reducing the amount of his property. Whatever land produces at all is a net addition to the general income of society.

Net Rent of Artificial Instruments Smaller than Gross Rent.—It is not safe, on the other hand, for the owner of buildings, tools, or live stock to take for his own consumption all that these produce. If he were to use up their gross produce as he gets it, he would find, in due time, that a considerable part of his property had vanished. Such instruments wear out and become worthless, and if no part of what they produce is set aside as a sinking fund with which to purchase other instruments to take their places, one whole genus of capital must go altogether out of existence.

Artificial Instruments Self-replacing.—What actually happens is that these instruments create enough wealth to pay for their own successors, and that, too, besides paying a net return, which, regarded in one way, is interest. If you compute the whole product of one of these instruments by the Ricardian formula which we have examined, the amount of it will be whatever the instrument, during its entire career, adds to the product of the labor and of the capital that are used in connection with it; and that includes the fund for renewal that has just been described, the amount, namely, which the owners must set aside for repairing the instrument and finally purchasing another. As the instrument itself provides this sinking fund, it may be said to create, in an indirect way, its own successor. The ship earns, over and above the net income which is interest on its cost, enough to keep itself seaworthy so long as it sails and, in the end, to build another ship. The locomotive, the furnace, the loom, the sewing machine, the printing press, etc., all pay for and thus indirectly produce their own successors.

The Net Rent of a Permanent Series of Similar Instruments.—The first charge on the product of any instrument of this kind is the amount necessary for replenishing the waste of it and for providing a successor when this original instrument shall have been wholly worn out. In like manner, the first charge on the successor is providing a similar fund, and so on indefinitely. A part of the productive power of every one in an endless series of similar instruments is devoted to this type of reproduction. The series maintains itself and yields an income besides; and that remainder of its gross rent which is left after waste of tissue is repaired is available as a net income for the owner. This net remainder constitutes an interest on the owner's capital. He possesses a permanent fund of productive wealth embodied in the endless series of these perishable instruments, and the series taken as a self-perpetuating whole yields nothing but this interest. Each instrument, separately considered, yields interest and a sinking fund; but the sinking fund is not available as an income, since it must take shape as another instrument which serves to keep the series intact. What the first instrument creates in addition to the sinking fund is its contribution to interest, and what each instrument creates above what is required for virtual self-perpetuation is also interest.

Interest and Net Rent Identical.—We may therefore reduce interest to the form of a net rent by calculating the gross rent afforded by each instrument in such a series and by ascertaining how much of this merely repairs waste and how much is true income. As interest is usually expressed in the form of a percentage, we may reduce the net rent to this form by comparing it with the cost of the first instrument, which is the amount originally invested. The series of instruments will yield a net return every year. We can compute the gross return of each instrument according to the Ricardian formula for measuring the product of the land. It will diminish from year to year and will ultimately vanish. We can add the several annual gross earnings of the instrument during its economic lifetime in the form of an absolute sum, which is the total rent of the instrument. From this we can deduct the cost of replacing this worn-out capital good, and the remainder will be the net rent of the instrument. We can, in a like way, get the net rent of all the following instruments in the series for a long period, add these net rents together, and get the true net earnings of the series for the time covered by the calculation. If this chances to be ten years we may compare a tenth of this total, or the earnings of the series for one average year, with the cost of the first instrument,—which is the capitalist's original investment,—and we shall thus get the fraction which represents the annual rate of interest on that investment. Perhaps in an average year the series has earned, above what is required to repair waste, five hundredths of what the first instrument cost. That is, then, the rate of interest that the series as a whole, or the permanent capital, is yielding. The whole procession of instruments in which permanent capital is invested creates every year this fraction of its own value, over and above the sum that is needed to offset the wear and tear of an average year's use.[2]

[2] If the fund for replacing a costly capital good, such as a ship or a building, were allowed to accumulate for a term of years before being spent, the parts of it remaining on hand for some time would earn interest for their owner, and in his bookkeeping this would figure as reducing the amount he must save from the product of the ship or the building in order to replace it. This does not affect the general law of self-replacement, for the ship or building really produces what results from this compounding.

General Interest as Rent.—If you compute the net income of all tools, machines, and other like things in the world, add the amounts, and get the grand total of them all, you have the entire income from this part of the capital of the world in the form of net rent. If then you compute the value of all this class of instruments and see how large a part of this value the net rent is, you translate this total rent into the form of interest, and therefore net rent and interest are the same income regarded in two different ways.[3]

[3] In computing both of these values for comparison one should use a labor-cost standard, and we shall later see under what limitations such a standard may legitimately be used.

Stocks of Made Instruments graded in Quality as is Land.—It is necessary to notice the fact that the permanent series of tools, buildings, and other active capital goods shows forever the same gradations of quality that are found in the case of land. There are always to be found some instruments which are producing a large amount—that is, they are adding a large amount to the product of the labor and the further capital that are combined with them in production. A given amount of labor and capital creates much more wealth when working with a machine of the highest class than it would if distributed in marginal positions; and this is equivalent to saying that such an instrument is itself highly productive. Other instruments are to be found which are creating less, and there is never wanting a grade of no-rent instruments which are adding nothing to the marginal product of the other agents. It would be as well for the labor that used them if it should drop them and add itself to the force which is working with good instruments. Any one manufactured instrument begins its career as a maximum-rent instrument and ends it as a no-rent one. The ship is at its best when it starts on its first voyage, and the mill is at its best in the first year of its running. Each instrument goes gradually downward in the scale till it reaches a stage in which it really produces nothing, since it adds nothing to what would be produced without it. The permanent series of instruments never thus deteriorates. All the depreciation of particular things is made good by the repairing and the replenishing which go on. In the series as a whole there are forever present grade number one, grade number two, grade number three, etc., exactly as in the case of land. If we wish, we can reckon the income that is to be gotten from each part of the series according to the old-time formula that is familiarly used in the case of land, "What labor and capital create by the use of this piece of ground in excess of what they would create if they were applied to the poorest land in use." For a grade of land read a grade of the self-perpetuating series of artificial instruments, and it will appear that each grade above the poorest yields, with the labor and capital that are combined with it, a surplus above what this labor and this capital could create if they were combined with the poorest grade in the permanent series.

Different Modes of Destroying and Replenishing Stocks of Capital Goods of the Two General Classes.—The process of keeping up a stock of tools of trade is unlike the process of keeping intact a stock of materials and unfinished goods, because the modes in which the two kinds of capital goods deteriorate and perish are unlike.

In the case of the raw materials that gradually ripen into articles for consumption and which we have called passive capital goods, the waste of tissues that takes place is quite unlike that which takes place in the case of active capital goods, the tools and implements that are used in the process. The raw material acquires value through the whole process, and in the end it gives itself, with all its acquired value, into the hands of the consumer. In a static state such goods embody the whole income of society, including the products of all labor and of all capital.

A''' A'' A' A

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

Labor and the Obtaining of its Product, in Static Industry, Synchronous.—One function of the permanent series of A's is to enable labor everywhere to get its virtual product without waiting, and that too in the form in which it needs it for use. The labor that converts A'' into A''' supplies the waste of tissue that takes place at that end of the line by withdrawal of an A'''. The labor that turns A' into A'' replaces the waste that takes place at that point when an earlier A'' becomes an A'''. The labor at A' replaces the waste at that point, and that at A replaces the waste at still another point. They are all at work keeping the stock of A's unimpaired, and one of them does as much toward keeping up the perpetual flow of A''''s as any other.

If we pump water in at one end of a full reservoir, we instantly cause it to overflow at the other end; and every worker in such a series as we have described may be thought of as putting something into the permanent reservoir of capital and so causing a corresponding overflow. He gets his reward day by day as the work proceeds. Wherever a laborer may be in such a series, his work creates a ripened product as it goes on. He has not to wait for it. His work and its fruit are synchronous.

Differences between Land and Made Instruments Apparent in Dynamic Conditions.—A point that has great theoretical interest is the nature of the difference between land and other productive instruments. In a static society the difference would be comparatively unimportant, but it is brought into prominence by the changes which constitute a dynamic state. The static hypothesis requires that capital should not increase or diminish in quantity, and that it should not change its forms. The equipment of every mill and of every ship is kept unimpaired but not enlarged or improved. There is a fixed number of spindles in the cotton mill, of lathes in the machine shop, of sewing machines in the shoe factory, etc., and this fact removes the most striking difference which, in a dynamic society, actually distinguishes land from other things.

Land, in the economic sense, does not increase in quantity, however changeful and progressive a society may be. The chief distinguishing mark of land—that of being fixed in amount—separates it from other things only in a dynamic state and because of the action of the forces which produce organic changes. These are subjects to be studied in the dynamic division of economic theory.

A Distinguishing Mark of Land which appears in a Static State of Industry.—In a static state there remains this difference between a piece of ground and a building, a tool, or any other instrument: the ground is not artificially made and does not perish in the using; while the building or the tool or other appliance is so made and does so perish. It must in wearing itself out create in the indirect way which we have described its own successor. The engine must, by a part of its product, pay the men who will make another engine and so perpetuate the series of engines. This makes it necessary for the owner of the engine to save some of its gross rent to pay for depreciation and renewal, while he can safely use the whole rent of land.

This Mark of Distinction not Applicable when Land is contrasted with a Permanent Stock of Capital Goods.—If we look, not at one particular instrument, but at an entire series of them,—if we take into view, not only the engine which is now driving the mill, but also the one that will succeed it, and again the one which will succeed that second engine, and so on forever,—this difference between land and the artificial instrumentality vanishes. The series of engines, like land itself, yields only a net rent. The remainder of its gross product is not a true rent at all, since any one of the engines creating it has to consume it on itself and cannot give it to the owner as an income. This remainder pays certain men for keeping the series of engines intact, and what is given to them as pay for their services cannot accrue to any one as an income from the series of instruments so maintained. It is the earnings of the corps of maintenance created by their own labor and capital. What the series of engines yields over and above what it expends in maintaining itself it gives to its owners as an income. This is their net return and they can use it without trenching on their property. The analogy between the returns from land and those from a self-perpetuating series of made capital goods is in this particular complete.

The Source of the Fund for Repairs and Renewals.—The fund for repairs and renewals must, of course, like the net income itself, be furnished by instruments that are above the no-rent grade. A machine will naturally be used as long as it pays anything whatever, and during the latter part of its career it usually produces less than mere interest on its cost. So long as the labor and the auxiliary capital that are combined with the instrument produce by its aid any more than they would produce if they were withdrawn from it and added, as marginal increments, to the labor and capital that are working in connection with good instruments, they will continue to use the machine and they will abandon it only when it ceases to pay anything whatever. Out of the total amount it produces before reaching this point of abandonment comes the amount that is needed as an offset for the cost of providing a new machine.

Incorrectness of a Common Statement concerning Rent and Price.—This brings into view a striking fallacy of what has been current economic theory. It has been customary to claim that the rent of land "is not an element in price," although the interest on capital is such an element. The rent of land is the net product of land; and if interest be kept distinct from it, this income is the net product of a permanent stock of capital goods. The relations of these two component parts of the constant output of goods to the prices of the goods are identical.

Proof of the Incorrectness of the Current Statement concerning Rent and Price.—The vague form of the current statement concerning rent and price is responsible for much confusion of thought on that subject. What the statement would mean is that the price of wheat is not affected by the great contributions to the supply of it which good lands are making. These contributions are the rent in its original form. The rent of wheat land is wheat, that of cotton land is cotton, that of mill sites is manufactured goods, etc. That money is used in payments made to landlords changes nothing that is essential. To say that such contributions to the supply of particular commodities are not an element in determining the prices of them, would be as unreasonable as to make the same assertion concerning other parts of the supply. Quite as logically might it be asserted that other components in the supply do not affect prices—that the amount of wheat which is attributable to harvesting machinery or the amount of calico which is imputable to looms has no influence in the market values of these articles.

Why the Produce due to Good Land prevents Prices from greatly Rising.—If the use of good wheat land were merely discontinued, the supply of wheat would of course be not only lessened, but reduced almost to nothing, and a famine price would at once result. If, now, an attempt were made to make good the shortage of the supply of this cereal by tilling lands which are now at the margin of cultivation, it would at once appear that not enough of such land exists to enable us to accomplish the purpose, and it would be necessary to push the margin outward and till poorer and poorer soils, at a greatly enlarging cost. We should grub out worse thickets, drain worse swamps, terrace more discouraging hillsides, irrigate more remote and barren deserts, etc. All this would mean a greater cost of production of wheat and a higher price for it in the market.

It would also mean another thing. The extending of the margin of cultivation which makes it include poorer grades of land causes that part of the area now tilled which does not command any rent to yield one. After the margin should have been greatly extended and finally located in a region where getting anything out of the soil would require a struggle, it would appear that all of the lands newly annexed to the cultivated area except the last and poorest would command a rent. All but those on the new margin would add a definite quota to the supply of wheat, and this contribution would be their rent. Entering into the supply, it would of course count in the adjustment of price.

What can reasonably be conceded concerning Rent and Price.—There is another possible meaning of the phrase "Rent is not an element in price"; and, whether it was clearly in the minds of those early economists who made the assertion or not, it is what their argument proves. The payment of rent by tenants to landlords has no effect on the market value of the produce. "Food would not become cheaper," says Professor Fawcett, "even if land were made rent free." There would be the same need of food stuffs as before, and the tillage of lands would be pushed to the present margin, where the yield is smallest. The cost, in labor and capital, of that marginal part of the supply of food which has come from these poorest lands would continue to be what it has been heretofore. The farmers would, of course, get from the good lands the same surplus that they get at present; but the fact that land had been made rent free would enable them to keep it. This surplus is, of course, rent, and transferring it from landlords to tenants does not affect prices. So much of the doctrine formerly current is true; and it would have forestalled much confused thought as well as much controversy if the statement concerning rent and price had made it clear that any rent in its original form is an element in the supply of produce, and the existence of it helps to determine prices, while the payments made by tenants to landlords do not affect them. If these payments should cease and the tenants should retain the rent, prices would continue to be what they now are.[4]

[4] The claim that rent is not an element in price making might be made in the case of artificial instruments of production as reasonably as it can be made in the case of land. If it means that the existence of the rent has no effect on price, it is wholly incorrect in both cases. The statement may be so changed as to tell what is true concerning the rent of land, and it will then also tell the truth about the product of the artificial instruments, which is interest in its original form. These statements may be made in parallel columns, and one will be as true as the other and no truer.

A needed part of the supply A needed part of the supply of wheat is grown on marginal of woolen cloth is woven on land. marginal looms.

The price of the wheat must The price of the cloth must pay for the labor and capital pay for the labor and capital used on this land. that, in the woolen manufacture, are combined with these looms.

The price of wheat raised on The price of cloth woven good land is the same as that on good looms is the same as of wheat raised on the marginal that of equally good cloth zone, and it affords a surplus woven on marginal ones, and above wages and interest paid it affords a net surplus above by farmers for labor and the cost of maintaining the capital used in the tilling stock of looms and the of the good land. wages and interest paid by manufacturers for further capital used in connection with the good looms.

The existence of this surplus The existence of this surplus in its original form, that in its original form, that of wheat, affects the supply of cloth, affects the supply and the price of that product. and the price of this product.

The fact that farmers pay The fact that entrepreneurs landlords for this surplus pay capitalists for this has no effect on the price surplus has no effect on the of wheat. price of cloth.

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



CHAPTER XII

ECONOMIC DYNAMICS

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

Differences between Static Forms of Society at Different Dates.—A highly dynamic condition, then, is one in which the economic organism changes rapidly and yet, at any time in the course of its changes, is relatively near to a certain static model. It is clear, therefore, that it cannot, at different periods, conform even approximately to one single model. If the forces of change which in 1800 were impelling the industrial society of America to a forward movement had been suppressed, and if competition had been ideally free and active, that society would before long have settled into the shape then required by the forces which, in the preceding chapters, we have described. Some labor would have moved from certain occupations to others and gained by the change; and this movement of labor would have ended by making the productive power and the pay of a unit of this agent uniform in all the different subgroups of the system. Capital would have so apportioned itself as to level out inequalities in its earning power. The profits of entrepreneurs would have been equalized by becoming in all cases nil, and the best available methods of production would everywhere be found surviving and bestowing their entire fruits on laborers and capitalists. All this is involved in saying that the static model, the form of which was determined by the conditions of 1800, would have been realized. This would have been brought about by suppressing at that date the forces which cause organic change and by giving to competition a perfectly unobstructed field. If we had done this in 1900, instead of at the earlier date, economic society would, in a like way, have conformed to the shape required by the conditions of 1900; and this would have been very different from the shape which the static forces would have given to society a century earlier. There is an ideal static shape for every period, and no two of these static shapes are alike.

Differences between the Actual Shape of Society and the Static One at Any One Time.—The actual shape of society at any one time is not the static model of that time; but it tends to conform to it, and in a very dynamic society is more nearly like it than it would be in one in which the forces of change are less active. With all the transforming influences to which American industrial society is subject, it to-day conforms more closely to a normal form than do the more conservative societies of Europe and far more closely than do the sluggish societies of Asia. A viscous liquid in a vessel may show a surface that is far from level; but a highly fluid substance will come nearly to a level, even though we shake the vessel containing it vigorously enough to create waves on the surface and currents throughout the whole mass. This is a fair representation of a society in a highly dynamic condition. Its very activities tend to bring it nearer to its static model than it would be if its constituent materials were not fluid and if it were never agitated. The static shape itself, though it is never completely copied in the actual shape of society, is for scientific purposes a reality. There are powerful influences tending to force the industrial organization at every point to conform to it. The level of the sea is a reality, though the motion of the waters never subsides sufficiently to make their surface accurately conform to it. As vigorously agitated, the water shows a surface that is nearer to the ideal level than would an ocean of mud, tar, or other sluggishly flowing stuff. The winds throw up waves a few feet high, but the fluidity keeps the general surface surprisingly level; and so civilized society, made as it is of fluid material kept in vigorous agitation, finds, as it were, its level easily. If in any year we could and should stop the dynamic disturbances, the economic society would assume the static shape which the conditions of that year called for as readily as the sea would find its normal level if winds and tides should completely cease. Static influences that draw society forever toward its natural form are always fundamental, and progress has no tendency to suppress them.

Competition a Cause of Rapid Changes in the Standard Shape of Society and of a Quick Conformity of the Actual Shape to the Standard One.—The competition which is active enough to change the standard shape of society rapidly—that, for example, which spurs on mechanical invention and causes a large profit to be realized in a particular subgroup—has also the effect of calling labor and capital quickly to the point at which the profit appears, and, in the absence of any monopoly, reduces this profit to nil and restores, in so far as this cause of disturbance goes, the equilibrium of the groups. Under the influence of active competition a particular group frequently undergoes quick changes which call for more labor and capital, but it gets them quickly; and, as has just been said, the standard shape of a society which is in this highly fluid condition does not differ so much from the actual shape as does that of a society the movements of which are sluggish. The standard shape is like the hare that moves quickly and irregularly; while the actual shape is like the pursuing hound, which moves equally quickly, follows closely all turns of the course, and, if the game were to stop moving, would in short order close on it.

The Equalization of the Productive Power of Labor and of Capital in the Different Subgroups.—We have seen that in a static state labor and capital do not move from subgroup to subgroup in the system, and that this absence of flow in a fluid body is not brought about by monopoly or by any approach to it. That, indeed, would obstruct transfers of the producing agents from point to point; but monopoly is a thing most rigorously excluded by the static hypothesis. At every point we have assumed that the power to move is absolute, while only the motive is lacking. The equalization of the productive power of labor in the various subgroups precludes the migration of labor, and a like equalization precludes a migration of capital.

Equalization of Productive Powers within the Subgroups.—Not merely must each unit of labor or of capital be able to create as much wealth in one subgroup as in another, but within the subgroup—the specific industry—each unit must be able to create as much under one employer within the industry as under another. The different entrepreneurs must compete with each other on terms of equality, and no one of them must be able to wrest from a rival any part of the rival's patronage. So long as one competitor has an advantage over another in his mode of creating a product, there is no equilibrium within the subgroup. The more efficient user of labor and capital is able to draw away labor and capital from the less efficient one, and the self-seeking impulse which is at the basis of competition impels him to do it. The producer who works at the greater advantage is foreordained to underbid and supplant the one who works under more unfavorable conditions. That a static state may exist and that the movements of labor and capital from point to point may be precluded, every competitor within a subgroup must be able to keep his business intact, hold his customers, and retain in his employment all the labor and the capital that he has.

Equality of Size of Productive Establishments not Necessary.—Size is, as we shall see, an element of efficiency, and the great establishment often sells goods for less than it would cost a small one to make them. The small manufacturer often finds that he would best become a mere merchant, buying some of the products of the great mill and selling them to his customers, rather than continue making similar goods. In the general market an approach to equality of size is usually necessary in order that competitors may be on even terms. This does not preclude the survival of many small establishments. The local retailers have an advantage over great department stores in the filling of small orders. When one has to buy what costs a dollar it does not pay to spend a dime in car-fares, and waste a dollar's worth of time in order to secure the thing for ninety cents. Weariness to customers is here the element that gives to the small producer his advantage and enables him to keep that part of the business which comes in the form of many small orders; but small producers often have other advantages than those which depend on location. In a shop which is more like that of a craftsman of three centuries ago than it is like the great furniture factory, a cabinetmaker can make a single chair of a special pattern more cheaply than the great manufacturer can afford to do it. The great shop requires that there should be many articles of a kind turned out by its elaborate machines in order that the owner should get the benefit of their rapid and unerring action. There will long be at work hand presses much like those used by Benjamin Franklin, besides the complicated automata which do the bulk of our printing, because for printing a dozen copies of anything the lever press is the cheaper. There will be shoemakers who not only mend shoes but occasionally make them for customers who want other than standard kinds; and local tailors are sure to survive. Only in the general market and in the making of standard goods is size essential to success.

A Considerable Number of Competitors Assumed.—The most striking phenomenon of our time is the consolidation of independent establishments by the forming of what are usually called trusts; and this and all the approaches to it are precluded by the static hypothesis. There is a question whether, after competition has reduced the establishments in one subgroup to a half dozen or less, they would not, even without forming a trust, act as a quasi-monopoly. This question we have at the proper point fully to discuss, but here it is necessary to assume that nothing which creates even a quasi-monopoly exists. We shall find that competition usually would, in fact, survive and be extremely effective among as few as five or six competitors, till they formed some sort of union with each other. To avoid all uncertainty we assume that in the static state in which values, wages, and interest are natural and in which each subgroup has its perfectly normal share of labor and capital, there are competitors enough in each occupation to preclude all question as to the continuance of an active rivalry.

Static Values and Prices.—The equilibrium referred to requires that all values should stand at their static levels, which means that the prices of goods should be the "cost prices" of the older economists. The entrepreneur should make no net profit on the goods he is producing. The wages of labor must be productivity wages, since each man must get the amount of wealth that he brings into existence. Interest on capital needs, in like manner, to be productivity interest, and each unit of capital must get the amount it creates. Moreover, the prices of goods, as expressed in money, must be accurate representations of the comparative values of goods. All these features mark the static state; but the most obvious mark of distinction is the absence of movement from group to group. We shall see that values are ultimately measured in marginal labor, and as the value of money is measured in the same way, it follows that the price of each article, as expressed in money, is in a static state a correct expression of the comparative amount of labor that will make it. And the entire relation of commodities to each other and to labor can be expressed by the medium of currency. If a unit of labor produces gold enough to make an eagle, and if any commodity sells for ten dollars, it will be safe to infer that it is also produced by one unit of labor. If one commodity sells for ten dollars and another for five dollars, the former is the product of twice as many units of marginal labor as is the latter. This remains true only while currency continues to be in its normal state and all other static adjustments continue complete.

Influences that disturb the Static Equilibrium.—It might seem that the influences that disturb such a static equilibrium are too numerous to be described; and yet these changes may be classed under five general types:—

1. Growth of Population.—The supply of labor is increasing, and this fact of itself calls for continual readjustment of the group system.

2. Increase of Capital.—The amount of capital is increasing, and this change also disturbs the static equilibrium and calls for a rearrangement. As far as wages and interest are concerned, the effect of this latter change is the opposite of that which follows an increase in the amount of labor. When people become more numerous, other things remaining equal, their individual earning capacity becomes smaller. The increase of capital reduces the earning power of each unit of the supply of it and depresses the rate of interest; but it raises the rate of wages, for it causes labor itself to act more efficiently.

It is to be noted, indeed, that when new laborers enter society they become consumers as well as producers, and this affects the utility and the value of goods. When more people use a given amount of consumers' wealth, values, measured in ultimate units of utility or disutility, rise. An increase of capital does not directly neutralize this effect, since it does not change the number of consumers; but it multiplies commodities and brings down their utilities and their values. The rise of "subjective" values which follows an influx of laborers is an indication of diminished wealth per capita, and the reduction of values which follows an influx of capital is a sign of increased wealth per capita.

3. Changes of Method.—Changes take place in the methods of production. New processes are devised, improved machines are invented, cheap motive powers are utilized, and cheap and available raw materials are discovered, and these changes continually disturb the static state. There are certain to be improvements on the older methods of production, for a law of the survival of the fittest insures this.

Under competition the process that, with a given amount of labor and capital, turns out a larger product inevitably displaces one that turns out less. The employer who is using the better method undersells those who use inferior ones, and forces them either to improve their own methods or to go out of business. Working humanity as a whole is therefore making a constant gain in producing power, as man's appliances equip him more and more effectively for his conflict with nature and enable him to subjugate it more rapidly and thoroughly. It would seem that they ought to have only good effects on wages, and in the long run they invariably do have such effects. In the absence of improvements there would be little hope for the future of wage earners. The immediate effects of improvements upon individual workers, as we shall see, are not always unqualifiedly good, but the essential effect is the general and permanent one, and the character of this has been attested by past experience too fully to be in doubt. In improvements in production lies the hope of laboring humanity. Nearly the whole earning power of the labor of the present day is the result of improvements that have taken place in the past, though these gains have not been secured without causing local and temporary hardships. If in the future the wages of labor are doubled or quadrupled, as the result of a series of improvements beginning now and extending to a remote period, this progress cannot be secured for nothing. The costs will be less than those attending improvements of the past, but they will be real. The most important fact is that they tend to become fewer and smaller and that the gains immeasurably exceed them.

4. Changes in Organization.—There are changes in the mode of organizing the establishments in which commodities are produced, and so far as these occur under a regime of active competition, they also are improvements and give added power of production. The mills and shops become larger and relatively fewer. There is a great centralizing movement going on, since the large shop undersells and suppresses the smaller one, and combinations unite many great shops under one management. The effect of this, when it takes place in a perfectly normal way, is akin to that of improvements of method. It benefits society as a whole somewhat at the cost of individual members of the body, and it causes wages to rise by adding continually to the wealth-creating power of the men who earn them. We shall see that when consolidations repress competition their effect is far from being thus wholly beneficial, and that not only are particular persons injured by them, but the community as a whole has a serious bill of charges to bring against them. The securing of the gains that come by consolidation without such evils is an end the realization of which will tax the statesmanship of the future.

5. Changes in Consumers' Wants.—The wants of consumers are changing. They are growing more numerous as well as more refined and intellectual. This expansion of desires follows the general increase of productive power, since every one already wants some things that he cannot procure, and all society has a fringe of ungratified wants just beyond the limit of actual gratification. Even if all these wants that are now near the point of actual satisfaction were to be satisfied, the desires would at once project themselves farther. The mere increase in earning power without any special education enlarges the want scale, but intellectual and moral growth cooeperates with it in that direction and calls latent wants into an active state. More and more eagerly do men seek things for which the desire was formerly dormant. Changes of this kind affect values, cause labor and capital to move from group to group, and thus cause society as a whole to produce less of some things and more of others. They sometimes cause wholly new groups to appear, and draw workers and equipment from the old ones.



Advantage of Diversity of Wants.—One very marked effect of the diversification of wants is to increase the aggregate utility of a mass of commodity produced with a given expenditure of labor. Measure the whole wealth available for consumption on the basis of the labor that it takes to create it, and it will appear that it has more utility and is worth more to society in consequence of this evolution that is going on in the nature of the individual consumer. A given amount of labor benefits most the men whose wants are of the most varied character. If A, B, and C are three commodities, and if their several utilities decline, as successive units of them are given to a consumer, along the curves descending from the letters A, B, and C of the diagram, it is clear that the man whose consumption is confined to the commodity A gets less benefit from three units of wealth than does the man who consumes A, B, and C. The utility of the first unit of A is measured by the vertical line from A to the line DE, that of the second by the line from A' to DE, and that of the third by the line from A'' to DE. The utility of the first unit of B is measured by the distance from B to the line DE and exceeds that of the second unit of A by the difference between the lengths of those lines. In like manner the utility of C exceeds that of the third unit of A by the difference between the length of the line descending from C and that of the one descending from A''. The declining utility of the income of the man who satisfies three wants is represented by the slowly descending curve ABC, while the diminishing utility of the income of the man who satisfies only one want declines along the sharply descending curve A, A', A''.[1]

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

Changes in Static Standards.—The grand resultant of all the changes that are going on in the more highly civilized countries is a continual rise, not only in actual wages but in the theoretical standard of wages. The static or "natural" rate of pay for labor to-day is higher than it was fifty years ago and lower than it will naturally be fifty years hence. Removing all disturbing influences and letting society settle to-day into a perfectly static condition would reveal the theoretical standard of present wages. Doing the same thing after a lapse of fifty years would show what would then be the natural or standard rate; and this would be higher than the present one. Not only would the actual pay of labor have risen, but the standard to which it tends to conform would have become higher after every interval. The actual rate of wages at any one time varies from the standard; but as both rise from decade to decade, the actual rate hovers all the while within a certain distance of the standard one.

Effects on Values.—In the same way the values of goods measured in labor will in general be declining values. At no one time will actual market prices accurately express the amounts of marginal labor that are required for producing different articles, but they will approximately express this. Articles will sell in the market for about enough to pay for the labor that, when used as marginal labor, suffices to produce them; and as this amount of labor put into a given article grows less and less, the prices of the goods will actually pay for fewer and fewer days' labor.

The standard price of anything will be the amount of money that is needed to pay for the labor of making it, provided always that we are careful to use only empty-handed labor in applying the test and that we put that labor in the marginal position, as described in Chapters IV and V, and so disentangle the product that is attributable to it from that which is imputable to capital. If wages, as paid in money, remain stationary, normal prices will decline and actual prices will hover about them in their downward course, so that goods will actually buy smaller and smaller amounts of labor, or, what is the same thing, labor will secure as its pay more and more goods.[2]

[2] In measuring the cost of goods in labor, in Chapters IV and V, we disentangled from the amount of goods which is the joint product of labor and capital, the part which is attributable to labor only. The mode of doing this is there more fully stated. The old and crude method of using a labor standard of value—which assumes that the product of a unit of labor aided by capital will always buy the product of another unit of labor aided by capital—we must take all pains to avoid.

In connection with the cost in labor of different articles it is to be remembered that in agriculture the effect of improvements of method may not always suffice to counteract the working of the so-called law of diminishing returns, which insures, with agricultural science in a given state of advancement, smaller products per capita when there are more men on a given area. That this influence should preponderate over that of improved processes requires that population should increase with a degree of rapidity which may or may not be maintained.



CHAPTER XIII

THE LIMITS OF AN ECONOMIC SOCIETY

When we try to establish a standard to which wages generally tend to conform, the question arises how much of the earth we have in view. Is there a rate at which the pay of labor in Europe, Asia, Africa, Australia, and America tends to settle and remain? Is there a common rate of interest that is normal in all these grand divisions, and are there also general standards of value for goods which govern their prices in all the markets of the world? If there are no such standards having universal validity, are there any that are valid within single geographical divisions? On what principle can we divide the earth into sections for economic purposes? These are some of the questions which must be answered if a theory of distribution is to have any definiteness of meaning, and they arise whenever we try to establish a static standard of any kind. If we talk about natural wages, we must know in how much of the world they are natural. The questions become even more urgent when we try to solve dynamic problems. We shall have to determine the effects of an influx of labor into the economic society we are studying; but does this mean an increase of population in the world as a whole? Does an influx of capital have a similar comprehensive meaning, and does an improvement in the method of producing some commodity mean a change in the mode of making it in every part of the world where it is produced at all? We need to know how extensive the society is whose activities we are examining.