FOOTNOTES[1]The termmarket, as used in this discussion, means a local area within which goods of given kinds are bought and sold; and for different purposes we may make the area small or large. For some purposes it is necessary to take a "world market" into consideration, while for others it is desirable to include only that part of the world within which competition is very active and within which also goods and persons move freely and cheaply from place to place. A single country like the United States affords a market large enough to illustrate the laws of value, though one must always keep in view the relation of this circumscribed area to its environment. How local areas may, in a scientific way, be delimited and isolated for purposes of study will appear in a later chapter.[2]It will be seen that to a man who buys the seventy-five dollar coat that article in its entirety is the final one of its kind which he will buy. He does not want a second coat exactly like the first. The same thing is true of the man who buys the five hundred dollar watch, since he does not think of buying more than one. In each case the first unit of the article bought is the last one, and it contains utilities which are worth more than they cost. It contains one utility only which is marginal in the true sense of affording no surplus of gain above cost. This utility stands on the boundary line where consumers' surpluses stop.
[1]The termmarket, as used in this discussion, means a local area within which goods of given kinds are bought and sold; and for different purposes we may make the area small or large. For some purposes it is necessary to take a "world market" into consideration, while for others it is desirable to include only that part of the world within which competition is very active and within which also goods and persons move freely and cheaply from place to place. A single country like the United States affords a market large enough to illustrate the laws of value, though one must always keep in view the relation of this circumscribed area to its environment. How local areas may, in a scientific way, be delimited and isolated for purposes of study will appear in a later chapter.[2]It will be seen that to a man who buys the seventy-five dollar coat that article in its entirety is the final one of its kind which he will buy. He does not want a second coat exactly like the first. The same thing is true of the man who buys the five hundred dollar watch, since he does not think of buying more than one. In each case the first unit of the article bought is the last one, and it contains utilities which are worth more than they cost. It contains one utility only which is marginal in the true sense of affording no surplus of gain above cost. This utility stands on the boundary line where consumers' surpluses stop.
[1]The termmarket, as used in this discussion, means a local area within which goods of given kinds are bought and sold; and for different purposes we may make the area small or large. For some purposes it is necessary to take a "world market" into consideration, while for others it is desirable to include only that part of the world within which competition is very active and within which also goods and persons move freely and cheaply from place to place. A single country like the United States affords a market large enough to illustrate the laws of value, though one must always keep in view the relation of this circumscribed area to its environment. How local areas may, in a scientific way, be delimited and isolated for purposes of study will appear in a later chapter.
[2]It will be seen that to a man who buys the seventy-five dollar coat that article in its entirety is the final one of its kind which he will buy. He does not want a second coat exactly like the first. The same thing is true of the man who buys the five hundred dollar watch, since he does not think of buying more than one. In each case the first unit of the article bought is the last one, and it contains utilities which are worth more than they cost. It contains one utility only which is marginal in the true sense of affording no surplus of gain above cost. This utility stands on the boundary line where consumers' surpluses stop.
Natural Supply.—We have attained a law of market value, which determines the price at which a given amount of any commodity will sell, and have taken a quick glance at the influence which fixes the amount that is offered and thus furnishes a natural standard to which the market value tends to conform. At any one moment the amount which is supplied is an exact quantity, and if it all has to be sold, it will bring a price which is fixed by the final utility of that amount of the commodity. If the quantity offered for sale should become greater or less, the final utility and the price would change. Final utility controls the immediate selling price, and if that is above the cost of production, a margin of gain is afforded which appeals to producers, sets competition working, and brings the quantity made up to the full amount which can be sold at cost. The amount of the supply itself is therefore not a matter of chance or caprice. It is natural that a certain quantity of each article should be supplied, and that the price should hover about the level which the final utility of that quantity of the good fixes. "Natural" or "normal" price is, in this view, the market price of a natural quantity.
Cost as a Standard of Normal Price.—It is commonly and correctly stated that the normal price of anything is that which just covers the cost ofproducing it. Cost in this case is the total amount of money that theentrepreneurpays out in order to bring the commodity into existence. He buys raw materials and pays for all the labor and capital that transform them into a new and saleable shape. If he can make a net profit, he does so; but competition tends to adjust the quantity produced and the consequent price in such a way that he can make no net profit. What he gets for the article will then reimburse him for his total outlay, but it will do no more. Since the quantity produced is normal when it brings the market price to this level of cost, it appears that the cost is the ultimate standard in the case. The quantity supplied varies till it causes the market price just to cover the cost; and so long as the quantity supplied is thus natural, other influences remaining the same, the price is so. This states the cost of production in terms of money paid by anentrepreneurand the returns from the operation as money received by him; but there is a more philosophical way of conceiving the law of cost, and to this we shall soon recur.
Elements of Cost.—Whatever theentrepreneurhas to pay for in the production of an article is of course an element in its monetary cost to him. If he does not begin the making of it by drawing his raw materials from what nature freely furnishes, he must pay some one for the raw material. He must also pay for the labor, and this is equivalent to buying the fraction of the article that is produced by labor; for the laborer, as we have seen, is the producer of a certain fractional share of the article and the natural owner of that share, and when he agrees to let his labor for hire, what hereally does is to sell out his individual interest in the forthcoming product of the industry in which he is about to engage. When a workman in a shoe factory agrees to work for two dollars and a half a day, he really contracts to sell every day for that amount a certain quantity of shoes. The leather is one element which enters into the finished shoes, and therefore the entire shoe is not really made in the factory; but of the part which is there made, namely, the utility that results from transforming the leather into shoes, one part is made by labor and another by capital. Theentrepreneurhas to buy both of these if he is to acquire a valid title to the product and have a right to sell it. These costs are therefore "purchase money" paid for undivided shares of goods.
Labor of Management.—It usually happens that anentrepreneur, or employer of labor and capital, performs some labor himself; and we have already noted the reason for this in the fact that the kind of labor that he performs is so important that the fate of the business often depends on it. He may manage the business so well as to make it succeed or so ill as to make it fail. He pays himself for this labor when he draws a salary for his services. As anentrepreneurhe treats his own labor as he does that of any one else and buys the fraction of the product of his business that his own labor of management has created. In this he illustrates the general law that all payments of wages are payments of the purchase of a certain quantity of product. Though the owner's own contribution to the product is not always mentioned in terms in the accounting, that is what his salary is paidfor, though it is spoken of as a payment for his "time," or his labor.
The Capitalist as the Vender of a Share in a Product.—Capital, as we have seen, also contributes a definite share toward the total amount of every product in the making of which it coöperates. Labor does not do all the transforming of leather into shoes which is done in the factory, since machines, fuel, etc., help; and we shall later find that there is a way of determining how much of the product the help so given creates. It adds a certain amount to what labor can claim as its own special product, and the man who owns the capital becomes the lawful claimant for this additional share. When he agrees to let his capital work for an employer, he virtually sells to the employer the undivided share of the product—shoes or what not—that the capital really creates. The furnisher of productive instruments, like the furnisher of labor, is a vender, and theentrepreneuris a buyer.
Entrepreneur and Capitalist.—As was stated in an earlier chapter, an actual employer nearly always furnishes some of the capital that he uses. If he did not do so, he would have difficulty in borrowing more, since banks or other lenders do not loan to empty-handed men. It is clear that what the employer gets in return for such capital as he may put into the business is in reality a payment for a contribution which that particular part of the capital makes to the product. Since each bit of capital in an establishment contributes something toward the creating of the product, the employer's own capital has the same right to the value of its contributary share as has the capital of any oneelse. What the employer-capitalist gets for capital the employer, pure and simple, pays. As the furnisher of instruments the man is a vender of the product of these instruments, while as anentrepreneurproper he is the buyer. He must purchase the product of his own capital just as he purchased the product of his own labor. In paying, therefore, wages for all labor, including what he performs himself, interest on all capital, including his own, and the price of raw materials, he gets something which, if competition does a perfect work, he has to sell for what he gives for it. The shoes, when he sells them, tend, under active competition, to yield only what has been paid for them in the making and, in a perfectly static state, would actually yield no net profit. All theentrepreneur'scosts, therefore, resolve themselves into purchase money paid, his receipts are money accruing from sales; and under ideally free competition the two sums total are equal.
The Entrepreneur's Proper Function not Labor of Management.—In some theoretical discussions the management of a business figures as the principal function of theentrepreneur, and all or nearly all of the reward that comes to him is represented as coming in the shape of a reward for a responsible kind of labor that calls great abilities into requisition. But it is very clear that, whether he personally performs any labor or not, the employer has a distinctly mercantile function to perform; and this in itself is totally unlike the work of overseeing the mill, the shop, or the salesroom. He acquires a title to the whole product by paying for the contributions which labor and producersof raw material separately make toward it, and then parts with the product; and if he gets any more than he has paid out, he makes a profit. When industry is in what we have termed a dynamic state, such a difference between the value of the product and the cost of the elements that go into it is continually appearing, and that, too, largely in consequence of causes over which, as a mere manager, the employer has no control. A profit so gained cannot be wages of management. It is a purely commercial gain, or a difference between what is paid for something and what is received for it.
Mercantile Profit.—It is best, therefore, to distinguish in some perfectly clear way between that function of theentrepreneur, which consists in buying and selling, and any work that he may find it best to do in the way of superintending the business. At the cost of using the termentrepreneurin a stricter sense than the one customarily attached to it, we will make this word describe the purely mercantile functionary who pays for the elements of a product and then sells the product. The reason for the very division between gains from this source and gains from management we shall soon appreciate, for we shall see that competition tends to reduce one of these incomes to nothing, but tends to perpetuate the other and to make the amount of it conform to a positive standard. Theentrepreneur, as we shall use the term, is neither the manager nor the capitalist, and when we have occasion to speak of either of these functionaries, we shall call him by his own distinctive name; though we know perfectly well that, in actual business, it is desirableand often quite essential that the same one who acts as anentrepreneurshould also put into the business some labor as well as some capital. A man who performs two unlike functions, buying and selling, on the one hand, and managing the business, on the other, serves in two capacities that are clearly distinguished from each other; while if he furnishes any of the capital, he adds to these a third capacity entitling him to the value of the product of his capital. As a manager he directly aids in producing goods, and he gets pay for so doing from his other self, theentrepreneur, who acquires the title to the goods; as a capitalist he has another legitimate claim upon himself asentrepreneur.
These Distinctions recognized in Practical Accounting.—That this is no bit of mere theoretical subtlety is proved by the fact that the bookkeeping of nearly all establishments distinguishes between these two incomes by actually putting an appraisal on the work the employer does and paying a salary for it. A man may be a large owner of stock in a corporation and yet receive a salary that is fixed by an estimate of what an equally useful man could be hired for. If personal influence secures more for him than this, the excess is taken from the pockets of the stockholders, and the amount of it is accounted for in a way that does not fall within the scope of pure economic law.
How "Natural" Prices exclude Entrepreneur's Profits.—The old and correct view is that the tendency of competition is to make things sell for enough to cover all costs, as we have defined them, and no more. Under a different phraseology thisis what Ricardo and others have rightly claimed. They were unconsciously explaining what would happen in a static state, for if society were actually in this state, the goods that come out of the factory would be worth just enough to reimburse the owner for all the outlays that can be called costs. If they sell for more than this, there is to be had from the business an income that costs nothing. It is a net profit above all claims based on personal labor or on the aid furnished by capital, and it furnishes an incentive for enlarging the business, and labor and capital are therefore drawn into it.Entrepreneursbring them and for a time make a profit by this means; but as their presence increases the output of goods that are here made, it brings down the price till there is no inducement to move any more labor and capital in this direction.
The Significance of a Natural Adjustment of Different Industries.—The "natural" state of general industry is that in which each particular branch of it is in the no-profit state. It is as though laborers and capitalists in a shoe factory took all the shoes that it turns out, sold them in a market, paid for the raw material out of the proceeds, and kept the remainder, dividing it between themselves in proportions which corresponded with the amounts they had severally contributed toward the making of this product; and as though the laborers in cotton mills and iron foundries received the goods there made and dealt with them in a like manner. It is as though in every branch of business the whole product were turned over in kind to the furnishers of labor and capital.
The Entrepreneur a Passive Functionary underStatic Conditions.—Purely passive is the function of theentrepreneurunder static conditions. In so far as any effect on his income is concerned he might as well reside in a foreign land as in the one where his business is located, provided always that the management were unaffected. When the same man is bothentrepreneurand manager, the absence of the first of these functionaries would mean the absence also of the second, and that would cause trouble; but the purely mercantile operation of getting a title to a product and then surrendering it can be carried on as well in one place as in another. Theentrepreneurin his capacity of buyer and seller does not even do the work which purchases and sales involve. That is commonly done by agents. Some of it, of course, may be done by the responsible manager himself, and if that person is also theentrepreneur, it follows that he does a part of the commercial labor of his business. In this, however, he goes beyond his function asentrepreneur. In that capacity he does, as we have said, no labor of any kind. Sales and purchases are made in his name, but he does none of the work that leads up to them.[1]
How the Entrepreneur contributes to Production under Dynamic Conditions.—In a dynamic state theentrepreneuremerges from this passive position. He makes the supreme decisions which now and again lead to changes in the business. "Shall we adopt this new machine?" "Shall we make this new product?" "Shall we enter this new market?" are questions which are referred to him, and on thedecisions he reaches depends the prospects of profit for the business. This activity is not ordinary labor, but in a true sense it is a productive activity, since it results in placing labor and capital where they can produce more than they have done and more than they could do were it not for the enabling act of theentrepreneurwhich places them on a vantage ground of superiority. This subject will be discussed in a later chapter and in connection with other phases of economic dynamics.
Values at a Static Level only when Entrepreneurs' Gains are Nil.—Any net profit on anentrepreneur'spart means that his product is selling for more than the elements of it have cost him. But this is a condition which, if labor and capital are as mobile as the static hypothesis requires that they should be, will cause thisentrepreneurand others to move labor and capital into his industry, thus increasing its output and lowering the selling price of its product. If there is no such action going on, it shows that theentrepreneurshave no incentive for taking it.
Values at a Static Level only when the Gains of Labor in the Different Industries are Equalized.—If labor is creating more in one subgroup than in others, as it often is in a dynamic condition, that fact means that someentrepreneursare making a profit, and, according to the principle stated in the preceding paragraph, this means that values are not at their static or "natural" level. If, owing to new methods or to some other cause, a given amount of labor[2]inthe subgroup that produced the A´´´ of our table creates an amount of that product which sells for more than the B´´´ or the C´´´ which labor of like quantity makes, then the manufacturers of A´´´ would obviously get a margin of profit. They would not be obliged to pay for labor any more than the market rate, and that, as we shall see, cannot exceed what labor produces in the groups B´´´ and C´´´. In A´´´ the labor creates more and the employer pockets the difference. In saying this we assume one fact which we undertake later to prove; namely, that there is a definite amount of each product which can be attributed to labor alone as its producer. Capital and labor work together, but each is, in effect, the creator of a certain fraction of their joint product.
Values Static only when the Gains of Capital in Different Industries are Equalized.—If capital is creating more in one industry than in another, there is a margin of profit for theentrepreneursin the exceptionally productive industry. They pay as interest on the capital they use only the market rate, which is what equal amounts of capital can produce and get elsewhere. If they produce more in the one group, theentrepreneursthere can pocket the excess as they did in the case of the product of labor. We assume that there is everywhere a definite product that can be attributed to capital alone.
Values Normal when Moneys paid out by Entrepreneurs equal Moneys Received.—In the preceding paragraphs we have spoken of exchange values as being static under certain conditions, but we might have expressed the essential fact by saying that prices are static under these conditions since the moneya product brings is a true expression of its value. If A´´´ sells for as many dollars as does B´´´, the two things exchange for each other. In like manner the product of labor and that of capital may be expressed in terms of money, since the quantities of goods which they respectively make sell for certain sums. Wages and interest are nearly always conceived in terms of money. The commercial mode of computing costs of production and returns from production is to translate them into moneys paid byentrepreneursand moneys received.
Costs of Production as related to Static Incomes.—What to anentrepreneurare costs are to workmen and capitalists incomes. The one pays out wages and interest, and the others get them; and these two sums are normal when together they equal the prices received for goods produced. Theentrepreneuris the universal paymaster, and in a static condition all incomes come from his hand.
FOOTNOTES[1]The holders of common stock in a corporation are alwaysentrepreneurs, and they are also capitalists if the stock represents any real capital actually paid in. If the bonds and the preferred stock represent all the real capital that there is, any dividends that may be paid on the common stock are a pureentrepreneur'sprofit. If, on the other hand, the stock all represents money actually put into the business, the dividends on it contain an element of net profit if they exceed simple interest on the capital and insurance against the risks that are not guarded against by actual insurance policies. If the rate of simple interest is four per cent, and the value of the unavoidable risk is one per cent, then a dividend of six per cent contains a pureentrepreneur'sprofit of one per cent. In dynamic conditions such a return is often to be expected, and we shall soon study the conditions that afford it.In the present study we do not need to consider risks, inasmuch as the greater part of them arise from dynamic causes; that is, from the changes and disturbances to which the business world is subject. An invention promises greatly to cheapen the production of some article and, for a time, to insure large returns for the men who first utilize it. A capitalist may be willing to take a risk for the sake of sharing this gain; but in time both the risk and the gain will vanish. The capacity of the new appliances will have to be tested, a market for their output found, etc. A small remainder of risk is still entailed upon the capitalist if he leaves his money in this business. The death of the managing partner, the defaulting of payments for goods sold, the chances of unwise or dishonest conduct on the part of clerks or overseers, always impend over a business, but these dangers are at a minimum when the man who is at the head of the force of managers has capital of his own in the business. Risks are at a static level only when they are thus reduced; and for our present purpose it is best to consider that competition has eliminated the establishments where any recklessness has been shown in the management, and that the unavoidable remainder of risk resolves itself, nearly enough for practical purposes, into adeduction from the productwhich the surviving establishments turn out in a long period of time. A small percentage of their annual gains, set aside for meeting unavoidable losses, will make good these losses as they occur and leave the businesses in a condition in which they can yield as a steady return to owners of stock, to lenders of further capital, and to laborers all of their real product.[2]In measuring labor we, of course, take account of the quality of the men who perform it, and the work of a skillful man is counted as more units of labor than that of an unskillful one.
[1]The holders of common stock in a corporation are alwaysentrepreneurs, and they are also capitalists if the stock represents any real capital actually paid in. If the bonds and the preferred stock represent all the real capital that there is, any dividends that may be paid on the common stock are a pureentrepreneur'sprofit. If, on the other hand, the stock all represents money actually put into the business, the dividends on it contain an element of net profit if they exceed simple interest on the capital and insurance against the risks that are not guarded against by actual insurance policies. If the rate of simple interest is four per cent, and the value of the unavoidable risk is one per cent, then a dividend of six per cent contains a pureentrepreneur'sprofit of one per cent. In dynamic conditions such a return is often to be expected, and we shall soon study the conditions that afford it.In the present study we do not need to consider risks, inasmuch as the greater part of them arise from dynamic causes; that is, from the changes and disturbances to which the business world is subject. An invention promises greatly to cheapen the production of some article and, for a time, to insure large returns for the men who first utilize it. A capitalist may be willing to take a risk for the sake of sharing this gain; but in time both the risk and the gain will vanish. The capacity of the new appliances will have to be tested, a market for their output found, etc. A small remainder of risk is still entailed upon the capitalist if he leaves his money in this business. The death of the managing partner, the defaulting of payments for goods sold, the chances of unwise or dishonest conduct on the part of clerks or overseers, always impend over a business, but these dangers are at a minimum when the man who is at the head of the force of managers has capital of his own in the business. Risks are at a static level only when they are thus reduced; and for our present purpose it is best to consider that competition has eliminated the establishments where any recklessness has been shown in the management, and that the unavoidable remainder of risk resolves itself, nearly enough for practical purposes, into adeduction from the productwhich the surviving establishments turn out in a long period of time. A small percentage of their annual gains, set aside for meeting unavoidable losses, will make good these losses as they occur and leave the businesses in a condition in which they can yield as a steady return to owners of stock, to lenders of further capital, and to laborers all of their real product.[2]In measuring labor we, of course, take account of the quality of the men who perform it, and the work of a skillful man is counted as more units of labor than that of an unskillful one.
[1]The holders of common stock in a corporation are alwaysentrepreneurs, and they are also capitalists if the stock represents any real capital actually paid in. If the bonds and the preferred stock represent all the real capital that there is, any dividends that may be paid on the common stock are a pureentrepreneur'sprofit. If, on the other hand, the stock all represents money actually put into the business, the dividends on it contain an element of net profit if they exceed simple interest on the capital and insurance against the risks that are not guarded against by actual insurance policies. If the rate of simple interest is four per cent, and the value of the unavoidable risk is one per cent, then a dividend of six per cent contains a pureentrepreneur'sprofit of one per cent. In dynamic conditions such a return is often to be expected, and we shall soon study the conditions that afford it.
In the present study we do not need to consider risks, inasmuch as the greater part of them arise from dynamic causes; that is, from the changes and disturbances to which the business world is subject. An invention promises greatly to cheapen the production of some article and, for a time, to insure large returns for the men who first utilize it. A capitalist may be willing to take a risk for the sake of sharing this gain; but in time both the risk and the gain will vanish. The capacity of the new appliances will have to be tested, a market for their output found, etc. A small remainder of risk is still entailed upon the capitalist if he leaves his money in this business. The death of the managing partner, the defaulting of payments for goods sold, the chances of unwise or dishonest conduct on the part of clerks or overseers, always impend over a business, but these dangers are at a minimum when the man who is at the head of the force of managers has capital of his own in the business. Risks are at a static level only when they are thus reduced; and for our present purpose it is best to consider that competition has eliminated the establishments where any recklessness has been shown in the management, and that the unavoidable remainder of risk resolves itself, nearly enough for practical purposes, into adeduction from the productwhich the surviving establishments turn out in a long period of time. A small percentage of their annual gains, set aside for meeting unavoidable losses, will make good these losses as they occur and leave the businesses in a condition in which they can yield as a steady return to owners of stock, to lenders of further capital, and to laborers all of their real product.
[2]In measuring labor we, of course, take account of the quality of the men who perform it, and the work of a skillful man is counted as more units of labor than that of an unskillful one.
The Equilibrium of Industrial Groups.—The different industrial groups are in equilibrium when they attract labor and capital equally, and that occurs when these agents produce as much per unit employed in one group as in another. Such equalized productivity is the bottom fact of a static condition, and equalized pay follows from it. Wages and interest tend to be uniform in all the groups. Efficient labor, of course, gets in any employment more than inefficient; but labor of a given grade gets in all the groups that make up industrial society a uniform rate of pay, and nothing is to be gained by any capitalist or by any laborer by moving from one employment to another. They all therefore stay where they are, not because they cannot move freely if they wish to do so, but because no inducement to move is offered to them. This is a condition of perfect mobility without motion—of atoms ready to move at a touch without the touch that would move them. The paradox indeed holds that it is the ideally perfect mobility which has existed in the past which positively excludes motion in the present. At some time in the past labor and capital have gone from group to group till they have brought about an adjustment in which they have no incentive for moving farther. The surface of a pool of water is kept tranquil, not because the water is not perfectly fluid, but because, in spiteof the fact that it can flow with entire freedom in any direction if it is impelled more in that direction than in any other, each particle of it is impelled equally in all directions. It is the perfect equilibrium that keeps the particles from changing their places, and fluidity has caused the equilibrium. In like manner when labor and capital can create and get just as much in one place as in another, they are attracted as strongly in one direction as in another and therefore do not move. A young man of average capacity, who is deliberating upon the choice of an occupation, will find that he can do as well in a cotton mill as he can in a shoe factory, a machine shop, a lumber mill, a flouring mill, or any other industrial establishment requiring his particular grade of capacity. This is the picture of a perfectly static industrial condition. Economic science has to account for values, wages, and interest as they would be in such a condition, however impossible it is that society should ever reach exactly such a state. The values, wages, and interest in a real market are forever tending toward the rates that would be established if the static condition were realized.
The Sign of a Static State.—The sign of the existence of a static condition is, therefore, that labor and capital, though they are perfectly free to move from one employment to another and would actually do so on the slightest inducement, still do not move. They stay where they are because they cannot find places where they can produce the slightest amount in excess of what they now produce, and no employer will anywhere offer any excess above the prevailing rate of pay.
Profits and the Movements they induce the Sign of aDynamic State.—Entrepreneur'sprofits, when they exist, mean that this equilibrium is disturbed, and when it is so, mobility of labor and capital affords the guaranty that a new equilibrium will be established if no further disturbances follow. As we have said, profits attract labor and capital, increase the output of those goods which yield the profit, and reduce the prices of them to the no-profit level. Workmen and capitalists then get from theentrepreneuras wages and interest all that he gets from the public as the price of his goods, except what he pays for raw materials.[1]In other words, the employer sells his goods at cost.
How Costs are Determined.—The early studies of "natural" values, or values which conform to costs of production, were unconscious and imperfect attempts to attain the laws of value in a static state. In such a state costs resolve themselves into wages and interest, and the conception of such a static state is therefore not complete unless we know how wages and interest themselves are determined. What we have already said implies that they fluctuate about certain standards, just as do the prices of goods, and that they would remain at these standards if society were reduced to a static condition.
Significance of Static Law in a Dynamic State.—An actual society is undergoing constant disturbances. It is very far from being static; and yet values of goods, on the one hand, and the earnings of labor and capital, on the other, hover within a certain distance of the standards which would be realized if the society became static. In spite of active dynamic movements the general returns of labor and capital can never range so far from these theoretical amounts that the distance from them cannot in some way be measured and accounted for. The sea, when gales are blowing and tides are rising and falling, is anything but a static object, and yet it keeps a general level in spite of storms and tides, and the surface of it as a whole is surprisingly near to the ideal mathematical surface that would be presented if all disturbances were to cease. In like manner there are certain influences that are disturbing the economic equilibriumjust as storms and tidal waves disturb the equilibrium of the sea. We cannot actually stop these influences any more than we can stay the winds and the lunar attraction; but we can create an imaginary static state for scientific purposes, just as a physicist by a process of calculation can create a hypothetical static condition of the sea and discover the level from which heights and depths should be measured. No more than the economist can he actually bring the subject he is dealing with to a motionless condition. The economic ocean will defy any modern Canute who may try to stop its movements; but it is necessary to know what shape and level it would take if this were done.
Influences that disturb the Static Equilibrium.—The influences that disturb the economic equilibrium are, in general, five. The population of the world increases, and this is one influence which prevents values, wages, and interest from subsiding to perfectly "natural" standards. Capital is increasing, and this influence also acts as a disturbing factor. The methods of producing things change, and the changes have a very powerful effect in preventing the attainment of a static equilibrium. New modes of organizing different industries are coming into vogue, and this causes a further disturbance of the economic adjustment. The wants of men are by no means fixed; they change, multiply, and act on the economic condition of society in a way that affects the static adjustment. Even physical nature undergoes change, and the perishable part of the earth does so in a disquieting way. We are using up much of our natural inheritance. As the effect of this appears chiefly in forcing us to change our processes of production, weshall, for convenience, limit our study to the five changes here enumerated.
Movement Inevitable in the Dynamic State.—These influences reveal their presence by making labor and capital more productive in some places than they are in others, and by causing them ever and anon to move from places of less productiveness to places where gains are greater. As we have said, this moving of labor and capital to and fro is, like currents in the sea, a sign of a dynamic condition. As in the static state these agents would not thus move, however fluid and mobile they might be, so in a dynamic state they are bound to move, because their earning powers do not remain long exactly equal in any two employments, and they go now hither and now yon, as, in the changeful system, openings for increased gains present themselves. If commodities were everywhere selling at cost prices and if wages and interest were everywhere normal and uniform, labor and capital would not move to and fro, and this would be a proof that dynamic influences were absent.
How an Imaginary Static Society is Created.—If we wish to discover to what standard the values of goods, on the one hand, and the rewards of labor and capital, on the other, continually tend to conform, we must create an imaginary society in which population neither increases nor diminishes, in which capital is fixed in amount, in which the method of making goods does not change, in which the mode of organizing industry continues without alteration, and in which the wants of consumers never vary in number, in kind, or in intensity.
Costs of Production in a Static State.—We have said that in such a static state the prices of differentproducts are just high enough to cover the wages and interest which are generally paid. There are uniform or all-around rates of pay for labor and for capital, and every man who hires workmen or gets loans from a bank has to pay them. In the real world, full as it is of disturbances, and given over as it is to forces of change and progress, we find that values, wages, and interest are in general surprisingly near to these standards. In a particular business products may for a time sell for enough to afford a large surplus above prevailing wages and interest, and business as a whole may, for a time, yield some such surplus; but in the absence of monopolistic privileges no one business yields a large surplus for a long time, and still less does business as a whole do so, though profits may always be found somewhere within the system.
The Final Productivity of Labor.—If we assume that the capital of society is a fixed amount, we may perform an imaginary experiment which will show how much labor really produces. We may set men at work, a few at a time, until they are all employed, and we may measure the product of each of the detachments. We should make the different sections of the working force as similar to each other as it is possible to make them and call each section a unit of labor. If there were ten such divisions and if the quantity of capital were sufficient to equip them all on the scale on which laborers are at present actually equipped, it is clear that this amount of capital, when it was lavished on one single section, must have supplied it with instruments of production in nearly inconceivable profusion. What we should to-day regard as a fair complement of capital for a thousand men would nearly glut the wants of a hundred, andyet it is thinkable that it should take such forms that they would be able to use it.
Productivity of the First Unit of Labor.—We will set at work one section which we have called one unit of labor and will put into the hands of its members the whole capital which is designed ultimately to equip the ten sections. It is very clear that the forms that this capital will take cannot be the same that it will have to take when the entire working force is using it. Indeed, we shall have to tax our ingenuity to devise ways in which one unit of labor can utilize the capital that will ultimately be used by ten. The tools and machines will have to be few in number but very costly and perfect. We shall have to resort to every device that will make a machine nearly automatic and cause it to exact very little attention from the person who tends it. The buildings will have to be of the most substantial and durable kind. We shall have to spend money without stint wherever the spending of it will make labor more productive than it would otherwise be. If we do this, however, the product of the labor and its equipment will be a very large one. The industry will succeed in turning out indefinitely more goods than a modern industry actually does, and the reason for it will be that the workmen have capital placed in their hands in unparalleled profusion.
The Product of the Second Unit of Labor.—We will now introduce a second unit of labor, by doubling the number of workers, without changing the amount of the capital. We must, of course, change the forms of the capital, or it cannot be advantageously used by the larger working force. The buildings will have to be larger, and if they are to be erected with about thesame amount of capital as was formerly used, they must be built in a cheaper way. Tools of every sort must be more numerous, and this larger number of tools, if it is to represent the same investment of capital that the former number embodied, must also be simpler and cheaper. The whole equipment ofcapital goodswill have to undergo a complete transmutation; but the essential thing is that the amount of the capital should not be changed.
A Provisional Mode of Measuring Capital.—In measuring the amount of the capital we are obliged to use a unit of cost, and in the illustration we have assumed that the cost can be measured in dollars. The productive fund consisted at the outset of a certain number of dollars invested in productive operations. This is only a provisional mode of measuring it. The money spent really represents sacrifice incurred, and we shall find that the only kind of sacrifice that is available for measuring the cost of goods of any kind is that which is incurred by labor. Ultimate measurements of wealth in all its forms have to be made in terms of labor. Such measurements have presented difficulties, and the attempt to make them has led to serious fallacies. We shall see, in due time, how these fallacies can be avoided.
The Law of Diminishing Productivity.—Under these conditions the second unit of labor will add something to the amount that was produced by the first unit, but it will not cause the product to become double what it was. It could not do that unless the capital also were doubled. Each unit of labor is now coöperating with one half of the original capital, and the total product is less than it would have been if the new labor, on entering the field, had brought with itas full an equipment of productive instruments as was possessed by the labor that preceded it. Adding to the industry a second unit of labor without adding anything to the capital makes the total product somewhat larger, but falls short of doubling it. If we credit to this second unit of labor what it adds to the product that was created before it came into the field, we shall find that it is a certain positive amount, but obviously less than the total product which was realized by the first unitand all the capital. It is even less than a half of the product of the two units using all the capital. Perhaps the first unit of labor, when it used all the capital, created ten units of product; while the two units of labor, using this same original amount of capital, produce sixteen units of product. The clear addition to the original product which is caused by the added labor of the second squad of workmen is only six units, while a half of the total product after the addition to the labor has been made is eight. This figure represents the amount we may attribute to one unit of labor and a half of the total capital, while six represent what iscausallydue to one unit of bare labor only. With all the capital and one unit of labor we get ten units of product, while the addition of one unit of bare labor brings the total amount up to sixteen. Six units find the cause of their existence in the presence of the second unit of labor, and the second unit therefore shows, as compared with the first, a diminished productivity.
Product of the Third Unit of Labor.—We will now introduce a third unit of labor, leaving the amount of capital still unchanged, but again altering the forms of it so as to adapt them to the needs of a still larger working force. We will make the buildings largerand therefore, of necessity, cheaper in their forms and materials. We will make the tools and machines more numerous and simple, and will do everything that is necessary in order to make the fixed amount of capital—the fund amounting to a given number of "dollars"—embody itself in the number and the kinds of capital goods that are requisite in order to supply three times the original number of workmen. The third unit of labor now adds something to the product realized by the first two, but the addition is smaller than it was in the case of the second unit.
Products of a Series of Units of Labor.—If we continue this process till we have ten units of labor, employing the same amount of capital as was formerly used by one, we shall find that each unit as it begins to work adds less to the previous product than did the unit which preceded it, and that the tenth unit adds the least of all.
Care must be taken not to confound the addition that is made to the product in consequence of the additional working force with the amount which, after the enlargement of the force, is created by the last unit of laborand its pro rata share of the capital. When the tenth unit of labor is working, it is using a tenth of the capital and the two together create a tenth of the product. This is more than the amount which isaddedto the product by the advent of the tenth unit of labor. That addition is merely the difference between the product of all the capital and nine units of labor and that of all the capital and ten units of labor. This extra product can be attributed entirely to the increment of labor.
It is also carefully to be noted that when the units are all working together, their products are equal andthe particular one which happened to arrive last is not less productive than the others. Each one of them isnowless productive than each one of the force of ninewas under the earlier conditions. In like manner each unit of the nine is less productive than was, in the still earlier period, each unit of the force of eight. At any one period, all units produce the same amount. At any one period, then, what any one unit of labor produces by the aid of itspro ratashare of the capital is a larger amount than what each can be regarded as producing by itself. Though one of ten units creates, with the aid of a tenth of the capital, a tenth of the product, of itself it creates less; for we can only regard as its own product what it adds to the product that was creating before it arrived on the scene. It is the bare product of a unit of labor alone that we are seeking to distinguish from other elements in the general output of the industry, and that consists in the difference between what nine units of labor and all the capital can produce, and what ten units of labor and all the capital can produce.
We will consider the amount of capital fixed and let the amount of labor increase along the lineAE, and we will let the product of successive units of labor be measured by the vertical distance from the points on the lineAEto the descending curveCD.ACis the product of the first unit of labor. The product of later units is measured by lines to the right ofACand parallel with it, which grow shorter as the number of units increases.EDis the product of the last unit. In each case we impute to an increment of labor whatever amount of product its presence adds to that which was created before.
Summary of Essential Facts.—The facts that areto be remembered then are: first, that the capital remains fixed in amount, though the forms of it change as the number of units of labor increases; secondly, that that which we call the product of a unit of labor is what that unit, coming into the field without any capital, can add to the product of the labor and capital that were there before; and thirdly, that this specific product of labor grows smaller as the amount of labor grows larger, rendering the product of the last unit the smallest of all. When the tenth and last unit is working, each one of the nine earlier units is, of itself, producing no more than does the final one, though it formerly produced more because of the larger quota of capital with which it was formerly supplied.
The Test of Final Productivity.—There are now at work ten units of capital and ten of labor, and we cannot go through the process of building up the working force from the beginning. How, then, do we measure the true product of a single unit of labor? By withdrawing that unit, letting the industry go on by the aid of all the capital and one unit of labor the less. Whatever one of the ten units of labor we take away we leave only nine working. If the forms of the capital change so as to allow the nine units to use it advantageously, the product will not be reduced to nine tenths of its former size, but it will still be reduced; and the amount of the diminution measuresthe amount of product that can be attributed to one unit of bare labor. Or we may add a certain number of workmen to a social force already at work, making no change in the amount of the capital,—though changing its forms,—and see how much additional product we get. That also is a test of final productivity. It gives the same measurement as does the experiment of taking away the little detachment of men and seeing how much the product shrinks. By either process we measure an amount that is attributable altogether to bare labor and not to capital.
The whole areaBCDin the diagram is an amount of product that is attributable to capital and not to labor. It represents the total surplus produced by labor and capital over the amount that can be traced to the labor alone. The product of all the capital and all the labor minus ten times the product of a single unit of labor is the amount that is attributable to the productive fund only.
The areaABDErepresents this amount. The last unit of labor creates the amountDEand the number of units is represented by the amountAE. All of them are now equally productive and what all create, as apart from what capital creates, is the amountABDE.
Only the Final Part of this Mode of gathering a Working Force practically resorted To.—The process of building up the working force from a single unit is imaginary. In practical life we see the process only in its final stage.Entrepreneursdo continually have to test the effect of making their working forces a little larger or a little smaller, and in so doing they test the final productivity of labor; and this is all that is necessary. Tracing the processof building up the force of labor unit by unit reveals a law which is important, namely, that of the diminishing productivity of single units of labor as the number of units increases. If we crowd the world full of people but do not proportionately multiply working appliances of every kind, we shall make labor poorer.
Why a Detachment of Laborers rather than One Man is treated as a Unit of Labor.—In making up the force of workers we might have treated each individual as a unit; but we have preferred to call a detachment a unit in order that the symmetry of the force might be preserved. Even though we were studying only a single mill it would have its departments, and it would be desirable that, when we enlarge the force of men, we should be able without difficulty to give to each part of the mill its fair share of the new laborers. If it were a shoe factory, we should need to add lasters, welters, sewers of uppers, etc., in a certain proportionate way, in order that one part of the mill might not get ahead of another and pile up unfinished products faster than they could be taken and completed.
In the last analysis the law applies to the industry of all society. The final unit in the case consists of shoemakers, cotton spinners, builders, foundrymen, miners, cultivators, etc., and of men of all subtrades included in the general callings. As the composite detachments come into the field, they apportion themselves among all the occupations that are represented, and that too in nicely adjusted proportions. We shall see in due time how this adjustment of the several shares of the social force of laborers is practically made.
The Law of Final Productivity Applicable to theLabor of Society.—The law of final productivity applies to every mill, shop, or mine separately considered. If its capital remains fixed in amount, units of labor produce less and less as they become more numerous. The product of any unit at any one time may be measured by taking it away and seeing how much the output of the establishment is reduced. The law, however, applies to all the mills, shops, mines, etc., considered as a social complex of working establishments. As the working society grows larger without growing richer in the aggregate, the power of labor to produce goods of all kinds grows less. At any one time this producing power is measured by taking away from every working establishment a number of its operatives and ascertaining how much less is produced after the withdrawal. Such a test on the social scale is never made consciously. Each employer can test in an approximate way the effect of reducing his own force, and the effect of gradually enlarging it, and there are influences at work which result in enlarging one industry when others are enlarged and in causing the final productivity of labor to be uniform in all. A shoe manufacturer can tell, in a general way, how much an extra man or two will be worth to him. It is possible to ascertain by experience about what number of shoes that additional labor will, in a year, add to the output of the shoe factory or the number of tons of steel it will add to the present annual output of a furnace. When these products vary in the case of different shops, the men are called to the points where the apparent additions are largest, and the constant tendency is toward a level of productive power. The building up of an imaginary force from the beginning presents, in a clear and emphatic way,the fact that the specific productivity of labor grows less as, other things remaining the same, workers become more numerous. We should know ona priorigrounds that this must be the fact; but we can verify it by observation and statistical inquiry. Where men are numerous and land and tools are scarce, labor is comparatively unproductive; and it is highly productive where land and tools are plentiful. There is no doubt that crowding the world full of people, without providing the world with capital in a proportionate way, would impoverish everybody whose income depends on labor.