Curve of Profit in Trust.CURVE OF PROFIT IN TRUST.
CURVE OF PROFIT IN TRUST.
In the figures A and B the perpendicular lineairepresents a number of increments of production. The expense of producing a supply of 100 will be measured by the linebb', that of producing 200 bycc', and so on. But never in actual industry will the lines of growing expense be regular in their relation to the increase of production, as would be the case in the figure A; they will always be irregular, as in the figure B. The curve of expenseai'inthe figure B will be determined by the resultant of the various forces which make for increasing and diminishing returns for each new increment of the requisites of production required to produce the new portion of output. When the increased scale of production makes some new application of machinery economically possible, or where recourse must be had to some decidedly inferior land for the raw material, a large sudden irregularity may show itself in the curve of expense.
When we turn from expenses of production to the aggregate takings from the sale of the several quantities of supply, we shall find a similar irregularity of increase. Elasticity in demand, as tested by the stimulus given to consumption by a fall of price, differs not merely in different commodities, but at different points in a falling scale of prices. A number of equal decrements in price, according as they stimulate the satisfaction of weaker wants of earlier consumers, or strike into new classes of consumers, or supply new kinds of wants, will have widely different effects in increasing the aggregate takings.
We have then two widely fluctuating and highly irregular gradations of money terms, representing expenses of production and the aggregate price of the various quantities of supply, each determined by a wholly different class of considerations. But the interest of a Trust, as we see, lies in fixing supply at the highest net profits. Now the net profits of producing and selling any specified quantity of supply are ascertained by deducting the expenses of production from the aggregate takings. The relation between the growth of expenses of production and of aggregate takings will yield a different net amount of profit at each increment of supply. The diagram opposite will illustrate the nature of these relations.
AL is the line indicating at the several points, B, C, D, etc., proportional increments in supply. If the monopoly be a steel rail trust, B marks the millionth ton, C the two millionth ton of output, and so on. A'L' is a curve indicating, by its diminishing distance from AL, the diminishing expense of producing each unit of the increased output, so that the expense of producing the first ton, if only one is produced, is AA', that of the millionth ton, if one million are produced, BB', and so on. The expenses ofproducing one million tons will thus be represented by the figure ABB'A', those of two millions by the figure ACC'A'. Further, let the curvealrepresent, by its diminishing distance from AL, the diminishing price at which the several additions to supply can be sold, so that the first ton sells at Aa, the millionth at Bb, and so on, the aggregate price of the first million tons being ABba, that of the first two millions being ACca.
Diagram of Trust Prices.DIAGRAM OF TRUST PRICES.
DIAGRAM OF TRUST PRICES.
Assuming that the Trust is planning a new business and determining the most profitable output, it will limit that output not necessarily at the point where the selling price gives the widest margin of profit upon the expenses ofproduction, as might be the case at the point B in the diagram, but at the point F, where the margin of profit bears the largest proportion to the expenses of production, or in other words, where the area of absolute takings shows the largest surplus over the area of aggregate expenses. Thus it will here be to the interest of the Trust to produce and sell six millions (limiting production at F) with an aggregate expense AFF'A' and an aggregate takings AFfa, yielding an aggregate net profit A'F'fa. They will not produce five millions because the figure AEeabears a smaller proportion to AEE'A' than does AFfa'to AFF'A'. For a similar reason they will not produce seven millions.
Since the fluctuations in the curve of expenses and in that of selling price or "demand" are determined by an entirely different set of forces, it will be evident that there may be several points in AL where the proportions between the area of expenses and that of profits may be the same. So there may be several maxima at which Trust prices may be indifferently fixed. The figure upon F'fmay have the same quantitative relation to the figure upon FF', as that upon H'hto that upon HH'. In such a case it will be a matter of indifference to the Trust whether it sells five million tons at a price 100s. per ton, or seven millions at 90s.
We have seen that the causes which determine expenses at the several points in A'L' have no relation to the causes which determine the selling price at the various points, except to furnish a minimum below which the price cannot fall. Above this limit expenses of production in no sense help to determine monopoly prices; the true determinants are entirely in the region of demand, and are measured by the marginal utility or satisfaction afforded to consumers by the several quantities which constitute supply at any given time.
Since expenses of production always enter into the determination of competition-prices, which are fixed by the interaction of expenses and money estimates of utility—i.e., by supply and demand, it is evident that the curve of monopoly prices has no assignable relation whatever to the curve of competition prices, and that the most profitable output and prices of Trust-made goods are in no way identified with the most profitable output and prices in acompetitive trade. In competition the curve of selling prices tends to follow closely the curve of expenses, and consequently the areas of profits and expenses tend to bear the same proportion to each other at different points of increment in the trade. For if at any point great increases in economy of production are achieved, while the large elasticity of demand maintains a price nearly the same as before, the wide margin of profit which might fix the actual price at that point for a monopolist only serves to stimulate such increased output on the part of trade competitors as will continue until the flexibility of demand weakens, and prices are lowered to such a point as will yield the normal margin or market rate of profit.
There is, therefore, nothing in common between competition prices and monopoly prices for different quantities of supply, nor anything to secure that the actual quantity of supply and the price shall be the same in the two cases.
§ 6. It is, however, conceivable that in a certain commodity where a genuine monopoly holds the market, the price should be as low as under free competition. This may be illustrated by the following curves of expense and price:—
Curves of Expense and Price
where the economies of increased production continue to be very great, while the flexibility of demand is also high. In other words, it may pay the Trust better to make very large sales at a low price when the expenses of productionare low, than to sell a smaller quantity at a higher price and with a higher expense of production. In this case the consumer may get a part of the advantage of large-scale production along with the saving of expense of competition. There is, however, no guarantee to society that low prices will be fixed. In the vast majority of cases it will probably pay the Trust better to limit production and sell at higher prices.
In the illustration above we have assumed that a monopoly was startingde novo. Where a Trust is formed, as is commonly the case, by an amalgamation of existing capitals largely embodied in plant and machinery of production, it will probably not pay to limit production to a very small output, even though the largest proportionate margin of profit might seem to stand there. For the interest upon the closed mills and other idle capital should be reckoned among the expenses of production for the purposes of determining the profitable price. Thus where large means of production are owned by a monopoly it will seldom pay to sell a very small supply at a very high price.
So far we have treated of absolute monopolies, eliminating all consideration of competition. We have found that the supply and the price of an article of absolute monopoly is determined by the relation between expenses of production and flexibility of demand. Although a new invention or a wide expansion of market may alter so considerably the expenses of production of the several quantities of supply as to materially affect monopoly-supply and prices, it is the latter influence, that of flexibility of demand, that directly in each specific case determines whether a Trust's prices shall be high or low. When we find the Standard Oil Trust maintaining a low level of prices, or the Western Union Telegraph Company charging low rates, we shall find the explanation in the character of the public demand for oil and telegraphic messages.
§ 7. A number of considerations relating to "demand" limit the economic power of monopolies to charge high prices.
A monopoly price, as we have seen, exactly measures the marginal utility of the supply, as indicated by the quantity of money which the purchaser of the last increment of supply is just willing to pay for it. When this marginal utilitysinks fast with an increase of supply the monopoly price will be high for it, and it will pay the monopolist better to restrict the output and sell the limited supply at a high price, because a large reduction of price will not stimulate a proportionably large increase of consumption. So where the marginal utility sinks slowly, it will pay to increase the supply and lower the price, for each fall of price will stimulate a large increase of consumption.
Since the marginal utility of a number of increments of supply will not be the same in the case of any two commodities, it is evident that the determination of monopoly prices is a very delicate operation.
It is not possible to present even an approximately accurate classification of commodities in relation to the powers of a Trust or Monopoly. But the following considerations will assist us to understand why in some cases a Trust appears to raise prices, in others to keep them as they were, and in others even to lower them:—
(a) The urgency of the need which a commodity satisfies enables the monopolist to charge high prices. Where a community is dependent for life upon some single commodity, as the Chinese on rice, the monopolist is able to obtain a high price for the whole of a supply which does not exceed what is necessary to keep alive the whole population. Thus a monopolist of corn or rice in a famine can get an exorbitant price for a considerable supply. But after the supply is large enough to enable every one to satisfy the most urgent need for sustenance, the urgency of the need satisfied by any further supply falls rapidly, for there is no comparison between the demand of famine and the demand induced by the pleasures of eating.
A monopoly of a necessity of life is therefore more dangerous than any other monopoly, because it not merely places the lives of the people at the mercy of private traders, but because it will generally be the interest of such monopolists to limit supply to the satisfaction of the barest necessaries of life.
Next to a necessary in this respect will come what is termed a "conventional necessary," something which by custom has been firmly implanted as an integral portion of the standard of comfort. This differs, of course, in different classes of a community. Boots may now be regarded asa "conventional necessary" of almost all grades of English society, and a monopolist could probably raise the price of boots considerably without greatly diminishing the consumption. Half a century ago, however, when boots were not firmly established as part of the standard of comfort of the great mass of the working classes, the power of a monopolist to raise prices would have been far smaller.
As we descend in the urgency of wants supplied we find that the comforts and luxuries form a part of the standard of life of a smaller and smaller number of persons, and satisfying intrinsically weaker needs, are more liable to be affected by a rise of price.
(b) Closely related to this consideration, and working in with it at every point, is the question of the possibility of substituting another commodity for the one monopolised. This everywhere tempers the urgency of the need attaching to a commodity. There are few, if any, even among the commodities on which we habitually rely for food, shelter, clothing, which we could not and would not dispense with if prices rose very high. The incessant competition which is going on between different commodities which claim to satisfy some particular class of need cannot be got rid of by the monopoly of one of them. This is probably the chief explanation of the low prices of the Standard Oil. As an illuminant, oil is competing with gas, candles, electricity, and unless the monopoly were extended laterally so as to include these and any other possible illuminants, the Trust's prices cannot be determined merely by the pressure of the need for artificial light. Though to a modern society artificial light is probably even more important than sugar, a Sugar Trust may have a stronger monopoly and be able to raise prices higher than an Oil Trust, because the substitutes for sugar, such as molasses and beetroot, are less effective competitors than gas, candles, and electricity with oil.
The power of railway monopolies largely depends upon the degree in which their services are indispensable, and no alternative mode of transport is open. Sometimes, however, they miscalculate the extent of their power. The high railway rates in England have recently led in several quarters to a substitution of road and canal traffic in the case of goods where rapidity of conveyance was not essential. So also in other cases sea-transport has been substituted.
The stronger monopoly of American railways consists partly in the fact that distances are so great, and the sea-board or other water conveyance so remote, that over a large part of the Continent the monopoly is untempered by alternative possibilities of transport.
The reverse consideration, the possibility of substituting the article of monopoly for other articles of consumption, and so securing a wider market, has quite as important an influence on prices. The possibility of substituting oil for coal in cooking and certain other operations has probably a good deal to do with the low price of oil. A Trust will often keep prices low for a season in order to enable their article to undersell and drive out a rival article, a competition closely akin to the competition with a rival producer of the same article. When natural gas was discovered in the neighbourhood of Pittsburg, the price was lowered sufficiently to induce a large number of factories and private houses to give up coal and to burn gas. After expensive fittings had been put in, and the habit of using gas established, the Gas Company, without any warning, proceeded to raise the rates to the tune of 100 per cent. When we ascend to the higher luxuries, the competition between different commodities to satisfy the same generic taste, or even to divert taste or fashion from one class of consumption to another class, is highly complicated, and tempers considerably the control of a Trust over prices.
The power of a company which holds the patent for a particular kind of corkscrew is qualified very largely not only by competition of other corkscrews, but by screw-stoppers and various other devices for securing the contents of bottles. The ability to dispense with the object of a monopoly, though it does not prevent the monopolist from charging prices so much higher than competition prices as to extract all the "consumer's rent," of the marginal consumer, forms a practical limit to monopoly prices.
(c) Lastly, there is the influence of existing or potential competition of other producers upon monopoly prices. Where prices and profits are very high a Trust is liable to more effective competition on the part of any surviving independent firms, and likewise to the establishment of new competitors. This ability of outside capital to enter into competition will of course differ in different trades.Where the monopoly is protected by a tariff the possibility of new competition from outside is lessened. When the monopoly is connected with some natural advantage or the exclusive possession of some special convenience, as in mining or railways, direct competition of outsiders on equal terms is prohibited. Where the combination of large capital and capable administration is indispensable to the possibility of success in a rival producer, the power of a monopoly is stronger than where a small capital can produce upon fairly equal terms and compete. If the monopoly is linked with close personal qualities and with special opportunities of knowledge, as in banking, it is most difficult for outside capital to effectively compete.
§ 8. These considerations show that the power of a Trust or other monopoly over prices is determined by a number of intricate forces which react upon one another with varying degrees of pressure, according as the quantity of supply is increased or diminished. But a Trust is always able to charge prices in excess of competitive prices, and it is generally its interest to do so. It will commonly be to the interest of a Trust or other monopoly to maintain a lower scale of prices in those commodities which are luxuries or satisfy some less urgent and more capricious taste, and to maintain high prices where the article of monopoly is a common comfort or a prime necessary of life for which there is no easily available substitute.
[138]S.C.T. Dodd,The Forum, May 1892.
[138]S.C.T. Dodd,The Forum, May 1892.
[139]"Trusts in the United States,"Economic Journal, p. 86.
[139]"Trusts in the United States,"Economic Journal, p. 86.
[140]Baker,Monopolies and the People, p. 85.
[140]Baker,Monopolies and the People, p. 85.
[141]Cf. Chapter ix.
[141]Cf. Chapter ix.
[142]Mr. George Gunton, in writing upon "The Economic Aspect of Trusts" (Political Science Quarterly, Sept. 1888), claims a rise in wages as one of the advantages of Trusts, but Mr. Gunton throughout his argument assumes that a Trust is a large competing capital and not a monopoly. If a Trust were a competing capital its formation would be an economic and social advantage, tending, as he says, "to increase production, to lower prices, and to raise wages." But as a Trust is not a competing capital it does none of these things.
[142]Mr. George Gunton, in writing upon "The Economic Aspect of Trusts" (Political Science Quarterly, Sept. 1888), claims a rise in wages as one of the advantages of Trusts, but Mr. Gunton throughout his argument assumes that a Trust is a large competing capital and not a monopoly. If a Trust were a competing capital its formation would be an economic and social advantage, tending, as he says, "to increase production, to lower prices, and to raise wages." But as a Trust is not a competing capital it does none of these things.
[143]J.W. Jenks, "Trusts in the United States,"Economic Journal, vol. ii. p. 80.
[143]J.W. Jenks, "Trusts in the United States,"Economic Journal, vol. ii. p. 80.
[144]H.D. Lloyd, Essay on "Trusts," reprinted inBoston Daily Traveller(June 16, 1893).
[144]H.D. Lloyd, Essay on "Trusts," reprinted inBoston Daily Traveller(June 16, 1893).
[145]G. Gunton,Political Science Quarterly, Sept. 1888. This statement, however, appears in contradiction to the "Report of the Committee on Investigations relative to Trusts in the State of New York," p. 12.
[145]G. Gunton,Political Science Quarterly, Sept. 1888. This statement, however, appears in contradiction to the "Report of the Committee on Investigations relative to Trusts in the State of New York," p. 12.
§ 1.The external phenomena of Trade Depression.§ 2.Correctly described as Under-production and Over-production.§ 3.Testimony to a general excess of Productive Power over the requirement for Consumption.§ 4.The connection of modern Machine-production and Depression shown by statistics of price.§ 5.Changing forms in which Over-supply of Capital is embodied.§ 6.Summary of economic relation of Machinery to Depression.§ 7.Under-consumption as the root-evil.§ 8.Economic analysis of "Saving."§ 9.Saving requires increased Consumption in the future.§ 10.Quantitative relation of parts in the organism of Industry.§ 11.Quantitative relation of Capital and Consumption.§ 12.Economic limits of Saving for a Community.§ 13.No limits to the possibility of individual Saving—Clash of individual and social interests in Saving.§ 14.Objection that excess in forms of Capital would drive interest to zero not valid.§ 15.Excess is in embodiments of Capital, not in real Capital.§ 16.Uncontrolled Machinery a source of fluctuation.
§ 1.The external phenomena of Trade Depression.
§ 2.Correctly described as Under-production and Over-production.
§ 3.Testimony to a general excess of Productive Power over the requirement for Consumption.
§ 4.The connection of modern Machine-production and Depression shown by statistics of price.
§ 5.Changing forms in which Over-supply of Capital is embodied.
§ 6.Summary of economic relation of Machinery to Depression.
§ 7.Under-consumption as the root-evil.
§ 8.Economic analysis of "Saving."
§ 9.Saving requires increased Consumption in the future.
§ 10.Quantitative relation of parts in the organism of Industry.
§ 11.Quantitative relation of Capital and Consumption.
§ 12.Economic limits of Saving for a Community.
§ 13.No limits to the possibility of individual Saving—Clash of individual and social interests in Saving.
§ 14.Objection that excess in forms of Capital would drive interest to zero not valid.
§ 15.Excess is in embodiments of Capital, not in real Capital.
§ 16.Uncontrolled Machinery a source of fluctuation.
§ 1. The leading symptom of the disease called Depression of Trade is a general fall of wholesale prices, accompanied by a less than corresponding fall of retail prices. Whatever may be the ultimate causes of a trade depression, the direct and immediate cause of every fall of price must be a failureof demand to keep pace with supply at the earlier price. So long as those who have goods to sell can sell all these goods at the price they have been getting, they will not lower the price. The efficient cause then of any fall of price is an actual condition of over-supply at earlier prices. A very small quantity of over-supply will bring down prices in a business, or in a whole market, provided the competition between the businesses is keen. Where such a fall of prices quickly stimulates demand so that the over-supply is carried off and the rate of demand is equated to the rate of supply at the lower price level, the condition is commonly described as a "tendency to over-supply." But it is important to bear in mind that in strictness it was not a "tendency" but an actually existing quantity of over-supply which brought down the price.
Where any fall of price thus brought about quickly stimulates a corresponding increase of demand, stability of prices follows, and there will be a full, healthy production at the lower prices.
The mere fact then that prices are generally lower than they were five or ten years ago is no evidence of depressed trade. Depressed trade signifies not merely low prices but relaxed production: more has been produced than can be sold at the lowest profitable prices, and markets are congested with stock, but less is being produced than could be produced with existing means of production. The fact which faces us in a period of depression is an apparent excess of productive power. If this excess were of labour alone it might be explained with some plausibility as due to the displacement of labour by machinery. For it has been admitted that the first and immediate effect of introducing labour-saving or labour-aiding machines may be a diminution in the demand for labour, even when the labour of making and repairing the machines and of distributing the increased product which finds a sale is taken into consideration. The simultaneous application of a number of new forms of machinery attended by other general economies in the organisation of industry might seem to explain why for a time there should be a general redundancy of labour in all or most of the chief industries of a country. Such an over-supply of labour would result from the accumulated action of "first effects."When the cheapening influences of machinery had time to exercise their full natural influence in stimulating consumption the labour temporarily displaced would be again fully utilised; for the moment, past labour saved and stored in forms of fixed capital would do a great deal of the work which would otherwise be done by present living labour. But such an explanation is wholly negatived by the fact that in a depressed condition of trade there is an excess of forms of capital as well as of labour. There exists simultaneously a redundancy of both factors in production. Labourers are out of work or are in irregular employment, mills and factories are closed or working short time, the output of coal and metals is reduced, and yet with this relaxed production the markets are glutted with unsold goods unable to find purchasers at a price which will yield a minimum profit to their owners. To this must be added, in the case of the extractive industries, agriculture, mining, etc., the exclusion from productive use of land which had formerly found a profitable employment.
§ 2. To this condition of industry the antithetical terms, over-production and under-production, may be both correctly applied, according as one regards production as a state or as a process. The state of trade in a depression is one of over-production—the industrial body is congested with goods which are not drawn out for consumption fast enough. This plethora debilitates the industrial body, its functional activities are weakened. The slackness of trade thus induced is rightly described as under-production.
It is commonly said by English writers upon economics that the state of over-production, the redundancy of capital and labour, though found in one or two or several trades at the same time, cannot be of general application. If too much capital and labour is engaged in one industry there is, they argue, too little in another, there cannot be at the same time a general state of over-production. Now if by general over-production is meant not that every single industry is supplied with an excess of capital, but that there exists a net over-supply, taking into account the plethora in some trades and the deficiency in others, this assertion of English economists is not in accordance with ascertained facts or with the authority of economists outside of England.
§ 3. If a depression of trade signified a misapplication ofcapital and labour, so that too much was applied in some industries, too little in others, there would be a rise of prices in as many cases as there was a fall of prices, and the admitted symptom of depression, the simultaneous fall of price in all or nearly all the staple industries, would not occur. The most careful students of the phenomena of depressed trade agree in describing the condition as one of general or net excess of the forms of capital. They are also agreed in regarding the enormous growth of modern machinery as the embodiment of a general excess of producing power over that required to maintain current consumption.
Lord Playfair, writing on this subject in 1888, says, "It matters not whether the countries were devastated by war or remained in the enjoyment of peace; whether they were isolated by barriers of Protection or conducted these industries under Free Trade; whether they abounded in the raw materials of industry or had to import them from other lands; under all these varying conditions the machine-using countries of the world have felt the fifteen years of depression in the same way, though with varying degrees of intensity." His conclusion is "that the improvements of machinery used in production have increased the supply of commodities beyond the immediate demands of the world."[146]In support of this position he adduces the authority of continental writers such as Dr. A. von Studnitz, Piermez, Jules Duckerts, Laveleye, Trasenster, Annecke, and Engel. In the United States, Carroll Wright, David Wells, and Atkinson are foremost in upholding this to be the explanation of depression of trade. Mr. Carroll D. Wright, Commissioner of Labour at Washington, is emphatic in his assertion of the fact. "So far as the factories and the operatives of the countries concerned are to be taken into consideration (England, the United States, France, Belgium, Germany), there does exist a positive and emphatic over-production, and this over-production could not exist without the introduction of power-machinery at a rate greater than the consuming power of the nations involved, and of those dependent upon them, demand; in other words, the over-production of power-machinery logically results in theover-production of goods made with the aid of such machinery, and this represents the condition of those countries depending largely upon mechanical industries for their prosperity."[147]The Reports of the English "Commission on the Depression of Trade and Industry" make similar admissions of an excess of producing power as distinct from a mere miscalculation in the application of capital and labour. The Majority Report, defining "over-production" as "the production of commodities, or even the existence of a capacity for production at a time when the demand is not sufficiently brisk to maintain a remunerative price to the producer," affirms "that such an over-production has been one of the prominent features of the course of trade during recent years, and that the depression under which we are now suffering may be partially explained by this fact...."[148]The Minority Report lays still stronger stress upon "systematic over-production," alleging "that the demand for commodities does not increase at the same rate as formerly, and that our capacity for production is consequently in excess of our home and export demand, and could, moreover, be considerably increased at short notice by the fuller employment of labour and appliances now partially idle."[149]
The most abundant information regarding the excess of the machinery of production in the several branches of industry has been given by Mr. D.A. Wells, who regards machinery as the direct cause of depressed trade, operating in three ways—(1) increased capacity of production, (2) improved methods of distribution, (3) the opening up of new abundant supplies of raw material. Thus production grows faster than consumption. "In this way only is it possible to account for the circumstances that the supply of the great articles and instrumentalities of the world's use and commerce have increased during the last twelve or fifteen years in a far greater ratio than the contemporaneous increase of the world's population or of its immediate consuming capacity."[150]
The earlier inventions in the textile industries, and the general application of steam to manufacture and to thetransport services, have played the most dramatic part in the industrial revolution of the last hundred years. But it should be borne in mind that it is far from being true that the great forces of invention have spent themselves, and that we have come to an era of small increments in the growth of productive power. On the contrary, within this last generation a number of discoveries have taken place in almost all the chief industrial arts, in the opening up of new supplies of raw material, and in the improvement of industrial organisation, which have registered enormous advances of productive power. In the United States, where the advance has been most marked, it is estimated that in the fifteen or twenty years preceding 1886 the gain of machinery, as measured by "displacement of the muscular labour," amounts to more than one-third, taking the aggregate of manufactures into account. In many manufactures the introduction of steam-driven machinery and the factory system belongs to this generation. The substitution of machinery for hand labour in boot-making signifies a gain of 80 per cent. for some classes of goods, 50 per cent. for others. In the silk manufacture there has been a gain of 50 per cent., in furniture some 30 per cent., while in many minor processes, such as wood-planing, tin cans, wall-papers, soap, patent leather, etc., the improvement of mechanical productiveness per labourer is measured as a rise of from 50 to 300 per cent. or more. The gain is, however, by no means confined to an extension of "power" into processes formerly performed by human muscle and skill. Still more significant is the increased mechanical efficiency in the foundational industries. In the manufacture of agricultural implements the increase is put down at from 50 to 70 per cent., in the manufacture of machines and machinery from 25 to 40 per cent., while "in the production of metals and metallic goods long-established firms testify that machinery has decreased manual labour 33-1/3 per cent." The increase in the productive power of cotton mills is far greater than this. From 1870 to 1884 the make of pig-iron rose 131 per cent. in Great Britain and 237 per cent. in the rest of the world.[151]"In building vessels an approximate idea of the relative labourdisplacement is given as 4 or 5 to 1—that is, four or five times the amount of labour can be performed to-day by the use of machinery in a given time that could be done under old hand methods."[152]
In England the rise in productiveness of machinery is roughly estimated at 40 per cent. in the period 1850 to 1885, and there is no reason to suppose this is an excessive estimate. In the shipping industry, where more exact statistics are available, the advance is even greater. The diminution of manual labour required to do a given quantity of work in 1884 as compared with 1870 is put down at no less than 70 per cent., owing in large measure to the introduction and increased application of steam-hoisting machines and grain elevators, and the employment of steam power in steering, raising the sails and anchors, pumping, and discharging cargoes.[153]In the construction of ships enormous economies have taken place. A ship which in 1883 cost £24,000 can now be built for £14,000. In the working of vessels the economy of fuel, due to the introduction of compound-engines, has been very large. A ton of wheat can now be hauled by sea at less than a farthing per mile. Similarly with land haulage the economy of fuel has made immense reductions in cost. "In an experiment lately made on the London and North Western Railway, a compound locomotive dragged a ton of goods for one mile by the combustion of two ounces of coal."[154]The quickening of voyages by steam motor, and by the abandonment of the old Cape route in favour of the Suez Canal, enormously facilitated commerce. The last arrangement is calculated to have practically destroyed a tonnage of two millions. The still greater facilitation of intelligence by electricity did away with the vast system of warehousing required by the conditions of former commerce. These economies of the foundational transport industries have deeply affected the whole commerce and manufacture of the country, and have played no inconsiderable part inbringing about the general fall of prices by lowering the expenses of production and stimulating an increased output.
Excessive production of transport-machinery, especially of railways, has played an important part as an immediate cause of modern trade depression. The depression beginning in 1873 and culminating in 1878 is described as having its origin "in the excessive lock-up of capital in the construction of railways, especially in America and Germany, many of which, when built, had neither population to use them nor traffic to carry; in the wild speculation that followed the German assertion of supremacy on the Continent; in the exaggerated armaments, which withdrew an inordinate amount of labour from productive industry, and over-weighed the taxpayers of the great European nations; and in over-production in the principal trades in all European countries."[155]
Mr. Bowley points out that "after each of the great railway booms of the century, for instance in England about 1847, in America before 1857 and 1873, in India in 1878, and on the Continent in 1873, the collapse has been very violent; for the materials are bought at exaggerated prices; the weekly wage during construction is enormous; no return is obtained till the whole scheme, whose carrying out probably lasts many years, is complete."
A great deal of this railway enterprise meant over-production of forms of transport-capital and a corresponding withholding of current consumption. In other words, a large part of the "savings" of England, Germany, America, etc., invested in these new railways, were sterilised; they were not economically needed to assist in the work of transport, and many of them remain almost useless, as the quoted value of the shares testifies. It is not true, as is sometimes suggested, that after a great effort in setting on foot such gigantic enterprises, a collapse is economically necessary. If the large incomes and high wages earned in the period prior to 1873, when capital and labour found full employment in these great enterprises, had been fully applied in increased demand for commodities and an elevated standard of consumption, much of the newmachinery of transport, which long stood useless, would have been required to assist in forwarding goods to maintain the raised standard of consumption. This argument, of course, assumes that ignorance or fraud have not caused a misdirection of investment. There is no evidence to indicate that the vast sums invested in 1869-72 in railway enterprise could have found any safer or more remunerative investment. It is the overflow of "savings," after all capital economically needed to carry on the work of production to supply steady current wants has been secured, that flows into the hands of speculative company-promoters. Such savings are not diverted from safe and useful forms of investment, they are "savings" which ought never to have been attempted, for they have no economic justification in the needs of commerce, as is proved by results.
§ 4. The direct causal connection between the increased productive power of modern machinery and trade depression clearly emerges from a comparison of the fluctuations in the several departments of industry in different industrial countries. As modern machinery and modern methods of commerce are more highly developed and are applied more generally, trade fluctuations are deeper and more lasting. A comparison between more backward countries largely engaged in raising food and raw materials of manufacture for the great manufacturing countries is sometimes adduced in support of the contention that highly-evolved industry is steadier. But though Mr. Giffen is undoubtedly correct in holding that depressions are often worse in countries producing raw materials than in manufacturing countries,[156]this is only true of raw-material producing countries which produce for export, and which are therefore dependent for their trade upon fluctuations in demand for commodities in distant markets whose movements they are least able to calculate or control. Irregularity of climate, disease, and other natural causes must be a constant source of fluctuation in the productivity of agriculture. But those non-manufacturing countries which are little dependent upon commerce with manufacturing nations, and which are chiefly self-supporting, will of necessity retain a larger variety of agriculture and of other primitive industries, and willtherefore be less at the mercy of some climatic or other injury than a country more specialised in some single crop or other industry. The specialisation impressed upon a backward country by commerce with advanced industrial countries, confining it to growing cotton or wheat or sheep or wine, exaggerates the irregularity imposed by nature upon its productivity, by making it subservient to the fluctuating demands of distant and wholly incalculable markets. The fluctuations brought about by irregular consumption and uncontrolled production in highly-evolved industrial countries are thus reflected with terrible force upon the more primitively-ordered parts of the industrial world. Thus does the character of modern machine-industry impress itself on the countries which feed it with raw materials.
If we turn to investigate the several departments of industry in the more highly-evolved communities, where statistics yield more accurate information, we have most distinct evidence that so far as the world-market is concerned, the fluctuations are far more extreme in the industries to which machine-production and high organisation have been applied. An investigation of changes of wholesale prices indicates that the most rapid and extreme fluctuations are found in the prices of textile and mineral materials which form the foundation of our leading manufactures. A comparison of the price changes of food as a whole, and of corn prices with textiles and minerals, shows that especially during the last thirty years the fluctuations of the latter have been much more rapid and pronounced. (See following diagrams.)
Course of Average Prices of General CommoditiesCOURSE OF AVERAGE PRICES OF GENERAL COMMODITIES.
COURSE OF AVERAGE PRICES OF GENERAL COMMODITIES.
Corn PricesCORN PRICES.
CORN PRICES.
§ 5. It ought to be clearly understood that the real congestion with which we are concerned, the over-supply, does not chiefly consist of goods in their raw or finished state passing through the machine on their way to the consumer. The economic diagnosis is sometimes confused upon this point, speaking of the increased productive power of machinery as if it continued to pour forth an unchecked flood of goods in excess of possible consumption. This shows a deep misunderstanding of the malady. Only in its early stages does it take this form. When in any trade the producing power of machinery is in excess of the demand at a remunerative price, the series of processes throughwhich the raw material passes on its way to the consumer soon become congested with an over-supply. This, however, need not be very large, nor does it long continue to grow. So long as the production of these excessive wares continues, though we have a growing glut of them, the worst features of industrial disease do not appear; profits are low, perhaps business is carried on at a loss, but factories, workshops, mines, railways, etc., are in active operation; wages may be reduced, but there is plenty of employment. It is when this congestion of goods has clogged the wheels of the industrial machine, retarded the rate of production, when the weaker manufacturers can no longer get credit at the bank, can no longer meet their engagements, and collapse, when the stronger firms are forced to close some of their mills, to shut down the less productive mines, to work short hours, to economise in every form of labour, that depression of trade assumes itsmore enduring and injurious shape. The condition now is not that of an increasing glut of goods; the existing glut continues to block the avenues of commerce and to check further production, but it does not represent the real burden of over-supply. The true excess now shows itself in the shape of idle machinery, closed factories, unworked mines, unused ships and railway trucks. It is the auxiliary capital that represents the bulk of over-supply, and whose idleness signifies the enforced unemployment of large masses of labour. It is machinery, made and designed to increase the flow of productive goods, that has multiplied too fast for the growth of consumption. This machinery does not continue in full use, a large proportion of it is not required to assist in producing the quantity of consumptive goods which can find a market, and must of necessity stand idle; it represents a quantity of useless forms of capital, over-supply, and its unused productive power represents an incomparably larger amount of potential over-supply of goods. Economic forces are at work preventing the continuation of the use of this excessive machinery; if it were used in defiance of these forces, if its owners could afford to keep it working, there would be no market for the goods it would turn out, and these too would swell the mass of over-supply.