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Essentials of Economic Theory - As Applied to Modern Problems of Industry and Public Policy
by John Bates Clark
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ESSENTIALS OF ECONOMIC THEORY

AS APPLIED TO MODERN PROBLEMS OF INDUSTRY AND PUBLIC POLICY

BY JOHN BATES CLARK

PROFESSOR OF POLITICAL ECONOMY IN COLUMBIA UNIVERSITY

AUTHOR OF "THE DISTRIBUTION OF WEALTH," "THE PHILOSOPHY OF WEALTH," "THE PROBLEM OF MONOPOLY," ETC.

New York THE MACMILLAN COMPANY 1915

All rights reserved

COPYRIGHT, 1907, BY THE MACMILLAN COMPANY.

Set up and electrotyped. Published October, 1907. Reprinted July, 1909; July, 1915.



PREFACE

In a work on the "Distribution of Wealth," which was published in 1899, I expressed an intention of offering later to my readers a volume on "Economic Dynamics, or The Laws of Industrial Progress." Though eight years have since passed, that purpose is still unexecuted, and it has become apparent that any adequate treatment of Economic Dynamics will require more than one volume of the size of the present one. In the meanwhile it is possible to offer a brief and provisional statement of the more general laws of progress.

Industrial society is going through an evolution which is transforming its structure and all its activities. Four general changes are going on within the producing organization, and the resultant of them, under favorable conditions, should be an enrichment in which all classes would share. Population is increasing, capital is accumulating, technical methods are improving, and the organization of productive establishments is perfecting itself; while over against these changes in industry is an evolution in the wants of the individual consumer, whom industry has to serve. The nature, the causes, and the effects of these changes are among the subjects treated in this volume.

The Political Economy of the century following the publication of the "Wealth of Nations" dealt more with static problems than with dynamic ones. It sought to obtain laws which fixed the "natural" prices of goods and those which, in a like way, governed the natural wages of labor and the interest on capital. This term natural as thus used, was equivalent to static. If the laws of value, wages, and interest had at this time been correctly stated, they would have furnished standards to which, in the absence of all change and disturbance, actual values, wages, and interest would ultimately have conformed. The economic theory of this time succeeded in formulating, correctly or otherwise, principles of economic statics and a fragment or two of a science of economic dynamics, although the distinction between the two divisions of the science was not clearly before the writers' eyes. The law of population contained in the work of Malthus is the only systematic statement then made of a general law of economic change. Though histories of wages, prices, etc., furnished some material for a science of Economic Dynamics, none of them attained the dignity of a presentation of law or merited a place in Economic Theory. Students of Political Economy were at that date scarcely awakened to the perception of laws of dynamics, and still less were they conscious of the need of a systematic statement of them. A modest beginning in the way of formulating such laws the present work endeavors to make.

The first fact which becomes apparent when economic progress is studied, is that static laws have a general application and are as efficient in a society which is undergoing rapid transformation as in one that is altogether changeless. Water in a tranquil pool is affected by static forces. Let a quantity of other water rush in and there are superinduced on these forces others which are highly dynamic. The original forces are as strongly operative as ever, and if the inflow were to stop, would again reduce the surface to a level. The laws of hydrostatics affect the waters in the rapids of Niagara as truly as they do those in a tranquil pool; but in the rapids a further set of forces is also operative. In the work referred to, issued in 1899, an effort was made to isolate the phenomena of Economic Statics and to attain the laws which govern them. Necessarily this study made a certain impression of unreality, since it put out of sight changes which are actually going on and are the conspicuous fact of modern life. It assumed the conditions of a world without any such movement and endeavored to formulate laws which, in such a condition, would fix standards of value, wages, interest, etc. It put actual changes out of sight, intentionally and heroically, but with a full recognition of the fact that they are actually taking place and must in due time be introduced and studied. We live in what is par excellence an age of progress, and it is in part for the sake of perceiving the laws of progress that we first disentangle from them the laws of rest and make a separate study of these. The world from which change is excluded is unreal, but the static laws which can be most clearly discerned by mentally creating such a world have reality. Every day's transactions are governed by them as truly as a physical element like water in active movement is affected by forces which, if they acted alone, would bring it to a state of permanent rest. The first purpose, therefore, of the present work is to show the presence and dominance in the real world of the forces described in the earlier work. It brings static laws into view and endeavors to show how they act at any one particular stage of industrial evolution. Even while changes are examined, the fact is perceived that there are steadily at work forces which, if changes should cease, would make society conform to a certain imaginary static model and makes wages and interest also conform to static standards.

Another purpose of the work is to examine seriatim the effects of different changes, to gauge the probability of their continuance, and to determine the resultant of all of them acting together. It is important to know under what conditions changes proceed at a normal rate, and when the standard of wages rises as it naturally should. As the actual rate of wages pursues its rising standard, but lags somewhat behind it, it is necessary to know what determines the interval between the two, and when the interval is normal. What is called "economic friction" is the cause of this interval and is an element that is amenable to law.

There is to be studied, not only the friction which obstructs the action of natural forces, but positive perversions of the forces themselves. Of these the chief is monopoly; and its influence, its growth, the sources of its power, and its prospect of continuance have to be determined. The actual tendencies of the economic system are against it, and so—if we except a few monopolies created for special ends—are both the spirit and the letter of the civil law. In a country in which law held complete sway, all objectionable monopolies would be held in repression. In order to see how much economic forces can be made to do in this direction, the present work discusses railroads and their charges, and some of the practices of great industrial corporations, and tries to determine what type of measures a government should take in dealing with these powerful agents. In connection with monopoly and with the conditions of economic progress a study is made of trade unions, strikes, boycotts, and the arbitration of disputes between employers and employed, and also of the policy of the state in connection with them, and with money and protective duties.

It is my belief that students should become acquainted with the laws of Economic Dynamics, and that they can approach the study of them advantageously only after a study of Economic Statics. The present work is in a form which, as is hoped, will make it available for use in class rooms, not as a substitute for elementary text-books, but as supplementary to them. It omits a large part of what such books contain, presents what they do not contain, and tries to be of service to those who wish for more than a single introductory volume can offer.

An essential part of the theory of wages here stated was presented in a paper read before the American Economic Association, in December, 1888, and published in a monograph of the American Economic Association in March, 1889; and other parts of this theory were issued at intervals following that date. The theory of value was published in the New Englander for July, 1881. I had not then chanced to see the early statements of the principle of marginal appraisal contained in the works of Von Thuenen and Jevons, and did not consciously borrow anything from their writings, but I gladly render to them the credit that is their due. I do not fear that I shall be supposed to have borrowed other parts of the general theory here offered. The theory of capital here stated was first presented in a monograph of the American Economic Association for May, 1888, and the discussion of money of which the present work gives a summary, in articles in the Political Science Quarterly for September, 1895, and for June and September, 1896. The discussion of the relation of protective duties to monopoly appeared in the same quarterly for September, 1904.

The author should, perhaps, apologize for the fewness of the citations from other works which this volume contains. The richness of the recent literature of Economic Theory, especially in America, would have made it necessary to use much space if the resemblances and the contrasts presented by points in this volume, and corresponding points in other volumes, had been noted.

Worthy of special attention, if citations had been given, would have been the writings of Professors Irving Fisher, Simon N. Patten, and Frank A. Fetter of this country, and Professor Friedrich von Wieser of Prague, who have worked in various parts of the same field in which the studies here offered belong, and also those of Minister Eugen von Boehm-Bawerk of Vienna, who has treated some of the same themes in a strongly contrasted way. If merited attention were paid to the works of Hadley, Taussig, Carver, Seligman, Giddings, Seager, Walker, and a host of eminent foreign scholars, a large part of the space in the book would have to be thus preempted.

I desire most gratefully to acknowledge the assistance which in the preparation of this book I have received from my colleague, Professor H. L. Moore of Columbia University, from my son, Mr. John Maurice Clark, Fellow in Economics in Columbia University, and from my former colleague, Professor A. S. Johnson of the University of Nebraska. Besides reading the manuscript and offering valuable suggestions, Professor Johnson has kindly taken upon himself the reading of the proof.

JOHN BATES CLARK.



CONTENTS

CHAPTER PAGE I. WEALTH AND ITS ORIGIN 1 II. VARIETIES OF ECONOMIC GOODS 20 III. THE MEASURE OF CONSUMERS' WEALTH 39 IV. THE SOCIALIZATION OF INDUSTRY 59 V. PRODUCTION A SYNTHESIS; DISTRIBUTION AN ANALYSIS 74 VI. VALUE AND ITS RELATION TO DIFFERENT INCOMES 92 VII. NORMAL VALUE 114 VIII. WAGES 127 IX. THE LAW OF INTEREST 146 X. RENT 159 XI. LAND AND ARTIFICIAL INSTRUMENTS 174 XII. ECONOMIC DYNAMICS 195 XIII. THE LIMITS OF AN ECONOMIC SOCIETY 210 XIV. EFFECTS OF DYNAMIC INFLUENCES WITHIN THE LIMITED ECONOMIC SOCIETY 229 XV. PERPETUAL CHANGE OF THE SOCIAL STRUCTURE 244 XVI. EFFECT OF IMPROVEMENTS IN METHODS OF PRODUCTION 256 XVII. FURTHER INFLUENCES WHICH REDUCE THE HARDSHIPS ENTAILED BY DYNAMIC CHANGES 282 XVIII. CAPITAL AS AFFECTED BY CHANGES OF METHOD 301 XIX. THE LAW OF POPULATION 321 XX. THE LAW OF ACCUMULATION OF CAPITAL 339 XXI. CONDITIONS INSURING PROGRESS IN METHOD AND ORGANIZATION 358 XXII. INFLUENCES WHICH PERVERT THE FORCES OF PROGRESS 372 XXIII. GENERAL ECONOMIC LAWS AFFECTING TRANSPORTATION 396 XXIV. THE FOREGOING PRINCIPLES APPLIED TO THE RAILROAD PROBLEM 416 XXV. ORGANIZATION OF LABOR 451 XXVI. THE BASIS OF WAGES AS FIXED BY ARBITRATION 470 XXVII. BOYCOTTS AND THE LIMITING OF PRODUCTS 503 XXVIII. PROTECTION AND MONOPOLY 517 XXIX. LEADING FACTS CONCERNING MONEY 538 XXX. SUMMARY OF CONCLUSIONS 555 INDEX 563



ESSENTIALS OF ECONOMIC THEORY



CHAPTER I

WEALTH AND ITS ORIGIN

The creation and the use of wealth are everywhere governed by natural laws, and these, as discovered and stated, constitute the science of Economics. Some of them come into operation only when men live in more or less civilized societies and work in an organized way, while others are operative wherever men work at all. Every man who lives must have something that can be called wealth, and, unless it is given to him, he must do something in order to get it. A solitary hunter, living in a cave, eating the flesh of animals and clothing himself in their skins, would create wealth and use it; but he would not take part in a social kind of industry. What he does could not be described as a bit of "social," "national," or "political" economy. Yet the gaining of his living would be an economic operation and would involve a creating and using of wealth. A statement of the laws governing the processes by which such a man makes the earth yield to him means of support and comfort would constitute a Science of the Economy of Isolated Life, which is a part of the general Science of Economics.

Primitive Capital.—If an isolated man hunts with good implements, he gets more game than he would have done if he had not used some of his time in making such implements. It pays such a man to interrupt his hunting long enough to make a spear or a bow and arrows. This amounts to saying that it is an advantage to him to become, in a simple way, a capitalist as well as a laborer; for the primitive implements of the chase are forms of productive wealth, or capital. Moreover, if he possesses foresight, he will keep enough food within reach to tide him over periods when game is not to be had, and such a store is another form of capital.

The Field of General Economics.—The economy of a man who works only for himself is subject to laws that are based on his own nature and the character of his material environment. Because he is what he is and because nature is what it is there is a certain way in which he must proceed, if he will live at all, and there are certain conditions which must exist, if he is to live well. The inherent productive power of labor and of capital is of vital concern to him, since he is both a laborer and a capitalist; but he is in no way interested in what we commonly call the relations of labor and capital, since that expression always suggests the dealings of one class of men, who labor, with another class, who own or control productive wealth. The study of such relations takes us at once into the domain of Social Economy; but we can study certain universal laws of wealth without at all entering that domain. When we speak of the power that resides in a bow and arrow, we refer to a truth of General Economics and one which illustrates the inherent power of capital, though we may be far from thinking of lenders and borrowers in a modern "money market" or of dealings of any one class of men with any other.

The Field of Social Economics.—The moment that we begin to examine economic relations that different classes of men sustain to each other, we enter the realm of Social Economics; and we do this whenever we study modern business dealings. Even our hunter would take part in a social economy if he began to sell some of his game; and from that time on his income would depend, not wholly on his relation to material nature, but partly on his relation to other men. A good market for his game would come to be of the greatest importance to him; and a market for anything implies a social method of securing wealth.

Fundamental Facts Common to Primitive Life and Social Life.—The relations which men sustain to each other in civilized industry are thrown into the foreground in the science of Social or "Political" Economy.[1] It is an organized system of industry in which we are engaged, and it is that which we care most to understand. Until recently we have had a far less satisfactory understanding of the social element in industry—that is, of the relations that men who are producing wealth sustain to each other—than we have had of such general facts as a primitive producer needs to know. We have had, for example, much information concerning the materials which the earth contains and the way to make them useful. We have had a practical knowledge of what wealth is and of the mode of creating it, and we have been able to identify it as we have seen it either in the raw or the finished state. We have known what labor is, how it proceeds and what helps it needs to enable it to make clothing, to prepare food, etc. We have not known as much about the way in which the modern market for such products is regulated, and how a modern tailor or baker shares gains with the man who employs him and provides him with materials and tools, and the main purpose of studying Economics is to get an understanding of such social facts; but this cannot be done without first bringing before the mind the more general facts concerning the inherent nature of wealth itself and of the activities that are always necessary—in uncivilized life as well as in civilized—for creating and using it.

[1] Past usage renders the somewhat misleading term Political Economy more available than the more accurately descriptive term Social Economics, as the title of the science which treats of the creation and use of wealth by an organized society. Either title implies the existence of such an organization, but the word political calls attention to the fact that it is under a government. The fact that, in a study of wealth, is most important is that the exchanges of products which spontaneously take place create an industrial society whose activities, going on as they do under a government, constitute the subject of the studies which are properly indicated by the traditional term, Political Economy. Government as such is not the subject of those studies.

General Facts First in the Natural Order of Study.—The primitive and general facts concerning industry, which, in a broad sense, is the creating of wealth, need to be known before the social facts can profitably be studied; and a statement of the principles of Political Economy should therefore begin by presenting a body of truth which is independent of politics and sociology and so general that it is illustrated even in that simplest of all conditions, in which no market exists and every man makes by his own labor all the goods that he uses. The wealth of a Crusoe, that of a solitary Esquimau, and that of a pygmy in equatorial Africa have laws as well as that of a European or American employer or bondholder. The qualities in matter which make a share of it important for promoting the welfare of its possessor can be detected in the simplest commodities that are anywhere used. All kinds of industrial products have a common origin. Labor and capital act together in making a birch canoe as truly as they do in producing a transatlantic liner; and the productive power of each of these two agents is everywhere governed by certain general laws. Before ascertaining what is true of wealth when capital has become complex and when laborers have become specialists, each producing one particular part of one product and securing many finished goods in exchange for it, it is well to state some facts relating to wealth which are so general that they appear in all stages of civilization.

The Nature of Wealth.—The old English word weal describes a condition of life. It is the state of being "well off," or of having one's wants amply supplied. Well-being in a broad sense of the term may depend largely on a man's state of health, his temperament, his conscience, or his relation to his friends; but the weal that is so secured is not described as a state of wealth. That depends on the possession of useful and material things, and the rich man has more of them than other men. The term wealth, which originally signified the state of being rich, afterwards came to be applied to the things which make a man rich, and it is thus that the term is used in the science of Economics.

What Things constitute Wealth.—It is clear that useful things, like air, which are at hand in unlimited quantity, do not make any one rich in this comparative sense, for they benefit all alike; and, in so far as they are concerned, all men are on the same level of welfare. Moreover, since they are so abundant as to shower benefits everywhere in profusion, the quantity of them that a man has at his disposal may be lost or thrown away with entire impunity. He would only have to help himself again from the abounding supply which nature thrusts on him in order to be as well off as he was before. A bucketful of water on the shore of Lake Superior is of no importance to the man who has it. If it were spilled on the sand, the man would have only to dip up another bucketful, with an expenditure of effort that would be too small to take account of. If, however, fresh water were scarce, every bucketful would have its importance, and the loss of that quantity would make a distinct impression on the man's well-being. Whenever each particular part of the supply has this power to make a possessor better off than he would be without it, the substance is a form of wealth. The quality of being specifically important is, therefore, the essential attribute of all the concrete forms of wealth. Sand by the seashore does not have any specific importance, since it is so abundant that the gain or loss of a wheelbarrow load would not make a man better off or worse off; but a pile of sand by the side of an unfinished building has this quality. There every barrow load is of consequence, for the available quantity is so small that diminutions reduce and additions increase the wealth of the possessor. Sand on the shore has the inherent power to help make mortar, and water in Lake Superior has the power to quench thirst, but neither of them has the attribute which would make it a form of wealth, namely, specific importance. Particular parts of the supply may be lost with impunity.

Varieties of Utility.—We have used the term importance, rather than usefulness or utility, to describe the quality which, if it exists in every particular bit of a substance, makes it all a form of wealth. With due care we may use the term utility. In a way even a cup of water dipped by a fisherman from the lake is useful, for it renders a service. Though the man might lose it and be no poorer, he cannot say that the thing has no utility of any kind. He can say that it has no importance. What it has we may call absolute utility, or the power to do for a man something which he wishes to have done. When the fisherman is thirsty the water will do him good. It has an absolute service-rendering power; and yet this cupful makes the owner no better off than he would be without it, since the service which it is capable of rendering would be rendered whether the man had it or not. Absolute utility in an article is the power to render any service whatever, regardless of the question whether it would be rendered equally well if the article were absent. If conditions were such that the man would have to go thirsty in case he spilled his cupful of water, then this little supply would have what we may term effective utility, and this means that the presence of the particular bit is a positive element in conducing to the man's welfare. Usable things have absolute utility even when they are superabundant, but they have effective utility only when the quantity of them is so limited that every particular bit of it is of some importance. Absolute utility and limitation of supply insure to them this quality; and this principle holds true in the economy of the most primitive state as well as in that of a civilized one.

The Origin of Wealth.—Some of the things that have this kind[2] of utility have been given to man by nature. She has furnished some materials that are useful and has not furnished them in quantities sufficient to prevent them from being specifically important. On account of the comparatively niggardly way in which she has doled them out to man, every bit of the supply has a power to benefit him; and if he gains some portions, he goes upward in the scale of well-being, and if he loses some, he goes downward. Wild fruits and fruit trees come in this category; and a savage who should build his hut in a small grove of banana trees, if he could keep other people out of it, would be, by so much, better off than they. The grove and its fruits would constitute their owner's wealth.

[2] The term final utility is used with much the same significance as specific importance. It is the utility of the last and least important part of the supply, and the use of the term requires us to think of the supply as offered to users unit by unit till the whole amount is in their hands. The first unit, when it stands alone, is more important than any later one will be. The second is of less consequence, and the last is the least important of all. When, however, all have been supplied and are together available for use, one is as important as another. Each one has an effective utility which is measured by the service rendered by the last one. The term specific indicates that we measure the importance of the supply of an article not in its entirety, but bit by bit, while the term effective is the antithesis of absolute and means that each bit of the supply not only renders an absolute service, but renders one which would not be gratuitously rendered by some other part of the supply in case this portion were removed or destroyed. We do not here think of the supply as built up from nothing to its present size bit by bit, but look at it as it stands and measure the importance of any particular quantity. When we speak of final utility, we think of a series of "increments" supplied one after another, and in this case the successive increments become less and less important, since, after some have been supplied, the want of the kind of good that they represent is less keenly felt. The conception of the series of units is merely a means of isolating one unit from a total number and obtaining a mental measurement of its importance which corresponds with the effective importance of any unit in the entire quantity.

Land an Original Form of Wealth.—Land is the original gift of nature to humanity, and wherever there are people enough to make the possession of a particular piece of it important, it becomes a form of wealth. It can be valueless only when population is very sparse; and then an increase in the number of people dwelling on it gives to it early the attribute of specific importance. The land that is accessible to a growing population cannot long be superabundant.

Forms of Wealth produced by Labor.—Few useful goods are presented to man by nature in a finished state, and it is therefore necessary for man to exert himself in order to get the goods that he needs in the condition in which he can use them. He must make raw substances more useful than they naturally are, and as he does this the things become partly products of his labor. Of course the supply of them is limited, since labor is so.

Labor a Wealth Creator.—Labor is a wealth-creating effort, and there is no labor that is successful in attaining its purpose that does not help to bring into a serviceable condition something that can be identified as an economic good or a form of wealth. Some effort, indeed, fails in what it attempts to do and therefore produces nothing. We may build a machine that will not work, or make a product that no one wants; but labor that attains a rational purpose is always economically productive.

Protective Labor and the Attribute it imparts to Useful Matter.—Labor may be classed according to the particular result that it accomplishes. In saying that the banana grove in our illustration is wealth to the savage who resides in it, we had to insert the proviso that he is able to keep other persons out of it. Exclusive possession or ownership is necessary in order that things may continue to be effectively useful to any particular person or persons. If they are superabundant, as we have seen, no part of the supply is important; but it is also true that if they are scarce and a man is not able to keep any of them, they will not serve him. In order that an economic good may be effective, it must be appropriable, and where claimants are numerous and lawless it may take much of the owner's time and effort to keep the article in his possession. The savage must personally protect his goods, and to some extent the civilized man must do so; for however well policed a city may be, it will not do to leave purses or portable goods by the wayside. Protective labor is necessary in all stages of social advancement. In civilized life, indeed, we delegate much of it to a special class of persons,—policemen, judges, lawyers, and legislators,—and this is the most fundamental division of labor that civilization entails; but the work has to be done in any stage of social evolution. Crusoe's goods would have been worth nothing to him if he could not have kept them from the savages who, in time, appeared on his island; and they would have been worth little if he had been forced to spend most of his time in guarding them.

Appropriability is, therefore, a further essential attribute of the things which can make particular men richer by reason of their presence. When such things are actually brought into ownership, their utilities become available, as they would not otherwise be. Effort expended in protecting property is wealth-creating, since it causes those service-rendering powers which otherwise would be only potential in goods to become active. In other words, it gives to things which are otherwise in a condition to be effectively useful a further quality which they require in order that they may actually promote an owner's well-being.

Industrial Labor.—Industrial labor is the antithesis of protective labor, and it invariably changes the qualities of material objects in such a way as to make them useful; that is to say, it directly creates utilities.[3] These utilities are of different kinds, and the labor may be classified according to the kind it creates.

[3] The term create is here used in a somewhat loose sense and does not imply that the man originates matter or even that he always transforms it without calling in, as an aid, the forces of nature. The farmer must depend on vital forces in soil and air in order to raise a crop. What he and other laborers do is to cause the product in some way to come into existence, and he and they may in this sense be said to create the products which would not appear without them.

Elementary Utility.—An elementary utility is created when a substance is either dug out of the ground, as is done in mining, or when it is secured through the vital forces of the earth, as is done in agriculture. Hunting, fishing, and stock raising should be classed with agriculture, since they use the resources of animate nature to secure for mankind new raw products on which labor will confer further useful qualities. This utility has to be created by men in every stage of industrial development, from that of a tropical savage to that of men in the most advanced civilization.[4]

[4] The distinction between elementary utility and others does not need to be applied with the utmost strictness, for mining creates form utility by breaking up masses of ore, and place utility by making them accessible. Agriculture shapes its products and moves them to places of storage. It is convenient in practice to adhere to the more general classification suggested in the text.

Form Utility.—A form utility is created when a raw material is fashioned into a new shape, subdivided, or combined with other materials, as is done in manufacturing and, in a certain way, in commerce. Buying goods in bulk and selling them in small quantities is the creating of form utilities and makes an addition to total wealth. Oil in small cans is worth far more for consumption than it would be if each consumer were forced to buy a tankful. Sugar is worth more to a consumer when it is doled out to him in paper sacks than it would be if it were to be had only in hogsheads. Merchants are not mere exchangers, for they make positive additions to the utility of goods. In primitive life no such class exists; and yet form utilities of every kind are created, since men make for themselves the goods that they use and adapt them in shape and in quantity to their current needs.

Place Utility.—Carrying things to places where they become more useful creates place utilities. In primitive life men do their own carrying; but in civilized states the common carrier does most of it, and so imparts place utility to matter on the most extensive scale. All useful transportation creates this quality, which is a general attribute of wealth; and the operation of so moving matter as to create place utility is one of the general functions of labor.[5]

[5] In a way all kinds of production may be analyzed into the moving of matter. In cutting up raw materials a manufacturer moves waste portions away from those that are to be utilized, while combining materials, of course, moves them toward each other. Neither of these operations creates place utility. This quality consists in a relation, not between some materials and others, but between goods and the persons who are to use them. Bringing things to us from a distance changes their local relation to us, and in this is the essence of place utility, and every article that we use must have acquired this quality. The service-rendering power which it possesses is only potential until it reaches a place where the power can be exercised.

Time Utility.—There is, moreover, a kind of utility which depends on the existence of a good at the time when it is needed. Ice in the warm season, a plow in the spring or the fall, a pleasure boat in summer, and anything which, by the aid of capital, is presented to a user when he needs it, illustrate this quality. We may call it time utility, and creating it is a function of capital. We shall see how capital assists in the production of the other utilities; but the creation of time utility it accomplishes without assistance.

Executive and Directive Labor.—Labor involves the whole man, physical, mental, and moral. No labor is so simple that it is not better done when intelligence is used in the performance of it. The savage's hut, his canoe, his bows and arrows, etc., vary in their efficiency and value, not merely according to the time and muscular effort spent in making them, but also according to the efficiency of the thought by which those efforts are guided. There is here the germ of the difference between the executive labor of the modern employee and the directive labor of the manager. Yet no manager directs in more than a general way the muscular movements of his subordinates, and their own intelligence must still be trusted to do much of the directing. The mental labor that guides and controls the physical is universal in industry, but becomes more and more a distinct and dominant factor as civilization increases.

Fidelity as affecting the Productivity of Labor.—The fact that all workmen are largely their own directors brings fidelity into the foreground as an element in determining men's earning power; but this element counts for much more in the civilized state than it does in the primitive one, for here fidelity in directive laborers of the highest type is most important and difficult to secure. One of the greatest problems of modern business is how to make directors and executive officers of corporations faithful to the stockholders who employ them. In the primitive state these problems do not arise. When a man is working for himself, mere interest largely takes the place of fidelity. If to-day any one secures a good house of his own to live in, it is because he employs contractors, overseers, and artisans all of whom are, in the main, faithful to his interests and see that the work of building is properly done. A savage looks after his own interests as his personal work proceeds; and yet even in his case there is the germ of that enthronement of character in the supreme place which is the prominent feature of highly organized industry. In building a hut to shelter his family, a savage puts into his work conscience and affection as well as muscular effort; and when the mother of the family does this work, the altruistic element in it is still more conspicuous. As society becomes highly organized the importance of the moral element in all labor increases till the further progress, or even the existence, of the social order may be said to depend on it. In the world of business there is now distrust and turmoil, and revolutions are feared, because of the unfaithfulness of a class of men to trusts committed to them.[6]

[6] On the ground of convenience, we may classify labor as physical or mental, according as the work of muscle or of brain is especially prominent. Digging a ditch requires more than an average amount of strength and not even an average amount of intelligence, and it is, therefore, physical labor rather than mental; while writing a brief or arguing a case in court requires much power of thought and only a small amount of muscular strength, and is typically mental labor. Managing an estate for an absent owner is more largely a moral function, since the value of the service depends chiefly on the fidelity of the man who renders it; but physical and intellectual labor are also involved. These three types of personal effort are exerted wherever wealth is created.

The Requisites of Production.—If we start with nothing but the earth in its natural state, inhabited by empty-handed men, and seek to know what is necessary in order that some wealth may be created, we find that nothing is absolutely necessary except labor. By working for a few minutes it is possible to get something that will minister directly to wants. Yet if men begin operations in a state of such poverty that they have only their bare hands to apply to the elements about them, they do not commonly get the usable goods immediately. If a savage wants fish and makes the rudest net with which to catch them, he makes what is a capital good. This is wanted only for the sake of the consumers' wealth which it will help to produce. The end in view has all the while been fish; but the man works first on an instrument for catching them. He makes the net by mere labor, but he catches the fish by means of labor and the net. Without such instruments to aid in production a dense population could not live at all, and a very sparse one could live only in a meager and precarious way. If the instruments are artificially made, or if they are furnished by nature in limited amounts, they are forms of wealth, or goods; but as their function is not to minister directly to consumers' wants, but to help in making things which do this, we distinguish them by the name "producers' goods" or "capital goods." In contrast with them those commodities which directly minister to wants may be called "consumers' goods."

The Production of Intermediate Goods.—All economic goods are means to an end. Wealth is always mediate. It is usually a connecting link between man's labor and the satisfaction of his wants. Man, the worker, first spends himself on nature, and then nature in turn spends itself on him. In production nature is the recipient, but in consumption the recipient is man. This is saying that man serves himself by means of some element in nature which, under his manipulation, becomes a form of wealth. He thrusts a bit of natural matter between himself as a producer and himself as a consumer. All kinds of wealth, then, stand in an intermediate position between original labor and the gratification that ultimately results from it. Some goods, however, are means in the special sense of standing between labor and other goods. Instruments help to make consumers' goods and these add to man's pleasure. Using a tool is not generally agreeable. The tool stands not only between the effort and the gratification that will ultimately follow, but between the effort and the further material good that will directly produce gratification. The hatchet intervenes between the labor that makes it and the firewood it will cut, while the wood acts directly on the man and keeps him warm. Capital goods are in this special sense mediate. They are not wanted for their own sake, but for the sake of something else that is directly useful.[7]

[7] For an elaboration of the conception of mediate goods the reader is referred to Von Boehm-Bawerk's work on "Positive Theory of Capital" and to John Rae's work on "The Sociological Theory of Capital."

All Labor immediately Productive of Wealth.—When a savage abandons the plan of fishing from the shore and gives his labor for a fortnight to making a canoe with which to fish more effectively, he interposes an interval of time between his labor and its ultimate fruits, the consumers' goods. There is no such interval between the labor and the kind of wealth that it first creates, namely, the canoe. This immediate product of labor is itself a form of wealth and at once rewards the laborer, since it is what he needs, though he does not need it for consumption. Industry always pays as it goes and tolerates no hiatus between labor and wealth in some form.

Organized Industry immediately Productive of Consumers' Goods.—If one man were keeping the stock of canoes of a few fishermen in repair and taking as his pay a share of each day's catch, he would not have to wait for his food any longer than the fishermen themselves. This mode of conducting the industry, however, involves organization. If each fisherman had to make his first canoe, it would be necessary for him to wait for fish; but as soon as a stock of canoes has been obtained and a special set of men assigned to the work of keeping this stock intact in number and quality, that necessity entirely ceases. Five men may do nothing but fish while a sixth keeps their stock of canoes intact by repairing old ones left on the shore and making new ones to replace such as are beyond repairing. Fishing and boat building may go on simultaneously, and all the men may go share and share in each day's catch.[8] This is a type of what goes on in modern industry, where a complex stock of capital goods always exists and is kept intact by the action of a class of persons who share the returns that come from using the stock. None of these persons has to wait for food, although some of them devote themselves exclusively to the production of tools. This fact shows that the necessity for waiting, as well as working, wherever instruments are in the process of manufacture, is not among the universal phenomena of economics, and that it is not present in that organized industry which we chiefly study. Such a permanent stock of capital goods as the fishing community of our illustration possesses would enable it to get its food, the fish, day by day, by working in different ways and using the permanent stock. If we call this permanent supply of canoes, etc., capital, it is, in a causal way, mediate wealth, though it is not so in point of time. Some labor is spent each day on it, and itself creates each day some consumers' wealth. These two operations go on simultaneously, and the men who work to maintain the stock and those who use it get their returns together. In very primitive life the work spent on capital goods and that spent on consumers' goods are not always synchronous, but organization and the acquiring of a permanent fund of capital make them so. Work to-day and you eat to-day food that is a consequence of the working. In point of time the canoe makers are fed as promptly as the fishermen, and this fact is duplicated in every part of the industrial system. We shall later see more fully what this signifies, but it is clear that any study of this phenomenon—the synchronizing of labor and its reward—takes us out of the field of Universal Economics, since it does not appear in the industry of primitive beginnings, but is the fruit of organization.[9]

[8] One man might be employed in guarding canoes and fish against theft, which is doing protective rather than industrial labor; and economic forces would tend to give him a share as large as each of the others receives, provided, of course, that the men are of equal capacity as workers.

[9] The conception of capital goods as always putting enjoyments into the future has crept into economic science because in certain illustrations taken from primitive life they seem to have that effect. We shall see that they do not have it at all in static social industry, and that they have it only in a limited way in dynamic social industry, or that which is carried on by a society undergoing organic change.



CHAPTER II

VARIETIES OF ECONOMIC GOODS

Passive Capital Goods.—Labor spends itself on materials, and these, in their rawest state, are furnished by nature herself. They "ripen" as the work goes on. Every touch that is put on them imparts to them more of the utility which is the essence of wealth. They are technically "goods," or concrete forms of wealth, from the moment when they begin to acquire this utility, though for a time they are in an unfinished state. The function of materials, raw or partly finished, in the physical operation of industry is a passive one, since they receive utility and do not impart it. The iron is passive under the blows of the blacksmith's hammer; leather is passive under the action of the shoemaker's sewing machine; a log is passive under the action of the lumberman's saw, etc. The materials which are thus receiving utilities under the producers' manipulations constitute a distinct variety of capital goods, while the implements which help to impart the utilities constitute another variety, and both kinds are present in all stages of industrial evolution. Savages use raw materials and tools for fashioning them.

Active Capital Goods.—The hammer which fashions the iron, the awl which pierces the leather, and the saw that cuts the log into boards have an active function to perform. They do not receive utilities, but impart them. They manipulate other things and are not themselves manipulated; and except as unavoidable wear and tear injure or destroy them, they are not themselves at all changed by the processes in which they take part. They are the workman's active assistants in the attacks that he makes on the resisting elements of nature. Passive instruments, then, and active ones—things which receive utility, as industry goes on, and those which impart utility—constitute the two generic kinds of capital goods. What is commonly called "circulating capital" is a permanent stock of passive capital goods; and, in like manner, what is usually known as "fixed capital" is such a stock of capital goods of the active kind. The materials and the unfinished goods that are scattered through a modern mill and receiving utility are what the manufacturer would at this moment identify if he were asked to point out the things in which he has circulating capital invested; while the mill, the machinery, the land, etc., which are imparting utility, are what he can point to as now constituting his fixed capital. At a later time there will be other goods of both kinds in his possession, and these will at that time embody the two kinds of capital. While a primitive man would have little occasion to use the term capital goods, he would possess both varieties of the goods which the term denotes.

Varieties of Active Capital Goods.—Mere hand tools act as armatures attached to the person of the worker, and they enable him effectively to attack resisting substances. The hammer fortifies the blacksmith's hand against the injuries it would suffer if he delivered blows with his fist, and it multiplies the efficiency of the blows. Machines, however, substitute themselves for the person of the worker and carry the tool through its movements. A steam hammer, so called, is an engine that gets power from a boiler and wields an armature, which is the real hammer, much as a smith would do it, though with far greater force and effect. Machines do rapidly and accurately what a manual laborer would, without them, have to do slowly and imperfectly, by carrying the armature in his own hand and moving it by his own muscular strength. Tools and machines impart "form utility" to materials. Vehicles which carry goods impart "place utility" to them by putting them where they are more useful than they would be elsewhere. Buildings protect goods and workers alike, and enable the operation of transforming them to go on successfully. They also make it possible to store goods at a time when they are not needed and take them out for use when they are needed. In doing this, buildings help to impart "time utility" to the merchandise that is put into them by keeping them intact till the time comes when they will be useful. Tools, machines, reservoirs of water, canals, roadways, buildings, and even land itself are active capital goods, and are, for that reason, component elements of that part of the permanent productive fund which is known as fixed capital. They aid workers in their efforts to bring materials into usable shapes, and this is as true of the hole in the earth in which a savage stores provisions as it is of a fireproof warehouse in a modern city.

Materials which are at first Passive and later pass into the Active State.—The hammer itself has to be made out of raw material, and, while it is in the making, the material that enters into it is as passive as anything else. While the ore is smelting and while the steel is forging, the future hammer is in a preliminary stage of its existence and is discharging a passive function. When it is completely finished, its period of activity begins, and from this time on it helps to manipulate other things. The materials which enter into consumers' goods go through no such transition. The leather remains passive till, in the form of a pair of shoes, it clothes its user's feet; and at this point it ceases to be a capital good at all. The steel of the hammer is first a passive good and later an active one.

The Use of Capital Goods Universal.—There is no doubt that capital goods are used in the most primitive industry. Implements existed in times too remote for tracing; and even if they had not been used, raw material would have been indispensable. People living in an economic stage so ultraprimitive as to use no mediate goods whatever could sustain life only by plucking wild fruit or gathering fish or other food stuff by hand, and so long as they could do this their industry might conceivably consist in getting consumers' goods by labor only. The rudest pick, shovel, or ax and the simplest hunting implement are early types of what, in "capitalistic production," is represented by mills with their intricate machines, ships, railroads, and the like. Primitive industry has capital but is not highly capitalistic, since labor and a little capital in simple forms are all that it requires. These primitive capital goods are still essential.

Capital.—It might seem that we have already described the nature of capital, but we have not. We have described the kinds of goods of which it consists. A sharp distinction is to be drawn between two ways of treating capital goods, and only one of these ways affords a treatment of capital properly so called. To attain that concept we must think of goods as in some way constituting a stock which abides as long as the business continues. And yet the things themselves separately considered do not abide. Goods are perishable things; no one lasts forever, and some last only a very short time. Raw materials best serve their purpose when they are quickly transformed into usable goods and taken out of the category of productive instruments. Tools may last longer, but they ultimately wear out and have to be replaced.

How Capital Goods Originate and Perish.—If you watch a particular mediate good of the passive kind, say wood in a growing tree, you see it beginning its career as an absolutely raw material, and then under the hand of labor, aided by tools, receiving utility till it takes its final form in some article for a consumer's use, say a dining table. Little labor is applied to it during the first stage of the process, that in which the tree is guarded and allowed to grow to a size that fits it for conversion into lumber; but the cutting, carrying, sawing, and fashioning are done by labor and tools, and under their manipulations the wood "ripens" in the economic sense—that is, it becomes quite fit for consumption. It is ready to serve a consumer as a table, and, when this service begins, the wood that up to this point has been a passive capital good, constantly receiving utilities, will cease to be a capital good at all and begin slowly to wear out in the service of its owner.[1]

[1] In the economic sense consumption is the utilization rather than the destruction of the thing consumed, though many things go rapidly to destruction in the process. Food is destroyed in the moment of using; clothing perishes more slowly by use, and furniture and dwellings more slowly still. Some things that go gradually to destruction during the process of utilization do not perish the more rapidly because of it. A vase, a statue, or a picture is consumed, in the economic sense, by a person's act of looking at it and getting pleasure from it; but this does not hasten its deterioration except as keeping such an ornament where it can be seen exposes it to deterioration or accident. Climbing a hill to get a view "consumes" the hill in a true sense, and looking from the summit over a wide stretch of picturesque country even consumes—that is, utilizes—the landscape; and certainly this act does not injure the thing utilized. The general fact, however, that goods for final use are, as a rule, injured or destroyed either by the act of consumption or by the exposures that are incidental to it, justifies the use of this term to express the receiving of a service from the usable article. It is a process in which the commodity acts on men's sensibilities and, as a general rule, exhausts itself while so doing. It is worth remembering that this exhaustion of the good is not the essential part of consumption. On the man's side that consists in deriving benefits from the good, while on the side of the good itself it consists in conferring benefit on the man—in doing him good and not in doing itself harm.

The Transition of Goods from one State to Another.—The beginning of its service in the purchaser's dining room takes the wood of the table out of the category of producers' goods; but there is some raw material that is never destined to emerge from that category and enter another. Its last state of existence as a good will be that in which it is embodied, not in an article for consumers' use, but in an active tool. Our tree might have furnished some of its wood for a wheelbarrow, and if so, that part of it would have been a capital good until it ceased to be an economic good at all. If we watch it as it grows toward its economic maturity, we see it sawed, planed, and otherwise fashioned under the laborer's hand, and maintaining during all this time its passive attitude, just as does the wood that is destined to constitute a table. When the wheelbarrow is completed, it does not, like the table, begin to minister directly to consumers' wants, but begins actively to aid some laborer in a further productive operation. It carries mortar to the wall of an unfinished building and is thus taken out of the list of passive goods—recipients of utility—and is ranged with other active tools which impart utility. The same thing is true of the steel that is destined to compose the head of a modern woodman's ax or the stone that is in process of fashioning into the rude hatchet of some primitive savage. As raw or partly wrought material it is a passive capital good; later it becomes an instrument of the active sort.

The Ultimate Perishability of all Kinds of Goods artificially Made.—In the end both kinds of material will cease to be capital goods. The raw stuff that goes into food, clothing, furnishings, or the like will become consumers' goods, while the raw material of tools will, in its final form, the tools themselves, have one more lease of life as capital goods. In the end, however, as wheelbarrows, axes, hatchets, and the whole long list of active implements are used up, they cease to be capital goods because they cease to be economic goods at all. They are as truly ordained to be ultimately used up as are food and clothing, and this is true of the most durable things that are artificially made. Walls, roadways, bridges, and buildings slowly deteriorate till the time comes when for productive purposes their room is worth more than their company.

Why the Perishability of Capital Goods does not put Capital out of Existence.—Perishability is the most striking trait of capital goods. Each particular one comes and goes, but there is always a stock of them on hand; for when one is on the point of going, another is ready to take its place and keep up the succession. New tools replace old tools; new materials replace those that are finished and withdrawn, and so it comes about that a stock of such things abides forever. Not one of the individual instruments is permanent, for each one only does its part in keeping up an endless procession. It is the procession that is always there—a moving series of individual goods, not one of which has more than a transient economic career. Each one helps to keep up the supply of permanent capital just as each man, taking his turn in an endless succession of laborers, serves during his brief life to keep up the permanent force of laboring humanity. Men come and go, but "labor"—a mass of working humanity—abides; and so capital goods come and go, but a stock of them abides, kept up by perpetual replacement. We may trace the career of any single instrument from a beginning to an end; but we may, on the other hand, cease to look at any instruments that we single out and identify and look rather at the procession of them; and if we do this, we look at a body which never wastes away, though the things that compose it are, separately considered, forever wasting.

There are many kinds of transient things which, by the same process of renewal, constitute permanent entities. Composing a human body at this moment are certain tissues that can be separately identified; and if we watch any one of them, we shall see it going in a short time to destruction. Yet the body lasts while life continues. Indeed, the evidence of the life itself is the discarding and replacing of the tissues. A living body is a durable thing, though the particular tissues that at any one time compose it are not so. In a like way drops of water make a river, and this is a permanent thing, however rapidly its composition changes. The waterfall that drives the machinery of a mill is permanent, though no particular particle of water remains in it for more than a moment. Society is permanent, though the men who compose it are short-lived. In an exactly similar way a body of capital goods is maintained as a perpetual instrumentality of production. This is capital properly so called. It is, as it were, a quasi-living body, perpetuated by the constant replacement of the component parts, which are destroyed as its normal activities go on.

The Difference between Capital Goods and Capital Summarized.—The distinction between capital goods, on the one hand, and capital, on the other, is, then, like that between particular tissues and a living body, or like that between particular particles of water in the river and the river that flows forever. We can single out and watch certain drops of the water as they flow from a spring, and we can trace them through their brief careers, and say truly that the river is composed of fickle and transient stuff; but we cannot say that the river is transient. That is perpetuated by the renewing of the supply of water as the original drops disappear. We can mentally watch a particular man, as he enters the social force of workmen, labors for a time, and drops out of the line, and can see that society is composed of transient material; but society itself is an abiding thing. So we can study a particular bit of ore or wool or leather or a particular hammer or spindle or sewing machine, and in those cases we shall be studying capital goods and finding how perishable they are; but we shall also see that a stock of them always abides as the capital of economic society. We can cease to look at individual things and study the permanent fund of productive wealth, which is made up of goods like ore, wool, leather, hammers, spindles, and sewing machines. The identity of the things which make up this stock is forever changing. The same list of things we shall never find in the stock on any two dates, but a supply of similar things forever abides. Capital is this permanent fund of productive goods, the identity of whose component elements is forever changing. Capital goods are the shifting component parts of this permanent aggregate. They are the particular instruments that, each during its own brief economic lifetime, take their places in the endless procession of things which in its entirety is an abiding productive agent—the co-worker of labor and its perpetual assistant in creating consumers' wealth.

The Business Man's View of Capital.—It is as such an abiding entity that a business man regards capital. He describes it nearly always as a sum of money. Thus the capital of a manufacturer is "a million dollars" because a stock of instruments worth that amount is kept intact in his possession. It is not allowed to waste away, however much the constituent parts of it may shift. The waste and renewal which business entails leave the equivalent of the million dollars always on hand, though never in the literal shape of money. A stock of shifting goods always worth a million dollars is, by a figure of speech, described as a million dollars "invested in the goods."[2]

[2] We here put out of sight all questions connected with the changing purchasing power of money. This is, in ordinary times, the business man's habit. He considers his capital intact if the number of dollars invested originally in his business still appears on his inventory as representing the net surplus of his assets over his liabilities. If a currency were undergoing rapid inflation, a fixed amount of invested money would represent a shrinking stock of capital goods. This stock would last always, but would grow smaller by a true standard of measurement. All that we are at present interested in knowing is that practical usage treats capital as a permanent fund of productive wealth, and most conveniently describes it as a fixed amount of money "invested" in goods of a productive kind. What is thought of as "money" abides. Of course the practical man does not regard it as actually composed of currency.

The Chief Attribute of Capital.—A chief attribute of capital, properly so called, is permanence. If a man's productive fund does not last, he is impoverished. The farmer keeps on hand a more or less constant supply of the implements he has to use. He takes a part of the proceeds of the sale of his crops, puts it into the shape of implements and materials, and in this way keeps an amount of them on hand as the auxiliary capital of agriculture. Particular goods are not constant, but the sum of money or quantum of wealth "invested" in the moving procession of them is so. At any one instant the capital is composed of particular instruments which can be sought out and identified, but at no two instants are the goods the same.

The Reasons for describing Capital as a Sum of Money.—This fact explains the general practice of describing capital in terms of money. The manufacturer just referred to will speak of his capital as "a million dollars" and consider that sum as a "permanent investment" because he knows that while the goods that now represent that value will soon pass from him, the "dollars"—that is, the value which is equivalent to the dollars—will abide. There is, moreover, no failure on his part to discriminate between his capital and literal money, for he knows in what his productive fund consists, and is fully aware that only the minutest part of it is in the shape of actual currency.

Instruments of production compose the fund, but the dollars serve to describe it. They indicate the amount and the abiding quality of it, since they describe what he has invested or embodied in the shifting things and can, by a fair sale, get out of them.

Why Abstract Terms are used in popularly describing Capital.—In certain connections money is, in unintelligent thinking, confused with real capital in ways that we should guard against. In avoiding such errors we need to be even more careful that we do not miss the truth that is at the basis of the common mode of describing capital. A permanent fund that is spoken of as a million dollars invested in a business does not suggest to any one a literal pile of a million silver or paper dollars or of a hundred thousand gold eagles. It suggests what is actually in the business, a procession of things each of which comes into the man's possession and then leaves him, and helps him to keep the constant stock of goods that at any time is a potential million of dollars. A permanent body of any kind, if it is made up of shifting tissues, is commonly described by the use of an abstract term. A waterfall, made as it is of rapidly changing drops of water, is spoken of as a "water power," since the power is the abiding thing. An endless series of living human beings is described as "humanity," since that remains through all personal changes. An endless series of workingmen is described as "labor," and we study the "wages of labor," the "relations of labor to capital," etc., because these are permanent relations. Men come and go, but labor continues and is the source of a permanent income. It is actually the fact that in speaking of the "labor problem" or the "relation of capital and labor" we usually think of "labor in the abstract," as we might term it; but this is very far from implying that we consider a series of generations of actual workingmen as an abstraction. We may, using terms in a like way, speak of the problem of interest as concerning "capital in the abstract"; but this is far from meaning that we consider an endless series of material instruments of industry an abstraction. We describe these real things by the use of an abstract term, just as we describe a thousand other realities. A "fund," a "value," a "permanent quantum of wealth," is capital; but with the abstract notion the mind always merges the thought of the concrete entity. It is the tools of industry that, in their endless march, come into and go out of the industrial field that we think of even when we use the abstract term. This term, however, saves us from the danger of thinking merely of particular tools that we can identify and trace to their final destruction when we form the concept of capital.

The Importance of discriminating between the Concept of Capital Goods and that of Capital.—Very great is the importance of keeping sharply distinct the two concepts of productive wealth of which one is described by the term capital goods and the other by the term capital. In the one case we think of a particular thing which we identify, keep in mind, and watch as it goes through its transformations, does its final work, and perishes. The brilliant studies of Professor Boehm-Bawerk are based on the idea that such a tracing of the biography of a particular instrument is the true way to solve the problem of interest. Yet the very term interest itself suggests the existence of what we have defined as permanent capital—an abiding fund or sum of wealth that every year yields as an income a certain percentage of itself. The "hundred dollars" yields five dollars; that is, the fund yields a twentieth of the amount which, amid all the changes of its constituent parts, it continues to embody. It is true, indeed, that a study of all capital goods which have existed or will exist, with due attention to their relations to each other, would reveal the fact that they maintain such an endless procession as has been here described, and it would thus bring before the mind such a concept of capital as the business man has and describes by the monetary form of expression. By making a synthetic study of capital goods in general, and not separate studies of particular goods as they come and go, we can obtain a grand resultant of the action of all of them, which is nothing less than permanent capital doing its continuous work. Such a comprehensive study of capital goods, if it is carried far enough, becomes a study of the abiding entity, capital. Allowing ourselves, however, to put the abiding entity out of sight and merely to trace the origin, growth, and productive action of separate instruments of production would be disastrous. The undying body in which the particular things are tissues absolutely needs to come into view. The very mention of a problem of interest—of the percentage of itself that a fund of a given amount can annually earn—puts before us at once the permanent entity, capital, and the problems relating to it.[3]

[3] Consumers' goods may be regarded in the two distinct ways in which it is necessary to regard capital goods. We may look at particular articles for consumption, as they begin their careers by ministering to their owners' needs, and follow them as they wear out and finally perish. This gives a conception of them which is analogous to the conception of capital goods rather than to that of capital. On the other hand, we may look at the permanent stock of usable articles, which is maintained by the constant coming of new ones to replace those which are worn out, and in this way we get a conception of permanent consumers' wealth. The flow of finished goods from the shops to the users offsetting the concurrent destruction of such articles in the users' hands, has the effect of maintaining a permanent fund of consumers' wealth consisting of perishable goods the identity of which is always changing; and this fund is analogous to permanent capital as we have defined it. Professor C. A. Tuttle has advocated the use of the generic term wealth to denote the two continuing funds which we have here termed, on the one hand, capital, and, on the other hand, the permanent stock of consumers' wealth. We have preferred to use the term wealth in a sense that is generic enough to include both capital and capital goods, and both the permanent stock of consumers' goods and the particular articles that, in turn, compose it. Wealth consists of effectively useful concrete things regarded either as particular articles that can be identified and watched till they perish in the using, or as an abiding stock of articles of this genus, each one of which has in itself only a transient existence. See an article on "The Wealth Concept," by Professor Charles A. Tuttle, in the Annals of the American Academy of Political and Social Science, for April, 1891, and other articles by the same author.

Labor as a Permanent Entity.—The term labor is sometimes used to describe a permanent aggregation of laborers no one of whom lives and works through more than a brief period. Labor is thus analogous to capital and laborers to capital goods. A permanent working force is composed of perishable beings as a permanent producing fund is composed of perishable goods. Both are commonly described by the use of abstract terms, but both are in reality concrete things; and actually to reduce either to a mere abstraction would be to put a material entity out of existence. We instinctively speak of a value—a given number of dollars—in describing a man's capital, but it is dollars "invested in" productive instruments; and we instinctively speak of labor when we mean an abiding force of workingmen. Neither capital nor labor is like an immaterial soul that can live apart from its body. Each consists of a permanent body with a shifting composition. A permanent sum, on the one hand, a permanent amount of working energy, on the other, are always present, but they are in goods and men respectively. Each may well be described by the use of an abstract term, and in practical life it commonly is so; but it is a concrete reality.

Peculiarity of Land as a Capital Good.—One reservation needs to be made when we call capital goods perishable. If we include land under this term, we must make it an exception to the rule of destructibility. It is the only thing that does not go out of existence in the using. It is not a produced good at all and does not stand, like other goods, in an intermediate position between labor and the gratification that labor is intended to produce. Work did not create it and using will not end it. It will be called, in our study, a capital good, for it is a form of wealth which produces other wealth. It enters into the permanent productive fund that society is using.

Differences between Land and Other Capital Goods Important in Economic Dynamics.—It is in a later part of the study which deals with economic changes—the part which we shall call Economic Dynamics—that the differences between land and artificially made goods become prominent, and these differences will receive due emphasis in their proper place. In studying the law which would govern economic society if no essential economic changes were taking place,—in reducing society, as it were, to a static state,—we find that there is a certain set of characteristics which land shares with those capital goods which are the products of human industry. In static studies it is best to group the productive instruments which men make with the one unmade good which nature furnishes and to recognize that together they embody the permanent fund of productive wealth.[4]

[4] What is commonly termed land contains elements which perish in the using. Such are deposits of coal, ores, or oil, and those ingredients of loam which are exhausted by tillage. Such elements of the soil are not land in the economic sense. How they should be regarded will be shown in a later chapter.

Mobility an Attribute of Capital.—Even in a static society capital would be permanent, while particular capital goods would be perishable. In dynamic studies another quality of capital, as distinguished from capital goods, comes into the foreground, namely, mobility. It is the power to move without loss from one industry to another. Goods cannot be thus moved with any freedom. A loom cannot be taken out of a woolen mill and made to do duty in a carpenter's shop, nor can a circular saw be made available in weaving. When the loom wears out and needs replacement, it is in the owner's power to procure either another loom or a circular saw, and if he chooses the latter alternative, he causes capital to move into the woodworking business. A whaling ship would not be useful as a cotton mill; but much capital that was once invested in the whale fishery of New England has since found its way into manufacturing. The transfer can often be made without waste. If the earnings of an instrument have sufficed to replace it with another that is like it, they may suffice for producing an instrument that is unlike it. Waste, if it occurs, results from a failure of the original instrument to earn the fund for replacement. Capital which thus abides but passes from one employment to another is a body the identity and the character of whose component parts change. The transfer of capital from one industry to another is a dynamic phenomenon which is later to be considered. What is here important is the fact that it is in the main accomplished without entailing transfers of capital goods. An instrument wears itself out in one industry, and instead of being succeeded by a like instrument in the same industry, it is succeeded by one of a different kind which is used in a different branch of production. Goods have not moved from one branch to another, but capital has done so.

How Capital itself may be Destroyed.—When we speak of capital as permanent, we mean that using does not destroy it as it destroys the tissues of which it is composed. Fires, earthquakes, and business disasters put parts of it out of existence and affect the volume of the fund as a whole; but production itself leaves it intact. It is this very production which destroys capital goods and makes it necessary to replace them.



CHAPTER III

THE MEASURE OF CONSUMERS' WEALTH

In all stages of social development the economic motives that actuate men remain essentially the same. All men seek to get as much net service from material wealth as they can. The more wealth they have, other things remaining the same, the better off they are, and the more personal sacrifice they are compelled to undergo in the securing of the wealth, the worse off they are. Some of the benefit received is neutralized by the sacrifice incurred; but there is a net surplus of gains not thus canceled by sacrifices, and the generic motive which may properly be called economic is the desire to make this surplus large. Except in a perfectly isolated individual life, there is opportunity for ethical motives to affect men's economic actions. Altruism has a place in any social system of economics, and so have the sense of justice and the positive compulsion of the law. Altruism does its largest work in causing men to give away wealth after they have acquired it, but conscience and the law powerfully affect their actions in acquiring it. These are forces of which Social Economics has to take account; but the more egoistic motive, desire to secure the largest net benefit from the wealth-creating process, is one of the premises of any economic science. This involves a general pursuit of wealth; but men seek the wealth for a certain personal effect which comes from the use of it, and they measure it, when attained, by means of this subjective effect.

How Specific Utilities are Measured.—As the essential quality of wealth is specific effective utility, we measure wealth by estimating the amount of this quality, and it is always a consumer who must make the measurement. He must discover the importance to himself of a small quantity of a particular commodity. The hunter must find out how much worse off he would be if he were to lose a small part of his supply of game and endure some hunger as a consequence. In doing this he gets the measure of the effective utility of any like quantity of game, since any one specific part of his supply is as important as any other and no more so. The estimate of the importance of such a supply of food material has to be made in this specific way, by taking the amount on hand piece by piece, and not by gauging the importance of the whole of it at once.

Value the Measure of Specific Effective Utility.—If any consumer will estimate the importance to himself of a single unit of goods of a certain kind, and multiply the measure so gained by the number of units he is appraising, he will make a measurement of the value of the total amount.

Values not based on the Importance of the Total Supply of Goods.—It is essential that the consumer, in determining the value of a kind of goods, should not estimate the importance of the supply in its entirety, since that would give an exaggerated measure. Measurements of value are always made specifically, and single units of the supply of goods are appraised apart from the remainder. The total utility of atmospheric air is infinite, since the loss of the whole of it would mean the total destruction of animal life; but the specific utility and the value of air is nil, since no one limited part of the supply has any practical importance. A roomful of it might be destroyed with impunity. So the cereal crops of the world, taken as a whole, have almost infinite importance, since their destruction would result in universal famine; but each bushel of grain has an importance that is relatively small. The loss of it would impose no serious hardship upon the average consumer, since he could easily replace it. The value of the crop is determined by the importance of one bushel taken separately and by the number of the bushels. If we estimate the importance of one unit of the supply of anything, express the result of the estimate in a number, and then multiply this by the number of units in the supply, we express the value of this total amount. The total utility of it, on the other hand, is measured by the benefit which we get from the supply in its entirety, or by the difference between the state we are in when we have it all and that to which we should be reduced if we lost it all and were unable to replace it. To measure any such total utility we contrast, in imagination, our condition with the full supply on hand and a condition of total and hopeless privation, in so far as these goods and similar ones are concerned.

This Method of measuring Wealth Universal.—These principles apply as well to the economy of a solitary islander of the Crusoe type as they do to that of a civilized society. A Crusoe does not need to measure values for purposes of exchange, but he has other reasons for measuring them. It is for his interest to use his own labor economically, and to that end he should not put too much of it into one occupation and too little into another. When, by reason of a large store of wheat on hand, the specific importance of it is small,—or, if we use a common expression, when the utility of the "final increment" of it, which a man might secure by making an addition to his supply, is small,—he should divert his labor to raising goats or building huts, where the utility of the increment of product to be gained is, for the time, greater. The solitary man thus well illustrates the act of the society which, in its own peculiar way, sends labor from one department of industry where the "final utility" of its product is small to another where it is larger. It is all done by measuring the specific importance of goods.[1]

[1] For extended discussions of the relations of utility and value the reader is referred to the works of Jevons, Menger, Von Wieser, Von Boehm-Bawerk, and Walras. A study of "effective" utility and its relations to value, by the writer of the present treatise, is contained in the New Englander for July, 1881.

The Utility of Producers' Goods.—Consumers' goods have a direct utility, which is a power immediately to serve a consumer. Instruments of production, on the other hand, have indirect utility, since all that they are good for is to help produce things that render the immediate service. They have productivity, and this has to be measured in determining their value. What we need to know about hoes and shovels, hammers and anvils, spindles and looms, etc., is how much power they have to create the goods that we want for consumption. Here again the measurement has to be made in the specific way. The capital goods have to be taken unit by unit if their value for productive purposes is to be rightly gauged. A part of a supply of potatoes is traceable to the hoes that dig them; but in valuing the hoes we do not try to find out how much worse off we should be if we had no hoes at all. We endeavor simply to ascertain how badly the loss of one hoe would affect us or how much good the restoration of it would do us. This truth, like the foregoing ones, has a universal application in economics; for primitive men as well as civilized ones must estimate the specific productivity of the tools that they use, and make hoes, shovels, or axes according as the procuring of a single tool of one kind becomes more important than procuring one of another kind. Indeed, the measuring of the utility has to be done, as we shall soon see, in a way that is even more specific than this; for the man has to determine not only how many hoes he will make, but how good he shall make them. The quality of each tool has to be determined in a manner that we must hereafter examine with care. The earning power of capital is, as we shall later see, governed by a specific power of productivity which resides in capital goods.

Cost and Utility.—A ripe consumers' good, in exhausting itself on man, benefits him; but during the period in which it is being prepared for use, when it is receiving utilities at the hands of successive producers, it has an opposite relation to the men who handle it. In making the material useful a man confines and tires himself. He is willing to do it if the reward that he expects will more than pay for the sacrifice, but not otherwise. Moreover, this sacrifice itself has to be estimated specifically in a way that is akin to the method of measuring utilities which determines the values of goods. It is necessary for a man to gauge the sacrifice which is entailed on him, not by his labor as a whole, but by a specific part of it. He finds himself in the evening feeling the fatigue and the sense of confinement which the day of labor has imposed and asks himself how much it would burden him to work a little longer. If what he can get by this means pays for the extra sacrifice involved in thus getting it, he will work for the few minutes, but otherwise he will not. His objection to a few minutes of additional work measures what we may call the specific disutility of labor; and men, whether they be primitive or civilized, are forever making such measurements. They consider how much it will cost them to add slightly to the length of their working day or how much it will benefit them to shorten it. In this way they measure the specific disutility of labor rather than the total disutility of it, since they do not gauge the relief that it would afford to cease working altogether.

The Increasing Cost of Successive Periods of Labor.—It is easy to work when one is not tired, and the first hour or two of labor may even afford a pleasure that largely offsets the burden that it entails; but it is hard to work when one is tired and painfully conscious of the confinement of the shop. Adding anything to the length of a working day imposes on a man the necessity of working at the time when the burden is greatest; and shortening his day, for a like reason, relieves him of some of his most costly toil.

The Natural Length of the Working Day.—Any laborer, as his work goes on, hour after hour, is certain to reach a point at which it is unprofitable to go farther. However greatly he may need more goods, he will not need them as much as he needs rest and change. It may be that he has worked twelve hours, and that, by working longer, he can improve his wardrobe, his food, or his furnishings; but if he has a tolerable supply of such things, he will hardly choose to add to it by staying in the shop when his strength has been exhausted and he is eager to reach his home.

Specific Cost at its Maximum a Measure of Specific Utility.—Two very important principles are at work whenever a man is performing labor in order to create wealth. The more consumers' wealth he gets, the less important to him are the successive units of it, and the more do these successive units cost him. The tenth hour of labor adds to his supply of food, but this addition is not as important as the supplies that were already on hand. If we divide the supply into tenths and let the man produce a tenth in each successive hour, the first tenth, which rescues him from starvation, is the most important, while the last tenth, which comes nearest to glutting his appetite, is least important. This last increment, however, is produced by the greatest sacrifice, for it is gained by making the working day ten hours long instead of nine.



Let the hours of the working day be counted along the line AD, and let us suppose that a man gets unit after unit of consumers' wealth, as he works hour after hour, and the units grow less and less important. The first and most important we may measure by the vertical line AB. The second is worth less, the third still less, and the last one is worth only the amount CD. This means that the successive units of what we may call general commodity for personal use have declined in utility along the curve BC. On the other hand, as the man's labor has been prolonged, it has grown more and more wearying and irksome. The sacrifice that it involved at first was almost nothing, but the sacrifice of the succeeding hours has increased until, in the last hour, it amounts to the quantity expressed by CD.[2] As the man has continued to work, the onerousness of working has increased along the ascending line AC until the point has been reached where it is so great that it is barely compensated by the fruits of the labor. The man will then work no longer. If he were to do so, his sacrifice would become still larger and his reward still less. Up to this point it is profitable to work, for every hour of labor has brought him something so useful that it has more than paid for whatever sacrifice he has made in order to get it. Beyond this point this is not the case. The line CD represents the cost of labor at its maximum, and it is this which acts as a measure of effective utility and value.

[2] If we should try to describe all the possibilities in the case, we should take account of the fact that a man may get a positive pleasure from his first hour or two of labor and construct a figure thus to express this fact:—



AC is the curve representing the sacrifice entailed by successive hours of labor.



In like manner we should have to recognize the fact that the utility of some kinds of goods may not reach a maximum with the first increment, and should construct a utility curve to express this fact. BC here represents the increase and the following decrease in the specific utility of the supply of an article of this kind.

The Coincident Measure of Cost and Utility.—It now appears that the line CD signifies two different things. It measures the utility of the last unit of the man's consumers' wealth, and it also measures the sacrifice that he has incurred in order to get it. These are opposing influences, but are equally strong. The one, of itself, makes man better off, while the other, of itself alone, makes him worse off. At the last instant of the working day they neutralize each other, though in all the earlier periods the utility secured is greater than the sacrifice incurred and the net gain thus secured has kept the man working.

The Point at which Utility and Disutility are mutually Neutralizing.—At a certain test point, then, production acts on man in such a way as exactly to offset the effect experienced from the consuming of the product. Man, as a consumer, has to measure a beneficial effect on himself, and, as a producer, he has to measure an unpleasant effect. He finds how much he is benefited by the last unit of wealth which he gets for personal use, and also how much he is burdened by the last bit of labor that he performs. If this sacrifice just offsets the benefit derived from the final consumption, it is the best unit for measuring all kinds of utilities. A man secures by means of this final and most costly labor a variety of things, for if he works up to this point every day in the year, he will have at his disposal, say, a hundred hours of labor in excess of what he would have had if he had worked a third of an hour less each day. The product of this extra labor will be taken in the shape of goods that are also extra, or additional to whatever he would otherwise have secured. They will represent special comforts and luxuries of many kinds. The values of these goods may be measured and compared by means of the quantity of labor that the man has thought it worth while to perform in order to get them. If he values one of them highly enough to think it worth while to work for an extra period of twenty minutes at the end of a day in order to get it, it may be said to have one unit of value; and if he is anxious enough to get something else by doing this on two successive days, this second article may be said to have two units of value. The savage who, by working for an extra hour, makes some improvement in his canoe, and by doing the same thing on another day makes some improvement in his food, establishes thereby the fact that he values these two additional bits of consumers' wealth equally. If he uses ten hours of the same costly kind of labor in making an addition to his hut, he proves that he values that gain ten times as highly as he does either of the others. Establishing values by means of such final costs is a process that goes on in every stage of social evolution.

Unlike Results of Creating Wealth and Using it Summarized.—Wealth, then, affects a man as a consumer in one way and the same man as a producer in an opposite way. In the one case the effects are favorable, and in the other they are unfavorable. At a certain test point the two effects may be equally strong as motives to action, and so may be said to be equivalent. The man is impelled to work by his desire for a final unit of wealth, and he is deterred from it by his aversion for the final unit of labor which he will have to incur if he secures the benefit. If he performs the labor and gets the benefit, he neither gains nor loses as the net result of this particular part of his labor, though from all other parts of his labor he gets a net surplus of benefit. It is natural to measure all such economic gains in terms of sacrifices incurred at the test point where these are greatest. This is the labor one would have to incur in order to add the means of gratification to his previous supply of consumers' goods.

Minimum Gains offset Maximum Pains.—Running through and through the economic process are these two different measuring operations. Man is forever estimating the amount of harm that wealth does him when he is in the act of producing it, and the amount of good it does him when he consumes it; and there is always to be found a point where the two amounts are equal. It is the point at which gains are smallest and sacrifices greatest. It is at this point that men measure values in primitive life and in civilized life. How in the intricate life of a modern society the measuring is done we shall in due time see; for the present it is enough that we perceive the universality of the law according to which value is best measured by the disutility of the labor which is most costly to the worker. Organized societies do something which is tantamount to this. It is as though the whole social organism were an individual counting the sacrifices of his most costly labor and getting therefrom a unit for comparing the effective utilities of different goods.

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