Informational Site NetworkInformational Site Network

     Home - Stock Buying - Money Basics - Banking - Wealth - Nature of Rent- Economic Theory

Most Viewed

The Limits Of An Economic Society
The Law Of Accumulation Of Capital
Value And Its Relation To Different Incomes
The Law Of Population
Boycotts And The Limiting Of Products
Organization Of Labor
Normal Value
Effects Of Dynamic Influences Within The Limited Economic Society
Perpetual Change Of The Social Structure

Least Viewed

Leading Facts Concerning Money
Production A Synthesis Distribution An Analysis
Further Influences Which Reduce The Hardships Entailed By Dynamic Changes
Capital As Affected By Changes Of Method
The Measure Of Consumers' Wealth
Effect Of Improvements In Methods Of Production
The Foregoing Principles Applied To The Railroad Problem
The Law Of Interest
Summary Of Conclusions
Conditions Insuring Progress In Method And Organization

Capital As Affected By Changes Of Method

Labor Saving and Capital Concentrating

There is a common
impression that whatever saves labor usually requires an increase of
capital in the industry where the economy is secured, and this
impression is justified by the experience of the century following the
invention of the steam engine and the early textile machinery. Hand
spinning and weaving require small amounts of fixed capital, while the
mills in which spinning and weaving are done by steam or water power
require a great deal. Fortunately in any long period this capital
comes as abundantly as it is needed from the profits of the very
business that calls for it and does not reduce the capital of other
industries. The profit of one year furnishes the new instruments
required in the next; but the immediate effect of substituting a
costly machine for hand labor is to concentrate capital, or to call it
from places to which it would otherwise go.

The Liberation of Capital by Invention

For a long period it was
the general rule that a mechanical invention at first called capital
to the point at which it was applied, although it afterward created
new capital and sent it away to make more than good the draft it
originally made. This rule is no longer universally applicable. When
an invention cheapens capital goods, it liberates capital. It is
clear that a hundred and twenty-five years ago there was small chance
that an invention would liberate very much capital by reducing the
cost of making tools, buildings, rails, machinery, etc., since there
were so few of them to cheapen. Now that machines are at hand in
myriad forms the chance is large that an invention will substitute for
many of them others of less costly construction. It will in these
cases cause less capital to be required per machine than was formerly

Simplifying the Forms of Machinery and Cheapening the Materials of

The history of invention shows that the early machines sometimes
took cumbersome and expensive forms, for which simple and cheaper
forms were later substituted. Much simplifying of mechanical
appliances is all the while going on, and this, of course, liberates
some capital. Making instruments of any kind out of cheaper materials
has the same effect that anything has which reduces the cost of
constructing the instruments. Bessemer steel has made rails, bridges,
ships, buildings, steam boilers, and a vast number of mechanical tools
and appliances less costly than they were, and so has liberated some
of the capital which such things formerly embodied. After one of the
machines of the costlier type has earned the fund on which its owner
relies for replacing it as it is worn out, it appears that a part of
this fund will suffice for procuring a perfectly good substitute for
it, and the remainder may be used for procuring other appliances of

A''' B''' C''' H'''
A'' B'' C'' H''
A' B' C' H'

Cheapening the Process of Making Instruments

If we recur to the
table which represents the groups of the industrial system, we shall
see that improvements of method in the general group H-H''' have the
effect of liberating capital in the other groups and subgroups. H'''
is the comprehensive symbol that represents active instruments of all
kinds. It is engines and boilers, looms and spindles, lathes and
planers, rails, cars, bridges, tunnels, canals, ships, buildings, and
all the myriad instruments which actively aid man in making the things
he wants for consumption. New methods at H-H''' make the supply of
all these things cheaper, which means that the labor and capital of
the group H-H''' which would have been required for replacing the
instruments used in the other groups will more than suffice for that
purpose, and a part of their time may be given to making machinery,
etc., not formerly used. This amounts to liberating a part of the
fixed capital in the three groups producing A''', B''', and
C''', although the free capital that is thus gained may in part be
used in furnishing additional appliances for use in these same groups.

Local Concentration of Capital which causes a General Liberation of

In such a case the new method used at H''' may, at its
introduction, require more capital than was formerly used at that
point in the system. Building Bessemer converters was a costly
operation, though the output of cheap steel afterward saved far more
capital than the converters required. The power canals of Niagara cost
something, but the products created by means of them are cheapening
many tools of industry; and like effects follow most applications of
electricity for utilizing waterfalls and carrying to great distances
the power which they generate. They follow on a considerable scale as
the culm of coal mines is economically burned and made to generate
steam and drive dynamos. All cheapening of transportation, besides
making consumers' goods cheaper, has the same effect on producers'
goods, and by this means liberates capital. It causes a single
productive appliance to cost less than it otherwise would cost and
renders available for other purposes a part of the outlay that was
formerly required for replacing it at the end of its industrial

Effect of Speeding Machinery

Increasing the speed of a machine is
a capital-liberating operation, since it enables a certain number of
machines to do the work of a larger number. Running spindles and looms
rapidly, while it requires fewer laborers for a given amount of
product, requires fewer spindles and looms also.

Cases in which Liberated Capital remains partly in the Same Industry
in which it has been Used

A distinction has carefully to be made
between causing less capital to be used per unit of physical
product, and causing less to be used in a particular occupation
without regard to the amount of the product. If we cheapen the
operation of cloth making, we shall increase the consumption of cloth,
and in this way we may draw new capital into this business, even
though we can build and equip a mill of a given capacity more cheaply
than before. In this case we have liberated capital in this business
and at once reemployed it at the same point. If we use as many looms
as before, the more rapid running calls for more spindles to furnish
yarn, and the new spindles require larger engines and boilers, or more
water wheels, wheel pits, and reservoirs, to furnish power. Enlarging
a business in this way usually calls for an enlarged general capital
in the industry, though it calls for less capital for a given
output; and the striking fact is that this effect may be realized by
means of devices which actually save capital at particular points in
the industry. If, after power looms were introduced, some inventive
genius had made them cost only a quarter as much as on their first
introduction they had cost, the profits of the business would have
been increased and, in time, far more capital in the shape of spinning
machinery, engines, etc., would have been required than had formerly
been used in those forms. With general growth of population and wealth
the increased consumption of cloth calls, in the end, for more capital
in the form of the looms themselves.

General Consumption as affected by a Specific Increase of Productive

Consumption in the generic--the use of consumers' goods of
every kind--grows as the power to make the good increases; but a point
that is of great importance is that any specific increase of
productive power brings about a general increase of consumption. It
brings about a greater all-round creating and using of commodity. If
we can hereafter make the A''' of our table with the expenditure of
half as much labor and capital as we have heretofore used in creating
it, the liberated agents of production become available for making
whatever is most needed, and they will, in fact, be used for
increasing the supply of all three types of consumers' goods
represented in the table. They will give us more of A''', B''',
and C''' in quantities adjusted by the laws of value. The outcome of
this is that an economy in making A''' actually gives us more of
A''', B''', and C'''. We become larger consumers of everything
because of the cheapening of anything which enters into our list of
articles for personal use. This presents a further aspect of the
process of moving labor and capital from group to group, in which the
possibility of hardship for particular persons inheres. The conclusion
to which a fair weighing of the effects of mechanical progress has
already led us is that there are very few, even of the workers who
suffer displacements of this kind, who do not during their lives gain
far more than they lose by general progress; and the effects of
cheapening capital goods at one point, and so liberating capital for
use at other points, increases this beneficent effect. The special
costs of making the new kinds of machinery have been large in the
earlier stages of the process, but have afterward grown smaller; and
as machinery has come into general use the liberating of capital by
the cheapening of the machines has become a more and more important
factor. Some of the capital liberated at A goes to assist labor in
furnishing the additional amount of B''' and C''' which enlarged
consumption requires.

Hardships entailed on Capitalists by Progress

As the old
handicrafts have now been largely supplanted by machinery, and the
hardship that continuing progress entails on laborers is greatly
reduced, there is involved in progress a new burden which falls
altogether on the capitalist employer. The machine itself is often a
hopeless specialist. It can do one minute thing and that only, and
when a new and better device appears for doing that one thing, the
machine has to go, and not to some new employment, but to the junk
heap. There is thus taking place a considerable waste of capital in
consequence of mechanical and other progress. As there have come into
use marine boilers made of steel and capable of standing a very high
pressure, the low-pressure boilers of former days have become useless.
With the advent of triple expansion cylinders, twin screws, and better
and larger hulls, ships of the old type lost their value; and similar
things are occurring in every line of production. A new mill is built
and equipped with the best machinery known at the date of its
building; but before a year has gone by all the machines in one
department are so antiquated that it is best to throw them out.
Indeed, a quick throwing away of instruments which have barely begun
to do their work is often a secret of the success of an enterprising
manager; but it entails a destruction of capital. What is easily to be
seen is (1) that a single change of that kind makes an immediate draft
on the general fund of available social capital; and (2) that this
draft, as a rule, is soon repaid with increase. Machinery that is
nearly new is thrown away when it appears that another kind soon will
earn enough to make good the waste thus entailed, and the paradox is
in the fact that the entrepreneur who quickly destroys capital
really saves it, while he who, by using the old appliances, tries to
hold on to the capital loses it, since he sacrifices profits from
which more would have come. Running his antiquated engine, the
unenterprising man has to content himself with small returns and, in
the meanwhile, sees his actual productive fund dwindling by the
deterioration of the old equipment.

The Offset for Capital destroyed by Changes of Method

What has
happened in such a case to the enterprising man is a loss of personal
capital. What he has just paid for the supplanted instruments has gone
for nothing. His financial status is improved rather than injured
because of the prospective profits which the new appliances will earn.
What has happened to the man who keeps the old machinery is a partial
or total loss of whatever he has lately put into it, not offset by
such profits. By keeping his capital goods he is losing his capital
without having his rival's assured prospect of regaining it. Whether
the gains made by those who promptly discard antiquated appliances
offset the wastes suffered by those who hold on to them too long, is a
question that requires more space than can here be allotted to it; but
the following facts determine the answer:--

(1) Instruments naturally at any one date are of an average age equal
to about half their working duration.

(2) Discarding all of one kind at any one date would involve drawing
on the fund of social capital for about one half of the amount needed
to replace these instruments.

(3) Very few are at once discarded on the invention of the improved

(4) Nothing but a fall in the price of the product created by the aid
of these old machines can prevent them from earning the remainder of
the fund required for replacing them. If they do this, they prevent
any positive destruction of capital which many inventions cause.

(5) When only one entrepreneur introduces the new appliance, his
production is usually increased, but not to an extent that causes a
quick fall in price. This affords to the users of old appliances whose
plants are not already at the final point of inefficiency a chance to
continue accumulating the fund for replacement. The profits of the
user of the better appliance are meanwhile accruing.

(6) When all entrepreneurs introduce the new appliance at once they
do so--provided that their act is intelligent--because the saving
effected in the cost of production makes the change advantageous in
spite of the waste entailed. They expect an all-round net profit
during the period before the price of the product falls to its new
level, and they expect that this will give them more than is required
for interest, cost of future replacement of the superior instruments,
and the deficit in the accounts caused by the early discarding of the
superseded appliances.

(7) Without treating this prospective profit inhering in the new
appliance as capital, we must regard it as affording an assurance that
new capital will soon appear. There are great gains to be made by
using the new appliances, and some of these will add themselves to the
permanent fund of productive wealth.

(8) The cost of the new appliances may be defrayed by their owner's
earlier accumulations or by loans. In either case they come out of a
social fund that is created mainly by the appliances which in a
preceding period have yielded special gains. The machine of to-day is
paid for from the available surplus created by the machine of an
earlier day, and a series of inventions enlarges the social fund of
capital in spite of all wastes by which it is attended.

The effect that a series of improvements has on the amount of social
capital, if we measure the fund solely on the basis of the cost of the
capital goods which embody it, may be represented thus:--The
horizontal line measures time and is graduated in years from one to
ten. The distance of the point above this base represents the amount
of capital as estimated in units of cost, in the possession of the
society at the time a particular improvement is made, and would remain
unchanged if society were static. The level of the line AB
represents what, under such a condition, would be the capital of a
decade. The curved line AB', dipping below AB and then rising
above it, expresses the fact that a single important improvement first
trenches on the amount of capital in use, and soon makes good the
deduction and makes a positive addition. It raises the sum total of
capital to the level of the latter part of the line AB'. The curved
line A'B'', first falling below A'B' and then rising above it,
expresses the fact that a second improvement, made a year or two after
the first one, makes a reduction of the amount of capital as
determined by the first improvement, and later adds more than enough
to make good this reduction. A third improvement, at the end of two or
three further years, has the effect expressed by the line A''B''';
that is, it first reduces the fund below the level at which at that
time it would otherwise have stood,--but by no means to the level at
which it stood when the series of improvements began,--and later
carries it above the line expressing the highest level it would,
without this improvement, have attained. In so far as these three
improvements affect the level of the social capital for the ten-year
period, it stands at the level indicated by the line AA'A''B''', and
no later improvement, even at the time of its introduction, does more
than to make a small reduction of the increment of capital accruing
from the products of the earlier improvements. A series of economical
changes means a perpetual increase of the social capital as well as a
perpetual improvement in the mode of applying labor. The increments of
capital due to the earlier changes are far more than is required by
the introduction of any later one.

The Impossibility of Reducing Capital by too Rapid Progress

is a theoretical question whether this series might be too rapid to
permit this result. If the interval were a month instead of several
years, and if the amount of capital put into the new appliances were
the same that, in the figure, they are represented as requiring, the
effect would be to make twelve deductions from the amount of the
social capital in the course of a year, which would carry it some
distance below its original level, while in this one year there
would have been no time for the profits to accrue in order to restore
and add to the fund. In the next year and the following ones this
would follow, and the effect, in the course of ten years, would be to
carry the social capital to a still higher level than the one it
reaches in consequence of the slower succession of economical changes.
Increasing the rapidity of productive inventions only multiplies the
additions made to the social capital.

We may summarize the chief facts concerning technical progress as

(1) Progress may throw particular men out of their present employment,
but cannot destroy the social demand for their labor. Somewhere in
society there is a place for them.

(2) If improvements were long confined to one subgroup, they might
send labor into other subgroups and even into other general groups.
Occurring as they do at nearly all parts of the system, they very
seldom require an absolute diminution of the amount of labor in a
subgroup, and practically never cause such a reduction in a general

(3) The gradual introduction of an improvement is important, since it
affords time for an increase in the social demand for the product
which is thus cheapened and for introducing at many other points
improvements which neutralize, in a large degree, the labor-expelling
effect of the first improvement.

(4) Technical gains are the largest source of additions to the total
amount of the social capital. The constant influx of new capital
facilitates the placing of laborers at the points where they are

(5) The fact that elementary utilities which are produced by
agriculture cater to a less elastic demand than do the form utilities
which are the product of manufacturing occupations, has caused labor
to move slowly from the lowest subgroups of the various series to the
upper ones, as the productive power of labor in agriculture has

(6) This movement is so gradual that it can be accomplished almost
entirely by devoting to the industries constituting the upper
subgroups an enlarged share of new laborers as they enter the field in
quest of employment. Young men drift from the farm to the village and
the city.

(7) In addition to the upward flow of labor in the series of subgroups
there are some lateral movements, or transfers from group to group, to
be taken into account. The fact that improvements are widely diffused
and that there is a succession of them at each point makes it possible
to make these lateral movements of labor in the same way in which the
movement within the groups is accomplished; namely, by putting the new
men who are entering the field of employment in the places where they
are most needed.

(8) These facts do not always prevent particular men from losing the
special benefit that skilled handicrafts have insured to them, since a
machine, to the running of which they are compelled to betake
themselves, may often be as well tended by persons who have never
learned such a handicraft.

(9) The loss thus entailed on craftsmen was very large during the
original process of supplanting hand labor by machinery, but bids fair
to be relatively small hereafter, since fewer men go through long and
costly apprenticeships, and since the operator of one machine can
usually learn to operate another with little waste of time.

(10) Such injuries as particular men now suffer from the introduction
of economical devices are, as a rule, more than atoned for even to
these men by the greater productivity of social labor, as it is
applied in new ways, and by the greater abundance of social capital.
These gains are the result of improvements made in the earlier
periods, and they benefit every one who labors.

(11) The new capital created by productive inventions is an essential
cause of the continuing gain of the working class.

(12) While most inventions at first draw capital from the social fund
to the point where they are applied, many of them soon liberate
capital by cheapening particular appliances of production, and nearly
all of them, by means of the profits they insure, ultimately add to
the social capital.

The Vital Importance of Continued Improvement

Intelligent study
will make it clear to every one that any assertion that machinery is
the enemy of labor is not merely erroneous, it is a contradiction of
the most striking and important fact connected with general progress.
The gains of labor during the past century, which have been partly due
to the occupation of areas of new land, have been largely due to the
mechanical inventions and technical discoveries which have put the
forces of nature so largely at man's disposal. These forces have
worked for all society, indeed, but they have worked largely for the
men who labor, whether in the factory, in the shop, on the railroad,
or on the farm. Their effects are all-pervasive, since they signify an
increase in the productive power of that final unit of social labor
on which wages generally depend. General riches have been and must
continue to be generally beneficent. As an isolated man working,
Crusoe-like, for himself alone, gains by every technical discovery he
can make and by everything he can add to his stock of productive
appliances, so society, the great and isolated organism which is the
tenant of our planet, reaps a benefit by every improvement it can
make, and the forces of distribution see to it that this benefit is
carried through and through the system and made to improve the
condition of the most humble members. Since the great areas of new
land are no longer available as a future resource, the hope of labor
during the coming centuries, under any form of industrial
organization, whether it be competitive or socialistic, rests on the
prospect of continued technical gains,--an unending succession of
calls on the exhaustless serving power of nature.

The Effect of Changes in the Relative Amounts of Labor and

The law of wages, as stated in an early chapter of this
work, makes it evident that an increase of population, while the
social fund of capital remains the same, would reduce the product of
marginal labor and therefore the rate of wages. In every establishment
into which more workmen should come, while its capital remained the
same in amount, the power of an individual worker to produce goods
would be lessened. Moreover, any influx of laborers into the society
as a whole would be attended by a diffusion of them among all the
groups and subgroups, so that the power of an individual laborer to
create any kind of goods would be reduced. This means that labor has
lost some of its power to create commodity, which is the concrete
name for general wealth, and its wages fall accordingly.

An influx of capital without any change in the number of laborers
would have the opposite effect. It would add to the productive power
of marginal labor. As the new capital should diffuse itself through
the producing organism it would enlarge the product of workers
everywhere. The wages of labor depend in part on a numerical ratio
between units of capital and units of labor, as they cooeperate in
production; and the change in the ratio which enlarging capital causes
improves the condition of the working people. The capital also
diffuses itself throughout the system, every subgroup gets a share of
it, and labor everywhere responds to this influence and produces more
than before. In a change in this ratio--in a gain of per capita
wealth in productive forms--lies one influence which has a great power
over human destiny and is one main cause of weal or woe for coming
generations. Method as it improves is related in two ways to this
critical change in the ratio of capital to population. It is a
prominent cause of the increase of capital. What men make by juggling
with values and putting taxes on other men adds nothing to the
aggregate wealth; but what they make by improved methods of production
causes a net addition to it. The improvement in method also directly
reenforces the influence of enlarging capital, by infusing
productivity into labor and increasing its returns.

The Resultant of the Five Dynamic Changes acting Together

So long
as the increase of capital more than offsets the increase of
population, the ultimate result of all five of the general changes
which characterize a dynamic state is to increase the well-being of
laborers. The movement of labor from point to point in the system of
industrial groups is a necessary means of securing the largest gain
for society as a whole and of diffusing the benefit among all members.
It is wage earners who are most numerous and most needy, and the
greatest benefit which can be credited to any economic influence is
that which takes the shape of a rise in wages. Moreover, an upward
trend in the rate of pay is of far greater importance than the level
of the rate at any one time. A system that should afford high present
wages would stand condemned if it precluded all chance of higher ones
hereafter; while a system that should begin with a low rate and afford
a guaranty that it should grow higher each year to the end of time
would have the most important merit which any system could possess.
The outlook it would afford for humanity would far outweigh a measure
of hardship imposed on the present generation. A present purgatory
with dynamic capabilities must in the end excel any earthly paradise
which is held fast in a stationary state.

We may represent the resultant of the actual growth of population and
of capital by the following figure:--

Measuring time by decades along the horizontal base line and the rate
of wages at the beginning of a century by the line AB, we represent
the increase in the pay of labor which would be brought about by an
increase of capital not counteracted by any other influence by the
dotted line BC, and the reduction which would be caused by an
increase of population by the dotted line BE. The line BD
describes the resultant effect of these two changes acting together,
on the supposition that during the latter part of the century the
growth of population is somewhat retarded and that the increase of
capital is the predominating influence.

We may further represent the change in the rate of wages which is
caused by improvements in method and organization by lines rising
above the one which expresses the trend of wages as it is affected
only by an increase of capital and of population.

AF measures time as before and AB the rate of pay at the beginning
of the century. The dotted line BE represents the rise in wages due
to the increase of capital, as it more than counteracts the growth of
population. The rise of the line BD above BC represents the
additional increase in wages which is brought about by improvements of
method, and finally, the rise of BC above BD expresses the further
addition to the pay of labor which comes by reason of improved
organization. The uppermost line BC describes the resultant of all
the dynamic changes on the supposition that they act in a natural way.

It will be seen that BC at first rises above BD rapidly and later
runs nearly parallel with it. This expresses the fact that while gains
insured by organization may continue for a long period, the amount of
them does not greatly increase after a fairly efficient type of
organization has been secured. On the other hand, the fact that BD
rises above BE by a wider and wider interval expresses the fact that
gains which come from technical improvements may increase for an
indefinitely long time.

The Rate of Interest contrasted with the Absolute Amount of it; this
Amount Increasing

The changes which make wages rise cause interest
to fall and there would seem to be a partial offset for the general
gain; but the chief cause of a declining rate of interest is an
increase of the total amount of capital. The size of the income
which comes to the capitalists as a class from their entire invested
wealth grows larger wherever the amount of the fund increases more
rapidly than the rate of interest falls. A million dollars yielding
four per cent gives a larger income than a half million yielding five
or six. It is a condition such as this which we have described in
outline, and it enables the holders of investments to receive a
constantly increasing total return, although the percentage yielded by
a given amount invested grows continually smaller.

The Conditions of Increasing Future Well-being

The realization of
this resultant of all dynamic forces requires that the rate of growth
of population should be subject to a natural check, that the increase
of capital should not be unduly retarded, that technical improvements
should go on, and that the organization which is effected should be of
the kind which makes for efficiency but not for monopoly. Competition
must be kept alive. In altered ways, indeed, the essential power of it
must forever dominate the industrial system, as it will do if the
state shall do its duty and not otherwise. A dynamic society requires
a dynamic government whose enlarging functions are shaped by economic

Next: The Law Of Population

Previous: Further Influences Which Reduce The Hardships Entailed By Dynamic Changes

Add to Add to Reddit Add to Digg Add to Add to Google Add to Twitter Add to Stumble Upon
Add to Informational Site Network

Viewed 1118