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The Limits Of An Economic Society
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Leading Facts Concerning Money
Production A Synthesis Distribution An Analysis
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Effect Of Improvements In Methods Of Production
The Foregoing Principles Applied To The Railroad Problem
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Summary Of Conclusions
Conditions Insuring Progress In Method And Organization


Conditions Insuring Progress In Method And Organization








The Possibility of a Law of Technical Progress

It might seem that
inventions were not subject to any influence that can be described
under the head of a law. Genius certainly follows its own devices, and
inventive power that has in it any touch of genius may be supposed to
do the same. It is, however, a fact of experience that some
circumstances favor and increase the actual exercise of this faculty,
while other influences deter it. Moreover, what is important is not
merely the making of inventions, but the introduction of such of them
as are valuable into the productive operations of the world. Some
influences favor this and others oppose it, and it is entirely
possible to recognize the conditions in which economies of production
rapidly take place in the actual industry of different countries.

Technical progress has been particularly rapid in the United States,
though in this respect Germany has in recent years been a strong
rival, and ever since the introduction of steam engines and textile
machinery, England has continued to make a brilliant record. France,
Belgium, and a number of other countries of Europe have developed an
industry that is in a high degree dynamic, and Japan is now in the
lists and giving promise of holding her own against the best of her
competitors. The question arises whether it is something in the
people, or something in their natural and commercial environment,
which makes differences between their several rates of progress.

Inventive Abilities widely Diffused

In so far as originating
important changes is concerned, mental alertness and scientific
training without doubt have a large effect. Some races have by nature
more of the inventive quality than others, but within the circle of
nations that we include in our purview no one has any approach to a
monopoly of this quality. Any people that can make discoveries in
physical science can make practical inventions, and will certainly do
so if they are under a large incentive to do it. Moreover, alertness
in discovering and duplicating the inventions of others is as
important in actual business as originating new devices. At present it
is a known fact that the Germans not only invent machinery, but
quickly learn to make and to use machinery that originates elsewhere
and demonstrates its value in reducing the cost of the production; and
the remote Japanese have not only surpassed all others in the quick
adoption of economic methods that have originated in Western
countries, but have put their own touch upon them and revealed the
existence of an inventive faculty that is likely to make them worthy
rivals of Occidental races.

The Importance of Inducements to make and use Inventions

Granted a
wide diffusion of inventive ability, the actual amount of really
useful inventing that is done must depend on the inducement that is
offered. Will an economical device bring an adequate return to the man
who discovers it and to the man who introduces it into productive
operations? If it will, we may expect that a brilliant succession of
such devices will come into use, and that the power of mankind to bend
the elements of nature to its service will rapidly increase.

The Usefulness of a Temporary Monopoly of a New Device for
Production

If an invention became public property the moment that
it was made, there would be small profit accruing to any one from the
use of it and smaller ones from making it. Why should one
entrepreneur incur the cost and the risk of experimenting with a new
machine if another can look on, ascertain whether the device works
well or not, and duplicate it if it is successful? Under such
conditions the man who watches others, avoids their losses, and shares
their gains is the one who makes money; and the system which gave a
man no control over the use of his inventions would result in a
rivalry in waiting for others rather than an effort to distance others
in originating improvements. This fact affords a justification for one
variety of monopoly. The inventor in any civilized state is given an
exclusive right to make and sell an economical appliance for a term of
years that is long enough to pay him for perfecting it and to pay
others for introducing it. Patents stimulate improvement, and the
general practice of the nations indicates their recognition of this
fact. They all give to the inventor a temporary monopoly of the new
appliance he devises, but this monopoly differs from others in this
essential fact: the man is allowed to have an exclusive control of
something which otherwise might not and often would not have come into
existence at all. If it would not,--if the patented article is
something which society without a patent system would not have
secured at all,--the inventor's monopoly hurts nobody. It is as though
in some magical way he had caused springs of water to flow in the
desert or loam to cover barren mountains or fertile islands to rise
from the bottom of the sea. His gains consist in something which no
one loses, even while he enjoys them, and at the expiration of his
patent they are diffused freely throughout society.

Possible Abuses of the Patent System

It is of course true that a
patent may often be granted for something that would have been
invented in any case, and patents which are granted are sometimes made
too broad, and so cover a large number of appliances for accomplishing
the same thing. In these cases the public is somewhat the loser; but
for the reasons about to be given this loss is far more than offset by
the gain which the system of patents brings with it.

The gains of the inventor cannot extend much beyond the period covered
by his patent, unless some further and less legitimate monopoly
arises. If the use of an important machine builds up a great
corporation which afterward, by virtue of its size, is able to club
off competitors that would like to enter its field, the public pays
more than it should for what it gets; and yet even in these cases it
almost never pays more than it gets. The benefit it derives is simply
less cheap than it ought to be. Much of the power of the telephone
monopoly has been extended beyond the duration of its most important
patent, and that patent was in its day broader than it should have
been; and yet there never was a time when the use of the telephone in
facilitating business, and in saving time and trouble in a myriad of
ways, did not far outweigh the total cost which the users of
telephones incurred. As we shall soon see, important inventions
invariably confer some benefit on the public at the start. The owner
of the new device must find a market for his products, and must offer
them on terms which will make it for the interest of the public to use
them largely.

The Effect of Competition in Causing Improvements to
Multiply

Competition insures a large number of inventors and offers
to each of them a large inducement to use his gifts and opportunities.
A great corporation may employ salaried inventors and, because of its
great capital and large income, it may experiment with inventions with
far less risk to itself than an inventor usually takes. When large
corporations compete actively with one another, the employment of
salaried inventors is very profitable to them; and improvements in
production go on more rapidly than they are likely to do after these
firms consolidate with each other and cease to feel the spur which the
danger of being distanced in a race affords. It is a fact of
observation, and not merely an inference, that monopolies are not as
enterprising as competing companies.

Effects of Monopoly on the Spirit of Enterprise

In monopolies,
theoretically, there is the same inducement to adopt inventions as in
the case of competing firms, excepting always the motive of
self-preservation. The monopoly can make money by improvements as
competing firms would do. A perfectly intelligent monopoly, with
disinterested management, would adopt an improvement offered to it as
promptly as any competing firm, if the sole motive were profit. There
is no reason why an intelligent monopoly should hold on to antiquated
machinery, when modern machinery would enable it to stand the cost of
introduction and make a net improvement besides. A competing producer
gains an advantage over his rivals by discarding old machinery and
adopting new at exactly the right time, neither too late nor too
early. The true point of abandonment of the old machine, as we have
already seen, is reached when the labor and capital that now work in
connection with it can make a shade more by casting it off and making
a combination of a better kind; and this rule applies to monopolies as
well as to competitors. At just the point where a competitor can gain
an advantage over rivals by modernizing his appliances, the monopoly
can make money by doing so.

An important fact is that the monopoly has as a motive the making of
profits for its stockholders. Not only is that a less powerful motive
than self-preservation, but it appeals largely to persons who are not
themselves in control of the business. Absentee ownership is the chief
disability of the monopoly. Managers may have other interests than
those of large dividend making, and in such cases a monopoly is apt to
wait too long before changing its appliances. It needs to be in no
hurry to buy a new invention, and it can make delay and tire out a
patentee, in order to make good terms with him; and this practice
affords little encouragement to the independent inventor. On the
whole, a genuine and perfectly secure monopoly would mean a certain
degree of stagnation where progress until now has been rapid.

Why the Public depends on Competition for Securing its Share of
Benefit from Improvements

Another question is whether the two
systems, that of competition, on the one hand, and monopoly, on the
other, confer equal benefits on the public by virtue of the
improvements they make. Competition does this with the greatest
rapidity. As we have seen, it transforms the net profits due to

economies into increments of gain for capitalists and laborers
throughout all society. The wages of to-day are chiefly the
transformed profits of yesterday and of an indefinite series of
earlier yesterdays. The man who is now making the profits is
increasing his output, supplanting less efficient rivals, and giving
consumers the benefit of his newly attained efficiency in the shape of
lower prices of goods. In practice rivals take turns in leading the
procession; now one has the most economical method, now another, and
again another; and the great residual claimant, the public, very
shortly gathers all gains into its capacious pouch and keeps them
forever.

Would a secure monopoly do something like this? Far from it. It would
be governed at every step by the rule of maximum net profits for
itself. Its output would not be carried beyond the point at which the
fall in price begins really to be costly. The lowering of the price
enlarges the market for the monopoly's product and up to a certain
point increases its net gains. Beyond that point it lessens them.



Now, even the interest of the monopoly itself would lead it to give
the public some benefit from every economy that it makes. This is
because the amount of output that will yield a maximum of profit at a
certain cost of production is not the same that will yield the maximum
of net profit when the cost is lower. Every fall in cost makes it for
the interest of the monopoly to enlarge its output somewhat, but by no
means as much as competing producers would enlarge theirs. It will
always hold the price well above the level of cost. In the
accompanying figure distance along the line AK represents the amount
of goods produced, while vertical distance above the line measures
costs of production, as well as selling prices, and the descending
curve FJ represents the fall of prices which takes place as the
output of the goods is increased. Now, when the cost of production
stands at the level of the line CI, the amount of output that will
yield the largest amount of net profit is the amount represented by
the length of the line AM. That amount of product can be sold at the
price represented by the line MG. The gross return from the sale
will be expressed by the area of the rectangle AEGM, and the area
CEGN, which falls above the line of cost, CI, is net profits. They
are larger than they would be if the line MG were moved either to
the right or to the left, i.e., if the amount of production were
made either larger or smaller. Now, if the cost of production falls to
the level of the line BJ, it will be best to increase the output
from AM to AL. The whole return will then be represented by the
rectangle ADHL, and the area BDHO represents profits, with the
cost at the new and lower level. These are somewhat larger than they
would be if the output continued to be only the amount AM. Under
free competition the price would fall to the line BJ, the net
profits would disappear, and the public would have the full benefit of
the improvement in production.

The Purpose of the System of Patents

Patents are a legal device
for promoting improvements, and they accomplish this by invoking the
principle of monopoly which in itself is hostile to improvement. They
do not as a rule create the exclusive privilege of producing a kind of
consumers' goods, but they give to their holders exclusive use of some
instrumentality or some process of making them. The patentee is not
the only one who can reach a goal,--the production of a certain
article,--but he is the only one who can reach it by a particular
path. A patented machine for welting shoes stops no one from making
shoes, but it forces every one who would make them, except the
patentee or his assigns, to resort to a less economical process.

Patents Limited in Duration indispensable as Dynamic Agents

If an
inventor had no such protection, the advantage he could derive would
be practically nil, and there would be no incentive whatever for
making ventures except the pleasure of achievement or the honor that
might accrue from it. In the case of poor inventors this would be cold
comfort in view of the time and outlay which most inventions require.
Not only on a priori grounds, but on grounds of actual experience
and universal practice, we may say that patents are an indispensable
part of a dynamic system of industry. It is also important that the
monopoly of method which the patent gives should be of limited
duration. If the method is a good one and the profit from using it is
large, the seventeen years during which in our own country a patent
may run affords, not only an adequate reward for the inventor, but an
incentive to a myriad of other inventors to emulate him and try to
duplicate his success. Ingenious brains, which are everywhere at work,
usually prevent the owners of a particular patent from keeping any
decisive advantage over competitors during the whole period of
seventeen years. Long before the expiration of that time some device
of a different sort may enable a rival to create the same product with
more than equal economy, and the leadership in production then passes
to this rival, to remain with him till a still further device effects
a still larger economy and carries the leadership elsewhere. That
alternation in leadership which we have described and illustrated
takes place largely in consequence of our system of patents; and yet
every particular patent affords a quasi-monopoly to its holder. The
endless succession of them insures a wide diffusion of advantages. At
the expiration of each patent, even if it has not been supplanted by a
later and more valuable one, the public gets the benefit of the full
economy it insures, and wherever an unexpired patent is supplanted by
a new one, the public gets this benefit much earlier. Cost of
production tends rapidly downward, and the public is the permanent
beneficiary.

Patents as a Means of Curtailing Monopolies

While a patent may
sometimes sustain a powerful monopoly it may also afford the best
means of breaking one up. Often have small producers, by the use of
patented machinery, trenched steadily on the business of great
combinations, till they themselves became great producers, secure in
the possession of a large field and abundant profit. Moreover, in the
case of a patent which builds up a monopoly and continues for the full
seventeen years of its duration unsupplanted by any rival device, the
public is likely to get more benefit than the patentee, or even the
company which uses his invention. In widening the market for its
product the company must constantly cater to new circles of marginal
consumers, and must give to all but the marginal ones an increasing
benefit that is in excess of what it costs them. Probably few patents
have been issued in America which illustrate the unfavorable features
of the system more completely than did the Bell telephone patent,
which gave to a single company during a long period a monopoly of the
telephone business; and yet there are few men of affairs who do not
perceive that, in the saving of time which the telephone effected and
in the acceleration of business which it caused, they gained from the
outset more than they lost in the shape of high fees. Something of the
same kind is true of the users of domestic telephones; for though they
may cost more than they should, they do their share toward placing
those who use them on a higher level of comfort.

The Law of Survival of Efficient Organization

In broad outlines we
have depicted the conditions which favor technical progress. There is
a law of survival which, when competition rules, eliminates poor
methods and introduces better ones in endless succession. Under a
regime of secure monopoly this law of survival scarcely operates,
though desire for gain causes a progress which is less rapid and sure.
The same may be said of changes in organization, in so far as that
means a cooerdinating of the labor and the capital within an
establishment. When the manager of a mill so marshals his forces as to
get a much larger product per man and per dollar of invested capital
than a rival can do, he has that rival at his mercy and can absorb his
business and drive him from the field. In order to survive, any
producer must keep pace with the aggressive and growing ones among his
rivals in the march of improvement, whether it comes by improved tools
of trade or improved generalship in the handling of men and tools.
Quite as remorseless as the law of survival of good technical methods
is the law of survival of efficient organization, and so long as the
organization is limited to the forces under the control of single and
competing entrepreneurs, what we have said about the advance in
methods applies to it. It is a beneficent process for society, though
its future scope is more restricted than is that of technical
improvement, since the marshaling of forces in an establishment may be
carried so near to perfection that there is a limit on further gains.
Moreover organization, in the end, ceases to confine itself to the
working forces of single entrepreneurs, but often continues till it
brings rival producers into a union.

The Extension of Organization to Entire Subgroups

Both of these
modes of progress cause establishments to grow larger, and the
ultimate effect of this is to give over the market for goods of any
one kind to a few establishments which are enormously large and on
something like a uniform plane of efficiency. Then the organizing
tendency takes a baleful cast as the creator of "trusts" and the
extinguisher of rivalries that have insured progress.

When monster-like corporations once start a competitive strife with
each other, it is very fierce and very costly for themselves; and this
affords an inducement for taking that final step in organization which
brings competition to an end. That is organization of a different
kind, and the effects of it are very unlike those of the cooerdinating
process which goes on within the several establishments. In this, its
final stage, the organizing tendency brings a whole subgroup into
union, and undoes much of the good it accomplished in its earlier
stage, when it was perfecting the individual establishments within the
subgroup. While the earlier process makes the supply of goods of a
certain kind larger and cheaper, the final one makes it smaller and
dearer; and while the earlier process scatters benefits among
consumers, the final one imposes a tax on consumers in the shape of
higher prices for merchandise. Yet the union that is formed between
the shops is, in a way, the natural sequel to the preliminary
organization which took place within them and helped to make them few
and large. Trusts are a product of economic dynamics, and we shall
study them in due time. The organization we have here in view is the
earlier one which takes place within the several establishments. It
obeys a law of survival in which competition is the impelling force,
though it leads to a condition in which an effort is made to bring
competition to an end. This earlier organization is most beneficent in
its general and permanent effects; and what has been said of the
results of progress in the technique of production may, with a change
of terms, be said again of progress in the art of cooerdinating the
agents employed. It is a source of temporary gain for entrepreneurs
and of permanent gains for laborers and capitalists. It adds to the
grand total of the social product and leaves this to be distributed in
accordance with the principle which, in the absence of untoward
influences, would treat the producers fairly--that which tends to give
to each producer a share more or less equivalent to his contribution.
In its nature and in its results it is the opposite of that other type
of organization which seeks to bring competitive rivalry to an end,
and in so far as it succeeds divorces men's contributions to the
social product from the shares that they draw from it.





Next: Influences Which Pervert The Forces Of Progress

Previous: The Law Of Accumulation Of Capital



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