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The Limits Of An Economic Society
Wages
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


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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 Law Of Interest
The Foregoing Principles Applied To The Railroad Problem
Summary Of Conclusions
Conditions Insuring Progress In Method And Organization


Normal Value








Natural Supply

We have attained a law of market value, which
determines the price at which a given amount of any commodity will
sell, and have taken a quick glance at the influence which fixes the
amount that is offered and thus furnishes a natural standard to which
the market value tends to conform. At any one moment the amount which
is supplied is an exact quantity, and if it all has to be sold, it
will bring a price which is fixed by the final utility of that amount
of the commodity. If the quantity offered for sale should become
greater or less, the final utility and the price would change. Final
utility controls the immediate selling price, and if that is above the
cost of production, a margin of gain is afforded which appeals to
producers, sets competition working, and brings the quantity made up
to the full amount which can be sold at cost. The amount of the supply
itself is therefore not a matter of chance or caprice. It is natural
that a certain quantity of each article should be supplied, and that
the price should hover about the level which the final utility of that
quantity of the good fixes. "Natural" or "normal" price is, in this
view, the market price of a natural quantity.

Cost as a Standard of Normal Price

It is commonly and correctly
stated that the normal price of anything is that which just covers the
cost of producing it. Cost in this case is the total amount of money
that the entrepreneur pays out in order to bring the commodity into
existence. He buys raw materials and pays for all the labor and
capital that transform them into a new and saleable shape. If he can
make a net profit, he does so; but competition tends to adjust the
quantity produced and the consequent price in such a way that he can
make no net profit. What he gets for the article will then reimburse
him for his total outlay, but it will do no more. Since the quantity
produced is normal when it brings the market price to this level of
cost, it appears that the cost is the ultimate standard in the case.
The quantity supplied varies till it causes the market price just to
cover the cost; and so long as the quantity supplied is thus natural,
other influences remaining the same, the price is so. This states the
cost of production in terms of money paid by an entrepreneur and the
returns from the operation as money received by him; but there is a
more philosophical way of conceiving the law of cost, and to this we
shall soon recur.

Elements of Cost

Whatever the entrepreneur has to pay for in the
production of an article is of course an element in its monetary cost
to him. If he does not begin the making of it by drawing his raw
materials from what nature freely furnishes, he must pay some one for
the raw material. He must also pay for the labor, and this is
equivalent to buying the fraction of the article that is produced by
labor; for the laborer, as we have seen, is the producer of a certain
fractional share of the article and the natural owner of that share,
and when he agrees to let his labor for hire, what he really does is
to sell out his individual interest in the forthcoming product of the
industry in which he is about to engage. When a workman in a shoe
factory agrees to work for two dollars and a half a day, he really
contracts to sell every day for that amount a certain quantity of
shoes. The leather is one element which enters into the finished
shoes, and therefore the entire shoe is not really made in the
factory; but of the part which is there made, namely, the utility that
results from transforming the leather into shoes, one part is made by
labor and another by capital. The entrepreneur has to buy both of
these if he is to acquire a valid title to the product and have a
right to sell it. These costs are therefore "purchase money" paid for
undivided shares of goods.

Labor of Management

It usually happens that an entrepreneur, or
employer of labor and capital, performs some labor himself; and we
have already noted the reason for this in the fact that the kind of
labor that he performs is so important that the fate of the business
often depends on it. He may manage the business so well as to make it
succeed or so ill as to make it fail. He pays himself for this labor
when he draws a salary for his services. As an entrepreneur he
treats his own labor as he does that of any one else and buys the
fraction of the product of his business that his own labor of
management has created. In this he illustrates the general law that
all payments of wages are payments of the purchase of a certain
quantity of product. Though the owner's own contribution to the
product is not always mentioned in terms in the accounting, that is
what his salary is paid for, though it is spoken of as a payment for
his "time," or his labor.

The Capitalist as the Vender of a Share in a Product

Capital, as
we have seen, also contributes a definite share toward the total
amount of every product in the making of which it cooeperates. Labor
does not do all the transforming of leather into shoes which is done
in the factory, since machines, fuel, etc., help; and we shall later
find that there is a way of determining how much of the product the
help so given creates. It adds a certain amount to what labor can
claim as its own special product, and the man who owns the capital
becomes the lawful claimant for this additional share. When he agrees
to let his capital work for an employer, he virtually sells to the
employer the undivided share of the product--shoes or what not--that
the capital really creates. The furnisher of productive instruments,
like the furnisher of labor, is a vender, and the entrepreneur is a
buyer.

Entrepreneur and Capitalist

As was stated in an earlier chapter,
an actual employer nearly always furnishes some of the capital that he
uses. If he did not do so, he would have difficulty in borrowing more,
since banks or other lenders do not loan to empty-handed men. It is
clear that what the employer gets in return for such capital as he may
put into the business is in reality a payment for a contribution which
that particular part of the capital makes to the product. Since each
bit of capital in an establishment contributes something toward the
creating of the product, the employer's own capital has the same right
to the value of its contributary share as has the capital of any one
else. What the employer-capitalist gets for capital the employer,
pure and simple, pays. As the furnisher of instruments the man is a
vender of the product of these instruments, while as an entrepreneur
proper he is the buyer. He must purchase the product of his own
capital just as he purchased the product of his own labor. In paying,
therefore, wages for all labor, including what he performs himself,
interest on all capital, including his own, and the price of raw
materials, he gets something which, if competition does a perfect
work, he has to sell for what he gives for it. The shoes, when he
sells them, tend, under active competition, to yield only what has
been paid for them in the making and, in a perfectly static state,
would actually yield no net profit. All the entrepreneur's costs,
therefore, resolve themselves into purchase money paid, his receipts
are money accruing from sales; and under ideally free competition the
two sums total are equal.

The Entrepreneur's Proper Function not Labor of Management

In some
theoretical discussions the management of a business figures as the
principal function of the entrepreneur, and all or nearly all of the
reward that comes to him is represented as coming in the shape of a
reward for a responsible kind of labor that calls great abilities into
requisition. But it is very clear that, whether he personally performs
any labor or not, the employer has a distinctly mercantile function to
perform; and this in itself is totally unlike the work of overseeing
the mill, the shop, or the salesroom. He acquires a title to the whole
product by paying for the contributions which labor and producers of
raw material separately make toward it, and then parts with the
product; and if he gets any more than he has paid out, he makes a
profit. When industry is in what we have termed a dynamic state, such
a difference between the value of the product and the cost of the
elements that go into it is continually appearing, and that, too,
largely in consequence of causes over which, as a mere manager, the
employer has no control. A profit so gained cannot be wages of
management. It is a purely commercial gain, or a difference between
what is paid for something and what is received for it.

Mercantile Profit

It is best, therefore, to distinguish in some
perfectly clear way between that function of the entrepreneur, which
consists in buying and selling, and any work that he may find it best
to do in the way of superintending the business. At the cost of using
the term entrepreneur in a stricter sense than the one customarily
attached to it, we will make this word describe the purely mercantile
functionary who pays for the elements of a product and then sells the
product. The reason for the very division between gains from this
source and gains from management we shall soon appreciate, for we
shall see that competition tends to reduce one of these incomes to
nothing, but tends to perpetuate the other and to make the amount of
it conform to a positive standard. The entrepreneur, as we shall use
the term, is neither the manager nor the capitalist, and when we have
occasion to speak of either of these functionaries, we shall call him
by his own distinctive name; though we know perfectly well that, in
actual business, it is desirable and often quite essential that the
same one who acts as an entrepreneur should also put into the
business some labor as well as some capital. A man who performs two
unlike functions, buying and selling, on the one hand, and managing
the business, on the other, serves in two capacities that are clearly
distinguished from each other; while if he furnishes any of the
capital, he adds to these a third capacity entitling him to the value
of the product of his capital. As a manager he directly aids in
producing goods, and he gets pay for so doing from his other self, the
entrepreneur, who acquires the title to the goods; as a capitalist
he has another legitimate claim upon himself as entrepreneur.

These Distinctions recognized in Practical Accounting

That this is
no bit of mere theoretical subtlety is proved by the fact that the
bookkeeping of nearly all establishments distinguishes between these
two incomes by actually putting an appraisal on the work the employer
does and paying a salary for it. A man may be a large owner of stock
in a corporation and yet receive a salary that is fixed by an estimate
of what an equally useful man could be hired for. If personal
influence secures more for him than this, the excess is taken from the
pockets of the stockholders, and the amount of it is accounted for in
a way that does not fall within the scope of pure economic law.

How "Natural" Prices exclude Entrepreneur's Profits

The old and
correct view is that the tendency of competition is to make things
sell for enough to cover all costs, as we have defined them, and no
more. Under a different phraseology this is what Ricardo and others
have rightly claimed. They were unconsciously explaining what would
happen in a static state, for if society were actually in this state,
the goods that come out of the factory would be worth just enough to
reimburse the owner for all the outlays that can be called costs. If
they sell for more than this, there is to be had from the business an
income that costs nothing. It is a net profit above all claims based
on personal labor or on the aid furnished by capital, and it furnishes
an incentive for enlarging the business, and labor and capital are
therefore drawn into it. Entrepreneurs bring them and for a time
make a profit by this means; but as their presence increases the
output of goods that are here made, it brings down the price till
there is no inducement to move any more labor and capital in this
direction.

The Significance of a Natural Adjustment of Different
Industries

The "natural" state of general industry is that in which
each particular branch of it is in the no-profit state. It is as
though laborers and capitalists in a shoe factory took all the shoes
that it turns out, sold them in a market, paid for the raw material
out of the proceeds, and kept the remainder, dividing it between
themselves in proportions which corresponded with the amounts they had
severally contributed toward the making of this product; and as though
the laborers in cotton mills and iron foundries received the goods
there made and dealt with them in a like manner. It is as though in
every branch of business the whole product were turned over in kind to
the furnishers of labor and capital.

The Entrepreneur a Passive Functionary under Static
Conditions

Purely passive is the function of the entrepreneur
under static conditions. In so far as any effect on his income is
concerned he might as well reside in a foreign land as in the one
where his business is located, provided always that the management
were unaffected. When the same man is both entrepreneur and manager,
the absence of the first of these functionaries would mean the absence
also of the second, and that would cause trouble; but the purely
mercantile operation of getting a title to a product and then
surrendering it can be carried on as well in one place as in another.
The entrepreneur in his capacity of buyer and seller does not even
do the work which purchases and sales involve. That is commonly done
by agents. Some of it, of course, may be done by the responsible
manager himself, and if that person is also the entrepreneur, it
follows that he does a part of the commercial labor of his business.
In this, however, he goes beyond his function as entrepreneur. In
that capacity he does, as we have said, no labor of any kind. Sales
and purchases are made in his name, but he does none of the work that
leads up to them.[1]

[1] The holders of common stock in a corporation are always
entrepreneurs, and they are also capitalists if the stock
represents any real capital actually paid in. If the bonds
and the preferred stock represent all the real capital that
there is, any dividends that may be paid on the common stock
are a pure entrepreneur's profit. If, on the other hand,
the stock all represents money actually put into the
business, the dividends on it contain an element of net
profit if they exceed simple interest on the capital and
insurance against the risks that are not guarded against by
actual insurance policies. If the rate of simple interest is
four per cent, and the value of the unavoidable risk is one
per cent, then a dividend of six per cent contains a pure
entrepreneur's profit of one per cent. In dynamic
conditions such a return is often to be expected, and we
shall soon study the conditions that afford it.

In the present study we do not need to consider risks,
inasmuch as the greater part of them arise from dynamic
causes; that is, from the changes and disturbances to which
the business world is subject. An invention promises greatly
to cheapen the production of some article and, for a time, to
insure large returns for the men who first utilize it. A
capitalist may be willing to take a risk for the sake of
sharing this gain; but in time both the risk and the gain
will vanish. The capacity of the new appliances will have to
be tested, a market for their output found, etc. A small
remainder of risk is still entailed upon the capitalist if he
leaves his money in this business. The death of the managing
partner, the defaulting of payments for goods sold, the
chances of unwise or dishonest conduct on the part of clerks
or overseers, always impend over a business, but these
dangers are at a minimum when the man who is at the head of
the force of managers has capital of his own in the business.
Risks are at a static level only when they are thus reduced;
and for our present purpose it is best to consider that
competition has eliminated the establishments where any
recklessness has been shown in the management, and that the
unavoidable remainder of risk resolves itself, nearly enough
for practical purposes, into a deduction from the product
which the surviving establishments turn out in a long period
of time. A small percentage of their annual gains, set aside
for meeting unavoidable losses, will make good these losses
as they occur and leave the businesses in a condition in
which they can yield as a steady return to owners of stock,
to lenders of further capital, and to laborers all of their
real product.

How the Entrepreneur contributes to Production under Dynamic
Conditions

In a dynamic state the entrepreneur emerges from this
passive position. He makes the supreme decisions which now and again
lead to changes in the business. "Shall we adopt this new machine?"
"Shall we make this new product?" "Shall we enter this new market?"
are questions which are referred to him, and on the decisions he
reaches depends the prospects of profit for the business. This
activity is not ordinary labor, but in a true sense it is a productive
activity, since it results in placing labor and capital where they can
produce more than they have done and more than they could do were it
not for the enabling act of the entrepreneur which places them on a
vantage ground of superiority. This subject will be discussed in a
later chapter and in connection with other phases of economic
dynamics.

Values at a Static Level only when Entrepreneurs' Gains are
Nil

Any net profit on an entrepreneur's part means that his
product is selling for more than the elements of it have cost him. But
this is a condition which, if labor and capital are as mobile as the
static hypothesis requires that they should be, will cause this
entrepreneur and others to move labor and capital into his industry,
thus increasing its output and lowering the selling price of its
product. If there is no such action going on, it shows that the
entrepreneurs have no incentive for taking it.

Values at a Static Level only when the Gains of Labor in the
Different Industries are Equalized

If labor is creating more in one
subgroup than in others, as it often is in a dynamic condition, that
fact means that some entrepreneurs are making a profit, and,
according to the principle stated in the preceding paragraph, this
means that values are not at their static or "natural" level. If,
owing to new methods or to some other cause, a given amount of
labor[2] in the subgroup that produced the A''' of our table creates
an amount of that product which sells for more than the B''' or the
C''' which labor of like quantity makes, then the manufacturers of
A''' would obviously get a margin of profit. They would not be obliged
to pay for labor any more than the market rate, and that, as we shall
see, cannot exceed what labor produces in the groups B''' and C'''. In
A''' the labor creates more and the employer pockets the difference.
In saying this we assume one fact which we undertake later to prove;
namely, that there is a definite amount of each product which can be
attributed to labor alone as its producer. Capital and labor work
together, but each is, in effect, the creator of a certain fraction of
their joint product.

[2] In measuring labor we, of course, take account of the
quality of the men who perform it, and the work of a skillful
man is counted as more units of labor than that of an
unskillful one.

Values Static only when the Gains of Capital in Different Industries
are Equalized

If capital is creating more in one industry than in
another, there is a margin of profit for the entrepreneurs in the
exceptionally productive industry. They pay as interest on the capital
they use only the market rate, which is what equal amounts of capital
can produce and get elsewhere. If they produce more in the one group,
the entrepreneurs there can pocket the excess as they did in the
case of the product of labor. We assume that there is everywhere a
definite product that can be attributed to capital alone.

Values Normal when Moneys paid out by Entrepreneurs equal Moneys
Received

In the preceding paragraphs we have spoken of exchange
values as being static under certain conditions, but we might have
expressed the essential fact by saying that prices are static under
these conditions since the money a product brings is a true
expression of its value. If A''' sells for as many dollars as does
B''', the two things exchange for each other. In like manner the
product of labor and that of capital may be expressed in terms of
money, since the quantities of goods which they respectively make sell
for certain sums. Wages and interest are nearly always conceived in
terms of money. The commercial mode of computing costs of production
and returns from production is to translate them into moneys paid by
entrepreneurs and moneys received.

Costs of Production as related to Static Incomes

What to an
entrepreneur are costs are to workmen and capitalists incomes. The
one pays out wages and interest, and the others get them; and these
two sums are normal when together they equal the prices received for
goods produced. The entrepreneur is the universal paymaster, and in
a static condition all incomes come from his hand.





Next: Wages

Previous: Value And Its Relation To Different Incomes



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