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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

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


The Equilibrium of Industrial Groups

The different industrial
groups are in equilibrium when they attract labor and capital equally,
and that occurs when these agents produce as much per unit employed in
one group as in another. Such equalized productivity is the bottom
fact of a static condition, and equalized pay follows from it. Wages
and interest tend to be uniform in all the groups. Efficient labor, of
course, gets in any employment more than inefficient; but labor of a
given grade gets in all the groups that make up industrial society a
uniform rate of pay, and nothing is to be gained by any capitalist or
by any laborer by moving from one employment to another. They all
therefore stay where they are, not because they cannot move freely if
they wish to do so, but because no inducement to move is offered to
them. This is a condition of perfect mobility without motion--of atoms
ready to move at a touch without the touch that would move them. The
paradox indeed holds that it is the ideally perfect mobility which has
existed in the past which positively excludes motion in the present.
At some time in the past labor and capital have gone from group to
group till they have brought about an adjustment in which they have no
incentive for moving farther. The surface of a pool of water is kept
tranquil, not because the water is not perfectly fluid, but because,
in spite of the fact that it can flow with entire freedom in any
direction if it is impelled more in that direction than in any other,
each particle of it is impelled equally in all directions. It is the
perfect equilibrium that keeps the particles from changing their
places, and fluidity has caused the equilibrium. In like manner when
labor and capital can create and get just as much in one place as in
another, they are attracted as strongly in one direction as in another
and therefore do not move. A young man of average capacity, who is
deliberating upon the choice of an occupation, will find that he can
do as well in a cotton mill as he can in a shoe factory, a machine
shop, a lumber mill, a flouring mill, or any other industrial
establishment requiring his particular grade of capacity. This is the
picture of a perfectly static industrial condition. Economic science
has to account for values, wages, and interest as they would be in
such a condition, however impossible it is that society should ever
reach exactly such a state. The values, wages, and interest in a real
market are forever tending toward the rates that would be established
if the static condition were realized.

The Sign of a Static State

The sign of the existence of a static
condition is, therefore, that labor and capital, though they are
perfectly free to move from one employment to another and would
actually do so on the slightest inducement, still do not move. They
stay where they are because they cannot find places where they can
produce the slightest amount in excess of what they now produce, and
no employer will anywhere offer any excess above the prevailing rate
of pay.

Profits and the Movements they induce the Sign of a Dynamic

Entrepreneur's profits, when they exist, mean that this
equilibrium is disturbed, and when it is so, mobility of labor and
capital affords the guaranty that a new equilibrium will be
established if no further disturbances follow. As we have said,
profits attract labor and capital, increase the output of those goods
which yield the profit, and reduce the prices of them to the no-profit
level. Workmen and capitalists then get from the entrepreneur as
wages and interest all that he gets from the public as the price of
his goods, except what he pays for raw materials.[1] In other words,
the employer sells his goods at cost.

[1] The entrepreneur of A' of our table must buy the A in
order to impart to it that utility which is his own
particular contribution. He pays as wages and interest all
that he gets for this contribution. The true product of the
entrepreneur is not the entire price of the A', but is the
difference between that and the price of the A. The entire
amount received for the A' resolves itself into wages,
interest, and cost of A; but as a rule the price of A
resolves itself practically into wages and interest only, and
when it does so, all that is paid for the A' ultimately takes
these forms. The same is then true of the finished product
A'''. The entire price of it is ultimately resolvable into
wages and interest; and in speaking of the product of an
entire group we do not need to make any reservation for raw

The case in which this statement requires qualification is
that in which the material in its rawest state still has
value, as is the case with ore and mineral oil contained in
the earth but not a true part of land in the economic sense,
since they are exhausted in the using. The price of a product
into which these elements enter includes something that
represents the value which they have in situ and before any
labor has been expended on them. It is true even in these
cases that the value of the product is measured in terms of
wages and interest, provided that the exhaustible elements
such as ore, oil, etc., are capable of being replenished, or
provided that an effective substitute for them is in process
of production by means of labor and capital. The natural raw
material is then worth what the artificial substitute costs
in terms of capital and labor, and the finished product which
contains some of the natural material sells for the amount
which the finished product costs, which is made altogether by
labor and capital applied to valueless elements in nature.

How Costs are Determined

The early studies of "natural" values, or
values which conform to costs of production, were unconscious and
imperfect attempts to attain the laws of value in a static state. In
such a state costs resolve themselves into wages and interest, and the
conception of such a static state is therefore not complete unless we
know how wages and interest themselves are determined. What we have
already said implies that they fluctuate about certain standards, just
as do the prices of goods, and that they would remain at these
standards if society were reduced to a static condition.

Significance of Static Law in a Dynamic State

An actual society is
undergoing constant disturbances. It is very far from being static;
and yet values of goods, on the one hand, and the earnings of labor
and capital, on the other, hover within a certain distance of the
standards which would be realized if the society became static. In
spite of active dynamic movements the general returns of labor and
capital can never range so far from these theoretical amounts that the
distance from them cannot in some way be measured and accounted for.
The sea, when gales are blowing and tides are rising and falling, is
anything but a static object, and yet it keeps a general level in
spite of storms and tides, and the surface of it as a whole is
surprisingly near to the ideal mathematical surface that would be
presented if all disturbances were to cease. In like manner there are
certain influences that are disturbing the economic equilibrium just
as storms and tidal waves disturb the equilibrium of the sea. We
cannot actually stop these influences any more than we can stay the
winds and the lunar attraction; but we can create an imaginary static
state for scientific purposes, just as a physicist by a process of
calculation can create a hypothetical static condition of the sea and
discover the level from which heights and depths should be measured.
No more than the economist can he actually bring the subject he is
dealing with to a motionless condition. The economic ocean will defy
any modern Canute who may try to stop its movements; but it is
necessary to know what shape and level it would take if this were

Influences that disturb the Static Equilibrium

The influences that
disturb the economic equilibrium are, in general, five. The population
of the world increases, and this is one influence which prevents
values, wages, and interest from subsiding to perfectly "natural"
standards. Capital is increasing, and this influence also acts as a
disturbing factor. The methods of producing things change, and the
changes have a very powerful effect in preventing the attainment of a
static equilibrium. New modes of organizing different industries are
coming into vogue, and this causes a further disturbance of the
economic adjustment. The wants of men are by no means fixed; they
change, multiply, and act on the economic condition of society in a
way that affects the static adjustment. Even physical nature undergoes
change, and the perishable part of the earth does so in a disquieting
way. We are using up much of our natural inheritance. As the effect of
this appears chiefly in forcing us to change our processes of
production, we shall, for convenience, limit our study to the five
changes here enumerated.

Movement Inevitable in the Dynamic State

These influences reveal
their presence by making labor and capital more productive in some
places than they are in others, and by causing them ever and anon to
move from places of less productiveness to places where gains are
greater. As we have said, this moving of labor and capital to and fro
is, like currents in the sea, a sign of a dynamic condition. As in the
static state these agents would not thus move, however fluid and
mobile they might be, so in a dynamic state they are bound to move,
because their earning powers do not remain long exactly equal in any
two employments, and they go now hither and now yon, as, in the
changeful system, openings for increased gains present themselves. If
commodities were everywhere selling at cost prices and if wages and
interest were everywhere normal and uniform, labor and capital would
not move to and fro, and this would be a proof that dynamic influences
were absent.

How an Imaginary Static Society is Created

If we wish to discover
to what standard the values of goods, on the one hand, and the rewards
of labor and capital, on the other, continually tend to conform, we
must create an imaginary society in which population neither increases
nor diminishes, in which capital is fixed in amount, in which the
method of making goods does not change, in which the mode of
organizing industry continues without alteration, and in which the
wants of consumers never vary in number, in kind, or in intensity.

Costs of Production in a Static State

We have said that in such a
static state the prices of different products are just high enough to
cover the wages and interest which are generally paid. There are
uniform or all-around rates of pay for labor and for capital, and
every man who hires workmen or gets loans from a bank has to pay them.
In the real world, full as it is of disturbances, and given over as it
is to forces of change and progress, we find that values, wages, and
interest are in general surprisingly near to these standards. In a
particular business products may for a time sell for enough to afford
a large surplus above prevailing wages and interest, and business as a
whole may, for a time, yield some such surplus; but in the absence of
monopolistic privileges no one business yields a large surplus for a
long time, and still less does business as a whole do so, though
profits may always be found somewhere within the system.

The Final Productivity of Labor

If we assume that the capital of
society is a fixed amount, we may perform an imaginary experiment
which will show how much labor really produces. We may set men at
work, a few at a time, until they are all employed, and we may measure
the product of each of the detachments. We should make the different
sections of the working force as similar to each other as it is
possible to make them and call each section a unit of labor. If there
were ten such divisions and if the quantity of capital were sufficient
to equip them all on the scale on which laborers are at present
actually equipped, it is clear that this amount of capital, when it
was lavished on one single section, must have supplied it with
instruments of production in nearly inconceivable profusion. What we
should to-day regard as a fair complement of capital for a thousand
men would nearly glut the wants of a hundred, and yet it is thinkable
that it should take such forms that they would be able to use it.

Productivity of the First Unit of Labor

We will set at work one
section which we have called one unit of labor and will put into the
hands of its members the whole capital which is designed ultimately to
equip the ten sections. It is very clear that the forms that this
capital will take cannot be the same that it will have to take when
the entire working force is using it. Indeed, we shall have to tax our
ingenuity to devise ways in which one unit of labor can utilize the
capital that will ultimately be used by ten. The tools and machines
will have to be few in number but very costly and perfect. We shall
have to resort to every device that will make a machine nearly
automatic and cause it to exact very little attention from the person
who tends it. The buildings will have to be of the most substantial
and durable kind. We shall have to spend money without stint wherever
the spending of it will make labor more productive than it would
otherwise be. If we do this, however, the product of the labor and its
equipment will be a very large one. The industry will succeed in
turning out indefinitely more goods than a modern industry actually
does, and the reason for it will be that the workmen have capital
placed in their hands in unparalleled profusion.

The Product of the Second Unit of Labor

We will now introduce a
second unit of labor, by doubling the number of workers, without
changing the amount of the capital. We must, of course, change the
forms of the capital, or it cannot be advantageously used by the
larger working force. The buildings will have to be larger, and if
they are to be erected with about the same amount of capital as was
formerly used, they must be built in a cheaper way. Tools of every
sort must be more numerous, and this larger number of tools, if it is
to represent the same investment of capital that the former number
embodied, must also be simpler and cheaper. The whole equipment of
capital goods will have to undergo a complete transmutation; but the
essential thing is that the amount of the capital should not be

A Provisional Mode of Measuring Capital

In measuring the amount of
the capital we are obliged to use a unit of cost, and in the
illustration we have assumed that the cost can be measured in dollars.
The productive fund consisted at the outset of a certain number of
dollars invested in productive operations. This is only a provisional
mode of measuring it. The money spent really represents sacrifice
incurred, and we shall find that the only kind of sacrifice that is
available for measuring the cost of goods of any kind is that which is
incurred by labor. Ultimate measurements of wealth in all its forms
have to be made in terms of labor. Such measurements have presented
difficulties, and the attempt to make them has led to serious
fallacies. We shall see, in due time, how these fallacies can be

The Law of Diminishing Productivity

Under these conditions the
second unit of labor will add something to the amount that was
produced by the first unit, but it will not cause the product to
become double what it was. It could not do that unless the capital
also were doubled. Each unit of labor is now cooeperating with one half
of the original capital, and the total product is less than it would
have been if the new labor, on entering the field, had brought with it
as full an equipment of productive instruments as was possessed by
the labor that preceded it. Adding to the industry a second unit of
labor without adding anything to the capital makes the total product
somewhat larger, but falls short of doubling it. If we credit to this
second unit of labor what it adds to the product that was created
before it came into the field, we shall find that it is a certain
positive amount, but obviously less than the total product which was
realized by the first unit and all the capital. It is even less than
a half of the product of the two units using all the capital. Perhaps
the first unit of labor, when it used all the capital, created ten
units of product; while the two units of labor, using this same
original amount of capital, produce sixteen units of product. The
clear addition to the original product which is caused by the added
labor of the second squad of workmen is only six units, while a half
of the total product after the addition to the labor has been made is
eight. This figure represents the amount we may attribute to one unit
of labor and a half of the total capital, while six represent what is
causally due to one unit of bare labor only. With all the capital
and one unit of labor we get ten units of product, while the addition
of one unit of bare labor brings the total amount up to sixteen. Six
units find the cause of their existence in the presence of the second
unit of labor, and the second unit therefore shows, as compared with
the first, a diminished productivity.

Product of the Third Unit of Labor

We will now introduce a third
unit of labor, leaving the amount of capital still unchanged, but
again altering the forms of it so as to adapt them to the needs of a
still larger working force. We will make the buildings larger and
therefore, of necessity, cheaper in their forms and materials. We will
make the tools and machines more numerous and simple, and will do
everything that is necessary in order to make the fixed amount of
capital--the fund amounting to a given number of "dollars"--embody
itself in the number and the kinds of capital goods that are requisite
in order to supply three times the original number of workmen. The
third unit of labor now adds something to the product realized by the
first two, but the addition is smaller than it was in the case of the
second unit.

Products of a Series of Units of Labor

If we continue this process
till we have ten units of labor, employing the same amount of capital
as was formerly used by one, we shall find that each unit as it begins
to work adds less to the previous product than did the unit which
preceded it, and that the tenth unit adds the least of all.

Care must be taken not to confound the addition that is made to the
product in consequence of the additional working force with the amount
which, after the enlargement of the force, is created by the last unit
of labor and its pro rata share of the capital. When the tenth unit
of labor is working, it is using a tenth of the capital and the two
together create a tenth of the product. This is more than the amount
which is added to the product by the advent of the tenth unit of
labor. That addition is merely the difference between the product of
all the capital and nine units of labor and that of all the capital
and ten units of labor. This extra product can be attributed entirely
to the increment of labor.

It is also carefully to be noted that when the units are all working
together, their products are equal and the particular one which
happened to arrive last is not less productive than the others. Each
one of them is now less productive than each one of the force of
nine was under the earlier conditions. In like manner each unit of
the nine is less productive than was, in the still earlier period,
each unit of the force of eight. At any one period, all units produce
the same amount. At any one period, then, what any one unit of labor
produces by the aid of its pro rata share of the capital is a larger
amount than what each can be regarded as producing by itself. Though
one of ten units creates, with the aid of a tenth of the capital, a
tenth of the product, of itself it creates less; for we can only
regard as its own product what it adds to the product that was
creating before it arrived on the scene. It is the bare product of a
unit of labor alone that we are seeking to distinguish from other
elements in the general output of the industry, and that consists in
the difference between what nine units of labor and all the capital
can produce, and what ten units of labor and all the capital can

We will consider the amount of capital fixed and let the amount of
labor increase along the line AE, and we will let the product of
successive units of labor be measured by the vertical distance from
the points on the line AE to the descending curve CD. AC is the
product of the first unit of labor. The product of later units is
measured by lines to the right of AC and parallel with it, which
grow shorter as the number of units increases. ED is the product of
the last unit. In each case we impute to an increment of labor
whatever amount of product its presence adds to that which was created

Summary of Essential Facts

The facts that are to be remembered
then are: first, that the capital remains fixed in amount, though the
forms of it change as the number of units of labor increases;
secondly, that that which we call the product of a unit of labor is
what that unit, coming into the field without any capital, can add to
the product of the labor and capital that were there before; and
thirdly, that this specific product of labor grows smaller as the
amount of labor grows larger, rendering the product of the last unit
the smallest of all. When the tenth and last unit is working, each one
of the nine earlier units is, of itself, producing no more than does
the final one, though it formerly produced more because of the larger
quota of capital with which it was formerly supplied.

The Test of Final Productivity

There are now at work ten units of
capital and ten of labor, and we cannot go through the process of
building up the working force from the beginning. How, then, do we
measure the true product of a single unit of labor? By withdrawing
that unit, letting the industry go on by the aid of all the capital
and one unit of labor the less. Whatever one of the ten units of labor
we take away we leave only nine working. If the forms of the capital
change so as to allow the nine units to use it advantageously, the
product will not be reduced to nine tenths of its former size, but it
will still be reduced; and the amount of the diminution measures the
amount of product that can be attributed to one unit of bare labor. Or
we may add a certain number of workmen to a social force already at
work, making no change in the amount of the capital,--though changing
its forms,--and see how much additional product we get. That also is a
test of final productivity. It gives the same measurement as does the
experiment of taking away the little detachment of men and seeing how
much the product shrinks. By either process we measure an amount that
is attributable altogether to bare labor and not to capital.

The whole area BCD in the diagram is an amount of product that is
attributable to capital and not to labor. It represents the total
surplus produced by labor and capital over the amount that can be
traced to the labor alone. The product of all the capital and all the
labor minus ten times the product of a single unit of labor is the
amount that is attributable to the productive fund only.

The area ABDE represents this amount. The last unit of labor creates
the amount DE and the number of units is represented by the amount
AE. All of them are now equally productive and what all create, as
apart from what capital creates, is the amount ABDE.

Only the Final Part of this Mode of gathering a Working Force
practically resorted To

The process of building up the working
force from a single unit is imaginary. In practical life we see the
process only in its final stage. Entrepreneurs do continually have
to test the effect of making their working forces a little larger or a
little smaller, and in so doing they test the final productivity of
labor; and this is all that is necessary. Tracing the process of
building up the force of labor unit by unit reveals a law which is
important, namely, that of the diminishing productivity of single
units of labor as the number of units increases. If we crowd the world
full of people but do not proportionately multiply working appliances
of every kind, we shall make labor poorer.

Why a Detachment of Laborers rather than One Man is treated as a Unit
of Labor

In making up the force of workers we might have treated
each individual as a unit; but we have preferred to call a detachment
a unit in order that the symmetry of the force might be preserved.
Even though we were studying only a single mill it would have its
departments, and it would be desirable that, when we enlarge the force
of men, we should be able without difficulty to give to each part of
the mill its fair share of the new laborers. If it were a shoe
factory, we should need to add lasters, welters, sewers of uppers,
etc., in a certain proportionate way, in order that one part of the
mill might not get ahead of another and pile up unfinished products
faster than they could be taken and completed.

In the last analysis the law applies to the industry of all society.
The final unit in the case consists of shoemakers, cotton spinners,
builders, foundrymen, miners, cultivators, etc., and of men of all
subtrades included in the general callings. As the composite
detachments come into the field, they apportion themselves among all
the occupations that are represented, and that too in nicely adjusted
proportions. We shall see in due time how this adjustment of the
several shares of the social force of laborers is practically made.

The Law of Final Productivity Applicable to the Labor of

The law of final productivity applies to every mill, shop,
or mine separately considered. If its capital remains fixed in amount,
units of labor produce less and less as they become more numerous. The
product of any unit at any one time may be measured by taking it away
and seeing how much the output of the establishment is reduced. The
law, however, applies to all the mills, shops, mines, etc., considered
as a social complex of working establishments. As the working society
grows larger without growing richer in the aggregate, the power of
labor to produce goods of all kinds grows less. At any one time this
producing power is measured by taking away from every working
establishment a number of its operatives and ascertaining how much
less is produced after the withdrawal. Such a test on the social scale
is never made consciously. Each employer can test in an approximate
way the effect of reducing his own force, and the effect of gradually
enlarging it, and there are influences at work which result in
enlarging one industry when others are enlarged and in causing the
final productivity of labor to be uniform in all. A shoe manufacturer
can tell, in a general way, how much an extra man or two will be worth
to him. It is possible to ascertain by experience about what number of
shoes that additional labor will, in a year, add to the output of the
shoe factory or the number of tons of steel it will add to the present
annual output of a furnace. When these products vary in the case of
different shops, the men are called to the points where the apparent
additions are largest, and the constant tendency is toward a level of
productive power. The building up of an imaginary force from the
beginning presents, in a clear and emphatic way, the fact that the
specific productivity of labor grows less as, other things remaining
the same, workers become more numerous. We should know on a priori
grounds that this must be the fact; but we can verify it by
observation and statistical inquiry. Where men are numerous and land
and tools are scarce, labor is comparatively unproductive; and it is
highly productive where land and tools are plentiful. There is no
doubt that crowding the world full of people, without providing the
world with capital in a proportionate way, would impoverish everybody
whose income depends on labor.

The Law of Wages

Even though labor creates the amount ABDE, it
is not yet perfectly clear that it will be able to get that amount.
For aught we now know the entrepreneur may keep some of it, and for
aught we know he may keep some of the quantity BCD which is
distinctly the product of capital. Let us see whether he can in
reality withhold any part of ABDE, which is the product of labor.

Wages under Perfect Competition

In the static state that we have
assumed, competition works without let or hindrance. It does not work
thus in the actual world, and we shall in due time take account of the
obstacles it encounters; but what we are now studying is the standards
to which such competition as there is--and it is in reality very
active--is tending to make wages conform. We want to know what would
happen in case this competition encountered no hindrance at all. This
would require that a workman should be able to set employers bidding
against each other for his services just as actively as an employer
can make laborers bid against each other in selling their services. If
this were the case, every unit of labor could get what it produces, no
more and no less. Even a single man, offering himself to one employer
after another, would virtually carry in his hands a potential product
for sale. His coming to any man's mill would mean more goods turned
out in a year by the mill; and if one employer would not pay him for
them at their market value, another one would. The final unit of
social labor can get, under perfectly free competition, the value of
whatever things that labor, considered apart from capital, brings into
existence. Moreover, each unit of labor by itself alone now produces,
as we have seen, the same amount of commodity as the final unit, and
can get the price of it. Now that they are all working together each
one of them can place itself in the position of the final unit by
leaving its present employment and offering its services elsewhere.

Wages regarded as Prices of Fractional Products adjusted by Perfect

Under the hypothesis of perfect competition, as the
term has been used in our discussion, the venders of goods can get
their market values. These values are fixed by the final utility law.
Free competition means, then, not only that any average laborer who
offers himself for hire virtually carries in his hands a potential but
definite product for sale, but that he may confidently offer it at the
price that is fixed by its final utility. Like other venders, the
laborer can get the true value of his product and he can get no more.
In an ideally perfect society organized on the competitive plan a man
would be as dependent on his own productive power as he would be if he
were alone in a wilderness. His pay would be his product; but that
would be indefinitely larger than it could be in a wilderness or in
any primitive state. The capital of other men and the organization
that they maintain enable a worker to create and get far more than he
could if he lived alone, even though, like Crusoe, he were monarch of
his whole environment. It would be a losing bargain for the worker to
surrender the product of mere labor in a state of civilization in
exchange for what both labor and capital create in a state of

Next: The Law Of Interest

Previous: Normal Value

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