Economic Dynamics





The Efficiency of Static Forces in Dynamic Societies



The static

state which has thus far been kept in view is a hypothetical one, for

there is no actual society which is not changing its form and the

character of its activities. Five organic changes, which we shall soon

study, are going on in every economic society; and yet the striking

fact is that, in spite of this, a civilized society usually has, at

each particular date, a shape that conforms in some degree to the one

which, under the conditions existing at that date, the static forces

acting alone would give to it. It is even true that, as long as

competition is free, the most active societies conform most closely to

their static models. If we could check the five radical changes that

are going on in a society that is very full of energy,--if, as it

were, we could stop such an organism midway in its career of rapid

growth and let it lapse into a stationary condition,--the shape that

it would take would be not radically unlike the one which it had when

we interposed the check on its progress. Taking on the theoretically

static form would not strikingly alter its actual shape. The actual

form of a highly dynamic society hovers relatively near to its static

model though it never conforms to it. In the case of sluggish

societies this would not be true; for if in one of them we stopped the

forces of growth and waited long enough to let the static influences

produce their full effects, the shape to which they would bring the

organism would be very different from the one which it actually had

when its slow progress was brought to a stop. Most efficient in the

most changeful societies are forces which, if they were acting by

themselves alone, would produce a changeless state. The reasons for

this will later appear.



Differences between Static Forms of Society at Different Dates



A

highly dynamic condition, then, is one in which the economic organism

changes rapidly and yet, at any time in the course of its changes, is

relatively near to a certain static model. It is clear, therefore,

that it cannot, at different periods, conform even approximately to

one single model. If the forces of change which in 1800 were impelling

the industrial society of America to a forward movement had been

suppressed, and if competition had been ideally free and active, that

society would before long have settled into the shape then required by

the forces which, in the preceding chapters, we have described. Some

labor would have moved from certain occupations to others and gained

by the change; and this movement of labor would have ended by making

the productive power and the pay of a unit of this agent uniform in

all the different subgroups of the system. Capital would have so

apportioned itself as to level out inequalities in its earning power.

The profits of entrepreneurs would have been equalized by becoming

in all cases nil, and the best available methods of production would

everywhere be found surviving and bestowing their entire fruits on

laborers and capitalists. All this is involved in saying that the

static model, the form of which was determined by the conditions of

1800, would have been realized. This would have been brought about by

suppressing at that date the forces which cause organic change and by

giving to competition a perfectly unobstructed field. If we had done

this in 1900, instead of at the earlier date, economic society would,

in a like way, have conformed to the shape required by the conditions

of 1900; and this would have been very different from the shape which

the static forces would have given to society a century earlier. There

is an ideal static shape for every period, and no two of these static

shapes are alike.



Differences between the Actual Shape of Society and the Static One at

Any One Time



The actual shape of society at any one time is not the

static model of that time; but it tends to conform to it, and in a

very dynamic society is more nearly like it than it would be in one in

which the forces of change are less active. With all the transforming

influences to which American industrial society is subject, it to-day

conforms more closely to a normal form than do the more conservative

societies of Europe and far more closely than do the sluggish

societies of Asia. A viscous liquid in a vessel may show a surface

that is far from level; but a highly fluid substance will come nearly

to a level, even though we shake the vessel containing it vigorously

enough to create waves on the surface and currents throughout the

whole mass. This is a fair representation of a society in a highly

dynamic condition. Its very activities tend to bring it nearer to its

static model than it would be if its constituent materials were not

fluid and if it were never agitated. The static shape itself, though

it is never completely copied in the actual shape of society, is for

scientific purposes a reality. There are powerful influences tending

to force the industrial organization at every point to conform to it.

The level of the sea is a reality, though the motion of the waters

never subsides sufficiently to make their surface accurately conform

to it. As vigorously agitated, the water shows a surface that is

nearer to the ideal level than would an ocean of mud, tar, or other

sluggishly flowing stuff. The winds throw up waves a few feet high,

but the fluidity keeps the general surface surprisingly level; and so

civilized society, made as it is of fluid material kept in vigorous

agitation, finds, as it were, its level easily. If in any year we

could and should stop the dynamic disturbances, the economic society

would assume the static shape which the conditions of that year called

for as readily as the sea would find its normal level if winds and

tides should completely cease. Static influences that draw society

forever toward its natural form are always fundamental, and progress

has no tendency to suppress them.



Competition a Cause of Rapid Changes in the Standard Shape of Society

and of a Quick Conformity of the Actual Shape to the Standard

One



The competition which is active enough to change the standard

shape of society rapidly--that, for example, which spurs on mechanical

invention and causes a large profit to be realized in a particular

subgroup--has also the effect of calling labor and capital quickly to

the point at which the profit appears, and, in the absence of any

monopoly, reduces this profit to nil and restores, in so far as this

cause of disturbance goes, the equilibrium of the groups. Under the

influence of active competition a particular group frequently

undergoes quick changes which call for more labor and capital, but it

gets them quickly; and, as has just been said, the standard shape of

a society which is in this highly fluid condition does not differ so

much from the actual shape as does that of a society the movements of

which are sluggish. The standard shape is like the hare that moves

quickly and irregularly; while the actual shape is like the pursuing

hound, which moves equally quickly, follows closely all turns of the

course, and, if the game were to stop moving, would in short order

close on it.



The Equalization of the Productive Power of Labor and of Capital in

the Different Subgroups



We have seen that in a static state labor

and capital do not move from subgroup to subgroup in the system, and

that this absence of flow in a fluid body is not brought about by

monopoly or by any approach to it. That, indeed, would obstruct

transfers of the producing agents from point to point; but monopoly is

a thing most rigorously excluded by the static hypothesis. At every

point we have assumed that the power to move is absolute, while only

the motive is lacking. The equalization of the productive power of

labor in the various subgroups precludes the migration of labor, and a

like equalization precludes a migration of capital.



Equalization of Productive Powers within the Subgroups



Not merely

must each unit of labor or of capital be able to create as much wealth

in one subgroup as in another, but within the subgroup--the specific

industry--each unit must be able to create as much under one employer

within the industry as under another. The different entrepreneurs

must compete with each other on terms of equality, and no one of them

must be able to wrest from a rival any part of the rival's patronage.

So long as one competitor has an advantage over another in his mode

of creating a product, there is no equilibrium within the subgroup.

The more efficient user of labor and capital is able to draw away

labor and capital from the less efficient one, and the self-seeking

impulse which is at the basis of competition impels him to do it. The

producer who works at the greater advantage is foreordained to

underbid and supplant the one who works under more unfavorable

conditions. That a static state may exist and that the movements of

labor and capital from point to point may be precluded, every

competitor within a subgroup must be able to keep his business intact,

hold his customers, and retain in his employment all the labor and the

capital that he has.



Equality of Size of Productive Establishments not Necessary



Size

is, as we shall see, an element of efficiency, and the great

establishment often sells goods for less than it would cost a small

one to make them. The small manufacturer often finds that he would

best become a mere merchant, buying some of the products of the great

mill and selling them to his customers, rather than continue making

similar goods. In the general market an approach to equality of size

is usually necessary in order that competitors may be on even terms.

This does not preclude the survival of many small establishments. The

local retailers have an advantage over great department stores in the

filling of small orders. When one has to buy what costs a dollar it

does not pay to spend a dime in car-fares, and waste a dollar's worth

of time in order to secure the thing for ninety cents. Weariness to

customers is here the element that gives to the small producer his

advantage and enables him to keep that part of the business which

comes in the form of many small orders; but small producers often have

other advantages than those which depend on location. In a shop which

is more like that of a craftsman of three centuries ago than it is

like the great furniture factory, a cabinetmaker can make a single

chair of a special pattern more cheaply than the great manufacturer

can afford to do it. The great shop requires that there should be many

articles of a kind turned out by its elaborate machines in order that

the owner should get the benefit of their rapid and unerring action.

There will long be at work hand presses much like those used by

Benjamin Franklin, besides the complicated automata which do the bulk

of our printing, because for printing a dozen copies of anything the

lever press is the cheaper. There will be shoemakers who not only mend

shoes but occasionally make them for customers who want other than

standard kinds; and local tailors are sure to survive. Only in the

general market and in the making of standard goods is size essential

to success.



A Considerable Number of Competitors Assumed



The most striking

phenomenon of our time is the consolidation of independent

establishments by the forming of what are usually called trusts; and

this and all the approaches to it are precluded by the static

hypothesis. There is a question whether, after competition has reduced

the establishments in one subgroup to a half dozen or less, they would

not, even without forming a trust, act as a quasi-monopoly. This

question we have at the proper point fully to discuss, but here it is

necessary to assume that nothing which creates even a quasi-monopoly

exists. We shall find that competition usually would, in fact,

survive and be extremely effective among as few as five or six

competitors, till they formed some sort of union with each other. To

avoid all uncertainty we assume that in the static state in which

values, wages, and interest are natural and in which each subgroup has

its perfectly normal share of labor and capital, there are competitors

enough in each occupation to preclude all question as to the

continuance of an active rivalry.



Static Values and Prices



The equilibrium referred to requires that

all values should stand at their static levels, which means that the

prices of goods should be the "cost prices" of the older economists.

The entrepreneur should make no net profit on the goods he is

producing. The wages of labor must be productivity wages, since each

man must get the amount of wealth that he brings into existence.

Interest on capital needs, in like manner, to be productivity

interest, and each unit of capital must get the amount it creates.

Moreover, the prices of goods, as expressed in money, must be accurate

representations of the comparative values of goods. All these features

mark the static state; but the most obvious mark of distinction is the

absence of movement from group to group. We shall see that values are

ultimately measured in marginal labor, and as the value of money is

measured in the same way, it follows that the price of each article,

as expressed in money, is in a static state a correct expression of

the comparative amount of labor that will make it. And the entire

relation of commodities to each other and to labor can be expressed by

the medium of currency. If a unit of labor produces gold enough to

make an eagle, and if any commodity sells for ten dollars, it will be

safe to infer that it is also produced by one unit of labor. If one

commodity sells for ten dollars and another for five dollars, the

former is the product of twice as many units of marginal labor as is

the latter. This remains true only while currency continues to be in

its normal state and all other static adjustments continue complete.



Influences that disturb the Static Equilibrium



It might seem that

the influences that disturb such a static equilibrium are too numerous

to be described; and yet these changes may be classed under five

general types:--



1. Growth of Population



The supply of labor is increasing, and

this fact of itself calls for continual readjustment of the group

system.



2. Increase of Capital



The amount of capital is increasing, and

this change also disturbs the static equilibrium and calls for a

rearrangement. As far as wages and interest are concerned, the effect

of this latter change is the opposite of that which follows an

increase in the amount of labor. When people become more numerous,

other things remaining equal, their individual earning capacity

becomes smaller. The increase of capital reduces the earning power of

each unit of the supply of it and depresses the rate of interest; but

it raises the rate of wages, for it causes labor itself to act more

efficiently.



It is to be noted, indeed, that when new laborers enter society they

become consumers as well as producers, and this affects the utility

and the value of goods. When more people use a given amount of

consumers' wealth, values, measured in ultimate units of utility or

disutility, rise. An increase of capital does not directly neutralize

this effect, since it does not change the number of consumers; but it

multiplies commodities and brings down their utilities and their

values. The rise of "subjective" values which follows an influx of

laborers is an indication of diminished wealth per capita, and the

reduction of values which follows an influx of capital is a sign of

increased wealth per capita.



3. Changes of Method



Changes take place in the methods of

production. New processes are devised, improved machines are invented,

cheap motive powers are utilized, and cheap and available raw

materials are discovered, and these changes continually disturb the

static state. There are certain to be improvements on the older

methods of production, for a law of the survival of the fittest

insures this.



Under competition the process that, with a given amount of labor and

capital, turns out a larger product inevitably displaces one that

turns out less. The employer who is using the better method undersells

those who use inferior ones, and forces them either to improve their

own methods or to go out of business. Working humanity as a whole is

therefore making a constant gain in producing power, as man's

appliances equip him more and more effectively for his conflict with

nature and enable him to subjugate it more rapidly and thoroughly. It

would seem that they ought to have only good effects on wages, and in

the long run they invariably do have such effects. In the absence of

improvements there would be little hope for the future of wage

earners. The immediate effects of improvements upon individual

workers, as we shall see, are not always unqualifiedly good, but the

essential effect is the general and permanent one, and the character

of this has been attested by past experience too fully to be in

doubt. In improvements in production lies the hope of laboring

humanity. Nearly the whole earning power of the labor of the present

day is the result of improvements that have taken place in the past,

though these gains have not been secured without causing local and

temporary hardships. If in the future the wages of labor are doubled

or quadrupled, as the result of a series of improvements beginning now

and extending to a remote period, this progress cannot be secured for

nothing. The costs will be less than those attending improvements of

the past, but they will be real. The most important fact is that they

tend to become fewer and smaller and that the gains immeasurably

exceed them.



4. Changes in Organization



There are changes in the mode of

organizing the establishments in which commodities are produced, and

so far as these occur under a regime of active competition, they also

are improvements and give added power of production. The mills and

shops become larger and relatively fewer. There is a great

centralizing movement going on, since the large shop undersells and

suppresses the smaller one, and combinations unite many great shops

under one management. The effect of this, when it takes place in a

perfectly normal way, is akin to that of improvements of method. It

benefits society as a whole somewhat at the cost of individual members

of the body, and it causes wages to rise by adding continually to the

wealth-creating power of the men who earn them. We shall see that when

consolidations repress competition their effect is far from being thus

wholly beneficial, and that not only are particular persons injured by

them, but the community as a whole has a serious bill of charges to

bring against them. The securing of the gains that come by

consolidation without such evils is an end the realization of which

will tax the statesmanship of the future.



5. Changes in Consumers' Wants



The wants of consumers are

changing. They are growing more numerous as well as more refined and

intellectual. This expansion of desires follows the general increase

of productive power, since every one already wants some things that he

cannot procure, and all society has a fringe of ungratified wants just

beyond the limit of actual gratification. Even if all these wants that

are now near the point of actual satisfaction were to be satisfied,

the desires would at once project themselves farther. The mere

increase in earning power without any special education enlarges the

want scale, but intellectual and moral growth cooeperates with it in

that direction and calls latent wants into an active state. More and

more eagerly do men seek things for which the desire was formerly

dormant. Changes of this kind affect values, cause labor and capital

to move from group to group, and thus cause society as a whole to

produce less of some things and more of others. They sometimes cause

wholly new groups to appear, and draw workers and equipment from the

old ones.






Advantage of Diversity of Wants



One very marked effect of the

diversification of wants is to increase the aggregate utility of a

mass of commodity produced with a given expenditure of labor. Measure

the whole wealth available for consumption on the basis of the labor

that it takes to create it, and it will appear that it has more

utility and is worth more to society in consequence of this evolution

that is going on in the nature of the individual consumer. A given

amount of labor benefits most the men whose wants are of the most

varied character. If A, B, and C are three commodities, and if

their several utilities decline, as successive units of them are given

to a consumer, along the curves descending from the letters A, B,

and C of the diagram, it is clear that the man whose consumption is

confined to the commodity A gets less benefit from three units of

wealth than does the man who consumes A, B, and C. The utility

of the first unit of A is measured by the vertical line from A to

the line DE, that of the second by the line from A' to DE, and

that of the third by the line from A'' to DE. The utility of the

first unit of B is measured by the distance from B to the line

DE and exceeds that of the second unit of A by the difference

between the lengths of those lines. In like manner the utility of C

exceeds that of the third unit of A by the difference between the

length of the line descending from C and that of the one descending

from A''. The declining utility of the income of the man who

satisfies three wants is represented by the slowly descending curve

ABC, while the diminishing utility of the income of the man who

satisfies only one want declines along the sharply descending curve

A, A', A''.[1]



[1] For studies of the effect of diversified wants, see S. N.

Patten, "Consumption of Wealth." It will be seen that account

must be taken first of the natural expansion of the want

which comes from an increase of productive power, and second

of the changes in the quality of the wants to be gratified,

which sometimes go ahead of any change in the productive

system and call for new kinds of commodities.



Changes in Static Standards



The grand resultant of all the changes

that are going on in the more highly civilized countries is a

continual rise, not only in actual wages but in the theoretical

standard of wages. The static or "natural" rate of pay for labor

to-day is higher than it was fifty years ago and lower than it will

naturally be fifty years hence. Removing all disturbing influences and

letting society settle to-day into a perfectly static condition would

reveal the theoretical standard of present wages. Doing the same thing

after a lapse of fifty years would show what would then be the natural

or standard rate; and this would be higher than the present one. Not

only would the actual pay of labor have risen, but the standard to

which it tends to conform would have become higher after every

interval. The actual rate of wages at any one time varies from the

standard; but as both rise from decade to decade, the actual rate

hovers all the while within a certain distance of the standard one.



Effects on Values



In the same way the values of goods measured in

labor will in general be declining values. At no one time will actual

market prices accurately express the amounts of marginal labor that

are required for producing different articles, but they will

approximately express this. Articles will sell in the market for about

enough to pay for the labor that, when used as marginal labor,

suffices to produce them; and as this amount of labor put into a given

article grows less and less, the prices of the goods will actually pay

for fewer and fewer days' labor.



The standard price of anything will be the amount of money that is

needed to pay for the labor of making it, provided always that we are

careful to use only empty-handed labor in applying the test and that

we put that labor in the marginal position, as described in Chapters

IV and V, and so disentangle the product that is attributable to it

from that which is imputable to capital. If wages, as paid in money,

remain stationary, normal prices will decline and actual prices will

hover about them in their downward course, so that goods will actually

buy smaller and smaller amounts of labor, or, what is the same thing,

labor will secure as its pay more and more goods.[2]



[2] In measuring the cost of goods in labor, in Chapters IV

and V, we disentangled from the amount of goods which is the

joint product of labor and capital, the part which is

attributable to labor only. The mode of doing this is there

more fully stated. The old and crude method of using a labor

standard of value--which assumes that the product of a unit

of labor aided by capital will always buy the product of

another unit of labor aided by capital--we must take all

pains to avoid.



In connection with the cost in labor of different articles

it is to be remembered that in agriculture the effect of

improvements of method may not always suffice to counteract

the working of the so-called law of diminishing returns,

which insures, with agricultural science in a given state of

advancement, smaller products per capita when there are more

men on a given area. That this influence should preponderate

over that of improved processes requires that population

should increase with a degree of rapidity which may or may

not be maintained.





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