Capital As Affected By Changes Of Method

Labor Saving and Capital Concentrating

There is a common

impression that whatever saves labor usually requires an increase of

capital in the industry where the economy is secured, and this

impression is justified by the experience of the century following the

invention of the steam engine and the early textile machinery. Hand

spinning and weaving require small amounts of fixed capital, while the

/> mills in which spinning and weaving are done by steam or water power

require a great deal. Fortunately in any long period this capital

comes as abundantly as it is needed from the profits of the very

business that calls for it and does not reduce the capital of other

industries. The profit of one year furnishes the new instruments

required in the next; but the immediate effect of substituting a

costly machine for hand labor is to concentrate capital, or to call it

from places to which it would otherwise go.

The Liberation of Capital by Invention

For a long period it was

the general rule that a mechanical invention at first called capital

to the point at which it was applied, although it afterward created

new capital and sent it away to make more than good the draft it

originally made. This rule is no longer universally applicable. When

an invention cheapens capital goods, it liberates capital. It is

clear that a hundred and twenty-five years ago there was small chance

that an invention would liberate very much capital by reducing the

cost of making tools, buildings, rails, machinery, etc., since there

were so few of them to cheapen. Now that machines are at hand in

myriad forms the chance is large that an invention will substitute for

many of them others of less costly construction. It will in these

cases cause less capital to be required per machine than was formerly


Simplifying the Forms of Machinery and Cheapening the Materials of


The history of invention shows that the early machines sometimes

took cumbersome and expensive forms, for which simple and cheaper

forms were later substituted. Much simplifying of mechanical

appliances is all the while going on, and this, of course, liberates

some capital. Making instruments of any kind out of cheaper materials

has the same effect that anything has which reduces the cost of

constructing the instruments. Bessemer steel has made rails, bridges,

ships, buildings, steam boilers, and a vast number of mechanical tools

and appliances less costly than they were, and so has liberated some

of the capital which such things formerly embodied. After one of the

machines of the costlier type has earned the fund on which its owner

relies for replacing it as it is worn out, it appears that a part of

this fund will suffice for procuring a perfectly good substitute for

it, and the remainder may be used for procuring other appliances of


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

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

A' B' C' H'


Cheapening the Process of Making Instruments

If we recur to the

table which represents the groups of the industrial system, we shall

see that improvements of method in the general group H-H''' have the

effect of liberating capital in the other groups and subgroups. H'''

is the comprehensive symbol that represents active instruments of all

kinds. It is engines and boilers, looms and spindles, lathes and

planers, rails, cars, bridges, tunnels, canals, ships, buildings, and

all the myriad instruments which actively aid man in making the things

he wants for consumption. New methods at H-H''' make the supply of

all these things cheaper, which means that the labor and capital of

the group H-H''' which would have been required for replacing the

instruments used in the other groups will more than suffice for that

purpose, and a part of their time may be given to making machinery,

etc., not formerly used. This amounts to liberating a part of the

fixed capital in the three groups producing A''', B''', and

C''', although the free capital that is thus gained may in part be

used in furnishing additional appliances for use in these same groups.

Local Concentration of Capital which causes a General Liberation of


In such a case the new method used at H''' may, at its

introduction, require more capital than was formerly used at that

point in the system. Building Bessemer converters was a costly

operation, though the output of cheap steel afterward saved far more

capital than the converters required. The power canals of Niagara cost

something, but the products created by means of them are cheapening

many tools of industry; and like effects follow most applications of

electricity for utilizing waterfalls and carrying to great distances

the power which they generate. They follow on a considerable scale as

the culm of coal mines is economically burned and made to generate

steam and drive dynamos. All cheapening of transportation, besides

making consumers' goods cheaper, has the same effect on producers'

goods, and by this means liberates capital. It causes a single

productive appliance to cost less than it otherwise would cost and

renders available for other purposes a part of the outlay that was

formerly required for replacing it at the end of its industrial


Effect of Speeding Machinery

Increasing the speed of a machine is

a capital-liberating operation, since it enables a certain number of

machines to do the work of a larger number. Running spindles and looms

rapidly, while it requires fewer laborers for a given amount of

product, requires fewer spindles and looms also.

Cases in which Liberated Capital remains partly in the Same Industry

in which it has been Used

A distinction has carefully to be made

between causing less capital to be used per unit of physical

product, and causing less to be used in a particular occupation

without regard to the amount of the product. If we cheapen the

operation of cloth making, we shall increase the consumption of cloth,

and in this way we may draw new capital into this business, even

though we can build and equip a mill of a given capacity more cheaply

than before. In this case we have liberated capital in this business

and at once reemployed it at the same point. If we use as many looms

as before, the more rapid running calls for more spindles to furnish

yarn, and the new spindles require larger engines and boilers, or more

water wheels, wheel pits, and reservoirs, to furnish power. Enlarging

a business in this way usually calls for an enlarged general capital

in the industry, though it calls for less capital for a given

output; and the striking fact is that this effect may be realized by

means of devices which actually save capital at particular points in

the industry. If, after power looms were introduced, some inventive

genius had made them cost only a quarter as much as on their first

introduction they had cost, the profits of the business would have

been increased and, in time, far more capital in the shape of spinning

machinery, engines, etc., would have been required than had formerly

been used in those forms. With general growth of population and wealth

the increased consumption of cloth calls, in the end, for more capital

in the form of the looms themselves.

General Consumption as affected by a Specific Increase of Productive


Consumption in the generic--the use of consumers' goods of

every kind--grows as the power to make the good increases; but a point

that is of great importance is that any specific increase of

productive power brings about a general increase of consumption. It

brings about a greater all-round creating and using of commodity. If

we can hereafter make the A''' of our table with the expenditure of

half as much labor and capital as we have heretofore used in creating

it, the liberated agents of production become available for making

whatever is most needed, and they will, in fact, be used for

increasing the supply of all three types of consumers' goods

represented in the table. They will give us more of A''', B''',

and C''' in quantities adjusted by the laws of value. The outcome of

this is that an economy in making A''' actually gives us more of

A''', B''', and C'''. We become larger consumers of everything

because of the cheapening of anything which enters into our list of

articles for personal use. This presents a further aspect of the

process of moving labor and capital from group to group, in which the

possibility of hardship for particular persons inheres. The conclusion

to which a fair weighing of the effects of mechanical progress has

already led us is that there are very few, even of the workers who

suffer displacements of this kind, who do not during their lives gain

far more than they lose by general progress; and the effects of

cheapening capital goods at one point, and so liberating capital for

use at other points, increases this beneficent effect. The special

costs of making the new kinds of machinery have been large in the

earlier stages of the process, but have afterward grown smaller; and

as machinery has come into general use the liberating of capital by

the cheapening of the machines has become a more and more important

factor. Some of the capital liberated at A goes to assist labor in

furnishing the additional amount of B''' and C''' which enlarged

consumption requires.

Hardships entailed on Capitalists by Progress

As the old

handicrafts have now been largely supplanted by machinery, and the

hardship that continuing progress entails on laborers is greatly

reduced, there is involved in progress a new burden which falls

altogether on the capitalist employer. The machine itself is often a

hopeless specialist. It can do one minute thing and that only, and

when a new and better device appears for doing that one thing, the

machine has to go, and not to some new employment, but to the junk

heap. There is thus taking place a considerable waste of capital in

consequence of mechanical and other progress. As there have come into

use marine boilers made of steel and capable of standing a very high

pressure, the low-pressure boilers of former days have become useless.

With the advent of triple expansion cylinders, twin screws, and better

and larger hulls, ships of the old type lost their value; and similar

things are occurring in every line of production. A new mill is built

and equipped with the best machinery known at the date of its

building; but before a year has gone by all the machines in one

department are so antiquated that it is best to throw them out.

Indeed, a quick throwing away of instruments which have barely begun

to do their work is often a secret of the success of an enterprising

manager; but it entails a destruction of capital. What is easily to be

seen is (1) that a single change of that kind makes an immediate draft

on the general fund of available social capital; and (2) that this

draft, as a rule, is soon repaid with increase. Machinery that is

nearly new is thrown away when it appears that another kind soon will

earn enough to make good the waste thus entailed, and the paradox is

in the fact that the entrepreneur who quickly destroys capital

really saves it, while he who, by using the old appliances, tries to

hold on to the capital loses it, since he sacrifices profits from

which more would have come. Running his antiquated engine, the

unenterprising man has to content himself with small returns and, in

the meanwhile, sees his actual productive fund dwindling by the

deterioration of the old equipment.

The Offset for Capital destroyed by Changes of Method

What has

happened in such a case to the enterprising man is a loss of personal

capital. What he has just paid for the supplanted instruments has gone

for nothing. His financial status is improved rather than injured

because of the prospective profits which the new appliances will earn.

What has happened to the man who keeps the old machinery is a partial

or total loss of whatever he has lately put into it, not offset by

such profits. By keeping his capital goods he is losing his capital

without having his rival's assured prospect of regaining it. Whether

the gains made by those who promptly discard antiquated appliances

offset the wastes suffered by those who hold on to them too long, is a

question that requires more space than can here be allotted to it; but

the following facts determine the answer:--

(1) Instruments naturally at any one date are of an average age equal

to about half their working duration.

(2) Discarding all of one kind at any one date would involve drawing

on the fund of social capital for about one half of the amount needed

to replace these instruments.

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


(4) Nothing but a fall in the price of the product created by the aid

of these old machines can prevent them from earning the remainder of

the fund required for replacing them. If they do this, they prevent

any positive destruction of capital which many inventions cause.

(5) When only one entrepreneur introduces the new appliance, his

production is usually increased, but not to an extent that causes a

quick fall in price. This affords to the users of old appliances whose

plants are not already at the final point of inefficiency a chance to

continue accumulating the fund for replacement. The profits of the

user of the better appliance are meanwhile accruing.

(6) When all entrepreneurs introduce the new appliance at once they

do so--provided that their act is intelligent--because the saving

effected in the cost of production makes the change advantageous in

spite of the waste entailed. They expect an all-round net profit

during the period before the price of the product falls to its new

level, and they expect that this will give them more than is required

for interest, cost of future replacement of the superior instruments,

and the deficit in the accounts caused by the early discarding of the

superseded appliances.

(7) Without treating this prospective profit inhering in the new

appliance as capital, we must regard it as affording an assurance that

new capital will soon appear. There are great gains to be made by

using the new appliances, and some of these will add themselves to the

permanent fund of productive wealth.

(8) The cost of the new appliances may be defrayed by their owner's

earlier accumulations or by loans. In either case they come out of a

social fund that is created mainly by the appliances which in a

preceding period have yielded special gains. The machine of to-day is

paid for from the available surplus created by the machine of an

earlier day, and a series of inventions enlarges the social fund of

capital in spite of all wastes by which it is attended.

The effect that a series of improvements has on the amount of social

capital, if we measure the fund solely on the basis of the cost of the

capital goods which embody it, may be represented thus:--The

horizontal line measures time and is graduated in years from one to

ten. The distance of the point above this base represents the amount

of capital as estimated in units of cost, in the possession of the

society at the time a particular improvement is made, and would remain

unchanged if society were static. The level of the line AB

represents what, under such a condition, would be the capital of a

decade. The curved line AB', dipping below AB and then rising

above it, expresses the fact that a single important improvement first

trenches on the amount of capital in use, and soon makes good the

deduction and makes a positive addition. It raises the sum total of

capital to the level of the latter part of the line AB'. The curved

line A'B'', first falling below A'B' and then rising above it,

expresses the fact that a second improvement, made a year or two after

the first one, makes a reduction of the amount of capital as

determined by the first improvement, and later adds more than enough

to make good this reduction. A third improvement, at the end of two or

three further years, has the effect expressed by the line A''B''';

that is, it first reduces the fund below the level at which at that

time it would otherwise have stood,--but by no means to the level at

which it stood when the series of improvements began,--and later

carries it above the line expressing the highest level it would,

without this improvement, have attained. In so far as these three

improvements affect the level of the social capital for the ten-year

period, it stands at the level indicated by the line AA'A''B''', and

no later improvement, even at the time of its introduction, does more

than to make a small reduction of the increment of capital accruing

from the products of the earlier improvements. A series of economical

changes means a perpetual increase of the social capital as well as a

perpetual improvement in the mode of applying labor. The increments of

capital due to the earlier changes are far more than is required by

the introduction of any later one.

The Impossibility of Reducing Capital by too Rapid Progress


is a theoretical question whether this series might be too rapid to

permit this result. If the interval were a month instead of several

years, and if the amount of capital put into the new appliances were

the same that, in the figure, they are represented as requiring, the

effect would be to make twelve deductions from the amount of the

social capital in the course of a year, which would carry it some

distance below its original level, while in this one year there

would have been no time for the profits to accrue in order to restore

and add to the fund. In the next year and the following ones this

would follow, and the effect, in the course of ten years, would be to

carry the social capital to a still higher level than the one it

reaches in consequence of the slower succession of economical changes.

Increasing the rapidity of productive inventions only multiplies the

additions made to the social capital.

We may summarize the chief facts concerning technical progress as


(1) Progress may throw particular men out of their present employment,

but cannot destroy the social demand for their labor. Somewhere in

society there is a place for them.

(2) If improvements were long confined to one subgroup, they might

send labor into other subgroups and even into other general groups.

Occurring as they do at nearly all parts of the system, they very

seldom require an absolute diminution of the amount of labor in a

subgroup, and practically never cause such a reduction in a general


(3) The gradual introduction of an improvement is important, since it

affords time for an increase in the social demand for the product

which is thus cheapened and for introducing at many other points

improvements which neutralize, in a large degree, the labor-expelling

effect of the first improvement.

(4) Technical gains are the largest source of additions to the total

amount of the social capital. The constant influx of new capital

facilitates the placing of laborers at the points where they are


(5) The fact that elementary utilities which are produced by

agriculture cater to a less elastic demand than do the form utilities

which are the product of manufacturing occupations, has caused labor

to move slowly from the lowest subgroups of the various series to the

upper ones, as the productive power of labor in agriculture has


(6) This movement is so gradual that it can be accomplished almost

entirely by devoting to the industries constituting the upper

subgroups an enlarged share of new laborers as they enter the field in

quest of employment. Young men drift from the farm to the village and

the city.

(7) In addition to the upward flow of labor in the series of subgroups

there are some lateral movements, or transfers from group to group, to

be taken into account. The fact that improvements are widely diffused

and that there is a succession of them at each point makes it possible

to make these lateral movements of labor in the same way in which the

movement within the groups is accomplished; namely, by putting the new

men who are entering the field of employment in the places where they

are most needed.

(8) These facts do not always prevent particular men from losing the

special benefit that skilled handicrafts have insured to them, since a

machine, to the running of which they are compelled to betake

themselves, may often be as well tended by persons who have never

learned such a handicraft.

(9) The loss thus entailed on craftsmen was very large during the

original process of supplanting hand labor by machinery, but bids fair

to be relatively small hereafter, since fewer men go through long and

costly apprenticeships, and since the operator of one machine can

usually learn to operate another with little waste of time.

(10) Such injuries as particular men now suffer from the introduction

of economical devices are, as a rule, more than atoned for even to

these men by the greater productivity of social labor, as it is

applied in new ways, and by the greater abundance of social capital.

These gains are the result of improvements made in the earlier

periods, and they benefit every one who labors.

(11) The new capital created by productive inventions is an essential

cause of the continuing gain of the working class.

(12) While most inventions at first draw capital from the social fund

to the point where they are applied, many of them soon liberate

capital by cheapening particular appliances of production, and nearly

all of them, by means of the profits they insure, ultimately add to

the social capital.

The Vital Importance of Continued Improvement

Intelligent study

will make it clear to every one that any assertion that machinery is

the enemy of labor is not merely erroneous, it is a contradiction of

the most striking and important fact connected with general progress.

The gains of labor during the past century, which have been partly due

to the occupation of areas of new land, have been largely due to the

mechanical inventions and technical discoveries which have put the

forces of nature so largely at man's disposal. These forces have

worked for all society, indeed, but they have worked largely for the

men who labor, whether in the factory, in the shop, on the railroad,

or on the farm. Their effects are all-pervasive, since they signify an

increase in the productive power of that final unit of social labor

on which wages generally depend. General riches have been and must

continue to be generally beneficent. As an isolated man working,

Crusoe-like, for himself alone, gains by every technical discovery he

can make and by everything he can add to his stock of productive

appliances, so society, the great and isolated organism which is the

tenant of our planet, reaps a benefit by every improvement it can

make, and the forces of distribution see to it that this benefit is

carried through and through the system and made to improve the

condition of the most humble members. Since the great areas of new

land are no longer available as a future resource, the hope of labor

during the coming centuries, under any form of industrial

organization, whether it be competitive or socialistic, rests on the

prospect of continued technical gains,--an unending succession of

calls on the exhaustless serving power of nature.

The Effect of Changes in the Relative Amounts of Labor and


The law of wages, as stated in an early chapter of this

work, makes it evident that an increase of population, while the

social fund of capital remains the same, would reduce the product of

marginal labor and therefore the rate of wages. In every establishment

into which more workmen should come, while its capital remained the

same in amount, the power of an individual worker to produce goods

would be lessened. Moreover, any influx of laborers into the society

as a whole would be attended by a diffusion of them among all the

groups and subgroups, so that the power of an individual laborer to

create any kind of goods would be reduced. This means that labor has

lost some of its power to create commodity, which is the concrete

name for general wealth, and its wages fall accordingly.

An influx of capital without any change in the number of laborers

would have the opposite effect. It would add to the productive power

of marginal labor. As the new capital should diffuse itself through

the producing organism it would enlarge the product of workers

everywhere. The wages of labor depend in part on a numerical ratio

between units of capital and units of labor, as they cooeperate in

production; and the change in the ratio which enlarging capital causes

improves the condition of the working people. The capital also

diffuses itself throughout the system, every subgroup gets a share of

it, and labor everywhere responds to this influence and produces more

than before. In a change in this ratio--in a gain of per capita

wealth in productive forms--lies one influence which has a great power

over human destiny and is one main cause of weal or woe for coming

generations. Method as it improves is related in two ways to this

critical change in the ratio of capital to population. It is a

prominent cause of the increase of capital. What men make by juggling

with values and putting taxes on other men adds nothing to the

aggregate wealth; but what they make by improved methods of production

causes a net addition to it. The improvement in method also directly

reenforces the influence of enlarging capital, by infusing

productivity into labor and increasing its returns.

The Resultant of the Five Dynamic Changes acting Together

So long

as the increase of capital more than offsets the increase of

population, the ultimate result of all five of the general changes

which characterize a dynamic state is to increase the well-being of

laborers. The movement of labor from point to point in the system of

industrial groups is a necessary means of securing the largest gain

for society as a whole and of diffusing the benefit among all members.

It is wage earners who are most numerous and most needy, and the

greatest benefit which can be credited to any economic influence is

that which takes the shape of a rise in wages. Moreover, an upward

trend in the rate of pay is of far greater importance than the level

of the rate at any one time. A system that should afford high present

wages would stand condemned if it precluded all chance of higher ones

hereafter; while a system that should begin with a low rate and afford

a guaranty that it should grow higher each year to the end of time

would have the most important merit which any system could possess.

The outlook it would afford for humanity would far outweigh a measure

of hardship imposed on the present generation. A present purgatory

with dynamic capabilities must in the end excel any earthly paradise

which is held fast in a stationary state.

We may represent the resultant of the actual growth of population and

of capital by the following figure:--

Measuring time by decades along the horizontal base line and the rate

of wages at the beginning of a century by the line AB, we represent

the increase in the pay of labor which would be brought about by an

increase of capital not counteracted by any other influence by the

dotted line BC, and the reduction which would be caused by an

increase of population by the dotted line BE. The line BD

describes the resultant effect of these two changes acting together,

on the supposition that during the latter part of the century the

growth of population is somewhat retarded and that the increase of

capital is the predominating influence.

We may further represent the change in the rate of wages which is

caused by improvements in method and organization by lines rising

above the one which expresses the trend of wages as it is affected

only by an increase of capital and of population.

AF measures time as before and AB the rate of pay at the beginning

of the century. The dotted line BE represents the rise in wages due

to the increase of capital, as it more than counteracts the growth of

population. The rise of the line BD above BC represents the

additional increase in wages which is brought about by improvements of

method, and finally, the rise of BC above BD expresses the further

addition to the pay of labor which comes by reason of improved

organization. The uppermost line BC describes the resultant of all

the dynamic changes on the supposition that they act in a natural way.

It will be seen that BC at first rises above BD rapidly and later

runs nearly parallel with it. This expresses the fact that while gains

insured by organization may continue for a long period, the amount of

them does not greatly increase after a fairly efficient type of

organization has been secured. On the other hand, the fact that BD

rises above BE by a wider and wider interval expresses the fact that

gains which come from technical improvements may increase for an

indefinitely long time.

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

Amount Increasing

The changes which make wages rise cause interest

to fall and there would seem to be a partial offset for the general

gain; but the chief cause of a declining rate of interest is an

increase of the total amount of capital. The size of the income

which comes to the capitalists as a class from their entire invested

wealth grows larger wherever the amount of the fund increases more

rapidly than the rate of interest falls. A million dollars yielding

four per cent gives a larger income than a half million yielding five

or six. It is a condition such as this which we have described in

outline, and it enables the holders of investments to receive a

constantly increasing total return, although the percentage yielded by

a given amount invested grows continually smaller.

The Conditions of Increasing Future Well-being

The realization of

this resultant of all dynamic forces requires that the rate of growth

of population should be subject to a natural check, that the increase

of capital should not be unduly retarded, that technical improvements

should go on, and that the organization which is effected should be of

the kind which makes for efficiency but not for monopoly. Competition

must be kept alive. In altered ways, indeed, the essential power of it

must forever dominate the industrial system, as it will do if the

state shall do its duty and not otherwise. A dynamic society requires

a dynamic government whose enlarging functions are shaped by economic