Conditions Insuring Progress In Method And Organization

The Possibility of a Law of Technical Progress

It might seem that

inventions were not subject to any influence that can be described

under the head of a law. Genius certainly follows its own devices, and

inventive power that has in it any touch of genius may be supposed to

do the same. It is, however, a fact of experience that some

circumstances favor and increase the actual exercise of this faculty,

while other influences deter it. Moreover, what is important is not

merely the making of inventions, but the introduction of such of them

as are valuable into the productive operations of the world. Some

influences favor this and others oppose it, and it is entirely

possible to recognize the conditions in which economies of production

rapidly take place in the actual industry of different countries.

Technical progress has been particularly rapid in the United States,

though in this respect Germany has in recent years been a strong

rival, and ever since the introduction of steam engines and textile

machinery, England has continued to make a brilliant record. France,

Belgium, and a number of other countries of Europe have developed an

industry that is in a high degree dynamic, and Japan is now in the

lists and giving promise of holding her own against the best of her

competitors. The question arises whether it is something in the

people, or something in their natural and commercial environment,

which makes differences between their several rates of progress.

Inventive Abilities widely Diffused

In so far as originating

important changes is concerned, mental alertness and scientific

training without doubt have a large effect. Some races have by nature

more of the inventive quality than others, but within the circle of

nations that we include in our purview no one has any approach to a

monopoly of this quality. Any people that can make discoveries in

physical science can make practical inventions, and will certainly do

so if they are under a large incentive to do it. Moreover, alertness

in discovering and duplicating the inventions of others is as

important in actual business as originating new devices. At present it

is a known fact that the Germans not only invent machinery, but

quickly learn to make and to use machinery that originates elsewhere

and demonstrates its value in reducing the cost of the production; and

the remote Japanese have not only surpassed all others in the quick

adoption of economic methods that have originated in Western

countries, but have put their own touch upon them and revealed the

existence of an inventive faculty that is likely to make them worthy

rivals of Occidental races.

The Importance of Inducements to make and use Inventions

Granted a

wide diffusion of inventive ability, the actual amount of really

useful inventing that is done must depend on the inducement that is

offered. Will an economical device bring an adequate return to the man

who discovers it and to the man who introduces it into productive

operations? If it will, we may expect that a brilliant succession of

such devices will come into use, and that the power of mankind to bend

the elements of nature to its service will rapidly increase.

The Usefulness of a Temporary Monopoly of a New Device for


If an invention became public property the moment that

it was made, there would be small profit accruing to any one from the

use of it and smaller ones from making it. Why should one

entrepreneur incur the cost and the risk of experimenting with a new

machine if another can look on, ascertain whether the device works

well or not, and duplicate it if it is successful? Under such

conditions the man who watches others, avoids their losses, and shares

their gains is the one who makes money; and the system which gave a

man no control over the use of his inventions would result in a

rivalry in waiting for others rather than an effort to distance others

in originating improvements. This fact affords a justification for one

variety of monopoly. The inventor in any civilized state is given an

exclusive right to make and sell an economical appliance for a term of

years that is long enough to pay him for perfecting it and to pay

others for introducing it. Patents stimulate improvement, and the

general practice of the nations indicates their recognition of this

fact. They all give to the inventor a temporary monopoly of the new

appliance he devises, but this monopoly differs from others in this

essential fact: the man is allowed to have an exclusive control of

something which otherwise might not and often would not have come into

existence at all. If it would not,--if the patented article is

something which society without a patent system would not have

secured at all,--the inventor's monopoly hurts nobody. It is as though

in some magical way he had caused springs of water to flow in the

desert or loam to cover barren mountains or fertile islands to rise

from the bottom of the sea. His gains consist in something which no

one loses, even while he enjoys them, and at the expiration of his

patent they are diffused freely throughout society.

Possible Abuses of the Patent System

It is of course true that a

patent may often be granted for something that would have been

invented in any case, and patents which are granted are sometimes made

too broad, and so cover a large number of appliances for accomplishing

the same thing. In these cases the public is somewhat the loser; but

for the reasons about to be given this loss is far more than offset by

the gain which the system of patents brings with it.

The gains of the inventor cannot extend much beyond the period covered

by his patent, unless some further and less legitimate monopoly

arises. If the use of an important machine builds up a great

corporation which afterward, by virtue of its size, is able to club

off competitors that would like to enter its field, the public pays

more than it should for what it gets; and yet even in these cases it

almost never pays more than it gets. The benefit it derives is simply

less cheap than it ought to be. Much of the power of the telephone

monopoly has been extended beyond the duration of its most important

patent, and that patent was in its day broader than it should have

been; and yet there never was a time when the use of the telephone in

facilitating business, and in saving time and trouble in a myriad of

ways, did not far outweigh the total cost which the users of

telephones incurred. As we shall soon see, important inventions

invariably confer some benefit on the public at the start. The owner

of the new device must find a market for his products, and must offer

them on terms which will make it for the interest of the public to use

them largely.

The Effect of Competition in Causing Improvements to


Competition insures a large number of inventors and offers

to each of them a large inducement to use his gifts and opportunities.

A great corporation may employ salaried inventors and, because of its

great capital and large income, it may experiment with inventions with

far less risk to itself than an inventor usually takes. When large

corporations compete actively with one another, the employment of

salaried inventors is very profitable to them; and improvements in

production go on more rapidly than they are likely to do after these

firms consolidate with each other and cease to feel the spur which the

danger of being distanced in a race affords. It is a fact of

observation, and not merely an inference, that monopolies are not as

enterprising as competing companies.

Effects of Monopoly on the Spirit of Enterprise

In monopolies,

theoretically, there is the same inducement to adopt inventions as in

the case of competing firms, excepting always the motive of

self-preservation. The monopoly can make money by improvements as

competing firms would do. A perfectly intelligent monopoly, with

disinterested management, would adopt an improvement offered to it as

promptly as any competing firm, if the sole motive were profit. There

is no reason why an intelligent monopoly should hold on to antiquated

machinery, when modern machinery would enable it to stand the cost of

introduction and make a net improvement besides. A competing producer

gains an advantage over his rivals by discarding old machinery and

adopting new at exactly the right time, neither too late nor too

early. The true point of abandonment of the old machine, as we have

already seen, is reached when the labor and capital that now work in

connection with it can make a shade more by casting it off and making

a combination of a better kind; and this rule applies to monopolies as

well as to competitors. At just the point where a competitor can gain

an advantage over rivals by modernizing his appliances, the monopoly

can make money by doing so.

An important fact is that the monopoly has as a motive the making of

profits for its stockholders. Not only is that a less powerful motive

than self-preservation, but it appeals largely to persons who are not

themselves in control of the business. Absentee ownership is the chief

disability of the monopoly. Managers may have other interests than

those of large dividend making, and in such cases a monopoly is apt to

wait too long before changing its appliances. It needs to be in no

hurry to buy a new invention, and it can make delay and tire out a

patentee, in order to make good terms with him; and this practice

affords little encouragement to the independent inventor. On the

whole, a genuine and perfectly secure monopoly would mean a certain

degree of stagnation where progress until now has been rapid.

Why the Public depends on Competition for Securing its Share of

Benefit from Improvements

Another question is whether the two

systems, that of competition, on the one hand, and monopoly, on the

other, confer equal benefits on the public by virtue of the

improvements they make. Competition does this with the greatest

rapidity. As we have seen, it transforms the net profits due to

economies into increments of gain for capitalists and laborers

throughout all society. The wages of to-day are chiefly the

transformed profits of yesterday and of an indefinite series of

earlier yesterdays. The man who is now making the profits is

increasing his output, supplanting less efficient rivals, and giving

consumers the benefit of his newly attained efficiency in the shape of

lower prices of goods. In practice rivals take turns in leading the

procession; now one has the most economical method, now another, and

again another; and the great residual claimant, the public, very

shortly gathers all gains into its capacious pouch and keeps them


Would a secure monopoly do something like this? Far from it. It would

be governed at every step by the rule of maximum net profits for

itself. Its output would not be carried beyond the point at which the

fall in price begins really to be costly. The lowering of the price

enlarges the market for the monopoly's product and up to a certain

point increases its net gains. Beyond that point it lessens them.

Now, even the interest of the monopoly itself would lead it to give

the public some benefit from every economy that it makes. This is

because the amount of output that will yield a maximum of profit at a

certain cost of production is not the same that will yield the maximum

of net profit when the cost is lower. Every fall in cost makes it for

the interest of the monopoly to enlarge its output somewhat, but by no

means as much as competing producers would enlarge theirs. It will

always hold the price well above the level of cost. In the

accompanying figure distance along the line AK represents the amount

of goods produced, while vertical distance above the line measures

costs of production, as well as selling prices, and the descending

curve FJ represents the fall of prices which takes place as the

output of the goods is increased. Now, when the cost of production

stands at the level of the line CI, the amount of output that will

yield the largest amount of net profit is the amount represented by

the length of the line AM. That amount of product can be sold at the

price represented by the line MG. The gross return from the sale

will be expressed by the area of the rectangle AEGM, and the area

CEGN, which falls above the line of cost, CI, is net profits. They

are larger than they would be if the line MG were moved either to

the right or to the left, i.e., if the amount of production were

made either larger or smaller. Now, if the cost of production falls to

the level of the line BJ, it will be best to increase the output

from AM to AL. The whole return will then be represented by the

rectangle ADHL, and the area BDHO represents profits, with the

cost at the new and lower level. These are somewhat larger than they

would be if the output continued to be only the amount AM. Under

free competition the price would fall to the line BJ, the net

profits would disappear, and the public would have the full benefit of

the improvement in production.

The Purpose of the System of Patents

Patents are a legal device

for promoting improvements, and they accomplish this by invoking the

principle of monopoly which in itself is hostile to improvement. They

do not as a rule create the exclusive privilege of producing a kind of

consumers' goods, but they give to their holders exclusive use of some

instrumentality or some process of making them. The patentee is not

the only one who can reach a goal,--the production of a certain

article,--but he is the only one who can reach it by a particular

path. A patented machine for welting shoes stops no one from making

shoes, but it forces every one who would make them, except the

patentee or his assigns, to resort to a less economical process.

Patents Limited in Duration indispensable as Dynamic Agents

If an

inventor had no such protection, the advantage he could derive would

be practically nil, and there would be no incentive whatever for

making ventures except the pleasure of achievement or the honor that

might accrue from it. In the case of poor inventors this would be cold

comfort in view of the time and outlay which most inventions require.

Not only on a priori grounds, but on grounds of actual experience

and universal practice, we may say that patents are an indispensable

part of a dynamic system of industry. It is also important that the

monopoly of method which the patent gives should be of limited

duration. If the method is a good one and the profit from using it is

large, the seventeen years during which in our own country a patent

may run affords, not only an adequate reward for the inventor, but an

incentive to a myriad of other inventors to emulate him and try to

duplicate his success. Ingenious brains, which are everywhere at work,

usually prevent the owners of a particular patent from keeping any

decisive advantage over competitors during the whole period of

seventeen years. Long before the expiration of that time some device

of a different sort may enable a rival to create the same product with

more than equal economy, and the leadership in production then passes

to this rival, to remain with him till a still further device effects

a still larger economy and carries the leadership elsewhere. That

alternation in leadership which we have described and illustrated

takes place largely in consequence of our system of patents; and yet

every particular patent affords a quasi-monopoly to its holder. The

endless succession of them insures a wide diffusion of advantages. At

the expiration of each patent, even if it has not been supplanted by a

later and more valuable one, the public gets the benefit of the full

economy it insures, and wherever an unexpired patent is supplanted by

a new one, the public gets this benefit much earlier. Cost of

production tends rapidly downward, and the public is the permanent


Patents as a Means of Curtailing Monopolies

While a patent may

sometimes sustain a powerful monopoly it may also afford the best

means of breaking one up. Often have small producers, by the use of

patented machinery, trenched steadily on the business of great

combinations, till they themselves became great producers, secure in

the possession of a large field and abundant profit. Moreover, in the

case of a patent which builds up a monopoly and continues for the full

seventeen years of its duration unsupplanted by any rival device, the

public is likely to get more benefit than the patentee, or even the

company which uses his invention. In widening the market for its

product the company must constantly cater to new circles of marginal

consumers, and must give to all but the marginal ones an increasing

benefit that is in excess of what it costs them. Probably few patents

have been issued in America which illustrate the unfavorable features

of the system more completely than did the Bell telephone patent,

which gave to a single company during a long period a monopoly of the

telephone business; and yet there are few men of affairs who do not

perceive that, in the saving of time which the telephone effected and

in the acceleration of business which it caused, they gained from the

outset more than they lost in the shape of high fees. Something of the

same kind is true of the users of domestic telephones; for though they

may cost more than they should, they do their share toward placing

those who use them on a higher level of comfort.

The Law of Survival of Efficient Organization

In broad outlines we

have depicted the conditions which favor technical progress. There is

a law of survival which, when competition rules, eliminates poor

methods and introduces better ones in endless succession. Under a

regime of secure monopoly this law of survival scarcely operates,

though desire for gain causes a progress which is less rapid and sure.

The same may be said of changes in organization, in so far as that

means a cooerdinating of the labor and the capital within an

establishment. When the manager of a mill so marshals his forces as to

get a much larger product per man and per dollar of invested capital

than a rival can do, he has that rival at his mercy and can absorb his

business and drive him from the field. In order to survive, any

producer must keep pace with the aggressive and growing ones among his

rivals in the march of improvement, whether it comes by improved tools

of trade or improved generalship in the handling of men and tools.

Quite as remorseless as the law of survival of good technical methods

is the law of survival of efficient organization, and so long as the

organization is limited to the forces under the control of single and

competing entrepreneurs, what we have said about the advance in

methods applies to it. It is a beneficent process for society, though

its future scope is more restricted than is that of technical

improvement, since the marshaling of forces in an establishment may be

carried so near to perfection that there is a limit on further gains.

Moreover organization, in the end, ceases to confine itself to the

working forces of single entrepreneurs, but often continues till it

brings rival producers into a union.

The Extension of Organization to Entire Subgroups

Both of these

modes of progress cause establishments to grow larger, and the

ultimate effect of this is to give over the market for goods of any

one kind to a few establishments which are enormously large and on

something like a uniform plane of efficiency. Then the organizing

tendency takes a baleful cast as the creator of "trusts" and the

extinguisher of rivalries that have insured progress.

When monster-like corporations once start a competitive strife with

each other, it is very fierce and very costly for themselves; and this

affords an inducement for taking that final step in organization which

brings competition to an end. That is organization of a different

kind, and the effects of it are very unlike those of the cooerdinating

process which goes on within the several establishments. In this, its

final stage, the organizing tendency brings a whole subgroup into

union, and undoes much of the good it accomplished in its earlier

stage, when it was perfecting the individual establishments within the

subgroup. While the earlier process makes the supply of goods of a

certain kind larger and cheaper, the final one makes it smaller and

dearer; and while the earlier process scatters benefits among

consumers, the final one imposes a tax on consumers in the shape of

higher prices for merchandise. Yet the union that is formed between

the shops is, in a way, the natural sequel to the preliminary

organization which took place within them and helped to make them few

and large. Trusts are a product of economic dynamics, and we shall

study them in due time. The organization we have here in view is the

earlier one which takes place within the several establishments. It

obeys a law of survival in which competition is the impelling force,

though it leads to a condition in which an effort is made to bring

competition to an end. This earlier organization is most beneficent in

its general and permanent effects; and what has been said of the

results of progress in the technique of production may, with a change

of terms, be said again of progress in the art of cooerdinating the

agents employed. It is a source of temporary gain for entrepreneurs

and of permanent gains for laborers and capitalists. It adds to the

grand total of the social product and leaves this to be distributed in

accordance with the principle which, in the absence of untoward

influences, would treat the producers fairly--that which tends to give

to each producer a share more or less equivalent to his contribution.

In its nature and in its results it is the opposite of that other type

of organization which seeks to bring competitive rivalry to an end,

and in so far as it succeeds divorces men's contributions to the

social product from the shares that they draw from it.