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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