Effects Of Dynamic Influences Within The Limited Economic Society

How the General Unification of Methods of Production Calls at First

for an Increased Exportation of Capital from the Central Area and

Checks the Immigration of Laborers

A study of the causes of the

interchanges which take place between the economic center and its

environment shows that the movement of goods, the diffusion of modern

methods of making goods, and the movements of capital and labor across
the border of the economic society we are studying are interdependent.

Opening a field for a profitable export trade increases the

productivity of labor at home and tends to attract immigration. On the

other hand, establishing in the outer zone a market for the products

of the center prepares the way for introducing modern manufactures

into the more densely peopled parts of the outer area. The company

that sells cotton goods to the Chinese or the Hindoos will find that

there is more to be made by utilizing the cheap labor of those peoples

for making the goods by efficient machinery. Commerce tends to diffuse

a knowledge of the most economical processes of manufacturing, and

this interposes a certain stay on migrations of labor toward the

center. It will in time help to retain Chinamen in China and Hindoos

in India. It does, however, cause a movement of capital from the

center outward, followed in time by a creation of wealth in the outer

zone for proprietors residing within the center. The Englishman draws

dividends from investments in many lands not within the field covered

by the present studies. In so far as he reinvests them, as capital, in

those lands, they supply a need that, without them, would have to be

supplied by a new exportation of capital from the home country, and

they therefore tend to check such exportation. In so far as the

dividends are brought home they directly neutralize a certain amount

of exportation of capital.

Effects experienced within Economic Society from Interchanges with

the Environing Area

The introduction of improved methods of

production within the central area usually calls for an expenditure of

capital there, and this is largely furnished from the net profits from

previous economies in production, and will, in its turn, furnish net

profits that will convert themselves into the capital needed for

applying future inventions. The study of the causes of an increase of

capital, as well as of each of the generic changes that are going on

within the center we defer for later chapters; but at present we need

to know that the changes going on within what we define as economic

society are affected by the intercourse which that society maintains

with its environment. Immigration across the outer boundary of the

general division enhances the rapidity of growth of the population

within it, while emigration reduces it. Exporting capital in itself

reduces the rate of accumulation at home, and importing increases it.

Introducing into foreign regions economical methods in use at home,

modifies the trade which goes on between the great areas, and there

is a perpetual rivalry between the direct and the indirect process of

obtaining goods at home. When a unit of labor can directly make more

of A''' than it can procure by making A and exchanging it abroad

for A''', the manufacture of A''' is legitimate and profitable,

but when the unit of labor can procure more of A''' by the indirect

process in which an exchange with a foreign region intervenes, static

law requires that this indirect process be resorted to. We should make

A and buy A''' in order to get the most of the latter commodity.

This is the essence of the time-honored argument for freedom of trade,

but the conclusion to which it leads is modified by a consideration of

further dynamic influences which will, in due time, be presented.

How we may get Valid Results by Studying only a Part of the


It is entirely possible to study by themselves the activities

of such a part of the world, and we will therefore draw a line of

demarcation about the countries which constitute the economic center

of it, and thus include an area within which economic causes produce

speedy effects. Each part of this area quickly responds to influences

that originate in any other part. If the steel mills in America make

radical improvements in their machinery, this change should, in the

absence of a strong monopoly, affect the price of rails in England,

Germany, etc. Within the central region wages and interest tend toward

uniformity, though, as we have seen, they do not attain it. Across the

boundary which separates this center from the outer zone, economic

influences act in a more feeble way and are unable to bring rates of

wages and interest even to an approximate equality. Western Europe,

America, and whatever regions are in very close connection with them,

we treat as a society, with the remainder of the world as its

environment. This center trades with the environing region, sends some

capital and labor thither, and draws some of each thence to the home

countries. Willingly or otherwise, it instructs the people of the

outer region in modern methods of industry, and thus causes what we

may regard as a slow annexation of a part of the outer zone to the

economic center and a modification of the character of industries at

home and abroad. The principal movement of labor is in an inward

direction, and from our point of view it is immigration not into one

country merely but into all economic society. The predominant movement

of capital has been outward.

Mode of Studying Interchanges between Center and Environing


All these movements have to be recognized in a study of the

economic life of the central society. How, for example, is commerce

with undeveloped regions to be regarded if we have the center only in

view? It is simply one of two possible ways of getting goods. The

people of the center can make a commodity that they use, or they can

make something to send into the outlying countries in exchange for it.

In the latter case they acquire it indirectly rather than directly,

but they acquire it by their own industry in the one case as well as

in the other.

Natural Selection of Modes of procuring Usable Goods

Under natural

influences, as we have said, men select the most economical way to get

what they use, or--what is the same thing--they select the mode of

utilizing their own labor and capital that will give them the largest

return in goods. There is competition between different methods of

directly making goods, and the best method survives. The man with a

good machine undersells the man with a poor one; this latter producer

must improve his equipment, or fail, and appliances thus tend toward a

maximum of efficiency. In like manner there is competition between the

direct and the indirect mode of obtaining goods. The man who, by using

a certain amount of labor for a week in making steel for exportation,

can obtain in exchange fifteen yards of silk, can undersell and drive

from the field the man who, by using the same amount of labor for a

week in silk making, can produce ten yards of silk. The importer

naturally supplants the manufacturer when, by bartering with

foreigners the product of a given amount of labor, he can get from

them more than can be produced at home by the same amount of labor.

The manufacturers naturally survive when direct production gives the

larger returns. In our studies of the economy of the society that is

most advanced and central, we may treat whatever is imported as, in an

indirect way, produced. In a sense the activities of that society are

nearly self-contained since, by the direct or the indirect method, the

people produce within their own boundaries the most of what they

consume. In doing so they naturally use with a maximum of economy the

forces at their command, and resort to traffic when that is


Mode of Treating the Exportation of Capital

Capital is moving

across the boundary mainly in an outward direction. This fact,

standing alone, would be equivalent to a mere retarding of the rate of

increase of capital within the economic center; but the exported

capital, as it is used outside of the exporting society, produces an

income for owners living within it. The income comes in kind, since it

takes the form of goods which are an addition to those imported in the

course of ordinary exchanges. This tribute paid to capitalists within

the industrial center comes chiefly in the form of consumers' goods,

the receiving of which does not entail the producing of something to

send away in exchange for them. The material agent which creates the

imported goods remains outside of the society, and sends its product

into the society with no offset. The fact of such an income coming

from beyond the pale of an economic society has compelled us to

qualify the statement that the economy of the society is

self-contained, for there is a small part of its income which is not

created within its borders. This comes about by the exportation of

capital and the importation of some of its products.

Effects of Drawing Interest from Investments beyond the Social


Not all of these are consumers' goods. Some capital goods

are imported and, moreover, many consumers' goods are passed over to

the group called HH''' in our table,--the one that makes active

instruments of production,--and in this indirect way the earnings of

capital invested abroad add to the amount of capital at home. In the

long run the exportation of funds for permanent investment may, by its

other and more indirect effects, increase the supply of them at home.

The literal fact in each year is that what is exported is itself a

reduction of the amount that would otherwise be added to the home

supply, but that the income accruing from what has been exported in

earlier years makes an addition to what is in this year accumulated at

home. Primarily, the exportation of capital is to be treated as

causing a modification of the rate of accumulation of capital and, in

a long term of years, an increase of the rate.

Movements of Labor

Laborers cross the boundary in both directions,

but inducements favor the inward movement. In the absence of positive

obstacles the denser populations of Asia could overflow into America

with a startling rapidity. Such a movement, on whatever scale it

occurs, is to be treated as causing an acceleration of the rate of

increase of the population within the center. Whatever results arise

from growth of population within are emphasized by immigration.

The Assimilation of Economic Methods and Forms of


People without the center are borrowing from it the

newer and more efficient methods of production. Already Asiatics are

making some things by machinery, and when they shall do it more

generally there will take place changes that will be very

revolutionary in their own economic life and will react on the life of

the center itself. Learning to use a thousand and one machines will

rend China and disturb Europe and America. In general, better

appliances and a more efficient organization will make it possible for

Asia to create for herself, and ultimately export much that she now

imports, and this will react on the character of the industries of

America and Europe. We shall somewhat modify our industries in order

to get the benefit of new openings for commerce, and some of the

things which we now directly produce we may find it more profitable to

get by exchange, which is indirect production. On the other hand, some

foreign products which we now get with great economy of labor,

because the goods we exchange for them are scarce and dear in the

countries that receive them, we shall get on less favorable terms,

because the goods we now send to the foreign lands will have become

there more abundant and cheap. In general, we must regard the opening

of a profitable avenue for trade as we should the invention of a new

machine, the discovery of a better electrical transmitter, or the

utilizing of a cheaper motive power. It gives us more goods as the

fruit of a given expenditure of labor and capital and affords a profit

which, as we shall see, comes first to entrepreneurs and later to

laborers and capitalists within the pale. Ultimately, those living

beyond the pale will get a share of this gain.

Summary of Facts concerning the Economic Center

We may, then,

regard a certain limited part of the world as a society in itself. It

is modified by its environment, but, in an important sense, it has a

self-contained life. The economic changes which go on within it can be

grouped under the five generic heads: increase in the amount of labor,

increase in the quantity of capital, improvement of method,

improvement in organization, and changes in the wants of the

individual consumers.

The Geographical Boundaries of Society not Fixed

The boundaries of

this central area are not fixed. As relations between the center and

the part of the outer zone which is nearest to it become more and more

intimate, the adjacent region takes on the character of the center. It

is, in an economic way, assimilated to it; and in this way the center

may be regarded as annexing to itself belt after belt of the

environing world. Ultimately it will doubtless annex the whole of it;

and for this reason, even though we confine our studies to the

center, we shall establish a system of economic laws which will apply,

in the end, to all the world. This indeed is not the only way in which

the economic life of the outer area comes into the economist's

purview, for he can study it for itself. This zone has its peculiar

life, which is a distant reflection of the life of the center. It is a

type of economic activity in which all the primary forces work, but in

which friction abounds and adjustments are made with extreme slowness.

For the present, what interests us is the life of the center itself,

and in studying this we take account of the influence of the

environment. The effects of these influences are first seen in changes

in the rate at which the five general dynamic movements go on within

the center. The grand resultant is more rapid progress within the


What is involved in a Full Study of the Relative Density of


A full treatment of the subject of the comparative

density of population in different places would include an extended

study of the kinds of industry which find their natural homes in

densely peopled countries and of those which flourish in sparsely

peopled ones, and a much more detailed tracing than it is possible

here to undertake of those changes in the character of industries

everywhere which result from a leveling out of differences in

population. Clearly, if all America were to become as crowded with

inhabitants as are Holland and Belgium we should develop industries of

a different type from those that we now have, and the change would be

in the direction of producing relatively more form utilities and

relatively less of the elementary utilities. Labor and capital would

move from the subgroups which in our table we have called A, B,

and C toward A''', B''', and C'''. We should spend more of our

energy in making finished goods and less in getting raw materials. I

shall note in a very general way the changes in social industry caused

by increase of population without looking forward to that remote time

when the density of population shall be equalized.

Why an Approximately Static Adjustment of Industries within the

Central Area permits Unequal Density of Population in Different Parts

of It

We exclude from view the ultimate static adjustment of the

whole world, and content ourselves with an approximate adjustment

within society as we have defined it. Even within this limit there are

inequalities in the density of population which it would require a

very long time to remove, and a perfectly static state cannot be

reached till they are leveled out. The selection of industries in

Texas and in Belgium cannot be, in the ultimate sense, natural till

population in these two regions is so adjusted that there is no longer

an economic motive for migrating from the one to the other. If, in

order to determine what an absolutely static condition for the central

society would be, we were to apply the rule of imagining all new

dynamic influences precluded and of allowing time enough to elapse to

bring about a normal apportionment of population within that limited

area, we should encounter a measure of the same difficulty which

confronted us when we proposed to attain a similar static state for

the entire world, though the trouble would be less serious in degree.

In waiting long enough for population to distribute itself naturally,

we cut off influences that, within that period, will affect

production and distribution far more than the change in population

will affect them. In so far as Texas or any newly occupied region is

concerned, the changes thus precluded are those which would have

tended to reverse the effect of the redistribution of population.

Migrations from Belgium to Texas, if extensive and long continued,

would reduce the productive power of labor in Texas; while the dynamic

changes which will actually go on within any such period will increase

the productive power of that labor, and it is not certain whether the

one or the other influence will predominate. For the United States as

a whole it is probable that progress in the useful arts will more than

offset the influx of new laborers and give to wages a rising trend.

If, however, we establish the natural standard of wages by cutting off

such progress and letting the influx of labor continue, the test would

give a standard lower than the present one,--a false, as well as a

discouraging result. The resultant of all the changes we are about to

study will probably give to the future pay of labor in America a

rising trend.

How Industries adapt themselves to Unequal Density of


In view of this fact it is necessary to recognize a

proximate rather than an ultimate static state as that toward which

the adjustments now going on are immediately tending. We will treat

the unequal density of population within our economic society as

something which will last, not forever, but so long that it will not

be removed or appreciably affected within the period required for the

other adjustments that we are studying. Given a population that is

dense in Belgium and sparse in Texas, and competition will cause the

industries to take on the types which they would have and retain if

that difference in density were destined to be permanent. The type

toward which the economic life of both regions is tending is thus a

proximate rather than an ultimate one. Each region will, in the near

future, be of the type toward which influences which do not involve an

equalization of population are impelling it. We get the true direction

of the change that is going on in the earning power of labor and in

the shape of the industrial organism in both regions by recognizing

the fact that the differences in the density of their populations will

continue through the period which we are considering.

If the line BC represents the productive power of a unit of labor in

a region which is sparsely peopled, and the line B'C' represents the

productive power of a unit of labor in a densely peopled region, we

may assume that AC and A'C', which are equal to each other,

represent the product of a unit in either locality when, general

progress being precluded, the difference in the density of population

should have been leveled out. Move people at once and in a wholesale

manner till there is nothing to be gained by further moving them,--let

pressure of population on the land be fully equalized,--and you may be

supposed to create a condition of uniform productive power for

laborers of a given grade in the entire region. The horizontal line

AA', which is everywhere the same distance above the line CC',

represents the universal level of the productivity of labor in such a

theoretical condition. The line BB' represents the actual and

different levels of the natural earnings of labor in the different

regions. Assuming that all other static adjustments are made, but that

the equalization of population has not taken place, labor will earn

the amount BC in one place and the amount B'C' in another.

Somewhere it will earn an amount represented by the vertical line

descending from D and somewhere that expressed by the line

descending from F, while there will be places where the earnings of

labor are measured by the line descending from E, which is the

amount that labor would everywhere create and get if the population

could be quickly made normal in all regions. The standard of wages for

the whole of the great region, largely European and American, which

constitutes the economic center of the world, shows varying levels in

different countries and parts of countries, and the actual rates in

every place fluctuate about this proximately normal standard for that

place, the standard rate in one locality being higher than that of


The line A'B' exceeds in length the line AB, and this expresses

the fact that equalizing the pressure of population on the land in

different regions adds more to the productivity of labor in the region

now crowded than it deducts from that of labor in regions now sparsely

peopled. The overcrowding does greater and greater harm the further it

is carried, and therefore taking away a surplus of people from a

region which has suffered greatly from overcrowding affords a relief

which more than offsets what is lost in other places by a moderate

increase of population. Moreover, the fact has to be recognized that

at present there are ten square miles of sparse population for one

that is very densely peopled, and reducing all to an equality would

add only slightly to the number of inhabitants of the regions that now

contain few of them.[1]

[1] Exceptional local conditions may make an influx of

population for a time a cause of greater productivity rather

than of less. The general and permanent effects are

otherwise, and it is on these that the present argument


If the line BB' represents the unequal level of natural wages in

different localities, on the assumption that populations remain

unequal, the undulating curve DD' which crosses and recrosses the

line BB' represents actual local rates fluctuating about the

standard ones.

How a Static Adjustment for the World is a Dynamic Influence within

a Limited Part of It

Commodities are, by traffic, crossing the

social boundary in both directions, and with the goods there go and

come influences that affect the economic life of the central society.

Methods and modes of organizing business are taught by each region to

the other, though most of the teaching is done by the people of the

center and most of the learning by those of the environment. All this

affects the center and falls within our study. It has dynamic effects

within the center, though it is only a part of a static adjustment for

the world as a whole. If the grand bank of Newfoundland were to

subside to the level of the middle of the Atlantic, there would be a

great rush of water toward the place that the banks now occupy, but

this would be only what is required in bringing the general level of

the sea to an equilibrium. It would be essentially a static

phenomenon, but for the region of the banks it would be dynamic in the

highest degree. A rush of population from China to America would be a

change tending to establish an equilibrium of population in the world,

but it would be a startling bit of dynamics for America. Teaching the

Chinese all the mechanical arts that we know would be creating an

equilibrium of another sort, in which methods would be similar in the

two countries; but for China itself this acquiring of practical arts

would be dynamics acting on a vast scale. What is a static adjustment

for the world is a dynamic change for parts of the world, and all such

changes that can occur within the area of economic society proper and

within the period we can wisely include in our study we need to take

into account. Changes in population, wealth, method, and organization

must be studied, however they may originate.