The Equilibrium of Industrial Groups

The different industrial

groups are in equilibrium when they attract labor and capital equally,

and that occurs when these agents produce as much per unit employed in

one group as in another. Such equalized productivity is the bottom

fact of a static condition, and equalized pay follows from it. Wages

and interest tend to be uniform in all the groups. Efficient labor,

course, gets in any employment more than inefficient; but labor of a

given grade gets in all the groups that make up industrial society a

uniform rate of pay, and nothing is to be gained by any capitalist or

by any laborer by moving from one employment to another. They all

therefore stay where they are, not because they cannot move freely if

they wish to do so, but because no inducement to move is offered to

them. This is a condition of perfect mobility without motion--of atoms

ready to move at a touch without the touch that would move them. The

paradox indeed holds that it is the ideally perfect mobility which has

existed in the past which positively excludes motion in the present.

At some time in the past labor and capital have gone from group to

group till they have brought about an adjustment in which they have no

incentive for moving farther. The surface of a pool of water is kept

tranquil, not because the water is not perfectly fluid, but because,

in spite of the fact that it can flow with entire freedom in any

direction if it is impelled more in that direction than in any other,

each particle of it is impelled equally in all directions. It is the

perfect equilibrium that keeps the particles from changing their

places, and fluidity has caused the equilibrium. In like manner when

labor and capital can create and get just as much in one place as in

another, they are attracted as strongly in one direction as in another

and therefore do not move. A young man of average capacity, who is

deliberating upon the choice of an occupation, will find that he can

do as well in a cotton mill as he can in a shoe factory, a machine

shop, a lumber mill, a flouring mill, or any other industrial

establishment requiring his particular grade of capacity. This is the

picture of a perfectly static industrial condition. Economic science

has to account for values, wages, and interest as they would be in

such a condition, however impossible it is that society should ever

reach exactly such a state. The values, wages, and interest in a real

market are forever tending toward the rates that would be established

if the static condition were realized.

The Sign of a Static State

The sign of the existence of a static

condition is, therefore, that labor and capital, though they are

perfectly free to move from one employment to another and would

actually do so on the slightest inducement, still do not move. They

stay where they are because they cannot find places where they can

produce the slightest amount in excess of what they now produce, and

no employer will anywhere offer any excess above the prevailing rate

of pay.

Profits and the Movements they induce the Sign of a Dynamic


Entrepreneur's profits, when they exist, mean that this

equilibrium is disturbed, and when it is so, mobility of labor and

capital affords the guaranty that a new equilibrium will be

established if no further disturbances follow. As we have said,

profits attract labor and capital, increase the output of those goods

which yield the profit, and reduce the prices of them to the no-profit

level. Workmen and capitalists then get from the entrepreneur as

wages and interest all that he gets from the public as the price of

his goods, except what he pays for raw materials.[1] In other words,

the employer sells his goods at cost.

[1] The entrepreneur of A' of our table must buy the A in

order to impart to it that utility which is his own

particular contribution. He pays as wages and interest all

that he gets for this contribution. The true product of the

entrepreneur is not the entire price of the A', but is the

difference between that and the price of the A. The entire

amount received for the A' resolves itself into wages,

interest, and cost of A; but as a rule the price of A

resolves itself practically into wages and interest only, and

when it does so, all that is paid for the A' ultimately takes

these forms. The same is then true of the finished product

A'''. The entire price of it is ultimately resolvable into

wages and interest; and in speaking of the product of an

entire group we do not need to make any reservation for raw


The case in which this statement requires qualification is

that in which the material in its rawest state still has

value, as is the case with ore and mineral oil contained in

the earth but not a true part of land in the economic sense,

since they are exhausted in the using. The price of a product

into which these elements enter includes something that

represents the value which they have in situ and before any

labor has been expended on them. It is true even in these

cases that the value of the product is measured in terms of

wages and interest, provided that the exhaustible elements

such as ore, oil, etc., are capable of being replenished, or

provided that an effective substitute for them is in process

of production by means of labor and capital. The natural raw

material is then worth what the artificial substitute costs

in terms of capital and labor, and the finished product which

contains some of the natural material sells for the amount

which the finished product costs, which is made altogether by

labor and capital applied to valueless elements in nature.

How Costs are Determined

The early studies of "natural" values, or

values which conform to costs of production, were unconscious and

imperfect attempts to attain the laws of value in a static state. In

such a state costs resolve themselves into wages and interest, and the

conception of such a static state is therefore not complete unless we

know how wages and interest themselves are determined. What we have

already said implies that they fluctuate about certain standards, just

as do the prices of goods, and that they would remain at these

standards if society were reduced to a static condition.

Significance of Static Law in a Dynamic State

An actual society is

undergoing constant disturbances. It is very far from being static;

and yet values of goods, on the one hand, and the earnings of labor

and capital, on the other, hover within a certain distance of the

standards which would be realized if the society became static. In

spite of active dynamic movements the general returns of labor and

capital can never range so far from these theoretical amounts that the

distance from them cannot in some way be measured and accounted for.

The sea, when gales are blowing and tides are rising and falling, is

anything but a static object, and yet it keeps a general level in

spite of storms and tides, and the surface of it as a whole is

surprisingly near to the ideal mathematical surface that would be

presented if all disturbances were to cease. In like manner there are

certain influences that are disturbing the economic equilibrium just

as storms and tidal waves disturb the equilibrium of the sea. We

cannot actually stop these influences any more than we can stay the

winds and the lunar attraction; but we can create an imaginary static

state for scientific purposes, just as a physicist by a process of

calculation can create a hypothetical static condition of the sea and

discover the level from which heights and depths should be measured.

No more than the economist can he actually bring the subject he is

dealing with to a motionless condition. The economic ocean will defy

any modern Canute who may try to stop its movements; but it is

necessary to know what shape and level it would take if this were


Influences that disturb the Static Equilibrium

The influences that

disturb the economic equilibrium are, in general, five. The population

of the world increases, and this is one influence which prevents

values, wages, and interest from subsiding to perfectly "natural"

standards. Capital is increasing, and this influence also acts as a

disturbing factor. The methods of producing things change, and the

changes have a very powerful effect in preventing the attainment of a

static equilibrium. New modes of organizing different industries are

coming into vogue, and this causes a further disturbance of the

economic adjustment. The wants of men are by no means fixed; they

change, multiply, and act on the economic condition of society in a

way that affects the static adjustment. Even physical nature undergoes

change, and the perishable part of the earth does so in a disquieting

way. We are using up much of our natural inheritance. As the effect of

this appears chiefly in forcing us to change our processes of

production, we shall, for convenience, limit our study to the five

changes here enumerated.

Movement Inevitable in the Dynamic State

These influences reveal

their presence by making labor and capital more productive in some

places than they are in others, and by causing them ever and anon to

move from places of less productiveness to places where gains are

greater. As we have said, this moving of labor and capital to and fro

is, like currents in the sea, a sign of a dynamic condition. As in the

static state these agents would not thus move, however fluid and

mobile they might be, so in a dynamic state they are bound to move,

because their earning powers do not remain long exactly equal in any

two employments, and they go now hither and now yon, as, in the

changeful system, openings for increased gains present themselves. If

commodities were everywhere selling at cost prices and if wages and

interest were everywhere normal and uniform, labor and capital would

not move to and fro, and this would be a proof that dynamic influences

were absent.

How an Imaginary Static Society is Created

If we wish to discover

to what standard the values of goods, on the one hand, and the rewards

of labor and capital, on the other, continually tend to conform, we

must create an imaginary society in which population neither increases

nor diminishes, in which capital is fixed in amount, in which the

method of making goods does not change, in which the mode of

organizing industry continues without alteration, and in which the

wants of consumers never vary in number, in kind, or in intensity.

Costs of Production in a Static State

We have said that in such a

static state the prices of different products are just high enough to

cover the wages and interest which are generally paid. There are

uniform or all-around rates of pay for labor and for capital, and

every man who hires workmen or gets loans from a bank has to pay them.

In the real world, full as it is of disturbances, and given over as it

is to forces of change and progress, we find that values, wages, and

interest are in general surprisingly near to these standards. In a

particular business products may for a time sell for enough to afford

a large surplus above prevailing wages and interest, and business as a

whole may, for a time, yield some such surplus; but in the absence of

monopolistic privileges no one business yields a large surplus for a

long time, and still less does business as a whole do so, though

profits may always be found somewhere within the system.

The Final Productivity of Labor

If we assume that the capital of

society is a fixed amount, we may perform an imaginary experiment

which will show how much labor really produces. We may set men at

work, a few at a time, until they are all employed, and we may measure

the product of each of the detachments. We should make the different

sections of the working force as similar to each other as it is

possible to make them and call each section a unit of labor. If there

were ten such divisions and if the quantity of capital were sufficient

to equip them all on the scale on which laborers are at present

actually equipped, it is clear that this amount of capital, when it

was lavished on one single section, must have supplied it with

instruments of production in nearly inconceivable profusion. What we

should to-day regard as a fair complement of capital for a thousand

men would nearly glut the wants of a hundred, and yet it is thinkable

that it should take such forms that they would be able to use it.

Productivity of the First Unit of Labor

We will set at work one

section which we have called one unit of labor and will put into the

hands of its members the whole capital which is designed ultimately to

equip the ten sections. It is very clear that the forms that this

capital will take cannot be the same that it will have to take when

the entire working force is using it. Indeed, we shall have to tax our

ingenuity to devise ways in which one unit of labor can utilize the

capital that will ultimately be used by ten. The tools and machines

will have to be few in number but very costly and perfect. We shall

have to resort to every device that will make a machine nearly

automatic and cause it to exact very little attention from the person

who tends it. The buildings will have to be of the most substantial

and durable kind. We shall have to spend money without stint wherever

the spending of it will make labor more productive than it would

otherwise be. If we do this, however, the product of the labor and its

equipment will be a very large one. The industry will succeed in

turning out indefinitely more goods than a modern industry actually

does, and the reason for it will be that the workmen have capital

placed in their hands in unparalleled profusion.

The Product of the Second Unit of Labor

We will now introduce a

second unit of labor, by doubling the number of workers, without

changing the amount of the capital. We must, of course, change the

forms of the capital, or it cannot be advantageously used by the

larger working force. The buildings will have to be larger, and if

they are to be erected with about the same amount of capital as was

formerly used, they must be built in a cheaper way. Tools of every

sort must be more numerous, and this larger number of tools, if it is

to represent the same investment of capital that the former number

embodied, must also be simpler and cheaper. The whole equipment of

capital goods will have to undergo a complete transmutation; but the

essential thing is that the amount of the capital should not be


A Provisional Mode of Measuring Capital

In measuring the amount of

the capital we are obliged to use a unit of cost, and in the

illustration we have assumed that the cost can be measured in dollars.

The productive fund consisted at the outset of a certain number of

dollars invested in productive operations. This is only a provisional

mode of measuring it. The money spent really represents sacrifice

incurred, and we shall find that the only kind of sacrifice that is

available for measuring the cost of goods of any kind is that which is

incurred by labor. Ultimate measurements of wealth in all its forms

have to be made in terms of labor. Such measurements have presented

difficulties, and the attempt to make them has led to serious

fallacies. We shall see, in due time, how these fallacies can be


The Law of Diminishing Productivity

Under these conditions the

second unit of labor will add something to the amount that was

produced by the first unit, but it will not cause the product to

become double what it was. It could not do that unless the capital

also were doubled. Each unit of labor is now cooeperating with one half

of the original capital, and the total product is less than it would

have been if the new labor, on entering the field, had brought with it

as full an equipment of productive instruments as was possessed by

the labor that preceded it. Adding to the industry a second unit of

labor without adding anything to the capital makes the total product

somewhat larger, but falls short of doubling it. If we credit to this

second unit of labor what it adds to the product that was created

before it came into the field, we shall find that it is a certain

positive amount, but obviously less than the total product which was

realized by the first unit and all the capital. It is even less than

a half of the product of the two units using all the capital. Perhaps

the first unit of labor, when it used all the capital, created ten

units of product; while the two units of labor, using this same

original amount of capital, produce sixteen units of product. The

clear addition to the original product which is caused by the added

labor of the second squad of workmen is only six units, while a half

of the total product after the addition to the labor has been made is

eight. This figure represents the amount we may attribute to one unit

of labor and a half of the total capital, while six represent what is

causally due to one unit of bare labor only. With all the capital

and one unit of labor we get ten units of product, while the addition

of one unit of bare labor brings the total amount up to sixteen. Six

units find the cause of their existence in the presence of the second

unit of labor, and the second unit therefore shows, as compared with

the first, a diminished productivity.

Product of the Third Unit of Labor

We will now introduce a third

unit of labor, leaving the amount of capital still unchanged, but

again altering the forms of it so as to adapt them to the needs of a

still larger working force. We will make the buildings larger and

therefore, of necessity, cheaper in their forms and materials. We will

make the tools and machines more numerous and simple, and will do

everything that is necessary in order to make the fixed amount of

capital--the fund amounting to a given number of "dollars"--embody

itself in the number and the kinds of capital goods that are requisite

in order to supply three times the original number of workmen. The

third unit of labor now adds something to the product realized by the

first two, but the addition is smaller than it was in the case of the

second unit.

Products of a Series of Units of Labor

If we continue this process

till we have ten units of labor, employing the same amount of capital

as was formerly used by one, we shall find that each unit as it begins

to work adds less to the previous product than did the unit which

preceded it, and that the tenth unit adds the least of all.

Care must be taken not to confound the addition that is made to the

product in consequence of the additional working force with the amount

which, after the enlargement of the force, is created by the last unit

of labor and its pro rata share of the capital. When the tenth unit

of labor is working, it is using a tenth of the capital and the two

together create a tenth of the product. This is more than the amount

which is added to the product by the advent of the tenth unit of

labor. That addition is merely the difference between the product of

all the capital and nine units of labor and that of all the capital

and ten units of labor. This extra product can be attributed entirely

to the increment of labor.

It is also carefully to be noted that when the units are all working

together, their products are equal and the particular one which

happened to arrive last is not less productive than the others. Each

one of them is now less productive than each one of the force of

nine was under the earlier conditions. In like manner each unit of

the nine is less productive than was, in the still earlier period,

each unit of the force of eight. At any one period, all units produce

the same amount. At any one period, then, what any one unit of labor

produces by the aid of its pro rata share of the capital is a larger

amount than what each can be regarded as producing by itself. Though

one of ten units creates, with the aid of a tenth of the capital, a

tenth of the product, of itself it creates less; for we can only

regard as its own product what it adds to the product that was

creating before it arrived on the scene. It is the bare product of a

unit of labor alone that we are seeking to distinguish from other

elements in the general output of the industry, and that consists in

the difference between what nine units of labor and all the capital

can produce, and what ten units of labor and all the capital can


We will consider the amount of capital fixed and let the amount of

labor increase along the line AE, and we will let the product of

successive units of labor be measured by the vertical distance from

the points on the line AE to the descending curve CD. AC is the

product of the first unit of labor. The product of later units is

measured by lines to the right of AC and parallel with it, which

grow shorter as the number of units increases. ED is the product of

the last unit. In each case we impute to an increment of labor

whatever amount of product its presence adds to that which was created


Summary of Essential Facts

The facts that are to be remembered

then are: first, that the capital remains fixed in amount, though the

forms of it change as the number of units of labor increases;

secondly, that that which we call the product of a unit of labor is

what that unit, coming into the field without any capital, can add to

the product of the labor and capital that were there before; and

thirdly, that this specific product of labor grows smaller as the

amount of labor grows larger, rendering the product of the last unit

the smallest of all. When the tenth and last unit is working, each one

of the nine earlier units is, of itself, producing no more than does

the final one, though it formerly produced more because of the larger

quota of capital with which it was formerly supplied.

The Test of Final Productivity

There are now at work ten units of

capital and ten of labor, and we cannot go through the process of

building up the working force from the beginning. How, then, do we

measure the true product of a single unit of labor? By withdrawing

that unit, letting the industry go on by the aid of all the capital

and one unit of labor the less. Whatever one of the ten units of labor

we take away we leave only nine working. If the forms of the capital

change so as to allow the nine units to use it advantageously, the

product will not be reduced to nine tenths of its former size, but it

will still be reduced; and the amount of the diminution measures the

amount of product that can be attributed to one unit of bare labor. Or

we may add a certain number of workmen to a social force already at

work, making no change in the amount of the capital,--though changing

its forms,--and see how much additional product we get. That also is a

test of final productivity. It gives the same measurement as does the

experiment of taking away the little detachment of men and seeing how

much the product shrinks. By either process we measure an amount that

is attributable altogether to bare labor and not to capital.

The whole area BCD in the diagram is an amount of product that is

attributable to capital and not to labor. It represents the total

surplus produced by labor and capital over the amount that can be

traced to the labor alone. The product of all the capital and all the

labor minus ten times the product of a single unit of labor is the

amount that is attributable to the productive fund only.

The area ABDE represents this amount. The last unit of labor creates

the amount DE and the number of units is represented by the amount

AE. All of them are now equally productive and what all create, as

apart from what capital creates, is the amount ABDE.

Only the Final Part of this Mode of gathering a Working Force

practically resorted To

The process of building up the working

force from a single unit is imaginary. In practical life we see the

process only in its final stage. Entrepreneurs do continually have

to test the effect of making their working forces a little larger or a

little smaller, and in so doing they test the final productivity of

labor; and this is all that is necessary. Tracing the process of

building up the force of labor unit by unit reveals a law which is

important, namely, that of the diminishing productivity of single

units of labor as the number of units increases. If we crowd the world

full of people but do not proportionately multiply working appliances

of every kind, we shall make labor poorer.

Why a Detachment of Laborers rather than One Man is treated as a Unit

of Labor

In making up the force of workers we might have treated

each individual as a unit; but we have preferred to call a detachment

a unit in order that the symmetry of the force might be preserved.

Even though we were studying only a single mill it would have its

departments, and it would be desirable that, when we enlarge the force

of men, we should be able without difficulty to give to each part of

the mill its fair share of the new laborers. If it were a shoe

factory, we should need to add lasters, welters, sewers of uppers,

etc., in a certain proportionate way, in order that one part of the

mill might not get ahead of another and pile up unfinished products

faster than they could be taken and completed.

In the last analysis the law applies to the industry of all society.

The final unit in the case consists of shoemakers, cotton spinners,

builders, foundrymen, miners, cultivators, etc., and of men of all

subtrades included in the general callings. As the composite

detachments come into the field, they apportion themselves among all

the occupations that are represented, and that too in nicely adjusted

proportions. We shall see in due time how this adjustment of the

several shares of the social force of laborers is practically made.

The Law of Final Productivity Applicable to the Labor of


The law of final productivity applies to every mill, shop,

or mine separately considered. If its capital remains fixed in amount,

units of labor produce less and less as they become more numerous. The

product of any unit at any one time may be measured by taking it away

and seeing how much the output of the establishment is reduced. The

law, however, applies to all the mills, shops, mines, etc., considered

as a social complex of working establishments. As the working society

grows larger without growing richer in the aggregate, the power of

labor to produce goods of all kinds grows less. At any one time this

producing power is measured by taking away from every working

establishment a number of its operatives and ascertaining how much

less is produced after the withdrawal. Such a test on the social scale

is never made consciously. Each employer can test in an approximate

way the effect of reducing his own force, and the effect of gradually

enlarging it, and there are influences at work which result in

enlarging one industry when others are enlarged and in causing the

final productivity of labor to be uniform in all. A shoe manufacturer

can tell, in a general way, how much an extra man or two will be worth

to him. It is possible to ascertain by experience about what number of

shoes that additional labor will, in a year, add to the output of the

shoe factory or the number of tons of steel it will add to the present

annual output of a furnace. When these products vary in the case of

different shops, the men are called to the points where the apparent

additions are largest, and the constant tendency is toward a level of

productive power. The building up of an imaginary force from the

beginning presents, in a clear and emphatic way, the fact that the

specific productivity of labor grows less as, other things remaining

the same, workers become more numerous. We should know on a priori

grounds that this must be the fact; but we can verify it by

observation and statistical inquiry. Where men are numerous and land

and tools are scarce, labor is comparatively unproductive; and it is

highly productive where land and tools are plentiful. There is no

doubt that crowding the world full of people, without providing the

world with capital in a proportionate way, would impoverish everybody

whose income depends on labor.

The Law of Wages

Even though labor creates the amount ABDE, it

is not yet perfectly clear that it will be able to get that amount.

For aught we now know the entrepreneur may keep some of it, and for

aught we know he may keep some of the quantity BCD which is

distinctly the product of capital. Let us see whether he can in

reality withhold any part of ABDE, which is the product of labor.

Wages under Perfect Competition

In the static state that we have

assumed, competition works without let or hindrance. It does not work

thus in the actual world, and we shall in due time take account of the

obstacles it encounters; but what we are now studying is the standards

to which such competition as there is--and it is in reality very

active--is tending to make wages conform. We want to know what would

happen in case this competition encountered no hindrance at all. This

would require that a workman should be able to set employers bidding

against each other for his services just as actively as an employer

can make laborers bid against each other in selling their services. If

this were the case, every unit of labor could get what it produces, no

more and no less. Even a single man, offering himself to one employer

after another, would virtually carry in his hands a potential product

for sale. His coming to any man's mill would mean more goods turned

out in a year by the mill; and if one employer would not pay him for

them at their market value, another one would. The final unit of

social labor can get, under perfectly free competition, the value of

whatever things that labor, considered apart from capital, brings into

existence. Moreover, each unit of labor by itself alone now produces,

as we have seen, the same amount of commodity as the final unit, and

can get the price of it. Now that they are all working together each

one of them can place itself in the position of the final unit by

leaving its present employment and offering its services elsewhere.

Wages regarded as Prices of Fractional Products adjusted by Perfect


Under the hypothesis of perfect competition, as the

term has been used in our discussion, the venders of goods can get

their market values. These values are fixed by the final utility law.

Free competition means, then, not only that any average laborer who

offers himself for hire virtually carries in his hands a potential but

definite product for sale, but that he may confidently offer it at the

price that is fixed by its final utility. Like other venders, the

laborer can get the true value of his product and he can get no more.

In an ideally perfect society organized on the competitive plan a man

would be as dependent on his own productive power as he would be if he

were alone in a wilderness. His pay would be his product; but that

would be indefinitely larger than it could be in a wilderness or in

any primitive state. The capital of other men and the organization

that they maintain enable a worker to create and get far more than he

could if he lived alone, even though, like Crusoe, he were monarch of

his whole environment. It would be a losing bargain for the worker to

surrender the product of mere labor in a state of civilization in

exchange for what both labor and capital create in a state of