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ESSENTIALS OF ECONOMIC THEORY
_AS APPLIED TO MODERN PROBLEMS OF INDUSTRY AND PUBLIC POLICY_
BY
JOHN BATES CLARK
PROFESSOR OF POLITICAL ECONOMY IN COLUMBIA UNIVERSITY
AUTHOR OF "THE DISTRIBUTION OF WEALTH,"
"THE PHILOSOPHY OF WEALTH,"
"THE PROBLEM OF MONOPOLY," ETC.
New York
THE MACMILLAN COMPANY
1915
_All rights reserved_
COPYRIGHT, 1907,
BY THE MACMILLAN COMPANY.
Set up and electrotyped. Published October, 1907. Reprinted
July, 1909; July, 1915.
PREFACE
In a work on the "Distribution of Wealth," which was published in
1899, I expressed an intention of offering later to my readers a
volume on "Economic Dynamics, or The Laws of Industrial Progress."
Though eight years have since passed, that purpose is still
unexecuted, and it has become apparent that any adequate treatment of
Economic Dynamics will require more than one volume of the size of the
present one. In the meanwhile it is possible to offer a brief and
provisional statement of the more general laws of progress.
Industrial society is going through an evolution which is transforming
its structure and all its activities. Four general changes are going
on within the producing organization, and the resultant of them, under
favorable conditions, should be an enrichment in which all classes
would share. Population is increasing, capital is accumulating,
technical methods are improving, and the organization of productive
establishments is perfecting itself; while over against these changes
in industry is an evolution in the wants of the individual consumer,
whom industry has to serve. The nature, the causes, and the effects of
these changes are among the subjects treated in this volume.
The Political Economy of the century following the publication of the
"Wealth of Nations" dealt more with static problems than with dynamic
ones. It sought to obtain laws which fixed the "natural" prices of
goods and those which, in a like way, governed the natural wages of
labor and the interest on capital. This term _natural_ as thus used,
was equivalent to static. If the laws of value, wages, and interest
had at this time been correctly stated, they would have furnished
standards to which, in the absence of all change and disturbance,
actual values, wages, and interest would ultimately have conformed.
The economic theory of this time succeeded in formulating, correctly
or otherwise, principles of economic statics and a fragment or two of
a science of economic dynamics, although the distinction between the
two divisions of the science was not clearly before the writers' eyes.
The law of population contained in the work of Malthus is the only
systematic statement then made of a general law of economic change.
Though histories of wages, prices, etc., furnished some material for a
science of Economic Dynamics, none of them attained the dignity of a
presentation of law or merited a place in Economic Theory. Students of
Political Economy were at that date scarcely awakened to the
perception of laws of dynamics, and still less were they conscious of
the need of a systematic statement of them. A modest beginning in the
way of formulating such laws the present work endeavors to make.
The first fact which becomes apparent when economic progress is
studied, is that static laws have a general application and are as
efficient in a society which is undergoing rapid transformation as in
one that is altogether changeless. Water in a tranquil pool is
affected by static forces. Let a quantity of other water rush in and
there are superinduced on these forces others which are highly
dynamic. The original forces are as strongly operative as ever, and if
the inflow were to stop, would again reduce the surface to a level.
The laws of hydrostatics affect the waters in the rapids of Niagara as
truly as they do those in a tranquil pool; but in the rapids a further
set of forces is also operative. In the work referred to, issued in
1899, an effort was made to isolate the phenomena of Economic Statics
and to attain the laws which govern them. Necessarily this study made
a certain impression of unreality, since it put out of sight changes
which are actually going on and are the conspicuous fact of modern
life. It assumed the conditions of a world without any such movement
and endeavored to formulate laws which, in such a condition, would fix
standards of value, wages, interest, etc. It put actual changes out of
sight, intentionally and heroically, but with a full recognition of
the fact that they are actually taking place and must in due time be
introduced and studied. We live in what is _par excellence_ an age of
progress, and it is in part for the sake of perceiving the laws of
progress that we first disentangle from them the laws of rest and make
a separate study of these. The world from which change is excluded is
unreal, but the _static laws_ which can be most clearly discerned by
mentally creating such a world have reality. Every day's transactions
are governed by them as truly as a physical element like water in
active movement is affected by forces which, if they acted alone,
would bring it to a state of permanent rest. The first purpose,
therefore, of the present work is to show the presence and dominance
in the real world of the forces described in the earlier work. It
brings static laws into view and endeavors to show how they act at
any one particular stage of industrial evolution. Even while changes
are examined, the fact is perceived that there are steadily at work
forces which, if changes should cease, would make society conform to a
certain imaginary static model and makes wages and interest also
conform to static standards.
Another purpose of the work is to examine seriatim the effects of
different changes, to gauge the probability of their continuance, and
to determine the resultant of all of them acting together. It is
important to know under what conditions changes proceed at a normal
rate, and when the standard of wages rises as it naturally should. As
the actual rate of wages pursues its rising standard, but lags
somewhat behind it, it is necessary to know what determines the
interval between the two, and when the interval is normal. What is
called "economic friction" is the cause of this interval and is an
element that is amenable to law.
There is to be studied, not only the friction which obstructs the
action of natural forces, but positive perversions of the forces
themselves. Of these the chief is monopoly; and its influence, its
growth, the sources of its power, and its prospect of continuance have
to be determined. The actual tendencies of the economic system are
against it, and so--if we except a few monopolies created for special
ends--are both the spirit and the letter of the civil law. In a
country in which law held complete sway, all objectionable monopolies
would be held in repression. In order to see how much economic forces
can be made to do in this direction, the present work discusses
railroads and their charges, and some of the practices of great
industrial corporations, and tries to determine what type of measures
a government should take in dealing with these powerful agents. In
connection with monopoly and with the conditions of economic progress
a study is made of trade unions, strikes, boycotts, and the
arbitration of disputes between employers and employed, and also of
the policy of the state in connection with them, and with money and
protective duties.
It is my belief that students should become acquainted with the laws
of Economic Dynamics, and that they can approach the study of them
advantageously only after a study of Economic Statics. The present
work is in a form which, as is hoped, will make it available for use
in class rooms, not as a substitute for elementary text-books, but as
supplementary to them. It omits a large part of what such books
contain, presents what they do not contain, and tries to be of service
to those who wish for more than a single introductory volume can
offer.
An essential part of the theory of wages here stated was presented in
a paper read before the American Economic Association, in December,
1888, and published in a monograph of the American Economic
Association in March, 1889; and other parts of this theory were issued
at intervals following that date. The theory of value was published in
the _New Englander_ for July, 1881. I had not then chanced to see the
early statements of the principle of marginal appraisal contained in
the works of Von Thuenen and Jevons, and did not consciously borrow
anything from their writings, but I gladly render to them the credit
that is their due. I do not fear that I shall be supposed to have
borrowed other parts of the general theory here offered. The theory
of capital here stated was first presented in a monograph of the
American Economic Association for May, 1888, and the discussion of
money of which the present work gives a summary, in articles in the
_Political Science Quarterly_ for September, 1895, and for June and
September, 1896. The discussion of the relation of protective duties
to monopoly appeared in the same quarterly for September, 1904.
The author should, perhaps, apologize for the fewness of the citations
from other works which this volume contains. The richness of the
recent literature of Economic Theory, especially in America, would
have made it necessary to use much space if the resemblances and the
contrasts presented by points in this volume, and corresponding points
in other volumes, had been noted.
Worthy of special attention, if citations had been given, would have
been the writings of Professors Irving Fisher, Simon N. Patten, and
Frank A. Fetter of this country, and Professor Friedrich von Wieser of
Prague, who have worked in various parts of the same field in which
the studies here offered belong, and also those of Minister Eugen von
Boehm-Bawerk of Vienna, who has treated some of the same themes in a
strongly contrasted way. If merited attention were paid to the works
of Hadley, Taussig, Carver, Seligman, Giddings, Seager, Walker, and a
host of eminent foreign scholars, a large part of the space in the
book would have to be thus preempted.
I desire most gratefully to acknowledge the assistance which in the
preparation of this book I have received from my colleague, Professor
H. L. Moore of Columbia University, from my son, Mr. John Maurice
Clark, Fellow in Economics in Columbia University, and from my former
colleague, Professor A. S. Johnson of the University of Nebraska.
Besides reading the manuscript and offering valuable suggestions,
Professor Johnson has kindly taken upon himself the reading of the
proof.
JOHN BATES CLARK.
CONTENTS
CHAPTER PAGE
I. WEALTH AND ITS ORIGIN 1
II. VARIETIES OF ECONOMIC GOODS 20
III. THE MEASURE OF CONSUMERS' WEALTH 39
IV. THE SOCIALIZATION OF INDUSTRY 59
V. PRODUCTION A SYNTHESIS; DISTRIBUTION AN ANALYSIS 74
VI. VALUE AND ITS RELATION TO DIFFERENT INCOMES 92
VII. NORMAL VALUE 114
VIII. WAGES 127
IX. THE LAW OF INTEREST 146
X. RENT 159
XI. LAND AND ARTIFICIAL INSTRUMENTS 174
XII. ECONOMIC DYNAMICS 195
XIII. THE LIMITS OF AN ECONOMIC SOCIETY 210
XIV. EFFECTS OF DYNAMIC INFLUENCES WITHIN THE LIMITED
ECONOMIC SOCIETY 229
XV. PERPETUAL CHANGE OF THE SOCIAL STRUCTURE 244
XVI. EFFECT OF IMPROVEMENTS IN METHODS OF PRODUCTION 256
XVII. FURTHER INFLUENCES WHICH REDUCE THE HARDSHIPS ENTAILED
BY DYNAMIC CHANGES 282
XVIII. CAPITAL AS AFFECTED BY CHANGES OF METHOD 301
XIX. THE LAW OF POPULATION 321
XX. THE LAW OF ACCUMULATION OF CAPITAL 339
XXI. CONDITIONS INSURING PROGRESS IN METHOD AND
ORGANIZATION 358
XXII. INFLUENCES WHICH PERVERT THE FORCES OF PROGRESS 372
XXIII. GENERAL ECONOMIC LAWS AFFECTING TRANSPORTATION 396
XXIV. THE FOREGOING PRINCIPLES APPLIED TO THE RAILROAD
PROBLEM 416
XXV. ORGANIZATION OF LABOR 451
XXVI. THE BASIS OF WAGES AS FIXED BY ARBITRATION 470
XXVII. BOYCOTTS AND THE LIMITING OF PRODUCTS 503
XXVIII. PROTECTION AND MONOPOLY 517
XXIX. LEADING FACTS CONCERNING MONEY 538
XXX. SUMMARY OF CONCLUSIONS 555
INDEX 563
ESSENTIALS OF ECONOMIC THEORY
CHAPTER I
WEALTH AND ITS ORIGIN
The creation and the use of wealth are everywhere governed by natural
laws, and these, as discovered and stated, constitute the science of
Economics. Some of them come into operation only when men live in more
or less civilized societies and work in an organized way, while others
are operative wherever men work at all. Every man who lives must have
something that can be called wealth, and, unless it is given to him,
he must do something in order to get it. A solitary hunter, living in
a cave, eating the flesh of animals and clothing himself in their
skins, would create wealth and use it; but he would not take part in a
social kind of industry. What he does could not be described as a bit
of "social," "national," or "political" economy. Yet the gaining of
his living would be an economic operation and would involve a creating
and using of wealth. A statement of the laws governing the processes
by which such a man makes the earth yield to him means of support and
comfort would constitute a Science of the Economy of Isolated Life,
which is a part of the general Science of Economics.
_Primitive Capital._--If an isolated man hunts with good implements,
he gets more game than he would have done if he had not used some of
his time in making such implements. It pays such a man to interrupt
his hunting long enough to make a spear or a bow and arrows. This
amounts to saying that it is an advantage to him to become, in a
simple way, a capitalist as well as a laborer; for the primitive
implements of the chase are forms of _productive_ wealth, or capital.
Moreover, if he possesses foresight, he will keep enough food within
reach to tide him over periods when game is not to be had, and such a
store is another form of capital.
_The Field of General Economics._--The economy of a man who works only
for himself is subject to laws that are based on his own nature and
the character of his material environment. Because he is what he is
and because nature is what it is there is a certain way in which he
must proceed, if he will live at all, and there are certain conditions
which must exist, if he is to live well. The inherent productive power
of labor and of capital is of vital concern to him, since he is both a
laborer and a capitalist; but he is in no way interested in what we
commonly call the relations of labor and capital, since that
expression always suggests the dealings of one class of men, who
labor, with another class, who own or control productive wealth. The
study of such relations takes us at once into the domain of _Social_
Economy; but we can study certain universal laws of wealth without at
all entering that domain. When we speak of the power that resides in a
bow and arrow, we refer to a truth of _General_ Economics and one
which illustrates the inherent power of capital, though we may be far
from thinking of lenders and borrowers in a modern "money market" or
of dealings of any one class of men with any other.
_The Field of Social Economics._--The moment that we begin to examine
economic relations that different classes of men sustain to each
other, we enter the realm of _Social_ Economics; and we do this
whenever we study modern business dealings. Even our hunter would take
part in a social economy if he began to sell some of his game; and
from that time on his income would depend, not wholly on his relation
to material nature, but partly on his relation to other men. A good
market for his game would come to be of the greatest importance to
him; and a market for anything implies a social method of securing
wealth.
_Fundamental Facts Common to Primitive Life and Social Life._--The
relations which men sustain to each other in civilized industry are
thrown into the foreground in the science of Social or "Political"
Economy.[1] It is an organized system of industry in which we are
engaged, and it is that which we care most to understand. Until
recently we have had a far less satisfactory understanding of the
social element in industry--that is, of the relations that men who are
producing wealth sustain to each other--than we have had of such
general facts as a primitive producer needs to know. We have had, for
example, much information concerning the materials which the earth
contains and the way to make them useful. We have had a practical
knowledge of what wealth is and of the mode of creating it, and we
have been able to identify it as we have seen it either in the raw or
the finished state. We have known what labor is, how it proceeds and
what helps it needs to enable it to make clothing, to prepare food,
etc. We have not known as much about the way in which the modern
market for such products is regulated, and how a modern tailor or
baker shares gains with the man who employs him and provides him with
materials and tools, and the main purpose of studying Economics is to
get an understanding of such social facts; but this cannot be done
without first bringing before the mind the more general facts
concerning the inherent nature of wealth itself and of the activities
that are always necessary--in uncivilized life as well as in
civilized--for creating and using it.
[1] Past usage renders the somewhat misleading term
_Political Economy_ more available than the more accurately
descriptive term _Social Economics_, as the title of the
science which treats of the creation and use of wealth by an
organized society. Either title implies the existence of such
an organization, but the word _political_ calls attention to
the fact that it is under a government. The fact that, in a
study of wealth, is most important is that the exchanges of
products which spontaneously take place create an industrial
society whose activities, going on as they do under a
government, constitute the subject of the studies which are
properly indicated by the traditional term, Political
Economy. Government as such is not the subject of those
studies.
_General Facts First in the Natural Order of Study._--The primitive
and general facts concerning industry, which, in a broad sense, is the
creating of wealth, need to be known before the social facts can
profitably be studied; and a statement of the principles of Political
Economy should therefore begin by presenting a body of truth which is
independent of politics and sociology and so general that it is
illustrated even in that simplest of all conditions, in which no
market exists and every man makes by his own labor all the goods that
he uses. The wealth of a Crusoe, that of a solitary Esquimau, and that
of a pygmy in equatorial Africa have laws as well as that of a
European or American employer or bondholder. The qualities in matter
which make a share of it important for promoting the welfare of its
possessor can be detected in the simplest commodities that are
anywhere used. All kinds of industrial products have a common origin.
Labor and capital act together in making a birch canoe as truly as
they do in producing a transatlantic liner; and the productive power
of each of these two agents is everywhere governed by certain general
laws. Before ascertaining what is true of wealth when capital has
become complex and when laborers have become specialists, each
producing one particular part of one product and securing many
finished goods in exchange for it, it is well to state some facts
relating to wealth which are so general that they appear in all stages
of civilization.
_The Nature of Wealth._--The old English word _weal_ describes a
condition of life. It is the state of being "well off," or of having
one's wants amply supplied. Well-being in a broad sense of the term
may depend largely on a man's state of health, his temperament, his
conscience, or his relation to his friends; but the weal that is so
secured is not described as a state of wealth. That depends on the
possession of useful and material things, and the rich man has more of
them than other men. The term _wealth_, which originally signified the
state of being rich, afterwards came to be applied to the things which
make a man rich, and it is thus that the term is used in the science
of Economics.
_What Things constitute Wealth._--It is clear that useful things, like
air, which are at hand in unlimited quantity, do not make any one
rich in this comparative sense, for they benefit all alike; and, in so
far as they are concerned, all men are on the same level of welfare.
Moreover, since they are so abundant as to shower benefits everywhere
in profusion, the quantity of them that a man has at his disposal may
be lost or thrown away with entire impunity. He would only have to
help himself again from the abounding supply which nature thrusts on
him in order to be as well off as he was before. A bucketful of water
on the shore of Lake Superior is of no importance to the man who has
it. If it were spilled on the sand, the man would have only to dip up
another bucketful, with an expenditure of effort that would be too
small to take account of. If, however, fresh water were scarce, every
bucketful would have its importance, and the loss of that quantity
would make a distinct impression on the man's well-being. Whenever
each particular part of the supply has this power to make a possessor
better off than he would be without it, the substance is a form of
wealth. The quality of being _specifically_ important is, therefore,
the essential attribute of all the concrete forms of wealth. Sand by
the seashore does not have any specific importance, since it is so
abundant that the gain or loss of a wheelbarrow load would not make a
man better off or worse off; but a pile of sand by the side of an
unfinished building has this quality. There every barrow load is of
consequence, for the available quantity is so small that diminutions
reduce and additions increase the wealth of the possessor. Sand on the
shore has the inherent power to help make mortar, and water in Lake
Superior has the power to quench thirst, but neither of them has the
attribute which would make it a form of wealth, namely, specific
importance. Particular parts of the supply may be lost with impunity.
_Varieties of Utility._--We have used the term _importance_, rather
than usefulness or utility, to describe the quality which, if it
exists in every particular bit of a substance, makes it all a form of
wealth. With due care we may use the term _utility_. In a way even a
cup of water dipped by a fisherman from the lake is useful, for it
renders a service. Though the man might lose it and be no poorer, he
cannot say that the thing has no utility of any kind. He can say that
it has no importance. What it has we may call _absolute_ utility, or
the power to do for a man something which he wishes to have done. When
the fisherman is thirsty the water will do him good. It has an
absolute service-rendering power; and yet this cupful makes the owner
no better off than he would be without it, since the service which it
is capable of rendering would be rendered whether the man had it or
not. Absolute utility in an article is the power to render any service
whatever, regardless of the question whether it would be rendered
equally well if the article were absent. If conditions were such that
the man would have to go thirsty in case he spilled his cupful of
water, then this little supply would have what we may term _effective_
utility, and this means that the presence of the particular bit is a
positive element in conducing to the man's welfare. Usable things have
absolute utility even when they are superabundant, but they have
effective utility only when the quantity of them is so limited that
every particular bit of it is of some importance. Absolute utility
and limitation of supply insure to them this quality; and this
principle holds true in the economy of the most primitive state as
well as in that of a civilized one.
_The Origin of Wealth._--Some of the things that have this kind[2] of
utility have been given to man by nature. She has furnished some
materials that are useful and has not furnished them in quantities
sufficient to prevent them from being _specifically_ important. On
account of the comparatively niggardly way in which she has doled them
out to man, every bit of the supply has a power to benefit him; and if
he gains some portions, he goes upward in the scale of well-being, and
if he loses some, he goes downward. Wild fruits and fruit trees come
in this category; and a savage who should build his hut in a small
grove of banana trees, if he could keep other people out of it, would
be, by so much, better off than they. The grove and its fruits would
constitute their owner's wealth.
[2] The term _final_ utility is used with much the same
significance as specific importance. It is the utility of the
last and least important part of the supply, and the use of
the term requires us to think of the supply as offered to
users unit by unit till the whole amount is in their hands.
The first unit, when it stands alone, is more important than
any later one will be. The second is of less consequence, and
the last is the least important of all. When, however, all
have been supplied and are together available for use, one is
as important as another. Each one has an effective utility
which is measured by the service rendered by the last one.
The term _specific_ indicates that we measure the importance
of the supply of an article not in its entirety, but bit by
bit, while the term _effective_ is the antithesis of
_absolute_ and means that each bit of the supply not only
renders an absolute service, but renders one which would not
be gratuitously rendered by some other part of the supply in
case this portion were removed or destroyed. We do not here
think of the supply as built up from nothing to its present
size bit by bit, but look at it as it stands and measure the
importance of any particular quantity. When we speak of final
utility, we think of a series of "increments" supplied one
after another, and in this case the successive increments
become less and less important, since, after some have been
supplied, the want of the kind of good that they represent is
less keenly felt. The conception of the series of units is
merely a means of isolating one unit from a total number and
obtaining a mental measurement of its importance which
corresponds with the effective importance of any unit in the
entire quantity.
_Land an Original Form of Wealth._--Land is the original gift of
nature to humanity, and wherever there are people enough to make the
possession of a particular piece of it important, it becomes a form of
wealth. It can be valueless only when population is very sparse; and
then an increase in the number of people dwelling on it gives to it
early the attribute of specific importance. The land that is
accessible to a growing population cannot long be superabundant.
_Forms of Wealth produced by Labor._--Few useful goods are presented
to man by nature in a finished state, and it is therefore necessary
for man to exert himself in order to get the goods that he needs in
the condition in which he can use them. He must make raw substances
more useful than they naturally are, and as he does this the things
become partly products of his labor. Of course the supply of them is
limited, since labor is so.
_Labor a Wealth Creator._--Labor is a wealth-creating effort, and
there is no labor that is successful in attaining its purpose that
does not help to bring into a serviceable condition something that can
be identified as an economic good or a form of wealth. Some effort,
indeed, fails in what it attempts to do and therefore produces
nothing. We may build a machine that will not work, or make a product
that no one wants; but labor that attains a rational purpose is always
economically productive.
_Protective Labor and the Attribute it imparts to Useful
Matter._--Labor may be classed according to the particular result that
it accomplishes. In saying that the banana grove in our illustration
is wealth to the savage who resides in it, we had to insert the
proviso that he is able to keep other persons out of it. Exclusive
possession or ownership is necessary in order that things may continue
to be effectively useful to any particular person or persons. If they
are superabundant, as we have seen, no part of the supply is
important; but it is also true that if they are scarce and a man is
not able to keep any of them, they will not serve him. In order that
an economic good may be effective, it must be appropriable, and where
claimants are numerous and lawless it may take much of the owner's
time and effort to keep the article in his possession. The savage must
personally protect his goods, and to some extent the civilized man
must do so; for however well policed a city may be, it will not
do to leave purses or portable goods by the wayside. Protective
labor is necessary in all stages of social advancement. In civilized
life, indeed, we delegate much of it to a special class of
persons,--policemen, judges, lawyers, and legislators,--and this is
the most fundamental division of labor that civilization entails; but
the work has to be done in any stage of social evolution. Crusoe's
goods would have been worth nothing to him if he could not have kept
them from the savages who, in time, appeared on his island; and they
would have been worth little if he had been forced to spend most of
his time in guarding them.
Appropriability is, therefore, a further essential attribute of the
things which can make particular men richer by reason of their
presence. When such things are actually brought into ownership, their
utilities become available, as they would not otherwise be. Effort
expended in protecting property is wealth-creating, since it causes
those service-rendering powers which otherwise would be only potential
in goods to become active. In other words, it gives to things which
are otherwise in a condition to be effectively useful a further
quality which they require in order that they may actually promote an
owner's well-being.
_Industrial Labor._--Industrial labor is the antithesis of protective
labor, and it invariably changes the qualities of material objects in
such a way as to make them useful; that is to say, it directly creates
utilities.[3] These utilities are of different kinds, and the labor
may be classified according to the kind it creates.
[3] The term _create_ is here used in a somewhat loose
sense and does not imply that the man originates matter or
even that he always transforms it without calling in, as an
aid, the forces of nature. The farmer must depend on vital
forces in soil and air in order to raise a crop. What he and
other laborers do is to cause the product in some way to come
into existence, and he and they may in this sense be said to
create the products which would not appear without them.
_Elementary Utility._--An elementary utility is created when a
substance is either dug out of the ground, as is done in mining, or
when it is secured through the vital forces of the earth, as is done
in agriculture. Hunting, fishing, and stock raising should be classed
with agriculture, since they use the resources of animate nature to
secure for mankind new raw products on which labor will confer further
useful qualities. This utility has to be created by men in every stage
of industrial development, from that of a tropical savage to that of
men in the most advanced civilization.[4]
[4] The distinction between elementary utility and others
does not need to be applied with the utmost strictness, for
mining creates form utility by breaking up masses of ore, and
place utility by making them accessible. Agriculture shapes
its products and moves them to places of storage. It is
convenient in practice to adhere to the more general
classification suggested in the text.
_Form Utility._--A form utility is created when a raw material is
fashioned into a new shape, subdivided, or combined with other
materials, as is done in manufacturing and, in a certain way, in
commerce. Buying goods in bulk and selling them in small quantities is
the creating of form utilities and makes an addition to total wealth.
Oil in small cans is worth far more for consumption than it would be
if each consumer were forced to buy a tankful. Sugar is worth more to
a consumer when it is doled out to him in paper sacks than it would be
if it were to be had only in hogsheads. Merchants are not mere
exchangers, for they make positive additions to the utility of goods.
In primitive life no such class exists; and yet form utilities of
every kind are created, since men make for themselves the goods that
they use and adapt them in shape and in quantity to their current
needs.
_Place Utility._--Carrying things to places where they become more
useful creates place utilities. In primitive life men do their own
carrying; but in civilized states the common carrier does most of it,
and so imparts place utility to matter on the most extensive scale.
All useful transportation creates this quality, which is a general
attribute of wealth; and the operation of so moving matter as to
create place utility is one of the general functions of labor.[5]
[5] In a way all kinds of production may be analyzed into the
moving of matter. In cutting up raw materials a manufacturer
moves waste portions away from those that are to be utilized,
while combining materials, of course, moves them toward each
other. Neither of these operations creates place utility.
This quality consists in a relation, not between some
materials and others, but between goods and the persons who
are to use them. Bringing things to us from a distance
changes their local relation to us, and in this is the
essence of place utility, and every article that we use must
have acquired this quality. The service-rendering power which
it possesses is only potential until it reaches a place where
the power can be exercised.
_Time Utility._--There is, moreover, a kind of utility which depends
on the existence of a good at the time when it is needed. Ice in the
warm season, a plow in the spring or the fall, a pleasure boat in
summer, and anything which, by the aid of capital, is presented to a
user when he needs it, illustrate this quality. We may call it time
utility, and creating it is a function of capital. We shall see how
capital assists in the production of the other utilities; but the
creation of time utility it accomplishes without assistance.
_Executive and Directive Labor._--Labor involves the whole man,
physical, mental, and moral. No labor is so simple that it is not
better done when intelligence is used in the performance of it. The
savage's hut, his canoe, his bows and arrows, etc., vary in their
efficiency and value, not merely according to the time and muscular
effort spent in making them, but also according to the efficiency of
the thought by which those efforts are guided. There is here the germ
of the difference between the executive labor of the modern employee
and the directive labor of the manager. Yet no manager directs in more
than a general way the muscular movements of his subordinates, and
their own intelligence must still be trusted to do much of the
directing. The mental labor that guides and controls the physical is
universal in industry, but becomes more and more a distinct and
dominant factor as civilization increases.
_Fidelity as affecting the Productivity of Labor._--The fact that all
workmen are largely their own directors brings fidelity into the
foreground as an element in determining men's earning power; but this
element counts for much more in the civilized state than it does in
the primitive one, for here fidelity in directive laborers of the
highest type is most important and difficult to secure. One of the
greatest problems of modern business is how to make directors and
executive officers of corporations faithful to the stockholders who
employ them. In the primitive state these problems do not arise. When
a man is working for himself, mere interest largely takes the place of
fidelity. If to-day any one secures a good house of his own to live
in, it is because he employs contractors, overseers, and artisans all
of whom are, in the main, faithful to his interests and see that the
work of building is properly done. A savage looks after his own
interests as his personal work proceeds; and yet even in his case
there is the germ of that enthronement of character in the supreme
place which is the prominent feature of highly organized industry. In
building a hut to shelter his family, a savage puts into his work
conscience and affection as well as muscular effort; and when the
mother of the family does this work, the altruistic element in it is
still more conspicuous. As society becomes highly organized the
importance of the moral element in all labor increases till the
further progress, or even the existence, of the social order may be
said to depend on it. In the world of business there is now distrust
and turmoil, and revolutions are feared, because of the unfaithfulness
of a class of men to trusts committed to them.[6]
[6] On the ground of convenience, we may classify labor as
physical or mental, according as the work of muscle or of
brain is especially prominent. Digging a ditch requires more
than an average amount of strength and not even an average
amount of intelligence, and it is, therefore, physical labor
rather than mental; while writing a brief or arguing a case
in court requires much power of thought and only a small
amount of muscular strength, and is typically mental labor.
Managing an estate for an absent owner is more largely a
moral function, since the value of the service depends
chiefly on the fidelity of the man who renders it; but
physical and intellectual labor are also involved. These
three types of personal effort are exerted wherever wealth is
created.
_The Requisites of Production._--If we start with nothing but the
earth in its natural state, inhabited by empty-handed men, and seek to
know what is necessary in order that some wealth may be created, we
find that nothing is absolutely necessary except labor. By working for
a few minutes it is possible to get something that will minister
directly to wants. Yet if men begin operations in a state of such
poverty that they have only their bare hands to apply to the elements
about them, they do not commonly get the usable goods immediately. If
a savage wants fish and makes the rudest net with which to catch them,
he makes what is a _capital good_. This is wanted only for the sake of
the consumers' wealth which it will help to produce. The end in view
has all the while been fish; but the man works first on an instrument
for catching them. He makes the net by mere labor, but he catches the
fish by means of labor and the net. Without such instruments to aid in
production a dense population could not live at all, and a very sparse
one could live only in a meager and precarious way. If the instruments
are artificially made, or if they are furnished by nature in limited
amounts, they are forms of wealth, or goods; but as their function is
not to minister directly to consumers' wants, but to help in making
things which do this, we distinguish them by the name "producers'
goods" or "capital goods." In contrast with them those commodities
which directly minister to wants may be called "consumers' goods."
_The Production of Intermediate Goods._--All economic goods are means
to an end. Wealth is always mediate. It is usually a connecting link
between man's labor and the satisfaction of his wants. Man, the
worker, first spends himself on nature, and then nature in turn spends
itself on him. In production nature is the recipient, but in
consumption the recipient is man. This is saying that man serves
himself by means of some element in nature which, under his
manipulation, becomes a form of wealth. He thrusts a bit of natural
matter between himself as a producer and himself as a consumer. All
kinds of wealth, then, stand in an intermediate position between
original labor and the gratification that ultimately results from it.
Some goods, however, are means in the special sense of standing
between labor and other goods. Instruments help to make consumers'
goods and these add to man's pleasure. Using a tool is not generally
agreeable. The tool stands not only between the effort and the
gratification that will ultimately follow, but between the effort and
the further material good that will directly produce gratification.
The hatchet intervenes between the labor that makes it and the
firewood it will cut, while the wood acts directly on the man and
keeps him warm. Capital goods are in this special sense mediate. They
are not wanted for their own sake, but for the sake of something else
that is directly useful.[7]
[7] For an elaboration of the conception of mediate goods the
reader is referred to Von Boehm-Bawerk's work on "Positive
Theory of Capital" and to John Rae's work on "The
Sociological Theory of Capital."
_All Labor immediately Productive of Wealth._--When a savage abandons
the plan of fishing from the shore and gives his labor for a fortnight
to making a canoe with which to fish more effectively, he interposes
an interval of time between his labor and its ultimate fruits, the
consumers' goods. There is no such interval between the labor and the
kind of wealth that it first creates, namely, the canoe. This
immediate product of labor is itself a form of wealth and at once
rewards the laborer, since it is what he needs, though he does not
need it for consumption. Industry always pays as it goes and tolerates
no hiatus between labor and wealth in some form.
_Organized Industry immediately Productive of Consumers' Goods._--If
one man were keeping the stock of canoes of a few fishermen in repair
and taking as his pay a share of each day's catch, he would not have
to wait for his food any longer than the fishermen themselves. This
mode of conducting the industry, however, involves organization. If
each fisherman had to make his first canoe, it would be necessary for
him to wait for fish; but as soon as a stock of canoes has been
obtained and a special set of men assigned to the work of keeping this
stock intact in number and quality, that necessity entirely ceases.
Five men may do nothing but fish while a sixth keeps their stock of
canoes intact by repairing old ones left on the shore and making new
ones to replace such as are beyond repairing. Fishing and boat
building may go on simultaneously, and all the men may go share and
share in each day's catch.[8] This is a type of what goes on in modern
industry, where a complex stock of capital goods always exists and is
kept intact by the action of a class of persons who share the returns
that come from using the stock. None of these persons has to wait for
food, although some of them devote themselves exclusively to the
production of tools. This fact shows that the necessity for waiting,
as well as working, wherever instruments are in the process of
manufacture, is not among the universal phenomena of economics, and
that it is not present in that organized industry which we chiefly
study. Such a permanent stock of capital goods as the fishing
community of our illustration possesses would enable it to get its
food, the fish, day by day, by working in different ways and using the
permanent stock. If we call this permanent supply of canoes, etc.,
_capital_, it is, _in a causal way_, mediate wealth, though it is not
so in point of time. Some labor is spent each day on it, and itself
creates each day some consumers' wealth. These two operations go on
simultaneously, and the men who work to maintain the stock and those
who use it get their returns together. In very primitive life the work
spent on capital goods and that spent on consumers' goods are not
always synchronous, but organization and the acquiring of a permanent
fund of capital make them so. Work to-day and you eat to-day food that
is a consequence of the working. In point of time the canoe makers are
fed as promptly as the fishermen, and this fact is duplicated in every
part of the industrial system. We shall later see more fully what this
signifies, but it is clear that any study of this phenomenon--the
synchronizing of labor and its reward--takes us out of the field of
Universal Economics, since it does not appear in the industry of
primitive beginnings, but is the fruit of organization.[9]
[8] One man might be employed in guarding canoes and fish
against theft, which is doing protective rather than
industrial labor; and economic forces would tend to give him
a share as large as each of the others receives, provided, of
course, that the men are of equal capacity as workers.
[9] The conception of capital goods as always putting
enjoyments into the future has crept into economic science
because in certain illustrations taken from primitive life
they seem to have that effect. We shall see that they do not
have it at all in _static_ social industry, and that they
have it only in a limited way in _dynamic_ social industry,
or that which is carried on by a society undergoing organic
change.