Essentials of Economic Theory Part 16

_Countries similarly exposed to Dangers from Other Countries._--Something of this kind is true of a number of countries which are in close communication with each other. If a rise of pay gave a great impetus to growth of population in Europe, and if this carried the pay down to its original level or a lower one, emigration would be quickened; and although the natural growth in America might be slower, the American worker might not be adequately protected. The influx of foreigners might more than offset the slowness of the natural growth of population in America itself. The most important ill.u.s.tration of this principle is afforded by the new connection which America is forming with the Asiatic nations across the Pacific.

CHAPTER XX

THE LAW OF ACc.u.mULATION OF CAPITAL

Adam Smith and many others have noticed that the growth of capital varies with the intelligence and the foresight of a population. It should therefore increase in rapidity as intelligence increases. A high valuation of the future is a mark of intelligence, and there is no reason why an entirely rational being should value a benefit accruing to himself in the future any less than he does a benefit accruing at once. Perfectly rational estimates of present and future, if there are no influences affecting the choice except these mere differences in time, mean that the two stand at par. It was once supposed that the disposition to save from one's present income varies directly as the rate of interest of the capital which is thus accrued, and in the main this is still regarded as a nearly self-evident proposition. Abstinence imposes a present cost on anybody that practices it. Whosoever saves a dollar misses the gratification which that dollar might bring. He may regard that sacrifice as fixed. It causes him to go without his marginal gratification, whatever that may be. If interest for a year amounts to twenty-five cents, the man has at the end of the year one dollar and twenty-five cents, with which to do whatever he may choose. He may spend it, if he will, and get all the gratification that a dollar and a quarter can bring. If interest stands at five per cent per annum, his abstinence will bring him only one dollar and five cents a year, and that, or whatever he can get by means of it, is a smaller benefit than the one he could get for one dollar and a quarter. If it is barely worth while to go without something now in order to have a dollar and five cents in the future, it is more than worth while to do it in order to have a dollar and a quarter at the same future date. If a man is induced to save only a dollar, for the sake of having a dollar and five cents at the end of the year, why should he not save two dollars, in order to have two dollars and a half at that time? Why should not the amount of his present privation increase, when the surplus of benefit he can gain by it at a future date grows greater? Such is the reasoning, and it seems entirely plausible, if we a.s.sume that what the man loses is the gratification he might have by spending his dollar, and that what he gains is the benefit of spending it and its acc.u.mulation of interest at the end of the year. The a.s.sumption is that the man proposes at a certain future date to spend the princ.i.p.al or the capital which he acquires by saving in the present, together with whatever it may have earned as interest; that he measures the personal benefit which he can get by this spending, and finds the larger benefit better worth a fixed sacrifice in the present than a small one.

_The Actual Purpose of Abstinence._--Most capital is saved with no expectation of ever spending the princ.i.p.al. The motive is a perpetual income, which the capital will earn. What the man appraises in his own mind is not the personal benefit he can get by spending a dollar and five cents at the end of the year; it is the benefit that will come from spending five cents at the end of the first year, another five cents at the end of a second, and a more or less similar amount at the end of every year that shall follow. It is a perpetual income, and as the man's life is limited, the greater part of it must accrue to others than himself. The satisfaction which he will get from it near the close of his own life comes altogether from the prospect of pa.s.sing the princ.i.p.al unimpaired to others and in a.s.suring to them and to their successors the perpetual income which the foundation yields.

Even on this basis it might be supposed that a large perpetual income would offer a greater inducement to save than a small one, and therefore that the amount of saving would be greater when the rate of interest was higher. This would be true if the importance of the perpetual income could be estimated in this simple way by the mere amount of it.

_Conditions affecting the Importance of a Future Income._--The importance of a future income may be large because of the prospective helplessness or poverty of the one who expects to enjoy it. A workman may save at a great present cost to himself in order to provide for old age or sickness, in which case the income from the savings, and often the savings themselves, would be the means of averting a great calamity. To make one's self secure against privation in the future is worth more than to add to one's comforts in the present. If a certain minimum amount were needed to avert starvation at the end of a man's life, he should secure that amount at all hazards, however much that may trench on his present comforts. Now, as the amount which he can have at the end of his life depends largely on the rate of interest which his savings will earn, during such time as they may remain in a productive shape, it will take more positive abstinence on his part to keep himself from starvation when the rate of interest is low than it will when the rate is high. If there were no interest at all, he would have to put by from his income his entire old-age fund. If the rate were a hundred per cent per annum, taking a very small part of the fund out of the income of his active years would suffice, since the fund itself would earn the remainder. Is the income which is provided for the future to be treated as a variable amount in addition to some other income, or is it to be regarded as a fixed amount, which is needed for some definite purpose? On the answer to this question depends the entire issue as to whether a low rate of interest or a high one affords the larger incentive for saving.

_Future Incomes More or Less Fixed usually Needed._--Recent writers have called attention to the fact that in many cases saving has the providing of a definite future income in view. The owner of a landed estate, who intends to leave it to a son, may try to provide from his rents an endowment which will save from want or from an unhappy approach to want his daughters and his younger sons. He might accomplish this, indeed, without any present saving by putting rent charges or mortgages upon his land, but that would trench on the income which his heir can derive from it. It would reduce the establishment which the heir can maintain and cause him to fall out of the cla.s.s to which his father has belonged. Rather than do this, the present owner will usually reduce the present standard of living of the entire family and try to make sure that its future standard shall not fall below the one thus established. It seems better to maintain the somewhat lower standard through a series of generations than to make the present mode of living more luxurious at the cost of uncla.s.sing one's self and one's heirs at a later date.

_This Fact heretofore Underestimated._--To the writers who have cited this familiar fact it appears to require merely a partial amendment of the general proposition that a high rate of interest insures more saving than a low one, and the inference which one naturally draws from this supposed fact is that growing wealth, as is still supposed, reduces the incentive for the acc.u.mulation of more wealth. Such an acc.u.mulation is an essential part of general progress and is practically necessary for sustaining the rate of wages. Here, then, if this supposition is true, we might see an important influence tending to bring progress to a standstill. Great wealth as the result of progress, a reduced motive for acquiring still further wealth, a r.e.t.a.r.ding of progress--such would be the sequence. Dynamics would thus be, in a very important respect, self-r.e.t.a.r.ding if not self-halting.

_Future Standards of Living the Important Element._--The actual fact, as we may venture to affirm, is that the standards of living which need to be maintained in the future are the all-important element in the case. To the laboring man it is necessary to avoid starvation or the workhouse; to the well-paid artisan it seems necessary to do this and to make for his children a provision which will keep them in the same cla.s.s with himself. To the capitalist who by successful business has raised himself above the artisan cla.s.s it seems necessary to keep his children above the rank from which he has lifted the family; and the same principle applies to all the wealthier cla.s.ses. The tenacity with which a man holds to a station in life outweighs his desire to add to his own present luxuries, and his ambition to keep his children in a certain station far outweighs his desire to add to their present luxuries.

_The Importance of Future Standards not affected by the Fact that Men differ in Altruism._--This does not at all raise the question how many people care as much for their children as they do for themselves. That is not the principle at issue. _In so far as men do care for their children_ the end they seek for them is to enable them to avoid what seems like a disaster, rather than to make positive gains in the way of comfortable living. Even in the case of those who have little altruism, such provision as they make for descendants is inspired by the desire to keep them within a certain cla.s.s more than by any computation of how many comforts or luxuries a surplus income of any amount might give them. Whatever provision for children a selfish or dull person makes is dictated by the same motive that incites him to make provision for his own future, and in both cases it is chiefly the maintenance of a standard that he usually has in mind.

_The Principle not invalidated by the Fact that Forethought is often Weak._--All the motives for saving may be unduly weak. The man may care far less for the future than he should do, and may make an unreasonably small provision for it. Incapacity to estimate the importance of this provision, as well as the degree of selfishness which excludes the exercise of self-denial for the benefit of others, are not the only reasons for this disregard of the future. There is an optimism which is natural; and a religious faith which bids one not to take unduly anxious thought for the morrow may occasionally be carried to the harmful length of justifying a neglect of coming years and their needs. An intelligent trust in Providence, however, incites a man to do his own full duty, and it is the better men who do the most to avert future evils from their families. The principle that we are maintaining applies as completely in the cases of those who make small provision for the future as it does in any others. In the majority of cases whatever they do save is set aside chiefly for the maintenance of some standard of living by those who get the benefit of it; and to maintain any standard whatever, whether high or low, requires a larger fortune when interest is low than it does when interest is high.

_Forethought limited in the Length of Time it Covers._--There is little danger that we make any mistake in ascribing to the dread of falling below a standard of living more influence on the acc.u.mulation of capital than any other motive exerts. This will be clearer if we look at the actual manner in which present and future are estimated and compared. The fact is not that most people care unduly little for all future benefits as compared with present ones, as it is that they throw off responsibility for all the future beyond a limited period.

The perspective does not reduce the size of remote objects unduly as often as it cuts off the view of them altogether. In looking through coming years a man is subject to a certain economic myopia. One might compare what he sees with what a man sees in a foggy atmosphere, if it were not for the fact that the view of comparatively near objects is clear. It is as though a circle of fog surrounded him and cut off somewhat abruptly the view of everything that was far away. For a short distance the man sees everything with comparative clearness, but the limitless s.p.a.ces that lie beyond he sees not at all. We have seen that the amount of abstinence he will practice now for the sake of what he or others will gain later varies as he is rational or foolish, unselfish or selfish, and it is also true that the length of his outlook into the future varies in the same way. There are all gradations of far-sightedness among those who create capital; but even comparatively near-sighted ones usually provide for the maintenance of some standard or other during the period that falls within their range of vision, and this requires that they should save more when interest is low than they do when interest is high.

_Marginal Capitalists._--In this connection, however, it is to be noted that economic myopia may go to the extreme length of making men nearly indifferent to all future standards. In this case they const.i.tute an exception to the general rule, since whatever they save, if they save at all, is likely to be more when interest is high than when it is low. They are marginal capitalists, who are not influenced by any benefits except immediate ones and only inquire how much an investment will, from the day when it is made, add to their own incomes. The higher rate is then the greater lure. Moreover, other capitalists, who are influenced mainly by regard for future standards of living, are somewhat affected by the immediate benefit which marginal savers have exclusively in view. To the extent that they are so, the higher the rate of their immediate returns, the more strongly are they impelled to "abstain" and acc.u.mulate. The essential fact is that marginal capitalists are few numerically, and their savings count for little as they enter into the general fund, and that most capitalists, including nearly all who save great amounts, do it chiefly from a desire to maintain themselves and their descendants on an established level of living. In the main the social motives for saving are those we have described.

_Enjoyment largely Teleological._--There is a special reason why a rational man, if offered an enjoyment now or later, at his option, is quite likely to take it later. Enjoyment is mainly teleological. It consists in a conscious approach to a desirable end. The knowledge that one's efforts to attain a desired goal are successful and that the good thing is really coming, sheds a light on the present. Indeed, it is antic.i.p.ation and memory which prolong any enjoyment, and of these antic.i.p.ation is the more effective. The knowledge that one is at a certain time to sail for a foreign tour confers before the sailing an enjoyment which is often more than a foretaste. It often rivals the pleasure that is consciously taken in the trip itself. A man may be happy for years in the prospect of a business success or a prospect of election to a public office, and many years of hard labor in scientific investigation may be illuminated by the expectation of the ultimate discovery and its consequences. There is a good reason why even an average man, as well as a wise one, will wish to distribute his expenditures over the different periods of his life, and to give a preference to the future whenever that is necessary in order to enable him to hold through his earlier years the comfortable a.s.surance that his later ones are well provided for.

[Ill.u.s.tration]

If the line _AB_ represents by its distance above _CD_ a fixed standard of living during a period of ten years, the highly rational man will prefer to take something from the enjoyments of the first five and bestow them on the second five. The consciousness of improvement, of the fact that every year will bring a new enjoyment never before experienced, makes the whole life brighter than it could be with any other disposition of the available means of pleasure. The man's standard of living during the whole ten-year period will be represented by the rising dotted line _EF_.

_The Effect of Robbing the Future._--If a man pursued the opposite course, of taking something from the future to add to the desirableness of the present, thus establishing a falling standard of living, he would have to relinquish every year something to which he was accustomed, which would cause him a keen pain. The very excessive gains of the present would thus become sources of unhappiness at a later period, while the antic.i.p.ation of the later unhappinesses would throw a shadow over the present. The men who in spite of all this live recklessly and waste their present substance do so, not so much because they undervalue so much of the future as falls within their purview, as because they are so extremely short-sighted that over nearly all of the future they have practically no vision at all.

_The Actual Conduct of a very Reasonable Man._--The real fact in the case of a reasonable man is represented by the following figure:--

[Ill.u.s.tration]

Line _EF_ measures fifty years and line _FG_ another fifty. The heavy line _AB_, rising toward the right, represents the rising standard of living which the man's reason makes him maintain during the period over which his vision is clear, while the dotted line _BC_ represents the standard for which, in an imperfect way, he makes provision during the next fifty years. Over later periods his vision does not extend at all. It loses clearness after the point _B_ is pa.s.sed, and in the same proportion it loses influence over the man's conduct. He therefore reconciles himself to whatever standard may prevail, even though it were a stationary one during the latter part of the time. Very seldom, however, would the man consciously lower the standard even during this later period.

_The Effect of Limited Vision on the Valuation of a Perpetual Income._--This failure of vision, or economic myopia, accounts for the fact that the infinite series of payments of interest that a sum of invested capital will earn do not overbalance, in the man's estimate, the princ.i.p.al which he must refrain from spending in order to get them. If interest is at five per cent, abstaining from using a hundred dollars for present pleasure will put into the man's hands, in twenty years, a sum equal to the princ.i.p.al, in twenty years more another like sum, and so on _ad infinitum_. The man who considers whether he shall save a hundred dollars or spend it might be said to be comparing the importance of a hundred present dollars with that of an infinite number of future ones. In his consciousness the number is not infinite, because his vision does not extend over much of the future.

The fact of most importance, as determining whether low interest causes small savings, is that in weighing the importance of the dollars which will be used during the period over which his vision ranges the average man is influenced by a desire to maintain some standard of living, which involves the more saving, the lower the rate of interest.

_The Action of the Motive for Saving on Minds of Varying Degrees of Reasonableness._--Not only the man who looks a little way forward, but the man so const.i.tuted that he can content himself with a falling standard, is impelled to save more if interest is low than he is if interest is high, so long as he deems it necessary to maintain any standard at all; but much importance still attaches to the question whether the standard which the man hopes to maintain is a rising, a stationary, or a falling one. The average man, indeed, does hope to maintain at least a stationary standard during so much of the future as he cares much about. This mode of distributing pleasures appears in matters both small and great. In taking a walk for pleasure one is more likely to go up a rising grade first and descend afterward than he is to go down at first and afterward bear the fatigue of climbing.

While there may be those who would rather play in the forenoon and work in the afternoon, when the choice is presented at the beginning of the day, there are certainly more among the cla.s.ses that society depends on for capital who would put the work in the forenoon and the pleasure in the afternoon or evening. If a man were taking a canoeing trip on a swiftly flowing stream, he would paddle his boat up the stream and then come down with the current, rather than let it float down with the current and then paddle it back. If it be thought that this is true of only a specially rational mind, one may say that the capitalist cla.s.s represents men who in this respect are more than ordinarily rational. They are generous, foresighted, and in their relation to descendants affectionate. The men who really do the saving for society have more to make them think and act in the intelligent way we have described than do ordinary men. The miser, the paragon of abstinence, can hardly be said to be the man who thinks too much of future enjoyments, for he contemplates no such enjoyments that call for spending money, for he never means to spend it. He is an abnormal type and fortunately a rare one. With him there is a standard of _possessions_ to be maintained, rather than one of enjoyments, and it is always a rising standard, since he cares for nothing so much as to see his possessions increasing. To make them increase at any given rate when the direct earnings of capital are small requires severer abstinence than it would if the capital yielded a larger return.

_The Effect of an Increase in the Number of Persons who seek to maintain a Rising Standard of Living._--While it is true that even the half-evolved intellects that care little for coming years do, if they care for them at all, find themselves impelled to save more capital when interest is small than they do when it is large; it is also true that minds of a high order save more than minds of a low one. In order to live during one's latter years just out of danger of the workhouse, one does not need to trench deeply on the comforts and pleasures which he is able to enjoy during the greater part of his life; but if he is determined to live to the end of his days as well as he has done at any time and to help his children to do the same, he must practice a severer self-denial and acc.u.mulate a larger fund. Still sharper becomes the abstinence and still greater the acc.u.mulated fund where men provide for a future mode of living that shall surpa.s.s the present one. The importance of this fact lies in this: the condition which brings with it a low rate of interest does so because of the great number of men who do thus value a future standard of living that shall be at least stationary if not positively rising. The growing size of the social capital implies a more general appreciation of the importance of future well-being. Because men's economic psychology has become what it is and because it is still changing for the better there is a second reason for expecting that the acc.u.mulation of capital will not hereafter be r.e.t.a.r.ded. We make here no extravagant claim as to the number of persons in a community who take the more rational views as to present and future. The number of each cla.s.s is what it is; but facts show that the maintenance of some standard is the most efficient motive for saving in the case of each one of them, and that low interest therefore calls for large acc.u.mulations. They do show that the number who take the more rational views is a growing cla.s.s, that they acc.u.mulate more than other cla.s.ses, and that every addition to their relative number makes for more rapid acc.u.mulation within the society of which they are members. Two decisive reasons, then, exist for thinking that the growth of capital will never end or check further growth. There are still further facts, however, which have a bearing on this problem.

_The Importance of the Character of the Increases which are the Largest Sources of Acc.u.mulation._--If one has a doubt whether the large sums which enter into the capital which is steadily acc.u.mulating are saved under the influence of a desire to maintain a standard, this doubt will be removed by a consideration of the source from which great acc.u.mulations come. They come most largely from the net profits of the _entrepreneur_. Next to that they come from the earnings of what must be cla.s.sed as labor, though much of it is labor of a special and very superior sort. The salary which the head of a corporation receives, the fees that its lawyers get, the fees that come to eminent surgeons or engineers, are all payments for labor; and these, taken together with the earnings of well-paid artisans, successful farmers, and very many others, const.i.tute the second contribution to acc.u.mulating capital. Savings from simple interest itself const.i.tute the third contribution.[1]

[1] Gains which come from holding land which rises in value more rapidly than the interest on the price of it acc.u.mulates, is to be rated as part of net _entrepreneur's_ profits.

Now, of these sources of income, net profits and the wages of superior labor are transient, and the profits are particularly so. The man whose mill earns fifty per cent in a particular year would be foolish in the last degree if he used all that as income. That would mean brief and riotous enjoyment, followed by a most painful fall from the standard so established. He will naturally spend some part of the phenomenal dividend and lay aside enough of it to afford a guarantee that his future income will not fall below the present one. The man who during the best years of his working life enjoys a salary or professional fees amounting to a hundred thousand dollars a year would be almost equally foolish if he were to spend it all as he earns it, leaving his family unprovided for and his own later years exposed to the pains of sharp retrenchment. Transient incomes suggest to every one who has any degree of reason the need of establishing and maintaining some future standard of living, and of investing enough to accomplish this. This is more true, of course, when the rate of interest is low.

_The Importance of the Need of Enlarging a Business._--There is a special reason why legitimate business profits are morally certain to be to a large extent laid aside for investment. The man would say that he "needs them in his business." They come at a time when there is an inducement to enlarge the scale of his profitable operations. The man who is getting a dividend of fifty per cent per annum must make hay while the sun shines, and he can do it by doubling the capacity of his mill. What he makes and what he can borrow he uses for an increase of his output, which it is important to secure during the profitable time. All this means a quick increase of the total capital in existence.

The profits of a monopoly are not transient, but are likely to be both long-continued and large, and it might seem that they would const.i.tute a larger source of addition to capital than those profits which come from technical improvement. There are several reasons why this is not the fact. In the first place, what we are discussing is the addition that profits make to the total capital of society, rather than to the capital of any one person or corporation. The monopoly makes its gains by taking something from the pockets of the general public, and in so far it reduces the power of the general public to save.

It might be alleged, however, that since a monopoly reduces wages and interest, adds to profits, and creates enormous incomes for a few persons, it really diverts income from a myriad of persons who would save very little of it, and puts it into the pockets of a few persons who are likely to save a great deal of it. This might conceivably add to the capital of society were it not for the fact that the more secure and regular gains of monopolies are made the basis of large capitalization. A company that earns twenty-five per cent of its real capital per annum may have its stock diluted with four parts of water and pay only five per cent in dividends on its capitalization. This looks like interest and is apt to be treated as such by those who receive it. It is, therefore, not a more favorable income from which to make acc.u.mulations of capital than is the interest on real capital. The sudden gains which promoters and manipulators of consolidated companies make are, indeed, transient gains and may be largely added to capital. The introduction of a regime of monopoly may insure a period of much saving by the cla.s.s that profits by it; but the later career of the monopoly is unfavorable to the growth of capital.

_The Special Effect of a Prospective Fall in the Rate of Interest._--If interest which continues steadily at a low rate affords an especially strong incentive for saving, it follows that a falling rate, one that begins low and steadily becomes lower, affords a still stronger one. The average rate during the years of the future for which a prudent man makes provision is made, of course, lower than it would be if the rate were stationary. This influence is probably not as effective as it would be if the remote future were included in the view of those who are securing capital. On account of the near-sightedness to which attention has been called, a rate of interest that begins at four per cent and falls very slowly to three and a half presents to those who have this defective vision the same incentive to saving as one that begins at four per cent and remains steadily at that figure. What is true, however, is that a falling rate is to be expected, that this fact acts as a stimulus for saving in the case of the more far-sighted cla.s.ses, and that the number of persons in these cla.s.ses is increasing.

In so far as the increase of capital is concerned society is secure against the danger of reaching a stationary state. Progress in wealth will not build a barrier against itself by stinting the resources on which hereafter labor must rely. When we examine the sources from which capital mainly comes, we shall further test the probability that the instrumentalities which add productive power to human effort will increase through the longest period that science needs to take account of.[2]

[2] For a somewhat similar view of the effect of a fall of interest on the acc.u.mulation of capital, see Webb's "Industrial Democracy," Vol. II, pp. 610-632.

CHAPTER XXI

CONDITIONS INSURING PROGRESS IN METHOD AND ORGANIZATION

_The Possibility of a Law of Technical Progress._--It might seem that inventions were not subject to any influence that can be described under the head of a law. Genius certainly follows its own devices, and inventive power that has in it any touch of genius may be supposed to do the same. It is, however, a fact of experience that some circ.u.mstances favor and increase the actual exercise of this faculty, while other influences deter it. Moreover, what is important is not merely the making of inventions, but the introduction of such of them as are valuable into the productive operations of the world. Some influences favor this and others oppose it, and it is entirely possible to recognize the conditions in which economies of production rapidly take place in the actual industry of different countries.

Technical progress has been particularly rapid in the United States, though in this respect Germany has in recent years been a strong rival, and ever since the introduction of steam engines and textile machinery, England has continued to make a brilliant record. France, Belgium, and a number of other countries of Europe have developed an industry that is in a high degree dynamic, and j.a.pan is now in the lists and giving promise of holding her own against the best of her compet.i.tors. The question arises whether it is something in the people, or something in their natural and commercial environment, which makes differences between their several rates of progress.

_Inventive Abilities widely Diffused._--In so far as originating important changes is concerned, mental alertness and scientific training without doubt have a large effect. Some races have by nature more of the inventive quality than others, but within the circle of nations that we include in our purview no one has any approach to a monopoly of this quality. Any people that can make discoveries in physical science can make practical inventions, and will certainly do so if they are under a large incentive to do it. Moreover, alertness in discovering and duplicating the inventions of others is as important in actual business as originating new devices. At present it is a known fact that the Germans not only invent machinery, but quickly learn to make and to use machinery that originates elsewhere and demonstrates its value in reducing the cost of the production; and the remote j.a.panese have not only surpa.s.sed all others in the quick adoption of economic methods that have originated in Western countries, but have put their own touch upon them and revealed the existence of an inventive faculty that is likely to make them worthy rivals of Occidental races.

_The Importance of Inducements to make and use Inventions._--Granted a wide diffusion of inventive ability, the actual amount of really useful inventing that is done must depend on the inducement that is offered. Will an economical device bring an adequate return to the man who discovers it and to the man who introduces it into productive operations? If it will, we may expect that a brilliant succession of such devices will come into use, and that the power of mankind to bend the elements of nature to its service will rapidly increase.

_The Usefulness of a Temporary Monopoly of a New Device for Production._--If an invention became public property the moment that it was made, there would be small profit accruing to any one from the use of it and smaller ones from making it. Why should one _entrepreneur_ incur the cost and the risk of experimenting with a new machine if another can look on, ascertain whether the device works well or not, and duplicate it if it is successful? Under such conditions the man who watches others, avoids their losses, and shares their gains is the one who makes money; and the system which gave a man no control over the use of his inventions would result in a rivalry in waiting for others rather than an effort to distance others in originating improvements. This fact affords a justification for one variety of monopoly. The inventor in any civilized state is given an exclusive right to make and sell an economical appliance for a term of years that is long enough to pay him for perfecting it and to pay others for introducing it. Patents stimulate improvement, and the general practice of the nations indicates their recognition of this fact. They all give to the inventor a temporary monopoly of the new appliance he devises, but this monopoly differs from others in this essential fact: the man is allowed to have an exclusive control of something which otherwise might not and often would not have come into existence at all. If it would not,--if the patented article is something which society without a patent system would not have secured at all,--the inventor's monopoly hurts n.o.body. It is as though in some magical way he had caused springs of water to flow in the desert or loam to cover barren mountains or fertile islands to rise from the bottom of the sea. His gains consist in something which no one loses, even while he enjoys them, and at the expiration of his patent they are diffused freely throughout society.

_Possible Abuses of the Patent System._--It is of course true that a patent may often be granted for something that would have been invented in any case, and patents which are granted are sometimes made too broad, and so cover a large number of appliances for accomplishing the same thing. In these cases the public is somewhat the loser; but for the reasons about to be given this loss is far more than offset by the gain which the system of patents brings with it.

The gains of the inventor cannot extend much beyond the period covered by his patent, unless some further and less legitimate monopoly arises. If the use of an important machine builds up a great corporation which afterward, by virtue of its size, is able to club off compet.i.tors that would like to enter its field, the public pays more than it should for what it gets; and yet even in these cases it almost never pays more than it gets. The benefit it derives is simply less cheap than it ought to be. Much of the power of the telephone monopoly has been extended beyond the duration of its most important patent, and that patent was in its day broader than it should have been; and yet there never was a time when the use of the telephone in facilitating business, and in saving time and trouble in a myriad of ways, did not far outweigh the total cost which the users of telephones incurred. As we shall soon see, important inventions invariably confer some benefit on the public at the start. The owner of the new device must find a market for his products, and must offer them on terms which will make it for the interest of the public to use them largely.

_The Effect of Compet.i.tion in Causing Improvements to Multiply._--Compet.i.tion insures a large number of inventors and offers to each of them a large inducement to use his gifts and opportunities.

A great corporation may employ salaried inventors and, because of its great capital and large income, it may experiment with inventions with far less risk to itself than an inventor usually takes. When large corporations compete actively with one another, the employment of salaried inventors is very profitable to them; and improvements in production go on more rapidly than they are likely to do after these firms consolidate with each other and cease to feel the spur which the danger of being distanced in a race affords. It is a fact of observation, and not merely an inference, that monopolies are not as enterprising as competing companies.

_Effects of Monopoly on the Spirit of Enterprise._--In monopolies, theoretically, there is the same inducement to adopt inventions as in the case of competing firms, excepting always the motive of self-preservation. The monopoly can make money by improvements as competing firms would do. A perfectly intelligent monopoly, with disinterested management, would adopt an improvement offered to it as promptly as any competing firm, if the sole motive were profit. There is no reason why an intelligent monopoly should hold on to antiquated machinery, when modern machinery would enable it to stand the cost of introduction and make a net improvement besides. A competing producer gains an advantage over his rivals by discarding old machinery and adopting new at exactly the right time, neither too late nor too early. The true point of abandonment of the old machine, as we have already seen, is reached when the labor and capital that now work in connection with it can make a shade more by casting it off and making a combination of a better kind; and this rule applies to monopolies as well as to compet.i.tors. At just the point where a compet.i.tor can gain an advantage over rivals by modernizing his appliances, the monopoly can make money by doing so.