Essentials of Economic Theory Part 3

_How Primitive Man measures the Productivity of Labor and Capital._--There is a truth relating to producers' wealth that resembles the truth that we have just stated with regard to consumers'

wealth. The more consumers' goods of one kind a man has, the less is the value that any one of them has to him. The more producers' goods of a given kind a man has, the less is the efficiency that any particular one of them possesses as an aid to labor. The last bit of bread serves the man himself in a less important way than does the first, inasmuch as it gratifies a want that is less intense; and the last implement of a given kind--the last hatchet or spade or arrow--helps him less in his productive operations than did the first one. On the one hand, we have the law of the diminishing utility of successive units of consumers' goods, and on the other hand, we have a parallel law of the diminishing productivity of successive increments of producers' goods.

_The Necessity for measuring the Productive Powers of Capital Goods even in Primitive Life._--Now, it is necessary for every producer, though living in the simplest possible manner, to measure in some way the efficiency of the last unit of each kind of productive instrument that he uses. He has, let us say, a certain number of hatchets and of arrows, and he can produce one hatchet with the same amount of labor that would produce an arrow. Now, if a hatchet will do more good than an arrow, he will direct his energies to the making of the hatchet. It is important that any producer should bring the final units of the different parts of his equipment to a certain uniformity of producing power. He must not go on adding to the stock of implement No. 1 when implement No. 2, which could be had by the same expenditure of labor, would do more good; nor must he add to the stock of either of these after he has acquired such a supply of them that the first unit of implement No. 3 would be of greater importance. Measuring the efficiency of producers' goods is necessary in the case of every one who creates wealth at all, and such measurements reveal the fact that the more producers' goods of one kind a man has, the less is the productive power that resides in one of them.[5]

[5] The law of diminishing returns of successive units of _capital goods_ is based on the same principle as the law of diminishing returns of _capital_, but it is not identical with it. We shall see, in due time, how a permanent fund of producers' wealth actually grows and why each new unit, as it adds itself to the fund, creates a smaller income than did its predecessor.

_The Foregoing Truths Universal._--All the general facts which have been thus far stated hold true wherever wealth is produced. They do not presuppose the facts of a division of labor and a system of exchanges, and they do not even require that there should be any social organization. Men in the most primitive tribes and even men living in Crusoe-like isolation would create wealth by labor aided by capital. The essence of that wealth would be effective utility, and the measure of this, which is value, would be made in the specific way that we have described. The varieties of capital, the distinction between capital and capital goods, and the law of diminishing productivity of such goods would appear in the most primitive economics as well as in the most advanced. These are by no means all of the facts and principles which are thus of universal application.

They are merely a few of the more important and may serve as a foundation or a "Grundlegung," for further study. If we should extend our list of general and basic truths, it would quickly appear that the incomes that have been treated as rent and the various surplus gains which are a.n.a.logous to rent are universal economic phenomena which it would be not illogical to discuss in the preliminary part of this treatise. What has been stated, however, concerning the laws of diminishing productivity of successive units of producers' wealth, concerning the diminishing utility of successive units of consumers'

wealth, and also concerning the increasing burdensomeness of continuous hours of labor, presents the essential principles on which all rents and quasi-rents rest. It is best to study the applications of these principles as they are made in a civilized state.

_Universal Economic Truths independent of the Special Facts of Sociology._--This first division of economic science borrows none of its premises from sociology, for the truths which compose it would abide if there were no society in existence. Basic facts it takes from Physics, Biology, Psychology, Chemistry, etc. Facts concerning man, nature, and the relation between them are material for it, but relations between man and man come into view only in the later divisions. There, indeed, they do come into the very foreground with results which immeasurably enrich the science. What we may call the socialization of the economic process we shall have next before us, and we shall find it full of critical problems involving the future well-being of humanity. Industry is carried on by a social organism in which men are atomic parts and to which nature has given a const.i.tution with laws of action and development. We have first to study the nature of this industrial organism and the mode in which it would act if it were not subject to any const.i.tutional change; and later we must study it in its process of growth. The economic action of a society which is undergoing no organic changes is the subject of Social Economic Statics, while such changes with their causes and effects const.i.tute the subject of the science of Social Economic Dynamics.

CHAPTER IV

THE SOCIALIZATION OF INDUSTRY

We have now before us a few principles of so general a kind that they apply to the economy of the most primitive state as well as to that of the most advanced. It is not necessary that men should live in any particular relation to each other, in order that, in creating and consuming wealth, they should exemplify these principles. They would do this even though they never came into touch with each other, but lived, as best they could, each man on his solitary farm. Laws of this general kind result from man's relation to nature, and not at all from the relation of different men to each other. Let a man keep wholly aloof from other men, apply his labor directly to nature, and he can produce wealth of the various kinds that we have described. He can secure food, clothing, and other things for his own use, and he can make tools to help him in securing them. He will appraise the consumers' goods according to the law of what has been called _final utility_ or, in another view, effective specific utility, and he will also test the comparative usefulness of his various tools by an appeal to the law of final or specific productivity.

_Social Economy the Chief Subject of Study._--We care most to know how an organized society produces and uses its wealth, and in making this inquiry we encounter at once phenomena that are not universal. The civilized society creates its wealth cooperatively, by the joint action of its various members; that is, it proceeds by means of a division of labor and an exchanging of products. Moreover, it has, in some way, to share the sum total of its gains among its various members. It has to apportion labor among different occupations for the sake of collective production, which is a grand synthetic operation whereby each man puts something into a common total which is the income of all society. It has, further, to divide the grand total into shares for its different members--an a.n.a.lytical operation in which each man takes something out of the aggregate for his personal use.

This is distribution in the narrower sense of that term--the apportionment among the members of a civilized society of the fruits of production. In the wider sense the term also includes the apportionment of the sacrifices incurred in the joint production.

Distribution, as thus defined, is the element that appears in economic life in consequence of social organization. This is a secondary element, indeed; for man, nature and their relations and interactions are the primary facts, and the relations of men to each other come logically after these. Social organization, however, is so transforming in its effects as to reduce to small proportions the amount of attention it is worth our while to devote to the economy of the primitive types of life. It is necessary to make some study of that economy, for it is thus that we place before ourselves the fact that there are universal economic laws and perceive distinctly the nature of some of the more important of them.

_Facts Peculiar to Socialized Industry._--The term _Political Economy_ denotes a science of industry[1] as thus socialized, for it is a science of the wealth which is produced in an organized way by the people of a more or less civilized state. The general truths which we have thus far stated apply to such an economy, indeed, but they also apply to the wealth-creating and wealth-consuming processes of uncivilized peoples, and even of isolated individuals who have no dealings with each other. They are truths of Economics in the unrestricted sense, and we have now to study the special truths of _Political_ Economy. When production goes on by division of labor, as when one man works at one occupation and another at another, phenomena appear that do not appear in more primitive life; and still others appear when, within each occupation, there is a division of functions between the laborer and the capitalist, as is the case whenever one set of men furnish tools of production and another set do the work.

The special laws of this highly developed economic system require far more extended study than do those more general laws which are common to it and simpler systems. We now continue to recognize the universal and basic truths which have been stated in the foregoing chapters and proceed to the study of the special principles which apply only to organized economic life.

[1] We use this term in a broad sense, including agriculture and commerce as well as manufacturing.

_Specialized Production the Means of Diversified Consumption._--As the kinds of goods that we individually make become fewer, the things which we get and use become more numerous and varied--such is the law of economic specialization. Society as a whole produces an infinite variety of things, and the individual member of it secures for himself goods of very many kinds. The typical modern worker is, in his production, a very narrow specialist, but in his consumption he is far less a specialist than was the rude hunter who was able to enjoy only the few goods which he himself produced. The modern worker's tastes are omnivorous, for he has developed an immense variety of wants and, through social organization, he has acquired the means of satisfying many of them.

_The Position of Individuals in the Producing Organism._--When we say that production has been socialized, we mean something very far-reaching. We mean that an organization has grown up in which men are members or parts of members, and that this great organization has undertaken to do the productive work for all the individuals that compose it. For the first time we now recognize a sociological fact among the premises of economic science. When men, whose predecessors may have lived in isolated families or in a society organized for defense or for the mere pleasures of a.s.sociation, now develop a truly economic society, the individual depends on other individuals as well as on nature for the supply of his wants. Economic independence gives way to interdependence, because the fortune of each man is largely dependent, not merely on his own efforts, but on the relations which he sustains to other men. Simple laws of nature still largely control his income, but social laws also have a certain control over it.

_Exchanges in their Primitive Stage._--The exchanging of products is, of course, the process with which the organization begins, and this process is introduced by easy and natural stages. The man who at first makes everything for himself develops a particular apt.i.tude for making some one thing; and, though he may still continue to make most things for himself, he finds it advantageous to barter off a part of the supply of the one article for the making of which he is especially well fitted. He seeks out a neighbor whose special apt.i.tude lies in a different direction and who has a surplus of some other article. It may be that one is a successful fisherman and the other is, by preference, a maker of clothing, and that they can get a mutual benefit by an exchange of food for raiment.[2]

[2] If we were giving a history of the division of labor, we should have to record the effects of differences of climate and of agricultural and mineral resources in occasioning, at an early period, a territorial division of labor. We are here describing the division of labor which occurs within a society and in consequence of what may be called social economic causes.

_The Intermediate Type of Exchanges and the Final One._--In the next stage a man becomes wholly a specialist, making one kind of product only and bartering it away for others. It might seem, at the first glance, that differentiation has now done its full work; but it is very far from having done so. Making one complete good for consumption is still a complex operation, which can advantageously be subdivided in such a way that one man produces a raw material while another works it up into a useful shape. A gain may be made by a further division of the manufacturing process, whereby the first worker makes only the rawest material, another fashions it somewhat, a third carries the process farther, and a fourth or a still later one completes it. In modern industry the material must often pa.s.s through very many hands before it is ready to be made over to the consumer. Each man in the series puts a touch on it and pa.s.ses it on to his successor.

A'''

A''

A'

A

A''' is an article of consumers' wealth and A is the rawest material that enters into it. A' is this material somewhat transformed; A'' is the same material after it has received the second transformation and needs only a final touch to convert it into A''', in which state it will be ready for the consumer's use. We have here a symbol of what is actually taking place in the industry of the world. Cattle are grazing on western ranches; hides are tanning in the woods of Pennsylvania; leather is going through the many changes that fashion it into shoes in the mills of Brockton; shoes are arranged on the shelves of retailers in New York in readiness for the people who are to wear them. These are stages in the making of a single product, and a thousand different products are coming into existence in a like way.

_A Representation of the Groups, or Specific Industries, which compose Economic Society._--If we put beside the series of A's a series of B's and one of C's, we have a much simplified representation of what is actually taking place. There are, in reality, a myriad of different things which almost every consumer uses, and every one of them is made by a series of productive operations like the one we have described.

The very fact that there are so many of them that it is hopeless to try to represent them all in the table makes it desirable to ill.u.s.trate the principle by tabulating only a few and to a.s.sume that these few are all that there are. For the purposes that we have in mind it is entirely safe to suppose that a series of A's, one of B's, and one of C's represent all the consumers' goods that society uses.

What we wish to ascertain is how the different series work together to furnish an income for each member of society.

_The Organization Spontaneous._--Laborers can go where they will, and yet they are in some way brought into an orderly relation to each other, being placed in certain proportions in different industries.

Capitalists also are free to invest their funds as they will, and yet there is a certain amount that is naturally devoted to each branch of business. How this apportionment takes place we can most readily ascertain by creating such an imaginary and very much simplified society as this table furnishes.

A''' B''' C'''

A'' B'' C''

A' B' C'

A B C

The series of A's, which we have already studied, represents one kind of raw material ripening into a finished product. B represents a second kind of raw material, which, like the A, is produced by its own set of workers and is then pa.s.sed on to a second, who transform it into B'--a partly finished product. These then pa.s.s it on, as the corresponding set of men pa.s.sed on the A'. They hand it over to a set of workmen who change it into B'', a nearly completed product, and these hand it over to men at B''', who, by giving the final fashioning, bring it into the form of a finished consumers' good. The C's represent another general group of workers who transform the raw material, C, into the finished product, C'''.

_Industrial Groups and Subgroups._--Each of these more general bodies of workmen and employers, such as the entire series of A's, we may call an industrial group, and the divisions within each of them, such as A' or A'', we may term subgroups. The product of a group is a complete article, while that of a subgroup is not a complete article nor any part of an article that can be taken bodily from it. Yet it is a distinguishable element in the article. The product of the shoe factory is certainly not complete shoes, for the owners of the factory buy leather which has already pa.s.sed through the hands of tanners; and the tanners themselves bought it in the shape of raw hides, which were furnished by still earlier producers. What the shoe factory has done is to impart a new utility to dressed leather by transforming it into shoes. It would be impossible ever to get that utility out again, or to point to any one part of the shoe as the only part that contains it. What the factory has really made is therefore a utility--a distinguishable quality which pervades a concrete thing. It makes the difference between the leather and the shoes. What the tanner has created is, in like manner, another utility, which makes the difference between raw hides and leather. Groups, then, in their entirety produce whole articles for direct use, while subgroups produce distinguishable utilities which are embodied in such articles.

The sum total of all the different utilities const.i.tutes the article.

It is a complex of useful qualities held together by the fact that they are attached to the same original matter.

_Proportionate Production._--All the subgroups working together in an orderly way not only produce the consumers' wealth that society needs, but produce the different kinds of consumers' goods in nicely adjusted proportions. Unless the general order of the group system is disturbed, there is a normal amount of A''' put on the market and also normal amounts of B''' and C'''. This result is attained by influences that run through the productive organism and bring about an adjustment of the comparative amounts of labor in the different occupations. If compet.i.tion worked quite freely, this adjustment would be so nice that no military apportionment of forces among different brigades, regiments, etc., made consciously and by the most intelligent commanding officer, could surpa.s.s the perfection of it. There would be also an equally fine adjustment of the comparative amounts of capital devoted to different industries. In the actual productive organism each man goes where he will--capitalist, laborer, and employer of capital and labor alike. Each man acts in this respect as though there were no such thing as coercion, and as though he might, with unchecked freedom, do solely what is good in his own sight. By reason of the fact that all are seeking to produce what they can in order that they may get what they can, there comes into operation an organic law which brings the groups and subgroups into a delicate balance, in point of size and output, whereby the grand total of force that society commands is prevented from making too much of one product and too little of another, and is made to do its utmost in getting a large sum total of wealth for the benefit of its various members.

_What the "Division of Labor" Involves._--This is the real signification of what it has been common to call the division of labor. It is the socialization of labor, or the gathering of isolated laborers into a great organism that, entirely without coercion, determines in some way what each one shall do, and not only makes the product of the whole a myriadfold greater than without any organization it could be, but causes this product to take certain well-adjusted shapes which, as we shall later see, serve consumers better than they could be served by products in misadjusted proportions.

_Capital as well as Labor Apportioned._--As we have said, there is a corresponding division of capital or an a.s.signment of different parts of the total fund to different employments; and this is made in the same way as is the division of labor and results in an equally nice adjustment. Each bit of capital, like each workman, becomes, as it were, a specialist. It may take the shape of an instrument which is capable of performing only its one service, like the loom, which is capable of doing nothing except weaving; but even if the tool is somewhat adaptable, like a hammer which can be used in several trades, it is, as it were, stationed in one trade and held, by economic influences, at that one point in the system. The house carpenter keeps his hammer though the cabinet maker could use it. Each bit of capital helps to create a particular utility, and the number of units of the fund that each subgroup contains is, as we shall see, so arranged as to enable the fund as a whole to do its utmost for the general good.

It is all without the use of force, since each bit of capital does what its owner pleases to have it do.

_A Government Presupposed._--Of course there must be a government over it all. Such a method of producing wealth could never continue unless property were secure and unless it were made so without much effort on the part of its owners. A blacksmith who should have at one moment to use his hammer as a tool and at another to wield it as a weapon of defense could make but poor headway, and a society in which such a state of things existed in various trades would be too anarchic to permit the elaborate division of trades which is the key to success in industry. The most noticeable fact about organized production is that man is forever letting go the thing he has made or helped to make and allowing it to pa.s.s out of sight and reach without losing or greatly imperiling his t.i.tle to the amount of wealth it represents. He casts his bread on the waters, but they bring him a return for it. Under these circ.u.mstances it is impossible for him to protect his product as the savage protects his tools, his clothing, and his hut. What a modern worker makes pa.s.ses into the hands of other men and gets completely out of the maker's direct personal control. If he wanted it again, he could never find it; and if he could find it, it would be in a new shape and other men would have claims upon it. The man who has sold some hides that in the end have become shoes can hardly identify his product on the shelves of retail shoe dealers all over the country, or perhaps all over the world. If by a miracle he could find the particular bits of leather that in their raw stage he himself has furnished, they would be in new and far more valuable forms than they were when he had possession of them. The shoes contain utilities which the man who furnished the hides cannot claim to have created.

They have been changed and improved by elements contributed by many other persons, such as manufacturers, carriers, merchants, etc., and he could never carry away the concrete thing that he himself produced without carrying with it other men's property.

_The Surrendering of Goods and the Retention of Values Features of Social Industry._--Socialization of industry means, then, that individuals forego all effort to retain their own concrete products, but that they retain certain parts of the value of the products to which they have made contributions. The value of A''' when it is sold is claimed by men at A''', A'', A', and A according to some principle.

The values of B''' and C''' can be followed until they reach the pockets of the men who have contributed their several shares to the making of these things. All this requires a government and a well-developed system of laws and courts for the protection of property, including the protection of it in the form of a claim to a value that is embodied in things which have gone beyond the maker's reach. Property here takes a refined form which requires that the man should forego all desire to keep the literal thing he has made and should make it his aim to retain the value of it in some other form.

It is a comparatively simple matter to guard a concrete article which a man has in his possession, though even that requires some energy on the part of the police force and is never quite perfectly accomplished; but it is a far more difficult matter to enforce a claim that a man has against other men, in consequence of some utility that has been created by him but has gone away from him and mingled with utilities created by many other persons in a product that the man will never see. It is the problem of guaranteeing to the shoemaker the due return for the st.i.tches he has put into shoes when the shoes themselves have gone to buyers and wearers in every quarter of the land and many quarters of the globe.

_Groups under a Socialistic State._--In _political_ economy as distinct from _general_ economy we take one premise from sociology and another from politics. We a.s.sume that society exists and that it has taken on a political character, by establishing laws with courts to interpret them and officials to enforce them. We do not, however, a.s.sume that the direction of industrial affairs is in the hands of such officials. In the main industry is organized in a spontaneous way. Men choose such occupations as they like, and when there are too many of them in one group and too few in another, the rewards naturally increase in the group where a larger force is needed, and this lures men in that direction.

In a socialistic society such adjustments would be made under the direction of the state. Officials would have to decide when more workers are needed in the A series and less in the B series and would have to use either inducements or some kind of compulsion in order to move them from the one group to the other. What we actually have to deal with is a society that shapes itself by the free acts of individuals, and we have to see how, in this way, it organizes itself for production and divides among different claimants the product that, by the joint action of all of them, it creates.

_Gains from the Organization of Industry._--The advantages of the division of labor consist in an increase in the quant.i.ty of products and in an improvement in their quality, and the quant.i.tative gain is almost beyond computing. The advantage appears mainly in the middle and upper subgroups of the series, which transform the materials, rather than in the lower subgroups, which produce them; and yet there is a gain everywhere from such organization. A man produces far more when he performs the same operation many times than when he goes through a whole series of unlike operations. Moreover, he can perform the single operation far more accurately and can thus attain a more perfect result. He can learn his minute trade more easily than he could a complex one. Where unusual strength or skill is required, the work may be given to persons who have the requisite quality so that a good product can be insured, and none of the labor of these superior workers will need to be wasted on work which inferior labor can perfectly well perform.

_Improvement in the Forms of Capital._--The greatest of all the advantages that come from this division and subdivision of wealth-creating processes comes in the way of applying machinery. A machine is a hopeless specialist and can, as a rule, put only a single minute touch on the material submitted to it; and the introduction of machines differentiates capital in a way that is parallel to the minute subdivision of labor. If the machine is to work at all economically, it must put its touch quickly on one after another of a series of articles, as they are submitted to it in uninterrupted succession. If only one kind of machine were employed in the making of shoes--if, for instance, the sewing of the uppers to the soles were done on sewing machines, even though all the rest were done by hand--it would be natural and almost necessary to have one cla.s.s of workers to prepare the uppers, another to prepare the soles, and a third to sew them together by aid of the machine. When the several stages of the process are thus given over to different cla.s.ses of workers, the situation is ripe for the application of more machines, and inventors readily devise apparatus that will perform one or another minute part of the manufacturing process. In the end most branches of manufacture take such shapes that the raw material is intrusted to a series of machines and pa.s.ses from one to another by a nearly continuous movement, till it emerges from the hands of these automata as complete as any manipulation can make it and ready for the merchants who will convey it to their customers.

_Economy of Capital._--There is an economy of capital involved in the fact that instruments can be used thus continuously. A worker does not have to have several sets of tools, many of which would be idle the greater part of the time, as would be the case if the man performed several unlike operations; but the greatest economy comes from the energy, rapidity, and accuracy with which the new instruments act. The tools are far more efficient than they could be if human muscles furnished the power and eyes and nerves supplied the deftness and accuracy that the making of the goods requires. Automata which men set working excel hand tools with men wielding them by a greater ratio than can be calculated.

CHAPTER V

PRODUCTION A SYNTHESIS; DISTRIBUTION AN a.n.a.lYSIS