INFLUENCE OF ENTERPRISERS

275

with land and natural resources in proportion to its population, the lands, mines, forests, fisheries, sources of water power, etc., which are used at the margin are rich and afford large returns to the labor and capital applied to them. Up to a quite recent period in the history of America, improvements in transportation facilities and the discovery of new sources of natural wealth have kept pace with the growth of population and of capital and the margin of production has been lowered but little, if at all. It has been from the first discovery of the country very much higher than the margin of production found in Europe, and this has been a chief cause of the high earnings which labor and capital have commanded in the New World. Wages and interest have been higher because labor and capital have been more generously assisted by nature in marginal industries where this assistance has been gratuitous.

Enter

prisers.

and

Next to the location of the margin of production, the effi- The ciency with which labor and capital are correlated in produc- Influence of tion is the most important influence determining the amount of their joint share. This depends upon the intelligence and alertness of enterprisers. The United States is fortunate in this regard also. Its captains of industry compare favorably with those of any other country and it is doubtful if industrial organization is anywhere more highly developed. Through efficient organization labor and capital succeed in producing and earning more than they could if less intelligently directed. Other factors influencing the result are the industrial capac- Qualities ity of the workers as individuals. The more ability and energy they put into their work the larger will their return be. of WorkEqually important is the efficiency of the forms of capital men and utilized in production. If improved tools and machinery, Capital convenient and sanitary buildings, etc., are the forms into Goods which the community's capital is thrown, the returns will Important. be larger than if poor implements and badly planned structures predominate. The efficiency of the forms of capital used depends upon the progress that has been made in invention and discovery. In this field, also, the United States compares favorably with other countries. Its capital equipment is not perhaps quite as large in proportion to its popula

Quantities

Both

Interest

United
States.

tion as is that of some older countries, but it is up-to-date and efficient. By its aid the product shared between labor and capital in marginal industries is further increased.

Through these influences, and all of the others discussed in Wages and the chapters on production, the joint share of income which High in the goes to labor and capital is determined. If the conditions are favorable, as they unquestionably are in the United States, the joint share will be large. The terms of its division between labor and capital themselves determine whether wages will be high relatively and interest low, or interest high and wages low, or both wages and interest high together. The last condition is that found in the United States in comparison with conditions in European countries.

The Law of

Distribu

tion.

§ 157. We are now ready to discuss the causes which deCompetitive termine the division of income between wages and interest. As these shares are paid for the part which the respective factors, labor and capital, play in production, we should expect the amounts paid or the rates of wages and interest to be in proportion to the importance of the services which each renders, and this is in fact the case. Each tends to get a share of the joint-product exactly equivalent to what it produces. This is to be understood, of course, not in the sense that a determinable part of the product can be said to be created by it, but only in the sense that such a determinable part is economically imputable to it. Thus land and natural forces assist production at every point. Their aid is necessary to the productive result at the margin as elsewhere and from the point of view of physical causation the marginal product is theirs as well as that of the other factors. Economically, however, they have no claim to a share of this product because their services are gratuitous. Only in this economic sense can we say that labor and capital tend to get the exact equivalents of what they produce.

Workmen

Goods

Compete

As already suggested, workmen and capital goods not only and Capital cooperate in production, but also compete. At some points in every industry enterprisers have the alternative of using certain grades of labor or certain forms of capital for the Coöperate. accomplishment of a desired result. Lifting may be done by capital goods in the form of elevators, cranes, etc., requiring

as well as

INFLUENCE OF COMPETITION

277

only human guidance, or by workmen laboriously climbing ladders with loads on their backs. Moving may be accomplished by men trundling wheelbarrows or pushing tram cars, by means of horsecars or by steam railroads. Similarly in manufacturing, the tool-equipped workman is ever a competitor of the automatic machine. Even in agriculture steam plows may be used in place of horse plows with a considerable saving in labor, and harrowing, planting, reaping and other processes may be performed through the use of machines of varying degrees of complexity, or by hand tools. This choice between workmen and capital goods to accomplish specific productive results is by no means a simple matter. complicated both because the utilization of capital goods, even automatic machines, nearly always necessitates the employment of some labor and because the employment of wageearners, except in those rare cases in which they receive their compensation directly from the product, requires the use of some capital (Section 102). The usual choice is, thus, not one between pure labor and pure capital, but between expenditure for wages and interest in one proportion or in another proportion to secure the same productive return. In deciding between capital goods and workmen at competing points, the guiding principle always acted upon by enterprisers is to choose that combination of factors which, in proportion to its efficiency, is cheapest. Workmen are substituted for capital so long as it pays to make the change. At other points capital goods are substituted for labor so long as this is profitable. Every such substitution tends to enhance the price that must be paid for the use of the preferred factor, since it involves increased demand for it without any change in its supply. It at the same time tends to lower the price that must be paid for the factor that is rejected. Its supply is increased without any corresponding increase in demand. In actual society, where changes are constantly occurring not only in the quantities of labor and capital, but in the methods of production and the kinds of capital used, these substitutions occur constantly and the distribution of labor and capital is far from being at any one time what it is tending to become. If changes were suspended, substitutions

This

of workmen for capital and of capital goods for labor would continue for a time, but each substitution would help to bring society nearer to the state of normal equilibrium. When that state was reached capital goods would continue to be used for many purposes for which they alone are suited, and workmen would continue to be employed at many tasks which could not possibly be done by the most perfect machinery or other capital goods. At other points capital goods would be doing Competition tasks that might be done by labor, while workmen would be Leads to doing things that might be effected through capital. For Comparisons and some of these tasks one or the other would be distinctly preferSubstitu- able so long as wage and interest rates remained as they were, tions by and therefore they would be little involved in the substitutions Which made after changes were suspended. In the case of others the Wage and choice between the factors at current rates of wages and Interest Rates Are interest would be a very nice one. Enterprisers would conDetermined. tinue for some time to make substitutions at these points, and these substitutions would serve for some time to cause changes in wage and interest rates which would make further substitutions desirable. The range of these changes would contract steadily as the state of normal equilibrium was approached, and when that state was reached capital goods would be so assigned that their net addition to the product just covered the rate of interest that had to be paid for them, and workers would be so assigned that they received just what they produced also. Only on this condition could there be a state of equilibrium, because paying to owners of capital less than capital goods produced, or to workers less than they produced, would involve a third element in distribution, an extra profit to the enterpriser. Competition eliminates this extra profit only by bidding up wages and interest until each corresponds accurately to the additions that workmen and capital goods respectively contribute to the product. The measurement of these additions economically ascribable to workers and capital goods is effected by means of substitutions. Capital goods are substituted for labor and workmen are substituted for capital down to a margin of indifference, that is, to a point where both factors are equally cheap at prevailing rates of wages and interest. At this margin of indifference it would

be possible to compare the shares of the product to be credited to the respective factors and each would get the equivalent of what it produced. The law regulating the division of the Law product between labor and capital for a society in a state Restated. of normal equilibrium is, therefore, that each receives the share that it produces. As all capital goods will have the same earning power, the earnings of the goods at the margin of indifference will fix the general rate of interest. All grades of workmen will not be compensated equally, but as their earnings are arranged in a scale, in the manner explained in the last chapter, the determination of the earnings of marginal workmen will serve indirectly to determine the wages of all.

Distribu

§ 158. It should be carefully noted that the productiveness The Law of of either labor or capital, as measured by economic forces, Competitive depends not only upon the location of the margin of produc- tion Illustion and its own efficiency and supply, but also upon the trated. efficiency and supply of the other factor. This may be made clear by means of an example. Let the reader imagine an island community which has an abundance of land of the best quality and therefore no occasion to pay rent, and from which monopoly is absent, so that the products of industry are divided by competition between wages and interest. Suppose that at the outset there are 1000 workers and $1,000,000 worth of capital embodied in those capital goods for which the community has most need. Assume further that the net product of a year's industry is worth $600,000 and that it is divided by the method just explained so that $500,000 or an average of $500 to a man is assigned as wages, and $100,000, or ten per cent, is assigned to capital goods as interest. These rates of wages and interest measure the productiveness of capital goods and workers as determined by comparisons at those points where they may be substituted for each other. Now suppose that instead of consuming its entire income the community saves ten per cent of it, that is, acts in such a way that ten per cent of the net product of the year's business will take the form of new capital goods to be added to the continuously renewed original stock of capital goods, and only the remaining ninety per cent of the product the form of consumers' goods. This, it must be noted, involves