an increased willingness to save on the part of the people, but how this develops we need not here inquire. Let the population meantime merely renew itself so that there are still 1000 workers. The total capital for the second year's industry is now $1,060,000. The addition of the new capital will tend at once to lower the rate of interest. The free loanable fund is larger, and those controlling it as it arises, bankers, etc., will compete against one another to induce enterprisers to take it. As interest goes down wages, on the other hand, will tend to go up. To utilize the new capital to best advantage more workmen are needed, and enterprisers to whom the capital is intrusted will compete against one another in hiring workmen. These are temporary effects. To decide whether they will remain as permanent results after the new capital has been assimilated by the producing mechanism we must consider how the productiveness of units of capital and units of labor under the new conditions will compare with their productiveness before the change. The addition of $60,000 to the capital fund will cause a recasting of the whole capital-goods equipment of the society. The $1,000,000 worth of capital was already embodied in the most needed forms of tools, machines, etc. Since there are no new workers the new capital must be embodied in less needed forms to supplement the old forms that continue to be renewed, or else must be combined with the old capital released as old capital goods wear out to replace these old forms with new and more costly tools, machines, etc., that are more efficient, but not to the full extent of their increased prices. Incidentally some of the new capital goods will be used for purposes for which workmen were previously employed before they became relatively so scarce. The productiveness of capital goods in the marginal uses to which capital is put will, assuming that no improvements in methods of production are introduced, be lessened by these changes. The forms of capital goods which it now pays to use are less needed. They add less to the product of industry and those who supply them must be content with less interest. But if interest falls at one point it must, for reasons already explained, fall over the entire industrial field before adjustment is complete.

Hence we may conclude that the fall in the rate of interest noted as a temporary effect of the increase of capital will, in the absence of improved methods, be permanent.

But by so much as units of capital in the illustration have lost in relative importance, workmen have gained. With their superior equipment they can produce at least as much more than before as corresponds to the productiveness of the new capital goods. Suppose that the fall in the rate of interest amounts to per cent. Then the total deduction from the year's product on account of interest will be 9 per cent of $1,060,000, or $100,700, of which 9 per cent of $60,000, or $5700, will represent the addition to the product ascribable to the new capital. The total product of the year's industry will be the old product, $600,000 plus at least this new product, $5700, or $605,700. Since of this only $100,700 is now deducted for interest the remainder, or $505,000, will go to the 1000 workers as wages, or each will receive on the average $505 a year instead of the $500 previously earned. They are the same men working no harder than before, but the increased supply of capital has increased their relative importance and, therefore, the share of the product economically ascribable to the part they play in production. In such a community capital might conceivably be increased until every known kind of capital good capable of earning enough for its own replacement was added to the community's equipment and interest was lowered to nothing. Each addition to capital would increase the relative importance of labor and by the time interest was eliminated wages would have assumed princely proportions, although the workmen remained the same sort of men and continued to exert themselves no more than when their earnings averaged but $500 a year.

This assumed case is entirely hypothetical and the figures used are intended to be merely illustrative, but the fundamental relation between wages and interest which it indicates is believed to be true of actual industrial society. The introduction of rent and other complications will not alter this fundamental relation. The productiveness of labor will still depend not merely upon the richness of the land and natural resources at the margin of cultivation and upon the

Corre

with Actual

Industrial
Society.

number and efficiency of the workmen, but also upon the kinds of capital goods in use and the quantity of capital. A change in any one of these factors will alter the economic importance of every other and consequently the share of the joint product that is economically imputable to it as its share.

§ 159. The assumption that industrial society is brought spondence to the state of normal equilibrium, which plays such an important part in the preceding discussion, is merely a device for making clear and precise what in actual industrial society is indefinite and elusive. This assumption involves, however, nothing more than giving free play to competition and allowing time for it to work out its full effects. In actual industrial society the efforts of enterprisers are constantly directed, as we have represented them to be, toward using capital goods only down to the margin of indifference on the capital side, and toward employing workmen only down to this margin on the labor side. To overstep it in respect to either is to incur loss, while on the other hand failure to push the use of the productive factors to this limit in each branch of production is to forego a profit that might otherwise be obtained. Thus in actual practice the use of additional capital goods here, and the employment of more workmen of a given grade there, or the withdrawal of capital goods or the discharge of workmen, have for their purpose better conformity to the ideal arrangement of labor and capital that has been described. At any given time a rough approximation to the ideal toward which competitive forces are always straining is actually presented, and in every branch of production comparisons between the productiveness of quantities of capital and quantities of labor are being made by enterprisers and are determining their business decisions. The law of competitive distribution that we have stated is, therefore, the law to which actual distribution tends to conform.

REFERENCES FOR COLLATERAL READING

*Clark, Essentials of Economic Theory, Chap. IX.; *Seligman, Principles of Economics, Chap. XXV.; Carver, The Distribution of Wealth, Chap. VI.; *Marshall, Principles of Economics, Book VI., Chaps. VI.VIII.; Pierson, Principles of Economics, Part I., Chap. IV.; Taussig, Principles of Economics, Chaps. XXXVIII.-XL.

CHAPTER XVII

VALUE, PRICE AND DISTRIBUTION

§ 160. We have now surveyed, in broad outline, the whole Summary field of consumption, production and distribution, and are of Theory prepared to discuss the ultimate determinants of economic relations. We have seen that men habitually value goods not as aggregates, but as divided up into distinguishable units, such as pounds or bushels, and that the use-values they ascribe to these units are in proportion to their marginal utilities. We have seen further that in industrial society making valuations is a collective process. It is not the marginal utility of each good to each consumer that determines its value, but the marginal utility of each good to consumers collectively. Moreover, goods are valued as bundles of utilities by adding together the marginal utilities of their different qualities to the groups which are just able to command those qualities. Thus the rich accept in large measure the valuations which the poor place upon necessaries and comforts, and confine their influence to the valuation of luxuries. For consumers collectively, however, the values of goods are determined by their marginal utilities.

of Prices.

From the point of view of consumption, values in use, the Summary relations between goods and men, are all-important. In pro- of Theory duction and distribution their derivative, values in exchange, concretely represented by prices, hold the forefront of interest. The exchange value of a good is its power to command other goods in exchange for itself. Price is exchange value in terms of the good used as the medium of exchange, or money. The determination of money prices was shown to result from competition and bargaining among buyers and sellers and it was found that laws of price might be formulated from the point of view of either. From the side of buyers the tendency is for price to correspond with the money equivalent of the

Relation
Between

Incomes of

Consumers

penses of

marginal utility or use to the marginal buyer of the good purchased. It thus depends in part upon buyers' scales of wants or uses and in part upon the sums of money which they have to spend. From the side of sellers the law of price depends upon the conditions of production. Under conditions of monopoly the tendency is for the monopolist to charge the price calculated in the long run to afford the largest monopoly profit. Under conditions of free competition, on the other hand, the price tends to correspond with the expenses of production to representative firms. The actual price is usually somewhat above or somewhat below this normal and allows for a competitive profit or loss to the enterpriser.

These laws of price leave unconnected two factors that are intimately related to each other-the sums of money which buyers have to spend and the profits and expenses of producand the Ex- tion which figure in the calculations of sellers. Generally speaking these are the same sums of money, for what buyers Production. spend is their money incomes, and money incomes arise because of the part which those who receive them play in production. They are either profits, rents, wages or interest. To bridge over this gap in the explanation of prices and in so doing to supply a complete theory of value and price is the task of the theory of distribution. It recognizes that buyers and sellers, consumers and producers, are, in general, the same individuals and that the whole machinery of buying and selling is simply a convenient means of combining effectively the various factors in production and of assigning the appropriate shares of the product to those who have claims. upon it.

Graphic

Production

bution.

§ 161. In order to restate the laws determining rent, wages Repre- and interest it will be necessary to advert for the last time to sentation of the relations that would prevail in an industrial society and Distri- brought to the state of normal equilibrium. In such a society the relation between production, distribution and consumption would be extremely simple. Production would still be carried on as a serial process, but it could be readily analyzed, since all prices would correspond exactly to the expenses of production and these would never vary. The whole matter may be represented graphically by the following figure: