180. INDUSTRIAL SPECULATION1 It is not only in commercial matters but also in industrial ones that the speculator exercises a dominant influence. He controls production as well as trade. What the merchant does when he buys products in the hope of selling them at an advanced price, the manufacturer is doing when he buys labor in the hope of selling the results of that labor at a profit. The whole wage system is one under which the employers of the country part with property rights today in the hope of securing larger property rights in the future. Part of their prosperity arises from skill in organizing labor; part, and usually a larger part, arises from skill in foreseeing the wants of the market. The success or failure of a man engaged in manufacturing, in transportation, or in agriculture depends more upon his skill as a prophet than upon his industry as a producer. The industrial development of the last three or four hundred years, rightly interpreted, is an account of the reasons which have led society to put the control of its industry into the hands of a body of speculative investors. All productive industry involves a certain amount of risk. Whenever time elapses between the application of labor and the completion of the product of labor in a form available for actual enjoyment, there is an advance of capital to the producers for the sake of a remote and generally somewhat unknown result. In the building of a factory or a railroad a great deal of food is consumed. Whether the product of the labor thus applied will be as useful to the community as the food which was consumed by those who have produced it, is always somewhat uncertain. The more remote the consumers in time or place, the greater is the uncertainty and the more speculative the whole transaction. Especially prominent does this uncertainty become in the application of any new process or the development of any new locality. Under old conditions, experience has proved what products are wanted and how labor can be economically applied; but every new invention or new settlement involves a multitude of new and unknown conditions. A large proportion of the capital embarked in such enterprises is lost. A large proportion of the food consumed by the laborers engaged in such undertakings is virtually wasted. Are we then to forego all chance of such progress? No. The gain to the community as a whole from one successful experiment may Adapted by permission from A. T. Hadley, Economics, pp. 112-15. (G. P. Putnam's Sons, 1899.) I outweigh the loss from ten unsuccessful ones. The conservative nation that never changes its methods avoids a great many losses, but it fails to make the conspicuous gains which constitute modern industrial civilization. The problem of industrial growth can be solved only by encouraging enough experiments to secure progress without encouraging so many as to destroy the whole accumulated capital of the community. We have tried to accomplish the former object by giving individual possessors of capital the chance of realizing large profits in case of success, and to protect ourselves against the latter danger by insisting, at least in theory, that a man shall make these experiments at his own expense. If everybody were free to undertake them whether he had proved his fitness by accumulating private capital or not, the food supply of the community would probably soon run short. If nobody were to be allowed to make them until the whole community was ready to vote for their adoption, they would be indefinitely delayed. By leaving it to the option of the individual property-holder to undertake them or not as he pleases, society secures most of the gain and avoids most of the loss. It allows him to waste part of the capital of the community in unsuccessful experiments, believing that his example will be a warning to prevent others from following in his track, and that the immediate loss to the community may become a means of future gain. It guarantees him the good results from the successful experiments, trusting that competition will subsequently prevent his profits from being too large. All risks may be divided into static risks and dynamic risks. Static risks are those risks which would be found in a stationary state of society. Among them are those due to natural causes, such as damage by lightning, hail, earthquake, storms, disease, and many others. Risks arising from ignorance are a large class, which includes many fires, bankruptcies, sicknesses, accidents, early deaths, and failures in business from misdirected effort. Carelessness is closely akin to ignorance as a cause of damage. Lack of moral character Taken by permission from John Haynes, "Risk as an Economic Factor," Quarterly Journal of Economics, IX (1894–95), 412-14. gives rise to a class of risks known by insurance men as moral hazards. The most familiar example of this class of risks is the danger of incendiary fires. Dishonest failures, bad debts, etc., would fall in this class, as well as all forms of danger from the criminal classes. When these risks are spoken of as static, it is not meant that dynamic changes cannot modify them. Such is not the case. The invention of the electric light was a dynamic change which has modified the danger of damage by fire. Nevertheless, we may legitimately use the word "static" because, even in a stationary state of society, we should expect risks of the same essential kind. The amount of loss coming from static risks is incapable of calculation, but is certainly very great. The losses direct and indirect by fire alone are estimated by Mr. Edward Atkinson at $250,000,000 for the United States in 1893. Other risks may be called dynamic, because they are risks of damage which may be directly due to dynamic changes. These are chiefly of two kinds, the first being changes in the wants of society. As civilization advances, human desires are subject to constant modification and to sudden changes in amount and direction. Changes of style which cannot be foreseen by producers are an example of changes in the wants of society. A stock of men's hats which is salable today will, perhaps, be utterly without a market next year. A dealer who has an overstock is subject to heavy loss. In the second place, changes in methods of production give rise to losses which may be subdivided into two classes. The first are the losses which fall upon those who are attempting to introduce new processes. "The uncertainties," says Professor Clark, "that attend the introduction of a new process are dynamic, since they would have no existence if industry were to continue in a stationary state. There is the chance that the process may be mechanically defective. It may not create the desired commodity as the projector of the enterprise expects. If, on the other hand, the dynamic change consists in offering some new commodity for the comfort and pleasure of consumers, the public may fail to give the expected welcome." The second are losses which fall upon producers in consequence of the introduction of improved processes by others. There is constant danger that an innovation or an improvement of some kind will destroy the value of property in which a great amount of capital has been invested. Losses of this kind differ from those of which Professor Clark speaks, in that, while causing a loss to individuals, they bring a social gain. The wealth directed to the unsuccessful venture might have been employed in lines of static activity; but, by being diverted, it is lost, not only to its owner, but to society as well. In the second case, though society is a gainer by the improvement, individuals are large losers. Losses of this kind have been exceedingly common in recent years. A notable case was the destruction of capital incident to the opening of the Suez Canal. The ships, mainly sailing vessels, which went around the Cape of Good Hope and carried the products of India, were not adapted to the canal, and an amount of shipping estimated at two million tons was rendered practically valueless. Several years ago it was discovered that worsted goods soon became glossy, and that by an improved method this defect could be remedied. The Bradford manufacturers of worsted were unwilling to incur the great expense of changing their method. The French quickly made the change, and secured most of the market. The English made the change too late to save their trade. In this country a large manufactory made the change at once at a cost of three-quarters of a million dollars. It is clear that the total amoun of dynamic losses must be very great. See also 174. Simple versus Complex Industry. 182. INFLUENCES THAT DISTURB THE STATIC It might seem that the influences that disturb such a static equilibrium are too numerous to be described; and yet these changes may be classed under five general types: 1. Growth of population. The supply of labor is increasing, and this fact of itself calls for continual readjustment of the group system. 2. Increase of capital. The amount of capital is increasing, and this change also disturbs the static equilibrium and calls for a rearrangement. 3. Changes of method.-Changes take place in the methods of production. New processes are devised, improved machines are invented, cheap motive powers are utilized, and cheap and available raw materials are discovered, and these changes continually disturb I Adapted by permission from J. B. Clark, Essentials of Economic Theory, pp. 203-6. (The Macmillan Co., 1997.) the static state. There are certain to be improvements on the older methods of production, for a law of the survival of the fittest insures this. 4. Changes in organization. There are changes in the mode of organizing the establishments in which commodities are produced, and so far as these occur under a régime of active competition they also are improvements and give added power of production. The mills and shops become larger and relatively fewer. There is a great centralizing movement going on, since the large shop undersells and suppresses the smaller one, and combinations unite many great shops under one management. 5. Changes in consumers' wants.-The wants of consumers are changing. They are growing more numerous as well as more refined and intellectual. This expansion of desires follows the general increase of productive power, since everyone already wants some things that he cannot procure, and all society has a fringe of ungratified wants just beyond the limit of actual gratification. Even if all these wants that are now near the point of actual satisfaction were to be satisfied, the desires would at once project themselves farther. The mere increase in earning power without any special education enlarges the want scale, but intellectual and moral growth co-operates with it in that direction and calls latent wants into an active state. More and more eagerly do men seek things for which the desire was formerly dormant. Changes of this kind affect values, cause labor and capital to move from group to group, and thus cause society as a whole to produce less of some things and more of others. They sometimes cause wholly new groups to appear, and draw workers and equipment from the old ones. See also 209. Changes of Industrial Structure and Unemployment. 183. CLASSIFICATION OF PRICE INFLUENCES1 [NOTE. Ours is a pecuniary society. Industry is conducted on a price basis. This selection shows how numerous are the risks of the business man, no other factor than change of price being considered.] We may now fitly review the theory of prices by enumerating the various possible causes which might decrease the price of, let us say, I 1 Taken by permission from Irving Fisher, Elementary Principles of Economics, pp. 408-9. (The Macmillan Co., 1912.) |