destroying the capital already invested. No social balance wheel exists by which the gains and losses may be adjudged from the standpoint of society as a whole. A monopoly, on the other hand, must compare these items, for it suffers the loss as well as secures the gain; hence it is slow to adopt a new invention. It waits until the old capital is largely worn out before it introduces the new method. The gain must be so great that it will be a recompense not only for the new capital invested, but also for the incomes which would have been derived from the old capital, but which have been destroyed. Now the interest of society as a whole is similar to that of a monopoly; it suffers the losses as well as secures the gains. Yet ordinarily no effort is made to compare these as they affect society. The greater the proportion of fixed capital, the more destructive is a change. The corner grocer, who has little fixed capital, if defeated in the competitive struggle can easily sell his stock at comparatively little loss. His goods may be sold. for bargain prices, his store fitted out for some other purpose, and he himself can find another job. But the loss when a highly specialized modern factory goes to the wall because a cheaper process has been invented is the total value of its capital, namely, the present discounted value of the large, prospective, future incomes which it had represented. It might be argued that even in this event there would be a social gain, since the public would get the article more cheaply than formerly. This view is due to a too narrow conception of the forces involved. It is true that there is a certain gain, represented by the difference between the two methods of manufacturing; but there is a loss due to what the same capital would have earned if it had been used in some other manner which did not involve the destruction of existing capital. The loss is hidden, but none the less real.' A defence of the competitive system might be built up on the argument that, in spite of such individual losses, the general welfare is still promoted by encouraging initiative in every way, especially since one invention often leads to others. The scheme proposed in this paper would, however, only discourage invention in a few industries; and in these industries inventions are pretty well regulated by the semimonopoly power of the large corporations and banks. It seems as if the government The railroads furnish an example of the possible anti-social effect of a change, which would be individually profitable. Should an entire new railroad system be built, with tracks six feet apart, which exactly duplicated the present lines whose tracks are four feet, eight and a half inches apart, the saving in costs on account of the more powerful engines and longer trains would probably be such as to render valueless the present lines. Freight rates might perhaps profitably be cut in two by the new system, so that no one would ever ship over the old lines. The public would unquestionably gain by the lower freight rates, but in order to make the change profitable in a national sense the gain must be great enough to replace all the dividends and interest on the stocks and bonds of the old line. It is just this comparison that we do not make. We permit anyone to do anything if it is profitable to him individually, no matter what the effect on the rest of the country. The only fact that prevents this occurrence from taking place is that the financial institutions, with enough capital to put through such a scheme, have also sufficient monopoly power to prevent the experiment from being made. Since so large a part of their loans are secured by railroad stocks and bonds, they naturally are interested in maintaining the value of the present system. But this power may not always be used so happily, since the banks may be equally interested in preventing changes of all sorts, no matter what their effect on the country at large. An extreme example will perhaps illustrate how the principle operates, although it will be recognized that only rarely does it work so drastically or in such a clean-cut manner. In an industry in which $100,000,000 capital is invested, which has been yielding to its owners an annual income of $5,000,000 (5 per cent being the ordinary rate of interest), a superior, new machine is invented, of such a revolutionary character that it reduces costs by $2,000,000 annually and competes with all existing machinery. Through the reduced cost, prices may be could artificially foster invention, at least as much as it is encouraged under present conditions. We have not today a complete competitive system as a matter of fact; and monopolies, in so far as they exist, are not adequately controlled by any power sufficiently lowered to make it unprofitable to continue operating the old machines. It is found that $80,000,000, invested in the new machines, will be sufficient to supply the demand for these goods. There is clearly a social gain through the saving of $2,000,000 annually; but there is a loss in the destruction of the incomes formerly enjoyed. The social inventory, $180, 000,000 capital being involved in each case, would be: Under conditions of maximum advantage, when the new capital is invested in other enterprises which involve no destruction of existing capital: Now had the $80,000,000 of new capital been used in some entirely new industry, where it yielded to society goods representing $4,000,000 worth of income without destroying any existing income, clearly society would have been better off. And yet, if the inventor could gain for himself any part of the $2,000,000 which his new process saves in the cost, and thus get a return above five per cent on his new investment, it would be profitable for him to do so, regardless of the effect upon others or national benefit. Only rarely does this principle operate in so drastic a manner. Generally there is some chance to use up, at least partially, the old machines. With this contrast clearly in mind, we may now turn to an examination of the relation between capital and income in our various industries. The total capital invested in the railroads ' in 1910 was $14,387,816,000, and the total gross income was $2,812,142,000, or 19.54 per cent of the capital. The capital invested in manufactures in 1910 was $18,428,270,000, and the total value added by manufacturing 3 was $8,529,261,000, or 46.28 per cent of the capital. While the proportion in manufacturing as a whole which the annual added value bears to the capital is thus very much greater than in the case of the railroads, showing a much smaller preponderance of fixed capital, a close parallel is disclosed through an analysis of individual manufacturing industries. The tables on pages 584 and 585 show the two extremes of relationship. All the amounts of capital are par value. They are thus only approximately accurate. The actual investment amounts are unknown. It is reasonable to expect, however, that variates from the mean will about counterbalance each other. An exception will be found in the automobile industry, which for special reasons is disproportionately overcapitalized. 2 Compilation in Matter of Application of Eastern Railways for Increase of Freights, 1913. I am indebted to Mr. A. S. Field, of the Bureau of Railway Statistics, for help in determining the comparability of these figures. In this table there is an item entitled, "Materials, supplies, etc.," a permissible interpretation of which might lead to finding a partial similarity with the item, "cost of materials," in the manufacturing industries. Accepting this interpretation, it would be necessary to subtract this item of $738,154,000 from the gross income, leaving $2,073,058,000 as the value added by railroads, which is 14.41 per cent of the capital. This is the extreme low relationship of the two figures and its acceptance does not materially affect the argument. The reason that this figure is not accepted in the text is because the item in the case of railroads is an integral part of the cost of transportation, whereas, in the case of manufactures, the cost of materials includes those articles which are passed through a process of manufacturing, and are, themselves, an item in the final value. 3 13th Census of the United States, volume 8, pp. 507 ff. |