Chapter 23

CONDITIONS INSURING PROGRESS IN METHOD AND ORGANIZATION

_The Possibility of a Law of Technical Progress._--It might seem that inventions were not subject to any influence that can be described under the head of a law. Genius certainly follows its own devices, and inventive power that has in it any touch of genius may be supposed to do the same. It is, however, a fact of experience that some circumstances favor and increase the actual exercise of this faculty, while other influences deter it. Moreover, what is important is not merely the making of inventions, but the introduction of such of them as are valuable into the productive operations of the world. Some influences favor this and others oppose it, and it is entirely possible to recognize the conditions in which economies of production rapidly take place in the actual industry of different countries.

Technical progress has been particularly rapid in the United States, though in this respect Germany has in recent years been a strong rival, and ever since the introduction of steam engines and textile machinery, England has continued to make a brilliant record. France, Belgium, and a number of other countries of Europe have developed an industry that is in a high degree dynamic, and Japan is now in the lists and giving promise of holding her own against the best of her competitors. The question arises whether it is something in the people, or something in their natural and commercial environment, which makes differences between their several rates of progress.

_Inventive Abilities widely Diffused._--In so far as originating important changes is concerned, mental alertness and scientific training without doubt have a large effect. Some races have by nature more of the inventive quality than others, but within the circle of nations that we include in our purview no one has any approach to a monopoly of this quality. Any people that can make discoveries in physical science can make practical inventions, and will certainly do so if they are under a large incentive to do it. Moreover, alertness in discovering and duplicating the inventions of others is as important in actual business as originating new devices. At present it is a known fact that the Germans not only invent machinery, but quickly learn to make and to use machinery that originates elsewhere and demonstrates its value in reducing the cost of the production; and the remote Japanese have not only surpassed all others in the quick adoption of economic methods that have originated in Western countries, but have put their own touch upon them and revealed the existence of an inventive faculty that is likely to make them worthy rivals of Occidental races.

_The Importance of Inducements to make and use Inventions._--Granted a wide diffusion of inventive ability, the actual amount of really useful inventing that is done must depend on the inducement that is offered. Will an economical device bring an adequate return to the man who discovers it and to the man who introduces it into productive operations? If it will, we may expect that a brilliant succession of such devices will come into use, and that the power of mankind to bend the elements of nature to its service will rapidly increase.

_The Usefulness of a Temporary Monopoly of a New Device for Production._--If an invention became public property the moment that it was made, there would be small profit accruing to any one from the use of it and smaller ones from making it. Why should one _entrepreneur_ incur the cost and the risk of experimenting with a new machine if another can look on, ascertain whether the device works well or not, and duplicate it if it is successful? Under such conditions the man who watches others, avoids their losses, and shares their gains is the one who makes money; and the system which gave a man no control over the use of his inventions would result in a rivalry in waiting for others rather than an effort to distance others in originating improvements. This fact affords a justification for one variety of monopoly. The inventor in any civilized state is given an exclusive right to make and sell an economical appliance for a term of years that is long enough to pay him for perfecting it and to pay others for introducing it. Patents stimulate improvement, and the general practice of the nations indicates their recognition of this fact. They all give to the inventor a temporary monopoly of the new appliance he devises, but this monopoly differs from others in this essential fact: the man is allowed to have an exclusive control of something which otherwise might not and often would not have come into existence at all. If it would not,--if the patented article is something which society without a patent system would not have secured at all,--the inventor's monopoly hurts nobody. It is as though in some magical way he had caused springs of water to flow in the desert or loam to cover barren mountains or fertile islands to rise from the bottom of the sea. His gains consist in something which no one loses, even while he enjoys them, and at the expiration of his patent they are diffused freely throughout society.

_Possible Abuses of the Patent System._--It is of course true that a patent may often be granted for something that would have been invented in any case, and patents which are granted are sometimes made too broad, and so cover a large number of appliances for accomplishing the same thing. In these cases the public is somewhat the loser; but for the reasons about to be given this loss is far more than offset by the gain which the system of patents brings with it.

The gains of the inventor cannot extend much beyond the period covered by his patent, unless some further and less legitimate monopoly arises. If the use of an important machine builds up a great corporation which afterward, by virtue of its size, is able to club off competitors that would like to enter its field, the public pays more than it should for what it gets; and yet even in these cases it almost never pays more than it gets. The benefit it derives is simply less cheap than it ought to be. Much of the power of the telephone monopoly has been extended beyond the duration of its most important patent, and that patent was in its day broader than it should have been; and yet there never was a time when the use of the telephone in facilitating business, and in saving time and trouble in a myriad of ways, did not far outweigh the total cost which the users of telephones incurred. As we shall soon see, important inventions invariably confer some benefit on the public at the start. The owner of the new device must find a market for his products, and must offer them on terms which will make it for the interest of the public to use them largely.

_The Effect of Competition in Causing Improvements to Multiply._--Competition insures a large number of inventors and offers to each of them a large inducement to use his gifts and opportunities. A great corporation may employ salaried inventors and, because of its great capital and large income, it may experiment with inventions with far less risk to itself than an inventor usually takes. When large corporations compete actively with one another, the employment of salaried inventors is very profitable to them; and improvements in production go on more rapidly than they are likely to do after these firms consolidate with each other and cease to feel the spur which the danger of being distanced in a race affords. It is a fact of observation, and not merely an inference, that monopolies are not as enterprising as competing companies.

_Effects of Monopoly on the Spirit of Enterprise._--In monopolies, theoretically, there is the same inducement to adopt inventions as in the case of competing firms, excepting always the motive of self-preservation. The monopoly can make money by improvements as competing firms would do. A perfectly intelligent monopoly, with disinterested management, would adopt an improvement offered to it as promptly as any competing firm, if the sole motive were profit. There is no reason why an intelligent monopoly should hold on to antiquated machinery, when modern machinery would enable it to stand the cost of introduction and make a net improvement besides. A competing producer gains an advantage over his rivals by discarding old machinery and adopting new at exactly the right time, neither too late nor too early. The true point of abandonment of the old machine, as we have already seen, is reached when the labor and capital that now work in connection with it can make a shade more by casting it off and making a combination of a better kind; and this rule applies to monopolies as well as to competitors. At just the point where a competitor can gain an advantage over rivals by modernizing his appliances, the monopoly can make money by doing so.

An important fact is that the monopoly has as a motive the making of profits for its stockholders. Not only is that a less powerful motive than self-preservation, but it appeals largely to persons who are not themselves in control of the business. Absentee ownership is the chief disability of the monopoly. Managers may have other interests than those of large dividend making, and in such cases a monopoly is apt to wait too long before changing its appliances. It needs to be in no hurry to buy a new invention, and it can make delay and tire out a patentee, in order to make good terms with him; and this practice affords little encouragement to the independent inventor. On the whole, a genuine and perfectly secure monopoly would mean a certain degree of stagnation where progress until now has been rapid.

_Why the Public depends on Competition for Securing its Share of Benefit from Improvements._--Another question is whether the two systems, that of competition, on the one hand, and monopoly, on the other, confer equal benefits on the public by virtue of the improvements they make. Competition does this with the greatest rapidity. As we have seen, it transforms the net profits due to economies into increments of gain for capitalists and laborers throughout all society. The wages of to-day are chiefly the transformed profits of yesterday and of an indefinite series of earlier yesterdays. The man who is now making the profits is increasing his output, supplanting less efficient rivals, and giving consumers the benefit of his newly attained efficiency in the shape of lower prices of goods. In practice rivals take turns in leading the procession; now one has the most economical method, now another, and again another; and the great residual claimant, the public, very shortly gathers all gains into its capacious pouch and keeps them forever.

Would a secure monopoly do something like this? Far from it. It would be governed at every step by the rule of maximum net profits for itself. Its output would not be carried beyond the point at which the fall in price begins really to be costly. The lowering of the price enlarges the market for the monopoly's product and up to a certain point increases its net gains. Beyond that point it lessens them.

Now, even the interest of the monopoly itself would lead it to give the public some benefit from every economy that it makes. This is because the amount of output that will yield a maximum of profit at a certain cost of production is not the same that will yield the maximum of net profit when the cost is lower. Every fall in cost makes it for the interest of the monopoly to enlarge its output somewhat, but by no means as much as competing producers would enlarge theirs. It will always hold the price well above the level of cost. In the accompanying figure distance along the line _AK_ represents the amount of goods produced, while vertical distance above the line measures costs of production, as well as selling prices, and the descending curve _FJ_ represents the fall of prices which takes place as the output of the goods is increased. Now, when the cost of production stands at the level of the line _CI_, the amount of output that will yield the largest amount of net profit is the amount represented by the length of the line _AM_. That amount of product can be sold at the price represented by the line _MG_. The gross return from the sale will be expressed by the area of the rectangle _AEGM_, and the area _CEGN_, which falls above the line of cost, _CI_, is net profits. They are larger than they would be if the line _MG_ were moved either to the right or to the left, _i.e._, if the amount of production were made either larger or smaller. Now, if the cost of production falls to the level of the line _BJ_, it will be best to increase the output from _AM_ to _AL_. The whole return will then be represented by the rectangle _ADHL_, and the area _BDHO_ represents profits, with the cost at the new and lower level. These are somewhat larger than they would be if the output continued to be only the amount _AM_. Under free competition the price would fall to the line _BJ_, the net profits would disappear, and the public would have the full benefit of the improvement in production.

_The Purpose of the System of Patents._--Patents are a legal device for promoting improvements, and they accomplish this by invoking the principle of monopoly which in itself is hostile to improvement. They do not as a rule create the exclusive privilege of producing a kind of consumers' goods, but they give to their holders exclusive use of some instrumentality or some process of making them. The patentee is not the only one who can reach a goal,--the production of a certain article,--but he is the only one who can reach it by a particular path. A patented machine for welting shoes stops no one from making shoes, but it forces every one who would make them, except the patentee or his assigns, to resort to a less economical process.

_Patents Limited in Duration indispensable as Dynamic Agents._--If an inventor had no such protection, the advantage he could derive would be practically _nil_, and there would be no incentive whatever for making ventures except the pleasure of achievement or the honor that might accrue from it. In the case of poor inventors this would be cold comfort in view of the time and outlay which most inventions require. Not only on _a priori_ grounds, but on grounds of actual experience and universal practice, we may say that patents are an indispensable part of a dynamic system of industry. It is also important that the monopoly of method which the patent gives should be of limited duration. If the method is a good one and the profit from using it is large, the seventeen years during which in our own country a patent may run affords, not only an adequate reward for the inventor, but an incentive to a myriad of other inventors to emulate him and try to duplicate his success. Ingenious brains, which are everywhere at work, usually prevent the owners of a particular patent from keeping any decisive advantage over competitors during the whole period of seventeen years. Long before the expiration of that time some device of a different sort may enable a rival to create the same product with more than equal economy, and the leadership in production then passes to this rival, to remain with him till a still further device effects a still larger economy and carries the leadership elsewhere. That alternation in leadership which we have described and illustrated takes place largely in consequence of our system of patents; and yet every particular patent affords a quasi-monopoly to its holder. The endless succession of them insures a wide diffusion of advantages. At the expiration of each patent, even if it has not been supplanted by a later and more valuable one, the public gets the benefit of the full economy it insures, and wherever an unexpired patent is supplanted by a new one, the public gets this benefit much earlier. Cost of production tends rapidly downward, and the public is the permanent beneficiary.

_Patents as a Means of Curtailing Monopolies._--While a patent may sometimes sustain a powerful monopoly it may also afford the best means of breaking one up. Often have small producers, by the use of patented machinery, trenched steadily on the business of great combinations, till they themselves became great producers, secure in the possession of a large field and abundant profit. Moreover, in the case of a patent which builds up a monopoly and continues for the full seventeen years of its duration unsupplanted by any rival device, the public is likely to get more benefit than the patentee, or even the company which uses his invention. In widening the market for its product the company must constantly cater to new circles of marginal consumers, and must give to all but the marginal ones an increasing benefit that is in excess of what it costs them. Probably few patents have been issued in America which illustrate the unfavorable features of the system more completely than did the Bell telephone patent, which gave to a single company during a long period a monopoly of the telephone business; and yet there are few men of affairs who do not perceive that, in the saving of time which the telephone effected and in the acceleration of business which it caused, they gained from the outset more than they lost in the shape of high fees. Something of the same kind is true of the users of domestic telephones; for though they may cost more than they should, they do their share toward placing those who use them on a higher level of comfort.

_The Law of Survival of Efficient Organization._--In broad outlines we have depicted the conditions which favor technical progress. There is a law of survival which, when competition rules, eliminates poor methods and introduces better ones in endless succession. Under a régime of secure monopoly this law of survival scarcely operates, though desire for gain causes a progress which is less rapid and sure. The same may be said of changes in organization, in so far as that means a coördinating of the labor and the capital within an establishment. When the manager of a mill so marshals his forces as to get a much larger product per man and per dollar of invested capital than a rival can do, he has that rival at his mercy and can absorb his business and drive him from the field. In order to survive, any producer must keep pace with the aggressive and growing ones among his rivals in the march of improvement, whether it comes by improved tools of trade or improved generalship in the handling of men and tools. Quite as remorseless as the law of survival of good technical methods is the law of survival of efficient organization, and so long as the organization is limited to the forces under the control of single and competing _entrepreneurs_, what we have said about the advance in methods applies to it. It is a beneficent process for society, though its future scope is more restricted than is that of technical improvement, since the marshaling of forces in an establishment may be carried so near to perfection that there is a limit on further gains. Moreover organization, in the end, ceases to confine itself to the working forces of single _entrepreneurs_, but often continues till it brings rival producers into a union.

_The Extension of Organization to Entire Subgroups._--Both of these modes of progress cause establishments to grow larger, and the ultimate effect of this is to give over the market for goods of any one kind to a few establishments which are enormously large and on something like a uniform plane of efficiency. Then the organizing tendency takes a baleful cast as the creator of "trusts" and the extinguisher of rivalries that have insured progress.

When monster-like corporations once start a competitive strife with each other, it is very fierce and very costly for themselves; and this affords an inducement for taking that final step in organization which brings competition to an end. That is organization of a different kind, and the effects of it are very unlike those of the coördinating process which goes on within the several establishments. In this, its final stage, the organizing tendency brings a whole subgroup into union, and undoes much of the good it accomplished in its earlier stage, when it was perfecting the individual establishments within the subgroup. While the earlier process makes the supply of goods of a certain kind larger and cheaper, the final one makes it smaller and dearer; and while the earlier process scatters benefits among consumers, the final one imposes a tax on consumers in the shape of higher prices for merchandise. Yet the union that is formed between the shops is, in a way, the natural sequel to the preliminary organization which took place within them and helped to make them few and large. Trusts are a product of economic dynamics, and we shall study them in due time. The organization we have here in view is the earlier one which takes place within the several establishments. It obeys a law of survival in which competition is the impelling force, though it leads to a condition in which an effort is made to bring competition to an end. This earlier organization is most beneficent in its general and permanent effects; and what has been said of the results of progress in the technique of production may, with a change of terms, be said again of progress in the art of coördinating the agents employed. It is a source of temporary gain for _entrepreneurs_ and of permanent gains for laborers and capitalists. It adds to the grand total of the social product and leaves this to be distributed in accordance with the principle which, in the absence of untoward influences, would treat the producers fairly--that which tends to give to each producer a share more or less equivalent to his contribution. In its nature and in its results it is the opposite of that other type of organization which seeks to bring competitive rivalry to an end, and in so far as it succeeds divorces men's contributions to the social product from the shares that they draw from it.